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 [No Fee Required]
For the Fiscal Year Ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
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Commission File Number: 0-10956
EMC INSURANCE GROUP INC.
--------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Iowa 42-6234555
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
717 Mulberry Street, Des Moines, Iowa 50309
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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, 1997 was $44,393,702.
The number of shares outstanding of the registrant's common stock, $1.00
par value, on March 1, 1997, was 11,092,380.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's annual report to stockholders for the year
ended December 31, 1996 are incorporated by reference under Parts II and IV.
2. Portions of the registrant's definitive proxy statement, which will be
filed with the Securities and Exchange Commission on or before April 30, 1997,
are incorporated by reference under Part III.
<PAGE>
This document contains 97 sequentially numbered pages.
Index to Exhibits is on page number 45.
<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 subsidiaries (including the
Company), which collectively have assets totaling $1,451,019,234 and written
premiums of $594,018,148, are referred to as the "EMC Insurance Companies."
The Company conducts its insurance business through four business
segments as follows:
...............................
: :
: EMC INSURANCE GROUP INC. :
:.............................:
: Excess and
Property and : Nonstandard Surplus Lines
Casualty : Risk Automobile Insurance
Insurance Reinsurance : Insurance Agency
................................:.................................
: : : :
: : : :
EMCASCO Insurance EMC Farm and City EMC
Company (EMCASCO) Reinsurance Insurance Underwriters,
Illinois EMCASCO Company Company Ltd.
Insurance Company
(Illinois EMCASCO)
Dakota Fire Insurance
Company (Dakota Fire)
EMCASCO was formed in Iowa in 1958, Illinois EMCASCO was formed in
Illinois in 1976 and Dakota Fire was formed in North Dakota in 1957 for the
purpose of writing property and casualty insurance. These companies are
licensed to write insurance in a total of 35 states and are participants in a
pooling agreement with Employers Mutual. (See "Property and Casualty Insurance
- - Pooling Agreement").
The reinsurance subsidiary was formed in 1981 to assume reinsurance
business from Employers Mutual. The company assumes 95 percent of Employers
Mutual's assumed reinsurance business, exclusive of certain reinsurance
contracts, and is licensed to do business in 11 states.
The nonstandard risk automobile insurance subsidiary was purchased in
1984. The company was formed in Iowa in 1962 to write nonstandard risk
automobile insurance and is licensed in 6 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 8 of Notes to Consolidated Financial Statements under
Item 8 of this Form 10-K.
<PAGE>
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 spread the risk of an exposure
insured by any of the pool participants 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.
On December 9, 1996, Employers Mutual announced its intention to affiliate
with Hamilton Mutual Insurance Company of Cincinnati, Ohio (Hamilton Mutual).
This affiliation is subject to approval by Hamilton Mutual's policyholders and
the Ohio Insurance Department. Hamilton Mutual will participate in the pooling
agreement effective January 1, 1997. The addition of Hamilton Mutual will have
no impact on the Company's aggregate participation in the pooling agreement;
however, the size of the pool is expected to increase by approximately 7
percent.
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, 1996. 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.
<PAGE>
Percent Percent Percent
of of of
Line of Business 1996 total 1995 total 1994 total
- ---------------- -------- ----- -------- ----- -------- -----
(Dollars in thousands)
Commercial Lines:
Automobile ............ $107,786 18.9% $ 99,165 17.8% $ 91,674 17.0%
Property .............. 92,963 16.3 89,130 16.0 81,358 15.1
Workers' compensation 118,479 20.7 131,415 23.5 133,621 24.7
Liability ............. 105,889 18.5 105,571 18.9 100,844 18.7
Other ................. 13,998 2.5 13,975 2.5 13,405 2.5
-------- ----- -------- ----- -------- -----
Total commercial lines 439,115 76.9 439,256 78.7 420,902 78.0
-------- ----- -------- ----- -------- -----
Personal Lines:
Automobile ............ 83,428 14.6 79,121 14.2 80,694 14.9
Property .............. 46,459 8.2 39,840 7.1 38,107 7.1
Liability ............. 1,946 0.3 - - - -
Other ................. 53 - 54 - 56 -
-------- ----- -------- ----- -------- -----
Total personal lines 131,886 23.1 119,015 21.3 118,857 22.0
-------- ----- -------- ----- -------- -----
Total ............ $571,001 100.0% $558,271 100.0% $539,759 100.0%
======== ===== ======== ===== ======== =====
MARKETING
Marketing of insurance by the parties to the pooling agreement is
conducted through 17 offices located throughout the United States and
approximately 2,350 independent agencies. These offices maintain close contact
with the local market conditions and are able to react rapidly to change. Each
office employs underwriting, claims, marketing and risk improvement
representatives, as well as field auditors and branch administrative
technicians. The offices are supported by Employers Mutual technicians and
specialists. Systems are in place to monitor the underwriting results of each
office and to maintain guidelines and policies consistent with the underwriting
and marketing environment in each region.
The following table sets forth the geographic distribution of the
aggregate direct written premiums of all parties to the pooling agreement for
the three years ended December 31, 1996.
1996 1995 1994
---- ---- ----
Alabama ............................ 3.7% 3.1% 2.7%
Arizona ............................ 4.2 3.9 3.8
Colorado ........................... 3.2 3.3 3.3
Illinois ........................... 6.5 6.5 6.7
Iowa ............................... 20.3 21.7 23.0
Kansas ............................. 9.0 8.8 8.2
Michigan ........................... 3.2 3.6 3.8
Minnesota .......................... 4.0 4.7 5.3
Nebraska ........................... 7.7 8.1 8.0
North Carolina ..................... 4.1 4.0 3.8
Rhode Island ....................... 3.2 3.2 3.3
Texas .............................. 3.9 2.9 2.7
Wisconsin .......................... 4.8 5.5 5.7
Other * ............................ 22.2 20.7 19.7
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
* Includes all other jurisdictions, none of which accounted for more than 3%.
<PAGE>
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' 1995 operating results
and financial condition as of December 31, 1995. Best's reevaluates its
ratings from time to time (normally on an annual basis) and there can be no
assurance that the Company's property and casualty insurance subsidiaries and
the other pool members will maintain their current rating in the future.
Management believes that a Best's rating of "A (Excellent)" or better is
important to the Company's business since many insureds require that companies
with which they insure be so rated. Best's publications indicate that these
ratings are assigned to companies which Best's believes have achieved excellent
overall performance and have a strong ability to meet their obligations over a
long period of time. Best's ratings are based upon factors of concern to
policyholders and insurance agents and are not necessarily directed toward the
protection of investors.
REINSURANCE CEDED
The parties to the pooling agreement cede insurance in the ordinary course
of business for the purpose of limiting their maximum loss exposure through
diversification of their risks. The pool participants also purchase
catastrophe reinsurance to cover multiple losses arising from a single event.
All major reinsurance treaties, with the exception of the pooling
agreement and a boiler treaty, are on an "excess of loss" basis whereby the
reinsurer agrees to reimburse the primary insurer for covered losses in excess
of a predetermined amount, up to a stated limit. The boiler treaty provides
for 100 percent reinsurance of the pool's direct boiler coverage written.
Facultative reinsurance from approved domestic markets, which provides
reinsurance on an individual risk basis and requires specific agreement of the
reinsurer as to the limits of coverage provided, is purchased when coverage by
an insured is required in excess of treaty capacity or where a high-risk type
policy could expose the treaty reinsurance programs.
Each type of reinsurance coverage is purchased in layers, and each layer
may have a separate retention level. Retention levels are adjusted according
to reinsurance market conditions and the surplus position of Employers Mutual.
The intercompany pooling arrangement aids efficient buying of reinsurance since
it allows for higher retention levels and correspondingly decreased dependence
on the reinsurance marketplace.
<PAGE>
A summary of the reinsurance treaties benefitting 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 ...................... $ 500,000 100 percent of $ 5,300,000
Boiler ...................... $ 0 100 percent of $50,000,000
* An annual aggregate deductible of $3,600,000 must be reached before the
reinsurers may be petitioned.
Although reinsurance does not discharge the original insurer from its
primary liability to its policyholders, it is the practice of insurers for
accounting purposes to treat reinsured risks as risks of the reinsurer since
the primary insurer would only reassume liability in those situations where the
reinsurer is unable to meet the obligations it assumed under the reinsurance
agreements. The ability to collect 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 60 domestic and foreign reinsurers.
Percent
of Total 1996
Property per risk, property catastrophe Reinsurance Best's
and casualty coverages: Protection Rating
- --------------------------------------- ----------- ------
Underwriters at Lloyd's of London .................... 20.3% (1)
AXA Reinsurance Company .............................. 5.5 A
Hannover Ruckversicherung AG ......................... 5.2 (2)
Zurich Reinsurance Centre ............................ 5.2 A
Hartford Fire Insurance Company ...................... 4.6 A+
St. Paul Fire and Marine ............................. 3.6 A+
NAC Reinsurance Corporation .......................... 3.6 A
Mid-Ocean Reinsurance Company Ltd. ................... 3.1 (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 Lloyd's of London 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 Department of
Trade and Industry (DTI) stated that Lloyd's of London satisfied its 1995
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."
* Lloyd's syndicates must keep on deposit in the U.S. an amount equal to
100% of their gross surplus liabilities. In addition, Lloyd's as a body
must maintain a minimum of $100 million in a trust fund. Moreover, the
Names that appear on the list must file financial statements, copies of
auditor's reports, the name of their U.S. attorneys or other
representative, and details of U.S. trust accounts with the NAIC. The
intermediaries have received verification from their U.K. correspondent
brokers that they will use only those syndicates appearing on the NAIC
quarterly list.
The New York Insurance Department is essentially requiring the following
terms for these new trust funds: 1)they are to be segregated on an
individual Name basis, 2)they must be sufficient to support the gross
liabilities (before reinsurance) assumed by Names, and 3) they must also
be segregated according to each individual insured/reinsured entity.
For purposes of determining the liabilities for which assets are to be
deposited in the new U.S. Reinsurance Trust Fund, the New York Insurance
Department has agreed that the syndicates should use the existing DTI
approved methodology.
With respect to profitability, Chatset (a publication that is considered
a guide to syndicate run-offs) is predicting profits in British Pounds of
1.18 billion ($2 billion) for the 1994 year of account, 985 billion
for 1995 and 716 million for 1996.
(2) Not rated.
<PAGE>
Premiums ceded by all pool members and by the Company's property and
casualty insurance subsidiaries for the year ended December 31, 1996 are
presented below. Each type of reinsurance coverage is purchased in layers, and
an individual reinsurer may participate in more than one coverage and at
various layers within the coverages. Since each layer of each coverage is
priced separately, with the lower layers being more expensive than the upper
layers, a reinsurer's overall participation in a reinsurance program does not
necessarily correspond to the amount of premiums it receives.
Premiums ceded by
------------------------
Property
and casualty
All pool insurance
Reinsurer members subsidiaries
- --------- ----------- ------------
SCOR Reinsurance Company.............................. $ 3,455,971 $ 760,314
General Reinsurance Corporation ...................... 3,104,121 682,907
Kemper Reinsurance Company............................ 2,123,007 467,061
Hartford Steam Boiler Inspection & Insurance Company.. 1,522,248 334,895
Winterthur Reinsurance Company of America............. 1,006,951 221,529
Hartford Fire Insurance Company....................... 891,730 196,181
Signet Star Reinsurance Company....................... 705,772 155,270
AXE Reinsurance Company............................... 647,848 142,526
PMA Reinsurance Corporation........................... 491,030 108,027
NAC Reinsurance Corporation .......................... 448,477 98,665
Other Reinsurers ..................................... 6,373,392 1,402,145
----------- ------------
Total .............................................. $20,770,547 $ 4,569,520
=========== ============
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
pool members and by the Company's property and casualty insurance subsidiaries
for the year ended December 31, 1996 are presented below.
Premiums ceded by
------------------------
Property
and casualty
All pool insurance
Reinsurer members subsidiaries
- --------- ----------- ------------
Wisconsin Compensation Rating Bureau ................. $ 5,351,407 $ 1,177,309
National Workers' Compensation Reinsurance Pool ...... 4,269,905 939,379
Improved Risk Mutual ................................. 3,030,217 666,648
North Carolina Reinsurance Facility .................. 1,378,103 303,183
Michigan Catastrophe Claims Association .............. 695,139 152,930
Other Reinsurers ..................................... 551,867 121,412
----------- ------------
$15,276,638 $ 3,360,861
=========== ============
In formulating reinsurance programs, Employers Mutual is selective in its
choice of reinsurers. Employers Mutual selects reinsurers on the basis of
financial stability and long-term relationships, as well as price of the
coverage. Reinsurers are generally required to have a Best's rating of "A-" or
higher and policyholders' surplus of $50,000,000 ($100,000,000 for casualty
reinsurance).
For information concerning amounts due the Company from reinsurers for
losses and settlement expenses and prepaid reinsurance premiums and the effect
of reinsurance on premiums written and earned, and losses and settlement
expenses incurred, see "Property and Casualty Insurance Subsidiaries,
Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary -
Reinsurance Ceded."
<PAGE>
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,
------------------------------
1996 1995 1994
---- ---- ----
Employers Mutual .................. .95 1.07 1.28
EMCASCO ........................... 1.67 1.91 2.18
Illinois EMCASCO .................. 1.73 1.95 2.18
Dakota Fire ....................... 1.61 1.80 1.98
American Liberty .................. 1.05 1.15 1.26
Union ............................. .68 .73 .77
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The property and casualty insurance subsidiaries' reserve information is
included in the property and casualty loss reserve development for 1996. 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, subject to a maximum
loss of $1,000,000 per event. The reinsurance subsidiary does not reinsure any
of Employers Mutual's direct insurance business, nor any "involuntary" facility
or pool business that Employers Mutual assumes pursuant to state law. In
addition, the reinsurance subsidiary is not liable for credit risk in
connection with the insolvency of any reinsurers of Employers Mutual.
Effective January 1, 1997, the reinsurance subsidiary's quota share
participation was increased from 95 percent to 100 percent and the cap on
losses assumed per event was increased from $1,000,000 to $1,500,000.
<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, 1996.
Percent Percent Percent
of of of
Line of Business 1996 total 1995 total 1994 total
- ---------------- ------- ----- ------- ----- ------- -----
(Dollars in thousands)
Pro rata reinsurance:
Property ............... $16,459 45.7% $19,417 53.3% $21,952 55.0%
Crop ................... 3,704 10.3 3,085 8.5 5,120 12.8
Casualty ............... 2,796 7.7 2,879 7.9 2,728 6.8
Marine/aviation ........ 2,762 7.7 4,168 11.4 4,563 11.5
Other .................. 228 0.6 398 1.1 360 0.9
------- ----- ------- ----- ------- -----
Total pro rata reinsurance 25,949 72.0 29,947 82.2 34,723 87.9
------- ----- ------- ----- ------- -----
Excess per risk reinsurance:
Property ............... 2,258 6.3 1,760 4.8 2,118 5.3
Casualty ............... 1,182 3.3 840 2.3 (107) (0.3)
Marine/aviation ........ 9 - 21 0.1 16 0.1
Other .................. 628 1.7 341 0.9 268 0.7
------- ----- ------- ----- ------- -----
Total excess per
risk reinsurance ...... 4,077 11.3 2,962 8.1 2,295 5.8
------- ----- ------- ----- ------- -----
Excess catastrophe/
aggregate reinsurance:
Property ............... 5,671 15.7 3,178 8.7 2,567 6.4
Crop ................... 242 0.7 292 0.8 278 0.7
Marine/aviation ........ 29 0.1 52 0.2 36 0.1
Other .................. 84 0.2 2 - - -
------- ----- ------- ----- -------- -----
Total excess catastrophe/
aggregate reinsurance 6,026 16.7 3,524 9.7 2,881 7.2
------- ----- ------- ----- ------- -----
Total excess reinsurance 10,103 28.0 6,486 17.8 5,176 13.0
------- ----- ------- ----- ------- -----
$36,052 100.0% $36,433 100.0% $39,899 100.0%
======= ===== ======= ===== ======= =====
MARKETING
During 1996 and 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. The reinsurance subsidiary strives to be
flexible and aggressive with opportunities that arise, while remaining
committed to profitability over premium volume.
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
reinsurance subsidiary is addressing this by accepting larger lines on
desirable programs and strengthening its relationships with reinsurance
intermediaries.
<PAGE>
REINSURANCE CEDED
The reinsurance subsidiary had an aggregate excess of loss reinsurance
treaty with Employers Mutual which provided protection from a large
accumulation of retentions resulting from multiple catastrophes in any one
calendar year. The coverage provided was $2,000,000, excess of $3,000,000
($2,500,000 in 1994) aggregate losses retained, excess of $200,000 per event.
Maximum recovery was limited to $2,000,000 ($4,000,000 in 1994) per accident
year. The reinsurance subsidiary did not have any recoveries under this treaty
during the last three years. Premiums paid to Employers Mutual amounted to
$500,000, $499,950 and $557,842 in 1996, 1995 and 1994, respectively. This
reinsurance treaty was canceled effective January 1, 1997.
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 1996. See "Property and
Casualty Insurance Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk
Automobile Insurance Subsidiary - Outstanding Losses and Settlement Expenses."
NONSTANDARD RISK AUTOMOBILE INSURANCE
- -------------------------------------
The Company's nonstandard risk automobile insurance subsidiary specializes
in insuring private passenger automobile risks that are found to be
unacceptable in the standard automobile insurance market.
<PAGE>
MARKETING
The nonstandard risk automobile insurance subsidiary is licensed in a six
state area that includes Iowa, Kansas, Missouri, Nebraska, North Dakota and
South Dakota. Personal lines automobile policies are solicited through the
American Agency System using approximately 1,100 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 nonstandard risk automobile
insurance subsidiary has experienced a decline in premium volume over the last
several years. This decline is being addressed by appointing new agents and
improving marketing and business relationships with the existing agency force.
During 1996, rating disks were supplied to all agents, enhancing service levels
for the company.
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, 1996.
1996 1995 1994
----- ----- -----
Iowa ............................... 37.2% 39.9% 42.3%
Nebraska ........................... 22.4 25.0 26.6
South Dakota ....................... 21.9 20.3 17.2
Kansas ............................. 13.9 11.0 10.8
North Dakota ....................... 4.6 3.8 3.1
Missouri ........................... - - -
----- ----- -----
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 continually 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 $0, $0 and $71,567 in 1996,
1995 and 1994, respectively. Premiums paid to Employers Mutual amounted to
$37,942 in 1996, $45,232 in 1995 and $49,659 in 1994.
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.
<PAGE>
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The nonstandard risk automobile insurance subsidiary's reserve information
is included in the property and casualty loss reserve development for 1996. 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, 1996. 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,
--------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Property and casualty insurance
Loss ratio .................... 69.1% 65.0% 67.2% 72.6% 76.1%
Expense ratio ................. 34.9 33.1 31.1 30.9 30.1
------ ------ ------ ------ ------
Combined ratio .............. 104.0% 98.1% 98.3% 103.5% 106.2%
====== ====== ====== ====== ======
Reinsurance
Loss ratio .................... 68.7% 66.3% 82.0% 77.7% 109.1%
Expense ratio ................. 31.5 31.3 30.4 33.1 34.8
------ ------ ------ ------ ------
Combined ratio .............. 100.2% 98.6% 112.4% 110.8% 143.9%
====== ====== ====== ====== ======
Nonstandard risk automobile insurance
Loss ratio .................... 88.7% 94.5% 71.5% 94.3% 92.3%
Expense ratio ................. 26.8 26.1 24.4 23.7 23.7
------ ------ ------ ------ ------
Combined ratio .............. 115.5% 120.6% 95.9% 118.0% 116.0%
====== ====== ====== ====== ======
Total insurance operations
Loss ratio .................... 70.0% 67.1% 70.9% 75.6% 83.4%
Expense ratio ................. 33.6 32.5 30.4 30.7 30.5
------ ------ ------ ------ ------
Combined ratio .............. 103.6% 99.6% 101.3% 106.3% 113.9%
====== ====== ====== ====== ======
Property and casualty insurance
industry averages (1)
Loss ratio .................... 79.6% 78.9% 81.1% 79.5% 88.1%
Expense ratio ................. 26.4 26.1 27.3 27.4 27.6
------ ------ ------ ------ ------
Combined ratio .............. 106.0% 105.0% 108.4% 106.9% 115.7%
====== ====== ====== ====== ======
(1) As reported by A.M. Best Company. The ratio for 1996 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, 1996:
1996
Amount Percent Best's
recoverable of total rating
----------- -------- ------
Wisconsin Compensation Rating Bureau .. $ 6,342,412 39.0% (1)
National Workers' Compensation
Reinsurance Pool .................... 1,983,095 12.2 (1)
American Re-Insurance Company ......... 1,698,618 10.4 A+
General Reinsurance Company............ 675,375 4.2 A++
SCOR Reinsurance Company............... 552,444 3.4 A
Improved Risk Mutual (IRM) ............ 513,309 3.2 (2)
North Carolina Reinsurance Facility.... 443,072 2.7 (3)
Minnesota Workers' Compensation
Reinsurance Association ............ 423,656 2.6 (4)
Kemper Reinsurance Company ............ 421,380 2.6 A-
Mutual Reinsurance Bureau (MRB)........ 317,014 2.0 (5)
Other Reinsurers ...................... 2,882,383 17.7
----------- --------
Total ........................... $16,252,758(6) 100.0%
=========== ========
<PAGE>
(1) Amounts recoverable reflect the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to these
organizations by Employers Mutual in connection with its role as "service
carrier." Under these arrangements, Employers Mutual writes business for
these organizations on a direct basis and then cedes 100 percent of the
business to these organizations. Credit risk associated with these
amounts is minimal as all companies participating in these organizations
are responsible for the liabilities of such organizations on a pro rata
basis.
(2) The amount recoverable reflects the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to this
underwriting association by the pool members. IRM was formed to
underwrite property insurance for large commercial risks and is
composed of Employers Mutual and 13 other nonaffiliated property and
casualty insurance companies. Each of the 14 insurance companies cede
insurance to IRM and assume back a percentage of this business.
Participation ranges from 2.0 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 a B+ (very good) or better rating by the most recent Best's
Property Casualty Key Ratings Guide.
(3) The amount recoverable reflects the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to this
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.
(4) 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 $1,040,000 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.
(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, 1996 represented $939,017 in paid
losses and settlement expenses recoverable, $13,796,769 in unpaid losses
and settlement expenses recoverable and $1,516,972 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, 1996 is
presented below.
Year ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Premiums written:
Direct ........................ $156,161,030 $152,579,014 $143,444,388
Assumed from nonaffiliates .... 1,951,071 3,282,699 5,843,091
Assumed from affiliates ....... 161,671,754 159,253,136 158,646,332
Ceded to nonaffiliates ........ (7,930,381) (8,365,648) (8,890,119)
Ceded to affiliates ........... (147,467,508) (143,259,942) (132,100,537)
------------ ------------ ------------
Net premiums written ........ $164,385,966 $163,489,259 $166,943,155
============ ============ ============
Premiums earned:
Direct ........................ $154,859,778 $151,450,871 $140,012,247
Assumed from nonaffiliates .... 2,350,321 3,548,647 5,988,228
Assumed from affiliates ....... 162,326,189 157,897,322 156,839,482
Ceded to nonaffiliates ........ (8,219,290) (8,680,800) (9,601,270)
Ceded to affiliates ........... (146,126,332) (141,949,790) (128,409,308)
------------ ------------ ------------
Net premiums earned ......... $165,190,666 $162,266,250 $164,829,379
============ ============ ============
Losses and settlement expenses
incurred:
Direct ........................ $117,368,771 $ 98,651,399 $113,680,306
Assumed from nonaffiliates .... 948,218 608,796 2,774,689
Assumed from affiliates ....... 113,083,014 100,098,436 108,594,530
Ceded to nonaffiliates ........ (6,817,132) (2,036,962) (3,077,305)
Ceded to affiliates ........... (109,215,656) (89,169,391) (105,028,166)
------------ ------------ ------------
Net losses and settlement
expenses incurred ......... $115,367,215 $108,152,278 $116,944,054
============ ============ ============
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.
<PAGE>
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, 1996 are adequate.
The following table sets forth a reconciliation of beginning and ending
reserves for losses and settlement expenses of the property and casualty
insurance subsidiaries, the reinsurance subsidiary and the nonstandard risk
automobile insurance subsidiary. Amounts presented are on a net basis, with a
reconciliation of beginning and ending reserves to the gross amounts presented
in the consolidated financial statements in accordance with Statement of
Financial Accounting Standards (SFAS) 113. (See note 1 of Notes to
Consolidated Financial Statements under Item 8 of this Form 10-K.)
<PAGE>
Year ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Gross reserves for losses and
settlement expenses, beginning
of year .......................... $205,422,109 $203,181,615 $197,121,852
Ceded reserves for losses and
settlement expenses, beginning
of year .......................... 12,226,680 14,146,874 17,454,679
------------ ------------ ------------
Net reserves for losses and
settlement expenses, beginning
of year .......................... 193,195,429 189,034,741 179,667,173
------------ ------------ ------------
Incurred losses and
settlement expenses:
- ----------------------
Provision for insured events
of the current year .......... 131,375,234 123,876,601 123,343,829
Decrease in provision for
insured events of prior
years ........................ (16,008,019) (15,724,323) (6,399,775)
------------ ------------ ------------
Total incurred losses and
settlement expenses ...... 115,367,215 108,152,278 116,944,054
------------ ------------ ------------
Payments:
- ---------
Losses and settlement expenses
attributable to insured events
of the current year ............ 59,948,110 48,237,715 48,771,573
Losses and settlement expenses
attributable to insured events
of prior years ................. 59,908,317 55,753,875 59,491,875
Payment related to the commutation
of the reinsurance subsidiary's
catastrophe and aggregate excess
of loss reinsurance treaties ... - - (686,962)
------------ ------------ ------------
Total payments .............. 119,856,427 103,991,590 107,576,486
------------ ------------ ------------
Net reserves for losses and
settlement expenses, end of year 188,706,217 193,195,429 189,034,741
Ceded reserves for losses and
settlement expenses, end of year 13,796,769 12,226,680 14,146,874
------------ ------------ ------------
Gross reserves for losses and
settlement expenses, end of year $202,502,986 $205,422,109 $203,181,615
============ ============ ============
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, beginning in
1992, (i) a reconciliation of the net loss and settlement expense reserves, 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 and the related re-estimated reinsurance
receivables.
<PAGE>
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 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 the reform measures implemented by several states to
control administrative costs for workers' compensation insurance, 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 benefitted 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 1996 and 1995 is not expected to continue.
<PAGE>
<TABLE>
<CAPTION> Year ended December 31,
-------------------------------------------------------------------------------------------------
(Dollars in thousands) 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Statutory reserves for losses <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
and settlement expenses ...... $ 90,357 109,088 121,667 127,870 131,623 139,317 180,797 182,072 191,514 196,293 191,892
Reclassification of reserve
amounts associated with the
National Workers' Compensation
Reinsurance Pool ............. 1,561 2,378 2,911 3,855 4,338 6,830 11,364 - - - -
Statutory reserves after
Reclassification ............. 91,918 111,466 124,578 131,725 135,961 146,147 192,161 182,072 191,514 196,293 191,892
GAAP adjustments:
Salvage and subrogation ...... (1,000) (930) (930) (930) (1,203) (1,284) (2,026) (1,804) (1,799) (2,369) (2,400)
Statutory settlement expense
portion of postretirement
benefit obligation ......... - - - - - - - (601) (680) (729) (786)
Reserves for losses and
settlement expenses .......... 90,918 110,536 123,648 130,795 134,758 144,863 190,135 179,667 189,035 193,195 188,706
Paid (cumulative) as of:
One year later ............... 25,874 23,805 34,648 42,357 42,601 30,379 77,589 58,805 55,754 59,908 -
Two years later .............. 36,199 44,662 57,511 65,965 58,242 78,096 108,253 87,059 86,409 - -
Three years later ............ 52,014 61,052 72,121 76,356 95,154 94,854 125,457 104,796 - - -
Four years later ............. 63,902 71,550 79,092 106,432 104,324 104,372 134,910 - - - -
Five years later ............. 71,859 77,230 105,513 112,100 109,932 109,607 - - - - -
Six years later .............. 76,748 101,714 108,764 115,213 113,444 - - - - - -
Seven years later ............ 97,533 103,948 110,740 117,796 - - - - - - -
Eight years later ............ 99,179 105,486 112,626 - - - - - - - -
Nine years later ............. 100,481 106,999 - - - - - - - - -
Ten years later .............. 101,764 - - - - - - - - - -
Reserves reestimated as of:
End of year .................. 90,918 110,536 123,648 130,795 134,758 144,863 190,135 179,667 189,035 193,195 188,706
One year later ............... 98,127 109,099 123,628 134,453 139,385 150,335 190,594 173,267 173,311 177,187 -
Two years later .............. 97,465 111,212 124,011 136,972 140,764 147,388 186,543 164,833 167,437 - -
Three years later ............ 100,437 113,588 125,957 136,902 139,421 144,340 181,633 161,598 - - -
Four years later ............. 104,024 116,995 127,964 137,510 139,054 143,985 181,551 - - - -
Five years later ............. 107,784 119,332 128,434 136,912 139,877 144,362 - - - - -
Six years later .............. 110,961 120,147 127,908 138,740 140,621 - - - - - -
Seven years later ............ 111,988 120,343 130,066 140,368 - - - - - - -
Eight years later ............ 112,433 122,568 131,681 - - - - - - - -
Nine years later ............. 114,516 124,112 - - - - - - - - -
Ten years later .............. 115,787 - - - - - - - - - -
Cumulative redundancy
(Deficiency) ................. $(24,869) (13,576) (8,033) (9,573) (5,863) 501 8,584 18,069 21,598 16,008 -
======= ======= ====== ====== ====== ======= ======= ======= ======= ======= =======
Gross loss and settlement expense reserves - end of year (A) ........................ $215,389 197,122 203,182 205,422 202,503
Reinsurance receivables .............................................................. 25,254 17,455 14,147 12,227 13,797
-------- ------- ------- ------- -------
Net loss and settlement expense reserves - end of year ............................... $190,135 179,667 189,035 193,195 188,706
======== ======= ======= ======= =======
Gross re-estimated reserves - latest (B) ............................................. $203,148 175,441 179,967 190,293 202,503
Re-estimated reinsurance receivables - latest ........................................ 21,597 13,843 12,530 13,106 13,797
-------- ------- ------- ------- -------
Net re-estimated reserves - latest ................................................... $181,551 161,598 167,437 177,187 188,706
======== ======= ======= ======= =======
Gross cumulative redundancy (deficiency) (A-B) ....................................... $ 12,241 21,681 23,215 15,129 -
======== ======= ======= ======= =======
</TABLE>
<PAGE>
ASBESTOS AND ENVIRONMENTAL CLAIMS
The Company has exposure to asbestos and environmental related claims
associated with the insurance business issued by the parties to the pooling
agreement and the reinsurance business assumed from Employers Mutual by the
reinsurance subsidiary. 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 industry.
During 1995, the parties to 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 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.
Employers Mutual requested and obtained more detailed information from its
ceding reinsurers than had previously been provided. Based on this
information, Employers Mutual allocated a portion of the 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 reflect the fact that the ending reserves are not
reported on the same basis as the beginning reserves. As discussed above, the
ending reserves reflect an increased allocation of IBNR reserves, and related
settlement expense reserves, due to a change in reserving methodology and the
receipt of additional information regarding the assumed reinsurance business.
Based upon current facts, management believes the reserves established for
asbestos and environmental related claims at December 31, 1996 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.
<PAGE>
The following table presents selected data on asbestos related losses
and settlement expenses incurred and reserves outstanding for the Company:
Year ended December 31,
--------------------------------
1996 1995 1994
---------- ---------- ----------
Total losses incurred ....................... $ 100,090 $ 336,899 $ 210,776
Total settlement expenses incurred .......... 5,847 (31,667) 9,750
---------- ---------- ----------
Total losses and settlement expenses
incurred ................................ $ 105,937 $ 305,232 $ 270,526
========== ========== ==========
Loss reserves ............................... $ 662,910 $ 581,549 $ 255,799
Settlement expense reserves ................. 28,089 32,117 70,286
---------- ---------- ----------
Total loss and settlement expense reserves $ 690,999 $ 613,666 $ 326,085
========== ========== ==========
Number of outstanding claims ................ 57 71 70
========== ========== ==========
The incurred and reserve amounts for 1996, 1995 and 1994 reflect 40, 25
and 20 claims, respectively, by individuals asserting asbestos exposure while
in the employment of a single policyholder. Coverage for these claims is
disputed. 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.
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.
<PAGE>
The following table presents selected data on environmental losses and
settlement expenses incurred and reserves outstanding for the Company.
Year ended December 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
Total losses incurred .................... $ 85,454 $ 892,250 $ (30,130)
Total settlement expenses incurred ....... (27,761) 185,412 37,359
---------- ---------- ----------
Total losses and settlement expenses
incurred ............................. $ 57,693 $1,077,662 $ 7,229
========== ========== ==========
Loss reserves ............................ $1,103,466 $1,109,072 $ 258,524
Settlement expense reserves .............. 308,145 345,897 165,198
---------- ---------- ----------
Total loss and settlement expense
reserves ............................. $1,411,611 $1,454,969 $ 423,722
========== ========== ==========
Number of outstanding claims ............. 63 58 46
========== ========== ==========
Included in the above table at December 31, 1996 and 1995 are two closed
landfills which involve three and six policyholders, respectively. Coverage is
disputed in all 63 of the claims which were outstanding at December 31, 1996.
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.
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.
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
straightforward 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 fair value, with unrealized holding gains and
losses reported as a separate component of stockholders' equity, net of tax.
<PAGE>
At December 31, 1996, approximately 90 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.
During 1996, the Company increased its equity holdings by investing $5,273,000
in preferred stocks. The overall liquidity position of the Company was not
affected by these investments.
In November of 1995 the Financial Accounting Standards Board issued a
special report titled "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities." This report contained
a provision that allowed entities a one-time option to reassess the
appropriateness of the classifications of all securities held and to reclassify
securities from the held-to-maturity category without calling into question the
intent of that enterprise to hold other debt securities to maturity in the
future. The Company elected to take advantage of this option and reclassified
$80,534,719 of municipal and corporate bonds from the held-to-maturity category
to the available-for-sale category in the fourth quarter of 1995 in order to
achieve more flexibility in its investment portfolio.
Investments of the Company's insurance subsidiaries are subject to the
insurance laws of the state of their incorporation. These laws prescribe the
kind, quality and concentration of investments which may be made by insurance
companies. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks and real estate
mortgages. The Company believes it is in compliance with these laws.
In 1996 the National Association of Insurance Commissioners (NAIC) adopted
model legislation governing insurance company investments. This model
investment law is not expected to have a material impact on the operations of
the Company's insurance subsidiaries.
The investments of EMC Insurance Group Inc. and its subsidiaries are
supervised by investment committees of each entity's respective board of
directors. The bond portfolios for each entity 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.
<PAGE>
The following table shows the composition of the Company's investment
portfolio (at amortized cost), by type of security, as of December 31, 1996 and
1995. In the Company's consolidated financial statements, securities
held-to-maturity are carried at amortized cost; securities available-for-sale
are carried at fair value.
Year ended December 31,
--------------------------------------------
1996 1995
--------------------- ---------------------
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 ............. $113,288,092 30.3% $115,512,952 30.0%
Obligations of states and
political subdivisions ... 30,975,611 8.3 37,972,295 10.6
Mortgage-backed securities 44,122,018 11.8 37,955,569 10.5
------------ ------- ------------ -------
Total securities held-
to-maturity ............ 188,385,721 50.4 191,440,816 53.1
------------ ------- ------------ -------
Securities available-for-sale:
Fixed maturity securities:
Obligations of states and
political subdivisions ... 114,538,500 30.6 108,241,811 30.0
Foreign governments ........ 2,573,101 .7 1,996,716 .6
Public utilities ........... 8,970,242 2.4 9,458,349 2.6
Corporate securities ....... 20,023,965 5.3 17,233,563 4.8
Redeemable preferred stocks 688,350 .2 169,500 -
------------ ------- ------------ -------
Total fixed maturity
securities ............. 146,794,158 39.2 137,099,939 38.0
Equity securities:
Common stock mutual funds .. 15,963,269 4.3 14,771,422 4.1
Non-redeemable preferred
stocks ................... 5,273,012 1.4 - -
------------ ------- ------------ -------
Total equity securities .. 21,236,281 5.7 14,771,422 4.1
------------ ------- ------------ -------
Total securities
available-for-sale ..... 168,030,439 44.9 151,871,361 42.1
------------ ------- ------------ -------
Short-term investments ......... 17,553,606 4.7 17,271,798 4.8
------------ ------- ------------ -------
Total investments ........ $373,969,766 100.0% $360,583,975 100.0%
============ ======= ============ =======
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, 1996.
<PAGE>
Securities Securities
held-to-maturity available-for-sale
(at amortized cost) (at fair value)
--------------------- ---------------------
Amount Percent Amount Percent
------------ ------- ------------ -------
Rating(1)
Aaa ..................... $188,385,721 100.0% $ 36,918,374 24.6%
Aa ...................... - - 62,369,633 41.6
A ....................... - - 49,374,158 32.9
Baa ..................... - - 874,604 .6
Ba ...................... - - 501,875 .3
------------ ------- ------------ -------
Total fixed maturities $188,385,721 100.0% $150,038,644 100.0%
============ ======= ============ =======
(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 fair value of fixed maturity securities
at December 31, 1996, 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 fair
cost value
------------ ------------
Securities held-to-maturity:
Due in one year or less ................... $ 17,979,237 $ 18,161,080
Due after one year through five years ..... 63,568,520 65,932,577
Due after five years through ten years .... 57,245,134 59,680,950
Due after ten years ....................... 5,470,812 5,638,350
Mortgage-backed securities ................ 44,122,018 45,242,299
------------ ------------
Totals .................................. $188,385,721 $194,655,256
============ ============
Securities available-for-sale:
Due in one year or less ................... $ 5,897,516 $ 5,906,146
Due after one year through five years ..... 52,339,833 52,669,538
Due after five years through ten years .... 48,196,941 49,721,511
Due after ten years ....................... 40,359,868 41,741,449
------------ ------------
Totals .................................. $146,794,158 $150,038,644
============ ============
The mortgage-backed securities shown in the above table include
$26,642,980 of securities issued by government corporations and agencies and
$17,479,038 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.
<PAGE>
Investment results of the Company for the periods indicated are shown in
the following table:
Year ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Average invested assets (1) ........ $367,276,871 $349,036,057 $319,475,663
Investment income (2) .............. 23,907,599 23,173,794 20,929,680
Average yield ...................... 6.51% 6.64% 6.55%
Realized investment gains .......... $ 1,890,923 $ 1,043,730 $ 519,567
(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 15 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 insurance
subsidiary and one of the property and casualty insurance subsidiaries, which
have 1,612, 12 and 67 employees, respectively. The property and casualty
insurance subsidiaries share the costs associated with the pooling agreement in
accordance with their pool participation percentages. See "Property and
Casualty Insurance - Pooling Agreement."
REGULATION
- ----------
The Company's insurance subsidiaries are subject to extensive regulation
and supervision by their home states, as well as those in which they do
business. The purpose of such regulation and supervision is primarily to
provide safeguards for policyholders rather than to protect the interests of
stockholders. The insurance laws of the various states establish regulatory
agencies with broad administrative powers, including the power to grant or
revoke operating licenses and to regulate trade practices, investments, premium
rates, deposits of securities, the form and content of financial statements and
insurance policies, accounting practices and the maintenance of specified
reserves and capital for the protection of policyholders.
Premium rate regulation varies greatly among jurisdictions and lines of
insurance. In most states in which the Company's subsidiaries write insurance,
premium rates for their lines of insurance are subject to either prior approval
or limited review upon implementation. States require rates for property and
casualty insurance that are adequate, not excessive, and not unfairly
discriminatory.
The Company's insurance subsidiaries are required to file detailed annual
reports with the appropriate regulatory agency in each state where they do
business based on applicable statutory regulations, which differ from generally
accepted accounting principles. Their businesses and accounts are subject to
examination by such agencies at any time. Since EMC Insurance Group Inc. and
Employers Mutual are domiciled in Iowa, the State of Iowa exercises principal
regulatory supervision, and Iowa law requires periodic examination. The
Company's insurance subsidiaries are subject to examination by state insurance
departments on a periodic basis as applicable law requires.
State laws governing insurance holding companies also impose standards on
certain transactions with related companies, which include, among other
requirements, that all transactions be fair and reasonable and that an
insurer's surplus as regards policyholders be reasonable and adequate in
relation to its liabilities. Under Iowa law, dividends or distributions made
by registered insurers are restricted in amount and may be subject to approval
from the Iowa Commissioner of Insurance. "Extraordinary" dividends or
distributions are subject to prior approval and are defined as dividends or
distributions which exceed the greater of 10 percent of statutory surplus as
regards policyholders as of the preceding December 31, or net income of the
preceding calendar year on a statutory basis. Both Illinois and North Dakota
impose restrictions which are similar to those of Iowa on the payment of
dividends and distributions. At December 31, 1996, $15,548,160 was available
for distribution in 1997 to EMC Insurance Group Inc. without prior approval.
See note 6 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 $34,456,
($2,099)and $128,576 in 1996, 1995 and 1994, 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, 1996 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 $274,000 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 "Market for Common Stock and Related Security Holder Matters" section
from the Company's Annual Report to Stockholders for the year ended December
31, 1996, which is included as Exhibit 13(d) to this Form 10-K, is incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
- ------- ------------------------
The "Selected Consolidated Financial Data" section from the Company's
Annual Report to Stockholders for the year ended December 31, 1996, which is
included as Exhibit 13(a) to this Form 10-K, is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ----------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section from the Company's Annual Report to Stockholders
for the year ended December 31, 1996, which is included as Exhibit 13(b) to
this Form 10-K, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
The consolidated financial statements from the Company's Annual Report to
Stockholders for the year ended December 31, 1996, which is included as Exhibit
13(c) to this Form 10-K, are incorporated herein by reference.
<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 20, 1997, 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
and Treasurer of both organizations since
1996. 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 by Employers
Mutual since 1985.
Fred A. Schiek 62 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.
John D. Isenhart 59 Senior Vice President of the Company since
February 1997 and of Employers Mutual since
1992. He has been employed by Employers
Mutual since 1963.
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.
Raymond W. Davis 51 Vice President of the Company and Employers
Mutual since 1985. He has been employed by
Employers Mutual since 1979.
Ronald W. Jean 48 Vice President of the Company since February
1997 and Employers Mutual since 1981. He has
been employed by Employers Mutual since 1984.
<PAGE>
Donald D. Klemme 51 Vice President and Secretary of the Company
since 1996. Vice President of Employers
Mutual since 1987. He has been employed by
Employers Mutual since 1972.
David O. Narigon 44 Vice President of the Company and of Employers
Mutual since 1989. He has been employed by
Employers Mutual since 1983.
Mark E. Reese 39 Vice President of the Company since 1996
and Controller of the Company and Employers
Mutual since 1995. He has been employed by
Employers Mutual since 1984.
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 20, 1997, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- ---------------------------------------------------------------
See the information under the captions "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Company's
Proxy Statement in connection with its Annual Meeting to be held on May 20,
1997, 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 20, 1997, 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.
Page
------
1. Financial Statements
Independent Auditor's Report ................................ 13*
Consolidated Balance Sheets, December 31, 1996 and 1995 ..... 26-27*
Consolidated Statements of Income for the Years ended
December 31, 1996, 1995 and 1994 ......................... 28*
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 1996, 1995 and 1994 ............. 29*
Consolidated Statements of Cash Flows for the Years ended
December 31, 1996, 1995 and 1994 ......................... 30-31*
Notes to Consolidated Financial Statements .................. 32-54*
Form 10-K
2. Schedules Page
------
Independent Auditor's Report on Schedules ................... 36
Schedule I - Summary of Investments ....................... 37
Schedule II - Condensed Financial Information of Registrant 38
Schedule III - Supplementary Insurance Information .......... 41
Schedule IV - Reinsurance .................................. 42
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations ..... 43
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.
* Refers to the respective page of EMC Insurance Group Inc.'s 1996
Annual Report to Stockholders. The Consolidated Financial Statements
and Independent Auditor's Report, which are included as Exhibit
13(c), are incorporated by reference. With the exception of the
portions of such Annual Report specifically incorporated by reference
in this Item and Items 5, 6, 7 and 8, such Annual Report shall not be
deemed filed as part of this Form 10-K or otherwise subject to the
liabilities of Section 18 of the Securities Exchange Act of 1934.
3. Management contracts and compensatory plan arrangements
Exhibit 10(b). Management Incentive Compensation Plan.
Exhibit 10(d). Employers Mutual Casualty Company 1982 Incentive
Stock Option Plan, as amended.
Exhibit 10(f). Deferred Bonus Compensation Plans.
Exhibit 10(g). EMC Reinsurance Company Executive Bonus Program.
Exhibit 10(i). Employers Mutual Casualty Company Excess Retirement
Benefit Agreement.
Exhibit 10(k). Employers Mutual Casualty Company 1993 Employee
Stock Purchase Plan.
Exhibit 10(l). 1993 Employers Mutual Casualty Company Incentive
Stock Option Plan.
Exhibit 10(m). Employers Mutual Casualty Company Non-Employee
Director Stock Option Plan.
Exhibit 10(n). Employers Mutual Casualty Company Supplemental
Executive Retirement Plan.
(b) Reports on Form 8-K.
None.
<PAGE>
(c) Exhibits.
3. Articles of incorporation and bylaws:
(a) Articles of Incorporation of the Company, as amended.
(Incorporated by reference to the Company's Form 10-K
for the calendar year ended December 31, 1988.)
(b) Bylaws of the Company, as amended. (Incorporated by
reference to the Company's Form 10-K for the calendar
year ended December 31, 1992.)
10. Material contracts.
(a) Quota Share Reinsurance Contract between Employers Mutual
Casualty Company and EMC Reinsurance Company, as amended.
(Incorporated by reference to the Company's Form 10-K for
the calendar year ended December 31, 1993.)
(b) Management Incentive Compensation Plan. (Incorporated by
reference to the Company's Form 10-K for the calendar year
ended December 31, 1983.)
(c) EMC Insurance Companies reinsurance pooling agreements
between Employers Mutual Casualty Company and certain of its
affiliated companies, as amended. (Incorporated by reference
to the Company's Form 10-K for the calendar year ended
December 31, 1993.)
(d) Employers Mutual Casualty Company 1982 Incentive Stock Option
Plan, as amended. (Incorporated by reference to the Company's
Form 10-K for the calendar year ended December 31, 1986.)
(e) Excess of loss reinsurance contract between Employers Mutual
Casualty Company and Farm and City Insurance Company.
(Incorporated by reference to the Company's Form 10-K for the
calendar year ended December 31, 1985.)
(f) Deferred Bonus Compensation Plans. (Incorporated by reference
to the Company's Form 10-K for the calendar year ended December
31, 1986.)
(g) EMC Reinsurance Company Executive Bonus Program. (Incorporated
by reference to the Company's Form 10-K for the calendar year
ended December 31, 1989.)
(h) EMC Insurance Group Inc. Amended and Restated Dividend
Reinvestment and Common Stock Purchase Plan. (Incorporated by
reference to Registration No. 33-34499.)
(i) Employers Mutual Casualty Company Excess Retirement Benefit
Agreement. (Incorporated by reference to the Company's Form
10-K for the calendar year ended December 31, 1989.)
(j) Aggregate Catastrophe Excess of Loss Retrocession Agreement
between EMC Reinsurance Company and Employers Mutual Casualty
Company. (Incorporated by reference to the Company's Form
10-K for the calendar year ended December 31, 1995.)
(k) Employers Mutual Casualty Company 1993 Employee Stock Purchase
Plan. (Incorporated by reference to Registration No. 33-49335.)
<PAGE>
(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. (Incorporated by reference to the Company's
Form 10-K for the calendar year ended December 31, 1995.)
13. Annual Report to Security Holders.
(a) Selected Financial Data from the Company's 1996 Annual Report to
Stockholders.
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations from the Company's 1996 Annual Report to
Stockholders.
(c) Consolidated Financial Statements from the Company's 1996
Annual Report to Stockholders.
(d) Market for Common Stock and Related Security Holder Matters from
the Company's 1996 Annual Report to Stockholders.
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 20, 1997.
EMC INSURANCE GROUP INC.
/s/ Mark E. Reese
--------------------------------------
Mark E. Reese
Vice President - Controller
(Principal financial and accounting 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 20, 1997.
/s/ Mark E. Reese
--------------------------------------
George C. Carpenter III*
Director
/s/ Mark E. Reese
--------------------------------------
E. H. Creese*
Director
/s/ Mark E. Reese
--------------------------------------
David J. Fisher*
Director
/s/ Mark E. Reese
--------------------------------------
Bruce G. Kelley*
President, Treasurer and Chief Executive Officer
/s/ Mark E. Reese
--------------------------------------
George W. Kochheiser*
Chairman of the Board
/s/ Mark E. Reese
--------------------------------------
Raymond A. Michel*
Director
/s/ Mark E. Reese
--------------------------------------
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 26, 1997, we reported on the consolidated balance
sheets of EMC Insurance Group Inc. and Subsidiaries as of December 31, 1996
and 1995, 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, 1996, 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.
/s/ KPMG Peat Marwick LLP
Des Moines, Iowa
February 26, 1997
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule I - Summary of Investments -
Other Than Investments in Related Parties
December 31, 1996
Amount at
which shown
Fair in the
Type of investment Cost value balance sheet
------------------ ------------ ------------ ------------
Securities held-to-maturity:
Fixed maturities:
United States Government
and government agencies
and authorities ............... $113,288,092 $118,587,957 $113,288,092
States, municipalities and
political subdivisions ........ 30,975,611 30,825,001 30,975,611
Mortgage - backed securities .... 44,122,018 45,242,298 44,122,018
------------ ------------ ------------
Total fixed maturity securities 188,385,721 194,655,256 188,385,721
------------ ------------ ------------
Securities available-for-sale:
Fixed maturities:
States, municipalities and
political subdivisions ........ 114,538,500 117,525,919 117,525,919
Foreign governments ............. 2,573,101 2,588,599 2,588,599
Public utilities ................ 8,970,242 8,945,583 8,945,583
Corporate securities ............ 20,023,965 20,287,932 20,287,932
Redeemable preferred stocks ..... 688,350 690,611 690,611
------------ ------------ ------------
Total fixed maturity securities 146,794,158 150,038,644 150,038,644
Equity securities:
Common stock mutual funds ....... 15,963,269 18,623,166 18,623,166
Non-redeemable preferred stocks 5,273,012 5,417,215 5,417,215
------------ ------------ ------------
Total equity securities ....... 21,236,281 24,040,381 24,040,381
Short-term investments .............. 17,553,606 17,553,606 17,553,606
------------ ------------ ------------
Total investments ....... $373,969,766 $386,287,887 $380,018,352
============ ============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31,
--------------------------
1996 1995
------------ ------------
ASSETS
- ------
Investment in common stock of
subsidiaries (equity method) .................. $141,767,346 $130,150,418
Fixed maturity securities held-to-maturity,
at amortized cost ............................. 4,488,040 4,003,016
Short-term investments .......................... 2,323,602 2,688,128
Cash ............................................ 180,917 19,536
Accrued investment income ....................... 74,259 66,031
Accounts receivable ............................. 30,234 106,398
Indebtedness of related party ................... 14,375 -
------------ ------------
Total assets ............................... $148,878,773 $137,033,527
============ ============
LIABILITIES
- -----------
Accounts payable ................................ $ 112,169 $ 119,558
Income taxes payable ............................ 37,000 24,000
Indebtedness to related party ................... - 1,211
Deferred tax liability .......................... 576 -
------------ ------------
Total liabilities .......................... 149,745 144,769
------------ ------------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 11,084,461 shares
in 1996 and 10,821,978 shares in 1995 ......... 11,084,461 10,821,978
Additional paid-in capital ...................... 62,762,613 59,787,926
Retained earnings ............................... 74,881,954 66,379,275
Treasury stock, at cost (0 shares in 1996 and
7,585 shares in 1995) ......................... - (100,421)
------------ ------------
Total stockholders' equity ................. 148,729,028 136,888,758
------------ ------------
Total liabilities and stockholders' equity $148,878,773 $137,033,527
============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Condensed Statements of Income
Years ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Equity in undistributed earnings ...... $11,914,842 $13,123,772 $10,464,926
Dividends received from
consolidated subsidiaries ........... 3,060,026 4,200,019 3,068,019
Investment income ..................... 406,952 357,408 236,519
Loss on sale of stock ................. - - (5,000)
----------- ----------- -----------
15,381,820 17,681,199 13,764,464
Operating expenses .................... 313,087 307,713 315,784
----------- ----------- -----------
Income from operations before
income taxes (benefit) ........... 15,068,733 17,373,486 13,448,680
Income taxes (benefit) ................ 34,569 24,658 (57,047)
----------- ----------- -----------
Net income............... 15,034,164 17,348,828 13,505,727
=========== =========== ===========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Condensed Statements of Cash Flows
Years ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Net cash provided by
operating activities ................ $ 3,178,773 $ 4,269,852 $ 2,963,071
----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed maturity
securities held-to-maturity ....... (485,938) (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 sales (purchases) of short-term
investments ...................... 364,526 (515,869) 2,613,433
Sale of equity securities
available-for-sale ............... - - 500,000
----------- ----------- -----------
Net cash (used in) provided by
investing activities ........... (121,412) (1,518,369) 110,464
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock ........... 3,467,468 2,859,364 2,403,285
Dividends paid to stockholders ..... (6,233,571) (5,662,346) (5,422,164)
(Purchases) sales of treasury
stock, net ....................... (129,877) 9,646 (28,681)
----------- ----------- -----------
Net cash used in financing
activities ..................... (2,895,980) (2,793,336) (3,047,560)
----------- ----------- -----------
Net increase (decrease) in cash ....... 161,381 (41,853) 25,975
Cash at beginning of year ............. 19,536 61,389 35,414
----------- ----------- -----------
Cash at end of year ................... $ 180,917 $ 19,536 $ 61,389
=========== =========== ===========
Income taxes paid ..................... $ 20,993 $ 31,342 $ 62,433
<PAGE>
<TABLE>
<CAPTION>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information
For Years Ended December 31, 1996, 1995 and 1994
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, 1996:
Property and casualty insurance $ 7,335,953 $142,948,679 $40,278,119 $119,282,389 $15,828,102
Reinsurance ................... 1,482,796 51,816,998 6,739,983 36,674,831 6,436,095
Nonstandard risk automobile
insurance ................... 203,114 7,737,309 890,852 9,233,446 1,111,896
Excess and surplus lines
insurance agency ............ - - - - 124,554
Parent company ................ - - - - 406,952
----------- ------------ ----------- ------------ -----------
Consolidated ............. $ 9,021,863 $202,502,986 $47,908,954 $165,190,666 $23,907,599
=========== ============ =========== ============ ===========
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
=========== ============ =========== ============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information
For Years Ended December 31, 1996, 1995 and 1994
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, 1996:
Property and casualty insurance $ 82,034,078 $ 22,505,659 $ 15,399,752 $119,640,828
Reinsurance ................... 25,180,022 7,951,458 3,506,366 35,551,617
Nonstandard risk automobile
insurance ................... 8,153,115 2,097,616 541,985 9,193,521
Excess and surplus lines
insurance agency ............ - - (333,880) -
Parent company ................ - - 313,087 -
----------- ------------ ------------ ------------
Consolidated ............. $115,367,215 $ 32,554,733 $ 19,427,310 $164,385,966
============ ============ ============ ============
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 $163,489,259
============ ============ ============ ============
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 $166,943,155
============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule IV - Reinsurance
For years ended December 31, 1996, 1995 and 1994
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, 1996:
Earned premiums:
Consolidated property and casualty
insurance .......................... $154,859,778 $154,345,622 $164,676,510 $165,190,666 99.7%
============ ============ ============ ============ ==========
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%
============ ============ ============ ============ ==========
</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, 1996, 1995 and 1994
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, 1996: $ 9,021,863 $202,502,986 $ -0- $47,908,954 $165,190,666 $23,376,093
=========== ============ ======== =========== ============ ===========
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
=========== ============ ======== =========== ============ ===========
</TABLE>
<PAGE>
<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, 1996: $131,375,234 ($16,008,019) $ 32,554,733 $119,856,427 $164,385,966
============ =========== ============ ============ ============
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
============ =========== ============ ============ ============
</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
- ------ ----
13(a) Selected Financial Data. Included in
direct transmission
13(b) Management's Discussion and Analysis Included in
of Financial Condition and Results direct transmission
of Operations.
13(c) Financial Statements and Supplementary Included in
Data. direct transmission
13(d) Market for Registrant's Common Equity Included in
and Related Stockholder Matters. 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>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA. EXHIBIT 13(a)
- ------------------------ -------------
Year ended December 31,
--------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
Income Statement Data
Insurance premiums earned ... $165,191 $162,266 $164,829 $156,438 $147,410 $113,419 $101,323 $ 91,728 $ 88,598 $ 95,531 $ 98,456
Investment income, net ...... 23,907 23,174 20,930 20,780 21,540 20,202 19,884 19,309 16,623 13,632 13,221
Realized investment gains ... 1,891 1,043 520 684 384 65 48 257 36 177 68
Other income ................ 274 344 434 259 - - - - - - 11
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total revenues ......... 191,263 186,827 186,713 178,161 169,334 133,686 121,255 111,294 105,257 109,340 111,756
Losses and expenses ......... 170,594 162,511 168,036 169,142 168,359 123,254 110,415 102,517 89,795 96,612 101,097
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes .. 20,669 24,316 18,677 9,019 975 10,432 10,840 8,777 15,462 12,728 10,659
Income taxes ................ 5,635 6,967 5,171 1,885 759 3,124 2,894 2,055 3,920 2,271 3,917
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income from:
Continuing operations .... 15,034 17,349 13,506 7,134 216 7,308 7,946 6,722 11,542 10,457 6,742
Discontinued operations .. - - - - - 1,853 319 274 263 225 216
Accounting changes ....... - - - 2,621 - - - - - - -
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income ............ $ 15,034 $ 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 .. $ 1.37 $ 1.62 $ 1.29 $ .70 $ .02 $ .73 $ .80 $ .71 $ 1.29 $ 1.23 $ .80
Discontinued operations - - - - - .18 .03 .03 .03 .03 .03
Accounting changes ..... - - - .26 - - - - - - -
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total ................. $ 1.37 $ 1.62 $ 1.29 $ .96 $ .02 $ .91 $ .83 $ .74 $ 1.32 $ 1.26 $ .83
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Premiums earned by segment:
Property and casualty ..... $119,282 $116,439 $115,412 $109,585 $109,139 $ 78,413 $ 70,597 $ 62,517 $ 54,178 $ 51,534 $ 48,294
Reinsurance ............... 36,675 35,826 37,256 33,324 26,615 25,009 20,696 18,621 21,417 29,808 40,068
Nonstandard risk automobile 9,234 10,001 12,161 13,529 11,656 9,997 10,030 10,590 13,003 14,189 10,094
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total ..................$165,191 $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 ................ $430,328 $412,881 $387,370 $368,936 $372,807 $311,001 $296,126 $284,396 $266,812 $235,435 $204,187
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Stockholders' equity ........ $148,729 $136,889 $116,727 $109,634 $100,911 $105,144 $100,615 $ 95,911 $ 89,604 $ 78,240 $ 70,616
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA.(continued) EXHIBIT 13(a)
- ----------------------------------- -------------
Year ended December 31,
--------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
Other Data
Average return on equity .... 10.50% 13.7% 11.9% 9.3% .2% 8.9% 8.4% 7.5% 14.1% 14.4% 9.8%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Book value per share ........ $ 13.42 $ 12.66 $ 11.03 $ 10.63 $ 9.98 $ 10.47 $ 10.04 $ 9.82 $ 9.65 $ 9.01 $ 8.39
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Dividends paid per share .... $ .57 $ .53 $ .52 $ .52 $ .52 $ .52 $ .52 $ .52 $ .49 $ .48 $ .48
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Property and casualty segment
pool percentage ........... 22% 22% 22% 22% 22% 17% 17% 17% 17% 17% 17%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Reinsurance subsidiary quota
share percentage .......... 95% 95% 95% 95% 95% 95% 95% 95% 95% 75% 75%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Closing stock price ......... $ 12 $ 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) 6.51% 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........ 4.8% 3.9% 5.5% 5.5% 6.1% 5.5% 7.6% 6.5% 6.3% 6.4% 4.8%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Common shares outstanding ... 11,084 10,814 10,577 10,317 10,112 10,046 10,015 9,762 9,287 8,684 8,419
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Statutory combined ratio .... 101.7% 99.6% 101.3% 106.3% 113.9% 109.2% 109.5% 112.7% 98.7% 99.8% 102.5%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 13(b) 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 72.2 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 spread the risk of an exposure
insured by any of the pool participants 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.
On December 9, 1996, Employers Mutual announced its intention to affiliate
with Hamilton Mutual Insurance Company of Cincinnati, Ohio (Hamilton Mutual).
This affiliation is subject to approval by Hamilton Mutual's policyholders and
the Ohio Insurance Department. Hamilton Mutual will participate in the pooling
agreement effective January 1, 1997. The addition of Hamilton Mutual will have
no impact on the Company's aggregate participation in the pooling agreement.
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, subject to a maximum loss of $1,000,000 per event.
The reinsurance subsidiary does not reinsure any of Employers Mutual's direct
insurance business, nor any "involuntary" facility or pool business that
Employers Mutual assumes pursuant to state law. In addition, the reinsurance
subsidiary is not liable for credit risk in connection with the insolvency of
any reinsurers of Employers Mutual. Effective January 1, 1997, the reinsurance
subsidiary's quota share participation was increased from 95 percent to 100
percent and the cap on losses assumed per event was increased from $1,000,000
to $1,500,000.
<PAGE>
The Company's nonstandard risk automobile insurance subsidiary specializes
in insuring private passenger automobile risks that are found to be
unacceptable in the standard automobile insurance market.
The excess and surplus lines insurance agency provides insurance agents
access to the excess and surplus lines markets and also functions as managing
underwriter for such lines for Employers Mutual and several of the pool
members.
CONSOLIDATED RESULTS OF OPERATIONS
Operating results for the three years ended December 31, 1996 are as follows:
($ in thousands) 1996 1995 1994
-------- -------- --------
Premiums earned .......................... $165,191 $162,266 $164,829
Losses and settlement expenses ........... 115,367 108,152 116,944
Other expenses ........................... 55,227 54,359 51,092
-------- -------- --------
Underwriting loss ........................ (5,403) (245) (3,207)
Net investment income .................... 23,907 23,174 20,930
Realized investment gains ................ 1,891 1,043 520
Other income ............................. 274 344 434
-------- -------- --------
Operating income before income taxes ..... $ 20,669 $ 24,316 $ 18,677
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ..... $131,375 $123,877 $123,344
Decrease in provision for insured
events of prior years ................ (16,008) (15,725) (6,400)
-------- -------- --------
Total losses and settlement expenses $115,367 $108,152 $116,944
======== ======== ========
Catastrophe and storm losses ............. $ 9,192 $ 6,603 $ 6,343
======== ======== ========
Operating income before income taxes declined in 1996 after increasing
substantially in 1995 and 1994. The decline in 1996 operating results is
primarily attributable to the property and casualty insurance subsidiaries,
which experienced an unusually large number of commercial property losses.
Operating results for the reinsurance subsidiary declined slightly in 1996 but
continued to be well above the results reported in 1994. Results for the
nonstandard risk automobile insurance subsidiary improved but remained
unprofitable for the second consecutive year. 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.
Operating results for 1996 reflect a benefit of $2,078,000 related to a
reduction in Incurred But Not Reported (IBNR) reserves in the property and
casualty insurance subsidiaries that was made during the fourth quarter. This
reduction in IBNR reserves was based upon the results of an actuarial review of
overall reserve adequacy that was completed during 1996. The property and
casualty insurance subsidiaries have historically experienced favorable
development in their reserves and current reserving practices have not been
relaxed.
Premium income increased moderately in 1996 after falling slightly in
1995. Both the property and casualty insurance subsidiaries and the
reinsurance subsidiary reported an increase in premium income in 1996 while the
nonstandard risk automobile insurance subsidiary experienced a decline. 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.
<PAGE>
Losses and settlement expenses increased substantially in 1996 despite the
benefit of a second consecutive year of an increased level of favorable
development in the provision for insured events of prior years. This increase
in losses and settlement expenses reflects an unusually large number of
commercial property losses experienced by the property and casualty insurance
subsidiaries and a substantial increase in catastrophe losses in the
reinsurance subsidiary. Losses and settlement expenses declined in 1995 as a
result of a large increase in 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
benefitted from state reform measures in workers' compensation insurance and
various cost control functions implemented by Employers Mutual to minimize
losses.
Other expenses have increased steadily over the last three years. These
increases are primarily attributable to higher commission rates associated with
property business that is being written by the property and casualty insurance
subsidiaries and various cost control functions that have been implemented to
control losses.
Investment income continued to increase in 1996, but at a more moderate
rate than experienced in 1995. During 1996 the Company experienced a large
increase in loss payments associated with commercial property claims, which
resulted in less rapid growth in the invested asset balance.
Realized gains on investments increased significantly in 1996 and 1995,
reflecting profits recognized on the sale of mutual funds invested in equity
securities. The amount for 1994 does not include any activity in mutual funds
and is primarily composed of calls and prepayments on fixed maturity
securities.
SEGMENT RESULTS
Property and Casualty Insurance
Operating results for the three years ended December 31, 1996 are as follows:
($ in thousands) 1996 1995 1994
-------- -------- --------
Premiums earned .......................... $119,282 $116,439 $115,412
Losses and settlement expenses ........... 82,034 74,926 77,872
Other expenses ........................... 41,150 40,030 36,606
-------- -------- --------
Underwriting (loss) gain ................. (3,902) 1,483 934
Net investment income .................... 15,828 15,428 14,080
Realized investment gains ................ 1,790 1,027 334
-------- -------- --------
Operating income before income taxes ..... $ 13,716 $ 17,938 $ 15,348
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ..... $ 93,965 $ 87,411 $ 84,204
Decrease in provision for insured
events of prior years ................ (11,931) (12,485) (6,332)
-------- -------- --------
Total losses and settlement expenses $ 82,034 $ 74,926 $ 77,872
======== ======== ========
Catastrophe and storm losses ............. $ 4,935 $ 5,671 $ 4,919
======== ======== ========
<PAGE>
Premium income has increased steadily over the last three years, but has
been limited by intense competition in the property and casualty insurance
industry. The property and casualty insurance subsidiaries continue to
emphasize property insurance through marketing programs targeted at commercial
insureds. Premium production for workers' compensation insurance was hampered
in 1996 by large rate decreases in the states of Iowa, Illinois, Kansas and
Nebraska, where a significant portion of the Company's workers' compensation
business is produced. There has also been a significant decline in the
mandatory assigned risk business over the last several years; however, this
decline is looked at favorably as losses associated with this type of business
are generally higher than losses associated with controlled business. During
1996, most of the Company's premium growth came from areas outside of the
Midwest. This is due to intense competition in the Midwest for properly priced
business and the workers' compensation rate decreases mentioned above. Rate
adequacy continues to be pressured in this competitive environment. The
Company remains committed to utilizing stringent underwriting procedures and is
only writing business in those areas where there is a potential for profit.
Premium growth for the existing pool members is not expected to increase
significantly in 1997 as the market conditions that have limited production
over the last several years are not expected to change; however, the pool is
expected to increase in size by approximately 7 percent with the addition of
Hamilton Mutual on January 1, 1997.
Underwriting results declined substantially in 1996 after improving in
1995 and 1994. This decline is primarily due to an unusually large number of
severe commercial property losses as well as the workers' compensation rate
decreases previously discussed. Underwriting results deteriorated in 1996
despite a decline in catastrophe and storm losses and the benefit of a second
consecutive year of an increased level of favorable development of prior
accident year loss estimates. As noted previously, results for 1996 also
reflect a benefit of $2,078,000 related to a reduction in IBNR reserves. The
property and casualty insurance subsidiaries have historically experienced
favorable development in their reserves and current reserving practices have
not been relaxed; however, the level of favorable development experienced in
1996 and 1995 is not expected to continue. Other expenses have increased over
the last three years primarily due to higher commission rates on the growing
book of property business as well as additional expenses associated with the
various cost control functions that have been implemented to control losses.
Investment income has grown steadily over the last three years. The rate
of growth experienced in 1996 was less than that experienced in 1995 due to a
smaller increase in the invested asset balance. Growth in the invested asset
balance was negatively impacted by a large increase in loss payments associated
with the commercial property claims previously discussed.
<PAGE>
Reinsurance
Operating results for the three years ended December 31, 1996 are as follows:
($ in thousands) 1996 1995 1994
-------- -------- --------
Premiums earned ............................ $ 36,675 $ 35,826 $ 37,256
Losses and settlement expenses ............. 25,180 23,744 30,565
Other expenses ............................. 11,457 11,584 11,408
-------- -------- --------
Underwriting gain (loss) ................... 38 498 (4,717)
Net investment income ...................... 6,436 6,068 5,354
Realized investment gains .................. 73 13 116
Other income ............................... 274 344 434
-------- -------- --------
Operating income before income taxes ....... $ 6,821 $ 6,923 $ 1,187
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ....... $ 28,877 $ 26,668 $ 29,270
(Decrease) increase in provision for
insured events of prior years .......... (3,697) (2,924) 1,295
-------- -------- --------
Total losses and settlement expenses $ 25,180 $ 23,744 $ 30,565
======== ======== ========
Catastrophe losses ......................... $ 4,257 $ 932 $ 1,424
======== ======== ========
Premium income increased in 1996 despite a slight decline in production
from 1995. This increase is primarily attributable to a change in the mix of
business from pro rata reinsurance to excess of loss reinsurance, which
generally earns premiums more rapidly. The decrease in premium income in 1995
is primarily due to the cancellation of four large national pro rata treaties
that had experienced poor underwriting results for several years. The
reinsurance subsidiary continues to emphasize profitability over premium volume
and will only write business if there is a potential for profit.
The reinsurance market continues to have excess capacity, which has led to
increased competition. The reinsurance subsidiary is addressing this by
accepting larger lines on desirable programs and strengthening its
relationships with reinsurance intermediaries. Management expects premium
volume to continue to grow moderately in 1997. In addition, premium volume for
1997 will benefit from an increase in the quota share agreement with Employers
Mutual from 95 percent to 100 percent.
Underwriting results for 1996 declined slightly from 1995 but remained
well ahead of the results reported in 1994. Results for 1996 benefitted from
an increase in favorable development in the provision for insured events of
prior years; however, this increase was more than offset by an increase in
catastrophe losses. The reinsurance subsidiary has re-underwritten its book of
business over the last several years and continues to emphasize profitability
over premium volume.
Investment income has grown moderately over the last three years. This
increase is primarily due to a steady increase in the invested asset base.
<PAGE>
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 $1,893,000,
$1,913,000 and $2,095,000 in 1996, 1995 and 1994, 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 $1,316,000,
$1,984,000 and $2,836,000 in 1996, 1995 and 1994, respectively. Losses
retained by Employers Mutual for the three years ended 1996, 1995 and 1994
amounted to $167,000, $1,103,000 and $7,020,000, respectively. As previously
noted, the cap on losses assumed per event was increased to $1,500,000
effective January 1, 1997.
The reinsurance subsidiary had an aggregate excess of loss reinsurance
treaty with Employers Mutual which provided protection from a large
accumulation of retentions resulting from multiple catastrophes in any one
year. The coverage provided was $2,000,000, excess of $3,000,000 ($2,500,000
in 1994) aggregate loss retained, excess of $200,000 per event. Maximum
recovery was limited to $2,000,000 ($4,000,000 in 1994) per accident year. The
reinsurance subsidiary had no recoveries under this treaty during the last
three years. Premiums paid to Employers Mutual amounted to $500,000, $500,000
and $558,000 in 1996, 1995 and 1994, respectively. This reinsurance treaty was
canceled effective January 1, 1997.
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 $687,000. There was no income effect from these
commutations.
Nonstandard Risk Automobile Insurance
Operating results for the three years ended December 31, 1996 are as follows:
($ in thousands) 1996 1995 1994
-------- -------- --------
Premiums earned ............................ $ 9,234 $ 10,001 $ 12,161
Losses and settlement expenses ............. 8,153 9,482 8,507
Other expenses ............................. 2,640 2,775 3,160
-------- -------- --------
Underwriting (loss) gain ................... (1,559) (2,256) 494
Net investment income ...................... 1,111 1,175 1,152
Realized investment gains .................. 28 3 75
-------- -------- --------
Operating (loss) income before income taxes $ (420) $ (1,078) $ 1,721
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ....... $ 8,533 $ 9,798 $ 9,870
Decrease in provision for insured
events of prior years .................. (380) (316) (1,363)
-------- -------- --------
Total losses and settlement expenses $ 8,153 $ 9,482 $ 8,507
======== ======== ========
Premium income has declined steadily over the last three years due to
intense competition for nonstandard insurance business from both the standard
and the nonstandard markets. The company is responding to this decline in
production by appointing new agents and improving marketing and business
relationships with its existing agency force. During 1996 the company obtained
its license and began writing insurance business in the state of Missouri.
Production in this new market was very limited in 1996 but is expected to grow
during 1997. Rate increases were implemented in the states of Iowa and South
Dakota and were applied for in the state of Nebraska in late 1996.
<PAGE>
Underwriting results have declined significantly during the last two
years, primarily due to the intense competition for nonstandard business.
Companies within the standard market are 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. Results for 1996 improved over 1995, but
remained unprofitable. This improvement is primarily related to a decline in
both the frequency and severity of losses from the very high levels experienced
in 1995. 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.
Excess and Surplus Lines Insurance Management Agency
Operating income before income taxes has declined over the last three
years, totaling $458,000, $483,000 and $505,000 for 1996, 1995 and 1994,
respectively. These declines primarily reflect a reduction in commission
income caused by increased competition for excess and surplus lines business.
Due to the intense competition for property and casualty insurance business, a
growing number of insurance carriers are pursuing opportunities in the excess
and surplus lines market.
Parent Company
Operating income before income taxes increased to $94,000 in 1996 from
$50,000 in 1995 and a loss of $84,000 in 1994. The improvement in 1996 and
1995 is primarily due to additional investment income that resulted from an
increase in the invested asset balance.
LOSS AND SETTLEMENT EXPENSE RESERVES
Loss and settlement expense reserves are the Company's largest liability.
Management continually reviews these reserves using a variety of statistical
and actuarial techniques to analyze claim costs, frequency and severity data,
and social and economic factors. Significant periods of time may elapse
between the occurrence of an insured loss, the reporting of the loss and the
settlement of the loss. During the loss settlement period, additional facts
regarding individual claims become known, and accordingly, it often becomes
necessary to refine and adjust the estimates of liability on a claim. Changes
in reserve estimates are reflected in operating results in the year such
changes are recorded.
Estimating loss and settlement expense reserves for asbestos and
environmental claims 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.
<PAGE>
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 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 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.
Employers Mutual requested and obtained more detailed information from its
ceding reinsurers than had previously been provided. Based on this
information, Employers Mutual allocated a portion of the 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.
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 $2,141,000 at December 31, 1996.
This compares to net unrealized holding gains of $3,472,000 at December 31,
1995 and net unrealized holding losses of $1,317,000 at December 31, 1994.
Since the Company does not actively trade in the bond market, such fluctuations
in the fair 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.
During 1996, the Company increased its equity holdings by investing $5,273,000
in preferred stocks. The overall liquidity position of the Company was not
affected by these investments. Net unrealized holding gains on equity
securities totaled $1,851,000 at December 31, 1996 and $818,000 at December 31,
1995.
<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 1996, the Company generated positive cash flows from operations of
$17,097,000 compared to $24,651,000 in 1995 and $39,006,000 in 1994. The
amount for 1994 included $13,148,000 related to the gross-up of reserve amounts
associated with the National Workers' Compensation Reinsurance Pool.
CAPITAL RESOURCES
As of December 31, 1996, 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, 1996 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 6 of Notes to Consolidated Financial Statements for additional information
regarding dividend restrictions. The Company collected $3,060,000, $3,200,000
and $3,068,000 of dividends from its insurance subsidiaries in 1996, 1995 and
1994, respectively and $1,000,000 from its insurance agency in 1995. The
Company paid cash dividends to stockholders totaling $6,234,000, $5,662,000 and
$5,422,000 in 1996, 1995 and 1994, respectively. For the last four years,
Employers Mutual has received 50 percent of its dividends in common stock under
the Company's dividend reinvestment and common stock purchase plan.
IMPACT OF INFLATION
Inflation has a widespread effect on the Company's results of operations,
primarily through increased losses and settlement expenses. The Company
considers inflation, including social inflation which reflects an increasingly
litigious society and increasing jury awards, when setting reserve amounts.
Premiums are also affected by inflation, although they are often restricted or
delayed by competition and the regulatory rate-setting environment.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996 the Company adopted Statement of Financial
Accounting Standards (SFAS) 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of" and the disclosure
requirements of SFAS 123, "Accounting for Stock-Based Compensation." The
adoption of these standards had no effect on the income of the Company.
<PAGE>
DEVELOPMENTS IN INSURANCE REGULATION
In 1996 the NAIC adopted model legislation governing insurance company
investments. This model investment 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 finalized; however, many complex and
controversial issues are still being addressed at this time. 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, unforeseen losses with respect to loss and
settlement expense reserves for unreported and reported claims, including
asbestos and environmental claims.
<PAGE>
EXHIBIT 13(c) 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 Company's financial statements have been audited by KPMG Peat Marwick
LLP, independent certified public accountants. Management has made available
to KPMG Peat Marwick LLP all of the Corporation's financial records and related
data, as well as the minutes of the shareholders' and Directors' meetings.
Furthermore, management believes that all representations made to KPMG Peat
Marwick LLP during its audit were valid and appropriate. Their report appears
elsewhere in this annual report.
Management of the Company 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 or disposition, and the prevention and detection of fraudulent
financial reporting. 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, 1996,
the Company's system of internal controls was adequate to accomplish the above
objectives.
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/ Bruce G. Kelley /s/ Mark E. Reese
- ------------------------------------ -----------------------------------
Bruce G. Kelley Mark E. Reese
President, Treasurer and Chief Vice President - Controller
Executive 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, 1996 and 1995, 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, 1996.
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, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Des Moines, Iowa
February 26, 1997
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
--------------------------
1996 1995
------------ ------------
ASSETS
Investments (note 9):
Fixed maturities:
Securities held-to-maturity, at amortized cost
(fair value $194,655,256 and $203,312,748) $188,385,721 $191,440,816
Securities available-for-sale, at fair value
(amortized cost $146,794,158 and $137,099,939) 150,038,644 142,360,569
Equity securities available-for-sale, at fair
value (cost $21,236,281 and $14,771,422) ...... 24,040,381 16,010,763
Short-term investments, at cost ................. 17,553,606 17,271,798
------------ ------------
Total investments .......................... 380,018,352 367,083,946
Cash .............................................. 3,500,629 1,198,436
Accrued investment income ......................... 6,567,186 5,749,619
Accounts receivable ............................... 740,736 726,181
Deferred policy acquisition costs ................. 9,021,863 8,714,769
Deferred income taxes (note 10) ................... 10,974,425 11,921,182
Intangible assets, including goodwill, at cost
less accumulated amortization of $1,943,669
and $1,809,156 .................................. 1,614,151 1,748,664
Reinsurance receivables (note 3) .................. 14,735,786 12,916,943
Prepaid reinsurance premiums (note 3) ............. 1,516,972 1,805,881
Other assets ...................................... 1,637,473 1,015,352
------------ ------------
Total assets ............................... $430,327,573 $412,880,973
============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
--------------------------
1996 1995
------------ ------------
LIABILITIES
Losses and settlement expenses (notes 2,3,4 and 5) $202,502,986 $205,422,109
Unearned premiums (notes 2 and 3) ................. 47,908,954 48,767,147
Other policyholders' funds ........................ 3,467,449 3,593,328
Indebtedness to related party (note 2) ............ 7,000,482 428,463
Income taxes payable .............................. 2,942,000 2,538,669
Postretirement benefits (note 12) ................. 4,932,834 4,489,812
Deferred income ................................... 665,550 940,009
Other liabilities ................................. 12,178,290 9,812,678
------------ ------------
Total liabilities .......................... 281,598,545 275,992,215
------------ ------------
STOCKHOLDERS' EQUITY (notes 6,7,9,13 and 14)
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 11,084,461 shares
in 1996 and 10,821,978 shares in 1995 ........... 11,084,461 10,821,978
Additional paid-in capital ........................ 62,762,613 59,787,926
Unrealized holding gains on fixed
maturity securities available-for-sale,
net of tax ...................................... 2,141,361 3,472,016
Unrealized holding gains on equity securities
available-for-sale, net of tax .................. 1,850,706 817,965
Retained earnings ................................. 70,889,887 62,089,294
Treasury stock, at cost (0 shares in 1996 and
and 7,585 shares in 1995) ...................... - (100,421)
------------ ------------
Total stockholders' equity ................. 148,729,028 136,888,758
------------ ------------
Contingent liabilities (notes 3 and 16)
Total liabilities and stockholders' equity $430,327,573 $412,880,973
============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income
Year ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
REVENUES:
Premiums earned (notes 2 and 3) ..... $165,190,666 $162,266,250 $164,829,379
Investment income, net (note 9) ..... 23,907,599 23,173,794 20,929,680
Realized investment gains (note 9) .. 1,890,923 1,043,730 519,567
Other income ........................ 274,459 343,653 433,979
------------ ------------ ------------
191,263,647 186,827,427 186,712,605
------------ ------------ ------------
LOSSES AND EXPENSES:
Losses and settlement
expenses (notes 2,3,4 and 5) ...... 115,367,215 108,152,278 116,944,054
Dividends to policyholders .......... 3,245,036 3,739,533 3,103,788
Amortization of deferred
policy acquisition costs .......... 32,554,733 32,152,616 31,701,789
Other underwriting expenses ......... 19,427,310 18,467,091 16,286,206
------------ ------------ ------------
170,594,294 162,511,518 168,035,837
------------ ------------ ------------
Income before income taxes .... 20,669,353 24,315,909 18,676,768
------------ ------------ ------------
INCOME TAXES (note 10):
Current ........................... 4,534,961 6,907,754 5,265,482
Deferred .......................... 1,100,228 59,327 (94,441)
------------ ------------ ------------
5,635,189 6,967,081 5,171,041
------------ ------------ ------------
Net income .................... $ 15,034,164 $ 17,348,828 $ 13,505,727
============ ============ ============
Earnings per common share ........... $ 1.37 $ 1.62 $ 1.29
============ ============ ============
Average number of shares outstanding 10,936,897 10,685,344 10,431,925
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Year ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Common stock:
Beginning of year .................... $10,821,978 $10,587,629 $10,325,329
Issuance of common stock:
Stock option plans ................. 91,062 102,797 41,694
Dividend reinvestment
plan (note 14(a)) ................ 188,072 131,552 220,606
Retirement of treasury stock ......... (16,651) - -
----------- ----------- -----------
End of year .......................... 11,084,461 10,821,978 10,587,629
----------- ----------- -----------
Additional paid-in capital:
Beginning of year .................... 59,787,926 57,162,911 55,021,926
From issuance of common stock:
Stock option plans ................. 1,105,155 1,092,041 349,390
Dividend reinvestment plan ......... 2,099,436 1,417,808 1,791,595
(Loss) gain on sale of treasury stock (16,257) 115,166 -
Retirement of treasury stock ......... (213,647) - -
----------- ----------- -----------
End of year .......................... 62,762,613 59,787,926 57,162,911
----------- ----------- -----------
Unrealized holding gains (losses) on
fixed maturity securities available-
for-sale, net of tax:
Beginning of year .................. 3,472,016 (1,316,596) 2,068,451
(Losses) gains on revaluation of
fixed maturity securities
available-for-sale, net of
tax (notes 1 and 9) .............. (1,330,655) 4,788,612 (3,385,047)
----------- ----------- -----------
End of year ........................ 2,141,361 3,472,016 (1,316,596)
----------- ----------- -----------
Unrealized holding gains (losses) on
equity securities available-for-sale,
net of tax:
Beginning of year .................. 817,965 - (19,800)
Gains on revaluation of equity
securities available-for-sale, net
of tax (notes 1 and 9) ........... 1,032,741 817,965 19,800
----------- ----------- -----------
End of year ........................ $ 1,850,706 $ 817,965 $ -
----------- ----------- -----------
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity, Continued
Year ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Retained earnings:
Beginning of year ................. $ 62,089,294 $ 50,402,812 $ 42,319,249
Net income ........................ 15,034,164 17,348,828 13,505,727
Dividends on common stock ($.57 per
share in 1996,$.53 in 1995 and
$.52 in 1994):
Cash dividends ................ (4,017,222) (3,653,299) (3,510,555)
Dividends reinvested in shares
of common stock ............. (2,216,349) (2,009,047) (1,911,609)
------------ ------------ ------------
End of year ....................... 70,889,887 62,089,294 50,402,812
------------ ------------ ------------
Treasury stock, at cost:
Beginning of year ................. (100,421) (110,067) (81,386)
Purchase of stock for the treasury (265,499) (653,967) (28,681)
Sale of stock from the treasury ... 135,622 663,613 -
Retirement of treasury stock ...... 230,298 - -
------------ ------------ ------------
End of year ....................... - (100,421) (110,067)
------------ ------------ ------------
Total stockholders' equity ...... $148,729,028 $136,888,758 $116,726,689
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................... $15,034,164 $17,348,828 $13,505,727
----------- ----------- -----------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Losses and settlement expenses ... (2,919,123) 2,240,494 5,372,801
Unearned premiums ................ (858,193) 1,094,577 1,731,514
Other policyholders' funds ....... (125,879) 490,719 247,816
Deferred policy acquisition costs (307,094) (321,134) (694,771)
Indebtedness of related
party .......................... 6,572,019 (508,893) 13,228,868
Accrued investment income ........ (263,435) (188,986) (725,182)
Accrued income taxes:
Current ........................ 403,331 802,669 1,186,000
Deferred ....................... 1,100,228 59,327 (94,441)
Provision for amortization ....... (16,068) (82) 4,101
Realized investment gains ........ (1,890,923) (1,043,730) (519,567)
Postretirement benefits .......... 443,022 403,138 549,225
Reinsurance receivables .......... (1,818,843) 2,018,105 3,542,358
Prepaid reinsurance premiums ..... 288,909 315,152 711,151
Amortization of deferred income .. (274,459) (343,653) (433,979)
Other, net ....................... 1,728,936 2,284,532 706,967
----------- ----------- -----------
2,062,428 7,302,235 24,812,861
Cash provided by the commutation
of outstanding reinsurance
balances by the reinsurance
subsidiary (note 2) ............ - - 686,962
----------- ----------- -----------
Total adjustment ............. 2,062,428 7,302,235 25,499,823
----------- ----------- -----------
Net cash provided by
operating activities ..... $17,096,592 $24,651,063 $39,005,550
----------- ----------- -----------
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity
securities held-to-maturity ..... $(30,412,885) $(46,384,530) $(93,131,676)
Maturities of fixed maturity
securities held-to-maturity ..... 33,576,694 18,257,425 41,099,534
Purchases of fixed maturity
securities available-for-sale ... (30,619,591) (27,866,616) (193,422,946)
Maturities of fixed maturity
securities available-for-sale ... 21,202,597 49,104,032 208,880,152
Purchases of non-redeemable
preferred stock
available-for-sale .............. (5,273,011) - -
Net purchases of mutual funds
invested in equity securities
available-for-sale .............. (90,415) (13,785,451) -
Sales of equity securities
available-for-sale .............. - - 500,000
Net (purchases) sales of short-term
investments ..................... (281,808) (1,242,372) 699,964
------------ ------------ ------------
Net cash used in investing
activities ............... (11,898,419) (21,917,512) (35,374,972)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock .......... 3,467,468 2,859,364 2,403,285
Dividends paid to stockholders .... (6,233,571) (5,662,346) (5,422,164)
(Purchases) sales of treasury
stock, net ...................... (129,877) 9,646 (28,681)
------------ ------------ -----------
Net cash used in financing
activities ............... (2,895,980) (2,793,336) (3,047,560)
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH ..... 2,302,193 (59,785) 583,018
Cash at beginning of year ........... 1,198,436 1,258,221 675,203
------------ ------------ ------------
Cash at end of year ................. $ 3,500,629 $ 1,198,436 $ 1,258,221
============ ============ ============
Income taxes paid ................... $ 4,131,630 $ 6,242,085 $ 3,795,381
Interest paid ....................... 57,938 177,156 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 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.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
PROPERTY AND CASUALTY INSURANCE, REINSURANCE AND NONSTANDARD RISK AUTOMOBILE
INSURANCE OPERATIONS
Premiums are recognized as revenue ratably over the terms of the
respective policies. Unearned premiums are calculated on the daily pro rata
method. Amounts paid for ceded reinsurance premiums are reported as prepaid
reinsurance premiums and amortized over the remaining contract period in
proportion to the amount of insurance protection provided.
Certain costs of acquiring new business, principally commissions, premium
taxes and other underwriting expenses that vary with and are directly related
to the production of business have been deferred. Such deferred 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 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 fair value, with unrealized holding gains and losses reported as a
separate component of stockholders' equity, net of deferred income taxes.
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.
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 fair 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, 1996 and 1995 are
securities on deposit with various regulatory authorities as required by law
amounting to $11,971,889 and $11,971,564, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has no derivative financial instruments subject to the
provisions of SFAS 119, "Disclosure About Derivative Financial Instruments and
Fair Value of Financial Instruments." The carrying values and fair values of
the Company's financial instruments are disclosed in Note 15 - Disclosures
About the Fair Value of Financial Instruments.
<PAGE>
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.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 benefit 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.
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.
TREASURY STOCK
Prior to 1996, repurchased shares of the Company's common stock were
included in treasury stock at cost. Shares issued from treasury stock under
Employers Mutual's employee stock purchase plan and the Company's dividend
reinvestment plan were at original cost on a first-in, first-out basis.
Effective June 30, 1996, the use of treasury stock was discontinued and all
treasury shares held at that time were retired. Any shares of the Company's
common stock that are repurchased after June 30, 1996 will be retired.
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. The
assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
Effective January 1, 1996, the Company adopted SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement establishes accounting standards which address the
recognition and measurement of losses due to the impairment of long-lived
assets. Adoption of this standard had no effect on the income of the Company.
<PAGE>
STOCK BASED COMPENSATION
Effective January 1, 1996, the Company adopted SFAS 123, "Accounting for
Stock-Based Compensation." SFAS 123 specifies a fair value method of
accounting for stock-based compensation plans and recognizes compensation
expense over the vesting period of the granted options; however, it also
permits continued application of the provisions of Accounting Practice Bulletin
(APB)No. 25, "Accounting for Stock Issued to Employees", with separate
disclosure of information prepared under the guidelines of SFAS 123. The
Company elected to adopt the disclosure requirements of SFAS 123 but will
continue to account for stock-based compensation plans under APB No. 25.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
RECLASSIFICATIONS
Certain amounts previously reported in prior years' consolidated financial
statements have been reclassified to conform to current year presentation.
2. AFFILIATION AND TRANSACTIONS WITH AFFILIATES
PROPERTY AND CASUALTY INSURANCE SUBSIDIARIES
The three property and casualty insurance subsidiaries of the Company and
two subsidiaries of Employers Mutual are parties to reinsurance pooling
agreements with Employers Mutual (collectively the "pooling agreement"). Under
the terms of the pooling agreement, each company cedes to Employers Mutual all
of its insurance business and assumes from Employers Mutual an amount equal to
its participation in the pool. All losses, settlement expenses and other
underwriting and administrative expenses, excluding the voluntary reinsurance
business assumed by Employers Mutual from unaffiliated insurance companies, are
prorated among the parties on the basis of participation in the pool. 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.
Effective January 1, 1997, a new affiliate of Employers Mutual (Hamilton
Mutual Insurance Company of Cincinnati, Ohio) will begin participating in the
pooling agreement. The addition of a new member will have no impact on the
Company's aggregate participation in the pooling agreement; however, the
revenues of the Company are expected to increase by approximately $10,000,000
due to the increase in the size of the pool.
REINSURANCE SUBSIDIARY
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.
The reinsurance subsidiary receives 95 percent of all premiums and assumes 95
percent of all related losses and settlement expenses of this business, subject
to a maximum loss of $1,000,000 per event. The reinsurance subsidiary does not
reinsure any of Employers Mutual's direct insurance business, nor any
"involuntary" facility or pool business that Employers Mutual assumes pursuant
to state law. In addition, the reinsurance subsidiary is not liable for credit
risk in connection with the insolvency of any reinsurers of Employers Mutual.
Effective January 1, 1997, the reinsurance subsidiary's quota share
participation was increased from 95 percent to 100 percent and the cap on
losses assumed per event was increased from $1,000,000 to $1,500,000.
<PAGE>
Premiums assumed by the reinsurance subsidiary from Employers Mutual
amounted to $36,051,617, $36,433,443 and $39,899,335 in 1996, 1995 and 1994,
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 $8,200,072, $8,224,060
and $9,387,371 in 1996, 1995 and 1994, respectively.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The reinsurance subsidiary pays an annual override commission to Employers
Mutual in connection with the $1,000,000 cap on losses assumed per event, which
totaled $1,892,710, $1,912,756 and $2,094,715 in 1996, 1995 and 1994,
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 $1,315,750, $1,983,579 and $2,836,067 in 1996, 1995 and 1994,
respectively. Employers Mutual retained losses and settlement expenses
totaling $166,573 in 1996, $1,103,442 in 1995 and $7,019,772 in 1994 under this
agreement.
The reinsurance subsidiary had an aggregate excess of loss reinsurance
treaty with Employers Mutual which provided protection from a large
accumulation of retentions resulting from multiple catastrophes in any one
calendar year. The coverage provided was $2,000,000, excess of $3,000,000
($2,500,000 in 1994) aggregate losses retained, excess of $200,000 per event.
Maximum recovery was limited to $2,000,000 ($4,000,000 in 1994) per accident
year. The reinsurance subsidiary did not have any recoveries under this treaty
during the last three years. Premiums paid to Employers Mutual amounted to
$500,000, $499,950 and $557,842 in 1996, 1995 and 1994, respectively. This
reinsurance treaty was canceled effective January 1, 1997.
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.
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 $0, $0 and $71,567 in 1996,
1995 and 1994, respectively. Premiums paid to Employers Mutual amounted to
$37,942 in 1996, $45,232 in 1995 and $49,659 in 1994.
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.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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, 1996, deductions for reinsurance ceded to two
unaffiliated reinsurers aggregated $8,325,506, 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>
The effect of reinsurance on premiums written and earned, and losses and
settlement expenses incurred for the three years ended December 31, 1996 is
presented below.
Year ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
PREMIUMS WRITTEN
Direct ......................... $156,161,030 $152,579,014 $143,444,388
Assumed from nonaffiliates ..... 1,951,071 3,282,699 5,843,091
Assumed from affiliates ........ 161,671,754 159,253,136 158,646,332
Ceded to nonaffiliates ......... (7,930,381) (8,365,648) (8,890,119)
Ceded to affiliates ............ (147,467,508) (143,259,942) (132,100,537)
------------ ------------ ------------
Net premiums written ......... $164,385,966 $163,489,259 $166,943,155
============ ============ ============
PREMIUMS EARNED
Direct ......................... $154,859,778 $151,450,871 $140,012,247
Assumed from nonaffiliates ..... 2,350,321 3,548,647 5,988,228
Assumed from affiliates ........ 162,326,189 157,897,322 156,839,482
Ceded to nonaffiliates ......... (8,219,290) (8,680,800) (9,601,270)
Ceded to affiliates ............ (146,126,332) (141,949,790) (128,409,308)
------------ ------------ ------------
Net premiums earned .......... $165,190,666 $162,266,250 $164,829,379
============ ============ ============
LOSSES AND SETTLEMENT EXPENSES
INCURRED
Direct ......................... $117,368,771 $ 98,651,399 $113,680,306
Assumed from nonaffiliates ..... 948,218 608,796 2,774,689
Assumed from affiliates ........ 113,083,014 100,098,436 108,594,530
Ceded to nonaffiliates ......... (6,817,132) (2,036,962) (3,077,305)
Ceded to affiliates ............ (109,215,656) (89,169,391) (105,028,166)
------------ ----------- ------------
Net losses and settlement
expenses incurred .......... $115,367,215 $108,152,278 $116,944,054
============ ============ ============
<PAGE>
4. 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).
Year ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Gross reserves for losses and
settlement expenses, beginning
of year .......................... $205,422,109 $203,181,615 $197,121,852
Ceded reserves for losses and
settlement expenses, beginning
of year .......................... 12,226,680 14,146,874 17,454,679
------------ ------------ ------------
Net reserves for losses and
settlement expenses, beginning
of year .......................... 193,195,429 189,034,741 179,667,173
------------ ------------ ------------
Incurred losses and
settlement expenses:
- ----------------------
Provision for insured events
of the current year .......... 131,375,234 123,876,601 123,343,829
Decrease in provision for
insured events of prior years (16,008,019) (15,724,323) (6,399,775)
------------ ------------ ------------
Total incurred losses and
settlement expenses ...... 115,367,215 108,152,278 116,944,054
------------ ------------ ------------
Payments:
- ---------
Losses and settlement expenses
attributable to insured events
of the current year ............ 59,948,110 48,237,715 48,771,573
Losses and settlement expenses
attributable to insured events
of prior years ................. 59,908,317 55,753,875 59,491,875
Payment related to the commutation
of the reinsurance subsidiary's
catastrophe and aggregate excess
of loss reinsurance treaties ... - - (686,962)
------------ ------------ ------------
Total payments ............. $119,856,427 $103,991,590 $107,576,486
------------ ------------ ------------
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Year ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Net reserves for losses and
settlement expenses, end of year $188,706,217 $193,195,429 $189,034,741
Ceded reserves for losses and
settlement expenses, end of year 13,796,769 12,226,680 14,146,874
------------ ------------ ------------
Gross reserves for losses and
settlement expenses, end of year $202,502,986 $205,422,109 $203,181,615
============ ============ ============
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 automobile
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 1996 and 1995 is not expected to continue.
5. ASBESTOS AND ENVIRONMENTAL RELATED CLAIMS
The Company has exposure to asbestos and environmental related claims
associated with the insurance business written by the parties to the pooling
agreement and the reinsurance business assumed from Employers Mutual by the
reinsurance subsidiary. Reserves for asbestos and environmental related claims
totaled $2,102,610 and $2,068,635 at December 31, 1996 and 1995, respectively.
As noted in the following discussion, the reserves at December 31, 1996 and
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 additional information regarding the assumed
reinsurance business.
Prior to 1995, the parties to 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 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.
Employers Mutual requested and obtained more detailed information from its
ceding reinsurers than had previously been provided. Based on this
information, Employers Mutual allocated a portion of the 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 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 industry.
6. RETAINED EARNINGS
Retained earnings of the Company's insurance subsidiaries available for
distribution as dividends 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, 1996, $15,548,160 was available for distribution in 1997 without
prior approval.
Statutory surplus of the Company's insurance subsidiaries was $111,069,880
and $97,385,213 at December 31, 1996 and 1995, respectively. Statutory net
income of the Company's insurance subsidiaries was $14,876,685, $17,411,599 and
$13,430,353 for the three years ended December 31, 1996.
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, 1996 is well in excess of the minimum level required.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
7. 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,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Statutory net income ............... $ 14,876,685 $ 17,411,599 $ 13,430,353
Net income from non-insurance
subsidiaries ..................... 309,595 295,244 267,129
Change in deferred policy
acquisition costs ................ 307,094 321,134 694,771
Change in salvage and subrogation
accrual .......................... 290,917 568,919 5,851
Change in other policyholders' funds 125,879 (490,719) (247,816)
Change in pension accrual .......... 251,042 (572,062) (298,021)
GAAP postretirement benefit cost
in excess of statutory cost ...... (256,119) (235,592) (314,583)
Deferred income tax (expense)
benefit .......................... (1,100,228) (59,327) 94,441
Prior year income taxes and
related interest ................. 24,002 (231,001) (180,770)
GAAP basis amortization of reserve
discount on commutation of
reinsurance contract ............. 274,459 343,653 433,979
Other, net ......................... (69,162) (3,020) (379,607)
------------ ------------ ------------
Net income, GAAP basis ............. $ 15,034,164 $ 17,348,828 $ 13,505,727
============ ============ ============
Statutory surplus .................. $111,069,880 $ 97,385,213 $ 86,820,039
Equity from non-insurance
subsidiaries .................... 8,671,633 8,198,635 7,497,176
Deferred policy acquisition costs .. 9,021,863 8,714,769 8,393,635
Accrued salvage and subrogation .... 2,399,578 2,368,362 1,799,443
Other policyholders' funds payable . (3,467,449) (3,593,328) (3,102,609)
Pension asset ...................... 1,086,694 835,652 1,407,714
GAAP postretirement benefit
liability in excess of statutory
liability ........................ (2,164,491) (1,908,372) (1,672,780)
Deferred income tax asset .......... 10,974,425 11,921,182 14,190,499
Goodwill ........................... 1,614,151 1,748,664 1,883,177
Excess of statutory reserves
over statement reserves .......... 6,667,612 6,685,303 2,044,268
GAAP basis reserve discount on
commutation of reinsurance
contract in excess of statutory
recognition ...................... (665,550) (940,009) (1,283,662)
Unrealized holding gains (losses)
on fixed maturity securities
available-for-sale ............... 3,248,859 5,260,630 (1,316,596)
Other .............................. 271,823 212,057 66,385
------------ ------------ ------------
Stockholders' equity, GAAP basis ... $148,729,028 $136,888,758 $116,726,689
============ ============ ============
<PAGE>
<TABLE>
<CAPTION>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
8. 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, 1996
Property and casualty insurance $119,282,389 $ (3,902,136) $15,828,102 $1,789,890 $ - $13,715,856 $296,036,605
Reinsurance ................... 36,674,831 36,985 6,436,095 73,308 274,459 6,820,847 98,603,338
Nonstandard risk automobile
insurance ................... 9,233,446 (1,559,270) 1,111,896 27,725 - (419,649) 18,759,584
Excess and surplus lines
insurance agency ............ - 333,880 124,554 - - 458,434 3,191,718
Parent company ................ - (313,087) 406,952 - - 93,865 148,878,197
Eliminations .................. - - - - - - (135,141,869)
------------ ------------ ----------- ---------- -------- ----------- ------------
Consolidated ............ $165,190,666 $ (5,403,628) $23,907,599 $1,890,923 $274,459 $20,669,353 $430,327,573
============ ============ =========== ========== ======== =========== ============
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
============ ============ =========== ========== ======== =========== ============
</TABLE>
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
9. INVESTMENTS
The amortized cost and estimated fair value of securities held-to-
maturity and available-for-sale as of December 31, 1996 are as follows. The
estimated fair value is based on quoted market prices, where available, or
on values obtained from independent pricing services.
Gross Gross Estimated
Amortized unrealized unrealized fair
December 31, 1996 cost gains losses value
----------------- ------------ ----------- ----------- ------------
Securities held-to-maturity:
Fixed maturity securities:
U.S. treasury securities
and obligations of
U.S. government
corporations and
agencies ............. $113,288,092 $ 5,300,274 $ (409)$118,587,957
Obligations of states
and political
subdivisions ......... 30,975,611 131,398 (282,008) 30,825,001
Mortgage-backed
securities ........... 44,122,018 1,313,204 (192,924) 45,242,298
------------ ----------- ----------- ------------
Total securities
held-to-maturity $188,385,721 $ 6,744,876 $ (475,341)$194,655,256
============ =========== =========== ============
Securities available-for-
sale:
Fixed maturity securities:
Obligations of states
and political
subdivisions ......... $114,538,500 $ 3,089,141 $ (101,722)$117,525,919
Debt securities issued
by foreign governments 2,573,101 15,498 - 2,588,599
Public utilities ....... 8,970,242 26,525 (51,184) 8,945,583
Corporate securities ... 20,023,965 306,841 (42,874) 20,287,932
Redeemable preferred
stocks ............... 688,350 5,387 (3,126) 690,611
------------ ----------- ----------- ------------
Total fixed maturity
securities ....... 146,794,158 3,443,392 (198,906) 150,038,644
Equity securities: ------------ ----------- ----------- ------------
Common stock mutual
funds ................ 15,963,269 2,659,897 - 18,623,166
Non-redeemable
preferred stocks ..... 5,273,012 147,953 (3,750) 5,417,215
------------ ----------- ----------- ------------
Total equity
securities ....... 21,236,281 2,807,850 (3,750) 24,040,381
------------ ----------- ----------- ------------
Total securities
available-for-sale $168,030,439 $ 6,251,242 $ (202,656)$174,079,025
============ =========== =========== ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The amortized cost and estimated fair value of securities held-to-
maturity and available-for-sale as of December 31, 1995 are as follows.
Gross Gross Estimated
Amortized unrealized unrealized fair
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
Redeemable preferred
stocks ............... 169,500 9,534 - 179,034
------------ ----------- ----------- ------------
Total fixed maturity
securities ....... 137,099,939 5,375,526 (114,896) 142,360,569
Equity securities:
Common stock mutual
funds ................ 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
============ =========== =========== ============
The amortized cost and estimated fair value of fixed maturity securities
at December 31, 1996, 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 fair
cost value
------------ ------------
Securities held-to-maturity:
Due in one year or less ................... $ 17,979,237 $ 18,161,080
Due after one year through five years ..... 63,568,520 65,932,577
Due after five years through ten years .... 57,245,134 59,680,950
Due after ten years ....................... 5,470,812 5,638,351
Mortgage-backed securities ................ 44,122,018 45,242,298
------------ ------------
Totals .................................... $188,385,721 $194,655,256
============ ============
Securities available-for-sale:
Due in one year or less ................... $ 5,897,516 $ 5,906,146
Due after one year through five years ..... 52,339,833 52,669,538
Due after five years through ten years .... 48,196,941 49,721,511
Due after ten years ....................... 40,359,868 41,741,449
------------ ------------
Totals .................................. $146,794,158 $150,038,644
============ ============
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 1996, 1995 and 1994; all activity is due to calls, prepayments and
maturities.
Year ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Fixed maturity securities
held-to-maturity:
Proceeds from calls and prepayments $14,576,696 $ 6,492,429 $26,469,534
Gross realized investment gains ... 36,155 32,733 501,628
Gross realized investment losses .. 7,957 2,388 1,027
Fixed maturity securities
available-for-sale:
Proceeds from calls and prepayments 9,802,597 786,616 842,000
Gross realized investment gains ... 207,161 27,414 23,966
Equity securities available-for-sale:
Proceeds from sales ............... 1,655,566 985,971 500,000
Gross realized investment gains ... 1,655,566 985,971 -
Gross realized investment losses .. - - 5,000
<PAGE>
A summary of net investment income is as follows:
Year ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Interest on fixed maturities .......... $22,921,309 $22,895,745 $20,886,029
Dividends on equity securities ........ 481,025 235,451 14,167
Interest on short-term investments .... 1,178,435 821,560 597,896
Other interest ........................ - - 1,552
----------- ----------- -----------
Total investment income ........... 24,580,769 23,952,756 21,499,644
Investment expense .................... 673,170 778,962 569,964
----------- ----------- -----------
Net investment income ............. $23,907,599 $23,173,794 $20,929,680
=========== =========== ===========
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A summary of net changes in unrealized holding gains (losses) on
securities available-for-sale is as follows:
Year ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Fixed maturity securities ........... $(2,016,144) $ 6,577,226 $(4,450,612)
Applicable income taxes ............. 685,489 (1,788,614) 1,065,565
----------- ----------- -----------
Total fixed maturity securities ... (1,330,655) 4,788,612 (3,385,047)
----------- ----------- -----------
Equity securities ................... 1,564,759 1,239,341 30,000
Applicable income taxes ............. (532,018) (421,376) (10,200)
----------- ----------- -----------
Total equity securities ........... 1,032,741 817,965 19,800
----------- ----------- -----------
Total available-for-sale securities $ (297,914) $ 5,606,577 $(3,365,247)
=========== =========== ===========
<PAGE>
10. INCOME TAXES
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, 1996 and 1995
relate to the following:
Year ended December 31,
------------------------
1996 1995
----------- -----------
Loss reserve discounting ........................... $11,912,949 $12,486,760
Unearned premium reserve limitation ................ 3,103,585 3,158,304
Postretirement benefits ............................ 1,613,764 1,482,631
Policyholder dividends payable ..................... 1,178,933 1,221,732
Prepayment of tax on commutation of loss reserves .. 226,287 319,603
Other, net ......................................... 496,498 547,799
----------- -----------
Total gross deferred income tax asset ........ 18,532,016 19,216,829
Less valuation allowance ........................... (1,200,000) (1,000,000)
----------- -----------
Total deferred income tax asset .............. 17,332,016 18,216,829
----------- -----------
Deferred policy acquisition costs .................. (3,067,433) (2,963,021)
Net unrealized holding gains ....................... (2,056,519) (2,209,990)
Other, net ......................................... (1,233,639) (1,122,636)
----------- -----------
Total gross deferred income tax liability .... (6,357,591) (6,295,647)
----------- -----------
Net deferred income tax asset .............. $10,974,425 $11,921,182
=========== ===========
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The valuation allowance at December 31, 1996 and 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 1992 through 1996
of approximately $56,662,000.
<PAGE>
The actual income tax expense for the years ended December 31, 1996, 1995
and 1994 differed from the "expected" tax expense for those years (computed by
applying the United States federal corporate tax rate of 34 percent, 35 percent
in 1995, to income before income taxes) as follows:
Year ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Computed "expected" tax expense ...... $ 7,027,580 $ 8,510,568 $ 6,350,101
Increases (decreases) in
tax resulting from:
Tax-exempt interest income ....... (1,980,599) (2,190,686) (2,034,273)
Change in accrual of prior year
taxes .......................... - - (209,734)
Settlement of tax examinations ... (46,949) 182,309 147,098
Proration of tax-exempt interest
and dividends received deduction 289,705 235,330 223,484
Other, net ....................... 345,452 229,560 694,365
----------- ----------- -----------
Income taxes ................... $ 5,635,189 $ 6,967,081 $ 5,171,041
=========== =========== ===========
Comprehensive income tax expense included in the consolidated financial
statements for the years ended December 31, 1996, 1995 and 1994 was as follows:
Year ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Income tax expense (benefit) on:
Operations .......................... $ 5,635,189 $ 6,967,081 $ 5,171,041
Unrealized holding (losses) gains on
revaluation of securities
available-for-sale ................ (153,471) 2,209,990 (1,055,365)
----------- ----------- -----------
Comprehensive income tax
expense ....................... $ 5,481,718 $ 9,177,071 $ 4,115,676
=========== =========== ===========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
11. 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, 1996, 1995 and 1994,
respectively:
Year ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Actuarial present value of
benefit obligations:
Accumulated benefit obligation,
including vested benefits of
$50,211,301, $51,185,830 and
$52,520,753 .................. $ 51,043,973 $ 52,190,610 $ 53,244,188
============ ============ ============
Projected benefit obligation for
service rendered to date ......... $(66,414,419) $(66,544,344) $(69,337,553)
Plan assets at fair value .......... 76,056,949 72,048,850 66,760,033
------------ ------------ ------------
Plan assets greater (less) than
projected benefit obligation ..... 9,642,530 5,504,506 (2,577,520)
Unrecognized net (gain) loss from
past experience different from
that assumed and effects of
changes in assumptions ........... (3,080,096) 625,332 12,201,810
Prior service cost not yet
recognized in net periodic
pension cost ..................... 3,327,217 3,765,174 3,955,406
Unrecognized portion of initial
net asset ........................ (3,956,372) (5,031,812) (6,107,252)
------------ ------------ ------------
Prepaid pension cost ........ $ 5,933,279 $ 4,863,200 $ 7,472,444
============ ============ ============
Service cost - benefits earned
during the period ................ $ 3,029,857 $ 3,124,494 $ 2,965,867
Interest cost on projected
benefit obligation ............... 4,477,060 4,827,694 2,925,086
Actual gain on plan assets ......... (9,237,498) (10,414,728) (1,606,902)
Net amortization and deferral ...... 3,043,014 5,071,784 (3,078,202)
------------ ------------ ------------
Net periodic pension cost ... $ 1,312,433 $ 2,609,244 $ 1,205,849
============ ============ ============
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 7.25 percent for 1996, 7.00
percent for 1995 and 7.25 percent for 1994. The assumed long-term rate of
return on plan assets was 8.00 percent for 1996, 1995 and 1994. The rate of
increase in future compensation levels used in measuring the projected benefit
obligation was 5.30 percent in 1996, 1995 and 1994. Pension expense for the
Company amounted to $289,055, $572,062 and $298,021 in 1996, 1995 and 1994,
respectively.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
12. 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 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, 1996, 1995 and 1994,
respectively.
Year ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Actuarial present value of
benefit obligations:
Retirees ....................... $ 8,878,520 $ 8,319,946 $ 7,404,314
Fully eligible active plan
participants ................. 4,624,846 4,775,324 4,859,467
Other active plan participants 7,777,499 6,705,681 6,767,662
------------ ------------ ------------
Total ........................ 21,280,865 19,800,951 19,031,443
Unrecognized net gain from
past experience different from
that assumed and effects of
changes in assumptions ......... 3,973,690 4,110,579 3,707,110
Prior service cost not yet
recognized in net periodic
postretirement benefit cost .... (3,391,395) (3,962,633) (4,533,871)
------------ ------------ ------------
Postretirement benefit
obligation ................. $ 21,863,160 $ 19,948,897 $ 18,204,682
============ ============ ============
Service cost - benefits earned
during the period .............. $ 917,917 $ 907,297 $ 1,027,634
Interest cost on accumulated
postretirement benefit
obligation ..................... 1,365,150 1,361,790 1,412,961
Net amortization and deferral .... 336,117 409,556 571,595
------------ ------------ ------------
Net periodic postretirement
benefit cost ............... $ 2,619,184 $ 2,678,643 $ 3,012,190
============ ============ ============
<PAGE>
Prior service costs are being amortized over 8.9 to 10 years beginning
January 1, 1994. 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 11.00 percent for individuals under age 65 and 9.50
percent for individuals age 65 and older, and is assumed to decrease gradually
to 5.50 percent in 2004 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, 1996 by $2,806,994 and the aggregate of
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
the service and interest cost components of net periodic postretirement benefit
cost for the year ended December 31, 1996 by $423,519. The weighted average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.25 percent for 1996, 7.00 percent for 1995 and 7.25 percent
for 1994.
The Company's net periodic postretirement benefit cost for the years ended
December 31, 1996, 1995 and 1994 was $596,102, $608,832 and $684,899,
respectively.
13. STOCK PLANS
Employers Mutual has several stock plans which utilize the common stock of
the Company. The Company receives the current fair 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 1996, 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 81
individuals under the 1993 Plan. At February 26, 1997, 26 eligible
participants remained in the 1982 Plan and 65 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.
<PAGE>
During 1996, 54,800 options were granted under the 1993 plan to eligible
participants at a price of $13.25 and 79,270 options were exercised under the
plans at prices ranging from $11.25 to $14.25. A summary of Employers Mutual's
incentive stock option plans is as follows:
Year ended December 31,
-----------------------------
1996 1995 1994
-------- -------- --------
Options outstanding, beginning of year .. 565,882 556,277 518,023
Granted ................................. 54,800 119,550 64,600
Exercised ............................... (79,270) (88,645) (13,546)
Expired ................................. ( 3,400) (21,300) (12,800)
-------- -------- --------
Options outstanding, end of year ........ 538,012 565,882 556,277
======== ======== ========
Options exercisable, end of year ........ 296,552 284,112 299,207
======== ======== ========
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company applied APB No. 25 in accounting for stock option grants; and,
as a result, recognized no compensation expense in the financial statements in
connection with the granting of options in 1996 and 1995. Had the Company
determined compensation expense based on the fair value of the options at the
dates of grant under SFAS 123, the effect on the Company's net income and
earnings per share for 1996 and 1995 would have been immaterial. Total
compensation expense for stock option grants under SFAS 123 is recognized over
the options vesting period.
The calculation of compensation expense under SFAS 123 is based on various
factors. The per share weighted-average fair value of stock options granted
during 1996 was $2.40 and for options granted during 1995 was $2.34 using the
Black Scholes option-pricing model with the following weighted-average
assumptions:
1996 1995
---- ----
Expected dividend yield ............. 4.68% 4.26%
Risk free interest rate ............. 5.22% 7.60%
Expected life ....................... 6 years 6 years
Expected volatility ................. 23.59 22.90
<PAGE>
(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 1996, 151 employees participated in the plan and exercised a total
of 21,123 options at prices of $9.89 and $10.20. Activity under the plan was
as follows:
Year ended December 31,
----------------------------
1996 1995 1994
-------- -------- --------
Shares available for purchase,
beginning of year ...................... 446,045 463,940 486,546
Shares purchased under plan .............. (21,123) (17,895) (22,606)
-------- -------- --------
Shares available for purchase, end of year 424,922 446,045 463,940
======== ======== ========
<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 1996, five directors
participated in the plan and exercised a total of 9,316 options at prices
ranging from $10.67 to $14.06. Activity under the plan was as follows:
Year ended December 31,
----------------------------
1996 1995 1994
-------- -------- --------
Shares available for purchase,
beginning of year ...................... 185,568 188,099 194,048
Shares purchased under plan .............. (9,316) (2,531) (5,949)
-------- -------- --------
Shares available for purchase, end of year 176,252 185,568 188,099
======== ======== ========
<PAGE>
14. 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 1996, 1995 and
1994, 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,
----------------------------
1996 1995 1994
-------- -------- --------
Shares available for purchase,
beginning of year ....................... 364,561 537,660 758,266
Shares purchased under plan ............... (188,072) (173,099) (220,606)
-------- -------- --------
Shares available for purchase, end of year 176,489 364,561 537,660
======== ======== ========
Range of purchase prices .................. $11.00 $10.00 $ 8.75
to to to
$13.75 $14.75 $ 9.50
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(b) TREASURY STOCK
The Company repurchases shares of its outstanding common stock in
connection with the issuance of new shares under Employers Mutual's stock
option plans. These repurchased shares have historically been used to fulfill
the stock requirements of the Company's dividend reinvestment plan and
Employers Mutual's employee stock purchase plan.
Effective June 30, 1996, the use of treasury stock was discontinued and
all treasury shares held at that time were retired. Any shares of the
Company's common stock that are repurchased after June 30, 1996 will be
retired.
Treasury stock activity was as follows:
Year ended December 31,
----------------------------
1996 1995 1994
-------- -------- --------
Treasury shares, beginning of year ....... 7,585 10,931 8,090
Shares repurchased ....................... 19,328 56,096 2,841
Shares reissued .......................... (10,262) (59,442) -
Shares retired ........................... (16,651) - -
-------- -------- --------
Treasury shares, end of year ............. - 7,585 10,931
======== ======== ========
Average cost ............................. $ - $ 11.66 $ 10.07
======== ======== ========
(Loss) gain on reissue of treasury shares $(16,257) $115,166 $ -
======== ======== ========
<PAGE>
15. DISCLOSURES ABOUT THE FAIR 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 value because of the short maturity of these instruments.
The estimated fair value of the Company's investments are summarized as
follows. The estimated fair value is based on quoted market prices, where
available, or on values obtained from independent pricing services (see
note 9).
Carrying Estimated
December 31, 1996 amount fair value
------------ ------------
Fixed maturity securities:
Held-to-maturity ......................... $188,385,721 $194,655,256
Available-for-sale ....................... 150,038,644 150,038,644
Equity securities available-for-sale ....... 24,040,381 24,040,381
Short-term investments ..................... 17,553,606 17,553,606
December 31, 1995
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
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
16. 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, 1996, the Company is contingently liable for $481,626 of unsecured
receivables held by Employers Mutual.
Employers Mutual has purchased annuities to fund future payments that are
fixed pursuant to specific claim settlement provisions. The Company, under
terms of the pooling agreement, is a 22 percent participant in these annuities
(note 2). The Company is contingently liable to various claimants in the
amount of $1,068,082 in the event that the issuing company would be unable to
fulfill its obligations.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
17. UNAUDITED INTERIM FINANCIAL INFORMATION
Three months ended,
------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
1996
- ----
Total revenues ........ $ 46,337,861 $ 46,456,275 $ 48,302,736 $ 50,166,775
============ ============ ============ ============
Income before income
taxes ............... $ 4,373,874 $ 1,482,899 $ 5,587,906 $ 9,224,674
Income taxes .......... 1,041,409 11,696 1,409,696 3,172,388
------------ ------------ ------------ ------------
Net income ....... $ 3,332,465 $ 1,471,203 $ 4,178,210 $ 6,052,286
============ ============ ============ ============
Earnings per share*.... $ .31 $ .13 $ .38 $ .55
============ ============ ============ ============
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
============ ============ ============ ============
* 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>
EXHIBIT 13(d) MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ------------- -------------------------------------------------
STOCKHOLDER MATTERS.
--------------------
The Company's common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market under the symbol EMCI.
The following table shows the high and low sales prices, as reported by
by Nasdaq, and the dividends paid for each quarter within the two most recent
years.
1996 1995
---------------------------- ----------------------------
High Low Dividends High Low Dividends
------- ------- --------- ------- ------- ---------
1st Quarter $14 1/4 $11 3/4 $.14 $10 7/8 $ 9 1/2 $ .13
2nd Quarter 14 1/2 10 1/8 .14 12 9 3/4 .13
3rd Quarter 13 1/2 10 1/2 .14 15 1/4 11 1/2 .13
4th Quarter 12 1/4 10 1/2 .15 14 12 .14
At December 31 12 13 3/4
On February 28, 1997, there were approximately 1,363 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 6 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 14(a) of Notes to Consolidated Financial
Statements under Item 8 of this Form 10-K. During 1996 and 1995, Employers
Mutual elected to receive 50 percent of its dividends in common stock under
this plan.
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 26, 1997,
relating to the consolidated balance sheets of EMC Insurance Group Inc. and
Subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows and related financial
statement schedules for each of the years in the three-year period ended
December 31, 1996, which reports appear in the December 31, 1996 annual report
on Form 10-K of EMC Insurance Group Inc.
/s/ KPMG Peat Marwick LLP
Des Moines, Iowa
March 20, 1997
Exhibit 24
POWER OF ATTORNEY
KNOW EVERYONE BY THESE PRESENTS, that each director whose signature appears
below constitutes and appoints Mark E. Reese 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 signing and filing the 1996 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 1997 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
/s/ Raymond A. Michel
- ---------------------------
Raymond A. Michel Director
/s/ Fredrick A. Schiek
- ---------------------------
Fredrick A. Schiek Director
May 22, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 12/31/96
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-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 150,038,644
<DEBT-CARRYING-VALUE> 188,385,721
<DEBT-MARKET-VALUE> 194,655,256
<EQUITIES> 24,040,381
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 380,018,352
<CASH> 3,500,629
<RECOVER-REINSURE> 14,735,786
<DEFERRED-ACQUISITION> 9,021,863
<TOTAL-ASSETS> 430,327,573
<POLICY-LOSSES> 202,502,986
<UNEARNED-PREMIUMS> 47,908,954
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 3,467,449
<NOTES-PAYABLE> 0
0
0
<COMMON> 11,084,461
<OTHER-SE> 137,644,567
<TOTAL-LIABILITY-AND-EQUITY> 430,327,573
165,190,666
<INVESTMENT-INCOME> 23,907,599
<INVESTMENT-GAINS> 1,890,923
<OTHER-INCOME> 274,459
<BENEFITS> 115,367,215
<UNDERWRITING-AMORTIZATION> 32,554,733
<UNDERWRITING-OTHER> 19,427,310
<INCOME-PRETAX> 20,669,353
<INCOME-TAX> 5,635,189
<INCOME-CONTINUING> 15,034,164
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,034,164
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.37
<RESERVE-OPEN> 205,422,109
<PROVISION-CURRENT> 131,375,234
<PROVISION-PRIOR> (16,008,019)
<PAYMENTS-CURRENT> 59,948,110
<PAYMENTS-PRIOR> 59,908,317
<RESERVE-CLOSE> 202,502,986
<CUMULATIVE-DEFICIENCY> (16,008,019)
