Fair Value (Tables)

9 Months Ended

Sep. 30, 2014

Schedule of consolidated fair value measurements on a recurring basis by asset class and level of input

The following table represents our consolidated fair value measurements on a recurring basis by asset class and level of input at September 30, 2014:



	Erie Insurance Group
	September 30, 2014
	Fair value measurements using:
(in millions)	Total		Quoted prices in active markets for identical assets Level 1		Observable inputs Level 2		Unobservable inputs Level 3
Indemnity
Available-for-sale securities:
States & political subdivisions	$	231	$	0	$	231	$	0
Corporate debt securities	242		0		241		1
Residential mortgage-backed securities	10		0		10		0
Commercial mortgage-backed securities	49		0		46		3
Collateralized debt obligations	24		0		24		0
Other debt securities	7		0		7		0
Total fixed maturities	563		0		559		4
Nonredeemable preferred stock	12		2		10		0
Common stock	13		13		0		0
Total available-for-sale securities	588		15		569		4
Other investments ⁽¹⁾	19		0		0		19
Total – Indemnity	$	607	$	15	$	569	$	23
Exchange
Available-for-sale securities:
U.S. treasury	$	6	$	0	$	6	$	0
Government sponsored enterprises	4		0		4		0
States & political subdivisions	1,483		0		1,483		0
Foreign government securities	15		0		15		0
Corporate debt securities	7,161		0		7,090		71
Residential mortgage-backed securities	119		0		119		0
Commercial mortgage-backed securities	33		0		33		0
Collateralized debt obligations	11		0		11		0
Other debt securities	70		0		68		2
Total fixed maturities	8,902		0		8,829		73
Nonredeemable preferred stock	720		334		378		8
Common stock	197		197		0		0
Total available-for-sale securities	9,819		531		9,207		81
Trading securities:
Common stock	3,125		3,110		0		15
Total trading securities	3,125		3,110		0		15
Other investments ⁽¹⁾	103		0		0		103
Total – Exchange	$	13,047	$	3,641	$	9,207	$	199
Total – Erie Insurance Group	$	13,654	$	3,656	$	9,776	$	222

(1) Other investments measured at fair value represent four real estate funds included on the balance sheet as limited partnership investments that are reported under the fair value option. These investments can never be redeemed with the funds. Instead, distributions are received when liquidation of the underlying assets of the funds occur. It is estimated that the underlying assets will generally be liquidated between 5 and 10 years from the inception of the funds. The fair value of these investments is based on the net asset value (NAV) information provided by the general partner. Fair value is based on our proportionate share of the NAV based on the most recent partners' capital statements received from the general partners, which is generally one quarter prior to our balance sheet date. These values are then analyzed to determine if they represent the NAV at our balance sheet date, with adjustment being made where appropriate. We consider observable market data and perform a review validating the appropriateness of the NAV at each balance sheet date. It is likely that all of the investments will be redeemed at a future date for an amount different than the NAV of our ownership interest in partners' capital as of September 30, 2014. During the nine months ended September 30, 2014, Indemnity made no contributions and received distributions totaling $2.6 million, and the Exchange made no contributions and received distributions totaling $9.7 million for these investments. As of September 30, 2014, the amount of unfunded commitments related to the investments was $0.9 million for Indemnity and $2.8 million for the Exchange.

The following table represents our consolidated fair value measurements on a recurring basis by asset class and level of input at December 31, 2013:



