Erie 10-Q 06.30.2013
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PERSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2013
 
Commission file number 0-24000
 
 
ERIE INDEMNITY COMPANY
 
 
(Exact name of registrant as specified in its charter)
 
 
PENNSYLVANIA
 
25-0466020
 
 
(State or other jurisdiction of
 
(I.R.S. Employer
 
 
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)
 
 
Not applicable
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
  
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 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 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
 
The number of shares outstanding of the registrant’s Class A Common Stock as of the latest practicable date, with no par value and a stated value of $0.0292 per share, was 46,679,320 at July 19, 2013.
 
The number of shares outstanding of the registrant’s Class B Common Stock as of the latest practicable date, with no par value and a stated value of $70 per share, was 2,542 at July 19, 2013.

Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of Contents

PART I.  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(dollars in millions, except per share data)

 
 
Three months ended
 
Six months ended
 
 
June 30,
 
June 30,
 
 
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 

 
 

Premiums earned
 
$
1,215

 
$
1,109

 
$
2,390

 
$
2,196

Net investment income
 
104

 
113

 
207

 
221

Net realized investment gains (losses)
 
61

 
(107
)
 
310

 
189

Net impairment losses recognized in earnings
 
(1
)
 
0

 
(1
)
 
0

Equity in earnings of limited partnerships
 
39

 
37

 
75

 
58

Other income
 
8

 
8

 
16

 
16

Total revenues
 
1,426

 
1,160

 
2,997

 
2,680

Benefits and expenses
 
 
 
 
 
 

 
 

Insurance losses and loss expenses
 
861

 
943

 
1,703

 
1,659

Policy acquisition and underwriting expenses
 
302

 
287

 
595

 
557

Total benefits and expenses
 
1,163

 
1,230

 
2,298

 
2,216

Income (loss) from operations before income taxes and noncontrolling interest
 
263

 
(70
)
 
699

 
464

Provision for income taxes
 
86

 
(32
)
 
232

 
148

Net income (loss)
 
$
177

 
$
(38
)
 
$
467

 
$
316

 
 
 
 
 
 
 
 
 
Less: Net income (loss) attributable to noncontrolling interest in consolidated entity – Exchange
 
133

 
(81
)
 
386

 
237

 
 
 
 
 
 
 
 
 
Net income attributable to Indemnity
 
$
44

 
$
43

 
$
81

 
$
79

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings Per Share
 
 
 
 
 
 

 
 

Net income attributable to Indemnity per share
 
 
 
 
 
 

 
 

Class A common stock – basic
 
$
0.95

 
$
0.90

 
$
1.73

 
$
1.65

Class A common stock – diluted
 
$
0.84

 
$
0.80

 
$
1.54

 
$
1.47

Class B common stock – basic and diluted
 
$
142

 
$
135

 
$
259

 
$
249

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding attributable to Indemnity – Basic
 
 
 
 
 
 

 
 

Class A common stock
 
46,693,333

 
47,492,305

 
46,733,925

 
47,619,852

Class B common stock
 
2,542

 
2,544

 
2,542

 
2,545

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding attributable to Indemnity – Diluted
 
 
 
 
 
 

 
 

Class A common stock
 
52,886,259

 
53,677,848

 
52,926,851

 
53,807,795

Class B common stock
 
2,542

 
2,544

 
2,542

 
2,545

 
 
 
 
 
 
 
 
 
Dividends declared per share
 
 
 
 
 
 

 
 

Class A common stock
 
$
0.5925

 
$
0.5525

 
$
1.185

 
$
1.105

Class B common stock
 
$
88.8750

 
$
82.8750

 
$
177.750

 
$
165.750

 
 
See accompanying notes to Consolidated Financial Statements. See Note 12. "Indemnity Accumulated Other Comprehensive Loss," for amounts reclassified out of accumulated other comprehensive income (loss) into the Consolidated Statements of Operations.  See Note 15. “Indemnity Supplemental Information,” for supplemental statements of operations information.

