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Erie Indemnity(ERIE) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section details Erie Indemnity Company's unaudited financial statements, including operations, position, cash flows, and comprehensive notes on accounting policies and investments Item 1. Financial Statements (Unaudited) This section presents the unaudited financial statements for Erie Indemnity Company, including statements of operations, comprehensive income, financial position, shareholders' equity, and cash flows, along with detailed notes explaining the company's operations, accounting policies, revenue recognition, investments, and other financial disclosures for the three months ended March 31, 2024 and 2023 Statements of Operations (Unaudited) For the three months ended March 31, 2024, Erie Indemnity Company reported a significant increase in net income, reaching $124.55 million, up 44.4% from $86.24 million in the prior year, primarily driven by a 17.0% increase in total operating revenue and a positive shift in total investment income from a loss to a gain | Metric | 3 Months Ended March 31, 2024 (in thousands) | 3 Months Ended March 31, 2023 (in thousands) | YoY Change (%) | | :--------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------- | | Total operating revenue | $880,701 | $752,465 | 17.0% | | Total operating expenses | $741,889 | $641,922 | 15.6% | | Operating income | $138,812 | $110,543 | 25.6% | | Total investment income (loss) | $15,079 | $(4,732) | NM | | Income before income taxes | $157,302 | $109,148 | 44.1% | | Net income | $124,552 | $86,241 | 44.4% | | Class A common stock – basic EPS | $2.67 | $1.85 | 44.3% | | Class A common stock – diluted EPS | $2.38 | $1.65 | 44.2% | | Class B common stock – basic and diluted EPS | $401 | $278 | 44.2% | | Dividends declared per share (Class A) | $1.275 | $1.19 | 7.1% | | Dividends declared per share (Class B) | $191.25 | $178.50 | 7.1% | Statements of Comprehensive Income (Unaudited) For the three months ended March 31, 2024, comprehensive income increased to $122.72 million from $93.99 million in the prior year, primarily driven by a substantial increase in net income, partially offset by a shift from other comprehensive income to a loss due to changes in unrealized holding gains/losses on available-for-sale securities | Metric | 3 Months Ended March 31, 2024 (in thousands) | 3 Months Ended March 31, 2023 (in thousands) | YoY Change (approx.) | | :------------------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------- | | Net income | $124,552 | $86,241 | 44.4% | | Other comprehensive (loss) income, net of tax | $(1,830) | $7,752 | NM | | Change in unrealized holding (losses) gains on AFS securities | $(754) | $10,494 | NM | | Amortization of prior service costs and net actuarial gain on pension and other postretirement plans | $(1,076) | $(2,742) | 60.8% | | Comprehensive income | $122,722 | $93,993 | 30.6% | Statements of Financial Position As of March 31, 2024, Erie Indemnity Company reported a 3.4% increase in total assets to $2.56 billion from $2.47 billion at December 31, 2023, mainly driven by increases in fixed assets and the defined benefit pension plan asset, while total liabilities increased by 2.5% and total shareholders' equity rose by 3.8% to $1.73 billion | Metric | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | QoQ Change (%) | | :--------------------------------------- | :------------------------------ | :------------------------------- | :------------- | | Assets: | | | | | Cash and cash equivalents | $144,872 | $144,055 | 0.6% | | Receivables from Erie Insurance Exchange and affiliates, net | $641,691 | $625,338 | 2.6% | | Total current assets | $941,771 | $930,189 | 1.2% | | Available-for-sale securities, net | $892,952 | $879,224 | 1.6% | | Fixed assets, net | $461,914 | $442,610 | 4.3% | | Defined benefit pension plan | $66,270 | $34,320 | 93.1% | | Total assets | $2,555,794 | $2,471,964 | 3.4% | | Liabilities: | | | | | Commissions payable | $384,613 | $353,709 | 8.7% | | Agent incentive compensation | $26,968 | $68,077 | (60.4)% | | Accounts payable and accrued liabilities | $213,062 | $175,622 | 21.3% | | Total current liabilities | $727,516 | $708,977 | 2.6% | | Total liabilities | $829,614 | $809,129 | 2.5% | | Shareholders' Equity: | | | | | Retained earnings | $2,868,864 | $2,803,689 | 2.3% | | Total shareholders' equity | $1,726,180 | $1,662,835 | 3.8% | Statements of Shareholders' Equity (Unaudited) Total shareholders' equity increased to $1.73 billion as of March 31, 2024, from $1.66 billion at December 31, 2023, primarily driven by net income of $124.55 million, partially offset by an other comprehensive loss of $1.83 million and dividends declared totaling $59.38 million | Metric | Balance, December 31, 2023 (in thousands) | Net Income (in thousands) | Other Comprehensive Loss (in thousands) | Dividends Declared (in thousands) | Balance, March 31, 2024 (in thousands) | | :--------------------------------------- | :---------------------------------------- | :------------------------ | :-------------------------------------- | :-------------------------------- | :--------------------------------------- | | Total shareholders' equity | $1,662,835 | $124,552 | $(1,830) | $(59,377) | $1,726,180 | Statements of Cash Flows (Unaudited) Net cash provided by operating activities