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, 2012 as filed with the Securities and Exchange Commission on February 26, 2013. 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 upon 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 included 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 which was incorrectly recorded as a benefit to the Exchange in prior periods.

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 2013 and 2012, investment activities on life insurance related assets generated revenues of $26 million and $25 million, respectively, resulting in EFL reporting income before income taxes of $10 million and $12 million, respectively, before intercompany eliminations. For the nine months ended September 30, 2013 and 2012, investment activities on life insurance related assets generated revenues of $78 million and $77 million, respectively, resulting in EFL reporting income before income taxes of $34 million for both periods, before intercompany eliminations.

Investment operations

The investment operations segment includes returns from our fixed maturity, equity security and limited partnership investment portfolios to support our underwriting business. The Indemnity and Exchange portfolios are managed with the objective of maximizing after-tax returns on a risk-adjusted basis, while the EFL portfolio is managed to be closely aligned to its liabilities and to maintain a sufficient yield to meet profitability targets. Management actively evaluates the portfolios for impairments. We record impairment writedowns on investments in instances where the fair value of the investment is substantially below cost, and we conclude that the decline in fair value is other-than-temporary. 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)	Three months ended September 30, 2013
	Management operations		Property and casualty insurance operations		Life insurance operations			Investment operations			Eliminations			Consolidated
Premiums earned/life policy revenue			$	1,221	$	21					$	(1	)	$	1,241
Net investment income								$	111		(2		)	109
Net realized investment gains								191						191
Net impairment losses recognized in earnings								(9		)				(9		)
Equity in earnings of limited partnerships								37						37
Management fee revenue	$	333									(333		)	—
Service agreement and other revenue	8				0									8
Total revenues	341		1,221		21			330			(336		)	1,577
Cost of management operations	281										(281		)	—
Insurance losses and loss expenses			841		28						(1		)	868
Policy acquisition and underwriting expenses			356		9						(54		)	311
Total benefits and expenses	281		1,197		37			—			(336		)	1,179
Income (loss) before income taxes	60		24		(16		)	330			—			398
Provision for income taxes	21		8		(5		)	107			—			131
Net income (loss)	$	39	$	16	$	(11	)	$	223		—			$	267



	Erie Insurance Group
(in millions)	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				$	0		$	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 expense			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)	Nine months ended September 30, 2013
	Management operations		Property and casualty insurance operations		Life insurance operations			Investment operations			Eliminations			Consolidated
Premiums earned/life policy revenue			$	3,573	$	60					$	(2	)	$	3,631
Net investment income								$	324		(8		)	316
Net realized investment gains								501						501
Net impairment losses recognized in earnings								(10		)				(10		)
Equity in earnings of limited partnerships								112						112
Management fee revenue	$	965									(965		)	—
Service agreement and other revenue	23				1									24
Total revenues	988		3,573		61			927			(975		)	4,574
Cost of management operations	820										(820		)	—
Insurance losses and loss expenses			2,495		80						(4		)	2,571
Policy acquisition and underwriting expenses			1,032		25						(151		)	906
Total benefits and expenses	820		3,527		105			—			(975		)	3,477
Income (loss) before income taxes	168		46		(44		)	927			—			1,097
Provision for income taxes	59		16		(15		)	303			—			363
Net income (loss)	$	109	$	30	$	(29	)	$	624		$	—		$	734




	Erie Insurance Group
(in millions)	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