Indemnity and the Exchange also operate 25 field offices in 12 states. Of these field offices, 16 provide both agency support and claims services and are referred to as branch offices, while seven provide only claims services and are referred to as claims offices, and two provide only agency support and are referred to as sales offices. We own three field offices and lease a portion of these buildings to the Exchange. The remaining field offices are leased from other parties as detailed below:
The following discussion of financial condition and results of operations highlights significant factors influencing Erie Indemnity Company ("Indemnity", "we", "us", "our"). This discussion should be read in conjunction with the audited financial statements and related notes and all other items contained within this Annual Report on Form 10-K as these contain important information helpful in evaluating our financial condition and results of operations.
See Part II, Item 8. "Financial Statements and Supplementary Data - Note 2, Significant Accounting Policies, of Notes to Financial Statements" contained within this report for a discussion of adopted and other recently issued accounting standards, none of which had or are expected to have a material impact on our future financial condition, results of operations or cash flows.
Total investment income increased 18.6% in 2015 primarily due to higher earnings from limited partnership investments.
The following presents a discussion of those accounting policies surrounding estimates that we believe are the most critical to our reported amounts and require the most subjective and complex judgment. If actual events differ significantly from the underlying assumptions, there could be material adjustments to prior estimates that could potentially adversely affect our results of operations, financial condition, and cash flows. The estimates and the estimating methods used are reviewed continually, and any adjustments considered necessary are reflected in current earnings.
and considers factors specific to the asset, such as the relative impact on the fair value as a result of including a particular input and market conditions. We did not make any other significant judgments except as described above.
We have three types of limited partnership investments: private equity, mezzanine debt, and real estate. Our private equity and mezzanine debt partnerships are diversified among numerous industries and geographies to minimize potential loss exposure. Nearly all of the underlying investments in our limited partnerships are valued using a source other than quoted prices in active markets. The fair value amounts for our private equity and mezzanine debt partnerships are based upon the financial statements prepared by the general partners, who use various methods to estimate fair value including the market approach, income approach, and the cost approach. The market approach uses prices and other pertinent information from market-generated transactions involving identical or comparable assets or liabilities. Such valuation techniques often use market multiples derived from a set of comparables. The income approach uses valuation techniques to convert future cash flows or earnings to a single discounted present value amount. The measurement is based upon the value indicated by current market expectations about those future amounts. The cost approach is derived from the amount that is currently required to replace the service capacity of an asset. If information becomes available that would impair the cost of investments owned by the partnerships, then the general partner would adjust the investments to the net realizable value.
Our pension plans consist of a noncontributory defined benefit pension plan covering substantially all employees and an unfunded supplemental employee retirement plan ("SERP") for certain members of executive and senior management. Although we are the sponsor of these postretirement plans and record the funded status of these plans, the Exchange reimburses us for approximately 57% of the annual benefit expense of these plans, which represents pension benefits for our employees performing claims and life insurance functions.
Accumulated and projected benefit obligations are expressed as the present value of future cash payments. We discount those cash payments based upon a yield curve developed from corporate bond yield information with maturities that correspond to the payment of benefits. Lower discount rates increase present values and subsequent year pension expense, while higher discount rates decrease present values and subsequent year pension expense. The construction of the yield curve is based upon yields of corporate bonds rated Aa quality. Target yields are developed from bonds at various maturity points and a curve is fitted to those targets. Spot rates (zero coupon bond yields) are developed from the yield curve and used to discount benefit payment amounts associated with each future year. The present value of plan benefits is calculated by applying the spot/discount rates to projected benefit cash flows. A single discount rate is then developed to produce the same present value. The cash flows from the yield curve were matched against our projected benefit payments in the pension plan, which have a duration of about 19 years. This yield curve supported the selection of a 4.57% discount rate for the projected benefit obligation at December 31, 2015 and for the 2016 pension expense. The same methodology was used to develop the 4.17% and 5.11% discount rates used to determine the projected benefit obligation for 2014 and 2013, respectively, and the pension expense for 2015 and 2014, respectively. A 25 basis point decrease in the discount rate assumption, with other assumptions held constant, would increase pension cost in the following year by $3.5 million and would increase the pension benefit obligation by $33.0 million.
