SEC Info - Erie Indemnity Co. - ‘10-Q’ for 6/30/22

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		Alternative Formats (Word, et al.) And Si And Six Cautionary Statement Regarding Forward-Looking Information Controls and Procedures Critical Accounting Estimates Exhibits Financial Condition Financial Information Financial Statements (Unaudited) Item 1 Item 1A Item 2 Item 3 Item 4 Item 6 June June 30 Legal Proceedings Liquidity and Capital Resources Management's Discussion and Analysis of Financial Condition and Results of Operations Months Ended Notes to Financial Statements Operating Overview Other Information Part I Part Ii Quantitative and Qualitative Disclosures About Market Risk Results of Operations Risk Factors Signatures Statements of Cash Flows Statements of Comprehensive Income -- Three Statements of Financial Position Statements of Operations -- Three Statements of Shareholders' Equity -- Three Table of Contents Three Unregistered Sales of Equity Securities and Use of Proceeds 2022 2022 and 2021 2022 and December 31, 2021
1	1st Page – Filing Submission
"	Table of Contents
"	Part I
"	Financial Information
"	Item 1
"	Financial Statements (Unaudited)
"	Statements of Operations -- Three
"	And Si
"	Months Ended
"	June
"	2022 and 2021
"	Statements of Comprehensive Income -- Three
"	And Six
"	Statements of Financial Position
"	2022 and December 31, 2021
"	Statements of Shareholders' Equity -- Three
"	June 30
"	Statements of Cash Flows
"	Notes to Financial Statements
"	2022
"	Item 2
"	Management's Discussion and Analysis of Financial Condition and Results of Operations
"	Cautionary Statement Regarding Forward-Looking Information
"	Operating Overview
"	Results of Operations
"	Financial Condition
"	Liquidity and Capital Resources
"	Critical Accounting Estimates
"	Item 3
"	Quantitative and Qualitative Disclosures About Market Risk
"	Item 4
"	Controls and Procedures
"	Part Ii
"	Other Information
"	Legal Proceedings
"	Item 1A
"	Risk Factors
"	Unregistered Sales of Equity Securities and Use of Proceeds
"	Item 6
"	Exhibits
"	Signatures

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

For the quarterly period ended i June 30, 2022

i ☐ 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 i 0-24000


			i ERIE INDEMNITY COMPANY
			(Exact name of registrant as specified in its charter)

i 100 Erie Insurance Place,

i Erie,

i Pennsylvania

i 16530

(Address of principal executive offices)

(Zip Code)


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


			Not applicable
			(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

i Class A common stock,

stated value $0.0292 per share

i ERIE

i NASDAQ Stock Market, LLC

(Title of each class)

(Trading Symbol)

(Name of each exchange on which registered)

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. i Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). i Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

i Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

i ☐

Emerging growth company

i ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The number of shares outstanding of the registrant’s Class A Common Stock as of the latest practicable date was i 46,189,068 at July 22, 2022.

The number of shares outstanding of the registrant’s Class B Common Stock as of the latest practicable date was i 2,542 at July 22, 2022.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ERIE INDEMNITY COMPANY

STATEMENTS OF OPERATIONS (UNAUDITED)

(dollars in thousands, except per share data)

Three months ended

Six months ended

June 30,

2022

2021

2022

2021

Operating revenue

Management fee revenue - policy issuance and renewal services

i 544,555

i 502,271

i 1,032,547

i 957,989

Management fee revenue - administrative services

i 14,476

i 14,667

i 28,789

i 29,514

Administrative services reimbursement revenue

i 160,675

i 157,190

i 324,002

i 310,723

Service agreement revenue

i 6,437

i 5,902

i 12,915

i 11,981

Total operating revenue

i 726,143

i 680,030

i 1,398,253

i 1,310,207

Operating expenses

Cost of operations - policy issuance and renewal services

i 461,468

i 437,775

i 885,939

i 838,324

Cost of operations - administrative services

i 160,675

i 157,190

i 324,002

i 310,723

Total operating expenses

i 622,143

i 594,965

i 1,209,941

i 1,149,047

Operating income

i 104,000

i 85,065

i 188,312

i 161,160

Investment income

Net investment income

i 8,268

i 13,650

i 18,772

i 30,747

Net realized and unrealized investment (losses) gains

( i 10,324)

i 2,769

( i 17,603)

i 3,573

Net impairment (losses) recoveries recognized in earnings

( i 38)

( i 1)

( i 254)

i 86

Total investment (loss) income

( i 2,094)

i 16,418

i 915

i 34,406

Interest expense

i 895

i 1,039

i 1,894

i 2,048

Other income (expense)

i 337

( i 548)

i 810

( i 1,067)

Income before income taxes

i 101,348

i 99,896

i 188,143

i 192,451

Income tax expense

i 21,201

i 20,867

i 39,377

i 39,856

Net income

i 80,147

i 79,029

i 148,766

i 152,595

Net income per share

Class A common stock – basic

i 1.72

i 1.70

i 3.19

i 3.28

Class A common stock – diluted

i 1.53

i 1.51

i 2.84

i 2.92

Class B common stock – basic and diluted

i i 258 /

i i 255 /

i i 479 /

i i 491 /

Weighted average shares outstanding – Basic

Class A common stock

i 46,188,845

i 46,188,289

i 46,188,803

i 46,188,573

Class B common stock

i 2,542

Weighted average shares outstanding – Diluted

Class A common stock

i 52,296,139

i 52,302,370

i 52,298,321

i 52,309,163

Class B common stock

i 2,542

Dividends declared per share

Class A common stock

i 1.11

i 1.035

i 2.22

i 2.070

Class B common stock

i 166.50

i 155.25

i 333.00

i 310.50

See accompanying notes to Financial Statements. See Note 11, "Accumulated Other Comprehensive Income (Loss)", for amounts reclassified out of accumulated other comprehensive income (loss) into the Statements of Operations.

ERIE INDEMNITY COMPANY

STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three months ended

Six months ended

June 30,

2022

2021

2022

2021

Net income

i 80,147

i 79,029

i 148,766

i 152,595

Other comprehensive (loss) income, net of tax

Change in unrealized holding (losses) gains on available-for-sale securities

( i 24,985)

i 2,676

( i 51,904)

( i 6,076)

Amortization of prior service costs and net actuarial loss on pension and other postretirement plans

i 1,737

i 3,463

i 3,467

i 6,926

Total other comprehensive (loss) income, net of tax

( i 23,248)

i 6,139

( i 48,437)

i 850

Comprehensive income

i 56,899

i 85,168

i 100,329

i 153,445

ERIE INDEMNITY COMPANY

STATEMENTS OF FINANCIAL POSITION

(dollars in thousands, except per share data)

June 30,

December 31,

2022

2021

Assets

(Unaudited)

Current assets:

Cash and cash equivalents

i 90,324

i 183,702

Available-for-sale securities

i 57,150

i 38,396

Receivables from Erie Insurance Exchange and affiliates, net

i 538,283

i 479,123

Prepaid expenses and other current assets

i 50,508

i 56,206

Accrued investment income

i 6,839

i 6,303

Total current assets

i 743,104

i 763,730

Available-for-sale securities, net

i 832,577

i 907,689

Equity securities

i 71,448

i 87,743

Fixed assets, net

i 402,475

i 374,802

Agent loans, net

i 61,865

i 58,683

Deferred income taxes, net

i 20,491

i 145

Other assets

i 48,262

i 49,265

Total assets

i 2,180,222

i 2,242,057

Liabilities and shareholders' equity

Current liabilities:

Commissions payable

i 305,984

i 270,746

Agent bonuses

i 55,146

i 120,437

Accounts payable and accrued liabilities

i 141,861

i 138,317

Dividends payable

i 51,693

Contract liability

i 35,836

i 34,935

Deferred executive compensation

i 6,045

i 12,637

Short-term borrowings

i 40,000

i —

Current portion of long-term borrowings

i —

i 2,098

Total current liabilities

i 636,565

i 630,863

Defined benefit pension plans

i 148,078

i 130,383

Long-term borrowings

i —

i 91,734

Contract liability

i 17,740

i 17,686

Deferred executive compensation

i 11,199

i 14,571

Other long-term liabilities

i 27,234

i 14,342

Total liabilities

i 840,816

i 899,579

Shareholders’ equity

Class A common stock, stated value $ i i 0.0292 / per share; i i 74,996,930 / shares authorized; i i 68,299,200 / shares issued; i i 46,189,068 / shares outstanding

i 1,992

Class B common stock, convertible at a rate of i i 2,400 / Class A shares for one Class B share, stated value $ i i 70 / per share; i i 3,070 / shares authorized; i i i i 2,542 / / / shares issued and outstanding

i 178

Additional paid-in-capital

i 16,481

i 16,496

Accumulated other comprehensive loss

( i 73,725)

( i 25,288)

Retained earnings

i 2,540,570

i 2,495,190

Total contributed capital and retained earnings

i 2,485,496

i 2,488,568

Treasury stock, at cost; i i 22,110,132 / shares held

( i 1,169,140)

( i 1,167,828)

Deferred compensation

i 23,050

i 21,738

Total shareholders’ equity

i 1,339,406

i 1,342,478

Total liabilities and shareholders’ equity

i 2,180,222

i 2,242,057

See accompanying notes to Financial Statements.

