Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of financial condition and results of operations highlights significant factors influencing Erie Indemnity Company ("Indemnity", "we", "us", "our"). This discussion should be read in conjunction with the historical financial statements and the related notes thereto included in Part I, Item 1. "Financial Statements" of this Quarterly Report on Form 10-Q, and with Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for the year ended December 31, 2021, as contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2022.

INDEX


			Page Number
Cautionary Statement Regarding Forward-Looking Information			24


Operating Overview			25
Results of Operations			28




Financial Condition			34



Liquidity and Capital Resources			35

Critical Accounting Estimates			37

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995:

Statements contained herein that are not historical fact are forward-looking statements and, as such, are subject to risks and uncertainties that could cause actual events and results to differ, perhaps materially, from those discussed herein. Forward-looking statements relate to future trends, events or results and include, without limitation, statements and assumptions on which such statements are based that are related to our plans, strategies, objectives, expectations, intentions, and adequacy of resources. Examples of forward-looking statements are discussions relating to premium and investment income, expenses, operating results, and compliance with contractual and regulatory requirements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Among the risks and uncertainties, in addition to those set forth in our filings with the Securities and Exchange Commission, that could cause actual results and future events to differ from those set forth or contemplated in the forward-looking statements include the following:

dependence upon our relationship with the Erie Insurance Exchange ("Exchange") and the management fee under the agreement with the subscribers at the Exchange;
dependence upon our relationship with the Exchange and the growth of the Exchange, including:

◦general business and economic conditions;

◦factors affecting insurance industry competition;

◦dependence upon the independent agency system; and

◦ability to maintain our reputation for customer service;

dependence upon our relationship with the Exchange and the financial condition of the Exchange, including:

◦the Exchange's ability to maintain acceptable financial strength ratings;

◦factors affecting the quality and liquidity of the Exchange's investment portfolio;

◦changes in government regulation of the insurance industry;

◦litigation and regulatory actions;

◦emergence of significant unexpected events, including pandemics;

◦emerging claims and coverage issues in the industry; and

◦severe weather conditions or other catastrophic losses, including terrorism;

costs of providing policy issuance and renewal services to the Exchange under the subscriber's agreement;
ability to attract and retain talented management and employees;
ability to ensure system availability and effectively manage technology initiatives;
difficulties with technology or data security breaches, including cyber attacks;
ability to maintain uninterrupted business operations;
outcome of pending and potential litigation;
factors affecting the quality and liquidity of our investment portfolio; and
our ability to meet liquidity needs and access capital.

A forward-looking statement speaks only as of the date on which it is made and reflects our analysis only as of that date. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changes in assumptions, or otherwise.

OPERATING OVERVIEW

Overview

We serve as the attorney-in-fact for the subscribers (policyholders) at the Exchange, a 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, as well as the service provider for its insurance subsidiaries, with respect to all administrative services.

The Exchange is a reciprocal insurance exchange, which is an unincorporated association of individuals, partnerships and corporations that agree to insure one another. Each applicant for insurance to the Exchange signs a subscriber's agreement, which contains an appointment of Indemnity as their attorney-in-fact to transact the business of the Exchange 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.

Our earnings are primarily driven by the management fee revenue generated for the services we provide to 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. Agent compensation generally comprises approximately two-thirds of our policy issuance and renewal expenses. 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 as the Exchange is our sole customer, and our earnings are largely generated from management fees based on the direct and affiliated assumed premiums written by the Exchange. The Exchange generates revenue by insuring preferred and standard risks, with personal lines comprising 70% of the 2021 direct and affiliated assumed written premiums and commercial lines comprising the remaining 30%. The principal personal lines products are private passenger automobile and homeowners. The principal commercial lines products are commercial multi-peril, commercial automobile and workers compensation.

Coronavirus ("COVID-19") Pandemic and Economic Uncertainty

Uncertainty resulting from current events, including but not limited to, the ongoing coronavirus ("COVID-19") pandemic, resulting continued supply chain disruptions and certain geopolitical concerns, have influenced various economic factors, including an elevated inflationary environment and rising interest rates in recent months. As these events continue to evolve, the ultimate impact and duration remain uncertain at this time.

