2014 Erie Indemnity Company Annual Report
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This year’s cover represents who we are as a company. It features veteran Employees dedicated to ERIE’s
promise of protection and new Employees excited to begin a career in service. They are Employees who
best represent ERIE’s Values in Practice and have been selected by their peers as this year’s VIPs. And
they are Employees who have been giving their above all to celebrate ERIE’s important milestone—
our 90th anniversary. Learn more on page 21.
From Left to Right:
Michael Filipski, Premium Audit - Eileen Polito, Total Rewards - Nick Schneider, Actuarial - Deborah Beck, Commercial Underwriting -
Alicia Aldridge, Service Delivery - Jishnu Sasi, Claims Technology - Maria Carney, Actuarial - Crystal Walters, Personal Lines Underwriting -
Bryan Morphy, Strategic Communications - Vineetha Jaju Babu, Total Rewards - Donna Mushrush, Personal Lines Product Services -
Jae Aoh, Creative Services - Karen Skarupski, Law
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As ERIE Employees and Agents,
we are successful because
we are, above all, together in
our drive to always be better.
We are, above all, together in
our
mission to provide the very
best products and services.
And we are, above all, together in
our promise to always be
there for our Customers.
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1
Erie Insurance Property
& Casualty Company
Flagship City
Insurance Company
Erie Insurance
Company
Erie Insurance
Company of New York
Management Operation Property/Casualty Insurance Life Insurance
Erie Indemnity Company
Erie Insurance Exchange
(A Reciprocal Exchange)
Denotes ownership
(wholly owned unless otherwise noted)
Denotes attorney-in-fact
relationship to reciprocal exchange
Erie Family Life
Insurance Company
ORGANIZATIONAL STRUCTURE
Erie Indemnity Company (Indemnity) is a publicly held Pennsylvania business corporation that
has been the managing attorney-in-fact for the subscribers (policyholders) at the Erie Insurance
Exchange (Exchange) since 1925. The Exchange is a subscriber-owned Pennsylvania-domiciled
reciprocal insurer that writes property and casualty insurance.
Indemnity’s primary function is to perform certain services for the Exchange relating to
the sales, underwriting and issuance of policies on behalf of the Exchange. This is done in
accordance with a subscriber’s agreement (a limited power of attorney) executed by each
subscriber (policyholder), who appoints Indemnity as their common attorney-in-fact to
transact business on their behalf and manage the affairs at the Exchange.
The property and casualty and life insurance operations are owned by the Exchange, and
Indemnity functions as the management company. Indemnity, the Exchange, and its
subsidiaries and affiliates, operate collectively as the “Erie Insurance Group” (The ERIE
®
).
ERIE INSURANCE GROUP ORGANIZATIONAL CHART
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ANNUAL REPORT 2014
SHAREHOLDERS’ LETTER
To our Shareholders:
It’s our 90th anniversary this year. That’s a big deal for any company, especially in today’s
churning business environment. Economic disruptions, rapid-fire innovations in technology
and shifting demographics are presenting challenges like never before. Companies that can
reach this kind of milestone have figured something out. At The ERIE, we have always
stayed true to our mission and have never been intimidated by a changing marketplace or
larger, more visible competitors.
We are the competition.
That’s one of the iconic ERIE mantras that describes how we work. We are the only thing
that stands between good and great, failure and success. We stay focused on our values, our
strategy and our execution. Our success now and into the future depends on how well we
engage our Employees and Agents to uphold our time-honored commitment to do the right
thing and find new and better ways to run a business for our Customers.
This has not changed in over nine decades, and it’s what enables us to keep growing.
Today, The ERIE boasts nearly 5,000 dedicated Employees and almost 2,200 highly
loyal independent agencies across our footprint. In 2014, our property and casualty
business achieved record results, and we expanded into a 12th state. We continue to earn
consecutive honors from J.D. Power and Associates and Ward Group, and we climbed 39
spots on the Fortune 500 list. At the same time, we’re exploring new technology tools like
drones to support underwriting and claims. And among our new products, we introduced a
first-of-its-kind coverage that meets emerging Customer needs in the new sharing economy.
Over the years and through every economic condition imaginable, we continue to thrive
when others fight to survive. That’s because our co-founders, H.O. Hirt and O.G. Crawford,
established a firm foundation and an inspiring legacy of service. In the nine decades since,
generations of dedicated Employees and Agents have remained grounded in that vision,
building upon it in new and inspiring ways all their own.
That’s why the theme for our 90th anniversary is “Above All Together.” It combines
two cherished values: The ERIE Family Spirit of Employees and Agents working together
for the good of our Customers and our forever promise to be Above all in
S
ER
V
I
C
E
SM
.
To me, there’s no better way to describe our 90 years in business.
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As ERIE Employees and Agents, we are successful because we are, above all, together in our
drive to always be better. We are, above all, together in our mission to provide the very best
products and services. And we are, above all, together in our promise to always be there for
our Customers.
STRONG PERFORMANCE
The ERIE’s consistently strong results are tied to the interdependent relationship H.O. Hirt
created in two organizations working together to succeed—the Erie Insurance Exchange
and Erie Indemnity Company. The Exchange is a reciprocal insurance exchange. Indemnity
is the dedicated management company for the Exchange. Indemnity’s primary source of
revenue is the fee it earns by providing management services to the Exchange.
As a result, Indemnity’s success is directly related to the health and growth of the Exchange.
With direct written premium of over $5.5 billion, 2014 marked our seventh straight year of
premium growth for the Exchange. Direct written premium in the property/casualty lines
grew 8.6 percent, year-over-year. This is well over the 4.6-percent anticipated growth that
researchers at Conning & Co. predicted for the industry in 2014.
Driving overall premium growth was a 4.3-percent increase in total policies in force and
a 4.2-percent increase in average premium per policy. We ended the year with a statutory
combined ratio of 100.6 percent. That’s an uptick from the 97.2 percent we recorded during a
3
Lauren Laws,
Property Adjuster, Hagerstown Claims O ce
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relatively calm weather year in 2013. Our retention rate remained solid at 90.3 percent at the
close of 2014—a metric that affirms our Agents’ and Employees’ commitment to do right by
our Customers.
Ensuring that we’re well-capitalized to absorb the ebbs and flows of severe weather and
other catastrophic experiences remains a fundamental strength of the Exchange. Our
exceptional on-the-ground service is backed by a solid balance sheet and a growing
policyholder surplus that exceeded $6.8 billion at year-end.
The Exchange’s 2014 premium performance benefitted Indemnity’s management operations,
generating revenue of $1.4 billion. That’s an increase of more than 8 percent over 2013.
Indemnity finished the year with a net income of $3.18 per diluted Class A share, compared
to $3.08 per diluted Class A share in 2013. The net income increased $5 million, from $163
million in 2013 to $168 million in 2014. This increase was driven by the results of our
management operations.
Indemnity’s financial performance and the strength of our overall balance sheet in 2014
enabled us to return almost $119 million in dividends to Shareholders. Indemnity has paid
steadily increasing dividends since 1933. Additionally, we maintained a share repurchase
program in 2014, repurchasing approximately 276,000 Class A shares at a cost of almost
$20 million.
In December 2014, our Board of Directors agreed to increase Indemnity’s regular quarterly
cash dividend from $0.635 to $0.681 on each Class A share and from $95.25 to $102.15 on
each Class B share. This represents a 7.2-percent increase in payout per share over the prior
dividend rate.
CLEAR PRIORITIES
In 2014, we updated our long-term strategic plan and enrolled our Employees in a deeper
understanding and connection between what they do day-to-day and how it impacts our
Agents, Customers, co-workers and ERIE’s long-term success.
Our strategic focus centers on engaging our Employees, empowering our Agents and
better understanding our Customers. We’re also aimed at supporting future growth and
differentiation by broadening our product portfolio, refreshing our Claims function and
expanding our geographic reach.
Attracting and retaining Employees
The ERIE has long been an esteemed employer with a strong corporate culture. Shifting
demographics and evolving processes and tools are creating high demand for talented
4
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Employees. We have a strategic approach to ensure we attract and retain the right skillsets
and values to grow and develop our work force. New Employees, as well as those new to
leadership, go through a robust onboarding experience that shapes them in ERIE’s culture
and business. It also connects them with others in the organization with whom they can
network and share ideas and experiences.
ERIE also maintains a broad array of learning and development opportunities, a recognized
wellness program, and varied communication channels to build and sustain the kind of
trusted environment that leads to Employee satisfaction and engagement.
Our recruiting process is also targeted at bringing in a diversity of talent, with a passion
for service—that’s a given at The ERIE. In 2014, we hired nearly 50 U.S. military veterans.
It’s a means to provide opportunity to those who have served our country, as well as
recognition of the proven assets service men and women often have to effectively solve
problems and lead the way.
Enhancing the Agent experience
ERIE’s business model is built on a strong and
trusted relationship with the independent
Agents who represent us. That goes back as far
as 1927, when our longest running independent
agency signed with The ERIE. The Ralph C.
Mehler Insurance Agency is now led by the
family’s third generation. This kind of loyalty
is not unusual for ERIE, and it’s something we
never take for granted.
Over the last several years, we’ve enhanced the
collaboration with our Agents through a number of Agent task forces that help ensure our
mutual success. These task forces promote increased communication and strategic alignment
between ERIE and the Agents who represent us.
Our Agents face relentless competitive pressures and changing consumer expectations, and
we’re committed to their success in advising and servicing ERIE Customers while attracting
new ones. This year, we spent a great deal of effort enhancing our Agents’ online presence
by developing new mobile-friendly websites hosted on erieinsurance.com. We also continue
to provide expertise to help Agents better leverage rapidly evolving digital and social
media channels.
These improvements strengthen ERIE’s strategic marketing alliance with our Agents, using
our buying power and marketing expertise to advance our Agents’ efforts and allow them
to better compete at the local level.
5
ERIE’s
business model
is built on a
strong and trusted
relationship
with the independent Agents
who represent us.
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Furthermore, we’ve improved the sales workflow with Agents. Our online system for
personal lines has evolved to further streamline the process from quote through down
payment and online signature, saving Agents time and effort. Billing-related platforms
and applications are now consolidated with a consistent look and feel and more intuitive
functionality. And we also began to restructure our Agent website, making it easier for
Agents to perform common transactions. These enhancements combine to free up Agents to
be more attentive to their Customers and bring in new business.
Matching product to opportunity
We helped Agents in other ways as well. In 2014, we expanded product offerings by
bringing our industry-leading Rate Lock protection to Maryland and completing the
rollout of ErieSecure Home
®
in North Carolina. We’ve added more customized homeowner’s
protection and even enhanced our personal auto coverage for Customers providing
rideshare services like Lyft and Uber. In our Commercial Division, we rolled out new
restaurant-specific coverages and data breach protection. And the Life Division revamped
its portfolio to offer more competitively priced, consumer-friendly products.
Better serving our Customers
Agents are our valued, front-line connection to the Customer, but the direct customer
experience is, itself, a significant focus of our strategy. In 2014, we launched a
comprehensive upgrade to our Claims capabilities and began exploring emerging
technology tools to more quickly and effectively handle Customer claims.
This forward-thinking mindset is also well represented in ERIE’s state-of-the-art Technical
Learning Center, just completed at year-end. It is an advanced, interactive training
6
Nathan Eades,
IT Intern
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destination for our claims adjusters and risk control consultants throughout our territories.
The 52,000-square-foot training center features 14 fully equipped auto bays and a three-
story home. This house is constructed using hundreds of different building materials
so that Claims personnel can learn how to better serve Customers living in homes of all
different styles, periods and values.
With this new facility, Employees experience hands-on training to prepare them for the
complexities of accurate underwriting, claims adjusting and risk control. It also creates
greater consistency and uniformity across our footprint. In an era when nearly every
insurer touts superior service, the Technical Learning Center is a concrete example of
ERIE’s continued investment, action and commitment to be Above all in
S
ER
V
I
C
E
.
Growing inside and out
Expansion has always been an important part of our strategy. We believe if you’re going to
give great service, you have to meet people where they live. In 1953, ERIE opened its first
branch office outside Pennsylvania—in Silver Spring, Maryland, and this year, Kentucky
became our 12th state.
Our strategic entry into the Bluegrass State also serves as a template for future growth.
Specifically, we looked to ERIE’s existing agencies to expand into Kentucky—and not
just those in close proximity. We tapped strong, entrepreneurial agents from throughout
our footprint to import their expertise, service commitment and knowledge of ERIE to a
promising new consumer base. The first Kentucky policy was issued in early November and
by year-end, nearly 40 Agents had committed to representing ERIE in our newest territory.
We’re driving growth within our existing footprint as well, providing resources and
support for our best Agents to grow their business through prudent acquisition. This has
proved to be an efficient way to quickly increase our penetration and market share in
communities where the ERIE name and reputation are already well established. And its
impact is evident in our ability to gain market share in each of our product lines and in
every state in which we do business.
SOUND MANAGEMENT, SUPERIOR SERVICE
Beyond strides in growing our business, in 2014 we continued to receive accolades for our
financial performance and service standard.
From a service perspective, The ERIE was once again recognized by consumer research
firm J.D. Power and Associates. ERIE was highest in customer satisfaction with the Auto
Insurance Purchase Experience in 2014. And for the second year running, ERIE ranked
highest in J.D. Power’s U.S. Small Business Commercial Study. The ERIE also finished
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among high customer satisfaction groups in
J.D. Power and Associates’ studies of auto
and homeowners insurers and in handling
property claims.
For the seventh straight year—and 17th time
overall—the Ward Group named ERIE to its
Ward’s 50 list of top-performing property and
casualty companies. Erie Family Life Insurance
was also named to this year’s Life/Health list,
marking the second time the life company
was recognized by Ward. Meanwhile, A.M.
Best again affirmed our A+ (Superior) rating
for ERIE’s Property/Casualty Group and the A
(Excellent) rating for Erie Family Life Insurance.
Particularly satisfying was the fact that the
recognition acknowledged so many aspects of our business for both the Exchange and
Indemnity. We were named to the Forbes’ list of America’s 100 Most Trustworthy Financial
Companies. The list is based on data from GMI Ratings, a proprietary ratings provider and
investment advisor.
Indemnity was also named to the Barron’s 500 Index, which collects the most
fundamentally sound and attractively priced stocks from all industries and corners
of the market. Only 6 percent of all publicly traded companies are included on the list.
Our recognition from respected organizations helps Customers, prospects and investors
clearly see what sets The ERIE apart from other insurers. Those external indicators also
provide us with useful benchmarks to track our progress and challenge our performance.
After all, we are the competition.
HONOR THE PAST, SECURE THE FUTURE
The ERIE has always been a company that frames its future upon the bedrock values,
principles and successes of its past. It’s a tribute to the key architect of this company,
H.O. Hirt, who led ERIE for more than half a century. His vision and perseverance have
allowed us to build a company that delivers consistent value to all of our stakeholders—
our Customers and communities, our Agents and Employees, and you, our Shareholders.
8
For the
seventh straight
year–and
17th time overall
–
the Ward Group
named
ERIE
to its
Ward’s 50 list
of top-performing
property and casualty
companies.
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Seven years into my tenure, I feel honored to be a part of the ERIE Family as we celebrate
our 90th anniversary. We reached this milestone as a result of our founders’ great vision—
as well as the dedicated leadership of some extraordinary men and women through the past
nine decades. I’m excited to be building on our legacy of service and success, and creating
an even more powerful and productive future.
It’s exhilarating to think about what’s ahead for us. We have the right business model
to weather any economic storm. We have a loyal and engaged agency force, and a rock-
solid balance sheet. Most importantly, we have dedicated and highly knowledgeable
Employees and an engaged and aligned leadership team that will move this company
forward and make it strong for the next 90 years.
That’s our intent, our plan and our commitment. And we’ll make it happen,
above all, together.
Terrence W. Cavanaugh
President and Chief Executive Officer
Sarah Pierce,
Sales Promotions &
Agency Relations
9
TW
C
h
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ERIE FOOTPRINTS—1925 TO 2015
Extraordinary People and Pivotal Moments
that Made a Lasting Impression on Erie Insurance
On the heels of the 19th century’s world-changing industrial
revolution, America grew flush with wealth and opportunity.
Rail lines, mass production—and a little something called the
automobile—forever altered a once frontier nation. For young
entrepreneurs with vision and gusto, this was the time to act.
H.O. Hirt and O.G. Crawford were two such men.
Having transformed a failing grocery store into a thriving
business, H.O. Hirt became known in the business community
as a strategic thinker. His friend and partner, O.G. Crawford,
proved himself to be an aggressive and savvy salesman.
Together they were unstoppable. In 1925, they took a big risk.
They quit their jobs at the Pennsylvania Indemnity Exchange
and launched their own kind of insurance company—named
after the city they called home.
H.O. and O.G. founded the Erie Insurance Exchange, a
Policyholder-owned reciprocal exchange, and the Erie
Indemnity Company, a company to manage its operations. In
creating “The ERIE,” the two shaped a company based on an
important principle: Insurance shouldn’t just be for the rich,
but for all the hard-working people around them who had no
way to shelter their families from unpredicted loss and keep
secure what they worked so hard to achieve. In H.O.’s words,
“Insurance is the most important thing a person buys because it protects him against the loss of
everything he has in the world.”
His vision became the founding principle for ERIE—to provide the people of their community
with “as near perfect protection, as near perfect service as is humanly possible, and to do so at the
lowest possible cost.” As we celebrate our 90th anniversary, ERIE remains true to these words.
ERIE Employees and Agents are, as our anniversary theme says, Above All Together in our
united and unshakeable purpose to deliver our promise to be Above all in
S
ER
V
I
C
E
.
Following are some of the extraordinary people and the pivotal moments—from 1925 to 2015—
that helped make The ERIE what it is today.
10
“Insurance is themost important
From top left to right: Patrick Duda, Corporate Marketing Services - Patrick Murphy, Claims Refresh - Sandra Smialek, Customer Service Program
Management - Norma Upperman, Commercial Underwriting - Gretchen Clorley, Corporate Services - Darrell Thorpe, Diversity & Inclusion -
Evonne Hanson (retired), IT Software Development - Lee’a Thigpen, IT Service Management - Naveen Davala, Commercial Lines Technology
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11
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Eileen Polito,
Total Rewards
12
1926
Salesman of the Year
In 1926, just 40 days shy of its
first anniversary, Erie Insurance
was already about to close its
doors because it needed $67,000 to
comply with a recently legislated
guarantee-fund requirement of
$100,000. But a 90-day extension,
two $25,000 loans from local
banks and a super salesman in
O.G. Crawford saved the company.
O.G. is said to have sold 243 auto
policies in just 30 days! His heroic
efforts remain an inspiration to all
of us working to help ERIE reach
an extraordinary milestone in
2015—5 million policies in force.
1927
The Agent Advantage
The Ralph C. Mehler Insurance Agency was founded
in 1925 in Sharpsville, Pennsylvania. Two years
later, the agency signed on to represent The ERIE.
Mehler remains ERIE’s longest-running independent
agency, now led by the family’s third generation.
This kind of enduring trust comes from a tradition
of collaboration and cooperation between The ERIE
and its independent Agents. It’s represented not only
through strong day-to-day business relationships
but through ERIE’s ongoing Agent task forces and
combined annual meeting. ERIE leaders and Agents
from throughout the footprint gather to talk about
how to improve business operations and make Erie
Insurance a sought-after brand in the marketplace.
Each year, we also gather to celebrate our Agents’
success at Branch Recognition Meetings throughout
our territories.
1927
Above all in
S
ER
V
I
C
E
SM
Samuel P. Black joined Erie
Insurance in 1927 as the
company’s first full-time adjuster
and claims manager and worked
closely with H.O. Hirt to respond
to ERIE’s Customers. H.O. believed
that it was the responsibility
of ERIE adjusters and claims
Employees to be “ambassadors
of good will” even during the
most difficult or inconvenient
times. Sam embodied this. He
installed a phone extension in his
room at the nearby YMCA. He
was 24/7 well before it became
a customer service “strategy.”
This extraordinary attention to
ERIE Customers emphasized the
powerful and enduring ERIE
motto H.O. set out at the start:
“Above all in
S
ER
V
I
C
E
.”
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Nettie Johnson,
Mail & Document Services
13
1928
The Write Stuff
H.O. Hirt was prolific, and when he put pen to
paper, his words resonated beyond his corner office.
On May 1, 1928, he published his first newsletter,
called
S
ER
V
I
C
E
, as a way to regularly communicate
with the field and quickly address common business
questions and issues.
S
ER
V
I
C
E
set the stage for the
weekly Bulletin, which started on Aug. 1, 1931. The
Bulletin continues to be published today in the same
purposeful and plain-spoken spirit as H.O.’s first
columns and helps keep both Agents and Employees
close to ERIE’s business strategy.
1934
Super Security
As America recovered from the Great Depression, The ERIE lived up to its promise to provide “as near perfect protection” by
introducing a brand-new Super Standard Auto Policy in 1934. Like its forward-thinking founders, the product and its “Xtra
features” were ahead of its time. Erie Insurance offered much more protection than what people could normally afford and
showed consumers it was a company that cared. ERIE’s Super Standard Auto Policy later became “the standard” auto policy
in the United States. Today, The ERIE continues to develop industry-leading insurance products like ERIE Rate Lock
®
for
more stable insurance premiums and ErieSecure Home
®
with guaranteed replacement costs.
1938
You Can Go Home Again
Nearing its 13th anniversary, ERIE moved its Home Office
from the original office space in the Scott Block Building at
10th and State Streets to the C.F. Adams Building at Sixth
and French. H.O. Hirt described the building, constructed
in 1910, as “magnificent…the most cheerfully daylight place
we have ever worked in.” The company remained there until
the mid-1950s, when it moved across the street into a newly
constructed Georgian colonial-style headquarters. After
decades of service as a center for the developmental needs
of children, the former C.F. Adams Building will return to
active duty as part of ERIE’s campus in 2015, housing the
Erie Insurance Heritage Center.
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Tesha NesbitArrington,
Diversity & Inclusion
1940
Fire Starter
Because ERIE started out insuring
automobiles exclusively, ERIE Agents
looked to other companies to meet
their Customers’ non-auto needs. In
1940, The ERIE began closing that
gap, offering fire insurance protection
for homes, followed by casualty
and liability in subsequent years.
Expanding insurance coverages was
a critical business move for The ERIE
through the decades. Today, Erie
Insurance Group is a full-service
insurer offering life, home, auto and
commercial coverage with popular
products such as ErieSecure Home
®
,
Ultraflex
SM
, Ultrapack
SM
, and the
recently released Custom Collection
SM
.
1941
Sharing in Success
H.O. Hirt never forgot that he was
in the relationship business and that
its success depended on satisfied
Employees serving satisfied Customers.
As he once said, “If you give your
Policyholders the proper service that
they have a right to expect, you will grow
and you will prosper.” To that end, H.O.
was again ahead of his time when, in
1941, he led the industry by offering
a profit-sharing bonus to all of his
Employees, not just executives. The
ERIE quickly developed a reputation
for being a great place to work and
became a sought-after place for
employment. Today, ERIE has nearly
5,000 Employees in its footprint from
all over the globe, and continues to
attract prospective hires, with tens
of thousands of unsolicited resumes
received each year.
1945
First Lady of Rate
Elizabeth “Liz” Sandstrom was a trail
blazer. Shortly after being hired to
manage the Filing Department in 1945,
Liz’s analytic capability led her up the
corporate ladder where she eventually
headed ERIE’s first Statistics Department
and established consistent practices for the
company. She went on to lead the Statistical
& Pricing Department—the forerunner
of today’s Actuarial Division. Liz became
the first woman in Erie County to earn a
Chartered Property Casualty Underwriter
designation. Her imprint endures not only
in ERIE’s strong actuarial discipline, but
in the organization’s focus on learning and
development for all Employees. In 2014,
Employees completed over 35,000 training
courses, more than 100 Employees obtained
insurance designations and over 100
Employees participated in ERIE’s tuition-
reimbursement program.
1946
A Children’s Story
Following World War II, H.O. became
very interested in the plight of children
orphaned by the war. He began
privately donating to a nationally
established War Orphans Fund, and
wrote numerous columns about the
fund and the status of newly adopted
orphans in The Bulletin, his weekly
newsletter to Agents. In 31 years
following his first donation in 1949,
ERIE Employees and Agents adopted
50 children and donated an average of
$12,000 annually. This set in motion
our deeply-rooted culture of giving and
support for children’s development—
most recently, providing financial
and advisory support to Erie’s public
Pfeiffer-Burleigh School. The ERIE
also reaches communities throughout
its footprint by matching Employees’
generous donations to local and
national charities. Its community
outreach is also embodied in the ERIE
Service Corps, which allows Employees
to devote a full work-day to local
volunteer efforts.
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Nick Schneider,
Actuarial
1949
Like Father, Like Son
Although he started working for ERIE part time in 1937
when he was just 12 years old, F. W. “Bill” Hirt officially
joined the company in 1949, after serving as a Naval
officer in World War II, finishing college and receiving
an MBA from the Wharton School at the University
of Pennsylvania. He was responsible for bringing The
ERIE into the automation age by converting handwritten
records to the then latest punch-card technology.
During his 41-year career, he held a variety of positions,
including Secretary, Treasurer (CFO) and Executive Vice
President. In 1976, he succeeded his father in leading The
ERIE and went on to become the second longest tenured
CEO in ERIE’s history. Under Bill’s leadership, ERIE’s
premiums increased nearly sevenfold, topping $1.1 billion
at his retirement in 1990. Also, among Bill’s lasting
imprint is ERIE’s first subsidiary, the Erie Family Life
Insurance Company (EFL), which he organized in 1967
and managed. Today, ERIE’s life business is an integral
part of the Erie Insurance Group’s book of business and
our commitment to serving the coverage needs of our
Customers. Bill was active in leadership positions for a
number of charitable and community organizations, and
was a longtime board member of the National Association
of Independent Insurers (NAII), now the Property
Casualty Insurers Association of America (PCI).
1953
Making History
On September 15, 1953, a 17-year-old recent high school
graduate, Tom Hagen, joined The ERIE as a part-time file
clerk just before entering college. He continued to work at
The ERIE throughout college and summers in underwriting
and on special projects. After graduating from The Ohio
State University and serving as an active-duty Naval officer,
Tom became H.O. Hirt’s Assistant to the President in 1960,
serving him for a dozen years. Tom also served as Secretary
to the Board for 20 years, and as the number two executive
(Executive Vice President and then President) for over 14 years.
During that time he founded The ERIE’s first stock property/
casualty subsidiary, Erie Insurance Company, in 1972 and later,
Flagship City Insurance Company in 1992. He followed Bill
Hirt as Chairman of the Board and CEO from 1990 to 1993 and
later, succeeded Bill as non-executive Chairman of the Board,
since 2007. Tom retired from the Navy Reserve as a Captain
and has since served as Pennsylvania Secretary of Commerce
and Secretary of Community & Economic Development.
Tom takes an active role in many business and community
activities, including past Chairman of the Pennsylvania
Chamber of Business and Industry. A student of history like
his father-in-law, H.O. Hirt, Tom has taken an active role in the
revitalization of Erie’s historic neighborhoods and restoration of
some of the city’s treasured homes and public buildings.
15
39679.indd 19 3/16/15 8:01 AM
1953
Spring Forward
In the early 1950s, the post-war boom was bringing in more
business than even H.O. Hirt could have predicted. The ERIE was
growing so quickly that it knew it was time to expand outside of
Pennsylvania. In 1953, ERIE opened its first out-of-state branch
office in Silver Spring, Maryland. The branch, which started in
the living room of founding Branch Manager Frank Yarian, earned
$1 million in premium in just five years. Geographic expansion
has been a key strategy for The ERIE ever since. In addition to
Maryland, ERIE also began writing in Washington, D.C., in 1953 and
then in Virginia in 1955. In the 1960s, The ERIE opened branches in
West Virginia and Ohio, followed by Indiana in 1978 and Tennessee
in 1987. ERIE began selling insurance in North Carolina, New York
and Illinois in the 1990s and then opened a branch in Wisconsin in
2000. In 2014, The ERIE entered its 12th state, Kentucky.
Alicia Aldridge,
Service Delivery
16
1956
The Spirit of America
The post-war boom caught H.O. by
surprise when his original prediction
of a $50,000 per year growth was
actually $50,000 per month between
1945 and 1955. ERIE’s extraordinary
market success resulted in Employees
working elbow to elbow in the
company’s latest office location, the
C.F. Adams Building. So in 1956,
ERIE erected a bold new building
that would symbolize ERIE’s
patriotic spirit and its leader’s respect
for American history. What is now
called the H.O. Hirt Building, was
inspired by our country’s famed
Independence Hall in Philadelphia.
Even as more structures have been
added to the ERIE campus, the
H.O. Hirt Building stands apart as
a reminder of one man’s American
dream—and its cupola remains
a symbol of ERIE’s stability and
uniqueness captured in our logo.
1963
Pioneer Spirit
Not satisfied with its new and generic
homeowners policy, H.O. hired a
one-man product development
department in Don Eagan. Don was
charged with creating a new and
improved homeowners policy that
would be true to the mission of The
ERIE: “To provide our policyholders
with as near perfect protection, as near
perfect service as is humanly possible,
and to do so at the lowest possible
cost.” Eagan first created ERIE’s
popular Pioneer Home Protector
policy and then launched a whole
new commercial sales strategy with
the Pioneer Business Protector policy.
Today, Eagan’s legacy lives on in
ERIE’s thriving commercial business,
which is leading the industry with
innovative new products such as
data breach protection.
39679.indd 20 3/16/15 8:01 AM
Sydney Cassidy,
Financial Planning
& Analysis
17
1977
House Proud
In 1977, The ERIE joined other bayfront area businesses and institutions to form a nonprofit called the Bayfront East Side TaskForce (BEST).
A $7.3 million federal grant to the City of Erie made it possible for The ERIE to expand its footprint and build the F.W. Hirt Perry Square
Building—a major addition to the Home Office campus. The Urban Development Action Grant included restoration of local neighborhoods,
as well as a row of historic townhomes on East Fifth and Holland Streets. ERIE Chairman Tom Hagen has personally been involved in
much local revitalization. He led the restoration of the Charles M. Tibbals House, an 1842 Greek Revival home on ERIE’s campus and the
100-year-old C.F. Adams Building.
1973
Fast Forward
H.O. once wrote in The Bulletin, “From that first day—April 20,
1925—ERIE has never taken a backward step.” He then continued
to write that ERIE “has progressed from a tiny, purely local insurer
of autos only, to a 10-million dollar, four-state insurer of nearly all
lines.” By 1973, Erie Insurance became the largest Pennsylvania-
based auto insurer in the state and today, Erie Insurance
policies are available in 12 states and the District of Columbia.
1980
A Family Affair
Upon H.O.’s retirement in 1980, his daughter, Susan Hirt Hagen,
was named a director of the Erie Indemnity Company. The first
woman to hold that office at The ERIE, Susan is also the longest
serving active ERIE Board Member. H.O’s grandson, Jonathan
Hirt Hagen, joined the board in 2005, today serving as Vice
Chairman. H.O’s eldest grandchild (and Bill Hirt’s daughter)
Elizabeth (Betsy) Hirt Vorsheck also serves on the ERIE board,
having joined in 2007. The ERIE was and continues to be family-
focused, with friends, family and neighbors working side by side
across the footprint. It reflects one of our longstanding values—
the ERIE Family Spirit of Employees and Agents working together
for the good of our Customers.
39679.indd 21 3/16/15 8:01 AM
Jishnu Sassi,
Claims Technology Services
18
1985
First Responders
The ERIE faced a great many weather events since it was
founded, but its commitment to service was truly put
to the test when an F4 tornado hit the town of Albion,
Pennsylvania, on May 31, 1985. ERIE moved in fast and
quickly responded by cleverly spray-painting debris to
deliver messages to policyholders and claimants when
communications were down. Since then, ERIE has developed
a reputation as first responders to catastrophic events that
impact our Customers. More recently, this was, again, evident
in November 2013 when the town of Washington, Illinois,
was hit by a tornado with the same velocity as Albion. In
May 2014, a devastating hail storm enveloped Harrisburg,
Pennsylvania. ERIE quickly responded to thousands of
Customers’ claims in what would be the largest weather-
related auto claims event in ERIE’s history.
1992
Claims to Be the Best
In 1992, The ERIE implemented a new technology called the Claims Management System (CMS). This bold technological
achievement not only improved overall efficiency and helped reduce the need for paper claims, it set in motion ERIE’s focus on
technology as a way to better serve our Customers and help Agents run their business. Today, Claims Refresh, one of our top
strategic initiatives, is enabling the next generation of technology and customer-focused processes to further advance quick and
efficient response to The ERIE‘s Customers and claimants.
1993
Above and Beyond
The late Bob Marrion started at Erie Insurance in 1966
as a claims adjuster and quickly became an inspiration
to his peers for his ability to connect and form lasting
relationships with Customers and claimants. It was not
unusual to see Bob burning the midnight oil to make sure
a Customer’s question was answered or claim was settled.
Bob became a vice president in 1984 and died in 1992.
The following year, Bob’s commitment to ERIE Customers
was immortalized in one of The ERIE’s most prestigious
awards, the Robert H. Marrion Award—setting the
standard for exceptional service. Each year, a Claims
Employee is recognized for delivering a new level of
customer service in each state of our footprint as a way to
celebrate and reinforce The ERIE’s long-standing promise
to be Above all in
S
ER
V
I
C
E
.
39679.indd 22 3/16/15 8:02 AM
Maria Carney,
Actuarial
Donna Mushrush,
Personal Lines Product Services
19
1993
On the Market
The early 1990s were an exciting
time financially for ERIE. In 1993—
nearly 70 years after the Company’s
founding—Erie Indemnity Company
Class A stock became available to
the public. In 1994, Erie Indemnity
registered with the Securities and
Exchange Commission (SEC), and
was listed on the NASDAQ as “ERIE”
a year later. The ERIE has paid a
dividend to its stockholders every
year since 1933, and has repeatedly
earned recognition from A.M. Best,
Fortune and Ward Group for its robust
financial performance.
2000
Many Milestones
The ERIE celebrated its 75th
anniversary as it approached 3 million
policies in force and added Wisconsin
to its footprint with the opening of
the Waukesha Branch. In 2015, The
ERIE marked its 90th anniversary,
and approached another important
milestone: 5 million policies in force.
2001
Power Position
In 2001, ERIE received its first J.D.
Power award, ranking highest in
overall satisfaction for homeowners
insurance in the inaugural J.D. Power
Homeowners Insurance Study. Since
then, The ERIE has received 11 J.D.
Power awards, including highest in
the Collision Repair Satisfaction Study,
highest in Customer Satisfaction
with the Auto Insurance Purchase
Experience and top honors in the
Small Business Commercial Insurance
Study. J.D. Power is just one way
that Erie Insurance is recognized as a
service leader throughout the industry.
39679.indd 23 3/16/15 8:02 AM
2011
Future-Focused Service
Ever since Sam Black installed an ERIE phone
extension in his YMCA room in 1927 to quickly
respond to Customers’ claims, The ERIE has done
whatever it takes to provide reliable and quick
claims response. In 2011, ERIE launched a fleet of
Sprinter
TM
vans to immediately respond to areas
in our footprint hit by natural disaster. With
fully equipped work stations directly connected
to ERIE’s service network, these vans continue
to provide on-the-ground claims service and
emergency supplies such as food and water to
ERIE Customers and other affected residents.
Today, The ERIE is experimenting with the latest
technology, including airborne drones, to more
quickly and effectively handle insurance claims.
Jae Aoh,
Creative Services
2013
The 500 Club
In 2013, The ERIE hit a decade mark on the
Fortune 500 list (and, again, making it in 2014).
The company also earned a seventh consecutive
year on the Ward’s 50 listing and reached a
financial milestone—$5 billion in direct written
premium. In 2014, ERIE’s consistent performance
and transparent operations also earned it a spot
on Forbes magazine’s 50 Most Trustworthy
Companies in America. The ERIE is proud to be
an insurer that, for 90 years, has succeeded in a
competitive marketplace while maintaining the
highest of ethical standards.
2014
Above All in Training
H.O. Hirt once wrote an instruction booklet to help Agents and Employees in the field understand and promote The ERIE’s
way of doing business. The spirit of that noteworthy document—called the “Yellow Book”—lives on in an extraordinary
new building on the ERIE campus called the Technical Learning Center (TLC). Opened in January 2015, it’s a state-of-the-art
training facility for ERIE claims handlers and risk control consultants. The TLC encompasses a three-story house constructed
from hundreds of different building materials and 14 high-tech auto bays. The facility propels ERIE ahead of its competition
with its advanced and comprehensive learning technology. More importantly, it promotes to a new generation of ERIE
Employees and Agents what it means to be Above all in
S
ER
V
I
C
E
.
20
39679.indd 24 3/16/15 8:02 AM
Crystal Walters,
Personal Lines Underwriting
2014
Thinking Ahead
During the early 20th century, IBM CEO
Thomas Watson, Sr., used “Think” as a quick
slogan for his then fledgling technology
company. This simple message resonated
with H.O. who placed a “THINK” plaque
in his office, but added an ERIE twist.
He said, “Thinking—yes, thinking—plus
compassion put The ERIE where it is today.”
Through the following decades, The ERIE has
developed a tradition of thinking creatively
to provide the highest level of service to
our Customers. In 2014, ERIE’s President
and CEO Terry Cavanaugh started a new
digital arena of creative collaboration and
innovation called ThinkAhead: A CEO
Challenge that sparked hundreds of new
process efficiencies and product ideas. That
same year, The ERIE launched a first-of-
its-kind coverage to protect drivers who
participate in online ridesharing services.
2015
Above All Together
The theme for the 90th anniversary—“Above All Together”—combines two cherished values: The ERIE Family Spirit of
Employees and Agents working together for the good of our Customers and our forever promise to be Above all in
S
ER
V
I
C
E
SM
.
Pictured above are ERIE VIPs—Employees selected by their peers as models of our company’s “Values in Practice”—and
dedicated Employees who volunteered to make a memorable 90th anniversary celebration. The anniversary year is being marked
by company-wide festivities, a social media tribute to ERIE Employees, retirees, Agents and community leaders, and the grand
opening of campus additions, including the Erie Insurance Heritage Center. Thoughtfully renovated, it will contain treasured
archives as a way to remember the significant contribution The ERIE has made to the communities it serves and the insurance
industry at large.
21
39679.indd 25 3/16/15 8:02 AM
CORPORATE DIRECTORY
BOARD OF DIRECTORS
J. RALPH BORNEMAN JR.,
CIC, CPIA
1, 5, 7C, 8
President, Chief Executive Officer and
Chairman of the Board, Body-Borneman
Insurance & Financial Services, LLC
TERRENCE W. CAVANAUGH
5, 6, 7
President and Chief Executive Officer,
Erie Insurance Group
JONATHAN HIRT HAGEN, J.D.
2, 3, 4C, 7, 8
Vice Chairman of the Board of
Erie Indemnity Company;
Vice Chairman, Custom Group Industries
SUSAN HIRT HAGEN
1,
4, 5, 8C
Co-Trustee, H.O. Hirt Trusts
THOMAS B. HAGEN
1C,
9
Chairman of the Board, Erie Indemnity Company;
Chairman, Custom Group Industries
C. SCOTT HARTZ, CPA
6, 7
Chief Executive Officer,
TaaSera, Inc. and Hartz Group
CLAUDE C. LILLY III,
Ph.D., CPCU, CLU
2C, 6, 7, 8
President, Presbyterian College
THOMAS W. PALMER, ESQ.
2, 3C, 4, 7
A member of the law firm of Marshall & Melhorn, LLC
MARTIN P. SHEFFIELD, CPCU
1, 2, 7, 8
Owner, Sheffield Consulting, LLC
RICHARD L. STOVER
2, 6C
Managing Principal, Birchmere Capital, L.P.
ELIZABETH HIRT VORSHECK
1, 4, 5C, 7, 8
Co-Trustee, H.O. Hirt Trusts
ROBERT C. WILBURN, Ph.D.
3, 5, 6
President and Chief Executive Officer,
Medal of Honor Museum Foundation;
Principal, Wilburn Group
1
Member of the Executive Committee
2
Member of the Audit Committee
3
Member of the Executive Compensation
and Development Committee
4
Member of the Nominating and
Governance Committee
5
Member of the Charitable Giving Committee
6
Member of the Investment Committee
7
Member of the Strategy Committee
8
Member of the Exchange Relationship Committee
9
Ex-officio non-voting member of Audit Committee
and Executive Compensation and Development
Committee and voting member of all
other committees
C
Denotes Committee Chairperson
22
39679.indd 26 3/16/15 8:03 AM
EXECUTIVE OFFICERS
TERRENCE W.CAVANAUGH
President and Chief Executive Officer
RICHARD F. BURT JR., FCAS, MAAA
Executive Vice President, Products
MARCIA A. DALL,CPA, CPCU
Executive Vice President and
Chief Financial Officer
GEORGE D. “CHIP” DUFALA, CPCU
Executive Vice President, Services
ROBERT C. INGRAM III
Executive Vice President and
Chief Information Officer
JOHN F.KEARNS,FCII
Executive Vice President, Sales and Marketing
SEAN J. McLAUGHLIN,ESQ.
Executive Vice President, Secretary
and General Counsel
SENIOR OFFICERS
JEFFREY W. BRINLING, CPCU
Senior Vice President, Corporate Services
MARC CIPRIANI, CIC
Senior Vice President, Commercial Lines
LOUIS F. COLAIZZO,CIC
Senior Vice President, Sales and Agency
BRADLEY C. EASTWOOD, FCAS, MAAA
Senior Vice President, Actuarial, and Chief Actuary
RUBEN F. FECHNER III
Senior Vice President, Business Applications and Support,
Information Technology
LORIANNE FELTZ, CPCU, CIC,CPIW
Senior Vice President, Customer Service
GREGORY J. GUTTING, CPA
Senior Vice President and Controller
JAYASHREEISHWAR
Senior Vice President, Chief Underwriting Officer -
Commercial Lines
KEITH E. KENNEDY
Senior Vice President, Strategic and
Integrated Services, Information Technology
CHRISTINA M. MARSH, CPA
Senior Vice President, Services
MATTHEW W. MYERS, CPCU, CIC, SCLA, AIC,
AIM, AIS, AAM
Senior Vice President, Claims Refresh Program Sponsor
TIMOTHY G. NECASTRO,CPA, CIC
Senior Vice President and Regional Officer, West Region
RANDALL T.PETERMAN
Senior Vice President, Financial Planning and Analysis,
Investor Relations and Capital Management
MICHAEL A. PLAZONY,FLMI
Senior Vice President, Erie Family Life Insurance Company
BRADLEY G. POSTEMA
Senior Vice President and Chief Investment Officer
SHERRI A.SILVER, CPCU
Senior Vice President, Strategic Marketing
DOUGLAS E. SMITH, FCAS,MAAA
Senior Vice President, Personal Lines
GARY D.VESHECCO,ESQ.
Senior Vice President and Deputy General Counsel, Law
DIONNE WALLACE OAKLEY
Senior Vice President, Human Resources
ANN H.ZAPRAZNY
Senior Vice President and Regional Officer, East Region
CHRISTOPHER J. ZIMMER, CIC,LUTCF
Senior Vice President, Field Claims
23
39679.indd 27 3/16/15 8:03 AM
The F. W. Hirt Quality Agency Award is the highest honor bestowed on an ERIE agency. Itrecognizes
long-term profitability and growth, thorough and responsible underwriting practices, and continuing
commitment to education.
NEW Y
O
RK BRAN
CH
2014 T
h
e R
y
an A
g
enc
y
2012 Qu
i
nton Insurance Protect
i
on Team
2011 Jo
h
n J. Petruzzi Agenc
y
2010
Lon
g
A
g
enc
y
, Inc
.
PITT
S
B
U
R
G
H BRAN
CH
201
4 Bruner Insurance A
g
enc
y
, LL
C
2013 H
all
m
a
n In
su
r
a
n
ce
2012 Hutton-Blews Insurance
,
LL
C
2011 Madia Insurance A
g
enc
y
, Inc
.
2010 Wi
ll
iam S. E
b
er Insurance A
g
enc
y
RALEI
G
H BRAN
CH
2012 Bree
d
en Insurance Services
,
Inc
.
RI
C
HM
O
ND BRAN
CH
2014 Cascade Insurance Grou
p
, LLC
2013 G.L. Hern
d
on Insurance A
g
enc
y
, Inc
.
2010 L
ewis
In
su
r
a
n
ce
A
ssociates
R
O
AN
O
KE BRAN
CH
2013 The Winchester Grou
p
S
ILVER
S
PRIN
G
BRAN
CH
2014 Wa
lk
er Poo
l
e Insurance, Inc
.
2013 Stat
l
an
d
an
d
Katz
,
LT
D
2012 McCabe Insurance Associates
,
Inc
.
2011 Brownin
g
-Rea
g
le Insurance A
g
enc
y
2010 O
ld
e Towne Insurance A
g
enc
y
, Inc
.
WE
S
T VIR
G
INIA BRAN
CH
201
4 Insurance
C
enters
,
Inc
.
2012 H
ott
In
su
r
a
n
ce
a
n
d
Fin
a
n
c
i
a
l S
e
r
v
i
ces
2011 Unite
d
Securit
y
A
g
enc
y
2010 Assure Amer
i
ca Cor
p
orat
i
o
n
WI
SCO
N
S
IN BRAN
C
H
2013 S
p
arks Insurance
A
LLENT
O
WN BRAN
CH
2014 Bo
dy
-Borneman Associates, Inc
.
2013 Kone
ll
Insurance A
g
enc
y
2012 Ro
b
ert S. Mase
y
c
h
i
k
A
g
enc
y
, Inc
.
2011 Paciotti Insurance A
g
enc
y
2010 Ce
ll
ucci-Foran Insurance A
g
enc
y
C
ANT
O
N BRAN
CH
2013 M
i
nor Insurance A
g
enc
y
, LL
C
C
HARL
O
TTE BRAN
CH
2013 Stan
b
err
y
Insurance A
g
enc
y
2010 En
l
oe Insurance A
g
enc
y
, Inc
.
CO
L
U
MB
US
BRAN
CH
2014 Mitchell Insurance A
g
enc
y
, Inc
.
2012 John W. Nei
g
hbar
g
er Insurance A
g
enc
y
, LL
C
ERIE BRAN
CH
201
4 Turner Insurance A
g
enc
y
, Inc
.
2013 B
o
r
t
In
su
r
a
n
ce
S
e
r
vice
2012 Pfeffer Insurance A
g
enc
y
, Inc
.
2011 Milliren-Hoak A
g
enc
y
2010 H
i
stor
i
c Square A
g
enc
y
HARRI
S
B
U
R
G
BRAN
CH
201
4
C
RS Insurance
,
Inc
.
2013 Saleme Insurance Services
,
Inc
.
2012 Michael A. Starr Insurance, Inc
.
2011 Fisc
h
er Insurance A
g
enc
y
2010 S.M. Smit
h
& Compan
y
ILLIN
O
I
S
BRAN
CH
2011 Y
ae
k
e
l
&
A
ssoc
i
ates
In
su
r
a
n
ce
S
e
r
v
i
ces
INDIANA BRAN
CH
2014 A
ld
ri
dg
e Insurance, Inc
.
2013 Reliance Insurance A
g
enc
y
2012 Masters Insurance A
g
enc
y
2011 Mart
i
n Insurance A
g
enc
y
2010 Nic
h
o
l
s Insurance A
g
enc
y
F. W. HIRT QUALITY AGENCY AWARD WINNERS 2010–2014
24
39679.indd 28 3/16/15 8:03 AM
(1) Before income taxes
(2) In addition to the regular quarterly dividend declared in November 2012, Indemnity’s Board of Directors also declared a special one-time cash dividend of
$2.00 on each Class A share and $300.00 on each Class B share.
