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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, 2010
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 þ No o
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 þ No o
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
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 þ   Accelerated Filer o   Non-Accelerated Filer o   Smaller Reporting Company o
        (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 o No þ
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 $.0292 per share, was 50,662,752 at July 21, 2010.
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 2,546 at July 21, 2010.
The common stock is the only class of stock the registrant is presently authorized to issue.
 
 

 


 

     
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 EX-3.1.A
 EX-3.1.B
 EX-3.1.C
 EX-31.1
 EX-31.2
 EX-32

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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,
    2010   2009   2010   2009
            (As adjusted           (As adjusted
            Note 2)           Note 2)
Revenues
                               
Premiums earned
  $ 989     $ 964     $ 1,967     $ 1,921  
Net investment income
    108       105       212       222  
Net realized investment (losses) gains
    (213 )     208       (88 )     53  
Net impairment losses recognized in earnings
    (4 )     (12 )     (6 )     (83 )
Equity in earnings (losses) of limited partnerships
    27       (126 )     30       (287 )
Other income
    9       10       17       18  
         
Total revenues
    916       1,149       2,132       1,844  
         
Benefits and expenses
                               
Insurance losses and loss expenses
    737       660       1,498       1,463  
Policy acquisition and underwriting expenses
    230       231       457       463  
         
Total benefits and expenses
    967       891       1,955       1,926  
         
(Loss) income from operations before income taxes and noncontrolling interests
    (51 )     258       177       (82 )
(Benefit) provision for income taxes
    (20 )     (13 )     46       (102 )
         
Net (loss) income
  $ (31 )   $ 271     $ 131     $ 20  
 
                               
Less: Net (loss) income attributable to noncontrolling interest in consolidated entity — Exchange
    (80 )     238       35       (24 )
         
 
                               
Net income attributable to Indemnity
  $ 49     $ 33     $ 96     $ 44  
         
 
                               
Earnings Per Share
                               
Net income attributable to Indemnity per share
                               
Class A common stock — basic
  $ 0.96     $ 0.63     $ 1.87     $ 0.85  
         
Class A common stock — diluted
  $ 0.86     $ 0.57     $ 1.68     $ 0.76  
         
Class B common stock — basic and diluted
  $ 138.21     $ 93.19     $ 271.03     $ 127.98  
         
 
                               
Weighted average shares outstanding attributable to Indemnity — Basic
                               
Class A common stock
    51,013,358       51,240,693       51,099,071       51,255,385  
         
Class B common stock
    2,546       2,551       2,546       2,551  
         
 
                               
Weighted average shares outstanding attributable to Indemnity— Diluted
                               
Class A common stock
    57,146,855       57,390,302       57,231,936       57,404,994  
         
Class B common stock
    2,546       2,551       2,546       2,551  
         
 
                               
Dividends declared per share
                               
Class A common stock
  $ 0.48     $ 0.45     $ 0.96     $ 0.90  
         
Class B common stock
  $ 72.00     $ 67.50     $ 144.00     $ 135.00  
         
See accompanying notes to Consolidated Financial Statements.

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ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(dollars in millions, except per share data)
                 
    June 30,   December 31,
    2010   2009
    (Unaudited)        
Assets
               
Investments — Indemnity
               
Available-for-sale securities, at fair value:
               
Fixed maturities (amortized cost of $637 and $642, respectively)
  $ 671     $ 664  
Equity securities (cost of $41 and $35, respectively)
    45       38  
Trading securities, at fair value (cost of $36 and $36, respectively)
    40       42  
Limited partnerships (cost of $273 and $281, respectively)
    234       235  
Other invested assets
    1       1  
Investments — Exchange
               
Available-for-sale securities, at fair value:
               
Fixed maturities (amortized cost of $6,379 and $6,277, respectively)
    6,789       6,517  
Equity securities (cost of $477 and $425, respectively)
    523       472  
Trading securities, at fair value (cost of $1,604 and $1,556, respectively)
    1,712       1,835  
Limited partnerships (cost of $1,341 and $1,392, respectively)
    1,123       1,116  
Other invested assets
    19       20  
     
Total investments
    11,157       10,940  
 
               
Cash and cash equivalents (Exchange portion of $189 and $158, respectively)
    223       234  
Premiums receivable from policyholders (Exchange portion of $770 and $715, respectively)
    977       906  
Reinsurance recoverable (Exchange portion of $198 and $212, respectively)
    201       215  
Deferred income taxes (Exchange portion of $72 and $75, respectively)
    101       116  
Deferred acquisition costs (Exchange portion of $417 and $416, respectively)
    473       467  
Other assets (Exchange portion of $322 and $306, respectively)
    438       409  
     
Total assets
  $ 13,570     $ 13,287  
     
 
               
Liabilities and shareholders’ equity
               
Liabilities
               
Indemnity liabilities
               
Losses and loss expense reserves
  $ 739     $ 752  
Unearned premiums
    345       325  
Other liabilities
    350       387  
Exchange liabilities
               
Losses and loss expense reserves
    2,883       2,846  
Life policy and deposit contract reserves
    1,574       1,540  
Unearned premiums
    1,748       1,656  
Other liabilities
    62       56  
     
Total liabilities
    7,701       7,562  
     
 
               
Indemnity’s shareholders’ equity
               
Class A common stock, stated value $0.0292 per share; authorized 74,996,930 shares; 68,289,600 issued; 50,759,754 and 51,203,473 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; 2,546 authorized, issued and outstanding, respectively
    0       0  
Additional paid-in-capital
    8       8  
Accumulated other comprehensive loss
    (32 )     (43 )
 
               
Retained earnings, before cumulative effect adjustment
    1,796       1,743  
Cumulative effect of accounting changes, net of tax
    0       6  
     
Retained earnings, after cumulative effect adjustment
    1,796       1,749  
     
Total contributed capital and retained earnings
    1,774       1,716  
Treasury stock, at cost, 17,529,846 and 17,086,127 shares, respectively
    (834 )     (814 )
     
Total Indemnity shareholders’ equity
    940       902  
 
               
Noncontrolling interest in consolidated entity — Exchange
    4,929       4,823  
     
Total equity
    5,869       5,725  
     
Total liabilities, shareholders’ equity and noncontrolling interest
  $ 13,570     $ 13,287  
     
See accompanying notes to Consolidated Financial Statements. See Note 14 for supplemental consolidating statements of financial position information.

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ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in millions)
                                 
    Erie Insurance Group
    Three months ended   Six months ended
    June 30,   June 30,
    2010   2009   2010   2009
         
            (As adjusted     (As adjusted
            Note 2)       Note 2)
Accumulated other comprehensive loss:
                               
Balance, beginning of period
  $ (37 )   $ (138 )   $ (43 )   $ (136 )
Adjustments to opening balance, net of tax*
          (6 )           (6 )
         
Adjusted balance, beginning of period
    (37 )     (144 )     (43 )     (142 )
 
                               
Gross unrealized holding gains on investments arising during period
    7       60       14       54  
Reclassification adjustment for gross losses included in net income
    0       6       3       9  
         
Unrealized holding gains excluding realized losses, gross
    7       66       17       63  
Income tax expense related to unrealized gains
    (2 )     (23 )     (6 )     (22 )
         
Change in other comprehensive income, net of tax — Indemnity
    5       43       11       41  
 
                               
Balance, end of period — Indemnity
  $ (32 )   $ (101 )   $ (32 )   $ (101 )
         
 
                               
Change in other comprehensive income, net of tax — Indemnity
  $ 5     $ 43     $ 11     $ 41  
Change in other comprehensive income, net of tax — Exchange
  $ 26     $ 293     $ 71     $ 292  
         
Change in other comprehensive income, net of tax — Erie Insurance Group
  $ 31     $ 336     $ 82     $ 333  
         
 
                               
Comprehensive income:
                               
Net (loss) income — Erie Insurance Group
  $ (31 )   $ 271     $ 131     $ 20  
Change in other comprehensive income, net of tax — Erie Insurance Group
    31       336       82       333  
         
Total comprehensive income — Erie Insurance Group
    0       607       213       353  
Less: Noncontrolling interest in consolidated entity — Exchange
    54       531       106       268  
         
Total comprehensive income — Indemnity
  $ 54     $ 76     $ 107     $ 85  
         
 
*   Previously recognized non-credit other-than-temporary impairment losses were reclassified from retained earnings to other comprehensive income upon the implementation of FASB ASC 320, Investments — Debt and Equity Securities, during the second quarter of 2009.

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ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
                 
    Six months ended June 30,
    2010   2009
            (As adjusted
            Note 2)
Cash flows from operating activities
               
Premiums collected
  $ 2,011     $ 1,947  
Net investment income received
    217       210  
Limited partnership distributions
    48       44  
Service agreement fee received
    17       17  
Commissions and bonuses paid to agents
    (290 )     (300 )
Losses paid
    (1,216 )     (1,145 )
Loss expenses paid
    (212 )     (205 )
Other underwriting and acquisition costs paid
    (278 )     (259 )
Income taxes (paid) recovered
    (85 )     162  
     
Net cash provided by operating activities
    212       471  
     
 
               
Cash flows from investing activities
               
Purchase of investments:
               
Fixed maturities
    (930 )     (866 )
Preferred stock
    (112 )     (77 )
Common stock
    (546 )     (854 )
Limited partnerships
    (59 )     (97 )
Sales/maturities of investments:
               
Fixed maturity sales
    359       277  
Fixed maturity calls/maturities
    509       327  
Preferred stock
    66       96  
Common stock
    538       819  
Sale of and returns on limited partnerships
    15       6  
Purchase of property and equipment
    (21 )     (8 )
Net distributions on agent loans
    1       (2 )
     
Net cash used in investing activities
    (180 )     (379 )
     
 
               
Cash flows from financing activities
               
Annuity and supplementary contract deposits and interest
    61       88  
Annuity and supplementary contract surrenders and withdrawals
    (39 )     (88 )
Universal life deposits and interest
    21       14  
Universal life surrenders
    (19 )     (18 )
Purchase of treasury stock
    (17 )     (1 )
Dividends paid to shareholders
    (50 )     (46 )
Decrease in collateral from securities lending
    0       (70 )
Redemption of securities lending collateral
    0       70  
     
Net cash used in financing activities
    (43 )     (51 )
     
 
               
Net (decrease) increase in cash and cash equivalents
    (11 )     41  
Cash and cash equivalents at beginning of period
    234       277  
     
Cash and cash equivalents at end of period
  $ 223     $ 318  
     
See accompanying notes to Consolidated Financial Statements. See Note 14 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 since 1925 has been the managing Attorney-in-Fact for the subscribers (policyholders) of Erie Insurance Exchange (“Exchange”). The Exchange is a subscriber (policyholder) 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 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), appointing Indemnity as their common attorney-in-fact to transact business on their behalf and to manage the affairs of the Exchange. Indemnity earns a management fee from the Exchange for these services, which is paid from the premiums collected from subscribers (policyholders).
Indemnity also operates as a property and casualty insurer through its wholly-owned subsidiaries, Erie Insurance Company (“EIC”), Erie Insurance Company of New York (“ENY”) and the Erie Insurance Property and Casualty Company (“EPC”).
The “Property and Casualty Group” refers to the Exchange and its wholly-owned subsidiary, Flagship City Insurance Company (“Flagship”) and Indemnity’s wholly-owned subsidiaries. The Property and Casualty Group operates in 11 Midwestern, Mid-Atlantic and Southeastern states and the District of Columbia and primarily writes personal auto insurance, which comprises 48% of its 2009 direct premiums.
Erie Family Life Insurance Company (“EFL”) is an affiliated life insurance company that underwrites and sells nonparticipating individual and group life insurance policies and fixed annuities. Indemnity and Exchange own 21.6% and 78.4% of EFL, respectively.
“Indemnity shareholder interest” refers to the interest in Erie Indemnity Company owned by the Class A and Class B shareholders. In addition to referring to Erie Insurance Exchange, the term “Exchange” sometimes refers to the noncontrolling interest held for the benefit of the subscribers (policyholders) and includes its interests in Flagship and EFL.
The accompanying consolidated financial statements of Erie Indemnity Company reflect the consolidated results of Indemnity and its variable interest entity, the Exchange, which we refer to collectively as “Erie Insurance Group”.
Note 2. Significant Accounting Policies
Basis of presentation and principles of consolidation
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. In addition, 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’ 78.4% ownership interest in EFL. See the discussion “Retrospective adoption of new accounting principle” that follows for additional consolidation information.
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 have been included. Operating results for the three month period ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, refer to the consolidated financial statements and footnotes for

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the year ended December 31, 2009 included in our Form 8-K as filed with the Securities and Exchange Commission on May 6, 2010.
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. 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 benefit 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 Statements of Financial Position.
Retrospective adoption of new accounting principle
On June 12, 2009, the Financial Accounting Standards Board (FASB) updated ASC 810, Consolidation, which amended the existing guidance for determining whether an enterprise is the primary beneficiary of a variable interest entity (“VIE”). As of January 1, 2010, Indemnity adopted the new accounting principle on a retrospective basis since inception.
This guidance changed the methodology for assessing whether an enterprise is the primary beneficiary of a VIE by requiring a qualitative analysis to determine if an enterprise’s variable interest gives it a controlling financial interest. The qualitative analysis looks at the power to direct activities of the VIE that most significantly impact economic performance and the right to receive benefits (or obligation to absorb losses) from the VIE that could potentially be significant.
In accordance with the new accounting guidance, Indemnity is deemed to be the primary beneficiary of the Exchange given the significance of the management fee to the Exchange and Indemnity’s power to direct the Exchange’s significant activities. Under the previously issued accounting guidance, Indemnity was not deemed the primary beneficiary of the Exchange and its financial position and operating results were not consolidated with Indemnity’s. Following adoption of the new accounting guidance, as primary beneficiary of the Exchange, Erie Indemnity Company has consolidated Indemnity and the Exchange’s financial position and operating results.
Furthermore, upon consolidation of the Exchange, 100% of the ownership of EFL resides within the consolidated entity and consequently EFL’s financial results are also consolidated. The financial statements and notes to the financial statements presented herein have all been adjusted to reflect the retrospective adoption of the new accounting principle.
There was no cumulative effect to Indemnity’s shareholders’ equity from consolidation of the Exchange and EFL. The noncontrolling interest in total equity represents the amount of the Exchange’s subscribers’ (policyholders’) equity.
Recent Accounting Updates
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. This guidance updated the disclosures for FASB ASC 820, Fair Value Measurements and Disclosures. The additional disclosures include the amounts and reasons for significant transfers between the levels in the fair value hierarchy, the expansion of fair market disclosures by each class of assets, disclosure of the policy for recognition of level transfers, and disclosure of the valuation techniques used for all Level 2 and Level 3 assets. These disclosures are effective for periods beginning after December 15, 2009 and have been included in Note 6. An additional disclosure requirement to present purchases, sales, issuances, and settlements of Level 3 activity on a gross basis becomes effective with periods beginning after December 15, 2010.

