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, 1999
[ ] 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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 1, 2000 was $29,207,981.
The number of shares outstanding of the registrant's common stock, $1.00
par value, on March 1, 2000, were 11,266,950.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's annual report to stockholders for the year
ended December 31, 1999 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 29, 2000,
are incorporated by reference under Part III.
<PAGE>
TABLE OF CONTENTS
Part I
Item 1. Business ........................................................ 2
Item 2. Properties ...................................................... 22
Item 3. Legal Proceedings ............................................... 22
Item 4. Submission of Matters to a Vote of Security Holders ............. 22
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters .................................. 23
Item 6. Selected Financial Data ......................................... 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 23
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ...... 23
Item 8. Financial Statements and Supplementary Data ..................... 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .......................... 23
Part III
Item 10. Directors and Executive Officers of the Registrant .............. 24
Item 11. Executive Compensation .......................................... 24
Item 12. Security Ownership of Certain Beneficial Owners
and Management ............................................... 25
Item 13. Certain Relationships and Related Transactions .................. 25
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K .................................................. 26
Index to Financial Statement Schedules ................................... 26
Signatures ............................................................... 29
Index to Exhibits ........................................................ 39
<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 72 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 two business segments
as follows:
...............................
: :
: EMC INSURANCE GROUP INC. :
:.............................:
:
Property and :
Casualty Insurance : Reinsurance
......................:................................
: :
: :
Illinois EMCASCO Insurance Company (Illinois EMCASCO) EMC
Dakota Fire Insurance Company (Dakota Fire) Reinsurance
Farm and City Insurance Company (Farm and City) Company
EMCASCO Insurance Company (EMCASCO)
:
:
EMC Underwriters, LLC.
Illinois EMCASCO was formed in Illinois in 1976, Dakota Fire was formed in
North Dakota in 1957 and EMCASCO was formed in Iowa in 1958 for the purpose of
writing property and casualty insurance. Farm and City was formed in Iowa in
1962 to write nonstandard risk automobile insurance and was purchased by the
Company in 1984. 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 nine states.
The Company's excess and surplus lines insurance agency, EMC Underwriters,
LLC., was acquired in 1985. The company was formed in Iowa in 1975 as a broker
for excess and surplus lines insurance. Effective December 31, 1998, the
excess and surplus lines insurance agency was converted to a limited liability
company and the ownership was contributed to EMCASCO.
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 four property and casualty insurance subsidiaries of the Company and
two subsidiaries and an affiliate of Employers Mutual (Union Insurance Company
of Providence, EMC Property & Casualty 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. Operations of the pool give rise to intercompany balances with Employers
Mutual, which are settled on a quarterly basis. The investment and income tax
activities 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 companies
in the pool.
Effective January 1, 1998, Farm and City, a subsidiary of the Company that
writes nonstandard risk automobile insurance business, became a participant in
the pooling agreement. Farm and City assumes a 1.5 percent participation in
the pool, which increased the Company's aggregate participation in the pool
from 22 percent in 1997 to 23.5 percent in 1998 and 1999. In connection with
this change in the pooling agreement, the Company's liabilities increased
$6,224,586 and invested assets increased $5,569,567. The Company reimbursed
Employers Mutual $726,509 for expenses that were incurred to generate the
additional business assumed by the Company and Employers Mutual paid the
Company $71,490 in interest income as the actual cash transfer did not occur
until March 25, 1998.
Effective January 1, 1997, Hamilton Mutual Insurance Company (Hamilton
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 expenses incurred to generate the additional business
assumed by the Company and Employers Mutual paid the Company $75,469 in
interest income as the actual cash transfer did not occur until March 24, 1997.
<PAGE>
PRINCIPAL PRODUCTS
The Company's property and casualty insurance subsidiaries and the other
parties to the pooling agreement underwrite both commercial and personal lines
of insurance. The following table sets forth the aggregate direct written
premiums of all parties to the pooling agreement for the three years ended
December 31, 1999. The pooling agreement is continuous, but may be amended or
terminated at the end of any calendar year as to any one or more parties.
Percent Percent Percent
of of of
Line of Business 1999 total 1998 total 1997 total
- ---------------- ---- ----- ---- ----- ---- -----
(Dollars in thousands)
Commercial Lines:
Automobile ............ $157,095 20.8% $131,317 18.9% $118,624 18.2%
Property .............. 118,939 15.8 115,815 16.6 110,637 17.0
Workers' compensation 126,285 16.7 117,120 16.8 115,117 17.6
Liability ............. 122,528 16.2 115,377 16.6 110,647 16.9
Other ................. 16,615 2.2 15,418 2.2 15,139 2.3
-------- ----- -------- ----- -------- -----
Total commercial lines 541,462 71.7 495,047 71.1 470,164 72.0
-------- ----- -------- ----- -------- -----
Personal Lines:
Automobile ............ 138,168 18.3 130,693 18.8 119,580 18.3
Property .............. 73,380 9.7 68,365 9.8 61,569 9.4
Liability ............. 2,280 0.3 2,134 0.3 2,026 0.3
Other ................. 51 - 52 - 51 -
-------- ----- -------- ----- -------- -----
Total personal lines 213,879 28.3 201,244 28.9 183,226 28.0
-------- ----- -------- ----- -------- -----
Total ............ $755,341 100.0% $696,291 100.0% $653,390 100.0%
======== ===== ======== ===== ======== =====
MARKETING
Marketing of insurance by the parties to the pooling agreement, excluding
the nonstandard risk automobile insurance sold by Farm and City, is conducted
through 18 offices located throughout the United States and approximately 3,200
independent agencies. These offices allow the Company to respond quickly to
changes in local market conditions. 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.
Farm and City specializes in insuring private passenger automobile risks
that are found to be unacceptable in the standard automobile insurance market.
Farm and City is licensed in a six state area that includes Iowa, Kansas,
Missouri, Nebraska, North Dakota and South Dakota. Private passenger
automobile policies are solicited through the American Agency System using
approximately 1,100 independent agencies.
<PAGE>
The following table sets forth the geographic distribution of the
aggregate direct written premiums of all parties to the pooling agreement for
the three years ended December 31, 1999.
1999 1998 1997
------ ------ ------
Alabama ............................ 3.7% 3.7% 3.6%
Arizona ............................ 3.7 3.7 3.7
Illinois ........................... 4.8 5.2 5.3
Iowa ............................... 18.1 19.3 19.0
Kansas ............................. 7.8 7.8 8.3
Michigan ........................... 3.7 3.6 4.1
Minnesota .......................... 3.6 3.8 3.8
Nebraska ........................... 6.9 7.1 7.2
North Carolina ..................... 2.9 3.2 3.3
North Dakota ....................... 3.2 3.1 2.4
Ohio ............................... 2.3 2.3 3.2
Texas .............................. 4.9 4.4 4.4
Wisconsin .......................... 4.3 4.4 4.4
Other * ............................ 30.1 28.4 27.3
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
* Includes all other jurisdictions, none of which accounted for more than 3%.
COMPETITION
The property and casualty insurance business is highly competitive. The
Company's property and casualty insurance subsidiaries and the other pool
members compete in the United States insurance market with numerous insurers,
many of which have greater financial resources. Competition in the types of
insurance in which the property and casualty insurance subsidiaries are engaged
is based on many factors, including the perceived overall financial strength of
the insurer, premiums charged, contract terms and conditions, services offered,
speed of claim payments, reputation and experience. In this competitive
environment, insureds have tended to favor large, financially strong insurers
and the Company faces the risk that insureds may become more selective and may
seek larger and/or more highly rated insurers.
BEST'S RATING
A.M. Best rates insurance companies based on their relative financial
strength and ability to meet their contractual obligations. The "A"
(Excellent) rating assigned to the Company's property and casualty insurance
subsidiaries and the other pool members is based on the pool members' 1998
operating results and financial condition as of December 31, 1998. A.M. Best
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 A.M. Best 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.
<PAGE>
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.
During 1999 and 1998, the pool participants purchased aggregate property
catastrophe excess of loss reinsurance to cover losses arising from multiple
catastrophes. Due to substantial changes in both the terms and the cost of the
coverage, this reinsurance protection has not been renewed for year 2000. If
this reinsurance protection had not been in place in 1999 the Company would
have reported $3,524,000 of additional operating losses, net of the premium
cost savings.
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 EMC Insurance
Companies. The intercompany pooling arrangement aids efficient buying of
reinsurance since it allows for higher retention levels and correspondingly
decreased dependence on the reinsurance marketplace.
A summary of the reinsurance treaties benefiting the parties to the
pooling agreement as of December 31, 1999 is presented below. Retention
amounts reflect the accumulated retentions of all layers within a treaty.
Type of Reinsurance Treaty 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
Aggregate property
catastrophe excess ........ $21,225,000 100 percent of $37,500,000
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 $ 4,250,000
Surety excess .............. $ 1,450,000 100 percent of $10,550,000
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.
<PAGE>
The major participants in the pool members' reinsurance programs as of
December 31, 1999 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.
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).
Percent
of total 1999
Property per risk, property catastrophe reinsurance Best's
and casualty coverages: protection rating
- --------------------------------------- ----------- ------
Underwriters at Lloyd's of London .................... 20.6% A
Transatlantic Reinsurance Company .................... 8.9 A++
Zurich Reinsurance (North America), Inc .............. 6.5 A+
NAC Reinsurance Corporation .......................... 6.2 A+
X.L. Mid Ocean Reinsurance Company, Ltd .............. 5.6 (1)
AXA Reassurance ...................................... 5.1 A+
Continental Casualty Company ......................... 3.9 A
Aggregate property catastrophe excess coverage:
- -----------------------------------------------
Munich Reinsurance Company (UK) ...................... 49.5 (1)
Underwriters at Lloyd's of London .................... 33.4 A
Workers' compensation excess coverage:
- --------------------------------------
First Allmerica Financial Life Insurance Company ..... 50.0 A
Trenwick America Reinsurance Corporation ............. 50.0 A+
Umbrella coverage:
- ------------------
General Reinsurance Corporation ...................... 100.0 A++
Fidelity and surety coverages:
- ------------------------------
SCOR Reinsurance Company ............................. 42.0 A+
GE Reinsurance Corporation ........................... 20.0 A
Signet Star Reinsurance Company ...................... 20.0 A
Partner Reinsurance Company of the U.S. .............. 18.0 A
Boiler coverage:
- ----------------
Hartford Steam Boiler Inspection and Insurance Company 100.0 A+
(1) Not rated.
<PAGE>
Premiums ceded under the pool members' reinsurance programs by all pool
members and by the Company's property and casualty insurance subsidiaries for
the year ended December 31, 1999 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..................... $ 4,338,094 $ 1,019,452
Hartford Steam Boiler Inspection & Insurance Company 2,267,667 532,902
NAC Reinsurance Corporation ........................ 1,322,065 310,685
SCOR Reinsurance Company ........................... 902,154 212,006
Transatlantic Reinsurance Company .................. 874,276 205,455
Munchener Ruckversicherungs ........................ 758,796 178,317
Continental Casualty Company........................ 724,654 170,294
Signet Star Reinsurance Company .................... 720,956 169,425
Renaissance Reinsurance Company .................... 680,400 159,894
AXA Reassurance .................................... 649,503 152,633
Other Reinsurers ................................... 8,179,443 1,922,169
----------- ------------
Total ............................................ $21,418,008 $ 5,033,232
=========== ============
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, 1999 are presented below.
Premiums ceded by
------------------------
Property
and casualty
All pool insurance
Reinsurer members subsidiaries
- --------- ----------- ------------
Wisconsin Compensation Rating Bureau ............... $ 3,737,058 $ 878,209
National Workers' Compensation Reinsurance Pool .... 3,015,899 708,736
North Carolina Reinsurance Facility ................ 1,153,243 271,012
North Carolina Insurance Underwriting Association .. 754,400 177,284
Mutual Reinsurance Bureau .......................... 495,270 116,388
Other Reinsurers ................................... 365,255 85,835
----------- ------------
$ 9,521,125 $ 2,237,464
=========== ============
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 and
Reinsurance Subsidiary - Reinsurance Ceded."
<PAGE>
REINSURANCE ASSUMED
The parties to the pooling agreement also assume insurance from
involuntary pools and associations in conjunction with direct business written
in various states. Through its participation in the pooling agreement, the
Company assumes insurance business from the North Carolina Reinsurance Facility
(NCRF), which is a state run assigned risk program. Prior to 1998 the Company
had not recognized its share of certain surcharges reported by the NCRF.
During the fourth quarter of 1998, the Company received clarification regarding
such amounts and recorded its share of these cumulative surcharges. As a
result, the consolidated financial statements for the year ended December 31,
1998 reflect assumed premium income of $542,656 and assumed loss recoveries of
$661,818 related to prior years. Beginning in 1999, these surcharges are being
recorded on a quarterly basis.
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 by regulatory authorities. The ratios of the pool
members for the past three years are as follows:
Year ended December 31,
------------------------------
1999 1998 1997
---- ---- ----
Employers Mutual .................... .86 .82 .80
EMCASCO ............................. 2.03 1.66 1.62
Illinois EMCASCO .................... 2.18 1.87 1.68
Dakota Fire ......................... 2.17 1.79 1.59
Farm and City ....................... 2.04 2.15 1.60
EMC Property & Casualty Company ..... .80 .65 1.08
Union Insurance Company of Providence .79 .75 .72
Hamilton Mutual ..................... 1.69 1.41 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 1999. See
"Property and Casualty Insurance Subsidiaries and Reinsurance 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, or 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. Operations of the quota share agreement
give rise to intercompany balances with Employers Mutual, which are settled on
a quarterly basis.
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 expenses that
were incurred to generate the additional business assumed by the Company.
<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, 1999. The amounts reported in the Company's financial statements
for the year 1997 reflect an adjustment of $354,735 related to the change in
the 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 1999 total 1998 total 1997 total
- ---------------- ------- ----- ------- ----- ------- -----
(Dollars in thousands)
Pro rata reinsurance:
Property and Casualty .. $12,642 29.0% $15,105 38.7% $ 8,985 26.2%
Property ............... 7,461 17.1 2,601 6.7 6,546 19.0
Crop ................... 4,727 10.8 3,967 10.2 3,101 9.0
Casualty ............... 4,771 11.0 3,919 10.0 2,879 8.4
Marine/aviation ........ 2,289 5.3 1,424 3.6 1,866 5.4
Other .................. 261 0.6 1,661 4.2 2,116 6.2
------- ----- ------- ----- ------- -----
Total pro rata reinsurance 32,151 73.8 28,677 73.4 25,493 74.2
------- ----- ------- ----- ------- -----
Excess per risk reinsurance:
Property ............... 2,298 5.3 2,099 5.4 2,110 6.2
Casualty ............... 1,979 4.6 2,104 5.4 1,595 4.6
Other .................. 754 1.7 868 2.2 647 1.9
------- ----- ------- ----- ------- -----
Total excess per
risk reinsurance ...... 5,031 11.6 5,071 13.0 4,352 12.7
------- ----- ------- ----- ------- -----
Excess catastrophe/
aggregate reinsurance:
Property ............... 5,674 13.0 4,744 12.1 4,293 12.5
Crop ................... 330 0.8 284 0.7 252 0.8
Marine/aviation ........ 20 - 38 0.1 8 -
Other .................. 341 0.8 260 0.7 (62) (0.2)
------- ----- ------- ----- ------- -----
Total excess catastrophe/
aggregate reinsurance 6,365 14.6 5,326 13.6 4,491 13.1
------- ----- ------- ----- ------- -----
Total excess reinsurance 11,396 26.2 10,397 26.6 8,843 25.8
------- ----- ------- ----- ------- -----
$43,547 100.0% $39,074 100.0% $34,336 100.0%
======= ===== ======= ===== ======= =====
MARKETING
Over the last several years Employers Mutual has emphasized writing excess
of loss reinsurance business and has worked to increase its participation on
existing contracts that had favorable terms. Employers Mutual strives to be
flexible in the types of reinsurance products it offers, but generally limits
its writings to direct reinsurance business rather than providing
retrocessional covers. During the last three years there has been a trend
in the reinsurance marketplace for "across the board" participation on
excess of loss reinsurance contracts. As a result, reinsurance companies
must be willing to participate in all coverages and on all layers offered
under a specific contract in order to be considered a viable reinsurer.
COMPETITION
The reinsurance marketplace is very competitive; however, recent worldwide
catastrophe losses may help ease rate adequacy concerns. 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 issue by accepting a larger share of
coverage on desirable programs and strengthening its relationships with
reinsurance intermediaries.
REINSURANCE CEDED
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 and
Reinsurance Subsidiary - Reinsurance Ceded."
<PAGE>
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 1999. See "Property and
Casualty Insurance Subsidiaries and Reinsurance Subsidiary - Outstanding Losses
and Settlement Expenses."
PROPERTY AND CASUALTY INSURANCE SUBSIDIARIES AND REINSURANCE SUBSIDIARY
- -----------------------------------------------------------------------
Employers Mutual provides various services to all of its subsidiaries.
Such services include data processing, claims, financial, actuarial, auditing,
marketing and underwriting. Costs of these services are allocated to the
subsidiaries outside the pooling agreement based upon a number of criteria,
including usage and number of transactions. Costs not allocated to these
subsidiaries are charged to the pool and each pool participant shares in the
total cost in proportion to its participation percentage.
STATUTORY COMBINED RATIOS
The following table sets forth the Company's insurance subsidiaries'
statutory combined ratios and the property and casualty insurance industry
averages for the five years ended December 31, 1999. 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,
--------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Property and casualty insurance
Loss ratio ................... 83.6% 83.5% 74.3% 70.5% 67.3%
Expense ratio ................ 32.0 33.3 32.8 34.3 32.6
------ ------ ------ ------ ------
Combined ratio ............. 115.6% 116.8% 107.1% 104.8% 99.9%
====== ====== ====== ====== ======
Reinsurance
Loss ratio ................... 83.1% 75.4% 68.4% 68.7% 66.3%
Expense ratio ................ 30.6 31.1 34.1 31.5 32.3
------ ------ ------ ------ ------
Combined ratio ............. 113.7% 106.5% 102.5% 100.2% 98.6%
====== ====== ====== ====== ======
Total insurance operations
Loss ratio ................... 83.5% 81.9% 73.1% 70.0% 67.1%
Expense ratio ................ 31.7 32.9 33.1 33.6 32.5
------ ------ ------ ------ ------
Combined ratio ............. 115.2% 114.8% 106.2% 103.6% 99.6%
====== ====== ====== ====== ======
Property and casualty insurance
industry averages (1)
Loss ratio ................... 78.3% 76.3% 72.8% 78.3% 78.9%
Expense ratio ................ 29.2 29.4 28.8 27.5 26.1
------ ------ ------ ------ ------
Combined ratio ............. 107.5% 105.7% 101.6% 105.8% 105.0%
====== ====== ====== ====== ======
(1) As reported by A.M. Best Company. The ratio for 1999 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, 1999:
1999
Amount Percent Best's
recoverable of total rating
----------- -------- ------
Wisconsin Compensation Rating Bureau .. $ 3,470,126 28.0% (1)
National Workers' Compensation
Reinsurance Pool .................... 1,813,296 14.6 (1)
General Reinsurance Corporation ....... 796,609 6.4 A++
Hartford Fire Insurance Company ....... 636,935 5.1 A+
Minnesota Workers'Comp Reins Assoc .... 574,790 4.6 (2)
PMA Reinsurance Corporation ........... 502,545 4.1 A+
American Re-Insurance Company ......... 472,057 3.8 A++
Mutual Reinsurance Bureau (MRB)........ 449,830 3.6 (3)
GE Reinsurance Corporation ............ 345,542 2.8 A
AXA Reinsurance Corporation ........... 290,479 2.3 A+
Other Reinsurers ...................... 3,057,720 24.7
----------- --------
Total ........................... $12,409,929(4) 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) Not rated.
(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
A.M. Best.
(4) The total amount recoverable at December 31, 1999 represented $868,550 in
paid losses and settlement expenses, $10,260,815 in unpaid losses
and settlement expenses and $1,280,564 in unearned premiums.
