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Dynamic quotes 
OFFON

ERIE INDEMNITY COMPANY

(ERIE)
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ERIE INDEMNITY CO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

10/28/2021 | 04:30pm EST
The following discussion of financial condition and results of operations
highlights significant factors influencing Erie Indemnity Company ("Indemnity",
"we", "us", "our").  This discussion should be read in conjunction with the
historical financial statements and the related notes thereto included in Part
I, Item 1. "Financial Statements" of this Quarterly Report on Form 10-Q, and
with Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for the year ended December 31, 2020, as contained in our
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
February 25, 2021.


INDEX
                                                                  Page Number
  Cautionary Statement Regarding Forward-Looking Information           24

  Operating Overview                                                   25
  Results of Operations                                                28

  Financial Condition                                                  34

  Liquidity and Capital Resources                                      36

  Critical Accounting Estimates                                        38



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION


"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
Statements contained herein that are not historical fact are forward-looking
statements and, as such, are subject to risks and uncertainties that could cause
actual events and results to differ, perhaps materially, from those discussed
herein.  Forward-looking statements relate to future trends, events or results
and include, without limitation, statements and assumptions on which such
statements are based that are related to our plans, strategies, objectives,
expectations, intentions, and adequacy of resources.  Examples of
forward-looking statements are discussions relating to premium and investment
income, expenses, operating results, and compliance with contractual and
regulatory requirements.  Forward-looking statements are not guarantees of
future performance and involve risks and uncertainties that are difficult to
predict.  Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in such forward-looking statements.  Among the risks
and uncertainties, in addition to those set forth in our filings with the
Securities and Exchange Commission, that could cause actual results and future
events to differ from those set forth or contemplated in the forward-looking
statements include the following:
•dependence upon our relationship with the Erie Insurance Exchange ("Exchange")
and the management fee under the agreement with the subscribers at the Exchange;
•dependence upon our relationship with the Exchange and the growth of the
Exchange, including:
•general business and economic conditions;
•factors affecting insurance industry competition;
•dependence upon the independent agency system; and
•ability to maintain our reputation for customer service;
•dependence upon our relationship with the Exchange and the financial condition
of the Exchange, including:
•the Exchange's ability to maintain acceptable financial strength ratings;
•factors affecting the quality and liquidity of the Exchange's investment
portfolio;
•changes in government regulation of the insurance industry;
•litigation and regulatory actions;
•emerging claims and coverage issues in the industry; and
•severe weather conditions or other catastrophic losses, including terrorism;
•potential impacts of the COVID-19 pandemic on the growth and financial
condition of the Exchange;
•costs of providing policy issuance and renewal services to the Exchange under
the subscriber's agreement;
•ability to attract and retain talented management and employees;
•ability to ensure system availability and effectively manage technology
initiatives;
•difficulties with technology or data security breaches, including cyber
attacks;
•ability to maintain uninterrupted business operations;
•outcome of pending and potential litigation;
•potential impacts of the COVID-19 pandemic on our operations, the business
operations of our customers and/or independent agents, or our third-party vendor
operations;
                                       24
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•factors affecting the quality and liquidity of our investment portfolio; and
•our ability to meet liquidity needs and access capital.

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


OPERATING OVERVIEW

Overview

We serve as the attorney-in-fact for the subscribers (policyholders) at the
Exchange, a reciprocal insurer that writes property and casualty insurance. Our
primary function as attorney-in-fact is to perform policy issuance and renewal
services on behalf of the subscribers at the Exchange. We also act as
attorney-in-fact on behalf of the Exchange, as well as the service provider for
its insurance subsidiaries, with respect to all administrative services.

The Exchange is a reciprocal insurance exchange, which is an unincorporated
association of individuals, partnerships and corporations that agree to insure
one another. Each applicant for insurance to the Exchange signs a subscriber's
agreement, which contains an appointment of Indemnity as their attorney-in-fact
to transact the business of the Exchange on their behalf. Pursuant to the
subscriber's agreement for acting as attorney-in-fact in these two
capacities, we earn a management fee calculated as a percentage of the direct
and affiliated assumed premiums written by the Exchange.

Our earnings are primarily driven by the management fee revenue generated for
the services we provide to the Exchange. The policy issuance and renewal
services we provide to the Exchange are related to the sales, underwriting and
issuance of policies. The sales related services we provide include agent
compensation and certain sales and advertising support services. Agent
compensation includes scheduled commissions to agents based upon premiums
written as well as additional commissions and bonuses to agents, which are
earned by achieving targeted measures. Agent compensation generally comprises
approximately two-thirds of our policy issuance and renewal expenses. The
underwriting services we provide include underwriting and policy processing. The
remaining services we provide include customer service and administrative
support. We also provide information technology services that support all the
functions listed above. Included in these expenses are allocations of costs for
departments that support these policy issuance and renewal functions.

