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<SEC-DOCUMENT>0000356130-04-000050.txt : 20040927
<SEC-HEADER>0000356130-04-000050.hdr.sgml : 20040927
<ACCEPTANCE-DATETIME>20040927113142
ACCESSION NUMBER: 0000356130-04-000050
CONFORMED SUBMISSION TYPE: 10-K/A
PUBLIC DOCUMENT COUNT: 16
CONFORMED PERIOD OF REPORT: 20031231
FILED AS OF DATE: 20040927
DATE AS OF CHANGE: 20040927
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/A
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-10956
FILM NUMBER: 041046431
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>10-K/A
<SEQUENCE>1
<FILENAME>business.txt
<DESCRIPTION>BUSINESS SECTION
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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. [X] Yes [ ] 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]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). [ ] Yes [X] No
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 30, 2003 was $40,895,145.
The number of shares outstanding of the registrant's common stock, $1.00
par value, on March 5, 2004, were 11,534,691.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's annual report to stockholders for the
year ended December 31, 2003 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 16,
2004, are incorporated by reference under Part III.
EXPLANATORY NOTE
EMC Insurance Group Inc. is filing this amendment on Form 10-K/A in
response to comments received from the staff of the Securities and Exchange
Commission (SEC) in connection with its review of EMC Insurance Group Inc.'s
registration statement on Form S-1 (Registration No. 333-117406).
This amendment makes changes to Part I - Item 1, "Business" and
Part II - Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The primary changes were made to clarify the
critical accounting policies of the Company, expand the discussions relating
to changes in loss and settlement expense reserve estimates of prior periods,
expand the discussions relating to liquidity and capital resources and
include a contractual obligations table.
Unless otherwise stated, all information contained in this amendment is
as of March 29, 2004, the filing date of the Company's original Annual Report
on Form 10-K.
<PAGE>
TABLE OF CONTENTS
Part I
Item 1. Business ........................................................ 2
Item 2. Properties ...................................................... 28
Item 3. Legal Proceedings ............................................... 28
Item 4. Submission of Matters to a Vote of Security Holders ............. 28
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters .................................. 28
Item 6. Selected Financial Data ......................................... 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 28
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ...... 28
Item 8. Financial Statements and Supplementary Data ..................... 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .......................... 29
Item 9A. Controls and Procedures ......................................... 29
Part III
Item 10. Directors and Executive Officers of the Registrant .............. 29
Item 11. Executive Compensation .......................................... 30
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters ............... 30
Item 13. Certain Relationships and Related Transactions .................. 31
Item 14. Principal Accounting Fees and Services .......................... 31
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K .................................................. 32
Index to Financial Statement Schedules ................................... 32
Signatures ............................................................... 35
Index to Exhibits ........................................................ 44
<PAGE>
PART I
ITEM 1. BUSINESS.
- ------- ---------
GENERAL
- -------
EMC Insurance Group Inc. is an insurance holding company incorporated in
Iowa in 1974. EMC Insurance Group Inc. is 80.9 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 and was redomesticated to
Iowa in 2001, 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").
EMC Reinsurance Company 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.
<PAGE>
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 7 of Notes to Consolidated Financial Statements
under Item 8 of this Form 10-K.
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. The aggregate participation of the Company's
property and casualty insurance subsidiaries is 23.5 percent. Operations of
the pool give rise to inter-company balances with Employers Mutual, which are
settled on a quarterly basis. Effective December 31, 2003, the pooling
agreement was amended to provide that Employers Mutual will make up any
shortfall or difference resulting from an error in its systems and/or
computational processes that would otherwise result in the required
restatement of the pool participants' financial statements. The investment
and income tax activities of the pool participants are not subject to the
pooling agreement.
On January 22, 2004, the Company announced that Farm and City Insurance
Company, its wholly-owned subsidiary, would discontinue writing nonstandard
risk automobile insurance and institute non-renewal procedures on all existing
business. Farm and City will continue to participate in the pooling agreement
even though it will no longer write any direct business.
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. The pooling agreement is continuous, but may be amended or
terminated at the end of any calendar year as to any one or more parties.
<PAGE>
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, 2003.