<PAGE>
The effect of reinsurance on premiums written and earned, and losses and
settlement expenses incurred for the three years ended December 31, 1999 is
presented below.
Year ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Premiums written:
Direct ........................ $228,588,440 $213,134,588 $175,350,677
Assumed from nonaffiliates .... 781,225 1,888,951 1,219,564
Assumed from affiliates ....... 221,051,986 204,964,038 178,624,357
Ceded to nonaffiliates ........ (7,270,696) (5,808,352) (5,615,772)
Ceded to affiliates ........... (228,588,440) (213,249,508) (164,978,055)
------------ ------------ ------------
Net premiums written ........ $214,562,515 $200,929,717 $184,600,771
============ ============ ============
Premiums earned:
Direct ........................ $223,593,165 $202,514,027 $169,304,584
Assumed from nonaffiliates .... 873,710 1,969,067 1,403,778
Assumed from affiliates ....... 217,416,300 197,166,272 171,514,339
Ceded to nonaffiliates ........ (7,191,869) (5,801,680) (5,937,679)
Ceded to affiliates ........... (223,593,165) (201,603,281) (159,066,776)
------------ ------------ ------------
Net premiums earned ......... $211,098,141 $194,244,405 $177,218,246
============ ============ ============
Losses and settlement expenses
incurred:
Direct ........................ $183,031,797 $171,209,604 $126,922,536
Assumed from nonaffiliates .... 429,244 1,298,167 926,403
Assumed from affiliates ....... 182,375,574 171,681,607 122,827,934
Ceded to nonaffiliates ........ (5,928,570) (7,395,934) (3,364,737)
Ceded to affiliates ........... (183,031,797) (178,917,350) (117,458,832)
------------ ------------ ------------
Net losses and settlement
expenses incurred ......... $176,876,248 $157,876,094 $129,853,304
============ ============ ============
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 ($100,000 and over) incurred and reported gross reserves are reviewed
regularly for adequacy. In addition, long-term and lifetime medical claims are
periodically reviewed for cost trends and the applicable reserves are
appropriately revised.
Loss reserves are estimates at a given time of what the insurer expects to
pay on incurred losses, based on facts and circumstances then known. During
the loss settlement period, which may be many years, additional facts regarding
individual claims become known, and accordingly, it often becomes necessary to
refine and adjust the estimates of liability on a claim.
Settlement expense reserves are intended to cover the ultimate cost of
investigating claims and defending lawsuits arising from claims. These
reserves are established each year based on previous years experience to
project the ultimate cost of settlement expenses. To the extent that
adjustments are required to be made in the amount of loss reserves each year,
settlement expense reserves are correspondingly revised.
<PAGE>
Changes in reserves for losses and settlement expenses are reflected in
the operating results of the year such changes are recorded.
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, 1999 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 and the reinsurance 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.
Year ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Gross reserves at beginning of year $245,610,323 $217,777,942 $202,502,986
Ceded reserves at beginning of year (15,563,600) (13,030,150) (13,796,769)
------------ ------------ ------------
Net reserves at beginning of year,
before adjustments ............... 230,046,723 204,747,792 188,706,217
Adjustment to beginning reserves
due to change in pooling
agreement ........................ - 3,600,220 3,795,453
Adjustment to beginning reserves
due to change in quota share
percentage ....................... - - 2,726,913
------------ ------------ ------------
Net reserves at beginning of year,
after adjustments ................ 230,046,723 208,348,012 195,228,583
------------ ------------ ------------
Incurred losses and
settlement expenses:
- ----------------------
Provision for insured events
of the current year ............ 182,609,687 168,953,309 137,300,762
Decrease in provision for
insured events of prior years .. (5,733,439) (11,077,215) (7,447,458)
------------ ------------ ------------
Total incurred losses and
settlement expenses ...... 176,876,248 157,876,094 129,853,304
------------ ------------ ------------
Payments:
- ---------
Losses and settlement expenses
attributable to insured events
of the current year ............ 72,970,531 73,228,354 57,649,830
Losses and settlement expenses
attributable to insured events
of prior years ................. 77,699,231 62,949,029 62,684,265
------------ ------------ ------------
Total payments ............. 150,669,762 136,177,383 120,334,095
------------ ------------ ------------
Net reserves at end of year ........ 256,253,209 230,046,723 204,747,792
Ceded reserves at end of year ...... 10,260,815 15,563,600 13,030,150
------------ ------------ ------------
Gross reserves at end of year ...... $266,514,024 $245,610,323 $217,777,942
============ ============ ============
<PAGE>
The following table shows the calendar year development of loss and
settlement expense reserves of the property and casualty insurance subsidiaries
and the reinsurance 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 property and casualty
insurance subsidiaries' collective participation in the pool from 17 percent to
22 percent in 1992, (2) 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, (3) the commutation of two
reinsurance contracts under the reinsurance subsidiary's quota share agreement
in 1993, (4) the gross-up of reserve amounts associated with the National
Workers' Compensation Reinsurance Pool at December 31, 1993, (5) 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, and
(6) 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. The table has been restated to reflect the addition of Hamilton
Mutual to the pooling agreement effective January 1, 1997 and the addition of
Farm and City to the pooling agreement effective January 1, 1998.
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. Favorable development has also been experienced in the
reinsurance subsidiary, but to a lesser degree.
The Company has historically experienced favorable development in its
reserves and current reserving practices have not been relaxed; however, the
amount of favorable development experienced is expected to fluctuate from year
to year.
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
(Dollars in thousands) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
<S> ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Statutory reserves for losses <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
and settlement expenses ...... $127,870 131,623 139,317 180,797 182,072 191,514 196,293 191,892 205,606 230,937 257,201
Reclassification of reserve
amounts associated with the
National Workers' Compensation
Reinsurance Pool ............. 3,855 4,338 6,830 11,364 - - - - - - -
Retroactive restatement of
reserves in conjunction with
admittance of new participants
into the pooling agreement ... 2,182 3,334 4,364 5,314 5,248 6,603 6,809 7,018 3,600 - -
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Statutory reserves after
reclassification ............. 133,907 139,295 150,511 197,475 187,320 198,117 203,102 198,910 209,206 230,937 257,201
GAAP adjustments:
Salvage and subrogation ...... (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) (890) (948)
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Reserves for losses and
settlement expenses .......... 132,977 138,092 149,227 195,449 184,915 195,638 200,004 195,724 208,348 230,047 256,253
Paid (cumulative) as of:
One year later ............... 42,480 42,990 31,577 78,000 60,162 57,247 62,012 59,856 62,949 77,699 -
Two years later .............. 66,185 59,579 79,619 109,985 89,153 88,831 92,626 92,191 99,870 - -
Three years later ............ 77,009 96,796 97,152 127,885 107,372 106,691 112,985 113,343 - - -
Four years later ............. 107,215 106,391 107,114 137,783 116,856 118,705 124,450 - - - -
Five years later ............. 113,112 112,200 112,598 143,876 123,843 126,384 - - - - -
Six years later .............. 116,338 115,858 116,670 148,518 128,931 - - - - - -
Seven years later ............ 119,039 118,725 119,699 151,895 - - - - - - -
Eight years later ............ 120,879 120,122 121,817 - - - - - - - -
Nine years later ............. 121,758 121,763 - - - - - - - - -
Ten years later .............. 122,893 - - - - - - - - - -
Reserves reestimated as of:
End of year .................. 132,977 138,092 149,227 195,449 184,915 195,638 200,004 195,724 208,348 230,047 256,253
One year later ............... 137,442 143,884 155,537 197,008 179,527 179,818 183,760 188,579 197,271 224,313 -
Two years later .............. 140,272 145,101 152,771 192,318 170,653 173,162 182,285 185,465 194,287 - -
Three years later ............ 139,949 143,413 148,867 186,730 166,778 172,118 179,797 181,392 - - -
Four years later ............. 140,315 142,496 148,017 186,133 166,133 170,570 176,176 - - - -
Five years later ............. 139,380 143,063 148,098 186,319 165,548 167,763 - - - - -
Six years later .............. 141,133 143,638 148,686 186,095 163,406 - - - - - -
Seven years later ............ 142,650 144,318 148,991 184,174 - - - - - - -
Eight years later ............ 143,763 144,679 147,579 - - - - - - - -
Nine years later ............. 143,051 143,472 - - - - - - - - -
Ten years later .............. 141,920 - - - - - - - - - -
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cumulative redundancy
(Deficiency) ................. $ (8,943) (5,380) 1,648 11,275 21,509 27,875 23,828 14,332 14,061 5,734 -
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross loss and settlement expense
reserves - end of year (A) .............................. $220,703 202,370 209,785 212,231 209,521 221,378 245,610 266,514
Reinsurance receivables ................................... 25,254 17,455 14,147 12,227 13,797 13,030 15,563 10,261
-------- ------- ------- ------- ------- ------- ------- -------
Net loss and settlement expense
reserves - end of year .................................. $195,449 184,915 195,638 200,004 195,724 208,348 230,047 256,253
======== ======= ======= ======= ======= ======= ======= =======
Gross re-estimated reserves - latest (B) .................. $206,278 178,876 181,805 190,981 198,572 209,794 240,911 266,514
Re-estimated reinsurance receivables - latest ............. 22,104 15,470 14,042 14,805 17,180 15,507 16,598 10,261
-------- ------- ------- ------- ------- ------- ------- -------
Net re-estimated reserves - latest ........................ $184,174 163,406 167,763 176,176 181,392 194,287 224,313 256,253
======== ======= ======= ======= ======= ======= ======= =======
Gross cumulative redundancy (deficiency) (A-B) ............ $ 14,425 23,494 27,980 21,250 10,949 11,584 4,699 -
======== ======= ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
Asbestos and Environmental 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.
Estimating loss and settlement expense reserves for asbestos and
environmental claims are very difficult due to the many uncertainties
surrounding these types of claims. These uncertainties exist because 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, 1999 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.
The following table presents asbestos and environmental related losses
and settlement expenses incurred and reserves outstanding for the Company:
Year ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
Losses and settlement expenses incurred:
Asbestos:
Property and casualty insurance ......... $ 125,687 $ 34,287 $ 25,246
Reinsurance ............................. (25,971) - 394,524
---------- ---------- ----------
99,716 34,287 419,770
---------- ---------- ----------
Environmental:
Property and casualty insurance ......... 11,227 18,288 25,615
Reinsurance ............................. 223,996 - 374,822
---------- ---------- ----------
235,223 18,288 400,437
Total loss and settlement expenses ---------- ---------- ----------
incurred .......................... $ 334,939 $ 52,575 $ 820,207
========== ========== ==========
Loss and settlement expense reserves:
Asbestos:
Property and Casualty insurance ......... $ 259,148 $ 186,840 $ 170,302
Reinsurance ............................. 753,481 793,624 805,429
---------- ---------- ----------
1,012,629 980,464 975,731
---------- ---------- ----------
Environmental:
Property and casualty insurance ......... 724,662 885,578 864,043
Reinsurance ............................. 710,520 506,056 572,961
---------- ---------- ----------
1,435,182 1,391,634 1,437,004
Total loss and settlement expense ---------- ---------- ----------
reserves .......................... $2,447,811 $2,372,098 $2,412,735
========== ========== ==========
<PAGE>
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 accumulated other comprehensive
income in stockholders' equity, net of deferred income taxes.
At December 31, 1999, approximately 71 percent of the Company's bonds were
invested in government or government agency issued securities. A variety of
maturities are maintained in the Company's portfolio to assure adequate
liquidity. The maturity structure of bond investments is also established by
the relative attractiveness of yields on short, intermediate and long-term
bonds. The Company does not invest in any high-yield debt investments
(commonly referred to as junk bonds).
During the second and third quarters of 1999, the Company sold
approximately $55,000,000 of investments in tax-exempt fixed maturity
securities and reinvested the proceeds into taxable fixed maturity securities
that pay a higher interest rate. This change in asset allocation was
implemented to increase the Company's after-tax rate of return on its
investment portfolio in response to the recent deterioration in the Company's
underwriting results and the expectation that underwriting results will not
improve significantly in the near future.
The Company's equity investment holdings include common stock and
preferred stock. During 1998 the Company liquidated its common stock mutual
fund portfolio and reinvested the proceeds in individual stock issues that are
being managed on a tax-aware basis.
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 that 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.
The investments of EMC Insurance Group Inc. and its subsidiaries are
supervised by investment committees of each entity's respective board of
directors. The investment portfolios are managed by an internal staff that is
composed of employees of Employers Mutual.
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, 1999 and
1998. 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,
--------------------------------------------
1999 1998
--------------------- ---------------------
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 ............. $109,055,239 24.8% $140,041,154 33.0%
Mortgage-backed securities 18,148,921 4.1 24,885,036 5.8
------------ ------- ------------ -------
Total securities held-
to-maturity ............ 127,204,160 28.9 164,926,190 38.8
------------ ------- ------------ -------
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury securities
and obligations of U.S.
government corporations
and agencies ............. 4,419,411 1.0 3,491,259 0.8
Obligations of states and
political subdivisions ... 96,077,294 21.9 155,138,275 36.5
Mortgage-backed
securities ............... 49,440,943 11.2 - -
Debt securities issued by
foreign governments ...... 6,479,135 1.5 - -
Public utilities ........... 8,890,108 2.0 7,304,015 1.7
Corporate securities ....... 98,413,442 22.4 42,181,578 9.9
------------ ------- ------------ -------
Total fixed maturity
securities ............. 263,720,333 60.0 208,115,127 48.9
------------ ------- ------------ -------
Equity securities:
Common stock ............... 25,853,745 5.9 26,782,547 6.3
Non-redeemable preferred
stocks ................... 2,640,886 0.6 3,145,886 0.7
------------ ------- ------------ -------
Total equity securities .. 28,494,631 6.5 29,928,433 7.0
------------ ------- ------------ -------
Total securities
available-for-sale ..... 292,214,964 66.5 238,043,560 55.9
------------ ------- ------------ -------
Short-term investments ......... 20,164,210 4.6 22,660,011 5.3
------------ ------- ------------ -------
Total investments ........ $439,583,334 100.0% $425,629,761 100.0%
============ ======= ============ =======
<PAGE>
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, 1999.
Securities Securities
held-to-maturity available-for-sale
(at amortized cost) (at fair value)
--------------------- ---------------------
Amount Percent Amount Percent
------------ ------- ------------ -------
Rating(1)
AAA ..................... $127,204,160 100.0% $108,712,161 42.5%
AA ...................... - - 56,705,280 22.1
A ....................... - - 86,180,793 33.6
BAA ..................... - - 4,583,195 1.8
------------ ------- ------------ -------
Total fixed maturities $127,204,160 100.0% $256,181,429 100.0%
============ ======= ============ =======
(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, 1999, 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 ................... $ 4,498,477 $ 4,562,505
Due after one year through five years ..... 32,067,841 33,088,104
Due after five years through ten years .... 63,257,577 62,077,061
Due after ten years ....................... 9,231,344 8,592,680
Mortgage-backed securities ................ 18,148,921 18,358,715
------------ ------------
Totals .................................. $127,204,160 $126,679,065
============ ============
Securities available-for-sale:
Due in one year or less ................... $ 1,753,344 $ 1,756,937
Due after one year through five years ..... 25,307,861 25,259,693
Due after five years through ten years .... 54,694,520 53,277,920
Due after ten years ....................... 132,523,665 126,452,673
Mortgage-backed securities ................ 49,440,943 49,434,206
------------ ------------
Totals .................................. $263,720,333 $256,181,429
============ ============
The mortgage-backed securities shown in the above table include
$52,661,313 of securities issued by government corporations and agencies and
$14,928,551 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,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Average invested assets (1) ........ $432,606,548 $412,682,091 $386,852,093
Investment income (2) .............. $ 25,760,561 $ 24,859,063 $ 23,780,303
Average yield ...................... 5.96% 6.02% 6.15%
Realized investment gains (3) ...... $ 276,673 $ 5,901,049 $ 4,100,006
(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 income tax provisions.
(3) The amount for 1999 reflects realized gains of $1,589,953 resulting from
the disposal of tax-exempt fixed maturity securities. The proceeds from
the disposal of these tax-exempt fixed maturity securities were reinvested
in taxable fixed maturity securities that pay a higher interest rate. This
change in asset allocation was implemented to increase the Company's after-
tax rate of return on its investment portfolio. The amount for 1998
reflects realized gains of $7,585,293 resulting from the liquidation of the
Company's common stock mutual fund portfolio. The proceeds from the
disposal of the common stock mutual fund portfolio were reinvested in
individual stock issues that are being managed on a tax-aware basis. The
amount for 1997 reflects a capital gains distribution of $4,010,683 related
to the Company's common stock mutual fund portfolio.
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 and one of the property and casualty insurance
subsidiaries, which have 1,980 and 68 employees, respectively. The property
and casualty insurance subsidiaries share the costs charged to 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.
<PAGE>
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 made within a 12 month period 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, 1999,
$11,505,996 was available for distribution in 2000 to the Company without prior
approval. See note 6 of Notes to Consolidated Financial Statements under Item
8 of this Form 10-K.
The National Association of Insurance Commissioners (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, 1999, 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.
ITEM 2. PROPERTIES.
- ------- -----------
The Company does not own any real property. Lease costs of the Company's
office facilities in Oak Brook, Illinois, and Bismarck, North Dakota, which
total approximately $293,000 and $300,000 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 that 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 "Stockholder Information" section from the Company's Annual Report to
Stockholders for the year ended December 31, 1999, 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, 1999, 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, 1999, which is included as Exhibit 13(b) to
this Form 10-K, is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- -------- -----------------------------------------------------------
The information under the caption "Market Risk" in 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, 1999, 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, 1999, which is included as Exhibit
13(c) to this Form 10-K, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------- ------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
------------------------------------
None.
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- ---------------------------------------------------
See the information under the caption "Election of Directors" in the
Company's Proxy Statement in connection with its Annual Meeting to be held on
May 25, 2000, 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 46 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 65 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 62 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 61 Senior Vice President of the Company since
1998 and of Employers Mutual since 1997.
She was Vice President of the Company from
1995 until 1998. She has been employed by
Employers Mutual since 1971.
Ronald W. Jean 51 Senior Vice President of the Company and
Employers Mutual since 1997. He was Vice
President of the Company from 1985 until 1997.
He has been employed by Employers Mutual since
1979.
Raymond W. Davis 54 Senior Vice President of the Company and
Employers Mutual since 1998. He was Vice
President of the Company from 1985 until 1998.
He has been employed by Employers Mutual since
1979.
Donald D. Klemme 54 Senior Vice President and Secretary of the
Company since 1998. Senior Vice President
of Employers Mutual since 1998. He was Vice
President and Secretary of the Company from
1996 until 1998. He has been employed by
Employers Mutual since 1972.
David O. Narigon 47 Senior Vice President of the Company and of
Employers Mutual since 1998. He was Vice
President of the Company from 1989 until 1998.
He has been employed by Employers Mutual since
1983.
Mark E. Reese 42 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.
ITEM 11. EXECUTIVE COMPENSATION.
- -------- -----------------------
See the information under the caption "Compensation of Management" in the
Company's Proxy Statement in connection with its Annual Meeting to be held on
May 25, 2000, which information is incorporated herein by reference.
<PAGE>
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 25,
2000, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
See the information under the caption "Certain Relationships and Related
Transactions" in the Company's Proxy Statement in connection with its Annual
Meeting to be held on May 25, 2000, 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 ................................ 15*
Consolidated Balance Sheets, December 31, 1999 and 1998 ..... 16*
Consolidated Statements of Income for the Years ended
December 31, 1999, 1998 and 1997 ......................... 17*
Consolidated Statements of Comprehensive Income for the
Years ended December 31, 1999, 1998 and 1997 ............. 17*
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 1999, 1998 and 1997 ............. 18*
Consolidated Statements of Cash Flows for the Years ended
December 31, 1999, 1998 and 1997 ......................... 19*
Notes to Consolidated Financial Statements .................. 21-40*
Form 10-K
2. Schedules Page
----
Independent Auditors' Report on Schedules ................... 30
Schedule I - Summary of Investments ....................... 31
Schedule II - Condensed Financial Information of Registrant 32
Schedule III - Supplementary Insurance Information .......... 35
Schedule IV - Reinsurance .................................. 36
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations ..... 37
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 the notes to the consolidated
financial statements or are not significant in amount.
