Note 7. Investments

Available-for-sale securities

The following table summarizes the cost and fair value of our available-for-sale securities at March 31, 2015:



	Erie Insurance Group
	March 31, 2015
(in millions)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Indemnity
Available-for-sale securities:
States & political subdivisions	$	213	$	12	$	0	$	225
Corporate debt securities	232		2		2		232
Residential mortgage-backed securities	8		0		0		8
Commercial mortgage-backed securities	51		0		1		50
Collateralized debt obligations	36		0		0		36
Other debt securities	5		0		0		5
Total fixed maturities	545		14		3		556
Nonredeemable preferred stock	11		1		0		12
Common stock	13		0		0		13
Total available-for-sale securities – Indemnity	$	569	$	15	$	3	$	581
Exchange
Available-for-sale securities:
U.S. treasury	$	6	$	0	$	0	$	6
Government sponsored enterprises	3		1		0		4
States & political subdivisions	1,421		86		1		1,506
Foreign government securities	80		2		0		82
Corporate debt securities	7,278		470		24		7,724
Residential mortgage-backed securities	57		1		0		58
Commercial mortgage-backed securities	28		2		0		30
Collateralized debt obligations	6		5		0		11
Other debt securities	75		3		0		78
Total fixed maturities	8,954		570		25		9,499
Nonredeemable preferred stock	667		72		1		738
Common stock	96		3		0		99
Total available-for-sale securities – Exchange	$	9,717	$	645	$	26	$	10,336
Total available-for-sale securities – Erie Insurance Group	$	10,286	$	660	$	29	$	10,917

The following table summarizes the cost and fair value of our available-for-sale securities at December 31, 2014:



	Erie Insurance Group
	December 31, 2014
(in millions)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Indemnity
Available-for-sale securities:
States & political subdivisions	$	219	$	12	$	0	$	231
Corporate debt securities	236		1		3		234
Residential mortgage-backed securities	8		0		0		8
Commercial mortgage-backed securities	52		0		1		51
Collateralized debt obligations	33		0		0		33
Other debt securities	7		0		0		7
Total fixed maturities	555		13		4		564
Nonredeemable preferred stock	11		1		0		12
Common stock	13		0		0		13
Total available-for-sale securities – Indemnity	$	579	$	14	$	4	$	589
Exchange
Available-for-sale securities:
U.S. treasury	$	6	$	0	$	0	$	6
Government sponsored enterprises	3		1		0		4
States & political subdivisions	1,394		84		1		1,477
Foreign government securities	10		0		0		10
Corporate debt securities	6,918		405		34		7,289
Residential mortgage-backed securities	109		3		1		111
Commercial mortgage-backed securities	28		2		0		30
Collateralized debt obligations	6		5		0		11
Other debt securities	66		3		0		69
Total fixed maturities	8,540		503		36		9,007
Nonredeemable preferred stock	650		64		4		710
Common stock	138		3		1		140
Total available-for-sale securities – Exchange	$	9,328	$	570	$	41	$	9,857
Total available-for-sale securities – Erie Insurance Group	$	9,907	$	584	$	45	$	10,446

The amortized cost and estimated fair value of fixed maturities at March 31, 2015 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
	March 31, 2015
(in millions)	Amortized		Estimated
	cost		fair value
Indemnity
Due in one year or less	$	71	$	71
Due after one year through five years	226		227
Due after five years through ten years	145		150
Due after ten years	103		108
Total fixed maturities – Indemnity	$	545	$	556
Exchange
Due in one year or less	$	446	$	453
Due after one year through five years	3,320		3,512
Due after five years through ten years	3,656		3,852
Due after ten years	1,532		1,682
Total fixed maturities – Exchange	$	8,954	$	9,499
Total fixed maturities – Erie Insurance Group	$	9,499	$	10,055

Available-for-sale securities in a gross unrealized loss position at March 31, 2015 are as follows. Data is provided by length of time for securities in a gross unrealized loss position.



