-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HJt4EJ1ZyyeJpjW2xTEq9aJzz3ieO2e11aCVxpVdt1bUtMdoK62dmStR1pn5qAMQ v/kh4+yfpiIlbaV3F1RQgQ== 0000356130-96-000002.txt : 19960325 0000356130-96-000002.hdr.sgml : 19960325 ACCESSION NUMBER: 0000356130-96-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960322 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMC INSURANCE GROUP INC CENTRAL INDEX KEY: 0000356130 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 426234555 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-10956 FILM NUMBER: 96537319 BUSINESS ADDRESS: STREET 1: 717 MULBERRY ST CITY: DES MOINES STATE: IA ZIP: 50309 BUSINESS PHONE: 5152802902 10-K405 1 1995 EMC INSURANCE GROUP INC 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the Fiscal Year Ended December 31, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from to ------------ ----------- Commission File Number: 0-10956 EMC INSURANCE GROUP INC. -------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Iowa 42-6234555 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 717 Mulberry Street, Des Moines, Iowa 50309 ----------------------------------------- ---------- (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code: (515) 280-2902 --------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $1.00 ----------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 1, 1996 was $45,554,960. The number of shares outstanding of the registrant's common stock, $1.00 par value, on March 1, 1996, was 10,833,951. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission on or before April 30, 1996, are incorporated by reference under Part III. This document contains 162 sequentially numbered pages. Index to Exhibits is on page number 95. PART I ------ ITEM 1. BUSINESS. - ------- -------- GENERAL - ------- EMC Insurance Group Inc. is an insurance holding company incorporated in Iowa in 1974. EMC Insurance Group Inc. is approximately 67 percent owned by Employers Mutual Casualty Company (Employers Mutual), a multiple-line property and casualty insurance company organized as an Iowa mutual insurance company in 1911 that is licensed in all 50 states and the District of Columbia. EMC Insurance Group Inc. and its subsidiaries are referred to herein as the "Company". Employers Mutual and all of its property and casualty insurance subsidiaries (including the Company), which collectively have assets totaling $1,416,051,098 and written premiums of $586,502,641, are referred to as the "EMC Insurance Companies." The Company conducts its insurance business through four business segments as follows: ............................... : : : EMC INSURANCE GROUP INC. : :.............................: : Excess and Property and : Nonstandard Surplus Lines Casualty : Risk Automobile Insurance Insurance Reinsurance : Insurance Agency ................................:................................. : : : : : : : : EMCASCO Insurance EMC Farm and City EMC Company (EMCASCO) Reinsurance Insurance Underwriters, Illinois EMCASCO Company Company Ltd. Insurance Company (Illinois EMCASCO) Dakota Fire Insurance Company (Dakota Fire) EMCASCO was formed in Iowa in 1958, Illinois EMCASCO was formed in Illinois in 1976 and Dakota Fire was formed in North Dakota in 1957 for the purpose of writing property and casualty insurance. These companies are licensed to write insurance in a total of 35 states and are participants in a pooling agreement with Employers Mutual. (See "Property and Casualty Insurance - Pooling Agreement"). The reinsurance subsidiary was formed in 1981 to assume reinsurance business from Employers Mutual. The company assumes 95 percent of Employers Mutual's assumed reinsurance business, exclusive of certain reinsurance contracts, and is licensed to do business in 11 states. The nonstandard risk automobile insurance subsidiary was purchased in 1984. The company was formed in Iowa in 1962 to write nonstandard risk automobile insurance and is licensed in 5 states. The excess and surplus lines insurance agency was acquired in 1985. The company was formed in Iowa in 1975 as a broker for excess and surplus lines insurance. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS - --------------------------------------------- For information concerning the Company's revenues, operating income and identifiable assets attributable to each of its industry segments over the past three years, see note 9 of Notes to Consolidated Financial Statements under Item 8 of this Form 10-K. PROPERTY AND CASUALTY INSURANCE - ------------------------------- POOLING AGREEMENT The three property and casualty insurance subsidiaries of the Company and two subsidiaries of Employers Mutual (Union Insurance Company of Providence and American Liberty Insurance Company) are parties to reinsurance pooling agreements with Employers Mutual (collectively the "pooling agreement"). Under the terms of the pooling agreement, each company cedes to Employers Mutual all of its insurance business and assumes from Employers Mutual an amount equal to its participation in the pool. All losses, settlement expenses and other underwriting and administrative expenses, excluding the voluntary reinsurance business assumed by Employers Mutual from unaffiliated insurance companies, are prorated among the parties on the basis of participation in the pool. The aggregate participation of the Company's property and casualty insurance subsidiaries is 22 percent. Operations of the pool give rise to intercompany balances with Employers Mutual, which are settled on a quarterly basis. The investment activities and income tax liabilities of the pool participants are not subject to the pooling agreement. The purpose of the pooling agreement is to reduce the risk of an exposure insured by any of the pool participants by spreading it among all the companies. The pooling agreement produces a more uniform and stable underwriting result from year to year for all companies in the pool than might be experienced individually. In addition, each company benefits from the capacity of the entire pool, rather than being limited to policy exposures of a size commensurate with its own assets, and from the wide range of policy forms, lines of insurance written, rate filings and commission plans offered by each of the companies. A single set of reinsurance treaties is maintained for the protection of all six companies in the pool. PRINCIPAL PRODUCTS The Company's property and casualty insurance subsidiaries and the other parties to the pooling agreement underwrite both commercial and personal lines of insurance. The following table sets forth the aggregate direct written premiums of all parties to the pooling agreement for the three years ended December 31, 1995. The pooling agreement is continuous but may be amended or terminated at the end of any calendar year as to any one or more parties. Percent Percent Percent of of of Line of Business 1995 total 1994 total 1993 total - ---------------- -------- ----- -------- ----- -------- ----- (Dollars in thousands) Commercial Lines: Automobile ............ $ 99,165 17.8% $ 91,674 17.0% $ 83,415 16.0% Property .............. 89,130 16.0 81,358 15.1 72,743 13.9 Workers' compensation 131,415 23.5 133,621 24.7 134,529 25.8 Liability ............. 105,571 18.9 100,844 18.7 99,976 19.1 Other ................. 13,975 2.5 13,405 2.5 11,948 2.3 -------- ----- -------- ----- -------- ----- Total commercial lines 439,256 78.7 420,902 78.0 402,611 77.1 -------- ----- -------- ----- -------- ----- Personal Lines: Automobile ............ 79,121 14.2 80,694 14.9 83,068 15.9 Property .............. 39,840 7.1 38,107 7.1 36,515 7.0 Other ................. 54 - 56 - 56 - -------- ----- -------- ----- -------- ----- Total personal lines 119,015 21.3 118,857 22.0 119,639 22.9 -------- ----- -------- ----- -------- ----- Total ............ $558,271 100.0% $539,759 100.0% $522,250 100.0% ======== ===== ======== ===== ======== ===== MARKETING Marketing of insurance by the parties to the pooling agreement is conducted through 18 offices located throughout the United States and approximately 2,350 independent agencies. These offices maintain close contact with the local market conditions and are able to react rapidly to change. Each office employs underwriting, claims, marketing and risk improvement representatives, as well as field auditors and branch administrative technicians. The offices are supported by Employers Mutual technicians and specialists. Systems are in place to monitor the underwriting results of each office and to maintain guidelines and policies consistent with the underwriting and marketing environment in each region. The following table sets forth the geographic distribution of the aggregate direct written premiums of all parties to the pooling agreement for the three years ended December 31, 1995. 1995 1994 1993 ---- ---- ---- Alabama ............................ 3.1% 2.7% 2.5% Arizona ............................ 3.9 3.8 3.7 Colorado ........................... 3.3 3.3 2.8 Illinois ........................... 6.5 6.7 6.8 Iowa ............................... 21.7 23.0 26.2 Kansas ............................. 8.8 8.2 7.4 Michigan ........................... 3.6 3.8 3.1 Minnesota .......................... 4.7 5.3 5.3 Nebraska ........................... 8.1 8.0 7.5 North Carolina ..................... 4.0 3.8 3.3 Rhode Island ....................... 3.2 3.3 3.2 Wisconsin .......................... 5.5 5.7 6.7 Other * ............................ 23.6 22.4 21.5 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== ===== * Includes all other jurisdictions, none of which accounted for more than 3%. COMPETITION The property and casualty insurance business is highly competitive. The Company's property and casualty insurance subsidiaries and the other pool members compete in the United States insurance market with numerous insurers, many of which have greater financial resources. Competition in the types of insurance in which the property and casualty insurance subsidiaries are engaged is based on many factors, including the perceived overall financial strength of the insurer, premiums charged, contract terms and conditions, services offered, speed of claim payments, reputation and experience. In this competitive environment, insureds have tended to favor large, financially strong insurers and the Company faces the risk that insureds may become more selective and may seek larger and/or more highly rated insurers. BEST'S RATING A.M. Best rates insurance companies based on their relative financial strength and ability to meet their contractual obligations. The A (Excellent) rating assigned to the Company's property and casualty insurance subsidiaries and the other pool members is based on the pool members' 1994 operating results and financial condition as of December 31, 1994. Best's reevaluates its ratings from time to time (normally on an annual basis) and there can be no assurance that the Company's property and casualty insurance subsidiaries and the other pool members will maintain their current rating in the future. Management believes that a Best's rating of "A (Excellent)" or better is important to the Company's business since many insureds require that companies with which they insure be so rated. Best's publications indicate that these ratings are assigned to companies which Best's believes have achieved excellent overall performance and have a strong ability to meet their obligations over a long period of time. Best's ratings are based upon factors of concern to policyholders and insurance agents and are not necessarily directed toward the protection of investors. REINSURANCE CEDED The parties to the pooling agreement cede insurance in the ordinary course of business for the purpose of limiting their maximum loss exposure through diversification of their risks. The pool participants also purchase catastrophe reinsurance to cover multiple losses arising from a single event. All major reinsurance treaties, with the exception of the pooling agreement and a boiler treaty, are on an "excess of loss" basis whereby the reinsurer agrees to reimburse the primary insurer for covered losses in excess of a predetermined amount, up to a stated limit. The boiler treaty provides for 100 percent reinsurance of the pool's direct boiler coverage written. Facultative reinsurance from approved domestic markets, which provides reinsurance on an individual risk basis and requires specific agreement of the reinsurer as to the limits of coverage provided, is purchased when coverage by an insured is required in excess of treaty capacity or where a high-risk type policy could expose the treaty reinsurance programs. Each type of reinsurance coverage is purchased in layers, and each layer may have a separate retention level. Retention levels are adjusted according to reinsurance market conditions and the surplus position of Employers Mutual. The intercompany pooling arrangement aids efficient buying of reinsurance since it allows for higher retention levels and correspondingly decreased dependence on the reinsurance marketplace. A summary of the reinsurance treaties benefiting the parties to the pooling agreement is presented below. Retention amounts reflect the accumulated retentions of all layers within a coverage. Type of Coverage Retention Limits ---------------- ----------- ------ Property per risk ........... $ 2,000,000 100 percent of $18,000,000 Property catastrophe ........ $11,550,000 95 percent of $51,000,000 Casualty .................... $ 2,000,000 100 percent of $38,000,000 Umbrella .................... $ 1,400,000* 100 percent of $ 8,600,000 Fidelity .................... $ 500,000 100 percent of $ 3,500,000 Surety ...................... $ 700,000 100 percent of $ 5,300,000 Boiler ...................... $ 0 100 percent of $50,000,000 * An annual aggregate deductible of $3,600,000 must be reached before the reinsurers may be petitioned. Although reinsurance does not discharge the original insurer from its primary liability to its policyholders, it is the practice of insurers for accounting purposes to treat reinsured risks as risks of the reinsurer since the primary insurer would only reassume liability in those situations where the reinsurer is unable to meet the obligations it assumed under the reinsurance agreements. The collectability of reinsurance is subject to the solvency of the reinsurers. The major participants in the pool members' reinsurance programs are presented below. The percentages represent the reinsurers' share of the total reinsurance protection under all coverages. Each type of coverage is purchased in layers, and an individual reinsurer may participate in more than one coverage and at various layers within these coverages. The property per risk, property catastrophe and casualty reinsurance programs are handled by a reinsurance intermediary (broker). The reinsurance of those programs is syndicated to approximately 75 domestic and foreign reinsurers. Percent of Total 1995 Property per risk, property catastrophe Reinsurance Best's and casualty coverages: Protection Rating - --------------------------------------- ----------- ------ Underwriters at Lloyd's of London .................... 23.2% (1) Insurance Company of North America ................... 7.6 B+ Prudential Reinsurance Company ....................... 5.4 A AXA Reinsurance Company .............................. 3.2 A NAC Reinsurance Corporation .......................... 2.9 A Hartford Fire Insurance Company ...................... 2.9 A+ Hannover Ruckversicherung AG ......................... 2.9 (2) Mid-Ocean Reinsurance Company Ltd. ................... 2.5 (2) Umbrella coverage: - ------------------ General Reinsurance Corporation ...................... 100.0 A++ Fidelity and surety coverages: - ------------------------------ Allstate Insurance Company ........................... 42.0 A- Kemper Reinsurance Company ........................... 20.0 A- Signet Star Reinsurance Company ...................... 20.0 A Winterthur Reinsurance Corporation of America ........ 18.0 A Boiler coverage: - ---------------- Hartford Steam Boiler Inspection and Insurance Company 100.0 A+ (1) Not rated; however, the individual members of the Lloyd's organization are required to pledge their entire net worth toward the satisfaction of their liabilities. In addition, standing behind the means of individual members is Lloyd's Central Fund. This fund is considered by Lloyd's to be a safety net, whereby Lloyd's membership as a whole can be compelled to make up deficiencies caused by individual names defaulting. The London Department of Trade stated that Lloyd's of London satisfied its 1994 statutory solvency requirements. In addition, U.S. Trusts are maintained to protect American policyholders. A stipulation agreement dated May 24, 1995 between the state of New York and Lloyd's of London outlines the following terms of a trust: * Lloyd's of London has placed in trust in New York an amount of $500,000,000 to be held unconditionally for the benefit of American policyholders. This amount essentially represents collateral for obligations arising from policies incepting up to and including July 31, 1995. * For policies incepting up to and including July 31, 1995, underwriting members of Lloyd's of London will continue as accredited reinsurers and as eligible excess lines insurers. * For policies incepting on or after August 1, 1995, only underwriting members of Lloyd's of London subscribing risks through syndicates that establish and maintain amounts within the trust funds established in accordance with the stipulation agreement and only with respect to policies subscribed through "Sponsoring Syndicates" will be accredited reinsurers or eligible excess and surplus lines insurers. The amount of assets in each trust fund shall not be less than the liabilities incurred by the underwriting members of Lloyd's of London as participants of the "Sponsoring Syndicate." With respect to profitability, Chatset (a publication that is considered a guide to syndicate run-offs) is predicting profits of 976 million British Pounds ($1.51 billion) for the 1993 year of account, 1.02 billion British Pounds for 1994 and 888 million British Pounds for 1995. (2) Not rated. Premiums ceded by all parties to the pooling agreement and by the Company's property and casualty insurance subsidiaries for the year ended December 31, 1995 are presented below. Each type of reinsurance coverage is purchased in layers, and an individual reinsurer may participate in more than one coverage and at various layers within the coverages. Since each layer of each coverage is priced separately, with the lower layers being more expensive than the upper layers, a reinsurer's overall participation in a reinsurance program does not necessarily correspond to the amount of premiums it receives. Premiums ceded by ------------------------ Property and casualty All pool insurance Reinsurer members subsidiaries - --------- ----------- ------------ General Reinsurance Corporation ...................... $ 3,109,549 $ 684,101 Underwriters at Lloyd's of London .................... 1,869,958 411,391 Hartford Steam Boiler Inspection and Insurance Company 1,332,433 293,135 Hartford Fire Insurance Company ...................... 833,790 183,434 Allstate Insurance Company ........................... 645,350 141,977 Kemper Reinsurance Company ........................... 617,876 135,933 AXA Reinsurance Company .............................. 571,629 125,758 PMA Reinsurance Corporation .......................... 529,551 116,501 American Reinsurance Company ......................... 509,878 112,173 NAC Reinsurance Corporation .......................... 415,738 91,462 Other Reinsurers ..................................... 5,316,929 1,169,725 ----------- ------------ Total .............................................. $15,752,681 $ 3,465,590 =========== ============ The parties to the pooling agreement also cede reinsurance on both a voluntary and a mandatory basis to state and national organizations in connection with various workers' compensation and assigned risk programs and to private organizations established to handle large risks. Premiums ceded by all parties to the pooling agreement and by the Company's property and casualty insurance subsidiaries for the year ended December 31, 1995 are presented below. Premiums ceded by ------------------------ Property and casualty All pool insurance Reinsurer members subsidiaries - --------- ----------- ------------ Wisconsin Compensation Rating Bureau ................. $ 8,688,645 $ 1,911,502 National Workers' Compensation Reinsurance Pool ...... 6,905,474 1,519,204 Improved Risk Mutual ................................. 3,750,918 825,202 North Carolina Reinsurance Facility .................. 1,390,142 305,831 Michigan Catastrophe Claims Association .............. 800,310 176,068 Other Reinsurers ..................................... 737,504 162,251 ----------- ------------ $22,272,993 $ 4,900,058 =========== ============ In formulating reinsurance programs, Employers Mutual is selective in its choice of reinsurers. Employers Mutual selects reinsurers on the basis of financial stability and long-term relationships, as well as price of the coverage. Reinsurers are generally required to have a Best's rating of "A-" or higher and policyholders' surplus of $50,000,000 ($100,000,000 for casualty reinsurance). For information concerning amounts due the Company from reinsurers for losses and settlement expenses and prepaid reinsurance premiums and the effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, see "Property and Casualty Insurance Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary - Reinsurance Ceded." RELATIONSHIP BETWEEN NET PREMIUMS WRITTEN AND SURPLUS The volume of insurance which a property and casualty insurance company writes under industry standards is a multiple of its surplus calculated in accordance with statutory accounting practices. Generally, a ratio of 3 to 1 or less is considered satisfactory. The ratios of the pool members for the past three years are as follows: Year ended December 31, ------------------------------ 1995 1994 1993 ---- ---- ---- Employers Mutual .................. 1.07 1.28 1.33 EMCASCO ........................... 1.91 2.18 2.51 Illinois EMCASCO .................. 1.95 2.18 2.44 Dakota Fire ....................... 1.80 1.98 2.18 American Liberty .................. 1.15 1.26 1.38 Union ............................. .73 .77 1.63 Union's ratio for the years 1995 and 1994 reflects a significant increase in surplus resulting from its demutualization in the first quarter of 1994. OUTSTANDING LOSSES AND SETTLEMENT EXPENSES The property and casualty insurance subsidiaries' reserve information is included in the property and casualty loss reserve development for 1995. See "Property and Casualty Insurance Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary - Outstanding Losses and Settlement Expenses." REINSURANCE - ----------- The reinsurance subsidiary is a property and casualty treaty reinsurer with a concentration in property lines. The reinsurance subsidiary began its operations in 1981 with a five percent quota share assumption of Employers Mutual's assumed reinsurance business. The quota share percentage has been gradually increased over the years and since 1988 the reinsurance subsidiary has assumed a 95 percent quota share of Employers Mutual's assumed reinsurance business, exclusive of certain reinsurance contracts. The reinsurance subsidiary receives 95 percent of all premiums and assumes 95 percent of all related losses and settlement expenses of this business. Since 1993, losses in excess of $1,000,000 per event are retained by Employers Mutual. The reinsurance subsidiary does not reinsure any of Employers Mutual's direct insurance business, nor any "involuntary" facility or pool business that Employers Mutual assumes pursuant to state law. In addition, the reinsurance subsidiary is not liable for credit risk in connection with the insolvency of any reinsurers of Employers Mutual. PRINCIPAL PRODUCTS The reinsurance subsidiary assumes both pro rata and excess of loss reinsurance. The following table sets forth the assumed written premiums of the reinsurance subsidiary for the three years ended December 31, 1995. Percent Percent Percent of of of Line of Business 1995 total 1994 total 1993 total - ---------------- ------- ----- ------- ----- ------- ----- (Dollars in thousands) Pro rata reinsurance: Property ............... $19,417 53.3% $21,952 55.0% $19,032 55.2% Marine/aviation ........ 4,168 11.4 4,563 11.5 3,917 11.4 Crop ................... 3,085 8.5 5,120 12.8 4,671 13.6 Casualty ............... 2,879 7.9 2,728 6.8 2,239 6.5 Other .................. 398 1.1 360 0.9 416 1.2 ------- ----- ------- ----- ------- ----- Total pro rata reinsurance 29,947 82.2 34,723 87.0 30,275 87.9 ------- ----- ------- ----- ------- ----- Excess per risk reinsurance: Property ............... 1,760 4.8 2,118 5.3 1,479 4.3 Marine/aviation ........ 21 0.1 16 0.1 68 0.2 Casualty ............... 840 2.3 (107) (0.3) (68) (0.2) Other .................. 341 0.9 268 0.7 227 0.7 ------- ----- ------- ----- ------- ----- Total excess per risk reinsurance ...... 2,962 8.1 2,295 5.8 1,706 5.0 ------- ----- ------- ----- ------- ----- Excess catastrophe/ aggregate reinsurance: Property ............... 3,178 8.7 2,567 6.4 2,235 6.5 Marine/aviation ........ 52 0.2 36 0.1 14 - Crop ................... 292 0.8 278 0.7 216 0.6 Other .................. 2 - - - - - ------- ----- ------- ----- -------- ----- Total excess catastrophe/ aggregate reinsurance 3,524 9.7 2,881 7.2 2,465 7.1 ------- ----- ------- ----- ------- ----- Total excess reinsurance 6,486 17.8 5,176 13.0 4,171 12.1 ------- ----- ------- ----- ------- ----- $36,433 100.0% $39,899 100.0% $34,446 100.0% ======= ===== ======= ===== ======= ===== MARKETING During 1995, more emphasis was placed upon writing excess of loss business and on increasing participation on existing contracts that had favorable terms. This movement towards excess of loss business was prompted by the continued deterioration of pro rata rates and greater control over the pricing of excess of loss business. While pro rata business continued to be written, the emphasis was on local and regional accounts. Some national account pro rata business was retained, but the terms provide appropriate limitations and protection for catastrophe exposures. The reinsurance subsidiary continues to emphasize profitability over production and therefore cancelled several unprofitable aircraft and marine accounts at the end of 1995. Despite these cancellations, premium volume for 1996 is expected to increase. COMPETITION The reinsurance marketplace is very competitive. Employers Mutual competes in the global reinsurance market with numerous reinsurers, many of which have greater financial resources. In this competitive environment, reinsurance brokers have tended to favor large, financially strong reinsurers who are able to provide "mega" line capacity for all lines of business. The Company faces the risk that reinsurance brokers may become more selective and may seek larger and/or more highly rated reinsurers. REINSURANCE CEDED The reinsurance subsidiary has an aggregate excess of loss reinsurance treaty with Employers Mutual which provides protection from a large accumulation of retentions resulting from multiple catastrophes in any one calendar year. The coverage provided is $2,000,000, excess of $3,000,000 ($2,500,000 in 1994 and 1993) aggregate losses retained, excess of $200,000 per event. Maximum recovery is limited to $2,000,000 ($4,000,000 in 1994 and 1993) per accident year. The reinsurance subsidiary recovered $0, $0 and $143,501 under this treaty and paid reinstatement premiums of $0, $0 and $208,470 in 1995, 1994 and 1993, respectively. Total premiums paid to Employers Mutual amounted to $499,950, $557,842 and $708,445 in 1995, 1994 and 1993, respectively. For information concerning amounts due the Company from reinsurers for losses and settlement expenses and prepaid reinsurance premiums and the effect of reinsurance on premiums written and earned and losses and settlement expenses incurred, see "Property and Casualty Insurance Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary - Reinsurance Ceded." BEST'S RATING The most recent Best's Property Casualty Key Rating Guide gives the reinsurance subsidiary a B+ (Very Good) policyholders' rating. Best's ratings are based upon factors of concern to policyholders and insurance agents and are not necessarily directed toward the protection of investors. OUTSTANDING LOSSES AND SETTLEMENT EXPENSES The reinsurance subsidiary's reserve information is included in the property and casualty loss reserve development for 1995. See "Property and Casualty Insurance Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary - Outstanding Losses and Settlement Expenses." NONSTANDARD RISK AUTOMOBILE INSURANCE - ------------------------------------- The Company's nonstandard risk automobile insurance subsidiary specializes in insuring private passenger automobile risks that are found to be unacceptable in the standard automobile insurance market. MARKETING The nonstandard risk automobile insurance subsidiary is licensed in a five state area that includes Iowa, Kansas, Nebraska, North Dakota and South Dakota. The nonstandard risk automobile insurance subsidiary expects to begin writing business in the state of Missouri in early 1996. Personal lines automobile policies are solicited through the American Agency System using approximately 1,020 independent agencies and are written for two, three or six month terms. Limits of liability are offered equal to the state financial responsibility laws. Physical damage coverages are written at normal insurance deductibles. The following table sets forth the geographic distribution of the direct written premiums of the nonstandard risk automobile insurance subsidiary for the three years ended December 31, 1995. 1995 1994 1993 ----- ----- ----- Iowa ............................... 39.9% 42.3% 42.5% Nebraska ........................... 25.0 26.6 29.1 South Dakota ....................... 20.3 17.2 14.3 Kansas ............................. 11.0 10.8 11.1 North Dakota ....................... 3.8 3.1 3.0 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== ===== COMPETITION The nonstandard risk marketplace is very competitive. Policies are written for relatively short periods of time and insureds search for the best rates available. During the last several years, the larger standard insurance companies have been developing rate tiers that are geared toward retaining nonstandard risk customers, rather than passing them into the nonstandard market. In addition, more companies have been willing to write nonstandard coverage. This additional availability in both the standard market and the nonstandard market has resulted in increased competition within the nonstandard market. REINSURANCE CEDED The nonstandard risk automobile insurance subsidiary has a reinsurance treaty on an excess of loss basis with Employers Mutual, which provides reinsurance for 100 percent of each loss in excess of $100,000, up to $1,000,000. Recoveries under this treaty totaled $2,140, $71,567 and $0 in 1995, 1994 and 1993, respectively. Premiums paid to Employers Mutual amounted to $45,232, $49,659 and $42,065 in 1995, 1994 and 1993, respectively. For information concerning amounts due the Company from reinsurers for losses and settlement expenses and prepaid reinsurance premiums and the effect of reinsurance on premiums written and earned and losses and settlement expenses incurred, see "Property and Casualty Insurance Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary - Reinsurance Ceded." BEST'S RATING The most recent Best's Property Casualty Key Rating Guide gives the nonstandard risk automobile insurance subsidiary an A (Excellent) policyholders' rating. Best's ratings are based upon factors of concern to policyholders and insurance agents and are not necessarily directed toward the protection of investors. Best has indicated that the nonstandard risk automobile insurance subsidiary's rating may be downgraded in 1996 due to the poor operating results achieved over the last year. Management does not believe that a downgrade in the Best's rating will have a significant impact on the subsidiary's ability to generate business due to the type of insureds seeking nonstandard auto insurance coverage. OUTSTANDING LOSSES AND SETTLEMENT EXPENSES The nonstandard risk automobile insurance subsidiary's reserve information is included in the property and casualty loss reserve development for 1995. See "Property and Casualty Insurance Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary - Outstanding Losses and Settlement Expenses." PROPERTY AND CASUALTY INSURANCE SUBSIDIARIES, REINSURANCE SUBSIDIARY AND - ------------------------------------------------------------------------ NONSTANDARD RISK AUTOMOBILE INSURANCE SUBSIDIARY. - ------------------------------------------------ SERVICES PROVIDED BY EMPLOYERS MUTUAL Employers Mutual provides various services to all of its subsidiaries. Such services include data processing, claims, financial, actuarial, auditing, marketing and underwriting. Costs of these services are allocated to the subsidiaries outside the pooling agreement based upon a number of criteria, including usage and number of transactions. Costs not allocated to these subsidiaries are charged to the pool and each pool participant shares in the total cost in proportion to its participation percentage. STATUTORY COMBINED RATIOS The following table sets forth the Company's insurance subsidiaries' statutory combined ratios and the property and casualty insurance industry averages for the five years ended December 31, 1995. The combined ratios below are the sum of the following: the loss ratio, calculated by dividing losses and settlement expenses incurred by net premiums earned, and the expense ratio, calculated by dividing underwriting expenses incurred by net premiums written and policyholder dividends by net premiums earned. Generally, if the combined ratio is below 100 percent, a company has an underwriting profit; if it is above 100 percent, a company has an underwriting loss. Year ended December 31, -------------------------------------- 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ Property and casualty insurance Loss ratio .................... 65.0% 67.2% 72.6% 76.1% 76.8% Expense ratio ................. 33.1 31.1 30.9 30.1 30.5 ------ ------ ------ ------ ------ Combined ratio .............. 98.1% 98.3% 103.5% 106.2% 107.3% ====== ====== ====== ====== ====== Reinsurance Loss ratio .................... 66.3% 82.0% 77.7% 109.1% 82.9% Expense ratio ................. 32.3 30.4 33.1 34.8 36.6 ------ ------ ------ ------ ------ Combined ratio .............. 98.6% 112.4% 110.8% 143.9% 119.5% ====== ====== ====== ====== ====== Nonstandard risk automobile insurance Loss ratio .................... 94.5% 71.5% 94.3% 92.3% 72.4% Expense ratio ................. 26.1 24.4 23.7 23.7 25.2 ------ ------ ------ ------ ------ Combined ratio .............. 120.6% 95.9% 118.0% 116.0% 97.6% ====== ====== ====== ====== ====== Total insurance operations Loss ratio .................... 