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, 2022, as contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2023.

INDEX

			Page Number
Cautionary Statement Regarding Forward-Looking Information			23
Operating Overview			24
Results of Operations			26
Financial Condition			33
Liquidity and Capital Resources			34
Critical Accounting Estimates			36

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;

• 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 and inflation;

◦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 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. In 2022, approximately 71% of the administrative services expenses were entirely attributable to the respective administrative functions (claims handling, life insurance management and investment management), while the remaining 29% of these expenses were allocations of costs for departments that support these administrative functions. The expenses we incur and related reimbursements we receive for administrative services are presented gross in our Statements of Operations. The subscriber's agreement and service agreements provide for reimbursement of amounts incurred for these services to Indemnity. Reimbursements are settled at cost on a monthly basis. 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 69% of the 2022 direct and affiliated assumed written premiums and commercial lines comprising the remaining 31%. 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.

Financial Overview

						Three months ended June 30,																					Six months ended June 30,
(dollars in thousands, except per share data)						2023						2022						% Change									2023						2022						% Change
						(Unaudited)																					(Unaudited)
Operating income						$	134,158					$	104,000					29.0			%						$	244,701					$	188,312					29.9			%
Total investment income (loss)						11,627						(2,094)						NM									6,895						915						NM
Interest expense						—						895						(100.0)									—						1,894						(100.0)
Other income						3,305						337						NM									6,642						810						NM
Income before income taxes						149,090						101,348						47.1									258,238						188,143						37.3
Income tax expense						31,238						21,201						47.3									54,145						39,377						37.5
Net income						$	117,852					$	80,147					47.0			%						$	204,093					$	148,766					37.2			%
Net income per share – diluted						$	2.25					$	1.53					47.0			%						$	3.90					$	2.84					37.2			%

NM = not meaningful

Operating income increased in both the second quarter and six months ended June 30, 2023, compared to the same periods in 2022, as growth in operating revenue outpaced the growth in operating expenses. Management fee revenue for policy issuance and renewal services increased 16.3% to $633.3 million in the second quarter of 2023 and 15.4% to $1.2 billion for the six months ended June 30, 2023. 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 2023 and 2022. The direct and affiliated assumed premiums written by the Exchange increased 16.3% to $2.6 billion in the second quarter of 2023 and increased 15.5% to $4.9 billion for the six months ended June 30, 2023, compared to the same periods in 2022.

Cost of operations for policy issuance and renewal services increased 13.0% to $521.2 million and 11.8% to $990.3 million in the second quarter and six months ended June 30, 2023, compared to the same periods in 2022, primarily due to higher scheduled commissions driven by direct and affiliated assumed written premium growth, as well as increased employee compensation and technology investments, partially offset by decreased agent incentive compensation driven by higher claims severity and related loss costs experienced by the Exchange.

Management fee revenue for administrative services increased 8.0% to $15.6 million and 7.1% to $30.8 million in the second quarter and six months ended June 30, 2023, compared to the same periods in 2022. The administrative services reimbursement revenue and corresponding cost of operations increased both total operating revenue and total operating expenses by $184.5 million in the second quarter of 2023 and $357.3 million for the six months ended June 30, 2023, but had no net impact on operating income.

Total investment income increased $13.7 million and $6.0 million in the second quarter and six months ended June 30, 2023, compared to the same periods in 2022. The results from both periods were primarily due to lower net realized and unrealized investment losses in 2023 compared to 2022.

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 revenue. Inflation remained elevated from historical levels during the second quarter of 2023. Continued elevated inflation could impact the Exchange's operations and our management fees. 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 impacts to economic conditions remain uncertain. 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, 2022 as filed with the Securities and Exchange Commission on March 1, 2023 for a discussion of the potential impacts to our operations or those of the Exchange.

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. Various ongoing geopolitical events, the high inflationary environment and recent developments in the banking sector 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 resulting from instability and volatility within the banking sector, 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 2023 and 2022. 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.

