Item 1. FINANCIAL STATEMENTS

ERIE INDEMNITY COMPANY

STATEMENTS OF OPERATIONS (UNAUDITED)

(dollars in thousands, except per share data)

			Three months ended												Nine months ended
			September 30,												September 30,
			2022						2021						2022						2021
Operating revenue
Management fee revenue - policy issuance and renewal services			$	551,666					$	504,891					$	1,584,213					$	1,462,880
Management fee revenue - administrative services			14,657						14,471						43,446						43,985
Administrative services reimbursement revenue			168,653						162,410						492,655						473,133
Service agreement revenue			6,260						6,067						19,175						18,048
Total operating revenue			741,236						687,839						2,139,489						1,998,046
Operating expenses
Cost of operations - policy issuance and renewal services			466,111						430,326						1,352,050						1,268,650
Cost of operations - administrative services			168,653						162,410						492,655						473,133
Total operating expenses			634,764						592,736						1,844,705						1,741,783
Operating income			106,472						95,103						294,784						256,263
Investment income
Net investment income			5,834						18,858						24,606						49,605
Net realized and unrealized investment (losses) gains			(6,230)						1,610						(23,833)						5,183
Net impairment (losses) recoveries recognized in earnings			(175)						130						(429)						216
Total investment (loss) income			(571)						20,598						344						55,004
Interest expense			115						1,034						2,009						3,082
Other income (expense)			562						(541)						1,372						(1,608)
Income before income taxes			106,348						114,126						294,491						306,577
Income tax expense			22,035						23,903						61,412						63,759
Net income			$	84,313					$	90,223					$	233,079					$	242,818
Net income per share
Class A common stock – basic			$	1.81					$	1.94					$	5.00					$	5.21
Class A common stock – diluted			$	1.61					$	1.72					$	4.46					$	4.64
Class B common stock – basic and diluted			$	272					$	291					$	751					$	782
Weighted average shares outstanding – Basic
Class A common stock			46,189,025						46,189,035						46,188,878						46,188,729
Class B common stock			2,542						2,542						2,542						2,542
Weighted average shares outstanding – Diluted
Class A common stock			52,296,411						52,305,245						52,297,685						52,307,859
Class B common stock			2,542						2,542						2,542						2,542
Dividends declared per share
Class A common stock			$	1.11					$	1.035					$	3.33					$	3.105
Class B common stock			$	166.50					$	155.25					$	499.50					$	465.75

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												Nine months ended
			September 30,												September 30,
			2022						2021						2022						2021
Net income			$	84,313					$	90,223					$	233,079					$	242,818
Other comprehensive (loss) income, net of tax
Change in unrealized holding losses on available-for-sale securities			(17,178)						(3,732)						(69,082)						(9,808)
Amortization of prior service costs and net actuarial loss on pension and other postretirement plans			1,731						3,463						5,198						10,389
Total other comprehensive (loss) income, net of tax			(15,447)						(269)						(63,884)						581
Comprehensive income			$	68,866					$	89,954					$	169,195					$	243,399

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 FINANCIAL POSITION

(dollars in thousands, except per share data)

						September 30,						December 31,
						2022						2021
Assets						(Unaudited)
Current assets:
Cash and cash equivalents						$	97,664					$	183,702
Available-for-sale securities						25,750						38,396
Receivables from Erie Insurance Exchange and affiliates, net						544,353						479,123
Prepaid expenses and other current assets						49,360						56,206
Accrued investment income						7,352						6,303
Total current assets						724,479						763,730
Available-for-sale securities, net						848,937						907,689
Equity securities						68,969						87,743
Fixed assets, net						408,750						374,802
Agent loans, net						60,673						58,683
Deferred income taxes, net						20,859						145
Other assets						45,085						49,265
Total assets						$	2,177,752					$	2,242,057
Liabilities and shareholders' equity
Current liabilities:
Commissions payable						$	310,225					$	270,746
Agent bonuses						77,609						120,437
Accounts payable and accrued liabilities						149,020						138,317
Dividends payable						51,693						51,693
Contract liability						36,786						34,935
Deferred executive compensation						8,859						12,637
Current portion of long-term borrowings						—						2,098
Total current liabilities						634,192						630,863
Defined benefit pension plans						131,222						130,383
Long-term borrowings						—						91,734
Contract liability						18,024						17,686
Deferred executive compensation						11,441						14,571
Other long-term liabilities						26,294						14,342
Total liabilities						821,173						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						(89,172)						(25,288)
Retained earnings						2,573,190						2,495,190
Total contributed capital and retained earnings						2,502,669						2,488,568
Treasury stock, at cost; 22,110,132 shares held						(1,168,482)						(1,167,828)
Deferred compensation						22,392						21,738
Total shareholders’ equity						1,356,579						1,342,478
Total liabilities and shareholders’ equity						$	2,177,752					$	2,242,057

