Item 1. FINANCIAL STATEMENTS

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Item 1. FINANCIAL STATEMENTS

ERIE INDEMNITY COMPANY

STATEMENTS OF OPERATIONS (UNAUDITED)

(dollars in thousands, except per share data)


	Three months ended				Six months ended
	June 30,				June 30,
	2022		2021		2022		2021
Operating revenue
Management fee revenue - policy issuance and renewal services	$	544,555	$	502,271	$	1,032,547	$	957,989
Management fee revenue - administrative services	14,476		14,667		28,789		29,514
Administrative services reimbursement revenue	160,675		157,190		324,002		310,723
Service agreement revenue	6,437		5,902		12,915		11,981
Total operating revenue	726,143		680,030		1,398,253		1,310,207

Operating expenses
Cost of operations - policy issuance and renewal services	461,468		437,775		885,939		838,324
Cost of operations - administrative services	160,675		157,190		324,002		310,723

Total operating expenses	622,143		594,965		1,209,941		1,149,047
Operating income	104,000		85,065		188,312		161,160

Investment income
Net investment income	8,268		13,650		18,772		30,747
Net realized and unrealized investment (losses) gains	(10,324)		2,769		(17,603)		3,573
Net impairment (losses) recoveries recognized in earnings	(38)		(1)		(254)		86

Total investment (loss) income	(2,094)		16,418		915		34,406

Interest expense	895		1,039		1,894		2,048
Other income (expense)	337		(548)		810		(1,067)
Income before income taxes	101,348		99,896		188,143		192,451
Income tax expense	21,201		20,867		39,377		39,856
Net income	$	80,147	$	79,029	$	148,766	$	152,595


Net income per share
Class A common stock – basic	$	1.72	$	1.70	$	3.19	$	3.28
Class A common stock – diluted	$	1.53	$	1.51	$	2.84	$	2.92
Class B common stock – basic and diluted	$	258	$	255	$	479	$	491


Weighted average shares outstanding – Basic
Class A common stock	46,188,845		46,188,289		46,188,803		46,188,573
Class B common stock	2,542		2,542		2,542		2,542

Weighted average shares outstanding – Diluted
Class A common stock	52,296,139		52,302,370		52,298,321		52,309,163
Class B common stock	2,542		2,542		2,542		2,542

Dividends declared per share
Class A common stock	$	1.11	$	1.035	$	2.22	$	2.070
Class B common stock	$	166.50	$	155.25	$	333.00	$	310.50

See accompanying notes to Financial Statements. See Note 11, "Accumulated Other Comprehensive Income (Loss)", for amounts reclassified out of accumulated other comprehensive income (loss) into the Statements of Operations.

ERIE INDEMNITY COMPANY

STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)


	Three months ended				Six months ended
	June 30,				June 30,
	2022		2021		2022		2021
Net income	$	80,147	$	79,029	$	148,766	$	152,595

Other comprehensive (loss) income, net of tax
Change in unrealized holding (losses) gains on available-for-sale securities	(24,985)		2,676		(51,904)		(6,076)
Amortization of prior service costs and net actuarial loss on pension and other postretirement plans	1,737		3,463		3,467		6,926
Total other comprehensive (loss) income, net of tax	(23,248)		6,139		(48,437)		850
Comprehensive income	$	56,899	$	85,168	$	100,329	$	153,445

ERIE INDEMNITY COMPANY

STATEMENTS OF FINANCIAL POSITION

(dollars in thousands, except per share data)


	June 30,		December 31,
	2022		2021
Assets	(Unaudited)
Current assets:
Cash and cash equivalents	$	90,324	$	183,702
Available-for-sale securities	57,150		38,396

Receivables from Erie Insurance Exchange and affiliates, net	538,283		479,123
Prepaid expenses and other current assets	50,508		56,206

Accrued investment income	6,839		6,303
Total current assets	743,104		763,730

Available-for-sale securities, net	832,577		907,689
Equity securities	71,448		87,743

Fixed assets, net	402,475		374,802
Agent loans, net	61,865		58,683


Deferred income taxes, net	20,491		145
Other assets	48,262		49,265
Total assets	$	2,180,222	$	2,242,057

Liabilities and shareholders' equity
Current liabilities:
Commissions payable	$	305,984	$	270,746
Agent bonuses	55,146		120,437
Accounts payable and accrued liabilities	141,861		138,317
Dividends payable	51,693		51,693
Contract liability	35,836		34,935
Deferred executive compensation	6,045		12,637

Short-term borrowings	40,000		—
Current portion of long-term borrowings	—		2,098
Total current liabilities	636,565		630,863

Defined benefit pension plans	148,078		130,383
Long-term borrowings	—		91,734
Contract liability	17,740		17,686
Deferred executive compensation	11,199		14,571

Other long-term liabilities	27,234		14,342
Total liabilities	840,816		899,579

Shareholders’ equity
Class A common stock, stated value $0.0292 per share; 74,996,930 shares authorized; 68,299,200 shares issued; 46,189,068 shares outstanding	1,992		1,992
Class B common stock, convertible at a rate of 2,400 Class A shares for one Class B share, stated value $70 per share; 3,070 shares authorized; 2,542 shares issued and outstanding	178		178
Additional paid-in-capital	16,481		16,496
Accumulated other comprehensive loss	(73,725)		(25,288)
Retained earnings	2,540,570		2,495,190

Total contributed capital and retained earnings	2,485,496		2,488,568
Treasury stock, at cost; 22,110,132 shares held	(1,169,140)		(1,167,828)
Deferred compensation	23,050		21,738
Total shareholders’ equity	1,339,406		1,342,478
Total liabilities and shareholders’ equity	$	2,180,222	$	2,242,057

See accompanying notes to Financial Statements.