	Erie Insurance Group
	December 31, 2013
	Fair value measurements using:
(in millions)	Total		Quoted prices in active markets for identical assets Level 1		Observable inputs Level 2		Unobservable inputs Level 3
Indemnity
Available-for-sale securities:
States & political subdivisions	$	243	$	0	$	243	$	0
Corporate debt securities	282		0		281		1
Collateralized debt obligations	1		0		0		1
Total fixed maturities	526		0		524		2
Nonredeemable preferred stock	25		2		23		0
Common stock	25		25		0		0
Total available-for-sale securities	576		27		547		2
Other investments ⁽¹⁾	18		0		0		18
Total – Indemnity	$	594	$	27	$	547	$	20
Exchange
Available-for-sale securities:
U.S. government & agencies	$	172	$	0	$	172	$	0
States & political subdivisions	1,470		0		1,470		0
Foreign government securities	15		0		15		0
Corporate debt securities	6,211		0		6,185		26
Residential mortgage-backed securities	156		0		156		0
Commercial mortgage-backed securities	47		0		47		0
Collateralized debt obligations	16		0		11		5
Other debt securities	75		0		75		0
Total fixed maturities	8,162		0		8,131		31
Nonredeemable preferred stock	621		242		379		0
Common stock	198		198		0		0
Total available-for-sale securities	8,981		440		8,510		31
Trading securities:
Common stock	3,202		3,187		0		15
Total trading securities	3,202		3,187		0		15
Other investments ⁽¹⁾	98		0		0		98
Total – Exchange	$	12,281	$	3,627	$	8,510	$	144
Total – Erie Insurance Group	$	12,875	$	3,654	$	9,057	$	164

(1) Other investments measured at fair value represent four real estate funds included on the balance sheet as limited partnership investments that are reported under the fair value option. These investments can never be redeemed with the funds. Instead, distributions are received when liquidation of the underlying assets of the funds occur. It is estimated that the underlying assets will generally be liquidated between 5 and 10 years from the inception of the funds. The fair value of these investments is based on the net asset value (NAV) information provided by the general partner. Fair value is based on our proportionate share of the NAV based on the most recent partners' capital statements received from the general partners, which is generally one quarter prior to our balance sheet date. These values are then analyzed to determine if they represent the NAV at our balance sheet date, with adjustment being made where appropriate. We consider observable market data and perform a review validating the appropriateness of the NAV at each balance sheet date. It is likely that all of the investments will be redeemed at a future date for an amount different than the NAV of our ownership interest in partners' capital as of December 31, 2013. During the year ended December 31, 2013, Indemnity made no contributions and received distributions totaling $2.4 million, and the Exchange made no contributions and received distributions totaling $21.7 million for these investments. As of December 31, 2013, the amount of unfunded commitments related to the investments was $1.5 million for Indemnity and $4.5 million for the Exchange.

Schedule of roll forward of consolidated Level 3 fair value measurements on a recurring basis

Level 3 Assets – Quarterly Change:



	Erie Insurance Group
(in millions)	Beginning balance at June 30, 2014		Included in earnings ⁽¹⁾		Included in other comprehensive income			Purchases		Sales			Transfers in and (out) of Level 3 ⁽²⁾		Ending balance at September 30, 2014
Indemnity
Available-for-sale securities:
Corporate debt securities	$	1	$	0	$	0		$	0	$	0		$	0	$	1
Commercial mortgage-backed securities	0		0		0			3		0			0		3
Collateralized debt obligations	0		0		0			0		0			0		0
Total fixed maturities	1		0		0			3		0			0		4
Total available-for-sale securities	1		0		0			3		0			0		4
Other investments	18		1		0			0		0			0		19
Total Level 3 assets – Indemnity	$	19	$	1	$	0		$	3	$	0		$	0	$	23
Exchange
Available-for-sale securities:
Corporate debt securities	$	25	$	0	$	(1	)	$	25	$	(1	)	$	23	$	71
Collateralized debt obligations	0		0		0			0		0			0		0
Other debt securities	0		0		0			0		0			2		2
Total fixed maturities	25		0		(1		)	25		(1		)	25		73
Nonredeemable preferred stock	1		0		0			0		0			7		8
Total available-for-sale securities	26		0		(1		)	25		(1		)	32		81
Trading securities:
Common stock	15		0		0			0		0			0		15
Total trading securities	15		0		0			0		0			0		15
Other investments	102		4		0			0		(3		)	0		103
Total Level 3 assets – Exchange	$	143	$	4	$	(1	)	$	25	$	(4	)	$	32	$	199
Total Level 3 assets – Erie Insurance Group	$	162	$	5	$	(1	)	$	28	$	(4	)	$	32	$	222


(1)	These amounts are reported in the Consolidated Statement of Operations. There is $5 million included in equity in earnings of limited partnerships for the three months ended September 30, 2014 on Level 3 securities.


