Erie Indemnity Company — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited financial statements; amounts below are in U.S. dollars. Erie Indemnity acts as attorney-in-fact and service provider for Erie Insurance Exchange (the Exchange). Its primary earnings source is a management fee tied to premiums written by the Exchange, its sole customer.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 or comparison |
|---|---|---|
| Total operating revenue | $672.1 million | $630.2 million; up 6.7% |
| Operating income | $84.3 million | $76.1 million; up 10.8% |
| Operating margin | 12.5% | 12.1% |
| Total investment income | $3.0 million | $18.0 million; down 83.3% |
| Income before taxes | $86.8 million | $92.6 million; down 6.2% |
| Net income | $68.6 million | $73.6 million; down 6.7% |
| Diluted Class A EPS | $1.31 | $1.41; down 6.7% |
| Cash from operating activities | $23.6 million | $33.5 million |
| Cash and cash equivalents | $141.3 million at quarter-end | $183.7 million at Dec. 31, 2021 |
| Total assets / shareholders’ equity | $2.224 billion / $1.334 billion | $2.242 billion / $1.342 billion at Dec. 31, 2021 |
| Borrowings | $93.3 million carrying value, including current portion | $93.8 million at Dec. 31, 2021 |
Administrative services reimbursements and corresponding expenses are recorded gross and have no net impact on operating income. The filing does not provide a separate overall liquidity ratio. Current assets were $751.3 million and current liabilities were $601.3 million at March 31.
Changes versus the prior comparable period
- Exchange direct and affiliated assumed premiums written rose 7.0% to $2.010 billion. Policy issuance and renewal management fee revenue increased 7.1% to $488.0 million.
- Policy issuance and renewal costs increased 6.0% to $424.5 million, mainly reflecting higher agent commissions. The segment’s operating income rose 14.3% to $70.0 million.
- Administrative services management fee revenue declined 3.6% to $14.3 million; total administrative services revenue, including cost reimbursements, increased 5.5% to $177.6 million.
- Investment results weakened sharply: net investment income declined 38.6% to $10.5 million, while realized and unrealized investment losses were $7.3 million versus gains of $0.8 million. The 2022 losses included equity-security fair-value declines and losses on sales of available-for-sale securities.
- Other comprehensive loss was $25.2 million, primarily reflecting unrealized losses on available-for-sale securities. Net unrealized losses on fixed maturities were $20.7 million at quarter-end, compared with net unrealized gains of $6.2 million at year-end 2021.
- Cash from operations fell to $23.6 million from $33.5 million. Cash dividends paid were $51.7 million; quarterly dividends declared per share increased 7.2% year over year.
Liquidity, debt and capital
Cash declined by $42.4 million during the quarter. Erie Indemnity reported $99.1 million available under its $100 million revolving credit facility after outstanding letters of credit; there were no revolver borrowings. The facility expires in October 2026. A separate amortizing term loan bears fixed interest at 4.35%. The company reported compliance with applicable credit covenants. It also cited approximately $642.9 million of unpledged investment assets as a potential liquidity source, while cautioning that market volatility could impair sale prices or liquidity.
Outlook, risks and unusual items
- No specific company earnings or revenue guidance was provided. Management said it expects operating cash needs to be met from operations and described cash, marketable securities and credit availability as additional funding sources.
- Management reported 7.0% premium growth, a 3.1% year-over-year increase in policies in force, and a 90.3% policy retention ratio for the Exchange and its property-and-casualty subsidiaries. Growth was driven primarily by homeowners and commercial multi-peril business. The Exchange’s A.M. Best financial strength rating was A+ with a stable outlook, affirmed in July 2021.
- Management cited inflation—including medical, building-material and auto-repair costs—potentially affecting Exchange loss reserves and future premium rates. Other risks include the COVID-19 pandemic, Russia/Ukraine-related market volatility, rising interest rates, catastrophe losses, technology or cyber disruptions, and dependence on the Exchange and its agency relationships.
- A pending lawsuit alleges breach of fiduciary duty regarding the management fee. Plaintiffs seek damages and other relief, including possible disgorgement; a motion to remand the case to state court was pending. The company said it intends to vigorously defend the claims. Separately, the company filed a federal action seeking to protect prior judgments concerning compensation practices.
- The company committed to fund at least 30% of loans made through an agent-loan participation program. At quarter-end, its portion of executed loans was $13.4 million and its maximum potential payments under a guarantee were $4.7 million; payments were current.
- Management said there were no material changes to previously disclosed risk factors, no material change in internal control over financial reporting, and no subsequent event requiring adjustment or additional disclosure.
Important facts for investors to verify
- Whether Exchange premium growth and retention remain sufficient to support management-fee revenue, and whether the fee rate remains at its 25% maximum.
- How investment performance, interest-rate movements and unrealized portfolio losses affect earnings, equity and liquidity in subsequent periods.
- Developments and potential financial exposure in the fiduciary-duty litigation concerning the management fee.
- Whether inflation and changing claims conditions affect the Exchange’s financial strength, premium rates or business growth.
- Cash generation, dividend commitments, credit-facility availability and the liquidity of unpledged investments.