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Investments

6 Months Ended

Jun. 30, 2011

Note 7. Investments

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

The following tables summarize the cost and fair value of our available-for-sale securities at June 30, 2011 and December 31, 2010:

	Erie Insurance Group
	June 30, 2011
(in millions)	Amortized	Gross unrealized	Gross unrealized	Estimated
	cost	gains	losses	fair value
Indemnity
Available-for-sale securities:
U.S. government & agencies	$ 8	$ 0	$ 0	$ 8
States & political subdivisions	214	8	0	222
Corporate debt securities	256	1	0	257
Other debt securities	10	0	0	10
Commercial mortgage-backed securities (CMBS)	24	0	0	24
Collateralized debt obligations (CDO)	4	0	0	4
Total fixed maturities	516	9	0	525
Nonredeemable preferred stock	19	1	0	20
Total available-for-sale securities – Indemnity	$ 535	$ 10	$ 0	$ 545
Exchange
Available-for-sale securities:
U.S. government & agencies	$ 65	$ 2	$ 0	$ 67
States & political subdivisions	1,385	56	3	1,438
Foreign government securities	20	1	0	21
Corporate debt securities	5,051	383	6	5,428
Other debt securities	59	2	0	61
Residential mortgage-backed securities (RMBS)	212	10	0	222
Commercial mortgage-backed securities (CMBS)	68	4	0	72
Collateralized debt obligations (CDO)	69	7	5	71
Total fixed maturities	6,929	465	14	7,380
Nonredeemable preferred stock	538	74	2	610
Total available-for-sale securities – Exchange	$7,467	$539	$16	$7,990
Total available-for-sale securities – Erie Insurance Group	$8,002	$549	$16	$8,535

	Erie Insurance Group
	December 31, 2010
(in millions)	Amortized	Gross unrealized	Gross unrealized	Estimated
	cost	gains	Losses	fair value
Indemnity
Available-for-sale securities:
U.S. government & agencies	$ 25	$ 0	$ 0	$ 25
States & political subdivisions	193	6	2	197
Corporate debt securities	36	2	0	38
Collateralized debt obligations (CDO)	3	1	0	4
Total fixed maturities	257	9	2	264
Nonredeemable preferred stock	20	4	0	24
Total available-for-sale securities – Indemnity	$ 277	$ 13	$ 2	$ 288
Exchange
Available-for-sale securities:
U.S. government & agencies	$ 85	$ 2	$ 0	$ 87
States & political subdivisions	1,437	43	9	1,471
Foreign government securities	20	1	0	21
Corporate debt securities	4,900	377	14	5,263
Other debt securities	54	3	0	57
Residential mortgage-backed securities (RMBS)	216	9	1	224
Commercial mortgage-backed securities (CMBS)	82	5	1	86
Collateralized debt obligations (CDO)	69	6	5	70
Total fixed maturities	6,863	446	30	7,279
Nonredeemable preferred stock	503	74	7	570
Total available-for-sale securities – Exchange	$7,366	$520	$37	$7,849
Total available-for-sale securities – Erie Insurance Group	$7,643	$533	$39	$8,137

The amortized cost and estimated fair value of fixed maturities at June 30, 2011 are shown below by remaining contractual term to maturity. Mortgage-backed securities are allocated based on 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
(in millions)	Amortized	Estimated
	cost	fair value
Indemnity
Due in one year or less	$ 154	$ 154
Due after one year through five years	220	224
Due after five years through ten years	54	57
Due after ten years	88	90
Total fixed maturities – Indemnity	$ 516	$ 525
Exchange
Due in one year or less	$ 392	$ 401
Due after one year through five years	2,469	2,622
Due after five years through ten years	2,798	3,019
Due after ten years	1,270	1,338
Total fixed maturities – Exchange	$6,929	$7,380
Total fixed maturities – Erie Insurance Group	$7,445	$7,905

Fixed maturities and equity securities in a gross unrealized loss position at June 30, 2011 are as follows for Indemnity. Data is provided by length of time securities were in a gross unrealized loss position.