By virtue of its legal structure as a reciprocal insurer, the Exchange does not
have any employees or officers. Therefore, it enters into contractual
relationships by and through an attorney-in-fact. Indemnity serves as the
attorney-in-fact on behalf of the Exchange with respect to its administrative
services. The Exchange's insurance subsidiaries also utilize Indemnity for these
services in accordance with the service agreements between each of the
subsidiaries and Indemnity. Claims handling services include costs incurred in
the claims process, including the adjustment, investigation, defense, recording
and payment functions. Life insurance management services include costs incurred
in the management and processing of life insurance business. Investment
management services are related to investment trading activity, accounting and
all other functions attributable to the investment of funds. Included in these
expenses are allocations of costs for departments that support these
administrative functions. The amounts incurred for these services are reimbursed
to Indemnity at cost in accordance with the subscriber's agreement and the
service agreements. State insurance regulations require that intercompany
service agreements and any material amendments be approved in advance by the
state insurance department.

Our results of operations are tied to the growth and financial condition of the
Exchange as the Exchange is our sole customer, and our earnings are largely
generated from management fees based on the direct and affiliated assumed
premiums written by the Exchange. The Exchange generates revenue by insuring
preferred and standard risks, with personal lines comprising 71% of the 2020
direct and affiliated assumed written premiums and commercial lines comprising
the remaining 29%.  The principal personal lines products are private passenger
automobile and homeowners.  The principal commercial lines products are
commercial multi-peril, commercial automobile and workers compensation.

                                       25
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Coronavirus ("COVID-19") pandemic
In March 2020, the outbreak of the coronavirus ("COVID-19") was declared a
global pandemic. The uncertainty resulting from the COVID-19 pandemic continues
to evolve and the pandemic's ultimate impact and duration remain uncertain at
this time.

The impact the COVID-19 pandemic has on the premiums written by the Exchange,
our sole customer, affects our management fee revenue. The uncertainty of the
ongoing impacts of the COVID-19 pandemic will likely continue until such time as
the spread of the virus is contained. 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. For the nine months ended September 30,
2021, these rate reductions resulted in a decrease to Exchange's written
premiums of approximately $110 million and a corresponding decrease in our
management fee revenue of approximately $28 million. There may also be other
market and/or regulatory pressures that could impact the Exchange's operations.
While financial markets remained generally strong in the first nine months of
2021, we could experience future losses and/or impairments to the portfolio if
future development of the pandemic impacts market conditions. Additionally, we
continued to incur increased agent incentive costs as claim frequency, while
increasing in 2021, remains lower than pre-pandemic levels resulting in improved
agent profitability the first nine months of 2021. We have provided additional
disclosure of these impacted areas throughout our Management's Discussion and
Analysis that follows. A broader discussion of the potential future impacts has
also been disclosed in Financial Condition and Liquidity and Capital Resources
contained within this report, as well as Part I. Item 1A. "Risk Factors" related
to COVID-19 as included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2020 as filed with the Securities and Exchange Commission on
February 25, 2021.

We have a dedicated internal committee comprised of management from various
finance disciplines reviewing our risk positions and emerging trends on an
ongoing basis as circumstances are evolving. The committee is reviewing risk
scenarios and performing stress tests, including the review of cash flow trends,
liquidity requirements and other forms of risk quantification. This provides
tools for management, as well as our Risk Committee of the Board of Directors,
to assess risks and prioritize key issues.

While we were not required to close our physical locations under the state
mandated closure of nonessential services, out of concern for the health and
safety of our employees, over 90% of our workforce has been working remote since
March 2020. We have had no significant interruption to our core business
processes or systems to date. We have had no significant changes to our
financial close or reporting processes or related internal controls, nor do we
anticipate any significant future challenges at this time. We have a dedicated
team responsible for the development and implementation of a return to office
plan. We began returning some employees to our offices in July 2021, but paused
as a result of the national increase in infections. We plan to resume returning
employees to our offices in phases when we consider it appropriate.
                                       26
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Financial Overview
                                                Three months ended September 30,                               Nine months ended September 30,
(dollars in thousands, except
per share data)                          2021              2020                % Change                2021                2020               % Change
                                              (Unaudited)                                                    (Unaudited)

Operating income                     $  95,103          $ 96,225             (1.2)    %            $  256,263          $ 273,105            (6.2)    %
Total investment income                 20,598            16,438             25.3                      55,004             18,796                  NM
Interest expense, net                    1,034                 3                   NM                   3,082                  8                  NM
Other expense                              541               964            (43.7)                      1,608              1,588             1.3
Income before income taxes             114,126           111,696              2.2                     306,577            290,305             5.6
Income tax expense                      23,903            22,480              6.3                      63,759             59,786             6.6
Net income                           $  90,223          $ 89,216              1.1     %            $  242,818          $ 230,519             5.3     %
Net income per share - diluted       $    1.72          $   1.71              1.1     %            $     4.64          $    4.41             5.3     %


NM = not meaningful


Operating income decreased in both the third quarter and nine months ended
September 30, 2021, compared to the same periods in 2020, as growth in operating
expenses outpaced the growth in operating revenues. Management fee revenue for
policy issuance and renewal services increased 4.2% to $504.9 million in the
third quarter of 2021 and 3.6% to $1.5 billion for the nine months ended
September 30, 2021, respectively. Management fee revenue is based upon the
management fee rate we charge, and the direct and affiliated assumed premiums
written by the Exchange. The management fee rate was 25% for both 2021 and 2020.
The direct and affiliated assumed premiums written by the Exchange increased
3.8% to $2.1 billion in the third quarter of 2021 and increased 3.0% to $6.0
billion for the nine months ended September 30, 2021 compared to the same
periods in 2020.

