Erie Indemnity(ERIE) - 2023 Q4 - Annual Report

PART I ITEM 1. Business Erie Indemnity Company serves as attorney-in-fact for Erie Insurance Exchange, managing operations and earning fees, with a focus on human capital and regulatory compliance - Erie Indemnity Company (Indemnity) serves as the attorney-in-fact for the Erie Insurance Exchange (Exchange), providing policy issuance, renewal, claims handling, and investment management services[11][12] - Indemnity's primary revenue source is a management fee, calculated as a percentage (not exceeding 25%) of direct and affiliated assumed premiums written by the Exchange[12][15] - The Exchange's business is segmented into personal lines (70% of 2023 premiums) and commercial lines (30%), distributed exclusively through independent agencies[16][17][18] - Indemnity's human capital strategy emphasizes attracting, retaining, and developing talent through a positive employee value proposition, including competitive pay, comprehensive benefits, work/life balance, and professional development opportunities[26][27][28] - Diversity, Equity & Inclusion (DEI) is a core business strategy, led by a Chief Diversity Officer, with initiatives like a Future Focus internship program and nine affinity networks to foster an inclusive workplace[30][31][32] Workforce Metrics (Years ended December 31) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Full-time workforce size | 6,481 | 5,970 | 5,805 | | Part-time workforce size | 24 | 23 | 30 | | Temporary workforce size | 51 | 45 | 41 | | Turnover | 9.0 % | 11.2 % | 8.0 % | | Voluntary turnover | 4.8 % | 6.9 % | 4.8 % | | Retirements | 2.8 % | 3.6 % | 2.2 % | | Average tenure (years) | 10.4 | 11.7 | 12.6 | - Indemnity and the Exchange, along with its subsidiaries, operate as an insurance holding company system, subject to extensive state insurance regulations requiring fairness and reasonableness in intercompany transactions and prior approval for material amendments[38][39][40] ITEM 1A. Risk Factors The company faces risks from its dependence on the Exchange, operational challenges, and market, capital, and liquidity factors - Risks are categorized into those related to the Erie Insurance Exchange (dependence on management fees, premium growth, financial condition), operating risks (service costs, talent, technology, cybersecurity), and market, capital, and liquidity risks (investment portfolio, financial obligations)[44] - A reduction in the management fee rate or a significant decrease in direct and affiliated assumed premiums written by the Exchange could materially adversely affect revenues and profitability[45][46][47] - The Exchange faces significant competition, macroeconomic condition impacts, and risks related to its independent agency distribution channel and brand reputation, all of which could impair its ability to grow and renew business, thereby affecting Indemnity's management fee revenue[48][49][50][52][53] - The Exchange's financial condition is crucial, with risks including failure to maintain acceptable financial strength ratings (currently A+ 'Superior'), investment portfolio performance (fixed income, equity, limited partnerships), extensive regulatory supervision, and litigation[54][55][56][57][58][59][60][61][62] - Operating risks include controlling service costs (commissions, employee, technology), attracting and retaining talent, maintaining system availability, managing technology initiatives (including AI), and mitigating difficulties with technology, data, and network security (cyber attacks, third-party reliance)[63][64][65][66][67][68][69][70][71][72][73][74][75][76] - Market, capital, and liquidity risks are tied to the performance of Indemnity's investment portfolio (85% fixed maturity, 15% equity/other), which is subject to interest rate, credit, sector/concentration, and liquidity risks. Failure to accurately estimate capital needs or market volatility could impact liquidity and access to capital[77][78][79][80][81][82][83][84] ITEM 1B. Unresolved Staff Comments The company has no unresolved staff comments from the SEC - There are no unresolved staff comments[85] ITEM 1C. Cybersecurity The company maintains a robust cybersecurity program aligned with NIST, overseen by a dedicated committee, with no material breaches reported - Cybersecurity risk management is overseen by the Privacy and Information Security Committee, reporting to the Executive Council and