Fair Value

9 Months Ended

Sep. 30, 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 service.  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 September 30, 2012:

	Erie Insurance Group
	September 30, 2012
	Fair value measurements using:
		Quoted prices in active markets for	Observable	Unobservable
(in millions)	Total	identical assets Level 1	inputs Level 2	inputs Level 3
Indemnity
Available-for-sale securities:
States & political subdivisions	$    195	$      0	$   195	$    0
Corporate debt securities	335	0	334	1
Commercial mortgage-backed securities (CMBS)	6	0	6	0
Collateralized debt obligations (CDO)	3	0	0	3
Other debt securities	8	0	8	0
Total fixed maturities	547	0	543	4
Nonredeemable preferred stock	29	8	21	0
Total available-for-sale securities	576	8	564	4
Trading securities:
Common stock	30	30	0	0
Total trading securities	30	30	0	0
Total available-for-sale and trading securities – Indemnity	$    606	$    38	$   564	$    4
Exchange
Available-for-sale securities:
U.S. government & agencies	$     17	$      5	$     12	$    0
States & political subdivisions	1,348	0	1,344	4
Foreign government securities	16	0	16	0
Corporate debt securities	5,886	6	5,846	34
Residential mortgage-backed securities (RMBS)	174	0	174	0
Commercial mortgage-backed securities (CMBS)	72	0	72	0
Collateralized debt obligations (CDO)	62	0	16	46
Other debt securities	48	0	43	5
Total fixed maturities	7,623	11	7,523	89
Nonredeemable preferred stock	624	263	355	6
Total available-for-sale securities	8,247	274	7,878	95
Trading securities:
Common stock	2,639	2,626	0	13
Total trading securities	2,639	2,626	0	13
Total available-for-sale and trading securities – Exchange	$10,886	$2,900	$7,878	$108
Total available-for-sale and trading securities – Erie Insurance Group	$11,492	$2,938	$8,442	$112

Level 3 Assets – Quarterly Change:

	Erie Insurance Group
(in millions)	Beginning	Included		Included in other				Transfers in and (out)	Ending balance at
	balance at June 30, 2012	in earnings (1)		comprehensive income	Purchases	Sales		of Level 3 (2)	September 30, 2012
Indemnity
Available-for-sale securities:
Corporate debt securities	$  1	$ 0		$0	$0	$ 0		$  0	$    1
Collateralized debt obligations (CDO)	4	0		0	0	(1	)	0	3
Total fixed maturities	5	0		0	0	(1	)	0	4
Total available-for-sale securities	5	0		0	0	(1	)	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	$  5	$ 0		$0	$0	$(1	)	$  0	$   4
Exchange
Available-for-sale securities:
States & political subdivisions	$  4	$ 0		$0	$0	$ 0		$  0	$    4
Corporate debt securities	23	0		1	0	0		10	34
Collateralized debt obligations (CDO)	27	0		0	0	(4	)	23	46
Other debt securities	5	0		0	0	0		0	5
Total fixed maturities	59	0		1	0	(4	)	33	89
Nonredeemable preferred stock	5	0		1	0	0		0	6
Total available-for-sale securities	64	0		2	0	(4	)	33	95
Trading securities:
Common stock	14	(1	)	0	0	0		0	13
Total trading securities	14	(1	)	0	0	0		0	13
Total Level 3 assets – Exchange	$78	$(1	)	$2	$0	$(4	)	$33	$108
Total Level 3 assets – Erie Insurance Group	$83	$(1	)	$2	$0	$(5	)	$33	$112

(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 were no unrealized gains included in earnings for the three months ended September 30, 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.

