Annual Statements Open main menu

ERIE INDEMNITY CO - Quarter Report: 2022 March (Form 10-Q)

Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___to___
Commission file number 0-24000

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

Pennsylvania
25-0466020
(State or other jurisdiction of(IRS Employer
incorporation or organization)Identification No.)

100 Erie Insurance Place,Erie,Pennsylvania16530
(Address of principal executive offices)(Zip Code)

814870-2000
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Securities registered pursuant to Section 12(b) of the Act:
Class A common stock,stated value $0.0292 per shareERIENASDAQ Stock Market, LLC
(Title of each class)(Trading Symbol)(Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ 

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

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

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

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

The number of shares outstanding of the registrant’s Class A Common Stock as of the latest practicable date was 46,189,068 at April 22, 2022.
 
The number of shares outstanding of the registrant’s Class B Common Stock as of the latest practicable date was 2,542 at April 22, 2022.


Table of Contents
2

Table of Contents
PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

ERIE INDEMNITY COMPANY
STATEMENTS OF OPERATIONS (UNAUDITED)
(dollars in thousands, except per share data)
Three months ended
March 31,
20222021
Operating revenue
Management fee revenue - policy issuance and renewal services
$487,992 $455,718 
Management fee revenue - administrative services14,313 14,847 
Administrative services reimbursement revenue163,327 153,533 
Service agreement revenue6,478 6,079 
Total operating revenue672,110 630,177 
Operating expenses
Cost of operations - policy issuance and renewal services424,471 400,549 
Cost of operations - administrative services163,327 153,533 
Total operating expenses587,798 554,082 
Operating income84,312 76,095 
Investment income
Net investment income10,504 17,097 
Net realized and unrealized investment (losses) gains(7,279)804 
Net impairment (losses) recoveries recognized in earnings(216)87 
Total investment income3,009 17,988 
Interest expense999 1,009 
Other income (expense)473 (519)
Income before income taxes86,795 92,555 
Income tax expense18,176 18,989 
Net income$68,619 $73,566 
Net income per share
Class A common stock – basic$1.47 $1.58 
Class A common stock – diluted$1.31 $1.41 
Class B common stock – basic and diluted$221 $237 
Weighted average shares outstanding – Basic
Class A common stock46,188,761 46,188,860 
Class B common stock2,542 2,542 
Weighted average shares outstanding – Diluted
Class A common stock52,300,501 52,315,958 
Class B common stock2,542 2,542 
Dividends declared per share
Class A common stock$1.110 $1.035 
Class B common stock$166.50 $155.25 

See accompanying notes to Financial Statements. See Note 11, "Accumulated Other Comprehensive Income (Loss)", for amounts reclassified out of accumulated other comprehensive income (loss) into the Statements of Operations. 
3

Table of Contents
ERIE INDEMNITY COMPANY
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three months ended
March 31,
20222021
Net income$68,619 $73,566 
Other comprehensive loss, net of tax
Change in unrealized holding losses on available-for-sale securities(26,919)(8,752)
Amortization of prior service costs and net actuarial loss on pension and other postretirement plans
1,730 3,463 
Total other comprehensive loss, net of tax(25,189)(5,289)
Comprehensive income$43,430 $68,277 
 
See accompanying notes to Financial Statements. See Note 11, "Accumulated Other Comprehensive Income (Loss)", for amounts reclassified out of accumulated other comprehensive income (loss) into the Statements of Operations.
4

Table of Contents
ERIE INDEMNITY COMPANY
STATEMENTS OF FINANCIAL POSITION
(dollars in thousands, except per share data)
March 31,December 31,
20222021
Assets(Unaudited)
Current assets:
Cash and cash equivalents$141,305 $183,702 
Available-for-sale securities46,155 38,396 
Receivables from Erie Insurance Exchange and affiliates, net478,754 479,123 
Prepaid expenses and other current assets78,877 56,206 
Accrued investment income6,255 6,303 
Total current assets751,346 763,730 
Available-for-sale securities, net877,165 907,689 
Equity securities78,069 87,743 
Fixed assets, net396,072 374,802 
Agent loans, net61,579 58,683 
Deferred income taxes, net9,818 145 
Other assets49,804 49,265 
Total assets$2,223,853 $2,242,057 
Liabilities and shareholders' equity
Current liabilities:
Commissions payable$287,989 $270,746 
Agent bonuses31,507 120,437 
Accounts payable and accrued liabilities186,386 138,317 
Dividends payable51,693 51,693 
Contract liability34,872 34,935 
Deferred executive compensation6,752 12,637 
Current portion of long-term borrowings2,132 2,098 
Total current liabilities601,331 630,863 
Defined benefit pension plans139,231 130,383 
Long-term borrowings91,177 91,734 
Contract liability17,493 17,686 
Deferred executive compensation13,821 14,571 
Other long-term liabilities26,600 14,342 
Total liabilities889,653 899,579 
Shareholders’ equity
Class A common stock, stated value $0.0292 per share; 74,996,930 shares authorized; 68,299,200 shares issued; 46,189,068 shares outstanding
1,992 1,992 
Class B common stock, convertible at a rate of 2,400 Class A shares for one Class B share, stated value $70 per share; 3,070 shares authorized; 2,542 shares issued and outstanding
178 178 
Additional paid-in-capital16,481 16,496 
Accumulated other comprehensive loss(50,477)(25,288)
Retained earnings2,512,116 2,495,190 
Total contributed capital and retained earnings2,480,290 2,488,568 
Treasury stock, at cost; 22,110,132 shares held
(1,168,332)(1,167,828)
Deferred compensation22,242 21,738 
Total shareholders’ equity1,334,200 1,342,478 
Total liabilities and shareholders’ equity$2,223,853 $2,242,057 

See accompanying notes to Financial Statements. 
5

Table of Contents
ERIE INDEMNITY COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
Three months ended March 31, 2022 and 2021
(dollars in thousands, except per share data)

Class A common stockClass B common stockAdditional paid-in-capitalAccumulated other comprehensive lossRetained earningsTreasury stockDeferred compensationTotal shareholders' equity
Balance, December 31, 2021$1,992 $178 $16,496 $(25,288)$2,495,190 $(1,167,828)$21,738 $1,342,478 
Net income68,619 68,619 
Other comprehensive loss(25,189)(25,189)
Dividends declared:
Class A $1.11 per share
(51,270)(51,270)
Class B $166.50 per share
(423)(423)
Net purchase of treasury stock (1)
(15)(15)
Deferred compensation(802)802 
Rabbi trust distribution (2)
298 (298)
Balance, March 31, 2022$1,992 $178 $16,481 $(50,477)$2,512,116 $(1,168,332)$22,242 $1,334,200 


Class A common stockClass B common stockAdditional paid-in-capitalAccumulated other comprehensive lossRetained earningsTreasury stockDeferred compensationTotal shareholders' equity
Balance, December 31, 2020$1,992 $178 $16,487 $(78,143)$2,393,624 $(1,163,670)$17,580 $1,188,048 
Net income73,566 73,566 
Other comprehensive loss(5,289)(5,289)
Dividends declared:
Class A $1.035 per share
(47,806)(47,806)
Class B $155.25 per share
(395)(395)
Net purchase of treasury stock (1)
Deferred compensation(846)846 
Rabbi trust distribution (2)
876 (876)
Balance, March 31, 2021$1,992 $178 $16,496 $(83,432)$2,418,989 $(1,163,640)$17,550 $1,208,133 

(1)Net purchases of treasury stock in 2022 and 2021 include the repurchase of our Class A common stock in the open market that were subsequently distributed to satisfy stock based compensation awards.
(2)Distributions of our Class A shares were made from the rabbi trust to an incentive compensation deferral plan participant in 2022 and a retired director in 2021.