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Note 3. Earnings Per Share
Basic earnings per share is calculated under the two-class method, which allocates earnings to each class of stock based on 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 is calculated under the if-converted method which reflects the conversion of Class B shares and the effect of potentially dilutive outstanding employee stock-based awards and awards not yet vested related to the outside directors’ stock compensation plan.
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 Earnings Per Share Calculation
(dollars in millions,   Three months ended June 30,
except per share data)   2010   2009
    Allocated   Weighted   Per-   Allocated   Weighted   Per-
    net income   shares   share   net income   shares   share
    (numerator)   (denominator)   amount   (numerator)   (denominator)   amount
         
Class A — Basic EPS:
                                               
Income available to Class A stockholders
  $ 49       51,013,358     $ 0.96     $ 33       51,240,693     $ 0.63  
         
Dilutive effect of stock awards
    0       23,097             0       27,209        
         
Assumed conversion of Class B shares
    0       6,110,400             0       6,122,400        
         
Class A — Diluted EPS:
                                               
Income available to Class A stockholders on Class A equivalent shares
  $ 49       57,146,855     $ 0.86     $ 33       57,390,302     $ 0.57  
         
Class B — Basic and diluted EPS:
                                               
Income available to Class B stockholders
  $ 0       2,546     $ 138.21     $ 0       2,551     $ 93.19  
         
                                                 
    Indemnity Earnings Per Share Calculation
(dollars in millions,   Six months ended June 30,
except per share data)   2010   2009
    Allocated   Weighted   Per-   Allocated   Weighted   Per-
    net income   shares   share   net income   Shares   share
    (numerator)   (denominator)   amount   (numerator)   (denominator)   amount
         
Class A — Basic EPS:
                                               
Income available to Class A stockholders
  $ 95       51,099,071     $ 1.87     $ 44       51,255,385     $ 0.85  
         
Dilutive effect of stock awards
    0       22,465             0       27,209        
         
Assumed conversion of Class B shares
    1       6,110,400             0       6,122,400        
         
Class A — Diluted EPS:
                                               
Income available to Class A stockholders on Class A equivalent shares
  $ 96       57,231,936     $ 1.68     $ 44       57,404,994     $ 0.76  
         
Class B — Basic and diluted EPS:
                                               
Income available to Class B stockholders
  $ 1       2,546     $ 271.03     $ 0       2,551     $ 127.98  
         
Included in the diluted earnings per share calculations for the second quarters of 2010 and 2009, respectively, were 10,612 and 12,809 shares of awards not yet vested related to our outside directors’ stock compensation plan, and 11,200 and 14,400 shares of other stock-based awards not yet vested. The second quarter and first half of 2010 diluted earnings per share calculations also include 1,285 and 653, respectively, weighted average shares related to our long-term incentive plan for executive and senior management for the 2007-2009 performance period, as 39,406 shares were granted and vested in June. These shares were delivered in July 2010.
Note 4. Variable Interest Entity
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 because of the absence of decision-making capabilities by the equity owners (i.e. subscribers (policyholders)) of the Exchange and because of the significance of the management fees the Exchange pays to Indemnity as the decision maker. The new accounting guidance, which we adopted on January 1, 2010, requires entities to perform a qualitative analysis to determine the primary

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beneficiary of variable interest entities. As a result of adopting the new guidance, Indemnity is deemed to have a controlling financial interest in the Exchange and is considered the primary beneficiary. The Exchange’s results have been consolidated with those of Indemnity. We have retrospectively applied the new accounting guidance and have consolidated the Exchange for all periods presented in this report for comparability purposes. See Note 2.
Consolidation of the Exchange 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. Indemnity earns management fee revenues from the Exchange for services provided as attorney-in-fact for the Exchange. Indemnity’s management fee revenues are based on the direct written premiums of the Exchange and the other members of the Property and Casualty Group. Indemnity’s Board of Directors determines the management fee rate paid by the Exchange to Indemnity. This rate cannot exceed 25% of the direct and affiliated assumed written premiums of the Exchange, as defined by the subscriber agreement signed by each policyholder. The management fee revenues and management fee expenses are eliminated in consolidation.
Indemnity participates in the underwriting results of the Exchange through the pooling arrangement in which its insurance subsidiaries have a 5.5% participation. If the Exchange were to default, Indemnity’s insurance subsidiaries would be liable for the policies that they wrote directly. Indemnity’s property and casualty insurance subsidiaries wrote approximately 16% of the 2009 direct written premiums of the Property and Casualty Group. Indemnity’s Board of Directors determines the continuation and participation percentage of Indemnity’s property and casualty subsidiaries in the reinsurance pooling arrangement.
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 and the underwriting results of the Property and Casualty Group in which Indemnity has a 5.5% participation. 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, reinsurance recoverables from unpaid losses and loss expenses and unearned premium balances ceded under the pooling arrangement and cost reimbursements.
Indemnity has not provided financial or other support to the Exchange for the reporting periods presented. At June 30, 2010, 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.
Note 5. Segment Information
As a result of the changes in our reporting entity at January 1, 2010 (see Note 2), our reportable segments have increased from three to four. Our reportable segments include management operations, property and casualty insurance operations, life insurance operations and investment operations. The segment information presented below includes reclassification of all comparative prior period segment information. Accounting policies for segments are the same as those described in the summary of significant accounting policies. For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2009 included in our Form 8-K as filed with the Securities and Exchange Commission on May 6, 2010. 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.
Our management operations segment reflects the results of 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 management fees from the Exchange for providing sales, underwriting and policy issuance services. The management fee revenue, which is eliminated in consolidation, is calculated as a percentage of the direct written premium of the Property and Casualty Group. The Exchange issues policies with annual terms only. Management

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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 Indemnity 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 in consolidation, the amount of the fee directly impacts allocations of our consolidated net income between noncontrolling interest, which bears the management fee expense and represents the interests of the Exchange subscribers, and Indemnity’s interests, which earns the management fee revenue and represents Indemnity shareholder interest in net income.
Our property and casualty insurance operations segment includes personal and commercial lines business. 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 Indemnity subsidiaries and the Exchange, and includes 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 operations principally based on net underwriting results represented by the combined ratio.
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 operations. We evaluate profitability of the life insurance operations segment principally based on 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 quarter 2010 and 2009, investment activities on life insurance-related assets generated revenues of $25 million and $20 million, respectively, resulting in EFL reporting income before income taxes of $11 million and $6 million, respectively, before intercompany eliminations. For the six months ended June 30, 2010 and 2009, investment activities on life insurance and related assets generated revenues of $52 million and $26 million, respectively, resulting in EFL reporting income before taxes of $21 million and $0 million, respectively, before intercompany eliminations. See Note 15 for EFL supplemental information.
The investment operations segment performance is evaluated based on appreciation of assets, rate of return and overall return. Investment-related income for the life operations is included in the investment segment results.
The following tables summarize the components of the Consolidated Statements of Operations by reportable business segments:
                                                 
    Erie Insurance Group
    For the three months ended June 30, 2010
            Property                
            and   Life            
    Management   casualty   insurance   Investment        
(in millions)   operations   operations   operations   operations   Eliminations   Consolidated
     
Premiums earned/life policy revenue
          $ 974     $ 16             $ (1 )   $ 989  
Net investment income
                          $ 110       (2 )     108  
Net realized investment losses
                            (213 )             (213 )
Net impairment losses recognized in earnings
                            (4 )             (4 )
Equity in earnings of limited partnerships
                            27               27  
Management fee revenue
  $ 270                               (270 )      
Service agreement and other revenue
    9               0                       9  
     
Total revenues (losses)
    279       974       16       (80 )     (273 )     916  
     
Cost of management operations
    217                               (217 )      
Insurance losses and loss expenses
            717                       (2 )     715  
Benefits and other changes in policy reserves
                    22                       22  
Policy acquisition and underwriting expense
            275       9               (54 )     230  
     
Total benefits and expenses
    217       992       31             (273 )     967  
     
Income (loss) before income taxes
    62       (18 )     (15 )     (80 )           (51 )
Provision (benefit) for income taxes
    21       (7 )     (5 )     (29 )           (20 )
     
Net income (loss)
  $ 41     $ (11 )   $ (10 )   $ (51 )   $     $ (31 )
     

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    Erie Insurance Group
    For the six months ended June 30, 2010
            Property                
            and   Life            
    Management   casualty   insurance   Investment        
(in millions)   operations   operations   operations   operations   Eliminations   Consolidated
     
Premiums earned/life policy revenue
          $ 1,936     $ 32             $ (1 )   $ 1,967  
Net investment income
                          $ 217       (5 )     212  
Net realized investment losses
                            (88 )             (88 )
Net impairment losses recognized in earnings
                            (6 )             (6 )
Equity in earnings of limited partnerships
                            30               30  
Management fee revenue
  $ 507                               (507 )      
Service agreement and other revenue
    17               0                       17  
     
Total revenues
    524       1,936       32       153       (513 )     2,132  
     
Cost of management operations
    409                               (409 )      
Insurance losses and loss expenses
            1,455                       (3 )     1,452  
Benefits and other changes in policy reserves
                    46                       46  
Policy acquisition and underwriting expense
            540       18               (101 )     457  
     
Total benefits and expenses
    409       1,995       64             (513 )     1,955  
     
Income (loss) before income taxes
    115       (59 )     (32 )     153             177  
Provision (benefit) for income taxes
    39       (21 )     (11 )     39             46  
     
Net income (loss)
  $ 76     $ (38 )   $ (21 )   $ 114     $     $ 131  
     
                                                 
    Erie Insurance Group
    For the three months ended June 30, 2009
            Property                
            and   Life            
    Management   casualty   insurance   Investment        
(in millions)   operations   operations   operations   operations(1)   Eliminations   Consolidated
     
Premiums earned/life policy revenue
          $ 947     $ 18             $ (1 )   $ 964  
Net investment income
                          $ 107       (2 )     105  
Net realized investment gains
                            208               208  
Net impairment losses recognized in earnings
                            (12 )             (12 )
Equity in losses of limited partnerships
                            (126 )             (126 )
Management fee revenue
  $ 259                               (259 )      
Service agreement and other revenue
    9               1                       10  
     
Total revenues
    268       947       19       177       (262 )     1,149  
     
Cost of management operations
    208                               (208 )      
Insurance losses and loss expenses
            638                       (2 )     636  
Benefits and other changes in policy reserves
                    24                       24  
Policy acquisition and underwriting expense
            274       9               (52 )     231  
     
Total benefits and expenses
    208       912       33             (262 )     891  
     
Income (loss) before income taxes
    60       35       (14 )     177             258  
Provision (benefit) for income taxes
    16       12       (5 )     (36 )           (13 )
     
Net income (loss)
  $ 44     $ 23     $ (9 )   $ 213     $     $ 271  
     

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    Erie Insurance Group
    For the six months ended June 30, 2009
            Property                
            and   Life            
    Management   casualty   insurance   Investment        
(in millions)   operations   operations   operations   operations(1)   Eliminations   Consolidated
     
Premiums earned/life policy revenue
          $ 1,888     $ 34             $ (1 )   $ 1,921  
Net investment income
                          $ 227       (5 )     222  
Net realized investment gains
                            53               53  
Net impairment losses recognized in earnings
                            (83 )             (83 )
Equity in losses of limited partnerships
                            (287 )             (287 )
Management fee revenue
  $ 489                               (489 )      
Service agreement and other revenue
    17               1                       18  
     
Total revenues (losses)
    506       1,888       35       (90 )     (495 )     1,844  
     
Cost of management operations
    401                               (401 )      
Insurance losses and loss expenses
            1,420                       (3 )     1,417  
Benefits and other changes in policy reserves
                    46                       46  
Policy acquisition and underwriting expense
            539       15               (91 )     463  
     
Total benefits and expenses
    401       1,959       61             (495 )     1,926  
     
Income (loss) before income taxes
    105       (71 )     (26 )     (90 )           (82 )
Provision (benefit) for income taxes
    30       (25 )     (9 )     (98 )           (102 )
     
Net income (loss)
  $ 75     $ (46 )   $ (17 )   $ 8     $     $ 20  
     
 
(1)   The significant realized losses, impairment charges and market value adjustments on limited partnership investments were impacted by the significant disruption in the financial markets.
See the “Results of the Erie Insurance Group’s operations by interest” table in the Management’s Discussion and Analysis for the composition of income attributable to Indemnity and income attributable to the noncontrolling interest (Exchange).
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 on 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 for identical instruments in active markets not subject to adjustments or discounts.
 
  Level 2   Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
 
  Level 3   Instruments whose significant value drivers are unobservable and reflect management’s estimate of fair value based on assumptions used by market participants in an orderly transaction as of the valuation date.

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The following table represents the fair value measurements on a recurring basis for our consolidated available-for-sale and trading securities by asset class and level of input at June 30, 2010:
                                 
    Erie Insurance Group
            June 30, 2010    
            Fair value measurements using:    
            Quoted prices in       Significant
            active markets for   Significant   unobservable
            identical assets   observable inputs   inputs
(in millions)   Total   Level 1   Level 2   Level 3
     
Indemnity
                               
Available for sale securities:
                               
Fixed maturities
                               
U.S. treasuries and government agencies
  $ 4     $ 4     $ 0     $ 0  
U.S. government sponsored enterprises
    19       0       19       0  
Foreign government
    2       0       2       0  
Municipal securities
    253       0       253       0  
U.S. corporate debt — non-financial
    177       0       177       0  
U.S. corporate debt — financial
    136       0       134       2  
Foreign corporate debt — non-financial
    29       0       29       0  
Foreign corporate debt — financial
    17       0       17       0  
Structured securities:
                               
Asset-backed securities — auto loans
    3       0       3       0  
Collateralized debt obligations
    10       0       2       8  
Commercial mortgage-backed
    5       0       5       0  
Residential mortgage-backed:
                               
Government sponsored enterprises
    13       0       13       0  
Non-government sponsored enterprises
    3       0       3       0  
     
Total fixed maturities-Indemnity
  $ 671     $ 4     $ 657     $ 10  
     
Equity securities
                               
U.S. nonredeemable preferred securities:
                               
Financial
  $ 26     $ 7     $ 18     $ 1  
Non-financial
    14       6       8       0  
Foreign nonredeemable preferred securities:
                               
Financial
    4       0       4       0  
Non-financial
    1       0       1       0  
     
Total equity securities — Indemnity
  $ 45     $ 13     $ 31     $ 1  
     
Total available-for-sale securities — Indemnity
  $ 716     $ 17     $ 688     $ 11  
     
Trading securities:
                               
Common stock
  $ 40     $ 40     $ 0     $ 0  
     
Total trading securities
  $ 40     $ 40     $ 0     $ 0  
     
Total Indemnity
  $ 756     $ 57     $ 688     $ 11  
     

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    Erie Insurance Group
            June 30, 2010    
            Fair value measurements using:    
            Quoted prices in       Significant
            active markets for   Significant   unobservable
            identical assets   observable inputs   inputs
(in millions)   Total   Level 1   Level 2   Level 3
     
Exchange
                               
Available for sale securities:
                               
Fixed maturities
                               
U.S. treasuries and government agencies
  $ 5     $ 5     $ 0     $ 0  
U.S. government sponsored enterprises
    91       0       91       0  
Foreign government
    15       0       15       0  
Municipal securities
    1,441       0       1,441       0  
U.S. corporate debt — non-financial
    2,296       5       2,282       9  
U.S. corporate debt — financial
    1,659       6       1,653       0  
Foreign corporate debt — non-financial
    396       0       396       0  
Foreign corporate debt — financial
    372       0       372       0  
Structured securities:
                               
Asset-backed securities — auto loans
    47       0       47       0  
Asset-backed securities — other
    28       0       23       5  
Collateralized debt obligations
    86       0       33       53  
Commercial mortgage-backed
    150       0       150       0  
Residential mortgage-backed:
                               
Government sponsored enterprises
    171       0       171       0  
Non-government sponsored enterprises
    32       0       32       0  
     
Total fixed maturities — Exchange
  $ 6,789     $ 16     $ 6,706     $ 67  
     
Equity securities
                               
U.S. nonredeemable preferred securities:
                               
Financial
  $ 311     $ 96     $ 211     $ 4  
Non-financial
    153       60       93       0  
Government sponsored enterprises
    1       1       0       0  
Foreign nonredeemable preferred securities:
                               
Financial
    50       15       35       0  
Non-financial
    8       0       8       0  
     
Total equity securities — Exchange
  $ 523     $ 172     $ 347     $ 4  
     
Total available for sale securities — Exchange
  $ 7,312     $ 188     $ 7,053     $ 71  
     
Trading securities:
                               
Common stock
  $ 1,712     $ 1,702     $ 0     $ 10  
     
Total trading securities
  $ 1,712     $ 1,702     $ 0     $ 10  
     
Total — Exchange
  $ 9,024     $ 1,890     $ 7,053     $ 81  
     
Total — Erie Insurance Group
  $ 9,780     $ 1,947     $ 7,741     $ 92  
     

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Level 3 Assets — Quarterly Change:
                                                 
    Erie Insurance Group
    Beginning           Included in other   Purchases,   Transfers in   Ending
    balance at   Included in   comprehensive   sales and   and (out) of   balance at
(in millions)   March 31, 2010   earnings (1)   income   adjustments   Level 3 (2)   June 30, 2010
     
Indemnity
                                               
Available-for-sale securities:
                                               
Fixed maturities:
                                               
U.S. corporate debt — financial
  $ 2     $ 0     $ 0     $ 0     $ 0     $ 2  
Collateralized debt obligations
    9       0       1       0       (2 )     8  
     
Total fixed maturities
    11       0       1       0       (2 )     10  
Preferred stock:
                                               
U.S. nonredeemable — financial
    2       0       (1 )     0       0       1  
     
Total preferred stock
    2       0       (1 )     0       0       1  
     
Total Level 3 assets — Indemnity
  $ 13     $ 0     $ 0     $ 0     $ (2 )   $ 11  
Exchange
                                               
Available-for-sale securities:
                                               
Fixed maturities:
                                               
U.S. corporate debt — non-financial
  $ 9     $ 0     $ 0     $ 0     $ 0     $ 9  
Asset backed securities — other
    5       0       0       0       0       5  
Collateralized debt obligations
    70       1       3       0       (21 )     53  
     
Total fixed maturities
    84       1       3       0       (21 )   $ 67  
Preferred stock:
                                               
U.S. nonredeemable — financial
    5       0       (1 )     0       0       4  
     
Total preferred stock
    5       0       (1 )     0       0       4  
Trading securities:
                                               
