Company Quick10K Filing
Quick10K
Erie Indemnity
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$196.76 52 $10,290
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-23 Earnings, Other Events, Exhibits
8-K 2019-05-02 Earnings, Exhibits
8-K 2019-04-30 Amend Bylaw, Shareholder Vote, Other Events, Exhibits
8-K 2019-02-21 Earnings, Other Events, Exhibits
8-K 2019-01-10 Officers
8-K 2018-12-04 Other Events, Exhibits
8-K 2018-11-13 Enter Agreement, Exhibits
8-K 2018-10-30 Enter Agreement, Exhibits
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-09-26 Officers, Exhibits
8-K 2018-09-14 Other Events, Exhibits
8-K 2018-07-24 Earnings, Officers, Other Events, Exhibits
8-K 2018-01-22 Enter Agreement, Exhibits
8-K 2018-01-16 Other Events
8-K 2018-01-10 Officers
8-K 2017-12-28 Other Events
AMH American Homes 4 Rent 7,070
CUBE Cubesmart 6,120
TX Ternium 4,870
LCII LCI Industries 2,260
AIR AAR 1,180
QTNT Quotient 578
AAOI Applied Optoelectronics 217
APT Alpha Pro Tech 50
AMAR Amarillo Biosciences 0
FGCO Financial Gravity Companies 0
ERIE 2019-06-30
Part I. Financial Information
Item 1. Financial Statements
Note 1. Nature of Operations
Note 2. Significant Accounting Policies
Note 3. Revenue
Note 4. Earnings per Share
Note 5. Fair Value
Note 6. Investments
Note 7. Leases
Note 8. Borrowing Arrangements
Note 9. Postretirement Benefits
Note 10. Income Taxes
Note 11. Capital Stock
Note 12. Accumulated Other Comprehensive Income (Loss)
Note 13. Concentrations of Credit Risk
Note 14. Commitments and Contingencies
Note 15. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 ex-10106302019.htm
EX-10.2 ex-10206302019.htm
EX-31.1 ex-31106302019.htm
EX-31.2 ex-31206302019.htm
EX-32 ex-3206302019.htm

Erie Indemnity Earnings 2019-06-30

ERIE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___to___
 
Commission file number 0-24000
 
ERIE INDEMNITY COMPANY
 
 
(Exact name of registrant as specified in its charter)
 
 
Pennsylvania
 
25-0466020
 
 
(State or other jurisdiction of
 
(IRS Employer
 
 
incorporation or organization)
 
Identification No.)
 
 
100 Erie Insurance Place,
Erie,
Pennsylvania
 
16530
 
 
(Address of principal executive offices)
 
(Zip Code)
 
 
814
870-2000
 
 
(Registrant’s telephone number, including area code)
 
 
Not applicable
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
Securities registered pursuant to Section 12(b) of the Act:
Class A common stock,
stated value $0.0292 per share
 
ERIE
 
NASDAQ Stock Market, LLC
(Title of each class)
 
(Trading Symbol)
 
(Name of each exchange on which registered)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
 
 
 
 
 
 
 
 
 
Smaller reporting company
 
Emerging growth company
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No ☒
 
The number of shares outstanding of the registrant’s Class A Common Stock as of the latest practicable date was 46,189,068 at July 12, 2019.
 
The number of shares outstanding of the registrant’s Class B Common Stock as of the latest practicable date was 2,542 at July 12, 2019.


Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

ERIE INDEMNITY COMPANY
STATEMENTS OF OPERATIONS (UNAUDITED)
(dollars in thousands, except per share data)

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Operating revenue
 
 
 
 
 

 
 

Management fee revenue - policy issuance and renewal services, net
$
480,513

 
$
454,572

 
$
911,496

 
$
860,550

Management fee revenue - administrative services, net
14,195

 
13,299

 
28,146

 
26,373

Administrative services reimbursement revenue
146,095

 
146,507

 
288,575

 
292,470

Service agreement revenue
6,907

 
7,080

 
13,599

 
14,225

Total operating revenue
647,710

 
621,458

 
1,241,816

 
1,193,618

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Cost of operations - policy issuance and renewal services
405,005

 
379,628

 
770,509

 
728,258

Cost of operations - administrative services
146,095

 
146,507

 
288,575

 
292,470

Total operating expenses
551,100

 
526,135

 
1,059,084

 
1,020,728

Operating income
96,610

 
95,323

 
182,732

 
172,890

 
 
 
 
 
 
 
 
Investment income
 
 
 
 
 
 
 
Net investment income
8,030

 
7,104

 
16,547

 
13,924

Net realized investment gains (losses)
1,302

 
(32
)
 
3,805

 
(497
)
Net impairment losses recognized in earnings
(84
)
 
(646
)
 
(162
)
 
(646
)
Equity in earnings (losses) of limited partnerships
404

 
(219
)
 
(743
)
 
(411
)
Total investment income
9,652

 
6,207

 
19,447

 
12,370

 
 
 
 
 
 
 
 
Interest expense, net
272

 
602

 
721

 
1,155

Other income
48

 
58

 
95

 
102

Income before income taxes
106,038

 
100,986

 
201,553

 
184,207

Income tax expense
18,284

 
21,280

 
38,488

 
38,743

Net income
$
87,754

 
$
79,706

 
$
163,065

 
$
145,464

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share
 
 
 
 
 

 
 

Class A common stock – basic
$
1.88

 
$
1.71

 
$
3.50

 
$
3.12

Class A common stock – diluted
$
1.68

 
$
1.52

 
$
3.12

 
$
2.78

Class B common stock – basic
$
283

 
$
257

 
$
525

 
$
469

Class B common stock – diluted
$
283

 
$
257

 
$
525

 
$
468

 
 
 
 
 
 
 
 
Weighted average shares outstanding – Basic
 
 
 
 
 

 
 

Class A common stock
46,188,994

 
46,188,705

 
46,188,668

 
46,188,309

Class B common stock
2,542

 
2,542

 
2,542

 
2,542

 
 
 
 
 
 
 
 
Weighted average shares outstanding – Diluted
 
 
 
 
 

 
 

Class A common stock
52,314,700

 
52,312,849

 
52,313,371

 
52,311,741

Class B common stock
2,542

 
2,542

 
2,542

 
2,542

 
 
 
 
 
 
 
 
Dividends declared per share
 
 
 
 
 

 
 

Class A common stock
$
0.90

 
$
0.84

 
$
1.80

 
$
1.68

Class B common stock
$
135.00

 
$
126.00

 
$
270.00

 
$
252.00

 
 
See accompanying notes to Financial Statements. See Note 12, "Accumulated Other Comprehensive Income (Loss)", for amounts reclassified out of accumulated other comprehensive income (loss) into the Statements of Operations. 

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ERIE INDEMNITY COMPANY
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
87,754

 
$
79,706

 
$
163,065

 
$
145,464

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 

 
 

Change in unrealized holding gains (losses) on available-for-sale securities
2,579

 
(551
)
 
8,057

 
(5,978
)
Amortization of prior service costs and net actuarial loss on pension and other postretirement plans
1,231

 
0

 
2,463

 
0

Total other comprehensive income (loss), net of tax
3,810

 
(551
)
 
10,520

 
(5,978
)
Comprehensive income
$
91,564

 
$
79,155

 
$
173,585

 
$
139,486

 
See accompanying notes to Financial Statements. See Note 12, "Accumulated Other Comprehensive Income (Loss)", for amounts reclassified out of accumulated other comprehensive income (loss) into the Statements of Operations.

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ERIE INDEMNITY COMPANY
STATEMENTS OF FINANCIAL POSITION
(dollars in thousands, except per share data)

 
 
 
June 30,
 
December 31,
 
 
2019
 
2018
Assets
 
(Unaudited)
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
338,262

 
$
266,417

Available-for-sale securities
 
61,210

 
402,339

Receivables from Erie Insurance Exchange and affiliates
 
483,319

 
449,873

Prepaid expenses and other current assets
 
42,300

 
36,892

Federal income taxes recoverable
 
7,791

 
8,162

Accrued investment income
 
4,365

 
5,263

Total current assets
 
937,247

 
1,168,946

 
 
 
 
 
Available-for-sale securities
 
627,898

 
346,184

Equity securities
 
12,445

 
11,853

Limited partnership investments
 
30,344

 
34,821

Fixed assets, net
 
173,055

 
130,832

Deferred income taxes, net
 
19,090

 
24,101

Other assets
 
89,568

 
61,590

Total assets
 
$
1,889,647

 
$
1,778,327

 
 
 
 
 
Liabilities and shareholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Commissions payable
 
$
267,403

 
$
241,573

Agent bonuses
 
51,357

 
103,462

Accounts payable and accrued liabilities
 
124,794

 
111,291

Dividends payable
 
41,913

 
41,910

Contract liability
 
35,374

 
33,854

Deferred executive compensation
 
12,605

 
13,107

Current portion of long-term borrowings
 
1,914

 
1,870

Total current liabilities
 
535,360

 
547,067

 
 
 
 
 
Defined benefit pension plans
 
129,674

 
116,866

Long-term borrowings
 
96,860

 
97,860

Contract liability
 
18,339

 
17,873

Deferred executive compensation
 
13,199

 
13,075

Other long-term liabilities
 
32,761

 
11,914

Total liabilities
 
826,193

 
804,655

 
 
 
 
 
Shareholders’ equity
 
 
 
 
Class A common stock, stated value $0.0292 per share; 74,996,930 shares authorized; 68,299,200 shares issued; 46,189,068 shares outstanding
 
1,992

 
1,992

Class B common stock, convertible at a rate of 2,400 Class A shares for one Class B share, stated value $70 per share; 3,070 shares authorized; 2,542 shares issued and outstanding
 
178

 
178

Additional paid-in-capital
 
16,483

 
16,459

Accumulated other comprehensive loss
 
(119,764
)
 
(130,284
)
Retained earnings
 
2,310,655

 
2,231,417

Total contributed capital and retained earnings
 
2,209,544

 
2,119,762

Treasury stock, at cost; 22,110,132 shares held
 
(1,158,300
)
 
(1,157,625
)
Deferred compensation
 
12,210

 
11,535

Total shareholders’ equity
 
1,063,454

 
973,672

Total liabilities and shareholders’ equity
 
$
1,889,647

 
$
1,778,327


See accompanying notes to Financial Statements. 

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ERIE INDEMNITY COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
Three and six months ended June 30, 2019 and 2018
(dollars in thousands, except per share data)
 
Class A common stock
Class B common stock
Additional paid-in-capital
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock
Deferred compensation
Total shareholders' equity
Balance, December 31, 2018
$
1,992

$
178

$
16,459

$
(130,284
)
$
2,231,417

$
(1,157,625
)
$
11,535

$
973,672

Net income
 
 
 
 
75,311

 
 
75,311

Other comprehensive income
 
 
 
6,710

 
 
 
6,710

Dividends declared:
 
 
 
 
 
 
 
 
Class A $0.90 per share
 
 
 
 
(41,570
)
 
 
(41,570
)
Class B $135.00 per share
 
 
 
 
(343
)
 
 
(343
)
Net purchase of treasury stock (1)
 
 
24

 
 
0

 
24

Deferred compensation
 
 
 
 
 
(1,154
)
1,154

0

Balance, March 31, 2019
$
1,992

$
178

$
16,483

$
(123,574
)
$
2,264,815

$
(1,158,779
)
$
12,689

$
1,013,804

Net income
 
 
 
 
87,754

 
 
87,754

Other comprehensive income
 
 
 
3,810

 
 
 
3,810

Dividends declared:
 
 
 
 
 
 
 
 
Class A $0.90 per share
 
 
 
 
(41,570
)
 
 
(41,570
)
Class B $135.00 per share
 
 
 
 
(344
)
 
 
(344
)
Net purchase of treasury stock (1)
 
 
0

 
 
0

 
0

Deferred compensation
 
 
 
 
 
(443
)
443

0

Rabbi trust distribution (2)
 
 
 
 
 
922

(922
)
0

Balance, June 30, 2019
$
1,992

$
178

$
16,483

$
(119,764
)
$
2,310,655

$
(1,158,300
)
$
12,210

$
1,063,454




 
Class A common stock
Class B common stock
Additional paid-in-capital
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock
Deferred compensation
Total shareholders' equity
Balance, December 31, 2017
$
1,992

$
178

$
16,470

$
(156,059
)
$
2,140,853

$
(1,155,668
)
$
9,578

$
857,344

Cumulative effect adjustments (3)
 
 
 
 
(38,392
)
 
 
(38,392
)
Net income
 
 
 
 
65,758

 
 
65,758

Other comprehensive loss
 
 
 
(5,427
)
 
 
 
(5,427
)
Dividends declared:
 
 
 
 
 
 
 
 
Class A $0.84 per share
 
 
 
 
(38,799
)
 
 
(38,799
)
Class B $126.00 per share
 
 
 
 
(320
)
 
 
(320
)
Net purchase of treasury stock (1)
 
 
(9
)
 
 
0

 
(9
)
Deferred compensation
 
 
 
 
 
(1,663
)
1,663

0

Balance, March 31, 2018
$
1,992

$
178

$
16,461

$
(161,486
)
$
2,129,100

$
(1,157,331
)
$
11,241

$
840,155

Net income
 
 
 
 
79,706

 
 
79,706

Other comprehensive loss
 
 
 
(551
)
 
 
 
(551
)
Dividends declared:
 
 
 
 
 
 
 
 
Class A $0.84 per share
 
 
 
 
(38,799
)
 
 
(38,799
)
Class B $126.00 per share
 
 
 
 
(321
)
 
 
(321
)
Net purchase of treasury stock (1)
 
 
(2
)
 
 
0

 
(2
)
Deferred compensation
 
 
 
 
 
(276
)
276

0

Rabbi trust distribution (2)
 
 
 
 
 
608

(608
)
0

Balance, June 30, 2018
$
1,992

$
178

$
16,459

$
(162,037
)
$
2,169,686

$
(1,156,999
)
$
10,909

$
880,188


(1) Net purchases of treasury stock in 2019 and 2018 include the repurchase of our Class A common stock in the open market that were subsequently distributed to satisfy stock based compensation awards. See Note 11, "Capital Stock", for additional information on treasury stock transactions.
(2) Distributions of our Class A shares were made from the rabbi trust to retired directors in 2019 and 2018.
(3) Cumulative effect adjustments are primarily related to the implementation of new revenue recognition guidance effective January 1, 2018.

See accompanying notes to Financial Statements.


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ERIE INDEMNITY COMPANY
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)

 
 
Six months ended
 
 
June 30,
 
 
2019
 
2018
Cash flows from operating activities
 
 
 
 
Management fee received
 
$
902,958

 
$
859,694

Administrative services reimbursements received
 
296,390

 
298,056

Service agreement fee received
 
13,599

 
14,225

Net investment income received
 
16,799

 
17,279

Limited partnership distributions
 
1,292

 
3,037

Commissions paid to agents
 
(434,599
)
 
(413,880
)
Agents bonuses paid
 
(108,540
)
 
(126,594
)
Salaries and wages paid
 
(101,765
)
 
(102,601
)
Pension contributions and employee benefits paid
 
(22,085
)
 
(99,334
)
General operating expenses paid
 
(117,915
)
 