Board of Directors[86][88][89] - The cybersecurity program aligns with the NIST Cybersecurity Framework, focusing on identification, protection, detection, response, and recovery from threats, including annual risk assessments and third-party validations[87] - A Core Incident Response Team, with specialized leaders (CISO, Privacy leader, Legal leader) and augmented by internal and external experts, is responsible for analyzing and responding to cyber incidents[90][91][92] - To date, the company is not aware of any cybersecurity breach or incident that would have a material impact on its business strategy, results of operations, or financial condition[93] ITEM 2. Properties The company shares a 996,000 square foot corporate campus and 25 field offices with the Exchange, with costs allocated by occupied space - Indemnity and the Exchange share a corporate home office campus in Erie, Pennsylvania, totaling approximately 996,000 square feet[94] - The entities own or lease 25 field offices in 12 states, primarily supporting claims activities, with rental costs for shared facilities allocated by square footage[95] ITEM 3. Legal Proceedings The company is vigorously defending a class action lawsuit alleging breaches of fiduciary duty regarding its management fee, with a petition pending before the Supreme Court - Erie Indemnity Company is a defendant in a class action lawsuit alleging breaches of fiduciary duty concerning the setting of its management fee from the Erie Insurance Exchange[96][97][101] - The lawsuit seeks damages, disgorgement of profits, or other injunctive relief for the period starting two years prior to August 24, 2021, and continuing through 2021[97][98][102] - The case has undergone several procedural changes, including removal to federal court, voluntary dismissal, refiling, remand to state court, and appeals, with a Petition for Writ of Certiorari currently pending before the Supreme Court of the United States[99][100][103][104][105][106] - Indemnity intends to vigorously defend against all allegations and has filed a separate complaint in Federal Court to protect prior binding judgments in its favor[103][107][108] ITEM 4. Mine Safety Disclosures Mine Safety Disclosures are not applicable to the registrant - Mine Safety Disclosures are not applicable to the registrant[110] PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Class A common stock trades on NASDAQ, Class B is closely held, with historical dividends and a $150 million repurchase program having $17.8 million remaining - Class A common stock (ERIE) trades on NASDAQ, while Class B voting common stock has no active market and is closely held[113] - The company historically pays quarterly cash dividends, with future payments dependent on operating results, financial condition, cash requirements, and business conditions[113] Stock Performance (Cumulative Total Shareholder Return, $100 invested) | Year | Erie Indemnity Company Class A common stock | Standard & Poor's 500 Stock Index | Standard & Poor's Supercomposite Insurance Industry Group Index | | :--- | :--- | :--- | :--- | | 2018 | $100 | $100 | $100 | | 2019 | $127 | $131 | $128 | | 2020 | $194 | $156 | $127 | | 2021 | $155 | $200 | $163 | | 2022 | $205 | $164 | $178 | | 2023 | $281 | $207 | $196 | - A stock repurchase program for Class A common stock, authorized for $150 million in 2011 with no time limitation, had approximately $17.8 million remaining as of December 31, 2023[119][120] Issuer Purchases of Equity Securities (Quarter ending December 31, 2023) | 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 | | :--- | :--- | :--- | :--- | :--- | | October 1–31, 2023 | — | $— | — | $17,754 | | November 1–30, 2023 | 1,258 | $277.03 | — | $17,754 | | December 1–31, 2023 | — | $— | — | $17,754 | | Total | 1,258 | $277.03 | — | | - The 1,258 shares purchased in November 2023 were for funding the rabbi trust for the outside director deferred stock compensation plan, not the publicly announced repurchase program[120] ITEM 6. Selected Financial Data Selected Financial Data is not applicable to the company - Selected Financial Data is not applicable[122] ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition and operations, focusing on management fees, economic impacts, accounting estimates, and liquidity Cautionary Statement Regarding Forward-Looking Information Forward-looking statements are subject to risks and uncertainties, and the