3. REINSURANCE

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.

As of December 31, 2011 and 2010, reinsurance ceded to three nonaffiliated reinsurers totaled $22,228,862 and $21,833,644, respectively, which represents a significant portion of the total prepaid reinsurance premiums and reinsurance receivables for losses and settlement expenses. For two of these nonaffiliated reinsurers, the amounts reflect the property and casualty insurance subsidiaries' aggregate pool participation percentage of amounts ceded by Employers Mutual to these organizations on a mandatory basis. 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. The third reinsurer is MRB. The total amount due from MRB for prepaid reinsurance premiums and reinsurance receivables for losses and settlement expenses primarily includes amounts ceded to it by the reinsurance subsidiary as part of a fronting arrangement initiated by Employers Mutual in 2010. Through Employers Mutual's membership in MRB, the reinsurance subsidiary assumes back a one-fourth portion (an approximate one-fifth portion prior to January 1, 2011) of these amounts through the quota share agreement (after ceded reinsurance protections purchased by the MRB pool are applied).

The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the three years ended December 31, 2011 is presented below.

	Year ended December 31, 2011
	Property and
	casualty
	insurance			Reinsurance			Total
Premiums written
Direct	$	301,829,277		$	-		$	301,829,277
Assumed from nonaffiliates		1,610,872			123,274,743			124,885,615
Assumed from affiliates		356,622,503			-			356,622,503
Ceded to nonaffiliates		(24,939,233	)		(16,059,909	)		(40,999,142	)
Ceded to affiliates		(301,829,277	)		(10,721,484	)		(312,550,761	)
Net premiums written	$	333,294,142		$	96,493,350		$	429,787,492

Premiums earned
Direct	$	283,482,713		$	-		$	283,482,713
Assumed from nonaffiliates		1,541,807			122,064,711			123,606,518
Assumed from affiliates		344,668,820			-			344,668,820
Ceded to nonaffiliates		(24,561,412	)		(16,590,129	)		(41,151,541	)
Ceded to affiliates		(283,482,713	)		(10,721,484	)		(294,204,197	)
Net premiums earned	$	321,649,215		$	94,753,098		$	416,402,313

Losses and settlement expenses incurred
Direct	$	249,429,916		$	-		$	249,429,916
Assumed from nonaffiliates		1,619,025			122,680,597			124,299,622
Assumed from affiliates		264,217,463			732,478			264,949,941
Ceded to nonaffiliates		(14,387,241	)		(16,010,258	)		(30,397,499	)
Ceded to affiliates		(249,429,916	)		(15,877,627	)		(265,307,543	)
Net losses and settlement expenses incurred	$	251,449,247		$	91,525,190		$	342,974,437

	Year ended December 31, 2010
	Property and
	casualty
	insurance			Reinsurance			Total
Premiums written
Direct	$	261,451,268		$	-		$	261,451,268
Assumed from nonaffiliates		1,803,365			112,255,735			114,059,100
Assumed from affiliates		332,195,425			-			332,195,425
Ceded to nonaffiliates		(23,204,501	)		(28,200,915	)		(51,405,416	)
Ceded to affiliates		(261,451,268	)		-			(261,451,268	)
Net premiums written	$	310,794,289		$	84,054,820		$	394,849,109

Premiums earned
Direct	$	249,254,444		$	-		$	249,254,444
Assumed from nonaffiliates		1,907,337			107,458,179			109,365,516
Assumed from affiliates		326,744,028			-			326,744,028
Ceded to nonaffiliates		(23,004,707	)		(23,982,687	)		(46,987,394	)
Ceded to affiliates		(249,254,444	)		-			(249,254,444	)
Net premiums earned	$	305,646,658		$	83,475,492		$	389,122,150

Losses and settlement expenses incurred
Direct	$	177,642,699		$	-		$	177,642,699
Assumed from nonaffiliates		1,718,591			55,989,808			57,708,399
Assumed from affiliates		210,780,608			1,166,006			211,946,614
Ceded to nonaffiliates		(4,385,038	)		(10,629,456	)		(15,014,494	)
Ceded to affiliates		(177,642,699	)		-			(177,642,699	)
Net losses and settlement expenses incurred	$	208,114,161		$	46,526,358		$	254,640,519

	Year ended December 31, 2009
	Property and
	casualty
	insurance			Reinsurance			Total
Premiums written
Direct	$	247,722,866		$	-		$	247,722,866
Assumed from nonaffiliates		2,251,157			78,094,405			80,345,562
Assumed from affiliates		333,862,328			-			333,862,328
Ceded to nonaffiliates		(23,298,602	)		(2,192,976	)		(25,491,578	)
Ceded to affiliates		(247,722,866	)		-			(247,722,866	)
Net premiums written	$	312,814,883		$	75,901,429		$	388,716,312

Premiums earned
Direct	$	230,497,985		$	-		$	230,497,985
Assumed from nonaffiliates		2,364,787			77,741,189			80,105,976
Assumed from affiliates		328,927,476			-			328,927,476
Ceded to nonaffiliates		(23,213,227	)		(1,809,324	)		(25,022,551	)
Ceded to affiliates		(230,497,985	)		-			(230,497,985	)
Net premiums earned	$	308,079,036		$	75,931,865		$	384,010,901

Losses and settlement expenses incurred
Direct	$	154,142,419		$	-		$	154,142,419
Assumed from nonaffiliates		1,523,446			51,256,602			52,780,048
Assumed from affiliates		202,616,957			673,957			203,290,914
Ceded to nonaffiliates		(5,016,118	)		(2,305,385	)		(7,321,503	)
Ceded to affiliates		(154,142,419	)		-			(154,142,419	)
Net losses and settlement expenses incurred	$	199,124,285		$	49,625,174		$	248,749,459

Individual lines in the above tables are defined as follows:

“Direct” represents business produced by the property and casualty insurance subsidiaries.

“Assumed from nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of involuntary business assumed by the pool participants pursuant to state law. For the reinsurance subsidiary, this line represents the reinsurance business assumed through the quota share agreement (including “fronting” activities initiated by Employers Mutual, which were expanded significantly during 2010, most notably with MRB) and the business assumed outside the quota share agreement.

“Assumed from affiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of all the pool members' direct business. Losses and settlement expenses incurred also includes claim-related services provided by Employers Mutual that are allocated to the property and casualty insurance subsidiaries and the reinsurance subsidiary.

“Ceded to nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of the cost of the ceded reinsurance agreements that provide protection to the pool and each of its participants. For the reinsurance subsidiary, this line includes reinsurance business that is ceded to other insurance companies in connection with “fronting” activities initiated by Employers Mutual.

“Ceded to affiliates” for the property and casualty insurance subsidiaries represents the cession of their direct business to Employers Mutual under the terms of the pooling agreement. For the reinsurance subsidiary, starting in 2011 this line includes amounts ceded to Employers Mutual in connection with the excess of loss agreement.