(2)	Transfers in and out of Level 3 are attributable to changes in the availability of market observable information for individual securities within the respective categories. Transfers in and out of levels are recognized at the start of the period.

Level 3 Assets – Year-to-Date Change:




	Erie Insurance Group
(in millions)	Beginning balance at December 31, 2012		Included in earnings ⁽¹⁾		Included in other comprehensive income			Purchases		Sales			Transfers in and (out) of Level 3 ⁽²⁾			Ending balance at September 30, 2013
Indemnity
Available-for-sale securities:
Corporate debt securities	$	1	$	0	$	0		$	0	$	0		$	0		$	1
Collateralized debt obligations	3		0		0			0		(2		)	0			1
Total fixed maturities	4		0		0			0		(2		)	0			2
Total available-for-sale securities	4		0		0			0		(2		)	0			2
Other investments	19		1		0			0		(1		)	0			19
Total Level 3 assets – Indemnity	$	23	$	1	$	0		$	0	$	(3	)	$	0		$	21
Exchange
Available-for-sale securities:
Corporate debt securities	$	43	$	0	$	0		$	1	$	(3	)	$	(15	)	$	26
Commercial mortgage-backed securities	0		0		0			0		(1		)	1			0
Collateralized debt obligations	16		2		0			0		(10		)	1			9
Total fixed maturities	59		2		0			1		(14		)	(13		)	35
Nonredeemable preferred stock	0		2		(1		)	4		(10		)	5			0
Total available-for-sale securities	59		4		(1		)	5		(24		)	(8		)	35
Trading securities:
Common stock	15		0		0			4		(5		)	0			14
Total trading securities	15		0		0			4		(5		)	0			14
Other investments	109		9		0			0		(18		)	0			100
Total Level 3 assets – Exchange	$	183	$	13	$	(1	)	$	9	$	(47	)	$	(8	)	$	149
Total Level 3 assets – Erie Insurance Group	$	206	$	14	$	(1	)	$	9	$	(50	)	$	(8	)	$	170


(1)	These amounts are reported in the Consolidated Statement of Operations. There is $4 million of losses included in net realized investment (losses) and $10 million included in equity in earnings of limited partnerships for the nine months ended September 30, 2013 on Level 3 securities.


(2)	Transfers in and out of Level 3 are attributable to changes in the availability of market observable information for individual securities within the respective categories. Transfers in and out of levels are recognized at the start of the period.

Level 3 Assets – Quarterly Change:



	Erie Insurance Group
(in millions)	Beginning balance at June 30, 2013		Included in earnings ⁽¹⁾		Included in other comprehensive income			Purchases		Sales			Transfers in and (out) of Level 3 ⁽²⁾			Ending balance at September 30, 2013
Indemnity
Available-for-sale securities:
Corporate debt securities	$	1	$	0	$	0		$	0	$	0		$	0		$	1
Collateralized debt obligations	1		0		0			0		0			0			1
Total fixed maturities	2		0		0			0		0			0			2
Total available-for-sale securities	2		0		0			0		0			0			2
Other investments	20		0		0			0		(1		)	0			19
Total Level 3 assets – Indemnity	$	22	$	0	$	0		$	0	$	(1	)	$	0		$	21
Exchange
Available-for-sale securities:
Corporate debt securities	$	33	$	0	$	0		$	0	$	0		$	(7	)	$	26
Commercial mortgage-backed securities	4		0		0			0		0			(4		)	0
Collateralized debt obligations	12		0		0			0		(3		)	0			9
Total fixed maturities	49		0		0			0		(3		)	(11		)	35
Nonredeemable preferred stock	7		0		(3		)	0		(4		)	0			0
Total available-for-sale securities	56		0		(3		)	0		(7		)	(11		)	35
Trading securities:
Common stock	7		3		0			4		0			0			14
Total trading securities	7		3		0			4		0			0			14
Other investments	113		3		0			0		(16		)	0			100
Total Level 3 assets – Exchange	$	176	$	6	$	(3	)	$	4	$	(23	)	$	(11	)	$	149
Total Level 3 assets – Erie Insurance Group	$	198	$	6	$	(3	)	$	4	$	(24	)	$	(11	)	$	170