* Refers to the respective page of the financial information insert of
EMC Insurance Group Inc.'s 1999 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). 1999 Senior Executive Compensation Bonus Program.
Exhibit 10(d). 1982 Employers Mutual Casualty Company Incentive
Stock Option Plan, as amended.
Exhibit 10(e). Deferred Bonus Compensation Plans.
Exhibit 10(f). EMC Reinsurance Company Executive Bonus Program.
Exhibit 10(h). Employers Mutual Casualty Company Excess Retirement
Benefit Agreement.
Exhibit 10(i). Employers Mutual Casualty Company 1993 Employee
Stock Purchase Plan.
Exhibit 10(j). 1993 Employers Mutual Casualty Company Incentive
Stock Option Plan, as amended.
Exhibit 10(k). Employers Mutual Casualty Company Non-Employee
Director Stock Option Plan.
Exhibit 10(l). Employers Mutual Casualty Company Supplemental
Executive Retirement Plan.
(b) Reports on Form 8-K.
None
<PAGE>
(c) Exhibits.
3. Articles of incorporation and bylaws:
(a) Articles of Incorporation of the Company, as amended.
(Incorporated by reference to the Company's Form 10-K
for the calendar year ended December 31, 1998.)
(b) Bylaws of the Company, as amended. (Incorporated by reference
to the Company's Form 10-K for the calendar year ended December
31, 1998.)
10. Material contracts.
(a) Quota Share Reinsurance Contract between Employers Mutual
Casualty Company and EMC Reinsurance Company. (Incorporated
by reference to the Company's Form 10-K for the calendar year
ended December 31, 1997.)
(b) 1999 Senior Executive Compensation Bonus Program.
(c) EMC Insurance Companies reinsurance pooling agreements
between Employers Mutual Casualty Company and certain of its
affiliated companies, as amended. (Incorporated by reference
to the Company's Form 10-K for the calendar year ended December
31, 1998.)
(d) 1982 Employers Mutual Casualty Company Incentive Stock Option
Plan, as amended. (Incorporated by reference to the Company's
Form 10-K for the calendar year ended December 31, 1998.)
(e) Deferred Bonus Compensation Plans. (Incorporated by reference
to the Company's Form 10-K for the calendar year ended December
31, 1998.)
(f) EMC Reinsurance Company Executive Bonus Program. (Incorporated
by reference to the Company's Form 10-K for the calendar year
ended December 31, 1998.)
(g) EMC Insurance Group Inc. Amended and Restated Dividend
Reinvestment and Common Stock Purchase Plan. (Incorporated by
reference to Registration No. 33-34499.)
(h) 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, 1998.)
(i) Employers Mutual Casualty Company 1993 Employee Stock Purchase
Plan. (Incorporated by reference to Registration No. 33-49335.)
(j) 1993 Employers Mutual Casualty Company Incentive Stock Option
Plan. (Incorporated by reference to Registration Nos.33-49337
and 333-45279.)
(k) Employers Mutual Casualty Company Non-Employee Director Stock
Option Plan. (Incorporated by reference to Registration No.
33-49339.)
(l) 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 1999 Annual Report to
Stockholders.
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations from the Company's 1999 Annual Report to
Stockholders.
(c) Consolidated Financial Statements from the Company's 1999
Annual Report to Stockholders.
(d) Stockholder Information from the Company's 1999 Annual Report to
Stockholders.
<PAGE>
21. Subsidiaries of the Registrant.
23. Consent of KPMG 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 28, 2000.
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 28, 2000.
/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 24, 2000, we reported on the consolidated balance
sheets of EMC Insurance Group Inc. and Subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of income, comprehensive
income, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1999, as contained in Part II, Item 8 of
Form 10-K for the year 1999. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedules listed in Part IV, Item 14(a)2.
These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.
In our opinion, such 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 LLP
Des Moines, Iowa
February 24, 2000
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule I - Summary of Investments -
Other Than Investments in Related Parties
December 31, 1999
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 .............. $109,055,239 $108,320,350 $109,055,239
Mortgage-backed securities ..... 18,148,921 18,358,715 18,148,921
------------ ------------ ------------
Total fixed maturity securities 127,204,160 126,679,065 127,204,160
------------ ------------ ------------
Securities available-for-sale:
Fixed maturities:
United States Government
and government agencies
and authorities .............. 4,419,411 4,361,084 4,361,084
States, municipalities and
political subdivisions ....... 96,077,294 93,213,764 93,213,764
Mortgage-backed securities ..... 49,440,943 49,434,206 49,434,206
Debt securities issued by
foreign governments .......... 6,479,135 6,569,030 6,569,030
Public utilities ............... 8,890,108 8,837,456 8,837,456
Corporate securities ........... 98,413,442 93,765,889 93,765,889
------------ ------------ ------------
Total fixed maturity securities 263,720,333 256,181,429 256,181,429
------------ ------------ ------------
Equity securities:
Common stocks .................. 25,853,745 29,803,765 29,803,765
Non-redeemable preferred stocks 2,640,886 2,604,507 2,604,507
------------ ------------ ------------
Total equity securities ...... 28,494,631 32,408,272 32,408,272
------------ ------------ ------------
Short-term investments ............. 20,164,210 20,164,210 20,164,210
------------ ------------ ------------
Total investments ...... $439,583,334 $435,432,976 $435,958,071
============ ============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31,
--------------------------
1999 1998
------------ ------------
ASSETS
- ------
Investment in common stock of
subsidiaries (equity method) .................. $138,167,388 $157,416,941
Fixed maturity investments:
Securities held-to-maturity, at amortized cost 1,999,431 3,999,138
Securities available-for-sale, at market value 1,467,525 -
Short-term investments .......................... 337,525 2,552,944
Cash ............................................ 5,008 62,448
Accrued investment income ....................... 78,409 50,417
Income taxes recoverable ........................ 12,000 -
Accounts receivable ............................. 2,568 216
Deferred tax asset .............................. 6,252 3,850
------------ ------------
Total assets ............................... $142,076,106 $164,085,954
============ ============
LIABILITIES
- -----------
Accounts payable ................................ $ 127,548 $ 128,245
Income taxes payable ............................ - 18,000
Indebtedness to related party ................... 32,281 1,869
------------ ------------
Total liabilities .......................... 159,829 148,114
------------ ------------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 11,265,232 shares
in 1999 and 11,496,389 shares in 1998 ......... 11,265,232 11,496,389
Additional paid-in capital ...................... 65,333,686 67,822,412
Accumulated other comprehensive (loss) income ... (3,625,263) 8,079,371
Retained earnings ............................... 68,942,622 76,539,668
------------ ------------
Total stockholders' equity ................. 141,916,277 163,937,840
------------ ------------
Total liabilities and stockholders' equity $142,076,106 $164,085,954
============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Condensed Statements of Income
Years ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Equity in undistributed (loss) earnings
of subsidiaries ..................... $(7,577,404) $ 1,685,244 $ 9,377,037
Dividends received from subsidiaries .. 6,800,055 4,275,035 3,750,032
Investment income ..................... 364,042 463,889 445,816
Other income .......................... 52 - -
----------- ----------- -----------
(413,255) 6,424,168 13,572,885
Operating expenses .................... 390,894 387,056 313,762
----------- ----------- -----------
(Loss) income from operations before
income tax (benefit) expense ..... (804,149) 6,037,112 13,259,123
Income tax (benefit) expense .......... (164) 24,247 42,556
----------- ----------- -----------
Net (loss) income ....... $ (803,985) $ 6,012,865 $13,216,567
=========== =========== ===========
Condensed Statements of Comprehensive Income
Years ended December 31,
-------------------------------------
1999 1998 1997
------------ ----------- -----------
Net (loss) income ..................... $ (803,985) $ 6,012,865 $13,216,567
------------ ----------- -----------
Other Comprehensive Income:
Unrealized holding (losses) gains
arising during the period, net of
deferred income tax (benefit)
expense ........................... (11,527,264) 4,264,242 6,399,757
Reclassification adjustment for gains
included in net (loss) income, net
of income tax expense ............. (177,370) (3,871,963) (2,704,732)
------------ ----------- -----------
Other comprehensive (loss) income (11,704,634) 392,279 3,695,025
------------ ----------- -----------
Total comprehensive (loss) income $(12,508,619) $ 6,405,144 $16,911,592
============ =========== ===========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Condensed Statements of Cash Flows
Years ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Net cash provided by
operating activities ................ $ 6,740,085 $ 4,015,569 $ 3,702,567
----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed maturity
securities held-to-maturity ....... - - (3,999,340)
Disposals of fixed maturity
securities held-to-maturity ....... 2,000,000 2,500,000 2,000,000
Purchases of fixed maturity
securities available-for-sale ..... (1,500,000) - -
Net sales (purchases) of short-term
investments ...................... 2,215,419 (1,643,245) 1,413,904
----------- ----------- -----------
Net cash provided by (used in)
investing activities ........... 2,715,419 856,755 (585,436)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock ........... 278,794 823,927 1,019,919
Dividends paid to stockholders ..... (6,793,061) (5,637,687) (4,314,083)
Repurchase of common stock ......... (2,998,677) - -
----------- ----------- -----------
Net cash used in financing
activities ..................... (9,512,944) (4,813,760) (3,294,164)
----------- ----------- -----------
Net (decrease) increase in cash ....... (57,440) 58,564 (177,033)
Cash at beginning of year ............. 62,448 3,884 180,917
----------- ----------- -----------
Cash at end of year ................... $ 5,008 $ 62,448 $ 3,884
=========== =========== ===========
Income taxes paid ..................... $ 31,952 $ 50,229 $ 40,000
Interest paid ......................... $ 285 $ - $ -
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information
For Years Ended December 31, 1999, 1998 and 1997
Deferred Losses and
policy settlement
acquisition expense Unearned
Segment costs reserves premiums
------- ----------- ------------ -----------
Year ended December 31, 1999:
Property and casualty insurance $11,992,874 $194,872,984 $57,598,773
Reinsurance ................... 1,626,318 71,641,040 7,392,356
Parent company ................ - - -
----------- ------------ -----------
Consolidated ............. $13,619,192 $266,514,024 $64,991,129
=========== ============ ===========
Year ended December 31, 1998:
Property and casualty insurance $10,666,188 $182,529,015 $53,785,443
Reinsurance ................... 1,689,294 63,081,308 7,678,608
Parent company ................ - - -
----------- ------------ -----------
Consolidated ............. $12,355,482 $245,610,323 $61,464,051
=========== ============ ===========
Year ended December 31, 1997:
Property and casualty insurance $ 8,949,126 $159,403,277 $47,532,320
Reinsurance ................... 1,611,531 58,374,665 7,325,143
Parent company ................ - - -
----------- ------------ -----------
Consolidated ............. $10,560,657 $217,777,942 $54,857,463
=========== ============ ===========
Losses and
Net settlement
Premium investment expenses
Segment revenue income incurred
------------ ----------- ------------
Year ended December 31, 1999:
Property and casualty insurance $167,265,093 $18,282,642 $140,481,323
Reinsurance ................... 43,833,048 7,113,877 36,394,925
Parent company ................ - 364,042 -
------------ ----------- ------------
Consolidated ............. $211,098,141 $25,760,561 $176,876,248
============ =========== ============
Year ended December 31, 1998:
Property and casualty insurance $155,523,486 $17,635,076 $128,666,666
Reinsurance ................... 38,720,919 6,760,098 29,209,428
Parent company ................ - 463,889 -
------------ ----------- ------------
Consolidated ............. $194,244,405 $24,859,063 $157,876,094
============ =========== ============
Year ended December 31, 1997:
Property and casualty insurance $143,112,560 $16,719,458 $106,547,480
Reinsurance ................... 34,105,686 6,615,029 23,305,824
Parent company ................ - 445,816 -
------------ ----------- ------------
Consolidated ............. $177,218,246 $23,780,303 $129,853,304
============ =========== ============
Amortization
of deferred
policy Other
acquisition underwriting Premiums
Segment costs expenses written
------- ----------- ----------- ------------
Year ended December 31, 1999:
Property and casualty insurance $38,374,266 $13,698,660 $171,015,719
Reinsurance ................... 9,682,652 3,767,162 43,546,796
Parent company ................ - - -
----------- ----------- ------------
Consolidated ............. $48,056,918 $17,465,822 $214,562,515
=========== =========== ============
Year ended December 31, 1998:
Property and casualty insurance $35,754,919 $13,829,886 $161,855,333
Reinsurance ................... 8,907,722 3,186,535 39,074,384
Parent company ................ - - -
----------- ----------- ------------
Consolidated ............. $44,662,641 $17,016,421 $200,929,717
=========== =========== ============
Year ended December 31, 1997:
Property and casualty insurance $27,688,763 $16,557,572 $149,909,925
Reinsurance ................... 8,253,329 3,498,497 34,690,846
Parent company ................ - - -
----------- ----------- ------------
Consolidated ............. $35,942,092 $20,056,069 $184,600,771
=========== =========== ============
<PAGE>
<TABLE>
<CAPTION>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule IV - Reinsurance
For years ended December 31, 1999, 1998 and 1997
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
------------ ------------ ------------ ------------ ----------
<S>
Year ended December 31, 1999:
Earned premiums:
Consolidated property and casualty <C> <C> <C> <C> <C>
insurance .......................... $223,593,165 $230,785,034 $218,290,010 $211,098,141 103.4%
============ ============ ============ ============ ==========
Year ended December 31, 1998:
Earned premiums:
Consolidated property and casualty
insurance .......................... $202,514,027 $207,404,961 $199,135,339 $194,244,405 102.5%
============ ============ ============ ============ ==========
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%
============ ============ ============ ============ ==========
</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, 1999, 1998 and 1997
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, 1999: $13,619,192 $266,514,024 $ -0- $64,991,129 $211,098,141 $25,760,561
=========== ============ ======== =========== ============ ===========
Year ended December 31, 1998: $12,355,482 $245,610,323 $ -0- $61,464,051 $194,244,405 $24,395,174
=========== ============ ======== =========== ============ ===========
Year ended December 31, 1997: $10,560,657 $217,777,942 $ -0- $54,857,463 $177,218,246 $23,334,487
=========== ============ ======== =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Losses and Amortization
settlement expenses of deferred Paid
incurred related to policy losses and
Consolidated property- Current Prior acquisition settlement Premiums
casualty entities Year Years costs expenses (1) Written
- ---------------------- ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999: $182,609,687 ($ 5,733,439) $ 48,056,918 $150,669,762 $214,562,515
============ =========== ============ ============ ============
Year ended December 31, 1998: $168,953,309 ($11,077,215) $ 44,662,641 $132,577,163 $200,929,717
============ =========== ============ ============ ============
Year ended December 31, 1997: $137,300,762 ($ 7,447,458) $ 35,942,092 $113,811,729 $184,600,771
============ =========== ============ ============ ============
</TABLE>
(1) The amount for 1998 reflects an adjustment of ($3,600,220) related to the
1998 change in the property and casualty insurance subsidiaries' pooling
agreement. This adjustment was made to offset the income statement
effect that resulted from the $3,600,220 increase in reserves for losses
and settlement expenses on January 1, 1998 related to this transaction.
The 1997 amount reflects an adjustment of ($3,795,453) related to the
1997 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.
<PAGE>
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(b) 1999 Senior Executive Compensation Included in
Bonus Program. direct transmission
13(a) Selected Financial Data. Included in
direct transmission
13(b) Management's Discussion and Analysis
of Financial Condition and Results Included in
of Operations. direct transmission
13(c) Consolidated Financial Statements. Included in
direct transmission
13(d) Stockholder Information. Included in
direct transmission
21 Subsidiaries of the Registrant. Included in
direct transmission
23 Consent of KPMG LLP with respect to Included in
Forms S-8 and Form S-3. direct transmission
24 Power of Attorney. Included in
direct transmission
Exhibit 10(b)
-------------
1999 SENIOR EXECUTIVE COMPENSATION BONUS PROGRAM
The Senior Executive Bonus Program is a measure of the three areas often
looked at when comparing results of different companies or in comparing
current company results from one year to the next.
PURPOSE
1. To provide a motivational tool in the form of compensation to help
executives focus on specific organizational goals to improve profits,
surplus and service in all areas of the corporation.
2. To maintain competitive advantage in terms of recruitment and retention
of senior executives.
3. To provide a plan based on EMC results and industry results, to provide
a better measure of performance.
4. Reward superior results more appropriately.
5. Provide a maximum bonus difficult to attain so there is incentive to
strive for better results.
6. To provide a measure of safety to the company so that senior officers'
total compensation is reduced if company performance declines.
GENERAL BONUS CALCULATION
The bonus plan uses production, surplus growth and the combined ratio, all
valid measures of performance, as follows:
1. EMC WRITTEN PREMIUM - Compares consolidated written premium to a goal
that is established each year.
2. CHANGE IN SURPLUS
3. COMBINED RATIO - Compares EMC combined ratio to a target ratio
established by the Committee each year. Also compares EMC's combined
ratio to that of the industry.
- ----------------------------------------------------------------------------
The initial Industry estimate published in December or January by A.M. Best
will be the number used in the calculation regardless of any adjustments
A.M. Best may make to the Industry number later in the year.
- ----------------------------------------------------------------------------
ALL CALCULATIONS ARE ROUNDED TO THE NEAREST ONE TENTH OF ONE PERCENT.
The factors in each of the formulas are subject to change each year with final
approval by the Senior Executive Compensation and Incentive Stock Option
Committee.
WRITTEN PREMIUM
This component is based on actual net written premium growth compared to a
consolidated written premium goal established each year and approved by the
Committee.
Achieving goal results in a bonus contribution of plus 7.5 percent of salary.
This changes by 1.5 percent for each 1.0 percent variation from goal, subject
to a maximum contribution of plus 15.0 percent and a minimum contribution of
minus 15.0 percent.
- ----------------------------------------------------------------------------
The written premium component is determined as follows:
Percent of actual change, minus goal, plus 5.0, times 1.50.
- ----------------------------------------------------------------------------
Example 1: The goal equals 8.5 percent premium growth.
- --------- The actual change equals 7.5 percent premium growth.
7.5 percent minus 8.5 percent equals minus 1 plus 5.0, equals 4.0 times 1.50
equals 6.0. The contribution in this example of written premium towards the
total bonus is equal to 6.0 percent.
------------
<PAGE>
Example 2: The goal equals 5.7 percent premium growth. The actual change
- --------- equals minus 1.3 percent premium growth.
Minus 1.3 percent minus 5.7 percent equals minus 7.0 plus 5.0 equals minus 2.0
times 1.50 equals minus 3.0.
----------
Example 3: The goal equals 4.7 percent premium growth.
- --------- The actual change equals 9.8 percent premium growth.
9.8 percent minus 4.7 percent equals 5.1 percent plus 5.0 equals 10.1 times
1.50 equals 15.2 percent. The contribution in this example of written
premium towards the total bonus equals plus 15.0 percent.
-------------
(This component not to exceed plus or minus 15.0 percent of total bonus.)
SURPLUS
The component of surplus is based on the actual change in surplus. Each one
percent change in surplus represents a change in bonus equal to .75 percent of
salary subject to a maximum of 20.0 percent and a minimum of 0.0 percent.
- ----------------------------------------------------------------------------
Note: No bonus is payable if there is a decrease is surplus.
- ----------------------------------------------------------------------------
Example 1: Change in surplus equals plus 4.6 percent.
- --------- Contribution towards total bonus from surplus component equals
4.6 percent times .75 equals 3.5 percent.
------------
Example 2: Change in surplus equals a minus 2.4 percent. There would be
- --------- no bonus because of the decrease in surplus.
Example 3: Change in surplus equals a plus 10.7 percent. Contribution
- --------- towards total bonus from surplus component equals 10.7 percent
times .75 equals 8.0 percent.
