REINSURANCE

The parties to the pooling agreement cede insurance business to other insurers in the ordinary course of business for the purpose of limiting their maximum loss exposure through diversification of their risks. In its consolidated financial statements, the Company treats risks to the extent they are reinsured as though they were risks for which the Company is not liable. Insurance ceded by the pool participants does not relieve their primary liability as the originating insurers. Employers Mutual evaluates the financial condition of the reinsurers of the parties to the pooling agreement and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize exposure to significant losses from reinsurer insolvencies.

As of December 31, 2013, reinsurance ceded to four nonaffiliated reinsurers (two at December 31, 2012) totaled $24,261,121 and $16,783,964 respectively, which represents a significant portion of the total prepaid reinsurance premiums and reinsurance receivables for losses and settlement expenses. The largest balance due is from the Mutual Reinsurance Bureau (MRB) underwriting association, of which the Company (through Employers Mutual) is a member with other unaffiliated reinsurers. All members of MRB have joint and several liability for MRB's obligations. For two of the other nonaffiliated reinsurers, the amounts reflect the property and casualty insurance subsidiaries’ aggregate pool participation percentage of amounts ceded by Employers Mutual to these organizations on a mandatory basis. Credit risk associated with these amounts is minimal, as all companies participating in these organizations are responsible for the liabilities of such organizations on a pro rata basis.

The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the three years ended December 31, 2013 is presented below. The classification of the assumed and ceded reinsurance amounts between affiliates and nonaffiliates is based on the participants in the underlying reinsurance agreements, and is intended to provide an understanding of the actual source of the reinsurance activities. This presentation differs from the classifications used in the consolidated financial statements, where all amounts flowing through the pooling, quota share and excess of loss agreements with Employers Mutual are reported as “affiliated” balances.



	Year ended December 31, 2013
	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	368,532,466		$	—		$	368,532,466
Assumed from nonaffiliates	3,501,067			162,291,009			165,792,076
Assumed from affiliates	425,218,093			—			425,218,093
Ceded to nonaffiliates	(23,670,306		)	(20,502,167		)	(44,172,473		)
Ceded to affiliates	(368,532,466		)	(12,760,996		)	(381,293,462		)
Net premiums written	$	405,048,854		$	129,027,846		$	534,076,700

Premiums earned
Direct	$	361,009,971		$	—		$	361,009,971
Assumed from nonaffiliates	3,275,147			151,978,261			155,253,408
Assumed from affiliates	412,664,850			—			412,664,850
Ceded to nonaffiliates	(23,221,149		)	(16,429,847		)	(39,650,996		)
Ceded to affiliates	(361,009,971		)	(12,760,996		)	(373,770,967		)
Net premiums earned	$	392,718,848		$	122,787,418		$	515,506,266

Losses and settlement expenses incurred
Direct	$	237,108,829		$	—		$	237,108,829
Assumed from nonaffiliates	2,280,529			80,854,436			83,134,965
Assumed from affiliates	267,292,454			1,199,022			268,491,476
Ceded to nonaffiliates	(8,655,974		)	(8,860,465		)	(17,516,439		)
Ceded to affiliates	(237,108,829		)	(822,553		)	(237,931,382		)
Net losses and settlement expenses incurred	$	260,917,009		$	72,370,440		$	333,287,449



	Year ended December 31, 2012
	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	341,306,420		$	—		$	341,306,420
Assumed from nonaffiliates	2,459,427			121,500,482			123,959,909
Assumed from affiliates	390,982,516			—			390,982,516
Ceded to nonaffiliates	(22,206,486		)	(2,338,228		)	(24,544,714		)
Ceded to affiliates	(341,306,420		)	(11,916,226		)	(353,222,646		)
Net premiums written	$	371,235,457		$	107,246,028		$	478,481,485