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

			Three months ended June 30,															Six months ended June 30,
(dollars in thousands)			2023			2022			% Change									2023			2022			% Change
			(Unaudited)															(Unaudited)
Policy issuance and renewal services
Direct and affiliated assumed premiums written by the Exchange			$	2,613,131		$	2,247,766		16.3			%						$	4,916,999		$	4,257,963		15.5			%
Management fee rate			24.30		%	24.30		%										24.30		%	24.30		%
Management fee revenue			634,991			546,207			16.3									1,194,831			1,034,685			15.5
Change in estimate for management fee returned on cancelled policies (1)			(1,652)			(1,652)			0.0									(3,402)			(2,138)			(59.1)
Management fee revenue - policy issuance and renewal services			$	633,339		$	544,555		16.3			%						$	1,191,429		$	1,032,547		15.4			%
Administrative services
Direct and affiliated assumed premiums written by the Exchange			$	2,613,131		$	2,247,766		16.3			%						$	4,916,999		$	4,257,963		15.5			%
Management fee rate			0.70		%	0.70		%										0.70		%	0.70		%
Management fee revenue			18,292			15,735			16.3									34,419			29,806			15.5
Change in contract liability (2)			(2,646)			(1,266)			NM									(3,579)			(1,028)			NM
Change in estimate for management fee returned on cancelled policies (1)			(10)			7			NM									(15)			11			NM
Management fee revenue - administrative services			15,636			14,476			8.0									30,825			28,789			7.1
Administrative services reimbursement revenue			184,466			160,675			14.8									357,293			324,002			10.3
Total revenue from administrative services			$	200,102		$	175,151		14.2			%						$	388,118		$	352,791		10.0			%

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 16.3% to $2.6 billion in the second quarter of 2023 compared to the second quarter of 2022, primarily driven by increased personal lines and commercial multi-peril premiums written. Year-over-year policies in force for all lines of business increased 5.2% in the second quarter of 2023 compared to 3.1% in the second quarter of 2022. The year-over-year average premium per policy for all lines of business increased 7.6% at June 30, 2023 compared to 2.9% at June 30, 2022.

Premiums generated from new business increased 32.6% to $386 million in the second quarter of 2023 compared to the same period in 2022, primarily driven by increased premiums written in the personal auto, commercial multi-peril and homeowners lines. Contributing to this change was a 19.0% increase in new business policies written and a 10.9% increase in year-over-year average premium per policy on new business at June 30, 2023. Premiums generated from new business increased 10.7% to $291 million in the second quarter of 2022 compared to the same period in 2021, primarily driven by increased premium written in the commercial multi-peril and personal auto lines. Contributing to this change was a 7.2% increase in year-over-year average premium per policy on new business and a 1.7% increase in new business policies written in the second quarter of 2022.

Premiums generated from renewal business increased 13.8% to $2.2 billion in the second quarter of 2023 compared to the second quarter of 2022 and increased 8.3% to $2.0 billion in the second quarter of 2022 compared to the second quarter of 2021. Underlying the trend in renewal business premiums in both periods was a 7.1% increase in year-over-year average

premium per policy at June 30, 2023, and 2.3% at June 30, 2022, as well as an increase in year-over-year policies in force of 3.7% and 4.0% in the second quarters of 2023 and 2022, respectively, driven by a slight increase in the policy retention ratios.

Personal lines – Total personal lines premiums written increased 17.4% to $1.8 billion in the second quarter of 2023, compared to 7.8% in the second quarter of 2022, driven by a 7.4% increase in total personal lines year-over-year average premium per policy and a 5.6% increase in total personal lines policies in force.

Commercial lines – Total commercial lines premiums written increased 13.6% to $775 million in the second quarter of 2023, compared to 10.3% in the second quarter of 2022, driven by a 10.1% increase in total commercial lines year-over-year average premium per policy and a 2.3% increase in total commercial lines policies in force.

Future trends-premium revenue – Through a careful agency selection and monitoring 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 affect the profitability of the Exchange and have a direct bearing on our management fee revenue. Future premiums could be impacted by potential regulatory changes and continued inflationary trends, among others. Inflation-driven severity continued to impact underwriting results in the second quarter of 2023, and will continue to impact future rate decisions. See also Part I. Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the Securities and Exchange Commission on March 1, 2023.

