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 benefits.

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. Through 2014, the health care postretirement plan required contributions from participants and contained certain cost sharing provisions such as coinsurance and deductibles. Effective January 1, 2015, the health care plan was replaced with a new Employers Mutual - funded Health Reimbursement Arrangement (HRA). Under the HRA, Employers Mutual reimburses participants, up to a pre-determined maximum, for amounts expended to enroll in publicly available health care plans and/or pay for qualifying out-of-pocket health care costs. The obligations of the HRA are based on the total amount of reimbursements expected to be made by Employers Mutual over the lives of the participants, rather than the total amount of medical benefits expected to be paid over the participants’ lives. Therefore, the obligations of the HRA are not impacted by changes in the cost of health care. 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 that has historically been used to accumulate funds for the payment of postretirement health care and life insurance benefits. Contributions to the VEBA trust have been used to fund the projected postretirement benefit obligation, as well as pay benefits. Given the overfunded position of the postretirement benefit plans, contributions to the VEBA trust are not anticipated for the foreseeable future.

The following table sets forth the funded status of Employers Mutual’s pension and postretirement benefit plans as of December 31, 2015 and 2014, based upon measurement dates of December 31, 2015 and 2014, respectively.



	Pension plans						Postretirement benefit plans
($ in thousands)	2015			2014			2015			2014
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	267,129		$	239,109		$	54,503		$	50,006
Service cost	13,962			12,863			1,411			1,260
Interest cost	9,311			9,664			2,148			2,254
Actuarial (gain) loss	(1,661		)	19,257			(5,895		)	3,516
Benefits paid	(18,837		)	(13,764		)	(2,185		)	(2,533		)
Plan amendments	—			—			1,467			—
Projected benefit obligation at end of year	269,904			267,129			51,449			54,503

Change in plan assets:
Fair value of plan assets at beginning of year	297,848			288,750			69,290			67,276
Actual return on plan assets	(591		)	15,029			(785		)	4,547
Employer contributions	4,811			7,833			—			—
Benefits paid	(18,837		)	(13,764		)	(2,185		)	(2,533		)
Fair value of plan assets at end of year	283,231			297,848			66,320			69,290
Funded status	$	13,327		$	30,719		$	14,871		$	14,787

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, 2015 and 2014:

Amounts recognized in the Company’s consolidated balance sheets:



	Pension plans						Postretirement benefit plans
($ in thousands)	2015			2014			2015		2014
Assets:
Prepaid pension and postretirement benefits	$	8,132		$	13,267		$	4,001	$	4,093
Liability:
Pension and postretirement benefits	(4,299		)	(4,162		)	—		—
Net amount recognized	$	3,833		$	9,105		$	4,001	$	4,093

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
($ in thousands)	2015			2014			2015			2014
Net actuarial loss	$	(20,101	)	$	(15,097	)	$	(6,523	)	$	(7,258	)
Prior service (cost) credit	(15		)	(25		)	23,662			27,458
Net amount recognized	$	(20,116	)	$	(15,122	)	$	17,139		$	20,200

During 2016, the Company will amortize $1.3 million of net actuarial loss and $10,000 of prior service cost associated with the pension plans into net periodic benefit cost. In addition, the Company will amortize $422,000 of net actuarial loss and $3.3 million of prior service credit associated with the postretirement benefit plans into net periodic postretirement benefit income in 2016.

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



	Pension plans						Postretirement benefit plans
($ in thousands)	2015			2014			2015			2014
Net actuarial gain (loss)	$	(5,004	)	$	(7,492	)	$	735		$	(431	)
Prior service (cost) credit	10			10			(3,796		)	(3,370		)
Net amount recognized	$	(4,994	)	$	(7,482	)	$	(3,061	)	$	(3,801	)

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,
($ in thousands)	2015		2014
Projected benefit obligation	$	13,505	$	13,057
Accumulated benefit obligation	12,405		12,121
Fair value of plan assets	—		—

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



	Year ended December 31,
($ in thousands)	2015			2014			2013
Pension plans:
Service cost	$	13,962		$	12,863		$	13,213
Interest cost	9,311			9,664			7,656
Expected return on plan assets	(20,298		)	(20,733		)	(17,150		)
Amortization of net actuarial loss	2,710			366			5,962
Amortization of prior service cost	31			31			50
Net periodic pension benefit cost	$	5,716		$	2,191		$	9,731

Postretirement benefit plans:
Service cost	$	1,411		$	1,260		$	6,300
Interest cost	2,148			2,254			6,172
Expected return on plan assets	(4,416		)	(4,396		)	(3,631		)
Amortization of net actuarial loss	1,745			1,651			3,694
Amortization of prior service credit	(11,466		)	(11,466		)	(2,491		)
Net periodic postretirement benefit cost (income)	$	(10,578	)	$	(10,697	)	$	10,044

The net periodic postretirement benefit income recognized on Employers Mutual's postretirement benefit plans during 2015 and 2014 is due to a plan amendment that was announced in the fourth quarter of 2013. This plan amendment generated a large prior service credit that is being amortized into net periodic benefit cost over a period of 10 years. In addition, the service cost and interest cost components of net periodic benefit cost of the revised plan declined significantly.