company disclaims any obligation to update them - Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially, including dependence on the Exchange, economic conditions, competition, talent retention, technology, and regulatory changes[125][126] - The company undertakes no obligation to publicly update or revise any forward-looking statement[127] Recent Accounting Standards The company is evaluating new accounting standards for segment reporting and income tax disclosures, with no expected financial statement impact - The company is evaluating the impact of ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Tax Disclosures) on its disclosures, with no expected impact on financial statements[128][279][280] Operating Overview The company's operating overview highlights its role as attorney-in-fact, management fee revenue, and the impact of economic conditions on financial performance - Erie Indemnity Company acts as the managing attorney-in-fact for the Erie Insurance Exchange, providing policy issuance, renewal, and administrative services[129] - Management fee revenue, the primary driver of earnings, is based on direct and affiliated assumed premiums written by the Exchange and a management fee rate, which was set at 25% for 2021, 2022, 2023, and 2024[131][132][135] Financial Overview (Years ended December 31, in thousands, except per share data) | Metric | 2023 | % Change | 2022 | % Change | 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating income | $520,256 | 38.3 % | $376,214 | 18.3 % | $318,097 | | Total investment income | $28,968 | NM | $632 | (99.1) % | $67,332 | | Interest expense, net | $— | NM | $2,009 | (51.4) % | $4,132 | | Other income (expense) | $12,712 | NM | $1,615 | NM | $(4,893) | | Income before income taxes | $561,936 | 49.3 % | $376,452 | 0.0 % | $376,404 | | Income tax expense | $115,875 | 48.8 % | $77,883 | (0.8) % | $78,544 | | Net income | $446,061 | 49.4 % | $298,569 | 0.2 % | $297,860 | | Net income per share - diluted | $8.53 | 49.4 % | $5.71 | 0.3 % | $5.69 | - Operating income increased significantly in 2023 (38.3%) due to operating revenue growth outpacing expense growth. Net income also saw a substantial increase of 49.4% in 2023[137] - Direct and affiliated assumed premiums written by the Exchange increased 17.0% to $10.1 billion in 2023 and 9.2% to $8.6 billion in 2022[137] - Cost of operations for policy issuance and renewal services increased 12.0% in 2023 and 7.0% in 2022, driven by higher scheduled commissions, employee compensation, and technology costs, partially offset by decreased agent incentive compensation[138] - Total investment income increased by $28.3 million in 2023, primarily due to lower net realized and unrealized investment losses and an increase in net investment income[140] - Unfavorable economic conditions (inflation, high unemployment, recession threat) and financial market volatility could adversely affect the Exchange's premium revenue and Indemnity's management fees and investment portfolio[142][143] Critical Accounting Estimates Critical accounting estimates involve investment valuation, including fair value measurements and impairments, and retirement benefit plans - Critical accounting estimates include investment valuation (fair value measurements, impairments) and retirement benefit plans for employees (pension obligations, discount rates, expected return on assets)[144][145] - Fair value measurements for investments are primarily classified as Level 2, using observable inputs from industry-standard models[147][148][149][150] - Impairments on fixed maturity and equity portfolios are regularly monitored, with credit-related or intent-to-sell impairments recognized in earnings[152] - Pension plan obligations are based on actuarial estimates, with key assumptions including discount rates (5.34% for 2023 PBO) and expected rates of return on plan assets (increased to 7.00% for 2024)[155][156][159] - A 25 basis point decrease in the discount rate would increase pension cost by $4.1 million and the pension benefit obligation by $37.2 million[156] - The company recognized net pension benefit income of $3.8 million in 2023, primarily due to higher discount rates and expected return on assets, and projects $4.3 million in 2024[161] Results of Operations This section details revenue allocation, premium growth drivers, expense trends, and investment income performance - Management fee revenue is allocated