------------
COMBINED RATIO
The component for combined ratio is based on EMC's consolidated combined
ratio relative to a target combined ratio on a trade basis, adjusted by a
comparison of the EMC combined ratio to that of the industry.
The target combined ratio for 1999 is 104.0 percent. Current actuarial
calculations estimate that a combined ratio of 104.0 percent produces a
return on statutory surplus of 12.5 percent after taxes. This considers
income from all sources including investment return on surplus and assumes
a premium to surplus ratio of two to one.
The formula uses a target ratio of 104.0 percent which is subject to
Committee approval each year. For each 1.0 percent change in the combined
ratio, the bonus contribution changes 2.9 percent subject to a maximum
contribution of plus 60.0 percent and a minimum contribution of minus
35.0 percent.
- ----------------------------------------------------------------------------
First determine EMC's relationship to the industry by subtracting EMC's
combined ratio from that of the industry.
- ----------------------------------------------------------------------------
The initial Industry estimate published in December or January by A.M. Best
will be the number used in the calculation regardless of any adjustments A.M.
Best may make to the Industry number later in the year.
If the result is a positive number, subtract result (not to exceed 3.0
percent) from EMC's combined ratio to obtain adjusted combined ratio.
Subtract adjusted combined ratio from target combined ratio, add 6.0,
multiply by 2.90 to equal the bonus produced by the combined ratio component.
If the result is a negative number or 0.0, no adjustment is necessary and
the EMC combined ratio is the adjusted combined ratio. Subtract the
adjusted combined ratio from the target combined ratio, add 6.0, multiply
by 2.90 to equal the bonus produced by the combined ratio component.
<PAGE>
- ----------------------------------------------------------------------------
The combined ratio formula is determined as follows:
104.0 minus the adjusted combined ratio plus 6.0 times 2.90.
- ----------------------------------------------------------------------------
Example 1: Industry ratio equals 101.6 percent.
- --------- EMC ratio equals 97.1 percent.
Adjustment * 101.6 minus 97.1 equals 3.0 (maximum adjustment
allowed).
Adjusted ratio * 97.1 minus 3.0 equals 94.1 percent. Target
ratio equals 104.0 percent.
104.0 percent minus 94.1 percent equals 9.9 plus 6 equals 15.9
times 2.90 equals 46.1 percent.
-------------
The contribution towards total bonus from the combined ratio component
equals 46.1 percent.
-------------
Example 2: Industry ratio equals 101.6 percent.
- --------- EMC ratio equals 100.1 percent.
Adjustment * 101.6 minus 100.1 equals 1.5 percent.
Adjusted ratio * 100.1 minus 1.5 equals 98.6 percent. Target
ratio equals 104.0 percent.
104.0 percent minus 98.6 percent equals 5.4 percent plus 6.0
equals 11.4 percent times 2.90 equals 33.1 percent.
-------------
The contribution towards the total bonus from the combined ratio component
equals 33.1 percent.
-------------
Example 3: Industry ratio equals 101.6 percent.
- --------- EMC ratio equals 110.1 percent.
Adjustment - None (If EMC performance is worse than the
industry average, use the EMC ratio in the formula).
Adjusted ratio * 110.1.
Target ratio equals 104.0 percent.
104.0 percent minus 110.1 percent equals minus 6.1 plus 6.0
equals minus 0.1 times 2.90 equals minus 0.3.
----------
The contribution towards the total bonus from the combined ratio component
equals minus 0.3 percent.
------------------
Assuming each example represents one year, the bonus for the three years
would be as follows:
Component Example 1 Example 2 Example 3
- --------- --------- --------- ---------
Written Premium 6.0% -3.0% 15.0%
Surplus 3.5% *0.0% 8.0%
Combined Ratio 46.1% 33.1% -0.3%
----- ----- -----
Total Bonus 55.6% 0% 22.7%
* Actual change in surplus was minus 2.4%. No bonus is payable since surplus
decreased.
This represents the bonus for Vice Presidents. Factors would be applied
as follows to arrive at the bonus calculations for Senior Vice Presidents,
Executive Vice President, and President.
Position Example 1 Example 2 Example 3
- -------- --------- --------- ---------
Vice President 55.6% 0% 22.7%
Senior VP Multiply by 1.10 61.2% 0% 25.0%
Executive VP Multiply by 1.20 66.7% 0% 27.2%
President Multiply by 1.30 72.3% 0% 29.5%
<PAGE>
MAXIMUM BONUS
For Vice Presidents, the total bonus is the sum of the three components
subject to a maximum of 75 percent of salary.
Maximum Bonus
-------------
For Vice Presidents, the percent of salary is 75.0 %
For Senior Vice Presidents, multiply the bonus
percentage by 1.10. 82.5 %
For Executive Vice President, multiply the bonus
percentage by 1.20. 90.0 %
For President, multiply the bonus percentage by
1.30. 97.5 %
EXECUTIVES ELIGIBLE FOR BONUS
Vice Presidents Senior VP Executive VP President
- --------------- --------- ------------ ---------
Mark E. Reese Margaret A. Ball Fred A. Schiek Bruce G. Kelley
Richard W. Hoffmann John D. Isenhart
Douglas J. Zmolek Ronald W. Jean
David O. Narigon
Raymond W. Davis
Donald D. Klemme
PLAN ADMINISTRATION
1. An executive must be on the payroll a minimum of six months before
he/she is eligible for a bonus payment.
2. An executive terminating employment with the companies before the
established date for the payment of bonuses will not be paid a bonus.
3. Executives retiring or becoming deceased or disabled before the
established date for the payment of bonuses will receive a bonus on the
basis of the portion of the year he/she was on the payroll.
4. If an executive becomes a member of the Policy Committee at some time
during the year, they will receive a prorata bonus for that portion of
the year they are a member.
5. If an executive is promoted during the year and/or given a salary
increase, the bonus will be prorated on the basis of the position and/or
the salaries paid for the specific position.
6. Deductions for federal and state income taxes, and FICA, if applicable,
will be made from each bonus on the basis of IRS regulations.
7. Before any bonuses are paid, a member of KPMG Peat Marwick Auditing Firm
will determine that the calculations are correct according to the bonus
plan document.
8. The Executive Compensation Committee may, at its discretion adjust the
bonus calculation for unusual or extenuating circumstances that unfairly
impact the results.
Such circumstances may include but are not limited to the following:
1. Surplus declines due to an acquisition but other factors
would have produced a bonus.
2. Surplus decline is minimal and other factors produce a
bonus.
3. Required change in accounting methodology has a material
affect on any of the factors.
9. If there is a disagreement or misunderstanding of the basis for the
bonus or in the calculation in the amounts, the decision of the Senior
Executive Compensation and Incentive Stock Option Committee will be
final.
SELECTED FINANCIAL DATA. EXHIBIT 13(a)
- ------------------------ -------------
Year ended December 31,
-----------------------------------
1999 1998 1997 1996
-------- -------- -------- --------
($ in thousands, except per share amounts)
Income Statement Data
Insurance premiums earned ........ $211,098 $194,244 $177,218 $165,191
Investment income, net ........... 25,761 24,859 23,780 24,007
Realized investment gains ........ 277 5,901 4,100 1,891
Other income ..................... 2,194 1,701 1,023 904
-------- -------- -------- -------
Total revenues .............. 239,330 226,705 206,121 191,993
Losses and expenses .............. 245,321 223,031 189,318 171,324
-------- -------- -------- --------
(Loss) income before income
tax (benefit) expense .......... (5,991) 3,674 16,803 20,669
Income tax (benefit) expense ..... (5,187) (2,339) 3,586 5,635
-------- -------- -------- -------
(Loss) income from:
Continuing operations ......... (804) 6,013 13,217 15,034
Discontinued operations ....... - - - -
Accounting changes ............ - - - -
-------- -------- -------- --------
Net (loss) income .......... $ (804)$ 6,013 $ 13,217 $ 15,034
======== ======== ======== ========
Net (loss) income per common
share - basic and diluted:
Continuing operations ....... $ (.07)$ .53 $ 1.18 $ 1.37
Discontinued operations ..... - - - -
Accounting changes .......... - - - -
-------- -------- -------- --------
Total ...................... $ (.07)$ .53 $ 1.18 $ 1.37
======== ======== ======== ========
Premiums earned by segment:
Property and casualty insurance $167,265 $155,523 $143,113 $128,516
Reinsurance .................... 43,833 38,721 34,105 36,675
-------- -------- -------- --------
Total ...................... $211,098 $194,244 $177,218 $165,191
======== ======== ======== ========
Balance Sheet Data
Total assets ..................... $496,576 $496,046 $459,110 $430,328
======== ======== ======== ========
Stockholders' equity ............. $141,916 $163,938 $162,346 $148,729
======== ======== ======== ========
<PAGE>
SELECTED FINANCIAL DATA.(continued)
- -----------------------------------
Year ended December 31,
----------------------------------
1999 1998 1997 1996
-------- -------- -------- -------
($ in thousands, except per share amounts)
Other Data
Average return on equity ......... (.5)% 3.7% 8.5% 10.5%
======== ======== ======== ========
Book value per share ............. $ 12.60 $ 14.26 $ 14.30 $ 13.42
======== ======== ======== ========
Dividends paid per share ......... $ .60 $ .60 $ .60 $ .57
======== ======== ======== ========
Property and casualty insurance
subsidiaries aggregate pool
percentage ..................... 23.5% 23.5% 22% 22%
======== ======== ======== ========
Reinsurance subsidiary quota
share percentage ............... 100% 100% 100% 95%
======== ======== ======== ========
Closing stock price ............. $ 9 1/8 $ 12 3/4 $ 13 1/4 $ 12
======== ======== ======== ========
Net investment yield (pretax) .... 5.96% 6.02% 6.15% 6.54%
======== ======== ======== ========
Cash dividends to
closing stock price ............ 6.6% 4.7% 4.5% 4.8%
======== ======== ======== ========
Common shares outstanding ........ 11,265 11,496 11,351 11,084
======== ======== ======== ========
Statutory combined ratio ......... 115.2% 114.8% 106.2% 103.6%
======== ======== ======== ========
<PAGE>
SELECTED FINANCIAL DATA.(continued)
- -----------------------------------
Year ended December 31,
-----------------------------------
1995 1994 1993 1992
-------- -------- -------- --------
($ in thousands, except per share amounts)
Income Statement Data
Insurance premiums earned ........ $162,266 $164,829 $156,438 $147,410
Investment income, net ........... 23,204 21,042 20,936 21,586
Realized investment gains ........ 1,043 520 684 384
Other income ..................... 1,005 1,128 668 701
-------- -------- -------- --------
Total revenues .............. 187,518 187,519 178,726 170,081
Losses and expenses .............. 163,202 168,842 169,707 169,106
-------- -------- -------- --------
(Loss) income before income
tax (benefit) expense .......... 24,316 18,677 9,019 975
Income tax (benefit) expense ..... 6,967 5,171 1,885 759
-------- -------- -------- --------
(Loss) income from:
Continuing operations ......... 17,349 13,506 7,134 216
Discontinued operations ....... - - - -
Accounting changes ............ - - 2,621 -
-------- -------- -------- --------
Net (loss) income .......... $ 17,349 $ 13,506 $ 9,755 $ 216
======== ======== ======== ========
Net (loss) income per common
share - basic and diluted:
Continuing operations ....... $ 1.62 $ 1.29 $ .70 $ .02
Discontinued operations ..... - - - -
Accounting changes .......... - - .26 -
-------- -------- -------- --------
Total ...................... $ 1.62 $ 1.29 $ .96 $ .02
======== ======== ======== ========
Premiums earned by segment:
Property and casualty insurance $126,440 $127,573 $123,114 $120,795
Reinsurance .................... 35,826 37,256 33,324 26,615
-------- -------- -------- --------
Total .......................$162,266 $164,829 $156,438 $147,410
======== ======== ======== ========
Balance Sheet Data
Total assets ..................... $412,881 $387,370 $368,936 $372,807
======== ======== ======== ========
Stockholders' equity ............. $136,889 $116,727 $109,634 $100,911
======== ======== ======== ========
<PAGE>
SELECTED FINANCIAL DATA.(continued)
- -----------------------------------
Year ended December 31,
-----------------------------------
1995 1994 1993 1992
-------- -------- -------- --------
($ in thousands, except per share amounts)
Other Data
Average return on equity ......... 13.7% 11.9% 9.3% .2%
======== ======== ======== ========
Book value per share ............. $ 12.66 $ 11.03 $ 10.63 $ 9.98
======== ======== ======== ========
Dividends paid per share ......... $ .53 $ .52 $ .52 $ .52
======== ======== ======== ========
Property and casualty insurance
subsidiaries aggregate pool
percentage ..................... 22% 22% 22% 22%
======== ======== ======== ========
Reinsurance subsidiary quota
share percentage ............... 95% 95% 95% 95%
======== ======== ======== ========
Closing stock price ............. $ 13 3/4 $ 9 1/2 $ 9 1/2 $ 8 1/2
======== ======== ======== ========
Net investment yield (pretax) .... 6.65% 6.59% 6.83% 7.50%
======== ======== ======== ========
Cash dividends to
closing stock price ............ 3.9% 5.5% 5.5% 6.1%
======== ======== ======== ========
Common shares outstanding ........ 10,814 10,577 10,317 10,112
======== ======== ======== ========
Statutory combined ratio ......... 99.6% 101.3% 106.3% 113.9%
======== ======== ======== ========
<PAGE>
SELECTED FINANCIAL DATA.(continued)
- -----------------------------------
Year ended December 31,
--------------------------
1991 1990 1989
-------- -------- --------
($ in thousands, except per
share amounts)
Income Statement Data
Insurance premiums earned ........ $113,419 $101,323 $ 91,728
Investment income, net ........... 20,223 20,038 19,345
Realized investment gains ........ 65 48 257
Other income ..................... 860 888 543
-------- -------- -------
Total revenues .............. 134,567 122,297 111,873
Losses and expenses .............. 124,135 111,457 103,096
-------- -------- -------
(Loss) income before income
tax (benefit) expense .......... 10,432 10,840 8,777
Income tax (benefit) expense ..... 3,124 2,894 2,055
-------- -------- -------
(Loss) income from:
Continuing operations ......... 7,308 7,946 6,722
Discontinued operations ....... 1,853 319 274
Accounting changes ............ - - -
-------- -------- -------
Net (loss) income .......... $ 9,161 $ 8,265 $ 6,996
======== ======== =======
Net (loss) income per common
share - basic and diluted:
Continuing operations ....... $ .73 $ .80 $ .71
Discontinued operations ..... .18 .03 .03
Accounting changes .......... - - -
-------- -------- --------
Total ...................... $ .91 $ .83 $ .74
======== ======== ========
Premiums earned by segment:
Property and casualty insurance $ 88,410 $ 80,627 $ 73,107
Reinsurance .................... 25,009 20,696 18,621
-------- -------- --------
Total ...................... 113,419 $101,323 $ 91,728
======== ======== ========
Balance Sheet Data
Total assets ..................... $311,001 $296,126 $284,396
======== ======== ========
Stockholders' equity ............. $105,144 $100,615 $ 95,911
======== ======== ========
<PAGE>
SELECTED FINANCIAL DATA.(continued)
- -----------------------------------
Year ended December 31,
--------------------------
1991 1990 1989
-------- -------- --------
($ in thousands, except per
share amounts)
Other Data
Average return on equity ......... 8.9% 8.4% 7.5%
======== ======== ========
Book value per share ............. $ 10.47 $ 10.04 $ 9.82
======== ======== ========
Dividends paid per share ......... $ .52 $ .52 $ .52
======== ======== ========
Property and casualty insurance
subsidiaries aggregate pool
percentage ..................... 17% 17% 17%
======== ======== ========
Reinsurance subsidiary quota
share percentage ............... 95% 95% 95%
======== ======== ========
Closing stock price ............. $ 9 1/2 $ 6 7/8 $ 8
======== ======== ========
Net investment yield (pretax) .... 8.02% 8.53% 8.74%
======== ======== ========
Cash dividends to
closing stock price ............ 5.5% 7.6% 6.5%
======== ======== ========
Common shares outstanding ........ 10,046 10,015 9,762
======== ======== ========
Statutory combined ratio ......... 109.2% 109.5% 112.7%
======== ======== ========
Amounts previously reported in prior consolidated financial statements have
been reclassified to conform to current presentation.
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 72 percent owned subsidiary of
Employers Mutual Casualty Company (Employers Mutual), is an insurance holding
company with operations in property and casualty insurance and reinsurance.
Property and casualty insurance is the most significant segment, representing
79.2 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 Company adopted Statement of Financial Accounting Standard (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related Information" in
the fourth quarter of 1998. Implementation of this standard caused the Company
to redefine its reportable segments (see note 8 of Notes to Consolidated
Financial Statements).
The Company's four property and casualty insurance subsidiaries 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. Operations of the pool
give rise to intercompany balances with Employers Mutual, which are settled on
a quarterly basis. The investment and income tax activities 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 companies
in the pool.
Effective January 1, 1998, Farm and City Insurance Company (Farm and
City), a subsidiary of the Company that writes nonstandard risk automobile
insurance business, became a participant in the pooling agreement. Farm and
City assumes a 1.5 percent participation in the pool, which increased the
Company's aggregate participation in the pool from 22 percent in 1997 to 23.5
percent in 1998 and 1999. In connection with this change in the pooling
agreement, the Company's liabilities increased $6,225,000 and invested assets
increased $5,570,000. The Company reimbursed Employers Mutual $727,000 for the
expenses that were incurred to generate the additional business assumed by the
Company and Employers Mutual paid the Company $72,000 in interest income as the
actual cash transfer did not occur until March 25, 1998. As a result of this
change in structure, the Company now has four subsidiaries that comprise the
property and casualty insurance segment and no longer has a separate segment
for the nonstandard risk automobile insurance business.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
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 the expenses
that were incurred to generate the additional business assumed by the Company
and Employers Mutual paid the Company $75,000 in interest income as the actual
cash transfer did not occur until March 24, 1997.
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 $107,000 for the expenses that were incurred to
generate the additional business assumed by the Company.
CONSOLIDATED RESULTS OF OPERATIONS
Operating results for the three years ended December 31, 1999 are as follows:
($ in thousands) 1999 1998 1997
-------- -------- --------
Premiums earned .......................... $211,098 $194,244 $177,218
Losses and settlement expenses ........... 176,876 157,876 129,853
Acquisition and other expenses ........... 66,760 63,554 58,529
-------- -------- --------
Underwriting loss ........................ (32,538) (27,186) (11,164)
Net investment income .................... 25,760 24,859 23,780
Other income ............................. 510 100 87
-------- -------- --------
Operating (loss) income before
income tax (benefit) expense ........... (6,268) (2,227) 12,703
Realized investment gains ................ 277 5,901 4,100
-------- -------- --------
(Loss) income before income tax
(benefit) expense ...................... (5,991) 3,674 16,803
Income tax (benefit) expense ............. (5,187) (2,339) 3,586
-------- -------- --------
Net (loss) income ........................ $ (804) $ 6,013 $ 13,217
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ..... $182,609 $168,953 $137,301
Decrease in provision for insured
events of prior years ................ (5,733) (11,077) (7,448)
-------- -------- --------
Total losses and settlement expenses $176,876 $157,876 $129,853
======== ======== ========
Catastrophe and storm losses ............. $ 11,162 $ 13,477 $ 5,846
======== ======== ========
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Operating results before income taxes have declined significantly over the
last three years. This decline is primarily attributable to the property and
casualty insurance segment, which has experienced inadequate premium rates,
high levels of catastrophe and storm losses and increased loss frequency and
severity. The reinsurance segment has also experienced a steady decline in
operating income over the last three years, but continues to be profitable.
Inadequate premium rates, which have resulted from thirteen consecutive years
of intense rate competition within the insurance industry, continue to be the
primary cause of the Company's substandard performance. Premium rates showed
signs of stabilization during 1999 as the Company was able to implement
moderate rate increases on select lines of business; however, overall premium
rate adequacy continued to decline due to rate reductions that were implemented
in prior years. As the impact of the 1999 rate increases become more fully
reflected in earned premiums, profit margins should begin to improve. However,
overall premium rate adequacy is not expected to improve significantly in the
near future due to the competitive rate environment that continues to exist in
the insurance industry. As a result, management is working to improve
profitability through re-underwriting programs for both the existing book of
business and the agency force. Operating results for 1998 reflect earnings of
$1,204,000 that resulted from a one-time adjustment in certain balances
reported by a state run assigned risk program in which the Company's property
and casualty insurance segment participates.
