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 2024, 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 7.6% to $3.4 billion in the third quarter of 2025 compared to the third 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 0.2% in the third quarter of 2025 compared to 6.0% in the third quarter of 2024. The year-over-year average premium per policy for all lines of business increased 10.7% at September 30, 2025 compared to 12.8% at September 30, 2024.

Premiums generated from new business decreased 20.5% to $351 million in the third 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 24.1% decrease in new business policies written, partially offset by a 8.5% increase in year-over-year average premium per policy on new business at September 30, 2025. Premiums generated from new business increased 9.5% to $441 million in the third quarter of 2024 compared to the same period in 2023, primarily driven by increased premiums written in the commercial multi-peril and homeowners lines. Contributing to this change was a 15.9% increase in year-over-year average premium per policy on new business, somewhat offset by a 4.0% decrease in new business policies written in the third quarter of 2024.

Premiums generated from renewal business increased 12.1% to $3.1 billion in the third quarter of 2025 compared to the third quarter of 2024 and increased 20.0% to $2.7 billion in the third quarter of 2024 compared to the third quarter of 2023. Underlying the trend in renewal business premiums in both periods was an 11.3% increase in year-over-year average premium per policy at September 30, 2025, and 12.3% at September 30, 2024, as well as an increase in year-over-year policies in force of 4.1% and 5.7% in the third quarters of 2025 and 2024, respectively.

Personal lines – Total personal lines premiums written increased 7.1% to $2.5 billion in the third quarter of 2025, compared to 20.1% in the third quarter of 2024, driven by a 11.1% increase in total personal lines year-over-year average premium per policy, slightly offset by a 0.2% decrease in total personal lines policies in force.

Commercial lines – Total commercial lines premiums written increased 8.9% to $902 million in the third quarter of 2025, compared to 13.9% in the third quarter of 2024, driven by a 7.9% 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.

Premium levels impacted by changes in policies in force and rate actions affect the profitability of the Exchange and have a direct bearing on our management fee revenue. Future rate actions could be impacted by potential changes in regulation, inflationary trends and tariff policies, among others. As the Exchange writes policies almost exclusively with annual terms, premium rate actions take 12 months to be fully recognized in written premiums, or longer for policies with a rate locking feature. 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 and Part II. Item 1A. "Risk Factors" included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2025 as filed with the Securities and Exchange Commission on February 27, 2025 and August 7, 2025, respectively.

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 nine month periods ended September 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 $41.0 million in the third quarter of 2025 and $145.6 million for the nine months ended September 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 September 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 decreased $11.9 million in the third quarter of 2025 compared to the third quarter of 2024. Underwriting and policy processing expense increased $1.6 million primarily due to increased postage costs, partially offset by a decrease in underwriting report costs. Sales and advertising expense decreased $4.4 million primarily due to decreased agent-related costs and costs from community development initiatives. Administrative and other costs decreased $11.5 million primarily due to decreases in personnel costs and professional fees.

Non-commission expense increased $15.0 million for the nine months ended September 30, 2025 compared to the same period in 2024. Underwriting and policy processing expense increased $5.9 million primarily due to increased postage and personnel costs. Information technology costs increased $19.8 million primarily due to an increase in personnel costs and hardware and software costs. Customer service costs increased $3.5 million primarily due to increased personnel costs and credit card processing fees. Administrative and other costs decreased $12.9 million primarily due to decreased personnel costs.

Personnel costs in both the third quarter and nine months ended September 30, 2025 were impacted by decreased incentive compensation compared to 2024. Decreases in incentive plan costs in both periods were primarily driven by lower performance metrics compared to 2024 and a decrease in company stock price during the third quarter and nine months ended September 30, 2025 compared to an increase during the respective periods in 2024. Personnel costs in all expense categories for the nine months ended September 30, 2025 were also 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 nine month periods ended September 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:

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 $3.7 million in the third quarter of 2025 and $11.8 million for the nine months ended September 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 third quarter of 2025, compared to losses of $0.1 million for the same period in 2024, and $1.3 million of limited partnership earnings for the nine months ended September 30, 2025, compared to $0.1 million for the same period in 2024.

Net realized and unrealized investment gains

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

Net realized and unrealized gains of $1.3 million during the third quarter of 2025 and $2.3 million for the nine months ended September 30, 2025 were primarily due to market value adjustments on equity securities and net gains on disposals of securities. Net realized and unrealized gains of $2.9 million during the third quarter of 2024 were primarily due to market value adjustments on equity securities. Net realized and unrealized gains of $3.0 million for the nine months ended September 30, 2024 were primarily due to market value adjustments on equity securities, partially offset by losses on disposals of available-for-sale securities.

Net impairment losses recognized in earnings

Net impairment losses during the three and nine months ended September 30, 2025 and 2024 included both credit-related and intent to sell impairments on available-for-sale securities as well as current expected credit losses on agent loans and other loans receivable. The nine months ended September 30, 2024 also included current expected credit losses on held-to-maturity 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 AM 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. On September 5, 2025, the Exchange and each of its property and casualty insurance subsidiaries were downgraded from A+ "Superior" to A "Excellent" and our financial strength rating was revised from negative to stable. The A "Excellent" rating is the third highest financial strength rating assigned to companies that have achieved excellent overall performance when compared to the standards established by AM Best and have an excellent ability to meet obligations to policyholders over the long term. While the Exchange's policyholder surplus continues to be classified in AM Best's strongest category, the downgrade was primarily driven by the Exchange’s large underwriting losses in each of the last three years, driven by elevated weather-related events and increased severity in the auto and homeowners’ segments. The stable financial strength rating reflects the expectation that the Exchange's profitability initiatives will accelerate and stabilize operating results over the near term. Furthermore, the stable outlook reflects the strongest level of balance sheet strength as assessed by AM Best.

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 10.1% to $9.9 billion in the first nine months of 2025 compared to the first nine 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 $9.6 billion and $9.3 billion at September 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 89.1% at September 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 AM 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 and Part II. Item 1A. "Risk Factors" included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2025 as filed with the Securities and Exchange Commission on February 27, 2025 and August 7, 2025, respectively for possible outcomes that could impact that determination.