Note 23. Indemnity Supplemental Information

Consolidating Statement of Financial Position



	Erie Insurance Group
(in millions)	December 31, 2012
Assets	Indemnity shareholder interest		Exchange noncontrolling interest		Reclassifications and eliminations			Erie Insurance Group
Investments
Available-for-sale securities, at fair value:
Fixed maturities	$	452	$	7,707	$	—		$	8,159
Equity securities	55		945		—			1,000
Trading securities, at fair value	—		2,417		—			2,417
Limited partnerships	180		1,037		—			1,217
Other invested assets	1		20		—			21
Total investments	688		12,126		—			12,814
Cash and cash equivalents	12		388		—			400
Premiums receivable from policyholders	—		1,062		—			1,062
Reinsurance recoverable	—		168		—			168
Deferred income tax asset	37		—		—			37
Deferred acquisition costs	—		504		—			504
Other assets	117		339		—			456
Receivables from the Exchange and other affiliates	281		—		(281		)	—
Note receivable from EFL	25		—		(25		)	—
Total assets	$	1,160	$	14,587	$	(306	)	$	15,441
Liabilities
Losses and loss expense reserves	$	—	$	3,598	$	—		$	3,598
Life policy and deposit contract reserves	—		1,708		—			1,708
Unearned premiums	—		2,365		—			2,365
Deferred income tax liabitlity	—		365		—			365
Other liabilities	518		402		(306		)	614
Total liabilities	518		8,438		(306		)	8,650
Shareholders’ equity and noncontrolling interest
Total Indemnity shareholders’ equity	642		—		—			642
Noncontrolling interest in consolidated entity – Exchange	—		6,149		—			6,149
Total equity	642		6,149		—			6,791
Total liabilities, shareholders’ equity and noncontrolling interest	$	1,160	$	14,587	$	(306	)	$	15,441

Consolidating Statement of Financial Position



	Erie Insurance Group
(in millions)	December 31, 2011
Assets	Indemnity shareholder interest		Exchange noncontrolling interest		Reclassifications and eliminations			Erie Insurance Group
Investments
Available-for-sale securities, at fair value:
Fixed maturities	$	548	$	7,292	$	—		$	7,840
Equity securities	25		564		—			589
Trading securities, at fair value	27		2,308		—			2,335
Limited partnerships	208		1,082		—			1,290
Other invested assets	1		19		—			20
Total investments	809		11,265		—			12,074
Cash and cash equivalents	11		174		—			185
Premiums receivable from policyholders	—		976		—			976
Reinsurance recoverable	—		166		—			166
Deferred income tax asset	19		—		—			19
Deferred acquisition costs	—		487		—			487
Other assets	119		322		—			441
Receivables from the Exchange and other affiliates	254		—		(254		)	—
Note receivable from EFL	25		—		(25		)	—
Total assets	$	1,237	$	13,390	$	(279	)	$	14,348
Liabilities
Losses and loss expense reserves	$	—	$	3,499	$	—		$	3,499
Life policy and deposit contract reserves	—		1,671		—			1,671
Unearned premiums	—		2,178		—			2,178
Deferred income tax liabiltiy	—		147		—			147
Other liabilities	456		383		(279		)	560
Total liabilities	456		7,878		(279		)	8,055
Shareholders’ equity and noncontrolling interest
Total Indemnity shareholders’ equity	781		—		—			781
Noncontrolling interest in consolidated entity – Exchange	—		5,512		—			5,512
Total equity	781		5,512		—			6,293
Total liabilities, shareholders’ equity and noncontrolling interest	$	1,237	$	13,390	$	(279	)	$	14,348

Receivables from the Exchange and EFL and concentrations of credit risk – Financial instruments could potentially expose Indemnity to concentrations of credit risk, including unsecured receivables from the Exchange. A majority of Indemnity’s revenue and receivables are from the Exchange and affiliates. See also Note 4, “Variable Interest Entity.”

Management fees and expense allocation amounts due from the Exchange were $278 million and $251 million at December 31, 2012 and 2011, respectively. The receivable from EFL for expense allocations and interest on the surplus note totaled $3 million at December 31, 2012 and 2011.

Indemnity is due $25 million from EFL in the form of a surplus note that was issued in 2003. The note may be repaid only out of unassigned surplus of EFL. Both principal and interest payments are subject to prior approval by the Pennsylvania Insurance Commissioner. The note bears an annual interest rate of 6.7% and will be payable on demand on or after December 31, 2018, with interest scheduled to be paid semi-annually, subject to prior approval by the Pennsylvania Insurance Commissioner. Indemnity recognized interest income on the note of $2 million in 2012 and 2011.

