Item 1. FINANCIAL STATEMENTS

ERIE INDEMNITY COMPANY

STATEMENTS OF OPERATIONS (UNAUDITED)

(dollars in thousands, except per share data)

			Three months ended												Six months ended
			June 30,												June 30,
			2023						2022						2023						2022
Operating revenue
Management fee revenue - policy issuance and renewal services			$	633,339					$	544,555					$	1,191,429					$	1,032,547
Management fee revenue - administrative services			15,636						14,476						30,825						28,789
Administrative services reimbursement revenue			184,466						160,675						357,293						324,002
Service agreement revenue			6,429						6,437						12,788						12,915
Total operating revenue			839,870						726,143						1,592,335						1,398,253
Operating expenses
Cost of operations - policy issuance and renewal services			521,246						461,468						990,341						885,939
Cost of operations - administrative services			184,466						160,675						357,293						324,002
Total operating expenses			705,712						622,143						1,347,634						1,209,941
Operating income			134,158						104,000						244,701						188,312
Investment income
Net investment income			13,535						8,268						15,718						18,772
Net realized and unrealized investment losses			(1,737)						(10,324)						(7,019)						(17,603)
Net impairment losses recognized in earnings			(171)						(38)						(1,804)						(254)
Total investment income (loss)			11,627						(2,094)						6,895						915
Interest expense			—						895						—						1,894
Other income			3,305						337						6,642						810
Income before income taxes			149,090						101,348						258,238						188,143
Income tax expense			31,238						21,201						54,145						39,377
Net income			$	117,852					$	80,147					$	204,093					$	148,766
Net income per share
Class A common stock – basic			$	2.53					$	1.72					$	4.38					$	3.19
Class A common stock – diluted			$	2.25					$	1.53					$	3.90					$	2.84
Class B common stock – basic and diluted			$	380					$	258					$	657					$	479
Weighted average shares outstanding – Basic
Class A common stock			46,189,026						46,188,845						46,188,923						46,188,803
Class B common stock			2,542						2,542						2,542						2,542
Weighted average shares outstanding – Diluted
Class A common stock			52,299,974						52,296,139						52,298,298						52,298,321
Class B common stock			2,542						2,542						2,542						2,542
Dividends declared per share
Class A common stock			$	1.19					$	1.11					$	2.38					$	2.22
Class B common stock			$	178.50					$	166.50					$	357.00					$	333.00

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

ERIE INDEMNITY COMPANY

STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

			Three months ended												Six months ended
			June 30,												June 30,
			2023						2022						2023						2022
Net income			$	117,852					$	80,147					$	204,093					$	148,766
Other comprehensive (loss) income, net of tax
Change in unrealized holding (losses) gains on available-for-sale securities			(1,746)						(24,985)						8,748						(51,904)
Amortization of prior service costs and net actuarial (gain) loss on pension and other postretirement plans			(2,742)						1,737						(5,484)						3,467
Total other comprehensive (loss) income, net of tax			(4,488)						(23,248)						3,264						(48,437)
Comprehensive income			$	113,364					$	56,899					$	207,357					$	100,329

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)

						June 30,						December 31,
						2023						2022
Assets						(Unaudited)
Current assets:
Cash and cash equivalents						$	142,996					$	142,090
Available-for-sale securities						63,510						24,267
Receivables from Erie Insurance Exchange and affiliates, net						591,008						524,937
Prepaid expenses and other current assets						66,399						79,201
Accrued investment income						8,890						8,301
Total current assets						872,803						778,796
Available-for-sale securities, net						857,442						870,394
Equity securities						77,220						72,560
Fixed assets, net						422,903						413,874
Agent loans, net						60,367						60,537
Other assets						34,776						43,295
Total assets						$	2,325,511					$	2,239,456
Liabilities and shareholders' equity
Current liabilities:
Commissions payable						$	347,795					$	300,028
Agent bonuses						37,443						95,166
Accounts payable and accrued liabilities						164,718						165,915
Dividends payable						55,419						55,419
Contract liability						39,046						36,547
Deferred executive compensation						7,672						12,036
Total current liabilities						652,093						665,111
Defined benefit pension plans						55,075						51,224
Contract liability						18,892						17,895
Deferred executive compensation						13,539						13,724
Deferred income taxes, net						15,647						14,075
Other long-term liabilities						25,353						29,019
Total liabilities						780,599						791,048
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						16,466						16,481
Accumulated other comprehensive loss						(4,150)						(7,414)
Retained earnings						2,676,516						2,583,261
Total contributed capital and retained earnings						2,691,002						2,594,498
Treasury stock, at cost; 22,110,132 shares held						(1,168,380)						(1,168,949)
Deferred compensation						22,290						22,859
Total shareholders’ equity						1,544,912						1,448,408
Total liabilities and shareholders’ equity						$	2,325,511					$	2,239,456

