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What changed in Erie Indemnity's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Erie Indemnity's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+279 added−291 removedSource: 10-K (2024-02-26) vs 10-K (2023-03-01)

Top changes in Erie Indemnity's 2023 10-K

279 paragraphs added · 291 removed · 235 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

31 edited+7 added−6 removed17 unchanged
Biggest changeWorkforce Metrics We used the following human capital metrics as part of managing our business for the years ended December 31: 2022 2021 2020 Workforce size Full-time (1) 5,970 5,805 5,849 Part-time 23 30 31 Temporary (2) 45 41 34 Turnover (3) 11.2 % 8.0 % 5.3 % Average tenure (4) 11.7 12.6 12.5 (1) Includes 50% of employees who provide claims and life insurance management services exclusively for the Exchange and its subsidiaries.
Biggest changeThrough these groups, we are taking a broader approach to problem-solving and innovation by aligning cross-functional teams of employees to our business strategy. 5 Table of Contents Workforce Metrics We used the following human capital metrics as part of managing our business for the years ended December 31: 2023 2022 2021 Workforce size Full-time (1) 6,481 5,970 5,805 Part-time 24 23 30 Temporary (2) 51 45 41 Turnover (3) 9.0 % 11.2 % 8.0 % Voluntary 4.8 % 6.9 % 4.8 % Retirements 2.8 % 3.6 % 2.2 % Average tenure (4) 10.4 11.7 12.6 (1) Includes 50% of employees who provide claims and life insurance management services exclusively for the Exchange and its subsidiaries for all periods presented.
The Exchange’s strategic focus as a reciprocal insurer is to employ a disciplined underwriting philosophy and to leverage its strong surplus position to generate higher risk adjusted investment returns. The goal is to produce acceptable returns, on a long-term basis, through careful risk selection, rational pricing and superior investment returns.
The Exchange’s strategic focus as a reciprocal insurer is to employ a disciplined underwriting philosophy and to leverage its strong surplus position to generate higher risk adjusted investment returns. The goal is to produce acceptable returns, on a long-term basis, through careful risk selection, appropriate pricing and superior investment returns.
The Exchange and its subsidiaries reimburse us monthly for the cost of these services. (2) Temporary employees are hired for short-term work and paid directly by us. (3) The percentage of employees who left voluntarily or involuntarily, including retirements; calculated using the number of employees who exited, divided by the average headcount of the period.
The Exchange and its subsidiaries reimburse us monthly for the cost of these services. (2) Temporary employees are hired for short-term work and paid directly by us. (3) Turnover is calculated using the number of employees who exited, divided by the average headcount of the period and represents the percentage of employees who left voluntarily or involuntarily, including retirements.
A decline in the business of the Exchange almost certainly would have as a consequence a decline in the total premiums paid and a correspondingly adverse effect on the amount of the management fees we receive.
A decline in the business of the Exchange almost certainly could have as a consequence a decline in the total premiums paid and a correspondingly adverse effect on the amount of the management fees we receive.
Additionally, copies of our annual report on Form 10-K are available free of charge, upon written request, by contacting Investor Relations, Erie Indemnity Company, 100 Erie Insurance Place, Erie, PA 16530, or calling (800) 458-0811.
Additionally, copies of our annual report on Form 10-K are available free of charge, upon written request, by contacting Investor Relations, Erie Indemnity Company, 100 Erie Insurance Place, Erie, PA 16530, or calling (800) 458-0811. 6 Table of Contents
Acting as attorney-in-fact in these two capacities is done in accordance with a subscriber's agreement (a limited power of attorney) executed individually by each subscriber (policyholder), which appoints us as their common attorney-in-fact to transact certain business on their behalf.
Acting as attorney-in-fact in these two capacities is done in accordance with a subscriber's agreement (a limited power of attorney) executed individually by each subscriber (policyholder), which appoints Indemnity as each subscriber's attorney-in-fact to transact certain business on their behalf.
The process of setting the management fee rate includes the evaluation of current year operating results compared to both prior year and industry estimated results for both Indemnity and the Exchange, and consideration of several factors for both entities including: their relative financial strength and capital position; projected revenue, expense and earnings for the subsequent year; future capital needs; as well as competitive position.
The process of setting the management fee rate includes, but is not limited to, the evaluation of current year operating results compared to both prior year and industry estimated results for both Indemnity and the Exchange, and consideration of several factors for both entities including, but not limited to: their relative financial strength and capital position; projected revenue, expense and earnings for the subsequent year; future capital needs; as well as competitive position.
We also have an exposure to a concentration of credit risk related to the unsecured receivables due from the Exchange for its management fee and cost reimbursements. See Part II, Item 8. "Financial Statements and Supplementary Data - Note 15, Concentrations of Credit Risk, of Notes to Financial Statements" contained within this report.
We also have an exposure to a concentration of credit risk related to the unsecured receivables due from the Exchange for net management fee and other reimbursements. See Part II, Item 8. "Financial Statements and Supplementary Data - Note 15, Concentrations of Credit Risk, of Notes to Financial Statements" contained within this report.
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. There are a limited number of companies that provide services under a reciprocal insurance exchange structure.
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. There are a limited number of companies that provide services under a reciprocal insurance exchange structure.
We also act as attorney-in-fact on behalf of the Exchange with respect to all claims handling and investment management services, as well as the service provider for all claims handling, life insurance, and investment management services for its insurance subsidiaries, collectively referred to as "administrative services".
We also act as attorney-in-fact on behalf of the subscribers at the Exchange with respect to all claims handling and investment management services, as well as the service provider for all claims handling, life insurance, and investment management services for the Exchange's insurance subsidiaries, collectively referred to as "administrative services".
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, not to exceed 25%, of the direct and affiliated assumed premiums written by the Exchange. The management fee rate is set at least annually by our Board of Directors.
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, not to exceed 25%, of the direct and affiliated assumed premiums written by the Exchange. The management fee rate is set at least annually by our Board of Directors.
Services 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.
Services The policy issuance and renewal services we provide on behalf of the subscribers at 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.
The Exchange is represented by independent agencies that serve as its sole distribution channel. In addition to their principal role as salespersons, the independent agents play a significant role as underwriting and service providers and are an integral part of the Exchange's success. Our results of operations are tied to the growth and financial condition of the Exchange.
In addition to their principal role as salespersons, the independent agents play a significant role as underwriting and service providers and are an integral part of the Exchange's success. Our results of operations are tied to the growth and financial condition of the Exchange.
The Exchange also carefully selects the independent agencies that represent it and seeks to be the lead insurer with its agents in order to enhance the agency relationship and the likelihood of receiving the most desirable underwriting opportunities from its agents.
Indemnity, as part of its role managing and conducting the business and affairs of the Exchange, also carefully selects the independent agencies that represent the Exchange, which seeks to be the lead insurer with its agents in order to enhance the agency relationship and the likelihood of receiving the most desirable underwriting opportunities from its agents.
Our department of Diversity & Community Development is led by the Chief Diversity Officer who reports directly to the Chief Executive Officer, affirming our commitment to DEI from executive leadership. Our DEI efforts are further supported by a dedicated team of professionals including a Vice President of Diversity, Equity, and Inclusion.
Our DEI efforts are led by a Chief Diversity Officer who reports directly to the Chief Executive Officer, affirming our commitment to DEI from executive leadership. These efforts are further supported by a dedicated team of professionals including a Vice President of Diversity, Equity, and Inclusion. We recognize the importance of diverse backgrounds and experiences.
The underwriting services we provide include underwriting and policy processing and comprised approximately 10% of our 2022 policy issuance and renewal expenses. The remaining services we provide include customer service and administrative support. We also provide information technology services that support all the functions listed above that comprised approximately 11% of our 2022 policy issuance and renewal expenses.
The remaining services we provide include customer service and administrative support. We also provide information technology services that support all the functions listed above that comprised approximately 11% of our 2023 policy issuance and renewal expenses. Included in these expenses are allocations of costs for departments that support these policy issuance and renewal functions.
Our partnership with our employees is one of the cornerstones of our success. Our employee value proposition includes a culture that focuses on physical, financial, and emotional well-being.
Our partnership with our employees is one of the cornerstones of our success. Our employee value proposition includes a culture that focuses on physical, financial, and emotional well-being. In 2023, we were Certified™ by Great Place To Work® for our positive employee experience.
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 comprised approximately 66% of our 2022 policy issuance and renewal expenses.
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 comprised approximately 67% of our 2023 policy issuance and renewal expenses. The underwriting services we provide include underwriting and policy processing and comprised approximately 9% of our 2023 policy issuance and renewal expenses.
We foster an inclusive workplace through the endorsement of nine affinity networks and five business resource groups. Affinity networks are employee-driven groups that focus on particular dimensions of diversity and are designed to foster greater awareness and a culture of inclusion across our company. Business resource groups address business issues using a DEI lens.
We are also intentional about leveraging talent from the neuro diverse population, engaging individuals to support various enterprise initiatives. We foster an inclusive workplace through the endorsement of nine affinity networks and five business resource groups. Affinity networks are employee-driven groups that focus on particular dimensions of diversity and are designed to foster greater awareness and a culture of inclusion.
Included in these expenses are allocations of costs for departments that support these administrative functions. The subscriber's agreement and service agreements provide for reimbursement of amounts incurred for these services to Indemnity. Reimbursements are settled at cost. State insurance regulations require that intercompany service agreements and any material amendments be approved in advance by the state insurance department.
Investment management services are related to investment trading activity, accounting and all other functions attributable to the investment of funds. Included in these expenses are allocations of costs for departments that support these administrative functions. The subscriber's agreement and service agreements provide for reimbursement of amounts incurred for these services to Indemnity. Reimbursements are settled at cost.
We have no direct competition in providing these services to 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 Exchange generates revenue by insuring preferred and standard risks, with personal lines comprising 70% of the 2023 direct and affiliated assumed written premiums and commercial lines comprising the remaining 30%. The principal personal 3 Table of Contents lines products are private passenger automobile and homeowners. The principal commercial lines products are commercial multi-peril, commercial automobile and workers compensation.
Employees have access to skills enhancement training and programs as well as a generous tuition reimbursement program for higher education. We also grow and develop our employees by offering talent mobility opportunities such as expanded leadership experience, job shadowing, cross-training, stretch assignments, and formal career development programs.
We also grow and develop our employees by offering talent mobility opportunities such as expanded leadership experience, job shadowing, cross-training, stretch assignments, and formal career development programs. Our employees also share in our values to give back and make a positive difference in their communities.
Government Regulation Most states have enacted legislation that regulates insurance holding company systems, defined as two or more affiliated persons, one or more of which is an insurer. Indemnity and the Exchange, and its wholly owned subsidiaries, meet the definition of an insurance holding company system.
We continue to monitor turnover trends to determine the appropriate actions to ensure we are well positioned for the future. Government Regulation Most states have enacted legislation that regulates insurance holding company systems, defined as two or more affiliated persons, one or more of which is an insurer.
An engaged workforce is necessary for accomplishing organizational objectives and our portfolio of employee experience initiatives demonstrates our commitment to provide employees an engaging environment throughout all stages of their careers. We offer professional development opportunities that are designed to prepare employees for future career growth.
We encourage a work/life balance for all employees and recognize the need for employee flexibility by offering an allowance of remote work days to use throughout the year. An engaged workforce is necessary for accomplishing organizational objectives and our portfolio of employee experience initiatives demonstrates our commitment to provide employees an engaging environment throughout all stages of their careers.
Erie Insurance Exchange As our primary purpose is to manage the affairs at the Exchange for the benefit of the subscribers (policyholders) through the policy issuance and renewal services and administrative services, the Exchange is our sole customer. Our earnings are largely generated from management fees based on the direct and affiliated assumed premiums written by the Exchange.
State insurance regulations require that intercompany service agreements and any material amendments be approved in advance by the state insurance department. Erie Insurance Exchange As our primary purpose is to manage the affairs at the Exchange for the benefit of the subscribers (policyholders) through the policy issuance and renewal services and administrative services, the Exchange is our sole customer.
(4) The average number of years employees have been employed with the organization; calculated using the total number of years of employment, divided by average headcount of full-time and part-time employees for the period. The volatile talent market experienced during the pandemic continued to be a challenge in 2022.
(4) Average tenure is calculated using the total number of years of employment, divided by average headcount of full-time and part-time employees for the period and represents the average number of years employees have been employed with the organization. The largest portion of our turnover continues to be voluntary turnover, excluding retirements, and remains lower than industry benchmark data.
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.
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.
The principal commercial lines products are commercial 3 Table of Contents multi-peril, commercial automobile and workers compensation. Historically, due to policy renewal and sales patterns, the Exchange's direct and affiliated assumed written premiums are greater in the second and third quarters than in the first and fourth quarters of the calendar year.
Historically, due to policy renewal and sales patterns, the Exchange's direct and affiliated assumed written premiums tend to be greater in the second and third quarters than in the first and fourth quarters of the calendar year. The Exchange is represented by independent agencies that serve as its sole distribution channel.
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.
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.
Employees have access to an employee assistance plan, emergency child and elder care providers, adoption assistance, and infertility assistance, among others. We hold a shared responsibility view of retirement planning whereby we provide tools and resources that employees are expected to use to achieve their retirement goals.
We hold a shared responsibility view of retirement planning whereby we provide tools and resources that employees are expected to use to achieve their retirement goals. We set ourselves apart by offering both a 401(k) savings plan and a noncontributory defined benefit pension plan.
