UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the ~~quarterly~~quarter ~~period~~ ended March 31, ~~2005~~ 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission file number 2-39458

ERIE FAMILY LIFE INSURANCE COMPANY

(Exact name of registrant as specified in its charter)

PENNSYLVANIA	25-1186315
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer
(State or other jurisdiction of	(I.R.S. Employer
	Identification No.)
incorporation or organization)	Identification No.)
100 Erie Insurance Place, Erie, Pennsylvania	16530	~~16530~~
(Address of principal executive offices)	(Zip ~~Code~~code)

~~Registrant’s telephone number, including area code~~ (814) 870-2000

Registrant’s telephone number, including area code

Not applicable

Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the ~~registrant~~Registrant is a large accelerated filer, an accelerated filer ~~(as~~or a ~~defined~~non-accelerated filer. See definition of “accelerated filer and large accelerated filer” 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~~Large ofAccelerated ~~the~~filer ~~latest~~o Accelerated ~~practicable~~filer ~~date:~~o Non-accelerated ~~9,450,000~~filer ~~shares of Common Stock outstanding on April 15, 2005.~~þ

1Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of Common stock, $ .40 par value, was 9,450,000 at May 1, 2006.

INDEX

ERIE FAMILY LIFE INSURANCE COMPANY

PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Statements of Financial Position — March 31, 2005 and December 31, 2004
		Statements of Financial Position — March 31, 2006 and December 31, 2005
		Statements of Operations — Three months ended March 31, 2005 and 2004
		Statements of Operations — Three months ended March 31, 2006 and 2005
		Statements of Comprehensive Income — Three months ended March 31, 2005 and 2004
		Statements of Comprehensive Income — Three months ended March 31, 2006 and 2005
		Statements of Cash Flows — Three months ended March 31, 2005 and 2004
		Statements of Cash Flows — Three months ended March 31, 2006 and 2005
		Notes to Financial Statements — March 31, 2005
		Notes to Financial Statements — March 31, 2006
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures About Market Risk
Item 4.		Controls and Procedures
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings
Item 6.		Exhibits
SIGNATURES
Exhibit 31.1
EX-31.1
Exhibit 31.2
EX-31.2
Exhibit 32
EX-32

PART I. FINANCIAL INFORMATION

ERIE FAMILY LIFE INSURANCE COMPANY ~~STATEMENTS OF FINANCIAL POSITION~~

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

STATEMENTS OF FINANCIAL POSITION


	(Dollars in thousands, except per share data)
	March 31,		December 31,
	2006		2005
	(Unaudited)
ASSETS

INVESTMENTS
Fixed maturities at fair value (amortized cost of $1,370,937 and $1,349,646, respectively)	$	1,369,733	$	1,378,067
Equity securities at fair value (cost of $71,869 and $78,890, respectively)		75,899		84,545
Limited partnerships (cost of $18,091 and $15,341, respectively)		19,189		16,671
Real estate mortgage loans		5,879		5,930
Real estate		1,212		1,219
Policy loans		11,792		11,667


Total investments		1,483,704		1,498,099

Cash and cash equivalents		534		18,636
Premiums receivable from policyholders		128		180
Reinsurance recoverable		2,929		3,770
Other receivables		294		406
Accrued investment income		19,865		16,715
Deferred policy acquisition costs		140,859		133,812
Reserve credit for reinsurance ceded		42,276		40,366
Securities lending collateral		53,240		59,514
Prepaid federal income taxes		0		273
Other assets		5,713		4,589


Total assets	$	1,749,542	$	1,776,360

See Accompanying Notes to Financial Statements.

ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION

	(Dollars in thousands)
	(Dollars in thousands, except per share data)
	March 31,		December 31,
LIABILITIES AND SHAREHOLDERS’ EQUITY	2005		2004
	2006		2005
	(Unaudited)
Liabilities:
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Policy Liabilities and Accruals:
Future life and accident and health policy benefits	$	~~128~~153,~~247~~189	$	~~124~~148,~~016~~034
Policy and contract claims		43,~~551~~656		35,~~153~~867
Annuity deposits		~~997~~1,~~869~~018,437		~~984~~1,~~870~~021,442
Universal life deposits		~~166~~179,~~717~~031		~~163~~176,~~489~~569
Supplementary contracts not including life contingencies		~~705~~682		~~702~~741
Other policyholder funds		78,~~091~~190		68,~~048~~420
Federal income taxes payable		~~1,472~~783		0
Deferred income taxes		4026,~~158~~172		4833,~~066~~821
Reinsurance premium due		~~907~~1,177		2,~~581~~357
Accounts payable and accrued expenses		11,531		10,581
Securities lending collateral		53,240		59,514
Notes payable to Erie Indemnity Company		40,000		40,000
Accounts payable and accrued expenses		12,507		12,604
Due to affiliates		4,716		4,327
Notes payable to affiliates		45,000		45,000
Due to affiliates		2,968		3,942
Dividends payable		2,079		2,079
Total liabilities		1,~~406~~507,~~043~~111		1,~~389~~520,~~912~~390
Shareholders’ Equity:
SHAREHOLDERS’ EQUITY
Common stock, $.40 par value per share; authorized 15,000,000 shares; 9,450,000 shares issued and outstanding		3,780		3,780
Additional paid-in capital		630		630
Accumulated other comprehensive income		~~25,217~~732		3915,~~252~~471
Retained earnings		~~229~~237,~~336~~289		~~227~~236,~~866~~089
Total shareholders’ equity		~~258~~242,~~963~~431		~~271~~255,~~528~~970
Total liabilities and shareholders’ equity	$	1,~~665~~749,~~006~~542	$	1,~~661~~776,~~440~~360

See Accompanying Notes to Financial Statements.

ERIE FAMILY LIFE INSURANCE COMPANY ~~STATEMENTS OF OPERATIONS (Unaudited)~~

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

STATEMENTS OF OPERATIONS (Unaudited)


	Three Months Ended		Three Months Ended
	March 31, 2006		March 31, 2005
	(Dollars in thousands, except per share data)
REVENUES
Net Policy Revenue:
Life premiums	$	14,190	$	13,502
Group life and other premiums		928		906

Total net policy revenue		15,118		14,408

Net investment income		21,278		20,306
Net realized gains (losses) on investments		349		(1,353	)
Equity in earnings of limited partnerships		106		604
Other income		199		177

Total revenues		37,050		34,142


BENEFITS AND EXPENSES
Death benefits		5,502		3,430
Interest on annuity deposits		11,623		11,027
Interest on universal life deposits		1,938		1,795
Interest on surplus notes and other affiliate interest		787		712
Surrender and other benefits		396		337
Increase in future life policy benefits		3,244		3,160
Amortization of deferred policy acquisition costs		3,201		2,254
Commissions		423		400
General expenses		4,299		4,611
Taxes, licenses and fees		1,014		956

Total benefits and expenses		32,427		28,682


Income before income taxes		4,623		5,460

Provision for income taxes		1,344		1,911


Net income	$	3,279	$	3,549


Net income per share	$	0.35	$	0.38


Dividends declared per share	$	0.22	$	0.22

See Accompanying Notes to Financial Statements.

ERIE FAMILY LIFE INSURANCE COMPANY ~~STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)~~

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

STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	Three Months Ended			Three Months Ended
	March 31, 2006			March 31, 2005
	(Dollars in thousands)
Net income	$	3,279		$	3,549


Unrealized losses on securities:
Unrealized holding losses arising during period, net of adjustments to deferred acquisition costs and life contingent payout annuities		(22,327	)		(22,945	)
Less: (gains) losses included in net income		(349	)		1,353

Net unrealized holding losses arising during period, net of adjustments to deferred acquisition costs and life contingent payout annuities		(22,676	)		(21,592	)

Income tax benefit related to unrealized losses		7,937			7,557


Unrealized depreciation of investments, net of taxes		(14,739	)		(14,035	)


Comprehensive loss	$	(11,460	)	$	(10,486	)

See Accompanying Notes to Financial Statements.

ERIE FAMILY LIFE INSURANCE COMPANY ~~STATEMENTS OF CASH FLOWS (Unaudited)~~

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

STATEMENTS OF CASH FLOWS (Unaudited)


	Three Months Ended			Three Months Ended
	March 31, 2006			March 31, 2005
	(Dollars in thousands)
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Premiums collected	$	13,883		$	14,232
Net investment income received		18,383			17,406
Limited partnership distributions		262			2,592
Miscellaneous income		199			177
Benefits to policyholders		(21,778	)		(15,470	)
Commissions and bonuses paid to agents		(2,822	)		(469	)
Salaries and wages paid		(4,112	)		(4,277	)
General operating expenses paid		(4,117	)		(4,434	)
Taxes, licenses and fees paid		(1,409	)		(1,416	)
Interest paid		(51	)		(51	)

Net cash (used in) provided by operating activities		(1,562	)		8,290


CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of investments:
Fixed maturities		(77,441	)		(72,713	)
Equity securities		(6,094	)		(464	)
Limited partnerships		(2,674	)		(1,390	)
Sales/maturities of investments:
Sales of fixed maturities		47,759			35,803
Calls/maturities of fixed maturities		9,098			16,734
Equity securities		13,678			0
Real estate additions		(2	)		0
Net mortgage loans		51			47
Net policy loans		(125	)		(183	)

Net cash used in investing activities		(15,750	)		(22,166	)


CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Annuity and supplementary contract deposits and interest		32,329			30,702
Annuity and supplementary contract surrenders and withdrawals		(33,502	)		(17,700	)
Universal life deposits and interest		4,768			4,749
Universal life surrenders		(2,306	)		(1,521	)
Decrease in collateral from securities lending		(6,274	)		0
Redemption of securities lending collateral		6,274			0
Dividends paid to shareholders		(2,079	)		(2,079	)

Net cash (used in) provided by financing activities		(790	)		14,151


Net (decrease) increase in cash and cash equivalents		(18,102	)		275
Cash and cash equivalents at beginning of period		18,636			22,446

Cash and cash equivalents at end of period	$	534		$	22,721

See Accompanying Notes to Financial Statements.

ERIE FAMILY LIFE INSURANCE COMPANY ~~NOTES TO FINANCIAL STATEMENTS (Unaudited)~~

~~NOTE~~NOTES ATO —FINANCIAL ~~BASIS~~STATEMENTS ~~OF PRESENTATION~~ (Unaudited)

~~The~~NOTE ~~accompanying~~1 ~~unaudited~~— ~~financial~~BASIS ~~statements~~OF ~~have been prepared in accordance with generally~~PRESENTATION accepted accounting principles for interim financial information and in conformity with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on February 24, 2005.

~~NOTE~~The Baccompanying —unaudited ~~RECLASSIFICATIONS~~financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in conformity with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on March 8, 2006.

~~Certain~~NOTE ~~amounts~~2 ~~previously~~— ~~reported in the 2004 financial statements have been reclassified to~~RECLASSIFICATIONS ~~conform to the current period’s presentation. Such reclassification did not impact earnings or total Shareholders’ Equity.~~

~~NOTE~~Certain Camounts —previously ~~EARNINGS~~reported ~~PER~~in ~~SHARE~~the 2005 financial statements have been reclassified to conform to the current period’s presentation. Such reclassification did not impact earnings or total Shareholders’ Equity.

NOTE 3 — EARNINGS PER SHARE

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

NOTE 4 — INVESTMENTS

Fixed maturities and marketable equity securities are classified as “available-for-sale.” Equity securities consist of nonredeemable preferred stocks 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 and adjustments to acquisition costs and life contingent payout annuities, reflected in shareholders’ equity in accumulated other comprehensive income. When a decline in the value of an investment is considered to be other-than-temporary by management, the investment is written down to net estimated realizable value. Investment impairments are evaluated on an individual security position basis. Adjustments to the carrying value of marketable equity securities and fixed maturities that are considered impaired are recorded as realized losses in the Statements of Operations.

The Company participates in a program whereby marketable securities from its investment portfolio are lent to independent brokers or dealers based on, among other things, their creditworthiness in exchange for collateral initially equal to 102% of the value of the securities on loan and is thereafter maintained at a minimum of 100% of the market value of the securities loaned. The market value of the securities on loan to each borrower is monitored daily by the third party custodian and the borrower is required to deliver additional collateral if the market value of the collateral falls below 100% of the market value of the securities on loan.

The Company had loaned securities included as part of its invested assets with a market value of $52.0 million and $58.0 million at March 31, 2006 and December 31, 2005, respectively. The Company has incurred no losses on the securities lending program since the program’s inception.

ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited)

NOTE D4 —– INVESTMENTS (Continued)

AtThe ~~March 31,~~following ~~2005~~is ~~and~~a ~~2004,~~summary ~~marketable equity securities consist~~ of ~~nonredeemable preferred stock while~~ fixed maturities ~~consist of bonds, notes~~ and ~~redeemable~~equity preferred stock. Management considers all fixed maturities as available-for-sale. Management determines the appropriate classification of fixed maturities at the time of purchase and reevaluates such designation as of each statement of financial position date. Available-for-sale securities ~~are~~: ~~stated at fair value, with the unrealized gains and losses, net of deferred federal income taxes, reported as a separate component of Comprehensive Income and Shareholders’ Equity.~~

The following is a summary of available-for-sale securities:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
(in thousands)	Cost		Gains		Losses		Fair Value
March 31, 2006

Fixed maturities
Bonds:
U.S. treasuries and government agencies	$	37,096	$	174	$	661	$	36,609
Public utilities		177,452		4,896		3,778		178,570
U.S. banks, trusts and insurance companies		243,000		4,104		4,705		242,399
U.S. industrial and miscellaneous		563,425		11,629		11,148		563,906
Mortgage-backed securities		172,830		1,190		3,899		170,121
Asset-backed securities		15,358		64		262		15,160
Foreign		157,233		4,849		3,670		158,412


Total bonds		1,366,394		26,906		28,123		1,365,177

Redeemable preferred stock		4,543		13		0		4,556


Total fixed maturities	$	1,370,937	$	26,919	$	28,123	$	1,369,733


Equity securities
Nonredeemable preferred stock:
U.S. banks, trusts and insurance companies		30,908		1,551		462		31,997
U.S. industrial and miscellaneous		20,802		1,307		58		22,051
Foreign		20,159		1,700		8		21,851


Total equity securities	$	71,869	$	4,558	$	528	$	75,899

(in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
March 31, 2005	Cost		Gains		Losses		Fair Value
Fixed maturities
Bonds:
U.S. treasuries and government agencies	$	55,118	$	478	$	449	$	55,147
Public utilities		168,127		8,377		1,083		175,421
U.S. banks, trusts and insurance companies		205,760		7,467		1,952		211,275
U.S. industrial and miscellaneous		568,811		24,396		4,211		588,996
Mortgage-backed securities		156,229		2,215		1,738		156,706
Asset-backed securities		10,720		215		132		10,803
Foreign		146,287		9,343		1,340		154,290
Total bonds		1,311,052		52,491		10,905		1,352,638
Redeemable preferred stock		7,016		47		185		6,878
Total fixed maturities		1,318,068		52,538		11,090		1,359,516
Equity securities
Nonredeemable preferred stock:
U.S. banks, trusts and insurance companies		19,909		1,785		0		21,694
U.S. industrial and miscellaneous		18,801		1,771		1		20,571
Foreign		21,181		2,474		8		23,647
Total equity securities		59,891		6,030		9		65,912
Total fixed maturities and equity securities	$	1,377,959	$	58,568	$	11,099	$	1,425,428

ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE D4 — INVESTMENTS (Continued)

(in thousands)

Gross

Amortized

Unrealized

Estimated

December 31, 2004

Cost

Gains

Losses

Fair Value

(in thousands)

Cost

Gains

Losses

Fair Value

December 31, 2005

Fixed maturities

Bonds:

U.S. treasuries and government agencies

6037,~~126~~091

~~1,048~~365

98261

6137,~~076~~195

Public utilities

~~160~~183,~~516~~441

117,~~313~~080

~~219~~1,589

~~171~~188,~~610~~932

U.S. banks, trusts and insurance companies

~~193~~232,~~461~~128

96,~~148~~852

~~709~~1,745

~~201~~237,~~900~~235

U.S. industrial and miscellaneous

~~566~~560,~~633~~596

3417,~~721~~914

~~976~~5,991

~~600~~572,~~378~~519

Mortgage-backed securities

~~157~~155,~~289~~603

32,~~713~~126

~~609~~1,973

~~160~~155,~~393~~756

Asset-backed securities

1015,~~946~~862

~~348~~114

77175

1115,~~217~~801

Foreign

~~141~~162,~~926~~774

127,~~080~~129

~~686~~1,427

~~153~~168,~~320~~476

Total bonds

1,~~290~~347,~~897~~495

7241,~~371~~580

313,~~374~~161

1,~~359~~375,~~894~~914

Redeemable preferred stock

72,~~016~~151

942

~~106~~0

72,~~004~~153

Total fixed maturities

1,~~297~~349,~~913~~646

7241,~~465~~582

313,~~480~~161

1,~~366~~378,~~898~~067

Equity securities

Nonredeemable preferred stock:

U.S. banks, trusts and insurance companies

1933,909

21,~~078~~889

2105

2135,~~985~~693

U.S. industrial and miscellaneous

1820,801

1,~~873~~555

064

2022,~~674~~292

Foreign

2024,~~716~~180

32,~~000~~421

041

2326,~~716~~560

Total equity securities

5978,~~426~~890

65,~~951~~865

2210

6684,~~375~~545

Total fixed maturities and equity securities

1,357,339

79,416

3,482

1,433,273

Realized gains and losses on the sale of investments are recognized in income using the specific identification method. Investments that have declined in value below cost and for which the decline is considered to be other-than-temporary by management are written down to estimated net realizable value. The impairments are made on an individual security basis and are recorded as a component of net realized (losses) gains on investments in the Statements of Operations.

ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE D4 — INVESTMENTS (Continued)

~~The~~Fixed ~~components~~maturities ofand ~~net~~equity ~~realized~~securities ~~(losses) gains~~in ona ~~investments~~gross asunrealized ~~reported~~loss inposition ~~the~~at ~~Statements~~March 31, ~~of Operations~~2006 are ~~included below~~as follows. ~~Included~~Data inis ~~the~~provided ~~first~~by ~~quarter~~length of ~~2005~~time ~~realized~~securities ~~losses~~were ~~are impairment~~in ~~charges of $1.5 million related to~~ a ~~fixed~~gross ~~maturity~~unrealized inloss ~~the automotive industry~~position. ~~There~~ ~~were~~ ~~no impairment charges recorded in the first quarter of 2004.~~

(in thousands)	Three Months Ended			Three Months Ended
	Less than 12 months						12 months or longer				Total
	March 31, 2005			March 31, 2004
	Fair			Unrealized			Fair		Unrealized		Fair		Unrealized		Number of
Fixed maturities:
(in thousands)	Value			Losses			Value		Losses		Value		Losses		Holdings
Gross realized gains	$	1,083		$	2,930
Fixed maturities
Gross realized losses	(	2,441	)	(	93	)
Bonds:
Net realized (losses) gains	(	1,358	)		2,837
U.S. treasuries and government agencies	$	20,849		$	456		$	9,796	$	205	$	30,645	$	661		13
Equity securities:
Public utilities		94,934			3,098			10,999		680		105,933		3,778		42
Gross realized gains		7			11
U.S. banks, trusts and insurance companies		119,886			3,463			24,206		1,242		144,092		4,705		61
Gross realized losses	(	2	)		0
U.S. industrial and miscellaneous		253,943			8,553			49,647		2,595		303,590		11,148		122
Net realized gains		5			11
Mortgage-backed securities		89,737			2,413			39,113		1,486		128,850		3,899		36
Net realized (losses) gains on investments	($	1,353	)	$	2,848
Asset-backed securities		1,943			57			2,787		205		4,730		262		2
Foreign		75,900			2,693			12,885		977		88,785		3,670		36
Total fixed maturities		657,192			20,733			149,433		7,390		806,625		28,123		312
Equity securities
Nonredeemable preferred stock		8,481			528			0		0		8,481		528		4
Total fixed maturity and equity securities	$	665,673		$	21,261		$	149,433	$	7,390	$	815,106	$	28,651		316

~~Fixed~~Almost ~~maturities~~all ~~and~~of ~~equity~~the ~~securities~~fixed maturities in aan ~~gross~~ unrealized loss position atwere ~~March 31,~~investment ~~2005~~grade securities ~~are~~below ~~as follows~~cost due to changes in interest rates from the date of purchase. ~~Data~~There iswere ~~provided~~no securities bywith ~~length~~a market value less than 80% of ~~time~~the security’s amortized cost. Of the fixed maturities that are below amortized cost for less than 12 months, securities that were investment-grade inhad a ~~gross~~fair ~~unrealized~~value ~~loss~~of ~~position~~$638.0 million at March 31, 2006. These fixed maturities had unrealized losses as of March 31, 2006, of $19.9 million.

	Less than 12 months				12 months or longer				Total
(in thousands)	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Fixed maturities
U.S. treasuries and government agencies	$	35,491	$	419	$	1,968	$	30	$	37,459	$	449
Public utilities		41,297		716		9,429		367		50,726		1,083
U.S. banks, trusts and insurance companies		60,653		1,131		20,125		821		80,778		1,952
U.S. industrial and miscellaneous		137,976		3,166		24,007		1,045		161,983		4,211
Mortgage-backed securities		75,574		1,161		18,169		577		93,743		1,738
Asset-backed securities		0		0		2,860		132		2,860		132
Foreign		29,397		503		17,294		837		46,691		1,340
Total bonds		380,388		7,096		93,852		3,809		474,240		10,905
Redeemable preferred stock		4,681		185		0		0		4,681		185
Total fixed maturities		385,069		7,281		93,852		3,809		478,921		11,090
Equity securities
Nonredeemable preferred stock		2,998		9		0		0		2,998		9
Total equity securities		2,998		9		0		0		2,998		9
Total fixed maturities and equity securities	$	388,067	$	7,290	$	93,852	$	3,809	$	481,919	$	11,099

The remaining fair value of fixed maturities below amortized cost for less than 12 months of $19.2 million at March 31, 2006, were non-investment grade securities and had unrealized losses of $0.8 million. An impairment charge of $0.8 million was recorded for one of these securities to write it down to its estimated market value in 2005. It is possible that these securities may be further impaired resulting in realized losses in future periods.

There are $139.3 million in investment-grade fixed maturity securities at fair value that at March 31, 2006, had been below amortized cost for 12 months or longer. These fixed maturities had unrealized losses as of March 31, 2006, of $6.9 million. These unrealized losses are due to higher market interest rates and greater spread requirements in the market in general and are not related to the credit quality of specific issuers. The remaining $10.1 million fair value of fixed maturities below amortized cost for greater than 12 months were non-investment grade and had unrealized losses of $0.5 million. The Company continues to monitor the financial condition of these companies as every security is included in the Company’s portfolio monitoring process.

No investments in an unrealized loss position at March 31, 2006 had experienced a decline in market value that was considered by management to be significant and other-than-temporary based on Company policy.

ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE D4 — INVESTMENTS (Continued)

No investments in an unrealized loss position at March 31, 2005 had experienced a decline in market value that was considered by management to be significant and other-than-temporary based on Company policy. There were no market conditions, industry characteristics or fundamental operating results of a specific issuer that suggested other-than-temporary impairment of any of these investments held at March 31, ~~2005~~2006.

The ~~Company~~components ~~participates in a securities lending program whereby certain securities from its portfolio are loaned to other institutions for short periods~~ of ~~time.~~net Arealized ~~fee~~(losses) gains ison ~~paid~~investments toas ~~the~~reported ~~Company by~~in the ~~borrower.~~Statements ~~Company policy requires collateral equal to 102%~~ of ~~the fair value of the loaned~~ ~~securities.~~Operations ~~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 onincluded ~~loan~~below. ~~The~~Included ~~Company has an indemnification agreement with the lending agent~~ in the ~~event~~first ~~a borrower~~quarter ~~becomes insolvent or fails to return securities. The Company shares a portion~~ of ~~the interest~~2005 ~~received~~realized onlosses ~~these short-term investments with the lending agent. Revenue received for the~~are ~~three~~impairment ~~months~~charges ~~ended~~of ~~March~~$1.5 ~~31,~~million ~~2005 and 2004,~~ related to ~~this~~a ~~program~~fixed ~~totaled~~maturity ~~$10,025~~in ~~and~~the ~~$27,821, respectively.~~automotive ~~The Company had no loaned securities at March 31, 2005 or December 31, 2004~~industry. ~~The~~There ~~Company~~were ~~has~~no ~~incurred~~impairment nocharges ~~losses~~recorded onin the ~~loan~~first ~~program~~quarter ~~since~~of ~~the program’s inception~~2006.