Percent Percent Percent
of of of
Line of Business 2003 total 2002 total 2001 total
- ---------------- ---------- ----- ---------- ----- -------- -----
(Dollars in thousands)
Commercial Lines:
Automobile .......... $ 239,960 21.6% $ 224,321 21.5% $216,371 21.7%
Property ............ 202,124 18.2 180,622 17.3 162,670 16.4
Workers' compensation 209,171 18.8 194,853 18.7 208,652 21.0
Liability ........... 213,150 19.1 195,682 18.8 176,774 17.8
Other ............... 22,524 2.0 20,489 2.0 19,325 1.9
---------- ----- ---------- ----- -------- -----
Total commercial
lines ............ 886,929 79.7 815,967 78.3 783,792 78.8
---------- ----- ---------- ----- -------- -----
Personal Lines:
Automobile .......... 128,671 11.5 134,405 12.9 126,280 12.7
Property ............ 95,550 8.6 89,248 8.6 81,124 8.2
Liability ........... 1,972 0.2 1,815 0.2 3,284 0.3
---------- ----- ---------- ----- -------- -----
Total personal lines 226,193 20.3 225,468 21.7 210,688 21.2
---------- ----- ---------- ----- -------- -----
Total .......... $1,113,122 100.0% $1,041,435 100.0% $994,480 100.0%
========== ===== ========== ===== ======== =====
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 16 branch offices located throughout the United States and
approximately 3,150 independent insurance agencies. These branch offices
allow the Company to respond quickly to changes in local market conditions.
Each branch office employs underwriting, claims, marketing and risk
improvement representatives, as well as field auditors and branch
administrative technicians. The branch offices are supported by technicians
and specialists that operate out of Employers Mutual's home office. Systems
are in place to monitor the underwriting results of each branch office and to
maintain guidelines and policies consistent with the underwriting and
marketing environment in each region.
Farm and City had specialized 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 were solicited through the Independent Agency System using
approximately 725 agencies.
<PAGE>
The following table sets forth the geographic distribution of the
aggregate direct written premiums of all parties to the pooling agreement for
the three years ended December 31, 2003.
2003 2002 2001
---- ---- ----
Arizona ............................ 3.6 3.8 3.8
Illinois ........................... 4.3 4.7 5.1
Iowa ............................... 15.4 15.9 16.8
Kansas ............................. 8.9 8.8 8.8
Michigan ........................... 4.9 5.1 4.2
Minnesota .......................... 3.3 3.3 3.5
Nebraska ........................... 6.9 6.8 7.0
North Carolina ..................... 2.9 2.7 3.1
Pennsylvania ....................... 3.1 3.1 2.8
Texas .............................. 4.9 5.0 5.2
Wisconsin .......................... 5.5 5.0 5.0
Other * ............................ 36.3 35.8 34.7
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
* Includes all other jurisdictions, none of which accounted for more than
3 percent.
COMPETITION
The property and casualty insurance business is very 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. Because
the insurance products of the pool members are marketed exclusively through
independent agencies, the Company faces competition to retain qualified
independent agencies, as well as competition within the agencies. The pool
members also compete with direct writers, who utilize salaried employees and
generally offer their products at a lower cost, exclusive agencies who write
insurance business for only one company, and to a lesser extent, Internet-
based enterprises. The pool members utilize a profit-sharing plan as an
incentive for the independent agencies to place high-quality insurance
business with them.
<PAGE>
BEST'S RATING
A.M. Best Company rates insurance companies based on their relative
financial strength and ability to meet their contractual obligations. A.M.
Best announced on July 10, 2001 that their rating of the EMC Insurance
Companies, which includes the Company's property and casualty insurance
subsidiaries, was changed from "A" (Excellent) to "A-" (Excellent). This
rating action reflected A.M. Best's opinion of the EMC Insurance Companies'
underwriting performance and operating losses during the three years ended
December 31, 2000. Despite this rating action, A.M. Best stated that the EMC
Insurance Companies' "Excellent" rating reflects its strong capitalization,
conservative operating strategies and local-market presence. 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 that have achieved excellent
overall performance and have a strong ability to meet their obligations over a
long period of time. Best's ratings are based upon factors of concern to
policyholders and insurance agents and are not necessarily directed toward the
protection of investors.
REINSURANCE CEDED
The parties to the pooling agreement cede insurance in the ordinary
course of business for the purpose of limiting their maximum loss exposure
through diversification of their risks. The pool participants also purchase
catastrophe reinsurance to cover multiple losses arising from a single event.
All major reinsurance treaties, with the exception of the pooling
agreement and a boiler treaty, are on an "excess of loss" basis whereby the
reinsurer agrees to reimburse the primary insurer for covered losses in excess
of a predetermined amount, up to a stated limit. The boiler treaty provides
for 100 percent reinsurance of the pool's direct boiler coverage written.
Facultative reinsurance from approved domestic markets, which provides
reinsurance on an individual risk basis and requires specific agreement of the
reinsurer as to the limits of coverage provided, is purchased when coverage by
an insured is required in excess of treaty capacity or where a high-risk type
policy could expose the treaty reinsurance programs.