67.1% 70.9% 75.6% 83.4% 77.8% Expense ratio ................. 32.5 30.4 30.7 30.5 31.4 ------ ------ ------ ------ ------ Combined ratio .............. 99.6% 101.3% 106.3% 113.9% 109.2% ====== ====== ====== ====== ====== Property and casualty insurance industry averages (1) Loss ratio .................... 80.3% 81.1% 79.5% 88.1% 81.2% Expense ratio ................. 26.9 27.3 27.4 27.6 27.7 ------ ------ ------ ------ ------ Combined ratio .............. 107.2% 108.4% 106.9% 115.7% 108.9% ====== ====== ====== ====== ====== (1) As reported by A.M. Best Company. The ratio for 1995 is an estimate; the actual combined ratio is not currently available. REINSURANCE CEDED The following table presents amounts due to the Company from reinsurers for losses and settlement expenses and prepaid reinsurance premiums as of December 31, 1995: 1995 Amount Percent Best's recoverable of total rating ----------- -------- ------ Wisconsin Compensation Rating Bureau .. $ 6,722,903 45.7% (1) National Workers' Compensation Reinsurance Pool .................... 2,051,212 13.9 (1) American Re-Insurance Company ......... 629,049 4.3 A+ Allstate Insurance Company ............ 509,107 3.5 A- Minnesota Workers' Compensation Reinsurance Association ............. 498,624 3.4 (2) Improved Risk Mutual (IRM) ............ 458,722 3.1 (3) North Carolina Reinsurance Facility ... 403,954 2.7 (4) Mutual Reinsurance Bureau (MRB) ....... 402,311 2.7 (5) Kemper Reinsurance Company ............ 378,253 2.6 A- General Reinsurance Company ........... 302,507 2.0 A+ Other Reinsurers ...................... 2,366,182 16.1 ----------- -------- Total ........................... $14,722,824(6) 100.0% =========== ======== (1) Amounts recoverable reflect the property and casualty insurance subsidiaries' pool participation percentage of amounts ceded to these organizations by Employers Mutual in connection with its role as "service carrier." Under these arrangements, Employers Mutual writes business for these organizations on a direct basis and then cedes 100 percent of the business to these organizations. 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. (2) The amount recoverable reflects the property and casualty insurance subsidiaries' pool participation percentage of amounts ceded to this association by the pool members under a reinsurance contract that provides protection for workers' compensation losses in excess of $430,000 per occurrence. Credit risk associated with this amount is minimal as all companies writing direct workers' compensation business in the state of Minnesota are responsible for the liabilities of this association on a pro rata basis. (3) The amount recoverable reflects the property and casualty insurance subsidiaries' pool participation percentage of amounts ceded to this underwriting association by the pool members. IRM was formed to underwrite property insurance for large commercial risks and is composed of Employers Mutual and 14 other nonaffiliated property and casualty insurance companies. Each of the 15 insurance companies cede insurance to IRM and assume back a percentage of this business. Participation ranges from 3.2 percent to a maximum of 10.0 percent (Employers Mutual has a 10.0 percent share of this business). Each member company benefits from the increased capacity, as well as risk improvement and other services provided by IRM. IRM is backed by the financial strength of the 15 member companies. All of the members of IRM were assigned an A- (Excellent) or better rating by the most recent Best's Property Casualty Key Ratings Guide. (4) The amount recoverable reflects the property and casualty insurance subsidiaries' pool participation percentage of amounts ceded to this organization by the pool members in conjunction with the state run assigned risk program ("state fund"). Under this program, all insurers writing direct business in the state of North Carolina are required by law to write insurance for risks that are not insurable in the normal marketplace. Business written under this program is ceded 100 percent to the state fund and each respective company assumes from the state fund its share of such business in proportion to its direct writings in the state. Credit risk associated with this amount is minimal as all companies writing direct business in the state are responsible for the liabilities of this organization on a pro rata basis. (5) The amount recoverable reflects the property and casualty insurance subsidiaries' pool participation percentage of amounts ceded to this underwriting organization by Employers Mutual. MRB is composed of Employers Mutual and five other nonaffiliated mutual insurance companies. Each of the six members cede primarily property insurance to MRB and assume equal proportionate shares of this business. Each member benefits from the increased capacity provided by MRB. MRB is backed by the financial strength of the six member companies. All of the members of MRB were assigned an A (Excellent) or better rating by the most recent Best's Property Casualty Key Ratings Guide. (6) The total amount at December 31, 1995 represented $690,263 in paid losses and settlement expenses recoverable, $12,226,680 in unpaid losses and settlement expenses recoverable and $1,805,881 in unearned premiums recoverable. The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred for the three years ended December 31, 1995 is presented below. Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ PREMIUMS WRITTEN: Direct ........................ $152,579,014 $143,444,388 $135,277,129 Assumed from nonaffiliates .... 3,282,699 5,843,091 6,636,942 Assumed from affiliates ....... 159,253,136 158,646,332 147,620,705 Ceded to nonaffiliates ........ (8,365,648) (8,890,119) (10,701,482) Ceded to affiliates ........... (143,259,942) (132,100,537) (120,898,914) ------------ ------------ ------------ Net premiums written ........ $163,489,259 $166,943,155 $157,934,380 ============ ============ ============ PREMIUMS EARNED: Direct ........................ $151,450,871 $140,012,247 $137,141,457 Assumed from nonaffiliates .... 3,548,647 5,988,228 6,758,364 Assumed from affiliates ....... 157,897,322 156,839,482 148,366,487 Ceded to nonaffiliates ........ (8,680,800) (9,601,270) (11,507,217) Ceded to affiliates ........... (141,949,790) (128,409,308) (124,321,553) ------------ ------------ ------------ Net premiums earned ......... $162,266,250 $164,829,379 $156,437,538 ============ ============ ============ LOSSES AND SETTLEMENT EXPENSES INCURRED: Direct ........................ $ 98,651,399 $113,680,306 $ 97,842,980 Assumed from nonaffiliates .... 608,796 2,774,689 6,575,099 Assumed from affiliates ....... 100,098,436 108,594,530 107,369,274 Ceded to nonaffiliates ........ (2,036,962) (3,077,305) (5,845,414) Ceded to affiliates ........... (89,169,391) (105,028,166) (85,586,640) ------------ ------------ ------------ Net losses and settlement expenses incurred ......... $108,152,278 $116,944,054 $120,355,299 ============ ============ ============ OUTSTANDING LOSSES AND SETTLEMENT EXPENSES The Company maintains reserves for losses and settlement expenses with respect to both reported and unreported claims. The amount of reserves for reported claims is primarily based upon a case-by-case evaluation of the specific type of claim, knowledge of the circumstances surrounding each claim and the policy provisions relating to the type of loss. Reserves on assumed business are the amounts reported by the ceding company. The amount of reserves for unreported claims is determined on the basis of statistical information for each line of insurance with respect to the probable number and nature of claims arising from occurrences which have not yet been reported. Established reserves are closely monitored and are frequently recomputed using a variety of formulas and statistical techniques for analyzing current actual claim cost, frequency data and other economic and social factors. The Company does not discount reserves. Inflation is implicitly provided for in the reserving function through analysis of cost trends, reviews of historical reserving results and projections of future economic conditions. Large ($25,000 and over) incurred and reported gross reserves are reviewed regularly for adequacy. In addition, long-term and lifetime medical claims are periodically reviewed for cost trends and the applicable reserves are appropriately revised. Loss reserves are estimates at a given time of what the insurer expects to pay on incurred losses, based on facts and circumstances then known. During the loss settlement period, which may be many years, additional facts regarding individual claims become known, and accordingly, it often becomes necessary to refine and adjust the estimates of liability on a claim. Settlement expense reserves are intended to cover the ultimate cost of investigating claims and defending lawsuits arising from claims. These reserves are established each year based on previous years' experience to project the ultimate cost of settlement expenses. To the extent that adjustments are required to be made in the amount of outstanding loss reserves each year, settlement expense reserves are correspondingly revised. Despite the inherent uncertainties of estimating insurance company loss and settlement expense reserves, management believes that the Company's reserves are being calculated in accordance with sound actuarial practices and, based upon current information, that the Company's reserves for losses and settlement expenses at December 31, 1995 are adequate. The following table sets forth a reconciliation of beginning and ending reserves for losses and settlement expenses of the property and casualty insurance subsidiaries, the reinsurance subsidiary and the nonstandard risk automobile insurance subsidiary. Amounts presented are on a net basis, with a reconciliation of beginning and ending reserves to the gross amounts presented in the consolidated financial statements in accordance with Statement of Financial Accounting Standards (SFAS) 113. (See note 1 of Notes to Consolidated Financial Statements under Item 8 of this Form 10K.) Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Gross reserves for losses and settlement expenses, beginning of year .......................... $203,181,615 $197,121,852 $215,388,865 Ceded reserves for losses and settlement expenses, beginning of year .......................... 14,146,874 17,454,679 25,253,507 ------------ ------------ ------------ Net reserves for losses and settlement expenses, beginning of year .......................... 189,034,741 179,667,173 190,135,358 ------------ ------------ ------------ Incurred losses and settlement expenses: - ---------------------- Provision for insured events of the current year .......... 123,876,601 123,343,829 119,896,526 (Decrease) increase in provision for insured events of prior years ........................ (15,724,323) (6,399,775) 458,773 ------------ ------------ ------------ Total incurred losses and settlement expenses ...... 108,152,278 116,944,054 120,355,299 ------------ ------------ ------------ Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Payments: - --------- Losses and settlement expenses attributable to insured events of the current year ............ 48,237,715 48,771,573 47,600,851 Losses and settlement expenses attributable to insured events of prior years ................. 55,753,875 59,491,875 45,508,460 Payment related to the commutation of the reinsurance subsidiary's catastrophe and aggregate excess of loss reinsurance treaties ... - (686,962) - Payment related to the change in the property and casualty insurance subsidiaries' pooling agreement ...................... - - 4,373,629 Payment related to the commutation of two reinsurance contracts under the reinsurance subsidiary's quota share agreement ...................... - - 21,904,001 Adjustment related to the gross-up of reserve amounts associated with the National Workers' Compensation Reinsurance Pool .. - - 11,436,543 ------------ ------------ ------------ Total payments .............. 103,991,590 107,576,486 130,823,484 ------------ ------------ ------------ Net reserves for losses and settlement expenses, end of year 193,195,429 189,034,741 179,667,173 Ceded reserves for losses and settlement expenses, end of year 12,226,680 14,146,874 17,454,679 ------------ ------------ ------------ Gross reserves for losses and settlement expenses, end of year $205,422,109 $203,181,615 $197,121,852 ============ ============ ============ The following table shows the calendar year development of loss and settlement expense reserves of the property and casualty insurance subsidiaries, the reinsurance subsidiary and the nonstandard risk automobile insurance subsidiary. Amounts presented are on a net basis with (i) a reconciliation of the net loss and settlement expense reserves at the end of 1992, 1993, 1994 and 1995 to the gross amounts presented in the consolidated financial statements in accordance with SFAS 113 and (ii) disclosure of the gross re-estimated loss and settlement expense reserves as of the end of 1993, 1994 and 1995 and the related re-estimated reinsurance receivables. Reflected in this table is (1) the increase in the reinsurance subsidiary's quota share assumption of Employers Mutual's assumed reinsurance business from 75 percent in 1987 to 95 percent in 1988, (2) the increase in the property and casualty insurance subsidiaries' collective participation in the pool from 17 percent to 22 percent in 1992, (3) the change in the pooling agreement whereby effective January 1, 1993 the voluntary reinsurance business written by Employers Mutual is no longer subject to cession to the pool members, (4) the commutation of two reinsurance contracts under the reinsurance subsidiary's quota share agreement in 1993, (5) the gross-up of reserve amounts associated with the National Workers' Compensation Reinsurance Pool at December 31, 1993 and (6) the reinsurance subsidiary's commutation of all outstanding reinsurance balances ceded to Employers Mutual under catastrophe and aggregate excess of loss reinsurance treaties related to accident years 1991 through 1993 in 1994. In evaluating the table, it should be noted that each cumulative redundancy (deficiency) amount includes the effects of all changes in reserves for prior periods. Conditions and trends that have affected development of the liability in the past, such as a time lag in the reporting of assumed reinsurance business, the high rate of inflation associated with medical services and supplies and reform measures for workers' compensation insurance implemented by several states, may not necessarily occur in the future. Accordingly, it may not be appropriate to project future development of reserves based on this table. During the last three years the Company has experienced favorable development in the provision for insured events of prior years. The majority of the favorable development has come from the property and casualty insurance subsidiaries, which have benefited from state reform measures in workers' compensation insurance and various cost control functions implemented by Employers Mutual to minimize losses. Favorable development has also been experienced in the reinsurance subsidiary and the nonstandard risk auto insurance subsidiary, but to a lesser degree. The property and casualty insurance subsidiaries have historically experienced favorable development in their reserves and current reserving practices have not been relaxed; however, the level of favorable development experienced in 1995 is not expected to continue.
Year ended December 31, - --------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Statutory reserves for losses and settlement expenses ...... $ 67,921 90,357 109,088 121,667 127,870 131,623 139,317 180,797 182,072 191,514 196,293 Reclassification of reserve amounts associated with the National Workers' Compensation Reinsurance Pool ............. 1,028 1,561 2,378 2,911 3,855 4,338 6,830 11,364 - - - Statutory reserves after Reclassification ............. 68,949 91,918 111,466 124,578 131,725 135,961 146,147 192,161 182,072 191,514 196,293 GAAP adjustments: Salvage and subrogation ...... (1,130) (1,000) (930) (930) (930) (1,203)(1,284) (2,026) (1,804) (1,799) (2,369) Statutory settlement expense portion of postretirement benefit obligation ......... - - - - - - - - (601) (680) (729) Reserves for losses and settlement expenses .......... 67,819 90,918 110,536 123,648 130,795 134,758 144,863 190,135 179,667 189,035 193,195 Paid (cumulative) as of: One year later ............... 27,040 25,874 23,805 34,648 42,357 42,601 30,379 77,589 58,805 55,754 - Two years later .............. 41,667 36,199 44,662 57,511 65,965 58,242 78,096 108,253 87,059 - - Three years later ............ 48,477 52,014 61,052 72,121 76,356 95,154 94,854 125,457 - - - Four years later ............. 59,885 63,902 71,550 79,092 106,432 104,324 104,372 - - - - Five years later ............. 69,214 71,859 77,230 105,513 112,100 109,932 - - - - - Six years later .............. 75,371 76,748 101,714 108,764 115,213 - - - - - - Seven years later ............ 79,141 97,533 103,948 110,740 - - - - - - - Eight years later ............ 96,470 99,179 105,486 - - - - - - - - Nine years later ............. 97,448 100,481 - - - - - - - - - Ten years later .............. 98,535 - - - - - - - - - - Reserves reestimated as of: End of year .................. 67,819 90,918 110,536 123,648 130,795 134,758 144,863 190,135 179,667 189,035 193,195 One year later ............... 80,888 98,127 109,099 123,628 134,453 139,385 150,335 190,594 173,267 173,311 - Two years later .............. 91,452 97,465 111,212 124,011 136,972 140,764 147,388 186,543 164,833 - - Three years later ............ 91,927 100,437 113,588 125,957 136,902 139,421 144,340 181,633 - - - Four years later ............. 95,199 104,024 116,995 127,964 137,510 139,054 143,985 - - - - Five years later ............. 99,649 107,784 119,332 128,434 136,912 139,877 - - - - - Six years later .............. 103,157 110,961 120,147 127,908 138,740 - - - - - - Seven years later ............ 106,671 111,988 120,343 130,066 - - - - - - - Eight years later ............ 107,681 112,433 122,568 - - - - - - - - Nine years later ............. 108,082 114,516 - - - - - - - - - Ten years later .............. 110,145 - - - - - - - - - - Cumulative redundancy (Deficiency) ................. $(42,326) (23,598) (12,032) (6,418) (7,945) (5,119) 878 8,502 14,834 15,724 - ================================================================================================= Gross loss and settlement expense reserves - end of year (A).................................$215,389 197,122 203,182 205,422 Reinsurance receivables....................................................................... 25,254 17,455 14,147 12,227 -------- ------- ------- ------- Net loss and settlement expense reserves - end of year........................................$190,135 179,667 189,035 193,195 ======== ======= ======= ======= Gross re-estimated reserves - latest (B)......................................................$203,255 178,877 185,532 205,422 Re-estimated reinsurance receivables - latest................................................. 21,622 14,044 12,221 12,227 Net re-estimated reserves - latest............................................................$181,633 164,833 173,311 193,195 =================================== Gross cumulative redundancy (deficiency) (A-B)................................................$ 12,134 18,245 17,650 - ===================================
ASBESTOS AND ENVIRONMENTAL CLAIMS The Company has exposure to asbestos and environmental related claims associated with the insurance business issued by the property and casualty insurance subsidiaries and the reinsurance business assumed from Employers Mutual. Based on current information, this exposure is not material to the financial condition or the operations of the Company. Estimating loss and settlement expense reserves for asbestos and environmental claims is very difficult due to the many uncertainties surrounding these types of claims. Such uncertainties include the fact that the legal definition of asbestos and environmental damage is still evolving, the assignment of responsibility varies widely by state and claims often emerge long after the policy has expired, making assignment of damages to the appropriate party and to the time period covered by a particular policy difficult. In establishing reserves for these types of claims, management monitors the relevant facts concerning each claim, the current status of the legal environment, the social and political conditions and the claim history and trends within the Company and the industry. During 1995, the members of the pooling agreement changed the reserving methodology used to calculate Incurred But Not Reported (IBNR) reserves for asbestos and environmental claims. Prior to this change, IBNR reserves for asbestos and environmental claims were calculated by applying a factor to the case basis reserves. IBNR reserve levels produced with this methodology tended to vary from year to year due to the relatively small amount of case basis reserves carried for these types of claims. At December 31, 1995, a portion of the current IBNR reserve was allocated to these exposures to reflect estimated ultimate losses. No additional IBNR reserves were established. During 1995, Employers Mutual attempted to improve its disclosure of asbestos and environmental exposures related to its assumed reinsurance business, some of which is ceded to the Company's reinsurance subsidiary, by mailing supplemental questionnaires to its ceding reinsurers. Many of these reinsurers responded with more detailed information than they had previously provided. Using this additional information, Employers Mutual allocated a portion of the current bulk IBNR reserve to asbestos and environmental exposures. No additional bulk IBNR reserves were established on the business ceded to the Company's reinsurance subsidiary. When reviewing the disclosures contained in the following tables for asbestos and environmental claims activity, it should be noted that the incurred losses for 1995 are overstated due to the fact that the ending reserves are not reported on the same basis as the beginning reserves. As discussed above, the ending reserves reflect an increased allocation of IBNR reserves, and related settlement expense reserves, due to a change in reserving methodology and the receipt of additional information regarding the assumed reinsurance business. Based upon current facts, management believes the reserves established for asbestos and environmental related claims at December 31, 1995 are adequate. Although future changes in the legal and political environment may result in adjustments to these reserves, management believes any adjustments will not have a material impact on the financial condition or operations of the Company. ASBESTOS CLAIMS The Company's asbestos claim activity primarily relates to bodily injury claims where a former insured has been named as one of multiple defendants covering exposure over many years. The following table presents selected data on asbestos related losses and settlement expenses incurred and reserves outstanding for the Company: Year ended December 31, ------------------------------- 1995 1994 1993 ---------- ---------- ---------- Total losses incurred ....................... $ 336,899 $ 210,776 $ 198,267 Total settlement expenses incurred .......... (31,667) 9,750 (3,299) ---------- ---------- ---------- Total losses and settlement expenses incurred ................................ $ 305,232 $ 270,526 $ 194,968 ========== ========== ========== Loss reserves ............................... $ 581,549 $ 255,799 $ 49,161 Settlement expense reserves ................. 32,117 70,286 16,616 ---------- ---------- ---------- Total loss and settlement expense reserves $ 613,666 $ 326,085 $ 65,777 ========== ========== ========== Number of outstanding claims ................ 71 70 39 ========== ========== ========== The incurred and reserve amounts for 1995 reflect the change in reserving methodology and the receipt of additional information on the assumed reinsurance business as previously noted. The incurred and reserve amounts for 1994 reflect a workers' compensation claim involving an employee of an insured who alleges exposure to asbestos. The insured asserts that the employee was not exposed to asbestos while in their employment. While the Company has established a loss reserve for this claim, management does not anticipate a workers' compensation award being upheld for the employee. The increase in the number of outstanding claims in 1994 is primarily due to an insured being named as one of several defendants in a case involving twenty claimants who were allegedly exposed to asbestos. The Company's initial investigation failed to find a link between the claimants and our insured. Management does not expect to have a large exposure and has established nominal reserve amounts related to these claims. ENVIRONMENTAL CLAIMS The Company's environmental claims activity is predominately from hazardous waste and pollution-related claims. The parties to the pooling agreement have not written primary coverage for the major oil or chemical companies; the greatest exposure arises out of commercial general liability and umbrella policies issued to municipalities during the 1970s which allegedly cover contamination emanating from closed landfills. The remaining exposure is for claims from small regional operations or local businesses involved with disposing wastes at dump sites or having pollution on their own property due to hazardous material use or leaking underground storage tanks. These insureds include small manufacturing operations, tool makers, automobile dealerships, contractors, gasoline stations and real estate developers. Claims related to misdeliveries or minor spills of petroleum products covered under properly endorsed commercial auto policies are not considered environmental claims since coverage is normally not disputed, damages are readily determinable and settlement normally occurs over a short period of time. The following table presents selected data on environmental losses and settlement expenses incurred and reserves outstanding for the Company. Year ended December 31, ---------------------------------- 1995 1994 1993 ---------- ---------- ---------- Total losses incurred .................... $ 892,250 $ (30,130) $ 292,440 Total settlement expenses incurred ....... 185,412 37,359 88,847 ---------- ---------- ---------- Total losses and settlement expenses incurred ............................. $1,077,662 $ 7,229 $ 381,287 ========== ========== ========== Loss reserves ............................ $1,109,072 $ 258,524 $ 316,341 Settlement expense reserves .............. 345,897 165,198 168,615 ---------- ---------- ---------- Total loss and settlement expense reserves ............................. $1,454,969 $ 423,722 $ 484,956 ========== ========== ========== Number of outstanding claims ............. 58 46 42 ========== ========== ========== The incurred and reserve amounts for 1995 reflect the change in reserving methodology and the receipt of additional information on the assumed reinsurance business as previously noted. The negative incurred loss amount in 1994 reflects the settlement of several claims for less than the reserves carried and a reduction in the amount of reserves carried for several other claims. Included in the above table at December 31, 1995 is one closed landfill which involves six policyholders. Coverage is being disputed in 57 of the 58 claims which were outstanding at December 31, 1995. The coverage disputes relate to claims involving the removal of underground storage tanks or the clean up of (i) underground storage tank sites, (ii) landfills based on ownership of the landfill or the generation of waste disposed of at landfills or (iii) insured property. EXCESS AND SURPLUS LINES INSURANCE AGENCY - ----------------------------------------- The excess and surplus lines insurance agency provides access to the excess and surplus lines markets through independent agents and managing general agents and represents several major excess and surplus lines companies, including Lloyd's of London. Lines of insurance handled range from relatively straight forward property and casualty insurance to the more exotic hole-in-one, kidnap and ransom, ocean marine, aircraft and professional liability lines. Income is derived from fees and commissions and not from underwriting the risk. INVESTMENTS - ----------- The Company's investments are presented in conformity with SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities." Securities classified as held-to-maturity are purchased with the intent and ability to be held to maturity and are carried at amortized cost. Unrealized holding gains and losses on securities held-to-maturity are not reflected in the financial statements. All other securities have been classified as securities available-for-sale and are carried at market value, with unrealized holding gains and losses reported as a separate component of stockholders' equity, net of tax. At December 31, 1995, approximately 91 percent of the Company's bonds were invested in government or government agency issued securities. A variety of maturities are maintained in the Company's portfolio to assure adequate liquidity. The maturity structure of bond investments is also established by the relative attractiveness of yields on short, intermediate, and long-term bonds. The Company does not invest in any high-yield debt investments (commonly referred to as junk bonds). During 1995, the Company invested $13,550,000 of short-term funds and maturing U.S. Treasury Bills into mutual funds invested in equity securities. The overall liquidity position of the Company was not affected by these investments. In November of 1995 the Financial Accounting Standards Board issued a special report titled "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." This report contained a provision that allowed entities a one-time option to reassess the appropriateness of the classifications of all securities held and to reclassify securities from the held-to-maturity category without calling into question the intent of that enterprise to hold other debt securities to maturity in the future. The Company elected to take advantage of this option and reclassified $80,534,719 of municipal and corporate bonds from the held- to-maturity category to the available-for-sale category in the fourth quarter of 1995 in order to achieve more flexibility in its investment portfolio. Investments of the Company's insurance subsidiaries are subject to the insurance laws of the state of their incorporation. These laws prescribe the kind, quality and concentration of investments which may be made by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks and real estate mortgages. The Company believes it is in compliance with these laws. Failure to comply could result in administrative supervision. The National Association of Insurance Commissioners (NAIC) is in the process of developing model legislation to govern insurance company investments. An exposure draft was released in August of 1994 and a model law is expected to be ratified by the NAIC in 1996. This model law is not expected to have a material impact on the operations of the Company's insurance subsidiaries. The investments of the Company's subsidiaries are supervised by the investment committee of each subsidiaries' respective board of directors. The investments of the parent company are supervised by the investment committee of the Board of Directors. The bond portfolios for each of the companies are managed by an internal staff which is composed of employees of Employers Mutual. The mutual fund equity portfolios of the property and casualty insurance subsidiaries are managed by outside fund managers. Investment expenses are based on actual expenses incurred plus an allocation of other investment expenses incurred by Employers Mutual, which is based on a weighted average of total invested assets and number of investment transactions of each subsidiary. The following table shows the composition of the Company's investment portfolio (at amortized cost), by type of security, as of December 31, 1995 and 1994. In the Company's consolidated financial statements, securities held-to-maturity are carried at amortized cost; securities available-for-sale are carried at market value. Year ended December 31, -------------------------------------------- 1995 1994 --------------------- --------------------- Amortized Amortized cost Percent cost Percent ------------ ------- ------------ ------- Securities held-to-maturity: Fixed maturity securities: U.S. treasury securities and obligations of U.S. government corporations and agencies ............. $115,512,952 32.0% $102,480,740 30.4% Obligations of states and political subdivisions ... 37,972,295 10.6 78,423,605 23.2 Debt securities issued by foreign governments ...... - - 583,309 .2 Public utilities ........... - - 8,622,154 2.5 Corporate securities ....... - - 13,052,550 3.9 Mortgage-backed securities . 37,955,569 10.5 40,487,362 12.0 ------------ ------- ------------ ------- Total securities held- to-maturity ............ 191,440,816 53.1 243,649,720 72.2 ------------ ------- ------------ ------- Securities available-for-sale: Fixed maturity securities: U.S. treasury securities ... - - 15,835,019 4.7 Obligations of states and political subdivisions ... 108,241,811 30.0 55,274,052 16.4 Foreign governments ........ 1,996,716 .6 1,994,980 .6 Public utilities ........... 9,458,349 2.6 - - Corporate securities ....... 17,233,563 4.8 4,250,000 1.3 Other debt securities ...... 169,500 - 454,941 .1 ------------ ------- ------------ ------- Total fixed maturity securities ............. 137,099,939 38.0 77,808,992 23.1 Equity securities ............ 14,771,422 4.1 - - ------------ ------- ------------ ------- Total securities available-for-sale ..... 151,871,361 42.1 77,808,992 23.1 ------------ ------- ------------ ------- Short-term investments ......... 17,271,798 4.8 16,029,426 4.7 ------------ ------- ------------ ------- Total investments ........ $360,583,975 100.0% $337,488,138 100.0% ============ ======= ============ ======= Fixed maturity securities held by the Company generally have an investment quality rating of "A" or better by independent rating agencies. The following table shows the composition of the Company's fixed maturity securities, by rating, as of December 31, 1995. Securities Securities held-to-maturity available-for-sale (at amortized cost) (at market value) --------------------- --------------------- Amount Percent Amount Percent ------------ ------- ------------ ------- Rating(1) Aaa ..................... $191,440,816 100.0% $ 28,012,917 19.7% Aa ...................... - - 60,521,085 42.5 A ....................... - - 50,961,701 35.8 Baa ..................... - - 2,427,366 1.7 Ba ...................... - - 437,500 .3 ------------ ------- ------------ ------- Total fixed maturities $191,440,816 100.0% $142,360,569 100.0% ============ ======= ============ ======= (1) Ratings for preferred stocks and fixed maturity securities with initial maturities greater than one year are assigned by Moody's Investor's Services, Inc. Moody's rating process seeks to evaluate the quality of a security by examining the factors that affect returns to investors. Moody's ratings are based on quantitative and qualitative factors, as well as the economic, social and political environment in which the issuing entity exists. The quantitative factors include debt coverage, sales and income growth, cash flows and liquidity ratios. Qualitative factors include management quality, access to capital markets and the quality of earnings and balance sheet items. Ratings for securities with initial maturities less than one year are based on an evaluation of the underlying assets or the credit rating of the issuer's parent company. The amortized cost and estimated market value of fixed maturity securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Estimated Amortized market cost value ------------ ------------ Securities held-to-maturity: Due in one year or less ................... $ 19,002,127 $ 19,143,485 Due after one year through five years ..... 67,912,517 71,776,690 Due after five years through ten years .... 62,095,274 67,615,966 Due after ten years ....................... 4,475,329 4,890,645 Mortgage-backed securities ................ 37,955,569 39,885,962 ------------ ------------ Totals .................................. $191,440,816 $203,312,748 ============ ============ Securities available-for-sale: Due in one year or less ................... $ 4,661,697 $ 4,706,611 Due after one year through five years ..... 51,336,077 51,891,447 Due after five years through ten years .... 49,477,831 52,246,301 Due after ten years ....................... 31,624,334 33,516,210 ------------ ------------ Totals .................................. $137,099,939 $142,360,569 ============ ============ The mortgage-backed securities shown in the above table include $20,568,206 of securities issued by government corporations and agencies and $17,387,363 of collateralized mortgage obligations (CMOs). CMOs are securities backed by mortgages on real estate which come due at various times. The Company has attempted to minimize the prepayment risks associated with mortgage-backed securities by not investing in "principal only" and "interest only" CMOs. The CMOs that the Company has invested in are designed to reduce the risk of prepayment by providing predictable principal payment schedules within a designated range of prepayments. Investment yields may vary from those anticipated due to changes in prepayment patterns of the underlying collateral. Investment results of the Company for the periods indicated are shown in the following table: Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Average invested assets (1) ........ $349,036,057 $319,475,663 $306,387,058 Investment income (2) .............. 23,173,794 20,929,680 20,779,951 Average yield ...................... 6.64% 6.55% 6.78% Realized investment gains .......... $ 1,043,730 $ 519,567 $ 684,445 (1) Average of the aggregate invested amounts (amortized cost) at the beginning and end of the year. (2) Investment income is net of investment expenses and does not include realized gains or provision for income taxes. EMPLOYEES - --------- EMC Insurance Group Inc. has no employees of its own, although approximately 13 employees of Employers Mutual perform administrative duties on a part-time basis. Otherwise, the Company's business activities are conducted by employees of Employers Mutual, the nonstandard risk automobile subsidiary, and one of the property and casualty insurance subsidiaries, which have 1,552, 13 and 69 employees, respectively. The property and casualty insurance subsidiaries share the costs associated with the pooling agreement in accordance with their pool participation percentages. See "Property and Casualty Insurance - Pooling Agreement." REGULATION - ---------- The Company's insurance subsidiaries are subject to extensive regulation and supervision by their home states, as well as those in which they do business. The purpose of such regulation and supervision is primarily to provide safeguards for policyholders rather than to protect the interests of stockholders. The insurance laws of the various states establish regulatory agencies with broad administrative powers, including the power to grant or revoke operating licenses and to regulate trade practices, investments, premium rates, deposits of securities, the form and content of financial statements and insurance policies, accounting practices and the maintenance of specified reserves and capital for the protection of policyholders. Premium rate regulation varies greatly among jurisdictions and lines of insurance. In most states in which the Company's subsidiaries write insurance, premium rates for their lines of insurance are subject to either prior approval or limited review upon implementation. States require rates for property and casualty insurance that are adequate, not excessive, and not unfairly discriminatory. The Company's insurance subsidiaries are required to file detailed annual reports with the appropriate regulatory agency in each state where they do business based on applicable statutory regulations, which differ from generally accepted accounting principles. Their businesses and accounts are subject to examination by such agencies at any time. Since EMC Insurance Group Inc. and Employers Mutual are domiciled in Iowa, the State of Iowa exercises principal regulatory supervision, and Iowa law requires periodic examination. The Company's insurance subsidiaries are subject to examination by state insurance departments on a periodic basis as applicable law requires. State laws governing insurance holding companies also impose standards on certain transactions with related companies, which include, among other requirements, that all transactions be fair and reasonable and that an insurer's surplus as regards policyholders be reasonable and adequate in relation to its liabilities. Under Iowa law, dividends or distributions made by registered insurers are restricted in amount and may be subject to approval from the Iowa Commissioner of Insurance. "Extraordinary" dividends or distributions are subject to prior approval and are defined as dividends or distributions which exceed the greater of 10 percent of statutory surplus as regards policyholders as of the preceding December 31, or net income of the preceding calendar year on a statutory basis. Both Illinois and North Dakota impose restrictions which are similar to those of Iowa on the payment of dividends and distributions. At December 31, 1995, $18,326,542 was available for distribution in 1996 to EMC Insurance Group Inc. without prior approval. See note 7 of Notes to Consolidated Financial Statements under Item 8 of this Form 10-K. Under the insurance laws of all states in which the Company's insurance subsidiaries and Employers Mutual operate, insurers can be assessed up to prescribed limits for policyholder losses occasioned by the insolvency or liquidation of other insurance companies. Under these laws, the extent of any future assessments against the Company is uncertain. Most laws do provide, however, that an assessment may be excused or deferred if it would threaten a solvent insurer's financial strength. Such assessments totaled ($2,099), $128,576 and $86,200 in 1995, 1994 and 1993, respectively. The NAIC utilizes a risk-based capital model to help state regulators assess the capital adequacy of insurance companies and identify property/casualty insurers that are in (or are perceived as approaching) financial difficulty by establishing minimum capital needs based on the risks applicable to the operations of the individual insurer. The risk-based capital requirements for property and casualty insurance companies measure three major areas of risk: asset risk, credit risk and underwriting risk. Companies having less statutory surplus than required by the risk-based capital requirements are subject to varying degrees of regulatory scrutiny and intervention, depending on the severity of the inadequacy. The Company's insurance subsidiaries' ratio of total adjusted capital to risk-based capital at December 31, 1995 is well in excess of the minimum level required. ITEM 2. PROPERTIES. - ------- ----------- Lease costs of the Company's two office facilities in West Des Moines, Iowa total approximately $71,000 and $31,000 annually. These leases expire March 31, 1998 and November 30, 1998, respectively. Lease costs of the Company's office facilities in Oak Brook, Illinois, and Bismarck, North Dakota, which total approximately $256,000 and $125,000 annually, are included as expenses under the pooling agreement. Expenses of office facilities owned and leased by Employers Mutual are borne by the parties to the pooling agreement, less the rent received from the space used and paid for by non-insurance subsidiaries and outside tenants. See "Property and Casualty Insurance - Pooling Agreement" under Item 1 of this Form 10-K. ITEM 3. LEGAL PROCEEDINGS. - ------- ------------------ The Company and Employers Mutual and its other subsidiaries are parties to numerous lawsuits arising in the normal course of the insurance business. The Company believes that the resolution of these lawsuits will not have a material adverse effect on its financial condition or its results of operations. The companies involved have reserves which are believed adequate to cover any potential liabilities arising out of all such pending or threatened proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------- ---------------------------------------------------- None. PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED - ------- ------------------------------------------------- STOCKHOLDER MATTERS. -------------------- The Company's common stock is traded on the NASDAQ National Market System under the symbol EMCI. The following table shows the range of high and low bid quotations and dividends paid for each quarter within the two most recent years. Over-the- counter market quotations may reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. 1995 1994 ---------------------------- ---------------------------- High Low Dividends High Low Dividends ------- ------- --------- ------- ------- --------- 1st Quarter $10 7/8 $ 9 1/2 $.13 $ 9 3/4 $ 8 1/2 $.13 2nd Quarter 12 9 3/4 .13 10 8 1/2 .13 3rd Quarter 15 1/4 11 1/2 .13 9 1/2 8 1/2 .13 4th Quarter 14 12 .14 10 3/4 8 3/4 .13 At December 31 13 3/4 9 1/2 On March 1, 1996, there were approximately 1,215 shareholders of the Company's common stock. There are certain regulatory restrictions relating to the payment of dividends by the Company's insurance subsidiaries (see note 7 of Notes to Consolidated Financial Statements under Item 8 of this Form 10-K). It is the present intention of the Company's Board of Directors to declare quarterly cash dividends, but the amount and timing thereof, if any, is to be determined by the Board of Directors at its discretion. A dividend reinvestment and common stock purchase plan provides stockholders with the option of receiving additional shares of common stock instead of cash dividends. Participants may also purchase additional shares of common stock without incurring broker commissions by making optional cash contributions to the Plan. See note 15(a) of Notes to Consolidated Financial Statements under Item 8 of this Form 10-K. During 1995 and 1994, Employers Mutual elected to receive 50 percent of its dividends in common stock under this plan.
ITEM 6. SELECTED FINANCIAL DATA. - ------- ------------------------ Year ended December 31, - --------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 -------- -------- -------- -------- -------- ---------------- -------- -------- -------- (In thousands, except per share amounts) INCOME STATEMENT DATA Insurance premiums earned ............ $162,266 $164,829 $156,438 $147,410 $113,419 $101,323 $ 91,728 $ 88,598 $ 95,531 $ 98,456 Investment income, net ............... 23,174 20,930 20,780 21,540 20,202 19,884 19,309 16,623 13,632 13,221 Realized investment gains ............ 1,043 520 684 384 65 48 257 36 177 68 Other income ......................... 344 434 259 - - - - - - 11 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total revenues .................. 186,827 186,713 178,161 169,334 133,686 121,255 111,294 105,257 109,340 111,756 Losses and expenses .................. 162,511 168,036 169,142 168,359 123,254 110,415 102,517 89,795 96,612 101,097 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes ........... 24,316 18,677 9,019 975 10,432 10,840 8,777 15,462 12,728 10,659 Income taxes ......................... 6,967 5,171 1,885 759 3,124 2,894 2,055 3,920 2,271 3,917 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Income from continuing operations .... 17,349 13,506 7,134 216 7,308 7,946 6,722 11,542 10,457 6,742 Income from discontinued operations .. - - - - 1,853 319 274 263 225 216 Income from accounting changes ....... - - 2,621 - - - - - - - -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net income ..................... $ 17,349 $ 13,506 $ 9,755 $ 216 $ 9,161 $ 8,265 $ 6,996 $ 11,805 $ 10,682 $ 6,958 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Earnings per common share: Income from continuing operations .. $ 1.62 $ 1.29 $ .70 $ .02 $ .73 $ .80 $ .71 $ 1.29 $ 1.23 $ .80 Income from discontinued operations - - - - .18 .03 .03 .03 .03 .03 Income from accounting changes ..... - - .26 - - - - - - - -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total .......................... $ 1.62 $ 1.29 $ .96 $ .02 $ .91 $ .83 $ .74 $ 1.32 $ 1.26 $ .83 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Premiums earned by segment: Property and casualty .............. $116,439 $115,412 $109,585 $109,139 $ 78,413 $ 70,597 $ 62,517 $ 54,178 $ 51,534 $ 48,294 Reinsurance ........................ 35,826 37,256 33,324 26,615 25,009 20,696 18,621 21,417 29,808 40,068 Nonstandard risk automobile ........ 10,001 12,161 13,529 11,656 9,997 10,030 10,590 13,003 14,189 10,094 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total .......................... $162,266 $164,829 $156,438 $147,410 $113,419 $101,323 $ 91,728 $ 88,598 $ 95,531 $ 98,456 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== BALANCE SHEET DATA Total assets ......................... $412,881 $387,370 $368,936 $372,807 $311,001 $296,126 $284,396 $266,812 $235,435 $204,187 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Stockholders' equity ................. $136,889 $116,727 $109,634 $100,911 $105,144 $100,615 $ 95,911 $ 89,604 $ 78,240 $ 70,616 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== OTHER DATA Average return on equity ............. 13.7% 11.9% 9.3% .2% 8.9% 8.4% 7.5% 14.1% 14.4% 9.8% ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
ITEM 6. SELECTED FINANCIAL DATA (continued) - ------- ------------------------ Year ended December 31, --------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 -------- -------- -------- -------- -------- -------- -------- -------- -------- ------ (In thousands, except per share amounts) Book value per share ................. $ 12.66 $ 11.03 $ 10.63 $ 9.98 $ 10.47 $ 10.04 $ 9.82 $ 9.65 $ 9.01 $ 8.39 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Dividends paid per share ............. $ .53 $ .52 $ .52 $ .52 $ .52 $ .52 $ .52 $ .49 $ .48 $ .48 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Property and casualty segment pool percentage .................... 22% 22% 22% 22% 17% 17% 17% 17% 17% 17% ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Closing stock price .................. $ 13 3/4 $ 9 1/2 $ 9 1/2 $ 8 1/2 $ 9 1/2 $ 6 7/8 $ 8 $ 7 3/4 $ 7 1/2 $ 10 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Net investment yield (pretax) ........ 6.64% 6.55% 6.78% 7.47% 7.99% 8.49% 8.75% 8.28% 8.03% 9.09% ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Cash dividends to closing stock price 3.9% 5.5% 5.5% 6.1% 5.5% 7.6% 6.5% 6.3% 6.4% 4.8% ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Common shares outstanding ............ 10,814 10,577 10,317 10,112 10,046 10,015 9,762 9,287 8,684 8,419 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Statutory combined ratio ............. 99.6% 101.3% 106.3% 113.9% 109.2% 109.5% 112.7% 98.7% 99.8% 102.5% ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL - ------- ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS. ------------------------------------ OVERVIEW EMC Insurance Group Inc. (the "Company"), an approximately 67 percent owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is an insurance holding company with operations in property and casualty insurance, reinsurance, nonstandard risk automobile insurance and an excess and surplus lines insurance agency. Property and casualty insurance is the most significant segment, representing 71.8 percent of consolidated premium income. The three property and casualty insurance subsidiaries of the Company and two subsidiaries of Employers Mutual are parties to reinsurance pooling agreements with Employers Mutual (collectively the "pooling agreement"). Under the terms of the pooling agreement, each company cedes to Employers Mutual all of its insurance business and assumes from Employers Mutual an amount equal to its participation in the pool. All losses, settlement expenses and other underwriting and administrative expenses, excluding the voluntary reinsurance business assumed by Employers Mutual from unaffiliated insurance companies, are prorated among the parties on the basis of participation in the pool. The aggregate participation of the Company's property and casualty insurance subsidiaries is 22 percent. Operations of the pool give rise to intercompany balances with Employers Mutual, which are settled on a quarterly basis. The investment activities and income tax liabilities of the pool participants are not subject to the pooling agreement. The purpose of the pooling agreement is to reduce the risk of an exposure insured by any of the pool participants by spreading it among all the companies. The pooling agreement produces a more uniform and stable underwriting result from year to year for all companies in the pool than might be experienced individually. In addition, each company benefits from the capacity of the entire pool, rather than being limited to policy exposures of a size commensurate with its own assets, and from the wide range of policy forms, lines of insurance written, rate filings and commission plans offered by each of the companies. A single set of reinsurance treaties is maintained for the protection of all six companies in the pool. The Company's reinsurance subsidiary assumes a 95 percent quota share portion of Employers Mutual's assumed reinsurance business, exclusive of certain reinsurance contracts. The reinsurance subsidiary receives 95 percent of all premiums and assumes 95 percent of all related losses and settlement expenses of this business. Since 1993, losses in excess of $1,000,000 per event are retained by Employers Mutual. The reinsurance subsidiary does not reinsure any of Employers Mutual's direct insurance business, nor any "involuntary" facility or pool business that Employers Mutual assumes pursuant to state law. In addition, the reinsurance subsidiary is not liable for credit risk in connection with the insolvency of any reinsurers of Employers Mutual. The Company's nonstandard risk automobile insurance subsidiary specializes in insuring private passenger automobile risks that are found to be unacceptable in the standard automobile insurance market. The excess and surplus lines insurance agency provides insurance agents access to the excess and surplus lines markets and also functions as managing underwriter for such lines for Employers Mutual and several of the pool members. CONSOLIDATED RESULTS OF OPERATIONS Operating results for the three years ended December 31, 1995 are as follows: ($ in thousands) 1995 1994 1993 -------- -------- -------- Premiums earned .......................... $162,266 $164,829 $156,438 Losses and settlement expenses ........... 108,152 116,944 120,355 Other expenses ........................... 54,359 51,092 48,787 -------- -------- -------- Underwriting loss ........................ (245) (3,207) (12,704) Net investment income .................... 23,174 20,930 20,780 Realized investment gains ................ 1,043 520 684 Other income ............................. 344 434 259 -------- -------- -------- Operating income before income taxes ..... $ 24,316 $ 18,677 $ 9,019 ======== ======== ======== Incurred losses and settlement expenses: Insured events of the current year ..... $123,877 $123,344 $119,896 (Decrease) increase in provision for insured events of prior years ........ (15,725) (6,400) 459 -------- -------- -------- Total losses and settlement expenses $108,152 $116,944 $120,355 ======== ======== ======== Catastrophe and storm losses ............. $ 6,603 $ 6,343 $ 8,952 ======== ======== ======== Operating income before income taxes has increased significantly over the last three years. This increase has been fueled by improved operating results in both the property and casualty insurance subsidiaries and the reinsurance subsidiary. The results for 1995 reflect a substantial improvement in the operations of the reinsurance subsidiary and continued strong performance by the property and casualty insurance subsidiaries, while the nonstandard risk automobile insurance subsidiary showed a decline. The results for 1994 reflect improved operating results in all segments, with the property and casualty insurance subsidiaries and the nonstandard risk automobile insurance subsidiary posting significant increases over 1993. Premium income declined slightly in 1995 after posting modest increases in 1994 and 1993. For the year 1995, a small production increase for the property and casualty insurance subsidiaries was more than offset by production decreases for the reinsurance and nonstandard risk automobile insurance subsidiaries. For the year 1994, production increases in the property and casualty insurance subsidiaries and the reinsurance subsidiary were partially offset by a production decrease in the nonstandard risk automobile insurance subsidiary. Losses and settlement expenses have declined steadily over the last three years, reflecting favorable development in the provision for insured events of prior years and a decrease in catastrophe and storm losses. The majority of the favorable development in the provision for insured events of prior years has come from the property and casualty insurance subsidiaries, which have benefited from state reform measures in workers' compensation insurance and various cost control functions implemented by Employers Mutual to minimize losses. Favorable development has also been experienced in the reinsurance subsidiary and the nonstandard risk auto insurance subsidiary, but to a lesser degree. Catastrophe and storm losses increased only slightly in 1995, despite a substantial increase in hurricane and storm activity. This small increase is the result of careful underwriting and a reduction of coastal exposures in the assumed reinsurance business. Other expenses have increased slightly over the last three years. These increases are primarily attributable to the property and casualty insurance subsidiaries and reflect higher commission rates associated with writing more property insurance and additional expenses associated with the various cost control functions that have been implemented to control losses. Investment income increased substantially in 1995 after showing modest growth in 1994 and declining in 1993. The increase for 1995 is primarily due to a larger invested asset base earning income. The amounts for 1994 and 1993 were impacted by the transfer of $24,853,000 to Employers Mutual in 1993 in connection with changes to the property and casualty insurance subsidiaries' pooling agreement and the reinsurance subsidiary's quota share agreement. Realized gains on investments increased significantly in 1995, reflecting profits recognized on the sale of mutual funds invested in equity securities. The amounts for 1994 and 1993 are primarily the result of calls and prepayments on fixed maturity securities. Other income amounts represent the amortization of deferred income related to reserve discounting on the 1993 commutation of one of the reinsurance subsidiary's reinsurance contracts under the quota share agreement. Effective January 1, 1993 the Company adopted two new accounting standards and implemented an accounting change which resulted in an increase in net income of $2,621,000 ($.26 per share). Following is a brief explanation of each item: * The Company adopted Statement of Financial Accounting Standards (SFAS) 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" by recognizing the transition obligation as a cumulative effect adjustment to income. The Company's transition obligation amounted to $2,166,000 ($.21 per share), net of income tax benefits of $1,116,000. * The Company adopted SFAS 109, "Accounting for Income Taxes" as a cumulative effect adjustment to income. The Company recognized a benefit of $5,595,000 ($.55 per share), net of a valuation allowance of $1,000,000. * The property and casualty insurance subsidiaries changed their method of calculating unearned premiums from the monthly pro rata method to the daily method. This change resulted in a cumulative increase in unearned premiums of $1,110,000 and a decrease in income of $808,000 ($.08 per share), net of income tax benefits of $302,000. SEGMENT RESULTS PROPERTY AND CASUALTY INSURANCE Operating results for the three years ended December 31, 1995 are as follows: ($ in thousands) 1995 1994 1993 -------- -------- -------- Premiums earned .......................... $116,439 $115,412 $109,585 Losses and settlement expenses ........... 74,926 77,872 79,777 Other expenses ........................... 40,030 36,606 33,621 -------- -------- -------- Underwriting gain (loss) ................. 1,483 934 (3,813) Net investment income .................... 15,428 14,080 13,243 Realized investment gains ................ 1,027 334 405 -------- -------- -------- Operating income before income taxes ..... $ 17,938 $ 15,348 $ 9,835 ======== ======== ======== Incurred losses and settlement expenses: Insured events of the current year ..... $ 87,411 $ 84,204 $ 81,355 Decrease in provision for insured events of prior years ................ (12,485) (6,332) (1,578) -------- -------- -------- Total losses and settlement expenses $ 74,926 $ 77,872 $ 79,777 ======== ======== ======== Catastrophe and storm losses ............. $ 5,671 $ 4,919 $ 3,811 ======== ======== ======== Premium income has increased over the last three years, but has been limited by rate competition and the shift of large commercial insureds to alternative risk mechanisms. Rate levels declined in 1995 in response to competitive pressures and favorable experience. In spite of this, rate adequacy deteriorated only slightly due to careful underwriting, significant reform measures implemented by several states to control the administrative costs of workers' compensation claims and internal cost management programs. New marketing programs implemented in 1994, and expanded in 1995, have increased the amount of property insurance written and have also helped to highlight the subsidiaries' other products. During 1995, production increases in direct (controlled) business were partially offset by decreases in mandatory assigned risk programs, resulting in a small increase in total premiums earned. The decrease in the mandatory assigned risk premiums is looked at favorably as losses associated with this type of business are generally higher than losses from direct business. Direct business production for 1996 is not expected to increase significantly as the market conditions that have limited production over the last several years are not expected to change. Workers' compensation production for 1995 was hindered by rate reductions, including a 10.6% rate reduction in the State of Iowa, the pool's largest producer of workers' compensation business. During 1994, 11 states implemented rate reductions and 14 states implemented rate increases for workers' compensation insurance; however, the impact on production was not material as they were enacted at various times throughout the year and they generally offset each other. Underwriting results have improved significantly over the last three years, reflecting favorable development in the provision for insured events of prior years. This favorable development includes savings associated with reform measures implemented by several states to control administrative costs for workers' compensation insurance as well as various cost control functions that have been implemented by Employers Mutual to control losses. The property and casualty insurance subsidiaries have historically experienced favorable development in their reserves and current reserving practices have not been relaxed; however, the level of favorable development experienced in 1995 is not expected to continue. Underwriting results for 1993 were negatively impacted by reserve strengthening in the workers' compensation line of business related to greater than expected increases in the price and usage of drugs, medical durables and medical services. Other expenses have increased over the last three years due to higher commission rates associated with property business and additional expenses associated with the various cost control functions that have been implemented to control losses. Investment income has grown steadily over the last three years, primarily due to an increase in the invested asset base. The amounts for 1995 and 1994 reflect interest income earned on $13,148,000 received from Employers Mutual in 1994 in connection with the gross-up of reserve amounts associated with the National Workers' Compensation Reinsurance Pool at December 31, 1993. REINSURANCE Operating results for the three years ended December 31, 1995 are as follows: ($ in thousands) 1995 1994 1993 -------- -------- -------- Premiums earned ............................ $ 35,826 $ 37,256 $ 33,324 Losses and settlement expenses ............. 23,744 30,565 27,872 Other expenses ............................. 11,584 11,408 11,492 -------- -------- -------- Underwriting gain (loss) ................... 498 (4,717) (6,040) Net investment income ...................... 6,068 5,354 6,090 Realized investment gains .................. 13 116 201 Other income ............................... 344 434 259 -------- -------- -------- Operating income before income taxes ....... $ 6,923 $ 1,187 $ 510 ======== ======== ======== Incurred losses and settlement expenses: Insured events of the current year ....... $ 26,668 $ 29,270 $ 25,359 (Decrease) increase in provision for insured events of prior years .......... (2,924) 1,295 2,513 -------- -------- -------- Total losses and settlement expenses $ 23,744 $ 30,565 $ 27,872 ======== ======== ======== Catastrophe losses ......................... $ 932 $ 1,424 $ 5,141 ======== ======== ======== Premium income declined in 1995 after increasing in both 1994 and 1993. The majority of the decrease in 1995 production can be attributed to the cancellation of four large national pro rata treaties that had experienced poor underwriting results over the last several years. During 1995, more emphasis was placed upon writing excess of loss business and on increasing participation on existing contracts that had favorable terms. This movement towards excess of loss business was prompted by the continued deterioration of pro rata rates and greater control over the pricing of excess of loss business. While pro rata business continued to be written, the emphasis was on local and regional accounts. Some national account pro rata business was retained, but the terms provide appropriate limitations and protection for catastrophe exposures. The reinsurance subsidiary continues to emphasize profitability over production and therefore cancelled several unprofitable aircraft and marine accounts at the end of 1995. Despite these cancellations, premium volume for 1996 is expected to increase. Underwriting results have improved significantly over the last three years, reflecting a decline in catastrophe losses and favorable development in the provision for insured events of prior years. The large decrease in catastrophe losses in 1994 was partially offset by an increase in crop hail losses and a deterioration of results in the pro rata business. Results for 1993 reflect $1,678,000 of underwriting losses associated with two reinsurance contracts that were commuted in 1993. Investment income increased in 1995 after declining in 1994 and 1993 due to the transfer of $20,426,000 to Employers Mutual in 1993 in connection with the commutation of two reinsurance contracts. The increase for 1995 is primarily due to an increase in the invested asset balance. Under the terms of the amended quota share agreement with Employers Mutual, losses in excess of $1,000,000 per event are retained by Employers Mutual. The reinsurance subsidiary pays an annual override commission to Employers Mutual for this additional protection, which totaled $1,913,000, $2,095,000 and $1,809,000 in 1995, 1994 and 1993, respectively. The reinsurance subsidiary also pays for 95 percent of the outside protection Employers Mutual purchases to protect itself from catastrophic losses on the assumed reinsurance business. This cost is recorded as a reduction to the premiums received by the reinsurance subsidiary and amounted to $1,984,000, $2,836,000 and $2,439,000 in 1995, 1994 and 1993, respectively. Losses retained by Employers Mutual for the three years ended 1995, 1994 and 1993 amounted to $1,103,000, $7,020,000 and $615,000, respectively. The reinsurance subsidiary has an aggregate excess of loss treaty with Employers Mutual which provides protection from a large accumulation of retentions resulting from multiple catastrophes in any one year. The coverage provided is $2,000,000, excess of $3,000,000 ($2,500,000 in 1994 and 1993) aggregate loss retained, excess of $200,000 per event. Maximum recovery is limited to $2,000,000 ($4,000,000 in 1994 and 1993) per accident year. The reinsurance subsidiary recovered $0, $0 and $144,000 under this treaty and paid reinstatement premiums of $0, $0 and $208,000 in 1995, 1994 and 1993, respectively. Total premiums paid to Employers Mutual amounted to $500,000, $558,000 and $708,000 in 1995, 1994 and 1993, respectively. During 1994, the reinsurance subsidiary commuted all outstanding reinsurance balances ceded to Employers Mutual under catastrophe and aggregate excess of loss reinsurance treaties related to accident years 1991 through 1993. In connection with these commutations, the Company's assets and liabilities increased $687,000. There was no income effect from these commutations. Effective June 30, 1993, Employers Mutual commuted the portion of the quota share agreement that pertained to a casualty pool that is in a run-off position. In connection with this change in the quota share agreement, the Company's liabilities decreased $19,783,000 and invested assets decreased $17,806,000. The reserve discount amount of $1,977,000 was recorded as deferred income and is being amortized into operations over the estimated settlement period of the reserves, which is ten years. The amount recognized as income totaled $344,000, $434,000 and $259,000 in 1995, 1994 and 1993, respectively. Effective October 31, 1993, Employers Mutual commuted the portion of the quota share agreement that pertained to a voluntary pool that handled large "highly protected" risks. In connection with this change in the quota share agreement, the Company's liabilities decreased $3,827,000 and invested assets decreased $2,620,000. Employers Mutual reimbursed the Company $1,207,000 for commissions incurred to generate this business. No reserve discount was calculated as this business involved short-tail property coverage. NONSTANDARD RISK AUTOMOBILE INSURANCE Operating results for the three years ended December 31, 1995 are as follows: ($ in thousands) 1995 1994 1993 -------- -------- -------- Premiums earned ............................ $ 10,001 $ 12,161 $ 13,529 Losses and settlement expenses ............. 9,482 8,507 12,706 Other expenses ............................. 2,775 3,160 3,366 -------- -------- -------- Underwriting (loss) gain ................... (2,256) 494 (2,543) Net investment income ...................... 1,175 1,152 1,166 Realized investment gains .................. 3 75 109 -------- -------- -------- Operating (loss) income before income taxes $ (1,078) $ 1,721 $ (1,268) ======== ======== ======== Incurred losses and settlement expenses: Insured events of the current year ....... $ 9,798 $ 9,870 $ 13,182 Decrease in provision for insured events of prior years .................. (316) (1,363) (476) -------- -------- -------- Total losses and settlement expenses $ 9,482 $ 8,507 $ 12,706 ======== ======== ======== Premium income has declined substantially over the last two years after increasing in 1993. This decline is the result of intense competition for nonstandard auto business from both the standard and the nonstandard markets. The company has not reduced rates in order to retain business and, as a result, has experienced a significant reduction in premium volume. The company was approved for rate increases in the state of Nebraska in late 1995 and is in the process of applying for rate increases in the states of South Dakota and Iowa. The company expects to begin writing business in the state of Missouri in early 1996, which should help to offset the production decreases experienced in existing markets. The number of new applications received by the company has been increasing and management expects premium volume to improve in 1996. Underwriting results have fluctuated dramatically over the last three years. Results for 1995 were negatively impacted by an increase in both the frequency and severity of losses. Companies within the standard market have been retaining more of the marginal risks that previously had been passed on to the nonstandard market. As a result, the pool of potential insureds seeking nonstandard coverage is smaller and contains a larger percentage of high risk drivers. This has led to increased rate competition within the nonstandard market and an overall decline in the quality of the company's book of business. Underwriting results for 1994 reflect improved loss experience, favorable development in the provision for insured events of prior years and rate increases that were implemented in all states during the later part of 1993 and the first part of 1994. Results for 1993 were negatively impacted by increased loss frequency and severity associated with a new book of business and a strengthening of loss and settlement expense reserves. EXCESS AND SURPLUS LINES INSURANCE MANAGEMENT AGENCY Operating income before income taxes was $483,000, $505,000 and $103,000 for 1995, 1994 and 1993, respectively. The results for 1995 and 1994 reflect a new management plan put into effect which places more emphasis on writing excess and surplus lines business through Employers Mutual's agency force. Operating results for 1993 were negatively impacted by the termination of business with a large agency that had previously represented over 50 percent of this segment's volume. PARENT COMPANY Operating income before income taxes increased to $50,000 in 1995 from losses of $84,000 in 1994 and $161,000 in 1993. The improvement in 1995 and 1994 is primarily due to additional investment income that resulted from an increase in the invested asset balance. LOSS AND SETTLEMENT EXPENSE RESERVES Loss and settlement expense reserves are the Company's largest liability. Management continually reviews these reserves using a variety of statistical and actuarial techniques to analyze claim costs, frequency and severity data, and social and economic factors. Significant periods of time may elapse between the occurrence of an insured loss, the reporting of the loss and the settlement of the loss. During the loss settlement period, additional facts regarding individual claims become known, and accordingly, it often becomes necessary to refine and adjust the estimates of liability on a claim. Changes in reserve estimates are reflected in operating results in the year such changes are recorded. Estimating asbestos and environmental related reserves is very difficult due to many uncertainties surrounding these types of claims. Such uncertainties include the fact that the legal definition of asbestos and environmental damage is still evolving, the assignment of responsibility varies widely by state and claims often emerge long after the policy has expired, making assignment of damages to the appropriate party and to the time period covered by a particular policy difficult. In establishing reserves for these types of claims, management monitors the relevant facts concerning each claim, the current status of the legal environment, the social and political conditions and the claim history and trends within the Company and the industry. The Company's financial results have not been materially affected by losses associated with asbestos and environmental exposures. The Company's environmental claims activity is predominately from hazardous waste and pollution-related claims. The parties to the pooling agreement have not written primary coverage for the major oil or chemical companies; the greatest exposure arises out of commercial general liability and umbrella policies issued to municipalities during the 1970s which allegedly cover contamination emanating from closed landfills. The remaining exposure is for claims from small regional operations or local businesses involved with disposing wastes at dump sites or having pollution on their own property due to hazardous material use or leaking underground storage tanks. These insureds include small manufacturing operations, tool makers, automobile dealerships, contractors, gasoline stations and real estate developers. The Company's asbestos claims activity is predominately from insureds that have been named as one of multiple defendants covering exposure over many years. The Company has not found any evidence of injury as a result of exposure to the Company's insured's products during the policy periods. During 1995, the Company changed its methodology for establishing Incurred But Not Reported (IBNR) reserves for asbestos and environmental exposures related to the direct insurance business issued by the members of the pooling agreement. Prior to 1995, IBNR reserves were calculated by applying a factor to the case basis reserves. IBNR reserve levels produced with this methodology tended to vary from year to year due to the relatively small amount of case basis reserves carried for these types of claims. At December 31, 1995, the Company allocated a portion of the current IBNR reserve to these exposures to reflect estimated ultimate losses. No additional IBNR reserves were established for the direct insurance business. During 1995, Employers Mutual attempted to improve its disclosure of asbestos and environmental exposures related to its assumed reinsurance business, some of which is ceded to the Company's reinsurance subsidiary, by mailing supplemental questionnaires to its ceding reinsurers. Many of these reinsurers responded with more detailed information than they had previously provided. Using this additional information, Employers Mutual allocated a portion of the current bulk IBNR reserve to asbestos and environmental exposures. No additional bulk IBNR reserves were established on the business assumed by the Company's reinsurance subsidiary. LIQUIDITY AND INVESTMENTS The Company maintains a portion of the investment portfolio in relatively short-term and highly liquid investments to ensure the availability of funds to meet claims and expenses. The remainder of the investment portfolio is invested in securities with maturities that approximate the anticipated liabilities of the insurance issued. Net unrealized holding gains on fixed maturity securities available-for-sale totaled $3,472,000 at December 31, 1995. This compares to net unrealized holding losses of $1,317,000 at December 31, 1994 and net unrealized holding gains of $2,068,000 at December 31, 1993. Since the Company does not actively trade in the bond market, such fluctuations in the market value of these investments are not expected to have a material impact on the operations of the Company, as forced liquidations of investments are not anticipated. The Company closely monitors the bond market and makes appropriate adjustments in investment policy as changing conditions warrant. A valuation allowance was established in 1994 related to the tax benefits associated with the unrealized holding losses at December 31, 1994 due to the uncertainty concerning the future realization of these benefits. The majority of the Company's assets are invested in fixed maturities. These investments provide a substantial amount of income which supplements underwriting results and contributes to net earnings. As these investments mature the proceeds will be reinvested at current rates, which may be higher or lower than those now being earned; therefore, more or less investment income may be available to contribute to net earnings depending on the interest rate level. During 1995, the Company invested $13,550,000 of short-term funds and maturing U.S. Treasury Bills into mutual funds invested in equity securities. The overall liquidity position of the Company was not affected by these investments. Net unrealized holding gains on equity securities totaled $818,000 at December 31, 1995. In November of 1995 the Financial Accounting Standards Board issued a special report titled "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." This report contained a provision that allowed entities a one-time option to reassess the appropriateness of the classifications of all securities held and to reclassify securities from the held-to-maturity category without calling into question the intent of that enterprise to hold other debt securities to maturity in the future. The Company elected to take advantage of this option and reclassified $80,534,719 of municipal and corporate bonds from the held- to-maturity category to the available-for-sale category in the fourth quarter of 1995 in order to achieve more flexibility in its investment portfolio. The major ongoing sources of the Company's liquidity are insurance premium income, investment income and cash provided from maturing or liquidated investments. The principal outflows of cash are payments of claims, commissions, premium taxes, operating expenses, income taxes, dividends and investment purchases. During 1995, the Company generated positive cash flows from operations of $24,651,000. This compares to positive cash flows from operations of $39,006,000 in 1994, which included $13,148,000 related to the gross-up of reserve amounts associated with the National Workers' Compensation Reinsurance Pool. Negative operating cash flows of $8,794,000 in 1993 included $24,853,000 paid to Employers Mutual in connection with the change in the property and casualty insurance subsidiaries' pooling agreement relating to the voluntary assumed reinsurance business and the commutation of two reinsurance contracts under the reinsurance subsidiary's quota share agreement. CAPITAL RESOURCES As of December 31, 1995, the Company had no material commitments for capital expenditures. Insurance company operations require capital to support premium writings. The Company believes that its insurance company subsidiaries have sufficient capital to support their expected near-term writings. The Company's insurance agency operation does not require a large amount of capital. The National Association of Insurance Commissioners (NAIC) adopted certain risk-based capital standards for property and casualty insurance companies in 1994. Risk-based capital requirements attempt to measure minimum statutory capital needs based upon the risks in a company's mix of products and investment portfolio. The Company's insurance subsidiaries' ratio of total adjusted capital to risk-based capital at December 31, 1995 is well in excess of the minimum level required. A major source of cash flows for the Company is dividend payments from its subsidiaries. State insurance regulations restrict the maximum amount of dividends insurance companies can pay without prior regulatory approval. See note 7 of Notes to Consolidated Financial Statements for additional information regarding dividend restrictions. The Company collected $3,200,000, $3,068,000 and $860,000 of dividends from its insurance subsidiaries in 1995, 1994 and 1993, respectively and $1,000,000 from its insurance agency in 1995. The Company paid cash dividends to stockholders totaling $5,662,000, $5,422,000 and $5,303,000 in 1995, 1994 and 1993, respectively. For the last three years, Employers Mutual has received 50 percent of its dividends in common stock under the Company's dividend reinvestment and common stock purchase plan. IMPACT OF INFLATION Inflation has a widespread effect on the Company's results of operations, primarily through increased losses and settlement expenses. The Company considers inflation, including social inflation which reflects an increasingly litigious society and increasing jury awards, when setting reserve amounts. Premiums are also affected by inflation, although they are often restricted or delayed by competition and the regulatory rate-setting environment. DEVELOPMENTS IN INSURANCE REGULATION The NAIC is in the process of developing model legislation to govern insurance company investments. An exposure draft was released in August of 1994 and a model law is expected to be ratified by the NAIC in 1996. This model law is not expected to have a material impact on the operations of the Company's insurance subsidiaries. The NAIC is currently working on a project to codify statutory accounting principles. The goal of this project is to establish a uniform set of accounting rules and regulations that will be utilized by all insurance companies when preparing financial reports submitted to regulatory authorities. Issue papers documenting the NAIC's position on the proposed accounting treatment of many items have been released for comment; however, many complex and controversial issues have not been addressed at this time or are in the process of being reexamined by the NAIC. As a result, the Company is unable to determine what impact, if any, this project will have on the statutory surplus of its insurance subsidiaries when enacted. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS The 1995 Private Securities Litigation Reform Act provides issuers the opportunity to make cautionary statements regarding forward-looking statements. Accordingly, any forward-looking statement contained herein or in any other oral or written statement by the Company or any of its officers, directors or employees is qualified by the fact that actual results of the Company may differ materially from such statement due to the following important factors, among other risks and uncertainties inherent in the Company's business: catastrophic events, state insurance regulations, rate competition, adverse changes in interest rates and unforeseen losses with respect to loss and settlement expense reserves for unreported and reported claims, including asbestos and environmental claims. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ------- -------------------------------------------- Management's Responsibility for Financial Reporting The management of EMC Insurance Group Inc. and Subsidiaries is responsible for the preparation and for the integrity and objectivity of the accompanying financial statements and other financial information in this report. The financial statements have been prepared in accordance with generally accepted accounting principles and include amounts that are based on management's estimates and judgments where necessary. The accompanying financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. Their report appears elsewhere in this annual report. Management has established and maintains a system of internal controls that are designed to provide assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use, and the execution and recording of transactions in accordance with management's authorization. The system of internal controls provides for appropriate division of responsibility. Certain aspects of these systems and controls are tested periodically by the Company's internal auditors. Management considers the recommendations of its internal auditors and independent public accountants concerning the Company's internal controls and takes the necessary actions that are cost-effective in the circumstances to respond appropriately to the recommendations presented. Management believes that as of December 31, 1995, the Company's system of internal controls was adequate to accomplish the objectives described herein. The Audit Committee of the Board of Directors, composed solely of outside directors, met during the year with management and the independent accountants to review and discuss audit findings and other financial and accounting matters. The independent accountants and the internal auditors have free access to the Audit Committee, with and without management present, to discuss the results of their audit work. /s/ E.H. Creese - ------------------------------------ E.H. Creese, C.P.A. Senior Vice President, Treasurer and Chief Financial Officer Independent Auditor's Report The Board of Directors and Stockholders EMC Insurance Group Inc.: We have audited the accompanying consolidated balance sheets of EMC Insurance Group Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EMC Insurance Group Inc. and Subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in notes 1, 10, 11 and 13 to the consolidated financial statements, the Company changed its method of computing unearned premiums in 1993 and implemented the provisions of the Financial Accounting Standards Board's Statements No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions", No. 109, "Accounting for Income Taxes", and No. 115, "Accounting for Certain Investments in Debt and Equity Securities". /s/ KPMG Peat Marwick LLP Des Moines, Iowa February 20, 1996 EMC INSURANCE GROUP INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, -------------------------- 1995 1994 ------------ ------------ ASSETS Investments (note 10): Fixed maturities: Securities held-to-maturity, at amortized cost (market value $203,312,748 and $238,721,488) $191,440,816 $243,649,720 Securities available-for-sale, at market value (amortized cost $137,099,939 and $77,808,992) 142,360,569 76,492,396 Equity securities available-for-sale, at market value (cost $14,771,422 and $0) ............... 16,010,763 - Short-term investments, at cost ................. 17,271,798 16,029,426 ------------ ------------ Total investments .......................... 367,083,946 336,171,542 Cash .............................................. 1,198,436 1,258,221 Accrued investment income ......................... 5,749,619 5,560,633 Accounts receivable ............................... 726,181 1,280,550 Deferred policy acquisition costs ................. 8,714,769 8,393,635 Deferred income taxes (note 11) ................... 11,921,182 14,190,499 Intangible assets, including goodwill, at cost less accumulated amortization of $1,809,156 and $1,674,643 .................................. 1,748,664 1,883,177 Reinsurance receivables (note 3) .................. 12,916,943 14,935,048 Prepaid reinsurance premiums (note 3) ............. 1,805,881 2,121,033 Other assets ...................................... 1,015,352 1,575,540 ------------ ------------ Total assets ............................... $412,880,973 $387,369,878 ============ ============ See accompanying Notes to Consolidated Financial Statements. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, -------------------------- 1995 1994 ------------ ------------ LIABILITIES Losses and settlement expenses (notes 2,3,5 and 6) $205,422,109 $203,181,615 Unearned premiums (notes 2 and 3) ................. 48,767,147 47,672,570 Other policyholders' funds ........................ 3,593,328 3,102,609 Indebtedness to related party ..................... 428,463 937,356 Income taxes payable .............................. 2,538,669 1,736,000 Postretirement benefits (note 13) ................. 4,489,812 4,086,674 Deferred income (note 2) .......................... 940,009 1,283,662 Other liabilities ................................. 9,812,678 8,642,703 ------------ ------------ Total liabilities .......................... 275,992,215 270,643,189 ------------ ------------ STOCKHOLDERS' EQUITY (notes 7,8,10,14 and 15) Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding, 10,821,978 shares in 1995 and 10,587,629 shares in 1994 ........... 10,821,978 10,587,629 Additional paid-in capital ........................ 59,787,926 57,162,911 Unrealized holding gains (losses) on fixed maturity securities available-for-sale, net of tax ...................................... 3,472,016 (1,316,596) Unrealized holding gains on equity securities available-for-sale, net of tax .................. 817,965 - Retained earnings ................................. 62,089,294 50,402,812 Treasury stock, at cost (7,585 shares in 1995 and 10,931 shares in 1994) ...................... (100,421) (110,067) ------------ ------------ Total stockholders' equity ................. 136,888,758 116,726,689 ------------ ------------ Contingent liabilities (notes 3 and 17) Total liabilities and stockholders' equity $412,880,973 $387,369,878 ============ ============ See accompanying Notes to Consolidated Financial Statements. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Consolidated Statements of Income Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ REVENUES: Premiums earned (notes 2 and 3) ..... $162,266,250 $164,829,379 $156,437,538 Investment income, net (note 10) .... 23,173,794 20,929,680 20,779,951 Realized investment gains (note 10) 1,043,730 519,567 684,445 Other income (note 2) ............... 343,653 433,979 259,217 ------------ ------------ ------------ 186,827,427 186,712,605 178,161,151 ------------ ------------ ------------ LOSSES AND EXPENSES: Losses and settlement expenses (notes 2,3 and 5) ........ 108,152,278 116,944,054 120,355,299 Dividends to policyholders .......... 3,739,533 3,103,788 2,494,284 Amortization of deferred policy acquisition costs .......... 32,152,616 31,701,789 30,717,175 Other underwriting expenses ......... 18,467,091 16,286,206 15,575,257 ------------ ------------ ------------ 162,511,518 168,035,837 169,142,015 ------------ ------------ ------------ Income before income taxes and cumulative effect of changes in accounting principles .... 24,315,909 18,676,768 9,019,136 ------------ ------------ ------------ INCOME TAXES (note 11): Current ........................... 6,907,754 5,265,482 1,903,128 Deferred .......................... 59,327 (94,441) (18,027) ------------ ------------ ------------ 6,967,081 5,171,041 1,885,101 ------------ ------------ ------------ Income before cumulative effect of changes in accounting principles .................. 17,348,828 13,505,727 7,134,035 CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES FOR: Income taxes (note 11) .......... - - 5,595,177 Postretirement benefits (note 13) - - (2,165,900) Unearned premiums (note 1) ...... - - (807,933) ------------ ------------ ------------ NET INCOME .................... $ 17,348,828 $ 13,505,727 $ 9,755,379 ============ ============ ============ See accompanying Notes to Consolidated Financial Statements. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Consolidated Statements of Income, Continued Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ EARNINGS PER COMMON SHARE: Income before cumulative effect of changes in accounting principles $ 1.62 $ 1.29 $ .70 Cumulative effect of changes in accounting principles for: Income taxes ................. - - .55 Postretirement benefits ...... - - (.21) Unearned premiums ............ - - (.08) ------------ ------------ ------------ Total ...................... $ 1.62 $ 1.29 $ .96 ============ ============ ============ Average number of shares outstanding 10,685,344 10,431,925 10,197,999 ============ ============ ============ Pro forma amounts, assuming retroactive application of new method of calculating unearned premiums: Net income ............................................ $ 10,563,312 ============ Earnings per common share ............................. $ 1.04 ============ See accompanying Notes to Consolidated Financial Statements. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Year ended December 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- COMMON STOCK: Beginning of year .................... $10,587,629 $10,325,329 $10,161,760 Issuance of common stock: Stock option plans ................. 102,797 41,694 31,252 Dividend reinvestment plan (note 15(a)) ................ 131,552 220,606 132,317 ----------- ----------- ----------- End of year .......................... 10,821,978 10,587,629 10,325,329 ----------- ----------- ----------- ADDITIONAL PAID-IN CAPITAL: Beginning of year .................... 57,162,911 55,021,926 53,507,459 From issuance of common stock: Stock option plans ................. 1,092,041 349,390 279,234 Dividend reinvestment plan ......... 1,417,808 1,791,595 1,211,972 Gain on sale of treasury stock ....... 115,166 - 23,261 ----------- ----------- ----------- End of year .......................... 59,787,926 57,162,911 55,021,926 ----------- ----------- ----------- UNREALIZED HOLDING GAINS (LOSSES) ON FIXED MATURITY SECURITIES AVAILABLE- FOR-SALE, NET OF TAX: Beginning of year .................. (1,316,596) 2,068,451 - Gains (losses) on revaluation of fixed maturity securities available-for-sale, net of tax (notes 1 and 10) ............. 4,788,612 (3,385,047) 2,068,451 ----------- ----------- ----------- End of year ........................ 3,472,016 (1,316,596) 2,068,451 ----------- ----------- ----------- UNREALIZED HOLDING GAINS (LOSSES) ON EQUITY SECURITIES AVAILABLE-FOR-SALE, NET OF TAX: Beginning of year .................. - (19,800) (142,000) Gains on revaluation of equity securities available-for-sale, net of tax (notes 1 and 10) .......... 817,965 19,800 122,200 ----------- ----------- ----------- End of year ........................ $ 817,965 $ - $ (19,800) ----------- ----------- ----------- EMC INSURANCE GROUP INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity, Continued Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ RETAINED EARNINGS: Beginning of year ................. $ 50,402,812 $ 42,319,249 $ 37,866,902 Net income ........................ 17,348,828 13,505,727 9,755,379 Dividends on common stock ($.53 per share in 1995, $.52 in 1994 and 1993): Cash dividends ................ (3,653,299) (3,510,555) (3,443,465) Dividends reinvested in shares of common stock ............. (2,009,047) (1,911,609) (1,859,567) ------------ ------------ ------------ End of year ....................... 62,089,294 50,402,812 42,319,249 ------------ ------------ ------------ TREASURY STOCK AT COST: Beginning of year ................. (110,067) (81,386) (483,344) Purchase of shares for the treasury (653,967) (28,681) (126,948) Sale of shares from the treasury .. 663,613 - 528,906 ------------ ------------ ------------ End of year ....................... (100,421) (110,067) (81,386) ------------ ------------ ------------ Total stockholders' equity ...... $136,888,758 $116,726,689 $109,633,769 ============ ============ ============ See accompanying Notes to Consolidated Financial Statements. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Year ended December 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ........................... $17,348,828 $13,505,727 $ 9,755,379 ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Cumulative effect of changes in accounting principles, net of tax ............................ - - (2,621,344) Losses and settlement expenses ... 2,240,494 5,372,801 8,010,617 Unearned premiums ................ 1,094,577 1,731,514 650,196 Other policyholders' funds ....... 490,719 247,816 (840,604) Deferred policy acquisition costs (321,134) (694,771) 413,967 Indebtedness of related party (note 4) ................. (508,893) 13,228,868 (8,639,436) Accrued investment income ........ (188,986) (725,182) (242,595) Accrued income taxes: Current ........................ 802,669 1,186,000 (118,000) Deferred ....................... 59,327 (94,441) (18,027) Provision for amortization ....... (82) 4,101 (23,072) Realized investment gains ........ (1,043,730) (519,567) (684,445) Postretirement benefits .......... 403,138 549,225 255,782 Reinsurance receivables .......... 2,018,105 3,542,358 9,389,384 Prepaid reinsurance premiums ..... 315,152 711,151 805,733 Amortization of deferred income .. (343,653) (433,979) (259,217) Other, net ....................... 2,284,532 706,967 225,040 ----------- ----------- ----------- 7,302,235 24,812,861 6,303,979 Cash provided by the commutation of outstanding reinsurance balances by the reinsurance subsidiary (note 2) ............ - 686,962 - Cash used in the change in the property and casualty insurance subsidiaries' pooling agreement (note 2) ............. - - (4,426,945) Cash used in the commutation of two reinsurance contracts under the reinsurance subsidiary's quota share agreement (note 2) - - (20,425,955) ----------- ----------- ----------- Total adjustment ............. 7,302,235 25,499,823 (18,548,921) ----------- ----------- ----------- Net cash provided by (used in) operating activities $24,651,063 $39,005,550 $(8,793,542) ----------- ----------- ----------- EMC INSURANCE GROUP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, continued Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixed maturity securities held-to-maturity ..... $(46,384,530) $(93,131,676) $ - Maturities of fixed maturity securities held-to-maturity ..... 18,257,425 41,099,534 - Purchases of fixed maturity securities available for sale ... (27,866,616) (193,422,946) - Maturities of fixed maturity securities available-for-sale ... 49,104,032 208,880,152 - Net purchases of mutual funds invested in equity securities available-for-sale .............. (13,785,451) - - Sales of equity securities available-for-sale .............. - 500,000 1,043,068 Purchases of fixed maturity securities ...................... - - (266,682,915) Maturities of fixed maturity securities ...................... - - 274,909,330 Net (purchases) sales of short-term investments ..................... (1,242,372) 699,964 1,420,288 ------------ ------------ ------------ Net cash (used in) provided by investing activities .. (21,917,512) (35,374,972) 10,689,771 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock .......... 2,859,364 2,403,285 1,670,536 Dividends paid to stockholders .... (5,662,346) (5,422,164) (5,303,032) Sales (purchases) of treasury stock, net ...................... 9,646 (28,681) 401,958 ------------ ------------ ----------- Net cash used in financing activities ............... (2,793,336) (3,047,560) (3,230,538) ------------ ------------ ------------ NET (DECREASE) INCREASE IN CASH ..... (59,785) 583,018 (1,334,309) Cash at beginning of year ........... 1,258,221 675,203 2,009,512 ------------ ------------ ------------ Cash at end of year ................. $ 1,198,436 $ 1,258,221 $ 675,203 ============ ============ ============ Income taxes paid ................... $ 6,242,085 $ 3,795,381 $ 2,021,128 Interest paid ....................... 177,156 33,672 - See accompanying Notes to Consolidated Financial Statements. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION EMC Insurance Group Inc., an approximately 67 percent owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is an insurance holding company with operations in property and casualty insurance, reinsurance, nonstandard risk automobile insurance and an excess and surplus lines insurance agency. Both commercial and personal lines of insurance are written, with the focus on medium-sized commercial accounts. About two-thirds of the premiums written are in Iowa and the contiguous states. EMC Insurance Group Inc. and its subsidiaries are referred to herein as the "Company". The Company's subsidiaries include EMCASCO Insurance Company, Illinois EMCASCO Insurance Company, Dakota Fire Insurance Company, EMC Reinsurance Company, Farm and City Insurance Company and EMC Underwriters, Ltd. The consolidated financial statements have been prepared on the basis of generally accepted accounting principles (GAAP) which differ in some respects from those followed in reports to insurance regulatory authorities. All significant intercompany balances and transactions have been eliminated. PROPERTY AND CASUALTY INSURANCE, REINSURANCE AND NONSTANDARD RISK AUTOMOBILE INSURANCE OPERATIONS Premiums are recognized as revenue ratably over the terms of the respective policies. Effective January 1, 1993, the property and casualty insurance subsidiaries changed their method of calculating unearned premiums from the monthly pro rata method to the daily pro rata method. The property and casualty insurance subsidiaries changed their accounting method because of management's belief that the new method provides for a more accurate matching of revenues and expenses over the terms of the underlying insurance policies. This change resulted in a cumulative increase in unearned premiums of $1,109,799 and a decrease in income of $807,933 ($.08 per share), net of income tax benefits of $301,866. Certain costs of acquiring new business, principally commissions, premium taxes and variable underwriting expenses, have been deferred. Such costs are being amortized as premium revenue is recognized. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss settlement expenses and certain other costs expected to be incurred as the premium is earned. Unpaid losses and settlement expenses are based on estimates of reported and unreported claims and related settlement expenses. Changes in estimates are reflected in current operating results. The provisions for losses and settlement expenses are considered adequate to cover the ultimate net cost of losses and claims incurred to date net of estimated salvage and subrogation recoverable. Since the provisions are necessarily based on estimates, the ultimate liability may be more or less than such provisions. EXCESS AND SURPLUS LINES OPERATIONS Income is derived from fees and commissions which are realized when earned. Costs of doing business are expensed as incurred. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued REINSURANCE CEDED Ceded reinsurance activities are reported on the basis of Statement of Financial Accounting Standards (SFAS) 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." SFAS 113 requires a gross (rather than net) balance sheet presentation for ceded reinsurance amounts and addresses the recognition of gain or loss resulting from reinsurance transactions and appropriate financial statement disclosure of reinsurance activities. INVESTMENTS Investments are reported on the basis of SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." Securities classified as held-to-maturity are purchased with the intent and ability to be held to maturity and are carried at amortized cost. Unrealized holding gains and losses on securities held-to-maturity are not reflected in the financial statements. All other securities have been classified as securities available-for-sale and are carried at market value, with unrealized holding gains and losses reported as a separate component of stockholders' equity, net of tax. Short-term investments represent money market funds and are carried at cost. The Company's carrying value for investments is reduced to its estimated realizable value if a decline in the market value is deemed other than temporary. Such reductions in carrying value are recognized as realized losses and charged to income. Premiums and discounts on debt securities are amortized over the life of the security as an adjustment to yield using the effective interest method. Realized gains and losses on disposition of investments are included in net income. The cost of investments sold is determined on the first-in, first-out method. Included in investments at December 31, 1995 and 1994 are securities on deposit with various regulatory authorities as required by law amounting to $11,971,564 and $11,331,550, respectively. PENSION BENEFITS Net periodic pension cost relating to the Company's participation in Employers Mutual's Retirement Plan is computed on the basis of SFAS 87, "Employers' Accounting for Pensions." It is Employers Mutual's policy to fund pension costs according to regulations provided under the Internal Revenue Code. Assets held in the plan are a mix of equity, debt and guaranteed interest securities and real estate funds. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The cost of retiree health care and life insurance benefits relating to the Company's participation in Employers Mutual's postretirement benefits plans is recognized on the basis of SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Benefits provided under these plans are unfunded and are subject to change. INCOME TAXES The Company files a consolidated Federal income tax return with its subsidiaries. Consolidated income taxes/benefit are allocated among the entities based upon separate tax liabilities. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Deferred income taxes are provided for temporary differences between financial statement carrying values of assets and liabilities and their respective tax bases on the basis of SFAS 109, "Accounting for Income Taxes." A valuation allowance is established to reduce deferred tax assets to their net realizable value if it is "more likely than not" that a tax benefit will not be realized. EARNINGS PER SHARE Earnings per common share are computed by dividing earnings by the weighted average number of common shares outstanding during each year. INTANGIBLE ASSETS Goodwill, which represents the excess of cost over the fair value of net assets of acquired subsidiaries, is being amortized on a straight-line basis over 25 years. The Company reviews the recoverability of the unamortized balance of goodwill on a periodic basis using projected cash flows. ACCOUNTING STANDARDS NOT YET ADOPTED During 1995, the Financial Accounting Standards Board (FASB) issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which is effective for fiscal years beginning after December 15, 1995. This statement establishes accounting standards which address the recognition and measurement of losses due to the impairment of long-lived assets. The Company will adopt SFAS 121 in the first quarter of 1996. Adoption of this statement will have no effect on the income of the Company. During 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation", which is effective for fiscal years beginning after December 15, 1995. This statement establishes a fair value-based method of accounting for stock-based compensation plans; however, it also permits continued application of the provisions of Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees", with separate disclosure of information prepared under the guidelines of SFAS 123. The Company will adopt the new disclosure requirements of SFAS 123 in the first quarter of 1996. Adoption of this statement will have no effect on the income of the Company. RECLASSIFICATIONS Certain amounts previously reported in prior years' consolidated financial statements have been reclassified to conform to current year presentation. 2. AFFILIATION AND TRANSACTIONS WITH AFFILIATES PROPERTY AND CASUALTY INSURANCE SUBSIDIARIES The three property and casualty insurance subsidiaries of the Company and two subsidiaries of Employers Mutual are parties to reinsurance pooling agreements with Employers Mutual (collectively the "pooling agreement"). Under the terms of the pooling agreement, each company cedes to Employers Mutual all of its insurance business and assumes from Employers Mutual an amount equal to its participation in the pool. All losses, settlement expenses and other underwriting and administrative expenses, excluding the voluntary reinsurance business assumed by Employers Mutual from unaffiliated insurance companies, are prorated among the parties on the basis of participation in the pool. Operations of the pool give rise to intercompany balances with Employers Mutual, which are settled on a quarterly basis. The investment activities and income tax liabilities of the pool participants are not subject to the pooling agreement. Employers Mutual voluntarily assumes reinsurance business from nonaffiliated insurance companies and cedes 95 percent of this business to the Company's reinsurance subsidiary, exclusive of certain reinsurance contracts. Prior to 1993, amounts not ceded to the reinsurance subsidiary were retained by Employers Mutual and were subject to cession to the pool members. Effective January 1, 1993, the pooling agreement was amended so that the voluntary assumed reinsurance business written by Employers Mutual is no longer subject to cession to the pool members. In connection with this change in the pooling agreement, the Company's liabilities decreased $4,470,204 and invested assets decreased $4,426,945. Employers Mutual reimbursed the Company $43,259 for commissions incurred to generate this business. REINSURANCE SUBSIDIARY As noted above, the reinsurance subsidiary assumes a 95 percent quota share portion of Employers Mutual's assumed reinsurance business, exclusive of certain reinsurance contracts. The reinsurance subsidiary receives 95 percent of all premiums and assumes 95 percent of all related losses and settlement expenses of this business. Since 1993, losses in excess of $1,000,000 per event are retained by Employers Mutual. The reinsurance subsidiary does not reinsure any of Employers Mutual's direct insurance business, nor any "involuntary" facility or pool business that Employers Mutual assumes pursuant to state law. In addition, the reinsurance subsidiary is not liable for credit risk in connection with the insolvency of any reinsurers of Employers Mutual. Premiums assumed by the reinsurance subsidiary from Employers Mutual amounted to $36,433,443, $39,899,335 and $34,445,978 in 1995, 1994 and 1993, respectively. It is customary in the reinsurance business for the assuming company to compensate the ceding company for the acquisition expenses it incurred in the generation of the business. Commissions paid by the reinsurance subsidiary to Employers Mutual amounted to $8,224,060, $9,387,371 and $7,170,782 in 1995, 1994 and 1993, respectively. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The reinsurance subsidiary pays an annual override commission to Employers Mutual in connection with the $1,000,000 cap on losses per event, which totaled $1,912,756, $2,094,715 and $1,808,527 in 1995, 1994 and 1993, respectively. The reinsurance subsidiary also pays for 95 percent of the outside reinsurance protection Employers Mutual purchases to protect itself from catastrophic losses on the assumed reinsurance business. This cost is recorded as a reduction to the premiums received by the reinsurance subsidiary and amounted to $1,983,579 in 1995, $2,836,067 in 1994 and $2,438,919 in 1993. Employers Mutual retained losses and settlement expenses totaling $1,103,442 in 1995, $7,019,772 in 1994 and $615,000 in 1993 under this agreement. The reinsurance subsidiary has an aggregate excess of loss reinsurance treaty with Employers Mutual which provides protection from a large accumulation of retentions resulting from multiple catastrophes in any one calendar year. The coverage provided is $2,000,000, excess of $3,000,000 ($2,500,000 in 1994 and 1993) aggregate losses retained, excess of $200,000 per event. Maximum recovery is limited to $2,000,000 ($4,000,000 in 1994 and 1993) per accident year. The reinsurance subsidiary recovered $0, $0 and $143,501 under this treaty and paid reinstatement premiums of $0, $0 and $208,470 in 1995, 1994 and 1993, respectively. Total premiums paid to Employers Mutual amounted to $499,950, $557,842 and $708,445 in 1995, 1994 and 1993, respectively. During 1994, the reinsurance subsidiary commuted all outstanding reinsurance balances ceded to Employers Mutual under catastrophe and aggregate excess of loss reinsurance treaties related to accident years 1991 through 1993. In connection with these commutations, the Company's assets and liabilities increased $686,962. There was no income effect from these commutations. In conjunction with the implementation of the $1,000,000 cap on losses assumed under the quota share agreement, the reinsurance subsidiary terminated its catastrophe reinsurance treaty with Employers Mutual effective January 1, 1993. This treaty paid losses in excess of $1,000,000 resulting from any one catastrophe, subject to a maximum loss of $3,000,000. Maximum recovery was limited to $6,000,000. The reinsurance subsidiary recovered $306,250 under this treaty in 1993. Effective June 30, 1993, Employers Mutual commuted the portion of the quota share agreement that pertained to a casualty pool that is in a run-off position. In connection with this change in the quota share agreement, the Company's liabilities decreased $19,783,037 and invested assets decreased $17,806,179. The reserve discount amount of $1,976,858 was recorded as deferred income and is being amortized into operations over the estimated settlement period of the reserves, which is ten years. The amount recognized as income totaled $343,653 in 1995, $433,979 in 1994 and $259,217 in 1993. Effective October 31, 1993, Employers Mutual commuted the portion of the quota share agreement that pertained to a voluntary pool that handles large "highly protected" risks. In connection with this change in the quota share agreement, the Company's liabilities decreased $3,827,201 and invested assets decreased $2,619,776. Employers Mutual reimbursed the Company $1,207,425 for commissions incurred to generate this business. No reserve discount was calculated as this business involved short-tail property coverage. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued NONSTANDARD RISK AUTOMOBILE INSURANCE SUBSIDIARY The nonstandard risk automobile insurance subsidiary has a reinsurance treaty on an excess of loss basis with Employers Mutual which provides reinsurance for 100 percent of each loss in excess of $100,000, up to $1,000,000. Recoveries under this treaty totaled $2,140, $71,567 and $0 in 1995, 1994 and 1993, respectively. Premiums paid to Employers Mutual amounted to $45,232, $49,659 and $42,065 in 1995, 1994 and 1993, respectively. SERVICES PROVIDED BY EMPLOYERS MUTUAL Employers Mutual provides various services to all of its subsidiaries. Such services include data processing, claims, financial, actuarial, auditing, marketing and underwriting. Costs of these services are allocated to the subsidiaries outside the pooling agreement based upon a number of criteria, including usage and number of transactions. Costs not allocated to these subsidiaries are charged to the pool and each pool participant shares in the total cost in proportion to its participation percentage. 3. REINSURANCE CEDED 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. The parties to the pooling agreement also assume insurance from involuntary pools and associations in conjunction with direct business written in various states. As of December 31, 1995, deductions for reinsurance ceded to two unaffiliated reinsurers aggregated $8,774,115, which represented a significant portion of the total prepaid reinsurance premiums and reinsurance receivables for losses and settlement expenses. These amounts reflect the property and casualty insurance subsidiaries' pool participation percentage of amounts ceded by Employers Mutual to these organizations in connection with its role as "service carrier". Under these arrangements, Employers Mutual writes business for these organizations on a direct basis and then cedes 100 percent of this business to these organizations. 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. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred for the three years ended December 31, 1995 is presented below. Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ PREMIUMS WRITTEN Direct ......................... $152,579,014 $143,444,388 $135,277,129 Assumed from nonaffiliates ..... 3,282,699 5,843,091 6,636,942 Assumed from affiliates ........ 159,253,136 158,646,332 147,620,705 Ceded to nonaffiliates ......... (8,365,648) (8,890,119) (10,701,482) Ceded to affiliates ............ (143,259,942) (132,100,537) (120,898,914) ------------ ------------ ------------ Net premiums written ......... $163,489,259 $166,943,155 $157,934,380 ============ ============ ============ PREMIUMS EARNED Direct ......................... $151,450,871 $140,012,247 $137,141,457 Assumed from nonaffiliates ..... 3,548,647 5,988,228 6,758,364 Assumed from affiliates ........ 157,897,322 156,839,482 148,366,487 Ceded to nonaffiliates ......... (8,680,800) (9,601,270) (11,507,217) Ceded to affiliates ............ (141,949,790) (128,409,308) (124,321,553) ------------ ------------ ------------ Net premiums earned .......... $162,266,250 $164,829,379 $156,437,538 ============ ============ ============ LOSSES AND SETTLEMENT EXPENSES INCURRED Direct ......................... $ 98,651,399 $113,680,306 $ 97,842,980 Assumed from nonaffiliates ..... 608,796 2,774,689 6,575,099 Assumed from affiliates ........ 100,098,436 108,594,530 107,369,274 Ceded to nonaffiliates ......... (2,036,962) (3,077,305) (5,845,414) Ceded to affiliates ............ (89,169,391) (105,028,166) (85,586,640) ------------ ------------ ------------ Net losses and settlement expenses incurred .......... $108,152,278 $116,944,054 $120,355,299 ============ ============ ============ 4. REINSURANCE ASSUMED Prior to December 31, 1993, the parties to the pooling agreement recorded amounts assumed from the National Workers' Compensation Reinsurance Pool on a net basis. Under this approach, reserves for outstanding losses and unearned premiums were reported as liabilities under "Indebtedness to Related Party" in the Company's consolidated financial statements. Effective December 31, 1993, the parties to the pooling agreement began recording these amounts as outstanding losses and unearned premiums. As a result, outstanding losses increased $11,436,543, unearned premiums increased $1,711,288 and indebtedness to related party decreased $13,147,831. There was no income effect from this reclassification. The Company collected the balance due from Employers Mutual in the first quarter of 1994. 5. LIABILITY FOR LOSSES AND SETTLEMENT EXPENSES The following table sets forth a reconciliation of beginning and ending reserves for losses and settlement expenses of the Company. Amounts presented are on a net basis, with a reconciliation of beginning and ending reserves to the gross amounts presented in the consolidated financial statements in accordance with SFAS 113 (see note 1). EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Gross reserves for losses and settlement expenses, beginning of year .......................... $203,181,615 $197,121,852 $215,388,865 Ceded reserves for losses and settlement expenses, beginning of year .......................... 14,146,874 17,454,679 25,253,507 ------------ ------------ ------------ Net reserves for losses and settlement expenses, beginning of year .......................... 189,034,741 179,667,173 190,135,358 ------------ ------------ ------------ Incurred losses and settlement expenses: - ---------------------- Provision for insured events of the current year .......... 123,876,601 123,343,829 119,896,526 (Decrease) increase in provision for insured events of prior years ........................ (15,724,323) (6,399,775) 458,773 ------------ ------------ ------------ Total incurred losses and settlement expenses ...... 108,152,278 116,944,054 120,355,299 ------------ ------------ ------------ Payments: - --------- Losses and settlement expenses attributable to insured events of the current year ............ 48,237,715 48,771,573 47,600,851 Losses and settlement expenses attributable to insured events of prior years ................. 55,753,875 59,491,875 45,508,460 Payment related to the commutation of the reinsurance subsidiary's catastrophe and aggregate excess of loss reinsurance treaties ... - (686,962) - Payment related to the change in the property and casualty insurance subsidiaries' pooling agreement ...................... - - 4,373,629 Payment related to the commutation of two reinsurance contracts under the reinsurance subsidiary's quota share agreement ...................... - - 21,904,001 Adjustment related to the gross-up of reserve amounts associated with the National Workers' Compensation Reinsurance Pool .. - - 11,436,543 ------------ ------------ ------------ Total payments ............. $103,991,590 $107,576,486 $130,823,484 ------------ ------------ ------------ EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Net reserves for losses and settlement expenses, end of year $193,195,429 $189,034,741 $179,667,173 Ceded reserves for losses and settlement expenses, end of year 12,226,680 14,146,874 17,454,679 ------------ ------------ ------------ Gross reserves for losses and settlement expenses, end of year $205,422,109 $203,181,615 $197,121,852 ============ ============ ============ Underwriting results of the Company are significantly influenced by estimates of loss and settlement expense reserves. Changes in reserve estimates are reflected in operating results in the year such changes are recorded. During the last three years the Company has experienced favorable development in the provision for insured events of prior years. The majority of the favorable development has come from the property and casualty insurance subsidiaries, which have benefited from state reform measures in workers' compensation insurance and various cost control functions implemented by Employers Mutual to minimize losses. Favorable development has also been experienced in the reinsurance subsidiary and the nonstandard risk auto insurance subsidiary, but to a lesser degree. The property and casualty insurance subsidiaries have historically experienced favorable development in their reserves and current reserving practices have not been relaxed; however, the level of favorable development experienced in 1995 is not expected to continue. 6. ASBESTOS AND ENVIRONMENTAL RELATED CLAIMS The Company has exposure to asbestos and environmental related claims associated with the insurance business issued by the property and casualty insurance subsidiaries and the reinsurance business assumed from Employers Mutual. Reserves for asbestos and environmental related claims totaled $2,068,635 and $749,807 at December 31, 1995 and 1994, respectively. When comparing these amounts it is important to note that the reserves reported at December 31, 1995 are not presented on the same basis as the reserves reported at December 31, 1994. As noted in the following discussion, the reserves at December 31, 1995 reflect an increased allocation of Incurred But Not Reported (IBNR) reserves, and related settlement expense reserves, due to a change in reserving methodology and the receipt of additonal information regarding the assumed reinsurance business. Prior to 1995, the members of the pooling agreement calculated IBNR reserves for asbestos and environmental claims by applying a factor to the case basis reserves. IBNR reserve levels produced with this methodology tended to vary from year to year due to the relatively small amount of case basis reserves carried for these types of claims. At December 31, 1995, a portion of the current IBNR reserve was allocated to these exposures to reflect estimated ultimate losses. No additional IBNR reserves were established. During 1995, Employers Mutual attempted to improve its disclosure of asbestos and environmental exposures related to its assumed reinsurance business, some of which is ceded to the Company's reinsurance subsidiary, by mailing supplemental questionnaires to its ceding reinsurers. Many of these reinsurers responded with more detailed information than they had previously provided. Using this additional information, Employers Mutual allocated a portion of the current bulk IBNR reserve to asbestos and environmental exposures. No additional bulk IBNR reserves were established on the business ceded to the Company's reinsurance subsidiary. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Estimating loss and settlement expense reserves for asbestos and environmental related claims is very difficult due to the many uncertainties surrounding these types of claims. Such uncertainties include the fact that the legal definition of asbestos and environmental damage is still evolving, the assignment of responsibility varies widely by state and claims often emerge long after the policy has expired, making assignment of damages to the appropriate party and to the time period covered by a particular policy difficult. In establishing reserves for these types of claims, management monitors the relevant facts concerning each claim, the current status of the legal environment, the social and political conditions and the claim history and trends within the Company and the industry. 7. RETAINED EARNINGS Retained earnings of the Company's insurance subsidiaries available for distribution as dividends to EMC Insurance Group Inc. are limited by law to the statutory unassigned surplus of each of the subsidiaries as of the previous December 31, as determined in accordance with accounting practices prescribed by insurance regulatory authorities of the state of domicile of each subsidiary. Subject to this limitation, the maximum dividend that may be paid by Iowa corporations without prior approval of the insurance regulatory authorities is restricted to the greater of 10 percent of statutory surplus as regards policyholders as of the preceding December 31, or net income of the preceding calendar year on a statutory basis. Both Illinois and North Dakota impose restrictions which are similar to those of Iowa on the payment of dividends and distributions. At December 31, 1995, $18,326,542 was available for distribution in 1996 to EMC Insurance Group Inc. without prior approval. Statutory surplus of the Company's insurance subsidiaries was $97,385,213 and $86,820,039 at December 31, 1995 and 1994, respectively. Statutory net income of the Company's insurance subsidiaries was $17,170,163, $13,430,353 and $8,788,458 for the three years ended December 31, 1995. The National Association of Insurance Commissioners utilizes a risk-based capital model to help state regulators assess the capital adequacy of insurance companies and identify property/casualty insurers that are in (or are perceived as approaching) financial difficulty by establishing minimum capital needs based on the risks applicable to the operations of the individual insurer. The risk-based capital requirements for property and casualty insurance companies measure three major areas of risk: asset risk, credit risk and underwriting risk. Companies having less statutory surplus than required by the risk-based capital requirements are subject to varying degrees of regulatory scrutiny and intervention, depending on the severity of the inadequacy. The Company's insurance subsidiaries' ratio of total adjusted capital to risk-based capital at December 31, 1995 is well in excess of the minimum level required. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 8. RECONCILIATION OF STATUTORY NET INCOME AND SURPLUS A reconciliation of net income and surplus from that reported on a statutory basis to that reported in the accompanying consolidated financial statements on a GAAP basis is as follows: Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Statutory net income ................ $ 17,706,843 $ 13,697,482 $ 8,761,472 Change in deferred policy acquisition costs ................. 321,134 694,771 (413,967) Change in salvage and subrogation accrual ........................... 568,919 5,851 (232,760) Change in other policyholders' funds (490,719) (247,816) 840,604 Change in pension accrual ........... (572,062) (298,021) (103,846) GAAP postretirement benefit cost in excess of statutory cost ....... (235,592) (314,583) (216,091) Deferred income tax (expense) benefit (59,327) 94,441 18,027 Prior year income taxes and related interest .................. (231,001) (180,770) 817 GAAP basis amortization of reserve discount on commutation of reinsurance contract .............. 343,653 433,979 259,217 Statutory reserve discount on commutation of reinsurance contract - - (1,976,858) Other, net .......................... (3,020) (379,607) 197,420 ------------ ------------ ------------ Income before cumulative effect of changes in accounting principles, GAAP basis ........................ 17,348,828 13,505,727 7,134,035 Cumulative effect of changes in accounting principles for: Income taxes .................... - - 5,595,177 Postretirement benefits ......... - - (2,165,900) Unearned premiums ............... - - (807,933) ------------ ------------ ------------ Net income, GAAP basis .............. $ 17,348,828 $ 13,505,727 $ 9,755,379 ============ ============ ============ EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Statutory surplus ................... $105,583,848 $ 94,317,215 $ 85,830,140 Deferred policy acquisition costs ... 8,714,769 8,393,635 7,698,864 Accrued salvage and subrogation ..... 2,368,362 1,799,443 1,793,592 Other policyholders' funds payable .. (3,593,328) (3,102,609) (2,854,793) Pension asset ....................... 835,652 1,407,714 1,705,735 GAAP postretirement benefit liability in excess of statutory liability ......................... (1,908,372) (1,672,780) (1,358,197) Deferred income tax asset ........... 11,921,182 14,190,499 13,040,693 Goodwill ............................ 1,748,664 1,883,177 2,017,690 Excess statutory reserves over statement reserves............ 6,685,303 2,044,268 - GAAP basis reserve discount on commutation of reinsurance contract in excess of statutory recognition ....................... (940,009) (1,283,662) (1,717,641) Unrealized holding gains (losses) on fixed maturity securities available-for-sale ................ 5,260,630 (1,316,596) 3,134,016 Other ............................... 212,057 66,385 343,670 ------------ ------------ ------------ Stockholders' equity, GAAP basis .... $136,888,758 $116,726,689 $109,633,769 ============ ============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 9. SEGMENT INCOME The Company's operations include the following major segments: property and casualty insurance, reinsurance, nonstandard risk automobile insurance and an excess and surplus lines insurance agency. No single source accounted for 10 percent or more of consolidated revenues. Summarized financial information for these segments is as follows: Net Realized Operating Premiums Underwriting investment gains Other income earned gain (loss) income (losses) income (loss) Assets ------------ ------------ ----------- ---------- -------- ----------- ------------ Year ended December 31, 1995 Property and casualty insurance $116,439,266 $ 1,482,804 $15,428,401 $1,026,770 $ - $17,937,975 $290,494,396 Reinsurance ................... 35,825,953 498,377 6,067,678 13,626 343,653 6,923,334 94,412,625 Nonstandard risk automobile insurance ................... 10,001,031 (2,256,737) 1,175,392 3,334 - (1,078,011) 19,679,620 Excess and surplus lines insurance agency ............ - 338,001 144,915 - - 482,916 2,642,707 Parent company ................ - (307,713) 357,408 - - 49,695 137,033,527 Eliminations .................. - - - - - - (131,381,902) ------------ ------------ ----------- ---------- -------- ----------- ------------ Consolidated ............. $162,266,250 $ (245,268) $23,173,794 $1,043,730 $343,653 $24,315,909 $412,880,973 ============ ============ =========== ========== ======== =========== ============ Year ended December 31, 1994 Property and casualty insurance $115,411,835 $ 933,533 $14,080,206 $ 334,032 $ - $15,347,771 $273,308,572 Reinsurance ................... 37,256,763 (4,717,242) 5,354,494 115,720 433,979 1,186,951 84,495,802 Nonstandard risk automobile insurance ................... 12,160,781 493,910 1,152,341 74,815 - 1,721,066 20,146,281 Excess and surplus lines insurance agency ............ - 399,125 106,120 - - 505,245 4,238,732 Parent company ................ - (315,784) 236,519 (5,000) - (84,265) 116,870,504 Eliminations .................. - - - - - - (111,690,013) ------------ ------------ ----------- ---------- -------- ----------- ------------ Consolidated ............. $164,829,379 $ (3,206,458) $20,929,680 $ 519,567 $433,979 $18,676,768 $387,369,878 ============ ============ =========== ========== ======== =========== ============ Year ended December 31, 1993 Property and casualty insurance $109,584,986 $ (3,812,671) $13,242,584 $ 405,193 $ - $ 9,835,106 $266,070,386 Reinsurance ................... 33,324,202 (6,040,296) 6,090,294 200,612 259,217 509,827 76,743,953 Nonstandard risk automobile insurance ................... 13,528,350 (2,542,690) 1,165,684 108,640 - (1,268,366) 20,821,495 Excess and surplus lines insurance agency ............ - 36,858 66,564 - - 103,422 2,765,076 Parent company ................ - (345,678) 214,825 (30,000) - (160,853) 109,731,870 Eliminations .................. - - - - - - (107,197,257) ------------ ------------ ----------- ---------- -------- ----------- ------------ Consolidated ............. $156,437,538 $(12,704,477) $20,779,951 $ 684,445 $259,217 $ 9,019,136 $368,935,523 ============ ============ =========== ========== ======== ============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 10. INVESTMENTS During 1995, the Company invested $13,550,000 of short-term funds and maturing U.S. Treasury Bills into mutual funds invested in equity securities. In November of 1995 the FASB issued a special report titled "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." This report contained a provision that allowed entities a one-time option to reassess the appropriateness of the classifications of all securities held and to reclassify securities from the held-to-maturity category without calling into question the intent of that enterprise to hold other debt securities to maturity in the future. The Company elected to take advantage of this option and reclassified $80,534,719 of municipal and corporate bonds from the held-to-maturity category to the available-for-sale category in the fourth quarter of 1995 in order to achieve more flexibility in its investment portfolio. The amortized cost and estimated market value of securities held-to- maturity and available-for-sale as of December 31, 1995 are as follows. The estimated market value is based on quoted market prices, where available, or on values obtained from independent pricing services. Gross Gross Estimated Amortized unrealized unrealized market December 31, 1995 cost gains losses value ----------------- ------------ ----------- ----------- ------------ Securities held-to-maturity: Fixed maturity securities: U.S. treasury securities and obligations of U.S. government corporations and agencies ............. $115,512,952 $ 9,136,643 $ (909)$124,648,686 Obligations of states and political subdivisions ......... 37,972,295 805,805 - 38,778,100 Mortgage-backed securities ........... 37,955,569 1,930,393 - 39,885,962 ------------ ----------- ----------- ------------ Total securities held-to-maturity $191,440,816 $11,872,841 $ (909)$203,312,748 ============ =========== =========== ============ Securities available-for sale: Fixed maturity securities: Obligations of states and political subdivisions ......... $108,241,811 $ 4,301,309 $ (114,206)$112,428,914 Debt securities issued by foreign governments 1,996,716 16,104 - 2,012,820 Public utilities ....... 9,458,349 288,560 (690) 9,746,219 Corporate securities ... 17,233,563 760,019 - 17,993,582 Other debt securities .. 169,500 9,534 - 179,034 ------------ ----------- ----------- ------------ Total fixed maturity securities ....... 137,099,939 5,375,526 (114,896) 142,360,569 Equity securities ........ 14,771,422 1,239,341 - 16,010,763 ------------ ----------- ----------- ------------ Total securities available-for-sale $151,871,361 $ 6,614,867 $ (114,896)$158,371,332 ============ =========== =========== ============ EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The amortized cost and estimated market value of securities held-to- maturity and available-for-sale as of December 31, 1994 are as follows. Gross Gross Estimated Amortized unrealized unrealized market December 31, 1994 cost gains losses value ----------------- ------------ ----------- ----------- ------------ Securities held-to-maturity: Fixed maturity securities: U.S. treasury securities and obligations of U.S. government corporations and agencies ............. $102,480,740 $ 1,239,742 $(1,142,326)$102,578,156 Obligations of states and political subdivisions ......... 78,423,605 876,074 (3,804,723) 75,494,956 Debt securities issued by foreign governments 583,309 7,411 - 590,720 Public utilities ....... 8,622,154 - (370,847) 8,251,307 Corporate securities ... 13,052,550 17,625 (574,197) 12,495,978 Mortgage-backed securities ........... 