Cost of operations for policy issuance and renewal services increased 5.1% to
$430.3 million and 5.5% to $1.3 billion in the third quarter and nine months
ended September 30, 2021, compared to the same periods in 2020, due to higher
commissions driven by direct and affiliated assumed written premium growth,
technology investments and personnel costs.

Management fee revenue for administrative services decreased 2.9% to $14.5
million and 1.1% to $44.0 million in the third quarter and nine months ended
September 30, 2021, compared to the same periods in 2020. The administrative
services reimbursement revenue and corresponding cost of operations increased
both total operating revenue and total operating expenses by $162.4 million in
the third quarter of 2021 and $473.1 million for the nine months ended September
30, 2021, but had no net impact on operating income.

Total investment income increased $4.2 million and $36.2 million in the third
quarter and nine months ended September 30, 2021, compared to the same periods
in 2020. The results from both periods were primarily due to increases in net
investment income which were driven by favorable results in our limited
partnership portfolio.


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.  As the COVID-19
pandemic continues to evolve, the extent and duration of the impacts to economic
conditions remain uncertain. See Financial Condition and Liquidity and Capital
Resources contained within this report, as well as Part I. Item 1A. "Risk
Factors" related to COVID-19 included in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2020 as filed with the Securities and Exchange
Commission on February 25, 2021 for a discussion of the potential impacts of the
COVID-19 pandemic on our operations.

Financial market volatility
Our portfolio of fixed maturity and equity security investments is subject to
market volatility especially in periods of instability in the worldwide
financial markets. Over time, net investment income could also be impacted by
volatility and by the general level of interest rates, which impact reinvested
cash flow from the portfolio and business operations. Depending upon market
conditions, which are unpredictable and remain uncertain, considerable
fluctuation could exist 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. Significant
volatility was seen in the global financial markets at the onset of the COVID-19
pandemic and pandemic related events may create future volatility. The extent of
the impact on our invested assets cannot be estimated with a high degree of
certainty at this time given the ongoing developments of this pandemic and the
related impacts on the financial markets.
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RESULTS OF OPERATIONS

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

The management fee is calculated by multiplying all direct and affiliated
assumed premiums written by the Exchange by the management fee rate, which is
determined by our Board of Directors at least annually.  The management fee rate
was set at 25%, the maximum rate, for both 2021 and 2020.  Changes in the
management fee rate can affect our revenue and net income significantly. The
transaction price, including management fee revenue and administrative service
reimbursement revenue, includes variable consideration and is allocated based on
the estimated standalone selling prices developed using industry information and
other available information for similar services. We update the transaction
price and the related allocation at least annually based upon the most recent
information available or more frequently if there have been significant changes
in any components considered in the transaction price. Our current transaction
price allocation review resulted in a minor change in the allocation percentages
between the two performance obligations. The change in allocation will not have
a material impact on our financial statements.

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

                                                             Three months ended September 30,                                  Nine months ended September 30,
(dollars in thousands)                                 2021                2020              % Change                    2021                2020             % Change
                                                             (Unaudited)                                                       (Unaudited)
Policy issuance and renewal services
Direct and affiliated assumed premiums written
by the Exchange                                $      2,075,745     $      1,999,074        3.8     %             $     6,024,484     $     5,849,505        3.0     %
Management fee rate                                        24.3   %             24.2  %                                      24.3   %            24.2  %
Management fee revenue                                  504,406              483,776        4.3                         1,463,950           1,415,580        3.4
Change in estimate for management fee returned
on cancelled policies (1)                                   485                  775      (37.2)                           (1,070)             (3,484) 

69.3

Management fee revenue - policy issuance and
renewal services                               $        504,891     $        484,551        4.2     %             $     1,462,880     $     1,412,096        3.6     %

Administrative services
Direct and affiliated assumed premiums written
by the Exchange                                $      2,075,745     $      1,999,074        3.8     %             $     6,024,484     $     5,849,505        3.0     %
Management fee rate                                         0.7   %              0.8  %                                       0.7   %             0.8  %
Management fee revenue                                   14,530               15,993       (9.1)                           42,171              46,796       (9.9)
Change in contract liability (2)                            (67)              (1,064)      93.6                             1,808              (2,247)  

NM

Change in estimate for management fee returned
on cancelled policies (1)                                     8                  (19)            NM                             6                 (55) 

NM


Management fee revenue - administrative
services                                                 14,471               14,910       (2.9)                           43,985              44,494   

(1.1)

Administrative services reimbursement revenue           162,410              147,710       10.0                           473,133             451,229   

4.9

Total revenue from administrative services $ 176,881 $

 162,620        8.8     %             $       517,118     $       495,723        4.3     %


NM = not meaningful
(1)A constraining estimate of variable consideration exists related to the
potential for management fees to be returned if a policy were to be cancelled
mid-term. Management fees are returned to the Exchange when policies are
cancelled mid-term and unearned premiums are refunded.
(2)Management fee revenue - administrative services is recognized over time as
the services are provided. See Part I, Item 1. "Financial Statements - Note 3,
Revenue, of Notes to Financial Statements" contained within this report.

