ERIE INDEMNITY CO

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 subscribers at the Exchange, as well as the service provider for the Exchange's insurance subsidiaries with respect to all administrative services. We retain a 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% for both 2024 and 2023. Changes in the management fee rate can affect our revenue and net income significantly. The transaction price, including management fee revenue and administrative services 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 between the two performance obligations in 2024 compared to prior years, which did not have a material impact on our financial statements.

The following table presents the allocation and disaggregation of revenue for our two performance obligations for the three months ended March 31:

(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.

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 19.0% to $2.7 billion in the first quarter of 2024 compared to the first quarter of 2023, primarily driven by increased personal lines and commercial multi-peril premiums written. Year-over-year policies in force for all lines of business increased 7.1% in the first quarter of 2024 compared to 4.4% in the first quarter of 2023. The year-over-year average premium per policy for all lines of business increased 10.6% at March 31, 2024 compared to 6.4% at March 31, 2023.

Premiums generated from new business increased 32.4% to $449 million in the first quarter of 2024 compared to the same period in 2023, primarily driven by increased premiums written in the commercial multi-peril, personal auto and homeowners lines. Contributing to this change was a 11.1% increase in new business policies written and a 14.0% increase in year-over-year average premium per policy on new business at March 31, 2024. Premiums generated from new business increased 36.3% to $339 million in the first quarter of 2023 compared to the same period in 2022, primarily driven by increased premium written in the personal auto, homeowners and commercial multi-peril lines. Contributing to this change was a 25.9% increase in new business policies written and a 10.3% increase in year-over-year average premium per policy on new business at March 31, 2023.

Premiums generated from renewal business increased 16.7% to $2.3 billion in the first quarter of 2024 compared to the first quarter of 2023 and increased 11.5% to $2.0 billion in the first quarter of 2023 compared to the first quarter of 2022. Underlying the trend in renewal business premiums in both periods was a 9.9% increase in year-over-year average premium per policy at March 31, 2024, and 5.8% at March 31, 2023, as well as an increase in year-over-year policies in force of 5.1% and 3.5% in the first quarters of 2024 and 2023, respectively, driven by an increase in the policy retention ratios.

Personal lines – Total personal lines premiums written increased 20.6% to $1.9 billion in the first quarter of 2024, compared to 15.8% in the first quarter of 2023, driven by a 12.0% increase in total personal lines year-over-year average premium per policy and a 7.5% increase in total personal lines policies in force.

Commercial lines – Total commercial lines premiums written increased 15.6% to $874 million in the first quarter of 2024, compared to 12.2% in the first quarter of 2023, driven by a 9.4% increase in total commercial lines year-over-year average premium per policy and a 4.2% increase in total commercial lines policies in force.

Future trends-premium revenue – Through a careful agency selection and monitoring process, the Exchange plans to continue efforts to utilize 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 affect the profitability of the Exchange and have a direct bearing on our management fee revenue. Future premiums could be impacted by potential changes in regulation and inflationary trends, among others. The Exchange's pricing actions taken in 2023 have contributed to its increased average premium per policy in the first quarter of 2024. See also Part I. Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 as filed with the Securities and Exchange Commission on February 26, 2024.

Policy issuance and renewal services

Policy issuance and renewal services

The management fee revenue allocated for providing policy issuance and renewal services was 24.40% and 24.30% of the direct and affiliated assumed premiums written by the Exchange for the three month periods ended March 31, 2024 and 2023, respectively. 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. Service agreement revenue also includes fees received from the Exchange for the use of shared office space. The increase in service agreement revenue for the three month period ended March 31, 2024 compared to the same period in 2023 is primarily due to an increase in shared office space revenue.

Cost of policy issuance and renewal services

Commissions – Commissions increased $67.0 million in the first quarter of 2024 compared to the same period in 2023, primarily driven by the growth in direct and affiliated assumed written premium and an increase in agent incentive compensation. The estimated agent incentive payouts at March 31, 2024 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 2024. The profitability component of agent incentive compensation increased due to improved actual and forecasted loss ratios in 2024.

Non-commission expense – Non-commission expense increased $14.3 million in the first quarter of 2024 compared to the first quarter of 2023. Underwriting and policy processing expense increased $4.4 million primarily due to increased underwriting report and personnel costs. Information technology costs decreased $3.7 million primarily due to an increase in capitalized professional fees and personnel costs related to technology initiatives. Sales and advertising expense increased $4.3 million primarily due to increased agent-related costs. Administrative and other costs increased $7.2 million primarily due to an increase in personnel and travel costs.

Administrative services

Administrative services

The management fee revenue allocated to administrative services was 0.60% and 0.70% of the direct and affiliated assumed premiums written by the Exchange for the three month periods ended March 31, 2024 and 2023, respectively. 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

Consistent with 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 the subscribers' attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of the subscribers at Exchange with respect to its administrative services as enumerated in 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 subscriber's agreement and service agreements provide for reimbursement of amounts incurred for these services to Indemnity. Reimbursements due from the Exchange and its insurance subsidiaries are recorded as a receivable and settled at cost.

Total investment income (loss)

A summary of the results of our investment operations is as follows for the three months ended March 31:

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 increased $13.7 million in the first quarter of 2024, compared to the same period in 2023, primarily due to higher equity in earnings of limited partnerships and an increase in bond income as a result of higher yields. Included in net investment income is $0.5 million of limited partnership earnings in the first quarter of 2024 compared to losses of $10.8 million for the same period in 2023.

Net realized and unrealized investment gains (losses)

A breakdown of our net realized and unrealized investment gains (losses) is as follows for the three months ended March 31:

Net realized and unrealized gains of $1.9 million during the first quarter of 2024 were primarily due to market value adjustments in the preferred stock portfolio. Net realized and unrealized losses of $5.3 million during the same period in 2023 were primarily due to disposals of equity securities impacted by the banking industry events as well as disposals of available-for-sale securities and market value adjustments on equity securities.

Net impairment losses recognized in earnings

Net impairment losses of $2.7 million in the first quarter of 2024 include $2.2 million of current expected credit losses recognized on held-to-maturity securities. See "Other assets" in Part I, Item 1. "Financial Statements - Note 2, Significant Accounting Policies, of Notes to Financial Statements" for additional information. The first quarter of 2024 also includes $0.3 million related to available-for-sale securities where we had both the intent to sell prior to recovery of our amortized cost basis and credit-related impairment losses. Net impairment losses of $1.6 million in the first quarter of 2023 included $1.4 million of intent to sell related impairments and $0.2 million of credit impairments on available-for-sale securities.

Financial Condition of Erie Insurance Exchange

Serving in the capacity of attorney-in-fact for the subscribers at 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 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 August 10, 2023, the outlook for the financial strength rating was affirmed as stable. As of December 31, 2023, 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 19.0% to $2.7 billion in the first three months of 2024 compared to the first three months of 2023. 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 $9.5 billion at March 31, 2024 and $9.3 billion at December 31, 2023. The Exchange and its wholly owned property and casualty subsidiaries' year-over-year policy retention ratio continues to be high at 91.2% at both March 31, 2024 and December 31, 2023.

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. See Part I. Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 as filed with the Securities and Exchange Commission on February 26, 2024 for possible outcomes that could impact that determination.