See accompanying notes to Financial Statements.
6

Table of Contents
ERIE INDEMNITY COMPANY
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Three months ended
March 31,
20222021
Cash flows from operating activities
Management fee received$490,360 $486,040 
Administrative services reimbursements received193,919 157,692 
Service agreement fee received6,304 6,079 
Net investment income received9,510 9,873 
Commissions paid to agents(230,831)(219,346)
Agents bonuses paid(122,093)(111,099)
Salaries and wages paid(71,228)(68,373)
Employee benefits paid(11,470)(8,152)
General operating expenses paid(57,477)(56,456)
Administrative services expenses paid(182,437)(161,731)
Income taxes recovered (paid)17 (1)
Interest paid(1,021)(1,044)
Net cash provided by operating activities23,553 33,482 
Cash flows from investing activities
Purchase of investments:
Available-for-sale securities(91,055)(75,183)
Equity securities(4,619)(18,819)
Other investments— (349)
Proceeds from investments:
Available-for-sale securities sales48,291 31,238 
Available-for-sale securities maturities/calls42,699 45,145 
Equity securities8,984 16,326 
Other investments371 819 
Purchase of fixed assets(15,458)(11,146)
Proceeds from disposal of fixed assets30 
Loans to agents(5,195)(997)
Collections on agent loans2,220 2,138 
Net cash used in investing activities(13,732)(10,828)
Cash flows from financing activities
Dividends paid to shareholders(51,693)(48,200)
Net payments on long-term borrowings(525)(502)
Net cash used in financing activities(52,218)(48,702)
Net decrease in cash and cash equivalents(42,397)(26,048)
Cash and cash equivalents, beginning of period183,702 161,240 
Cash and cash equivalents, end of period$141,305 $135,192 
Supplemental disclosure of noncash transactions
Liability incurred to purchase fixed assets$17,673 $17,098 
Operating lease assets obtained in exchange for new operating lease liabilities$1,008 $68 

See accompanying notes to Financial Statements.
7

Table of Contents
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
 
Note 1.  Nature of Operations
 
Erie Indemnity Company ("Indemnity", "we", "us", "our") is a publicly held Pennsylvania business corporation that has since its incorporation in 1925 served as the attorney-in-fact for the subscribers (policyholders) at the Erie Insurance Exchange ("Exchange").  The Exchange, which also commenced business in 1925, is a Pennsylvania-domiciled reciprocal insurer that writes property and casualty insurance.
 
Our primary function as attorney-in-fact is to perform policy issuance and renewal services on behalf of the subscribers at the Exchange. We also act as attorney-in-fact on behalf of the Exchange with respect to all claims handling and investment management services, as well as the service provider for all claims handling, life insurance, and investment management services for its insurance subsidiaries, collectively referred to as "administrative services". Acting as attorney-in-fact in these two capacities is done in accordance with a subscriber's agreement (a limited power of attorney) executed individually by each subscriber (policyholder), which appoints us as their common attorney-in-fact to transact certain business on their behalf.  Pursuant to the subscriber's agreement for acting as attorney-in-fact in these two capacities, we earn a management fee calculated as a percentage of the direct and affiliated assumed premiums written by the Exchange.

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

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

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

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


8

Table of Contents
Note 2.  Significant Accounting Policies

Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information, refer to the financial statements and footnotes included in our Form 10-K for the year ended December 31, 2021 as filed with the Securities and Exchange Commission on February 24, 2022.

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


9

Table of Contents
Note 3.  Revenue

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

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

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

The Exchange, by virtue of its legal structure as a reciprocal insurer, does not have any employees or officers. Therefore, it enters into contractual relationships by and through an attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of the Exchange with respect to its administrative services in accordance with the subscriber's agreement. The Exchange's insurance subsidiaries also utilize Indemnity for these services in accordance with the service agreements between each of the subsidiaries and Indemnity. Collectively, these services represent a second performance obligation under the subscriber’s agreement and the service agreements. The revenue allocated to this performance obligation is recognized over a four-year period representing the time over which these services are provided. The portion of revenue not yet earned is recorded as a contract liability in the Statements of Financial Position. During the three months ending March 31, 2022, we recognized revenue of $12.7 million that was included in the contract liabilities balance as of December 31, 2021. During the three months ended March 31, 2021, we recognized revenue of $13.3 million that was included in the contract liabilities balance as of December 31, 2020. The administrative services expenses we incur and the related reimbursements we receive are recorded gross in the Statements of Operations.

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


The following table disaggregates revenue by our two performance obligations:
Three months ended March 31,
(in thousands)20222021
Management fee revenue - policy issuance and renewal services$487,992 $455,718 
Management fee revenue - administrative services14,313 14,847 
Administrative services reimbursement revenue163,327 153,533 
Total administrative services revenue$177,640 $168,380 
10

Table of Contents
Note 4.  Earnings Per Share
 
Class A and Class B basic earnings per share and Class B diluted earnings per share are calculated under the two-class method. The two-class method allocates earnings to each class of stock based upon its dividend rights.  Class B shares are convertible into Class A shares at a conversion ratio of 2,400 to 1. See Note 10, "Capital Stock".

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

A reconciliation of the numerators and denominators used in the basic and diluted per-share computations is presented as follows for each class of common stock: 
Three months ended March 31,
20222021
(dollars in thousands, except per share data)Allocated net income (numerator)Weighted shares (denominator)Per-share amountAllocated net income (numerator)Weighted shares (denominator)Per-share amount
Class A – Basic EPS:
Income available to Class A stockholders$68,057 46,188,761 $1.47 $72,964 46,188,860 $1.58 
Dilutive effect of stock-based awards10,940 — 26,298 — 
Assumed conversion of Class B shares562 6,100,800 — 602 6,100,800 — 
Class A – Diluted EPS:
Income available to Class A stockholders on Class A equivalent shares
$68,619 52,300,501 $1.31 $73,566 52,315,958 $1.41 
Class B – Basic and diluted EPS:
Income available to Class B stockholders$562 2,542 $221 $602 2,542 $237 

11

Table of Contents
Note 5. Fair Value
 
Financial instruments carried at fair value
Our available-for-sale and equity securities are recorded at fair value, which is the price that would be received to sell the asset in an orderly transaction between willing market participants as of the measurement date.
 
Valuation techniques used to derive the fair value of our available-for-sale and equity securities are based upon observable and unobservable inputs.  Observable inputs reflect market data obtained from independent sources.  Unobservable inputs reflect our own assumptions regarding fair market value for these securities.  Financial instruments are categorized based upon the following characteristics or inputs to the valuation techniques:

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

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

Level 3 – Unobservable inputs for the asset or liability.
 
Estimates of fair values for our investment portfolio are obtained primarily from a nationally recognized pricing service.  Our Level 1 securities are valued using an exchange traded price provided by the pricing service. Pricing service valuations for Level 2 securities include multiple verifiable, observable inputs including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data.  Pricing service valuations for Level 3 securities are based upon proprietary models and are used when observable inputs are not available or in illiquid markets.
 
Although virtually all of our prices are obtained from third party sources, we also perform internal pricing reviews, including evaluating the methodology and inputs used to ensure that we determine the proper classification level of the financial instrument and reviewing securities with price changes that vary significantly from current market conditions or independent price sources.  Price variances are investigated and corroborated by market data and transaction volumes. We have reviewed the pricing methodologies of our pricing service as well as other observable inputs and believe that the prices adequately consider market activity in determining fair value. 

In limited circumstances we adjust the price received from the pricing service when, in our judgment, a better reflection of fair value is available based upon corroborating information and our knowledge and monitoring of market conditions such as a disparity in price of comparable securities and/or non-binding broker quotes.  In other circumstances, certain securities are internally priced because prices are not provided by the pricing service.
 
When a price from the pricing service is not available, values are determined by obtaining broker/dealer quotes and/or market comparables. When available, we obtain multiple quotes for the same security. The ultimate value for these securities is determined based upon our best estimate of fair value using corroborating market information. As of March 31, 2022, nearly all of our available-for-sale and equity securities were priced using a third party pricing service.