between policy issuance and renewal services (recognized at policy issuance/renewal) and administrative services (recognized over a four-year period)[164][165] Revenue Allocation and Disaggregation (Years ended December 31, in thousands) | Revenue Category | 2023 | % Change | 2022 | % Change | 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | | Management fee revenue - policy issuance and renewal services | $2,442,073 | 17.0 % | $2,087,846 | 9.1 % | $1,913,166 | | Management fee revenue - administrative services | $63,669 | 9.2 % | $58,323 | 0.1 % | $58,286 | | Administrative services reimbursement revenue | $737,139 | 10.3 % | $668,268 | 4.7 % | $638,483 | | Total revenue from administrative services | $800,808 | 10.2 % | $726,591 | 4.3 % | $696,769 | - Direct and affiliated assumed premiums written by the Exchange increased 17.0% to $10.1 billion in 2023, driven by a 6.9% increase in policies in force and a 9.4% increase in average premium per policy[168] - New business premiums increased 37.9% to $1.5 billion in 2023, while renewal business premiums increased 13.9% to $8.5 billion[169][170] - The Exchange implemented rate increases in 2021, 2022, and 2023 due to increased claims frequency and inflation-driven severity, with full recognition taking 12-24 months[171][172] Policy Issuance and Renewal Services (Years ended December 31, in thousands) | Metric | 2023 | % Change | 2022 | % Change | 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | | Management fee revenue - policy issuance and renewal services | $2,442,073 | 17.0 % | $2,087,846 | 9.1 % | $1,913,166 | | Service agreement revenue | $26,059 | 1.4 % | $25,687 | 6.8 % | $24,042 | | Total revenue | $2,468,132 | 16.8 % | $2,113,533 | 9.1 % | $1,937,208 | | Cost of operations - policy issuance and renewal services | $2,011,545 | 12.0 % | $1,795,642 | 7.0 % | $1,677,397 | | Operating income - policy issuance and renewal services | $456,587 | 43.6 % | $317,891 | 22.4 % | $259,811 | - Commissions, the largest expense, increased by $169.0 million in 2023 due to premium growth, partially offset by decreased agent incentive compensation from higher claims severity[182][183] - Non-commission expenses increased by $46.9 million in 2023, driven by higher underwriting, IT, and administrative personnel costs, and increased incentive plan awards[184] Administrative Services (Years ended December 31, in thousands) | Metric | 2023 | % Change | 2022 | % Change | 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | | Management fee revenue - administrative services | $63,669 | 9.2 % | $58,323 | 0.1 % | $58,286 | | Administrative services reimbursement revenue | $737,139 | 10.3 % | $668,268 | 4.7 % | $638,483 | | Total revenue allocated to administrative services | $800,808 | 10.2 % | $726,591 | 4.3 % | $696,769 | | Administrative services expenses | | | | | | | Claims handling services | $635,043 | 10.1 % | $576,799 | 5.5 % | $546,962 | | Investment management services | $34,958 | (5.0) % | $36,795 | (5.3) % | $38,862 | | Life management services | $67,138 | 22.8 % | $54,674 | 3.8 % | $52,659 | | Operating income - administrative services | $63,669 | 9.2 % | $58,323 | 0.1 % | $58,286 | - Administrative services expenses and reimbursements are reported gross, with reimbursements settled at cost monthly, having no net impact on operating income[134][139][187][188] Total Investment Income (Years ended December 31, in thousands) | Metric | 2023 | % Change | 2022 | % Change | 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net investment income | $44,572 | 55.9 % | $28,585 | (54.0) % | $62,177 | | Net realized and unrealized investment (losses) gains | $(5,838) | 78.6 % | $(27,286) | NM | $4,946 | | Net impairment (losses) recoveries recognized in earnings | $(9,766) | NM | $(667) | NM | $209 | | Total investment income | $28,968 | NM | $632 | (99.1) % | $67,332 | - Net investment income increased by $16.0 million in 2023 due to higher bond and cash equivalent income from increased yields and rates[191] - Net realized and unrealized investment losses decreased to $5.8 million in 2023 from $27.3 million in 2022, partially offset by market value adjustment gains on equity securities[192] - Net impairment losses were $9.8 million in 2023, including $7.3 million for real estate development loans and $2.4 million for available-for-sale securities[193] Financial Condition of Erie Insurance Exchange The Erie Insurance