See accompanying notes to Financial Statements.

ERIE INDEMNITY COMPANY

STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

Three and six months ended June 30, 2023 and 2022

(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, 2022			$	1,992		$	178		$	16,481		$	(7,414)		$	2,583,261		$	(1,168,949)		$	22,859		$	1,448,408
Net income															86,241									86,241
Other comprehensive income												7,752												7,752
Dividends declared:
Class A $1.19 per share															(54,965)									(54,965)
Class B $178.50 per share															(454)									(454)
Net purchase of treasury stock (1)									(15)									0						(15)
Deferred compensation																		(822)			822			0
Rabbi trust distribution (2)																		416			(416)			0
Balance, March 31, 2023			$	1,992		$	178		$	16,466		$	338		$	2,614,083		$	(1,169,355)		$	23,265		$	1,486,967
Net income															117,852									117,852
Other comprehensive loss												(4,488)												(4,488)
Dividends declared:
Class A $1.19 per share															(54,965)									(54,965)
Class B $178.50 per share															(454)									(454)
Net purchase of treasury stock (1)									0									0						0
Deferred compensation																		(621)			621			0
Rabbi trust distribution (2)																		1,596			(1,596)			0
Balance, June 30, 2023			$	1,992		$	178		$	16,466		$	(4,150)		$	2,676,516		$	(1,168,380)		$	22,290		$	1,544,912

			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

*(1)*Net purchases of treasury stock in 2023 and 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 five incentive compensation deferral plan participants in 2023 and two in 2022.

See accompanying notes to Financial Statements.

ERIE INDEMNITY COMPANY

STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

						Six months ended
						June 30,
						2023						2022
Cash flows from operating activities
Management fee received						$	1,162,575					$	1,019,016
Administrative services reimbursements received						359,332						317,819
Service agreement revenue received						12,788						12,742
Net investment income received						27,069						18,595
Commissions paid to agents						(564,218)						(493,058)
Agents bonuses paid						(106,003)						(126,902)
Salaries and wages paid						(123,501)						(114,075)
Employee benefits paid						(37,460)						(21,108)
General operating expenses paid						(151,975)						(132,297)
Administrative services expenses paid						(362,228)						(333,532)
Income taxes paid						(36,372)						(38,989)
Interest paid						—						(1,937)
Net cash provided by operating activities						180,007						106,274
Cash flows from investing activities
Purchase of investments:
Available-for-sale securities						(123,767)						(211,492)
Equity securities						(18,690)						(7,157)
Other investments						(7)						(157)
Proceeds from investments:
Available-for-sale securities sales						78,808						123,758
Available-for-sale securities maturities/calls						28,972						74,628
Equity securities						10,579						10,131
Other investments						271						429
Purchase of fixed assets						(45,003)						(28,021)
Proceeds from disposal of fixed assets						—						156
Loans to agents						(4,150)						(8,769)
Collections on agent loans						4,723						4,298
Net cash used in investing activities						(68,264)						(42,196)
Cash flows from financing activities
Dividends paid to shareholders						(110,837)						(103,386)
Proceeds from short-term borrowings						—						55,000
Payments on short-term borrowings						—						(15,000)
Payments on long-term borrowings						—						(94,070)
Net cash used in financing activities						(110,837)						(157,456)
Net increase (decrease) in cash and cash equivalents						906						(93,378)
Cash and cash equivalents, beginning of period						142,090						183,702
Cash and cash equivalents, end of period						$	142,996					$	90,324
Supplemental disclosure of noncash transactions
Liability incurred to purchase fixed assets						$	—					$	24,833
Operating lease assets obtained in exchange for lease liabilities						$	3,757					$	1,487

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.