Net income per Class A share - diluted
Dividends declared per Class A share
(2)
2012
$4.25
2013
$2.4125
2014
$2.586
2013
$3.08
2012
$2.99
2014
$3.18
25
ERIE INDEMNITY COMPANY FINANCIAL HIGHLIGHTS
(dollars in millions, except share data)
PROPERTY & CASUALTY GROUP
Direct written premium $ 4,631 $ 5,076 $ 5,514
Statutory combined ratio 103.8 97.2 100.6
INDEMNITY SHAREHOLDER INTEREST
FINANCIAL OPERATING DATA:
Management fee rate 25% 25% 25%
Revenue from management operations $ 1,188 $ 1,297 $ 1,407
Income from management operations
(1)
205 209 223
Gross margin from management operations 17.3% 16.1% 15.8%
Income from investment operations
(1)
36 38 28
Net income 160 163 168
Return on equity 22.5% 23.6% 23.3%
PER SHARE DATA:
Net income per Class A share - diluted $ 2.99 $ 3.08 $ 3.18
Dividends declared per Class A share
(2)
4.25 2.4125 2.586
Dividends declared per Class B share
(2)
637.50 361.875 387.90
FINANCIAL POSITION DATA:
Total assets $ 1,160 $ 1,213 $ 1,319
Total equity 642 734 703
Weighted average Class A common and equivalent Class B shares
outstanding - diluted 53,547,833 52,855,757 52,616,234
2012 2013 2014
Return on equity
2012
22.5%
2013
23.6%
2014
23.3%
Revenue from management operations
2012
$1,188
2013
$1,297
2014
$1,407
39679.indd 29 3/16/15 8:03 AM
39679.indd 30 3/16/15 8:03 AM
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-24000
ERIE INDEMNITY COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 25-0466020
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 Erie Insurance Place, Erie, Pennsylvania 16530
(Address of principal executive offices) (Zip code)
(814) 870-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Class A common stock, stated value $0.0292 per share, listed on the NASDAQ Stock Market, LLC
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large Accelerated Filer X Accelerated Filer Non-Accelerated Filer Smaller Reporting Company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X
Aggregate market value of voting and non-voting common stock held by non-affiliates as of the last business day of the registrant’s most
recently completed second fiscal quarter: $1.8 billion of Class A non-voting common stock as of June 30, 2014. There is no active market for
the Class B voting common stock. The Class B common stock is closely held by few shareholders.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
46,189,068 shares of Class A common stock and 2,542 shares of Class B common stock outstanding on February 20, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Part III of this Form 10-K (Items 10, 11, 12, 13, and 14) are incorporated by reference to the information statement on Form 14
(C) to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2014.
26, 2015
2
INDEX
PART ITEM NUMBER AND CAPTION PAGE
I Item 1. Business 3
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 19
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Mine Safety Disclosures 20
II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
21
Item 6. Selected Consolidated Financial Data 23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 63
Item 8. Financial Statements and Supplementary Data 67
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 123
Item 9A. Controls and Procedures 123
Item 9B. Other Information 123
III Item 10. Directors, Executive Officers and Corporate Governance 125
Item 11. Executive Compensation 126
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
126
Item 13. Certain Relationships and Related Transactions, and Director Independence 126
Item 14. Principal Accountant Fees and Services 126
IV Item 15. Exhibits and Financial Statement Schedules 127
Signatures 128
3
PART I
ITEM 1. BUSINESS
General
Erie Indemnity Company (“Indemnity”) is a publicly held Pennsylvania business corporation that has been the managing
attorney-in-fact for the subscribers (policyholders) at the Erie Insurance Exchange (“Exchange”) since 1925. The Exchange is
a subscriber owned, Pennsylvania-domiciled, reciprocal insurer that writes property and casualty insurance.
Indemnity’s primary function is to perform certain services for the Exchange relating to the sales, underwriting, and issuance of
policies on behalf of the Exchange. This is done in accordance with a subscriber’s agreement (a limited power of attorney)
executed by each subscriber (policyholder), which appoints Indemnity as their common attorney-in-fact to transact business on
their behalf and to manage the affairs of the Exchange. Pursuant to the subscriber’s agreement and for its services as attorney-
in-fact, Indemnity earns a management fee calculated as a percentage of the direct premiums written by the Exchange and the
other members of the Property and Casualty Group (defined below), which are assumed by the Exchange under an
intercompany pooling arrangement.
Indemnity has the power to direct the activities of the Exchange that most significantly impact the Exchange’s economic
performance by acting as the common attorney-in-fact and decision maker for the subscribers (policyholders) at the Exchange.
The Exchange, together with its wholly owned subsidiaries, Erie Insurance Company (“EIC”), Erie Insurance Company of New
York (“ENY”), Erie Insurance Property and Casualty Company (“EPC”), and Flagship City Insurance Company (“Flagship”),
operate as a property and casualty insurer and are collectively referred to as the “Property and Casualty Group”. The Property
and Casualty Group operates in 12 Midwestern, Mid-Atlantic, and Southeastern states and the District of Columbia and writes
primarily private passenger automobile, homeowners, commercial multi-peril, commercial automobile, and workers
compensation lines of insurance.
Erie Family Life Insurance Company (“EFL”), a wholly owned subsidiary of the Exchange, operates as a life insurer that
underwrites and sells individual and group life insurance policies and fixed annuities.
The Property & Casualty Group and EFL began writing private passenger automobile, home insurance, personal excess liability
insurance, and life insurance and annuity products in Kentucky in the fourth quarter of 2014.
All property and casualty and life insurance operations are owned by the Exchange and Indemnity functions solely as the
management company.
The consolidated financial statements of Erie Indemnity Company reflect the results of Indemnity and its variable interest
entity, the Exchange, which we refer to collectively as the “Erie Insurance Group” (“we,” “us,” “our”).
“Indemnity shareholder interest” refers to the interest in Erie Indemnity Company owned by the Class A and Class B
shareholders. “Noncontrolling interest” refers to the interest in the Erie Insurance Exchange held for the subscribers
(policyholders).
Business Segments
We operate our business as four reportable segments – management operations, property and casualty insurance operations, life
insurance operations, and investment operations. Financial information about these segments is set forth in and referenced to
Item 8. “Financial Statements and Supplementary Data - Note 5, Segment Information, of Notes to Consolidated Financial
Statements” contained within this report. Further discussion of financial results by operating segment is provided in and
referenced to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained
within this report.
Management operations – We generate internal management fee revenue, which accrues to the Indemnity shareholder interest,
as Indemnity provides services to the Exchange relating to the sales, underwriting, and issuance of policies. The Exchange is
the sole customer of our management operations. Indemnity charges the Exchange a management fee, determined by our
Board of Directors, not to exceed 25% of all premiums written or assumed by the Exchange for its services as attorney-in-fact.
Management fee revenue is eliminated upon consolidation.
4
Property and casualty insurance operations – The Property and Casualty Group generates revenue, which accrues to the
noncontrolling interest, by insuring preferred and standard risks, with personal lines comprising 71% of the 2014 direct written
premiums and commercial lines comprising the remaining 29%. The principal personal lines products based upon 2014 direct
written premiums were private passenger automobile (43%) and homeowners (27%). The principal commercial lines products
based upon 2014 direct written premiums were commercial multi-peril (13%), commercial automobile (7%), and workers
compensation (7%).
The members of the Property and Casualty Group pool underwriting results under an intercompany pooling agreement. Under
the pooling agreement, the Exchange retains a 94.5% interest in the net underwriting results of the Property and Casualty
Group, while EIC retains a 5.0% interest, and ENY retains a 0.5% interest.
Historically, due to policy renewal and sales patterns, the Property and Casualty Group’s direct written premiums are greater in
the second and third quarters than in the first and fourth quarters of the calendar year. Property and casualty insurance
premiums earned accounted for approximately 86% of our total consolidated revenue in 2014, 77% in 2013, and 80% in 2012.
The Property and Casualty Group is represented by nearly 2,200 independent agencies comprising over 11,000 licensed
property and casualty representatives, which is our sole distribution channel. In addition to their principal role as salespersons,
the independent agents play a significant role as underwriting and service providers and are fundamental to the Property and
Casualty Group’s success.
The Property and Casualty Group writes business in Illinois, Indiana, Kentucky, Maryland, New York, North Carolina, Ohio,
Pennsylvania, Tennessee, Virginia, West Virginia, Wisconsin, and the District of Columbia. The states of Pennsylvania,
Maryland, Virginia, North Carolina and Ohio made up 74% of the Property and Casualty Group’s direct written premium in
2014.
While sales, underwriting, and policy issuance services are centralized at our home office, the Property and Casualty Group
maintains 25 field offices throughout its operating region to provide claims services to policyholders and marketing support for
the independent agencies that represent us.
The Property and Casualty Group ranked as the 12
th
largest automobile insurer in the United States based upon 2013 direct
premiums written and as the 16
th
largest property and casualty insurer in the United States based upon 2013 total lines net
premiums written according to A.M. Best Company.
Life insurance operations – Our life insurance operations generate revenue from the sale of individual and group life insurance
policies and fixed annuities. These products are offered through our property and casualty insurance agency force to provide an
opportunity to cross-sell both personal and commercial accounts. EFL writes business in 11 states including Illinois, Indiana,
Kentucky, Maryland, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, Wisconsin, and the District of
Columbia. The state of Pennsylvania made up 46% of EFL’s 2014 premium and annuity considerations, with Maryland,
Virginia, and Ohio making up nearly 10% each.
Investment operations – Our investment operations generate revenue 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. We actively evaluate 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, which includes consideration
for intent to sell. Revenues and losses included in investment operations consist of net investment income, net realized gains
and losses, net impairment losses recognized in earnings for our fixed maturity and preferred equity portfolios, and equity in
earnings and losses from our limited partnership investments, which include private equity, mezzanine debt, and real estate
limited partnerships. The volatility inherent in the financial markets has the potential to impact our investment portfolio from
time-to-time. Net revenues from our investment operations accounted for approximately 12% of our total consolidated revenue
in 2014, 21% in 2013, and 18% in 2012.
5
Competition
Property and casualty insurers generally compete on the basis of customer service, price, consumer recognition, coverages
offered, claims handling, financial stability, and geographic coverage. Vigorous competition, particularly in the personal lines
automobile and homeowners lines of business, is provided by large, well-capitalized national companies, some of which have
broad distribution networks of employed or captive agents, by smaller regional insurers, and by large companies who market
and sell personal lines products directly to consumers. In addition, because the insurance products of the Property and Casualty
Group are marketed exclusively through independent insurance agents, the Property and Casualty Group faces competition
within its appointed agencies based upon ease of doing business, product, price, and service relationships.
Market competition bears directly on the price charged for insurance products and services subject to regulatory limitations.
Growth is driven by a company’s ability to provide insurance services and competitive prices while maintaining target profit
margins. Industry capital levels can also significantly affect prices charged for coverage. Growth is a product of a company’s
ability to retain existing customers and to attract new customers, as well as movement in the average premium per policy.
The Erie Insurance Group has a strategic focus that we believe will result in long-term underwriting performance. First, we
employ an underwriting philosophy and product mix targeted to produce a Property and Casualty Group underwriting profit on
a long-term basis through careful risk selection and rational pricing. The careful selection of risk allows for lower claims
frequency and loss severity, thereby enabling insurance to be offered at favorable prices. The Property and Casualty Group has
continued to refine its risk measurement and price sophistication models used in the underwriting and pricing processes.
Second, the Property and Casualty Group focuses on consistently providing superior service to policyholders and agents.
Third, the Property and Casualty Group’s business model is designed to provide the advantages of localized marketing and
claims servicing with the economies of scale and low cost of operations from centralized accounting, administrative,
underwriting, investment, information management, and other support services.
Finally, we carefully select the independent agencies that represent the Property and Casualty Group. The Property and
Casualty Group seeks to be the lead insurer with its agents in order to enhance the agency relationship and the likelihood of
receiving the most desirable underwriting opportunities from its agents. We have ongoing, direct communications with our
agency force. Agents have access to a number of venues we sponsor designed to promote the sharing of ideas, concerns and
suggestions with the senior management of the Property and Casualty Group, with the goal of improving communications and
service. We continually evaluate new ways to support our agents’ efforts, from marketing programs to identifying potential
customer leads, to grow the business of the Property and Casualty Group and sustain our long-term agency relationships. High
agency penetration and long-term relationships allow for greater efficiency in providing agency support and training.
EFL, our life insurer, is subject to many of the same structural advantages and environmental challenges as the Property and
Casualty Group. Term life business accounts for the majority of policies issued by EFL, and this product line is extremely
competitive and increasingly transparent due in part to the proliferation of on-line quoting services. Besides price, ease of
application and processing improvements represent areas where companies are finding ways to differentiate themselves among
independent producers. EFL continues to progress in these areas using state-of-the-art technology and third-party vendors.
Historically, sound underwriting and disciplined approaches to pricing and investing have contributed to favorable operating
results. While EFL will be challenged to maintain these trends in the face of intensified competition going forward, we
continually shape our strategy and core processes to respond more effectively to the needs of our policyholders and
independent agents.
Employees
We employed nearly 4,700 full-time people at December 31, 2014.
6
Reserves for Property and Casualty Losses and Loss Expenses
Loss reserves are established to account for the estimated ultimate costs of losses and loss expenses for claims that have been
reported but not yet settled and claims that have been incurred but not reported. While we exercise professional diligence to
establish reserves at the end of each period that are fully reflective of the ultimate value of all claims incurred, these reserves
are, by nature, only estimates and cannot be established with absolute certainty. The factors which may potentially cause the
greatest variation between current reserve estimates and the actual future paid amounts include unforeseen changes in statutory
or case law altering the amounts to be paid on existing claim obligations, new medical procedures and/or drugs with costs
significantly different from those seen in the past, inflation, and claims patterns on current business that differ significantly
from historical claims patterns. A discussion of our property and casualty loss reserve methodology can be found in and is
referenced to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical
Accounting Estimates” contained within this report.
Losses and loss expense reserves are presented on the Consolidated Statements of Financial Position on a gross basis. The
table that follows provides a reconciliation of our loss and loss expense reserve beginning and ending balances established for
the Property and Casualty Group for the years ended December 31:
(in millions)
Property and Casualty Group
2014 2013 2012
Losses and loss expense reserves, beginning of year – Gross $ 3,747 $ 3,598 $ 3,499
Less: reinsurance recoverable, beginning of year 156 154 151
Losses and loss expense reserves, beginning of year – Net 3,591 3,444 3,348
Incurred losses and loss expenses related to:
Current accident year 3,969 3,379 3,494
Prior accident years (116) (19) (115)
Total incurred losses and loss expenses 3,853 3,360 3,379
Paid losses and loss expenses related to:
Current accident year 2,513 2,007 2,166
Prior accident years 1,220 1,206 1,117
Total paid losses and loss expenses 3,733 3,213 3,283
Losses and loss expense reserves, end of year – Net 3,711 3,591 3,444
Add: reinsurance recoverable, end of year 142 156 154
Losses and loss expense reserves, end of year – Gross $ 3,853 $ 3,747 $ 3,598
The Property and Casualty Group estimates loss reserves at ultimate cost except for workers compensation loss reserves, which
are discounted on a nontabular basis as prescribed by the Insurance Department of the Commonwealth of Pennsylvania. An
interest rate of 2.5% is used to discount these reserves based upon the Property and Casualty Group’s historical workers
compensation payout patterns. Loss and loss expense reserves were reduced by $89 million, $85 million, and $85 million at
December 31, 2014, 2013, and 2012, respectively, as a result of this discounting.
The Property and Casualty Group’s reserves for losses and loss expenses are reported net of receivables for salvage and
subrogation which totaled $171 million, $149 million, and $150 million at December 31, 2014, 2013, and 2012, respectively.
Additional discussions of our property and casualty loss reserve activity can be found in and is referenced to Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations, Property
and Casualty Insurance Operations” and “Financial Condition” sections contained within this report.
7
The following table illustrates the change over time of our loss and loss expense reserve estimates established for the Property
and Casualty Group at the end of the last ten calendar years:
Property and Casualty Group
Reserves for Unpaid Losses and Loss Expenses
(in millions) At December 31,
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Gross liability for unpaid losses and loss expenses
(LAE) $ 3,779 $ 3,830 $ 3,684 $ 3,586 $ 3,598 $ 3,584 $ 3,499 $ 3,598 $ 3,747 $ 3,853
Gross liability re-estimated as of:
One year later 3,651 3,559 3,487 3,502 3,336 3,282 3,385 3,581 3,614
Two years later 3,508 3,467 3,409 3,320 3,068 3,216 3,389 3,456
Three years later 3,464 3,412 3,307 3,101 3,043 3,223 3,289
Four years later 3,437 3,358 3,111 3,084 3,053 3,152
Five years later 3,404 3,174 3,102 3,097 3,004
Six years later 3,224 3,170 3,113 3,062
Seven years later 3,225 3,189 3,087
Eight years later 3,243 3,173
Nine years later 3,240
Cumulative (deficiency) redundancy $ 539 $ 657 $ 597 $ 524 $ 594 $ 432 $ 210 $ 142 $ 133 N/A
Gross liability for unpaid losses and LAE $ 3,779 $ 3,830 $ 3,684 $ 3,586 $ 3,598 $ 3,584 $ 3,499 $ 3,598 $ 3,747 $ 3,853
Reinsurance recoverable on unpaid losses
(1)
155 183 190 187 200 188 151 154 156 142
Net liability for unpaid losses and LAE $ 3,624 $ 3,647 $ 3,494 $ 3,399 $ 3,398 $ 3,396 $ 3,348 $ 3,444 $ 3,591 $ 3,711
Cumulative amount of gross liability paid through:
One year later $ 1,067 $ 1,019 $ 1,042 $ 1,033 $ 955 $ 1,042 $ 1,121 $ 1,212 $ 1,226
Two years later 1,630 1,621 1,573 1,538 1,474 1,591 1,705 1,819
Three years later 2,016 1,962 1,889 1,862 1,817 1,935 2,064
Four years later 2,235 2,147 2,079 2,070 2,018 2,152
Five years later 2,342 2,270 2,216 2,193 2,145
Six years later 2,427 2,368 2,291 2,274
Seven years later 2,500 2,423 2,348
Eight years later 2,542 2,470
Nine years later 2,575
(1) Reinsurance recoverable on unpaid losses represents the related ceded amounts.
Government Regulation
Property and casualty insurers are subject to supervision and regulation in the states in which business is transacted. The extent
of such regulation varies, but generally derives from state statutes that delegate regulatory, supervisory and administrative
authority to state insurance departments. Accordingly, the authority of the state insurance departments includes the
establishment of standards of solvency that must be met and maintained by insurers, the licensing to do business of insurers and
agents, the nature of the limitations on investments, the approval of premium rates for property and casualty insurance, the
provisions that insurers must make for current losses and future liabilities, the deposit of securities for the benefit of
policyholders, the approval of policy forms, notice requirements for the cancellation of policies, and the approval of certain
changes in control. In addition, many states have enacted variations of competitive rate-making laws that allow insurers to set
certain premium rates for certain classes of insurance without having to obtain the prior approval by the state insurance
department. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require
the filing of quarterly and annual reports relating to the financial condition of insurance companies.
The Property and Casualty Group is also required to participate in various involuntary insurance programs for automobile
insurance, as well as other property and casualty lines, in states in which these companies operate. These involuntary programs
provide various insurance coverages to individuals or other entities that are otherwise unable to purchase such coverages in the
voluntary market. These programs include joint underwriting associations, assigned risk plans, fair access to insurance
requirements (“FAIR”) plans, reinsurance facilities, and windstorm plans.
8
Legislation establishing these programs generally provides for participation in proportion to voluntary writings of related lines
of business in that state. The loss ratio on insurance written under involuntary programs has traditionally been greater than the
loss ratio on insurance in the voluntary market. Although currently the federal government does not directly regulate the
insurance industry, federal programs, such as federal terrorism backstop legislation and the Federal Insurance Office
established under the Dodd-Frank Act can also impact the insurance industry.
Our life insurer, EFL, is subject to similar state regulations as the Property and Casualty Group, although specific laws and
statutes applicable to life insurance and annuity carriers govern its activities. Valuation laws require statutory reserves to be
held at conservative levels, which can have a substantial impact on the amount of free surplus that is available for financing
new business and other growth opportunities.
Most states have enacted legislation that regulates insurance holding company systems such as the Erie Insurance Group. Each
insurance company in the holding company system is required to register with the insurance supervisory authority of its state of
domicile and furnish information regarding the operations of companies within the holding company system that may
materially affect the operations, management, or financial condition of the insurers within the system. Pursuant to these laws,
the respective insurance departments may examine Indemnity, as the management company, the Property and Casualty Group
and EFL at any time, and may require disclosure and/or prior approval of certain transactions with the insurers and Indemnity,
as an insurance holding company.
All transactions within a holding company system affecting the member insurers of the holding company system must be fair
and reasonable. Approval by the applicable insurance commissioner is required prior to the consummation of transactions
affecting the control of an insurer. Approval by the applicable insurance commissioner is also required in order to declare
extraordinary dividends. See Item 8, “Financial Statements and Supplementary Data – Note 21, Statutory Information, of
Notes to Consolidated Financial Statements” contained within this report.
Website Access
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those
reports are available free of charge on our website at www.erieinsurance.com as soon as reasonably practicable after such
material is filed electronically with the Securities Exchange Commission. Additionally, copies of our annual report on
Form 10-K are available free of charge, upon written request, by contacting Investor Relations, Erie Indemnity Company,
100 Erie Insurance Place, Erie, PA 16530, or calling 1-800-458-0811.
Our Code of Conduct and Code of Ethics for Senior Financial Officers are also available on our website and in printed form
upon request, and our information statement on Form 14(C) is available free of charge on our website at
www.erieinsurance.com.
9
ITEM 1A. RISK FACTORS
Our business involves various risks and uncertainties, including, but not limited to those discussed in this section. The risks
and uncertainties described in the risk factors below, or any additional risk outside of those discussed below, could have a
material adverse effect on our business, financial condition, operating results, cash flows, or liquidity if they were to develop
into actual events. This information should be considered carefully together with the other information contained in this report
and in other reports and materials we file periodically with the Securities and Exchange Commissions.
Risk Factors Related to the Indemnity Shareholder Interest
If the management fee rate paid to Indemnity by the Exchange is reduced or if there is a significant decrease in the amount of
premiums written or assumed by the Exchange, Indemnity revenues and profitability could be materially adversely affected.
Indemnity is dependent upon management fees paid by the Exchange, which represent its principal source of revenue.
Pursuant to the subscriber’s agreements with the policyholders at the Exchange, Indemnity may retain up to 25% of all
premiums written or assumed by the Exchange. Therefore, management fee revenue from the Exchange is calculated by
multiplying the management fee rate by 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. Accordingly, any
reduction in direct premiums written by the Property and Casualty Group would have a negative effect on Indemnity’s revenues
and net income. See “Risk Factors Related to the Non-Controlling Interest Owned by the Exchange”, which includes our
Property and Casualty Group and EFL insurance operations, within this section for a discussion of risks impacting direct
written premium.
The management fee rate is determined by our Board of Directors and may not exceed 25% of the premiums written or
assumed by the Exchange. The Board of Directors sets the management fee rate each December for the following year. At
their discretion, the rate can be changed at any time. The factors considered by the Board of Directors in setting the
management fee rate include Indemnity’s financial position in relation to the Exchange and the long-term needs of the
Exchange for capital and surplus to support its continued growth and competitiveness. If the Exchange’s surplus were
significantly reduced, the management fee rate could be reduced and Indemnity’s revenues and profitability could be materially
adversely affected.
If the costs of providing services to the Exchange are not controlled, Indemnity’s profitability could be materially adversely
affected.
Pursuant to the subscriber’s agreements with the policyholders at the Exchange, Indemnity is appointed to perform certain
services. These services relate to the sales, underwriting, and issuance of policies on behalf of the Exchange. Indemnity incurs
significant costs related to commissions, employees, and technology in order to provide these services.
Commissions to independent agents are the largest component of Indemnity’s cost of operations. Commissions include
scheduled commissions to agents based upon premiums written as well as additional commissions and bonuses to agents,
which are earned by achieving certain targeted measures. Changes to commission rates or bonus programs may result in
increased future costs and lower profitability.
Employees are an essential part of the operating costs related to providing services for the Exchange. As a result, Indemnity’s
profitability is affected by employee costs, including salaries, healthcare, pension, and other benefit costs. Recent regulatory
developments, provider relationships, and economic factors that are beyond our control indicate that employee healthcare costs
will continue to increase. Although Indemnity actively manages these cost increases, there can be no assurance that future cost
increases will not occur and reduce its profitability.
Technological development is necessary to facilitate ease of doing business for the agents and policyholders of the Property and
Casualty group and employees of Indemnity. If we are unable to keep pace with advancements in technology, our ability to
compete with other insurance companies may be negatively affected and result in lower revenues and reduced profitability for
Indemnity. In order to achieve a greater ease of doing business, additional costs may be incurred as we invest in new
technology and systems, which may negatively impact the profitability of Indemnity.
Our ability to attract, develop, and retain talented executives, key managers, and employees is critical to our success.
Our success is largely dependent upon our ability to attract and retain executives and other key management. The loss of the
services and leadership of certain key officers and the failure to attract and develop talented new executives and managers
10
could prevent us from successfully communicating, implementing, and executing business strategies, and therefore have a
material adverse effect on our financial condition and results of operations.
Our success also depends on our ability to attract, develop, and retain a talented employee base. The inability to staff all
functions of our business with employees possessing the appropriate technical expertise could have an adverse effect on our
business performance. Staffing appropriately skilled employees for the handling of claims and servicing of customers,
rendering of disciplined underwriting, and effective sales and marketing are critical to the core functions of our business. In
addition, skilled employees in the actuarial, finance, and information technology areas are also essential to support our core
functions.
If we are unable to ensure system availability, unable to secure sensitive information, or we make significant decisions based on
inaccurate data, the Erie Insurance Group may experience adverse financial consequences and/or may be unable to compete
effectively in the industry. Our business depends on the uninterrupted operations of our facilities, systems, and business
functions.
Indemnity is responsible for providing the technological resources necessary to support the operations of the Erie Insurance
Group. Our business is highly dependent upon the effective operations of our technology and information systems. We also
conduct business functions and computer operations using the systems of third-party vendors, which may provide software,
data storage, and other computer services to us. We rely upon our systems, and those of third-party vendors, to assist in key
functions of core business operations including processing claims, applications, and premium payments, providing customer
support, performing actuarial and financial analysis, and maintaining key data.
We necessarily collect, use, and hold data concerning individuals, businesses, strategic plans, and intellectual property. Threats
to data security, including unauthorized access, cyber-attacks, and other computer related penetrations, expose us to additional
costs for protection or remediation to secure our data in accordance with customer expectations and statutory and regulatory
requirements, including data privacy laws. Preventative actions we take, or our third-party vendors take, to reduce the risk of
cyber incidents and protect our information may be insufficient to prevent physical and electronic break-ins or other security
breaches to our computer system. Additionally, a breach of security that results in unauthorized access to our data could expose
us to an operational disruption, data loss, litigation, fines and penalties, increased compliance costs, and reputational damages.
While we maintain cyber liability insurance to mitigate the amount of financial loss, our insurance coverage may not be
sufficient to protect against all loss.
We depend on a large amount of data to price policies appropriately, track exposures, perform financial analysis, and ultimately
make business decisions. Should this data be inaccurate or insufficient, risk exposure may be underestimated and/or poor
business decisions may be made. This may in turn lead to adverse operational or financial performance.
We have an established business continuity plan to ensure the continuation of core business operations in the event that normal
business operations could not be performed due to a catastrophic event. While we continue to test and assess our business
continuity plan to ensure it meets the needs of our core business operations and addresses multiple business interruption events,
there is no assurance that core business operations could be performed upon the occurrence of such an event. Systems failures
or outages could compromise our ability to perform our business functions in a timely manner, which could harm our ability to
conduct business and hurt our relationships with our business partners and customers. Our business continuity is also
dependent on third-party systems on which our information technology systems interface and rely. Our systems and those of
our third-party vendors may become vulnerable to damage or disruption due to circumstances beyond our or their control, such
as from catastrophic events, power anomalies or outages, natural disasters, network failures, and viruses. The failure of our
information systems for any reason could result in a material adverse effect on our business, financial condition, or results of
operations.
The performance of Indemnity’s investment portfolio is subject to a variety of investment risks, which may in turn have a
material adverse effect on its results of operations or financial condition.
Indemnity’s investment portfolio is comprised principally of fixed-income maturities and limited partnerships. At
December 31, 2014, Indemnity’s investment portfolio consisted of approximately 80% fixed income securities, 16% limited
partnerships, and 4% equity securities.
All of Indemnity’s marketable securities are subject to market volatility. To the extent that future market volatility negatively
impacts Indemnity’s investments, its financial condition will be negatively impacted. We review the investment portfolio on a
continuous basis to evaluate positions that might have incurred other-than-temporary declines in value. Inherent in
management’s evaluation of a security are assumptions and estimates about the operations of the issuer and its future earnings
potential. The primary factors considered in our review of investment valuation include the extent and duration to which fair
11
value is less than cost, historical operating performance and financial condition of the issuer, short- and long-term prospects of
the issuer and its industry, specific events that occurred affecting the issuer, including rating downgrades, and, depending on the
type of security, our intent to sell or our ability and intent to retain the investment for a period of time sufficient to allow for a
recovery in value. As the process for determining impairments is highly subjective, changes in our assessments may have a
material effect on Indemnity’s operating results and financial condition. See also Item 7A. “Quantitative and Qualitative
Disclosures about Market Risk”.
If the fixed income, equity, or limited partnership portfolios were to suffer a substantial decrease in value, Indemnity’s financial
position could be materially adversely affected through increased unrealized losses or impairments.
Currently, 41% of the fixed-income portfolio is invested in municipal securities. The performance of the fixed-income
portfolio is subject to a number of risks including, but not limited to:
• Interest rate risk - the risk of adverse changes in the value of fixed-income securities as a result of increases in market
interest rates. A sustained low interest rate environment would pressure our net investment income.
• Investment credit risk - the risk that the value of certain investments may decrease due to the deterioration in financial
condition of, or the liquidity available to, one or more issuers of those securities or, in the case of asset-backed
securities, due to the deterioration of the loans or other assets that underlie the securities, which, in each case, also
includes the risk of permanent loss.
• Sector/Concentration risk - the risk that the portfolio may be too heavily concentrated in the securities of one or more
issuers, sectors, or industries. Events or developments that have a negative impact on any particular industry, group of
related industries, or geographic region may have a greater adverse effect on our investment portfolio to the extent that
the portfolio is concentrated within those issuers, sectors, or industries.
• Liquidity risk - the risk that Indemnity will not be able to convert investment securities into cash on favorable terms
and on a timely basis, or that Indemnity will not be able to sell them at all, when desired. Disruptions in the financial
markets or a lack of buyers for the specific securities that Indemnity is trying to sell, could prevent it from liquidating
securities or cause a reduction in prices to levels that are not acceptable to Indemnity.
General economic conditions and other factors beyond our control can adversely affect the value of our equity investments and
the realization of net investment income, or result in realized investment losses. In addition, downward economic trends also
may have an adverse effect on our investment results by negatively impacting the business conditions and impairing credit for
the issuers of securities held in their respective investment portfolios. This could reduce fair values of investments and
generate significant unrealized losses or impairment charges which may adversely affect our financial results.
In addition to the fixed-income securities, a significant portion of Indemnity’s portfolio is invested in limited partnerships. At
December 31, 2014, Indemnity had investments in limited partnerships of $113 million, or 9% of total assets. In
addition, Indemnity is obligated to invest up to an additional $24 million in limited partnerships, including private equity,
mezzanine debt, and real estate partnership investments. Limited partnerships are significantly less liquid and generally
involve higher degrees of price risk, the risk of potential loss in estimated fair value resulting from an adverse change in prices,
than publicly traded securities. Limited partnerships, like publicly traded securities, have exposure to market volatility; but
unlike fixed-income securities, cash flows and return expectations are less predictable. In addition, a portion of Indemnity’s
limited partnership portfolio is invested in partnerships denominated in currencies other than the U.S. dollar, and therefore
exposed to foreign exchange rate risk. Indemnity does not hedge its exposure to foreign exchange rate risk inherent in these
investments.
The primary basis for the valuation of limited partnership interests are financial statements prepared by the general partner.
Because of the timing of the preparation and delivery of these financial statements, the use of the most recently available
financial statements provided by the general partners result in a quarter delay in the inclusion of the limited partnership results
in our Consolidated Statements of Operations. Due to this delay, Indemnity’s financial statements at December 31, 2014, do
not reflect market conditions experienced in the fourth quarter of 2014.
Indemnity’s equity securities have exposure to price risk. Indemnity does not hedge its exposure to equity price risk inherent in
its equity investments. Equity markets, sectors, industries, and individual securities may also be subject to some of the same
risks that affect Indemnity’s fixed-income portfolio, as discussed above.
12
Indemnity is subject to credit risk from the Exchange because the management fees from the Exchange are not paid immediately
when premiums are written.
Indemnity recognizes management fees due from the Exchange as income when the premiums are written because at that time
Indemnity has performed substantially all of the services it is required to perform, including sales, underwriting, and policy
issuance activities. However, such fees are not paid to Indemnity by the Exchange until the Exchange collects the premiums
from policyholders. As a result, Indemnity holds receivables for management fees since such fees are based upon premiums
that have been written and assumed. Indemnity also holds receivables from the Exchange for costs it pays on the Exchange’s
behalf. The receivable from the Exchange totaled $335 million or 25% of our total assets at December 31, 2014.
Deteriorating capital and credit market conditions or a failure to accurately estimate capital needs may significantly affect
Indemnity’s ability to meet liquidity needs and access capital.
Sufficient liquidity and capital levels are required to pay operating expenses, income taxes, and to provide the necessary
resources to fund future growth opportunities, pay dividends on common stock, and repurchase common stock. Management
estimates the appropriate level of capital necessary based upon current and projected results, which include a loading for
potential risks. Failure to accurately estimate Indemnity’s capital needs may have a material adverse effect on its financial
condition until additional sources of capital can be located. Further, a deteriorating financial condition may create a negative
perception of Indemnity by third parties, including rating agencies, investors, agents, and customers which could impact
Indemnity’s ability to access additional capital in the debt or equity markets.
The primary sources of liquidity for Indemnity are management fees and cash flows generated from its investment portfolio. In
the event Indemnity’s current sources do not satisfy its liquidity needs, Indemnity has the ability to access its $100 million bank
revolving line of credit, from which there were no borrowings as of December 31, 2014, or sell assets in its investment
portfolio. Volatility in the financial markets could impair Indemnity’s ability to sell certain of its fixed income securities or, to
a greater extent, it’s significantly less liquid limited partnership investments, or cause such investments to sell at deep
discounts.
In the event these traditional sources of liquidity are not available, Indemnity may have to seek additional financing.
Indemnity’s access to funds will depend upon a number of factors including current market conditions, the availability of
credit, market liquidity, and credit ratings. In deteriorating market conditions, there can be no assurance that Indemnity will
obtain additional financing, or, if available, that the cost of financing will not substantially increase and affect our overall
profitability.
Indemnity is subject to applicable insurance laws, tax statutes, and regulations, as well as claims and legal proceedings, which,
if determined unfavorably, could have a material adverse effect on Indemnity’s business, results of operations, or financial
condition.
Indemnity faces a significant risk of litigation and regulatory investigations and actions in the ordinary course of operating its
businesses including the risk of class action lawsuits. Indemnity’s pending legal and regulatory actions include proceedings
specific to Indemnity and others generally applicable to business practices in the industries in which it operates. In Indemnity’s
operations, we are, have been, or may become subject to class actions and individual suits alleging, among other things, issues
relating to sales or underwriting practices, payment of contingent or other sales commissions, product design, product
disclosure, policy issuance and administration, additional premium charges for premiums paid on a periodic basis, charging
excessive or impermissible fees on products, recommending unsuitable products to customers, and breaching alleged fiduciary
or other duties (including our obligations to indemnify directors and officers in connection with certain legal matters).
Indemnity is also subject to litigation arising out of its general business activities such as its contractual and employment
relationships. Plaintiffs in class action and other lawsuits against Indemnity may seek very large or indeterminate amounts,
including punitive and treble damages, which may remain unknown for substantial periods of time. Indemnity is also subject to
various regulatory inquiries, such as information requests, subpoenas, and books and record examinations from state and
federal regulators and authorities. Changes in the way regulators administer those laws, tax statutes, or regulations could
adversely impact Indemnity’s business, results of operations, or financial condition. See “Risk Factors Related to the Non-
Controlling Interest Owned by the Exchange, which includes the Property and Casualty Group and EFL,” that follows for
additional discussion of litigation risks.
13
Risk Factors Related to the NonControlling Interest Owned by the Exchange, which Includes the Property and Casualty
Group and EFL
Deteriorating general economic conditions may have an adverse effect on our operating results and financial condition.
Unfavorable changes in economic conditions, including declining consumer confidence, inflation, high unemployment, and the
threat of recession, among others, may lead the Property and Casualty Group’s customers to modify coverage, not renew
policies, or even cancel policies, which could adversely affect the premium revenue of the Property and Casualty Group, and
consequently Indemnity’s management fee. These conditions could also impair the ability of customers to pay premiums when
due, and as a result, the Property and Casualty Group’s bad debt write-offs could increase.
The Property and Casualty Group depends on independent insurance agents, which exposes the Property and Casualty Group
to risks not applicable to companies with exclusive agents or other forms of distribution.
The Property and Casualty Group markets and sells its insurance products through independent, non-exclusive insurance
agencies. These agencies are not obligated to sell only the Property and Casualty Group’s insurance products, and generally
also sell competitors’ insurance products. We must offer insurance products that meet the needs of these agencies and their
clients and maintain good relationships with these agencies. The results of operations and business of the Property and
Casualty Group could be adversely affected by the following:
• Agencies’ marketing efforts not being maintained at their current levels or agencies binding the Property and Casualty
Group to unacceptable insurance risks, failing to comply with established underwriting guidelines, or otherwise
improperly marketing the Property and Casualty Group’s products.
• Agencies placing business with competing insurers due to compensation arrangements, real or perceived product or
price differences, ease of doing business, including the perception that our technology solutions do not match their
needs, perceived delivery of customer service, or other reasons.
• If the Property and Casualty Group is unsuccessful in maintaining and/or increasing the number of agencies in its
independent agent distribution system.
• Computer systems of our independent agencies experiencing cyber-attacks and other security breaches, loss or
corruption of information, or systems failures or outages.
• Consumer preferences, especially in personal lines insurance products, causing the insurance industry to migrate to a
delivery system other than independent agencies.
Our ability to maintain our reputation is a key factor to the Property and Casualty Group’s success.
The Property and Casualty Group maintains a brand recognized for customer service. The perceived performance, actions, and
behaviors of employees, independent insurance agency representatives, and third party service partners may result in
reputational harm to the Property and Casualty Group's brand and the potential for a reduction in business. Specific incidents
which may cause harm include but are not limited to disputes, long customer wait times, errors in processing a claim, failure to
protect sensitive customer data, and inappropriate social media communications. The degree of control we have over these
events varies based upon the event type and who is responsible for causing the incident. If an extreme catastrophic event were
to occur in a heavily concentrated area of policyholders, an extraordinarily high number of claims could have the potential to
strain claims processing and affect our ability to satisfy our customers. While we maintain and execute processes to minimize
these events, we cannot completely eliminate this risk.
If our third party service providers fail to perform as anticipated, we may experience operational difficulties, increased costs,
reputational damage and a loss of business that may have an adverse effect on our results of operations or financial condition.
The Property and Casualty Group faces significant competition from other regional and national insurance companies.
Failure to keep pace with competitors may result in lower market share and revenues, which may have a material adverse
effect on the Property and Casualty Group’s financial condition.
The Property and Casualty Group competes with regional and national property and casualty insurers including direct writers of
insurance coverage. Many of these competitors are larger and many have greater financial, technical, and operating resources.
If we are unable to perform at industry best practice levels in terms of quality, cost containment, and speed-to-market due to
inferior operating resources and/or problems with external relationships, the Property and Casualty Group’s business
14
performance may suffer. As the business environment changes, if we are unable to adapt timely to emerging industry changes,
or if our people do not conform to the changes, the Property and Casualty Group’s business could be materially impacted.
The property and casualty insurance industry is highly competitive on the basis of product, price, and service. If competitors
offer property and casualty products with more coverage and/or better service or offer lower rates, and we are unable to
implement product or service improvements quickly enough to keep pace, the Property and Casualty Group’s ability to grow
and renew its business may be adversely impacted. In addition, due to our focus on the automobile and homeowners insurance
markets, we may be more sensitive to trends that could affect auto and home insurance coverages and rates over time. For
example, if economic conditions, demographic trends, changing driving patterns, advancements in vehicle or home technology
or safety features, or other factors, were to result in decreased demand for auto or home insurance or decreased auto or home
insurance rates for an extended period, the automobile and homeowners insurance markets as a whole could shrink and our
ability to generate revenue growth could be significantly impacted.
Insurance customers are increasingly expecting to perform service interactions digitally, including but not limited to shopping,
paying bills, and reporting and monitoring claims. Examples of digital channels used in these interactions include traditional
websites, social media sites, and mobile device applications. We expect competitors to continue to grow these channels,
particularly those with some form of direct to consumer sales distribution. Failure to position our digital servicing and
distribution technology effectively in light of these trends could inhibit the Property and Casualty Group's ability to grow and
maintain its customer base.
Changes in applicable insurance laws, regulations, or changes in the way regulators administer those laws or regulations
could adversely change the Property and Casualty Group’s operating environment and increase its exposure to loss or put it at
a competitive disadvantage.
Property and casualty insurers are subject to extensive supervision in the states in which they do business. This regulatory
oversight includes, by way of example, matters relating to licensing examination, rate setting, market conduct, policy forms,
limitations on the nature and amount of certain investments, claims practices, mandated participation in involuntary markets
and guaranty funds, reserve adequacy, insurer solvency, restrictions on underwriting standards, accounting standards, and
transactions between affiliates. Such regulation and supervision are primarily for the benefit and protection of policyholders
and not for the benefit of shareholders. For instance, members of the Property and Casualty Group are subject to involuntary
participation in specified markets in various states in which they operate, and the rate levels the Property and Casualty Group is
permitted to charge do not always correspond with the underlying costs associated with the coverage issued. Additionally,
certain transactions and agreements between Indemnity and the Exchange must be approved by the appropriate state insurance
department(s). Although currently the federal government does not directly regulate the insurance industry, federal programs,
such as federal terrorism backstop legislation and the Federal Insurance Office established under the Dodd-Frank Act can also
impact the insurance industry. In addition to specific insurance regulation, the Property and Casualty Group must also comply
with other regulatory, legal, and ethical requirements relating to the general operation of a business.
Premium rates and reserves must be established for members of the Property and Casualty Group from forecasts of the ultimate
costs expected to arise from risks underwritten during the policy period. The Property and Casualty Group’s underwriting
profitability could be adversely affected to the extent such premium rates or reserves are too low or by the effects of inflation.
One of the distinguishing features of the property and casualty insurance industry in general is that its products are priced
before its costs are known, as premium rates are generally determined before losses are reported. Consequently, in establishing
premium rates, we attempt to anticipate claims frequency and the potential impact of inflation, including medical cost inflation,
construction and auto repair cost inflation and tort issues. Medical costs are a broad element of inflation that impact personal
and commercial auto, general liability, workers compensation and commercial multi-peril lines of insurance written by the
Property and Casualty Group. Accordingly, premium rates must be established from forecasts of the ultimate costs expected to
arise from risks underwritten during the policy period. These premium rates may prove to be inadequate if future claims
frequency and/or inflation are significantly higher than the estimates anticipated in pricing.
Property and casualty insurers establish reserves for losses and loss expenses that will not be paid and settled for many years.
Numerous factors affect both the current estimates and final settlement value of these losses and loss expenses. It is possible
that the ultimate liability for these losses and loss expenses will exceed these reserves because of unanticipated changes in the
future development of known losses, the unanticipated emergence of losses that have occurred but are currently unreported, and
larger than expected settlements on pending and unreported claims. The process of estimating reserves is inherently
judgmental and can be influenced by factors that are subject to variation. If pricing or reserves of the Property and Casualty
Group are not sufficient, the Property and Casualty Group’s financial condition may be adversely impacted.
15
The property and casualty insurance industry has historically been cyclical with periods of intense price competition. The
Property and Casualty Group seeks an appropriate balance between profitability and premium growth. Periods of intense price
competition in the cycle could adversely affect the Property and Casualty Group’s financial condition, profitability, or cash
flows.
Emerging claims and coverage issues in the insurance industry are unpredictable and could cause an adverse effect on the
Property and Casualty Group’s results of operations or financial condition.
As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues
related to claims and coverage may emerge. These issues may adversely affect the Property and Casualty Group’s business by
either extending coverage beyond its underwriting intent or by increasing the number or size of claims. In some instances,
these emerging issues may not become apparent for some time after the Property and Casualty Group has issued the affected
insurance policies. As a result, the full extent of liability under the Property and Casualty Group’s insurance policies may not
be known for many years after the policies are issued.
Changes in reserve estimates may adversely affect EFL’s operating results.
Reserves for life-contingent contract benefits are computed on the basis of long-term actuarial assumptions of future
investment yields, mortality, morbidity, persistency, and expenses. We periodically review the adequacy of these reserves on an
aggregate basis and, if future experience differs significantly from assumptions, adjustments to reserves and amortization of
deferred policy acquisition costs may be required, which could have a material adverse effect on EFL’s operating results.
The financial performance of members of the Property and Casualty Group could be adversely affected by severe weather
conditions or other catastrophic losses, including terrorism. The financial performance of EFL could be adversely affected by
pandemic events.
The Property and Casualty Group’s insurance operations expose us to claims arising out of catastrophes. A single catastrophic
occurrence or aggregation of multiple smaller occurrences could adversely affect the results of operations of members of the
Property and Casualty Group. Common natural catastrophic events include hurricanes, earthquakes, tornadoes, hail storms, and
severe winter weather. The extent of losses from a catastrophe is a function of both the total amount of insured exposures in the
area affected by the event and the severity of the event. The frequency and severity of these catastrophes is inherently
unpredictable. Changing climate conditions have added to the unpredictability, frequency and severity of natural disasters and
have created additional uncertainty as to future trends and exposures. We cannot predict the impact that changing climate
conditions may have on our results of operations.
Our ability to appropriately manage catastrophe risk depends partially on catastrophe models that are based on historical data,
current risk exposure, damageability assumptions and meteorological assumption. The unpredictability of some of these inputs
and the long-term impact of climate change create uncertainty in the frequency and severity of future events.
The Property and Casualty Group maintains an excess property catastrophe reinsurance program which became effective
January 1, 2015. The multi-layer program affords coverage up to a $1.1 billion catastrophe, providing a total of $682 million in
coverage excess of the Property and Casualty Group’s per occurrence loss retention of $300 million. If a major catastrophic
loss exceeds the reinsurance limit, this catastrophe reinsurance could be inadequate resulting in an adverse effect on the
Property and Casualty Group’s underwriting profitability and financial position. There is also a risk that the reinsurance
counterparties could default on their obligations.
Terrorist attacks could also cause losses from insurance claims related to the property and casualty insurance operations. The
federal Terrorism Risk Insurance Program Reauthorization Act ("TRIA") of 2015 requires that some coverage for terrorist
losses be offered by primary commercial property insurers and provides federal assistance for recovery of claims. While the
Property and Casualty Group is exposed to terrorism losses in commercial lines and workers compensation, these lines are
afforded a limited backstop above insurer deductibles for acts of terrorism under this federal program. There is no federal
assistance for personal lines terrorism losses. The Property and Casualty Group could incur large net losses if terrorist attacks
were to occur. The current federal TRIA expires at the end of 2020.
An epidemic or pandemic affecting one or more of the states in which EFL conducts substantial business could adversely affect
its financial and operational results, particularly if the event affected a broad range of the population.
16
The inability to acquire reinsurance coverage at reasonable rates or collect amounts due from reinsurers could have an
adverse effect on the Exchange.
The availability and cost of reinsurance are subject to prevailing market conditions, both in terms of price and available
capacity. The availability of reinsurance capacity can be impacted by general economic conditions and conditions in the
reinsurance market, such as the occurrence of significant reinsured events. The availability and cost of reinsurance could affect
the Property and Casualty Group’s business volume and profitability.
Although the reinsurer is liable to the Property and Casualty Group to the extent of the ceded reinsurance, reinsurance contracts
do not relieve the Property and Casualty Group from its primary obligations to its policyholders. As a result, ceded reinsurance
arrangements do not eliminate the Property and Casualty Group’s obligation to pay claims. The Property and Casualty Group
is subject to credit risk with respect to its ability to recover amounts due from reinsurers. The Property and Casualty Group’s
inability to collect a material recovery from a reinsurer could have an adverse effect on its underwriting profitability and
financial condition.
