Note 7. Investments

Available-for-sale securities

The following table summarizes the cost and fair value of our available-for-sale securities at June 30, 2013:



	Erie Insurance Group
	June 30, 2013
(in millions)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Indemnity
Available-for-sale securities:
States & political subdivisions	$	172	$	7	$	0	$	179
Corporate debt securities	257		2		1		258
Collateralized debt obligations	1		0		0		1
Total fixed maturities	430		9		1		438
Nonredeemable preferred stock	21		2		0		23
Common stock	26		0		1		25
Total available-for-sale securities – Indemnity	$	477	$	11	$	2	$	486
Exchange
Available-for-sale securities:
U.S. government & agencies	$	188	$	1	$	5	$	184
States & political subdivisions	1,226		61		13		1,274
Foreign government securities	23		1		1		23
Corporate debt securities	5,570		365		53		5,882
Residential mortgage-backed securities	222		3		4		221
Commercial mortgage-backed securities	48		2		1		49
Collateralized debt obligations	16		7		0		23
Other debt securities	66		3		0		69
Total fixed maturities	7,359		443		77		7,725
Nonredeemable preferred stock	577		74		4		647
Common stock	338		0		16		322
Total available-for-sale securities – Exchange	$	8,274	$	517	$	97	$	8,694
Total available-for-sale securities – Erie Insurance Group	$	8,751	$	528	$	99	$	9,180

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 June 30, 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
	June 30, 2013
(in millions)	Amortized		Estimated
	cost		fair value
Indemnity
Due in one year or less	$	127	$	127
Due after one year through five years	198		201
Due after five years through ten years	34		36
Due after ten years	71		74
Total fixed maturities – Indemnity	$	430	$	438
Exchange
Due in one year or less	476		486
Due after one year through five years	2,730		2,890
Due after five years through ten years	2,655		2,798
Due after ten years	1,498		1,551
Total fixed maturities – Exchange	$	7,359	$	7,725
Total fixed maturities – Erie Insurance Group	$	7,789	$	8,163

Available-for-sale securities in a gross unrealized loss position at June 30, 2013 are as follows. Data is provided by length of time for securities in a gross unrealized loss position.



	Erie Insurance Group
	June 30, 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:
States & political subdivisions	$	16	$	0	$	0	$	0	$	16	$	0	7
Corporate debt securities	122		1		0		0		122		1		23
Total fixed maturities	138		1		0		0		138		1		30
Nonredeemable preferred stock	6		0		3		0		9		0		4
Common stock	25		1		0		0		25		1		2
Total available-for-sale securities – Indemnity	$	169	$	2	$	3	$	0	$	172	$	2	36
Quality breakdown of fixed maturities:
Investment grade	$	132	$	1	$	0	$	0	$	132	$	1	29
Non-investment grade	6		0		0		0		6		0		1
Total fixed maturities – Indemnity	$	138	$	1	$	0	$	0	$	138	$	1	30
Exchange
Available-for-sale securities:
U.S. government & agencies	$	151	$	5	$	0	$	0	$	151	$	5	12
States & political subdivisions	284		13		0		0		284		13		65
Foreign government securities	13		1		0		0		13		1		2
Corporate debt securities	1,196		52		11		1		1,207		53		217
Residential mortgage-backed securities	122		4		7		0		129		4		21
Commercial mortgage-backed securities	15		1		0		0		15		1		3
Other debt securities	30		0		0		0		30		0		5
Total fixed maturities	1,811		76		18		1		1,829		77		325
Nonredeemable preferred stock	110		3		15		1		125		4		19
Common stock	322		16		0		0		322		16		3
Total available-for-sale securities – Exchange	$	2,243	$	95	$	33	$	2	$	2,276	$	97	347
Quality breakdown of fixed maturities:
Investment grade	$	1,713	$	72	$	18	$	1	$	1,731	$	73	305
Non-investment grade	98		4		0		0		98		4		20
Total fixed maturities – Exchange	$	1,811	$	76	$	18	$	1	$	1,829	$	77	325

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

Net investment income

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 June 30,				Six months ended June 30,
	2013		2012		2013		2012
Indemnity
Fixed maturities	$	3	$	3	$	6	$	6
Equity securities	0		1		1		2
Cash equivalents and other	1		0		1		0
Total investment income	4		4		8		8
Less: investment expenses	1		0		1		0
Investment income, net of expenses – Indemnity	$	3	$	4	$	7	$	8
Exchange
Fixed maturities	$	83	$	89	$	166	$	179
Equity securities	27		27		51		49
Cash equivalents and other	0		1		0		2
Total investment income	110		117		217		230
Less: investment expenses	9		8		17		17
Investment income, net of expenses – Exchange	$	101	$	109	$	200	$	213
Investment income, net of expenses – Erie Insurance Group	$	104	$	113	$	207	$	221