Limited partnerships at March 31, 2005 include U.S. and foreign real estate and mezzanine debt investments. Real estate limited partnerships represent 93%, while mezzanine debt limited partnerships represent 7%, of the total carrying value at March 31, 2005. These partnerships are recorded using the equity method, which is the Company’s share of the carrying value of the partnership. The Company has not guaranteed any of the partnership liabilities.


	Three Months Ended			Three Months Ended
(in thousands)	March 31, 2006			March 31, 2005
Fixed maturities:
Gross realized gains	$	528		$	1,083
Gross realized losses		(743	)		(2,441	)

Net realized losses		(215	)		(1,358	)

Equity securities:
Gross realized gains		564			7
Gross realized losses		0			(2	)

Net realized gains		564			5


Net realized gains (losses) on investments	$	349		$	(1,353	)

Limited partnerships include U.S. and foreign real estate and mezzanine debt investments. Real estate limited partnerships represent 98.1%, while mezzanine debt limited partnerships represent 1.9%, of the total carrying value at March 31, 2006. These partnerships are recorded using the equity method. The Company has not guaranteed any of the partnership liabilities.

The components of equity in earnings of limited partnerships as reported in the Statements of Operations are as follows:

	Three Months Ended
(in thousands)	March 31,
	March 31
	2005			2004
(in thousands)	2006			2005
Mezzanine Debt	$	0		$	20
Mezzanine debt	$	32		$	0
Real Estate		604			135
Real estate		306			604
	$	604		$	155
Valuation adjustments		(232	)		0
Total equity in earnings of limited partnerships	$	106		$	604

NOTE E5 — 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 or profits on its insurance and annuity products. In accordance with Financial Accounting Standard (FAS) 60, Accounting and Reporting by Insurance Enterprises, the DAC related to traditional life insurance products is amortized in proportion to expected premium revenues over the premium-paying period of related policies using assumptions consistent with those used in computing policy liability reserves. Assumptions used for a specific issue year are “locked-in;” therefore, amortization in subsequent years is not adjusted for changing assumptions.

In accordance with 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 era of issued policies are “locked-in;” therefore, amortization in subsequent years is not adjusted for changing assumptions. In any period where the Company’s actual policy terminations are higher (lower) than anticipated policy terminations, DAC amortization will be accelerated (decelerated) in that period.

ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE E5 — DEFERRED POLICY ACQUISITION COSTS (DAC) ASSET (Continued)

In accordance with FAS 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, the DAC related to universal life products and deferred annuities is amortized in relation to the expected gross profits from projected investment, mortality and expense margins and surrender charges of the policies over a specified period. This specified period is 30 years for universal life and 20 years for deferred annuities. Both historical and anticipated investment returns, including realized gains and losses, from the investment of policyholder funds are considered in determining the amortization of deferred policy acquisition costs. Generally accepted accounting principles require that changes in expected future gross profits on the annuity and universal life products cause the DAC amortization rate to be revised retroactively, or “unlocked”, to the date of policy issuance. The cumulative change in DAC related to prior periods is recognized as a component of the current period’s DAC amortization, along with DAC amortization associated with the actual gross profits of the current period. Lower actual gross profits in a period resulting from lower margins on investments, mortality, and/or expenses would typically result in ~~less~~ less DAC amortization in that period, whereas higher actual gross profits would result in more amortization in the period. However, if lower gross profits were expected to continue into the future, additional amortization of the existing DAC asset may occur.

During the first quarter of ~~2005~~2006, the Company unlocked certain assumptions ~~based~~for onprojected ~~the~~investment returns, ~~results~~credited ~~of an~~interest ~~expense~~rates ~~study~~and related interest margins. As a result of unlocking these ~~expense~~ assumptions, the DAC asset was ~~increased~~ decreased and the amortization of DAC ~~was~~increased ~~decreased~~ by $0.48 million. ~~In addition, during its annual review~~ ~~of actual experience to assumptions used, the Company trued up certain items in the first quarter of 2005 resulting in a $0.5 million increase in the DAC amortization.~~

~~The~~NOTE ~~Company~~6 ~~periodically~~— ~~reviews~~SEGMENT ~~the DAC asset to determine if it continues to be recoverable from~~INFORMATION future premiums or profits. If less than the full amount of DAC is determined to be recoverable, a portion of such costs are expensed at the time of determination. The amount of DAC considered recoverable could be reduced in the near term if the estimate of future gross premiums or profits were to be reduced. The amount of DAC amortization may be revised if any of the estimates discussed above are revised.

InThe ~~accordance~~Company ~~with~~offers ~~FAS~~a 97range of products and services, ~~DAC~~but isoperates ~~adjusted~~as ~~for~~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 ~~impact~~Company. ofVariable ~~unrealized~~universal ~~gains~~life orproducts ~~losses~~are onnot sold by the Company. The ~~investments~~Fixed asAnnuities ifline ~~these~~includes ~~gains~~fixed orordinary ~~losses~~deferred ~~had~~annuities, ~~been~~tax ~~realized~~advantaged deferred annuities, annuities ~~with~~in ~~corresponding~~pay-out ~~credits~~and orstructured ~~charges~~settlements. Neither variable nor equity indexed annuity ~~included~~products inare ~~accumulated~~sold ~~other~~by ~~comprehensive~~the Company. The Group Life and Other line includes group life insurance and disability income products. The Corporate Account line includes investment income earned from surplus not specifically allocable to any one product type.

NOTE F — SEGMENT INFORMATION

The Company offers a range of products and services, but operates as one reportable life insurance segment. The Company’s Traditional Life insurance line includes permanent life, endowment life, term life and whole life policies. The Universal Life line includes all fixed universal life products sold by the Company. Variable universal life products are not sold by the Company. The Fixed Annuities line includes fixed ordinary deferred annuities, tax advantaged deferred annuities, annuities in pay-out and structured settlements. Neither variable nor equity indexed annuity products are sold by the Company. The Group Life and Other line includes group life insurance and disability income products. The Corporate Account line includes investment income earned from surplus not specifically allocable to any one product type. Investment-related income is allocated based on the assumption that the fixed maturities and preferred stock portfolios support the insurance product lines and the limited partnership and remaining fixed maturity investments support the Corporate Account.

ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE F6 — SEGMENT INFORMATION (Continued)

(in thousands)										Group
Three Months Ended	Traditional			Universal			Fixed			Life &			Corporate
March 31, 2005	Life			Life			Annuities			Other			Account			Total
Total policy revenue, net of reinsurance	$	9,995		$	3,507		$	0		$	906		$	0		$	14,408
Net investment and other income		1,745			2,304			14,168			57			2,813			21,087
Net realized losses on investments	(	117	)	(	146	)	(	943	)	(	4	)	(	143	)	(	1,353	)
Total revenues		11,623			5,665			13,225			959			2,670			34,142
Less: Total benefits and expenses		10,133			4,651			13,131			690			77			28,682
Income before taxes	$	1,490		$	1,014		$	94		$	269		$	2,593		$	5,460

Investment-related income is allocated based on the assumption that the fixed maturities and preferred stock portfolios support the insurance product lines and the limited partnership and remaining fixed maturity investments support the Corporate Account.

(in thousands)
								Group
Three Months Ended	Traditional		Universal			Fixed		Life &		Corporate
March 31, 2004	Life		Life*			Annuities*		Other		Account		Total
March 31, 2006	Life(1)		Life (2)			Annuities(3)		Other		Account		Total
Total policy revenue, net of reinsurance	$	910,~~644~~459	$	3,~~468~~731		$	0	$	~~867~~928	$	0	$	1315,~~979~~118
Net investment and other income		1,669		2,253			13,724		45		2,254		19,945
Total net investment and other income		1,904		2,526			14,655		67		2,431		21,583
Net realized gains on investments		243		295			1,986		7		317		2,848
Net realized capital gains		31		40			239		1		38		349
Total revenues		1112,~~556~~394		6,~~016~~297			1514,~~710~~894		~~919~~996		2,~~571~~469		3637,~~772~~050
Less: Total benefits and expenses		1011,~~357~~551		26,~~877~~302			1213,~~513~~955		~~491~~533		7886		2632,~~316~~427
Income before taxes	$	1,199	$	3,139		$	3,197	$	428	$	2,493	$	10,456
Income (loss) before income taxes	$	843	$	(5	)	$	939	$	463	$	2,383	$	4,623

* The March 31, 2004 universal life benefits and expenses were reduced by $1.8 million, and the fixed annuities benefits and expenses were increased by $0.1 million, for the unlocking of certain assumptions related to the amortization of the DAC.


										Group
Three Months Ended	Traditional			Universal			Fixed			Life &			Corporate
March 31, 2005	Life			Life			Annuities			Other			Account			Total
Total policy revenue, net of reinsurance	$	9,995		$	3,507		$	0		$	906		$	0		$	14,408
Total net investment and other income		1,745			2,304			14,168			57			2,813			21,087
Net realized capital losses		(117	)		(146	)		(943	)		(4	)		(143	)		(1,353	)

Total revenues		11,623			5,665			13,225			959			2,670			34,142
Less: Total benefits and expenses		10,133			4,651			13,131			690			77			28,682

Income before income taxes	$	1,490		$	1,014		$	94		$	269		$	2,593		$	5,460

NOTE G — REINSURANCE


(1)		The March 31, 2006 traditional life benefits and expenses include a $2.1 million increase in death benefits when compared to the same period in 2005.

(2)		The March 31, 2006 universal life benefits and expenses were increased by $0.9 million, compared to a reduction of $0.4 million in the first quarter of 2005, for the unlocking of certain assumptions related to the amortization of DAC.

(3)		The March 31, 2006 fixed annuities benefits and expenses include $0.5 million directly allocated for annuity related projects.

~~The~~NOTE ~~Company~~7 ~~has~~— ~~entered into various reinsurance treaties for the purpose of ceding certain~~REINSURANCE portions of life insurance according to established guidelines. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. Management believes all of its reinsurance assets are collectible; therefore, no allowance has been established for uncollectible amounts.

~~Included~~The ~~in the reinsurance treaties are provisions for expense allowances to be provided to the~~ Company byhas ~~the~~entered ~~reinsurer.~~into ~~These~~various ~~allowances~~reinsurance ~~are~~treaties ~~intended~~for ~~to help offset policy acquisition and maintenance costs incurred by~~ the ~~Company.~~purpose ~~The rate~~ of ~~reimbursement~~mitigating ~~varies~~risk ~~by plan and~~ in ~~some~~ ~~cases~~accordance bywith ~~reinsurer. The~~ Company ~~put~~guidelines. inReinsurance ~~place~~contracts ado ~~new~~not ~~ceded~~relieve ~~arrangement~~the ~~for~~Company ~~new~~from ~~issues under certain~~its ofobligations ~~its Target Term plans~~to

ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE G7 — REINSURANCE (Continued)

~~as of January 1, 2005~~policyholders. ~~This~~Failure ~~change~~of ~~did~~reinsurers ~~not~~to ~~have~~honor atheir ~~material~~obligations ~~impact~~could onresult ~~the~~in ~~first~~losses ~~quarter~~to ~~2005~~the ~~financial~~Company. ~~results~~Management ~~nor~~believes isall itof ~~expected~~its toreinsurance ~~have~~assets aare ~~material~~collectible; ~~impact~~therefore, onno allowance ~~the~~has ~~Company’s~~been ~~financial statements~~established infor ~~future~~uncollectible ~~periods~~amounts.

~~The~~As Company’s retention limit is $0.3 million per life for individual coverage. For its ERIE Flagship Term2 and ERIE Target Term products, the Company has first dollar quota share treaties with several unaffiliated reinsurers. The Company reinsures 50% and 90% of the ERIE Flagship Term2 and ERIE Target Term products, respectively, subject to the Company’s $0.3 million retention limit. For its disability income product, the Company has a 50% quota share agreement with its reinsurer. As of March 31, ~~2005~~2006 and ~~2004~~2005, $1214.6 billion and $1012.06 billion, respectively, of life insurance in in force was ceded to other companies. The Company’s most significant reinsurance relationship is is with Generali USA Reassurance Company (Generali), which reinsures a portion of the Company’s life and accident and health business. At March 31, ~~2005~~2006 and ~~2004~~2005, the amount of in-force life insurance ceded to Generali totaled approximately $67.96 billion and $56.89 billion, respectively.

Included in the reinsurance treaties are provisions for expense allowances to be provided to the Company by the reinsurer. These allowances are intended to help offset policy acquisition and maintenance costs incurred by the Company. The rate of reimbursement varies by plan and in some cases by reinsurer. In 2005, new reinsurance treaties entered into included a provision whereby the Company cedes a portion of its policy maintenance fees to the reinsures. In addition, effective January 2006, the Company amended its treaty with its largest reinsurer to include this provision. All of the agreements provide a 100% expense allowance on the ceded policy maintenance fees. Included in the policy revenue ceded and reinsurance expense allowance balances, through March 31, 2006, is $0.6 million related to ceded policy maintenance fees.