Income attributable to Indemnity shareholder interest



				Indemnity Shareholder Interest
(in millions)				Years ended December 31,
	Percent			2012		2011		2010
Management operations:
Management fee revenue, net	100.0	%		$	1,157	$	1,067	$	1,009
Service agreement revenue	100.0	%		31		33		34
Total revenue from management operations				1,188		1,100		1,043
Cost of management operations	100.0	%		983		892		841
Income from management operations before taxes				205		208		202
Property and casualty insurance operations:⁽²⁾
Net premiums earned	5.5	%	⁽²⁾	—		—		216
Losses and loss expenses	5.5	%	⁽²⁾	—		—		155
Policy acquisition and underwriting expenses	5.5	%	⁽²⁾	—		—		61
Income from property and casualty insurance operations before taxes				—		—		0
Life insurance operations:⁽¹⁾
Total revenue	21.6	%	⁽³⁾	—		10		37
Total benefits and expenses	21.6	%	⁽³⁾	—		7		26
Income from life insurance operations before taxes				—		3		11
Investment operations:
Net investment income⁽²⁾				16		16		37
Net realized gains (losses) on investments⁽²⁾				5		3		(1		)
Net impairment losses recognized in earnings⁽²⁾				0		0		(1		)
Equity in earnings of limited partnerships				15		26		21
Income from investment operations before taxes⁽²⁾				36		45		56
Income from operations before income taxes				241		256		269
Provision for income taxes				81		87		107
Net income attributable to Indemnity				$	160	$	169	$	162

(1)

Earnings on life insurance related invested assets are integral to the evaluation of the life insurance operations because of the long duration of life products. On that basis, for presentation purposes, the life insurance operations in the table above include life insurance related investment results. However, the life insurance investment results are included in the investment operations segment discussion in Note 5, “Segment Information”.

(2)

Prior to and through December 31, 2010, the underwriting results retained by EIC and ENY and the investment results of EIC, ENY and EPC accrued to the Indemnity shareholder interest. Due to the sale of Indemnity’s property and casualty insurance subsidiaries to the Exchange on December 31, 2010, all property and casualty underwriting results and all investment results for these companies accrue to the interest of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after December 31, 2010.

(3)

Prior to and through March 31, 2011, Indemnity retained a 21.6% ownership interest in EFL, which accrued to the Indemnity shareholder interest, and the Exchange retained a 78.4% ownership interest in EFL, which accrued to the interest of the subscribers (policyholders) of the Exchange, or noncontrolling interest. Due to the sale of Indemnity’s 21.6% ownership interest in EFL to the Exchange on March 31, 2011, 100.0% of EFL’s life insurance results accrue to the interest of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after March 31, 2011.

Expense allocations – All claims handling services for the Exchange are performed by Indemnity employees who are entirely dedicated to claims related activities. All costs associated with these employees are reimbursed to Indemnity from the Exchange’s revenues in accordance with the subscriber’s agreement. Indemnity is reimbursed by EFL from its revenues for all costs associated with employees who perform life insurance related operating activities for EFL in accordance with its service agreement with Indemnity. Common overhead expenses included in the expenses paid by Indemnity are allocated based upon appropriate utilization statistics (employee count, square footage, vehicle count, project hours, etc.) specifically measured to accomplish proportional allocations. Executive compensation is allocated based upon each executive’s primary responsibilities (management services, property and casualty claims operations, EFL operations and investment operations). We believe the methods used to allocate common overhead expenses among the affiliated entities are reasonable.

Cash settlements for payments on the account of the Exchange totaled $343 million, $325 million and $293 million in 2012, 2011 and 2010, respectively, and $30 million, $28 million and $27 million in 2012, 2011 and 2010, respectively, for EFL. These reimbursements are settled on a monthly basis.

Office leases – Indemnity leases certain office space from the Exchange, including the home office and three field office facilities. Rent expenses under these leases totaled $6 million in 2012, 2011 and 2010. Indemnity also has a lease commitment with EFL for a branch office until 2018. Annual rentals paid to EFL under this lease totaled $0.4 million in 2012, 2011 and 2010.

Indemnity’s components of direct cash flows as included in the Consolidated Statements of Cash Flows



	Indemnity Shareholder Interest
(in millions)	Years ended December 31,
	2012			2011			2010
Management fee received	$	1,135		$	1,053		$	947
Service agreement fee received	31			33			34
Premiums collected ⁽¹⁾	—			—			220
Net investment income received ⁽¹⁾	28			22			45
Limited partnership distributions	21			22			21
Decrease in reimbursements collected from affiliates	(4		)	(9		)	(15		)
Commissions and bonuses paid to agents	(617		)	(583		)	(532		)
Salaries and wages paid	(130		)	(124		)	(106		)
Pension contribution and employee benefits paid	(38		)	(36		)	(33		)
Losses paid ⁽¹⁾	—			—			(132		)
Loss expenses paid ⁽¹⁾	—			—			(23		)
Other underwriting and acquisition costs paid ⁽¹⁾	—			—			(53		)
General operating expenses paid	(139		)	(127		)	(119		)
Income taxes paid	(82		)	(82		)	(61		)
Net cash provided by operating activities	205			169			193
Net cash provided by (used in) investing activities	95			(211		)	196
Net cash used in financing activities	(299		)	(257		)	(155		)
Net increase (decrease) in cash and cash equivalents	1			(299		)	234
Cash and cash equivalents at beginning of year	11			310			76
Cash and cash equivalents at end of year	$	12		$	11		$	310

(1)