filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of financial condition and results of operations highlights significant factors influencing Erie Indemnity Company ("Indemnity", "we", "us", "our"). This discussion should be read in conjunction with the historical consolidated 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, 2024, as contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2025.
INDEX
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:
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dependence upon our relationship with the Erie Insurance Exchange ("Exchange") and the management fee under the agreement with the subscribers at the Exchange;
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dependence upon our relationship with the Exchange and the growth of the Exchange, including:
◦general business and economic conditions;
◦factors impacting the timing of premium rates charged for policies;
◦factors affecting insurance industry competition, including technological innovations;
◦dependence upon the independent agency system; and
◦ability to maintain our brand, including our reputation for customer service;
- dependence upon our relationship with the Exchange and the financial condition of the Exchange, including:
◦the Exchange's ability to maintain acceptable financial strength ratings;
◦factors affecting the quality and liquidity of the Exchange's investment portfolio;
◦changes in government regulation of the insurance industry;
◦litigation and regulatory actions;
◦emergence of significant unexpected events, including pandemics, economic or social inflation, and changes in tariff policies;
◦emerging claims and coverage issues in the industry; and
◦severe weather conditions or other catastrophic losses, including terrorism;
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costs of providing policy issuance and renewal services to the subscribers at the Exchange under the subscriber's agreement;
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ability to attract and retain talented management and employees;
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ability to ensure system availability and effectively manage technology initiatives;
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difficulties with technology, data or network security breaches, including cyber attacks;
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ability to maintain uninterrupted business operations;
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compliance with complex and evolving laws and regulations and outcome of pending and potential litigation;
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factors affecting the quality and liquidity of our investment portfolio; and
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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.
RECENT ACCOUNTING STANDARDS AND DISCLOSURE RULES
See Part I, Item 1. "Financial Statements - Note 2, Significant Accounting Policies, of Notes to Consolidated Financial Statements" contained within this report for a discussion of recently adopted and issued accounting standards and disclosure rules, and the impact on our consolidated financial statements if known.
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 subscribers at the Exchange, as well as the service provider for the Exchange's 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 (a subscriber) 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. In accordance with the subscriber’s agreement for acting as attorney-in-fact in these two capacities, we retain 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 on behalf of the subscribers at the Exchange. The policy issuance and renewal services we provide 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 incentive compensation, which is 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.
Consistent with 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 the subscribers' attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of the subscribers at the Exchange with respect to its administrative services as enumerated in 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 2024, approximately 70% of the administrative services expenses were entirely attributable to the respective administrative functions (claims handling, life insurance management and investment management), while the remaining 30% 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 Consolidated 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 71% of the 2024 direct and affiliated assumed written premiums and commercial lines comprising the remaining 29%. 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 March 31, | ||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands, except per share data) | 2025 | 2024 | % Change | |||||||||||||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 151,376 | $ | 138,812 | 9.1 | % | ||||||||||||||||||||||||||||||||||||||
| Total investment income | 19,536 | 15,079 | 29.6 | |||||||||||||||||||||||||||||||||||||||||
| Other income | 3,834 | 3,411 | 12.4 | |||||||||||||||||||||||||||||||||||||||||
| Income before income taxes | 174,746 | 157,302 | 11.1 | |||||||||||||||||||||||||||||||||||||||||
| Income tax expense | 36,329 | 32,750 | 10.9 | |||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 138,417 | $ | 124,552 | 11.1 | % | ||||||||||||||||||||||||||||||||||||||
| Net income per share – diluted | $ | 2.65 | $ | 2.38 | 11.1 | % | ||||||||||||||||||||||||||||||||||||||
Operating income increased in the first quarter of 2025, compared to the same period in 2024. Management fee revenue for policy issuance and renewal services increased 13.4% to $755.0 million in the first quarter of 2025. 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 2025 and 2024. The direct and affiliated assumed premiums written by the Exchange increased 13.9% to $3.1 billion in the first quarter of 2025, compared to the same period in 2024.