ERIE INDEMNITY COMPANY

STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

Three and six months ended June 30, 2022 and 2021

(dollars in thousands, except per share data)


	Class A common stock		Class B common stock		Additional paid-in-capital		Accumulated other comprehensive loss		Retained earnings		Treasury stock		Deferred compensation		Total shareholders' equity
Balance, December 31, 2021	$	1,992	$	178	$	16,496	$	(25,288)	$	2,495,190	$	(1,167,828)	$	21,738	$	1,342,478

Net income									68,619						68,619
Other comprehensive loss							(25,189)								(25,189)
Dividends declared:
Class A $1.11 per share									(51,270)						(51,270)
Class B $166.50 per share									(423)						(423)
Net purchase of treasury stock (1)					(15)						0				(15)
Deferred compensation											(802)		802		0
Rabbi trust distribution (2)											298		(298)		0
Balance, March 31, 2022	$	1,992	$	178	$	16,481	$	(50,477)	$	2,512,116	$	(1,168,332)	$	22,242	$	1,334,200
Net income									80,147						80,147
Other comprehensive loss							(23,248)								(23,248)
Dividends declared:
Class A $1.11 per share									(51,270)						(51,270)
Class B $166.50 per share									(423)						(423)
Net purchase of treasury stock (1)					0						0				0
Deferred compensation											(907)		907		0
Rabbi trust distribution (2)											99		(99)		0
Balance, June 30, 2022	$	1,992	$	178	$	16,481	$	(73,725)	$	2,540,570	$	(1,169,140)	$	23,050	$	1,339,406


	Class A common stock		Class B common stock		Additional paid-in-capital		Accumulated other comprehensive (loss) income		Retained earnings		Treasury stock		Deferred compensation		Total shareholders' equity
Balance, December 31, 2020	$	1,992	$	178	$	16,487	$	(78,143)	$	2,393,624	$	(1,163,670)	$	17,580	$	1,188,048

Net income									73,566						73,566
Other comprehensive loss							(5,289)								(5,289)
Dividends declared:
Class A $1.035 per share									(47,806)						(47,806)
Class B $155.25 per share									(395)						(395)
Net purchase of treasury stock (1)					9						0				9
Deferred compensation											(846)		846		0
Rabbi trust distribution (2)											876		(876)		0
Balance, March 31, 2021	$	1,992	$	178	$	16,496	$	(83,432)	$	2,418,989	$	(1,163,640)	$	17,550	$	1,208,133
Net income									79,029						79,029
Other comprehensive income							6,139								6,139
Dividends declared:
Class A $1.035 per share									(47,805)						(47,805)
Class B $155.25 per share									(394)						(394)
Net purchase of treasury stock (1)					0						0				0
Deferred compensation											(3,668)		3,668		0
Rabbi trust distribution (2)											97		(97)		0
Balance, June 30, 2021	$	1,992	$	178	$	16,496	$	(77,293)	$	2,449,819	$	(1,167,211)	$	21,121	$	1,245,102

*(1)*Net purchases of treasury stock in 2022 and 2021 include the repurchase of our Class A common stock in the open market that were subsequently distributed to satisfy stock-based compensation awards.

*(2)*Distributions of our Class A shares were made from the rabbi trust to two incentive compensation deferral plan participants in 2022 and to a retired director and an incentive compensation deferral plan participant in 2021.

See accompanying notes to Financial Statements.

ERIE INDEMNITY COMPANY

STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	Six months ended
	June 30,
	2022		2021
Cash flows from operating activities
Management fee received	$	1,019,016	$	985,317
Administrative services reimbursements received	317,819		301,509
Service agreement fee received	12,742		11,981
Net investment income received	18,595		18,735

Commissions paid to agents	(493,058)		(464,550)
Agents bonuses paid	(126,902)		(115,678)
Salaries and wages paid	(114,075)		(113,452)
Employee benefits paid	(21,108)		(16,567)
General operating expenses paid	(132,297)		(126,373)
Administrative services expenses paid	(333,532)		(310,617)
Income taxes paid	(38,989)		(40,503)
Interest paid	(1,937)		(2,082)
Net cash provided by operating activities	106,274		127,720

Cash flows from investing activities
Purchase of investments:
Available-for-sale securities	(211,492)		(168,671)
Equity securities	(7,157)		(28,408)

Other investments	(157)		(605)
Proceeds from investments:
Available-for-sale securities sales	123,758		59,203
Available-for-sale securities maturities/calls	74,628		99,788
Equity securities	10,131		29,856

Other investments	429		869
Purchase of fixed assets	(28,021)		(28,197)
Proceeds from disposal of fixed assets	156		0
Loans to agents	(8,769)		(2,930)
Collections on agent loans	4,298		3,584
Net cash used in investing activities	(42,196)		(35,511)

Cash flows from financing activities


Dividends paid to shareholders	(103,386)		(96,400)
Proceeds from short-term borrowings	55,000		—
Payments on short-term borrowings	(15,000)		—
Payments on long-term borrowings	(94,070)		(1,011)

Net cash used in financing activities	(157,456)		(97,411)

Net decrease in cash and cash equivalents	(93,378)		(5,202)
Cash and cash equivalents, beginning of period	183,702		161,240
Cash and cash equivalents, end of period	$	90,324	$	156,038

Supplemental disclosure of noncash transactions
Liability incurred to purchase fixed assets	$	24,833	$	13,024
Operating lease assets obtained in exchange for new operating lease liabilities	$	1,487	$	977

See accompanying notes to Financial Statements.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Nature of Operations

Erie Indemnity Company ("Indemnity", "we", "us", "our") is a publicly held Pennsylvania business corporation that has since its incorporation in 1925 served as the attorney-in-fact for the subscribers (policyholders) at the Erie Insurance Exchange ("Exchange"). The Exchange, which also commenced business in 1925, is a Pennsylvania-domiciled 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 Exchange with respect to all claims handling and investment management services, as well as the service provider for all claims handling, life insurance, and investment management services for its insurance subsidiaries, collectively referred to as "administrative services". Acting as attorney-in-fact in these two capacities is done in accordance with a subscriber's agreement (a limited power of attorney) executed individually by each subscriber (policyholder), which appoints us as their common attorney-in-fact to transact certain business on their behalf. Pursuant to the subscriber's agreement for acting as attorney-in-fact in these two capacities, we earn a management fee calculated as a percentage of the direct and affiliated assumed premiums written by the Exchange.

