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Investments

12 Months Ended

Dec. 31, 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 December 31, 2011 and 2010:

	Erie Insurance Group
	December 31, 2011
(in millions)	Amortized		Gross unrealized		Gross unrealized		Estimated
	cost		gains		losses		fair value
Indemnity
Available-for-sale securities:
States & political subdivisions	$	208	$	13	$	0	$	221
Corporate debt securities	303		1		1		303
Commercial mortgage-backed securities (CMBS)	13		0		0		13
Collateralized debt obligations (CDO)	4		0		0		4
Other debt securities	7		0		0		7
Total fixed maturities	535		14		1		548
Nonredeemable preferred stock	24		1		0		25
Total available-for-sale securities – Indemnity	$	559	$	15	$	1	$	573
Exchange
Available-for-sale securities:
U.S. government & agencies	$	16	$	1	$	0	$	17
States & political subdivisions	1,289		91		1		1,379
Foreign government securities	15		0		0		15
Corporate debt securities	5,144		386		31		5,499
Residential mortgage-backed securities (RMBS)	178		11		0		189
Commercial mortgage-backed securities (CMBS)	62		4		0		66
Collateralized debt obligations (CDO)	66		4		5		65
Other debt securities	59		3		0		62
Total fixed maturities	6,829		500		37		7,292
Nonredeemable preferred stock	531		45		12		564
Total available-for-sale securities – Exchange	$	7,360	$	545	$	49	$	7,856
Total available-for-sale securities – Erie Insurance Group	$	7,919	$	560	$	50	$	8,429

	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
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
Other debt securities	54		3		0		57
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 December 31, 2011, 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
(in millions)	Amortized	Estimated
	cost	fair value
Indemnity
Due in one year or less	$ 152	$ 152
Due after one year through five years	253	256
Due after five years through ten years	47	52
Due after ten years	83	88
Total fixed maturities – Indemnity	$ 535	$ 548
Exchange
Due in one year or less	$ 506	$ 513
Due after one year through five years	2,397	2,519
Due after five years through ten years	2,669	2,898
Due after ten years	1,257	1,362
Total fixed maturities – Exchange	$6,829	$7,292
Total fixed maturities – Erie Insurance Group	$7,364	$7,840

Available-for-sale securities in a gross unrealized loss position at December 31, 2011 are as follows. Data is provided by length of time for securities in a gross unrealized loss position.

	Erie Insurance Group
	December 31, 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:
Corporate debt securities	$220	$ 1	$ 0	$ 0	$220	$ 1	41
Commercial mortgage-backed securities (CMBS)	4	0	9	0	13	0	3
Other debt securities	5	0	2	0	7	0	2
Total fixed maturities – Indemnity	229	1	11	0	240	1	46
Nonredeemable preferred stock	4	0	3	0	7	0	3
Total available-for-sale securities – Indemnity	$233	$ 1	$ 14	$ 0	$247	$ 1	49

Quality breakdown of fixed maturities:
Investment grade	$229	$ 1	$ 11	$ 0	$240	$ 1	46
Non-investment grade	0	0	0	0	0	0	0
Total fixed maturities – Indemnity	$229	$ 1	$ 11	$ 0	$240	$ 1	46

Exchange
Available-for-sale securities:
States & political subdivisions	$ 7	$ 0	$ 6	$ 1	$ 13	$ 1	3
Corporate debt securities	635	27	50	4	685	31	108
Residential mortgage-backed securities (RMBS)	7	0	0	0	7	0	4
Commercial mortgage-backed securities (CMBS)	5	0	0	0	5	0	1
Collateralized debt obligations (CDO)	0	0	32	5	32	5	6
Other debt securities	9	0	0	0	9	0	2
Total fixed maturities – Exchange	663	27	88	10	751	37	124
Nonredeemable preferred stock	168	11	34	1	202	12	27
Total available-for-sale securities – Exchange	$831	$38	$122	$11	$953	$49	151

Quality breakdown of fixed maturities:
Investment grade	$625	$26	$ 79	$ 9	$704	$35	109
Non-investment grade	38	1	9	1	47	2	15
Total fixed maturities – Exchange	$663	$27	$ 88	$10	$751	$37	124

Available-for-sale securities in a gross unrealized loss position at December 31, 2010 are as follows. Data is provided by length of time for securities 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

Exchange
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

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 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.

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

	Erie Insurance Group
(in millions)	Years ended December 31,
	2011	2010	2009
Indemnity
Fixed maturities	$ 14	$ 33	$ 36
Equity securities	2	4	5
Cash equivalents and other	1	1	1
Total investment income	17	38	42
Less: investment expenses	1	1	0
Investment income, net of expenses – Indemnity	$ 16	$ 37	$ 42
Exchange
Fixed maturities	$364	$350	$343
Equity securities	86	72	68
Cash equivalents and other	0	2	4
Total investment income	450	424	415
Less: investment expenses	33	28	24
Investment income, net of expenses – Exchange	$417	$396	$391
Investment income, net of expenses – Erie Insurance Group	$433	$433	$433

Interest and dividend income are recognized as earned and recorded to net investment income.

Indemnity net investment income decreased by $21 million in 2011 compared to 2010. The Exchange’s net investment income increased by $21 million in 2011 compared to 2010. These changes were primarily caused by the sale of the EIC, ENY and EPC from Indemnity to the Exchange on December 31, 2010.

In 2010, Indemnity sold its interest in nine limited partnerships and the Exchange sold its interest in eleven limited partnerships, which generated net realized losses. There were no sales of limited partnerships in 2011 or 2009.