Cost of operations for policy issuance and renewal services increased 14.1% to $627.8 million in the first quarter of 2025, compared to the same period in 2024, primarily due to higher scheduled commissions driven by direct and affiliated assumed written premium growth, as well as increased agent incentive compensation due to improved profitability, technology costs and employee compensation.
Management fee revenue for administrative services increased 4.2% to $17.6 million in the first quarter of 2025, compared to the same period in 2024. The administrative services reimbursement revenue and corresponding cost of operations increased both total operating revenue and total operating expenses by $210.3 million in the first quarter of 2025, but had no net impact on operating income.
Total investment income increased $4.5 million in the first quarter of 2025, compared to the same period in 2024, primarily due to an increase in net investment income and lower impairment losses, partially offset by a decrease in realized and unrealized investment gains.
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. Elevated inflation, supply chain disruptions or changes in tariff policies 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 social inflation may impact adequacy of estimated loss reserves and future premium rates of the Exchange. 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, 2024 as filed with the Securities and Exchange Commission on February 27, 2025 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. Net investment income is impacted by the general level of interest rates, which impact reinvested cash flow from the portfolio and business operations. Depending upon market conditions, 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 consolidated financial condition, results of operations and cash flows. Various ongoing geopolitical events, the uncertain tariff, inflationary and interest rate environment and a potential economic slowdown could have a significant impact on the global financial markets with the potential for future losses and/or impairments on our investment portfolio.
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 subscribers at the Exchange, as well as the service provider for the Exchange's insurance subsidiaries with respect to all administrative services. We retain 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% for both 2025 and 2024. Changes in the management fee rate can affect our revenue and net income significantly. The transaction price, including management fee revenue and administrative services reimbursement revenue, includes variable consideration and is allocated based on the estimated standalone selling prices developed using industry information and other available information for similar services. We update the transaction price and the related allocation at least annually based upon the most recent information available or more frequently if there have been significant changes in any components considered in the transaction price. Our current transaction price allocation review resulted in a minor change in the allocation between the two performance obligations in 2025 compared to prior years, which did not have a material impact on our consolidated financial statements.
The following table presents the allocation and disaggregation of revenue for our two performance obligations for the three months ended March 31:
| (dollars in thousands) | 2025 | 2024 | % Change | ||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||
| Policy issuance and renewal services | |||||||||||||||||||||||||||||
| Direct and affiliated assumed premiums written by the Exchange | $ | 3,120,674 | $ | 2,741,020 | 13.9 | % | |||||||||||||||||||||||
| Management fee rate | 24.37 | % | 24.40 | % | |||||||||||||||||||||||||
| Management fee revenue | 760,508 | 668,809 | 13.7 | ||||||||||||||||||||||||||
| Change in estimate for management fee returned on cancelled policies (1) | (5,459) | (3,123) | (74.8) | ||||||||||||||||||||||||||
| Management fee revenue - policy issuance and renewal services | $ | 755,049 | $ | 665,686 | 13.4 | % | |||||||||||||||||||||||
| Administrative services | |||||||||||||||||||||||||||||
| Direct and affiliated assumed premiums written by the Exchange | $ | 3,120,674 | $ | 2,741,020 | 13.9 | % | |||||||||||||||||||||||
| Management fee rate | 0.63 | % | 0.60 | % | |||||||||||||||||||||||||
| Management fee revenue | 19,660 | 16,446 | 19.5 | ||||||||||||||||||||||||||
| Change in contract liability (2) | (1,968) | 498 | NM | ||||||||||||||||||||||||||
| Change in estimate for management fee returned on cancelled policies (1) | (47) | (10) | NM | ||||||||||||||||||||||||||
| Management fee revenue - administrative services | 17,645 | 16,934 | 4.2 | ||||||||||||||||||||||||||
| Administrative services reimbursement revenue | 210,273 | 191,567 | 9.8 | ||||||||||||||||||||||||||
| Total revenue from administrative services | $ | 227,918 | $ | 208,501 | 9.3 | % |
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 Consolidated 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 13.9% to $3.1 billion in the first quarter of 2025 compared to the first quarter of 2024, primarily driven by increased personal lines and commercial multi-peril premiums written. Year-over-year policies in force for all lines of business increased 3.2% in the first quarter of 2025 compared to 7.1% in the first quarter of 2024. The year-over-year average premium per policy for all lines of business increased 13.2% at March 31, 2025 compared to 10.6% at March 31, 2024.
