Indemnity Supplemental Information |
Note 22. Indemnity Supplemental Information Consolidating Statement of Financial Position
| | | | | | | | | | | | | | | | | | | | Erie Insurance Group | (in millions) | | At December 31, 2013 | Assets | | Indemnity shareholder interest | | Exchange noncontrolling interest | | Reclassifications and eliminations | | Erie Insurance Group | Investments | | | | | | | | | Available-for-sale securities, at fair value: | | | | | | | | | Fixed maturities | | $ | 526 |
| | $ | 8,162 |
| | $ | — |
| | $ | 8,688 |
| Equity securities | | 50 |
| | 819 |
| | — |
| | 869 |
| Trading securities, at fair value | | 0 |
| | 3,202 |
| | — |
| | 3,202 |
| Limited partnerships | | 146 |
| | 940 |
| | — |
| | 1,086 |
| Other invested assets | | 1 |
| | 20 |
| | — |
| | 21 |
| Total investments | | 723 |
| | 13,143 |
| | — |
| | 13,866 |
| Cash and cash equivalents | | 49 |
| | 403 |
| | — |
| | 452 |
| Premiums receivable from policyholders | | — |
| | 1,167 |
| | — |
| | 1,167 |
| Reinsurance recoverable | | — |
| | 172 |
| | — |
| | 172 |
| Deferred income tax asset | | 2 |
| | 0 |
| | — |
| | 2 |
| Deferred acquisition costs | | — |
| | 566 |
| | — |
| | 566 |
| Other assets | | 114 |
| | 337 |
| | — |
| | 451 |
| Receivables from the Exchange and other affiliates | | 300 |
| | — |
| | (300 | ) | | — |
| Note receivable from EFL | | 25 |
| | — |
| | (25 | ) | | — |
| Total assets | | $ | 1,213 |
| | $ | 15,788 |
| | $ | (325 | ) | | $ | 16,676 |
| Liabilities | | | | | | | | | Losses and loss expense reserves | | $ | — |
| | $ | 3,747 |
| | $ | — |
| | $ | 3,747 |
| Life policy and deposit contract reserves | | — |
| | 1,758 |
| | — |
| | 1,758 |
| Unearned premiums | | — |
| | 2,598 |
| | — |
| | 2,598 |
| Deferred income tax liability | | 0 |
| | 450 |
| | — |
| | 450 |
| Other liabilities | | 479 |
| | 419 |
| | (325 | ) | | 573 |
| Total liabilities | | 479 |
| | 8,972 |
| | (325 | ) | | 9,126 |
| Shareholders’ equity and noncontrolling interest | | | | | | | | | Total Indemnity shareholders’ equity | | 734 |
| | — |
| | — |
| | 734 |
| Noncontrolling interest in consolidated entity – Exchange | | — |
| | 6,816 |
| | — |
| | 6,816 |
| Total equity | | 734 |
| | 6,816 |
| | — |
| | 7,550 |
| Total liabilities, shareholders’ equity, and noncontrolling interest | | $ | 1,213 |
| | $ | 15,788 |
| | $ | (325 | ) | | $ | 16,676 |
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Consolidating Statement of Financial Position
| | | | | | | | | | | | | | | | | | | | Erie Insurance Group | (in millions) | | At 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 | | 0 |
| | 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 |
| | 0 |
| | — |
| | 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 liability | | 0 |
| | 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 |
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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 $296 million and $278 million at December 31, 2013 and 2012, respectively. The receivable from EFL for expense allocations and interest on the surplus note totaled $4 million and $3 million at December 31, 2013 and 2012, respectively. Note receivable from EFL – 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 2013 and 2012. Income attributable to Indemnity shareholder interest
| | | | | | | | | | | | | | | | | | | | | Indemnity Shareholder Interest | (in millions) | | | | Years ended December 31, | | | Percent |
| | 2013 | | 2012 | | 2011 | Management operations: | | | | | | | | | Management fee revenue, net | | 100.0 | % | | $ | 1,266 |
| | $ | 1,157 |
| | $ | 1,067 |
| Service agreement revenue | | 100.0 | % | | 31 |
| | 31 |
| | 33 |
| Total revenue from management operations | | | | 1,297 |
| | 1,188 |
| | 1,100 |
| Cost of management operations | | 100.0 | % | | 1,088 |
| | 983 |
| | 892 |
| Income from management operations before taxes | | | | 209 |
| | 205 |
| | 208 |
| Life insurance operations:(1) | | | | | | | | | Total revenue | | 21.6 | % | (2) | — |
| | — |
| | 10 |
| Total benefits and expenses | | 21.6 | % | (2) | — |
| | — |
| | 7 |
| Income from life insurance operations before taxes | | | | — |
| | — |
| | 3 |
| Investment operations:(1) | | | | | | | | | Net investment income | | | | 15 |
| | 16 |
| | 16 |
| Net realized gains on investments | | | | 1 |
| | 5 |
| | 3 |
| Net impairment losses recognized in earnings | | | | 0 |
| | 0 |
| | 0 |
| Equity in earnings of limited partnerships | | | | 22 |
| | 15 |
| | 26 |
| Income from investment operations before taxes | | | | 38 |
| | 36 |
| | 45 |
| Income from operations before income taxes | | | | 247 |
| | 241 |
| | 256 |
| Provision for income taxes | | | | 84 |
| | 81 |
| | 87 |
| Net income attributable to Indemnity | | | | $ | 163 |
| | $ | 160 |
| | $ | 169 |
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| | (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 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 $351 million, $343 million and $325 million in 2013, 2012 and 2011, respectively, and $32 million, $30 million and $28 million in 2013, 2012 and 2011, 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 2013, 2012 and 2011. 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 2013, 2012 and 2011.
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, | | | 2013 |
| | 2012 |
| | 2011 |
| Management fee received | | $ | 1,240 |
| | $ | 1,135 |
| | $ | 1,053 |
| Service agreement fee received | | 31 |
| | 31 |
| | 33 |
| Net investment income received | | 22 |
| | 28 |
| | 22 |
| Limited partnership distributions | | 27 |
| | 21 |
| | 22 |
| Increase (decrease) in reimbursements collected from affiliates | | 6 |
| | (4 | ) | | (9 | ) | Commissions and bonuses paid to agents | | (681 | ) | | (617 | ) | | (583 | ) | Salaries and wages paid | | (147 | ) | | (130 | ) | | (124 | ) | Pension contribution and employee benefits paid | | (41 | ) | | (38 | ) | | (36 | ) | General operating expenses paid | | (153 | ) | | (139 | ) | | (127 | ) | Income taxes paid | | (86 | ) | | (82 | ) | | (82 | ) | Net cash provided by operating activities | | 218 |
| | 205 |
| | 169 |
| Net cash (used in) provided by investing activities | | (65 | ) | | 95 |
| | (211 | ) | Net cash used in financing activities | | (116 | ) | | (299 | ) | | (257 | ) | Net increase (decrease) in cash and cash equivalents | | 37 |
| | 1 |
| | (299 | ) | Cash and cash equivalents, beginning of year | | 12 |
| | 11 |
| | 310 |
| Cash and cash equivalents, end of year | | $ | 49 |
| | $ | 12 |
| | $ | 11 |
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