(1)	These amounts are reported in the Consolidated Statement of Operations. There is $3 million included in net realized investment gains (losses) and $3 million included in equity in earnings of limited partnerships for the three months ended September 30, 2013 on Level 3 securities.


(2)	Transfers in and out of Level 3 are attributable to changes in the availability of market observable information for individual securities within the respective categories. Transfers in and out of levels are recognized at the start of the period.

Level 3 Assets – Year-to-Date Change:




	Erie Insurance Group
(in millions)	Beginning balance at December 31, 2013		Included in earnings ⁽¹⁾		Included in other comprehensive income			Purchases		Sales			Transfers in and (out) of Level 3 ⁽²⁾			Ending balance at September 30, 2014
Indemnity
Available-for-sale securities:
Corporate debt securities	$	1	$	0	$	0		$	0	$	0		$	0		$	1
Commercial mortgage-backed securities	0		0		0			3		0			0			3
Collateralized debt obligations	1		0		0			0		(1		)	0			0
Total fixed maturities	2		0		0			3		(1		)	0			4
Total available-for-sale securities	2		0		0			3		(1		)	0			4
Other investments	18		3		0			0		(2		)	0			19
Total Level 3 assets – Indemnity	$	20	$	3	$	0		$	3	$	(3	)	$	0		$	23
Exchange
Available-for-sale securities:
Corporate debt securities	$	26	$	0	$	(1	)	$	25	$	(2	)	$	23		$	71
Collateralized debt obligations	5		1		(1		)	0		(3		)	(2		)	0
Other debt securities	0		0		0			0		0			2			2
Total fixed maturities	31		1		(2		)	25		(5		)	23			73
Nonredeemable preferred stock	0		0		0			1		0			7			8
Total available-for-sale securities	31		1		(2		)	26		(5		)	30			81
Trading securities:
Common stock	15		0		0			0		0			0			15
Total trading securities	15		0		0			0		0			0			15
Other investments	98		15		0			0		(10		)	0			103
Total Level 3 assets – Exchange	$	144	$	16	$	(2	)	$	26	$	(15	)	$	30		$	199
Total Level 3 assets – Erie Insurance Group	$	164	$	19	$	(2	)	$	29	$	(18	)	$	30		$	222


(1)	These amounts are reported in the Consolidated Statement of Operations. There is $1 million included in net realized investment gains (losses) and $18 million included in equity in earnings of limited partnerships for the nine months ended September 30, 2014 on Level 3 securities.


(2)	Transfers in and out of Level 3 are attributable to changes in the availability of market observable information for individual securities within the respective categories. Transfers in and out of levels are recognized at the start of the period.

Schedule of Quantitative and Qualitative Disclosures about Unobservable Inputs

Quantitative and Qualitative Disclosures about Unobservable Inputs

Erie Insurance Group

September 30, 2014

(dollars in millions)

Fair

value

Valuation techniques

Unobservable input

Range

Weighted

average

Indemnity

Corporate debt securities

Market approach

Non-binding broker quote ⁽⁴⁾

111

Commercial mortgage-backed securities

Market approach

Non-binding broker quote⁽⁴⁾

100

Other investments ⁽³⁾

Total Level 3 assets – Indemnity

Exchange

Corporate debt securities

Market approach

Non-binding broker quote ⁽⁴⁾

90-121

105

Comparable transaction EBITDA multiples ⁽¹⁾

8.0 - 12.1x

8.0x

Comparable security yield⁽¹⁾

Other debt securities

Market approach

Non-binding broker quote ⁽⁴⁾

100

Nonredeemable preferred stock

Market approach

Held at cost ⁽²⁾

Non-binding broker quote ⁽⁴⁾

Common stock

Market approach

Comparable transaction EBITDA multiples ⁽¹⁾

8.0 - 12.1x

8.0x

Discount for lack of marketability

5 - 30%

10%

Other investments ⁽³⁾

103

Total Level 3 assets – Exchange

199

Total Level 3 assets – Erie Insurance Group

222

(1)