(111,381
)
Administrative services expenses paid
 
(291,136
)
 
(295,635
)
Income taxes paid
 
(39,863
)
 
(208
)
Interest paid
 
(719
)
 
(1,065
)
Net cash provided by operating activities
 
114,416

 
41,593

 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Purchase of investments:
 
 
 
 
Available-for-sale securities
 
(615,384
)
 
(114,848
)
Equity securities
 
0

 
(1,035
)
Limited partnerships
 
(9
)
 
(215
)
Other investments
 
(124
)
 
0

Proceeds from investments:
 
 
 
 
Available-for-sale securities sales
 
430,596

 
76,387

Available-for-sale securities maturities/calls
 
261,902

 
69,674

Equity securities
 
0

 
1,157

Limited partnerships
 
2,450

 
2,682

Purchase of fixed assets
 
(34,260
)
 
(18,121
)
Distributions on agent loans
 
(6,947
)
 
(24,440
)
Collections on agent loans
 
3,991

 
3,106

Net cash provided by (used in) investing activities
 
42,215

 
(5,653
)
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
Dividends paid to shareholders
 
(83,824
)
 
(78,235
)
Net (payments) proceeds from long-term borrowings
 
(962
)
 
24,986

Net cash used in financing activities
 
(84,786
)
 
(53,249
)
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
71,845

 
(17,309
)
Cash and cash equivalents, beginning of period
 
266,417

 
215,721

Cash and cash equivalents, end of period
 
$
338,262

 
$
198,412

 
 
 
 
 
Supplemental disclosure of noncash transactions
 
 
 
 
Operating lease assets obtained in exchange for new operating lease liabilities
 
$
33,136

 
$

Liability incurred to purchase fixed assets
 
$
14,980

 
$

  
See accompanying notes to Financial Statements.

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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
 
Note 1.  Nature of Operations
 
Erie Indemnity Company ("Indemnity", "we", "us", "our") is a publicly held Pennsylvania business corporation that has since its incorporation in 1925 served as the attorney-in-fact for the subscribers (policyholders) at the Erie Insurance Exchange ("Exchange").  The Exchange, which also commenced business in 1925, is a Pennsylvania-domiciled reciprocal insurer that writes property and casualty insurance.
 
Our primary function as attorney-in-fact is to perform policy issuance and renewal services on behalf of the subscribers at the Exchange. We also act as attorney-in-fact on behalf of the Exchange with respect to all claims handling and investment management services, as well as the service provider for all claims handling, life insurance, and investment management services for its insurance subsidiaries, collectively referred to as "administrative services". Acting as attorney-in-fact in these two capacities is done in accordance with a subscriber's agreement (a limited power of attorney) executed individually by each subscriber (policyholder), which appoints us as their common attorney-in-fact to transact certain business on their behalf.  Pursuant to the subscriber's agreement for acting as attorney-in-fact in these two capacities, we earn a management fee calculated as a percentage of the direct and affiliated assumed premiums written by the Exchange.

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

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. If any events occurred that impaired the Exchange’s ability to grow or sustain its financial condition, including but not limited to reduced financial strength ratings, disruption in the independent agency relationships, significant catastrophe losses, or products not meeting customer demands, the Exchange could find it more difficult to retain its existing business and attract new business. A decline in the business of the Exchange almost certainly would have as a consequence a decline in the total premiums paid and a correspondingly adverse effect on the amount of the management fees we receive. We also have an exposure to a concentration of credit risk related to the unsecured receivables due from the Exchange for its management fee and cost reimbursements. See Note 13, "Concentrations of Credit Risk".


Note 2.  Significant Accounting Policies

Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. For further information, refer to the financial statements and footnotes included in our Form 10-K for the year ended December 31, 2018 as filed with the Securities and Exchange Commission on February 21, 2019.

