ERIE INDEMNITY CO

Erie Indemnity Company operates as the attorney-in-fact for the subscribers at the Erie Insurance Exchange, a Pennsylvania-domiciled reciprocal insurer that writes property and casualty insurance. The Exchange has wholly owned property and casualty insurance subsidiaries including Erie Insurance Company, Erie Insurance Company of New York, Erie Insurance Property & Casualty Company and Flagship City Insurance Company, and a wholly owned life insurance company, Erie Family Life Insurance Company. The property and casualty insurance industry is highly competitive, with insurers competing on the basis of customer service, price, consumer recognition, coverages offered, claims handling, financial stability and geographic coverage. Vigorous competition exists from large, well-capitalized national companies, smaller regional insurers, and large companies who market and sell personal lines products directly to consumers.

The Exchange is represented by independent agencies that serve as its sole distribution channel. Indemnity does not directly compete against other companies that provide services under a reciprocal insurance exchange structure, given it is appointed by the subscribers at the Exchange to provide these services. The Exchange's business model is designed to provide the advantages of localized marketing and claims servicing with the economies of scale and low cost of operations from centralized support services. The Exchange's strategic focus as a reciprocal insurer is to employ a disciplined underwriting philosophy and to leverage its strong surplus position to generate higher risk adjusted investment returns.

Indemnity generates revenue primarily by retaining a management fee calculated as a percentage, not to exceed 25%, of the direct and affiliated assumed premiums written by the Exchange. The management fee rate is set at least annually by the Board of Directors. Indemnity's primary function as attorney-in-fact is to perform policy issuance and renewal services on behalf of the subscribers at the Exchange, and it also acts as attorney-in-fact with respect to all claims handling and investment management services, as well as the service provider for all claims handling, life insurance, and investment management services for the Exchange's insurance subsidiaries. The Exchange is Indemnity's sole customer.

The policy issuance and renewal services provided on behalf of the subscribers at the Exchange are related to the sales, underwriting and issuance of policies. Agent compensation comprised approximately 71% of the 2025 policy issuance and renewal expenses. The underwriting services provided include underwriting and policy processing and comprised approximately 8% of the 2025 policy issuance and renewal expenses. Information technology services that support all functions comprised approximately 10% of the 2025 policy issuance and renewal expenses. The Exchange generates revenue by insuring preferred and standard risks, with personal lines comprising 71% of the 2025 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.

The management fee revenue for policy issuance and renewal services was $3,131,806 thousand ¹ in 2025, compared to $2,894,074 thousand ² in 2024. The management fee revenue for administrative services was $74,058 thousand ³ in 2025, compared to $68,355 thousand ⁴ in 2024. Administrative services reimbursement revenue was $836,639 thousand ⁵ in 2025, compared to $806,336 thousand ⁶ in 2024. Total operating revenue was $4,067,258 thousand ⁷ in 2025, compared to $3,795,115 thousand ⁸ in 2024. Net income was $559,335 thousand ⁹ in 2025, compared to $600,314 thousand ¹⁰ in 2024. Diluted net income per share for Class A common stock was $10.69 ¹¹ in 2025, compared to $11.48 ¹² in 2024.

In 2025, Indemnity made a $100,000 thousand ¹³ charitable contribution to the Erie Insurance Foundation. The direct and affiliated assumed premiums written by the Exchange increased 8.9% to $12,957,469 thousand ¹⁴ in 2025, from $11,903,759 thousand ¹⁵ in 2024. Operating income was $717,184 thousand ¹⁶ in 2025, compared to $676,455 thousand ¹⁷ in 2024. Total investment income was $84,861 thousand ¹⁸ in 2025, compared to $69,260 thousand ¹⁹ in 2024. Income before income taxes was $710,603 thousand ²⁰ in 2025, compared to $757,279 thousand ²¹ in 2024. Income tax expense was $151,268 thousand ²² in 2025, compared to $156,965 thousand ²³ in 2024.

The management fee rate was set at 25% for 2025 and 2024. Based on analysis of the foregoing factors, the Board of Directors set the 2026 management fee rate again at 25%.

The Exchange plans to continue efforts to utilize its agency force to increase market penetration in existing operating territories to contribute to future growth. The Exchange's continued growth of its policy base is dependent upon its ability to retain existing and attract new subscribers. The Exchange implements rate changes in order to meet loss cost expectations. In 2022 through 2024, the Exchange implemented rate increases primarily in response to inflation-driven severity trends in order to restore rate adequacy. As these cumulative rate actions have been recognized into earned premium, the Exchange implemented more moderate rate increases in 2025, reflecting alignment between pricing and underlying loss costs while continuing to monitor loss trends. The Exchange continuously evaluates pricing and product offerings to maintain rate adequacy while meeting consumer demands. The pricing actions already implemented, or to be implemented, have an effect on the market competitiveness of the Exchange's insurance products. Indemnity expects the Exchange's pricing actions in 2025 to result in an increase in direct written premiums in 2026.