Premiums generated from new business decreased 15.0% to $382 million in the first quarter of 2025 compared the same period in 2024, primarily driven by decreased premiums written in the personal auto and homeowners lines. Contributing to this change was a 22.4% decrease in new business policies written, partially offset by a 14.3% increase in year-over-year average premium per policy on new business at March 31, 2025. Premiums generated from new business increased 32.4% to $449 million in the first quarter of 2024 compared to the same period in 2023, primarily driven by increased premiums written in the commercial multi-peril, personal auto and homeowners lines. Contributing to this change was a 11.1% increase in new business policies written and a 14.0% increase in year-over-year average premium per policy on new business at March 31, 2024.
Premiums generated from renewal business increased 19.5% to $2.7 billion in the first quarter of 2025 compared to the first quarter of 2024 and increased 16.7% to $2.3 billion in the first quarter of 2024 compared to the first quarter of 2023. Underlying the trend in renewal business premiums in both periods was an 13.2% increase in year-over-year average premium per policy at March 31, 2025, and 9.9% at March 31, 2024, as well as an increase in year-over-year policies in force of 5.6% and 5.1% in the first quarters of 2025 and 2024, respectively.
Personal lines – Total personal lines premiums written increased 14.5% to $2.1 billion in the first quarter of 2025, compared to 20.6% in the first quarter of 2024, driven by a 14.6% increase in total personal lines year-over-year average premium per policy and a 3.1% increase in total personal lines policies in force.
Commercial lines – Total commercial lines premiums written increased 12.4% to $982 million in the first quarter of 2025, compared to 15.6% in the first quarter of 2024, driven by a 9.4% increase in total commercial lines year-over-year average premium per policy and a 3.8% 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 efforts to utilize 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 changes in regulation, inflationary trends and tariff policies, among others. The Exchange's pricing actions taken in 2024 have contributed to its increased average premium per policy at March 31, 2025. See also Part I. Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024 as filed with the Securities and Exchange Commission on February 27, 2025.
Policy issuance and renewal services
| Three months ended March 31, | |||||||||||||||||||||||||||||
| (dollars in thousands) | 2025 | 2024 | % Change | ||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||
| Management fee revenue - policy issuance and renewal services | $ | 755,049 | $ | 665,686 | 13.4 | % | |||||||||||||||||||||||
| Service agreement revenue | 6,432 | 6,514 | (1.3) | ||||||||||||||||||||||||||
| 761,481 | 672,200 | 13.3 | |||||||||||||||||||||||||||
| Cost of operations - policy issuance and renewal services | 627,750 | 550,322 | 14.1 | ||||||||||||||||||||||||||
| Operating income - policy issuance and renewal services | $ | 133,731 | $ | 121,878 | 9.7 | % | |||||||||||||||||||||||
Policy issuance and renewal services
The management fee revenue allocated for providing policy issuance and renewal services was 24.37% and 24.40% of the direct and affiliated assumed premiums written by the Exchange for the three month periods ended March 31, 2025 and 2024, respectively. 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. Service agreement revenue also includes fees received from the Exchange for the use of shared office space. The decrease in service agreement revenue reflects 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 March 31, | |||||||||||||||||||||||||||||