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. 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".

Note 2. Significant Accounting Policies

Basis of presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to the financial statements and footnotes included in our Form 10-K for the year ended December 31, 2022 as filed with the Securities and Exchange Commission on March 1, 2023.

Use of estimates

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

Note 3. Revenue

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

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

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

The Exchange, by virtue of its legal structure as a reciprocal insurer, does not have any employees or officers. Therefore, it enters into contractual relationships by and through an attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of the Exchange with respect to its administrative services in accordance with the subscriber's agreement. The Exchange's insurance subsidiaries also utilize Indemnity for these services in accordance with the service agreements between each of the subsidiaries and Indemnity. Collectively, these services represent a second performance obligation under the subscriber’s agreement and the service agreements. The revenue allocated to this performance obligation is recognized over a four-year period representing the time over which these services are provided. The portion of revenue not yet earned is recorded as a contract liability in the Statements of Financial Position. During the three and six months ended June 30, 2023, we recognized revenue of $10.5 million and $23.8 million, respectively, that was included in the contract liability balance as of December 31, 2022. During the three and six months ended June 30, 2022, we recognized revenue of $10.0 million and $22.7 million, respectively, that was included in the contract liability balance as of December 31, 2021. 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 from affiliates by the Exchange. Indemnity collects the management fee from the Exchange when the Exchange collects the premiums from the subscribers (policyholders). As the Exchange issues policies with annual terms only, cash collections generally occur within one year.

The following table disaggregates revenue by our two performance obligations:

			Three months ended June 30,												Six months ended June 30,
(in thousands)			2023			2022												2023			2022
Management fee revenue - policy issuance and renewal services			$	633,339		$	544,555											$	1,191,429		$	1,032,547
Management fee revenue - administrative services			15,636			14,476												30,825			28,789
Administrative services reimbursement revenue			184,466			160,675												357,293			324,002
Total revenue from administrative services			$	200,102		$	175,151											$	388,118		$	352,791

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

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

						Three months ended June 30,
						2023																		2022
(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						$	116,887					46,189,026						$	2.53					$	79,491					46,188,845						$	1.72
Dilutive effect of stock-based awards						0						10,148						—						0						6,494						—
Assumed conversion of Class B shares						965						6,100,800						—						656						6,100,800						—
Class A – Diluted EPS:
Income available to Class A stockholders on Class A equivalent shares						$	117,852					52,299,974						$	2.25					$	80,147					52,296,139						$	1.53
Class B – Basic and diluted EPS:
Income available to Class B stockholders						$	965					2,542						$	380					$	656					2,542						$	258
						Six months ended June 30,
						2023																		2022
(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						$	202,422					46,188,923						$	4.38					$	147,548					46,188,803						$	3.19
Dilutive effect of stock-based awards						0						8,575						—						0						8,718						—
Assumed conversion of Class B shares						1,671						6,100,800						—						1,218						6,100,800						—
Class A – Diluted EPS:
Income available to Class A stockholders on Class A equivalent shares						$	204,093					52,298,298						$	3.90					$	148,766					52,298,321						$	2.84
Class B – Basic and diluted EPS:
Income available to Class B stockholders						$	1,671					2,542						$	657					$	1,218					2,542						$	479

Note 5. Fair Value

Financial instruments carried at fair value

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

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

• Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

• Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

• Level 3 – Unobservable inputs for the asset or liability.