The effect of ceded reinsurance to the financial statement lines contained in the Statements of Operations is as follows:

(in thousands)	Three Months Ended			Three Months Ended
	Three Months Ended			Three Months Ended
	March 31, 2005			March 31, 2004
(in thousands)	March 31, 2006			March 31, 2005
Direct policy revenue	$	1921,~~286~~228		$	1819,~~023~~286
Policy revenue ceded	(	4(6,~~878~~110	)	(	(4,~~044~~878	)
Net policy revenue	$	1415,~~408~~118		$	1314,~~979~~408
Death benefits	$	56,~~059~~910		$	65,~~626~~059
Reinsurance recoveries	(	1,629	)	(	1,722	)
Reinsurance recoveries*		(1,408	)		(1,629	)
Net death benefits	$	35,~~430~~502		$	43,~~904~~430
Increases in future life policy benefits	$	45,~~231~~154		$	34,~~698~~231
Reinsurance reserve credits	(	(1,~~071~~910	)	(	(1,~~451~~071	)
Net increases in future life policy benefits	$	3,160		$	2,247
Net increases in future life policy benefits**	$	3,244		$	3,160
Commissions	$	2,~~162~~214		$	2,~~163~~162
Reinsurance commission allowance	(	(1,~~762~~791	)	(	(1,~~621~~762	)
Net commissions	$	~~400~~423		$	~~542~~400
General expenses	$	4,862		$	4,611
Reinsurance expense allowance		(563	)		(0	)
Net general expenses	$	4,299		$	4,611

The net increase in future life policy benefits in the first quarter of 2005 includes a $0.7 million charge to earnings related to an adjustment made to correct previously recorded reinsurance reserve credits, reflecting refinements in the method used to calculate these credits.


*		During the first quarter of 2006, three death claims that were outstanding at December 31, 2005 were rescinded. Death benefits and reinsurance recoveries on these policies totaled $1.5 million and $1.1 million, respectively. Excluding this adjustment, reinsurance recoveries as a percentage of death benefits for the first quarter of 2006 would have been 30.1%, compared to 32.2% for the first quarter of 2005.

**		The net increase in future life policy benefits in the first quarter of 2005 includes a $0.7 million charge to earnings related to an adjustment made to correct previously recorded reinsurance reserve credits, reflecting refinements in the method used to calculate these credits.

NOTE H — NOTES PAYABLE TO ERIE INDEMNITY COMPANY

The Company has $40 million due to Erie Indemnity Company (EIC) in the form of two surplus notes. The notes may be repaid only out of unassigned surplus of the Company. The first note, in the amount of $15 million, bears an annual interest rate of 6.45%. Interest on the note is scheduled to be paid semi-annually. The note is payable on demand on or after December 31, 2005. It is probable that EIC will allow the Company to repay this note through issuance of a new note with a later maturity date. Both principal and interest payments are subject to prior approval by the Pennsylvania Insurance Commissioner. Interest expense on this note totaled $0.2 million in the first quarter of 2005 and 2004.

ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE H8 — NOTES PAYABLE TO ERIE INDEMNITY COMPANY (Continued) The second note was issued in 2003 for an additional $25 million. This surplus note bears an annual interest rate of 6.70% and is scheduled to be paid semi-annually. The surplus note is payable on demand on or after December 31, 2018. Both principal and interest payments are subject to prior approval by the Pennsylvania Insurance Commissioner. Interest expense on this note totaled $0.4 million in the first quarter of 2005 and 2004. NOTE I — SUPPLEMENTARY DATA ON CASH FLOWS A reconciliation of net income to net cash provided by operating activities as presented in the Statements of Cash Flows is as follows:AFFILIATES

(in thousands)	Three Months Ended			Three Months Ended
	March 31, 2005			March 31, 2004
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income	$	3,549		$	6,516
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of deferred policy acquisition costs		2,254			228
Other amortization		232			246
Deferred federal income tax (benefit) expense	(	350	)		1,453
Realized losses (gains) on investments		1,353		(	2,848	)
Equity in earnings of limited partnerships	(	604	)	(	155	)
Decrease in premium and other receivables		454			204
Increase in accrued investment income	(	3,274	)	(	3,330	)
Policy acquisition costs deferred	(	3,547	)	(	3,476	)
Decrease (increase) in other assets		2		(	95	)
Increase in reinsurance recoverables and reserve credits	(	341	)	(	1,232	)
Decrease in prepaid federal income taxes		2,261			2,506
Increase in future policy benefits and claims		5,629			3,338
Increase (decrease) in other policyholder funds		1,043		(	2,296	)
Decrease in reinsurance premium due	(	1,674	)	(	1,089	)
Decrease in accounts payable and due to affiliates	(	1,289	)	(	1,373	)
Net cash provided by (used in) operating activities	$	5,698		( $	1,403	)

The Company holds a $25 million surplus note outstanding to Erie Indemnity Company. This note bears an annual interest rate of 6.7% and is scheduled to be paid semi-annually. The surplus note is payable on demand on or after December 31, 2018. Both principal and interest payments are subject to prior approval by the Pennsylvania Insurance Commissioner. Interest expense on this note totaled $0.4 million in the first quarter of 2006 and 2005.

~~NOTE~~The JCompany —also ~~COMMITMENTS~~holds a $20 million surplus note outstanding to the Erie Insurance Exchange that ~~AND~~was ~~CONTINGENCIES~~issued on December 30, 2005. This surplus note bears an annual interest rate of 6.26% and is scheduled to be paid semi-annually. The surplus note is payable on demand on or after December 31, 2025. Both principal and interest payments are subject to prior approval by the Pennsylvania Insurance Commissioner. Interest expense on this note totaled $0.3 million in the first quarter of 2006.

~~The~~NOTE ~~Company~~9 ~~has~~— ~~outstanding~~SUPPLEMENTARY ~~commitments~~DATA toON ~~invest~~CASH ~~up to $15.2 million in limited partnerships at~~FLOWS ~~March 31, 2005. These commitments will be funded as required through the end of the respective investment periods, which typically span 3 to 5 years.~~

A reconciliation of net income to net cash provided by operating activities as presented in the Statements of Cash Flows is as follows:


	Three Months Ended			Three Months Ended
(in thousands)	March 31, 2006			March 31, 2005
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net income	$	3,279		$	3,549
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of deferred policy acquisition costs		3,201			2,254
Other amortization		194			232
Deferred federal income tax expense (benefit)		288			(350	)
Realized (gains) losses on investments		(349	)		1,353
Equity in earnings of limited partnerships		(106	)		(604	)
Limited partnership distributions		262			2,592
Decrease in premium and other receivables		164			454
Increase in accrued investment income		(3,150	)		(3,274	)
Policy acquisition costs deferred		(3,565	)		(3,547	)
(Increase) decrease in other assets		(122	)		2
Increase in reinsurance recoverables and reserve credits		(1,070	)		(341	)
Decrease in prepaid federal income taxes		1,056			2,261
Increase in future policy benefits and claims		2,944			5,629
(Decrease) increase in other policyholder funds		(230	)		1,043
Decrease in reinsurance premium due		(1,180	)		(1,674	)
Decrease in accounts payable and due to affiliates		(3,178	)		(1,289	)

Net cash (used in) provided by operating activities	$	(1,562	)	$	8,290

ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE 10 — COMMITMENTS AND CONTINGENCIES

The Company has outstanding commitments to invest up to $22.5 million in limited partnerships at March 31, 2006. These commitments will be funded as required through the end of the respective investment periods, which typically span 3 to 5 years.

The Company is involved in litigation arising in the ordinary course of business. In the opinion of management, the effects, if any, of such litigation are not expected to be material to the Company’s financial condition, cash flows or operations.

NOTE K11 — STATUTORY INFORMATION

The minimum statutory capital and surplus requirements under Pennsylvania law for stock life insurance companies (Section 386 of the Pennsylvania Insurance Code) amounts to $1.65 million. The Company’s total statutory capital and surplus well exceeded these minimum requirements.

Bonds having a fair value of $2.1 million at March 31, ~~2005~~2006 and December 31, ~~2004~~2005, were on deposit with various regulatory authorities as required by law. The carrying value of these bonds are not material for separate disclosure on the Company’s Statement of Financial Position and are included with fixed maturities.

16NOTE 12 — TENDER OFFER

In March 2006, the Company announced a tender offer to be made by the Erie Insurance Exchange (Exchange) for all of the publicly held outstanding common stock of the Company. The Exchange currently owns 53.5% of the outstanding common stock of the Company and intends to offer to acquire the balance of the Company’s common stock at $32 per share in cash during the second quarter of 2006. The aggregate consideration for the outstanding shares would be approximately $75 million. The Exchange intends to complete the transaction as soon as practicable. EIC’s 21.6% stake in the Company will be unaffected by this transaction.

The offer will be conditioned on, among other things, the tender of a majority of the shares of the Company’s common stock owned by the Company’s shareholders other than shares owned by EIC, the Exchange, the Erie Insurance Group’s pension plan for employees and the executive officers and directors of EIC. The tender offer will not be conditioned on the Exchange obtaining any financing. The Exchange intends to acquire any shares not acquired in the tender offer in a subsequent “short form” merger transaction at the same $32 per share cash price.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL OPERATIONS

The following discussion and analysis should be read in conjunction with the historical financial information and ~~related~~the notes ~~found~~thereto onincluded ~~pages~~in 3Item 1 ~~through~~of 16this Quarterly Report on Form 10-Q, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2004~~2005, as filed with the Securities and Exchange Commission on ~~February~~ March 248, ~~2005~~2006.

FINANCIAL OVERVIEW

Net income decreased slightly to $3.53 million, or $0.3835 per share, in the first quarter of ~~2005~~2006, compared to $63.5 million, or $0.6938 per share, for the first quarter of ~~2004~~2005. ~~The~~Revenues increased $32.09 million ~~decrease~~ in the first quarter ~~2005~~of ~~earnings~~2006 ~~was~~ primarily ~~the~~due ~~result~~to ofan aincrease ~~$4.2 million change~~ in ~~realized gains and~~investment-related ~~losses on investments~~income. Realized ~~losses~~gains totaled $10.43 million during the first quarter of ~~2005~~2006, compared to realized losses ~~gains~~ of $21.84 million during the first quarter of ~~2004~~2005. ABenefits and expenses increased $23.~~0 million~~7 ~~increase~~million in ~~DAC~~2006 ~~amortization~~as ~~expense~~death inbenefits ~~2005~~and ~~also~~amortization ~~contributed~~of todeferred ~~the~~policy ~~reduction~~acquisition incosts ~~net income from~~(DAC) ~~the~~increased ~~first~~by ~~quarter of 2004~~$3.0 million.

REVENUES

Analysis of Policy Revenue

Total net policy revenue increased 34.19%, to $1415.41 million in the first quarter of ~~2005~~2006 from $14.04 million during the same period in ~~2004~~2005. Although total net premiums are up in ~~2005~~2006, ~~new~~premiums on new traditional policies issued declined in the first quarter of ~~2005~~2006 when compared to the same ~~period~~ period in ~~2004~~2005. Direct new premiums on traditional life insurance policies decreased 78.40% to $2.~~3 million~~1 million for the quarter ended March 31, ~~2005~~2006, from $2.43 million for the quarter ended March 31, 2005. ~~2004~~Effective January 1, 2006, the Erie Insurance Group introduced multi-policy discounts on auto and home insurance for policyholders who have a qualifying amount of life insurance with the Company. The Company believes this discount will have a positive effect on new life policy sales. The Erie Insurance Group also made 22 agency appointments in 2006 and is currently offering ERIE Agents a chance to qualify for a promotional incentive contest ending June 30, 2006.

Analysis of Investment-related Income

Net investment income increased $01.80 million to $2021.3 million in the first quarter of ~~2005~~2006 when compared to the same period in ~~2004~~2005. The increase in net investment income for the first quarter of ~~2005~~2006 is due in part to a moderate increase in the size of the investment portfolio and a slight improvement in yields on invested assets.

Net realized capital ~~losses~~gains on investments were $10.43 million in the first quarter of ~~2005~~2006, compared to net realized capital ~~gains~~losses of $21.84 million in the first quarter of ~~2004~~2005. The net realized ~~losses~~ losses for the first quarter of 2005 includes an impairment charge of $1.5 million. This ~~impairment~~ impairment charge was from a fixed maturity investment in the automotive industry.