We use a four year averaging method to determine the market-related value of plan assets, which is used to determine the expected return component of pension expense. Under this methodology, asset gains or losses that result from returns that differ from our long-term rate of return assumption are recognized in the market-related value of assets on a level basis over a four year period. The market-related asset experience during 2015 that related to the actual investment return being different from that assumed during the prior year was a loss of $37.0 million. Recognition of this loss will be deferred and recognized over a four year period, consistent with the market-related asset value methodology. Once factored into the market-related asset value, these experience gains and losses will be amortized over a period of 14 years, which is the remaining service period of the employee group.
Premiums generated from new business increased 3.9% to $722 million in 2015, compared to 5.8%, or $695 million, in 2014. Underlying the trend in new business premiums was a 2.3% increase in new business policies written in 2015, compared to 2.9% in 2014, while the year-over-year average premium per policy on new business increased 1.6% at December 31, 2015, compared to 2.9% at December 31, 2014.
The Exchange implemented rate increases in 2015, 2014, and 2013 in order to meet loss cost expectations. As the Exchange writes policies with annual terms only, rate actions take 12 months to be fully recognized in written premium and 24 months to
Future trends-premium revenue - The Exchange plans to continue its efforts to grow premiums and improve its competitive position in the marketplace. Expanding the size of its agency force through a careful agency selection process and increased market penetration in our existing operating territories will contribute to future growth as existing and new agents build their books of business
Changes in premium levels attributable to the growth in policies in force directly affects the profitability of the Exchange and has a direct bearing on our management fee. The Exchange’s continued focus on underwriting discipline and the maturing of our pricing sophistication models has contributed to its growth in new policies in force, steady policy retention ratios, and increased average premium per policy. The continued growth of its policy base is dependent upon the Exchange’s ability to retain existing policyholders and attract new policyholders. A lack of new policy growth or the inability to retain existing customers could have an adverse effect on the Exchange’s premium level growth, and consequently our management fee.
Commissions - Commissions increased $64.9 million in 2015 compared to 2014, and increased $73.0 million in 2014 compared to 2013, primarily as a result of the 7.3% and 8.6% respective increases in direct and assumed premiums written by the Exchange, while approximately one-quarter of the respective increases for the years ended December 31, 2015 and 2014 was due to higher agent incentive costs primarily related to profitable growth.
In 2014, compared to 2013, non-commission expense increased $23.3 million. Underwriting and policy processing costs increased $7.0 million due to the increased cost of underwriting reports, postage, and printing costs related to increased volume. Information technology costs increased $13.5 million, which included $6.1 million of professional fees, $3.9 million of personnel costs, and $3.5 million of hardware and software costs. Customer service costs increased $4.1 million due to an increase of $2.1 million in credit card processing fees and $2.0 million in personnel costs. All other operating costs decreased $1.3 million.
The gross margin in 2015 was 15.4%, compared to 15.8% in 2014 and 16.1% in 2013.
Net investment income increased by $1.3 million in 2015, compared to 2014, and increased by $1.5 million in 2014, compared to 2013. The increases in net investment income in both 2015 and 2014 were primarily attributable to income from fixed maturity investments, reflecting higher invested balances and higher investment yields.
Net realized gains were $0.5 million in 2015, compared to gains of $1.1 million in 2014 and $0.9 million in 2013. Net realized gains in 2015 were due to gains from sales of nonredeemable preferred stock, which were partially offset by losses from sales of fixed maturities. Net realized gains were primarily attributable to gains from sales of equity securities in 2014, and gains from sales of fixed maturity securities in 2013.