While we were not required to close our physical locations under the state mandated closure of nonessential services during the COVID-19 pandemic, out of concern for the health and safety of our employees, over 90% of our workforce had been working remotely from March 2020 through April 2022. We have had no significant interruption to our core business processes or systems to date. We have had no significant changes to our financial close or reporting processes or related internal controls, nor do we anticipate any significant future challenges at this time. We have a dedicated team responsible for the development and implementation of a return to office plan. We began a phased return of our workforce in April 2022 and expect to continue reopening our offices through the remainder of 2022. Consistent with our process from the beginning of the COVID-19 pandemic, we will prioritize the health and safety of our employees and adjust when and where appropriate.

Financial Overview


	Three months ended September 30,						Nine months ended September 30,
(dollars in thousands, except per share data)	2022		2021		% Change		2022		2021		% Change
	(Unaudited)						(Unaudited)


Operating income	$	106,472	$	95,103	12.0	%	$	294,784	$	256,263	15.0	%
Total investment (loss) income	(571)		20,598		NM		344		55,004		(99.4)
Interest expense	115		1,034		(88.9)		2,009		3,082		(34.8)
Other income (expense)	562		(541)		NM		1,372		(1,608)		NM
Income before income taxes	106,348		114,126		(6.8)		294,491		306,577		(3.9)
Income tax expense	22,035		23,903		(7.8)		61,412		63,759		(3.7)
Net income	$	84,313	$	90,223	(6.6)	%	$	233,079	$	242,818	(4.0)	%
Net income per share – diluted	$	1.61	$	1.72	(6.5)	%	$	4.46	$	4.64	(4.0)	%

NM = not meaningful

Operating income increased in both the third quarter and nine months ended September 30, 2022, compared to the same periods in 2021, as growth in operating revenue outpaced the growth in operating expenses. Management fee revenue for policy issuance and renewal services increased 9.3% to $551.7 million in the third quarter of 2022 and 8.3% to $1.6 billion for the nine months ended September 30, 2022. Management fee revenue is based upon the management fee rate we charge and the direct and affiliated assumed premiums written by the Exchange. The management fee rate was 25% for both 2022 and 2021. The direct and affiliated assumed premiums written by the Exchange increased 9.4% to $2.3 billion in the third quarter of 2022 and increased 8.4% to $6.5 billion for the nine months ended September 30, 2022 compared to the same periods in 2021.

Cost of operations for policy issuance and renewal services increased 8.3% to $466.1 million and 6.6% to $1.4 billion in the third quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, primarily due to higher scheduled commissions driven by direct and affiliated assumed written premium growth, as well as increased professional fees and technology investments.

Management fee revenue for administrative services increased 1.3% to $14.7 million and decreased 1.2% to $43.4 million in the third quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The administrative services reimbursement revenue and corresponding cost of operations increased both total operating revenue and total operating expenses by $168.7 million in the third quarter of 2022 and $492.7 million for the nine months ended September 30, 2022, but had no net impact on operating income.

Total investment income decreased $21.2 million in the third quarter of 2022 and $54.7 million for the nine months ended September 30, 2022, compared to the same periods in 2021. The results from both periods were primarily due to a decrease in net investment income as well as net realized and unrealized investment losses in 2022 compared to net gains in 2021.

General Conditions and Trends Affecting Our Business

Economic conditions

Unfavorable changes in economic conditions, including declining consumer confidence, inflation, high unemployment, and the threat of recession, among others, may lead the Exchange’s customers to modify coverage, not renew policies, or even cancel policies, which could adversely affect the premium revenue of the Exchange, and consequently our management fee. The extent to which economic conditions could impact the Exchange's operations and our management fee was exacerbated with the COVID-19 pandemic. Further, pandemic conditions and government responses to these conditions have created an inflationary environment in recent months. In particular, unanticipated increased inflation costs including medical cost inflation, building material cost inflation, auto repair and replacement cost inflation, and tort issues may impact adequacy of estimated loss reserves and future premium rates of the Exchange. The extent and duration of the impact to economic conditions remain uncertain as the COVID-19 pandemic and subsequent resulting conditions continue to evolve. If any of these items impacted the financial condition or operations of the Exchange, it could have an impact on our financial results. See Financial Condition and Liquidity and Capital Resources contained within this report, as well as Part I. Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the Securities and Exchange Commission on February 24, 2022 for a discussion of the potential impacts to our operations or those of the Exchange, including pandemics.