Each type of reinsurance coverage is purchased in layers, and each layer
may have a separate retention level. Retention levels are adjusted according
to reinsurance market conditions and the surplus position of the EMC Insurance
Companies. The inter-company pooling arrangement aids efficient buying of
reinsurance since it allows for higher retention levels and correspondingly
decreased dependence on the reinsurance marketplace.
<PAGE>
A summary of the reinsurance treaties benefiting the parties to the
pooling agreement during 2003 is presented below. Retention amounts reflect
the accumulated retentions of all layers within a treaty.
Type of Reinsurance Treaty Retention Limits
-------------------------- ----------- --------------------------
Property per risk ........... $ 3,000,000 100 percent of $37,000,000
Property catastrophe ........ $13,950,000 96 percent of $79,000,000
Casualty .................... $ 2,000,000 100 percent of $38,000,000
Workers' compensation excess $ - $20,000,000 excess of
$40,000,000
Umbrella .................... $ 2,000,000 100 percent of $ 8,000,000
Fidelity .................... $ 1,200,000(1) 95 percent of $ 4,000,000
Surety ...................... $ 2,200,000(1) 91 percent of $14,000,000
Non-obligatory surety
quota share ............... $10,500,000 70 percent of $35,000,000
Boiler ...................... $ - 100 percent of $50,000,000
Property terrorism .......... $10,000,000 100 percent of $30,000,000
Terrorism aggregate excess
of loss ................... $23,500,000 70 percent of $45,000,000
Employment practices
liability ................. $ 500,000 50 percent of $ 1,000,000
(1) Subject to annual aggregate limits for all losses of $14,000,000.
Although reinsurance does not discharge the original insurer from its
primary liability to its policyholders, it is the practice of insurers for
accounting purposes to treat reinsured risks as risks of the reinsurer since
the primary insurer would only reassume liability in those situations where
the reinsurer is unable to meet the obligations it assumed under the
reinsurance agreements. The ability to collect reinsurance is subject to the
solvency of the reinsurers.
The major participants in the pool members' reinsurance programs during
2003 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 type of coverage and at various layers within these coverages. The
property per risk, property catastrophe and casualty reinsurance programs are
handled by a reinsurance intermediary (broker). The reinsurance of those
programs is syndicated to approximately 50 domestic and foreign reinsurers.
In formulating reinsurance programs, Employers Mutual is selective in its
choice of reinsurers. Employers Mutual selects reinsurers on the basis of
financial stability and long-term relationships, as well as price of the
coverage. Reinsurers are generally required to have a Best's rating of "A-"
(Excellent) or higher and a minimum policyholders' surplus of $250,000,000.
<PAGE>
Percent
of total 2003
Property per risk, property catastrophe reinsurance Best's
and casualty coverages: protection rating
- --------------------------------------- ---------- ------
Underwriters at Lloyd's of London .................... 25.6% A-
Mutual Reinsurance Bureau ............................ 15.4 (1)
Converium AG, Zurich ................................. 7.8 A
Transatlantic Reinsurance Company .................... 5.4 A++
Hannover Ruckversicherung AG ......................... 5.3 A
Ace Tempest Reinsurance Company ...................... 2.7 A+
Workers' compensation excess coverage:
- --------------------------------------
Underwriters at Lloyd's of London .................... 74.6% A-
American National Insurance Company .................. 25.4 A+
Umbrella coverage:
- ------------------
January 1 - June 30, 2003
General Reinsurance Corporation ...................... 100.0% A++
July 1 - December 31, 2003
Partner Reinsurance Company .......................... 27.5% A+
Platinum Underwriters Reinsurance .................... 25.0 A
TOA Reinsurance Company .............................. 17.5 A+
Hannover Ruckversicherung AG ......................... 30.0 A
Fidelity and surety coverages:
- ------------------------------
Transatlantic Reinsurance Company .................... 40.0% A++
SCOR Reinsurance Company ............................. 20.0 A-
Hannover Ruckversicherung AG ......................... 18.0 A
Everest Reinsurance Company .......................... 17.0 A+
Berkley Insurance Company ............................ 5.0 A
Boiler coverage:
- ----------------
Hartford Steam Boiler Inspection and Insurance Company 100.0% A+
Property terrorism:
- -------------------
Underwriters at Lloyd's of London .................... 100.0% A-
Terrorism aggregate excess of loss:
- -----------------------------------
Axis Specialty LTD ................................... 40.0% A
Arch Reinsurance Company ............................. 20.0 A-
Everest Reinsurance Company .......................... 10.0 A+
Employment Practices Liability:
- -------------------------------
General Reinsurance Corporation (January 1 -
July 1, 2003) ...................................... 100.0% A++
(1) Mutual Reinsurance Bureau (MRB) is composed of Employers Mutual and three
other nonaffiliated mutual insurance companies. Each of the four members
cede primarily property insurance to MRB and assume, on an equal and
joint basis, proportionate shares of this business. Each member
benefits from the increased capacity provided by MRB. MRB is backed by
the financial strength of the four member companies. All of the members
of MRB were assigned an "A-" (Excellent) or better rating by A.M. Best.
