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, 1994
[ ] 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
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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) 280-2581
---------------
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, 1995 was $36,799,499.
The number of shares outstanding of the registrant's common stock, $1.00
par value, on March 1, 1995, was 10,589,368.
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, 1995,
are incorporated by reference under Part III.
<PAGE>
PART I
------
ITEM 1. BUSINESS.
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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 subsidiaries (including the
Company), which collectively have assets totaling $1,289,722,903 and written
premiums of $583,288,995, 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 lines. 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 of 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.
<PAGE>
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 and acts as managing underwriter for such lines for several of the
property and casualty pool members. (See "Property and Casualty Insurance -
Pooling Agreement").
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 programs 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
and lines of insurance written and the variety of 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.
<PAGE>
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 and restated all prior year
consolidated financial statements for comparative purposes. There was no
income effect from this reclassification. In connection with this gross-up of
balances, amounts due from Employers Mutual increased $13,147,831 at December
31, 1993. Under the terms of the pooling agreement, these balances were
settled in the first quarter of 1994.
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, 1994. 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 1994 Total 1993 Total 1992 Total
---------------- -------- ----- -------- ----- -------- -----
(Dollars in thousands)
Commercial Lines:
Automobile ............ $ 91,674 17.0% $ 83,415 16.0% $ 77,102 14.9%
Property .............. 81,358 15.1 72,743 13.9 71,856 13.9
Workers' compensation 133,621 24.7 134,529 25.8 141,245 27.2
Liability ............. 100,844 18.7 99,976 19.1 98,029 18.9
Other ................. 13,405 2.5 11,948 2.3 11,858 2.3
-------- ----- -------- ----- -------- -----
Total commercial lines 420,902 78.0 402,611 77.1 400,090 77.2
-------- ----- -------- ----- -------- -----
Personal Lines:
Automobile ............ 80,694 14.9 83,068 15.9 82,346 15.9
Property .............. 38,107 7.1 36,515 7.0 35,785 6.9
Liability ............. - - - - 200 -
Other ................. 56 - 56 - 57 -
-------- ----- -------- ----- -------- -----
Total personal lines 118,857 22.0 119,639 22.9 118,388 22.8
-------- ----- -------- ----- -------- -----
Total ............ $539,759 100.0% $522,250 100.0% $518,478 100.0%
======== ===== ======== ===== ======== =====
<PAGE>
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 agents. 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, 1994.
1994 1993 1992
---- ---- ----
Arizona ............................ 3.8% 3.7% 3.6%
Colorado ........................... 3.3 2.8 2.7
Illinois ........................... 6.7 6.8 7.0
Iowa ............................... 23.0 26.2 26.7
Kansas ............................. 8.2 7.4 7.1
Michigan ........................... 3.8 3.1 2.8
Minnesota .......................... 5.3 5.3 5.3
Nebraska ........................... 8.0 7.5 7.6
North Carolina ..................... 3.8 3.3 3.3
Rhode Island ....................... 3.3 3.2 2.9
Texas .............................. 2.7 2.8 3.2
Wisconsin .......................... 5.7 6.7 7.0
Other * ............................ 22.4 21.2 20.8
----- ----- -----
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.
<PAGE>
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' 1993 operating results
and financial condition as of December 31, 1993. 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.
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 follows:
Type of Coverage Retention Limits
---------------- --------- ------
Property per risk ........... $2,000,000 100 percent of $18,000,000
Property catastrophe ........ $9,000,000 95 percent of $51,000,000
Casualty .................... $2,000,000 100 percent of $44,000,000
Umbrella .................... $5,000,000 100 percent of $ 5,000,000
Fidelity .................... $ 500,000 100 percent of $ 3,500,000
Surety ...................... $ 500,000 100 percent of $ 5,300,000
Boiler ...................... $ 0 100 percent of $50,000,000
<PAGE>
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.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 90 domestic and foreign reinsurers.
Percent
of Total 1994
Property per risk, property Reinsurance Best's
catastrophe and casualty coverages: Protection Rating
----------------------------------- ----------- ------
Underwriters at Lloyd's of London .................... 22.0% (1)
Insurance Company of North America ................... 7.2 A-
Prudential Reinsurance Company ....................... 6.2 A
NAC Reinsurance Corporation .......................... 3.4 A
Hartford Fire Insurance Company ...................... 3.1 A+
Hannover Ruckversicherung AG ......................... 3.0 (2)
AXA Reinsurance Company .............................. 2.5 A
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 response to reported losses of $3.8 billion, $4.2 billion,
$4.9 billion and $1.5 billion (estimated) in 1989, 1990, 1991 and 1992,
respectively, Lloyd's has developed a business plan to improve its
profitability. The plan is described in detail in the "Rowland" report
published by Lloyd's in April, 1993 and Lloyd's began implementation of the
plan in 1994. For the 1993 underwriting year, Chatset (a publication that
is considered a guide to syndicate run-offs) is predicting an overall
profit of $1.2 billion for Lloyds.
<PAGE>
In addition, standing behind the means of individual members is the 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. Currently, there are
significant earmarkings against the Central Fund for these deficiencies.
There is also a multi-billion dollar trust fund to secure Lloyd's
obligations to United States policyholders which applies on a several, not
joint basis, to each syndicate's obligations for U.S. business. As of
January 31, 1995, the amount in the Lloyd's American Trust Fund is
$10.9 billion.
(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, 1994 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 these 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
All Pool and Casualty
Reinsurer Members Subsidiaries
--------- ----------- ------------
General Reinsurance Corporation ...................... $ 2,789,369 $ 613,662
Underwriters at Lloyd's of London .................... 1,845,726 406,060
Hartford Steam Boiler Inspection and Insurance Company 1,208,938 265,966
Hartford Fire Insurance Company ...................... 751,492 165,328
AXA Reinsurance Company .............................. 537,038 118,148
PMA Reinsurance Corporation .......................... 503,346 110,736
American Reinsurance Company ......................... 454,115 99,905
NAC Reinsurance Corporation .......................... 403,359 88,739
Prudential Reinsurance Company ....................... 346,385 76,205
Hannover Ruckversicherung AG ......................... 333,774 73,430
Other Reinsurers ..................................... 5,276,408 1,160,810
----------- ------------
Total ............................................. $14,449,950 $ 3,178,989
=========== ============
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, 1994 are presented
below.
<PAGE>
Premiums Ceded By
------------------------
Property
All Pool and Casualty
Reinsurer Members Subsidiaries
--------- ----------- ------------
Wisconsin Compensation Rating Bureau ................. $ 9,925,061 $ 2,183,514
National Workers' Compensation Reinsurance Pool ...... 9,313,774 2,049,030
Improved Risk Mutual ................................. 4,848,249 1,066,615
North Carolina Reinsurance Facility .................. 1,400,527 308,116
Other Reinsurers ..................................... 472,072 103,855
----------- ------------
$25,959,683 $ 5,711,130
=========== ============
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,
------------------------------
1994 1993 1992
---- ---- ----
Employers Mutual .................. 1.28 1.33 1.32
EMCASCO ........................... 2.18 2.51 2.56
Illinois EMCASCO .................. 2.18 2.44 2.65
Dakota Fire ....................... 1.98 2.18 2.49
American Liberty .................. 1.26 1.38 1.38
Union ............................. .77 1.63 1.68
The decrease in Union's 1994 ratio is primarily due to a significant
increase in surplus resulting from the demutualization of Union in the first
quarter of 1994.
<PAGE>
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The property and casualty insurance subsidiaries' reserve information is
included in the property and casualty loss reserve development for 1994. 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.
MARKETING
Operations for the last two years reflect a shift from catastrophe excess
of loss business to pro rata business. During 1995, more emphasis will be
placed on writing excess of loss business in non-hurricane prone areas and on
increasing participation on existing contracts that have favorable terms. Pro
rata business will continue to be written, but the focus will be on properly
structured regional accounts rather than large national accounts. This gradual
movement towards excess of loss business is prompted by a deterioration of pro
rata rates and a greater control over the pricing of excess of loss business.
<PAGE>
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 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 $2,500,000 aggregate losses retained,
excess of $200,000 per event. Maximum recovery is limited to $4,000,000 per
accident year. The reinsurance subsidiary recovered $0, $143,501 and
$4,221,444 under this treaty and paid reinstatement premiums of $0, $208,470
and $744,561 in 1994, 1993 and 1992, respectively. Total premiums paid to
Employers Mutual amounted to $557,842, $708,445 and $1,124,561 in 1994, 1993
and 1992, respectively.
Effective January 1, 1995, the aggregate excess of loss treaty was amended
to increase the aggregate losses retained to $3,000,000 and to decrease the
maximum recovery limit to $2,000,000 per accident year.
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."
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The reinsurance subsidiary's reserve information is included in the
property and casualty loss reserve development for 1994. See "Property and
Casualty Insurance Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk
Automobile Insurance Subsidiary - Outstanding Losses and Settlement Expenses."
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.
<PAGE>
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 normal automobile 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.
Personal lines automobile policies are solicited through the American Agency
System 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 nonstandard risk
automobile insurance subsidiary expects to begin writing business in the state
of Missouri in late 1995.
During 1994, the nonstandard risk automobile insurance subsidiary elected
to emphasize profitability over premium volume and did not reduce rates in
order to retain business. Production is expected to remain relatively flat in
1995 as the company will continue to emphasize profitability over market share.
Profitable underwriting results in the future are likely to be more dependent
upon successful niche marketing rather than full coverage programs.
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. Recently, the larger standard insurance companies have begun
to develop rate tiers that are geared toward retaining nonstandard risk
customers, rather than passing them into the nonstandard market. This
additional availability in the standard 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 $71,567, $0 and $0 in 1994,
1993 and 1992, respectively. Premiums paid to Employers Mutual amounted to
$49,659, $42,065 and $35,377 in 1994, 1993 and 1992, 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."
<PAGE>
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 1994.
See "Property and Casualty Insurance Subsidiaries, Reinsurance Subsidiary and
Nonstandard Risk Automobile Insurance Subsidiary - Outstanding Losses and
Settlement Expenses."
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.
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 it's subsidiaries.
Such services include data processing, claims, financial, actuarial, auditing,
marketing and underwriting. Costs of these services are charged to the
subsidiaries outside the pooling agreement based upon a number of criteria,
including usage and number of transactions. Costs not charged 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, 1994. The combined ratios below
are the sum of the following: the loss ratio, calculated by dividing losses and
settlement expenses by net premiums earned, and the expense ratio, calculated
by dividing underwriting expenses 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.
<PAGE>
Year ended December 31,
--------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
Property and casualty insurance
Loss ratio .................... 67.2% 72.6% 76.1% 76.8% 73.8%
Expense ratio ................. 31.1 30.9 30.1 30.5 30.8
------ ------ ------ ------ ------
Combined ratio .............. 98.3% 103.5% 106.2% 107.3% 104.6%
====== ====== ====== ====== ======
Reinsurance
Loss ratio .................... 82.0% 77.7% 109.1% 82.9% 92.6%
Expense ratio ................. 30.4 33.1 34.8 36.6 37.2
------ ------ ------ ------ ------
Combined ratio .............. 112.4% 110.8% 143.9% 119.5% 129.8%
====== ====== ====== ====== ======
Nonstandard risk automobile insurance
Loss ratio .................... 71.5% 94.3% 92.3% 72.4% 77.8%
Expense ratio ................. 24.4 23.7 23.7 25.2 24.7
------ ------ ------ ------ ------
Combined ratio .............. 95.9% 118.0% 116.0% 97.6% 102.5%
====== ====== ====== ====== ======
Total insurance operations
Loss ratio .................... 70.9% 75.6% 83.4% 77.8% 78.0%
Expense ratio ................. 30.4 30.7 30.5 31.4 31.5
------ ------ ------ ------ ------
Combined ratio .............. 101.3% 106.3% 113.9% 109.2% 109.5%
====== ====== ====== ====== ======
Property and casualty insurance
industry averages (1)
Loss ratio .................... 82.0% 79.5% 88.1% 81.2% 82.3%
Expense ratio ................. 27.4 27.4 27.6 27.7 27.3
------ ------ ------ ------ ------
Combined ratio .............. 109.4% 106.9% 115.7% 108.9% 109.6%
====== ====== ====== ====== ======
(1) As reported by A.M. Best Company. The ratio for 1994 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, 1994:
<PAGE>
1994
Amount Percent Best's
Recoverable of Total Rating
----------- -------- ------
Wisconsin Compensation Rating Bureau .. $ 7,507,636 44.0% (1)
National Workers' Compensation
Reinsurance Pool .................... 2,558,657 15.0 (1)
General Reinsurance Corporation ....... 968,459 5.7 A++
Improved Risk Mutual (IRM) ............ 780,179 4.6 (2)
American Re-Insurance Company ......... 633,168 3.7 A+
Minnesota Workers' Compensation
Reinsurance Association ............. 480,229 2.8 (3)
North Carolina Reinsurance Facility ... 426,218 2.5 (4)
Mutual Reinsurance Bureau (MRB)........ 406,627 2.4 (5)
New England Reinsurance Corporation ... 396,829 2.3 (6)
Hartford Fire Insurance Company ....... 338,510 2.0 A+
Other Reinsurers ...................... 2,559,569 15.0
----------- --------
Total ........................... $17,056,081(7) 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
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.
(3) 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.
<PAGE>
(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) Not rated.
(7) The total amount at December 31, 1994 represented $788,174 in paid
losses and settlement expenses recoverable, $14,146,874 in unpaid losses
and settlement expenses recoverable and $2,121,033 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, 1994 is
presented below. Amounts for the years ended December 31, 1994 and 1993
reflect (1) the change in the property and casualty insurance subsidiaries'
pooling agreement whereby effective January 1, 1993, the voluntary assumed
reinsurance business written by Employers Mutual is no longer subject to
cession to the pool members and (2) the amendment to the reinsurance
subsidiary's quota share agreement whereby effective January 1, 1993 losses in
excess of $1,000,000 per event are retained by Employers Mutual and the
reinsurance subsidiary therefore no longer purchases catastrophe protection.
(See notes 2 and 3 of Notes to Consolidated Financial Statements under Item 8
of this Form 10-K).
<PAGE>
Year ended December 31,
----------------------------------------
1994 1993 1992
------------ ------------ ------------
Premiums written:
Direct ......................... $143,444,388 $135,277,129 $138,829,576
Assumed from nonaffiliates ..... 5,843,091 6,636,942 16,467,613
Assumed from affiliates ........ 158,646,332 147,620,705 150,070,741
Ceded to nonaffiliates ......... (8,890,119) (10,701,482) (17,721,207)
Ceded to affiliates ............ (132,100,537) (120,898,914) (129,826,840)
------------ ------------ ------------
Net premiums written ........ $166,943,155 $157,934,380 $157,819,883
============ ============ ============
Premiums earned:
Direct ......................... $140,012,247 $137,141,457 $142,391,771
Assumed from nonaffiliates ..... 5,988,228 6,758,364 14,980,642
Assumed from affiliates ........ 156,839,482 148,366,487 140,442,245
Ceded to nonaffiliates ......... (9,601,270) (11,507,217) (16,775,394)
Ceded to affiliates ............ (128,409,308) (124,321,553) (133,628,977)
------------ ------------ ------------
Net premiums earned ......... $164,829,379 $156,437,538 $147,410,287
============ ============ ============
Losses and settlement expenses
incurred:
Direct ......................... $113,680,306 $ 97,842,980 $112,579,261
Assumed from nonaffiliates ..... 2,774,689 6,575,099 17,415,319
Assumed from affiliates ........ 108,594,530 107,369,274 114,359,445
Ceded to nonaffiliates ......... (3,077,305) (5,845,414) (16,862,082)
Ceded to affiliates ............ (105,028,166) (85,586,640) (105,404,110)
------------ ------------ ------------
Net losses and settlement
expenses incurred ......... $116,944,054 $120,355,299 $122,087,833
============ ============ ============
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.
<PAGE>
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.
Estimating reserves for asbestos and environmental related claims is very
difficult due to the following uncertainties surrounding these types of claims:
the legal definition of asbestos and environmental damage is still evolving,
the assignment of responsibility varies widely by state, defense costs are
often much greater than the claim costs 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.
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, 1994 are adequate.
<PAGE>
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 SFAS 113. (See
note 1 of Notes to Consolidated Financial Statements under Item 8 of this Form
10-K.)
Year ended December 31,
----------------------------------------
1994 1993 1992
------------ ------------ ------------
Gross reserves for losses and
settlement expenses, beginning
of year .......................... $197,121,852 $215,388,865 $158,814,130
Ceded reserves for losses and
settlement expenses, beginning
of year .......................... 17,454,679 25,253,507 13,951,033
------------ ------------ ------------
Net reserves for losses and
settlement expenses, beginning
of year .......................... 179,667,173 190,135,358 144,863,097
------------ ------------ ------------
Incurred losses and
settlement expenses:
----------------------
Provision for insured events
of the current year ............ 123,343,829 119,896,526 116,615,951
(Decrease) increase in provision
for insured events of prior
years .......................... (6,399,775) 458,773 5,471,882
------------ ------------ ------------
Total incurred losses and
settlement expenses ........ $116,944,054 $120,355,299 $122,087,833
------------ ------------ ------------
<PAGE>
Year ended December 31,
----------------------------------------
Payments: 1994 1993 1992
--------- ------------ ------------ ------------
Losses and settlement expenses
attributable to insured events
of the current year ............ $ 48,771,573 $ 47,600,851 $ 46,436,360
Losses and settlement expenses
attributable to insured events
of prior years ................. 59,491,875 45,508,460 53,810,715
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 (23,431,503)
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 .............. 107,576,486 130,823,484 76,815,572
------------ ------------ ------------
Net reserves for losses and
settlement expenses, end of year 189,034,741 179,667,173 190,135,358
Ceded reserves for losses and
settlement expenses, end of year 14,146,874 17,454,679 25,253,507
------------ ------------ ------------
Gross reserves for losses and
settlement expenses, end of year $203,181,615 $197,121,852 $215,388,865
============ ============ ============
<PAGE>
The following table shows the calendar year development of the unpaid 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 and 1994 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 1992,
1993 and 1994 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 the time lag in the reporting of assumed
reinsurance business and the high rate of inflation associated with medical
services and supplies, may not necessarily occur in the future. Accordingly,
it may not be appropriate to project future development of reserves based on
this table.
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------------------------------
(Dollars in thousands) 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATUTORY RESERVES FOR LOSSES
AND SETTLEMENT EXPENSES ...... $ 71,775 67,921 90,357 109,088 121,667 127,870 131,623 139,317 180,797 182,072 191,514
RECLASSIFICATION OF RESERVE
AMOUNTS ASSOCIATED WITH THE
NATIONAL WORKERS' COMPENSATION
REINSURANCE POOL ............. 949 1,028 1,561 2,378 2,911 3,855 4,338 6,830 11,364 - -
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
STATUTORY RESERVES AFTER
RECLASSIFICATION ............. 72,724 68,949 91,918 111,466 124,578 131,725 135,961 146,147 192,161 182,072 191,514
GAAP ADJUSTMENTS:
SALVAGE AND SUBROGATION ...... (950) (1,130) (1,000) (930) (930) (930) (1,203) (1,284) (2,026) (1,804) (1,799)
STATUTORY SETTLEMENT EXPENSE
PORTION OF POSTRETIREMENT
BENEFIT OBLIGATION ......... - - - - - - - - - (601) (680)
------- ------- ------- ------- ------- ------- -------- ------- -------- ------- -------
RESERVES FOR LOSSES AND
SETTLEMENT EXPENSES .......... 71,774 67,819 90,918 110,536 123,648 130,795 134,758 144,863 190,135 179,667 189,035
PAID (CUMULATIVE) AS OF:
One year later ............... 34,055 27,040 25,874 23,805 34,648 42,357 42,601 30,379 77,589 58,805 -
Two years later .............. 47,026 41,667 36,199 44,662 57,511 65,965 58,242 78,096 108,253 - -
Three years later ............ 56,283 48,477 52,014 61,052 72,121 76,356 95,154 94,851 - - -
Four years later ............. 59,882 59,885 63,902 71,550 79,092 106,432 104,324 - - - -
Five years later ............. 68,147 69,214 71,859 77,230 105,513 112,100 - - - - -
Six years later .............. 72,860 75,371 76,748 101,714 108,764 - - - - - -
Seven years later ............ 76,570 79,141 97,533 103,948 - - - - - - -
Eight years later ............ 78,102 96,470 99,179 - - - - - - - -
Nine years later ............. 88,952 97,448 - - - - - - - - -
Ten years later .............. 89,677 - - - - - - - - - -
RESERVES REESTIMATED AS OF:
End of year .................. 71,774 67,819 90,918 110,536 123,648 130,795 134,758 144,863 190,135 179,667 189,035
One year later ............... 73,823 80,888 98,127 109,099 123,628 134,453 139,385 150,335 190,594 173,267 -
Two years later .............. 79,445 91,452 97,465 111,212 124,011 136,972 140,764 147,388 186,543 - -
Three years later ............ 85,566 91,927 100,437 113,588 125,957 136,902 139,421 144,340 - - -
Four years later ............. 86,460 95,199 104,024 116,995 127,964 137,510 139,054 - - - -
Five years later ............. 88,958 99,649 107,784 119,332 128,434 136,912 - - - - -
Six years later .............. 92,681 103,157 110,961 120,147 127,908 - - - - - -
Seven years later ............ 95,051 106,671 111,988 120,343 - - - - - - -
Eight years later ............ 97,294 107,681 112,433 - - - - - - - -
Nine years later ............. 97,799 108,082 - - - - - - - - -
Ten years later .............. 98,052 - - - - - - - - - -
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
CUMULATIVE REDUNDANCY
(DEFICIENCY) ................. $(26,278) (40,263) (21,515) (9,807) (4,260) (6,117) (4,296) 523 3,592 6,400 -
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
GROSS LOSS AND SETTLEMENT EXPENSE RESERVES - END OF YEAR (A) ........................................... $215,389 197,122 203,182
REINSURANCE RECEIVABLES ................................................................................ 25,254 17,455 14,147
-------- ------- -------
NET LOSS AND SETTLEMENT EXPENSE RESERVES - END OF YEAR ................................................. $190,135 179,667 189,035
======== ======= =======
GROSS RE-ESTIMATED RESERVES - LATEST (B) ............................................................... $208,938 188,412 203,182
RE-ESTIMATED REINSURANCE RECEIVABLES - LATEST .......................................................... 22,395 15,145 14,147
-------- ------- -------
NET RE-ESTIMATED RESERVES - LATEST ..................................................................... $186,543 173,267 189,035
======== ======= =======
GROSS CUMULATIVE REDUNDANCY (DEFICIENCY) (A-B) ......................................................... $ 6,451 8,710 -
======== ======= =======
</TABLE>
<PAGE>
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 1992, the property and casualty insurance subsidiaries and
the nonstandard risk automobile insurance subsidiary strengthened prior year
reserves on certain lines of business and the reinsurance subsidiary
experienced a time lag in the reporting of assumed reinsurance business.
During 1993, the property and casualty insurance companies continued to
strengthen reserves on certain lines of business while the reinsurance
subsidiary experienced adverse development on losses associated with Hurricane
Andrew. These reserve increases in 1992 and 1993 were partially offset by
reserve decreases on other lines of business, resulting in a net increase in
the provision for insured events of prior years of $5,471,882 in 1992 and
$458,773 in 1993. During 1994, the reinsurance subsidiary experienced adverse
development on certain contracts. These reserve increases were offset by
significant reserve decreases in the property and casualty insurance
subsidiaries and the nonstandard risk automobile insurance subsidiary. As a
result, the provision for insured events of prior years decreased $6,399,775.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations" under Item 7 of this Form 10-K.
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 Company's reinsurance subsidiary assumes reinsurance business that has
environmental exposures. At December 31, 1994, reserves for reported claims
totaled $950. The reinsurance subsidiary's environmental exposures declined
substantially in 1993 due to the commutation of a reinsurance contract with
Employers Mutual. Outstanding losses and settlement expenses related to the
commuted contract totaled $319,211 in 1992. Losses and settlement expenses
incurred related to the commuted contract totaled $197,859 and $161,693 in 1993
and 1992, respectively.
<PAGE>
The following table presents selected data on environmental losses and
settlement expenses incurred and reserves outstanding for the Company. The
amounts for 1993 and 1992 have been restated to exclude claims associated with
misdeliveries or minor spills of petroleum products. As a result of this
restatement, incurred losses and settlement expenses decreased $189,192 and
$349,122, loss and settlement expense reserves decreased $426,981 and $389,806
and the number of outstanding claims decreased 21 and 26 for the years 1993 and
1992, respectively.
Year Ended December 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
Total losses incurred ....................... $ (31,616) $ 292,440 $ 199,992
Total settlement expenses incurred .......... 36,378 88,847 58,383
--------- --------- ---------
Total losses and settlement expenses
incurred ................................ $ 4,762 $ 381,287 $ 258,375
========= ========= =========
Loss reserves ............................... $ 257,038 $ 316,341 $ 579,770
Settlement expense reserves ................. 164,626 168,615 101,524
--------- --------- ---------
Total loss and settlement expense reserves $ 421,664 $ 484,956 $ 681,294
========= ========= =========
Number of outstanding claims ................ 46 42 48
========= ========= =========
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.
The Company has one policyholder which has filed claims at three separate
sites in connection with the transportation of hazardous waste to landfills.
Another policyholder has filed claims at two separate sites related to the
generation of waste disposed of at hazardous waste facilities. Included in the
above table at December 31, 1994 are four pollution sites which involve
multiple policyholders as follows:
Number
Pollution site of claims
-------------- ---------
Closed landfill ................... 6
Closed landfill ................... 3
Closed landfill ................... 2
Transformer reclamation facility .. 2
Coverage is being disputed in 44 of the 45 claims which were outstanding
at December 31, 1994. 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.
Asbestos Claims
---------------
The Company's asbestos claim activity primarily relates to bodily injury
claims where an insured has been named as one of multiple defendants covering
exposure over many years.
<PAGE>
The Company's reinsurance subsidiary assumes reinsurance business that has
asbestos related exposures. At December 31, 1994, reserves for reported claims
totaled $79,666. The reinsurance subsidiary's asbestos related exposures
declined substantially in 1993 due to the commutation of a reinsurance contract
with Employers Mutual. Outstanding losses and settlement expenses related to
the commuted contract totaled $904,834 in 1992. Losses and settlement expenses
incurred related to the commuted contract totaled $226,470 and $330,653 in 1993
and 1992, respectively.
The following table presents selected data on asbestos related losses
and settlement expenses incurred and reserves outstanding for the Company:
Year Ended December 31,
-------------------------------
1994 1993 1992
---------- ---------- ----------
Total losses incurred ....................... $ 210,776 $ 198,267 $ 347,764
Total settlement expenses incurred .......... 59,750 (3,299) 7,995
---------- ---------- ----------
Total losses and settlement expenses
incurred ................................ $ 270,526 $ 194,968 $ 355,759
========== ========== ==========
Loss reserves ............................... $ 255,799 $ 49,161 $ 982,197
Settlement expense reserves ................. 70,286 16,616 20,966
---------- ---------- ----------
Total loss and settlement expense reserves $ 326,085 $ 65,777 $1,003,163
========== ========== ==========
Number of outstanding claims ................ 70 39 44
========== ========== ==========
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 serval 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.
Based upon current facts, management believes the reserves established for
environmental and asbestos related claims at December 31, 1994 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.
<PAGE>
EXCESS AND SURPLUS LINES INSURANCE AGENCY
-----------------------------------------
The excess and surplus lines insurance agency was acquired by the Company
in 1985. Incorporated in 1974, the agency provides access to the excess and
surplus lines markets through independent agents and managing general agents.
The agency also functions as managing underwriter for such lines for several of
the pool members 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
-----------
Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115) "Accounting for Certain Investments in
Debt and Equity Securities." SFAS 115 requires that investments in all debt
securities and those equity securities with readily determinable market values
be classified into one of three categories: held-to-maturity, trading or
available-for-sale. Classification of investments is based upon management's
current intent. Debt securities which management has a positive intent and
ability to hold until maturity are classified as securities held-to-maturity
and are carried at amortized cost. Unrealized holding gains and losses on
securities held-to-maturity are not reflected in the consolidated financial
statements. Debt and equity securities that are held for current resale are
classified as trading securities and are carried at market value, with
unrealized holding gains and losses included in earnings. All other debt and
equity securities not included in the above two categories are 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. Adoption of this statement had no effect on the income of
the Company. Unrealized holding (losses) gains on securities available-for-
sale had the effect of (decreasing) increasing stockholders' equity by
($1,316,596) and $2,048,651 at December 31, 1994 and 1993, respectively, net of
income taxes of $0 and $1,055,365. At December 31, 1994 and 1993, the Company
had no investments classified as trading securities.
Prior to December 31, 1993, investments in fixed maturities were carried
at amortized cost and equity securities were carried at market value. Changes
in the unrealized holding gains and losses resulting from the revaluation of
equity securities were reported as direct increases and decreases in
stockholders' equity. Unrealized holding gains and losses on fixed maturities
were not recognized in the consolidated financial statements.
<PAGE>
The assets of the property and casualty insurance subsidiaries, the
reinsurance subsidiary and the nonstandard risk automobile insurance subsidiary
are primarily invested in government bonds. At December 31, 1994,
approximately 82 percent of the Company's fixed maturity bonds were invested in
government or government agency issued securities. Investments in bonds
categorized as held-to-maturity are purchased with the intent of being held to
maturity. 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).
The Company intends to increase its investment in equity securities during
1995. Approximately $13,500,000 of short-term funds will be reinvested in
equity securities classified as available-for-sale during the first six months
of 1995. The overall liquidity position of the Company will not be affected by
this change.
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
may be adopted by the NAIC in 1995. 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 are supervised by an investment committee
of the Board of Directors of the Company, which includes one individual who is
an officer of the Company. The bond portfolios for each of the subsidiaries
are managed by an internal staff which is composed of employees of Employers
Mutual.
Investment expenses are based on actual expenses incurred by each of the
Company's subsidiaries plus an allocation of other investment expenses incurred
by Employers Mutual, which is based on a weighted average of total assets and
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, 1994 and
1993. 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.
<PAGE>
Year ended December 31,
--------------------------------------------
1994 1993
--------------------- ---------------------
Amortized Amortized
Cost Percent Cost Percent
------------ ------- ------------ -------
Securities held-to-maturity:
Fixed maturity securities:
United States government
agencies and authorities .. $102,480,740 30.4% $109,895,914 36.4%
States and political
subdivisions .............. 78,423,605 23.2 18,374,003 6.1
Foreign governments ......... 583,309 .2 587,060 .2
Public utilities ............ 8,622,154 2.5 8,813,202 2.9
Corporate securities ........ 13,052,550 3.9 17,050,988 5.7
Mortgage-backed securities .. 40,487,362 12.0 36,289,456 12.0
------------ ------- ------------ -------
Total fixed maturity
securities .............. 243,649,720 72.2 191,010,623 63.3
------------ ------- ------------ -------
Securities available-for-sale:
Fixed maturity securities:
U.S. Treasury securities .... 15,835,019 4.7 26,803,980 8.9
States and political
subdivisions .............. 55,274,052 16.4 58,431,008 19.4
Foreign governments ......... 1,994,980 .6 - -
Corporate securities ........ 4,250,000 1.3 7,496,245 2.5
Other debt securities ....... 454,941 .1 486,941 .2
------------ ------- ------------ -------
Total fixed maturity
securities .............. 77,808,992 23.1 93,218,174 31.0
------------ ------- ------------ -------
Equity securities ............. - - 505,000 .2
------------ ------- ------------ -------
Short-term investments ........ 16,029,426 4.7 16,729,390 5.5
------------ ------- ------------ -------
Total investments ........ $337,488,138 100.0% $301,463,187 100.0%
============ ======= ============ =======
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, 1994.
<PAGE>
Securities Securities
held-to-maturity available-for-sale
(at amortized cost) (at market value)
--------------------- ---------------------
Amount Percent Amount Percent
------------ ------- ------------ -------
Rating(1)
Aaa ..................... $177,634,659 72.9% $ 37,805,573 49.4%
Aa ...................... 29,632,708 12.2 26,852,122 35.1
A ....................... 32,412,444 13.3 10,459,216 13.7
Baa ..................... 3,471,265 1.4 1,375,485 1.8
Ba ...................... 498,644 .2 - -
------------ ------- ------------ -------
Total fixed maturities $243,649,720 100.0% $ 76,492,396 100.0%
============ ======= ============ =======
(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, 1994, 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 ................... $ 11,767,723 $ 11,920,042
Due after one year through five years ..... 83,119,839 82,556,120
Due after five years through ten years .... 79,969,324 77,390,645
Due after ten years ....................... 28,305,472 27,544,307
Mortgage-backed securities ................ 40,487,362 39,310,374
------------ ------------
Totals .................................. $243,649,720 $238,721,488
============ ============
Securities available-for-sale:
Due in one year or less ................... $ 20,884,351 $ 20,896,089
Due after one year through five years ..... 16,762,627 16,297,903
Due after five years through ten years .... 25,213,287 25,595,670
Due after ten years ....................... 14,948,727 13,702,734
------------ ------------
Totals .................................. $ 77,808,992 $ 76,492,396
============ ============
<PAGE>
The mortgage-backed securities shown in the above table include
$23,034,688 of securities issued by government corporations and agencies and
$17,452,674 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,
----------------------------------------
1994 1993 1992
------------ ------------ ------------
Average invested assets (1) ........ $319,475,663 $306,387,058 $288,433,650
Investment income (2) .............. 20,929,680 20,779,951 21,539,597
Average yield ...................... 6.55% 6.78% 7.47%
Realized investment gains .......... $ 519,567 $ 684,445 $ 384,283
(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 12 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 1,492
(plus 32 part-time), 14 (plus 1 part-time), and 60 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.
<PAGE>
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, 1994, $15,513,214 was available
for distribution in 1995 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 $128,576,
$86,200 and $132,996 in 1994, 1993 and 1992, respectively.
The NAIC adopted certain risk-based capital standards in 1994 for property
and casualty insurance companies. 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 formula has been designed to help
state regulators assess 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 upon the risks
applicable to the operations of the individual insurer. The formula takes into
consideration industry performance and individual insurer financial
characteristics by examining a number of financial criteria to test its
perceived levels of risk against assets available to bear such risks.
<PAGE>
The model act adopted by the NAIC provides a minimum level of capital at
which a State Commissioner of Insurance may act to place an insurer under
certain restraints or in the worst case, to place an insurer under his or her
control. These risk-based capital rules are a quantitative measurement
technique which purport to quantify the minimum amount of capital necessary to
match the degree of financial risk. It is a method for specifying how much
minimum capital an insurer must have, based on the risks it has assumed, to
assure that it maintains an acceptably low probability of financial impairment.
The risk-based capital requirements measure three major areas of risk
facing property and casualty insurers: 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, 1994 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 $73,000 and $31,000 annually. These leases expire
March 31, 1998 and November 30, 1995, respectively.
Lease costs of the Company's office facilities in Oak Brook, Illinois, and
Bismarck, North Dakota, which total approximately $220,000 and $126,000
annually, are included as expenses under the pooling agreement. See "Property
and Casualty Insurance - Pooling Agreement" under Item 1 of this Form 10-K.
Expenses of office facilities owned 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. Expenses
totaling $1,714,082, $1,784,868 and $1,699,591 for the three years ended
December 31, 1994, 1993 and 1992, respectively, were charged to the pool in
connection with the rental of 229,770 and 63,450 square feet located in Des
Moines and Ames, Iowa.
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.
<PAGE>
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.
1994 1993
---------------------------- ----------------------------
High Low Dividends High Low Dividends
------- ------- --------- ------- ------- ---------
1st Quarter $ 9 3/4 $ 8 1/2 $.13 $10 3/4 $ 8 $.13
2nd Quarter 10 8 1/2 .13 11 1/4 9 1/2 .13
3rd Quarter 9 1/2 8 1/2 .13 10 1/4 9 1/4 .13
4th Quarter 10 3/4 8 3/4 .13 10 1/4 8 3/4 .13
At December 31 9 1/2 9 1/2
On March 6, 1995, there were approximately 791 holders of record 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.
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 14(c) of Notes to Consolidated Financial
Statements under Item 8 of this Form 10-K. During 1994 and 1993, Employers
Mutual elected to receive 50 percent of its dividends in common stock under
this plan.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
------- ------------------------
Year ended December 31,
--------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Insurance premiums earned ...... $164,829 $156,438 $147,410 $113,419 $101,323
Investment income, net ......... 20,930 20,780 21,540 20,202 19,884
Realized investment gains ...... 520 684 384 65 48
Other income ................... 434 259 - - -
-------- -------- -------- -------- --------
Total revenues ............ 186,713 178,161 169,334 133,686 121,255
Losses and expenses ............ 168,036 169,142 168,359 123,254 110,415
-------- -------- -------- -------- --------
Income before income taxes ..... 18,677 9,019 975 10,432 10,840
Income taxes ................... 5,171 1,885 759 3,124 2,894
-------- -------- -------- -------- --------
Income from continuing
operations ................... 13,506 7,134 216 7,308 7,946
Income from discontinued
operations ................... - - - 1,853 319
Income from accounting changes - 2,621 - - -
-------- -------- -------- -------- --------
Net income ............... $ 13,506 $ 9,755 $ 216 $ 9,161 $ 8,265
======== ======== ======== ======== ========
Earnings per common share:
Income from continuing
operations ................. $ 1.29 $ .70 $ .02 $ .73 $ .80
Income from discontinued
operations ................. - - - .18 .03
Income from accounting
changes .................... - .26 - - -
-------- -------- -------- -------- --------
Total .................... $ 1.29 $ .96 $ .02 $ .91 $ .83
======== ======== ======== ======== ========
Premiums earned by segment:
Property and casualty ........ $115,412 $109,585 $109,139 $ 78,413 $ 70,597
Reinsurance .................. 37,256 33,324 26,615 25,009 20,696
Nonstandard risk automobile .. 12,161 13,529 11,656 9,997 10,030
-------- -------- -------- -------- --------
Total .................... $164,829 $156,438 $147,410 $113,419 $101,323
======== ======== ======== ======== ========
Total assets ................... $387,370 $368,936 $372,807 $311,001 $296,126
======== ======== ======== ======== ========
Stockholders' equity ........... $116,727 $109,634 $100,911 $105,144 $100,615
======== ======== ======== ======== ========
Average return on equity ....... 11.9% 9.3% .2% 8.9% 8.4%
======== ======== ======== ======== ========
Book value per share ........... $ 11.03 $ 10.63 $ 9.98 $ 10.47 $ 10.04
======== ======== ======== ======== ========
Dividends paid per share ....... $ .52 $ .52 $ .52 $ .52 $ .52
======== ======== ======== ======== ========
<PAGE>
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 excess and
surplus lines insurance management. Property and casualty insurance is the
most significant segment, representing 70.0 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 programs 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 and lines of insurance written and the variety of 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 $1,000,000 per
event are retained by Employers Mutual. The reinsurance subsidiary does not
reinsure any of Employers Mutual's direct insurance business, nor any
"involuntary" facility or pool business that Employers Mutual assumes pursuant
to state law. In addition, the reinsurance subsidiary is not liable for
credit risk in connection with the insolvency of any reinsurers of Employers
Mutual.
<PAGE>
The Company's nonstandard risk automobile insurance subsidiary
specializes in insuring private passenger automobile risks that are found to
be unacceptable in the normal automobile market.
The excess and surplus lines insurance agency provides insurance
companies with access to the excess and surplus lines markets and also
functions as managing underwriter for such lines for Employers Mutual and
several of the pool members.
RESULTS OF OPERATIONS
Operating results for the three years ended December 31, 1994 are as follows:
($ in thousands) 1994 1993 1992
-------- -------- --------
Premiums earned .......................... $164,829 $156,438 $147,410
Losses and settlement expenses ........... 116,944 120,355 122,088
Other expenses ........................... 51,092 48,787 46,271
-------- -------- --------
Underwriting loss ........................ (3,207) (12,704) (20,949)
Net investment income .................... 20,930 20,780 21,540
Realized investment gains ................ 520 684 384
Other income ............................. 434 259 -
-------- -------- --------
Operating income before income taxes ..... $ 18,677 $ 9,019 $ 975
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ..... $123,344 $119,896 $116,616
(Decrease) increase in provision for
insured events of prior years ........ (6,400) 459 5,472
-------- -------- --------
Total losses and settlement expenses .. $116,944 $120,355 $122,088
======== ======== ========
Catastrophe losses ....................... $ 5,487 $ 8,513 $ 16,569
======== ======== ========
Operating results before income taxes have improved significantly over
the last three years. This improvement reflects a decrease in catastrophe
losses and a decline in the loss and settlement expense provision for insured
events of prior years. In 1994, all segments showed improved operating
results, with the property and casualty insurance subsidiaries and the
nonstandard risk automobile insurance subsidiary posting significant increases
over 1993. Operating results for 1993 reflect greatly improved underwriting
results in the property and casualty insurance subsidiaries and the
reinsurance subsidiary. Operating results for 1992 were severely impacted by
catastrophe losses associated with Hurricanes Andrew and Iniki.
Premiums earned have increased steadily over the last three years
despite the competitive market conditions. 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. For the year 1993,
production increased for the reinsurance subsidiary and the nonstandard risk
automobile insurance subsidiary, while the property and casualty insurance
subsidiaries remained relatively flat.
<PAGE>
Losses and settlement expenses have decreased over the last three years,
reflecting a decline in catastrophe losses and the provision for insured
events of prior years. During 1992, the property and casualty insurance
subsidiaries and the nonstandard risk automobile insurance subsidiary
strengthened prior year reserves on certain lines of business and the
reinsurance subsidiary experienced a time lag in the reporting of assumed
reinsurance business. During 1993, the property and casualty insurance
subsidiaries continued to strengthen reserves on certain lines of business,
while the reinsurance subsidiary experienced adverse development on losses
associated with Hurricane Andrew. These reserve increases in 1992 and 1993
were partially offset by reserve decreases on other lines of business,
resulting in a net increase in the Company's estimate of prior year reserves
of $5,472,000 in 1992 and $459,000 in 1993. During 1994, the reinsurance
subsidiary experienced adverse development on certain contracts. These
reserve increases were offset by significant reserve decreases in the property
and casualty insurance subsidiaries and the nonstandard risk automobile
insurance subsidiary. As a result, the net decrease in the Company's prior
year reserves in 1994 amounted to $6,400,000. In addition to the substantial
amount of catastrophe losses incurred in 1992 and 1993, results for these
years also reflect losses associated with two reinsurance contracts under the
reinsurance subsidiary's quota share agreement that were commuted in 1993.
Investment income increased in 1994 after experiencing a decrease in
1993. The decrease in 1993 is primarily due to a decline in invested assets
resulting from the transfer of $24,853,000 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.
Realized gains on investments 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 commutation of one of the reinsurance
subsidiary's reinsurance contracts under the quota share agreement in 1993.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits." Adoption of this statement had no effect on the operations of the
Company.
Effective December 31, 1994, the Company adopted Statement of Financial
Accounting Standards No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments." Adoption of this
statement had no effect on current disclosures as the Company did not hold or
issue any derivative financial instruments at December 31, 1994.
In 1993, the Company adopted four new accounting standards and
implemented an accounting change. The net impact of these items was an
increase in net income of $2,621,000 ($.26 per share). Following is a brief
explanation of each item:
<PAGE>
* Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The Company adopted SFAS 106
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.
* Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes."
The Company adopted SFAS 109 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.
* 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 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 $1,110,000 and a
decrease in income of $808,000 ($.08 per share), net of income tax benefits
of $302,000.
* Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 113 (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. Adoption of this statement had no
effect on the income of the Company.
* Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities." SFAS 115 provides that
investments in all debt securities and those equity securities with readily
determinable market values are to be classified in one of three categories:
held-to-maturity, trading or available-for-sale. Classification of
investments is based upon management's current intent. Debt securities
which management has a positive intent and ability to hold to maturity are
classified as "securities held-to-maturity" and are carried at amortized
cost. Unrealized holding gains and losses on securities held-to-maturity
are not reflected in the consolidated financial statements. Debt and
equity securities that are held for current resale are classified as
"trading securities" and are reported at market value, with unrealized
holding gains and losses included in earnings. All other debt and equity
securities are classified as "securities available-for-sale" and are
carried at market value, with unrealized holding gains and losses excluded
from earnings and reported as a separate component of stockholders' equity,
net of tax. Adoption of this statement had no effect on the income of the
Company. Unrealized holding (losses) gains on securities available-for-
sale had the effect of (decreasing) increasing stockholders' equity by
($1,317,000) and $2,048,000 at December 31, 1994 and 1993, respectively,
net of income taxes of $0 and $1,055,000. At December 31, 1994 and 1993,
the Company did not have any investments categorized as trading securities.
<PAGE>
SEGMENT RESULTS
Property and Casualty Insurance
Following is an overview of recent changes that have affected the
operations of the property and casualty insurance subsidiaries.
Effective January 1, 1992, the aggregate participation of the property
and casualty insurance subsidiaries was increased to 22 percent from 17
percent. In connection with this change in pool participation, the Company's
liabilities increased $31,428,000 and invested assets increased $29,402,000.
The Company reimbursed Employers Mutual $2,026,000 for commissions incurred to
generate this business.
As previously noted, 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. As a
result, amounts assumed by the Company from nonaffiliates have declined from
the amounts assumed in 1992. In connection with this change in the pooling
agreement, the Company's liabilities decreased $4,470,000 and invested assets
decreased $4,427,000. Employers Mutual reimbursed the Company $43,000 for
commissions incurred to generate this business.
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 and restated all prior year
consolidated financial statements for comparative purposes. There was no
income effect from this reclassification. In connection with this gross-up of
balances, amounts due from Employers Mutual increased $13,148,000 at December
31, 1993. Under the terms of the pooling agreement, these balances were
settled in the first quarter of 1994.
<PAGE>
Operating results for the three years ended December 31, 1994 are as follows:
($ in thousands) 1994 1993 1992
-------- -------- --------
Premiums earned .......................... $115,412 $109,585 $109,139
Losses and settlement expenses ........... 77,872 79,777 82,314
Other expenses ........................... 36,606 33,621 33,994
-------- -------- --------
Underwriting gain (loss) ................. 934 (3,813) (7,169)
Net investment income .................... 14,080 13,243 13,048
Realized investment gains ................ 334 405 285
-------- -------- --------
Operating income before income taxes ..... $ 15,348 $ 9,835 $ 6,164
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ..... $ 84,204 $ 81,355 $ 80,900
(Decrease) increase in provision for
insured events of prior years ........ (6,332) (1,578) 1,414
-------- -------- --------
Total losses and settlement expenses .. $ 77,872 $ 79,777 $ 82,314
======== ======== ========
Catastrophe losses ....................... $ 4,063 $ 3,372 $ 4,631
======== ======== ========
Production increases for the last three years have been hindered by rate
competition and the continued shift of large commercial insureds to
alternative risk mechanisms. In response to these difficult market
conditions, the property and casualty insurance subsidiaries have implemented
new marketing programs that emphasize property insurance. In addition to
increasing the amount of property insurance written, these programs have also
helped to highlight the subsidiaries' other products. Premium rate adequacy
varied greatly by line of business in 1994, but overall rate adequacy
improved. This improvement reflects many factors, including careful
underwriting, significant reform measures implemented by several states to
control the administrative costs of workers' compensation claims and internal
cost management programs. During 1994, 11 states implemented rate reductions
for the workers' compensation line of business ranging from .3 percent to 16.0
percent while 14 states implemented rate increases ranging from .1 percent to
12.6 percent. These rate changes did not have a material impact on 1994
production as they were implemented at various times throughout the year and
they largely offset each other.
<PAGE>
Underwriting results have improved significantly over the last three
years, primarily due to improved results in the workers' compensation line of
business. Reform measures implemented by several states to control
administrative costs related to workers' compensation insurance have been a
major factor in this improvement. By monitoring this reform on a state by
state basis and writing more business in states that show a potential for
profit, management has been able to achieve improved results. Underwriting
results for 1994 reflect a net decline of $6,332,000 in the estimate of prior
year loss reserves. This decline reflects savings associated with the reform
measures noted above. Underwriting results for 1993 and 1992 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. Results for 1992 also reflect
$1,427,000 of underwriting losses associated with the voluntary assumed
reinsurance business written by Employers Mutual that effective January 1,
1993 is no longer subject to cession to the pool members.
Investment income increased in each of the last three years. The large
increase in 1994 reflects interest income earned on $13,148,000 received from
Employers Mutual in connection with the gross-up of reserve amounts associated
with the National Workers' Compensation Reinsurance Pool in 1993.
Reinsurance
Following is an overview of recent changes that have affected the
operations of the reinsurance subsidiary.
Effective January 1, 1993, the quota share agreement was amended so that
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 $2,095,000 in 1994 and
$1,809,000 in 1993. 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 $2,563,000 and $2,867,000 in 1994 and 1993,
respectively. Employers Mutual retained losses and settlement expenses
totaling $7,020,000 in 1994 and $615,000 in 1993 under this agreement. In
conjunction with this amendment to the quota share agreement, the reinsurance
subsidiary terminated its catastrophe reinsurance contracts with Employers
Mutual and other nonaffiliated reinsurers. Effective January 1, 1993, the
reinsurance subsidiary no longer cedes reinsurance to nonaffiliated reinsurers
and only cedes reinsurance to Employers Mutual under an aggregate "excess of
loss" treaty.
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 $434,000 in 1994 and $259,000 in 1993.
<PAGE>
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.
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.
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 $2,500,000 aggregate loss retained, excess
of $200,000 per event. Maximum recovery is limited to $4,000,000 per accident
year. The reinsurance subsidiary recovered $0, $144,000 and $4,221,000 under
this treaty and paid reinstatement premiums of $0, $280,000 and $745,000 in
1994, 1993 and 1992, respectively. Total premiums paid to Employers Mutual
amounted to $558,000, $708,000 and $1,125,000 in 1994, 1993 and 1992,
respectively.
Operating results for the three years ended December 31, 1994 are as follows:
($ in thousands) 1994 1993 1992
-------- -------- --------
Premiums earned ............................ $ 37,256 $ 33,324 $ 26,615
Losses and settlement expenses ............. 30,565 27,872 29,047
Other expenses ............................. 11,408 11,492 9,472
-------- -------- --------
Underwriting loss .......................... (4,717) (6,040) (11,904)
Net investment income ...................... 5,354 6,090 6,763
Realized investment gains .................. 116 201 52
Other income ............................... 434 259 -
-------- -------- --------
Operating income (loss) before income taxes $ 1,187 $ 510 $ (5,089)
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ....... $ 29,270 $ 25,359 $ 25,608
Increase in provision for insured
events of prior years .................. 1,295 2,513 3,439
-------- -------- --------
Total losses and settlement expenses .... $ 30,565 $ 27,872 $ 29,047
======== ======== ========
Catastrophe losses ......................... $ 1,424 $ 5,141 $ 11,609
======== ======== ========
<PAGE>
Premiums earned have increased steadily over the last three years. Under
the terms of the amended quota share agreement with Employers Mutual, the
amounts for 1994 and 1993 reflect a reduction of $2,836,000 and $2,439,000,
respectively, related to the reinsurance subsidiary's payment of 95 percent of
the cost of the reinsurance protection purchased by Employers Mutual to
protect itself from catastrophic losses. Prior to 1993, the reinsurance
subsidiary purchased its own catastrophe protection. Premiums earned for 1992
reflect $6,481,000 in premiums ceded (including $3,149,000 of reinstatement
premiums) to Employers Mutual and other nonaffiliated reinsurers for this
catastrophe protection. Operations for 1994 and 1993 reflect a shift from
catastrophe "excess of loss" business to "pro rata" business. Premiums earned
for 1994 reflect an increased participation in a voluntary pool and additional
premium volume on new and existing pro rata contracts. Rates for pro rata
business deteriorated somewhat during 1994 due to competitive market
conditions at the primary company level.
Underwriting results have improved significantly over the last three
years, primarily due to a decline in catastrophe losses. 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. Incurred
losses for the last three years reflect adverse development on prior year
losses. The large amount in 1992 is primarily due to a time lag in the
reporting of assumed reinsurance business. This time lag did not have a
material effect on the underwriting results of the reinsurance subsidiary
since the premium income associated with this business was recorded at the
same time as the losses. The adverse development experienced in 1993
primarily relates to losses associated with Hurricane Andrew. Results for
1993 and 1992 reflect $1,678,000 and $2,246,000, respectively, of underwriting
losses associated with two reinsurance contracts that were commuted in 1993.
Expenses for 1994 and 1993 include $2,095,000 and $1,809,000,
respectively, of commissions paid to Employers Mutual in connection with the
$1,000,000 cap on catastrophe losses under the amended quota share agreement.
The large decline in investment income in 1994 and 1993 is primarily
attributable to the transfer of $20,426,000 to Employers Mutual during 1993 in
connection with the commutation of two reinsurance contracts. This decline in
investment income was partially offset by the recognition of deferred income
totaling $434,000 in 1994 and $259,000 in 1993 related to reserve discounting
on one of the commuted contracts.
Due to poor underwriting results achieved over the last several years,
four large national pro rata contracts with approximately $3,500,000 of earned
premium were cancelled effective December 31, 1994. As a result of these
cancellations, earned premiums for 1995 are expected to remain relatively
flat. During 1995, more emphasis will be placed upon writing excess of loss
business in non-hurricane prone areas and increasing participation on existing
contracts that have favorable terms. Pro rata business will continue to be
written, but the focus will be on properly structured regional accounts rather
than large national accounts. This gradual movement towards excess of loss
business is prompted by the continued deterioration of pro rata rates and a
greater control over the pricing of excess of loss business.
<PAGE>
Nonstandard Risk Automobile Insurance
Operating results for the three years ended December 31, 1994 are as follows:
($ in thousands) 1994 1993 1992
-------- -------- --------
Premiums earned ............................ $ 12,161 $ 13,529 $ 11,656
Losses and settlement expenses ............. 8,507 12,706 10,727
Other expenses ............................. 3,160 3,366 2,922
-------- -------- --------
Underwriting gain (loss) ................... 494 (2,543) (1,993)
Net investment income ...................... 1,152 1,166 1,179
Realized investment gains .................. 75 109 47
-------- -------- --------
Operating income (loss) before income taxes $ 1,721 $ (1,268) $ (767)
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ....... $ 9,870 $ 13,182 $ 10,108
(Decrease) increase in provision for
insured events of prior years .......... (1,363) (476) 619
-------- -------- --------
Total losses and settlement expenses .... $ 8,507 $ 12,706 $ 10,727
======== ======== ========
Catastrophe losses ......................... $ - $ - $ 329
======== ======== ========
The nonstandard risk marketplace is very competitive. Policies are
written for relatively short periods of time and insureds continually search
for the most attractive rates. In response to favorable results achieved in
prior years, the company began increasing market share in 1992 by offering
more competitive rates. The company experienced adverse selection in this new
business as the standard market began to accept more of the marginal risks
during this same time period. As a result, losses associated with this new
business exceeded the premiums received.
Premiums earned declined in 1994 as the company elected to emphasize
profitability over premium volume and did not reduce rates in order to retain
business. Recently, the larger standard companies have begun to develop rate
tiers that are geared toward retaining nonstandard risk customers, rather than
passing them into the nonstandard market. This additional availability in the
standard market has resulted in increased competition in the nonstandard
market. Production for 1995 is expected to remain relatively flat as the
company will continue to emphasize profitability over market share. The
company expects to begin writing business in the state of Missouri in late
1995 which should help to offset any production decreases experienced in
existing markets.
<PAGE>
Underwriting results for 1994 reflect improved loss experience, favorable
development on prior year loss reserves and rate increases that were
implemented in all states during the later part of 1993 and the first part of
1994. Results for 1992 and 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. During 1992, this
reserve strengthening was primarily directed toward prior year claims. During
1993, the reserve strengthening was primarily directed toward current year
claims in response to increased loss frequency and severity on the new book of
business. Profitable underwriting results in the future are likely to be more
dependent upon successful niche marketing, rather than full coverage programs.
The company is prepared to meet the needs of its consumers by offering
selected coverages at prices deemed adequate for the risks insured.
Investment income has declined slightly over the last three years. This
decline is due to reduced interest rates available for current investments.
Excess and Surplus Lines Insurance Management Agency
Operating income before income taxes increased to $505,000 in 1994 from
$103,000 in 1993 and $496,000 in 1992. The improvement in 1994 is the result
of 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 and 1992 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 loss before income taxes decreased to $84,000 in 1994 from
$161,000 in 1993 and a profit of $171,000 in 1992. The improvement in 1994
reflects a decline in operating expenses and an increase in investment income.
The large decline in 1993 reflects a substantial reduction in investment
income. Invested assets decreased in 1993 due to a capital contribution made
to the reinsurance subsidiary in 1992 and a reduction in the amount of
dividends received from the insurance company subsidiaries.
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.
<PAGE>
Estimating asbestos and environmental related reserves is very difficult
due to the following uncertainties surrounding these types of claims: the
legal definition of asbestos and environmental damage is still evolving, the
assignment of responsibility varies widely by state, defense costs are often
much greater than the claim costs 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.
Over the last several years, the Company's financial results have not
been materially affected by losses associated with environmental and asbestos
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.
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 1994, Congress debated potential reforms to the "Superfund" law
which included a new tax on commercial lines insurance companies. This tax
would have been used to fund clean-up costs and settle lawsuits between
potentially responsible parties and their insurers. This legislation was not
successful in 1994 and it is currently unknown whether similar legislation
will be introduced in 1995.
<PAGE>
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 losses on fixed
maturity securities available-for-sale totaled $1,317,000 at December 31,
1994. This compares to net unrealized holding gains of $3,134,000 at December
31, 1993. The decrease in the market value of these investments is primarily
due to higher interest rates imposed by the Federal Reserve Board during 1994,
which caused bond values to decline. Further declines in the market value of
these investments may occur if the Federal Reserve Board again raises interest
rates. 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 related to the tax benefits associated with
these unrealized holding losses was established in 1994 due to the uncertainty
concerning the future realization of these tax benefits.
The majority of the Company's assets are invested in fixed maturities.
These investments provide a substantial amount of income which offsets
underwriting losses 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.
The Company intends to increase its investment in equity securities
during 1995. Approximately $13,500,000 of short-term funds will be reinvested
in equity securities classified as available-for-sale during the first six
months of 1995. The overall liquidity position of the Company will not be
affected by this change.
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 1994, the Company generated positive cash flows from operations of
$39,006,000, which included $13,148,000 related to the gross-up of reserve
amounts associated with the National Workers' Compensation Reinsurance Pool,
as previously noted. This compares to a negative operating cash flow of
$8,794,000 in 1993, which 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. Operating cash flows of
$50,826,000 in 1992 included $29,402,000 received from Employers Mutual in
connection with the increase in the property and casualty insurance
subsidiaries' pool participation.
<PAGE>
The Company contributed $10,000,000 of the proceeds received from the
sale of the life subsidiary to increase the surplus of the property and
casualty insurance subsidiaries in 1992 in connection with the increase in
pool participation. The Company contributed $3,000,000 to the surplus of the
reinsurance subsidiary in 1992 in order to retain its status as an authorized
reinsurance company in several states.
CAPITAL RESOURCES
As of December 31, 1994, 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 operations do not require a large amount of capital.
A major source of cash flows for the holding 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
$3,068,000, $860,000 and $3,288,000 of dividends from its insurance
subsidiaries in 1994, 1993 and 1992, respectively. The Company paid cash
dividends to stockholders totaling $3,511,000, $3,443,000 and $5,104,000 in
1994, 1993 and 1992, respectively. The decrease from 1992 is due to the fact
that Employers Mutual received 50 percent of its dividends in common stock
under the Company's dividend reinvestment and common stock purchase plan in
1994 and 1993.
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.
<PAGE>
DEVELOPMENTS IN INSURANCE REGULATION
The National Association of Insurance Commissioners (NAIC) adopted
certain risk-based capital standards in 1994 for property and casualty
insurance companies. 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 formula has been designed to help
state regulators assess 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 upon the
risks applicable to the operations of the individual insurer. The formula
takes into consideration industry performance and individual insurer financial
characteristics by examining a number of financial criteria to test its
perceived levels of risk against assets available to bear such risks. The
model act adopted by the NAIC provides a minimum level of capital at which a
State Commissioner of Insurance may act to place an insurer under certain
restraints or in the worst case, to place an insurer under his or her control.
These risk-based capital rules are a quantitative measurement technique which
purport to quantify the minimum amount of capital necessary to match the
degree of financial risk. It is a method for specifying how much minimum
capital an insurer must have, based on the risks it has assumed, to assure
that it maintains an acceptably low probability of financial impairment.
The risk-based capital requirements measure three major areas of risk
facing property and casualty insurers: 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, 1994 is well in excess of the
minimum level required.
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 may be adopted by the NAIC in 1995. This model law is
not expected to have a material impact on the operations of the Company's
insurance subsidiaries.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
------- --------------------------------------------
Management's Responsibility for Financial Reporting
The consolidated financial statements contained in this annual report were
prepared by management in conformity with generally accepted accounting
principles. In preparing these financial statements, reasonable estimates and
judgments have been made when necessary.
Management is responsible for establishing and maintaining a system of
internal control, designed to provide reasonable assurance as to the integrity
and reliability of the financial records. The concept of reasonable assurance
recognizes that there are inherent limitations in any control system and that
the cost of maintaining a control system should not exceed the expected
benefits to be derived therefrom. Management believes its system of internal
control effectively meets its objective of reliable financial reporting.
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 have free access to the Audit Committee,
with and without management present, to discuss the results of their audit
work.
The consolidated financial statements are examined by KPMG Peat Marwick
LLP, independent certified public accountants. Their report appears elsewhere
in this annual report.
/s/ E. H. Creese
------------------------------------
E. H. Creese, C.P.A.
Senior Vice President, Treasurer and
Chief Financial Officer
<PAGE>
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, 1994 and 1993, 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, 1994.
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, 1994 and 1993, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1994, 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, 1995
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
--------------------------
1994 1993
------------ ------------
ASSETS
Investments (note 10):
Fixed maturities:
Securities held-to-maturity, at amortized cost
(market value $238,721,488 and $206,305,597) $243,649,720 $191,010,623
Securities available-for-sale, at market value
(amortized cost $77,808,992 and $93,218,174) 76,492,396 96,352,190
Equity securities available-for-sale, at market
value (cost $0 and $505,000) .................. - 475,000
Short-term investments, at cost ................. 16,029,426 16,729,390
------------ ------------
Total investments .......................... 336,171,542 304,567,203
Cash .............................................. 1,258,221 675,203
Indebtedness of related party (note 4) ............ - 12,291,512
Accrued investment income ......................... 5,560,633 4,835,451
Accounts receivable ............................... 1,280,550 415,215
Deferred policy acquisition costs ................. 8,393,635 7,698,864
Deferred income taxes (note 11) ................... 14,190,499 13,040,693
Intangible assets, including goodwill, at cost
less accumulated amortization of $1,674,643
and $1,540,130 .................................. 1,883,177 2,017,690
Reinsurance receivables (note 3) .................. 14,935,048 18,477,406
Prepaid reinsurance premiums (note 3) ............. 2,121,033 2,832,184
Other assets ...................................... 1,575,540 2,084,102
------------ ------------
Total assets ............................... $387,369,878 $368,935,523
============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
--------------------------
1994 1993
------------ ------------
LIABILITIES
Losses and settlement expenses (notes 2,3,5 and 6) $203,181,615 $197,121,852
Unearned premiums (notes 2 and 3) ................. 47,672,570 45,941,056
Other policyholders' funds ........................ 3,102,609 2,854,793
Indebtedness to related party (note 4) ............ 937,356 -
Income taxes payable .............................. 1,736,000 550,000
Postretirement benefits (note 13).................. 4,086,674 3,537,449
Deferred income (note 2) .......................... 1,283,662 1,717,641
Other liabilities ................................. 8,642,703 7,578,963
------------ ------------
Total liabilities .......................... 270,643,189 259,301,754
------------ ------------
STOCKHOLDERS' EQUITY (notes 7,8,10,14 and 15)
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 10,587,629 shares
in 1994 and 10,325,329 shares in 1993 ........... 10,587,629 10,325,329
Additional paid-in capital ........................ 57,162,911 55,021,926
Unrealized holding (losses) gains on fixed
maturity securities available-for-sale,
net of tax ...................................... (1,316,596) 2,068,451
Unrealized holding losses on equity securities
available-for-sale, net of tax .................. - (19,800)
Retained earnings ................................. 50,402,812 42,319,249
Treasury stock, at cost (10,931 shares in 1994
and 8,090 shares in 1993) ....................... (110,067) (81,386)
------------ ------------
Total stockholders' equity ................. 116,726,689 109,633,769
------------ ------------
Contingent liabilities (notes 3,11 and 17)
Total liabilities and stockholders' equity $387,369,878 $368,935,523
============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income
Year ended December 31,
----------------------------------------
1994 1993 1992
------------ ------------ ------------
REVENUES:
Premiums earned (notes 2 and 3) ... $164,829,379 $156,437,538 $147,410,287
Investment income, net (note 10) .. 20,929,680 20,779,951 21,539,597
Realized investment gains (note 10) 519,567 684,445 384,283
Other income (note 2) ............. 433,979 259,217 -
------------ ------------ ------------
186,712,605 178,161,151 169,334,167
------------ ------------ ------------
LOSSES AND EXPENSES:
Losses and settlement
expenses (notes 2,3 and 5) ...... 116,944,054 120,355,299 122,087,833
Dividends to policyholders ........ 3,103,788 2,494,284 3,382,736
Amortization of deferred
policy acquisition costs ........ 31,701,789 30,717,175 29,291,362
Other underwriting expenses ....... 16,286,206 15,575,257 13,597,179
------------ ------------ ------------
168,035,837 169,142,015 168,359,110
------------ ------------ ------------
Income before income taxes and
cumulative effect of changes
in accounting principles ....... 18,676,768 9,019,136 975,057
------------ ------------ ------------
INCOME TAXES (note 11):
Current ........................... 5,265,482 1,903,128 2,260,795
Deferred .......................... (94,441) (18,027) (1,501,430)
------------ ------------ ------------
5,171,041 1,885,101 759,365
------------ ------------ ------------
Income before cumulative effect of
changes in accounting principles 13,505,727 7,134,035 215,692
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 ................. $ 13,505,727 $ 9,755,379 $ 215,692
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income, Continued
Year ended December 31,
----------------------------------------
1994 1993 1992
------------ ------------ ------------
EARNINGS PER COMMON SHARE:
Income before cumulative effect of
changes in accounting principles $ 1.29 $ .70 $ .02
Cumulative effect of changes in
accounting principles for:
Income taxes ................. - .55 -
Postretirement benefits ...... - (.21) -
Unearned premiums ............ - (.08) -
------------ ------------ ------------
Total ...................... $ 1.29 $ .96 $ .02
============ ============ ============
Average number of shares outstanding 10,431,925 10,197,999 10,071,901
============ ============ ============
Pro forma amounts, assuming retroactive application of new method of
calculating unearned premiums:
Net income ............................... $ 10,563,312 $ 344,420
============ ============
Earnings per common share ................ $ 1.04 $ .03
============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Year ended December 31,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
Common stock, beginning of year ........ $10,325,329 $10,161,760 $10,082,675
Issuance of common stock:
Stock option plans ................. 41,694 31,252 79,085
Dividend reinvestment plan ......... 220,606 132,317 -
----------- ----------- -----------
Common stock, end of year .............. 10,587,629 10,325,329 10,161,760
----------- ----------- -----------
Additional paid-in capital,
beginning of year .................... 55,021,926 53,507,459 52,838,624
Additional paid-in capital from
issuance of common stock:
Stock option plans ................. 349,390 279,234 669,320
Dividend reinvestment plan ......... 1,791,595 1,211,972 -
Gain (loss) on sale of treasury stock .. - 23,261 (485)
----------- ----------- -----------
Additional paid-in capital, end of year 57,162,911 55,021,926 53,507,459
----------- ----------- -----------
Unrealized holding gains on fixed
maturity securities available-for-
sale, net of tax, beginning of year .. 2,068,451 - -
Unrealized holding (losses) gains on
revaluation of fixed maturity
securities available-for-sale,
net of tax (notes 1 and 10) .......... (3,385,047) 2,068,451 -
----------- ----------- -----------
Unrealized holding (losses) gains on
fixed maturity securities available-
for-sale, net of tax, end of year .... (1,316,596) 2,068,451 -
----------- ----------- -----------
Unrealized holding losses on equity
securities available-for-sale,
net of tax, beginning of year ........ (19,800) (142,000) (326,375)
Unrealized holding gains on
revaluation of equity securities
available-for-sale, net of tax ....... 19,800 122,200 184,375
----------- ----------- -----------
Unrealized holding losses on equity
securities available-for-sale,
net of tax, end of year .............. $ - $ (19,800) $ (142,000)
----------- ----------- -----------
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity, continued
Year ended December 31,
----------------------------------------
1994 1993 1992
------------ ------------ ------------
Retained earnings, beginning of year $ 42,319,249 $ 37,866,902 $ 42,891,128
Net income .......................... 13,505,727 9,755,379 215,692
Dividends on common stock ($.52 per
share in 1994, 1993 and 1992):
Cash dividends .................. (3,510,555) (3,443,465) (5,103,890)
Dividends reinvested in shares
of common stock .............. (1,911,609) (1,859,567) (136,028)
------------ ------------ ------------
Retained earnings, end of year ...... 50,402,812 42,319,249 37,866,902
------------ ------------ ------------
Treasury stock at cost,
beginning of year ................. (81,386) (483,344) (341,616)
Purchase of shares for the treasury (28,681) (126,948) (315,749)
Sale of shares from the treasury .... - 528,906 174,021
------------ ------------ ------------
Treasury stock at cost, end of year (110,067) (81,386) (483,344)
------------ ------------ ------------
Total stockholders' equity ..... $116,726,689 $109,633,769 $100,910,777
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended December 31,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................... $13,505,727 $ 9,755,379 $ 215,692
----------- ----------- -----------
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 ... 5,372,801 8,010,617 33,143,232
Unearned premiums ................ 1,731,514 650,196 4,122,176
Other policyholders' funds ....... 247,816 (840,604) 880,866
Deferred policy acquisition costs (694,771) 413,967 (2,189,375)
Indebtedness of related
party (note 4) ................. 13,228,868 (8,639,436) 2,261,884
Accrued investment income ........ (725,182) (242,595) (168,511)
Accrued income taxes:
Current ........................ 1,186,000 (118,000) (2,390,000)
Deferred ....................... (94,441) (18,027) (1,501,430)
Provision for amortization ....... 4,101 (23,072) 23,660
Realized investment gains ........ (519,567) (684,445) (384,283)
Postretirement benefits .......... 549,225 255,782 -
Reinsurance receivables .......... 3,542,358 9,389,384 (12,828,945)
Prepaid reinsurance premiums ..... 711,151 805,733 (945,813)
Amortization of deferred income .. (433,979) (259,217) -
Other, net ....................... 706,967 225,040 1,184,844
----------- ----------- -----------
24,812,861 6,303,979 21,208,305
Cash (used in) provided by the
change in the property and
casualty insurance subsidiaries'
pooling agreement (note 2) ..... - (4,426,945) 29,402,411
Cash provided by the commutation
of outstanding reinsurance
balances by the reinsurance
subsidiary (note 2) ............ 686,962 - -
Cash used in the commutation of
two reinsurance contracts under
the reinsurance subsidiary's
quota share agreement (note 2) - (20,425,955) -
----------- ----------- -----------
Total adjustment ............. 25,499,823 (18,548,921) 50,610,716
----------- ----------- -----------
Net cash provided by (used
in) operating activities $39,005,550 $(8,793,542) $50,826,408
----------- ----------- -----------
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Year ended December 31,
-----------------------------------------
1994 1993 1992
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity
securities held-to-maturity ..... $ (93,131,676) $ - $ -
Maturities of fixed maturity
securities held-to-maturity ..... 41,099,534 - -
Purchases of fixed maturity
securities available for sale ... (193,422,946) - -
Maturities of fixed maturity
securities available-for-sale ... 208,880,152 - -
Sales of equity securities
available-for-sale .............. 500,000 1,043,068 -
Purchases of fixed maturity
securities ...................... - (266,682,915)(316,878,492)
Maturities of fixed maturity
securities ...................... - 274,909,330 270,821,880
Net sales of short-term investments 699,964 1,420,288 797,191
Final settlement on sale of life
subsidiary ...................... - - 474,356
------------- ------------ ------------
Net cash (used in) provided
by investing activities .. (35,374,972) 10,689,771 (44,785,065)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock .......... 491,676 331,568 748,405
Dividends paid to
stockholders (note 14(c)) ....... (3,510,555) (3,443,465) (5,103,890)
Purchase of treasury stock, net ... (28,681) (118,641) (278,241)
------------- ------------ ------------
Net cash used in financing
activities ............... (3,047,560) (3,230,538) (4,633,726)
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH ..... 583,018 (1,334,309) 1,407,617
Cash at beginning of year ........... 675,203 2,009,512 601,895
------------- ------------ ------------
Cash at end of year ................. $ 1,258,221 $ 675,203 $ 2,009,512
============= ============ ============
Income taxes paid ................... $ 3,795,381 $ 2,021,128 $ 4,650,795
Interest paid ....................... 33,672 - 387,351
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
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 excess and surplus lines insurance
management. 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.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
Reinsurance Ceded
Ceded reinsurance activities are reported on the basis of Statement of
Financial Accounting Standards No. 113 (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
Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115) "Accounting for Certain Investments in
Debt and Equity Securities." SFAS 115 requires that investments in all debt
securities and those equity securities with readily determinable market values
be classified into one of three categories: held-to-maturity, trading or
available-for-sale. Classification of investments is based upon management's
current intent. Debt securities which management has a positive intent and
ability to hold until maturity are classified as securities held-to-maturity
and are carried at amortized cost. Unrealized holding gains and losses on
securities held-to-maturity are not reflected in the consolidated financial
statements. Debt and equity securities that are held for current resale are
classified as trading securities and are carried at market value, with
unrealized holding gains and losses included in earnings. All other debt and
equity securities not included in the above two categories are 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. Adoption of this statement had no effect on the income of
the Company. Unrealized holding (losses) gains on securities available-for-
sale had the effect of (decreasing) increasing stockholders' equity by
($1,316,596) and $2,048,651 at December 31, 1994 and 1993, respectively, net of
income taxes of $0 and $1,055,365. At December 31, 1994 and 1993, the Company
did not have any investments categorized as trading securities.
Prior to December 31, 1993, investments in fixed maturities were carried
at amortized cost and equity securities were carried at market value. Changes
in unrealized holding gains and losses resulting from the revaluation of equity
securities were reported as direct increases and decreases in stockholders'
equity. Unrealized holding gains and losses on fixed maturities were not
recognized in the consolidated financial statements.
Short-term investments represent money market funds and are carried at
cost.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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, 1994 and
1993 are securities on deposit with various regulatory authorities as required
by law amounting to $11,331,550 and $11,329,402, respectively.
Effective December 31, 1994, the Company adopted Statement of Financial
Accounting Standards No. 119 (SFAS 119), "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments." Adoption of this
statement had no effect on current disclosures as the Company did not hold or
issue any derivative financial instruments at December 31, 1994.
Pension Benefits
Net periodic pension cost relating to the Company's employee participation
in Employers Mutual's Retirement Plan is computed on the basis of Statement of
Financial Accounting Standards No. 87, "Employers' Accounting for Pensions."
It is the Company'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
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for
Postretirement Benefits Other Than Pensions." Under SFAS 106, the cost of
postretirement benefits other than pensions must be recognized on an accrual
basis as employees perform services to earn the benefits. Prior to 1993, the
cost of retiree health care and life insurance benefits were recognized as
expenses when paid.
Postemployment Benefits
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112 (SFAS 112), "Employers Accounting for
Postemployment Benefits." SFAS 112 requires that the cost of certain
postemployment benefits that vest or accumulate be accrued over the period of
an employee's service. Adoption of this standard had no effect on the income
of the Company.
Income Taxes
The Company files a consolidated Federal income tax return with its
subsidiaries. Consolidated income tax/benefit is allocated among the
entities based upon separate tax liabilities.
<PAGE>
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. Effective January 1, 1993, the Company adopted Statement
of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes." Under SFAS 109, deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carryforwards, and then
a valuation allowance is established to reduce that deferred tax asset if it is
"more likely than not" that the related tax benefits will not be realized.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities from a change in tax rates is recognized in income
in the period that includes the enactment date. Prior to 1993, the Company
computed deferred income taxes in accordance with Statement of Financial
Accounting Standards No. 96.
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 discounted cash flows.
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 programs and
income tax liabilities of the pool participants are not subject to the pooling
agreement.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Effective January 1, 1992, the aggregate participation of the property and
casualty insurance subsidiaries was increased to 22 percent from 17 percent.
In connection with this change in pool participation, the Company's liabilities
increased $31,427,861 and invested assets increased $29,402,411. The Company
reimbursed Employers Mutual $2,025,450 for commissions incurred to generate
this business.
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. As a result, amounts assumed from
nonaffiliates have declined from the amount's assumed in 1992. 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. 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.
Effective January 1, 1993, the quota share agreement was amended so that
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 $2,094,715 in 1994 and $1,808,527
in 1993. 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 $2,563,041 in 1994 and $2,866,825 in 1993. Employers Mutual
retained losses and settlement expenses totaling $7,019,772 in 1994 and
$615,000 in 1993 under this agreement.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In conjunction with this amendment to 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 and $4,125,000 under this treaty and paid
reinstatement premiums of $0 and $1,033,030 in 1993 and 1992, respectively.
Total premiums paid to Employers Mutual amounted to $0 and $2,253,579 in 1993
and 1992, respectively.
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 $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.
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.
Premiums assumed by the reinsurance subsidiary from Employers Mutual
amounted to $39,899,335, $34,445,978 and $34,777,710 in 1994, 1993 and 1992,
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 $11,482,086, $8,979,309
and $10,242,650 in 1994, 1993 and 1992, respectively.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 calendar year. The
coverage provided is $2,000,000 excess of $2,500,000 aggregate losses retained,
excess of $200,000 per event. Maximum recovery is limited to $4,000,000 per
accident year. The reinsurance subsidiary recovered $0, $143,501, and
$4,221,444 under this treaty and paid reinstatement premiums of $0, $208,470
and $744,561 in 1994, 1993 and 1992, respectively. Total premiums paid to
Employers Mutual amounted to $557,842, $708,445 and $1,124,561 in 1994, 1993
and 1992, respectively.
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 $71,567, $0 and $0 in 1994,
1993 and 1992, respectively. Premiums paid to Employers Mutual amounted to
$49,659, $42,065 and $35,377 in 1994, 1993 and 1992, respectively.
Services Provided by Employers Mutual
Employers Mutual provides various services to all of it's subsidiaries.
Such services include data processing, claims, financial, actuarial, auditing,
marketing and underwriting. Costs of these services are charged to the
subsidiaries outside the pooling agreement based upon a number of criteria,
including usage and number of transactions. Costs not charged 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.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Prior to 1993, the reinsurance subsidiary ceded reinsurance business to
Employers Mutual and other nonaffiliated reinsurers in the ordinary course of
business for the purpose of limiting its maximum loss exposure. Effective
January 1, 1993, the quota share agreement with Employers Mutual was amended so
that losses in excess of $1,000,000 per event are retained by Employers Mutual.
In conjunction with this amendment to the quota share agreement, the
reinsurance subsidiary terminated its catastrophe reinsurance contracts with
Employers Mutual and the nonaffiliated reinsurers. Effective January 1, 1993,
the reinsurance subsidiary no longer cedes reinsurance to unaffiliated
reinsurers and only cedes reinsurance to Employers Mutual under an aggregate
"excess of loss" treaty. As a result, reinsurance receivables and prepaid
reinsurance premiums for the Company have decreased from 1992 amounts.
As of December 31, 1994, deductions for reinsurance ceded to two
unaffiliated reinsurers aggregated $10,066,293, 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.
The effect of reinsurance on premiums written and earned, and losses and
settlement expenses incurred for the three years ended December 31, 1994 is
presented below. Amounts for the years ended December 31, 1994 and 1993
reflect (1) the change in the property and casualty insurance subsidiaries'
pooling agreement whereby effective January 1, 1993, the voluntary assumed
reinsurance business written by Employers Mutual is no longer subject to
cession to the pool members and (2) the amendment to the reinsurance
subsidiary's quota share agreement whereby effective January 1, 1993, losses in
excess of $1,000,000 per event are retained by Employers Mutual and the
reinsurance subsidiary therefore no longer purchases catastrophe protection
(see note 2).
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Year ended December 31,
----------------------------------------
1994 1993 1992
------------ ------------ ------------
Premiums Written
Direct ......................... $143,444,388 $135,277,129 $138,829,576
Assumed from nonaffiliates ..... 5,843,091 6,636,942 16,467,613
Assumed from affiliates ........ 158,646,332 147,620,705 150,070,741
Ceded to nonaffiliates ......... (8,890,119) (10,701,482) (17,721,207)
Ceded to affiliates ............ (132,100,537) (120,898,914) (129,826,840)
------------ ------------ ------------
Net premiums written ......... $166,943,155 $157,934,380 $157,819,883
============ ============ ============
Premiums Earned
Direct ......................... $140,012,247 $137,141,457 $142,391,771
Assumed from nonaffiliates ..... 5,988,228 6,758,364 14,980,642
Assumed from affiliates ........ 156,839,482 148,366,487 140,442,245
Ceded to nonaffiliates ......... (9,601,270) (11,507,217) (16,775,394)
Ceded to affiliates ............ (128,409,308) (124,321,553) (133,628,977)
------------ ------------ ------------
Net premiums earned .......... $164,829,379 $156,437,538 $147,410,287
============ ============ ============
Losses and Settlement Expenses
Incurred
Direct ......................... $113,680,306 $ 97,842,980 $112,579,261
Assumed from nonaffiliates ..... 2,774,689 6,575,099 17,415,319
Assumed from affiliates ........ 108,594,530 107,369,274 114,359,445
Ceded to nonaffiliates ......... (3,077,305) (5,845,414) (16,862,082)
Ceded to affiliates ............ (105,028,166) (85,586,640) (105,404,110)
------------ ------------ ------------
Net losses and settlement
expenses incurred .......... $116,944,054 $120,355,299 $122,087,833
============ ============ ============
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 and restated all prior year
consolidated financial statements for comparative purposes. There was no
income effect from this reclassification. In connection with this gross-up of
balances, amounts due from Employers Mutual increased $13,147,831 at December
31, 1993. Under the terms of the pooling agreement, these balances were
settled 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).
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Year ended December 31,
----------------------------------------
1994 1993 1992
------------ ------------ ------------
Gross reserves for losses and
settlement expenses, beginning
of year .......................... $197,121,852 $215,388,865 $158,814,130
Ceded reserves for losses and
settlement expenses, beginning
of year .......................... 17,454,679 25,253,507 13,951,033
------------ ------------ ------------
Net reserves for losses and
settlement expenses, beginning
of year .......................... 179,667,173 190,135,358 144,863,097
------------ ------------ ------------
Incurred losses and
settlement expenses:
-------------------------
Provision for insured events
of the current year ............ 123,343,829 119,896,526 116,615,951
(Decrease) increase in provision
for insured events of prior
years .......................... (6,399,775) 458,773 5,471,882
------------ ------------ ------------
Total incurred losses and
settlement expenses ...... 116,944,054 120,355,299 122,087,833
------------ ------------ ------------
Payments:
---------
Losses and settlement expenses
attributable to insured events
of the current year ............ 48,771,573 47,600,851 46,436,360
Losses and settlement expenses
attributable to insured events
of prior years ................. 59,491,875 45,508,460 53,810,715
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 $(23,431,503)
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Year ended December 31,
----------------------------------------
1994 1993 1992
------------ ------------ ------------
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 .............. 107,576,486 130,823,484 76,815,572
------------ ------------ ------------
Net reserves for losses and
settlement expenses, end of year 189,034,741 179,667,173 190,135,358
Ceded reserves for losses and
settlement expenses, end of year 14,146,874 17,454,679 25,253,507
------------ ------------ ------------
Gross reserves for losses and
settlement expenses, end of year $203,181,615 $197,121,852 $215,388,865
============ ============ ============
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 1992, the property and casualty insurance subsidiaries and
the nonstandard risk automobile insurance subsidiary strengthened prior year
reserves on certain lines of business and the reinsurance subsidiary
experienced a time lag in the reporting of assumed reinsurance business.
During 1993, the property and casualty insurance companies continued to
strengthen reserves on certain lines of business while the reinsurance
subsidiary experienced adverse development on losses associated with Hurricane
Andrew. These reserve increases in 1992 and 1993 were partially offset by
reserve decreases on other lines of business, resulting in a net increase in
the Company's estimate of prior year reserves of $5,471,882 in 1992 and
$458,773 in 1993. During 1994, the reinsurance subsidiary experienced adverse
development on certain contracts. These reserve increases were offset by
significant reserve decreases in the property and casualty insurance
subsidiaries and the nonstandard risk automobile insurance subsidiary. As a
result, the net decrease in the Company's estimate of prior year reserves in
1994 amounted to $6,399,775.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
6. ENVIRONMENTAL RELATED CLAIMS
Estimating loss and settlement reserves for asbestos and environmental
related claims is very difficult due to the following uncertainties surrounding
these types of claims: the legal definition of asbestos and environmental
damage is still evolving, the assignment of responsibility varies widely
by state, defense costs are often much greater than the claim costs 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. Reserves for asbestos and
environmental related claims at December 31, 1994 and 1993 were $749,807 and
$550,773, respectively.
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, 1994, $15,513,214 was available
for distribution in 1995 to EMC Insurance Group Inc. without prior approval.
Statutory surplus of the Company's insurance subsidiaries was $86,820,039
and $78,681,248 at December 31, 1994 and 1993, respectively. Statutory net
income (loss) of the Company's insurance subsidiaries was $13,430,353,
$8,788,458 and ($3,960,393) for the three years ended December 31, 1994.
During 1994, the National Association of Insurance Commissioners
implemented the Risk-Based Capital (RBC) model. The risk-based capital
requirements for property and casualty insurance companies measure three major
areas of risk facing property and casualty insurers: 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, 1994 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,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
Statutory net income (loss) ........... $13,697,482 $ 8,761,472 $(3,118,589)
Change in deferred policy
acquisition costs ................... 694,771 (413,967) 2,189,375
Change in salvage and subrogation
accrual ............................. 5,851 (232,760) 742,233
Change in other policyholders' funds .. (247,816) 840,604 (880,866)
Change in pension accrual ............. (298,021) (103,846) 622,177
GAAP postretirement benefit cost
in excess of statutory cost ......... (314,583) (216,091) -
Deferred income tax benefit ........... 94,441 18,027 1,501,430
Statutory gain on sale of
life subsidiary ..................... - - (474,356)
Prior year taxes and related interest (180,770) 817 (387,351)
GAAP basis amortization of reserve
discount on commutation of
reinsurance contract ................ 433,979 259,217 -
Statutory reserve discount on
commutation of reinsurance contract - (1,976,858) -
Other, net ............................ (379,607) 197,420 21,639
----------- ----------- -----------
Income before cumulative effect of
changes in accounting principles,
GAAP basis .......................... 13,505,727 7,134,035 215,692
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 ................ $13,505,727 $ 9,755,379 $ 215,692
=========== =========== ===========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Year ended December 31,
----------------------------------------
1994 1993 1992
------------ ------------ ------------
Statutory surplus .................. $ 94,317,215 $ 85,830,140 $ 83,331,013
Deferred policy acquisition costs .. 8,393,635 7,698,864 8,112,831
Accrued salvage and subrogation .... 1,799,443 1,793,592 2,026,352
Other policyholders' funds payable (3,102,609) (2,854,793) (3,695,397)
Pension asset ...................... 1,407,714 1,705,735 1,809,581
GAAP postretirement benefit
liability in excess of statutory
liability ........................ (1,672,780) (1,358,197) -
Deferred income tax asset .......... 14,190,499 13,040,693 7,065,221
Goodwill ........................... 1,883,177 2,017,690 2,152,203
Excess statutory reserves
over statement reserves .......... 2,044,268 - 8,007
GAAP basis reserve discount on
commutation of reinsurance
contract in excess of statutory
recognition ...................... (1,283,662) (1,717,641) -
Unrealized holding (losses) gains
on fixed maturity securities
available-for-sale ............... (1,316,596) 3,134,016 -
Other .............................. 66,385 343,670 100,966
------------ ------------ ------------
Stockholders' equity, GAAP basis ... $116,726,689 $109,633,769 $100,910,777
============ ============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
9. SEGMENT INCOME
<TABLE>
<CAPTION>
The Company's operations include the following major segments: property and casualty insurance, reinsurance,
nonstandard risk automobile insurance and excess and surplus lines insurance management. 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
------------ ------------ ----------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 management ........ - 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 management ........ - 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
============ ============ =========== ======== ======== =========== ============
Year Ended December 31, 1992
Property and casualty insurance $109,138,829 $ (7,168,779) $13,047,540 $285,367 $ - $ 6,164,128 $265,598,463
Reinsurance ................... 26,615,180 (11,904,373) 6,763,257 51,649 - (5,089,467) 98,293,214
Nonstandard risk automobile
insurance ................... 11,656,278 (1,992,649) 1,178,748 47,267 - (766,634) 18,681,308
Excess and surplus lines
insurance management ........ - 429,756 66,266 - - 496,022 2,940,889
Parent company ................ - (312,778) 483,786 - - 171,008 100,995,033
Eliminations .................. - - - - - - (113,701,807)
------------ ------------ ----------- -------- -------- ----------- ------------
Consolidated ............. $147,410,287 $(20,948,823) $21,539,597 $384,283 $ - $ 975,057 $372,807,100
============ ============ =========== ======== ======== =========== ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
10. INVESTMENTS
The amortized cost and estimated market value of securities held-to-
maturity and available-for-sale as of December 31, 1994 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, 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 fixed maturity
securities ......... $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 fixed maturity
securities ......... $ 77,808,992 $ 1,275,408 $(2,592,004)$ 76,492,396
============ =========== =========== ============
<PAGE>
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, 1993 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1993 Cost Gains Losses Value
----------------- ------------ ----------- ----------- ------------
Securities held-to-maturity:
Fixed maturity securities:
U.S. Treasury securities
and obligations of
U.S. government
corporations and
agencies ............. $109,895,914 $ 9,931,812 $ (630) $119,827,096
Obligations of states
and political
subdivisions ......... 18,374,003 1,936,083 (2,129) 20,307,957
Debt securities issued
by foreign governments 587,060 70,343 - 657,403
Public utilities ....... 8,813,202 336,199 (910) 9,148,491
Corporate securities ... 17,050,988 819,896 (467) 17,870,417
Mortgage-backed
securities ........... 36,289,456 2,204,777 - 38,494,233
------------ ----------- ----------- ------------
Total fixed maturity
securities ....... $191,010,623 $15,299,110 $ (4,136) $206,305,597
============ =========== =========== ============
Securities available-for-
sale:
Fixed maturity securities:
U.S. Treasury securities $ 26,803,980 $ 166,800 $ - $ 26,970,780
Obligations of states
and political
subdivisions ......... 58,431,008 3,038,591 (74,084) 61,395,515
Corporate securities ... 7,496,245 - - 7,496,245
Other debt securities .. 486,941 4,779 (2,070) 489,650
------------ ----------- ----------- ------------
Total fixed maturity
securities ....... $ 93,218,174 $ 3,210,170 $ (76,154) $ 96,352,190
============ =========== =========== ============
Equity securities ........ $ 505,000 $ - $ (30,000) $ 475,000
============ =========== =========== ============
The amortized cost and estimated market value of fixed maturity securities
at December 31, 1994, 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.
<PAGE>
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 ................... $ 11,767,723 $ 11,920,042
Due after one year through five years ..... 83,119,839 82,556,120
Due after five years through ten years .... 79,969,324 77,390,645
Due after ten years ....................... 28,305,472 27,544,310
Mortgage-backed securities ................ 40,487,362 39,310,371
------------ ------------
Totals .................................. $243,649,720 $238,721,488
============ ============
Securities available-for-sale:
Due in one year or less ................... $ 20,884,351 $ 20,896,089
Due after one year through five years ..... 16,762,627 16,297,903
Due after five years through ten years .... 25,213,287 25,595,670
Due after ten years ....................... 14,948,727 13,702,734
------------ ------------
Totals .................................. $ 77,808,992 $ 76,492,396
============ ============
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 1994; all activity is due to calls, prepayments and maturities.
Year ended December 31,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
Fixed maturity securities
held-to-maturity:
Proceeds from calls and prepayments $26,469,534 $37,759,956 $18,640,915
Gross realized investment gains ..... 501,628 706,059 388,692
Gross realized investment losses .... 1,027 9,682 4,409
Fixed maturity securities
available-for-sale:
Proceeds from calls and prepayments $ 842,000 $ - $ -
Gross realized investment gains ..... 23,966 - -
Equity securities available-for-sale:
Proceeds from sales ................. $ 500,000 $ 1,043,068 $ -
Gross realized investment gains ..... - 18,068 -
Gross realized investment losses .... 5,000 30,000 -
<PAGE>
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,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
Interest on fixed maturities .......... $20,886,029 $20,862,221 $21,361,673
Dividends on equity securities ........ 14,167 65,065 119,989
Interest on short-term investments .... 597,896 442,160 566,028
Other interest ........................ 1,552 - -
----------- ----------- -----------
Total investment income ........... 21,499,644 21,369,446 22,047,690
Investment expense .................... 569,964 589,495 508,093
----------- ----------- -----------
Net investment income ............. $20,929,680 $20,779,951 $21,539,597
=========== =========== ===========
A summary of net changes in unrealized holding (losses) gains is as
follows:
Year ended December 31,
-------------------------------------
1994 1993 1992
----------- ---------- ----------
Fixed maturity securities
available-for-sale ................ $ (4,450,612) $ 3,134,016 $ -
Equity securities
available-for-sale ................ 30,000 112,000 184,375
Applicable income taxes ............. 1,055,365 (1,055,365) -
----------- ---------- -----------
Net changes in unrealized
holding (losses) gains ......... $ (3,365,247) $ 2,190,651 $ 184,375
=========== ========== ==========
11. INCOME TAXES
As discussed in note 1, Summary of Significant Accounting Policies, 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).
<PAGE>
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, 1994 and 1993
relate to the following:
Year ended December 31,
------------------------
1994 1993
----------- -----------
Loss reserve discounting .......................... $12,690,876 $12,549,200
Unearned premium reserve limitation ............... 3,075,140 2,953,491
Postretirement benefits ........................... 1,389,469 1,202,733
Policyholder dividends payable .................... 1,054,887 970,630
Prepayment of tax on commutation of loss reserves 436,445 583,998
Net unrealized holding losses ..................... 447,643 -
Other, net ........................................ 574,569 617,529
----------- -----------
Total gross deferred income tax asset ......... 19,669,029 18,877,581
Less valuation allowance .......................... (1,447,643) (1,000,000)
----------- -----------
Total deferred income tax asset ............... 18,221,386 17,877,581
----------- -----------
Deferred policy acquisition costs ................. (2,853,836) (2,617,614)
Net unrealized holding gains ...................... - (1,055,365)
Other, net ........................................ (1,177,051) (1,163,909)
----------- -----------
Total gross deferred income tax liability ..... (4,030,887) (4,836,888)
----------- -----------
Net deferred income tax asset ............. $14,190,499 $13,040,693
=========== ===========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The valuation allowance for the years ended December 31, 1994 and 1993
increased $447,643 and $0, respectively. The valuation allowance at December
31, 1994 consists of $1,000,000 related to the tax benefit of future
postretirement deductions that are scheduled to reverse more than fifteen years
into the future and $447,643 related to tax benefits associated with unrealized
holding losses on fixed maturity securities available-for-sale. A valuation
allowance was established for these items 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 1990 through 1994
of approximately $44,036,000.
The actual income tax expense for the years ended December 31, 1994, 1993
and 1992 differed from the "expected" tax expense for those years (computed by
applying the United States federal corporate tax rate of 34 percent to income
before income taxes and cumulative effect of changes in accounting principles)
as follows:
Year ended December 31,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
Computed "expected" tax expense ...... $ 6,350,101 $ 3,066,506 $ 331,519
Increases (decreases) in
taxes resulting from:
Tax-exempt interest income ....... (2,034,273) (1,171,612) (1,312,568)
Unrecognized future temporary
differences .................... - - 1,745,003
Change in accrual of prior year
taxes .......................... (209,734) (252,839) -
Settlement of tax examinations ... 147,098 117,497 -
Proration of tax-exempt interest 223,484 123,342 120,332
Other, net ....................... 694,365 2,207 (124,921)
----------- ----------- -----------
Income taxes ................... $ 5,171,041 $ 1,885,101 $ 759,365
=========== =========== ===========
Comprehensive income tax expense (benefit) included in the consolidated
financial statements for the years ended December 31, 1994, 1993 and 1992 was
as follows:
Year ended December 31,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
Income tax expense (benefit) on:
Operations .......................... $ 5,171,041 $ 1,885,101 $ 759,365
Accounting changes:
Income taxes ...................... - (5,595,177) -
Postretirement benefits (note 13) - (1,115,767) -
Unearned premiums (note 1)......... - (301,866) -
Unrealized holding (losses) gains on
revaluation of securities
available-for-sale ................ (1,055,365) 1,055,365 -
----------- ----------- -----------
Comprehensive income tax
expense (benefit) ............... $ 4,115,676 $(4,072,344) $ 759,365
=========== =========== ===========
The Company's 1990 and 1991 tax returns have been examined by the Internal
Revenue Service. The Company is currently protesting certain issues arising
out of these examinations. The Company does not expect any material assessments
related to the final settlement of these issues.
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 a monthly income for life upon retirement or upon
total and permanent disability.
The following tables set forth the funded status and the components of the
net periodic pension cost (benefit) for the Employers Mutual defined benefit
retirement plan, based upon a measurement date of November 1, 1994, 1993 and
1992, respectively:
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Year ended December 31,
----------------------------------------
1994 1993 1992
------------ ------------ ------------
Actuarial present value of
benefit obligations:
Accumulated benefit obligation,
including vested benefits of
$52,520,753, $27,245,933 and
$23,739,308 .................. $ 53,244,188 $ 29,713,282 $ 24,695,567
============ ============ ============
Projected benefit obligation for
service rendered to date ......... $(69,337,553) $(44,579,398) $(36,103,055)
Plan assets at fair value .......... 66,760,033 51,625,386 48,365,122
------------ ------------ ------------
Plan assets (less) greater than
projected benefit obligation ..... (2,577,520) 7,045,988 12,262,067
Unrecognized net loss (gain) from
past experience different from
that assumed and effects of
changes in assumptions ........... 12,201,810 4,440,487 (754,346)
Prior service cost not yet recog-
nized in net periodic pension cost 3,955,406 4,374,510 4,941,220
Unrecognized portion of initial
net asset ........................ (6,107,252) (7,182,692) (8,072,193)
------------ ------------ ------------
Prepaid pension cost ........ $ 7,472,444 $ 8,678,293 $ 8,376,748
============ ============ ============
Service cost - benefits earned
during the period ................ $ 2,965,867 $ 2,347,984 $ 1,691,648
Interest cost on projected
benefit obligation ............... 2,925,086 2,533,587 2,053,584
Actual gain on plan assets ......... (1,606,902) (5,229,721) (4,386,821)
Net amortization and deferral ...... (3,078,202) 647,291 (615,762)
------------ ------------ ------------
Net periodic pension
cost (benefit) ............ $ 1,205,849 $ 299,141 $ (1,257,351)
============ ============ ============
The unrecognized net asset is being recognized over 12.5 to 15.2 years
beginning January 1, 1987. The weighted average discount rate used to measure
the projected benefit obligation was 7.25 percent for 1994, 6.75 percent for
1993 and 7.00 percent for 1992. The assumed long-term rate of return on plan
assets was 8.00 for 1994, 1993 and 1992. The rate of increase in future
compensation levels used in measuring the projected benefit obligation was 5.30
percent in 1994 and 1993 and 5.50 percent in 1992. Pension expense (benefit)
for the Company amounted to $298,021, $103,846 and ($622,177) in 1994, 1993 and
1992, respectively.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Effective November 1, 1992, the plan was amended to comply with the
requirements of the Tax Reform Act of 1986, which placed limits on the benefits
for highly compensated employees. The amended plan is referred to as a cash
balance plan since the benefits are expressed as a cash value instead of a
monthly benefit payment amount. The cash balance plan uses the Pension Benefit
Guaranty Corporation (PBGC) interest rate in effect on January 1 of each plan
year in calculating the cash value of benefits. Fluctuations in the PBGC rate
have a significant impact on the funded status of the plan. The PBGC rate used
for plan years ended December 31, 1994, 1993 and 1992 was 4.50 percent, 5.75
percent and 6.50 percent, respectively.
The plan amendment described above resulted in a prior service cost of
$4,472,778, which is being amortized over 12 to 14 years beginning January 1,
1993. The Company's share of this prior service cost amounted to $1,003,257.
The prior service cost amortized for the years ended December 31, 1994 and 1993
was $349,770 and $373,838, respectively, with the Company's share being $78,636
and $83,452, respectively.
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 of the Company's employees may become eligible
for those benefits if they reach normal retirement age and have attained the
required length of service while working for the Company.
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.
As discussed in note 1, Summary of Significant Accounting Policies, 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. Prior year financial statements have not been restated
to apply the provisions of SFAS 106.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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, 1994 and 1993,
respectively.
Year ended December 31,
--------------------------
1994 1993
------------ ------------
Actuarial present value of benefit obligations:
Retirees ....................................... $ 7,404,314 $ 7,874,628
Fully eligible active plan participants ........ 4,859,467 5,681,430
Other active plan participants ................. 6,767,662 7,783,183
------------ ------------
Total ...................................... 19,031,443 21,339,241
Unrecognized net gain (loss) from past
experience different from that assumed and
effects of changes in assumptions ............ 3,707,110 (447,778)
Prior service cost not yet recognized in net
periodic postretirement benefit cost ......... (4,533,871) (5,105,109)
------------ ------------
Postretirement benefit obligation .......... $ 18,204,682 $ 15,786,354
============ ============
Service cost - benefits earned during the
period ....................................... $ 1,027,634 $ 596,498
Interest cost on accumulated postretirement
benefit obligation ........................... 1,412,961 999,526
Net amortization and deferral .................. 571,595 -
------------ ------------
Net periodic postretirement benefit cost ... $ 3,012,190 $ 1,596,024
============ ============
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) is
12.0 percent for 1995 (compared to 12.5 percent assumed for 1994) and is
assumed to decrease gradually to 6 percent in 2007 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, 1994 by
$2,669,037 and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year ended December 31, 1994 by
$510,634. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation at December 31, 1994 and 1993 was
7.25 percent and 6.75 percent, respectively.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Effective January 1, 1993, the health care postretirement plan was amended
to provide additional benefits under the prescription drug coverage. The
amendment substantially reduced the retired employee's cost sharing provisions
for prescription drug coverage. The amendment resulted in a prior service
cost of $5,105,109, which is being amortized over 8.9 to 10.0 years. The
Company's share of the prior service cost amounted to $1,156,028. The prior
service cost amortized for the year ended December 31, 1994 was $571,238, with
the Company's share amounting to $129,528.
The Company's net periodic postretirement benefit cost for the years ended
December 31, 1994 and 1993 was $684,899 and $359,747, respectively. The
postretirement benefit cost of $78,807 for the year ended December 31, 1992,
which was recorded on a cash basis, has not been restated.
14. COMMON STOCK
(a) Employee Stock Purchase Plans
1993 Employee Stock Purchase Plan
On February 12, 1993, the Company filed a registration statement with the
Securities and Exchange Commission authorizing the issuance of up to 500,000
shares of the Company's common stock for use in the Employers Mutual Casualty
Company 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, the Company shall issue a stock
certificate evidencing the ownership of the participant in the shares of stock
so purchased. The certificate, however, will be 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 shall have 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 and common stock purchase
plan. However, the participant shall not be 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 shall, 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 Directors 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 1994, 126 employees
participated in the plan and exercised a total of 22,606 options at prices of
$7.65 and $8.08. Activity under the plan was as follows:
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Year ended December 31,
-----------------------
1994 1993
---------- ----------
Shares available for purchase, beginning of year 486,546 -
Shares registered for use in plan ............. - 500,000
Shares purchased under plan ................... (22,606) (13,454)
---------- ----------
Shares available for purchase, end of year ...... 463,940 486,546
========== ==========
1987 Employee Stock Purchase Plan
Under the Employers Mutual 1987 Employee Stock Purchase Plan, Employers
Mutual could purchase up to 200,000 shares of EMC Insurance Group Inc. common
stock for resale to eligible employees. The plan was similar to the 1993
employee stock purchase plan explained above, except that there was not a
holding period before the participant received the shares purchased. The plan
was terminated in August of 1993 and the remaining shares were deregistered.
Activity under the plan was as follows:
Year ended December 31,
-----------------------
1993 1992
---------- ----------
Shares available for purchase, beginning of year 55,720 85,765
Shares purchased under plan .................... (10,706) (30,045)
Shares deregistered ............................ (45,014) -
---------- ----------
Shares available for purchase, end of year ....... - 55,720
========== ==========
(b) 1993 Non-Employee Director Stock Purchase Plan
On February 12, 1993, the Company filed a registration statement with the
Securities and Exchange Commission authorizing the issuance of up to 200,000
shares of the Company's common stock for use in the 1993 Employers Mutual
Casualty Company 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 Employers Mutual's Board of Directors
(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 1994, five directors participated in the plan and exercised a total of
5,949 options at prices ranging from $6.47 to $6.94. Activity under the plan
was as follows:
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Year ended December 31,
--------------------------
1994 1993
------------ ------------
Shares available for purchase, beginning of year 194,048 -
Shares registered for use in plan ............. - 200,000
Shares purchased under plan ................... (5,949) (5,952)
------------ ------------
Shares available for purchase, end of year ...... 188,099 194,048
============ ============
(c) 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 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,
-------------------------
1994 1993 1992
------- ------- -------
Shares available for purchase, beginning of year 758,266 944,453 963,285
Shares purchased under plan ................... (220,606)(186,187) (18,832)
------- ------- -------
Shares available for purchase, end of year ...... 537,660 758,266 944,453
======= ======= =======
Range of purchase prices ........................ $ 8.75 $10.00 $ 8.00
to to to
$ 9.50 $10.25 $10.25
(d) 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 repurchased 7,000 shares for this purpose
during 1992 at an average cost of $10.47. 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,
-------------------------
1994 1993 1992
------- ------- -------
Treasury shares, beginning of year ............... 8,090 49,392 36,685
Repurchased shares ............................ 2,841 12,568 31,539
Reissued shares ............................... - (53,870) (18,832)
------- ------- -------
Treasury shares, end of year ..................... 10,931 8,090 49,392
======= ======= =======
Average cost ..................................... $ 10.07 $ 10.06 $ 9.79
======= ======= =======
Gain (loss) on sale .............................. $ - $23,261 $ (485)
======= ======= =======
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
15. STOCK OPTIONS
During 1994, Employers Mutual maintained three separate stock option 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) 1993 Incentive Stock Option Plan
On February 12, 1993, the Company filed a registration statement with the
Securities and Exchange Commission authorizing the issuance of up to 500,000
shares of the Company's common stock for use in the 1993 Employers Mutual
Casualty Company Incentive Stock Option Plan. Options granted under the plan
can be for a term of two to ten years. Each option shall have a vesting period
of two, three, four or five years, with options becoming exercisable in equal
annual cumulative increments. The vesting period shall commence one year from
the date of grant, with the exception of an option with a two year vesting
period for which the vesting period shall commence on the date of grant. The
time limit for granting options under the plan is December 31, 2002. The
Senior Executive Compensation and Stock Option Committee of Employers Mutual's
Board of Directors is the administrator of the plan. Options have been granted
to 64 individuals under the plan. For the 60 remaining eligible participants
at February 21, 1995, the option price is the fair market value at dates of
grant ranging from $8.81 to $9.56 per share. 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 1994, 64,600 options were granted to eligible
participants at a price of $8.81. During 1994, 800 options were exercised
under the plan at a price of $8.81. Stock options under the plan were as
follows:
Year ended December 31,
-------------------------
1994 1993
------------ ------------
Outstanding, beginning of year ............... 161,150 -
Granted .................................... 64,600 163,650
Exercised .................................. (800) -
Expired .................................... (7,800) (2,500)
------------ ------------
Outstanding, end of year ..................... 217,150 161,150
============ ============
Shares exercisable, end of year .............. 34,410 -
============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(b) 1982 Incentive Stock Option Plan
Under the terms of Employers Mutual's 1982 Incentive Stock Option Plan,
600,000 shares of the Company's common stock were reserved for issuance to
officers and key employees of Employers Mutual and its subsidiaries. The Board
of Directors of Employers Mutual is the administrator of the plan. Options
were granted to 57 individuals. For the 33 remaining eligible participants at
February 21, 1995, the option price is the fair market value at dates of grant
ranging from $7.81 to $10.25 per share. Options granted under the plan were
for a term of two to ten years. Each option granted had a vesting period of
two, three, four or five years, with such vesting commencing one year from the
date of grant, except in the event of termination of employment when all such
granted options are exercisable within three, six or twelve months depending
upon the circumstances of such termination. The period for granting options
under the plan expired on August 30, 1992. The period for exercising the
options can not exceed ten years from date of grant. The option price was
determined by the Board of Directors but could not be less than the fair market
value of the stock on the date of grant. During 1994, 7,946 options were
exercised at prices ranging from $7.81 to $8.75. Stock options under the plan
were as follows:
Year ended December 31,
----------------------------
1994 1993 1992
-------- -------- --------
Outstanding, beginning of year ............ 352,073 387,093 447,393
Granted ................................ - - 82,900
Exercised .............................. (7,946) (24,820) (58,540)
Expired ................................ (5,000) (10,200) (84,660)
-------- -------- -------
Outstanding, end of year .................. 339,127 352,073 387,093
======== ======== =======
Shares exercisable, end of year ........... 264,797 214,680 168,082
======== ======== =======
(c) 1979 Stock Option Plan
Under Employers Mutual's 1979 Stock Option Plan, 480,000 shares of the
Company's common stock were reserved for issuance to certain officers and key
management employees of Employers Mutual and its subsidiaries as determined by
its Board of Directors. Options were granted to 37 individuals. The period
for granting options under the plan expired on March 31, 1984. Options granted
vested at an annual rate of 10 percent on a cumulative basis. Upon death,
retirement, or permanent disability, all options granted became exercisable.
During 1994, 4,800 options were exercised at a price of $6.38. Stock options
under the plan were as follows:
Year ended December 31,
----------------------------
1994 1993 1992
-------- -------- --------
Outstanding, beginning of year ............ 4,800 5,760 44,440
Exercised .............................. (4,800) (960) (38,200)
Expired ................................ - - (480)
-------- -------- --------
Outstanding, end of year .................. - 4,800 5,760
======== ======== ========
Shares exercisable, end of year ........... - 4,800 3,840
======== ======== ========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
16. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of (1) cash, (2) indebtedness to/from related party,
(3) accounts receivable, (4) accounts payable and (5) accrued expenses
approximate fair value because of the short maturity of these instruments.
The estimated fair value of the Company's investments at December 31,
1994 are summarized as follows. The estimated fair value is based on quoted
market prices, where available, or on values obtained from independent pricing
services (see note 10).
Carrying Estimated
Amount Fair Value
------------ ------------
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, 1994, the Company is contingently liable for $2,156,000 of
unsecured receivables held by Employers Mutual.
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 $1,262,412 in the event that the issuing company would be unable to
fulfill its obligations.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
18. UNAUDITED INTERIM FINANCIAL INFORMATION
Three months ended,
------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
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
============ ============ ============ ============
1992
----
Total revenues ........ $ 40,592,007 $ 41,298,060 $ 42,664,483 $ 44,779,617
============ ============ ============ ============
Income (loss) before
income taxes
(benefit) ........... $ 2,315,687 $ 1,015,692 $ (2,472,573) $ 116,251
Income taxes (benefit) 299,983 516,923 (879,335) 821,794
------------ ------------ ------------ ------------
Net income (loss) $ 2,015,704 $ 498,769 $ (1,593,238) $ (705,543)
============ ============ ============ ============
Earnings (loss) per
share* .............. $ .20 $ .05 $ (.16) $ (.07)
============ ============ ============ ============
* 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.
<PAGE>
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 25, 1995, 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 41 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 60 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 63 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.
Philip T. Van Ekeren 64 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.
David O. Narigon 42 Vice President of the Company and of Employers
Mutual since 1989. He has been employed by
Employers Mutual since 1983.
Raymond W. Davis 49 Vice President of the Company and Employers
Mutual since 1985. He has been employed by
Employers Mutual since 1979.
<PAGE>
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 25, 1995, 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 25, 1995,
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 25, 1995, 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, 1994 and 1993 ..... 52
Consolidated Statements of Income for the Years ended
December 31, 1994, 1993 and 1992 ......................... 54
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 1994, 1993 and 1992 ............. 56
Consolidated Statements of Cash Flows for the Years ended
December 31, 1994, 1993 and 1992 ......................... 58
Notes to Consolidated Financial Statements .................. 60
2. Schedules
Independent Auditor's Report on Schedules ................... 97
Schedule I - Summary of Investments ....................... 98
Schedule III - Condensed Financial Information of Registrant 99
Schedule V - Supplementary Insurance Information .......... 102
Schedule VI - Reinsurance .................................. 103
Schedule X - Supplemental Information Concerning
Property-Casualty Insurance Operations ..... 104
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.
<PAGE>
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.
(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.)
<PAGE>
(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. (Incorporated by reference to the Company's Form 10-K
for the calendar year ended December 31, 1991.)
(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.)
13. 1994 Annual Report to Stockholders. (All information called for by
Parts I and II of this Form 10-K has been included in this document
under the respective item numbers (Items 1 through 9).
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.
<PAGE>
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 27, 1995.
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 27, 1995.
/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
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
The Board of Directors and Stockholders
EMC Insurance Group Inc.:
Under date of February 20, 1995, we reported on the consolidated balance
sheets of EMC Insurance Group Inc. and Subsidiaries as of December 31, 1994
and 1993, 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, 1994, 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, 1995
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule I - Summary of Investments -
Other Than Investments in Related Parties
December 31, 1994
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 ............... $142,968,102 $141,888,527 $142,968,102
States, municipalities and
political subdivisions ........ 78,423,605 75,494,956 78,423,605
Foreign governments ............. 583,309 590,720 583,309
Public utilities ................ 8,622,154 8,251,307 8,622,154
All other corporate bonds ....... 13,052,550 12,495,978 13,052,550
------------ ------------ ------------
Total fixed maturity securities 243,649,720 238,721,488 243,649,720
------------ ------------ ------------
Securities available-for-sale:
Fixed maturities:
United States Government
and government agencies
and authorities ............... 15,835,019 15,835,019 15,835,019
States, municipalities and
political subdivisions ........ 55,274,052 54,112,888 54,112,888
Foreign governments ............. 1,994,980 1,884,720 1,884,720
All other corporate bonds ....... 4,250,000 4,250,000 4,250,000
Redeemable preferred stocks ..... 454,941 409,769 409,769
------------ ------------ ------------
Total fixed maturity securities 77,808,992 76,492,396 76,492,396
------------ ------------ ------------
Short-term investments ............ 16,029,426 16,029,426 16,029,426
------------ ------------ ------------
Total investments ....... $337,488,138 $331,243,310 $336,171,542
============ ============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule III - Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31,
--------------------------
1994 1993
------------ ------------
ASSETS
------
Investment in common stock of
subsidiaries (equity method) .................. $111,420,069 $104,350,390
Fixed maturity securities held-to-maturity,
at amortized cost ............................. 2,002,494 -
Equity securities available-for-sale, at
market value .................................. - 475,000
Short-term investments .......................... 3,172,259 4,785,692
Cash ............................................ 61,389 35,414
Accrued investment income ....................... 57,768 13,750
Accounts receivable ............................. 37,502 -
Income taxes recoverable ........................ 32,000 67,000
Indebtedness of related party ................... 87,023 4,624
------------ ------------
Total assets ............................... $116,870,504 $109,731,870
============ ============
LIABILITIES
-----------
Accounts payable ................................ $ 143,815 $ 98,101
------------ ------------
Total liabilities .......................... 143,815 98,101
------------ ------------
STOCKHOLDERS' EQUITY
--------------------
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 10,587,629 shares
in 1994 and 10,325,329 shares in 1993 ......... 10,587,629 10,325,329
Additional paid-in capital ...................... 57,162,911 55,021,926
Unrealized holding losses on equity securities
available-for-sale, net of tax ................ - (19,800)
Retained earnings ............................... 49,086,216 44,387,700
Treasury stock, at cost (10,931 shares in 1994
and 8,090 shares in 1993) ..................... (110,067) (81,386)
------------ ------------
Total stockholders' equity ................. 116,726,689 109,633,769
------------ ------------
Total liabilities and stockholders' equity $116,870,504 $109,731,870
============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Condensed Statements of Income
Years ended December 31,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
Equity in undistributed earnings (loss) $10,464,926 $ 6,370,743 $(3,142,782)
Dividends received from
consolidated subsidiaries ........... 3,068,019 860,000 3,288,010
Investment income ..................... 236,519 214,825 483,786
Loss on sale of stock ................. (5,000) (30,000) -
----------- ----------- -----------
13,764,464 7,415,568 629,014
Operating expenses .................... 315,784 345,678 312,778
----------- ----------- -----------
Income from operations before
income taxes (benefit) ........... 13,448,680 7,069,890 316,236
Income taxes (benefit) ................ (57,047) (64,145) 100,544
----------- ----------- -----------
Income from operations ............. 13,505,727 7,134,035 215,692
Income from accounting changes ........ - 2,621,344 -
----------- ----------- -----------
Net income .............. $13,505,727 $ 9,755,379 $ 215,692
=========== =========== ===========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Condensed Statements of Cash Flows
Years ended December 31,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
Net cash provided by
operating activities ................ $ 2,962,596 $ 761,673 $ 3,370,212
----------- ----------- -----------
Cash flows from investing activities:
Fixed maturities .................... (2,002,494) - -
Short-term investments .............. 1,613,433 1,937,409 13,815,080
Sale of life subsidiary ............. - - 474,356
Sale of stock ....................... 500,000 500,000 -
----------- ----------- -----------
Net cash provided by
investing activities ........... 110,939 2,437,409 14,289,436
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock ............ 491,676 331,568 748,405
Dividends paid to stockholders ...... (3,510,555) (3,443,465) (5,103,890)
Capital contribution to subsidiaries - - (13,000,000)
Purchase of treasury stock, net ..... (28,681) (118,641) (278,241)
----------- ----------- -----------
Net cash used in financing
activities ....................... (3,047,560) (3,230,538) (17,633,726)
----------- ----------- -----------
Net increase (decrease) in cash ....... 25,975 (31,456) 25,922
Cash at beginning of year ............. 35,414 66,870 40,948
----------- ----------- -----------
Cash at end of year ................... $ 61,389 $ 35,414 $ 66,870
=========== =========== ===========
Income taxes paid ..................... $ 62,433 $ 14,000 $ 86,544
Interest paid ......................... - - -
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule V - Supplementary Insurance Information
For Years Ended December 31, 1994, 1993 and 1992
Deferred Losses and Net
acquisition settlement Unearned Premium Investment
Segment costs expenses premiums revenue income
------- ---------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
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 management ........ - - - - 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 management ........ - - - - 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, 1992:
Property and casualty insurance $5,824,597 $156,531,043 $39,252,263 $109,138,829 $13,047,540
Reinsurance ................... 2,006,408 68,136,494 6,918,647 26,615,180 6,763,257
Nonstandard risk automobile
insurance ................... 281,826 6,731,101 1,335,666 11,656,278 1,178,748
Excess and surplus lines
insurance management ........ - - - - 66,266
Parent company................. - - - - 483,786
Eliminations................... - (16,009,773) (1,522,102) - -
---------- ------------ ----------- ------------ -----------
Consolidated .............. $8,112,831 $215,388,865 $45,984,474 $147,410,287 $21,539,597
========== ============ =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule V - Supplementary Insurance Information
For Years Ended December 31, 1994, 1993 and 1992
Losses and policy Other
settlement acquisition underwriting Premiums
Segment expenses costs expenses written
------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
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 management ........ - - (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 management ........ - - (36,858)
Parent company ................ - - 345,678
------------ ------------ -----------
Consolidated .............. $120,355,299 $30,717,175 $15,575,257
============ ============ ===========
Year ended December 31, 1992:
Property and casualty insurance $ 82,313,897 $18,050,053 $12,560,922 $117,716,175
Reinsurance ................... 29,046,587 8,784,715 688,251 $ 28,207,488
Nonstandard risk automobile
insurance ................... 10,727,349 2,456,594 464,984 $ 11,896,220
Excess and surplus lines
insurance management ........ - - (429,756)
Parent company................. - - 312,778
Eliminations................... - - -
----------- ----------- -----------
Consolidated .............. $122,087,833 $29,291,362 $13,597,179
============ =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule VI - Reinsurance
For years ended December 31, 1994, 1993 and 1992
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
------------ ------------ ------------ ------------ ------
<S> <C> <C> <C> <C> <C>
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%
============ ============ ============ ============ ======
Year ended December 31, 1992:
Earned premiums:
Consolidated property and casualty
insurance .......................... $142,391,771 $150,404,371 $155,422,887 $147,410,287 105.4%
============ ============ ============ ============ ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule X - Supplemental Insurance Information Concerning
Property-Casualty Insurance Operations
For Years Ended December 31, 1994, 1993 and 1992
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
---------------------- ---------- ------------ -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
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
========== ============ ======== =========== ============ ==========
Year ended December 31, 1992: $8,112,831 $215,388,865 $ -0- $45,984,474 $147,410,287 $20,989,545
========== ============ ======== =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
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
---------------------- ------------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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
============ ========== =========== ============ ============
Year ended December 31, 1992: $116,615,951 $5,471,882 $29,291,362 $ 76,815,572 $157,819,883
============ ========== =========== ============ ============
</TABLE>
<PAGE>
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
filed under EDGAR.
EMC Insurance Group Inc. and Subsidiaries
Index to Exhibits
Exhibit
Number Item
------ ----
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
27 Financial Data Schedule Included in
direct transmission
28 Consolidated Schedule P of Annual Filed under cover
Statements provided to state regulatory of Form SE
authorities.
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
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, 1995,
relating to the consolidated balance sheets of EMC Insurance Group Inc. and
Subsidiaries as of December 31, 1994 and 1993, 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, 1994, which
reports appear in the December 31, 1994 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 24, 1995
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 1994 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 1995 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
February 28, 1995
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
12/31/94 BALANCE SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 76,492,396
<DEBT-CARRYING-VALUE> 243,649,720
<DEBT-MARKET-VALUE> 238,721,488
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 336,171,542
<CASH> 1,258,221
<RECOVER-REINSURE> 14,935,048
<DEFERRED-ACQUISITION> 8,393,635
<TOTAL-ASSETS> 387,369,878
<POLICY-LOSSES> 203,181,615
<UNEARNED-PREMIUMS> 47,672,570
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 3,102,609
<NOTES-PAYABLE> 0
<COMMON> 10,587,629
0
0
<OTHER-SE> 106,139,060
<TOTAL-LIABILITY-AND-EQUITY> 387,369,878
164,829,379
<INVESTMENT-INCOME> 20,929,680
<INVESTMENT-GAINS> 519,567
<OTHER-INCOME> 433,979
<BENEFITS> 116,944,054
<UNDERWRITING-AMORTIZATION> 31,701,789
<UNDERWRITING-OTHER> 19,389,994
<INCOME-PRETAX> 18,676,768
<INCOME-TAX> 5,171,041
<INCOME-CONTINUING> 13,505,727
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,505,727
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.29
<RESERVE-OPEN> 197,121,852
<PROVISION-CURRENT> 123,343,829
<PROVISION-PRIOR> (6,399,775)
<PAYMENTS-CURRENT> 48,771,573
<PAYMENTS-PRIOR> 59,491,875
<RESERVE-CLOSE> 203,181,615
<CUMULATIVE-DEFICIENCY> (6,399,775)