Exchange maintains a strong A+ 'Superior' financial strength rating, with significant premium growth and high policy retention - The Exchange and its subsidiaries hold an A+ 'Superior' financial strength rating from A.M. Best, the second highest rating, with a stable outlook affirmed on August 10, 2023[195] - Statutory direct written premiums grew 17.0% to $10.1 billion in 2023, and policyholders' surplus was $9.3 billion at December 31, 2023[196] - The year-over-year policy retention ratio remained high at 91.2% in 2023[196] Financial Condition The company's investment portfolio, primarily fixed maturities, is managed for risk-adjusted returns and continuously reviewed for impairment - The investment portfolio is managed to maximize after-tax returns on a risk-adjusted basis, with continuous review for impairment[199][201] Investment Portfolio Carrying Value (December 31, in thousands) | Investment Type | 2023 | % to total | 2022 | % to total | | :--- | :--- | :--- | :--- | :--- | | Fixed maturities | $961,241 | 85 % | $894,661 | 84 % | | Equity securities | $84,253 | 7 % | $72,560 | 7 % | | Agent loans | $67,787 | 6 % | $69,476 | 7 % | | Other investments | $23,026 | 2 % | $30,511 | 2 % | | Total investments | $1,136,307 | 100 % | $1,067,208 | 100 % | - Net unrealized losses on fixed maturities, net of deferred taxes, decreased to $24.7 million at December 31, 2023, from $52.5 million at December 31, 2022[203] Fixed Maturity Portfolio by Industry Sector and Rating (December 31, 2023, in thousands) | Industry Sector | AAA | AA | A | BBB | Non-investment grade | Fair value | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Basic materials | $0 | $0 | $954 | $4,345 | $5,814 | $11,113 | | Communications | $0 | $2,905 | $13,845 | $11,474 | $15,466 | $43,690 | | Consumer | $0 | $1,989 | $21,874 | $66,538 | $37,449 | $127,850 | | Diversified | $0 | $0 | $0 | $0 | $204 | $204 | | Energy | $0 | $0 | $3,860 | $21,854 | $9,239 | $34,953 | | Financial | $0 | $2,066 | $98,091 | $123,301 | $13,799 | $237,257 | | Industrial | $0 | $0 | $7,856 | $19,281 | $26,907 | $54,044 | | Structured securities | $137,058 | $190,550 | $27,517 | $16,464 | $117 | $371,706 | | Technology | $1,909 | $0 | $2,971 | $21,464 | $13,686 | $40,030 | | Utilities | $0 | $0 | $1,730 | $33,641 | $5,023 | $40,394 | | Total | $138,967 | $197,510 | $178,698 | $318,362 | $127,704 | $961,241 | Equity Securities Fair Value by Sector (December 31, in thousands) | Sector | 2023 | 2022 | | :--- | :--- | :--- | | Financial services | $69,900 | $61,084 | | Utilities | $5,810 | $5,708 | | Energy | $3,901 | $3,576 | | Consumer | $3,915 | $1,854 | | Technology | $500 | $0 | | Industrial | $180 | $0 | | Communications | $47 | $338 | | Total | $84,253 | $72,560 | Shareholders' Equity Shareholders' equity related to postretirement plans decreased in 2023 due to actuarial losses, partially offset by higher asset returns - Shareholders' equity related to postretirement plans decreased by $33.8 million (net of tax) in 2023, primarily due to a current period actuarial loss driven by a lower discount rate, partially offset by higher than expected return on plan assets[208] Liquidity and Capital Resources The company maintains strong liquidity through management fee revenue, investment income, and a revolving credit line to fund operations and shareholder distributions - Liquidity is primarily met by management fee revenue and investment income, used to fund operating costs, share repurchases, dividends, and capital expenditures[211] - The company maintains sufficient liquidity through cash, diverse liquid marketable securities, and a $100 million bank revolving line of credit (expires October 2026)[210][219][220] Condensed Cash Flow Information (Years ended December 31, in thousands) | Cash Flow Activity | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $381,205 | $366,152 | $402,794 | | Net cash used in investing activities | $(157,565) | $(106,922) | $(185,490) | | Net cash used in financing activities | $(221,675) | $(300,842) | $(194,842) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $1,965 | $(41,612) | $22,462 | - Operating cash increased in 2023 due to higher management fees, partially offset by increased agent commissions, pension contributions, and operating expenses[215] - Investing activities used $157.6 million in 2023, primarily for fixed asset purchases (software, home office renovations) and loans for real