ERIE INDEMNITY COMPANY

STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

Three and six months ended June 30, 2022 and 2021

(dollars in thousands, except per share data)

Class A common stock

Class B common stock

Additional paid-in-capital

Accumulated other comprehensive loss

Retained earnings

Treasury stock

Deferred compensation

Total shareholders' equity

Balance, December 31, 2021

i 1,992

i 178

i 16,496

( i 25,288)

i 2,495,190

( i 1,167,828)

i 21,738

i 1,342,478

Net income

i 68,619

Other comprehensive loss

( i 25,189)

Dividends declared:

Class A $ i 1.11 per share

( i 51,270)

Class B $ i 166.50 per share

( i 423)

Net purchase of treasury stock (1)

( i 15)

i 0

( i 15)

Deferred compensation

( i 802)

i 802

i 0

Rabbi trust distribution (2)

i 298

( i 298)

i 0

Balance, March 31, 2022

i 1,992

i 178

i 16,481

( i 50,477)

i 2,512,116

( i 1,168,332)

i 22,242

i 1,334,200

Net income

i 80,147

Other comprehensive loss

( i 23,248)

Dividends declared:

Class A $ i 1.11 per share

( i 51,270)

Class B $ i 166.50 per share

( i 423)

Net purchase of treasury stock (1)

i 0

Deferred compensation

( i 907)

i 907

i 0

Rabbi trust distribution (2)

i 99

( i 99)

i 0

Balance, June 30, 2022

i 1,992

i 178

i 16,481

( i 73,725)

i 2,540,570

( i 1,169,140)

i 23,050

i 1,339,406

Class A common stock

Class B common stock

Additional paid-in-capital

Accumulated other comprehensive (loss) income

Retained earnings

Treasury stock

Deferred compensation

Total shareholders' equity

Balance, December 31, 2020

i 1,992

i 178

i 16,487

( i 78,143)

i 2,393,624

( i 1,163,670)

i 17,580

i 1,188,048

Net income

i 73,566

Other comprehensive loss

( i 5,289)

Dividends declared:

Class A $ i 1.035 per share

( i 47,806)

Class B $ i 155.25 per share

( i 395)

Net purchase of treasury stock (1)

i 9

i 0

i 9

Deferred compensation

( i 846)

i 846

i 0

Rabbi trust distribution (2)

i 876

( i 876)

i 0

Balance, March 31, 2021

i 1,992

i 178

i 16,496

( i 83,432)

i 2,418,989

( i 1,163,640)

i 17,550

i 1,208,133

Net income

i 79,029

Other comprehensive income

i 6,139

Dividends declared:

Class A $ i 1.035 per share

( i 47,805)

Class B $ i 155.25 per share

( i 394)

Net purchase of treasury stock (1)

i 0

Deferred compensation

( i 3,668)

i 3,668

i 0

Rabbi trust distribution (2)

i 97

( i 97)

i 0

Balance, June 30, 2021

i 1,992

i 178

i 16,496

( i 77,293)

i 2,449,819

( i 1,167,211)

i 21,121

i 1,245,102

(1)Net purchases of treasury stock in 2022 and 2021 include the repurchase of our Class A common stock in the open market that were subsequently distributed to satisfy stock-based compensation awards.

(2)Distributions of our Class A shares were made from the rabbi trust to two incentive compensation deferral plan participants in 2022 and to a retired director and an incentive compensation deferral plan participant in 2021.

See accompanying notes to Financial Statements.

ERIE INDEMNITY COMPANY

STATEMENTS OF CASH FLOWS (UNAUDITED)

Six months ended

June 30,

2022

2021

Cash flows from operating activities

Management fee received

i 1,019,016

i 985,317

Administrative services reimbursements received

i 317,819

i 301,509

Service agreement fee received

i 12,742

i 11,981

Net investment income received

i 18,595

i 18,735

Commissions paid to agents

( i 493,058)

( i 464,550)

Agents bonuses paid

( i 126,902)

( i 115,678)

Salaries and wages paid

( i 114,075)

( i 113,452)

Employee benefits paid

( i 21,108)

( i 16,567)

General operating expenses paid

( i 132,297)

( i 126,373)

Administrative services expenses paid

( i 333,532)

( i 310,617)

Income taxes paid

( i 38,989)

( i 40,503)

Interest paid

( i 1,937)

( i 2,082)

Net cash provided by operating activities

i 106,274

i 127,720

Cash flows from investing activities

Purchase of investments:

Available-for-sale securities

( i 211,492)

( i 168,671)

Equity securities

( i 7,157)

( i 28,408)

Other investments

( i 157)

( i 605)

Proceeds from investments:

Available-for-sale securities sales

i 123,758

i 59,203

Available-for-sale securities maturities/calls

i 74,628

i 99,788

Equity securities

i 10,131

i 29,856

Other investments

i 429

i 869

Purchase of fixed assets

( i 28,021)

( i 28,197)

Proceeds from disposal of fixed assets

i 156

i 0

Loans to agents

( i 8,769)

( i 2,930)

Collections on agent loans

i 4,298

i 3,584

Net cash used in investing activities

( i 42,196)

( i 35,511)

Cash flows from financing activities

Dividends paid to shareholders

( i 103,386)

( i 96,400)

Proceeds from short-term borrowings

i 55,000

i —

Payments on short-term borrowings

( i 15,000)

i —

Payments on long-term borrowings

( i 94,070)

( i 1,011)

Net cash used in financing activities

( i 157,456)

( i 97,411)

Net decrease in cash and cash equivalents

( i 93,378)

( i 5,202)

Cash and cash equivalents, beginning of period

i 183,702

i 161,240

Cash and cash equivalents, end of period

i 90,324

i 156,038

Supplemental disclosure of noncash transactions

Liability incurred to purchase fixed assets

i 24,833

i 13,024

Operating lease assets obtained in exchange for new operating lease liabilities

i 1,487

i 977

See accompanying notes to Financial Statements.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

Note 1. i Nature of Operations

Erie Indemnity Company ("Indemnity", "we", "us", "our") is a publicly held Pennsylvania business corporation that has since its incorporation in 1925 served as the attorney-in-fact for the subscribers (policyholders) at the Erie Insurance Exchange ("Exchange"). The Exchange, which also commenced business in 1925, is a Pennsylvania-domiciled reciprocal insurer that writes property and casualty insurance.

Our primary function as attorney-in-fact is to perform policy issuance and renewal services on behalf of the subscribers at the Exchange. We also act as attorney-in-fact on behalf of the Exchange with respect to all claims handling and investment management services, as well as the service provider for all claims handling, life insurance, and investment management services for its insurance subsidiaries, collectively referred to as "administrative services". Acting as attorney-in-fact in these i two capacities is done in accordance with a subscriber's agreement (a limited power of attorney) executed individually by each subscriber (policyholder), which appoints us as their common attorney-in-fact to transact certain business on their behalf. Pursuant to the subscriber's agreement for acting as attorney-in-fact in these i two capacities, we earn a management fee calculated as a percentage of the direct and affiliated assumed premiums written by the Exchange.

The policy issuance and renewal services we provide to the Exchange are related to the sales, underwriting and issuance of policies. The sales related services we provide include agent compensation and certain sales and advertising support services. Agent compensation includes scheduled commissions to agents based upon premiums written as well as additional commissions and bonuses to agents, which are earned by achieving targeted measures. The underwriting services we provide include underwriting and policy processing. The remaining services we provide include customer service and administrative support. We also provide information technology services that support all the functions listed above. Included in these expenses are allocations of costs for departments that support these policy issuance and renewal functions.

By virtue of its legal structure as a reciprocal insurer, the Exchange does not have any employees or officers. Therefore, it enters into contractual relationships by and through an attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of the Exchange with respect to its administrative services. The Exchange's insurance subsidiaries also utilize Indemnity for these services in accordance with the service agreements between each of the subsidiaries and Indemnity. Claims handling services include costs incurred in the claims process, including the adjustment, investigation, defense, recording and payment functions. Life insurance management services include costs incurred in the management and processing of life insurance business. Investment management services are related to investment trading activity, accounting and all other functions attributable to the investment of funds. Included in these expenses are allocations of costs for departments that support these administrative functions. The amounts incurred for these services are reimbursed to Indemnity at cost in accordance with the subscriber's agreement and the service agreements. State insurance regulations require that intercompany service agreements and any material amendments be approved in advance by the state insurance department.

