ERIE INDEMNITY CO

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 subscribers at the Exchange, as well as the service provider for the Exchange's 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 (a subscriber) 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. In accordance with the subscriber’s agreement for acting as attorney-in-fact in these two capacities, we retain 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 on behalf of the subscribers at the Exchange. The policy issuance and renewal services we provide 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 incentive compensation, which is 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. See Part I, Item 1. "Financial Statements - Note 4, Segment Information, of Notes to Consolidated Financial Statements" contained within this report for the significant expense categories related to providing these services. Included in expenses for these services are allocations of costs for departments that support these policy issuance and renewal functions.

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 the 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. 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. In 2025, approximately 71% of the administrative services expenses were entirely attributable to the respective administrative functions (claims handling, life insurance management, and investment management), while the remaining 29% of these expenses were allocations of costs for departments that support these administrative functions. The expenses we incur and related reimbursements we receive for administrative services are presented gross in our Consolidated Statements of Operations. The subscriber's agreement and service agreements provide for reimbursement of amounts incurred for these services to Indemnity. Reimbursements are settled at cost on a monthly basis. 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 71% of the 2025 direct and affiliated assumed written premiums and commercial lines comprising the remaining 29%. The principal personal lines products are private passenger auto and homeowners. The principal commercial lines products are commercial multi-peril, commercial auto, and workers compensation.

Information security incident

In 2025, we experienced an information security incident that has been remediated and did not have a material impact on our consolidated financial condition, results of operations, or cash flows. As of September 30, 2026 we have recognized $4.0 million of recoveries under our cybersecurity insurance policy, which is included in the line item "Other Income" in the Consolidated Statements of Operations, and continue to pursue recovery of additional lost income due to business interruption and related expenses under the policy.

Financial Overview

Operating income decreased slightly in the third quarter and increased for the nine months ended September 30, 2026, compared to the same periods in 2025. Management fee revenue for policy issuance and renewal services increased 2.6% to $847.0 million in the third quarter of 2026 and 3.8% to $2.5 billion for the nine months ended September 30, 2026, compared to the same periods in 2025. 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 2026 and 2025. The direct and affiliated assumed premiums written by the Exchange increased 1.8% to $3.5 billion in the third quarter of 2026 and 2.9% to $10.2 billion for the nine months ended September 30, 2026, compared to the same periods in 2025.

Cost of operations for policy issuance and renewal services increased 3.6% to $665.0 million in the third quarter of 2026 and 4.0% to $2.0 billion for the nine months ended September 30, 2026, compared to the same periods in 2025, primarily due to increased agent incentive compensation due to improved underwriting profitability, higher scheduled commissions driven by direct and affiliated assumed written premium growth, and increased technology costs, partially offset by lower underwriting report and postage costs. The year-to-date increase was also partially offset by lower professional fees.

Management fee revenue for administrative services increased 4.7% to $19.7 million in the third quarter of 2026 and 7.4% to $58.8 million for the nine months ended September 30, 2026, compared to the same periods in 2025. The administrative services reimbursement revenue and corresponding cost of operations increased both total operating revenue and total operating expenses by $197.6 million in the third quarter of 2026 and $599.2 million for the nine months ended September 30, 2026, but had no net impact on operating income.

Total investment income decreased $1.7 million in the third quarter of 2026 and increased $3.9 million for the nine months ended September 30, 2026, compared to the same periods in 2025. The decrease in the third quarter of 2026 was primarily due to net realized and unrealized investment losses compared to net gains in 2025, partially offset by an increase in net investment income. The increase for the nine months ended September 30, 2026 was primarily due to an increase in net investment income, partially offset by net realized and unrealized investment losses compared to net gains in 2025.

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 revenue. Elevated inflation, supply chain disruptions, or changes in tariff policies could impact the Exchange's operations. In particular, unanticipated increased inflation costs including medical cost inflation, building material cost inflation, auto repair and replacement cost inflation, and social inflation may impact adequacy of estimated loss reserves and future premium rates of the Exchange. If any of these items impacted the financial condition or operations of the Exchange, it could have an impact on our financial results. For a discussion of the potential impacts to our operations or those of the Exchange, 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, 2025 as filed with the Securities and Exchange Commission on February 23, 2026.

Financial market volatility

Our portfolio of available-for-sale and equity security investments is subject to market volatility, especially in periods of instability in the worldwide financial markets. Net investment income is impacted by the general level of interest rates, which impact reinvested cash flow from the portfolio and business operations. Depending upon market conditions, considerable fluctuation could occur in the fair value of our investment portfolio and reported total investment income, which could have an adverse impact on our consolidated financial condition, results of operations and cash flows. Various ongoing geopolitical events, the uncertain tariff, inflationary, and interest rate environment, and a potential economic slowdown could have a significant impact on the global financial markets with the potential for future losses and/or impairments on our investment portfolio.