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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000356130-01-500005.txt : 20010329
<SEC-HEADER>0000356130-01-500005.hdr.sgml : 20010329
ACCESSION NUMBER: 0000356130-01-500005
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 11
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010328
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: EMC INSURANCE GROUP INC
CENTRAL INDEX KEY: 0000356130
STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331]
IRS NUMBER: 426234555
STATE OF INCORPORATION: IA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 000-10956
FILM NUMBER: 1581900
BUSINESS ADDRESS:
STREET 1: 717 MULBERRY ST
CITY: DES MOINES
STATE: IA
ZIP: 50309
BUSINESS PHONE: 5152802902
MAIL ADDRESS:
STREET 1: 717 MULBERRY STREET
CITY: DES MOINES
STATE: IA
ZIP: 50309
</SEC-HEADER>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>1
<FILENAME>exh10a.txt
<DESCRIPTION>QUOTA SHARE REINSURANCE CONTRACT
<TEXT>
EXHIBIT 10(a)
-------------
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
This agreement made by and between Employers Mutual Casualty Company
("Employers") and EMC Reinsurance Company ("EMC Re").
ARTICLE I
EMC Re is an affiliate of Employers and was formed by Employers for the
sole purpose of engaging in the business of reinsurance.
It is the intention of the parties hereto that EMC Re will solicit,
underwrite, and assume reinsurance risks in a mode of operation similar to
that heretofore conducted by Employers, and that consistent therewith, EMC Re
will gradually assume by means of this Quota Share Agreement, the major
portion of the reinsurance assumed business of Employers as is in force or as
may be placed in force by Employers.
ARTICLE II
Excluded from this Quota Share Agreement at its inception are: (1) all
direct insurance business written by Employers and its affiliated companies;
(2) all involuntary insurance or reinsurance business written by Employers and
classed by Employers as "facilities business"; (3) facultative reinsurance
assumed contracts; (4) intercompany reinsurance contracts between Employers
and its affiliated companies; (5) reinsurance assumed contracts that have been
terminated or are in the process of termination.
ARTICLE III
Pursuant to and subject to the foregoing, Employers hereby cedes and
transfers to EMC Re, and EMC Re hereby accepts, a quota share portion of the
reinsurance contracts on which Employers is subject to liability which were
outstanding and in force as of 12:01 a.m. January 1, 1981, or which were
issued thereafter, or as shall be issued hereafter, in accordance with the
Assumption Addendum attached hereto. Such liability shall include reserves
for unearned premiums, outstanding loss and loss expenses (including
unreported losses) and all other underwriting and administrative expenses, but
shall not include liabilities incurred in connection with investment
transactions. Employers hereby assigns and transfers to EMC Re amounts equal
to the aggregate of the liabilities quota shared as above, less a commission
for the prepaid expenses of Employers.
ARTICLE IV
Employers shall not be prejudiced in any way by any error or omission
through accident or oversight resulting in a failure to accurately or fully
cede, report, or recover with respect to this Quota Share Agreement, but any
such error or omission shall be corrected immediately upon discovery.
ARTICLE V
This agreement is a continuing one and is unlimited as to duration, but
may be terminated as of the end of any calendar year upon ninety days prior
written notice; or may be otherwise terminated by agreement of the parties.
<PAGE> 39
ARTICLE VI
Each of the parties hereto agrees that the reinsurance business quota
shared hereunder shall be payable by EMC Re on the basis of the liability of
Employers under the contracts reinsured without diminution because of the
insolvency of Employers; provided that such reinsurance shall be payable
directly to Employers or its liquidator, receiver or such other statutory
successor, except as provided by Section 315 of new York Insurance Law, or
except (a) where the contract specifically provides another payee for such
reinsurance in the event of the insolvency of the ceding insurer and (b) where
EMC Re, with the consent of the direct reinsured company, has assumed such
contract obligations of Employers as direct obligations of EMC Re to the
payees under wich reinsurance contracts and in substitution for the
obligations of Employers to such payees; and further provided that the
liquidator, receiver or statutory successor of Employers shall give written
notice of the pendency of any claim against Employers on such contracts with
any reasonable time after such claim; and EMC Re may investigate such claim
and interpose, at its own expense, in the proceeding where such claim is to be
ajudicated in the defense or defenses which it may deem available to Employers
or its liquidator, receiver or statutory successor, the expense thus incurred
by EMC Re to be chargable, subject to court approval, against Employers as
part of the expense of liquidation to the extent of a proportionate share of
the benefit which may accrue to Employers solely as a result of the defense
undertaken by EMC Re.
Executed by the parties hereto the day and year as reflected in the
Assumption Addendum attached hereto.
<PAGE> 40
ASSUMPTION ADDENDUM
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
This agreement shall incept as 12:01 a.m. on the date executed by the
parties hereto. The parties to this agreement mutually agree that as of its
inception, the quota share portion of the net liabilities of Employers as
12:01 a.m. January 1, 1981 ceded to and assumed by EMC Re shall be five
percent.
Executed by the parties hereto this 10th day of June, 1981.
Employers Mutual Casualty Company
By: /s/ Robb B. Kelley
-------------------------
Robb B. Kelley, President
EMC Reinsurance Company
By: /s/ Richard E. Haskins
-------------------------
Richard E. Haskins, President
<PAGE> 41
AMENDMENT #1
TO
ASSUMPTION ADDENDUM
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
The parties to this agreement mutually agree that the quota share portion
of the net liabilities of Employers at 12:01 a.m. January 1, 1982 ceded to and
assumed by EMC Re shall be twenty-five percent.
Executed by the parties hereto this 3rd day of January, 1982.
Employers Mutual Casualty Company
By: /s/ Robb B. Kelley
-------------------------
Robb B. Kelley, President
EMC Reinsurance Company
By: /s/ Richard E. Haskins
-------------------------
Richard E. Haskins, President
<PAGE> 42
AMENDMENT #2
TO
ASSUMPTION ADDENDUM
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
The parties to this agreement mutually agree that the quota share portion
of the net liabilities of Employers at 12:01 a.m. January 1, 1983 ceded to and
assumed by EMC Re shall be fifty percent.
Executed by the parties hereto this 18th day of March, 1983.
Employers Mutual Casualty Company
By: /s/ George W. Kochheiser
-------------------------------
George W. Kochheiser, President
EMC Reinsurance Company
By: /s/ Richard E. Haskins
-------------------------------
Richard E. Haskins, President
<PAGE> 43
AMENDMENT #3
TO
ASSUMPTION ADDENDUM
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
The parties to this agreement mutually agree that the quota share portion
of the net liabilities of Employers at 12:01 a.m. January 1, 1984 ceded to and
assumed by EMC Re shall be seventy five percent.
Executed by the parties hereto this 3rd day of January, 1984.
Employers Mutual Casualty Company
By: /s/ Robb B. Kelley
------------------------------
Robb B. Kelley, Chairman & CEO
EMC Reinsurance Company
By: /s/ Richard E. Haskins
------------------------------
Richard E. Haskins, President
<PAGE> 44
AMENDMENT #4
TO
ASSUMPTION ADDENDUM
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
The parties to this agreement mutually agree that the quota share portion
of the net liabilities of Employers at 12:01 a.m. January 1, 1988 ceded to and
assumed by EMC Re shall be ninety-five percent.
Executed by the parties hereto this 9th day of March, 1988.
Employers Mutual Casualty Company
By: /s/ Robb B. Kelley
------------------------------
Robb B. Kelley, Chairman & CEO
EMC Reinsurance Company
By: /s/ Richard E. Haskins
------------------------------
Richard E. Haskins, President
<PAGE> 45
ENDORSEMENT #1
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
It is understood and agreed by and between the parties as follows:
1. Certain business subject to this agreement and ceded hereunder was
protected by pro-rata and excess of loss reinsurances; such
reinsurances to enure to the benefit of the parties as their
interests appear herein.
2. Such reinsurances were represented to be collectable; there was no
intent to transfer to the reinsurer the credit risk of
non-collectable reinsurances other than as would be deemed
incidental; and there was no consideration contemplated nor given
for the assumption of such credit risk.
3. At various times during the pendency of this agreement the parties
have come to perceive that recoverables from on such reinsurer,
Transit Casualty Company, were becoming of doubtful
collectability, and the parties began a scheduled "write down" of
receivables from that source as their interests appeared in order
to recognize the degree of doubt perceived.
4. The parties have now determined that no part of such receivables
from Transit Casualty Company are collectable, and that the entire
account should be written off as a bad debt.
5. The parties further recognize that the combination of a) increases
in the percentages of business ceded hereunder, and b) the more
than 200 percent growth in the loss amounts now recognized as
non-recoverable from Transit, have exacerbated the adverse affects
upon EMC Re hereunder to the point of severely reducing EMC Re's
surplus, and to the frustration of the purpose of this contract
and to the goals of the parties when it was drafted.
Now therefore, in consideration of the foregoing, the parties agree as
follows:
1. EMC Re will pay Employers in full the outstanding portion of its
95% pro-rata part of the Transit Casualty Company scheduled write
off as booked through September 30, 1988, in the amount of 95% of
$2,650,000.
2. Employers Mutual Casualty Company will retain (in addition to its
5% quota share portion), and hereby releases EMC Re from liability
therefore, any additional non-recoverable sums now due or in the
future recognized as necessary to be written off, applicable not
only to Transit but to any other non-collectable reinsurance
protections on business subject to this quota share agreement,
from its inception.
Executed by the parties hereto this 6th day of December, 1988.
Employers Mutual Casualty Company
By: /s/ Robb B. Kelley
------------------------------
Robb B. Kelley, Chairman & CEO
EMC Reinsurance Company
By: /s/ Richard E. Haskins
------------------------------
Richard E. Haskins, President
<PAGE> 46
COMMUTATION AGREEMENT AND RELEASE
This Agreement entered into by and between Employers Mutual Casualty
Company (the "Company") and EMC Reinsurance Company (the "Reinsurer") and
shall be effective as of September 30, 1989 (the "commutation date").
WHEREAS, the parties have entered into a certain quota share reinsurance
contract effective from January 1, 1981, and remaining in full force and
effect, and
WHEREAS, the Company and the Reinsurer desire to settle, adjust and
determine the liabilities of the Reinsurer thereunder for losses
occurring during all years prior to 12:01 A.M., January 1, 1981, and
WHEREAS, by reason of which settlement agreement there is due and owing
to the Company from the Reinsurer the sum of $2,982,882.00,
NOW, THEREFORE, in consideration of the payment to the Company by the
Reinsurer of $2,982,882.00, the Company has released and discharged, and
by these presents does for itself, its successors and assigns, release
and discharge the Reinsurer with respect to any contractual obligations
under the aforesaid quota share reinsurance contract as respects, and
only as respects, losses occurring during any and all years prior to
12:01 A.M., January 1, 1981.
IN WITNESS WHEREOF, the parties have caused these presents to be executed
in duplicate this 5th day of December, 1989.
EMPLOYERS MUTUAL CASUALTY COMPANY
By: /s/ George W. Kochheiser
--------------------------
George W. Kochheiser
President
EMC REINSURANCE COMPANY
By: /s/ Richard E. Haskins
--------------------------
Richard E. Haskins
President
<PAGE> 47
ENDORSEMENT #2
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
It is understood and agreed by and between the parties as follows:
Effective January 1, 1993 Article III of the Quota Share is amended by
adding the following additional paragraph:
Notwithstanding the foregoing terms, it is agreed that the maximum
liability transferred to EMC Re for loss resulting from any one occurrence,
including reinstatement premium costs resulting from such occurrence, is
limited to $1,000,000. As consideration to Employers for this per occurrence
limitation, it is agreed that EMC Re shall allow Employers an additional
ceding commission of 5.25%
Executed by the parties this 2nd day of December, 1992.
Employers Mutual Casualty Company
By: /s/ Bruce G. Kelley
-------------------
EMC Reinsurance Company
By: /s/ Dean P. McClaflin
---------------------
<PAGE> 48
COMMUTATION AGREEMENT AND RELEASE
This Agreement entered into by and between Employers Mutual Casualty
Company (the "Company") and EMC Reinsurance Company (the "Reinsurer") and
shall be effective as of June 30, 1993 (the "commutation date").
WHEREAS, the parties have entered into a certain quota share
reinsurance contract effective from January 1, 1981, and remaining in
full force and effect, and
WHEREAS, the Company and the Reinsurer desire to settle, adjust and
determine final liabilities of the Reinsurer thereunder for losses
originating from the business written by Russell Reinsurance Services,
Inc., and
WHEREAS, by reason of such settlement agreement there is due and owing
to the Company from the Reinsurer the sum $17,806,179.
NOW, THEREFORE, in consideration of the payment to the Company by the
Reinsurer of $17,806,179, the Company has released and discharged, and
by these presents does for itself, its successors and assigns, release
and discharge the Reinsurer with respect to any contractual
obligations under the aforesaid quota share reinsurance contract as
respects, all business originating through Russell Reinsurance
Services, Inc.
IN WITNESS WHEREOF, the parties have caused these presents to be
executed in duplicate this 29th day of July, 1993.
EMPLOYERS MUTUAL CASUALTY COMPANY
By: /s/ Bruce G. Kelley
---------------------
Bruce G. Kelley
President
EMC REINSURANCE COMPANY
By: /s/ Dean P. McClaflin
---------------------
Dean P. McClaflin
President
<PAGE> 49
COMMUTATION AGREEMENT AND RELEASE
This Agreement entered into by and between Employers Mutual Casualty
Company (the "Company") and EMC Reinsurance Company (the "Reinsurer") and
shall be effective as of October 31, 1993 (the "commutation date").
WHEREAS, the parties have entered into a certain quota share
reinsurance contract effective from January 1, 1981, and remaining in
full force and effect, and
WHEREAS, the Company and the Reinsurer desire to settle, adjust and
determine final liabilities of the Reinsurer thereunder for losses
originating from the business written by Improved Risk Mutual, and
WHEREAS, by reason of such settlement agreement there is due and owing
to the Company from the Reinsurer the sum of $2,619,776.
NOW, THEREFORE, in consideration of the payment to the Company by the
Reinsurer of $2,619,776, the Company has released and discharged, and
by these presents does for itself, its successors and assigns, release
and discharge the Reinsurer with respect to any contractual
obligations under the aforesaid quota share reinsurance contract as
respects, all business originating through Improved Risk Mutual.
IN WITNESS WHEREOF, the parties have caused these presents to be
executed in duplicate this 1st day of December, 1993.
EMPLOYERS MUTUAL CASUALTY COMPANY
By: /s/ Bruce G. Kelley
----------------------
Bruce G. Kelley
President
EMC REINSURANCE COMPANY
By: /s/ Dean P. McClaflin
----------------------
Dean P. McClaflin
President
<PAGE> 50
ENDORSEMENT #3
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
It is understood and agreed by and between the parties as follows:
Effective January 1, 1997, the last paragraph of Article III of the
Quota Share found in Endorsement #2 is changed to read as follows:
Notwithstanding the foregoing terms, it is agreed that the maximum
liability transferred to EMC Re for loss resulting from any one
occurrence, including reinstatement premium costs resulting from such
occurrence, is limited to $1,500,000. As consideration to Employers
for this per occurrence limitation, it is agreed that EMC Re shall
allow Employers an override commission of 5.00% plus .25% (fronting
fee) equaling 5.25%.
Executed by the parties this 7th day of January, 1997.
Employers Mutual Casualty Company
By: /s/Bruce G. Kelley
------------------------
EMC Reinsurance Company
By: /s/Ronnie D. Hallenbeck
------------------------
<PAGE> 51
AMENDMENT #5
TO
ASSUMPTION ADDENDUM
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
The parties to this agreement mutually agree that the quota share portion
of the net liabilities of Employers at 12:01 a.m. January 1, 1997 ceded to and
assumed by EMC Re shall be one hundred percent.
Executed by the parties hereto this 7th day of January, 1997.
Employers Mutual Casualty Company
By: /s/Bruce G. Kelley
-----------------------
EMC Reinsurance Company
By: /s/Ronnie D. Hallenbeck
-----------------------
<PAGE> 52
ENDORSEMENT #4
TO
QUOTA SHARE
REINSURANCE RETROCESSIONAL AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY AND EMC REINSURANCE COMPANY
It is understood and agreed by and between the parties as follows:
Effective January 1, 2000, the last paragraph of Article III of the
Quota Share found in Endorsement #3 is changed to read as follows:
Notwithstanding the foregoing terms, it is agreed that the maximum
liability transferred to EMC Re for loss resulting from any one
occurrence, including reinstatement premium costs resulting from
such occurrence, is limited to $1,500,000. As consideration to
Employers for this per occurrence limitation, it is agreed that
EMC Re shall allow Employers an override commission of 4.25% plus
.25% (fronting fee) equaling 4.5%.
Executed by the parties this 7th day of July, 2000.
Employers Mutual Casualty Company
BY: /s/ Bruce G. Kelley
--------------------------------
Bruce G. Kelley, President & CEO
EMC Reinsurance Company
BY: /s/ Ronnie D. Hallenbeck
-------------------------------
Ronnie D. Hallenbeck, President
<PAGE> 53
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>2
<FILENAME>exh10l.txt
<DESCRIPTION>SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
<TEXT>
EXHIBIT 10(l)
-------------
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Employers Mutual Casualty Company
This Supplemental Executive Retirement Plan (hereinafter "the Plan") is
adopted this 13th day of September, 1994 by Employers Mutual Casualty Company
(hereinafter "EMCC").
Article I
Introduction and Purpose of Plan
1.1 Establishment of Plan. EMCC, by execution of this document, hereby
establishes this Supplemental Executive Retirement Plan which shall become
effective as of January 1, 1995. The Plan shall be maintained for the
exclusive benefit of Plan Participants and is intended to be a nonqualified
deferred compensation plan for the benefit of certain highly compensated and
managerial employees of EMCC.
1.2 Purpose of Plan. The purpose of this Plan is to aid EMCC in
attracting and retaining certain highly compensated key employees by providing
a level of retirement benefits that may otherwise be limited by governmental
limitations and by the level of benefits provided by other retirement income
programs of EMCC.
Article II
Definitions
2.1 Administrator means the Pension Committee of EMCC and any
individual or committee of individuals appointed by the Pension Committee to
administer the Plan.
2.2 (i) Average Annual Compensation for Eligibility means the average
of a Participant's Compensation for the previous three calendar years.
(ii) Average Annual compensation for Benefit Determination means
the average of a Participant's Compensation for the highest five years out of
the previous ten calendar years. If a Participant has not attained ten Years
of Service at the time the Average Annual Compensation is determined, the
average shall be determined for the highest five years out of all the
Participant's Years of Service.