12

Table of Contents
The following tables present our fair value measurements on a recurring basis by asset class and level of input as of: 
March 31, 2022
(in thousands)TotalLevel 1Level 2Level 3
Available-for-sale securities:
Corporate debt securities$577,724 $$566,797 $10,927 
Collateralized debt obligations101,297 101,297 
Commercial mortgage-backed securities81,101 70,504 10,597 
Residential mortgage-backed securities143,815 143,603 212 
Other debt securities18,444 18,444 
U.S. Treasury939 939 
Total available-for-sale securities923,320 901,584 21,736 
Equity securities:
Financial services sector61,917 632 59,268 2,017 
Utilities sector6,886 6,886 
Energy sector6,177 12 6,165 
Consumer sector3,089 3,089 
Total equity securities78,069 644 75,408 2,017 
Total$1,001,389 $644 $976,992 $23,753 


December 31, 2021
(in thousands)TotalLevel 1Level 2Level 3
Available-for-sale securities:
Corporate debt securities$573,165 $$567,909 $5,256 
Collateralized debt obligations115,462 115,462 
Commercial mortgage-backed securities89,324 73,596 15,728 
Residential mortgage-backed securities139,922 131,108 8,814 
Other debt securities23,920 23,920 
U.S. Treasury4,292 4,292 
Total available-for-sale securities946,085 916,287 29,798 
Equity securities:
Financial services sector71,722 1,624 68,015 2,083 
Utilities sector6,259 6,259 
Energy sector6,448 10 6,438 
Consumer sector3,314 3,314 
Total equity securities87,743 1,634 84,026 2,083 
Total$1,033,828 $1,634 $1,000,313 $31,881 


13

Table of Contents
We review the fair value hierarchy classifications each reporting period. Transfers between hierarchy levels may occur due to changes in available market observable inputs.
Level 3 Assets – Year-to-Date Change:
(in thousands)Beginning balance at December 31, 2021
Included in earnings(1)
Included
in other
comprehensive
income
PurchasesSales
Transfers into
Level 3(2)
Transfers out of Level 3(2)
Ending balance at March 31, 2022
Available-for-sale securities:
Corporate debt securities$5,256 $13 $(55)$3,984 $(508)$3,549 $(1,312)$10,927 
Commercial mortgage-backed securities15,728 (116)(839)(500)1,460 (5,136)10,597 
Residential mortgage-backed securities8,814 25 (336)(2,755)(5,536)212 
Total available-for-sale securities29,798 (78)(1,230)3,984 (3,763)5,009 (11,984)21,736 
Equity securities2,083 (66)2,017 
Total Level 3 securities$31,881 $(144)$(1,230)$3,984 $(3,763)$5,009 $(11,984)$23,753 

Level 3 Assets – Year-to-Date Change:
(in thousands)Beginning balance at December 31, 2020
Included in earnings(1)
Included
in other
comprehensive
income
PurchasesSales
Transfers into
Level 3(2)
Transfers out of Level 3(2)
Ending balance at March 31, 2021
Available-for-sale securities:
Corporate debt securities$5,825 $$42 $782 $(370)$1,202 $(2,027)$5,460 
Commercial mortgage-backed securities19,462 (95)(437)2,265 (5)1,230 (6,179)16,241 
Residential mortgage-backed securities937 (3)(1)(252)(208)473 
Other debt securities528 (9)521 
Total available-for-sale securities26,224 (92)(394)3,575 (636)2,432 (8,414)22,695 
Equity securities1,090 1,090 
Total Level 3 securities$26,224 $(92)$(394)$3,575 $(636)$3,522 $(8,414)$23,785 
(1)These amounts are reported as net investment income and net realized and unrealized investment gains (losses) for each of the periods presented above.
(2)Transfers into and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs.


Financial instruments not carried at fair value
The following table presents the carrying values and fair values of financial instruments categorized as Level 3 in the fair value hierarchy that are recorded at carrying value as of:
March 31, 2022December 31, 2021
(in thousands)Carrying valueFair valueCarrying valueFair value
Agent loans (1)
$69,342 $64,826 $66,368 $68,957 
Long-term borrowings (2)
93,546 93,294 94,070 103,981 
(1)The discount rate used to calculate fair value at March 31, 2022 is reflective of an increase in the BB+ financial yield curve.
(2)The discount rate used to calculate fair value at March 31, 2022 is reflective of an increase in U.S. Treasury bond yields.

14

Table of Contents
Note 6.  Investments
 
Available-for-sale securities
See Note 5, "Fair Value" for additional fair value disclosures. The following tables summarize the cost and fair value, net of credit loss allowance, of our available-for-sale securities as of:
March 31, 2022
 (in thousands)Amortized costGross unrealized gainsGross unrealized lossesEstimated fair value
Corporate debt securities $591,772 $1,304 $15,352 $577,724 
Collateralized debt obligations102,058 218 979 101,297 
Commercial mortgage-backed securities84,624 104 3,627 81,101 
Residential mortgage-backed securities150,841 24 7,050 143,815 
Other debt securities19,292 45 893 18,444 
U.S. Treasury997 58 939 
Total available-for-sale securities, net$949,584 $1,695 $27,959 $923,320 


December 31, 2021
(in thousands)Amortized costGross unrealized gainsGross unrealized lossesEstimated fair value
Corporate debt securities$565,997 $9,663 $2,495 $573,165 
Collateralized debt obligations115,344 456 338 115,462 
Commercial mortgage-backed securities88,636 1,465 777 89,324 
Residential mortgage-backed securities140,217 1,007 1,302 139,922 
Other debt securities23,859 197 136 23,920 
U.S. Treasury4,226 73 4,292 
Total available-for-sale securities, net$938,279 $12,861 $5,055 $946,085 


The amortized cost and estimated fair value of available-for-sale securities at March 31, 2022 are shown below by remaining contractual term to maturity.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
March 31, 2022
AmortizedEstimated
(in thousands)costfair value
Due in one year or less$46,013 $46,104 
Due after one year through five years401,680 392,696 
Due after five years through ten years204,733 200,244 
Due after ten years297,158 284,276 
Total available-for-sale securities (1)
$949,584 $923,320 
(1)The contractual maturities of our available-for-sale securities are included in the table. However, given our intent to sell certain impaired securities, these securities are classified as current assets in our Statements of Financial Position at March 31, 2022.
15

Table of Contents
The below securities have been evaluated and determined to be temporary declines in fair value for which we expect to recover our entire principal plus interest.  The following tables present available-for-sale securities based on length of time in a gross unrealized loss position as of:
March 31, 2022
Less than 12 months12 months or longerTotal
(dollars in thousands)Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
No. of
holdings
Corporate debt securities$421,303 $13,257 $30,331 $2,095 $451,634 $15,352 892 
Collateralized debt obligations74,277 771 14,477 208 88,754 979 135 
Commercial mortgage-backed securities67,202 3,027 2,894 600 70,096 3,627 125 
Residential mortgage-backed securities129,659 6,348 6,539 702 136,198 7,050 137 
Other debt securities16,382 893 16,382 893 35 
U.S. Treasury939 58 939 58 
Total available-for-sale securities$709,762 $24,354 $54,241 $3,605 $764,003 $27,959 1,326 
Quality breakdown of available-for-sale securities:
Investment grade$614,243 $21,202 $45,917 $3,275 $660,160 $24,477 634 
Non-investment grade95,519 3,152 8,324 330 103,843 3,482 692 
Total available-for-sale securities$709,762 $24,354 $54,241 $3,605 $764,003 $27,959 1,326 

December 31, 2021
Less than 12 months12 months or longerTotal
(dollars in thousands)Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
No. of
holdings
Corporate debt securities$179,281 $1,912 $12,494 $583 $191,775 $2,495 441 
Collateralized debt obligations64,270 278 9,370 60 73,640 338 104 
Commercial mortgage-backed securities28,001 595 917 182 28,918 777 61 
Residential mortgage-backed securities89,460 1,278 441 24 89,901 1,302 98 
Other debt securities14,576 136 14,576 136 24 
U.S. Treasury388 388 
Total available-for-sale securities$375,976 $4,206 $23,222 $849 $399,198 $5,055 729 
Quality breakdown of available-for-sale securities:
Investment grade$330,697 $3,801 $17,112 $434 $347,809 $4,235 366 
Non-investment grade45,279 405 6,110 415 51,389 820 363 
Total available-for-sale securities$375,976 $4,206 $23,222 $849 $399,198 $5,055 729 


Credit loss allowance on investments
The current expected credit loss allowance on agent loans was $1.0 million at both March 31, 2022 and December 31, 2021. The current expected credit loss allowance on available-for-sale securities was $0.2 million at March 31, 2022 and less than $0.1 million at December 31, 2021.

