Erie Indemnity(ERIE) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides unaudited financial statements, management's analysis of operations and financial condition, market risk disclosures, and internal controls Item 1. Financial Statements (Unaudited) The unaudited financial statements for the period ended September 30, 2023, show significant growth in revenue and net income compared to the prior year, with total assets increasing to $2.39 billion and shareholders' equity rising to $1.61 billion Statements of Operations For Q3 2023, Erie Indemnity reported a 55.4% increase in net income to $131.0 million, driven by a 15.9% rise in total operating revenue and a 39.4% increase in operating income Statements of Operations Highlights (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Total operating revenue | $858,938 | $741,236 | $2,451,273 | $2,139,489 | | Operating income | $148,471 | $106,472 | $393,172 | $294,784 | | Net income | $131,040 | $84,313 | $335,133 | $233,079 | | Class A common stock – diluted EPS | $2.51 | $1.61 | $6.41 | $4.46 | Statements of Comprehensive Income Comprehensive income for Q3 2023 increased to $122.4 million, including $131.0 million in net income partially offset by an $8.6 million other comprehensive loss from unrealized securities losses Comprehensive Income (in thousands) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income | $131,040 | $84,313 | $335,133 | $233,079 | | Total other comprehensive loss, net of tax | $(8,644) | $(15,447) | $(5,380) | $(63,884) | | Comprehensive income | $122,396 | $68,866 | $329,753 | $169,195 | Statements of Financial Position As of September 30, 2023, total assets reached $2.39 billion, driven by higher receivables, while total liabilities slightly decreased and shareholders' equity increased to $1.61 billion due to retained earnings growth Financial Position Highlights (in thousands) | Metric | Sep 30, 2023 (Unaudited) | Dec 31, 2022 | | :--- | :--- | :--- | | Total assets | $2,394,549 | $2,239,456 | | Total liabilities | $782,660 | $791,048 | | Total shareholders' equity | $1,611,889 | $1,448,408 | Statements of Shareholders' Equity Shareholders' equity increased to $1.61 billion by September 30, 2023, primarily due to $335.1 million in net income, partially offset by $166.3 million in dividends and a $5.4 million other comprehensive loss - Total shareholders' equity grew to $1,611.9 million by September 30, 2023, starting from $1,448.4 million at December 31, 2022[16] - Key changes in shareholders' equity for the nine months ended September 30, 2023 include net income of $335.1 million, offset by dividends of $166.3 million and an other comprehensive loss of $5.4 million[16] Statements of Cash Flows Net cash provided by operating activities was $232.8 million for the nine months ended September 30, 2023, while cash used in investing activities increased and financing activities decreased significantly due to prior-year debt repayment Cash Flow Summary (in thousands) | Activity | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $232,769 | $238,108 | | Net cash used in investing activities | $(105,730) | $(74,997) | | Net cash used in financing activities | $(166,256) | $(249,149) | | Net decrease in cash and cash equivalents | $(39,217) | $(86,038) | Notes to Financial Statements The notes detail the company's role as attorney-in-fact for Erie Insurance Exchange, its revenue recognition from management fees, and accounting for investments at fair value, including a $95 million pension contribution and $620.7 million in credit risk concentration - Erie Indemnity's primary function is to act as the attorney-in-fact for the policyholders of the Erie Insurance Exchange, performing policy issuance, renewal, and administrative services[26][27] - Revenue is derived from a management fee, capped at 25% of the Exchange's written premiums, which is allocated between two performance obligations: policy issuance/renewal and administrative services[35] - The company made a $95 million contribution to its defined benefit pension plan during the third quarter of 2023[72] - A significant concentration of credit risk exists, with net receivables from the Exchange and its affiliates totaling $620.7 million at September 30, 2023[80] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong performance to higher management fee revenue, driven by a 16.2% year-to-date increase in premiums written by the Erie Insurance Exchange, leading to increased operating income and a solid financial condition Operating Overview The company's earnings are primarily driven by management fee revenue from the Erie Insurance Exchange, with operating income increasing 33.4% to $393.2 million and net income rising 43.8% to $335.1 million for the nine months ended September 30, 2023 - The company's results are directly tied to the growth and financial condition of the Exchange, as management fees are based on the Exchange's written premiums[95] Financial Overview (in thousands) | Metric | YTD 2023 | YTD 2022 | % Change | | :--- | :--- | :--- | :--- | | Operating income | $393,172 | $294,784 | 33.4% | | Net income | $335,133 | $233,079 | 43.8% | - The direct and affiliated assumed premiums written by the Exchange increased 16.2% to $7.6 billion for the nine months ended September 30, 2023[96] Results