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ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in millions)

 
 
Three months ended
 
Six months ended
 
 
June 30,
 
June 30,
 
 
2013
 
2012
 
2013
 
2012
Net income (loss)
 
$
177

 
$
(38
)
 
$
467

 
$
316

 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income
 
 
 
 
 
 

 
 

Change in unrealized holding (losses) gains on available-for-sale securities, net of tax (benefit) expense of $(105), $12, $(111), and $53, respectively
 
(194
)
 
21

 
(206
)
 
98

Reclassification adjustment for gross gains included in net income, net of tax expense of $2, $6, $7, and $8, respectively
 
(3
)
 
(9
)
 
(13
)
 
(14
)
Other comprehensive (loss) income
 
(197
)
 
12

 
(219
)
 
84

 
 
 
 
 
 
 
 
 
Comprehensive (loss) income
 
$
(20
)
 
$
(26
)
 
$
248

 
$
400

Less: Comprehensive (loss) income attributable to noncontrolling interest in consolidated entity – Exchange
 
(60
)
 
(69
)
 
172

 
319

Total comprehensive income – Indemnity
 
$
40

 
$
43

 
$
76

 
$
81

 
 
See accompanying notes to Consolidated Financial Statements. See Note 12. "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
(dollars in millions, except per share data)

 
 
June 30,
2013
 
December 31,
2012
Assets
 
(Unaudited)
 
 
Investments – Indemnity
 
 
 
 
Available-for-sale securities, at fair value:
 
 
 
 
Fixed maturities (amortized cost of $430 and $437, respectively)
 
$
438

 
$
452

Equity securities (cost of $47 and $54, respectively)
 
48

 
55

Limited partnerships (cost of $138 and $151, respectively)
 
166

 
180

Other invested assets
 
1

 
1

Investments – Exchange
 
 
 
 
Available-for-sale securities, at fair value:
 
 
 
 
Fixed maturities (amortized cost of $7,359 and $7,016, respectively)
 
7,725

 
7,707

Equity securities (cost of $915 and $871, respectively)
 
969

 
945

Trading securities, at fair value (cost of $2,069 and $1,910, respectively)
 
2,724

 
2,417

Limited partnerships (cost of $880 and $913, respectively)
 
1,011

 
1,037

Other invested assets
 
20

 
20

Total investments
 
13,102

 
12,814

 
 
 
 
 
Cash and cash equivalents (Exchange portion of $326 and $388, respectively)
 
365

 
400

Premiums receivable from policyholders – Exchange
 
1,191

 
1,062

Reinsurance recoverable – Exchange
 
174

 
168

Deferred income taxes – Indemnity
 
43

 
37

Deferred acquisition costs – Exchange
 
553

 
504

Other assets (Exchange portion of $336 and $339, respectively)
 
451

 
456

Total assets
 
$
15,879

 
$
15,441

 
 
 
 
 
Liabilities and shareholders’ equity
 
 
 
 
Liabilities
 
 
 
 
Indemnity liabilities
 
 
 
 
Other liabilities
 
$
535

 
$
515

Exchange liabilities
 
 
 
 
Losses and loss expense reserves
 
3,668

 
3,598

Life policy and deposit contract reserves
 
1,739

 
1,708

Unearned premiums
 
2,553

 
2,365

Deferred income taxes
 
312

 
365

Other liabilities
 
104

 
99

Total liabilities
 
8,911

 
8,650

 
 
 
 
 
Indemnity shareholders’ equity
 
 
 
 
Class A common stock, stated value $0.0292 per share; 74,996,930 shares authorized; 68,299,200 shares issued; 46,676,287 and 46,892,681 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
 
(138
)
 
(133
)
Retained earnings
 
1,878

 
1,852

Total contributed capital and retained earnings
 
1,758

 
1,737

Treasury stock, at cost, 21,622,913 and 21,406,519 shares, respectively
 
(1,111
)
 
(1,095
)
Total Indemnity shareholders’ equity
 
647

 
642

 
 
 
 
 
Noncontrolling interest in consolidated entity – Exchange
 
6,321

 
6,149

Total equity
 
6,968

 
6,791

Total liabilities, shareholders’ equity and noncontrolling interest
 
$
15,879

 
$
15,441

 
 
See accompanying notes to Consolidated Financial Statements.  See Note 15. “Indemnity Supplemental Information,” for supplemental consolidating statements of financial position information.