<PAGE>
Premiums ceded under the pool members' reinsurance programs by all pool
members and by the Company's property and casualty insurance subsidiaries for
the year ended December 31, 2003 are presented below. Each type of
reinsurance coverage is purchased in layers, and an individual reinsurer may
participate in more than one type of coverage and at various layers within the
coverages. Since each layer of 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
- --------- ----------- ------------
Hartford Steam Boiler Inspection & Insurance Company $12,895,680 $ 3,030,485
General Reinsurance Corporation..................... 3,740,975 879,129
XL Reinsurance America Inc. ........................ 2,828,842 664,778
Axis Specialty Limited ............................. 2,494,011 586,093
Hannover Ruckversicherung AG ....................... 2,386,009 560,712
Transatlantic Reinsurance Company .................. 2,023,973 475,634
Converium AG, Zurich ............................... 1,474,996 346,624
Platinum Underwriters Reinsurance .................. 1,302,151 306,005
Managing Agency Partners ........................... 1,266,852 297,710
Partner Reinsurance Company of the US .............. 1,155,000 271,425
Other Reinsurers ................................... 15,114,903 3,552,002
----------- ------------
Total ............................................ $46,683,392 $ 10,970,597
=========== ============
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, 2003 are presented below.
Premiums ceded by
------------------------
Property
and casualty
All pool insurance
Reinsurer members subsidiaries
- --------- ----------- ------------
Wisconsin Compensation Rating Bureau ............... $16,032,519 $ 3,767,642
North Carolina Reinsurance Facility ................ 1,681,332 395,113
Michigan Catastrophe Claims Association ............ 1,355,025 318,431
Other Reinsurers ................................... 1,518,826 356,926
----------- ------------
Total ............................................ $20,587,702 $ 4,838,112
=========== ============
The Terrorism Risk Insurance Act of 2002 ("TRIA") provides a temporary
Federal backstop on losses from certified terrorism events from foreign
sources and is effective until December 31, 2005. Coverage includes most
direct commercial lines of business, including coverage for losses from
nuclear, biological, and chemical exposures. Each insurer has a deductible
amount, which is calculated as a percentage of the prior year's direct earned
commercial lines premium and a ten percent retention above the deductible.
The percentage used in the deductible calculation will increase from seven
percent in 2003 to ten percent in 2004 and to fifteen percent in 2005. TRIA
caps losses at $100 billion annually; no insurer that has met its deductible
will be liable for payment of any portion above that amount. Though it is
uncertain whether TRIA will be extended beyond 2005, it has and continues to
provide marketplace stability. As a result, coverage for terrorist events in
both the insurance and reinsurance markets is often available. For the
Company, the TRIA deductible was approximately $13,000,000 in 2003. The March
1, 2003 renewal of Employers Mutual's reinsurance coverage for terrorism
claims saw a broadening of coverage with limits corresponding to the TRIA
deductible (approximately $55,000,000 for the EMC Insurance Companies).
Coverage includes all commercial lines of business, losses from both certified
and non-certified terrorist events, and nuclear, biological and chemical
coverage.
<PAGE>
For information concerning amounts due the Company from reinsurers for
losses and settlement expenses and prepaid reinsurance premiums and the effect
of reinsurance on premiums written and earned, and losses and settlement
expenses incurred, see "Property and Casualty Insurance Subsidiaries and
Reinsurance Subsidiary - Reinsurance Ceded."
RELATIONSHIP BETWEEN NET PREMIUMS WRITTEN AND SURPLUS
The amount of insurance a property and casualty insurance company writes
under industry standards is commonly expressed as 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,
------------------------------
2003 2002 2001
---- ---- ----
Employers Mutual .................... 1.26 1.55 1.35
EMCASCO ............................. 2.15 2.41 2.25
Illinois EMCASCO .................... 2.07 2.36 2.20
Dakota Fire ......................... 2.11 2.41 2.23
Farm and City ....................... 2.35 2.49 2.70
EMC Property & Casualty Company ..... .92 .94 .97
Union Insurance Company of Providence .91 .93 .96
Hamilton Mutual Insurance Company ... 2.02 2.13 2.34
The ratios for three of the Company's property and casualty insurance
subsidiaries (EMCASCO, Illinois EMCASCO and Dakota Fire) reflect the issuance
of an aggregate of $25,000,000 of surplus notes to Employers Mutual on
December 28, 2001. Surplus notes are considered to be a component of surplus
for statutory reporting purposes; however, under generally accepted accounting
principals, surplus notes are considered to be debt and are reported as a
liability in the Company's financial statements.
