Note 5. Segment Information

Our reportable segments include management operations, property and casualty insurance operations, life insurance operations and investment operations. Accounting policies for segments are the same as those described in the summary of significant accounting policies. See Item 8. “Financial Statements and Supplementary Data, Note 2. Significant Accounting Policies,” in our Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission on February 26, 2013. Assets are not allocated to the segments, but rather, are reviewed in total for purposes of decision-making. No single customer or agent provides 10% or more of revenues.

Management operations

Our management operations segment consists of Indemnity serving as attorney-in-fact for the Exchange. Indemnity operates in this capacity solely for the Exchange. We evaluate profitability of our management operations segment principally on the gross margin from management operations. Indemnity earns a management fee from the Exchange for providing sales, underwriting and policy issuance services. Management fee revenue, which is eliminated upon consolidation, is calculated as a percentage not to exceed 25% of all the direct premiums written by the Exchange and the other members of the Property and Casualty Group, which are assumed by the Exchange under an intercompany pooling arrangement. The Property and Casualty Group issues policies with annual terms only. Management fees are recorded upon policy issuance or renewal, as substantially all of the services required to be performed by Indemnity have been satisfied at that time. Certain activities are performed and related costs are incurred by us subsequent to policy issuance in connection with the services provided to the Exchange; however, these activities are inconsequential and perfunctory. Although these management fee revenues and expenses are eliminated upon consolidation, the amount of the fee directly impacts the allocation of our consolidated net income between the noncontrolling interest, which bears the management fee expense and represents the interests of the Exchange subscribers (policyholders), and Indemnity’s interest, which earns the management fee revenue and represents the Indemnity shareholder interest in net income.

Additionally, the second quarter and six months ended June 30, 2012 included an adjustment that reduced commission expense by $6 million. This amount represents the reimbursement by the North Carolina Reinsurance Facility (NCRF) for commissions Indemnity paid to agents on the surcharges collected on behalf of the NCRF which was incorrectly recorded as a benefit to the Exchange in prior periods.

Property and casualty insurance operations

Our property and casualty insurance operations segment includes personal and commercial lines. Personal lines consist primarily of personal auto and homeowners and are marketed to individuals. Commercial lines consist primarily of commercial multi-peril, commercial auto and workers compensation and are marketed to small- and medium-sized businesses. Our property and casualty policies are sold by independent agents. Our property and casualty insurance underwriting operations are conducted through the Exchange and its subsidiaries and include assumed voluntary reinsurance from nonaffiliated domestic and foreign sources, assumed involuntary and ceded reinsurance business. The Exchange exited the assumed voluntary reinsurance business effective December 31, 2003, and therefore unaffiliated reinsurance includes only run-off activity of the previously assumed voluntary reinsurance business. We evaluate profitability of the property and casualty insurance operations principally based upon net underwriting results represented by the combined ratio.

Life insurance operations

Our life insurance operations segment includes traditional and universal life insurance products and fixed annuities marketed to individuals using the same independent agency force utilized by our property and casualty insurance operations. We evaluate profitability of the life insurance segment principally based upon segment net income, including investments, which for segment purposes are reflected in the investment operations segment. At the same time, we recognize that investment-related income is integral to the evaluation of the life insurance segment because of the long duration of life products. For the second quarters of 2013 and 2012, investment activities on life insurance related assets generated revenues of $26 million and $28 million, respectively, resulting in EFL reporting income before income taxes of $13 million for both periods, before intercompany eliminations. Investment activities on life insurance related assets generated revenues of $52 million for both the six months ended June 30, 2013 and 2012, resulting in EFL reporting income before income taxes of $24 million and $22 million, respectively, before intercompany eliminations.

Investment operations

The investment operations segment includes returns from our fixed maturity, equity security and limited partnership investment portfolios to support our underwriting business. The Indemnity and Exchange portfolios are managed with the objective of maximizing after-tax returns on a risk-adjusted basis, while the EFL portfolio is managed to be closely aligned to its liabilities and to maintain a sufficient yield to meet profitability targets. Management actively evaluates the portfolios for impairments. We record impairment writedowns on investments in instances where the fair value of the investment is substantially below cost, and we conclude that the decline in fair value is other-than-temporary. Investment related income for the life operations is included in the investment segment results.

