Note 7. Investments

Available-for-sale securities

The following table summarizes the cost and fair value of our available-for-sale securities at March 31, 2014:



	Erie Insurance Group
	March 31, 2014
(in millions)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Indemnity
Available-for-sale securities:
States & political subdivisions	$	231	$	10	$	0	$	241
Corporate debt securities	259		2		0		261
Collateralized debt obligations	0		0		0		0
Total fixed maturities	490		12		0		502
Nonredeemable preferred stock	14		1		0		15
Common stock	21		0		1		20
Total available-for-sale securities – Indemnity	$	525	$	13	$	1	$	537
Exchange
Available-for-sale securities:
U.S. treasury	$	66	$	0	$	0	$	66
Government sponsored enterprises	37		1		0		38
States & political subdivisions	1,422		70		7		1,485
Foreign government securities	15		0		0		15
Corporate debt securities	6,113		400		19		6,494
Residential mortgage-backed securities	151		3		3		151
Commercial mortgage-backed securities	42		2		0		44
Collateralized debt obligations	7		7		0		14
Other debt securities	70		2		0		72
Total fixed maturities	7,923		485		29		8,379
Nonredeemable preferred stock	596		64		4		656
Common stock	197		1		2		196
Total available-for-sale securities – Exchange	$	8,716	$	550	$	35	$	9,231
Total available-for-sale securities – Erie Insurance Group	$	9,241	$	563	$	36	$	9,768

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



	Erie Insurance Group
	December 31, 2013
(in millions)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Indemnity
Available-for-sale securities:
States & political subdivisions	$	237	$	7	$	1	$	243
Corporate debt securities	280		2		0		282
Collateralized debt obligations	1		0		0		1
Total fixed maturities	518		9		1		526
Nonredeemable preferred stock	24		2		1		25
Common stock	26		0		1		25
Total available-for-sale securities – Indemnity	$	568	$	11	$	3	$	576
Exchange
Available-for-sale securities:
U.S. government & agencies	$	171	$	1	$	0	$	172
States & political subdivisions	1,430		55		15		1,470
Foreign government securities	15		0		0		15
Corporate debt securities	5,902		354		45		6,211
Residential mortgage-backed securities	157		3		4		156
Commercial mortgage-backed securities	45		2		0		47
Collateralized debt obligations	8		8		0		16
Other debt securities	73		3		1		75
Total fixed maturities	7,801		426		65		8,162
Nonredeemable preferred stock	577		55		11		621
Common stock	201		0		3		198
Total available-for-sale securities – Exchange	$	8,579	$	481	$	79	$	8,981
Total available-for-sale securities – Erie Insurance Group	$	9,147	$	492	$	82	$	9,557

The amortized cost and estimated fair value of fixed maturities at March 31, 2014 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, 2014
(in millions)	Amortized		Estimated
	cost		fair value
Indemnity
Due in one year or less	$	76	$	77
Due after one year through five years	237		240
Due after five years through ten years	100		104
Due after ten years	77		81
Total fixed maturities – Indemnity	$	490	$	502
Exchange
Due in one year or less	386		393
Due after one year through five years	3,052		3,239
Due after five years through ten years	2,941		3,113
Due after ten years	1,544		1,634
Total fixed maturities – Exchange	$	7,923	$	8,379
Total fixed maturities – Erie Insurance Group	$	8,413	$	8,881

Available-for-sale securities in a gross unrealized loss position at March 31, 2014 are as follows. Data is provided by length of time for securities in a gross unrealized loss position.



	Erie Insurance Group
	March 31, 2014
(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	$	11	$	0	$	0	$	0	$	11	$	0	5
Corporate debt securities	40		0		0		0		40		0		9
Total fixed maturities	51		0		0		0		51		0		14
Nonredeemable preferred stock	3		0		1		0		4		0		3
Common stock	0		0		20		1		20		1		2
Total available-for-sale securities – Indemnity	$	54	$	0	$	21	$	1	$	75	$	1	19
Quality breakdown of fixed maturities:
Investment grade	$	51	$	0	$	0	$	0	$	51	$	0	14
Non-investment grade	0		0		0		0		0		0		0
Total fixed maturities – Indemnity	$	51	$	0	$	0	$	0	$	51	$	0	14
Exchange
Available-for-sale securities:
U.S. treasury	$	3	$	0	$	0	$	0	$	3	$	0	3
States & political subdivisions	216		5		31		2		247		7		62
Foreign government securities	0		0		5		0		5		0		1
Corporate debt securities	828		17		36		2		864		19		161
Residential mortgage-backed securities	67		2		14		1		81		3		14
Commercial mortgage-backed securities	2		0		0		0		2		0		1
Other debt securities	20		0		0		0		20		0		4
Total fixed maturities	1,136		24		86		5		1,222		29		246
Nonredeemable preferred stock	85		3		15		1		100		4		17
Common stock	31		1		100		1		131		2		2
Total available-for-sale securities – Exchange	$	1,252	$	28	$	201	$	7	$	1,453	$	35	265
Quality breakdown of fixed maturities:
Investment grade	$	1,104	$	23	$	81	$	4	$	1,185	$	27	238
Non-investment grade	32		1		5		1		37		2		8
Total fixed maturities – Exchange	$	1,136	$	24	$	86	$	5	$	1,222	$	29	246