1718

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL OPERATIONS (Continued)

The ~~Company’s~~ performance of ~~its~~the Company’s fixed maturities and preferred stock portfolios compared to ~~market~~the ~~indices~~market index is presented below. Annualized returns are shown pre-tax and include investment income, realized and unrealized gains and losses.

	Two year period ended
	March 31, 2005
	March 31, 2006
Erie Family Life Insurance Company indices:
Company performance:
Fixed maturities		52.~~75%~~06	%
Preferred stock		84.9448
Other indices:
Market index:
Lehman Brothers U.S. Aggregate		31.~~25%~~7	%

BENEFITS AND EXPENSES

~~Analysis~~Net ofdeath ~~Policy-related Benefits and Expenses~~benefits

Net death benefits on life insurance policies ~~decreased~~increased 30$2.1% million in the first quarter of ~~2005~~ 2006 to $35.4 5 million from the first quarter of ~~2004~~2005. ~~Random~~As ~~fluctuations~~the Company’s life insurance in force continues to grow, death benefits ~~incurred~~can ~~are~~ be expected ~~especially~~to ~~when~~increase. ~~mortality~~Net ~~results~~life ~~are~~insurance ~~measured~~in ~~over~~force ahas ~~short~~grown ~~period~~from $17.9 billion ofat ~~time~~March 31, ~~due~~2005 to ~~the small~~$18.4 billion ~~number~~at ofMarch 31, ~~claims~~2006. ~~These~~Additionally, ~~short-term~~death ~~fluctuations~~benefits in any single quarter can ~~influence~~vary ~~quarterly~~above or ~~annual~~below ~~results~~expected levels. Net death benefits in the first ~~without~~quarter ~~impacting~~of ~~long-term~~2006 ~~profitability~~were above average levels, whereas net death benefits in the first quarter of 2005 were below average levels. ~~Management~~Based on recent mortality studies, management believes its underwriting philosophy and practices are sound.

~~The~~Interest ~~liability for future life policy benefits is computed considering various factors such as~~expense anticipated mortality, future investment yields, withdrawals and anticipated credit for reinsurance ceded. Increase in future life policy benefits net of reinsurance ceded totaled $3.2 million in the first quarter of 2005 compared to $2.2 million in the first quarter of 2004, an increase of 40.6%. This increase includes a $0.7 million charge related to an adjustment made to correct previously recorded reinsurance reserve credits, reflecting refinements in the method used to calculate these credits.

~~Amortization~~Interest ofexpense ~~deferred~~incurred ~~policy~~on ~~acquisition~~annuity ~~costs~~deposits increased to5.4%, or $20.36 million, induring the first quarter of ~~2005,~~ ~~from~~2006 ~~$0.2 million~~when ~~during~~compared to the same period in ~~2004~~2005. InThis ~~accordance~~increase ~~with~~can ~~FAS~~be ~~97,~~attributed ~~the~~to ~~Company~~a ~~periodically~~growth ~~evaluates certain assumptions~~ in ~~use~~annuity todeposits ~~determine DAC~~ and ~~corresponding~~higher ~~amortization related~~credited ~~to its~~ interest ~~sensitive products~~rates. ~~During~~Rates ~~the~~credited ~~first quarter of 2005, the Company unlocked certain assumptions~~ on ~~its~~deferred ~~universal life and~~ annuity ~~products based on the results of an expense~~ ~~study.~~deposits Asranged afrom ~~result of unlocking these expense assumptions, the DAC asset was increased and the amortization of DAC was decreased by $0~~3.~~4 million. In addition, during its annual review of actual experience to assumptions used, the Company trued up certain items in the first quarter of 2005 resulting in a $0.~~5 ~~million~~% ~~increase~~— ~~in the DAC amortization~~6.25% ~~During~~during the first quarter of ~~2004~~2006, ~~the~~ ~~Company~~compared ~~unlocked assumptions relating~~ to ~~interest rate spreads on its interest sensitive products~~3.0% As— ~~a result of unlocking these assumptions, the DAC asset was increased and the amortization of DAC was decreased by $1~~4.7 ~~million~~% during the first quarter of ~~2004~~2005.

18Future life policy benefits

~~Table~~The liability for future life policy benefits is computed considering various factors such as anticipated mortality, future investment yields, withdrawals and anticipated credit for reinsurance ceded. Increase in future life policy benefits, net of ~~Contents~~reinsurance ceded, totaled $3.2 million for the first quarter of both 2006 and 2005. The 2005 net increase in future life policy benefits includes a $0.7 million charge related to a correction in the determination of reinsurance reserve credits. The prior calculation method overstated the amount of such credits for certain policy types due to an error in determining the inventory of policies qualifying for such credits.

~~ITEM~~DAC ~~2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF~~amortization ~~FINANCIAL OPERATIONS (Continued)~~

~~Analysis~~Amortization of ~~Other~~deferred ~~Expenses~~policy acquisition costs increased $0.9 million, or 42.0%, to $3.2 million in the first quarter of 2006, from $2.3 million during the same period in 2005. In accordance with FAS 97, the Company periodically evaluates certain assumptions used to determine DAC and corresponding amortization related to its interest sensitive products. During the first quarter of 2006, the Company unlocked assumptions on its universal life and annuity products related to interest rate spreads,

Direct commissions to independent agents include new and renewal commissions and production bonuses. These direct commission expenses are reported on the Statements of Operations net of commissions received from reinsurers. The reported expense is also affected by the amount of commission expenses capitalized as DAC. Commissions, which vary with and are related primarily to the production of new business, are deferrable as DAC. Most first-year and incentive commissions and some renewal commissions qualify for deferral as DAC. For the first quarter of 2005, the commission expense totaled $0.4 million, compared to $0.5 million for the first quarter of 2004. This decrease is partially attributable to the decline in annuity sales. Annuity premiums for the period ended March 31, 2005 were $19~~.7 million, compared to $22.7 million for the same period in~~ ~~2004. Commissions and bonuses on these premiums, net of DAC, were $0.2 million and $0.3 million for the periods ended March 31, 2005 and 2004, respectively.~~

GeneralTable expenses, net of DAC, increased $0.7 million from the first quarter of 2004, to $4.6 million for the first quarter of 2005. General expenses include wages and salaries, employee benefits, data processing expenses, professional fees, occupancy expenses and other office and general administrative expenses of the Company. Certain general expenses of the Company related to the acquisition and underwriting of new policies are deferred as DAC. Such expenses include medical inspection and exam fees related to new business production and salaries, wages and employee benefits of underwriting personnel. The increase in general expenses includes professional consulting fees related to the strengthening of internal accounting controls, increases in information technology costs and costs associated with the implementation of new actuarial valuation systems. In addition, in January 2005 the amount allocated to the Company for the salaries and benefits of various members of executive management of the Erie Insurance Group increased due to an increased amount of effort dedicated to Company issues. Contents

19ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL OPERATIONS (Continued)

~~Table~~investment returns and credited interest rates. As a result of ~~Contents~~unlocking these assumptions, the DAC asset was decreased and the amortization of DAC was increased by $0.8 million. During the first quarter of 2005, the Company unlocked certain assumptions on its interest sensitive products based on the results of an expense study. As a result of unlocking these expense assumptions, the DAC asset was increased and the amortization of DAC was decreased by $0.4 million during the first quarter of 2005.

~~ITEM~~Analysis 2.of ~~MANAGEMENT’S~~other ~~DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL~~expenses ~~OPERATIONS (Continued)~~

~~FINANCIAL~~General ~~CONDITION~~expenses

~~Investments~~General expenses, net of DAC and reinsurance expense allowances, decreased $0.3 million from the first quarter of 2005, to $4.3 million for the first quarter of 2006. General expenses include salaries, employee benefits, data processing expenses, professional fees, occupancy expenses and other office and general administrative expenses of the Company. Certain general expenses of the Company related to the acquisition and underwriting of new policies are deferred as DAC. The decrease in the first quarter of 2006 general expenses includes a $0.3 million credit adjustment for the re-estimation of certain litigation costs in previous periods. In addition, the Company has recently included a provision in several of its reinsurance treaties whereby the Company cedes a portion of its policy fees to reinsurers. This request was made by the Company’s reinsurers to enable them to reduce the impact of deficiency reserves. There is no impact to the Company’s net income as the Company receives an expense allowance of a 100% of these fees. These allowances reduced the general expenses for the first quarter of 2006 by $0.6 million. Offsetting these reductions to expenses are increases to the Company’s salaries of $0.3 million in 2006 due to increases in average pay rates and bonuses paid in the first quarter along with an increase to consultant fees of $0.2 million relating to various Company initiatives.

~~The~~Federal 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~~taxes ~~appreciation.~~

The Company’s ~~invested~~effective ~~assets~~tax ~~are~~rate ~~sufficiently~~for ~~liquid~~the tofirst ~~meet~~quarter ~~commitments~~of to2006, ~~its~~based on information reported in ~~policyholders.~~its AtStatement ~~March 31~~of Operations, ~~2005~~was 29.1%. During the quarter, the Company’s ~~investment~~adjusted ~~portfolio~~its ~~consisting~~deferred oftaxes to ~~cash,~~reflect a change in recognizing a deferred tax asset it previously recorded in 2005. This ~~investment~~adjustment ~~grade~~decreased ~~bonds~~the ~~and~~federal ~~investment~~income ~~grade~~tax ~~preferred~~expense ~~stock,~~for ~~totaled~~the ~~more~~period ~~than~~by $10.43 ~~billion~~million, or $0.03 per 84share.8% ofThe ~~total~~Company’s ~~assets.~~effective ~~These~~tax ~~resources~~rate ~~provide~~for the ~~liquidity~~quarter, ~~the~~excluding ~~Company~~this ~~requires~~adjustment, towould ~~meet~~have ~~known~~been ~~and unforeseen demands on its funds~~35.0%.

~~All~~FINANCIAL ~~investments are evaluated monthly for other-than-temporary impairment loss. Some factors~~CONDITION considered in evaluating whether or not a decline in fair value is other-than-temporary include: 1) the extent and duration to which fair value is less than cost, 2) historical operating performance and financial condition of the issuer, 3) near term prospects of the issuer and its industry, 4) specific events that occurred affecting the issuer, including a ratings downgrade, and 5) the Company’s ability and intent to retain the investment for a period of time sufficient to allow for a recovery in value. An investment which is deemed impaired is written down to its estimated net realizable value. For all investments except limited partnerships, the impairment charge is included as a realized loss in the Statements of Operations. For limited partnerships, the impairment charge is included as a component of equity in earnings of limited partnerships in the Statements of Operations.

~~If the Company’s policy for determining the recognition of impaired positions were changed, the~~Investments ~~Company’s Results of Operations could be significantly impacted. Management believes its investment~~ ~~valuation philosophy and accounting practices result in appropriate and timely measurement of value and recognition of impairment.~~

The Company’s ~~investments~~investment ~~are~~strategies ~~subject~~provide tothat ~~certain~~portfolios ~~risks,~~are ~~including~~structured ~~interest rate price risk and credit risk. The Company monitors exposure~~ to ~~interest~~match ~~rate~~the ~~risk~~features ~~through periodic reviews~~ of ~~asset~~ ~~and~~the ~~liability~~life ~~positions.~~insurance ~~Estimates~~and ofannuity ~~cash~~products ~~flows~~sold ~~and~~by the ~~impact~~Company. ofAnnuities ~~interest~~and ~~rate~~life ~~fluctuations relating~~insurance ~~to the investment portfolio~~ policies are ~~monitored~~long-term ~~regularly.~~products; ~~The~~therefore, the Company’s ~~objective~~investment isstrategy totakes ~~earn competitive relative returns by investing in~~ a ~~diverse~~long-term ~~portfolio~~perspective emphasizing ofinvestment ~~high-~~quality, ~~liquid securities.~~diversification ~~Portfolio characteristics are analyzed regularly~~ and ~~market~~superior ~~risk~~investment isreturns. ~~actively~~The ~~managed~~Company’s ~~through~~investments ~~a variety of techniques. Portfolio holdings~~ are ~~diversified~~managed ~~across~~on ~~industries,~~a ~~and concentrations~~total inreturn ~~any~~approach ~~one~~that ~~company~~focuses oron ~~industry~~current ~~are~~income ~~limited by parameters established by Company management~~ and ~~the Board of Directors~~capital appreciation.

20The Company’s invested assets are sufficiently liquid to meet commitments to its policyholders. At March 31, 2006, the Company’s investment portfolio consisting of cash, investment grade bonds and investment grade preferred stock, totaled more than $1.4 billion, or 93.3% of total investments. These resources provide the liquidity the Company requires to meet known and reasonable unforeseen demands on its funds.