Policy issuance and renewal services

			Three months ended June 30,															Six months ended June 30,
(dollars in thousands)			2023			2022			% Change									2023			2022			% Change
			(Unaudited)															(Unaudited)
Management fee revenue - policy issuance and renewal services			$	633,339		$	544,555		16.3			%						$	1,191,429		$	1,032,547		15.4			%
Service agreement revenue			6,429			6,437			(0.1)									12,788			12,915			(1.0)
			639,768			550,992			16.1									1,204,217			1,045,462			15.2
Cost of operations - policy issuance and renewal services			521,246			461,468			13.0									990,341			885,939			11.8
Operating income - policy issuance and renewal services			$	118,522		$	89,524		32.4			%						$	213,876		$	159,523		34.1			%

Policy issuance and renewal services

The management fee revenue allocated for providing policy issuance and renewal services was 24.30% of the direct and affiliated assumed premiums written by the Exchange for both three and six month periods ended June 30, 2023 and 2022. 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. The decrease in service agreement revenue for the three and six month periods ended June 30, 2023 compared to the same periods in 2022 is primarily due to the continued shift to payment plans that do not incur service charges or offer a premium discount for certain payment methods.

Cost of policy issuance and renewal services

			Three months ended June 30,															Six months ended June 30,
(dollars in thousands)			2023			2022			% Change									2023			2022			% Change
			(Unaudited)															(Unaudited)
Commissions:
Total commissions			$	351,144		$	307,483		14.2			%						$	659,952		$	588,618		12.1			%
Non-commission expense:
Underwriting and policy processing			$	46,514		$	42,802		8.7			%						$	90,237		$	83,856		7.6			%
Information technology			54,414			51,106			6.5									111,609			96,772			15.3
Sales and advertising			16,041			14,271			12.4									28,928			26,996			7.2
Customer service			8,338			8,738			(4.6)									16,423			17,085			(3.9)
Administrative and other			44,795			37,068			20.8									83,192			72,612			14.6
Total non-commission expense			170,102			153,985			10.5									330,389			297,321			11.1
Total cost of operations - policy issuance and renewal services			$	521,246		$	461,468		13.0			%						$	990,341		$	885,939		11.8			%

Commissions – Commissions increased $43.7 million in the second quarter of 2023 and $71.3 million for the six months ended June 30, 2023 compared to the same periods in 2022, 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 June 30, 2023 are based on actual underwriting results for the two prior years and current year-to-date and forecasted results for the remainder of 2023. The profitability component of agent incentive compensation decreased due to higher claims severity and related loss costs in the three-year period ending 2023 compared to the three-year period ended 2022.

Non-commission expense – Non-commission expense increased $16.1 million in the second quarter of 2023 compared to the second quarter of 2022. Underwriting and policy processing expense increased $3.7 million primarily due to increased personnel and postage costs. Information technology costs increased $3.3 million primarily due to increased personnel costs and professional fees. Sales and advertising expense increased $1.8 million primarily due to increased agent related costs. Administrative and other costs increased $7.7 million primarily due to an increase in personnel costs, partially offset by a decrease in professional fees.

Non-commission expense increased $33.1 million in the six months ended June 30, 2023 compared to the same period in 2022. Underwriting and policy processing expense increased $6.4 million primarily due to increased personnel and postage costs. Information technology costs increased $14.8 million primarily due to increased professional fees, personnel costs, and hardware and software costs. Sales and advertising expense increased $1.9 million primarily due to increased personnel and agent related costs. Administrative and other costs increased $10.6 million primarily due to an increase in personnel costs, partially offset by a decrease in professional fees. Personnel costs in both the second quarter and six months ended June 30, 2023 were impacted by increased compensation including higher estimated costs for incentive plan awards due to increased direct written premium and policies in force growth, partially offset by lower pension costs due to an increase in the discount rate compared to 2022.