The performance of the Exchange’s investment portfolio is subject to a variety of investment risks, which may in turn have a
material adverse effect on its results of operations or financial condition.
The Exchange’s investment portfolio is comprised principally of fixed-income maturities, common stocks, and limited
partnerships. At December 31, 2014, the Exchange’s investment portfolio consisted of approximately 65% fixed income
securities, 24% common stocks, 6% limited partnerships, and 5% preferred equity securities.
All of the Exchange’s marketable securities are subject to market volatility. To the extent that future market volatility
negatively impacts these investments, the financial condition of the Exchange will be negatively impacted. We review the
investment portfolio on a continuous basis to evaluate positions that might have incurred other-than-temporary declines in
value. Inherent in management’s evaluation of a security are assumptions and estimates about the operations of the issuer and
its future earnings potential. The primary factors considered in our review of investment valuation include the extent and
duration to which fair value is less than cost, historical operating performance and financial condition of the issuer, short- and
long-term prospects of the issuer and its industry, specific events that occurred affecting the issuer including rating downgrades,
and, depending on the type of security, our intent to sell or our ability and intent to retain the investment for a period of time
sufficient to allow for a recovery in value. As the process for determining impairments is highly subjective, changes in our
assessments may have a material effect on the Exchange’s operating results and financial condition. See also Item 7A.
“Quantitative and Qualitative Disclosures about Market Risk”.
If the fixed-income, equity, or limited partnership portfolios were to suffer a substantial decrease in value, the Exchange’s
financial position could be materially adversely affected through increased unrealized losses or impairments. A significant
decrease in the Exchange’s portfolio could also put it, or its subsidiaries, at risk of failing to satisfy regulatory or rating agency
minimum capital requirements.
The Exchange’s fixed-income portfolio is invested in 34% in financial sector securities and 16% in municipal securities. These
results may vary depending on the market environment. The performance of the fixed-income portfolio is subject to a number
of risks including, but not limited to:
• Interest rate risk - the risk of adverse changes in the value of fixed-income securities as a result of increases in market
interest rates. A sustained low interest rate environment would pressure our net investment income.
• Investment credit risk - the risk that the value of certain investments may decrease due to the deterioration in financial
condition of, or the liquidity available to, one or more issuers of those securities or, in the case of asset-backed
securities, due to the deterioration of the loans or other assets that underlie the securities, which, in each case, also
includes the risk of permanent loss.
• Sector/Concentration risk - the risk that the portfolio may be too heavily concentrated in the securities of one or more
issuers, sectors, or industries. Events or developments that have a negative impact on any particular industry, group of
related industries or geographic region may have a greater adverse effect on our investment portfolio to the extent that
the portfolio is concentrated within those issuers, sectors, or industries.
• Liquidity risk - the risk that we will not be able to convert investment securities into cash on favorable terms and on a
timely basis, or that the we will not be able to sell them at all, when desired. Disruptions in the financial markets, or a
lack of buyers for the specific securities that we are trying to sell, could prevent it from liquidating securities or cause
a reduction in prices to levels that are not acceptable to us.
17
The Exchange’s common and preferred equity securities have exposure to price risk, the risk of potential loss in estimated fair
value resulting from an adverse change in prices. In addition, a portion of the Exchange's common stock portfolio is invested
in securities denominated in currencies other than the U.S. dollar. These investments also have exposure to foreign exchange
rate risk, or the potential loss in estimated fair value resulting from adverse changes in foreign exchange rates. The Exchange
does not hedge its exposure to equity price risk or foreign exchange rate risk inherent in the equity investments. The
Exchange’s common and preferred equity securities may also be subject to some of the same risks that affect the Exchange’s
fixed-income portfolio, as discussed above. General economic conditions and other factors beyond our control can adversely
affect the value of our equity investments and the realization of net investment income, or result in realized investment losses.
In addition, downward economic trends also may have an adverse effect on our investment results by negatively impacting the
business conditions and impairing credit for the issuers of securities held in their respective investment portfolios. This could
reduce fair values of investments and generate significant unrealized losses or impairment charges which may adversely affect
our financial results.
A portion of the portfolio is invested in limited partnerships, including private equity, mezzanine debt, and real estate
partnership investments. At December 31, 2014, the Exchange had investments in limited partnerships of $866 million, or
5% of total assets, with an obligation to invest up to an additional $459 million. Limited partnerships are significantly less
liquid and generally involve higher degrees of price risk than publicly traded securities. Limited partnerships, like publicly
traded securities, have exposure to market volatility; but unlike fixed income securities, cash flows and return expectations are
less predictable. In addition, a portion of the Exchange's limited partnership portfolio is invested in partnerships denominated
in currencies other than the U.S. dollar, and therefore exposed to foreign exchange rate risk. The Exchange does not hedge its
exposure to foreign exchange rate risk inherent in these investments.
The primary basis for the valuation of limited partnership interests are financial statements prepared by the general partner.
Because of the timing of the preparation and delivery of these financial statements, the use of the most recently available
financial statements provided by the general partners result in a quarter delay in the inclusion of the limited partnership results
in our Consolidated Statements of Operations. Due to this delay, the Exchange’s financial statements at December 31, 2014 do
not reflect market conditions experienced in the fourth quarter of 2014.
Deteriorating capital and credit market conditions or a failure to accurately estimate capital needs may significantly affect the
Exchange’s ability to meet liquidity needs and access capital.
Sufficient liquidity and capital levels are required to pay claims, claims-related expenses, and income taxes as well as to build
the Exchange’s investment portfolio, provide for additional protection against possible large, unexpected losses, and maintain
adequate surplus amounts. Management estimates the appropriate level of capital necessary based upon current and projected
results, which include a loading for potential risks. Failure to accurately estimate the Exchange’s capital needs may have a
material adverse effect on the Exchange’s financial condition until additional sources of capital can be located. Further, a
deteriorating financial condition may create a negative perception of the Exchange by third parties, including rating agencies,
investors, agents, and customers which could impact the Exchange’s ability to access additional capital in the debt or equity
markets.
The primary sources of liquidity for the Exchange are insurance premiums and cash flow generated from its investment
portfolio. In the event the Exchange’s current sources do not satisfy its liquidity needs, the Exchange has the ability to access
its $300 million bank revolving line of credit, from which there were no borrowings as of December 31, 2014, or sell assets in
its investment portfolios. Volatility in the financial markets could impair the Exchange’s ability to sell certain fixed income
securities or, to a greater extent, our significantly less liquid limited partnership investments, or cause such investments to sell
at deep discounts. In the event these traditional sources of liquidity are not available, the Exchange may have to seek additional
financing. The Exchange’s access to funds will depend upon a number of factors including current market conditions, the
availability of credit, market liquidity, and credit ratings. In deteriorating market conditions, there can be no assurance that the
Exchange will obtain additional financing, or, if available, that the cost of financing will not substantially increase and affect
our overall profitability.
If there were a failure to maintain commercially acceptable financial strength ratings, the Exchange’s competitive position in
the insurance industry would be adversely affected.
Financial strength ratings are an important factor in establishing the competitive position of insurance companies. Higher
ratings generally indicate greater financial stability and a stronger ability to meet ongoing obligations to policyholders. Ratings
are assigned by rating agencies to insurers based upon factors that the rating agencies believe are relevant to policyholders.
The Property and Casualty Group’s pooled A.M. Best rating is currently A+ ("Superior"). EFL’s A.M. Best rating is currently
A (“Excellent”). Rating agencies periodically review insurers’ ratings and change their ratings criteria; therefore, our current
ratings may not be maintained in the future. A significant downgrade in this or other ratings would reduce the competitive
18
position of the Property and Casualty Group and EFL, making it more difficult to attract profitable business in the highly
competitive property and casualty insurance market resulting in reduced sales of our products.
The Property and Casualty Group is subject to claims and legal proceedings, which, if determined unfavorably to the Property
and Casualty Group, could have a material adverse effect on our business, results of operations, or financial condition.
The Property and Casualty Group faces a significant risk of litigation and regulatory investigations and actions in the ordinary
course of operating its businesses including the risk of class action lawsuits. The Property and Casualty Group’s pending legal
and regulatory actions include proceedings specific to the Property and Casualty Group and others generally applicable to
business practices in the industries in which it operates. In the Property and Casualty Group’s insurance operations, we are,
have been, or may become subject to class actions and individual suits alleging, among other things, issues relating to claims
payments and procedures, denial or delay of benefits, charging excessive or impermissible fees on products, and breaching
fiduciary or other duties to customers. The Property and Casualty Group is also subject to litigation arising out of its general
business activities such as its contractual relationships. Plaintiffs in class action and other lawsuits against the Property and
Casualty Group may seek very large or indeterminate amounts, including punitive and treble damages, which may remain
unknown for substantial periods of time. The Property and Casualty Group is also subject to various regulatory inquiries, such
as information requests, subpoenas, and books and record examinations from state and federal regulators and authorities. See
“Risk Factors Related to the Indemnity Shareholder Interest,” within this section for additional discussion of litigation risks.
The Exchange is dependent upon Indemnity to perform certain services, including sales, underwriting, and the issuance of
policies and the uninterrupted operation of our facilities, systems and business functions. Failure to perform these services
effectively may have a material adverse effect on the financial condition of the Exchange.
Pursuant to the attorney-in-fact agreements with the policyholders at the Exchange, Indemnity is responsible for performing
key functions for the Exchange including management and operational services, including the technology and systems to
perform business functions. The Board of Directors of Indemnity has the responsibility for Exchange-related activities such as
setting the management fee paid by the Exchange to Indemnity. The business and financial condition of the Exchange would be
materially adversely affected if Indemnity was not able to provide the necessary operating and management services required
by the Exchange.
An inability to access our facilities, or a failure of technology or other systems could significantly impair the ability to perform
business functions in a timely and effective manner. If our business continuity plan does not sufficiently consider and address
the circumstances of an interruption, including without limitation natural events, terrorist attacks, medical epidemics, computer
security breaches or cyber-attacks, or interruptions of our data processing and storage systems or the systems of third-party
vendors, our operating results and financial condition could be adversely effected.
19
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The companies comprising the Erie Insurance Group share a corporate home office complex in Erie, Pennsylvania, which
comprises approximately 521,000 square feet.
The Erie Insurance Group also operates 25 field offices in 12 states. Of these field offices, 16 provide both agency support and
claims services and are referred to as branch offices, while seven provide only claims services and are referred to as claims
offices, and two provide only agency support and are referred to as sales offices. Seven field offices are owned by the Erie
Insurance Group, while the remaining 18 field offices, one office building and one warehouse facility are leased from
unaffiliated parties.
ITEM 3. LEGAL PROCEEDINGS
State Court Lawsuit Against Erie Indemnity Company
Erie Indemnity Company (“Indemnity”) was named as a defendant in a complaint filed on August 1, 2012 by alleged
subscribers of the Erie Insurance Exchange (the “Exchange”) in the Court of Common Pleas Civil Division of Fayette County,
Pennsylvania captioned Erie Insurance Exchange, an unincorporated association, by Joseph S. Sullivan and Anita Sullivan,
Patricia R. Beltz, and Jenna L. DeBord, trustees ad litem v. Erie Indemnity Co. (the “Sullivan” lawsuit).
As subsequently amended, the complaint alleges that, beginning on September 1, 1997, Indemnity retained “Service
Charges” (installment fees) and “Added Service Charges” (late fees and policy reinstatement charges) on policies written by the
Exchange and its insurance subsidiaries, which allegedly should have been paid to the Exchange, in the amount of
approximately $308 million. In addition to their claim for monetary relief on behalf of the Exchange, the plaintiffs seek an
accounting of all so-called intercompany transactions between Indemnity and the Exchange from 1996 to date. Plaintiffs allege
that Indemnity breached its contractual, fiduciary, and equitable duties by retaining Service Charges and Added Service
Charges that should have been retained by the Exchange. Plaintiffs bring these same claims under three separate derivative-
type theories. First, plaintiffs purport to bring suit as members of the Exchange on behalf of the Exchange. Second, plaintiffs
purport to bring suit as trustees ad litem on behalf of the Exchange. Third, plaintiffs purport to bring suit on behalf of the
Exchange pursuant to Rule 1506 of the Pennsylvania Rules of Civil Procedure, which allows shareholders to bring suit
derivatively on behalf of a corporation or similar entity.
Indemnity filed a motion in the state court in November 2012 seeking dismissal of the lawsuit. On December 19, 2013, the
court granted Indemnity’s motion in part, holding that the Pennsylvania Insurance Holding Company Act “provides the
[Pennsylvania Insurance] Department with special competence to address the subject matter of plaintiff’s claims” and referring
“all issues” in the Sullivan lawsuit to the Pennsylvania Insurance Department (the “Department”) for “its views and any
determination.” The court stayed all further proceedings and reserved decision on all other grounds for dismissal raised by
Indemnity. Plaintiffs sought reconsideration of the court’s order, and on January 13, 2014, the court entered a revised order
affirming its prior order and clarifying that the Department “shall decide any and all issues within its jurisdiction.” On January
30, 2014, Plaintiffs asked the court to certify its order to permit an immediate appeal to the Superior Court and to stay any
proceedings in the Department pending completion of any appeal. On February 18, 2014, the court issued an order denying
Plaintiffs’ motion. On March 20, 2014, Plaintiffs filed a petition for review with the Superior Court of Pennsylvania.
Indemnity filed an answer to the petition on April 3, 2014. On May 5, 2014, the Superior Court denied Plaintiffs’ petition for
review.
The Sullivan matter is currently proceeding before the Department and has been assigned to an Administrative Judge for
determination. The parties agreed that an evidentiary hearing was not required and they entered into a stipulated record.
Briefing in the Department was completed on December 19, 2014, and oral argument was held before the Administrative Judge
on January 6, 2015. A ruling by the Department has not yet been made.
Indemnity believes that it has meritorious legal and factual defenses and intends to vigorously defend against all allegations and
requests for relief.
20
Federal Court Lawsuit Against Directors
On February 6, 2013, a lawsuit was filed in the United States District Court for the Western District of Pennsylvania, captioned
Erie Insurance Exchange, an unincorporated association, by members Patricia R. Beltz, Joseph S. Sullivan and Anita Sullivan,
and Patricia R. Beltz, on behalf of herself and others similarly situate v. Richard L. Stover; J. Ralph Borneman, Jr; Terrence W.
Cavanaugh; Jonathan Hirt Hagen; Susan Hirt Hagen; Thomas B. Hagen; C. Scott Hartz; Claude C. Lilly, III; Lucian L.
Morrison; Thomas W. Palmer; Martin P. Sheffield; Elizabeth H. Vorsheck; and Robert C. Wilburn (the “Beltz” lawsuit), by
alleged policyholders of the Exchange who are also the plaintiffs in the Sullivan lawsuit. The individuals named as defendants
in the Beltz lawsuit were the then-current Directors of Indemnity.
As subsequently amended, the Beltz lawsuit asserts many of the same allegations and claims for monetary relief as in the
Sullivan lawsuit. Plaintiffs purport to sue on behalf of all policyholders of the Exchange, or, alternatively, on behalf of the
Exchange itself. Indemnity filed a motion to intervene as a Party Defendant in the Beltz lawsuit in July 2013, and the Directors
filed a motion to dismiss the lawsuit in August 2013. On February 10, 2014, the court entered an order granting Indemnity’s
motion to intervene and permitting Indemnity to join the Directors’ motion to dismiss; granting in part the Directors’ motion to
dismiss; referring the matter to the Department to decide any and all issues within its jurisdiction; denying all other relief
sought in the Directors’ motion as moot; and dismissing the case without prejudice. To avoid duplicative proceedings and
expedite the Department’s review, the Parties have stipulated that only the Sullivan action will proceed before the Department
and any final and non-appealable determinations made by the Department in the Sullivan action will be applied to the Beltz
action. On March 7, 2014, Plaintiffs filed a notice of appeal to the United States Court of Appeals for the Third Circuit.
Indemnity filed a motion to dismiss the appeal on March 26, 2014. On November 17, 2014, the Third Circuit deferred ruling
on Indemnity’s motion to dismiss the appeal and instructed the parties to address that motion, as well as the merits of Plaintiffs’
appeal, in the parties’ briefing. Plaintiffs filed their Opening Brief on January 12, 2015. Defendants’ responsive briefing is
currently due on March 3, 2015.
Indemnity believes that it has meritorious legal and factual defenses and intends to vigorously defend against all allegations and
requests for relief in the Beltz lawsuit. The Directors have also advised Indemnity that they intend to vigorously defend against
the claims in the Beltz lawsuit and have sought indemnification and advancement of expenses from the Company in connection
with the Beltz lawsuit.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
21
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock Market Prices and Dividends
Indemnity’s Class A, non-voting common stock trades on The NASDAQ Stock Market
SM
LLC under the symbol “ERIE.” No
established trading market exists for the Class B voting common stock. American Stock Transfer & Trust Company serves as
Indemnity’s transfer agent and registrar. As of February 20, 2015, there were approximately 724 beneficial shareholders of
record for the Class A non-voting common stock and 10 beneficial shareholders of record for the Class B voting common stock.
Historically, Indemnity has declared and paid cash dividends on a quarterly basis at the discretion of its Board of Directors.
The payment and amount of future dividends on the common stock will be determined by the Board of Directors and will
depend upon, among other things, Indemnity’s operating results, financial condition, cash requirements, and general business
conditions at the time such payment is considered. Indemnity’s common stock high and low sales prices and cash dividends
declared for each full quarter of the last two years were as follows:
Indemnity Shareholder Interest
2014 2013
Stock sales price Cash dividend declared Stock sales price Cash dividend declared
Quarter ended High Low Class A Class B High Low Class A Class B
March 31 $ 74.57 $ 66.63 $ 0.635 $ 95.25 $ 76.66 $ 69.28 $ 0.5925 $ 88.875
June 30 76.71 68.72 0.635 95.25 82.64 72.69 0.5925 88.875
September 30 78.48 72.63 0.635 95.25 82.59 72.47 0.5925 88.875
December 31 93.35 75.72 0.681 102.15 74.23 69.42 0.6350 95.250
Total $ 2.586 $ 387.90 $ 2.4125 $ 361.875
Stock Performance
The following graph depicts the cumulative total shareholder return, assuming reinvestment of dividends, for the periods
indicated for Indemnity's Class A common stock compared to the Standard & Poor's 500 Stock Index and the Standard & Poor's
Supercomposite Insurance Industry Group Index. The Standard & Poor's Supercomposite Insurance Industry Group Index is
made up of 56 constituent members represented by property casualty insurers, insurance brokers, and life insurers, and is a
capitalization weighted index.
2009 2010 2011 2012 2013 2014
Erie Indemnity Company Class A common stock $ 100
(1)
$ 171 $ 210 $ 199 $ 215 $ 275
Standard & Poor's 500 Stock Index 100
(1)
115 117 136 179 204
Standard & Poor's Supercomposite Insurance Industry Group Index 100
(1)
116 108 128 187 203
(1) Assumes $100 invested at the close of trading, on the last trading day preceding the first day of the fifth preceding fiscal year, in Indemnity’s Class A
common stock, the Standard & Poor’s 500 Stock Index, and the Standard & Poor’s Supercomposite Insurance Industry Group Index.
22
Issuer Purchases of Equity Securities
Indemnity may purchase shares, from time-to-time, in the open market, through trading plans entered into with one or more
brokerage firms pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, or through privately negotiated
transactions. The purchase of shares is dependent upon prevailing market conditions and alternate uses of capital, and at times
and in a manner that is deemed appropriate.
On January 1, 2004, our Board of Directors authorized a stock repurchase program allowing the repurchase of Indemnity’s
outstanding Class A nonvoting common stock. Various approvals for continuation of this program have since been authorized,
with the most recent occurring in October 2011 for $150 million, which was authorized with no time limitation. There were no
repurchases of Indemnity’s Class A common stock during the quarter ending December 31, 2014. We had approximately
$18 million of repurchase authority remaining under this program at December 31, 2014, based upon trade date. During 2014,
shares repurchased under this program totaled 272,057 at a total cost of $19.2 million, based upon trade date. As of
February 20, 2015, we had approximately $18 million of repurchase authority remaining under this program.
See Item 8. “Financial Statements and Supplementary Data – Note 17, Indemnity Capital Stock, of Notes to Consolidated
Financial Statements” contained within this report for discussion of additional shares repurchased outside of this program.
23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ERIE INDEMNITY COMPANY
(dollars in millions, except share data) Years Ended December 31,
2014 2013 2012 2011
(1)
2010
(2)
Operating Data:
Premiums earned $ 5,344 $ 4,898 $ 4,493 $ 4,214 $ 3,987
Net investment income 446 422 438 433 433
Realized gains (losses) on investments 189 758 418 (6) 307
Equity in earnings of limited partnerships 113 161 131 149 128
Other income 32 32 32 34 35
Total revenues 6,124 6,271 5,512 4,824 4,890
Net income 573 1,048 619 268 660
Less: Net income attributable to noncontrolling interest in
consolidated entity – Exchange
405 885 459 99 498
Net income attributable to Indemnity 168 163 160 169 162
Per Share Data Attributable to Indemnity:
Net income per Class A share – diluted $ 3.18 $ 3.08 $ 2.99 $ 3.08 $ 2.85
Book value per share – Class A common and equivalent B shares 13.45 13.96 12.11 14.48 16.24
Dividends declared per Class A share 2.586 2.4125 4.25 2.0975 1.955
Dividends declared per Class B share 387.90 361.875 637.50 314.625 293.25
Financial Position Data:
Total assets $ 17,758 $ 16,676 $ 15,441 $ 14,348 $ 14,344
Total equity 7,983 7,550 6,791 6,293 6,334
Less: Noncontrolling interest in consolidated entity – Exchange 7,280 6,816 6,149 5,512 5,422
Total equity attributable to Indemnity 703 734 642 781 912
(1) Due to the sale of Indemnity’s 21.6% ownership interest in EFL to the Exchange on March 31, 2011, 100% of EFL’s life insurance results accrue to
the interest of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after March 31, 2011. 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.
(2) 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. 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.
24
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of financial condition and results of operations highlights significant factors influencing the Erie
Insurance Group (“we,” “us,” “our”). This discussion should be read in conjunction with the audited financial statements and
related notes and all other items contained within this Annual Report on Form 10-K as these contain important information
helpful in evaluating our financial condition and results of operations.
INDEX
Page Number
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:
Statements contained herein that are not historical fact are forward-looking statements and, as such, are subject to risks and
uncertainties that could cause actual events and results to differ, perhaps materially, from those discussed herein. Forward-
looking statements relate to future trends, events or results and include, without limitation, statements and assumptions on
which such statements are based that are related to our plans, strategies, objectives, expectations, intentions, and adequacy of
resources. Examples of forward-looking statements are discussions relating to premium and investment income, expenses,
operating results, agency relationships, and compliance with contractual and regulatory requirements. Forward-looking
statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore,
actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements.
Among the risks and uncertainties, in addition to those set forth in our filings with the Securities and Exchange Commission,
that could cause actual results and future events to differ from those set forth or contemplated in the forward-looking statements
include the following:
Risk factors related to the Erie Indemnity Company (“Indemnity”) shareholder interest:
• dependence upon Indemnity’s relationship with the Exchange and the management fee under the agreement with the
subscribers at the Exchange;
• costs of providing services to the Exchange under the subscriber’s agreement;
• ability to attract and retain talented management and employees;
• ability to maintain uninterrupted business operations;
• factors affecting the quality and liquidity of Indemnity’s investment portfolio;
• credit risk from the Exchange;
• Indemnity’s ability to meet liquidity needs and access capital; and
• outcome of pending and potential litigation.
Cautionary Statement Regarding Forward-Looking Information 24
Recent Accounting Standards 25
Operating Overview 26
Critical Accounting Estimates 31
Results of Operations 40
Management Operations 40
Property and Casualty Insurance Operations 42
Life Insurance Operations 47
Investment Operations 48
Financial Condition 51
Investments 51
Liabilities 54
Shareholders’ Equity 55
Impact of Inflation 55
Liquidity and Capital Resources 56
Transactions/Agreements Between Indemnity and Noncontrolling Interest (Exchange) 61
25
Risk factors related to the non-controlling interest owned by the Erie Insurance Exchange (“Exchange”), which includes the
Property and Casualty Group and Erie Family Life Insurance Company:
• general business and economic conditions;
• dependence upon the independent agency system;
• ability to maintain our reputation for customer service;
• factors affecting insurance industry competition;
• changes in government regulation of the insurance industry;
• premium rates and reserves must be established from forecasts of ultimate costs;
• emerging claims, coverage issues in the industry, and changes in reserve estimates related to the property and casualty
business;
• changes in reserve estimates related to the life business;
• severe weather conditions or other catastrophic losses, including terrorism and pandemic events;
• the Exchange’s ability to acquire reinsurance coverage and collectability from reinsurers;
• factors affecting the quality and liquidity of the Exchange’s investment portfolio;
• the Exchange’s ability to meet liquidity needs and access capital;
• the Exchange’s ability to maintain acceptable financial strength ratings;
• outcome of pending and potential litigation; and
• dependence upon the service provided by Indemnity.
A forward-looking statement speaks only as of the date on which it is made and reflects our analysis only as of that date. We
undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information,
future events, changes in assumptions, or otherwise.
RECENT ACCOUNTING STANDARDS
See Item 8. “Financial Statements and Supplementary Data - Note 2, Significant Accounting Policies, of Notes to Consolidated
Financial Statements” contained within this report for a discussion of adopted and/or recently issued accounting standards,
none of which are expected to have a material impact on our future financial condition, results of operations or cash flows.
26
OPERATING OVERVIEW
Overview
The Erie Insurance Group represents the consolidated results of Indemnity and the results of its variable interest entity, the
Exchange. The Erie Insurance Group operates predominantly as a property and casualty insurer through its regional insurance
carriers that write a broad range of personal and commercial coverages. Our property and casualty insurance companies
include the Exchange and its wholly owned subsidiaries, Erie Insurance Company (“EIC”), Erie Insurance Company of New
York (“ENY”), Erie Insurance Property and Casualty Company (“EPC”) and Flagship City Insurance Company (“Flagship”).
These entities operate collectively as the “Property and Casualty Group.” The Erie Insurance Group also operates as a life
insurer through the Exchange’s wholly owned subsidiary, Erie Family Life Insurance Company (“EFL”), which underwrites
and sells individual and group life insurance policies and fixed annuities.
The Exchange is a reciprocal insurance exchange organized under Article X of Pennsylvania's Insurance Company Law of 1921
under which individuals, partnerships, and corporations are authorized to exchange reciprocal or inter-insurance contracts with
each other, or with individuals, partnerships, and corporations of other states and countries, providing indemnity among
themselves from any loss which may be insured against under any provision of the insurance laws except life insurance. Each
applicant for insurance to the Exchange signs a subscriber’s agreement, which contains an appointment of Indemnity as their
attorney-in-fact to transact the business of the Exchange on their behalf.
Pursuant to the subscriber’s agreement and for its services as attorney-in-fact, Indemnity earns a management fee calculated as
a percentage of 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 Indemnity shareholder interest includes Indemnity’s equity and income, but not the equity or income of the Exchange. The
Exchange’s equity, which is comprised of its retained earnings and accumulated other comprehensive income, is held for the
interest of its subscribers (policyholders) and meets the definition of a noncontrolling interest, which is reflected as such in our
consolidated financial statements.
“Indemnity shareholder interest” refers to the interest in Erie Indemnity Company owned by the Class A and Class B
shareholders. “Noncontrolling interest” refers to the interest in the Erie Insurance Exchange held for the interest of the
subscribers (policyholders).
The Indemnity shareholder interest in income comprises:
• a management fee of up to 25% of all property and casualty insurance premiums written or assumed by the Exchange, less
the costs associated with the sales, underwriting, and issuance of these policies;
• net investment income and results on investments that belong to Indemnity; and
• other income and expenses, including income taxes, that are the responsibility of Indemnity.
The Exchange’s or the noncontrolling interest in income comprises:
• a 100% interest in the net underwriting results of the property and casualty insurance operations;
• a 100% interest in the net earnings of EFL's life insurance operations;
• net investment income and results on investments that belong to the Exchange and its subsidiaries; and
• other income and expenses, including income taxes, that are the responsibility of the Exchange and its subsidiaries.
27
Results of the Erie Insurance Group’s Operations by Interest
The following table represents a breakdown of the composition of the income attributable to the Indemnity shareholder interest
and the income attributable to the noncontrolling interest (Exchange). For purposes of this discussion, EFL’s investments are
included in the life insurance operations.
Indemnity
shareholder interest
Noncontrolling interest
(Exchange)
Eliminations of
related party transactions Erie Insurance Group
(in millions)
Years ended
December 31,
Years ended
December 31,
Years ended
December 31,
Years ended
December 31,
2014 2013 2012 2014 2013 2012 2014 2013 2012 2014 2013 2012
Management operations:
Management fee revenue, net $1,376 $1,266 $1,157 $ — $ — $ — $(1,376) $(1,266) $(1,157) $ — $ — $ —
Service agreement revenue 31 31 31 — — — — — — 31 31 31
Total revenue from management operations 1,407 1,297 1,188 — — — (1,376) (1,266) (1,157) 31 31 31
Cost of management operations 1,184 1,088 983 — — — (1,184) (1,088) (983) — — —
Income from management operations
before taxes
223 209 205 — — — (192) (178) (174) 31 31 31
Property and casualty insurance operations:
Net premiums earned — — — 5,260 4,820 4,422 — — — 5,260 4,820 4,422
Losses and loss expenses — — — 3,859 3,365 3,384 (6) (5) (5) 3,853 3,360 3,379
Policy acquisition and underwriting expenses — — — 1,502 1,387 1,284 (204) (187) (182) 1,298 1,200 1,102
(Loss) income from property and casualty
insurance operations before taxes
— — — (101) 68 (246) 210 192 187 109 260 (59)
Life insurance operations:
(1)
Total revenue — — — 192 192 178 (2) (2) (2) 190 190 176
Total benefits and expenses — — — 143 144 132 0 0 0 143 144 132
Income from life insurance operations
before taxes
— — — 49 48 46 (2) (2) (2) 47 46 44
Investment operations:
(1)
Net investment income 16 15 16 350 325 338 (16) (12) (11) 350 328 343
Net realized gains on investments 1 1 5 183 753 404 — — — 184 754 409
Net impairment losses recognized in earnings 0 0 0 (3) (12) 0 — — — (3) (12) 0
Equity in earnings of limited partnerships 11 22 15 101 138 116 — — — 112 160 131
Income from investment operations
before taxes
28 38 36 631 1,204 858 (16) (12) (11) 643 1,230 883
Income from operations before income taxes
and noncontrolling interest
251 247 241 579 1,320 658 — — — 830 1,567 899
Provision for income taxes 83 84 81 174 435 199 — — — 257 519 280
Net income
$ 168 $ 163 $ 160 $ 405 $ 885 $ 459 $ — $ — $ — $ 573 $ 1,048 $ 619
(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 as part of the Exchange’s investment results.
Net income decreased in 2014 when compared to 2013 due to an underwriting loss experienced in the property and casualty
insurance operations in 2014 compared to an underwriting gain in 2013 and lower levels of income from our investment
operations. The underwriting results in the property and casualty insurance operations were negatively impacted by an increase
in current accident year losses and catastrophe losses compared to 2013, offset somewhat by favorable development on prior
accident year loss reserves. Our income from investment operations recorded lower levels of net realized gains on investments
and earnings from limited partnerships in 2014 compared to 2013 offset somewhat by higher levels of net investment income.
Net income increased in 2013 when compared to 2012 due to an underwriting gain experienced in the property and casualty
insurance operations in 2013 compared to an underwriting loss in 2012 and increased income from our investment operations.
The 2013 underwriting results in the property and casualty insurance operations were positively impacted by lower levels of
catastrophe losses compared to 2012, offset somewhat by lower levels of favorable development on prior accident year loss
reserves in 2013 compared to 2012. Our income from investment operations improved in 2013 compared to 2012 due primarily
to an increase in net realized gains on investments.
The Exchange’s property and casualty insurance operations experienced a 8.6% and 9.6% increase in direct written premium in
2014 and 2013, respectively, driven by increases in policies in force and the average premium per policy, which also positively
impacted Indemnity’s management fee revenue.
28
Reconciliation of Operating Income to Net Income
We disclose operating income, a non-GAAP financial measure, to enhance our investors’ understanding of our performance
related to the Indemnity shareholder interest. Our method of calculating this measure may differ from those used by other
companies, and therefore comparability may be limited.
Indemnity defines operating income as net income excluding realized capital gains and losses, impairment losses, and related
federal income taxes.
Indemnity uses operating income to evaluate the results of its operations. It reveals trends that may be obscured by the net
effects of realized capital gains and losses including impairment losses. Realized capital gains and losses, including impairment
losses, may vary significantly between periods and are generally driven by business decisions and economic developments such
as capital market conditions which are not related to our ongoing operations. We are aware that the price to earnings multiple
commonly used by investors as a forward-looking valuation technique uses operating income as the denominator. Operating
income should not be considered as a substitute for net income prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”) and does not reflect Indemnity’s overall profitability.
The following table reconciles operating income and net income for the Indemnity shareholder interest for the years ended
December 31:
(in millions, except per share data)
Indemnity Shareholder Interest
2014 2013 2012
Operating income attributable to Indemnity $ 167 $ 162 $ 157
Net realized gains and impairments on investments 1 1 5
Income tax expense 0 0 (2)
Realized gains and impairments, net of income taxes 1 1 3
Net income attributable to Indemnity $ 168 $ 163 $ 160
Per Indemnity Class A common share-diluted:
Operating income attributable to Indemnity $ 3.17 $ 3.07 $ 2.92
Net realized gains and impairments on investments 0.02 0.01 0.10
Income tax expense (0.01) 0.00 (0.03)
Realized gains and impairments, net of income taxes 0.01 0.01 0.07
Net income attributable to Indemnity $ 3.18 $ 3.08 $ 2.99
29
Operating Segments
Our reportable segments include management operations, property and casualty insurance operations, life insurance operations,
and investment operations.
Management operations
Management operations generate internal management fee revenue, which accrues to the Indemnity shareholder interest, as
Indemnity provides services relating to the sales, underwriting, and issuance of policies on behalf of the Exchange.
Management fee revenue is based upon all premiums written or assumed by the Exchange and the management fee rate, which
is not to exceed 25%. Our Board of Directors establishes the management fee rate at least annually, generally in December for
the following year, and considers factors such as the relative financial strength of Indemnity and the Exchange and projected
revenue streams. The management fee rate was set at 25% for 2014, 2013 and 2012. Our Board of Directors set the 2015
management fee rate again at 25%, its maximum level. Management fee revenue is eliminated upon consolidation.
Property and casualty insurance operations
The property and casualty insurance business is driven by premium growth, the combined ratio, and investment returns. The
property and casualty insurance industry is cyclical, with periods of rising premium rates and shortages of underwriting
capacity followed by periods of substantial price competition and excess capacity. The cyclical nature of the insurance industry
has a direct impact on the direct written premium of the Property and Casualty Group.
The property and casualty insurance operation’s premium growth strategy focuses on growth by expansion of existing
operations including a careful agency selection process and increased market penetration in existing operating territories.
Expanding the size of our existing agency force of nearly 2,200 independent agencies, with over 11,000 licensed property and
casualty representatives, will contribute to future growth as new agents build their books of business with the Property and
Casualty Group.
Geographic expansion is also a component of the Property and Casualty Group's premium growth strategy. The Property and
Casualty Group began writing private passenger automobile, home insurance, and personal excess liability insurance in
Kentucky in the fourth quarter of 2014.
The property and casualty insurance operations insure preferred and standard risks while maintaining a disciplined underwriting
approach. The Property and Casualty Group’s principal personal lines products based upon 2014 direct written premiums were
private passenger automobile (43%) and homeowners (27%), and the principal commercial lines products were commercial
multi-peril (13%), commercial automobile (7%), and workers compensation (7%). Pennsylvania, Maryland, Virginia, North
Carolina and Ohio made up 74% of the property and casualty lines insurance business direct written premium in 2014.
Members of the Property and Casualty Group pool the underwriting results under an intercompany pooling agreement. Under
the pooling agreement, the Exchange retains a 94.5% interest in the net underwriting results of the Property and Casualty
Group, while EIC retains a 5.0% interest, and ENY retains a 0.5% interest.
The key measure of underwriting profitability traditionally used in the property and casualty insurance industry is the combined
ratio, which is expressed as a percentage. It is the sum of the ratio of losses and loss expenses to premiums earned (loss ratio)
plus the ratio of policy acquisition and other underwriting expenses to premiums earned (expense ratio). When the combined
ratio is less than 100%, underwriting results are generally considered profitable; when the combined ratio is greater than 100%,
underwriting results are generally considered unprofitable.
Factors affecting losses and loss expenses include the frequency and severity of losses, the nature and severity of catastrophic
losses, the quality of risks underwritten, and underlying claims and settlement expenses.
Investments held by the Property and Casualty Group are reported in the investment operations segment, separate from the
underwriting business.
Life insurance operations
EFL generates revenues through the sale of its individual and group life insurance policies and fixed annuities. These products
provide our property and casualty agency force an opportunity to cross-sell both personal and commercial accounts. EFL’s
profitability depends principally on the ability to develop, price, and distribute insurance products, attract and retain deposit
funds, generate investment returns, and manage expenses. Other drivers include mortality and morbidity experience,
persistency experience to enable the recovery of acquisition costs, maintenance of interest spreads over the amounts credited to
deposit funds, and the maintenance of strong ratings from rating agencies. EFL began writing life insurance and annuity
products in Kentucky in the fourth quarter of 2014.
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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 segment discussion
includes the life insurance related investment results. However, also for presentation purposes, the segment footnote and the
investment operations segment discussion include the life insurance investment results as part of the Exchange’s investment
results.
Investment operations
We generate revenues 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. We actively evaluate the portfolios for impairments, and record impairment writedowns on
investments in instances where the fair value of the investment is substantially below cost, and it is concluded that the decline
in fair value is other-than-temporary, which includes consideration for intent to sell.
General Conditions and Trends Affecting Our Business
Economic conditions
Unfavorable changes in economic conditions, including declining consumer confidence, inflation, high unemployment, and the
threat of recession, among others, may lead the Property and Casualty Group’s customers to modify coverage, not renew
policies, or even cancel policies, which could adversely affect the premium revenue of the Property and Casualty Group, and
consequently Indemnity’s management fee. These conditions could also impair the ability of customers to pay premiums when
due, and as a result, the Property and Casualty Group’s bad debt write-offs could increase. Further, unanticipated increased
inflation costs including medical cost inflation, construction and auto repair cost inflation, and tort issues may impact the
estimated loss reserves and future premium rates. Our key challenge is to generate profitable revenue growth in a highly
competitive market that continues to experience the effects of uncertain economic conditions.
Financial market volatility
Our portfolio of fixed income, preferred and common stocks, and limited partnerships are subject to market volatility especially
in periods of instability in the worldwide financial markets. Over time, net investment income could also be impacted by
volatility and by the general level of interest rates, which impact reinvested cash flow from the portfolio and business
operations. Depending upon market conditions, which are unpredictable and remain uncertain, considerable fluctuation could
exist in the fair value of our investment portfolio and reported total investment income, which could have an adverse impact on
our financial condition, results of operations, and cash flows.
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CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements include amounts based upon estimates and assumptions that have a significant effect on
reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period and related disclosures. We consider an accounting estimate to be critical if 1) it requires
assumptions to be made that were uncertain at the time the estimate was made, and 2) different estimates that could have been
used, or changes in the estimate that are likely to occur from period-to-period, could have a material impact on our
Consolidated Statements of Operations or Financial Position.
The following presents a discussion of those accounting policies surrounding estimates that we believe are the most critical to
our reported amounts and require the most subjective and complex judgment. If actual events differ significantly from the
underlying assumptions, there could be material adjustments to prior estimates that could potentially adversely affect our
results of operations, financial condition, and cash flows. The estimates and the estimating methods used are reviewed
continually, and any adjustments considered necessary are reflected in current earnings.
Property and Casualty Insurance Loss and Loss Expense Reserves
Property and casualty insurance loss and loss expense reserves are established to provide for the estimated costs of paying
claims under insurance policies written by us. These reserves include estimates for both claims that have been reported (case)
and those that have been incurred but not reported (IBNR) and include estimates of all future payments associated with
processing and settling these claims.
The process of establishing loss reserves is complex and involves a variety of actuarial techniques. The loss reserve estimation
process is based largely on the assumption that past development trends are an appropriate indicator of future events. Reserve
estimates are based upon our assessment of known facts and circumstances, review of historical settlement patterns, estimates
of trends in claims frequency and severity, legal theories of liability and other factors. Variables in the reserve estimation
process can be affected by 1) internal factors, including changes in claims handling procedures and changes in the quality of
risk selection in the underwriting process, and 2) external events, such as economic inflation and regulatory and legislative
changes. Due to the inherent complexity of the assumptions used, final loss settlements may vary significantly from the current
estimates, particularly when those settlements may not occur until well into the future.
How reserves are established
Case reserves are established by a claims handler on each individual claim and are adjusted as new information becomes
known during the course of handling the claims. IBNR reserves represent the difference between the case reserves for actual
reported loss and loss expenses and the estimated ultimate cost of all claims.
Our loss and loss expense reserves include amounts related to short-tail and long-tail lines of business. Tail refers to the time
period between the occurrence of a loss and the final settlement of the claim. The longer the time span between the incidence
of a loss and the settlement of the claim, the more the ultimate settlement amount can vary. Most of our loss and loss expense
reserves relate to long-tail liability lines of business including workers compensation, bodily injury and other liability
coverages, such as commercial liability. Short-tail lines of business, which represent a smaller percentage of our loss reserves,
include personal auto physical damage and personal property.
Our actuaries review all direct reserve estimates on a quarterly basis for both current and prior accident years using the most
current claim data. Reserves for massive injury lifetime medical claims, including auto no-fault and workers compensation
claims, are reviewed at a more detailed level semi-annually. These massive injury claim reserves are relatively few in number
and are very long-tail liabilities. In intervening quarters, development on massive injury reserves is monitored to confirm that
the estimate of ultimate losses should not change. If an unusual development is observed, a detailed review is conducted to
determine whether the reserve estimate should change. Significant changes to the factors discussed above, which are either
known or reasonably projected through analysis of internal and external data, are quantified in the reserve estimates each
quarter.
Our actuaries review assumed reserve estimates annually for both current and prior accident years. The Property and Casualty
Group ceased writing voluntary assumed business in 2003. Outstanding liabilities for the voluntary and involuntary assumed
business are immaterial compared to the overall reserves. Our ceded reserves primarily relate to massive injury lifetime
medical claims; the ceded estimates for these claims are adjusted when there is a change to the direct reserve estimate. The
remainder of the ceded reserves is reviewed by our actuaries annually.
The quarterly reserve reviews incorporate a variety of actuarial methods and judgments and involve rigorous analysis. A
comprehensive review is performed of the various estimation methods and reserve levels produced by each. The various
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methods generate different estimates of ultimate losses by product line and product coverage combination. Thus, reserves are
comprised of a set of point estimates of the ultimate losses developed from the various methods. These multiple reserve point
estimates are reviewed by our reserving actuaries and reserve best estimates are selected. The selected reserve estimates are
discussed with management.
Numerous factors are considered in setting reserve levels, including, but not limited to, the assessed reliability of key loss
trends and assumptions that may significantly influence the current actuarial indications, the maturity of the accident year,
pertinent claims frequency and severity trends observed over recent years, the level of volatility within a particular line of
business and the improvement or deterioration of actuarial rate indications in the current period as compared to prior periods.
Certain methods are considered more credible for each product/coverage combination depending on the maturity of the
accident quarter, the mix of business and the particular internal and external influences impacting the claims experience or the
method.
The following is a discussion of the most common methods used:
Paid development – Paid loss development patterns are generated from historical data and applied to current paid losses to
generate estimated ultimate losses. Paid development techniques do not use information about case reserves and therefore are
not affected by changes in case reserving practices. These techniques are generally most useful for short-tailed segments since
a high percentage of ultimate losses are paid in early periods of development.
Incurred development – Incurred loss development patterns (reflecting cumulative paid losses plus current case reserves) are
generated from historical data. The patterns are applied to current incurred losses to generate estimated ultimate losses.
Incurred methods and/or combinations of the paid and incurred methods are used in developing estimated ultimate losses for
short-tail coverages and long-tail coverages,
Expected loss ratio – An expected loss ratio is developed through a review of historical loss ratios by accident quarter, adjusted
for changes to earned premium, mix of business and other factors that are expected to impact the loss ratio for the accident
quarter being evaluated. A preliminary estimate of ultimate losses is calculated by multiplying this expected loss ratio by
earned premium.
Bornhuetter-Ferguson – Bornhuetter-Ferguson is a method of combining the results of the expected-loss-ratio method and the
paid or incurred development method. It places more weight on the paid or incurred development method as the accident
period matures. The Bornhuetter-Ferguson method is generally used for less mature accident periods on the long-tail coverages
because a low percentage of losses are paid or incurred in the early period of development.
Survival ratio – This method measures the ratio of the average loss and loss expense amount paid annually to the total reserve
for the product line or product coverage. The survival ratio represents the number of years of payments that the current level of
reserves will cover. The reserve is established so that a particular ratio, representing the time to closing of all claims, is
achieved. This method is also used as a reasonability check of reserve adequacy.
Individual claim – This method estimates the ultimate losses on a claim-by-claim basis. An annual payment assumption is
made for each claimant and then projected into the future based upon a particular assumption of the future inflation rate and life
expectancy of the claimant. This method is used for unusual, large claims.
Weather event paid and reported development – The historical patterns utilized in paid and reported development methods for
weather events are derived from historical data for the same type of weather event. Initial weather event ultimate loss estimates
are reviewed with claims management.
Line of business methods
For each product line and product/coverage combination, certain methods are given more influence than other methods. The
discussion below gives a general indication of which methods are preferred for each line of business. As circumstances change,
the methods that are given greater weight can change.
Massive injury lifetime medical claims (such as certain auto no-fault and workers compensation claims) – These
claims develop over a long period of time and are relatively few in number. We utilize the individual claim method to
evaluate each claim’s ultimate losses.
Personal auto physical damage and homeowners – These lines are fast-developing and we rely more on the paid and
incurred development techniques.
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Personal auto liability (such as bodily injury and uninsured/underinsured motorist) – For auto liability, and bodily
injury in particular, we review the results of a greater number of techniques than for physical damage. We tend to rely
on the Bornhuetter-Ferguson method for more recent experience periods and paid and incurred development methods
for the older accident periods.
Workers compensation and long-tailed liability (such as commercial liability) – We generally rely upon the expected
loss ratio, Bornhuetter-Ferguson and incurred development techniques. These techniques are generally weighted
together, relying more heavily on the Bornhuetter-Ferguson method at early ages of development and more on the
incurred development method as the accident periods mature.
The methods used for estimating loss expenses are as follows:
Defense and cost containment expenses (D&CC) – D&CC is analyzed using paid development techniques and an
analysis of the relationship between D&CC payments and loss payments.
Adjusting and other expenses (A&O) – A&O reserves are projected based upon an expected cost per claim year, the
anticipated claim closure pattern, and the ratio of paid A&O to paid loss.
Key assumptions for loss reserving
The accuracy of the various methods used to estimate reserves is a function of the degree to which underlying assumptions are
satisfied. The most significant key assumptions are:
Development patterns – Historical paid and incurred amounts contain patterns which indicate how unpaid and IBNR amounts
will emerge in future periods. Unless reasons or factors are identified that invalidate the extension of historical patterns into the
future, these patterns can be used to make projections necessary for estimating loss and loss adjustment expense reserves. This
is the most significant assumption and it applies to all methods.
Impact of inflation – Property and casualty insurance reserves are established before the extent to which inflation may impact
such reserves is known. Consequently, in establishing reserves, we attempt to anticipate the potential impact of inflation,
including medical cost inflation, construction and auto repair cost inflation and tort issues. Medical costs are a broad element
of inflation that impacts personal and commercial auto, general liability, workers compensation and commercial multi-peril
lines of insurance written by the Property and Casualty Group. Inflation assumptions take the form of explicit numerical values
in the survival ratio, individual claim, and massive injury lifetime medical reserving methods. Inflation assumptions are
implicitly derived through the selection of applicable loss development patterns for all other reserving methods.