Financial market volatility

Our portfolio of fixed maturity and equity security investments is subject to market volatility, especially in periods of instability in the worldwide financial markets. Over time, net investment income could also be impacted by volatility and by the general level of interest rates, which impact reinvested cash flow from the portfolio and business operations. Depending upon market

conditions, which are unpredictable and remain uncertain, considerable fluctuation could occur in the fair value of our investment portfolio and reported total investment income, which could have an adverse impact on our financial condition, results of operations, and cash flows. Response to the COVID-19 pandemic and various recent geopolitical events have had a significant impact on the global financial markets. The value of our invested assets could be adversely impacted and there is potential for future losses and/or impairments on our investment portfolio due to continued supply chain disruptions and the resulting conditions including further inflationary pressures and rising interest rates.

RESULTS OF OPERATIONS

Management fee revenue

We have two performance obligations in the subscriber’s agreement, providing policy issuance and renewal services and acting as attorney-in-fact for the Exchange, as well as the service provider for its insurance subsidiaries, with respect to all administrative services. We earn management fees for acting as the attorney-in-fact for the subscribers at the Exchange in these two capacities, and allocate our revenues between our performance obligations.

The management fee is calculated by multiplying all direct and affiliated assumed premiums written by the Exchange by the management fee rate, which is determined by our Board of Directors at least annually. The management fee rate was set at 25%, the maximum rate, for both 2022 and 2021. Changes in the management fee rate can affect our revenue and net income significantly. 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. 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. Our most recent transaction price allocation review resulted in a minor change in the allocation percentages between the two performance obligations, but does not have a material impact on our financial statements.

The following table presents the allocation and disaggregation of revenue for our two performance obligations:


	Three months ended September 30,								Nine months ended September 30,
(dollars in thousands)	2022			2021			% Change		2022			2021			% Change
	(Unaudited)								(Unaudited)
Policy issuance and renewal services
Direct and affiliated assumed premiums written by the Exchange	$	2,271,033		$	2,075,745		9.4	%	$	6,528,996		$	6,024,484		8.4	%
Management fee rate	24.3		%	24.3		%			24.3		%	24.3		%
Management fee revenue	551,861			504,406			9.4		1,586,546			1,463,950			8.4
Change in estimate for management fee returned on cancelled policies (1)	(195)			485			NM		(2,333)			(1,070)			NM
Management fee revenue - policy issuance and renewal services	$	551,666		$	504,891		9.3	%	$	1,584,213		$	1,462,880		8.3	%

Administrative services
Direct and affiliated assumed premiums written by the Exchange	$	2,271,033		$	2,075,745		9.4	%	$	6,528,996		$	6,024,484		8.4	%
Management fee rate	0.7		%	0.7		%			0.7		%	0.7		%
Management fee revenue	15,897			14,530			9.4		45,703			42,171			8.4
Change in contract liability (2)	(1,244)			(67)			NM		(2,272)			1,808			NM
Change in estimate for management fee returned on cancelled policies (1)	4			8			(43.5)		15			6			NM

Management fee revenue - administrative services	14,657			14,471			1.3		43,446			43,985			(1.2)
Administrative services reimbursement revenue	168,653			162,410			3.8		492,655			473,133			4.1
Total revenue from administrative services	$	183,310		$	176,881		3.6	%	$	536,101		$	517,118		3.7	%

NM = not meaningful

*(1)*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 policies are cancelled mid-term and unearned premiums are refunded.

*(2)*Management fee revenue - administrative services is recognized over time as the services are provided. See Part I, Item 1. "Financial Statements - Note 3, Revenue, of Notes to Financial Statements" contained within this report.

Direct and affiliated assumed premiums written by the Exchange

Direct and affiliated assumed premiums include premiums written directly by the Exchange and premiums assumed from its wholly owned property and casualty subsidiaries. Direct and affiliated assumed premiums written by the Exchange increased 9.4% to $2.3 billion in the third quarter of 2022 compared to the third quarter of 2021, primarily driven by increased personal lines and commercial multi-peril premiums written. Year-over-year policies in force for all lines of business increased 3.3% in the third quarter of 2022 compared to 3.2% in the third quarter of 2021. The year-over-year average premium per policy for all lines of business increased 4.1% at September 30, 2022 compared to a decrease of 0.7% at September 30, 2021. The year-over-year average premium per policy at September 30, 2021 was impacted by the rate reductions for personal and commercial auto policies written between October 1, 2020 and June 30, 2021, in response to lower driving activity as a result of the COVID-19 pandemic.

