Step into the ring: Erie Indemnity, Form AP, Robinhood and the WWE

“In the sunset of dissolution, everything is illuminated by the aura of nostalgia, even the guillotine.” Milan Kundera, The Unbearable Lightness of Being

Yesterday was Dr. Martin Luther King Day and also the college football championship game between Notre Dame and Ohio State.

I am partial to Ohio State, given my relationship to the school and several of its faculty and former students. Plus, as a Purdue University alum, I can't root for ND, or Indiana, ever!

Anything I've forgotten?

The famous Herb Greenberg, who now writes his On The Street column for Substack, got in touch a few weeks ago about a weird company called Erie Indemnity. I had to admit I had never heard of it, despite Herb writing about it in September and SprucePoint Capital writing on it and Herb talking about on CNBC back in October. I get a lot of calls from people with questions about all kinds of companies but when it is about REITS or insurance companies I usually avoid commenting. REITS are some of the most complex, inscrutable, and also fraught business models and it takes a lot of time and effort to untangle them.

You can’t pay me enough!

But Herb's request was simple: to help him understand why Erie Indemnity was not consolidating Erie Insurance Exchange.

My research approach started with looking at the filings of both companies to see what they say. In this case you had to go quite a way back, to 2010, to get the whole story. Then I looked at what the SEC may have said about decisions or changes in approach by the companies. In this case there were SEC comment letters!

Next, using the PCAOB's Form AP data, I looked to see who the assigned engagement partner is and review what the audit firm — in this case EY — says about the issue in its GAAP Guide for the industry and topic. It's really interesting to see whether the company is aligned with its own auditor’s guidance and whether the firm and partner have more clients covered by any quirky, bespoke examples the firm uses in its Guide to illustrate the specifics of the standard.

What is the thing Herb thinks is so quirky?

Here's Herb's take:

Erie is a so-called “attorney-in-fact” for an insurance company. In reality, it’s kind of like a glorified third-party agent, except with some power of attorney, doing all of the back-office work for its one and only customer, the Erie Mutual Exchange. The Exchange, as it’s known, is a related entity owned by Erie policyholders, or “subscribers,” who bought insurance through a half-dozen-related insurance companies that operate in 12 states and the District of Columbia.

In its role, Erie takes no actuarial risk, but instead does administrative services, such as issuing policies, handling claims, managing investments and providing customer service for the Exchange.

In return, it gets a management fee of as high as 25%. That administrative fee, for a single customer, is its entire business model. It lives and dies by that fee.

However, the accounting relationship between Erie Indemnity and Erie Insurance Exchange has changed over time.

After the paywall I'll tell you more about the Erie case and give an update on the issue of related party disclosure. I will also talk more about how I use Form AP to expand a story and identify opportunities for regulatory scrutiny. I’ll use the recent SEC settled enforcement actions against Robinhood and Vince McMahon of World Wrestling Entertainment (WWE) to illuminate my Form AP methods.