Note 7. Investments

Available-for-sale securities

The following table summarizes the cost and fair value of our available-for-sale securities at September 30, 2015:



	Erie Insurance Group
	September 30, 2015
(in millions)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Indemnity
Available-for-sale securities:
States & political subdivisions	$	226	$	11	$	0	$	237
Corporate debt securities	248		1		4		245
Residential mortgage-backed securities	11		0		0		11
Commercial mortgage-backed securities	45		0		1		44
Collateralized debt obligations	46		0		0		46
Other debt securities	5		0		0		5
Total fixed maturities	581		12		5		588
Nonredeemable preferred stock	7		1		0		8
Common stock	13		0		1		12
Total available-for-sale securities – Indemnity	$	601	$	13	$	6	$	608
Exchange
Available-for-sale securities:
U.S. treasury	$	8	$	0	$	0	$	8
Government sponsored enterprises	3		1		0		4
States & political subdivisions	1,402		75		1		1,476
Foreign government securities	91		0		5		86
Corporate debt securities	7,450		314		107		7,657
Residential mortgage-backed securities	30		0		0		30
Commercial mortgage-backed securities	28		1		0		29
Collateralized debt obligations	6		5		0		11
Other debt securities	88		3		0		91
Total fixed maturities	9,106		399		113		9,392
Nonredeemable preferred stock	585		43		5		623
Common stock	96		2		1		97
Total available-for-sale securities – Exchange	$	9,787	$	444	$	119	$	10,112
Total available-for-sale securities – Erie Insurance Group	$	10,388	$	457	$	125	$	10,720

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



	Erie Insurance Group
	December 31, 2014
(in millions)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Indemnity
Available-for-sale securities:
States & political subdivisions	$	219	$	12	$	0	$	231
Corporate debt securities	236		1		3		234
Residential mortgage-backed securities	8		0		0		8
Commercial mortgage-backed securities	52		0		1		51
Collateralized debt obligations	33		0		0		33
Other debt securities	7		0		0		7
Total fixed maturities	555		13		4		564
Nonredeemable preferred stock	11		1		0		12
Common stock	13		0		0		13
Total available-for-sale securities – Indemnity	$	579	$	14	$	4	$	589
Exchange
Available-for-sale securities:
U.S. treasury	$	6	$	0	$	0	$	6
Government sponsored enterprises	3		1		0		4
States & political subdivisions	1,394		84		1		1,477
Foreign government securities	10		0		0		10
Corporate debt securities	6,918		405		34		7,289
Residential mortgage-backed securities	109		3		1		111
Commercial mortgage-backed securities	28		2		0		30
Collateralized debt obligations	6		5		0		11
Other debt securities	66		3		0		69
Total fixed maturities	8,540		503		36		9,007
Nonredeemable preferred stock	650		64		4		710
Common stock	138		3		1		140
Total available-for-sale securities – Exchange	$	9,328	$	570	$	41	$	9,857
Total available-for-sale securities – Erie Insurance Group	$	9,907	$	584	$	45	$	10,446

The amortized cost and estimated fair value of fixed maturities at September 30, 2015 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
	September 30, 2015
(in millions)	Amortized		Estimated
	cost		fair value
Indemnity
Due in one year or less	$	68	$	68
Due after one year through five years	261		261
Due after five years through ten years	161		165
Due after ten years	91		94
Total fixed maturities – Indemnity	$	581	$	588
Exchange
Due in one year or less	$	432	$	438
Due after one year through five years	3,364		3,524
Due after five years through ten years	3,849		3,909
Due after ten years	1,461		1,521
Total fixed maturities – Exchange	$	9,106	$	9,392
Total fixed maturities – Erie Insurance Group	$	9,687	$	9,980

Available-for-sale securities in a gross unrealized loss position at September 30, 2015 are as follows. Data is provided by length of time for securities in a gross unrealized loss position.