New business premiums increased 20.9% to $288 million in the third quarter of 2022 compared to the same period in 2021, primarily driven by increased premiums written in the personal auto and commercial multi-peril lines. Contributing to this change was a 10.0% increase in new business policies written and a 7.8% increase in year-over-year average premium per policy on new business at September 30, 2022. New business premiums decreased 2.4% to $239 million in the third quarter of 2021 compared to the same period in 2020 due primarily to decreased personal auto premiums written. In the third quarter of 2021, new business policies written decreased 8.9%, partially offset by a 2.0% increase in year-over-year average premium per policy.

Premiums generated from renewal business increased 7.9% to $2.0 billion in the third quarter of 2022 compared to the third quarter of 2021 and increased 4.7% to $1.8 billion in the third quarter of 2021 compared to the third quarter of 2020. Underlying the trend in renewal business premiums was an increase in year-over-year policies in force of 3.5% and 1.9% in the third quarters of 2022 and 2021, respectively, driven by a slight increase in the policy retention ratios, as well as a 3.5% increase in year-over-year average premium per policy at September 30, 2022, compared to a 1.0% decrease in year-over-year average premium per policy at September 30, 2021.

Personal lines – Total personal lines premiums written increased 8.7% to $1.6 billion in the third quarter of 2022, compared to 2.6% in the third quarter of 2021, driven by a 3.4% increase in total personal lines policies in force and a 3.2% increase in total personal lines year-over-year average premium per policy.

Commercial lines – Total commercial lines premiums written increased 11.2% to $647 million in the third quarter of 2022, compared to 7.2% in the third quarter of 2021, driven by a 6.7% increase in total commercial lines year-over-year average premium per policy and a 2.4% increase in total commercial lines policies in force.

Future trends-premium revenue – Through a careful agency selection process, the Exchange plans to continue its effort to expand the size of its agency force to increase market penetration in existing operating territories to contribute to future growth.

Changes in premium levels attributable to the growth in policies in force and rate changes directly affect the profitability of the Exchange and have a direct bearing on our management fee. Future premiums could be impacted by changes resulting from the continued inflationary trends and potential regulatory changes resulting from the COVID-19 pandemic, among others. Longer-term, increased driving activity may result in future rate increases due to higher claims frequency and severity. See also Part I. Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the Securities and Exchange Commission on February 24, 2022.

Policy issuance and renewal services


	Three months ended September 30,						Nine months ended September 30,
(dollars in thousands)	2022		2021		% Change		2022		2021		% Change
	(Unaudited)						(Unaudited)
Management fee revenue - policy issuance and renewal services	$	551,666	$	504,891	9.3	%	$	1,584,213	$	1,462,880	8.3	%
Service agreement revenue	6,260		6,067		3.2		19,175		18,048		6.2
	557,926		510,958		9.2		1,603,388		1,480,928		8.3
Cost of policy issuance and renewal services	466,111		430,326		8.3		1,352,050		1,268,650		6.6
Operating income - policy issuance and renewal services	$	91,815	$	80,632	13.9	%	$	251,338	$	212,278	18.4	%

Policy issuance and renewal services

The management fee revenue allocated for providing policy issuance and renewal services was 24.3% of the direct and affiliated assumed premiums written by the Exchange for both three and nine month periods ended September 30, 2022 and 2021. This portion of the management fee is recognized as revenue when the policy is issued or renewed because it is at that time that the services we provide are substantially complete and the executed insurance policy is transferred to the customer. The increase in management fee revenue for policy issuance and renewal services was driven by the increase in the direct and affiliated assumed premiums written by the Exchange discussed previously.

Service agreement revenue

Service agreement revenue primarily consists of service charges we collect from subscribers/policyholders for providing multiple payment plans on policies written by the Exchange and its property and casualty subsidiaries and also includes late payment and policy reinstatement fees. The service charges are fixed dollar amounts per billed installment. In July 2021, we also began receiving service agreement revenue from the Exchange for the use of shared office space. The increase in service agreement revenue for the three and nine month periods ended September 30, 2022 compared to the same periods in 2021 is primarily due to the new shared office space agreement.

