Fair Value

6 Months Ended

Jun. 30, 2011

Fair Value

Fair Value

Note 6. Fair Value

The 2010 fair value information within this note has been conformed to this current presentation.

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 on 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 in the current market conditions.  Financial instruments are categorized based upon the following characteristics or inputs to the valuation techniques:

Level 1Quoted prices for identical instruments in active markets not subject to adjustments or discounts.

Level 2Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3Instruments whose significant value drivers are unobservable and reflect management’s estimate of fair value based on assumptions used by market participants in an orderly transaction as of the valuation date.

The following table represents the fair value measurements on a recurring basis for our consolidated available-for-sale and trading securities by asset class and level of input at June 30, 2011:

	Erie Insurance Group
	June 30, 2011
	Fair value measurements using:
(in millions)	Total	Quoted prices in active markets for identical assets Level 1	Significant observable inputs Level 2	Significant unobservable inputs Level 3
Indemnity
Available-for-sale securities:
U.S. government & agencies	$        8	$        0	$       8	$ 0
States & political subdivisions	222	0	222	0
Corporate debt securities	257	0	257	0
Other debt securities	10	0	10	0
Commercial mortgage-backed securities (CMBS)	24	0	24	0
Collateralized debt obligations (CDO)	4	0	0	4
Total fixed maturities	525	0	521	4
Nonredeemable preferred stock	20	9	11	0
Total available-for-sale securities	545	9	532	4
Trading securities:
Common stock	30	30	0	0
Total trading securities	30	30	0	0
Total – Indemnity	$    575	$     39	$   532	$ 4
Exchange
Available-for-sale securities:
U.S. government & agencies	$      67	$     11	$    56	$ 0
States & political subdivisions	1,438	0	1,434	4
Foreign government securities	21	0	21	0
Corporate debt securities	5,428	12	5,405	11
Other debt securities	61	0	56	5
Residential mortgage-backed securities (RMBS)	222	0	222	0
Commercial mortgage-backed securities (CMBS)	72	0	72	0
Collateralized debt obligations (CDO)	71	0	41	30
Total fixed maturities	7,380	23	7,307	50
Nonredeemable preferred stock	610	195	408	7
Total available-for-sale securities	7,990	218	7,715	57
Trading securities:
Common stock	2,513	2,500	0	13
Total trading securities	2,513	2,500	0	13
Total – Exchange	$10,503	$2,718	$7,715	$70
Total – Erie Insurance Group	$11,078	$2,757	$8,247	$74

Level 3 Assets – Quarterly Change:

	Erie Insurance Group
(in millions)	Beginning balance at March 31, 2011	Included in earnings (1)	Included in other comprehensive income		Purchases	Sales	Transfers in and (out) of Level 3 (2)	Ending balance at June 30, 2011
Indemnity
Available-for-sale securities:
Collateralized debt obligations (CDO)	$  4	$0	$ 0		$0	$0	$0	$  4
Total fixed maturities	4	0	0		0	0	0	4
Total available-for-sale securities	4	0	0		0	0	0	4
Trading securities:
Common stock	0	0	0		0	0	0	0
Total trading securities	0	0	0		0	0	0	0
Total Level 3 assets – Indemnity	$  4	$0	$ 0		$0	$0	$0	$  4
Exchange
Available-for-sale securities:
States & political subdivisions	$  4	$0	$ 0		$0	$0	$0	$  4
Corporate debt securities	11	0	0		0	0	0	11
Other debt securities	5	0	0		0	0	0	5
Collateralized debt obligations (CDO)	30	0	0		0	0	0	30
Total fixed maturities	50	0	0		0	0	0	50
Nonredeemable preferred stock	8	0	(1	)	0	0	0	7
Total available-for-sale securities	58	0	(1	)	0	0	0	57
Trading securities:
Common stock	13	0	0		0	0	0	13
Total trading securities	13	0	0		0	0	0	13
Total Level 3 assets – Exchange	$71	$0	$(1	)	$0	$0	$0	$70
Total Level 3 assets – Erie Insurance Group	$75	$0	$(1	)	$0	$0	$0	$74

(1) Includes losses as a result of other-than-temporary impairments and accrual of discount and amortization of premium.  These amounts are reported in the Consolidated Statements of Operations. There were no unrealized gains included in earnings for the three months ended June 30, 2011 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, 2010	Included in earnings (1)	Included in other comprehensive income	Purchases	Sales	Transfers in and (out) of Level 3 (2)	Ending balance at June 30, 2011
Indemnity
Available-for-sale securities:
Collateralized debt obligations (CDO)	$  4	$0	$ 0	$0	$0	$0	$  4
Total fixed maturities	4	0	0	0	0	0	4
Total available-for-sale securities	4	0	0	0	0	0	4
Trading securities:
Common stock	0	0	0	0	0	0	0
Total trading securities	0	0	0	0	0	0	0
Total Level 3 assets – Indemnity	$  4	$0	$ 0	$0	$0	$0	$  4
Exchange
Available-for-sale securities:
States & political subdivisions	$  4	$0	$ 0	$0	$0	$0	$  4
Corporate debt securities	11	0	0	0	0	0	11
Other debt securities	10	0	0	0	5	0	5
Collateralized debt obligations (CDO)	30	0	0	0	0	0	30
Total fixed maturities	55	0	0	0	5	0	50
Nonredeemable preferred stock	7	0	0	0	0	0	7
Total available-for-sale securities	62	0	0	0	5	0	57
Trading securities:
Common stock	12	1	0	0	0	0	13
Total trading securities	12	1	0	0	0	0	13
Total Level 3 assets – Exchange	$74	$1	$0	$0	$5	$0	$70
Total Level 3 assets – Erie Insurance Group	$78	$1	$0	$0	$5	$0	$74

