
12.	EMPLOYEE RETIREMENT PLANS

Employers Mutual has various employee benefit plans, including two defined benefit pension plans and two postretirement benefit plans, that provide retiree healthcare and life insurance coverage.

Employers Mutual’s pension plans include a qualified defined benefit pension plan and a non-qualified defined benefit supplemental pension plan. The qualified defined benefit plan covers substantially all of its employees. This plan is funded by employer contributions and provides benefits under two different formulas, depending on an employee’s age and date of service. Benefits generally vest after three years of service or the attainment of 55 years of age. It is Employers Mutual’s funding policy to make contributions sufficient to be in compliance with minimum regulatory funding requirements plus additional amounts as determined by management.

Employers Mutual’s non-qualified defined benefit supplemental pension plan provides retirement benefits for a select group of management and highly-compensated employees. This plan enables select employees to receive retirement benefits without the limit on compensation imposed on qualified defined benefit pension plans by the Internal Revenue Service (IRS) and to recognize compensation that has been deferred in the determination of retirement benefits. The plan is unfunded and benefits generally vest after three years of service.

Employers Mutual also offers postretirement benefit plans which provide certain health care and life insurance benefits for retired employees. Substantially all of its employees may become eligible for those benefits if they reach normal retirement age and have attained the required length of service while working for Employers Mutual. The health care postretirement plan requires contributions from participants and contains certain cost sharing provisions such as coinsurance and deductibles. On December 2, 2013, Employers Mutual notified its employees and retirees that effective January 1, 2015 this plan will be replaced with a new Employers Mutual-funded Health Reimbursement Arrangement (HRA). Under the HRA, Employers Mutual will deposit a pre-determined amount of money into an account established for each participant that they can use to enroll in a variety of publicly available health plans and pay for qualifying out-of-pocket health care costs. As a result of this change, the postretirement benefit plans' benefit obligation decreased $96,704,413 (Company's share was $26,936,515) as of December 31, 2013. The life insurance plan is noncontributory. The benefits provided under both plans are subject to change.

Employers Mutual maintains a Voluntary Employee Beneficiary Association (VEBA) trust which accumulates funds for the payment of postretirement health care and life insurance benefits. Contributions to the VEBA trust are used to fund the projected postretirement benefit obligation, as well as pay current year benefits.

The following table sets forth the funded status of Employers Mutual’s pension and postretirement benefit plans as of December 31, 2013 and 2012, based upon measurement dates of December 31, 2013 and 2012, respectively.



	Pension plans						Postretirement benefit plans
	2013			2012			2013			2012
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	247,290,081		$	225,100,396		$	155,102,015		$	144,354,348
Service cost	13,212,796			12,386,021			6,299,916			6,150,118
Interest cost	7,656,037			8,818,790			6,171,884			6,536,842
Actuarial loss	(14,458,374		)	14,251,377			(18,581,923		)	4,086,259
Benefits paid	(14,591,200		)	(13,266,503		)	(2,587,765		)	(2,787,354		)
Medicare subsidy reimbursements	—			—			305,971			579,650
Plan amendments	—			—			(96,704,413		)	(3,817,848		)
Projected benefit obligation at end of year	239,109,340			247,290,081			50,005,685			155,102,015

Change in plan assets:
Fair value plan of plan assets at beginning of year	240,033,882			209,926,692			57,815,079			53,446,305
Actual return on plan assets	48,623,187			27,715,290			11,548,326			5,656,128
Employer contributions	14,684,459			15,658,403			500,000			1,500,000
Benefits paid	(14,591,200		)	(13,266,503		)	(2,587,765		)	(2,787,354		)
Fair value of plan assets at end of year	288,750,328			240,033,882			67,275,640			57,815,079
Funded status	$	49,640,988		$	(7,256,199	)	$	17,269,955		$	(97,286,936	)

The following tables set forth the amounts recognized in the Company’s financial statements as a result of the property and casualty insurance subsidiaries’ aggregate 30 percent participation in the pooling agreement and amounts allocated to the reinsurance subsidiary as of December 31, 2013 and 2012:

Amounts recognized in the Company’s consolidated balance sheets:



	Pension plans						Postretirement benefit plans
	2013			2012			2013		2012
Assets:
Prepaid pension and postretirement benefits	$	18,310,029		$	1,413,104		$	4,810,529	$	—
Liability:
Pension and postretirement benefits	(3,401,045		)	(3,800,987		)	—		(26,913,646		)
Net amount recognized	$	14,908,984		$	(2,387,883	)	$	4,810,529	$	(26,913,646	)

