Note 13. Related Party

Management fee

A management fee is charged to the Exchange for services we provide under subscriber’s agreements with policyholders at the Exchange. The fee is a percentage of direct and assumed premiums written by the Exchange. This percentage rate is adjusted periodically by our Board of Directors but cannot exceed 25%. The effective management fee rate charged the Exchange was 25% in 2016, 2015 and 2014. The Board of Directors elected to maintain the fee at 25% beginning January 1, 2017.

There is no provision in the subscriber's agreement for termination of our appointment as attorney-in-fact by the subscribers of the Exchange and the appointment is not affected by a policyholder’s disability or incapacity.

Insurance holding company system

Most states have enacted legislation that regulates insurance holding company systems, defined as two or more affiliated persons, one or more of which is an insurer. The Exchange has the following wholly owned property and casualty subsidiaries: Erie Insurance Company, Erie Insurance Company of New York, Erie Insurance Property and Casualty Company and Flagship City Insurance Company, and a wholly owned life insurance company, Erie Family Life Insurance Company ("EFL"). Indemnity and the Exchange, and its wholly owned subsidiaries, meet the definition of an insurance holding company system.

Expense allocations

All claims handling services for the Exchange are performed by our employees who are entirely dedicated to claims related activities. All costs associated with these employees, including postretirement benefits, are reimbursed to us from the Exchange’s revenues in accordance with the subscriber’s agreement. We are reimbursed by EFL from its revenues for all costs, including postretirement benefits, associated with employees who perform life insurance related operating activities for EFL in accordance with its service agreement with us. See also Note 8, "Postretirement Benefits" for a discussion of intercompany expense allocations under the postretirement benefit plans. Investment management services are also provided by Indemnity to the Exchange and EFL in accordance with the subscriber’s and services agreements, respectively. These services include Indemnity engaging third party investment management services for several assets classes on behalf of the Exchange. In addition, common overhead expenses and certain service department costs incurred by us on behalf of the Exchange and its wholly owed subsidiaries are reimbursed by the proper entity based upon appropriate utilization statistics (employee count, square footage, vehicle count, project hours, etc.) specifically measured to accomplish proportional allocations, which we believe are reasonable.

All reimbursements are made on an actual cost basis and do not include a profit component. We record these reimbursements as receivables from the Exchange and EFL with a corresponding reduction to our expenses. Reimbursements are settled on a monthly basis. The amounts incurred on behalf of the Exchange and EFL were as follows for the years ended December 31:



(in thousands)	2016		2015
Erie Insurance Exchange
Operating expenses	$	429,985	$	406,246
Investment expenses	27,240		24,620
	457,225		430,866
Erie Family Life Insurance
Operating expenses	$	36,818	$	33,988
Investment expenses	2,070		1,773
	38,888		35,761
Total cash settlements	$	496,113	$	466,627

Office leases

We lease certain office space from the Exchange including the home office and three field office facilities. Rents are determined considering returns on invested capital and building operating and overhead costs. Rent expenses under these leases, which include all operating expenses, totaled $14.3 million, $12.2 million and $15.7 million in 2016, 2015 and 2014, respectively. Reimbursements from the Exchange and EFL related to the use of this space totaled $4.9 million, $3.6 million and $5.6 million in 2016, 2015 and 2014, respectively. We also have a lease commitment with EFL for a branch office until 2018. Annual rentals paid to EFL under this lease totaled $0.4 million in 2016, 2015 and 2014.

Notes receivable from EFL

We are due $25 million from EFL in the form of a surplus note that was issued in 2003. The note may be repaid only out of unassigned surplus of EFL. Both principal and interest payments are subject to prior approval by the Pennsylvania Insurance Commissioner. The note bears an annual interest rate of 6.7% and will be payable on demand on or after December 31, 2018, with interest scheduled to be paid semi-annually. EFL paid annual interest to us of $1.7 million in 2016, 2015 and 2014.