| (dollars in thousands) | 2025 | 2024 | % Change | ||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||
| Commissions: | |||||||||||||||||||||||||||||
| Total commissions | $ | 436,860 | $ | 375,760 | 16.3 | % | |||||||||||||||||||||||
| Non-commission expense: | |||||||||||||||||||||||||||||
| Underwriting and policy processing | $ | 51,260 | $ | 48,168 | 6.4 | % | |||||||||||||||||||||||
| Information technology | 64,785 | 53,490 | 21.1 | ||||||||||||||||||||||||||
| Sales and advertising | 17,375 | 17,207 | 1.0 | ||||||||||||||||||||||||||
| Customer service | 11,687 | 10,080 | 15.9 | ||||||||||||||||||||||||||
| Administrative and other | 45,783 | 45,617 | 0.4 | ||||||||||||||||||||||||||
| Total non-commission expense | 190,890 | 174,562 | 9.4 | ||||||||||||||||||||||||||
| Total cost of operations - policy issuance and renewal services | $ | 627,750 | $ | 550,322 | 14.1 | % |
Commissions – Commissions increased $61.1 million in the first quarter of 2025, compared to the same period in 2024, primarily driven by the growth in direct and affiliated assumed written premium and, to a lesser extent, an increase in agent incentive compensation. The estimated agent incentive payouts at March 31, 2025 are based on actual underwriting results for the two prior years and current year-to-date actual results and forecasted results for the remainder of 2025. The profitability component of agent incentive compensation increased due to improved actual and forecasted loss ratios for the three-year period ended 2025 compared to the three-year period ended 2024.
Non-commission expense – Non-commission expense increased $16.3 million in the first quarter of 2025 compared to the first quarter of 2024. Underwriting and policy processing expense increased $3.1 million primarily due to increased personnel costs. Information technology costs increased $11.3 million primarily due to an increase in hardware and software costs and personnel costs and a decrease in capitalized professional fees related to technology initiatives. Customer service costs increased $1.6 million primarily due to increased personnel costs and credit card processing fees. Personnel costs in the first quarter of 2025 were impacted by increased compensation including higher estimated costs for incentive plan awards compared to 2024.
Administrative services
| Three months ended March 31, | |||||||||||||||||||||||||||||
| (dollars in thousands) | 2025 | 2024 | % Change | ||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||
| Management fee revenue - administrative services | $ | 17,645 | $ | 16,934 | 4.2 | % | |||||||||||||||||||||||
| Administrative services reimbursement revenue | 210,273 | 191,567 | 9.8 | ||||||||||||||||||||||||||
| Total revenue allocated to administrative services | 227,918 | 208,501 | 9.3 | ||||||||||||||||||||||||||
| Administrative services expenses | |||||||||||||||||||||||||||||
| Claims handling services | 185,999 | 167,963 | 10.7 | ||||||||||||||||||||||||||
| Investment management services | 7,733 | 8,593 | (10.0) | ||||||||||||||||||||||||||
| Life management services | 16,541 | 15,011 | 10.2 | ||||||||||||||||||||||||||
| Operating income - administrative services | $ | 17,645 | $ | 16,934 | 4.2 | % |
Administrative services
The management fee revenue allocated to administrative services was 0.63% and 0.60% of the direct and affiliated assumed premiums written by the Exchange for the three month periods ended March 31, 2025 and 2024, respectively. 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 Consolidated Statements of Operations.