2.3 Beneficiary means the spouse of the Participant. No person other
than the Participant and the Participant's spouse shall be entitled to receive
a benefit from this Plan on account of the Participant's participation.
2.4 Code means the Internal Revenue Code of 1986, as amended, and
includes any regulations thereunder.
2.5 Compensation. Compensation includes all wages for federal income
tax purposes, as defined under Code Section 3401(a) (for purposes of income
tax withholding at the source), disregarding any rules limiting the
remuneration included as wages based on the nature or location of the
employment or services performed. Compensation shall also include
compensation which is contributed by EMCC pursuant to a salary reduction
agreement and which is not currently includable in the employee's gross income
by reason of the application of Code Sections 125, 401(k), 402(a)(8), 402(h),
403(b) or 457 along with any amounts deferred by the Participant under the
EMCC Deferred Bonus Plan. Compensation shall specifically exclude the
following: relocation allowances, pay in lieu of vacation, gain from stock
options, accumulated sick leave paid at retirement, reimbursement for loss of
auto, payment of stock purchase discount and the EMCC matching contribution to
the EMCC 401(k) Plan. This definition of compensation is the same definition
as used in the EMCC Retirement Plan. If at any time that definition of
compensation changes, the definition for purposes of this Plan shall not
change unless the Administrator specifically amends this Plan in writing.
<PAGE> 54
2.6 EMCC Retirement Plan means the EMCC qualified retirement pension
plan which is maintained by EMCC and which may be amended from time to time.
2.7 Normal Retirement Age means the date on which the Participant
attains the age of 65.
2.8 Participant means an employee or former employee who meets the
eligibility requirements of Article III of this Plan and who retains the
rights to benefits under the Plan.
2.9 Plan Year means the calendar year.
2.10 Senior Officer means any employee of EMCC who holds the title of
Resident Vice President or higher. If at any time the issue arises whether a
particular employee of EMCC is a Senior Officer, the Administrator shall have
the sole authority to determine the status of that particular employee;
provided, however, that any such decisions shall be made in a uniform and
nondiscriminatory manner.
2.11 Year of Service. An employee shall be credited with a Year of
Service for each calendar year which that employee has worked over 1000 hours
or is otherwise considered a full-time employee of EMCC or any of its
affiliates and subsidiaries. For purposes of eligibility and vesting, an
employee will be credited with all Years of Service both before and after the
effective date of this Plan.
Article III
Participation and Eligibility
3.1 Eligibility. Senior Officers of EMCC whose Average Annual
Compensation is equal to or greater than $100,000 are eligible to participate
in the Plan. Beginning on January 1, 1996, and annually thereafter, the
$100,000 amount (as previously adjusted) shall be adjusted by the percentage
increase (or decrease) in the Cost Price Indicator (CPI) published for the
prior calendar year. If, for example, the CPI increases by 4.2% in 1995, an
employee must have an average annual compensation of $104,200 or more in order
to become eligible to participate in 1996. Subsequent adjustments shall be
made by applying the CPI to the minimum earnings figure for that calendar
year. In the previous example, the 1997 adjustment would be calculated by
multiplying $104,200 by the CPI for 1996 and adding the product to $104,200.
3.2 Continuing Eligibility and Participation. Once an employee has
become eligible to participate, that employee shall become a Participant in
the Plan and shall remain as a participant until all benefits of the Plan have
been paid to that Participant. A reduction in Compensation of a Participant
or a change in officer status shall not cause the Participant to lose
eligibility for the Plan. If a Participant terminates employment and is
subsequently reemployed, that Participant shall be treated as a new employee
for purposes of determining eligibility and benefits and shall not be given
Years of Service credit for the previous employment period.
Article IV
Amount of Benefit
4.1 Amount of Benefit. The Benefit each Participant shall be entitled
to receive will be a lump sum payment which is equal to the present value of
the right to receive the Base Benefit, less applicable offsets, over a 10 year
certain period. It is anticipated that for some Participants the entire Base
Benefit will be provided through other sources of retirement benefits and that
this Plan will not be needed to provide a supplemental benefit.
4.2 Base Benefit. The annual Base Benefit shall be equal to 60% of a
Participant's Average Annual Compensation for Benefit Determination, which for
purposes of determining the Base Benefit shall be equal to the average of the
five highest years out of the past ten years of service (or, if less, the
Participant's total Years of Service) which results in the highest average
compensation for that Participant.
<PAGE> 55
4.3 Offsets against Base Benefit. The annual Base Benefit shall be
reduced by the following enumerated offsets:
4.3.(a) The benefit shall first be reduced by one-half of the
annual social security benefit that the Participant will receive if retirement
occurs at age 65.
4.3.(b) The result in (a) shall be multiplied by a years of
service factor which is equal to the years of service of the Participant
divided by 30, the maximum number of years which will be taken into account.
All years of service up to age 65 will be counted for this purpose. In no
event shall this fraction or factor be more than one.
4.3.(c) The result in (b) shall then be multiplied by an earned
service percentage equal to the number of months and Years of Service worked
by the Participant over the total number of months and years from the date of
hire to the participant's Normal Retirement Date.
4.3.(d) The result of (c) is then adjusted for early or late
retirement factors. A Participant who elects to receive a benefit prior to
the time that Participant attains the age of 65 shall be multiplied by a
factor based on the number of years that the date the benefits commence
precedes the date the Participant would attain the age of 65 years, as shown
in the following table:
NUMBER OF YEARS BENEFIT
PAYMENT PRECEDES ATTAINING
AGE 65 FACTOR
1 .92
2 .86
3 .80
4 .75
5 .70
6 .66
7 .62
8 .58
9 .55
10 .52
A Participant who elects to receive a benefit after the time that Participant
attains the age of 65 years shall be multiplied by a factor based on the
number of years that the date the benefits commence follows the date the
Participant attained the age of 65 years, as shown in the following table:
NUMBER OF YEARS BENEFIT
PAYMENT FOLLOWS ATTAINING
AGE 65 FACTOR
1 1.06
2 1.12
3 1.19
4 1.26
5 1.34
6 1.42
7 1.50
8 1.59
9 1.69
10 1.79
Both of the above factors shall be prorated for a partial year (counting a
partial month as a complete month). Factors for numbers of years beyond ten
shall be calculated using a consistently applied reasonable actuarial
equivalent method.
<PAGE> 56
4.3.(e) From the result in (d) the following annual benefits shall
be subtracted:
(i) The Participant's annual benefit from the EMCC Retirement
Plan, calculated on the Participant's actual retirement
date and valuing the annual benefit as if the Participant
had elected a ten year certain payout of those Retirement
Plan benefits. A Participant's retirement date shall be
determined in accordance with the provisions of Article V.
(ii) The value of the EMCC matching contribution to the EMCC
401(k) Plan, also valued by converting the Participant's
account balance attributable to EMCC matching
contributions (including income earned thereon) to an
annual payment using ten year certain payout.
(iii) The value of additional EMCC payments made to the
Participant, such as from the Excess Retirement Benefit
Agreement, or any other retirement income benefits paid by
EMCC. This amount shall also be converted to an annual
payment amount using a ten year certain payout.
4.3.(f) The value of the benefit shall be reduced by the amount of
Benefit that a reemployed Participant was entitled to receive because of prior
participation in this Plan. This amount shall be converted to an annual
payment amount using a ten year certain payout.
4.3.(g) Any benefit payable under this Plan will be the positive
remainder value resulting from the above Calculations. If the above
calculations result in a negative number, no benefit shall be payable under
this Plan as the Base Benefit will have been furnished the Participant through
other sources.
4.4 Vesting. A Participant shall become vested in the right to receive
any benefits provided by this Plan upon the completion of five (5) Years of
Service.
Article V
Payment of Benefits
5.1 Retirement Benefits. Benefits under this Plan shall become payable
at the date of retirement to any Participant who retires after attaining age
55, subject to the provisions of Section 5.7.
5.2 Death Benefits. If a Participant who is vested in the Plan dies
prior to age 55, the Participant's surviving spouse shall be entitled to a
benefit equal to one-half of the Participant's benefit calculated under
Article IV, which shall be payable to the Participant's surviving spouse at
the time the Participant would have attained age 55. If the spouse does not
survive to the time the Participant would have attained age 55, no benefit
will be payable to the surviving spouse. If a Participant dies after
attaining age 55, and before receiving a benefit under this Plan, the
Participant's surviving spouse shall be entitled to a benefit equal to one-
half of the Participant's benefit calculated under Article IV, which shall be
payable at the death of the Participant. If a Participant dies leaving no
surviving spouse, no death benefit shall be payable. For purposes of this
Plan, a surviving spouse shall include only a person who was legally married
to the Participant for at least one year prior to the date benefits become
payable under the Plan and continued to be married to that Participant at the
date of the Participant's death. For purposes of this Plan, the term
surviving spouse shall not include anyone who was a spouse by reason of any
state law which allows for common law marriage.
5.3 Disability Payments. If a vested Participant becomes disabled,
that Participant shall be entitled to receive that Participant's benefit in
the same manner as vested termination benefits provided for in section 5.4
below.
<PAGE> 57
5.4 Benefits on Termination of Employment. If a vested Participant
terminates employment before age 55, benefits payable under the Plan shall be
paid at the same time that the Participant elects to receive benefits under
the then existing EMCC Retirement Plan, but in no instance prior to the time
the Participant attains the age of 55 and no later than the time the
Participant attains the age of 65. If a vested Participant who has terminated
employment dies before attaining age 55, the benefit shall be paid to the
surviving spouse in the same manner as in Section 5.2. A Participant whose
employment is terminated for cause, or an employee who has voluntarily
terminated employment and who committed theft, embezzlement or other acts of
dishonesty against EMCC shall not be entitled to any benefits under this Plan.
5.5 Form of Payment. The normal Form of Payment will be calculated
based upon a ten year certain and shall be paid in a lump sum equal to the
present value of the stream of payments over that ten year certain. At the
time the benefit is calculated, the calculation of the present value shall be
made using the PBGC (Pension Benefit Guaranty Corporation) interest rate for
immediate annuities (PBGC Reg. Part 2619, Appendix B) averaged over the prior
five years. The average rate shall be calculated based on the PBGC rate for
January 1 of the year in which the benefit is payable and the immediately
preceding 4 years.
5.6 Funding of Benefit. This Plan is an unfunded plan. Benefits will
be payable from the general assets of EMCC. Accordingly, these benefits are
not secured; the Participants' claims to benefits are the same as the claims
of a general unsecured creditor of EMCC.
5.7 Timing of Payment of Benefit. Payment of the lump sum benefit
shall be made at such time as is determined by the Administrator but shall be
made no later than the last day of the seventh month of the Plan Year
following the year in which the benefit becomes payable.
Article VI
Administration of Plan
6.1 Administration. The Administrator shall maintain appropriate
records which detail the accrued benefit of each Participant and any other
records which are necessary or appropriate. The Administrator shall institute
an appropriate claims procedure and procedures for communication of the
details of this Plan to Participants.
6.2 Adoption by Subsidiaries. This Plan may be adopted by any of the
subsidiaries or affiliates of EMCC to cover those Employees who meet the
eligibility requirements of this Plan and who are otherwise eligible to
participate in the EMCC Retirement Plan. Each adopting subsidiary or
affiliate shall determine its own definition of "Senior Officer" but otherwise
the terms of this Plan shall control. A subsidiary or affiliate shall adopt
this Plan by resolution of its Board of Directors.
Article VII
Amendment or Termination of Plan
7.1 Amendment of Plan. The Administrator shall have the right to amend
the Plan, at any time and from time to time, in whole or in part. The
Administrator shall notify each Participant in writing of any Plan amendment.
No amendment shall reduce amount of benefit which any participant has accrued
to the date of the amendment. If at any time the EMCC Retirement Plan is
amended in any way which would affect this Plan, the terms and conditions of
the EMCC Retirement Plan as in effect at the effective date of this Plan shall
control in determining coverage, eligibility and the amount of benefits under
this Plan, unless this Plan is specifically amended to conform to the changes
in the EMCC Retirement Plan.
<PAGE> 58
7.2 Termination of Plan. Although EMCC has established this Plan with
the intention and expectation to maintain the Plan indefinitely, EMCC may
terminate or discontinue the Plan in whole or in part at any time without any
liability for such termination or discontinuance. Upon Plan termination, all
further benefit accruals shall cease. Benefits accrued to the date of
termination shall be paid out in accordance with the terms of this Plan.
Article VIII
Miscellaneous
8.1 Limitation of Rights: Employment Relationship. Neither the
establishment of this Plan nor any modification thereof, nor the accrual of
any benefit, nor the payment of any benefits, shall be construed as giving a
Participant or other person any legal or equitable right against EMCC except
as provided in the Plan. In no event shall the terms of employment of any
employee be modified or in any way be affected by the Plan.
8.2 Limitation on Assignment. Benefits under this Plan may not be
assigned, sold, transferred, or encumbered, and any attempt to do so shall be
void. A Participant's or Beneficiary's interest in benefits under the Plan
shall not be subject to debts or liabilities of any kind and shall not be
subject to attachment, garnishment or other legal process.
8.3 Representations. EMCC does not represent or guarantee that any
particular federal or state income, payroll, personal property or other tax
consequence will result from participation in this Plan. A Participant should
consult with professional tax advisors to determine the tax consequences of
his or her participation.
8.4 Severability. If a court of competent jurisdiction holds any
provision of this Plan to be invalid or unenforceable, the remaining
provisions of the Plan shall continue to be fully effective.
8.5 Applicable Law. This Plan shall be construed in accordance with
applicable federal law and, to the extent otherwise applicable, the laws of
the State of Iowa.
This Plan is entered into as of the date first above entered.
EMPLOYERS MUTUAL CASUALTY COMPANY
by /s/ Bruce G. Kelley
----------------------
Attest:
/s/ Philip T. Van Ekeren
Secretary
<PAGE> 59
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>3
<FILENAME>exh13a.txt
<DESCRIPTION>SELECTED FINANCIAL DATA
<TEXT>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA. EXHIBIT 13(a)
- ------------------------ -------------
Year ended December 31,
--------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
<S> ($ in thousands, except per share amounts)
Income Statement Data <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insurance premiums earned ... $231,459 $211,098 $194,244 $177,218 $165,191 $162,266 $164,829 $156,438 $147,410 $113,419 $101,323
Investment income, net ...... 29,006 25,761 24,859 23,780 24,007 23,204 21,042 20,936 21,586 20,223 20,038
Realized investment gains ... 1,558 277 5,901 4,100 1,891 1,043 520 684 384 65 48
Other income ................ 1,473 2,194 1,701 1,023 904 1,005 1,128 668 701 860 888
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total revenues ......... 263,496 239,330 226,705 206,121 191,993 187,518 187,519 178,726 170,081 134,567 122,297
Losses and expenses ......... 262,431 245,321 223,031 189,318 171,324 163,202 168,842 169,707 169,106 124,135 111,457
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Income (loss) before income
tax (benefit) expense ..... 1,065 (5,991) 3,674 16,803 20,669 24,316 18,677 9,019 975 10,432 10,840
Income tax (benefit)
expense ................... (1,264) (5,187) (2,339) 3,586 5,635 6,967 5,171 1,885 759 3,124 2,894
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Income (loss) from:
Continuing operations .... 2,329 (804) 6,013 13,217 15,034 17,349 13,506 7,134 216 7,308 7,946
Discontinued
operations ............. - - - - - - - - - 1,853 319
Accounting changes ....... - - - - - - - 2,621 - - -
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Net income (loss) ..... $ 2,329 $ (804)$ 6,013 $ 13,217 $ 15,034 $ 17,349 $ 13,506 $ 9,755 $ 216 $ 9,161 $ 8,265
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== =======
Net income (loss) per common
share - basic and diluted:
Continuing operations .. $ .21 $ (.07)$ .53 $ 1.18 $ 1.37 $ 1.62 $ 1.29 $ .70 $ .02 $ .73 $ .80
Discontinued operations - - - - - - - - - .18 .03
Accounting changes ..... - - - - - - - .26 - - -
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total ................. $ .21 $ (.07)$ .53 $ 1.18 $ 1.37 $ 1.62 $ 1.29 $ .96 $ .02 $ .91 $ .83
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== =======
Premiums earned by segment:
Property and casualty
insurance ............... $184,986 $167,265 $155,523 $143,113 $128,516 $126,440 $127,573 $123,114 $120,795 $ 88,410 $ 80,627
Reinsurance ............... 46,473 43,833 38,721 34,105 36,675 35,826 37,256 33,324 26,615 25,009 20,696
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total ..................$231,459 $211,098 $194,244 $177,218 $165,191 $162,266 $164,829 $156,438 $147,410 $113,419 $101,323
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== =======
Balance Sheet Data
Total assets ................ $587,676 $542,395 $496,046 $459,110 $430,328 $412,881 $387,370 $368,936 $372,807 $311,001 $296,126
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Stockholders' equity ........ $148,393 $141,916 $163,938 $162,346 $148,729 $136,889 $116,727 $109,634 $100,911 $105,144 $100,615
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Other Data
Average return on equity .... 1.6% (.5)% 3.7% 8.5% 10.5% 13.7% 11.9% 9.3% .2% 8.9% 8.4%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Book value per share ........ $ 13.14 $ 12.60 $ 14.26 $ 14.30 $ 13.42 $ 12.66 $ 11.03 $ 10.63 $ 9.98 $ 10.47 $ 10.04
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Dividends paid per share .... $ .60 $ .60 $ .60 $ .60 $ .57 $ .53 $ .52 $ .52 $ .52 $ .52 $ .52
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Property and casualty
insurance subsidiaries
aggregate pool percentage 23.5% 23.5% 23.5% 22% 22% 22% 22% 22% 22% 17% 17%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Reinsurance subsidiary quota
share percentage .......... 100% 100% 100% 100% 95% 95% 95% 95% 95% 95% 95%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Closing stock price ........ $ 11 3/4 $ 9 1/8 $ 12 3/4 $ 13 1/4 $ 12 $ 13 3/4 $ 9 1/2 $ 9 1/2 $ 8 1/2 $ 9 1/2 $ 6 7/8
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Net investment yield (pre-tax) 6.47% 5.96% 6.02% 6.15% 6.54% 6.65% 6.59% 6.83% 7.50% 8.02% 8.53%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Cash dividends to
closing stock price ........ 5.1% 6.6% 4.7% 4.5% 4.8% 3.9% 5.5% 5.5% 6.1% 5.5% 7.6%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Common shares outstanding .... 11,294 11,265 11,496 11,351 11,084 10,814 10,577 10,317 10,112 10,046 10,015
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Statutory trade combined ratio 113.5% 115.2% 114.8% 106.2% 103.6% 99.6% 101.3% 106.3% 113.9% 109.2% 109.5%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Amounts previously reported in prior consolidated financial statements have
been reclassified to conform to current presentation.