estate development[216] - Financing activities used $221.7 million in 2023, mainly for dividends paid to shareholders[217] - Future funding requirements can be met through unrestricted cash ($128.7 million at Dec 31, 2023), the $100 million revolving line of credit, and liquidation of unpledged investment assets ($799.0 million at Dec 31, 2023)[219] Off-Balance Sheet Arrangements The company has contingent obligations for guarantees but does not expect a material impact on its financial condition or cash flows - The company has contingent obligations for guarantees, but does not believe they will have a material current or future effect on its financial condition, results of operations, or cash flows[221] Enterprise Risk Management The ERM function identifies, manages, and monitors significant risks to achieve strategic objectives, with Board oversight and scenario testing - The ERM function ensures significant risks are identified, understood, managed, and monitored to achieve strategic objectives, with oversight from the Board of Directors and executive management[222][223] - The ERM process includes extreme event analyses and scenario testing to quantify potential variability and assess capital and liquidity sufficiency[223] Transactions/Agreements with Related Parties The Board oversees intercompany relationships with the Exchange, ensuring fair transactions within the regulated insurance holding company system - The Board of Directors oversees intercompany relationships with the Exchange, making decisions that benefit subscribers and the Exchange's overall health[224] - Indemnity and the Exchange, along with its subsidiaries, form an insurance holding company system, subject to state regulations requiring fair and reasonable intercompany transactions[225][226] - Intercompany agreements include the subscriber's agreement (management fee for services) and service agreements for administrative services and shared facilities, with reimbursements settled at cost[227][228] - Net receivables from the Exchange and affiliates were $625.3 million (25.3% of total assets) at December 31, 2023, representing a concentration of credit risk[230] - In December 2023, Indemnity issued two senior secured loans totaling $13.6 million to fund a real estate development project with related party investors[231][385][386] ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk Market risk primarily arises from the investment portfolio's exposure to interest rate, credit, concentration, liquidity, and equity price risks - Market risk arises from adverse changes in interest rates, credit spreads, equity prices, and foreign exchange rates, with the investment portfolio (85% fixed maturity) being the primary exposure[232][233] - Interest rate risk is managed by monitoring effective duration; a 100-basis point parallel increase in interest rates would decrease the fair value of the fixed maturity portfolio by an estimated $25.8 million in 2023[233][234][235] Fixed Maturities Interest-Rate Sensitivity Analysis (December 31, in thousands) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Fair value of fixed maturity portfolio | $961,241 | $894,661 | | Fair value assuming 100-basis point rise in interest rates | $935,444 | $868,919 | | Effective duration (as a percentage) | 2.7 | 2.9 | - Investment credit risk is managed through upfront underwriting analysis and ongoing credit quality reviews, with the majority of fixed maturities being investment grade[238][239] Fixed Maturity Investments by Rating (December 31, in thousands) | Rating Category | Amortized cost (2023) | Fair value (2023) | Percent of total (2023) | Amortized cost (2022) | Fair value (2022) | Percent of total (2022) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | AAA, AA, A | $537,751 | $515,175 | 54 % | $518,088 | $479,413 | 54 % | | BBB | $324,538 | $318,362 | 33 % | $318,801 | $300,900 | 33 % | | Total investment grade | $862,289 | $833,537 | 87 % | $836,889 | $780,313 | 87 % | | BB | $51,564 | $50,170 | 5 % | $45,784 | $41,978 | 5 % | | B | $65,453 | $65,251 | 7 % | $66,574 | $62,530 | 7 % | | CCC, CC, C, and below | $13,247 | $12,283 | 1 % | $11,888 | $9,840 | 1 % | | Total non-investment grade | $130,264 | $127,704 | 13 % | $124,246 | $114,348 | 13 % | | Total | $992,553 | $961,241 | 100 % | $961,135 | $894,661 | 100 % | - Concentration risk is monitored against internal policies for individual issuers and industry