Erie Indemnity · 10-Q · Item 2 MD&A

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of financial condition and results of operations highlights significant factors influencing Erie Indemnity Company ("Indemnity", "we", "us", "our"). This discussion should be read in conjunction with the historical consolidated financial statements and the related notes thereto included in Part I, Item 1. "Financial Statements" of this Quarterly Report on Form 10-Q, and with Part II, Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for the year ended December 31, 2025, as contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 23, 2026.

INDEX

Page Number

Cautionary Statement Regarding Forward-Looking Information

Recent Accounting Standards

Operating Overview

Results of Operations

Financial Condition

Liquidity and Capital Resources

Critical Accounting Estimates

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 impacting the timing of premium rates charged for policies;

◦factors affecting insurance industry competition, including technological innovations;

◦dependence upon the independent agency system; and

◦ability to maintain our brand, including our reputation for customer service;

•dependence upon our relationship with the Exchange and the financial condition of the Exchange, including:

◦the Exchange's ability to maintain acceptable financial strength ratings;

◦factors affecting the quality and liquidity of the Exchange's investment portfolio;

◦changes in government regulation of the insurance industry;

◦litigation and regulatory actions;

◦emergence of significant unexpected events, including pandemics, economic or social inflation, and changes in tariff policies;

◦emerging claims and coverage issues in the industry; and

◦severe weather conditions or other catastrophic losses, including terrorism;

•costs of providing policy issuance and renewal services to the subscribers at the Exchange under the subscriber's agreement;

•ability to attract, develop, retain, and protect talented management and employees;

•ability to ensure system availability and effectively manage technology initiatives;

•difficulties with technology, data or network security breaches, including cyber attacks;

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•ability to maintain uninterrupted business operations;

•compliance with complex and evolving laws and regulations and outcome of pending and potential litigation;

•factors affecting the quality and liquidity of our investment portfolio; and

•ability to meet liquidity needs and access capital.

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

RECENT ACCOUNTING STANDARDS

See Part I, Item 1. "Financial Statements - Note 2, Significant Accounting Policies, of Notes to Consolidated Financial Statements" contained within this report for a discussion of recently issued accounting standards, and the impact on our consolidated financial statements if known.

OPERATING OVERVIEW

Overview

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

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

Our earnings are primarily driven by the management fee revenue generated for the services we provide on behalf of the subscribers at the Exchange. The policy issuance and renewal services we provide are related to the sales, underwriting, and issuance of policies. The sales related services we provide include agent compensation and certain sales and advertising support services. Agent compensation includes scheduled commissions to agents based upon premiums written as well as incentive compensation, which is earned by achieving targeted measures. Agent compensation generally comprises approximately two-thirds of our policy issuance and renewal expenses. The underwriting services we provide include underwriting and policy processing. The remaining services we provide include customer service and administrative support.

We also provide information technology services that support all the functions listed above. See Part I, Item 1. "Financial Statements - Note 4, Segment Information, of Notes to Consolidated Financial Statements" contained within this report for the significant expense categories related to providing these services. Included in expenses for these services are allocations of costs for departments that support these policy issuance and renewal functions.

Consistent with its legal structure as a reciprocal insurer, the Exchange does not have any employees or officers. Therefore, it enters into contractual relationships by and through the subscribers' attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of the subscribers at the Exchange with respect to its administrative services as enumerated in the subscriber's agreement. The Exchange's insurance subsidiaries also utilize Indemnity for these services in accordance with the service agreements between each of the subsidiaries and Indemnity. Claims handling services include costs incurred in the claims process, including the adjustment, investigation, defense, recording, and payment functions. Life insurance management services include costs incurred in the management and processing of life insurance business.

Investment management services are related to investment trading activity, accounting, and all other functions attributable to the investment of funds. In 2025, approximately 71% of the administrative services expenses were entirely attributable to the respective administrative functions (claims handling, life insurance management, and investment management), while the remaining 29% of these expenses were allocations of costs for departments that support these administrative functions. The expenses we incur and related reimbursements we receive for administrative services are presented gross in our Consolidated Statements of Operations. The subscriber's agreement and service agreements provide for reimbursement of amounts incurred for these services to Indemnity. Reimbursements are settled at cost on a monthly basis. State insurance regulations require that intercompany service agreements and any material amendments be approved in advance by the state insurance department.