Realized gains (losses) on investments were as follows:

(in millions)	Erie Insurance Group
	Years ended December 31,
Indemnity	2011		2010		2009
Available-for-sale securities:
Fixed maturities:
Gross realized gains	$	2	$	6	$	5
Gross realized losses	0		(1)		(4)
Net realized gains	2		5		1
Equity securities:
Gross realized gains	3		1		8
Gross realized losses	0		0		(7)
Net realized gains	3		1		1
Trading securities:
Common stock:
Gross realized gains	2		6		2
Gross realized losses	(1)		(1)		(5)
Valuation adjustments	(3)		0		11
Net realized (losses) gains	(2)		5		8
Limited partnerships:
Gross realized gains	0		0		0
Gross realized losses	0		(12)		0
Net realized gains (losses)	0		(12)		0
Net realized investment gains (losses) – Indemnity	$	3	$	(1)	$	10
Exchange
Available-for-sale securities:
Fixed maturities:
Gross realized gains	$	77	$	49	$	22
Gross realized losses	(29)		(24)		(37)
Net realized gains (losses)	48		25		(15)
Equity securities:
Gross realized gains	28		14		39
Gross realized losses	(1)		(3)		(26)
Net realized gains	27		11		13
Trading securities:
Common stock:
Gross realized gains	271		205		143
Gross realized losses	(106)		(135)		(203)
Valuation adjustments	(247)		254		464
Net realized (losses) gains	(82)		324		404
Limited partnerships:
Gross realized gains	0		0		0
Gross realized losses	0		(46)		0
Net realized losses	0		(46)		0
Net realized investment (losses) gains – Exchange	$	(7)	$	314	$	402
Net realized investment (losses) gains – Erie Insurance Group	$	(4)	$	313	$	412

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

(in millions)	Erie Insurance Group
	Years ended December 31
	2011	2010	2009
Indemnity
Fixed maturities	$ 0	$(1)	$ (7)
Equity securities	0	0	(5)
Total other-than-temporary impairments	0	(1)	(12)
Portion recognized in other comprehensive income	0	0	0
Net impairment losses recognized in earnings – Indemnity	$ 0	$(1)	$ (12)

Exchange
Fixed maturities	$ 0	$(4)	$ (54)
Equity securities	(2)	(1)	(60)
Total other-than-temporary impairments	(2)	(5)	(114)
Portion recognized in other comprehensive income	0	0	0
Net impairment losses recognized in earnings – Exchange	$(2)	$(5)	$(114)
Net impairment losses recognized in earnings – Erie Insurance Group	$(2)	$(6)	$(126)

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. Prior to the second quarter of 2009, when new impairment guidance was issued for debt securities, the impairment policy for fixed maturities was consistent with that of equity securities. See also Note 2, “Significant Accounting Policies.”

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 December 31, 2011 are comprised of partnership financial results for the fourth quarter of 2010 and the first, second, and third quarters of 2011. Given the lag in reporting, our limited partnership results do not reflect the market conditions of the fourth 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 years ended December 31, 2011 and 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 upon 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 December 31, 2011 include partnership financial results for the fourth quarter of 2010 and the first three quarters of 2011.

	Erie Insurance Group
	As of and for the year ended December 31, 2011
(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%	26	$ 73	$ 2	$ 5
Greater than or equal to 10% but less than 50%	3	9	0	3
Greater than 50%	0	0	0	0
Total private equity	29	82	2	8
Mezzanine debt:
Less than 10%	11	22	0	6
Greater than or equal to 10% but less than 50%	3	12	1	1
Greater than 50%	1	1	(1)	0
Total mezzanine debt	15	35	0	7
Real estate:
Less than 10%	12	62	5	(1	)
Greater than or equal to 10% but less than 50%	3	18	1	0
Greater than 50%	3	11	3	1
Total real estate	18	91	9	0
Total limited partnerships – Indemnity	62	$ 208	$11	$15
Exchange
Private equity:
Less than 10%	41	$ 452	$13	$30
Greater than or equal to 10% but less than 50%	3	43	(1)	12
Greater than 50%	0	0	0	0
Total private equity	44	495	12	42
Mezzanine debt:
Less than 10%	17	133	(9)	26
Greater than or equal to 10% but less than 50%	3	33	3	3
Greater than 50%	3	35	(2)	3
Total mezzanine debt	23	201	(8)	32
Real estate:
Less than 10%	25	284	31	(1	)
Greater than or equal to 10% but less than 50%	5	59	3	0
Greater than 50%	3	43	2	10
Total real estate	33	386	36	9
Total limited partnerships – Exchange	100	$1,082	$40	$83
Total limited partnerships – Erie Insurance Group		$1,290	$51	$98

Per the limited partner financial statements, total partnership assets were $54 billion and total partnership liabilities were $6 billion at December 31, 2011 (as recorded in the September 30, 2011 limited partnership financial statements). For the twelve month period comparable to that presented in the preceding table (fourth quarter of 2010 and first three quarters of 2011), total partnership valuation adjustment gains were $2 billion and total partnership net income was $3 billion.

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

	Erie Insurance Group
	As of and for the year ended December 31, 2010
(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%	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 20, “Commitments and Contingencies,” for investment commitments related to limited partnerships.

Securities lending program

We previously participated in a program whereby marketable securities from our investment portfolio were lent to independent brokers or dealers based upon, among other things, their creditworthiness, in exchange for collateral initially equal to 102% of the value of the securities on loan and are thereafter maintained at a minimum of 100% of the fair value of the securities loaned. The program was terminated in 2009.