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Direct and affiliated assumed premiums written by the Exchange
Direct and affiliated assumed premiums include premiums written directly by the
Exchange and premiums assumed from its wholly owned property and casualty
subsidiaries. Direct and affiliated assumed premiums written by the Exchange
increased 3.8% to $2.1 billion in the third quarter of 2021 compared to the
third quarter of 2020, primarily driven by increases in homeowners and
commercial multi-peril premiums written.  Year-over-year policies in force for
all lines of business increased 3.2% in the third quarter of 2021 compared to
1.7% in the third quarter of 2020.  The year-over-year average premium per
policy for all lines of business decreased 0.7% at September 30, 2021 compared
to an increase of 0.8% at September 30, 2020. The year-over-year average premium
per policy at September 30, 2021 was impacted by the rate reductions for our
personal and commercial auto policies written between July 1, 2020 and June 30,
2021, in response to lower driving activity as a result of the COVID-19
pandemic.

Premiums generated from new business decreased 2.4% to $239 million in the third
quarter of 2021. While year-over-year average premium per policy on new business
increased 2.0% at September 30, 2021, new business policies written decreased
8.9% in the third quarter of 2021. Premiums generated from new business
increased 10.4% to $244 million in the third quarter of 2020. While
year-over-year average premium per policy on new business decreased 4.6% at
September 30, 2020, new business policies written increased 19.7% in the third
quarter of 2020. Premiums generated from renewal business increased 4.7% to $1.8
billion in the third quarter of 2021 compared to the third quarter of 2020.
Underlying the trend in renewal business premiums was steady policy retention
ratios, partially offset by a 1.0% decrease in year-over-year average premium
per policy at September 30, 2021, compared to an increase of 1.5% at
September 30, 2020.

Personal lines - Total personal lines premiums written increased 2.6% to $1.5
billion in the third quarter of 2021, compared to 1.8% in the third quarter of
2020. While total personal lines year-over-year average premium per policy
decreased 1.5% at September 30, 2021, total personal lines policies in force
increased 3.1% in the third quarter of 2021.

Commercial lines - Total commercial lines premiums written increased 7.2% to
$582 million in the third quarter of 2021, compared to 2.5% in the third quarter
of 2020, driven by a 3.7% increase in total commercial lines policies in force
and a 0.9% increase in total commercial lines year-over-year average premium per
policy.

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

Changes in premium levels attributable to the growth in policies in force and
rate changes directly affect the profitability of the Exchange and have a direct
bearing on our management fee. Future premiums could be impacted by changes
resulting from the COVID-19 pandemic, including potential regulatory changes and
inflationary trends, among others. Longer-term, increased driving activity may
result in future rate increases due to higher claims frequencies and severity.
See also Part I. Item 1A. "Risk Factors" related to COVID-19 included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2020 as filed
with the Securities and Exchange Commission on February 25, 2021.


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Policy issuance and renewal services
                                                            Three months ended September 30,                                Nine months ended September 30,
(dollars in thousands)                                 2021              2020             % Change                   2021               2020              % Change
                                                             (Unaudited)                                                    (Unaudited)
Management fee revenue - policy issuance and
renewal services                                 $        504,891 $          484,551     4.2     %             $       1,462,880 $         1,412,096     3.6     %
Service agreement revenue                                   6,067              6,310    (3.9)                             18,048              19,418    (7.1)
                                                          510,958            490,861     4.1                           1,480,928           1,431,514     3.5
Cost of policy issuance and renewal services              430,326            409,546     5.1                           1,268,650           1,202,903    

5.5

Operating income - policy issuance and renewal
services                                         $         80,632 $           81,315    (0.8)    %             $         212,278 $           228,611    (7.1)    %




Policy issuance and renewal services
The management fee revenue allocated for providing policy issuance and renewal
services was 24.3% and 24.2% of the direct and affiliated assumed premiums
written by the Exchange for both the three and nine months ended September 30,
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.  The increase in management fee revenue
for policy issuance and renewal services was driven by the increase in the
direct and affiliated assumed premiums written by the Exchange discussed
previously.

Service agreement revenue
Service agreement revenue includes service charges we collect from
subscribers/policyholders for providing extended payment terms on policies
written and assumed by the Exchange, and late payment and policy reinstatement
fees.  The service charges are fixed dollar amounts per billed installment. 

The

decrease in service agreement revenue reflects the continued shift to payment
plans that do not incur service charges or offer a premium discount for certain
payment methods.

