Erie Indemnity Company — Q2 2023 Form 10-Q
Business and period: Unaudited results for the three and six months ended June 30, 2023, compared with the same periods in 2022. Erie Indemnity acts as attorney-in-fact for policyholders of Erie Insurance Exchange, its primary customer. It earns management fees based on Exchange premiums and is reimbursed at cost for administrative services.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $839.9M | $726.1M | $1,592.3M | $1,398.3M |
| Operating income | $134.2M | $104.0M | $244.7M | $188.3M |
| Net income | $117.9M | $80.1M | $204.1M | $148.8M |
| Diluted Class A EPS | $2.25 | $1.53 | $3.90 | $2.84 |
| Net investment income | $13.5M | $8.3M | $15.7M | $18.8M |
| Total investment income (loss) | $11.6M | $(2.1)M | $6.9M | $0.9M |
| Operating cash flow | — | $180.0M | $106.3M |
Q2 operating income rose 29.0% and net income 47.0%; for the first half, operating income grew 29.9% and net income 37.2%. Reported operating margin was approximately 16.0% in Q2 versus 14.3% a year earlier, and 15.4% for the first half versus 13.5%. These ratios include administrative-services reimbursements recorded gross with corresponding costs; reimbursements have no net effect on operating income. Policy issuance and renewal services operating income was $118.5M in Q2, up 32.4%, and $213.9M for six months, up 34.1%.
At June 30, 2023, cash and cash equivalents were $143.0M; total assets were $2.326B, total liabilities $780.6M, and shareholders’ equity $1.545B. Available-for-sale securities had a fair value of $921.0M. The company had no line-of-credit borrowings and $99.1M of availability under its $100M revolving facility, after letters of credit. No conventional funded debt balance is reported on the balance sheet. The current ratio was approximately 1.34.
First-half investing cash use was $68.3M and financing cash use was $110.8M, including $110.8M of dividends paid. Cash increased $0.9M to $143.0M. Dividends declared per Class A share were $1.19 in Q2 and $2.38 for the first half.
Material changes and drivers
- Exchange direct and affiliated assumed premiums written increased 16.3% to $2.613B in Q2 and 15.5% to $4.917B for the first half. Management fee revenue for policy issuance and renewal services increased 16.3% in Q2 and 15.4% year to date. The fee rate was 25% overall, allocated 24.3% to policy issuance and renewal services and 0.7% to administrative services.
- Premium growth reflected both more policies and higher average premiums: all-lines policies in force increased 5.2% year over year and average premium per policy rose 7.6% at June 30. New-business premiums rose 32.6% in Q2.
- Policy issuance and renewal costs increased 13.0% in Q2 and 11.8% year to date, principally from higher scheduled commissions, employee compensation and technology spending. Lower agent incentive compensation, reflecting higher claims severity and related loss costs, partly offset the increase.
- Q2 total investment income improved from a loss to income, mainly because investment losses were lower and bond and cash yields increased. First-half net investment income declined 16.3%, including $10.7M of limited-partnership losses; total investment income nevertheless increased versus the prior-year period as realized and unrealized losses were smaller.
- First-half AOCI improved to a $4.2M loss from a $7.4M loss at year-end 2022. The investment portfolio still included $56.6M of gross unrealized losses on available-for-sale securities at June 30.
Outlook, risks and contingencies
No specific earnings or revenue guidance is provided. Management says it plans to continue expanding the Exchange’s agency force and market penetration. Future results remain closely tied to Exchange premiums and financial condition. Management noted elevated inflation and its potential effects on medical, construction and auto repair costs, claims severity, loss reserves and future premium rates. It also cited financial-market volatility, rising interest rates, banking-sector instability, investment valuation and liquidity risks, technology and cybersecurity risks, and dependence on the Exchange and independent-agent relationships.
The company expects to contribute approximately $95M to pension plans in Q3 2023; actual contributions may vary. It reported $591.0M in net receivables from the Exchange and affiliates, creating concentration in unsecured credit exposure. A guarantee under an agent-loan participation program could require up to $6.7M in future payments; underlying loan payments were current. The company is defending a state-court fiduciary-duty suit concerning management-fee setting, seeking damages and other relief; it stated that litigation accruals are not expected to be material, while noting outcomes cannot be assured. The Exchange and its P&C subsidiaries retained A.M. Best A+ ratings with a stable outlook last affirmed in August 2022; their statutory policyholders’ surplus was $9.7B at June 30, down from $10.1B at year-end.
Important facts for investors to verify
- Whether premium growth and planned agency expansion persist, and whether rate increases keep pace with claims-cost inflation and severity.
- Whether operating-cost growth, particularly commissions, compensation and technology expense, remains below management-fee growth.
- Investment portfolio performance, including limited-partnership results, unrealized losses, credit impairments and the effect of rates or market disruption on liquidity.
- The timing and cash impact of the expected $95M pension contribution, and the level of available liquidity after planned dividends and capital spending.
- Developments in the management-fee litigation and any resulting financial, regulatory or business consequences.
- Continuing credit exposure to the Exchange and affiliates, Exchange financial strength and surplus, and compliance with revolving-credit covenants.