	Erie Insurance Group
	September 30, 2015
(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	$	4	$	0	$	0	$	0	$	4	$	0	2
Corporate debt securities	134		1		17		3		151		4		292
Residential mortgage-backed securities	2		0		1		0		3		0		4
Commercial mortgage-backed securities	16		0		23		1		39		1		26
Collateralized debt obligations	22		0		7		0		29		0		15
Other debt securities	5		0		0		0		5		0		3
Total fixed maturities	183		1		48		4		231		5		342
Nonredeemable preferred stock	3		0		0		0		3		0		2
Common stock	13		1		0		0		13		1		1
Total available-for-sale securities – Indemnity	$	199	$	2	$	48	$	4	$	247	$	6	345
Quality breakdown of fixed maturities:
Investment grade	$	131	$	0	$	35	$	1	$	166	$	1	80
Non-investment grade	52		1		13		3		65		4		262
Total fixed maturities – Indemnity	$	183	$	1	$	48	$	4	$	231	$	5	342
Exchange
Available-for-sale securities:
U.S. treasury	$	0	$	0	$	0	$	0	$	0	$	0	1
States & political subdivisions	75		1		5		0		80		1		20
Foreign government securities	77		5		0		0		77		5		51
Corporate debt securities	1,951		84		151		23		2,102		107		987
Residential mortgage-backed securities	0		0		13		0		13		0		3
Other debt securities	6		0		7		0		13		0		4
Total fixed maturities	2,109		90		176		23		2,285		113		1,066
Nonredeemable preferred stock	146		4		24		1		170		5		29
Common stock	31		1		0		0		31		1		1
Total available-for-sale securities – Exchange	$	2,286	$	95	$	200	$	24	$	2,486	$	119	1,096
Quality breakdown of fixed maturities:
Investment grade	$	1,521	$	62	$	109	$	9	$	1,630	$	71	434
Non-investment grade	588		28		67		14		655		42		632
Total fixed maturities – Exchange	$	2,109	$	90	$	176	$	23	$	2,285	$	113	1,066

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, 2014 are as follows. Data is provided by length of time for securities in a gross unrealized loss position.



	Erie Insurance Group
	December 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	$	6	$	0	$	2	$	0	$	8	$	0	4
Corporate debt securities	121		3		0		0		121		3		250
Residential mortgage-backed securities	6		0		0		0		6		0		4
Commercial mortgage-backed securities	41		1		0		0		41		1		24
Collateralized debt obligations	21		0		0		0		21		0		9
Other debt securities	7		0		0		0		7		0		3
Total fixed maturities	202		4		2		0		204		4		294
Common stock	0		0		13		0		13		0		1
Total available-for-sale securities – Indemnity	$	202	$	4	$	15	$	0	$	217	$	4	295
Quality breakdown of fixed maturities:
Investment grade	$	146	$	1	$	2	$	0	$	148	$	1	58
Non-investment grade	56		3		0		0		56		3		236
Total fixed maturities – Indemnity	$	202	$	4	$	2	$	0	$	204	$	4	294
Exchange
Available-for-sale securities:
U.S. treasury	$	1	$	0	$	0	$	0	$	1	$	0	2
States & political subdivisions	47		0		47		1		94		1		24
Corporate debt securities	980		29		181		5		1,161		34		656
Residential mortgage-backed securities	6		0		27		1		33		1		8
Commercial mortgage-backed securities	1		0		0		0		1		0		1
Other debt securities	13		0		7		0		20		0		4
Total fixed maturities	1,048		29		262		7		1,310		36		695
Nonredeemable preferred stock	86		3		25		1		111		4		16
Common stock	0		0		73		1		73		1		2
Total available-for-sale securities – Exchange	$	1,134	$	32	$	360	$	9	$	1,494	$	41	713
Quality breakdown of fixed maturities:
Investment grade	$	606	$	10	$	253	$	5	$	859	$	15	172
Non-investment grade	442		19		9		2		451		21		523
Total fixed maturities – Exchange	$	1,048	$	29	$	262	$	7	$	1,310	$	36	695

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 September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Indemnity
Fixed maturities	$	4	$	4	$	12	$	10
Equity securities	1		0		1		1
Cash equivalents and other	0		0		1		1
Total investment income	5		4		14		12
Less: investment expenses	1		0		1		0
Investment income, net of expenses – Indemnity	$	4	$	4	$	13	$	12
Exchange
Fixed maturities	$	97	$	90	$	287	$	261
Equity securities	29		30		91		89
Cash equivalents and other	1		0		2		1
Total investment income	127		120		380		351
Less: investment expenses	11		9		33		28
Investment income, net of expenses – Exchange	$	116	$	111	$	347	$	323
Investment income, net of expenses – Erie Insurance Group	$	120	$	115	$	360	$	335

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 September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Indemnity
Available-for-sale securities:
Fixed maturities:
Gross realized gains	$	0		$	0		$	0		$	0
Gross realized losses	(1		)	0			(1		)	0
Net realized (losses) gains	(1		)	0			(1		)	0
Equity securities:
Gross realized gains	1			0			1			1
Gross realized losses	0			0			0			0
Net realized gains	1			0			1			1
Net realized investment gains – Indemnity	$	0		$	0		$	0		$	1
Exchange
Available-for-sale securities:
Fixed maturities:
Gross realized gains	$	4		$	8		$	17		$	18
Gross realized losses	(9		)	(2		)	(17		)	(3		)
Net realized (losses) gains	(5		)	6			0			15
Equity securities:
Gross realized gains	7			0			18			10
Gross realized losses	0			0			(1		)	(2		)
Net realized gains	7			0			17			8
Trading securities:
Common stock:
Gross realized gains	52			89			218			211
Gross realized losses	(19		)	(5		)	(42		)	(15		)
(Decreases) increases in fair value⁽¹⁾	(327		)	(175		)	(436		)	(116		)
Net realized (losses) gains	(294		)	(91		)	(260		)	80
Net realized investment (losses) gains – Exchange	$	(292	)	$	(85	)	$	(243	)	$	103
Net realized investment (losses) gains – Erie Insurance Group	$	(292	)	$	(85	)	$	(243	)	$	104


(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 were $0.5 million for the third quarter, and $0.6 million for the nine months ended September 30, 2015, compared to less than $0.1 million for the third quarter and $0.1 million for the nine months ended September 30, 2014. Net impairment losses recorded in earnings for the Exchange were $3 million for the third quarter, and $7 million for the nine months ended September 30, 2015, compared to $1 million for both the third quarter and the nine months ended September 30, 2014.

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 September 30, 2015 are comprised of partnership financial results for the fourth quarter of 2014 and the first two quarters of 2015. Given the lag in reporting, our limited partnership results do not reflect the market conditions of the third quarter of 2015. 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:



	Erie Insurance Group
(in millions)	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Indemnity
Equity in earnings of limited partnerships accounted for under the equity method	$	3	$	3	$	17	$	10
Change in fair value of limited partnerships accounted for under the fair value option	1		1		0		3
Equity in earnings of limited partnerships – Indemnity	$	4	$	4	$	17	$	13
Exchange
Equity in earnings of limited partnerships accounted for under the equity method	$	37	$	26	$	121	$	83
Change in fair value of limited partnerships accounted for under the fair value option	2		4		5		15
Equity in earnings of limited partnerships – Exchange	$	39	$	30	$	126	$	98
Equity in earnings of limited partnerships – Erie Insurance Group	$	43	$	34	$	143	$	111

We have provided summarized financial information in the following tables for the nine months ended September 30, 2015 and for the year ended December 31, 2014. 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 we evaluate these investments.

As these investments are generally reported on a one-quarter lag, our limited partnership results through September 30, 2015 include partnership financial results for the fourth quarter of 2014 and the first two quarters of 2015.



	Erie Insurance Group
	As of and for the nine months ended September 30, 2015
(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%	24	$	23	$	(2	)	$	2
Greater than or equal to 10% but less than 50%	3	28		11			2
Total private equity	27	51		9			4
Mezzanine debt:
Less than 10%	10	8		0			1
Greater than or equal to 10% but less than 50%	3	5		0			1
Greater than 50%	1	0		0			0
Total mezzanine debt	14	13		0			2
Real estate:
Less than 10%	11	21		(11		)	11
Greater than or equal to 10% but less than 50%	2	4		(6		)	6
Greater than 50%	2	6		2			0
Total real estate	15	31		(15		)	17
Total limited partnerships – Indemnity	56	$	95	$	(6	)	$	23
Exchange
Private equity:
Less than 10%	43	$	306	$	5		$	32
Greater than or equal to 10% but less than 50%	3	112		45			8
Total private equity	46	418		50			40
Mezzanine debt:
Less than 10%	21	115		(4		)	13
Greater than or equal to 10% but less than 50%	4	24		1			2
Greater than 50%	3	27		1			2
Total mezzanine debt	28	166		(2		)	17
Real estate:
Less than 10%	27	178		(25		)	34
Greater than or equal to 10% but less than 50%	4	45		(16		)	19
Greater than 50%	2	25		8			1
Total real estate	33	248		(33		)	54
Total limited partnerships – Exchange	107	$	832	$	15		$	111
Total limited partnerships – Erie Insurance Group		$	927	$	9		$	134

Per the limited partnership financial statements, total partnership assets were $41 billion and total partnership liabilities were $4 billion at September 30, 2015 (as recorded in the June 30, 2015 limited partnership financial statements). For the nine month period comparable to that presented in the preceding table (fourth quarter of 2014 and first two quarters of 2015), total partnership valuation adjustment gains were $0.5 billion and total partnership net income was $5 billion.

As these investments are generally reported on a one-quarter lag, our limited partnership results through December 31, 2014 include partnership financial results for the fourth quarter of 2013 and the first three quarters of 2014.



	Erie Insurance Group
	As of and for the year ended December 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%	24	$	34	$	(7	)	$	7
Greater than or equal to 10% but less than 50%	3	18		3			1
Total private equity	27	52		(4		)	8
Mezzanine debt:
Less than 10%	11	10		0			2
Greater than or equal to 10% but less than 50%	3	4		0			0
Greater than 50%	1	0		0			0
Total mezzanine debt	15	14		0			2
Real estate:
Less than 10%	11	36		5			(2		)
Greater than or equal to 10% but less than 50%	3	4		1			0
Greater than 50%	2	7		0			1
Total real estate	16	47		6			(1		)
Total limited partnerships – Indemnity	58	$	113	$	2		$	9
Exchange
Private equity:
Less than 10%	42	$	344	$	(12	)	$	43
Greater than or equal to 10% but less than 50%	3	74		13			3
Total private equity	45	418		1			46
Mezzanine debt:
Less than 10%	21	120		0			16
Greater than or equal to 10% but less than 50%	4	23		(3		)	3
Greater than 50%	3	27		0			3
Total mezzanine debt	28	170		(3		)	22
Real estate:
Less than 10%	22	207		18			7
Greater than or equal to 10% but less than 50%	5	44		6			2
Greater than 50%	2	27		(17		)	20
Total real estate	29	278		7			29
Total limited partnerships – Exchange	102	$	866	$	5		$	97
Total limited partnerships – Erie Insurance Group		$	979	$	7		$	106

Per the limited partnership financial statements, total partnership assets were $45 billion and total partnership liabilities were $4 billion at December 31, 2014 (as recorded in the September 30, 2014 limited partnership financial statements). For the twelve month period comparable to that presented in the preceding table (fourth quarter of 2013 and first three quarters of 2014), total partnership valuation adjustment losses were $1 billion and total partnership net income was $7 billion.

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