significantly increased to $87.19 million for the three months ended March 31, 2024, up from $48.03 million in the prior year, driven by higher management fees received and reduced agent incentive compensation paid, while net cash used in investing activities increased to $27.00 million and net cash used in financing activities remained stable at $59.38 million due to dividends paid | Metric | 3 Months Ended March 31, 2024 (in thousands) | 3 Months Ended March 31, 2023 (in thousands) | YoY Change (in thousands) | | :--------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------ | | Net cash provided by operating activities | $87,193 | $48,031 | $39,162 | | Net cash used in investing activities | $(26,999) | $(12,326) | $(14,673) | | Net cash used in financing activities | $(59,377) | $(55,419) | $(3,958) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $817 | $(19,714) | $20,531 | | Cash, cash equivalents, and restricted cash end of period | $144,872 | $122,376 | $22,496 | Notes to Financial Statements (Unaudited) This section provides detailed disclosures and explanations for the financial statements, covering the company's nature of operations, significant accounting policies, revenue recognition, earnings per share, fair value measurements, investment details, credit risk, commitments, contingencies, and subsequent events Note 1. Nature of Operations Erie Indemnity Company serves as the attorney-in-fact for the Erie Insurance Exchange, a reciprocal insurer, performing policy issuance and renewal services, as well as administrative services like claims handling and investment management, with its financial performance directly dependent on the growth and financial health of the Exchange as management fees are calculated as a percentage of premiums written by the Exchange - Erie Indemnity Company's primary function is to act as attorney-in-fact for the Erie Insurance Exchange, providing policy issuance, renewal, and administrative services25 - The company's results of operations are directly tied to the growth and financial condition of the Exchange, with management fees based on premiums written by the Exchange28 Note 2. Significant Accounting Policies The financial statements are prepared under GAAP for interim periods, involving significant management estimates, and the company is currently evaluating the disclosure impact of new FASB ASUs (2023-07 on Segment Reporting, 2023-09 on Income Taxes) and SEC climate-related disclosure rules (SEC Release No. 33-11275), with no expected impact on the financial statements themselves - The company is evaluating the impact of ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Taxes) on its disclosures, with no impact on financial statements3233 - The company is evaluating the impact of SEC Release No. 33-11275 (Climate-Related Disclosures) on its disclosures, with disclosure requirements phasing in for fiscal years beginning in 202534 Note 3. Revenue The majority of revenue comes from management fees, which are a percentage of direct and affiliated assumed written premiums of the Exchange, allocated between policy issuance/renewal and administrative services, with administrative services reimbursement revenue recognized at cost and revenue from administrative services recognized over a four-year period | (in thousands) | 2024 | 2023 | | :------------------------------------------ | :----- | :----- | | Management fee revenue - policy issuance and renewal services | $665,686 | $558,090 | | Management fee revenue - administrative services | $16,934 | $15,189 | | Administrative services reimbursement revenue | $191,567 | $172,827 | | Total revenue from administrative services | $208,501 | $188,016 | - Revenue allocated to administrative services is recognized over a four-year period, with $15.0 million recognized in Q1 2024 from the prior year's contract liability39 Note 4. Earnings Per Share Basic earnings per share for Class A and Class B common stock is calculated using the two-class method, while Class A diluted earnings per share is determined by the if-converted method, accounting for the conversion of Class B shares and the dilutive effect of stock-based awards | Metric | 3 Months Ended March 31, 2024 | 3 Months Ended March 31, 2023 | | :--------------------------------------- | :---------------------------- | :---------------------------- | | Class A – Basic EPS | $2.67 | $1.85 | | Class A – Diluted EPS | $2.38 | $1.65 | | Class B – Basic and diluted EPS | $401 | $278 | | Weighted average shares outstanding – Basic (Class A) | 46,189,014 | 46,188,819 | | Weighted average shares outstanding – Diluted (Class A) | 52,301,803 | 52,296,621 | Note 5. Fair Value The company values available-for-sale and equity securities at fair value, categorized into Level 1, 2, or 3 based on input observability, with valuations primarily obtained from a nationally recognized pricing service, supplemented by internal reviews, and total Level 3 securities increased from $24.37 million at December 31, 2023, to $26.45 million at March 31, 2024 Fair Value Measurements by Level (March 31, 2024) | (in thousands) | Total | Level 1 | Level 2 | Level 3 | | :--------------------------------------- | :------ | :------ | :------ | :------ | | Total available-for-sale securities | $969,645 | $0 | $951,160 | $18,485 | | Total equity securities | $86,578 | $524 | $78,086 | $7,968 | | Total | $1,056,223 | $524 | $1,029,246 | $26,453 | Level 3 Assets – Year-to-Date Change (2024) | (in thousands) | Beginning balance at Dec 31, 2023 | Ending balance at Mar 31, 2024 | | :--------------------------------------- | :-------------------------------- | :----------------------------- | | Total available-for-sale securities | $17,034 | $18,485 | | Equity securities | $7,334 | $7,968 | | Total Level 3 securities | $24,368 | $26,453 | Note 6. Investments The company's fixed maturity securities portfolio, comprising available-for-sale and held-to-maturity securities, had an estimated fair value of $974.48 million at March 31, 2024, with gross unrealized losses totaling $37.87 million, primarily driven by interest rate fluctuations, and are not considered credit-related, with no intent to sell these securities before anticipated recovery of amortized cost Total Fixed Maturity Securities (March 31, 2024) | (in thousands) | Amortized cost | Gross unrealized gains | Gross unrealized losses | Estimated fair value | | :--------------------------------------- | :------------- | :--------------------- | :---------------------- | :------------------- | | Total available-for-sale securities, net | $1,001,906 | $5,613 | $37,874 | $969,645 | | Held-to-maturity securities | $4,833 | $0 | $0 | $4,833 | | Total fixed maturity securities, net | $1,006,739 | $5,613 | $37,874 | $974,478 | Available-for-Sale Securities by Unrealized Loss Position (March 31, 2024) | (dollars in thousands) | Fair value (Less than 12 months) | Unrealized losses (Less than 12 months) | Fair value (12 months or longer) | Unrealized losses (12 months or longer) | Total Fair value | Total Unrealized losses | | :--------------------------------------- | :------------------------------- | :-------------------------------------- | :------------------------------- | :-------------------------------------- | :--------------- | :---------------------- | | Total available-for-sale securities | $147,521 | $1,763 | $507,072 | $36,111 | $654,593 | $37,874 | Note 6. Investments - Credit loss allowances & Net investment income Credit loss allowances for available-for-sale securities decreased slightly to $575 thousand, while held-to-maturity securities saw a new allowance of $2.17 million in Q1 2024, and net investment income significantly increased to $15.90 million, up from $2.18 million in Q1 2023, primarily driven by a positive swing in limited partnership earnings and higher bond income Credit Loss Allowances Roll-Forward (March 31, 2024) | (in thousands) | Available-for-sale securities | Held-to-maturity securities | Other loans receivable | Agent loans | | :--------------------------------------- | :---------------------------- | :-------------------------- | :--------------------- | :---------- | | Balance, beginning of period | $597 | $0 | $11,081 | $957 | | Provision and recoveries | $164 | $2,167 | $172 | $0 | | Sales/collections and write-offs | $(186) | $0 | $0 | $0 | | Balance, end of period | $575 | $2,167 | $11,253 | $957 | Net Investment Income (3 Months Ended March 31) | (in thousands) | 2024 | 2023 | | :--------------------------------------- | :----- | :----- | | Available-for-sale securities | $11,613 | $9,833 | | Equity securities | $1,218 | $1,015 | | Limited partnerships | $525 | $(10,752) | | Cash equivalents and other | $2,948 | $2,105 | | Total investment income | $16,304 | $2,201 | | Less: investment expenses | $401 | $18 | | Net investment income | $15,903 | $2,183 | Note 6. Investments - Net realized and unrealized investment gains (losses) & Net impairment losses recognized in earnings The company reported net realized and unrealized investment gains of $1.85 million in Q1 2024, a substantial turnaround from a $5.28 million loss in Q1 2023, driven by positive market value adjustments in the preferred stock portfolio, while net impairment losses increased to $2.68 million, primarily due to $2.17 million in expected credit losses on held-to-maturity securities Net Realized and Unrealized Investment Gains (Losses) (3 Months Ended March 31) | (in thousands) | 2024 | 2023 | | :--------------------------------------- | :----- | :----- | | Net realized losses on available-for-sale securities | $(262) | $(1,619) | | Equity securities | $2,115 | $(3,663) | | Net realized and unrealized investment gains (losses) | $1,853 | $(5,282) | Net Impairment Losses Recognized in Earnings (3 Months Ended March 31) | (in thousands) | 2024 | 2023 | | :--------------------------------------- | :----- | :----- | | Available-for-sale securities | $(338) | $(1,633) | | Held-to-maturity securities - expected credit losses | $(2,167) | $— | | Other loans receivable - expected credit losses | $(172) | $0 | | Net impairment losses recognized in earnings | $(2,677) | $(1,633) | Note 7. Bank Line of Credit Erie Indemnity Company maintains a $100 million bank revolving line of credit, expiring in October 2026, with $99.2 million remaining available as of March 31, 2024, no outstanding borrowings, and the company in compliance with all covenants - The company has a $100 million bank revolving line of credit, with $99.2 million available as of March 31, 2024, and no outstanding borrowings70 - Investments with a fair value of $117.1 million were pledged as collateral on the line of credit70 Note 8. Postretirement Benefits Erie Indemnity Company sponsors a noncontributory