Segment Information

6 Months Ended

Jun. 30, 2012

Segment Information

Segment Information

Note 5. Segment Information

Our reportable segments include management operations, property and casualty insurance operations, life insurance operations and investment operations.  Accounting policies for segments are the same as those described in the summary of significant accounting policies.  See Item 8. “Financial Statements and Supplementary Data, Note 2. Significant Accounting Policies,” in our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on February 27, 2012.  Assets are not allocated to the segments but rather are reviewed in total for purposes of decision-making.  No single customer or agent provides 10% or more of revenues.

Management operations

Our management operations segment consists of Indemnity serving as attorney-in-fact for the Exchange.  Indemnity operates in this capacity solely for the Exchange.  We evaluate profitability of our management operations segment principally on the gross margin from management operations.  Indemnity earns a management fee from the Exchange for providing sales, underwriting and policy issuance services.  Management fee revenue, which is eliminated in consolidation, is calculated as a percentage not to exceed 25% of all the direct premiums written by the Exchange and the other members of the Property and Casualty Group, which are assumed by the Exchange under an intercompany pooling arrangement.  The Property and Casualty Group issues policies with annual terms only.  Management fees are recorded upon policy issuance or renewal, as substantially all of the services required to be performed by Indemnity have been satisfied at that time.  Certain activities are performed and related costs are incurred by us subsequent to policy issuance in connection with the services provided to the Exchange; however, these activities are inconsequential and perfunctory.  Although these management fee revenues and expenses are eliminated upon consolidation, the amount of the fee directly impacts the allocation of our consolidated net income between the noncontrolling interest, which bears the management fee expense and represents the interests of the Exchange subscribers (policyholders), and Indemnity’s interest, which earns the management fee revenue and represents the Indemnity shareholder interest in net income.

Additionally, the second quarter and six months ended June 30, 2012 included an adjustment that reduced commission expense by $6 million.  This amount represents the reimbursement by the North Carolina Reinsurance Facility (NCRF) for commissions Indemnity paid to agents on the surcharges collected on behalf of the NCRF in prior periods.  This amount was incorrectly recorded as a benefit to the Exchange in prior periods.  If these amounts had been correctly recorded, Indemnity’s commission expense would have been lower by $0.5 million and $0.7 million, for the years ended December 31, 2011 and 2010, respectively.

Property and casualty insurance operations

Our property and casualty insurance operations segment includes personal and commercial lines.  Personal lines consist primarily of personal auto and homeowners and are marketed to individuals.  Commercial lines consist primarily of commercial multi-peril, commercial auto and workers compensation and are marketed to small- and medium-sized businesses.  Our property and casualty policies are sold by independent agents.  Our property and casualty insurance underwriting operations are conducted through the Exchange and its subsidiaries and include assumed voluntary reinsurance from nonaffiliated domestic and foreign sources, assumed involuntary and ceded reinsurance business.  The Exchange exited the assumed voluntary reinsurance business effective December 31, 2003, and therefore unaffiliated reinsurance includes only run-off activity of the previously assumed voluntary reinsurance business.  We evaluate profitability of the property and casualty insurance operations principally based upon net underwriting results represented by the combined ratio.

Life insurance operations

Our life insurance operations segment includes traditional and universal life insurance products and fixed annuities marketed to individuals using the same independent agency force utilized by our property and casualty insurance operations.  We evaluate profitability of the life insurance segment principally based upon segment net income, including investments, which for segment purposes are reflected in the investment operations segment.  At the same time, we recognize that investment-related income is integral to the evaluation of the life insurance segment because of the long duration of life products.  For the second quarters of 2012 and 2011, investment activities on life insurance related assets generated revenues of $28 million and $27 million, respectively, resulting in EFL reporting income before income taxes of $13 million and $12 million, respectively, before intercompany eliminations.  For the six months ended June 30, 2012 and 2011, investment activities on life insurance related assets generated revenues of $52 million and $54 million, respectively, resulting in EFL reporting income before taxes of $22 million and $25 million, respectively, before intercompany eliminations.

Investment operations

The investment operations segment performance is evaluated based upon appreciation of assets, rate of return and overall return.  Investment related income for the life operations is included in the investment segment results.