See accompanying notes to Financial Statements.

ERIE INDEMNITY COMPANY

STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

Three and nine months ended September 30, 2022

(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
Net income															84,313									84,313
Other comprehensive loss												(15,447)												(15,447)
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																		(799)			799			0
Rabbi trust distribution (2)																		1,457			(1,457)			0
Balance, September 30, 2022			$	1,992		$	178		$	16,481		$	(89,172)		$	2,573,190		$	(1,168,482)		$	22,392		$	1,356,579

*(1)*Net purchases of treasury stock in 2022 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 four incentive compensation deferral plan participants in 2022.

ERIE INDEMNITY COMPANY

STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

Three and nine months ended September 30, 2021

(dollars in thousands, except per share data)

			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
Net income															90,223									90,223
Other comprehensive loss												(269)												(269)
Dividends declared:
Class A $1.035 per share															(47,805)									(47,805)
Class B $155.25 per share															(395)									(395)
Net purchase of treasury stock (1)									0									0						0
Deferred compensation																		(279)			279			0
Balance, September 30, 2021			$	1,992		$	178		$	16,496		$	(77,562)		$	2,491,842		$	(1,167,490)		$	21,400		$	1,286,856

*(1)*Net purchases of treasury stock in 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 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)

						Nine months ended
						September 30,
						2022						2021
Cash flows from operating activities
Management fee received						$	1,574,694					$	1,496,372
Administrative services reimbursements received						487,081						471,395
Service agreement fee received						19,025						18,048
Net investment income received						28,901						27,957
Commissions paid to agents						(771,664)						(726,411)
Agents bonuses paid						(131,699)						(119,778)
Salaries and wages paid						(164,726)						(160,784)
Pension contribution and employee benefits paid						(57,222)						(24,592)
General operating expenses paid						(187,152)						(180,028)
Administrative services expenses paid						(497,007)						(471,523)
Income taxes paid						(59,989)						(63,504)
Interest paid						(2,134)						(3,114)
Net cash provided by operating activities						238,108						264,038
Cash flows from investing activities
Purchase of investments:
Available-for-sale securities						(375,466)						(267,067)
Equity securities						(12,956)						(45,654)
Other investments						(157)						(605)
Proceeds from investments:
Available-for-sale securities sales						238,732						108,869
Available-for-sale securities maturities/calls						111,419						142,614
Equity securities						16,679						54,303
Other investments						429						903
Purchase of fixed assets						(50,885)						(38,097)
Proceeds from disposal of fixed assets						265						0
Loans to agents						(9,570)						(5,648)
Collections on agent loans						6,513						7,224
Net cash used in investing activities						(74,997)						(43,158)
Cash flows from financing activities
Dividends paid to shareholders						(155,079)						(144,600)
Proceeds from short-term borrowings						55,000						—
Payments on short-term borrowings						(55,000)						—
Payments on long-term borrowings						(94,070)						(1,524)
Net cash used in financing activities						(249,149)						(146,124)
Net (decrease) increase in cash and cash equivalents						(86,038)						74,756
Cash and cash equivalents, beginning of period						183,702						161,240
Cash and cash equivalents, end of period						$	97,664					$	235,996
Supplemental disclosure of noncash transactions
Liability incurred to purchase fixed assets						$	26,386					$	13,102
Operating lease assets obtained in exchange for new operating lease liabilities						$	3,176					$	2,379

