Note 7. Investments

The following table summarizes the cost and fair value of our available-for-sale securities at March 31, 2013:



	Erie Insurance Group
	March 31, 2013
(in millions)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Indemnity
Available-for-sale securities:
States & political subdivisions	$	164	$	12	$	0	$	176
Corporate debt securities	240		3		0		243
Collateralized debt obligations	2		0		0		2
Total fixed maturities	406		15		0		421
Nonredeemable preferred stock	21		2		0		23
Common stock	26		0		0		26
Total available-for-sale securities – Indemnity	$	453	$	17	$	0	$	470
Exchange
Available-for-sale securities:
U.S. government & agencies	$	185	$	1	$	1	$	185
States & political subdivisions	1,204		96		1		1,299
Foreign government securities	28		1		0		29
Corporate debt securities	5,442		538		6		5,974
Residential mortgage-backed securities	229		6		1		234
Commercial mortgage-backed securities	52		4		0		56
Collateralized debt obligations	39		7		0		46
Other debt securities	63		5		0		68
Total fixed maturities	7,242		658		9		7,891
Nonredeemable preferred stock	541		91		1		631
Common stock	316		0		4		312
Total available-for-sale securities – Exchange	$	8,099	$	749	$	14	$	8,834
Total available-for-sale securities – Erie Insurance Group	$	8,552	$	766	$	14	$	9,304

The following table summarizes the cost and fair value of our available-for-sale securities at December 31, 2012:



	Erie Insurance Group
	December 31, 2012
(in millions)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Indemnity
Available-for-sale securities:
States & political subdivisions	$	172	$	13	$	0	$	185
Corporate debt securities	259		2		0		261
Commercial mortgage-backed securities	3		0		0		3
Collateralized debt obligations	3		0		0		3
Total fixed maturities	437		15		0		452
Nonredeemable preferred stock	28		2		1		29
Common stock	26		0		0		26
Total available-for-sale securities – Indemnity	$	491	$	17	$	1	$	507
Exchange
Available-for-sale securities:
U.S. government & agencies	$	190	$	2	$	1	$	191
States & political subdivisions	1,218		103		0		1,321
Foreign government securities	15		1		0		16
Corporate debt securities	5,211		569		3		5,777
Residential mortgage-backed securities	226		6		1		231
Commercial mortgage-backed securities	62		5		0		67
Collateralized debt obligations	43		6		0		49
Other debt securities	51		4		0		55
Total fixed maturities	7,016		696		5		7,707
Nonredeemable preferred stock	555		77		1		631
Common stock	316		0		2		314
Total available-for-sale securities – Exchange	$	7,887	$	773	$	8	$	8,652
Total available-for-sale securities – Erie Insurance Group	$	8,378	$	790	$	9	$	9,159

The amortized cost and estimated fair value of fixed maturities at March 31, 2013 are shown below by remaining contractual term to maturity. Mortgage-backed securities are allocated based upon their stated maturity dates. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	Erie Insurance Group
	March 31, 2013
(in millions)	Amortized		Estimated
	cost		fair value
Indemnity
Due in one year or less	$	144	$	145
Due after one year through five years	170		175
Due after five years through ten years	34		36
Due after ten years	58		65
Total fixed maturities – Indemnity	$	406	$	421
Exchange
Due in one year or less	538		548
Due after one year through five years	2,570		2,762
Due after five years through ten years	2,753		3,068
Due after ten years	1,381		1,513
Total fixed maturities – Exchange	$	7,242	$	7,891
Total fixed maturities – Erie Insurance Group	$	7,648	$	8,312

Available-for-sale securities in a gross unrealized loss position at March 31, 2013 are as follows. Data is provided by length of time for securities in a gross unrealized loss position.