Serving in the capacity of attorney-in-fact for the Exchange, we are dependent on the growth and financial condition of the Exchange, who is our sole customer. The strength of the Exchange and its wholly owned subsidiaries is rated annually by A.M. Best Company. Higher ratings of insurance companies generally indicate financial stability and a strong ability to pay claims. The ratings are generally based upon factors relevant to policyholders and are not directed toward return to investors. The Exchange and each of its property and casualty subsidiaries are rated A+ “Superior”. The outlook for the financial strength rating is stable. According to A.M. Best, this second highest financial strength rating category is assigned to those companies that, in A.M. Best’s opinion, have achieved superior overall performance when compared to the standards established by A.M. Best and have a superior ability to meet obligations to policyholders over the long term. Only 11.0% of insurance groups are rated A+ or higher, and the Exchange is included in that group.
For all investment holdings, general economic conditions and/or conditions specifically affecting the underlying issuer or its industry, including downgrades by the major rating agencies, are considered in evaluating impairment in value. In addition to specific factors, other factors considered in our review of investment valuation are the length of time the fair value is below cost and the amount the fair value is below cost.
We individually analyze all positions with emphasis on those that have, in our opinion, declined significantly below cost. In compliance with impairment guidance for debt securities, we perform further analysis to determine if a credit-related impairment has occurred. Some of the factors considered in determining whether a debt security is credit impaired include potential for the default of interest and/or principal, level of subordination, collateral of the issue, compliance with financial covenants, credit ratings and industry conditions. We have the intent to sell all credit-impaired debt securities; therefore, the entire amount of the impairment charges are included in earnings and no impairments are recorded in other comprehensive income. For available-for-sale equity securities, a charge is recorded in the Statements of Operations for positions that have experienced other-than-temporary impairments. (See the "Total Investment Income" section herein for further information.)
Fixed maturities classified as available-for-sale are carried at fair value with unrealized gains and losses, net of deferred taxes, included in shareholders’ equity. Net unrealized gains on fixed maturities, net of deferred taxes, amounted to $3.4 million at December 31, 2015, compared to $6.2 million at December 31, 2014.
The following table presents a breakdown of the fair value of our fixed maturity portfolio by sector and rating as of December 31, 2015: (1)
The following table presents an analysis of the fair value of our preferred and common stock securities by sector at December 31:
(1) Includes certain exchange traded funds with underlying holdings of fixed maturity securities. These securities meet the criteria of a common stock under U.S. GAAP, and are included on the balance sheet as available-for-sale equity securities.
Net cash provided by operating activities increased to $217.4 million in 2015, compared to $186.0 million in 2014, and $218.0 million in 2013. Increased cash from operating activities in 2015 was primarily due to increases in management fee revenue received and reimbursements collected from affiliates, combined with a decrease in pension and employee benefits paid. Somewhat offsetting this increase in cash provided were increases in commissions and bonuses paid to agents, and general operating expenses and income taxes paid, compared to 2014. Management fee revenues were higher reflecting the increase in direct and assumed premiums written by the Exchange. Cash paid for agent commissions and bonuses increased to $822.5 million in 2015, compared to $748.6 million in 2014, as a result of an increase in cash paid for scheduled commissions due to premium growth and bonus awards due to profitable underwriting results. We contributed $17.0 million to our pension plan in 2015, compared to $23.1 million in 2014. Additionally, we made a contribution to our pension plan for $17.4 million in January 2016. Our funding policy is generally to contribute an amount equal to the greater of the target normal cost for the plan year or the amount necessary to fund the plan to 100% plus interest to the date the contribution is made. We are reimbursed approximately 57% of the net periodic benefit cost of the pension plans from the Exchange, which represents pension benefits for our employees performing claims and life insurance functions. In 2014, decreased cash from operating activities, compared to 2013, was primarily due to increases in commissions and bonuses paid to agents and general operating expenses, combined with decreases in reimbursements collected from affiliates and limited partnership distributions. Somewhat offsetting this decrease in cash provided was an increase in management fee revenue received, compared to 2013.