Amounts recognized in the Company’s consolidated balance sheets under the caption “accumulated other comprehensive income”, before deferred income taxes:



	Pension plans						Postretirement benefit plans
	2013			2012			2013			2012
Net actuarial loss	$	(7,605,752	)	$	(23,299,008	)	$	(6,827,263	)	$	(15,133,387	)
Prior service (cost) credit	(34,482		)	(49,643		)	30,828,393			4,554,453
Net amount recognized	$	(7,640,234	)	$	(23,348,651	)	$	24,001,130		$	(10,578,934	)

During 2014, the Company will amortize $81,483 of net actuarial loss and $9,695 of prior service cost associated with the pension plans into net periodic benefit cost. In addition, the Company will amortize $462,971 of net actuarial loss and $3,316,777 of prior service credit associated with the postretirement benefit plans into net periodic postretirement benefit cost in 2014.

Amounts recognized in the Company’s consolidated statements of comprehensive income, before deferred income taxes:



	Pension plans				Postretirement benefit plans
	2013		2012		2013		2012
Net actuarial gain (loss)	$	15,693,256	$	1,620,026	$	8,306,124	$	491,692
Prior service (cost) credit	15,161		87,981		26,273,940		508,273
Net amount recognized	$	15,708,417	$	1,708,007	$	34,580,064	$	999,965

The following table sets forth the projected benefit obligation, accumulated benefit obligation and fair value of plan assets of Employers Mutual’s non-qualified pension plan. The amounts related to the qualified pension plan are not included since the plan assets exceeded the accumulated benefit obligation.



	Year ended December 31,
	2013		2012
Projected benefit obligation	$	10,856,004	$	11,931,828
Accumulated benefit obligation	10,485,220		10,889,563
Fair value of plan assets	—		—

The components of net periodic benefit cost for Employers Mutual’s pension and postretirement benefit plans is as follows:



	Year ended December 31,
	2013			2012			2011
Pension plans:
Service cost	$	13,212,796		$	12,386,021		$	11,527,452
Interest cost	7,656,037			8,818,790			9,703,193
Expected return on plan assets	(17,150,462		)	(14,925,445		)	(15,506,042		)
Amortization of net actuarial loss	5,962,361			6,808,576			3,528,096
Amortization of prior service cost	50,329			291,152			432,134
Net periodic pension benefit cost	$	9,731,061		$	13,379,094		$	9,684,833

Postretirement benefit plans:
Service cost	$	6,299,916		$	6,150,118		$	4,602,488
Interest cost	6,171,884			6,536,842			5,998,581
Expected return on plan assets	(3,631,000		)	(3,219,175		)	(2,929,894		)
Amortization of net actuarial loss	3,694,018			4,008,614			1,776,849
Amortization of prior service credit	(2,491,125		)	(2,131,256		)	(2,131,256		)
Net periodic postretirement benefit cost	$	10,043,693		$	11,345,143		$	7,316,768

Net periodic pension benefit cost allocated to the Company amounted to $3,013,316, $4,115,440 and $2,983,679 in 2013, 2012 and 2011, respectively. Net periodic postretirement benefit cost allocated to the Company for the years ended December 31, 2013, 2012 and 2011 was $2,911,785, $3,287,184, and $2,111,176, respectively.

The weighted-average assumptions used to measure the benefit obligations are as follows:



	Year ended December 31,
	2013		2012
Pension plans:
Discount rate	4.17	%	3.24	%
Rate of compensation increase:
Qualified pension plan	4.73	%	4.73	%
Non-qualified pension plan	4.68	%	4.68	%

Postretirement benefit plans:
Discount rate	4.71	%	4.03	%

The weighted-average assumptions used to measure the net periodic benefit costs are as follows:



	Year ended December 31,
	2013		2012		2011
Pension plans:
Discount rate	3.24	%	4.13	%	5.00	%
Expected long-term rate of return on plan assets	7.25	%	7.25	%	7.50	%
Rate of compensation increase:
Qualified pension plan	4.73	%	4.73	%	4.73	%
Non-qualified pension plan	4.68	%	4.68	%	4.68	%

Postretirement benefit plans:
Discount rate	4.03	%	4.59	%	5.50	%
Expected long-term rate of return on plan assets	6.50	%	6.25	%	6.25	%

The expected long-term rates of return on plan assets were developed considering actual historical results, current and expected market conditions, plan asset mix and management’s investment strategy.