	Erie Insurance Group
	March 31, 2013
(dollars in millions)	Less than 12 months				12 months or longer				Total
Indemnity	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		No. of holdings
Available-for-sale securities:
Corporate debt securities	$	55	$	0	$	0	$	0	$	55	$	0	11
Total fixed maturities	55		0		0		0		55		0		11
Nonredeemable preferred stock	3		0		3		0		6		0		2
Common stock	$	26	$	0	$	0	$	0	$	26	$	0	2
Total available-for-sale securities – Indemnity	$	84	$	0	$	3	$	0	$	87	$	0	15
Quality breakdown of fixed maturities:
Investment grade	$	45	$	0	$	0	$	0	$	45	$	0	9
Non-investment grade	10		0		0		0		10		0		2
Total fixed maturities – Indemnity	$	55	$	0	$	0	$	0	$	55	$	0	11
Exchange
Available-for-sale securities:
U.S. government & agencies	$	84	$	1	$	0	$	0	$	84	$	1	7
States & political subdivisions	72		1		0		0		72		1		24
Foreign government securities	13		0		0		0		13		0		2
Corporate debt securities	344		6		1		0		345		6		58
Residential mortgage-backed securities	71		1		0		0		71		1		12
Commercial mortgage-backed securities	5		0		0		0		5		0		1
Collateralized debt obligations	0		0		21		0		21		0		1
Other debt securities	11		0		0		0		11		0		2
Total fixed maturities	600		9		22		0		622		9		107
Nonredeemable preferred stock	8		0		21		1		29		1		5
Common stock	$	312	$	4	$	0	$	0	$	312	$	4	3
Total available-for-sale securities – Exchange	$	920	$	13	$	43	$	1	$	963	$	14	115
Quality breakdown of fixed maturities:
Investment grade	$	597	$	9	$	22	$	0	$	619	$	9	105
Non-investment grade	3		0		0		0		3		0		2
Total fixed maturities – Exchange	$	600	$	9	$	22	$	0	$	622	$	9	107

The above securities for Indemnity and the Exchange have been evaluated and determined to be temporary impairments for which we expect to recover our entire principal plus interest. The primary components of this analysis include a general review of market conditions and financial performance of the issuer along with the extent and duration at which fair value is less than cost. Any debt securities that we intend to sell or will more likely than not be required to sell before recovery are included in other-than-temporary impairments with the impairment charges recognized in earnings.

Available-for-sale securities in a gross unrealized loss position at December 31, 2012 are as follows. Data is provided by length of time for securities in a gross unrealized loss position.



	Erie Insurance Group
	December 31, 2012
(dollars in millions)	Less than 12 months				12 months or longer				Total
Indemnity	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		No. of holdings
Available-for-sale securities:
Corporate debt securities	$	59	$	0	$	0	$	0	$	59	$	0	12
Commercial mortgage-backed securities	0		0		3		0		3		0		1
Total fixed maturities	59		0		3		0		62		0		13
Nonredeemable preferred stock	7		0		3		1		10		1		4
Common stock	26		0		0		0		26		0		2
Total available-for-sale securities – Indemnity	$	92	$	0	$	6	$	1	$	98	$	1	19
Quality breakdown of fixed maturities:
Investment grade	$	55	$	0	$	3	$	0	$	58	$	0	12
Non-investment grade	4		0		0		0		4		0		1
Total fixed maturities – Indemnity	$	59	$	0	$	3	$	0	$	62	$	0	13
Exchange
Available-for-sale securities:
U.S. government & agencies	$	80	$	1	$	0	$	0	$	80	$	1	7
States & political subdivisions	23		0		0		0		23		0		11
Corporate debt securities	152		3		9		0		161		3		31
Residential mortgage-backed securities	56		1		0		0		56		1		9
Collateralized debt obligations	0		0		21		0		21		0		1
Other debt securities	5		0		0		0		5		0		2
Total fixed maturities	316		5		30		0		346		5		61
Nonredeemable preferred stock	64		0		18		1		82		1		13
Common stock	314		2		0		0		314		2		3
Total available-for-sale securities – Exchange	$	694	$	7	$	48	$	1	$	742	$	8	77
Quality breakdown of fixed maturities:
Investment grade	$	296	$	4	$	24	$	0	$	320	$	4	53
Non-investment grade	20		1		6		0		26		1		8
Total fixed maturities – Exchange	$	316	$	5	$	30	$	0	$	346	$	5	61

Interest and dividend income are recognized as earned and recorded to net investment income. Investment income, net of expenses, was generated from the following portfolios:



	Erie Insurance Group
(in millions)	Three months ended March 31,
	2013		2012
Indemnity
Fixed maturities	$	3	$	3
Equity securities	1		1
Cash equivalents and other	0		0
Total investment income	4		4
Less: investment expenses	0		0
Investment income, net of expenses – Indemnity	$	4	$	4
Exchange
Fixed maturities	$	83	$	90
Equity securities	24		22
Cash equivalents and other	0		1
Total investment income	107		113
Less: investment expenses	8		9
Investment income, net of expenses – Exchange	$	99	$	104
Investment income, net of expenses – Erie Insurance Group	$	103	$	108

Realized gains and losses on sales of securities are recognized in income based upon the specific identification method. Realized gains (losses) on investments were as follows:



	Erie Insurance Group
(in millions)	Three months ended March 31,
	2013			2012
Indemnity
Available-for-sale securities:
Fixed maturities:
Gross realized gains	$	0		$	0
Gross realized losses	0			0
Net realized gains	0			0
Equity securities:
Gross realized gains	0			0
Gross realized losses	0			0
Net realized gains	0			0
Trading securities:
Common stock:
Gross realized gains	0			1
Gross realized losses	0			0
Increases in fair value⁽¹⁾	0			2
Net realized gains	0			3
Net realized investment gains – Indemnity	$	0		$	3
Exchange
Available-for-sale securities:
Fixed maturities:
Gross realized gains	$	15		$	9
Gross realized losses	(2		)	(3		)
Net realized gains	13			6
Equity securities:
Gross realized gains	2			1
Gross realized losses	0			0
Net realized gains	2			1
Trading securities:
Common stock:
Gross realized gains	102			41
Gross realized losses	(12		)	(12		)
Increases in fair value⁽¹⁾	144			257
Net realized gains	234			286
Net realized investment gains – Exchange	$	249		$	293
Net realized investment gains – Erie Insurance Group	$	249		$	296


(1)	The fair value on our common stock portfolio is based upon exchange traded prices provided by a nationally recognized pricing service.

There were no impairment losses for Indemnity in the first quarter of 2013 and 2012. The Exchange recorded impairment losses of $0.4 million in the first quarter of 2013, compared to $0.1 million for the first quarter of 2012.

In considering if fixed maturity securities were credit-impaired, some of the factors considered include: potential for the default of interest and/or principal, level of subordination, collateral of the issue, compliance with financial covenants, credit ratings and industry conditions. We have the intent to sell all credit-impaired fixed maturity securities, therefore the entire amount of the impairment charges were included in earnings and no non-credit impairments were recognized in other comprehensive income.

Limited partnerships

Limited partnership investments, excluding certain real estate limited partnerships recorded at fair value, are generally reported on a one-quarter lag, therefore our year-to-date limited partnership results through March 31, 2013 are comprised of partnership financial results for the fourth quarter of 2012. Given the lag in reporting, our limited partnership results do not reflect the market conditions of the first quarter of 2013. Cash contributions made to and distributions received from the partnerships are recorded in the period in which the transaction occurs.

We have provided summarized financial information in the following table for the three months ended March 31, 2013 and for the year ended December 31, 2012. Amounts provided in the table are presented using the latest available financial statements received from the partnerships. Limited partnership financial information has been presented based upon the investment percentage in the partnerships for the Erie Insurance Group consistent with how management evaluates the investments.

As these investments are generally reported on a one-quarter lag, our limited partnership results through March 31, 2013 include partnership financial results for the fourth quarter of 2012.