     
Common stock
    10       0       0       0       0       10  
     
Total Level 3 assets — Exchange
  $ 99     $ 1     $ 2     $ 0     $ (21 )   $ 81  
     
Total Level 3 assets — Erie Insurance Group
  $ 112     $ 1     $ 2     $ 0     $ (23 )   $ 92  
     

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Level 3 Assets — Year-to-Date Change:
                                                 
    Erie Insurance Group
    Beginning                        
    balance at           Included in other   Purchases,   Transfers in   Ending
    December 31,   Included in   comprehensive   sales and   and (out) of   balance at
(in millions)   2009   earnings (1)   income   adjustments   Level 3 (2)   June 30, 2010
     
Indemnity
                                               
Available-for-sale securities:
                                               
Fixed maturities:
                                               
U.S. corporate debt — financial
  $ 2     $ 0     $ 0     $ 0     $ 0     $ 2  
Collateralized debt obligations
    8       0       1       0       (1 )     8  
     
Total fixed maturities
    10       0       1       0       (1 )     10  
Preferred stock:
                                               
U.S. nonredeemable — financial
    1       0       0       0       0       1  
     
Total preferred stock
    1       0       0       0       0       1  
     
Total Level 3 assets — Indemnity
  $ 11     $ 0     $ 1     $ 0     $ (1 )   $ 11  
Exchange
                                               
Available-for-sale securities:
                                               
Fixed maturities:
                                               
U.S. corporate debt — non-financial
  $ 17     $ 0     $ 0     $ 0     $ (8 )   $ 9  
Asset backed securities — other
    5       0       0       0       0       5  
Collateralized debt obligations
    49       1       6       0       (3 )     53  
     
Total fixed maturities
    71       1       6       0       (11 )     67  
Preferred stock:
                                               
U.S. nonredeemable — financial
    4       0       0       0       0       4  
     
Total preferred stock
    4       0       0       0       0       4  
Trading securities:
                                               
     
Common stock
    9       1       0       0       0       10  
     
Total Level 3 assets — Exchange
  $ 84     $ 2     $ 6     $ 0     $ (11 )   $ 81  
     
Total Level 3 assets — Erie Insurance Group
  $ 95     $ 2     $ 7     $ 0     $ (12 )   $ 92  
     
 
(1)   Includes losses as a result of other-than-temporary impairments and accrual of discount and amortization of premium. These amounts are reported in the Consolidated Statement of Operations. There were no unrealized gains or losses included in earnings for the three or six months ended June 30, 2010 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. There were no significant transfers in and out of Level 3. Transfers in and out of levels are recognized at the end of the period.
There were no significant transfers between Levels 1 and 2 during the six months ended June 30, 2010.

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The following table represents the fair value measurements on a recurring basis for our consolidated available-for-sale and trading securities by asset class and level of input at December 31, 2009:
                                 
    Erie Insurance Group
    At December 31, 2009
            Fair value measurements using:    
            Quoted prices        
            in active   Significant   Significant
            markets for   observable   unobservable
            identical assets   inputs   inputs
(in millions)   Total   Level 1   Level 2   Level 3
     
Indemnity
                               
Available-for-sale securities:
                               
Fixed maturities
  $ 664     $ 6     $ 648     $ 10  
Preferred stock
    38       9       28       1  
Trading securities — common stock
    42       42       0       0  
     
Total — Indemnity
  $ 744     $ 57     $ 676     $ 11  
Exchange
                               
Available-for-sale securities:
                               
Fixed maturities
  $ 6,517     $ 31     $ 6,415     $ 71  
Preferred stock
    472       157       311       4  
Trading securities — common stock
    1,835       1,826       0       9  
     
Total — Exchange
  $ 8,824     $ 2,014     $ 6,726     $ 84  
     
Total — Erie Insurance Group
  $ 9,568     $ 2,071     $ 7,402     $ 95  
     

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Level 3 Assets — Quarterly Change:
                                                 
    Erie Insurance Group
    Beginning           Included in other   Purchases,   Transfers in   Ending
    balance at   Included in   comprehensive   sales and   and (out) of   balance at
(in millions)   March, 2009   earnings (1)   income   adjustments   Level 3 (2)   June 30, 2009
     
Indemnity
                                               
Available-for-sale securities:
                                               
Fixed maturities:
                                               
U.S. corporate debt — financial
  $ 5     $ 0     $ 0     $ 0     $ 0     $ 5  
Collateralized debt obligations
    6       (1 )     3       1       0       9  
Commercial mortgage backed securities
    2       0       0       0       (2 )     0  
     
Total fixed maturities
    13       (1 )     3       1       (2 )     14  
Preferred stock:
                                               
U.S. nonredeemable — financial
    6       0       1       0       0       7  
U.S. nonredeemable — non-financial
    4       0       0       0       0       4  
     
Total preferred stock
    10       0       1       0       0       11  
     
Total Level 3 assets — Indemnity
  $ 23     $ (1 )   $ 4     $ 1     $ (2 )   $ 25  
Exchange
                                               
Available-for-sale securities:
                                               
Fixed maturities:
                                               
U.S. corporate debt — financial
  $ 33     $ 0     $ 3     $ (16 )   $ (3 )   $ 17  
U.S. corporate debt — non-financial
    21       0       0       (2 )     0       19  
Foreign corporate debt — financial
    1       0       0       (1 )     0       0  
Foreign corporate debt — non-financial
    1       0       0       0       0       1  
Asset backed securities — other
    5       0       0       0       0       5  
Collateralized debt obligations
    32       (4 )     28       11       9       76  
Commercial mortgage backed securities
    9       0       0       0       (9 )     0  
     
Total fixed maturities
    102       (4 )     31       (8 )     (3 )     118  
Preferred stock:
                                               
U.S. nonredeemable — financial
    19       0       1       0       0       20  
U.S. nonredeemable — non-financial
    23       0       1       0       0       24  
     
Total preferred stock
    42       0       2       0       0       44  
     
Total Level 3 assets — Exchange
  $ 144     $ (4 )   $ 33     $ (8 )   $ (3 )   $ 162  
     
Total Level 3 assets — Erie Insurance Group
  $ 167     $ (5 )   $ 37     $ (7 )   $ (5 )   $ 187  
     

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Level 3 Assets — Year-to-Date Change:
                                                 
    Erie Insurance Group
    Beginning                        
    balance at           Included in other   Purchases,   Transfers in   Ending
    December 31,   Included in   comprehensive   sales and   and (out) of   balance at
(in millions)   2008   earnings (1)   income   adjustments   Level 3 (2)   June 30, 2009
     
Indemnity
                                               
Available-for-sale securities:
                                               
Fixed maturities:
                                               
U.S. corporate debt — financial
  $ 5     $ 0     $ 0     $ 0     $ 0     $ 5  
Collateralized debt obligations
    7       (1 )     2       1       0       9  
Commercial mortgage-backed securities
    2       0       0       0       (2 )     0  
     
Total fixed maturities
    14       (1 )     2       1       (2 )     14  
Preferred stock:
                                               
U.S. nonredeemable — financial
    7       0       0       0       0       7  
U.S. nonredeemable — non-financial
    4       0       0       0       0       4  
     
Total preferred stock
    11       0       0       0       0       11  
     
Total Level 3 assets — Indemnity
  $ 25     $ (1 )   $ 2     $ 1     $ (2 )   $ 25  
Exchange
                                               
Available-for-sale securities:
                                               
Fixed maturities:
                                               
U.S. corporate debt —financial
  $ 36     $ (3 )   $ 3     $ (16 )   $ (3 )   $ 17  
U.S. corporate debt — non-financial
    21       0       0       (2 )     0       19  
Foreign corporate debt —financial
    1       0       0       (1 )     0       0  
Foreign corporate debt — non-financial
    2       0       0       (1 )     0       1  
Asset backed securities — other
    5       0       0       0       0       5  
Collateralized debt obligations
    36       (2 )     16       11       15       76  
Commercial mortgage-backed securities
    7       0       0       0       (7 )     0  
     
Total fixed maturities
    108       (5 )     19       (9 )     5       118  
Preferred stock:
                                               
U.S. nonredeemable — financial
    24       0       (2 )     0       (2 )     20  
U.S. nonredeemable — non-financial
    22       0       2       0       0       24  
     
Total preferred stock
    46       0       0       0       (2 )     44  
     
Total Level 3 assets — Exchange
  $ 154     $ (5 )   $ 19     $ (9 )   $ 3     $ 162  
     
Total Level 3 assets — Erie Insurance Group
  $ 179     $ (6 )   $ 21     $ (8 )   $ 1     $ 187  
     
 
(1)   Includes losses as a result of other-than-temporary impairments and accrual of discount and amortization of premium. These amounts are reported in the Consolidated Statement of Operations. There were no unrealized gains or losses included in earnings for the three or six months ended June 30, 2009 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 end of the period.
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 on 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 on corroborating information and our knowledge and monitoring of market conditions. At June 30, 2010, we adjusted some prices received by the pricing service to reflect an alternate fair market value based on observable market data such as a disparity in price of comparable securities and/or non-binding broker quotes.

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The following table displays the number and values of these adjustments at June 30, 2010:
                         
            Value of   Value of
            securities   securities used in
    Number of   using pricing   the financial
(dollars in millions)   holdings   service   statements
 
Indemnity
    5     $ 4     $ 3  
Exchange
    14       39       42  
             
Total — Erie Insurance Group
          $ 43     $ 45  
             
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 level classification 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 and believe that their prices adequately consider market activity in determining fair value.
In cases in which 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 on 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.

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The following table sets forth the fair value of the consolidated fixed maturity and preferred stock securities by pricing source:
                                 
    Erie Insurance Group
    June 30, 2010
(in millions)   Total   Level 1   Level 2   Level 3
     
Indemnity
                               
Fixed maturity securities:
                               
Priced via pricing services
  $ 659     $ 4     $ 655     $ 0  
Priced via market comparables/non-binding broker quote(1)
    2       0       2       0  
Priced via internal modeling (2)
    10       0       0       10  
     
Total fixed maturity securities
    671       4       657       10  
     
Preferred stock securities:
                               
Priced via pricing services
    41       13       28       0  
Priced via market comparables/non-binding broker quote (1)
    4       0       3       1  
Priced via internal modeling (2)
    0       0       0       0  
     
Total preferred stock securities
    45       13       31       1  
     
Common stock securities:
                               
Priced via pricing services
    40       40       0       0  
Priced via market comparables/non-binding broker quote (1)
    0       0       0       0  
Priced via internal modeling (2)
    0       0       0       0  
     
Total common stock securities
    40       40       0       0  
     
Total available-for-sale/trading securities — Indemnity
  $ 756     $ 57     $ 688     $ 11  
     
Exchange
                               
Fixed maturity securities:
                               
Priced via pricing services
  $ 6,665     $ 16     $ 6,649     $ 0  
Priced via market comparables/non-binding broker quote (1)
    51       0       51       0  
Priced via internal modeling (2)
    73       0       6       67  
     
Total fixed maturity securities
    6,789       16       6,706       67  
     
Preferred stock securities:
                               
Priced via pricing services
    506       172       334       0  
Priced via market comparables/non-binding broker quote (1)
    17       0       13       4  
Priced via internal modeling (2)
    0       0       0       0  
     
Total preferred stock securities
    523       172       347       4  
     
Common stock securities:
                               
Priced via pricing services
    1,701       1,701       0       0  
Priced via market comparables/non-binding broker quote (1)
    0       0       0       0  
Priced via internal modeling (2)
    11       1       0       10  
     
Total common stock securities
    1,712       1,702       0       10  
     
Total available-for-sale/trading securities — Exchange
  $ 9,024     $ 1,890     $ 7,053     $ 81  
     
Total available-for-sale/trading securities — Erie Insurance Group
  $ 9,780     $ 1,947     $ 7,741     $ 92  
     
 
(1)   All broker quotes obtained for securities were non-binding. When a non-binding broker quote was the only price available, the security was classified as Level 3.
 
(2)   Internal modeling using a discounted cash flow model was performed on 14 fixed maturities and 3 common equity securities representing less than 0.8% of the total portfolio.
We have no assets that were measured at fair value on a nonrecurring basis during the six months ended June 30, 2010.

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Note 7. Investments
The following tables summarize the cost and fair value of our available-for-sale securities at June 30, 2010 and December 31, 2009:
                                 
    Erie Insurance Group
    June 30, 2010
    Amortized   Gross unrealized   Gross unrealized   Estimated
(in millions)   cost   gains   losses   fair value
     
Available-for-sale securities
                               
Indemnity
                               
Fixed maturities
                               
U.S. treasuries and government agencies
  $ 4     $ 0     $ 0     $ 4  
U.S. government sponsored enterprises
    19       0       0       19  
Foreign government
    2       0       0       2  
Municipal securities
    242       11       0       253  
U.S. corporate debt — non-financial
    164       13       0       177  
U.S. corporate debt — financial
    130       7       1       136  
Foreign corporate debt — non-financial
    26       3       0       29  
Foreign corporate debt — financial
    17       1       1       17  
Structured securities:
                               
Asset-backed securities — auto loans
    3       0       0       3  
Collateralized debt obligations
    10       1       1       10  
Commercial mortgage-backed
    5       0       0       5  
Residential mortgage-backed:
                            0  
Government sponsored enterprises
    12       1       0       13  
Non-government sponsored enterprises
    3       0       0       3  
     
Total fixed maturities-Indemnity
  $ 637     $ 37     $ 3     $ 671  
     
Equity securities
                               
U.S. nonredeemable preferred securities:
                               
Financial
  $ 24     $ 3     $ 1     $ 26  
Non-financial
    13       1       0       14  
Foreign nonredeemable preferred securities:
                               
Financial
    3       1       0       4  
Non-financial
    1       0       0       1  
     
Total equity securities — Indemnity
  $ 41     $ 5     $ 1     $ 45  
     
Total available-for-sale securities — Indemnity
  $ 678     $ 42     $ 4     $ 716  
     
Exchange
                               
Fixed maturities
                               
U.S. treasuries and government agencies
  $ 5     $ 0     $ 0     $ 5  
U.S. government sponsored enterprises
    89       2       0       91  
Foreign government
    14       1       0       15  
Municipal securities
    1,380       62       1       1,441  
U.S. corporate debt — non-financial
    2,119       184       7       2,296  
U.S. corporate debt — financial
    1,552       119       12       1,659  
Foreign corporate debt — non-financial
    367       30       1       396  
Foreign corporate debt — financial
    357       16       1       372  
Structured securities:
                               
Asset-backed securities — auto loans
    44       3       0       47  
Asset-backed securities — other
    28       1       1       28  
Collateralized debt obligations
    85       9       8       86  
Commercial mortgage-backed
    144       7       1       150  
Residential mortgage-backed:
                               
Government sponsored enterprises
    162       9       0       171  
Non-government sponsored enterprises
    33       0       1       32  
     
Total fixed maturities — Exchange
  $ 6,379     $ 443     $ 33     $ 6,789  
     
Equity securities
                               
U.S. nonredeemable preferred securities:
                               
Financial
  $ 271     $ 47     $ 7     $ 311  
Non-financial
    148       7       2       153  
Government sponsored enterprises
    1       0       0       1  
Foreign nonredeemable preferred securities:
                               
Financial
  $ 49     $ 4     $ 3     $ 50  
Non-financial
  $ 8     $ 0     $ 0     $ 8  
     
Total equity securities — Exchange
  $ 477     $ 58     $ 12     $ 523  
     
Total available-for-sale securities — Exchange
  $ 6,856     $ 501     $ 45     $ 7,312  
     
Total available-for-sale securities — Erie Insurance Group
  $ 7,534     $ 543     $ 49     $ 8,028  
     

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    Erie Insurance Group
    December 31, 2009
    Amortized   Gross unrealized   Gross unrealized   Estimated
(in millions)   cost   gains   losses   fair value
     
Available-for-sale securities
                               
Indemnity
                               
Fixed maturities
                               
U.S. treasuries and government agencies
  $ 3     $ 0     $ 0     $ 3  
U.S. government sponsored enterprises
    14       0       0       14  
Foreign government
    2       0       0       2  
Municipal securities
    235       9       0       244  
U.S. corporate debt — non-financial
    172       10       1       181  
U.S. corporate debt — financial
    135       7       4       138  
Foreign corporate debt — non-financial
    26       2       0       28  
Foreign corporate debt — financial
    19       2       1       20  
Structured securities:
                               
Asset-backed securities — auto loans
    4       0       0       4  
Collateralized debt obligations
    10       0       2       8  
Commercial mortgage-backed
    5       0       0       5  
Residential mortgage-backed:
                               
Government sponsored enterprises
    14       0       0       14  
Non-government sponsored enterprises
    3       0       0       3  
     
Total fixed maturities-Indemnity
  $ 642     $ 30     $ 8     $ 664  
     
Equity securities
                               
U.S. nonredeemable preferred securities:
                               