Cost of policy issuance and renewal services


	Three months ended September 30,						Nine months ended September 30,
(dollars in thousands)	2022		2021		% Change		2022		2021		% Change
	(Unaudited)						(Unaudited)
Commissions:
Total commissions	$	309,597	$	288,046	7.5	%	$	898,215	$	842,647	6.6	%
Non-commission expense:
Underwriting and policy processing	$	43,627	$	40,731	7.1	%	$	127,483	$	124,500	2.4	%
Information technology	50,345		46,693		7.8		147,117		139,174		5.7
Sales and advertising	15,011		13,422		11.8		42,007		38,955		7.8
Customer service	8,675		8,980		(3.4)		25,760		26,909		(4.3)
Administrative and other	38,856		32,454		19.7		111,468		96,465		15.6
Total non-commission expense	156,514		142,280		10.0		453,835		426,003		6.5
Total cost of policy issuance and renewal services	$	466,111	$	430,326	8.3	%	$	1,352,050	$	1,268,650	6.6	%

Commissions – Commissions increased $21.6 million in the third quarter of 2022 and $55.6 million for the nine months ended September 30, 2022 compared to the same periods in 2021, primarily driven by the growth in direct and affiliated assumed written premium, partially offset by a decrease in agent incentive compensation. The estimated agent incentive payouts at September 30, 2022 are based on actual underwriting results for the two prior years and current year-to-date actual results and forecasted results for the remainder of 2022. The profitability component of agent incentive compensation decreased due to higher claims severity and related loss costs in 2022 compared to 2021.

Non-commission expense – Non-commission expense increased $14.2 million in the third quarter of 2022 compared to the third quarter of 2021. Underwriting and policy processing expense increased $2.9 million primarily due to increased postage and underwriting report costs. Information technology costs increased $3.7 million primarily due to increased professional fees and hardware and software costs, partially offset by decreased personnel costs. Administrative and other costs increased $6.4

million primarily due to an increase in personnel costs related to compensation and increased professional fees compared to the same period in 2021.

Non-commission expense increased $27.8 million for the nine months ended September 30, 2022 compared to the same period in 2021. Underwriting and policy processing expense increased $3.0 million primarily driven by increased underwriting report costs. Information technology costs increased $7.9 million primarily due to increased hardware and software costs and professional fees, partially offset by decreased personnel costs. Sales and advertising increased $3.1 million primarily due to agent related expenses. Administrative and other costs increased $15.0 million primarily driven by increased professional fees and personnel costs related to compensation compared to the same period in 2021. Personnel costs in all expense categories were also impacted by lower estimated costs for incentive plan awards related to underwriting performance.

Administrative services


	Three months ended September 30,						Nine months ended September 30,
(dollars in thousands)	2022		2021		% Change		2022		2021		% Change
	(Unaudited)						(Unaudited)
Management fee revenue - administrative services	$	14,657	$	14,471	1.3	%	$	43,446	$	43,985	(1.2)	%
Administrative services reimbursement revenue	168,653		162,410		3.8		492,655		473,133		4.1
Total revenue allocated to administrative services	183,310		176,881		3.6		536,101		517,118		3.7
Administrative services expenses
Claims handling services	146,097		140,100		4.3		427,483		407,762		4.8
Investment management services	9,273		9,884		(6.2)		28,264		29,287		(3.5)
Life management services	13,283		12,426		6.9		36,908		36,084		2.3
Operating income - administrative services	$	14,657	$	14,471	1.3	%	$	43,446	$	43,985	(1.2)	%

Administrative services

The management fee revenue allocated to administrative services was 0.7% of the direct and affiliated assumed premiums written by the Exchange for both three and nine month periods ended September 30, 2022 and 2021. This portion of the management fee is recognized as revenue over a four-year period representing the time over which the services are provided. We also report reimbursed costs as revenues, which are recognized monthly as services are provided. The administrative services expenses we incur and the related reimbursements we receive are recorded gross in the Statements of Operations.

