Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes

Income Taxes

Note 11.  Income Taxes

The provision for income taxes consists of the following for the years ended December 31:

(in millions)	Erie Insurance Group
	2011		2010		2009
Indemnity
Current income tax expense	$  85		$  37		$56
Deferred income tax expense (benefit)	0		67		(7	)
Total provision for income taxes – Indemnity	85		104		49
Exchange
Current income tax expense (benefit)	110		(43	)	7
Deferred income tax (benefit) expense	(105	)	278		22
Total provision for income taxes – Exchange	5		235		29
Total provision for income taxes – Erie Insurance Group	$  90		$339		$78

The deferred income tax benefit in 2011 was primarily driven by unrealized losses on common stock.  The deferred income tax expense in 2010 was primarily driven by the sale of previously impaired investments and unrealized gains on common stock and limited partnerships.  In addition, the deferred tax liability recorded for Indemnity’s investment in EFL increased by $18 million in 2010 as a result of a change in the tax rate used to calculate the liability.  This deferred tax charge was required due to Indemnity’s decision to sell its 21.6% ownership interest in EFL, rather than receiving its share of EFL’s earnings in the form of future dividends which would have been eligible for an 80% dividends received deduction.

A reconciliation of the provision for income taxes, with amounts determined by applying the statutory federal income tax rates to pre-tax income, is as follows for the years ended December 31:

(in millions)	Erie Insurance Group
	2011		2010		2009
Indemnity
Income tax at statutory rates	$89		$  93		$ 53
Tax-exempt interest	(3	)	(3	)	(3	)
Dividends received deduction	(1	)	(1	)	(1	)
Deferred tax valuation allowance	0		(2	)	0
Erie Family Life (losses) earnings (1)	(1	)	15		0
Other, net	1		2		0
Provision for income taxes – Indemnity	85		104		49
Exchange
Income tax at statutory rates	37		259		130
Tax-exempt interest	(15	)	(16	)	(17	)
Dividends received deduction	(13	)	(11	)	(11	)
Deferred tax valuation allowance	0		(4	)	(71	)
Goodwill impairments	0		8		0
Prior year adjustments	(5	)	0		0
Other, net	1		(1	)	(2	)
Provision for income taxes – Exchange	5		235		29
Provision for income taxes – Erie Insurance Group	$90		$339		$ 78

(1)In 2010 Indemnity’s tax rate on its share of EFL earnings was adjusted from 7% to 35% due to Indemnity’s decision to sell its 21.6% ownership interest in EFL to the Exchange, which closed on March 31, 2011, rather than receiving its share of EFL’s earnings in the form of future dividends, which would have been eligible for an 80% dividends received deduction.

Temporary differences and carry-forwards, which give rise to consolidated deferred tax assets and liabilities, are as follows for the years ended December 31:

(in millions)	Erie Insurance Group
	2011	2010
Indemnity
Deferred tax assets:
Net allowance for service fees and premium cancellations	$  3	$   3
Other employee benefits	9	8
Pension and other postretirement benefits	45	21
Write-downs of impaired securities	1	2
Capital loss carryover	0	7
Other	0	1
Total deferred tax assets	58	42
Deferred tax liabilities:
Unrealized gains on investments	6	7
Equity interest in EFL	0	22
Limited partnerships	10	20
Depreciation	13	7
Prepaid expenses	7	5
Capitalized internally developed software	1	5
Other	2	2
Total deferred tax liabilities	39	68
Net deferred income tax asset (liability) – Indemnity	$19	$(26	)

(in millions)	Erie Insurance Group (continued)
	2011		2010
Exchange
Deferred tax assets:
Loss reserve discount	$    81		$    83
Liability for future life and annuity policy benefits	12		13
Unearned premiums	165		156
Write-downs of impaired securities	29		42
Wash sales	6		8
Capital loss carryover	7		9
Other	14		8
Total deferred tax assets	314		319
Deferred tax liabilities:
Deferred policy acquisition costs	159		153
Unrealized gains on investments	272		356
Limited partnerships	12		49
Net allowance for service fees and premium cancellations	3		3
Other	15		15
Total deferred tax liabilities	461		576
Net deferred tax liability – Exchange	$(147	)	$(257	)
Net deferred tax liability – Erie Insurance Group	$(128	)	$(283	)

Neither the Indemnity nor the Exchange had a valuation allowance recorded at December 31, 2011 or December 31, 2010.

In 2010, Indemnity generated taxable losses of $38 million and the Exchange generated taxable losses of $175 million on the sale of limited partnerships.  These partnerships were sold to recapture tax paid on prior period capital gains that were due to expire.  The unrealized losses on these partnerships were previously recorded as a deferred tax asset.  Indemnity and the Exchange received $13 million and $61 million, respectively, in tax on these transactions in 2011.

We have one uncertain income tax position for which a current liability was recorded.  As a related temporary tax difference was also recognized, there was no impact on our results of operations or financial position.  We recognized interest related to our remaining uncertain tax position in income tax expense.  Accrued estimated interest on our unrecognized tax benefit was $0.3 million and $0.2 million at December 31, 2011 and 2010, respectively.  The IRS has examined tax filings through 2007 and is currently examining our federal income tax returns for 2008 and 2009.  We currently estimate that our unrecognized tax benefits will not change significantly in the next 12 months.

Indemnity is the attorney-in-fact for the subscribers (policyholders) at the Exchange, a reciprocal insurance exchange.  In that capacity, Indemnity provides all services and facilities necessary to conduct the Exchange’s insurance business.  Indemnity and the Exchange together constitute one insurance business.  Indemnity is not subject to state corporation income or franchise taxes in states where the Exchange conducts its business, as a result of the Exchange’s remittance of premium taxes in those states.