Net investment income
Investment income, net of expenses, was generated from the following portfolios for the three months ended March 31:
(in thousands)20222021
Available-for-sale securities$6,358 $6,197 
Equity securities988 1,202 
Limited partnerships (1)
2,775 9,046 
Cash equivalents and other785 977 
Total investment income10,906 17,422 
Less: investment expenses402 325 
Investment income, net of expenses$10,504 $17,097 
(1)Equity in earnings (losses) of limited partnerships includes both realized gains (losses) and unrealized valuation changes. Our limited partnership investments are included in the line item "Other assets" in the Statements of Financial Position. We have made no new significant limited partnership commitments since 2006, and the balance of limited partnership investments is expected to decline over time as additional distributions are received.
16

Table of Contents
Realized and unrealized investment gains (losses)
Realized and unrealized gains (losses) on investments were as follows for the three months ended March 31:
(in thousands)20222021
Available-for-sale securities:
Gross realized gains$491 $1,923 
Gross realized losses(2,571)(440)
Net realized (losses) gains on available-for-sale securities(2,080)1,483 
Equity securities(5,201)(679)
Miscellaneous
Net realized and unrealized investment (losses) gains$(7,279)$804 


The portion of net unrealized gains and losses recognized during the reporting period related to equity securities held at the reporting date is calculated as follows for the three months ended March 31:
(in thousands)20222021
Equity securities:
Net losses recognized during the period$(5,201)$(679)
Less: net losses recognized on securities sold(280)(289)
Net unrealized losses recognized on securities held at reporting date$(4,921)$(390)


Net impairment (losses) recoveries recognized in earnings
Impairments on available-for-sale securities were as follows for the three months ended March 31:
(in thousands)20222021
Available-for-sale securities:
Intent to sell$(70)$— 
Credit (impaired) recovered(146)87 
Net impairment (losses) recoveries recognized in earnings$(216)$87 

17

Table of Contents
Note 7.  Borrowing Arrangements
 
Bank line of credit
As of March 31, 2022, we have access to a $100 million bank revolving line of credit with a $25 million letter of credit sublimit that expires on October 29, 2026. As of March 31, 2022, a total of $99.1 million remains available under the facility due to $0.9 million outstanding letters of credit, which reduces the availability for letters of credit to $24.1 million.  We had no borrowings outstanding on our line of credit as of March 31, 2022.  Investments with a fair value of $110.9 million were pledged as collateral on the line at March 31, 2022. The investments pledged as collateral have no trading restrictions and are reported as available-for-sale securities and cash and cash equivalents on our Statement of Financial Position as of March 31, 2022. The bank requires compliance with certain covenants, which include leverage ratios and debt restrictions, for our line of credit.  We are in compliance with all covenants at March 31, 2022.

Term loan credit facility
In 2016, we entered into a credit agreement for a $100 million senior secured draw term loan credit facility ("Credit Facility") for the acquisition of real property and construction of an office building that now serves as part of our principal headquarters. On January 1, 2019, the Credit Facility converted to a fully-amortized term loan with monthly payments of principal and interest at a fixed rate of 4.35% over a period of 28 years. Investments with a fair value of $110.0 million were pledged as collateral for the facility and are reported as available-for-sale securities and cash and cash equivalents on our Statement of Financial Position as of March 31, 2022. The bank requires compliance with certain covenants, which include leverage ratios, debt restrictions and minimum net worth, for our Credit Facility. We are in compliance with all covenants at March 31, 2022.

The remaining unpaid balance from the Credit Facility is reported at carrying value, net of unamortized loan origination and commitment fees, as long-term borrowings on our Statements of Financial Position. See Note 5, "Fair Value" for the estimated fair value of these borrowings.

Annual principal and interest payments
The following table sets forth future principal and interest payments:
(in thousands)
YearPrincipal paymentsInterest paymentsTotal
2022$1,574 $3,063 $4,637 
20232,226 3,957 6,183 
20242,302 3,881 6,183 
20252,448 3,735 6,183 
20262,556 3,627 6,183 
Thereafter82,440 41,108 123,548 

18

Table of Contents
Note 8.  Postretirement Benefits
 
Pension plans
Our pension plans consist of a noncontributory defined benefit pension plan covering substantially all employees and an unfunded supplemental employee retirement plan for certain members of executive and senior management. Although we are the sponsor of these postretirement plans and record the funded status of these plans, the Exchange and its subsidiaries reimburse us for approximately 58% of the annual benefit expense of these plans, which represents pension benefits for employees performing administrative services and their allocated share of costs for employees in departments that support the administrative functions.

The cost of our pension plans are as follows:
Three months ended March 31,
(in thousands)20222021
Service cost for benefits earned$12,560 $13,260 
Interest cost on benefits obligation9,941 9,206 
Expected return on plan assets(13,639)(12,569)
Prior service cost amortization361 357 
Net actuarial loss amortization1,830 4,027 
Pension plan cost (1)
$11,053 $14,281 
(1)The components of pension plan costs other than the service cost component are included in the line item "Other income (expense)" in the Statements of Operations after reimbursements from the Exchange and its subsidiaries.


Note 9.  Income Taxes
 
Income tax expense is provided on an interim basis based upon our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. For the three months ended March 31, 2022 and 2021, our effective tax rate was 20.9% and 20.5%, respectively.


Note 10.  Capital Stock
 
Class A and B common stock
Holders of Class B shares may, at their option, convert their shares into Class A shares at the rate of 2,400 Class A shares per Class B share.  There were no shares of Class B common stock converted into Class A common stock during the three months ended March 31, 2022 and the year ended December 31, 2021. There is no provision for conversion of Class A shares to Class B shares, and Class B shares surrendered for conversion cannot be reissued.

Stock repurchases
In 2011, our Board of Directors approved a continuation of the current stock repurchase program of $150 million, with no time limitation.  There were no shares repurchased under this program during the three months ended March 31, 2022 and the year ended December 31, 2021. We had approximately $17.8 million of repurchase authority remaining under this program at March 31, 2022.
19

Table of Contents
Note 11.  Accumulated Other Comprehensive Income (Loss)
 
Changes in accumulated other comprehensive income ("AOCI") (loss) by component, including amounts reclassified to other comprehensive income ("OCI") (loss) and the related line item in the Statements of Operations where net income is presented, are as follows:
Three months endedThree months ended
March 31, 2022March 31, 2021
(in thousands)Before TaxIncome TaxNetBefore TaxIncome TaxNet
Investment securities:
AOCI, beginning of period$7,722 $1,621 $6,101 $29,384 $6,171 $23,213 
OCI (loss) before reclassifications(36,371)(7,638)(28,733)(9,508)(1,997)(7,511)
Realized investment losses (gains)2,080 437 1,643 (1,483)(311)(1,172)
Impairment losses (recoveries)216 45 171 (87)(18)(69)
OCI (loss)(34,075)(7,156)(26,919)(11,078)(2,326)(8,752)
AOCI (loss), end of period$(26,353)$(5,535)$(20,818)$18,306 $3,845 $14,461 
Pension and other postretirement plans:
AOCI (loss), beginning of period$(39,734)$(8,345)$(31,389)$(128,300)$(26,944)$(101,356)
Amortization of prior service costs361 76 285 357 75 282 
Amortization of net actuarial loss 1,830 385 1,445 4,026 845 3,181 
OCI2,191 461 1,730 4,383 920 3,463 
AOCI (loss), end of period$(37,543)$(7,884)$(29,659)$(123,917)$(26,024)$(97,893)
Total
AOCI (loss), beginning of period$(32,012)$(6,724)$(25,288)$(98,916)$(20,773)$(78,143)
Investment securities(34,075)(7,156)(26,919)(11,078)(2,326)(8,752)
Pension and other postretirement plans2,191 461 1,730 4,383 920 3,463 
OCI (loss)(31,884)(6,695)(25,189)(6,695)(1,406)(5,289)
AOCI (loss), end of period$(63,896)$(13,419)$(50,477)$(105,611)$(22,179)$(83,432)
20

Table of Contents
Note 12. Concentrations of Credit Risk

Financial instruments could potentially expose us to concentrations of credit risk, including unsecured receivables from the Exchange. A large majority of our revenue and receivables are from the Exchange and its affiliates. See also Note 1, "Nature of Operations". Net management fee amounts and other reimbursements due from the Exchange and its affiliates were $478.8 million and $479.1 million at March 31, 2022 and December 31, 2021, respectively, which includes a current expected credit loss allowance of $0.5 million in both periods.


Note 13.  Commitments and Contingencies

In 2020, we entered into an agreement with a bank for the establishment of a loan participation program for agent loans. The maximum amount of loans to be funded through this program is $100 million. We have committed to fund a minimum of 30% of each loan executed through this program. As of March 31, 2022, loans executed under this agreement totaled $38.2 million, of which our portion of the loans is $13.4 million. Additionally, we have agreed to guarantee a portion of the funding provided by the other participants in the program in the event of default. As of March 31, 2022, our maximum potential amount of future payments on the guaranteed portion is $4.7 million. All loan payments under the participation program are current as of March 31, 2022.

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

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


Note 14.  Subsequent Events

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

21

Table of Contents
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion of financial condition and results of operations highlights significant factors influencing Erie Indemnity Company ("Indemnity", "we", "us", "our").  This discussion should be read in conjunction with the historical financial statements and the related notes thereto included in Part I, Item 1. "Financial Statements" of this Quarterly Report on Form 10-Q, and with Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for the year ended December 31, 2021, as contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2022.
 