Level 3 Assets – Year-to-Date Change:

	Erie Insurance Group
(in millions)	Beginning balance at	Included	Included in other				Transfers in and (out)	Ending balance at
	December 31, 2011	in earnings (1)	comprehensive income	Purchases	Sales		of Level 3 (2)	September 30, 2012
Indemnity
Available-for-sale securities:
Corporate debt securities	$  0	$0	$0	$0	$   0		$  1	$   1
Collateralized debt obligations (CDO)	4	0	0	0	(1	)	0	3
Total fixed maturities	4	0	0	0	(1	)	1	4
Total available-for-sale securities	4	0	0	0	(1	)	1	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	$  (1	)	$  1	$   4
Exchange
Available-for-sale securities:
States & political subdivisions	$  4	$0	$0	$0	$   0		$  0	$   4
Corporate debt securities	12	0	1	1	(5	)	25	34
Collateralized debt obligations (CDO)	29	1	3	0	(7	)	20	46
Other debt securities	5	0	0	0	0		0	5
Total fixed maturities	50	1	4	1	(12	)	45	89
Nonredeemable preferred stock	5	0	1	0	0		0	6
Total available-for-sale securities	55	1	5	1	(12	)	45	95
Trading securities:
Common stock	12	2	0	0	(1	)	0	13
Total trading securities	12	2	0	0	(1	)	0	13
Total Level 3 assets – Exchange	$67	$3	$5	$1	$(13	)	$45	$108
Total Level 3 assets – Erie Insurance Group	$71	$3	$5	$1	$(14	)	$46	$112

(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 nine months ended September 30, 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.

We review the fair value hierarchy classifications each reporting period.  Transfers between hierarchy levels may occur due to changes in the available market observable inputs.  Transfers in and out of level classifications are reported as having occurred at the beginning of the quarter in which the transfers occurred.

For the three months ended September 30, 2012, transfers of $44 million from Level 1 to Level 2 and transfers of $36 million from Level 2 to Level 1 occurred.  Trading activity levels for these seven preferred stock securities and one fixed maturity security necessitated reclassification between Level 1 and Level 2.  Similarly, for the nine months ended September 30, 2012, transfers of $59 million from Level 1 to Level 2 and transfers of $54 million from Level 2 to Level 1 occurred.  Trading activity levels for these 12 preferred stock securities necessitated reclassification between Level 1 and Level 2.

Quantitative and Qualitative Disclosures about Unobservable Inputs

	Erie Insurance Group
	September 30, 2012
(dollars in millions)	Fair value	No. of holdings	Valuation techniques	Unobservable input	Range	Weighted average
Indemnity
Corporate debt securities	$     1	1	Market approach	Non-binding broker quote	115.33
Collateralized debt obligations (CDO)	3	2	Income approach	Projected maturity date	Jun 2014 – Aug 2015
				Repayment at maturity	42-100%	88.2%
				Discount rate	7.5-15.0%	10.8%
				Projected LIBOR rate	0.42%
Total Level 3 assets – Indemnity	$    4	3
Exchange
States & political subdivisions	$     4	1	Market approach	Comparable security yield	0.43%
				Added yield due to lack of marketability	1.00%
Corporate debt securities	34	9	Market approach	Non-binding broker quote	107.16 – 120.00	110.66
				Comparable transaction EBITDA multiples	6.7 – 17.1x	7.5x
				Comparable security yield	6.00%
Collateralized debt obligations (CDO)	22	6	Income approach	Projected maturity date	Dec 2012 – Oct 2035
				Repayment at maturity	42-100%	93.7%
				Discount rate	7.0-15%	9.1%
				Projected LIBOR rate	0.42%
	24	3	Market approach	Comparable security yield	0-0.55%
				Added yield due to lack of marketability	1.00-2.80%
				Non-binding broker quote	8.50
Other debt securities	5	1	Income approach	Projected maturity date Repayment at maturity Discount rate	Jan 2029 100% 1.83%
Nonredeemable preferred stock	6	1	Market approach	Comparable security yield	7.21%
Common stock	13	4	Market approach	Comparable transaction EBITDA multiples	6.7 – 17.1x	7.5x
				Discount for lack of marketability	5 – 30%	30%
Total Level 3 assets – Exchange	$108	25
Total Level 3 assets – Erie Insurance Group	$112	28

Securities valued using unobservable inputs totaled $112 million at September 30, 2012.  These securities represent less than 0.9% 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.

