Note 7. Investments

The following table summarizes the cost and fair value of our available-for-sale securities at December 31, 2012:



	Erie Insurance Group
	December 31, 2012
(in millions)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Indemnity
Available-for-sale securities:
States & political subdivisions	$	172	$	13	$	0	$	185
Corporate debt securities	259		2		0		261
Commercial mortgage-backed securities (CMBS)	3		0		0		3
Collateralized debt obligations (CDO)	3		0		0		3
Total fixed maturities	437		15		0		452
Nonredeemable preferred stock	28		2		1		29
Common stock	26		0		0		26
Total available-for-sale securities – Indemnity	$	491	$	17	$	1	$	507
Exchange
Available-for-sale securities:
U.S. government & agencies	$	190	$	2	$	1	$	191
States & political subdivisions	1,218		103		0		1,321
Foreign government securities	15		1		0		16
Corporate debt securities	5,211		569		3		5,777
Residential mortgage-backed securities (RMBS)	226		6		1		231
Commercial mortgage-backed securities (CMBS)	62		5		0		67
Collateralized debt obligations (CDO)	43		6		0		49
Other debt securities	51		4		0		55
Total fixed maturities	7,016		696		5		7,707
Nonredeemable preferred stock	555		77		1		631
Common stock	316		0		2		314
Total available-for-sale securities – Exchange	$	7,887	$	773	$	8	$	8,652
Total available-for-sale securities – Erie Insurance Group	$	8,378	$	790	$	9	$	9,159

The following table summarizes the cost and fair value of our available-for-sale securities at December 31, 2011:



	Erie Insurance Group
	December 31, 2011
(in millions)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Indemnity
Available-for-sale securities:
States & political subdivisions	$	208	$	13	$	0	$	221
Corporate debt securities	303		1		1		303
Commercial mortgage-backed securities (CMBS)	13		0		0		13
Collateralized debt obligations (CDO)	4		0		0		4
Other debt securities	7		0		0		7
Total fixed maturities	535		14		1		548
Nonredeemable preferred stock	24		1		0		25
Total available-for-sale securities – Indemnity	$	559	$	15	$	1	$	573
Exchange
Available-for-sale securities:
U.S. government & agencies	$	16	$	1	$	0	$	17
States & political subdivisions	1,289		91		1		1,379
Foreign government securities	15		0		0		15
Corporate debt securities	5,144		386		31		5,499
Residential mortgage-backed securities (RMBS)	178		11		0		189
Commercial mortgage-backed securities (CMBS)	62		4		0		66
Collateralized debt obligations (CDO)	66		4		5		65
Other debt securities	59		3		0		62
Total fixed maturities	6,829		500		37		7,292
Nonredeemable preferred stock	531		45		12		564
Total available-for-sale securities – Exchange	$	7,360	$	545	$	49	$	7,856
Total available-for-sale securities – Erie Insurance Group	$	7,919	$	560	$	50	$	8,429

The amortized cost and estimated fair value of fixed maturities at December 31, 2012, are shown below by remaining contractual term to maturity. Mortgage-backed securities are allocated based upon their stated maturity dates. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	Erie Insurance Group
	December 31, 2012
(in millions)	Amortized		Estimated
	cost		fair value
Indemnity
Due in one year or less	$	116	$	116
Due after one year through five years	222		227
Due after five years through ten years	38		41
Due after ten years	61		68
Total fixed maturities – Indemnity	$	437	$	452
Exchange
Due in one year or less	$	512	$	524
Due after one year through five years	2,302		2,486
Due after five years through ten years	2,816		3,161
Due after ten years	1,386		1,536
Total fixed maturities – Exchange	$	7,016	$	7,707
Total fixed maturities – Erie Insurance Group	$	7,453	$	8,159

Available-for-sale securities in a gross unrealized loss position at December 31, 2012 are as follows. Data is provided by length of time for securities in a gross unrealized loss position.