	Erie Insurance Group
	June 30, 2011
(dollars in millions)	Less than 12 months		12 months or longer		Total
	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized	No. of
Indemnity	value	losses	value	losses	value	losses	holdings
Available-for-sale securities:
States & political subdivisions	$ 24	$0	$0	$0	$ 24	$0	11
Corporate debt securities	78	0	0	0	78	0	12
Other debt securities	5	0	0	0	5	0	1
Commercial mortgage-backed securities (CMBS)	24	0	0	0	24	0	4
Total fixed maturities – Indemnity	131	0	0	0	131	0	28
Nonredeemable preferred stock	3	0	0	0	3	0	1
Total available-for-sale-securities – Indemnity	$134	$0	$0	$0	$134	$0	29

Quality breakdown of fixed maturities:
Investment grade	$131	$0	$0	$0	$131	$0	28
Non-investment grade	0	0	0	0	0	0	0
Total fixed maturities – Indemnity	$131	$0	$0	$0	$131	$0	28

Fixed maturities and equity securities in a gross unrealized loss position at June 30, 2011 are as follows for the Exchange. Data is provided by length of time securities were in a gross unrealized loss position.

	Erie Insurance Group
	June 30, 2011
(dollars in millions)	Less than 12 months		12 months or longer		Total
	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized	No. of
Exchange	value	losses	value	losses	value	losses	holdings
Available-for-sale securities:
U.S. government & agencies	$ 25	$0	$ 0	$0	$ 25	$ 0	3
States & political subdivisions	122	2	4	1	126	3	28
Corporate debt securities	362	4	57	2	419	6	75
Residential mortgage-backed securities (RMBS)	13	0	3	0	16	0	4
Commercial mortgage-backed securities (CMBS)	5	0	1	0	6	0	2
Collateralized debt obligations (CDO)	0	0	32	5	32	5	5
Total fixed maturities – Exchange	527	6	97	8	624	14	117
Nonredeemable preferred stock	53	1	20	1	73	2	12
Total available-for-sale-securities – Exchange	$580	$7	$117	$9	$697	$16	129

Quality breakdown of fixed maturities:
Investment grade	$498	$6	$ 85	$7	$583	$13	105
Non-investment grade	29	0	12	1	41	1	12
Total fixed maturities – Exchange	$527	$6	$ 97	$8	$624	$14	117

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 are a general review of market conditions and financial performance of the issuer along with the extent and duration of which fair value is less than cost. Any debt 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.

Fixed maturities and equity securities in a gross unrealized loss position at December 31, 2010 are as follows for Indemnity. Data is provided by length of time securities were in a gross unrealized loss position.

	Erie Insurance Group
	December 31, 2010
(dollars in millions)	Less than 12 months		12 months or longer		Total
	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized	No. of
Indemnity	value	losses	value	losses	value	losses	holdings
Available-for-sale securities:
U.S. government & agencies	$25	$0	$0	$0	$25	$0	1
States & political subdivisions	39	2	1	0	40	2	20
Corporate debt securities	31	0	0	0	31	0	3
Total fixed maturities – Indemnity	95	2	1	0	96	2	24
Nonredeemable preferred stock	3	0	0	0	3	0	1
Total available-for-sale-securities – Indemnity	$98	$2	$1	$0	$99	$2	25

Quality breakdown of fixed maturities:
Investment grade	$95	$2	$1	$0	$96	$2	24
Non-investment grade	0	0	0	0	0	0	0
Total fixed maturities – Indemnity	$95	$2	$1	$0	$96	$2	24

Fixed maturities and equity securities in a gross unrealized loss position at December 31, 2010 are as follows for the Exchange. Data is provided by length of time securities were in a gross unrealized loss position.

	Erie Insurance Group
	December 31, 2010
(dollars in millions)	Less than 12 months		12 months or longer		Total
	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized	No. of
Exchange	value	losses	value	losses	value	losses	holdings
Available-for-sale securities:
U.S. government & agencies	$ 22	$ 0	$ 0	$ 0	$ 22	$ 0	3
States & political subdivisions	299	8	5	1	304	9	59
Foreign government securities	10	0	0	0	10	0	1
Corporate debt securities	398	8	144	6	542	14	101
Residential mortgage-backed securities (RMBS)	6	0	7	1	13	1	4
Commercial mortgage-backed securities (CMBS)	0	0	12	1	12	1	2
Collateralized debt obligations (CDO)	1	0	33	5	34	5	6
Total fixed maturities – Exchange	736	16	201	14	937	30	176
Nonredeemable preferred stock	45	2	59	5	104	7	15
Total available-for-sale-securities – Exchange	$781	$18	$260	$19	$1,041	$37	191

Quality breakdown of fixed maturities:
Investment grade	$703	$16	$155	$11	$ 858	$27	154
Non-investment grade	33	0	46	3	79	3	22
Total fixed maturities – Exchange	$736	$16	$201	$14	$ 937	$30	176

Investment income, net of expenses, was generated from the following portfolios:

	Erie Insurance Group
	Three months ended June 30,		Six months ended June 30,
(in millions)	2011	2010	2011	2010
Indemnity
Fixed maturities	$ 4	$ 9	$ 7	$ 17
Equity securities	0	1	1	2
Cash equivalents and other	1	0	1	0
Total investment income	5	10	9	19
Less: investment expenses	1	1	1	1
Investment income, net of expenses – Indemnity	$ 4	$ 9	$ 8	$ 18
Exchange
Fixed maturities	$ 92	$ 87	$184	$173
Equity securities	24	18	42	34
Cash equivalents and other	0	0	0	0
Total investment income	116	105	226	207
Less: investment expenses	7	6	16	13
Investment income, net of expenses – Exchange	$109	$ 99	$210	$194
Investment income, net of expenses – Erie Insurance Group	$113	$108	$218	$212

Dividend income is recognized as earned and recorded to net investment income.

Realized gains (losses) on Indemnity’s investments were as follows:

	Erie Insurance Group
(in millions)	Three months ended June 30,		Six months ended June 30,
Indemnity	2011	2010	2011	2010
Available-for-sale securities:
Fixed maturities:
Gross realized gains	$2	$ 1	$2	$ 3
Gross realized losses	0	0	0	0
Net realized gains	2	1	2	3
Equity securities:
Gross realized gains	2	1	3	1
Gross realized losses	0	(1)	0	(1)
Net realized gains	2	0	3	0
Trading securities:
Common stock:
Gross realized gains	1	0	2	1
Gross realized losses	0	0	0	0
Valuation adjustments	1	(4)	0	(2)
Net realized gains (losses)	2	(4)	2	(1)
Net realized gains (losses) on investments – Indemnity	$6	$(3)	$7	$ 2

Realized gains (losses) on the Exchange’s investments were as follows:

	Erie Insurance Group
(in millions)	Three months ended June 30,		Six months ended June 30,
Exchange	2011	2010	2011	2010
Available-for-sale securities:
Fixed maturities:
Gross realized gains	$ 26	$ 7	$ 51	$ 28
Gross realized losses	(5)	(3)	(17)	(12)
Net realized gains	21	4	34	16
Equity securities:
Gross realized gains	10	3	16	7
Gross realized losses	0	(1)	(1)	(1)
Net realized gains	10	2	15	6
Trading securities:
Common stock:
Gross realized gains	71	44	127	89
Gross realized losses	(16)	(18)	(24)	(30)
Valuation adjustments	(53)	(242)	29	(171)
Net realized gains (losses)	2	(216)	132	(112)
Net realized gains (losses) on investments – Exchange	$ 33	$(210)	$181	$ (90)
Net realized gains (losses) on investments – Erie Insurance Group	$ 39	$(213)	$188	$ (88)

The components of other-than-temporary impairments on investments are included below.

	Erie Insurance Group
(in millions)	Three months ended June 30,		Six months ended June 30,
	2011	2010	2011	2010
Indemnity
Fixed maturities	$0	$(1)	$0	$(1)
Equity securities	0	0	0	0
Total	0	(1)	0	(1)
Portion recognized in other comprehensive income	0	0	0	0
Net impairment losses recognized in earnings – Indemnity	$0	$(1)	$0	$(1)
Exchange
Fixed maturities	$0	$(2)	$0	$(4)
Equity securities	0	(1)	0	(1)
Total	0	(3)	0	(5)
Portion recognized in other comprehensive income	0	0	0	0
Net impairment losses recognized in earnings – Exchange	$0	$(3)	$0	$(5)
Net impairment losses recognized in earnings – Erie Insurance Group	$0	$(4)	$0	$(6)

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

Our limited partnership investments are recorded using the equity method of accounting. As these investments are generally reported on a one-quarter lag, our limited partnership results through June 30, 2011 are comprised of partnership financial results for the first quarter of 2011. Given the lag in reporting, our limited partnership results do not reflect the market conditions of the second quarter of 2011. Cash contributions made to and distributions received from the partnerships are recorded in the period in which the transaction occurs.

We have provided summarized financial information in the following table for the six months ended June 30, 2011 and for the year ended December 31, 2010. Amounts provided in the table are presented using the latest available financial statements received from the partnerships. Limited partnership financial information has been presented based on the investment percentage in the partnerships for the Erie Insurance Group consistent with how management evaluates the investments.

As these investments are generally reported on a one-quarter lag, our limited partnership results through June 30, 2011 include the partnership financial results for the fourth quarter of 2010 and first quarter of 2011.