Our results of operations are tied to the growth and financial condition of the Exchange. If any events occurred that impaired the Exchange’s ability to grow or sustain its financial condition, including but not limited to reduced financial strength ratings, disruption in the independent agency relationships, significant catastrophe losses, or products not meeting customer demands, the Exchange could find it more difficult to retain its existing business and attract new business. A decline in the business of the Exchange almost certainly would have as a consequence a decline in the total premiums paid and a correspondingly adverse effect on the amount of the management fees we receive. We also have an exposure to a concentration of credit risk related to the unsecured receivables due from the Exchange for its management fee and cost reimbursements. See Note 12, "Concentrations of Credit Risk".

Coronavirus ("COVID-19") pandemic

In March 2020, the outbreak of the coronavirus ("COVID-19") was declared a global pandemic and pandemic conditions have created an inflationary environment which may impact estimated loss reserves and future premium rates of the Exchange. The uncertainty resulting from COVID-19 and subsequent resulting conditions continues to evolve and the ultimate impact and duration remains uncertain at this time. We are unable to predict the duration or extent of the business disruption or the financial impact given the ongoing development of the pandemic and its impact on the economy and financial markets.

Note 2. i Significant Accounting Policies

Basis of presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP 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 six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information, refer to the financial statements and footnotes included in our Form 10-K for the year ended December 31, 2021 as filed with the Securities and Exchange Commission on February 24, 2022.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The majority of our revenue is derived from the subscriber’s agreement between us and the subscribers (policyholders) at the Exchange. Pursuant to the subscriber’s agreement, we earn a management fee calculated as a percentage, not to exceed i 25%, of all direct and affiliated assumed written premiums of the Exchange. We allocate a portion of our management fee revenue, currently i 25% of the direct and affiliated assumed written premiums of the Exchange, between the i two performance obligations we have under the subscriber’s agreement. The first performance obligation is to provide policy issuance and renewal services to the subscribers (policyholders) at the Exchange, and the second is to act as attorney-in-fact on behalf of the Exchange, as well as the service provider for its insurance subsidiaries, with respect to all administrative services.

The transaction price, including management fee revenue and administrative services reimbursement revenue, includes variable consideration and is allocated based on the estimated standalone selling prices developed using industry information and other available information for similar services. A constraining estimate of variable consideration exists related to the potential for management fees to be returned if a policy were to be cancelled mid-term. Management fees are returned to the Exchange when policyholders cancel their insurance coverage mid-term and premiums are refunded to them. The constraining estimate is determined using the expected value method, based on both historical and current information. The estimated transaction price, as reduced by the constraint, reflects consideration expected for performance of our services. We update the transaction price and the related allocation at least annually based upon the most recent information available or more frequently if there have been significant changes in any components considered in the transaction price.

The first performance obligation is to provide policy issuance and renewal services that result in executed insurance policies between the Exchange or one of its insurance subsidiaries and the subscriber (policyholder). The subscriber (policyholder) receives economic benefits when substantially all the policy issuance or renewal services are complete and an insurance policy is issued or renewed by the Exchange or one of its insurance subsidiaries. It is at the time of policy issuance or renewal that the allocated portion of revenue is recognized.

The Exchange, by virtue of its legal structure as a reciprocal insurer, does not have any employees or officers. Therefore, it enters into contractual relationships by and through an attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of the Exchange with respect to its administrative services in accordance with the subscriber's agreement. The Exchange's insurance subsidiaries also utilize Indemnity for these services in accordance with the service agreements between each of the subsidiaries and Indemnity. Collectively, these services represent a second performance obligation under the subscriber’s agreement and the service agreements. The revenue allocated to this performance obligation is recognized over a i four-year period representing the time over which these services are provided. The portion of revenue not yet earned is recorded as a contract liability in the Statements of Financial Position. During the three and six months ending June 30, 2022, we recognized revenue of $ i 10.0 million and $ i 22.7 million, respectively, that was included in the contract liabilities balance as of December 31, 2021. During the three and six months ended June 30, 2021, we recognized revenue of $ i 10.6 million and $ i 23.9 million, respectively, that was included in the contract liabilities balance as of December 31, 2020. The administrative services expenses we incur and the related reimbursements we receive are recorded gross in the Statements of Operations.

Indemnity records a receivable from the Exchange for management fee revenue when the premium is written or assumed by the Exchange. Indemnity collects the management fee from the Exchange when the Exchange collects the premiums from the subscribers (policyholders). As the Exchange issues policies with annual terms only, cash collections generally occur within one year.

The following table disaggregates revenue by our i two performance obligations:

Three months ended June 30,

Six months ended June 30,

(in thousands)

2022

2021

2022

2021

Management fee revenue - policy issuance and renewal services

i 544,555

i 502,271

i 1,032,547

i 957,989

Management fee revenue - administrative services

i 14,476

i 14,667

i 28,789

i 29,514

Administrative services reimbursement revenue

i 160,675

i 157,190

i 324,002

i 310,723

Total administrative services revenue

i 175,151

i 171,857

i 352,791

i 340,237

Note 4. i Earnings Per Share

i Class A and Class B basic earnings per share and Class B diluted earnings per share are calculated under the two-class method. The two-class method allocates earnings to each class of stock based upon its dividend rights. Class B shares are convertible into Class A shares at a conversion ratio of i 2,400 to 1. See Note 10, "Capital Stock". /

Class A diluted earnings per share are calculated under the if-converted method, which reflects the conversion of Class B shares to Class A shares. Diluted earnings per share calculations include the dilutive effect of assumed issuance of stock-based awards under compensation plans that have the option to be paid in stock using the treasury stock method.

A reconciliation of the numerators and denominators used in the basic and diluted per-share computations is presented as follows for each class of common stock:

Three months ended June 30,

2022

2021

(dollars in thousands, except per share data)

Allocated net income (numerator)

Weighted shares (denominator)

Per-share amount

Allocated net income (numerator)

Weighted shares (denominator)

Per-share amount

Class A – Basic EPS:

Income available to Class A stockholders

i 79,491

i 46,188,845

i 1.72

i 78,382

i 46,188,289

i 1.70

Dilutive effect of stock-based awards

i 0

i 6,494

—

i 0

i 13,281

—

Assumed conversion of Class B shares

i 656

i 6,100,800

—

i 647

i 6,100,800

—

Class A – Diluted EPS:

Income available to Class A stockholders on Class A equivalent shares

i 80,147

i 52,296,139

i 1.53

i 79,029

i 52,302,370

i 1.51

Class B – Basic and diluted EPS:

Income available to Class B stockholders

i i 656 /

i i 2,542 /

i i 258 /

i i 647 /

i i 2,542 /

i i 255 /

Six months ended June 30,

2022

2021

(dollars in thousands, except per share data)

Allocated net income (numerator)

Weighted shares (denominator)

Per-share amount

Allocated net income (numerator)

Weighted shares (denominator)

Per-share amount

Class A – Basic EPS:

Income available to Class A stockholders

i 147,548

i 46,188,803

i 3.19

i 151,346

i 46,188,573

i 3.28

Dilutive effect of stock-based awards

i 0

i 8,718

—

i 0

i 19,790

—

Assumed conversion of Class B shares

i 1,218

i 6,100,800

—

i 1,249

i 6,100,800

—

Class A – Diluted EPS:

Income available to Class A stockholders on Class A equivalent shares

i 148,766

i 52,298,321

i 2.84

i 152,595

i 52,309,163

i 2.92

Class B – Basic and diluted EPS:

Income available to Class B stockholders

i i 1,218 /

i i 2,542 /

i i 479 /

i i 1,249 /

i i 2,542 /

i i 491 /

Note 5. i Fair Value

Financial instruments carried at fair value

Our available-for-sale and equity securities are recorded at fair value, which is the price that would be received to sell the asset in an orderly transaction between willing market participants as of the measurement date.

Valuation techniques used to derive the fair value of our available-for-sale and equity securities are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect our own assumptions regarding fair market value for these securities. Financial instruments are categorized based upon the following characteristics or inputs to the valuation techniques:

•Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

•Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

•Level 3 – Unobservable inputs for the asset or liability.