At December 31, 2015, we recorded a net deferred tax asset of $40.7 million. There was no deferred tax valuation allowance recorded at December 31, 2015.
No shares of our Class A nonvoting common stock were repurchased in 2015 in conjunction with our stock repurchase program. In 2014, shares repurchased under this program totaled 276,390 at a total cost of $19.5 million, compared to 441,024 shares at a total cost of $31.9 million in 2013, based upon settlement date. In October 2011, our Board of Directors approved a continuation of the current stock repurchase program for a total of $150 million with no time limitation. This repurchase authority includes, and is not in addition to, any unspent amounts remaining under the prior authorization. We had approximately $17.8 million of repurchase authority remaining under this program at December 31, 2015, based upon trade date.
In 2015, we purchased 111,535 shares of our outstanding Class A nonvoting common stock outside of our publicly announced share repurchase program at a total cost of $10.4 million for the vesting of stock-based awards in conjunction with our long-term incentive plan, for stock-based awards for executive management and an outside director, and for the rabbi trust outside director deferred compensation plan. These shares were delivered in 2015. In 2014, we purchased 64,398 shares of our outstanding Class A nonvoting common stock outside of our publicly announced share repurchase program at a total cost of $4.9 million for the vesting of stock-based awards for executive management and an outside director, and for awards under our long-term incentive plan. These shares were delivered in 2014. In 2013, we purchased 3,477 shares of our outstanding Class A nonvoting common stock outside of our publicly announced share repurchase program at a total cost of $0.3 million to settle payments due to a retired executive under our long-term incentive plan. These shares were delivered in 2013.
We regularly prepare forecasts evaluating the current and future cash requirements for both normal and extreme risk events. Should an extreme risk event result in a cash requirement exceeding normal cash flows, we have the ability to meet our future funding requirements through various alternatives available to us.
As of December 31, 2015, we have access to a $100 million bank revolving line of credit with a $25 million letter of credit sublimit that expires on November 3, 2020. As of December 31, 2015, a total of $98.2 million remains available under the facility due to $1.8 million outstanding letters of credit, which reduce the availability for letters of credit to $23.2 million. We had no borrowings outstanding on our line of credit as of December 31, 2015. Bonds with a fair value of $109.0 million were pledged as collateral on the line at December 31, 2015. These securities have no trading restrictions and are reported as available-for-sale securities in the Statements of Financial Position. The bank requires compliance with certain covenants, which include leverage ratios. We were in compliance with our bank covenants at December 31, 2015.
We have certain obligations and commitments to make future payments under various contracts. As of December 31, 2015, the aggregate obligations were as follows:
The pension contribution for 2016 was estimated in accordance with the Pension Protection Act of 2006. Contributions anticipated in future years depend upon certain factors that cannot be reasonably predicted. Any contributions required in future years will be an amount equal to the greater of the target normal cost for the plan year or the amount necessary to fund the plan to 100% plus interest to the date the contribution is made. The obligations for our unfunded benefit plans, including the Supplemental Employee Retirement Plan (SERP) for our executive and senior management, are not included in gross contractual obligations. The recorded accumulated benefit obligation for this plan at December 31, 2015 is $10.5 million. We expect to have sufficient cash flows from operations to meet the future benefit payments as these become due.
Off-balance sheet arrangements include those with unconsolidated entities that may have a material current or future effect on our financial condition or results of operations, including material variable interests in unconsolidated entities that conduct certain activities. We have no material off-balance sheet obligations or guarantees, other than limited partnership investment commitments. See the preceding Contractual Obligations section for further discussion of limited partnership investment commitments.
