EMPLOYEE RETIREMENT PLANS

Employers Mutual has various employee benefit plans, including a qualified defined benefit pension plan, a non-qualified defined benefit supplemental pension plan, a retiree life insurance benefit and a retiree health reimbursement arrangement (HRA) benefit.

The qualified defined benefit plan covers substantially all of its employees. This plan is funded by employer contributions and provides a benefit under a cash balance formula for most employees; however, benefits are provided to a few long-term employees based on a traditional benefit formula. The cash balance method accumulates funds so that the employee can receive a specified benefit amount at retirement. Benefits accrue with an interest and salary credit each year. On December 18, 2017, Employers Mutual notified its employees that effective January 1, 2019, the salary credit will be based on a combination of age and years of service, rather than just age. This change did not have a material impact on the pension benefit obligation. Benefits generally vest after three years of service or the attainment of 55 years of age and one year of service. 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 retirement plan provides additional retirement benefits for a select group of management. This plan enables select employees to receive retirement benefits without the limit on compensation imposed on qualified defined benefit pension plans by the IRS and to recognize compensation that has been deferred in the non-qualified deferred compensation plan. The plan is unfunded and benefits generally vest after three years of service.

Employers Mutual also offers postretirement benefit plans which provide an HRA and life insurance benefits for eligible retired employees. Substantially all of its employees may become eligible for those benefits if they reach age 55 and have attained the required length of service while working for Employers Mutual. Under the HRA, Employers Mutual reimburses eligible participants, up to a pre-determined maximum, for amounts expended to enroll in publicly available individual 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 directly impacted by changes in the cost of health care. However, the maximum amount Employers Mutual will reimburse eligible participants may be adjusted periodically based on an analysis of the change in health care costs. Such adjustments are reflected as plan amendments and increased the postretirement benefit plans' benefit obligation $2.7 million in 2017. During December 2017, Employers Mutual notified its employees that the life insurance benefit will be eliminated for employees retiring after 2018. As a result, the postretirement benefit plans' benefit obligation as of December 31, 2017 decreased $3.8 million. This change is also reflected as a plan amendment. 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 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, 2018 and 2017, based upon measurement dates of December 31, 2018 and 2017, respectively.



	Pension plans						Postretirement benefit plans
($ in thousands)	2018			2017			2018			2017
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	308,244		$	284,194		$	59,004		$	55,651
Service cost	16,852			15,135			1,473			1,362
Interest cost	10,726			11,190			2,084			2,281
Actuarial (gain) loss	(30,787		)	12,577			(7,484		)	3,278
Benefits paid	(16,933		)	(14,852		)	(2,579		)	(2,455		)
Plan amendments	—			—			—			(1,113		)
Projected benefit obligation at end of year	288,102			308,244			52,498			59,004

Change in plan assets:
Fair value of plan assets at beginning of year	349,004			300,915			75,658			67,809
Actual return on plan assets	(24,325		)	54,255			(4,311		)	10,304
Employer contributions	9,009			8,686			—			—
Benefits paid	(16,933		)	(14,852		)	(2,579		)	(2,455		)
Fair value of plan assets at end of year	316,755			349,004			68,768			75,658
Funded status	$	28,653		$	40,760		$	16,270		$	16,654

The actuarial gains in the projected benefit obligations of the pension and postretirement benefit plans during 2018 are largely due to the increases in the discount rate assumptions, partially offset by losses from an extension in the retirement rate assumption. For the pension plans, a decline in the interest credit rate assumption also contributed to the actuarial gain.

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.

Amounts recognized in the Company’s consolidated balance sheets:



	Pension plans						Postretirement benefit plans
($ in thousands)	2018			2017			2018		2017
Assets:
Prepaid pension and postretirement benefits	$	12,603		$	16,327		$	5,088	$	4,356
Liability:
Pension and postretirement benefits	(4,070		)	(4,185		)	—		—
Net amount recognized	$	8,533		$	12,142		$	5,088	$	4,356

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)	2018			2017			2018			2017
Net actuarial loss	$	(16,691	)	$	(11,598	)	$	(5,622	)	$	(4,950	)
Prior service credit	—			—			14,586			16,407
Net amount recognized	$	(16,691	)	$	(11,598	)	$	8,964		$	11,457

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



	Pension plans					Postretirement benefit plans
($ in thousands)	2018			2017		2018			2017
Net actuarial gain (loss)	$	(5,093	)	$	7,329	$	(672	)	$	1,197
Prior service (cost) credit	—			6		(1,821		)	(3,034		)
Net amount recognized	$	(5,093	)	$	7,335	$	(2,493	)	$	(1,837	)