	Erie Insurance Group
	March 31, 2015
(dollars in millions)	Less than 12 months				12 months or longer				Total
Indemnity	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		No. of holdings
Available-for-sale securities:
States & political subdivisions	$	3	$	0	$	0	$	0	$	3	$	0	2
Corporate debt securities	70		2		3		0		73		2		185
Residential mortgage-backed securities	3		0		0		0		3		0		3
Commercial mortgage-backed securities	30		1		0		0		30		1		20
Collateralized debt obligations	13		0		0		0		13		0		6
Other debt securities	1		0		0		0		1		0		1
Total fixed maturities	120		3		3		0		123		3		217
Common stock	13		0		0		0		13		0		1
Total available-for-sale securities – Indemnity	$	133	$	3	$	3	$	0	$	136	$	3	218
Quality breakdown of fixed maturities:
Investment grade	$	69	$	1	$	3	$	0	$	72	$	1	37
Non-investment grade	51		2		0		0		51		2		180
Total fixed maturities – Indemnity	$	120	$	3	$	3	$	0	$	123	$	3	217
Exchange
Available-for-sale securities:
U.S. treasury	$	0	$	0	$	0	$	0	$	0	$	0	1
States & political subdivisions	108		1		5		0		113		1		29
Foreign government securities	6		0		0		0		6		0		6
Corporate debt securities	673		22		56		2		729		24		468
Residential mortgage-backed securities	6		0		17		0		23		0		6
Commercial mortgage-backed securities	0		0		1		0		1		0		1
Other debt securities	9		0		7		0		16		0		3
Total fixed maturities	802		23		86		2		888		25		514
Nonredeemable preferred stock	47		0		22		1		69		1		11
Total available-for-sale securities – Exchange	$	849	$	23	$	108	$	3	$	957	$	26	525
Quality breakdown of fixed maturities:
Investment grade	$	445	$	6	$	82	$	1	$	527	$	7	136
Non-investment grade	357		17		4		1		361		18		378
Total fixed maturities – Exchange	$	802	$	23	$	86	$	2	$	888	$	25	514

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 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, 2014 are as follows. Data is provided by length of time for securities in a gross unrealized loss position.



	Erie Insurance Group
	December 31, 2014
(dollars in millions)	Less than 12 months				12 months or longer				Total
Indemnity	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses		No. of holdings
Available-for-sale securities:
States & political subdivisions	$	6	$	0	$	2	$	0	$	8	$	0	4
Corporate debt securities	121		3		0		0		121		3		250
Residential mortgage-backed securities	6		0		0		0		6		0		4
Commercial mortgage-backed securities	41		1		0		0		41		1		24
Collateralized debt obligations	21		0		0		0		21		0		9
Other debt securities	7		0		0		0		7		0		3
Total fixed maturities	202		4		2		0		204		4		294
Common stock	0		0		13		0		13		0		1
Total available-for-sale securities – Indemnity	$	202	$	4	$	15	$	0	$	217	$	4	295
Quality breakdown of fixed maturities:
Investment grade	$	146	$	1	$	2	$	0	$	148	$	1	58
Non-investment grade	56		3		0		0		56		3		236
Total fixed maturities – Indemnity	$	202	$	4	$	2	$	0	$	204	$	4	294
Exchange
Available-for-sale securities:
U.S. treasury	$	1	$	0	$	0	$	0	$	1	$	0	2
States & political subdivisions	47		0		47		1		94		1		24
Corporate debt securities	980		29		181		5		1,161		34		656
Residential mortgage-backed securities	6		0		27		1		33		1		8
Commercial mortgage-backed securities	1		0		0		0		1		0		1
Other debt securities	13		0		7		0		20		0		4
Total fixed maturities	1,048		29		262		7		1,310		36		695
Nonredeemable preferred stock	86		3		25		1		111		4		16
Common stock	0		0		73		1		73		1		2
Total available-for-sale securities – Exchange	$	1,134	$	32	$	360	$	9	$	1,494	$	41	713
Quality breakdown of fixed maturities:
Investment grade	$	606	$	10	$	253	$	5	$	859	$	15	172
Non-investment grade	442		19		9		2		451		21		523
Total fixed maturities – Exchange	$	1,048	$	29	$	262	$	7	$	1,310	$	36	695