	Year ended December 31,
	2013		2012
Assumed health care cost trend rate:
Health care cost trend rate assumed for next year	7.50	%	7.75	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	5.00	%	5.00	%
Year that the rate reaches the ultimate trend rate	2024		2024

The assumed health care cost trend rate has a significant effect on the service and interest cost components of the net periodic benefit cost and the benefit obligation reported for the postretirement benefit plans. A one-percentage-point change in the assumed health care cost trend rate would have the following effects on the plan:



	One-percentage-point
	Increase		Decrease
Effect on total of service and interest cost	$	2,655,000	$	(2,048,969	)
Effect on postretirement benefit obligation	$	60,276	$	(60,276	)

The following benefit payments, which reflect expected future service, are expected to be paid from the plans over the next ten years:



			Postretirement benefits
	Pension benefits		Gross		Medicare subsidy		Net
2014	$	21,632,278	$	4,863,986	$	566,889	$	4,297,097
2015	24,410,864		3,030,138		—		3,030,138
2016	19,469,861		3,095,475		—		3,095,475
2017	20,228,563		3,210,403		—		3,210,403
2018	20,981,451		3,339,653		—		3,339,653
2019 - 2023	113,113,599		17,222,818		—		17,222,818

The Company manages its VEBA trust assets internally. The asset allocation strategy has concentrated on funding the postretirement benefit plan with the expectation that over time, contributions, investment returns and life insurance death benefits will be large enough to cover current and future expenses. The VEBA trust assets are reviewed relative to liabilities to determine the optimum allocation, focusing on both asset accumulation and income generation.

Assets contained in the VEBA trust to fund Employers Mutual’s postretirement benefit obligations are currently invested in universal life insurance policies (issued by EMC National Life Company, an affiliate of Employers Mutual), mutual funds and an exchange-traded fund (ETF). The mutual funds are fixed income, international equity and domestic equity funds. The ETF is an emerging markets fund.

See Note 8 for a discussion on fair value measurement. The following is a description of the fair value pricing techniques used for the asset classes of Employers Mutual’s VEBA trust.


•	Money Market Fund: Valued at amortized cost, which approximates fair value. Under this method, investments purchased at a discount or premium are valued by accreting or amortizing the difference between the original purchase price and maturity value of the issue over the period to maturity. The net asset value of each share held by the trust at year-end was $1.00.

•

Mutual Funds: Valued at the net asset value of shares held by the trust at year-end. For purposes of calculating the net asset value, portfolio securities and other assets for which market quotes are readily available are valued at fair value. Fair value is generally determined on the basis of last reported sales prices, or if no sales are reported, based on quotes obtained from a quotation reporting system, established market makers, or independent pricing services.


•	ETF: Valued at the closing price from the applicable exchange.


•	Life Insurance Contract: Valued at the cash accumulation value, which approximates fair value.

The fair values of the assets held in Employers Mutual’s VEBA trust are as follows:



			Fair value measurements using
December 31, 2013	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Money market fund	$	574,763	$	574,763	$	—	$	—
Emerging markets ETF	3,224,265		3,224,265		—		—
Mutual funds:
Equity	39,709,720		39,709,720		—		—
Tax-exempt fixed income	2,865,017		2,865,017		—		—
International equity	7,674,589		7,674,589		—		—
Life insurance contracts	13,227,286		—		—		13,227,286
Total benefit plan assets	$	67,275,640	$	54,048,354	$	—	$	13,227,286



			Fair value measurements using
December 31, 2012	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Money market fund	$	2,478,233	$	2,478,233	$	—	$	—
Emerging markets ETF	3,489,949		3,489,949		—		—
Mutual funds:
Equity	29,398,816		29,398,816		—		—
Tax-exempt fixed income	2,908,889		2,908,889		—		—
International equity	6,666,766		6,666,766		—		—
Life insurance contracts	12,872,426		—		—		12,872,426
Total benefit plan assets	$	57,815,079	$	44,942,653	$	—	$	12,872,426

Presented below is a reconciliation of the assets measured at fair value using significant unobservable inputs (Level 3) for the years ended December 31, 2013 and 2012.