 
INDEX
 Page Number
 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
 
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995:
Statements contained herein that are not historical fact are forward-looking statements and, as such, are subject to risks and uncertainties that could cause actual events and results to differ, perhaps materially, from those discussed herein.  Forward-looking statements relate to future trends, events or results and include, without limitation, statements and assumptions on which such statements are based that are related to our plans, strategies, objectives, expectations, intentions, and adequacy of resources.  Examples of forward-looking statements are discussions relating to premium and investment income, expenses, operating results, and compliance with contractual and regulatory requirements.  Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict.  Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements.  Among the risks and uncertainties, in addition to those set forth in our filings with the Securities and Exchange Commission, that could cause actual results and future events to differ from those set forth or contemplated in the forward-looking statements include the following:
dependence upon our relationship with the Erie Insurance Exchange ("Exchange") and the management fee under the agreement with the subscribers at the Exchange;
dependence upon our relationship with the Exchange and the growth of the Exchange, including:
general business and economic conditions;
factors affecting insurance industry competition;
dependence upon the independent agency system; and
ability to maintain our reputation for customer service;
dependence upon our relationship with the Exchange and the financial condition of the Exchange, including:
the Exchange's ability to maintain acceptable financial strength ratings;
factors affecting the quality and liquidity of the Exchange's investment portfolio;
changes in government regulation of the insurance industry;
litigation and regulatory actions;
emergence of significant unexpected events, including pandemics;
emerging claims and coverage issues in the industry; and
severe weather conditions or other catastrophic losses, including terrorism;
costs of providing policy issuance and renewal services to the Exchange under the subscriber's agreement;
ability to attract and retain talented management and employees;
ability to ensure system availability and effectively manage technology initiatives;
difficulties with technology or data security breaches, including cyber attacks;
ability to maintain uninterrupted business operations;
outcome of pending and potential litigation;
factors affecting the quality and liquidity of our investment portfolio; and
our ability to meet liquidity needs and access capital.
22

Table of Contents

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


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

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

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

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

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

23

Table of Contents
Coronavirus ("COVID-19") pandemic
In March 2020, the outbreak of the coronavirus ("COVID-19") was declared a global pandemic and pandemic conditions have influenced various economic factors, including a more inflationary environment in recent months. As the uncertainty resulting from the COVID-19 pandemic and subsequent resulting conditions continues to evolve, the ultimate impact and duration remain uncertain at this time.

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

24

Table of Contents
Financial Overview
Three months ended March 31,
(dollars in thousands, except per share data)20222021% Change
(Unaudited)
Operating income$84,312 $76,095 10.8 %
Total investment income3,009 17,988 (83.3)
Interest expense999 1,009 (1.0)
Other income (expense)473 (519)NM
Income before income taxes86,795 92,555 (6.2)
Income tax expense18,176 18,989 (4.3)
Net income$68,619 $73,566 (6.7)%
Net income per share – diluted$1.31 $1.41 (6.7)%
NM = not meaningful


Operating income increased in the first quarter of 2022, compared to the first quarter of 2021, as growth in operating revenue outpaced the growth in operating expenses. Management fee revenue for policy issuance and renewal services increased 7.1% to $488.0 million in the first quarter of 2022. Management fee revenue is based upon the management fee rate we charge and the direct and affiliated assumed premiums written by the Exchange. The management fee rate was 25% for both 2022 and 2021. The direct and affiliated assumed premiums written by the Exchange increased 7.0% to $2.0 billion in the first quarter of 2022, compared to the same period in 2021.

Cost of operations for policy issuance and renewal services increased 6.0% to $424.5 million in the first quarter of 2022, compared to the same period in 2021, primarily due to higher commissions driven by direct and affiliated assumed written premium growth.

Management fee revenue for administrative services decreased 3.6% to $14.3 million in the first quarter of 2022, compared to the same period in 2021. The administrative services reimbursement revenue and corresponding cost of operations increased both total operating revenue and total operating expenses by $163.3 million and $153.5 million in the first quarter of 2022 and 2021, respectively, but had no net impact on operating income.

Total investment income decreased $15.0 million in the first quarter of 2022 compared to the same period in 2021, primarily due to net realized and unrealized investment losses in 2022 and a decrease in net investment income.


General Conditions and Trends Affecting Our Business
Economic conditions
Unfavorable changes in economic conditions, including declining consumer confidence, inflation, high unemployment, and the threat of recession, among others, may lead the Exchange’s customers to modify coverage, not renew policies, or even cancel policies, which could adversely affect the premium revenue of the Exchange, and consequently our management fee.  The extent to which economic conditions could impact the Exchange's operations and our management fee was exacerbated with the COVID-19 pandemic. Further, pandemic conditions have created an inflationary environment in recent months. In particular, unanticipated increased inflation costs including medical cost inflation, building material cost inflation, auto repair cost inflation, and tort issues may impact estimated loss reserves and future premium rates of the Exchange. The extent and duration of the impact to economic conditions remain uncertain as the pandemic and subsequent resulting conditions continue to evolve. If any of these items impacted the financial condition or operations of the Exchange, it could have an impact on our financial results. See Financial Condition and Liquidity and Capital Resources contained within this report, as well as Part I. Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the Securities and Exchange Commission on February 24, 2022 for a discussion of the potential impacts to our operations or those of the Exchange, including pandemics.

Financial market volatility
Our portfolio of fixed maturity and equity security investments is subject to market volatility especially in periods of instability in the worldwide financial markets. Over time, net investment income could also be impacted by volatility and by the general level of interest rates, which impact reinvested cash flow from the portfolio and business operations. Depending upon market conditions, which are unpredictable and remain uncertain, considerable fluctuation could exist in the fair value of our investment portfolio and reported total investment income, which could have an adverse impact on our financial condition, results of operations, and cash flows. Although the conditions of the COVID-19 pandemic appear to be improving, the recent conflict between Russia and Ukraine has had a significant impact on the global financial markets. The value of our invested assets could be adversely impacted and there is potential for future losses and/or impairments on our investment portfolio due to the ongoing pandemic, the Russian/Ukraine war, and the resulting conditions including inflationary pressures and rising interest rates.
25

Table of Contents
RESULTS OF OPERATIONS 

Management fee revenue
We have two performance obligations in the subscriber’s agreement, providing policy issuance and renewal services and acting as attorney-in-fact for the Exchange, as well as the service provider for its insurance subsidiaries, with respect to all administrative services. We earn management fees for acting as the attorney-in-fact for the subscribers at the Exchange in these two capacities, and allocate our revenues between our performance obligations.

The management fee is calculated by multiplying all direct and affiliated assumed premiums written by the Exchange by the management fee rate, which is determined by our Board of Directors at least annually.  The management fee rate was set at 25%, the maximum rate, for both 2022 and 2021.  Changes in the management fee rate can affect our revenue and net income significantly. The transaction price, including management fee revenue and administrative service reimbursement revenue, includes variable consideration and is allocated based on the estimated standalone selling prices developed using industry information and other available information for similar services. We update the transaction price and the related allocation at least annually based upon the most recent information available or more frequently if there have been significant changes in any components considered in the transaction price. Our current transaction price allocation review resulted in a minor change in the allocation percentages between the two performance obligations. The change in allocation will not have a material impact on our financial statements.

The following table presents the allocation and disaggregation of revenue for our two performance obligations: 
Three months ended March 31,
(dollars in thousands)20222021% Change
(Unaudited)
Policy issuance and renewal services
Direct and affiliated assumed premiums written by the Exchange
$2,010,197 $1,878,182 7.0 %
Management fee rate24.3 %24.3 %
Management fee revenue488,478 456,398 7.0 
Change in estimate for management fee returned on cancelled policies (1)
(486)(680)28.6 
Management fee revenue - policy issuance and renewal services$487,992 $455,718 7.1 %
Administrative services
Direct and affiliated assumed premiums written by the Exchange
$2,010,197 $1,878,182 7.0 %
Management fee rate0.7 %0.7 %
Management fee revenue14,071 13,147 7.0 
Change in contract liability (2)
238 1,707 (86.1)
Change in estimate for management fee returned on cancelled policies (1)
(7)NM
Management fee revenue - administrative services14,313 14,847 (3.6)
Administrative services reimbursement revenue
163,327 153,533 6.4 
Total revenue from administrative services
$177,640 $168,380 5.5 %
NM = not meaningful
(1)A constraining estimate of variable consideration exists related to the potential for management fees to be returned if a policy were to be cancelled mid-term. Management fees are returned to the Exchange when policies are cancelled mid-term and unearned premiums are refunded. 
(2)Management fee revenue - administrative services is recognized over time as the services are provided. See Part I, Item 1. "Financial Statements - Note 3, Revenue, of Notes to Financial Statements" contained within this report.