The policy issuance and renewal services we provide to the Exchange 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 additional commissions and bonuses to agents, which are earned by achieving targeted measures. 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. Included in these expenses are allocations of costs for departments that support these policy issuance and renewal functions.

By virtue of 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 an attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of the Exchange with respect to its administrative services. 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. Included in these expenses are allocations of costs for departments that support these administrative functions. The amounts incurred for these services are reimbursed to Indemnity at cost in accordance with the subscriber's agreement and the service agreements. 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. If any events occurred that impaired the Exchange’s ability to grow or sustain its financial condition, including but not limited to reduced financial strength ratings, disruption in the independent agency relationships, significant catastrophe losses, or products not meeting customer demands, the Exchange could find it more difficult to retain its existing business and attract new business. A decline in the business of the Exchange almost certainly would have as a consequence a decline in the total premiums paid and a correspondingly adverse effect on the amount of the management fees we receive. We also have an exposure to a concentration of credit risk related to the unsecured receivables due from the Exchange for its management fee and cost reimbursements. See Note 12, "Concentrations of Credit Risk".

Coronavirus ("COVID-19") pandemic

In March 2020, the outbreak of the coronavirus ("COVID-19") was declared a global pandemic and pandemic conditions have created an inflationary environment which may impact estimated loss reserves and future premium rates of the Exchange. The uncertainty resulting from COVID-19 and subsequent resulting conditions continues to evolve and the ultimate impact and duration remains uncertain at this time. We are unable to predict the duration or extent of the business disruption or the financial impact given the ongoing development of the pandemic and its impact on the economy and financial markets.

Note 2. Significant Accounting Policies

Basis of presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information, refer to the financial statements and footnotes included in our Form 10-K for the year ended December 31, 2021 as filed with the Securities and Exchange Commission on February 24, 2022.

Use of estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Note 3. Revenue

The majority of our revenue is derived from the subscriber’s agreement between us and the subscribers (policyholders) at the Exchange. Pursuant to the subscriber’s agreement, we earn a management fee calculated as a percentage, not to exceed 25%, of all direct and affiliated assumed written premiums of the Exchange. We allocate a portion of our management fee revenue, currently 25% of the direct and affiliated assumed written premiums of the Exchange, between the two performance obligations we have under the subscriber’s agreement. The first performance obligation is to provide policy issuance and renewal services to the subscribers (policyholders) at the Exchange, and the second is to act as attorney-in-fact on behalf of the Exchange, as well as the service provider for its insurance subsidiaries, with respect to all administrative services.

The transaction price, including management fee revenue and administrative services reimbursement revenue, includes variable consideration and is allocated based on the estimated standalone selling prices developed using industry information and other available information for similar services. A constraining estimate of variable consideration exists related to the potential for management fees to be returned if a policy were to be cancelled mid-term. Management fees are returned to the Exchange when policyholders cancel their insurance coverage mid-term and premiums are refunded to them. The constraining estimate is determined using the expected value method, based on both historical and current information. The estimated transaction price, as reduced by the constraint, reflects consideration expected for performance of our services. We update the transaction price and the related allocation at least annually based upon the most recent information available or more frequently if there have been significant changes in any components considered in the transaction price.

The first performance obligation is to provide policy issuance and renewal services that result in executed insurance policies between the Exchange or one of its insurance subsidiaries and the subscriber (policyholder). The subscriber (policyholder) receives economic benefits when substantially all the policy issuance or renewal services are complete and an insurance policy is issued or renewed by the Exchange or one of its insurance subsidiaries. It is at the time of policy issuance or renewal that the allocated portion of revenue is recognized.

The Exchange, by virtue of its legal structure as a reciprocal insurer, does not have any employees or officers. Therefore, it enters into contractual relationships by and through an attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of the Exchange with respect to its administrative services in accordance with 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. Collectively, these services represent a second performance obligation under the subscriber’s agreement and the service agreements. The revenue allocated to this performance obligation is recognized over a four-year period representing the time over which these services are provided. The portion of revenue not yet earned is recorded as a contract liability in the Statements of Financial Position. During the three and six months ending June 30, 2022, we recognized revenue of $10.0 million and $22.7 million, respectively, that was included in the contract liabilities balance as of December 31, 2021. During the three and six months ended June 30, 2021, we recognized revenue of $10.6 million and $23.9 million, respectively, that was included in the contract liabilities balance as of December 31, 2020. The administrative services expenses we incur and the related reimbursements we receive are recorded gross in the Statements of Operations.

Indemnity records a receivable from the Exchange for management fee revenue when the premium is written or assumed by the Exchange. Indemnity collects the management fee from the Exchange when the Exchange collects the premiums from the subscribers (policyholders). As the Exchange issues policies with annual terms only, cash collections generally occur within one year.

The following table disaggregates revenue by our two performance obligations:


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2022		2021			2022		2021
Management fee revenue - policy issuance and renewal services	$	544,555	$	502,271		$	1,032,547	$	957,989

Management fee revenue - administrative services	14,476		14,667			28,789		29,514
Administrative services reimbursement revenue	160,675		157,190			324,002		310,723
Total administrative services revenue	$	175,151	$	171,857		$	352,791	$	340,237

Note 4. Earnings Per Share

Class A and Class B basic earnings per share and Class B diluted earnings per share are calculated under the two-class method. The two-class method allocates earnings to each class of stock based upon its dividend rights. Class B shares are convertible into Class A shares at a conversion ratio of 2,400 to 1. See Note 10, "Capital Stock".