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

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

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

When a price from the pricing service is not available, values are determined by obtaining broker/dealer quotes and/or market comparables. When available, we obtain multiple quotes for the same security. The ultimate value for these securities is determined based upon our best estimate of fair value using corroborating market information. As of June 30, 2023, nearly all of our available-for-sale and equity securities were priced using a third party pricing service.

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

						June 30, 2023
(in thousands)						Total						Level 1						Level 2						Level 3
Available-for-sale securities:
Corporate debt securities						$	569,111					$	0					$	563,988					$	5,123
Collateralized debt obligations						106,921						0						106,921						0
Commercial mortgage-backed securities						70,970						0						64,437						6,533
Residential mortgage-backed securities						158,375						0						158,363						12
Other debt securities						15,575						0						15,575						0
Total available-for-sale securities						920,952						0						909,284						11,668
Equity securities:
Financial services sector						62,475						826						57,419						4,230
Utilities sector						7,408						0						7,408						0
Energy sector						4,113						0						4,113						0
Consumer sector						2,561						0						2,561						0
Technology sector						500						0						0						500
Industrial sector						163						0						163						0
Total equity securities						77,220						826						71,664						4,730
Total						$	998,172					$	826					$	980,948					$	16,398

						December 31, 2022
(in thousands)						Total						Level 1						Level 2						Level 3
Available-for-sale securities:
Corporate debt securities						$	553,382					$	0					$	549,696					$	3,686
Collateralized debt obligations						102,537						0						102,537						0
Commercial mortgage-backed securities						66,054						0						55,144						10,910
Residential mortgage-backed securities						150,415						0						146,231						4,184
Other debt securities						22,273						0						22,273						0
Total available-for-sale securities						894,661						0						875,881						18,780
Equity securities:
Financial services sector						61,084						0						57,305						3,779
Utilities sector						5,708						0						5,708						0
Energy sector						3,576						0						3,576						0
Consumer sector						1,854						0						1,854						0
Communications sector						338						0						338						0
Total equity securities						72,560						0						68,781						3,779
Total						$	967,221					$	0					$	944,662					$	22,559

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 – 2023 Quarterly Change:

(in thousands)						Beginning balance at March 31, 2023						Included in earnings(1)						Included in other comprehensive income						Purchases						Sales						Transfers into Level 3(2)						Transfers out of Level 3(2)						Ending balance at June 30, 2023
Available-for-sale securities:
Corporate debt securities						$	4,503					$	14					$	37					$	779					$	(100)					$	1,655					$	(1,765)					$	5,123
Commercial mortgage-backed securities						6,415						(169)						(117)						866						(185)						329						(606)						6,533
Residential mortgage-backed securities						33						0						0						0						(21)						0						0						12
Total available-for-sale securities						10,951						(155)						(80)						1,645						(306)						1,984						(2,371)						11,668
Equity securities						4,699						31						0						0						0						0						0						4,730
Total Level 3 securities						$	15,650					$	(124)					$	(80)					$	1,645					$	(306)					$	1,984					$	(2,371)					$	16,398

Level 3 Assets – 2023 Year-to-Date Change:

(in thousands)						Beginning balance at December 31, 2022						Included in earnings(1)						Included in other comprehensive income						Purchases						Sales						Transfers into Level 3(2)						Transfers out of Level 3(2)						Ending balance at June 30, 2023
Available-for-sale securities:
Corporate debt securities						$	3,686					$	(14)					$	122					$	1,532					$	(745)					$	3,153					$	(2,611)					$	5,123
Commercial mortgage-backed securities						10,910						(360)						100						1,455						(185)						466						(5,853)						6,533
Residential mortgage-backed securities						4,184						(5)						96						0						(108)						33						(4,188)						12
Total available-for-sale securities						18,780						(379)						318						2,987						(1,038)						3,652						(12,652)						11,668
Equity securities						3,779						(7)						0						958						0						0						0						4,730
Total Level 3 securities						$	22,559					$	(386)					$	318					$	3,945					$	(1,038)					$	3,652					$	(12,652)					$	16,398

Level 3 Assets – 2022 Quarterly Change:

(in thousands)						Beginning balance at March 31, 2022						Included in earnings(1)						Included in other comprehensive income						Purchases						Sales						Transfers into Level 3(2)						Transfers out of Level 3(2)						Ending balance at June 30, 2022
Available-for-sale securities:
Corporate debt securities						$	10,927					$	(8)					$	(334)					$	950					$	(2,611)					$	2,225					$	(5,040)					$	6,109
Commercial mortgage-backed securities						10,597						(588)						181						0						(2,665)						2,875						(1,529)						8,871
Residential mortgage-backed securities						212						(1)						2						4,887						(91)						37,540						0						42,549
Total available-for-sale securities						21,736						(597)						(151)						5,837						(5,367)						42,640						(6,569)						57,529
Equity securities						2,017						(151)						0						0						0						0						0						1,866
Total Level 3 securities						$	23,753					$	(748)					$	(151)					$	5,837					$	(5,367)					$	42,640					$	(6,569)					$	59,395

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

(in thousands)						Beginning balance at December 31, 2021						Included in earnings(1)						Included in other comprehensive income						Purchases						Sales						Transfers into Level 3(2)						Transfers out of Level 3(2)						Ending balance at June 30, 2022
Available-for-sale securities:
Corporate debt securities						$	5,256					$	5					$	(389)					$	4,934					$	(3,119)					$	5,774					$	(6,352)					$	6,109
Commercial mortgage-backed securities						15,728						(704)						(658)						0						(3,165)						4,335						(6,665)						8,871
Residential mortgage-backed securities						8,814						24						(334)						4,887						(2,846)						37,540						(5,536)						42,549
Total available-for-sale securities						29,798						(675)						(1,381)						9,821						(9,130)						47,649						(18,553)						57,529
Equity securities						2,083						(217)						0						0						0						0						0						1,866
Total Level 3 securities						$	31,881					$	(892)					$	(1,381)					$	9,821					$	(9,130)					$	47,649					$	(18,553)					$	59,395

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

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

Financial instruments not carried at fair value

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

						June 30, 2023												December 31, 2022
(in thousands)						Carrying value						Fair value						Carrying value						Fair value
Agent loans (1)						$	68,903					$	60,249					$	69,476					$	62,954

*(1)*The discount rate used to calculate fair value at June 30, 2023 is reflective of an increase in the BB+ financial yield curve from December 31, 2022.

Note 6. Investments

Available-for-sale securities

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

						June 30, 2023
(in thousands)						Amortized cost						Gross unrealized gains						Gross unrealized losses						Estimated fair value
Corporate debt securities						$	598,164					$	1,089					$	30,142					$	569,111
Collateralized debt obligations						110,724						25						3,828						106,921
Commercial mortgage-backed securities						77,168						87						6,285						70,970
Residential mortgage-backed securities						173,842						39						15,506						158,375
Other debt securities						16,460						0						885						15,575
Total available-for-sale securities, net						$	976,358					$	1,240					$	56,646					$	920,952

						December 31, 2022
(in thousands)						Amortized cost						Gross unrealized gains						Gross unrealized losses						Estimated fair value
Corporate debt securities						$	588,536					$	657					$	35,811					$	553,382
Collateralized debt obligations						107,730						11						5,204						102,537
Commercial mortgage-backed securities						73,855						157						7,958						66,054
Residential mortgage-backed securities						166,412						72						16,069						150,415
Other debt securities						24,602						0						2,329						22,273
Total available-for-sale securities, net						$	961,135					$	897					$	67,371					$	894,661

The amortized cost and estimated fair value of available-for-sale securities at June 30, 2023 are shown below by remaining contractual term to maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

						June 30, 2023
						Amortized						Estimated
(in thousands)						cost						fair value
Due in one year or less						$	56,875					$	55,714
Due after one year through five years						435,531						414,012
Due after five years through ten years						174,031						167,272
Due after ten years						309,921						283,954
Total available-for-sale securities, net (1)						$	976,358					$	920,952

*(1)*The contractual maturities of our available-for-sale securities are included in the table. However, given our intent to sell certain impaired securities, these securities are classified as current assets in our Statement of Financial Position at June 30, 2023.

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

						June 30, 2023
						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						$	183,248					$	4,632					$	328,904					$	25,510					$	512,152					$	30,142					817
Collateralized debt obligations						9,239						102						92,447						3,726						101,686						3,828						157
Commercial mortgage-backed securities						26,338						352						32,703						5,933						59,041						6,285						153
Residential mortgage-backed securities						73,239						2,212						78,972						13,294						152,211						15,506						177
Other debt securities						9,785						262						5,790						623						15,575						885						36
Total available-for-sale securities						$	301,849					$	7,560					$	538,816					$	49,086					$	840,665					$	56,646					1,340
Quality breakdown of available-for-sale securities:
Investment grade						$	275,990					$	6,914					$	482,717					$	42,549					$	758,707					$	49,463					790
Non-investment grade						25,859						646						56,099						6,537						81,958						7,183						550
Total available-for-sale securities						$	301,849					$	7,560					$	538,816					$	49,086					$	840,665					$	56,646					1,340

						December 31, 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						$	397,511					$	21,371					$	121,094					$	14,440					$	518,605					$	35,811					916
Collateralized debt obligations						44,823						2,529						55,335						2,675						100,158						5,204						159
Commercial mortgage-backed securities						41,139						5,124						15,864						2,834						57,003						7,958						131
Residential mortgage-backed securities						109,499						9,131						31,465						6,938						140,964						16,069						161
Other debt securities						15,682						1,323						6,591						1,006						22,273						2,329						46
Total available-for-sale securities						$	608,654					$	39,478					$	230,349					$	27,893					$	839,003					$	67,371					1,413
Quality breakdown of available-for-sale securities:
Investment grade						$	525,805					$	31,904					$	215,742					$	25,205					$	741,547					$	57,109					761
Non-investment grade						82,849						7,574						14,607						2,688						97,456						10,262						652
Total available-for-sale securities						$	608,654					$	39,478					$	230,349					$	27,893					$	839,003					$	67,371					1,413

Credit loss allowance on investments

The current expected credit loss allowance on agent loans was $1.0 million at both June 30, 2023 and December 31, 2022. The current expected credit loss allowance on available-for-sale securities was $0.4 million at June 30, 2023 and $0.2 million at December 31, 2022.

Net investment income

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

						Three months ended June 30,												Six months ended June 30,
(in thousands)						2023						2022						2023						2022
Available-for-sale securities						$	10,534					$	7,015					$	20,367					$	13,373
Equity securities						1,084						975						2,099						1,963
Limited partnerships (1)						40						(290)						(10,712)						2,485
Cash equivalents and other						1,922						865						4,027						1,650
Total investment income						13,580						8,565						15,781						19,471
Less: investment expenses						45						297						63						699
Net investment income						$	13,535					$	8,268					$	15,718					$	18,772

*(1)*Equity in earnings (losses) 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.

Net realized and unrealized investment losses

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

						Three months ended June 30,												Six months ended June 30,
(in thousands)						2023						2022						2023						2022
Available-for-sale securities:
Gross realized gains						$	100					$	418					$	306					$	909
Gross realized losses						(2,196)						(2,840)						(4,021)						(5,411)
Net realized losses on available-for-sale securities						(2,096)						(2,422)						(3,715)						(4,502)
Equity securities						359						(7,902)						(3,304)						(13,103)
Miscellaneous						0						0						0						2
Net realized and unrealized investment losses						$	(1,737)					$	(10,324)					$	(7,019)					$	(17,603)

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

						Three months ended June 30,												Six months ended June 30,
(in thousands)						2023						2022						2023						2022
Equity securities:
Net gains (losses) recognized during the period						$	359					$	(7,902)					$	(3,304)					$	(13,103)
Less: net losses recognized on securities sold						(78)						(51)						(2,704)						(409)
Net unrealized gains (losses) recognized on securities held at reporting date						$	437					$	(7,851)					$	(600)					$	(12,694)