(1) Includes losses as a result of other-than-temporary impairments and accrual of discount and amortization of premium.  These amounts are reported in the Consolidated Statements of Operations. There was $1 million in unrealized gains included in earnings for the six months ended June 30, 2011 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.

There were no significant transfers between levels 1 and 2 for the six months ended June 30, 2011.

The following table represents the fair value measurements on a recurring basis for our consolidated available-for-sale and trading securities by asset class and level of input at December 31, 2010:

	Erie Insurance Group
	December 31, 2010
	Fair value measurements using:
(in millions)	Total		Quoted prices in active markets for identical assets Level 1		Significant observable inputs Level 2		Significant unobservable inputs Level 3
Indemnity
Available-for-sale securities:
U.S. government & agencies	$	25	$	25	$	0	$0
States & political subdivisions	197		0		197		0
Corporate debt securities	38		0		38		0
Collateralized debt obligations (CDO)	4		0		0		4
Total fixed maturities	264		25		235		4
Nonredeemable preferred stock	24		11		13		0
Total available-for-sale securities	288		36		248		4
Trading securities:
Common stock	28		28		0		0
Total trading securities	28		28		0		0
Total – Indemnity	$	316	$	64	$	248	$4
Exchange
Available-for-sale securities:
U.S. government & agencies	$	87	$	12	$	75	$0
States & political subdivisions	1,471		0		1,467		4
Foreign government securities	21		0		21		0
Corporate debt securities	5,263		12		5,240		11
Other debt securities	57		0		47		10
Residential mortgage-backed securities (RMBS)	224		0		224		0
Commercial mortgage-backed securities (CMBS)	86		0		86		0
Collateralized debt obligations (CDO)	70		0		40		30
Total fixed maturities	7,279		24		7,200		55
Nonredeemable preferred stock	570		166		397		7
Total available-for-sale securities	7,849		190		7,597		62
Trading securities:
Common stock	2,306		2,294		0		12
Total trading securities	2,306		2,294		0		12
Total – Exchange	$	10,155	$	2,484	$	7,597	$74
Total – Erie Insurance Group	$	10,471	$	2,548	$	7,845	$78

Level 3 Assets – Quarterly Change:

	Erie Insurance Group
(in millions)	Beginning balance at March 31, 2010		Included in earnings (1)	Included in other comprehensive income		Purchases, sales and adjustments	Transfers in and (out) of Level 3 (2)			Ending balance at June 30, 2010
Indemnity
Available-for-sale securities:
Corporate debt securities	$	2	$0	$0		$0	$	0		$ 2
Collateralized debt obligations (CDO)	9		0	1		0	(2		)	8
Total fixed maturities	11		0	1		0	(2		)	10
Nonredeemable preferred stock	2		0	(1	)	0	0			1
Total available-for-sale securities	13		0	0		0	(2		)	11
Trading securities:
Common stock	0		0	0		0	0			0
Total trading securities	0		0	0		0	0			0
Total Level 3 assets – Indemnity	$	13	$0	$0		$0	$	(2	)	$11
Exchange
Available-for-sale securities:
Corporate debt securities	$	9	$0	$0		$0	$	0		$ 9
Other debt securities	5		0	0		0	0			5
Collateralized debt obligations (CDO)	70		1	3		0	(21		)	53
Total fixed maturities	84		1	3		0	(21		)	67
Nonredeemable preferred stock	5		0	(1	)	0	0			4
Total available-for-sale securities	89		1	2		0	(21		)	71
Trading securities:
Common stock	10		0	0		0	0			10
Total trading securities	10		0	0		0	0			10
Total Level 3 assets – Exchange	$	99	$1	$2		$0	$	(21	)	$81
Total Level 3 assets – Erie Insurance Group	$	112	$1	$2		$0	$	(23	)	$92