defined benefit pension plan and an unfunded supplemental employee retirement plan (SERP), with cost allocations and reimbursements occurring between the company and the Exchange, and a $33 million contribution was made to the defined benefit pension plan in January 2024 Pension Plan Income Components (3 Months Ended March 31) | (in thousands) | 2024 | 2023 | | :--------------------------------------- | :----- | :----- | | Service cost for benefits earned | $8,651 | $7,191 | | Interest cost on benefit obligation | $13,145 | $12,548 | | Expected return on plan assets | $(20,198) | $(17,218) | | Prior service cost amortization | $389 | $362 | | Net actuarial gain amortization | $(1,751) | $(3,833) | | Settlement gain | $(249) | $— | | Pension plan income | $(13) | $(950) | - A $33 million contribution was made to the defined benefit pension plan in January 202473 Note 9. Income Taxes The effective income tax rate for the three months ended March 31, 2024, was 20.8%, a slight decrease from 21.0% in the same period of 2023 - Effective income tax rate for Q1 2024 was 20.8%, compared to 21.0% for Q1 202376 Note 10. Capital Stock Class B common stock is convertible into Class A common stock at a 2,400:1 ratio, with no conversions occurring in the first quarter of 2024, and the company has approximately $17.8 million of repurchase authority remaining under its $150 million stock repurchase program, with no shares repurchased under this program during the quarter - Class B shares are convertible into Class A shares at a rate of 2,400 to 177 - Approximately $17.8 million of repurchase authority remained under the stock repurchase program at March 31, 202478 Note 11. Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive loss increased to $15.23 million at March 31, 2024, from $13.40 million at December 31, 2023, driven by other comprehensive losses from both investment securities and pension and other postretirement plans during the quarter Changes in Accumulated Other Comprehensive Income (Loss) (3 Months Ended March 31) | (in thousands) | AOCI (loss), beginning of period (Net) | OCI (loss) (Net) | AOCI (loss), end of period (Net) | | :--------------------------------------- | :------------------------------------- | :--------------- | :------------------------------- | | Investment securities | $(24,807) | $(754) | $(25,561) | | Pension and other postretirement plans | $11,407 | $(1,076) | $10,331 | | Total | $(13,400) | $(1,830) | $(15,230) | Note 12. Concentrations of Credit Risk Erie Indemnity Company faces a concentration of credit risk from unsecured receivables due from the Erie Insurance Exchange and its affiliates, which amounted to $641.7 million at March 31, 2024, including a $0.6 million credit loss allowance - Unsecured receivables from the Exchange and its affiliates totaled $641.7 million at March 31, 2024, representing a concentration of credit risk80 Note 13. Commitments and Contingencies The company has commitments including an agent loan participation program with a maximum potential guarantee of $7.3 million and guarantees for real estate development projects totaling $7.8 million, and is also involved in litigation, for which reserves are established based on probability and estimability of loss, believing current accruals are appropriate - Maximum potential obligation for guarantees related to the agent loan participation program is $7.3 million at March 31, 202481 - Maximum potential obligation related to guarantees for real estate development projects is $7.8 million at March 31, 202482 - The company is involved in litigation and establishes reserves when a loss is probable and reasonably estimable, believing current accruals are appropriate83 Note 14. Subsequent Events On April 23, 2024, subsequent to the financial statement date, the maximum amount of loans to be funded through the agent loan participation program was increased to $150 million - The maximum amount of loans for the agent loan participation program was increased to $150 million on April 23, 202485 PART II. OTHER INFORMATION This section provides management's discussion and analysis of financial condition, results of operations, market risks, controls, legal proceedings, and other disclosures Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting key factors influencing performance, including operating overview, detailed results of operations, financial condition, liquidity, capital resources, and critical accounting estimates, and includes a cautionary statement regarding forward-looking information Cautionary Statement Regarding Forward-Looking Information This section serves as a 'Safe Harbor' statement, indicating that forward-looking statements in the report are subject to various risks and uncertainties that could cause actual outcomes to differ materially, with key risks including dependence on the Erie Insurance Exchange, general economic conditions, insurance industry competition, and financial market volatility - Forward-looking statements are subject to risks and uncertainties, including dependence on the Erie Insurance Exchange and its financial condition, general business and economic conditions, and factors affecting insurance industry competition8990 - Other risks include the ability to attract and retain talent, manage technology initiatives, maintain business operations, and comply with evolving laws