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 subscriber's agreement and service agreements provide for reimbursement of amounts incurred for these services to Indemnity. Reimbursements are settled at cost. 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 adequacy of 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 nine months ended September 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 nine months ending September 30, 2022, we recognized revenue of $7.4 million and $30.1 million, respectively, that was included in the contract liabilities balance as of December 31, 2021. During the three and nine months ended September 30, 2021, we recognized revenue of $7.8 million and $31.7 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 September 30,												Nine months ended September 30,
(in thousands)			2022			2021												2022			2021
Management fee revenue - policy issuance and renewal services			$	551,666		$	504,891											$	1,584,213		$	1,462,880
Management fee revenue - administrative services			14,657			14,471												43,446			43,985
Administrative services reimbursement revenue			168,653			162,410												492,655			473,133
Total administrative services revenue			$	183,310		$	176,881											$	536,101		$	517,118

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 September 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						$	83,623					46,189,025						$	1.81					$	89,484					46,189,035						$	1.94
Dilutive effect of stock-based awards						0						6,586						—						0						15,410						—
Assumed conversion of Class B shares						690						6,100,800						—						739						6,100,800						—
Class A – Diluted EPS:
Income available to Class A stockholders on Class A equivalent shares						$	84,313					52,296,411						$	1.61					$	90,223					52,305,245						$	1.72
Class B – Basic and diluted EPS:
Income available to Class B stockholders						$	690					2,542						$	272					$	739					2,542						$	291
						Nine months ended September 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						$	231,171					46,188,878						$	5.00					$	240,830					46,188,729						$	5.21
Dilutive effect of stock-based awards						0						8,007						—						0						18,330						—
Assumed conversion of Class B shares						1,908						6,100,800						—						1,988						6,100,800						—
Class A – Diluted EPS:
Income available to Class A stockholders on Class A equivalent shares						$	233,079					52,297,685						$	4.46					$	242,818					52,307,859						$	4.64
Class B – Basic and diluted EPS:
Income available to Class B stockholders						$	1,908					2,542						$	751					$	1,988					2,542						$	782

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 September 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:

						September 30, 2022
(in thousands)						Total						Level 1						Level 2						Level 3
Available-for-sale securities:
Corporate debt securities						$	547,193					$	0					$	539,918					$	7,275
Collateralized debt obligations						100,671						0						100,671						0
Commercial mortgage-backed securities						63,217						0						57,850						5,367
Residential mortgage-backed securities						128,546						0						124,884						3,662
Other debt securities						22,855						0						22,855						0
U.S. Treasury						12,205						0						12,205						0
Total available-for-sale securities						874,687						0						858,383						16,304
Equity securities:
Financial services sector						57,595						0						55,747						1,848
Utilities sector						6,072						0						6,072						0
Energy sector						3,513						0						3,513						0
Consumer sector						1,418						0						1,418						0
Communications sector						371						0						371						0
Total equity securities						68,969						0						67,121						1,848
Total						$	943,656					$	0					$	925,504					$	18,152

						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 June 30, 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 September 30, 2022
Available-for-sale securities:
Corporate debt securities						$	6,109					$	(7)					$	(28)					$	753					$	(495)					$	2,899					$	(1,956)					$	7,275
Commercial mortgage-backed securities						8,871						(188)						(413)						0						(660)						1,174						(3,417)						5,367
Residential mortgage-backed securities						42,549						(667)						(1,708)						0						(6,626)						674						(30,560)						3,662
Total available-for-sale securities						57,529						(862)						(2,149)						753						(7,781)						4,747						(35,933)						16,304
Equity securities						1,866						(18)						0						0						0						0						0						1,848
Total Level 3 securities						$	59,395					$	(880)					$	(2,149)					$	753					$	(7,781)					$	4,747					$	(35,933)					$	18,152