Financial
  $ 20     $ 3     $ 1     $ 22  
Non-financial
    9       1       0       10  
Foreign nonredeemable preferred securities:
                               
Financial
    5       0       0       5  
Non-financial
    1       0       0       1  
     
Total equity securities — Indemnity
  $ 35     $ 4     $ 1     $ 38  
     
Total available-for-sale securities — Indemnity
  $ 677     $ 34     $ 9     $ 702  
     
Exchange
                               
Fixed maturities
                               
U.S. treasuries and government agencies
  $ 5     $ 0     $ 0     $ 5  
U.S. government sponsored enterprises
    76       1       0       77  
Foreign government
    10       1       0       11  
Municipal securities
    1,389       55       3       1,441  
U.S. corporate debt — non-financial
    2,078       125       10       2,193  
U.S. corporate debt — financial
    1,498       82       28       1,552  
Foreign corporate debt — non-financial
    375       22       2       395  
Foreign corporate debt — financial
    292       11       4       299  
Structured securities:
                               
Asset-backed securities — auto loans
    48       3       0       51  
Asset-backed securities — credit cards
    5       0       0       5  
Asset-backed securities — other
    35       0       2       33  
Collateralized debt obligations
    88       5       16       77  
Commercial mortgage-backed
    127       5       5       127  
Residential mortgage-backed:
                               
Government sponsored enterprises
    192       6       0       198  
Non-government sponsored enterprises
    59       0       6       53  
     
Total fixed maturities — Exchange
  $ 6,277     $ 316     $ 76     $ 6,517  
     
Equity securities
                               
U.S. nonredeemable preferred securities:
                               
Financial
  $ 259     $ 53     $ 11     $ 301  
Non-financial
    111       4       2       113  
Government sponsored enterprises
    1       2       0       3  
Foreign nonredeemable preferred securities:
                               
Financial
    46       4       3       47  
Non-financial
    8       0       0       8  
     
Total equity securities — Exchange
  $ 425     $ 63     $ 16     $ 472  
     
Total available-for-sale securities — Exchange
  $ 6,702     $ 379     $ 92     $ 6,989  
     
Total available-for-sale securities — Erie Insurance Group
  $ 7,379     $ 413     $ 101     $ 7,691  
     

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The amortized cost and estimated fair value of fixed maturities at June 30, 2010, are shown below by remaining contractual term to maturity. Mortgage-backed securities are allocated based on their stated maturity dates. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
                 
    Erie Insurance Group  
    Amortized     Estimated  
(in millions)   cost     fair value  
Indemnity
               
Due in one year or less
  $ 33     $ 36  
Due after one year through five years
    253       265  
Due after five years through ten years
    256       272  
Due after ten years
    95       98  
 
           
Total fixed maturities — Indemnity
  $ 637     $ 671  
 
           
Exchange
               
Due in one year or less
  $ 330     $ 346  
Due after one year through five years
    2,238       2,380  
Due after five years through ten years
    2,531       2,716  
Due after ten years
    1,280       1,347  
 
           
Total fixed maturities — Exchange
  $ 6,379     $ 6,789  
 
           
Total fixed maturities — Erie Insurance Group
  $ 7,016     $ 7,460  
 
           
Fixed maturities and equity securities in a gross unrealized loss position at June 30, 2010 are as follows for Indemnity. Data is provided by length of time securities were in a gross unrealized loss position.
June 30, 2010
                                                         
    Erie Insurance Group
    Less than 12 months   12 months or longer   Total
    Fair   Unrealized   Fair   Unrealized   Fair   Unrealized   No. of
(dollars in millions)   value   losses   value   losses   Value   losses   holdings
             
Indemnity
                                                       
Fixed maturities:
                                                       
U.S. government sponsored enterprises
  $ 8     $ 0     $ 0     $ 0     $ 8     $ 0       2  
Municipal securities
    9       0       4       0       13       0       6  
U.S. corporate debt — non-financial
    8       0       3       0       11       0       11  
U.S. corporate debt — financial
    23       0       13       1       36       1       22  
Foreign corporate debt — non-financial
    0       0       2       0       2       0       2  
Foreign corporate debt — financial
    0       0       2       1       2       1       1  
Structured securities:
                                                       
Collateralized debt obligations
    0       0       3       1       3       1       4  
Commercial mortgage-backed
    1       0       0       0       1       0       1  
Residential mortgage-backed:
                                                       
Non-government sponsored enterprises
    0       0       2       0       2       0       1  
             
Total fixed maturities — Indemnity
  $ 49     $ 0     $ 29     $ 3     $ 78     $ 3       50  
             
Equity securities:
                                                       
U.S. nonredeemable preferred securities:
                                                       
Financial
  $ 2     $ 0     $ 5     $ 1     $ 7     $ 1       6  
Non-financial
    5       0       2       0       7       0       3  
Foreign nonredeemable preferred securities:
                                                       
Financial
    2       0       1       0       3       0       2  
             
Total equity securities — Indemnity
  $ 9     $ 0     $ 8     $ 1     $ 17     $ 1       11  
             
 
       
Quality breakdown of fixed maturities at June 30, 2010
    Less than 12 months   12 months or longer   Total
    Fair   Unrealized   Fair   Unrealized   Fair   Unrealized   No. of
(dollars in millions)   value   losses   value   losses   Value   losses   holdings
Indemnity
                                                       
Investment grade
  $ 43     $ 0     $ 27     $ 2     $ 70     $ 2       42  
Non-investment grade
    6       0       2       1       8       1       8  
 
                                         
Total fixed maturities — Indemnity
  $ 49     $ 0     $ 29     $ 3     $ 78     $ 3       50  
 
                                         

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Fixed maturities and equity securities in a gross unrealized loss position at June 30, 2010 are as follows for the Exchange. Data is provided by length of time securities were in a gross unrealized loss position.
June 30, 2010
                                                         
    Erie Insurance Group
    Less than 12 months   12 months or longer   Total
    Fair   Unrealized   Fair   Unrealized   Fair   Unrealized   No. of
(dollars in millions)   value   losses   value   losses   Value   losses   holdings
             
Exchange
                                                       
Fixed maturities:
                                                       
U.S. government sponsored enterprises
  $ 38     $ 0     $ 0     $ 0     $ 38     $ 0       5  
Municipal securities
    37       1       24       0       61       1       10  
U.S. corporate debt — non-financial
    62       2       55       5       117       7       24  
U.S. corporate debt — financial
    99       2       122       10       221       12       50  
Foreign corporate debt — non-financial
    15       0       21       1       36       1       6  
Foreign corporate debt — financial
    13       0       39       1       52       1       8  
Structured securities:
                                                       
Asset backed — auto loans
    4       0       0       0       4       0       1  
Asset backed — other
    0       0       9       1       9       1       2  
Collateralized debt obligations
    0       0       35       8       35       8       8  
Commercial mortgage-backed
    0       0       13       1       13       1       4  
Residential mortgage-backed:
                                                       
Non-government sponsored
enterprises
    0       0       27       1       27       1       5  
             
Total fixed maturities — Exchange
  $ 268     $ 5     $ 345     $ 28     $ 613     $ 33       123  
             
Equity securities:
                                                       
U.S. nonredeemable preferred securities:
                                                       
Financial
  $ 36     $ 2     $ 35     $ 5     $ 71     $ 7       16  
Non-financial
    13       1       26       1       39       2       7  
Government sponsored enterprises
    0       0       0       0       0       0       4  
Foreign nonredeemable preferred securities:
                                                       
Financial
    12       1       19       2       31       3       6  
             
Total equity securities — Exchange
  $ 61     $ 4     $ 80     $ 8     $ 141     $ 12       33  
             
Quality breakdown of fixed maturities at June 30, 2010
                                                         
    Less than 12 months     12 months or longer     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized     No. of  
(dollars in millions)   value     losses     value     losses     Value     losses     holdings  
Exchange
                                                       
Investment grade
  $ 229     $ 3     $ 246     $ 19     $ 475     $ 22       87  
Non-investment grade
    39       2       99       9       138       11       36  
 
                                         
Total fixed maturities — Exchange
  $ 268     $ 5     $ 345     $ 28     $ 613     $ 33       123  
 
                                         
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 are a general review of market conditions and financial performance of the issuer along with the extent and duration of which fair value is less than cost. A large portion of the unrealized losses greater than 12 months are related to U.S. financial sector securities. Any debt 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.

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Fixed maturities and equity securities in a gross unrealized loss position at December 31, 2009 are as follows for Indemnity. Data is provided by length of time securities were in a gross unrealized loss position.
December 31, 2009
                                                         
    Erie Insurance Group
    Less than 12 months   12 months or longer   Total
    Fair   Unrealized   Fair   Unrealized   Fair   Unrealized   No. of
(dollars in millions)   value   losses   value   losses   Value   losses   holdings
             
Indemnity
                                                       
Fixed maturities:
                                                       
U.S. government sponsored enterprises
  $ 8     $ 0     $ 0     $ 0     $ 8     $ 0       2  
Municipal securities
    18       0       5       0       23       0       12  
U.S. corporate debt — non-financial
    19       0       8       1       27       1       16  
U.S. corporate debt — financial
    16       1       40       3       56       4       42  
Foreign corporate debt — non-financial
    0       0       4       0       4       0       3  
Foreign corporate debt — financial
    2       0       3       1       5       1       4  
Structured securities:
                                                       
Collateralized debt obligations
    0       0       3       2       3       2       6  
Commercial mortgage-backed
    0       0       1       0       1       0       1  
Residential mortgage-backed:
                                                       
Government sponsored enterprises
    6       0       0       0       6       0       2  
Non-government sponsored
enterprises
    0       0       3       0       3       0       2  
             
Total fixed maturities — Indemnity
  $ 69     $ 1     $ 67     $ 7     $ 136     $ 8       90  
             
Equity securities:
                                                       
U.S. nonredeemable preferred securities:
                                                       
Financial
  $ 5     $ 0     $ 5     $ 1     $ 10     $ 1       8  
Non-financial
    3       0       4       0       7       0       3  
Foreign nonredeemable preferred securities:
                                                       
Financial
    0       0       1       0       1       0       1  
             
Total equity securities —
Indemnity
  $ 8     $ 0     $ 10     $ 1     $ 18     $ 1       12  
             
Quality breakdown of fixed maturities at December 31, 2009
                                                         
    Less than 12 months     12 months or longer     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized     No. of  
(dollars in millions)   value     losses     value     losses     value     losses     holdings  
Indemnity
                                                       
Investment grade
  $ 69     $ 1     $ 49     $ 4     $ 118     $ 5       71  
Non-investment grade
    0       0       18       3       18       3       19  
 
                                         
Total fixed maturities — Indemnity
  $ 69     $ 1     $ 67     $ 7     $ 136     $ 8       90  
 
                                         

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Fixed maturities and equity securities in a gross unrealized loss position at December 31, 2009 are as follows for the Exchange. Data is provided by length of time securities were in a gross unrealized loss position.
December 31, 2009
                                                         
    Erie Insurance Group
    Less than 12 months   12 months or longer   Total
    Fair   Unrealized   Fair   Unrealized   Fair   Unrealized   No. of
(dollars in millions)   value   losses   value   losses   Value   losses   holdings
             
Exchange
                                                       
Fixed maturities:
                                                       
U.S. government sponsored enterprises
  $ 50     $ 0     $ 0     $ 0     $ 50     $ 0       6  
Municipal securities
    105       2       26       1       131       3       24  
U.S. corporate debt — non-financial
    128       3       129       7       257       10       56  
U.S. corporate debt — financial
    159       2       318       26       477       28       98  
Foreign corporate debt — non-financial
    12       0       36       2       48       2       9  
Foreign corporate debt — financial
    17       0       68       4       85       4       17  
Structured securities:
                                                       
Asset backed — credit cards
    0       0       5       0       5       0       1  
Asset backed — other
    0       0       18       2       18       2       3  
Collateralized debt obligations
    8       1       28       15       36       16       15  
Commercial mortgage-backed
    1       0       34       5       35       5       6  
Residential mortgage-backed:
                                                       
Government sponsored enterprises
    28       0       0       0       28       0       4  
Non-government sponsored
enterprises
    0       0       45       6       45       6       9  
             
Total fixed maturities — Exchange
  $ 508     $ 8     $ 707     $ 68     $ 1,215     $ 76       248  
             
Equity securities:
                                                       
U.S. nonredeemable preferred securities:
                                                       
Financial
  $ 36     $ 2     $ 72     $ 9     $ 108     $ 11       20  
Non-financial
    14       0       43       2       57       2       10  
Foreign nonredeemable preferred securities:
                                                       
Financial
    0       0       18       3       18       3       4  
             
Total equity securities — Exchange
  $ 50     $ 2     $ 133     $ 14     $ 183     $ 16       34  
             
Quality breakdown of fixed maturities at December 31, 2009
                                                         
    Less than 12 months     12 months or longer     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized     No. of  
(dollars in millions)   value     losses     value     losses     value     losses     holdings  
Exchange
                                                       
Investment grade
  $ 494     $ 8     $ 522     $ 50     $ 1,016     $ 58       191  
Non-investment grade
    14       0       185       18       199       18       57  
 
                                         
Total fixed maturities — Exchange
  $ 508     $ 8     $ 707     $ 68     $ 1,215     $ 76       248  
 
                                         

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Investment income, net of expenses, was generated from the following portfolios:
                                 
    Erie Insurance Group
    Three months ended   Six months ended
    June 30,   June 30,
(in millions)   2010   2009   2010   2009
         
Indemnity
                               
Fixed maturities
  $ 9     $ 9     $ 17     $ 19  
Equity securities
    1       1       2       3  
Cash equivalents and other
    0       0       0       1  
         
Total investment income
    10       10       19       23  
Less: investment expenses
    1       1       1       1  
         
Investment income, net of expenses — Indemnity
  $ 9     $ 9     $ 18     $ 22  
         
Exchange
                               
Fixed maturities
  $ 87     $ 83     $ 173     $ 174  
Equity securities
    18       17       34       34  
Cash equivalents and other
    0       1       0       4  
         
Total investment income
    105       101       207       212  
Less: investment expenses
    6       5       13       12  
         
Investment income, net of expenses — Exchange
  $ 99     $ 96     $ 194     $ 200  
         
Total consolidated investment income, net of expenses — Erie Insurance Group
  $ 108     $ 105     $ 212     $ 222  
         
Dividend income is recognized as earned and recorded to net investment income.
Realized gains (losses) on investments were as follows:
                                 
    Erie Insurance Group
    Three months ended   Six months ended
    June 30,   June 30,
(in millions)   2010   2009   2010   2009
Indemnity
                               
Available-for-sale securities:
                               
Fixed maturities
                               
Gross realized gains
  $ 1     $ 1     $ 3     $ 1  
Gross realized (losses)
    0       (1 )     0       (3 )
         
Net realized gains (losses)
    1       0       3       (2 )
         
Equity securities
                               
Gross realized gains
    1       0       1       3  
Gross realized (losses)
    (1 )     (2 )     (1 )     (3 )
         
Net realized gains
    0       (2 )     0       0  
         
Trading securities:
                               
Common stock
                               
Gross realized gains
    0       1       1       1  
Gross realized (losses)
    0       (1 )     0       (3 )
Valuation adjustments
    (4 )     6       (2 )     4  
         
Net realized gains (losses)
    (4 )     6       (1 )     2  
         
Net realized gains (losses) on investments — Indemnity
  $ (3 )   $ 4     $ 2     $ 0  
         

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    Erie Insurance Group
    Three months ended   Six months ended
    June 30,   June 30,
(in millions)   2010   2009   2010   2009
         
Exchange
                               
Available-for-sale securities:
                               
Fixed maturities
                               
Gross realized gains
  $ 7     $ 6     $ 28     $ 9  
Gross realized (losses)
    (3 )     (13 )     (12 )     (28 )
         
Net realized gains (losses)
    4       (7 )     16       (19 )
         
Equity securities
                               
Gross realized gains
    3       6       7       13  
Gross realized (losses)
    (1 )     (9 )     (1 )     (13 )
         
Net realized gains (losses)
    2       (3 )     6       0  
         
Trading securities:
                               
Common stock
                               
Gross realized gains
    44       33       89       48  
Gross realized (losses)
    (18 )     (66 )     (30 )     (162 )
Valuation adjustments
    (242 )     247       (171 )     186  
         
Net realized gains (losses)
    (216 )     214       (112 )     72  
         
Net realized gains (losses) on investments — Exchange
  $ (210 )   $ 204     $ (90 )   $ 53  
         
Net realized gains (losses) on investments — Erie Insurance Group
  $ (213 )   $ 208     $ (88 )   $ 53  
         
The components of other-than-temporary impairments on investments are included below.
                                 