Cost of administrative services
Consistent with 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 the subscribers' attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of the subscribers at Exchange with respect to its administrative services as enumerated in 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
A summary of the results of our investment operations is as follows for the three months ended March 31:
| 2025 | 2024 | % Change | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | (Unaudited) | |||||||||||||||||||||||||||||||||||||
| Net investment income | $ | 19,948 | $ | 15,903 | 25.4 | % | ||||||||||||||||||||||||||||||||
| Net realized and unrealized investment gains | 502 | 1,853 | (72.9) | |||||||||||||||||||||||||||||||||||
| Net impairment losses recognized in earnings | (914) | (2,677) | 65.9 | |||||||||||||||||||||||||||||||||||
| Total investment income | $ | 19,536 | $ | 15,079 | 29.6 | % |
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 $4.0 million in the first quarter of 2025, compared to the same period in 2024, primarily due to an increase in bond and cash and cash equivalent income driven by higher average holdings and bond yields, higher equity in earnings of limited partnerships and an increase in agent loan interest income. Net investment income includes limited partnership earnings of $1.1 million in the first quarter of 2025, compared to $0.5 million for the same period in 2024.
Net realized and unrealized investment gains
A breakdown of our net realized and unrealized investment gains (losses) is as follows for the three months ended March 31:
| (in thousands) | 2025 | 2024 | |||||||||||||||||||||||||||
| Securities sold: | (Unaudited) | ||||||||||||||||||||||||||||
| Available-for-sale securities | $ | (262) | $ | (262) | |||||||||||||||||||||||||
| Equity securities | 101 | 67 | |||||||||||||||||||||||||||
| Change in fair value on remaining equity securities | 658 | 2,048 | |||||||||||||||||||||||||||
| Miscellaneous | 5 | 0 | |||||||||||||||||||||||||||
| Net realized and unrealized investment gains | $ | 502 | $ | 1,853 |
Net realized and unrealized gains of $0.5 million during the first quarter of 2025 were primarily due to market value adjustments on equity securities, partially offset by losses on disposals of available-for-sale securities. Net realized and unrealized gains of $1.9 million during the same period in 2024 were primarily due to market value adjustments on equity securities.
Net impairment losses recognized in earnings
Net impairment losses of $0.9 million in the first quarter of 2025 include current expected credit losses on other loans receivable and agent loans of $0.5 million as well as credit-related impairments on available-for-sale securities of $0.4 million. Net impairments losses of $2.7 million during the same period in 2024 primarily included $2.2 million of current expected credit losses recognized on held-to-maturity securities as well as intent to sell and credit-related impairments on available-for-sale securities of $0.3.
Financial Condition of Erie Insurance Exchange
Serving in the capacity of attorney-in-fact for the subscribers at 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 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 insurance 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. As of December 31, 2024, only approximately 13% of insurance groups, in which the Exchange is included, are rated A+ or higher. On August 8, 2024, while our A+ "Superior" rating was reaffirmed, the financial strength rating outlook was revised from stable to negative. The outlook was primarily driven by the Exchange’s recent profitability challenges from rising loss cost pressures and increased weather-related activity, and the related surplus impact. The outlook acknowledged that while actions have been implemented to address the challenges, the timing lag related to the most significant action, rate increases, could result in interim challenges until such time as the rate increases are earned and the full beneficial impact is realized.
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 insurance subsidiaries grew 13.9% to $3.1 billion in the first three months of 2025 compared to the first three months of 2024. 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 $9.2 billion and $9.3 billion at March 31, 2025 and December 31, 2024, respectively. The Exchange and its wholly owned property and casualty insurance subsidiaries' year-over-year policy retention ratio continues to be high at 89.9% at March 31, 2025 and 90.4% at December 31, 2024.
We have prepared our consolidated 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, 2024 as filed with the Securities and Exchange Commission on February 27, 2025 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) | March 31, 2025 | % to total | December 31, 2024 | % to total | ||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||
| Available-for-sale securities (1) | $ | 1,112,707 | 84 | % | $ | 1,043,615 | 83 | % | ||||||||||||||||||
| Equity securities (2) | 81,912 | 6 | 85,891 | 7 | ||||||||||||||||||||||
| Agent loans (3) | 98,823 | 7 | 92,731 | 7 | ||||||||||||||||||||||
| Other investments (4) | 34,666 | 3 | 29,610 | 3 | ||||||||||||||||||||||
| Total investments | $ | 1,328,108 | 100 | % | $ | 1,251,847 | 100 | % |
*(1)*This includes $12.2 million and $7.3 million of securities lent under a securities lending agreement as of March 31, 2025 and December 31, 2024, respectively.