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ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)

 
 
Six months ended
 
 
June 30,
 
 
2013
 
2012
Cash flows from operating activities
 
 
 
 
Premiums collected
 
$
2,450

 
$
2,253

Net investment income received
 
222

 
233

Limited partnership distributions
 
79

 
54

Service agreement fee received
 
15

 
15

Commissions and bonuses paid to agents
 
(356
)
 
(320
)
Losses paid
 
(1,359
)
 
(1,267
)
Loss expenses paid
 
(227
)
 
(232
)
Other underwriting and acquisition costs paid
 
(345
)
 
(318
)
Income taxes paid
 
(149
)
 
(227
)
Net cash provided by operating activities
 
330

 
191

 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Purchase of investments:
 
 
 
 
Fixed maturities
 
(1,240
)
 
(983
)
Preferred stock
 
(54
)
 
(82
)
Common stock
 
(700
)
 
(518
)
Limited partnerships
 
(52
)
 
(42
)
Sales/maturities of investments:
 
 
 
 
Fixed maturity sales
 
330

 
338

Fixed maturity calls/maturities
 
617

 
567

Preferred stock
 
42

 
67

Common stock
 
654

 
503

Sale of and returns on limited partnerships
 
86

 
112

Net purchase of property and equipment
 
(19
)
 
(20
)
Net collections on agent loans
 
1

 
1

Net cash used in investing activities
 
(335
)
 
(57
)
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
Annuity deposits and interest
 
47

 
49

Annuity surrenders and withdrawals
 
(39
)
 
(37
)
Universal life deposits and interest
 
12

 
11

Universal life surrenders
 
(5
)
 
(5
)
Purchase of treasury stock
 
(17
)
 
(44
)
Dividends paid to shareholders
 
(28
)
 
(53
)
Net cash used in financing activities
 
(30
)
 
(79
)
 
 
 
 
 
Net (decrease) increase in cash and cash equivalents
 
(35
)
 
55

Cash and cash equivalents at beginning of period
 
400

 
185

Cash and cash equivalents at end of period
 
$
365

 
$
240

 
 
See accompanying notes to Consolidated Financial Statements. See Note 15. “Indemnity Supplemental Information,” for supplemental cash flow information.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
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 11 Midwestern, Mid-Atlantic and Southeastern states and the District of Columbia.
 
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.
 
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 affiliate 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.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods have been included.  Operating results for the six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013.  The accompanying consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission on February 26, 2013.


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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 are 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 pronouncements
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.  The amendments in this ASU require an entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the line items affected by the reclassification. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other related disclosures for additional information. ASU 2013-02 is effective prospectively for interim and annual periods beginning after December 15, 2012.  We have elected to present amounts reclassified out of accumulated other comprehensive income by component and the respective line items of net income in the notes to our consolidated financial statements. See Note 12. "Indemnity's Accumulated Other Comprehensive Loss".

Pending accounting pronouncements
In February 2013, the FASB issued ASU 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. The amendments in this ASU provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in GAAP. ASU 2013-04 is effective for interim and annual periods beginning after December 15, 2013, with early adoption permitted.  We do not expect the adoption of this new guidance to have a material impact on our consolidated financial statements.


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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.

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 effect of any potential common shares. Potential common shares include outstanding vested and not yet vested awards related to our outside directors’ stock compensation plan and any employee stock based awards.