~~Table of Contents~~20

ITEMTable 2.of MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL OPERATIONS (Continued) Contents

~~Reserve~~ITEM ~~Liabilities~~2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL OPERATIONS (Continued)

~~The~~All ~~Company’s~~investments ~~primary~~are ~~commitment~~evaluated ismonthly ~~its~~for ~~obligation~~other-than-temporary toimpairment ~~pay~~loss. ~~future~~Some ~~policy~~factors considered ~~benefits~~in ~~under~~evaluating ~~the~~whether ~~terms~~or ~~of its~~not ~~life~~a ~~insurance~~decline ~~and~~in ~~annuity~~fair ~~contracts.~~value Tois ~~meet~~other-than-temporary ~~these~~include: ~~future obligations,~~ 1) the ~~Company establishes~~extent ~~life~~and ~~insurance~~duration ~~reserves~~to ~~based~~which ~~upon~~fair ~~the~~value ~~type~~is ofless ~~policy~~than cost, 2) historical operating performance and financial condition of the ~~age~~issuer, ~~gender~~3) ~~and~~near ~~risk~~term ~~class~~ prospects of the ~~insured~~issuer and ~~the~~its ~~number~~industry ofbased on ~~years~~analysts’ ~~the~~recommendations, ~~policy~~4) ~~has~~specific ~~been~~events inthat ~~force.~~occurred ~~The~~affecting ~~Company~~the ~~also~~issuer, ~~establishes~~including a ~~annuity~~ratings downgrade, and ~~universal~~5) ~~life~~the ~~reserves~~Company’s ~~based~~ability onand ~~the~~intent ~~amount~~to ofhold ~~policyholder~~the ~~deposits~~investment ~~(less~~for ~~applicable insurance~~a ~~and~~period ~~expense~~of time ~~charges)~~sufficient ~~plus~~to ~~interest~~allow ~~earned~~for ona ~~those~~recovery ~~deposits~~in value. ~~Life~~An ~~insurance~~investment ~~and~~that ~~annuity reserves~~is ~~are~~deemed ~~supported~~impaired ~~primarily~~is bywritten down ~~the~~to ~~Company’s~~its ~~long-term,~~estimated ~~fixed~~net ~~income~~realizable ~~investments~~value. asImpairment ~~the underlying~~charges ~~policy~~are ~~reserves~~included ~~are~~as ~~generally~~realized ~~also~~losses ofin the aStatements ~~long-term~~of ~~nature~~Operations.

~~LIQUIDITY~~If ~~AND~~the ~~CAPITAL~~Company’s ~~RESOURCES~~policy for determining the recognition of impaired positions were changed, the Company’s Results of Operations could be significantly impacted. Management believes its investment valuation philosophy and accounting practices result in appropriate and timely measurement of value and recognition of impairment.

~~Liquidity~~The ~~is a measure of the~~ Company’s ~~ability~~investments toare ~~secure~~subject ~~enough cash~~ to ~~meet~~certain ~~its~~risks, ~~contractual obligations~~including ~~and~~interest ~~operating~~rate ~~needs.~~price ~~Insurance~~risk ~~premiums are collected prior to claims~~ and ~~benefit~~ ~~disbursements~~credit ~~and~~risk. ~~these~~The ~~funds~~Company ~~are~~monitors ~~invested~~exposure to ~~provide~~interest ~~necessary~~rate ~~cash~~risk ~~flows~~through inperiodic ~~future~~reviews ~~years.~~of ~~The~~asset ~~Company’s~~and ~~major~~liability ~~sources~~positions. Estimates of cash ~~from~~flows ~~operations~~and ~~are~~the ~~life~~impact ~~insurance~~of ~~premiums~~interest ~~and~~rate ~~investment income.~~fluctuations ~~Major~~relating ~~cash~~to ~~outflows~~the ~~from~~investment ~~operations~~portfolio are ~~for~~monitored ~~benefits~~regularly. toThe ~~policyholders,~~Company’s ~~commissions~~objective is to ~~agents and~~earn ~~salaries,~~competitive ~~wages~~relative ~~and~~returns ~~operating~~by ~~expenses.~~investing ~~The~~in ~~net~~a ~~positive~~diverse ~~cash~~portfolio ~~flow~~of ~~from~~high-quality, ~~operations~~liquid securities. isPortfolio ~~used~~characteristics toare ~~fund Company~~analyzed ~~commitments~~regularly and tomarket ~~build~~risk ~~the~~is ~~investment~~actively ~~portfolio,~~managed through ~~thereby~~a ~~increasing~~variety ~~future~~of ~~investment returns~~techniques. ~~Net~~Portfolio ~~cash~~holdings ~~provided~~are bydiversified ~~operating~~across ~~activities for the three months ended March 31~~industries, ~~2005 was~~and ~~$5.7 million.~~concentrations ~~With~~in ~~investments~~any ~~and~~one ~~cash~~company ~~and~~or ~~cash~~industry ~~equivalents~~are ~~totaling~~limited ~~approximately~~by ~~$1.5 billion at~~parameters ~~March 31,~~established ~~2005,~~by ~~the~~ Company’s management ~~liquidity~~and ~~position~~the ~~remains~~Board ~~strong~~of Directors.

~~Annuity~~Reserve ~~and universal life deposits, which do not appear as revenue on the Statement of Operations,~~Liabilities are a source of funds. These deposits do not involve a mortality or morbidity risk and are accounted for using methods applicable to comparable interest-bearing obligations of other types of financial institutions. This method of accounting records deposits as a liability rather than as revenue. Annuity and universal life deposits were $22.6 million in the first quarter of 2005 and $25.8 million in the first quarter of 2004. The Company’s ability to attract deposits depends in large part on the relative attractiveness of its products compared to other investment alternatives. Annuity deposits have slowed during recent years as the equity market has improved.

~~All~~The Company’s ~~commitments~~primary ~~are~~commitment ~~met~~is byits ~~cash~~obligation ~~flows~~to ~~from~~pay future policy ~~revenue,~~benefits ~~annuity~~under ~~and~~the ~~universal~~terms ~~life~~of ~~deposits and investment income. Management believes~~ its ~~cash~~life ~~flow~~insurance ~~from operations~~ and ~~its~~annuity ~~liquid assets~~contracts. ~~and~~To ~~marketable~~meet ~~securities~~these ~~will~~future ~~also~~obligations, ~~enable~~ the Company establishes tolife ~~meet~~insurance ~~any~~reserves ~~foreseeable~~based ~~cash requirements.~~upon ~~Also~~the ~~available~~type ~~as a source~~ of ~~funds~~policy, to the ~~Company~~age, isgender aand ~~$10 million~~risk ~~committed line~~class of ~~credit~~the ~~with~~insured aand ~~commercial~~the ~~bank.~~number ~~The~~of ~~Company~~years ~~may~~the ~~use~~policy ~~extensions~~has ofbeen ~~credit~~in ~~from~~force. ~~the~~The ~~bank~~Company toalso ~~fund~~establishes ~~working~~annuity ~~capital~~and ~~needs~~universal oflife ~~the~~reserves ~~Company~~based ~~and~~on ~~for~~the ~~other~~amount ~~general~~of ~~corporate~~policyholder ~~purposes.~~deposits At(less ~~March 31, 2005~~applicable insurance and ~~December 31,~~expense ~~2004,~~charges) ~~securities~~plus ~~held~~interest asearned ~~collateral~~ on ~~the~~those ~~committed~~deposits. ~~line~~Life ofinsurance ~~credit~~and ~~totaled $15.1~~annuity ~~million.~~reserves Atare ~~March 31,~~supported ~~2005~~primarily ~~and~~by ~~December 31,~~the ~~2004~~Company’s long-term, ~~there~~fixed ~~were~~income noinvestments ~~borrowings~~as onthe underlying ~~this~~policy ~~line~~reserves are generally also of ~~credit~~a long-term nature.

~~The~~LIQUIDITY ~~Company’s~~AND ~~$15 million~~CAPITAL ~~surplus note due to EIC is payable on demand on or after December 31,~~RESOURCES 2005. It is probable that EIC will allow the Company to repay this note through issuance of a new note with a later maturity date. Interest payments on this note, totaling $0.5 million each, are paid in June and December of each year.

21Liquidity is a measure of the Company’s ability to secure enough cash to meet its contractual obligations and operating needs. Insurance premiums are collected prior to claims and benefit disbursements and these funds are invested to provide necessary cash flows in future years. The Company’s major sources of cash from operations are life insurance premiums and investment income. Major cash outflows from operations are for benefits to policyholders, commissions to agents and salaries and other operating expenses. Net cash used in operating activities for the three months ended March 31, 2006 was $1.6 million, including $7.8 million of net death benefits paid to policyholders. Net death benefits paid to policyholders for the three months ended March 31, 2005 totaled $2.4 million. With investments and cash and cash equivalents totaling approximately $1.5 billion at March 31, 2006, the Company’s liquidity position remains strong.

~~Table~~Annuity and universal life deposits, which do not appear as revenue on the Statement of ~~Contents~~Operations, are a source of funds. These deposits do not involve a mortality or morbidity risk and are accounted for using methods applicable to comparable interest-bearing obligations of other types of financial institutions. This method of accounting records deposits as a liability rather than as revenue. Annuity and universal life deposits were $23.5 million in the first quarter of 2006 and $22.6 million in the first quarter of 2005. The Company’s ability to attract deposits depends in large part on the relative attractiveness of its product compared

~~ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL~~21 ~~OPERATIONS (Continued)~~

ForTable a complete discussion of the fixed contractual obligations see Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on February 24, 2005. Contents

~~FACTORS~~ITEM ~~THAT~~2. ~~MAY~~MANAGEMENT’S ~~AFFECT~~DISCUSSION ~~FUTURE~~AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL OPERATIONS (Continued)

~~Products~~to ~~with~~other ~~Interest~~investment ~~Rate~~alternatives. ~~Guarantees~~In August 2005, the Company began offering a new annuity product – ERIE Flagship Annuity. Because this new product uses a “New Money” interest rate method and has other attractive provisions, the Company expects this product to remain competitive in the market place.

~~The~~All Company’s commitments are met by cash flows from policy revenue, annuity and universal life deposits ~~contracts~~and ~~contain~~investment ~~provisions~~income. ~~that~~Management ~~guarantee~~believes ~~interest~~its ~~rates~~cash flow from operations and its liquid assets and marketable securities will ~~not~~also ~~decrease~~enable ~~below~~the ~~certain~~Company ~~levels~~to meet any foreseeable cash requirements. IfAlso ~~the~~available ~~interest~~as ~~rates~~a ~~earned~~source onof funds to the Company’s ~~investments~~is a $10 million committed line ~~become~~of ~~insufficient~~credit towith ~~meet~~a ~~targeted~~commercial bank. ~~interest~~The ~~spreads~~Company ~~because~~may use extensions of ~~these~~credit ~~minimum~~from ~~guarantees~~the bank to fund working capital needs of the Company and for other general corporate purposes. At March 31, ~~profit~~2006 and December 31, 2005, ~~margins~~securities held as collateral on ~~annuity~~the committed line of credit totaled $16.0 million and ~~universal~~$16.1 million, ~~life~~respectively. ~~deposits~~At ~~will~~March 31, ~~decrease~~2006 orand inDecember 31, ~~extreme~~2005, ~~situations~~there ~~could~~were ~~turn~~no borrowings on this ~~negative~~line of credit.

~~The~~For ~~Company~~a ~~revised~~complete ~~its~~discussion ~~deferred~~of ~~annuity~~the ~~products~~fixed incontractual ~~2003~~obligations tosee ~~lower~~Management’s ~~interest~~Discussion ~~rate guarantees on~~and ~~newly~~Analysis ~~issued~~of ~~policies~~Financial toCondition ~~1.5%~~and inResults ~~all~~of ~~policy~~Operations ~~years.~~contained ~~The~~in ~~guaranteed~~the ~~interest~~Annual ~~rates~~Report ~~and approximate~~on ~~deposit~~Form ~~liabilities~~10-K for ~~deferred~~the ~~annuity~~year ~~products~~ended ~~with~~December 31, ~~credited~~2005 ~~interest~~as ~~rates~~filed ~~subject~~with tothe ~~change~~Securities byand Exchange ~~the~~Commission ~~Company~~on ~~are~~March 8, ~~as follows:~~2006.