*(2)*This includes $0.1 million of securities lent under a securities lending agreement as of March 31, 2025.
*(3)*The current portion of agent loans is included in the line item "Prepaid expenses and other current assets, net" in the Consolidated Statements of Financial Position.
*(4)*The current and long-term portions of other investments are included in the line items "Prepaid expenses and other current assets, net" and "Other assets, net", respectively in the Consolidated Statements of Financial Position.
Available-for-sale securities
Under our investment strategy, we maintain an available-for-sale portfolio that is of high quality and well diversified within each market sector. This investment strategy also achieves a balanced maturity schedule. Our available-for-sale portfolio is managed with the goal of achieving reasonable returns while limiting exposure to risk.
Available-for-sale securities are carried at fair value with unrealized gains and losses, net of deferred taxes, included in shareholders’ equity. Net unrealized losses on available-for-sale securities, net of deferred taxes, totaled $11.9 million at March 31, 2025, compared to $17.6 million at December 31, 2024.
The following table presents a breakdown of the fair value of our available-for-sale portfolio by industry sector and rating as of:
| (in thousands) | March 31, 2025 (1) | |||||||||||||||||||||||||||||||||||||
| AAA | AA | A | BBB | Non- investment grade | Fair value | |||||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||||||||||
| Basic materials | $ | 0 | $ | 0 | $ | 976 | $ | 2,158 | $ | 8,261 | $ | 11,395 | ||||||||||||||||||||||||||
| Communications | 0 | 6,015 | 12,638 | 15,298 | 11,783 | 45,734 | ||||||||||||||||||||||||||||||||
| Consumer | 0 | 1,997 | 37,477 | 63,256 | 47,651 | 150,381 | ||||||||||||||||||||||||||||||||
| Diversified | 0 | 0 | 0 | 0 | 829 | 829 | ||||||||||||||||||||||||||||||||
| Energy | 0 | 872 | 5,789 | 20,159 | 14,731 | 41,551 | ||||||||||||||||||||||||||||||||
| Financial | 0 | 4,302 | 118,532 | 137,048 | 21,234 | 281,116 | ||||||||||||||||||||||||||||||||
| Industrial | 0 | 0 | 6,900 | 19,112 | 32,048 | 58,060 | ||||||||||||||||||||||||||||||||
| Structured securities (2) | 170,957 | 190,005 | 25,226 | 14,762 | 844 | 401,794 | ||||||||||||||||||||||||||||||||
| Technology | 1,956 | 0 | 0 | 20,481 | 15,103 | 37,540 | ||||||||||||||||||||||||||||||||
| U.S. Treasury | 0 | 9,135 | 0 | 0 | 0 | 9,135 | ||||||||||||||||||||||||||||||||
| Utilities | 0 | 0 | 13,621 | 48,916 | 12,635 | 75,172 | ||||||||||||||||||||||||||||||||
| Total | $ | 172,913 | $ | 212,326 | $ | 221,159 | $ | 341,190 | $ | 165,119 | $ | 1,112,707 |
*(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 Consolidated Statements of Financial Position with all changes in unrealized gains and losses reflected in the Consolidated Statements of Operations.
The following table presents an analysis of the fair value of our equity securities by sector as of:
| (in thousands) | March 31, 2025 | December 31, 2024 | ||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||
| Financial services | $ | 67,776 | $ | 69,930 | ||||||||||||||||||||||
| Utilities | 4,229 | 5,629 | ||||||||||||||||||||||||
| Energy | 2,995 | 4,117 | ||||||||||||||||||||||||
| Consumer | 4,037 | 3,341 | ||||||||||||||||||||||||
| Technology | 1,974 | 1,974 | ||||||||||||||||||||||||
| Communications | 901 | 900 | ||||||||||||||||||||||||
| Total | $ | 81,912 | $ | 85,891 |
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 the uncertain tariff, inflationary and interest rate environment. While we did not see a significant impact on our sources or uses of cash in the first quarter of 2025, 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 November 2029. 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, 2024 as filed with the Securities and Exchange Commission on February 27, 2025.