Class A diluted earnings per share are calculated under the if-converted method, which reflects the conversion of Class B shares to Class A shares. Diluted earnings per share calculations include the dilutive effect of assumed issuance of stock-based awards under compensation plans that have the option to be paid in stock using the treasury stock method.

A reconciliation of the numerators and denominators used in the basic and diluted per-share computations is presented as follows for each class of common stock:


	Three months ended June 30,
	2022					2021
(dollars in thousands, except per share data)	Allocated net income (numerator)		Weighted shares (denominator)	Per-share amount		Allocated net income (numerator)		Weighted shares (denominator)	Per-share amount
Class A – Basic EPS:
Income available to Class A stockholders	$	79,491	46,188,845	$	1.72	$	78,382	46,188,289	$	1.70
Dilutive effect of stock-based awards	0		6,494	—		0		13,281	—
Assumed conversion of Class B shares	656		6,100,800	—		647		6,100,800	—
Class A – Diluted EPS:
Income available to Class A stockholders on Class A equivalent shares	$	80,147	52,296,139	$	1.53	$	79,029	52,302,370	$	1.51
Class B – Basic and diluted EPS:
Income available to Class B stockholders	$	656	2,542	$	258	$	647	2,542	$	255



	Six months ended June 30,
	2022					2021
(dollars in thousands, except per share data)	Allocated net income (numerator)		Weighted shares (denominator)	Per-share amount		Allocated net income (numerator)		Weighted shares (denominator)	Per-share amount
Class A – Basic EPS:
Income available to Class A stockholders	$	147,548	46,188,803	$	3.19	$	151,346	46,188,573	$	3.28
Dilutive effect of stock-based awards	0		8,718	—		0		19,790	—
Assumed conversion of Class B shares	1,218		6,100,800	—		1,249		6,100,800	—
Class A – Diluted EPS:
Income available to Class A stockholders on Class A equivalent shares	$	148,766	52,298,321	$	2.84	$	152,595	52,309,163	$	2.92
Class B – Basic and diluted EPS:
Income available to Class B stockholders	$	1,218	2,542	$	479	$	1,249	2,542	$	491

Note 5. Fair Value

Financial instruments carried at fair value

Our available-for-sale and equity securities are recorded at fair value, which is the price that would be received to sell the asset in an orderly transaction between willing market participants as of the measurement date.

Valuation techniques used to derive the fair value of our available-for-sale and equity securities are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect our own assumptions regarding fair market value for these securities. Financial instruments are categorized based upon the following characteristics or inputs to the valuation techniques:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 – Unobservable inputs for the asset or liability.

Estimates of fair values for our investment portfolio are obtained primarily from a nationally recognized pricing service. Our Level 1 securities are valued using an exchange traded price provided by the pricing service. Pricing service valuations for Level 2 securities include multiple verifiable, observable inputs including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data. Pricing service valuations for Level 3 securities are based upon proprietary models and are used when observable inputs are not available or in illiquid markets.

Although virtually all of our prices are obtained from third party sources, we also perform internal pricing reviews, including evaluating the methodology and inputs used to ensure that we determine the proper classification level of the financial instrument and reviewing securities with price changes that vary significantly from current market conditions or independent price sources. Price variances are investigated and corroborated by market data and transaction volumes. We have reviewed the pricing methodologies of our pricing service as well as other observable inputs and believe that the prices adequately consider market activity in determining fair value.

In limited circumstances we adjust the price received from the pricing service when, in our judgment, a better reflection of fair value is available based upon corroborating information and our knowledge and monitoring of market conditions such as a disparity in price of comparable securities and/or non-binding broker quotes. In other circumstances, certain securities are internally priced because prices are not provided by the pricing service.

When a price from the pricing service is not available, values are determined by obtaining broker/dealer quotes and/or market comparables. When available, we obtain multiple quotes for the same security. The ultimate value for these securities is determined based upon our best estimate of fair value using corroborating market information. As of June 30, 2022, nearly all of our available-for-sale and equity securities were priced using a third party pricing service.

The following tables present our fair value measurements on a recurring basis by asset class and level of input as of:


	June 30, 2022
(in thousands)	Total		Level 1		Level 2		Level 3
Available-for-sale securities:




Corporate debt securities	$	553,123	$	0	$	547,014	$	6,109
Collateralized debt obligations	99,219		0		99,219		0
Commercial mortgage-backed securities	68,849		0		59,978		8,871
Residential mortgage-backed securities	137,003		0		94,454		42,549
Other debt securities	20,382		0		20,382		0
U.S. Treasury	11,151		0		11,151		0
Total available-for-sale securities	889,727		0		832,198		57,529
Equity securities:
Financial services sector	57,841		512		55,463		1,866
Utilities sector	6,165		0		6,165		0
Energy sector	4,817		0		4,817		0
Consumer sector	2,625		0		2,625		0


Total equity securities	71,448		512		69,070		1,866
Total	$	961,175	$	512	$	901,268	$	59,395


	December 31, 2021
(in thousands)	Total		Level 1		Level 2		Level 3
Available-for-sale securities:




Corporate debt securities	$	573,165	$	0	$	567,909	$	5,256
Collateralized debt obligations	115,462		0		115,462		0
Commercial mortgage-backed securities	89,324		0		73,596		15,728
Residential mortgage-backed securities	139,922		0		131,108		8,814
Other debt securities	23,920		0		23,920		0
U.S. Treasury	4,292		0		4,292		0
Total available-for-sale securities	946,085		0		916,287		29,798
Equity securities:
Financial services sector	71,722		1,624		68,015		2,083
Utilities sector	6,259		0		6,259		0
Energy sector	6,448		10		6,438		0
Consumer sector	3,314		0		3,314		0


Total equity securities	87,743		1,634		84,026		2,083
Total	$	1,033,828	$	1,634	$	1,000,313	$	31,881

We review the fair value hierarchy classifications each reporting period. Transfers between hierarchy levels may occur due to changes in available market observable inputs.