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)	2018		2017
Projected benefit obligation	$	13,566	$	13,950
Accumulated benefit obligation	11,882		12,272
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)	2018			2017			2016
Pension plans:
Service cost	$	16,852		$	15,135		$	14,432
Interest cost	10,726			11,190			10,161
Expected return on plan assets	(24,052		)	(20,765		)	(19,361		)
Amortization of net actuarial loss	537			3,643			4,311
Amortization of prior service cost	—			20			31
Net periodic pension benefit cost	$	4,063		$	9,223		$	9,574

Postretirement benefit plans:
Service cost	$	1,473		$	1,362		$	1,273
Interest cost	2,084			2,281			2,215
Expected return on plan assets	(4,815		)	(4,311		)	(4,224		)
Amortization of net actuarial loss	935			1,371			1,494
Amortization of prior service credit	(11,129		)	(11,154		)	(11,338		)
Net periodic postretirement benefit income	$	(11,452	)	$	(10,451	)	$	(10,580	)

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 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 $1.2 million, $2.8 million and $2.9 million for the years ended December 31, 2018, 2017 and 2016, respectively. Net periodic postretirement benefit income allocated to the Company for the years ended December 31, 2018, 2017 and 2016 amounted to $3.2 million, $2.9 million, and $3.0 million, respectively.

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



	Year ended December 31,
	2018		2017
Pension plans:
Discount rate	4.24	%	3.60	%
Interest credit rate	4.50	%	5.50	%
Rate of compensation increase:
Qualified pension plan	5.07	%	5.09	%
Non-qualified pension plan	4.37	%	4.45	%

Postretirement benefit plans:
Discount rate	4.27	%	3.63	%

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



	Year ended December 31,
	2018		2017		2016
Pension plans:
Discount rate	3.60	%	4.07	%	3.90	%
Interest credit rate	5.50	%	5.50	%	5.50	%
Expected long-term rate of return on plan assets	7.00	%	7.00	%	7.00	%
Rate of compensation increase:
Qualified pension plan	5.07	%	5.08	%	5.07	%
Non-qualified pension plan	4.37	%	4.47	%	4.56	%

Postretirement benefit plans:
Discount rate	3.63	%	4.21	%	4.42	%
Expected long-term rate of return on plan assets	6.50	%	6.50	%	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
2019	$	19,932	$	2,805
2020	22,180		2,998
2021	21,996		3,169
2022	22,620		3,286
2023	23,408		3,358
2024 - 2028	124,035		17,922

Employers Mutual manages its VEBA trust assets internally. 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 are invested in fixed income, international equity and domestic equity mutual funds, an emerging markets exchange traded fund (ETF) and universal life insurance policies issued by EMC National Life Company, an affiliate of Employers Mutual, that carry a guaranteed interest rate of 4.5 percent.

See note 8 for a discussion on fair value measurement. Following is a description of the valuation techniques and inputs used for each major class of assets measured at fair value in 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, 2018			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	$	1,506	$	1,506	$	—	$	—
Emerging markets ETF	3,986		3,986		—		—
Mutual funds	47,632		47,632		—		—
Life insurance contracts	14,885		—		—		14,885
Cash	759		759		—		—
Total benefit plan assets	$	68,768	$	53,883	$	—	$	14,885



December 31, 2017			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	$	1,254	$	1,254	$	—	$	—
Emerging markets ETF	4,803		4,803		—		—
Mutual funds	54,180		54,180		—		—
Life insurance contracts	14,524		—		—		14,524
Cash	897		897		—		—
Total benefit plan assets	$	75,658	$	61,134	$	—	$	14,524

Presented below is a reconciliation of the assets measured at fair value using significant unobservable inputs (Level 3) for the years ended December 31, 2018 and 2017.



	Fair value measurements using significant unobservable (Level 3) inputs
	Life insurance contracts
($ in thousands)	2018		2017
Balance at beginning of year	$	14,524	$	14,159
Actual return on plan assets:
Increase in cash surrender value of life insurance contracts	361		365
Balance at end of year	$	14,885	$	14,524

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 recommend 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 description of the valuation techniques and inputs used for pooled separate accounts, the only major class of assets measured at fair value in 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 net asset value is determined by the issuer of the fund by taking the fair value of the underlying investments less any liabilities divided by the number of units outstanding. Sponsors of the funds specify 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)	2018		2017
Pooled separate accounts	$	316,755	$	349,004
Total benefit plan assets	$	316,755	$	349,004

Employers Mutual plans to contribute approximately $7.0 million to the pension plan in 2019. No contributions are expected to be made to the VEBA trust in 2019.

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 $3.3 million, $2.9 million and $2.7 million in 2018, 2017 and 2016, respectively.