The following tables summarize the components of the Consolidated Statements of Operations by reportable business segment:



	Erie Insurance Group
(in millions)	Three months ended June 30, 2013
	Management operations		Property and casualty insurance operations		Life insurance operations			Investment operations			Eliminations			Consolidated
Premiums earned/life policy revenue			$	1,196	$	20					$	(1	)	$	1,215
Net investment income								$	107		(3		)	104
Net realized investment gains								61						61
Net impairment losses recognized in earnings								(1		)				(1		)
Equity in earnings of limited partnerships								39						39
Management fee revenue	$	336									(336		)	—
Service agreement and other revenue	8				0									8
Total revenues	344		1,196		20			206			(340		)	1,426
Cost of management operations	285										(285		)	—
Insurance losses and loss expenses			837		26						(2		)	861
Policy acquisition and underwriting expenses			348		7						(53		)	302
Total benefits and expenses	285		1,185		33			—			(340		)	1,163
Income (loss) before income taxes	59		11		(13		)	206			—			263
Provision for income taxes	21		4		(5		)	66			—			86
Net income (loss)	$	38	$	7	$	(8	)	$	140		—			$	177



	Erie Insurance Group
(in millions)	Three months ended June 30, 2012
	Management operations		Property and casualty insurance operations			Life insurance operations			Investment operations			Eliminations			Consolidated
Premiums earned/life policy revenue			$	1,092		$	18					$	(1	)	$	1,109
Net investment income									$	115		(2		)	113
Net realized investment losses									(107		)				(107		)
Net impairment losses recognized in earnings									0						0
Equity in earnings of limited partnerships									37						37
Management fee revenue	$	308										(308		)	—
Service agreement and other revenue	8					0									8
Total revenues	316		1,092			18			45			(311		)	1,160
Cost of management operations	257											(257		)	—
Insurance losses and loss expenses			919			25						(1		)	943
Policy acquisition and underwriting expense			332			8						(53		)	287
Total benefits and expenses	257		1,251			33			—			(311		)	1,230
Income (loss) before income taxes	59		(159		)	(15		)	45			—			(70		)
Provision for income taxes	21		(55		)	(6		)	8			—			(32		)
Net income (loss)	$	38	$	(104	)	$	(9	)	$	37		$	—		$	(38	)




	Erie Insurance Group
(in millions)	Six months ended June 30, 2013
	Management operations		Property and casualty insurance operations		Life insurance operations			Investment operations			Eliminations			Consolidated
Premiums earned/life policy revenue			$	2,352	$	39					$	(1	)	$	2,390
Net investment income								$	213		(6		)	207
Net realized investment gains								310						310
Net impairment losses recognized in earnings								(1		)				(1		)
Equity in earnings of limited partnerships								75						75
Management fee revenue	$	632									(632		)	—
Service agreement and other revenue	15				1									16
Total revenues	647		2,352		40			597			(639		)	2,997
Cost of management operations	539										(539		)	—
Insurance losses and loss expenses			1,654		52						(3		)	1,703
Policy acquisition and underwriting expenses			676		16						(97		)	595
Total benefits and expenses	539		2,330		68			—			(639		)	2,298
Income (loss) before income taxes	108		22		(28		)	597			—			699
Provision for income taxes	38		8		(10		)	196			—			232
Net income (loss)	$	70	$	14	$	(18	)	$	401		$	—		$	467




	Erie Insurance Group
(in millions)	Six months ended June 30, 2012
	Management operations		Property and casualty insurance operations			Life insurance operations			Investment operations		Eliminations			Consolidated
Premiums earned/life policy revenue			$	2,161		$	36				$	(1	)	$	2,196
Net investment income									$	226	(5		)	221
Net realized investment gains									189					189
Net impairment losses recognized in earnings									0					0
Equity in earnings of limited partnerships									58					58
Management fee revenue	$	577									(577		)	—
Service agreement and other revenue	15					1								16
Total revenues	592		2,161			37			473		(583		)	2,680
Cost of management operations	487										(487		)	—
Insurance losses and loss expenses			1,611			50					(2		)	1,659
Policy acquisition and underwriting expenses			634			17					(94		)	557
Total benefits and expenses	487		2,245			67			—		(583		)	2,216
Income (loss) before income taxes	105		(84		)	(30		)	473		—			464
Provision for income taxes	37		(29		)	(11		)	151		—			148
Net income (loss)	$	68	$	(55	)	$	(19	)	$	322	$	—		$	316