Administrative services

			Three months ended June 30,															Six months ended June 30,
(dollars in thousands)			2023			2022			% Change									2023			2022			% Change
			(Unaudited)															(Unaudited)
Management fee revenue - administrative services			$	15,636		$	14,476		8.0			%						$	30,825		$	28,789		7.1			%
Administrative services reimbursement revenue			184,466			160,675			14.8									357,293			324,002			10.3
Total revenue allocated to administrative services			200,102			175,151			14.2									388,118			352,791			10.0
Administrative services expenses
Claims handling services			159,595			138,890			14.9									307,795			281,386			9.4
Investment management services			8,473			9,100			(6.9)									17,218			18,991			(9.3)
Life management services			16,398			12,685			29.3									32,280			23,625			36.6
Operating income - administrative services			$	15,636		$	14,476		8.0			%						$	30,825		$	28,789		7.1			%

Administrative services

The management fee revenue allocated to administrative services was 0.70% of the direct and affiliated assumed premiums written by the Exchange for both the three and six month periods ended June 30, 2023 and 2022. 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

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 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. The subscriber's agreement and service agreements provide for reimbursement of amounts incurred for these services to Indemnity. Reimbursements due from the Exchange and its insurance subsidiaries are recorded as a receivable and settled at cost.

Total investment income (loss)

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

						Three months ended June 30,																		Six months ended June 30,
(dollars in thousands)						2023			2022						% Change									2023			2022						% Change
						(Unaudited)																		(Unaudited)
Net investment income						$	13,535		$	8,268					63.7			%						$	15,718		$	18,772					(16.3)			%
Net realized and unrealized investment losses						(1,737)			(10,324)						83.2									(7,019)			(17,603)						60.1
Net impairment losses recognized in earnings						(171)			(38)						NM									(1,804)			(254)						NM
Total investment income (loss)						$	11,627		$	(2,094)					NM			%						$	6,895		$	915					NM			%

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 increased $5.3 million in the second quarter of 2023 and decreased $3.1 million for the six months ended June 30, 2023, compared to the same periods in 2022. The increase in the second quarter of 2023 was primarily due to an increase in bond income due to higher yields and cash and cash equivalent income driven by an increase in rates. The decrease for the six months ended June 30, 2023 was primarily due to lower equity in earnings of limited partnerships, partially offset by an increase in bond and cash and cash equivalent income driven by higher yields and increased rates. Net investment income included less than $0.1 million of limited partnership earnings in the second quarter of 2023 compared to losses of $0.3 million for the same period in 2022 and $10.7 million of limited partnership losses for the six months ended June 30, 2023, compared to earnings of $2.5 million for the same period in 2022.

Net realized and unrealized investment losses

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

						Three months ended June 30,												Six months ended June 30,
(in thousands)						2023						2022						2023						2022
Securities sold:						(Unaudited)												(Unaudited)
Available-for-sale securities						$	(2,096)					$	(2,422)					$	(3,715)					$	(4,502)
Equity securities						(78)						(51)						(2,704)						(409)
Equity securities change in fair value						437						(7,851)						(600)						(12,694)
Miscellaneous						0						0						0						2
Net realized and unrealized investment losses						$	(1,737)					$	(10,324)					$	(7,019)					$	(17,603)

Net realized and unrealized losses during the three and six months ended June 30, 2023 were primarily due to disposals of available-for-sale securities. The six months ended June 30, 2023 also included disposals of equity securities impacted by the recent banking industry events. Net realized and unrealized losses during the same periods in 2022 were primarily due to market value adjustments on equity securities and disposals of available-for-sale securities.

Net impairment losses recognized in earnings

Net impairment losses during the three and six months ended June 30, 2023 and 2022 were related to available-for-sale securities in an unrealized loss position where we had the intent to sell prior to recovery of our amortized cost basis as well as credit impairment losses.

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, 2022, 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 15.5% to $4.9 billion in the first six months of 2023 compared to the first six months of 2022. 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 $9.7 billion at June 30, 2023 and $10.1 billion at December 31, 2022. The Exchange and its wholly owned property and casualty subsidiaries' year-over-year policy retention ratio continues to be high at 90.8% at June 30, 2023 and 90.5% at December 31, 2022.

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. See Part I. Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the Securities and Exchange Commission on March 1, 2023 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)						June 30, 2023						% to total						December 31, 2022						% to total
						(Unaudited)
Fixed maturities						$	920,952					85		%				$	894,661					84		%
Equity securities						77,220						7						72,560						7
Agent loans (1)						68,903						6						69,476						7
Other investments						18,528						2						30,511						2
Total investments						$	1,085,603					100		%				$	1,067,208					100		%

*(1)*The current portion of agent loans is included in the line item "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 $43.8 million at June 30, 2023, compared to $52.5 million at December 31, 2022.