40,487,362 469,879 (1,646,870) 39,310,371 ------------ ----------- ----------- ------------ Total securities held-to-maturity $243,649,720 $ 2,610,731 $(7,538,963)$238,721,488 ============ =========== =========== ============ Securities available-for sale: Fixed maturity securities: U.S. treasury securities $ 15,835,019 $ - $ - $ 15,835,019 Obligations of states and political subdivisions ......... 55,274,052 1,275,408 (2,436,572) 54,112,888 Debt securities issued by foreign governments 1,994,980 - (110,260) 1,884,720 Corporate securities ... 4,250,000 - - 4,250,000 Other debt securities .. 454,941 - (45,172) 409,769 ------------ ----------- ----------- ------------ Total securities available-for-sale $ 77,808,992 $ 1,275,408 $(2,592,004)$ 76,492,396 ============ =========== =========== ============ The amortized cost and estimated market value of fixed maturity securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Estimated Amortized market cost value ------------ ------------ Securities held-to-maturity: Due in one year or less ................... $ 19,002,127 $ 19,143,485 Due after one year through five years ..... 67,912,517 71,776,690 Due after five years through ten years .... 62,095,274 67,615,966 Due after ten years ....................... 4,475,329 4,890,645 Mortgage-backed securities ................ 37,955,569 39,885,962 ------------ ------------ Totals .................................. $191,440,816 $203,312,748 ============ ============ Securities available-for-sale: Due in one year or less ................... $ 4,661,697 $ 4,706,611 Due after one year through five years ..... 51,336,077 51,891,447 Due after five years through ten years .... 49,477,831 52,246,301 Due after ten years ....................... 31,624,334 33,516,210 ------------ ------------ Totals .................................. $137,099,939 $142,360,569 ============ ============ Proceeds from calls, prepayments and sales of securities held-to-maturity and available-for-sale and realized investment gains and losses were as follows. There were no sales of securities classified as held-to-maturity during 1995; all activity is due to calls, prepayments and maturities. Year ended December 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Fixed maturity securities held-to-maturity: Proceeds from calls and prepayments $ 6,492,429 $26,469,534 $37,759,956 Gross realized investment gains ... 32,733 501,628 706,059 Gross realized investment losses .. 2,388 1,027 9,682 Fixed maturity securities available-for-sale: Proceeds from calls and prepayments 786,616 842,000 - Gross realized investment gains ... 27,414 23,966 - Equity securities available-for-sale: Proceeds from sales ............... 985,971 500,000 1,043,068 Gross realized investment gains ... 985,971 - 18,068 Gross realized investment losses .. - 5,000 30,000 EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued A summary of net investment income is as follows: Year ended December 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Interest on fixed maturities .......... $22,895,745 $20,886,029 $20,862,221 Dividends on equity securities ........ 235,451 14,167 65,065 Interest on short-term investments .... 821,560 597,896 442,160 Other interest ........................ - 1,552 - ----------- ----------- ----------- Total investment income ........... 23,952,756 21,499,644 21,369,446 Investment expense .................... 778,962 569,964 589,495 ----------- ----------- ----------- Net investment income ............. $23,173,794 $20,929,680 $20,779,951 =========== =========== =========== A summary of net changes in unrealized holding gains (losses) on securities available-for-sale is as follows: Year ended December 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Fixed maturity securities ........... $ 6,577,226 $(4,450,612) $ 3,134,016 Applicable income taxes ............. (1,788,614) 1,065,565 (1,065,565) ----------- ----------- ----------- Total fixed maturity securities ... 4,788,612 (3,385,047) 2,068,451 ----------- ----------- ----------- Equity securities ................... 1,239,341 30,000 112,000 Applicable income taxes ............. (421,376) (10,200) 10,200 ----------- ----------- ----------- Total equity securities ........... 817,965 19,800 122,200 ----------- ----------- ----------- Total available-for-sale securities $ 5,606,577 $(3,365,247) $ 2,190,651 =========== =========== =========== 11. INCOME TAXES The Company adopted SFAS 109 as of January 1, 1993. The cumulative effect of this change in accounting for income taxes as of January 1, 1993 increased income by $5,595,177 ($.55 per share), net of a valuation allowance of $1,000,000, and is reported separately in the consolidated statement of income for the year ended December 31, 1993. Excluding the amount recognized as the cumulative effect of the change, the effect of applying SFAS 109 on net income for the year ended December 31, 1993 was a decrease of $174,483 ($.02 per share). EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Temporary differences between the consolidated financial statement carrying amount and tax basis of assets and liabilities that give rise to significant portions of the deferred tax asset at December 31, 1995 and 1994 relate to the following: Year ended December 31, ------------------------ 1995 1994 ----------- ----------- Loss reserve discounting .......................... $12,486,760 $12,690,876 Unearned premium reserve limitation ............... 3,158,304 3,075,140 Postretirement benefits ........................... 1,482,631 1,389,469 Policyholder dividends payable .................... 1,221,732 1,054,887 Prepayment of tax on commutation of loss reserves 319,603 436,445 Net unrealized holding losses ..................... - 447,643 Other, net ........................................ 547,799 574,569 ----------- ----------- Total gross deferred income tax asset ......... 19,216,829 19,669,029 Less valuation allowance .......................... (1,000,000) (1,447,643) ----------- ----------- Total deferred income tax asset ............... 18,216,829 18,221,386 ----------- ----------- Deferred policy acquisition costs ................. (2,963,021) (2,853,836) Net unrealized holding gains ...................... (2,209,990) - Other, net ........................................ (1,122,636) (1,177,051) ----------- ----------- Total gross deferred income tax liability ..... (6,295,647) (4,030,887) ----------- ----------- Net deferred income tax asset ............... $11,921,182 $14,190,499 =========== =========== EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The valuation allowance decreased $447,643 in 1995 after increasing by the same amount in 1994. This change in the valuation allowance relates to tax benefits associated with unrealized holding losses on fixed maturity securities available-for-sale that existed at December 31, 1994 but no longer exist at December 31, 1995. The valuation allowance of $1,000,000 at December 31, 1995 relates to the tax benefits associated with postretirement benefit deductions that are scheduled to reverse more than fifteen years into the future. The valuation allowance was established due to the uncertainty concerning the future realization of these tax benefits. Based upon anticipated future taxable income and consideration of all other available evidence, management believes that it is "more likely than not" that the Company's net deferred income tax asset will be realized. The Company has had cumulative taxable income in the five-year period of 1991 through 1995 of approximately $54,181,000. The actual income tax expense for the years ended December 31, 1995, 1994 and 1993 differed from the "expected" tax expense for those years (computed by applying the United States federal corporate tax rate of 35 percent (34 percent in 1994 and 1993) to income before income taxes and cumulative effect of changes in accounting principles) as follows: Year ended December 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Computed "expected" tax expense ...... $ 8,510,568 $ 6,350,101 $ 3,066,506 Increases (decreases) in tax resulting from: Tax-exempt interest income ....... (2,190,686) (2,034,273) (1,171,612) Change in accrual of prior year taxes .......................... - (209,734) (252,839) Settlement of tax examinations ... 182,309 147,098 117,497 Proration of tax-exempt interest 235,330 223,484 123,342 Other, net ....................... 229,560 694,365 2,207 ----------- ----------- ----------- Income taxes ................... $ 6,967,081 $ 5,171,041 $ 1,885,101 =========== =========== =========== Comprehensive income tax expense (benefit) included in the consolidated financial statements for the years ended December 31, 1995, 1994 and 1993 was as follows: Year ended December 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Income tax expense (benefit) on: Operations .......................... $ 6,967,081 $ 5,171,041 $ 1,885,101 Unrealized holding gains (losses) on revaluation of securities available-for-sale ................ 2,209,990 (1,055,365) 1,055,365 Accounting changes: Income taxes ...................... - - (5,595,177) Postretirement benefits (note 13) - - (1,115,767) Unearned premiums (note 1) ........ - - (301,866) ----------- ----------- ----------- Comprehensive income tax expense (benefit) ............. $ 9,177,071 $ 4,115,676 $(4,072,344) =========== =========== =========== The Company has established reserves totaling $251,988 for the payment of taxes and interest related to the examination of the Company's 1991 and 1990 tax returns by the Internal Revenue Service. The Company is currently protesting certain issues arising out of these examinations. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 12. EMPLOYEE RETIREMENT PLAN The Company participates in Employers Mutual's defined benefit retirement plan covering substantially all employees. The plan is funded by employer contributions and provides benefits based on the employee's years of service and compensation level. Benefits generally vest after five years of service. The following tables set forth the funded status and the components of the net periodic pension cost for the Employers Mutual defined benefit retirement plan, based upon a measurement date of November 1, 1995, 1994 and 1993, respectively: Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $51,185,830, $52,520,753 and $27,245,933 ................... $ 52,190,610 $ 53,244,188 $ 29,713,282 ============ ============ ============ Projected benefit obligation for service rendered to date .......... $(66,544,344) $(69,337,553) $(44,579,398) Plan assets at fair value ........... 72,048,850 66,760,033 51,625,386 ------------ ------------ ------------ Plan assets greater (less) than projected benefit obligation ...... 5,504,506 (2,577,520) 7,045,988 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions ............ 625,332 12,201,810 4,440,487 Prior service cost not yet recognized in net periodic pension cost ...... 3,765,174 3,955,406 4,374,510 Unrecognized portion of initial net asset ......................... (5,031,812) (6,107,252) (7,182,692) ------------ ------------ ------------ Prepaid pension cost ........ $ 4,863,200 $ 7,472,444 $ 8,678,293 ============ ============ ============ Service cost - benefits earned during the period ................. $ 3,124,494 $ 2,965,867 $ 2,347,984 Interest cost on projected benefit obligation ................ 4,827,694 2,925,086 2,533,587 Actual gain on plan assets .......... (10,414,728) (1,606,902) (5,229,721) Net amortization and deferral ....... 5,071,784 (3,078,202) 647,291 ------------ ------------ ------------ Net periodic pension cost .... $ 2,609,244 $ 1,205,849 $ 299,141 ============ ============ ============ The unrecognized net asset is being recognized over 12.5 to 15.2 years beginning January 1, 1987. Prior service costs are being amortized over 12 to 14 years beginning January 1, 1993. The weighted average discount rate used to measure the projected benefit obligation was 7.00 percent for 1995, 7.25 percent for 1994 and 6.75 percent for 1993. The assumed long-term rate of return on plan assets was 8.00 percent for 1995, 1994 and 1993. The rate of increase in future compensation levels used in measuring the projected benefit obligation was 5.30 percent in 1995, 1994 and 1993. Pension expense for the Company amounted to $572,062, $298,021 and $103,846 in 1995, 1994 and 1993, respectively. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Effective April 1, 1994, Employers Mutual entered into a new group annuity contract with its pension administrator. Under the old contract, the pension administrator assumed the mortality risk associated with retirees. Accordingly, assets and liabilities of retirees were transferred to the pension administrator and were excluded from the plan. Effective April 1, 1994, Employers Mutual assumed the mortality risk associated with retirees and the related assets and liabilities were transferred back into the plan. As a result, the plan's assets and liabilities increased approximately $19,100,000. This change in contracts had no effect on the funded status of the plan or the benefits payable to participants. 13. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company participates in Employers Mutual's postretirement benefit plans which provide certain health care and life insurance benefits for retired employees. Substantially all 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 or its subsidiaries. The health care postretirement plan requires contributions from participants and contains certain cost sharing provisions such as coinsurance and deductibles. The life insurance plan is noncontributory. Both plans are unfunded and benefits provided are subject to change. The Company adopted SFAS 106 as of January 1, 1993. The Company's transition obligation as of January 1, 1993 amounted to $2,165,900 ($.21 per share), net of income tax benefits of $1,115,767, and was recorded as a cumulative effect adjustment to income. The following tables set forth the status and the components of the net periodic postretirement benefit cost of the Employers Mutual postretirement benefit plans based upon a measurement date of November 1, 1995, 1994 and 1993, respectively. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Actuarial present value of benefit obligations: Retirees ........................ $ 8,319,946 $ 7,404,314 $ 7,874,628 Fully eligible active plan participants .................. 4,775,324 4,859,467 5,681,430 Other active plan participants .. 6,705,681 6,767,662 7,783,183 ------------ ------------ ------------ Total ......................... 19,800,951 19,031,443 21,339,241 Unrecognized net gain (loss) from past experience different from that assumed and effects of changes in assumptions .......... 4,110,579 3,707,110 (447,778) Prior service cost not yet recognized in net periodic postretirement benefit cost ..... (3,962,633) (4,533,871) (5,105,109) ------------ ------------ ------------ Postretirement benefit obligation .................. $ 19,948,897 $ 18,204,682 $ 15,786,354 ============ ============ ============ Service cost - benefits earned during the period ............... $ 907,297 $ 1,027,634 $ 596,498 Interest cost on accumulated postretirement benefit obligation 1,361,790 1,412,961 999,526 Net amortization and deferral ..... 409,556 571,595 - ------------ ------------ ------------ Net periodic postretirement benefit cost ................ $ 2,678,643 $ 3,012,190 $ 1,596,024 ============ ============ ============ Prior service costs are being amortized over 8.9 to 10 years beginning January 1, 1993. The assumed weighted average annual rate of increase in the per capita cost of covered health care benefits (i.e. the health care cost trend rate) for 1996 is 11.75 percent for individuals under age 65 and 10.00 percent for individuals age 65 and older, and is assumed to decrease gradually to 5.50 percent in 2005 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, a one-percentage-point increase in the assumed health care cost trend rate for each future year would increase the accumulated postretirement benefit obligation as of December 31, 1995 by $2,623,928 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1995 by $437,272. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.00 percent for 1995, 7.25 percent for 1994 and 6.75 percent for 1993. The Company's net periodic postretirement benefit cost for the years ended December 31, 1995, 1994 and 1993 was $608,832, $684,899 and $359,747, respectively. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 14. STOCK PLANS Employers Mutual has several stock plans which utilize the common stock of the Company. The Company receives the current fair market value for any shares issued under the plans and all costs of the plans are borne by Employers Mutual or the company employing the individual optionees. (a) INCENTIVE STOCK OPTION PLANS During 1995, Employers Mutual maintained two separate stock option plans for the benefit of officers and key employees of Employers Mutual and its subsidiaries. A total of 500,000 shares were reserved for issuance under the 1993 Employers Mutual Incentive Stock Option Plan (1993 Plan) and a total of 600,000 shares were reserved for the 1982 Employers Mutual Incentive Stock Option Plan (1982 Plan). Prior to 1995, options were also exercisable under the 1979 Employers Mutual Incentive Stock Option Plan (1979 Plan). All options under the 1979 Plan were either exercised or expired at December 31, 1994. There is a ten year time limit for granting options under the plans. Options can no longer be granted under the 1982 Plan and the time period for granting options under the 1993 Plan expires on December 31, 2002. Options granted under the plans can be for a term of two, three, four or five years with options becoming exercisable in equal annual cumulative increments. Options have been granted to 57 individuals under the 1982 Plan and 69 individuals under the 1993 Plan. At February 20, 1996, 30 eligible participants remained in the 1982 Plan and 64 eligible participants remained in the 1993 Plan. The Senior Executive Compensation and Stock Option Committee (the "Committee") of Employers Mutual's Board of Directors (the "Board") is the administrator of the plans. Option prices are determined by the Committee but can not be less than the fair market value of the stock on the date of grant. During 1995, 119,550 options were granted under the 1993 plan at prices ranging from $10.00 to $10.38 and 88,645 options were exercised under the plans at prices ranging from $7.81 to $9.75. A summary of Employers Mutual's incentive stock option plans is as follows: Year ended December 31, ------------------------------- 1995 1994 1993 --------- --------- --------- Options outstanding, beginning of year 556,277 518,023 392,853 Granted .............................. 119,550 64,600 163,650 Exercised ............................ (88,645) (13,546) (25,780) Expired .............................. (21,300) (12,800) (12,700) --------- --------- --------- Options outstanding, end of year ..... 565,882 556,277 518,023 ========= ========= ========= Options exercisable, end of year ..... 284,112 299,207 219,480 ========= ========= ========= EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (b) EMPLOYEE STOCK PURCHASE PLAN A total of 500,000 shares of the Company's common stock were reserved for issuance under the Employers Mutual 1993 Employee Stock Purchase Plan. The plan provides for two option periods each calendar year; from January 1 until the last business day of June and from July 1 until the last business day of December, with the last business day in each option period being the option exercise date. Any employee who is employed by Employers Mutual or its subsidiaries on the first day of the month immediately preceding any option period is eligible to participate in the plan. Eligible employees may elect to participate in the plan either through payroll deduction or by lump sum contributions, but in no case can the participation level exceed 10 percent of the employee's base annual compensation amount. The option price is 85 percent of the fair market value of the stock on the exercise date. Upon exercise of an option, a stock certificate is issued evidencing the ownership of the participant in the shares of stock so purchased. The certificate, however, is held in custody by the stock transfer agent for a period of one year from the exercise date. During such one year period, the participant has the rights and privileges of a shareholder, including the right to vote, to receive dividends and to have such shares participate in the dividend reinvestment plan. However, the participant is not able to sell, transfer, assign, pledge or otherwise encumber or dispose of such shares during such one year period. Upon expiration of the one year period or upon any earlier termination of employment of the participant for any reason, including death, such participant will, within thirty days of such expiration or termination, receive the stock certificate(s) evidencing his or her shares of stock. The plan is administered by the Board of Employers Mutual and the Board has the right to amend or terminate the plan at any time; however, no such amendment or termination shall adversely affect the rights and privileges of participants with unexercised options. During 1995, 130 employees participated in the plan and exercised a total of 17,895 options at prices of $10.20 and $11.69. Activity under the plan was as follows: Year ended December 31, ---------------------------- 1995 1994 1993 -------- -------- -------- Shares available for purchase, beginning of year ...................... 463,940 486,546 55,720 Share registered for use in plan ......... - - 500,000 Shares purchased under plan .............. (17,895) (22,606) (24,160) Shares deregistered ...................... - - (45,014) -------- -------- -------- Shares available for purchase, end of year 446,045 463,940 486,546 ======== ======== ======== EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (c) NON-EMPLOYEE DIRECTOR STOCK PURCHASE PLAN A total of 200,000 shares of the Company's common stock were reserved for issuance under Employers Mutual's Non-Employee Director Stock Purchase Plan. All non-employee directors of Employers Mutual and its subsidiaries who are not serving on the "Disinterested Director Committee" of the Board as of the beginning of the option period are eligible for participation in the plan. The option period is from the date of each eligible director's respective annual meeting to the day immediately prior to the next and subsequent annual meeting. Each eligible director is granted an option at the beginning of the option period to purchase stock at an option price equal to 75 percent of the fair market value of the stock on the option exercise date. The option may be exercised anytime during the option period. An eligible director can purchase shares of common stock in an amount equal to a minimum of 25 percent to a maximum of 100 percent of their annual cash retainer. Eligible directors may not have sold any of the Company's common stock in the six month period preceding the exercise date and may not sell any shares of the Company's common stock in the six month period following the exercise of an option. The plan is administered by the Disinterested Director Committee of the Board. The Board may amend or terminate the plan at any time; however, no such amendment or termination shall adversely affect the rights and privileges of participants with unexercised options. The plan will continue through the option period for options granted at the 2002 annual meeting. During 1995, four directors participated in the plan and exercised a total of 2,531 options at prices ranging from $7.13 to $8.35. Activity under the plan was as follows: Year ended December 31, ---------------------------- 1995 1994 1993 -------- -------- -------- Shares available for purchase, beginning of year ...................... 188,099 194,048 - Shares registered for use in the plan .... - - 200,000 Shares purchased under plan .............. (2,531) (5,949) (5,952) -------- -------- -------- Shares available for purchase, end of year 185,568 188,099 194,048 ======== ======== ======== 15. COMMON STOCK (a) DIVIDEND REINVESTMENT PLAN The Company maintains a Dividend Reinvestment and Common Stock Purchase Plan which provides stockholders with the option of reinvesting cash dividends in additional shares of the Company's common stock. Participants may also purchase additional shares of common stock without incurring broker commissions by making optional cash contributions to the plan. Any holder of shares of common stock is eligible to participate in the plan. During 1995, 1994 and 1993, Employers Mutual elected to participate in the Dividend Reinvestment Plan by reinvesting 50 percent of its dividends in additional shares of the Company's common stock. Activity under the plan was as follows: Year ended December 31, --------------------------- 1995 1994 1993 -------- -------- -------- Shares available for purchase, beginning of year ....................... 537,660 758,266 944,453 Shares purchased under plan ............... (173,099) (220,606) (186,187) -------- -------- -------- Shares available for purchase, end of year 364,561 537,660 758,266 ======== ======== ======== Range of purchase prices .................. $10.00 $ 8.75 $10.00 to to to $14.75 $ 9.50 $10.25 EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (b) TREASURY STOCK The Company from time to time repurchases shares of its outstanding common stock in the open market or through negotiated purchases for the purpose of providing shares for use in the Company's Dividend Reinvestment and Common Stock Purchase Plan. The Company also repurchases shares of its outstanding common stock in connection with the issuance of new shares under Employers Mutual's stock option plans. Treasury stock activity was as follows: Year ended December 31, ---------------------------- 1995 1994 1993 -------- -------- -------- Treasury shares, beginning of year ....... 10,931 8,090 49,392 Repurchased shares ....................... 56,096 2,841 12,568 Reissued shares .......................... (59,442) - (53,870) -------- -------- -------- Treasury shares, end of year ............. 7,585 10,931 8,090 ======== ======== ======== Average cost ............................. $ 11.66 $ 10.07 $ 10.06 ======== ======== ======== Gain on sale ............................. $115,166 $ - $ 23,261 ======== ======== ======== 16. DISCLOSURES ABOUT THE FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS The carrying amount of (1) cash, (2) indebtedness to related party, (3) accounts receivable, (4) accounts payable and (5) accrued expenses approximate fair market value because of the short maturity of these instruments. The estimated fair market value of the Company's investments are summarized as follows. The estimated fair market value is based on quoted market prices, where available, or on values obtained from independent pricing services (see note 10). Carrying Estimated December 31, 1995 amount market value ------------ ------------ Fixed maturity securities: Held-to-maturity ......................... $191,440,816 $203,312,748 Available-for-sale ....................... 142,360,569 142,360,569 Equity securities available-for-sale ....... 16,010,763 16,010,763 Short-term investments ..................... 17,271,798 17,271,798 December 31, 1994 Fixed maturity securities: Held-to-maturity ......................... $243,649,720 $238,721,488 Available-for-sale ....................... 76,492,396 76,492,396 Short-term investments ..................... 16,029,426 16,029,426 17. CONTINGENT LIABILITIES The Company and Employers Mutual and its other subsidiaries are parties to numerous lawsuits arising in the normal course of the insurance business. The Company believes that the resolution of these lawsuits will not have a material adverse effect on its financial condition or its results of operations. The companies involved have reserves which are believed adequate to cover any potential liabilities arising out of all such pending or threatened proceedings. Employers Mutual has entered into unsecured financing arrangements with several large commercial policyholders. The Company, under terms of the pooling agreement, is a 22 percent participant in these policies (note 2). At December 31, 1995, the Company is contingently liable for $1,166,000 of unsecured receivables held by Employers Mutual. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Employers Mutual has purchased annuities to fund future payments that are fixed pursuant to specific claim settlement provisions. The Company, under terms of the pooling agreement, is a 22 percent participant in these annuities (note 2). The Company is contingently liable to various claimants in the amount of $1,134,026 in the event that the issuing company would be unable to fulfill its obligations. 18. UNAUDITED INTERIM FINANCIAL INFORMATION Three months ended, ------------------------------------------------------ March 31 June 30 September 30 December 31 ------------ ------------ ------------ ------------ 1995 - ---- Total revenues ........ $ 45,941,694 $ 43,549,373 $ 47,358,200 $ 49,978,160 ============ ============ ============ ============ Income before income taxes ............... $ 5,528,309 $ 7,393,160 $ 3,706,098 $ 7,688,342 Income taxes .......... 1,528,206 2,273,383 715,805 2,449,687 ------------ ------------ ------------ ------------ Net income ....... $ 4,000,103 $ 5,119,777 $ 2,990,293 $ 5,238,655 ============ ============ ============ ============ Earnings per share*.... $ .38 $ .48 $ .28 $ .48 ============ ============ ============ ============ 1994 - ---- Total revenues ........ $ 45,660,377 $ 44,748,377 $ 47,061,359 $ 49,242,492 ============ ============ ============ ============ Income before income taxes ............... $ 3,059,771 $ 5,107,880 $ 4,830,735 $ 5,678,382 Income taxes .......... 757,227 1,288,137 1,543,917 1,581,760 ------------ ------------ ------------ ------------ Net income ....... $ 2,302,544 $ 3,819,743 $ 3,286,818 $ 4,096,622 ============ ============ ============ ============ Earnings per share*.... $ .22 $ .37 $ .31 $ .39 ============ ============ ============ ============ 1993 - ---- Total revenues ........ $ 42,369,391 $ 45,480,653 $ 45,519,261 $ 44,791,846 ============ ============ ============ ============ Income before income taxes (benefit)...... $ 3,375,144 $ 476,062 $ 627,295 $ 4,540,635 Income taxes (benefit) 1,262,205 (963,626) 392,546 1,193,976 ------------ ------------ ------------ ------------ Income from operations 2,112,939 1,439,688 234,749 3,346,659 Income from accounting changes ............. 2,621,344 - - - ------------ ------------ ------------ ------------ Net income ....... $ 4,734,283 $ 1,439,688 $ 234,749 $ 3,346,659 ============ ============ ============ ============ Earnings per share:* Income from operations ........ $ .21 $ .14 $ .02 $ .33 Income from accounting changes .26 - - - ------------ ------------ ------------ ------------ Total ............ $ .47 $ .14 $ .02 $ .33 ============ ============ ============ ============ * Since the weighted average shares for the quarters are calculated independent of the weighted average shares for the year, quarterly earnings per share may not total to annual earnings per share. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON - ------- ------------------------------------------------ ACCOUNTING AND FINANCIAL DISCLOSURE. ------------------------------------ None. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - -------- --------------------------------------------------- See the information under the caption "Election of Directors" in the Company's Proxy Statement in connection with its Annual Meeting to be held on May 22, 1996, which information is incorporated herein by reference. The following sets forth information regarding all executive officers of the Company. NAME AGE POSITION Bruce G. Kelley 42 President and Chief Executive Officer of the Company and of Employers Mutual since 1992. He was elected President of the Company and Employers Mutual in 1991. Mr. Kelley was Executive Vice President of the Company and Employers Mutual from 1989 to 1991. He has been employed with Employers Mutual since 1985. Fred A. Schiek 61 Executive Vice President and Chief Operating Officer of the Company and of Employers Mutual since 1992. He was Vice President of Employers Mutual from 1983 until 1992. He has been employed by Employers Mutual since 1959. E. H. Creese 64 Senior Vice President and Treasurer of the Company since 1993 and of Employers Mutual since 1992. He was Vice President and Treasurer of the Company from 1983 until 1993 and of Employers Mutual from 1985 until 1992. He has been employed by Employers Mutual since 1984. He will be retiring from the Company and Employers Mutual effective April 1, 1996. NAME AGE POSITION Philip T. Van Ekeren 65 Senior Vice President and Secretary of the Company since 1993 and of Employers Mutual since 1992. He was Vice President and Secretary of the Company from 1978 until 1993 and of Employers Mutual from 1978 until 1992. He has been employed by Employers Mutual since 1961. He will be retiring from the Company and Employers Mutual effective June 1, 1996. David O. Narigon 43 Vice President of the Company and of Employers Mutual since 1989. He has been employed by Employers Mutual since 1983. Raymond W. Davis 50 Vice President of the Company and Employers Mutual since 1985. He has been employed by Employers Mutual since 1979. Margaret A. Ball 58 Vice President of the Company since 1995 and of Employers Mutual since 1983. She has been employed by Employers Mutual since 1971. ITEM 11. EXECUTIVE COMPENSATION. - -------- ----------------------- See the information under the caption "Compensation of Management" in the Company's Proxy Statement in connection with its Annual Meeting to be held on May 22, 1996, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - -------- --------------------------------------------------------------- See the information under the captions "Voting Securities and Principal Stockholder" and "Security Ownership of Management" in the Company's Proxy Statement in connection with its Annual Meeting to be held on May 22, 1996, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------- ----------------------------------------------- See the information under the caption "Certain Relationships and Related Transactions" in the Company's Proxy Statement in connection with its Annual Meeting to be held on May 22, 1996, which information is incorporated herein by reference. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - -------- ----------------------------------------------------------------- (a) List of Financial Statements and Schedules. Form 10-K Page ------ 1. Financial Statements Independent Auditor's Report ................................ 51 Consolidated Balance Sheets, December 31, 1995 and 1994 ..... 52 Consolidated Statements of Income for the Years ended December 31, 1995, 1994 and 1993 ......................... 54 Consolidated Statements of Stockholders' Equity for the Years ended December 31, 1995, 1994 and 1993.............. 56 Consolidated Statements of Cash Flows for the Years ended December 31, 1995, 1994 and 1993 ......................... 58 Notes to Consolidated Financial Statements .................. 60 2. Schedules Independent Auditor's Report on Schedules ................... 