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

Recently adopted accounting standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") 842, "Leases", which requires lessees to recognize assets and liabilities arising from operating leases on the Statements of Financial Position and to disclose certain information about leasing arrangements. We adopted ASC 842 on January 1, 2019 using the optional transition method, which permits entities to apply the new guidance prospectively with certain practical expedients available. We elected the package of practical expedients which among other things allowed us to carry forward the historical lease classifications. We did not elect the hindsight practical expedient in determining the lease term for existing leases.

The adoption of the new standard resulted in the recognition of operating lease assets of $32.7 million and operating lease liabilities of $32.1 million on the Statement of Financial Position at January 1, 2019. The adoption of this standard did not have a material impact on our Statement of Operations and had no impact on our net cash flows.

Recently issued accounting standards
In August 2018, the FASB issued Accounting Standards Update ("ASU") 2018-15, "Intangibles-Goodwill and Other Internal-Use Software", which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The amendments under ASU 2018-15 may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption and early adoption is permitted. We plan to adopt this guidance on a prospective basis and do not expect a material impact on our financial statements or disclosures.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses", which requires financial assets measured at amortized cost to be presented at the net amount expected to be collected through the use of a new forward-looking expected loss model and credit losses relating to available-for-sale debt securities to be recognized through an allowance for credit losses. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption for interim and annual periods beginning after December 15, 2018 is permitted. We have evaluated the impact of this guidance on our financial assets. Our investments are not measured at amortized cost, and therefore do not require the use of a new expected loss model. Our available-for-sale debt securities will continue to be monitored for credit losses which would be limited to the amount by which the fair value is below amortized cost and reflected as an allowance for credit losses rather than a reduction of the carrying value of the asset. Our receivables from Erie Insurance Exchange and affiliates are unlikely to have a significant credit loss exposure given the financial strength of the Exchange as demonstrated by its strong surplus position, industry ratings, and historical experience of no credit losses. We currently do not record an allowance for credit losses related to our agent loans as historical default amounts have been insignificant and the majority of the loans are senior secured. Accordingly, when we establish an allowance related to agent loans upon adoption of this guidance, we do not expect it to be material. Our cash equivalents include money market mutual funds comprised of U.S. government securities, therefore a corresponding allowance, if any, would be expected to be immaterial. As a result of our evaluation, we do not expect a material impact on our financial statements.

Other assets
Other assets include agent loans, operating lease assets and other long-term prepaid assets. Agent loans are carried at unpaid principal balance with interest recorded in investment income as earned. It is our policy to charge the loans that are in default directly to expense. We do not record an allowance for credit losses on these loans, as the majority of the loans are senior secured and historically have had insignificant default amounts.

The determination of whether an arrangement is a lease, and the related lease classification, is made at inception of a contract. Our leases are classified as operating leases. Operating lease assets and liabilities are recorded at inception based on the present value of the future minimum lease payments over the lease term at commencement date. When an implicit rate for the lease is not available, we use our incremental borrowing rate based on the information available at commencement date to determine the present value of future payments. Lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Most of our lease contracts contain lease and non-lease components. Non-lease components are expensed as incurred. Operating lease assets are included in other assets, and the current and noncurrent portions of the operating lease liabilities are included in accounts payable and accrued expenses and other long-term liabilities, respectively, in the Statement of Financial Position.

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Table of Contents

Note 3.  Revenue

The majority of our revenue is derived from the subscriber’s agreement between us and the subscribers (policyholders) at the Exchange. Pursuant to the subscriber’s agreement, we earn a management fee calculated as a percentage, not to exceed 25%, of all direct and affiliated assumed written premiums of the Exchange.
We allocate a portion of our management fee revenue, currently 25% of the direct and affiliated assumed written premiums of the Exchange, between the two performance obligations we have under the subscriber’s agreement. The first performance obligation is to provide policy issuance and renewal services to the subscribers (policyholders) at the Exchange, and the second is to act as attorney-in-fact on behalf of the Exchange, as well as the service provider for its insurance subsidiaries, with respect to all administrative services. The transaction price, including management fee revenue and administrative service reimbursement revenue, 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 allocation annually based upon the most recent information available. There was no material change to the allocation in 2019.

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

The Exchange, by virtue of its legal structure as a reciprocal insurer, does not have any employees or officers. Therefore, it enters into contractual relationships by and through an attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of the Exchange with respect to its administrative services in accordance with the subscriber's agreement. The Exchange's insurance subsidiaries also utilize Indemnity for these services in accordance with the service agreements between each of the subsidiaries and Indemnity. Collectively, these services represent a second performance obligation under the subscriber’s agreement and the service agreements. The revenue allocated to this performance obligation is recognized over time as these services are provided. The portion of revenue not yet earned is recorded as a contract liability in the Statements of Financial Position. The administrative services expenses we incur and the related reimbursements we receive are recorded gross in the Statements of Operations.

Indemnity records a receivable from the Exchange for management fee revenue when the premium is written or assumed by the Exchange. Indemnity collects the management fee from the Exchange when the Exchange collects the premiums from the subscribers (policyholders). As the Exchange issues policies with annual terms only, cash collections generally occur within one year.

A constraining estimate exists around the management fee received as consideration related to the potential for management fee to be returned if a policy were to be cancelled mid-term. Management fees are returned to the Exchange when policyholders cancel their insurance coverage mid-term and unearned premiums are refunded to them. We maintain an estimated allowance to reduce the management fee to its estimated net realizable value to account for the potential of mid-term policy cancellations based on historical cancellation rates. This estimated allowance has been allocated between the two performance obligations consistent with the revenue allocation proportions.

The following table disaggregates revenue by our two performance obligations:
 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2019
2018
 
2019
2018
Management fee revenue - policy issuance and renewal services, net
$
480,513

$
454,572

 
$
911,496

$
860,550

 
 
 
 
 
 
Management fee revenue - administrative services, net
14,195

13,299

 
28,146

26,373

Administrative services reimbursement revenue
146,095

146,507

 
288,575

292,470

Total administrative services
$
160,290

$
159,806

 
$
316,721

$
318,843





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Table of Contents

Note 4.  Earnings Per Share
 
Class A and Class B basic earnings per share and Class B diluted earnings per share are calculated under the two-class method. The two-class method allocates earnings to each class of stock based upon its dividend rights.  Class B shares are convertible into Class A shares at a conversion ratio of 2,400 to 1. See Note 11, "Capital Stock".

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

A reconciliation of the numerators and denominators used in the basic and diluted per-share computations is presented as follows for each class of common stock: 
 
 
Three months ended June 30,
 
 
2019
 
2018
(dollars in thousands, except per share data)
 
Allocated net income (numerator)
 
Weighted shares (denominator)
 
Per-share amount
 
Allocated net income (numerator)
 
Weighted shares (denominator)
 
Per-share amount
Class A – Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to Class A stockholders
 
$
87,036

 
46,188,994

 
$
1.88

 
$
79,053

 
46,188,705

 
$
1.71

Dilutive effect of stock-based awards
 
0

 
24,906

 

 
0

 
23,344

 

Assumed conversion of Class B shares
 
718

 
6,100,800

 

 
653

 
6,100,800

 

Class A – Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to Class A stockholders on Class A equivalent shares
 
$
87,754

 
52,314,700

 
$
1.68

 
$
79,706

 
52,312,849

 
$
1.52

Class B – Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to Class B stockholders
 
$
718

 
2,542

 
$
283

 
$
653

 
2,542

 
$
257

Class B – Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to Class B stockholders
 
$
718

 
2,542

 
$
283

 
$
653

 
2,542

 
$
257



 
 
Six months ended June 30,
 
 
2019
 
2018
(dollars in thousands, except per share data)
 
Allocated net income (numerator)
 
Weighted shares (denominator)
 
Per-share amount
 
Allocated net income (numerator)