	Erie Insurance Group
	December 31, 2012
(dollars in millions)	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		No. of
Indemnity	value		losses		value		losses		value		losses		holdings
Available-for-sale securities:
Corporate debt securities	$	59	$	0	$	0	$	0	$	59	$	0	12
Commercial mortgage-backed securities (CMBS)	0		0		3		0		3		0		1
Total fixed maturities – Indemnity	59		0		3		0		62		0		13
Nonredeemable preferred stock	7		0		3		1		10		1		4
Common stock	26		0		0		0		26		0		2
Total available-for-sale securities – Indemnity	$	92	$	0	$	6	$	1	$	98	$	1	19
Quality breakdown of fixed maturities:
Investment grade	$	55	$	0	$	3	$	0	$	58	$	0	12
Non-investment grade	4		0		0		0		4		0		1
Total fixed maturities – Indemnity	$	59	$	0	$	3	$	0	$	62	$	0	13
Exchange
Available-for-sale securities:
U.S. government & agencies	$	80	$	1	$	0	$	0	$	80	$	1	7
States & political subdivisions	23		0		0		0		23		0		11
Corporate debt securities	152		3		9		0		161		3		31
Residential mortgage-backed securities (RMBS)	56		1		0		0		56		1		9
Collateralized debt obligations (CDO)	0		0		21		0		21		0		1
Other debt securities	5		0		0		0		5		0		2
Total fixed maturities – Exchange	316		5		30		0		346		5		61
Nonredeemable preferred stock	64		0		18		1		82		1		13
Common stock	314		2		0		0		314		2		3
Total available-for-sale securities – Exchange	$	694	$	7	$	48	$	1	$	742	$	8	77
Quality breakdown of fixed maturities:
Investment grade	$	296	$	4	$	24	$	0	$	320	$	4	53
Non-investment grade	20		1		6		0		26		1		8
Total fixed maturities – Exchange	$	316	$	5	$	30	$	0	$	346	$	5	61

The above securities for Indemnity and the Exchange have been evaluated and determined to be temporary impairments for which we expect to recover our entire principal plus interest. The primary components of this analysis include a general review of market conditions and financial performance of the issuer along with the extent and duration at which fair value is less than cost. Any debt securities that we intend to sell or will more likely than not be required to sell before recovery are included in other-than-temporary impairments with the impairment charges recognized in earnings.

Available-for-sale securities in a gross unrealized loss position at December 31, 2011 are as follows. Data is provided by length of time for securities in a gross unrealized loss position.



	Erie Insurance Group
	December 31, 2011
(dollars in millions)	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		No. of
Indemnity	value		losses		value		losses		value		losses		holdings
Available-for-sale securities:
Corporate debt securities	$	220	$	1	$	0	$	0	$	220	$	1	41
Commercial mortgage-backed securities (CMBS)	4		0		9		0		13		0		3
Other debt securities	5		0		2		0		7		0		2
Total fixed maturities – Indemnity	229		1		11		0		240		1		46
Nonredeemable preferred stock	4		0		3		0		7		0		3
Total available-for-sale securities – Indemnity	$	233	$	1	$	14	$	0	$	247	$	1	49
Quality breakdown of fixed maturities:
Investment grade	$	229	$	1	$	11	$	0	$	240	$	1	46
Non-investment grade	0		0		0		0		0		0		0
Total fixed maturities – Indemnity	$	229	$	1	$	11	$	0	$	240	$	1	46
Exchange
Available-for-sale securities:
States & political subdivisions	$	7	$	0	$	6	$	1	$	13	$	1	3
Corporate debt securities	635		27		50		4		685		31		108
Residential mortgage-backed securities (RMBS)	7		0		0		0		7		0		4
Commercial mortgage-backed securities (CMBS)	5		0		0		0		5		0		1
Collateralized debt obligations (CDO)	0		0		32		5		32		5		6
Other debt securities	9		0		0		0		9		0		2
Total fixed maturities – Exchange	663		27		88		10		751		37		124
Nonredeemable preferred stock	168		11		34		1		202		12		27
Total available-for-sale securities – Exchange	$	831	$	38	$	122	$	11	$	953	$	49	151
Quality breakdown of fixed maturities:
Investment grade	$	625	$	26	$	79	$	9	$	704	$	35	109
Non-investment grade	38		1		9		1		47		2		15
Total fixed maturities – Exchange	$	663	$	27	$	88	$	10	$	751	$	37	124

Interest and dividend income are recognized as earned and recorded to net investment income. Investment income, net of expenses, was generated from the following portfolios:



	Erie Insurance Group
(in millions)	Years ended December 31,
	2012		2011		2010
Indemnity
Fixed maturities	$	13	$	14	$	33
Equity securities	3		2		4
Cash equivalents and other	1		1		1
Total investment income	17		17		38
Less: investment expenses	1		1		1
Investment income, net of expenses – Indemnity	$	16	$	16	$	37
Exchange
Fixed maturities	$	350	$	364	$	350
Equity securities	102		86		72
Cash equivalents and other	2		0		2
Total investment income	454		450		424
Less: investment expenses	32		33		28
Investment income, net of expenses – Exchange	$	422	$	417	$	396
Investment income, net of expenses – Erie Insurance Group	$	438	$	433	$	433

Indemnity’s net investment income decreased by $21 million in 2011, compared to 2010, while the Exchange’s net investment income increased by $21 million during the same period. These changes were primarily caused by the sale of the EIC, ENY and EPC from Indemnity to the Exchange on December 31, 2010.