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 September 30, 2022
Available-for-sale securities:
Corporate debt securities						$	5,256					$	(2)					$	(417)					$	5,687					$	(3,614)					$	8,673					$	(8,308)					$	7,275
Commercial mortgage-backed securities						15,728						(892)						(1,071)						0						(3,825)						5,509						(10,082)						5,367
Residential mortgage-backed securities						8,814						(643)						(2,042)						4,887						(9,472)						38,214						(36,096)						3,662
Total available-for-sale securities						29,798						(1,537)						(3,530)						10,574						(16,911)						52,396						(54,486)						16,304
Equity securities						2,083						(235)						0						0						0						0						0						1,848
Total Level 3 securities						$	31,881					$	(1,772)					$	(3,530)					$	10,574					$	(16,911)					$	52,396					$	(54,486)					$	18,152

Level 3 Assets – 2021 Quarterly Change:

(in thousands)						Beginning balance at June 30, 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 September 30, 2021
Available-for-sale securities:
Corporate debt securities						$	6,078					$	7					$	3					$	1,995					$	(1,213)					$	1,129					$	(1,802)					$	6,197
Collateralized debt obligations						750						0						0						0						0						0						(750)						0
Commercial mortgage-backed securities						17,133						(90)						(143)						229						(2,912)						0						(4,523)						9,694
Residential mortgage-backed securities						3,041						(5)						(26)						0						(366)						4,288						(2,644)						4,288
Other debt securities						2,544						0						1						0						(757)						0						(1,334)						454
Total available-for-sale securities						29,546						(88)						(165)						2,224						(5,248)						5,417						(11,053)						20,633
Equity securities						1,000						13						0						0						0						1,093						0						2,106
Total Level 3 securities						$	30,546					$	(75)					$	(165)					$	2,224					$	(5,248)					$	6,510					$	(11,053)					$	22,739

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 September 30, 2021
Available-for-sale securities:
Corporate debt securities						$	5,825					$	27					$	82					$	4,253					$	(1,886)					$	3,678					$	(5,782)					$	6,197
Collateralized debt obligations						0						0						0						750						0						0						(750)						0
Commercial mortgage-backed securities						19,462						(287)						(590)						3,073						(3,878)						3,854						(11,940)						9,694
Residential mortgage-backed securities						937						(11)						(26)						0						(842)						7,318						(3,088)						4,288
Other debt securities						0						0						(1)						2,588						(799)						0						(1,334)						454
Total available-for-sale securities						26,224						(271)						(535)						10,664						(7,405)						14,850						(22,894)						20,633
Equity securities						0						18						0						1,000						0						2,183						(1,095)						2,106
Total Level 3 securities						$	26,224					$	(253)					$	(535)					$	11,664					$	(7,405)					$	17,033					$	(23,989)					$	22,739

*(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:

						September 30, 2022												December 31, 2021
(in thousands)						Carrying value						Fair value						Carrying value						Fair value
Agent loans (1)						$	69,425					$	57,457					$	66,368					$	68,957
Long-term borrowings						—						—						94,070						103,981

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

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:

						September 30, 2022
(in thousands)						Amortized cost						Gross unrealized gains						Gross unrealized losses						Estimated fair value
Corporate debt securities						$	591,682					$	186					$	44,675					$	547,193
Collateralized debt obligations						105,938						6						5,273						100,671
Commercial mortgage-backed securities						71,032						0						7,815						63,217
Residential mortgage-backed securities						147,276						1						18,731						128,546
Other debt securities						25,103						0						2,248						22,855
U.S. Treasury						13,266						0						1,061						12,205
Total available-for-sale securities, net						$	954,297					$	193					$	79,803					$	874,687

						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 September 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.

						September 30, 2022
						Amortized						Estimated
(in thousands)						cost						fair value
Due in one year or less						$	25,891					$	25,558
Due after one year through five years						424,086						396,166
Due after five years through ten years						217,387						200,110
Due after ten years						286,933						252,853
Total available-for-sale securities, net (1)						$	954,297					$	874,687

*(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 September 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:

						September 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						$	488,178					$	37,243					$	52,867					$	7,432					$	541,045					$	44,675					1,030
Collateralized debt obligations						67,482						3,368						31,984						1,905						99,466						5,273						159
Commercial mortgage-backed securities						56,265						6,480						6,174						1,335						62,439						7,815						123
Residential mortgage-backed securities						104,610						13,096						23,145						5,635						127,755						18,731						157
Other debt securities						21,428						2,034						1,122						214						22,550						2,248						45
U.S. Treasury						12,205						1,061						0						0						12,205						1,061						3
Total available-for-sale securities						$	750,168					$	63,282					$	115,292					$	16,521					$	865,460					$	79,803					1,517
Quality breakdown of available-for-sale securities:
Investment grade						$	649,184					$	51,725					$	106,235					$	14,782					$	755,419					$	66,507					770
Non-investment grade						100,984						11,557						9,057						1,739						110,041						13,296						747
Total available-for-sale securities						$	750,168					$	63,282					$	115,292					$	16,521					$	865,460					$	79,803					1,517

						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 September 30, 2022 and December 31, 2021. The current expected credit loss allowance on available-for-sale securities was $0.1 million at September 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 September 30,												Nine months ended September 30,
(in thousands)						2022						2021						2022						2021
Available-for-sale securities						$	8,546					$	5,786					$	21,919					$	17,773
Equity securities						979						1,030						2,942						3,348
Limited partnerships (1)						(4,643)						11,504						(2,158)						26,701
Cash equivalents and other						1,251						862						2,901						2,774
Total investment income						6,133						19,182						25,604						50,596
Less: investment expenses						299						324						998						991
Net investment income						$	5,834					$	18,858					$	24,606					$	49,605

*(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 September 30,												Nine months ended September 30,
(in thousands)						2022						2021						2022						2021
Available-for-sale securities:
Gross realized gains						$	146					$	2,424					$	1,055					$	5,422
Gross realized losses						(4,752)						(235)						(10,163)						(1,353)
Net realized (losses) gains on available-for-sale securities						(4,606)						2,189						(9,108)						4,069
Equity securities						(1,624)						(579)						(14,727)						1,113
Miscellaneous						0						0						2						1
Net realized and unrealized investment (losses) gains						$	(6,230)					$	1,610					$	(23,833)					$	5,183

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

						Three months ended September 30,												Nine months ended September 30,
(in thousands)						2022						2021						2022						2021
Equity securities:
Net (losses) gains recognized during the period						$	(1,624)					$	(579)					$	(14,727)					$	1,113
Less: net gains (losses) recognized on securities sold						243						(267)						(1,327)						5
Net unrealized (losses) gains recognized on securities held at reporting date						$	(1,867)					$	(312)					$	(13,400)					$	1,108

Net impairment (losses) recoveries recognized in earnings

Impairments on available-for-sale securities and agent loans were as follows:

						Three months ended September 30,												Nine months ended September 30,
(in thousands)						2022						2021						2022						2021
Available-for-sale securities:
Intent to sell						$	(45)					$	(10)					$	(146)					$	(10)
Credit (impaired) recovered						(130)						(13)						(283)						73
Total available-for-sale securities						(175)						(23)						(429)						63
Agent loans - expected credit recoveries						0						153						0						153
Net impairment (losses) recoveries recognized in earnings						$	(175)					$	130					$	(429)					$	216

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 Statement of Operations for the nine months ended September 30, 2022.

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 September 30, 2022, outstanding borrowings on the line of credit had been repaid and a total of $99.1 million remains available under the facility due to $0.9 million outstanding letters of credit, which reduce availability for letters of credit to $24.1 million. Investments with a fair value of $108.7 million were pledged as collateral on the line of credit at September 30, 2022. These investments 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 September 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 September 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 57% 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 made a $25 million contribution during the third quarter of 2022.

The cost of our pension plans are as follows:

						Three months ended September 30,												Nine months ended September 30,
(in thousands)						2022						2021						2022						2021
Service cost for benefits earned						$	12,560					$	13,260					$	37,681					$	39,780
Interest cost on benefits obligation						9,941						9,206						29,823						27,618
Expected return on plan assets						(13,639)						(12,569)						(40,917)						(37,706)
Prior service cost amortization						361						357						1,082						1,071
Net actuarial loss amortization						1,830						4,027						5,490						12,080
Pension plan cost (1)						$	11,053					$	14,281					$	33,159					$	42,843