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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 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.

Information security incident

T1In 2025, we experienced an information security incident that has been remediated and did not have a material impact on our consolidated financial condition, results of operations, or cash flows. As of June 30, 2026, we continue to pursue recovery of a portion of lost income due to business interruption and related expenses from our cybersecurity insurance policy.

Financial Overview

Three months ended June 30,

Six months ended June 30,

(dollars in thousands, except per share data)

% Change

% Change

(Unaudited)

(Unaudited)

Operating income

$

$

%

$

$

%

Total investment income

Other income

Income before income taxes

Income tax expense

Net income

$

$

%

$

$

%

Net income per share – diluted

$

$

%

$

$

%

Operating income increased in both the second quarter and six months ended June 30, 2026, compared to the same periods in 2025. T2Management fee revenue for policy issuance and renewal services increased 4.7% to $862.9 million in the second quarter of 2026 and 4.5% to $1.6 billion for the six months ended June 30, 2026, compared to the same periods in 2025. Management fee revenue is based upon the management fee rate we charge and the direct and affiliated assumed premiums written by the Exchange. The management fee rate was 25% for both 2026 and 2025. The T3direct and affiliated assumed premiums written by the Exchange increased 3.3% to $3.5 billion in the second quarter of 2026 and 3.4% to $6.8 billion for the six months ended June 30, 2026, compared to the same periods in 2025.

Cost of operations for policy issuance and renewal services increased 5.5% to $684.1 million in the second quarter of 2026 and 4.2% to $1.3 billion for the six months ended June 30, 2026, compared to the same periods in 2025, primarily due to increased agent incentive compensation due to improved profitability and higher scheduled commissions driven by direct and affiliated assumed written premium growth, partially offset by lower professional fees and decreased survey and underwriting report costs.

Management fee revenue for administrative services increased 7.2% to $19.6 million in the second quarter of 2026 and 8.8% to $39.1 million for the six months ended June 30, 2026, compared to the same periods in 2025. The administrative services reimbursement revenue and corresponding cost of operations increased both total operating revenue and total operating expenses by $201.6 million in the second quarter of 2026 and $401.7 million for the six months ended June 30, 2026, but had no net impact on operating income.

Total investment income increased $3.0 million in the second quarter of 2026 and $5.5 million for the six months ended June 30, 2026, compared to the same periods in 2025. The results from both periods were primarily due to an increase in net investment income. The increase for the six months ended June 30, 2026 was partially offset by net realized and unrealized investment losses compared to net gains in 2025.

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General Conditions and Trends Affecting Our Business

Economic conditions

T4Unfavorable changes in economic conditions, including declining consumer confidence, inflation, high unemployment, and the threat of recession, among others, may lead the Exchange’s customers to modify coverage, not renew policies, or even cancel policies, which could adversely affect the premium revenue of the Exchange, and consequently our management fee revenue. T5Elevated inflation, supply chain disruptions, or changes in tariff policies could impact the Exchange's operations and our management fees. In particular, unanticipated increased inflation costs including medical cost inflation, building material cost inflation, auto repair and replacement cost inflation, and social inflation may impact adequacy of estimated loss reserves and future premium rates of the Exchange. If any of these items impacted the financial condition or operations of the Exchange, it could have an impact on our financial results.

For a discussion of the potential impacts to our operations or those of the Exchange, see Financial Condition and Liquidity and Capital Resources contained within this report, as well as Part I. Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025 as filed with the Securities and Exchange Commission on February 23, 2026.

Financial market volatility

T6Our portfolio of available-for-sale and equity security investments is subject to market volatility, especially in periods of instability in the worldwide financial markets. Net investment income is impacted by the general level of interest rates, which impact reinvested cash flow from the portfolio and business operations. Depending upon market conditions, considerable fluctuation could occur in the fair value of our investment portfolio and reported total investment income, which could have an adverse impact on our consolidated financial condition, results of operations and cash flows. Various ongoing geopolitical events, the uncertain tariff, inflationary, and interest rate environment, and a potential economic slowdown could have a significant impact on the global financial markets with the potential for future losses and/or impairments on our investment portfolio.