Net investment income

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)	Three months ended March 31,
	2015		2014
Indemnity
Fixed maturities	$	4	$	3
Equity securities	0		1
Cash equivalents and other	0		0
Total investment income	4		4
Less: investment expenses	0		0
Investment income, net of expenses – Indemnity	$	4	$	4
Exchange
Fixed maturities	$	94	$	86
Equity securities	26		29
Cash equivalents and other	1		0
Total investment income	121		115
Less: investment expenses	12		10
Investment income, net of expenses – Exchange	$	109	$	105
Investment income, net of expenses – Erie Insurance Group	$	113	$	109

Realized investment gains (losses)

Realized gains and losses on sales of securities are recognized in income based upon the specific identification method. Realized gains (losses) on investments were as follows:



	Erie Insurance Group
(in millions)	Three months ended March 31,
	2015			2014
Indemnity
Available-for-sale securities:
Fixed maturities:
Gross realized gains	$	0		$	0
Gross realized losses	0			0
Net realized gains	0			0
Equity securities:
Gross realized gains	0			1
Gross realized losses	0			0
Net realized gains	0			1
Net realized investment gains – Indemnity	$	0		$	1
Exchange
Available-for-sale securities:
Fixed maturities:
Gross realized gains	$	6		$	6
Gross realized losses	(4		)	(1		)
Net realized gains	2			5
Equity securities:
Gross realized gains	5			8
Gross realized losses	0			(1		)
Net realized gains	5			7
Trading securities:
Common stock:
Gross realized gains	117			70
Gross realized losses	(12		)	(3		)
Decreases in fair value⁽¹⁾	(56		)	(24		)
Net realized gains	49			43
Net realized investment gains – Exchange	$	56		$	55
Net realized investment gains – Erie Insurance Group	$	56		$	56


(1)	The fair value on our common stock portfolio is based upon exchange traded prices provided by a nationally recognized pricing service.

Net impairment losses

Net impairment losses recorded in earnings for Indemnity were $0.1 million for the first quarter of 2015, compared to net impairment losses of less than $0.1 million in the first quarter of 2014. Net impairment losses recorded in earnings for the Exchange were $2 million for the first quarter of 2015, compared to net impairment losses of $0.2 million for the first quarter of 2014.

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.

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 March 31, 2015 are comprised of partnership financial results for the fourth quarter of 2014. Given the lag in reporting, our limited partnership results do not reflect the market conditions of the first quarter of 2015. Cash contributions made to and distributions received from the partnerships are recorded in the period in which the transaction occurs.

At the conclusion of each quarter, we survey each general partner to determine if they are aware of changes to valuations, plus or minus 10% compared to the previous quarter valuation, prior to the release of the fund’s financial statements. Based upon that information from the general partner, we consider whether additional disclosure is warranted. In April 2015, a private equity partnership identified a significant valuation increase that will be reported in the fund’s March 31, 2015 financial statements. Given the one-quarter reporting lag, this change will be reflected in the second quarter 2015 consolidated financial statements. Based upon the general partner’s estimate of the valuation change, Indemnity and the Exchange expect to record equity in earnings of limited partnerships from this investment in the second quarter of 2015 of approximately $7 million and $28 million, respectively.

Amounts included in equity in earnings of limited partnerships by method of accounting are included below:



(in millions)	Erie Insurance Group
	Three months ended March 31,
	2015		2014
Indemnity
Equity in earnings of limited partnerships accounted for under the equity method	$	2	$	5
Change in fair value of limited partnerships accounted for under the fair value option	0		1
Equity in earnings of limited partnerships – Indemnity	$	2	$	6
Exchange
Equity in earnings of limited partnerships accounted for under the equity method	$	25	$	39
Change in fair value of limited partnerships accounted for under the fair value option	1		5
Equity in earnings of limited partnerships – Exchange	$	26	$	44
Equity in earnings of limited partnerships – Erie Insurance Group	$	28	$	50

We have provided summarized financial information in the following tables for the three months ended March 31, 2015 and for the year ended December 31, 2014. Amounts provided in the tables are presented using the latest available financial statements received from the partnerships for the respective periods. Limited partnership financial information has been presented based upon the investment percentage in the partnerships for the Erie Insurance Group consistent with how we evaluate these investments.