Estimates of fair values for our investment portfolio are obtained primarily from a nationally recognized pricing service. Our Level 1 securities are valued using an exchange traded price provided by the pricing service. Pricing service valuations for Level 2 securities include multiple verifiable, observable inputs including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data. Pricing service valuations for Level 3 securities are based upon proprietary models and are used when observable inputs are not available or in illiquid markets.

Although virtually all of our prices are obtained from third party sources, we also perform internal pricing reviews, including evaluating the methodology and inputs used to ensure that we determine the proper classification level of the financial instrument and reviewing securities with price changes that vary significantly from current market conditions or independent price sources. Price variances are investigated and corroborated by market data and transaction volumes. We have reviewed the pricing methodologies of our pricing service as well as other observable inputs and believe that the prices adequately consider market activity in determining fair value.

In limited circumstances we adjust the price received from the pricing service when, in our judgment, a better reflection of fair value is available based upon corroborating information and our knowledge and monitoring of market conditions such as a disparity in price of comparable securities and/or non-binding broker quotes. In other circumstances, certain securities are internally priced because prices are not provided by the pricing service.

When a price from the pricing service is not available, values are determined by obtaining broker/dealer quotes and/or market comparables. When available, we obtain multiple quotes for the same security. The ultimate value for these securities is determined based upon our best estimate of fair value using corroborating market information. As of June 30, 2022, nearly all of our available-for-sale and equity securities were priced using a third party pricing service.

The following tables present our fair value measurements on a recurring basis by asset class and level of input as of:

June 30, 2022

(in thousands)

Total

Level 1

Level 2

Level 3

Available-for-sale securities:

Corporate debt securities

i 553,123

i 0

i 547,014

i 6,109

Collateralized debt obligations

i 99,219

i 0

i 99,219

i 0

Commercial mortgage-backed securities

i 68,849

i 0

i 59,978

i 8,871

Residential mortgage-backed securities

i 137,003

i 0

i 94,454

i 42,549

Other debt securities

i 20,382

i 0

i 20,382

i 0

U.S. Treasury

i 11,151

i 0

i 11,151

i 0

Total available-for-sale securities

i 889,727

i 0

i 832,198

i 57,529

Equity securities:

Financial services sector

i 57,841

i 512

i 55,463

i 1,866

Utilities sector

i 6,165

i 0

i 6,165

i 0

Energy sector

i 4,817

i 0

i 4,817

i 0

Consumer sector

i 2,625

i 0

i 2,625

i 0

Total equity securities

i 71,448

i 512

i 69,070

i 1,866

Total

i 961,175

i 512

i 901,268

i 59,395

December 31, 2021

(in thousands)

Total

Level 1

Level 2

Level 3

Available-for-sale securities:

Corporate debt securities

i 573,165

i 0

i 567,909

i 5,256

Collateralized debt obligations

i 115,462

i 0

i 115,462

i 0

Commercial mortgage-backed securities

i 89,324

i 0

i 73,596

i 15,728

Residential mortgage-backed securities

i 139,922

i 0

i 131,108

i 8,814

Other debt securities

i 23,920

i 0

i 23,920

i 0

U.S. Treasury

i 4,292

i 0

i 4,292

i 0

Total available-for-sale securities

i 946,085

i 0

i 916,287

i 29,798

Equity securities:

Financial services sector

i 71,722

i 1,624

i 68,015

i 2,083

Utilities sector

i 6,259

i 0

i 6,259

i 0

Energy sector

i 6,448

i 10

i 6,438

i 0

Consumer sector

i 3,314

i 0

i 3,314

i 0

Total equity securities

i 87,743

i 1,634

i 84,026

i 2,083

Total

i 1,033,828

i 1,634

i 1,000,313

i 31,881

i We review the fair value hierarchy classifications each reporting period. Transfers between hierarchy levels may occur due to changes in available market observable inputs.

Level 3 Assets – 2022 Quarterly Change:

(in thousands)

Beginning balance at March 31, 2022

Included in earnings(1)

Included
in other
comprehensive
income

Purchases

Sales

Transfers into

Level 3(2)

Transfers out of Level 3(2)

Ending balance at June 30, 2022

Available-for-sale securities:

Corporate debt securities

i 10,927

( i 8)

( i 334)

i 950

( i 2,611)

i 2,225

( i 5,040)

i 6,109

Commercial mortgage-backed securities

i 10,597

( i 588)

i 181

i 0

( i 2,665)

i 2,875

( i 1,529)

i 8,871

Residential mortgage-backed securities

i 212

( i 1)

i 2

i 4,887

( i 91)

i 37,540

i 0

i 42,549

Total available-for-sale securities

i 21,736

( i 597)

( i 151)

i 5,837

( i 5,367)

i 42,640

( i 6,569)

i 57,529

Equity securities

i 2,017

( i 151)

i 0

i 1,866

Total Level 3 securities

i 23,753

( i 748)

( i 151)

i 5,837

( i 5,367)

i 42,640

( i 6,569)

i 59,395

Level 3 Assets – 2022 Year-to-Date Change:

(in thousands)

Beginning balance at December 31, 2021

Included in earnings(1)

Included
in other
comprehensive
income

Purchases

Sales

Transfers into

Level 3(2)

Transfers out of Level 3(2)

Ending balance at June 30, 2022

Available-for-sale securities:

Corporate debt securities

i 5,256

i 5

( i 389)

i 4,934

( i 3,119)

i 5,774

( i 6,352)

i 6,109

Commercial mortgage-backed securities

i 15,728

( i 704)

( i 658)

i 0

( i 3,165)

i 4,335

( i 6,665)

i 8,871

Residential mortgage-backed securities

i 8,814

i 24

( i 334)

i 4,887

( i 2,846)

i 37,540

( i 5,536)

i 42,549

Total available-for-sale securities

i 29,798

( i 675)

( i 1,381)

i 9,821

( i 9,130)

i 47,649

( i 18,553)

i 57,529

Equity securities

i 2,083

( i 217)

i 0

i 1,866

Total Level 3 securities

i 31,881

( i 892)

( i 1,381)

i 9,821

( i 9,130)

i 47,649

( i 18,553)

i 59,395

Level 3 Assets – 2021 Quarterly Change:

(in thousands)

Beginning balance at March 31, 2021

Included in earnings(1)

Included
in other
comprehensive
income

Purchases

Sales

Transfers into

Level 3(2)

Transfers out of Level 3(2)

Ending balance at June 30, 2021

Available-for-sale securities:

Corporate debt securities

i 5,460

i 14

i 37

i 1,476

( i 303)

i 1,347

( i 1,953)

i 6,078

Collateralized debt obligations

i 0

i 750

i 0

i 750

Commercial mortgage-backed securities

i 16,241

( i 102)

( i 10)

i 579

( i 961)

i 2,624

( i 1,238)

i 17,133

Residential mortgage-backed securities

i 473

( i 3)

i 1

i 0

( i 224)

i 3,030

( i 236)

i 3,041

Other debt securities

i 521

i 0

( i 4)

i 2,060

( i 33)

i 0

i 2,544

Total available-for-sale securities

i 22,695

( i 91)

i 24

i 4,865

( i 1,521)

i 7,001

( i 3,427)

i 29,546

Equity securities

i 1,090

i 5

i 0

i 1,000

i 0

( i 1,095)

i 1,000

Total Level 3 securities

i 23,785

( i 86)

i 24

i 5,865

( i 1,521)

i 7,001

( i 4,522)

i 30,546

Level 3 Assets – 2021 Year-to-Date Change:

(in thousands)

Beginning balance at December 31, 2020

Included in earnings(1)

Included
in other
comprehensive
income

Purchases

Sales

Transfers into

Level 3(2)

Transfers out of Level 3(2)

Ending balance at June 30, 2021

Available-for-sale securities:

Corporate debt securities

i 5,825

i 20

i 79

i 2,258

( i 673)

i 2,549

( i 3,980)

i 6,078

Collateralized debt obligations

i 0

i 750

i 0

i 750

Commercial mortgage-backed securities

i 19,462

( i 197)

( i 447)

i 2,844

( i 966)

i 3,854

( i 7,417)

i 17,133

Residential mortgage-backed securities

i 937

( i 6)

i 0

( i 476)

i 3,030

( i 444)

i 3,041

Other debt securities

i 0

( i 2)

i 2,588

( i 42)

i 0

i 2,544

Total available-for-sale securities

i 26,224

( i 183)

( i 370)

i 8,440

( i 2,157)

i 9,433

( i 11,841)

i 29,546

Equity securities

i 0

i 5

i 0

i 1,000

i 0

i 1,090

( i 1,095)

i 1,000

Total Level 3 securities

i 26,224

( i 178)

( i 370)

i 9,440

( i 2,157)

i 10,523

( i 12,936)

i 30,546

(1)These amounts are reported as net investment income and net realized and unrealized investment (losses) gains for each of the periods presented above.