26

Table of Contents
Direct and affiliated assumed premiums written by the Exchange
Direct and affiliated assumed premiums include premiums written directly by the Exchange and premiums assumed from its wholly owned property and casualty subsidiaries. Direct and affiliated assumed premiums written by the Exchange increased 7.0% to $2.0 billion in the first quarter of 2022 compared to the first quarter of 2021, primarily driven by increased homeowners and commercial multi-peril premiums written.  Year-over-year policies in force for all lines of business increased 3.1% in the first quarter of 2022 compared to 2.8% in the first quarter of 2021.  The year-over-year average premium per policy for all lines of business increased 1.5% at March 31, 2022 compared to a decrease of 1.5% at March 31, 2021. The year-over-year average premium per policy at March 31, 2021 was impacted by the rate reductions for personal and commercial auto policies written between July 1, 2020 and March 31, 2021, in response to lower driving activity as a result of the COVID-19 pandemic.

New business premiums increased 4.0% to $249 million in the first quarter of 2022 compared to the same period in 2021, primarily driven by increased premiums written in the commercial multi-peril lines. Contributing to this change was a 6.3% increase in year-over-year average premium per policy on new business, somewhat offset by a 4.7% decrease in new business policies written in the first quarter of 2022. New business premiums increased 19.7% to $239 million in the first quarter of 2021 compared to the same period in 2020 due primarily to increased personal lines premiums written. In the first quarter of 2021, new business policies written increased 22.4%, partially offset by a 5.8% decrease in year-over-year average premium per policy.

Premiums generated from renewal business increased 7.5% to $1.8 billion in the first quarter of 2022 compared to the first quarter of 2021 and decreased 0.5% to $1.6 billion in the first quarter of 2021 compared to the first quarter of 2020.  Underlying the trend in renewal business premiums was a slight increase in the policy retention ratio and a 0.9% increase in year-over-year average premium per policy at March 31, 2022, compared to a 0.8% decrease in year-over-year average premium per policy at March 31, 2021.

Personal lines – Total personal lines premiums written increased 5.6% to $1.3 billion in the first quarter of 2022, compared to 1.3% in the first quarter of 2021, driven by a 3.0% increase in total personal lines policies in force and a 0.5% increase in total personal lines year-over-year average premium per policy.

Commercial lines – Total commercial lines premiums written increased 10.0% to $674 million in the first quarter of 2022, compared to 2.4% in the first quarter of 2021, driven by a 3.8% increase in total commercial lines year-over-year average premium per policy and a 3.4% increase in total commercial lines policies in force.

Future trends-premium revenue – Through a careful agency selection process, the Exchange plans to continue its effort to expand the size of its agency force to increase market penetration in existing operating territories to contribute to future growth.

Changes in premium levels attributable to the growth in policies in force and rate changes directly affect the profitability of the Exchange and have a direct bearing on our management fee. Future premiums could be impacted by changes resulting from the COVID-19 pandemic, including potential regulatory changes and inflationary trends, among others. Longer-term, increased driving activity may result in future rate increases due to higher claims frequency and severity. See also Part I. Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the Securities and Exchange Commission on February 24, 2022.


27

Table of Contents
Policy issuance and renewal services
Three months ended March 31,
(dollars in thousands)20222021% Change
(Unaudited)
Management fee revenue - policy issuance and renewal services$487,992$455,7187.1 %
Service agreement revenue6,4786,0796.6 
494,470461,7977.1 
Cost of policy issuance and renewal services
424,471400,5496.0 
Operating income - policy issuance and renewal services
$69,999$61,24814.3 %


Policy issuance and renewal services
The management fee revenue allocated for providing policy issuance and renewal services was 24.3% of the direct and affiliated assumed premiums written by the Exchange for both three month periods ended March 31, 2022 and 2021.  This portion of the management fee is recognized as revenue when the policy is issued or renewed because it is at that time that the services we provide are substantially complete and the executed insurance policy is transferred to the customer.  The increase in management fee revenue for policy issuance and renewal services was driven by the increase in the direct and affiliated assumed premiums written by the Exchange discussed previously.

Service agreement revenue
Service agreement revenue primarily consists of service charges we collect from subscribers/policyholders for providing multiple payment plans on policies written by the Exchange and its property and casualty subsidiaries and also includes late payment and policy reinstatement fees.  The service charges are fixed dollar amounts per billed installment.  In July 2021, we began receiving service agreement revenue from the Exchange for the use of shared office space. The increase in service agreement revenue is due to the previously mentioned agreement with the Exchange, somewhat offset by a decrease in service charges from subscribers/policyholders due to the continued shift to payment plans that do not incur service charges or offer a premium discount for certain payment methods.

Cost of policy issuance and renewal services
Three months ended March 31,
(dollars in thousands)20222021% Change
(Unaudited)
Commissions:
Total commissions$281,135$261,3817.6 %
Non-commission expense:
Underwriting and policy processing$41,054$40,5881.1 %
Information technology45,66646,405(1.6)
Sales and advertising12,72510,94316.3 
Customer service8,3478,798(5.1)
Administrative and other35,54432,4349.6 
Total non-commission expense143,336139,1683.0 
Total cost of policy issuance and renewal services
$424,471$400,5496.0 %


Commissions – Commissions increased $19.8 million in the first quarter of 2022 compared to the same period in 2021, primarily driven by the growth in direct and affiliated assumed written premium, primarily in lines of business that pay a higher commission rate. The estimated agent incentive payouts at March 31, 2022 are based on actual underwriting results for the two prior years and current year-to-date actual results and forecasted results for the remainder of 2022.

Non-commission expense – Non-commission expense increased $4.2 million in the first quarter of 2022 compared to the first quarter of 2021. Sales and advertising increased $1.8 million primarily due to agent related expenses. Administrative and other costs increased $3.1 million primarily due to an increase in professional fees compared to the same period in 2021.

28

Table of Contents
Administrative services
Three months ended March 31,
(dollars in thousands)20222021% Change
(Unaudited)
Management fee revenue - administrative services$14,313$14,847(3.6)%
Administrative services reimbursement revenue
163,327153,5336.4 
Total revenue allocated to administrative services
177,640168,3805.5 
Administrative services expenses
Claims handling services
142,496132,4707.6 
Investment management services
9,8919,7141.8 
Life management services
10,94011,349(3.6)
Operating income - administrative services
$14,313$14,847(3.6)%


Administrative services
The management fee revenue allocated to administrative services was 0.7% of the direct and affiliated assumed premiums written by the Exchange for both three month periods ended March 31, 2022 and 2021. This portion of the management fee is recognized as revenue over a four-year period representing the time over which the services are provided. We also report reimbursed costs as revenues, which are recognized monthly as services are provided. The administrative services expenses we incur and the related reimbursements we receive are recorded gross in the Statements of Operations.

Cost of administrative services
By virtue of its legal structure as a reciprocal insurer, the Exchange does not have any employees or officers. Therefore, it enters into contractual relationships by and through an attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of the Exchange with respect to its administrative services in accordance with the subscriber's agreement. The Exchange's insurance subsidiaries also utilize Indemnity for these services in accordance with the service agreements between each of the subsidiaries and Indemnity. The amounts incurred for these services are reimbursed to Indemnity at cost in accordance with the subscriber's agreement and the service agreements.  We record these reimbursements due from the Exchange and its insurance subsidiaries as a receivable.
29

Table of Contents
Total investment income
A summary of the results of our investment operations is as follows for the three months ended March 31:
(dollars in thousands)20222021% Change
(Unaudited)
Net investment income$10,504 $17,097 (38.6)%
Net realized and unrealized investment (losses) gains(7,279)804 NM
Net impairment (losses) recoveries recognized in earnings(216)87 NM
Total investment income$3,009 $17,988 (83.3)%
NM = not meaningful


Net investment income
Net investment income includes interest and dividends on our fixed maturity and equity security portfolios and the results of our limited partnership investments, net of investment expenses. Net investment income decreased $6.6 million in the first quarter of 2022, primarily due to equity in earnings of limited partnerships of $2.8 million in 2022 compared to equity in earnings of limited partnerships of $9.0 million in 2021.