Cost of administrative services

Total investment (loss) income

A summary of the results of our investment operations is as follows:


	Three months ended September 30,						Nine months ended September 30,
(dollars in thousands)	2022		2021		% Change		2022		2021		% Change
	(Unaudited)						(Unaudited)
Net investment income	$	5,834	$	18,858	(69.1)	%	$	24,606	$	49,605	(50.4)	%
Net realized and unrealized investment (losses) gains	(6,230)		1,610		NM		(23,833)		5,183		NM
Net impairment (losses) recoveries recognized in earnings	(175)		130		NM		(429)		216		NM
Total investment (loss) income	$	(571)	$	20,598	NM	%	$	344	$	55,004	(99.4)	%

NM = not meaningful

Net investment income

Net investment income includes interest and dividends on our fixed maturity and equity security portfolios and the results of our limited partnership investments, net of investment expenses. Net investment income decreased $13.0 million in the third quarter of 2022 and $25.0 million for the nine months ended September 30, 2022, compared to the same periods in 2021, primarily due to lower equity in earnings of limited partnerships. Included in net investment income is $4.6 million of limited partnership losses in the third quarter of 2022 compared to earnings of $11.5 million for the same period in 2021 and $2.2 million of limited partnership losses for the nine months ended September 30, 2022 compared to earnings of $26.7 million for the same period in 2021.

Net realized and unrealized investment (losses) gains

A breakdown of our net realized and unrealized investment (losses) gains is as follows:


	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2022		2021		2022		2021
Securities sold:	(Unaudited)				(Unaudited)
Available-for-sale securities	$	(4,606)	$	2,189	$	(9,108)	$	4,069
Equity securities	243		(267)		(1,327)		5
Equity securities change in fair value	(1,867)		(312)		(13,400)		1,108
Miscellaneous	0		0		2		1
Net realized and unrealized investment (losses) gains	$	(6,230)	$	1,610	$	(23,833)	$	5,183

Net realized and unrealized losses during the three and nine months ended September 30, 2022 were primarily due to disposals of available-for-sale securities and market value adjustments on equity securities. Net realized and unrealized gains during the three and nine months ended September 30, 2021 were primarily due to disposals of available-for-sale securities.

Net impairment (losses) recoveries recognized in earnings

Net impairment losses during the three and nine months ended September 30, 2022 were related to available-for-sale securities. Net impairment recoveries during the three and nine months ended September 30, 2021 were primarily the result of a change in the current expected credit loss allowance related to our agent loans.

Financial condition of Erie Insurance Exchange

Serving in the capacity of attorney-in-fact for the Exchange, we are dependent on the growth and financial condition of the Exchange, who is our sole customer. The strength of the Exchange and its wholly owned subsidiaries is rated annually by A.M. Best Company through assessing its financial stability and ability to pay claims. The ratings are generally based upon factors relevant to policyholders and are not directed toward return to investors. The Exchange and each of its property and casualty subsidiaries are rated A+ "Superior", the second highest financial strength rating, which is assigned to companies that have achieved superior overall performance when compared to the standards established by A.M. Best and have a superior ability to meet obligations to policyholders over the long term. On August 9, 2022, the outlook for the financial strength rating was affirmed as stable. As of December 31, 2021, only approximately 12% of insurance groups, in which the Exchange is included, are rated A+ or higher.

The financial statements of the Exchange are prepared in accordance with statutory accounting principles prescribed by the Commonwealth of Pennsylvania. Financial statements prepared under statutory accounting principles focus on the solvency of the insurer and generally provide a more conservative approach than under U.S. generally accepted accounting principles. Statutory direct written premiums of the Exchange and its wholly owned property and casualty subsidiaries grew 8.4% to $6.5 billion in the first nine months of 2022 compared to the first nine months of 2021. These premiums, along with investment income, are the major sources of cash that support the operations of the Exchange. Policyholders’ surplus determined under statutory accounting principles was $10.2 billion at September 30, 2022 and $11.7 billion at December 31, 2021. The Exchange and its wholly owned property and casualty subsidiaries' year-over-year policy retention ratio continues to be high at 90.3% at September 30, 2022, 90.1% at December 31, 2021 and 90.0% at September 30, 2021.

We have prepared our financial statements considering the financial strength of the Exchange based on its A.M. Best rating and strong level of surplus. We are monitoring risks resulting from the COVID-19 pandemic and current economic environment on an ongoing basis and believe that the Exchange falls within defined risk tolerances. However, see Part I. Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the Securities and Exchange Commission on February 24, 2022 for possible outcomes that could impact that determination.