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 9, Postretirement Benefits, of Notes to Consolidated Financial Statements" contained within this report for the funding policy and related contribution for our defined benefit pension plan. 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.
We maintain relationships and cash balances at diversified and well-capitalized financial institutions and have established processes to monitor them. We believe that our current cash, cash equivalents and marketable securities and cash generated from operations will be sufficient to meet our current and future cash requirements.
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. Additionally, if we require significant amounts of cash on short notice in excess of anticipated cash requirements, or if we are required to return cash collateral in connection with our securities lending program, we may have difficulty selling investments in a timely manner, or be forced 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 three months ended March 31:
| (in thousands) | 2025 | 2024 | ||||||||||||
| (Unaudited) | ||||||||||||||
| Net cash provided by operating activities | $ | 118,118 | $ | 87,193 | ||||||||||
| Net cash used in investing activities | (97,760) | (26,999) | ||||||||||||
| Net cash used in financing activities | (58,376) | (59,377) | ||||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (38,018) | $ | 817 |
Net cash provided by operating activities was $118.1 million in the first three months of 2025, compared to $87.2 million for the same period in 2024. Increased cash provided by operating activities was primarily due to an increase in management fees received of $96.3 million driven by growth in direct and affiliated assumed premiums written by the Exchange. This was partially offset by an increase in cash paid for agent commissions of $55.5 million driven by premium growth, and increases in incentive compensation paid to agents of $6.6 million and pension and employee benefits paid of $6.1 million due to higher pension contributions. Pension contributions totaled $39.0 million in 2025 compared to $33.0 million in 2024.
Net cash used in investing activities was $97.8 million in the first three months of 2025, compared to $27.0 million for the same period in 2024. Increased cash used in investing activities was primarily due to an increase in purchases of available-for-sale securities of $53.8 million and loans to agents and others of $10.1 million.
Net cash used in financing activities was $58.4 million in the first three months of 2025, compared to $59.4 million for the same period in 2024, primarily due to dividends paid to shareholders. We increased both our Class A and Class B shareholder regular quarterly dividends by 7.1% for 2025, compared to 2024. There are no regulatory restrictions on the payment of dividends to our shareholders.
Capital Outlook
We regularly prepare forecasts evaluating the current and future cash requirements for both normal and extreme risk 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) unrestricted and unpledged cash and cash equivalents, which totaled approximately $232.8 million at March 31, 2025, 2) $100 million available bank revolving line of credit, and 3) liquidation of unrestricted and unpledged assets held in our investment portfolio, including equity securities and investment grade bonds which totaled approximately $892.7 million at March 31, 2025. 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. See Part I, Item 1. "Financial Statements - Note 8, Bank Line of Credit, of Notes to Consolidated Financial Statements" for additional information related to our bank revolving line of credit.
Off-Balance Sheet Arrangements
We have entered into certain contingent obligations for guarantees. See Part I, Item 1. "Financial Statements - Note 14, Commitments and Contingencies, of Notes to Consolidated Financial Statements" contained within this report for additional information. We do not believe that these obligations will have a material current or future effect on our consolidated financial condition, results of operations or cash flows.
CRITICAL ACCOUNTING ESTIMATES
We make estimates and assumptions that have a significant effect on the amounts and disclosures reported in the consolidated 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, 2024 of our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on February 27, 2025. See Part I, Item 1. "Financial Statements - Note 6, Fair Value, of Notes to Consolidated Financial Statements" contained within this report for additional information on our valuation of investments.
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