Cost of policy issuance and renewal services

                                                           Three months ended September 30,                               Nine months ended September 30,
(dollars in thousands)                                2021              2020             % Change                   2021               2020             % Change
                                                            (Unaudited)                                                   (Unaudited)
Commissions:
Total commissions                               $        288,046 $          273,184     5.4     %             $         842,647 $          803,658     4.9     %
Non-commission expense:
Underwriting and policy processing              $         40,731 $           40,674     0.1     %             $         124,500 $          121,917     2.1     %
Information technology                                    46,693             42,940     8.7                             139,174            128,253     8.5
Sales and advertising                                     13,422             12,111    10.8                              38,955             39,356    (1.0)
Customer service                                           8,980              8,650     3.8                              26,909             25,860     4.1
Administrative and other                                  32,454             31,987     1.5                              96,465             83,859    15.0
Total non-commission expense                             142,280            136,362     4.3                             426,003            399,245     

6.7

Total cost of policy issuance and renewal
services                                        $        430,326 $          409,546     5.1     %             $       1,268,650 $        1,202,903     5.5     %




Commissions - Commissions increased $14.9 million in the third quarter of 2021
and $39.0 million for the nine months ended September 30, 2021 compared to the
same periods in 2020, primarily driven by the growth in direct and affiliated
assumed written premium, primarily in lines of business that pay a higher
commission rate. To a lesser extent, there was also an increase in agent
incentive compensation for the third quarter and nine months ended September 30,
2021 compared to the third quarter and nine months ending September 30, 2020.
The estimated agent incentive payouts at September 30, 2021 are based on actual
underwriting results for the two prior years and current year-to-date actual
results and forecasted results for the remainder of 2021. For the nine months
ended September 30, 2020, lower claims frequency and related loss expense due to
the COVID-19 pandemic impacted agent compensation related to the profitability
component.

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Non-commission expense - Non-commission expense increased $5.9 million in the
third quarter of 2021 compared to the third quarter of 2020. Information
technology costs increased $3.8 million primarily due to increased hardware and
software costs as well as increased personnel costs. Sales and advertising
increased $1.3 million primarily due to personnel costs. Administrative and
other costs increased $0.5 million primarily driven by increased building and
equipment depreciation compared to the same period in 2020. Personnel costs in
all expense categories for the third quarter of 2021 were impacted by higher
medical costs compared to the prior year as the COVID-19 pandemic reduced
elective procedures in 2020 and higher incentive plan award accruals due to
increased direct written premium growth.

Non-commission expense increased $26.8 million in the nine months ended
September 30, 2021 compared to the same period of 2020. Underwriting and policy
processing expense increased $2.6 million primarily due to increased personnel
costs and underwriting report costs. Information technology costs increased
$10.9 million primarily due to increased hardware and software costs and
personnel costs. Administrative and other costs increased $12.6 million
primarily driven by increased building and equipment depreciation, professional
fees and personnel costs compared to the same period in 2020. Personnel costs in
all expense categories were impacted by higher medical costs compared to the
prior year as the COVID-19 pandemic reduced elective procedures in 2020 and
higher incentive plan award accruals due to increased direct written premium
growth.


Administrative services
                                                        Three months ended September 30,                           Nine months ended September 30,
(dollars in thousands)                             2021             2020            % Change                  2021             2020            % Change
                                                        (Unaudited)                                                (Unaudited)
Management fee revenue - administrative
services                                      $        14,471 $         14,910    (2.9)    %             $        43,985 $         44,494    (1.1)  

%

Administrative services reimbursement revenue 162,410 147,710 10.0

                           473,133          451,229     4.9
Total revenue allocated to administrative
services                                              176,881          162,620     8.8                           517,118          495,723     4.3
Administrative services expenses
Claims handling services                              140,100          127,055    10.3                           407,762          390,832     4.3
Investment management services                          9,884            9,373     5.4                            29,287           26,783     9.3
Life management services                               12,426           11,282    10.1                            36,084           33,614     7.3
Operating income - administrative services    $        14,471 $         14,910    (2.9)    %             $        43,985 $         44,494    (1.1)    %




Administrative services
The management fee revenue allocated to administrative services was 0.7% and
0.8% of the direct and affiliated assumed premiums written by the Exchange for
both the three and nine months ended September 30, 2021 and 2020, respectively.
This portion of the management fee is recognized as revenue over a four-year
period representing the time over which the services are provided. We also
report reimbursed costs as revenues, which are recognized monthly as services
are provided. The administrative services expenses we incur and the related
reimbursements we receive are recorded gross in the Statements of Operations.

Cost of administrative services
By virtue of its legal structure as a reciprocal insurer, the Exchange does not
have any employees or officers. Therefore, it enters into contractual
relationships by and through an attorney-in-fact. Indemnity serves as the
attorney-in-fact on behalf of the Exchange with respect to its administrative
services in accordance with the subscriber's agreement. The Exchange's insurance
subsidiaries also utilize Indemnity for these services in accordance with the
service agreements between each of the subsidiaries and Indemnity. The amounts
incurred for these services are reimbursed to Indemnity at cost in accordance
with the subscriber's agreement and the service agreements.  We record these
reimbursements due from the Exchange and its insurance subsidiaries as a
receivable.
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Total investment income
A summary of the results of our investment operations is as follows:
                                                     Three months ended September 30,                           Nine months ended September 30,
(dollars in thousands)                          2021        2020                % Change                 2021              2020               % Change
                                                  (Unaudited)                                                 (Unaudited)
Net investment income                       $  18,858    $ 10,645             77.2     %             $  49,605          $ 20,353                 NM
Net realized investment gains                   1,610       5,915            (72.8)    %                 5,183             1,635                 NM
Net impairment recoveries (losses)
recognized in earnings                            130        (122)                  NM                     216            (3,192)                NM