(2)Transfers into and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs.

Financial instruments not carried at fair value

The following table presents the carrying values and fair values of financial instruments categorized as Level 3 in the fair value hierarchy that are recorded at carrying value as of:

June 30, 2022

December 31, 2021

(in thousands)

Carrying value

Fair value

Carrying value

Fair value

Agent loans (1)

i 70,839

i 68,777

i 66,368

i 68,957

Long-term borrowings

i —

i 94,070

i 103,981

Short-term borrowings (2)

i 40,000

i —

(1)The discount rate used to calculate fair value at June 30, 2022 is reflective of an increase in the BB+ financial yield curve.

(2)The fair value reflects current market interest rates and approximates carrying value in our Statement of Financial Position at June 30, 2022.

Note 6. i Investments

Available-for-sale securities

See Note 5, "Fair Value" for additional fair value disclosures. i The following tables summarize the cost and estimated fair value, net of credit loss allowance, of our available-for-sale securities as of:

June 30, 2022

(in thousands)

Amortized cost

Gross unrealized gains

Gross unrealized losses

Estimated fair value

Corporate debt securities

i 586,857

i 187

i 33,921

i 553,123

Collateralized debt obligations

i 102,868

i 52

i 3,701

i 99,219

Commercial mortgage-backed securities

i 74,778

i 49

i 5,978

i 68,849

Residential mortgage-backed securities

i 150,035

i 56

i 13,088

i 137,003

Other debt securities

i 21,771

i 17

i 1,406

i 20,382

U.S. Treasury

i 11,296

i 5

i 150

i 11,151

Total available-for-sale securities, net

i 947,605

i 366

i 58,244

i 889,727

December 31, 2021

(in thousands)

Amortized cost

Gross unrealized gains

Gross unrealized losses

Estimated fair value

Corporate debt securities

i 565,997

i 9,663

i 2,495

i 573,165

Collateralized debt obligations

i 115,344

i 456

i 338

i 115,462

Commercial mortgage-backed securities

i 88,636

i 1,465

i 777

i 89,324

Residential mortgage-backed securities

i 140,217

i 1,007

i 1,302

i 139,922

Other debt securities

i 23,859

i 197

i 136

i 23,920

U.S. Treasury

i 4,226

i 73

i 7

i 4,292

Total available-for-sale securities, net

i 938,279

i 12,861

i 5,055

i 946,085

The amortized cost and estimated fair value of available-for-sale securities at June 30, 2022 are shown below by remaining contractual term to maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

June 30, 2022

Amortized

Estimated

(in thousands)

cost

fair value

Due in one year or less

i 57,501

i 57,107

Due after one year through five years

i 408,070

i 389,070

Due after five years through ten years

i 193,835

i 180,451

Due after ten years

i 288,199

i 263,099

Total available-for-sale securities (1)

i 947,605

i 889,727

(1)The contractual maturities of our available-for-sale securities are included in the table. However, given our intent to sell certain impaired securities, these securities are classified as current assets in our Statement of Financial Position at June 30, 2022.

The below securities have been evaluated and determined to be temporary declines in fair value for which we expect to recover our entire principal plus interest. The following tables present available-for-sale securities based on length of time in a gross unrealized loss position as of:

June 30, 2022

Less than 12 months

12 months or longer

Total

(dollars in thousands)

Fair
value

Unrealized
losses

Fair
value

Unrealized
losses

Fair
value

Unrealized
losses

No. of
holdings

Corporate debt securities

i 518,575

i 30,975

i 26,993

i 2,946

i 545,568

i 33,921

i 1,006

Collateralized debt obligations

i 73,825

i 2,684

i 22,805

i 1,017

i 96,630

i 3,701

i 148

Commercial mortgage-backed securities

i 60,844

i 5,394

i 3,827

i 584

i 64,671

i 5,978

i 121

Residential mortgage-backed securities

i 127,928

i 11,922

i 6,696

i 1,166

i 134,624

i 13,088

i 147

Other debt securities

i 19,121

i 1,406

i 0

i 19,121

i 1,406

i 41

U.S. Treasury

i 8,560

i 150

i 0

i 8,560

i 150

i 3

Total available-for-sale securities

i 808,853

i 52,531

i 60,321

i 5,713

i 869,174

i 58,244

i 1,466

Quality breakdown of available-for-sale securities:

Investment grade

i 703,654

i 41,032

i 54,745

i 5,033

i 758,399

i 46,065

i 719

Non-investment grade

i 105,199

i 11,499

i 5,576

i 680

i 110,775

i 12,179

i 747

Total available-for-sale securities

i 808,853

i 52,531

i 60,321

i 5,713

i 869,174

i 58,244

i 1,466

December 31, 2021

Less than 12 months

12 months or longer

Total

(dollars in thousands)

Fair
value

Unrealized
losses

Fair
value

Unrealized
losses

Fair
value

Unrealized
losses

No. of
holdings

Corporate debt securities

i 179,281

i 1,912

i 12,494

i 583

i 191,775

i 2,495

i 441

Collateralized debt obligations

i 64,270

i 278

i 9,370

i 60

i 73,640

i 338

i 104

Commercial mortgage-backed securities

i 28,001

i 595

i 917

i 182

i 28,918

i 777

i 61

Residential mortgage-backed securities

i 89,460

i 1,278

i 441

i 24

i 89,901

i 1,302

i 98

Other debt securities

i 14,576

i 136

i 0

i 14,576

i 136

i 24

U.S. Treasury

i 388

i 7

i 0

i 388

i 7

i 1

Total available-for-sale securities

i 375,976

i 4,206

i 23,222

i 849

i 399,198

i 5,055

i 729

Quality breakdown of available-for-sale securities:

Investment grade

i 330,697

i 3,801

i 17,112

i 434

i 347,809

i 4,235

i 366

Non-investment grade

i 45,279

i 405

i 6,110

i 415

i 51,389

i 820

i 363

Total available-for-sale securities

i 375,976

i 4,206

i 23,222

i 849

i 399,198

i 5,055

i 729

Credit loss allowance on investments

The current expected credit loss allowance on agent loans was $ i i 1.0 / million at both June 30, 2022 and December 31, 2021. The current expected credit loss allowance on available-for-sale securities was $ i 0.1 million at June 30, 2022 and less than $ i 0.1 million at December 31, 2021.

Net investment income

Investment income (loss), net of expenses, was generated from the following portfolios:

Three months ended June 30,

Six months ended June 30,

(in thousands)

2022

2021

2022

2021

Available-for-sale securities

i 7,015

i 5,790

i 13,373

i 11,987

Equity securities

i 975

i 1,116

i 1,963

i 2,318

Limited partnerships (1)

( i 290)

i 6,151

i 2,485

i 15,197

Cash equivalents and other

i 865

i 935

i 1,650

i 1,912

Total investment income

i 8,565

i 13,992

i 19,471

i 31,414

Less: investment expenses

i 297

i 342

i 699

i 667

Net investment income

i 8,268

i 13,650

i 18,772

i 30,747

(1)Equity in (losses) earnings of limited partnerships includes both realized gains (losses) and unrealized valuation changes. Our limited partnership investments are included in the line item "Other assets" in the Statements of Financial Position. We have made no new significant limited partnership commitments since 2006, and the balance of limited partnership investments is expected to decline over time as additional distributions are received.