<PAGE> 60
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>4
<FILENAME>exh13d.txt
<DESCRIPTION>STOCKHOLDER INFORMATION
<TEXT>
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.
2000 1999
---------------------------- ----------------------------
High Low Dividends High Low Dividends
------- ------- --------- ------- ------- ---------
1st Quarter $10 $ 7 5/8 $ .15 $12 7/8 $10 5/8 $ .15
2nd Quarter 9 1/8 6 13/16 .15 12 3/4 9 1/4 .15
3rd Quarter 11 3/8 8 1/2 .15 13 3/8 9 5/8 .15
4th Quarter 12 1/8 9 1/4 .15 10 1/2 9 .15
At December 31 11 3/4 9 1/8
On February 16, 2001, there were approximately 1,248 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.
<PAGE> 101
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>5
<FILENAME>exh21.txt
<DESCRIPTION>ORGANIZATIONAL CHART
<TEXT>
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.
<PAGE> 103
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>6
<FILENAME>exh23.txt
<DESCRIPTION>CONSENT OF INDEPENDENT ACCOUNTANTS
<TEXT>
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
27, 2001, relating to the consolidated balance sheets of EMC Insurance Group
Inc. and Subsidiaries as of December 31, 2000 and 1999, 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, 2000, which reports appear in the
December 31, 2000 annual report on Form 10-K of EMC Insurance Group Inc.
/s/ KPMG LLP
Des Moines, Iowa
March 23, 2001
<PAGE> 104
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-24
<SEQUENCE>7
<FILENAME>exh24.txt
<DESCRIPTION>POWER OF ATTORNEY
<TEXT>
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, 2000, 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 28, 2001
<PAGE> 105
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>8
<FILENAME>exh13b.txt
<DESCRIPTION>MD & A
<TEXT>
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 77 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 79.9 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'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 inter-company 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 to 23.5 percent. 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.
<PAGE> 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
The Company's reinsurance subsidiary assumes a 100 percent quota share
portion of Employers Mutual's assumed reinsurance business, exclusive of
certain reinsurance contracts. This includes all premiums and related losses
and settlement expenses of this business, subject to a maximum loss of
$1,500,000 per event. The reinsurance subsidiary does not reinsure any of
Employers Mutual's direct insurance business, nor any "involuntary" facility
or pool business that Employers Mutual assumes pursuant to state law. In
addition, the reinsurance subsidiary is not liable for credit risk in
connection with the insolvency of any reinsurers of Employers Mutual.
Operations of the quota share agreement give rise to inter-company balances
with Employers Mutual, which are settled on a quarterly basis.
CONSOLIDATED RESULTS OF OPERATIONS
Operating results for the three years ended December 31, 2000 are as follows:
($ in thousands) 2000 1999 1998
-------- -------- --------
Premiums earned .......................... $231,459 $211,098 $194,244
Losses and settlement expenses ........... 189,522 176,876 157,876
Acquisition and other expenses ........... 71,401 66,760 63,554
-------- -------- --------
Underwriting loss ........................ (29,464) (32,538) (27,186)
Net investment income .................... 29,006 25,760 24,859
Other (expense) income ................... (35) 510 100
-------- -------- --------
Operating loss before income tax benefit . (493) (6,268) (2,227)
Realized investment gains ................ 1,558 277 5,901
-------- -------- --------
Income (loss) before income tax benefit .. 1,065 (5,991) 3,674
Income tax benefit ....................... (1,264) (5,187) (2,339)
-------- -------- --------
Net income (loss) ........................ $ 2,329 $ (804) $ 6,013
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ..... $191,425 $182,609 $168,953
Decrease in provision for insured
events of prior years ................ (1,903) (5,733) (11,077)
-------- -------- --------
Total losses and settlement expenses $189,522 $176,876 $157,876
======== ======== ========
Catastrophe and storm losses ............. $ 8,604 $ 11,162 $ 13,477
======== ======== ========
Operating results before income taxes improved in 2000 after declining
significantly in 1999 and 1998, but remained unprofitable. This improvement
is attributable to the property and casualty insurance segment, which
experienced a decline in loss frequency and a moderate increase in overall
premium rate adequacy. Operating results for the reinsurance subsidiary
declined for the fifth consecutive year, but remained profitable. Inadequate
premium rates, which have resulted from several years of intense rate
competition within the insurance industry, continue to be the primary cause
of the Company's recent performance. Premium rate levels continued to show
improvement throughout 2000 and rate increases grew progressively larger as
the year developed. This trend of accelerating rate increases is expected to
continue in 2001, but it will take time for premium rates to return to
adequate levels. The improvement that has been achieved in premium rate
adequacy will have a positive impact on future operating results, but the
unpredictable nature of catastrophe and storm losses will remain. In the
meantime, management continues to work toward improving profitability through
re-underwriting programs for both the existing book of business and the
agency force and by controlling the usage of discretionary rate credits.
<PAGE> 62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
Operating results for 2000 include earnings of $1,517,000 associated
with a change in the estimate of additional/return premium income expected on
policies, primarily workers' compensation, subject to audit in the property
and casualty insurance segment. This change in estimate was prompted by
additional research that was conducted in connection with a required change
in the tax accounting method used for recognizing audit-based premiums.
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 9.6 percent in 2000, 8.7 percent in 1999 and
9.6 percent in 1998. These increases, which are well above the industry
averages of approximately five percent in 2000 and two percent for 1999 and
1998, are primarily associated with the property and casualty insurance
segment. Applications for insurance coverage increased significantly in 2000
as some of the Company's competitors withdrew from certain markets or
implemented large, mandatory across-the-board rate increases regardless of
loss experience. The Company has been selective in the insurance risks it
has accepted and has been able to price both new and renewal business at more
adequate levels. The combination of these factors, coupled with the addition
of several new contracts in the reinsurance segment, contributed to the
strong growth rate in 2000.
Losses and settlement expenses increased 7.1 percent in 2000, 12.0
percent in 1999 and 21.6 percent in 1998. Overall loss frequency declined
significantly in the property and casualty insurance segment during 2000, but
this improvement was partially offset by increased loss experience in the
reinsurance segment. Active storm patterns in 2000 kept catastrophe and
storm losses at an elevated level for the third consecutive year, compounding
the impact of the inadequate premium rate levels that existed during this
time period. Results for 1999 and 1998 reflect an unusually large increase
in both the frequency and severity of losses unrelated to catastrophe and
storm activity. The benefit provided by the development of prior years'
reserves has declined significantly over the last three years, but remained
positive. The Company has historically experienced favorable development in
its reserves and reserving practices have not been changed; however, the
amount of development experienced will fluctuate from year to year as
individual claims are settled.
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, this reinsurance protection was not renewed for 2000. Had
this reinsurance protection been renewed, no reinsurance recoveries would
have been available in 2000 as the aggregate retention amount would not have
been exceeded.
Acquisition and other expenses increased 7.0 percent in 2000, 5.0
percent in 1999 and 8.6 percent in 1998. These increases reflect additional
expenses associated with the higher production levels achieved during these
years by both the property and casualty insurance segment and the reinsurance
segment. The increase in 2000 was limited by an $824,000 decline in
contingent commission expense in the reinsurance subsidiary. The increase
reported for 1998 includes expenses associated with the addition of Farm and
City to the pooling agreement.
Net investment income increased 12.6 percent in 2000, 3.6 percent in
1999 and 4.5 percent in 1998. The large increase in 2000 reflects both a
higher average invested balance in fixed maturity securities and an increase
in the average rate of return earned on the fixed-maturity portfolio. During
2000 and 1999, the Company sold approximately $14,000,000 and $55,000,000,
respectively, of tax-exempt securities and reinvested the proceeds into
taxable securities in order to achieve a better rate of return after taxes.
The increases in 1999 and 1998 are attributed to increases in the average
invested asset balances, as the Company was experiencing a decline in the
average rate of return earned on fixed maturity investments in 1998 and into
1999 due to declining interest rates.
<PAGE> 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
Realized investment gains increased in 2000 and 1998 but declined in
1999. The realized investment gains of 2000 include $531,000 from the
disposal of tax-exempt fixed maturity securities, $531,000 from the disposal
of other fixed maturity securities and $496,000 from the Company's equity
portfolio. The realized investment gains for 1999 reflect $1,590,000 of
gains from the disposal of tax-exempt fixed maturity securities, but these
gains were mostly offset by realized losses of $1,321,000 that were
recognized on the Company's equity portfolio. The realized investment gains
of 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 issues that are being managed on a tax-aware basis.
The income tax benefit decreased in 2000 after increasing in 1999 and
1998. This decrease is primarily due to the improved operating results
experienced in 2000, but also reflects a significant decline in the amount of
tax-exempt interest earned by the Company. Due to the change in the
allocation of the Company's investment portfolio noted above, tax-exempt
interest decreased to $4,922,000 in 2000 from $6,784,000 in 1999 and
$7,250,000 in 1998. The income tax benefit for 2000 also reflects $470,000
of benefit from the elimination of an accrual that had been carried for
potential tax examination adjustments and $775,000 of expense associated with
required changes in the tax accounting methods used to recognize audit-based
premiums and installment premiums. The income tax benefits for 1999 and 1998
included $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. The tax benefit for 1998 also includes $550,000 related to a
reduction in an accrual that had been carried for potential tax examination
adjustments.
SEGMENT RESULTS
Property and Casualty Insurance
Operating results for the three years ended December 31, 2000 are as follows:
($ in thousands) 2000 1999 1998
-------- -------- --------
Premiums earned .......................... $184,986 $167,265 $155,523
Losses and settlement expenses ........... 149,519 140,481 128,667
Acquisition and other expenses ........... 57,748 53,310 51,460
-------- -------- --------
Underwriting loss ........................ (22,281) (26,526) (24,604)
Net investment income .................... 20,788 18,283 17,635
Other income ............................. 286 781 319
-------- -------- --------
Operating loss before income taxes ....... $ (1,207) $ (7,462) $ (6,650)
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ..... $152,360 $145,806 $136,209
Decrease in provision for insured
events of prior years ................ (2,841) (5,325) (7,542)
-------- -------- --------
Total losses and settlement expenses $149,519 $140,481 $128,667
======== ======== ========
Catastrophe and storm losses ............. $ 7,945 $ 7,389 $ 10,163
======== ======== ========
<PAGE> 64
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
Premiums earned increased 10.6 percent in 2000, 7.6 percent in 1999 and
8.7 percent in 1998. This growth in premium income has been significantly
greater than the industry averages over the last three years, which amounted
to approximately five percent in 2000 and two percent in 1999 and 1998. The
major driver behind this strong growth rate has been an increase in policy
count, which resulted from an improved retention rate on renewal business and
a steady amount of new business. In addition to these factors, the increase
for 2000 reflects growth in the exposure base on commercial lines of business
as well as rate increases in most lines of business. As a result of the rate
increases implemented during 1999 and 2000, overall premium rate adequacy
improved in 2000 for the first time in several years. Overall premium rate
adequacy should continue to improve in 2001 as the rate increases implemented
during 2000 become more fully recognized. Rate increases grew progressively
larger during 2000 and this trend is expected to continue in 2001. The
premium income amount for 2000 includes $1,727,000 of income associated with
a change in the estimate of additional/return premium income expected on
policies, primarily workers' compensation, subject to audit as of December
31, 2000. This change in estimate was prompted by additional research that
was conducted in connection with a required change in the tax accounting
method used for recognizing audit-based premiums.
Losses and settlement expenses increased 6.4 percent in 2000, 9.2
percent in 1999 and 20.8 percent in 1998. The improvement for 2000 is
primarily attributable to a substantial decline in overall loss frequency
from the elevated levels experienced in 1999 and 1998. Catastrophe and storm
losses have had a significant impact on operating results over the last three
years due to the persistence of active storm patterns that developed in 1998.
In 1999 and 1998 the property and casualty insurance subsidiaries recovered
$3,825,000 and $1,762,000, respectively, of reinsurance benefits under an
aggregate excess of loss catastrophe reinsurance agreement that was in effect
for those years for the pool members. Due to substantial changes in both the
terms and the cost of the coverage, this reinsurance protection was not
renewed for year 2000. Had this reinsurance protection been renewed, no
reinsurance recoveries would have been available in 2000 as the aggregate
retention amount would not have been exceeded. The benefit realized from the
development of prior years' reserves declined for the second consecutive year
in 2000, but remained favorable. The property and casualty insurance
subsidiaries have historically experienced favorable development in their
reserves and reserving practices have not been changed; however, the amount
of development experienced will fluctuate from year to year as individual
claims are settled.
Acquisition and other expenses increased 8.3 percent in 2000, 3.6
percent in 1999 and 10.0 percent in 1998. These increases reflect additional
expenses associated with the higher production levels achieved during these
years. 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.
Underwriting results for the property and casualty insurance segment
improved in 2000 after deteriorating significantly in 1999 and 1998, but
remained unprofitable. Inadequate premium rates, high levels of catastrophe
and storm losses and increased loss severity and frequency have all
contributed to the underwriting results experienced during the last three
years. There were definite signs of improvement during 2000 as overall
premium rate adequacy improved for the first time in several years and loss
frequency declined after increasing substantially in 1999 and 1998. However,
premium rates remain inadequate and it will take time for them to return to
adequate levels. In addition, it is uncertain whether the high level of
catastrophe and storm losses and the increased loss severity that have
plagued this segment will continue. Management continues to work toward
improving profitability through re-underwriting programs for both the
existing book of business and the agency force and by controlling the usage
of discretionary rate credits.
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 $662,000
related to prior years. Beginning in 1999, these surcharges are being
recorded on a quarterly basis.
<PAGE> 65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
Reinsurance
Operating results for the three years ended December 31, 2000 are as follows:
($ in thousands) 2000 1999 1998
-------- -------- --------
Premiums earned ............................ $ 46,473 $ 43,833 $ 38,721
Losses and settlement expenses ............. 40,003 36,395 29,209
Acquisition and other expenses ............. 13,653 13,450 12,094
-------- -------- --------
Underwriting loss .......................... (7,183) (6,012) (2,582)
Net investment income ...................... 7,873 7,114 6,760
Other income ............................... 80 119 168
-------- -------- --------
Operating income before income taxes ....... $ 770 $ 1,221 $ 4,346
======== ======== ========
Incurred losses and settlement expenses:
Insured events of the current year ....... $ 39,065 $ 36,803 $ 32,744
Increase (decrease) in provision for
insured events of prior years .......... 938 (408) (3,535)
-------- -------- --------
Total losses and settlement expenses $ 40,003 $ 36,395 $ 29,209
======== ======== ========
Catastrophe losses ......................... $ 659 $ 3,773 $ 3,314
======== ======== ========
Premium income increased 6.0 percent in 2000, 13.2 percent in 1999 and
13.5 percent in 1998. The increase for 2000 reflects growth in the exposure
base on existing contracts, the addition of several new contracts and an
increase of approximately $750,000 in the estimate of "earned but not
reported" premium mainly attributable to foreign reinsurance contracts. Due to
the time lag in the reporting of foreign reinsurance contracts, estimated
amounts of premium income and related losses and expenses are booked on a
quarterly basis. These estimates are adjusted when the reported amounts
deviate from the estimates. Premium rate increases had a very minor impact on
premium growth in 2000 as renewal rates were flat during the January 2000
renewal season, which is when the majority of the reinsurance subsidiary's
contracts renew. Industry premium rates improved during 2000 and the
reinsurance subsidiary was successful in obtaining modest rate increases on
many of its reinsurance contracts during the January 2001 renewal season, which
should benefit 2001 operating results. It should be noted that the production
increases reported for 2000 and 1999 are distorted by the delayed reporting of
several foreign reinsurance contracts that were written in 1998 but were
included in 1999 results. The large increase reported for 1998 reflects the
addition of several new accounts.
Losses and settlement expenses increased 9.9 percent in 2000, 24.6
percent in 1999 and 25.3 percent in 1998, which is consistent with the
increases in premium income noted above. Operating results for 2000
benefited from a significant decline in catastrophe and storm losses from the
elevated levels experienced in 1999 and 1998. However, this benefit was
partially offset by adverse development on prior years' reserves, including
those established for the 1999 European storms, increased loss severity on
several aggregate treaties and property contracts and increased loss
frequency in the workers' compensation line of business. The results for
1999 reflect a large decline in the amount of favorable development
experienced on prior years' reserves, heavy storm losses in Europe and large
losses on several property per-risk, property pro-rata and aggregate excess
of loss contracts. Results 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.
<PAGE> 66
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
Acquisition and other expenses increased 1.5 percent in 2000, 11.2
percent in 1999 and 2.9 percent in 1998. The relatively small increase for
2000 is attributed to two transactions that produced a $824,000 decline in
contingent commission expense. The first transaction was the receipt of
$420,000 of profit share commission income associated with an outside
reinsurance contract that the reinsurance subsidiary pays for to protect
Employers Mutual from catastrophic losses on its assumed book of business.
The second transaction was a $404,000 decline in contingent commission
expense that was recognized by a reinsurance pool that the reinsurance
subsidiary participates in. The small increase for 1998 also reflects a
decline in contingent commission expense and is attributable to the
deterioration in the profitability of the assumed book of business.
Underwriting results of the reinsurance segment have declined steadily
over the last three years due to reduced premium rate levels, higher levels
of catastrophe and storm losses and increased loss severity. Industry
premium rate levels improved during 2000 and the reinsurance subsidiary was
able to implement moderate rate increases during the January 2001 renewal
season; however, premium rate levels are still considered to be inadequate
and the excess capacity that led to the reduction in premium rate levels
continues to exist. Underwriting results for 2001 should benefit from the
recent rate increases, but it is unknown whether the trend of increased loss
frequency and severity will continue. Employers Mutual continues to work
toward improving profitability on the assumed book of business by accepting a
larger share of coverage on desirable programs, strengthening its
relationships with reinsurance intermediaries and monitoring premium growth.
Parent Company
The parent company reported an operating loss before income taxes of
$56,000 in 2000 compared to an operating loss of $27,000 in 1999 and
operating income of $77,000 in 1998. The decrease in 2000 and 1999 operating
results is primarily attributed to a decline in investment income, which
resulted from a decrease in the average invested asset balance. The
operating results for 1998 decreased due to higher operating expenses.