A 2022 employee survey, administered by Willis Towers Watson, indicated that our employees place a value of 84 out of 100 on their total rewards package, approximately 12 points above the industry benchmark. We offer competitive pay with a signature and affordable benefits package including options designed to meet the unique needs of our employees and their families.
We offer competitive pay with a signature and affordable benefits package including options designed to meet the unique needs of our employees and their families. Employees have access to an employee assistance plan, emergency child and elder care providers, adoption assistance, and infertility assistance, among others.
Removed
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.
Added
Our earnings are largely generated from management fees based on the direct and affiliated assumed premiums written by the Exchange. We have no direct competition in providing these services to the Exchange.
Removed
We set ourselves apart by offering both a 401(k) savings plan and a noncontributory defined benefit pension plan. We encourage a work/life balance for all employees. During 2022, we began returning employees to the office and addressed the need to meet business requirements while recognizing the need for employee flexibility by offering a variety of hybrid working arrangements.
Added
We offer professional development opportunities that are designed to prepare employees for future career growth. Employees have access to skills enhancement training and programs as well as a generous tuition reimbursement program for higher education.
Removed
Diversity, Equity & Inclusion Diversity, equity, and inclusion (“DEI”) is integral to our business success. Our strength is in our people and the more diverse our backgrounds and experiences, the stronger we are.
Added
We offer a volunteer program that provides employees with an allotment of paid hours annually to volunteer with eligible nonprofit organizations. We also offer a matching gifts program for donations to eligible nonprofit organizations. Diversity, Equity & Inclusion Diversity, equity, and inclusion ("DEI") is integral to our business success.
Removed
Through these groups, we are taking a broader approach to problem-solving and innovation by aligning cross-functional teams of employees to our business strategy.
Added
Our recruiting strategy includes access to multiple talent channels. We work to expand our pool of potential talent to include an array of skills, backgrounds, and experiences.
Removed
Our turnover rate increased to 11.2% in 2022 from 8.0% in 2021 and 5.3% in 2020. The largest portion of our turnover continues to be voluntary turnover, excluding retirements, which increased to 6.9% in 2022 from 4.8% in 2021 and 2.4% in 2020, but continues to remain lower 5 Table of Contents than industry benchmark data.
Added
We also offer a Future Focus internship program that provides opportunities for college students to gain relevant and real-world business experience in the insurance industry as well as an apprentice program to create a bridge for talent from high schools and community colleges into our workforce.
Removed
Employee retirements also contributed to the increased turnover rate as they increased to 3.6% in 2022 from 2.2% in 2021 and 2.0% in 2020. We continue to monitor turnover trends to determine the appropriate actions to ensure we are well positioned for the future.
Added
In support of our recruiting strategy, members of these networks engage with various colleges and universities throughout the country, including Historically Black Colleges and Universities. Business resource groups address business issues using a DEI lens.
Added
Indemnity and the Exchange, and its wholly owned subsidiaries, meet the definition of an insurance holding company system.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

56 edited+8 added−9 removed50 unchanged
Biggest changeAdditionally, we depend on a large amount of data to price policies appropriately, track exposures, perform financial analysis, report to regulatory bodies, and ultimately make business decisions. Should this data be inaccurate or insufficient, risk exposure may be underestimated and/or poor business decisions may be made.
Biggest changeIf we do not effectively and efficiently manage and upgrade our technology systems, or attract and retain qualified information technology employees and contract personnel to support those systems, our ability to serve our customers and implement our strategic initiatives could be adversely impacted. 10 Table of Contents Additionally, we depend on a large amount of data to price policies appropriately, track exposures, perform financial analysis, report to regulatory bodies, and ultimately make business decisions.
If agencies do not maintain their current levels of marketing efforts, bind the Exchange to unacceptable risks, or place business with competing insurers, or if the Exchange is unsuccessful in attracting or retaining agencies in its distribution system or maintaining its relationships with those agencies, the Exchange's ability to grow and renew its business may be adversely impacted.
If agencies do not maintain their current levels of marketing efforts, bind the Exchange to unacceptable risks, place business with competing insurers, or if the Exchange is unsuccessful in attracting or retaining agencies in its distribution system or maintaining its relationships with those agencies, the Exchange's ability to grow and renew its business may be adversely impacted.
Failure to accurately estimate our capital needs may have a material adverse effect on our financial condition until additional sources of capital can be obtained. Further, a deteriorating financial condition may create a negative perception of us by third parties, including investors, and financial institutions, which could impact our ability to access additional capital in the debt or equity markets.
Failure to accurately estimate our capital needs may have a material adverse effect on our financial condition until additional sources of capital can be obtained. Further, a deteriorating financial condition may create a negative perception of us by third parties, including investors, and financial institutions, which could impact our ability to access capital in the debt or equity markets.
In addition, due to the Exchange's premium concentration in the automobile and homeowners insurance markets, it may be more sensitive to trends that could affect auto and home insurance coverages and rates over time, for example changing vehicle usage, usage-based methods of determining premiums, ownership and driving patterns such as ride sharing or remote work, advancements in vehicle or home technology or safety features such as accident and loss prevention technologies, the development of autonomous vehicles, or residential occupancy patterns, among other factors.
In addition, due to the Exchange's premium concentration in the automobile and homeowners insurance markets, it may be more sensitive to trends that could affect auto and home insurance coverages and rates over time, for example changing vehicle types or usage, usage-based methods of determining premiums, ownership and driving patterns such as ride sharing or remote work, advancements in vehicle or home technology or safety features such as accident and loss prevention technologies, the development of autonomous vehicles, or residential occupancy patterns, among other factors.
Our risks have been divided into the following categories: Risks related to Erie Insurance Exchange – risks related to our dependence on our relationship with the Exchange associated with management fees, premium growth, and financial condition, as the Exchange is our sole customer and principal source of revenue Operating risks – risks stemming from events or circumstances that directly or indirectly affect our operations, including our operations as attorney-in-fact for the Exchange Market, Capital, and Liquidity risks – risks that may impact the values or results of our investment portfolio, ability to meet financial obligations or covenants, or obtain capital as necessary Although we have organized risks generally according to these categories in the discussion below, risks may have impacts in more than one category and are included where the impact is most significant.
Our risks have been divided into the following categories: Risks related to Erie Insurance Exchange – risks related to our dependence on our relationship with the Exchange associated with management fees, premium growth, and financial condition, as the Exchange is our sole customer and principal source of revenue Operating risks – risks stemming from events or circumstances that directly or indirectly affect our operations, including our operations as attorney-in-fact for the subscribers at the Exchange Market, Capital, and Liquidity risks – risks that may impact the values or results of our investment portfolio, ability to meet financial obligations or covenants, or obtain capital as necessary Although we have organized risks generally according to these categories in the discussion below, risks may have impacts in more than one category and are included where the impact is most significant.
If claims frequency and loss expenses were to decrease significantly as a result of an unexpected event, such as a pandemic, the profitability component of our agent incentive bonuses would improve, and our agent compensation costs would increase. Our second largest expense is employee costs, including salaries, healthcare, pension, and other benefit costs.
If claims frequency and loss expenses were to decrease significantly as a result of an unexpected event, such as a pandemic, the profitability component of our agent incentive compensation would improve, and our agent compensation costs would increase. Our second largest expense is employee costs, including salaries, healthcare, pension, and other benefit costs.
It is also possible that changes in economic conditions and steps taken by federal, state and local governments in response to a pandemic or other significant events could cause an increase in taxes at the federal, state and local levels, which would adversely impact our results of operations.
It is also possible that changes in economic conditions and steps taken by federal, state, and local governments in response to a pandemic or other significant events could cause an increase in taxes at the federal, state, and local levels, which could adversely impact our results of operations.
If a rating downgrade led to customers not renewing or canceling policies, or impacted the Exchange's ability to attract new customers, the premium revenue of the Exchange would be adversely affected which would reduce our management fee revenue. The circumstances or events that might impair the Exchange's financial condition include, but are not limited to, the items discussed below.
If a rating downgrade led to customers not renewing or canceling policies, or impacted the Exchange's ability to attract new customers, the premium revenue of the Exchange could be adversely affected, which could reduce our management fee revenue. The circumstances or events that might impair the Exchange's financial condition include, but are not limited to, the items discussed below.
The defined benefit pension plan we offer to our employees is affected by variable factors such as the interest rate used to discount pension liabilities, asset performance and changes in retirement patterns, which are beyond our control and any related future cost increases would reduce our profitability.
The defined benefit pension plan we offer to our employees is affected by variable factors such as the interest rate used to discount pension liabilities, asset performance, and changes in retirement patterns, which are beyond our control, and any related future cost increases could reduce our profitability.
This regulatory oversight includes, by way of example, matters relating to licensing, examination, rate setting, market conduct, policy forms, limitations on the nature and amount of certain investments, claims practices, mandated participation in involuntary markets and guaranty funds, reserve adequacy, insurer solvency, restrictions on underwriting standards, accounting standards, transactions between affiliates, risk management, and ESG practices.
This regulatory oversight includes, by way of example, matters relating to licensing, examination, rate setting, market conduct, policy forms, limitations on the nature and amount of certain investments, claims practices, mandated participation in involuntary markets and guaranty funds, reserve adequacy, insurer solvency, restrictions on underwriting standards, accounting standards, transactions between affiliates, risk management, cybersecurity and data privacy, and ESG practices.
Changes in applicable insurance laws, tax statutes, regulations, or changes in the way regulators administer those laws, tax statutes, or regulations could adversely impact the Exchange's business, cash flows, results of operations, financial condition, or operating environment and increase its exposure to loss or put it at a competitive disadvantage, which could result in reduced sales of its products and lower premium revenue.
Changes in applicable insurance laws, tax statutes, cyber, privacy, and other laws and regulations, or changes in the way regulators administer those laws, tax statutes, or regulations could adversely impact the Exchange's business, cash flows, results of operations, financial condition, or operating environment and increase its exposure to loss or put it at a competitive disadvantage, which could result in reduced sales of its products and lower premium revenue.
Disruptions in the financial markets or a lack of buyers for the specific securities that we are trying to sell, could prevent us from liquidating securities or cause a reduction in prices to levels that are not acceptable to us. 11 Table of Contents • Reinvestment risk - the possibility that the cash flows produced by an investment will have to be reinvested at a reduced rate of return.
Disruptions in the financial markets or a lack of buyers for the specific securities that we are trying to sell could prevent us from liquidating securities or cause a reduction in prices to levels that are not acceptable to us. • Reinvestment risk - the possibility that the cash flows produced by an investment will have to be reinvested at a reduced rate of return.
Our operations and those of our third parties may become vulnerable to damage or disruption due to circumstances beyond our or their control, such as from catastrophic events, power anomalies or 10 Table of Contents outages, natural disasters, pandemics, supply chain interruptions, network failures, and cyber attacks. Additionally, we are dependent on internet and telecommunications access and capabilities.
Our operations and those of our third parties may become vulnerable to damage or disruption due to circumstances beyond our or their control, such as from catastrophic events, power anomalies or outages, natural disasters, pandemics, supply chain interruptions, network failures, and cyber attacks. Additionally, we are dependent on internet and telecommunications access and capabilities.
Man-made disasters such as terrorist attacks and riots could also cause losses from insurance claims related to the property and casualty insurance operations, which could adversely affect its financial condition. Operating risks If the costs of providing services to the Exchange are not controlled, our profitability could be materially adversely affected.
Man-made disasters such as terrorist attacks and riots could also cause losses from insurance claims related to the property and casualty insurance operations, which could adversely affect its financial condition. 9 Table of Contents Operating risks If the costs of providing services to the Exchange are not controlled, our profitability could be materially adversely affected.
Approximately 36% of our fixed maturity portfolio is expected to mature over the next three years. Our equity securities have exposure to price risk. Equity markets, sectors, industries, and individual securities may also be subject to some of the same risks that affect our fixed income portfolio, as discussed above.
Approximately 36% of our fixed maturity portfolio is expected to mature over the next three years. 12 Table of Contents Our equity securities have exposure to price risk. Equity markets, sectors, industries, and individual securities may also be subject to some of the same risks that affect our fixed income portfolio, as discussed above.
The Exchange's common stock and preferred equity securities have exposure to price risk, the risk of potential loss in estimated fair value resulting from an adverse change in prices. Limited partnerships are significantly less liquid and generally involve higher degrees of price risk than publicly traded securities.
The Exchange's common stock and preferred equity securities have exposure to price risk, the risk of potential loss in estimated fair value resulting from an adverse change in prices. Limited partnerships are 8 Table of Contents significantly less liquid and generally involve higher degrees of price risk than publicly traded securities.
Pursuant to the subscriber's agreement, we perform policy issuance and renewal services for the subscribers at the Exchange and we serve as the attorney-in-fact on behalf of the Exchange with respect to its administrative services. The most significant costs we incur in providing policy issuance and renewal services are commissions, employee costs, and technology costs.
In accordance with the subscriber's agreement, we perform policy issuance and renewal services for the subscribers at the Exchange and we serve as the attorney-in-fact on behalf of the subscribers at the Exchange with respect to administrative services. The most significant costs we incur in providing policy issuance and renewal services are commissions, employee costs, and technology costs.
The process of setting the management fee rate includes the evaluation of current year operating results compared to both prior year and industry estimated results for both Indemnity and the Exchange, and consideration of several factors for both entities including: their relative financial strength and capital position; projected revenue, expense and earnings for the subsequent year; future capital needs; as well as competitive position.