    Erie Insurance Group
    Three months ended   Six months ended
    June 30,   June 30,
(in millions)   2010   2009   2010   2009
         
Indemnity
                               
Fixed maturities
  $ (1 )   $ (1 )   $ (1 )   $ (4 )
Equity securities
    0       (1 )     0       (3 )
         
Total
    (1 )     (2 )     (1 )     (7 )
Portion recognized in other comprehensive income
    0       0       0       0  
         
Net impairment losses recognized in earnings — Indemnity
  $ (1 )   $ (2 )   $ (1 )   $ (7 )
         
Exchange
                               
Fixed maturities
  $ (2 )   $ (6 )   $ (4 )   $ (32 )
Equity securities
    (1 )     (4 )     (1 )     (44 )
         
Total
    (3 )     (10 )     (5 )     (76 )
Portion recognized in other comprehensive income
    0       0       0       0  
         
Net impairment losses recognized in earnings — Exchange
  $ (3 )   $ (10 )   $ (5 )   $ (76 )
         
Net impairment losses recognized in earnings — Erie Insurance Group
  $ (4 )   $ (12 )   $ (6 )   $ (83 )
         
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. Prior to the second quarter of 2009 when new impairment guidance was issued for debt securities, the impairment policy for fixed maturities was consistent with that of equity securities.

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Limited partnerships
Our limited partnership investments are recorded using the equity method of accounting as we do not exercise significant influence over any of these partnerships. As these investments are generally reported on a one-quarter lag, our limited partnership results through June 30, 2010 are comprised of general partnership financial results for the fourth quarter of 2009 and the first quarter of 2010. Given the lag in reporting, our limited partnership results do not reflect the market conditions of the second quarter of 2010. Cash contributions made to and distributions received from the partnerships are recorded in the period in which the transaction occurs.
We have provided summarized financial information in the following table for the six months ended June 30, 2010 and for the year ended December 31, 2009. Amounts provided in the table are presented using the latest available financial statements received from the partnerships. Limited partnership financial information has been presented based on the investment percentage in the partnerships for the Erie Insurance Group consistent with how management evaluates the investments.

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As these investments are generally reported on a one-quarter lag, our limited partnership results through June 30, 2010 include the general partnership financial results for the fourth quarter of 2009 and first quarter of 2010.
(dollars in millions)
                                 
    As of and for the six months ended June 30, 2010
                    Income (loss)    
                    recognized    
                    due to    
                    valuation    
                    adjustments   Income
Investment percentage in partnership   Number of   Asset   by the   (loss)
for Erie Insurance Group   partnerships   recorded   partnerships   recorded
 
Indemnity
                               
Private equity:
                               
Less than 10%
    26     $ 81     $ 7     $ 0  
Greater than or equal to 10% but less than 50%
    3       7       1       0  
Greater than 50%
    1       3       0       0  
     
Total private equity
    30       91       8       0  
Mezzanine debt:
                               
Less than 10%
    12       32       3       1  
Greater than or equal to 10% but less than 50%
    3       17       2       (2 )
Greater than 50%
    1       2       0       0  
     
Total mezzanine debt
    16       51       5       (1 )
Real estate:
                               
Less than 10%
    19       69       (2 )     (2 )
Greater than or equal to 10% but less than 50%
    5       14       (1 )     (1 )
Greater than 50%
    4       9       1       (1 )
     
Total real estate
    28       92       (2 )     (4 )
     
Total limited partnerships — Indemnity
    74     $ 234     $ 11     $ (5 )
     
 
Exchange
                               
Private equity:
                               
Less than 10%
    41     $ 490     $ 29     $ 5  
Greater than or equal to 10% but less than 50%
    3       34       4       (1 )
Greater than 50%
    1       6       0       0  
     
Total private equity
    45       530       33       4  
Mezzanine debt:
                               
Less than 10%
    14       146       10       2  
Greater than or equal to 10% but less than 50%
    4       47       1       (2 )
Greater than 50%
    3       27       0       1  
     
Total mezzanine debt
    21       220       11       1  
Real estate:
                               
Less than 10%
    32       287       (15 )     (4 )
Greater than or equal to 10% but less than 50%
    7       52       (3 )     (3 )
Greater than 50%
    4       34       5       (5 )
     
Total real estate
    43       373       (13 )     (12 )
     
Total limited partnerships — Exchange
    109     $ 1,123     $ 31     $ (7 )
     
Total limited partnerships — Erie Insurance Group
          $ 1,357     $ 42     $ (12 )
             
Per the limited partner financial statements, total partnership assets were $56 billion and total partnership liabilities were $10 billion at June 30, 2010 (as recorded in the March 31, 2010 limited partnership financial statements). For the six month period comparable to that presented in the preceding table (fourth quarter of 2009 and first quarter of 2010), total partnership valuation adjustment gains were $3 billion and total partnership net income was $55 million.

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As these investments are generally reported on a one-quarter lag, our limited partnership results through December 31, 2009 include the general partnership results for the fourth quarter of 2008 and the first three quarters of 2009.
(dollars in millions)
                                 
    As of and for the year ended December 31, 2009
                    (Loss)    
                    income    
                    recognized    
                    due to    
                    valuation    
                    adjustments   (Loss)
Investment percentage in partnership   Number of   Asset   by the   income
for Erie Insurance Group   partnerships   recorded   partnerships   recorded
 
Indemnity
                               
Private equity:
                               
Less than 10%
    26     $ 76     $ (11 )   $ (1 )
Greater than or equal to 10% but less than 50%
    3       6       0       0  
Greater than 50%
    1       3       0       0  
     
Total private equity
    30       85       (11 )     (1 )
Mezzanine debt:
                               
Less than 10%
    12       30       (4 )     (1 )
Greater than or equal to 10% but less than 50%
    3       18       (2 )     2  
Greater than 50%
    1       3       (1 )     0  
     
Total mezzanine debt
    16       51       (7 )     1  
Real estate:
                               
Less than 10%
    19       65       (31 )     1  
Greater than or equal to 10% but less than 50%
    5       17       (6 )     1  
Greater than 50%
    4       17       (21 )     (2 )
     
Total real estate
    28       99       (58 )     0  
     
Total limited partnerships — Indemnity
    74     $ 235     $ (76 )   $ 0  
     
 
Exchange
                               
Private equity:
                               
Less than 10%
    41     $ 466     $ (46 )   $ 14  
Greater than or equal to 10% but less than 50%
    3       31       1       (1 )
Greater than 50%
    1       6       (1 )     (1 )
     
Total private equity
    45       503       (46 )     12  
Mezzanine debt:
                               
Less than 10%
    14       138       (11 )     4  
Greater than or equal to 10% but less than 50%
    4       48       (4 )     9  
Greater than 50%
    3       30       (2 )     2  
     
Total mezzanine debt
    21       216       (17 )     15  
Real estate:
                               
Less than 10%
    32       302       (164 )     (8 )
Greater than or equal to 10% but less than 50%
    7       61       (40 )     (1 )
Greater than 50%
    4       34       (48 )     4  
     
Total real estate
    43       397       (252 )     (5 )
     
Total limited partnerships — Exchange
    109     $ 1,116     $ (315 )   $ 22  
     
Total limited partnerships — Erie Insurance Group
          $ 1,351     $ (391 )   $ 22  
             
Per the limited partner financial statements, total partnership assets were $53 billion and total partnership liabilities were $11 billion at December 31, 2009 (as recorded in the September 30, 2009 limited partnership financial statements). For the twelve month period comparable to that presented in the preceding table (fourth quarter of 2008 and first three quarters of 2009), total partnership valuation adjustment losses were $8 billion and total partnership net losses were $1 billion.
See also Note 12 for investment commitments related to limited partnerships.

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Note 8. Bank Line of Credit
As of June 30, 2010, Indemnity has available a $100 million line of credit that expires on December 31, 2011. There were no borrowings outstanding on the line of credit as of June 30, 2010. Bonds with a fair value of $132 million are pledged as collateral on the line at June 30, 2010.
As of June 30, 2010, the Exchange has available a $200 million revolving line of credit that expires on September 30, 2012. There were no borrowings outstanding on the line of credit as of June 30, 2010. Bonds with a fair value of $262 million are pledged as collateral on the lines at June 30, 2010.
Securities pledged as collateral on both lines have no restrictions and are reported as available-for-sale fixed maturities in the Consolidated Statements of Financial Position as of June 30, 2010. The banks require compliance with certain covenants, which include statutory surplus and risk based capital ratios for the Exchange’s line of credit and minimum net worth and leverage ratios for Indemnity’s line of credit. We are in compliance with all covenants at June 30, 2010.
Note 9. Income Tax
Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statement or tax returns. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. At June 30, 2010, we recorded a net deferred tax asset of $101 million on our Consolidated Statements of Financial Position. Although realization is not assured, management believes it is more likely than not that the deferred tax asset will be realized based on our assessment that the losses ultimately recognized for tax purposes will be fully utilized. As such, there was no deferred tax valuation allowance recorded at June 30, 2010. The Exchange uses the period-to-date tax rate rather than the annual projected tax rate. This is primarily due to the volatility related to investment income under the current economic conditions and catastrophic activity.
Note 10. Postretirement Benefits
The liabilities for the plans described in this note are presented in total for all employees of the Erie Insurance Group. The gross liability for the pension plans is presented in the Consolidated Statements of Financial Position as part of other liabilities. A portion of annual expenses related to the pension plans is allocated to related entities within the Erie Insurance Group.
We offer a noncontributory defined benefit pension plan that covers substantially all employees. This is the largest benefit plan we offer. We also offer an unfunded supplemental retirement plan (SERP) for certain members of executive and senior management of the Erie Insurance Group. The components of net periodic benefit cost for our pension benefits are:
                                 
    Three months ended     Six months ended  
    June 30,     June 30,  
(in millions)   2010     2009     2010     2009  
         
Service cost
  $ 4     $ 4     $ 8     $ 8  
Interest cost
    5       5       10       10  
Expected return on plan assets
    (7 )     (6 )     (13 )     (12 )
Amortization of actuarial loss
    1       0       2       1  
         
Net periodic benefit cost
  $ 3     $ 3     $ 7     $ 7  
         

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Note 11. Reconciliation of shareholders’ equity
A reconciliation of shareholders’ equity follows for the year to date December 31, 2009 and June 30, 2010:
                         
                    Noncontrolling
                    interest in
            Total Indemity   consolidated
    Total   shareholders’   entity —
(in millions, except per share data)   equity   equity   Exchange
     
Balance at December 31, 2008
  $ 4,759     $ 792     $ 3,967  
Comprehensive income:
                       
Net income
    446       108       338  
Other comprehensive income, net of tax:
                       
Unrealized gains on securities
    593       75       518  
Postretirement plans:
                       
Prior service cost
    0       0        
Net actuarial gain
    27       27        
Loss due to amendments
    (2 )     (2 )      
Curtailment/settlement loss
    (1 )     (1 )      
     
Postretirement plans
    24       24        
     
Other comprehensive income, net of tax
    617       99       518  
     
Comprehensive income
    1,063       207       856  
     
Purchase of treasury stock
    (3 )     (3 )      
Conversion of Class B shares to Class A shares
    0       0        
Dividends declared:
                       
Class A $1.83 per share
    (94 )     (94 )      
Class B $274.50 per share
    0       0        
     
Balance at December 31, 2009
  $ 5,725     $ 902     $ 4,823  
     
Comprehensive income:
                       
Net income
    131       96       35  
Other comprehensive income, net of tax:
                       
Unrealized gains on securities
    82       11       71  
     
Other comprehensive income, net of tax
    82       11       71  
     
Comprehensive income
    213       107       106  
     
Purchase of treasury stock
    (20 )     (20 )      
Dividends declared:
                       
Class A $0.96 per share
    (49 )     (49 )      
Class B $144.00 per share
    0       0        
     
Balance at June 30, 2010
  $ 5,869     $ 940     $ 4,929  
     

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Note 12. Commitments and Contingencies
Indemnity has contractual commitments to invest up to $62 million related to its limited partnership investments at June 30, 2010. These commitments are split between private equity securities of $29 million, real estate activities of $20 million and mezzanine debt securities of $13 million. These commitments will be funded as required by the partnership agreements.
The Exchange, including EFL, has contractual commitments to invest up to $503 million related to its limited partnership investments at June 30, 2010. These commitments are split between private equity securities of $232 million, real estate activities of $177 million and mezzanine debt securities of $94 million. These commitments will be funded as required by the partnership agreements.
We are involved in litigation arising in the ordinary course of business. In our opinion, the effects, if any, of such litigation are not expected to be material to our consolidated financial condition, operations or cash flows.
Note 13. Statutory Information
Cash and securities with a carrying value of $14 million and $13 million were deposited by the property and casualty and life entities with regulatory authorities under statutory requirements at June 30, 2010 and December 31, 2009, respectively.

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Note 14. Indemnity supplemental information
                                 
    Consolidated Statement of Financial Position
    Indemnity   Exchange   Reclassifications   Erie
June 30, 2010   shareholder   noncontrolling   and   Insurance
(in millions)   interest   Interest   eliminations   Group
     
Assets
                               
Investments
                               
Available-for-sale securities, at fair value:
                               
Fixed maturities
  $ 671     $ 6,789     $     $ 7,460  
Equity securities
    45       523             568  
Trading securities, at fair value
    40       1,712             1,752  
Limited partnerships
    234       1,123             1,357  
Other invested assets
    1       19             20  
     
Total investments
    991       10,166             11,157  
Cash and cash equivalents
    34       189             223  
Premiums receivable from policyholders
    256       980       (259 )     977  
Reinsurance recoverable
    2       199             201  
Deferred income taxes
    29       72             101  
Deferred acquisition costs
    56       417             473  
Other assets
    114       324             438  
Reinsurance recoverables and receivables from Exchange and other affiliates
    1,068             (1,068 )      
Note receivable from EFL
    25             (25 )      
Equity in EFL
    81             (81 )      
     
Total assets
  $ 2,656     $ 12,347     $ (1,433 )   $ 13,570  
     
Liabilities
                               
Losses and loss expense reserves(1)
  $ 928     $ 3,451     $ (757 )   $ 3,622  
Life policy and deposit contract reserves
          1,574             1,574  
Unearned premiums(1)
    459       1,977       (343 )     2,093  
Other liabilities
    329       335       (252 )     412  
     
Total liabilities
    1,716       7,337       (1,352 )     7,701  
     
Shareholders’ equity and noncontrolling interest
                               
Total Indemnity shareholders’ equity
    940                   940  
Noncontrolling interest in consolidated entity — Exchange
          5,010       (81 )     4,929  
     
Total equity
    940       5,010       (81 )     5,869  
     
Total liabilities, shareholders’ equity and noncontrolling interest
  $ 2,656     $ 12,347     $ (1,433 )   $ 13,570  
     
 
(1)   Indemnity’s insurance related accounts in this table include its wholly-owned property and casualty insurance subsidiaries’ direct business in addition to their share of the pooling transactions, which represents 5.5% of the total Property and Casualty Group business. The Consolidated Statements of Financial Position include direct business only as the 5.5% of activity assumed in accordance with the intercompany pooling arrangement has been eliminated in the consolidated presentation.

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    Consolidated Statement of Financial Position
    Indemnity   Exchange   Reclassifications   Erie
December 31, 2009   shareholder   noncontrolling   and   Insurance
(in millions)   interest   interest   eliminations   Group
     
Assets
                               
Investments
                               
Available-for-sale securities, at fair value:
                               
Fixed maturities
  $ 664     $ 6,517     $     $ 7,181  
Equity securities
    38       472             510  
Trading securities, at fair value
    42       1,835             1,877  
Limited partnerships
    235       1,116             1,351  
Other invested assets
    1       20             21  
     
Total investments
    980       9,960             10,940  
Cash and cash equivalents
    76       158             234  
Premiums receivable from policyholders
    237       872       (203 )     906  
Reinsurance recoverable
    2       213             215  
Deferred income taxes
    41       75             116  
Deferred acquisition costs
    17       450             467  
Other assets
    102       308       (1 )     409  
Reinsurance recoverables and receivables from Exchange and other affiliates
    1,115             (1,115 )      
Note receivable from EFL
    25             (25 )      
Equity in EFL
    72             (72 )      
     
Total assets
  $ 2,667     $ 12,036     $ (1,416 )   $ 13,287  
     
Liabilities
                               
Losses and loss expense reserves(1)
  $ 965     $ 3,424     $ (791 )   $ 3,598  
Life policy and deposit contract reserves
          1,540             1,540  
Unearned premiums(1)
    434       1,872       (325 )     1,981  
Other liabilities
    366       305       (228 )     443  
     
Total liabilities
    1,765       7,141       (1,344 )     7,562  
     
Shareholders’ equity and noncontrolling interest
                               
Total Indemnity shareholders’ equity
    902                   902  
Noncontrolling interest in consolidated entity — Exchange
          4,895       (72 )     4,823  
     
Total equity
    902       4,895       (72 )     5,725  
     
Total liabilities, shareholders’ equity and noncontrolling interest
  $ 2,667     $ 12,036     $ (1,416 )   $ 13,287  
     
 
(1)   Indemnity’s insurance related accounts in this table include its wholly-owned property and casualty insurance subsidiaries’ direct business in addition to their share of the pooling transactions, which represents 5.5% of the total Property and Casualty Group business. The Consolidated Statements of Financial Position include direct business only as the 5.5% of activity assumed in accordance with the intercompany pooling arrangement has been eliminated in the consolidated presentation.
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. EFL accrued interest to Indemnity of $0.4 million in each of the second quarters ended June 30, 2010 and 2009.