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The property and casualty insurance subsidiaries' reserve information is
included in the property and casualty loss reserve development for 2003. 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 inter-company balances
with Employers Mutual, which are settled on a quarterly basis. The investment
and income tax activities of the reinsurance subsidiary are not subject to the
quota share agreement.
<PAGE>
PRINCIPAL PRODUCTS
The reinsurance subsidiary assumes both pro rata and excess of loss
reinsurance from Employers Mutual. The following table sets forth the assumed
written premiums of the reinsurance subsidiary for the three years ended
December 31, 2003.
Percent Percent Percent
of of of
Line of Business 2003 total 2002 total 2001 total
- ---------------- ------- ----- ------- ----- ------- -----
(Dollars in thousands)
Pro rata reinsurance:
Property and Casualty $20,025 22.2% $17,856 23.4% $10,716 16.2%
Property ............. 15,282 17.0 11,417 15.0 12,935 19.5
Crop ................. 2,693 3.0 1,535 2.0 2,605 3.9
Casualty ............. 1,771 2.0 2,886 3.8 2,819 4.3
Marine/aviation ...... 12,377 13.7 12,073 15.8 6,380 9.6
------- ----- ------- ----- ------- -----
Total pro rata
Reinsurance ...... 52,148 57.9 45,767 60.0 35,455 53.5
------- ----- ------- ----- ------- -----
Excess reinsurance:
Excess per risk
reinsurance:
Property ............. 23,744 26.4 18,925 24.9 20,050 30.2
Casualty ............. 12,954 14.4 10,610 13.9 10,124 15.3
Surety ............... 1,212 1.3 902 1.2 658 1.0
------- ----- ------- ----- ------- -----
Total excess per
risk reinsurance 37,910 42.1 30,437 40.0 30,832 46.5
------- ----- ------- ----- ------- -----
Total .............. $90,058 100.0% $76,204 100.0% $66,287 100.0%
======= ===== ======= ===== ======= =====
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 on all layers offered under a specific contract in
order to be considered a viable reinsurer.
<PAGE>
COMPETITION
The reinsurance marketplace is generally considered to be competitive;
however, competition for reinsurance business has declined significantly as a
result of the September 11, 2001 terrorist attack on the World Trade Center.
Industry-wide premium increases for January 2003 renewals averaged 11.2
percent for excess of loss business and retention levels increased again as
well. Exclusions for terrorist activities remained commonplace. The market
for terrorism coverage is still evolving, but is becoming more available
(sometimes including nuclear, biological and chemical perils). Terrorism
coverage is still being written on a stand-alone basis. New reinsurance
capacity, primarily from Bermuda, has entered the reinsurance marketplace to
take advantage of higher reinsurance pricing, which could lead to increased
rate competition in the future.
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. During the last several years, some ceding companies have
tended to favor large, financially strong reinsurance companies who are able
to provide "mega" line capacity for multiple lines of business. The Company
faces the risk of ceding companies becoming less interested in diversity and
spread of reinsurance risk in favor of having fewer well capitalized
reinsurance companies on their program.
REINSURANCE CEDED
The reinsurance subsidiary does not purchase outside reinsurance
protection due to the $1,500,000 cap on losses assumed per event under the
terms of the quota share agreement with Employers Mutual. The reinsurance
subsidiary pays an annual override commission to Employers Mutual for this
protection, which amounted to $4,052,600 in 2003. 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 $3,802,878 in 2003.
BEST'S RATING
The most recent Best's Property Casualty Key Rating Guide gives the
reinsurance subsidiary an "A-" (Excellent) policyholders' rating. Best's
ratings are based upon factors of concern to policyholders and insurance
agents and are not necessarily directed toward the protection of investors.
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The reinsurance subsidiary's reserve information is included in the
property and casualty loss reserve development for 2003. See "Property and
Casualty Insurance Subsidiaries and Reinsurance Subsidiary - Outstanding
Losses and Settlement Expenses."
<PAGE>
PROPERTY AND CASUALTY INSURANCE SUBSIDIARIES AND REINSURANCE SUBSIDIARY
- -----------------------------------------------------------------------
Employers Mutual provides various services to all of its subsidiaries and
affiliates. Such services include data processing, claims, financial,
actuarial, auditing, marketing and underwriting. Employers Mutual allocates a
portion of the cost of these services to the subsidiaries that do not
participate in the pooling agreement based upon a number of criteria,
including usage and number of transactions. The remaining costs are charged
to the pooling agreement and each pool participant shares in the total cost in
accordance with its pool participation percentage. Costs allocated to the
Company by Employers Mutual for services provided to the holding company and
its subsidiaries that do not participate in the pooling agreement amounted to
$2,097,057, $1,765,287 and $2,040,822 in 2003, 2002 and 2001, respectively.