Total investment income                     $  20,598    $ 16,438             25.3     %             $  55,004          $ 18,796                 NM


NM = not meaningful


Net investment income
Net investment income includes interest and dividends on our fixed maturity and
equity security portfolios and the results of our limited partnership
investments, net of investment expenses. Net investment income increased $8.2
million in the third quarter of 2021 and $29.3 million for the nine months ended
September 30, 2021, compared to the same periods in 2020. The results from both
periods were primarily due to equity in earnings of limited partnerships of
$11.5 million and $26.7 million for the three and nine months ended September
30, 2021, respectively, compared to equity in earnings of limited partnerships
of $3.6 million and equity in losses of limited partnerships $2.4 million,
respectively, for the same periods in 2020. We have made no new limited
partnership commitments since 2006, and the balance of limited partnership
investments is expected to decline over time as additional distributions are
received.

Net realized investment gains (losses)
A breakdown of our net realized investment gains (losses) is as follows:
                                                  Three months ended September 30,               Nine months ended September 30,
(in thousands)                                        2021                   2020                    2021                   2020

Securities sold:                                            (Unaudited)                                    (Unaudited)
Available-for-sale securities                 $           2,189          $      137          $           4,069          $    1,107
Equity securities                                          (267)              1,796                          5              (1,009)

Equity securities change in fair value                     (312)              3,981                      1,108               1,534
Miscellaneous                                                 0                   1                          1                   3
Net realized investment gains                 $           1,610          $    5,915          $           5,183          $    1,635




Net realized gains during the three and nine months ended September 30, 2021
were primarily due to disposals of available-for-sale securities. Net realized
gains during the three and nine months ended September 30, 2020 were primarily
due to market value adjustments on equity securities.

Net impairment recoveries (losses) recognized in earnings
Net impairment recoveries during the three and nine months ended September 30,
2021 were primarily a result of the change in the current expected credit loss
allowance related to our agent loans. Net impairment losses for the nine months
ended September 30, 2020 were primarily due to the COVID-19 pandemic's impact on
financial markets on our available-for-sale securities.


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Financial condition of Erie Insurance Exchange
Serving in the capacity of attorney-in-fact for the Exchange, we are dependent
on the growth and financial condition of the Exchange, who is our sole customer.
The strength of the Exchange and its wholly owned subsidiaries is rated annually
by A.M. Best Company through assessing its financial stability and ability to
pay claims. The ratings are generally based upon factors relevant to
policyholders and are not directed toward return to investors. The Exchange and
each of its property and casualty subsidiaries are rated A+ "Superior", the
second highest financial strength rating, which is assigned to companies that
have achieved superior overall performance when compared to the standards
established by A.M. Best and have a superior ability to meet obligations to
policyholders over the long term. On July 27, 2021, the outlook for the
financial strength rating was affirmed as stable. As of December 31, 2020, only
approximately 12% of insurance groups, in which the Exchange is included, are
rated A+ or higher.

The financial statements of the Exchange are prepared in accordance with
statutory accounting principles prescribed by the Commonwealth of Pennsylvania.
Financial statements prepared under statutory accounting principles focus on the
solvency of the insurer and generally provide a more conservative approach than
under U.S. generally accepted accounting principles. Statutory direct written
premiums of the Exchange and its wholly owned property and casualty subsidiaries
grew 3.0% to $6.0 billion in the first nine months of 2021 compared to the first
nine months of 2020. 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 $11.7 billion at
September 30, 2021, $10.7 billion at December 31, 2020, and $10.0 billion at
September 30, 2020. The Exchange and its wholly owned property and casualty
subsidiaries' year-over-year policy retention ratio continues to be high at
90.0% at September 30, 2021 and 89.9% at both December 31, 2020 and
September 30, 2020.

We have prepared our financial statements considering the financial strength of
the Exchange based on its A.M. Best rating and strong level of surplus. We are
monitoring risks related to the COVID-19 pandemic on an ongoing basis and
believe that the Exchange falls within defined risk tolerances. However, see
Part I. Item 1A. "Risk Factors" related to COVID-19 included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2020 as filed with
the Securities and Exchange Commission on February 25, 2021 for possible
outcomes that could impact that determination.

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FINANCIAL CONDITION

Investments

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


                                                    September 30,
(dollars in thousands)                                   2021                 % to total             December 31, 2020             % to total
                                                                  (Unaudited)
Fixed maturities                                   $     937,504                       83  %       $          928,236                       84  %
Equity securities:
Preferred stock                                           86,270                        8                      94,071                        9
Common stock                                                  10                        0                          19                        0

Agent loans (1)                                           67,789                        6                      69,212                        6
Other investments                                         40,009                        3                      14,325                        1
Total investments                                  $   1,131,582                      100  %       $        1,105,863                      100  %

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



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

Fixed maturities are carried at fair value with unrealized gains and losses, net
of deferred taxes, included in shareholders' equity. Net unrealized gains on
fixed maturities, net of deferred taxes, totaled $13.5 million at September 30,
2021, compared to net unrealized gains of $23.3 million at December 31, 2020.

