Note 10. Income Taxes

The provision for income taxes consists of the following for the years ended December 31:



(in millions)	Erie Insurance Group
	2013			2012			2011
Indemnity
Current income tax expense	$	89		$	84		$	85
Deferred income tax (benefit) expense	(5		)	(3		)	0
Provision for income taxes – Indemnity	84			81			85
Exchange
Current income tax expense	232			78			110
Deferred income tax expense (benefit)	203			121			(105		)
Provision for income taxes – Exchange	435			199			5
Provision for income taxes – Erie Insurance Group	$	519		$	280		$	90

The deferred income tax expense in 2013 and 2012 was primarily driven by unrealized gains on investments. The deferred income tax benefit in 2011 was primarily driven by unrealized losses on common stock.

A reconciliation of the provision for income taxes, with amounts determined by applying the statutory federal income tax rates to pre-tax income, is as follows for the years ended December 31:



(in millions)	Erie Insurance Group
	2013			2012			2011
Indemnity
Income tax at statutory rates	$	86		$	84		$	89
Tax-exempt interest	(2		)	(2		)	(3		)
Dividends received deduction	0			(1		)	(1		)
Erie Family Life losses	—			—			(1		)
Other, net	0			0			1
Provision for income taxes – Indemnity	84			81			85
Exchange
Income tax at statutory rates	462			230			37
Tax-exempt interest	(13		)	(13		)	(15		)
Dividends received deduction	(14		)	(14		)	(13		)
Return to provision adjustments	(1		)	(3		)	(5		)
Other, net	1			(1		)	1
Provision for income taxes – Exchange	435			199			5
Provision for income taxes – Erie Insurance Group	$	519		$	280		$	90

Temporary differences and carry-forwards, which give rise to consolidated deferred tax assets and liabilities, are as follows for the years ended December 31:



(in millions)	Erie Insurance Group
	2013		2012
Indemnity
Deferred tax assets:
Net allowance for service fees and premium cancellations	$	3	$	3
Other employee benefits	14		9
Pension and other postretirement benefits	24		65
Other	0		3
Total deferred tax assets	41		80
Deferred tax liabilities:
Unrealized gains on investments	11		6
Limited partnerships	3		13
Depreciation	17		15
Prepaid expenses	7		5
Capitalized internally developed software	0		3
Other	1		1
Total deferred tax liabilities	39		43
Net deferred income tax asset – Indemnity	$	2	$	37



Exchange
Deferred tax assets:
Loss reserve discount	$	63		$	78
Liability for future life and annuity policy benefits	2			7
Unearned premiums	197			179
Write-downs of impaired securities	18			19
Other	17			22
Total deferred tax assets	297			305
Deferred tax liabilities:
Deferred policy acquisition costs	185			165
Unrealized gains on investments	489			443
Limited partnerships	61			43
Other	12			19
Total deferred tax liabilities	747			670
Net deferred income tax liability – Exchange	$	(450	)	$	(365	)
Net deferred income tax liability – Erie Insurance Group	$	(448	)	$	(328	)

Neither the Indemnity nor the Exchange had a valuation allowance recorded at December 31, 2013 or December 31, 2012.

Indemnity is the attorney-in-fact for the subscribers (policyholders) at the Exchange, a reciprocal insurance exchange. In that capacity, Indemnity provides all services and facilities necessary to conduct the Exchange’s insurance business. Indemnity and the Exchange together constitute a single insurance business. Indemnity is not subject to state corporate income or franchise taxes in states where the Exchange conducts its business and the states collect premium tax in lieu of corporate income or franchise tax, as a result of the Exchange’s remittance of premium taxes in those states.