Note 6. Fair Value

Our available-for-sale and trading securities are recorded at fair value, which is the price that would be received to sell the asset in an orderly transaction between willing market participants as of the measurement date.

Valuation techniques used to derive the fair value of our available-for-sale and trading securities are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect our own assumptions regarding fair market value for these securities. Although the majority of our prices are obtained from third party sources, we also perform an internal pricing review for securities with low trading volumes under current market conditions. Financial instruments are categorized based upon the following characteristics or inputs to the valuation techniques:


•	Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.


•	Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.


•	Level 3 – Unobservable inputs for the asset or liability.

Estimates of fair values for our investment portfolio are obtained primarily from a nationally recognized pricing service. Our Level 1 category includes those securities valued using an exchange traded price provided by the pricing service. The methodologies used by the pricing service that support a Level 2 classification of a financial instrument include multiple verifiable, observable inputs including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data. Pricing service valuations for Level 3 securities are based upon proprietary models and are used when observable inputs are not available or in illiquid markets.

In limited circumstances we adjust the price received from the pricing service when, in our judgment, a better reflection of fair value is available based upon corroborating information and our knowledge and monitoring of market conditions such as a disparity in price of comparable securities and/or non-binding broker quotes. In other circumstances, certain securities are internally priced because prices are not provided by the pricing service.

We perform continuous reviews of the prices obtained from the pricing service. This includes evaluating the methodology and inputs used by the pricing service to ensure that we determine the proper classification level of the financial instrument. Price variances, including large periodic changes, are investigated and corroborated by market data. We have reviewed the pricing methodologies of our pricing service as well as other observable inputs, such as data, and transaction volumes and believe that the prices adequately consider market activity in determining fair value. Our review process continues to evolve based upon accounting guidance and requirements.

When a price from the pricing service is not available, values are determined by obtaining broker/dealer quotes and/or market comparables. When available, we obtain multiple quotes for the same security. The ultimate value for these securities is determined based upon our best estimate of fair value using corroborating market information. Our evaluation includes the consideration of benchmark yields, reported trades, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data.

For certain securities in an illiquid market, there may be no prices available from a pricing service and no comparable market quotes available. In these situations, we value the security using an internally-developed, risk-adjusted, discounted cash flow model.

The following table presents our consolidated fair value measurements on a recurring basis by asset class and level of input at December 31, 2014:



	Erie Insurance Group
	December 31, 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	234			0			234			0
Residential mortgage-backed securities	8			0			8			0
Commercial mortgage-backed securities	51			0			51			0
Collateralized debt obligations	33			0			33			0
Other debt securities	7			0			7			0
Total fixed maturities	564			0			564			0
Nonredeemable preferred stock	12			2			10			0
Common stock	13			13			0			0
Total available-for-sale securities	589			15			574			0
Other investments ⁽¹⁾	8			0			0			8
Total – Indemnity	$	597		$	15		$	574		$	8
Exchange
Available-for-sale securities:
U.S. treasury	$	6		$	0		$	6		$	0
Government sponsored enterprises	4			0			4			0
States & political subdivisions	1,477			0			1,477			0
Foreign government securities	10			0			10			0
Corporate debt securities	7,289			0			7,202			87
Residential mortgage-backed securities	111			0			111			0
Commercial mortgage-backed securities	30			0			30			0
Collateralized debt obligations	11			0			11			0
Other debt securities	69			0			57			12
Total fixed maturities	9,007			0			8,908			99
Nonredeemable preferred stock	710			328			381			1
Common stock	140			140			0			0
Total available-for-sale securities	9,857			468			9,289			100
Trading securities:
Common stock	3,223			3,208			0			15
Total trading securities	3,223			3,208			0			15
Other investments ⁽¹⁾	71			0			0			71
Total – Exchange	$	13,151		$	3,676		$	9,289		$	186
Total – Erie Insurance Group	$	13,748		$	3,691		$	9,863		$	194

% of total assets at fair value	100.0		%	26.9		%	71.7		%	1.4		%

(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 the NAV represents fair value 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, 2014. During the year ended December 31, 2014, Indemnity made no contributions and received distributions totaling $12.9 million, and the Exchange made no contributions and received distributions totaling $41.5 million for these investments. As of December 31, 2014, the amount of unfunded commitments related to the investments was $0.6 million for Indemnity and $1.7 million for the Exchange.

The following table presents 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

% of total assets at fair value	100.0		%	28.4		%	70.3		%	1.3		%

(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 the NAV represents fair value 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.

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			Ending balance at December 31, 2014
Indemnity
Available-for-sale securities:
Corporate debt securities	$	1	$	0	$	0		$	0	$	0		$	(1	)	$	0
Commercial mortgage-backed securities	0		0		0			3		0			(3		)	0
Collateralized debt obligations	1		0		0			0		(1		)	0			0
Total fixed maturities	2		0		0			3		(1		)	(4		)	0
Total available-for-sale securities	2		0		0			3		(1		)	(4		)	0
Other investments	18		2		0			0		(12		)	0			8
Total Level 3 assets – Indemnity	$	20	$	2	$	0		$	3	$	(13	)	$	(4	)	$	8
Exchange
Available-for-sale securities:
Corporate debt securities	$	26	$	0	$	(1	)	$	46	$	(6	)	$	22		$	87
Collateralized debt obligations	5		1		(1		)	0		(3		)	(2		)	0
Other debt securities	0		0		0			0		0			12			12
Total fixed maturities	31		1		(2		)	46		(9		)	32			99
Nonredeemable preferred stock	0		0		0			1		0			0			1
Total available-for-sale securities	31		1		(2		)	47		(9		)	32			100
Trading securities:
Common stock	15		0		0			0		0			0			15
Total trading securities	15		0		0			0		0			0			15
Other investments	98		14		0			0		(41		)	0			71
Total Level 3 assets – Exchange	$	144	$	15	$	(2	)	$	47	$	(50	)	$	32		$	186
Total Level 3 assets – Erie Insurance Group	$	164	$	17	$	(2	)	$	50	$	(63	)	$	28		$	194

(1) These amounts are reported in the Consolidated Statements of Operations. There was $1 million included in net realized investment gains (losses) and $16 million included in equity in earnings of limited partnerships for the year ended December 31, 2014 on Level 3 securities.

We review the fair value hierarchy classifications each reporting period. Transfers between hierarchy levels may occur due to changes in available market observable inputs. Transfers in and out of level classifications are reported as having occurred at the beginning of the quarter in which the transfers occurred.

For Indemnity, there were no transfers between Level 1 and Level 2, or from Level 2 to Level 3, for the year ended December 31, 2014. Level 3 to Level 2 transfers totaled $4 million related to two fixed maturity holdings due to the use of observable market data to determine the fair value at December 31, 2014.

For the Exchange, Level 1 to Level 2 transfers totaled $36 million and Level 2 to Level 1 transfers totaled $25 million due to trading activity levels related to four preferred stock holdings and three preferred stock holdings, respectively, for the year ended December 31, 2014. Level 2 to Level 3 transfers totaled $56 million for nine fixed maturity holdings and one preferred stock holding due to the use of unobservable inputs to determine the fair value. Level 3 to Level 2 transfers totaled $24 million for three fixed maturity holdings and one preferred stock holding due to the use of observable market data to determine the fair value at December 31, 2014.

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			Ending balance at December 31, 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		(2		)	0			18
Total Level 3 assets – Indemnity	$	23	$	1	$	0		$	0	$	(4	)	$	0		$	20
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		3		1			0		(16		)	1			5
Total fixed maturities	59		3		1			1		(20		)	(13		)	31
Nonredeemable preferred stock	0		2		(1		)	4		(10		)	5			0
Total available-for-sale securities	59		5		0			5		(30		)	(8		)	31
Trading securities:
Common stock	15		1		0			4		(5		)	0			15
Total trading securities	15		1		0			4		(5		)	0			15
Other investments	109		11		0			0		(22		)	0			98
Total Level 3 assets – Exchange	$	183	$	17	$	0		$	9	$	(57	)	$	(8	)	$	144
Total Level 3 assets – Erie Insurance Group	$	206	$	18	$	0		$	9	$	(61	)	$	(8	)	$	164

(1) These amounts are reported in the Consolidated Statements of Operations. There was $6 million included in net realized investment gains (losses) and $12 million included in equity in earnings of limited partnerships for the year ended December 31, 2013 on Level 3 securities.

For Indemnity, there were no Level 1 to Level 2 transfers for the year ended December 31, 2013. Level 2 to Level 1 transfers totaled $1 million due to trading activity levels related to one preferred stock holding, and there where no transfers between Level 2 and Level 3.

For the Exchange, Level 1 to Level 2 transfers totaled $6 million and Level 2 to Level 1 transfers totaled $51 million due to trading activity levels related to one preferred stock holding and five preferred stock holdings, respectively, for the year ended December 31, 2013. Level 2 to Level 3 transfers totaled $39 million related to seven fixed maturity holdings and one preferred stock holding, and Level 3 to Level 2 transfers totaled $47 million for six fixed maturity holdings. These transfers in and out of Level 3 were primarily the result of using non-binding and binding broker quotes, respectively, to determine the fair value at December 31, 2013.

When a non-binding broker quote was the only input available, it was classified within Level 3. The unobservable inputs are not reasonably available to us and therefore have not been included in the tables below. These investments totaled $92 million for the Exchange at December 31, 2014, and $1 million for Indemnity and $21 million for the Exchange at December 31, 2013.

Other investments represent certain limited partnerships that are recorded at fair value based upon net asset value (NAV) provided by the general partner. Due to the nature of these investments, the NAV was classified within Level 3. The unobservable inputs are not reasonably available to us and therefore have not been included in the tables below. These investments totaled $8 million for Indemnity and $71 million for the Exchange at December 31, 2014, and $18 million for Indemnity and $98 million for the Exchange at December 31, 2013.

Quantitative and Qualitative Disclosures about Unobservable Inputs

Erie Insurance Group

December 31, 2014

(dollars in millions)

Fair

value

Valuation techniques

Unobservable input

Range

Weighted

average

Exchange

Corporate debt securities ⁽¹⁾

Market approach

Comparable transaction EBITDA multiples

8.0x

Comparable security yield

Nonredeemable preferred stock ⁽²⁾

Market approach

Held at cost

Common stock ⁽¹⁾

Market approach

Comparable transaction EBITDA multiples

8.0x

Discount for lack of marketability

10%

December 31, 2013

(dollars in millions)

Fair

value

Valuation techniques

Unobservable input

Range

Weighted

average

Indemnity

Collateralized debt obligations ⁽³⁾

Income approach

Projected maturity date

Mar 2014 - Nov 2014

Repayment at maturity

13 - 100%

79%

Discount rate

7.5 - 15%

Exchange

Corporate debt securities ⁽¹⁾

Market approach

Comparable transaction EBITDA multiples

8.0 - 11.9x

8.0x

Comparable security yield

Collateralized debt obligations ⁽³⁾

Income approach

Projected maturity date

Mar 2014 - Oct 2035

Repayment at maturity

13 - 100%

80%

Discount rate

7.5 - 18%

10%

Common stock ⁽¹⁾

Market approach

Comparable transaction EBITDA multiples

8.0 - 11.9x

8.0x

Discount for lack of marketability

5 - 30%

7.5%

(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)

Collateralized-debt-obligation securities – The unobservable inputs used in the fair value measurement of certain collateralized-debt-obligation securities are the repayment at maturity of underlying collateral available to pay note holders, the projected maturity of the underlying security, and a discount rate appropriate for the security. Significant changes in any of those inputs in isolation would result in a significantly higher or lower fair value measurement. Generally, a change in the assumption used for the performance of the underlying collateral is accompanied by an opposite change in the maturity and a directionally opposite change in the discount rate used to value the security.

The following table presents our consolidated fair value measurements on a recurring basis by pricing source at December 31, 2014:



	Erie Insurance Group
(in millions)	December 31, 2014
	Total		Level 1		Level 2		Level 3
Indemnity
Fixed maturities:
Priced via pricing services	$	564	$	0	$	564	$	0
Total fixed maturities	564		0		564		0
Nonredeemable preferred stock:
Priced via pricing services	12		2		10		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⁾	8		0		0		8
Total other investments	8		0		0		8
Total – Indemnity	$	597	$	15	$	574	$	8
Exchange
Fixed maturities:
Priced via pricing services	$	8,897	$	0	$	8,897	$	0
Priced via market comparables/broker quotes ⁽¹⁾	103		0		11		92
Priced via internal modeling	7		0		0		7
Total fixed maturities	9,007		0		8,908		99
Nonredeemable preferred stock:
Priced via pricing services	709		328		381		0
Priced via internal modeling	1		0		0		1
Total nonredeemable preferred stock	710		328		381		1
Common stock:
Priced via pricing services	3,348		3,348		0		0
Priced via internal modeling	15		0		0		15
Total common stock	3,363		3,348		0		15
Other investments:
Priced via unobservable inputs ⁽²⁾	71		0		0		71
Total other investments	71		0		0		71
Total – Exchange	$	13,151	$	3,676	$	9,289	$	186
Total – Erie Insurance Group	$	13,748	$	3,691	$	9,863	$	194

(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.

There were no assets measured at fair value on a nonrecurring basis during the year ended December 31, 2014.