	Erie Insurance Group
	As of and for the three months ended March 31, 2013
(dollars in millions) Investment percentage in limited partnerships	Number of partnerships	Asset recorded		Income (loss) recognized due to valuation adjustments by the partnerships			Income (1oss) recorded
Indemnity
Private equity:
Less than 10%	26	$	55	$	(4	)	$	3
Greater than or equal to 10% but less than 50%	3	13		0			0
Greater than 50%	0	0		0			0
Total private equity	29	68		(4		)	3
Mezzanine debt:
Less than 10%	11	16		0			0
Greater than or equal to 10% but less than 50%	3	8		(1		)	2
Greater than 50%	1	0		0			0
Total mezzanine debt	15	24		(1		)	2
Real estate:
Less than 10%	12	52		0			0
Greater than or equal to 10% but less than 50%	3	14		0			1
Greater than 50%	3	9		2			0
Total real estate	18	75		2			1
Total limited partnerships – Indemnity	62	$	167	$	(3	)	$	6
Exchange
Private equity:
Less than 10%	43	$	418	$	(18	)	$	27
Greater than or equal to 10% but less than 50%	3	58		1			0
Greater than 50%	0	0		0			0
Total private equity	46	476		(17		)	27
Mezzanine debt:
Less than 10%	18	124		0			4
Greater than or equal to 10% but less than 50%	4	24		(3		)	5
Greater than 50%	3	37		1			0
Total mezzanine debt	25	185		(2		)	9
Real estate:
Less than 10%	21	234		(6		)	12
Greater than or equal to 10% but less than 50%	6	78		1			4
Greater than 50%	3	31		5			0
Total real estate	30	343		0			16
Total limited partnerships – Exchange	101	$	1,004	$	(19	)	$	52
Total limited partnerships – Erie Insurance Group		$	1,171	$	(22	)	$	58

Per the limited partnership financial statements, total partnership assets were $51 billion and total partnership liabilities were $5 billion at March 31, 2013 (as recorded in the December 31, 2012 limited partnership financial statements). For the three month period comparable to that presented in the preceding table (fourth quarter of 2012), total partnership valuation adjustment losses were $1 billion and total partnership net income was $2 billion.

As these investments are generally reported on a one-quarter lag, our limited partnership results through December 31, 2012 include partnership financial results for the fourth quarter of 2011 and the first three quarters of 2012.



	Erie Insurance Group
	As of and for the year ended December 31, 2012
(dollars in millions) Investment percentage in limited partnerships	Number of partnerships	Asset recorded		Income (loss) recognized due to valuation adjustments by the partnerships			Income (1oss) recorded
Indemnity
Private equity:
Less than 10%	26	$	60	$	(3	)	$	6
Greater than or equal to 10% but less than 50%	3	13		4			0
Greater than 50%	0	0		0			0
Total private equity	29	73		1			6
Mezzanine debt:
Less than 10%	11	18		(2		)	5
Greater than or equal to 10% but less than 50%	3	9		0			2
Greater than 50%	1	0		1			(1		)
Total mezzanine debt	15	27		(1		)	6
Real estate:
Less than 10%	12	55		4			(3		)
Greater than or equal to 10% but less than 50%	3	16		(1		)	1
Greater than 50%	3	9		2			0
Total real estate	18	80		5			(2		)
Total limited partnerships – Indemnity	62	$	180	$	5		$	10
Exchange
Private equity:
Less than 10%	42	$	424	$	22		$	24
Greater than or equal to 10% but less than 50%	3	58		16			(1		)
Greater than 50%	0	0		0			0
Total private equity	45	482		38			23
Mezzanine debt:
Less than 10%	18	132		(5		)	29
Greater than or equal to 10% but less than 50%	4	27		1			4
Greater than 50%	3	37		(2		)	5
Total mezzanine debt	25	196		(6		)	38
Real estate:
Less than 10%	22	274		(7		)	26
Greater than or equal to 10% but less than 50%	5	52		(4		)	3
Greater than 50%	3	33		6			(1		)
Total real estate	30	359		(5		)	28
Total limited partnerships – Exchange	100	$	1,037	$	27		$	89
Total limited partnerships – Erie Insurance Group		$	1,217	$	32		$	99

Per the limited partnership financial statements, total partnership assets were $53 billion and total partnership liabilities were $6 billion at December 31, 2012 (as recorded in the September 30, 2012 limited partnership financial statements). For the twelve month period comparable to that presented in the preceding table (fourth quarter of 2011 and first three quarters of 2012), total partnership valuation adjustment gains were $2 billion and total partnership net income was $5 billion.

See also Note 14. “Commitments and Contingencies,” for investment commitments related to limited partnerships.