Future cost increase assumptions are derived from a review of historical cost increases and are assumed to persist into the
future. Future medical cost increases and claimant mortality assumptions utilized in the reserve estimates for massive injury
lifetime medical claims are obtained from industry studies adjusted for our own experience. Reserve levels are sensitive to
these assumptions because these amounts represent projections over 30 to 40 years into the future.
Other internal and external factors
Occasionally, unusual aberrations in loss development patterns are caused by external and internal factors such as changes in
claim reporting and/or settlement patterns, unusually large losses, process changes, legal or regulatory changes and other
influences. In these instances, analyses of alternate development factor selections are performed to evaluate the effect of these
factors and actuarial judgment is applied to make appropriate assumptions needed to develop a best estimate of ultimate losses.
Claims with atypical emergence patterns – Characteristics of certain subsets of claims, such as those with high severity, have
the potential to distort patterns contained in historical paid loss and reported loss data. When testing indicates this to be the
case for a particular subset of claims, our actuaries segregate these claims from the data and analyze them separately.
Changes in loss ratio trends – Prior loss ratio assumptions utilized in the Bornhuetter-Ferguson method are derived from
projections of historical loss ratios based upon actual experience from more mature accident periods adjusted for assumed
changes in average premiums, frequency and severity. These assumptions influence only the most recent accident periods, but
the majority of reserves originate with the most recent accident periods. Reserve levels are highly sensitive to these
assumptions.
Relationship of loss expense to losses – D&CC-to-loss ratio assumptions utilized in the Bornhuetter-Ferguson method are
initially derived from historical relationships. These historical ratios are adjusted according to the impact of changing internal
and external factors. The A&O-to-loss ratio assumption is similarly derived from historical relationships and adjusted as
required for identified internal or external changes.
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Reserve discounting
Loss reserves are set at ultimate cost, except for workers compensation loss reserves, which are discounted on a nontabular
basis using an interest rate of 2.5% and our historical workers compensation payout patterns. In our workers compensation
discounting methodology, we segregate the workers compensation massive injury claims that have longer payout patterns from
the non-massive injury workers compensation claims. The discount on workers compensation reserves was $89 million at
December 31, 2014. A 100-basis point increase in the discount rate would result in an increase to the discount of $48 million at
December 31, 2014.
Reserve estimate variability
The property and casualty reserves with the greatest potential for variation are the massive injury lifetime medical reserves.
These claims arise from the automobile no-fault law in Pennsylvania before 1986 and workers compensation policies which
provide unlimited medical benefits. The estimate of ultimate liabilities for these claims is subject to significant judgment due
to variations in claimant health, mortality over time and health care cost trends. These claims have been segregated from the
total population of claims. Ultimate losses for these claims are estimated on a claim-by-claim basis. We are currently reserving
for 245 claimants requiring lifetime medical care, of which 97 involve massive injuries. The annual payment is projected into
the future based upon particular assumptions of the future inflation rate and life expectancy of the claimant. The most
significant variable in estimating this liability is medical cost inflation. The life expectancy (mortality rate) assumption
underlying the estimate reflects the gender specific disabled pensioner mortality table. Actual experience, however, may
emerge in a manner that is different relative to the original assumptions, which could have a significant impact on our reserve
estimates.
Auto no-fault (massive injury lifetime medical claims) - The automobile massive injury gross reserve carried by the Property
and Casualty Group totaled $330 million at December 31, 2014, compared to $345 million at December 31, 2013. The slight
decrease in the pre-1986 automobile massive injury reserves in 2014, compared to 2013, was due to continued payments on
these claims. A 100-basis point increase in the medical cost inflation assumption would result in an increase in the Property
and Casualty Group’s gross year-end reserve of $64 million. This increase in the medical cost inflation assumption would also
increase the reinsurance recoverable related to these reserves by $25 million, resulting in a $39 million increase in the net
reserve.
Workers compensation (massive injury lifetime medical claims) - The workers compensation massive injury reserve carried by
the Property and Casualty Group totaled $82 million at December 31, 2014, compared to $94 million at December 31, 2013,
net of discounting. The decrease in the workers compensation massive injury reserves in 2014, compared to 2013, was
primarily due to the settlement of two claims, offset somewhat by the addition of two new claims. A 100-basis point increase in
the medical cost inflation assumption would result in an increase in the Property and Casualty Group’s December 31, 2014
gross reserve of $20 million. This increase in the medical cost inflation assumption would also increase the related reinsurance
recoverable and the workers compensation discount by $16 million, resulting in a $4 million increase in the net reserve.
Reserve adequacy
We also perform analyses to evaluate the adequacy of past total reserve levels for the Property and Casualty Group. Previously
established estimates for reserves were not materially different than those determined in these retrospective analyses. At
December 31, 2014, our current estimate of direct loss reserves, including salvage and subrogation for accident years 2013 and
prior is $120 million, or 3.2% less than the reserve amount we had established at December 31, 2013. At December 31, 2013,
our estimate of direct loss reserves, including salvage and subrogation recoveries for accident years 2012 and prior was
$2 million, or 0.1% higher than the reserve amount we had established at December 31, 2012. At December 31, 2012, our
estimate of direct loss reserves, including salvage and subrogation recoveries for accident years 2011 and prior was
$92 million, or 2.6% lower than the reserve amount we had established at December 31, 2011. See an additional discussion of
our reserve development in the “Prior year loss reserve development” section.
Life Insurance and Annuity Policy Reserves
Reserves for traditional life insurance future policy benefits are computed primarily by the net level premium method.
Generally, benefits are payable over an extended period of time and related reserves are calculated as the present value of future
expected benefits to be paid reduced by the present value of future expected net premiums. Such reserves are established based
upon methods and underlying assumptions in accordance with GAAP and applicable actuarial standards. Principal assumptions
used in the establishment of policy reserves are mortality, lapses, expenses, and investment yields. Mortality assumptions are
based upon tables typically used in the industry, modified to reflect actual experience and to include a provision for the risk of
adverse deviation where appropriate. Lapse, expense, and investment yield assumptions are based upon actual company
experience and may include a provision for the risk of adverse deviation. Assumptions on these policies are locked in at the
time of issue and are not subject to change unless a premium deficiency exists. A premium deficiency exists if, based upon
revised assumptions, the existing contract liabilities together with the present value of future gross premiums are not sufficient
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to cover the present value of future expected benefits and maintenance costs and to recover unamortized acquisition costs.
Historically, our reserves plus expected gross premiums have been demonstrated to be sufficient. There were no premium
deficiencies in 2014, 2013 or 2012.
Reserves for income-paying annuity future policy benefits are computed as the present value of future expected benefits.
Principal assumptions used in the establishment of policy reserves are mortality and investment yields. Interest rates used to
discount future expected benefits are set at the policy level and range from 1.50% to 9.0%. The equivalent aggregate interest
rate is 5.7%. If the aggregate interest rate was reduced by 100 basis points, the present value of future expected benefits would
increase by $16 million at December 31, 2014.
Reserves for universal life and deferred annuity plans are primarily based upon the contract account balance without reduction
for surrender charges.
Investment Valuation
Available-for-sale and trading securities
We make estimates concerning the valuation of all investments. Valuation techniques are used to derive the fair value of the
available-for-sale and trading securities we hold. Fair value is the price that would be received to sell an asset in an orderly
transaction between willing market participants at the measurement date.
Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained
from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable
market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs.
For purposes of determining whether the market is active or inactive, the classification of a financial instrument was based
upon the following definitions:
• An active market is one in which transactions for the assets being valued occur with sufficient frequency and volume
to provide reliable pricing information.
• An inactive (illiquid) market is one in which there are few and infrequent transactions, where the prices are not
current, price quotations vary substantially, and/or there is little information publicly available for the asset being
valued.
We continually assess whether or not an active market exists for all of our investments and as of each reporting date re-evaluate
the classification in the fair value hierarchy. All assets carried at fair value are classified and disclosed in one of the following
three categories:
• Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can
access at the measurement date.
• Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly.
• Level 3 – Unobservable inputs for the asset or liability.
Level 1 primarily consists of publicly traded common stock, nonredeemable preferred stock, and exchange traded funds and
reflects market data obtained from independent sources, such as prices obtained from an exchange or a nationally recognized
pricing service for identical instruments in active markets.
Level 2 includes those financial instruments that are valued using industry-standard models that consider various inputs, such
as the interest rate and credit spread for the underlying financial instruments. All significant inputs are observable, or derived
from observable information in the marketplace, or are supported by observable levels at which transactions are executed in the
marketplace. Financial instruments in this category primarily include corporate bonds, municipal bonds, structured securities,
redeemable preferred stock and certain nonredeemable preferred stock.
Level 3 securities are valued based upon unobservable inputs, reflecting our estimates of value based upon assumptions used by
market participants. Securities are assigned to Level 3 in cases where non-binding broker quotes are significant to the
valuation and there is a lack of transparency as to whether these quotes are based upon information that is observable in the
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marketplace. Fair value estimates for securities valued using unobservable inputs require significant judgment due to the
illiquid nature of the market for these securities and represent the best estimate of the fair value that would occur in an orderly
transaction between willing market participants at the measurement date under current market conditions. Fair value for these
securities are generally determined using comparable securities or non-binding broker quotes received from outside broker
dealers based upon security type and market conditions. Remaining securities, where a price is not available, are valued using
an estimate of fair value based upon indicative market prices that include significant unobservable inputs not based upon, nor
corroborated by, market information, including the utilization of discounted cash flow analyses which have been risk-adjusted
to take into account illiquidity and other market factors. This category primarily consists of corporate bonds priced using non-
binding broker quotes as well as certain private securities.
As of each reporting period, financial instruments recorded at fair value are classified based upon the lowest level of input that
is significant to the fair value measurement. The presence of at least one unobservable input would result in classification as a
Level 3 instrument. Our assessment of the significance of a particular input to the fair value measurement requires judgment,
and considers factors specific to the asset, such as the relative impact on the fair value as a result of including a particular input
and market conditions. We did not make any other significant judgments except as described above.
Estimates of fair values for our investment portfolio are obtained primarily from a nationally recognized pricing service. Our
Level 1 category includes those securities valued using an exchange traded price provided by the pricing service. The
methodologies used by the pricing service that support a Level 2 classification of a financial instrument include multiple
verifiable, observable inputs including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided
markets, benchmark securities, bids, offers, and reference data. Pricing service valuations for Level 3 securities are based upon
proprietary models and are used when observable inputs are not available in illiquid markets. In limited circumstances we
adjust the price received from the pricing service when, in our judgment, a better reflection of fair value is available based upon
corroborating information and our knowledge and monitoring of market conditions such as a disparity in price of comparable
securities and/or non-binding broker quotes. In other circumstances, certain securities are internally priced because prices are
not provided by the pricing service.
We perform continuous reviews of the prices obtained from the pricing service. This includes evaluating the methodology and
inputs used by the pricing service to ensure we determine the proper classification level of the financial instrument. Price
variances, including large periodic changes, are investigated and corroborated by market data. We have reviewed the pricing
methodologies of our pricing service as well as other observable inputs, such as benchmark yields, reported trades, issuer
spreads, two-sided markets, benchmark securities, bids, offers, reference data, and transaction volumes, and believe that the
prices adequately consider market activity in determining fair value. Our review process continues to evolve based upon
accounting guidance and requirements.
When a price from the pricing service is not available, values are determined by obtaining non-binding broker quotes and/or
market comparables. When available, we obtain multiple quotes for the same security. The ultimate value for these securities
is determined based upon our best estimate of fair value using corroborating market information. Our evaluation includes the
consideration of benchmark yields, reported trades, issuer spreads, two-sided markets, benchmark securities, bids, offers, and
reference data.
Other-than-temporary impairments
Investments are evaluated monthly for other-than-temporary impairment loss. Some factors considered in evaluating whether
or not a decline in fair value is other-than-temporary include:
• the extent and duration for which fair value is less than cost;
• historical operating performance and financial condition of the issuer;
• short- and long-term prospects of the issuer and its industry based upon analysts’ recommendations;
• specific events that occurred affecting the issuer, including rating downgrades;
• intent to sell or more likely than not be required to sell (debt securities); and
• ability and intent to retain the investment for a period of time sufficient to allow for a recovery in value (equity
securities).
For available-for-sale equity securities, a charge is recorded in the Consolidated Statements of Operations for positions that
have experienced other-than-temporary impairments. For debt securities in which we do not expect full recovery of amortized
cost, the security is deemed to be credit-impaired. Credit-related impairments and impairments on securities we intend to sell
or more likely than not will be required to sell are recorded in the Consolidated Statements of Operations. It is our intention to
sell all debt securities with credit impairments.
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Limited partnerships
The primary basis for the valuation of limited partnership interests is financial statements prepared by the general partner.
Because of the timing of the preparation and delivery of these financial statements, the use of the most recently available
financial statements provided by the general partners generally result in a quarter delay in the inclusion of the limited
partnership results in our Consolidated Statements of Operations. Due to this delay, these financial statements do not reflect the
market conditions experienced in the fourth quarter of 2014.
The majority of our limited partnership holdings are considered investment companies where the general partners record assets
at fair value. These limited partnerships are recorded using the equity method of accounting. We also own some real estate
limited partnerships that do not meet the criteria of an investment company. These partnerships prepare audited financial
statements on a cost basis. We have elected to report these limited partnerships under the fair value option, which is based on
the net asset value (NAV) from our partner's capital statement reflecting the general partner's estimate of fair value for the
fund's underlying assets. Fair value provides consistency in the evaluation and financial reporting for these limited partnerships
and limited partnerships accounted for under the equity method.
We have three types of limited partnership investments: private equity, mezzanine debt, and real estate. Our private equity and
mezzanine debt partnerships are diversified among numerous industries and geographies to minimize potential loss exposure.
Nearly all of the underlying investments in our limited partnerships are valued using a source other than quoted prices in active
markets. The fair value amounts for our private equity and mezzanine debt partnerships are based upon the financial statements
prepared by the general partners, who use various methods to estimate fair value including the market approach, income
approach, and the cost approach. The market approach uses prices and other pertinent information from market-generated
transactions involving identical or comparable assets or liabilities. Such valuation techniques often use market multiples
derived from a set of comparables. The income approach uses valuation techniques to convert future cash flows or earnings to
a single discounted present value amount. The measurement is based upon the value indicated by current market expectations
about those future amounts. The cost approach is derived from the amount that is currently required to replace the service
capacity of an asset. If information becomes available that would impair the cost of investments owned by the partnerships,
then the general partner would adjust the investments to the net realizable value.
The fair value of investments in real estate limited partnerships is determined by the general partner based upon independent
appraisals and/or internal valuations. Real estate projects under development are generally valued at cost and impairment
tested by the general partner. We minimize the risk of market decline by avoiding concentration in a particular geographic area
and are diversified across residential, commercial, industrial, and retail real estate investments.
While we perform various procedures in review of the general partners’ valuations, we rely on the general partners’ financial
statements as the best available information to record our share of the partnership unrealized gains and losses resulting from
valuation changes. Due to the limited market for these investments, there is the greatest potential for variability. We survey
each of the general partners quarterly about expected significant changes (plus or minus 10% compared to previous quarter) to
valuations prior to the release of the fund’s quarterly and annual financial statements. Based upon that information from the
general partner, we consider whether additional disclosure is warranted. We analyze limited partnerships measured at fair value
based upon NAV to determine if the most recently available NAV reflects fair value at the balance sheet date, with an
adjustment being made where appropriate (change of plus or minus 5% compared to most recent NAV.)
Deferred Acquisition Costs Related to Life Insurance and Investment-Type Contracts
Acquisition costs that vary with and relate to the production of life insurance and investment-type contracts are deferred.
Deferred acquisition costs (“DAC”) are incremental direct costs of contract acquisition. These costs are limited to the
successful acquisition of new and renewal contracts. Such costs consist principally of commissions and policy issuance
expenses.
DAC on life insurance and investment-type contracts are amortized in proportion to gross premiums or gross profits, depending
on the type of contract. DAC related to traditional life insurance products is amortized in proportion to premium revenues over
the premium-paying period of related policies using assumptions consistent with those used in computing policy liability
reserves. These assumptions are not revised after policy issuance unless the DAC balance is deemed to be unrecoverable from
future expected profits. In any period where the actual policy terminations are higher (lower) than anticipated policy
terminations, DAC amortization will be accelerated (decelerated) in that period.
DAC related to universal life products and deferred annuities is amortized over the estimated lives of the contracts in
proportion to actual and expected future gross profits, which include investment, mortality, and expense margins and surrender
charges. Both historical and anticipated investment returns, including realized gains and losses, are considered in determining
the amortization of DAC. When the actual gross profits change from previously estimated gross profits, the cumulative DAC
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amortization is re-estimated and adjusted by a cumulative charge or credit to current operations. When actual gross profits
exceed those previously estimated, DAC amortization will increase, resulting in a current period charge to earnings. The
opposite result occurs when the actual gross profits are below the previously estimated gross profits. DAC is also adjusted for
the impact of unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding credits
or charges, net of income taxes, included in EFL’s accumulated other comprehensive income, which is presented in the
“Noncontrolling interest in consolidated entity – Exchange,” amount in the Consolidated Statements of Financial Position.
The actuarial assumptions used to determine investment, mortality, and expense margins and surrender charges for universal
life products and deferred annuities are reviewed periodically, are based upon best estimates and do not include any provision
for the risk of adverse deviation. If actuarial analysis indicates that expectations have changed, the actuarial assumptions are
updated and the investment, mortality, and expense margins and surrender charges are unlocked. If this unlocking results in a
decrease in the present value of future expected gross profits, DAC amortization for the period will increase. If this unlocking
results in an increase in the present value of future expected gross profits, DAC amortization for the current period will
decrease.
DAC is periodically reviewed for recoverability. For traditional life products, if the benefit reserves plus anticipated future
premiums and interest earnings for a line of business are less than the current estimate of future benefits and expenses
(including any unamortized DAC), a charge to income is recorded for additional DAC amortization or for increased benefit
reserves. For universal life products and deferred annuities, if the current present value of future expected gross profits is less
than the unamortized DAC, a charge to income is recorded for additional DAC amortization. There were no impairments to
DAC in 2014, 2013 or 2012.
Deferred Taxes
Deferred tax assets represent the tax benefit of future deductible temporary differences and operating loss and tax credit carry-
forwards. Deferred tax assets are measured using the enacted tax rates expected to be in effect when such benefits are realized.
We perform an analysis of our deferred tax assets to determine recoverability on a quarterly basis for each legal entity, by
character of the income (ordinary or capital). Deferred tax assets are reduced by a valuation allowance, if based upon the
weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized.
In determining the need for a valuation allowance, we consider carry-back capacity, reversal of existing temporary differences,
future taxable income and tax planning strategies. The determination of the valuation allowance for our deferred tax assets
requires us to make certain judgments and assumptions regarding future operations that are based upon our historical
experience and our expectations of future performance. Our judgments and assumptions are subject to change given the
inherent uncertainty in predicting future performance, which is impacted by such things as financial market conditions,
policyholder behavior, competitor pricing, new product introductions, and specific industry and economic conditions.
Indemnity had a net deferred tax asset of $37 million and $2 million at December 31, 2014 and 2013, respectively. There was
no valuation allowance recorded on Indemnity at December 31, 2014 or 2013. The Exchange had a net deferred tax liability of
$490 million and $450 million at December 31, 2014 and 2013, respectively.
Retirement Benefit Plans for Employees
Our pension plans consist of a noncontributory defined benefit pension plan covering substantially all employees and an
unfunded supplemental employee retirement plan ("SERP") for certain members of executive and senior management of the
Erie Insurance Group. Although Indemnity is the sponsor of these postretirement plans and records the funded status of these
plans, the Exchange and EFL reimburse Indemnity for approximately 56% of the annual benefit expense of these plans, which
represents pension benefits for Indemnity employees performing claims and EFL functions.
Our pension obligation is developed from actuarial estimates. Several statistical and other factors, which attempt to anticipate
future events, are used in calculating the expense and liability related to the plans. Key factors include assumptions about the
discount rates and expected rates of return on plan assets. We review these assumptions annually and modify them considering
historical experience, current market conditions, including changes in investment returns and interest rates and expected future
trends.
Accumulated and projected benefit obligations are expressed as the present value of future cash payments. We discount those
cash payments based upon a yield curve developed from corporate bond yield information with maturities that correspond to
the payment of benefits. Lower discount rates increase present values and subsequent year pension expense, while higher
discount rates decrease present values and subsequent year pension expense. The construction of the yield curve is based upon
yields of corporate bonds rated Aa quality. Target yields are developed from bonds at various maturity points and a curve is
fitted to those targets. Spot rates (zero coupon bond yields) are developed from the yield curve and used to discount benefit
payment amounts associated with each future year. The present value of plan benefits is calculated by applying the spot/
39
discount rates to projected benefit cash flows. A single discount rate is then developed to produce the same present value. The
cash flows from the yield curve were matched against our projected benefit payments in the pension plan, which have a
duration of about 20 years. This yield curve supported the selection of a 4.17% discount rate for the projected benefit
obligation at December 31, 2014 and for the 2015 pension expense. The same methodology was used to develop the 5.11%
and 4.19% discount rates used to determine the projected benefit obligation for 2013 and 2012, respectively, and the pension
expense for 2014 and 2013, respectively. A 25 basis point decrease in the discount rate assumption, with other assumptions
held constant, would increase pension cost in the following year by $4 million and would increase the pension benefit
obligation by $34 million.
Unrecognized actuarial gains and losses arise from several factors, including experience and assumption changes in the
obligations and from the difference between expected returns and actual returns on plan assets. These unrecognized gains and
losses are recorded in the pension plan obligation and accumulated other comprehensive income (loss) on the Consolidated
Statements of Financial Position. These amounts are systematically recognized to net periodic pension expense in future
periods, with gains decreasing and losses increasing future pension expense. If actuarial net gains or losses exceed 5% of the
greater of the projected benefit obligation and the market-related value of plan assets, the excess is recognized through the net
periodic pension expense equally over the estimated service period of the employee group, which is currently 14 years.
The expected long-term rate of return for the pension plan represents the average rate of return to be earned on plan assets over
the period the benefits included in the benefit obligation are to be paid. The expected long-term rate of return is less
susceptible to annual revisions, as there are typically no significant changes in the asset mix. To determine the expected long-
term rate of return assumption, we utilized models based upon rigorous historical analysis and forward-looking views of the
financial markets based upon key factors such as historical returns for the asset class' applicable indices, the correlations of the
asset classes under various market conditions and consensus views on future real economic growth and inflation. The expected
future return for each asset class is then combined by considering correlations between asset classes and the volatilities of each
asset class to produce a reasonable range of asset return results within which our expected long-term rate of return assumption
falls. A change of 25 basis points in the expected long-term rate of return assumption, with other assumptions held constant,
would have an estimated $1.3 million impact on net pension benefit cost in the following year, of which Indemnity’s share
would be approximately $0.6 million.
We use a four year averaging method to determine the market-related value of plan assets, which is used to determine the
expected return component of pension expense. Under this methodology, asset gains or losses that result from returns that
differ from our long-term rate of return assumption are recognized in the market-related value of assets on a level basis over a
four year period. The market-related asset experience during 2014 that related to the actual investment return being different
from that assumed during the prior year was a gain of $42 million. Recognition of this gain will be deferred and recognized
over a four year period, consistent with the market-related asset value methodology. Once factored into the market-related
asset value, these experience gains and losses will be amortized over a period of 14 years, which is the remaining service period
of the employee group.
Estimates of fair values of the pension plan assets are obtained primarily from our trustee and custodian of our pension plan.
Our Level 1 category includes a money market fund that is a mutual fund for which the fair value is determined using an
exchange traded price provided by the trustee and custodian. Our Level 2 category includes commingled pools. Estimates of
fair values for securities held by our commingled pools are obtained primarily from the trustee and custodian. The
methodologies used by the trustee and custodian that support a financial instrument Level 2 classification include multiple
verifiable, observable inputs including benchmark yields, reported trades, broker/dealer quotes, issuers spreads, two-sided
markets, benchmark securities, bids, offers, and reference data. There were no Level 3 investments in 2014 or 2013.
We expect our net pension benefit costs to increase from $26 million in 2014 to $39 million in 2015. This increase is due to
both the lower discount rate and the adoption of the newly issued mortality tables, partially offset by a change in other plan
assumptions that were updated to reflect our most recent actual experience. Indemnity’s share of the net pension benefit costs
after reimbursements will increase from $12 million in 2014 to approximately $17 million in 2015.
The actuarial assumptions we used in determining our pension obligation may differ materially from actual results due to
changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants.
While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may
materially affect our financial position, results of operations, or cash flows. See Item 8. “Financial Statements and
Supplementary Data - Note 15, Postretirement Benefits, of Notes to Consolidated Financial Statements” contained within this
report for additional details on the pension plans.
40
RESULTS OF OPERATIONS
The information that follows is presented on a segment basis prior to eliminations.
Management Operations
Indemnity earns management fee revenue from providing services relating to the sales, underwriting, and issuance of policies
on behalf of the Exchange as a result of its attorney-in-fact relationship, which is eliminated upon consolidation. A summary
of the results of our management operations is as follows:
Indemnity Shareholder Interest
Years ended December 31,
(dollars in millions)
2014
%
Change
2013
%
Change
2012
Management fee revenue, net $ 1,376 8.7 % $ 1,266 9.4 % $ 1,157
Service agreement revenue 31 NM 31 NM 31
Total revenue from management operations 1,407 8.5 1,297 9.2 1,188
Cost of management operations 1,184 8.8 1,088 10.6 983
Income from management operations – Indemnity
(1)
$ 223 6.5 % $ 209 2.1 % $ 205
Gross margin 15.8% (0.3) pts. 16.1% (1.2) pts. 17.3%
NM = not meaningful
(1) The Indemnity shareholder interest retains 100% of the income from management operations.
Management fee revenue
Management fee revenue is based upon all premiums written or assumed by the Exchange and the management fee rate, which
is determined by our Board of Directors at least annually. Management fee revenue is calculated by multiplying the
management fee rate by 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 agreement. The following table presents the
calculation of management fee revenue:
Indemnity Shareholder Interest
Years ended December 31,
(dollars in millions)
2014
%
Change
2013
%
Change
2012
Property and Casualty Group direct written premium $ 5,514 8.6 % $ 5,076 9.6 % $ 4,631
Management fee rate 25%
25%
25%
Management fee revenue, gross 1,379 8.6 1,269 9.6 1,157
Change in allowance for management fee returned on
cancelled policies
(1)
(3
) NM
(3
) NM 0
Management fee revenue, net of allowance $ 1,376 8.7 % $ 1,266 9.4 % $ 1,157
NM = not meaningful
(1) Management fees are returned to the Exchange when policies are cancelled mid-term and unearned premiums are refunded. We record an
estimated allowance for management fees returned on mid-term policy cancellations.
Management fee revenue increased $110 million, or 8.7%, in 2014, compared to 2013. Direct written premium of the Property
and Casualty Group increased 8.6% in 2014, compared to 2013, due to a 4.3% increase in policies in force and a 4.2% increase
in the year-over-year average premium per policy for all lines of business. The year-over-year policy retention ratio was 90.3%
at December 31, 2014, 90.6% at December 31, 2013, and 90.9% at December 31, 2012. See the “Property and Casualty
Insurance Operations” segment that follows for a complete discussion of property and casualty direct written premium, which
has a direct bearing on Indemnity’s management fee. The management fee rate was set at 25%, the maximum rate, for 2014,
2013 and 2012. The management fee rate for 2015 was set at 25% by our Board of Directors. Changes in the management fee
rate can affect the Indemnity shareholder interest's revenue and net income from this segment significantly. See also, the
“Transactions/Agreements between Indemnity and Noncontrolling Interest (Exchange), Board Oversight” section within this
report.
Service agreement revenue
Service agreement revenue includes service charges Indemnity collects from policyholders for providing extended payment
terms on policies written by the Property and Casualty Group and late payment and policy reinstatement fees. The service
41
charges are fixed dollar amounts per billed installment. Service agreement revenue totaled $31 million in 2014, 2013 and 2012.
The consistency in the service agreement revenue compared to the growth in policies in force reflects the continued shift in
policies to the monthly direct debit payment plan, which does not incur service charges, and the no-fee single payment plan,
which offers a premium discount. The shift to these plans is driven by the consumers’ desire to avoid paying service charges
and to take advantage of the discount in pricing offered for paid-in-full policies.
Cost of management operations
Indemnity Shareholder Interest
Years ended December 31,
(in millions)
2014
%
Change
2013
%
Change
2012
Commissions:
Total commissions $ 783 10.3 % $ 710 11.7 % $ 635
Non-commission expense:
Sales and advertising $ 60 2.1 $ 59 6.2 $ 55
Underwriting and policy processing 127 5.8 120 8.0 111
Information technology 121 12.5 108 4.8 103
Customer service 26 18.4 22 19.1 19
Administrative and other 67 (3.7) 69 15.4 60
Total non-commission expense 401 6.2 378 8.6 348
Total cost of management operations $ 1,184 8.8 % $ 1,088 10.6 % $ 983
Commissions – Commissions increased $73 million in 2014 compared to 2013, and increased $75 million in 2013 compared to
2012, primarily as a result of the 8.6% and 9.6% respective increases in direct written premiums of the Property and Casualty
Group. Commission growth outpaced direct written premium growth in 2014 and 2013 primarily due to an increase in agent
incentive costs related to profitable growth. Also impacting the increase in 2013 was an adjustment that reduced commission
expense by $6 million in 2012. This amount represented 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.
Non-commission expense – Non-commission expense increased $23 million in 2014 compared to 2013. Information
technology costs increased $13 million, which included $6 million of professional fees, $4 million of personnel costs, and
$3 million of hardware and software costs. Underwriting and policy processing costs increased $7 million due to the increased
cost of underwriting reports, postage, and printing costs related to increased volume. Customer service costs increased
$4 million due to an increase of $2 million in credit card processing fees and $2 million in personnel costs. All other operating
costs decreased $1 million.
In 2013, compared to 2012, non-commission expense increased $30 million. Sales and advertising costs increased $4 million
due to personnel costs. Underwriting and policy processing costs increased $9 million due to increased personnel costs and the
increased cost of underwriting reports and postage and printing costs. Information technology costs increased $5 million,
which included $6 million of personnel costs, offset by a decrease of $1 million in software, hardware, and maintenance costs.
Customer service costs increased $3 million due to an increase of $2 million in credit card processing fees and $1 million in
personnel costs. Administrative and other costs increased $9 million driven by increases in professional fees and personnel
costs of $5 million and $4 million, respectively. Personnel costs in all expense categories were impacted by higher staffing
levels, increased pension and medical costs, and increased estimates for incentive plan compensation costs related to growth
and underwriting performance.
Gross margin
The gross margin in 2014 was 15.8%, compared to 16.1% in 2013 and 17.3% in 2012. Excluding the adjustment in 2012 that
reduced commission expense by $6 million (described above), the gross margin would have been 16.8% in 2012.
42
Property and Casualty Insurance Operations
The Property and Casualty Group operates in 12 Midwestern, Mid-Atlantic, and Southeastern states and the District of
Columbia and primarily writes private passenger automobile, homeowners, commercial multi-peril, commercial automobile,
and workers compensation lines of insurance. A summary of the results of our property and casualty insurance operations is as
follows:
Property and Casualty Group
Years ended December 31,
(dollars in millions)
2014
%
Change
2013
%
Change
2012
Premiums:
Direct written premium $ 5,514 8.6 % $ 5,076 9.6 % $ 4,631
Reinsurance premium – assumed and ceded (27) 13.4 (31) (9.3) (28)
Net written premium 5,487 8.8 5,045 9.6 4,603
Change in unearned premium (227) (1.1) (225) 24.1 (181)
Net premiums earned 5,260 9.1 4,820 9.0 4,422
Losses and loss expenses:
Current accident year, excluding catastrophe losses 3,580 11.1 3,222 7.0 3,010
Current accident year catastrophe losses 395 NM 162 NM 489
Prior accident years, including prior year catastrophe losses (116) NM (19) NM (115)
Losses and loss expenses 3,859 14.7 3,365 (0.5) 3,384
Policy acquisition and other underwriting expenses 1,502 8.4 1,387 7.9 1,284
Total losses and expenses 5,361 12.8 4,752 1.8 4,668
Underwriting (loss) income – Exchange
(1)
$ (101) NM % $ 68 NM % $ (246)
Loss and loss expense ratios:
Current accident year loss ratio, excluding catastrophe
losses
68.1% 1.3 pts. 66.8%
(1.3
) pts. 68.1%
Current accident year catastrophe loss ratio 7.5 4.1 3.4 (7.6) 11.0
Prior accident year loss ratio, including prior year
catastrophe losses
(2.2
)
(1.8
)
(0.4
) 2.2
(2.6
)
Total loss and loss expense ratio 73.4 3.6 69.8 (6.7) 76.5
Policy acquisition and other underwriting expense ratio 28.5 (0.3) 28.8 (0.3) 29.1
Combined ratio 101.9% 3.3 pts. 98.6% (7.0) pts. 105.6%
NM = not meaningful
(1) The Exchange retains 100% of the income from the property and casualty insurance operations.
We measure profit or loss from our property and casualty insurance segment based upon its underwriting results, which are
represented by net premiums earned less losses and loss expenses and policy acquisition and other underwriting expenses on a
pre-tax basis. The loss and loss expense ratio and combined ratio are key performance indicators that we use to assess business
trends and to make comparisons to industry results. The investment results related to our property and casualty insurance
operations are included in our investment operations segment discussion.
Premiums
Direct written premium – Direct written premium of the Property and Casualty Group increased 8.6% to $5.5 billion in 2014,
from $5.1 billion in 2013, driven by an increase in policies in force and increases in average premium per policy. Year-over-
year policies in force for all lines of business increased by 4.3% in 2014 as the result of continuing strong policyholder
retention and an increase in new policies written, compared to 4.8% in 2013. The year-over-year average premium per policy
for all lines of business increased 4.2% at December 31, 2014, compared to 4.5% at December 31, 2013.
Premiums generated from new business increased 5.8% to $695 million in 2014, compared to 15.6%, or $656 million, in 2013.
Underlying the trend in new business premiums was a 2.9% increase in new business policies written in 2014, compared to
13.6% in 2013, while the year-over-year average premium per policy on new business increased 2.9% at December 31, 2014,
compared to 1.8% at December 31, 2013.
Premiums generated from renewal business increased 9.0% to $4.8 billion in 2014, compared to 8.8%, or $4.4 billion, in 2013.
Underlying the trend in renewal business premiums were increases in average premium per policy and steady policy retention
ratios. The renewal business year-over-year average premium per policy increased 4.3% at December 31, 2014, compared to
43
5.0% at December 31, 2013. The Property and Casualty Group’s year-over-year policy retention ratio was 90.3% at
December 31, 2014, 90.6% at December 31, 2013, and 90.9% at December 31, 2012.
The Property and Casualty Group implemented rate increases in 2014, 2013, and 2012 in order to meet loss cost expectations.
As the Property and Casualty Group writes policies with annual terms only, rate actions take 12 months to be fully recognized
in written premium and 24 months to be fully recognized in earned premiums. Since rate changes are realized at renewal, it
takes 12 months to implement a rate change to all policyholders and another 12 months to earn the increased or decreased
premiums in full. As a result, certain rate actions approved in 2013 were reflected in 2014, and recent rate actions in 2014 will
be reflected in 2015. The Property and Casualty Group continuously evaluates pricing and product offerings to meet consumer
demands.
Personal lines – Total personal lines premiums written increased 7.9% to $3.9 billion in 2014, from $3.6 billion in 2013, driven
by an increase of 4.3% in total personal lines policies in force and an increase of 3.5% in the total personal lines year-over-year
average premium per policy.
New business premiums written on personal lines increased 6.0% in 2014, compared to 21.1% in 2013, driven by increases in
new business policies written in the private passenger auto and other personal lines of business and average premium per
policy. Personal lines new business policies written increased 3.0% in 2014, compared to 15.7% in 2013, while the year-over-
year average premium per policy on personal lines new business increased 2.9% at December 31, 2014, compared to 4.7% at
December 31, 2013.
• Private passenger auto new business premiums written increased 7.3% in 2014, compared to 22.8% in 2013. New
business policies written for private passenger auto increased 3.7% in 2014, compared to 19.5% in 2013, while the
new business year-over-year average premium per policy for private passenger auto increased 3.6% at December 31,
2014, compared to 2.8% at December 31, 2013.
• Homeowners new business premiums written increased 2.9% in 2014, compared to 18.4% in 2013. New business
policies written for homeowners decreased 0.5% in 2014, compared to an increase of 11.7% in 2013. The new
business year-over-year average premium per policy for homeowners increased 3.5% at December 31, 2014,
compared to 6.0% at December 31, 2013.
Renewal premiums written on personal lines increased 8.2% in 2014, compared to 7.3% in 2013, driven by increases in average
premium per policy and steady policy retention ratios. The year-over-year average premium per policy on personal lines
renewal business increased 3.6% at December 31, 2014, compared to 3.8% at December 31, 2013. The personal lines year-
over-year policy retention ratio was 90.9% at December 31, 2014, 91.2% at December 31, 2013, and 91.6% at December 31,
2012.
• Private passenger auto renewal premiums written increased 6.3% in 2014, compared to 4.5% in 2013. The year-over-
year average premium per policy on private passenger auto renewal business increased 2.0% at December 31, 2014,
compared to 1.5% at December 31, 2013. The private passenger auto year-over-year policy retention ratio was 91.7%
at December 31, 2014, and 92.1% at December 31, 2013 and 2012.
• Homeowners renewal premiums written increased 11.2% in 2014, compared to 12.2% in 2013. The year-over-year
average premium per policy on homeowners renewal business increased 6.7% at December 31, 2014, compared to
8.4% in 2013. The homeowners year-over-year policyholder retention ratio was 89.8% at December 31, 2014, 90.1%
at December 31, 2013, and 90.9% at December 31, 2012.
Commercial lines – Total commercial lines premiums written increased 10.4%, to $1.6 billion in 2014, from $1.5 billion in
2013, driven by a 4.4% increase in total commercial lines policies in force and a 5.7% increase in the total commercial lines
year-over-year average premium per policy.
New business premiums written on commercial lines increased 5.5% in 2014, compared to 6.3% in 2013, driven by increases in
new business policies written seen across all major commercial lines of business and average premium per policy. Commercial
lines new business policies written increased 2.2% in 2014, compared to 4.6% in 2013, while the year-over-year average
premium per policy on commercial lines new business increased 3.2% at December 31, 2014, compared to 1.6% at
December 31, 2013.
Renewal premiums for commercial lines increased 11.3% in 2014, compared to 12.9% in 2013, driven by increases in average
premium per policy and steady policy retention ratios. The combined impact of these increases was seen primarily in the
44
commercial multi-peril line of business, and to a lesser extent in the commercial auto and workers compensation lines of
business. The year-over-year average premium per policy on commercial lines renewal business increased 6.0% in 2014,
compared to 7.2% in 2013. The year-over-year policy retention ratio for commercial lines was 86.5% at December 31, 2014,
86.7% at December 31, 2013, and 86.2% at December 31, 2012.
Future trends—premium revenue – We plan to continue our efforts to grow Property and Casualty Group premiums and
improve our competitive position in the marketplace. Expanding the size of our agency force through a careful agency
selection process and increased market penetration in our existing operating territories will contribute to future growth as
existing and new agents build their books of business with the Property and Casualty Group. At December 31, 2014, we had
nearly 2,200 agencies with over 11,000 licensed property and casualty representatives. The Property and Casualty Group
began writing private passenger automobile, home insurance, and personal excess liability insurance in Kentucky in the fourth
quarter of 2014.
Changes in premium levels attributable to the growth in policies in force directly affect the profitability of the Property and
Casualty Group and have a direct bearing on Indemnity’s management fee. Our continued focus on underwriting discipline and
the maturing of our pricing sophistication models has contributed to the Property and Casualty Group’s growth in new policies
in force, steady policy retention ratios, and increased average premium per policy. The continued growth of our policy base is
dependent upon the Property and Casualty Group’s ability to retain existing policyholders and attract new policyholders. A
lack of new policy growth or the inability to retain existing customers could have an adverse effect on the Property and
Casualty Group’s premium level growth, and consequently Indemnity’s management fee.
Changes in premium levels attributable to rate changes also directly affect the profitability of the Property and Casualty Group
and have a direct bearing on Indemnity’s management fee. Pricing actions contemplated or taken by the Property and Casualty
Group are subject to various regulatory requirements of the states in which our insurers operate. The pricing actions already
implemented, or to be implemented, have an effect on the market competitiveness of our insurance products. Such pricing
actions, and those of competitors, could affect the ability of our agents to retain and attract new business. We expect the
Property and Casualty Group’s pricing actions to result in a net increase in direct written premium in 2015, however, exposure
reductions and/or changes in our mix of business as a result of economic conditions could impact the average premium written
by the Property and Casualty Group, as customers may reduce coverages.
Losses and loss expenses
Current accident year, excluding catastrophe losses – The current accident year loss and loss expense ratio for all lines of
business, excluding catastrophe losses, was 68.1% in 2014, compared to 66.8% in 2013 and 68.1% in 2012. The personal lines
loss and loss expense ratio related to the current accident year, excluding catastrophe losses, was 67.9% in 2014, compared to
67.3% in 2013 and 68.5% in 2012. The commercial lines loss and loss expense ratio related to the current accident year,
excluding catastrophe losses, was 68.6% in 2014, compared to 65.7% in 2013 and 67.1% in 2012. The higher ratios for 2014
were driven primarily by a higher volume of non-catastrophe weather related claims resulting from more severe winter weather
experienced in the first quarter and a few large commercial property claims, compared to 2013.
Current accident year catastrophe losses – Catastrophic events, destructive weather patterns, or changes in climate conditions
are an inherent risk of the property and casualty insurance business and can have a material impact on our property and casualty
insurance underwriting results. In addressing this risk, we employ what we believe are reasonable underwriting standards and
monitor our exposure by geographic region. The Property and Casualty Group’s definition of catastrophes includes those
weather-related or other loss events that we consider significant to our geographic footprint which, individually or in the
aggregate, may not reach the level of a national catastrophe as defined by the Property Claim Service ("PCS").
The Property and Casualty Group maintains property catastrophe reinsurance coverage from unaffiliated reinsurers to mitigate
future potential catastrophe loss exposures and no longer participates in the voluntary assumed reinsurance business, which
lowers the variability of the Property and Casualty Group’s underwriting results. The property catastrophe reinsurance
coverage during 2014 included a first treaty providing coverage of up to 30% of a loss of $100 million in excess of the Property
and Casualty Group’s loss retention of $300 million per occurrence, a second treaty providing coverage of up to 90% of a loss
of $500 million in excess of $400 million, a third treaty providing coverage of up to 85% of a loss of $200 million in excess of
$900 million, and a fourth treaty providing coverage of up to 100% of a loss of $25 million in excess of $1.1 billion. The
property catastrophe reinsurance coverage that became effective for January 1, 2015 included a first property catastrophe
reinsurance treaty providing coverage of up to 35% of a loss of $100 million in excess of the Property and Casualty Group’s
loss retention of $300 million per occurrence, a second treaty providing coverage of up to 90% of a loss of $500 million in
excess of $400 million, a third treaty providing coverage of up to 86% of a loss of $200 million in excess of $900 million, and a
fourth treaty providing coverage of up to 100% of a loss of $25 million in excess of $1.1 billion.
45
While the Property and Casualty Group is exposed to terrorism losses in commercial lines, including workers compensation,
these lines are afforded a limited backstop above insurer deductibles for foreign acts of terrorism under the federal Terrorism
Risk Insurance Program Reauthorization and Extension Act of 2015 that continues through December 31, 2020. There is no
federal assistance for personal lines terrorism losses. Although current models suggest the most likely occurrences would not
have a material impact on the Property and Casualty Group, there is a chance that if future terrorism attacks occur, the Property
and Casualty Group could incur large losses.
Catastrophe losses for the current accident year, as defined by the Property and Casualty Group, totaled $395 million in 2014,
$162 million in 2013, and $489 million in 2012, and contributed 7.5 points, 3.4 points and 11.0 points to the respective loss
ratios. For 2014, catastrophe losses primarily resulted from many smaller events across our footprint and one large hail event
in Pennsylvania.
Prior accident years, including prior accident year catastrophe losses – The following table provides a breakout of our
property and casualty insurance operation’s prior year loss reserve development, including prior accident year catastrophe loss
reserves, by type of business:
Property and Casualty Group
(in millions)
Years ended December 31,
2014 2013 2012
Direct business, including reserves for catastrophe losses and salvage and
subrogation $
(120
) $ 2 $
(92
)
Assumed reinsurance business 4 (13) (14)
Ceded reinsurance business 0 (8) (9)
Total prior year loss development $ (116) $ (19) $ (115)
Negative amounts represent a redundancy (decrease in reserves), while positive amounts represent a deficiency (increase in reserves).
Direct business, including reserves for catastrophe losses and salvage and subrogation – The following table presents the
overall prior year loss development of direct reserves, including reserves for catastrophe losses and the effects of salvage and
subrogation recoveries, for our personal and commercial lines' operations by accident year:
Property and Casualty Group
(in millions)
Years ended December 31,
2014 2013 2012
2013 $ (23) $ — $ —
2012 (20) (11) —
2011 (25) 2 (46)
2010 (21) (2) (27)
2009 (12) (1) (7)
2008 (8) 1 (6)
2007 (6) (2) (5)
2006 (12) 0 (4)
2005 1 (2) (3)
2004 and prior 6 17 6
Total $ (120) $ 2 $ (92)
Negative amounts represent a redundancy (decrease in reserves), while positive amounts represent a deficiency (increase in reserves).
The 2014 direct business favorable development, including reserves for catastrophe losses and salvage and subrogation
recoveries, totaled $120 million, improved the combined ratio by 2.3 points, and represented 3.2% of the net loss reserves at
December 31, 2013. The most significant factors contributing to the 2014 favorable development were:
• Favorable development of $78 million related to better than expected severity trends in personal auto, commercial
multi-peril, and workers compensation lines of business. Additionally, $42 million of favorable development was due
to changes on individual claims, primarily workers compensation massive injury lifetime medical claims, personal
auto massive injury lifetime medical claims, and the settlement of one commercial multi-peril individual large claim.
46
The 2013 direct business adverse development, including reserves for catastrophe losses and salvage and subrogation
recoveries, totaled $2 million, contributing only 0.1 points to the combined ratio, and represented 0.1% of the net loss reserves
at December 31, 2012. The most significant factors contributing to the 2013 adverse development were:
• Adverse development of $29 million related to the personal auto and workers compensation massive injury lifetime
medical claims due to increased annual claims cost expectations. This was offset somewhat by favorable development
of $10 million due to the settlement of three massive injury lifetime medical claims. These primarily impacted
accident years 2003 and prior.
• Favorable development of $22 million related to the personal auto line of business resulting from better than expected
severity trends, offset somewhat by minor changes across all other lines of business, which impacted the
2012 accident year.
The 2012 direct business favorable development, including reserves for catastrophe losses and salvage and subrogation
recoveries, totaled $92 million, improved the combined ratio by 2.1 points, and represented 2.6% of the net loss reserves at
December 31, 2011. The most significant factors contributing to the 2012 favorable development were:
• Favorable development of $54 million related to the homeowners line of business primarily resulting from improved
claims frequency trends, which impacted the 2011 accident year, better than expected severity trends, which impacted
the 2007 through 2011 accident years, and the closing of one large claim which impacted the 2010 accident year.
• Favorable development of $42 million related to the commercial multi-peril line of business primarily resulting from
better than expected severity trends, which impacted the 2007 through 2011 accident years, and the closing of two
large claims which impacted the 2006 through 2010 accident years.
• Favorable development of $11 million related to the commercial auto line of business primarily resulting from better
than expected severity trends, which impacted the 2007 through 2011 accident years.
• Adverse development of $15 million related to the workers compensation line of business primarily resulting from
increased severity trends, which impacted accident years 2000 through 2008.
Additional information on direct loss reserve development is provided in Item 1. “Business, Reserves for losses and loss
expenses.” The variability in reserve development over the ten year period illustrates the uncertainty of the loss reserving
process. Conditions and trends that have affected reserve development in the past will not necessarily recur in the future. It is
not appropriate to extrapolate future favorable or unfavorable reserve development based upon amounts experienced in prior
years.