sectors. Liquidity risk is managed by actively managing the maturity profile of the fixed maturity portfolio[242][243] - Equity price risk, primarily from nonredeemable preferred stock, is not hedged[244] PART III ITEM 8. Financial Statements and Supplementary Data This section provides audited financial statements, including statements of operations, financial position, and cash flows, along with detailed notes and auditor's report - The financial statements, audited by Ernst & Young LLP, present fairly the financial position, results of operations, and cash flows in conformity with U.S. GAAP[247] Statements of Operations (Years ended December 31, in thousands) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total operating revenue | $3,268,940 | $2,840,124 | $2,633,977 | | Total operating expenses | $2,748,684 | $2,463,910 | $2,315,880 | | Operating income | $520,256 | $376,214 | $318,097 | | Total investment income | $28,968 | $632 | $67,332 | | Income before income taxes | $561,936 | $376,452 | $376,404 | | Income tax expense | $115,875 | $77,883 | $78,544 | | Net income | $446,061 | $298,569 | $297,860 | | Net income per share - diluted (Class A) | $8.53 | $5.71 | $5.69 | Statements of Financial Position (December 31, in thousands) | Asset/Liability/Equity | 2023 | 2022 | | :--- | :--- | :--- | | Total assets | $2,471,964 | $2,239,456 | | Total liabilities | $809,129 | $791,048 | | Total shareholders' equity | $1,662,835 | $1,448,408 | Statements of Cash Flows (Years ended December 31, in thousands) | Cash Flow Activity | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $381,205 | $366,152 | $402,794 | | Net cash used in investing activities | $(157,565) | $(106,922) | $(185,490) | | Net cash used in financing activities | $(221,675) | $(300,842) | $(194,842) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $1,965 | $(41,612) | $22,462 | | Cash, cash equivalents, and restricted cash, end of year | $144,055 | $142,090 | $183,702 | - The company's primary function is to serve as attorney-in-fact for the Erie Insurance Exchange, providing policy issuance, renewal, and administrative services, for which it retains a management fee based on direct and affiliated assumed premiums[271][272] - Management fee revenue for policy issuance and renewal services is recognized at the time of policy issuance or renewal, while revenue for administrative services is recognized over a four-year period[293][294] - The company's investment portfolio consists primarily of fixed maturity securities (85% in 2023) and equity securities, with unrealized gains and losses on available-for-sale securities recognized in other comprehensive income[199][283] - Fixed assets, primarily software and buildings, are depreciated using the straight-line method, with construction in progress for home office renovations expected to complete by 2027[288][327][328] - The company has access to a $100 million bank revolving line of credit, with $99.1 million available as of December 31, 2023, and is in compliance with all covenants[330] - Pension plans include a defined benefit plan and an unfunded SERP, with a $95 million contribution made in 2023, resulting in a net benefit asset of $34.3 million[331][338] - Deferred compensation plans for executives and directors include annual and long-term incentive plans, with awards settled in cash or Class A common stock, often held in a rabbi trust[352][353][354][355][359][360][361][362] - The company's effective tax rate is reconciled to the statutory federal income tax rate, and it had no valuation allowance for deferred tax assets at December 31, 2023 or 2022[369][370] - Significant receivables from the Exchange and its affiliates ($625.3 million at Dec 31, 2023) represent a concentration of credit risk[387] - The company is involved in litigation in the ordinary course of business and establishes reserves when losses are probable and estimable, believing current accruals are appropriate[390][391] ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with accountants regarding accounting or financial disclosure - There were no changes in or disagreements with accountants on accounting and financial disclosure[395] ITEM 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes - Disclosure controls and procedures were evaluated and deemed effective as of December 31, 2023, by management, including the CEO and CFO[396][397] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[398] - Management