Premiums earned
Direct	$	328,227,401		$	—		$	328,227,401
Assumed from nonaffiliates	2,296,360			119,502,706			121,799,066
Assumed from affiliates	377,690,009			—			377,690,009
Ceded to nonaffiliates	(22,847,683		)	(5,879,167		)	(28,726,850		)
Ceded to affiliates	(328,227,401		)	(11,916,226		)	(340,143,627		)
Net premiums earned	$	357,138,686		$	101,707,313		$	458,845,999

Losses and settlement expenses incurred
Direct	$	191,281,648		$	—		$	191,281,648
Assumed from nonaffiliates	1,718,484			83,987,064			85,705,548
Assumed from affiliates	237,723,061			962,408			238,685,469
Ceded to nonaffiliates	(5,549,265		)	(5,528,003		)	(11,077,268		)
Ceded to affiliates	(191,281,648		)	(9,926,034		)	(201,207,682		)
Net losses and settlement expenses incurred	$	233,892,280		$	69,495,435		$	303,387,715



	Year ended December 31, 2011
	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	301,829,277		$	—		$	301,829,277
Assumed from nonaffiliates	1,610,872			123,274,743			124,885,615
Assumed from affiliates	356,622,503			—			356,622,503
Ceded to nonaffiliates	(24,939,233		)	(16,059,909		)	(40,999,142		)
Ceded to affiliates	(301,829,277		)	(10,721,484		)	(312,550,761		)
Net premiums written	$	333,294,142		$	96,493,350		$	429,787,492

Premiums earned
Direct	$	283,482,713		$	—		$	283,482,713
Assumed from nonaffiliates	1,541,807			122,064,711			123,606,518
Assumed from affiliates	344,668,820			—			344,668,820
Ceded to nonaffiliates	(24,561,412		)	(16,590,129		)	(41,151,541		)
Ceded to affiliates	(283,482,713		)	(10,721,484		)	(294,204,197		)
Net premiums earned	$	321,649,215		$	94,753,098		$	416,402,313

Losses and settlement expenses incurred
Direct	$	247,585,728		$	—		$	247,585,728
Assumed from nonaffiliates	1,619,025			122,680,597			124,299,622
Assumed from affiliates	264,217,463			732,478			264,949,941
Ceded to nonaffiliates	(14,387,241		)	(16,010,258		)	(30,397,499		)
Ceded to affiliates	(247,585,728		)	(15,877,627		)	(263,463,355		)
Net losses and settlement expenses incurred	$	251,449,247		$	91,525,190		$	342,974,437

Individual lines in the above tables are defined as follows:


•	“Direct” represents business produced by the property and casualty insurance subsidiaries.

•

“Assumed from nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of involuntary business assumed by the pool participants pursuant to state law. For the reinsurance subsidiary, this line represents the reinsurance business assumed through the quota share agreement (including “fronting” activities initiated by Employers Mutual) and the business assumed outside the quota share agreement. Contractual changes in 2012 on selected accounts resulted in a reduction in "fronting" activity.

•

“Assumed from affiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of all the pool members’ direct business. The amounts reported under the caption “Losses and settlement expenses incurred” also include claim-related services provided by Employers Mutual that are allocated to the property and casualty insurance subsidiaries and the reinsurance subsidiary.

•

“Ceded to nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of 1) the amounts ceded to nonaffiliated reinsurance companies in accordance with the terms of the reinsurance agreements providing protection to the pool and each of its participants, and 2) the amounts ceded on a mandatory basis to state organizations in connection with various programs. For the reinsurance subsidiary, this line includes reinsurance business that is ceded to other insurance companies in connection with “fronting” activities initiated by Employers Mutual. Contractual changes in 2012 on selected accounts resulted in a reduction in "fronting" activity.


•	“Ceded to affiliates” for the property and casualty insurance subsidiaries represents the cession of their direct business to Employers Mutual under the terms of the pooling agreement. For the reinsurance subsidiary this line represents amounts ceded to Employers Mutual under the terms of the excess of loss reinsurance agreement.