Premium income increased 8.7 percent in 1999, 9.6 percent in 1998 and 7.3
percent in 1997. These increases are primarily attributable to the property
and casualty insurance segment, which has benefited from the regional presence
provided by Employers Mutual's 18 branch offices and the addition of Hamilton
Mutual to the pooling agreement in 1997. The addition of Farm and City to the
pooling agreement in 1998 did not have a material impact on the revenues of the
Company. The reinsurance segment experienced a significant increase in premium
income in 1999 and 1998 after reporting a decline in 1997. These increases are
due to the addition of several new accounts during 1998.
Losses and settlement expenses increased 12.0 percent in 1999, 21.6
percent in 1998 and 12.6 percent in 1997. Catastrophe and storm losses
remained at an unusually high level for the second consecutive year as both the
property and casualty insurance segment and the reinsurance segment experienced
significant storm activity. In addition to the high level of catastrophe and
storm losses, the results for 1998 were negatively impacted by an unusually
large increase in the frequency and severity of losses unrelated to catastrophe
and storm activity. Development on prior years' reserves remained favorable in
1999 but declined substantially from the amount experienced in 1998. The
Company has historically experienced favorable development in its reserves and
current reserving practices have not been relaxed; however, the amount of
development experienced will fluctuate from year to year.
The catastrophe and storm loss amounts reported for 1999 and 1998 reflect
ceded reinsurance recoveries of $3,825,000 and $1,762,000, respectively,
related to an aggregate excess of loss catastrophe reinsurance agreement that
was in effect for those years for the property and casualty insurance segment.
Due to substantial changes in both the terms and the cost of the coverage, thi
reinsurance protection has not been renewed for year 2000. If this reinsurance
protection had not been in place in 1999 the Company would have reported
additional operating losses, net of premium cost savings, of $3,524,000 or
$0.21 per share after taxes.
Acquisition and other expenses increased 5.0 percent in 1999, 8.6 percent
in 1998 and 6.3 percent in 1997. These increases primarily relate to the
property and casualty insurance segment and reflect a variety of factors
including increased production levels and higher commission costs. The
increases reported for 1998 and 1997 also include expenses associated with the
addition of Hamilton Mutual and Farm and City to the pooling agreement and the
increase in the reinsurance subsidiary's quota share percentage.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Net investment income increased 3.6 percent in 1999 and 4.5 percent in
1998 after declining 0.9 percent in 1997. These increases are primarily
attributable to increases in the average invested asset balances. The Company
has experienced a decline in the average rate of return earned on fixed
maturity investments over the last three years due to declining interest rates.
During the second and third quarters of 1999 the Company sold approximately
$55,000,000 of investments in tax-exempt fixed maturity securities and
reinvested the proceeds into taxable fixed maturity securities that pay a
higher interest rate. This change in asset allocation was implemented to
increase the Company's after-tax rate of return on its investment portfolio in
response to the recent deterioration in the Company's underwriting results and
the expectation that underwriting results will not improve significantly in the
near future.
Realized investment gains declined in 1999 after increasing in 1998 and
1997. Realized investment gains for 1999 reflect $1,590,000 of gains from the
disposal of the tax-exempt fixed maturity securities noted above. These
gains were mostly offset by realized losses of $1,284,000 that were
recognized on the Company's equity portfolio during the fourth quarter of
1999. The realized investment gains for 1998 are primarily the result of
the liquidation of the Company's common stock mutual fund portfolio.
Proceeds from this liquidation were reinvested into individual stock issue
ax-aware basis. Realized investment gains for 1997 reflect capital gains
distributions from the common stock mutual fund portfolio.
Income tax benefits increased substantially during the last two years,
especially when compared to the pre-tax operating results reported for those
years. These increases are primarily a result of the large amount of tax-
exempt interest earned by the Company and the relative relationship this tax-
exempt interest has had to the declining pre-tax operating results. Tax-exempt
interest totaled $6,784,000 in 1999 and $7,250,000 in 1998, which exceeded the
pre-tax loss of $5,991,000 reported for 1999 and the pre-tax income of
$3,674,000 reported in 1998. Tax-exempt interest is expected to decline to
approximately $5,285,000 in 2000 due to the previously noted sale of
approximately $55,000,000 of tax-exempt bonds during 1999. In addition, the
tax benefits for 1999 and 1998 include $800,000 and $400,000, respectively,
related to a reduction in a deferred tax valuation allowance associated with
future postretirement benefit deductions. The valuation allowance was
eliminated in 1999 due to the establishment by Employers Mutual of Voluntary
Employee Beneficiary Association (VEBA) trusts that will fund the liability for
postretirement benefits. Tax benefits for 1998 also include $550,000 related
to a reduction in an accrual that had been established for potential tax
examination adjustments.
SEGMENT RESULTS
Property and Casualty Insurance
Operating results for the three years ended December 31, 1999 are as follows:
($ in thousands) 1999 1998 1997
-------- -------- --------
Premiums earned .......................... $167,265 $155,523 $143,112
Losses and settlement expenses ........... 140,481 128,667 106,547
Acquisition and other expenses ........... 53,310 51,460 46,777
-------- -------- --------
Underwriting loss ........................ (26,526) (24,604) (10,212)
Net investment income .................... 18,283 17,635 16,720
Other income ............................. 781 319 181
-------- -------- --------
Operating (loss) income before
income taxes ........................... $ (7,462) $ (6,650) $ 6,689
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ..... $145,806 $136,209 $112,192
Decrease in provision for insured
events of prior years ................ (5,325) (7,542) (5,645)
-------- -------- --------
Total losses and settlement expenses $140,481 $128,667 $106,547
======== ======== ========
Catastrophe and storm losses ............. $ 7,389 $ 10,163 $ 4,570
======== ======== ========
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
As previously noted, Farm and City became a 1.5 percent participant in the
pooling agreement on January 1, 1998, which increased the property and casualty
insurance segment's aggregate participation in the pooling agreement from 22
percent in 1997 to 23.5 percent in 1998 and 1999. The segment results reported
for 1997 have been restated to include the results of Farm and City for
comparative purposes.
Premiums earned increased 7.6 percent in 1999, 8.7 percent in 1998 and
11.4 percent in 1997. This growth in premium income, which is significantly
greater than the industry average of less than two percent annually over this
time period, is primarily the result of an increase in the number of policies
issued. This growth in policy count has resulted from an increase in the
retention rate on renewal business as well as a steady amount of new business.
The increase for 1997 also reflects the addition of Hamilton Mutual to the
pooling agreement, which added $8,634,000 to premiums earned. Premium rate
levels, which had declined steadily for thirteen consecutive years due to
intense competition, exhibited signs of stabilization during 1999 as the
property and casualty insurance subsidiaries were able to implement moderate
rate increases on select lines of business. This trend of moderate rate
increases is expected to continue in 2000 as large-scale rate increases are not
considered likely due to the significant amount of excess capacity that
continues to exist in the insurance industry. As a result, overall premium
rate adequacy is not expected to improve significantly in the near future.
Losses and settlement expenses increased 9.2 percent in 1999, 20.8 percent
in 1998 and 18.1 percent in 1997. Catastrophe and storm losses declined in
1999 from the storm plagued amounts reported in 1998, but continued to have a
significant impact on operating results. In addition to the high level of
catastrophe and storm losses, the property and casualty insurance segment has
been negatively impacted during the last two years by an increase in the
severity and frequency of losses unrelated to catastrophe and storm activity.
Development on prior years' reserves remained favorable in 1999, but declined
from the amount experienced in 1998.
As previously noted, the catastrophe and storm loss amounts reported for
1999 and 1998 reflect ceded reinsurance recoveries of $3,825,000 and
$1,762,000, respectively, related to an aggregate excess of loss catastrophe
reinsurance agreement that was in effect for those years. Due to substantial
changes in both the terms and the cost of the coverage, this reinsurance
protection has not been renewed for year 2000.
Acquisition and other expenses increased 3.6 percent in 1999, 10.0 percent
in 1998 and 7.2 percent in 1997. These increases reflect additional expenses
associated with the higher production levels achieved during the last three
years and an increase in commission costs related to the intense competition
for insurance business and the growing book of property business. The large
increase for 1998 reflects the payment of approximately $727,000 of expenses in
connection with the addition of Farm and City to the pooling agreement and an
increase in the estimate of deferrable acquisition expenses. The increase for
1997 reflects an increase in the size of the pool and the payment of
approximately $794,000 of expenses related to the addition of Hamilton Mutual
to the pooling agreement.
Underwriting results for the property and casualty insurance segment have
deteriorated significantly over the last three years. Inadequate premium
rates, high levels of catastrophe and storm losses and increased loss severity
and frequency have combined to produce substandard results. Premium rate
levels exhibited signs of stabilization during 1999, but overall premium rate
adequacy continued to decline due to rate decreases that were implemented in
prior years. Profit margins are expected to improve in 2000 as the impact of
the 1999 rate increases become more fully recognized; however, underwriting
results could be negatively impacted by increased catastrophe and storm losses
due to the cancellation of the aggregate excess of loss catastrophe reinsurance
agreement. Management is working to improve profitability through re-
underwriting programs for both the current book of business and the agency
force and by controlling the usage of discretionary rate credits.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Through its participation in the pooling agreement, the property and
casualty insurance subsidiaries assume insurance business from the North
Carolina Reinsurance Facility (NCRF), which is a state run assigned risk
program. Prior to 1998, the property and casualty insurance subsidiaries were
not recognizing their share of certain surcharges reported by the NCRF. During
1998, the property and casualty insurance subsidiaries received clarification
regarding such amounts and recorded their share of the cumulative surcharges.
As a result, operating results for 1998 reflect assumed premium income of
$543,000 and assumed loss recoveries of $662,000 related to prior years.
Beginning in 1999, these surcharges are being recorded on a quarterly basis.
Reinsurance
Operating results for the three years ended December 31, 1999 are as follows:
($ in thousands) 1999 1998 1997
-------- -------- --------
Premiums earned ............................ $ 43,833 $ 38,721 $ 34,106
Losses and settlement expenses ............. 36,395 29,209 23,306
Acquisition and other expenses ............. 13,450 12,094 11,752
-------- -------- --------
Underwriting loss .......................... (6,012) (2,582) (952)
Net investment income ...................... 7,114 6,760 6,615
Other income ............................... 119 168 219
-------- -------- --------
Operating income before income taxes ....... $ 1,221 $ 4,346 $ 5,882
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ....... $ 36,803 $ 32,744 $ 25,109
Decrease in provision for insured
events of prior years .................. (408) (3,535) (1,803)
-------- -------- --------
Total losses and settlement expenses $ 36,395 $ 29,209 $ 23,306
======== ======== ========
Catastrophe losses ......................... $ 3,773 $ 3,314 $ 1,276
======== ======== ========
Premium income increased 13.2 percent in 1999 and 13.5 percent in 1998
after declining in 1997. The increase reported for 1999 is primarily
attributable to the delayed reporting of several foreign reinsurance contracts
written in 1998. Production for 1999 was also impacted by the addition of new
contracts and increases in premiums on existing contracts, but to a lesser
degree. The increase reported for 1998 reflects the addition of several new
accounts. 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 decline is attributed
to a decrease in the estimate of earned but not reported premium, rate
reductions and the absence of run-off premium that was recognized in 1996.
Premium rates stabilized somewhat during 1999 as moderate rate increases were
implemented on some foreign contracts that were exposed to losses in 1998;
however, overall rate adequacy did not improve as rate decreases were
experienced on domestic contracts with good loss experience.
Losses and settlement expenses increased 24.6 percent in 1999 and 25.3
percent in 1998 after declining in 1997. These fluctuations are consistent
with the changes experienced in premium income. Results for 1999 reflect a
large decline in the amount of favorable development experienced on prior
years' reserves. In addition, the results for 1999 were negatively impacted by
heavy storm losses in Europe and by large losses on several property per-risk,
property pro-rata and aggregate excess of loss contracts. The losses and
settlement expenses reported for 1998 reflect a large increase in catastrophe
losses and a deterioration in the loss experience of a reinsurance pool that
Employers Mutual participates in, which was attributed to a high level of storm
activity.
Acquisition and other expenses increased 11.2 percent in 1999, 2.9 percent
in 1998 and 2.6 percent in 1997. The large increase for 1999 is reflective of
the increase in premium income. The increases for 1998 and 1997 differ from
the changes experienced in premium income due to fluctuations in contingent
commission expense, which is based on the profitability of the assumed book of
business.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Underwriting results of the reinsurance segment have declined steadily
over the last three years. This decline can be attributed to premium rate
reductions, higher levels of catastrophe and storm losses and increased loss
severity. Premium rate levels continue to be negatively impacted by excess
capacity in the reinsurance industry. Employers Mutual is working to address
this issue by accepting a larger share of coverage on desirable programs,
strengthening its relationships with reinsurance intermediaries and adopting
the use of new underwriting tools and technologies, while continuing to
emphasize profitability over premium growth.
Parent Company
The parent company reported an operating loss before income taxes of
$27,000 in 1999 compared to operating income of $77,000 in 1998 and $132,000 in
1997. The decrease in 1999 operating results is attributed to a decline in
investment income, which resulted from a decrease in the invested asset
balance. The decline in 1998 results is primarily due to higher operating
expenses while the results for 1997 reflect 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. Such
changes in estimates are reflected in operating results in the year the changes
are recorded.
The Company's financial results have not been materially affected by
losses associated with asbestos and environmental exposures. Total reserves
for asbestos and environmental related claims totaled $2,448,000 at December
31, 1999. Approximately $1,464,000 of these reserves are attributed to the
reinsurance business assumed by the Company's reinsurance subsidiary with the
remaining $984,000 attributed to the direct insurance business written by the
parties to the pooling agreement.
LIQUIDITY AND INVESTMENTS
The Company maintains a portion of its 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, excluding
investments in equity securities, is invested in securities with maturities
that approximate the anticipated liabilities of the insurance issued.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
The Company considers itself to be a long-term investor and generally
purchases fixed maturity investments with the intent to hold them to maturity.
The Company has previously classified a portion of its investments in fixed
maturity securities, primarily bonds issued by municipalities and corporations,
as available-for-sale securities to provide flexibility in the management of
the portfolio. Beginning in the third quarter of 1999, all newly acquired
securities are being classified as available-for-sale to provide increased
management flexibility. Unrealized holding losses on fixed maturity securities
available-for-sale, net of tax, totaled $7,539,000 at December 31, 1999
compared to unrealized holding gains of $6,194,000 and $4,577,000 at December
31, 1998 and 1997, respectively. The decrease in the market value of these
investments is primarily due to an increase in interest rates during 1999.
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.
At December 31, 1999, a valuation allowance of $1,233,000 was established for
the deferred tax asset associated with net unrealized holding losses on the
Company's available-for-sale fixed maturity and equity securities. This
valuation allowance was established due to uncertainties concerning the future
realization of these tax benefits.
The majority of the Company's assets are invested in fixed maturity
securities. These investments provide a substantial amount of income which
supplements underwriting results and contributes to net earnings. As these
investments mature, the proceeds will be reinvested at current rates, which may
be higher or lower than those now being earned; therefore, more or less
investment income may be available to contribute to net earnings depending on
the interest rate level.
During the third quarter of 1999, the Company began participating in a
securities lending program whereby certain fixed maturity securities from the
investment portfolio are loaned to other institutions for short periods of
time. The Company receives a fee for each security loaned out under this
program and requires initial collateral equal to 102 percent of the market
value of the loaned securities.
During the second and third quarters of 1999 the Company disposed of
approximately $55,000,000 of investments in tax-exempt fixed maturity
securities and reinvested the proceeds in taxable fixed maturity securities.
This change in asset allocation is not expected to have a material impact on
the operations of the Company, as forced liquidations of investments are not
anticipated.
During the third quarter of 1998 the Company liquidated its common stock
mutual fund portfolio and reinvested the proceeds in individual stock issues
that are being managed on a tax-aware basis. This change in investment
strategy allows the Company to control both the timing and the amount of
sales that occur in these investments.
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.
The Company generated positive cash flows from operations of $22,457,000
in 1999, $25,565,000 in 1998 and $22,564,000 in 1997. Included in the amounts
for 1998 and 1997 are $5,570,000 and $8,741,000, respectively, received from
Employers Mutual in connection with the addition of Farm and City and Hamilton
Mutual to the pooling agreement and the increase in the reinsurance
subsidiary's quota share percentage.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
During the second quarter of 1999 the Company completed a $3,000,000 stock
repurchase plan that was approved by its Board of Directors on November 20,
1998. A total of 254,950 shares of common stock were repurchased under this
plan at an average cost of $11.76 per share.
During the second quarter of 1999, Employers Mutual elected to increase
its participation in the Company's dividend reinvestment plan. As a result,
Employers Mutual is now reinvesting 100 percent of its dividends in additional
shares of the Company's common stock. Prior to the second quarter of 1999,
Employers Mutual was reinvesting 50 percent of its dividends in additional
shares of the Company's common stock.
MARKET RISK
The main objectives in managing the investment portfolios of the Company
are to maximize after-tax investment income and total investment return while
minimizing credit risks, in order to provide maximum support for the
underwriting operations. Investment strategies are developed based upon many
factors including underwriting results and the Company's resulting tax
position, regulatory requirements, fluctuations in interest rates and
consideration of other market risks. Investment decisions are centrally
managed by investment professionals and are supervised by the investment
committees of the respective board of directors for each of the Company's
subsidiaries.
Market risk represents the potential for loss due to adverse changes in
the fair value of financial instruments. The market risks of the financial
instruments of the Company relate to the investment portfolio, which exposes
the Company to interest rate and equity price risk, and to a lesser extent
credit quality and prepayment risk. Monitoring systems and analytical tools
are in place to assess each of these elements of market risk.
Interest rate risk includes the price sensitivity of a fixed maturity
security to changes in interest rates and the affect on future earnings from
short-term investments and maturing long-term investments, given a change in
interest rates. The following analysis illustrates the sensitivity of the
Company's financial instruments to selected changes in market rates and prices.
A hypothetical one percent increase in interest rates as of December 31, 1999
would result in a corresponding pre-tax decrease in the fair value of the fixed
maturity portfolios of approximately $21,500,000 or 5.3 percent. In addition,
a hypothetical one percent decrease in interest rates at December 31, 1999
would result in a corresponding decrease in pre-tax income over the next twelve
months of approximately $400,000, assuming the current maturity and prepayment
patterns. The Company monitors interest rate risk through the analysis of
interest rate simulations, and adjusts the average duration of its fixed
maturity portfolio by investing in either longer or shorter term instruments
given the results of interest rate simulations and judgments of cash flow
needs. The effective duration of the fixed maturity portfolio at December 31,
1999 was 5.27 years.
The valuation of the Company's marketable equity portfolios is subject to
equity price risk. In general, equities have more year-to-year price
variability than bonds. However, returns from equity securities over longer
time frames have been consistently higher. The Company invests in a
diversified portfolio of readily marketable equity securities. A hypothetical
10 percent decrease in the S&P 500 as of December 31, 1999 would result in a
corresponding pre-tax decrease in the fair value of the Company's equity
portfolio of approximately $3,000,000.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
The Company invests in high quality fixed maturity securities, thus
minimizing credit quality risk. At December 31, 1999 the portfolio of long-
term fixed maturity securities consists of 15.0 percent U.S. Treasury, 13.9
percent government agency, 15.2 percent mortgage-backed, 24.6 percent
municipal, and 31.3 percent corporate securities. At December 31, 1998 the
portfolio of long-term fixed maturity securities consisted of 24.5 percent U.S.
Treasury, 13.3 percent government agency, 6.8 percent mortgage-backed, 42.1
percent municipal, and 13.3 percent corporate securities. No securities are
below investment grade.