(1) Includes losses as a result of other-than-temporary impairments and accrual of discount and amortization of premium.  These amounts are reported in the Consolidated Statements of Operations. There were no unrealized gains included in earnings for the three months ended June 30, 2010 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, 2009	Included in earnings (1)	Included in other comprehensive income	Purchases, sales and adjustments	Transfers in and (out) of Level 3 (2)	Ending balance at June 30, 2010
Indemnity
Available-for-sale securities:
Corporate debt securities	$ 2	$0	$0	$0	$  0	$ 2
Collateralized debt obligations (CDO)	8	0	1	0	(1)	8
Total fixed maturities	10	0	1	0	(1)	10
Nonredeemable preferred stock	1	0	0	0	0	1
Total available-for-sale securities	11	0	1	0	(1)	11
Trading securities:
Common Stock	0	0	0	0	0	0
Total trading securities	0	0	0	0	0	0
Total Level 3 assets – Indemnity	$11	$0	$1	$0	$ (1)	$11
Exchange
Available-for-sale securities:
Corporate debt securities	$17	$0	$0	$0	$ (8)	$ 9
Other debt securities	5	0	0	0	0	5
Collateralized debt obligations (CDO)	49	1	6	0	(3)	53
Total fixed maturities	71	1	6	0	(11)	67
Nonredeemable preferred stock	4	0	0	0	0	4
Total available-for-sale securities	75	1	6	0	(11)	71
Trading securities:
Common Stock	9	1	0	0	0	10
Total trading securities	9	1	0	0	0	10
Total Level 3 assets – Exchange	$84	$2	$6	$0	$(11)	$81
Total Level 3 assets – Erie Insurance Group	$95	$2	$7	$0	$(12)	$92

(1) Includes losses as a result of other-than-temporary impairments and accrual of discount and amortization of premium.  These amounts are reported in the Consolidated Statements of Operations. There was $1 million in unrealized gains included in earnings for the six months ended June 30, 2010 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.

There were no significant transfers between levels 1 and 2 for the six months ended June 30, 2010.

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 on proprietary models and are used when observable inputs are not available 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 on corroborating information and our knowledge and monitoring of market conditions.  At June 30, 2011, we adjusted some prices received by the pricing service to reflect an alternate fair market value based on observable market data such as a disparity in price of comparable securities and/or non-binding broker quotes.

The following table displays the number and values of these adjustments at June 30, 2011:

	Erie Insurance Group
(dollars in millions)	Number of holdings	Value of securities using pricing service	Value of securities used in the financial statements
Exchange	2	$4.7	$4.8
Total – Erie Insurance Group		$4.7	$4.8

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 we determine the proper level classification 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 and believe that their prices adequately consider market activity in determining fair value.

When a price from the pricing service is not available, values are determined by obtaining non-binding broker quotes and/or market comparables.  When available, we obtain multiple quotes for the same security.  The ultimate value for these securities is determined based on 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 structured 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 sets forth the fair value of the consolidated fixed maturity and preferred and common stock securities by pricing source:

	Erie Insurance Group
(in millions)	June 30, 2011
	Total	Level 1	Level 2	Level 3
Indemnity
Fixed maturity securities:
Priced via pricing services	$    521	$      0	$   521	$ 0
Priced via market comparables/non-binding broker quote (1)	0	0	0	0
Priced via internal modeling (2)	4	0	0	4
Total fixed maturity securities	525	0	521	4
Preferred stock securities:
Priced via pricing services	18	9	9	0
Priced via market comparables/non-binding broker quote (1)	2	0	2	0
Priced via internal modeling (2)	0	0	0	0
Total preferred stock securities	20	9	11	0
Common stock securities:
Priced via pricing services	30	30	0	0
Priced via market comparables/non-binding broker quote (1)	0	0	0	0
Priced via internal modeling (2)	0	0	0	0
Total common stock securities	30	30	0	0
Total available-for-sale/trading securities – Indemnity	$    575	$    39	$   532	$ 4
Exchange
Fixed maturity securities:
Priced via pricing services	$ 7,232	$    23	$7,209	$ 0
Priced via market comparables/non-binding broker quote (1)	98	0	98	0
Priced via internal modeling (2)	50	0	0	50
Total fixed maturity securities	7,380	23	7,307	50
Preferred stock securities:
Priced via pricing services	577	188	389	0
Priced via market comparables/non-binding broker quote (1)	33	7	19	7
Priced via internal modeling (2)	0	0	0	0
Total preferred stock securities	610	195	408	7
Common stock securities:
Priced via pricing services	2,500	2,500	0	0
Priced via market comparables/non-binding broker quote (1)	0	0	0	0
Priced via internal modeling (2)	13	0	0	13
Total common stock securities	2,513	2,500	0	13
Total available-for-sale/trading securities – Exchange	$10,503	$2,718	$7,715	$70
Total available-for-sale/trading securities – Erie Insurance Group	$11,078	$2,757	$8,247	$74

(1)All broker quotes obtained for securities were non-binding. When a non-binding broker quote was the only price available, the security was classified as Level 3.

(2)Internal modeling using a discounted cash flow model was performed on 11 fixed maturities and 3 common equity securities representing 0.5% of the total portfolio of the Erie Insurance Group.

We have no assets that were measured at fair value on a nonrecurring basis during the six months ended June 30, 2011.