The following table presents a breakdown of the fair value of our fixed maturity
portfolio by industry sector and rating as of:
(in thousands)                                                                            September 30, 2021 (1)
                                                                                                                               Non-
                                                                                                                            investment             Fair
                                                   AAA                 AA                 A                 BBB                grade              value
                                                                                                (Unaudited)
Basic materials                                $       0          $       0          $   3,206          $       0          $    8,930          $  12,136
Communications                                         0              8,742              8,456             17,550              18,715             53,463
Consumer                                               0              3,180             20,079             69,040              42,643            134,942
Diversified                                            0                  0                  0              1,033               1,004              2,037
Energy                                                 0              4,160              7,835             18,554              11,863             42,412
Financial                                              0              1,015             67,054            113,215              16,850            198,134

Industrial                                             0                  0             10,009             16,435              24,128             50,572
Structured securities (2)                        151,952            164,822             30,168             16,846                   0            363,788
Technology                                         5,213                  0              7,814             22,137              13,317             48,481
U.S. Treasury                                          0              5,749                  0                  0                   0              5,749
Utilities                                              0                  0              3,800             17,045               4,945             25,790
Total                                          $ 157,165          $ 187,668          $ 158,421          $ 291,855          $  142,395          $ 937,504


(1)Ratings are supplied by S&P, Moody's, and Fitch.  The table is based upon the
lowest rating for each security.
(2)Structured securities include residential and commercial mortgage-backed
securities, collateralized debt obligations, and asset-backed securities.


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

The following table presents an analysis of the fair value of our nonredeemable
preferred and common stock securities by sector as of:
(in thousands)                    September 30, 2021                         December 31, 2020
                           Preferred stock        Common stock       Preferred stock       Common stock
                                      (Unaudited)

Communications          $       1,013            $          0      $      2,699           $          0
Consumer                        2,218                       0             3,068                      0

Energy                          5,306                      10             2,187                     19
Financial services             70,432                       0            76,575                      0

Industrial                        255                       0               800                      0

Utilities                       7,046                       0             8,742                      0
Total                   $      86,270            $         10      $     94,071           $         19





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LIQUIDITY AND CAPITAL RESOURCES

We continue to monitor the sufficiency of our liquidity and capital resources
given the potential impact of the COVID-19 pandemic. We did not see a
significant impact on our sources or uses of cash in the first nine months of
2021. However, we may experience future reductions in our management fee revenue
if the Exchange's premium growth is constrained. Also, 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 2023. See broader discussions
of potential risks to our operations in the Operating Overview contained within
this report and Part I. Item 1A. "Risk Factors" related to COVID-19 included in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 as
filed with the Securities and Exchange Commission on February 25, 2021.

Sources and Uses of Cash
Liquidity is a measure of a company's ability to generate sufficient cash flows
to meet the short- and long-term cash requirements of its business operations
and growth needs.  Our liquidity requirements have been met primarily by funds
generated from management fee revenue and income from investments.  Cash
provided from these sources is used primarily to fund the costs of our
management operations including commissions, salaries and wages, pension plans,
share repurchases, dividends to shareholders, and the purchase and development
of information technology.  We expect that our operating cash needs will be met
by funds generated from operations.

Volatility in the financial markets presents challenges to us as we do
occasionally access our investment portfolio as a source of cash.  Some of our
fixed income investments, despite being publicly traded, may be illiquid.
Volatility in these markets could impair our ability to sell certain fixed
income securities or cause such securities to sell at deep discounts. We believe
we have sufficient liquidity to meet our needs from sources other than the
liquidation of securities, even if market volatility persists throughout 2021
and beyond.

Cash flow activities
The following table provides condensed cash flow information for the nine months
ended September 30:
(in thousands)                                                   2021             2020
                                                             (Unaudited)       (Unaudited)
Net cash provided by operating activities                   $    264,038      $   234,478
Net cash used in investing activities                            (43,158)   

(218,571)

Net cash used in financing activities                           (146,124)   

(136,291)

Net increase (decrease) in cash and cash equivalents $ 74,756

  $  (120,384)




Net cash provided by operating activities was $264.0 million in the first nine
months of 2021, compared to $234.5 million in the first nine months of 2020.
Increased cash provided by operating activities in the first nine months of 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 $62.3 million
and an increase in administrative service reimbursements received of $39.3
million. Partially offsetting the increase in cash provided by operating
activities was an increase in cash paid for agent commissions of $30.0 million,
due to higher scheduled commission driven by premium growth, an increase in
agent bonuses of $15.5 million and increases in administrative services expenses
paid of $31.0 million, in the first nine months of 2021 compared to the same
period in 2020.

Net cash used in investing activities was $43.2 million in the first nine months
of 2021, compared to $218.6 million in the same period in 2020. In the first
nine months of 2021, net cash used in investing activities was primarily driven
by fixed asset purchases, as purchases of investments were offset by proceeds
from sales and maturities/calls of investments. Net cash used in investing
activities in the first nine months of 2020 was primarily due to purchases of
available-for-sale securities exceeding the proceeds generated from investment
sales and maturities/calls of available-for-sale securities.

Net cash used in financing activities totaled $146.1 million in the first nine
months of 2021, compared to $136.3 million in the first nine months of 2020. The
increase in cash used in the first nine months of 2021, compared to the same
period in 2020, was due to dividends paid to shareholders. We increased both our
Class A and Class B shareholder regular quarterly dividends by 7.3% for 2021,
compared to 2020.  There are no regulatory restrictions on the payment of
dividends to our shareholders.

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There were no repurchases of our Class A nonvoting common stock in the first
nine months of 2021 and 2020 in conjunction with our stock repurchase program.
In 2011, our Board of Directors approved a continuation of the current stock
repurchase program of $150 million with no time limitation.  This repurchase
authority includes, and is not in addition to, any unspent amounts remaining
under the prior authorization.  We had approximately $17.8 million of repurchase
authority remaining under this program at September 30, 2021, based upon trade
date.

During the nine months ended September 30, 2021, we purchased 25,065 shares of
our outstanding Class A nonvoting common stock outside of our publicly announced
share repurchase program at a total cost of $5.0 million. Of this amount, we
purchased 978 shares for $0.2 million, or $242.01 per share, for stock-based
awards in conjunction with our equity compensation plan. We purchased 3,939
shares for $0.8 million, or $212.69 per share, to fund the rabbi trust for the
outside director deferred stock compensation plan. The remaining 20,148 shares
were purchased at a total cost of $4.0 million, or $196.25 per share, to fund
the rabbi trust for the incentive compensation deferral plan. All shares were
delivered as of September 30, 2021.

During the nine months ended September 30, 2020, we purchased 28,155 shares of
our outstanding Class A nonvoting common stock outside of our publicly announced
share repurchase program at a total cost of $5.0 million. Of this amount, we
purchased 1,787 shares for $0.3 million, or $165.82 per share, for stock-based
awards in conjunction with our equity compensation plan. We purchased 4,785
shares for $0.9 million, or $178.98 per share, to fund the rabbi trust for the
outside director deferred stock compensation plan. The remaining 21,583 shares
were purchased at a total cost of $3.8 million, or $178.62 per share, to fund
the rabbi trust for the incentive compensation deferral plan. All shares were
delivered as of September 30, 2020.

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

Outside of our normal operating and investing cash activities, future funding
requirements could be met through: 1) cash and cash equivalents, which total
approximately $236.0 million at September 30, 2021, 2) a $100 million bank
revolving line of credit, and 3) liquidation of unpledged assets held in our
investment portfolio, including preferred stock and investment grade bonds,
which totaled approximately $644.2 million at September 30, 2021.  Volatility in
the financial markets could impair our ability to sell certain fixed income
securities or cause such securities to sell at deep discounts.  Additionally, we
have the ability to curtail or modify discretionary cash outlays such as those
related to shareholder dividends and share repurchase activities.

As of September 30, 2021, we have access to a $100 million bank revolving line
of credit with a $25 million letter of credit sublimit that expires on
October 30, 2023. As of September 30, 2021, a total of $99.1 million remains
available under the facility due to $0.9 million outstanding letters of credit,
which reduce the availability for letters of credit to $24.1 million.  We had no
borrowings outstanding on our line of credit as of September 30, 2021.
Investments with a fair value of $122.6 million were pledged as collateral on
the line at September 30, 2021. The investments pledged as collateral have no
trading restrictions and are reported as available-for-sale securities and cash
and cash equivalents in the Statements of Financial Position.  The banks require
compliance with certain covenants, which include leverage ratios and debt
restrictions.  We were in compliance with our bank covenants at September 30,
2021.

Off-Balance Sheet Arrangements and Contractual Obligations
Off-balance sheet arrangements include those with unconsolidated entities that
may have a material current or future effect on our financial condition or
results of operations, including material variable interests in unconsolidated
entities that conduct certain activities. We have no material off-balance sheet
obligations. As of September 30, 2021, there were no material changes to our
future contractual obligations as previously reported in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2020 as filed with the
Securities and Exchange Commission on February 25, 2021.

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CRITICAL ACCOUNTING ESTIMATES

We make estimates and assumptions that have a significant effect on the amounts
and disclosures reported in the financial statements.  The most significant
estimates relate to investment valuation and retirement benefit plans for
employees.  While management believes its estimates are appropriate, the
ultimate amounts may differ from estimates provided.  Our most critical
accounting estimates are described in Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for the year ended
December 31, 2020 of our Annual Report on Form 10-K as filed with the Securities
and Exchange Commission on February 25, 2021.  See Part I, Item 1. "Financial
Statements - Note 5, Fair Value, of Notes to Financial Statements" contained
within this report for additional information on our valuation of investments.

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