Fair Value

12 Months Ended

Dec. 31, 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 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 in the current market conditions.  Financial instruments are categorized based upon the following characteristics or inputs to the valuation techniques:

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

Level 2:Quoted 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 3:Instruments whose significant value drivers are unobservable and reflect management’s estimate of fair value based upon 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 December 31, 2011:

	Erie Insurance Group
	December 31, 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:
States & political subdivisions	$	221	$	0	$	221	$	0
Corporate debt securities	303		0		303		0
Commercial mortgage-backed securities (CMBS)	13		0		13		0
Collateralized debt obligations (CDO)	4		0		0		4
Other debt securities	7		0		7		0
Total fixed maturities	548		0		544		4
Nonredeemable preferred stock	25		10		15		0
Total available-for-sale securities	573		10		559		4
Trading securities:
Common stock	27		27		0		0
Total trading securities	27		27		0		0
Total – Indemnity	$	600	$	37	$	559	$	4
Exchange
Available-for-sale securities:
U.S. government & agencies	$	17	$	6	$	11	$	0
States & political subdivisions	1,379		0		1,375		4
Foreign government securities	15		0		15		0
Corporate debt securities	5,499		20		5,467		12
Residential mortgage-backed securities (RMBS)	189		0		189		0
Commercial mortgage-backed securities (CMBS)	66		0		66		0
Collateralized debt obligations (CDO)	65		0		36		29
Other debt securities	62		0		57		5
Total fixed maturities	7,292		26		7,216		50
Nonredeemable preferred stock	564		188		371		5
Total available-for-sale securities	7,856		214		7,587		55
Trading securities:
Common stock	2,308		2,296		0		12
Total trading securities	2,308		2,296		0		12
Total – Exchange	$	10,164	$	2,510	$	7,587	$	67
Total – Erie Insurance Group	$	10,764	$	2,547	$	8,146	$	71

Level 3 Assets – Quarterly Change:

	Erie Insurance Group
(in millions)	Beginning balance at September 30, 2011	Included in earnings (1)	Included in other comprehensive income	Purchases	Sales	Transfers in and (out) of Level 3 (2)	Ending balance at December 31, 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	12	0	0	0	0	0	12
Collateralized debt obligations (CDO)	29	0	0	0	0	0	29
Other debt securities	5	0	0	0	0	0	5
Total fixed maturities	50	0	0	0	0	0	50
Nonredeemable preferred stock	6	0	(1)	0	0	0	5
Total available-for-sale securities	56	0	(1)	0	0	0	55
Trading securities:
Common stock	13	(1)	0	0	0	0	12
Total trading securities	13	(1)	0	0	0	0	12
Total Level 3 assets – Exchange	$69	$(1)	$(1)	$0	$0	$0	$67
Total Level 3 assets – Erie Insurance Group	$73	$(1)	$(1)	$0	$0	$0	$71

(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 or losses included in earnings for the three months ended December 31, 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 transfers between Levels 1 and 2 during the three months ended December 31, 2011.

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 December 31, 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	1	0	0	12
Collateralized debt obligations (CDO)	30	0	(1)	0	0	0	29
Other debt securities	10	0	0	0	(5)	0	5
Total fixed maturities	55	0	(1)	1	(5)	0	50
Nonredeemable preferred stock	7	0	(2)	0	0	0	5
Total available-for-sale securities	62	0	(3)	1	(5)	0	55
Trading securities:
Common stock	12	0	0	0	0	0	12
Total trading securities	12	0	0	0	0	0	12
Total Level 3 assets – Exchange	$74	$0	$(3)	$1	$(5)	$0	$67
Total Level 3 assets – Erie Insurance Group	$78	$0	$(3)	$1	$(5)	$0	$71

(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 or losses included in earnings for the year ended December 31, 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 transfers between Levels 1 and 2 during the year ended December 31, 2011.

The following table represents the fair value measurements on a recurring basis for our consolidated available-for-sale and trading securities by major category 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
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
Other debt securities	57	0	47	10
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 September 30, 2010	Transfer(s) in and (out) (1)	Included in earnings (2)	Included in other comprehensive income	Purchases, sales and adjustments	Transfer(s) in and (out) of Level 3 (3)	Ending balance at December 31, 2010
Indemnity
Available-for-sale securities:
Corporate debt securities	$  2	$(2)	$ 0	$0	$  0	$  0	$  0
Collateralized debt obligations (CDO)	7	(4)	0	0	0	1	4
Total fixed maturities	9	(6)	0	0	0	1	4
Nonredeemable preferred stock	2	(1)	0	0	(1)	0	0
Total available-for-sale securities	11	(7)	0	0	(1)	1	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	$11	$(7)	$ 0	$0	$  (1)	$  1	$  4
Exchange
Available-for-sale securities:
States & political subdivisions	$  0	$ 0	$ 0	$0	$  0	$  4	$  4
Corporate debt securities	9	2	0	0	0	0	11
Collateralized debt obligations (CDO)	42	4	(1)	1	(16)	0	30
Other debt securities	5	0	0	0	0	5	10
Total fixed maturities	56	6	(1)	1	(16)	9	55
Nonredeemable preferred stock	5	1	0	1	0	0	7
Total available-for-sale securities	61	7	(1)	2	(16)	9	62
Trading securities:
Common stock	11	0	1	0	0	0	12
Total trading securities	11	0	1	0	0	0	12
Total Level 3 assets – Exchange	$72	$ 7	$ 0	$2	$(16)	$  9	$74
Total Level 3 assets – Erie Insurance Group	$83	$ 0	$ 0	$2	$(17)	$10	$78

(1)Transfers in and out are attributable to the sale of Indemnity’s wholly owned property and casualty insurance subsidiaries Erie Insurance Company, Erie Insurance Company of New York and Erie Insurance Property and Casualty Company, to the Exchange.  Level 3 securities previously held by the Indemnity are shown as transfer (out) while transfers to the Exchange are shown as transfer in.