Level 3 Assets – 2022 Quarterly Change:



(in thousands)	Beginning balance at March 31, 2022		Included in earnings(1)		Included in other comprehensive income		Purchases		Sales		Transfers into Level 3(2)		Transfers out of Level 3(2)		Ending balance at June 30, 2022
Available-for-sale securities:
Corporate debt securities	$	10,927	$	(8)	$	(334)	$	950	$	(2,611)	$	2,225	$	(5,040)	$	6,109

Commercial mortgage-backed securities	10,597		(588)		181		0		(2,665)		2,875		(1,529)		8,871
Residential mortgage-backed securities	212		(1)		2		4,887		(91)		37,540		0		42,549

Total available-for-sale securities	21,736		(597)		(151)		5,837		(5,367)		42,640		(6,569)		57,529
Equity securities	2,017		(151)		0		0		0		0		0		1,866
Total Level 3 securities	$	23,753	$	(748)	$	(151)	$	5,837	$	(5,367)	$	42,640	$	(6,569)	$	59,395

Level 3 Assets – 2022 Year-to-Date Change:


(in thousands)	Beginning balance at December 31, 2021		Included in earnings(1)		Included in other comprehensive income		Purchases		Sales		Transfers into Level 3(2)		Transfers out of Level 3(2)		Ending balance at June 30, 2022
Available-for-sale securities:
Corporate debt securities	$	5,256	$	5	$	(389)	$	4,934	$	(3,119)	$	5,774	$	(6,352)	$	6,109

Commercial mortgage-backed securities	15,728		(704)		(658)		0		(3,165)		4,335		(6,665)		8,871
Residential mortgage-backed securities	8,814		24		(334)		4,887		(2,846)		37,540		(5,536)		42,549

Total available-for-sale securities	29,798		(675)		(1,381)		9,821		(9,130)		47,649		(18,553)		57,529
Equity securities	2,083		(217)		0		0		0		0		0		1,866
Total Level 3 securities	$	31,881	$	(892)	$	(1,381)	$	9,821	$	(9,130)	$	47,649	$	(18,553)	$	59,395

Level 3 Assets – 2021 Quarterly Change:



(in thousands)	Beginning balance at March 31, 2021		Included in earnings(1)		Included in other comprehensive income		Purchases		Sales		Transfers into Level 3(2)		Transfers out of Level 3(2)		Ending balance at June 30, 2021
Available-for-sale securities:
Corporate debt securities	$	5,460	$	14	$	37	$	1,476	$	(303)	$	1,347	$	(1,953)	$	6,078
Collateralized debt obligations	0		0		0		750		0		0		0		750
Commercial mortgage-backed securities	16,241		(102)		(10)		579		(961)		2,624		(1,238)		17,133
Residential mortgage-backed securities	473		(3)		1		0		(224)		3,030		(236)		3,041
Other debt securities	521		0		(4)		2,060		(33)		0		0		2,544
Total available-for-sale securities	22,695		(91)		24		4,865		(1,521)		7,001		(3,427)		29,546
Equity securities	1,090		5		0		1,000		0		0		(1,095)		1,000
Total Level 3 securities	$	23,785	$	(86)	$	24	$	5,865	$	(1,521)	$	7,001	$	(4,522)	$	30,546

Level 3 Assets – 2021 Year-to-Date Change:


(in thousands)	Beginning balance at December 31, 2020		Included in earnings(1)		Included in other comprehensive income		Purchases		Sales		Transfers into Level 3(2)		Transfers out of Level 3(2)		Ending balance at June 30, 2021
Available-for-sale securities:
Corporate debt securities	$	5,825	$	20	$	79	$	2,258	$	(673)	$	2,549	$	(3,980)	$	6,078
Collateralized debt obligations	0		0		0		750		0		0		0		750
Commercial mortgage-backed securities	19,462		(197)		(447)		2,844		(966)		3,854		(7,417)		17,133
Residential mortgage-backed securities	937		(6)		0		0		(476)		3,030		(444)		3,041
Other debt securities	0		0		(2)		2,588		(42)		0		0		2,544
Total available-for-sale securities	26,224		(183)		(370)		8,440		(2,157)		9,433		(11,841)		29,546
Equity securities	0		5		0		1,000		0		1,090		(1,095)		1,000
Total Level 3 securities	$	26,224	$	(178)	$	(370)	$	9,440	$	(2,157)	$	10,523	$	(12,936)	$	30,546

*(1)*These amounts are reported as net investment income and net realized and unrealized investment (losses) gains for each of the periods presented above.

*(2)*Transfers into and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs.

Financial instruments not carried at fair value

The following table presents the carrying values and fair values of financial instruments categorized as Level 3 in the fair value hierarchy that are recorded at carrying value as of:



	June 30, 2022				December 31, 2021
(in thousands)	Carrying value		Fair value		Carrying value		Fair value

Agent loans (1)	$	70,839	$	68,777	$	66,368	$	68,957
Long-term borrowings	—		—		94,070		103,981
Short-term borrowings (2)	40,000		40,000		—		—

*(1)*The discount rate used to calculate fair value at June 30, 2022 is reflective of an increase in the BB+ financial yield curve.

*(2)*The fair value reflects current market interest rates and approximates carrying value in our Statement of Financial Position at June 30, 2022.