We have audited the accompanying statements of financial position of Erie Indemnity Company as of December 31, 2015 and 2014, and the related statements of operations, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
(1) Net purchases of treasury stock in 2015 includes the repurchase of our Class A common stock in the open market that were subsequently distributed to satisfy stock based compensation awards. See Note 11, "Capital Stock", for additional information on treasury stock transactions.
See accompanying notes to Financial Statements. See Note 16, “Supplementary Data on Cash Flows”, for supplemental cash flow information.
The services we provide to the Exchange are related to the sales, underwriting and issuance of policies. The sales related services we provide include agent compensation and certain sales and advertising support services. Agent compensation includes scheduled commissions to agents based upon premiums written as well as additional commissions and bonuses to agents, which are earned by achieving targeted measures. Agent compensation comprised approximately 67% of our 2015 expenses. The underwriting services we provide include underwriting and policy processing expenses and comprised approximately 11% of our 2015 expenses. We provide information technology services that support all functions that comprised approximately 10% of our 2015 expenses. The remaining services we provide include customer service and administrative costs.
The assets and liabilities of the Noncontrolling Interest - Exchange are not included on the Statements of Financial Position. The assets and liabilities of Indemnity are presented on a classified basis, which distinguishes between current and noncurrent on the Statements of Financial Position.
In May 2015, the FASB issued ASU 2015-07, "Fair Value Measurement", which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient and limits the disclosure requirements. ASU 2015-07 is effective for annual and interim periods beginning after December 15, 2015 with early adoption permitted. Our disclosure was prepared in accordance with this amended guidance at December 31, 2015.
consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, ASU 2015-14, "Revenue from Contracts with Customers", deferred the effective date of ASU 2014-09 to annual and interim reporting periods beginning after December 15, 2017. Earlier application is permitted only as of annual and interim reporting periods beginning after December 15, 2016. We do not expect the adoption of ASU 2014-09 related to the management fee and service agreement revenue to have a material impact on our financial statements.
Because of the timing of the preparation and delivery of financial statements for limited partnership investments, the use of the most recently available financial statements provided by the general partners results in a quarter delay in the inclusion of the limited partnership results in our Statements of Operations. Due to this delay, these financial statements do not yet reflect the market conditions experienced in the fourth quarter of 2015 for all partnerships other than the real estate limited partnerships that are reported under the fair value option.
While we perform various procedures in review of the general partners’ valuations, we rely on the general partners’ financial statements as the best available information to record our share of the partnership unrealized gains and losses resulting from valuation changes. Due to the limited market for these investments, there is a greater potential for market price variability.
Agent bonuses are based upon an individual agency’s property and casualty underwriting profitability and also include a component for growth in agency property and casualty premiums if the agency’s underwriting profitability targets for the book of business are met. The estimate for agent bonuses, which are based upon the performance over 36 months, is modeled on a monthly basis using actual underwriting data by agency for the prior two years combined with the current year-to-date actual data.
At December 31 of each year, we use actual data available and record an accrual based upon the expected payment amount. These costs are included in commissions expense in the Statements of Operations.
Valuation techniques used to derive the fair value of our available-for-sale and trading securities are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect our own assumptions regarding fair market value for these securities. Although the majority of our prices are obtained from third-party sources, we also perform an internal pricing review for securities with low trading volumes under current market conditions. Financial instruments are categorized based upon the following characteristics or inputs to the valuation techniques:
We perform continuous reviews of the prices obtained from the pricing service. This includes evaluating the methodology and inputs used by the pricing service to ensure that we determine the proper classification level of the financial instrument. Price variances, including large periodic changes, are investigated and corroborated by market data. We have reviewed the pricing methodologies of our pricing service as well as other observable inputs, such as data, and transaction volumes and believe that the prices adequately consider market activity in determining fair value. Our review process continues to evolve based upon accounting guidance and requirements.