In the first quarter of 2012, two shares of Class B common stock were converted into 4,800 shares of Class A common stock.  See Note 11. “Indemnity Capital Stock”.
 
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)
 
Three months ended June 30,

 
2013
 
2012
 
 
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
 
$
44

 
46,693,333

 
$
0.95

 
$
43

 
47,492,305

 
$
0.90

Dilutive effect of stock-based awards
 
0

 
92,126

 
—

 
0

 
79,943

 
—

Assumed conversion of Class B shares
 
0

 
6,100,800

 
—

 
0

 
6,105,600

 
—

Class A – Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to Class A stockholders on Class A equivalent shares
 
$
44

 
52,886,259

 
$
0.84

 
$
43

 
53,677,848

 
$
0.80

Class B – Basic and diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to Class B stockholders
 
$
0

 
2,542

 
$
142

 
$
0

 
2,544

 
$
135

  
 
 
 
Indemnity Shareholder Interest
(dollars in millions, except per share data)
 
Six months ended June 30,

 
2013
 
2012
 
 
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
 
$
80

 
46,733,925

 
$
1.73

 
$
78

 
47,619,852

 
$
1.65

Dilutive effect of stock-based awards
 
0

 
92,126

 
—

 
0

 
79,943

 
—

Assumed conversion of Class B shares
 
1

 
6,100,800

 
—

 
1

 
6,108,000

 
—

Class A – Diluted EPS:
 
 

 
 

 
 

 
 

 
 

 
 

Income available to Class A stockholders on Class A equivalent shares
 
$
81

 
52,926,851

 
$
1.54

 
$
79

 
53,807,795

 
$
1.47

Class B – Basic and diluted EPS:
 
 

 
 

 
 

 
 

 
 

 
 

Income available to Class B stockholders
 
$
1

 
2,542

 
$
259

 
$
1

 
2,545

 
$
249


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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 on 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 the reporting periods presented.  At June 30, 2013, 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.

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Table of Contents

Note 5. Segment Information
 
Our reportable segments include management operations, property and casualty insurance operations, life insurance operations and investment operations.  Accounting policies for segments are the same as those described in the summary of significant accounting policies.  See Item 8. “Financial Statements and Supplementary Data, Note 2. Significant Accounting Policies,” in our Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission on February 26, 2013.  Assets are not allocated to the segments, but rather, are reviewed in total for purposes of decision-making.  No single customer or agent provides 10% or more of revenues.
 
Management operations
Our management operations segment consists of Indemnity serving as attorney-in-fact for the Exchange.  Indemnity operates in this capacity solely for the Exchange.  We evaluate profitability of our management operations segment principally on the gross margin from management operations.  Indemnity earns a management fee from the Exchange for providing sales, underwriting and policy issuance services.  Management fee revenue, which is eliminated upon consolidation, is calculated as a percentage not to exceed 25% of all the direct premiums written by the Exchange and the other members of the Property and Casualty Group, which are assumed by the Exchange under an intercompany pooling arrangement.  The Property and Casualty Group issues policies with annual terms only.  Management fees are recorded upon policy issuance or renewal, as substantially all of the services required to be performed by Indemnity have been satisfied at that time.  Certain activities are performed and related costs are incurred by us subsequent to policy issuance in connection with the services provided to the Exchange; however, these activities are inconsequential and perfunctory.  Although these management fee revenues and expenses are eliminated upon consolidation, the amount of the fee directly impacts the allocation of our consolidated net income between the noncontrolling interest, which bears the management fee expense and represents the interests of the Exchange subscribers (policyholders), and Indemnity’s interest, which earns the management fee revenue and represents the Indemnity shareholder interest in net income.
 