Note 6. Investments

Available-for-sale securities

See Note 5, "Fair Value" for additional fair value disclosures. The following tables summarize the cost and estimated fair value, net of credit loss allowance, of our available-for-sale securities as of:


	June 30, 2022
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value




Corporate debt securities	$	586,857	$	187	$	33,921	$	553,123
Collateralized debt obligations	102,868		52		3,701		99,219
Commercial mortgage-backed securities	74,778		49		5,978		68,849
Residential mortgage-backed securities	150,035		56		13,088		137,003
Other debt securities	21,771		17		1,406		20,382
U.S. Treasury	11,296		5		150		11,151
Total available-for-sale securities, net	$	947,605	$	366	$	58,244	$	889,727


	December 31, 2021
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value




Corporate debt securities	$	565,997	$	9,663	$	2,495	$	573,165
Collateralized debt obligations	115,344		456		338		115,462
Commercial mortgage-backed securities	88,636		1,465		777		89,324
Residential mortgage-backed securities	140,217		1,007		1,302		139,922
Other debt securities	23,859		197		136		23,920
U.S. Treasury	4,226		73		7		4,292
Total available-for-sale securities, net	$	938,279	$	12,861	$	5,055	$	946,085

The amortized cost and estimated fair value of available-for-sale securities at June 30, 2022 are shown below by remaining contractual term to maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	June 30, 2022
	Amortized		Estimated
(in thousands)	cost		fair value
Due in one year or less	$	57,501	$	57,107
Due after one year through five years	408,070		389,070
Due after five years through ten years	193,835		180,451
Due after ten years	288,199		263,099
Total available-for-sale securities (1)	$	947,605	$	889,727

*(1)*The contractual maturities of our available-for-sale securities are included in the table. However, given our intent to sell certain impaired securities, these securities are classified as current assets in our Statement of Financial Position at June 30, 2022.

The below securities have been evaluated and determined to be temporary declines in fair value for which we expect to recover our entire principal plus interest. The following tables present available-for-sale securities based on length of time in a gross unrealized loss position as of:


	June 30, 2022
	Less than 12 months				12 months or longer				Total
(dollars in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		No. of holdings





Corporate debt securities	$	518,575	$	30,975	$	26,993	$	2,946	$	545,568	$	33,921	1,006
Collateralized debt obligations	73,825		2,684		22,805		1,017		96,630		3,701		148
Commercial mortgage-backed securities	60,844		5,394		3,827		584		64,671		5,978		121
Residential mortgage-backed securities	127,928		11,922		6,696		1,166		134,624		13,088		147
Other debt securities	19,121		1,406		0		0		19,121		1,406		41
U.S. Treasury	8,560		150		0		0		8,560		150		3
Total available-for-sale securities	$	808,853	$	52,531	$	60,321	$	5,713	$	869,174	$	58,244	1,466
Quality breakdown of available-for-sale securities:
Investment grade	$	703,654	$	41,032	$	54,745	$	5,033	$	758,399	$	46,065	719
Non-investment grade	105,199		11,499		5,576		680		110,775		12,179		747
Total available-for-sale securities	$	808,853	$	52,531	$	60,321	$	5,713	$	869,174	$	58,244	1,466


	December 31, 2021
	Less than 12 months				12 months or longer				Total
(dollars in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		No. of holdings





Corporate debt securities	$	179,281	$	1,912	$	12,494	$	583	$	191,775	$	2,495	441
Collateralized debt obligations	64,270		278		9,370		60		73,640		338		104
Commercial mortgage-backed securities	28,001		595		917		182		28,918		777		61
Residential mortgage-backed securities	89,460		1,278		441		24		89,901		1,302		98
Other debt securities	14,576		136		0		0		14,576		136		24
U.S. Treasury	388		7		0		0		388		7		1
Total available-for-sale securities	$	375,976	$	4,206	$	23,222	$	849	$	399,198	$	5,055	729
Quality breakdown of available-for-sale securities:
Investment grade	$	330,697	$	3,801	$	17,112	$	434	$	347,809	$	4,235	366
Non-investment grade	45,279		405		6,110		415		51,389		820		363
Total available-for-sale securities	$	375,976	$	4,206	$	23,222	$	849	$	399,198	$	5,055	729

Credit loss allowance on investments

The current expected credit loss allowance on agent loans was $1.0 million at both June 30, 2022 and December 31, 2021. The current expected credit loss allowance on available-for-sale securities was $0.1 million at June 30, 2022 and less than $0.1 million at December 31, 2021.

Net investment income

Investment income (loss), net of expenses, was generated from the following portfolios:


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2022		2021		2022		2021
Available-for-sale securities	$	7,015	$	5,790	$	13,373	$	11,987
Equity securities	975		1,116		1,963		2,318
Limited partnerships (1)	(290)		6,151		2,485		15,197
Cash equivalents and other	865		935		1,650		1,912
Total investment income	8,565		13,992		19,471		31,414
Less: investment expenses	297		342		699		667
Net investment income	$	8,268	$	13,650	$	18,772	$	30,747

*(1)*Equity in (losses) earnings of limited partnerships includes both realized gains (losses) and unrealized valuation changes. Our limited partnership investments are included in the line item "Other assets" in the Statements of Financial Position. We have made no new significant limited partnership commitments since 2006, and the balance of limited partnership investments is expected to decline over time as additional distributions are received.