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 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, 2013 are as follows. Data is provided by length of time for securities in a gross unrealized loss position.



	Erie Insurance Group
	December 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:
States & political subdivisions	$	58	$	1	$	0	$	0	$	58	$	1	21
Corporate debt securities	$	54	$	0	$	10	$	0	$	64	$	0	11
Total fixed maturities	112		1		10		0		122		1		32
Nonredeemable preferred stock	5		1		3		0		8		1		4
Common stock	12		1		13		0		25		1		2
Total available-for-sale securities – Indemnity	$	129	$	3	$	26	$	0	$	155	$	3	38
Quality breakdown of fixed maturities:
Investment grade	$	112	$	1	$	10	$	0	$	122	$	1	32
Non-investment grade	0		0		0		0		0		0		0
Total fixed maturities – Indemnity	$	112	$	1	$	10	$	0	$	122	$	1	32
Exchange
Available-for-sale securities:
U.S. government & agencies	$	1	$	0	$	0	$	0	$	1	$	0	2
States & political subdivisions	408		13		18		2		426		15		100
Foreign government securities	5		0		0		0		5		0		1
Corporate debt securities	1,251		43		36		2		1,287		45		237
Residential mortgage-backed securities	71		4		8		0		79		4		12
Commercial mortgage-backed securities	5		0		0		0		5		0		1
Other debt securities	30		1		0		0		30		1		5
Total fixed maturities	1,771		61		62		4		1,833		65		358
Nonredeemable preferred stock	182		10		13		1		195		11		27
Common stock	97		3		101		0		198		3		3
Total available-for-sale securities – Exchange	$	2,050	$	74	$	176	$	5	$	2,226	$	79	388
Quality breakdown of fixed maturities:
Investment grade	$	1,707	$	57	$	62	$	4	$	1,769	$	61	344
Non-investment grade	64		4		0		0		64		4		14
Total fixed maturities – Exchange	$	1,771	$	61	$	62	$	4	$	1,833	$	65	358

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 March 31,
	2014		2013
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	$	86	$	83
Equity securities	29		24
Cash equivalents and other	0		0
Total investment income	115		107
Less: investment expenses	10		8
Investment income, net of expenses – Exchange	$	105	$	99
Investment income, net of expenses – Erie Insurance Group	$	109	$	103

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 March 31,
	2014			2013
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	1			0
Gross realized losses	0			0
Net realized gains	1			0
Net realized investment gains – Indemnity	$	1		$	0
Exchange
Available-for-sale securities:
Fixed maturities:
Gross realized gains	$	6		$	15
Gross realized losses	(1		)	(2		)
Net realized gains	5			13
Equity securities:
Gross realized gains	8			2
Gross realized losses	(1		)	0
Net realized gains	7			2
Trading securities:
Common stock:
Gross realized gains	70			102
Gross realized losses	(3		)	(12		)
(Decreases) increases in fair value⁽¹⁾	(24		)	144
Net realized gains	43			234
Net realized investment gains – Exchange	$	55		$	249
Net realized investment gains – Erie Insurance Group	$	56		$	249


(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

Indemnity recorded impairment losses of less than $0.1 million in the first quarter of 2014, compared to no impairment losses in the first quarter of 2013. The Exchange record impairment losses of $0.2 million in the first quarter of 2014, compared to $0.4 million in the first quarter of 2013.

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, 2014 are comprised of partnership financial results for the fourth quarter of 2013. Given the lag in reporting, our limited partnership results do not reflect the market conditions of the first quarter of 2014. Cash contributions made to and distributions received from the partnerships are recorded in the period in which the transaction occurs.