Realized and unrealized investment gains (losses)

Realized and unrealized gains (losses) on investments were as follows:

Three months ended June 30,

Six months ended June 30,

(in thousands)

2022

2021

2022

2021

Available-for-sale securities:

Gross realized gains

i 418

i 1,075

i 909

i 2,998

Gross realized losses

( i 2,840)

( i 678)

( i 5,411)

( i 1,118)

Net realized (losses) gains on available-for-sale securities

( i 2,422)

i 397

( i 4,502)

i 1,880

Equity securities

( i 7,902)

i 2,371

( i 13,103)

i 1,692

Miscellaneous

i 0

i 1

i 2

i 1

Net realized and unrealized investment (losses) gains

( i 10,324)

i 2,769

( i 17,603)

i 3,573

The portion of net unrealized gains and losses recognized during the reporting period related to equity securities held at the reporting date is calculated as follows:

Three months ended June 30,

Six months ended June 30,

(in thousands)

2022

2021

2022

2021

Equity securities:

Net (losses) gains recognized during the period

( i 7,902)

i 2,371

( i 13,103)

i 1,692

Less: net (losses) gains recognized on securities sold

( i 51)

i 128

( i 409)

( i 293)

Net unrealized (losses) gains recognized on securities held at reporting date

( i 7,851)

i 2,243

( i 12,694)

i 1,985

Net impairment (losses) recoveries recognized in earnings

Impairments on available-for-sale securities were as follows:

Three months ended June 30,

Six months ended June 30,

(in thousands)

2022

2021

2022

2021

Available-for-sale securities:

Intent to sell

( i 31)

i —

( i 101)

i —

Credit (impaired) recovered

( i 7)

( i 1)

( i 153)

i 86

Net impairment (losses) recoveries recognized in earnings

( i 38)

( i 1)

( i 254)

i 86

Note 7. i Borrowing Arrangements

Term loan credit facility

In 2016, we entered into a credit agreement for a $ i 100 million senior secured draw term loan credit facility ("Credit Facility") for the acquisition of real property and construction of an office building that now serves as part of our principal headquarters. On January 1, 2019, the Credit Facility converted to a fully-amortized term loan with monthly payments of principal and interest at a fixed rate of i 4.35% over a period of i 28 years. In May 2022, we repaid the remaining $ i 93.2 million balance on the term loan. In conjunction with the payoff, pledged collateral was released and we accelerated amortization of $ i 0.2 million related to unamortized loan origination and commitment fees which is included in interest expense in the Statements of Operations for the three and six months ended June 30, 2022, respectively.

In October 2021, we entered into a new credit agreement with PNC Bank National Association to provide for a $ i 100 million bank revolving line of credit with a $ i 25 million letter of credit sublimit that expires on October 29, 2026. In May 2022, we borrowed on the line of credit to support the payoff of the term loan. As of June 30, 2022, outstanding borrowings on the line of credit totaled $ i 40 million and outstanding letters of credit totaled $ i 0.9 million, which reduces availability under the line of credit and letters of credit to $ i 59.1 million and $ i 24.1 million, respectively. The outstanding borrowings accrue interest at the rate of i 1.92% per annum and are expected to be repaid by September 30, 2022. Investments with a fair value of $ i 108.7 million were pledged as collateral on the line at June 30, 2022. The investments pledged as collateral have no trading restrictions and are reported as available-for-sale securities and cash and cash equivalents on our Statement of Financial Position as of June 30, 2022. The bank requires compliance with certain covenants, which include leverage ratios and debt restrictions, for our line of credit. We are in compliance with all covenants at June 30, 2022.

Note 8. i Postretirement Benefits

Our pension plans consist of a noncontributory defined benefit pension plan covering substantially all employees and an unfunded supplemental employee retirement plan for certain members of executive and senior management. Although we are the sponsor of these postretirement plans and record the funded status of these plans, the Exchange and its subsidiaries reimburse us for approximately i 58% of the annual benefit expense of these plans, which represents pension benefits for employees performing administrative services and their allocated share of costs for employees in departments that support the administrative functions.

Our funding policy is generally to contribute an amount equal to the greater of the target normal cost for the plan year, or the amount necessary to fund the plan to i 100%. Accordingly, we plan to make a $ i 25 million contribution during the third quarter of 2022.

The cost of our pension plans are as follows:

Three months ended June 30,

Six months ended June 30,

(in thousands)

2022

2021

2022

2021

Service cost for benefits earned

i 12,561

i 13,260

i 25,121

i 26,520

Interest cost on benefits obligation

i 9,941

i 9,206

i 19,882

i 18,412

Expected return on plan assets

( i 13,639)

( i 12,568)

( i 27,278)

( i 25,137)

Prior service cost amortization

i 360

i 357

i 721

i 714

Net actuarial loss amortization

i 1,830

i 4,026

i 3,660

i 8,053

Pension plan cost (1)

i 11,053

i 14,281

i 22,106

i 28,562

(1)The components of pension plan costs other than the service cost component are included in the line item "Other income (expense)" in the Statements of Operations after reimbursements from the Exchange and its subsidiaries.

Note 9. i Income Taxes

Income tax expense is provided on an interim basis based upon our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. For the three months ended June 30, 2022 and 2021, our effective tax rate was i i 20.9 / %. For the six months ended June 30, 2022 and 2021, our effective tax rate was i 20.9% and i 20.7%, respectively.

Note 10. i Capital Stock

Class A and B common stock

Holders of Class B shares may, at their option, convert their shares into Class A shares at the rate of i 2,400 Class A shares per Class B share. There were i i no / shares of Class B common stock converted into Class A common stock during the six months ended June 30, 2022 and the year ended December 31, 2021. There is no provision for conversion of Class A shares to Class B shares, and Class B shares surrendered for conversion cannot be reissued.

In 2011, our Board of Directors approved a continuation of the current stock repurchase program of $ i 150 million, with no time limitation. There were i i no / shares repurchased under this program during the six months ended June 30, 2022 and the year ended December 31, 2021. We had approximately $ i 17.8 million of repurchase authority remaining under this program at June 30, 2022.

Note 11. i Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income ("AOCI") (loss) by component, including amounts reclassified to other comprehensive income ("OCI") (loss) and the related line item in the Statements of Operations where net income is presented, are as follows:

Three months ended

June 30, 2022

June 30, 2021

(in thousands)

Before Tax

Income Tax

Net

Before Tax

Income Tax

Net

Investment securities:

AOCI (loss), beginning of period

( i 26,353)

( i 5,535)

( i 20,818)

i 18,306

i 3,845

i 14,461

OCI (loss) before reclassifications

( i 34,087)

( i 7,158)

( i 26,929)

i 3,783

i 795

i 2,988

Realized investment losses (gains)

i 2,422

i 508

i 1,914

( i 397)

( i 84)

( i 313)

Impairment losses

i 38

i 8

i 30

i 1

i 0

i 1

OCI (loss)

( i 31,627)

( i 6,642)

( i 24,985)

i 3,387

i 711

i 2,676

AOCI (loss), end of period

( i 57,980)

( i 12,177)

( i 45,803)

i 21,693

i 4,556

i 17,137

Pension and other postretirement plans:

AOCI (loss), beginning of period

( i 37,543)

( i 7,884)

( i 29,659)

( i 123,917)

( i 26,024)

( i 97,893)

Amortization of prior service costs

i 360

i 75

i 285

i 357

i 75

i 282

Amortization of net actuarial loss

i 1,837

i 385

i 1,452

i 4,027

i 846

i 3,181

OCI

i 2,197

i 460

i 1,737

i 4,384

i 921

i 3,463

AOCI (loss), end of period

( i 35,346)

( i 7,424)

( i 27,922)

( i 119,533)

( i 25,103)

( i 94,430)

Total

AOCI (loss), beginning of period

( i 63,896)

( i 13,419)

( i 50,477)

( i 105,611)

( i 22,179)

( i 83,432)

Investment securities

( i 31,627)

( i 6,642)

( i 24,985)

i 3,387

i 711

i 2,676

Pension and other postretirement plans

i 2,197

i 460

i 1,737

i 4,384

i 921

i 3,463

OCI (loss)

( i 29,430)

( i 6,182)

( i 23,248)

i 7,771

i 1,632

i 6,139

AOCI (loss), end of period

( i 93,326)

( i 19,601)

( i 73,725)

( i 97,840)

( i 20,547)

( i 77,293)

Six months ended

June 30, 2022

June 30, 2021

(in thousands)

Before Tax

Income Tax

Net

Before Tax

Income Tax

Net

Investment securities:

AOCI, beginning of period

i 7,722

i 1,621

i 6,101

i 29,384

i 6,171

i 23,213

OCI (loss) before reclassifications

( i 70,458)

( i 14,796)

( i 55,662)

( i 5,725)

( i 1,202)

( i 4,523)

Realized investment losses (gains)

i 4,502

i 945

i 3,557

( i 1,880)

( i 395)

( i 1,485)

Impairment losses (recoveries)

i 254

i 53

i 201

( i 86)

( i 18)

( i 68)

OCI (loss)

( i 65,702)

( i 13,798)

( i 51,904)

( i 7,691)

( i 1,615)

( i 6,076)

AOCI (loss), end of period

( i 57,980)

( i 12,177)

( i 45,803)

i 21,693

i 4,556

i 17,137

Pension and other postretirement plans:

AOCI (loss), beginning of period

( i 39,734)

( i 8,345)

( i 31,389)

( i 128,300)

( i 26,944)

( i 101,356)

Amortization of prior service costs

i 721

i 151

i 570

i 714

i 150

i 564

Amortization of net actuarial loss

i 3,667

i 770

i 2,897

i 8,053

i 1,691

i 6,362

OCI

i 4,388

i 921

i 3,467

i 8,767

i 1,841

i 6,926

AOCI (loss), end of period

( i 35,346)

( i 7,424)

( i 27,922)

( i 119,533)

( i 25,103)

( i 94,430)

Total

AOCI (loss), beginning of period

( i 32,012)

( i 6,724)

( i 25,288)

( i 98,916)

( i 20,773)

( i 78,143)

Investment securities

( i 65,702)

( i 13,798)

( i 51,904)

( i 7,691)

( i 1,615)

( i 6,076)

Pension and other postretirement plans

i 4,388

i 921

i 3,467

i 8,767

i 1,841

i 6,926

OCI (loss)

( i 61,314)

( i 12,877)

( i 48,437)

i 1,076

i 226

i 850

AOCI (loss), end of period

( i 93,326)

( i 19,601)

( i 73,725)

( i 97,840)

( i 20,547)

( i 77,293)

Note 12. i Concentrations of Credit Risk

Financial instruments could potentially expose us to concentrations of credit risk, including unsecured receivables from the Exchange. A large majority of our revenue and receivables are from the Exchange and its affiliates. See also Note 1, "Nature of Operations". Net management fee amounts and other reimbursements due from the Exchange and its affiliates were $ i 538.3 million and $ i 479.1 million at June 30, 2022 and December 31, 2021, respectively, which includes a current expected credit loss allowance of $ i i 0.5 / million in both periods.

Note 13. i Commitments and Contingencies

In 2020, we entered into an agreement with a bank for the establishment of a loan participation program for agent loans. The maximum amount of loans to be funded through this program is $ i 100 million. We have committed to fund a minimum of i 30% of each loan executed through this program. As of June 30, 2022, loans executed under this agreement totaled $ i 47.3 million, of which our portion of the loans is $ i 16.3 million. Additionally, we have agreed to guarantee a portion of the funding provided by the other participants in the program in the event of default. As of June 30, 2022, our maximum potential amount of future payments on the guaranteed portion is $ i 5.9 million. All loan payments under the participation program are current as of June 30, 2022.

We are involved in litigation arising in the ordinary course of conducting business. In accordance with current accounting standards for loss contingencies and based upon information currently known to us, we establish reserves for litigation when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss or range of loss can be reasonably estimated. When no amount within the range of loss is a better estimate than any other amount, we accrue the minimum amount of the estimable loss. To the extent that such litigation against us may have an exposure to a loss in excess of the amount we have accrued, we believe that such excess would not be material to our financial condition, results of operations, or cash flows. Legal fees are expensed as incurred. We believe that our accruals for legal proceedings are appropriate and, individually and in the aggregate, are not expected to be material to our financial condition, results of operations, or cash flows.

We review all litigation on an ongoing basis when making accrual and disclosure decisions. For certain legal proceedings, we cannot reasonably estimate losses or a range of loss, if any, particularly for proceedings that are in their early stages of development or where the plaintiffs seek indeterminate damages. Various factors, including, but not limited to, the outcome of potentially lengthy discovery and the resolution of important factual questions, may need to be determined before probability can be established or before a loss or range of loss can be reasonably estimated. If the loss contingency in question is not both probable and reasonably estimable, we do not establish an accrual and the matter will continue to be monitored for any developments that would make the loss contingency both probable and reasonably estimable. In the event that a legal proceeding results in a substantial judgment against, or settlement by, us, there can be no assurance that any resulting liability or financial commitment would not have a material adverse effect on the financial condition, results of operations, or cash flows.

Note 14. i Subsequent Events

No items were identified in this period subsequent to the financial statement date that required adjustment or additional disclosure.

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

The following discussion of financial condition and results of operations highlights significant factors influencing Erie Indemnity Company ("Indemnity", "we", "us", "our"). This discussion should be read in conjunction with the historical financial statements and the related notes thereto included in Part I, Item 1. "Financial Statements" of this Quarterly Report on Form 10-Q, and with Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for the year ended December 31, 2021, as contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2022.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995:

Statements contained herein that are not historical fact are forward-looking statements and, as such, are subject to risks and uncertainties that could cause actual events and results to differ, perhaps materially, from those discussed herein. Forward-looking statements relate to future trends, events or results and include, without limitation, statements and assumptions on which such statements are based that are related to our plans, strategies, objectives, expectations, intentions, and adequacy of resources. Examples of forward-looking statements are discussions relating to premium and investment income, expenses, operating results, and compliance with contractual and regulatory requirements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Among the risks and uncertainties, in addition to those set forth in our filings with the Securities and Exchange Commission, that could cause actual results and future events to differ from those set forth or contemplated in the forward-looking statements include the following:

•dependence upon our relationship with the Erie Insurance Exchange ("Exchange") and the management fee under the agreement with the subscribers at the Exchange;

•dependence upon our relationship with the Exchange and the growth of the Exchange, including:

◦general business and economic conditions;

◦factors affecting insurance industry competition;

◦dependence upon the independent agency system; and

◦ability to maintain our reputation for customer service;

•dependence upon our relationship with the Exchange and the financial condition of the Exchange, including:

◦the Exchange's ability to maintain acceptable financial strength ratings;

◦factors affecting the quality and liquidity of the Exchange's investment portfolio;

◦changes in government regulation of the insurance industry;

◦litigation and regulatory actions;

◦emergence of significant unexpected events, including pandemics;

◦emerging claims and coverage issues in the industry; and

◦severe weather conditions or other catastrophic losses, including terrorism;

•costs of providing policy issuance and renewal services to the Exchange under the subscriber's agreement;

•ability to attract and retain talented management and employees;

•ability to ensure system availability and effectively manage technology initiatives;

•difficulties with technology or data security breaches, including cyber attacks;

•ability to maintain uninterrupted business operations;

•outcome of pending and potential litigation;

•factors affecting the quality and liquidity of our investment portfolio; and

•our ability to meet liquidity needs and access capital.

A forward-looking statement speaks only as of the date on which it is made and reflects our analysis only as of that date. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changes in assumptions, or otherwise.

We serve as the attorney-in-fact for the subscribers (policyholders) at the Exchange, a reciprocal insurer that writes property and casualty insurance. Our primary function as attorney-in-fact is to perform policy issuance and renewal services on behalf of the subscribers at the Exchange. We also act as attorney-in-fact on behalf of the Exchange, as well as the service provider for its insurance subsidiaries, with respect to all administrative services.

The Exchange is a reciprocal insurance exchange, which is an unincorporated association of individuals, partnerships and corporations that agree to insure one another. Each applicant for insurance to the Exchange signs a subscriber's agreement, which contains an appointment of Indemnity as their attorney-in-fact to transact the business of the Exchange on their behalf. Pursuant to the subscriber’s agreement for acting as attorney-in-fact in these two capacities, we earn a management fee calculated as a percentage of the direct and affiliated assumed premiums written by the Exchange.

Our earnings are primarily driven by the management fee revenue generated for the services we provide to the Exchange. The policy issuance and renewal services we provide to the Exchange are related to the sales, underwriting and issuance of policies. The sales related services we provide include agent compensation and certain sales and advertising support services. Agent compensation includes scheduled commissions to agents based upon premiums written as well as additional commissions and bonuses to agents, which are earned by achieving targeted measures. Agent compensation generally comprises approximately two-thirds of our policy issuance and renewal expenses. The underwriting services we provide include underwriting and policy processing. The remaining services we provide include customer service and administrative support. We also provide information technology services that support all the functions listed above. Included in these expenses are allocations of costs for departments that support these policy issuance and renewal functions.

Our results of operations are tied to the growth and financial condition of the Exchange as the Exchange is our sole customer, and our earnings are largely generated from management fees based on the direct and affiliated assumed premiums written by the Exchange. The Exchange generates revenue by insuring preferred and standard risks, with personal lines comprising 70% of the 2021 direct and affiliated assumed written premiums and commercial lines comprising the remaining 30%. The principal personal lines products are private passenger automobile and homeowners. The principal commercial lines products are commercial multi-peril, commercial automobile and workers compensation.

Coronavirus ("COVID-19") Pandemic and Economic Uncertainty

Uncertainty resulting from current events, including but not limited to, the ongoing coronavirus ("COVID-19") pandemic, resulting continued supply chain disruptions and certain geopolitical concerns, have influenced various economic factors, including an elevated inflationary environment and rising interest rates in recent months. As these events continue to evolve, the ultimate impact and duration remain uncertain at this time.

While we were not required to close our physical locations under the state mandated closure of nonessential services during the COVID-19 pandemic, out of concern for the health and safety of our employees, over 90% of our workforce had been working remotely from March 2020 through April 2022. We have had no significant interruption to our core business processes or systems to date. We have had no significant changes to our financial close or reporting processes or related internal controls, nor do we anticipate any significant future challenges at this time. We have a dedicated team responsible for the development and implementation of a return to office plan. We began a phased return of our workforce in April 2022 and expect to continue reopening our offices through the remainder of 2022. Consistent with our process from the beginning of the COVID-19 pandemic, we will prioritize the health and safety of our employees and adjust when and where appropriate.