Assumed reinsurance – The Property and Casualty Group experienced adverse development on prior accident year loss reserves
for its assumed involuntary reinsurance business totaling $4 million in 2014, compared to favorable development of
$13 million in 2013 and $14 million in 2012. The adverse development in 2014 was primarily from the personal auto and
workers compensation lines of business somewhat offset by favorable development in commercial auto. The favorable
development in 2013 and 2012 was due to less than anticipated growth in involuntary reinsurance.
Ceded reinsurance – The Property and Casualty Group's ceded reinsurance reserve recoveries remained flat during 2014,
compared to an increase of $8 million in 2013 and an increase of $9 million in 2012. An increase in ceded recoveries is
reflected as favorable loss development as it represents an increase in recoveries resulting from adverse development on our
direct loss reserves, while a decrease in ceded recoveries is reflected as adverse loss development as it represents a decrease in
recoveries resulting from favorable development on our direct loss reserves. Ceded reinsurance reserves primarily relate to the
pre-1986 automobile massive injury claims. In 2013, the increase in ceded recoveries was primarily due to adverse
development related to the pre-1986 automobile massive injury claims and the commercial multi-peril and business catastrophe
liability lines of business, offset somewhat by favorable development in the workers compensation line of business. In 2012,
the increase in ceded recoveries was primarily the result of adverse development related to the pre-1986 automobile massive
injury claims.
Policy acquisition and other underwriting expenses – Our policy acquisition and other underwriting expense ratio decreased
0.3% points to 28.5% in 2014, from 28.8% in 2013, and decreased 0.3 points in 2013 from 29.1% in 2012. Additionally, 2012
included an adjustment of $4 million which contributed 0.1 points to the combined ratio at December 31, 2012. This
adjustment 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. The management fee rate was 25.0% in 2014, 2013 and 2012.
47
Life Insurance Operations
EFL is a Pennsylvania-domiciled life insurance company which underwrites and sells individual and group life insurance
policies and fixed annuities and operates in 11 states and the District of Columbia. EFL began writing life insurance and
annuity products in Kentucky in the fourth quarter of 2014. A summary of the results of our life insurance operations is as
follows:
Erie Family Life Insurance Company
Years ended December 31,
(in millions)
2014
%
Change
2013
%
Change
2012
Individual and group life premiums, gross $ 127 5.1 % $ 121 4.6 % $ 116
Reinsurance premium – ceded (41) NM (41) 2.2 (43)
Individual and group life premiums, net 86 7.9 80 8.4 73
Other revenue 1 NM 1 NM 1
Total net policy revenue 87 7.9 81 8.0 74
Net investment income 96 2.0 94 (1.0) 95
Net realized gains on investments 9 (45.9) 17 NM 9
Impairment losses recognized in earnings (1) NM (1) NM 0
Equity in earnings of limited partnerships 1 NM 1 NM 0
Total revenues 192 NM 192 7.8 178
Benefits and other changes in policy reserves 105 (1.6) 107 5.8 101
Amortization of deferred policy acquisition costs 13 (12.9) 15 48.7 10
Other operating expenses 25 10.1 22 6.7 21
Total benefits and expenses 143 (1.0) 144 9.2 132
Income before taxes – Exchange
(1)
$ 49 3.7 % $ 48 3.6 % $ 46
NM = not meaningful
(1) The Exchange retains 100% of the income from the life insurance operations.
Policy revenue
Gross policy revenues increased 5.1% to $127 million in 2014, compared to $121 million in 2013, and $116 million in 2012.
EFL uses, and has used, a variety of reinsurance programs to reduce claims volatility and for other financial benefits. While the
amount of risk that EFL retains can vary based upon the type of policy issued and the year it was issued, EFL generally does
not retain more than $1 million of risk on any individual life. Ceded reinsurance premiums totaled $41 million in 2014 and
2013, and $43 million in 2012.
Annuity and universal life premiums that are recorded as deposits totaled $65 million, $59 million, and $58 million in 2014,
2013 and 2012, respectively, and therefore are not reflected in individual and group life premiums in the table above.
Investment revenue
EFL’s investment revenue decreased in 2014 due to a decrease in net realized gains on investments from the sale of bonds.
Offsetting this decrease was a slight increase in net investment income from higher bond earnings primarily due to increased
holdings. EFL’s investment revenue increased in 2013 due to an increase in net realized gains on investments from the sale of
bonds and a slight increase in equity in earnings of limited partnerships. Offsetting these increases was a slight decrease in net
investment income due to lower investment yields and a slight increase in impairment losses recognized in earnings due to
bond impairments. See the discussion of investments in the “Investment Operations” segment that follows for further
information.
Benefits and expenses
In 2014, total benefits and expenses were impacted by a decrease in benefits and other changes in policy reserves, as a result of
a decrease in interest on annuity deposits partially offset by a slight increase in death benefits. Amortization of deferred policy
acquisition costs also decreased compared to 2013 as a result of the annual unlocking. In 2013, total benefits and expenses
were primarily impacted by increases in benefits and other changes in policy reserves, as a result of increases in death benefits
and future policy benefits, and the amortization of deferred policy acquisition costs, as a result of the annual unlocking,
compared to 2012.
48
Investment Operations
The investment results related to our life insurance operations are included in the investment operations segment discussion as
part of the Exchange’s investment results. A summary of the results of our investment operations is as follows:
Erie Insurance Group
Years ended December 31,
(in millions)
2014
%
Change
2013
%
Change
2012
Indemnity
Net investment income $ 16 10.0 % $ 15 (8.4)% $ 16
Net realized gains on investments 1 11.8 1 (82.7) 5
Net impairment losses recognized in earnings 0 NM 0 NM 0
Equity in earnings of limited partnerships 11 (49.6) 22 51.2 15
Net revenue from investment operations – Indemnity $ 28 (23.8)% $ 38 3.0 % $ 36
Exchange
Net investment income $ 446 6.4 % $ 419 (3.1)% $ 433
Net realized gains on investments 192 (75.0) 770 86.4 413
Net impairment losses recognized in earnings (4) (66.3) (13) NM 0
Equity in earnings of limited partnerships 102 (26.7) 139 19.6 116
Net revenue from investment operations – Exchange
(1)
$ 736 (44.1)% $ 1,315 36.8 % $ 962
NM = not meaningful
(1) The Exchange’s investment results include net investment revenues from EFL’s operations of $105 million in 2014, $111 million in 2013, and
$104 million in 2012.
Net investment income
Net investment income primarily includes interest and dividends on our fixed maturity and equity security portfolios.
Indemnity's net investment income increased by $1 million in 2014, compared to 2013, and decreased by $1 million in 2013,
compared to 2012, while net investment income for the Exchange increased by $27 million and decreased by $14 million
during the same respective periods. The increase in net investment income for Indemnity in 2014 was due to higher invested
balances and higher investment yields, while the decrease in 2013 was primarily due to lower average invested balances. The
increase in net investment income for the Exchange in 2014 was due to an increase in invested balances partially offset by
lower investment yields, while the decrease in 2013 was due to lower yields partially offset by an increase in invested balances.
Net impairment losses recognized in earnings
Net impairment losses recognized in earnings for Indemnity were $0.1 million in 2014, compared to $0.4 million in 2013, and
$0.1 million in 2012. Impairment losses for the Exchange totaled $4 million in 2014, compared to $13 million in 2013, and
$0.1 million in 2012. The impairments for the Exchange in 2014 and 2013 were related to several securities in unrealized loss
positions that we intended to sell prior to an expected recovery to our cost basis.
49
Net realized gains on investments
A breakdown of our net realized gains (losses) on investments is as follows:
Erie Insurance Group
(in millions)
Years ended December 31,
2014 2013 2012
Indemnity
Securities sold:
Fixed maturities $ 0 $ 1 $ 0
Equity securities 1 0 0
Common stock equity securities 0 0 8
Common stock increases (decreases) in fair value
(1)
0 0 (3)
Total net realized gains – Indemnity
(2)
$ 1 $ 1 $ 5
Exchange
Securities sold:
Fixed maturities $ 17 $ 6 $ 58
Equity securities 14 (4) 9
Common stock equity securities 231 271 125
Common stock (decreases) increases in fair value
(1)
(70) 497 221
Total net realized gains – Exchange
(2) (3)
$ 192 $ 770 $ 413
(1) The fair value on our common stock portfolio is based upon exchange traded prices provided by a nationally recognized pricing service.
(2) See Item 8. “Financial Statements and Supplementary Data – Note 7, Investments, of Notes to Consolidated Financial Statements” contained within
this report for additional disclosures regarding net realized gains (losses) on investments.
(3) The Exchange’s results include net realized gains from EFL’s operations of $9 million in 2014, $17 million in 2013, and $9 million in 2012.
Net realized gains and losses on investments include the changes in fair value of common stocks designated as trading
securities, and gains and losses resulting from the actual sales of all security categories.
Indemnity generated net realized gains of $1 million in both 2014 and 2013, compared to gains of $5 million in 2012. The
Exchange generated net realized gains of $192 million in 2014, compared to gains of $770 million in 2013 and $413 million in
2012. Realized gains for Indemnity were primarily attributable to gains from sales of equity securities in 2014, and gains from
sales of fixed maturity securities in 2013. Indemnity recorded no changes in fair value of common stocks in 2014 or 2013 due
to the sale of its common stock portfolio classified as trading securities in the fourth quarter of 2012. In 2012, Indemnity's net
realized gains were primarily due to the favorable performance and sale of its common stock portfolio. Realized gains for the
Exchange in 2014 primarily reflected gains from sales of common stock partially offset by decreases in fair value of common
stock. Realized gains for the Exchange in 2013 and 2012 were primarily due to increases in fair value and realized gains on the
sale of common stock securities reflecting favorable market performance.
Equity in earnings of limited partnerships
The components of equity in earnings of limited partnerships are as follows:
Erie Insurance Group
(in millions)
Years ended December 31,
2014 2013 2012
Indemnity
Private equity $ 4 $ 6 $ 7
Mezzanine debt 2 3 5
Real estate 5 13 3
Total equity in earnings of limited partnerships – Indemnity $ 11 $ 22 $ 15
Exchange
Private equity $47 $70 $61
Mezzanine debt 19 22 32
Real estate 36 47 23
Total equity in earnings of limited partnerships – Exchange
(1)
$ 102 $ 139 $ 116
(1) The Exchange’s results include equity in earnings of limited partnerships from EFL’s operations of $1 million in 2014 and 2013, and $0.1 million in
2012.
50
Limited partnership earnings pertain to investments in U.S. and foreign private equity, mezzanine debt, and real estate
partnerships. Valuation adjustments are recorded to reflect the changes in fair value of the underlying investments held by the
limited partnerships. These adjustments are recorded as a component of equity in earnings of limited partnerships in the
Consolidated Statements of Operations.
Limited partnership earnings tend to be cyclical based upon market conditions, the age of the partnership, and the nature of the
investments. Generally, limited partnership earnings are recorded on a quarter lag from financial statements we receive from
our general partners. As a consequence, earnings from limited partnerships reported at December 31, 2014 reflect investment
valuation changes resulting from the financial markets and the economy for the twelve month period ending September 30,
2014.
Indemnity's equity in earnings of limited partnerships decreased by $11 million in 2014, compared to 2013, and increased by
$7 million in 2013, compared to 2012, while earnings for the Exchange decreased by $37 million and increased by $23 million
during the same respective periods. These changes in earnings for both Indemnity and the Exchange were the result of lower
earnings from each investment sector in 2014, and primarily due to higher earnings from real estate investments in 2013.
51
FINANCIAL CONDITION
Investments
We generate revenues 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.
Distribution of investments
Erie Insurance Group
Carrying value at December 31,
(in millions)
2014
% to
total
2013
% to
total
Indemnity
Fixed maturities $ 564 80 % $ 526 73 %
Equity securities:
Preferred stock 12 2 25 3
Common stock 13 2 25 3
Limited partnerships:
Private equity 52 7 62 9
Mezzanine debt 14 2 20 3
Real estate 47 7 64 9
Real estate mortgage loans 1 0 1 0
Total investments – Indemnity $ 703 100 % $ 723 100 %
Exchange
Fixed maturities $ 9,007 65 % $ 8,162 62 %
Equity securities:
Preferred stock 710 5 621 5
Common stock 3,363 24 3,400 26
Limited partnerships:
Private equity 418 3 463 4
Mezzanine debt 170 1 172 1
Real estate 278 2 305 2
Life policy loans 18 0 17 0
Real estate mortgage loans 2 0 3 0
Total investments – Exchange $ 13,966 100 % $ 13,143 100 %
Total investments – Erie Insurance Group $ 14,669 $ 13,866
During 2014, Indemnity increased its investments in non-investment grade fixed maturities from less than 1% of total invested
assets at December 31, 2013 to 9% of total invested assets at December 31, 2014. The increase during 2014 was primarily
funded by cash flows from limited partnership distributions. The Exchange also increased its investment in non-investment
grade fixed maturities during 2014 from 2% of total invested assets at December 31, 2013 to 5% of total invested assets at
December 31, 2014. The increase during 2014 was primarily funded by cash flows from the sale of common stock and limited
partnership distributions.
We continually review our investment portfolio to evaluate positions that might incur other-than-temporary declines in value.
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, which includes consideration for intent to sell.
For all investment holdings, general economic conditions and/or conditions specifically affecting the underlying issuer or its
industry, including downgrades by the major rating agencies, are considered in evaluating impairment in value. In addition to
specific factors, other factors considered in our review of investment valuation are the length of time the fair value is below
cost and the amount the fair value is below cost.
We individually analyze all positions with emphasis on those that have, in our opinion, declined significantly below cost. In
compliance with impairment guidance for debt securities, we perform further analysis to determine if a credit-related
impairment has occurred. Some of the factors considered in determining whether a debt security is credit impaired 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 debt securities, therefore the
52
entire amount of the impairment charges are included in earnings and no impairments are recorded in other comprehensive
income. For available-for-sale equity securities, a charge is recorded in the Consolidated Statements of Operations for
positions that have experienced other-than-temporary impairments. (See the “Investment Operations” section herein for further
information.) We believe our investment valuation philosophy and accounting practices result in appropriate and timely
measurement of value and recognition of impairment.
Fixed maturities
Under our investment strategy, we maintain a fixed maturity portfolio that is of high quality and well diversified within each
market sector. This investment strategy also achieves a balanced maturity schedule. Our fixed maturity portfolio is managed
with the goal of achieving reasonable returns while limiting exposure to risk. Our municipal bond portfolio accounts for
$231 million, or 41%, of the total fixed maturity portfolio for Indemnity and $1.5 billion, or 16%, of the fixed maturity
portfolio for the Exchange at December 31, 2014. The overall credit rating of the municipal portfolio without consideration of
the underlying insurance is AA.
Fixed maturities classified as available-for-sale are carried at fair value with unrealized gains and losses, net of deferred taxes,
included in shareholders’ equity. Indemnity’s net unrealized gains on fixed maturities, net of deferred taxes, amounted to
$6 million at December 31, 2014, compared to $5 million at December 31, 2013. At December 31, 2014, the Exchange had net
unrealized gains on fixed maturities of $303 million, compared to $234 million at December 31, 2013.
The following table presents a breakdown of the fair value of our fixed maturity portfolio by sector and rating for Indemnity
and the Exchange, respectively:
Erie Insurance Group
(1)
(in millions)
December 31, 2014
Non-
investment
Fair
Industry Sector AAA AA A BBB grade value
Indemnity
Basic materials $ 0 $ 0 $ 3 $ 3 $ 4 $ 10
Communications 0 0 0 15 8 23
Consumer 0 0 8 21 25 54
Energy 0 0 0 5 6 11
Financial 0 8 43 39 7 97
Government-municipal 105 104 21 1 0 231
Industrial 0 0 1 5 8 14
Structured securities
(2)
29 23 31 15 1 99
Technology 0 0 0 0 4 4
Utilities 0 0 13 7 1 21
Total – Indemnity $ 134 $ 135 $ 120 $ 111 $ 64 $ 564
Exchange
Basic materials $ 0 $ 0 $ 59 $ 187 $ 58 $ 304
Communications 0 0 252 337 96 685
Consumer 0 35 383 723 196 1,337
Diversified 0 0 14 0 2 16
Energy 7 67 134 461 76 745
Financial 1 138 1,004 1,713 165 3,021
Foreign government 0 10 0 0 0 10
Government-municipal 445 846 161 25 0 1,477
Government sponsored entity 0 4 0 0 0 4
Industrial 0 11 69 281 57 418
Structured securities
(2)
42 122 32 25 0 221
Technology 0 34 62 92 22 210
U.S. Treasury 0 6 0 0 0 6
Utilities 0 3 164 359 27 553
Total – Exchange $ 495 $ 1,276 $ 2,334 $ 4,203 $ 699 $ 9,007
(1) Ratings are supplied by S&P, Moody’s, and Fitch. The table is based upon the lowest rating for each security.
(2) Structured securities include residential mortgage-backed securities. commercial mortgage-backed securities, collateralized debt obligations, and
asset-backed securities.
53
Equity securities
Our equity securities consist of common stock and nonredeemable preferred stock. Investment characteristics of common
stock and nonredeemable preferred stock differ from one another. Our nonredeemable preferred stock portfolio provides a
source of current income that is competitive with investment-grade bonds.
The following table presents an analysis of the fair value of our preferred and common stock securities by sector for Indemnity
and the Exchange, respectively:
Erie Insurance Group
(in millions)
Fair value at
December 31, 2014 December 31, 2013
Industry sector
Preferred
stock
Common
stock
Preferred
stock
Common
stock
Indemnity
Communications $ 1 $ 0 $ 1 $ 0
Diversified 0 0 3 0
Financial 7 0 16 0
Funds
(1)
0 13 0 25
Utilities 4 0 5 0
Total – Indemnity $ 12 $ 13 $ 25 $ 25
Exchange
Basic materials $ 0 $ 88 $ 0 $ 86
Communications 6 278 6 352
Consumer 16 980 6 968
Diversified 0 19 2 14
Energy 0 187 0 205
Financial 587 590 518 538
Funds
(1)
0 435 0 479
Government sponsored entity 0 0 2 0
Industrial 0 456 0 457
Technology 1 268 0 240
Utilities 100 62 87 61
Total – Exchange $ 710 $ 3,363 $ 621 $ 3,400
(1) Includes certain exchange traded funds with underlying holdings of fixed maturity securities totaling $13 million for Indemnity and $140 million for
the Exchange at December 31, 2014, and $25 million for Indemnity and $198 million for the Exchange at December 31, 2013. These securities
meet the criteria of a common stock under U.S. GAAP, and are included on the balance sheet as available-for-sale equity securities. Remaining
common stock investments are classified as trading securities.
Equity securities classified as available-for-sale include preferred and certain common stock securities, and are carried at fair
value on the Consolidated Statements of Financial Position with all changes in unrealized gains and losses reflected in other
comprehensive income. The unrealized gain on equity securities classified as available-for-sale, net of deferred taxes, for
Indemnity was $0.6 million at December 31, 2014, compared to an unrealized loss of less than $0.1 million at December 31,
2013. The net unrealized gain on equity securities classified as available-for-sale, net of deferred taxes, for the Exchange was
$40 million at December 31, 2014, compared to an unrealized gain of $26 million at December 31, 2013.
Our common stocks classified as trading securities are measured at fair value with all increases or decreases in fair value
reflected in the Consolidated Statements of Operations.
Limited partnerships
In 2014, investments in limited partnerships decreased for both Indemnity and the Exchange from the investment levels at
December 31, 2013. Changes in partnership values are a function of contributions and distributions, adjusted for market value
changes in the underlying investments. The decrease in limited partnership investments was due to net distributions received
from the partnerships which were partially offset by increases in underlying asset values. Indemnity has made no new limited
partnership commitments since 2006, and the balance of its limited partnership investments is expected to decline over time as
additional distributions are received. The results from our limited partnerships are based upon financial statements received
from our general partners, which are generally received on a quarter lag. As a result, the market values and earnings recorded
at December 31, 2014 reflect the partnership activity experienced during the twelve month period ending September 30, 2014.
54
The components of limited partnership investments are as follows:
Erie Insurance Group
(in millions)
At December 31,
2014 2013
Indemnity
Private equity $ 52 $ 62
Mezzanine debt 14 20
Real estate 47 64
Total limited partnerships – Indemnity $ 113 $ 146
Exchange
Private equity $ 418 $ 463
Mezzanine debt 170 172
Real estate 278 305
Total limited partnerships – Exchange $ 866 $ 940
Liabilities
Property and casualty losses and loss expense reserves
Loss reserves are established to account for the estimated ultimate costs of losses and loss expenses for claims that have been
reported but not yet settled and claims that have been incurred but not reported. While we exercise professional diligence to
establish reserves at the end of each period that are fully reflective of the ultimate value of all claims incurred, these reserves
are, by nature, only estimates and cannot be established with absolute certainty.
The factors which may potentially cause the greatest variation between current reserve estimates and the actual future paid
amounts include unforeseen changes in statutory or case law altering the amounts to be paid on existing claim obligations, new
medical procedures and/or drugs with costs significantly different from those seen in the past, inflation, and claims patterns on
current business that differ significantly from historical claims patterns.
Losses and loss expense reserves are presented on the Consolidated Statements of Financial Position on a gross basis. The
following table represents the direct and assumed losses and loss expense reserves by major line of business for our property
and casualty insurance operations. The reinsurance recoverable amount represents the related ceded amounts which results in
the net liability attributable to the Property and Casualty Group.
Property and Casualty Group
(in millions)
At December 31,
2014 2013
Gross reserve liability
(1)
:
Personal auto $ 1,245 $ 1,217
Automobile massive injury 330 345
Homeowners 279 271
Workers compensation 636 604
Workers compensation massive injury 82 94
Commercial auto 388 371
Commercial multi-peril 630 587
All other direct lines of business 179 170
Assumed reinsurance 84 88
Gross reserves 3,853 3,747
Less: reinsurance recoverable 142 156
Net reserve liability – Exchange $ 3,711 $ 3,591
(1) Loss reserves are set at estimated ultimate costs, except for workers compensation loss reserves which have been discounted using an interest rate
of 2.5%. This discounting reduced unpaid losses and loss expenses by $89 million and $85 million at December 31, 2014 and 2013, respectively.
The reserves that have the greatest potential for variation are the massive injury lifetime medical claim reserves. The Property
and Casualty Group is currently reserving for 245 claimants requiring lifetime medical care, of which 97 involve massive
injuries. The reserve carried by the Property and Casualty Group for the massive injury claimants, which includes automobile
massive injury and workers compensation massive injury reserves, totaled $274 million at December 31, 2014, which is net of
$138 million of anticipated reinsurance recoverables, compared to $291 million at December 31, 2013, which was net of
55
$148 million of anticipated reinsurance recoverables. The pre-1986 automobile and workers compensation massive injury
gross reserves both decreased at December 31, 2014, compared to December 31, 2013, primarily due to continued payments on
the pre-1986 automobile massive injury claims and the settlement of two workers compensation massive injury claims, offset
somewhat by the addition of two new workers compensation massive injury claims, respectively.
The estimation of ultimate liabilities for these claims is subject to significant judgment due to variations in medical cost
inflation, claimant health, and mortality over time. It is anticipated that these massive injury lifetime medical claims will
require payments over the next 30 to 40 years. Actual experience, however, may emerge in a manner that is different relative to
the original assumptions, which could have a significant impact on our reserve estimates. A 100-basis point increase in the
medical cost inflation assumption would result in an increase in the combined automobile and workers compensation massive
injury gross reserves of $84 million and a $41 million increase in the reinsurance recoverable and the workers compensation
discount, resulting in a $43 million increase in the net reserve. Massive injury claims payments totaled $12 million,
$15 million, and $13 million in 2014, 2013 and 2012, respectively.
Life insurance reserves
EFL’s primary commitment is its obligation to pay future policy benefits under the terms of its life insurance and annuity
contracts. To meet these future obligations, EFL establishes life insurance reserves based upon the type of policy, the age,
gender, and risk class of the insured, and the number of years the policy has been in force. EFL also establishes annuity and
universal life reserves primarily based upon the amount of policyholder deposits (less applicable insurance and expense
charges) plus interest earned on those deposits. Life insurance and annuity reserves are supported primarily by EFL’s long-
term, fixed income investments as the underlying policy reserves are generally also of a long-term nature.
Shareholders’ Equity
Pension plan
The funded status of our postretirement benefit plans is recognized in the statement of financial position, with a corresponding
adjustment to accumulated other comprehensive income, net of tax. At December 31, 2014, shareholders’ equity decreased by
$60 million, net of tax, of which $5 million represents amortization of the prior service cost and net actuarial loss and
$65 million represents the current period actuarial loss. The 2014 actuarial loss was primarily due to the change in the discount
rate assumption used to measure the future benefit obligations to 4.17% in 2014, from 5.11% in 2013. At December 31, 2013,
shareholders’ equity increased by $81 million, net of tax, of which $10 million represents amortization of the prior service cost
and net actuarial loss and $71 million represents the current period actuarial gain. The 2013 actuarial gain was primarily due to
the change in the discount rate assumption used to measure the future benefit obligations to 5.11% in 2013, from 4.19% in
2012. Although Indemnity is the sponsor of these postretirement plans and records the funded status of these plans, the
Exchange and EFL reimburse Indemnity for approximately 56% of the annual benefit expense of these plans, which represents
pension benefits for Indemnity employees performing claims and EFL functions.
IMPACT OF INFLATION
Property and casualty insurance premiums are established before losses occur and before loss expenses are incurred, and
therefore, before the extent to which inflation may impact such costs is known. Consequently, in establishing premium rates,
we attempt to anticipate the potential impact of inflation, including medical cost inflation, construction and auto repair cost
inflation, and tort issues. Medical costs are a broad element of inflation that impacts personal and commercial auto, general
liability, workers compensation, and commercial multi-peril lines of insurance written by the Property and Casualty Group.
Inflation assumptions take the form of explicit numerical values in the survival ratio, individual claim, and massive injury
lifetime medical reserving methods. Inflation assumptions are implicitly derived through the selection of applicable loss
development patterns for all other reserving methods. Occasionally, unusual aberrations in loss development patterns are
caused by external and internal factors such as changes in claim reporting, settlement patterns, unusually large losses, process
changes, legal or regulatory changes, and other influences. In these instances, analyses of alternate development factor
selections are performed to evaluate the effect of these factors and actuarial judgment is applied to make appropriate
assumptions needed to develop a best estimate of ultimate losses.
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LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet the short- and long-term cash
requirements of its business operations and growth needs. Our liquidity requirements have been met primarily by funds
generated from premiums collected and income from investments. Our insurance operations provide liquidity in that premiums
are collected in advance of paying losses under the policies purchased with those premiums. Cash outflows for the property
and casualty insurance operations are generally variable since settlement dates for liabilities for unpaid losses and the potential
for large losses, whether individual or in the aggregate, cannot be predicted with absolute certainty. Accordingly, after
satisfying our operating cash requirements, excess cash flows are used to build our investment operation's portfolios in order to
increase future investment income, which then may be used as a source of liquidity if cash from our insurance operations would
not be sufficient to meet our obligations. Cash provided from these sources is used primarily to fund losses and policyholder
benefits, fund the costs of our management operations including commissions, salaries and wages, pension plans, share
repurchases, dividends to shareholders, and the purchase and development of information technology. We expect that our
operating cash needs will be met by funds generated from operations.
Volatility in the financial markets presents challenges to us as we do occasionally access our investment portfolio as a source of
cash. Some of our fixed income investments, despite being publicly traded, are illiquid. Volatility in these markets could
impair our ability to sell certain of our fixed income securities or cause such securities to sell at deep discounts. Additionally,
our limited partnership investments are significantly less liquid. We believe we have sufficient liquidity to meet our needs from
other sources even if market volatility persists throughout 2015.
Cash flow activities – Erie Insurance Group
The following table provides condensed consolidated cash flow information for the years ended December 31:
(in millions)
Erie Insurance Group
2014 2013 2012
Net cash provided by operating activities $ 779 $ 903 $ 577
Net cash used in investing activities (596) (759) (85)
Net cash used in financing activities (121) (92) (277)
Net increase in cash $ 62 $ 52 $ 215
Net cash provided by operating activities totaled $779 million in 2014, $903 million in 2013, and $577 million in 2012.
Decreased cash from operating activities in 2014 was driven primarily by increases in losses and loss expense paid,
commissions and bonuses paid to agents, and other underwriting and acquisition costs, combined with a decrease in limited
partnership distributions received. Somewhat offsetting this decrease in cash provided was an increase in premiums collected
by the Exchange, driven by the increase in premiums written, and an increase in net investment income received, combined
with a decrease in income taxes paid, compared to 2013. The increase in 2013, compared to 2012, was primarily due to an
increase in premiums collected by the Exchange driven by the increase in premiums written, a decrease in losses and loss
expense paid, and a slight increase in limited partnership distributions received. Somewhat offsetting this increase in cash was
an increase in income taxes and other underwriting and acquisition costs paid, and a slight decrease in net investment income
received, compared to 2012.
At December 31, 2014, we recorded a net deferred tax asset of $37 million related to Indemnity and a net deferred tax liability
of $490 million related to the Exchange. There was no deferred tax valuation allowance recorded at December 31, 2014.
During calendar years 2014, 2013, and 2012, we received cash refunds of federal income taxes paid in prior tax periods of
$4 million, $4 million, and $49 million respectively.
Net cash used in investing activities totaled $596 million in 2014, $759 million in 2013, and $85 million in 2012. Changes in
investing activities in 2014 primarily included a decrease in certain fixed maturity purchases and increased cash generated from
the sale of preferred stocks, offset somewhat by an increase in other preferred stock purchases combined with decreased cash
generated from the sale, call and maturity of fixed income securities, compared to 2013. At December 31, 2014, we had
contractual commitments to invest up to $483 million related to our limited partnership investments to be funded as required by
the partnerships’ agreements. Of this amount, the total remaining commitment to fund limited partnerships that invest in
private equity securities was $151 million, mezzanine debt securities was $165 million, and real estate activities was
$167 million. Changes in investing activities in 2013 primarily included an increase in certain fixed maturity purchases and
decreased cash generated from the sale of common stocks, offset somewhat by a decrease in other common stock purchases,
compared to 2012.
For a discussion of net cash used in financing activities, see the following “Cash flow activities – Indemnity,” for the primary
drivers of financing cash flows related to the Indemnity shareholder interest.
57
Cash flow activities – Indemnity
The following table is a summary of cash flows for Indemnity for the years ended December 31:
(in millions)
Indemnity Shareholder Interest
2014 2013 2012
Net cash provided by operating activities $ 186 $ 218 $ 205
Net cash (used in) provided by investing activities (4) (65) 95
Net cash used in financing activities (139) (116) (299)
Net increase in cash $ 43 $ 37 $ 1
See Item 8. “Financial Statements and Supplementary Data - Note 22, Indemnity Supplemental Information, of Notes to
Consolidated Financial Statements” contained within this report for more detail on Indemnity’s cash flows.
Net cash provided by Indemnity’s operating activities decreased to $186 million in 2014, compared to $218 million in 2013,
and $205 million in 2012. Decreased cash from operating activities in 2014 was primarily due to increases in commissions and
bonuses paid to agents and general operating expenses combined with decreases in reimbursements collected from affiliates
and limited partnership distributions. Somewhat offsetting this decrease in cash was an increase in management fee revenue
received, compared to 2013. Management fee revenues were higher reflecting the increase in premiums written or assumed by
the Exchange. Cash paid for agent commissions and bonuses increased to $749 million in 2014, compared to $681 million in
2013, as a result of an increase in cash paid for scheduled commissions and bonus awards. Indemnity contributed $23 million
to its pension plan in 2014, compared to $17 million in 2013. Additionally, Indemnity made a contribution to its pension plan
for $17 million in January 2015. Our funding policy is generally to contribute an amount equal to the greater of the target
normal cost for the plan year or the amount necessary to fund the plan to 100% plus interest to the date the contribution is
made. Indemnity is reimbursed approximately 56% of the net periodic benefit cost of the pension plan from its affiliates, which
represents pension benefits for Indemnity employees performing claims and EFL functions. In 2013, increased cash from
operating activities, compared to 2012, was primarily due to increases in management fee revenue and limited partnership
distributions received. Offsetting this increase in cash were increases in cash paid for commissions to agents, general operating
expenses, salaries and wages, and income taxes, combined with a slight decrease in net investment income received, compared
to 2012.
At December 31, 2014, Indemnity recorded a net deferred tax asset of $37 million. There was no deferred tax valuation
allowance recorded at December 31, 2014. During calendar year 2014, Indemnity received cash refunds of federal income
taxes paid in prior tax periods of $1 million.
Net cash used in Indemnity’s investing activities totaled $4 million in 2014 and $65 million in 2013, compared to cash provided
of $95 million in 2012. Changes in Indemnity’s 2014 investing activities primarily included increased cash generated from
fixed maturity and equity security sales, somewhat offset by decreased cash generated from fixed maturity calls combined with
an increase in purchases of property, plant and equipment, compared to 2013. Also impacting Indemnity's future investing
activities are limited partnership commitments, which totaled $24 million at December 31, 2014, and will be funded as required
by the partnerships’ agreements. Of this amount, the total remaining commitment to fund limited partnerships that invest in
private equity securities was $10 million, mezzanine debt securities was $9 million, and real estate activities was $5 million.
Changes in Indemnity’s 2013 investing activities primarily included decreased cash generated from the sales of fixed maturities
and common stocks, compared to 2012.
Net cash used in Indemnity’s financing activities totaled $139 million in 2014, $116 million in 2013, and $299 million in 2012.
The increase in cash used in financing activities for 2014 was driven by an increase in the cash outlay for dividends paid to
shareholders, somewhat offset by a decrease in the cash outlay for share repurchases. Decreased cash used in financing
activities in 2013 was driven by a decrease in dividends paid to shareholders, due to the accelerated payment of the regular first
quarter 2013 dividend into the fourth quarter of 2012 and a special one-time cash dividend, and a decrease in the cash outlay
for share repurchases. Dividends paid to shareholders totaled $119 million, $84 million, and $229 million in 2014, 2013 and
2012, respectively. Indemnity increased both its Class A and Class B shareholder regular quarterly dividends for 2014 and
2013. In 2012, in addition to the regular quarterly dividend declared in November, the Board also declared a special one-time
cash dividend of $2.00 on each Class A share and $300.00 on each Class B share, totaling $95 million. The payment of both
the regular and special dividend was accelerated and paid in December 2012 due to the potential significant increases in tax
rates on 2013 dividend income pending at the time of declaration. In 2013, the regular quarterly dividend was declared by the
Board at its December meeting and paid in January of the following year. There are no regulatory restrictions on the payment
of dividends to Indemnity’s shareholders. Dividends have been approved at a 7.2% increase for 2015.
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Indemnity repurchased 276,390 shares of its Class A nonvoting common stock in conjunction with its stock repurchase
program at a total cost of $19.5 million in 2014, based upon settlement date. In 2013, shares repurchased under this program
totaled 441,024 at a total cost of $31.9 million, compared to 986,439 shares at a total cost of $70.2 million in 2012. In
October 2011, our Board of Directors approved a continuation of the current stock repurchase program for a total of
$150 million with no time limitation. This repurchase authority includes, and is not in addition to, any unspent amounts
remaining under the prior authorization. Indemnity had approximately $18 million of repurchase authority remaining under
this program at December 31, 2014, based upon trade date.
In 2014, we repurchased 64,398 shares of our outstanding Class A nonvoting common stock outside of our publicly announced
share repurchase program at a total cost of $4.9 million for the vesting of stock-based awards for executive management and an
outside director, and for awards under our long-term incentive plan. These shares were delivered in January, May and June
2014, respectively. In 2013, we repurchased 3,477 shares of our outstanding Class A nonvoting common stock outside of our
publicly announced share repurchase program at a total cost of $255,454 to settle payments due to a retired executive under our
long-term incentive plan. These shares were delivered to the plan participant in January 2013 and July 2013. In 2012, we also
repurchased 1,803 shares of our outstanding Class A nonvoting common stock outside of our publicly announced share
repurchase program at a total cost of $129,849 to settle payments due to two retired senior vice presidents under our long-term
incentive plan. These shares were delivered to the plan participants in January 2012 and June 2012, respectively.
Capital Outlook
We regularly prepare forecasts evaluating the current and future cash requirements of Indemnity and the Exchange for both
normal and extreme risk events. Should an extreme risk event result in a cash requirement exceeding normal cash flows, we
have the ability to meet our future funding requirements through various alternatives available to us.
Indemnity
Outside of Indemnity’s normal operating and investing cash activities, future funding requirements could be met through:
1) Indemnity’s cash and cash equivalents, which total approximately $92 million at December 31, 2014, 2) a $100 million bank
revolving line of credit held by Indemnity, and 3) liquidation of assets held in Indemnity’s investment portfolio, including
common stock, preferred stock, and investment grade bonds which totaled approximately $411 million at December 31, 2014.
Volatility in the financial markets could impair Indemnity’s ability to sell certain of its fixed income securities or cause such
securities to sell at deep discounts. Additionally, Indemnity has the ability to curtail or modify discretionary cash outlays such
as those related to shareholder dividends and share repurchase activities.
As of December 31, 2014, Indemnity has access to a $100 million bank revolving line of credit with a $25 million letter of
credit sublimit that expires on November 3, 2018. As of December 31, 2014, a total of $98 million remains available under the
facility due to $2 million outstanding letters of credit, which reduce the availability for letters of credit to $23 million.
Indemnity had no borrowings outstanding on its line of credit as of December 31, 2014. Bonds with a fair value of
$114 million were pledged as collateral on the line at December 31, 2014. These securities have no trading restrictions and are
reported as available-for-sale fixed maturities in the Consolidated Statements of Financial Position. The bank requires
compliance with certain covenants, which include leverage ratios. Indemnity was in compliance with its bank covenants at
December 31, 2014.
Exchange
Outside of the Exchange’s normal operating and investing cash activities, future funding requirements could be met through:
1) the Exchange’s cash and cash equivalents, which total approximately $422 million at December 31, 2014, 2) a $300 million
bank revolving line of credit held by the Exchange, and 3) liquidation of assets held in the Exchange’s investment portfolio,
including common stock, preferred stock, and investment grade bonds which totaled approximately $12.1 billion at
December 31, 2014. Volatility in the financial markets could impair the Exchange’s ability to sell certain of its fixed income
securities or cause such securities to sell at deep discounts.
As of December 31, 2014, the Exchange has access to a $300 million bank revolving line of credit with a $25 million letter of
credit sublimit that expires on October 25, 2018. As of December 31, 2014, a total of $299 million remains available under the
facility due to $1 million outstanding letters of credit, which reduce the availability for letters of credit to $24 million. The
Exchange had no borrowings outstanding on its line of credit as of December 31, 2014. Bonds with a fair value of
$328 million were pledged as collateral on the line at December 31, 2014. These securities have no trading restrictions and are
reported as available-for-sale fixed maturities in the Consolidated Statements of Financial Position. The bank requires
compliance with certain covenants, which include statutory surplus and risk based capital ratios. The Exchange was in
compliance with its bank covenants at December 31, 2014.
Indemnity has no rights to the assets, capital, or line of credit of the Exchange and, conversely, the Exchange has no rights to
the assets, capital, or line of credit of Indemnity. We believe we have the funding sources available to us to support our cash
flow requirements in 2015.
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Contractual Obligations
Cash outflows for the Property and Casualty Group are variable as fluctuations in settlement dates for claims payments vary
and cannot be predicted with absolute certainty. While volatility in claims payments could be significant, the cash flow
requirements for claims have not historically had a significant effect on our liquidity. Based upon a historical 15 year average,
approximately 35% of losses and loss expenses included in reserves for the Property and Casualty Group are settled within the
first 12 months, and approximately 80% are settled within the first five years. Amounts that are paid after the first five years
reflect long-tail lines such as workers compensation and auto bodily injury.
We have certain obligations and commitments to make future payments under various contracts. As of December 31, 2014, the
aggregate obligations were as follows:
Erie Insurance Group
(in millions)
Payments due by period
Total 2015
2016-
2017
2018-
2019
2020 and
thereafter
Fixed obligations:
Indemnity:
Limited partnership commitments
(1)
$ 24 $ 24 $ 0 $ 0 $ 0
Pension contribution
(2)
17 17 0 0 0
Other commitments
(3)
88 40 43 5 0
Operating leases – vehicles 16 5 8 3 0
Operating leases – real estate
(4)
8 2 4 2 0
Operating leases – computer equipment 4 2 2 0 0
Total fixed contractual obligations – Indemnity
157 90 57 10 0
Noncontrolling interest:
Limited partnership commitments
(1)
459 199 74 146 40
Total fixed contractual obligations – Exchange
459 199 74 146 40
Total fixed contractual obligations – Erie Insurance Group 616 289 131 156 40
Gross property and casualty loss and loss expense reserves – Exchange 3,853 1,310 1,195 462 886
Life gross long-term liabilities
(5)
4,866 172 334 332 4,028
Gross contractual obligations – Erie Insurance Group $ 9,335 $ 1,771 $ 1,660 $ 950 $ 4,954
Gross contractual obligations net of estimated reinsurance recoverables are as follows:
Erie Insurance Group
(in millions)
Payments due by period
Total 2015
2016-
2017
2018-
2019
2020 and
thereafter
Gross contractual obligations – Erie Insurance Group $ 9,335 $ 1,771 $ 1,660 $ 950 $ 4,954
Estimated reinsurance recoverables – property and casualty
(6)
142 7 11 10 114
Estimated reinsurance recoverables – life
(6)
666 27 60 69 510
Net contractual obligations – Erie Insurance Group $ 8,527 $ 1,737 $ 1,589 $ 871 $ 4,330
(1) Limited partnership commitments will be funded as required for capital contributions at any time prior to the agreement expiration date. The
commitment amounts are presented using the expiration date as the factor by which to age when the amounts are due. At December 31, 2014,
Indemnity’s total commitment to fund limited partnerships that invest in private equity securities was $10 million, mezzanine debt was $9 million,
and real estate activities was $5 million. At December 31, 2014, the Exchange’s total commitment to fund limited partnerships that invest in private
equity securities was $141 million, mezzanine debt was $156 million, and real estate activities was $162 million.
(2) The pension contribution for 2015 was estimated in accordance with the Pension Protection Act of 2006. Contributions anticipated in future years
depend upon certain factors that cannot be reasonably predicted. Any contributions required in future years will be an amount equal to the greater
of the target normal cost for the plan year or the amount necessary to fund the plan to 100% plus interest to the date the contribution is made. The
obligations for our unfunded benefit plans, including the Supplemental Employee Retirement Plan (SERP) for our executive and senior
management, are not included in gross contractual obligations. The recorded accumulated benefit obligation for this plan at December 31, 2014, is
$10 million. We expect to have sufficient cash flows from operations to meet the future benefit payments as these become due.
(3) Other commitments include various agreements for services, including such things as computer software, telephones, copiers, and maintenance.
(4) Operating leases – real estate are for 18 of our 25 field offices that are operated in the states in which the Property and Casualty Group does
business and two operating leases are for office space and a warehouse facility leased from unaffiliated parties.
(5) Life gross long-term liabilities represent estimated benefit payments from insurance policies and annuity contracts including claims currently
payable. Actual obligations in any single year will vary based upon actual mortality, morbidity, lapse, and withdrawal experience. The sum of
these obligations exceeds the liability on the Consolidated Statements of Financial Position of $1.8 billion due to expected future premiums and
investment income that, along with invested assets backing the liabilities, will be used to fund these obligations.
(6) Reinsurance recoverables include estimated amounts from reinsurers on long-term liabilities subject to the credit worthiness of the reinsurer.
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Off-Balance Sheet Arrangements
Off-balance sheet arrangements include those with unconsolidated entities that may have a material current or future effect on
our financial condition or results of operations, including material variable interests in unconsolidated entities that conduct
certain activities. We have no material off-balance sheet obligations or guarantees, other than limited partnership investment
commitments.
Financial Ratings
Our property and casualty insurers are rated by rating agencies that provide insurance consumers with meaningful information
on the financial strength of insurance entities. Higher ratings generally indicate financial stability and a strong ability to pay
claims. The ratings are generally based upon factors relevant to policyholders and are not directed toward return to investors.
The insurers of the Property and Casualty Group are currently rated by A.M. Best Company as follows:
Erie Insurance Exchange A+
Erie Insurance Company A+
Erie Insurance Property and Casualty Company A+
Erie Insurance Company of New York A+
Flagship City Insurance Company A+
Erie Family Life Insurance Company A
The outlook for all ratings is stable. According to A.M. Best, a “Superior” rating (A+), the second highest financial strength
rating category, is assigned to those companies that, in A.M. Best’s opinion, have achieved superior overall performance when
compared to the standards established by A.M. Best and have a superior ability to meet obligations to policyholders over the
long term. Only 9.7% of insurance groups are rated A+ or higher, and we are included in that group. By virtue of its affiliation
with the Property and Casualty Group, EFL is typically rated one level lower, or an “Excellent” rating (A), than our property
and casualty insurance companies by A.M. Best Company. Financial strength ratings continue to be an important factor in
evaluating the competitive position of insurance companies.
Regulatory Risk-Based Capital
The standard set by the National Association of Insurance Commissioners (NAIC) for measuring the solvency of insurance
companies, referred to as Risk-Based Capital (RBC), is a method of measuring the minimum amount of capital appropriate for
an insurance company to support its overall business operations in consideration of its size and risk profile. The RBC formula
is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. In addition, the formula defines minimum capital standards
that will supplement the current system of low fixed minimum capital and surplus requirements on a state-by-state basis. At
December 31, 2014, the members of the Property and Casualty Group and EFL had RBC levels substantially in excess of levels
that would require regulatory action.
Regulatory Restrictions on Surplus
The members of the Property and Casualty Group and EFL are subject to various regulatory restrictions that limit the maximum
amount of dividends available to be paid without prior approval by insurance regulatory authorities. The Exchange’s property
and casualty insurance subsidiaries have a maximum of $35 million available for such dividends in 2015 without prior approval
by the Pennsylvania Insurance Commissioner for Pennsylvania-domiciled subsidiaries and the New York Superintendent of
Insurance for the New York domiciled subsidiary. No dividends were paid from the property and casualty insurance
subsidiaries in 2014, 2013, or 2012.
The maximum dividend EFL could pay the Exchange in 2015 without prior approval is $30 million. No dividends were paid
by EFL in 2014, 2013 or 2012.
The Exchange is operated for the interest of its subscribers (policyholders) and any distributions it might declare would only be
payable to them. The Exchange did not make any distributions to its subscribers (policyholders) in 2014, 2013, or 2012.
Enterprise Risk Management
The role of our Enterprise Risk Management ("ERM") function is to ensure that all significant risks are clearly identified,
understood, proactively managed and consistently monitored to achieve strategic objectives for all stakeholders of the Erie
Insurance Group. See Item 1A “Risk Factors” contained in this report for a list of risk factors related to the Erie Insurance
Group.
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As an insurance company, we are in the business of taking risks from our policyholders, managing these risks in a cost-
effective manner and ensuring long term stability for policyholders as well as shareholders. Since risk is integral to our
business, we strive to manage the multitude of risks we face in an optimal manner. Some risks can occur simultaneously or be
correlated with other risks. Therefore an event or a series of events has the potential to impact multiple areas of our business
and materially affect our operations, financial position or liquidity. As such, our ERM program takes a holistic view of risk and
ensures implementation of risk responses to mitigate potential impacts across our entire group of companies.
Our ERM process is founded on a governance framework that includes oversight at multiple levels of our organization,
including our Board of Directors and executive management. Accountability to identify, manage, and mitigate risk is
embedded within all functions and areas of our business. We have defined risk tolerances to monitor and manage significant
risks within acceptable levels. In addition to identifying, evaluating, prioritizing, monitoring, and mitigating significant risks,
our ERM process includes extreme event analyses and scenario testing. Financial and catastrophe modeling enable us to
quantify risk within our property and casualty insurance operations and investment portfolio. Model output is used to quantify
the potential variability of future performance and the sufficiency of capital levels given our defined tolerance for risk. These
models provide insight into capital management, allocation of capital by product lines, catastrophe exposure management, and
reinsurance purchasing decisions. Additionally, ERM tools have been developed and modified to enhance our ability to assess
project level risk and to provide senior management with pertinent risk information, enabling them to make better informed
decisions.
Insurers are required to regularly conduct an Own Risk and Solvency Assessment (“ORSA”) starting in 2015. ORSA
regulation requires insurance companies to document their risk management framework, assess individual material risks, and
test group capital and solvency. This will allow regulators to form an enhanced view of an insurer’s ability to withstand stress.
