Fair Value

3 Months Ended

Mar. 31, 2012

Fair Value

Fair Value

Note 6. Fair Value

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 (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

·Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

·Level 3 – Unobservable inputs for the asset or liability.

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 upon proprietary models and are used when observable inputs are not available or 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 upon corroborating information and our knowledge and monitoring of market conditions such as a disparity in price of comparable securities and/or non-binding broker quotes.  In other circumstances, certain securities are internally priced because prices are not provided by the pricing service.

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 classification level 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 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 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 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 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 March 31, 2012:

	Erie Insurance Group
	March 31, 2012
	Fair value measurements using:
(in millions)	Total	Quoted prices in active markets for identical assets Level 1	Observable inputs Level 2	Unobservable inputs Level 3
Indemnity
Available-for-sale securities:
States & political subdivisions	$     217	$       0	$   217	$  0
Corporate debt securities	258	0	257	1
Commercial mortgage-backed securities (CMBS)	10	0	10	0
Collateralized debt obligations (CDO)	4	0	0	4
Other debt securities	5	0	5	0
Total fixed maturities	494	0	489	5
Nonredeemable preferred stock	26	11	15	0
Total available-for-sale securities	520	11	504	5
Trading securities:
Common stock	29	29	0	0
Total trading securities	29	29	0	0
Total – Indemnity	$     549	$     40	$   504	$  5
Exchange
Available-for-sale securities:
U.S. government & agencies	$       20	$       6	$     14	$  0
States & political subdivisions	1,361	0	1,356	5
Foreign government securities	15	0	15	0
Corporate debt securities	5,711	20	5,665	26
Residential mortgage-backed securities (RMBS)	179	0	179	0
Commercial mortgage-backed securities (CMBS)	71	0	71	0
Collateralized debt obligations (CDO)	65	0	38	27
Other debt securities	61	0	56	5
Total fixed maturities	7,483	26	7,394	63
Nonredeemable preferred stock	621	226	389	6
Total available-for-sale securities	8,104	252	7,783	69
Trading securities:
Common stock	2,596	2,582	0	14
Total trading securities	2,596	2,582	0	14
Total – Exchange	$10,700	$2,834	$7,783	$83
Total – Erie Insurance Group	$11,249	$2,874	$8,287	$88

Level 3 Assets – Quarterly Change:

	Erie Insurance Group
(in millions)	Beginning balance at December 31, 2011	Included in earnings (1)	Included in other comprehensive income	Purchases	Sales		Transfers in and (out) of Level 3 (2)	Ending balance at March 31, 2012
Indemnity
Available-for-sale securities:
Corporate debt securities	$  0	$0	$0	$0	$ 0		$  1	$  1
Collateralized debt obligations (CDO)	4	0	0	0	0		0	4
Total fixed maturities	4	0	0	0	0		1	5
Total available-for-sale securities	4	0	0	0	0		1	5
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		$  1	$  5
Exchange
Available-for-sale securities:
States & political subdivisions	$  4	$0	$1	$0	$ 0		$  0	$  5
Corporate debt securities	12	0	0	0	0		14	26
Collateralized debt obligations (CDO)	29	0	0	0	(4	)	2	27
Other debt securities	5	0	0	0	0		0	5
Total fixed maturities	50	0	1	0	(4	)	16	63
Nonredeemable preferred stock	5	0	1	0	0		0	6
Total available-for-sale securities	55	0	2	0	(4	)	16	69
Trading securities:
Common stock	12	2	0	0	0		0	14
Total trading securities	12	2	0	0	0		0	14
Total Level 3 assets – Exchange	$67	$2	$2	$0	$(4	)	$16	$83
Total Level 3 assets – Erie Insurance Group	$71	$2	$2	$0	$(4	)	$17	$88

(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 $2 million in unrealized gains included in earnings for the three months ended March 31, 2012 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 for the three months ended March 31, 2012.

Transfers into Level 3 are primarily the result of using non-binding broker quotes to determine fair value at March 31, 2012.

Quantitative and Qualitative Disclosures about Unobservable Inputs

	Erie Insurance Group
	March 31, 2012
(dollars in millions)	Fair value	No. of holdings	Valuation techniques	Unobservable input	Range	weighted average
Indemnity
Corporate debt securities	$  1	1	Consensus pricing	Non-binding broker quote	115.86
Collateralized debt obligations (CDO)	4	2	Present value	Projected maturity date	Jun 2014 – Feb 2015
				Repayment at maturity	45-100%	90.6%
				Discount rate	7.5-15.0%	10.8%
				Projected LIBOR rate	0.48%
Total – Indemnity	$  5	3
Exchange
States & political subdivisions	5	1	Comparable pricing	Comparable security yield	0.48%
				Added yield due to lack of marketability	1.00%
Corporate debt securities	15	3	Consensus pricing	Non-binding broker quote	102.00 – 117.00
	1	2	Held at cost	Private securities with no observable market	100.00
	10	2	Comparable pricing	Comparable private transaction EBITDA multiples	7.5 – 17.1x	7.5x
				Average comparable publicly traded EBITDA multiple	7.8x	7.5x
Collateralized debt obligations (CDO)	24	6	Present value	Projected maturity date	Dec 2012 – Dec 2035
				Repayment at maturity	45-100%	94.4%
				Discount rate	7.0-15%	9.2%
				Projected LIBOR rate	0.48%
	3	4	Consensus pricing	Non-binding broker quote	3.00 – 85.00	64.70
Other debt securities	5	1	Held at cost	Private securities with no observable market	100.00
Nonredeemable preferred stock	6	1	Comparable pricing	Comparable security yield	7.68%
Common stock	14	3	Comparable pricing	Comparable private transaction EBITDA multiples	7.5 – 17.1x	7.5x
				Average comparable publicly traded EBITDA multiple	7.8x	7.5x
				Discount for lack of marketability	5 – 30%	30%
Total – Exchange	$83	23
Total – Erie Insurance Group	$88

Securities valued using unobservable inputs totaled $88 million at March 31, 2012.  These securities represent less than 0.8% of the total portfolio of the Erie Insurance Group.