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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 subscribers at the Exchange, as well as the service provider for the Exchange's insurance subsidiaries with respect to all administrative services. We retain management fees for acting as the attorney-in-fact for the subscribers at the Exchange in these two capacities and allocate our revenues between our performance obligations.

The management fee is calculated by multiplying all direct and affiliated assumed premiums written by the Exchange by the management fee rate, which is set by our Board of Directors at least annually. The management fee rate was set at 25% for both 2026 and 2025. Changes in the management fee rate can affect our revenue and net income significantly. The transaction price, including management fee revenue and administrative services reimbursement revenue, includes variable consideration and is allocated based on the estimated standalone selling prices developed using industry information and other available information for similar services. We update the transaction price and the related allocation at least annually based upon the most recent information available or more frequently if there have been significant changes in any components considered in the transaction price.

Our current transaction price allocation review resulted in a minor change in the allocation between the two performance obligations in 2026 compared to 2025, which did not have a material impact on our consolidated financial statements.

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

Three months ended June 30,

Six months ended June 30,

(dollars in thousands)

% Change

% Change

(Unaudited)

(Unaudited)

Policy issuance and renewal services

Direct and affiliated assumed premiums written by the Exchange

$

$

%

$

$

%

Management fee rate

%

%

%

%

Management fee revenue

Change in estimate for management fee returned on cancelled policies (1)

Management fee revenue - policy issuance and renewal services

$

$

%

$

$

%

Administrative services

Direct and affiliated assumed premiums written by the Exchange

$

$

%

$

$

%

Management fee rate

%

%

%

%

Management fee revenue

Change in contract liability (2)

Change in estimate for management fee returned on cancelled policies (1)

NM

NM

Management fee revenue - administrative services

Administrative services reimbursement revenue

Total revenue from administrative services

$

$

%

$

$

%

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. See Part I, Item 1. "Financial Statements - Note 3, Revenue, of Notes to Consolidated Financial Statements" contained within this report.

(2)Management fee revenue - administrative services is recognized over time as the services are provided. See Part I, Item 1. "Financial Statements - Note 3, Revenue, of Notes to Consolidated Financial Statements" contained within this report.

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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 3.3% to $3.5 billion in the second quarter of 2026 compared to the second quarter of 2025, primarily driven by increased commercial lines and homeowners premiums written, partially offset by decreased personal auto premiums written. The year-over-year average premium per policy for all lines of business increased 6.8% at June 30, 2026 compared to 11.9% at June 30, 2025. Year-over-year policies in force for all lines of business decreased 2.0% in the second quarter of 2026 compared to an increase 1.7% in the second quarter of 2025.

Premiums generated from new business increased 9.8% to $395 million in the second quarter of 2026 compared to the same period in 2025, primarily driven by increased premiums written in the personal auto and homeowners lines. Contributing to this change was a 13.9% increase in new business policies written and a 3.9% increase in year-over-year average premium per policy on new business at June 30, 2026. The increase in new business was impacted by the 2025 information security incident, which disrupted operations including new business production from June 7, 2025 through June 30, 2025, affecting the year-over-year comparison.

Premiums generated from renewal business increased 2.5% to $3.1 billion in the second quarter of 2026 compared to the second quarter of 2025 resulting from an increase of 7.2% in year-over-year average premium per policy at June 30, 2026, partially offset by a decrease in year-over-year policies in force of 0.9% in the second quarter of 2026.

Personal lines – Total personal lines premiums written increased 1.2% to $2.5 billion in the second quarter of 2026, compared to the second quarter of 2025, driven by a 6.0% increase in total personal lines year-over-year average premium per policy, partially offset by a 2.5% decrease in total personal lines policies in force.

Commercial lines – Total commercial lines premiums written increased 8.3% to $1.0 billion in the second quarter of 2026, compared to the second quarter of 2025, driven by a 5.9% increase in total commercial lines year-over-year average premium per policy and a 2.1% increase in total commercial lines policies in force.

Future trends-premium revenue – The Exchange plans to continue its efforts to grow premiums and improve its competitive position in the marketplace. Expanding the size of its agency force through a careful agency selection and monitoring process and increased market penetration in our existing operating territories is expected to contribute to future growth .