The Exchange's AM Best rating was downgraded from A+ 'Superior' to A 'Excellent' and its financial strength rating was revised from negative to stable on September 5, 2025. The downgrade was primarily driven by the Exchange's large underwriting losses in recent years, driven by elevated weather-related events and increased severity in the auto and homeowners' segments. The stable financial strength rating reflects the expectation that the Exchange's profitability initiatives will accelerate and stabilize operating results over the near term. The stable outlook reflects the strongest level of balance sheet strength as assessed by AM Best.

Indemnity expects to recognize net pension benefit expense of $18,000 thousand ²⁴ in 2026. The estimated increase from 2025 is primarily driven by anticipated plan progression and a decrease in the discount rate. Indemnity's share of the net pension benefit expense after reimbursements is expected to be approximately $7,000 thousand ²⁵ in 2026, of which expense of $14,500 thousand ²⁶ will be recorded in operating expense and income of $7,500 thousand ²⁷ will be recorded in other income. The expected return on asset assumption will remain at 7.00% ²⁸ for 2026.

Indemnity has access to a $100,000 thousand ²⁹ bank revolving line of credit with a $25,000 thousand ³⁰ letter of credit sublimit that expires on November 1, 2029. As of December 31, 2025, a total of $99,200 thousand ³¹ remains available under the facility due to $800 thousand ³² outstanding letters of credit. Indemnity had no borrowings outstanding on its line of credit as of December 31, 2025. Investments with a fair value of $111,400 thousand ³³ were pledged as collateral on the line of credit at December 31, 2025.

Indemnity has commitments for approximately $473,000 thousand ³⁴ which include agreements for various services, including information technology, support and maintenance obligations, operating leases for equipment, vehicles, and real estate, and other obligations in the ordinary course of business. Approximately two-thirds of these commitments are due in the next 12 months. Remaining commitments related to home office renovation contracts total $77,500 thousand ³⁵ at December 31, 2025, of which the majority is due in the next 12 months. The renovations are expected to be completed in phases with full completion expected in 2027.

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 Indemnity's management fee revenue. Elevated inflation, supply chain disruptions, or changes in tariff policies could impact the Exchange's operations and Indemnity's management fees. In particular, unanticipated increased inflation costs including medical cost inflation, building material cost inflation, auto repair and replacement cost inflation, and social inflation may impact adequacy of estimated loss reserves and future premium rates of the Exchange.

The Exchange's policyholder surplus, determined under statutory accounting principles, was $10,100,000 thousand ³⁶ and $9,300,000 thousand ³⁷ at December 31, 2025 and 2024, respectively. The Exchange and its wholly owned property and casualty insurance subsidiaries' year-over-year policy retention ratio continues to be high at 88.4% ³⁸ at December 31, 2025 and 90.4% ³⁹ at December 31, 2024.

Indemnity's revenues and profitability could be materially adversely affected if the management fee rate is reduced or if there is a significant decrease in the amount of direct and affiliated assumed premiums written by the Exchange, as management fee revenue is calculated by multiplying the management fee rate by the direct and affiliated assumed premiums written by the Exchange. The management fee rate may not exceed 25% of the direct and affiliated assumed premiums written by the Exchange. The Exchange's AM Best rating was downgraded from A+ 'Superior' to A 'Excellent' on September 5, 2025, and a significant downgrade could reduce the Exchange's competitive position. The Exchange's policyholder surplus was $10,100,000 thousand ⁴⁰ at December 31, 2025. The Exchange's investment portfolio is comprised principally of fixed income securities, equity securities and limited partnerships, and a substantial decrease in value could materially adversely affect the Exchange's financial position. The Exchange faces significant competition from other regional and national insurance companies, and if it fails to respond to innovations on a timely basis, its competitive position and results may be materially adversely affected.

Management's discussion emphasizes that Indemnity's results of operations are tied to the growth and financial condition of the Exchange as the Exchange is its sole customer, and its earnings are largely generated from management fees based on the direct and affiliated assumed premiums written by the Exchange. The management fee rate was set at 25% for 2025 and 2024, and the Board of Directors set the 2026 management fee rate again at 25%. The strategic priorities emphasized include employing a disciplined underwriting philosophy, leveraging the Exchange's strong surplus position to generate higher risk adjusted investment returns, and continuing efforts to utilize the agency force to increase market penetration in existing operating territories to contribute to future growth. Management also highlights the focus on underwriting discipline and the maturing of pricing sophistication models to support risk selection and long-term rate adequacy.