The process of setting the management fee rate includes, but is not limited to, the evaluation of current year operating results compared to both prior year and industry estimated results for both Indemnity and the Exchange, and consideration of several factors for both entities including, but not limited to: their relative financial strength and capital position; projected revenue, expense and earnings for the subsequent year; future capital needs; as well as competitive position.
In addition, talented employees in the actuarial, finance, human resources, information technology, law, and risk management areas are also essential to support our core functions. 9 Table of Contents If we are unable to effectively maintain system availability or manage technology initiatives, we may experience adverse financial consequences and/or may be unable to compete effectively.
In addition, talented employees in the actuarial, finance, human resources, information technology, law, and risk management areas are also essential to support our core functions. If we are unable to effectively maintain system availability or manage technology initiatives, we may experience adverse financial consequences and/or may be unable to compete effectively.
If the Exchange were to fail to maintain acceptable financial strength ratings, its competitive position in the insurance industry would be adversely affected.
If the Exchange were to fail to maintain acceptable financial strength ratings, its competitive position in the insurance industry could be adversely affected.
The uncertainty of risks that emerge upon the occurrence of significant unexpected events, such as pandemics, or unexpected inflation caused by supply chain issues or otherwise, may cause additional challenges in the process of estimating loss and loss adjustment expense reserves or premiums to accommodate future claims and expenses.
The uncertainty of risks that emerge upon the occurrence of significant unexpected events, such as pandemics, or unexpected economic or social inflation caused by supply chain issues, societal trends, or otherwise, may cause additional challenges in the process of estimating loss and loss adjustment expense reserves or premiums to accommodate future claims and expenses.
Technological development is necessary to facilitate ease of doing business for employees, agents and customers. Our technological developments are focused on simplifying and improving the employee, agent and customer experiences, increasing efficiencies, redesigning products and addressing other potentially disruptive changes in the insurance industry.
Technological development is necessary to facilitate ease of doing business for employees, agents, and customers. Our technological developments are focused on simplifying and improving the employee, agent, and customer experiences, increasing efficiencies, redesigning products, and addressing other potentially disruptive changes in the insurance industry, including the use of artificial intelligence.
We are subject to applicable insurance laws, tax statutes, and regulations, as well as claims and legal proceedings, which, if determined unfavorably, could have a material adverse effect on our business, results of operations, or financial condition.
We are subject to applicable insurance laws, tax statutes, and numerous other federal and state laws and regulations, as well as claims and legal proceedings, which, if determined unfavorably, could have a material adverse effect on our business, results of operations, or financial condition.
These issues may 8 Table of Contents adversely affect the Exchange's business by either extending coverage beyond its underwriting intent or by increasing the number or size of claims.
These issues may adversely affect the Exchange's business by either extending coverage beyond its underwriting intent or by increasing the number or size of claims.
Commissions to independent agents are our largest expense. Commissions include scheduled commissions to agents based upon premiums written as well as additional commissions and bonuses to agents, which are earned by achieving certain targeted measures. Changes to commission rates or bonus programs may result in increased future costs and lower profitability. Our agent incentive bonuses include a profitability component.
Commissions to independent agents are our largest expense. Commissions include scheduled commissions to agents based upon premiums written as well as incentive compensation, which is earned by achieving certain targeted measures. Changes to commission rates or incentive programs may result in increased future costs and lower profitability. Our agent incentive compensation includes a profitability component.
Any reputational harm to the Exchange could have the potential to impair its ability to grow and renew its business. 7 Table of Contents As the attorney-in-fact in the reciprocal insurance exchange structure with the Exchange as our sole customer, we are dependent on the financial condition of the Exchange.
Any reputational harm to the Exchange could have the potential to impair its ability to grow and renew its business. As the attorney-in-fact for subscribers in the reciprocal insurance exchange structure with the Exchange as our sole customer, we are dependent on the financial condition of the Exchange.
At December 31, 2022, our investment portfolio consisted of approximately 84% fixed maturity securities, with the remaining 16% invested in equity securities and other investments. General economic conditions and other factors beyond our control can adversely affect the value of our investments and the realization of net investment income, or result in realized investment losses.
At December 31, 2023, our investment portfolio consisted of approximately 85% fixed maturity securities, with the remaining 15% invested in equity securities and other investments. General economic conditions and other factors beyond our control can adversely affect the value of our investments and the realization of net investment income or result in realized investment losses.
Employee absence, physical premises damage, systems failures or outages could compromise our ability to perform our business functions in a timely manner, which could harm our ability to conduct business and hurt our business and customer relationships. Our operational resiliency is also dependent on third-party personnel, infrastructure and systems on which we rely.
Employee absence, physical premises damage, systems failures or outages could compromise our ability to perform our business functions in a timely manner, which could harm our ability to conduct business and hurt our business and customer relationships. Our operational resiliency is also dependent on third-party personnel, infrastructure and systems on which we rely, including cloud-based technologies and software-as-a-service applications.
The number, complexity and sophistication of cyber threats continue to increase over time. While we maintain cyber liability insurance to mitigate the financial risk around cyber incidents, such insurance may not cover all costs associated with the consequences of information or systems being compromised, and such insurance may become prohibitively expensive to maintain.
While we maintain cyber liability insurance to mitigate the financial risk around cyber incidents, such insurance may not cover all costs associated with the consequences of information or systems being compromised, and such insurance may become prohibitively expensive to maintain.
Additionally, shifting consumer behaviors toward increased digital interactions may cause the insurance industry as a whole to migrate to a delivery system other than independent agencies. The Exchange maintains a brand recognized for customer service.
Additionally, shifting consumer behaviors toward increased digital interactions may cause the insurance industry as a whole to migrate to a delivery system other than independent agencies. The Exchange maintains a brand recognized for customer service, which is the result of Indemnity's management of the Exchange in accordance with the subscriber's agreement.
For example, the behavior of claimants and policyholders and the timing and amounts of claims settlements may change in unexpected ways. Furthermore, actions taken by governmental bodies, both legislative and regulatory, in reaction to significant unexpected events, and their related impacts, are hard to predict.
For example, the behavior of claimants and policyholders and the timing and amounts of claims settlements may change in unexpected ways. Furthermore, actions taken by governmental bodies, both legislative and regulatory, in reaction to significant unexpected events, and their related impacts, are hard to predict. Technology advancements, such as electric and autonomous vehicles, could impact frequency or severity of losses.
If the Exchange's competitors offer property and casualty products with more coverage or offer lower rates, and the Exchange is unable to implement product improvements quickly enough to keep pace, its ability to grow and renew its business may be adversely impacted.
If the Exchange's competitors offer property and casualty products with more coverage, offer lower rates, or introduce innovative services in response to evolving customer 7 Table of Contents preferences, and the Exchange is unable to implement product or service improvements quickly enough to keep pace, its ability to grow and renew its business may be adversely impacted.
Risks related to Erie Insurance Exchange If the management fee rate paid by the Exchange is reduced or if there is a significant decrease in the amount of direct and affiliated assumed premiums written by the Exchange, revenues and profitability could be materially adversely affected.
Risks related to Erie Insurance Exchange If the management fee rate retained by Indemnity is reduced or if there is a significant decrease in the amount of direct and affiliated assumed premiums written by the Exchange, revenues and profitability could be materially adversely affected. We are dependent upon management fees we retain, which represent our principal source of revenue.
In the normal course of business, we collect, use, store and where appropriate, disclose data concerning individuals and businesses. We also conduct business using third parties who may provide software, data storage, cloud-based computing and other technology services. We have on occasion experienced, and will continue to experience, cyber threats to our data and systems.
We also conduct business using third parties who may provide software, data storage, cloud-based computing and other technology services. We have on occasion experienced, and will continue to experience, cyber threats to our data and systems.
These agencies are not obligated to sell only the Exchange's insurance products, and generally also sell products of the Exchange's competitors.
The Exchange markets and sells its insurance products through independent, non-exclusive insurance agencies. These agencies are not obligated to sell only the Exchange's insurance products, and generally also sell products of the Exchange's competitors.
Innovations by competitors or other market participants may increase the level of competition in the industry. If the Exchange fails to respond to those innovations on a timely basis, its competitive position and results may be materially adversely affected. The Exchange markets and sells its insurance products through independent, non-exclusive insurance agencies.
Innovations, including the use of artificial intelligence and machine learning to support underwriting or other decisions, by competitors or other market participants may increase the level of competition in the industry. If the Exchange fails to respond to those innovations on a timely basis, its competitive position and results may be materially adversely affected.
The evaluation of these factors could result in a reduction to the management fee rate and our revenues and profitability could be materially adversely affected. Serving as the attorney-in-fact in the reciprocal insurance exchange structure results in the Exchange being our sole customer.
The evaluation of these factors could result in a reduction to the management fee rate and our revenues and profitability could be materially adversely affected.
If an extreme catastrophic event were to occur in a heavily concentrated geographic area of subscribers/policyholders, an extraordinarily high number of claims could have the potential to strain claims processing and affect the Exchange's ability to satisfy its customers.
If an extreme catastrophic event were to occur in a heavily concentrated geographic area of subscribers/policyholders, an extraordinarily high number of claims could have the potential to strain claims processing and affect the Exchange's ability to service its customers. If third-party service providers fail to perform as anticipated, the Exchange may experience operational difficulties, increased costs, and reputational damage.
If we are unable to attract, develop, and retain talented executives, key managers, and employees our financial condition and results of operations could be adversely affected. Our success is largely dependent upon our ability to attract and retain talented executives and other key management. Talent is defined as people with the right skills, knowledge, abilities, character, and motivation.
Our success is largely dependent upon our ability to attract and retain talented executives and other key management. Talent is defined as people with the right skills, knowledge, abilities, character, and motivation.
Therefore, management fee revenue from the Exchange is calculated by multiplying the management fee rate by the direct and affiliated assumed premiums written by the Exchange. Accordingly, any reduction in 6 Table of Contents direct and affiliated assumed premiums written by the Exchange and/or the management fee rate would have a negative effect on our revenues and net income.
Accordingly, any reduction in direct and affiliated assumed premiums written by the Exchange and/or the management fee rate could have a negative effect on our revenues and net income. The management fee rate is determined by our Board of Directors and may not exceed 25% of the direct and affiliated assumed premiums written by the Exchange.
Property and casualty insurers face a significant risk of litigation and regulatory investigations and actions in the ordinary course of operating their businesses including the risk of class action lawsuits. The Exchange and its subsidiaries have also been named as defendants in a number of pandemic-related lawsuits and, therefore, are subject to the risks and uncertainties of such litigation.
The Exchange and its subsidiaries have also been named as defendants in a number of pandemic-related lawsuits and, therefore, are subject to the risks and uncertainties of such litigation.
As we invest in the development of our systems, costs and completion times could exceed original estimates, and/or the project may not deliver the anticipated benefit or perform as expected. If we do not effectively and efficiently manage and upgrade our technology systems, our ability to serve our customers and implement our strategic initiatives could be adversely impacted.
As we invest in the development of our systems, costs and completion times could exceed original estimates, and/or the project may not deliver the anticipated benefit or perform as expected.
Likewise, an inability to match or exceed the service provided by competitors, which is increasingly relying on digital delivery and enhanced distribution technology, may impede the Exchange's ability to maintain and/or grow its customer base. If third-party service providers fail to perform as anticipated, the Exchange may experience operational difficulties, increased costs and reputational damage.
Likewise, an inability to match or exceed the service provided by competitors, who are increasingly relying on digital delivery and enhanced distribution technology, may impede the Exchange’s ability to maintain and/or grow its customer base.
The management fee rate is determined by our Board of Directors and may not exceed 25% of the direct and affiliated assumed premiums written by the Exchange. The Board of Directors sets the management fee rate each December for the following year. At their discretion, the rate can be changed at any time.
The Board of Directors sets the management fee rate each December for the following year. At their discretion, the rate can be changed at any time.
Plaintiffs in class action and other lawsuits against the Exchange may seek large or indeterminate amounts of damages, including punitive and treble damages, which may remain unknown for substantial periods of time. The Exchange is also subject to various regulatory inquiries, such as information requests, subpoenas, and books and record examinations from state and federal regulators and authorities.
Plaintiffs in class action and other lawsuits against the Exchange may seek large or indeterminate amounts of damages, including punitive and treble damages, which may remain unknown for substantial periods of time.
This may in turn lead to adverse operational or financial performance and adverse customer or investor confidence. If we experience difficulties with technology, data and network security, including those that could result from cyber attacks, third-party relationships or cloud-based relationships, our ability to conduct our business could be adversely impacted.
If we experience difficulties with technology, data and network security, including those that could result from cyber attacks, third-party relationships or cloud-based relationships, our ability to conduct our business could be adversely impacted. In the normal course of business, we collect, use, store and where appropriate, disclose data concerning individuals and businesses.
We are dependent upon management fees paid by the Exchange, which represent our principal source of revenue. Pursuant to the subscriber's agreement with the subscribers at the Exchange, we may retain up to 25% of all direct and affiliated assumed premiums written by the Exchange.
In accordance with the subscriber's agreement with the subscribers at the Exchange, we may retain up to 25% of all direct and affiliated assumed premiums written by the Exchange. Therefore, management fee revenue from the Exchange is calculated by multiplying the management fee rate by the direct and affiliated assumed premiums written by the Exchange.