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 $2,829,000 at December
31, 2000. Approximately $1,402,000 of these reserves are attributed to the
reinsurance business assumed by the Company's reinsurance subsidiary with the
remaining $1,427,000 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> 67
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. The Company had an unrealized
holding gain on fixed maturity securities available-for-sale of $3,107,000 at
December 31, 2000 compared to an unrealized holding loss of $7,539,000 at
December 31, 1999 and an unrealized holding gain of $6,194,000 at December
31, 1998. The fluctuation in the market value of these investments is
primarily due to changes in the interest rate environment during this time
period. 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 the Company established a valuation
allowance of $1,233,000 for the deferred tax asset associated with the
unrealized holding losses on the Company's available-for-sale securities.
This valuation allowance was established due to uncertainties concerning the
future realization of the tax benefit. During 2000, the valuation allowance
was eliminated as the Company had a net unrealized holding gain on its
available-for-sale securities.
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, primarily cash, equal to 102 percent
of the market value of the loaned securities.
During 1999 and 2000 the Company sold approximately $55,000,000
and $14,000,000, respectively, 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.
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 $21,519,000
in 2000, $22,457,000 in 1999 and $25,565,000 in 1998. Included in the amount
for 1998 is $5,570,000 received from Employers Mutual in connection with the
addition of Farm and City to the pooling agreement.
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.
<PAGE> 68
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
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 of 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, 2000 would result in a corresponding pre-tax decrease in the fair value
of the fixed maturity portfolios of approximately $22,708,000 or 5.1 percent.
In addition, a hypothetical one percent decrease in interest rates at
December 31, 2000 would result in a corresponding decrease in pre-tax income
over the next twelve months of approximately $734,000, 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, 2000 was 4.76 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, 2000 would
result in a corresponding pre-tax decrease in the fair value of the Company's
equity portfolio of approximately $3,050,000.
The Company invests in high quality fixed maturity securities, thus
minimizing credit quality risk. At December 31, 2000 the portfolio of long-
term fixed maturity securities consists of 12.5 percent U.S. Treasury, 12.2
percent government agency, 12.3 percent mortgage-backed, 19.1 percent
municipal, and 43.9 percent corporate securities. At December 31, 1999 the
portfolio of long-term fixed maturity securities consisted 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. The Company
had one bond (Southern California Edison) below investment grade. The bond
has a book value of $1,399,885 and is being carried at its market value of
$1,387,638. It is unknown at this time what portion of the bond balance, if
any, will be collectible.
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, 2000 the effective duration of
the mortgage-backed securities is 3.89 years with an average life and current
yield of 5.4 years and 7.4 percent, respectively. At December 31, 1999 the
effective duration of the mortgage-backed securities was 4.4 years with an
average life and current yield of 7.5 years and 7.7 percent, respectively.
<PAGE> 69
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
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, 2000, 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
$6,375,000, $6,800,000 and $4,275,000 of dividends from its insurance
subsidiaries and paid cash dividends to its stockholders totaling $6,771,000,
$6,793,000 and $5,638,000 in 2000, 1999 and 1998, respectively. Total
dividends, including amounts reinvested in shares of the Company's common
stock, amounted to $6,771,000, $6,793,000 and $6,865,000 in 2000, 1999 and
1998, respectively.
As of December 31, 2000, 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.
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 problems as a result of the
Year 2000 date rollover. All of the Company's systems are functioning
normally. In addition, the Company has not encountered any problems with any
vendor-supplied hardware or software. The Company continues to monitor the
situation closely for any potential 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 claims have been reported
relating to Year 2000 losses.
<PAGE> 70
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------
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. In June 2000, the FASB issued SFAS 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment of FASB
statement No. 133". SFAS 138 addresses a limited number of Statement 133
implementation issues, and is effective for 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 these statements will not have any effect on the operating
results of the Company.
In September 2000, the FASB issued SFAS 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement of FASB Statement No. 125". SFAS 140 is effective for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after March 31, 2001 and for recognition and reclassification of collateral
and disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. As a result of the adoption of
SFAS 140 securities on loan to others have been segregated from the other
invested assets on the Company's balance sheet. In addition, the assets and
liabilities of the Company have been grossed up to reflect the collateral
held under the securities lending program and the obligation to return this
collateral upon the return of the loaned securities. Adoption of this
statement had no effect on the operating results of the Company.
DEVELOPMENTS IN INSURANCE REGULATION
In 1998, the NAIC adopted a comprehensive Codification of Statutory
Accounting Principles (Codification), which will replace the current
Accounting Practices and Procedures Manual as the NAIC's primary guidance on
statutory accounting. Codification is intended to provide a consistent and
comprehensive basis of statutory accounting for all insurance companies and
became effective in most states, including the Company's insurance
subsidiaries' states of domicile, on January 1, 2001. The adoption of
Codification will result in changes to the accounting practices that the
Company's insurance subsidiaries use to prepare their statutory financial
statements. One of the more significant changes will be the recording of
deferred taxes. As a result of the adoption of Codification, the statutory
surplus of the Company's insurance subsidiaries increased by approximately
$9,135,000 on January 1, 2001.
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; and other risks and uncertainties inherent
in the Company's business.
<PAGE> 71
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>9
<FILENAME>exh13c.txt
<DESCRIPTION>CONSOLIDATED FINANCIAL STATEMENTS
<TEXT>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. EXHIBIT 13(c)
- -------------------------------------------- -------------
Management's Responsibility for Financial Reporting
The management of EMC Insurance Group Inc. and Subsidiaries is responsible
for the preparation, 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 accounting
principles generally accepted in The United States of America 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, 2000, 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 and Vice President and
Chief Executive Officer Chief Financial Officer
<PAGE> 72
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, 2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Des Moines, Iowa
February 27, 2001
<PAGE> 73
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
2000 1999
------------ ------------
ASSETS
Investments (notes 1 and 9):
Fixed maturities:
Securities held-to-maturity, at amortized cost
(fair value $70,975,728 and $86,263,445) ..... $ 70,202,394 $ 88,056,277
Securities available-for-sale, at fair value
(amortized cost $279,770,031 and $260,109,454) 284,400,891 252,706,015
Equity securities available-for-sale, at fair
value (cost $28,742,915 and $28,494,631) ...... 34,720,458 32,408,272
Short-term investments, at cost ................. 23,388,027 20,164,210
Fixed maturity securities on loan:
Securities held-to-maturity, at amortized cost
(fair value $48,599,702 and $40,415,620) .... 45,509,199 39,147,883
Securities available-for-sale, at fair value
(amortized cost $9,679,449 and $3,610,879) .. 9,755,774 3,475,414
------------ ------------
Total investments ........................... 467,976,743 435,958,071
Cash .............................................. 490,226 1,508,678
Accrued investment income ......................... 7,345,363 6,886,939
Accounts receivable (net of allowance for
uncollectible accounts of $634,000 and $633,000) 274,014 3,293,537
Income taxes recoverable .......................... 735,911 1,537,000
Reinsurance receivables (note 3) .................. 11,925,355 11,129,365
Deferred policy acquisition costs ................. 15,636,753 13,619,192
Deferred income taxes (note 10) ................... 15,445,251 18,121,317
Intangible assets, including goodwill, at cost
less accumulated amortization of $2,481,721
and $2,347,208 .................................. 1,076,099 1,210,612
Prepaid reinsurance premiums (note 3) ............. 1,945,099 1,280,564
Indebtedness of related party (note 2) ............ 3,799,671 -
Securities lending collateral (note 1) ............ 60,254,637 45,818,533
Other assets ...................................... 770,552 2,030,703
------------ ------------
Total assets ................................ $587,675,674 $542,394,511
============ ============
LIABILITIES
Losses and settlement expenses (notes 2, 4 and 5) $286,489,028 $266,514,024
Unearned premiums (note 2) ....................... 73,678,414 64,991,129
Other policyholders' funds ....................... 728,653 1,093,254
Indebtedness to related party (note 2) ........... - 3,886,559
Postretirement benefits (note 12) ................ 6,848,512 6,768,219
Deferred income .................................. 78,212 158,831
Securities lending (note 1) ...................... 60,254,637 45,818,533
Other liabilities ................................ 11,204,902 11,247,685
------------ ------------
Total liabilities .......................... 439,282,358 400,478,234
------------ ------------
STOCKHOLDERS' EQUITY (notes 6, 7 and 13)
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 11,294,220 shares
in 2000 and 11,265,232 shares in 1999 .......... 11,294,220 11,265,232
Additional paid-in capital ....................... 65,546,963 65,333,686
Accumulated other comprehensive income (loss) .... 7,051,920 (3,625,263)
Retained earnings ................................ 64,500,213 68,942,622
------------ ------------
Total stockholders' equity ................. 148,393,316 141,916,277
------------ ------------
Contingent liabilities (notes 3 and 15)
Total liabilities and stockholders' equity $587,675,674 $542,394,511
============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 74
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
REVENUES:
Premiums earned (notes 2 and 3) .... $231,458,442 $211,098,141 $194,244,405
Investment income, net (note 9) .... 29,006,193 25,760,561 24,859,063
Realized investment gains (note 9) 1,557,870 276,673 5,901,049
Other income ....................... 1,473,236 2,194,162 1,700,331
------------ ------------ ------------
263,495,741 239,329,537 226,704,848
------------ ------------ ------------
LOSSES AND EXPENSES (note 2):
Losses and settlement
expenses (notes 3, 4 and 5) ...... 189,521,674 176,876,248 157,876,094
Dividends to policyholders ......... 1,632,961 1,237,368 1,874,900
Amortization of deferred
policy acquisition costs ......... 51,288,479 48,056,918 44,662,641
Other underwriting expenses ........ 18,479,492 17,465,822 17,016,421
Other expenses ..................... 1,508,523 1,684,455 1,600,936
------------ ------------ ------------
262,431,129 245,320,811 223,030,992
------------ ------------ ------------
Income (loss) before income
tax benefit ................ 1,064,612 (5,991,274) 3,673,856
------------ ------------ ------------
INCOME TAX BENEFIT
(note 10):
Current ........................ (307,677) (1,599,826) (1,516,892)
Deferred ....................... (956,742) (3,587,463) (822,117)
------------ ------------ ------------
(1,264,419) (5,187,289) (2,339,009)
------------ ------------ ------------
Net income (loss) ............ $ 2,329,031 $ (803,985) $ 6,012,865
============ ============ ============
Net income (loss) per common share
- basic and diluted .............. $ .21 $ (0.07) $ .53
============ ============ ============
Average number of shares outstanding
- basic and diluted .............. 11,284,885 11,330,705 11,440,592
============ ============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31,
---------------------------------------
2000 1999 1998
------------ ------------ -----------
Net income (loss) .................... $ 2,329,031 $ (803,985) $ 6,012,865
------------ ------------ -----------
OTHER COMPREHENSIVE INCOME (note 9):
Unrealized holding gains (losses)
arising during the period, before
deferred income tax expense
(benefit) ........................ 15,872,363 (15,597,992) 6,460,974
Deferred income tax expense
(benefit) ........................ 4,164,014 (4,070,728) 2,196,732
------------ ------------ -----------
11,708,349 (11,527,264) 4,264,242
------------ ------------ -----------
Reclassification adjustment for
gains included in net income
(loss), before income tax expense (1,562,372) (268,742) (5,866,610)
Income tax expense ................. 531,206 91,372 1,994,647
------------ ------------ -----------
(1,031,166) (177,370) (3,871,963)
------------ ------------ -----------
Other comprehensive income
(loss) ....................... 10,677,183 (11,704,634) 392,279
------------ ------------ -----------
Total comprehensive income
(loss) ....................... $ 13,006,214 $(12,508,619) $ 6,405,144
============ ============ ===========
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 75
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31,
--------------------------------------
2000 1999 1998
------------ ------------ ------------
COMMON STOCK:
Beginning of year ................... $ 11,265,232 $ 11,496,389 $ 11,351,119
Issuance of common stock:
Stock option plans ................ 28,988 23,793 55,102
Dividend reinvestment
plan (note 13) .................. - - 90,168
Repurchase of common stock (note 13) - (254,950) -
------------ ------------ ------------
End of year ......................... 11,294,220 11,265,232 11,496,389
------------ ------------ ------------
ADDITIONAL PAID-IN CAPITAL:
Beginning of year ................... 65,333,686 67,822,412 65,916,681
From issuance of common stock:
Stock option plans ................ 213,277 255,001 722,511
Dividend reinvestment plan ........ - - 1,183,220
Repurchase of common stock .......... - (2,743,727) -
------------ ------------ ------------
End of year ......................... 65,546,963 65,333,686 67,822,412
------------ ------------ ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Beginning of year ................... (3,625,263) 8,079,371 7,687,092
Change in other comprehensive
income ............................ 10,677,183 (11,704,634) 392,279
------------ ------------ ------------
End of year ......................... 7,051,920 (3,625,263) 8,079,371
------------ ------------ ------------
RETAINED EARNINGS:
Beginning of year ................... 68,942,622 76,539,668 77,391,564
Net income (loss) ................... 2,329,031 (803,985) 6,012,865
Dividends on common stock
($.60 per share in 2000, 1999 and
1998):
Cash dividends .................. (6,771,440) (6,793,061) (5,637,687)
Dividends reinvested in shares
of common stock ............... - - (1,227,074)
------------ ------------ ------------
End of year ......................... 64,500,213 68,942,622 76,539,668
------------ ------------ ------------
Total stockholders' equity ........ $148,393,316 $141,916,277 $163,937,840
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 76
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................... $ 2,329,031 $ (803,985) $ 6,012,865
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Losses and settlement expenses .. 19,975,004 20,903,701 24,524,043
Unearned premiums ............... 8,687,285 3,527,078 4,345,359
Other policyholders' funds ...... (364,601) (858,429) (829,861)
Deferred policy acquisition costs (2,017,561) (1,263,710) (1,794,825)
Indebtedness of related party ... (7,686,230) (1,976,126) 5,346,899
Accrued investment income ....... (458,424) (1,021,632) (113,012)
Accrued income taxes:
Current ....................... 801,089 1,687,000 (6,772,000)
Deferred ...................... (956,742) (3,587,463) (822,116)
Realized investment gains ....... (1,557,870) (276,673) (5,901,049)
Postretirement benefits ......... 80,293 750,654 588,652
Reinsurance receivables ......... (795,990) 5,498,426 (3,026,100)
Prepaid reinsurance premiums .... (664,535) (78,827) (6,672)
Amortization of deferred income (80,619) (119,023) (168,824)
Accounts receivable ............. 3,019,523 (514,496) (1,321,729)
Other, net ...................... 1,209,447 590,972 (66,663)
----------- ----------- -----------
19,190,069 23,261,452 13,982,102
Cash provided by the change in
the property and casualty
insurance subsidiaries' pooling
agreement (note 2) ............ - - 5,569,567
----------- ----------- -----------
Net cash provided by
operating activities .... $21,519,100 $22,457,467 $25,564,534
----------- ----------- -----------
<PAGE> 77
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Year ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity
securities held-to-maturity .... $ - $(13,459,272) $(20,959,844)
Maturities of fixed maturity
securities held-to-maturity .... 11,529,551 51,260,724 42,025,415
Purchases of fixed maturity
securities available-for-sale .. (52,060,772) (135,872,298) (57,514,297)
Disposals of fixed maturity
securities available-for-sale .. 27,499,407 81,893,552 22,210,930
Purchases of equity securities
available-for-sale ............. (23,203,788) (24,924,562) (40,789,067)
Disposals of equity securities
available-for-sale ............. 23,451,046 25,037,159 42,941,862
Net (purchases) sales of
short-term investments ......... (3,223,821) 2,495,796 (7,733,017)
------------- ------------- ------------
Net cash used in investing
activities .............. (16,008,377) (13,568,901) (19,818,018)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ......... 242,265 278,794 823,927
Dividends paid to
stockholders (note 13) ......... (6,771,440) (6,793,061) (5,637,687)
Repurchase of common
stock (note 13) ................ - (2,998,677) -
------------ ------------ ------------
Net cash used in financing
activities .............. (6,529,175) (9,512,944) (4,813,760)
------------ ------------ ------------
Net (decrease) increase in cash .... (1,018,452) (624,378) 932,756
Cash at beginning of year .......... 1,508,678 2,133,056 1,200,300
------------ ------------ ------------
Cash at end of year ................ $ 490,226 $ 1,508,678 $ 2,133,056
============ ============ ============
Income taxes (recovered) paid ...... $ (1,108,766) $ (3,294,499) $ 5,236,047
Interest (received) paid ........... $ (23,722) $ 89,032 $ -
See accompanying Notes to Consolidated Financial Statements
<PAGE> 78
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 77 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
accounting principles generally accepted in The United States of America
(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 the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. 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> 79
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, 2000 and 1999 are securities on deposit with
various regulatory authorities as required by law amounting to $12,444,903 and
$12,011,143, 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.
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
- - a replacement of FASB Statement No. 125". SFAS 140 is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after March 31, 2001 and for recognition and reclassification of
collateral and disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. As a result of the
adoption of SFAS 140 securities on loan to others have been segregated from the
other invested assets on the Company's balance sheet. In addition, the assets
and liabilities of the Company have been grossed up to reflect the collateral
held under the securities lending program and the obligation to return this
collateral upon the return of the loaned securities. Adoption of this
statement had no effect on the operating results of the Company.
In June 1998, the 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. In June 2000, the FASB issued SFAS
138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB statement No. 133". SFAS 138 addresses a
limited number of Statement 133 implementation issues, and is effective for
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 these statements will not have
any effect on the operating results of the Company.
<PAGE> 80
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 under two different formulas, depending on
an employee's age and date of service. 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.
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 2000, 1999 and 1998 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.
<PAGE> 81
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
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 to 23.5 percent. 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.
REINSURANCE SUBSIDIARY
The Company's reinsurance subsidiary assumes a 100 percent quota share
portion of Employers Mutual's assumed reinsurance business, exclusive of
certain reinsurance contracts. This includes all premiums and related losses
and settlement expenses of this business, subject to a maximum loss of
$1,500,000 per event. The reinsurance subsidiary does not reinsure any of
Employers Mutual's direct insurance business, nor any "involuntary" facility or
pool business that Employers Mutual assumes pursuant to state law. In
addition, the reinsurance subsidiary is not liable for credit risk in
connection with the insolvency of any reinsurers of Employers Mutual.
Operations of the quota share agreement give rise to intercompany balances with
Employers Mutual, which are settled on a quarterly basis.
Premiums assumed by the reinsurance subsidiary from Employers Mutual
amounted to $47,530,111, $43,546,796 and $39,074,384 in 2000, 1999 and 1998,
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 $10,795,106, $10,156,159 and
$9,862,675 in 2000, 1999 and 1998, 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.