93 Schedule I - Summary of Investments ....................... 94 Schedule II - Condensed Financial Information of Registrant 95 Schedule III - Supplementary Insurance Information .......... 98 Schedule IV - Reinsurance .................................. 99 Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations ..... 100 All other schedules have been omitted for the reason that the items required by such schedules are not present in the consolidated financial statements, are covered in notes to consolidated financial statements or are not significant in amount 3. Management contracts and compensatory plan arrangements Exhibit 10(b). Management Incentive Compensation Plan. Exhibit 10(d). Employers Mutual Casualty Company 1982 Incentive Stock Option Plan, as amended. Exhibit 10(f). Deferred Bonus Compensation Plans. Exhibit 10(g). EMC Reinsurance Company Executive Bonus Program. Exhibit 10(i). Employers Mutual Casualty Company Excess Retirement Benefit Agreement. Exhibit 10(k). Employers Mutual Casualty Company 1993 Employee Stock Purchase Plan. Exhibit 10(l). 1993 Employers Mutual Casualty Company Incentive Stock Option Plan. Exhibit 10(m). Employers Mutual Casualty Company Non-Employee Director Stock Option Plan. Exhibit 10(n). Employers Mutual Casualty Company Supplemental Executive Retirement Plan. (b) Reports on Form 8-K. None. (c) Exhibits. 3. Articles of incorporation and bylaws: (a) Articles of Incorporation of the Company, as amended. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1988.) (b) Bylaws of the Company, as amended. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1992.) 10. Material contracts. (a) Quota Share Reinsurance Contract between Employers Mutual Casualty Company and EMC Reinsurance Company, as amended. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1993.) (b) Management Incentive Compensation Plan. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1983.) (c) EMC Insurance Companies reinsurance pooling agreements between Employers Mutual Casualty Company and certain of its affiliated companies, as amended. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1993.) (d) Employers Mutual Casualty Company 1982 Incentive Stock Option Plan, as amended. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1986.) (e) Excess of loss reinsurance contract between Employers Mutual Casualty Company and Farm and City Insurance Company. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1985.) (f) Deferred Bonus Compensation Plans. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1986.) (g) EMC Reinsurance Company Executive Bonus Program. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1989.) (h) EMC Insurance Group Inc. Amended and Restated Dividend Reinvestment and Common Stock Purchase Plan. (Incorporated by reference to Registration No. 33-34499.) (i) Employers Mutual Casualty Company Excess Retirement Benefit Agreement. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1989.) (j) Aggregate Catastrophe Excess of Loss Retrocession Agreement between EMC Reinsurance Company and Employers Mutual Casualty Company. (k) Employers Mutual Casualty Company 1993 Employee Stock Purchase Plan. (Incorporated by reference to Registration No. 33-49335.) (l) 1993 Employers Mutual Casualty Company Incentive Stock Option Plan. (Incorporated by reference to Registration No. 33-49337.) (m) Employers Mutual Casualty Company Non-Employee Director Stock Option Plan. (Incorporated by reference to Registration No. 33-49339.) (n) Employers Mutual Casualty Company Supplemental Executive Retirement Plan 21. Subsidiaries of the Registrant. 23. Consent of KPMG Peat Marwick LLP with respect to Forms S-8 (Registration Nos. 2-93738, 33-49335, 33-49337 and 33-49339) and Form S-3 (Registration No. 33-34499). 24. Power of Attorney. 28. Consolidated Schedule P of Annual Statements provided to state regulatory authorities. (d) Financial statements required by Regulation S-X which are excluded from the Annual Report to Stockholders by Rule 14a-3(b)(1). None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 22, 1996. EMC INSURANCE GROUP INC. /s/ E. H. Creese ------------------------------------ E. H. Creese Senior Vice President, Treasurer & Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 22, 1996. /s/ E. H. Creese -------------------------------------- George C. Carpenter III* Director /s/ E. H. Creese -------------------------------------- E. H. Creese Director /s/ E. H. Creese -------------------------------------- David J. Fisher* Director /s/ E. H. Creese -------------------------------------- Bruce G. Kelley* President and Director (Chief Executive Officer) /s/ E. H. Creese -------------------------------------- George W. Kochheiser* Chairman of the Board and Director /s/ E. H. Creese -------------------------------------- Raymond A. Michel* Director /s/ E. H. Creese -------------------------------------- Fredrick A. Schiek* Director * by power of attorney INDEPENDENT AUDITORS' REPORT ON SCHEDULES The Board of Directors and Stockholders EMC Insurance Group Inc.: Under date of February 20, 1996, we reported on the consolidated balance sheets of EMC Insurance Group Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995, as contained in Part II, Item 8 of the Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related supplementary financial statement schedules listed in Part IV, Item 14(a)2. These supplementary financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these supplementary financial statement schedules based on our audits. In our opinion, such supplementary financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in notes 1, 10, 11 and 13 to the consolidated financial statements, the Company changed its method of computing unearned premiums in 1993 and implemented the provisions of the Financial Accounting Standards Board's Statements No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions", No. 109, "Accounting for Income Taxes" and No. 115, "Accounting for Certain Investments in Debt and Equity Securities". /s/ KPMG Peat Marwick LLP Des Moines, Iowa February 20, 1996 EMC INSURANCE GROUP INC. AND SUBSIDIARIES Schedule I - Summary of Investments - Other Than Investments in Related Parties December 31, 1995 Amount at which shown Market in the Type of investment Cost value balance sheet ------------------ ------------ ------------ ------------ Securities held-to-maturity: Fixed maturities: United States Government and government agencies and authorities ............... $153,468,521 $164,534,648 $153,468,521 States, municipalities and political subdivisions ........ 37,972,295 38,778,100 37,972,295 ------------ ------------ ------------ Total fixed maturity securities 191,440,816 203,312,748 191,440,816 ------------ ------------ ------------ Securities available-for-sale: Fixed maturities: States, municipalities and political subdivisions ........ 108,241,811 112,428,914 112,428,914 Foreign governments ............. 1,996,716 2,012,820 2,012,820 Public utilities ................ 9,458,349 9,746,219 9,746,219 Corporate securities ............ 17,233,563 17,993,582 17,993,582 Other debt securities ........... 169,500 179,034 179,034 ------------ ------------ ------------ Total fixed maturity securities 137,099,939 142,360,569 142,360,569 ------------ ------------ ------------ Equity securities: Common stocks ................... 14,771,422 16,010,763 16,010,763 ------------ ------------ ------------ Short-term investments .............. 17,271,798 17,271,798 17,271,798 ------------ ------------ ------------ Total investments ....... $360,583,975 $378,955,878 $367,083,946 ============ ============ ============ EMC INSURANCE GROUP INC. AND SUBSIDIARIES Schedule II - Condensed Financial Information of Registrant Condensed Balance Sheets December 31, -------------------------- 1995 1994 ------------ ------------ ASSETS - ------ Investment in common stock of subsidiaries (equity method) .................. $130,150,418 $111,420,069 Fixed maturity securities held-to-maturity, at amortized cost ............................. 4,003,016 2,002,494 Fixed maturity securities available-for-sale, at market value ............................... - 1,000,000 Short-term investments .......................... 2,688,128 2,172,259 Cash ............................................ 19,536 61,389 Accrued investment income ....................... 66,031 57,768 Accounts receivable ............................. 106,398 37,502 Income taxes recoverable ........................ - 32,000 Indebtedness of related party ................... - 87,023 ------------ ------------ Total assets ............................... $137,033,527 $116,870,504 ============ ============ LIABILITIES - ----------- Accounts payable ................................ $ 119,558 $ 143,815 Income taxes payable ............................ 24,000 - Indebtedness to related party ................... 1,211 - ------------ ------------ Total liabilities .......................... 144,769 143,815 ------------ ------------ STOCKHOLDERS' EQUITY - -------------------- Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding, 10,821,978 shares in 1995 and 10,587,629 shares in 1994 ......... 10,821,978 10,587,629 Additional paid-in capital ...................... 59,787,926 57,162,911 Retained earnings ............................... 66,379,275 49,086,216 Treasury stock, at cost (7,585 shares in 1995 and 10,931 shares in 1994) .................... (100,421) (110,067) ------------ ------------ Total stockholders' equity ................. 136,888,758 116,726,689 ------------ ------------ Total liabilities and stockholders' equity $137,033,527 $116,870,504 ============ ============ EMC INSURANCE GROUP INC. AND SUBSIDIARIES Condensed Statements of Income Years ended December 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Equity in undistributed earnings ...... $13,123,772 $10,464,926 $ 6,370,743 Dividends received from consolidated subsidiaries ........... 4,200,019 3,068,019 860,000 Investment income ..................... 357,408 236,519 214,825 Loss on sale of stock ................. - (5,000) (30,000) ----------- ----------- ----------- 17,681,199 13,764,464 7,415,568 Operating expenses .................... 307,713 315,784 345,678 ----------- ----------- ----------- Income from operations before income taxes (benefit) ........... 17,373,486 13,448,680 7,069,890 Income taxes (benefit) ................ 24,658 (57,047) (64,145) ----------- ----------- ----------- Income from operations ............. 17,348,828 13,505,727 7,134,035 Income from accounting changes ........ - - 2,621,344 ----------- ----------- ----------- Net income .............. $17,348,828 $13,505,727 $ 9,755,379 =========== =========== =========== EMC INSURANCE GROUP INC. AND SUBSIDIARIES Condensed Statements of Cash Flows Years ended December 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Net cash provided by operating activities ................ $ 4,269,852 $ 2,963,071 $ 761,673 ----------- ----------- ----------- Cash flows from investing activities: Purchases of fixed maturity securities held-to-maturity ....... (2,002,500) (2,002,969) - Purchases of fixed maturity securities available-for-sale ..... - (1,000,000) - Maturities of fixed maturity securities available-for-sale ..... 1,000,000 - - Net (purchases) sales of short-term investments ...................... (515,869) 2,613,433 1,937,409 Sale of equity securities available-for-sale ............... - 500,000 500,000 ----------- ----------- ----------- Net cash (used in) provided by investing activities ........... (1,518,369) 110,464 2,437,409 ----------- ----------- ----------- Cash flows from financing activities: Issuance of common stock ........... 2,859,364 2,403,285 1,670,536 Dividends paid to stockholders ..... (5,662,346) (5,422,164) (5,303,032) Sales (purchases) of treasury stock, net ....................... 9,646 (28,681) 401,958 ----------- ----------- ----------- Net cash used in financing activities ..................... (2,793,336) (3,047,560) (3,230,538) ----------- ----------- ----------- Net (decrease) increase in cash ....... (41,853) 25,975 (31,456) Cash at beginning of year ............. 61,389 35,414 66,870 ----------- ----------- ----------- Cash at end of year ................... $ 19,536 $ 61,389 $ 35,414 =========== =========== =========== Income taxes paid ..................... $ 31,342 $ 62,433 $ 14,000 Interest paid ......................... - - -
EMC INSURANCE GROUP INC. AND SUBSIDIARIES Schedule III - Supplementary Insurance Information For years ended December 31, 1995, 1994 and 1993 Deferred policy Losses and Net acquisition settlement Unearned Premium investment Segment costs expenses premiums revenue income ------- ----------- ------------ ----------- ------------ ----------- Year ended December 31, 1995: Property and casualty insurance $ 6,777,303 $146,575,010 $39,973,174 $116,439,266 $15,428,401 Reinsurance ................... 1,729,903 50,748,972 7,863,197 35,825,953 6,067,678 Nonstandard risk automobile insurance ................... 207,563 8,098,127 930,776 10,001,031 1,175,392 Excess and surplus lines insurance agency ............ - - - - 144,915 Parent company ................ - - - - 357,408 ----------- ------------ ----------- ------------ ----------- Consolidated ............. $ 8,714,769 $205,422,109 $48,767,147 $162,266,250 $23,173,794 =========== ============ =========== ============ =========== Year ended December 31, 1994: Property and casualty insurance $ 6,448,141 $148,541,352 $38,804,128 $115,411,835 $14,080,206 Reinsurance ................... 1,706,245 46,925,895 7,755,657 37,256,763 5,354,494 Nonstandard risk automobile insurance ................... 239,249 7,714,368 1,112,785 12,160,781 1,152,341 Excess and surplus lines insurance agency ............ - - - - 106,120 Parent company ................ - - - - 236,519 ----------- ------------ ----------- ------------ ----------- Consolidated ............. $ 8,393,635 $203,181,615 $47,672,570 $164,829,379 $20,929,680 =========== ============ =========== ============ =========== Year ended December 31, 1993: Property and casualty insurance $ 6,275,214 $146,305,725 $38,898,256 $109,584,986 $13,242,584 Reinsurance ................... 1,134,185 42,063,802 5,670,927 33,324,202 6,090,294 Nonstandard risk automobile insurance ................... 289,465 8,752,325 1,371,873 13,528,350 1,165,684 Excess and surplus lines insurance agancy ............ - - - - 66,564 Parent company ................ - - - - 214,825 ----------- ------------ ----------- ------------ ----------- Consolidated ............. $ 7,698,864 $197,121,852 $45,941,056 $156,437,538 $20,779,951 =========== ============ =========== ============ ===========
Year ended December 31, 1995: Property and casualty insurance $ 74,926,023 $ 21,742,128 $14,548,401 $117,736,744 Reinsurance ................... 23,744,247 8,191,751 3,391,578 35,933,493 Nonstandard risk automobile insurance ................... 9,482,008 2,218,737 557,028 9,819,022 Excess and surplus lines insurance agency ............ - - (338,001) Parent company ................ - - 307,713 ------------ ------------ ----------- Consolidated ............. $108,152,278 $ 32,152,616 $18,467,091 ============ ============ =========== Year ended December 31, 1994: Property and casualty insurance $ 77,872,039 $ 20,338,769 $13,163,706 $115,699,969 Reinsurance ................... 30,564,830 8,754,885 2,654,290 39,341,493 Nonstandard risk automobile insurance ................... 8,507,185 2,608,135 551,551 11,901,693 Excess and surplus lines insurance agency ............ - - (399,125) Parent company ................ - - 315,784 ------------ ------------ ----------- Consolidated ............. $116,944,054 $ 31,701,789 $16,286,206 ============ ============ =========== Year ended December 31, 1993: Property and casualty insurance $ 79,777,312 $ 19,528,117 $11,597,944 $112,293,341 Reinsurance ................... 27,871,896 8,331,595 3,161,007 32,076,482 Nonstandard risk automobile insurance ................... 12,706,091 2,857,463 507,486 13,564,557 Excess and surplus lines insurance agancy ............ - - (36,858) Parent company ................ - - 345,678 ------------ ------------ ---------- Consolidated ............. $120,355,299 $ 30,717,175 $15,575,257 ============ ============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES Schedule IV - Reinsurance For years ended December 31, 1995, 1994, and 1993 Percentage Ceded to Assumed of amount Gross other from other Net assumed amount companies companies amount to net ------------ ------------ ------------ ------------ ---------- Year ended December 31, 1995: Earned premiums: Consolidated property and casualty insurance .......................... $151,450,871 $150,630,590 $161,445,969 $162,266,250 99.5% ============ ============ ============ ============ ========== Year ended December 31, 1994: Earned premiums: Consolidated property and casualty insurance .......................... $140,012,247 $138,010,578 $162,827,710 $164,829,379 98.8% ============ ============ ============ ============ ========== Year ended December 31, 1993: Earned premiums: Consolidated property and casualty insurance .......................... $137,141,457 $135,828,770 $155,124,851 $156,437,538 99.2% ============ ============ ============ ============ ==========
EMC INSURANCE GROUP INC. AND SUBSIDIARIES Schedule VI - Supplemental Insurance Information Concerning Property-Casualty Insurance Operations For years ended December 31, 1995, 1994 and 1993 Discount, Deferred Reserves for if any, policy losses and deducted Net Consolidated property- acquisition settlement from Unearned Earned investment casualty entities costs expenses reserves premiums premiums income - ---------------------- ----------- ------------ -------- ----------- ------------ ----------- Year ended December 31, 1995: $ 8,714,769 $205,422,109 $ -0- $48,767,147 $162,266,250 $22,671,471 =========== ============ ======== =========== ============ =========== Year ended December 31, 1994: $ 8,393,635 $203,181,615 $ -0- $47,672,570 $164,829,379 $20,587,041 =========== ============ ======== =========== ============ =========== Year ended December 31, 1993: $ 7,698,864 $197,121,852 $ -0- $45,941,056 $156,437,538 $20,498,562 =========== ============ ======== =========== ============ ===========
Losses and settlement expenses Amortization incurred related to of deferred Paid (1) (2) policy losses and Consolidated property- Current Prior acquisition settlement Premiums casualty entities Year Years costs expenses Written - ---------------------- ------------ ----------- ------------ ------------ ------------ Year ended December 31, 1995: $123,876,601 ($15,724,323) $ 32,152,616 $103,991,590 $163,489,259 ============ =========== ============ ============ ============ Year ended December 31, 1994: $123,343,829 ($ 6,399,775) $ 31,701,789 $107,576,486 $166,943,155 ============ =========== ============ ============ ============ Year ended December 31, 1993: $119,896,526 $ 458,773 $ 30,717,175 $130,823,484 $157,934,380 ============ =========== ============ ============ ============
Differences between Electronic and Circulated 10-K's - ---------------------------------------------------- 1) The index to exhibits in the electronic format indicates if the exhibits are included in the direct transmission or are filed under Form SE. The circulated document contains the page numbers of the exhibits. 2) Exhibit 28 was filed in hard copy under Form SE and is not included in the document filed under EDGAR. EMC Insurance Group Inc. and Subsidiaries Index to Exhibits Exhibit Number Item - ------ ---- 10(j) Aggregate Catastrophe Excess of Loss Included in Retrocession Agreement between EMC direct transmission Reinsurance Company and Employers Mutual Casualty Company 10(n) Employers Mutual Casualty Company Included in Supplemental Executive Retirement Plan direct transmission 21 Subsidiaries of the Registrant Included in direct transmission 23 Consent of KPMG Peat Marwick LLP with Included in respect to Forms S-8 and Form S-3. direct transmission 24 Power of Attorney. Included in direct transmission 28 Consolidated Schedule P of Annual Filed under cover Statements provided to state regulatory of Form SE authorities. EX-10 2 MATERIAL CONTRACT- REINSURANCE Exhibit 10(J) ADDENDUM #1 TO AGGREGATE CATASTROPHE EXCESS OF LOSS RETROCESSION AGREEMENT between EMC REINSURANCE COMPANY and EMPLOYERS MUTUAL CASUALTY COMPANY Effective January 1, 1992, this Agreement is amended as follows: 1. ARTICLE 2 - COVER - is amended by substituting "ultimate net retained losses of $2,500,000" in line 3, in lieu of "ultimate net retained losses of $2,000,000". 2. ARTICLE 3 - TERM. The first paragraph is replaced from inception with the following: This Agreement shall become effective for the annual period beginning 12:01 A.M., Central Standard Time January 1, 1991, and ending 12:01 A.M., Central Standard Time, January 1, 1992; and is further automatically extended for each subsequent annual period from January 1, 1992 until amended by the parties or until terminated. 3. ARTICLE 8 - PREMIUM is replaced by the following: Effective January 1, 1992 the Company will pay the Reinsurer a premium of $380,000 for each annual term of this Agreement, to be paid in equal installments of $95,000 on the first day of January, April, July and October. IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed, by the Company, this 9th day of January, 1992. EMC REINSURANCE COMPANY Des Moines, Iowa /s/ Richard E. Haskins, President --------------------------------- and by the Reinsurer on this 9th day of January, 1992. EMPLOYERS MUTUAL CASUALTY COMPANY Des Moines, Iowa /s/ Robb Kelley, C.E.O. & Chairman ---------------------------------- ADDENDUM #2 TO AGGREGATE CATASTROPHE EXCESS OF LOSS RETROCESSION AGREEMENT between EMC REINSURANCE COMPANY and EMPLOYERS MUTUAL CASUALTY COMPANY Effective January 1, 1993, this Agreement is amended as follows: ARTICLE 8 - PREMIUM is replaced by the following: Effective January 1, 1993, the Company will pay the Reinsurer a premium of $500,000 for each annual term of this Agreement, to be paid in equal installments of $125,000 on the first day of January, April, July and October. IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed, by the Company, this 8th day of December, 1992. EMC REINSURANCE COMPANY Des Moines, Iowa /s/ Dean P. McClaflin, President -------------------------------- and by the Reinsurer on this 8th day of December 1992. EMPLOYERS MUTUAL CASUALTY COMPANY Des Moines, Iowa /s/ Bruce G. Kelley, President --------------------------------- ADDENDUM #3 TO AGGREGATE CATASTROPHE EXCESS OF LOSS RETROCESSION AGREEMENT between EMC REINSURANCE COMPANY and EMPLOYERS MUTUAL CASUALTY COMPANY Effective January 1, 1995, this Agreement is amended as follows: I Article 2 - Cover is amended to read as follows: The Reinsurer will be liable in respect of Loss Occurrences in the Aggregate for 100% of the Ultimate Net Retained Loss over and above initial Ultimate Net Retained Losses of $3,000,000 in the Aggregate, irrespective of the number of Loss Occurrences or the number or kinds of risks involved, subject to a limit of liability to the Reinsurer of $2,000,000; but only those Loss Occurrences exceeding a franchise of $200,000 shall be subject to this cover. The maximum liability of the Reinsurer under this Agreement, is $2,000,000. II Article 10 - Reinstatement is deleted. IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed, by the Company, this 5th day of October 1994. EMC REINSURANCE COMPANY Des Moines, Iowa /s/ Ron Hallenbeck ---------------------- President and by the Reinsurer on this 5th day of October 1994. EMPLOYERS MUTUAL CASUALTY COMPANY Des Moines, Iowa /s/ Bruce Kelley --------------------------------- President EMC REINSURANCE COMPANY AGGREGATE CATASTROPHE EXCESS OF LOSS RETROCESSION AGREEMENT EFFECTIVE: January 1, 1991 TABLE OF CONTENTS ----------------- ARTICLE SUBJECT PAGE(S) - ---------------- ------------------------------ --------- Preamble 1 1 Business Reinsured 1 2 Cover 1 3 Term 1,2 4 Territory 2 5 Definitions 2,3 6 Net Retained Lines 3 7 Exclusions 3,4 8 Premium 4 9 Currency 4 10 Reinstatement 4 11 Taxes 4 12 Reports 5 13 Notice of Loss & Loss Settlements 5 14 Extra Contractual Obligations 5,6 15 Errors & omissions 6 16 Inspection 6 17 Insolvency 6 18 Arbitration 6 19 Signing Page 7 AGGREGATE CATASTROPHE EXCESS OF LOSS RETROCESSION AGREEMENT This Agreement is made and entered into by and between EMC REINSURANCE COMPANY, Des Moines, Iowa. (Hereinafter called the "Company") and EMPLOYERS MUTUAL CASUALTY COMPANY, Des Moines, Iowa, (Hereinafter called the "Reinsurer"). ARTICLE 1 --------- BUSINESS REINSURED - ------------------ This Agreement is to indemnify the Company in respect of the net excess liability as herein provided and specified which may accrue to the Company as a result of any loss or losses which may occur during the term of this Agreement under any Policies covering Reinsurance Business in force, written or renewed by or on behalf of the Company, subject to the terms and conditions herein contained. ARTICLE 2 --------- COVER - ----- The Reinsurer will be liable in respect of Loss Occurrences in the Aggregate for 100% of the Ultimate Net Retained Loss over and above initial Ultimate Net Retained Losses of $2,000,000 in the Aggregate, irrespective of the number of Loss Occurrences or the number or kinds of risks involved, subject to a limit of liability to the Reinsurer of $2,000,000; but only those Loss Occurrences exceeding a franchise of $200,000 shall be subject to this cover. The maximum liability of the Reinsurer under this Agreement, including liability reinstated, is $4,000,000. ARTICLE 3 --------- TERM - ---- This Agreement shall become effective at 12:01 A.M., Central Standard Time, January 1, 1991, and shall remain in full force and effect for one year, expiring 12:01 A.M., Central Standard Time, January 1, 1992. Upon expiration of this Agreement the entire liability of the Reinsurer for losses occurring subsequent to expiration shall cease concurrently with the expiration. Should this Agreement expire while a loss covered hereunder is in progress, the Reinsurer shall be responsible for the loss in progress in the same manner and to the same extent it would have been responsible had the Agreement expired the day following the conclusion of the loss in progress. ARTICLE 4 --------- TERRITORY - --------- This Agreement will cover worldwide. ARTICLE 5 --------- DEFINITIONS - ----------- A. The term "Ultimate Net Retained Losses" as used in this Agreement shall mean the aggregate actual losses paid by the Company, or for which the Company becomes liable to pay; such losses to include Extra Contractual Obligations as defined in the EXTRA CONTRACTUAL OBLIGATIONS ARTICLE of this Agreement, and expenses of litigation and interest, and all other loss expense of the Company including subrogations, salvage, and recovery expenses (office expenses and salaries of officials and employees not classified as loss adjusters are not chargeable as expenses for purposes of this paragraph), but salvages and all recoveries, including recoveries under all reinsurances (whether recovered or not), shall be first deducted from such losses to arrive at the amount of liability attaching hereunder. All reinsurances carried by the Company or benefiting the Company in any way shall be deemed reinsurances inuring to the benefit of this cover. All salvages, recoveries or payments recovered or received subsequent to loss settlement hereunder shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments shall be made by the parties hereto. Nothing in this clause shall be construed to mean that losses are not recoverable hereunder until the Company's Ultimate Net Retained Losses have been ascertained. B. The term "Loss Occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event. C. The term "Policy" as used in this Agreement shall mean any binder, policy, or contract of reinsurance issued, accepted or held covered provisionally or otherwise, by or on behalf of the Company. D. "Franchise" as used in this Agreement means that when the franchise is exceeded, the entire Loss Occurrence is subject to coverage hereunder. ARTICLE 6 --------- NET RETAINED LINES - ------------------ This Agreement applies only to that portion of any reinsurances covered by this Agreement which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount in excess of which this Agreement attaches, only loss or losses in respect of that portion of any reinsurances which the Company retains net for its own account shall be included, it being understood and agreed that the amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurers, whether specific or general, any amounts which may have become due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. ARTICLE 7 --------- EXCLUSIONS - ---------- This Agreement does not cover: A. Business assumed from any source other than the, Home Office Reinsurance Underwriting Department of Employers Mutual Casualty Company. B. Business excluded by the attached Nuclear Incident Exclusion Clauses: Physical Damage - Reinsurance - U.S.A., Physical Damage and Liability - (Boiler and Machinery Policies) Reinsurance - U.S.A., Liability - Reinsurance - U.S.A. C. Financial Guarantee or Insolvency. D. Pools, Associations, Syndicates per the attached. Pools, Associations, Syndicates Exclusion Clause. E. Life business other than accidental death and dismemberment. F. Aviation business (including satellites). G. Any loss arising from a pattern of violation of the Company's letter of intent dated December 1, 1987 on Seepage and Pollution, it being understood that the nature of the Business covered hereunder precludes absolute enforcement of the Company's intent in all instances. ARTICLE 8 --------- PREMIUM - ------- The Company will pay the Reinsurer a premium of $320,000 for the term of this Agreement, to be paid in the amount of $240,000 on July 1, and $80,000 on October 1. ARTICLE 9 --------- CURRENCY - -------- The currency to be used for all purposes of this Agreement shall be United States of America currency. ARTICLE 10 ---------- REINSTATEMENT - ------------- Loss payments under this Agreement will reduce the limit of coverage afforded by the amounts paid, but the limit of coverage will be reinstated from the time of the occurrence of the loss and for each amount so reinstated the Company agrees to pay an additional premium calculated at pro rata of the Reinsurer's premium for term of this Agreement, being pro rata only as to the fraction of the face value of this Agreement (i.e., the fraction of $2,000,000) so reinstated. The Company's initial retention of $2,000,000 Ultimate Net Retained loss in the Aggregate shall satisfy the retention requirement as to any coverage reinstated. One full reinstatement only is provided by this Agreement. ARTICLE 11 ---------- TAXES - ----- The Company will be liable for taxes on premiums reported to the Reinsurer hereunder. ARTICLE 12 ---------- REPORTS - ------- Within 60 days after the expiration of the Agreement, the Company will furnish the Reinsurer with: A. Gross Net Written Premium Income of the Company for the term of this Agreement. B. Any other information which the Reinsurer may require to prepare its Annual Statement which is reasonably available to the Company. ARTICLE 13 ---------- NOTICE OF LOSS AND LOSS SETTLEMENTS - ----------------------------------- The Company will advise the Reinsurer promptly of all claims which in the opinion of the Company may involve the Reinsurer, and of all subsequent developments on these claims which may materially affect the position of the Reinsurer. The Reinsurer agrees to abide by the loss settlements of the Company, it being understood, however, that when so requested the Company will afford the Reinsurer an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim or suit or proceeding involving this reinsurance and that the Company will cooperate in every respect in the defense or control of such claim, suit or proceeding. The Reinsurer will pay its share of loss settlements immediately upon receipt of proof of loss from the Company. ARTICLE 14 ---------- EXTRA CONTRACTUAL OBLIGATIONS - ----------------------------- This agreement shall also protect the Company within the limits hereof where the Ultimate Net Loss includes any Extra Contractual Obligations incurred by the Company. "Extra Contractual Obligations" are defined as those liabilities not covered under any other provision of this Agreement and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its reinsured or in the preparation or prosecution of an appeal consequent upon such action. The date on which any Extra Contractual Obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the original accident, casualty, disaster, or Loss Occurrence. ARTICLE 15 ---------- ERRORS AND OMISSIONS - -------------------- Any inadvertent delay, omission or error shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such delay, omission or error had not been made, providing such delay, omission or error is rectified upon discovery. ARTICLE 16 ---------- INSPECTION - ---------- The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect, through its authorized representatives, all books, records and papers of the Company in connection with any reinsurance hereunder, or claims in connection herewith. ARTICLE 17 ---------- INSOLVENCY - ---------- In the event of the insolvency of the Company the attached General Insolvency Clause No. 21-01 will apply. ARTICLE 18 ---------- ARBITRATION - ----------- Any irreconcilable dispute between the parties to this Agreement will be arbitrated in Des Moines, Iowa in accordance with the attached Arbitration Clause No. 22-01. ARTICLE 19 ---------- Executed by the Company, this 30th day of May 1991. EMC REINSURANCE COMPANY Des Moines, Iowa /s/ Richard E. Haskins, President --------------------------------- and by the Reinsurer this 30th day of May 1991. EMPLOYERS MUTUAL CASUALTY COMPANY Des Moines, Iowa /s/ Robb B. Kelley, President --------------------------------- AGGREGATE CATASTROPHE EXCESS OF LOSS RETROCESSION AGREEMENT issued to EMC REINSURANCE COMPANY --------------------------- | EMC RE | --------------------------- EMC Reinsurance Company 717 Mulberry Street, Des Moines, Iowa 50309 Mail Address: P.O. Box 712, Des Moines, Iowa 50303 May 24, 1991 To Whom It May Concern: Re: Catastrophe Retrocessional Program Seepage and Pollution Letter of Intent ------------------------------------------- It is not the intention of the reassured to underwrite any original or primary reinsurance treaty business (U.S.A.) that does not contain a seepage and pollution exclusion clause where legal and applicable. In respect of any retrocessional business, the reassured will endeavor to ensure (as far as possible) that clients reinsured adhere to a similar philosophy. Very truly yours, /s/ Dean P. McClaflin ------------------- Dean P. McClaflin Vice President POOLS, ASSOCIATIONS & SYNDICATES EXCLUSION CLAUSE SECTION A: Excluding: (a) All business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities. (b) Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, 1968 for the purpose of insuring property whether on a country-wide basis or in respect of designated areas. This exclusion shall not apply to so-called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage. SECTION B: It is agreed that business written by the Company for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in the following Pools, Associations or Syndicates, whether by way of insurance or reinsurance, is excluded hereunder: Industrial Risk Insurers, Associated Factory Mutuals, Improved Risk Mutuals, Any Pool, Association or Syndicate formed for the purpose of writing Oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs, United States Aircraft Insurance Group, Canadian Aircraft Insurance Group, Associated Aviation Underwriters, American Aviation Underwriters. Section B does not apply: (a) Where The Total Insured Value over all interests of the risk in question is less than $250,000,000. (b) To interests traditionally underwritten as Inland Marine or stock and/or contents written on a blanket basis. (c) To Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above, other than as provided for under Section B(a). (d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (other than railroad schedules) and builder's risks on the classes of risks specified in this subsection (d) only. Where this clause attaches to Catastrophe Excesses, the following SECTION C is added: Nevertheless the Reinsurer specifically agrees that liability accruing to the Company from its participation in: (1) The following so-called "Coastal Pools": Alabama Insurance Underwriting Association Florida Windstorm Underwriting Association Louisiana Insurance Underwriting Association Mississippi Insurance Underwriting Association North Carolina Insurance Underwriting Association South Carolina Windstorm and Hail Underwriting Association Texas Catastrophe Property Insurance Association AND (2) All "Fair Plan" business for all perils otherwise protected hereunder shall not be excluded, except, however, that this reinsurance does not include any increase in such liability resulting from: (i) The inability of any other participant in such "Coastal Pool" or Fair Plan to meet its liability. (ii) Any claim against such "Coastal Pool" or Fair Plan, or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund (as defined in the Insolvency Fund Exclusion Clause incorporated in this Contract). 