and regulations90 Recent Accounting Standards and Disclosure Rules This section refers readers to Note 2, 'Significant Accounting Policies,' within Part I, Item 1 of this report for a detailed discussion of recently issued accounting standards and disclosure rules and their known or potential impact on the company's financial statements Operating Overview Erie Indemnity Company operates as the attorney-in-fact for the Erie Insurance Exchange, generating management fee revenue from policy issuance, renewal, and administrative services, with its financial performance closely tied to the Exchange's premium growth, and in Q1 2024, operating income increased by 25.6% and net income by 44.4%, primarily due to a 19.3% rise in management fee revenue for policy services and a positive swing in investment income - Erie Indemnity Company's earnings are primarily driven by management fee revenue from services provided to the Erie Insurance Exchange, based on direct and affiliated assumed premiums written9597 Financial Overview (3 Months Ended March 31) | (dollars in thousands, except per share data) | 2024 | 2023 | % Change | | :-------------------------------------------- | :----- | :----- | :------- | | Operating income | $138,812 | $110,543 | 25.6 % | | Total investment income (loss) | $15,079 | $(4,732) | NM | | Income before income taxes | $157,302 | $109,148 | 44.1 % | | Net income | $124,552 | $86,241 | 44.4 % | | Net income per share – diluted | $2.38 | $1.65 | 44.4 % | - Management fee revenue for policy issuance and renewal services increased 19.3% to $665.7 million in Q1 2024, driven by a 19.0% increase in direct and affiliated assumed premiums written by the Exchange99 General Conditions and Trends Affecting Our Business The company's business is sensitive to economic conditions, where factors like declining consumer confidence, inflation, and recession threats could negatively impact the Exchange's premium revenue and, consequently, the company's management fees, and financial market volatility poses a risk to the fair value of the investment portfolio and total investment income - Unfavorable economic conditions (e.g., inflation, recession) may lead to reduced premium revenue for the Exchange, adversely affecting the company's management fee revenue103 - The investment portfolio is subject to market volatility, which could cause considerable fluctuations in fair value and total investment income, with geopolitical events and inflation posing future risks104 Results of Operations This section details the drivers behind the company's financial performance, including management fee revenue, direct and affiliated assumed premiums written by the Exchange, costs associated with policy issuance and administrative services, and a comprehensive analysis of total investment income and its components Management fee revenue Management fee revenue is generated from two performance obligations: policy issuance and renewal services, and administrative services, calculated as a percentage of direct and affiliated assumed premiums written by the Exchange, with the management fee rate at 25% for both 2024 and 2023, and a minor change in transaction price allocation in 2024 Management Fee Revenue Allocation (3 Months Ended March 31) | (dollars in thousands) | 2024 | 2023 | % Change | | :------------------------------------------ | :----- | :----- | :------- | | Management fee revenue - policy issuance and renewal services | $665,686 | $558,090 | 19.3 % | | Management fee revenue - administrative services | $16,934 | $15,189 | 11.5 % | - Direct and affiliated assumed premiums written by the Exchange increased 19.0% to $2.74 billion in Q1 2024107 - The management fee rate was 25% for both 2024 and 2023, with a minor change in transaction price allocation in 2024106 Direct and affiliated assumed premiums written by the Exchange Direct and affiliated assumed premiums written by the Exchange increased 19.0% in Q1 2024, driven by growth in both new and renewal business, particularly in personal lines and commercial multi-peril, supported by increases in policies in force and average premium per policy - Direct and affiliated assumed premiums written by the Exchange increased 19.0% to $2.74 billion in Q1 2024110 - Year-over-year policies in force for all lines of business increased 7.1% in Q1 2024, and average premium per policy increased 10.6%110 - Premiums from new business increased 32.4% to $449 million, while renewal business premiums increased 16.7% to $2.3 billion in Q1 2024111112 Policy issuance and renewal services Operating income from policy issuance and renewal services increased by 27.8% to $121.88 million in Q1 2024, driven by higher management fee revenue (24.40% of premiums) due to increased direct and affiliated assumed premiums written by the Exchange Policy Issuance and Renewal Services Operating Income (3 Months Ended March 31) | (dollars in thousands) | 2024 | 2023 | % Change | | :------------------------------------------ | :----- | :----- | :------- | | Management fee revenue - policy issuance and renewal services | $665,686 | $558,090 | 19.3 % | | Service agreement revenue | $6,514 | $6,359 | 2.4 % | | Cost of operations - policy issuance and renewal services | $550,322 | $469,095 | 17.3 % | | Operating income - policy issuance and renewal services | $121,878 | $95,354 | 27.8 % | - The management fee revenue