TRANSACTIONS / AGREEMENTS BETWEEN INDEMNITY AND NONCONTROLLING INTEREST
(EXCHANGE)
Board Oversight
Our Board of Directors has a broad oversight responsibility over our intercompany relationships within and among the Property
and Casualty Group. As a consequence, our Board of Directors may be required to make decisions or take actions that may not
be solely in the interest of our shareholders, such as setting the management fee rate paid by the Exchange to Indemnity and
ratifying any other significant intercompany activity.
Subscriber’s Agreement
Indemnity serves as attorney-in-fact for the policyholders at the Exchange, a reciprocal insurance exchange. Each applicant for
insurance to a reciprocal insurance exchange signs a subscriber’s agreement that contains an appointment of an attorney-in-fact.
Through the designation of attorney-in-fact, Indemnity is required to provide sales, underwriting, and policy issuance services
to the policyholders of the Exchange, as discussed previously. Pursuant to the subscriber’s agreement, Indemnity earns a
management fee for these services calculated as a percentage of 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.
Intercompany Agreements
Pooling
Members of the Property and Casualty Group participate in an intercompany reinsurance pooling agreement. Under the
pooling agreement, all insurance business of the Property and Casualty Group is pooled in the Exchange. The Erie Insurance
Company and Erie Insurance Company of New York share in the underwriting results of the reinsurance pool through
retrocession. Since 1995, the Board of Directors has set the allocation of the pooled underwriting results at 5.0% participation
for Erie Insurance Company, 0.5% participation for Erie Insurance Company of New York, and 94.5% participation for the
Exchange.
Service agreements
Indemnity makes certain payments on behalf of the Erie Insurance Group’s related entities. These amounts are reimbursed to
Indemnity on a cost basis in accordance with service agreements between Indemnity and the individual entities within the Erie
Insurance Group. These reimbursements are settled on a monthly basis.
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Leased property
The Exchange leases certain office space to Indemnity, including the home office and four field office facilities, with one field
office owned by EFL. Rents are determined considering returns on invested capital and building operating and overhead costs.
Rental costs of shared facilities are allocated based upon square footage occupied.
Cost Allocation
The allocation of costs affects the financial condition of the Erie Insurance Group companies. Management’s role is to
determine that allocations are consistently made in accordance with the subscriber’s agreements with the policyholders at the
Exchange, intercompany service agreements, and applicable insurance laws and regulations. Allocation of costs under these
various agreements requires judgment and interpretation, and such allocations are performed using a consistent methodology,
which is intended to adhere to the terms and intentions of the underlying agreements.
Intercompany Receivables of Indemnity
Indemnity Shareholder Interest
(in millions)
2014
Percent of
Indemnity
total
assets
2013
Percent of
Indemnity
total
assets
2012
Percent of
Indemnity
total
assets
Receivables from the Exchange and other affiliates
(management fees, costs and reimbursements)
$ 335 25.4 % $ 300 24.7 % $ 281 24.2 %
Note receivable from EFL 25 1.9 25 2.1 25 2.2
Total intercompany receivables $ 360 27.3 % $ 325 26.8 % $ 306 26.4 %
Indemnity has significant receivables from the Exchange that result in a concentration of credit risk. These receivables include
management fees due for services performed by Indemnity for the Exchange under the subscriber’s agreement, and costs
Indemnity pays on behalf of the Exchange. We periodically evaluate credit risks related to the receivables from the Exchange.
Indemnity also pays certain costs for, and is reimbursed monthly by, EFL. The receivable from the Exchange for management
fees and costs Indemnity pays on behalf of the Exchange is settled monthly.
Surplus Notes
Indemnity holds a surplus note for $25 million from EFL that is payable on demand on or after December 31, 2018; however,
no principal or interest payments may be made without prior approval by the Pennsylvania Insurance Commissioner. Interest
payments are scheduled to be paid semi-annually. Indemnity recognized interest income on the note of $2 million in both 2014
and 2013.
The Exchange holds a surplus note for $20 million from EFL that is payable on demand on or after December 31, 2025;
however, no principal or interest payments may be made without prior approval by the Pennsylvania Insurance Commissioner.
Interest payments are scheduled to be paid semi-annually. The Exchange recognized interest income on the note of $1 million
in both 2014 and 2013.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is the risk of loss arising from adverse changes in interest rates, credit spreads, equity prices, or foreign exchange
rates, as well as other relevant market rate or price changes. The volatility and liquidity in the markets in which the underlying
assets are traded directly influence market risk. The following is a discussion of our primary risk exposures, including interest
rate risk, investment credit risk, concentration risk, liquidity risk, equity price risk, and foreign exchange rate risk, and how
those exposures are currently managed as of December 31, 2014.
Interest Rate Risk
We invest primarily in fixed maturity investments, which comprised 80% of invested assets for Indemnity and 65% of invested
assets for the Exchange at December 31, 2014. The value of the fixed maturity portfolio is subject to interest rate risk. As
market interest rates decrease, the value of the portfolio goes up with the opposite holding true in rising interest rate
environments. We do not hedge our exposure to interest rate risk. A common measure of the interest sensitivity of fixed
maturity assets is modified duration, a calculation that utilizes maturity, coupon rate, yield, and call terms to calculate an
average age of the expected cash flows. The longer the duration, the more sensitive the asset is to market interest rate
fluctuations. Duration is analyzed quarterly to ensure that it remains in the targeted range we established.
A sensitivity analysis is used to measure the potential loss in future earnings, fair values, or cash flows of market-sensitive
instruments resulting from one or more selected hypothetical changes in interest rates and other market rates or prices over a
selected period. In our sensitivity analysis model, a hypothetical change in market rates is selected that is expected to reflect
reasonably possible changes in those rates. The following pro forma information is presented assuming a 100-basis point
increase in interest rates at December 31 of each year and reflects the estimated effect on the fair value of our fixed maturity
investment portfolio. We used the modified duration of our fixed maturity investment portfolio to model the pro forma effect
of a change in interest rates at December 31, 2014 and 2013.
Fixed maturities interest-rate sensitivity analysis
(dollars in millions)
Erie Insurance Group
At December 31,
2014 2013
Indemnity
Fair value of fixed maturity portfolio $ 564 $ 526
Fair value assuming 100-basis point rise in interest rates $ 550 $ 508
Modified duration – Indemnity 3.6 3.6
Exchange
Fair value of fixed maturity portfolio $ 9,007 $ 8,162
Fair value assuming 100-basis point rise in interest rates $ 8,580 $ 7,747
Modified duration – Exchange 5.2 5.3
While the fixed maturity portfolio is sensitive to interest rates, the future principal cash flows that will be received by
contractual maturity date are presented below at December 31, 2014 and 2013. Actual cash flows may differ from those stated
as a result of calls, prepayments, or defaults.
Contractual repayments of principal by maturity date
(in millions)
Erie Insurance Group
December 31, 2014
Fixed maturities: Indemnity Exchange
2015 $ 62 $ 450
2016 111 582
2017 62 890
2018 29 837
2019 33 861
Thereafter 233 4,704
Total
(1)
$ 530 $ 8,324
Fair value $ 564 $ 9,007
(1) These amounts exclude Indemnity’s $25 million surplus note due from EFL and the Exchange’s $20 million surplus note due from EFL.
64
(in millions)
Erie Insurance Group
December 31, 2013
Fixed maturities: Indemnity Exchange
2014 $ 101 $ 370
2015 91 505
2016 112 694
2017 21 797
2018 12 900
Thereafter 158 4,380
Total
(1)
$ 495 $ 7,646
Fair value $ 526 $ 8,162
(1) These amounts exclude Indemnity’s $25 million surplus note due from EFL and the Exchange’s $20 million surplus note due from EFL.
Investment Credit Risk
Our objective is to earn competitive returns by investing in a diversified portfolio of securities. Our portfolios of fixed maturity
securities, nonredeemable preferred stock, mortgage loans and, to a lesser extent, short-term investments are subject to credit
risk. This risk is defined as the potential loss in fair value resulting from adverse changes in the borrower’s ability to repay the
debt. We manage this risk by performing upfront underwriting analysis and ongoing reviews of credit quality by position and
for the fixed maturity portfolio in total. We do not hedge the credit risk inherent in our fixed maturity investments.
Generally, the fixed maturities in our portfolio are rated by external rating agencies. If not externally rated, we rate them
internally on a basis consistent with that used by the rating agencies. We classify all fixed maturities as available-for-sale
securities, allowing us to meet our liquidity needs and provide greater flexibility to appropriately respond to changes in market
conditions.
The following table shows our fixed maturity investments by rating as of December 31, 2014:
(dollars in millions)
Erie Insurance Group
(1)
Amortized cost Fair value Percent of total
Indemnity
AAA, AA, A $ 378 $ 389 69 %
BBB 110 111 20
Total investment grade 488 500 89
BB 15 15 2
B 40 38 7
CCC, CC, C 12 11 2
Total non-investment grade 67 64 11
Total – Indemnity $ 555 $ 564 100 %
Exchange
AAA, AA, A $ 3,857 $ 4,105 45 %
BBB 3,977 4,203 47
Total investment grade 7,834 8,308 92
BB 362 370 4
B 259 250 3
CCC, CC, C 85 79 1
Total non-investment grade 706 699 8
Total – Exchange $ 8,540 $ 9,007 100 %
(1) Ratings are supplied by S&P, Moody’s, and Fitch. The table is based upon the lowest rating for each security.
Approximately 18% of Indemnity’s and 2% of the Exchange’s fixed income portfolios are invested in structured products. This
includes mortgage-backed securities, collateralized debt and loan obligations, collateralized mortgage obligations, and asset-
backed securities. The overall credit rating of the structured product portfolio is AA-.
65
Our municipal bond portfolio accounts for $231 million, or 41% of the total fixed maturity portfolio for Indemnity, and
$1.5 billion, or 16% of the total fixed maturity portfolio for the Exchange. The overall credit rating of our municipal portfolio,
without consideration of the underlying insurance, is AA.
Our limited partnership investment portfolio is exposed to credit risk, as well as price risk. Price risk is defined as the potential
loss in estimated fair value resulting from an adverse change in prices. Our investments are directly affected by the impact of
changes in these risk factors on the underlying investments held by our fund managers, which could vary significantly from
fund to fund. We manage these risks by performing up-front due diligence on our fund managers, ongoing monitoring, and
through the construction of a diversified portfolio.
Indemnity is also exposed to a concentration of credit risk with the Exchange. See the section, “Transactions / Agreements
between Indemnity and Noncontrolling Interest (Exchange), Intercompany receivables of Indemnity” for further discussion of
this risk.
Concentration Risk
While our portfolio is well diversified within each market sector, there is an inherent risk of concentration in a particular
industry or sector. We continually monitor our level of exposure to individual issuers as well as our allocation to each industry
and market sector against internally established policies. See the “Financial Condition” section of Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” contained within this report for details of
investment holdings by sector.
Liquidity Risk
Periods of volatility in the financial markets can create conditions where fixed maturity investments, despite being publicly
traded, can become illiquid. However, we actively manage the maturity profile of our fixed maturity portfolio such that
scheduled repayments of principal occur on a regular basis. Additionally, there is no ready market for limited partnerships
which increases the risk that these investments may not be converted to cash on favorable terms and on a timely basis.
Equity Price Risk
Our portfolio of equity securities, which include common stock classified as available-for-sale and trading securities and non-
redeemable preferred stock classified as available-for-sale, are carried on the Consolidated Statements of Financial Position at
estimated fair value. Equity securities are exposed to the risk of potential loss in estimated fair value resulting from an adverse
change in prices (“price risk”). We do not hedge our exposure to price risk inherent in our equity investments.
The majority of our equity security portfolio is invested in common stock. Our objective is to earn competitive relative returns
by investing in a diverse portfolio of high-quality, liquid securities. Portfolio holdings are diversified across industries and
among exchange-traded, small- to large-cap stocks. We measure the risk of our common stock investments designated as
trading securities by comparing performance to benchmark returns such as the Standard & Poors (S&P) 500 Composite Index.
Beta is a measure of a security’s systematic (non-diversifiable) risk, which is the percentage change in an individual security’s
return for a 1% change in the return of the market.
At December 31, 2014, the weighted average Beta for our common stock holdings designated as trading securities was 1.00 for
the Exchange. Based upon a hypothetical 20% reduction in the overall value of the stock market, the fair value of the common
stock portfolio designated as trading securities would decrease by approximately $645 million for the Exchange. At
December 31, 2013, the weighted average Beta for our common stock holdings designated as trading securities was 1.03 for the
Exchange. Based upon a hypothetical 20% reduction in the overall value of the stock market, the fair value of the common
stock portfolio designated as trading securities would decrease by approximately $660 million for the Exchange.
Common stocks designated as available-for-sale securities represent investments in certain exchange traded funds with
underlying holdings of fixed maturity securities. While the performance of the exchange traded funds closely tracks that of the
underlying fixed maturity securities, these investments are reported as common stock based on U.S. GAAP requirements. The
average effective duration of these investments as reported by the funds was 6.3 for Indemnity and 5.4 for the Exchange at
December 31, 2014, compared to 4.4 for Indemnity and 4.5 for the Exchange at December 31, 2013.
66
Foreign Exchange Rate Risk
This risk primarily arises from our foreign investments included in the Exchange’s common stock and limited partnership
portfolios. As of December 31, 2014, we had $679 million and $74 million in foreign currency denominated common stock
and limited partnership investments, respectively, which represented 5.4% of Exchange's total invested assets. As of
December 31, 2013, we had $449 million and $97 million in foreign currency denominated common stock and limited
partnership investments, respectively, which represented 4.2% of Exchanges total invested assets. The principal currencies
creating foreign exchange rate risk for us are the Pound Sterling and Euro, and to a lesser extent the Swiss Franc and Japanese
Yen. We actively monitor the level of our exposure to non-U.S. dollar denominated investments, but do not hedge the foreign
exchange rate risk inherent in these investments.
Based on the fair values of the Exchange’s non-U.S. dollar denominated securities as of December 31, 2014 and 2013, a
simultaneous 10% unfavorable change across each of the foreign exchange rates to which we are exposed would decrease the
fair value of our foreign currency denominated investments by $75 million and $55 million, respectively.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Erie Indemnity Company
We have audited the accompanying consolidated statements of financial position of Erie Indemnity Company as of December
31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, shareholders' equity and
noncontrolling interest, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also
included the financial statement schedules listed in the Index at 15 (a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Erie Indemnity Company at December 31, 2014 and 2013, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Erie Indemnity Company's internal control over financial reporting as of December 31, 2014, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
2013 framework and our report dated February 26, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young
Philadelphia, PA
February 26, 2015
68
FERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2014, 2013 and 2012
(dollars in millions, except per share data)
2014 2013 2012
Revenues
Premiums earned $ 5,344 $ 4,898 $ 4,493
Net investment income 446 422 438
Net realized investment gains 193 771 418
Net impairment losses recognized in earnings (4) (13) 0
Equity in earnings of limited partnerships 113 161 131
Other income 32 32 32
Total revenues 6,124 6,271 5,512
Benefits and expenses
Insurance losses and loss expenses 3,958 3,467 3,480
Policy acquisition and underwriting expenses 1,336 1,237 1,133
Total benefits and expenses 5,294 4,704 4,613
Income from operations before income taxes and noncontrolling interest
830 1,567 899
Provision for income taxes 257 519 280
Net income $ 573 $ 1,048 $ 619
Less: Net income attributable to noncontrolling interest in consolidated
entity – Exchange
405 885 459
Net income attributable to Indemnity $ 168 $ 163 $ 160
Earnings Per Share
Net income attributable to Indemnity per share
Class A common stock – basic $ 3.59 $ 3.46 $ 3.38
Class A common stock – diluted $ 3.18 $ 3.08 $ 2.99
Class B common stock – basic $ 539 $ 520 $ 505
Class B common stock – diluted $ 538 $ 519 $ 505
Weighted average shares outstanding attributable to Indemnity – Basic
Class A common stock 46,247,876 46,660,651 47,357,836
Class B common stock 2,542 2,542 2,544
Weighted average shares outstanding attributable to Indemnity – Diluted
Class A common stock 52,616,234 52,855,757 53,547,833
Class B common stock 2,542 2,542 2,544
See accompanying notes to Consolidated Financial Statements. See Note 18, "Indemnity Accumulated Other Comprehensive
Loss," for amounts reclassified out of accumulated other comprehensive income (loss) into the Consolidated Statements of
Operations. See Note 22, “Indemnity Supplemental Information,” for supplemental statements of operations information.
69
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2014, 2013 and 2012
(in millions)
2014 2013 2012
Net income
$ 573 $ 1,048 $ 619
Other comprehensive (loss) income
Change in unrealized holding gains (losses) on available-for-sale securities, net of
tax (expense) benefit of $(42), $125, and $(121), respectively
78
(232
) 224
Reclassification adjustment for gross (gains) losses included in net income, net of
tax benefit (expense) of $10, $(3) and $23, respectively
(18
) 7
(44
)
Postretirement plans, net of tax (benefit) expense of $(31), $44 and $(17),
respectively
(60
) 81
(30
)
Other comprehensive (loss) income
0 (144) 150
Comprehensive income
573 904 769
Less: Comprehensive income attributable to noncontrolling interest in
consolidated entity – Exchange
464 667 637
Total comprehensive income – Indemnity
$ 109 $ 237 $ 132
See accompanying notes to Consolidated Financial Statements. See Note 18, "Indemnity Accumulated Other Comprehensive
Loss," for supplemental statements of comprehensive income (loss) information.
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ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
At December 31, 2014 and 2013
(dollars in millions, except per share data)
2014 2013
Assets
Investments – Indemnity
Available-for-sale securities, at fair value:
Fixed maturities (amortized cost of $555 and $518, respectively) $ 564 $ 526
Equity securities (cost of $24 and $50, respectively) 25 50
Limited partnerships (cost of $89 and $123, respectively) 113 146
Other invested assets 1 1
Investments – Exchange
Available-for-sale securities, at fair value:
Fixed maturities (amortized cost of $8,540 and $7,801, respectively) 9,007 8,162
Equity securities (cost of $788 and $778 respectively) 850 819
Trading securities, at fair value (cost of $2,289 and $2,198, respectively) 3,223 3,202
Limited partnerships (cost of $694 and $790, respectively) 866 940
Other invested assets 20 20
Total investments 14,669 13,866
Cash and cash equivalents (Exchange portion of $422 and $403, respectively) 514 452
Premiums receivable from policyholders – Exchange 1,281 1,167
Reinsurance recoverable – Exchange 161 172
Deferred income taxes – Indemnity 37 2
Deferred acquisition costs – Exchange 595 566
Other assets (Exchange portion of $374 and $337, respectively) 501 451
Total assets $ 17,758 $ 16,676
Liabilities and shareholders’ equity
Liabilities
Indemnity liabilities
Other liabilities $ 611 $ 476
Exchange liabilities
Losses and loss expense reserves 3,853 3,747
Life policy and deposit contract reserves 1,812 1,758
Unearned premiums 2,834 2,598
Deferred income taxes 490 450
Other liabilities 175 97
Total liabilities 9,775 9,126
Indemnity’s shareholders’ equity
Class A common stock, stated value $0.0292 per share; 74,996,930 shares authorized;
68,299,200 shares issued; 46,189,068 and 46,461,125 shares outstanding, respectively
2 2
Class B common stock, convertible at a rate of 2,400 Class A shares for one Class B share,
stated value $70 per share; 3,070 shares authorized; 2,542 shares issued and outstanding
0 0
Additional paid-in-capital 16 16
Accumulated other comprehensive loss (118) (59)
Retained earnings 1,949 1,902
Total contributed capital and retained earnings 1,849 1,861
Treasury stock, at cost; 22,110,132 and 21,838,075 shares held, respectively (1,146) (1,127)
Total Indemnity shareholders’ equity 703 734
Noncontrolling interest in consolidated entity – Exchange 7,280 6,816
Total equity 7,983 7,550
Total liabilities, shareholders’ equity, and noncontrolling interest $ 17,758 $ 16,676
See accompanying notes to Consolidated Financial Statements. See Note 22, “Indemnity Supplemental Information,” for
supplemental consolidating statements of financial position information.
71
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND NONCONTROLLING INTEREST
Years ended December 31, 2014, 2013 and 2012
(dollars in millions, except per share data)
2014 2013 2012
Common stock
Class A $ 2 $ 2 $ 2
Class B 0 0 0
Total common stock 2 2 2
Additional paid-in-capital
Balance, end of year 16 16 16
Accumulated other comprehensive loss
Balance, beginning of year (59) (133) (105)
Change in accumulated other comprehensive loss (59) 74 (28)
Balance, end of year (118) (59) (133)
Retained earnings
Balance, beginning of year 1,902 1,852 1,894
Net income attributable to Indemnity 168 163 160
Dividends declared – Class A ($2.586, $2.4125 and $4.25 per share, respectively) (120) (112) (200)
Dividends declared – Class B ($387.90, $361.875 and $637.50 per share,
respectively)
(1
)
(1
)
(2
)
Balance, end of year 1,949 1,902 1,852
Treasury stock
Balance, beginning of year (1,127) (1,095) (1,026)
Net purchase of treasury stock (19) (32) (69)
Balance, end of year (1,146) (1,127) (1,095)
Total Indemnity shareholders’ equity $ 703 $ 734 $ 642
Noncontrolling interest in consolidated entity – Exchange
Balance, beginning of year $ 6,816 $ 6,149 $ 5,512
Comprehensive income 464 667 637
Balance, end of year
7,280 6,816 6,149
Total equity $ 7,983 $ 7,550 $ 6,791
See accompanying notes to Consolidated Financial Statements.
72
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2014, 2013 and 2012
(in millions)
2014 2013 2012
Cash flows from operating activities
Premiums collected $ 5,466 $ 5,026 $ 4,594
Net investment income received 484 450 471
Limited partnership distributions 131 176 164
Service agreement fee received 31 31 31
Commissions and bonuses paid to agents (749) (681) (617)
Losses paid (3,217) (2,742) (2,818)
Loss expenses paid (516) (470) (464)
Other underwriting and acquisition costs paid (661) (603) (557)
Income taxes paid (190) (284) (227)
Net cash provided by operating activities
779 903 577
Cash flows from investing activities
Purchase of investments:
Fixed maturities (2,298) (2,879) (2,112)
Preferred stock (445) (136) (172)
Common stock (1,262) (1,339) (1,807)
Limited partnerships (120) (88) (100)
Sales/maturities of investments:
Fixed maturity sales 645 849 881
Fixed maturity calls/maturities 854 1,135 1,169
Preferred stock 398 115 154
Common stock 1,486 1,426 1,733
Sale of and returns on limited partnerships 197 198 201
Net purchase of property and equipment (52) (42) (33)
Net collections on agent loans 2 3 1
Net distributions on life policy loans (1) (1) 0
Net cash used in investing activities
(596) (759) (85)
Cash flows from financing activities
Annuity deposits and interest 85 89 92
Annuity surrenders and withdrawals (88) (82) (83)
Universal life deposits and interest 34 27 23
Universal life surrenders (13) (10) (10)
Purchase of treasury stock (20) (32) (70)
Dividends paid to shareholders (119) (84) (229)
Net cash used in financing activities
(121) (92) (277)
Net increase in cash and cash equivalents 62 52 215
Cash and cash equivalents, beginning of year 452 400 185
Cash and cash equivalents, end of year
$ 514 $ 452 $ 400
See accompanying notes to Consolidated Financial Statements. See Note 20, “Supplementary Data on Cash Flows,” and Note
22, “Indemnity Supplemental Information,” for supplemental cash flow information.
73
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations
Erie Indemnity Company (“Indemnity”) is a publicly held Pennsylvania business corporation that has been the managing
attorney-in-fact for the subscribers (policyholders) at the Erie Insurance Exchange (“Exchange”) since 1925. The Exchange is
a subscriber-owned, Pennsylvania-domiciled, reciprocal insurer that writes property and casualty insurance.
Indemnity’s primary function is to perform certain services for the Exchange relating to the sales, underwriting, and issuance of
policies on behalf of the Exchange. This is done in accordance with a subscriber’s agreement (a limited power of attorney)
executed by each subscriber (policyholder), which appoints Indemnity as their common attorney-in-fact to transact business on
their behalf and to manage the affairs of the Exchange. Pursuant to the subscriber’s agreement and for its services as attorney-
in-fact, Indemnity earns a management fee calculated as a percentage of the direct premiums written by the Exchange and the
other members of the Property and Casualty Group (defined below), which are assumed by the Exchange under an
intercompany pooling arrangement.
Indemnity has the power to direct the activities of the Exchange that most significantly impact the Exchange’s economic
performance by acting as the common attorney-in-fact and decision maker for the subscribers (policyholders) at the Exchange.
The Exchange, together with its wholly owned subsidiaries, Erie Insurance Company (“EIC”), Erie Insurance Company of New
York (“ENY”), Erie Insurance Property and Casualty Company (“EPC”), and Flagship City Insurance Company (“Flagship”),
operate as a property and casualty insurer and are collectively referred to as the “Property and Casualty Group”. The Property
and Casualty Group operates in 12 Midwestern, Mid-Atlantic, and Southeastern states and the District of Columbia and
primarily writes private passenger auto (43%), homeowners (27%), commercial multi-peril (13%), commercial automobile
(7%), and workers compensation (7%) lines of insurance based upon 2014 direct written premiums.
Erie Family Life Insurance Company (“EFL”), a wholly owned subsidiary of the Exchange, operates as a life insurer that
underwrites and sells individual and group life insurance policies and fixed annuities.
The Property & Casualty Group and EFL began writing private passenger automobile, home insurance, personal excess liability
insurance, and life insurance and annuity products in Kentucky in the fourth quarter of 2014.
All property and casualty and life insurance operations are owned by the Exchange and Indemnity functions solely as the
management company.
The consolidated financial statements of Erie Indemnity Company reflect the results of Indemnity and its variable interest
entity, the Exchange, which we refer to collectively as the “Erie Insurance Group” (“we,” “us,” “our”).
“Indemnity shareholder interest” refers to the interest in Erie Indemnity Company owned by the Class A and Class B
shareholders. “Noncontrolling interest” refers to the interest in the Erie Insurance Exchange held for the subscribers
(policyholders).
Note 2. Significant Accounting Policies
Basis of presentation
The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted
accounting principles (“GAAP”) and include the accounts of Indemnity together with its affiliated companies in which
Indemnity holds a majority voting or economic interest.
Use of estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
74
Principles of consolidation
We consolidate the Exchange as a variable interest entity for which Indemnity is the primary beneficiary. All intercompany
accounts and transactions have been eliminated in consolidation. The required presentation of noncontrolling interests is
reflected in the consolidated financial statements. Noncontrolling interests represent the ownership interests of the Exchange,
all of which is held by parties other than Indemnity (i.e., the Exchange’s subscribers (policyholders)). Noncontrolling interests
also include the Exchange subscribers’ ownership interest in EFL.
Presentation of assets and liabilities – While the assets of the Exchange are presented separately in the Consolidated
Statements of Financial Position, the Exchange’s assets can only be used to satisfy the Exchange’s liabilities or for other
unrestricted activities. Accounting Standards Codification (“ASC”) 810, Consolidation, does not require separate presentation
of the Exchange’s assets; however, because the shareholders of Indemnity have no rights to the assets of the Exchange and,
conversely, the Exchange has no rights to the assets of Indemnity, we have presented the invested assets of the Exchange
separately on the Consolidated Statements of Financial Position along with the remaining consolidated assets reflecting the
Exchange’s portion parenthetically. Liabilities are required under ASC 810, Consolidation, to be presented separately for the
Exchange on the Consolidated Statements of Financial Position as the Exchange’s creditors do not have recourse to the general
credit of Indemnity.
Rights of shareholders of Indemnity and subscribers (policyholders) of the Exchange – The shareholders of Indemnity, through
the management fee, have a controlling financial interest in the Exchange; however, they have no other rights to or obligations
arising from assets and liabilities of the Exchange. The shareholders of Indemnity own its equity but have no rights or interest
in the Exchange’s (noncontrolling interest) income or equity. The noncontrolling interest equity represents the Exchange’s
equity held for the interest of its subscribers (policyholders), who have no rights or interest in the Indemnity shareholder
interest income or equity.
All intercompany assets, liabilities, revenues, and expenses between Indemnity and the Exchange have been eliminated in the
Consolidated Financial Statements.
Adopted accounting standards
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires entities to
present in either a single note or parenthetically on the face of the financial statements the effect of significant amounts
reclassified from each component of accumulated other comprehensive income based on its source and the income statement
line affected by the reclassification. ASU 2013-02 was effective for reporting periods beginning after December 15, 2012. We
adopted the guidance effective January 1, 2013 and disclose reclassifications from accumulated other comprehensive income
and the impact on our consolidated financial statements in Note 18, "Indemnity Accumulated Other Comprehensive Loss".
Recently issued accounting standards
In February 2015, the FASB issued ASU 2015-02, “Consolidation”, which changes the analysis that a reporting entity must
perform to determine whether it should consolidate certain types of legal entities. ASU 2015-02 modifies the evaluation of
whether limited partnerships are variable interest entities and the consolidation analysis of reporting entities that are involved in
variable interest entities, particularly those that have fee arrangements and related party relationships. All legal entities are
subject to reevaluation under this revised consolidation model. ASU 2015-02 is effective for interim and annual periods
beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We are currently
evaluating this new guidance and have not yet determined the impact that the adoption of this new consolidation model will
have on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 clarifies the
principles for recognizing revenue and provides a common revenue standard for GAAP. The core principle of the guidance is
that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. Insurance contracts are not
within the scope of this guidance. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016.
Early application is not permitted. We do not expect the adoption of ASU 2014-09 related to the management fee and service
agreement revenue to have a material impact on our consolidated financial statements.
Investments
Available-for-sale securities – Fixed maturity, preferred stock, and common stock securities classified as available-for-sale are
reported at fair value. Unrealized holding gains and losses, net of related tax effects, on available-for-sale securities are
recorded directly to shareholders’ equity as accumulated other comprehensive income (loss).
75
Common stock securities classified as available-for-sale represent certain exchange traded funds with underlying holdings of
fixed maturity securities.
Realized gains and losses on sales of available-for-sale securities are recognized in income based upon the specific
identification method. Interest and dividend income are recognized as earned.
Fixed income and redeemable preferred stock (debt securities) are evaluated monthly for other-than-temporary impairment
loss. For debt securities that have experienced a decline in fair value and that we intend to sell, or for which it is more likely
than not we will be required to sell the security before recovery of its amortized cost, an other-than-temporary impairment is
deemed to have occurred, and is recognized in earnings.
Debt securities that have experienced a decline in fair value and that we do not intend to sell, and that we will not be required to
sell before recovery, are evaluated to determine if the decline in fair value is other-than-temporary.
Some factors considered in this evaluation include:
• the extent and duration to which fair value is less than cost;
• historical operating performance and financial condition of the issuer;
• short and long-term prospects of the issuer and its industry based upon analysts’ recommendations;
• specific events that occurred affecting the issuer, including a ratings downgrade;
• near term liquidity position of the issuer; and
• compliance with financial covenants.
If a decline is deemed to be other-than-temporary, an assessment is made to determine the amount of the total impairment
related to a credit loss and that related to all other factors. Consideration is given to all available information relevant to the
collectability of the security in this determination. If the entire amortized cost basis of the security will not be recovered, a
credit loss exists. Currently, we have the intent to sell all of our securities that have been determined to have a credit-related
impairment. As a result, the entire amount of any impairment would be recognized in earnings. If we had securities with credit
impairments that we did not intend to sell, the non-credit portion of the impairment would be recorded in other comprehensive
income.
Other-than-temporary impairment charges on non-redeemable preferred securities, hybrid securities with equity characteristics
and common stock are included in earnings consistent with the treatment for equity securities.
Trading securities – Common stock securities classified as trading securities are reported at fair value. Unrealized holding
gains and losses on trading securities are included in net realized gains (losses) in the Consolidated Statements of Operations.
Realized gains and losses on sales of trading securities are recognized in income based upon the specific identification method.
Dividend income is recognized as of the ex-dividend date.
Limited partnerships – Limited partnerships include U.S. and foreign private equity, mezzanine debt, and real estate
investments. The majority of our limited partnership holdings are considered investment companies and are recorded using the
equity method of accounting. For these limited partnerships the general partners record assets at fair value, including any
other-than-temporary impairments of these individual investments. We also own some real estate limited partnerships that do
not meet the criteria of an investment company. These partnerships prepare audited financial statements on a cost basis. We
have elected to report these limited partnerships under the fair value option, which is based on the net asset value (NAV) from
our partner’s capital statement reflecting the general partner’s estimate of fair value for the fund’s underlying assets. Limited
partnerships reported under the fair value option are disclosed in Note 6, “Fair Value” as other investments. Fair value provides
consistency in the evaluation and financial reporting for these limited partnerships and limited partnerships accounted for under
the equity method.
Because of the timing of the preparation and delivery of financial statements for limited partnership investments, the use of the
most recently available financial statements provided by the general partners results in a quarter delay in the inclusion of the
limited partnership results in our Consolidated Statements of Operations. Due to this delay, these financial statements do not
yet reflect the market conditions experienced in the fourth quarter of 2014 for all partnerships other than the real estate limited
partnerships that are reported under the fair value option.
Nearly all of the underlying investments in our limited partnerships are valued using a source other than quoted prices in active
markets. The fair value amounts for our private equity and mezzanine debt partnerships are based upon the financial statements
of the general partners, who use multiple methods to estimate fair value including the market approach, income approach or the
cost approach. The market approach uses prices and other pertinent information from market-generated transactions involving
76
identical or comparable assets or liabilities. Such valuation techniques often use market multiples derived from a set of
comparables. The income approach uses valuation techniques to convert future cash flows or earnings to a single discounted
present value amount. The measurement is based upon the value indicated by current market expectations on those future
amounts. The cost approach is derived from the amount that is currently required to replace the service capacity of an asset. If
information becomes available that would impair the cost of investments owned by the partnerships, then the general partner
would adjust to the net realizable value. For real estate limited partnerships, the general partners record these at fair value
based upon an independent appraisal or internal estimates of fair value.
While we perform various procedures in review of the general partners’ valuations, we rely on the general partners’ financial
statements as the best available information to record our share of the partnership unrealized gains and losses resulting from
valuation changes. Due to the limited market for these investments, there is a greater potential for market price variability.
Unrealized gains and losses for these investments are reflected in equity in earnings (losses) of limited partnerships in our
Consolidated Statements of Operations in accordance with the equity method of accounting or the fair value option, as
applicable. Cash contributions made to and distributions received from the partnerships are recorded in the period in which the
transaction occurs.
Cash and cash equivalents – Short-term investments, consisting of cash, money market accounts and other short-term, highly
liquid investments with a maturity of three months or less at the date of purchase, are considered cash and cash equivalents.
Deferred acquisition costs
Costs that vary with and directly relate to the successful acquisition of new and renewal insurance and investment-type
contracts are deferred. These costs are principally commissions, premium taxes and policy issuance expenses.
Property and casualty insurance – DAC is amortized as premiums are earned over the applicable policy term. Investment
income is considered in determining the recoverability of DAC. If a premium deficiency exists, it would first be recognized by
charging any unamortized acquisition costs to expense. If the premium deficiency were greater than unamortized acquisition
costs, a liability would be accrued for the excess deficiency. There was no reduction in costs deferred in any periods presented.
Profitability is analyzed annually to ensure recoverability.
Life insurance – DAC related to traditional life insurance products is amortized in proportion to premium revenues over the
premium-paying period of related policies using assumptions about mortality, morbidity, lapse rates, expenses, and future yield
on related investments established when the policy was issued. Amortization is adjusted each period to reflect policy lapse or
termination rates as compared to anticipated experience. DAC related to universal life products and deferred annuities is
amortized over the estimated lives of the contracts in proportion to actual and expected future gross profits, investment,
mortality, expense margins, and surrender charges. Historical and anticipated investment returns, including realized gains and
losses, are considered in determining the amortization of DAC.
Estimated gross profits are adjusted monthly to reflect actual experience to date and/or for the unlocking of underlying key
assumptions based upon experience studies. DAC is periodically reviewed for recoverability. For traditional life products, if
the benefit reserves plus anticipated future premiums and interest earnings for a line of business are less than the current
estimate of future benefits and expenses (including any unamortized DAC), a charge to income is recorded for additional DAC
amortization or for increased benefit reserves. For universal life and deferred annuities, if the current present value of future
expected gross profits is less than the unamortized DAC, a charge to income is recorded for additional DAC amortization.
Deferred taxes
Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and the
reported amounts in the consolidated financial statements, using the statutory tax rates in effect for the year in which the
differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the
results of operations in the period that includes the enactment date under the law. Valuation allowances on deferred tax assets
are estimated based upon our assessment of the realizability of such amounts.
Property and casualty unpaid losses and loss expenses
Unpaid losses and loss expenses include estimates for claims that have been reported and those that have been incurred but not
reported, as well as estimates of all expenses associated with processing and settling these claims, less estimates of anticipated
salvage and subrogation recoveries. Unpaid loss and loss expense reserves are set at ultimate cost, except for workers
compensation loss reserves, which have been discounted using an interest rate of 2.5%. Estimating the ultimate cost of future
losses and loss expenses is an uncertain and complex process. This estimation process is based upon the assumption that past
developments are an appropriate indicator of future events, and involves a variety of actuarial techniques that analyze
77
experience, trends, and other relevant factors. The uncertainties involved with the reserving process include internal factors,
such as changes in claims handling procedures, as well as external factors, such as economic trends and changes in the concepts
of legal liability and damage awards. Accordingly, final loss settlements may vary from the present estimates, particularly
when those payments may not occur until well into the future.
We regularly review the adequacy of our estimated loss and loss expense reserves by line of business. Adjustments to
previously established reserves are reflected in the operating results of the period in which the adjustment is determined to be
necessary. Such adjustments could possibly be significant, reflecting any variety of new and adverse or favorable trends.
Life insurance reserves
The liability for future benefits of life insurance contracts is the present value of such benefits less the present value of future
net premiums. Life insurance and income-paying annuity future policy benefit reserves are computed primarily by the net level
premium method with assumptions as to mortality, withdrawal, lapses, and investment yields. Traditional life insurance
products are subject to loss recognition testing. The adequacy of the related reserves is verified as part of loss recognition
testing. Loss recognition is necessary when the sum of the reserve and the present value of projected policy cash flows is less
than unamortized DAC.
Deferred annuity future benefit reserves are established at accumulated account values without reduction for surrender charges.
These account values are credited with varying interest rates determined at the discretion of EFL subject to certain minimums.
Agent bonus estimates
Agent bonuses are based upon an individual agency’s property and casualty underwriting profitability and also include a
component for growth in agency property and casualty premiums if the agency’s underwriting profitability targets for our book
of business are met. The estimate for agent bonuses, which are based upon the performance over 36 months, is modeled on a
monthly basis using actual underwriting data by agency for the prior two years combined with the current year-to-date actual
data.
At December 31 of each year, we use actual data available and record an accrual based upon the expected payment amount.
These costs are included in the policy acquisition and underwriting expenses in the Consolidated Statements of Operations.
Recognition of premium revenues and losses
Property and casualty insurance – Insurance premiums written are earned over the terms of the policies on a pro-rata basis.
Premiums receivable from policyholders represent premiums written but not yet collected. Premiums receivable are reported
net of an allowance for uncollectible premiums. Unearned premiums represent that portion of premiums written which is
applicable to the unexpired terms of policies in force. Losses and loss expenses are recorded as incurred.
Life insurance – Premiums on traditional life insurance products are recognized as revenue when due. Reserves for future
policy benefits are established when premiums are earned. Premiums received for annuity and universal life products are
reported as deposits and included in liabilities. For universal life products, revenue is recognized when amounts are assessed
against the policyholder’s account for mortality coverage and contract expenses. The primary source of revenue on annuity
deposits is derived from the interest earned by EFL, which is reflected in net investment income.
Reinsurance
Property and casualty insurance – Property and casualty assumed and ceded reinsurance premiums are earned over the terms
of the reinsurance contracts. Premiums ceded to other companies are reported as a reduction of premium income. Reinsurance
contracts do not relieve the Property and Casualty Group from its obligations to policyholders.
Life insurance – Reinsurance premiums, commissions, and expense reimbursements on reinsurance ceded on life insurance
policies are accounted for on a basis consistent with those used in accounting for the underlying reinsured policies. Expense
reimbursements received in connection with new reinsurance ceded have been accounted for as a reduction of the related policy
acquisition costs. Amounts recoverable from reinsurers for future policy benefits are estimated in a manner consistent with the
assumptions used for the underlying policy benefits. Amounts recoverable for incurred claims, future policy benefits, and
expense reimbursements are recorded as assets. Reinsurance contracts do not relieve EFL from its obligations to policyholders.
Recognition of management fee revenue
Indemnity earns management fees from the Exchange for providing sales, underwriting, and policy issuance services. Pursuant
to the subscriber’s agreements with the policyholders at the Exchange, Indemnity may retain up to 25% of all premiums written
or assumed by the Exchange. Management fee revenue is calculated by multiplying the management fee rate by 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
78
only. Management fees are recorded as revenue upon policy issuance or renewal, as substantially all of the services required to
be performed by us 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. Management fee revenue is eliminated upon consolidation.
Recognition of service agreement revenue
Included in service agreement revenue are service charges Indemnity collects from policyholders for providing multiple
payment plans on policies written by the Property and Casualty Group. Service charges, which are flat dollar charges for each
installment billed beyond the first installment, are recognized as revenue when bills are rendered to the policyholder. Service
agreement revenue also includes late payment and policy reinstatement fees. Service agreement revenue is included in other
income in the Consolidated Statements of Operations.
79
Note 3. Indemnity Earnings Per Share
Class A and Class B basic earnings per share and Class B diluted earnings per share are calculated under the two-class method.
The two-class method allocates earnings to each class of stock based upon its dividend rights. Class B shares are convertible
into Class A shares at a conversion ratio of 2,400 to 1. See Note 17, “Indemnity Capital Stock.”
Class A diluted earnings per share are calculated under the if-converted method, which reflects the conversion of Class B shares
to Class A shares. Diluted earnings per share calculations include the dilutive effect of assumed issuance of stock-based awards
under compensation plans using the treasury stock method. See Note 16, "Incentive and Deferred Compensation Plans."
A reconciliation of the numerators and denominators used in the basic and diluted per-share computations is presented as
follows for each class of Indemnity common stock:
Indemnity Shareholder Interest
(dollars in millions,
except per share data)
For the years ended December 31,
2014 2013 2012
Allocated
net income
(numerator)
Weighted
shares
(denominator)
Per-
share
amount
Allocated
net income
(numerator)
Weighted
shares
(denominator)
Per-
share
amount
Allocated
net income
(numerator)
Weighted
shares
(denominator)
Per-
share
amount
Class A – Basic EPS:
Income available to
Class A stockholders
$ 167 46,247,876 $ 3.59 $ 162 46,660,651 $ 3.46 $ 159 47,357,836 $ 3.38
Dilutive effect of stock-
based awards
0 267,558 — 0 94,306 — 0 84,397 —
Assumed conversion of
Class B shares
1 6,100,800 — 1 6,100,800 — 1 6,105,600 —
Class A – Diluted EPS:
Income available to Class
A stockholders on
Class A equivalent
shares
$ 168 52,616,234 $ 3.18 $ 163 52,855,757 $ 3.08 $ 160 53,547,833 $ 2.99
Class B – Basic EPS:
Income available to Class
B stockholders
$ 1 2,542 $ 539 $ 1 2,542 $ 520 $ 1 2,544 $ 505
Class B – Diluted EPS:
Income available to Class
B stockholders
$ 1 2,542 $ 538 $ 1 2,542 $ 519 $ 1 2,544 $ 505
80
Note 4. Variable Interest Entity
Erie Insurance Exchange
The Exchange is a reciprocal insurance exchange domiciled in Pennsylvania, for which Indemnity serves as attorney-in-fact.
Indemnity holds a variable interest in the Exchange due to the absence of decision-making capabilities by the equity owners
(subscribers/policyholders) of the Exchange and due to the significance of the management fee the Exchange pays to Indemnity
as its decision maker. As a result, Indemnity is deemed to have a controlling financial interest in the Exchange and is
considered to be its primary beneficiary.
Consolidation of the Exchange’s financial results is required given the significance of the management fee to the Exchange and
because Indemnity has the power to direct the activities of the Exchange that most significantly impact the Exchange’s
economic performance. The Exchange’s anticipated economic performance is the product of its underwriting results combined
with its investment results. The fees paid to Indemnity under the subscriber’s agreement impact the anticipated economic
performance attributable to the Exchange’s results. Indemnity earns a management fee from the Exchange for the services it
provides as attorney-in-fact. Indemnity’s management fee revenues are based upon all premiums written or assumed by the
Exchange. Indemnity’s Board of Directors determines the management fee rate to be paid by the Exchange to Indemnity. This
rate cannot exceed 25% of the direct and assumed written premiums of the Exchange, as defined by the subscriber’s agreement
signed by each policyholder. Management fee revenues and management fee expenses are eliminated upon consolidation.
The shareholders of Indemnity have no rights to the assets of the Exchange and no obligations arising from the liabilities of the
Exchange. Indemnity has no obligation related to any underwriting and/or investment losses experienced by the Exchange.
Indemnity would, however, be adversely impacted if the Exchange incurred significant underwriting and/or investment losses.
If the surplus of the Exchange were to decline significantly from its current level, its financial strength ratings could be reduced
and, as a consequence, the Exchange could find it more difficult to retain its existing business and attract new business. A
decline in the business of the Exchange would have an adverse effect on the amount of the management fees Indemnity
receives. In addition, a decline in the surplus of the Exchange from its current level may impact the management fee rate
received by Indemnity. Indemnity also has an exposure to a concentration of credit risk related to the unsecured receivables
due from the Exchange for its management fee. If any of these events occurred, Indemnity’s financial position, financial
performance, and/or cash flows could be adversely impacted.
All property and casualty and life insurance operations are owned by the Exchange, and Indemnity functions solely as the
management company.
Indemnity has not provided financial or other support to the Exchange for any of the reporting periods presented. At
December 31, 2014, there are no explicit or implicit arrangements that would require Indemnity to provide future financial
support to the Exchange. Indemnity is not liable if the Exchange was to be in violation of its debt covenants or was unable to
meet its obligation for unfunded commitments to limited partnerships.
81
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 Note 2, “Significant Accounting Policies”). 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.
The year ended December 31, 2012 includes an adjustment that reduced commission expense by $6 million. 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 involuntary and ceded reinsurance
business and 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. In 2014,
investment activities on life insurance-related assets generated revenues of $105 million, resulting in EFL reporting income
before income taxes of $49 million, before intercompany eliminations. In 2013, investment activities on life insurance-related
assets generated revenues of $111 million, resulting in EFL reporting income before income taxes of $48 million, before
intercompany eliminations. In 2012, investment activities on life insurance-related assets generated revenues of $104 million,
resulting in EFL reporting income before income taxes of $46 million, 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. We actively evaluate the portfolios for impairments and record
impairment writedowns on investments in instances where the fair value of the investment is substantially below cost, and it is
concluded that the decline in fair value is other-than-temporary. Investment-related income for the life operations is included in
the investment segment results.