The improper access, disclosure, misuse or mishandling of such information could result in legal liability, regulatory action and reputational damage. Third parties on whom we rely for certain business processing functions are also subject to these risks, and their failure to adhere to these laws and regulations could negatively impact us.
Third parties on whom we rely for certain business processing functions are also subject to these risks, and their failure to adhere to these laws and regulations could negatively impact us. The number, complexity, and sophistication of cyber threats continue to increase over time.
In deteriorating market conditions, there can be no assurance that we will obtain additional financing, or, if available, that the cost of financing will not substantially increase and affect our overall profitability. 12 Table of Contents ITEM 1B. UNRESOLVED STAFF COMMENTS None.
Our access to funds will depend upon a number of factors including current market conditions, the availability of credit, market liquidity, and the timing of obtaining credit ratings. In deteriorating market conditions, there can be no assurance that we will obtain additional financing, or, if available, that the cost of financing will not substantially increase and affect our overall profitability.
Additionally, we are not aware of any cybersecurity breach experienced by anyone with whom we have a third-party relationship that has had a material impact on our systems or data. If events occurred causing interruption of our operations, facilities, systems or business functions, it could have a material adverse effect on our operations and financial results.
If events occurred causing interruption of our operations, facilities, systems or business functions, it could have a material adverse effect on our operations and financial results.
The circumstances or events that might impair the Exchange's ability to grow include, but are not limited to, the items discussed below.
If the Exchange's ability to grow or renew policies were adversely impacted, the premium revenue of the Exchange could be adversely affected, which could reduce our management fee revenue. The circumstances or events that might impair the Exchange's ability to grow include, but are not limited to, the items discussed below.
As a result, we may suffer significant legal, reputational, or financial losses, which could adversely affect our business, cash flows, financial condition or results of operations. To date, we are not aware of any material cybersecurity breach with respect to our systems or data.
Similarly, if our third-party service providers experience a cyber incident, they may fail to report, or timely report, the incident to us. As a result, we may suffer significant legal, reputational, or financial losses, which could adversely affect our business, cash flows, financial condition or results of operations.
As we continue to develop technology initiatives in order to remain competitive, our profitability could be negatively impacted as we invest in system development. We may also experience increased technology costs as we re-design hybrid work models for our employees.
As we continue to develop technology initiatives in order to remain competitive, our profitability could be negatively impacted as we invest in system development. If we are unable to attract, develop, and retain talented executives, key managers, and employees our financial condition and results of operations could be adversely affected.
Our interactions with third parties may expose us to increased risk related to data security, service disruptions or effectiveness of our control system. In addition, we are subject to numerous federal and state data privacy and security laws relating to the privacy and security of the nonpublic personal information of our customers, employees and others.
In addition, we are subject to numerous federal and state laws relating to the privacy and security of nonpublic personal information and other sensitive information of our customers, employees and others. The improper access, disclosure, misuse or mishandling of such information could result in legal liability, regulatory action and reputational damage.
Also, we, or the Exchange, may fail to meet environmental, social, and governance (ESG) expectations of our customers or other interested parties. Failure to satisfy expectations in these areas may result in negative publicity or other adverse outcomes.
Failure to satisfy expectations in these areas may result in negative publicity or other adverse outcomes, which could be aggravated as the expectations of consumers, regulators and other stakeholders evolve and as social media and other forms of modern communication rapidly magnify reactions.
The growth of the Exchange directly affects our management fee revenue, which is largely generated from management fees based on the direct and affiliated assumed premiums written by the Exchange. If the Exchange's ability to grow or renew policies were adversely impacted, the premium revenue of the Exchange would be adversely affected which would reduce our management fee revenue.
Serving as the attorney-in-fact for subscribers in the reciprocal insurance exchange structure with the Exchange being our sole customer, the growth of the Exchange could directly affect our operating revenue, which is largely generated from management fees based on the direct and affiliated assumed premiums written by the Exchange.
Removed
In July 2017, the United Kingdom’s Financial Conduct Authority ("FCA"), which regulates the London Interbank Offered Rate (“LIBOR”), announced that it intends to phase out LIBOR by the end of 2021. After this date, the FCA would no longer require banks to make LIBOR submissions.
Added
Similarly, the Exchange’s brand could be tarnished by reactions to business practices, adverse financial developments, perceptions of our corporate governance, how we address employee matters and concerns, environmental, social and governance (ESG) initiatives, or the conduct of our employees, officers and directors.
Removed
Following discussions with the FCA and other official sector bodies, the Intercontinental Exchange Benchmark Administration announced in March 2021 the publication of certain USD LIBOR settings will continue through June 30, 2023.
Added
Property and casualty insurers face a significant risk of litigation and state and federal regulatory investigations, inquiries and actions in the ordinary course of operating their businesses, including the risk of class action lawsuits.
Removed
The Alternative Reference Rates Committee of the Federal Reserve Board (ARRC), a group of market participants convened to help ensure a successful transition away from LIBOR, has recommended the Secured Overnight Financing Rate (SOFR) as its preferred alternative reference rate and has proposed a transition plan and timeline designed to encourage the adoption of SOFR from LIBOR.
Added
Should this data be inaccurate or insufficient, risk exposure may be underestimated and/or poor business decisions may be made. This may in turn lead to adverse operational or financial performance and adverse customer or investor confidence.
Removed
Volume in SOFR-linked products progressed strongly in 2022, and SOFR is now the predominant floating rate used in newly issued fixed income transactions. However, most floating rate instruments outstanding still reference LIBOR and therefore will need to transition to an alternative rate.
Added
Even with appropriate governance and controls, the use of artificial intelligence may increase our exposure to cyber threats.
Removed
We have identified our population of contracts that contain a LIBOR reference and have determined that our primary exposure is in fixed income securities within our investment portfolio. At December 31, 2022, approximately 17% of our investment portfolio includes securities with LIBOR exposure where the stated final maturity date extends beyond June 30, 2023.
Added
Our interactions with, and reliance upon, third parties may also expose us to increased risk related to data security, service disruptions or effectiveness of our control system, particularly as we increase our reliance on cloud-based computing and software-as-a-service from third parties to operate our business.
Removed
Many of our LIBOR indexed securities have fallback provisions that provide for an alternative reference rate when LIBOR ceases to exist. For securities governed by U.S. law without adequate fallback provisions already in place, federal legislation was passed in 2022 to provide a safe harbor for transition to the recommended alternative reference rate.
Added
Our activities are subject to extensive regulation under federal and state laws on matters as diverse as internal control over financial reporting and disclosure controls, securities regulation, data privacy and protection, cybersecurity, taxation, immigration, wage-and-hour standards and employment and labor relations.
Removed
We continually monitor the risks associated with the LIBOR transition which include identifying and monitoring our exposure to LIBOR, monitoring the market adoption of alternative reference rates and ensuring operational processes are updated to accommodate alternative rates.
Added
These laws and regulations are complex and 11 Table of Contents evolving, and compliance with these laws requires significant resources. In some cases, these laws and regulations may increase our costs, negatively impact revenues, or impose operational limitations on our business.
Removed
Due to the inherent uncertainty in financial markets, we are currently unable to predict the overall impact of LIBOR transition on our net investment income, fair market value and return on investments that contain a LIBOR reference.
Added
Further, there can be no assurance that we, our third-party service providers and our independent agents are in full compliance with all applicable laws and regulations at all times. Efforts at compliance with all laws and regulations are further complicated by new and evolving regulations regarding cybersecurity, artificial intelligence and ESG matters.
Removed
Our access to funds will depend upon a number of factors including current market conditions, the availability of credit, market liquidity, and the timing of obtaining credit ratings.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeWe expect that most leases will be renewed or replaced upon expiration. Rental costs of shared facilities are allocated based upon usage or square footage occupied. Over 90% of our workforce had been working remotely from March 2020 through April 2022 due to the COVID-19 pandemic.
Biggest changeWe expect that most leases will be renewed or replaced upon expiration. Rental costs of shared facilities are allocated based upon square footage occupied. 14 Table of Contents
ITEM 2. PROPERTIES Indemnity and the Exchange share a corporate home office campus in Erie, Pennsylvania, which comprises approximately 996,000 square feet. Additionally, we lease two office buildings and one warehouse facility from third parties. We are charged rent for the related square footage we occupy.
ITEM 2. PROPERTIES Indemnity and the Exchange share a corporate home office campus in Erie, Pennsylvania, which comprises approximately 996,000 square feet. Additionally, we lease two office buildings and one warehouse facility from third parties and are charged rent for the related square footage we occupy.
Indemnity and the Exchange also operate 25 field offices in 12 states used to primarily support claims-related activities. The Exchange owns seven field offices and leases another 16 from third parties. Indemnity owns one field office and leases another from a third party. Commitments for properties leased from third parties expire periodically through 2027.
Indemnity and the Exchange also own or lease 25 field offices in 12 states used to primarily support claims-related activities. The Exchange owns seven field offices and leases another 16 from third parties. Indemnity owns one field office and leases another from a third party. Commitments for properties leased from third parties expire periodically through 2029.
Removed
We implemented a phased return of our workforce beginning in April 2022 and transitioned to a predominately hybrid format. 13 Table of Contents

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

6 edited+4 added−0 removed9 unchanged
Biggest changeIndemnity intends to vigorously defend against all of the allegations and requests for relief in the complaint.
Biggest changeThe Petition is currently pending before the Court. 15 Table of Contents Indemnity intends to vigorously defend against all of the allegations and requests for relief in the complaint.
For additional information on contingencies, see Part II, Item 8. "Financial Statements and Supplementary Data - Note 16, Commitment and Contingencies, of Notes to Financial Statements". 14 Table of Contents ITEM 4. MINE SAFETY DISCLOSURES Not applicable. PART II
For additional information on contingencies, see Part II, Item 8. "Financial Statements and Supplementary Data - Note 16, Commitment and Contingencies, of Notes to Financial Statements". ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 16 Table of Contents PART II
Erie Indemnity Company (Defendant). The complaint seeks relief for alleged breaches of fiduciary duty by Indemnity in connection with the setting of the management fee it receives, pursuant to the terms of the Subscribers Agreement executed between Indemnity and all policyholders of the Exchange, as compensation for acting as the attorney-in-fact in the management of the Exchange.
Erie Indemnity Company (Defendant). The complaint seeks relief for alleged breaches of fiduciary duty by Indemnity in connection with the setting of the management fee it receives, in accordance with the terms of the Subscribers Agreement executed between Indemnity and all policyholders of the Exchange, as compensation for acting as the attorney-in-fact in the management of the Exchange.
This most recent complaint has the same allegation of breach of fiduciary duty by Indemnity in connection with the setting of the management fee it receives, pursuant to the terms of the Subscribers Agreement executed between Indemnity and all policyholders of the Exchange, as compensation for acting as the attorney-in-fact in the management of the Exchange.
This most recent complaint has the same allegation of breach of fiduciary duty by Indemnity in connection with the setting of the management fee it receives, in accordance with the terms of the Subscribers Agreement executed between Indemnity and all policyholders of the Exchange, as compensation for acting as the attorney-in-fact in the management of the Exchange.
Separately, Indemnity filed a Complaint in Federal Court to invoke certain provisions of the “All Writs Act” and the “Anti-Injunction Act.” By filing this complaint, Indemnity seeks to protect the federal court’s prior binding, final judgments in favor of Indemnity and thereby foreclose further litigation of the claims and issues pertaining to the compensation practices that were the subject of the prior judgments.
Separately, Indemnity filed a Complaint in Federal Court to invoke certain provisions of the "All Writs Act" and the "Anti-Injunction Act." By filing this complaint, Indemnity seeks to protect the federal court’s prior binding, final judgments in favor of Indemnity and thereby foreclose further litigation of the claims and issues pertaining to the compensation practices that were the subject of the prior judgments.
On November 21, 2022, Indemnity filed a Petition for Rehearing requesting that the Third Circuit permit the appeal. By Order dated January 9, 2023, the Court granted the petition for rehearing and vacated the prior Order of October 7, 2022, denying permission to appeal. The appeal will now be heard before the Third Circuit.
On November 21, 2022, Indemnity filed a Petition for Rehearing requesting that the Third Circuit permit the appeal. By Order dated January 9, 2023, the Court granted the petition for rehearing and vacated the prior Order of October 7, 2022, denying permission to appeal. On April 20, 2023, argument was held before a three-judge panel of the Third Circuit.
Added
By Opinion dated May 22, 2023, the Court affirmed the decision of the District Court finding that there was no basis for federal court jurisdiction and that the matter had been properly remanded to state court. On June 5, 2023, Indemnity filed a Petition for Panel Rehearing or Rehearing En Banc.
Added
By Order dated June 22, 2023, the Court denied the Petition.
Added
The United States District Court thereafter extended its stay of the issuance of the remand order through the conclusion of any proceedings in the United States Supreme Court challenging the decision of the United States Court of Appeals for the Third Circuit that no federal jurisdiction exists in this case.
Added
On October 20, 2023, Indemnity filed a Petition for Writ of Certiorari with the Supreme Court of the United States. The Petition seeks a determination from the Court that the lower courts improperly denied federal jurisdiction.

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

1 edited+0 added−0 removed0 unchanged
Biggest changeItem 4. Mine Safety Disclosures 15 II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 15 Item 6. Selected Financial Data 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 37 Item 8.