FINANCIAL CONDITION

Investments

Our investment portfolio is managed with the objective of maximizing after-tax returns on a risk-adjusted basis. The following table presents the carrying value of our investments as of:


(dollars in thousands)	September 30, 2022		% to total		December 31, 2021		% to total
	(Unaudited)
Fixed maturities	$	874,687	83	%	$	946,085	83	%
Equity securities	68,969		7		87,743		8
Agent loans (1)	69,425		7		66,368		6
Other investments	33,570		3		36,846		3
Total investments	$	1,046,651	100	%	$	1,137,042	100	%

*(1)*The current portion of agent loans is included with prepaid expenses and other current assets in the Statements of Financial Position.

Fixed maturities

Under our investment strategy, we maintain a fixed maturity portfolio that is of high quality and well diversified within each market sector. This investment strategy also achieves a balanced maturity schedule. Our fixed maturity portfolio is managed with the goal of achieving reasonable returns while limiting exposure to risk.

Fixed maturities are carried at fair value with unrealized gains and losses, net of deferred taxes, included in shareholders’ equity. Net unrealized losses on fixed maturities, net of deferred taxes, totaled $62.9 million at September 30, 2022, compared to net unrealized gains of $6.2 million at December 31, 2021.

The following table presents a breakdown of the fair value of our fixed maturity portfolio by industry sector and rating as of:


(in thousands)	September 30, 2022 (1)
	AAA		AA		A		BBB		Non- investment grade		Fair value
	(Unaudited)
Basic materials	$	0	$	0	$	0	$	4,395	$	6,299	$	10,694
Communications	0		2,830		10,588		12,116		14,961		40,495
Consumer	0		4,869		11,075		69,106		35,806		120,856
Diversified	0		0		0		0		766		766
Energy	0		0		3,734		22,578		6,708		33,020
Financial	0		0		86,795		121,468		15,125		223,388





Industrial	0		0		10,054		14,139		20,792		44,985
Structured securities (2)	121,384		158,911		21,376		12,634		0		314,305
Technology	1,852		0		5,262		19,705		12,251		39,070
U.S. Treasury	0		12,205		0		0		0		12,205
Utilities	0		0		3,386		28,136		3,381		34,903
Total	$	123,236	$	178,815	$	152,270	$	304,277	$	116,089	$	874,687

*(1)*Ratings are supplied by S&P, Moody’s, and Fitch. The table is based upon the lowest rating for each security.

*(2)*Structured securities include residential and commercial mortgage-backed securities, collateralized debt obligations, and asset-backed securities.

Equity securities

Equity securities primarily include nonredeemable preferred stocks and are carried at fair value in the Statements of Financial Position with all changes in unrealized gains and losses reflected in the Statements of Operations.

The following table presents an analysis of the fair value of our equity securities by sector as of:


(in thousands)	September 30, 2022		December 31, 2021
	(Unaudited)

Communications	$	371	$	0
Consumer	1,418		3,314

Energy	3,513		6,448
Financial services	57,595		71,722




Utilities	6,072		6,259
Total	$	68,969	$	87,743

LIQUIDITY AND CAPITAL RESOURCES

We continue to monitor the sufficiency of our liquidity and capital resources given the potential impact of the ongoing COVID-19 pandemic and recent geopolitical events and resulting conditions, including rising interest rates and inflationary costs. While we did not see a significant impact on our sources or uses of cash in the first nine months of 2022, future disruptions in the markets could occur which may affect our liquidity position. If our normal operating and investing cash activities were to become insufficient to meet future funding requirements, we believe we have sufficient access to liquidity through our cash position, liquid marketable securities and our $100 million bank revolving line of credit that does not expire until October 2026. See broader discussions of potential risks to our operations in the Operating Overview contained within this report and Part I. Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the Securities and Exchange Commission on February 24, 2022.

