Erie Indemnity(ERIE) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents Erie Indemnity Company's unaudited financial statements, showing increased net income and asset growth for the periods ended June 30, 2023 Statements of Operations Erie Indemnity reported $839.9 million in Q2 2023 operating revenue and $117.9 million net income, a 47% increase driven by higher management fee revenue Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Total operating revenue | $839,870 | $726,143 | $1,592,335 | $1,398,253 | | Operating income | $134,158 | $104,000 | $244,701 | $188,312 | | Net income | $117,852 | $80,147 | $204,093 | $148,766 | | Diluted EPS (Class A) | $2.25 | $1.53 | $3.90 | $2.84 | Statements of Comprehensive Income Comprehensive income significantly increased to $113.4 million in Q2 2023, driven by higher net income and reduced other comprehensive losses Comprehensive Income (in thousands) | Metric | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $117,852 | $80,147 | $204,093 | $148,766 | | Other comprehensive (loss) income, net of tax | $(4,488) | $(23,248) | $3,264 | $(48,437) | | Comprehensive Income | $113,364 | $56,899 | $207,357 | $100,329 | Statements of Financial Position Total assets increased to $2.33 billion as of June 30, 2023, with shareholders' equity rising to $1.54 billion Financial Position Highlights (in thousands) | Metric | June 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $2,325,511 | $2,239,456 | | Total Liabilities | $780,599 | $791,048 | | Total Shareholders' Equity | $1,544,912 | $1,448,408 | Statements of Cash Flows Net cash from operating activities significantly increased to $180.0 million in H1 2023, leading to a slight overall increase in cash and cash equivalents Cash Flow Summary - Six Months Ended June 30 (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $180,007 | $106,274 | | Net cash used in investing activities | $(68,264) | $(42,196) | | Net cash used in financing activities | $(110,837) | $(157,456) | | Net increase (decrease) in cash | $906 | $(93,378) | Notes to Financial Statements The notes detail the company's operations as attorney-in-fact for Erie Insurance Exchange, outlining revenue streams, accounting policies, and significant credit risk concentration - The company's primary function is serving as the attorney-in-fact for the subscribers at the Erie Insurance Exchange, performing policy issuance, renewal, and administrative services. Its revenue is directly tied to the premiums written by the Exchange[24][25] - Management fee revenue is calculated as a percentage (not to exceed 25%) of the direct and affiliated assumed written premiums of the Exchange. This fee is allocated between two performance obligations: policy issuance/renewal and administrative services[33] - The company has a significant concentration of credit risk, as the majority of its revenue and receivables are from the Erie Insurance Exchange and its affiliates. Net receivables from the Exchange were $591.0 million as of June 30, 2023[28][77] - The company expects to contribute an estimated $95 million to its pension plans during the third quarter of 2023[69] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong H1 2023 performance to robust management fee revenue growth, driven by a 15.5% increase in Erie Insurance Exchange premiums, alongside improved investment performance and strong liquidity Operating Overview The company's operating income significantly increased in Q2 2023 and H1 2023, driven by a 15.5% rise in Erie Insurance Exchange's written premiums - The company's results are directly tied to the growth and financial condition of the Erie Insurance Exchange, as management fees are based on the Exchange's direct and affiliated assumed written premiums[92] Financial Overview (in thousands) | Metric | Q2 2023 | Q2 2022 | % Change | YTD 2023 | YTD 2022 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Operating income | $134,158 | $104,000 | 29.0% | $244,701 | $188,312 | 29.9% | | Net income | $117,852 | $80,147 | 47.0% | $204,093 | $148,766 | 37.2% | - Direct and affiliated assumed premiums written by the Exchange increased 16.3% in Q2 2023 and 15.5% in the first six months of 2023, driving management fee revenue growth[93] Results of Operations Management fee revenue grew 15.4% in H1 2023 due to a 15.5% increase in Exchange premiums, while investment income significantly improved to $11.6 million in Q2 2023 Direct and Affiliated Assumed Premiums Written by the Exchange (in thousands) | Period | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Three months ended June 30 | $2,613,131 | $2,247,766 | 16.3% | | Six months ended June 30 | $4,916,999 | $4,257,963 | 15.5% | - The increase in the Exchange's premiums was driven by a 5.2% increase in policies in force and a 7.6% increase in average premium per policy year-over-year as of June 30, 2023[104] - Total commission costs increased by $71.3 million (12.1%) for the first six months of 2023, primarily due to premium growth, partially offset by lower agent incentive compensation[115] Total Investment Income (Loss) (in thousands) | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three months ended June 30 | $11,627 | $(2,094) | | Six months ended June 30 | $6,895 | $915 | Financial Condition The investment portfolio grew to $1.09 billion as of June 30, 2023, primarily in high-quality fixed maturities, while the Erie Insurance Exchange maintains an A+ 'Superior' rating Investment Portfolio Composition (in thousands) | Investment Type | June 30, 2023 | % to total | Dec 31, 2022 | % to total | | :--- | :--- | :--- | :--- | :--- | | Fixed maturities | $920,952 | 85% | $894,661 | 84% | | Equity securities | $77,220 | 7% | $72,560 | 7% | | Agent loans | $68,903 | 6% | $69,476 | 7% | | Other investments | $18,528 | 2% | $30,511 | 2% | | Total investments | $1,085,603 | 100% | $1,067,208 | 100% | - The Erie Insurance Exchange and its property and casualty subsidiaries are rated A+ 'Superior' by A.M. Best, with a stable outlook as of August 9, 2022[127] - The Exchange's policyholders' surplus was $9.7 billion at June 30, 2023, down from $10.1 billion at December 31, 2022[128] Liquidity and Capital Resources The company maintains strong liquidity, with net cash from operations increasing to $180.0 million in H1 2023 and $99.1 million available on its revolving credit line - Primary sources of liquidity are funds from management fee revenue and investment income, used to fund operations, commissions, dividends, and capital expenditures[139] - Net cash provided by operating activities increased to $180.0 million in H1 2023 from $106.3 million in H1 2022, mainly due to higher management fees received[141] - The company has access to a $100 million bank revolving line of credit expiring in October 2026, with $99.1 million available as of June 30, 2023[146] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to its market risk profile or investment strategies during H1 2023, despite inflationary pressures and rising interest rates - There have been no material changes that impacted the company's portfolio or reshaped its periodic investment reviews of asset allocations during the six months ended June 30, 2023[149] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures are effective as of June 30, 2023[150] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[151] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is vigorously defending an ongoing lawsuit alleging breach of fiduciary duty regarding the management fee received from the Erie Insurance Exchange - The company is a defendant in a lawsuit alleging breach of fiduciary duty regarding the management fee it receives from the Erie Insurance Exchange[153][154] - The plaintiffs seek damages, disgorgement of profits, and other relief, with the case remanded to the Court of Common Pleas of Allegheny County, Pennsylvania[155][161] - Erie Indemnity intends to vigorously defend against all allegations and requests for relief in the complaint[163] Item 1A. Risk Factors No material changes to the company's risk factors have occurred since the 2022 Annual Report on Form 10-K - There have been no material changes from the risk factors previously disclosed in the company's 2022 Form 10-K[166] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 1,905 Class A common shares at $225.87 per share in Q2 2023, with $17.8 million remaining under the repurchase program Issuer Purchases of Equity Securities (Q2 2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 1-30, 2023 | — | $ — | | May 1-31, 2023 | 1,905 | $225.87 | | June 1-30, 2023 | — | $ — | | Total | 1,905 | $225.87 | - The repurchased shares were used to fund the rabbi trust for the outside director deferred stock compensation plan and the incentive compensation deferral plan[168] - Approximately $17.8 million of repurchase authority remained under the current stock repurchase program as of June 30, 2023[167][168] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including various agreements, employee benefit plans, and CEO/CFO certifications - Exhibits filed include employee savings and retirement plans, CEO/CFO certifications under Sarbanes-Oxley Sections 302 and 906, and Inline XBRL data files[170]