Realized and unrealized investment gains (losses)

Realized and unrealized gains (losses) on investments were as follows:


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2022		2021		2022		2021
Available-for-sale securities:
Gross realized gains	$	418	$	1,075	$	909	$	2,998
Gross realized losses	(2,840)		(678)		(5,411)		(1,118)
Net realized (losses) gains on available-for-sale securities	(2,422)		397		(4,502)		1,880
Equity securities	(7,902)		2,371		(13,103)		1,692
Miscellaneous	0		1		2		1
Net realized and unrealized investment (losses) gains	$	(10,324)	$	2,769	$	(17,603)	$	3,573

The portion of net unrealized gains and losses recognized during the reporting period related to equity securities held at the reporting date is calculated as follows:


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2022		2021		2022		2021
Equity securities:
Net (losses) gains recognized during the period	$	(7,902)	$	2,371	$	(13,103)	$	1,692
Less: net (losses) gains recognized on securities sold	(51)		128		(409)		(293)
Net unrealized (losses) gains recognized on securities held at reporting date	$	(7,851)	$	2,243	$	(12,694)	$	1,985

Net impairment (losses) recoveries recognized in earnings

Impairments on available-for-sale securities were as follows:


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2022		2021		2022		2021
Available-for-sale securities:
Intent to sell	$	(31)	$	—	$	(101)	$	—
Credit (impaired) recovered	(7)		(1)		(153)		86


Net impairment (losses) recoveries recognized in earnings	$	(38)	$	(1)	$	(254)	$	86

Note 7. Borrowing Arrangements

Term loan credit facility

In 2016, we entered into a credit agreement for a $100 million senior secured draw term loan credit facility ("Credit Facility") for the acquisition of real property and construction of an office building that now serves as part of our principal headquarters. On January 1, 2019, the Credit Facility converted to a fully-amortized term loan with monthly payments of principal and interest at a fixed rate of 4.35% over a period of 28 years. In May 2022, we repaid the remaining $93.2 million balance on the term loan. In conjunction with the payoff, pledged collateral was released and we accelerated amortization of $0.2 million related to unamortized loan origination and commitment fees which is included in interest expense in the Statements of Operations for the three and six months ended June 30, 2022, respectively.

Bank line of credit

In October 2021, we entered into a new credit agreement with PNC Bank National Association to provide for a $100 million bank revolving line of credit with a $25 million letter of credit sublimit that expires on October 29, 2026. In May 2022, we borrowed on the line of credit to support the payoff of the term loan. As of June 30, 2022, outstanding borrowings on the line of credit totaled $40 million and outstanding letters of credit totaled $0.9 million, which reduces availability under the line of credit and letters of credit to $59.1 million and $24.1 million, respectively. The outstanding borrowings accrue interest at the rate of 1.92% per annum and are expected to be repaid by September 30, 2022. Investments with a fair value of $108.7 million were pledged as collateral on the line at June 30, 2022. The investments pledged as collateral have no trading restrictions and are reported as available-for-sale securities and cash and cash equivalents on our Statement of Financial Position as of June 30, 2022. The bank requires compliance with certain covenants, which include leverage ratios and debt restrictions, for our line of credit. We are in compliance with all covenants at June 30, 2022.

Note 8. Postretirement Benefits

Pension plans

Our pension plans consist of a noncontributory defined benefit pension plan covering substantially all employees and an unfunded supplemental employee retirement plan for certain members of executive and senior management. Although we are the sponsor of these postretirement plans and record the funded status of these plans, the Exchange and its subsidiaries reimburse us for approximately 58% of the annual benefit expense of these plans, which represents pension benefits for employees performing administrative services and their allocated share of costs for employees in departments that support the administrative functions.

Our funding policy is generally to contribute an amount equal to the greater of the target normal cost for the plan year, or the amount necessary to fund the plan to 100%. Accordingly, we plan to make a $25 million contribution during the third quarter of 2022.

The cost of our pension plans are as follows:


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2022		2021		2022		2021
Service cost for benefits earned	$	12,561	$	13,260	$	25,121	$	26,520
Interest cost on benefits obligation	9,941		9,206		19,882		18,412
Expected return on plan assets	(13,639)		(12,568)		(27,278)		(25,137)
Prior service cost amortization	360		357		721		714
Net actuarial loss amortization	1,830		4,026		3,660		8,053
Pension plan cost (1)	$	11,053	$	14,281	$	22,106	$	28,562

*(1)*The components of pension plan costs other than the service cost component are included in the line item "Other income (expense)" in the Statements of Operations after reimbursements from the Exchange and its subsidiaries.

Note 9. Income Taxes

Income tax expense is provided on an interim basis based upon our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. For the three months ended June 30, 2022 and 2021, our effective tax rate was 20.9%. For the six months ended June 30, 2022 and 2021, our effective tax rate was 20.9% and 20.7%, respectively.

Note 10. Capital Stock

Class A and B common stock

Holders of Class B shares may, at their option, convert their shares into Class A shares at the rate of 2,400 Class A shares per Class B share. There were no shares of Class B common stock converted into Class A common stock during the six months ended June 30, 2022 and the year ended December 31, 2021. There is no provision for conversion of Class A shares to Class B shares, and Class B shares surrendered for conversion cannot be reissued.

Stock repurchases

In 2011, our Board of Directors approved a continuation of the current stock repurchase program of $150 million, with no time limitation. There were no shares repurchased under this program during the six months ended June 30, 2022 and the year ended December 31, 2021. We had approximately $17.8 million of repurchase authority remaining under this program at June 30, 2022.

Note 11. Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income ("AOCI") (loss) by component, including amounts reclassified to other comprehensive income ("OCI") (loss) and the related line item in the Statements of Operations where net income is presented, are as follows:


	Three months ended						Three months ended
	June 30, 2022						June 30, 2021
(in thousands)	Before Tax		Income Tax		Net		Before Tax		Income Tax		Net
Investment securities:
AOCI (loss), beginning of period	$	(26,353)	$	(5,535)	$	(20,818)	$	18,306	$	3,845	$	14,461
OCI (loss) before reclassifications	(34,087)		(7,158)		(26,929)		3,783		795		2,988
Realized investment losses (gains)	2,422		508		1,914		(397)		(84)		(313)
Impairment losses	38		8		30		1		0		1

OCI (loss)	(31,627)		(6,642)		(24,985)		3,387		711		2,676
AOCI (loss), end of period	$	(57,980)	$	(12,177)	$	(45,803)	$	21,693	$	4,556	$	17,137