Additionally, the second quarter and six months ended June 30, 2012 included 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 voluntary reinsurance from nonaffiliated domestic and foreign sources, assumed involuntary and ceded reinsurance business.  The Exchange exited the assumed voluntary reinsurance business effective December 31, 2003, and therefore unaffiliated reinsurance includes only run-off activity of the previously assumed voluntary reinsurance business.  We evaluate profitability of the property and casualty insurance operations principally based upon net underwriting results represented by the combined ratio.
 
Life insurance operations
Our life insurance operations segment includes traditional and universal life insurance products and fixed annuities marketed to individuals using the same independent agency force utilized by our property and casualty insurance operations.  We evaluate profitability of the life insurance segment principally based upon segment net income, including investments, which for segment purposes are reflected in the investment operations segment.  At the same time, we recognize that investment-related income is integral to the evaluation of the life insurance segment because of the long duration of life products.  For the second quarters of 2013 and 2012, investment activities on life insurance related assets generated revenues of $26 million and $28 million, respectively, resulting in EFL reporting income before income taxes of $13 million for both periods, before intercompany eliminations. Investment activities on life insurance related assets generated revenues of $52 million for both the six months ended June 30, 2013 and 2012, resulting in EFL reporting income before income taxes of $24 million and $22 million, respectively, before intercompany eliminations.
 
Investment operations
The investment operations segment includes returns from our fixed maturity, equity security and limited partnership investment portfolios to support our underwriting business.  The Indemnity and Exchange portfolios are managed with the objective of maximizing after-tax returns on a risk-adjusted basis, while the EFL portfolio is managed to be closely aligned to its liabilities and to maintain a sufficient yield to meet profitability targets.  Management actively evaluates the portfolios for impairments. We record impairment writedowns on investments in instances where the fair value of the investment is substantially below cost, and we conclude that the decline in fair value is other-than-temporary.  Investment related income for the life operations is included in the investment segment results.

11
Table of Contents

The following tables summarize the components of the Consolidated Statements of Operations by reportable business segment:
 
 
 
Erie Insurance Group
(in millions)
 
Three months ended June 30, 2013
 
 
Management
operations
 
Property
and casualty
insurance
operations
 
Life
insurance
operations
 
Investment
operations
 
Eliminations
 
Consolidated
Premiums earned/life policy revenue
 
 
 
$
1,196

 
$
20

 
 
 
$
(1
)
 
$
1,215

Net investment income
 
 
 
 
 
 
 
$
107

 
(3
)
 
104

Net realized investment gains
 
 
 
 
 
 
 
61

 
 
 
61

Net impairment losses recognized in earnings
 
 
 
 
 
 
 
(1
)
 
 
 
(1
)
Equity in earnings of limited partnerships
 
 
 
 
 
 
 
39

 
 
 
39

Management fee revenue
 
$
336

 
 
 
 
 
 
 
(336
)
 
—

Service agreement and other revenue
 
8

 
 
 
0

 
 
 
 
 
8

Total revenues
 
344

 
1,196

 
20

 
206

 
(340
)
 
1,426

Cost of management operations
 
285

 
 
 
 
 
 
 
(285
)
 
—

Insurance losses and loss expenses
 
 
 
837

 
26

 
 
 
(2
)
 
861

Policy acquisition and underwriting expenses
 
 
 
348

 
7

 
 
 
(53
)
 
302

Total benefits and expenses
 
285

 
1,185

 
33

 
—

 
(340
)
 
1,163

Income (loss) before income taxes
 
59

 
11

 
(13
)
 
206

 
—

 
263

Provision for income taxes
 
21

 
4

 
(5
)
 
66

 
—

 
86

Net income (loss)
 
$
38

 
$
7

 
$
(8
)
 
$
140

 
—

 
$
177

 
 
 
 
Erie Insurance Group
(in millions)
 
Three months ended June 30, 2012
 
 
Management
operations
 
Property
and casualty
insurance
operations
 
Life
insurance
operations
 
Investment
operations
 
Eliminations
 
Consolidated
Premiums earned/life policy revenue
 
 
 
$
1,092

 
$
18

 
 