The following tables summarize the components of the Consolidated Statements of Operations by reportable business segment:

	Erie Insurance Group
(in millions)	For the three months ended June 30, 2012
	Management operations	Property and casualty insurance operations		Life insurance operations		Investment operations		Eliminations		Consolidated
Premiums earned/life policy revenue		$1,092		$ 18				$    (1	)	$1,109
Net investment income						$ 115		(2	)	113
Net realized investment losses						(107	)			(107	)
Net impairment losses recognized in earnings						0				0
Equity in earnings of limited partnerships						37				37
Management fee revenue	$308							(308	)	–
Service agreement and other revenue	8			0						8
Total revenues	316	1,092		18		45		(311	)	1,160
Cost of management operations	257							(257	)	–
Insurance losses and loss expenses		919		25				(1	)	943
Policy acquisition and underwriting expenses		332		8				(53	)	287
Total benefits and expenses	257	1,251		33		–		(311	)	1,230
Income (loss) before income taxes	59	(159	)	(15	)	45		–		(70	)
Provision for income taxes	21	(55	)	(6	)	8		–		(32	)
Net income (loss)	$  38	$  (104	)	$  (9	)	$   37		$     –		$    (38	)
	Erie Insurance Group
(in millions)	For the three months ended June 30, 2011
	Management operations	Property and casualty insurance operations		Life insurance operations		Investment operations		Eliminations		Consolidated
Premiums earned/life policy revenue		$1,030		$ 18				$   (1	)	$1,047
Net investment income						$115		(2	)	113
Net realized investment gains						39				39
Net impairment losses recognized in earnings						0				0
Equity in earnings of limited partnerships						38				38
Management fee revenue	$285							(285	)	–
Service agreement and other revenue	9			(1	)					8
Total revenues	294	1,030		17		192		(288	)	1,245
Cost of management operations	230							(230	)	–
Insurance losses and loss expenses		1,147		25				(2	)	1,170
Policy acquisition and underwriting expense		298		7				(56	)	249
Total benefits and expenses	230	1,445		32		–		(288	)	1,419
Income (loss) before income taxes	64	(415	)	(15	)	192		–		(174	)
Provision for income taxes	22	(145	)	(5	)	61		–		(67	)
Net income (loss)	$  42	$  (270	)	$(10	)	$131		$    –		$ (107	)

	Erie Insurance Group
(in millions)	For the six months ended June 30, 2012
	Management operations	Property and casualty insurance operations		Life insurance operations		Investment operations	Eliminations		Consolidated
Premiums earned/life policy revenue		$2,161		$ 36			$     (1	)	$2,196
Net investment income						$226	(5	)	221
Net realized investment gains						189			189
Net impairment losses recognized in earnings						0			0
Equity in earnings of limited partnerships						58			58
Management fee revenue	$577						(577	)	–
Service agreement and other revenue	15			1					16
Total revenues	592	2,161		37		473	(583	)	2,680
Cost of management operations	487						(487	)	–
Insurance losses and loss expenses		1,611		50			(2	)	1,659
Policy acquisition and underwriting expenses		634		17			(94	)	557
Total benefits and expenses	487	2,245		67		–	(583	)	2,216
Income (loss) before income taxes	105	(84	)	(30	)	473	–		464
Provision for income taxes	37	(29	)	(11	)	151	–		148
Net income (loss)	$  68	$    (55	)	$(19	)	$322	$     –		$   316

	Erie Insurance Group
(in millions)	For the six months ended June 30, 2011
	Management operations	Property and casualty insurance operations		Life insurance operations		Investment operations	Eliminations		Consolidated
Premiums earned/life policy revenue		$2,044		$ 34			$    (1	)	$2,077
Net investment income						$223	(5	)	218
Net realized investment gains						188			188
Net impairment losses recognized in earnings						0			0
Equity in earnings of limited partnerships						110			110
Management fee revenue	$536						(536	)	–
Service agreement and other revenue	17			0					17
Total revenues	553	2,044		34		521	(542	)	2,610
Cost of management operations	441						(441	)	–
Insurance losses and loss expenses		1,830		49			(3	)	1,876
Policy acquisition and underwriting expenses		580		14			(98	)	496
Total benefits and expenses	441	2,410		63		–	(542	)	2,372
Income (loss) before income taxes	112	(366	)	(29	)	521	–		238
Provision for income taxes	39	(128	)	(10	)	170	–		71
Net income (loss)	$  73	$  (238	)	$(19	)	$351	$     –		$   167

See the “Results of the Erie Insurance Group’s Operations by Interest” table in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the composition of income attributable to the Indemnity shareholder interest and income attributable to the noncontrolling interest (Exchange).