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 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 2025 and 2024. 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 2025 compared to prior years, which did not have a material impact on our consolidated financial statements.

The following table presents the allocation and disaggregation of revenue for our two performance obligations:

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 Consolidated 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 9.2% to $3.4 billion in the second quarter of 2025 compared to the second quarter of 2024, primarily driven by increased personal lines and commercial multi-peril premiums written. Year-over-year policies in force for all lines of business increased 1.7% in the second quarter of 2025 compared to 6.8% in the second quarter of 2024. The year-over-year average premium per policy for all lines of business increased 11.9% at both June 30, 2025 and June 30, 2024.

Premiums generated from new business decreased 24.2% to $360 million in the second quarter of 2025 compared to the same period in 2024, primarily driven by decreased premiums written in the personal auto, commercial multi-peril and homeowners lines. Contributing to this change was a 31.1% decrease in new business policies written, partially offset by a 10.6% increase in year-over-year average premium per policy on new business at June 30, 2025. New business in the second quarter of 2025 was also impacted by the information security incident, which disrupted business operations from June 7, 2025 through the remainder of the quarter. Premiums generated from new business increased 23.0% to $475 million in the second quarter of 2024 compared to the same period in 2023, primarily driven by increased premiums written in the commercial multi-peril, homeowners and personal auto lines. Contributing to this change was a 3.6% increase in new business policies written and a 16.0% increase in year-over-year average premium per policy on new business at June 30, 2024.

Premiums generated from renewal business increased 15.2% to $3.1 billion in the second quarter of 2025 compared to the second quarter of 2024 and increased 19.4% to $2.7 billion in the second quarter of 2024 compared to the second quarter of 2023. Underlying the trend in renewal business premiums in both periods was an 12.4% increase in year-over-year average premium per policy at June 30, 2025, and 11.1% at June 30, 2024, as well as an increase in year-over-year policies in force of 5.2% and 5.5% in the second quarters of 2025 and 2024, respectively.

Personal lines – Total personal lines premiums written increased 8.9% to $2.4 billion in the second quarter of 2025, compared to 22.2% in the second quarter of 2024, driven by a 12.8% increase in total personal lines year-over-year average premium per policy and a 1.5% increase in total personal lines policies in force.

Commercial lines – Total commercial lines premiums written increased 9.9% to $978 million in the second quarter of 2025, compared to 14.7% in the second quarter of 2024, driven by a 9.0% increase in total commercial lines year-over-year average premium per policy and a 3.0% 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, inflationary trends and tariff policies, among others. The Exchange's pricing actions taken in 2024 have contributed to its increased average premium per policy at June 30, 2025. See also Part I. Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024 as filed with the Securities and Exchange Commission on February 27, 2025.

Policy issuance and renewal services

Policy issuance and renewal services

The management fee revenue allocated for providing policy issuance and renewal services was 24.37% and 24.40% of the direct and affiliated assumed premiums written by the Exchange for both the three and six month periods ended June 30, 2025 and 2024, 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.

Cost of policy issuance and renewal services

Commissions – Commissions increased $43.5 million in the second quarter of 2025 and $104.6 million for the six months ended June 30, 2025, compared to the same periods in 2024, primarily driven by the growth in direct and affiliated assumed written premium and, to a lesser extent, an increase in agent incentive compensation. The estimated agent incentive payouts at June 30, 2025 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 2025. The profitability component of agent incentive compensation increased due to improved actual and forecasted loss ratios for the three-year period ended 2025 compared to the three-year period ended 2024.

Non-commission expense – Non-commission expense increased $10.6 million in the second quarter of 2025 compared to the second quarter of 2024. Information technology costs increased $7.1 million primarily due to an increase in personnel costs and a decrease in capitalized professional fees related to technology initiatives. Sales and advertising expense increased $2.8 million primarily due to increased agent-related and advertising costs.

Non-commission expense increased $26.9 million for the six months ended June 30, 2025 compared to the same period in 2024. Underwriting and policy processing expense increased $4.3 million primarily due to increased personnel costs and printing and postage costs. Information technology costs increased $18.4 million primarily due to an increase in personnel costs and hardware and software costs and a decrease in capitalized professional fees related to technology initiatives. Customer service costs increased $2.7 million primarily due to increased personnel costs. Sales and advertising expense increased $3.0 million primarily due to increased advertising and personnel costs. Personnel costs for both the second quarter and six months ended June 30, 2025 were impacted by increased healthcare costs compared to 2024.

Administrative services

Administrative services

The management fee revenue allocated to administrative services was 0.63% and 0.60% of the direct and affiliated assumed premiums written by the Exchange for both the three and six month periods ended June 30, 2025 and 2024, 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 Consolidated 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

A summary of the results of our investment operations is as follows:

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 increased $4.0 million in the second quarter of 2025 and $8.1 million for the six months ended June 30, 2025, compared to the same periods in 2024. The increase in both periods was primarily due to an increase in bond and cash and cash equivalent income driven by higher average holdings and bond yields, an increase in agent loan interest income, and higher equity in earnings of limited partnerships. Net investment income included limited partnership earnings of $0.1 million in the second quarter of 2025, compared to losses of $0.3 million for the same period in 2024, and $1.2 million of limited partnership earnings for the six months ended June 30, 2025, compared to $0.3 million for the same period in 2024.

Net realized and unrealized investment gains (losses)

A breakdown of our net realized and unrealized investment gains (losses) is as follows:

Net realized and unrealized gains of $0.5 million during the second quarter of 2025 and $1.0 million for the six months ended June 30, 2025 were primarily due to market value adjustments on equity securities, partially offset by losses on disposals of available-for-sale securities. Net realized and unrealized losses of $1.8 million during the second quarter of 2024 were primarily due to disposals of available-for-sale securities. Net realized and unrealized gains of $0.1 million for the six months ended June 30, 2024 were primarily due to market value adjustments on equity securities, mostly offset by losses on disposals of available-for-sale securities.

Net impairment losses recognized in earnings

Net impairment losses during both the three and six months ended June 30, 2025 and 2024 included both intent to sell and credit-related impairments on available-for-sale securities as well as current expected credit losses on other loans receivable. The six months ended June 30, 2025 and 2024 also included current expected credit losses on agent loans and held-to-maturity securities, respectively.

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 insurance 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. As of December 31, 2024, only approximately 13% of insurance groups, in which the Exchange is included, are rated A+ or higher. On August 8, 2024, while our A+ "Superior" rating was reaffirmed, the financial strength rating outlook was revised from stable to negative. The outlook was primarily driven by the Exchange’s recent profitability challenges from rising loss cost pressures and increased weather-related activity, and the related surplus impact. The outlook acknowledged that while actions have been implemented to address the challenges, the timing lag related to the most significant action, rate increases, could result in interim challenges until such time as the rate increases are earned and the full beneficial impact is realized.

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 insurance subsidiaries grew 11.4% to $6.5 billion in the first six months of 2025 compared to the first six months of 2024. 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 $9.2 billion and $9.3 billion at June 30, 2025 and December 31, 2024, respectively. The Exchange and its wholly owned property and casualty insurance subsidiaries' year-over-year policy retention ratio continues to be high at 89.7% at June 30, 2025 and 90.4% at December 31, 2024.

We have prepared our consolidated 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, 2024 as filed with the Securities and Exchange Commission on February 27, 2025 for possible outcomes that could impact that determination.