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    Income attributable to Indemnity shareholder interest
            Three months ended   Six months ended
    June 30,   June 30,
(in millions)   Percent   2010   2009   2010   2009
     
Management operations
                                       
Management fee revenue, net
    100.0 %   $ 270     $ 259     $ 507     $ 489  
Service agreement revenue
    100.0 %     9       9       17       17  
             
Total revenue from management operations
            279       268       524       506  
Cost of management operations
    100.0 %     217       208       409       401  
             
Income from management operations before taxes
            62       60       115       105  
             
Property and casualty operations
                                       
Premiums earned
    5.5 %     53       52       106       104  
Losses and loss expenses
    5.5 %     40       35       80       78  
Underwriting expenses
    5.5 %     15       15       30       30  
             
Income (loss) from property and casualty operations before taxes
            (2 )     2       (4 )     (4 )
             
Life insurance operations
                                       
Total revenue
    21.6 %     9       8       18       13  
Total benefits and expenses
    21.6 %     6       7       13       13  
             
Income from life operations before taxes
            3       1       5       0  
             
Investment operations
                                       
Investment income, net of expenses
            9       9       18       22  
Net realized (losses) gains on investments
            (3 )     4       2       0  
Impairment losses recognized in earnings
            (1 )     (2 )     (1 )     (7 )
Equity in earnings (losses) of limited partnerships
            6       (27 )     6       (55 )
             
Total investment income (loss) before taxes
            11       (16 )     25       (40 )
             
Income from operations before income taxes and noncontrolling interests
            74       47       141       61  
Provision for income taxes
            25       14       45       17  
             
Net income
          $ 49     $ 33     $ 96     $ 44  
             
Indemnity’s components of direct cash flows as presented in the Consolidated Statements of Cash Flows is as follows for the six months ended June 30:
                 
Direct method of cash flows
    Indemnity
(in millions)   2010   2009
     
Management fee received
  $ 467     $ 453  
Service agreement fee received
    17       17  
Premiums collected
    109       105  
Net investment income received
    23       23  
Limited partnership distributions
    7       7  
(Decrease) increase in reimbursements collected from affiliates
    (11 )     12  
Commissions and bonuses paid to agents
    (290 )     (300 )
Salaries and wages paid
    (56 )     (58 )
Pension contribution and employee benefits paid
    (20 )     (11 )
Losses paid
    (67 )     (63 )
Loss expenses paid
    (11 )     (11 )
Other underwriting and acquisition costs paid
    (30 )     (30 )
General operating expenses paid
    (59 )     (54 )
Income taxes paid
    (37 )     (45 )
     
Net cash provided by operating activities
    42       45  
Net cash used in investing activities
    (17 )     (33 )
Net cash used in financing activities
    (67 )     (47 )
     
Net decrease in cash
    (42 )     (35 )
Cash and cash equivalents at beginning of period
    76       61  
     
Cash and cash equivalents at end of period
  $ 34     $ 26  
     

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Note 15. EFL Supplemental Information
EFL is a Pennsylvania-domiciled life insurance company operating in 10 states and the District of Columbia. Indemnity owns 21.6% of EFL’s common shares outstanding and accounts for its ownership interest using the equity method of accounting.
The following presents condensed financial information for EFL on a U.S. GAAP basis:
                                 
    Three months ended June 30,   Six months ended June 30,
(in millions)   2010   2009   2010   2009
         
Policy and other revenues
  $ 16     $ 19     $ 32     $ 35  
Net investment income
    25       20       52       26  
Benefits and expenses
    30       33       63       61  
         
Income (loss) before income taxes
    11       6       21       0  
Income tax expense (benefit)
    4       (5 )     3       (2 )
         
Net income
    7       11       18       2  
         
Comprehensive income
    20       74       44       76  
         
EFL recorded impairment charges of $2 million in the second quarter of 2010 compared to $1 million in the second quarter of 2009. Realized gains on investments totaled $3 million in 2010 compared to gains of less than $100 thousand recorded in the second quarter of 2009. Equity in earnings of limited partnerships improved by $2 million in the second quarter of 2010 compared to the second quarter of 2009.
Net income in the second quarter of 2009 was positively impacted by a reduction in the deferred tax valuation allowance of $7 million. As a result of improved market conditions, the valuation allowance was reduced by $4 million to $0 in the first quarter of 2010 and remains at $0 at June 30, 2010.
EFL experienced unrealized gains, after tax of $12 million in the second quarter of 2010 which contributed to the change in comprehensive income. Comprehensive income for the second quarter of 2009 included unrealized gains after tax of $63 million.
For the six months ended June 30, 2010, net investment income increased $27 million over the six months ended June 30, 2009 as a result of a $10 million increase in realized gains, a $13 million decrease in impairment losses and a $4 million decrease in equity in losses of limited partnerships.
                 
    At June 30,   At December 31,
(in millions, except per share data)   2010   2009
     
Investments
  $ 1,762     $ 1,639  
Total assets
    2,036       1,941  
Liabilities
    1,660       1,609  
Accumulated other comprehensive income
    43       18  
Cumulative effect adjustment
          27  
Total shareholders’ equity
    376       333  
Book value per share
  $ 39.81     $ 35.19  
EFL shareholders’ equity increased $44 million at June 30, 2010 compared to December 31, 2009. The main factors driving this increase were $25 million in unrealized gains, net of tax and net income of $18 million.
In 2009, Indemnity made a $12 million capital contribution to EFL and the Exchange made a $43 million capital contribution to EFL to strengthen its surplus. The $55 million in capital contributions increased EFL’s investments and total shareholders’ equity. Also in 2009, a required cumulative effect adjustment reclassified previously recognized non-credit other-than-temporary impairments of $27 million out of retained earnings. Deferred taxes of $9 million related to this cumulative effect adjustment were offset by a reduction in the valuation allowance in the same amount related to previously recognized impairments.

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Note 16. Capital Stock
Stock repurchase plan
In April 2010, our Board of Directors approved a continuation of the current stock repurchase program through June 30, 2011 for a total of $100 million.
Note 17. Subsequent Events
We have evaluated for recognized and nonrecognized subsequent events through the date of financial statement issuance. No items were identified in this period subsequent to the financial statement date that required adjustment or disclosure.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On June 12, 2009, the Financial Accounting Standards Board (FASB) updated ASC 810, Consolidation, which amended the existing guidance for determining whether an enterprise is the primary beneficiary of a variable interest entity (“VIE”). As of January 1, 2010 Erie Indemnity Company (“Indemnity”) adopted the new accounting principle on a retrospective basis since inception.
The following discussion of financial condition and results of operations highlights significant factors influencing Erie Insurance Group (“we,” “us,” “our”). This discussion should be read in conjunction with the historical financial information and the related notes thereto included in Item 1. “Financial Statements” of this Quarterly Report on Form 10-Q and with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 2009 contained in our Form 8-K as filed with the Securities and Exchange Commission on May 6, 2010.
INDEX
         
    Page Number
Cautionary statement regarding forward-looking information
    42  
Recent accounting pronouncements
    43  
Operating review
    44  
Results of operations
    50  
Management operations
    50  
Property and casualty insurance operations
    52  
Life insurance operations
    56  
Investment operations
    57  
Financial condition
    59  
Investments
    59  
Liabilities
    63  
Impact of inflation
    64  
Liquidity and capital resources
    65  
Critical accounting estimates
    67  
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained herein are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are not in the present or past tense and can generally be identified by the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “likely,” “plan,” “project,” “seek,” “should,” “target,” “will,” “may,” and other expressions that indicate future trends and events. Forward-looking statements 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 such statements are discussions relating to underwriting, premium and investment income volumes, expenses and agency appointments. Such 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 that could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements are the following:
    factors affecting the property and casualty and life insurance industries generally, including price competition, legislative and regulatory developments;
 
    government regulation of the insurance industry including approval of rate increases;
 
    the frequency and severity of claims;
 
    natural disasters;
 
    exposure to environmental claims;
 
    fluctuations in interest rates;
 
    inflation and general business conditions;
 
    the geographic concentration of our business as a result of being a regional company;

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    the accuracy of our pricing and loss reserving methodologies;
 
    changes in driving habits;
 
    our ability to maintain our business operations including our information technology system;
 
    our dependence on the independent agency system;
 
    the quality and liquidity of our investment portfolio;
 
    Indemnity’s dependence on its relationship with Exchange; and
 
    the other risks and uncertainties discussed or indicated in all documents filed by the Company with the Securities and Exchange Commission, including those described in Part I, Item 1A. “Risk Factors” of the 2009 Form 10-K, which information is incorporated by reference, updated by Part II, Item 1A. “Risk Factors” of this Form 10-Q.
A forward-looking statement speaks only as of the date on which it is made and reflects the Erie Insurance Group’s analysis only as of that date. The Erie Insurance Group undertakes 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 PRONOUNCEMENTS
Indemnity adopted amended guidance related to the consolidation of affiliated entities that became effective January 1, 2010 as required under generally accepted accounting principles (“GAAP”). As a result of this new guidance, Indemnity is considered to have a controlling financial interest in its affiliated entity, the Erie Insurance Exchange (“Exchange”). Indemnity is named as, and serves as, the Exchange’s attorney-in-fact. Consolidation of the Exchange 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 consolidation of the Exchange resulted in no change to Indemnity’s net income or equity. The Exchange’s net income and equity is identified as the noncontrolling interest net income or equity.

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OPERATING REVIEW
Overview
Erie Insurance Group represents the consolidated results of Indemnity and the results of its VIE, the Exchange. The Erie Insurance Group operates as a property and casualty insurer through its regional insurance carriers that write a broad line of personal and commercial lines coverages. The property and casualty insurance companies include the Exchange, a consolidated affiliate and its property and casualty insurance subsidiary, Flagship City Insurance Company (“Flagship”), and Indemnity’s three wholly-owned property and casualty insurance subsidiaries, Erie Insurance Company (“EIC”), Erie Insurance Property and Casualty Company (“EPC”) and Erie Insurance Company of New York (“ENY”). These entities operate collectively as the Property and Casualty Group. The Erie Insurance Group also operates as a life insurer through its affiliate, Erie Family Life Insurance Company (“EFL”), which is owned 21.6% by Indemnity and 78.4% by the Exchange. EFL underwrites and sells nonparticipating individual and group life insurance policies and fixed annuities.
The Exchange is a reciprocal insurance exchange, which is an unincorporated association of individuals, partnerships and corporations that agree to insure one another. 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. As attorney-in-fact, Indemnity is required to perform certain services relating to the sales, underwriting and issuance of policies on behalf of the Exchange. The Exchange is a VIE.
The Exchange’s equity, which is comprised of its retained earnings and accumulated other comprehensive income, is held for the benefit of its subscribers (policyholders) and meets the definition of a noncontrolling interest and is reflected as such in our consolidated financial statements. Indemnity shareholders benefit from their interest in Indemnity’s income and equity but not in the noncontrolling interest’s income or equity.
Generally, Indemnity shareholders’ interest in income comprises:
    a 25% management fee on all property and casualty insurance policies written, less the costs associated with the sales, underwriting and issuance of these policies,
 
    a 5.5% interest in the net underwriting results of the property and casualty lines operations,
 
    a 21.6% equity interest in the net earnings of EFL,
 
    net investment income and results on investments that do not belong to the Exchange or its subsidiaries, and
 
    other income and expenses, including income taxes, that are not the responsibility of the Exchange or its subsidiaries.
Generally, the noncontrolling interest’s income comprises:
    a 94.5% interest in the net underwriting results of the property and casualty lines operations,
 
    a 78.4% equity interest in the net earnings of EFL,
 
    net investment income and related 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.
“Indemnity shareholder interest” refers to the interest in Indemnity owned by the Class A and Class B shareholders. Exchange refers to the noncontrolling interest held for the benefit of the subscribers (policyholders) and includes its interests in Flagship and EFL.

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The following tables represent a breakdown of the composition of the income attributable to Indemnity and the income attributable to the noncontrolling interest (Exchange) for the three and six months ended June 30, 2010. For purposes of this discussion, EFL’s investments are included in the life insurance operations.
Results of the Erie Insurance Group’s operations by interest (unaudited)
                                                                                 
                                                    Eliminations of    
    Indemnity shareholder   Noncontrolling interest   related party    
    interest   (Exchange)   transactions   Erie Insurance Group
            Three months                    
            ended           Three months ended   Three months ended   Three months ended
            June 30,           June 30,   June 30,   June 30,
(in millions)   Percent   2010   2009   Percent   2010   2009   2010   2009   2010   2009
     
Management operations
                                                                               
Management fee revenue, net
    100.0 %   $ 270     $ 259             $     $     $ (270 )   $ (259 )   $     $  
Service agreement revenue
    100.0 %     9       9                                       9       9  
                         
Total revenue from management operations
            279       268                           (270 )     (259 )     9       9  
Cost of management operations
    100.0 %     217       208                           (217 )     (208 )            
                         
Income from management operations before taxes
            62       60                           (53 )     (51 )     9       9  
                         
Property and casualty operations
                                                                               
Premiums earned
    5.5 %     53       52       94.5 %     921       895                   974       947  
Losses and loss expenses
    5.5 %     40       35       94.5 %     677       603       (2 )     (2 )     715       636  
Underwriting expenses
    5.5 %     15       15       94.5 %     261       259       (54 )     (52 )     222       222  
                         
(Loss) income from property and casualty operations before taxes
            (2 )     2               (17 )     33       56       54       37       89  
                         
Life insurance operations (1)
                                                                               
Total revenue
    21.6 %     9       8       78.4 %     32       31       (1 )     (1 )     40       38  
Total benefits and expenses
    21.6 %     6       7       78.4 %     24       26       0       0       30       33  
                         
Income from life operations before taxes
            3       1               8       5       (1 )     (1 )     10       5  
                         
Investment operations
                                                                               
Investment income, net of expenses
            9       9               78       75       (2 )     (2 )     85       82  
Net realized (losses) gains on investments
            (3 )     4               (213 )     203                   (216 )     207  
Impairment losses recognized in earnings
            (1 )     (2 )             (1 )     (8 )                 (2 )     (10 )
Equity in earnings (losses) of limited partnerships
            6       (27 )             20       (97 )                 26       (124 )
                         
Total investment income (loss) before taxes
            11       (16 )             (116 )     173       (2 )     (2 )     (107 )     155  
                         
Income (loss) from operations before income taxes and noncontrolling interests
            74       47               (125 )     211                   (51 )     258  
Provision for income taxes
            25       14               (45 )     (27 )                 (20 )     (13 )
                         
Net income (loss)
          $ 49     $ 33             $ (80 )   $ 238     $     $     $ (31 )   $ 271  
                         
 
(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.