Common stock investments and Corporate debt securities – The unobservable inputs used in the fair value measurement of direct private equity common stock investments and certain corporate debt securities are comparable private transaction earnings before interest, taxes, depreciation, and amortization (“EBITDA”) multiples, the average EBITDA multiple for comparable publicly traded companies and the amount of discount applied to the price due to the illiquidity of the securities being valued. Significant changes in any of those inputs in isolation could result in a significantly higher or lower fair value measurement.


(2)	Nonredeemable preferred stock - Represents a private security where cost was determined to be the best estimate of fair value.


(3)	Other investments – Other investments represent certain limited partnerships that are recorded at fair value and are based upon net asset value (NAV) provided by the general partner where the unobservable inputs are not reasonably available to us.


(4)	When a non-binding broker quote was the only input available, it was considered unobservable.

Securities valued using unobservable inputs shown above totaled $222 million at September 30, 2014. In total, Level 3 assets represent less than 1.6% of the total assets measured at fair value on a recurring basis for the Erie Insurance Group.

Schedule of consolidated fair value measurements on a recurring basis by pricing source

The following table presents our consolidated fair value measurements on a recurring basis by pricing source at September 30, 2014:



	Erie Insurance Group
(in millions)	September 30, 2014
	Total		Level 1		Level 2		Level 3
Indemnity
Fixed maturities:
Priced via pricing services	$	557	$	0	$	557	$	0
Priced via market comparables/broker quotes ⁽¹⁾	6		0		2		4
Priced via internal modeling	0		0		0		0
Total fixed maturities	563		0		559		4
Nonredeemable preferred stock:
Priced via pricing services	10		2		8		0
Priced via market comparables/broker quotes ⁽¹⁾	2		0		2		0
Total nonredeemable preferred stock	12		2		10		0
Common stock:
Priced via pricing services	13		13		0		0
Total common stock	13		13		0		0
Other investments:
Priced via unobservable inputs ⁽²⁾	19		0		0		19
Total other investments	19		0		0		19
Total – Indemnity	$	607	$	15	$	569	$	23
Exchange
Fixed maturities:
Priced via pricing services	$	8,763	$	0	$	8,763	$	0
Priced via market comparables/broker quotes ⁽¹⁾	132		0		66		66
Priced via internal modeling	7		0		0		7
Total fixed maturities	8,902		0		8,829		73
Nonredeemable preferred stock:
Priced via pricing services	697		334		363		0
Priced via market comparables/broker quotes ⁽¹⁾	22		0		15		7
Priced via internal modeling	1		0		0		1
Total nonredeemable preferred stock	720		334		378		8
Common stock:
Priced via pricing services	3,307		3,307		0		0
Priced via internal modeling	15		0		0		15
Total common stock	3,322		3,307		0		15
Other investments:
Priced via unobservable inputs ⁽²⁾	103		0		0		103
Total other investments	103		0		0		103
Total – Exchange	$	13,047	$	3,641	$	9,207	$	199
Total – Erie Insurance Group	$	13,654	$	3,656	$	9,776	$	222


(1)	When a non-binding broker quote was the only price available, the security was classified as Level 3.


(2)	Other investments measured at fair value represent real estate funds included on the balance sheet as limited partnership investments that are reported under the fair value option. The fair value of these investments is based on the net asset value (NAV) information provided by the general partner.

- Definition

Tabular disclosure of the fair value measurement of assets using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (1) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets) and gains or losses recognized in other comprehensive income (loss), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (2) purchases, sales, issues, and settlements (each type disclosed separately); and (3) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs), by class of asset.

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