(1) Other investments measured at fair value represent real estate funds included on the balance sheet as limited partnership investments that are reported under the fair value option using the net asset value practical expedient. These amounts are not required to be categorized in the fair value hierarchy. The investments can never be redeemed with the funds. Instead, distributions are received when liquidation of the underlying assets of the funds occur. It is estimated that the underlying assets will generally be liquidated between 5 and 10 years from the inception of the funds. The fair value of these investments is based on the net asset value (NAV) information provided by the general partner. Fair value is based on our proportionate share of the NAV based on the most recent partners' capital statements received from the general partners, which is generally one quarter prior to our balance sheet date. These values are then analyzed to determine if the NAV represents fair value at our balance sheet date, with adjustment being made where appropriate. We consider observable market data and perform a review validating the appropriateness of the NAV at each balance sheet date. It is likely that all of the investments will be redeemed at a future date for an amount different than the NAV of our ownership interest in partners' capital as of December 31, 2015 and December 31, 2014. During the year ended December 31, 2015, no contributions were made and distributions totaling $3.5 million were received from these investments. During the year ended December 31, 2014, no contributions were made and distributions totaling $12.9 million were received from these investments. As of December 31, 2015 and 2014, the amount of unfunded commitments related to the investments was $0.6 million.
(1) These amounts are reported in the Statements of Operations as net investment income (losses) for the year ended December 31, 2015 on Level 3 securities.
There were no transfers between Level 1 and Level 2 for the year ended December 31, 2015. Level 2 to Level 3 transfers totaled $0.1 million related to one fixed maturity holding due to the use of unobservable market data to determine the fair value at December 31, 2015. Level 3 to Level 2 transfers totaled $0.2 million related to two fixed maturity holdings due to the use of observable market data to determine the fair value at December 31, 2015.
Other investments measured at fair value represent real estate funds included on the balance sheet as limited partnership investments that are reported under the fair value option using the net asset value practical expedient. These amounts are not required to be categorized in the fair value hierarchy. The fair value of these investments is based on the net asset value (NAV) information provided by the general partner.
The amortized cost and estimated fair value of fixed maturities at December 31, 2015, are shown below by remaining contractual term to maturity. Mortgage-backed securities are allocated based upon stated maturity dates. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The components of other-than-temporary impairments on investments are included below for the years ended December 31:
Limited partnership investments, excluding certain real estate limited partnerships recorded at fair value, are generally reported on a one-quarter lag; therefore, our year-to-date limited partnership results through December 31, 2015 are comprised of partnership financial results for the fourth quarter of 2014 and the first, second and third quarters of 2015. Given the lag in reporting, our limited partnership results do not reflect the market conditions of the fourth quarter of 2015. Cash contributions made to and distributions received from the partnerships are recorded in the period in which the transaction occurs.
The following table outlines the estimated future amortization expense related to capitalized software development costs as of December 31, 2015:
Although we are the sponsor of these postretirement plans and record the funded status of these plans, the Exchange reimburses us for approximately 57% of the annual benefit expense of these plans, which represents pension benefits for our employees performing claims and life insurance functions. For our funded pension plan, amounts are settled in cash for the portion of pension costs allocated to the Exchange. For our unfunded plans, we pay the obligations when due and amounts are settled in cash between entities when there is a payout.
The rate of compensation increase for the employee plan is age-graded. An equivalent single compensation increase rate of 3.32% in 2015 and 2014, and 4.15% in 2013 would produce similar results.
The pension plan's expected long-term rate of return represents the average rate of return to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid. To determine the expected long-term rate of return assumption, we utilized models based upon rigorous historical analysis and forward-looking views of the financial markets
Our funding policy is generally to contribute an amount equal to the greater of the target normal cost for the plan year or the amount necessary to fund the plan to 100% plus interest to the date the contribution is made. Employer contributions of
$17.4 million were made to the defined benefit pension plan in January 2016. The following table sets forth the funded status of the pension plans and the amounts recognized in the Statements of Financial Position at December 31:
(1) The current portion of pension liabilities is included in accrued expenses and other current liabilities in the Statements of Financial Position.