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Results of the Erie Insurance Group’s operations by interest (unaudited)
                                                                                 
                                                    Eliminations of    
    Indemnity shareholder   Noncontrolling interest   related party    
    interest   (Exchange)   transactions   Erie Insurance Group
            Six months                    
            ended           Six months ended   Six months ended   Six months ended
            June 30,           June 30,   June 30,   June 30,
(in millions)   Percent   2010   2009   Percent   2010   2009   2010   2009   2010   2009
     
Management operations
                                                                               
Management fee revenue, net
    100.0 %   $ 507     $ 489             $     $     $ (507 )   $ (489 )   $     $  
Service agreement revenue
    100.0 %     17       17                                       17       17  
                         
Total revenue from management operations
            524       506                           (507 )     (489 )     17       17  
Cost of management operations
    100.0 %     409       401                           (409 )     (401 )            
                         
Income from management operations before taxes
            115       105                           (98 )     (88 )     17       17  
                         
Property and casualty operations
                                                                               
Premiums earned
    5.5 %     106       104       94.5 %     1,830       1,784                   1,936       1,888  
Losses and loss expenses
    5.5 %     80       78       94.5 %     1,375       1,342       (3 )     (3 )     1,452       1,417  
Underwriting expenses
    5.5 %     30       30       94.5 %     511       509       (100 )     (90 )     441       449  
                         
(Loss) Income from property and casualty operations before taxes
            (4 )     (4 )             (56 )     (67 )     103       93       43       22  
                         
Life insurance operations(1)
                                                                               
Total revenue
    21.6 %     18       13       78.4 %     66       48       (1 )     (1 )     83       60  
Total benefits and expenses
    21.6 %     13       13       78.4 %     50       48       (1 )     (1 )     62       60  
                         
Income from life operations before taxes
            5       0               16       0       0       0       21       0  
                         
Investment operations
                                                                               
Investment income, net of expenses
            18       22               153       158       (5 )     (5 )     166       175  
Net realized gains (losses) on investments
            2       0               (98 )     54                   (96 )     54  
Impairment losses recognized in earnings
            (1 )     (7 )             (3 )     (61 )                 (4 )     (68 )
Equity in earnings (losses) of limited partnerships
            6       (55 )             24       (227 )                 30       (282 )
                         
Total investment income (loss) before taxes
            25       (40 )             76       (76 )     (5 )     (5 )     96       (121 )
                         
Income (loss) from operations before income taxes and noncontrolling interests
            141       61               36       (143 )                 177       (82 )
Provision for income taxes
            45       17               1       (119 )                 46       (102 )
                         
Net income (loss)
          $ 96     $ 44             $ 35     $ (24 )   $     $     $ 131     $ 20  
                         
 
(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.

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Reconciliation of operating income to net income
We believe that investors’ understanding of our performance related to the Indemnity shareholder interest is enhanced by the disclosure of the following non-GAAP financial measure. Our method of calculating this measure may differ from those used by other companies and therefore comparability may be limited.
Operating income is net income excluding realized capital gains and losses, impairment losses and related federal income taxes. Our common stock portfolio is measured at fair value. As such, changes in fair value related to common stocks are reported in earnings. These unrealized gains or losses are included in the net realized gains and losses on investments in our Consolidated Statements of Operations that is used to calculate operating income. Equity in earnings or losses of EFL and equity in earnings or losses of limited partnerships are included in the calculation of operating income. Equity in earnings or losses of limited partnerships includes the respective investment’s realized capital gains and losses, as well as unrealized gains and losses.
Net income is the generally accepted accounting principle (GAAP) measure that is most directly comparable to operating income. We use operating income to evaluate the results of operations. It reveals trends in our management services, insurance underwriting and investment operations 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, the timing of which is unrelated to our management services and insurance underwriting processes. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. 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 and does not reflect our overall profitability.
The following table reconciles operating income and net income for Indemnity shareholder interest:
                                 
    Indemnity Shareholder Interest
    Three months ended   Six months ended
    June 30,   June 30,
    2010   2009   2010   2009
(in millions, except per share data)   (Unaudited)   (Unaudited)
Operating income attributable to Indemnity
  $ 51     $ 32     $ 95     $ 49  
     
Net realized (losses) gains and impairments on investments
    (4 )     2       1       (7 )
Income tax benefit (expense)
    2       (1 )     0       2  
         
Realized (losses) gains and impairments, net of income taxes
    (2 )     1       1       (5 )
         
Net income attributable to Indemnity
  $ 49     $ 33     $ 96     $ 44  
         
 
                               
Per Indemnity Class A common share-diluted:
                               
Operating income attributable to Indemnity
  $ 0.89     $ 0.56     $ 1.66     $ 0.85  
         
Net realized (losses) gains and impairments on investments
    (0.07 )     0.02       0.02       (0.13 )
Income tax benefit (expense)
    0.04       (0.01 )     0.00       0.04  
         
Realized (losses) gains and impairments, net of income taxes
    (0.03 )     0.01       0.02       (0.09 )
         
Net income attributable to Indemnity
  $ 0.86     $ 0.57     $ 1.68     $ 0.76  
         
The increase in operating income was primarily the result of Indemnity’s limited partnerships investments generating earnings of $6 million in the second quarter of 2010 compared to generating losses of $27 million in the second quarter of 2009. For the six months ended June 30, 2010, limited partnership earnings totaled $6 million compared to limited partnership losses of $55 million recorded for the same period in 2009.

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Operating Segments
As a result of the changes in our reporting entity at January 1, 2010 (see Note 2), our reportable segments have increased from three to four. Our reportable segments include management operations, property and casualty insurance operations, life insurance operations and investment operations. The segment information presented below includes reclassification of all comparative prior period segment information.
Management operations
Management operations generate internal fee revenue by providing services to the Exchange. Management fee revenue is based upon the management fee rate, determined by our Board of Directors, and the direct written premiums of the Property and Casualty Group.
Property and casualty insurance operations
The property and casualty insurance industry is highly 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 premiums of the Property and Casualty Group. The Property and Casualty Group’s economically sensitive lines, such as workers compensation and commercial auto, continue to experience reduced exposures and reduced average premium per policy due to economic conditions. Industry premium exposures in property and casualty lines were suppressed in 2009, with premium rates for personal lines showing signs of firming and most commercial lines reflecting rate reductions.
The property and casualty insurance business is driven by premium growth, the combined ratio and investment returns. The property and casualty operations 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 over 2,000 independent agencies will contribute to future growth as new agents build up their books of business with the Property and Casualty Group. The Property and Casualty Group appointed 57 new agencies through the six months ended June 30, 2010. In 2009, we appointed 120 new agencies and plan to appoint a similar number during 2010.
The property and casualty insurance operations insure standard and preferred risks while adhering to a set of consistent underwriting standards. Nearly 50% of premiums are derived from personal auto, 20% from homeowners and 30% from commercial lines. Pennsylvania, Maryland and Virginia made up 64% of the property and casualty lines insurance business based on 2009 direct written premium. As a result of the intercompany pooling arrangement, Indemnity retains a 5.5% interest in the net underwriting results of the Property and Casualty Group. The Exchange retains 94.5% of the net underwriting results of the Property and Casualty Group.
The combined ratio, expressed as a percentage, is the key measure of underwriting profitability traditionally used in the property and casualty insurance industry. 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 loss 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 related to medical costs and litigation.
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 sales of its individual and group life insurance policies and fixed individual and group 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, maintaining interest spreads over the amounts credited to deposit funds and the maintenance of strong ratings from rating agencies.

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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 in the Management’s Discussion and Analysis, the life insurance operations include life insurance related investment results. However, for presentation purposes in the segment footnote, the life insurance investment results are included in the investment operations segment discussion as part of the Exchange’s investment results.
Investment operations
We generate revenues from our fixed maturity, equity security and alternative investment portfolios. The portfolios are managed with a view toward maximizing after-tax returns on a risk-adjusted basis. Management actively evaluates the portfolios for impairments. We record impairment writedowns on investments in circumstances where the fair value of the investment is substantially below cost, and we conclude that the decline in fair value is other-than-temporary.
Our investment operations reflect the improvement experienced in the financial markets. During the second quarter 2010, we impaired $4 million of securities compared to $11 million in the second quarter 2009.
Our alternative investments benefited from improving financial market conditions in the fourth quarter of 2009 and the first quarter of 2010. In particular, the improvement in the private equity and mezzanine debt markets had a positive impact on our limited partnership portfolio. Equity in earnings of limited partnerships was $31 million through June 30, 2010 compared to losses of $287 million through June 30, 2009. The valuation adjustments in the limited partnerships are based on financial statements received from our general partners, which are generally received on a quarter lag. As a result, the second quarter partnership earnings do not reflect the valuation changes from the second quarter of 2010.
General conditions and trends affecting our business
Financial conditions
Unfavorable changes in economic conditions, including declining consumer confidence, inflation, unemployment, recession or other changes, may lead the Property and Casualty Group’s customers to cancel insurance policies, modify coverage or not renew policies. Our key challenge is to generate profitable revenue growth in a highly competitive market that is currently experiencing the effects of these economic conditions.
Market volatility
Our portfolio of fixed income, preferred and common stocks and limited partnerships is subject to market volatility. Depending upon market conditions, this could cause considerable fluctuation in reported total investment income.

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RESULTS OF OPERATIONS
The information below is presented on a segment basis prior to eliminations.
Management operations
Management fee revenue earned by Indemnity from services provided to the Exchange is eliminated upon consolidation.
                                                 
    Erie Insurance Group
    Three months ended June 30,   Six months ended June 30,
    2010   2009   % Change   2010   2009   % Change
(in millions)   (Unaudited)           (Unaudited)        
Management fee revenue
  $ 270     $ 259       4.3 %   $ 507     $ 489       3.6 %
Service agreement revenue
    9       9       (1.6 )     17       17       (1.6 )
         
Total revenue from management operations
    279       268       4.1       524       506       3.5  
Cost of management operations
    217       208       4.7       409       401       2.0  
         
Income from management
operations —Indemnity (1)
  $ 62     $ 60       2.0 %   $ 115     $ 105       9.1 %
         
Gross margin
    22.0 %     22.5 %   (0.5 ) pts.     21.9 %     20.8 %   1.1 pts.  
         
 
(1)   Indemnity retains 100% of the income from management operations.
Management fee revenue
The following table presents the direct written premium of the Property and Casualty Group and the calculation of the management fee revenue.
                                                 
    Erie Insurance Group
    Three months ended June 30,   Six months ended June 30,
    2010   2009   % Change   2010   2009   % Change
(dollars in millions)       (Unaudited)                   (Unaudited)            
Property and Casualty Group direct written premiums
  $ 1,088     $ 1,044       4.1 %   $ 2,036     $ 1,965       3.6 %
Management fee rate
    25.00 %     25.00 %             25.00 %     25.00 %        
         
Management fee revenue, gross
  $ 271     $ 260       4.1 %   $ 509     $ 491       3.6 %
Change in allowance for management fee returned on cancelled policies(1)
    (1 )     (1 )   NM       (2 )     (2 )   NM  
         
Management fee revenue, net of allowance
  $ 270     $ 259       4.3 %   $ 507     $ 489       3.6 %
         
 
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 is based upon the management fee rate, determined by our Board of Directors, and the direct written premiums of the Property and Casualty Group. Changes in the management fee rate can affect the segment’s revenue and net income significantly. The management fee rate was set at 25%, the maximum rate, for both 2010 and 2009.
Direct written premiums of the Property and Casualty Group increased 4.1% in the second quarter of 2010, compared to the second quarter of 2009, due to an increase in policies in force of 3.5%. The year-over-year average premium per policy improved from a decrease of 2.5% at June 30, 2009, to a decrease of 0.5% at June 30, 2010. The policy retention ratio was 90.5% at June 30, 2010, compared to 90.6% at December 31, 2009, and 90.8% at June 30, 2009. See the segment discussion of “Property and casualty insurance operations” for a complete discussion of property and casualty premiums.
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 charges are fixed dollar amounts per billed installment. Service agreement revenue totaled $9 million in both second quarters of 2010 and 2009.

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Cost of management operations
                                                 
    Erie Insurance Group
    Three months ended June 30,   Six months ended June 30,
    2010   2009   % Change   2010   2009   % Change
(in millions)   (Unaudited)           (Unaudited)        
Commissions
  $ 149     $ 143       3.5 %   $ 277     $ 273       1.6 %
Non-commission expense
    68       65       7.3       132       128       2.8  
         
Total cost of management operations
  $ 217     $ 208       4.7 %   $ 409     $ 401       2.0 %
         
Scheduled rate commissions increased $6 million in the second quarter of 2010 and $10 million for the six months ended June 30, 2010, compared to the same periods in 2009, impacted by the 4.1% and 3.6%, respectively, increase in direct written premiums of the Property and Casualty Group. Offsetting this increase was a slight decrease in agent bonuses in the second quarter of 2010 and a $5 million decrease for the six months ended June 30, 2010.
Non-commission expense increased $3 million in the second quarter of 2010 compared to the second quarter of 2009, primarily due a $3 million increase in personnel costs, the second largest component in the cost of management operations, as a result of higher average pay rates and an increase in management incentive plan expense.
For the six months ended June 30, 2010, non-commission expense increased $3 million. Driving this increase is a $3 million increase in software costs related to various technology initiatives and a $3 million increase in personnel costs, as salaries and wages were impacted by higher average pay rates and staffing levels offset by a $5 million reduction for a favorable ruling related to an outstanding judgment against us.
The gross margin of 21.9% for the six months ended June 30, 2010, was positively impacted by a $5 million reduction for a favorable court ruling. Excluding this adjustment, the gross margin would have been 21.0%, compared to 20.8% for the first six months of 2009. The improved gross margin in the first half of 2010 resulted from revenue growth slightly outpacing expense growth compared to the first half of 2009.

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Property and casualty insurance operations
A summary of the results of operations of our property and casualty insurance business is as follows:
                                                 
    Property and Casualty Group
    Three months ended June 30,   Six months ended June 30,
    2010   2009   % Change   2010   2009   % Change
(dollars in millions)   (unaudited)           (unaudited)        
Direct written premium
  $ 1,088     $ 1,044       4.1 %   $ 2,036     $ 1,965       3.6 %
Reinsurance — assumed and ceded
    (4 )     1     NM       (6 )     2     NM  
         
Net written premium
    1,084       1,045       3.6       2,030       1,967       3.1  
Change in unearned premium
    110       98       11.7       94       79       18.3  
         
Net premiums earned
    974       947       2.7       1,936       1,888       2.5  
         
Losses and loss expenses
    717       638       12.4       1,455       1,420       2.5  
Policy acquisition and other underwriting expenses
    276       274       0.1       541       539       0.2  
         
Total losses and expenses
    993       912       8.7       1,996       1,959       1.8  
         
Underwriting income (loss) — Erie Insurance Group
  $ (19 )   $ 35     NM     $ (60 )   $ (71 )     15.3 %
         
Underwriting income (loss) — Indemnity
  $ (2 )   $ 2             $ (4 )   $ (4 )        
                         
Underwriting income (loss) — Exchange
  $ (17 )   $ 33             $ (56 )   $ (67 )        
                         
 
                                               
Loss and loss expense ratio
    73.7 %     67.3 %     6.4 pts.     75.2 %     75.2 %     0.0 pts.
Policy acquisition and other underwriting expense ratio
    28.1       29.3       (1.2 )     28.0       28.7       (0.7 )
         
Combined ratio
    101.8 %     96.6 %     5.2 pts.     103.2 %     103.9 %     (0.7 )pts.
         
 
NM = not meaningful
We measure profit or loss for our property and casualty segment based upon underwriting results, which represent net earned premium less loss and loss expenses and underwriting expenses on a pre-tax basis. Loss and combined ratios are key performance indicators that we use to assess business trends and to make comparisons to industry results. Investment results of our property and casualty insurance company subsidiaries are included in our investment operations segment.
Direct written premiums
Direct written premiums of the Property and Casualty Group increased 4.1% to nearly $1.1 billion in the second quarter of 2010 compared to the second quarter of 2009 primarily driven by an increase in policies in force.
Premiums generated from new business increased 6.5% in the second quarter of 2010, compared to 2.9% in the second quarter of 2009. Underlying the trend in new business premiums was an increase in new business policies in force of 6.9% in the second quarter of 2010, and 6.1% in the second quarter of 2009, while year-over-year average premiums per policy on new business decreased 0.1% at June 30, 2010, and 2.2% at June 30, 2009.
Premiums generated from renewal business increased 3.9% in the second quarter of 2010, compared to 1.2% in the second quarter of 2009. Renewal policies in force increased 3.0% in both the second quarters of 2010 and 2009. The year-over-year average premium per policy on renewal business decreased 0.5% at June 30, 2010, compared to 2.5% at June 30, 2009. The Property and Casualty Group’s year-over-year policy retention ratio was 90.5% at June 30, 2010, compared to 90.6% at December 31, 2009, and 90.8% at June 30, 2009.
Personal lines — Total personal lines premiums written increased 5.5% to $792 million in the second quarter of 2010, compared to $750 million in the second quarter of 2009. Total personal lines policies in force increased 3.5% in the second quarter of 2010, and the total personal lines year-over-year average premium per policy increased 1.3%.
The Property and Casualty Group’s personal lines new business premiums written increased 4.7% in the second quarter of 2010, compared to 7.7% in the second quarter of 2009. Personal lines new business policies in force increased 6.3% in the second quarter of 2010, compared to 7.7% in the second quarter of 2009. The year-over-year average premium per policy on personal lines new business increased 0.6% at June 30, 2010, compared to a decline of 0.3% at June 30, 2009.

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    Private passenger auto new business premiums written increased 3.3% in the second quarter of 2010, compared to 4.5% in the second quarter of 2009. Private passenger auto new business policies in force increased 5.0% in the second quarter of 2010, compared to 9.8% in the second quarter of 2009. The new business year-over-year average premium per policy for private passenger auto increased 1.4% at June 30, 2010, compared to a decrease of 1.6% at June 30, 2009.
 
