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. Employers Mutual has a Health Reimbursement Arrangement (HRA) that is available to participants. 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, 2016 and 2015, based upon measurement dates of December 31, 2016 and 2015, respectively.



	Pension plans						Postretirement benefit plans
($ in thousands)	2016			2015			2016			2015
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	269,904		$	267,129		$	51,449		$	54,503
Service cost	14,432			13,962			1,273			1,411
Interest cost	10,161			9,311			2,215			2,148
Actuarial (gain) loss	5,361			(1,661		)	357			(5,895		)
Benefits paid	(15,664		)	(18,837		)	(2,377		)	(2,185		)
Medicare subsidy reimbursements	—			—			553			—
Plan amendments	—			—			2,181			1,467
Projected benefit obligation at end of year	284,194			269,904			55,651			51,449

Change in plan assets:
Fair value of plan assets at beginning of year	283,231			297,848			66,320			69,290
Actual return on plan assets	23,081			(591		)	3,866			(785		)
Employer contributions	10,267			4,811			—			—
Benefits paid	(15,664		)	(18,837		)	(2,377		)	(2,185		)
Fair value of plan assets at end of year	300,915			283,231			67,809			66,320
Funded status	$	16,721		$	13,327		$	12,158		$	14,871

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, prior to 2016, amounts allocated to the reinsurance subsidiary.

Amounts recognized in the Company’s consolidated balance sheets:



	Pension plans						Postretirement benefit plans
($ in thousands)	2016			2015			2016		2015
Assets:
Prepaid pension and postretirement benefits	$	9,065		$	8,132		$	3,249	$	4,001
Liability:
Pension and postretirement benefits	(4,097		)	(4,299		)	—		—
Net amount recognized	$	4,968		$	3,833		$	3,249	$	4,001

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)	2016			2015			2016			2015
Net actuarial loss	$	(18,927	)	$	(20,101	)	$	(6,147	)	$	(6,523	)
Prior service (cost) credit	(6		)	(15		)	19,441			23,662
Net amount recognized	$	(18,933	)	$	(20,116	)	$	13,294		$	17,139

During 2017, the Company will amortize $1.1 million of net actuarial loss and $6,000 of prior service cost associated with the pension plans into net periodic benefit cost. In addition, the Company will amortize $381,000 of net actuarial loss and $3.2 million of prior service credit associated with the postretirement benefit plans into net periodic postretirement benefit income in 2017.

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



	Pension plans					Postretirement benefit plans
($ in thousands)	2016		2015			2016			2015
Net actuarial gain (loss)	$	1,174	$	(5,004	)	$	376		$	735
Prior service (cost) credit	9		10			(4,221		)	(3,796		)
Net amount recognized	$	1,183	$	(4,994	)	$	(3,845	)	$	(3,061	)

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)	2016		2015
Projected benefit obligation	$	13,656	$	13,505
Accumulated benefit obligation	12,182		12,405
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)	2016			2015			2014
Pension plans:
Service cost	$	14,432		$	13,962		$	12,863
Interest cost	10,161			9,311			9,664
Expected return on plan assets	(19,361		)	(20,298		)	(20,733		)
Amortization of net actuarial loss	4,311			2,710			366
Amortization of prior service cost	31			31			31
Net periodic pension benefit cost	$	9,574		$	5,716		$	2,191

Postretirement benefit plans:
Service cost	$	1,273		$	1,411		$	1,260
Interest cost	2,215			2,148			2,254
Expected return on plan assets	(4,224		)	(4,416		)	(4,396		)
Amortization of net actuarial loss	1,494			1,745			1,651
Amortization of prior service credit	(11,338		)	(11,466		)	(11,466		)
Net periodic postretirement benefit income	$	(10,580	)	$	(10,578	)	$	(10,697	)

The net periodic postretirement benefit income recognized on Employers Mutual's postretirement benefit plans 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.

Net periodic pension benefit cost allocated to the Company amounted to $2.9 million, $1.8 million and $680,000 for the years ended December 31, 2016, 2015 and 2014, respectively. Net periodic postretirement benefit income allocated to the Company for the years ended December 31, 2016, 2015 and 2014 amounted to $3.0 million, $3.0 million, and $3.1 million, respectively.

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



	Year ended December 31,
	2016		2015
Pension plans:
Discount rate	4.07	%	3.90	%
Rate of compensation increase:
Qualified pension plan	5.07	%	5.07	%
Non-qualified pension plan	4.53	%	4.56	%

Postretirement benefit plans:
Discount rate	4.21	%	4.42	%

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



	Year ended December 31,
	2016		2015		2014
Pension plans:
Discount rate	3.90	%	3.57	%	4.17	%
Expected long-term rate of return on plan assets	7.00	%	7.00	%	7.25	%
Rate of compensation increase:
Qualified pension plan	5.07	%	4.73	%	4.73	%
Non-qualified pension plan	4.56	%	4.68	%	4.68	%

Postretirement benefit plans:
Discount rate	4.42	%	4.04	%	4.71	%
Expected long-term rate of return on plan assets	6.50	%	6.50	%	6.75	%

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
2017	$	19,120	$	2,959
2018	20,282		3,197
2019	21,615		3,352
2020	22,434		3,441
2021	20,233		3,497
2022 - 2026	116,612		17,909

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. Following is a brief description of the various 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 surrender value, which approximates fair value.

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



December 31, 2016			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	$	1,485	$	1,485	$	—	$	—
Emerging markets ETF	3,743		3,743		—		—
Mutual funds	47,916		47,916		—		—
Life insurance contracts	14,159		—		—		14,159
Cash	506		506		—		—
Total benefit plan assets	$	67,809	$	53,650	$	—	$	14,159



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	46,397		46,397		—		—
Life insurance contracts	13,792		—		—		13,792
Total benefit plan assets	$	66,320	$	52,528	$	—	$	13,792

Presented below is a reconciliation of the assets measured at fair value using significant unobservable inputs (Level 3) for the years ended December 31, 2016 and 2015.



	Fair value measurements using significant unobservable (Level 3) inputs
	Life insurance contracts
($ in thousands)	2016		2015
Balance at beginning of year	$	13,792	$	13,408
Actual return on plan assets:
Increase in cash surrender value of life insurance contracts	367		384
Balance at end of year	$	14,159	$	13,792

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.

Following is a brief description of the 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.

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)	2016		2015
Pooled separate accounts	$	300,915	$	283,231
Total benefit plan assets	$	300,915	$	283,231

Employers Mutual plans to contribute approximately $9.0 million to the pension plan in 2017. No contributions are expected to be made to the VEBA trust in 2017.

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 $2.7 million, $2.5 million and $1.7 million in 2016, 2015 and 2014, respectively. Note that the amount for 2016 includes an allocation of retirement benefit expenses to the Company's reinsurance subsidiary(portion of the service cost components of the qualified and non-qualified pension plans and the postretirement benefits plans). In prior years the Company's reinsurance subsidiary was allocated a portion of all activities of these plans (including the balance sheet amounts) which are included in the relevant tables and disclosures contained in this footnote.