 
$
(1
)
 
$
1,109

Net investment income
 
 
 
 
 
 
 
$
115

 
(2
)
 
113

Net realized investment losses
 
 
 
 
 
 
 
(107
)
 
 
 
(107
)
Net impairment losses recognized in earnings
 
 
 
 
 
 
 
0

 
 
 
0

Equity in earnings of limited partnerships
 
 
 
 
 
 
 
37

 
 
 
37

Management fee revenue
 
$
308

 
 
 
 
 
 
 
(308
)
 
—

Service agreement and other revenue
 
8

 
 
 
0

 
 
 
 
 
8

Total revenues
 
316

 
1,092

 
18

 
45

 
(311
)
 
1,160

Cost of management operations
 
257

 
 
 
 
 
 
 
(257
)
 
—

Insurance losses and loss expenses
 
 
 
919

 
25

 
 
 
(1
)
 
943

Policy acquisition and underwriting expense
 
 
 
332

 
8

 
 
 
(53
)
 
287

Total benefits and expenses
 
257

 
1,251

 
33

 
—

 
(311
)
 
1,230

Income (loss) before income taxes
 
59

 
(159
)
 
(15
)
 
45

 
—

 
(70
)
Provision for income taxes
 
21

 
(55
)
 
(6
)
 
8

 
—

 
(32
)
Net income (loss)
 
$
38

 
$
(104
)
 
$
(9
)
 
$
37

 
$
—

 
$
(38
)


12
Table of Contents

 
 
 
Erie Insurance Group
(in millions)
 
Six months ended June 30, 2013
 
 
Management
operations
 
Property
and casualty
insurance
operations
 
Life
insurance
operations
 
Investment
operations
 
Eliminations
 
Consolidated
Premiums earned/life policy revenue
 
 
 
$
2,352

 
$
39

 
 
 
$
(1
)
 
$
2,390

Net investment income
 
 
 
 
 
 
 
$
213

 
(6
)
 
207

Net realized investment gains
 
 
 
 
 
 
 
310

 
 
 
310

Net impairment losses recognized in earnings
 
 
 
 
 
 
 
(1
)
 
 
 
(1
)
Equity in earnings of limited partnerships
 
 
 
 
 
 
 
75

 
 
 
75

Management fee revenue
 
$
632

 
 
 
 
 
 
 
(632
)
 
—

Service agreement and other revenue
 
15

 
 
 
1

 
 
 
 
 
16

Total revenues
 
647

 
2,352

 
40

 
597

 
(639
)
 
2,997

Cost of management operations
 
539

 
 
 
 
 
 
 
(539
)
 
—

Insurance losses and loss expenses
 
 
 
1,654

 
52

 
 
 
(3
)
 
1,703

Policy acquisition and underwriting expenses
 
 
 
676

 
16

 
 
 
(97
)
 
595

Total benefits and expenses
 
539

 
2,330

 
68

 
—

 
(639
)
 
2,298

Income (loss) before income taxes
 
108

 
22

 
(28
)
 
597

 
—

 
699

Provision for income taxes
 
38

 
8

 
(10
)
 
196

 
—

 
232

Net income (loss)
 
$
70

 
$
14

 
$
(18
)
 
$
401

 
$
—

 
$
467

 
 
 
 
Erie Insurance Group
(in millions)
 
Six months ended June 30, 2012
 
 
Management operations
 
Property
and casualty
insurance
operations
 
Life insurance operations
 
Investment operations
 
Eliminations
 
Consolidated
Premiums earned/life policy revenue
 
 

 
$
2,161

 
$
36

 
 

 
$
(1
)
 
$
2,196

Net investment income
 
 

 
 

 
 

 
$
226

 
(5
)
 
221

Net realized investment gains
 
 

 
 

 
 

 
189

 
 

 
189

Net impairment losses recognized in earnings
 
 

 
 

 
 

 
0

 
 