concluded that internal control over financial reporting was effective as of December 31, 2023, based on the 2013 COSO framework[399] - Ernst & Young LLP, the independent auditor, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[400][403][404] ITEM 9B. Other Information No additional information was filed in the fourth quarter of 2023 that had not already been reported in a Form 8-K - No additional information was filed in the fourth quarter of 2023 that had not already been reported in a Form 8-K[401] PART IV ITEM 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the Schedule 14C, with established codes of conduct - Information on directors, executive officers, corporate governance, audit committee, and Section 16(a) compliance is incorporated by reference to the Schedule 14C information statement[412] - The company has a Code of Conduct for all directors, officers, and employees, and a Code of Ethics for Senior Financial Officers[413] Executive Officers of the Registrant (Age as of 12/31/2023) | Name | Age | Principal Occupation and Positions for Past Five Years | | :--- | :--- | :--- | | Timothy G. NeCastro | 63 | President and Chief Executive Officer since August 2016. Director of EFL, EIC, Flagship, ENY and EPC. | | Brian W. Bolash | 58 | Executive Vice President, Secretary and General Counsel since January 2022. Senior Vice President, Secretary and General Counsel, October 2018-December 2021. Senior Counsel and Corporate Secretary, January 2016-September 2018. Director of EFL, EIC, Flagship, ENY and EPC. | | Sean D. Dugan | 55 | Executive Vice President, Human Resources and Corporate Services since January 2023. Senior Vice President, Human Resources, March 2020-December 2022. Corporate Human Resources Officer, October 2018-March 2020. Director of EFL, EIC, Flagship, ENY and EPC. | | Lorianne Feltz | 54 | Executive Vice President, Claims & Customer Service since November 2016. | | Julie M. Pelkowski | 54 | Executive Vice President and Chief Financial Officer since May 2023. Senior Vice President, Enterprise Office, March 2022-April 2023. Senior Vice President and Controller, August 2016-February 2022. Director of EFL, EIC, Flagship, ENY and EPC. | | Douglas E. Smith | 49 | Executive Vice President, Sales & Products since November 2016. | | Parthasarathy Srinivasa | 52 | Executive Vice President and Chief Information Officer since April 2022. Prior roles at Verisk Analytics and Safe Auto Insurance. | ITEM 11. Executive Compensation Executive compensation information is incorporated by reference from the Schedule 14C information statement - Executive compensation information is incorporated by reference to the Schedule 14C information statement[415] ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan information is incorporated by reference from the Schedule 14C information statement - Information on security ownership and equity compensation plans is incorporated by reference to the Schedule 14C information statement[416] ITEM 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships with outside directors is incorporated by reference from the Schedule 14C information statement - Information on certain relationships with outside directors is incorporated by reference to the Schedule 14C information statement[417] ITEM 14. Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the Schedule 14C information statement - Information on principal accountant fees and services is incorporated by reference to the Schedule 14C information statement[418] ITEM 15. Exhibits and Financial Statement Schedules This section lists exhibits and financial statement schedules, including the auditor's report, financial statements, and a detailed Exhibit Index - The section includes the Report of Independent Registered Public Accounting Firm, financial statements (Operations, Comprehensive Income, Financial Position, Shareholders' Equity, Cash Flows), and Notes to Financial Statements[424] - A detailed Exhibit Index lists corporate documents (Articles of Incorporation, Bylaws), agreements (Subscriber's Agreement, Services Agreements, Indemnification Agreements, Credit Agreements), and compensation plans (Annual Incentive Plan, Long-Term Incentive Plan, Equity Compensation Plan, Deferred Compensation Plans, Retirement Plans)[426][427][428] ITEM 16. Form 10-K Summary No Form 10-K Summary is provided - No Form 10-K Summary is provided[423]