Prepayment risk refers to the changes in prepayment patterns that can
either shorten or lengthen the expected timing of the principal repayments and
thus the average life and the effective yield of a security. Such risk exists
primarily within the portfolio of mortgage-backed securities. The prepayment
risk analysis is monitored regularly through the analysis of interest rate
simulations. At December 31, 1999 the effective duration of the mortgage-
backed securities is 4.4 years with an average life and current yield of 7.5
years and 7.7 percent, respectively. At December 31, 1998 the effective
duration of the mortgage-backed securities was 1.5 years with an average life
and current yield of 2.1 years and 7.7 percent, respectively.
CAPITAL RESOURCES
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 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, 1999, 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.
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 $6,800,000, $4,275,000
and $3,750,000 of dividends from its insurance subsidiaries and paid cash
dividends to its stockholders totaling $6,793,000, $5,638,000 and $4,314,000 in
1999, 1998 and 1997, respectively. Total dividends, including amounts
reinvested in shares of the Company's common stock, amounted to $6,793,000,
$6,865,000 and $6,715,000 in 1999, 1998 and 1997, respectively.
As of December 31, 1999, the Company had no material commitments for
capital expenditures.
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 that reflects an increasingly
litigious society and increasing jury awards, when setting reserve amounts.
Premiums are also affected by inflation, although they are often restricted or
delayed by competition and the regulatory rate-setting environment.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
IMPACT OF YEAR 2000 REMEDIATION ON OPERATIONS
The Year 2000 issue presented both operational and underwriting risks to
the Company. Operational risks included the failure of computer systems and
equipment owned and operated by Employers Mutual, as well as those owned and
operated by vendors and other parties with which the Company conducts business.
Underwriting risks included, but were not limited to, potential claims by the
Company's policyholders to recover losses due to interruption of business or
liability to third parties that resulted from the failure of computer systems.
To date, the Company has not encountered any significant problems as the
result of the Year 2000 date rollover. All of the Company's systems are
functioning normally. In addition, the Company has not encountered any
significant problems with any vendor-supplied hardware or software. The
Company continues to monitor the situation closely for any future Year 2000
issues.
The Company distributed a letter during 1999 to all of its commercial
policyholders notifying them that their policies did not cover Year 2000
losses, but that coverage was available through an endorsement to the policy.
A questionnaire was developed and provided to them to aid in the assessment of
potential risks associated with Year 2000 noncompliance. Very few
policyholders elected to purchase the additional coverage provided by this
endorsement. The parties to the pooling agreement purchased reinsurance
protection for potential third party liability claims against policyholders
arising from Year 2000 issues. To date, no significant claims have been
reported relating to Year 2000 losses.
Year 2000 compliance efforts were in process for a number of years. The
majority of the costs associated with these efforts represented the salaries
and benefit expenses of the information systems department of Employers Mutual.
These costs were charged to operations in the year incurred and were not
separately tracked. In addition, most purchases of computer hardware and
software applications were not made specifically for Year 2000 compliance, and
were not considered costs of the Year 2000 compliance effort. The Company's
share of the costs associated with the Year 2000 compliance project did not
exceed estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities", effective
for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued
SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of Effective Date of FASB Statement No. 133", which defers the
effective date of SFAS 133 until fiscal years beginning after June 15, 2000.
Currently, the Company's investment strategy does not include investments in
derivative instruments or hedging activities. Accordingly, adoption of this
statement is not expected to have any effect on the operating results of the
Company.
Effective January 1, 1999, the Company adopted Statement of Position (SOP)
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments", issued by the American Institute of Certified Public Accountants.
This statement provides accounting guidance for insurance and other types of
entities that are subject to guaranty fund and other insurance-related
assessments. The Company's accounting policies were previously in
compliance with the provisions of this statement. Adoption of this
statement did not have a material effect on the Company's operating results.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
DEVELOPMENTS IN INSURANCE REGULATION
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.
The issue papers documenting this new comprehensive basis of accounting have
been finalized; however, the adoption 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 has not determined 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 Private Securities Litigation Reform Act of 1995 provides issuers the
opportunity to make cautionary statements regarding forward-looking statements.
Accordingly, any forward-looking statement contained in this report is based on
management's current expectations and actual results of the Company may differ
materially from such expectations. The risks and uncertainties that may affect
the actual results of the Company include but are not limited to the following:
catastrophic events and the occurrence of significant severe weather
conditions; state and federal legislation and regulations; changes in the
demand for, pricing of, or supply of insurance or reinsurance; changes in
interest rates and the performance of financial markets; the adequacy of loss
and settlement expense reserves, including asbestos and environmental claims;
subsequent losses associated with Year 2000 compliance issues by the Company,
its vendors or third party service providers; and other risks and
uncertainties inherent in the Company's business.
CONSOLIDATED FINANCIAL STATEMENTS. EXHIBIT 13(c)
- --------------------------------- -------------
Management's Responsibility for Financial Reporting
The management of EMC Insurance Group Inc. and Subsidiaries is responsible
for the preparation, integrity and objectivity of the accompanying financial
statements, as well as 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 LLP,
independent certified public accountants. Management has made available to
KPMG LLP all of the Company's financial records and related data, as well as
the minutes of the stockholders' and directors' meetings. Furthermore,
management believes that all representations made to KPMG LLP during its audit
were valid and appropriate. Their report appears elsewhere in this annual
report.
Management of the Company has established and continues to maintain 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
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,
1999, 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 Vice President and
Chief 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, 1999 and 1998, and
the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999. 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, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Des Moines, Iowa
February 24, 2000
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
--------------------------
1999 1998
------------ ------------
ASSETS
Investments (note 9):
Fixed maturities:
Securities held-to-maturity, at amortized cost
(fair value $126,679,065 and $174,623,439) ... $127,204,160 $164,926,190
Securities available-for-sale, at fair value
(amortized cost $263,720,333 and $208,115,127) 256,181,429 217,499,600
Equity securities available-for-sale, at fair
value (cost $28,494,631 and $29,928,433) ...... 32,408,272 32,785,429
Short-term investments, at cost ................. 20,164,210 22,660,011
------------ ------------
Total investments ........................... 435,958,071 437,871,230
Cash .............................................. 1,508,678 2,133,056
Accrued investment income ......................... 6,886,939 5,865,307
Accounts receivable (net of allowance for
uncollectible accounts of $633,000 and $400,000) 3,293,537 2,779,041
Income taxes recoverable .......................... 1,537,000 3,224,000
Reinsurance receivables (note 3) .................. 11,129,365 16,627,791
Deferred policy acquisition costs ................. 13,619,192 12,355,482
Deferred income taxes (note 10) ................... 18,121,317 10,371,754
Intangible assets, including goodwill, at cost
less accumulated amortization of $2,347,208
and $2,212,695 .................................. 1,210,612 1,345,125
Prepaid reinsurance premiums (note 3) ............. 1,280,564 1,201,737
Other assets ...................................... 2,030,703 2,271,829
------------ ------------
Total assets ................................ $496,575,978 $496,046,352
============ ============
LIABILITIES
Losses and settlement expenses (notes 2, 4 and 5) $266,514,024 $245,610,323
Unearned premiums (note 2) ....................... 64,991,129 61,464,051
Other policyholders' funds ....................... 1,093,254 1,951,683
Indebtedness to related party (note 2) ........... 3,886,559 5,862,685
Postretirement benefits (note 12) ................ 6,768,219 6,017,565
Deferred income .................................. 158,831 277,854
Other liabilities ................................ 11,247,685 10,924,351
------------ ------------
Total liabilities ......................... 354,659,701 332,108,512
------------ ------------
STOCKHOLDERS' EQUITY (notes 6, 7 and 13)
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 11,265,232 shares
in 1999 and 11,496,389 shares in 1998 .......... 11,265,232 11,496,389
Additional paid-in capital ....................... 65,333,686 67,822,412
Accumulated other comprehensive (loss) income .... (3,625,263) 8,079,371
Retained earnings ................................ 68,942,622 76,539,668
------------ ------------
Total stockholders' equity ................ 141,916,277 163,937,840
------------ ------------
Contingent liabilities (notes 3 and 15)
Total liabilities and stockholders' equity $496,575,978 $496,046,352
============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income
Year ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
REVENUES:
Premiums earned (notes 2 and 3) .... $211,098,141 $194,244,405 $177,218,246
Investment income, net (note 9) .... 25,760,561 24,859,063 23,780,303
Realized investment gains (note 9) 276,673 5,901,049 4,100,006
Other income ....................... 2,194,162 1,700,331 1,022,371
------------ ------------ ------------
239,329,537 226,704,848 206,120,926
------------ ------------ ------------
LOSSES AND EXPENSES (note 2):
Losses and settlement
expenses (notes 3, 4 and 5) ...... 176,876,248 157,876,094 129,853,304
Dividends to policyholders ......... 1,237,368 1,874,900 2,530,747
Amortization of deferred
policy acquisition costs ......... 48,056,918 44,662,641 35,942,092
Other underwriting expenses ........ 17,465,822 17,016,421 20,056,069
Other expenses ..................... 1,684,455 1,600,936 935,981
------------ ------------ ------------
245,320,811 223,030,992 189,318,193
------------ ------------ ------------
(Loss) income before income
tax (benefit) expense ...... (5,991,274) 3,673,856 16,802,733
------------ ------------ ------------
INCOME TAX (BENEFIT) EXPENSE
(note 10):
Current ........................ (1,599,826) (1,516,892) 4,266,959
Deferred ....................... (3,587,463) (822,117) (680,793)
------------ ------------ ------------
(5,187,289) (2,339,009) 3,586,166
------------ ------------ ------------
Net (loss) income ............ $ (803,985) $ 6,012,865 $ 13,216,567
============ ============ ============
Net (loss) income per common share
- basic and diluted .............. $ (0.07) $ 0.53 $ 1.18
============ ============ ============
Average number of shares outstanding
- basic and diluted .............. 11,330,705 11,440,592 11,193,243
============ ============ ============
Consolidated Statements of Comprehensive Income
Year ended December 31,
-------------------------------------
1999 1998 1997
------------ ----------- -----------
Net (loss) income ..................... $ (803,985) $ 6,012,865 $13,216,567
------------ ----------- -----------
OTHER COMPREHENSIVE INCOME (note 9):
Unrealized holding (losses) gains
arising during the period, before
deferred income tax (benefit)
expense ........................... (15,597,992) 6,460,974 9,696,600
Deferred income tax (benefit) expense (4,070,728) 2,196,732 3,296,843
------------ ----------- -----------
(11,527,264) 4,264,242 6,399,757
------------ ----------- -----------
Reclassification adjustment for gains
included in net (loss) income,
before income tax expense ......... (268,742) (5,866,610) (4,098,079)
Income tax expense .................. 91,372 1,994,647 1,393,347
------------ ----------- -----------
(177,370) (3,871,963) (2,704,732)
------------ ----------- -----------
Other comprehensive (loss) income (11,704,634) 392,279 3,695,025
------------ ----------- -----------
Total comprehensive (loss) income $(12,508,619) $ 6,405,144 $16,911,592
============ =========== ===========
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
COMMON STOCK:
Beginning of year ...................$ 11,496,389 $ 11,351,119 $ 11,084,461
Issuance of common stock:
Stock option plans ................ 23,793 55,102 71,073
Dividend reinvestment
plan (note 13) .................. - 90,168 195,585
Repurchase of common stock (note 13) (254,950) - -
----------- ----------- -----------
End of year ......................... 11,265,232 11,496,389 11,351,119
----------- ----------- -----------
ADDITIONAL PAID-IN CAPITAL:
Beginning of year ................... 67,822,412 65,916,681 62,762,613
From issuance of common stock:
Stock option plans ................ 255,001 722,511 854,641
Dividend reinvestment plan ........ - 1,183,220 2,299,427
Repurchase of common stock .......... (2,743,727) - -
----------- ----------- -----------
End of year ......................... 65,333,686 67,822,412 65,916,681
----------- ----------- -----------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Beginning of year ................... 8,079,371 7,687,092 3,992,067
Change in other comprehensive
income ............................ (11,704,634) 392,279 3,695,025
----------- ----------- -----------
End of year ......................... (3,625,263) 8,079,371 7,687,092
----------- ----------- -----------
RETAINED EARNINGS:
Beginning of year ................... 76,539,668 77,391,564 70,889,887
Net (loss) income ................... (803,985) 6,012,865 13,216,567
Dividends on common stock
($.60 per share in 1999, 1998 and
1997):
Cash dividends .................. (6,793,061) (5,637,687) (4,314,083)
Dividends reinvested in shares
of common stock ............... - (1,227,074) (2,400,807)
----------- ----------- -----------
End of year ......................... 68,942,622 76,539,668 77,391,564
----------- ----------- -----------
Total stockholders' equity ........$141,916,277 $163,937,840 $162,346,456
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ................... $ (803,985) $ 6,012,865 $13,216,567
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Losses and settlement expenses .. 20,903,701 24,524,043 9,356,859
Unearned premiums ............... 3,527,078 4,345,359 4,125,443
Other policyholders' funds ...... (858,429) (829,861) (685,905)
Deferred policy acquisition costs (1,263,710) (1,794,825) (1,538,794)
Indebtedness of related party ... (1,976,126) 5,346,899 (7,707,448)
Accrued investment income ....... (1,021,632) (113,012) 814,891
Accrued income taxes:
Current ....................... 1,687,000 (6,772,000) 606,000
Deferred ...................... (3,587,463) (822,116) (680,794)
Realized investment gains ....... (276,673) (5,901,049) (4,100,006)
Postretirement benefits ......... 750,654 588,652 496,079
Reinsurance receivables ......... 5,498,426 (3,026,100) 1,134,095
Prepaid reinsurance premiums .... (78,827) (6,672) 321,907
Amortization of deferred income (119,023) (168,824) (218,872)
Other, net ...................... 76,476 (1,388,392) (1,316,735)
----------- ----------- -----------
23,261,452 13,982,102 606,720
Cash provided by the change in
the property and casualty
insurance subsidiaries' pooling
agreement (note 2) ............ - 5,569,567 5,674,458
Cash provided by the change in
the reinsurance subsidiary's
quota share agreement (note 2) - - 3,066,705
----------- ----------- -----------
Net cash provided by
operating activities .... $22,457,467 $25,564,534 $22,564,450
----------- ----------- -----------
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Year ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity
securities held-to-maturity .... $(13,459,272) $(20,959,844) $(35,504,382)
Maturities of fixed maturity
securities held-to-maturity .... 51,260,724 42,025,415 38,138,196
Purchases of fixed maturity
securities available-for-sale .. (135,872,298) (57,514,297) (46,586,660)
Disposals of fixed maturity
securities available-for-sale .. 81,893,552 22,210,930 20,769,810
Purchases of equity securities
available-for-sale ............. (24,924,562) (40,789,067) (5,024,876)
Disposals of equity securities
available-for-sale ............. 25,037,159 42,941,862 4,010,683
Net sales (purchases) of
short-term investments ......... 2,495,796 (7,733,017) 2,626,614
------------ ------------ -----------
Net cash used in investing
activities .............. (13,568,901) (19,818,018) (21,570,615)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ......... 278,794 823,927 1,019,919
Dividends paid to
stockholders (note 13) ......... (6,793,061) (5,637,687) (4,314,083)
Repurchase of common
stock (note 13) ................ (2,998,677) - -
------------ ------------ ------------
Net cash used in financing
activities .............. (9,512,944) (4,813,760) (3,294,164)
------------ ------------ ------------
Net (decrease) increase in cash .... (624,378) 932,756 (2,300,329)
Cash at beginning of year .......... 2,133,056 1,200,300 3,500,629
------------ ------------ ------------
Cash at end of year ................ $ 1,508,678 $ 2,133,056 $ 1,200,300
============ ============ ============
Income taxes (recovered) paid ...... $ (3,294,499) $ 5,236,047 $ 3,660,959
Interest paid ...................... $ 89,032 $ - $ 88,922
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 72 percent owned subsidiary of
Employers Mutual Casualty Company (Employers Mutual), is an insurance holding
company with operations in property and casualty insurance and reinsurance.
Both commercial and personal lines of insurance are written, with the focus on
medium-sized commercial accounts. About one-half 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, Farm and City
Insurance Company, EMC Reinsurance Company and EMC Underwriters, LLC.
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 AND REINSURANCE 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 as 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 settlement expenses are provided by
estimating expenses expected to be incurred in settling the claims provided for
in the loss reserves. Changes in estimates are reflected in current operating
results (see note 4).
Ceded reinsurance amounts with nonaffiliated reinsurers relating to
reinsurance receivables for paid and unpaid losses and loss settlement expenses
and prepaid reinsurance are reported on the balance sheet 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. Since
the provisions are necessarily based on estimates, the ultimate liability may
be more or less than such provisions.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 accumulated other comprehensive
income in 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, 1999 and 1998 are securities on deposit with
various regulatory authorities as required by law amounting to $12,011,143 and
$11,958,675, respectively.
During the third quarter of 1999, the Company began participating in a
securities lending program whereby certain fixed-maturity securities from the
investment portfolio are loaned to other institutions for a short period of
time. The Company receives a fee in exchange for the loan of securities and
requires initial collateral equal to 102 percent of the market value of the
loaned securities.
INSURANCE-RELATED ASSESSMENTS
Effective January 1, 1999, the Company adopted Statement of Position (SOP)
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments", issued by the American Institute of Certified Public Accountants.
This statement provides accounting guidance for insurance and other types of
entities that are subject to guaranty fund and other insurance-related
assessments. The Company's accounting policies were previously in compliance
with the provisions of this statement. As a result, adoption of this statement
did not have a material effect on operating results.
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.
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 also 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. The benefits provided under both
plans are subject to change.
During 1998, Employers Mutual established two Voluntary Employee
Beneficiary Association (VEBA) trusts to accumulate funds for the payment of
postretirement health care and life insurance benefits. Contributions to the
VEBA trusts are used to fund the accumulated postretirement benefit obligation
as well as pay current year benefits. Assets held in the VEBA trusts are
primarily invested in life insurance products purchased from Employers Modern
Life Company, a subsidiary of Employers Mutual.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
INCOME TAXES
The Company files a consolidated Federal income tax return with its
subsidiaries. Consolidated income taxes/benefits 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'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. The Company had no potential common shares outstanding
during 1999, 1998 and 1997 that would have been dilutive to net income per
share.
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.
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 Company's four property and casualty insurance subsidiaries 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. Operations of the pool
give rise to intercompany balances with Employers Mutual, which are settled on
a quarterly basis. The investment and income tax activities of the pool
participants are not subject to the pooling agreement.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Effective January 1, 1998, Farm and City Insurance Company (Farm and
City), a subsidiary of the Company that writes nonstandard risk automobile
insurance business, became a participant in the pooling agreement. Farm and
City assumes a 1.5 percent participation in the pool, which increased the
Company's aggregate participation in the pool from 22 percent in 1997 to 23.5
percent in 1998 and 1999. In connection with this change in the pooling
agreement, the Company's liabilities increased $6,224,586 and invested assets
increased $5,569,567. The Company reimbursed Employers Mutual $726,509 for
expenses that were incurred to generate the additional business assumed by the
Company and Employers Mutual paid the Company $71,490 in interest income as the
actual cash transfer did not occur until March 25, 1998.
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 expenses that were incurred to generate the additional business assumed by
the Company and Employers Mutual paid the Company $75,469 in interest income as
the actual cash transfer did not occur until March 24, 1997.
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. Operations of the quota
share agreement give rise to intercompany balances with Employers Mutual, which
are settled on a quarterly basis.
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 this 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 expenses that
were incurred to generate the additional business assumed by the Company.
Premiums assumed by the reinsurance subsidiary from Employers Mutual
amounted to $43,546,796, $39,074,384 and $34,690,846 in 1999, 1998 and 1997,
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 $10,156,159, $9,862,675 and
$8,134,202 in 1999, 1998 and 1997, respectively.
The reinsurance subsidiary pays an annual override commission to Employers
Mutual in connection with the $1,500,000 cap on losses assumed per event, which
totaled $2,286,207, $2,051,405 and $1,821,270 in 1999, 1998 and 1997,
respectively. Employers Mutual retained losses and settlement expenses
totaling ($6,484) in 1999, $144,329 in 1998 and ($93,621) in 1997 under this
agreement. The reinsurance subsidiary also pays for 100 percent of the outside
reinsurance protection Employers Mutual purchases to protect itself from
catastrophic losses on the assumed reinsurance business. This cost is recorded
as a reduction to the premiums received by the reinsurance subsidiary and
amounted to $1,660,950, $1,648,583 and $1,841,000 in 1999, 1998 and 1997,
respectively.
<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
The parties to the pooling agreement cede insurance business to other
insurers in the ordinary course of business for the purpose of limiting their
maximum loss exposure through diversification of their risks. In its
consolidated financial statements, the Company treats risks to the extent they
are reinsured as though they were risks for which the Company is not liable.
Insurance ceded by the pool participants does not relieve their primary
liability as the originating insurers. Employers Mutual evaluates the
financial condition of the reinsurers of the parties to the pooling agreement
and monitors concentrations of credit risk arising from similar geographic
regions, activities or economic characteristics of the reinsurers to minimize
exposure to significant losses from reinsurer insolvencies.
As of December 31, 1999, reinsurance ceded to two nonaffiliated reinsurers
aggregated $5,283,422, which represents a significant portion of the total
prepaid reinsurance premiums and reinsurance receivables for losses and
settlement expenses. These amounts reflect the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded by Employers
Mutual to these organizations in connection with its role as "service carrier".
Under these arrangements, Employers Mutual writes business for these
organizations on a direct basis and then cedes 100 percent of this business to
these organizations. Credit risk associated with these amounts is minimal, as
all companies participating in these organizations are responsible for the
liabilities of such organizations on a pro rata basis.
The parties to the pooling agreement also assume insurance from
involuntary pools and associations in conjunction with direct business written
in various states. Through its participation in the pooling agreement, the
Company assumes insurance business from the North Carolina Reinsurance Facility
(NCRF), which is a state run assigned risk program. Prior to 1998 the Company
had not recognized its share of certain surcharges reported by the NCRF.
During the fourth quarter of 1998, the Company received clarification regarding
such amounts and recorded its share of these cumulative surcharges. As a
result, the consolidated financial statements for the year ended December 31,
1998 reflect assumed premium income of $542,656 and assumed loss recoveries of
$661,818 related to prior years. Beginning in 1999, these surcharges are being
recorded on a quarterly 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, 1999 is
presented below.
Year ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
PREMIUMS WRITTEN
Direct ......................... $228,588,440 $213,134,588 $175,350,677
Assumed from nonaffiliates ..... 781,225 1,888,951 1,219,564
Assumed from affiliates ........ 221,051,986 204,964,038 178,624,357
Ceded to nonaffiliates ......... (7,270,696) (5,808,352) (5,615,772)
Ceded to affiliates ............ (228,588,440) (213,249,508) (164,978,055)
------------ ------------ ------------
Net premiums written ......... $214,562,515 $200,929,717 $184,600,771
============ ============ ============
PREMIUMS EARNED
Direct ......................... $223,593,165 $202,514,027 $169,304,584
Assumed from nonaffiliates ..... 873,710 1,969,067 1,403,778
Assumed from affiliates ........ 217,416,300 197,166,272 171,514,339
Ceded to nonaffiliates ......... (7,191,869) (5,801,680) (5,937,679)
Ceded to affiliates ............ (223,593,165) (201,603,281) (159,066,776)
------------ ------------ ------------
Net premiums earned .......... $211,098,141 $194,244,405 $177,218,246
============ ============ ============
LOSSES AND SETTLEMENT EXPENSES
INCURRED
Direct ......................... $183,031,797 $171,209,604 $126,922,536
Assumed from nonaffiliates ..... 429,244 1,298,167 926,403
Assumed from affiliates ........ 182,375,574 171,681,607 122,827,934
Ceded to nonaffiliates ......... (5,928,570) (7,395,934) (3,364,737)
Ceded to affiliates ............ (183,031,797) (178,917,350) (117,458,832)
------------ ----------- ------------
Net losses and settlement
expenses incurred .......... $176,876,248 $157,876,094 $129,853,304
============ ============ ============
<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,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Gross reserves at beginning of year $245,610,323 $217,777,942 $202,502,986
Ceded reserves at beginning of year (15,563,600) (13,030,150) (13,796,769)
------------ ------------ ------------
Net reserves at beginning of year,
before adjustments ............... 230,046,723 204,747,792 188,706,217
Adjustment to beginning reserves
due to change in pooling
agreement (note 2) ............... - 3,600,220 3,795,453
Adjustment to beginning reserves
due to change in quota share
percentage (note 2) .............. - - 2,726,913
------------ ------------ ------------
Net reserves at beginning of year,
after adjustments ................ 230,046,723 208,348,012 195,228,583
------------ ------------ ------------
Incurred losses and
settlement expenses:
- ----------------------
Provision for insured events
of the current year ............ 182,609,687 168,953,309 137,300,762
Decrease in provision for
insured events of prior years .. (5,733,439) (11,077,215) (7,447,458)
------------ ------------ ------------
Total incurred losses and
settlement expenses ...... 176,876,248 157,876,094 129,853,304
------------ ------------ ------------
Payments:
- ---------
Losses and settlement expenses
attributable to insured events
of the current year ............ 72,970,531 73,228,354 57,649,830
Losses and settlement expenses
attributable to insured events
of prior years ................. 77,699,231 62,949,029 62,684,265
------------ ------------ ------------
Total payments ............. 150,669,762 136,177,383 120,334,095
------------ ------------ ------------
Net reserves at end of year ........ 256,253,209 230,046,723 204,747,792
Ceded reserves at end of year ...... 10,260,815 15,563,600 13,030,150
------------ ------------ ------------
Gross reserves at end of year ...... $266,514,024 $245,610,323 $217,777,942
============ ============ ============
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. Favorable development has also been experienced in the
reinsurance subsidiary. The Company has historically experienced favorable
development in its reserves; however, the amount of favorable development
experienced is expected to fluctuate from year to year.
<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 $2,447,811 and $2,372,098 at December 31, 1999 and 1998, 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. These uncertainties exist because 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 within a 12 month period
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, 1999, $11,505,996 was available
for distribution to the Company in 2000 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 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, 1999, 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,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Net (loss) income from insurance
subsidiaries, statutory basis .... $ (5,439,665) $ 2,117,464 $ 10,389,599
Change in deferred policy
acquisition costs ................ 1,263,710 1,794,825 1,538,794
Change in salvage and subrogation
accrual .......................... - - (419,578)
Change in other policyholders' funds 858,429 829,861 685,905
Change in pension accrual .......... (516,880) (33,749) 476,705
GAAP postretirement benefit cost
in excess of statutory cost ...... (583,380) (368,061) (235,916)
Deferred income tax benefit ........ 3,585,061 815,135 683,349
Prior years' income tax expense and
related interest ................. (96,134) - (117,948)
GAAP basis amortization of reserve
discount on commutation of
reinsurance contract ............. 119,023 168,824 218,872
Prior years' NCRF surcharges
(note 3) ......................... - 1,204,474 -
Other, net ......................... 32,487 (568,494) (92,713)
------------ ------------ ------------
Net (loss) income from insurance
subsidiaries, GAAP basis ......... (777,349) 5,960,279 13,127,069
Net (loss) income from Parent
Company........................... (26,636) 52,586 89,498
------------ ------------ ------------
Net (loss) income, GAAP basis .... $ (803,985) $ 6,012,865 $ 13,216,567
============ ============ ============
Surplus from insurance subsidiaries,
statutory basis .................. $116,151,399 $127,251,446 $129,258,305
Deferred policy acquisition costs .. 13,619,192 12,355,482 10,560,657
Other policyholders' funds payable (1,093,254) (1,951,683) (2,781,544)
Prepaid pension cost ............... 1,012,770 1,529,650 1,566,343
GAAP postretirement benefit
liability in excess of statutory
liability ........................ (3,351,848) (2,768,468) (2,400,407)
Deferred income tax asset .......... 18,115,065 10,367,904 9,754,853
Goodwill ........................... 1,210,612 1,345,125 1,479,638
Excess of statutory reserves
over statement reserves .......... 37,491 40,847 677,975
GAAP basis reserve discount on
commutation of reinsurance
contract in excess of statutory
recognition ...................... (158,831) (277,854) (446,678)
Unrealized holding (losses) gains on
available-for-sale securities .... (7,495,349) 9,398,727 6,940,501
Other, net ......................... 120,141 125,765 229,775
------------ ------------ ------------
Equity from insurance
subsidiaries, GAAP basis ......... 138,167,388 157,416,941 154,839,418
Equity from Parent Company ......... 3,748,889 6,520,899 7,507,038
----------- ----------- -----------
Stockholders' equity, GAAP basis .. $141,916,277 $163,937,840 $162,346,456
============ ============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
8. SEGMENT INFORMATION
The Company's operations consist of a property and casualty insurance
segment and a reinsurance segment. The property and casualty insurance segment
writes both commercial and personal lines of insurance, with a focus on medium
sized commercial accounts. The reinsurance segment provides reinsurance for
other insurers and reinsurers. The segments are managed separately due to
differences in the insurance products sold and the business environment in
which they operate. The accounting policies of the segments are described in
the summary of significant accounting policies.
Summarized financial information for the Company's segments is as
follows:
Property
Year ended and casualty Parent
December 31, 1999 insurance Reinsurance company Consolidated
- ----------------- ------------ ------------ ------------ ------------
Premiums earned ......... $167,265,093 $ 43,833,048 $ - $211,098,141
Underwriting loss ....... (26,526,524) (6,011,691) - (32,538,215)
Net investment income ... 18,282,642 7,113,877 364,042 25,760,561
Realized (losses) gains (4,127) 280,800 - 276,673
Other income ............ 2,075,087 119,023 52 2,194,162
Other expenses .......... (1,293,561) - (390,894) (1,684,455)
------------ ------------ ------------ ------------
(Loss) income before
income tax (benefit)
expense ............... $ (7,466,483)$ 1,502,009 $ (26,800)$ (5,991,274)
============ ============ ============ ============
Assets .................. $372,378,937 $123,658,090 $142,076,106 $638,113,133
Eliminations ............ - - (141,537,155)(141,537,155)
------------ ------------ ------------ ------------
Net assets ......... $372,378,937 $123,658,090 $ 538,951 $496,575,978
============ ============ ============ ============
Year ended
December 31, 1998
- -----------------
Premiums earned ......... $155,523,486 $ 38,720,919 $ - $194,244,405
Underwriting loss ....... (24,602,885) (2,582,766) - (27,185,651)
Net investment income ... 17,635,076 6,760,098 463,889 24,859,063
Realized gains .......... 5,870,125 30,924 - 5,901,049
Other income ............ 1,531,507 168,824 - 1,700,331
Other expenses .......... (1,213,880) - (387,056) (1,600,936)
------------ ------------ ------------ ------------
(Loss) income before
income tax (benefit)
expense ............... $ (780,057)$ 4,377,080 $ 76,833 $ 3,673,856
============ ============ ============ ============
Assets .................. $372,974,038 $117,739,839 $164,085,954 $654,799,831
Eliminations ............ - - (158,753,479)(158,753,479)
------------ ------------ ------------ ------------
Net assets ......... $372,974,038 $117,739,839 $ 5,332,475 $496,046,352
============ ============ ============ ============
Year ended
December 31, 1997
- -----------------
Premiums earned ......... $143,112,560 $ 34,105,686 $ - $177,218,246
Underwriting loss ....... (10,212,002) (951,964) - (11,163,966)
Net investment income ... 16,719,458 6,615,029 445,816 23,780,303
Realized gains .......... 4,077,083 22,923 - 4,100,006
Other income ............ 803,499 218,872 - 1,022,371
Other expenses .......... (622,219) - (313,762) (935,981)
------------ ------------ ------------ ------------
Income before income
tax expense ........... $ 10,765,819 $ 5,904,860 $ 132,054 $16,802,733
============ ============ ============ ============
Assets .................. $340,552,986 $111,568,145 $162,519,792 $614,640,923
Eliminations ............ - - (155,531,127)(155,531,127)
------------ ------------ ------------ ------------
Net assets ......... $340,552,986 $111,568,145 $ 6,988,665 $459,109,796
============ ============ ============ ============
<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, 1999 and 1998 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, 1999 cost gains losses value
----------------- ------------ ---------- ------------ ------------
Securities held-to-maturity:
Fixed maturity securities:
U.S. treasury securities
and obligations of
U.S. government
corporations and
agencies ............. $109,055,239 $2,043,252 $ (2,778,141)$108,320,350
Mortgage-backed
securities ........... 18,148,921 334,351 (124,557) 18,358,715
------------ ---------- ------------ ------------
Total securities
held-to-maturity $127,204,160 $2,377,603 $ (2,902,698)$126,679,065
============ ========== ============ ============
Securities available-for-
sale:
Fixed maturity securities:
U.S. treasury securities
and obligations of
U.S. government
corporations and
agencies ............. $ 4,419,411 $ - $ (58,327)$ 4,361,084
Obligations of states
and political
subdivisions ......... 96,077,294 1,305,302 (4,168,832) 93,213,764
Mortgage-backed
securities ........... 49,440,943 175,699 (182,436) 49,434,206
Debt securities issued by
foreign governments .. 6,479,135 89,895 - 6,569,030
Public utilities ....... 8,890,108 2,050 (54,702) 8,837,456
Corporate securities ... 98,413,442 143,084 (4,790,637) 93,765,889
------------ ---------- ------------ ------------
Total fixed maturity
securities ....... 263,720,333 1,716,030 (9,254,934) 256,181,429
------------ ---------- ------------ ------------
Equity securities:
Common stocks .......... 25,853,745 6,798,240 (2,848,220) 29,803,765
Non-redeemable
preferred stocks ..... 2,640,886 65,497 (101,876) 2,604,507
------------ ---------- ------------ ------------
Total equity
securities ....... 28,494,631 6,863,737 (2,950,096) 32,408,272
------------ ---------- ------------ ------------
Total securities
available-for-sale $292,214,964 $8,579,767 $(12,205,030)$288,589,701
============ ========== ============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Gross Gross Estimated
Amortized unrealized unrealized fair
December 31, 1998 cost gains losses value
----------------- ------------ ----------- ----------- ------------
Securities held-to-maturity:
Fixed maturity securities:
U.S. treasury securities
and obligations of
U.S. government
corporations and
agencies ............. $140,041,154 $ 8,696,984 $ (17,335)$148,720,803
Mortgage-backed
securities ........... 24,885,036 1,017,600 - 25,902,636
------------ ----------- ----------- ------------
Total securities
held-to-maturity $164,926,190 $ 9,714,584 $ (17,335)$174,623,439
============ =========== =========== ============
Securities available-for-
sale:
Fixed maturity securities:
U.S. treasury securities
and obligations of
U.S. government
corporations and
agencies ............. $ 3,491,259 $ - $ (4,354)$ 3,486,905
Obligations of states
and political
subdivisions ......... 155,138,275 8,026,883 (86,485) 163,078,673
Public utilities ....... 7,304,015 212,312 (17) 7,516,310
Corporate securities ... 42,181,578 1,243,951 (7,817) 43,417,712
------------ ----------- ----------- ------------
Total fixed maturity
securities ....... 208,115,127 9,483,146 (98,673) 217,499,600
------------ ----------- ----------- ------------
Equity securities:
Common stocks .......... 26,782,547 4,293,187 (1,551,293) 29,524,441
Non-redeemable
preferred stocks ..... 3,145,886 129,164 (14,062) 3,260,988
------------ ----------- ----------- ------------
Total equity
securities ....... 29,928,433 4,422,351 (1,565,355) 32,785,429
------------ ----------- ----------- ------------
Total securities
available-for-sale $238,043,560 $13,905,497 $(1,664,028)$250,285,029
============ =========== =========== ============
The amortized cost and estimated fair value of fixed maturity securities
at December 31, 1999, by contractual maturity, are shown below. Expected
maturities may 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 ................... $ 4,498,477 $ 4,562,505
Due after one year through five years ..... 32,067,841 33,088,104
Due after five years through ten years .... 63,257,577 62,077,061
Due after ten years ....................... 9,231,344 8,592,680
Mortgage-backed securities ................ 18,148,921 18,358,715
------------ ------------
Totals ................................ $127,204,160 $126,679,065
============ ============
Securities available-for-sale:
Due in one year or less ................... $ 1,753,344 $ 1,756,937
Due after one year through five years ..... 25,307,861 25,259,693
Due after five years through ten years .... 54,694,520 53,277,920
Due after ten years ....................... 132,523,665 126,452,673
Mortgage-backed securities ................ 49,440,943 49,434,206
------------ ------------
Totals ................................ $263,720,333 $256,181,429
============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Realized investment gains and losses from calls and prepayments of fixed
maturity securities held-to-maturity and available-for-sale and sales of fixed
maturity securities and equity securities available-for-sale are presented
below.
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Fixed maturity securities
held-to-maturity:
Gross realized investment gains ... $ 7,931 $ 34,439 $ 1,927
Gross realized investment losses .. - - -
Fixed maturity securities
available-for-sale:
Gross realized investment gains ... 1,593,437 46,620 110,304
Gross realized investment losses .. (3,490) (81) (22,908)
Equity securities
available-for-sale:
Gross realized investment gains ... 2,299,740 7,865,619 4,010,683
Gross realized investment losses .. (3,620,945) (2,045,548) -
---------- ---------- ----------
Totals .......................... $ 276,673 $5,901,049 $4,100,006
========== ========== ==========
During the second and third quarters of 1999, the Company sold
approximately $55,000,000 of investments in tax-exempt fixed maturity
securities available-for-sale and reinvested the proceeds into taxable fixed
maturity securities available-for-sale that pay a higher interest rate. This
change in asset allocation was implemented to increase the Company's after-tax
rate of return on its investment portfolio. Realized investment gains for 1999
reflect $1,589,953 of gains from the disposal of these tax-exempt fixed
maturity securities.
During 1998, the Company liquidated its common stock mutual fund portfolio.
Total proceeds amounted to $28,675,920 and included realized investment gains
of $7,585,293. Realized investment gains for 1997 reflect capital gain
distributions of $4,010,683 related to the Company's common stock mutual fund
portfolio.