Costs allocated to the Company through the operation of the pooling agreement
amounted to $63,293,517, $56,897,066 and $51,041,812 in 2003, 2002 and 2001,
respectively.
STATUTORY COMBINED RATIOS
The following table sets forth the statutory combined ratios of the
Company's insurance subsidiaries and the property and casualty insurance
industry averages for the five years ended December 31, 2003. 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,
--------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Property and casualty insurance
Loss ratio ................... 70.3% 69.8% 83.0% 82.2% 83.6%
Expense ratio ................ 32.2 31.2 28.5 30.8 32.0
------ ------ ------ ------ ------
Combined ratio ............. 102.5% 101.0% 111.5% 113.0% 115.6%
====== ====== ====== ====== ======
Reinsurance
Loss ratio ................... 65.2% 70.7% 86.6% 86.1% 83.1%
Expense ratio ................ 27.2 31.6 29.1 29.1 30.6
------ ------ ------ ------ ------
Combined ratio ............. 92.4% 102.3% 115.7% 115.2% 113.7%
====== ====== ====== ====== ======
Total insurance operations
Loss ratio ................... 68.9% 70.0% 83.8% 83.0% 83.5%
Expense ratio ................ 30.9 31.3 28.6 30.5 31.7
------ ------ ------ ------ ------
Combined ratio ............. 99.8% 101.3% 112.4% 113.5% 115.2%
====== ====== ====== ====== ======
Property and casualty insurance
industry averages (1)
Loss ratio ................... 76.1% 81.7% 88.5% 81.5% 78.6%
Expense ratio ................ 25.0 25.7 27.5 28.9 29.2
------ ------ ------ ------ ------
Combined ratio ............. 101.1% 107.4% 116.0% 110.4% 107.8%
====== ====== ====== ====== ======
(1) As reported by A.M. Best Company. The ratio for 2003 is an estimate; the
actual combined ratio is not currently available.
The 2001 expense ratios and combined ratios for "property and casualty
insurance" and "total insurance operations" are distorted by $13,884,000 of
additional written premiums that were recorded in 2001 in connection with a
change in the recording of installment-based insurance policies. Excluding
this adjustment, the expense ratios would have been 30.2 percent and 30.0
percent, respectively, and the combined ratios would have been 113.2 percent
and 113.8 percent, respectively.
<PAGE>
REINSURANCE CEDED
The following table presents amounts due to the Company from reinsurers
for losses and settlement expenses and prepaid reinsurance premiums as of
December 31, 2003:
2003
Amount Percent Best's
recoverable of total rating
----------- -------- ------
Wisconsin Compensation Rating Bureau .. $ 4,862,984 25.4% (1)
XL Reinsurance America ................ 2,180,744 11.4 A+
Minnesota Workers' Comp Reins Assoc ... 1,857,178 9.7 (1)
Hartford Steam Boiler Insp. & Ins. .... 1,772,704 9.3 A+
General Reinsurance Corporation ....... 1,576,805 8.2 A++
National Workers' Compensation
Reinsurance Pool .................... 1,516,420 7.9 (1)
Mutual Reinsurance Bureau ............. 389,681 2.0 (2)
Converium Rens North America Inc ...... 376,509 2.0 A
North Carolina Reins Faculity ......... 344,435 1.8 (1)
Hartford Fire Insurance Company ....... 332,775 1.7 A+
Other Reinsurers ...................... 3,948,747 20.6
----------- --------
Total ........................... $19,158,982(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) Mutual Reinsurance Bureau (MRB) is composed of Employers Mutual and three
other nonaffiliated mutual insurance companies. Each of the four members
cede primarily property insurance to MRB and assume, on an equal and
joint basis, proportionate shares of this business. Each member
benefits from the increased capacity provided by MRB. MRB is backed by
the financial strength of the four member companies. All of the members
of MRB were assigned an "A-" (Excellent) or better rating by A.M. Best.
(3) The total amount recoverable at December 31, 2003 represented $1,054,360
in paid losses and settlement expenses, $14,807,394 in unpaid losses
and settlement expenses and $3,297,228 in unearned premiums.
<PAGE>
The effect of reinsurance on premiums written and earned, and losses and
settlement expenses incurred for the three years ended December 31, 2003 is
presented below.