Biggest changeItem 4. Mine Safety Disclosures 16 II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 17 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36 Item 8.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe following table presents the number and average price of our outstanding Class A nonvoting common stock shares purchased during the quarter ending December 31, 2022: (dollars in thousands, except per share data) Period Total number of shares purchased Average price paid per share Total number of shares purchased as part of publicly announced program Dollar value of shares that may yet be purchased under the program October 1–31, 2022 — $ — — $ 17,754 November 1–30, 2022 (1) 1,835 254.47 — 17,754 December 1–31, 2022 — — — 17,754 Total 1,835 254.47 — (1) Represents shares purchased on the open market to fund the rabbi trust for both the outside director deferred stock compensation plan (1,563 shares at an average price of $254.47 per share) and the incentive compensation deferral plan (272 shares at an average price of $254.47 per share).
Biggest changeThe following table presents the number and average price of our outstanding Class A nonvoting common stock shares purchased during the quarter ending December 31, 2023: (dollars in thousands, except per share data) Period Total number of shares purchased Average price paid per share Total number of shares purchased as part of publicly announced program Dollar value of shares that may yet be purchased under the program October 1–31, 2023 — $ — — $ 17,754 November 1–30, 2023 (1) 1,258 277.03 — 17,754 December 1–31, 2023 — — — 17,754 Total 1,258 277.03 — (1) Represents shares purchased on the open market to fund the rabbi trust for the outside director deferred stock compensation plan.
Broadridge Corporate Issuer Solutions, Inc. serves as our transfer agent and registrar. As of February 17, 2023, there were approximately 527 shareholders of record for the Class A non-voting common stock and 9 shareholders of record for the Class B voting common stock.
Broadridge Corporate Issuer Solutions, Inc. serves as our transfer agent and registrar. As of February 20, 2024, there were approximately 504 shareholders of record for the Class A non-voting common stock and 8 shareholders of record for the Class B voting common stock.
The Standard & Poor's Supercomposite Insurance Industry Group Index is made up of 55 constituent members represented by property and casualty insurers, insurance brokers, and life insurers, and is a capitalization weighted index. 2017 2018 2019 2020 2021 2022 Erie Indemnity Company Class A common stock $ 100 (1) $ 113 $ 143 $ 218 $ 174 $ 230 Standard & Poor's 500 Stock Index 100 (1) 96 126 149 191 157 Standard & Poor's Supercomposite Insurance Industry Group Index 100 (1) 90 116 114 148 161 (1) Assumes $100 invested at the close of trading, including reinvestment of dividends, on the last trading day preceding the first day of the fifth preceding fiscal year, in our Class A common stock, the Standard & Poor's 500 Stock Index, and the Standard & Poor's Supercomposite Insurance Industry Group Index. 15 Table of Contents Issuer Purchases of Equity Securities We may purchase shares, from time-to-time, in the open market, through trading plans entered into with one or more brokerage firms pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, or through privately negotiated transactions.
The Standard & Poor's Supercomposite Insurance Industry Group Index is made up of 56 constituent members represented by property and casualty insurers, insurance brokers, and life insurers, and is a capitalization weighted index. 2018 2019 2020 2021 2022 2023 Erie Indemnity Company Class A common stock $ 100 (1) $ 127 $ 194 $ 155 $ 205 $ 281 Standard & Poor's 500 Stock Index 100 (1) 131 156 200 164 207 Standard & Poor's Supercomposite Insurance Industry Group Index 100 (1) 128 127 163 178 196 (1) Assumes $100 invested at the close of trading, including reinvestment of dividends, on the last trading day preceding the first day of the fifth preceding fiscal year, in our Class A common stock, the Standard & Poor's 500 Stock Index, and the Standard & Poor's Supercomposite Insurance Industry Group Index. 17 Table of Contents Issuer Purchases of Equity Securities We may purchase shares, from time-to-time, in the open market, through trading plans entered into with one or more brokerage firms pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, or through privately negotiated transactions.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

126 edited+24 added−38 removed62 unchanged
Biggest changeConsistent with our process from the beginning of the pandemic, we prioritize the health and safety of our employees and will adjust as appropriate. 20 Table of Contents Financial Overview Years ended December 31, (dollars in thousands, except per share data) 2022 % Change 2021 % Change 2020 Operating income $ 376,214 18.3 % $ 318,097 (5.9) % $ 338,157 Total investment income 632 (99.1) 67,332 NM 32,867 Interest expense, net 2,009 (51.4) 4,132 NM 731 Other income (expense) 1,615 NM (4,893) NM (1,778) Income before income taxes 376,452 0.0 376,404 2.1 368,515 Income tax expense 77,883 (0.8) 78,544 4.4 75,211 Net income $ 298,569 0.2 % $ 297,860 1.6 % $ 293,304 Net income per share - diluted $ 5.71 0.3 % $ 5.69 1.6 % $ 5.61 NM = not meaningful Operating income increased in 2022 compared to 2021 as growth in operating revenue outpaced the growth in operating expenses.
Biggest changeFinancial Overview Years ended December 31, (dollars in thousands, except per share data) 2023 % Change 2022 % Change 2021 Operating income $ 520,256 38.3 % $ 376,214 18.3 % $ 318,097 Total investment income 28,968 NM 632 (99.1) 67,332 Interest expense, net — NM 2,009 (51.4) 4,132 Other income (expense) 12,712 NM 1,615 NM (4,893) Income before income taxes 561,936 49.3 376,452 0.0 376,404 Income tax expense 115,875 48.8 77,883 (0.8) 78,544 Net income $ 446,061 49.4 % $ 298,569 0.2 % $ 297,860 Net income per share - diluted $ 8.53 49.4 % $ 5.71 0.3 % $ 5.69 NM = not meaningful Operating income increased in 2023 compared to 2022 as growth in operating revenue outpaced the growth in operating expenses.
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.
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.
Additionally, purchases of investments exceeded proceeds generated from sales and maturities/calls of investments. In 2021, net cash used in investing activities was mainly driven by fixed asset purchases of $148.8 million, which included the purchase of the home office from the Exchange. To a lesser extent, purchases of investments exceeded proceeds generated from sales and maturities/calls of investments.
In 2021, net cash used in investing activities was mainly driven by fixed asset purchases of $148.8 million, which included the purchase of the home office from the Exchange. To a lesser extent, purchases of investments exceeded proceeds generated from sales and maturities/calls of investments.
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 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.
Approval by the applicable insurance commissioner is required prior to the consummation of transactions affecting the members within a holding company system. Intercompany Agreements Subscriber's and services agreements We serve as attorney-in-fact for the subscribers at the Exchange, a reciprocal insurance exchange.
Approval by the applicable insurance commissioner is required prior to the consummation of certain transactions affecting the members within a holding company system. Intercompany Agreements Subscriber's and services agreements We serve as attorney-in-fact for the subscribers at the Exchange, a reciprocal insurance exchange.
Indemnity and the Exchange, and its wholly owned subsidiaries, meet the definition of an insurance holding company system. All transactions within a holding company system affecting the member insurers of the holding company system must be fair and reasonable and any charges or fees for services performed must be reasonable.
Indemnity and the Exchange, and its wholly owned subsidiaries, meet the definition of an insurance holding company system. Transactions within a holding company system affecting the member insurers of the holding company system must be fair and reasonable and any charges or fees for services performed must be reasonable.
See broader discussions of potential risks to our operations in the Operating Overview and Part I, Item 1A. "Risk Factors" contained within this report. 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.
See broader discussions of potential risks to our operations in Part I, Item 1A. "Risk Factors" contained within this report. 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.
Since rate changes are realized at renewal, it takes 12 months to implement a rate change to all policyholders and another 12 months to earn the increased or decreased premiums in full. As a result, certain rate changes approved in 2021 were reflected in 2022, and a portion of the rate actions approved in 2022 will be reflected in 2023.
Since rate changes are realized at renewal, it takes 12 months to implement a rate change to all policyholders and another 12 months to earn the increased or decreased premiums in full. As a result, certain rate changes approved in 2022 were reflected in 2023, and a portion of the rate actions approved in 2023 will be reflected in 2024.
A change of 25 basis points in the expected long-term rate of return assumption, with other assumptions held constant, would have an estimated $2.6 million impact on net pension benefit cost in the following year, of which our share would be approximately $1.1 million.
A change of 25 basis points in the expected long-term rate of return assumption, with other assumptions held constant, would have an estimated $2.9 million impact on net pension benefit cost in the following year, of which our share would be approximately $1.2 million.
While estimates of the fair values of our investment portfolio are obtained from outside pricing services, we ultimately determine whether the inputs used are observable or unobservable. As of December 31, 2022, substantially all of the securities measured at fair value in our investment portfolio are classified as Level 2.
While estimates of the fair values of our investment portfolio are obtained from outside pricing services, we ultimately determine whether the inputs used are observable or unobservable. As of December 31, 2023, substantially all of the securities measured at fair value in our investment portfolio are classified as Level 2.
At December 31, 2022, our investments classified as Level 3 were not significant. See Item 8. "Financial Statements and Supplementary Data - Note 5, Fair Value, of Notes to Financial Statements" contained within this report for additional details on the fair value measurement of our investments.
At December 31, 2023, our investments classified as Level 3 were not significant. See Item 8. "Financial Statements and Supplementary Data - Note 5, Fair Value, of Notes to Financial Statements" contained within this report for additional details on the fair value measurement of our investments.
INDEX Page Number Cautionary Statement Regarding Forward-Looking Information 17 Recent Accounting Standards 18 Operating Overview 19 Critical Accounting Estimates 22 Results of Operations 25 Financial Condition 31 Investments 31 Shareholders' Equity 32 Liquidity and Capital Resources 33 Transactions/Agreements with Related Parties 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.
INDEX Page Number Cautionary Statement Regarding Forward-Looking Information 19 Recent Accounting Standards 20 Operating Overview 20 Critical Accounting Estimates 22 Results of Operations 25 Financial Condition 31 Investments 31 Shareholders' Equity 32 Liquidity and Capital Resources 33 Transactions/Agreements with Related Parties 35 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.
"Financial Statements and Supplementary Data - Note 9, Postretirement Benefits, of Notes to Financial Statements" contained within this report for additional details on the pension plans. 24 Table of Contents 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.
"Financial Statements and Supplementary Data - Note 9, Postretirement Benefits, of Notes to Financial Statements" contained within this report for additional details on the pension plans. 24 Table of Contents 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.
Commercial lines – Total commercial lines premiums written increased 11.2% to $2.6 billion in 2022, compared to 2021, driven by a 9.0% increase in the total commercial lines year-over-year average premium per policy and a 2.0% increase in total commercial lines policies in force.
Total commercial lines premiums written increased 11.2% in 2022, compared to 2021, driven by a 9.0% increase in the total commercial lines year-over-year average premium per policy and a 2.0% increase in total commercial lines policies in force.
While we did not see a significant impact on our sources or uses of cash in 2022, future disruptions in the markets could occur which may affect our liquidity position.
While we did not see a significant impact on our sources or uses of cash in 2023, future disruptions in the markets could occur which may affect our liquidity position.
If our normal operating and investing cash activities were to become insufficient to meet future funding requirements, we believe we have sufficient access to liquidity through our cash position, liquid marketable securities and our $100 million line of credit that does not expire until October 2026.
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.
Each applicant for insurance to a reciprocal insurance exchange signs a subscriber's agreement that contains an appointment of an attorney-in-fact. Through the designation of attorney-in-fact, we are required to provide policy issuance and renewal services and act as the attorney-in-fact for the Exchange with respect to all administrative services, as discussed previously.
Each applicant for insurance to a reciprocal insurance exchange (a subscriber) signs a subscriber's agreement that contains an appointment of an attorney-in-fact. Through the designation of attorney-in-fact, we are required to provide policy issuance and renewal services and act as the attorney-in-fact for the subscribers at the Exchange with respect to all administrative services, as discussed previously.
If actuarial net gains or losses exceed 5% of the greater of the projected benefit obligation and the market-related value of plan assets, the excess is recognized through the net periodic pension expense equally over the estimated service period of the employee group, which is currently 14 years.
If actuarial net gains or losses exceed 5% of the greater of the projected benefit obligation and the market- 23 Table of Contents related value of plan assets, the excess is recognized through the net periodic pension expense equally over the estimated service period of the employee group, which is currently 14 years.
Net impairment (losses) recoveries recognized in earnings Net impairment losses of $0.7 million in 2022 were related to available-for-sale securities and include $0.5 million of credit impairment losses and $0.2 million of securities in an unrealized loss position where we had intent to sell prior to recovery of our amortized cost basis.
Net impairment losses of $0.7 million in 2022 were related to available-for-sale securities and include $0.5 million of credit impairment losses and $0.2 million of securities in an unrealized loss position where we had intent to sell prior to recovery of our amortized cost basis.
Among the risks and uncertainties, in addition to those set forth in our filings with the Securities and Exchange Commission, that could cause actual results and future events to differ from those set forth or contemplated in the forward-looking statements include the following: • dependence upon our relationship with the Erie Insurance Exchange ("Exchange") and the management fee under the agreement with the subscribers at the Exchange; • dependence upon our relationship with the Exchange and the growth of the Exchange, including: ◦ general business and economic conditions; ◦ factors affecting insurance industry competition; ◦ dependence upon the independent agency system; and ◦ ability to maintain our reputation for customer service; • dependence upon our relationship with the Exchange and the financial condition of the Exchange, including: ◦ the Exchange's ability to maintain acceptable financial strength ratings; ◦ factors affecting the quality and liquidity of the Exchange's investment portfolio; ◦ changes in government regulation of the insurance industry; ◦ litigation and regulatory actions; ◦ emergence of significant unexpected events, including pandemics 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; 17 Table of Contents • 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.