Premium levels impacted by changes in policies in force and rate actions affect the profitability of the Exchange and have a direct bearing on our management fee revenue. Future rate actions could be impacted by potential changes in regulation, inflationary trends, geopolitical factors, and tariff policies, among others. As the Exchange writes policies almost exclusively with annual terms, premium rate actions take 12 months to be fully recognized in written premiums, or longer for policies with a rate locking feature. See also Part I. Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025 as filed with the Securities and Exchange Commission on February 23, 2026.

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Policy issuance and renewal services

Three months ended June 30,

Six months ended June 30,

(dollars in thousands)

% Change

% Change

(Unaudited)

(Unaudited)

Management fee revenue - policy issuance and renewal services

$

$

%

$

$

%

Service agreement revenue

Cost of operations - policy issuance and renewal services

Operating income - policy issuance and renewal services

$

$

%

$

$

%

Policy issuance and renewal services

The management fee revenue allocated for providing policy issuance and renewal services was 24.41% of the direct and affiliated assumed premiums written by the Exchange for the three and six month periods ended June 30, 2026 and 24.37% for the same periods in 2025. This portion of the management fee is recognized as revenue when the policy is issued or renewed because it is at that time that the services we provide are substantially complete and the executed insurance policy is transferred to the customer. The increase in management fee revenue for policy issuance and renewal services was driven by the increase in the direct and affiliated assumed premiums written by the Exchange discussed previously.

Service agreement revenue

Service agreement revenue primarily consists of service charges we collect from subscribers (policyholders) for providing multiple payment plans on policies written by the Exchange and its property and casualty subsidiaries and also includes late payment and policy reinstatement fees. The service charges are fixed dollar amounts per billed installment. Service agreement revenue also includes fees received from the Exchange for the use of shared office space.

Cost of policy issuance and renewal services

Three months ended June 30,

Six months ended June 30,

(dollars in thousands)

% Change

% Change

(Unaudited)

(Unaudited)

Commissions:

Total commissions

$

$

%

$

$

%

Non-commission expense:

Personnel costs (1)

$

$

%

$

$

%

Sales and advertising (1)

Acquisition and underwriting support costs (1)

Technology infrastructure costs (1)

Professional fees (1)

Administrative and other (1)

Total non-commission expense

Total cost of operations - policy issuance and renewal services

$

$

%

$

$

%

(1)2025 amounts have been recast to conform to the current presentation. See Part I, Item 1. "Financial Statements - Note 4, Segment Information, of Notes to Consolidated Financial Statements" contained within this report for additional information on the revised expense categories.

Commissions – T7Commissions increased $44.7 million in the second quarter of 2026 and $72.7 million for the six months ended June 30, 2026, compared to the same periods in 2025, primarily driven by an increase in agent incentive compensation. The estimated agent incentive payouts at June 30, 2026 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 2026. The profitability component of agent incentive compensation increased due to improved actual and forecasted loss ratios for the three-year period ended 2026 compared to the three-year period ended 2025. Commission expense is also impacted by the growth in direct and affiliated assumed written premium.

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Non-commission expense – Non-commission expense decreased $8.8 million in the second quarter of 2026 compared to the second quarter of 2025. Personnel costs increased $3.0 million, primarily due to increased incentive compensation driven by stronger performance metrics and a smaller decrease in company stock price. This increase was partially offset by bonuses awarded to all employees in 2025 in recognition of our 100th anniversary. Sales and advertising decreased $1.7 million primarily due to a decrease in agent-related and advertising costs. Acquisition and underwriting support costs decreased $3.9 million primarily due to lower underwriting report and postage costs. Professional fees decreased $5.0 million primarily due to reduced use of third-party services related to technology initiatives.

Administrative and other costs decreased $2.1 million primarily due to lower credit card processing fees and charitable contributions related to the transition of charitable giving through the Erie Insurance Foundation.