82
The following tables summarize the components of the Consolidated Statements of Operations by reportable business segment:
Erie Insurance Group
Year ended December 31, 2014
(in millions)
Management
operations
Property
and casualty
insurance
operations
Life
insurance
operations
Investment
operations Eliminations Consolidated
Premiums earned/life policy revenue $ 5,260 $ 86 $ (2) $ 5,344
Net investment income $ 462 (16) 446
Net realized investment gains 193 193
Net impairment losses recognized in earnings (4) (4)
Equity in earnings of limited partnerships 113 113
Management fee revenue $ 1,376 (1,376) —
Service agreement and other revenue 31 1 32
Total revenues 1,407 5,260 87 764 (1,394) 6,124
Cost of management operations 1,184 (1,184) —
Insurance losses and loss expenses 3,859 105 (6) 3,958
Policy acquisition and underwriting expenses 1,502 38 (204) 1,336
Total benefits and expenses 1,184 5,361 143 — (1,394) 5,294
Income (loss) before income taxes 223 (101) (56) 764 — 830
Provision for income taxes 78 (35) (20) 234 — 257
Net income (loss) $ 145 $ (66) $ (36) $ 530 $ — $ 573
Erie Insurance Group
Year ended December 31, 2013
(in millions)
Management
operations
Property
and casualty
insurance
operations
Life
insurance
operations
Investment
operations Eliminations Consolidated
Premiums earned/life policy revenue
$ 4,820 $ 80
$ (2) $ 4,898
Net investment income
$ 434 (12) 422
Net realized investment gains
771
771
Net impairment losses recognized in earnings
(13)
(13)
Equity in earnings of limited partnerships
161
161
Management fee revenue $ 1,266
(1,266) —
Service agreement and other revenue 31
1
32
Total revenues 1,297 4,820 81 1,353 (1,280) 6,271
Cost of management operations 1,088
(1,088) —
Insurance losses and loss expenses
3,365 107
(5) 3,467
Policy acquisition and underwriting expenses
1,387 37
(187) 1,237
Total benefits and expenses 1,088 4,752 144 — (1,280) 4,704
Income (loss) before income taxes 209 68 (63) 1,353 — 1,567
Provision for income taxes 73 24 (22) 444 — 519
Net income (loss) $ 136 $ 44 $ (41) $ 909 $ — $ 1,048
83
Erie Insurance Group
Year ended December 31, 2012
(in millions)
Management
operations
Property
and casualty
insurance
operations
Life
insurance
operations
Investment
operations Eliminations Consolidated
Premiums earned/life policy revenue
$ 4,422 $ 73
$ (2) $ 4,493
Net investment income
$ 449 (11) 438
Net realized investment gains
418
418
Net impairment losses recognized in earnings
0
0
Equity in earnings of limited partnerships
131
131
Management fee revenue $ 1,157
(1,157) —
Service agreement and other revenue 31
1
32
Total revenues 1,188 4,422 74 998 (1,170) 5,512
Cost of management operations 983
(983) —
Insurance losses and loss expenses
3,384 101
(5) 3,480
Policy acquisition and underwriting expenses
1,284 31
(182) 1,133
Total benefits and expenses 983 4,668 132 — (1,170) 4,613
Income (loss) before income taxes 205 (246) (58) 998 — 899
Provision for income taxes 72 (86) (20) 314 — 280
Net income (loss) $ 133 $ (160) $ (38) $ 684 $ — $ 619
84
Note 6. Fair Value
Our available-for-sale and trading securities are recorded at fair value, which is the price that would be received to sell the asset
in an orderly transaction between willing market participants as of the measurement date.
Valuation techniques used to derive the fair value of our available-for-sale and trading securities are based upon observable and
unobservable inputs. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect
our own assumptions regarding fair market value for these securities. Although the majority of our prices are obtained from
third party sources, we also perform an internal pricing review for securities with low trading volumes under current market
conditions. Financial instruments are categorized based upon the following characteristics or inputs to the valuation
techniques:
• Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can
access at the measurement date.
• Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly.
• Level 3 – Unobservable inputs for the asset or liability.
Estimates of fair values for our investment portfolio are obtained primarily from a nationally recognized pricing service. Our
Level 1 category includes those securities valued using an exchange traded price provided by the pricing service. The
methodologies used by the pricing service that support a Level 2 classification of a financial instrument include multiple
verifiable, observable inputs including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided
markets, benchmark securities, bids, offers, and reference data. Pricing service valuations for Level 3 securities are based upon
proprietary models and are used when observable inputs are not available or in illiquid markets.
In limited circumstances we adjust the price received from the pricing service when, in our judgment, a better reflection of fair
value is available based upon corroborating information and our knowledge and monitoring of market conditions such as a
disparity in price of comparable securities and/or non-binding broker quotes. In other circumstances, certain securities are
internally priced because prices are not provided by the pricing service.
We perform continuous reviews of the prices obtained from the pricing service. This includes evaluating the methodology and
inputs used by the pricing service to ensure that we determine the proper classification level of the financial instrument. Price
variances, including large periodic changes, are investigated and corroborated by market data. We have reviewed the pricing
methodologies of our pricing service as well as other observable inputs, such as data, and transaction volumes and believe that
the prices adequately consider market activity in determining fair value. Our review process continues to evolve based upon
accounting guidance and requirements.
When a price from the pricing service is not available, values are determined by obtaining broker/dealer quotes and/or market
comparables. When available, we obtain multiple quotes for the same security. The ultimate value for these securities is
determined based upon our best estimate of fair value using corroborating market information. Our evaluation includes the
consideration of benchmark yields, reported trades, issuer spreads, two-sided markets, benchmark securities, bids, offers, and
reference data.
For certain securities in an illiquid market, there may be no prices available from a pricing service and no comparable market
quotes available. In these situations, we value the security using an internally-developed, risk-adjusted, discounted cash flow
model.
85
The following table presents our consolidated fair value measurements on a recurring basis by asset class and level of input at
December 31, 2014:
Erie Insurance Group
December 31, 2014
Fair value measurements using:
(in millions)
Total
Quoted prices in
active markets for
identical assets
Level 1
Observable
inputs
Level 2
Unobservable
inputs
Level 3
Indemnity
Available-for-sale securities:
States & political subdivisions $ 231 $ 0 $ 231 $ 0
Corporate debt securities 234 0 234 0
Residential mortgage-backed securities 8 0 8 0
Commercial mortgage-backed securities 51 0 51 0
Collateralized debt obligations 33 0 33 0
Other debt securities 7 0 7 0
Total fixed maturities 564 0 564 0
Nonredeemable preferred stock 12 2 10 0
Common stock 13 13 0 0
Total available-for-sale securities 589 15 574 0
Other investments
(1)
8 0 0 8
Total – Indemnity $ 597 $ 15 $ 574 $ 8
Exchange
Available-for-sale securities:
U.S. treasury $ 6 $ 0 $ 6 $ 0
Government sponsored enterprises 4 0 4 0
States & political subdivisions 1,477 0 1,477 0
Foreign government securities 10 0 10 0
Corporate debt securities 7,289 0 7,202 87
Residential mortgage-backed securities 111 0 111 0
Commercial mortgage-backed securities 30 0 30 0
Collateralized debt obligations 11 0 11 0
Other debt securities 69 0 57 12
Total fixed maturities 9,007 0 8,908 99
Nonredeemable preferred stock 710 328 381 1
Common stock 140 140 0 0
Total available-for-sale securities 9,857 468 9,289 100
Trading securities:
Common stock 3,223 3,208 0 15
Total trading securities 3,223 3,208 0 15
Other investments
(1)
71 0 0 71
Total – Exchange $ 13,151 $ 3,676 $ 9,289 $ 186
Total – Erie Insurance Group $ 13,748 $ 3,691 $ 9,863 $ 194
% of total assets at fair value 100.0% 26.9% 71.7% 1.4%
(1) Other investments measured at fair value represent four real estate funds included on the balance sheet as limited partnership investments that are
reported under the fair value option. These investments can never be redeemed with the funds. Instead, distributions are received when liquidation
of the underlying assets of the funds occur. It is estimated that the underlying assets will generally be liquidated between 5 and 10 years from the
inception of the funds. The fair value of these investments is based on the net asset value (NAV) information provided by the general partner. Fair
value is based on our proportionate share of the NAV based on the most recent partners' capital statements received from the general partners,
which is generally one quarter prior to our balance sheet date. These values are then analyzed to determine if the NAV represents fair value at our
balance sheet date, with adjustment being made where appropriate. We consider observable market data and perform a review validating the
appropriateness of the NAV at each balance sheet date. It is likely that all of the investments will be redeemed at a future date for an amount
different than the NAV of our ownership interest in partners' capital as of December 31, 2014. During the year ended December 31, 2014,
Indemnity made no contributions and received distributions totaling $12.9 million, and the Exchange made no contributions and received
distributions totaling $41.5 million for these investments. As of December 31, 2014, the amount of unfunded commitments related to the investments
was $0.6 million for Indemnity and $1.7 million for the Exchange.
86
The following table presents our consolidated fair value measurements on a recurring basis by asset class and level of input at
December 31, 2013:
Erie Insurance Group
December 31, 2013
Fair value measurements using:
(in millions)
Total
Quoted prices in
active markets for
identical assets
Level 1
Observable
inputs
Level 2
Unobservable
inputs
Level 3
Indemnity
Available-for-sale securities:
States & political subdivisions $ 243 $ 0 $ 243 $ 0
Corporate debt securities 282 0 281 1
Collateralized debt obligations 1 0 0 1
Total fixed maturities 526 0 524 2
Nonredeemable preferred stock 25 2 23 0
Common stock 25 25 0 0
Total available-for-sale securities 576 27 547 2
Other investments
(1)
18 0 0 18
Total – Indemnity $ 594 $ 27 $ 547 $ 20
Exchange
Available-for-sale securities:
U.S. government & agencies $ 172 $ 0 $ 172 $ 0
States & political subdivisions 1,470 0 1,470 0
Foreign government securities 15 0 15 0
Corporate debt securities 6,211 0 6,185 26
Residential mortgage-backed securities 156 0 156 0
Commercial mortgage-backed securities 47 0 47 0
Collateralized debt obligations 16 0 11 5
Other debt securities 75 0 75 0
Total fixed maturities 8,162 0 8,131 31
Nonredeemable preferred stock 621 242 379 0
Common stock 198 198 0 0
Total available-for-sale securities 8,981 440 8,510 31
Trading securities:
Common stock 3,202 3,187 0 15
Total trading securities 3,202 3,187 0 15
Other investments
(1)
98 0 0 98
Total – Exchange $ 12,281 $ 3,627 $ 8,510 $ 144
Total – Erie Insurance Group $ 12,875 $ 3,654 $ 9,057 $ 164
% of total assets at fair value 100.0% 28.4% 70.3% 1.3%
(1) Other investments measured at fair value represent four real estate funds included on the balance sheet as limited partnership investments that are
reported under the fair value option. These investments can never be redeemed with the funds. Instead, distributions are received when liquidation
of the underlying assets of the funds occur. It is estimated that the underlying assets will generally be liquidated between 5 and 10 years from the
inception of the funds. The fair value of these investments is based on the net asset value (NAV) information provided by the general partner. Fair
value is based on our proportionate share of the NAV based on the most recent partners' capital statements received from the general partners,
which is generally one quarter prior to our balance sheet date. These values are then analyzed to determine if the NAV represents fair value at our
balance sheet date, with adjustment being made where appropriate. We consider observable market data and perform a review validating the
appropriateness of the NAV at each balance sheet date. It is likely that all of the investments will be redeemed at a future date for an amount
different than the NAV of our ownership interest in partners' capital as of December 31, 2013. During the year ended December 31, 2013,
Indemnity made no contributions and received distributions totaling $2.4 million, and the Exchange made no contributions and received
distributions totaling $21.7 million for these investments. As of December 31, 2013, the amount of unfunded commitments related to the investments
was $1.5 million for Indemnity and $4.5 million for the Exchange.
87
Level 3 Assets –Year-to-Date Change:
Erie Insurance Group
(in millions)
Beginning
balance at
December 31,
2013
Included
in
earnings
(1)
Included
in other
comprehensive
income
Purchases Sales
Transfers
in and (out)
of
Level 3
Ending
balance at
December 31,
2014
Indemnity
Available-for-sale securities:
Corporate debt securities $ 1 $ 0 $ 0 $ 0 $ 0 $ (1) $ 0
Commercial mortgage-backed securities 0 0 0 3 0 (3) 0
Collateralized debt obligations 1 0 0 0 (1) 0 0
Total fixed maturities 2 0 0 3 (1) (4) 0
Total available-for-sale securities 2 0 0 3 (1) (4) 0
Other investments 18 2 0 0 (12) 0 8
Total Level 3 assets – Indemnity $ 20 $ 2 $ 0 $ 3 $ (13) $ (4) $ 8
Exchange
Available-for-sale securities:
Corporate debt securities $ 26 $ 0 $ (1) $ 46 $ (6) $ 22 $ 87
Collateralized debt obligations 5 1 (1) 0 (3) (2) 0
Other debt securities 0 0 0 0 0 12 12
Total fixed maturities 31 1 (2) 46 (9) 32 99
Nonredeemable preferred stock 0 0 0 1 0 0 1
Total available-for-sale securities 31 1 (2) 47 (9) 32 100
Trading securities:
Common stock 15 0 0 0 0 0 15
Total trading securities 15 0 0 0 0 0 15
Other investments 98 14 0 0 (41) 0 71
Total Level 3 assets – Exchange $ 144 $ 15 $ (2) $ 47 $ (50) $ 32 $ 186
Total Level 3 assets – Erie Insurance Group $ 164 $ 17 $ (2) $ 50 $ (63) $ 28 $ 194
(1) These amounts are reported in the Consolidated Statements of Operations. There was $1 million included in net realized investment gains (losses)
and $16 million included in equity in earnings of limited partnerships for the year ended December 31, 2014 on Level 3 securities.
We review the fair value hierarchy classifications each reporting period. Transfers between hierarchy levels may occur due to
changes in available market observable inputs. Transfers in and out of level classifications are reported as having occurred at
the beginning of the quarter in which the transfers occurred.
For Indemnity, there were no transfers between Level 1 and Level 2, or from Level 2 to Level 3, for the year ended
December 31, 2014. Level 3 to Level 2 transfers totaled $4 million related to two fixed maturity holdings due to the use of
observable market data to determine the fair value at December 31, 2014.
For the Exchange, Level 1 to Level 2 transfers totaled $36 million and Level 2 to Level 1 transfers totaled $25 million due to
trading activity levels related to four preferred stock holdings and three preferred stock holdings, respectively, for the year
ended December 31, 2014. Level 2 to Level 3 transfers totaled $56 million for nine fixed maturity holdings and one preferred
stock holding due to the use of unobservable inputs to determine the fair value. Level 3 to Level 2 transfers totaled $24 million
for three fixed maturity holdings and one preferred stock holding due to the use of observable market data to determine the fair
value at December 31, 2014.
88
Level 3 Assets – Year-to-Date Change:
Erie Insurance Group
(in millions)
Beginning
balance at
December 31,
2012
Included
in
earnings
(1)
Included
in other
comprehensive
income
Purchases Sales
Transfers
in and (out)
of
Level 3
Ending
balance at
December 31,
2013
Indemnity
Available-for-sale securities:
Corporate debt securities $ 1 $ 0 $ 0 $ 0 $ 0 $ 0 $ 1
Collateralized debt obligations 3 0 0 0 (2) 0 1
Total fixed maturities 4 0 0 0 (2) 0 2
Total available-for-sale securities 4 0 0 0 (2) 0 2
Other investments 19 1 0 0 (2) 0 18
Total Level 3 assets – Indemnity $ 23 $ 1 $ 0 $ 0 $ (4) $ 0 $ 20
Exchange
Available-for-sale securities:
Corporate debt securities $ 43 $ 0 $ 0 $ 1 $ (3) $ (15) $ 26
Commercial mortgage-backed securities 0 0 0 0 (1) 1 0
Collateralized debt obligations 16 3 1 0 (16) 1 5
Total fixed maturities 59 3 1 1 (20) (13) 31
Nonredeemable preferred stock 0 2 (1) 4 (10) 5 0
Total available-for-sale securities 59 5 0 5 (30) (8) 31
Trading securities:
Common stock 15 1 0 4 (5) 0 15
Total trading securities 15 1 0 4 (5) 0 15
Other investments 109 11 0 0 (22) 0 98
Total Level 3 assets – Exchange $ 183 $ 17 $ 0 $ 9 $ (57) $ (8) $ 144
Total Level 3 assets – Erie Insurance Group $ 206 $ 18 $ 0 $ 9 $ (61) $ (8) $ 164
(1) These amounts are reported in the Consolidated Statements of Operations. There was $6 million included in net realized investment gains (losses)
and $12 million included in equity in earnings of limited partnerships for the year ended December 31, 2013 on Level 3 securities.
For Indemnity, there were no Level 1 to Level 2 transfers for the year ended December 31, 2013. Level 2 to Level 1 transfers
totaled $1 million due to trading activity levels related to one preferred stock holding, and there where no transfers between
Level 2 and Level 3.
For the Exchange, Level 1 to Level 2 transfers totaled $6 million and Level 2 to Level 1 transfers totaled $51 million due to
trading activity levels related to one preferred stock holding and five preferred stock holdings, respectively, for the year ended
December 31, 2013. Level 2 to Level 3 transfers totaled $39 million related to seven fixed maturity holdings and one preferred
stock holding, and Level 3 to Level 2 transfers totaled $47 million for six fixed maturity holdings. These transfers in and out of
Level 3 were primarily the result of using non-binding and binding broker quotes, respectively, to determine the fair value at
December 31, 2013.
89
When a non-binding broker quote was the only input available, it was classified within Level 3. The unobservable inputs are
not reasonably available to us and therefore have not been included in the tables below. These investments totaled $92 million
for the Exchange at December 31, 2014, and $1 million for Indemnity and $21 million for the Exchange at December 31, 2013.
Other investments represent certain limited partnerships that are recorded at fair value based upon net asset value (NAV)
provided by the general partner. Due to the nature of these investments, the NAV was classified within Level 3. The
unobservable inputs are not reasonably available to us and therefore have not been included in the tables below. These
investments totaled $8 million for Indemnity and $71 million for the Exchange at December 31, 2014, and $18 million for
Indemnity and $98 million for the Exchange at December 31, 2013.
Quantitative and Qualitative Disclosures about Unobservable Inputs
Erie Insurance Group
December 31, 2014
(dollars in millions)
Fair
value
Valuation
techniques Unobservable input Range
Weighted
average
Exchange
Corporate debt securities
(1)
$ 7 Market approach Comparable transaction
EBITDA multiples
8.0x 8.0x
Comparable security
yield
6% 6%
Nonredeemable preferred stock
(2)
1 Market approach Held at cost
Common stock
(1)
15 Market approach Comparable transaction
EBITDA multiples
8.0x 8.0x
Discount for lack of
marketability
10% 10%
December 31, 2013
(dollars in millions)
Fair
value
Valuation
techniques Unobservable input Range
Weighted
average
Indemnity
Collateralized debt obligations
(3)
$ 1 Income approach Projected maturity date
Mar 2014 -
Nov 2014
Repayment at maturity 13 - 100% 79%
Discount rate 7.5 - 15% 9%
Exchange
Corporate debt securities
(1)
8 Market approach Comparable transaction
EBITDA multiples
8.0 - 11.9x 8.0x
Comparable security
yield
6% 6%
Collateralized debt obligations
(3)
2 Income approach Projected maturity date
Mar 2014 -
Oct 2035
Repayment at maturity 13 - 100% 80%
Discount rate 7.5 - 18% 10%
Common stock
(1)
15 Market approach Comparable transaction
EBITDA multiples
8.0 - 11.9x 8.0x
Discount for lack of
marketability
5 - 30% 7.5%
(1) Common stock investments and Corporate debt securities – The unobservable inputs used in the fair value measurement of direct private equity
common stock investments and certain corporate debt securities are comparable private transaction earnings before interest, taxes, depreciation,
and amortization (“EBITDA”) multiples, the average EBITDA multiple for comparable publicly traded companies and the amount of discount
applied to the price due to the illiquidity of the securities being valued. Significant changes in any of those inputs in isolation could result in a
significantly higher or lower fair value measurement.
(2) Nonredeemable preferred stock - represents a private security where cost was determined to be the best estimate of fair value.
(3) Collateralized-debt-obligation securities – The unobservable inputs used in the fair value measurement of certain collateralized-debt-obligation
securities are the repayment at maturity of underlying collateral available to pay note holders, the projected maturity of the underlying security, and
a discount rate appropriate for the security. Significant changes in any of those inputs in isolation would result in a significantly higher or lower
fair value measurement. Generally, a change in the assumption used for the performance of the underlying collateral is accompanied by an
opposite change in the maturity and a directionally opposite change in the discount rate used to value the security.
90
The following table presents our consolidated fair value measurements on a recurring basis by pricing source at December 31,
2014:
Erie Insurance Group
(in millions)
December 31, 2014
Total Level 1 Level 2 Level 3
Indemnity
Fixed maturities:
Priced via pricing services $ 564 $ 0 $ 564 $ 0
Total fixed maturities 564 0 564 0
Nonredeemable preferred stock:
Priced via pricing services 12 2 10 0
Total nonredeemable preferred stock 12 2 10 0
Common stock:
Priced via pricing services 13 13 0 0
Total common stock 13 13 0 0
Other investments:
Priced via unobservable inputs
(2)
8 0 0 8
Total other investments 8 0 0 8
Total – Indemnity $ 597 $ 15 $ 574 $ 8
Exchange
Fixed maturities:
Priced via pricing services $ 8,897 $ 0 $ 8,897 $ 0
Priced via market comparables/broker quotes
(1)
103 0 11 92
Priced via internal modeling 7 0 0 7
Total fixed maturities 9,007 0 8,908 99
Nonredeemable preferred stock:
Priced via pricing services 709 328 381 0
Priced via internal modeling 1 0 0 1
Total nonredeemable preferred stock 710 328 381 1
Common stock:
Priced via pricing services 3,348 3,348 0 0
Priced via internal modeling 15 0 0 15
Total common stock 3,363 3,348 0 15
Other investments:
Priced via unobservable inputs
(2)
71 0 0 71
Total other investments 71 0 0 71
Total – Exchange $ 13,151 $ 3,676 $ 9,289 $ 186
Total – Erie Insurance Group $ 13,748 $ 3,691 $ 9,863 $ 194
(1) When a non-binding broker quote was the only price available, the security was classified as Level 3.
(2) Other investments measured at fair value represent real estate funds included on the balance sheet as limited partnership investments that are
reported under the fair value option. The fair value of these investments is based on the net asset value (NAV) information provided by the general
partner.
There were no assets measured at fair value on a nonrecurring basis during the year ended December 31, 2014.
91
Note 7. Investments
Available-for-sale securities
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
92
The following table summarizes the cost and fair value of our available-for-sale securities at December 31, 2013:
Erie Insurance Group
December 31, 2013
(in millions)
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Estimated fair
value
Indemnity
Available-for-sale securities:
States & political subdivisions $ 237 $ 7 $ 1 $ 243
Corporate debt securities 280 2 0 282
Collateralized debt obligations 1 0 0 1
Total fixed maturities 518 9 1 526
Nonredeemable preferred stock 24 2 1 25
Common stock 26 0 1 25
Total available-for-sale securities – Indemnity $ 568 $ 11 $ 3 $ 576
Exchange
Available-for-sale securities:
U.S. government & agencies $ 171 $ 1 $ 0 $ 172
States & political subdivisions 1,430 55 15 1,470
Foreign government securities 15 0 0 15
Corporate debt securities 5,902 354 45 6,211
Residential mortgage-backed securities 157 3 4 156
Commercial mortgage-backed securities 45 2 0 47
Collateralized debt obligations 8 8 0 16
Other debt securities 73 3 1 75
Total fixed maturities 7,801 426 65 8,162
Nonredeemable preferred stock 577 55 11 621
Common stock 201 0 3 198
Total available-for-sale securities – Exchange $ 8,579 $ 481 $ 79 $ 8,981
Total available-for-sale securities – Erie Insurance Group $ 9,147 $ 492 $ 82 $ 9,557
The amortized cost and estimated fair value of fixed maturities at December 31, 2014, are shown below by remaining
contractual term to maturity. Mortgage-backed securities are allocated based upon 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
December 31, 2014
(in millions)
Amortized Estimated
cost fair value
Indemnity
Due in one year or less $ 63 $ 63
Due after one year through five years 241 241
Due after five years through ten years 144 148
Due after ten years 107 112
Total fixed maturities – Indemnity $ 555 $ 564
Exchange
Due in one year or less $ 450 $ 457
Due after one year through five years 3,240 3,409
Due after five years through ten years 3,327 3,482
Due after ten years 1,523 1,659
Total fixed maturities – Exchange $ 8,540 $ 9,007
Total fixed maturities – Erie Insurance Group $ 9,095 $ 9,571
93
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
Fair Unrealized Fair Unrealized Fair Unrealized No. of
Indemnity
value losses value losses value losses 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 – Indemnity 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 – Exchange 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
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.
94
Available-for-sale securities in a gross unrealized loss position at December 31, 2013 are as follows. Data is provided by
length of time for securities in a gross unrealized loss position.
Erie Insurance Group
December 31, 2013
(dollars in millions)
Less than 12 months 12 months or longer Total
Fair Unrealized Fair Unrealized Fair Unrealized No. of
Indemnity
value losses value losses value losses holdings
Available-for-sale securities:
States & political subdivisions $ 58 $ 1 $ 0 $ 0 $ 58 $ 1 21
Corporate debt securities 54 0 10 0 64 0 11
Total fixed maturities – Indemnity 112 1 10 0 122 1 32
Nonredeemable preferred stock 5 1 3 0 8 1 4
Common stock 12 1 13 0 25 1 2
Total available-for-sale securities – Indemnity $ 129 $ 3 $ 26 $ 0 $ 155 $ 3 38
Quality breakdown of fixed maturities:
Investment grade $ 112 $ 1 $ 10 $ 0 $ 122 $ 1 32
Non-investment grade 0 0 0 0 0 0 0
Total fixed maturities – Indemnity $ 112 $ 1 $ 10 $ 0 $ 122 $ 1 32
Exchange
Available-for-sale securities:
U.S. government & agencies $ 1 $ 0 $ 0 $ 0 $ 1 $ 0 2
States & political subdivisions 408 13 18 2 426 15 100
Foreign government securities 5 0 0 0 5 0 1
Corporate debt securities 1,251 43 36 2 1,287 45 237
Residential mortgage-backed securities 71 4 8 0 79 4 12
Commercial mortgage-backed securities 5 0 0 0 5 0 1
Other debt securities 30 1 0 0 30 1 5
Total fixed maturities – Exchange 1,771 61 62 4 1,833 65 358
Nonredeemable preferred stock 182 10 13 1 195 11 27
Common stock 97 3 101 0 198 3 3
Total available-for-sale securities – Exchange $ 2,050 $ 74 $ 176 $ 5 $ 2,226 $ 79 388
Quality breakdown of fixed maturities:
Investment grade $ 1,707 $ 57 $ 62 $ 4 $ 1,769 $ 61 344
Non-investment grade 64 4 0 0 64 4 14
Total fixed maturities – Exchange $ 1,771 $ 61 $ 62 $ 4 $ 1,833 $ 65 358
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.
95
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)
Years ended December 31,
2014 2013 2012
Indemnity
Fixed maturities $ 14 $ 12 $ 13
Equity securities 2 2 3
Cash equivalents and other 1 2 1
Total investment income 17 16 17
Less: investment expenses 1 1 1
Investment income, net of expenses – Indemnity $ 16 $ 15 $ 16
Exchange
Fixed maturities $ 354 $ 334 $ 350
Equity securities 115 105 102
Cash equivalents and other 1 2 2
Total investment income 470 441 454
Less: investment expenses 40 34 32
Investment income, net of expenses – Exchange $ 430 $ 407 $ 422
Investment income, net of expenses – Erie Insurance Group $ 446 $ 422 $ 438
96
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:
(in millions)
Erie Insurance Group
Years ended December 31,
Indemnity
2014 2013 2012
Available-for-sale securities:
Fixed maturities:
Gross realized gains $ 0 $ 1 $ 0
Gross realized losses 0 0 0
Net realized gains 0 1 0
Equity securities:
Gross realized gains 1 0 0
Gross realized losses 0 0 0
Net realized gains 1 0 0
Trading securities:
Common stock:
Gross realized gains 0 0 9
Gross realized losses 0 0 (1)
Increases (decreases) in fair value
(1)
0 0 (3)
Net realized gains 0 0 5
Net realized investment gains – Indemnity $ 1 $ 1 $ 5
Exchange
Available-for-sale securities:
Fixed maturities:
Gross realized gains $ 25 $ 37 $ 78
Gross realized losses (8) (31) (20)
Net realized gains 17 6 58
Equity securities:
Gross realized gains 17 7 17
Gross realized losses (3) (11) (8)
Net realized gains (losses) 14 (4) 9
Trading securities:
Common stock:
Gross realized gains 291 307 213
Gross realized losses (60) (36) (88)
(Decreases) increases in fair value
(1)
(70) 497 221
Net realized gains 161 768 346
Net realized investment gains – Exchange $ 192 $ 770 $ 413
Net realized investment gains – Erie Insurance Group $ 193 $ 771 $ 418
(1) The fair value on our common stock portfolio is based upon exchange traded prices provided by a nationally recognized pricing service.
97
Net impairment losses
The components of other-than-temporary impairments on investments are included below:
(in millions)
Erie Insurance Group
Years ended December 31
2014 2013 2012
Indemnity
Fixed maturities $ 0 $ 0 $ 0
Equity securities 0 0 0
Total other-than-temporary impairments 0 0 0
Portion recognized in other comprehensive income 0 0 0
Net impairment losses recognized in earnings – Indemnity $ 0 $ 0 $ 0
Exchange
Fixed maturities $ (4) $ (5) $ 0
Equity securities 0 (8) 0
Total other-than-temporary impairments (4) (13) 0
Portion recognized in other comprehensive income 0 0 0
Net impairment losses recognized in earnings – Exchange $ (4) $ (13) $ 0
Net impairment losses recognized in earnings – Erie Insurance Group $ (4) $ (13) $ 0
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. See also Note 2, “Significant Accounting Policies.”
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 December 31, 2014 are comprised of
partnership financial results for the fourth quarter of 2013 and the first, second and third quarters of 2014. Given the lag in
reporting, our limited partnership results do not reflect the market conditions of the fourth quarter of 2014. Cash contributions
made to and distributions received from the partnerships are recorded in the period in which the transaction occurs.
Amounts included in equity in earnings of limited partnerships by method of accounting are included below:
(in millions)
Erie Insurance Group
Years ended December 31
2014 2013 2012
Indemnity
Equity in earnings of limited partnerships accounted for under the equity method $ 9 $ 21 $ 13
Change in fair value of limited partnerships accounted for under the fair value option 2 1 2
Equity in earnings of limited partnerships – Indemnity $ 11 $ 22 $ 15
Exchange
Equity in earnings of limited partnerships accounted for under the equity method $ 88 $ 128 $ 105
Change in fair value of limited partnerships accounted for under the fair value option 14 11 11
Equity in earnings of limited partnerships – Exchange $ 102 $ 139 $ 116
Equity in earnings of limited partnerships – Erie Insurance Group $ 113 $ 161 $ 131
98
We have provided summarized financial information in the following tables for the years ended December 31, 2014 and 2013.
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 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
Greater than 50% 0 0 0 0
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
Greater than 50% 0 0 0 0
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.
99
As these investments are generally reported on a one-quarter lag, our limited partnership results through December 31, 2013
include partnership financial results for the fourth quarter of 2012 and the first three quarters of 2013.
Erie Insurance Group
As of and for the year ended December 31, 2013
(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% 26 $ 46 $ (6) $ 9
Greater than or equal to 10% but less than 50% 3 16 3 0
Greater than 50% 0 0 0 0
Total private equity 29 62 (3) 9
Mezzanine debt:
Less than 10% 11 14 0 1
Greater than or equal to 10% but less than 50% 3 6 0 2
Greater than 50% 1 0 0 0
Total mezzanine debt 15 20 0 3
Real estate:
Less than 10% 12 44 0 5
Greater than or equal to 10% but less than 50% 3 14 (1) 4
Greater than 50% 2 6 1 4
Total real estate 17 64 0 13
Total limited partnerships – Indemnity 61 $ 146 $ (3) $ 25
Exchange
Private equity:
Less than 10% 44 $ 396 $ (24) $ 79
Greater than or equal to 10% but less than 50% 3 67 13 2
Greater than 50% 0 0 0 0
Total private equity 47 463 (11) 81
Mezzanine debt:
Less than 10% 19 117 1 13
Greater than or equal to 10% but less than 50% 4 23 (3) 7
Greater than 50% 3 32 1 3
Total mezzanine debt 26 172 (1) 23
Real estate:
Less than 10% 22 211 (10) 34
Greater than or equal to 10% but less than 50% 6 71 (2) 10
Greater than 50% 2 23 (1) 16
Total real estate 30 305 (13) 60
Total limited partnerships – Exchange 103 $ 940 $ (25) $ 164
Total limited partnerships – Erie Insurance Group $ 1,086 $ (28) $ 189
Per the limited partnership financial statements, total partnership assets were $50 billion and total partnership liabilities were
$5 billion at December 31, 2013 (as recorded in the September 30, 2013 limited partnership financial statements). For the
twelve month period comparable to that presented in the preceding table (fourth quarter of 2012 and first three quarters of
2013), total partnership valuation adjustment gains were $2 billion and total partnership net income was $7 billion.
See also Note 19, “Commitments and Contingencies,” for investment commitments related to limited partnerships.
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Note 8. Capitalized Software Development Costs
We capitalize computer software costs developed or obtained for internal use. Capitalized costs include internal and external
labor and overhead. Capitalization ceases and amortization begins no later than the point at which a computer software project
is complete and ready for its intended use. Capitalized software costs are amortized over the estimated useful life of the
software.
The following table outlines the total capitalized software development costs subject to amortization and the related
amortization expense:
Indemnity Shareholder Interest
(in millions)
Years ended December 31,
2014 2013 2012
Gross carrying amount $ 68 $ 58 $ 54
Accumulated amortization (25) (18) (11)
Net carrying amount $ 43 $ 40 $ 43
Amortization expense $ 7 $ 7 $ 6
Included in the gross carrying amount above are costs not yet subject to amortization of $11 million, $9 million and $7 million
in 2014, 2013 and 2012, respectively.
The following table outlines the estimated future amortization expense related to capitalized software development costs as of
December 31, 2014:
(in millions)
Indemnity Shareholder Interest
Year ending
December 31,
Estimated
amortization expense
2015
$ 8
2016
8
2017
7
2018
4
2019
2
The Exchange had capitalized software development costs in-process of $4 million at December 31, 2014, not yet subject to
amortization.
Note 9. Bank Line of Credit
As of December 31, 2014, Indemnity has access to a $100 million bank revolving line of credit with a $25 million letter of
credit sublimit that expires on November 3, 2018. As of December 31, 2014, a total of $98 million remains available under the
facility due to $2 million outstanding letters of credit, which reduce the availability for letters of credit to $23 million.
Indemnity had no borrowings outstanding on its line of credit as of December 31, 2014. Bonds with a fair value of
$114 million were pledged as collateral on the line at December 31, 2014.
As of December 31, 2014, the Exchange has access to a $300 million bank revolving line of credit with a $25 million letter of
credit sublimit that expires on October 25, 2018. As of December 31, 2014, a total of $299 million remains available under the
facility due to $1 million outstanding letters of credit, which reduce the availability for letters of credit to $24 million. The
Exchange had no borrowings outstanding on its line of credit as of December 31, 2014. Bonds with a fair value of
$328 million were pledged as collateral on the line at December 31, 2014.
Both lines have securities pledged as collateral that have no trading restrictions and are reported as available-for-sale fixed
maturities in the Consolidated Statements of Financial Position as of December 31, 2014. The banks require compliance with
certain covenants, which include leverage ratios for Indemnity’s line of credit and statutory surplus and risk based capital ratios
for the Exchange’s line of credit. We are in compliance with all covenants at December 31, 2014.
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Note 10. Income Taxes
The provision for income taxes consists of the following for the years ended December 31:
(in millions)
Erie Insurance Group
2014 2013 2012
Indemnity
Current income tax expense $ 87 $ 89 $ 84
Deferred income tax benefit (4) (5) (3)
Provision for income taxes – Indemnity 83 84 81
Exchange
Current income tax expense 166 232 78
Deferred income tax expense 8 203 121
Provision for income taxes – Exchange 174 435 199
Provision for income taxes – Erie Insurance Group $ 257 $ 519 $ 280
The deferred income tax expense in 2013 and 2012 was primarily driven by unrealized gains on investments.
A reconciliation of the provision for income taxes, with amounts determined by applying the statutory federal income tax rates
to pre-tax income, is as follows for the years ended December 31:
(in millions)
Erie Insurance Group
2014 2013 2012
Indemnity
Income tax at statutory rates $ 88 $ 86 $ 84
Other, net (5) (2) (3)
Provision for income taxes – Indemnity 83 84 81
Exchange
Income tax at statutory rates 202 462 230
Tax-exempt interest (13) (13) (13)
Dividends received deduction (15) (14) (14)
Other, net 0 0 (4)
Provision for income taxes – Exchange 174 435 199
Provision for income taxes – Erie Insurance Group $ 257 $ 519 $ 280
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Temporary differences and carry-forwards, which give rise to consolidated deferred tax assets and liabilities, are as follows for
the years ended December 31:
(in millions)
Erie Insurance Group
2014 2013
Indemnity
Deferred tax assets:
Other employee benefits $ 18 $ 14
Pension and other postretirement benefits 55 24
Other 4 3
Total deferred tax assets 77 41
Deferred tax liabilities:
Unrealized gains on investments 4 3
Limited partnerships 11 11
Depreciation 17 17
Prepaid expenses 8 7
Other 0 1
Total deferred tax liabilities 40 39
Net deferred income tax asset – Indemnity $ 37 $ 2
Exchange
Deferred tax assets:
Loss reserve discount $ 55 $ 63
Unearned premiums 214 197
Write-downs of impaired securities 8 18
Other 25 19
Total deferred tax assets 302 297
Deferred tax liabilities:
Deferred policy acquisition costs 191 185
Unrealized gains on investments 510 489
Limited partnerships 67 61
Other 24 12
Total deferred tax liabilities 792 747
Net deferred income tax liability – Exchange $ (490) $ (450)
Net deferred income tax liability – Erie Insurance Group $ (453) $ (448)
Neither the Indemnity nor the Exchange had a valuation allowance recorded at December 31, 2014 or December 31, 2013. The
IRS has examined our tax filings through tax year ended 2009 and is currently examining our federal income tax returns for
2010, 2011 and 2012.
Indemnity is the attorney-in-fact for the subscribers (policyholders) at the Exchange, a reciprocal insurance exchange. In that
capacity, Indemnity provides all services and facilities necessary to conduct the Exchange’s insurance business. Indemnity and
the Exchange together constitute a single insurance business. Indemnity is not subject to state corporate income or franchise
taxes in states where the Exchange conducts its business and the states collect premium tax in lieu of corporate income or
franchise tax, as a result of the Exchange’s remittance of premium taxes in those states.
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Note 11. Deferred Policy Acquisition Costs
The following table summarizes the components of the Property and Casualty Group’s and EFL’s deferred policy acquisition
costs assets for the years ended December 31:
(in millions)
Erie Insurance Group
2014 2013
Property and Casualty Group
Deferred policy acquisition costs asset, beginning of year $ 402 $ 364
Capitalized deferred policy acquisition costs 874 801
Amortized deferred policy acquisition costs (836) (763)
Deferred policy acquisition costs asset, end of year – Property and Casualty Group $ 440 $ 402
Erie Family Life Insurance Company
Deferred policy acquisition costs asset, beginning of year $ 164 $ 140
Capitalized deferred policy acquisition costs 18 15
Amortized deferred policy acquisition costs (13) (15)
Change in shadow deferred policy acquisition costs (14) 24
Deferred policy acquisition costs asset, end of year – EFL $ 155 $ 164
Deferred policy acquisition costs asset, end of year – Erie Insurance Group $ 595 $ 566
Note 12. Property and Casualty Unpaid Losses and Loss Expenses
The following table provides a reconciliation of our property and casualty beginning and ending loss and loss expense reserve
balances for the years ended December 31:
(in millions)
Property and Casualty Group
2014 2013 2012
Losses and loss expense reserves, beginning of year – Gross $ 3,747 $ 3,598 $ 3,499
Less: reinsurance recoverable, beginning of year 156 154 151
Losses and loss expense reserves, beginning of year – Net 3,591 3,444 3,348
Incurred losses and loss expenses related to:
Current accident year 3,969 3,379 3,494
Prior accident years (116) (19) (115)
Total incurred losses and loss expenses 3,853 3,360 3,379
Paid losses and loss expenses related to:
Current accident year 2,513 2,007 2,166
Prior accident years 1,220 1,206 1,117
Total paid losses and loss expenses 3,733 3,213 3,283
Losses and loss expense reserves, end of year – Net 3,711 3,591 3,444
Add: reinsurance recoverable, end of year 142 156 154
Losses and loss expense reserves, end of year – Gross $ 3,853 $ 3,747 $ 3,598
Loss reserves are set at ultimate cost, except for workers compensation loss reserves, which have been discounted using an
interest rate of 2.5% for all periods presented. This discounting reduced unpaid losses and loss expenses by $89 million,
$85 million and $85 million at December 31, 2014, 2013 and 2012, respectively. The reserves for losses and loss expenses are
reported net of receivables for salvage and subrogation, which totaled $171 million, $149 million and $150 million at
December 31, 2014, 2013 and 2012, respectively.
In 2014, the favorable development on prior accident year direct loss reserves was primarily related to better than expected
severity trends in personal auto, commercial multi-peril, and workers compensation lines of business combined with changes
on individual claims, primarily workers compensation massive injury lifetime medical claims, personal auto massive injury
lifetime medical claims, and the settlement of a commercial multi-peril individual large claim. Favorable development on prior
accident year loss reserves was minimal in 2013. In 2012, the favorable development on prior accident year direct loss reserves
was primarily the result of improved claims frequency and severity trends combined with the closing of several large claims in
our homeowners, commercial multi-peril, and commercial auto lines of business, offset somewhat by adverse development in
our workers compensation line of business as a result of increased severity trends.
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Note 13. Life Policy and Deposit Contract Reserves
The following table provides the components of our life policy and deposit contract liability balances for the years ended
December 31:
(in millions)
Erie Family Life Insurance Company
2014 2013 2012
Deferred annuities $ 1,145 $ 1,135 $ 1,136
Ordinary/traditional life 374 343 313
Universal life 283 260 242
Other 10 20 17
Life policy and deposit contract reserves $ 1,812 $ 1,758 $ 1,708
The reinsurance credit related to life policy and deposit contract reserves was $146 million, $134 million and $122 million at
December 31, 2014, 2013 and 2012 respectively, and is presented in other assets in the Consolidated Statements of Financial
Position.
Note 14. Reinsurance
Members of the Property and Casualty Group participate in an intercompany reinsurance pooling agreement. Under the
pooling agreement, all insurance business of the Property and Casualty Group is pooled in the Exchange. EIC and ENY share
in the underwriting results of the reinsurance pool through retrocession. Since 1995, the Board of Directors has set the
allocation of the pooled underwriting results at 5.0% participation for EIC, 0.5% participation for ENY, and 94.5% participation
for the Exchange. The purpose of the pooling agreement is to spread the risks of the members of the Property and Casualty
Group collectively across the different lines of business and geographic regions in which each operates. This agreement may
be terminated by any party as of the end of any calendar year by providing not less than 365 days advance written notice.
Intercompany pooling accounts are settled in cash within 30 days after the end of each quarterly accounting period.
Reinsurance contracts do not relieve the Property and Casualty Group or EFL from the primary obligations to policyholders. A
contingent liability exists with respect to reinsurance recoverables in the event reinsurers are unable to meet their obligations
under the reinsurance agreements.
The Property and Casualty Group maintains several property catastrophe reinsurance treaties with nonaffiliated reinsurers to
mitigate future potential catastrophe loss exposures. During 2014, a first treaty provided coverage of up to 30% of a loss of
$100 million in excess of the Property and Casualty Group’s loss retention of $300 million per occurrence, a second treaty
provided coverage of up to 90% of a loss of $500 million in excess of $400 million, a third treaty provided coverage of up to
85% of a loss of $200 million in excess of $900 million, and a fourth treaty provided coverage of up to 100% of a loss of
$25 million in excess of $1.1 billion. The property catastrophe reinsurance treaties that became effective for January 1, 2015
included a first property catastrophe reinsurance treaty providing coverage of up to 35% of a loss of $100 million in excess of
the Property and Casualty Group’s loss retention of $300 million per occurrence, a second treaty providing coverage of up to
90% of a loss of $500 million in excess of $400 million, a third treaty providing coverage of up to 86% of a loss of
$200 million in excess of $900 million, and a fourth treaty providing coverage of up to 100% of a loss of $25 million in excess
of $1.1 billion. There have been no losses subject to these treaties.
In addition to the property catastrophe treaties, the Property and Casualty Group also cedes certain individual lines of business
to unaffiliated reinsurers and cedes certain individual risks on a facultative basis. The Property and Casualty Group maintains
several 100% quota share agreements with A.M. Best A++ rated Hartford Steam Boiler Inspection and Insurance Company.
These agreements cede 100% of the covered insurance risk relating to the reinsured portions of the equipment breakdown,
employment practices liability, and identity recovery lines of business. During 2014, the Property and Casualty Group ceded a
total of $24 million in premium to Hartford Steam Boiler. The cessions for 2013 and 2012 were $21 million and $17 million
respectively.
EFL maintains several reinsurance treaties with nonaffiliated life reinsurance companies in order to reduce claims volatility.
EFL had direct life insurance in force totaling $47 billion and $45 billion at December 31, 2014 and 2013, respectively. Of
these amounts, EFL ceded $21 billion of life insurance in force at December 31, 2014 and 2013. The largest amount of in force
life insurance ceded to one reinsurer totaled $10 billion at December 31, 2014 and 2013.
105
The following tables summarize the direct insurance and reinsurance for our property and casualty and life insurance activities,
respectively, for the years ended December 31:
(in millions)
Erie Insurance Group
Property and casualty insurance:
2014 2013 2012
Premiums written:
Direct $ 5,514 $ 5,076 $ 4,631
Assumed 30 26 21
Ceded (57) (57) (49)
Premiums written, net 5,487 5,045 4,603
Premiums earned:
Direct 5,286 4,850 4,449
Assumed 30 24 21
Ceded (56) (54) (48)
Premiums earned, net 5,260 4,820 4,422
Insurance losses and loss expenses:
Direct 3,834 3,366 3,382
Assumed 25 7 10
Ceded (6) (13) (13)
Insurance losses and loss expenses, net $ 3,853 $ 3,360 $ 3,379
Life insurance:
Premiums earned:
Direct $ 125 $ 119 $ 113
Ceded (41) (41) (42)
Premiums earned, net 84 78 71
Insurance losses and loss expenses:
Direct 120 124 120
Ceded (15) (17) (19)
Insurance losses and loss expenses, net $ 105 $ 107 $ 101
Total:
Premiums earned:
Property and casualty $ 5,260 $ 4,820 $ 4,422
Life 84 78 71
Premiums earned, net 5,344 4,898 4,493
Insurance losses and loss expenses:
Property and casualty 3,853 3,360 3,379
Life 105 107 101
Insurance losses and loss expenses, net $ 3,958 $ 3,467 $ 3,480
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Note 15. Postretirement Benefits
Pension plans
Our pension plans consist of a noncontributory defined benefit pension plan covering substantially all employees and an
unfunded supplemental employee retirement plan ("SERP") for certain members of executive and senior management of the
Erie Insurance Group. The pension plans provide benefits to covered individuals satisfying certain age and service
requirements. The defined benefit pension plan and SERP each provide benefits through a final average earnings formula.
Although Indemnity is the sponsor of these postretirement plans and records the funded status of these plans, the Exchange and
EFL reimburse Indemnity for approximately 56% of the annual benefit expense of these plans, which represents pension
benefits for Indemnity employees performing claims and EFL functions. For our funded pension plan, amounts are settled in
cash for the portion of pension costs allocated to the Exchange and EFL, respectively. For our unfunded plans, we pay the
obligations when due and amounts are settled in cash between entities when there is a payout.
Prior to 2003, the employee pension plan purchased annuities from EFL for certain plan participants that were receiving benefit
payments under the pension plan. These are nonparticipating annuity contracts under which EFL has unconditionally
contracted to provide specified benefits to beneficiaries; however, the pension plan remains the primary obliger to the
beneficiaries. A contingent liability of $25 million at December 31, 2014, exists in the event EFL does not honor the annuity
contracts.
Cost of pension plans
Pension plan cost includes the following components:
(in millions)
Erie Insurance Group
2014 2013 2012
Service cost for benefits earned $ 23 $ 27 $ 21
Interest cost on benefit obligation 28 26 24
Expected return on plan assets (32) (31) (27)
Prior service cost amortization 1 1 1
Net actuarial loss amortization 6 15 11
Pension plan cost
(1)
$ 26 $ 38 $ 30
(1) Pension plan costs represent the total cost for the Erie Insurance Group before reimbursements to Indemnity from the Exchange and EFL.