Realized gains (losses) on investments were as follows:



(in millions)	Erie Insurance Group
	Years ended December 31,
Indemnity	2012			2011			2010
Available-for-sale securities:
Fixed maturities:
Gross realized gains	$	0		$	2		$	6
Gross realized losses	0			0			(1		)
Net realized gains	0			2			5
Equity securities:
Gross realized gains	0			3			1
Gross realized losses	0			0			0
Net realized gains	0			3			1
Trading securities:
Common stock:
Gross realized gains	9			2			6
Gross realized losses	(1		)	(1		)	(1		)
Valuation adjustments	(3		)	(3		)	0
Net realized gains (losses)	5			(2		)	5
Limited partnerships:
Gross realized gains	0			0			0
Gross realized losses	0			0			(12		)
Net realized (losses)	0			0			(12		)
Net realized investment gains (losses) – Indemnity	$	5		$	3		$	(1	)
Exchange
Available-for-sale securities:
Fixed maturities:
Gross realized gains	$	78		$	77		$	49
Gross realized losses	(20		)	(29		)	(24		)
Net realized gains	58			48			25
Equity securities:
Gross realized gains	17			28			14
Gross realized losses	(8		)	(1		)	(3		)
Net realized gains	9			27			11
Trading securities:
Common stock:
Gross realized gains	213			271			205
Gross realized losses	(88		)	(106		)	(135		)
Valuation adjustments	221			(247		)	254
Net realized gains (losses)	346			(82		)	324
Limited partnerships:
Gross realized gains	0			0			0
Gross realized losses	0			0			(46		)
Net realized (losses)	0			0			(46		)
Net realized investment gains (losses) – Exchange	$	413		$	(7	)	$	314
Net realized investment gains (losses) – Erie Insurance Group	$	418		$	(4	)	$	313

In 2010, Indemnity sold its interest in nine limited partnerships and the Exchange sold its interest in eleven limited partnerships, which generated net realized losses. These partnerships were sold to recapture tax paid on previous period capital gains that were due to expire. There were no sales of limited partnerships in 2012 or 2011.

The components of other-than-temporary impairments on investments are included below:



(in millions)	Erie Insurance Group
	Years ended December 31
	2012		2011			2010
Indemnity
Fixed maturities	$	0	$	0		$	(1	)
Equity securities	0		0			0
Total other-than-temporary impairments	0		0			(1		)
Portion recognized in other comprehensive income	0		0			0
Net impairment losses recognized in earnings – Indemnity	$	0	$	0		$	(1	)
Exchange
Fixed maturities	$	0	$	0		$	(4	)
Equity securities	0		(2		)	(1		)
Total other-than-temporary impairments	0		(2		)	(5		)
Portion recognized in other comprehensive income	0		0			0
Net impairment losses recognized in earnings – Exchange	$	0	$	(2	)	$	(5	)
Net impairment losses recognized in earnings – Erie Insurance Group	$	0	$	(2	)	$	(6	)

In considering if fixed maturity securities were credit-impaired, some of the factors considered include: potential for the default of interest and/or principal, level of subordination, collateral of the issue, compliance with financial covenants, credit ratings and industry conditions. We have the intent to sell all credit-impaired fixed maturity securities, therefore the entire amount of the impairment charges were included in earnings and no non-credit impairments were recognized in other comprehensive income. See also Note 2, “Significant Accounting Policies.”

Limited partnerships

Limited partnership investments, excluding certain real estate limited partnerships recorded at fair value, are generally reported on a one-quarter lag, therefore our year-to-date limited partnership results through December 31, 2012 are comprised of partnership financial results for the fourth quarter of 2011 and the first, second and third quarters of 2012. Given the lag in reporting, our limited partnership results do not reflect the market conditions of the fourth quarter of 2012. Cash contributions made to and distributions received from the partnerships are recorded in the period in which the transaction occurs.

We have provided summarized financial information in the following table for the years ended December 31, 2012 and 2011. Amounts provided in the table are presented using the latest available financial statements received from the partnerships. Limited partnership financial information has been presented based upon the investment percentage in the partnerships for the Erie Insurance Group consistent with how management evaluates the investments.

As these investments are generally reported on a one-quarter lag, our limited partnership results through December 31, 2012 include partnership financial results for the fourth quarter of 2011 and the first three quarters of 2012.