Year ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
Premiums written:
Direct ........................ $220,741,419 $235,596,547 $272,027,823
Assumed from nonaffiliates .... 3,816,789 3,985,370 1,898,509
Assumed from affiliates ....... 351,641,368 320,940,551 299,990,245
Ceded to nonaffiliates ........ (15,808,709) (11,089,041) (11,189,227)
Ceded to affiliates ........... (220,741,419) (235,596,547) (272,027,823)
------------ ------------ ------------
Net premiums written ........ $339,649,448 $313,836,880 $290,699,527
============ ============ ============
Premiums earned:
Direct ........................ $221,662,098 $241,939,466 $255,764,274
Assumed from nonaffiliates .... 3,629,346 3,501,616 1,786,132
Assumed from affiliates ....... 341,947,846 304,462,790 274,352,821
Ceded to nonaffiliates ........ (14,954,382) (10,921,373) (10,859,095)
Ceded to affiliates ........... (221,662,098) (241,939,466) (255,764,274)
------------ ------------ ------------
Net premiums earned ......... $330,622,810 $297,043,033 $265,279,858
============ ============ ============
Losses and settlement expenses
incurred:
Direct ........................ $157,500,290 $165,218,514 $221,314,633
Assumed from nonaffiliates .... 3,270,406 2,876,808 1,336,824
Assumed from affiliates ....... 233,823,801 206,614,356 227,650,959
Ceded to nonaffiliates ........ (10,589,657) (2,433,308) (7,069,033)
Ceded to affiliates ........... (157,500,290) (165,218,514) (221,314,633)
------------ ------------ ------------
Net losses and settlement
expenses incurred ......... $226,504,550 $207,057,856 $221,918,750
============ ============ ============
Effective January 1, 2001, the Company began recording the full-term
written premium at the inception of insurance policies that are billed on an
installment basis. Previously, such amounts were recorded as each installment
became due. As a result, written premiums assumed from affiliates for 2001
increased $13,884,423. Earned premiums were not affected by this change, as
unearned premiums were increased by the same amount.
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
reinsurance 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 that 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.
<PAGE>
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
operating results in the year such changes are recorded.
Despite the inherent uncertainties of estimating insurance company loss
and settlement expense reserves, management believes that the Company's
reserves are being calculated in accordance with sound actuarial practices
and, based upon current information, that the Company's reserves for losses
and settlement expenses at December 31, 2003 are adequate.
<PAGE>
The following table sets forth a reconciliation of beginning and ending
reserves for losses and settlement expenses of the property and casualty
insurance subsidiaries 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,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
Gross reserves at beginning of year $331,226,753 $314,518,588 $286,489,028
Ceded reserves at beginning of year (10,367,624) (11,848,597) (11,224,797)
------------ ------------ ------------
Net reserves at beginning of year .. 320,859,129 302,669,991 275,264,231
------------ ------------ ------------
Incurred losses and
settlement expenses
- ---------------------
Provision for insured events
of the current year ............ 219,028,236 200,059,798 216,752,003
Increase in provision for
insured events of prior years .. 7,476,314 6,998,058 5,166,747
------------ ------------ ------------
Total incurred losses and
settlement expenses ...... 226,504,550 207,057,856 221,918,750
------------ ------------ ------------
Payments
- --------
Losses and settlement expenses
attributable to insured events
of the current year ............ 86,072,127 81,124,276 94,983,112
Losses and settlement expenses
attributable to insured events
of prior years ................. 108,175,065 107,744,442 99,529,878
------------ ------------ ------------
Total payments ............. 194,247,192 188,868,718 194,512,990
------------ ------------ ------------
Net reserves at end of year ........ 353,116,487 320,859,129 302,669,991
Ceded reserves at end of year ...... 14,807,394 10,367,624 11,848,597
------------ ------------ ------------
Gross reserves at end of year ...... $367,923,881 $331,226,753 $314,518,588
============ ============ ============
<PAGE>
During the three years ended December 31, 2003, the Company
experienced adverse development in the provision for insured events of prior
years. The majority of this adverse development has come from the property
and casualty insurance segment, primarily in the workers' compensation line
of business. Following are the significant issues and trends that the
Company has identified as contributors to this adverse development.
Workers' compensation claim severity has increased significantly over
the past five years, with the projected ultimate average claim amount
increasing approximately 67 percent over the five year period. An increase
of this magnitude has made the establishment of adequate case reserves
challenging. A review of the Company's claims data indicates that claims
adjusters have recently underestimated medical costs and the length of time
injured workers are away from work. In addition, partial disability benefits
have been underestimated or unanticipated. Large increases in drug costs and
the availability and utilization of new and costly medical procedures have
contributed to rapidly escalating medical costs.
Construction defect claims arising from general liability policies
issued to contractors have increased significantly during the past three
years. States with significant construction defect losses include Alabama,
Arizona, California, Colorado, Nevada and Texas.
