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