Net impairment losses recognized in earnings

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

						Three months ended June 30,												Six months ended June 30,
(in thousands)						2023						2022						2023						2022
Available-for-sale securities:
Intent to sell						$	(149)					$	(31)					$	(1,581)					$	(101)
Credit impaired						(22)						(7)						(223)						(153)
Net impairment losses recognized in earnings						$	(171)					$	(38)					$	(1,804)					$	(254)

Note 7. Bank Line of Credit

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 June 30, 2023, a total of $99.1 million remains available under the facility due to $0.9 million outstanding letters of credit, which reduce the availability for letters of credit to $24.1 million. We had no borrowings outstanding on our line of credit as of June 30, 2023. Investments with a fair value of $114.9 million were pledged as collateral on the line of credit at June 30, 2023. 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 June 30, 2023. The bank requires compliance with certain covenants, which include leverage ratios and debt restrictions. We are in compliance with all covenants at June 30, 2023.

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 ("SERP") 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, or are reimbursed for, their allocated share of pension cost or income, respectively. These reimbursements represent pension benefits for employees performing administrative services and an allocated share of plan (income) cost for employees in departments that support the administrative functions. As of June 30, 2023, approximately 60% of the annual defined benefit pension income and 36% of the annual SERP cost was reimbursed to and from, respectively, the Exchange and its subsidiaries.

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 expect to contribute an estimated $95 million during the third quarter of 2023. Actual contributions may vary from the current estimate depending on changes in assumptions, regulatory requirements and funding decisions, or due to future plan changes.

Pension plan (income) cost includes the following components:

						Three months ended June 30,												Six months ended June 30,
(in thousands)						2023						2022						2023						2022
Service cost for benefits earned						$	7,191					$	12,561					$	14,382					$	25,121
Interest cost on benefit obligation						12,548						9,941						25,096						19,882
Expected return on plan assets						(17,217)						(13,639)						(34,435)						(27,278)
Prior service cost amortization						361						360						723						721
Net actuarial (gain) loss amortization						(3,832)						1,830						(7,665)						3,660
Pension plan (income) cost (1)						$	(949)					$	11,053					$	(1,899)					$	22,106

*(1)*Pension plan (income) cost represents plan (income) cost before reimbursements between Indemnity and the Exchange and its subsidiaries. The components of pension plan (income) cost other than the service cost components are included in the line item "Other income" in the Statements of Operations, net of reimbursements between Indemnity and 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. Our effective tax rate was 21.0% for the three and six months ended June 30, 2023 and 20.9% for the three and six months ended June 30, 2022.

Note 10. Capital Stock

Class A and B common stock

Holders of Class B shares may, at their option, convert their shares into Class A shares at the rate of 2,400 Class A shares per Class B share. There were no shares of Class B common stock converted into Class A common stock during the six months ended June 30, 2023 and the year ended December 31, 2022. 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 six months ended June 30, 2023 and the year ended December 31, 2022. We had approximately $17.8 million of repurchase authority remaining under this program at June 30, 2023.

Note 11. Accumulated Other Comprehensive Income (Loss)

