Erie Indemnity Company — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; unaudited. Erie Indemnity acts as attorney-in-fact for Erie Insurance Exchange and provides policy issuance, renewal, claims, investment-management and other administrative services. Its results depend heavily on the Exchange, its sole customer. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total operating revenue | $858.9 | $741.2 | $2,451.3 | $2,139.5 |
| Operating income | $148.5 | $106.5 | $393.2 | $294.8 |
| Income before taxes | $163.8 | $106.3 | $422.0 | $294.5 |
| Net income | $131.0 | $84.3 | $335.1 | $233.1 |
| Diluted Class A EPS | $2.51 | $1.61 | $6.41 | $4.46 |
| Net cash from operating activities | — | — | $232.8 | $238.1 |
- Q3 operating income rose 39.4%, net income 55.4%, and diluted Class A EPS 55.4%. For the first nine months, operating income rose 33.4% and net income 43.8%.
- Management fee revenue for policy issuance and renewal services grew 17.7% in Q3 and 16.2% year to date. Exchange direct and affiliated assumed premiums written increased 17.6% to $2.67 billion in Q3 and 16.2% to $7.59 billion year to date.
- Reported operating income was 17.3% of total operating revenue in Q3 (14.4% in Q3 2022) and 16.0% year to date (13.8% in 2022). Administrative-services reimbursements are recorded gross as both revenue and expense, with no operating-income impact.
- Net investment income was $14.6 million in Q3 and $30.4 million year to date. Total investment income was $12.3 million in Q3, versus a $0.6 million loss in Q3 2022; year-to-date total investment income was $19.2 million versus $0.3 million. Year-to-date net realized and unrealized investment losses were $9.2 million, down from $23.8 million.
Financial position, cash flow and liquidity
- At September 30, 2023, total assets were $2.395 billion, total liabilities $782.7 million and shareholders’ equity $1.612 billion. Cash and cash equivalents were $102.9 million; the current ratio was approximately 1.28.
- Available-for-sale securities had a fair value of $915.2 million. Net unrealized losses on fixed maturities, net of deferred taxes, were $49.7 million, compared with $52.5 million at December 31, 2022.
- For the first nine months, operating cash flow was $232.8 million, investing cash outflow $105.7 million and financing cash outflow $166.3 million. Cash decreased $39.2 million to $102.9 million. Operating cash flow was slightly lower than the prior-year period, while investing outflows increased.
- The company had no line-of-credit borrowings and reported $99.1 million available under its $100 million revolving facility, which expires in October 2026. It was in compliance with covenants. The company also reported approximately $87.5 million of unpledged cash and $759.4 million of unpledged liquid investments.
- A $95 million pension contribution during Q3 resulted in a $65.2 million defined-benefit pension asset at quarter-end. Dividends paid totaled $166.3 million for the nine-month period.
Material changes and management commentary
- Premium growth reflected both higher policy counts and higher average premiums. Year-over-year policies in force increased 6.1% and average premium per policy increased 8.7% at September 30. New-business premiums rose 39.7% in Q3.
- Policy issuance and renewal costs increased 12.3% in Q3 and 12.0% year to date, less than the related revenue growth. Higher scheduled commissions, compensation and technology spending contributed; reduced agent incentive compensation partly offset the increases, reflecting higher claims severity and loss costs.
- Management said elevated inflation, including medical, building-material and auto-repair costs, could affect Exchange claims costs, underwriting results and future premium rates. It also cited interest-rate, market-volatility and economic-slowdown risks. No material changes to investment-market risk exposure or portfolio review practices were reported for the nine-month period.
- The Exchange and its property-and-casualty subsidiaries held an A.M. Best A+ “Superior” financial-strength rating, with a stable outlook affirmed August 10, 2023. Their statutory policyholders’ surplus was $9.1 billion at September 30, down from $10.1 billion at year-end 2022.
Outlook, risks and contingencies
- No specific financial guidance was provided. Management expects normal operating cash needs to be met from operations and describes the credit facility, cash and liquid investments as additional sources of liquidity.
- Principal business risks include reliance on the Exchange’s growth, financial condition and management-fee arrangement; catastrophe losses; inflation and claims severity; regulation; agency relationships; technology and cybersecurity; investment-market volatility; and access to liquidity and capital.
- A lawsuit alleging breach of fiduciary duty in setting the management fee remains a material matter to monitor. The case was remanded to Pennsylvania state court after federal appellate proceedings; the company states it intends to defend the claims. The filing says litigation reserves are considered appropriate and does not expect current accruals to be material, but notes a substantial judgment or settlement could adversely affect results.
- The company also guarantees a portion of funding by other participants in an agent-loan program; maximum potential future payments on the guaranteed portion were $6.9 million. All loan payments were current at quarter-end.
Important facts for investors to verify
- Whether Exchange premium and policy growth, and the maximum 25% management-fee rate, are sustained; the filing allocates the fee between policy issuance and administrative services.
- Whether rising claims severity, inflation and future rate decisions affect Exchange performance, agent incentives and Indemnity’s fee revenue.
- The status and potential financial exposure of the management-fee fiduciary-duty litigation and related federal-court proceedings.
- Investment portfolio valuation, credit quality and realized-loss trends, including the $63.8 million of gross unrealized losses on available-for-sale securities at September 30.
- Cash generation after pension funding and capital spending, as well as continued access to the revolving facility and liquid investments.