Net periodic pension benefit cost allocated to the Company amounted to $1.8 million, $680,000 and $3.0 million in 2015, 2014 and 2013, respectively. Net periodic postretirement benefit cost (income) allocated to the Company for the years ended December 31, 2015, 2014 and 2013 amounted to $(3.0) million, $(3.1) million, and $2.9 million, respectively.

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



	Year ended December 31,
	2015		2014
Pension plans:
Discount rate	3.90	%	3.57	%
Rate of compensation increase:
Qualified pension plan	5.07	%	4.73	%
Non-qualified pension plan	5.56	%	4.68	%

Postretirement benefit plans:
Discount rate	4.42	%	4.04	%

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



	Year ended December 31,
	2015		2014		2013
Pension plans:
Discount rate	3.57	%	4.17	%	3.24	%
Expected long-term rate of return on plan assets	7.00	%	7.25	%	7.25	%
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	4.04	%	4.71	%	4.03	%
Expected long-term rate of return on plan assets	6.50	%	6.75	%	6.50	%

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.

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



($ in thousands)	Pension benefits		Postretirement benefits
2016	$	22,066	$	2,668
2017	22,967		2,852
2018	23,334		3,033
2019	24,293		3,147
2020	25,502		3,215
2021 - 2025	123,096		16,670

The Company manages its VEBA trust assets internally. 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:



December 31, 2015			Fair value measurements using
($ in thousands)	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	$	2,709	$	2,709	$	—	$	—
Emerging markets ETF	3,422		3,422		—		—
Mutual funds:
Equity	36,286		36,286		—		—
Tax-exempt fixed income	3,422		3,422		—		—
International equity	6,689		6,689		—		—
Life insurance contracts	13,792		—		—		13,792
Total benefit plan assets	$	66,320	$	52,528	$	—	$	13,792



December 31, 2014			Fair value measurements using
($ in thousands)	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	$	4,644	$	4,644	$	—	$	—
Emerging markets ETF	4,187		4,187		—		—
Mutual funds:
Equity	36,451		36,451		—		—
Tax-exempt fixed income	3,425		3,425		—		—
International equity	7,175		7,175		—		—
Life insurance contracts	13,408		—		—		13,408
Total benefit plan assets	$	69,290	$	55,882	$	—	$	13,408

Presented below is a reconciliation of the assets measured at fair value using significant unobservable inputs (Level 3) for the years ended December 31, 2015 and 2014.



	Fair value measurements using significant unobservable (Level 3) inputs
	Life insurance contracts
($ in thousands)	2015		2014
Balance at beginning of year	$	13,408	$	13,227
Actual return on plan assets:
Increase in cash accumulation value of life insurance contracts	384		367
Gain on life insurance death benefit	—		89
Settlement of life insurance death benefit	—		(275		)
Balance at end of year	$	13,792	$	13,408

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, whose value is the accumulated value of the underlying investments less liabilities. The sponsor of the fund specifies the source(s) used for the underlying investment asset prices and the protocol used to value each fund. There are no redemption restrictions on these investments. The investments selected for the Plan represent a well diversified portfolio of assets, including fixed income securities, equity investments, and real estate investment trusts. The portfolio seeks to maximize investment returns while maintaining an appropriate level of risk. 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 exchange(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 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 monitored. Prices are reviewed to ensure comfort and can be challenged and/or overridden if the fund sponsor believes another price would be more reflective of fair value.

◦

Real Estate Funds are comprised of real estate properties that are priced through an independent appraisal process. The estimate of fair value is based on the conventional approaches to value, all of which require the exercise of subjective judgment. The three approaches are: (1) current cost of reproducing the real estate less deterioration and functional and economic obsolescence; (2) discounting a series of income streams and reversion at a specific yield or by directly capitalizing a single year income estimate by an appropriate factor; and (3) value indicated by recent sales of comparable real estate in the market. In the reconciliation of these three approaches, the one most heavily relied upon is the one then recognized as the most appropriate by the independent appraiser for the type of real estate in the market.

In accordance with ASU 2015-07, a fair value hierarchy table is not included here since all of the Plan's investments are measured at fair value using the net asset value per share (or its equivalent) practical expedient, which are not classified in the fair value hierarchy. Presented below are the fair values of assets held in Employers Mutual's defined benefit retirement plan:



	December 31,
($ in thousands)	2015		2014
Pooled separate accounts:
U.S. stock funds	$	142,934	$	154,478
International stock funds	55,850		57,955
U.S. bond funds	62,160		63,443
Real estate fund	20,414		17,735
Short-term funds	1,873		4,237
Total benefit plan assets	$	283,231	$	297,848

Employers Mutual plans to contribute approximately $8.2 million to the pension plan in 2016. No contributions are expected to be made to the VEBA trust in 2016.

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 $2.5 million, $1.7 million and $1.5 million in 2015, 2014 and 2013, respectively.