Both the defined benefit pension plan and the SERP had accumulated benefit obligations in excess of plan assets at December 31, 2015 and 2014.
Net actuarial loss and prior service cost included in accumulated other comprehensive income that were not yet recognized as components of net benefit costs were as follows:
The estimated net actuarial loss and prior service cost for the pension plans that will be amortized from accumulated other comprehensive income into pension cost during 2016 is $7.6 million and $0.7 million, respectively.
The retiree health benefit plan was terminated in 2006. We continue to provide retiree health benefits only to employees who met certain age and service requirements on or before July 1, 2010. The accumulated benefit obligation and net periodic benefit cost of this plan were not material to our financial statements.
Earned compensation costs are allocated to related entities and reimbursed to us in cash once the payout is made. The total compensation cost charged to operations related to these LTIP awards was $13.4 million in 2015, $12.5 million in 2014, and $7.9 million in 2013. The related tax benefits recognized in income were $4.7 million in 2015, $4.4 million in 2014, and $2.8 million in 2013. The Exchange reimburses us for approximately 33% of the annual compensation cost of these plans, which represents the amount of compensation expense for our employees performing claims and life insurance functions.
In October 2015 we established a rabbi trust to hold the shares earned by outside directors. The rabbi trust purchased 94,938 shares of our common stock on the open market at an average price of $94.99 for $9.0 million to satisfy the liability of the deferred compensation plan. The rabbi trust is classified and accounted for as equity in a manner consistent with the accounting for treasury stock. Dividends received on the shares in the rabbi trust will be used to purchase additional shares. The shares will be distributed to the outside director from the rabbi trust upon ending board service.
We had no valuation allowance recorded at December 31, 2015 or December 31, 2014. The IRS has examined our tax filings through tax year ended 2009 and is currently examining our federal income tax returns for 2010, 2011 and 2012.
We are the attorney-in-fact for the subscribers (policyholders) at the Exchange, a reciprocal insurance exchange. In that capacity, we provide all services and facilities necessary to conduct the Exchange’s insurance business. Indemnity and the Exchange together constitute a single insurance business. Consequently, we are not subject to state corporate income or franchise taxes in states where the Exchange conducts its business and the states collect premium tax in lieu of corporate income or franchise tax, as a result of the Exchange’s remittance of premium taxes in those states.
In 2014, we purchased 64,398 shares of our outstanding Class A nonvoting common stock outside of our publicly announced share repurchase program at a total cost of $4.9 million. Of this amount, we purchased 2,800 shares of our outstanding Class A nonvoting common stock at a total cost of $0.2 million, or $71.93 per share, for the vesting of stock-based awards for executive management. These shares were delivered to executive management in January 2014. In May 2014, we purchased
Changes in accumulated other comprehensive income (loss) by component, including amounts reclassified out of accumulated other comprehensive income (loss) and the related line item in the Statements of Operations where net income is presented, are as follows for the year ended December 31:
Other comprehensive (loss) income before reclassifications, net of tax benefit (expense) of $2,678, $(633), and $3,852, respectively
Other comprehensive income (loss) before reclassifications, net of tax (expense) benefit of $(8,433), $34,378, and $(38,352), respectively
Amortization of prior service costs, net of tax expense of $234, $248, and $278, respectively (1)
We make certain payments on behalf of the Exchange and EFL. These reimbursements are settled on a monthly basis. The amounts of these cash settlements were as follows for the years ended December 31:
We are 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 paid annual interest to us of $1.7 million in 2015, 2014 and 2013.
Financial instruments could potentially expose us to concentrations of credit risk, including unsecured receivables from the Exchange. A large majority of our revenue and receivables are from the Exchange and affiliates. See also Note 1, "Nature of Operations". Management fee amounts and other reimbursements due from the Exchange and affiliates were $348.1 million and $335.2 million at December 31, 2015 and 2014, respectively.