	As of and for the six months ended June 30, 2011
(dollars in millions)			Income (loss) recognized due to valuation
Investment percentage in partnership for Erie Insurance Group	Number of partnerships	Asset recorded	adjustments by the partnerships	Income (1oss) recorded
Indemnity
Private equity:
Less than 10%	26	$ 82	$ 7	$ 3
Greater than or equal to 10% but less than 50%	3	8	(2)	3
Greater than 50%	0	0	0	0
Total private equity	29	90	5	6
Mezzanine debt:
Less than 10%	11	27	(1)	3
Greater than or equal to 10% but less than 50%	3	15	1	0
Greater than 50%	1	2	0	0
Total mezzanine debt	15	44	0	3
Real estate:
Less than 10%	12	60	2	0
Greater than or equal to 10% but less than 50%	3	19	1	0
Greater than 50%	4	11	2	(1)
Total real estate	19	90	5	(1)
Total limited partnerships – Indemnity	63	$ 224	$10	$ 8

Exchange
Private equity:
Less than 10%	41	$ 547	$28	$25
Greater than or equal to 10% but less than 50%	3	38	(7)	11
Greater than 50%	0	0	0	0
Total private equity	44	585	21	36
Mezzanine debt:
Less than 10%	16	135	(2)	14
Greater than or equal to 10% but less than 50%	3	41	2	1
Greater than 50%	3	32	(1)	1
Total mezzanine debt	22	208	(1)	16
Real estate:
Less than 10%	25	270	17	(2)
Greater than or equal to 10% but less than 50%	5	63	1	0
Greater than 50%	4	40	(1)	5
Total real estate	34	373	17	3
Total limited partnerships – Exchange	100	$1,166	$37	$55
Total limited partnerships – Erie Insurance Group		$1,390	$47	$63

Per the limited partner financial statements, total partnership assets were $54 billion and total partnership liabilities were $5 billion at June 30, 2011 (as recorded in the March 31, 2011 limited partnership financial statements). For the six month period comparable to that presented in the preceding table (fourth quarter 2010 and first quarter of 2011), total partnership valuation adjustment gains were $4 billion and total partnership net income was $2 billion.

As these investments are generally reported on a one-quarter lag, our limited partnership results through
December 31, 2010 include the partnership results for the fourth quarter of 2009 and the first three quarters of 2010.

	As of and for the year ended December 31, 2010
(dollars in millions)			Income (loss) recognized due to valuation
Investment percentage in partnership for Erie Insurance Group	Number of partnerships	Asset recorded	adjustments by the partnerships	Income (1oss) recorded
Indemnity
Private equity:
Less than 10%	26	$ 78	$ 4	$ 7
Greater than or equal to 10% but less than 50%	3	8	3	0
Greater than 50%	0	0	0	0
Total private equity	29	86	7	7
Mezzanine debt:
Less than 10%	11	30	4	3
Greater than or equal to 10% but less than 50%	3	15	2	(2)
Greater than 50%	1	2	0	0
Total mezzanine debt	15	47	6	1
Real estate:
Less than 10%	12	59	30	(31)
Greater than or equal to 10% but less than 50%	4	14	10	(10)
Greater than 50%	4	10	4	(3)
Total real estate	20	83	44	(44)
Total limited partnerships – Indemnity	64	$ 216	$ 57	$(36)

Exchange
Private equity:
Less than 10%	41	$ 517	$ 28	$ 40
Greater than or equal to 10% but less than 50%	3	38	10	0
Greater than 50%	0	0	0	(1)
Total private equity	44	555	38	39
Mezzanine debt:
Less than 10%	14	142	12	13
Greater than or equal to 10% but less than 50%	3	41	2	(2)
Greater than 50%	3	31	0	2
Total mezzanine debt	20	214	14	13
Real estate:
Less than 10%	25	250	(11)	10
Greater than or equal to 10% but less than 50%	6	52	7	(7)
Greater than 50%	4	37	15	(11)
Total real estate	35	339	11	(8)
Total limited partnerships – Exchange	99	$1,108	$ 63	$ 44
Total limited partnerships – Erie Insurance Group		$1,324	$120	$ 8

Per the limited partner financial statements, total partnership assets were $58 billion and total partnership liabilities were $10 billion at December 31, 2010 (as recorded in the September 30, 2010 limited partnership financial statements). For the twelve month period comparable to that presented in the preceding table (fourth quarter of 2009 and first three quarters of 2010), total partnership valuation adjustment gains were $4 billion and total partnership net income was $3 billion.

See also Note 12, “Commitments and Contingencies,” for investment commitments related to limited partnerships.