allocated for policy issuance and renewal services was 24.40% of direct and affiliated assumed premiums written by the Exchange in Q1 2024119 Cost of policy issuance and renewal services The total cost of operations for policy issuance and renewal services increased by 17.3% to $550.32 million in Q1 2024, mainly driven by a 21.7% increase in commissions due to premium growth and higher agent incentive compensation, and an 8.9% increase in non-commission expenses, despite a decrease in information technology costs Cost of Operations - Policy Issuance and Renewal Services (3 Months Ended March 31) | (dollars in thousands) | 2024 | 2023 | % Change | | :--------------------------------------- | :----- | :----- | :------- | | Total commissions | $375,760 | $308,808 | 21.7 % | | Total non-commission expense | $174,562 | $160,287 | 8.9 % | | Total cost of operations - policy issuance and renewal services | $550,322 | $469,095 | 17.3 % | - Commissions increased by $67.0 million, primarily due to growth in direct and affiliated assumed written premium and higher agent incentive compensation121 - Information technology costs decreased by $3.7 million due to increased capitalized professional fees and personnel costs related to technology initiatives122 Administrative services Total revenue allocated to administrative services increased by 10.9% to $208.50 million in Q1 2024, including management fee revenue (0.60% of premiums) and administrative services reimbursement revenue, which is recognized monthly as services are provided and settled at cost Administrative Services Revenue and Expenses (3 Months Ended March 31) | (dollars in thousands) | 2024 | 2023 | % Change | | :------------------------------------------ | :----- | :----- | :------- | | Management fee revenue - administrative services | $16,934 | $15,189 | 11.5 % | | Administrative services reimbursement revenue | $191,567 | $172,827 | 10.8 % | | Total revenue allocated to administrative services | $208,501 | $188,016 | 10.9 % | | Claims handling services | $167,963 | $148,200 | 13.3 % | | Investment management services | $8,593 | $8,745 | (1.7)% | | Life management services | $15,011 | $15,882 | (5.5)% | | Operating income - administrative services | $16,934 | $15,189 | 11.5 % | - The management fee revenue allocated to administrative services was 0.60% of direct and affiliated assumed premiums written by the Exchange in Q1 2024124 Cost of administrative services As the attorney-in-fact for the Exchange and service provider for its subsidiaries, Erie Indemnity Company incurs administrative service expenses, including claims handling, investment management, and life management services, which are fully reimbursed at cost by the Exchange and its subsidiaries, with reimbursements recorded as a receivable - Administrative services expenses incurred by Indemnity on behalf of the Exchange and its subsidiaries are reimbursed at cost125 Total investment income (loss) Total investment income saw a significant positive swing to $15.08 million in Q1 2024 from a loss of $4.73 million in Q1 2023, driven by increased net investment income and a shift from net realized/unrealized losses to gains Total Investment Income (Loss) (3 Months Ended March 31) | (dollars in thousands) | 2024 | 2023 | % Change | | :--------------------------------------- | :----- | :----- | :------- | | Net investment income | $15,903 | $2,183 | NM % | | Net realized and unrealized investment gains (losses) | $1,853 | $(5,282) | NM | | Net impairment losses recognized in earnings | $(2,677) | $(1,633) | (63.9)% | | Total investment income (loss) | $15,079 | $(4,732) | NM % | Net investment income Net investment income increased significantly by $13.7 million in Q1 2024, primarily due to higher equity in earnings from limited partnerships and increased bond income from higher yields - Net investment income increased by $13.7 million in Q1 2024, primarily due to higher equity in earnings of limited partnerships and increased bond income from higher yields128 - Limited partnership earnings were $0.5 million in Q1 2024, a significant improvement from losses of $10.8 million in Q1 2023128 Net realized and unrealized investment gains (losses) The company reported net realized and unrealized investment gains of $1.85 million in Q1 2024, a positive reversal from a $5.28 million loss in Q1 2023, primarily driven by market value adjustments in the preferred stock portfolio Net Realized and Unrealized Investment Gains (Losses) Breakdown (3 Months Ended March 31) | (in thousands) | 2024 | 2023 | | :--------------------------------------- | :----- | :----- | | Available-for-sale securities | $(262) | $(1,619) | | Equity securities | $2,115 | $(3,663) | | Net realized and unrealized investment gains (losses) | $1,853 | $(5,282) | - Net unrealized gains recognized on equity securities held at the reporting date were $2.05 million in Q1 2024, compared to losses of $1.16 million in Q1 202366 Net impairment losses recognized in earnings Net impairment losses increased to $2.68 million in Q1 2024, primarily due to $2.17 million in current expected credit losses on held-to-maturity securities, in addition to impairments on available-for-sale securities Net Impairment Losses (3 Months Ended March 31) | (in thousands) | 2024 | 2023 | | :--------------------------------------- | :----- | :----- | | Available-for-sale securities | $(338) | $(1,633) | | Held-to-maturity securities - expected credit losses | $(2,167) | $— | | Other loans receivable - expected credit losses | $(172) | $0 | | Net impairment losses recognized in earnings | $(2,677) | $(1,633) | Financial Condition of Erie Insurance Exchange The Erie Insurance Exchange, the company's sole customer, maintains a strong financial condition with an A+ 'Superior' rating from A.M. Best, with its statutory direct written premiums growing 19.0% in Q1 2024, and policyholders' surplus reaching $9.5 billion - The Erie Insurance Exchange is rated A+ 'Superior' by A.M. Best, the second highest financial strength rating, with a stable outlook132 - Statutory direct written premiums of the Exchange grew 19.0% to $2.7 billion in Q1 2024133 - Policyholders' surplus was $9.5 billion at March 31, 2024, and the year-over-year policy retention ratio was 91.2%133 FINANCIAL CONDITION This section provides an overview of the company's investment portfolio, detailing the composition and management of fixed maturity and equity securities, and their impact on the company's financial position Investments The company's investment portfolio, managed to maximize after-tax returns on a risk-adjusted basis, totaled $1.15 billion at March 31, 2024, with available-for-sale securities constituting 84% of the portfolio and equity securities making up 8% Investment Portfolio Carrying Value (March 31, 2024) | (dollars in thousands) | March 31, 2024 | % to total | | :--------------------------------------- | :------------- | :--------- | | Available-for-sale securities | $969,645 | 84 % | | Equity securities | $86,578 | 8 % | | Agent loans | $67,448 | 6 % | | Other investments | $28,374 | 2 % | | Total investments | $1,152,045 | 100 % | Fixed maturities The fixed maturity portfolio is high quality and diversified, managed to achieve reasonable returns while limiting risk, with net unrealized losses on fixed maturities, net of deferred taxes, totaling $25.5 million at March 31, 2024 - Net unrealized losses on fixed maturities, net of deferred taxes, totaled $25.5 million at March 31, 2024, compared to $24.7 million at December 31, 2023139 Fair Value of Fixed Maturity Portfolio by Industry Sector and Rating (March 31, 2024) | (in thousands) | AAA | AA | A | BBB | Non investment grade | Fair value | | :--------------------------------------- | :---- | :--- | :-- | :---- | :------------------- | :--------- | | Basic materials | $0 | $0 | $957 | $5,366 | $5,920 | $12,243 | | Communications | $0 | $2,903 | $13,660 | $9,039 | $12,602 | $38,204 | | Consumer | $0 | $1,959 | $22,861 | $65,632 | $41,017 | $131,469 | | Energy | $0 | $0 | $5,638 | $20,734 | $14,447 | $40,819 | | Financial | $0 | $2,041 | $97,008 | $122,412 | $16,146 | $237,607 | | Structured securities | $139,122 | $188,164 | $29,749 | $15,347 | $132 | $372,514 | | Total | $141,020 | $196,106 | $180,437 | $315,617 | $141,298 | $974,478 | Equity securities Equity securities, predominantly nonredeemable preferred stocks, are recorded at fair value with all changes in unrealized gains and losses recognized in the Statements of Operations, and the fair value of equity securities increased to $86.58 million at March 31, 2024, from $84.25 million at December 31, 2023 Fair Value of Equity Securities by Sector (March 31, 2024) | (in thousands) | March 31, 2024 | December 31, 2023 | | :--------------------------------------- | :------------- | :---------------- | | Financial services | $70,834 | $69,900 | | Utilities | $5,876 | $5,810 | | Energy | $3,698 | $3,901 | | Consumer | $4,425 | $3,915 | | Technology | $1,500 | $500 | | Industrial | $221 | $180 | | Communications | $24 | $47 | | Total | $86,578 | $84,253 | LIQUIDITY AND CAPITAL RESOURCES This section discusses the company's ability to generate cash flows to meet its short- and long-term obligations, detailing sources and uses of cash, cash flow activities, capital outlook, and off-balance sheet arrangements, while monitoring economic conditions and market volatility Sources and Uses of Cash The company's liquidity is primarily generated from management fee revenue and investment income, which are used to fund operating expenses, commissions, salaries, pension plans, share repurchases, dividends, and capital expenditures, and it maintains sufficient liquidity through cash, liquid marketable securities, and a $100 million bank revolving line of credit, continuously monitoring economic conditions and market volatility - Liquidity requirements are primarily met by management fee revenue and income from investments145 - Cash is used to fund management operations, including commissions, salaries, pension plans, share repurchases, dividends, and capital expenditures145 - The company believes it has sufficient access to liquidity through its cash position, diverse liquid marketable securities, and a $100 million bank revolving line of credit144 Cash flow activities Net cash provided by operating activities rose to $87.19 million in Q1 2024, up from $48.03 million in Q1 2023, primarily due to increased management fees and reduced agent incentive compensation, while net cash used in investing activities increased to $27.00 million, mainly for fixed asset purchases, and financing activities was $59.38 million, consistent with dividends paid Condensed Cash Flow Information (3 Months Ended March 31) | (in thousands) | 