	Three months ended June 30,						Six months ended June 30,
(dollars in thousands, except per share data)	2022		2021		% Change		2022		2021		% Change
	(Unaudited)						(Unaudited)


Operating income	$	104,000	$	85,065	22.3	%	$	188,312	$	161,160	16.8	%
Total investment (loss) income	(2,094)		16,418		NM		915		34,406		(97.3)
Interest expense	895		1,039		(13.9)		1,894		2,048		(7.6)
Other income (expense)	337		(548)		NM		810		(1,067)		NM
Income before income taxes	101,348		99,896		1.5		188,143		192,451		(2.2)
Income tax expense	21,201		20,867		1.6		39,377		39,856		(1.2)
Net income	$	80,147	$	79,029	1.4	%	$	148,766	$	152,595	(2.5)	%
Net income per share – diluted	$	1.53	$	1.51	1.4	%	$	2.84	$	2.92	(2.5)	%

Operating income increased in both the second quarter and six months ended June 30, 2022, compared to the same periods in 2021, as growth in operating revenue outpaced the growth in operating expenses. Management fee revenue for policy issuance and renewal services increased 8.4% to $544.6 million in the second quarter of 2022 and 7.8% to $1.0 billion for the six months ended June 30, 2022. Management fee revenue is based upon the management fee rate we charge and the direct and affiliated assumed premiums written by the Exchange. The management fee rate was 25% for both 2022 and 2021. The direct and affiliated assumed premiums written by the Exchange increased 8.6% to $2.2 billion in the second quarter of 2022 and increased 7.8% to $4.3 billion for the six months ended June 30, 2022 compared to the same periods in 2021.

Cost of operations for policy issuance and renewal services increased 5.4% to $461.5 million and 5.7% to $885.9 million in the second quarter and six months ended June 30, 2022, compared to the same periods in 2021, primarily due to higher scheduled commissions driven by direct and affiliated assumed written premium growth, as well as increased professional fees and technology investments.

Management fee revenue for administrative services decreased 1.3% to $14.5 million and 2.5% to $28.8 million in the second quarter and six months ended June 30, 2022, compared to the same periods in 2021. The administrative services reimbursement revenue and corresponding cost of operations increased both total operating revenue and total operating expenses by $160.7 million in the second quarter of 2022 and $324.0 million for the six months ended June 30, 2022, but had no net impact on operating income.

Total investment income decreased $18.5 million and $33.5 million in the second quarter and six months ended June 30, 2022, compared to the same periods in 2021. The results from both periods were primarily due to net realized and unrealized investment losses in 2022 and a decrease in net investment income.


PART I.			FINANCIAL INFORMATION

Item 1.			Financial Statements (Unaudited)

			Statements of Operations – Three and si x months ended June 3 0 , 2022 and 2021

			Statements of Comprehensive Income – Three and six months ended June 3 0 , 2022 and 2021

			Statements of Financial Position – June 3 0 , 2022 and December 31, 2021

			Statements of Shareholders' Equity – Three and six months ended June 30 , 2022 and 2021

			Statements of Cash Flows – S ix months ended June 3 0 , 2022 and 2021

			Notes to Financial Statements – June 3 0 , 2022

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 1A.			Risk Factors

Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds



Item 6.			Exhibits


			SIGNATURES


	Three months ended June 30,						Six months ended June 30,
(dollars in thousands)	2022		2021		% Change		2022		2021		% Change
	(Unaudited)						(Unaudited)
Commissions:
Total commissions	$	307,483	$	293,220	4.9	%	$	588,618	$	554,601	6.1	%
Non-commission expense:
Underwriting and policy processing	$	42,802	$	43,181	(0.9)	%	$	83,856	$	83,769	0.1	%
Information technology	51,106		46,076		10.9		96,772		92,481		4.6
Sales and advertising	14,271		14,590		(2.2)		26,996		25,533		5.7
Customer service	8,738		9,131		(4.3)		17,085		17,929		(4.7)
Administrative and other	37,068		31,577		17.4		72,612		64,011		13.4
Total non-commission expense	153,985		144,555		6.5		297,321		283,723		4.8
Total cost of policy issuance and renewal services	$	461,468	$	437,775	5.4	%	$	885,939	$	838,324	5.7	%


(in thousands)	June 30, 2022 (1)
	AAA		AA		A		BBB		Non- investment grade		Fair value
	(Unaudited)
Basic materials	$	0	$	0	$	3,021	$	0	$	6,974	$	9,995
Communications	0		8,261		7,957		12,831		14,524		43,573
Consumer	0		2,985		15,468		68,705		34,787		121,945
Diversified	0		0		0		0		1,405		1,405
Energy	0		3,937		7,223		20,132		7,118		38,410
Financial	0		0		84,231		118,118		14,133		216,482





Industrial	0		0		9,314		15,942		19,871		45,127
Structured securities (2)	117,557		171,493		22,519		13,885		0		325,454
Technology	4,898		0		5,410		21,610		11,658		43,576
U.S. Treasury	0		11,151		0		0		0		11,151
Utilities	0		0		3,466		24,891		4,252		32,609
Total	$	122,455	$	197,827	$	158,609	$	296,114	$	114,722	$	889,727


(dollars in thousands, except per share data)
Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced program	Dollar value of shares that may yet be purchased under the program

April 1-30, 2022	—	$	—	—	$	17,754
May 1-31, 2022 (1)	1,778	166.62		—	17,754
June 1-30, 2022 (1)	3,353	174.02		—	17,754
Total	5,131	171.46		—


Exhibit
Number						Description of Exhibit

10.1						Form of Indemnification Agreement by and between Erie Indemnity Company and Jorie L. Novacek. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant's Form 10-K that was filed with the Commission on February 26, 2009.

10.2*						Erie Indemnity Company Equity Compensation Plan (As Amended and Restated April 26, 2022), dated June 28, 2022.

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*						Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*						Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH*						Inline XBRL Taxonomy Extension Schema Document.

101.CAL*						Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*						Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*						Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*						Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104*						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

Erie Indemnity Co. – ‘10-Q’ for 6/30/22

On: Thursday, 7/28/22, at 4:31pm ET · For: 6/30/22 · Accession #: 922621-22-32 · File #: 0-24000

Previous ‘10-Q’: ‘10-Q’ on 4/28/22 for 3/31/22 · Next: ‘10-Q’ on 10/27/22 for 9/30/22 · Latest: ‘10-Q’ on 10/26/23 for 9/30/23 · 3 References:

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			Page Number
Cautionary Statement Regarding Forward-Looking Information			23


Operating Overview			24
Results of Operations			27




Financial Condition			33



Liquidity and Capital Resources			34

Critical Accounting Estimates			36


(dollars in thousands)	June 30, 2022		% to total		December 31, 2021		% to total
	(Unaudited)
Fixed maturities	$	889,727	83	%	$	946,085	83	%
Equity securities	71,448		7		87,743		8
Agent loans (1)	70,839		7		66,368		6
Other investments	38,298		3		36,846		3
Total investments	$	1,070,312	100	%	$	1,137,042	100	%

This ‘10-Q’ Filing	Date	Other Filings

	10/29/26
	12/31/22
	9/30/22
Filed on:	7/28/22	8-K
	7/22/22	4
For Period end:	6/30/22
	3/31/22	10-Q, 4
	2/25/22
	2/24/22	10-K, 8-K
	1/27/22
	12/31/21	10-K, 4
	12/6/21
	11/2/21	4
	10/20/21	4
	9/20/21
	8/24/21	8-K
	7/27/21	8-K
	6/30/21	10-Q, 4
	3/31/21	10-Q, 4
	12/31/20	10-K, 4
	7/1/20	4, 4/A
	1/1/19
		List all Filings

Erie Indemnity Co. – ‘10-Q’ for 6/30/22

On: Thursday, 7/28/22, at 4:31pm ET · For: 6/30/22 · Accession #: 922621-22-32 · File #: 0-24000

Quarterly Report — Form 10-QFiling Table of Contents

‘10-Q’ — Quarterly ReportDocument Table of Contents

This is an HTML Document rendered as filed. [ Alternative Formats ]

Dates Referenced Herein and Documents Incorporated by Reference

2 Subsequent Filings that Reference this Filing

1 Previous Filing that this Filing References

Quarterly Report — Form 10-Q

Filing Table of Contents

‘10-Q’ — Quarterly Report

Document Table of Contents