*(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 September 30, 2022 and 2021, our effective tax rate was 20.7% and 20.9%, respectively. For the nine months ended September 30, 2022 and 2021, our effective tax rate was 20.9% and 20.8%, 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 nine months ended September 30, 2022 and the year ended December 31, 2021. There is no provision for conversion of Class A shares into 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 nine months ended September 30, 2022 and the year ended December 31, 2021. We had approximately $17.8 million of repurchase authority remaining under this program at September 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
						September 30, 2022												September 30, 2021
(in thousands)						Before Tax			Income Tax			Net						Before Tax			Income Tax			Net
Investment securities:
AOCI (loss), beginning of period						$	(57,980)		$	(12,177)		$	(45,803)					$	21,693		$	4,556		$	17,137
OCI (loss) before reclassifications						(26,524)			(5,570)			(20,954)						(2,557)			(537)			(2,020)
Realized investment losses (gains)						4,606			968			3,638						(2,189)			(459)			(1,730)
Impairment losses						175			37			138						23			5			18
OCI (loss)						(21,743)			(4,565)			(17,178)						(4,723)			(991)			(3,732)
AOCI (loss), end of period						$	(79,723)		$	(16,742)		$	(62,981)					$	16,970		$	3,565		$	13,405
Pension and other postretirement plans:
AOCI (loss), beginning of period						$	(35,346)		$	(7,424)		$	(27,922)					$	(119,533)		$	(25,103)		$	(94,430)
Amortization of prior service costs						361			76			285						357			75			282
Amortization of net actuarial loss						1,830			384			1,446						4,027			846			3,181
OCI						2,191			460			1,731						4,384			921			3,463
AOCI (loss), end of period						$	(33,155)		$	(6,964)		$	(26,191)					$	(115,149)		$	(24,182)		$	(90,967)
Total
AOCI (loss), beginning of period						$	(93,326)		$	(19,601)		$	(73,725)					$	(97,840)		$	(20,547)		$	(77,293)
Investment securities						(21,743)			(4,565)			(17,178)						(4,723)			(991)			(3,732)
Pension and other postretirement plans						2,191			460			1,731						4,384			921			3,463
OCI (loss)						(19,552)			(4,105)			(15,447)						(339)			(70)			(269)
AOCI (loss), end of period						$	(112,878)		$	(23,706)		$	(89,172)					$	(98,179)		$	(20,617)		$	(77,562)
						Nine months ended												Nine months ended
						September 30, 2022												September 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						(96,982)			(20,366)			(76,616)						(8,282)			(1,739)			(6,543)
Realized investment losses (gains)						9,108			1,913			7,195						(4,069)			(854)			(3,215)
Impairment losses (recoveries)						429			90			339						(63)			(13)			(50)
OCI (loss)						(87,445)			(18,363)			(69,082)						(12,414)			(2,606)			(9,808)
AOCI (loss), end of period						$	(79,723)		$	(16,742)		$	(62,981)					$	16,970		$	3,565		$	13,405
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						1,082			227			855						1,071			225			846
Amortization of net actuarial loss						5,497			1,154			4,343						12,080			2,537			9,543
OCI						6,579			1,381			5,198						13,151			2,762			10,389
AOCI (loss), end of period						$	(33,155)		$	(6,964)		$	(26,191)					$	(115,149)		$	(24,182)		$	(90,967)
Total
AOCI (loss), beginning of period						$	(32,012)		$	(6,724)		$	(25,288)					$	(98,916)		$	(20,773)		$	(78,143)
Investment securities						(87,445)			(18,363)			(69,082)						(12,414)			(2,606)			(9,808)
Pension and other postretirement plans						6,579			1,381			5,198						13,151			2,762			10,389
OCI (loss)						(80,866)			(16,982)			(63,884)						737			156			581
AOCI (loss), end of period						$	(112,878)		$	(23,706)		$	(89,172)					$	(98,179)		$	(20,617)		$	(77,562)

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 $544.4 million and $479.1 million at September 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 September 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 September 30, 2022, our maximum potential amount of future payments on the guaranteed portion is $5.8 million. All loan payments under the participation program are current as of September 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.