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, 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 and economic or social 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 subscribers at 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; 19 Table of Contents • ability to maintain uninterrupted business operations; • compliance with complex and evolving laws and regulations and outcome of pending and potential litigation; • factors affecting the quality and liquidity of our investment portfolio; and • ability to meet liquidity needs and access capital.
The process of setting the management fee rate includes the evaluation of current year operating results compared to both prior year and industry estimated results for both Indemnity and the Exchange, and consideration of several factors for both entities including: their relative financial strength and capital position; projected revenue, expense and earnings for the subsequent year; future capital needs; as well as competitive position.
The process of setting the management fee rate includes, but is not limited to, the evaluation of current year operating results compared to both prior year and industry estimated results for both Indemnity and the Exchange, and consideration of several factors for both entities including, but not limited to: their relative financial strength and capital position; projected revenue, expense and earnings for the subsequent year; future capital needs; as well as competitive position.
These receivables include management fees due for policy issuance and renewal services performed by us under the subscriber's agreement, and certain costs we incur acting as the attorney-in-fact on behalf of the Exchange as well as the service provider for its insurance subsidiaries with respect to all administrative services, as discussed previously.
These receivables include management fees due for policy issuance and renewal services performed by us under the subscriber's agreement, and certain costs we incur acting as the 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, as discussed previously.
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.
On August 10, 2023, the outlook for the financial strength rating was affirmed as stable. As of December 31, 2023, 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.
While the expected long-term rate of return is generally less susceptible to annual revisions as there are typically no significant changes in the asset mix, we increased the expected return on asset assumption from 5.50% to 6.50% in 2023 based on the current asset allocation and considering a review of the key factors and expectations of future performance as well as the current market environment.
While the expected long-term rate of return is generally less susceptible to annual revisions as there are typically no significant changes in the asset mix, we increased the expected return on asset assumption from 6.50% to 7.00% in 2024 based on the current asset allocation and considering a review of the key factors and expectations of future performance as well as the current market environment.
Our assessment of the significance of a particular input to the fair value measurement requires judgment, and considers factors specific to the asset, such as the relative impact on the fair value as a result of including a particular input and market conditions.
Our assessment of the significance of a particular input to the fair value measurement requires judgment, and considers factors specific to the asset, such as the relative impact on 22 Table of Contents the fair value as a result of including a particular input and market conditions.
Once factored into the market-related 23 Table of Contents asset value, these experience gains and losses will be amortized over a period of 14 years, which is the remaining service period of the employee group.
Once factored into the market-related asset value, these experience gains and losses will be amortized over a period of 14 years, which is the remaining service period of the employee group.
Allocation of costs under these various agreements requires judgment and interpretation, and such allocations are performed using a consistent methodology, which is intended to adhere to the terms and intentions of the underlying agreements. Intercompany Receivables We have significant receivables from the Exchange and its affiliates that result in a concentration of credit risk.
Allocation of costs under these various agreements requires judgment and interpretation by Indemnity, and such allocations are performed using a consistent methodology, which is intended to adhere to the terms and intentions of the underlying agreements. 35 Table of Contents Intercompany Receivables We have significant receivables from the Exchange and its affiliates that result in a concentration of credit risk.
Cash requirements within the next twelve months include accounts payable, accrued liabilities, and other current obligations. Our long-term cash requirements under various contractual obligations and commitments include: • Pension – We have a funded noncontributory defined benefit pension plan covering substantially all employees and an unfunded supplemental employee retirement plan ("SERP") for certain members of executive and senior management.
Cash requirements within the next twelve months include accounts payable, accrued liabilities, and other current obligations. Our long-term cash requirements under various contractual obligations and commitments include: • Pension – We have a funded noncontributory defined benefit pension plan covering substantially all employees and an unfunded SERP for certain members of executive and senior management. See Item 8.
In 2022, approximately 71% of the administrative services expenses are entirely attributable to the respective administrative functions (claims handling, life insurance management and investment management), while the remaining 29% of these expenses are allocations of costs for departments that support these administrative functions.
In 2023, 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.
Impairment resulting from credit loss is recognized in earnings with a corresponding allowance on the balance sheet. We believe our investment valuation philosophy and accounting practices result in appropriate and timely measurement of fair value and recognition of impairment.
Impairment resulting from credit loss is recognized in earnings with a corresponding allowance on the Statement of Financial Position. We believe our investment valuation philosophy and accounting practices result in appropriate and timely measurement of fair value and recognition of impairment.
Year-over-year policies in force for all lines of business increased 3.6% in 2022 as the result of continuing strong policyholder retention and an increase in new policies written, compared to 3.2% in 2021. The year-over-year average premium per policy for all lines of business increased 5.4% at December 31, 2022, compared to 0.1% at December 31, 2021.
Year-over-year policies in force for all lines of business increased 6.9% in 2023 as the result of continuing strong policyholder retention and an increase in new policies written, compared to 3.6% in 2022. The year-over-year average premium per policy for all lines of business increased 9.4% at December 31, 2023, compared to 5.4% at December 31, 2022.
We actively evaluate the portfolios for securities in an 19 Table of Contents unrealized loss position and record impairment write-downs on investments in instances where we have the intent to sell or it's more likely than not that we would be required to sell the security.
We actively evaluate the fixed maturity portfolios for securities in an unrealized loss position and record impairment write-downs on investments in instances where we have the intent to sell or it's more likely than not that we would be required to sell the security.
Related Party, of Notes to Financial Statements" for additional details. Cost Allocation The allocation of costs affects our financial condition and that of the Exchange and its wholly owned subsidiaries.
"Financial Statements and Supplementary Data - Note 14, Related Party, of Notes to Financial Statements" for additional details. Cost Allocation The allocation of costs affects our financial condition and that of the Exchange and its wholly owned subsidiaries.
Outside of our normal operating and investing cash activities, future funding requirements could be met through: 1) unpledged cash and cash equivalents, which total approximately $128.8 million at December 31, 2022, 2) $100 million available bank revolving line of credit, and 3) liquidation of unpledged assets held in our investment portfolio, including equity securities and investment grade bonds which totaled approximately $738.3 million at December 31, 2022.
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 total approximately $128.7 million at December 31, 2023, 2) $100 million available bank revolving line of credit, and 3) liquidation of unpledged assets held in our investment portfolio, including equity securities and investment grade bonds which totaled approximately $799.0 million at December 31, 2023.
A 25 basis point decrease in the discount rate assumption, with other assumptions held constant, would increase pension cost in the following year by $3.6 million, of which our share would be approximately $1.5 million, and would increase the pension benefit obligation by $32.3 million.
A 25 basis point decrease in the discount rate assumption, with other assumptions held constant, would increase pension cost in the following year by $4.1 million, of which our share would be approximately $1.6 million, and would increase the pension benefit obligation by $37.2 million.
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.
The Exchange generates revenue by insuring preferred and standard risks, with personal lines comprising 70% of the 2023 direct and affiliated assumed written premiums and commercial lines comprising the remaining 30%. The principal personal lines products are private passenger automobile and homeowners. The principal commercial lines products are commercial multi-peril, commercial automobile and workers compensation.
These premiums, along with investment income, are the major sources of cash that support the operations of the Exchange. Policyholders' surplus, determined under statutory accounting principles, was $10.1 billion and $11.7 billion at December 31, 2022 and 2021, respectively.
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 $9.3 billion and $10.1 billion at December 31, 2023 and 2022, respectively.
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 $52.5 million at December 31, 2022, compared to net unrealized gains of $6.2 million at December 31, 2021.
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 $24.7 million at December 31, 2023, compared to $52.5 million at December 31, 2022.
Pursuant to the subscriber's agreement, we earn a management fee for these services calculated as a percentage of the direct and affiliated assumed premiums written by the Exchange. 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 the attorney-in-fact.
In accordance with the subscriber's agreement, we retain a management fee for these services calculated as a percentage of the direct and affiliated assumed premiums written by the Exchange. 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.
The Exchange implements rate changes in order to meet loss cost expectations. In response to reduced driving conditions in 2020 resulting from the COVID-19 pandemic, the Exchange implemented $200 million in personal and commercial auto rate reductions on policies written between July 1, 2020 and June 30, 2021.
The Exchange implements rate changes in order to meet loss cost expectations. In response to reduced driving conditions in 2020 resulting from the COVID-19 pandemic, the Exchange implemented $200 million in personal and commercial auto rate reductions on policies written between July 1, 2020 and June 30, 2021, which negatively impacted Exchange's written premium in 2021 by approximately $110 million.
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 9.2% to $8.6 billion in 2022 from $7.9 billion in 2021.
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 17.0% to $10.1 billion in 2023 from $8.6 billion in 2022.
State insurance regulations require that intercompany service agreements and any material amendments be approved in advance by the state insurance department. Shared facilities The Exchange and its subsidiaries have a service agreement with Indemnity to use space in Indemnity-owned properties. See Part II, Item 8. "Financial Statements and Supplementary Data - Note 14.
State insurance regulations require that intercompany service agreements and any material amendments be approved in advance by the state insurance department. Shared facilities The Exchange and its subsidiaries have a service agreement with Indemnity to use space in Indemnity-owned properties. See Item 8.
Decreased cash provided by operating activities in 2022 was primarily due to increases in cash paid for agent commissions of $75.9 million due to higher scheduled commissions driven by premium growth, administrative services expenses paid of $35.0 million and pension contributions of $25.0 million.
Decreased cash provided by operating activities in 2022, compared to 2021, was primarily due to increases in cash paid for agent commissions of $75.9 million driven by premium growth, administrative services expenses paid of $35.0 million and a pension contribution of $25.0 million.
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 as post-pandemic conditions continue to evolve.
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. The extent and duration of the impacts to economic conditions remain uncertain.
The market-related asset experience during 2022 that related to the actual investment return being different from that assumed during the prior year was a loss of $358.6 million. Recognition of this loss will be deferred and recognized over a four-year period, consistent with the market-related asset value methodology.
The market-related asset experience during 2023 that related to the actual investment return being different from that assumed during the prior year was a gain of $36.8 million. Recognition of this gain will be deferred and recognized over a four-year period, consistent with the market-related asset value methodology.
Reimbursements due from the Exchange and its insurance subsidiaries are recorded as a receivable and settled at cost. 28 Table of Contents Total investment income A summary of the results of our investment operations is as follows for the years ended December 31: (dollars in thousands) 2022 % Change 2021 % Change 2020 Net investment income $ 28,585 (54.0) % $ 62,177 NM % $ 29,753 Net realized and unrealized investment (losses) gains (27,286) NM 4,946 (22.6) 6,392 Net impairment (losses) recoveries recognized in earnings (667) NM 209 NM (3,278) Total investment income $ 632 (99.1) % $ 67,332 NM % $ 32,867 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.
Reimbursements due from the Exchange and its insurance subsidiaries are recorded as a receivable and settled at cost. 28 Table of Contents Total investment income A summary of the results of our investment operations is as follows for the years ended December 31: (dollars in thousands) 2023 % Change 2022 % Change 2021 Net investment income $ 44,572 55.9 % $ 28,585 (54.0) % $ 62,177 Net realized and unrealized investment (losses) gains (5,838) 78.6 (27,286) NM 4,946 Net impairment (losses) recoveries recognized in earnings (9,766) NM (667) NM 209 Total investment income $ 28,968 NM % $ 632 (99.1) % $ 67,332 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.
The Exchange and its wholly owned property and casualty subsidiaries' year-over-year policy retention ratio continues to be high at 90.5% at December 31, 2022 and 90.1% at December 31, 2021. We have prepared our financial statements considering the financial strength of the Exchange based on its A.M. Best rating and strong level of surplus.
The Exchange and its wholly owned property and casualty subsidiaries' year-over-year policy retention ratio continues to be high at 91.2% at December 31, 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.
We review these assumptions annually and modify them considering historical experience, current market conditions, including changes in investment returns and interest rates, and expected future trends. Accumulated and projected benefit obligations are expressed as the present value of future cash payments.
Key factors include assumptions about the discount rates and expected rates of return on plan assets. We review these assumptions annually and modify them considering historical experience, current market conditions, including changes in investment returns and interest rates, and expected future trends. Accumulated and projected benefit obligations are expressed as the present value of future cash payments.
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 2022, 2021, and 2020. The direct and affiliated assumed premiums written by the Exchange increased 9.2% to $8.6 billion in 2022 and 3.3% to $7.9 billion in 2021.
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 2023, 2022, and 2021. The direct and affiliated assumed premiums written by the Exchange increased 17.0% to $10.1 billion in 2023 and 9.2% to $8.6 billion in 2022.
Net realized and unrealized gains of $4.9 million in 2021 were primarily due to disposals of available-for-sale securities, while gains of $6.4 million in 2020 were primarily due to market value adjustments on equity securities and sales of available-for-sale securities.
Net realized and unrealized losses of $27.3 million in 2022 were primarily due to disposals of available-for-sale securities and market value adjustments on equity securities, while gains of $4.9 million in 2021 were primarily due to disposals of available-for-sale securities.
Depending upon market conditions, which are unpredictable and remain uncertain, considerable fluctuation could exist in the fair value of our investment portfolio and reported total investment income, which could have an adverse impact on our financial condition, 21 Table of Contents results of operations, and cash flows.
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 financial condition, results of operations, and cash flows.
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.
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.