	Initial	Current
Policy	Guaranteed	Guaranteed	Deposit
Years	Interest Rate	Interest Rate	Liabilities
			(in thousands)
1-5	4.5%	4.5%	$	253,691
6-10	4.5	4.0		114,083
Over 10	4.5	3.5		188,487
All Years	3.0	3.0		32,462
All Years	1.5	1.5		38,685

Off-balance sheet arrangements

The Company ~~has~~does ~~some~~not ~~ability~~have toany ~~restrict~~off-balance ~~new~~sheet ~~deposits~~arrangements onnor ~~its~~does ~~universal life and annuity contracts. New deposits can be limited to planned premium amounts under~~ the ~~terms of the~~ Company’s ~~universal~~have ~~life~~relationships ~~contracts.~~with ~~Deposits~~any ~~are~~special ~~limited~~purpose ~~also by IRS guidelines~~entities. ~~Flexible premium deferred annuity~~ ~~(FPDA) contracts allow the Company to limit deposits to a maximum of $25,000 per year.~~

~~Market~~FACTORS ~~Conditions~~THAT ~~for~~MAY ~~Competing~~AFFECT ~~Products~~FUTURE RESULTS

~~The~~Products ~~Company’s deposit-type products compete~~ with aInterest ~~wide~~Rate ~~variety of investment options. Among other~~Guarantees factors affecting the investment decisions of policyholders and potential policyholders are general investment market conditions, particularly the market interest rate environment and the performance of the equity markets. Changes in interest rates affect pricing and the relative attractiveness of interest-sensitive investment options, which bears directly on the ability of the Company to attract new policyholders and retain existing holders of annuity, universal life and certain permanent life insurance products.

~~Investment~~The ~~Risk~~Company’s annuity and universal life contracts contain provisions that guarantee interest rates will not decrease below certain levels. If the interest rates earned on the Company’s investments become insufficient to meet targeted interest spreads because of these minimum guarantees, profit margins on annuity and universal life deposits will decrease or in extreme situations could turn negative.

The ~~Company~~guaranteed ~~is exposed to~~ interest ~~rate risk through its fixed maturities portfolio. As interest~~ rates ~~rise,~~and ~~impairment~~approximate ~~charges~~deposit ~~could~~liabilities befor ~~recognized~~deferred inannuity ~~future~~products ~~periods.~~with ~~Additionally,~~credited ~~the~~interest ~~emerging~~rates ~~authoritative~~subject ~~guidance~~to ~~on the~~change ~~determination~~by ~~of when an investment is impaired and whether~~ the ~~impairment~~ isCompany ~~other~~are ~~than~~as ~~temporary, could result in significant~~follows: ~~impairments being recognized in future periods.~~

Reinsurance


Initial		Current			Deposit
Guaranteed	Policy	Guaranteed			Liabilities
Interest Rate	Years	Interest Rate			(in Thousands)
4.5%	1-5		4.5	%	$	221,649
4.5%	6-10		4.0	%		110,212
4.5%	Over 10		3.5	%		200,603
3.0%	All Years		3.0	%		64,611
1.5%	All Years		1.5	%		48,375

Total					$	645,450

The Company ~~put~~has insome ~~place~~ability ato ~~new~~restrict ~~ceding arrangement for~~ new ~~issues~~deposits ~~under~~on ~~certain of~~ its ~~Target~~universal ~~Term plans~~life asand ofannuity ~~January 1, 2005~~contracts. ~~Allowances under this new arrangement are not as favorable as those~~ ~~under~~New ~~the~~deposits ~~arrangement~~can inbe ~~place~~limited through 2004. Increased reinsurance costs (reduced expense allowances) on this product will reduce the profitability of the Company’s traditional life line of business. This line of business, however, is expected to ~~remain~~planned ~~profitable.~~premium ~~Changes~~amounts inunder the ~~products,~~ ~~prices,~~terms ~~or features~~ of the Company’s ~~term product portfolio may be necessary in order to~~universal ~~return~~life ~~the profitability of this portfolio to desired levels~~contracts.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL OPERATIONS (Continued)

~~Financial~~Deposits ~~Ratings~~are limited also by IRS guidelines. Flexible premium deferred annuity (FPDA) contracts allow the Company to limit deposits to a maximum of $25,000 per year.

~~The~~As ~~combination~~mentioned ofpreviously, the Company ~~growth~~introduced ~~and~~a ~~declines~~new inportfolio ~~investment~~of ~~returns~~deferred ~~exposes~~annuity products during the ~~Company~~third toquarter ~~reduced statutory~~of ~~surplus levels~~2005. ~~Surplus~~The ~~levels~~new ~~are~~portfolio anincludes ~~important~~a ~~element~~number of ~~the~~features ~~rating~~that ~~process~~are ~~used~~expected byto ~~such~~add ~~agencies~~flexibility asin ~~A.M.~~dealing ~~Best~~with ~~and~~interest ~~Standard~~rate ~~& Poor’s~~changes, ~~which~~including ~~are~~higher ~~industry-accepted~~interest ~~measures~~rates ofon anlarger ~~insurance~~deposits ~~company’s~~and ~~financial~~a ~~health~~“new ~~and~~money” ~~ability~~interest crediting method that allows the Company to ~~meet~~quickly ~~ongoing~~change credited ~~obligations~~interest rates in response to ~~policyholders~~market conditions. ~~These~~ ~~ratings~~The ~~are~~portfolio has a ~~factor~~longer insurrender charge ~~establishing~~period ~~the~~and ~~competitive~~higher ~~position~~surrender ofcharge ~~insurance~~percentages, ~~companies~~which will reduce the Company’s vulnerability to disintermediation risk.

~~The~~Market ~~Company’s~~Conditions ~~rating~~for ~~from~~Competing ~~A.M. Best is A (Excellent). The A (Excellent) rating continues to affirm~~Products 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.

IfThe ~~the~~ Company’s ~~were~~deposit-type toproducts ~~incur~~compete ~~reductions~~with ina ~~statutory~~wide ~~surplus~~variety ~~for~~of aninvestment ~~extended~~options. ~~period~~Among ~~of time, the~~other ~~ratings~~factors ofaffecting the ~~Company~~investment ~~may~~decisions beof ~~downgraded.~~policyholders ~~Future~~and ~~downgrades~~potential inpolicyholders ~~these~~are orgeneral investment ~~other~~market ~~ratings~~conditions, ~~would~~particularly ~~reduce~~ the ~~competitive~~market ~~position~~interest ofrate ~~the~~environment ~~Company~~and bythe ~~making~~performance of itthe ~~more~~equity ~~difficult~~markets. toChanges ~~attract business~~ in ~~the highly~~interest ~~competitive~~rates ~~life~~affect ~~insurance~~pricing ~~industry.~~and ~~In such circumstances,~~ the ~~Company~~relative ~~may~~attractiveness ~~need to take~~of ~~measures~~interest-sensitive investment tooptions, ~~increase~~which ~~surplus~~bears ~~levels~~directly inon ~~order~~the toability ~~maintain~~of ~~adequate~~the ~~ratings.~~Company ~~The~~to ~~Company~~attract ~~may~~new ~~increase~~policyholders ~~surplus~~and ~~through~~retain aexisting ~~variety~~holders of ~~means~~annuity, ~~including~~universal ~~the~~life ~~issuance~~and ofcertain ~~additional~~permanent ~~surplus~~life ~~notes~~insurance products.

~~Implementation~~Information oftechnology ~~new valuation system~~development

InOn ~~2004~~April 13, 2006, the ~~Company~~Erie ~~implemented~~Insurance aGroup ~~new~~(Group) ~~valuation~~announced ~~system~~its ~~for~~decision ~~its~~to ~~statutory~~cease development of ErieConnection, the web based property and ~~tax~~casualty ~~reserves~~personal onlines policy processing and ~~traditional~~administration ~~products~~system under development since 2002. AsThis adecision ~~result,~~will ~~adjustments~~have ~~were~~no ~~made~~impact toon ~~conform~~the Company’s ~~reserve~~financial ~~estimates~~statements. The announcement followed an extensive study of the ~~old~~viability of the system toand consideration of the ~~estimates~~advancements ~~from~~in technology that have occurred since the inception ~~new~~of ~~system~~the ErieConnection program. The ~~Company~~Group ~~plans~~intends to ~~implement~~develop ~~the~~a ~~new~~program ~~valuation system~~of ~~for~~enhancements ~~GAAP~~to its ~~reserving~~existing onpolicy ~~traditional~~administration ~~products~~systems inand the ~~second~~existing ~~quarter~~agency ofinterface ~~2005.~~system, Ininvesting ~~implementing~~in ~~the~~improvements ~~new~~that ~~GAAP~~will ~~valuation~~enhance ~~system~~the ~~for~~ease ~~traditional~~of ~~products,~~doing ~~the~~business ~~Company~~with isthe ~~refining~~organization ~~its~~and ~~GAAP~~solidify ~~reserving~~the ~~methods,~~technological ~~assumptions~~infrastructure ~~and~~underlying ~~calculations~~these systems. ~~The~~Estimates ~~impact~~ of the ~~refined~~cost, ~~reserving~~duration ~~assumptions on the~~and ~~recorded~~deliverables ~~reserves~~under ~~cannot~~this beprogram ~~estimated~~are atcurrently ~~this~~being ~~time~~developed.

~~Introduction~~The ofCompany’s ~~ErieConnection®~~ability to attract new policyholders and to retain existing policyholders is directly influenced by the Company’s independent agents’ decisions to place business with the Company. To the extent that technological capabilities of alternative carriers represented by the Company’s agents are greater than those of the Company, the Company’s sales could be adversely affected.

InTender ~~2001, the Erie Insurance Group began a comprehensive program of eCommerce initiatives in support~~Offer of the Erie Insurance Group’s agency force and back office policy underwriting, issuance and administration for property/casualty business. The first major component of the eCommerce program (network and desktop hardware deployment) was completed during 2002.

~~The~~As ~~Erie~~referenced ~~Insurance~~in ~~Group~~footnote ~~has~~12, ~~spent~~the ~~$180~~Exchange expects to purchase all of the publicly held shares of the Company.~~4 million~~ onThis will eliminate the ~~eCommerce~~Company’s ~~program~~future ~~through~~public ~~March 2005~~filings with the Securities and Exchange Commission (SEC), and associated expenses. In addition, ~~Target~~based ~~delivery~~on ~~dates~~current ~~established~~regulations, inthe Company would be required to meet certain internal control evaluations under the Sarbanes-Oxley Act of 2002 ~~have~~beginning ~~generally~~in ~~not~~year ~~been~~2007. ~~met~~If asthe ~~management~~tender ~~has~~offer ~~devoted~~is completed as ~~increased~~scheduled, ~~effort~~however, the Company will not be subject to ~~quality~~these additional ~~assurance~~compliance requirements and thus, the expenses associated with the compliance efforts would not materialize The Exchange commenced the tender offer and has mailed offering materials to ~~ensure~~the ~~that~~Company’s shareholders. The Exchange has filed all necessary information with the ~~rollout~~SEC. ~~creates~~The ~~only~~completion ~~minimal~~of the tender offer and, if the tender offer is completed, ~~business~~the ~~disruption~~consummation of the merger, does not require approval by the Company’s Board of Directors.

~~While functional as a personal lines rating and policy administration system, ErieConnection agency~~23 interface has generally not met the Company’s or agent’s expectations for ease of use. The Company has postponed further deployment of the system until such usability issues are resolved. Estimates of the costs to improve the agency interface for ease of use needed to facilitate future deployment and the timetable for deployment are currently being developed.

23 Table of Contents

~~Table~~ITEM of3. ~~Contents~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~ITEM~~The 3Company’s exposure to market risk is primarily related to fluctuations in prices and interest rates. ~~QUANTITATIVE~~Quantitative ~~AND~~and ~~QUALITATIVE~~qualitative ~~DISCLOSURES~~disclosures ~~ABOUT~~about ~~MARKET~~market ~~RISK~~risk resulting from changes in prices and interest rates are included in Item 7A in the Company’s 2005 Annual Report on Form 10-K. The risks associated with interest rate guarantees on the Company’s universal life and annuity products are discussed in the Company’s Annual Report on Form 10-K for 2005 in Factors That May Affect Future Results. The information contained in the Investments section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2005 Annual Report on Form 10-K is incorporated herein by reference.