Non-commission expense decreased $19.5 million for the six months ended June 30, 2026 compared to the same period in 2025. Personnel costs increased $5.1 million, primarily due to increased incentive compensation driven by stronger performance metrics, and higher base compensation. The increase is partially offset by bonuses awarded to all employees in 2025 in recognition of our 100th anniversary. Sales and advertising decreased $3.7 million primarily due to a decrease in agent-related and advertising costs. Acquisition and underwriting support costs decreased $5.7 million primarily due to lower underwriting report costs. Professional fees decreased $12.0 million primarily due to reduced use of third-party services related to technology initiatives. Administrative and other costs decreased $3.7 million primarily due to lower charitable contributions related to the transition of charitable giving through the Erie Insurance Foundation and a decrease in credit card processing fees.

Administrative services

Three months ended June 30,

Six months ended June 30,

(dollars in thousands)

% Change

% Change

(Unaudited)

(Unaudited)

Management fee revenue - administrative services

$

$

%

$

$

%

Administrative services reimbursement revenue

Total revenue allocated to administrative services

Administrative services expenses

Claims handling services

Investment management services

Life management services

Operating income - administrative services

$

$

%

$

$

%

Administrative services

The management fee revenue allocated to administrative services was 0.59% of the direct and affiliated assumed premiums written by the Exchange for the three and six month periods ended June 30, 2026 and 0.63% for the same periods in 2025. This portion of the management fee is recognized as revenue over a four-year period representing the time over which the services are provided. We also report reimbursed costs as revenues, which are recognized monthly as services are provided. The administrative services expenses we incur and the related reimbursements we receive are recorded gross in the Consolidated Statements of Operations.

Cost of administrative services

Consistent with its legal structure as a reciprocal insurer, the Exchange does not have any employees or officers. Therefore, it enters into contractual relationships by and through the subscribers' attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of the subscribers at the Exchange with respect to its administrative services as enumerated in the subscriber's agreement. The Exchange's insurance subsidiaries also utilize Indemnity for these services in accordance with the service agreements between each of the subsidiaries and Indemnity. The subscriber's agreement and service agreements provide for reimbursement of amounts incurred for these services to Indemnity. Reimbursements due from the Exchange and its insurance subsidiaries are recorded as a receivable and settled at cost.

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Total investment income

A summary of the results of our investment operations is as follows:

Three months ended June 30,

Six months ended June 30,

% Change

% Change

(dollars in thousands)

(Unaudited)

(Unaudited)

Net investment income

$

$

%

$

$

%

Net realized and unrealized investment gains (losses)

NM

Net impairment losses recognized in earnings

Total investment income

$

$

%

$

$

%

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 $2.6 million in the second quarter of 2026 and $6.2 million for the six months ended June 30, 2026 compared to the same periods in 2025. The increase in both periods was primarily due to an increase in bond income driven by higher average holdings.

Net realized and unrealized investment gains (losses)

A breakdown of our net realized and unrealized investment gains (losses) is as follows:

Three months ended June 30,

Six months ended June 30,

(in thousands)

Securities sold:

(Unaudited)

(Unaudited)

Available-for-sale securities

$

$

$

$

Equity securities

(7)

Change in fair value on remaining equity securities

Miscellaneous

0

0

0

5

Net realized and unrealized investment gains (losses)

$

$

$

$

Net impairment losses recognized in earnings

Net impairment losses recognized in earnings were lower during both the three and six months ended June 30, 2026 compared to the same periods in 2025. The improvement was primarily driven by lower available-for-sale security impairments, reflecting reduced credit-related impairments. This was partially offset by higher current expected credit losses on other loans receivable during the quarter and higher current expected credit losses on agent loans for the six-month period.

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Financial Condition of Erie Insurance Exchange

Serving in the capacity of attorney-in-fact for the subscribers at the Exchange, we are dependent on the growth and financial condition of the Exchange, who is our sole customer. The strength of the Exchange and its wholly owned subsidiaries is rated annually by AM Best through assessing its financial stability and ability to pay claims. The ratings are generally based upon factors relevant to policyholders and are not directed toward return to investors. The Exchange and each of its property and casualty insurance subsidiaries are rated A "Excellent". See Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025 as filed with the Securities and Exchange Commission on February 23, 2026 for a discussion of the Exchange's financial strength rating.