Postretirement Benefits, of Notes to Financial Statements" for the funding policy for our defined benefit pension plan and accumulated benefit obligation for our unfunded SERP. • Deferred compensation – We have two deferred compensation plans for our executives, senior vice presidents, and other selected officers and two deferred compensation plans for our outside directors. See Part II, Item 8.
"Financial Statements and Supplementary Data - Note 9, Postretirement Benefits, of Notes to Financial Statements" for the funding policy and related contributions for our defined benefit pension plan, and accumulated benefit obligation for our unfunded SERP. • Deferred compensation – We have two deferred compensation plans for our executives, senior vice presidents, and other selected officers and two deferred compensation plans for our outside directors.
Future trends-premium revenue – Through a careful agency selection process, the Exchange plans to continue its effort to expand the size of its agency force to increase market penetration in existing operating territories to contribute to future growth.
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.
New business policies written increased 9.0% in 2021 and year-over-year average premium per policy on new business increased 3.9% at December 31, 2021. Premiums generated from renewal business increased 8.5% to $7.5 billion in 2022, and increased 2.1% to $6.9 billion, in 2021.
Year-over-year average premium per policy on new business increased 10.4% at December 31, 2022 and new business policies written increased 3.7% in 2022. Premiums generated from renewal business increased 13.9% to $8.5 billion in 2023, and increased 8.5% to $7.5 billion, in 2022.
Net realized and unrealized investment (losses) gains A breakdown of our net realized and unrealized investment (losses) gains is as follows for the years ended December 31: (in thousands) 2022 2021 2020 Securities sold: Available-for-sale securities $ (14,050) $ 5,131 $ 1,335 Equity securities (1,866) (76) (469) Equity securities change in fair value (11,372) (110) 5,525 Miscellaneous 2 1 1 Net realized and unrealized investment (losses) gains $ (27,286) $ 4,946 $ 6,392 Net realized and unrealized losses of $27.3 million in 2022 were primarily due to disposals of available-for-sale securities and market value adjustments on equity securities.
Net realized and unrealized investment (losses) gains A breakdown of our net realized and unrealized investment (losses) gains is as follows for the years ended December 31: (in thousands) 2023 2022 2021 Securities sold: Available-for-sale securities $ (6,719) $ (14,050) $ 5,131 Equity securities (2,328) (1,866) (76) Change in fair value on remaining equity securities 3,199 (11,372) (110) Miscellaneous 10 2 1 Net realized and unrealized investment (losses) gains $ (5,838) $ (27,286) $ 4,946 Net realized and unrealized losses of $5.8 million in 2023 were primarily due to disposals of available-for-sale and equity securities, partially offset by market value adjustment gains on equity securities.
The increase in investment portfolio positions with unrealized losses contributed to an increase in our deferred tax assets. Our evaluation of deferred tax assets and the need for a valuation allowance included available tax planning strategies that could be implemented, if necessary, to support the realizability of deferred tax assets. We believe those tax strategies are feasible and prudent.
Our evaluation of deferred tax assets and the need for a valuation allowance included available tax planning strategies that could be implemented, if necessary, to support the realizability of deferred tax assets. We believe those tax strategies are feasible and prudent.
We believe we have sufficient liquidity to meet our needs from sources other than the liquidation of securities. 33 Table of Contents Cash flow activities The following table provides condensed cash flow information for the years ended December 31: (in thousands) 2022 2021 2020 Net cash provided by operating activities $ 366,152 $ 402,794 $ 342,595 Net cash used in investing activities (106,922) (185,490) (243,225) Net cash used in financing activities (300,842) (194,842) (274,869) Net (decrease) increase in cash $ (41,612) $ 22,462 $ (175,499) Net cash provided by operating activities was $366.2 million in 2022, compared to $402.8 million in 2021 and $342.6 million in 2020.
We believe we have sufficient liquidity to meet our needs from sources other than the liquidation of securities. 33 Table of Contents Cash flow activities The following table provides condensed cash flow information for the years ended December 31: (in thousands) 2023 2022 2021 Net cash provided by operating activities $ 381,205 $ 366,152 $ 402,794 Net cash used in investing activities (157,565) (106,922) (185,490) Net cash used in financing activities (221,675) (300,842) (194,842) Net increase (decrease) in cash, cash equivalents, and restricted cash $ 1,965 $ (41,612) $ 22,462 Net cash provided by operating activities was $381.2 million in 2023, compared to $366.2 million in 2022 and $402.8 million in 2021.
Personal lines – Total personal lines premiums written increased 8.4% to $6.0 billion in 2022, from $5.5 billion in 2021, driven by a 4.4% increase in total personal lines year-over-year average premium per policy and a 3.9% increase in total personal lines policies in force.
Personal lines – Total personal lines premiums written increased 18.7% to $7.1 billion in 2023, from $6.0 billion in 2022, driven by a 10.5% increase in total personal lines year-over-year average premium per policy and a 7.4% increase in total personal lines policies in force.
The following table presents the allocation and disaggregation of revenue for our two performance obligations: Years ended December 31, (dollars in thousands) 2022 % Change 2021 % Change 2020 Policy issuance and renewal services Direct and affiliated assumed premiums written by the Exchange $ 8,595,960 9.2 % $ 7,868,311 3.3 % $ 7,613,519 Management fee rate 24.3 % 24.3 % 24.2 % Management fee revenue 2,088,818 9.2 1,912,000 3.8 1,842,472 Change in estimate for management fee returned on cancelled policies (1) (972) NM 1,166 NM (678) Management fee revenue - policy issuance and renewal services $ 2,087,846 9.1 % $ 1,913,166 3.9 % $ 1,841,794 Administrative services Direct and affiliated assumed premiums written by the Exchange $ 8,595,960 9.2 % $ 7,868,311 3.3 % $ 7,613,519 Management fee rate 0.7 % 0.7 % 0.8 % Management fee revenue 60,172 9.2 55,078 (9.6) 60,908 Change in contract liability (2) (1,865) NM 3,195 NM (1,376) Change in estimate for management fee returned on cancelled policies (1) 16 24.7 13 NM (69) Management fee revenue - administrative services 58,323 0.1 58,286 (2.0) 59,463 Administrative services reimbursement revenue 668,268 4.7 638,483 4.8 609,435 Total revenue from administrative services $ 726,591 4.3 % $ 696,769 4.2 % $ 668,898 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.
The following table presents the allocation and disaggregation of revenue for our two performance obligations: Years ended December 31, (dollars in thousands) 2023 % Change 2022 % Change 2021 Policy issuance and renewal services Direct and affiliated assumed premiums written by the Exchange $ 10,056,484 17.0 % $ 8,595,960 9.2 % $ 7,868,311 Management fee rate 24.30 % 24.30 % 24.30 % Management fee revenue 2,443,726 17.0 2,088,818 9.2 1,912,000 Change in estimate for management fee returned on cancelled policies (1) (1,653) (70.0) (972) NM 1,166 Management fee revenue - policy issuance and renewal services $ 2,442,073 17.0 % $ 2,087,846 9.1 % $ 1,913,166 Administrative services Direct and affiliated assumed premiums written by the Exchange $ 10,056,484 17.0 % $ 8,595,960 9.2 % $ 7,868,311 Management fee rate 0.70 % 0.70 % 0.70 % Management fee revenue 70,395 17.0 60,172 9.2 55,078 Change in contract liability (2) (6,690) NM (1,865) NM 3,195 Change in estimate for management fee returned on cancelled policies (1) (36) NM 16 24.7 13 Management fee revenue - administrative services 63,669 9.2 58,323 0.1 58,286 Administrative services reimbursement revenue 737,139 10.3 668,268 4.7 638,483 Total revenue from administrative services $ 800,808 10.2 % $ 726,591 4.3 % $ 696,769 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.
Partially offsetting this decrease in cash provided by operating activities was an increase in management fees received of $118.9 million driven by growth in direct and affiliated assumed premiums written by the Exchange, compared to 2021.
Partially offsetting this decrease in cash provided by operating activities was an increase in management fees received of $118.9 million driven by growth in direct and affiliated assumed premiums written by the Exchange. Net cash used in investing activities totaled $157.6 million in 2023, compared to $106.9 million in 2022 and $185.5 million in 2021.
The allocation of management fee for these services was 24.3% and 24.2% in 2021 and 2020, 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.
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.
Cost of operations for policy issuance and renewal services increased 7.0% to $1.8 billion in 2022 primarily due to higher scheduled commissions driven by direct and affiliated assumed written premium growth, as well as increased professional fees and technology costs, partially offset by decreased agent incentive compensation driven by higher claims severity and related loss costs experienced by the Exchange.
Cost of operations for policy issuance and renewal services increased 7.0% to $1.8 billion in 2022 primarily due to higher scheduled commissions driven by direct and affiliated assumed written premium growth, as well as increased professional fees and technology costs.
Underlying the trend in renewal business premiums was an increase in year-over-year policies in force of 3.6% and 2.4% in 2022 and 2021, respectively, driven by a slight increase in policy retention ratios, as well as a 4.7% increase in year-over-year average premium per policy at December 31, 2022, compared to a 0.3% decrease at December 31, 2021.
Underlying the trend in renewal business premiums in both periods were increases in year-over-year average premium per policy of 9.0% at December 31, 2023 and 4.7% at December 31, 2022, as well as an increase in year-over-year policies in force of 4.5% and 3.6% in 2023 and 2022, respectively, driven by a slight increase in policy retention ratios.
The following table presents an analysis of the fair value of our equity securities by sector as of December 31: (in thousands) 2022 2021 Financial services $ 61,084 $ 71,722 Utilities 5,708 6,259 Energy 3,576 6,448 Consumer 1,854 3,314 Communications 338 0 Total $ 72,560 $ 87,743 Shareholders' Equity Postretirement benefit plans The funded status of our postretirement benefit plans is recognized in the Statements of Financial Position, with a corresponding adjustment to accumulated other comprehensive income (loss), net of tax.
The following table presents an analysis of the fair value of our equity securities by sector as of December 31: (in thousands) 2023 2022 Financial services $ 69,900 $ 61,084 Utilities 5,810 5,708 Energy 3,901 3,576 Consumer 3,915 1,854 Technology 500 0 Industrial 180 0 Communications 47 338 Total $ 84,253 $ 72,560 Shareholders' Equity Postretirement benefit plans The funded status of our postretirement benefit plans is recognized in the Statements of Financial Position, with a corresponding adjustment to accumulated other comprehensive income (loss), net of tax.
Net receivables from the Exchange and other affiliates were $524.9 million, or 23.4% of total assets, at December 31, 2022 and $479.1 million, or 21.4% of total assets, at December 31, 2021.
Net receivables from the Exchange and other affiliates were $625.3 million, or 25.3% of total assets, at December 31, 2023 and $524.9 million, or 23.4% of total assets, at December 31, 2022.
Cost of policy issuance and renewal services Years ended December 31, (dollars in thousands) 2022 % Change 2021 % Change 2020 Commissions: Total commissions $ 1,179,569 6.4 % $ 1,108,426 5.4 % $ 1,051,272 Non-commission expense: Underwriting and policy processing $ 171,625 3.9 % $ 165,183 2.8 % $ 160,646 Information technology 198,157 7.1 185,096 6.5 173,827 Sales and advertising 60,000 14.3 52,511 (1.3) 53,212 Customer service 34,333 (6.5) 36,720 6.0 34,638 Administrative and other 151,958 17.4 129,461 12.3 115,302 Total non-commission expense 616,073 8.3 568,971 5.8 537,625 Total cost of policy issuance and renewal services $ 1,795,642 7.0 % $ 1,677,397 5.6 % $ 1,588,897 27 Table of Contents Commissions – Commissions increased $71.1 million in 2022 compared to 2021, primarily driven by the growth in direct and affiliated assumed written premium, partially offset by a decrease in agent incentive compensation.
Cost of policy issuance and renewal services Years ended December 31, (dollars in thousands) 2023 % Change 2022 % Change 2021 Commissions: Total commissions $ 1,348,530 14.3 % $ 1,179,569 6.4 % $ 1,108,426 Non-commission expense: Underwriting and policy processing $ 181,003 5.5 % $ 171,625 3.9 % $ 165,183 Information technology 216,746 9.4 198,157 7.1 185,096 Sales and advertising 58,905 (1.8) 60,000 14.3 52,511 Customer service 34,391 0.2 34,333 (6.5) 36,720 Administrative and other 171,970 13.2 151,958 17.4 129,461 Total non-commission expense 663,015 7.6 616,073 8.3 568,971 Total cost of policy issuance and renewal services $ 2,011,545 12.0 % $ 1,795,642 7.0 % $ 1,677,397 Commissions – Commissions increased $169.0 million in 2023 compared to 2022, primarily driven by the growth in direct and affiliated assumed written premium, partially offset by a decrease in agent incentive compensation.
Net investment income includes equity in losses of limited partnerships of $10.4 million in 2022, equity in earnings of limited partnerships of $31.7 million in 2021, and equity in losses of limited partnerships of $0.6 million in 2020.
Net investment income includes equity in losses of limited partnerships of $11.3 million and $10.4 million in 2023 and 2022, respectively, and equity in earnings of limited partnerships of $31.7 million in 2021.
Total investment income decreased $66.7 million in 2022 primarily due to a decrease in net investment income as well as net realized and unrealized investment losses in 2022 compared to net gains in 2021. Total investment income increased $34.5 million in 2021 primarily due to an increase in net investment income.