Effective January 1, 2000, the override commission rate was reduced to 4.50
percent of written premiums from 5.25 percent of written premiums because of
good loss experience. Total override commission paid to Employers Mutual
amounted to $2,138,855, $2,286,207 and $2,051,405 in 2000, 1999 and 1998,
respectively. Employers Mutual retained losses and settlement expenses under
this agreement totaling $373,847 in 2000, ($6,484) in 1999 and $144,329 in
1998. 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 $2,122,248, $1,660,950 and $1,648,583 in 2000, 1999 and 1998,
respectively.
<PAGE> 82
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, 2000, reinsurance ceded to two nonaffiliated reinsurers
aggregated $5,804,136, 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> 83
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, 2000 is
presented below.
Year ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Premiums written
Direct ......................... $249,896,499 $228,588,440 $213,134,588
Assumed from nonaffiliates ..... 1,220,442 781,225 1,888,951
Assumed from affiliates ........ 244,762,032 221,051,986 204,964,038
Ceded to nonaffiliates ......... (8,347,822) (7,270,696) (5,808,352)
Ceded to affiliates ............ (249,896,499) (228,588,440) (213,249,508)
------------ ------------ ------------
Net premiums written ......... $237,634,652 $214,562,515 $200,929,717
============ ============ ============
Premiums earned
Direct ......................... $245,078,165 $223,593,165 $202,514,027
Assumed from nonaffiliates ..... 1,194,835 873,710 1,969,067
Assumed from affiliates ........ 237,946,894 217,416,300 197,166,272
Ceded to nonaffiliates ......... (7,683,287) (7,191,869) (5,801,680)
Ceded to affiliates ............ (245,078,165) (223,593,165) (201,603,281)
------------ ------------ ------------
Net premiums earned .......... $231,458,442 $211,098,141 $194,244,405
============ ============ ============
Losses and settlement expenses
incurred
Direct ......................... $208,604,970 $183,031,797 $171,209,604
Assumed from nonaffiliates ..... 400,360 429,244 1,298,167
Assumed from affiliates ........ 194,017,734 182,375,574 171,681,607
Ceded to nonaffiliates ......... (4,896,420) (5,928,570) (7,395,934)
Ceded to affiliates ............ (208,604,970) (183,031,797) (178,917,350)
------------ ----------- ------------
Net losses and settlement
expenses incurred .......... $189,521,674 $176,876,248 $157,876,094
============ ============ ============
<PAGE> 84
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,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Gross reserves at beginning of year $266,514,024 $245,610,323 $217,777,942
Ceded reserves at beginning of year (10,260,815) (15,563,600) (13,030,150)
------------ ------------ ------------
Net reserves at beginning of year,
before adjustments ............... 256,253,209 230,046,723 204,747,792
Adjustment to beginning reserves
due to change in pooling
agreement (note 2) ............... - - 3,600,220
------------ ------------ ------------
Net reserves at beginning of year,
after adjustments ................ 256,253,209 230,046,723 208,348,012
------------ ------------ ------------
Incurred losses and
settlement expenses:
- ----------------------
Provision for insured events
of the current year ............ 191,425,036 182,609,687 168,953,309
Decrease in provision for
insured events of prior years .. (1,903,362) (5,733,439) (11,077,215)
------------ ------------ ------------
Total incurred losses and
settlement expenses ...... 189,521,674 176,876,248 157,876,094
------------ ------------ ------------
Payments:
- ---------
Losses and settlement expenses
attributable to insured events
of the current year ............ 82,912,082 72,970,531 73,228,354
Losses and settlement expenses
attributable to insured events
of prior years ................. 87,598,570 77,699,231 62,949,029
------------ ------------ ------------
Total payments ............. 170,510,652 150,669,762 136,177,383
------------ ------------ ------------
Net reserves at end of year ........ 275,264,231 256,253,209 230,046,723
Ceded reserves at end of year ...... 11,224,797 10,260,815 15,563,600
------------ ------------ ------------
Gross reserves at end of year ...... $286,489,028 $266,514,024 $245,610,323
============ ============ ============
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. The Company has historically experienced favorable development
in its reserves; however, the amount of favorable development experienced will
fluctuate from year to year as individual claims are settled.
<PAGE> 85
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 $2,829,252 and $2,447,811 at December 31, 2000 and 1999, 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, 2000, $10,751,674 was available
for distribution to the Company in 2001 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. This model establishes 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,
2000, 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> 86
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. RECONCILIATION OF STATUTORY NET INCOME AND SURPLUS
The Company's insurance subsidiaries are required to file financial
statements with state regulatory authorities. The accounting principles used
to prepare these statutory financial statements follow prescribed or permitted
accounting practices that differ from GAAP. Prescribed statutory accounting
principles include state laws, regulations and general administrative rules
issued by the state of domicile as well as a variety of publications and
manuals of the NAIC. Permitted accounting practices encompass all accounting
practices not prescribed, but allowed by the state of domicile.
The Company's insurance subsidiaries had no permitted accounting practices
during 2000, 1999 and 1998. A reconciliation of net income and surplus from
that reported on a statutory basis to that reported in the accompanying
consolidated statements on a GAAP basis is as follows:
Year ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Net (loss) income from insurance
subsidiaries, statutory basis .... $ (1,599,085) $ (5,439,665) $ 2,117,464
Change in deferred policy
acquisition costs ................ 2,017,561 1,263,710 1,794,825
Change in other policyholders' funds 364,601 858,429 829,861
GAAP pension expense ............... (691,007) (516,880) (33,749)
GAAP postretirement benefit cost
in excess of statutory cost ...... (409,101) (583,380) (368,061)
Deferred income tax benefit ........ 946,154 3,585,061 815,135
Prior years' income tax expense and
related interest ................. 48,111 (96,134) -
GAAP basis amortization of reserve
discount on commutation of
reinsurance contract ............. 80,619 119,023 168,824
Prior years' NCRF surcharges
(note 3) ......................... - - 1,204,474
Change in estimate of audit-based
premium income, net of expenses .. 1,516,550 - -
Other, net ......................... 105,623 32,487 (568,494)
------------ ------------ ------------
Net income (loss) from insurance
subsidiaries, GAAP basis ......... 2,380,026 (777,349) 5,960,279
Net (loss) income from Parent
Company........................... (50,995) (26,636) 52,586
------------ ------------ ------------
Net income (loss), GAAP basis .... $ 2,329,031 $ (803,985) $ 6,012,865
============ ============ ============
<PAGE> 87
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Surplus from insurance subsidiaries,
statutory basis .................. $110,371,864 $116,151,399 $127,251,446
Deferred policy acquisition costs .. 15,636,753 13,619,192 12,355,482
Other policyholders' funds payable (728,653) (1,093,254) (1,951,683)
Prepaid pension cost ............... 490,163 1,012,770 1,529,650
GAAP postretirement benefit
liability in excess of statutory
liability ........................ (3,822,213) (3,351,848) (2,768,468)
Deferred income tax asset .......... 15,438,611 18,115,065 10,367,904
Goodwill ........................... 1,076,099 1,210,612 1,345,125
Excess of statutory reserves
over statement reserves .......... - - 40,847
GAAP basis reserve discount on
commutation of reinsurance
contract in excess of statutory
recognition ...................... (78,212) (158,831) (277,854)
Unrealized holding gains (losses) on
available-for-sale securities .... 4,681,459 (7,495,349) 9,398,727
Change in estimate of audit-based
premium income, net of expenses .. 1,516,550 - -
Other, net ......................... 214,797 157,632 125,765
------------ ------------ ------------
Equity from insurance
subsidiaries, GAAP basis ......... 144,797,218 138,167,388 157,416,941
Equity from Parent Company ......... 3,596,098 3,748,889 6,520,899
----------- ----------- -----------
Stockholders' equity, GAAP basis .. $148,393,316 $141,916,277 $163,937,840
============ ============ ============
In 1998, the NAIC adopted a comprehensive Codification of Statutory
Accounting Principles (Codification), which will replace the current Accounting
Practices and Procedures Manual as the NAIC's primary guidance on statutory
accounting. Codification is intended to provide a consistent and comprehensive
basis of statutory accounting for all insurance companies and became effective
in most states, including the Company's insurance subsidiaries' states of
domicile, on January 1, 2001. The adoption of Codification will result in
changes to the accounting practices that the Company's insurance subsidiaries
use to prepare their statutory financial statements. One of the more
significant changes will be the recording of deferred taxes. As a result of
the adoption of Codification, the statutory surplus of the Company's insurance
subsidiaries increased by approximately $9,135,000 on January 1, 2001.
Operating results for 2000 include earnings of $1,516,550 associated with
a change in the estimate of additional/return premium income expected on
policies, primarily workers' compensation, subject to audit in the property and
casualty insurance segment. This change in estimate was prompted by additional
research that was conducted in connection with a required change in the tax
accounting method used for recognizing audit-based premiums.
<PAGE> 88
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
note 1, Summary of Significant Accounting Policies.
Summarized financial information for the Company's segments is as
follows:
Property
Year ended and casualty Parent
December 31, 2000 insurance Reinsurance company Consolidated
- ----------------- ------------ ------------ ------------ ------------
Premiums earned ......... $184,985,620 $ 46,472,822 $ - $231,458,442
Underwriting loss ....... (22,280,746) (7,183,418) - (29,464,164)
Net investment income ... 20,787,679 7,873,040 345,474 29,006,193
Realized gains .......... 1,242,233 315,101 536 1,557,870
Other income ............ 1,392,494 80,619 123 1,473,236
Other expenses .......... (1,106,996) - (401,527) (1,508,523)
------------ ------------ ------------ ------------
Income (loss) before
income tax (benefit)
expense ............... $ 34,664 $ 1,085,342 $ (55,394)$ 1,064,612
============ ============ ============ ============
Assets .................. $442,300,700 $142,109,821 $148,566,455 $732,976,976
Eliminations ............ - - (145,301,302)(145,301,302)
------------ ------------ ------------ ------------
Net assets ......... $442,300,700 $142,109,821 $ 3,265,153 $587,675,674
============ ============ ============ ============
Year ended
December 31, 1999
- -----------------
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 .... $ (7,466,483)$ 1,502,009 $ (26,800)$ (5,991,274)
============ ============ ============ ============
Assets .................. $406,695,052 $135,160,508 $142,076,106 $683,931,666
Eliminations ............ - - (141,537,155)(141,537,155)
------------ ------------ ------------ ------------
Net assets ......... $406,695,052 $135,160,508 $ 538,951 $542,394,511
============ ============ ============ ============
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
============ ============ ============ ============
<PAGE> 89
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, 2000 and 1999 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, 2000 cost gains losses value
----------------- ------------ ----------- ------------ ------------
Securities held-to-maturity:
Fixed maturity securities:
U.S. treasury securities
and obligations of
U.S. government
corporations and
agencies ............. $102,230,946 $ 4,084,693 $ (581,938)$105,733,701
Mortgage-backed
securities ........... 13,480,647 361,082 - 13,841,729
------------ ----------- ------------ ------------
Total securities
held-to-maturity $115,711,593 $ 4,445,775 $ (581,938)$119,575,430
============ =========== ============ ============
Securities available-for-
sale:
Fixed maturity securities:
U.S. treasury securities
and obligations of
U.S. government
corporations and
agencies ............. $ 6,603,794 $ 212,480 $ - $ 6,816,274
Obligations of states
and political
subdivisions ......... 79,782,459 2,607,857 (251,346) 82,138,970
Mortgage-backed
securities ........... 43,416,386 1,506,514 - 44,922,900
Debt securities issued
by foreign governments 6,480,421 307,986 - 6,788,407
Public utilities ....... 16,540,299 637,606 (13,691) 17,164,214
Corporate securities ... 136,626,121 1,951,900 (2,252,121) 136,325,900
------------ ----------- ------------ ------------
Total fixed maturity
securities ....... 289,449,480 7,224,343 (2,517,158) 294,156,665
------------ ----------- ------------ ------------
Equity securities:
Common stocks .......... 26,748,905 8,480,378 (2,474,801) 32,754,482
Non-redeemable
preferred stocks ..... 1,994,010 38,216 (66,250) 1,965,976
------------ ----------- ------------ ------------
Total equity
securities ....... 28,742,915 8,518,594 (2,541,051) 34,720,458
------------ ----------- ------------ ------------
Total securities
available-for-sale $318,192,395 $15,742,937 $ (5,058,209)$328,877,123
============ =========== ============ ============
<PAGE> 90
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
============ =========== ============ ============
The amortized cost and estimated fair value of fixed maturity securities
at December 31, 2000, 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 ................... $ 12,601,659 $ 12,779,128
Due after one year through five years ..... 31,460,958 33,675,535
Due after five years through ten years .... 48,936,085 50,104,475
Due after ten years ....................... 9,232,244 9,174,563
Mortgage-backed securities ................ 13,480,647 13,841,729
------------ ------------
Totals ................................ $115,711,593 $119,575,430
============ ============
Securities available-for-sale:
Due in one year or less ................... $ 6,539,167 $ 6,545,415
Due after one year through five years ..... 20,217,882 20,426,763
Due after five years through ten years .... 76,968,301 78,194,318
Due after ten years ....................... 142,307,744 144,067,269
Mortgage-backed securities ................ 43,416,386 44,922,900
------------ ------------
Totals ................................ $289,449,480 $294,156,665
============ ============
<PAGE> 91
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,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Fixed maturity securities
held-to-maturity:
Gross realized investment gains ... $ 536 $ 7,931 $ 34,439
Gross realized investment losses .. (5,038) - -
Fixed maturity securities
available-for-sale:
Gross realized investment gains ... 1,074,068 1,593,437 46,620
Gross realized investment losses .. (7,237) (3,490) (81)
Equity securities
available-for-sale:
Gross realized investment gains ... 3,911,717 2,299,740 7,865,619
Gross realized investment losses .. (3,416,176) (3,620,945) (2,045,548)
---------- ---------- ----------
Totals .......................... $1,557,870 $ 276,673 $5,901,049
========== ========== ==========
During 2000 and 1999, the Company sold approximately $14,000,000 and
$55,000,000, respectively, 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 from the
disposal of these tax-exempt fixed maturity securities amounted to $531,352 for
2000 and $1,589,953 for 1999.
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.
A summary of net investment income is as follows:
Year ended December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Interest on fixed maturities .......... $27,857,760 $24,504,253 $23,496,941
Dividends on equity securities ........ 494,941 582,496 547,238
Interest on short-term investments .... 1,114,594 1,387,774 1,483,167
Fees from securities lending .......... 96,709 21,313 -
----------- ----------- -----------
Total investment income ........... 29,564,004 26,495,836 25,527,346
Investment expenses ................... (557,811) (735,275) (668,283)
----------- ----------- -----------
Net investment income ............. $29,006,193 $25,760,561 $24,859,063
=========== =========== ===========
A summary of net changes in unrealized holding gains (losses) on
securities available-for-sale is as follows:
Year ended December 31,
---------------------------------------
2000 1999 1998
------------ ------------ -----------
Fixed maturity securities ........... $ 12,246,089 $(16,923,379) $ 2,448,942
Applicable income tax expense
(benefit) ......................... 4,163,670 (5,753,949) 832,641
------------ ------------ -----------
Total fixed maturity securities 8,082,419 (11,169,430) 1,616,301
------------ ------------ -----------
Equity securities ................... 2,063,902 1,056,645 (1,854,578)
Applicable income tax expense
(benefit) ......................... 701,728 359,259 (630,556)
------------ ------------ -----------
Total equity securities ......... 1,362,174 697,386 (1,224,022)
------------ ------------ -----------
Deferred tax valuation allowance ... (1,232,590) 1,232,590 -
------------ ------------ -----------
Total available-for-sale
securities .................... $ 10,677,183 $(11,704,634) $ 392,279
============ ============ ===========
<PAGE> 92
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, 2000 and 1999
are as follows:
Year ended December 31,
------------------------
2000 1999
----------- -----------
Loss reserve discounting ........................... $14,278,749 $13,587,146
Unearned premium reserve limitation ................ 4,833,178 4,295,775
Postretirement benefits ............................ 2,039,914 1,935,776
Other policyholders' funds payable ................. 247,742 371,706
Net operating loss carry forward ................... 1,060,347 -
Minimum tax credit ................................. 2,243,133 2,200,598
Net unrealized holding losses ...................... - 1,232,590
Other, net ......................................... 524,725 897,769
----------- -----------
Total gross deferred income tax asset ........ 25,227,788 24,521,360
Valuation allowance ................................ - (1,232,590)
----------- -----------
Total deferred income tax asset .............. 25,227,788 23,288,770
----------- -----------
Deferred policy acquisition costs .................. (5,316,496) (4,630,525)
Net unrealized holding gains ....................... (3,632,808) -
Other, net ......................................... (833,233) (536,928)
----------- -----------
Total gross deferred income tax liability .... (9,782,537) (5,167,453)
----------- -----------
Net deferred income tax asset .............. $15,445,251 $18,121,317
=========== ===========
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.
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 for the years ended December 31, 2000, 1999
and 1998 differed from the "expected" tax expense (benefit) for those years
(computed by applying the United States federal corporate tax rate of 34
percent to income (loss) before income tax benefit) as follows:
Year ended December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Computed "expected" tax expense
(benefit) ........................... $ 361,968 $(2,037,033) $ 1,249,111
Increases (decreases) in
tax resulting from:
Tax-exempt interest income ........ (1,673,566) (2,306,517) (2,464,971)
Change in accrual of prior year
taxes ........................... (470,000) - (550,000)
Change in valuation allowance ..... - (800,000) (400,000)
Proration of tax-exempt interest
and dividends received deduction 193,123 150,159 239,147
Other, net ........................ 324,056 (193,898) (412,296)
----------- ----------- -----------
Income tax benefit .............. $(1,264,419) $(5,187,289) $(2,339,009)
=========== =========== ===========
During 1999 and 1998, the valuation allowance was reduced as the result of
the establishment of VEBA trusts that accelerated the postretirement benefit
deductions and reduced the uncertainty of future realization of the tax
benefits (note 1).