 
0

Equity in earnings of limited partnerships
 
 

 
 

 
 

 
58

 
 

 
58

Management fee revenue
 
$
577

 
 

 
 

 
 

 
(577
)
 
—

Service agreement and other revenue
 
15

 
 

 
1

 
 

 
 

 
16

Total revenues
 
592

 
2,161

 
37

 
473

 
(583
)
 
2,680

Cost of management operations
 
487

 
 

 
 

 
 

 
(487
)
 
—

Insurance losses and loss expenses
 
 

 
1,611

 
50

 
 

 
(2
)
 
1,659

Policy acquisition and underwriting expenses
 
 

 
634

 
17

 
 

 
(94
)
 
557

Total benefits and expenses
 
487

 
2,245

 
67

 
—

 
(583
)
 
2,216

Income (loss) before income taxes
 
105

 
(84
)
 
(30
)
 
473

 
—

 
464

Provision for income taxes
 
37

 
(29
)
 
(11
)
 
151

 
—

 
148

Net income (loss)
 
$
68

 
$
(55
)
 
$
(19
)
 
$
322

 
$
—

 
$
316

 
 


13
Table of Contents

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 in the 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 their 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 structured 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.

14
Table of Contents

The following table represents our consolidated fair value measurements on a recurring basis by asset class and level of input at June 30, 2013:
 
 
 
Erie Insurance Group
 
 
June 30, 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
 
$
179

 
$
0

 
$
179

 
$
0

Corporate debt securities
 
258

 
0

 
257

 
1

Collateralized debt obligations
 
1

 
0

 
0

 
1

Total fixed maturities
 
438

 
0

 
436

 
2

Nonredeemable preferred stock
 
23

 
2

 
21

 
0

Common stock
 
25

 
25

 
0

 
0

Total available-for-sale securities
 
486

 
27

 
457

 
2

Other investments (1)
 
20

 
0

 
0

 
20

Total – Indemnity
 
$
506

 
$
27

 
$
457

 
$
22

Exchange
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
U.S. government & agencies
 
$
184

 
$
0

 
$
184

 
$
0

States & political subdivisions
 
1,274

 
0

 
1,274

 
0

Foreign government securities
 
23

 
0

 
23

 
0

Corporate debt securities
 
5,882

 
0

 
5,849

 
33

Residential mortgage-backed securities
 
221

 
0

 
221

 
0

Commercial mortgage-backed securities
 
49

 
0

 
45

 
4

Collateralized debt obligations
 
23

 
0

 
11

 
12

Other debt securities
 
69

 
0

 
69

 
0

Total fixed maturities
 
7,725

 
0

 
7,676

 
49

Nonredeemable preferred stock
 
647

 
231

 
409

 
7

Common stock
 
322

 
322

 
0

 
0

Total available-for-sale securities
 
8,694

 
553

 
8,085

 
56

Trading securities:
 
 
 
 
 
 
 
 
Common stock
 
2,724

 
2,717

 
0

 
7

Total trading securities
 
2,724

 
2,717

 
0

 
7

Other investments (1)
 
113

 
0

 
0

 
113

Total – Exchange
 
$
11,531

 
$
3,270

 
$
8,085

 
$
176

Total – Erie Insurance Group
 
$
12,037

 
$
3,297

 
$
8,542

 
$
198


(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 they represent the NAV 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 June 30, 2013. During the six months ended June 30, 2013, Indemnity made no contributions and received distributions totaling $0.3 million, and the Exchange made no contributions and received distributions totaling $2.5 million for these investments. As of June 30, 2013, the amount of unfunded commitments related to the investments was $1.5 million for Indemnity and $4.5 million for the Exchange.