Total investment income decreased $66.7 million in 2022 21 Table of Contents primarily due to a decrease in net investment income as well as net realized and unrealized investment losses in 2022 compared to net gains in 2021.
Direct and affiliated assumed premiums written by the Exchange increased 9.2% to $8.6 billion in 2022, from $7.9 billion in 2021, primarily driven by increased personal lines and commercial multi-peril premiums written .
Direct and affiliated assumed premiums written by the Exchange increased 17.0% to $10.1 billion in 2023, from $8.6 billion in 2022, primarily driven by increased personal lines and commercial multi-peril premiums written .
Impairments During 2022, as a result of rising interest rates, unrealized losses in our fixed maturity portfolio increased significantly. We regularly monitor our fixed maturity and equity security portfolios for price changes and perform detailed reviews of securities in an unrealized loss position that may indicate that credit-related or other impairments exist.
Impairments Our fixed maturity portfolio experienced unrealized losses in 2023 and 2022 as a result of the higher interest rate environment compared to prior years. We regularly monitor our fixed maturity and equity security portfolios for price changes and perform detailed reviews of securities in an unrealized loss position that may indicate that credit-related or other impairments exist.
If we have the intent to sell or it's more likely than not that we would be required to sell the security before recovery of the amortized cost basis, the entire impairment is recognized in earnings.
We analyze all positions with an emphasis on those in a significant unrealized loss position. If we have the intent to sell or it's more likely than not that we would be required to sell the security before recovery of the amortized cost basis, the entire impairment is recognized in earnings.
We expect our share of the net pension benefit income to be approximately $3.3 million in 2023, of which expense of $11.5 million will be recorded in operating expense and income of $14.8 million will be recorded in other income.
We expect our share of the net pension benefit income to be approximately $1.4 million in 2024, of which expense of $13.0 million will be recorded in operating expense and income of $14.4 million will be recorded in other income.
Total personal lines policies in force increased 3.1% in 2021 and year-over-year average premium per policy decreased 0.6% at December 31, 2021.
Total personal lines year-over-year average premium per policy increased 4.4% at December 31, 2022 and policies in force increased 3.9% in 2022.
The management fee rate was set at 25% for 2022, 2021 and 2020. Our Board of Directors set the 2023 management fee rate again at 25%, its maximum level. Our earnings are primarily driven by the management fee revenue generated for the services we provide to the Exchange.
The management fee rate was set at 25% for 2023, 2022 and 2021. Based on analysis of the foregoing factors, our Board of Directors set the 2024 management fee rate again at 25%. 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 following table presents the carrying value of our investments as of December 31: (dollars in thousands) 2022 % to total 2021 % to total Fixed maturities $ 894,661 84 % $ 946,085 83 % Equity securities 72,560 7 87,743 8 Agent loans (1) 69,476 7 66,368 6 Other investments 30,511 2 36,846 3 Total investments $ 1,067,208 100 % $ 1,137,042 100 % (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.
The following table presents the carrying value of our investments as of December 31: (dollars in thousands) 2023 % to total 2022 % to total Fixed maturities $ 961,241 85 % $ 894,661 84 % Equity securities 84,253 7 72,560 7 Agent loans (1) 67,787 6 69,476 7 Other investments (2) 23,026 2 30,511 2 Total investments $ 1,136,307 100 % $ 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.
Increased cash provided by operating activities in 2021 was primarily due to an increase in management fees received driven by growth in direct and affiliated assumed premiums written by the Exchange of $94.6 million and an increase in administrative service reimbursements received of $46.9 million.
Increased cash provided by operating activities in 2023, compared to 2022, was primarily due to an increase in management fees received of $319.2 million driven by growth in direct and affiliated assumed premiums written by the Exchange.
Volatility in the financial markets presents challenges to us as we 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.
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.
Total commercial lines premiums written increased 5.4% in 2021, compared to 2020, driven by a 3.6% increase in total commercial lines policies in force and a 1.7% increase in the total commercial lines year-over-year average premium per policy.
Commercial lines – Total commercial lines premiums written increased 13.0% to $3.0 billion in 2023, compared to 2022, driven by a 9.5% increase in the total commercial lines year-over-year average premium per policy and a 3.2% increase in total commercial lines policies in force.
Administrative services Years ended December 31, (dollars in thousands) 2022 % Change 2021 % Change 2020 Management fee revenue - administrative services $ 58,323 0.1 % $ 58,286 (2.0) % $ 59,463 Administrative services reimbursement revenue 668,268 4.7 638,483 4.8 609,435 Total revenue allocated to administrative services 726,591 4.3 696,769 4.2 668,898 Administrative services expenses Claims handling services 576,799 5.5 546,962 4.2 525,072 Investment management services 36,795 (5.3) 38,862 5.5 36,835 Life management services 54,674 3.8 52,659 10.8 47,528 Operating income - administrative services $ 58,323 0.1 % $ 58,286 (2.0) % $ 59,463 Administrative services We allocate a portion of the management fee, which currently equates to 0.7% of the direct and affiliated assumed premiums written by the Exchange, to the administrative services.
Administrative services Years ended December 31, (dollars in thousands) 2023 % Change 2022 % Change 2021 Management fee revenue - administrative services $ 63,669 9.2 % $ 58,323 0.1 % $ 58,286 Administrative services reimbursement revenue 737,139 10.3 668,268 4.7 638,483 Total revenue allocated to administrative services 800,808 10.2 726,591 4.3 696,769 Administrative services expenses Claims handling services 635,043 10.1 576,799 5.5 546,962 Investment management services 34,958 (5.0) 36,795 (5.3) 38,862 Life management services 67,138 22.8 54,674 3.8 52,659 Operating income - administrative services $ 63,669 9.2 % $ 58,323 0.1 % $ 58,286 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 2023, 2022, and 2021.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

9 edited+1 added−2 removed9 unchanged
Biggest changeWe classify all fixed maturities as available-for-sale securities, allowing us to meet our liquidity needs and provide greater flexibility to appropriately respond to changes in market conditions. 38 Table of Contents The following tables show our fixed maturity investments by rating (1) : At December 31, 2022 (dollars in thousands) Amortized cost Fair value Percent of total AAA, AA, A $ 518,088 $ 479,413 54 % BBB 318,801 300,900 33 Total investment grade 836,889 780,313 87 BB 45,784 41,978 5 B 66,574 62,530 7 CCC, CC, C, and below 11,888 9,840 1 Total non-investment grade 124,246 114,348 13 Total $ 961,135 $ 894,661 100 % At December 31, 2021 (dollars in thousands) Amortized cost Fair value Percent of total AAA, AA, A $ 506,271 $ 508,610 54 % BBB 295,681 299,270 31 Total investment grade 801,952 807,880 85 BB 45,541 46,922 5 B 76,144 76,913 8 CCC, CC, C, and below 14,642 14,370 2 Total non-investment grade 136,327 138,205 15 Total $ 938,279 $ 946,085 100 % (1) Ratings are supplied by S&P, Moody's, and Fitch.
Biggest changeWe classify all fixed maturities as available-for-sale securities, allowing us to meet our liquidity needs and provide greater flexibility to appropriately respond to changes in market conditions. 37 Table of Contents The following tables show our fixed maturity investments by rating (1) : At December 31, 2023 (dollars in thousands) Amortized cost Fair value Percent of total AAA, AA, A $ 537,751 $ 515,175 54 % BBB 324,538 318,362 33 Total investment grade 862,289 833,537 87 BB 51,564 50,170 5 B 65,453 65,251 7 CCC, CC, C, and below 13,247 12,283 1 Total non-investment grade 130,264 127,704 13 Total $ 992,553 $ 961,241 100 % At December 31, 2022 (dollars in thousands) Amortized cost Fair value Percent of total AAA, AA, A $ 518,088 $ 479,413 54 % BBB 318,801 300,900 33 Total investment grade 836,889 780,313 87 BB 45,784 41,978 5 B 66,574 62,530 7 CCC, CC, C, and below 11,888 9,840 1 Total non-investment grade 124,246 114,348 13 Total $ 961,135 $ 894,661 100 % (1) Ratings are supplied by S&P, Moody's, and Fitch.
Equity securities are exposed to the risk of potential loss in estimated fair value resulting from an adverse change in prices ("price risk"). We do not hedge our exposure to price risk inherent in our equity investments. 39 Table of Contents
Equity securities are exposed to the risk of potential loss in estimated fair value resulting from an adverse change in prices ("price risk"). We do not hedge our exposure to price risk inherent in our equity investments. 38 Table of Contents
Fixed maturities interest-rate sensitivity analysis (dollars in thousands) At December 31, 2022 2021 Fair value of fixed maturity portfolio $ 894,661 $ 946,085 Fair value assuming 100-basis point rise in interest rates $ 868,919 $ 921,642 Effective duration (as a percentage) 2.9 2.6 37 Table of Contents While the fixed maturity portfolio is sensitive to interest rates, the future principal cash flows that will be received by contractual maturity date are presented below at December 31, 2022 and 2021.
Fixed maturities interest-rate sensitivity analysis (dollars in thousands) At December 31, 2023 2022 Fair value of fixed maturity portfolio $ 961,241 $ 894,661 Fair value assuming 100-basis point rise in interest rates $ 935,444 $ 868,919 Effective duration (as a percentage) 2.7 2.9 36 Table of Contents While the fixed maturity portfolio is sensitive to interest rates, the future principal cash flows that will be received by contractual maturity date are presented below at December 31, 2023 and 2022.
Duration is analyzed quarterly to ensure that it remains in the targeted range. A sensitivity analysis is used to measure the potential loss in future earnings, fair values, or cash flows of interest-sensitive instruments resulting from one or more selected hypothetical changes in interest rates and other market rates or prices over a selected period.
A sensitivity analysis is used to measure the potential loss in future earnings, fair values, or cash flows of interest-sensitive instruments resulting from one or more selected hypothetical changes in interest rates and other market rates or prices over a selected period.
A common measure of the interest sensitivity of fixed maturity assets is effective duration, a calculation that utilizes maturity, coupon rate, yield, and call terms to calculate an expected change in fair value given a change in interest rates. The longer the duration, the more sensitive the asset is to market interest rate fluctuations.
We do not hedge our exposure to interest rate risk. A common measure of the interest sensitivity of fixed maturity assets is effective duration, a calculation that utilizes maturity, coupon rate, yield, and call terms to calculate an expected change in fair value given a change in interest rates.
Market Risk Market risk is the risk of loss arising from adverse changes in interest rates, credit spreads, equity prices, or foreign exchange rates, as well as other relevant market rate or price changes. The volatility and liquidity in the markets in which the underlying assets are traded directly influence market risk.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Market risk is the risk of loss arising from adverse changes in interest rates, credit spreads, equity prices, or foreign exchange rates, as well as other relevant market rate or price changes.
Contractual repayments of principal by maturity date (in thousands) Fixed maturities: December 31, 2022 2023 $ 24,561 2024 104,164 2025 125,785 2026 79,745 2027 116,571 Thereafter 500,905 Total $ 951,731 Fair value $ 894,661 (in thousands) Fixed maturities: December 31, 2021 2022 $ 38,122 2023 89,184 2024 131,577 2025 108,165 2026 71,375 Thereafter 472,350 Total $ 910,773 Fair value $ 946,085 Investment Credit Risk Our objective is to earn competitive returns by investing in a diversified portfolio of securities.
Contractual repayments of principal by maturity date (in thousands) Fixed maturities: December 31, 2023 2024 $ 81,072 2025 96,519 2026 79,385 2027 116,418 2028 137,065 Thereafter 481,895 Total $ 992,354 Fair value $ 961,241 (in thousands) Fixed maturities: December 31, 2022 2023 $ 24,561 2024 104,164 2025 125,785 2026 79,745 2027 116,571 Thereafter 500,905 Total $ 951,731 Fair value $ 894,661 Investment Credit Risk Our objective is to earn competitive returns by investing in a diversified portfolio of securities.
The following is a discussion of our primary risk exposures, including interest rate risk, investment credit risk, concentration risk, liquidity risk, and equity price risk, and how those exposures are currently managed as of December 31, 2022. Interest Rate Risk We invest primarily in fixed maturity investments, which comprised 84% of our invested assets at December 31, 2022.
The volatility and liquidity in the markets in which the underlying assets are traded directly influence market risk. The following is a discussion of our primary risk exposures, including interest rate risk, investment credit risk, concentration risk, liquidity risk, and equity price risk, and how those exposures are currently managed as of December 31, 2023.
The value of the fixed maturity portfolio is subject to interest rate risk. As market interest rates decrease, the value of the portfolio increases with the opposite holding true in rising interest rate environments. We do not hedge our exposure to interest rate risk.
Interest Rate Risk We invest primarily in fixed maturity investments, which comprised 85% of our invested assets at December 31, 2023. The value of the fixed maturity portfolio is subject to interest rate risk. As market interest rates decrease, the value of the portfolio increases with the opposite holding true in rising interest rate environments.
Removed
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The significant volatility in the financial markets and uncertainty resulting from current events and post-pandemic conditions, resulting in continued supply chain disruptions and certain geopolitical events, have influenced various economic factors, including an elevated inflationary environment and rising interest rates.
Added
The longer the duration, the more sensitive the asset is to market interest rate fluctuations. Duration is analyzed at least quarterly to ensure that it remains in the targeted range.
Removed
As these events continue to evolve, the ultimate impact and duration remain uncertain. We could experience future losses and/or impairments to the portfolio given the above impacts on market conditions.

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