2024 | 2023 | | :--------------------------------------- | :----- | :----- | | Net cash provided by operating activities | $87,193 | $48,031 | | Net cash used in investing activities | $(26,999) | $(12,326) | | Net cash used in financing activities | $(59,377) | $(55,419) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $817 | $(19,714) | - Increased cash from operating activities was primarily due to a $106.4 million increase in management fees received and a $26.5 million decrease in agent incentive compensation paid148 - Dividends paid to shareholders increased by 7.1% for both Class A and Class B common stock in 2024150 Capital Outlook The company regularly forecasts cash requirements for normal and extreme risk events and believes it has sufficient alternatives to meet future funding needs, including unrestricted cash, a $100 million bank revolving line of credit, and liquid investment grade bonds - Unrestricted and unpledged cash and cash equivalents totaled approximately $128.0 million at March 31, 2024152 - The company has access to a $100 million bank revolving line of credit and $801.1 million in unpledged equity securities and investment grade bonds152153 Off-Balance Sheet Arrangements The company has contingent obligations related to guarantees, as further detailed in Note 13, 'Commitments and Contingencies,' and management believes these arrangements will not have a material current or future effect on the company's financial condition, results of operations, or cash flows - The company has contingent obligations for guarantees, which are not expected to have a material effect on financial condition, results of operations, or cash flows154 CRITICAL ACCOUNTING ESTIMATES The company's financial statements involve significant estimates and assumptions, with the most critical relating to investment valuation and retirement benefit plans for employees, and while management believes these estimates are appropriate, actual amounts may differ - Significant estimates affecting financial statements include investment valuation and retirement benefit plans156 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is from fluctuations in interest rates and prices, and despite the current inflationary environment and rising interest rates, there have been no material changes to its portfolio or asset allocations in Q1 2024 - Primary market risk exposure is related to fluctuations in interest rates and prices157 - No material changes impacted the investment portfolio or reshaped periodic investment reviews of asset allocations during Q1 2024, despite the inflationary and rising interest rate environment158 Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2024, and furthermore, there were no material changes in internal control over financial reporting during the three months ended March 31, 2024 - Disclosure controls and procedures were effective as of March 31, 2024159 - No material changes in internal control over financial reporting occurred during Q1 2024160 Item 1. Legal Proceedings The company is vigorously defending against an ongoing class-action lawsuit alleging breaches of fiduciary duty related to management fees, and a district court recently granted a preliminary injunction preventing further state court proceedings, which is now under appeal - The company is a defendant in a class-action lawsuit alleging breaches of fiduciary duty related to the setting of its management fee162167 - A district court granted a preliminary injunction on February 28, 2024, to prevent further state court proceedings on claims previously dismissed in federal court174 - The district court's preliminary injunction is currently under appeal by the plaintiffs174 Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 - No material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2023176 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 1,238 shares of Class A common stock in March 2024 to fund a rabbi trust for deferred stock compensation, with approximately $17.75 million remaining under its $150 million stock repurchase program Class A Common Stock Share Repurchases (Q1 2024) | Period | Total number of shares purchased | Average price paid per share | Dollar value of shares that may yet be purchased under the program | | :----------------- | :----------------------------- | :--------------------------- | :--------------------------------------------------------------- | | January 1-31, 2024 | — | $— | $17,754 | | February 1-29, 2024 | — | $— | $17,754 | | March 1-31, 2024 | 1,238 | $405.57 | $17,754 | | Total | 1,238 | $405.57 | | - The repurchased shares were used to fund the rabbi trust for the outside director deferred stock compensation plan178 Item 6. Exhibits This section lists the various exhibits filed with the Form 10-Q, including certifications, XBRL documents, and the cover page interactive data file - Exhibits include certifications (31.1, 31.2, 32) and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)180 SIGNATURES The report is officially signed on behalf of Erie Indemnity Company by Timothy G. NeCastro, President & CEO, and Julie M. Pelkowski, Executive Vice President & CFO, on April 25, 2024, affirming compliance with Securities Exchange Act requirements - The report was signed by Timothy G. NeCastro, President & CEO, and Julie M. Pelkowski, Executive Vice President & CFO, on April 25, 2024183