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

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

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

(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