As these investments are generally reported on a one-quarter lag, our limited partnership results through March 31, 2015 include partnership financial results for the fourth quarter of 2014.



	Erie Insurance Group
	As of and for the three months ended March 31, 2015
(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%	24	$	32	$	(1	)	$	1
Greater than or equal to 10% but less than 50%	3	17		0			0
Total private equity	27	49		(1		)	1
Mezzanine debt:
Less than 10%	11	9		0			1
Greater than or equal to 10% but less than 50%	3	5		0			0
Greater than 50%	1	0		0			0
Total mezzanine debt	15	14		0			1
Real estate:
Less than 10%	11	25		(5		)	5
Greater than or equal to 10% but less than 50%	3	3		(6		)	5
Greater than 50%	2	9		2			0
Total real estate	16	37		(9		)	10
Total limited partnerships – Indemnity	58	$	100	$	(10	)	$	12
Exchange
Private equity:
Less than 10%	42	$	333	$	(8	)	$	15
Greater than or equal to 10% but less than 50%	3	71		1			0
Total private equity	45	404		(7		)	15
Mezzanine debt:
Less than 10%	21	118		(3		)	6
Greater than or equal to 10% but less than 50%	4	25		0			2
Greater than 50%	3	29		1			0
Total mezzanine debt	28	172		(2		)	8
Real estate:
Less than 10%	24	162		(11		)	16
Greater than or equal to 10% but less than 50%	5	42		(18		)	16
Greater than 50%	2	35		9			0
Total real estate	31	239		(20		)	32
Total limited partnerships – Exchange	104	$	815	$	(29	)	$	55
Total limited partnerships – Erie Insurance Group		$	915	$	(39	)	$	67

Per the limited partnership financial statements, total partnership assets were $43 billion and total partnership liabilities were $4 billion at March 31, 2015 (as recorded in the December 31, 2014 limited partnership financial statements). For the three months period comparable to that presented in the preceding table (fourth quarter of 2014), total partnership valuation adjustment losses were $0.4 billion and total partnership net income was $1.6 billion.

As these investments are generally reported on a one-quarter lag, our limited partnership results through December 31, 2014 include partnership financial results for the fourth quarter of 2013 and the first three quarters of 2014.



	Erie Insurance Group
	As of and for the year ended December 31, 2014
(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%	24	$	34	$	(7	)	$	7
Greater than or equal to 10% but less than 50%	3	18		3			1
Total private equity	27	52		(4		)	8
Mezzanine debt:
Less than 10%	11	10		0			2
Greater than or equal to 10% but less than 50%	3	4		0			0
Greater than 50%	1	0		0			0
Total mezzanine debt	15	14		0			2
Real estate:
Less than 10%	11	36		5			(2		)
Greater than or equal to 10% but less than 50%	3	4		1			0
Greater than 50%	2	7		0			1
Total real estate	16	47		6			(1		)
Total limited partnerships – Indemnity	58	$	113	$	2		$	9
Exchange
Private equity:
Less than 10%	42	$	344	$	(12	)	$	43
Greater than or equal to 10% but less than 50%	3	74		13			3
Total private equity	45	418		1			46
Mezzanine debt:
Less than 10%	21	120		0			16
Greater than or equal to 10% but less than 50%	4	23		(3		)	3
Greater than 50%	3	27		0			3
Total mezzanine debt	28	170		(3		)	22
Real estate:
Less than 10%	22	207		18			7
Greater than or equal to 10% but less than 50%	5	44		6			2
Greater than 50%	2	27		(17		)	20
Total real estate	29	278		7			29
Total limited partnerships – Exchange	102	$	866	$	5		$	97
Total limited partnerships – Erie Insurance Group		$	979	$	7		$	106

Per the limited partnership financial statements, total partnership assets were $45 billion and total partnership liabilities were $4 billion at December 31, 2014 (as recorded in the September 30, 2014 limited partnership financial statements). For the twelve month period comparable to that presented in the preceding table (fourth quarter of 2013 and first three quarters of 2014), total partnership valuation adjustment losses were $1 billion and total partnership net income was $7 billion.

See also Note 14. “Commitments and Contingencies,” for investment commitments related to limited partnerships.