The financial statements of the Exchange are prepared in accordance with statutory accounting principles prescribed by the Commonwealth of Pennsylvania. Financial statements prepared under statutory accounting principles focus on the solvency of the insurer and generally provide a more conservative approach than under U.S. generally accepted accounting principles. Statutory direct written premiums of the Exchange and its wholly owned property and casualty insurance subsidiaries grew 3.4% to $6.8 billion in the first six months of 2026 compared to the same period in 2025. These premiums, along with investment income, are the major sources of cash that support the operations of the Exchange. Policyholders’ surplus determined under statutory accounting principles was $10.7 billion and $10.1 billion at June 30, 2026 and December 31, 2025, respectively. The Exchange and its wholly owned property and casualty insurance subsidiaries' year-over-year policy retention ratio was 87.5% at June 30, 2026 and 88.4% at December 31, 2025.

We have prepared our consolidated financial statements considering the financial strength of the Exchange based on its AM Best rating and strong level of surplus. See Part I, Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025 as filed with the Securities and Exchange Commission on February 23, 2026 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:

(dollars in thousands)

% to total

% to total

(Unaudited)

Available-for-sale securities (1)

$

%

$

%

Equity securities (2)

6

Agent loans (3)

7

7

Other investments (4)

2

2

Total investments

$

%

$

%

(1)This includes $44.4 million of securities lent under a securities lending agreement as of June 30, 2026 and December 31, 2025.

(2)This includes $25.5 million and $20.1 million of securities lent under a securities lending agreement as of June 30, 2026 and December 31, 2025, respectively.

(3)The current portion of agent loans is included in the line item "Prepaid expenses and other current assets, net" in the Consolidated Statements of Financial Position.

(4)The current and long-term portions of other investments are included in the line items "Prepaid expenses and other current assets, net" and "Other assets, net", respectively in the Consolidated Statements of Financial Position.

Available-for-sale securities

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

Available-for-sale securities are carried at fair value with unrealized gains and losses, net of deferred taxes, included in shareholders’ equity. Net unrealized losses on available-for-sale securities, net of deferred taxes, totaled $10.3 million at June 30, 2026, compared to unrealized gains of $1.3 million at December 31, 2025.

The following table presents a breakdown of the fair value of our available-for-sale portfolio by industry sector and rating as of:

(in thousands)

AAA

AA

A

BBB

Non- investment

grade

Fair

value

(Unaudited)

Basic materials

$

0

$

0

$

$

$

$

Communications

0

Consumer

0

Diversified

0

0

0

0

Energy

0

Financial

0

0

Industrial

0

Structured securities (2)

Technology

U.S. Treasury

0

0

0

0

Utilities

0

0

Total

$

$

$

$

$

$

(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 primarily include non-redeemable preferred stocks and exchange-traded funds. These securities are carried at fair value in the Consolidated Statements of Financial Position with all changes in unrealized gains and losses reflected in the Consolidated Statements of Operations.

The following table presents an analysis of the fair value of our equity securities as of:

(in thousands)

(Unaudited)

Exchange-traded funds

$

$

—

Non-redeemable preferred stocks:

Financial services

Utilities

Energy

Consumer

Technology

Communications

Total non-redeemable preferred stocks

Total

$

$

LIQUIDITY AND CAPITAL RESOURCES

We continue to monitor the sufficiency of our liquidity and capital resources given the potential impact of current economic conditions, including the uncertain tariff, inflationary, and interest rate environment. While we did not see a significant impact on our sources or uses of cash in the second quarter of 2026, future market disruptions could occur which may affect our liquidity position. If our normal operating and investing cash activities were to become insufficient to meet future funding requirements, T8we believe we have sufficient access to liquidity through our cash position, diverse liquid marketable securities, and our $100 million bank revolving line of credit that does not expire until November 2029.

See broader discussions of potential risks to our operations in "Operating Overview" contained within this report and Part I. Item 1A. "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025 as filed with the Securities and Exchange Commission on February 23, 2026.

Sources and Uses of Cash

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet the short- and long-term cash requirements of its business operations and growth needs. Our liquidity requirements have been met primarily by funds generated from management fee revenue and income from investments. Cash provided from these sources is used primarily to fund the costs of our management operations including commissions, salaries and wages, pension plans, share repurchases, dividends to shareholders, the purchase and development of information technology, and other capital expenditures. See Part I, Item 1. "Financial Statements - Note 9, Postretirement Benefits, of Notes to Consolidated Financial Statements" contained within this report for the funding policy and contributions for our defined benefit pension plan.

