Segment Information

9 Months Ended

Sep. 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 nine months ended September 30, 2012 include an adjustment that reduced commission expense by $6 million which occurred in the second quarter of 2012.  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 third quarters of 2012 and 2011, investment activities on life insurance related assets generated revenues of $25 million and $29 million, respectively, resulting in EFL reporting income before income taxes of $12 million and $13 million, respectively, before intercompany eliminations.  For the nine months ended September 30, 2012 and 2011, investment activities on life insurance related assets generated revenues of $77 million and $83 million, respectively, resulting in EFL reporting income before taxes of $34 million and $38 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 September 30, 2012
	Management operations	Property and casualty insurance operations		Life insurance operations		Investment operations	Eliminations		Consolidated
Premiums earned/life policy revenue		$1,118		$19					$1,137
Net investment income						$108	$   (3	)	105
Net realized investment gains						169			169
Net impairment losses recognized in earnings						0			0
Equity in earnings of limited partnerships						41			41
Management fee revenue	$305						(305	)	–
Service agreement and other revenue	8			0					8
Total revenues	313	1,118		19		318	(308	)	1,460
Cost of management operations	247						(247	)	–
Insurance losses and loss expenses		890		24			(2	)	912
Policy acquisition and underwriting expenses		329		8			(59	)	278
Total benefits and expenses	247	1,219		32		–	(308	)	1,190
Income (loss) before income taxes	66	(101	)	(13	)	318	–		270
Provision for income taxes	23	(36	)	(4	)	103	–		86
Net income (loss)	$  43	$     (65	)	$ (9	)	$215	$     –		$   184

	Erie Insurance Group
(in millions)	For the three months ended September 30, 2011
	Management operations	Property and casualty insurance operations		Life insurance operations		Investment operations		Eliminations		Consolidated
Premiums earned/life policy revenue		$1,045		$  16						$1,061
Net investment income						$  111		$   (3	)	108
Net realized investment losses						(422	)			(422	)
Net impairment losses recognized in earnings						0				0
Equity in earnings of limited partnerships						40				40
Management fee revenue	$280							(280	)	–
Service agreement and other revenue	8			1						9
Total revenues (losses)	288	1,045		17		(271	)	(283	)	796
Cost of management operations	226							(226	)	–
Insurance losses and loss expenses		823		26				(1	)	848
Policy acquisition and underwriting expense		302		7				(56	)	253
Total benefits and expenses	226	1,125		33		–		(283	)	1,101
Income (loss) before income taxes	62	(80	)	(16	)	(271	)	–		(305	)
Provision for income taxes	22	(28	)	(6	)	(113	)	–		(125	)
Net income (loss)	$  40	$    (52	)	$(10	)	$(158	)	$    –		$ (180	)

	Erie Insurance Group
(in millions)	For the nine months ended September 30, 2012
	Management operations	Property and casualty insurance operations		Life insurance operations		Investment operations	Eliminations		Consolidated
Premiums earned/life policy revenue		$3,279		$ 55			$   (1	)	$3,333
Net investment income						$334	(8	)	326
Net realized investment gains						358			358
Net impairment losses recognized in earnings						0			0
Equity in earnings of limited partnerships						99			99
Management fee revenue	$882						(882	)	–
Service agreement and other revenue	23			1					24
Total revenues	905	3,279		56		791	(891	)	4,140
Cost of management operations	734						(734	)	–
Insurance losses and loss expenses		2,501		74			(4	)	2,571
Policy acquisition and underwriting expenses		963		25			(153	)	835
Total benefits and expenses	734	3,464		99		–	(891	)	3,406
Income (loss) before income taxes	171	(185	)	(43	)	791	–		734
Provision for income taxes	60	(65	)	(15	)	254	–		234
Net income (loss)	$111	$ (120	)	$(28	)	$537	$    –		$   500

	Erie Insurance Group
(in millions)	For the nine months ended September 30, 2011
	Management operations	Property and casualty insurance operations		Life insurance operations		Investment operations		Eliminations		Consolidated
Premiums earned/life policy revenue		$3,089		$ 50				$   (1	)	$3,138
Net investment income						$ 334		(8	)	326
Net realized investment losses						(234	)			(234	)
Net impairment losses recognized in earnings						0				0
Equity in earnings of limited partnerships						150				150
Management fee revenue	$816							(816	)	–
Service agreement and other revenue	25			1						26
Total revenues	841	3,089		51		250		(825	)	3,406
Cost of management operations	667							(667	)	–
Insurance losses and loss expenses		2,653		75				(4	)	2,724
Policy acquisition and underwriting expenses		882		21				(154	)	749
Total benefits and expenses	667	3,535		96		–		(825	)	3,473
Income (loss) before income taxes	174	(446	)	(45	)	250		–		(67	)
Provision for income taxes	61	(156	)	(16	)	57		–		(54	)
Net income (loss)	$113	$ (290	)	$(29	)	$ 193		$    –		$   (13	)

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).