Collateralized-debt-obligation securities– The unobservable inputs used in the fair value measurement of certain collateralized-debt-obligation securities are the repayment at maturity of underlying collateral available to pay note holders, the projected maturity of the underlying security, an expectation that the London Inter-Bank Offer Rates (“LIBOR”) do not change until maturity and a discount rate appropriate for the security. Significant changes in any of those inputs in isolation would result in a significantly higher or lower fair value measurement. Generally, a change in the assumption used for the performance of the underlying collateral is accompanied by an opposite change in the maturity and a directionally opposite change in the discount rate used to value the security.  LIBOR assumptions are independent of collateral performance.

States and political subdivisions and Nonredeemable preferred stock– The unobservable inputs used in the fair value measurement of certain states and political subdivisions and nonredeemable preferred stock are the yields on comparable securities used to provide a basis of valuation and the amount of discount applied to the price due to the illiquidity of the securities being valued. Significant changes in any of those inputs in isolation would result in a significantly higher or lower fair value measurement. Generally, a change in the yield used for the comparable security or a change in the discount for illiquidity would result in a directionally similar change in the yield used to calculate the fair value of the securities being valued.

Corporate debt securities and Other debt securities–The unobservable input used in the fair value measurement of certain corporate debt securities and other debt securities is the likelihood of repayment by the underlying entity when there is no market for trading these securities.  When available, we obtain non-binding broker quotes to value such securities.  In other cases, the securities may be held at cost provided no adverse changes have occurred in the financial condition of the underlying entity.

Common stock investments and Corporate debt securities–The unobservable inputs used in the fair value measurement of direct private equity common stock investments and certain corporate debt securities are comparable private transaction earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples, the average EBITDA multiple for comparable publicly traded companies and the amount of discount applied to the price due to the illiquidity of the securities being valued.  Significant changes in any of those inputs in isolation could result in a significantly higher or lower fair value measurement.

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	Observable inputs Level 2	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 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 March 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	0	0		0	11
Collateralized debt obligations (CDO)	30	0	0	0	0		0	30
Other debt securities	10	0	0	0	(5	)	0	5
Total fixed maturities	55	0	0	0	(5	)	0	50
Nonredeemable preferred stock	7	0	1	0	0		0	8
Total available-for-sale securities	62	0	1	0	(5	)	0	58
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	$1	$0	$(5	)	$0	$71
Total Level 3 assets – Erie Insurance Group	$78	$1	$1	$0	$(5	)	$0	$75

(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 three months ended March 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 for the three months ended March 31, 2011.

The following table sets forth the fair value measurements on a recurring basis for our consolidated available-for-sale and trading securities by pricing source at March 31, 2012:

	Erie Insurance Group
(in millions)	March 31, 2012
		Total	Level 1	Level 2	Level 3
Indemnity
Fixed maturities:
Priced via pricing services		$     489	$       0	$   489	$  0
Priced via market comparables/non-binding broker quotes (1)		1	0	0	1
Priced via unobservable inputs		4	0	0	4
Total fixed maturities		494	0	489	5
Nonredeemable preferred stock:
Priced via pricing services		24	11	13	0
Priced via market comparables/non-binding broker quotes(1)		2	0	2	0
Priced via unobservable inputs		0	0	0	0
Total nonredeemable preferred stock		26	11	15	0
Common stock:
Priced via pricing services		29	29	0	0
Priced via market comparables/non-binding broker quotes (1)		0	0	0	0
Priced unobservable inputs		0	0	0	0
Total common stock		29	29	0	0
Total available-for-sale and trading securities – Indemnity		$     549	$     40	$   504	$  5
Exchange
Fixed maturities:
Priced via pricing services		$  7,324	$     26	$7,298	$  0
Priced via market comparables/non-binding broker quotes (1)		114	0	96	18
Priced via unobservable inputs		45	0	0	45
Total fixed maturities		7,483	26	7,394	63
Nonredeemable preferred stock:
Priced via pricing services		600	226	374	0
Priced via market comparables/non-binding broker quotes(1)		15	0	15	0
Priced via unobservable inputs		6	0	0	6
Total nonredeemable preferred stock		621	226	389	6
Common stock:
Priced via pricing services		2,582	2,582	0	0
Priced via market comparables/non-binding broker quotes(1)		0	0	0	0
Priced via unobservable inputs		14	0	0	14
Total common stock		2,596	2,582	0	14
Total available-for-sale and trading securities – Exchange		$10,700	$2,834	$7,783	$83
Total available-for-sale and trading securities – Erie Insurance Group		$11,249	$2,874	$8,287	$88

(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.

We have no assets that were measured at fair value on a nonrecurring basis during the three months ended March 31, 2012.