Realized investment gains (losses)

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 June 30,						Six months ended June 30,
	2013			2012			2013			2012
Indemnity
Available-for-sale securities:
Fixed maturities:
Gross realized gains	$	0		$	0		$	0		$	0
Gross realized losses	0			0			0			0
Net realized gains	0			0			0			0
Equity securities:
Gross realized gains	0			0			0			0
Gross realized losses	0			0			0			0
Net realized gains	0			0			0			0
Trading securities:
Common stock:
Gross realized gains	0			0			0			1
Gross realized losses	0			0			0			0
Increases (decreases) in fair value⁽¹⁾	0			(1		)	0			1
Net realized gains (losses)	0			(1		)	0			2
Net realized investment gains (losses) – Indemnity	$	0		$	(1	)	$	0		$	2
Exchange
Available-for-sale securities:
Fixed maturities:
Gross realized gains	$	7		$	16		$	22		$	25
Gross realized losses	(3		)	(3		)	(5		)	(6		)
Net realized gains	4			13			17			19
Equity securities:
Gross realized gains	2			4			4			5
Gross realized losses	0			(2		)	0			(2		)
Net realized gains	2			2			4			3
Trading securities:
Common stock:
Gross realized gains	54			44			156			85
Gross realized losses	(3		)	(21		)	(15		)	(33		)
Increases (decreases) in fair value⁽¹⁾	4			(144		)	148			113
Net realized gains (losses)	55			(121		)	289			165
Net realized investment gains (losses) – Exchange	$	61		$	(106	)	$	310		$	187
Net realized investment gains (losses) – Erie Insurance Group	$	61		$	(107	)	$	310		$	189


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

Net impairment losses

Net impairment losses recorded in earnings for Indemnity for the second quarter and six months ended June 30, 2013 were $0.1 million, compared to no net impairment losses for the second quarter and six months ended June 30, 2012. Net impairment losses for the Exchange were $1 million for the second quarter and the six months ended June 30, 2013, compared to no net impairment losses for the second quarter of 2012, and $0.1 million for the six months ended June 30, 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 June 30, 2013 are comprised of partnership financial results for the fourth quarter of 2012 and first quarter of 2013. Given the lag in reporting, our limited partnership results do not reflect the market conditions of the second 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 six months ended June 30, 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 June 30, 2013 include partnership financial results for the fourth quarter of 2012 and the first quarter of 2013.



	Erie Insurance Group
	As of and for the six months ended June 30, 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	$	52	$	(5	)	$	5
Greater than or equal to 10% but less than 50%	3	15		2			0
Greater than 50%	0	0		0			0
Total private equity	29	67		(3		)	5
Mezzanine debt:
Less than 10%	11	15		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	23		(1		)	2
Real estate:
Less than 10%	12	51		0			0
Greater than or equal to 10% but less than 50%	3	16		1			2
Greater than 50%	3	9		2			0
Total real estate	18	76		3			2
Total limited partnerships – Indemnity	62	$	166	$	(1	)	$	9
Exchange
Private equity:
Less than 10%	43	$	410	$	(29	)	$	54
Greater than or equal to 10% but less than 50%	3	64		7			0
Greater than 50%	0	0		0			0
Total private equity	46	474		(22		)	54
Mezzanine debt:
Less than 10%	19	128		1			7
Greater than or equal to 10% but less than 50%	4	24		(4		)	5
Greater than 50%	3	35		1			2
Total mezzanine debt	26	187		(2		)	14
Real estate:
Less than 10%	22	237		(7		)	15
Greater than or equal to 10% but less than 50%	6	81		2			7
Greater than 50%	3	32		(1		)	7
Total real estate	31	350		(6		)	29
Total limited partnerships – Exchange	103	$	1,011	$	(30	)	$	97
Total limited partnerships – Erie Insurance Group		$	1,177	$	(31	)	$	106

Per the limited partnership financial statements, total partnership assets were $51 billion and total partnership liabilities were $5 billion at June 30, 2013 (as recorded in the March 31, 2013 limited partnership financial statements). For the six month period comparable to that presented in the preceding table (fourth quarter of 2012 and first quarter of 2013), total partnership valuation adjustment gains were $1 billion and total partnership net income was $3 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.