We expect that our operating cash needs will be met by funds generated from operations. Cash in excess of our operating needs is primarily invested in investment grade fixed maturities. As part of our liquidity review, we regularly evaluate our capital needs based on current and projected results and consider the potential impacts to our liquidity, borrowing capacity, financial covenants, and capital availability.

We maintain relationships and cash balances at diversified and well-capitalized financial institutions and have established processes to monitor them. We believe that our current cash, cash equivalents and marketable securities, and cash generated from operations will be sufficient to meet our current and future cash requirements.

Volatility in the financial markets presents challenges to us as we do occasionally access our investment portfolio as a source of cash. Some of our fixed income investments, despite being publicly traded, may be illiquid. Additionally, if we require significant amounts of cash on short notice in excess of anticipated cash requirements, or if we are required to return cash collateral in connection with our securities lending program, we may have difficulty selling investments in a timely manner, or be forced to sell at deep discounts. We believe we have sufficient liquidity to meet our needs from sources other than the liquidation of securities.

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Cash flow activities

The following table provides condensed cash flow information as follows for the six months ended June 30:

(in thousands)

(Unaudited)

Net cash provided by operating activities

$

$

Net cash used in investing activities

Net cash used in financing activities

Net (decrease) increase in cash, cash equivalents and restricted cash

$

$

Net cash provided by operating activities was $306.8 million in the first six months of 2026, compared to $295.7 million for the same period in 2025. Increased cash provided by operating activities was primarily due to an increase in management fees received of $181.8 million driven by growth in direct and affiliated assumed premiums written by the Exchange, and a decrease in administrative services expenses paid of $19.0 million. This was partially offset by a decrease in administrative services reimbursements received of $89.4 million and increases in incentive compensation paid to agents of $52.5 million from improved underwriting profitability and cash paid for agent commissions of $42.3 million driven by premium growth. Additionally, we plan to make an additional discretionary contribution of $30 million during the third quarter of 2026, which will further improve the plan's funded status.

Net cash used in investing activities was $234.7 million in the first six months of 2026, compared to $136.6 million for the same period in 2025. The increase in cash used in investing activities was primarily driven by an increase in purchases of investments of $402.3 million and an increase in fixed asset purchases of $29.0 million mostly related to software and home office renovations. This increase was partially offset by an increase in proceeds from investments of $335.8 million.

Net cash used in financing activities was $135.1 million in the first six months of 2026, compared to $99.5 million for the same period in 2025. Increased cash used in financing activities was primarily due to reduced cash collateral received during the first six months of 2026 compared to same period in 2025 resulting from lower securities lending activity under our securities lending program.

Capital Outlook

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

Outside of our normal operating and investing cash activities, future funding requirements could be met through: 1) unrestricted and unpledged cash and cash equivalents, which totaled approximately $242.5 million at June 30, 2026, 2) $100 million available bank revolving line of credit, and 3) liquidation of unrestricted and unpledged assets held in our investment portfolio, including equity securities and investment grade bonds, which totaled approximately $1.3 billion at June 30, 2026. Additionally, we have the ability to curtail or modify discretionary cash outlays such as those related to shareholder dividends and share repurchase activities. See Part I, Item 1. "Financial Statements - Note 8, Bank Line of Credit, of Notes to Consolidated Financial Statements" contained within this report for additional information related to our bank revolving line of credit.

Off-Balance Sheet Arrangements

We have entered into certain contingent obligations for guarantees. See Part I, Item 1. "Financial Statements - Note 14, Commitments and Contingencies, of Notes to Consolidated Financial Statements" contained within this report for additional information. We do not believe that these obligations will have a material current or future effect on our consolidated financial condition, results of operations or cash flows.

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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 consolidated financial statements. The most significant estimates relate to investment valuation and the retirement benefit plan 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, 2025 of our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on February 23, 2026. See Part I, Item 1. "Financial Statements - Note 6, Fair Value, of Notes to Consolidated Financial Statements" contained within this report for additional information on our valuation of investments.