(2)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 or losses included in earnings for the three months ended December 31, 2010 on Level 3 securities.

(3)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 during the three months ended December 31, 2010.

Level 3 Assets – Year-to-Date Change:

	Erie Insurance Group
(in millions)	Beginning balance at December 31, 2009	Transfer(s) in and (out) (1)	Included in earnings (2)	Included in other comprehensive income	Purchases, sales and adjustments	Transfer(s) in and (out) of Level 3 (3)	Ending balance at December 31, 2010
Indemnity
Available-for-sale securities:
Corporate debt securities	$  2	$(2)	$ 0	$0	$   0	$  0	$  0
Collateralized debt obligations (CDO)	8	(4)	0	0	0	0	4
Total fixed maturities	10	(6)	0	0	0	0	4
Nonredeemable preferred stock	1	(1)	0	0	0	0	0
Total available-for-sale securities	11	(7)	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	$  11	$(7)	$ 0	$0	$   0	$  0	$  4
Exchange
Available-for-sale securities:
States & political subdivisions	$  0	$ 0	$ 0	$0	$   0	$  4	$  4
Corporate debt securities	17	2	0	0	0	(8)	11
Collateralized debt obligations (CDO)	49	4	(1)	5	(19)	(8)	30
Other debt securities	5	0	0	0	0	5	10
Total fixed maturities	71	6	(1)	5	(19)	(7)	55
Nonredeemable preferred stock	4	1	0	2	0	0	7
Total available-for-sale securities	75	7	(1)	7	(19)	(7)	62
Trading securities:
Common stock	9	0	3	0	0	0	12
Total trading securities	9	0	3	0	0	0	12
Total Level 3 assets – Exchange	$84	$ 7	$ 2	$7	$(19)	$(7)	$74
Total Level 3 assets – Erie Insurance Group	$95	$ 0	$ 2	$7	$(19)	$(7)	$78

(1)Transfers in and out are attributable to the sale of Indemnity’s wholly owned property and casualty insurance subsidiaries Erie Insurance Company, Erie Insurance Company of New York and Erie Insurance Property and Casualty Company, to the Exchange.  Level 3 securities previously held by the Indemnity are shown as transfer (out) while transfers to the Exchange are shown as transfer in.

(2)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 or losses included in earnings for the year ended December 31, 2010 on Level 3 securities.

(3)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 end of the period.

There were no significant transfers between Levels 1 and 2 during the year ended December 31, 2010. Estimates of fair values for our investment portfolio are obtained primarily from nationally recognized pricing services.  Our Level 1 category includes those securities valued using an exchange traded price provided by the pricing services.  The methodologies used by the pricing services 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 in illiquid markets.  In limited circumstances we adjust the price received from the pricing services when, in our judgment, a better reflection of fair value is available based upon corroborating information and our knowledge and monitoring of market conditions.

At December 31, 2011, we adjusted one price received from our pricing services to reflect an alternate fair market value.  This alternative fair value was based upon observable market data.  The price difference between the pricing service and the observable market data was less than $0.1 million.

We perform continuous reviews of the prices obtained from the pricing services.  This includes evaluating the methodology and inputs used by the pricing service to ensure that 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 as well as other observable inputs, such as benchmark yields, reported trades, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and transaction volumes and believe that their prices adequately consider market activity in determining fair value.  Our review process continues to evolve based upon accounting guidance and requirements.

When prices from the pricing services are 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 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 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 available-for-sale and trading securities by pricing source:

	Erie Insurance Group
(in millions)	December 31, 2011
	Total		Level 1		Level 2		Level 3
Indemnity
Fixed maturities:
Priced via pricing services	$	542	$	0	$	542	$	0
Priced via market comparables/non-binding broker quote (1)	2		0		2		0
Priced via internal modeling (2)	4		0		0		4
Total fixed maturities	548		0		544		4
Nonredeemable preferred stock:
Priced via pricing services	23		10		13		0
Priced via market comparables/non-binding broker quote (1)	2		0		2		0
Priced via internal modeling (2)	0		0		0		0
Total nonredeemable preferred stock	25		10		15		0
Common stock:
Priced via pricing services	27		27		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	27		27		0		0
Total available-for-sale and trading securities – Indemnity	$	600	$	37	$	559	$	4
Exchange
Fixed maturities:
Priced via pricing services	$	7,158	$	26	$	7,132	$	0
Priced via market comparables/non-binding broker quote (1)	84		0		84		0
Priced via internal modeling (2)	50		0		0		50
Total fixed maturities	7,292		26		7,216		50
Nonredeemable preferred stock:
Priced via pricing services	528		188		340		0
Priced via market comparables/non-binding broker quote (1)	36		0		31		5
Priced via internal modeling (2)	0		0		0		0
Total nonredeemable preferred stock	564		188		371		5
Common stock:
Priced via pricing services	2,296		2,296		0		0
Priced via market comparables/non-binding broker quote (1)	0		0		0		0
Priced via internal modeling (2)	12		0		0		12
Total common stock	2,308		2,296		0		12
Total available-for-sale and trading securities – Exchange	$	10,164	$	2,510	$	7,587	$	67
Total available-for-sale and trading securities – Erie Insurance Group	$	10,764	$	2,547	$	8,146	$	71

(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 0.6% 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 year ended December 31, 2011.