The Company’s also has exposure to ~~market~~credit risk isthrough ~~primarily~~its ~~related~~portfolios toof ~~fluctuations~~fixed inmaturity ~~prices~~securities, preferred ~~and~~stock, ~~interest rates.~~mortgage ~~Quantitative~~loans, and ~~qualitative~~to ~~disclosures~~a ~~about~~lesser ~~market~~extent, ~~risk~~short-term ~~resulting~~investments. ~~from~~This ~~changes~~risk ~~in prices~~is ~~and~~defined ~~interest~~as ~~rates~~the ~~are~~potential ~~included~~loss in ~~Item 7A~~market invalue ~~the~~resulting ~~Company’s~~from ~~2004~~adverse ~~Annual~~changes ~~Report~~in ~~on Form 10-K. The risks associated with interest rate guarantees on~~ the ~~Company~~borrower’s ~~universal life and annuity products~~ ~~are~~ability ~~discussed~~to inrepay the debt. The Company’s ~~Annual~~objective ~~Report~~is onto ~~Form~~earn ~~10-K~~competitive ~~for~~returns ~~2004~~by investing in ~~Factors~~a diversified ~~That~~portfolio ~~May~~of ~~Affect Future Results~~securities. The ~~information~~Company ~~contained~~manages inthis ~~the~~risk ~~Investments~~by ~~section~~performing ofup ~~Management’s Discussion~~front ~~and~~underwriting ~~Analysis~~analysis ofand ~~Financial~~regular ~~Condition~~reviews ~~and~~by ~~Results~~its ofinvestment ~~Operations~~staff. inThe ~~the~~fixed ~~Company’s~~maturity ~~2004~~investments are ~~Annual~~also ~~Report on~~maintained ~~Form~~between ~~10-K~~minimum isand ~~incorporated~~maximum ~~herein~~percentages byof ~~reference~~invested assets.

~~The~~“Safe ~~Company~~Harbor” ~~also~~Statement ~~has~~Under ~~exposure~~the toPrivate ~~credit~~Securities ~~risk~~Litigation ~~through~~Reform ~~its~~Act ~~portfolios~~ of ~~fixed~~1995: ~~maturity securities,~~Certain ~~preferred~~forward-looking ~~stock,~~statements ~~mortgage~~contained ~~loans,~~herein ~~and~~involve torisks aand ~~lesser~~uncertainties. ~~extent,~~These ~~short-term~~statements include ~~investments.~~certain ~~This~~discussions ~~risk~~relating ~~is defined~~to asunderwriting, ~~the~~premium ~~potential~~and ~~loss~~investment inincome ~~market~~volume, business ~~value~~strategies, ~~resulting~~profitability ~~from~~and ~~adverse~~business ~~changes~~relationships inand the ~~borrower~~Company’s other business ~~ability~~activities toduring ~~repay~~2006 ~~the~~and ~~debt~~beyond. ~~The~~In ~~Company’s~~some ~~objective~~cases, isyou tocan ~~earn~~identify ~~competitive~~forward-looking ~~returns~~statements by terms ~~investing~~such inas a“may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “intend,” “anticipate,” ~~diversified~~“believe,” ~~portfolio~~“estimate,” of“project,” ~~securities~~“predict,” “potential” and similar expressions. ~~The~~These forward-looking statements reflect the Company’s ~~manages~~current ~~this~~views ~~risk~~about byfuture ~~performing~~events, upare ~~front~~based on ~~underwriting~~assumptions ~~analysis~~and are subject to known and ~~regular~~unknown ~~reviews~~risks byand ~~its~~uncertainties ~~investment~~that ~~staff~~may cause results to differ materially from those anticipated in those statements. ~~The~~Many ~~fixed~~of ~~maturity~~the ~~investments~~factors that will ~~are~~determine ~~also~~future ~~maintained~~events ~~between~~or ~~minimum~~achievements ~~and~~are ~~maximum~~beyond ~~percentages~~our ofability ~~invested~~to ~~assets~~control or predict.

~~“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995: Certain~~24 forward-looking statements contained herein involve risks and uncertainties. These statements include certain discussions relating to underwriting, premium and investment income volume, business strategies, profitability and business relationships and the Company’s other business activities during 2005 and beyond. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions. These forward-looking statements reflect the Company’s current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that may cause results to differ materially from those anticipated in those statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict.

24 Table of Contents

~~Table~~ITEM of4. ~~Contents~~CONTROLS AND PROCEDURES

~~ITEM~~The 4Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based ~~CONTROLS~~upon ~~AND~~that ~~PROCEDURES~~evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. Our management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, any change in the Company’s internal control over financial reporting and determined that there has been no change in the Company’s internal control over financial reporting during the quarter ended March 31, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Evaluation of Disclosure Controls and Procedures~~25

AsTable of March 31, 2005, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, except as described in the following paragraph, the Company’s disclosure controls and procedures as of March 31, 2005 are effective for gathering, analyzing and disclosing the information the Company is required to disclose in reports it files under the Securities Exchange Act of 1934, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Contents

InPART its Form 10-K Annual Report for 2004, the Company reported a weakness in internal control over the information systems and processes used to record actuarially determined amounts and disclosures in the financial statementsII. ~~The~~OTHER ~~Company has also concluded it does not have sufficient qualified~~INFORMATION actuarial resources to assure timely review and detection of errors in actuarially determined information. The Company’s independent registered public accounting firm, Ernst & Young LLP, in conjunction with their audit of the Company’s 2004 financial statements, characterized this weakness as a material weakness, as defined under standards established by the Public Company Accounting Oversight Board (United States), which they have communicated to Company management and the Audit Committee of the Board of Directors.

AsITEM ~~reported in its 2004 Form 10-K, management developed a plan in collaboration with the Audit Committee of the Board to correct this weakness in internal control during 2005~~I. ~~The~~LEGAL ~~plan entails~~PROCEEDINGS implementation of improved procedures and controls over systems and procedures underlying actuarial computations and balances. The plan also entails an enhanced oversight structure over actuarial functions supporting financial reporting. The plan has been reviewed with, and progress is being monitored by, Ernst & Young LLP, the Audit Committee of the Board, and Company management including the Chief Executive Officer and Chief Financial Officer.

~~The~~A ~~Company~~civil ~~has~~class ~~made~~action ~~progress~~lawsuit was filed in ~~correcting~~April ~~the~~of ~~weakness~~2003 in ~~control~~the ~~during~~Court ~~the~~of ~~first~~Common ~~quarter~~Pleas of ~~2005~~Philadelphia County, ~~including~~Pennsylvania. ~~adding~~Erie ~~qualified~~Family ~~actuarial~~Life ~~resources~~Insurance toCompany ~~prepare~~(Company) ~~and~~is ~~review~~the ~~actuarially determined~~named ~~information.~~defendant Inin ~~addition,~~ the lawsuit. The Company isissued ina ~~the~~life ~~process~~insurance ofpolicy ~~installing~~to ~~new~~the ~~actuarial~~plaintiff. ~~valuation~~The class ~~systems~~action ~~that~~Complaint ~~will~~alleges ~~improve~~that the ~~information~~Company ~~systems~~charged ~~used~~and tocollected ~~determine~~annual premium for the ~~recorded~~first ~~actuarial~~year, but ~~amounts~~did not provide 365 days of insurance coverage. The Complaint alleges that the policy forms ~~Certain~~and ofapplications ~~these~~used ~~systems~~by ~~are~~the ~~expected~~Company todo benot ~~functional~~disclose ~~for~~“that ~~reporting~~a ~~under~~portion ~~generally~~of ~~accepted~~the first premium will ~~accounting~~cover ~~principles~~a inperiod of time during which the ~~second~~Company ~~quarter~~does ofnot ~~2005~~provide insurance coverage.”

~~Changes~~The inComplaint ~~Internal~~contains ~~Control~~four ~~Over~~counts. ~~Financial~~In ~~Reporting~~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.

~~Other~~In ~~than~~early 2004, the ~~improvements~~parties ~~made~~reached asan ~~discussed~~agreement ~~above~~to settle this lawsuit. Under the Settlement Agreement, ~~there~~the ~~have~~Company ~~been~~agreed noto ~~significant~~provide ~~changes~~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 ~~Company’s~~days. ~~internal~~On ~~controls~~April 30, or2004, inPlaintiff ~~other~~filed ~~factors~~a ~~that~~Motion ~~could~~for ~~significantly~~Preliminary ~~affect~~Approval ~~internal~~of ~~controls~~Settlement ~~subsequent~~Agreement. toAfter the ~~date~~filing of ~~management~~the Motion for Preliminary Approval, Plaintiff and the Company agreed the Company would pay attorneys’s ~~evaluation~~fees in an amount up to $150,000, and to reimburse certain litigation costs and expenses in an amount up to $15,000.

25The Court preliminarily reviewed the proposed settlement. As a result of conferences with the Court, the parties engaged in further settlement negotiations. The parties entered into an Amended and Re-Stated Class Action Settlement Agreement. On March 11, 2005, Plaintiff filed a Motion for Preliminary Approval of the Amended and Re-Stated Class Action Settlement Agreement.

~~Table~~The Amended and Re-Stated Class Action Settlement Agreement provides qualifying class members the option of ~~Contents~~choosing the supplemental life insurance coverage, discussed above, or a cash payment. Qualifying class members who select the cash payment option shall receive a maximum of one cash payment of $10.67 for each policy, irrespective of number of purchasers and/or owners of the policy. If a qualifying class member does not submit a cash payment selection form within the timeframe set forth in the Amended and Re-Stated Class Action Settlement Agreement, the qualifying class member shall automatically receive the supplemental life insurance coverage. The Company agrees to pay attorneys’ fees in an amount up to $150,000, and will reimburse administrative costs and expenses in an amount up to $14,000.

~~PART~~In IIDecember of 2005, the Court of Common Pleas of Philadelphia County, Pennsylvania entered a Final Order Approving the Class Action Settlement and Dismissing the Class Action With Prejudice. ~~OTHER~~ ~~INFORMATION~~The Court approved attorneys’ fees, administrative expenses, and costs as part of its Final Order. The time for filing an appeal expired and no appeal was filed. The attorneys’ fees, administrative expenses and costs were paid by EFL in February 2006. EFL mailed refund checks to qualifying class members selecting the cash refund option in March 2006. For class members receiving the supplemental death benefit coverage, the 180-day period for EFL to provide supplemental life insurance coverage to qualifying class members expires on July 19, 2006.

~~ITEM I. LEGAL PROCEEDINGS~~26

ATable 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.” Contents

~~The~~ITEM ~~Complaint contains four counts~~6. InEXHIBITS ~~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~~Exhibits Agreement, the Company agreed to provide supplemental life insurance coverage to qualifying class members in an amount equal to 4.62% of the face value of the underlying policy for a period of 180 days. On April 30, 2004, Plaintiff filed a Motion for Preliminary Approval of Settlement Agreement. After the filing of the Motion for Preliminary Approval, Plaintiff and the Company agreed the Company would pay attorneys’ fees in an amount up to $150,000, and to reimburse certain litigation costs and expenses in an amount up to $15,000.

The Court preliminarily reviewed the proposed settlement. As a result of conferences with the Court, the parties engaged in further settlement negotiations. The parties entered into an Amended and Re-Stated Class Action Settlement Agreement. On March 11, 2005, Plaintiff filed a Motion for Preliminary Approval of the Amended and Re-Stated Class Action Settlement Agreement.


Exhibit
Number		Description of Exhibit
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Statements of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

~~The Amended and Re-Stated Class Action Settlement Agreement provides qualifying class members the~~27 option of choosing the supplemental life insurance coverage, discussed above, or a cash payment. Qualifying class members who select the cash payment option shall receive a maximum of one cash payment of $10.67 for each policy, irrespective of number of purchasers and/or owners of the policy. If a qualifying class member does not submit a cash payment selection form within the timeframe set forth in the Amended and Re-Stated Class Action Settlement Agreement, the qualifying class member shall automatically receive the supplemental life insurance coverage. The Company agrees to pay attorneys’ fees in an amount up to $150,000, and will reimburse administrative costs and expenses in an amount up to $14,000.

ItTable 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. Contents

26SIGNATURES

~~Table~~Pursuant to the requirements of ~~Contents~~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.

~~ITEM~~Erie 6Family Life Insurance Company (Registrant) /s/ Jeffrey A. ~~EXHIBITS~~Ludrof (Jeffrey A. Ludrof, President & CEO) /s/ Philip A. Garcia (Philip A. Garcia, Executive Vice President & CFO)

~~Exhibits~~Date: May 3, 2006

Exhibit
Number		Description of Exhibit
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Statements of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: April 27, 2005 Erie Family Life Insurance Company(Registrant) /s/ Jeffrey A. Ludrof (Jeffrey A. Ludrof, President & CEO) /s/ Philip A. Garcia (Philip A. Garcia, Executive Vice President & CFO)

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