Net realized and unrealized investment (losses) gains
A breakdown of our net realized and unrealized investment (losses) gains is as follows for the three months ended March 31:
(in thousands)20222021
Securities sold:(Unaudited)
Available-for-sale securities$(2,080)$1,483 
Equity securities(280)(289)
Equity securities change in fair value(4,921)(390)
Miscellaneous
Net realized and unrealized investment (losses) gains$(7,279)$804 


Net realized and unrealized losses during the first quarter of 2022 were primarily due to market value adjustments on equity securities and disposals of available-for-sale securities. Net realized and unrealized gains during the first quarter of 2021 were primarily due to disposals of available-for-sale securities.

Net impairment (losses) recoveries recognized in earnings
Net impairment (losses) recoveries during the first quarter of 2022 and 2021 were primarily related to available-for-sale securities.


30

Table of Contents
Financial condition of Erie Insurance Exchange
Serving in the capacity of attorney-in-fact for the Exchange, we are dependent on the growth and financial condition of the Exchange, who is our sole customer. The strength of the Exchange and its wholly owned subsidiaries is rated annually by A.M. Best Company through assessing its financial stability and ability to pay claims. The ratings are generally based upon factors relevant to policyholders and are not directed toward return to investors. The Exchange and each of its property and casualty subsidiaries are rated A+ "Superior", the second highest financial strength rating, which is assigned to companies that have achieved superior overall performance when compared to the standards established by A.M. Best and have a superior ability to meet obligations to policyholders over the long term. On July 27, 2021, the outlook for the financial strength rating was affirmed as stable. As of December 31, 2021, only approximately 12% of insurance groups, in which the Exchange is included, are rated A+ or higher.

The financial statements of the Exchange are prepared in accordance with statutory accounting principles prescribed by the Commonwealth of Pennsylvania. Financial statements prepared under statutory accounting principles focus on the solvency of the insurer and generally provide a more conservative approach than under U.S. generally accepted accounting principles. Statutory direct written premiums of the Exchange and its wholly owned property and casualty subsidiaries grew 7.0% to $2.0 billion in the first quarter of 2022 compared to the first quarter of 2021. These premiums, along with investment income, are the major sources of cash that support the operations of the Exchange. Policyholders’ surplus determined under statutory accounting principles was $11.5 billion at March 31, 2022, $11.7 billion at December 31, 2021, and $11.3 billion at March 31, 2021. The Exchange and its wholly owned property and casualty subsidiaries' year-over-year policy retention ratio continues to be high at 90.3% at March 31, 2022, 90.1% at December 31, 2021 and 90.0% at March 31, 2021.

We have prepared our financial statements considering the financial strength of the Exchange based on its A.M. Best rating and strong level of surplus. We are monitoring risks related to the COVID-19 pandemic on an ongoing basis and believe that the Exchange falls within defined risk tolerances. However, see Part I. Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the Securities and Exchange Commission on February 24, 2022 for possible outcomes that could impact that determination.

31

Table of Contents
FINANCIAL CONDITION
 
Investments
Our investment portfolio is managed with the objective of maximizing after-tax returns on a risk-adjusted basis. The following table presents the carrying value of our investments as of: 
 
(dollars in thousands)March 31, 2022% to totalDecember 31, 2021% to total
(Unaudited)  
Fixed maturities$923,320 83 %$946,085 83 %
Equity securities78,069 87,743 
Agent loans (1)
69,342 66,368 
Other investments38,602 36,846 
Total investments$1,109,333 100 %$1,137,042 100 %
(1)The current portion of agent loans is included with prepaid expenses and other current assets in the Statements of Financial Position.


Fixed maturities
Under our investment strategy, we maintain a fixed maturity portfolio that is of high quality and well diversified within each market sector.  This investment strategy also achieves a balanced maturity schedule. Our fixed maturity portfolio is managed with the goal of achieving reasonable returns while limiting exposure to risk. 

Fixed maturities are carried at fair value with unrealized gains and losses, net of deferred taxes, included in shareholders’ equity. Net unrealized losses on fixed maturities, net of deferred taxes, totaled $20.7 million at March 31, 2022, compared to net unrealized gains of $6.2 million at December 31, 2021.

The following table presents a breakdown of the fair value of our fixed maturity portfolio by industry sector and rating as of:
(in thousands)
March 31, 2022 (1)
AAAAAABBBNon- investment
grade
Fair
value
 (Unaudited)
Basic materials$$$3,063 $$7,828 $10,891 
Communications8,375 8,081 15,284 17,425 49,165 
Consumer3,034 15,720 68,428 41,642 128,824 
Diversified1,408 1,408 
Energy3,990 7,382 20,982 7,685 40,039 
Financial79,322 127,830 17,691 224,843 
Industrial9,466 15,426 25,324 50,216 
Structured securities (2)
122,348 181,012 26,518 14,779 344,657 
Technology4,991 5,512 21,130 14,484 46,117 
U.S. Treasury939 939 
Utilities3,536 18,077 4,608 26,221 
Total
$127,339 $197,350 $158,600 $301,936 $138,095 $923,320 
(1)Ratings are supplied by S&P, Moody’s, and Fitch.  The table is based upon the lowest rating for each security.
(2)Structured securities include residential and commercial mortgage-backed securities, collateralized debt obligations, and asset-backed securities.


Equity securities
Equity securities primarily include nonredeemable preferred stocks and are carried at fair value in the Statements of Financial Position with all changes in unrealized gains and losses reflected in the Statements of Operations.

The following table presents an analysis of the fair value of our equity securities by sector as of:
(in thousands)March 31, 2022December 31, 2021
(Unaudited)
Consumer$3,089 $3,314 
Energy6,177 6,448 
Financial services61,917 71,722 
Utilities6,886 6,259 
Total
$78,069 $87,743 
32

Table of Contents
LIQUIDITY AND CAPITAL RESOURCES

We continue to monitor the sufficiency of our liquidity and capital resources given the potential impact of the ongoing COVID-19 pandemic and the Russia/Ukraine war and resulting conditions, including rising interest rates and inflationary costs. While we did not see a significant impact on our sources or uses of cash in the first quarter of 2022, future disruptions in the markets could occur which may affect our liquidity position. If our normal operating and investing cash activities were to become insufficient to meet future funding requirements, we believe we have sufficient access to liquidity through our cash position, liquid marketable securities and our $100 million line of credit that does not expire until October 2026. See broader discussions of potential risks to our operations in the Operating Overview contained within this report and Part I. Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the Securities and Exchange Commission on February 24, 2022.

Sources and Uses of Cash
Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet the short- and long-term cash requirements of its business operations and growth needs.  Our liquidity requirements have been met primarily by funds generated from management fee revenue and income from investments.  Cash provided from these sources is used primarily to fund the costs of our management operations including commissions, salaries and wages, pension plans, share repurchases, dividends to shareholders, the purchase and development of information technology, and other capital expenditures.  We expect that our operating cash needs will be met by funds generated from operations. Cash in excess of our operating needs is primarily invested in investment grade fixed maturities. As part of our liquidity review, we regularly evaluate our capital needs based on current and projected results and consider the potential impacts to our liquidity, borrowing capacity, financial covenants and capital availability.

Volatility in the financial markets presents challenges to us as we do occasionally access our investment portfolio as a source of cash.  Some of our fixed income investments, despite being publicly traded, may be illiquid.  Volatility in these markets could impair our ability to sell certain fixed income securities or cause such securities to sell at deep discounts. We believe we have sufficient liquidity to meet our needs from sources other than the liquidation of securities.
 
Cash flow activities
The following table provides condensed cash flow information for the three months ended March 31:
(in thousands)20222021
(Unaudited)(Unaudited)
Net cash provided by operating activities$23,553 $33,482 
Net cash used in investing activities(13,732)(10,828)
Net cash used in financing activities(52,218)(48,702)
Net decrease in cash and cash equivalents$(42,397)$(26,048)
 
 
Net cash provided by operating activities was $23.6 million in the first three months of 2022, compared to $33.5 million in the first three months of 2021. Decreased cash provided by operating activities in the first three months of 2022 was primarily due to an increase in administrative services expenses paid of $20.7 million, commissions paid to agents of $11.5 million and agent bonuses paid of $11.0 million, partially offset by an increase in administrative service reimbursements received of $36.2 million in the first quarter of 2022 compared to the same period in 2021.

Net cash used in investing activities was $13.7 million in the first three months of 2022, compared to $10.8 million in the same period in 2021. Net cash used in investing activities in both periods was primarily driven by fixed asset purchases, as proceeds from sales and maturities/calls of investments were mostly offset by purchases of investments.