Actuarial assumptions
The following table describes the assumptions at December 31 used to measure the year-end obligations and the net periodic
benefit costs for the subsequent year:
Erie Insurance Group
2014 2013 2012 2011
Employee pension plan:
Discount rate 4.17% 5.11% 4.19% 4.99%
Expected return on assets 7.00 7.50 7.50 8.00
Compensation increases
(1)
3.32 4.15 4.15 4.15
SERP:
Discount rate – pre-retirement/post-retirement 4.17/3.67 5.11/4.61 4.19/3.69 4.99/4.49
Rate of compensation increase 5.00 6.00 6.00 6.00
(1) The rate of compensation increase for the employee plan is age-graded. An equivalent single compensation increase rate of 3.32% in 2014 and
4.15% in 2013 and 2012 would produce similar results.
The economic assumptions that have the most impact on the postretirement benefits expense are the discount rate and the long-
term rate of return on plan assets. The discount rate assumption used to determine the benefit obligation for 2014 was based
upon a yield curve developed from corporate bond yield information. The same methodology was employed to develop the
discount rates used to determine the benefit obligation for 2013 and 2012.
107
The pension plan's expected long-term rate of return represents the average rate of return to be earned on plan assets over the
period the benefits included in the benefit obligation are to be paid. To determine the expected long-term rate of return
assumption, we utilized models based upon rigorous historical analysis and forward-looking views of the financial markets
based upon key factors such as historical returns for the asset class' applicable indices, the correlations of the asset classes
under various market conditions and consensus views on future real economic growth and inflation. The expected future return
for each asset class is then combined by considering correlations between asset classes and the volatilities of each asset class to
produce a reasonable range of asset return results within which our expected long-term rate of return assumption falls.
Projected benefit obligations increased $180 million at December 31, 2014 compared to December 31, 2013. The largest factor
driving the increase was the change in the discount rate. Also contributing to this increase was the adoption of the newly issued
mortality tables, which was partially offset by the decrease related to other plan assumptions that were updated to reflect our
most recent actual experience.
Funding policy/funded status
Our funding policy is generally to contribute an amount equal to the greater of the target normal cost for the plan year or the
amount necessary to fund the plan to 100% plus interest to the date the contribution is made. Employer contributions of
$17 million were made to the defined benefit pension plan in January 2015. The following table sets forth the funded status of
the pension plans and the amounts recognized in the Consolidated Statements of Financial Position at December 31:
(in millions)
Erie Insurance Group
2014 2013
Funded status at end of year, included in Indemnity Other Liabilities
$ (189) $ (95)
Pension liabilities – due within one year $ 0 $ (1)
Pension liabilities – due after one year (189) (94)
Net amount recognized $ (189) $ (95)
Benefit obligations
Benefit obligations are described in the following tables. Accumulated and projected benefit obligations represent the
obligations of a pension plan for past service as of the measurement date. The accumulated benefit obligation is the present
value of pension benefits earned as of the measurement date based on employee service and compensation prior to that date. It
differs from the projected benefit obligation in that the accumulated benefit obligation includes no assumptions to reflect
expected future compensation. The following table sets forth a reconciliation of beginning and ending balances of the
projected benefit obligation, as well as the accumulated benefit obligation at December 31:
(in millions)
Erie Insurance Group
2014 2013
Projected benefit obligation, beginning of year
$ 557 $ 612
Service cost for benefits earned 23 27
Interest cost on benefit obligation 28 26
Plan amendments 0 1
Actuarial loss (gain) 140 (98)
Benefits paid (11) (11)
Projected benefit obligation, end of year
$ 737 $ 557
Accumulated benefit obligation, end of year
$ 583 $ 425
The following table describes plans with assets less than accumulated benefit obligation at December 31:
(in millions)
Erie Insurance Group
2014 2013
Projected benefit obligation $ 737 $ 557
Accumulated benefit obligation 583 425
Plan assets 548 462
Both the defined benefit pension plan and the SERP had accumulated benefit obligations in excess of plan assets at
December 31, 2014. The SERP had an accumulated benefit obligation in excess of plan assets at December 31, 2013.
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Pension assets
The following table sets forth a reconciliation of beginning and ending balances of the fair value of plan assets at December 31:
(in millions)
Erie Insurance Group
2014 2013
Fair value of plan assets, beginning of year
$ 462 $ 411
Actual gain on plan assets 73 43
Employer contributions 24 19
Benefits paid (11) (11)
Fair value of plan assets, end of year
$ 548 $ 462
Accumulated other comprehensive income
Net actuarial loss and prior service cost included in accumulated other comprehensive income that were not yet recognized as
components of net benefit costs were as follows:
(in millions)
Erie Insurance Group
2014 2013
Net actuarial loss $ 187 $ 95
Prior service cost 5 6
Net amount not yet recognized $ 192 $ 101
The estimated net actuarial loss and prior service cost for the pension plans that will be amortized from accumulated other
comprehensive income into pension cost during 2015 is $13 million and $1 million, respectively.
Other comprehensive income
Amounts recognized in other comprehensive income for pension plans:
(in millions)
Erie Insurance Group
2014 2013
Net actuarial loss (gain) arising during the year $ 98 $ (110)
Amortization of net actuarial loss (6) (15)
Amortization of prior service cost (1) (1)
Amendments 0
(1)
1
(2)
Total recognized in other comprehensive income $ 91 $ (125)
(1) The charges recognized as amendments were the result of factoring in the prior service cost for four new plan participants in 2014.
(2) The charges recognized as amendments were the result of factoring in the prior service cost for four new plan participants in 2013.
Asset allocation
The employee pension plan utilizes a return seeking and a liability asset matching allocation strategy. It is based upon the
understanding that 1) equity investments are expected to outperform debt investments over the long-term, 2) the potential
volatility of short-term returns from equities is acceptable in exchange for the larger expected long-term returns, and 3) a
portfolio structured across investment styles and markets (both domestic and foreign) reduces volatility. As a result, the
employee pension plan’s investment portfolio utilizes a broadly diversified asset allocation across domestic and foreign equity
and debt markets. The investment portfolio is composed of commingled pools that are dedicated exclusively to the
management of employee benefit plan assets.
109
The target and actual asset allocations for the portfolio are as follows for the years ended December 31:
Erie Insurance Group
Target asset
allocation
Target asset
allocation
Actual asset
allocation
Actual asset
allocation
Asset allocation:
2014 2013 2014 2013
Equity securities:
U.S. equity securities 35%
(1)
35% 37% 36%
Non-U.S. equity securities 20
(2)
20 19 20
Total equity securities 55 55 56 56
Debt securities 44
(3)
44 43 43
Other 1
(4)
1 1 1
Total 100% 100% 100% 100%
(1) U.S. equity securities – 22% seek to achieve excess returns relative to the Russell 2000 Index, while 30% seek to achieve excess returns relative to
the S&P 500. The remaining 48% of the allocation to U.S. equity securities are comprised of equity index funds that track the S&P 500.
(2) Non-U.S. equity securities – 11% are allocated to international small cap investments, while another 11% are allocated to international emerging
market investments. The remaining 78% of the Non-U.S. equity securities are allocated to investments seeking to achieve excess returns relative to
an international market index.
(3) Debt securities – 44% are allocated to long U.S. Treasury Strips, 44% are allocated to U.S. corporate bonds with an emphasis on long duration
bonds rated A or better, while the remaining 12% are allocated to floating rate high income leverage loans.
(4) Institutional money market fund.
The following tables represent the fair value measurements for the pension plan assets by major category and level of input:
Erie Insurance Group
At December 31, 2014
Fair value measurements of plan assets using:
(in millions)
Total
Quoted prices in
active markets for
identical assets
Level 1
Significant
observable
inputs
Level 2
Significant
unobservable
inputs
Level 3
Equity securities:
U.S. equity securities $ 202 $ 0 $ 202 $ 0
Non-U.S. equity securities 106 0 106 0
Total equity securities 308 0 308 0
Debt securities 237 0 237 0
Other 3 3 0 0
Total $ 548 $ 3 $ 545 $ 0
Erie Insurance Group
At December 31, 2013
Fair value measurements of plan assets using:
(in millions)
Total
Quoted prices in
active markets for
identical assets
Level 1
Significant
observable
inputs
Level 2
Significant
unobservable
inputs
Level 3
Equity securities:
U.S. equity securities $ 165 $ 0 $ 165 $ 0
Non-U.S. equity securities 94 0 94 0
Total equity securities 259 0 259 0
Debt securities 199 0 199 0
Other 4 4 0 0
Total $ 462 $ 4 $ 458 $ 0
Estimates of fair values of the pension plan assets are obtained primarily from our trustee and custodian of our pension plan.
Our Level 1 category includes a money market fund that is a mutual fund for which the fair value is determined using an
exchange traded price provided by the trustee and custodian. Our Level 2 category includes commingled pools. Estimates of
110
fair values for securities held by our commingled pools are obtained primarily from the trustee and custodian. The
methodologies used by the trustee and custodian that support a financial instrument Level 2 classification include multiple
verifiable, observable inputs including benchmark yields, reported trades, broker/dealer quotes, issuers spreads, two-sided
markets, benchmark securities, bids, offers, and reference data.
Estimated future benefit payments
The following table sets forth amounts of benefits expected to be paid over the next 10 years from our pension and other
postretirement plans as of December 31:
(in millions)
Erie Insurance Group
Year ending
December 31,
Expected future
benefit payments
2015 $ 13
2016 14
2017 16
2018 19
2019 21
2020 - 2024 150
Retiree health benefit plan
The retiree health benefit plan was terminated in 2006. We continue to provide retiree health benefits only to employees who
met certain age and service requirements on or before July 1, 2010. The accumulated benefit obligation and net periodic
benefit cost of this plan were not material to our consolidated financial statements.
Employee savings plan
All full-time and regular part-time employees are eligible to participate in a traditional qualified 401(k) or a Roth
401(k) savings plan. We match 100% of the participant contributions up to 3% of compensation and 50% of participant
contributions over 3% and up to 5% of compensation. Matching contributions paid to the plan were $11 million in 2014,
$10 million in 2013, and $9 million in 2012. Employees are permitted to invest the employer-matching contributions in our
Class A common stock. Employees, other than executive and senior officers, may sell the shares at any time without
restriction; sales by executive and senior officers are subject to restrictions imposed by our insider trading policies and the
federal securities laws. The plan acquires shares in the open market necessary to meet the obligations of the plan. Plan
participants held 0.2 million shares of our Class A common stock at December 31, 2014 and 2013.
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Note 16. Incentive and Deferred Compensation Plans
Annual incentive plan
Our annual incentive plan is a bonus plan that pays cash to our executive and senior vice presidents annually. The cash awards
are based on attainment of corporate and individual performance measures, which can include various financial measures. The
plan includes a funding qualifier which considers Indemnity’s financial results, based on operating income, before a payout can
be made to plan participants. If the funding qualifier is met, plan participants are eligible to receive the incentive based upon
specific performance measures. The measures are established at the beginning of each year by the Executive Compensation
and Development Committee of our Board of Directors (“ECDC”), with ultimate approval by the full Board of Directors. For
2014 and 2013, the performance measures primarily included the Property and Casualty Group’s direct written premium and
statutory combined ratio.
Long-term incentive plan
Our long-term incentive plan (“LTIP”) is a performance based incentive plan designed to reward executive and senior vice
presidents who can have a significant impact on our long-term performance and to further align the interests of such employees
with those of our shareholders. The LTIP permits grants of performance shares or units, to be satisfied with shares of our Class
A common stock or cash payment as determined by the ECDC. The ECDC determines the form of the award to be granted at
the beginning of each performance period, which is generally a three-year period. The number of shares of the Company’s
common stock authorized for grant under the LTIP is 1.5 million shares, with no one person able to receive more than
250,000 shares or the equivalent of $5 million during any one performance period. We repurchase our Class A common stock
on the open market to settle plan awards. We do not issue new shares of common stock to settle plan awards. LTIP awards are
considered vested at the end of each applicable performance period.
The LTIP provides the recipient the right to earn performance shares or units based on the level of achievement of performance
goals as defined by us. Performance measures and a peer group of property and casualty companies to be used for comparison
are determined by the ECDC. The performance measures for the 2014, 2013 and 2012 awards were the reported combined
ratio, growth in direct written premiums and return on invested assets over a three-year performance period as compared to the
results of the peer group over the same period. Because the award is based upon a comparison to results of a peer group over a
three-year period, the award accrual is based upon estimates of probable results for the remaining performance period. This
estimate is subject to variability if our results or the results of the peer group are substantially different than the results we
project.
The fair value of LTIP awards is measured at each reporting date at the current share price of our Class A common stock. A
liability is recorded and compensation expense is recognized ratably over the performance period.
At December 31, 2014, the plan awards for the 2012-2014 performance period were fully vested. Distributions will be made in
2015 once peer group financial information becomes available. The estimated plan award based upon the peer group
information as of September 30, 2014 is $9 million. At December 31, 2013, the awards for the 2011-2013 period were fully
vested. The average share price on the date the shares were delivered to plan participants for the 2011-2013 performance
period was $75.36. The plan award of 54,371 shares of Class A common stock with a market value of approximately
$4 million was paid in June 2014. At December 31, 2012, the awards for the 2010-2012 performance period were fully vested
and the related cash award of $5 million was paid in May 2013.
Earned compensation costs are allocated to related entities and reimbursed to Indemnity in cash once the payout is made. The
total compensation cost charged to operations related to these LTIP awards was $13 million in 2014, $8 million in 2013, and
$5 million in 2012. The related tax benefits recognized in income were $4 million in 2014, $3 million in 2013, and $2 million
in 2012.
At December 31, 2014, there was $11 million of total unrecognized compensation cost for non-vested LTIP awards related to
open performance periods. Unrecognized compensation is expected to be recognized over a period of two years.
Equity compensation plan
Effective April 17, 2013, our Board of Directors approved an equity compensation plan (“ECP”) designed to reward key
employees, as determined by the ECDC or the chief executive officer, who can have a significant impact on our long-term
performance and to further align the interests of such employees with those of our shareholders. The ECP permits grants of
restricted shares, restricted share units and other share based awards, to be satisfied with shares of our Class A common stock or
cash. The ECDC determines the form of the award to be granted at the beginning of each performance period. The number of
shares of Indemnity’s Class A common stock authorized for grant under the ECP is 100,000 shares, with no one person able to
112
receive more than 5,000 shares in a calendar year. Share awards are settled through the repurchase of our Class A common
stock on the open market. We do not issue new shares of common stock to satisfy plan awards.
Restricted share awards may be entitled to receive dividends payable during the performance period, or, if subject to
performance goals, to receive dividend equivalents payable upon vesting. Dividend equivalents may provide for the crediting
of interest or hypothetical reinvestment experience payable after expiration of the performance period.
Vesting conditions are determined at the time the award is granted and may include continuation of employment for a specific
period, satisfaction of performance goals and the defined performance period, and the satisfaction of any other terms and
conditions as determined to be appropriate. The plan is to remain in effect until December 31, 2022, unless earlier amended or
terminated by our Board of Directors. In 2014, 8,750 restricted stock units were granted under the plan. The total
compensation charged to operations related to these ECP awards was $0.3 million in 2014. Unrecognized compensation
expense of $1 million is expected to be recognized over a period of four years. There were no awards granted during 2013.
Deferred compensation plans
Our deferred compensation plans are arrangements for our executive and senior vice presidents and outside directors that
allows participants to elect to defer receipt of a portion of their compensation until a later date. Employer 401(k) matching
contributions that are in excess of the annual contribution or compensation limits are also credited to the participant accounts
for those who elected to defer receipt of some portion of their base salary. The deferred compensation plan for our outside
directors allows participants to defer receipt of a portion of their director and meeting fees until a later date. Employees or
outside directors participating in the respective plans select hypothetical investment funds for their deferrals which are credited
with the hypothetical returns generated.
The following summarizes the incentive and deferred compensation plans for the years ended December 31:
(in millions)
Erie Insurance Group
2014 2013 2012
Awards, employer match, and hypothetical earnings by plan:
Annual incentive plan awards $ 6 $ 8 $ 5
Long-term incentive plan awards 13 8 5
Deferred compensation plans, employer match, and hypothetical earnings 3 2 1
Total plan awards and earnings 22 18 11
Total plan awards paid (15) (10) (8)
Compensation deferred under the plans 0 0 0
Distributions from the deferred compensation plans (1) (1) (1)
Gross incentive plan and deferred compensation liabilities at end of period $ 39 $ 33 $ 26
Stock compensation plan for outside directors
We have a stock compensation plan for our outside directors to further align the interests of directors with those of our
shareholders that provides for a portion of the directors’ annual compensation in shares of our Class A common stock. Each
director vests in the grant 25% every three months over the course of a year. Dividends paid by us are reinvested into each
directors’ account as additional share credits which vest immediately. Upon ending board service, directors are paid shares of
our Class A common stock equal to the number of share credits in their deferred stock account. Our practice is to repurchase
shares of our Class A common stock in the open market to satisfy these awards. We do not issue new shares of common stock
to directors. The annual charge related to these awards totaled $2 million, $1 million and $0.5 million in 2014, 2013 and 2012,
respectively.
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Note 17. Indemnity Capital Stock
Class A and B common stock
We have two classes of common stock: Class A which has a dividend preference and Class B which has voting power and a
conversion right. Each share of Class A common stock outstanding at the time of the declaration of any dividend upon shares
of Class B common stock shall be entitled to a dividend payable at the same time, at the same record date, and in an amount at
least equal to 2/3 of 1.0% of any dividend declared on each share of Class B common stock. We may declare and pay a
dividend in respect to Class A common stock without any requirement that any dividend be declared and paid in respect to
Class B common stock. Sole shareholder voting power is vested in Class B common stock except insofar as any applicable law
shall permit Class A common shareholders to vote as a class in regards to any changes in the rights, preferences, and privileges
attaching to Class A common stock. Holders of Class B shares may, at their option, convert their shares into Class A shares at
the rate of 2,400 Class A shares per Class B share. There were no shares of Class B common stock converted into Class A
common stock in 2014 and 2013. In 2012, four shares of Class B common stock were converted into Class A common stock.
There is no provision for conversion of Class A shares to Class B shares, and, Class B shares surrendered for conversion cannot
be reissued.
Stock repurchases
A stock repurchase program was authorized for our outstanding Class A nonvoting common stock beginning January 1, 2004.
Treasury shares are recorded in the Consolidated Statements of Financial Position at total cost based upon trade date. Shares
repurchased under this program, based upon trade date, totaled 272,057 at a total cost of $19.2 million during 2014, and
431,556 shares at a total cost of $31.2 million during 2013. In October 2011, our Board of Directors approved a continuation
of the current stock repurchase program for a total of $150 million, with no time limitation. We had approximately $18 million
of repurchase authority remaining under this program at December 31, 2014, based upon trade date.
In 2014, we repurchased 64,398 shares of our outstanding Class A nonvoting common stock outside of our publicly announced
share repurchase program at a total cost of $4.9 million. Of this amount, we repurchased 2,800 shares of our outstanding Class
A nonvoting common stock at a total cost of $201,411, or $71.93 per share, for the vesting of stock-based awards for executive
management. These shares were delivered to executive management in January 2014. In May 2014, we repurchased
7,227 shares of our outstanding Class A nonvoting common stock at a total cost of $552,503, or $76.45 per share, for the
vesting of stock-based awards for a former outside director. These shares were delivered in May 2014. In May and June 2014,
we repurchased 54,371 shares of our outstanding Class A nonvoting common stock at a total cost of $4,143,544, or $76.21 per
share, for the vesting of stock-based awards in conjunction with our long-term incentive plan. These shares were delivered to
plan participants in June 2014.
In 2013, we also repurchased 3,477 shares of our outstanding Class A nonvoting common stock outside of our publicly
announced share repurchase program at a total cost of $255,454. Of this amount, 444 and 3,033 shares were purchased in
January 2013 and July 2013, respectively, for $30,927, or $69.65 per share, and $224,527, or $74.03 per share, respectively, to
settle payments due to a retired executive under our long-term incentive plan. These shares were delivered to the plan
participant in January 2013 and July 2013.
114
Note 18. Indemnity Accumulated Other Comprehensive Loss
Changes in Indemnity's accumulated other comprehensive loss by component attributable to the Indemnity shareholder interest
is presented as follows for the year ended December 31:
Indemnity Shareholder Interest
(in millions)
Unrealized
holding gains
(losses) on
available-for-
sale securities
Postretirement
plans Total
Balance at December 31, 2012 $ 13 $
(146
) $
(133
)
Other comprehensive (loss) income before reclassifications, net of tax (6) 71 65
Amounts reclassified from accumulated other comprehensive income
(loss), net of tax
(1)
(1
) 10 9
Net current period other comprehensive (loss) income, net of tax (7) 81 74
Balance at December 31, 2013 $ 6 $
(65
) $
(59
)
Other comprehensive income (loss) before reclassifications, net of tax 2 (65) (63)
Amounts reclassified from accumulated other comprehensive income
(loss), net of tax
(1)
(1
) 5 4
Net current period other comprehensive income (loss), net of tax 1 (60) (59)
Balance at December 31, 2014 $ 7 $
(125
) $
(118
)
(1) See the following table for details about these reclassifications.
Amounts reclassified out of accumulated other comprehensive income (loss) and the related affected line item in the
Consolidated Statements of Operations where net income is presented are as follows for the year ended December 31:
Erie Insurance Group
(in millions)
Amounts reclassified from
accumulated other
comprehensive income
(loss)
(1)
2014 2013
Unrealized holding gains (losses) on available-for-sale securities:
Net realized investment gains
$ 32 $ 3
Net impairment losses recognized in earnings
(4) (13)
Income (loss) from operations before income taxes and noncontrolling interest 28 (10)
Provision for income taxes 10 (3)
Net income (loss) 18 (7)
Less: Net income (loss) attributable to noncontrolling interest in consolidated entity –
Exchange 17
(8
)
Net income attributable to Indemnity $ 1 $ 1
Amortization of postretirement plan items
(2)
:
Prior service cost
$ (1) $ (1)
Net actuarial loss
(6) (15)
Loss from operations before income taxes and noncontrolling interest (7) (16)
Provision for income taxes (2) (6)
Net loss (5) (10)
Less: Net loss attributable to noncontrolling interest in consolidated entity – Exchange — —
Net loss attributable to Indemnity $ (5) $ (10)
Net loss attributable to Indemnity $ (4) $ (9)
(1) Positive amounts indicate net income, while negative amounts indicate net loss.
(2) Components of accumulated other comprehensive income (loss) related to postretirement plan items are included in the computation of pension plan
cost. See Note 15, "Postretirement Benefits," for additional details.
115
Note 19. Commitments and Contingencies
Indemnity has contractual commitments to invest up to $24 million related to its limited partnership investments at
December 31, 2014. These commitments are split between private equity securities of $10 million, mezzanine debt securities
of $9 million, and real estate activities of $5 million. These commitments will be funded as required by the limited partnership
agreements.
The Exchange, including EFL, has contractual commitments to invest up to $459 million related to its limited partnership
investments at December 31, 2014. These commitments are split between private equity securities of $141 million, mezzanine
debt securities of $156 million, and real estate activities of $162 million. These commitments will be funded as required by the
limited partnership agreements.
We are involved in litigation arising in the ordinary course of conducting business. In accordance with current accounting
standards for loss contingencies and based upon information currently known to us, we establish reserves for litigation when it
is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss or range of loss can
be reasonably estimated. When no amount within the range of loss is a better estimate than any other amount, we accrue the
minimum amount of the estimable loss. To the extent that such litigation against us may have an exposure to a loss in excess of
the amount we have accrued, we believe that such excess would not be material to our consolidated financial condition, results
of operations, or cash flows. Legal fees are expensed as incurred. We believe that our accruals for legal proceedings are
appropriate and, individually and in the aggregate, are not expected to be material to our consolidated financial condition,
operations, or cash flows.
We review all litigation on an ongoing basis when making accrual and disclosure decisions. For certain legal proceedings, we
cannot reasonably estimate losses or a range of loss, if any, particularly for proceedings that are in their early stages of
development or where the plaintiffs seek indeterminate damages. Various factors, including, but not limited to, the outcome of
potentially lengthy discovery and the resolution of important factual questions, may need to be determined before probability
can be established or before a loss or range of loss can be reasonably estimated. If the loss contingency in question is not both
probable and reasonably estimable, we do not establish an accrual and the matter will continue to be monitored for any
developments that would make the loss contingency both probable and reasonably estimable. In the event that a legal
proceeding results in a substantial judgment against, or settlement by, us, there can be no assurance that any resulting liability
or financial commitment would not have a material adverse effect on the financial condition, results of operations, or cash
flows of the Indemnity shareholder interest or the consolidated financial statements of Erie Indemnity Company.
We are subject to escheatment laws and regulations requiring the identification, reporting and payment to the state of unclaimed
or abandoned funds of our policyholders, annuitants, claimants and shareholders. We are also subject to audit and examination
for compliance with these requirements.
In August 2012, we were notified that we would be subject to an audit of our compliance with the unclaimed property laws of a
number of jurisdictions both within and outside our operating territory. The audit commenced in April 2013 and is ongoing.
We continue to cooperate with the auditors, responding to several requests for information and supplying data runs, as
requested. Additionally, EFL has been named in a lawsuit filed by the State Treasurer of West Virginia. The Complaint alleges
that EFL has failed to comply with the West Virginia Uniform Unclaimed Property Act. EFL filed a motion to dismiss and a
favorable decision was rendered in December 2013 with the Court dismissing the Complaint with prejudice. The State
Treasurer appealed the dismissal of the lawsuit in January 2014. Briefing was completed in the fall of 2014. Oral argument
before the West Virginia Supreme Court is scheduled for April 8, 2015.
It is probable that ongoing inquiries, audits, and other regulatory activity will result in the payment of additional death claims
and escheatment of funds, as well as possible fines. EFL will incur expenses to identify death claims, confirm that benefits are
due and notify the beneficiaries. At this time, we are not able to reasonably estimate the possible loss or range of loss related to
this issue due to the early stage of development.
116
Note 20. Supplementary Data on Cash Flows
Indirect method of cash flows
A reconciliation of net income to net cash provided by operating activities as presented in the Consolidated Statements of Cash
Flows is as follows for the years ended December 31:
(in millions)
Erie Insurance Group
2014 2013 2012
Cash flows from operating activities:
Net income $ 573 $ 1,048 $ 619
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 23 21 17
Amortization of deferred policy acquisition costs 849 778 715
Deferred income tax expense 4 198 118
Realized gains and impairments on investments (189) (758) (418)
Equity in earnings of limited partnerships (113) (161) (131)
Net amortization of bond premium 49 36 28
Increase in deferred compensation 6 8 2
Limited partnership distributions 131 176 164
Increase in receivables, reinsurance recoverables and reserve credits (159) (112) (166)
(Increase) decrease in prepaid expenses (2) 24 63
Increase in deferred policy acquisition costs (892) (816) (743)
Increase (decrease) in accounts payable and accrued expenses 98 18 (28)
Increase in accrued commissions and agent bonuses 35 28 20
Increase in loss reserves 106 148 99
Increase in future life policy benefits and claims reserves 24 34 31
Increase in unearned premiums 236 233 187
Net cash provided by operating activities $ 779 $ 903 $ 577
Note 21. Statutory Information
Accounting principles used to prepare statutory financial statements differ from those used to prepare financial statements
under GAAP. Prescribed statutory accounting practices (“SAP”) include state laws, regulations, and general administration
rules, as well as a variety of publications from the National Association of Insurance Commissioners (“NAIC”). The statutory
financial statements of the Exchange and its subsidiaries, EIC, EPC, Flagship, and EFL, are prepared in accordance with
accounting practices prescribed and permitted by the Pennsylvania Insurance Department. ENY prepares its statutory financial
statements in accordance with accounting practices prescribed by the New York Insurance Department.
Financial statements prepared under statutory accounting principles focus on the solvency of the insurer and generally provide
a more conservative approach than under GAAP. Differences between SAP and GAAP include the valuation of investments,
deferred policy acquisition cost assets, the actuarial assumptions used in life reserves, deferred tax assets, and unearned
subscriber fees.
Statutory net income and capital and surplus of the Exchange and its subsidiaries as determined in accordance with SAP
prescribed or permitted by insurance regulatory authorities are as follows:
SAP Net Income (Loss) SAP Capital and Surplus
Years ended December 31, At December 31,
Exchange and its subsidiaries (in millions) 2014 2013 2012 2014 2013
Property and casualty insurance operations:
Erie Insurance Exchange $ 353 $ 479 $ 311 $ 6,817 $ 6,467
Erie Insurance Company 12 17 14 312 294
Erie Insurance Company of New York 0 1 (1) 28 22
Erie Insurance Property & Casualty Company 0 0 0 12 12
Flagship City Insurance Company 0 0 0 12 12
Life insurance operations:
Erie Family Life Insurance Company 10 15 25 303 291
117
The minimum statutory capital and surplus requirements under Pennsylvania and New York law for the Exchange’s property
and casualty insurance subsidiaries amounts to $12 million. The Exchange’s property and casualty insurance subsidiaries’ total
statutory capital and surplus significantly exceed these minimum requirements, totaling $364 million at December 31, 2014.
The risk-based capital levels of all members of the Property and Casualty Group and EFL significantly exceed the minimum
requirements. Cash and securities with a carrying value of $15 million were deposited by the property and casualty and life
entities with regulatory authorities under statutory requirements at December 31, 2014.
As prescribed by the Insurance Department of the Commonwealth of Pennsylvania, the Exchange records unearned subscriber
fees (fees to the attorney-in-fact) as deductions from unearned premium reserve and charges current operations on a pro-rata
basis over the periods covered by the policies. The Pennsylvania-domiciled members of the Property and Casualty Group
discount workers compensation loss reserves on a non-tabular basis as prescribed by the Insurance Department of the
Commonwealth of Pennsylvania. The Exchange’s NAIC prepared statutory surplus, excluding the impact of the Pennsylvania
prescribed practices, would have been $6.2 billion at December 31, 2014. EIC’s NAIC prepared statutory surplus, excluding
the impact of the Pennsylvania prescribed practices, would have been $307 million at December 31, 2014. EPC and Flagship
record the discounting of workers compensation loss reserves on a direct basis, however, after application of the intercompany
pooling arrangement, there is no impact on these financial statements.
The amount of dividends that can be paid to the Exchange without the prior approval by the Pennsylvania Insurance
Commissioner by EIC, EPC, and Flagship, the Exchange’s Pennsylvania-domiciled property and casualty insurance
subsidiaries, is limited to not more than the greater of: (a) 10% of statutory surplus as reported in the last annual statement, or
(b) net income as reported in the last annual statement. The amount of dividends that EIC’s New York-domiciled property and
casualty subsidiary, ENY, can pay without the prior approval by the New York Superintendent of Insurance is limited to the
lesser of: (a) 10% of statutory surplus as reported in the last annual statement, or (b) 100% of adjusted net investment income
during such period. In 2015, the maximum dividend payout that the Exchange could receive from its property and casualty
insurance subsidiaries would be $35 million. No dividends were paid by these property and casualty insurance subsidiaries in
2014, 2013 or 2012.
The amount of dividends that can be paid to the Exchange without the prior approval by the Pennsylvania Insurance
Commissioner by EFL, a Pennsylvania-domiciled life insurer, is limited by statute to the greater of: (a) 10% of statutory surplus
as shown in the last annual statement on file with the commissioner, or (b) net income as reported in the last annual statement,
but shall not include pro-rata distribution of any class of the insurer’s own securities. Accordingly, the maximum dividend
payout that the Exchange could receive in 2015 without prior Pennsylvania Commissioner approval is $30 million. There were
no dividends paid to the Exchange in 2014, 2013 or 2012.
118
Note 22. Indemnity Supplemental Information
Consolidating Statement of Financial Position
Erie Insurance Group
(in millions)
At December 31, 2014
Assets
Indemnity
shareholder
interest
Exchange
noncontrolling
interest
Reclassifications
and
eliminations
Erie
Insurance
Group
Investments
Available-for-sale securities, at fair value:
Fixed maturities $ 564 $ 9,007 $ — $ 9,571
Equity securities 25 850 — 875
Trading securities, at fair value — 3,223 — 3,223
Limited partnerships 113 866 — 979
Other invested assets 1 20 — 21
Total investments 703 13,966 — 14,669
Cash and cash equivalents 92 422 — 514
Premiums receivable from policyholders — 1,281 — 1,281
Reinsurance recoverable — 161 — 161
Deferred income tax asset 37 0 — 37
Deferred acquisition costs — 595 — 595
Other assets 127 374 — 501
Receivables from the Exchange and other affiliates 335 — (335) —
Note receivable from EFL 25 — (25) —
Total assets $ 1,319 $ 16,799 $ (360) $ 17,758
Liabilities
Losses and loss expense reserves $ — $ 3,853 $ — $ 3,853
Life policy and deposit contract reserves — 1,812 — 1,812
Unearned premiums — 2,834 — 2,834
Deferred income tax liability — 490 — 490
Other liabilities 616 530 (360) 786
Total liabilities 616 9,519 (360) 9,775
Shareholders’ equity and noncontrolling interest
Total Indemnity shareholders’ equity 703 — — 703
Noncontrolling interest in consolidated entity – Exchange — 7,280 — 7,280
Total equity 703 7,280 — 7,983
Total liabilities, shareholders’ equity, and
noncontrolling interest
$ 1,319 $ 16,799 $
(360
) $ 17,758
119
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 — 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 — 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
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 $331 million and $296 million at December 31,
2014 and 2013, respectively. The receivable from EFL for expense allocations and interest on the surplus note totaled
$4 million at December 31, 2014 and 2013.
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 2014 and 2013.
120
Income attributable to Indemnity shareholder interest
Indemnity Shareholder Interest
(in millions)
Years ended December 31,
2014 2013 2012
Management operations:
Management fee revenue, net $ 1,376 $ 1,266 $ 1,157
Service agreement revenue 31 31 31
Total revenue from management operations 1,407 1,297 1,188
Cost of management operations 1,184 1,088 983
Income from management operations before taxes
223 209 205
Investment operations:
Net investment income 16 15 16
Net realized gains on investments 1 1 5
Net impairment losses recognized in earnings 0 0 0
Equity in earnings of limited partnerships 11 22 15
Income from investment operations before taxes
28 38 36
Income from operations before income taxes
251 247 241
Provision for income taxes 83 84 81
Net income attributable to Indemnity
$ 168 $ 163 $ 160
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 $378 million, $351 million and $343 million in 2014,
2013 and 2012, respectively, and $37 million, $32 million and $30 million in 2014, 2013 and 2012, 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 for the facilities totaled $8 million in 2014 and $6 million in 2013 and 2012. 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
2014, 2013 and 2012.
121
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,
2014 2013 2012
Management fee received $ 1,349 $ 1,240 $ 1,135
Service agreement fee received 31 31 31
Net investment income received 23 22 28
Limited partnership distributions 15 27 21
(Decrease) increase in reimbursements collected from affiliates (7) 6 (4)
Commissions and bonuses paid to agents (749) (681) (617)
Salaries and wages paid (153) (147) (130)
Pension contribution and employee benefits paid (49) (41) (38)
General operating expenses paid (179) (153) (139)
Income taxes paid (95) (86) (82)
Net cash provided by operating activities 186 218 205
Net cash (used in) provided by investing activities
(4
)
(65
) 95
Net cash used in financing activities
(139
)
(116
)
(299
)
Net increase in cash and cash equivalents 43 37 1
Cash and cash equivalents, beginning of year 49 12 11
Cash and cash equivalents, end of year $ 92 $ 49 $ 12
122
Note 23. Quarterly Results of Operations (unaudited)
Erie Insurance Group
Year ended December 31, 2014
(in millions, except per share data)
First
quarter
Second
quarter
Third
quarter
Fourth
quarter
Year
Revenues $ 1,511 $ 1,598 $ 1,426 $ 1,589 $ 6,124
Benefits and expenses 1,355 1,451 1,276 1,212 5,294
Income from operations before income taxes and
noncontrolling interest
156 147 150 377 830
Net income 109 103 108 253 573
Less: Net income attributable to noncontrolling interest in
consolidated entity – Exchange
63 54 61 227 405
Net income attributable to Indemnity $ 46 $ 49 $ 47 $ 26 $ 168
Earnings per share
(1)
Net income attributable to Indemnity per share
Class A common stock – basic $ 0.99 $ 1.05 $ 1.01 $ 0.54 $ 3.59
Class A common stock – diluted $ 0.88 $ 0.94 $ 0.90 $ 0.48 $ 3.18
Class B common stock – basic $ 149 $ 158 $ 151 $ 81 $ 539
Class B common stock – diluted $ 149 $ 158 $ 151 $ 81 $ 538
(1) The cumulative sum of quarterly basic and diluted net income per share amounts may not equal total basic and diluted net income per share for the
year due to differences in weighted average shares and equivalent shares outstanding for each of the periods presented.
Erie Insurance Group
Year ended December 31, 2013
(in millions, except per share data)
First
quarter
Second
quarter
Third
quarter
Fourth
quarter
Year
Revenues $ 1,571 $ 1,426 $ 1,577 $ 1,697 $ 6,271
Benefits and expenses 1,135 1,163 1,179 1,227 4,704
Income from operations before income taxes and
noncontrolling interest
436 263 398 470 1,567
Net income 290 177 267 314 1,048
Less: Net income attributable to noncontrolling interest in
consolidated entity – Exchange
253 133 221 278 885
Net income attributable to Indemnity $ 37 $ 44 $ 46 $ 36 $ 163
Earnings per share
(1)
Net income attributable to Indemnity per share
Class A common stock – basic $ 0.78 $ 0.95 $ 0.98 $ 0.75 $ 3.46
Class A common stock – diluted $ 0.69 $ 0.84 $ 0.87 $ 0.67 $ 3.08
Class B common stock – basic $ 117 $ 142 $ 147 $ 113 $ 520
Class B common stock – diluted $ 117 $ 142 $ 147 $ 113 $ 519
(1) The cumulative sum of quarterly basic and diluted net income per share amounts may not equal total basic and diluted net income per share for the
year due to differences in weighted average shares and equivalent shares outstanding for each of the periods presented.
Note 24. Subsequent Events
No items were identified in the period subsequent to the financial statement date that required adjustment or disclosure.
123
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed
under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and
communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for
timely decisions regarding required disclosures.
As required by the Securities and Exchange Commission Rule 13a-15(e), we carried out an evaluation, under the supervision
and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2014. Based upon the
foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
effective.
Changes in Internal Control over Financial Reporting
There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect our internal controls over financial reporting. Our process for
evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of
established controls and procedures.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting of Erie
Indemnity Company, as defined in Rules 13a-15(f) under the Exchange Act. Under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of the Erie Indemnity Company’s internal control over financial reporting based upon the framework in the
Internal Control-Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway
Commission. Based upon our evaluation under the framework in the Internal Control-Integrated Framework issued in 2013,
management has concluded that Erie Indemnity Company’s internal control over financial reporting was effective as of
December 31, 2014.
/s/ Terrence W. Cavanaugh
/s/ Marcia A. Dall
/s/ Gregory J. Gutting
Terrence W. Cavanaugh
Marcia A. Dall
Gregory J. Gutting
President and
Executive Vice President and
Senior Vice President and
Chief Executive Officer
Chief Financial Officer
Controller
February 26, 2015
February 26, 2015
February 26, 2015
Our independent auditor, Ernst & Young LLP, a registered public accounting firm, has issued an attestation report on our
internal control over financial reporting. This report appears on the following page.
ITEM 9B. OTHER INFORMATION
There was no additional information in the fourth quarter of 2014 that has not already been filed in a Form 8-K.
124
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Erie Indemnity Company
We have audited Erie Indemnity Company’s internal control over financial reporting as of December 31, 2014, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission 2013 framework (the COSO criteria). Erie Indemnity Company’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Erie Indemnity Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated statements of financial position of Erie Indemnity Company as of December 31, 2014 and 2013, and the
related consolidated statements of operations, comprehensive income, shareholders’ equity and noncontrolling interest, and
cash flows for each of the three years in the period ended December 31, 2014 of Erie Indemnity Company and our report dated
February 26, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young
Philadelphia, PA
February 26, 2015
125
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information with respect to our outside directors, audit committee and audit committee financial experts and Section
16(a) beneficial ownership reporting compliance, is incorporated by reference to the information statement on Form 14(C) to
be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2014.
We have adopted a Code of Conduct that applies to all of our outside directors, officers and employees. In addition to this, we
have adopted a Code of Ethics for Senior Financial Officers that also applies to our Chief Executive Officer, Chief Financial
Officer, Chief Accounting Officer and any other person performing similar functions. We have previously filed a copy of this
Code of Conduct and Code of Ethics for Senior Financial Officers as Exhibit 14.1 and 14.2, respectively, to the Registrant's
Form 8-K as filed with the Securities and Exchange Commission on April 25, 2012. Our Code of Conduct and Code of Ethics
for Senior Financial Officers are also available on our website at www.erieinsurance.com.
Executive Officers of the Registrant
Name
Age as of
12/31/2014
Principal Occupation for Past Five Years
and Positions with Erie Insurance Group
President & Chief Executive Officer:
Terrence W. Cavanaugh 61 President and Chief Executive Officer of Erie Indemnity Company
since July 29, 2008; Director, Erie Indemnity Company, EFL, EIC,
Flagship, ENY and EPC.
Executive Vice Presidents:
Richard F. Burt, Jr. 51 Executive Vice President - Products since August 22, 2012; Senior
Vice President, Actuarial, and Chief Actuary, July 2011 through
August 2012; Partner and Western Region Practice Leader, Actuarial
Risk & Analytics, Deloitte Consulting, LLP, 2002 to July 2011;
Director, EFL, EIC, Flagship, ENY, and EPC.
Marcia A. Dall 51 Executive Vice President and Chief Financial Officer since
March 30, 2009; Director, EFL, EIC, Flagship, ENY and EPC.
George D. Dufala 43 Executive Vice President – Services since September 1, 2010; Senior
Vice President, Erie Family Life Insurance Company, October 2008
through August 2010; Director, EFL, EIC, Flagship, ENY and EPC.
Robert C. Ingram, III 56 Executive Vice President and Chief Information Officer since
August 13, 2012; Senior Vice President and Chief Information
Officer (for Commercial Lines, Hartford Investment Management
Company and Enterprise Risk Management), The Hartford Financial
Services Group, February 2011 through August 2012; Senior Vice
President and Chief Information Officer, Commercial and Consumer
Markets, The Hartford Financial Services Group, August 2009
through February 2011; Director, EFL, EIC, Flagship, ENY, and
EPC.
John F. Kearns 55 Executive Vice President – Sales & Marketing since September 1,
2010; Senior Vice President, Commercial Lines Division,
February 2007 through August 2010; Director, EFL, EIC, Flagship,
ENY and EPC.
Sean J. McLaughlin 59 Executive Vice President, Secretary and General Counsel since
August 26, 2013; Chief Judge, United States District Court for the
Western District of Pennsylvania, April 2013 through August 2013;
United States District Judge for the Western District of
Pennsylvania, October 1994 through April 2013; Director, EFL, EIC,
Flagship, ENY and EPC.
126
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item with respect to executive compensation is incorporated by reference to the information
statement on Form 14(C) to be filed with the Securities and Exchange Commission no later than 120 days after December 31,
2014.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information with respect to security ownership of certain beneficial owners and management and securities authorized for
issuance under equity compensation plans, is incorporated by reference to the information statement on Form 14(C) to be filed
with the Securities and Exchange Commission no later than 120 days after December 31, 2014.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information with respect to certain relationships with our outside directors is incorporated by reference to the information
statement on Form 14(C) to be filed with the Securities and Exchange Commission no later than 120 days after December 31,
2014.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the information statement on Form 14(C) to be filed with
the Securities and Exchange Commission no later than 120 days after December 31, 2014.
127
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements
Included in Item 8 “Financial Statements and Supplementary Data” contained in this report.
Erie Indemnity Company:
• Report of Independent Registered Public Accounting Firm on the Effectiveness of Internal Control over
Financial Reporting
• Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements
• Consolidated Statements of Operations for the three years ended December 31, 2014, 2013 and 2012
• Consolidated Statements of Comprehensive Income for the three years ended December 31, 2014, 2013 and
2012
• Consolidated Statements of Financial Position as of December 31, 2014 and 2013
• Consolidated Statements of Shareholders’ Equity and Noncontrolling Interest for the three years ended
December 31, 2014, 2013 and 2012
• Consolidated Statements of Cash Flows for the three years ended December 31, 2014, 2013 and 2012
• Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Page
Erie Indemnity Company:
Summary of Investments – Other than Investments in Related Parties
Supplementary Insurance Information
Reinsurance
Supplemental Information Concerning Property-Casualty Insurance Operations
All other schedules are not required, not applicable or the information is included in the financial statements or notes thereto.
3. Exhibit Index
Schedule I. 129
Schedule III. 130
Schedule IV. 131
Schedule VI. 132
133
128
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
February 26, 2015 ERIE INDEMNITY COMPANY
(Registrant)
By: /s/ Terrence W. Cavanaugh
Terrence W. Cavanaugh, President and CEO
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the date indicated.
February 26, 2015 /s/ Terrence W. Cavanaugh
Terrence W. Cavanaugh, President and CEO
(Principal Executive Officer)
/s/ Marcia A. Dall
Marcia A. Dall, Executive Vice President & CFO
(Principal Financial Officer)
/s/ Gregory J. Gutting
Gregory J. Gutting, Senior Vice President & Controller
(Principal Accounting Officer)
Board of Directors:
/s/ J. Ralph Borneman, Jr.
/s/ Claude C. Lilly, III
J. Ralph Borneman, Jr.
Claude C. Lilly, III
/s/ Terrence W. Cavanaugh
/s/ Thomas W. Palmer
Terrence W. Cavanaugh
Thomas W. Palmer
/s/ Jonathan Hirt Hagen
/s/ Martin P. Sheffield
Jonathan Hirt Hagen
Martin P. Sheffield
/s/ Susan Hirt Hagen
/s/ Richard L. Stover
Susan Hirt Hagen
Richard L. Stover
/s/ Thomas B. Hagen
/s/ Elizabeth A. Vorsheck
Thomas B. Hagen, Chairman
Elizabeth A. Vorsheck
/s/ C. Scott Hartz
/s/ Robert C. Wilburn
C. Scott Hartz
Robert C. Wilburn
Active States
★
★
Home Office,
Erie Field Office
●
●
Field Offices
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders will be
held on April 21, 2015, at 9:30 a.m., EDT, atour
corporate headquarters in Erie, Pennsylvania.
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Ernst & Young LLP
2005 Market Street
Suite 700
Philadelphia, Pennsylvania 19103
ONLINE INFORMATION
Financial statement filings—specifically Erie Indemnity’s
information statement and the annual report—are available
online at erieindemnityinfostatement.com. Additional
financial and Shareholder information, as well as press
releases, Code of Conduct, Code of Ethics for Senior
Financial Officers, and general news about the Company
may be accessed at erieinsurance.com.
CORPORATE HEADQUARTERS/
HOME OFFICE
100 Erie Insurance Place
Erie, PA 16530
814.870.2000
STOCK LISTING
The Erie Indemnity Company’s Class A
nonvoting common stock is traded on
The NASDAQ Stock Market,
SM
LLC,
under the symbol “ERIE.”
STOCK TRANSFER INFORMATION
American Stock Transfer
and Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
800.937.5449
FIELD OFFICES
East Region
Hagerstown, MD
Silver Spring, MD
Rochester, NY
Charlotte, NC
Raleigh, NC
Allentown, PA
Erie, PA
Harrisburg, PA
Johnstown, PA
Murrysville, PA
Philadelphia, PA
Pittsburgh, PA
Richmond, VA
Roanoke, VA
Waynesboro, VA
West Region
Peoria, IL
Fort Wayne, IN
Indianapolis, IN
Lexington, KY
Canton, OH
Columbus, OH
Knoxville, TN
Nashville, TN
Parkersburg, WV
Waukesha, WI
CORPORATE INFORMATION FOR ERIE INDEMNITY COMPANY
39679.indd 31 3/16/15 8:03 AM
GF405 3/15 © 2015 Erie Indemnity Company
Member
•
Erie Insurance Group
Home Office
•
100 Erie Insurance Place on Perry Square
•
Erie, Pennsylvania 16530
814.870.2000
•
erieinsurance.com
•
An Equal Opportunity Employer
39679.indd 32 3/16/15 8:03 AM