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 available-for-sale and trading securities – 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 available-for-sale and trading securities – Exchange		$10,164		$2,510		$7,587		$67
Total available-for-sale and trading securities – Erie Insurance Group		$10,764		$2,547		$8,146		$71

Level 3 Assets – Quarterly Change:

	Erie Insurance Group
(in millions)	Beginning balance at June 30, 2011	Included in earnings (1)	Included in other comprehensive income	Purchases	Sales	Transfers in and (out) of Level 3 (2)	Ending balance at September 30, 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	1	0	0	12
Collateralized debt obligations (CDO)	30	0	(1)	0	0	0	29
Other debt securities	5	0	0	0	0	0	5
Total fixed maturities	50	0	(1)	1	0	0	50
Nonredeemable preferred stock	7	0	(1)	0	0	0	6
Total available-for-sale securities	57	0	(2)	1	0	0	56
Trading securities:
Common stock	13	0	0	0	0	0	13
Total trading securities	13	0	0	0	0	0	13
Total Level 3 assets – Exchange	$70	$0	$(2)	$1	$0	$0	$69
Total Level 3 assets – Erie Insurance Group	$74	$0	$(2)	$1	$0	$0	$73

(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 were no unrealized gains included in earnings for the three months ended September 30, 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.

Level 3 Assets – Year-to-Date 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 September 30, 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	1	0	0		12
Collateralized debt obligations (CDO)		30	1		(1)	0	(1)	0		29
Other debt securities		10	0		0	0	(5)	0		5
Total fixed maturities		55	1		(1)	1	(6)	0		50
Nonredeemable preferred stock		7	0		(1)	0	0	0		6
Total available-for-sale securities		62	1		(2)	1	(6)	0		56
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	$2		$(2)	$1	$(6)	$0		$69
Total Level 3 assets – Erie Insurance Group		$78	$2		$(2)	$1	$(6)	$0		$73

(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 nine months ended September 30, 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 and nine months ended September 30, 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 September 30, 2012:

	Erie Insurance Group
(in millions)	September 30, 2012
	Total		Level 1		Level 2		Level 3
Indemnity
Fixed maturities:
Priced via pricing services		$     543	$	0		$   543		$    0
Priced via market comparables/non-binding broker quotes (1)		1		0		0		1
Priced via unobservable inputs		3		0		0		3
Total fixed maturities		547		0		543		4
Nonredeemable preferred stock:
Priced via pricing services		27		8		19		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		29		8		21		0
Common stock:
Priced via pricing services		30		30		0		0
Priced via market comparables/non-binding broker quotes (1)		0		0		0		0
Priced via unobservable inputs		0		0		0		0
Total common stock		30		30		0		0
Total available-for-sale and trading securities – Indemnity		$     606	$	38		$   564		$    4
Exchange
Fixed maturities:
Priced via pricing services		$  7,497		$11		$7,486		$    0
Priced via market comparables/non-binding broker quotes (1)		92		0		37		55
Priced via unobservable inputs		34		0		0		34
Total fixed maturities		7,623		11		7,523		89
Nonredeemable preferred stock:
Priced via pricing services		585		263		322		0
Priced via market comparables/non-binding broker quotes (1)		39		0		33		6
Priced via unobservable inputs		0		0		0		0
Total nonredeemable preferred stock		624		263		355		6
Common stock:
Priced via pricing services		2,626		2,626		0		0
Priced via market comparables/non-binding broker quotes (1)		13		0		0		13
Priced via unobservable inputs		0		0		0		0
Total common stock		2,639		2,626		0		13
Total available-for-sale and trading securities – Exchange		$10,886	$	2,900		$7,878		$108
Total available-for-sale and trading securities – Erie Insurance Group		$11,492	$	2,938		$8,442		$112

(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.

There were no assets measured at fair value on a nonrecurring basis during the nine months ended September 30, 2012.