Pension and other postretirement plans:
AOCI (loss), beginning of period	$	(37,543)	$	(7,884)	$	(29,659)	$	(123,917)	$	(26,024)	$	(97,893)

Amortization of prior service costs	360		75		285		357		75		282
Amortization of net actuarial loss	1,837		385		1,452		4,027		846		3,181
OCI	2,197		460		1,737		4,384		921		3,463
AOCI (loss), end of period	$	(35,346)	$	(7,424)	$	(27,922)	$	(119,533)	$	(25,103)	$	(94,430)

Total
AOCI (loss), beginning of period	$	(63,896)	$	(13,419)	$	(50,477)	$	(105,611)	$	(22,179)	$	(83,432)
Investment securities	(31,627)		(6,642)		(24,985)		3,387		711		2,676
Pension and other postretirement plans	2,197		460		1,737		4,384		921		3,463
OCI (loss)	(29,430)		(6,182)		(23,248)		7,771		1,632		6,139
AOCI (loss), end of period	$	(93,326)	$	(19,601)	$	(73,725)	$	(97,840)	$	(20,547)	$	(77,293)

	Six months ended						Six months ended
	June 30, 2022						June 30, 2021
(in thousands)	Before Tax		Income Tax		Net		Before Tax		Income Tax		Net
Investment securities:
AOCI, beginning of period	$	7,722	$	1,621	$	6,101	$	29,384	$	6,171	$	23,213
OCI (loss) before reclassifications	(70,458)		(14,796)		(55,662)		(5,725)		(1,202)		(4,523)
Realized investment losses (gains)	4,502		945		3,557		(1,880)		(395)		(1,485)
Impairment losses (recoveries)	254		53		201		(86)		(18)		(68)

OCI (loss)	(65,702)		(13,798)		(51,904)		(7,691)		(1,615)		(6,076)
AOCI (loss), end of period	$	(57,980)	$	(12,177)	$	(45,803)	$	21,693	$	4,556	$	17,137

Pension and other postretirement plans:
AOCI (loss), beginning of period	$	(39,734)	$	(8,345)	$	(31,389)	$	(128,300)	$	(26,944)	$	(101,356)

Amortization of prior service costs	721		151		570		714		150		564
Amortization of net actuarial loss	3,667		770		2,897		8,053		1,691		6,362
OCI	4,388		921		3,467		8,767		1,841		6,926
AOCI (loss), end of period	$	(35,346)	$	(7,424)	$	(27,922)	$	(119,533)	$	(25,103)	$	(94,430)

Total
AOCI (loss), beginning of period	$	(32,012)	$	(6,724)	$	(25,288)	$	(98,916)	$	(20,773)	$	(78,143)
Investment securities	(65,702)		(13,798)		(51,904)		(7,691)		(1,615)		(6,076)
Pension and other postretirement plans	4,388		921		3,467		8,767		1,841		6,926
OCI (loss)	(61,314)		(12,877)		(48,437)		1,076		226		850
AOCI (loss), end of period	$	(93,326)	$	(19,601)	$	(73,725)	$	(97,840)	$	(20,547)	$	(77,293)

Note 12. Concentrations of Credit Risk

Financial instruments could potentially expose us to concentrations of credit risk, including unsecured receivables from the Exchange. A large majority of our revenue and receivables are from the Exchange and its affiliates. See also Note 1, "Nature of Operations". Net management fee amounts and other reimbursements due from the Exchange and its affiliates were $538.3 million and $479.1 million at June 30, 2022 and December 31, 2021, respectively, which includes a current expected credit loss allowance of $0.5 million in both periods.

Note 13. Commitments and Contingencies

In 2020, we entered into an agreement with a bank for the establishment of a loan participation program for agent loans. The maximum amount of loans to be funded through this program is $100 million. We have committed to fund a minimum of 30% of each loan executed through this program. As of June 30, 2022, loans executed under this agreement totaled $47.3 million, of which our portion of the loans is $16.3 million. Additionally, we have agreed to guarantee a portion of the funding provided by the other participants in the program in the event of default. As of June 30, 2022, our maximum potential amount of future payments on the guaranteed portion is $5.9 million. All loan payments under the participation program are current as of June 30, 2022.

We are involved in litigation arising in the ordinary course of conducting business. In accordance with current accounting standards for loss contingencies and based upon information currently known to us, we establish reserves for litigation when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss or range of loss can be reasonably estimated. When no amount within the range of loss is a better estimate than any other amount, we accrue the minimum amount of the estimable loss. To the extent that such litigation against us may have an exposure to a loss in excess of the amount we have accrued, we believe that such excess would not be material to our financial condition, results of operations, or cash flows. Legal fees are expensed as incurred. We believe that our accruals for legal proceedings are appropriate and, individually and in the aggregate, are not expected to be material to our financial condition, results of operations, or cash flows.

We review all litigation on an ongoing basis when making accrual and disclosure decisions. For certain legal proceedings, we cannot reasonably estimate losses or a range of loss, if any, particularly for proceedings that are in their early stages of development or where the plaintiffs seek indeterminate damages. Various factors, including, but not limited to, the outcome of potentially lengthy discovery and the resolution of important factual questions, may need to be determined before probability can be established or before a loss or range of loss can be reasonably estimated. If the loss contingency in question is not both probable and reasonably estimable, we do not establish an accrual and the matter will continue to be monitored for any developments that would make the loss contingency both probable and reasonably estimable. In the event that a legal proceeding results in a substantial judgment against, or settlement by, us, there can be no assurance that any resulting liability or financial commitment would not have a material adverse effect on the financial condition, results of operations, or cash flows.

Note 14. Subsequent Events

No items were identified in this period subsequent to the financial statement date that required adjustment or additional disclosure.

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