Erie Indemnity Company — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are U.S. dollars; financial statement amounts are in thousands unless noted.
Business context
Erie Indemnity acts as attorney-in-fact for policyholders of Erie Insurance Exchange, its sole customer, providing policy issuance and renewal services and administrative services. Its principal revenue is a management fee based on Exchange premiums written; administrative service reimbursements are recorded gross with matching costs and do not affect operating income.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenue | $680.0m | $657.0m | $1,310.2m | $1,273.8m |
| Operating income | $85.1m | $91.2m | $161.2m | $176.9m |
| Net income | $79.0m | $82.0m | $152.6m | $141.3m |
| Diluted Class A EPS | $1.51 | $1.57 | $2.92 | $2.70 |
| Operating margin | 12.5% | 13.9% | 12.3% | 13.9% |
Q2 revenue rose 3.5%, while operating income fell 6.7% and net income fell 3.6%. For the first half, revenue rose 2.9%, operating income declined 8.9%, and net income increased 8.0%. Higher investment income offset some operating pressure: total investment income was $16.4m in Q2 and $34.4m for the half, versus $11.6m and $2.4m, respectively, in 2020. Half-year net investment income benefited from limited-partnership earnings of $15.2m, compared with losses of $6.0m a year earlier.
Policy issuance and renewal fee revenue grew 3.8% in Q2 and 3.3% for the half, supported by Exchange premium growth. Related costs rose faster, 5.8% and 5.7%, respectively, reflecting commissions, personnel costs, and technology spending. Exchange direct and affiliated assumed premiums written increased 3.4% in Q2 and 2.6% for the half. The management fee rate remained at its 25% maximum.
Financial position, cash flow and capital
- At June 30, 2021, total assets were $2.164bn, liabilities $918.5m, and shareholders’ equity $1.245bn.
- Cash and cash equivalents were $156.0m. Current assets were $746.8m and current liabilities $591.9m.
- Borrowings totaled about $94.9m carrying value. No revolving-line borrowings were outstanding; $99.1m of the $100m facility remained available, subject to $0.9m of letters of credit. The term loan carries a fixed 4.35% rate. The company reported compliance with debt covenants.
- For the six months, operating cash flow was $127.7m, investing cash outflow $35.5m, and financing cash outflow $97.4m; cash decreased $5.2m.
- Dividends paid were $96.4m. Regular quarterly dividends per share increased 7.3% for 2021 versus 2020. No shares were repurchased under the public program; $17.8m of authorization remained.
Changes, outlook and risks
COVID-related auto rate reductions implemented by the Exchange in 2020 reduced its written premiums by an estimated $55m in Q2 and $110m for the first half of 2021, lowering Indemnity’s management fee revenue by approximately $14m and $28m, respectively. Policies in force grew 3.6% year over year in Q2, while average premium per policy fell 1.5%; new-business premiums rose 38.4%. Management noted that claim frequency was increasing from pandemic lows but remained below pre-pandemic levels, contributing to higher agent incentive costs.
No specific earnings or revenue guidance was provided. Management said it expected operating cash needs to be met from operations and considered liquidity adequate, including cash, marketable securities, and the revolving facility. Some portfolio securities may be difficult to sell or could require discounts in volatile markets. COVID-19’s duration and economic and market effects remained uncertain; management reported no significant business interruption and said phased office returns began in July 2021.
Key risks include dependence on the Exchange’s premium growth, financial strength, agency relationships and A.M. Best rating; market and investment volatility; catastrophe losses; inflation and economic conditions; regulatory or litigation developments; technology and cybersecurity risks; and the pandemic’s effects. The Exchange and its property-casualty subsidiaries retained an A+ “Superior” A.M. Best rating with stable outlook affirmed July 27, 2021. The company disclosed a $2.6m maximum potential guarantee under an agent-loan participation program; loans were current. Ordinary-course litigation reserves were not expected to be material, though certain losses could not be reasonably estimated. No subsequent events requiring adjustment or disclosure were identified.
Important facts for investors to verify
- Whether premium and policy growth can continue to offset the impact of reduced average premiums and the 2020 auto rate cuts.
- Whether operating expense growth—especially commissions, personnel, pension, and technology costs—continues to outpace fee revenue growth.
- How sustainable investment income is, given the first-half improvement was substantially driven by limited-partnership results and market-sensitive gains.
- Liquidity and credit exposure to the Exchange, including the $504.0m receivable from the Exchange and affiliates and the concentration of revenue in the sole customer.
- Developments in COVID-19 effects, claims frequency, investment valuations, and the agent-loan guarantee exposure.