Sources and Uses of Cash

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet the short- and long-term cash requirements of its business operations and growth needs. Our liquidity requirements have been met primarily by funds generated from management fee revenue and income from investments. Cash provided from these sources is used primarily to fund the costs of our management operations including commissions, salaries and wages, pension plans, share repurchases, dividends to shareholders, the purchase and development of information technology, and other capital expenditures. The funding policy for our pension plan 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 to our pension plan during the third quarter of 2022. We expect that our operating cash needs will be met by funds generated from operations. Cash in excess of our operating needs is primarily invested in investment grade fixed maturities. As part of our liquidity review, we regularly evaluate our capital needs based on current and projected results and consider the potential impacts to our liquidity, borrowing capacity, financial covenants and capital availability.

Volatility in the financial markets presents challenges to us as we do occasionally access our investment portfolio as a source of cash. Some of our fixed income investments, despite being publicly traded, may be illiquid. Volatility in these markets could impair our ability to sell certain fixed income securities or cause such securities to sell at deep discounts. We believe we have sufficient liquidity to meet our needs from sources other than the liquidation of securities.

Cash flow activities

The following table provides condensed cash flow information as follows:


	Nine months ended
	September 30,
(in thousands)	2022		2021
	(Unaudited)
Net cash provided by operating activities	$	238,108	$	264,038
Net cash used in investing activities	(74,997)		(43,158)
Net cash used in financing activities	(249,149)		(146,124)
Net (decrease) increase in cash and cash equivalents	$	(86,038)	$	74,756

Net cash provided by operating activities was $238.1 million in the first nine months of 2022, compared to $264.0 million for the same period in 2021. Decreased cash provided by operating activities was primarily due to increases in cash paid for agent commissions of $45.3 million due to higher scheduled commissions driven by premium growth, administrative services expenses paid of $25.5 million and pension contributions of $25.0 million. Partially offsetting this decrease in cash provided by operating activities was an increase in management fees received of $78.3 million driven by growth in direct and affiliated assumed premiums written by the Exchange.

Net cash used in investing activities was $75.0 million in the first nine months of 2022, compared to $43.2 million for the same period in 2021. Net cash used in investing activities was primarily driven by an increase in investment purchases of $75.3 million and fixed asset purchases of $12.8 million, partially offset by an increase in proceeds from sales and maturities/calls of investments of $60.6 million.

Net cash used in financing activities totaled $249.1 million in the first nine months of 2022, compared to $146.1 million for the same period in 2021. The increase in cash used was primarily due to the repayment of the remaining $93.2 million balance on the term loan in May 2022.

Capital Outlook

We regularly prepare forecasts evaluating the current and future cash requirements for both normal and extreme risk events, including the ongoing COVID-19 pandemic. Should an extreme risk event result in a cash requirement exceeding normal cash flows, we have the ability to meet our future funding requirements through various alternatives available to us.

Outside of our normal operating and investing cash activities, future funding requirements could be met through: 1) cash and cash equivalents, which total approximately $97.7 million at September 30, 2022, 2) $99.1 million available on our bank revolving line of credit, and 3) liquidation of unpledged assets held in our investment portfolio, including preferred stock and investment grade bonds, which totaled approximately $722.5 million at September 30, 2022. Volatility in the financial markets could impair our ability to sell certain fixed income securities or cause such securities to sell at deep discounts. Additionally, we have the ability to curtail or modify discretionary cash outlays such as those related to shareholder dividends and share repurchase activities.

As of September 30, 2022, we have access to a $100 million bank revolving line of credit with a $25 million letter of credit sublimit that expires on October 29, 2026. As of September 30, 2022, 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. We had no borrowings outstanding on our line of credit as of September 30, 2022. Investments with a fair value of $108.7 million were pledged as collateral on the line at September 30, 2022. These investments have no trading restrictions and are reported as available-for-sale securities and cash and cash equivalents in the Statement of Financial Position. The bank requires compliance with certain covenants, which include leverage ratios and debt restrictions. We were in compliance with all covenants at September 30, 2022.

CRITICAL ACCOUNTING ESTIMATES

We make estimates and assumptions that have a significant effect on the amounts and disclosures reported in the financial statements. The most significant estimates relate to investment valuation and retirement benefit plans for employees. While management believes its estimates are appropriate, the ultimate amounts may differ from estimates provided. Our most critical accounting estimates are described in Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for the year ended December 31, 2021 of our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on February 24, 2022. See Part I, Item 1. "Financial Statements - Note 5, Fair Value, of Notes to Financial Statements" contained within this report for additional information on our valuation of investments.

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