35 A NUCLEAR INCIDENT EXCLUSION CLAUSE- LIABILITY- REINSURANCE U.S.A. - ---------------------------------------------------------------- (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II of this paragraph (2) from the time specified in Clause III in this paragraph (2) shall be deemed to include the following provision (specified as the Limited Exclusion Provision): LIMITED EXCLUSION PROVISION.* I. It is agreed that the policy does not apply under any liability coverage, to: injury, sickness, disease, death or destruction bodily injury or property damage, with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability. II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies. III. The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either (a) become effective on or after 1st May, 1960, or (b) become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph (2) shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof. (3) Except for those classes of policies specified in Clause II of paragraph (2) and without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages: January 1, 1990 35 A Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability) shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph (3), the following provision (specified as the Broad Exclusion Provision): BROAD EXCLUSION PROVISION.* It is agreed that the policy does not apply: I. Under any Liability Coverage, to: injury, sickness, disease, death or destruction bodily injury or property damage (a) with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or (b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by tile United States of America, or any agency thereof, with any person or organization. II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to: immediate medical or surgical relief, first aid, to expenses incurred with respect to: bodily injury, sickness, disease or death bodily injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization. III. Under any Liability Coverage to: injury, sickness, desease, death, or destruction bodily injury or property damage resulting from the hazardous properties of nuclear material, if 35 A (a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom; (b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or (c) the: injury, sickness, disease, death or destruction bodily injury or property damage, arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories, or possessions or Canada, this exclusion (c) applies only to: injury to or destruction of property at such nuclear facility property damage to such nuclear facility and any property thereat. IV. As used in this endorsement: "HAZARDOUS PROPERTIES" include radioactive, toxic or explosive properties; "NUCLEAR MATERIAL" means source material, special nuclear material or byproduct material; "SOURCE MATERIAL," "SPECIAL NUCLEAR MATERIAL," and "BYPRODUCT MATERIAL" have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof, "SPENT FUEL" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "WASTE" means any waste material (1) containing byproduct material and (2) resulting from the operation by any person or organization of any nuclear facility included within the definition of nuclear facility under paragraph (a) or (b) thereof; "NUCLEAR FACILITY" means (a) any nuclear reactor, (b) any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling processing or packaging waste, (c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235, (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste, January 1, 1990 35 A and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; "NUCLEAR REACTOR" means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material; With respect to injury to or destruction of property, the word "injury" or "destruction" includes all forms of radio active contamination of property. "property damage" includes all forms of radio active contamination of property. V. The inception dates and thereafter of all original policies affording coverages specified in this paragraph (3), whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph (3) shall not be applicable to (i) Garage and Automobile Policies issued by the Reassured on New York risks, or (ii) statutory liability insurance required under Chapter 90, General Laws of Massachusetts, until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof. (4) Without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that paragraphs (2) and (3) above are not applicable to original liability policies of the Reassured in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters' Association of the Independent Insurance Conference of Canada. *NOTE. The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. January 1, 1990 35 B NUCLEAR INCIDENT EXCLUSION CLAUSE-PHYSICAL DAMAGE- REINSURANCE U.S.A. ------- 1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary property on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material", and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate (a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after lst January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. January 1, 1990 35 B 6. The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. Note: Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that (a) all policies issued by the Reassured on or before 3lst December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply, (b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31 st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. January 1, 1990 35 E NUCLEAR INCIDENT EXCLUSION CLAUSE - --------------------------------- PHYSICAL DAMAGE AND-LIABILITY - ----------------------------- (BOILER AND MACHINERY POLICIES) - REINSURANCE - U.S.A. - ------------------------------------------------------ (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all original Boiler and Machinery Insurance or Reinsurance contracts of the Reassured shall be deemed to include the following provisions of this paragraph; This Policy does not apply to "loss," whether it be direct or indirect, proximate or remote (a) from an Accident caused directly or indirectly by nuclear reaction, nuclear radiation or radioactive contamination, all whether controlled or uncontrolled; or (b) from nuclear reaction, nuclear radiation or radioactive contamination, all whether controlled or uncontrolled, caused directly or indirectly by, contributed to or aggravated by an Accident. (3) However, it is agreed that loss arising out of the use of Radioactive Isotopes in any form is not hereby excluded from reinsurance protection. (4) Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that (a) all policies issued by the Reassured effective on or before 30th April, 1958, shall be free from the application of the other provisions of this Clause until expiry date or 30th April, 1961, whichever first occurs, whereupon all the provisions of this Clause shall apply, (b) with respect to any risk located in Canada policies issued by the Reassured effective on or before 30th June, 1958, shall be free from the application of the other provisions of this Clause until expiry date of 30th June, 1961, whichever first occurs, whereupon all the provisions of this Clause shall apply. January 1, 1990 INSOLVENCY CLAUSE - ----------------- In the event of the insolvency of the Company, reinsurance under this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company under Policy or Policies reinsured without diminution because of the insolvency of the Company to the Company or to its liquidator, receiver, or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except where the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company, and where the Reinsurer with the consent of the direct insured or insureds has assumed such Policy obligations of the Company as direct obligations of the Reinsurer to the payees under such Policies and in substitution for the obligations of the Company to such payees. It is agreed, however, that the liquidator or receiver or statutory successor of the insolvent Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and that during the pendency of such claim the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator or receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. Where two or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the insolvent Company. Should the Company go into liquidation or should a receiver be appointed the Reinsurer shall be entitled to deduct from any sums which may be due or may become due to the Company under this Reinsurance Agreement, any sums which are due to the Reinsurer by the Company under this Reinsurance Agreement and which are payable at a fixed or stated date, as well as any other sums due the Reinsurer which are permitted to be offset under applicable law. Note: Wherever used herein the terms: "Company" shall be understood to mean "Company," "Reinsured," "Reassured" or whatever other term is used in the attached reinsurance agreement to designate the reinsured company. "Agreement" shall be understood to mean "Contract", "Agreement", "Policy" or whatever other term is used to designate the attached reinsurance document. Arbitration Clause ------------------ As a condition precedent to any right of action hereunder, any irreconcilable dispute between the parties to this Agreement will be submitted for decision to a board of arbitration composed of two arbitrators and an umpire. Arbitration shall be initiated by the delivery of a written notice of demand for arbitration by one party to the other within a reasonable time after the dispute has arisen. The members of the board of arbitration shall be active or retired disinterested officials of insurance or reinsurance companies, or Underwriters at Lloyd's, London, not under the control or management of either party to this Agreement. Each party shall appoint its arbitrator and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within four weeks after being requested to do so by the claimant, the latter shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the appointment of an umpire within four weeks after their nominations, each of them shall name three, of whom the other shall decline two, and the decision shall be made by drawing lots. The claimant shall submit its initial brief within 45 days from appointment of the umpire. The respondent shall submit its brief within 45 days thereafter and the claimant may submit a reply brief within 30 days after filing of the resdondent's brief. The board shall make its decision with record to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. The board shall make its decision within 60 days following the termination of the hearings unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this clause, and communications shall be made by the Company to each of the reinsurers constituting the one party, provided, however, that nothing therein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers under the terms of this Agreement from several to joint. If more than one reinsurer is involved in the arbitration as respondent, the time for appointing the arbitrators will be extended to six weeks. Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire. The remaining costs of the arbitration proceedings shall be allocated by the board. Note: Wherever used herein, the term "Company" shall be understood to mean "Reinsured", "Reassured" or whatever other term is used in the attached Agreement to designate the reinsured company. The term "Agreement" shall be understood to mean "Contract", "Policy" or whatever other term is used to designate the attached reinsurance document. EX-10 3 MATERIAL CONTRACT - RETIREMENT PLAN SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Employers Mutual Casualty Company This Supplemental Executive Retirement Plan (hereinafter "the Plan") is adopted this 13th day of September, 1994 by Employers Mutual Casualty Company (hereinafter "EMCC"). ARTICLE I INTRODUCTION AND PURPOSE OF PLAN 1.1 Establishment of Plan. EMCC, by execution of this document, hereby establishes this Supplemental Executive Retirement Plan which shall become effective as of January 1, 1995. The Plan shall be maintained for the exclusive benefit of Plan Participants and is intended to be a nonqualified deferred compensation plan for the benefit of certain highly compensated and managerial employees of EMCC. 1.2 Purpose of Plan. The purpose of this Plan is to aid EMCC in attracting and retaining certain highly compensated key employees by providing a level of retirement benefits that may otherwise be limited by governmental limitations and by the level of benefits provided by other retirement income programs of EMCC. ARTICLE II DEFINITIONS 2.1 Administrator means the Pension Committee of EMCC and any individual or committee of individuals appointed by the Pension Committee to administer the Plan. 2.2 (i) Average Annual Compensation for Eligibility means the average of a Participant's Compensation for the previous three calendar years. (ii) Average Annual compensation for Benefit Determination means the average of a Participant's Compensation for the highest five years out of the previous ten calendar years. If a Participant has not attained ten Years of Service at the time the Average Annual Compensation is determined, the average shall be determined for the highest five years out of all the Participant's Years of Service. 2.3 Beneficiary means the spouse of the Participant. No person other than the Participant and the Participant's spouse shall be entitled to receive a benefit from this Plan on account of the Participant's participation. 2.4 Code means the Internal Revenue Code of 1986, as amended, and includes any regulations thereunder. 2.5 Compensation. Compensation includes all wages for federal income tax purposes, as defined under Code Sec. 3401(a) (for purposes of income tax withholding at the source), disregarding any rules limiting the remuneration included as wages based on the nature or location of the employment or services performed. Compensation shall also include compensation which is contributed by EMCC pursuant to a salary reduction agreement and which is not currently includable in the employee's gross income by reason of the application of Code Sections 125, 401(k), 402(a)(8), 402(h), 403(b) or 457 along with any amounts deferred by the Participant under the EMCC Deferred Bonus Plan. Compensation shall specifically exclude the following: relocation allowances, pay in lieu of vacation, gain from stock options, accumulated sick leave paid at retirement, reimbursement for loss of auto, payment of stock purchase discount and the EMCC matching contribution to the EMCC 401(k) Plan. This definition of compensation is the same definition as used in the EMCC Retirement Plan. If at any time that definition of compensation changes, the definition for purposes of this Plan shall not change unless the Administrator specifically amends this Plan in writing. 2.6 EMCC Retirement Plan means the EMCC qualified retirement pension plan which is maintained by EMCC and which may be amended from time to time. 2.7 Normal Retirement Age means the date on which the Participant attains the age of 65. 2.8 Participant means an employee or former employee who meets the eligibility requirements of Article III of this Plan and who retains the rights to benefits under the Plan. 2.9 Plan Year means the calendar year. 2.10 Senior Officer means any employee of EMCC who holds the title of Resident Vice President or higher. If at any time the issue arises whether a particular employee of EMCC is a Senior office, the Administrator shall have the sole authority to determine the status of that particular employee; provided, however, that any such decisions shall be made in a uniform and nondiscriminatory manner. 2.11 Year of Service. An employee shall be credited with a Year of Service for each calendar year which that employee has worked over 1000 hours or is otherwise considered a full-time employee of EMCC or any of its affiliates and subsidiaries. For purposes of eligibility and vesting, an employee will be credited with all Years of Service both before and after the effective date of this Plan. ARTICLE III PARTICIPATION AND ELIGIBILITY 3.1 Eligibility. Senior Officers of EMCC whose Average Annual Compensation is equal to or greater than $100,000 are eligible to participate in the Plan. Beginning on January 1, 1996, and annually thereafter, the $100,000 amount (as previously adjusted) shall be adjusted by the percentage increase (or decrease) in the Cost Price Indicator (CPI) published for the prior calendar year. If, for example, the CPI increases by 4.2% in 1995, an employee must have an average annual compensation of $104,200 or more in order to become eligible to participate in 1996. Subsequent adjustments shall be made by applying the CPI to the minimum earnings figure for that calendar year. In the previous example, the 1997 adjustment would be calculated by multiplying $104,200 by the CPI for 1996 and adding the product to $104,200. 3.2 Continuing Eligibility and Participation. Once an employee has become eligible to participate, that employee shall become a Participant in the Plan and shall remain as a participant until all benefits of the Plan have been paid to that Participant. A reduction in Compensation of a Participant or a change in officer status shall not cause the Participant to lose eligibility for the Plan. If a Participant terminates employment and is subsequently reemployed, that Participant shall be treated as a new employee for purposes of determining eligibility and benefits and shall not be given Years of Service credit for the previous employment period. ARTICLE IV AMOUNT OF BENEFIT 4.1 Amount of Benefit. The Benefit each Participant shall be entitled to receive will be a lump sum payment which is equal to the present value of the right to receive the Base Benefit, less applicable offsets, over a 10 year certain period. It is anticipated that for some Participants the entire Base Benefit will be provided through other sources of retirement benefits and that this Plan will not be needed to provide a supplemental benefit. 4.2 Base Benefit. The annual Base Benefit shall be equal to 60% of a Participant's Average Annual Compensation for Benefit Determination, which for purposes of determining the Base Benefit shall be equal to the average of the five highest years out of the past ten years of service (or, if less, the Participant's total Years of Service) which results in the highest average compensation for that Participant. 4.3 Offsets against Base Benefit. The annual Base Benefit shall be reduced by the following enumerated offsets: 4.3.(a) The benefit shall first be reduced by one-half of the annual social security benefit that the Participant will receive if retirement occurs at age 65. 4.3.(b) The result in (a) shall be multiplied by a years of service factor which is equal to the years of service of the Participant divided by 30, the maximum number of years which will be taken into account. All years of service up to age 65 will be counted for this purpose. In no event shall this fraction or factor be more than one. 4.3.(c) The result in (b) shall then be multiplied by an earned service percentage equal to the number of months and Years of Service worked by the Participant over the total number of months and years from the date of hire to the participant's Normal Retirement Date. 4.3.(d) The result of (c) is then adjusted for early or late retirement factors. A Participant who elects to receive a benefit prior to the time that Participant attains the age of 65 shall be multiplied by a factor based on the number of years that the date the benefits commence precedes the date the Participant would attain the age of 65 years, as shown in the following table: NUMBER OF YEARS BENEFIT PAYMENT PRECEDES ATTAINING FACTOR AGE 65 1 .92 2 .86 3 .80 4 .75 5 .70 6 .66 7 .62 8 .58 9 .55 10 .52 A Participant who elects to receive a benefit after the time that Participant attains the age of 65 years shall be multiplied by a factor based on the number of years that the date the benefits commence follows the date the Participant attained the age of 65 years, as shown in the following table: NUMBER OF YEARS BENEFIT PAYMENT FOLLOWS ATTAINING FACTOR AGE 65 1 1.06 2 1.12 3 1.19 4 1.26 5 1.34 6 1.42 7 1.50 8 1.59 9 1.69 10 1.79 Both of the above factors shall be prorated for a partial year (counting a partial month as a complete month). Factors for numbers of years beyond ten shall be calculated using a consistently applied reasonable actuarial equivalent method. 4.3.(e) From the result in (d) the following annual benefits shall be subtracted: (i) The Participant's annual benefit from the EMCC Retirement Plan, calculated on the Participant's and valuing the annual benefit as if the Participant had elected a ten year certain payout of those Retirement Plan benefits. A Participant's retirement date shall be determined in accordance with the provisions of Article V. (ii) The value of the EMCC matching contribution to the EMCC 401(k) Plan, also valued by converting the Participant's account balance attributable to EMCC matching contributions (including income earned thereon) to an annual payment using a ten year certain payout. (iii) The value of additional EMCC payments made to the Participant, such as from the Excess Retirement Benefit Agreement, or any other retirement income benefits paid by EMCC. This amount shall also be converted to an annual payment amount using a ten year certain payout. 4.3.(f) The value of the benefit shall be reduced by the amount of Benefit that a reemployed Participant was entitled to receive because of prior participation in this Plan. This amount shall be converted to an annual payment amount using a ten year certain payout. 4.3.(g) Any benefit payable under this Plan will be the positive remainder value resulting from the above calculations. If the above calculations result in a negative number, no benefit shall be payable under this Plan as the Base Benefit will have been furnished the Participant through other sources. 4.4 Vesting. A Participant shall become vested in the right to receive any benefits provided by this Plan upon the completion of five (5) Years of Service. ARTICLE V PAYMENT OF BENEFITS 5.1 Retirement Benefits. Benefits under this Plan shall become payable at the date of retirement to any Participant who retires after attaining age 55, subject to the provisions of Section 5.7. 5.2 Death Benefits. If a Participant who is vested in the Plan dies prior to age 55, the Participant's surviving spouse shall be entitled to a benefit equal to one-half of the Participant's benefit calculated under Article IV, which shall be payable to the Participant's surviving spouse at the time the Participant would have attained age 55. If the spouse does not survive to the time the Participant would have attained age 55, no benefit will be payable to the surviving spouse. If a Participant dies after attaining age 55, and before receiving a benefit under this Plan, the Participant's surviving spouse shall be entitled to a benefit equal to one-half of the Participant's benefit calculated under Article IV, which shall be payable at the death of the Participant. If a Participant dies leaving no surviving spouse, no death benefit shall be payable. For purposes of this Plan, a surviving spouse shall include only a person who was legally married to the Participant for at least one year prior to the date benefits become payable under the Plan and continued to be married to that Participant at the date of the Participant's death. For purposes of this Plan, the term surviving spouse shall not include anyone who was a spouse by reason of any state law which allows for common law marriage. 5.3 Disability Payments. If a vested Participant becomes disabled, that Participant shall be entitled to receive that Participant's benefit in the same manner as vested termination benefits provided for in section 5.4 below. 5.4 Benefits on Termination of Employment. If a vested Participant terminates employment before age 55, benefits payable under the Plan shall be paid at the same time that the Participant elects to receive benefits under the then existing EMCC Retirement Plan, but in no instance prior to the time the Participant attains the age of 55 and no later than the time the Participant attains the age of 65. If a vested Participant who has terminated employment dies before attaining age 55, the benefit shall be paid to the surviving spouse in the same manner as in Section 5.2. A Participant whose employment is terminated for cause, or an employee who has voluntarily terminated employment and who committed theft, embezzlement or other acts of dishonesty against EMCC shall not be entitled to any benefits under this Plan. 5.5 Form of Payment. The normal Form of Payment will be calculated based upon a ten year certain and shall be paid in a lump sum equal to the present value of the stream of payments over that ten year certain. At the time the benefit is calculated, the calculation of the present value shall be made using the PBGC (Pension Benefit Guaranty Corporation) interest rate for immediate annuities (PBGC Reg. Part 2619, Appendix B) averaged over the prior five years. The average rate shall be calculated based on the PBGC rate for January 1 of the year in which the benefit is payable and the immediately preceding 4 years. 5.6 Funding of Benefit. This Plan is an unfunded plan. Benefits will be payable from the general assets of EMCC. Accordingly, these benefits are not secured; the Participants' claims to benefits are the same as the claims of a general unsecured creditor of EMCC. 5.7 Timing of Payment of Benefit. Payment of the lump sum benefit shall be made at such time as is determined by the Administrator but shall be made no later than the last day of the seventh month of the Plan Year following the year in which the benefit becomes payable. ARTICLE VI ADMINISTRATION OF PLAN 6.1 Administration. The Administrator shall maintain appropriate records which detail the accrued benefit of each Participant and any other records which are necessary or appropriate. The Administrator shall institute an appropriate claims procedure and procedures for communication of the details of this Plan to Participants. 6.2 Adoption by Subsidiaries. This Plan may be adopted by any of the subsidiaries or affiliates of EMCC to cover those Employees who meet the eligibility requirements of this Plan and who are otherwise eligible to participate in the EMCC Retirement Plan. Each adopting subsidiary or affiliate shall determine its own definition of "Senior Officer" but otherwise the terms of this Plan shall control. A subsidiary or affiliate shall adopt this Plan by resolution of its Board of Directors. ARTICLE VII AMENDMENT OR TERMINATION OF PLAN 7.1 Amendment of Plan. The Administrator shall have the right to amend the Plan, at any time and from time to time, in whole or in part. The Administrator shall notify each Participant in writing of any Plan amendment. No amendment shall reduce amount of benefit which any participant has accrued to the date of the amendment. If at any time the EMCC Retirement Plan is amended in any way which would affect this Plan, the terms and conditions of the EMCC Retirement Plan as in effect at the effective date of this Plan shall control in determining coverage, eligibility and the amount of benefits under this Plan, unless this Plan is specifically amended to conform to the changes in the EMCC Retirement Plan. 7.2 Termination of Plan. Although EMCC has established this Plan with the intention and expectation to maintain the Plan indefinitely, EMCC may terminate or discontinue the Plan in whole or in part at any time without any liability for such termination or discontinuance. Upon Plan termination, all further benefit accruals shall cease. Benefits accrued to the date of termination shall be paid out in accordance with the terms of this Plan. ARTICLE VIII MISCELLANEOUS 8.1 Limitation of Rights: Employment Relationship. Neither the establishment of this Plan nor any modification thereof, nor the accrual of any benefit, nor the payment of any benefits, shall be construed as giving a Participant or other person any legal or equitable right against EMCC except as provided in the Plan. In no event shall the terms of employment of any employee be modified or in any way be affected by the Plan. 8.2 Limitation on Assignment. Benefits under this Plan may not be assigned, sold, transferred, or encumbered, and any attempt to do so shall be void. A Participant's or Beneficiary's interest in benefits under the Plan shall not be subject to debts or liabilities of any kind and shall not be subject to attachment, garnishment or other legal process. 8.3 Representations. EMCC does not represent or guarantee that any particular federal or state income, payroll, personal property or other tax consequence will result from participation in this Plan. A Participant should consult with professional tax advisors to determine the tax consequences of his or her participation. 8.4 Severability. If a court of competent jurisdiction holds any provision of this Plan to be invalid or unenforceable, the remaining provisions of the Plan shall continue to be fully effective. 8.5 Applicable Law. This Plan shall be construed in accordance with applicable federal law and, to the extent otherwise applicable, the laws of the State of Iowa. This Plan is entered into as of the date first above entered. EMPLOYERS MUTUAL CASUALTY COMPANY By /s/ Bruce G. Kelley ------------------------------ Attest: Philip T. Van Ekeren - --------------------- Secretary EX-21 4 INDEX TO EXHIBITS Exhibit 21 EMC INSURANCE GROUP INC. ORGANIZATIONAL CHART ............................... : : : EMC INSURANCE GROUP INC. : :.............................: : : : : : ...............................:.................................. : : : : : : : : EMCASCO Insurance EMC Farm and City EMC Company Reinsurance Insurance Underwriters, Illinois EMCASCO Company Company Ltd. Insurance Company Dakota Fire Insurance Company EX-23 5 KPMG PEAT MARWICK, LLP CONSENT Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders EMC Insurance Group Inc.: We consent to incorporation by reference in Registration Statement Nos. 2-93738, 33-49335, 33-49337 and 33-49339 on Forms S-8 and No. 33-34499 on Form S-3 of EMC Insurance Group Inc. of our reports dated February 20, 1996, relating to the consolidated balance sheets of EMC Insurance Group Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows and related schedules for each of the years in the three-year period ended December 31, 1995, which reports appear in the December 31, 1995 annual report on Form 10-K of EMC Insurance Group Inc. As discussed in notes 1, 10, 11 and 13 to the consolidated financial statements, the Company changed its method of computing unearned premiums in 1993 and implemented the provisions of the Financial Accounting Standards Board's Statements No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions", No. 109, "Accounting for Income Taxes", and No. 115, "Accounting for Certain Investments in Debt and Equity Securities". /s/ KPMG Peat Marwick LLP Des Moines, Iowa March 20, 1996 EX-24 6 POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW EVERYONE BY THESE PRESENTS, that each director whose signature appears below constitutes and appoints E. H. Creese and B. G. Kelley, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities related to entering his personal identification number onto the EDGAR online reporting system and transmitting the 1995 Form 10-K (annual report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934) and all other required filings, until the 1996 annual meeting of shareholders, to the Securities and Exchange Commission, and hereby ratifies and confirms all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. SIGNATURE TITLE - --------- ----- /s/ George C. Carpenter III - --------------------------- George C. Carpenter III Director /s/ E. H. Creese - --------------------------- E.H. Creese Director /s/ David J. Fisher - --------------------------- David J. Fisher Director /s/ Bruce G. Kelley - --------------------------- Bruce G. Kelley Director /s/ George W. Kochheiser - --------------------------- Chairman of the Board of George W. Kochheiser Directors and Director /s/ Raymond A. Michel - --------------------------- Raymond A. Michel Director /s/ Fredrick A. Schiek - --------------------------- Fredrick A. Schiek Director May 25, 1995 EX-27 7 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 12/31/95 BALANCE SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1995 DEC-31-1995 142,360,569 191,440,816 203,312,748 16,010,763 0 0 367,083,946 1,198,436 12,916,943 8,714,769 412,880,973 205,422,109 48,767,147 0 3,593,328 0 10,821,978 0 0 126,066,780 412,880,973 162,266,250 23,173,794 1,043,730 343,653 108,152,278 32,152,616 18,467,091 24,315,909 6,967,081 17,348,828 0 0 0 17,348,828 1.62 1.62 203,181,615 123,876,601 (15,724,323) 48,237,715 55,753,875 205,422,109 (15,724,323) -----END PRIVACY-ENHANCED MESSAGE-----