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

						Three months ended												Three months ended
						June 30, 2023												June 30, 2022
(in thousands)						Before Tax			Income Tax			Net						Before Tax			Income Tax			Net
Investment securities:
AOCI (loss), beginning of period						$	(53,287)		$	(11,190)		$	(42,097)					$	(26,353)		$	(5,535)		$	(20,818)
OCI (loss) before reclassifications						(4,477)			(940)			(3,537)						(34,087)			(7,158)			(26,929)
Realized investment losses						2,096			440			1,656						2,422			508			1,914
Impairment losses						171			36			135						38			8			30
OCI (loss)						(2,210)			(464)			(1,746)						(31,627)			(6,642)			(24,985)
AOCI (loss), end of period						$	(55,497)		$	(11,654)		$	(43,843)					$	(57,980)		$	(12,177)		$	(45,803)
Pension and other postretirement plans:
AOCI (loss), beginning of period						$	53,715		$	11,280		$	42,435					$	(37,543)		$	(7,884)		$	(29,659)
Amortization of prior service costs						361			76			285						360			75			285
Amortization of net actuarial (gain) loss						(3,832)			(805)			(3,027)						1,837			385			1,452
OCI (loss)						(3,471)			(729)			(2,742)						2,197			460			1,737
AOCI (loss), end of period						$	50,244		$	10,551		$	39,693					$	(35,346)		$	(7,424)		$	(27,922)
Total
AOCI (loss), beginning of period						$	428		$	90		$	338					$	(63,896)		$	(13,419)		$	(50,477)
Investment securities						(2,210)			(464)			(1,746)						(31,627)			(6,642)			(24,985)
Pension and other postretirement plans						(3,471)			(729)			(2,742)						2,197			460			1,737
OCI (loss)						(5,681)			(1,193)			(4,488)						(29,430)			(6,182)			(23,248)
AOCI (loss), end of period						$	(5,253)		$	(1,103)		$	(4,150)					$	(93,326)		$	(19,601)		$	(73,725)
						Six months ended												Six months ended
						June 30, 2023												June 30, 2022
(in thousands)						Before Tax			Income Tax			Net						Before Tax			Income Tax			Net
Investment securities:
AOCI (loss), beginning of period						$	(66,571)		$	(13,980)		$	(52,591)					$	7,722		$	1,621		$	6,101
OCI (loss) before reclassifications						5,555			1,167			4,388						(70,458)			(14,796)			(55,662)
Realized investment losses						3,715			780			2,935						4,502			945			3,557
Impairment losses						1,804			379			1,425						254			53			201
OCI (loss)						11,074			2,326			8,748						(65,702)			(13,798)			(51,904)
AOCI (loss), end of period						$	(55,497)		$	(11,654)		$	(43,843)					$	(57,980)		$	(12,177)		$	(45,803)
Pension and other postretirement plans:
AOCI (loss), beginning of period						$	57,186		$	12,009		$	45,177					$	(39,734)		$	(8,345)		$	(31,389)
Amortization of prior service costs						723			152			571						721			151			570
Amortization of net actuarial (gain) loss						(7,665)			(1,610)			(6,055)						3,667			770			2,897
OCI (loss)						(6,942)			(1,458)			(5,484)						4,388			921			3,467
AOCI (loss), end of period						$	50,244		$	10,551		$	39,693					$	(35,346)		$	(7,424)		$	(27,922)
Total
AOCI (loss), beginning of period						$	(9,385)		$	(1,971)		$	(7,414)					$	(32,012)		$	(6,724)		$	(25,288)
Investment securities						11,074			2,326			8,748						(65,702)			(13,798)			(51,904)
Pension and other postretirement plans						(6,942)			(1,458)			(5,484)						4,388			921			3,467
OCI (loss)						4,132			868			3,264						(61,314)			(12,877)			(48,437)
AOCI (loss), end of period						$	(5,253)		$	(1,103)		$	(4,150)					$	(93,326)		$	(19,601)		$	(73,725)

Note 12. Concentrations of Credit Risk

Financial instruments could potentially expose us to concentrations of credit risk, including our unsecured receivables from the Exchange. The 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 $591.0 million and $524.9 million at June 30, 2023 and December 31, 2022, respectively, which includes a current expected credit loss allowance of $0.6 million in both periods.

Note 13. Commitments and Contingencies

We have an agreement with a bank for an agent loan participation program. The maximum amount of loans to be funded through this program is $100 million. We have committed to fund a minimum of 30% of each loan executed through this program. As of June 30, 2023, loans executed under this agreement totaled $56.9 million, of which our portion of the loans is $19.9 million. Additionally, we have agreed to guarantee a portion of the funding provided by the other participants in the program in the event of default. As of June 30, 2023, our maximum potential amount of future payments on the guaranteed portion is $6.7 million. All loan payments under the participation program are current as of June 30, 2023.

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 our 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.