Net cash used in financing activities totaled $52.2 million in the first three months of 2022, compared to $48.7 million in the first three months of 2021. The increase in cash used in the first three months of 2022, compared to the same period in 2021, was due to dividends paid to shareholders. We increased both our Class A and Class B shareholder regular quarterly dividends by 7.2% for 2022, compared to 2021. There are no regulatory restrictions on the payment of dividends to our shareholders.

33

Table of Contents
Capital Outlook
We regularly prepare forecasts evaluating the current and future cash requirements for both normal and extreme risk events, including the current COVID-19 pandemic.  Should an extreme risk event result in a cash requirement exceeding normal cash flows, we have the ability to meet our future funding requirements through various alternatives available to us.

Outside of our normal operating and investing cash activities, future funding requirements could be met through: 1) cash and cash equivalents, which total approximately $141.3 million at March 31, 2022, 2) a $100 million bank revolving line of credit, and 3) liquidation of unpledged assets held in our investment portfolio, including preferred stock and investment grade bonds, which totaled approximately $642.9 million at March 31, 2022.  Volatility in the financial markets could impair our ability to sell certain fixed income securities or cause such securities to sell at deep discounts.  Additionally, we have the ability to curtail or modify discretionary cash outlays such as those related to shareholder dividends and share repurchase activities.

As of March 31, 2022, we have access to a $100 million bank revolving line of credit with a $25 million letter of credit sublimit that expires on October 29, 2026. As of March 31, 2022, a total of $99.1 million remains available under the facility due to $0.9 million outstanding letters of credit, which reduce the availability for letters of credit to $24.1 million.  We had no borrowings outstanding on our line of credit as of March 31, 2022. Investments with a fair value of $110.9 million were pledged as collateral on the line at March 31, 2022. The investments pledged as collateral have no trading restrictions and are reported as available-for-sale securities and cash and cash equivalents in the Statement of Financial Position.  The banks require compliance with certain covenants, which include leverage ratios and debt restrictions.  We were in compliance with our bank covenants at March 31, 2022.


34

Table of Contents
CRITICAL ACCOUNTING ESTIMATES
 
We make estimates and assumptions that have a significant effect on the amounts and disclosures reported in the financial statements.  The most significant estimates relate to investment valuation and retirement benefit plans for employees.  While management believes its estimates are appropriate, the ultimate amounts may differ from estimates provided.  Our most critical accounting estimates are described in Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for the year ended December 31, 2021 of our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on February 24, 2022.  See Part I, Item 1. "Financial Statements - Note 5, Fair Value, of Notes to Financial Statements" contained within this report for additional information on our valuation of investments.


ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Our exposure to market risk is primarily related to fluctuations in prices and interest rates. Quantitative and qualitative disclosures about market risk resulting from changes in prices, interest rates, and other risk exposures for the year ended December 31, 2021 are included in Item 7A. "Quantitative and Qualitative Disclosures About Market Risk", of our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on February 24, 2022.
Certain geopolitical risks such as the COVID-19 pandemic and the Russia/Ukraine war may create future volatility; however, there have been no material changes that impacted our portfolio or reshaped our periodic investment reviews of asset allocations during the three months ended March 31, 2022. For a recent discussion of conditions surrounding our investment portfolio, see the "Operating Overview", "Results of Operations", and "Financial Condition" discussions contained in Part I, Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" contained within this report.


ITEM 4.    CONTROLS AND PROCEDURES
 
We carried out an evaluation, with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
 
Our management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, any change in our internal control over financial reporting and determined there has been no change in our internal control over financial reporting during the three months ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

35

Table of Contents
PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

Erie Indemnity Company ("Indemnity") was named as a defendant in a complaint filed on August 24, 2021, by alleged subscribers of the Erie Insurance Exchange (the "Exchange") in the Court of Common Pleas Civil Division of Allegheny County, Pennsylvania captioned TROY STEPHENSON, CHRISTINA STEPHENSON, SUSAN RUBEL, and STEVEN BARNETT, individually and on behalf of all others similarly situated (Plaintiffs) v. Erie Indemnity Company (Defendant).

The complaint seeks relief for alleged breaches of fiduciary duty by Indemnity in connection with the setting of the management fee it receives, pursuant to the terms of the Subscribers Agreement executed between Indemnity and all policyholders of the Exchange, as compensation for acting as the attorney-in-fact in the management of the Exchange. The relief sought is for the period beginning two years prior to the date of the filing of the complaint and continuing through 2021.

The complaint seeks (i) a finding that Indemnity has breached its fiduciary duties; (ii) an award of damages in an amount to be determined at trial; and (iii) such other relief, including disgorgement of profits or other injunctive relief, that the Court deems just and proper.

Service of the complaint was effectuated on September 20, 2021. A Notice of Removal to the United States District Court for the Western District of Pennsylvania was filed on October 20, 2021. On November 2, 2021, Plaintiffs filed a Notice of Voluntary Dismissal. As a result, the action was dismissed without prejudice.

On December 6, 2021, another Complaint was filed in the Court of Common Pleas of Allegheny County, Pennsylvania captioned ERIE INSURANCE EXCHANGE, an unincorporated association, by TROY STEPHENSON, CHRISTINA STEPHENSON, and STEVEN BARNETT, trustees ad litem, and alternatively, ERIE INSURANCE EXCHANGE, by TROY STEPHENSON, CHRISTINA STEPHENSON, and STEVEN BARNETT, (Plaintiff), v. ERIE INDEMNITY COMPANY, (Defendant).

This most recent complaint has essentially the same allegation of breach of fiduciary duty by Indemnity in connection with the setting of the management fee it receives, pursuant to the terms of the Subscribers Agreement executed between Indemnity and all policyholders of the Exchange, as compensation for acting as the attorney-in-fact in the management of the Exchange.

This most recent complaint seeks essentially the same relief, specifically, (i) a finding that Indemnity has breached its fiduciary duties; (ii) an award of damages in an amount to be determined at trial; and (iii) such other relief, including disgorgement of profits or other injunctive relief, that the Court deems just and proper.

A Notice of Removal to the United States District Court for the Western District of Pennsylvania was filed on January 27, 2022. On February 25, 2022, Plaintiffs filed a Motion to Remand the matter to state court. The Motion has been fully briefed and is now pending before the Court.

Indemnity intends to vigorously defend against all of the allegations and requests for relief in the complaint.

Separately, Indemnity filed a Complaint in Federal Court to invoke certain provisions of the “All Writs Act” and the “Anti-Injunction Act.” By filing this complaint, Indemnity seeks to protect the federal court’s prior binding, final judgments in the Sullivan, Beltz and Ritz actions and thereby foreclose further litigation of the claims and issues pertaining to the compensation practices that were the subject of the prior judgments.

For additional information on contingencies, see Part I, Item 1. "Financial Statements - Note 13, Commitment and Contingencies, of Notes to Financial Statements".


ITEM 1A.    RISK FACTORS
 
There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the Securities and Exchange Commission on February 24, 2022.


36

Table of Contents
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities
In 2011, our Board of Directors approved a continuation of the current stock repurchase program, authorizing repurchases for a total of $150 million with no time limitation.  This repurchase authority included, and was not in addition to, any unspent amounts remaining under the prior authorization.

The following table presents the number and average price of our outstanding Class A nonvoting common stock shares purchased during the quarter ending March 31, 2022:

(dollars in thousands, except per share data)
PeriodTotal number of shares purchasedAverage price paid per shareTotal number of shares purchased as part of publicly announced programDollar value of shares that may yet be purchased under the program
January 1-31, 2022 (1)
1,786$190.68 $17,754 
February 1-28, 202217,754 
March 1-31, 2022 (2)
4,133170.3317,754 
Total5,919176.47 

(1)Represents shares purchased on the open market for stock-based awards in conjunction with our equity compensation plan.
(2)Represents shares purchased on the open market to fund the rabbi trust for both the outside director deferred stock compensation plan (1,414 shares at an average price of $172.48 per share) and the incentive compensation deferral plan (2,719 shares at an average price of $169.21 per share).

37

Table of Contents
ITEM 6.    EXHIBITS
Exhibit  
Number Description of Exhibit
31.1* 
   
31.2* 
   
32* 
   
101.INS* Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
   
101.SCH* Inline XBRL Taxonomy Extension Schema Document.
   
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document.
   
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document.
   
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).


* Filed herewith.

38

Table of Contents
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  Erie Indemnity Company 
  (Registrant) 
    
    
Date:April 28, 2022By:/s/ Timothy G. NeCastro 
  Timothy G. NeCastro, President & CEO 
    
 By:/s/ Gregory J. Gutting 
  Gregory J. Gutting, Executive Vice President & CFO 
39