A summary of net investment income is as follows:
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Interest on fixed maturities .......... $24,504,253 $23,496,941 $22,876,491
Dividends on equity securities ........ 582,496 547,238 599,043
Interest on short-term investments .... 1,387,774 1,483,167 1,250,492
Securities lending .................... 21,313 - -
----------- ----------- -----------
Total investment income ........... 26,495,836 25,527,346 24,726,026
Investment expenses ................... (735,275) (668,283) (945,723)
----------- ----------- -----------
Net investment income ............. $25,760,561 $24,859,063 $23,780,303
=========== =========== ===========
A summary of net changes in unrealized holding gains (losses) on
securities available-for-sale is as follows:
Year ended December 31,
-------------------------------------
1999 1998 1997
------------ ----------- -----------
Fixed maturity securities ........... $(16,923,379) $ 2,448,942 $ 3,691,046
Applicable income tax (benefit)
expense ........................... (5,753,949) 832,641 1,254,955
------------ ----------- -----------
Total fixed maturity securities (11,169,430) 1,616,301 2,436,091
------------ ----------- -----------
Equity securities ................... 1,056,645 (1,854,578) 1,907,475
Applicable income tax expense
(benefit) ......................... 359,259 (630,556) 648,541
------------ ----------- -----------
Total equity securities ......... 697,386 (1,224,022) 1,258,934
------------ ----------- -----------
Valuation allowance ................. 1,232,590 - -
------------ ----------- -----------
Total available-for-sale
securities .................... $(11,704,634) $ 392,279 $ 3,695,025
============ =========== ===========
<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, 1999 and 1998
relate to the following:
Year ended December 31,
------------------------
1999 1998
----------- -----------
Loss reserve discounting ........................... $13,587,146 $12,514,967
Unearned premium reserve limitation ................ 4,295,775 4,060,198
Postretirement benefits ............................ 1,935,776 1,743,193
Other policyholders' funds payable ................. 371,706 663,572
Prepayment of tax on commutation of loss reserves .. 54,003 94,470
Minimum tax credit ................................. 2,200,598 560,719
Net unrealized holding losses ...................... 1,232,590 -
Other, net ......................................... 843,766 613,221
----------- -----------
Total gross deferred income tax asset ........ 24,521,360 20,250,340
Less valuation allowance ........................... (1,232,590) (800,000)
----------- -----------
Total deferred income tax asset .............. 23,288,770 19,450,340
----------- -----------
Deferred policy acquisition costs .................. (4,630,525) (4,200,864)
Net unrealized holding gains ....................... - (4,162,100)
Other, net ......................................... (536,928) (715,622)
----------- -----------
Total gross deferred income tax liability .... (5,167,453) (9,078,586)
----------- -----------
Net deferred income tax asset .............. $18,121,317 $10,371,754
=========== ===========
The valuation allowance at December 31, 1999 consists of $1,232,590
related to the tax benefits associated with unrealized holding losses on fixed
maturity securities available-for-sale. The valuation allowance at December
31, 1998 relates to the tax benefits associated with postretirement benefit
deductions that are scheduled to reverse more than fifteen years into the
future. These valuation allowances were established due to the uncertainty
concerning the future realization of the 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 actual income tax (benefit) expense for the years ended December 31,
1999, 1998 and 1997 differed from the "expected" tax (benefit) expense for
those years (computed by applying the United States federal corporate tax rate
of 34 percent to (loss) income before income tax (benefit) expense) as follows:
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Computed "expected" tax (benefit)
expense ............................ $(2,037,033) $ 1,249,111 $ 5,712,929
Increases (decreases) in
tax resulting from:
Tax-exempt interest income ....... (2,306,517) (2,464,971) (2,330,842)
Change in accrual of prior year
taxes .......................... - (550,000) (424,161)
Change in valuation allowance .... (800,000) (400,000) -
Settlement of tax examinations ... - - 29,026
Proration of tax-exempt interest
and dividends received deduction 150,159 239,147 226,175
Other, net ....................... (193,898) (412,296) 373,039
----------- ----------- -----------
Income tax (benefit) expense ... $(5,187,289) $(2,339,009) $ 3,586,166
=========== =========== ===========
During 1999 and 1998, the valuation allowance was reduced as the result of
the establishment of VEBA trusts that will accelerate the postretirement
benefit deductions and reduce the uncertainty of future realization of the tax
benefits (note 1).
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Comprehensive income tax (benefit) expense included in the consolidated
financial statements for the years ended December 31, 1999, 1998 and 1997 is as
follows:
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Income tax (benefit) expense on:
Operations .......................... $(5,187,289) $(2,339,009) $ 3,586,166
Unrealized holding (losses) gains on
revaluation of securities
available-for-sale ................ (4,162,100) 202,085 1,903,496
----------- ----------- -----------
Comprehensive income tax
(benefit) expense ............. $(9,349,389) $(2,136,924) $ 5,489,662
=========== =========== ===========
11. EMPLOYEE RETIREMENT PLAN
The following table sets forth the funded status of the Employers Mutual
defined benefit retirement plan, based upon a measurement date of November 1,
1999 and 1998, respectively:
Year ended December 31,
------------------------
1999 1998
----------- -----------
Change in projected benefit obligation:
Projected benefit obligation at beginning of year... $82,478,544 $68,560,979
Service cost ....................................... 4,359,955 3,482,226
Interest cost ...................................... 5,426,633 4,835,259
Actuarial (gain) loss .............................. (6,565,958) 10,571,289
Benefits paid ...................................... (5,713,244) (5,005,271)
Amendments ......................................... 1,552,384 34,062
----------- -----------
Projected benefit obligation at end of year ...... 81,538,314 82,478,544
----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of year...... 90,099,993 85,475,793
Actual return on plan assets ....................... 11,437,594 9,629,471
Benefits paid ...................................... (5,713,244) (5,005,271)
----------- -----------
Fair value of plan assets at end of year ......... 95,824,343 90,099,993
----------- -----------
Funded status ...................................... 14,286,029 7,621,449
Unrecognized net actuarial gain .................... (11,562,801) (600,529)
Unrecognized initial net asset ..................... (755,787) (1,805,492)
Unrecognized prior service costs ................... 3,602,821 2,485,365
----------- -----------
Prepaid pension cost ............................. $ 5,570,262 $ 7,700,793
=========== ===========
The components of net periodic pension cost for the Employers Mutual defined
benefit retirement plan is as follows:
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Service cost .......................... $ 4,359,955 $ 3,482,226 $ 3,174,041
Interest cost ......................... 5,426,633 4,835,259 4,673,368
Expected return on plan assets ........ (7,041,280) (6,980,310) (6,168,223)
Amortization of initial net asset ..... (1,049,705) (1,075,440) (1,075,440)
Amortization of prior service costs ... 434,928 437,957 437,957
----------- ----------- -----------
Net periodic pension cost ........... $ 2,130,531 $ 699,692 $ 1,041,703
=========== =========== ===========
The weighted average discount rate used to measure the projected benefit
obligation was 7.75 percent for 1999, 6.75 percent for 1998 and 7.25 percent
for 1997. The assumed long-term rate of return on plan assets was 8.00 percent
for 1999, 1998 and 1997. The rate of increase in future compensation levels
used in measuring the projected benefit obligation was 5.95 percent in 1999,
5.96 percent in 1998 and 5.26 percent in 1997. Pension expense for the Company
amounted to $516,880, $172,985 and $257,812 in 1999, 1998 and 1997,
respectively.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
12. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The following tables set forth the funded status of the Employers Mutual
postretirement benefit plans based upon a measurement date of November 1, 1999
and 1998, respectively.
Year ended December 31,
-------------------------
1999 1998
------------ ------------
Change in postretirement benefit obligation:
Benefit obligation at beginning of year ........... $ 35,326,000 $ 26,242,000
Service cost ...................................... 2,370,000 1,321,000
Interest cost ..................................... 2,350,000 1,871,000
Actuarial (gain) loss ............................. (7,565,000) 6,499,000
Benefits paid ..................................... (1,021,000) (607,000)
------------ ------------
Postretirement benefit obligation at end of year 31,460,000 35,326,000
------------ ------------
Change in plan assets:
Fair value of plan assets at beginning of year .... - -
Actual return on plan assets ...................... 222,000 -
Employer contribution ............................. 3,671,000 607,000
Benefits paid ..................................... (1,021,000) (607,000)
------------ ------------
Fair value of plan assets at end of year ........ 2,872,000 -
------------ ------------
Funded status ..................................... (28,588,000) (35,326,000)
Unrecognized net actuarial (gain) loss ............ (1,988,000) 5,904,000
Unrecognized prior service costs .................. 1,678,000 2,249,000
Employer contributions ............................ - 1,471,000
------------ ------------
Liability for postretirement benefits ........... $(28,898,000)$(25,702,000)
============ ============
The components of net periodic postretirement benefit cost for the Employers
Mutual postretirement benefit plans is as follows:
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Service cost ......................... $ 2,370,000 $ 1,321,000 $ 1,040,000
Interest cost ........................ 2,350,000 1,871,000 1,518,000
Expected return on assets ............ (38,000) - -
Amortization of net gain ............. 191,000 - (147,000)
Amortization of prior service costs .. 571,000 571,000 571,000
------------ ------------ ------------
Net periodic postretirement benefit
cost ............................. $ 5,444,000 $ 3,763,000 $ 2,982,000
============ ============ ============
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
1999 is 8 percent, and is assumed to decrease gradually to 5 percent in 2002
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, 1999 by $4,656,000 and the aggregate of the
service and interest cost components of net periodic postretirement benefit
cost for the year ended December 31, 1999 by $938,000. The weighted average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.75 percent for 1999, 6.75 percent for 1998 and 7.25 percent
for 1997. The Company's net periodic postretirement benefit cost for the years
ended December 31, 1999, 1998 and 1997 was $1,278,700, $883,270 and $677,336,
respectively.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
13. STOCK PLANS
STOCK BASED COMPENSATION
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 value for any shares issued
under the plans and all expenses (the excess of current fair 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 the accounting requirements of Accounting Principles
Board Opinion No. 25 or SFAS 123, "Accounting for Stock-Based Compensation."
Under the current terms of the pooling agreement (note 2), the Company's
property and casualty insurance subsidiaries incur 23.5 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 $59,379,
$97,763, and $84,058 for 1999, 1998 and 1997, respectively.
(a) INCENTIVE STOCK OPTION PLANS
During 1999, 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 600,000 shares have been reserved for the 1982
Employers Mutual Casualty Company Incentive Stock Option Plan (1982 Plan) and a
total of 500,000 shares of the Company's common stock were initially reserved
for issuance under the 1993 Employers Mutual Casualty Company Incentive Stock
Option Plan (1993 Plan). Effective January 30, 1998, an additional 500,000
shares were registered under the 1993 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 95
individuals under the 1993 Plan. As of February 24, 2000, 20 eligible
participants remained in the 1982 Plan and 71 eligible participants remained in
the 1993 Plan.
The Senior Executive Compensation and Stock Option Committee (the
"Committee") of Employers Mutual's Board of Directors (the "Board") is the
administrator of the plans. Option prices are determined by the Committee but
can not be less than the fair value of the stock on the date of grant.
During 1999, 71,700 options were granted under the 1993 Plan to eligible
participants at a price of $12.69 and 43,336 options were exercised under the
plans at prices ranging from $11.09 to $13.31. A summary of Employers Mutual's
incentive stock option plans is as follows:
Year ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
Options outstanding, beginning of year .. 574,391 550,444 538,012
Granted ................................. 71,700 87,700 88,050
Exercised ............................... (43,336) (63,753) (71,068)
Expired ................................. (7,500) - (4,550)
-------- -------- --------
Options outstanding, end of year ........ 595,255 574,391 550,444
======== ======== ========
Options exercisable, end of year ........ 361,055 331,771 308,354
======== ======== ========
<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 have been reserved
for issuance under the Employers Mutual Casualty Company 1993 Employee Stock
Purchase Plan. 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. Participants pay 85 percent of
the fair market value of the stock purchased, which is fully vested on the date
purchased. 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 1999, 148 employees participated in the plan and exercised a total
of 27,655 options at prices of $11.88 and $9.16. Activity under the plan was
as follows:
Year ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
Shares available for purchase,
beginning of year ...................... 380,009 402,982 424,922
Shares purchased under plan .............. (27,655) (22,973) (21,940)
-------- -------- --------
Shares available for purchase, end of year 352,354 380,009 402,982
======== ======== ========
(c) NON-EMPLOYEE DIRECTOR STOCK PURCHASE PLAN
A total of 200,000 shares of the Company's common stock have been reserved
for issuance under the Employers Mutual Casualty Company Non-Employee Director
Stock Purchase Plan. All non-employee directors of Employers Mutual and its
subsidiaries who are not serving on the "Disinterested Director Committee" of
the Board as of the beginning of the option period are eligible for
participation in the plan. Each eligible director can purchase shares of
common stock at 75 percent of the fair value of the stock in an amount equal to
a minimum of 25 percent to a maximum of 100 percent of their annual cash
retainer. The plan will continue through the option period for options granted
at the 2002 annual meetings. 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. During 1999,
nine directors participated in the plan and exercised a total of 10,738 options
at prices ranging from $9.50 to $12.41. Activity under the plan was as
follows:
Year ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
Shares available for purchase,
beginning of year ...................... 162,928 170,368 176,252
Shares purchased under plan .............. (10,738) (7,440) (5,884)
-------- -------- --------
Shares available for purchase, end of year 152,190 162,928 170,368
======== ======== ========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 and may sell shares of common
stock through the plan. Since the third quarter of 1998, all shares of common
stock issued under the plan have been purchased in the open market through the
Company's transfer agent. On December 17, 1997, an additional 1,000,000 shares
of stock were registered for issuance under the dividend reinvestment plan.
During the second quarter of 1999, Employers Mutual elected to increase its
participation in the Company's dividend reinvestment plan. As a result,
Employers Mutual is now reinvesting 100 percent of its dividends in additional
shares of the Company's common stock. Prior to the second quarter of 1999,
Employers Mutual was 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,
---------------------------------
1999 1998 1997
--------- --------- ---------
Shares available for purchase,
beginning of year .................. 792,325 980,904 176,489
Additional shares registered ......... - - 1,000,000
Shares purchased under plan .......... (392,696) (188,579) (195,585)
--------- --------- ---------
Shares available for purchase,
end of year ........................ 399,629 792,325 980,904
========= ========= =========
Range of purchase prices ............. $ 9.47 $11.25 $11.88
to to to
$12.81 $15.13 $13.50
STOCK REPURCHASE PLAN
During the second quarter of 1999 the Company completed a $3,000,000
common stock repurchase plan that was approved by the Company's Board of
Directors on November 20, 1998. The repurchase plan authorized the Company to
make repurchases in the open market or through privately negotiated
transactions. The timing and terms of the purchases were determined by
management based on market conditions and were conducted in accordance with the
applicable rules of the Securities and Exchange Commission. During 1999,
254,950 shares of common stock were repurchased under this plan at an average
cost of $11.76 per share. There were no repurchases of common stock during
1998.
14. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, indebtedness of/to related party, accounts
receivable and accounts payable 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 (note 9).
Carrying Estimated
December 31, 1999 amount fair value
----------------- ------------ ------------
Fixed maturity securities:
Held-to-maturity ......................... $127,204,160 $126,679,065
Available-for-sale ....................... 256,181,429 256,181,429
Equity securities available-for-sale ....... 32,408,272 32,408,272
Short-term investments ..................... 20,164,210 20,164,210
December 31, 1998
-----------------
Fixed maturity securities:
Held-to-maturity ......................... $164,926,190 $174,623,439
Available-for-sale ....................... 217,499,600 217,499,600
Equity securities available-for-sale ....... 32,785,429 32,785,429
Short-term investments ..................... 22,660,011 22,660,011
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
The members of the pooling agreement have purchased annuities to fund
future payments that are fixed pursuant to specific claim settlement
provisions. The Company, under the current terms of the pooling agreement, is
a 23.5 percent participant in these annuities (note 2). The Company is
contingently liable to various claimants in the amount of $734,586 in the event
that the issuing company would be unable to fulfill its obligations.
16. UNAUDITED INTERIM FINANCIAL INFORMATION
Three months ended,
-----------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
1999
- ----
Total revenues (1) .... $56,872,232 $57,711,432 $61,284,746 $63,461,127
=========== =========== =========== ===========
Income (loss) before
income tax benefit .. $ 1,572,517 $(3,638,168) $ 85,728 $(4,011,351)
Income tax benefit .... (209,226) (1,906,001) (706,930) (2,365,132)
----------- ----------- ----------- -----------
Net income (loss) $ 1,781,743 $(1,732,167) $ 792,658 $(1,646,219)
=========== =========== =========== ===========
Net income (loss) per
share
- basic and diluted* $ .15 $ (.15) $ .07 $ (.15)
=========== =========== =========== ===========
1998
- ----
Total revenues (1) .... $52,301,140 $53,276,556 $62,864,880 $58,262,272
=========== =========== =========== ===========
Income (loss) before
income tax expense
(benefit) ........... $ 6,013,327 $(4,824,800) $ 3,367,120 $ (881,791)
Income tax expense
(benefit) ........... 1,534,693 (2,058,639) 578,621 (2,393,684)
----------- ----------- ----------- -----------
Net income (loss) $ 4,478,634 $(2,766,161) $ 2,788,499 $ 1,511,893
=========== =========== =========== ===========
Net income (loss) per
share
- basic and diluted* $ .39 $ (.24) $ .24 $ .13
=========== =========== =========== ===========
1997
- ----
Total revenues (1) .... $48,478,016 $50,302,117 $52,561,207 $54,779,586
=========== =========== =========== ===========
Income before income
tax expense ......... $ 2,070,552 $ 1,922,904 $ 3,064,442 $ 9,744,835
Income tax expense .... 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
=========== =========== =========== ===========
(1) Amounts previously reported in prior consolidated financial statements have
been reclassified to conform to current presentation.
* Since the weighted average shares for the quarters are calculated independent
of the weighted average shares for the year, quarterly net income (loss) per
share may not total to annual net income (loss) per share.
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
Nasdaq, and the dividends paid for each quarter within the two most recent
years.
1999 1998
---------------------------- ----------------------------
High Low Dividends High Low Dividends
------- ------- --------- ------- ------- ---------
1st Quarter $12 7/8 $10 5/8 $ .15 $14 1/2 $12 1/4 $ .15
2nd Quarter 12 3/4 9 1/4 .15 15 7/8 13 1/4 .15
3rd Quarter 13 3/8 9 5/8 .15 15 11 3/4 .15
4th Quarter 10 1/2 9 .15 13 1/4 9 .15
At December 31 9 1/8 12 3/4
On March 2, 2000, there were approximately 1,274 registered stockholders
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 and may sell shares of common stock through the plan.
See note 13 of Notes to Consolidated Financial Statements under Item 8 of this
Form 10-K. During the second quarter of 1999, Employers Mutual elected to
increase its participation in the Company's dividend reinvestment plan. As a
result, Employers Mutual is now reinvesting 100 percent of its dividends in
additional shares of the Company's common stock. Prior to the second quarter
of 1999, Employers Mutual was reinvesting 50 percent of its dividends in
additional shares of the Company's common stock.
Exhibit 21
----------
EMC INSURANCE GROUP INC.
ORGANIZATIONAL CHART
...............................
: :
: EMC INSURANCE GROUP INC. :
:.............................:
:
:
:
......................:................................
: :
: :
Illinois EMCASCO Insurance Company EMC
Dakota Fire Insurance Company Reinsurance
Farm and City Insurance Company Company
EMCASCO Insurance Company
:
:
EMC Underwriters, LLC.
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
24, 2000, relating to the consolidated balance sheets of EMC Insurance Group
Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows and related financial statement schedules for each of the years
in the three-year period ended December 31, 1999, which reports appear in the
December 31, 1999 annual report on Form 10-K of EMC Insurance Group Inc.
/s/ KPMG LLP
Des Moines, Iowa
March 28, 2000
Exhibit 24
----------
POWER OF ATTORNEY
KNOW EVERYONE BY THESE PRESENTS, that each director whose signature appears
below constitutes and appoints Mark E. Reese and Bruce 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 Form 10-K (annual
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934)
for the year ending December 31, 1999, and all other related filings with 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
February 24, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
12/31/99 balance sheet and income statement and is qualified in its
entirety by reference.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 256,181,429
<DEBT-CARRYING-VALUE> 127,204,160
<DEBT-MARKET-VALUE> 126,679,065
<EQUITIES> 32,408,272
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 435,958,071
<CASH> 1,508,678
<RECOVER-REINSURE> 11,129,365
<DEFERRED-ACQUISITION> 13,619,192
<TOTAL-ASSETS> 496,575,978
<POLICY-LOSSES> 266,514,024
<UNEARNED-PREMIUMS> 64,991,129
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 1,093,254
<NOTES-PAYABLE> 0
0
0
<COMMON> 11,265,232
<OTHER-SE> 130,651,045
<TOTAL-LIABILITY-AND-EQUITY> 496,575,978
211,098,141
<INVESTMENT-INCOME> 25,760,561
<INVESTMENT-GAINS> 276,673
<OTHER-INCOME> 2,194,162
<BENEFITS> 176,876,248
<UNDERWRITING-AMORTIZATION> 48,056,918
<UNDERWRITING-OTHER> 17,465,822
<INCOME-PRETAX> (5,991,274)
<INCOME-TAX> (5,187,289)
<INCOME-CONTINUING> (803,985)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (803,985)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
<RESERVE-OPEN> 245,610,323
<PROVISION-CURRENT> 182,609,687
<PROVISION-PRIOR> (5,733,439)
<PAYMENTS-CURRENT> 72,970,531
<PAYMENTS-PRIOR> 77,699,231
<RESERVE-CLOSE> 266,514,024
<CUMULATIVE-DEFICIENCY> (5,733,439)
</TABLE>