of Operations Management fee revenue for policy issuance and renewal services increased 17.7% in Q3 2023, driven by 17.6% growth in the Exchange's written premiums, while total investment income turned positive due to lower losses and higher yields - The management fee rate was set at the maximum of 25% for both 2023 and 2022[103] - Direct and affiliated assumed premiums written by the Exchange increased 17.6% in Q3 2023, driven by growth in personal lines and commercial multi-peril premiums[107] - Total commissions expense increased 14.4% in Q3 2023, driven by premium growth but partially offset by a decrease in agent incentive compensation due to higher claims severity experienced by the Exchange[118] - Net investment income increased in Q3 2023 primarily due to a decrease in limited partnership losses and higher bond income from increased yields[126] Financial Condition The company's financial condition is stable, with a $1.08 billion investment portfolio primarily composed of high-quality fixed maturities, and its sole customer, the Erie Insurance Exchange, maintains a strong financial position with an A+ "Superior" rating and $9.1 billion in policyholders' surplus Investment Portfolio Composition (in thousands) | Investment Type | Sep 30, 2023 | % to total | | :--- | :--- | :--- | | Fixed maturities | $915,237 | 85% | | Equity securities | $79,516 | 7% | | Agent loans | $68,192 | 6% | | Other investments | $17,196 | 2% | | Total investments | $1,080,141 | 100% | - The Erie Insurance Exchange maintains an A+ "Superior" financial strength rating from A.M. Best, which was affirmed with a stable outlook on August 10, 2023[130] - The Exchange's policyholders' surplus was $9.1 billion at September 30, 2023[131] Liquidity and Capital Resources The company maintains a strong liquidity position, primarily funded by management fee revenue and investment income, generating $232.8 million in cash from operations for the first nine months of 2023, and has access to a $100 million revolving line of credit - Primary sources of liquidity are funds from management fee revenue and investment income, used to fund commissions, salaries, dividends, and capital expenditures[142] - A pension contribution of $95.0 million was made in 2023, compared to $25.0 million in 2022[144] - The company has access to a $100 million bank revolving line of credit expiring in October 2026, with no borrowings outstanding as of September 30, 2023[149] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposures relate to fluctuations in interest rates and security prices, with no material changes during the first nine months of 2023, though potential volatility from inflation and rising interest rates is monitored - There have been no material changes that impacted the investment portfolio or reshaped asset allocation reviews during the nine months ended September 30, 2023[153] - The company continues to monitor risks from the economic environment, including inflation and rising interest rates, and will take measures to minimize potential risk exposure[153] Item 4. Controls and Procedures The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures are effective as of the end of the period covered by the report[154] - No material changes to internal control over financial reporting occurred during the nine months ended September 30, 2023[155] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and a list of exhibits filed with the report Item 1. Legal Proceedings The company is a defendant in a lawsuit alleging breach of fiduciary duty related to management fees, with the case remanded to the Court of Common Pleas of Allegheny County, Pennsylvania, and the company intends to vigorously defend against all allegations - A complaint alleges breach of fiduciary duty by Indemnity in setting the management fee it receives from the Erie Insurance Exchange[158][162] - The case has been remanded to the Court of Common Pleas of Allegheny County, Pennsylvania, after appeals regarding federal jurisdiction were denied[165][166] - Indemnity intends to vigorously defend against all allegations and requests for relief in the complaint[167] Item 1A. Risk Factors There have been no material changes from the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - No material changes from the risk factors disclosed in the 2022 Form 10-K have been reported[170] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company has an ongoing stock repurchase program, repurchasing 1,445 shares of Class A common stock at an average price of $220.79 per share during Q3 2023, with approximately $17.8 million of repurchase authority remaining Issuer Purchases of Equity Securities (Q3 2023) | Period | Total number of shares purchased | Average price paid per share | | :--- | :--- | :--- | | July 1-31, 2023 | — | $ — | | August 1-31, 2023 | 1,445 | $220.79 | | September 1-30, 2023 | — | $ — | - Approximately $17.8 million of repurchase authority remained under the stock repurchase program as of September 30, 2023[172] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including a supplemental retirement plan document, certifications by the CEO and CFO, and Inline XBRL data files - Exhibits filed include management compensatory plan documents, CEO/CFO certifications (Sections 302 and 906), and XBRL data files[174]