15
Table of Contents

Level 3 Assets – Quarterly Change:
 
 
 
Erie Insurance Group
(in millions)
 
 
Beginning balance at March 31, 2013
 
Included in
earnings (1)
 
Included
in other comprehensive
income
 
Purchases
 
Sales
 
Transfers
in and (out) of
Level 3 (2)
 
Ending balance at June 30, 2013
Indemnity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
1

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
1

Collateralized debt obligations
 
2

 
0

 
0

 
0

 
(1
)
 
0

 
1

Total fixed maturities
 
3

 
0

 
0

 
0

 
(1
)
 
0

 
2

Total available-for-sale securities
 
3

 
0

 
0

 
0

 
(1
)
 
0

 
2

Other investments
 
20

 
0

 
0

 
0

 
0

 
0

 
20

Total Level 3 assets – Indemnity
 
$
23

 
$
0

 
$
0

 
$
0

 
$
(1
)
 
$
0

 
$
22

Exchange
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
58

 
$
0

 
$
(1
)
 
$
1

 
$
(2
)
 
$
(23
)
 
$
33

Commercial mortgage-backed securities
 
5

 
0

 
0

 
0

 
(1
)
 
0

 
4

Collateralized debt obligations
 
14

 
1

 
(1
)
 
0

 
(2
)
 
0

 
12

Total fixed maturities
 
77

 
1

 
(2
)
 
1

 
(5
)
 
(23
)
 
49

Nonredeemable preferred stock
 
12

 
2

 
(1
)
 
0

 
(6
)
 
0

 
7

Total available-for-sale securities
 
89

 
3

 
(3
)
 
1

 
(11
)
 
(23
)
 
56

Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
7

 
0

 
0

 
0

 
0

 
0

 
7

Total trading securities
 
7

 
0

 
0

 
0

 
0

 
0

 
7

Other investments
 
112

 
2

 
0

 
0

 
(1
)
 
0

 
113

Total Level 3 assets – Exchange
 
$
208

 
$
5

 
$
(3
)
 
$
1

 
$
(12
)
 
$
(23
)
 
$
176

Total Level 3 assets – Erie Insurance Group
 
$
231

 
$
5

 
$
(3
)
 
$
1

 
$
(13
)
 
$
(23
)
 
$
198

 
(1)
These amounts are reported in the Consolidated Statement of Operations. There is $3 million included in net realized investment gains (losses) and $2 million included in equity in earnings of limited partnerships for the three months ended June 30, 2013 on Level 3 securities.
 
(2)
Transfers in and out of Level 3 are attributable to changes in the availability of market observable information for individual securities within the respective categories. Transfers in and out of levels are recognized at the start of the period.
 

We review the fair value hierarchy classifications each reporting period.  Transfers between hierarchy levels may occur due to changes in the 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 between Level 2 and Level 3 for the three months ended June 30, 2013.

For the Exchange, there were no transfers between Level 1 and Level 2 or from Level 2 to Level 3 for the three months ended June 30, 2013. Level 3 to Level 2 transfers totaled $23 million for three fixed maturity holdings. These transfers out of Level 3 were primarily the result of using observable market data to determine the fair value at June 30, 2013.


16
Table of Contents

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 (2)
 
Ending balance at June 30, 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

 
0

 
0

 
20

Total Level 3 assets – Indemnity
 
$
23

 
$
1

 
$
0

 
$
0

 
$
(2
)
 
$
0

 
$
22

Exchange
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
43

 
$
0

 
$
(1
)
 
$
1

 
$
(2
)
 
$
(8
)
 
$
33

Commercial mortgage-backed securities
 
0

 
0

 
(1
)
 
0

 
(1
)
 
6

 
4

Collateralized debt obligations
 
16

 
1

 
0

 
0

 
(7
)
 
2

 
12

Total fixed maturities
 
59

 
1

 
(2
)
 
1

 
(10
)
 
0

 
49

Nonredeemable preferred stock
 
0

 
0

 
3

 
4

 
0

 
0

 
7

Total available-for-sale securities
 
59

 
1

 
1

 
5

 
(10
)
 
0

 
56

Trading securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock