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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission File Number: 0-10956
EMC INSURANCE GROUP INC.
(Exact Name of Registrant as Specified in its Charter)
Iowa 42-6234555
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
717 Mulberry Street, Des Moines, Iowa 50309
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (515) 280-2902
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $1.00
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 2, 1998 was $49,857,017.
The number of shares outstanding of the registrant's common stock, $1.00
par value, on March 2, 1998, was 11,354,129.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's annual report to stockholders for the
year ended December 31, 1997 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, 1998,
are incorporated by reference under Part III.
<PAGE>
This document contains 130 sequentially numbered pages.
Index to Exhibits is on page number 42.
<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. The
term "Company" is used interchangeably to describe EMC Insurance Group Inc.
(Parent Company only) and EMC Insurance Group Inc. and its subsidiaries.
Employers Mutual and all of its subsidiaries and an affiliate (including the
Company), 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 a portion 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 and an affiliate of Employers Mutual (Union Insurance Company
of Providence, American Liberty Insurance Company and Hamilton Mutual
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, with the exception of any voluntary reinsurance business
assumed from nonaffiliated insurance companies, 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
nonaffiliated 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 seven
companies in the pool.
Effective January 1, 1997, Hamilton Mutual Insurance Company (Hamilton
Mutual) became a participant in the pooling agreement. The addition of
Hamilton Mutual did not impact the Company's aggregate participation in the
pooling agreement. In connection with this change in the pooling agreement,
the Company's liabilities increased $6,393,063 and invested assets increased
$5,674,458. The Company reimbursed Employers Mutual $794,074 for commissions
incurred to generate this business and Employers Mutual paid the Company
$75,469 in interest income as the actual cash transfer did not occur until
March 24, 1997.
On December 19, 1997, the Company announced that its nonstandard risk
automobile insurance subsidiary will become a participant in the pooling
agreement effective January 1, 1998. The nonstandard risk automobile
insurance subsidiary will receive a 1.5 percent participation in the pool,
which will increase the Company's aggregate participation in the pool to 23.5
percent. Revenues of the Company are expected to increase by approximately
$2,000,000 due to the increase in the size of the pool.
PRINCIPAL PRODUCTS
The Company's property and casualty insurance subsidiaries and the other
parties to the pooling agreement underwrite both commercial and personal lines
of insurance. The following table sets forth the aggregate direct written
premiums of all parties to the pooling agreement for the three years ended
December 31, 1997. 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 1997 total 1996 total 1995 total
- ---------------- -------- ------ -------- ------ -------- ------
(Dollars in thousands)
Commercial Lines:
Automobile ............ $118,624 18.4% $107,786 18.9% $ 99,165 17.8%
Property .............. 110,637 17.2 92,963 16.3 89,130 16.0
Workers' compensation 115,117 17.9 118,479 20.7 131,415 23.5
Liability ............. 110,647 17.2 105,889 18.5 105,571 18.9
Other ................. 15,139 2.4 13,998 2.5 13,975 2.5
-------- ------ -------- ------ -------- ------
Total commercial lines 470,164 73.1 439,115 76.9 439,256 78.7
Personal Lines:
Automobile ............ 109,214 17.0 83,428 14.6 79,121 14.2
Property .............. 61,569 9.6 46,459 8.2 39,840 7.1
Liability ............. 2,026 0.3 1,946 0.3 - -
Other ................. 50 - 53 - 54 -
-------- ----- -------- ----- -------- -----
Total personal lines 172,859 26.9 131,886 23.1 119,015 21.3
-------- ----- -------- ----- -------- -----
Total ............ $643,023 100.0% $571,001 100.0% $558,271 100.0%
======== ===== ======== ===== ======== =====
MARKETING
Marketing of insurance by the parties to the pooling agreement is
conducted through 18 offices located throughout the United States and
approximately 2,700 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, 1997.
1997 1996 1995
---- ---- ----
Alabama ............................ 3.6% 3.7% 3.1%
Arizona ............................ 3.8 4.2 3.9
Illinois ........................... 5.4 6.5 6.5
Iowa ............................... 18.7 20.3 21.7
Kansas ............................. 8.2 9.0 8.8
Michigan ........................... 4.1 3.2 3.6
Minnesota .......................... 3.9 4.0 4.7
Nebraska ........................... 7.0 7.7 8.1
North Carolina ..................... 3.4 4.1 4.0
Ohio ............................... 3.2 - -
Texas .............................. 4.4 3.9 2.9
Wisconsin .......................... 4.5 4.8 5.5
Other * ............................ 29.8 28.6 27.2
----- ----- -----
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' 1996 operating
results and financial condition as of December 31, 1996. 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
Workers' Compensation excess $ - $20,000,000 excess of
$40,000,000
Umbrella .................... $ 1,400,000* 100 percent of $ 8,600,000
Fidelity and Surety ......... $ 750,000 100 percent of $ 3,250,000
Surety excess .............. $ 400,000 100 percent of $ 6,850,000
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 50 domestic and foreign reinsurers.
Percent
of total 1997
Property per risk, property catastrophe reinsurance Best's
and casualty coverages: protection rating
- --------------------------------------- ----------- ------
Underwriters at Lloyd's of London .................... 20.2% A
Hannover Ruckversicherung AG ......................... 5.8 (1)
Zurich Reinsurance Centre ............................ 5.2 A
Hartford Fire Insurance Company ...................... 4.8 A+
AXA Reassurance Company .............................. 4.2 A+
St. Paul Fire and Marine ............................. 3.6 A+
NAC Reinsurance Corporation .......................... 3.6 A+
PMA Reinsurance Corporation .......................... 3.2 A+
Umbrella coverage:
- ------------------
General Reinsurance Corporation ...................... 100.0 A++
Fidelity and surety coverages:
- ------------------------------
SCOR Reinsurance Company ............................. 42.0 A+
Kemper Reinsurance Company ........................... 20.0 A
Signet Star Reinsurance Company ...................... 20.0 A
Winterthur Reinsurance Corporation of America ........ 18.0 A
Boiler coverage:
- ----------------
Hartford Steam Boiler Inspection and Insurance Company 100.0 A+
(1) Not rated.
<PAGE>
Premiums ceded by all pool members and by the Company's property and
casualty insurance subsidiaries for the year ended December 31, 1997 are
presented below. Each type of reinsurance coverage is purchased in layers,
and an individual reinsurer may participate in more than one coverage and at
various layers within the coverages. Since each layer of each coverage is
priced separately, with the lower layers being more expensive than the upper
layers, a reinsurer's overall participation in a reinsurance program does not
necessarily correspond to the amount of premiums it receives.
Premiums ceded by
------------------------
Property
and casualty
All pool insurance
Reinsurer members subsidiaries
- --------- ----------- ------------
General Reinsurance Corporation...................... $ 3,568,951 $ 785,169
Hartford Steam Boiler Inspection & Insurance Company 1,605,214 353,147
Hartford Fire Insurance Company ..................... 882,352 194,118
SCOR Reinsurance Company ............................ 875,023 192,505
PMA Reinsurance Corporation ......................... 851,558 187,343
Kemper Reinsurance Company .......................... 631,642 138,961
AXA Reassurance Company ............................. 592,297 130,305
American Re-Insurance Company ....................... 494,472 108,784
Spreckley Villers Burnhope & Company ................ 451,669 99,367
PXRE Reinsurance Company ............................ 435,160 95,735
Other Reinsurers .................................... 7,117,222 1,565,789
----------- ------------
Total ............................................. $17,505,560 $ 3,851,223
=========== ============
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, 1997 are presented below.
Premiums ceded by
------------------------
Property
and casualty
All pool insurance
Reinsurer members subsidiaries
- --------- ----------- ------------
Wisconsin Compensation Rating Bureau ................ $ 4,214,988 $ 927,297
National Workers' Compensation Reinsurance Pool ..... 3,504,567 771,005
North Carolina Reinsurance Facility ................. 1,213,266 266,919
Mutual Reinsurance Bureau ........................... 493,270 108,519
Improved Risk Mutual ................................ 151,884 33,414
Minnesota Workers' Compensation Reinsurance Assn.(1) (1,720,064) (378,414)
Other Reinsurers .................................... 162,766 35,809
----------- -----------
$ 8,020,677 $ 1,764,549
=========== ===========
(1) The Minnesota Workers' Compensation Reinsurance Association
periodically reviews its financial position and distributes excess
funds to its members. Distributions totaling $1,712,074 were received
by the parties to the pooling agreement in 1997 and were recorded as a
return of ceded premium.
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 amount of insurance 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,
------------------------------
1997 1996 1995
---- ---- ----
Employers Mutual .................. .80 .95 1.07
EMCASCO ........................... 1.62 1.67 1.91
Illinois EMCASCO .................. 1.68 1.73 1.95
Dakota Fire ....................... 1.59 1.61 1.80
American Liberty .................. 1.08 1.05 1.15
Union ............................. .72 .68 .73
Hamilton Mutual ................... 1.17 - -
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The property and casualty insurance subsidiaries' reserve information is
included in the property and casualty loss reserve development for 1997. 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 assumes a
quota share portion of Employers Mutual's assumed reinsurance business,
exclusive of certain reinsurance contracts. The reinsurance subsidiary
assumes its quota share portion of all premiums and related losses and
settlement expenses of this business, subject to a maximum loss 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 maximum
loss per event assumed by the reinsurance subsidiary was increased from
$1,000,000 to $1,500,000. In connection with the change in the quota share
percentage, the Company's liabilities increased $3,173,647 and invested assets
increased $3,066,705. The Company reimbursed Employers Mutual $106,942 for
commissions incurred to generate this business.
<PAGE>
PRINCIPAL PRODUCTS
The reinsurance subsidiary assumes both pro rata and excess of loss
reinsurance from Employers Mutual. The following table sets forth the assumed
written premiums of the reinsurance subsidiary for the three years ended
December 31, 1997. The amounts for 1997 do not reflect an accounting
adjustment of $355 related to the change in quota share percentage. This
adjustment was made to offset the income statement effect that resulted from
the increase in the reinsurance subsidiary's reserve for unearned premiums on
January 1, 1997 in connection with this transaction.
Percent Percent Percent
of of of
Line of Business 1997 total 1996 total 1995 total
- ---------------- ------- ----- ------- ----- ------- -----
(Dollars in thousands)
Pro rata reinsurance:
Property ............... $15,499 45.1% $16,459 45.7% $19,417 53.3%
Crop ................... 3,101 9.0 3,704 10.3 3,085 8.5
Casualty ............... 2,911 8.5 2,796 7.7 2,879 7.9
Marine/aviation ........ 1,866 5.4 2,762 7.7 4,168 11.4
Other .................. 2,116 6.2 228 0.6 398 1.1
------- ----- ------- ----- ------- -----
Total pro rata reinsurance 25,493 74.2 25,949 72.0 29,947 82.2
Excess per risk reinsurance:
Property ............... 2,110 6.2 2,258 6.3 1,760 4.8
Casualty ............... 1,595 4.6 1,182 3.3 840 2.3
Marine/aviation ........ - - 9 - 21 0.1
Other .................. 647 1.9 628 1.7 341 0.9
------- ----- ------- ----- ------- -----
Total excess per
risk reinsurance ...... 4,352 12.7 4,077 11.3 2,962 8.1
------- ----- ------- ----- ------- -----
Excess catastrophe/
aggregate reinsurance:
Property ............... 4,293 12.5 5,671 15.7 3,178 8.7
Crop ................... 252 0.8 242 0.7 292 0.8
Marine/aviation ........ 8 - 29 0.1 52 0.2
Other .................. (62) (0.2) 84 0.2 2 -
------- ----- ------- ----- ------- -----
Total excess catastrophe/
aggregate reinsurance 4,491 13.1 6,026 16.7 3,524 9.7
------- ----- ------- ----- ------- -----
Total excess reinsurance 8,843 25.8 10,103 28.0 6,486 17.8
------- ----- ------- ----- ------- -----
$34,336 100.0% $36,052 100.0% $36,433 100.0%
======= ===== ======= ===== ======= =====
MARKETING
During 1997 and 1996, 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.
Employers Mutual is addressing this by accepting a larger share of coverage on
desirable programs and strengthening its relationships with reinsurance
intermediaries.
<PAGE>
REINSURANCE CEDED
Prior to 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 calendar year. The coverage provided was $2,000,000, excess of $3,000,000
aggregate losses retained, excess of $200,000 per event. Maximum recovery was
limited to $2,000,000 per accident year. The reinsurance subsidiary did not
have any recoveries under this treaty during 1996 or 1995. Premiums paid to
Employers Mutual amounted to $500,000 and $499,950 in 1996 and 1995,
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 1997. See "Property and
Casualty Insurance Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk
Automobile Insurance Subsidiary - Outstanding Losses and Settlement Expenses."
NONSTANDARD RISK AUTOMOBILE INSURANCE
- -------------------------------------
The Company's nonstandard risk automobile insurance subsidiary
specializes in insuring private passenger automobile risks that are found to
be unacceptable in the standard automobile insurance market.
MARKETING
The nonstandard risk automobile insurance subsidiary is licensed in a
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 various state financial responsibility laws. Physical
damage coverages are written at normal insurance deductibles. The nonstandard
risk automobile insurance subsidiary experienced an increase in premium volume
in 1997 for the first time since 1993. This increase is attributed to a
change in marketing philosophy that includes a closer alignment with EMC
Insurance Companies and improved marketing and business relationships with its
agency force.
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, 1997.
1997 1996 1995
----- ----- -----
Iowa ............................... 36.0% 37.2% 39.9%
Kansas ............................. 14.1 13.9 11.0
Missouri ........................... 2.1 - -
Nebraska ........................... 19.7 22.4 25.0
North Dakota........................ 6.5 4.6 3.8
South Dakota ....................... 21.6 21.9 20.3
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
<PAGE>
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. The larger standard insurance companies have
developed rate tiers 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. The
nonstandard risk automobile insurance subsidiary has responded with renewed
marketing efforts toward new and existing agents and a competitive rate
structure. The nonstandard risk automobile insurance subsidiary continues to
fine tune territories and classifications in order to maximize profit
potential.
REINSURANCE CEDED
The nonstandard risk automobile insurance subsidiary had a reinsurance
treaty on an excess of loss basis with Employers Mutual, which provided
reinsurance for 100 percent of each loss in excess of $100,000, up to
$1,000,000. There were no recoveries under this treaty during 1997, 1996 or
1995. Premiums paid to Employers Mutual amounted to $36,076 in 1997, $37,942
in 1996 and $45,232 in 1995.
This reinsurance treaty was canceled on December 31, 1997 in preparation
for the subsidiary's admittance into the pooling agreement on January 1, 1998
and all reinsurance recoverable amounts due from Employers Mutual were
commuted. In connection with this commutation, the Company's assets increased
$58,921 and liabilities increased $62,487. The Company reported incurred
settlement expenses of $3,566 from this transaction.
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.
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.
<PAGE>
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, 1997. The combined ratios
below are the sum of the following: the loss ratio, calculated by dividing
losses and settlement expenses incurred by net premiums earned, and the
expense ratio, calculated by dividing underwriting expenses incurred by net
premiums written and policyholder dividends by net premiums earned.
Generally, if the combined ratio is below 100 percent, a company has an
underwriting profit; if it is above 100 percent, a company has an underwriting
loss.
Year ended December 31,
--------------------------------------
1997 1996 1995 1994 1993
------ ----- ----- ----- -----
Property and casualty insurance
Loss ratio ................... 72.8% 69.1% 65.0% 67.2% 72.6%
Expense ratio ................ 33.2 34.9 33.1 31.1 30.9
----- ----- ----- ----- -----
Combined ratio ............. 106.0% 104.0% 98.1% 98.3% 103.5%
===== ===== ===== ===== =====
Reinsurance
Loss ratio ................... 68.4% 68.7% 66.3% 82.0% 77.7%
Expense ratio ................ 34.1 31.5 32.3 30.4 33.1
----- ----- ----- ----- -----
Combined ratio ............. 102.5% 100.2% 98.6% 112.4% 110.8%
===== ===== ===== ===== =====
Nonstandard risk
automobile insurance
Loss ratio ................... 92.8% 88.7% 94.5% 71.5% 94.3%
Expense ratio ................ 27.4 26.8 26.1 24.4 23.7
----- ----- ----- ----- -----
Combined ratio ............. 120.2% 115.5% 120.6% 95.9% 118.0%
===== ===== ===== ===== =====
Total insurance operations
Loss ratio ................... 73.1% 70.0% 67.1% 70.9% 75.6%
Expense ratio ................ 33.1 33.6 32.5 30.4 30.7
----- ----- ----- ----- -----
Combined ratio ............. 106.2% 103.6% 99.6% 101.3% 106.3%
===== ===== ===== ===== =====
Property and casualty insurance
industry averages (1)
Loss ratio ................... 73.7% 78.3% 78.9% 81.1% 79.5%
Expense ratio ................ 28.1 27.5 26.1 27.3 27.4
----- ----- ----- ----- -----
Combined ratio ............. 101.8% 105.8% 105.0% 108.4% 106.9%
===== ===== ===== ===== =====
(1) As reported by A.M. Best Company. The ratio for 1997 is an estimate; the
actual combined ratio is not currently available.
<PAGE>
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, 1997:
1997
Amount Percent Best's
recoverable of total rating
----------- -------- ------
Wisconsin Compensation Rating Bureau .. $ 5,721,614 38.7% (1)
American Re-Insurance Company ......... 1,784,051 12.1 A+
National Workers' Compensation
Reinsurance Pool .................... 1,678,319 11.3 (1)
General Reinsurance Company............ 772,022 5.2 A++
Kemper Reinsurance Company ............ 448,801 3.0 A
Minnesota Workers' Compensation
Reinsurance Association ............ 388,411 2.6 (2)
Mutual Reinsurance Bureau (MRB)........ 361,890 2.5 (3)
North Carolina Reinsurance Facility.... 350,290 2.4 (4)
Hartford Fire Insurance Company ....... 306,245 2.1 A+
PMA Reinsurance Corporation ........... 287,359 1.9 A+
Other Reinsurers ...................... 2,697,754 18.2
----------- -----
Total ........................... $14,796,756(5) 100.0%
=========== =====
(1) Amounts recoverable reflect the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to these
organizations by Employers Mutual in connection with its role as "service
carrier." Under these arrangements, Employers Mutual writes business for
these organizations on a direct basis and then cedes 100 percent of the
business to these organizations. Credit risk associated with these
amounts is minimal as all companies participating in these organizations
are responsible for the liabilities of such organizations on a pro rata
basis.
(2) The amount recoverable reflects the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to this
association by the pool members under a reinsurance contract that
provides protection for workers' compensation losses in excess of
$1,080,000 per occurrence. Credit risk associated with this amount is
minimal as all companies writing direct workers' compensation business in
the state of Minnesota are responsible for the liabilities of this
association on a pro rata basis.
(3) The amount recoverable reflects the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to this
underwriting 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.
(4) The amount recoverable reflects the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to this
organization by the pool members in conjunction with the state run
assigned risk program ("state fund"). Under this program, all insurers
writing direct business in the state of North Carolina are required by
law to write insurance for risks that are not insurable in the normal
marketplace. Business written under this program is ceded 100 percent to
the state fund and each respective company assumes from the state fund
its share of such business in proportion to its direct writings in the
state. Credit risk associated with this amount is minimal as all
companies writing direct business in the state are responsible for the
liabilities of this organization on a pro rata basis.
<PAGE>
(5) The total amount at December 31, 1997 represented $571,541 in paid
losses and settlement expenses recoverable, $13,030,150 in unpaid losses
and settlement expenses recoverable and $1,195,065 in unearned premiums
recoverable.
The effect of reinsurance on premiums written and earned, and losses and
settlement expenses incurred for the three years ended December 31, 1997 is
presented below.
Year ended December 31,
----------------------------------------
1997 1996 1995
Premiums written: ------------ ------------ ------------
Direct ........................ $175,350,677 $156,161,030 $152,579,014
Assumed from nonaffiliates .... 1,219,564 1,951,071 3,282,699
Assumed from affiliates ....... 178,624,357 161,671,754 159,253,136
Ceded to nonaffiliates ........ (5,615,772) (7,930,381) (8,365,648)
Ceded to affiliates ........... (164,978,055) (147,467,508) (143,259,942)
------------ ------------ ------------
Net premiums written ........ $184,600,771 $164,385,966 $163,489,259
============ ============ ============
Premiums earned:
Direct ........................ $169,304,584 $154,859,778 $151,450,871
Assumed from nonaffiliates .... 1,403,778 2,350,321 3,548,647
Assumed from affiliates ....... 171,514,339 162,326,189 157,897,322
Ceded to nonaffiliates ........ (5,937,679) (8,219,290) (8,680,800)
Ceded to affiliates ........... (159,066,776) (146,126,332) (141,949,790)
------------ ------------ ------------
Net premiums earned ......... $177,218,246 $165,190,666 $162,266,250
============ ============ ============
Losses and settlement expenses
incurred:
Direct ........................ $126,922,536 $117,368,771 $ 98,651,399
Assumed from nonaffiliates .... 926,403 948,218 608,796
Assumed from affiliates ....... 122,827,934 113,083,014 100,098,436
Ceded to nonaffiliates ........ (3,364,737) (6,817,132) (2,036,962)
Ceded to affiliates ........... (117,458,832) (109,215,656) (89,169,391)
------------ ------------ ------------
Net losses and settlement
expenses incurred ......... $129,853,304 $115,367,215 $108,152,278
============ ============ ============
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 actual claim costs, 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 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, 1997 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.
<PAGE>
Year ended December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Gross reserves for losses and
settlement expenses, beginning
of year .......................... $202,502,986 $205,422,109 $203,181,615
Ceded reserves for losses and
settlement expenses, beginning
of year .......................... 13,796,769 12,226,680 14,146,874
------------ ------------ ------------
Net reserves for losses and
settlement expenses, beginning
of year, before adjustments ...... 188,706,217 193,195,429 189,034,741
------------ ------------ ------------
Adjustment to beginning reserves
due to the change in the
property and casualty insurance
subsidiaries' pooling agreement... 3,795,453 - -
Adjustment to beginning reserves
due to the change in the
reinsurance subsidiary's quota
share percentage ................. 2,726,913 - -
------------ ------------ ------------
Net reserves for losses and
settlement expenses, beginning
of year, after adjustments ....... 195,228,583 193,195,429 189,034,741
Incurred losses and
settlement expenses:
- ----------------------
Provision for insured events
of the current year .......... 137,300,762 131,375,234 123,876,601
Decrease in provision for
insured events of prior years (7,447,458) (16,008,019) (15,724,323)
------------ ------------ ------------
Total incurred losses and
settlement expenses ...... 129,853,304 115,367,215 108,152,278
------------ ------------ ------------
Payments:
- ---------
Losses and settlement expenses
attributable to insured events
of the current year ............ 57,649,830 59,948,110 48,237,715
Losses and settlement expenses
attributable to insured events
of prior years ................. 62,684,265 59,908,317 55,753,875
------------ ------------ ------------
Total payments (1) ......... 120,334,095 119,856,427 103,991,590
------------ ------------ ------------
Net reserves for losses and
settlement expenses, end of year 204,747,792 188,706,217 193,195,429
Ceded reserves for losses and
settlement expenses, end of year 13,030,150 13,796,769 12,226,680
------------ ------------ ------------
Gross reserves for losses and
settlement expenses, end of year $217,777,942 $202,502,986 $205,422,109
============ ============ ============
<PAGE>
(1) Loss and settlement expense payments reported in the Company's financial
statements for the year 1997 totaled $113,811,729. This amount reflects
an adjustment of ($3,795,453) related to the change in the property and
casualty insurance subsidiaries' pooling agreement and ($2,726,913)
related to the change in the reinsurance subsidiary's quota share
percentage. These adjustments were made to offset the income statement
effect that resulted from the $6,522,366 increase in reserves for losses
and settlement expenses on January 1, 1997 related to these transactions.
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 and (ii)
disclosure of the gross re-estimated loss and settlement expense reserves and
the related re-estimated reinsurance receivables.
Reflected in this table is (1) the increase in the reinsurance
subsidiary's quota share assumption of Employers Mutual's assumed reinsurance
business from 75 percent 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, (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, (7) the increase in the reinsurance subsidiary's
quota share assumption of Employers Mutual's assumed reinsurance business from
95 percent to 100 percent in 1997 and (8) the addition of a new participant to
the pooling agreement effective January 1, 1997.
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 loss control functions implemented by
Employers Mutual. 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 redundancies
experienced in 1996 and 1995 is not expected to continue.
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------------------------------------
(Dollars in thousands) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> -------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Statutory reserves for losses <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
and settlement expenses ...... $109,088 121,667 127,870 131,623 139,317 180,797 182,072 191,514 196,293 191,892 205,606
Reclassification of reserve
amounts associated with the
National Workers' Compensation
Reinsurance Pool ............. 2,378 2,911 3,855 4,338 6,830 11,364 - - - - -
Retroactive restatement of
reserves in conjunction with
admittance of a new participant
into the pooling agreement ... 1,639 1,469 1,777 2,184 2,461 2,621 2,852 3,039 3,515 3,796 -
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Statutory reserves after
reclassification ............. 113,105 126,047 133,502 138,145 148,608 194,782 184,924 194,553 199,808 195,688 205,606
GAAP adjustments:
Salvage and subrogation ...... (930) (930) (930) (1,203) (1,284) (2,026) (1,804) (1,799) (2,369) (2,400) -
Reclass of statutory settlement
expense portion of
retirement benefit liability - - - - - - (601) (680) (729) (786) (858)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Reserves for losses and
settlement expenses .......... 112,175 125,117 132,572 136,942 147,324 192,756 182,519 192,074 196,710 192,502 204,748
Paid (cumulative) as of:
One year later ............... 25,462 36,488 44,341 44,694 32,647 80,171 61,738 59,136 63,613 63,494 -
Two years later .............. 46,154 57,836 66,075 59,033 78,792 109,023 88,056 87,480 91,951 - -
Three years later ............ 63,144 72,343 77,146 95,435 95,149 125,856 105,173 104,805 - - -
Four years later ............. 71,616 79,183 106,557 104,502 104,531 135,099 114,377 - - - -
Five years later ............. 77,271 105,572 112,201 109,990 109,662 141,023 - - - - -
Six years later .............. 101,726 108,794 115,213 113,479 113,663 - - - - - -
Seven years later ............ 103,955 110,746 117,797 116,340 - - - - - - -
Eight years later ............ 105,486 112,626 119,674 - - - - - - - -
Nine years later ............. 107,001 114,260 - - - - - - - - -
Ten years later .............. 108,586 - - - - - - - - - -
Reserves reestimated as of:
End of year .................. 112,175 125,117 132,572 136,942 147,324 192,756 182,519 192,074 196,710 192,502 204,748
One year later ............... 109,865 124,455 135,523 140,794 151,771 191,986 174,865 175,065 179,240 185,054 -
Two years later .............. 111,571 124,404 137,408 141,353 147,993 187,185 165,481 168,254 176,280 - -
Three years later ............ 113,724 126,140 137,138 139,774 144,649 181,915 161,805 167,485 - - -
Four years later ............. 117,060 128,087 137,656 139,233 144,144 181,783 161,803 - - - -
Five years later ............. 119,352 128,491 136,945 139,989 144,449 182,477 - - - - -
Six years later .............. 120,165 127,944 138,758 140,679 145,503 - - - - - -
Seven years later ............ 120,354 130,086 140,372 141,731 - - - - - - -
Eight years later ............ 122,579 131,700 141,746 - - - - - - - -
Nine years later ............. 124,121 133,171 - - - - - - - - -
Ten years later .............. 125,665 - - - - - - - - - -
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cumulative redundancy
(Deficiency) ................. $(13,490) (8,054) (9,174) (4,789) 1,821 10,279 20,716 24,589 20,430 7,448 -
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross loss and settlement expense reserves - end of year (A) ........................ $199,974 206,221 208,937 206,298 217,778
Reinsurance receivables .............................................................. 17,455 14,147 12,227 13,797 13,030
-------- ------- ------- ------- -------
Net loss and settlement expense reserves - end of year ............................... $182,519 192,074 196,710 192,501 204,748
======== ======= ======= ======= =======
Gross re-estimated reserves - latest (B) ............................................. $176,159 180,531 190,073 200,031 217,778
Re-estimated reinsurance receivables - latest ........................................ 14,356 13,046 13,793 14,977 13,030
-------- ------- ------- ------- -------
Net re-estimated reserves - latest ................................................... $161,803 167,485 176,280 185,054 204,748
======== ======= ======= ======= =======
Gross cumulative redundancy (deficiency) (A-B) ....................................... $ 23,815 25,690 18,864 6,267 -
======== ======= ======= ======= =======
</TABLE>
<PAGE>
Asbestos and Environmental Claims
The Company has exposure to asbestos and environmental related claims
associated with the insurance business wriiten by the parties to the pooling
agreement and the reinsurance business assumed from Employers Mutual by the
reinsurance subsidiary.
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 assignment of responsibility varies widely by state and claims often
emerge long after the policy has expired, which makes 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.
Based upon current facts, management believes the reserves established
for asbestos and environmental related claims at December 31, 1997 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 results of
operations of the Company.
Asbestos Claims
The Company's asbestos claim activity primarily relates to bodily injury
claims where a former insured has been named as one of multiple defendants
covering exposure over many years.
The following table presents selected data on asbestos related losses
and settlement expenses incurred and reserves outstanding for the Company:
Year ended December 31,
-------------------------------
1997 1996 1995
---------- ---------- ---------
Total losses incurred ....................... $ 394,524 $ 100,090 $ 336,899
Total settlement expenses incurred .......... 25,246 5,847 (31,667)
Total losses and settlement expenses ---------- ---------- ---------
incurred ................................ $ 419,770 $ 105,937 $ 305,232
========== ========== =========
Loss reserves ............................... $ 942,822 $ 662,910 $ 581,549
Settlement expense reserves ................. 32,909 28,089 32,117
---------- ---------- ---------
Total loss and settlement expense reserves $ 975,731 $ 690,999 $ 613,666
========== ========== =========
Number of outstanding claims ................ 92 57 71
========== ========== =========
The incurred and reserve amounts for 1997, 1996 and 1995 reflect 63, 40
and 25 claims, respectively, by individuals asserting asbestos exposure to
products allegedly manufactured by a former insured.
<PAGE>
Environmental Claims
The Company's environmental claims activity is predominately related to
pollution from hazardous waste of former insureds. The parties to the pooling
agreement have not written primary coverage for the major oil or chemical
companies. The greatest exposure arises out of claims from small regional
operations or local businesses 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 and gasoline stations. The remaining exposure arises out of
commercial general liability and umbrella policies issued during the 1970's
and early 1980's which allegedly cover contamination emanating from closed
landfills. Claims related to misdeliveries or minor spills of petroleum
products covered under properly endorsed commercial auto policies are not
considered environmental claims since coverage is normally not disputed,
damages are readily determinable and settlement normally occurs over a short
period of time.
The following table presents selected data on environmental losses and
settlement expenses incurred and reserves outstanding for the Company.
Year ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Total losses incurred .................... $ 374,822 $ 85,454 $ 892,250
Total settlement expenses incurred ....... 25,615 (27,761) 185,412
---------- ---------- ----------
Total losses and settlement expenses
incurred ............................. $ 400,437 $ 57,693 $1,077,662
========== ========== ==========
Loss reserves ............................ $1,184,569 $1,103,466 $1,109,072
Settlement expense reserves .............. 252,435 308,145 345,897
---------- ---------- ----------
Total loss and settlement expense
reserves ............................. $1,437,004 $1,411,611 $1,454,969
========== ========== ==========
Number of outstanding claims ............. 46 63 58
========== ========== ==========
Included in the above table at December 31, 1997, 1996 and 1995 are two
closed landfills which involve three and six policyholders, respectively.
Coverage is disputed in all 46 of the claims which were outstanding at
December 31, 1997. The coverage disputes relate to claims involving
contamination at or from (i) insured property and (ii) closed landfills based
on the generation of waste disposed of at these sites.
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
- -----------
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, 1997, 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).
The Company's equity investment holdings include common stock mutual
funds and preferred stocks.
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 has been adopted by one state (Illinois) and 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 and preferred stock portfolios are managed by an internal
staff which is composed of employees of Employers Mutual. The mutual fund
equity portfolios 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, 1997
and 1996. 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,
--------------------------------------------
1997 1996
--------------------- ---------------------
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 ............. $103,826,052 26.0% $113,288,092 30.3%
Obligations of states and
political subdivisions ... 41,989,442 10.5 30,975,611 8.3
Mortgage-backed securities 40,013,569 10.0 44,122,018 11.8
------------ ------- ------------ ------
Total securities held-
to-maturity ............ 185,829,063 46.5 188,385,721 50.4
------------ ------- ------------ ------
Securities available-for-sale:
Fixed maturity securities:
Obligations of states and
political subdivisions ... 130,945,594 32.8 114,538,500 30.6
Foreign governments ........ - - 2,573,101 .7
Public utilities ........... 8,760,899 2.2 8,970,242 2.4
Corporate securities ....... 32,861,713 8.2 20,023,965 5.3
Redeemable preferred stocks 149,000 - 688,350 .2
------------ ------- ------------ ------
Total fixed maturity
securities ............. 172,717,206 43.2 146,794,158 39.2
Equity securities:
Common stock mutual funds .. 20,988,146 5.3 15,963,269 4.3
Non-redeemable preferred
stocks ................... 5,273,011 1.3 5,273,012 1.4
------------ ------ ------------ ------
Total equity securities .. 26,261,157 6.6 21,236,281 5.7
------------ ------ ------------ ------
Total securities
available-for-sale ..... 198,978,363 49.8 168,030,439 44.9
------------ ------ ------------ ------
Short-term investments ......... 14,926,994 3.7 17,553,606 4.7
------------ ------ ------------ ------
Total investments ........ $399,734,420 100.0% $373,969,766 100.0%
============ ====== ============ ======
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, 1997.
<PAGE>
Securities Securities
held-to-maturity available-for-sale
(at amortized cost) (at fair value)
--------------------- ---------------------
Amount Percent Amount Percent
Rating(1) ------------ ------- ------------ -------
Aaa ..................... $185,829,063 100.0% $ 46,374,134 25.8%
Aa ...................... - - 56,387,608 31.4
A ....................... - - 76,037,537 42.3
Baa ..................... - - 352,209 .2
Ba ...................... - - 501,250 .3
------------ ------ ------------ ------
Total fixed maturities $185,829,063 100.0% $179,652,738 100.0%
============ ====== ============ ======
(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, 1997, 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 ................... $ 13,989,831 $ 14,142,820
Due after one year through five years ..... 50,088,102 51,876,854
Due after five years through ten years .... 66,752,623 70,871,137
Due after ten years ....................... 14,984,941 15,354,268
Mortgage-backed securities ................ 40,013,566 41,589,934
------------ ------------
Totals .................................. $185,829,063 $193,835,013
============ ============
Securities available-for-sale:
Due in one year or less ................... $ 13,803,121 $ 13,816,747
Due after one year through five years ..... 56,240,665 57,182,974
Due after five years through ten years .... 42,789,912 45,216,266
Due after ten years ....................... 59,883,508 63,436,751
------------ ------------
Totals .................................. $172,717,206 $179,652,738
============ ============
The mortgage-backed securities shown in the above table include
$22,523,833 of securities issued by government corporations and agencies and
$17,489,733 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,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Average invested assets (1) ........ $386,852,093 $367,276,871 $349,036,057
Investment income (2) .............. 23,759,988 23,907,599 23,173,794
Average yield ...................... 6.14% 6.51% 6.64%
Realized investment gains .......... $ 4,100,006 $ 1,890,923 $ 1,043,730
(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 1,782, 13 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, 1997, $12,722,219 was available
for distribution in 1998 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>
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. At December 31,
1997, each of the Company's insurance subsidiaries has a ratio of total
adjusted capital to risk-based capital 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 on
February 28, 1998 and November 30, 1998, at which time the operations will
move into facilities owned by Employers Mutual.
Lease costs of the Company's office facilities in Oak Brook, Illinois,
and Bismarck, North Dakota, which total approximately $288,000 and $128,000
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, 1997, 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, 1997, 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, 1997, 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, 1997, 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 21, 1998, 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 44 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 63 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 60 Senior Vice President of the Company since
1997 and of Employers Mutual since 1992.
He has been employed by Employers Mutual
since 1963.
Margaret A. Ball 59 Senior Vice President of the Company since
February 1998 and of Employers Mutual since
1997. She has been employed by Employers
Mutual since 1971.
Ronald W. Jean 49 Senior Vice President of the Company and
Employers Mutual since 1997. He has been
employed by Employers Mutual since 1979.
Raymond W. Davis 52 Vice President of the Company and Employers
Mutual since 1985. He has been employed by
Employers Mutual since 1979.
<PAGE>
NAME AGE POSITION
Donald D. Klemme 52 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 45 Vice President of the Company and of
Employers Mutual since 1989. He has been
employed by Employers Mutual since 1983.
Mark E. Reese 40 Vice President of the Company and Employers
Mutual since 1996 and Chief Financial Officer
of the Company and Employers Mutual since
1997. He has been employed by Employers
Mutual since 1984.
Section 16(a) Beneficial Ownership Reporting Compliance
On February 28, 1995, Mr. Ronnie D. Hallenbeck was designated as a
Section 16 reporting person, however, the Company failed to inform him of this
status until February 23, 1998. Due to this lack of notice, Mr. Hallenbeck
was not aware of his obligation to file appropriate reports required by
Section 16(a) of the Securities Exchange Act of 1934. Since being advised of
this designation, Mr. Hallenbeck has filed two late reports identifying his
status as a reporting person and nine events which were not reported on a
timely basis. All of Mr. Hallenbeck's activities during this period of non-
reporting involved purchases of Company stock resulting in his current
holdings of 610 shares and periodic awards of options under Employers Mutual's
Incentive Stock Option Plan.
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 21, 1998, 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 21,
1998, 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 21, 1998, 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 Auditors' Report ................................ 8*
Consolidated Balance Sheets, December 31, 1997 and 1996 ..... 21-22*
Consolidated Statements of Income for the Years ended
December 31, 1997, 1996 and 1995 ......................... 23*
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 1997, 1996 and 1995 ............. 24*
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1996 and 1995 ......................... 25-26*
Notes to Consolidated Financial Statements .................. 27-48*
Form 10-K
2. Schedules Page
-------
Independent Auditors' Report on Schedules ................... 33
Schedule I - Summary of Investments ....................... 34
Schedule II - Condensed Financial Information of Registrant 35
Schedule III - Supplementary Insurance Information .......... 38
Schedule IV - Reinsurance .................................. 39
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations ..... 40
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 1997
Annual Report to Stockholders. The Consolidated Financial Statements
and Independent Auditors' 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.
<PAGE>
(b) Reports on Form 8-K.
None.
(c) Exhibits.
3. Articles of incorporation and bylaws:
(a) Articles of Incorporation of the Company, as amended.
(Incorporated by reference to the Company's Form 10-K
for the calendar year ended December 31, 1988.)
(b) Bylaws of the Company, as amended. (Incorporated by
reference to the Company's Form 10-K for the calendar
year ended December 31, 1992.)
10. Material contracts.
(a) Quota Share Reinsurance Contract between Employers Mutual
Casualty Company and EMC Reinsurance Company, as amended.
(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.
(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 Nos. 33-49337
and 333-45279.)
(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 1997 Annual Report to
Stockholders.
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations from the Company's 1997 Annual Report to
Stockholders.
(c) Consolidated Financial Statements from the Company's 1997
Annual Report to Stockholders.
(d) Market for Common Stock and Related Security Holder Matters from
the Company's 1997 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, 33-49339 and
333-45279) and Form S-3 (Registration No. 33-34499).
24. Power of Attorney.
(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,
1998.
EMC INSURANCE GROUP INC.
/s/ Bruce G. Kelley
------------------------
Bruce G. Kelley
President, Treasurer and
Chief Executive Officer
/s/ Mark E. Reese
------------------------
Mark E. Reese
Vice President - Chief Financial Officer
(Principal 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, 1998.
/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/ Bruce G. Kelley
------------------------
Bruce G. Kelley
Director
/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, 1998, we reported on the consolidated balance
sheets of EMC Insurance Group Inc. and Subsidiaries as of December 31, 1997
and 1996, 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, 1997, 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, 1998
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule I - Summary of Investments -
Other Than Investments in Related Parties
December 31, 1997
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 .............. $103,826,052 $109,820,127 $103,826,052
States, municipalities and
political subdivisions ....... 41,989,442 42,424,949 41,989,442
Mortgage - backed securities ... 40,013,569 41,589,937 40,013,569
------------ ------------ ------------
Total fixed maturity securities 185,829,063 193,835,013 185,829,063
------------ ------------ ------------
Securities available-for-sale:
Fixed maturities:
States, municipalities and
political subdivisions ....... 130,945,594 137,218,479 137,218,479
Public utilities ............... 8,760,899 8,832,942 8,832,942
Corporate securities ........... 32,861,713 33,446,729 33,446,729
Redeemable preferred stocks .... 149,000 154,588 154,588
------------ ------------ ------------
Total fixed maturity securities 172,717,206 179,652,738 179,652,738
Equity securities:
Common stock mutual funds ...... 20,988,146 25,075,965 25,075,965
Non-redeemable preferred stocks 5,273,011 5,896,767 5,896,767
------------ ------------ ------------
Total equity securities ...... 26,261,157 30,972,732 30,972,732
Short-term investments ............. 14,926,994 14,926,994 14,926,994
------------ ------------ ------------
Total investments ...... $399,734,420 $419,387,477 $411,381,527
============ ============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31,
--------------------------
1997 1996
ASSETS ------------ ------------
- ------
Investment in common stock of
subsidiaries (equity method) .................. $154,839,418 $141,767,346
Fixed maturity securities held-to-maturity,
at amortized cost ............................. 6,494,491 4,488,040
Short-term investments .......................... 909,698 2,323,602
Cash ............................................ 3,884 180,917
Accrued investment income ....................... 108,945 74,259
Accounts receivable ............................. 166,488 30,234
Indebtedness of related party ................... - 14,375
------------ ------------
Total assets ............................... $162,522,924 $148,878,773
============ ============
LIABILITIES
- -----------
Accounts payable ................................ $ 127,846 $ 112,169
Income taxes payable ............................ 37,000 37,000
Indebtedness to related party ................... 8,490 -
Deferred tax liability .......................... 3,132 576
------------ ------------
Total liabilities .......................... 176,468 149,745
------------ ------------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 11,351,119 shares
in 1997 and 11,084,461 shares in 1996 ......... 11,351,119 11,084,461
Additional paid-in capital ...................... 65,916,681 62,762,613
Retained earnings ............................... 85,078,656 74,881,954
------------ ------------
Total stockholders' equity ................. 162,346,456 148,729,028
------------ ------------
Total liabilities and stockholders' equity $162,522,924 $148,878,773
============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Condensed Statements of Income
Years ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Equity in undistributed earnings ...... $ 9,377,037 $11,914,842 $13,123,772
Dividends received from
consolidated subsidiaries ........... 3,750,032 3,060,026 4,200,019
Investment income ..................... 445,816 406,952 357,408
----------- ----------- -----------
13,572,885 15,381,820 17,681,199
Operating expenses .................... 313,762 313,087 307,713
----------- ----------- -----------
Income from operations before
income taxes ..................... 13,259,123 15,068,733 17,373,486
Income taxes .......................... 42,556 34,569 24,658
----------- ----------- -----------
Net income............... $13,216,567 $15,034,164 $17,348,828
=========== =========== ===========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Condensed Statements of Cash Flows
Years ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Net cash provided by
operating activities ................ $ 3,702,567 $ 3,178,773 $ 4,269,852
----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed maturity
securities held-to-maturity ....... (3,999,340) (2,485,938) (2,002,500)
Disposals of fixed maturity
securities held-to-maturity ....... 2,000,000 2,000,000 -
Disposals of fixed maturity
securities available-for-sale ..... - - 1,000,000
Net sales (purchases) of short-term
investments ...................... 1,413,904 364,526 (515,869)
----------- ----------- -----------
Net cash used in
investing activities ........... (585,436) (121,412) (1,518,369)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock ........... 1,019,919 1,251,119 850,317
Dividends paid to stockholders ..... (4,314,083) (4,017,222) (3,653,299)
(Purchases) sales of treasury
stock, net ....................... - (129,877) 9,646
----------- ----------- -----------
Net cash used in financing
activities ..................... (3,294,164) (2,895,980) (2,793,336)
------------ ----------- -----------
Net (decrease) increase in cash ....... (177,033) 161,381 (41,853)
Cash at beginning of year ............. 180,917 19,536 61,389
----------- ----------- -----------
Cash at end of year ................... $ 3,884 $ 180,917 $ 19,536
=========== =========== ===========
Income taxes paid ..................... $ 40,000 $ 20,993 $ 31,342
<PAGE>
<TABLE>
<CAPTION>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information
For Years Ended December 31, 1997, 1996 and 1995
Amortization
Deferred of deferred
policy Losses and Net Losses and policy
acquisition settlement Unearned Premium investment settlement acquisition
Segment costs expenses premiums revenue income expenses costs
------- ----------- ------------ ----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Property and casualty insurance $ 8,711,171 $151,738,249 $46,506,654 $132,874,752 $15,528,726 $ 97,083,777 $ 25,328,393
Reinsurance ................... 1,611,531 58,374,665 7,325,143 34,105,686 6,615,029 23,305,824 8,253,329
Nonstandard risk automobile
insurance ................... 237,955 7,665,028 1,025,666 10,237,808 1,011,799 9,463,703 2,360,370
Excess and surplus lines
insurance agency ............ - - - - 158,618 - -
Parent company ................ - - - - 445,816 - -
----------- ------------ ----------- ------------ ----------- ------------ ------------
Consolidated ............. $10,560,657 $217,777,942 $54,857,463 $177,218,246 $23,759,988 $129,853,304 $ 35,942,092
=========== ============ =========== ============ =========== ============ ============
Year ended December 31, 1996:
Property and casualty insurance $ 7,335,953 $142,948,679 $40,278,119 $119,282,389 $15,828,102 $ 82,034,078 $ 22,505,659
Reinsurance ................... 1,482,796 51,816,998 6,739,983 36,674,831 6,436,095 25,180,022 7,951,458
Nonstandard risk automobile
insurance ................... 203,114 7,737,309 890,852 9,233,446 1,111,896 8,153,115 2,097,616
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 $115,367,215 $ 32,554,733
=========== ============ =========== ============ =========== ============ ============
Year ended December 31, 1995:
Property and casualty insurance $ 6,777,303 $146,575,010 $39,973,174 $116,439,266 $15,428,401 $ 74,926,023 $ 21,742,128
Reinsurance ................... 1,729,903 50,748,972 7,863,197 35,825,953 6,067,678 23,744,247 8,191,751
Nonstandard risk automobile
insurance ................... 207,563 8,098,127 930,776 10,001,031 1,175,392 9,482,008 2,218,737
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 $108,152,278 $ 32,152,616
=========== ============ =========== ============ =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Other
underwriting Premiums
Segment expenses written
------- ----------- ------------
<S> <C> <C>
Year ended December 31, 1997
Property and casualty insurance $16,168,332 $139,537,302
Reinsurance ................... 3,498,497 34,690,846
Nonstandard risk automobile
insurance ................... 604,897 10,372,622
Excess and surplus lines
insurance agency ............ (417,252) -
Parent company ................ 313,762 -
----------- ------------
Consolidated ............. $20,168,236 $184,600,771
=========== ============
Year ended December 31, 1996
Property and casualty insurance $15,399,752 $119,640,828
Reinsurance ................... 3,506,366 35,551,617
Nonstandard risk automobile
insurance ................... 541,985 9,193,521
Excess and surplus lines
insurance agency ............ (333,880) -
Parent company ................ 313,087 -
----------- ------------
Consolidated ............. $19,427,310 $164,385,966
=========== ============
Year ended December 31, 1995
Property and casualty insurance $14,548,773 $117,736,744
Reinsurance ................... 3,391,578 35,933,493
Nonstandard risk automobile
insurance ................... 557,028 9,819,022
Excess and surplus lines
insurance agency ............ (338,001) -
Parent company ................ 307,713 -
----------- ------------
Consolidated ............. $18,467,091 $163,489,259
=========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule IV - Reinsurance
For years ended December 31, 1997, 1996 and 1995
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, 1997:
Earned premiums:
Consolidated property and casualty
insurance .......................... $169,304,584 $165,004,455 $172,918,117 $177,218,246 97.6%
============ ============ ============ ============ ==========
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%
============ ============ ============ ============ ==========
</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, 1997, 1996 and 1995
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, 1997: $10,560,657 $217,777,942 $ -0- $54,857,463 $177,218,246 $23,155,554
=========== ============ ======== =========== ============ ===========
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
=========== ============ ======== =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Losses and
settlement expenses Amortization
incurred related to of deferred Paid
(1) (2) policy losses and
Consolidated property- Current Prior acquisition settlement Premiums
casualty entities Year Years costs expenses Written
- ----------------------------- ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997: $137,300,762 ($ 7,447,458) $ 35,942,092 $113,811,729 $184,600,771
============ =========== ============ ============ ============
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
============ =========== ============ ============ ============
</TABLE>
<PAGE>
Difference between Electronic and Circulated 10-k
- --------------------------------------------------
The index to exhibits in the electronic format indicates the exhibits
are included in the direct transmission. The circulated document
contains the page numbers of the exhibits.
<PAGE>
EMC Insurance Group Inc. and Subsidiaries
Index to Exhibits
Exhibit
number Item
- ------- ----
10(a) Quota Share Reinsurance Contract Included in
between Employers Mutual Casualty direct transmission
Company and EMC Reinsurance Company.
10(c) EMC Insurance Companies reinsurance Included in
pooling agreements between Employers direct transmission
Mutual Casualty Company and certain of
its affiliated companies.
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 transmissin
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
<PAGE>
Exhibit 10(a)
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
This agreement made by and between Employers Mutual Casualty Company
("Employers") and EMC Reinsurance Company ("EMC Re").
ARTICLE I
EMC Re is an affiliate of Employers and was formed by Employers
for the sole purpose of engaging in the business of reinsurance.
It is the intention of the parties hereto that EMC Re will solicit,
underwrite, and assume reinsurance risks in a mode of operation similar to
that heretofore conducted by Employers, and that consistent therewith, EMC Re
will gradually assume by means of this Quota Share Agreement, the major
portion of the reinsurance assumed business of Employers as is in force or as
may be placed in force by Employers.
ARTICLE II
Excluded from this Quota Share Agreement at its inception are:
(1) all direct insurance business written by Employers and its affiliated
companies; (2) all involuntary insurance or reinsurance business written by
Employers and classed by Employers as "facilities business"; (3) facultative
reinsurance assumed contracts; (4) intercompany reinsurance contracts between
Employers and its affiliated companies; (5) reinsurance assumed contracts that
have been terminated or are in the process of termination.
ARTICLE III
Pursuant to and subject to the foregoing, Employers hereby cedes
and transfers to EMC Re, and EMC Re hereby accepts, a quota share portion of
the reinsurance contracts on which Employers is subject to liability which
were outstanding and in force as of 12:01 a.m. January 1, 1981, or which were
issued thereafter, or as shall be issued hereafter, in accordance with the
Assumption Addendum attached hereto. Such liability shall include reserves
for unearned premiums, outstanding loss and loss expenses (including
unreported losses) and all other underwriting and administrative expenses, but
shall not include liabilities incurred in connection with investment
transactions. Employers hereby assigns and transfers to EMC Re amounts equal
to the aggregate of the liabilities quota shared as above, less a commission
for the prepaid expenses of Employers.
ARTICLE IV
Employers shall not be prejudiced in any way by any error or
omission through accident or oversight resulting in a failure to accurately or
fully cede, report, or recover with respect to this Quota Share Agreement, but
any such error or omission shall be corrected immediately upon discovery.
<PAGE>
ARTICLE V
This agreement is a continuing one and is unlimited as to
duration, but may be terminated as of the end of any calendar year upon ninety
days prior written notice; or may be otherwise terminated by agreement of the
parties.
ARTICLE VI
Each of the parties hereto agrees that the reinsurance business
quota shared hereunder shall be payable by EMC Re on the basis of the
liability of Employers under the contracts reinsured without diminution
because of the insolvency of Employers; provided that such reinsurance shall
be payable directly to Employers or its liquidator, receiver or such other
statutory successor, except as provided by Section 315 of new
York Insurance Law, or except (a) where the contract specifically
provides another payee for such reinsurance in the event of the
insolvency of the ceding insurer and (b) where EMC Re, with the
consent of the direct reinsured company, has assumed such contract obligations
of Employers as direct obligations of EMC Re to the payees under wich
reinsurance contracts and in substitution for the obligations of Employers to
such payees; and further provided that the liquidator, receiver or statutory
successor of Employers shall give written notice of the pendency of any claim
against Employers on such contracts with any reasonable time after such claim;
and EMC Re may investigate such claim and interpose, at its own expense, in
the proceeding where such claim is to be ajudicated in the defense or defenses
which it may deem available to Employers or its liquidator, receiver or
statutory successor, the expense thus incurred by EMC Re to be chargable,
subject to court approval, against Employers as part of the expense of
liquidation to the extent of a proportionate share of the benefit which may
accrue to Employers solely as a result of the defense undertaken by EMC Re.
Executed by the parties hereto the day and year as reflected in
the Assumption Addendum attached hereto.
<PAGE>
ASSUMPTION ADDENDUM
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
This agreement shall incept as 12:01 a.m. on the date executed by
the parties hereto. The parties to this agreement mutually agree that as of
its inception, the quota share portion of the net liabilities of Employers as
12:01 a.m. January 1, 1981 ceded to and assumed by EMC Re shall be five
percent.
Executed by the parties hereto this 10th day of June, 1981.
Employers Mutual Casualty Company
By:/s/ Robb B. Kelley
--------------------------------------
Robb B. Kelley, President
EMC Reinsurance Company
By:/s/ Richard E. Haskins
--------------------------------------
Richard E. Haskins, President
<PAGE>
AMENDMENT #1
TO
ASSUMPTION ADDENDUM
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
The parties to this agreement mutually agree that the quota share portion
of the net liabilities of Employers at 12:01 a.m. January 1, 1982 ceded to and
assumed by EMC Re shall be twenty-five percent.
Executed by the parties hereto this 3rd day of January, 1982.
Employers Mutual Casualty Company
By:/s/ Robb B. Kelley
------------------------------
Robb B. Kelley, President
EMC Reinsurance Company
By:/s/ Richard E. Haskins
------------------------------
Richard E. Haskins, President
<PAGE>
AMENDMENT #2
TO
ASSUMPTION ADDENDUM
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
The parties to this agreement mutually agree that the quota
share portion of the net liabilities of Employers at 12:01 a.m.
January 1, 1983 ceded to and assumed by EMC Re shall be fifty
percent.
Executed by the parties hereto this 18th day of March, 1983.
Employers Mutual Casualty Company
By:/s/ George W. Kochheiser
------------------------------
George W. Kochheiser, President
EMC Reinsurance Company
By:/s/ Richard E. Haskins
------------------------------
Richard E. Haskins, President
<PAGE>
AMENDMENT #3
TO
ASSUMPTION ADDENDUM
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
The parties to this agreement mutually agree that the quota
share portion of the net liabilities of Employers at 12:01 a.m.
January 1, 1984 ceded to and assumed by EMC Re shall be seventy-
five percent.
Executed by the parties hereto this 3rd day of January, 1984.
Employers Mutual Casualty Company
By:/s/ Robb B. Kelley
-------------------------------
Robb B. Kelley, Chairman & CEO
EMC Reinsurance Company
By:/s/ Richard E. Haskins
-------------------------------
Richard E. Haskins, President
<PAGE>
AMENDMENT #4
TO
ASSUMPTION ADDENDUM
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
The parties to this agreement mutually agree that the quota share portion
of the net liabilities of Employers at 12:01 a.m.
January 1, 1988 ceded to and assumed by EMC Re shall be ninety-
five percent.
Executed by the parties hereto this 9th day of March, 1988.
Employers Mutual Casualty Company
By:/s/ Robb B. Kelley
------------------------------
Robb B. Kelley, Chairman & CEO
EMC Reinsurance Company
By:/s/ Richard E. Haskins
------------------------------
Richard E. Haskins, President
<PAGE>
ENDORSEMENT #1
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
It is understood and agreed by and between the parties as follows:
1. Certain business subject to this agreement and ceded hereunder was
protected by pro-rata and excess of loss reinsurances; such
reinsurances to enure to the benefit of the parites as their
interests appear herein.
2. Such reinsurances were represented to be collectable; there was no
intent to transfer to the reinsurer the credit risk of
non-collectable reinsurances other than as would be deemed
incidental; and there was no consideration contemplated nor given
for the assumption of such credit risk.
3. At various times during the pendency of this agreement the parties
have come to perceive that recoverables from on such reinsurer,
Transit Casualty Company, were becoming of doubtful
collectability, and the parties began a scheduled "write down" of
receivables from that source as their interests appeared in order
to recognize the degree of doubt perceived.
4. The parties have now determined that no part of such receivables
from Transit Casualty Company are collectable, and that the entire
account should be written off as a bad debt.
5. The parties further recognize that the combination of a) increases
in the percentages of business ceded hereunder, and b) the more
than 200 percent growth in the loss amounts now recognized as
non-recoverable from Transit, have exacerbated the adverse affects
upon EMC Re hereunder to the point of severely reducing EMC Re's
surplus, and to the frustration of the purpose of this contract
and to the goals of the parties when it was drafted.
Now therefore, in consideration of the foregoing, the parties agree as
follows:
1. EMC Re will pay Employers in full the outstanding portion of its
95% pro-rata part of the Transit Casualty Company scheduled write
off as booked through September 30, 1988, in the amount of 95% of
$2,650,000.
<PAGE>
2. Employers Mutual Casualty Company will retain (in addition to its
5% quota share portion), and hereby releases EMC Re from liability
therefore, any additional non-recoverable sums now due or in the
future recognized as necessary to be written off, applicable not
only to Transit but to any other non-collectable reinsurance
protections on business subject to this quota share agreement,
from its inception.
Executed by the parties hereto this 6th day of December, 1988.
Employers Mutual Casualty Company
By: /s/ Robb B. Kelley
------------------------------
Robb B. Kelley, Chairman & CEO
EMC Reinsurance Company
By: /s/ Richard E. Haskins
------------------------------
Richard E. Haskins, President
<PAGE>
COMMUTATION AGREEMENT AND RELEASE
This Agreement entered into by and between Employers Mutual Casualty
Company (the "Company") and EMC Reinsurance Company (the "Reinsurer")
and shall be effective as of September 30, 1989 (the "commutation
date").
WHEREAS, the parties have entered into a certain quota share
reinsurance contract effective from January 1, 1981, and remaining in
full force and effect, and
WHEREAS, the Company and the Reinsurer desire to settle, adjust and
determine the liabilities of the Reinsurer thereunder for losses
occurring during all years prior to 12:01 A.M., January 1, 1981, and
WHEREAS, by reason of which settlement agreement there is due and
owing to the Company from the Reinsurer the sum of
$2,982,882.00,
NOW, THEREFORE, in consideration of the payment to the Company by the
Reinsurer of $2,982,882.00, the Company has released and discharged,
and by these presents does for itself, its successors and assigns,
release and discharge the Reinsurer with respect to any contractual
obligations under the aforesaid quota share reinsurance contract as
respects, and only as respects, losses occurring during any and all
years prior to 12:01 A.M., January 1, 1981.
IN WITNESS WHEREOF, the parties have caused these presents to be
executed in duplicate this 5th day of December, 1989.
EMPLOYERS MUTUAL CASUALTY COMPANY
By /s/ George W. Kochheiser
-----------------------------
George W. Kochheiser
President
EMC REINSURANCE COMPANY
By /s/ Richard E. Haskins
-----------------------------
Richard E. Haskins
President
<PAGE>
ENDORSEMENT #2
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
It is understood and agreed by and between the parties as follows:
Effective January 1, 1993 Article III of the Quota Share is amended by
adding the follosing additional paragraph:
Notwithstanding the foregoing terms, it is agreed that the maximum
liability transferred to EMC Re for loss resulting from any one occurrence,
including reinstatement premium costs resulting from such occurrence, is
limited to $1,000,000. As consideration to Employers for this per occurrence
limitation, it is agreed that EMC Re shall allow Employers an additional
ceding commission of 5.25%
Executed by the parties this 2nd day of December, 1992.
Employers Mutual Casualty Company
by /s/ Bruce G. Kelley
---------------------------------
EMC Reinsurance Company
by /s/ Dean P. McClaflin
---------------------------------
<PAGE>
COMMUTATION AGREEMENT AND RELEASE
This Agreement entered into by and between Employers Mutual Casualty
Company (the "Company") and EMC Reinsurance Company (the "Reinsurer") and
shall be effective as of June 30, 1993 (the "commutation date").
WHEREAS, the parties have entered into a certain quota share
reinsurance contract effective from January 1, 1981, and remaining in
full force and effect, and
WHEREAS, the Company and the Reinsurer desire to settle, adjust and
determine final liabilities of the Reinsurer thereunder for losses
originating from the business written by Russell Reinsurace Services,
Inc., and
WHEREAS, by reason of such settlement agreement there is due and owing
to the Company from the Reinsurer the sum $17,806,179.
NOW, THEREFORE, in consideration of the payment to the Company by the
Reinsurer of $17,806,179, the Company has released and discharged, and
by these presents does for itself, its successors and assigns, release
and discharge the Reinsurer with respect to any contractual
obligations under the aforesaid quota share reinsurance contract as
respects, all business originating through Russell Reinsurance
Services, Inc.
IN WITNESS WHEREOF, the parties have caused these presents to be
executed in duplicate this 29th day of July, 1993.
EMPLOYERS MUTUAL CASUALTY COMPANY
By /s/ Bruce G. Kelley
-----------------------------
Bruce G. Kelley
President
EMC REINSURANCE COMPANY
By /s/ Dean P. McClaflin
-----------------------------
Dean P. McClaflin
President
<PAGE>
COMMUTATION AGREEMENT AND RELEASE
This Agreement entered into by and between Employers Mutual Casualty
Company (the "Company") and EMC Reinsurance Company (the "Reinsurer")
and shall be effective as of October 31, 1993 (the "commutation date").
WHEREAS, the parties have entered into a certain quota share
reinsurance contract effective from January 1, 1981, and remaining in
full force and effect, and
WHEREAS, the Company and the Reinsurer desire to settle, adjust and
determine final liabilities of the Reinsurer thereunder for losses
originating from the business written by Improved Risk Mutual, and
WHEREAS, by reason of such settlement agreement there is due and owing
to the Company from the Reinsurer the sum of $2,619,776.
NOW, THEREFORE, in consideration of the payment to the Company by the
Reinsurer of $2,619,776, the Company has released and discharged, and
by these presents does for itself, its successors and assigns, release
and discharge the Reinsurer with respect to any contractual
obligations under the aforesaid quota share reinsurance contract as
respects, all business originating through Improved Risk Mutual.
IN WITNESS WHEREOF, the parties have caused these presents to be
executed in duplicate this 1st day of December, 1993.
EMPLOYERS MUTUAL CASUALTY COMPANY
By /s/ Bruce G. Kelley
-----------------------------
Bruce G. Kelley
President
EMC REINSURANCE COMPANY
By /s/ Dean P. McClaflin
-----------------------------
Dean P. McClaflin
President
<PAGE>
ENDORSEMENT #3
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
It is understood and agreed by and between the parties as follows:
Effective January 1, 1997, the last paragraph of Article III of the
Quota Share found in Endorsement #2 is changed to read as follows:
Notwithstanding the foregoing terms, it is agreed that the maximum
liability transferred to EMC Re for loss resulting from any one
occurrence, including reinstatement premium costs resulting from such
occurrence, is limited to $1,500,000. As consideration to Employers
for this per occurrence limitation, it is agreed that EMC Re shall
allow Employers an override commission of 5.00% plus .25% (fronting
fee) equaling 5.25%.
Executed by the parties this 7th day of January, 1997.
Employers Mutual Casualty Company
By:/s/Bruce G. Kelley
------------------------------
EMC Reinsurance Company
By:/s/Ronnie D. Hallenbeck
------------------------------
<PAGE>
AMENDMENT #5
TO
ASSUMPTION ADDENDUM
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
The parties to this agreement mutually agree that the quota share portion
of the net liabilities of Employers at 12:01 a.m. January 1, 1997 ceded to and
assumed by EMC Re shall be one hundred percent.
Executed by the parties hereto this 7th day of January, 1997.
Employers Mutual Casualty Company
By:/s/Bruce G. Kelley
------------------------------
EMC Reinsurance Company
By:/s/Ronnie D. Hallenbeck
-----------------------------
<PAGE>
Exhibit 10 (c)
EMPLOYERS MUTUAL COMPANIES
REINSURANCE POOLING AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY
AND
CERTAIN OF ITS AFFILIATED COMPANIES
REWRITTEN EFFECTIVE JANUARY 1, 1987
<PAGE>
REINSURANCE POOLING AGREEMENT
This Agreement made by and between Employers Mutual Casualty Company and
certain of its affiliated or subsidiary companies such as are signatory hereto
by means of exhibits setting forth the interests and liabilities of the
parties, attached hereto and made a part of this Agreement. Employers Mutual
Casualty Company is hereinafter referred to as "EMC", and the other companies
signatory hereto are hereinafter referred to as the "Affiliated Companies" or
as the "Affiliated Company", as the context requires.
EMC and each Affiliated Company signatory to the Pooling Agreement agree
to honor the terms set forth herein as if this Agreement were solely between
EMC and each such Affiliated Company. Balances payable to or recoverable from
EMC and any such Affiliated Company shall not serve to offset any balances
payable to or recoverable from any other Affiliated Company signatory to this
Agreement. Reports and remittances between EMC and each Affiliated Company
shall be in sufficient detail to identify the individual premium and loss
obligation of each party to the other.
ARTICLE I
The Companies are engaged in the insurance business and maintain a mutual
business relationship having certain incidents of common management, and
desire to bring about for each other added economies of operation, uniform
underwriting results, diversification as respects the classes of insurance
business written, and maximization of capacity. To accomplish the aforesaid,
the Companies do by means of this Agreement, pool all of their insurance
business then in force as of 12:01 A.M. of the date signatory hereto, and
thereafter to share in the fortunes of their pooled insurance business.
ARTICLE II
EMC hereby reinsures and the Affiliated Company hereby cedes and
transfers to EMC all liabilities incurred under or in connections with all
contracts and policies of insurance issued by the Affiliated Company
outstanding and in force as of 12:01 A.M. of the date signatory hereto, or
thereafter issued by it. Such liabilities shall include the Affiliated
Company's reserves for unearned premiums, outstanding losses and loss expenses
(including unreported losses) and all other underwriting and administrative
expenses as evidenced by the Affiliated Company's books and records, but shall
not include inter-company balances, liabilities for Corporate Taxes including
Federal or State Income
Taxes, or liabilities incurred in connection with their respective investment
transactions.
ARTICLE III
The Affiliated Company hereby assigns and transfers to EMC all right,
title and interest in and to reinsurance outstanding and in force with respect
to the liabilities reinsured by EMC under Article II hereof.
ARTICLE IV
The Affiliated Company assigns and transfers to EMC amounts equal to the
aggregate of all of its liabilities reinsured by EMC under Article II hereof,
less a commission allowance equal to the prepaid expenses of the Affiliated
Company but not in excess of 40 percent of the Affiliated Company's combined
ratio on a trade basis. Prepaid expenses is defined as those expenses records
in column 2, part 4, of the Underwriting and Expense Exhibit of the Affiliated
Company's convention statement. The trade combined ratio is the ratio of loss
and loss adjustment expense to earned premium, plus the ratio of underwriting
expenses to premiums written.
<PAGE>
ARTICLE V
The Affiliated Company hereby reinsures, and EMC hereby cedes and
transfers to the Affiliated Company a portion of its net liabilities under all
contracts and policies of insurance (including those reinsured by EMC under
Article II hereof) on which EMC is subject to liability and which are
outstanding and in force as of 12:01 A.M. of the date signatory hereto, or are
issued thereafter, in accordance with the exhibit attached hereto to which the
Affiliated Company is a signatory party. Such liabilities shall include
reserves for unearned premiums, outstanding losses and loss expenses
(including unreported losses) and all other underwriting and administrative
expenses, but shall not include inter-company balances, liabilities for
Corporate Taxes including Federal or State Income Taxes, or liabilities in
connection with investment transactions.
ARTICLE VI
EMC hereby assigns and transfers to the Affiliated Company amounts equal
to the aggregate of all liabilities of EMC reinsured by the Affiliated Company
under contracts and policies of insurance which are outstanding and in force
as of 12:01 A.M. of the date signatory hereto under Article V hereof, less a
commission allowance equal to the prepaid expenses of EMC but not in excess of
40 percent of EMC's combined ratio on a trade basis. Prepaid expenses is
defined as those expenses recorded in column 2, part 4, of the Underwriting
and Expense Exhibit of EMC's convention statement. The trade combined ratio
is the
ratio of loss and loss adjustment expense to earned premium, plus the ratio of
underwriting expenses to premiums written.
ARTICLE VII
EMC agrees to pay to the Affiliated Company it respective participation
of all premiums written by the companies after first deducting premiums on all
reinsurance ceded to reinsurers (other than the parties hereto). Similarly,
it is further agreed that all losses, loss expense and other underwriting and
administrative expenses (with the exceptions noted in Articles II and V
hereof) of the companies, less all losses and expense recovered and
recoverable under reinsurance ceded to reinsurers (other than the parties
hereto), shall be pro-rated between the parties on the basis of their
respective participations as reflected in the aforesaid exhibit.
ARTICLE VIII
The obligation of the companies under this Agreement to exchange
reinsurance between themselves may be offset by reciprocal obligation so that
the net amount only shall be required to be transferred, except no offset
shall be valid under circumstances prohibited by Section 7472, New York
Insurance
Laws. An accounting on all transactions shall be rendered quarterly, and the
settling of balances shall be made within 30 days after the rendering of the
quarterly reports. Except as otherwise required by the context of this
Agreement, the amount of all payments between the companies under this
Agreement shall be determined on the basis of the convention form of annual
statements of the companies. Notwithstanding anything herein contained, this
Agreement shall not apply to the investment operations of the companies.
ARTICLE IX
The conditions of reinsurance hereunder shall in all cases be identical
with the conditions of the original insurance or as changed during the term of
insurance.
<PAGE>
ARTICLE X
This Agreement is a continuing one and is unlimited as to duration but
may be terminated upon mutual consent or by 30 day prior written notice by
either party.
ARTICLE XI
Each of the companies hereto, as the assuming insurer, hereby agrees that
all reinsurance made, ceded, renewed or otherwise becoming effective under
this Agreement shall be payable by the assuming insurer on the basis of the
liability of the ceding insurer under the policy or contract reinsured without
diminution because of insolvency of the ceding insurer; provided that such
reinsurance shall be payable directly to the ceding insurer or to its
liquidator, receiver or other statutory successor, except as provided by
Section 4118 of New York Insurance Law or except (a) where the contract
specifically
provides another payee for such reinsurance in the event of the insolvency of
the ceding insurer and (b) where the assuming insurer, with consent of the
direct insured or insureds, has assumed such policy obligations of the ceding
insurer as direct obligations of the assuming insurer to the payees under such
policies and in substitution for the obligations of the ceding insurer to such
payee; and further provided that the liquidator, receiver or statutory
successor of the ceding insurer shall give written notice of the pendency of
any claim against the insolvent ceding insurer on the policy or contract
reinsured within a reasonable time after such claim; and the assuming insurer
may investigate such claim and interpose, at its own expense, in the
proceeding where such claim is to be adjudicated any defense or defenses which
it may deem available to the ceding insurer or it liquidator, receiver or
statutory successor, the expense thus incurred by the assuming insurer to be
chargeable, subject to court approval against the insolvent ceding insurer as
part of the expense of liquidation to the extent of proportionate share of the
benefit which may accrue to the ceding insurer solely as a result of the
defense undertaken by the assuming insurer.
ARTICLE XII
Each party shall allow the other party to inspect, at reasonable times,
the records of the Company relevant to the business reinsured under this
Agreement, including files concerning claims, losses, or legal proceedings
which involve or are likely to involve the other party.
ARTICLE XIII
A. As a condition precedent to any right of action hereunder, any dispute
arising out of this Agreement shall be submitted to the decision of a
board of arbitration composed of two arbitrators and an umpire, meeting
in Des Moines, Iowa, unless otherwise agreed.
B. The members of the board of arbitration shall be active or retired
disinterested officials of insurance or reinsurance companies. Each
party shall appoint its arbitrator and the two arbitrators shall choose
an umpire before instituting the hearing. If the respondent fails to
appoint its arbitrator within four weeks after being requested to do so
by the claimant, the latter shall also appoint the second arbitrator. If
the two arbitrators fail to agree upon the appointment of an umpire
within four weeks after their nominations, each of them shall name three,
of whom the other shall decline two and the decision shall be made by
drawing lots.
C. The claimant shall submit its initial brief within 20 days from
appointment of the umpire. The respondent shall submit its brief within
20 days after receipt of the claimant's brief and the claimant may submit
a reply brief within 10 days after receipt of the respondent's brief.
<PAGE>
D. The board shall make its decision with regard to the custom and usage of
the insurance and reinsurance business. The board shall issue its
decision in writing based upon a hearing in which evidence may be
introduced without following strict rules of evidence but in which cross
examination and rebuttal shall be allowed. The board shall make its
decision within 60 days following the termination of the hearings unless
the parties consent to an extension. The majority decision of the board
shall be final and binding upon all parties to the proceeding. Judgment
may be entered upon the award of the board in any court having
jurisdiction thereof.
E. Each party shall bear the expense of its own arbitrator and shall jointly
and equally bear with the other party the expense of the umpire. The
remaining costs of the arbitration proceedings shall be allocated by the
board.
ARTICLE XIV
By execution of this Agreement, the parties hereto simultaneously
terminate any and all reinsurance agreements by and between them heretofore
existing, upon the understanding that this Agreement shall supersede and exist
in substitution for any such prior agreements.
Executed by the parties hereto the day and year as reflected in the
exhibit attached hereto.
<PAGE>
ADDENDUM #I TO
EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY
AND
CERTAIN OF ITS AFFILIATED COMPANIES
This Pooling Agreement is amended by adding Article XV thereto, with effect
from January 1, 1993, as follows:
ARTICLE XV
Notwithstanding the wording of this Agreement as contained in Articles
II through VIII, it is agreed and understood that the voluntary
reinsurance assumed business written by EMC and heretofore ceded to
the Affiliated Companies under this Pooling Agreement, is
hereafter not "contracts and policies of insurance" as used in this
agreement, and is not business subject to cession and transfer by EMC
to the Affiliated Companies.
On January 1, 1993, EMC and the Affiliated Companies shall make such asset and
reserve transfers as are required to give effect to the provisions of this
Article XV.
This Pooling Agreement is further amended by substituting "EMC Insurance
Companies" for "Employers Mutual Companies" wherever it appears, consistent
with and pursuant to action of the Board of Directors effecting this name
change.
<PAGE>
INTEREST AND LIABILITIES EXHIBIT # II
TO EMPLOYERS MUTUAL COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in the
Reinsurance Pooling Agreement to which this exhibit is attached, by and
between EMC and the Affiliated Company which is signatory to this exhibit, EMC
hereby cedes and transfers to the Affiliated Company, and the Affiliated
Company hereby accepts reinsurance thereon, 3% of EMC's net liabilities,
pursuant to Article V, effective January 1, 1987.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the date of this Addendum,
as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 3 %
EMCASCO Insurance Company 8 %
Illinois EMCASCO Insurance Company 6 %
Union Mutual Insurance Company
of Providence 2.5%
-----
24.5%
EMC's Net Retained Portions of
its Net Liabilities is 75.5%
-----
100.0%
Executed by the parties hereto this 25th day of November, 1986.
Employers Mutual Casualty Company
By:/s/Richard E. Haskins
--------------------------
Dakota Fire Insurance Company
By:/s/Robb B. Kelley
--------------------------
<PAGE>
AMENDMENT # I TO
INTEREST AND LIABILITIES EXHIBIT # II
TO EMPLOYERS MUTUAL COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in the
Reinsurance Pooling Agreement to which this exhibit is attached, by and
between EMC and the Affiliated Company which is signatory to this exhibit, EMC
hereby cedes and transfers to the Affiliated Company, and the Affiliated
Company hereby accepts reinsurance thereon, 5% of EMC's net liabilities,
pursuant to Article V, effective January 1, 1992.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the effective date of this
Amendment, as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 5 %
EMCASCO Insurance Company 9 %
Illinois EMCASCO Insurance Company 8 %
Union Mutual Insurance Company
of Providence 2.5%
29.5% -----
EMC's Net Retained Portions of
its Net Liabilities is 70.5%
-----
100.0%
Executed by the parties hereto this 20th day of December, 1991.
Employers Mutual Casualty Company
By:/s/Richard E. Haskins
------------------------------
Dakota Fire Insurance Company
By:/s/Bruce G. Kelley
------------------------------
<PAGE>
ENDORSEMENT NO. I
TO
REINSURANCE POOLING AGREEMENT BETWEEN
DAKOTA FIRE INSURANCE CO. AND EMPLOYERS MUTUAL CASUALTY COMPANY
Whereby Dakota Fire Insurance Company does not desire to become licensed
in the State of Iowa which disallows credits taken by Employers Mutual
Casualty Company in their financial statements for unearned premium reserve
and loss reserve for reinsurance ceded to Dakota Fire Insurance Company. In
consideration of continuing with a reinsurance program between the companies,
Dakota Fire Insurance Company does place the Bond and Corporate Note portion
of their Custodial Account Number 1929009 at the Bankers Trust Company, Des
Moines, Iowa, under the control of Employers Mutual Casualty Company. The
market value of the account exceeds $9,000,000 and that amount or a greater
amount will be maintained there during the life of this Agreement.
It is further agreed that there will be no bonds cashed by Employers
Mutual casualty Company for their benefit unless Dakota Fire Insurance Company
defaults on the reinsurance contract.
This contract may be terminated by either party at such a time as may be
mutually agreeable.
Executed by the parties hereto 25th Day of November 1986.
DAKOTA FIRE INSURANCE COMPANY
By:/s/Robb B. Kelley
------------------------------
EMPLOYERS MUTUAL CASUALTY COMPANY
By:/s/Richard E. Haskins
------------------------------
<PAGE>
ENDORSEMENT NO. II
TO
REINSURANCE POOLING AGREEMENT BETWEEN DAKOTA FIRE AND
EMPLOYERS MUTUAL CASUALTY COMPANY
Endorsement No. I is hereby deleted from this Agreement.
Executed by the Parties this 4th day of March, 1993.
Employers Mutual Casualty Company
By:/s/Fred A. Schiek
------------------------------
Dakota Fire Insurance Company
By:/s/Bruce G. Kelley
------------------------------
<PAGE>
AMENDMENT #II TO INTERESTS AND LIABILITY EXHIBIT II
TO EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in Addendum
#I to the Reinsurance Pooling Agreement to which this Exhibit is attached, EMC
and the affiliated company which is signatory to this Exhibit each do hereby
ratify Addendum #I as a part of the Pooling Agreement effective from January
1, 1993.
Executed by the parties this 23rd day of December, 1992.
Employers Mutual Casualty Company
By:/s/Bruce G. Kelley
------------------------------
Dakota Fire Insurance Company
By:/s/Fred A. Schiek
------------------------------
<PAGE>
AMENDMENT #III TO
INTEREST AND LIABILITIES EXHIBIT #II
TO EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
This Amendment is effective January 1, 1997.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the effective date of this
Amendment, as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 5 %
EMCASCO Insurance Company 9 %
Hamilton Mutual Insurance Company of Cincinnati, Ohio 5 %
Illinois EMCASCO Insurance Company 8 %
Union Insurance Company of Providence 2.5%
-----
34.5%
EMC's Net Retained Portion of its Net Liabilities is 65.5%
-----
100.0%
Executed by the parties hereto this 26th day of March, 1997.
Employers Mutual Casualty Company
By: /s/Bruce G. Kelley
-----------------------------
Dakota Fire Insurance Company
By: /s/Fred A. Schiek
-----------------------------
<PAGE>
INTEREST AND LIABILITIES EXHIBIT #III
TO EMPLOYERS MUTUAL COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in the
Reinsurance Pooling Agreement to which this exhibit is attached, by and
between EMC and the Affiliated Company which is signatory to this exhibit, EMC
hereby cedes and transfer to the Affiliated Company, and the Affiliated
Company hereby accepts reinsurance thereon, 6% of EMC's net liabilities,
pursuant to Article V, effective January 1, 1987.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the date of this Addendum,
as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 3 %
EMCASCO Insurance Company 8 %
Illinois EMCASCO Insurance Company 6 %
Union Mutual Insurance Company
of Providence 2.5%
-----
24.5%
EMC's Net Retained Portions of
its Net Liabilities is 75.5%
-----
100.0%
Executed by the parties hereto this 25th day of November, 1986.
EMPLOYERS MUTUAL CASUALTY COMPANY
By:/s/Richard E. Haskins
-------------------------------
ILLINOIS EMCASCO INSURANCE COMPANY
By:/s/Robb B. Kelley
-------------------------------
<PAGE>
AMENDMENT # I TO
INTEREST AND LIABILITIES EXHIBIT # III
TO EMPLOYERS MUTUAL COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in the
Reinsurance Pooling Agreement to which this exhibit is attached, by and
between EMC and the Affiliated Company which is signatory to this exhibit, EMC
hereby cedes and transfers to the Affiliated Company, and the Affiliated
Company hereby accepts reinsurance thereon, 8% of EMC's net liabilities,
pursuant to Article V, effective January 1, 1992.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the effective date of this
Amendment, as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 5 %
EMCASCO Insurance Company 9 %
Illinois EMCASCO Insurance Company 8 %
Union Mutual Insurance Company
of Providence 2.5%
-----
29.5%
EMC's Net Retained Portions of
its Net Liabilities is 70.5%
-----
100.0%
Executed by the parties hereto this 20th day of December, 1991.
Employers Mutual Casualty Company
By:/s/Richard E. Haskins
-------------------------------
Illinois EMCASCO Insurance Company
By:/s/Bruce G. Kelley
-------------------------------
<PAGE>
AMENDMENT #II TO INTERESTS AND LIABILITY EXHIBIT III
TO EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in Addendum
#I to the Reinsurance Pooling Agreement to which this Exhibit is attached, EMC
and the affiliated company which is signatory to this Exhibit each do hereby
ratify Addendum #I as a part of the Pooling Agreement effective from January
1, 1993.
Executed by the parties this 23rd day of December, 1992.
Employers Mutual Casualty Company
By:/s/Bruce G. Kelley
-------------------------------
Illinois EMCASCO Insurance Company
By:/s/Fred A. Schiek
-------------------------------
<PAGE>
AMENDMENT #III TO
INTEREST AND LIABILITIES EXHIBIT #III
TO EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
This Amendment is effective January 1, 1997.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the effective date of this
Amendment, as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 5 %
EMCASCO Insurance Company 9 %
Hamilton Mutual Insurance Company of Cincinnati, Ohio 5 %
Illinois EMCASCO Insurance Company 8 %
Union Insurance Company of Providence 2.5%
-----
34.5%
EMC's Net Retained Portion of its Net Liabilities is 65.5%
-----
100.0%
Executed by the parties hereto this 26th day of March, 1997.
Employers Mutual Casualty Company
By: /s/Bruce G. Kelley
------------------------------
Illinois EMCASCO Insurance Company
By: /s/Fred A. Schiek
------------------------------
<PAGE>
INTEREST AND LIABILITIES EXHIBIT #IV
TO EMPLOYERS MUTUAL COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in the
Reinsurance Pooling Agreement to which this exhibit is attached, by and
between EMC and the Affiliated Company which is signatory to this exhibit, EMC
hereby cedes and transfers to the Affiliated Company, and the Affiliated
Company hereby accepts reinsurance thereon, 8% of EMC's net liabilities,
pursuant to Article V, effective January 1, 1987. The Affiliated Companies
signatory to this Agreement and their assumed portions of the net liabilities
of EMC are, as of the date of this Addendum, as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 3 %
EMCASCO Insurance Company 8 %
Illinois EMCASCO Insurance Company 6 %
Union Mutual Insurance Company
of Providence 2.5%
-----
24.5%
EMC's Net Retained Portions of
its Net Liabilities is 75.5%
-----
100.0%
Executed by the parties hereto this 25th day of November, 1986.
Employers Mutual Casualty Company
By:/s/Richard E. Haskins
------------------------------
EMCASCO Insurance Company
By:/s/Robb B. Kelley
------------------------------
<PAGE>
AMENDMENT # I TO
INTEREST AND LIABILITIES EXHIBIT # IV
TO EMPLOYERS MUTUAL COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in the
Reinsurance Pooling Agreement to which this exhibit is attached, by and
between EMC and the Affiliated Company which is signatory to this exhibit, EMC
hereby cedes and transfers to the Affiliated Company, and the Affiliated
Company hereby accepts reinsurance thereon, 9% of EMC's net liabilities,
pursuant to Article V, effective January 1, 1992.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the effective date of this
Amendment, as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 5 %
EMCASCO Insurance Company 9 %
Illinois EMCASCO Insurance Company 8 %
Union Mutual Insurance Company
of Providence 2.5%
-----
29.5%
EMC's Net Retained Portions of
its Net Liabilities is 70.5%
-----
100.0%
Executed by the parties hereto this 20th day of December, 1991.
Employers Mutual Casualty Company
By:/s/Richard E. Haskins
------------------------------
EMCASCO Insurance Company
By:/s/Bruce G. Kelley
------------------------------
<PAGE>
AMENDMENT #II TO INTERESTS AND LIABILITY EXHIBIT IV
TO EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in Addendum
#I to the Reinsurance Pooling Agreement to which this Exhibit is attached, EMC
and the affiliated company which is signatory to this Exhibit each do hereby
ratify Addendum #I as a part of the Pooling Agreement effective from January
1, 1993.
Executed by the parties this 23rd day of December, 1992.
Employers Mutual Casualty Company
By:/s/Bruce G. Kelley
------------------------------
EMCASCO Insurance Company
By:/s/Fred A. Schiek
------------------------------
<PAGE>
AMENDMENT #III TO
INTEREST AND LIABILITIES EXHIBIT #IV
TO EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
This Amendment is effective January 1, 1997.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the effective date of this
Amendment, as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 5 %
EMCASCO Insurance Company 9 %
Hamilton Mutual Insurance Company of Cincinnati, Ohio 5 %
Illinois EMCASCO Insurance Company 8 %
Union Insurance Company of Providence 2.5%
-----
34.5%
EMC's Net Retained Portion of its Net Liabilities is 65.5%
-----
100.0%
Executed by the parties hereto this 26th day of March, 1997.
Employers Mutual Casualty Company
By: /s/Bruce G. Kelley
-----------------------------
EMCASCO Insurance Company
By: /s/Fred A. Schiek
-----------------------------
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA. EXHIBIT 13(a)
- ------------------------ -------------
Year ended December 31,
--------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
Income Statement Data
Insurance premiums earned ... $177,218 $165,191 $162,266 $164,829 $156,438 $147,410 $113,419 $101,323 $ 91,728 $ 88,598 $95,531
Investment income, net ...... 23,760 23,907 23,174 20,930 20,780 21,540 20,202 19,884 19,309 16,623 13,632
Realized investment gains ... 4,100 1,891 1,043 520 684 384 65 48 257 36 177
Other income ................ 219 274 344 434 259 - - - - - -
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total revenues ......... 205,297 191,263 186,827 186,713 178,161 169,334 133,686 121,255 111,294 105,257 109,340
Losses and expenses ......... 188,494 170,594 162,511 168,036 169,142 168,359 123,254 110,415 102,517 89,795 96,612
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Income before income taxes .. 16,803 20,669 24,316 18,677 9,019 975 10,432 10,840 8,777 15,462 12,728
Income taxes ................ 3,586 5,635 6,967 5,171 1,885 759 3,124 2,894 2,055 3,920 2,271
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Income from:
Continuing operations .... 13,217 15,034 17,349 13,506 7,134 216 7,308 7,946 6,722 11,542 10,457
Discontinued operations .. - - - - - - 1,853 319 274 263 225
Accounting changes ....... - - - - 2,621 - - - - - -
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Net income ............ $ 13,217 $ 15,034 $ 17,349 $ 13,506 $ 9,755 $ 216 $ 9,161 $ 8,265 $ 6,996 $ 11,805 $10,682
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== =======
Earnings per common share:
Income from:
Continuing operations .. $ 1.18 $ 1.37 $ 1.62 $ 1.29 $ .70 $ .02 $ .73 $ .80 $ .71 $ 1.29 $ 1.23
Discontinued operations - - - - - - .18 .03 .03 .03 .03
Accounting changes ..... - - - - .26 - - - - - -
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total ................. $ 1.18 $ 1.37 $ 1.62 $ 1.29 $ .96 $ .02 $ .91 $ .83 $ .74 $ 1.32 $ 1.26
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== =======
Premiums earned by segment:
Property and casualty ..... $132,875 $119,282 $116,439 $115,412 $109,585 $109,139 $ 78,413 $ 70,597 $ 62,517 $ 54,178 $51,534
Reinsurance ............... 34,105 36,675 35,826 37,256 33,324 26,615 25,009 20,696 18,621 21,417 29,808
Nonstandard risk automobile 10,238 9,234 10,001 12,161 13,529 11,656 9,997 10,030 10,590 13,003 14,189
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total ..................$177,218 $165,191 $162,266 $164,829 $156,438 $147,410 $113,419 $101,323 $ 91,728 $ 88,598 $95,531
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== =======
Balance Sheet Data
Total assets ................ $459,110 $430,328 $412,881 $387,370 $368,936 $372,807 $311,001 $296,126 $284,396 $266,812 $235,435
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Stockholders' equity ........ $162,346 $148,729 $136,889 $116,727 $109,634 $100,911 $105,144 $100,615 $ 95,911 $ 89,604 $ 78,240
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA.(continued) EXHIBIT 13(a)
- ----------------------------------- -------------
Year ended December 31,
--------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
Other Data
Average return on equity .... 8.5% 10.5% 13.7% 11.9% 9.3% .2% 8.9% 8.4% 7.5% 14.1% 14.4%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Book value per share ........ $ 14.30 $ 13.42 $ 12.66 $ 11.03 $ 10.63 $ 9.98 $ 10.47 $ 10.04 $ 9.82 $ 9.65 $ 9.01
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Dividends paid per share .... $ .60 $ .57 $ .53 $ .52 $ .52 $ .52 $ .52 $ .52 $ .52 $ .49 $ .48
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Property and casualty segment
pool percentage ........... 22% 22% 22% 22% 22% 22% 17% 17% 17% 17% 17%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Reinsurance subsidiary quota
share percentage .......... 100% 95% 95% 95% 95% 95% 95% 95% 95% 95% 75%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Closing stock price ......... $ 13 1/4 $ 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
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Net investment yield (pretax) 6.14% 6.51% 6.64% 6.55% 6.78% 7.47% 7.99% 8.49% 8.75% 8.28% 8.03%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Cash dividends to
closing stock price........ 4.5% 4.8% 3.9% 5.5% 5.5% 6.1% 5.5% 7.6% 6.5% 6.3% 6.4%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Common shares outstanding ... 11,351 11,084 10,814 10,577 10,317 10,112 10,046 10,015 9,762 9,287 8,684
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Statutory combined ratio .... 106.2% 103.6% 99.6% 101.3% 106.3% 113.9% 109.2% 109.5% 112.7% 98.7% 99.8%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL EXHIBIT 13(b)
------------------------------------------------- -------------
CONDITION AND RESULTS OF OPERATIONS.
------------------------------------
The following discussion and analysis of EMC Insurance Group Inc. and its
subsidiaries' financial condition and results of operations should be read in
conjunction with the Consolidated Financial Statements and Notes to
Consolidated Financial Statements included elsewhere herein.
OVERVIEW
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. Property and casualty insurance is the most significant
segment, representing 75.0 percent of consolidated premiums earned. For
purposes of this discussion, the term "Company" is used interchangeably to
describe EMC Insurance Group Inc. (Parent company only) and EMC Insurance
Group Inc. and its subsidiaries.
The three property and casualty insurance subsidiaries of the Company and
two subsidiaries and an affiliate 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, with the exception of
any voluntary reinsurance business assumed from nonaffiliated insurance
companies, 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 nonaffiliated 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 seven
companies in the pool.
Effective January 1, 1997, Hamilton Mutual Insurance Company (Hamilton
Mutual), a new affiliate of Employers Mutual, became a participant in the
pooling agreement. In connection with this change in the pooling agreement,
the Company's liabilities increased $6,393,000 and invested assets increased
$5,674,000. The Company reimbursed Employers Mutual $794,000 for commissions
incurred to generate this business and Employers Mutual paid the Company
$75,000 in interest income as the actual cash transfer did not occur until
March 24, 1997.
<PAGE>
On December 19, 1997, the Company announced that its nonstandard risk
automobile insurance subsidiary (Farm and City Insurance Company) will become
a participant in the pooling agreement effective January 1, 1998. The
nonstandard risk automobile insurance subsidiary will receive a 1.5 percent
participation in the pool, which will increase the Company's aggregate
participation to 23.5 percent. Revenues of the Company are expected to
increase by approximately $2,000,000 due to the increase in the size of the
pool.
The Company's reinsurance subsidiary assumes a quota share portion of
Employers Mutual's assumed reinsurance business, exclusive of certain
reinsurance contracts. The reinsurance subsidiary assumes its quota share
portion of all premiums and related losses and settlement expenses of this
business, subject to a maximum loss 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 maximum
loss assumed per event was increased from $1,000,000 to $1,500,000. In
connection with the change in the quota share percentage, the Company's
liabilities increased $3,174,000 and invested assets increased $3,067,000.
The Company reimbursed Employers Mutual $107,000 for commissions incurred to
generate this business.
The Company's nonstandard risk automobile insurance subsidiary
specializes in insuring private passenger automobile risks that are found to
be unacceptable in the standard automobile insurance market.
The excess and surplus lines insurance agency provides insurance agents
access to the excess and surplus lines markets and also functions as managing
underwriter for such lines for Employers Mutual and several of the pool
members.
CONSOLIDATED RESULTS OF OPERATIONS
Operating results for the three years ended December 31, 1997 are as follows:
($ in thousands) 1997 1996 1995
-------- -------- --------
Premiums earned .......................... $177,218 $165,191 $162,266
Losses and settlement expenses ........... 129,853 115,367 108,152
Acquisition and other expenses ........... 58,641 55,227 54,359
-------- -------- --------
Underwriting loss ........................ (11,276) (5,403) (245)
Net investment income .................... 23,760 23,907 23,174
Realized investment gains ................ 4,100 1,891 1,043
Other income ............................. 219 274 344
-------- -------- --------
Operating income before income taxes ..... $ 16,803 $ 20,669 $ 24,316
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ..... $137,300 $131,375 $123,877
Decrease in provision for insured
events of prior years ................ (7,447) (16,008) (15,725)
-------- -------- --------
Total losses and settlement expenses $129,853 $115,367 $108,152
======== ======== ========
Catastrophe and storm losses ............. $ 5,846 $ 9,192 $ 6,603
======== ======== ========
<PAGE>
Operating income before income taxes declined in 1997 and 1996 after
increasing substantially in 1995. The decline in 1997 operating results is
primarily attributable to the property and casualty insurance subsidiaries,
although all segments contributed to the decline. The major factor
influencing this decline was a substantial decrease in the amount of favorable
development experienced in the actual settlement of claims and changes in
reserves associated with prior year losses. The decline in 1996 operating
results was also attributable to the property and casualty insurance
subsidiaries, which experienced an unusually large number of commercial
property losses. Results for 1995 reflect a substantial improvement in the
operations of the reinsurance subsidiary and a solid increase in the
performance of the property and casualty insurance subsidiaries.
Premium income increased substantially in 1997 after rising moderately in
1996. The majority of this increase came from the property and casualty
insurance subsidiaries, which benefitted from the addition of Hamilton Mutual
to the pooling agreement. The nonstandard risk automobile insurance
subsidiary also reported an increase in premium income while the reinsurance
subsidiary experienced a decline. For the year 1996, the property and
casualty insurance subsidiaries and the reinsurance subsidiary had increases
in premium income while the nonstandard risk automobile insurance subsidiary
reported a decline.
Losses and settlement expenses increased significantly in 1997,
reflecting a substantial decrease in the amount of favorable development
experienced in the actual settlement of claims and changes in reserves
associated with prior year losses. This decrease in favorable development was
partially offset by lower catastrophe and storm losses reported by the
reinsurance subsidiary and the property and casualty insurance subsidiaries.
For the year 1996, losses and settlement expenses increased despite the
benefit of an elevated level of favorable development in the actual settlement
of claims and changes in reserves associated with prior year losses. This was
primarily due to 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.
Acquisition and other expenses have increased steadily over the last
three years. These increases are primarily attributable to higher commission
rates associated with the property business written by the property and
casualty insurance subsidiaries, increased contingent commission expense on
the reinsurance subsidiary's assumed business and various loss control
functions that have been implemented. The increase for 1997 also reflects
commission expense incurred by the property and casualty insurance
subsidiaries in connection with the addition of Hamilton Mutual to the pooling
agreement and the reinsurance subsidiary in connection with the increase in
the quota share percentage.
Investment income declined in 1997 after increasing in 1996 and 1995.
This decline was attributable to a reduction in the average rate of return
earned on fixed maturity investments, which more than offset an increase in
the Company's average invested asset balance.
Realized gains on investments increased significantly in 1997 and more
moderately in 1996 as a result of capital gain distributions from the
Company's investment in common stock mutual funds. Proceeds from these
distributions were reinvested in the mutual funds.
<PAGE>
SEGMENT RESULTS
Property and Casualty Insurance
Operating results for the three years ended December 31, 1997 are as follows:
($ in thousands) 1997 1996 1995
-------- -------- --------
Premiums earned .......................... $132,874 $119,282 $116,439
Losses and settlement expenses ........... 97,083 82,034 74,926
Acquisition and other expenses ........... 44,027 41,150 40,030
-------- -------- --------
Underwriting (loss) gain ................. (8,236) (3,902) 1,483
Net investment income .................... 15,529 15,828 15,428
Realized investment gains ................ 4,071 1,790 1,027
-------- -------- --------
Operating income before income taxes ..... $ 11,364 $ 13,716 $ 17,938
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ..... $102,557 $ 93,965 $ 87,411
Decrease in provision for insured
events of prior years ................ (5,474) (11,931) (12,485)
-------- -------- --------
Total losses and settlement expenses $ 97,083 $ 82,034 $ 74,926
======== ======== ========
Catastrophe and storm losses ............. $ 4,570 $ 4,935 $ 5,671
======== ======== ========
Premium income increased substantially in 1997 after rising moderately in
1996 and 1995. The large increase for 1997 was due in part to the addition of
Hamilton Mutual to the pooling agreement, which added $8,634,000 to premium
income. The remaining increase was generated from the existing branch
structure, where competitive rates and a strong working relationship with
local agents played a critical role in this very competitive environment.
Marketing programs emphasizing property insurance targeted at commercial
insureds contributed to this increase in production, as did an increased
marketing emphasis in the South. Premium income from mandatory assigned risk
business continued to decline in 1997; however, this decline is looked at
favorably as losses associated with this type of business are generally higher
than losses associated with controlled business. Premium growth in the
workers' compensation line of business continued to be hampered by rate
decreases in 1997, although not to the extent experienced in 1996 when the
states of Iowa, Illinois, Kansas and Nebraska implemented large rate
decreases.
Losses and settlement expenses increased substantially in 1997 and 1996
after declining in 1995. The large increase for 1997 was attributable to a
significant decrease in the amount of favorable development experienced in the
actual settlement of claims and changes in reserves associated with prior year
losses as well as the increase in the size of the pool with the addition of
Hamilton Mutual. The decline in favorable development was not unexpected and
has been discussed in previous comments published by the Company. The large
increase for 1996 was primarily due to an unusually large number of severe
commercial property losses.
Acquisition and other expenses increased in 1997 as a result of the
increase in the size of the pool and the payment of $794,000 of commission
expense related to the transfer of unearned premiums to the Company in
connection with the pool change. Additional items affecting the growth in
expenses include higher commission rates on the growing book of property
business as well as expenses associated with various loss control functions
that have been implemented.
<PAGE>
The decline in 1997 underwriting results is primarily related to the
large decrease in the amount of favorable development experienced in the
actual settlement of claims and changes in reserves associated with prior year
losses. As previously noted, this decline in favorable development was not
unexpected; however, the impact of the decline was compounded by a second
consecutive year of an elevated loss and settlement expense ratio associated
with current accident year losses. Unlike 1996, when the elevated loss and
settlement expense ratio was attributable to an increase in loss frequency and
severity, the elevated loss and settlement expense ratio for 1997 is more
closely associated with the highly competitive marketplace for commercial
lines of insurance. Rates for commercial lines of insurance continue to
decline due to excess capitalization in the insurance industry. As a result,
increases in premium income are not keeping pace with increases in loss costs.
Management is aware of the narrowing profit margin on commercial lines of
insurance and continues to emphasize the use of strict underwriting
guidelines.
Reinsurance
Operating results for the three years ended December 31, 1997 are as follows:
($ in thousands) 1997 1996 1995
-------- -------- --------
Premiums earned ............................ $ 34,106 $ 36,675 $ 35,826
Losses and settlement expenses ............. 23,306 25,180 23,744
Acquisition and other expenses ............. 11,752 11,457 11,584
-------- -------- --------
Underwriting (loss) gain ................... (952) 38 498
Net investment income ...................... 6,615 6,436 6,068
Realized investment gains .................. 23 73 13
Other income ............................... 219 274 344
-------- -------- --------
Operating income before income taxes ....... $ 5,905 $ 6,821 $ 6,923
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ....... $ 25,109 $ 28,877 $ 26,668
Decrease in provision for insured
events of prior years .................. (1,803) (3,697) (2,924)
-------- -------- --------
Total losses and settlement expenses $ 23,306 $ 25,180 $ 23,744
======== ======== ========
Catastrophe losses ......................... $ 1,276 $ 4,257 $ 932
======== ======== ========
Premium income decreased in 1997 despite an increase in the quota share
percentage from 95 percent to 100 percent and the cancellation of an aggregate
reinsurance treaty with Employers Mutual. This decrease is primarily due to
rate reductions caused by the competitive reinsurance marketplace and the
absence of run-off premium recognized in 1996 related to the cancellation of
several large pro rata treaties in 1995. For the year 1996, premium income
increased slightly despite a decline in production. This increase was
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.
Losses and settlement expenses have fluctuated over the last three years
in connection with the changes experienced in premium volume. Results for
1997 benefitted from a substantial decrease in catastrophe losses; however,
this decline was partially offset by a reduction in the amount of benefit
realized from the actual settlement of claims and changes in reserves
associated with prior year losses. Results for 1996 were negatively impacted
by a large increase in catastrophe losses.
<PAGE>
Acquisition and other expenses increased slightly in 1997, despite the
decline in premium income. This increase is primarily due to an increase in
the reserve for contingent commissions, which is associated with the favorable
loss results experienced on the reinsurance book of business.
Underwriting results have declined during the last two years from the
exceptionally good results achieved in 1995, but are still considered very
favorable. Excluding the effect of catastrophe losses, which vary greatly
from year to year, the loss and settlement expense ratio associated with
insured events of the current year deteriorated in 1997. This decline is
primarily due to the rate reductions noted above, which are the result of
excess capacity in the reinsurance marketplace. The reinsurance subsidiary is
working to address this issue by accepting a larger share of coverage on
desirable programs and strengthening its relationships with reinsurance
intermediaries. Management is aware of the narrowing profit margin on
reinsurance business and continues to emphasize profitability over premium
volume.
Nonstandard Risk Automobile Insurance
Operating results for the three years ended December 31, 1997 are as follows:
($ in thousands) 1997 1996 1995
-------- -------- --------
Premiums earned ............................ $ 10,238 $ 9,234 $ 10,001
Losses and settlement expenses ............. 9,464 8,153 9,482
Acquisition and other expenses ............. 2,965 2,640 2,775
-------- -------- --------
Underwriting loss .......................... (2,191) (1,559) (2,256)
Net investment income ...................... 1,011 1,111 1,175
Realized investment gains .................. 6 28 3
-------- -------- --------
Operating loss before income taxes ......... $ (1,174) $ (420) $ (1,078)
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ....... $ 9,634 $ 8,533 $ 9,798
Decrease in provision for insured
events of prior years .................. (170) (380) (316)
-------- -------- --------
Total losses and settlement expenses $ 9,464 $ 8,153 $ 9,482
======== ======== ========
Premium income increased in 1997 for the first time since 1993. This
increase was the result of renewed marketing efforts toward new and existing
agents and a competitive rate structure. The nonstandard marketplace remains
highly competitive. Standard carriers in search of premium income continue to
actively pursue marginal risks that previously would have stayed in the
nonstandard market. As a result, nonstandard carriers are competing for a
smaller pool of potential insureds, which has led to intense rate competition.
Losses and settlement expenses have fluctuated over the last three years
in connection with the change in premium volume; however, the amounts for 1997
and 1995 also reflect a higher level of losses associated with poor winter
driving conditions. Results for 1997 also include a change to a more
conservative reserving methodology.
Acquisition and other expenses increased slightly in 1997 after declining
in 1996 and 1995. This increase primarily reflects costs associated with the
company's renewed marketing efforts.
<PAGE>
Underwriting results remained unprofitable for the third consecutive
year, the result of conflicting market forces at work in the nonstandard
marketplace. As previously noted, the nonstandard market has been faced with
a smaller pool of potential insureds due to the relaxed underwriting standards
being utilized by the standard carriers. This reduction in potential insureds
has led to increased rate competition, even though the pool of potential
insureds contains a higher percentage of high risk drivers. The combination
of reduced rates and increased loss costs has resulted in very poor
underwriting results. Management is working to improve both rate adequacy and
the overall quality of the book of business in 1998.
As previously noted, the nonstandard risk automobile insurance subsidiary
will become a participant in the pooling agreement effective January 1, 1998.
As a result of this change, future operating results for the nonstandard risk
automobile insurance subsidiary will be included in the amounts reported for
the property and casualty insurance subsidiaries and will no longer be
presented as a separate segment of business.
Excess and Surplus Lines Insurance Agency
Operating income before income taxes increased to $576,000 in 1997, up
from $458,000 in 1996 and $483,000 in 1995. The increase for 1997 reflects
increased commission income resulting from the introduction of a new long-haul
trucking program. Prior to 1997, operating income before income taxes had
decreased three consecutive years. These declines were primarily due to a
reduction in commission income caused by increased competition for excess and
surplus lines business. Competition for excess and surplus lines business
remains intense as a number of insurance carriers continue to pursue
opportunities in the excess and surplus lines market.
Parent Company
Operating income before income taxes increased to $132,000 in 1997 from
$94,000 in 1996 and $50,000 in 1995. The improvement in 1997 and 1996 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 the many uncertainties
surrounding these types of claims. Such uncertainties include the fact that
the assignment of responsibility varies widely by state and claims often
emerge long after the policy has expired, which makes 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 related to pollution from
hazardous waste of former insureds. The parties to the pooling agreement have
not written primary coverage for the major oil or chemical companies. The
greatest exposure arises out of claims from small regional operations or local
businesses 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,
and gasoline stations. The remaining exposure arises out of commercial
general liability and umbrella policies issued to municipalities during the
1970s which allegedly cover contamination emanating from closed landfills.
<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.
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. Unrealized holding gains on fixed
maturity securities available-for-sale, net of tax, totaled $4,577,000 at
December 31, 1997 compared to $2,141,000 and $3,472,000 at December 31, 1996
and 1995, respectively. 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.
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.
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 1997, the Company generated positive cash flows from operations of
$22,564,000 compared to $17,097,000 in 1996 and $24,651,000 in 1995. The
amount for 1997 includes $8,741,000 received from Employers Mutual in
connection with the change in the pooling agreement and the increase in the
quota share percentage.
CAPITAL RESOURCES
As of December 31, 1997, 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) maintains
certain risk-based capital standards for property and casualty insurance
companies. Risk-based capital requirements attempt to measure minimum
statutory capital needs based upon the risks in a company's mix of products
and investment portfolio. At December 31, 1997, each of the Company's
insurance subsidiaries has a ratio of total adjusted capital to risk-based
capital well in excess of the minimum level required.
<PAGE>
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 received $3,750,000,
$3,060,000 and $3,200,000 of dividends from its insurance subsidiaries in
1997, 1996 and 1995, respectively, and $1,000,000 from its insurance agency in
1995. The Company paid cash dividends to its stockholders totaling
$4,314,000, $4,017,000 and $3,653,000 in 1997, 1996 and 1995, respectively.
Total dividends, including amounts reinvested in shares of the Company's
common stock, amounted to $6,715,000, $6,234,000 and $5,662,000 in 1997, 1996
and 1995, respectively. For the last three years, Employers Mutual has
elected to receive 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.
IMPACT OF YEAR 2000 REMEDIATION ON OPERATIONS
Employers Mutual owns and maintains the computer systems utilized in the
operation of the Company's businesses. Employers Mutual is currently in the
process of finalizing changes to these systems in order to be Year 2000
compliant. Most systems have been updated and all remaining work is scheduled
for completion and testing in 1998. The Company, under the terms of the
pooling agreement, will be a 23.5 percent participant in the remaining costs
associated with this project. These costs are not expected to be material to
the Company's financial position or its results of operations.
Employers Mutual is also aware of and monitoring Year 2000 compliance on
systems from outside third parties with which it interacts. By verifying Year
2000 compliance with these parties, management is further minimizing the risks
of Year 2000 noncompliance.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards (SFAS)
128, "Earnings Per Share" in the fourth quarter of 1997. SFAS 128 simplifies
the computation of net income per share and specifies the disclosure
requirement of basic and diluted net income per share. Adoption of this
statement did not change the income or the number of shares used to compute
the Company's net income per share.
The Company will adopt the disclosure requirements of SFAS 130,
"Reporting Comprehensive Income" in the first quarter of 1998. Adoption of
this statement will have no effect on the income of the Company.
The Company will adopt the presentation requirements of SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information" in the
fourth quarter of 1998. Management is currently in the process of evaluating
the segment reporting disclosure requirements. Adoption of this statement
will have no effect on the income of the Company.
The Company will adopt the disclosure requirements of SFAS 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" in
the first quarter of 1998. Adoption of this statement will have 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 has been adopted by one state
(Illinois) and is not expected to have a material impact on the operations of
the Company's insurance subsidiaries.
The NAIC is in the final stages of 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. Nearly all issue papers documenting this new comprehensive basis
of accounting have been finalized; however, the approval process is not yet
complete. The Company has begun a study to determine the impact of adopting
the proposed accounting and reporting requirements in the codification of
statutory accounting principles, but 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>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. EXHIBIT 13(c)
- -------------------------------------------- -------------
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 Company'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, 1997, 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
Executive Officer Chief Financial Officer
<PAGE>
Independent Auditors' 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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Des Moines, Iowa
February 26, 1998
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
--------------------------
1997 1996
------------ ------------
ASSETS
Investments (note 9):
Fixed maturities:
Securities held-to-maturity, at amortized cost
(fair value $193,835,013 and $194,655,256) $185,829,063 $188,385,721
Securities available-for-sale, at fair value
(amortized cost $172,717,206 and $146,794,158) 179,652,738 150,038,644
Equity securities available-for-sale, at fair
value (cost $26,261,157 and $21,236,281) ...... 30,972,732 24,040,381
Short-term investments, at cost ................. 14,926,994 17,553,606
------------ ------------
Total investments .......................... 411,381,527 380,018,352
Cash .............................................. 1,200,300 3,500,629
Indebtedness of related party (note 2) ........... 822,403 -
Accrued investment income ......................... 5,752,295 6,567,186
Accounts receivable ............................... 1,457,312 740,736
Deferred policy acquisition costs ................. 10,560,657 9,021,863
Deferred income taxes (note 10) ................... 9,751,721 10,974,425
Intangible assets, including goodwill, at cost
less accumulated amortization of $2,078,182
and $1,943,669 .................................. 1,479,638 1,614,151
Reinsurance receivables (note 3) .................. 13,601,691 14,735,786
Prepaid reinsurance premiums (note 3) ............. 1,195,065 1,516,972
Other assets ...................................... 1,907,187 1,637,473
------------ ------------
Total assets ............................... $459,109,796 $430,327,573
============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
--------------------------
1997 1996
------------ ------------
LIABILITIES
Losses and settlement expenses (notes 2,4 and 5) $217,777,942 $202,502,986
Unearned premiums (note 2) ....................... 54,857,463 47,908,954
Other policyholders' funds ....................... 2,781,544 3,467,449
Indebtedness to related party (note 2) ........... - 7,000,482
Income taxes payable ............................. 3,548,000 2,942,000
Postretirement benefits (note 12) ................ 5,428,913 4,932,834
Deferred income .................................. 446,678 665,550
Other liabilities ................................ 11,922,800 12,178,290
------------ ------------
Total liabilities ......................... 296,763,340 281,598,545
------------ ------------
STOCKHOLDERS' EQUITY (notes 6,7,9 and 13)
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 11,351,119 shares
in 1997 and 11,084,461 shares in 1996 .......... 11,351,119 11,084,461
Additional paid-in capital ....................... 65,916,681 62,762,613
Unrealized holding gains on fixed
maturity securities available-for-sale,
net of tax ..................................... 4,577,452 2,141,361
Unrealized holding gains on equity securities
available-for-sale, net of tax ................. 3,109,640 1,850,706
Retained earnings ................................ 77,391,564 70,889,887
------------ ------------
Total stockholders' equity ................ 162,346,456 148,729,028
------------ ------------
Contingent liabilities (notes 3 and 15)
Total liabilities and stockholders' equity $459,109,796 $430,327,573
============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income
Year ended December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
REVENUES:
Premiums earned (notes 2 and 3) .... $177,218,246 $165,190,666 $162,266,250
Investment income, net (note 9) .... 23,759,988 23,907,599 23,173,794
Realized investment gains (note 9) 4,100,006 1,890,923 1,043,730
Other income ....................... 218,872 274,459 343,653
------------ ------------ ------------
205,297,112 191,263,647 186,827,427
------------ ------------ ------------
LOSSES AND EXPENSES (note 2):
Losses and settlement
expenses (notes 3,4 and 5) ....... 129,853,304 115,367,215 108,152,278
Dividends to policyholders ......... 2,530,747 3,245,036 3,739,533
Amortization of deferred
policy acquisition costs ......... 35,942,092 32,554,733 32,152,616
Other underwriting expenses ........ 20,168,236 19,427,310 18,467,091
------------ ------------ ------------
188,494,379 170,594,294 162,511,518
------------ ------------ ------------
Income before income taxes ... 16,802,733 20,669,353 24,315,909
------------ ------------ ------------
INCOME TAXES (note 10):
Current .......................... 4,266,959 4,534,961 6,907,754
Deferred ......................... (680,793) 1,100,228 59,327
------------ ------------ ------------
3,586,166 5,635,189 6,967,081
------------ ------------ ------------
Net income ................... $ 13,216,567 $ 15,034,164 $ 17,348,828
============ ============ ============
Net income per common share
- basic and diluted .............. $ 1.18 $ 1.37 $ 1.62
============ ============ ============
Average number of shares outstanding
- basic and diluted .............. 11,193,243 10,936,897 10,685,344
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Year ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Common stock:
Beginning of year ................... $11,084,461 $10,821,978 $10,587,629
Issuance of common stock:
Stock option plans ................ 71,073 91,062 102,797
Dividend reinvestment
plan (note 13(d)) ............... 195,585 188,072 131,552
Retirement of treasury stock ........ - (16,651) -
----------- ----------- -----------
End of year ......................... 11,351,119 11,084,461 10,821,978
----------- ----------- -----------
Additional paid-in capital:
Beginning of year ................... 62,762,613 59,787,926 57,162,911
From issuance of common stock:
Stock option plans ................ 854,641 1,105,155 1,092,041
Dividend reinvestment plan ........ 2,299,427 2,099,436 1,417,808
(Losses) gains on sale of treasury
stock ............................. - (16,257) 115,166
Retirement of treasury stock ........ - (213,647) -
----------- ----------- -----------
End of year ......................... 65,916,681 62,762,613 59,787,926
----------- ----------- -----------
Unrealized holding gains (losses) on
fixed maturity securities available-
for-sale, net of tax:
Beginning of year ................. 2,141,361 3,472,016 (1,316,596)
Gains (losses) on revaluation of
fixed maturity securities
available-for-sale, net of
tax (notes 1 and 9) ............. 2,436,091 (1,330,655) 4,788,612
----------- ----------- -----------
End of year ....................... 4,577,452 2,141,361 3,472,016
----------- ----------- -----------
Unrealized holding gains on equity
securities available-for-sale,
net of tax:
Beginning of year ................. 1,850,706 817,965 -
Gains on revaluation of equity
securities available-for-sale,
net of tax (note 9) ............. 1,258,934 1,032,741 817,965
----------- ----------- -----------
End of year ....................... $ 3,109,640 $ 1,850,706 $ 817,965
----------- ----------- -----------
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity, Continued
Year ended December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Retained earnings:
Beginning of year ................ $ 70,889,887 $ 62,089,294 $ 50,402,812
Net income ....................... 13,216,567 15,034,164 17,348,828
Dividends on common stock
($.60 per share in 1997, $.57
in 1996 and $.53 in 1995):
Cash dividends ............... (4,314,083) (4,017,222) (3,653,299)
Dividends reinvested in shares
of common stock ............ (2,400,807) (2,216,349) (2,009,047)
------------ ------------ ------------
End of year ...................... 77,391,564 70,889,887 62,089,294
------------ ------------ ------------
Treasury stock, at cost:
Beginning of year ................ - (100,421) (110,067)
Purchase of stock for the treasury - (265,499) (653,967)
Sale of stock from the treasury .. - 135,622 663,613
Retirement of treasury stock ..... - 230,298 -
------------ ------------ ------------
End of year ...................... - - (100,421)
------------ ------------ ------------
Total stockholders' equity ..... $162,346,456 $148,729,028 $136,888,758
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................... $13,216,567 $15,034,164 $17,348,828
----------- ----------- -----------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Losses and settlement expenses .. 9,356,859 (2,919,123) 2,240,494
Unearned premiums ............... 4,125,443 (858,193) 1,094,577
Other policyholders' funds ...... (685,905) (125,879) 490,719
Deferred policy acquisition costs (1,538,794) (307,094) (321,134)
Indebtedness of related party ... (7,822,885) 6,572,019 (508,893)
Accrued investment income ....... 814,891 (263,435) (188,986)
Accrued income taxes:
Current ....................... 606,000 403,331 802,669
Deferred ...................... (680,793) 1,100,228 59,327
Realized investment gains ....... (4,100,006) (1,890,923) (1,043,730)
Postretirement benefits ......... 496,079 443,022 403,138
Reinsurance receivables ......... 1,134,095 (1,818,843) 2,018,105
Prepaid reinsurance premiums .... 321,907 288,909 315,152
Amortization of deferred income (218,872) (274,459) (343,653)
Other, net ...................... (1,201,299) 1,712,868 2,284,450
----------- ----------- -----------
606,720 2,062,428 7,302,235
Cash provided by the change in the
property and casualty insurance
subsidiaries' pooling agreement
(note 2)....................... 5,674,458 - -
Cash provided by the change in the
reinsurance subsidiary's quota
share agreement (note 2)....... 3,066,705 - -
----------- ----------- -----------
Total adjustment ............ 9,347,883 2,062,428 7,302,235
----------- ----------- -----------
Net cash provided by
operating activities .... $22,564,450 $17,096,592 $24,651,063
----------- ----------- -----------
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Year ended December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity
securities held-to-maturity .... $(35,504,382) $(30,412,885) $(46,384,530)
Disposals of fixed maturity
securities held-to-maturity .... 38,138,196 33,576,694 18,257,425
Purchases of fixed maturity
securities available-for-sale .. (46,586,660) (30,619,591) (27,866,616)
Disposals of fixed maturity
securities available-for-sale .. 20,769,810 21,202,597 49,104,032
Purchases of equity securities
available-for-sale ............. (1,014,193) (5,363,426) (13,785,451)
Net sales (purchases) of
short-term investments ......... 2,626,614 (281,808) (1,242,372)
------------ ------------ -----------
Net cash used in investing
activities .............. (21,570,615) (11,898,419) (21,917,512)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ......... 1,019,919 1,251,119 850,317
Dividends paid to
stockholders (note 13(d)) ...... (4,314,083) (4,017,222) (3,653,299)
(Purchases) sales of treasury
stock, net ..................... - (129,877) 9,646
------------ ------------ ------------
Net cash used in financing
activities .............. (3,294,164) (2,895,980) (2,793,336)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH .... (2,300,329) 2,302,193 (59,785)
Cash at beginning of year .......... 3,500,629 1,198,436 1,258,221
------------ ------------ ------------
Cash at end of year ................ $ 1,200,300 $ 3,500,629 $ 1,198,436
============ ============ ============
Income taxes paid .................. $ 3,660,959 $ 4,131,630 $ 6,242,085
Interest paid ...................... 88,922 57,938 177,156
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. The term "Company"
is used interchangeably to describe EMC Insurance Group Inc.(Parent company
only) and EMC Insurance Group Inc. and its subsidiaries.
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.
Liabilities for losses are based upon case-basis estimates of reported
losses, estimates of unreported losses based upon prior experience adjusted
for current trends, and estimates of losses expected to be paid under assumed
reinsurance contracts. Liabilities for loss adjusting expenses are provided
by estimating expenses expected to be incurred in settling the claims provided
for in the loss reserve. Changes in estimates are reflected in current
operating results (see note 4).
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Ceded reinsurance amounts with nonaffiliated reinsurers relating to
reinsurance receivables for paid and unpaid losses and loss adjusting expenses
and prepaid reinsurance are reported on the balance sheets on a gross basis.
Amounts ceded to Employers Mutual relating to the affiliated reinsurance
pooling agreement have not been grossed up because the contracts provide that
receivables and payables may be offset upon settlement.
The liabilities 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.
INVESTMENTS
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. 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 specific identification method using the highest cost basis
first. Included in investments at December 31, 1997 and 1996 are securities
on deposit with various regulatory authorities as required by law amounting to
$12,178,402 and $11,971,889, respectively.
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.
BENEFIT PLANS
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.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
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.
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 the
tax basis of assets and liabilities and the reported amounts of those assets
and liabilities for financial reporting purposes. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Income tax expense provisions increase or decrease in
the same period in which a change in tax rates is enacted. 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.
NET INCOME PER SHARE - BASIC AND DILUTED
The Company adopted SFAS 128 "Earnings Per Share" in the fourth quarter
of 1997. SFAS 128 simplifies the computation of net income per share and
specifies the disclosure requirements of basic and diluted net income per
share. Adoption of this statement did not change the income or the number of
shares used to compute the Company's net income per share. The Company's
basic and diluted net income per share are computed by dividing net income 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 in
connection with 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. All
shares of the Company's common stock repurchased after June 30, 1996 have been
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.
<PAGE>
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 and an affiliate 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, with the exception of
any voluntary reinsurance business assumed from nonaffiliated insurance
companies, 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 nonaffiliated 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 became a
participant in the pooling agreement. In connection with this change in the
pooling agreement, the Company's liabilities increased $6,393,063 and invested
assets increased $5,674,458. The Company reimbursed Employers Mutual $794,074
for commissions incurred to generate this business and Employers Mutual paid
the Company $75,469 in interest income as the actual cash transfer did not
occur until March 24, 1997.
On December 19, 1997, the Company announced that its nonstandard risk
automobile insurance subsidiary will become a participant in the pooling
agreement effective January 1, 1998. The nonstandard risk automobile
insurance subsidiary will receive a 1.5 percent participation in the pool,
which will increase the Company's aggregate participation in the pool to 23.5
percent. Revenues of the Company are expected to increase by approximately
$2,000,000 due to the increase in the size of the pool.
REINSURANCE SUBSIDIARY
Employers Mutual voluntarily assumes reinsurance business from
nonaffiliated insurance companies and cedes a portion of this business to the
Company's reinsurance subsidiary, exclusive of certain reinsurance contracts.
The reinsurance subsidiary assumes its share of all premiums and related
losses and settlement expenses of this business, subject to a maximum loss 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.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Effective January 1, 1997, the reinsurance subsidiary's quota share
participation was increased from 95 percent to 100 percent and the maximum
loss per event assumed by the reinsurance subsidiary was increased from
$1,000,000 to $1,500,000. In connection with the change in the quota share
percentage, the Company's liabilities increased $3,173,647 and invested assets
increased $3,066,705. The Company reimbursed Employers Mutual $106,942 for
commissions incurred to generate this business.
Premiums assumed by the reinsurance subsidiary from Employers Mutual
amounted to $34,690,846, $36,051,617 and $36,433,443 in 1997, 1996 and 1995,
respectively. It is customary in the reinsurance business for the assuming
company to compensate the ceding company for the acquisition expenses incurred
in the generation of the business. Commissions paid by the reinsurance
subsidiary to Employers Mutual amounted to $8,134,202, $8,200,072 and
$8,224,060 in 1997, 1996 and 1995, respectively.
The reinsurance subsidiary pays an annual override commission to
Employers Mutual in connection with the $1,500,000 ($1,000,000 in 1996 and
1995) cap on losses assumed per event, which totaled $1,821,270, $1,892,710
and $1,912,756 in 1997, 1996 and 1995, respectively. Employers Mutual
retained losses and settlement expenses totaling ($93,621) in 1997, $166,573
in 1996 and $1,103,442 in 1995 under this agreement. The reinsurance
subsidiary also pays for 100 percent (95 percent in 1996 and 1995) 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 $1,841,000, $1,315,750 and $1,983,579 in 1997, 1996 and 1995,
respectively.
Prior to 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 calendar year. The coverage provided was $2,000,000, excess of $3,000,000
aggregate losses retained, excess of $200,000 per event. Maximum recovery was
limited to $2,000,000 per accident year. The reinsurance subsidiary did not
have any recoveries under this treaty during 1996 or 1995. Premiums paid to
Employers Mutual amounted to $500,000 and $499,950 in 1996 and 1995,
respectively. This reinsurance treaty was canceled effective January 1, 1997.
NONSTANDARD RISK AUTOMOBILE INSURANCE SUBSIDIARY
The nonstandard risk automobile insurance subsidiary had a reinsurance
treaty on an excess of loss basis with Employers Mutual which provided
reinsurance for 100 percent of each loss in excess of $100,000, up to
$1,000,000. There were no recoveries under this treaty during 1997, 1996 or
1995. Premiums paid to Employers Mutual amounted to $36,076 in 1997, $37,942
in 1996 and $45,232 in 1995.
The reinsurance treaty was canceled on December 31, 1997 in preparation
for the subsidiary's admittance into the pooling agreement on January 1, 1998
and all reinsurance recoverable amounts due from Employers Mutual were
commuted. In connection with this commutation, the Company's assets increased
$58,921 and liabilities increased $62,487. The Company reported incurred
settlement expenses of $3,566 from this transaction.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
SERVICES PROVIDED BY EMPLOYERS MUTUAL
Employers Mutual provides various services to all of its subsidiaries.
Such services include data processing, claims, financial, actuarial, auditing,
marketing and underwriting. Costs of these services are allocated to the
subsidiaries outside the pooling agreement based upon a number of criteria,
including usage and number of transactions. Costs not allocated to these
subsidiaries are charged to the pool and each pool participant shares in the
total cost in proportion to its participation percentage.
3. REINSURANCE CEDED
The parties to the pooling agreement cede insurance business to other
insurers in the ordinary course of business for the purpose of limiting their
maximum loss exposure through diversification of their risks. In its
consolidated financial statements, the Company treats risks to the extent they
are reinsured as though they were risks for which the Company is not liable.
Insurance ceded by the pool participants does not relieve their primary
liability as the originating insurers. Employers Mutual evaluates the
financial condition of the reinsurers of the parties to the pooling agreement
and monitors concentrations of credit risk arising from similar geographic
regions, activities or economic characteristics of the reinsurers to minimize
exposure to significant losses from reinsurer insolvencies. The parties to
the pooling agreement also assume insurance from involuntary pools and
associations in conjunction with direct business written in various states.
As of December 31, 1997, reinsurance ceded to two nonaffiliated
reinsurers aggregated $7,399,933, which represented a significant portion of
the total prepaid reinsurance premiums and reinsurance receivables for losses
and settlement expenses. These amounts reflect the property and casualty
insurance subsidiaries' pool participation percentage of amounts ceded by
Employers Mutual to these organizations in connection with its role as
"service carrier". Under these arrangements, Employers Mutual writes business
for these organizations on a direct basis and then cedes 100 percent of this
business to these organizations. Credit risk associated with these amounts is
minimal as all companies participating in these organizations are responsible
for the liabilities of such organizations on a pro rata basis.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The effect of reinsurance on premiums written and earned, and losses and
settlement expenses incurred for the three years ended December 31, 1997 is
presented below.
Year ended December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
PREMIUMS WRITTEN
Direct ......................... $175,350,677 $156,161,030 $152,579,014
Assumed from nonaffiliates ..... 1,219,564 1,951,071 3,282,699
Assumed from affiliates ........ 178,624,357 161,671,754 159,253,136
Ceded to nonaffiliates ......... (5,615,772) (7,930,381) (8,365,648)
Ceded to affiliates ............ (164,978,055) (147,467,508) (143,259,942)
------------ ------------ ------------
Net premiums written ......... $184,600,771 $164,385,966 $163,489,259
============ ============ ============
PREMIUMS EARNED
Direct ......................... $169,304,584 $154,859,778 $151,450,871
Assumed from nonaffiliates ..... 1,403,778 2,350,321 3,548,647
Assumed from affiliates ........ 171,514,339 162,326,189 157,897,322
Ceded to nonaffiliates ......... (5,937,679) (8,219,290) (8,680,800)
Ceded to affiliates ............ (159,066,776) (146,126,332) (141,949,790)
------------ ------------ ------------
Net premiums earned .......... $177,218,246 $165,190,666 $162,266,250
============ ============ ============
LOSSES AND SETTLEMENT EXPENSES
INCURRED
Direct ......................... $126,922,536 $117,368,771 $ 98,651,399
Assumed from nonaffiliates ..... 926,403 948,218 608,796
Assumed from affiliates ........ 122,827,934 113,083,014 100,098,436
Ceded to nonaffiliates ......... (3,364,737) (6,817,132) (2,036,962)
Ceded to affiliates ............ (117,458,832) (109,215,656) (89,169,391)
------------ ----------- ------------
Net losses and settlement
expenses incurred .......... $129,853,304 $115,367,215 $108,152,278
============ ============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
Year ended December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Gross reserves for losses and
settlement expenses, beginning
of year .......................... $202,502,986 $205,422,109 $203,181,615
Ceded reserves for losses and
settlement expenses, beginning
of year .......................... 13,796,769 12,226,680 14,146,874
------------ ------------ ------------
Net reserves for losses and
settlement expenses, beginning
of year, before adjustments ...... 188,706,217 193,195,429 189,034,741
Adjustment to beginning reserves
due to the change in the
property and casualty insurance
subsidiaries' pooling agreement
(note 2) ......................... 3,795,453 - -
Adjustment to beginning reserves
due to the change in the
reinsurance subsidiary's quota
share percentage (note 2)......... 2,726,913 - -
------------ ------------ ------------
Net reserves for losses and
settlement expenses, beginning
of year, after adjustments ....... 195,228,583 193,195,429 189,034,741
------------ ------------ ------------
Incurred losses and
settlement expenses:
- ----------------------
Provision for insured events
of the current year .......... 137,300,762 131,375,234 123,876,601
Decrease in provision for
insured events of prior years (7,447,458) (16,008,019) (15,724,323)
------------ ------------ ------------
Total incurred losses and
settlement expenses ...... 129,853,304 115,367,215 108,152,278
------------ ------------ ------------
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Year ended December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Payments:
- ---------
Losses and settlement expenses
attributable to insured events
of the current year ............ 57,649,830 59,948,110 48,237,715
Losses and settlement expenses
attributable to insured events
of prior years ................. 62,684,265 59,908,317 55,753,875
------------ ------------ ------------
Total payments (1) ......... $120,334,095 $119,856,427 $103,991,590
------------ ------------ ------------
Net reserves for losses and
settlement expenses, end of year $204,747,792 $188,706,217 $193,195,429
Ceded reserves for losses and
settlement expenses, end of year 13,030,150 13,796,769 12,226,680
------------ ------------ ------------
Gross reserves for losses and
settlement expenses, end of year $217,777,942 $202,502,986 $205,422,109
============ ============ ============
(1) Loss and settlement expense payments reported in the Company's financial
statements for the year 1997 totaled $113,811,729. This amount reflects
an adjustment of ($3,795,453) related to the change in the property and
casualty insurance subsidiaries' pooling agreement and ($2,726,913)
related to the change in the reinsurance subsidiary's quota share
percentage. These adjustments were made to offset the income statement
effect that resulted from the $6,522,366 increase in reserves for losses
and settlement expenses on January 1, 1997 related to these transactions.
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 benefitted from state reform measures in workers'
compensation insurance and various loss control functions implemented by
Employers Mutual. 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 redundancies
experienced in 1996 and 1995 is not expected to continue.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 $2,412,735 and $2,102,610 at December 31, 1997 and 1996,
respectively.
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 assignment of responsibility varies widely by state and claims often
emerge long after the policy has expired, which makes 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.
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, 1997, $12,722,219 was available for distribution in 1998
without prior approval.
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. At December 31, 1997, each of the Company's insurance
subsidiaries' ratio of total adjusted capital to risk-based capital 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,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Net income from insurance
subsidiaries, statutory basis .... $ 10,067,951 $ 14,876,685 $ 17,411,599
Change in deferred policy
acquisition costs ................ 1,538,794 307,094 321,134
Change in salvage and subrogation
accrual .......................... (419,578) 290,917 568,919
Change in other policyholders' funds 685,905 125,879 (490,719)
Change in pension accrual .......... 476,705 251,042 (572,062)
GAAP postretirement benefit cost
in excess of statutory cost ...... (235,916) (256,119) (235,592)
Deferred income tax benefit
(expense) ........................ 680,793 (1,100,228) (59,327)
Prior year income taxes and
related interest ................. (117,948) 24,002 (231,001)
GAAP basis amortization of reserve
discount on commutation of
reinsurance contract ............. 218,872 274,459 343,653
Other, net ......................... (92,713) (69,162) (3,020)
------------ ------------ ------------
Net income from insurance
subsidiaries, GAAP basis ......... 12,802,865 14,724,569 17,053,584
Net income from non-insurance
companies ........................ 413,702 309,595 295,244
------------ ------------ ------------
Net income, GAAP basis ............. $ 13,216,567 $ 15,034,164 $ 17,348,828
============ ============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Year ended December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Surplus from insurance subsidiaries,
statutory basis .................. $127,222,191 $111,069,880 $ 97,385,213
Deferred policy acquisition costs .. 10,560,657 9,021,863 8,714,769
Accrued salvage and subrogation .... - 2,399,578 2,368,362
Other policyholders' funds payable . (2,781,544) (3,467,449) (3,593,328)
Pension asset ...................... 1,563,399 1,086,694 835,652
GAAP postretirement benefit
liability in excess of statutory
liability ........................ (2,400,407) (2,164,491) (1,908,372)
Deferred income tax asset .......... 9,751,721 10,974,425 11,921,182
Goodwill ........................... 1,479,638 1,614,151 1,748,664
Excess of statutory reserves
over statement reserves .......... 677,975 6,667,612 6,685,303
GAAP basis reserve discount on
commutation of reinsurance
contract in excess of statutory
recognition ...................... (446,678) (665,550) (940,009)
Unrealized holding gains on
available-for-sale securities .... 6,940,501 3,248,859 5,260,630
Other .............................. 238,570 271,823 212,057
------------ ------------ ------------
Equity from insurance
subsidiaries, GAAP basis ......... 152,806,023 140,057,395 128,690,123
Equity from non-insurance companies 9,540,433 8,671,633 8,198,635
----------- ----------- -----------
Stockholders' equity, GAAP basis ... $162,346,456 $148,729,028 $136,888,758
============ ============ ============
<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 Operating
Premiums Underwriting investment Realized Other income
earned gain (loss) income gains income (loss) Assets
------------ ------------ ----------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Property and casualty insurance $132,874,752 $ (8,236,497) $15,528,726 $4,071,250 $ - $11,363,479 $318,339,019
Reinsurance ................... 34,105,686 (951,964) 6,615,029 22,923 218,872 5,904,860 111,568,145
Nonstandard risk automobile
insurance ................... 10,237,808 (2,191,162) 1,011,799 5,833 - (1,173,530) 18,438,160
Excess and surplus lines
insurance agency ............ - 417,252 158,618 - - 575,870 3,775,807
Parent company ................ - (313,762) 445,816 - - 132,054 162,519,792
Eliminations .................. - - - - - - (155,531,127)
------------ ------------ ----------- ---------- -------- ----------- ------------
Consolidated ............ $177,218,246 $(11,276,133) $23,759,988 $4,100,006 $218,872 $16,802,733 $459,109,796
============ ============ =========== ========== ======== =========== ============
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
============ ============ =========== ========== ======== =========== ============
</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, 1997 and 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, 1997 cost gains losses value
----------------- ------------ ----------- ----------- ------------
Securities held-to-maturity:
Fixed maturity securities:
U.S. treasury securities
and obligations of
U.S. government
corporations and
agencies ............. $103,826,052 $ 6,008,149 $ (14,074)$109,820,127
Obligations of states
and political
subdivisions ......... 41,989,442 481,671 (46,164) 42,424,949
Mortgage-backed
securities ........... 40,013,569 1,577,841 (1,473) 41,589,937
------------ ----------- ----------- ------------
Total securities
held-to-maturity $185,829,063 $ 8,067,661 $ (61,711)$193,835,013
============ =========== =========== ============
Securities available-for-
sale:
Fixed maturity securities:
Obligations of states
and political
subdivisions ......... $130,945,594 $ 6,272,885 $ - $137,218,479
Public utilities ....... 8,760,899 82,678 (10,635) 8,832,942
Corporate securities ... 32,861,713 598,805 (13,789) 33,446,729
Redeemable preferred
stocks ............... 149,000 5,588 - 154,588
------------ ----------- ----------- ------------
Total fixed maturity
securities ....... 172,717,206 6,959,956 (24,424) 179,652,738
------------ ----------- ----------- ------------
Equity securities:
Common stock mutual
funds ................ 20,988,146 4,228,650 (140,831) 25,075,965
Non-redeemable
preferred stocks ..... 5,273,011 628,916 (5,160) 5,896,767
------------ ----------- ----------- ------------
Total equity
securities ....... 26,261,157 4,857,566 (145,991) 30,972,732
------------ ----------- ----------- ------------
Total securities
available-for-sale $198,978,363 $11,817,522 $ (170,415)$210,625,470
============ =========== =========== ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 fixed maturity securities
at December 31, 1997, 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 ................... $ 13,989,831 $ 14,142,820
Due after one year through five years ..... 50,088,102 51,876,854
Due after five years through ten years .... 66,752,623 70,871,137
Due after ten years ....................... 14,984,941 15,354,268
Mortgage-backed securities ................ 40,013,566 41,589,934
------------ ------------
Totals .................................... $185,829,063 $193,835,013
============ ============
Securities available-for-sale:
Due in one year or less ................... $ 13,803,121 $ 13,816,747
Due after one year through five years ..... 56,240,665 57,182,974
Due after five years through ten years .... 42,789,912 45,216,266
Due after ten years ....................... 59,883,508 63,436,751
------------ ------------
Totals .................................. $172,717,206 $179,652,738
============ ============
Realized investment gains and losses from calls and prepayments of
securities held-to-maturity and available-for-sale are presented below.
Realized investment gains reported in the financial statements include capital
gain distributions of $4,010,683, $1,655,566, and $985,971 in 1997, 1996 and
1995, respectively, from common stock mutual funds included in equity
securities available-for-sale. There were no sales of securities classified
as held-to-maturity or available-for-sale during 1997, 1996 and 1995.
Year ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Fixed maturity securities
held-to-maturity:
Gross realized investment gains ... 1,927 36,155 32,733
Gross realized investment losses .. - 7,957 2,388
Fixed maturity securities
available-for-sale:
Gross realized investment gains ... 110,304 207,161 27,414
Gross realized investment losses .. 22,908 - -
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A summary of net investment income is as follows:
Year ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Interest on fixed maturities .......... $22,876,491 $22,921,309 $22,895,745
Dividends on equity securities ........ 599,043 481,025 235,451
Interest on short-term investments .... 1,250,492 1,178,435 821,560
----------- ----------- -----------
Total investment income ........... 24,726,026 24,580,769 23,952,756
Investment expense .................... 966,038 673,170 778,962
----------- ----------- -----------
Net investment income ............. $23,759,988 $23,907,599 $23,173,794
=========== =========== ===========
A summary of net changes in unrealized holding gains (losses) on
securities available-for-sale is as follows:
Year ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Fixed maturity securities ........... $ 3,691,046 $(2,016,144) $ 6,577,226
Applicable income taxes ............. (1,254,955) 685,489 (1,788,614)
----------- ----------- -----------
Total fixed maturity securities ... 2,436,091 (1,330,655) 4,788,612
----------- ----------- -----------
Equity securities ................... 1,907,475 1,564,759 1,239,341
Applicable income taxes ............. (648,541) (532,018) (421,376)
----------- ----------- -----------
Total equity securities ........... 1,258,934 1,032,741 817,965
----------- ----------- -----------
Total available-for-sale securities $ 3,695,025 $ (297,914) $ 5,606,577
=========== =========== ===========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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, 1997 and 1996
relate to the following:
Year ended December 31,
------------------------
1997 1996
----------- -----------
Loss reserve discounting ........................... $12,470,142 $11,912,949
Unearned premium reserve limitation ................ 3,605,597 3,103,585
Postretirement benefits ............................ 1,554,085 1,613,764
Other policyholders' funds payable ................. 945,725 1,178,933
Prepayment of tax on commutation of loss reserves .. 151,871 226,287
Other, net ......................................... 562,653 496,498
----------- -----------
Total gross deferred income tax asset ........ 19,290,073 18,532,016
Less valuation allowance ........................... (1,200,000) (1,200,000)
----------- -----------
Total deferred income tax asset .............. 18,090,073 17,332,016
----------- -----------
Deferred policy acquisition costs .................. (3,590,623) (3,067,433)
Net unrealized holding gains ....................... (3,960,017) (2,056,518)
Other, net ......................................... (787,712) (1,233,640)
----------- -----------
Total gross deferred income tax liability .... (8,338,352) (6,357,591)
----------- -----------
Net deferred income tax asset .............. $ 9,751,721 $10,974,425
=========== ===========
The valuation allowance at December 31, 1997 and 1996 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 1993
through 1997 of approximately $62,578,000.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The actual income tax expense for the years ended December 31, 1997, 1996
and 1995 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,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Computed "expected" tax expense ...... $ 5,712,929 $ 7,027,580 $ 8,510,568
Increases (decreases) in
tax resulting from:
Tax-exempt interest income ....... (2,330,842) (1,980,599) (2,190,686)
Change in accrual of prior year
taxes .......................... (424,161) - -
Settlement of tax examinations ... 29,026 (46,949) 182,309
Proration of tax-exempt interest
and dividends received deduction 226,175 289,705 235,330
Other, net ....................... 373,039 345,452 229,560
----------- ----------- -----------
Income taxes ................... $ 3,586,166 $ 5,635,189 $ 6,967,081
=========== =========== ===========
Comprehensive income tax expense included in the consolidated financial
statements for the years ended December 31, 1997, 1996 and 1995 was as
follows:
Year ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Income tax expense (benefit) on:
Operations .......................... $ 3,586,166 $ 5,635,189 $ 6,967,081
Unrealized holding gains (losses) on
revaluation of securities
available-for-sale ................ 1,903,496 (153,472) 2,209,990
----------- ----------- -----------
Comprehensive income tax
expense ....................... $ 5,489,662 $ 5,481,717 $ 9,177,071
=========== =========== ===========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
11. EMPLOYEE RETIREMENT PLAN
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, 1997, 1996 and
1995, respectively:
Year ended December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Actuarial present value of
benefit obligations:
Accumulated benefit obligation,
including vested benefits of
$51,311,323, $50,211,301 and
$51,185,830 .................. $ 52,198,952 $ 51,043,973 $ 52,190,610
============ ============ ============
Projected benefit obligation for
service rendered to date ..... $ 68,560,979 $ 66,414,419 $ 66,544,344
Plan assets at fair value .......... 85,475,793 76,056,949 72,048,850
------------ ------------ ------------
Plan assets greater than
projected benefit obligation ..... 16,914,814 9,642,530 5,504,506
Unrecognized net (gain) loss from
past experience different from
that assumed and effects of
changes in assumptions ........... (8,522,657) (3,080,096) 625,332
Prior service cost not yet
recognized in net periodic
pension cost ..................... 2,889,260 3,327,217 3,765,174
Unrecognized portion of initial
net asset ........................ (2,880,932) (3,956,372) (5,031,812)
------------ ------------ ------------
Prepaid pension cost ........ $ 8,400,485 $ 5,933,279 $ 4,863,200
============ ============ ============
Service cost - benefits earned
during the period ................ $ 3,174,041 $ 3,029,857 $ 3,124,494
Interest cost on projected
benefit obligation ............... 4,673,368 4,477,060 4,827,694
Actual gain on plan assets ......... (12,575,950) (9,237,498) (10,414,728)
Net amortization and deferral ...... 5,770,244 3,043,014 5,071,784
------------ ------------ ------------
Net periodic pension cost ... $ 1,041,703 $ 1,312,433 $ 2,609,244
============ ============ ============
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 1997 and 1996
and 7.00 percent for 1995. The assumed long-term rate of return on plan
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
assets was 8.00 percent for 1997, 1996 and 1995. The rate of increase in
future compensation levels used in measuring the projected benefit obligation
was 5.26 percent in 1997 and 5.30 percent in 1996 and 1995. Pension expense
for the Company amounted to $257,812, $289,055 and $572,062 in 1997, 1996 and
1995, respectively.
12. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
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, 1997, 1996 and
1995, respectively.
Year ended December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Actuarial present value of
postretirement benefit obligations:
Retirees ....................... $ 11,376,687 $ 8,878,520 $ 8,319,946
Fully eligible active plan
participants ................. 5,909,934 4,624,846 4,775,324
Other active plan participants 8,955,244 7,777,499 6,705,681
------------ ------------ ------------
Total ........................ 26,241,865 21,280,865 19,800,951
Unrecognized net gain from
past experience different from
that assumed and effects of
changes in assumptions ........... 594,992 3,973,690 4,110,579
Prior service cost not yet
recognized in net periodic
postretirement benefit cost ...... (2,820,157) (3,391,395) (3,962,633)
------------ ------------ ------------
Liability for postretirement
benefits ................... $ 24,016,700 $ 21,863,160 $ 19,948,897
============ ============ ============
Service cost - benefits earned
during the period ................ $ 1,039,710 $ 917,917 $ 907,297
Interest cost on accumulated
postretirement benefit
obligation ....................... 1,518,680 1,365,150 1,361,790
Net amortization and deferral ...... 423,899 336,117 409,556
------------ ------------ ------------
Net periodic postretirement
benefit cost ............... $ 2,982,289 $ 2,619,184 $ 2,678,643
============ ============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 1997 is 9.00 percent, and is assumed to decrease gradually to
5.00 percent in 2001 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, 1997 by $3,685,672 and the aggregate of
the service and interest cost components of net periodic postretirement
benefit cost for the year ended December 31, 1997 by $467,132. The weighted
average discount rate used in determining the accumulated postretirement
benefit obligation was 7.25 percent for 1997 and 1996, and 7.00 percent for
1995.
The Company's net periodic postretirement benefit cost for the years
ended December 31, 1997, 1996 and 1995 was $677,336, $596,102 and $608,832,
respectively.
13. COMMON STOCK
The Company has no stock based compensation plans of its own; however,
Employers Mutual has several stock plans which utilize the common stock of the
Company. The Company receives the current fair market value for any shares
issued under the plans and all expenses (the excess of current fair market
value over the participant's price) of the plans are borne by Employers Mutual
or the company employing the individual optionees. As a result of this
arrangement, the Company is not subject to accounting requirements of
Accounting Principles Board Opinion No. 25 or SFAS 123, "Accounting for Stock-
Based Compensation."
Under the terms of the pooling agreement (note 2), the Company's property
and casualty insurance subsidiaries incur 22 percent of the expenses
recognized by Employers Mutual relating to these plans. The Company also
incurs 100 percent of any expense of these plans that is associated with
optionees working for its other subsidiaries. Total expenses incurred by the
Company relating to the Employers Mutual stock plans amounted to $81,653,
$47,395 and $79,703 for 1997, 1996 and 1995, respectively.
(a) INCENTIVE STOCK OPTION PLANS
During 1997, 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).
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 have a vesting period 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 87
individuals under the 1993 Plan. At February 26, 1998, 24 eligible
participants remained in the 1982 Plan and 70 eligible participants remained
in the 1993 Plan.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Senior Executive Compensation and Stock Option Committee (the
"Committee") of Employers Mutual's Board of Directors (the "Board") is the
administrator of the plans. Option prices are determined by the Committee but
can not be less than the fair market value of the stock on the date of grant.
During 1997, 88,050 options were granted under the 1993 plan to eligible
participants at a price of $12.25 and 71,068 options were exercised under the
plans at prices ranging from $11.75 to $14.25. A summary of Employers
Mutual's incentive stock option plans is as follows:
Year ended December 31,
-----------------------------
1997 1996 1995
-------- -------- --------
Options outstanding, beginning of year .. 538,012 565,882 556,277
Granted ................................. 88,050 54,800 119,550
Exercised ............................... (71,068) (79,270) (88,645)
Expired ................................. (4,550) (3,400) (21,300)
-------- -------- --------
Options outstanding, end of year ........ 550,444 538,012 565,882
======== ======== ========
Options exercisable, end of year ........ 308,354 296,552 284,112
======== ======== ========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(b) EMPLOYEE STOCK PURCHASE PLAN
A total of 500,000 shares of the Company's common stock were reserved for
issuance under the Employers Mutual 1993 Employee Stock Purchase Plan. The
plan provides for two option periods each calendar year; from January 1 until
the last business day of June and from July 1 until the last business day of
December, with the last business day in each option period being the option
exercise date. Any employee who is employed by Employers Mutual or its
subsidiaries on the first day of the month immediately preceding any option
period is eligible to participate in the plan. Eligible employees may elect
to participate in the plan either through payroll deduction or by lump sum
contributions, but in no case can the participation level exceed 10 percent of
the employee's base annual compensation amount. The option price is 85
percent of the fair market value of the stock on the exercise date. Upon
exercise of an option, a stock certificate is issued evidencing the ownership
of the participant in the shares of stock so purchased. The certificate,
however, is held in custody by the stock transfer agent for a period of one
year from the exercise date. During such one year period, the participant has
the rights and privileges of a shareholder, including the right to vote, to
receive dividends and to have such shares participate in the dividend
reinvestment plan. However, the participant is not able to sell, transfer,
assign, pledge or otherwise encumber or dispose of such shares during such one
year period. Upon expiration of the one year period or upon any earlier
termination of employment of the participant for any reason, including death,
such participant will, within thirty days of such expiration or termination,
receive the stock certificate(s) evidencing his or her shares of stock. The
plan is administered by the Board of Employers Mutual and the Board has the
right to amend or terminate the plan at any time; however, no such amendment
or termination shall adversely affect the rights and privileges of
participants with unexercised options.
During 1997, 149 employees participated in the plan and exercised a total
of 21,940 options at prices of $12.81 and $13.13. Activity under the plan was
as follows:
Year ended December 31,
----------------------------
1997 1996 1995
-------- -------- --------
Shares available for purchase,
beginning of year ...................... 424,922 446,045 463,940
Shares purchased under plan .............. (21,940) (21,123) (17,895)
-------- -------- --------
Shares available for purchase, end of year 402,982 424,922 446,045
======== ======== ========
<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 1997,
six directors participated in the plan and exercised a total of 5,884 options
at prices ranging from $10.88 to $13.75. Activity under the plan was as
follows:
Year ended December 31,
----------------------------
1997 1996 1995
-------- -------- --------
Shares available for purchase,
beginning of year ...................... 176,252 185,568 188,099
Shares purchased under plan .............. (5,884) (9,316) (2,531)
-------- -------- --------
Shares available for purchase, end of year 170,368 176,252 185,568
======== ======== ========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(d) 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. On December
17, 1997, an additional 1,000,000 shares of stock were registered for issuance
in the Dividend Reinvestment Plan. During 1997, 1996 and 1995, 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,
-----------------------------
1997 1996 1995
--------- -------- --------
Shares available for purchase,
beginning of year ...................... 176,489 364,561 537,660
Additional shares registered ............. 1,000,000 - -
Shares purchased under plan .............. (195,585) (188,072) (173,099)
--------- -------- --------
Shares available for purchase, end of year 980,904 176,489 364,561
========= ======== ========
Range of purchase prices .................. $11.88 $11.00 $10.00
to to to
$13.50 $13.75 $14.75
(e) 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. All shares of the
Company's common stock repurchased after June 30, 1996 have been retired.
Treasury stock activity was as follows:
Year ended December 31,
----------------------------
1997 1996 1995
-------- -------- --------
Treasury shares, beginning of year ....... - 7,585 10,931
Shares repurchased ....................... - 19,328 56,096
Shares reissued .......................... - (10,262) (59,442)
Shares retired ........................... - (16,651) -
-------- -------- --------
Treasury shares, end of year ............. - - 7,585
======== ======== ========
Average cost ............................. $ - $ - $ 11.66
======== ======== ========
(Loss) gain on reissue of treasury shares $ - $(16,257) $115,166
======== ======== ========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
14. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of (1) cash, (2) indebtedness of/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, 1997 amount fair value
------------ ------------
Fixed maturity securities:
Held-to-maturity ......................... $185,829,063 $193,835,013
Available-for-sale ....................... 179,652,738 179,652,738
Equity securities available-for-sale ....... 30,972,732 30,972,732
Short-term investments ..................... 14,926,994 14,926,994
December 31, 1996
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
15. 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 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 $808,776 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
16. UNAUDITED INTERIM FINANCIAL INFORMATION
Three months ended,
------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
1997
- ----
Total revenues ........ $ 48,320,069 $ 50,104,278 $ 52,301,840 $ 54,570,925
============ ============ ============ ============
Income before income
taxes ............... $ 2,070,552 $ 1,922,904 $ 3,064,442 $ 9,744,835
Income taxes .......... 322,653 231,301 399,790 2,632,422
------------ ------------ ------------ ------------
Net income ....... $ 1,747,899 $ 1,691,603 $ 2,664,652 $ 7,112,413
============ ============ ============ ============
Net income per share
basic and diluted* $ .16 $ .15 $ .24 $ .63
============ ============ ============ ============
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
============ ============ ============ ============
Net income per share
basic and diluted* $ .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
============ ============ ============ ============
Net income per share
basic and diluted* $ .38 $ .48 $ .28 $ .48
============ ============ ============ ============
* Since the weighted average shares for the quarters are calculated
independent of the weighted average shares for the year, quarterly net income
per share may not total to annual net income per share.
<PAGE>
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED EXHIBIT 13(d)
------------------------------------------------- -------------
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.
1997 1996
---------------------------- ----------------------------
High Low Dividends High Low Dividends
------- ------- --------- ------- ------- ---------
1st Quarter $12 3/4 $11 1/4 $.15 $14 1/4 $11 3/4 $ .14
2nd Quarter 13 1/2 10 3/4 .15 14 1/2 10 1/8 .14
3rd Quarter 15 12 1/2 .15 13 1/2 10 1/2 .14
4th Quarter 14 1/4 12 3/4 .15 12 1/4 10 1/2 .15
At December 31 13 1/4 12
On February 27, 1998, there were approximately 1,387 registered
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 13(d) of Notes to Consolidated Financial
Statements under Item 8 of this Form 10-K. During 1997 and 1996, 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, 33-49339 and 333-45279 on Forms S-8 and No.
33-34499 on Form S-3 of EMC Insurance Group Inc. of our reports dated February
26, 1998, relating to the consolidated balance sheets of EMC Insurance Group
Inc. and Subsidiaries as of December 31, 1997 and 1996, 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, 1997, which reports appear in the December 31, 1997
annual report on Form 10-K of EMC Insurance Group Inc.
/s/ KPMG Peat Marwick LLP
Des Moines, Iowa
March 20, 1998
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 1997 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 1998 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 20, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
12/31/97 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-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 179,652,738
<DEBT-CARRYING-VALUE> 185,829,063
<DEBT-MARKET-VALUE> 193,835,013
<EQUITIES> 30,972,732
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 411,381,527
<CASH> 1,200,300
<RECOVER-REINSURE> 13,601,691
<DEFERRED-ACQUISITION> 10,560,657
<TOTAL-ASSETS> 459,109,796
<POLICY-LOSSES> 217,777,942
<UNEARNED-PREMIUMS> 54,857,463
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 2,781,544
<NOTES-PAYABLE> 0
0
0
<COMMON> 11,351,119
<OTHER-SE> 150,995,337
<TOTAL-LIABILITY-AND-EQUITY> 459,109,796
177,218,246
<INVESTMENT-INCOME> 23,759,988
<INVESTMENT-GAINS> 4,100,006
<OTHER-INCOME> 218,872
<BENEFITS> 129,853,304
<UNDERWRITING-AMORTIZATION> 35,942,092
<UNDERWRITING-OTHER> 20,168,236
<INCOME-PRETAX> 16,802,733
<INCOME-TAX> 3,586,166
<INCOME-CONTINUING> 13,216,567
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,216,567
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.18
<RESERVE-OPEN> 195,228,583
<PROVISION-CURRENT> 137,300,762
<PROVISION-PRIOR> (7,447,458)
<PAYMENTS-CURRENT> 57,649,830
<PAYMENTS-PRIOR> 62,684,265
<RESERVE-CLOSE> 217,777,942
<CUMULATIVE-DEFICIENCY> (7,447,458)
</TABLE>