	Erie Insurance Group
	As of and for the year ended December 31, 2012
(dollars in millions) Investment percentage in limited partnerships	Number of partnerships	Asset recorded		Income (loss) recognized due to valuation adjustments by the partnerships			Income (1oss) recorded
Indemnity
Private equity:
Less than 10%	26	$	60	$	(3	)	$	6
Greater than or equal to 10% but less than 50%	3	13		4			0
Greater than 50%	0	0		0			0
Total private equity	29	73		1			6
Mezzanine debt:
Less than 10%	11	18		(2		)	5
Greater than or equal to 10% but less than 50%	3	9		0			2
Greater than 50%	1	0		1			(1		)
Total mezzanine debt	15	27		(1		)	6
Real estate:
Less than 10%	12	55		4			(3		)
Greater than or equal to 10% but less than 50%	3	16		(1		)	1
Greater than 50%	3	9		2			0
Total real estate	18	80		5			(2		)
Total limited partnerships – Indemnity	62	$	180	$	5		$	10
Exchange
Private equity:
Less than 10%	42	$	424	$	22		$	24
Greater than or equal to 10% but less than 50%	3	58		16			(1		)
Greater than 50%	0	0		0			0
Total private equity	45	482		38			23
Mezzanine debt:
Less than 10%	18	132		(5		)	29
Greater than or equal to 10% but less than 50%	4	27		1			4
Greater than 50%	3	37		(2		)	5
Total mezzanine debt	25	196		(6		)	38
Real estate:
Less than 10%	22	274		(7		)	26
Greater than or equal to 10% but less than 50%	5	52		(4		)	3
Greater than 50%	3	33		6			(1		)
Total real estate	30	359		(5		)	28
Total limited partnerships – Exchange	100	$	1,037	$	27		$	89
Total limited partnerships – Erie Insurance Group		$	1,217	$	32		$	99

Per the limited partnership financial statements, total partnership assets were $53 billion and total partnership liabilities were $6 billion at December 31, 2012 (as recorded in the September 30, 2012 limited partnership financial statements). For the twelve month period comparable to that presented in the preceding table (fourth quarter of 2011 and first three quarters of 2012), total partnership valuation adjustment gains were $2 billion and total partnership net income was $5 billion.

As these investments are generally reported on a one-quarter lag, our limited partnership results through December 31, 2011 include partnership financial results for the fourth quarter of 2010 and the first three quarters of 2011.



	Erie Insurance Group
	As of and for the year ended December 31, 2011
(dollars in millions) Investment percentage in limited partnerships	Number of partnerships	Asset recorded		Income (loss) recognized due to valuation adjustments by the partnerships			Income (1oss) recorded
Indemnity
Private equity:
Less than 10%	26	$	73	$	2		$	5
Greater than or equal to 10% but less than 50%	3	9		0			3
Greater than 50%	0	0		0			0
Total private equity	29	82		2			8
Mezzanine debt:
Less than 10%	11	22		0			6
Greater than or equal to 10% but less than 50%	3	12		1			1
Greater than 50%	1	1		(1		)	0
Total mezzanine debt	15	35		0			7
Real estate:
Less than 10%	12	62		5			(1		)
Greater than or equal to 10% but less than 50%	3	18		1			0
Greater than 50%	3	11		3			1
Total real estate	18	91		9			0
Total limited partnerships – Indemnity	62	$	208	$	11		$	15
Exchange
Private equity:
Less than 10%	41	$	452	$	13		$	30
Greater than or equal to 10% but less than 50%	3	43		(1		)	12
Greater than 50%	0	0		0			0
Total private equity	44	495		12			42
Mezzanine debt:
Less than 10%	17	133		(9		)	26
Greater than or equal to 10% but less than 50%	3	33		3			3
Greater than 50%	3	35		(2		)	3
Total mezzanine debt	23	201		(8		)	32
Real estate:
Less than 10%	25	284		31			(1		)
Greater than or equal to 10% but less than 50%	5	59		3			0
Greater than 50%	3	43		2			10
Total real estate	33	386		36			9
Total limited partnerships – Exchange	100	$	1,082	$	40		$	83
Total limited partnerships – Erie Insurance Group		$	1,290	$	51		$	98

Per the limited partnership financial statements, total partnership assets were $54 billion and total partnership liabilities were $6 billion at December 31, 2011 (as recorded in the September 30, 2011 limited partnership financial statements). For the twelve month period comparable to that presented in the preceding table (fourth quarter of 2010 and first three quarters of 2011), total partnership valuation adjustment gains were $2 billion and total partnership net income was $3 billion.

See also Note 20, “Commitments and Contingencies,” for investment commitments related to limited partnerships.