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

(in thousands)						June 30, 2023 (1)
						AAA						AA						A						BBB						Non- investment grade						Fair value
						(Unaudited)
Basic materials						$	0					$	0					$	0					$	4,432					$	6,019					$	10,451
Communications						0						2,849						15,574						9,354						14,734						42,511
Consumer						0						4,881						17,598						72,044						36,450						130,973
Diversified						0						0						0						0						305						305
Energy						0						0						3,815						20,167						8,186						32,168
Financial						0						2,031						95,390						119,672						11,000						228,093
Industrial						0						0						10,124						16,364						22,720						49,208
Structured securities (2)						126,876						185,330						18,202						20,494						0						350,902
Technology						1,877						0						3,844						20,887						13,040						39,648
Utilities						0						0						2,374						30,781						3,538						36,693
Total						$	128,753					$	195,091					$	166,921					$	314,195					$	115,992					$	920,952

*(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)						June 30, 2023						December 31, 2022
						(Unaudited)
Financial services						$	62,475					$	61,084
Utilities						7,408						5,708
Energy						4,113						3,576
Consumer						2,561						1,854
Technology						500						0
Industrial						163						0
Communications						0						338
Total						$	77,220					$	72,560

LIQUIDITY AND CAPITAL RESOURCES

We continue to monitor the sufficiency of our liquidity and capital resources given the potential impact of current economic conditions, including volatility within the banking sector, inflationary pressures, and rising interest rates. We maintain relationships and cash balances at diversified and well-capitalized financial institutions and have established processes to monitor them. While we did not see a significant impact on our sources or uses of cash in the first half of 2023, future market disruptions 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, diverse 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, 2022 as filed with the Securities and Exchange Commission on March 1, 2023.

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. See Part I, Item 1. "Financial Statements - Note 8, Postretirement Benefits, of Notes to Financial Statements" contained within this report for our defined benefit pension plan funding policy and expected pension contribution during the third quarter of 2023. 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 for the six months ended June 30:

(in thousands)						2023						2022
						(Unaudited)
Net cash provided by operating activities						$	180,007					$	106,274
Net cash used in investing activities						(68,264)						(42,196)
Net cash used in financing activities						(110,837)						(157,456)
Net increase (decrease) in cash and cash equivalents						$	906					$	(93,378)

Net cash provided by operating activities was $180.0 million in the first six months of 2023, compared to $106.3 million for the same period in 2022. Increased cash provided by operating activities was primarily due to an increase in management fees received of $143.6 million driven by growth in direct and affiliated assumed premiums written by the Exchange and a decrease in agent bonuses paid of $20.9 million. Partially offsetting this increase in cash provided by operating activities was an increase in cash paid for agent commissions of $71.2 million due to higher scheduled commissions driven by premium growth, and an increase in general operating expenses paid of $19.7 million.

Net cash used in investing activities was $68.3 million in the first six months of 2023, compared to $42.2 million for the same period in 2022. Increased cash used in investing activities was primarily due to an increase in fixed asset purchases of $17.0 million and an increase in purchases of equity securities of $11.5 million. The decrease in proceeds from sales and maturities/calls of available-for-sale securities was mostly offset by a similar decrease in purchases of those securities.

Net cash used in financing activities was $110.8 million in the first six months of 2023, compared to $157.5 million for the same period in 2022. Decreased cash used in financing activities was primarily due to activity during the first six months of 2022, which included repayment of the remaining $93.2 million balance on the term loan credit facility in May 2022, partially offset by $40 million in net proceeds from our bank revolving line of credit.

Capital Outlook

We regularly prepare forecasts evaluating the current and future cash requirements for both normal and extreme risk events, including under current inflationary conditions, rising interest rates, and recent banking industry events. 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) unpledged cash and cash equivalents, which totaled approximately $128.6 million at June 30, 2023, 2) $100 million 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 $766.1 million at June 30, 2023. 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 June 30, 2023, 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 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 June 30, 2023.

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, 2022 of our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 1, 2023. 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.