<PAGE> 93
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Comprehensive income tax expense (benefit) included in the consolidated
financial statements for the years ended December 31, 2000, 1999 and 1998 is as
follows:
Year ended December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Income tax (benefit) expense on:
Operations .......................... $(1,264,419) $(5,187,289) $(2,339,009)
Unrealized holding gains (losses) on
revaluation of securities
available-for-sale ................ 3,632,808 (4,162,100) 202,085
----------- ----------- -----------
Comprehensive income tax
expense (benefit) ............. $ 2,368,389 $(9,349,389) $(2,136,924)
=========== =========== ===========
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,
2000 and 1999, respectively:
Year ended December 31,
------------------------
2000 1999
----------- -----------
Change in projected benefit obligation:
Projected benefit obligation at beginning of year .. $81,538,314 $82,478,544
Service cost ....................................... 4,599,973 4,359,955
Interest cost ...................................... 6,097,377 5,426,633
Actuarial loss (gain) .............................. 753,446 (6,565,958)
Benefits paid ...................................... (7,008,595) (5,713,244)
Amendments ......................................... 2,621,323 1,552,384
----------- -----------
Projected benefit obligation at end of year ...... 88,601,838 81,538,314
----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of year ..... 95,824,343 90,099,993
Actual return on plan assets ....................... 6,300,938 11,437,594
Benefits paid ...................................... (7,008,595) (5,713,244)
----------- -----------
Fair value of plan assets at end of year ......... 95,116,686 95,824,343
----------- -----------
Funded status ...................................... 6,514,848 14,286,029
Unrecognized net actuarial gain .................... (9,508,725) (11,562,801)
Unrecognized initial net asset ..................... - (755,787)
Unrecognized prior service costs ................... 5,660,230 3,602,821
----------- -----------
Prepaid pension cost ............................. $ 2,666,353 $ 5,570,262
=========== ===========
The components of net periodic pension cost for the Employers Mutual
defined benefit retirement plan is as follows:
Year ended December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Service cost .......................... $ 4,599,973 $ 4,359,955 $ 3,482,226
Interest cost ......................... 6,097,377 5,426,633 4,835,259
Expected return on plan assets ........ (7,436,949) (7,041,280) (6,980,310)
Recognized net actuarial gain ......... (164,619) - -
Amortization of initial net asset ..... (755,787) (1,049,705) (1,075,440)
Amortization of prior service costs ... 563,914 434,928 437,957
----------- ----------- -----------
Net periodic pension cost ........... $ 2,903,909 $ 2,130,531 $ 699,692
=========== =========== ===========
The weighted average discount rate used to measure the projected benefit
obligation was 7.75 percent for 2000 and 1999 and 6.75 percent for 1998. The
assumed long-term rate of return on plan assets was 8.00 percent for 2000, 1999
and 1998. The rate of increase in future compensation levels used in measuring
the projected benefit obligation was 5.96 percent in 2000, 5.95 percent in 1999
and 5.96 percent in 1998. Pension expense for the Company amounted to
$691,007, $516,880 and $172,985 in 2000, 1999 and 1998, respectively.
<PAGE> 94
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, 2000
and 1999, respectively.
Year ended December 31,
-------------------------
2000 1999
------------ ------------
Change in postretirement benefit obligation:
Benefit obligation at beginning of year ........... $ 31,460,000 $ 35,326,000
Service cost ...................................... 2,066,000 2,370,000
Interest cost ..................................... 2,396,000 2,350,000
Actuarial gain .................................... (157,000) (7,565,000)
Benefits paid ..................................... (1,050,000) (1,021,000)
------------ ------------
Postretirement benefit obligation at end of year 34,715,000 31,460,000
------------ ------------
Change in plan assets:
Fair value of plan assets at beginning of year .... 2,872,000 -
Actual return on plan assets ...................... 81,000 222,000
Employer contributions ............................ 1,450,000 3,671,000
Benefits paid ..................................... (1,050,000) (1,021,000)
------------ ------------
Fair value of plan assets at end of year ........ 3,353,000 2,872,000
------------ ------------
Funded status ..................................... (31,362,000) (28,588,000)
Unrecognized net actuarial gain ................... (2,070,000) (1,988,000)
Unrecognized prior service costs .................. 1,107,000 1,678,000
Employer contributions ............................ 3,075,000 -
------------ ------------
Liability for postretirement benefits ........... $(29,250,000)$(28,898,000)
============ ============
The components of net periodic postretirement benefit cost for the
Employers Mutual postretirement benefit plans is as follows:
Year ended December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Service cost ......................... $ 2,066,000 $ 2,370,000 $ 1,321,000
Interest cost ........................ 2,396,000 2,350,000 1,871,000
Expected return on assets ............ (140,000) (38,000) -
Amortization of net (gain) loss ...... (16,000) 191,000 -
Amortization of prior service costs .. 571,000 571,000 571,000
------------ ------------ ------------
Net periodic postretirement benefit
cost ............................. $ 4,877,000 $ 5,444,000 $ 3,763,000
============ ============ ============
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
2000 is 8 percent, and is assumed to decrease gradually to 5 percent in 2003
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, 2000 by $5,042,000 and the aggregate of the
service and interest cost components of net periodic postretirement benefit
cost for the year ended December 31, 2000 by $841,000. The weighted average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.75 percent for 2000 and 1999 and 6.75 percent for 1998. The
Company's net periodic postretirement benefit cost for the years ended December
31, 2000, 1999 and 1998 was $1,138,231, $1,278,700 and $883,270, respectively.
<PAGE> 95
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 exercise 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 the pool members 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 $26,820,
$59,379 and $97,763 for 2000, 1999 and 1998, respectively.
(a) INCENTIVE STOCK OPTION PLANS
Employers Mutual maintains 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 97
individuals under the 1993 Plan. As of February 27, 2001, 20 eligible
participants remained in the 1982 Plan and 73 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 2000, 265,775 options were granted under the 1993 Plan to eligible
participants at a price of $9.25 and 47,748 options were exercised under the
plans at prices ranging from $7.94 to $11.75. A summary of Employers Mutual's
incentive stock option plans is as follows:
Year ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Options outstanding, beginning of year .. 595,255 574,391 550,444
Granted ................................. 265,775 71,700 87,700
Exercised ............................... (47,748) (43,336) (63,753)
Expired ................................. (3,400) (7,500) -
-------- -------- --------
Options outstanding, end of year ........ 809,882 595,255 574,391
======== ======== ========
Options exercisable, end of year ........ 390,447 361,055 331,771
======== ======== ========
<PAGE> 96
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 2000, 140 employees participated in the plan and exercised a total
of 24,865 options at prices of $12.65 and $9.46. Activity under the plan was
as follows:
Year ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Shares available for purchase,
beginning of year ...................... 352,354 380,009 402,982
Shares purchased under plan .............. (24,865) (27,655) (22,973)
-------- -------- --------
Shares available for purchase, end of year 327,489 352,354 380,009
======== ======== ========
(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 2000,
four directors participated in the plan and exercised a total of 9,032 options
at prices ranging from $7.78 to $9.31. Activity under the plan was as follows:
Year ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Shares available for purchase,
beginning of year ...................... 152,190 162,928 170,368
Shares purchased under plan .............. (9,032) (10,738) (7,440)
-------- -------- --------
Shares available for purchase, end of year 143,158 152,190 162,928
======== ======== ========
<PAGE> 97
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 September 15, 2000, 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,
---------------------------------
2000 1999 1998
--------- --------- ---------
Shares available for purchase,
beginning of year .................. 399,629 792,325 980,904
Additional shares registered ......... 1,000,000 - -
Shares purchased under plan .......... (518,950) (392,696) (188,579)
--------- --------- ---------
Shares available for purchase,
end of year ........................ 880,679 399,629 792,325
========= ========= =========
Range of purchase prices ............. $ 7.50 $ 9.47 $11.25
to to to
$12.66 $12.81 $15.13
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.
<PAGE> 98
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of 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, 2000 amount fair value
- ----------------- ------------ ------------
Fixed maturity securities:
Held-to-maturity ............................ $ 70,202,394 $ 70,975,728
Available-for-sale .......................... 284,400,891 284,400,891
Equity securities available-for-sale .......... 34,720,458 34,720,458
Short-term investments ........................ 23,388,027 23,388,027
Fixed maturity securities on loan:
Held-to-maturity ............................ 45,509,199 48,599,702
Available-for-sale .......................... 9,755,774 9,755,774
December 31, 1999
- -----------------
Fixed maturity securities:
Held-to-maturity ............................ $ 88,056,277 $ 86,263,445
Available-for-sale .......................... 252,706,015 252,706,015
Equity securities available-for-sale .......... 32,408,272 32,408,272
Short-term investments ........................ 20,164,210 20,164,210
Fixed maturity securities on loan:
Held-to-maturity ............................ 39,147,883 40,415,620
Available-for-sale .......................... 3,475,414 3,475,414
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 $769,696 in the event
that the issuing company would be unable to fulfill its obligations.
<PAGE> 99
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. UNAUDITED INTERIM FINANCIAL INFORMATION
Three months ended,
-----------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
2000
- ----
Total revenues ........ $61,144,637 $62,917,075 $66,792,907 $72,641,122
=========== =========== =========== ===========
Income (loss) before
income tax expense
(benefit) ........... $ 2,003,674 $ (293,962) $ 1,428,928 $(2,074,028)
Income tax expense
(benefit) ........... 386,504 (489,810) 224,712 (1,385,825)
----------- ----------- ----------- -----------
Net income (loss) $ 1,617,170 $ 195,848 $ 1,204,216 $ (688,203)
=========== =========== =========== ===========
Net income (loss) per
share
- basic and diluted* $ .14 $ .02 $ .11 $ (.06)
=========== =========== =========== ===========
1999
- ----
Total revenues ........ $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 ........ $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
=========== =========== =========== ===========
* 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.
<PAGE> 100
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>10
<FILENAME>bus00.txt
<DESCRIPTION>BUSINESS SECTION
<TEXT>
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, 2000
[ ] 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, 2001 was $28,336,844.
The number of shares outstanding of the registrant's common stock, $1.00
par value, on March 1, 2001, were 11,298,276.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's annual report to stockholders for the year
ended December 31, 2000 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 19, 2001,
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 .................................. 22
Item 6. Selected Financial Data ......................................... 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 22
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 .......................................... 25
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> 1
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 77 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 (including the Company) and an affiliate,
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
37 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 100 percent quota share
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> 2
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 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.
<PAGE> 3
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, 2000. 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 2000 total 1999 total 1998 total
- ---------------- -------- ----- -------- ----- -------- -----
(Dollars in thousands)
Commercial Lines:
Automobile ............ $177,937 21.2% $157,095 20.8% $131,317 18.9%
Property .............. 135,639 16.2 118,939 15.8 115,815 16.6
Workers' compensation 155,752 18.6 126,285 16.7 117,120 16.8
Liability ............. 141,184 16.8 122,528 16.2 115,377 16.6
Other ................. 17,380 2.0 16,666 2.2 15,470 2.2
-------- ----- -------- ----- -------- -----
Total commercial lines 627,892 74.8 541,513 71.7 495,099 71.1
-------- ----- -------- ----- -------- -----
Personal Lines:
Automobile ............ 134,763 16.1 138,168 18.3 130,693 18.8
Property .............. 73,996 8.8 73,380 9.7 68,365 9.8
Liability ............. 2,634 0.3 2,280 0.3 2,134 0.3
-------- ----- -------- ----- -------- -----
Total personal lines 211,393 25.2 213,828 28.3 201,192 28.9
-------- ----- -------- ----- -------- -----
Total ............ $839,285 100.0% $755,341 100.0% $696,291 100.0%
======== ===== ======== ===== ======== =====
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 17 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 Independent Agency System using
approximately 1,000 agencies.
<PAGE> 4
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, 2000.
2000 1999 1998
------ ------ ------
Alabama ............................ 3.2% 3.7% 3.7%
Arizona ............................ 3.8 3.7 3.7
Illinois ........................... 4.8 4.8 5.2
Iowa ............................... 17.4 18.1 19.3
Kansas ............................. 8.2 7.8 7.8
Michigan ........................... 4.0 3.7 3.6
Minnesota .......................... 3.5 3.6 3.8
Nebraska ........................... 6.9 6.9 7.1
North Carolina ..................... 2.9 2.9 3.2
North Dakota ....................... 3.1 3.2 3.1
Texas .............................. 5.3 4.9 4.4
Wisconsin .......................... 4.5 4.3 4.4
Other * ............................ 32.4 32.4 30.7
----- ----- -----
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' 1999
operating results and financial condition as of December 31, 1999. 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> 5
REINSURANCE CEDED
The parties to the pooling agreement cede insurance in the ordinary course
of business for the purpose of limiting their maximum loss exposure through
diversification of their risks. The pool participants also purchase
catastrophe reinsurance to cover multiple losses arising from a single event.
All major reinsurance treaties, with the exception of the pooling
agreement and a boiler treaty, are on an "excess of loss" basis whereby the
reinsurer agrees to reimburse the primary insurer for covered losses in excess
of a predetermined amount, up to a stated limit. The boiler treaty provides
for 100 percent reinsurance of the pool's direct boiler coverage written.
Facultative reinsurance from approved domestic markets, which provides
reinsurance on an individual risk basis and requires specific agreement of the
reinsurer as to the limits of coverage provided, is purchased when coverage by
an insured is required in excess of treaty capacity or where a high-risk type
policy could expose the treaty reinsurance programs.
Each type of reinsurance coverage is purchased in layers, and each layer
may have a separate retention level. Retention levels are adjusted according
to reinsurance market conditions and the surplus position of 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.
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 was not renewed for year 2000. Had this
reinsurance protection been renewed, there would have been no reinsurance
recoveries in 2000 as the aggregate retention amount would not have been
exceeded.
A summary of the reinsurance treaties benefiting the parties to the
pooling agreement as of December 31, 2000 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
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 .................... $ 750,000 100 percent of $ 4,250,000
Surety ...................... $ 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> 6
The major participants in the pool members' reinsurance programs as of
December 31, 2000 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 48 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 2000
Property per risk, property catastrophe reinsurance Best's
and casualty coverages: protection rating
- --------------------------------------- ----------- ------
Underwriters at Lloyd's of London .................... 20.5% 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
Workers' compensation excess coverage:
- --------------------------------------
American United Life Insurance Company ............... 50.0 A+
Transatlantic Reinsurance Company .................... 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> 7
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, 2000 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..................... $ 5,376,158 $ 1,263,397
Hartford Steam Boiler Inspection & Insurance Company 3,103,477 729,317
NAC Reinsurance Corporation ........................ 1,275,040 299,634
SCOR Reinsurance Company ........................... 996,109 234,086
Transatlantic Reinsurance Company .................. 779,697 183,229
Hartford Fire Insurance Company .................... 774,127 181,920
Signet Star Reinsurance Company .................... 762,110 179,096
Continental Casualty Company........................ 707,987 166,377
GE Reinsurance Company ............................. 583,719 137,174
AXA Reassurance Corporation ........................ 565,571 132,909
Other Reinsurers ................................... 7,498,642 1,762,180
----------- ------------
Total ............................................ $22,422,637 $ 5,269,319
=========== ============
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, 2000 are presented below.
Premiums ceded by
-----------------------
Property
and casualty
All pool insurance
Reinsurer members subsidiaries
- --------- ----------- ------------
Wisconsin Compensation Rating Bureau ............... $ 5,020,105 $ 1,179,725
National Workers' Compensation Reinsurance Pool .... 6,276,358 1,474,944
North Carolina Reinsurance Facility ................ 1,092,739 256,794
Mutual Reinsurance Bureau .......................... 468,510 110,100
Illinois Mine Subsidence Fund ...................... 83,284 19,572
Other Reinsurers ................................... 159,012 37,368
----------- ------------
$13,100,008 $ 3,078,503
=========== ============
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> 8
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,
------------------------------
2000 1999 1998
---- ---- ----
Employers Mutual .................... 1.01 .86 .82
EMCASCO ............................. 2.39 2.03 1.66
Illinois EMCASCO .................... 2.46 2.18 1.87
Dakota Fire ......................... 2.46 2.17 1.79
Farm and City ....................... 2.32 2.04 2.15
EMC Property & Casualty Company ..... .87 .80 .65
Union Insurance Company of Providence .86 .79 .75
Hamilton Mutual ..................... 1.94 1.69 1.41
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The property and casualty insurance subsidiaries' reserve information is
included in the property and casualty loss reserve development for 2000. 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
100 percent 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 of
$1,500,000 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.
<PAGE> 9
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, 2000.
Percent Percent Percent
of of of
Line of Business 2000 total 1999 total 1998 total
- ---------------- ------- ----- ------- ----- ------- -----
(Dollars in thousands)
Pro rata reinsurance:
Property and Casualty .. $14,441 30.4% $12,642 29.0% $15,105 38.7%
Property ............... 7,399 15.6 7,461 17.1 2,601 6.7
Crop ................... 4,188 8.8 4,727 10.8 3,967 10.2
Casualty ............... 5,319 11.2 4,771 11.0 3,919 10.0
Marine/aviation ........ 1,869 3.9 2,289 5.3 1,424 3.6
Other .................. 374 0.8 261 0.6 1,661 4.2
------- ----- ------- ----- ------- -----
Total pro rata reinsurance 33,590 70.7 32,151 73.8 28,677 73.4
------- ----- ------- ----- ------- -----
Excess per risk reinsurance:
Property ............... 3,011 6.3 2,298 5.3 2,099 5.4
Casualty ............... 3,882 8.2 1,979 4.6 2,104 5.4
Other .................. 856 1.8 754 1.7 868 2.2
------- ----- ------- ----- ------- -----
Total excess per
risk reinsurance ...... 7,749 16.3 5,031 11.6 5,071 13.0
------- ----- ------- ----- ------- -----
Excess catastrophe/
aggregate reinsurance:
Property ............... 5,357 11.3 5,674 13.0 4,744 12.1
Crop ................... 297 0.6 330 0.8 284 0.7
Marine/aviation ........ 19 - 20 - 38 0.1
Other .................. 518 1.1 341 0.8 260 0.7
------- ----- ------- ----- ------- -----
Total excess catastrophe/
aggregate reinsurance 6,191 13.0 6,365 14.6 5,326 13.6
------- ----- ------- ----- ------- -----
Total excess reinsurance 13,940 29.3 11,396 26.2 10,397 26.6
------- ----- ------- ----- ------- -----
$47,530 100.0% $43,547 100.0% $39,074 100.0%
======= ===== ======= ===== ======= =====
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. Employers Mutual
competes in the global reinsurance market with numerous reinsurance companies,
many of which have greater financial resources. Competition for reinsurance
business is based on many factors, including financial strength, industry
ratings, stability in products offered and licensing status. In this
competitive environment, reinsurance brokers tend to favor large, financially
strong reinsurance companies who are able to provide "mega" line capacity for
all lines of business. The Company faces the risk that reinsurance brokers may
become more selective and may seek larger and/or more highly rated reinsurance
companies.
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> 10
BEST'S RATING
The most recent Best's Property Casualty Key Rating Guide gives the
reinsurance subsidiary a "A-" (Excellent) policyholders' rating. Best's
ratings are based upon factors of concern to policyholders and insurance agents
and are not necessarily directed toward the protection of investors.
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The reinsurance subsidiary's reserve information is included in the
property and casualty loss reserve development for 2000. 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, 2000. 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,
--------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Property and casualty insurance
Loss ratio ................... 82.2% 83.6% 83.5% 74.3% 70.5%
Expense ratio ................ 30.8 32.0 33.3 32.8 34.3
------ ------ ------ ------ ------
Combined ratio ............. 113.0% 115.6% 116.8% 107.1% 104.8%
====== ====== ====== ====== ======
Reinsurance
Loss ratio ................... 86.1% 83.1% 75.4% 68.4% 68.7%
Expense ratio ................ 29.1 30.6 31.1 34.1 31.5
------ ------ ------ ------ ------
Combined ratio ............. 115.2% 113.7% 106.5% 102.5% 100.2%
====== ====== ====== ====== ======
Total insurance operations
Loss ratio ................... 83.0% 83.5% 81.9% 73.1% 70.0%
Expense ratio ................ 30.5 31.7 32.9 33.1 33.6
------ ------ ------ ------ ------
Combined ratio ............. 113.5% 115.2% 114.8% 106.2% 103.6%
====== ====== ====== ====== ======
Property and casualty insurance
industry averages (1)
Loss ratio ................... 81.5% 78.6% 76.3% 72.8% 78.3%
Expense ratio ................ 28.8 29.2 29.4 28.8 27.5
------ ------ ------ ------ ------
Combined ratio ............. 110.3% 107.8% 105.7% 101.6% 105.8%
====== ====== ====== ====== ======
(1) As reported by A.M. Best Company. The ratio for 2000 is an estimate; the
actual combined ratio is not currently available.
<PAGE> 11
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, 2000:
2000
Amount Percent Best's
recoverable of total rating
----------- -------- ------
Wisconsin Compensation Rating Bureau .. $ 3,167,247 22.8% (1)
National Workers' Compensation
Reinsurance Pool .................... 2,636,889 19.0 (1)
General Reinsurance Corporation ....... 1,061,349 7.7 A++
Hartford Fire Insurance Company ....... 905,322 6.5 A+
Minnesota Workers'Comp Reins Assoc .... 571,487 4.1 (2)
PMA Reinsurance Corporation ........... 502,569 3.6 A+
American Re-Insurance Company ......... 435,887 3.2 A++
NAC Reinsurance Corporation ........... 364,977 2.6 A+
Hartford Steam Boiler Insp. & Ins. .... 361,093 2.6 A+
GE Reinsurance Corporation ............ 348,075 2.5 A++
Other Reinsurers ...................... 3,515,559 25.4
----------- --------
Total ........................... $13,870,454(3) 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 total amount recoverable at December 31, 2000 represented $700,558 in
paid losses and settlement expenses, $11,224,797 in unpaid losses
and settlement expenses and $1,945,099 in unearned premiums.
<PAGE> 12
The effect of reinsurance on premiums written and earned, and losses and
settlement expenses incurred for the three years ended December 31, 2000 is
presented below.
Year ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Premiums written:
Direct ........................ $249,896,499 $228,588,440 $213,134,588
Assumed from nonaffiliates .... 1,220,442 781,225 1,888,951
Assumed from affiliates ....... 244,762,032 221,051,986 204,964,038
Ceded to nonaffiliates ........ (8,347,822) (7,270,696) (5,808,352)
Ceded to affiliates ........... (249,896,499) (228,588,440) (213,249,508)
------------ ------------ ------------
Net premiums written ........ $237,634,652 $214,562,515 $200,929,717
============ ============ ============
Premiums earned:
Direct ........................ $245,078,165 $223,593,165 $202,514,027
Assumed from nonaffiliates .... 1,194,835 873,710 1,969,067
Assumed from affiliates ....... 237,946,894 217,416,300 197,166,272
Ceded to nonaffiliates ........ (7,683,287) (7,191,869) (5,801,680)
Ceded to affiliates ........... (245,078,165) (223,593,165) (201,603,281)
------------ ------------ ------------
Net premiums earned ......... $231,458,442 $211,098,141 $194,244,405
============ ============ ============
Losses and settlement expenses
incurred:
Direct ........................ $208,604,970 $183,031,797 $171,209,604
Assumed from nonaffiliates .... 400,360 429,244 1,298,167
Assumed from affiliates ....... 194,017,734 182,375,574 171,681,607
Ceded to nonaffiliates ........ (4,896,420) (5,928,570) (7,395,934)
Ceded to affiliates ........... (208,604,970) (183,031,797) (178,917,350)
------------ ------------ ------------
Net losses and settlement
expenses incurred ......... $189,521,674 $176,876,248 $157,876,094
============ ============ ============
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.
Changes in reserves for losses and settlement expenses are reflected in
the operating results of the year such changes are recorded.
<PAGE> 13
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, 2000 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,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Gross reserves at beginning of year $266,514,024 $245,610,323 $217,777,942
Ceded reserves at beginning of year (10,260,815) (15,563,600) (13,030,150)
------------ ------------ ------------
Net reserves at beginning of year,
before adjustments ............... 256,253,209 230,046,723 204,747,792
Adjustment to beginning reserves
due to change in pooling
agreement ........................ - - 3,600,220
------------ ------------ ------------
Net reserves at beginning of year,
after adjustments ................ 256,253,209 230,046,723 208,348,012
------------ ------------ ------------
Incurred losses and
settlement expenses:
- ----------------------
Provision for insured events
of the current year ............ 191,425,036 182,609,687 168,953,309
Decrease in provision for
insured events of prior years .. (1,903,362) (5,733,439) (11,077,215)
------------ ------------ ------------
Total incurred losses and
settlement expenses ...... 189,521,674 176,876,248 157,876,094
------------ ------------ ------------
Payments:
- ---------
Losses and settlement expenses
attributable to insured events
of the current year ............ 82,912,082 72,970,531 73,228,354
Losses and settlement expenses
attributable to insured events
of prior years ................. 87,598,570 77,699,231 62,949,029
------------ ------------ ------------
Total payments ............. 170,510,652 150,669,762 136,177,383
------------ ------------ ------------
Net reserves at end of year ........ 275,264,231 256,253,209 230,046,723
Ceded reserves at end of year ...... 11,224,797 10,260,815 15,563,600
------------ ------------ ------------
Gross reserves at end of year ...... $286,489,028 $266,514,024 $245,610,323
============ ============ ============
<PAGE> 14
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. The Company has historically experienced favorable development
in its reserves; however, the amount of favorable development experienced will
fluctuate from year to year as individual claims are settled.
<PAGE> 15
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------------------------------
(Dollars in thousands) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
<S> ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Statutory reserves for losses <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
and settlement expenses ...... $131,623 139,317 180,797 182,072 191,514 196,293 191,892 205,606 230,937 257,201 276,103
Reclassification of reserve
amounts associated with the
National Workers' Compensation
Reinsurance Pool ............. 4,338 6,830 11,364 - - - - - - - -
Retroactive restatement of
reserves in conjunction with
admittance of new participants
into the pooling agreement ... 3,334 4,364 5,314 5,248 6,603 6,809 7,018 3,600 - - -
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Statutory reserves after
reclassification ............. 139,295 150,511 197,475 187,320 198,117 203,102 198,910 209,206 230,937 257,201 276,103
GAAP adjustments:
Salvage and subrogation ...... (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) (839)
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Reserves for losses and
settlement expenses .......... 138,092 149,227 195,449 184,915 195,638 200,004 195,724 208,348 230,047 256,253 275,264
Paid (cumulative) as of:
One year later ............... 42,990 31,577 78,000 60,162 57,247 62,012 59,856 62,949 77,699 87,599 -
Two years later .............. 59,579 79,619 109,985 89,153 88,831 92,626 92,191 99,870 119,620 - -
Three years later ............ 96,796 97,152 127,885 107,372 106,691 112,985 113,343 122,455 - - -
Four years later ............. 106,391 107,114 137,783 116,856 118,705 124,450 126,507 - - - -
Five years later ............. 112,200 112,598 143,876 123,843 126,384 132,044 - - - - -
Six years later .............. 115,858 116,670 148,518 128,931 130,977 - - - - - -
Seven years later ............ 118,725 119,699 151,895 132,036 - - - - - - -
Eight years later ............ 120,122 121,817 154,160 - - - - - - - -
Nine years later ............. 121,763 123,494 - - - - - - - - -
Ten years later .............. 123,148 - - - - - - - - - -
Reserves reestimated as of:
End of year .................. 138,092 149,227 195,449 184,915 195,638 200,004 195,724 208,348 230,047 256,253 275,264
One year later ............... 143,884 155,537 197,008 179,527 179,818 183,760 188,579 197,271 224,313 254,350 -
Two years later .............. 145,101 152,771 192,318 170,653 173,162 182,285 185,465 194,287 225,288 - -
Three years later ............ 143,413 148,867 186,730 166,778 172,118 179,797 181,392 193,505 - - -
Four years later ............. 142,496 148,017 186,133 166,133 170,570 176,176 180,686 - - - -
Five years later ............. 143,063 148,098 186,319 165,548 167,763 175,465 - - - - -
Six years later .............. 143,638 148,686 186,095 163,406 166,764 - - - - - -
Seven years later ............ 144,318 148,991 184,174 161,985 - - - - - - -
Eight years later ............ 144,679 147,579 183,821 - - - - - - - -
Nine years later ............. 143,472 147,260 - - - - - - - - -
Ten years later .............. 143,386 - - - - - - - - - -
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cumulative redundancy
(Deficiency) ................. $ (5,294) 1,967 11,628 22,930 28,874 24,539 15,038 14,843 4,759 1,903 -
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross loss and settlement expense
reserves - end of year (A) .................... $220,703 202,370 209,785 212,231 209,521 221,378 245,610 266,514 286,489
Reinsurance receivables ......................... 25,254 17,455 14,147 12,227 13,797 13,030 15,563 10,261 11,225
-------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss and settlement expense
reserves - end of year ........................ $195,449 184,915 195,638 200,004 195,724 208,348 230,047 256,253 275,264
======== ======= ======= ======= ======= ======= ======= ======= =======
Gross re-estimated reserves - latest (B) ........ $206,125 178,236 181,571 190,986 198,335 208,681 241,135 264,102 286,489
Re-estimated reinsurance receivables - latest ... 22,304 16,251 14,807 15,521 17,649 15,176 15,847 9,752 11,225
-------- ------- ------- ------- ------- ------- ------- ------- -------
Net re-estimated reserves - latest .............. $183,821 161,985 166,764 175,465 180,686 193,505 225,288 254,350 275,264
======== ======= ======= ======= ======= ======= ======= ======= =======
Gross cumulative redundancy (deficiency) (A-B) .. $ 14,578 24,134 28,214 21,245 11,186 12,697 4,475 2,412 -
======== ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE> 16
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 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 a 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, 2000 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,
--------------------------------
2000 1999 1998
---------- ---------- ----------
Losses and settlement expenses incurred:
Asbestos:
Property and casualty insurance ......... $ 518,480 $ 125,687 $ 34,287
Reinsurance ............................. (135,695) (25,971) -
---------- ---------- ----------
382,785 99,716 34,287
---------- ---------- ----------
Environmental:
Property and casualty insurance ......... 96,828 11,227 18,288
Reinsurance ............................. 167,238 223,996 -
---------- ---------- ----------
264,066 235,223 18,288
---------- ---------- ----------
Total loss and settlement expenses
incurred .......................... $ 646,851 $ 334,939 $ 52,575
========== ========== ==========
Loss and settlement expense reserves:
Asbestos:
Property and Casualty insurance ......... $ 715,472 $ 259,148 $ 186,840
Reinsurance ............................. 589,518 753,481 793,624
---------- ---------- ----------
1,304,990 1,012,629 980,464
---------- ---------- ----------
Environmental:
Property and casualty insurance ......... 711,690 724,662 885,578
Reinsurance ............................. 812,572 710,520 506,056
---------- ---------- ----------
1,524,262 1,435,182 1,391,634
---------- ---------- ----------
Total loss and settlement expense
reserves .......................... $2,829,252 $2,447,811 $2,372,098
========== ========== ==========
<PAGE> 17
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, 2000, approximately 61 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 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, primarily cash, equal to 102 percent
of the market value of the loaned securities. The securities on loan to others
have been segregated from the other invested assets on the Company's balance
sheet. In addition, the assets and liabilities of the Company have been
grossed up to reflect the collateral held under the securities lending program
and the obligation to return this collateral upon the return of the loaned
securities.
During 1999 and 2000, the Company sold approximately $55,000,000 and
$14,000,000, respectively, 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 stocks and
preferred stocks. 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 that 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> 18
The following table shows the composition of the Company's investment
portfolio (at amortized cost), by type of security, as of December 31, 2000 and
1999. 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,
--------------------------------------------
2000 1999
--------------------- ---------------------
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 ............. $102,230,946 22.4% $109,055,239 24.8%
Mortgage-backed securities 13,480,647 2.9 18,148,921 4.1
------------ ------- ------------ -------
Total securities held-
to-maturity ............ 115,711,593 25.3 127,204,160 28.9
------------ ------- ------------ -------
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury securities
and obligations of U.S.
government corporations
and agencies ............. 6,603,794 1.4 4,419,411 1.0
Obligations of states and
political subdivisions ... 79,782,459 17.5 96,077,294 21.9
Mortgage-backed
securities ............... 43,416,386 9.5 49,440,943 11.2
Debt securities issued by
foreign governments ...... 6,480,421 1.4 6,479,135 1.5
Public utilities ........... 16,540,299 3.6 8,890,108 2.0
Corporate securities ....... 136,626,121 29.9 98,413,442 22.4
------------ ------- ------------ -------
Total fixed maturity
securities ............. 289,449,480 63.3 263,720,333 60.0
------------ ------- ------------ -------
Equity securities:
Common stocks .............. 26,748,905 5.9 25,853,745 5.9
Non-redeemable preferred
stocks ................... 1,994,010 0.4 2,640,886 0.6
------------ ------- ------------ -------
Total equity securities .. 28,742,915 6.3 28,494,631 6.5
------------ ------- ------------ -------
Total securities
available-for-sale ..... 318,192,395 69.6 292,214,964 66.5
------------ ------- ------------ -------
Short-term investments ......... 23,388,027 5.1 20,164,210 4.6
------------ ------- ------------ -------
Total investments ........ $457,292,015 100.0% $439,583,334 100.0%
============ ======= ============ =======
Fixed maturity securities held by the Company generally have an investment
quality rating of "A" or better by independent rating agencies. The following
table shows the composition of the Company's fixed maturity securities, by
rating, as of December 31, 2000.
Securities Securities
held-to-maturity available-for-sale
(at amortized cost) (at fair value)
Amount Percent Amount Percent
Rating(1) ------------ ------- ------------ -------
AAA ..................... $115,711,593 100.0% $ 97,544,520 33.2%
AA ...................... - - 74,217,973 25.2
A ....................... - - 116,331,622 39.5
BAA ..................... - - 6,062,550 2.1
------------ ------- ------------ -------
Total fixed maturities $115,711,593 100.0% $294,156,665 100.0%
============ ======= ============ =======
(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.
<PAGE> 19
The amortized cost and estimated fair value of fixed maturity securities
at December 31, 2000, 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 ................... $ 12,601,659 $ 12,779,128
Due after one year through five years ..... 31,460,958 33,675,535
Due after five years through ten years .... 48,936,085 50,104,475
Due after ten years ....................... 9,232,244 9,174,563
Mortgage-backed securities ................ 13,480,647 13,841,729
------------ ------------
Totals .................................. $115,711,593 $119,575,430
============ ============
Securities available-for-sale:
Due in one year or less ................... $ 6,539,167 $ 6,545,415
Due after one year through five years ..... 20,217,882 20,426,763
Due after five years through ten years .... 76,968,301 78,194,318
Due after ten years ....................... 142,307,744 144,067,269
Mortgage-backed securities ................ 43,416,386 44,922,900
------------ ------------
Totals .................................. $289,449,480 $294,156,665
============ ============
The mortgage-backed securities shown in the above table include
$48,728,677 of securities issued by government corporations and agencies and
$8,168,356 of collateralized mortgage obligations (CMOs). CMOs are securities
backed by mortgages on real estate, which come due at various times. The
Company has attempted to minimize the prepayment risks associated with
mortgage-backed securities by not investing in "principal only" and "interest
only" CMOs. The CMOs that the Company has invested in are designed to reduce
the risk of prepayment by providing predictable principal payment schedules
within a designated range of prepayments. Investment yields may vary from
those anticipated due to changes in prepayment patterns of the underlying
collateral.
Investment results of the Company for the periods indicated are shown in
the following table:
Year ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Average invested assets (1) ........ $448,437,675 $432,606,548 $412,682,091
Investment income (2) .............. $ 29,006,193 $ 25,760,561 $ 24,859,063
Average yield ...................... 6.47% 5.96% 6.02%
Realized investment gains (3) ...... $ 1,557,870 $ 276,673 $ 5,901,049
(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 amounts for 2000 and 1999 reflect realized gains of $531,352 and
$1,589,953, respectively, resulting from the sale of tax-exempt fixed
maturity securities. The proceeds from the sale 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 sale of the common
stock mutual fund portfolio were reinvested in individual stock issues that
are being managed on a tax-aware basis.
<PAGE> 20
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 1,981 and 65 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 state of domicile, 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.
In 1998, the National Association of Insurance Commissioners (NAIC)
adopted a comprehensive Codification of Statutory Accounting Principles
(Codification), which will replace the current Accounting Practices and
Procedures Manual as the NAIC's primary guidance on statutory accounting.
Codification is intended to provide a consistent and comprehensive basis of
statutory accounting for all insurance companies and became effective in most
states, including the Company's insurance subsidiaries' states of domicile, on
January 1, 2001. The adoption of Codification will result in changes to the
accounting practices that the Company's insurance subsidiaries use to prepare
their statutory financial statements. One of the more significant changes will
be the recording of deferred taxes. As a result of the adoption of
Codification, the statutory surplus of the Company's insurance subsidiaries
increased by approximately $9,135,000 on January 1, 2001.
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, 2000,
$10,751,674 was available for distribution in 2001 to the Company without prior
approval. See note 6 of Notes to Consolidated Financial Statements under Item
8 of this Form 10-K.