    Homeowners new business premiums written increased 9.3% in the second quarter of 2010, compared to 12.6% in the second quarter of 2009, while homeowners new business policies in force increased 9.0% compared to 3.8% in the second quarters of 2010 and 2009, respectively. The new business year-over-year average premium per policy for homeowners increased 1.0% at June 30, 2010, compared to 0.3% at June 30, 2009.
Renewal premiums written on personal lines increased 5.6% in the second quarter 2010, compared to 3.3% in the second quarter of 2009, driven by a modest increase in average premium per policy and steady policy retention ratio trends. The year-over-year average premium per policy on personal lines renewal business increased 1.5% at June 30, 2010, compared to a decline of 1.0% at June 30, 2009. The year-over-year policy retention ratio for personal lines was 91.3% at June 30, 2010, 91.5% at December 31, 2009, and 91.7% at June 30, 2009.
    Private passenger auto renewal premiums written increased 4.9% in the second quarter of 2010 compared to 1.6% in the second quarter of 2009. The year-over-year average premium per policy on private passenger auto renewal business increased 1.1% at June 30, 2010, compared to a decline of 1.0% at June 30, 2009. The private passenger auto year-over-year policy retention ratio remained steady at 91.8% at June 30, 2010, compared to 91.9% at December 31, 2009 and June 30, 2009.
 
    Homeowners renewal premiums written increased 6.9% in the in the second quarter of 2010, compared to 6.2% in the second quarter of 2009. The year-over-year average premium per policy on homeowners renewal business increased 3.7% at June 30, 2010, compared to 0.4% at June 30, 2009. The homeowners year-over-year policyholder retention ratio was 90.9% at June 30, 2010, 91.2% at December 31, 2009, and 91.6% at June 30, 2009.
Commercial lines — Total commercial lines premiums written increased 0.7% to $296 million in the second quarter of 2010, compared to $294 million in the second quarter of 2009. Total commercial lines policies in force increased 3.6% while the total commercial lines year-over-year average premium per policy decreased 5.2%.
Commercial lines new business premiums written increased 9.9% in the second quarter of 2010, compared to a decrease of 5.2% in the second quarter of 2009. Commercial lines new business policies in force increased 9.6% in the second quarter of 2010 compared to a decline of 0.9% in the second quarter of 2009. The year-over-year average premium per policy on commercial lines new business decreased 3.0% at June 30, 2010 compared to 2.0% at June 30, 2009, driven by reductions in exposure as a result of continued economic pressures on commercial customers.
Renewal premiums for commercial lines decreased 0.8% in the second quarter of 2010, compared to a decrease of 3.9% in the second quarter of 2009. The year-over-year average premium per policy on commercial lines renewal business declined 5.2% at June 30, 2010, compared to a decline of 6.1% at June 30, 2009, primarily driven by the workers compensation and commercial auto lines of business in both years. The workers compensation and commercial auto year-over-year average premium per policy decreased 13.8% and 3.8%, respectively, at June 30, 2010, compared to declines of 12.8% and 3.9%, respectively, at June 30, 2009. Contributing to the workers compensation lower average premium per policy were shifts in the mix of our book of business and lower exposures driven by reductions in payroll levels. The commercial auto average premium per policy decrease was driven by shifts in the mix of our book of business and fewer insured vehicles. The commercial lines year-over-year policy retention ratio was 85.2% at June 30, 2010, 84.9% at December 31, 2009, and 85.1% at June 30, 2009.
Future trends—premium revenue — We are continuing our efforts to grow Property and Casualty Group premiums and improve our competitive position in the marketplace. Expanding the size of the agency force will contribute to future growth as existing and new agents build up their book of business with the Property and Casualty Group. Through the first six months of 2010, we appointed 57 new agencies, which increased our total to 2,091 agencies. We expect our pricing actions to result in a net increase in direct written premium in 2010, however, exposure reductions and changes in our mix of business could impact the average premium written by the Property and Casualty Group as customers may continue to reduce coverages.

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Current year losses and loss expenses
The current accident year loss and loss expense ratio, excluding catastrophe losses was 67.9% in the second quarter of 2010 compared to 66.7% in the second quarter of 2009.
The personal lines loss and loss expense ratio related to the current accident year, excluding catastrophe losses, was 67.4% in the second quarter of 2010 compared to 67.9% in the second quarter of 2009. The personal auto loss and loss expense ratio related to the current accident year, excluding catastrophe losses, decreased to 68.8% in the second quarter of 2010 from 70.1% in the second quarter of 2009, while the homeowners loss and loss expense ratio decreased to 64.8% from 65.6% for the same periods, respectively.
The commercial lines loss and loss expense ratio related to the current accident year, excluding catastrophe losses, was 68.3% in the second quarter of 2010 compared to 64.0% in the second quarter of 2009. Excluding catastrophe losses, the current accident year loss and loss expense ratios for the second quarters of 2010 and 2009, respectively were 83.3% and 73.2% for the workers compensation line of business, 67.6% and 57.6% for the commercial multi-peril line of business, and 67.8% and 66.8% for the commercial auto line of business.
Catastrophe losses
Catastrophes are an inherent risk of the property and casualty insurance business and can have a material impact on our 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 which 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 sufficient property catastrophe reinsurance coverage from unaffiliated reinsurers and no longer participates in the voluntary assumed reinsurance business, which lowers the variability of the underwriting results of the Property and Casualty Group.
Catastrophe losses, as defined by the Property and Casualty Group, totaled $80 million in the second quarter of 2010 and $15 million in the second quarter of 2009. These catastrophe losses contributed 8.1 points and 1.5 points to the combined ratios at June 30, 2010 and 2009, respectively. Catastrophe losses in the second quarter of 2010 were the result of flooding, hail and wind storms primarily in the states of Pennsylvania, Maryland and Ohio. In the second quarter of 2009, catastrophe losses resulted from flooding, wind and rain storms primarily in Indiana and Illinois. Catastrophe losses incurred for the first half of 2010 and 2009 were $193 million and $87 million, respectively, and contributed 9.9 points and 4.6 points to the combined ratio, respectively.
Prior year loss development
The following table provides the details of the prior year loss reserve development:
                                 
    Erie Insurance Group
    Three months ended   Six months ended
    June 30,   June 30,
    2010   2009   2010   2009
(in millions)   (unaudited)   (unaudited)
Prior year loss development:
                               
Direct business including salvage and subrogation
  $ (13 )   $ (2 )   $ (56 )   $ 35  
Assumed reinsurance business
    (8 )     (7 )     (11 )     (8 )
Ceded reinsurance business
    (1 )     (1 )     (5 )     2  
         
Total prior year loss development
  $ (22 )   $ (10 )   $ (72 )   $ 29  
         
Negative amounts represent a redundancy (decrease in reserves), while positive amounts represent a deficiency (increase in reserves).
Development of loss reserves
Direct business including salvage and subrogation — Favorable development of prior accident years, including the effects of salvage and subrogation recoveries totaled $13 million and improved the combined ratio 1.3 points in the second quarter of 2010, compared to $2 million, or 0.1 points in the second quarter of 2009. The favorable development in the second quarter of 2010 was primarily the result of improved severity trends, of which $7 million related to the workers compensation line of business and $7 million related to the commercial multi-peril line of business. In the second quarter of 2009, frequency and severity trends were relatively stable.

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Favorable development of prior accident years, including the effects of salvage and subrogation recoveries totaled $56 million and improved the combined ratio 2.9 points in the first half of 2010, while adverse development of prior accident years totaled $35 million and contributed 1.9 points to the combined ratio in the first half of 2009. Driving the prior accident year development through June 30, 2010 was favorable development of $26 million related to the commercial multi-peril line of business, $22 million related to the personal auto line of business, $8 million related to the homeowners line of business, and $5 million related to the workers compensation line of business. The favorable development experienced in the commercial multi-peril line of business was primarily the result of improvements in severity trends. Of the $22 million of favorable development in the personal auto line of business, $13 million was the result of improvements in frequency trends on automobile bodily injury and uninsured/underinsured motorist bodily injury and $7 million was the result of two claims closing. The favorable development in the homeowners line of business was primarily the result of the settlement of one large claim, while the favorable development in the workers compensation line of business was primarily the result of improvements in severity trends. The adverse development in 2009 was primarily the result of one large workers compensation claim combined with increasing loss cost trends on automobile bodily injury and commercial liability claims.
Assumed reinsurance — The Property and Casualty Group’s favorable development of prior accident year loss reserves on its assumed reinsurance business was relatively flat at $8 million in the second quarter of 2010, compared to $7 million in the second quarter of 2009. For the first half of 2010, favorable development of prior accident year loss reserves on assumed reinsurance totaled $11 million, compared to $8 million in the first half of 2009. The favorable development was due to less than anticipated growth in involuntary reinsurance.
Ceded reinsurance — Favorable development of ceded reinsurance reserves was flat at $1 million in the second quarters of 2010 and 2009. In the first half of 2010, ceded reinsurance reserves, which is reflected as favorable development of reserves, increased $8 million related primarily to the business catastrophe liability line, offset by a $4 million reduction in ceded reserves related to the pre-1986 automobile massive injury reserves.
Policy acquisition and other underwriting expenses
Our expense ratio decreased 1.2 points in the second quarter of 2010, compared to the second quarter of 2009. The management fee rate was 25% at both June 30, 2010 and 2009. The second quarter and first half of 2009 amounts include a charge for the North Carolina Escrow account of $6 million and $10 million, respectively, which added 0.6 points to both the second quarter and first half of 2009 policy acquisition and other underwriting expense ratios. The final rate that was approved by North Carolina approximated our filed rates and the charge was reversed in the third quarter of 2009.

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Life insurance operations
EFL is a Pennsylvania-domiciled life insurance company which underwrites and sells nonparticipating individual and group life insurance policies and fixed annuities and operates in 10 states and the District of Columbia.
                                                 
    Erie Family Life Insurance Company
    Three months ended June 30,   Six months ended June 30,
    2010   2009   % Change   2010   2009   % Change
(in millions)   (unaudited)           (unaudited)        
Individual life premiums, net of reinsurance
  $ 16     $ 19       (8.8 )%   $ 31     $ 34       (3.7 )%
Group life and other premiums
    0       0     NM     1       1       (6.2 )
Other revenue
    0       0     NM     0       0     NM
         
Total net policy revenue
    16       19       (8.3 )     32       35       (3.9 )
Net investment income
    24       23       3.7       47       48       (1.3 )
Net realized gains (losses) on investments
    3       0     NM     8       (2 )   NM
Impairment losses recognized in earnings
    (2 )     (1 )     (80.5 )     (2 )     (15 )     87.3  
Equity in losses of limited partnerships
    0       (2 )     95.0       (1 )     (5 )     79.4  
         
Total revenues
    41       39       10.4       84       61       42.7  
         
Benefits and other changes in policy reserves
    22       24       (5.4 )     46       46       1.4  
Amortization of deferred policy acquisition costs
    4       4       0.2       9       7       41.2  
Other operating expenses
    4       5       (9.6 )     8       8       0.2  
         
Total benefits and expenses
    30       33       (5.2 )     63       61       5.6  
         
Income before income taxes
  $ 11     $ 6       96.6 %   $ 21     $ 0     NM
         
Income before taxes — Indemnity(1)
  $ 3     $ 1       96.6 %   $ 5     $ 0     NM
         
Income before taxes — Exchange
  $ 8     $ 5       96.6 %   $ 16     $ 0     NM
         
 
NM = not meaningful
 
(1)   The Exchange has a 78.4% ownership interest in EFL, with the remaining 21.6% owned by Indemnity.
Premiums
Gross policy revenues increased 4% to $27 million in the second quarter of 2010, compared to $26 million in the second quarter of 2009. EFL reinsures a large portion of its traditional products in order to reduce claims volatility. Our reinsurers assume 75% of the risk on new term business. Ceded reinsurance premiums were $11 million and $9 million in the second quarters of 2010 and 2009, respectively. For the first half of 2010 compared to the first half of 2009, gross policy revenues totaled $52 million and $50 million, respectively, while ceded reinsurance premiums totaled $20 million and $17 million, respectively.
Premiums received on annuity and universal life products totaled $29 million in the second quarter of 2010, compared to $43 million in the second quarter of 2009. Of this amount, annuity and universal life premiums recorded as deposits and therefore not reflected in revenue on the Consolidated Statements of Operations were $25 million and $39 million in the second quarters of 2010 and 2009, respectively. For the first half of 2010 compared to the first half of 2009, premiums received on annuity and universal life products totaled $62 million and $83 million, respectively, while annuity and universal life deposits totaled $54 million and $75 million, respectively.
Investments
Due to continued improvements in market conditions in the second quarter and first half of 2010, EFL experienced low levels of impairments and net realized gains on investments compared to the second quarter and first half of 2009. Equity in earnings of limited partnerships also reflected the improvement in market conditions, as limited partnership activity is reported on a one quarter lag. See additional discussion of investments in the “Investment Operations” segment that follows.
Benefits and expenses
In the second quarter of 2010, benefits and other changes in policy reserves were impacted by decreases in death benefits and interest on annuity deposits. In the first half of 2010, the amortization of deferred policy acquisition costs increased $2 million as a result of a significant reduction in impairments and due to experiencing realized gains compared to realized losses in the first half of 2009.

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Investment operations
                                 
    Erie Insurance Group
    Three months ended June 30,   Six months ended June 30,
    2010   2009   2010   2009
(in millions)   (unaudited)   (unaudited)
Indemnity
                               
Net investment income
  $ 9     $ 9     $ 18     $ 22  
Net realized gains (losses) on investments
    (3 )     4       2       0  
Net impairment losses recognized in earnings
    (1 )     (2 )     (1 )     (7 )
Equity in (losses) earnings of limited partnerships
    6       (27 )     6       (55 )
         
Net revenue (loss) from investment operations — Indemnity
  $ 11     $ (16 )   $ 25     $ (40 )
         
 
                               
Exchange
                               
Net investment income
  $ 101     $ 98     $ 199     $ 205  
Net realized gains (losses) on investments
    (210 )     204       (90 )     53  
Net impairment losses recognized in earnings
    (3 )     (10 )     (5 )     (76 )
Equity in gains (losses) of limited partnerships
    21       (99 )     24       (232 )
         
Net revenue (loss) from investment operations — Exchange(1)
  $ (91 )   $ 193     $ 128     $ (50 )
         
 
(1)   The Exchange’s results for the second quarter of 2010 and 2009 include net revenues of EFL operations of $25 million and $20 million, respectively. The Exchange’s results for the first six months of 2010 and 2009 include net revenues of EFL operations of $53 million and $26 million, respectively.
Investment income
Net investment income primarily includes interest and dividends on our fixed maturity and equity security portfolios. Net investment income was relatively flat in both Indemnity and the Exchange. Though our invested balances have increased, yields on new security purchases are down.
Realized gains and losses
Realized gains on investments decreased in both Indemnity and the Exchange in large part due to the valuation decreases on the common stock trading portfolios. Indemnity’s common stock trading portfolio contributed $4 million in valuation adjustment losses for the quarter ended June 30, 2010 compared to $6 million in valuation adjustment gains for the quarter ended June 30, 2009. The Exchange generated valuation adjustment losses for the quarter ended June 30, 2010 of $242 million compared to valuation adjustment gains of $247 million for the quarter ended June 30, 2009.
Impairment losses recognized in earnings
Impairment losses recognized in earnings for Indemnity decreased $1 million in the second quarter of 2010 compared to the second quarter of 2009. Impairment losses recognized in earnings for the Exchange decreased $7 million for the same period. Year-to-date 2010 impairment losses are down $6 million in Indemnity and $71 million in the Exchange from the prior year-to-date as a result of improved market conditions.
Equity in earnings of limited partnerships
Indemnity’s equity in earnings of limited partnerships was $6 million through June 30, 2010 compared to losses of $55 million through June 30, 2009. The Exchange’s equity in earnings of limited partnerships was $24 million through June 30, 2010 compared to losses of $232 million through June 30, 2009.
Limited partnership earnings pertain to investments in U.S. and foreign private equity, real estate and mezzanine debt partnerships. Valuation adjustments are recorded to reflect the fair value of limited partnerships. These adjustments are recorded as a component of equity in earnings of limited partnerships in the Consolidated Statements of Operations.
We experienced an increase in earnings as a result of fair value increases in our private equity and mezzanine debt limited partnerships which were offset by losses in our real estate limited partnerships. Limited partnership earnings tend to be cyclical based on market conditions, the age of the partnership and the nature of the investments. Generally,

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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 June 30, 2010 reflect investment valuation changes resulting from the financial markets and the economy in the first quarter of 2010.
The breakdown of our net realized (losses) gains on investments is as follows:
                                 
    Erie Insurance Group
    Three months ended   Six months ended<