Amounts included in equity in earnings of limited partnerships by method of accounting are included below:



(in millions)	Erie Insurance Group
	Three months ended March 31,
	2014		2013
Indemnity
Equity in earnings of limited partnerships accounted for under the equity method	$	5	$	2
Change in fair value of limited partnerships accounted for under the fair value option	1		1
Equity in earnings of limited partnerships – Indemnity	$	6	$	3
Exchange
Equity in earnings of limited partnerships accounted for under the equity method	$	39	$	29
Change in fair value of limited partnerships accounted for under the fair value option	5		4
Equity in earnings of limited partnerships – Exchange	$	44	$	33
Equity in earnings of limited partnerships – Erie Insurance Group	$	50	$	36

We have provided summarized financial information in the following tables for the three months ended March 31, 2014 and for the year ended December 31, 2013. Amounts provided in the tables are presented using the latest available financial statements received from the partnerships for the respective periods. 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, 2014 include partnership financial results for the fourth quarter of 2013.



	Erie Insurance Group
	As of and for the three months ended March 31, 2014
(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%	25	$	43	$	(3	)	$	3
Greater than or equal to 10% but less than 50%	3	19		4			0
Greater than 50%	0	0		0			0
Total private equity	28	62		1			3
Mezzanine debt:
Less than 10%	11	13		0			0
Greater than or equal to 10% but less than 50%	3	6		0			0
Greater than 50%	1	0		0			0
Total mezzanine debt	15	19		0			0
Real estate:
Less than 10%	11	43		1			0
Greater than or equal to 10% but less than 50%	3	15		1			0
Greater than 50%	2	6		0			0
Total real estate	16	64		2			0
Total limited partnerships – Indemnity	59	$	145	$	3		$	3
Exchange
Private equity:
Less than 10%	43	$	389	$	(6	)	$	19
Greater than or equal to 10% but less than 50%	3	79		14			0
Greater than 50%	0	0		0			0
Total private equity	46	468		8			19
Mezzanine debt:
Less than 10%	19	115		1			3
Greater than or equal to 10% but less than 50%	4	24		(2		)	2
Greater than 50%	3	31		1			1
Total mezzanine debt	26	170		0			6
Real estate:
Less than 10%	20	211		5			4
Greater than or equal to 10% but less than 50%	7	79		0			1
Greater than 50%	2	25		(12		)	13
Total real estate	29	315		(7		)	18
Total limited partnerships – Exchange	101	$	953	$	1		$	43
Total limited partnerships – Erie Insurance Group		$	1,098	$	4		$	46

Per the limited partnership financial statements, total partnership assets were $49 billion and total partnership liabilities were $5 billion at March 31, 2014 (as recorded in the December 31, 2013 limited partnership financial statements). For the three month period comparable to that presented in the preceding table (fourth quarter of 2013), total partnership valuation adjustment gains were $0.1 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, 2013 include partnership financial results for the fourth quarter of 2012 and the first three quarters of 2013.



	Erie Insurance Group
	As of and for the year ended December 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	$	46	$	(6	)	$	9
Greater than or equal to 10% but less than 50%	3	16		3			0
Greater than 50%	0	0		0			0
Total private equity	29	62		(3		)	9
Mezzanine debt:
Less than 10%	11	14		0			1
Greater than or equal to 10% but less than 50%	3	6		0			2
Greater than 50%	1	0		0			0
Total mezzanine debt	15	20		0			3
Real estate:
Less than 10%	12	44		0			5
Greater than or equal to 10% but less than 50%	3	14		(1		)	4
Greater than 50%	2	6		1			4
Total real estate	17	64		0			13
Total limited partnerships – Indemnity	61	$	146	$	(3	)	$	25
Exchange
Private equity:
Less than 10%	44	$	396	$	(24	)	$	79
Greater than or equal to 10% but less than 50%	3	67		13			2
Greater than 50%	0	0		0			0
Total private equity	47	463		(11		)	81
Mezzanine debt:
Less than 10%	19	117		1			13
Greater than or equal to 10% but less than 50%	4	23		(3		)	7
Greater than 50%	3	32		1			3
Total mezzanine debt	26	172		(1		)	23
Real estate:
Less than 10%	22	211		(10		)	34
Greater than or equal to 10% but less than 50%	6	71		(2		)	10
Greater than 50%	2	23		(1		)	16
Total real estate	30	305		(13		)	60
Total limited partnerships – Exchange	103	$	940	$	(25	)	$	164
Total limited partnerships – Erie Insurance Group		$	1,086	$	(28	)	$	189

Per the limited partnership financial statements, total partnership assets were $50 billion and total partnership liabilities were $5 billion at December 31, 2013 (as recorded in the September 30, 2013 limited partnership financial statements). For the twelve month period comparable to that presented in the preceding table (fourth quarter of 2012 and first three quarters of 2013), total partnership valuation adjustment gains were $2 billion and total partnership net income was $7 billion.

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