<PAGE> 21
The NAIC utilizes a risk-based capital model to help state regulators
assess the capital adequacy of insurance companies and identify
property/casualty insurers that are in (or are perceived as approaching)
financial difficulty by establishing minimum capital needs based on the risks
applicable to the operations of the individual insurer. The risk-based capital
requirements for property and casualty insurance companies measure three major
areas of risk: asset risk, credit risk and underwriting risk. Companies having
less statutory surplus than required by the risk-based capital requirements are
subject to varying degrees of regulatory scrutiny and intervention, depending
on the severity of the inadequacy. At December 31, 2000, 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 $344,000 and $330,000 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.
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, 2000, 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, 2000, 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, 2000, which is included as Exhibit 13(b) to
this Form 10-K, is incorporated herein by reference.
<PAGE> 22
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, 2000, 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, 2000, 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.
------------------------------------
On October 18, 2000, the Board of Directors of EMC Insurance Group Inc.
(the "Company") approved the dismissal of KPMG LLP (KPMG) as the Company's
independent accountants. This dismissal was recommended by the Audit Committee
of the Board of Directors and was effective upon issuance of KPMG's reports on
the consolidated financial statements of the Company and Subsidiaries for the
year ended December 31, 2000.
The audit reports of KPMG on the consolidated financial statements of the
Company and Subsidiaries for the years ended December 31, 2000 and 1999 did not
contain an adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope, or accounting principles.
During the audits of the years ended December 31, 2000 and 1999 and the
interim periods preceding their dismissal, there were no disagreements with
KPMG on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
The Company requested that KPMG furnish it with a letter addressed to the
Securities and Exchange Commission (SEC) stating whether or not KPMG agrees
with the above statements. A copy of KPMG's letter to the SEC dated March 23,
2001 is filed as Exhibit 16 to this Form 10-K.
The Board of Directors of EMC Insurance Group Inc. approved the engagement
of Ernst & Young LLP as the Company's new independent accountants effective
January 1, 2001.
<PAGE> 23
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 23, 2001, 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 47 President and Chief Executive Officer of the
Company and of Employers Mutual since 1992.
Treasurer of Employers Mutual from 1996 until
2000 and the Company from 1996 until February
2001. He was President and Chief Operating
Officer of the Company and Employers Mutual
from 1991 to 1992 and 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 66 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
was employed by Employers Mutual from 1959
until his retirement on March 1, 2001.
William A. Murray 54 Executive Vice President and Chief Operating
Officer of the Company and Employers Mutual
effective March 1, 2001. He was Resident Vice
President and Branch Manager of Employers
Mutual from 1992 until 2001. He has been
employed by Employers Mutual since 1985.
Ronald W. Jean 51 Executive Vice President for Corporate
Development of the Company and Employers
Mutual since 2000. He was Senior Vice
President - Actuary of the Company and
Employers Mutual from 1997 until 2000. He
was Vice President - Actuary of the Company
and Employers Mutual from 1985 until 1997.
He has been employed by Employers Mutual since
1979.
John D. Isenhart 63 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 63 Senior Vice President - Underwriting
of the Company since 1998 and of Employers
Mutual since 1997. She was Vice President -
Underwriting of the Company and Employers
Mutual from 1992 until 1998. She was employed
by Employers Mutual from 1971 until her
retirement on January 1, 2001.
<PAGE> 24
NAME AGE POSITION
Raymond W. Davis 55 Senior Vice President - Investments of the
Company and Employers Mutual since 1998.
Treasurer of the Company effective February
28, 2001 and of Employers Mutual since 2000.
He was Vice President - Investments of the
Company and of Employers Mutual from 1985
until 1998. He has been employed by Employers
Mutual since 1979.
Donald D. Klemme 55 Senior Vice President - Administration and
Secretary of the Company since 1998. Senior
Vice President - Administration of Employers
Mutual since 1998. He was Vice President -
Administration and Secretary of the Company
from 1996 until 1998 and was Vice President -
Director of Internal Audit prior to that. He
has been employed by Employers Mutual since
1972.
David O. Narigon 48 Senior Vice President - Claims of the Company
and of Employers Mutual since 1998. He was
Vice President - Claims of the Company from
1988 until 1998. He has been employed by
Employers Mutual since 1983.
Mark E. Reese 43 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 23, 2001, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- ---------------------------------------------------------------
See the information under the captions "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Company's
Proxy Statement in connection with its Annual Meeting to be held on May 23,
2001, 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 23, 2001, which information is incorporated herein
by reference.
<PAGE> 25
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 ................................ 14*
Consolidated Balance Sheets, December 31, 2000 and 1999 ..... 15*
Consolidated Statements of Income for the Years ended
December 31, 2000, 1999 and 1998 ......................... 16*
Consolidated Statements of Comprehensive Income for the
Years ended December 31, 2000, 1999 and 1998 ............. 16*
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 2000, 1999 and 1998 ............. 17*
Consolidated Statements of Cash Flows for the Years ended
December 31, 2000, 1999 and 1998 ......................... 18*
Notes to Consolidated Financial Statements .................. 20-41*
* Refers to the respective page of the financial information insert of
EMC Insurance Group Inc.'s 2000 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.
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.
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.
<PAGE> 26
(b) Reports on Form 8-K.
On October 19, 2000, the Company filed a report on Form 8-K related to a
change in the Company's independent accountants.
(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.
(b) 1999 Senior Executive Compensation Bonus Program. (Incorporated
by reference to the Company's Form 10-K for the calendar year
ended December 31, 1999.)
(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.
<PAGE> 27
13. Annual Report to Security Holders.
(a) Selected Financial Data from the Company's 2000 Annual Report to
Stockholders.
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations from the Company's 2000 Annual Report to
Stockholders.
(c) Consolidated Financial Statements from the Company's 2000
Annual Report to Stockholders.
(d) Stockholder Information from the Company's 2000 Annual Report to
Stockholders.
16. Letter from KPMG LLP to Securities and Exchange Commission.
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> 28
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 23, 2001.
EMC INSURANCE GROUP INC.
/s/ Bruce G. Kelley
-----------------------
Bruce G. Kelley
President 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 23, 2001.
/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> 29
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
The Board of Directors and Stockholders
EMC Insurance Group Inc.:
Under date of February 27, 2001, we reported on the consolidated balance
sheets of EMC Insurance Group Inc. and Subsidiaries as of December 31, 2000
and 1999, 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, 2000, as contained in Part II, Item 8 of
Form 10-K for the year 2000. 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 27, 2001
<PAGE> 30
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule I - Summary of Investments -
Other Than Investments in Related Parties
December 31, 2000
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 .............. $102,230,946 $105,733,701 $102,230,946
Mortgage-backed securities ..... 13,480,647 13,841,729 13,480,647
------------ ------------ ------------
Total fixed maturity
securities ............. 115,711,593 119,575,430 115,711,593
------------ ------------ ------------
Securities available-for-sale:
Fixed maturities:
United States Government
and government agencies
and authorities .............. 6,603,794 6,816,274 6,816,274
States, municipalities and
political subdivisions ....... 79,782,459 82,138,970 82,138,970
Mortgage-backed securities ..... 43,416,386 44,922,900 44,922,900
Debt securities issued by
foreign governments .......... 6,480,421 6,788,407 6,788,407
Public utilities ............... 16,540,299 17,164,214 17,164,214
Corporate securities ........... 136,626,121 136,325,900 136,325,900
------------ ------------ ------------
Total fixed maturity
securities ............. 289,449,480 294,156,665 294,156,665
------------ ------------ ------------
Equity securities:
Common stocks
Public utilities ............. 1,103,333 1,635,243 1,635,243
Banks, trust and insurance
companies .................. 1,856,015 3,096,091 3,096,091
Industrial, miscellaneous and
all other ................... 23,789,557 28,023,148 28,023,148
Non-redeemable preferred
stocks ..................... 1,994,010 1,965,976 1,965,976
------------ ------------ ------------
Total equity securities .. 28,742,915 34,720,458 34,720,458
------------ ------------ ------------
Short-term investments ............. 23,388,027 23,388,027 23,388,027
------------ ------------ ------------
Total investments ...... $457,292,015 $471,840,580 $467,976,743
============ ============ ============
<PAGE> 31
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31,
--------------------------
2000 1999
------------ ------------
ASSETS
- ------
Investment in common stock of
subsidiaries (equity method) .................. $144,797,218 $138,167,388
Fixed maturity investments:
Securities held-to-maturity, at amortized cost - 1,999,431
Securities available-for-sale, at market value 1,530,000 1,467,525
Short-term investments .......................... 2,157,665 337,525
Cash ............................................ 27,383 5,008
Accrued investment income ....................... 41,333 78,409
Income taxes recoverable ........................ 6,000 12,000
Accounts receivable ............................. 216 2,568
Deferred tax asset .............................. 6,640 6,252
------------ ------------
Total assets ............................... $148,566,455 $142,076,106
============ ============
LIABILITIES
- -----------
Accounts payable ................................ $ 142,103 $ 127,548
Indebtedness to related party ................... 31,036 32,281
------------ ------------
Total liabilities .......................... 173,139 159,829
------------ ------------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 11,294,220 shares
in 2000 and 11,265,232 shares in 1999 ......... 11,294,220 11,265,232
Additional paid-in capital ...................... 65,546,963 65,333,686
Accumulated other comprehensive income (loss) ... 7,051,920 (3,625,263)
Retained earnings ............................... 64,500,213 68,942,622
------------ ------------
Total stockholders' equity ................. 148,393,316 141,916,277
------------ ------------
Total liabilities and stockholders' equity $148,566,455 $142,076,106
============ ============
<PAGE> 32
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Condensed Statements of Income
Years ended December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Equity in undistributed (loss) earnings
of subsidiaries ..................... $(3,995,078) $(7,577,404) $ 1,685,244
Dividends received from subsidiaries .. 6,375,104 6,800,055 4,275,035
Investment income ..................... 345,474 364,042 463,889
Realized investment gains ............. 536 - -
Other income .......................... 123 52 -
----------- ----------- -----------
2,726,159 (413,255) 6,424,168
Operating expenses .................... 401,527 390,894 387,056
----------- ----------- -----------
Income (loss) before income tax
(benefit) expense ................ 2,324,632 (804,149) 6,037,112
Income tax (benefit) expense .......... (4,399) (164) 24,247
----------- ----------- -----------
Net income (loss) ....... $ 2,329,031 $ (803,985) $ 6,012,865
=========== =========== ===========
Condensed Statements of Comprehensive Income
Years ended December 31,
---------------------------------------
2000 1999 1998
------------ ------------ -----------
Net income (loss) ................... $ 2,329,031 $ (803,985) $ 6,012,865
------------ ------------ -----------
Other Comprehensive Income:
Unrealized holding gains (losses)
arising during the period, net
of deferred income tax expense
(benefit) ....................... 11,708,349 (11,527,264) 4,264,242
Reclassification adjustment for
gains included in net income
(loss), net of income tax expense (1,031,166) (177,370) (3,871,963)
------------ ------------ -----------
Other comprehensive income
(loss) ...................... 10,677,183 (11,704,634) 392,279
------------ ------------ -----------
Total comprehensive income
(loss) ...................... $ 13,006,214 $(12,508,619) $ 6,405,144
============ ============ ===========
<PAGE> 33
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Condensed Statements of Cash Flows
Years ended December 31,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
Net cash provided by
operating activities ................ $ 6,371,690 $ 6,740,085 $ 4,015,569
----------- ----------- -----------
Cash flows from investing activities:
Disposals of fixed maturity
securities held-to-maturity ....... 2,000,000 2,000,000 2,500,000
Purchases of fixed maturity
securities available-for-sale ..... - (1,500,000) -
Net (purchases) sales of short-term
investments ...................... (1,820,140) 2,215,419 (1,643,245)
Net cash provided by
investing activities ........... 179,860 2,715,419 856,755
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock ........... 242,265 278,794 823,927
Dividends paid to stockholders ..... (6,771,440) (6,793,061) (5,637,687)
Repurchase of common stock ......... - (2,998,677) -
----------- ----------- -----------
Net cash used in financing
activities ..................... (6,529,175) (9,512,944) (4,813,760)
----------- ----------- -----------
Net increase (decrease) in cash ....... 22,375 (57,440) 58,564
Cash at beginning of year ............. 5,008 62,448 3,884
----------- ----------- -----------
Cash at end of year ................... $ 27,383 $ 5,008 $ 62,448
=========== =========== ===========
Income taxes paid ..................... $ 189 $ 31,952 $ 50,229
Interest paid ......................... $ - $ 285 $ -
<PAGE> 34
<TABLE>
<CAPTION>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information
For Years Ended December 31, 2000, 1999 and 1998
Deferred Losses and Losses and
policy settlement Net settlement
acquisition expense Unearned Premium investment expenses
Segment costs reserves premiums revenue income incurred
------- ----------- ------------ ----------- ------------ ----------- ------------
<S>
Year ended December 31, 2000: <C> <C> <C> <C> <C> <C>
Property and casualty insurance $13,777,831 $209,365,347 $65,228,769 $184,985,620 $20,787,679 $149,518,346
Reinsurance ................... 1,858,922 77,123,681 8,449,645 46,472,822 7,873,040 40,003,328
Parent company ................ - - - - 345,474 -
----------- ------------ ----------- ------------ ----------- ------------
Consolidated ............. $15,636,753 $286,489,028 $73,678,414 $231,458,442 $29,006,193 $189,521,674
=========== ============ =========== ============ =========== ============
Year ended December 31, 1999:
Property and casualty insurance $11,992,874 $194,872,984 $57,598,773 $167,265,093 $18,282,642 $140,481,323
Reinsurance ................... 1,626,318 71,641,040 7,392,356 43,833,048 7,113,877 36,394,925
Parent company ................ - - - - 364,042 -
----------- ------------ ----------- ------------ ----------- ------------
Consolidated ............. $13,619,192 $266,514,024 $64,991,129 $211,098,141 $25,760,561 $176,876,248
=========== ============ =========== ============ =========== ============
Year ended December 31, 1998:
Property and casualty insurance $10,666,188 $182,529,015 $53,785,443 $155,523,486 $17,635,076 $128,666,666
Reinsurance ................... 1,689,294 63,081,308 7,678,608 38,720,919 6,760,098 29,209,428
Parent company ................ - - - - 463,889 -
----------- ------------ ----------- ------------ ----------- ------------
Consolidated ............. $12,355,482 $245,610,323 $61,464,051 $194,244,405 $24,859,063 $157,876,094
=========== ============ =========== ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
Amortization
of deferred
policy Other
acquisition underwriting Premiums
Segment costs expenses written
------- ------------ ------------ -----------
<S>
Year ended December 31, 2000: <C> <C> <C>
Property and casualty insurance $ 40,675,773 $ 15,439,286 $190,104,541
Reinsurance ................... 10,612,706 3,040,206 47,530,111
Parent company ................ - - -
------------ ------------ ------------
Consolidated ............. $ 51,288,479 $ 18,479,492 $237,634,652
============ ============ ============
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
============ ============ ============
</TABLE>
<PAGE> 35
<TABLE>
<CAPTION>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule IV - Reinsurance
For years ended December 31, 2000, 1999 and 1998
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
------------ ------------ ------------ ------------ ---------
<S>
Year ended December 31, 2000: <C> <C> <C> <C> <C>
Consolidated earned premiums ........... $245,078,165 $252,761,452 $239,141,729 $231,458,442 103.3%
============ ============ ============ ============ ==========
Year ended December 31, 1999:
Consolidated earned premiums ........... $223,593,165 $230,785,034 $218,290,010 $211,098,141 103.4%
============ ============ ============ ============ ==========
Year ended December 31, 1998:
Consolidated earned premiums ........... $202,514,027 $207,404,961 $199,135,339 $194,244,405 102.5%
============ ============ ============ ============ ==========
</TABLE>
<PAGE> 36
<TABLE>
<CAPTION>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule VI - Supplemental Insurance Information Concerning
Property-Casualty Insurance Operations
For Years Ended December 31, 2000, 1999 and 1998
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, 2000: $15,636,753 $286,489,028 $ -0- $73,678,414 $231,458,442 $28,660,719
=========== ============ ======== =========== ============ ===========
Year ended December 31, 1999: $13,619,192 $266,514,024 $ -0- $64,991,129 $211,098,141 $25,396,519
=========== ============ ======== =========== ============ ===========
Year ended December 31, 1998: $12,355,482 $245,610,323 $ -0- $61,464,051 $194,244,405 $24,395,174
=========== ============ ======== =========== ============ ===========
</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, 2000: $191,425,036 ($ 1,903,362) $ 51,288,479 $170,510,652 $237,634,652
============ =========== ============ ============ ============
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
============ =========== ============ ============ ============
</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.
<PAGE> 37
EMC Insurance Group Inc. and Subsidiaries
Index to Exhibits
Exhibit
number Item Page number
------ ---- -----------
10(a) Quota Share Reinsurance Contract between
Employers Mutual Casualty Company and
EMC Reinsurance Company. 39-53
10(l) Employers Mutual Casualty Company
Supplemental Executive Retirement Plan. 54-59
13(a) Selected Financial Data. 60
13(b) Management's Discussion and Analysis 61-71
of Financial Condition and Results
of Operations.
13(c) Financial Statements and Supplementary 72-100
Data.
13(d) Stockholder Information. 101
16 Letter from KPMG LLP to Securities and
Exchange Commission. 102
21 Subsidiaries of the Registrant. 103
23 Consent of KPMG LLP with respect to 104
Forms S-8 and Form S-3.
24 Power of Attorney. 105
<PAGE> 38
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-16
<SEQUENCE>11
<FILENAME>exh16.txt
<DESCRIPTION>KPMG LLP LETTER RE CHANGE IN ACCOUNTANT
<TEXT>
EXHIBIT 16
----------
LETTER RE CHANGE IN CERTIFYING ACCOUNTANT
March 23, 2001
Securities and Exchange Commission
Washington, DC 20549
Ladies and Gentlemen:
We were previously the principal accountants for EMC Insurance Group Inc. and,
under the date of February 27, 2001, we reported on the consolidated financial
statements of EMC Insurance Group Inc. and subsidiaries as of and for the years
ended December 31, 2000 and 1999. On October 18, 2000, we were notified by the
management of EMC Insurance Group Inc. that the client-auditor relationship
would cease upon completion of our audit of EMC Insurance Group Inc.'s
consolidated financial statements as of and for the year ended December 31,
2000, and the issuance of our report thereon. We have read EMC Insurance Group
Inc.'s statements included under Item 9 of its Form 10-K dated March 23, 2001,
and we agree with such statements, except that we are not in a position to
agree or disagree with EMC Insurance Group Inc.'s statement that the change was
approved by the board of directors.
KPMG LLP
<PAGE> 102
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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