	Fair value measurements using significant unobservable inputs (Level 3)
	Life insurance contracts
	2013		2012
Balance at beginning of year	$	12,872,426	$	12,490,608
Actual return on plan assets:
Increase in cash accumulation value of life insurance contracts	354,860		381,818
Balance at end of year	$	13,227,286	$	12,872,426

Employers Mutual uses Global Portfolio Strategies, Inc. to advise on the asset allocation strategy for its qualified pension plan. The asset allocation strategy and process of Global Portfolio Strategies, Inc. uses a diversified allocation of equity, debt and real estate exposures that is customized to the plan’s payment risk and return targets.

Global Portfolio Strategies, Inc. reviews the plan’s assets and liabilities in relation to expectations of long-term market performance and liability development to determine the appropriate asset allocation. The data for the contributions and emerging liabilities is provided from the plan’s actuarial valuation, while the current asset and monthly benefit payment data is provided by the plan record keeper.

The following is a description of the fair value pricing techniques used for the asset classes of Employers Mutual’s qualified pension plan.

•

Pooled Separate Accounts: Each of the funds held by the Plan is in a pooled or commingled investment vehicle that is maintained by the fund sponsor, each with many investors. The Plan asset is represented by a “unit of account” and a per unit value, much like a mutual fund, whose value is the accumulated value of the underlying investments. The sponsor of the fund specifies the source(s) used for the underlying investment asset prices and the protocol used to value each fund. These underlying investments are valued in the following ways:


◦	Short-Term Funds are comprised of short-term securities that are valued initially at cost and thereafter adjusted for amortization of any discount or premium.


◦	U.S. Stock Funds are comprised of domestic equity securities that are priced using the closing price from the applicable exchange.


◦	International Stock Funds are comprised of international equity securities that are priced using the closing price from the appropriate local stock exchanges(s). An independent pricing service is also used to seek updated prices in the event there are material market movements between local stock exchange closing time and portfolio valuation time.


◦	U.S. Bond Funds are comprised of domestic fixed income securities. These securities are priced using inputs such as benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. Market indices and industry and economic events are monitored.

•

Real Estate Securities Fund: Valued at the net asset value of shares held by the Plan at year-end. For purposes of calculating the net asset value, portfolio securities and other assets for which market quotes are readily available are valued at fair value. Fair value is generally determined on the basis of last reported sales prices, or if no sales are reported, based on quotes obtained from a quotation reporting system, established market makers, or independent pricing services.

•

Bond and Mortgage Separate Account: Invests mainly in fixed income securities such as asset-backed securities, residential mortgage-backed securities, commercial mortgage-backed securities and corporate bonds. Securities are priced by an independent pricing service using inputs such as benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. Market indices and industry and economic events are also monitored.

The fair values of the assets held in Employers Mutual’s defined benefit retirement plan are as follows:



			Fair value measurements using
December 31, 2013	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Bond and mortgage separate account	$	32,842,844	$	—	$	32,842,844	$	—
Pooled separate accounts:
U.S. stock funds	110,278,544		—		110,278,544		—
International stock funds	62,839,927		—		62,839,927		—
U.S. bond funds	60,200,104		—		60,200,104		—
Real estate fund	13,758,266		—		13,758,266		—
Short-term funds	7,672,422		—		7,672,422		—
Real estate securities fund	1,158,221		1,158,221		—		—
Total benefit plan assets	$	288,750,328	$	1,158,221	$	287,592,107	$	—



			Fair value measurements using
December 31, 2012	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Bond and mortgage separate account	$	29,689,019	$	—	$	29,689,019	$	—
Pooled separate accounts:
U.S. stock funds	123,183,685		—		123,183,685		—
International stock funds	46,927,216		—		46,927,216		—
U.S. bond funds	34,412,351		—		34,412,351		—
Short-term funds	1,199,931		—		1,199,931		—
Real estate securities fund	4,621,680		4,621,680		—		—
Total benefit plan assets	$	240,033,882	$	4,621,680	$	235,412,202	$	—

Employers Mutual plans to contribute approximately $15,000,000 to the pension plan. No contributions are expected to be made to the VEBA trust in 2014.

The Company participates in other benefit plans sponsored by Employers Mutual, including its 401(k) Plan, Board and Executive Non-Qualified Excess Plans and Defined Contribution Supplemental Executive Retirement Plan. The Company’s share of expenses for these plans amounted to $1,457,211, $1,822,925 and $1,523,675 in 2013, 2012 and 2011, respectively.