Large umbrella claims have recently contributed to the adverse
development experienced in the other liability line of business. The
Company's pattern of increasing umbrella claims severity is believed to be
generally consistent with industry umbrella severity trends. Also
contributing to overall umbrella reserve development is an increase in claims
arising from underlying general liability policies associated with claims
arising from commercial auto policies.
Legal expenses for the other liability line of business have also
increased rapidly over the past three years, with defense costs increasing at
an average rate of approximately 15 percent per year. This increase in legal
expenses has occurred despite a reduction in the number of new lawsuits.
The Company has also noticed increased attorney involvement in uninsured
and underinsured motorist claims. Under recent privacy constraints, claimant
medical information is often not forthcoming, which contributes to the
difficulty in establishing adequate case reserves for these types of claims.
Following is a detailed analysis of the adverse development the Company
has experienced during the past three years.
<PAGE>
Year ended December 31, 2003
- ----------------------------
Property and casualty insurance segment
- ---------------------------------------
For the property and casualty insurance segment, the December 31, 2003
estimate of loss and settlement expense reserves for accident years 2002 and
prior increased $9,015,000 from the estimate at December 31, 2002. This
increase represents 3.9 percent of the December 31, 2002 carried reserves and
is attributed to a combination of newly reported claims in excess of carried
IBNR reserves, development on case reserves of previously reported claims,
and bulk reserve strengthening. None of the adverse development experienced
in 2003 is associated with changes in the key actuarial assumptions utilized
to estimate loss and settlement expense reserves, although a shortage in
workers' compensation individual case reserves led to the establishment of a
bulk case reserve for that line of business.
The emergence of IBNR claims in excess of carried IBNR reserves resulted
in approximately $3,977,000 of adverse development in 2003. The most
significant development occurred in the workers' compensation ($1,742,000),
other liability ($1,565,000) and commercial auto liability ($659,000),
lines of business. Approximately 85 percent of the workers' compensation
adverse development was from accident years 1998 - 2002. The other liability
development is primarily attributed to construction defect and asbestos claims
for accident years prior to 1998, with modest downward development for
accident years 1998 - 2002. For commercial auto, the upward development
arose mainly from accident years 1998 - 2001, with 2002 developing downward.
For all other lines combined, IBNR reserves developed modestly upward with no
significant variations.
Reserves on previously reported claims also developed upward in 2003 by
approximately $3,529,000. Adverse case reserve development occurred
primarily in the workers' compensation ($7,234,000) and commercial auto
liability ($1,562,000) lines of business. Partially offsetting these two
lines was favorable development in the remaining lines, most notably other
liability ($1,520,000), property ($1,324,000) and auto physical damage
($1,193,000). About 80 percent of the workers' compensation adverse
development came from the latest four accident years. For all lines
combined, the latest four accident years developed upward by $3,800,000, with
the prior accident years combined developing modestly downward.
The Company also strengthened IBNR reserves in 2003 in response to the
results of a regularly-scheduled actuarial analysis, which indicated a higher
ratio of IBNR emergence in relation to premiums earned than the 2002 review.
The portion of IBNR reserve strengthening allocated to prior accident years
totaled $1,980,000. The largest indicated increase in IBNR reserves was in
the other liability line of business, where strengthening totaled $1,428,000.
Relatively minor strengthening also occurred in the other lines of business,
the greatest of which was workers' compensation ($238,000).
As previously noted, case reserves for the property and casualty
insurance segment developed upward during 2003, which represented a
significant change from the historical development pattern. To supplement
the individual case reserves, the Company established a bulk case reserve for
the workers' compensation line of business, which was primarily responsible
for the adverse development. The portion of this bulk reserve allocated to
prior accident years was $917,000. This action does not represent a change
in assumptions, but rather a reaction to a change in circumstances that
occurred in 2003. Prior to 2003, there was no indication that overall case
reserves were inadequate.
<PAGE>
Settlement expense reserves were also strengthened during 2003.
Actuarial analyses completed in 2003 indicated generally higher ultimate
expense to loss ratios for the other liability line of business, along with
higher estimates of ultimate losses than during 2002. Accordingly, the
Company strengthened settlement expense reserves, with $1,597,000 of the
increase allocated to prior accident years.
The above results reflect reserve development on a direct basis. During
2003, ceded losses for prior accident years increased $3,224,000.
Approximately three-fourths of the increase was in the other liability,
workers' compensation and surety bond lines of business, primarily as a
result of large claims exceeding the Company's excess of loss treaties'
retentions. The impact of the increase in reinsurance recoveries was to
offset some of the adverse development on direct business described above.
The Company also experienced $410,000 of adverse development on
involuntary pools during 2003. This development affected the auto and
workers' compensation lines of business. Since involuntary pool reserves are
booked as reported (except for a lag in IBNR reserves), this development did
not result from any change in actuarial assumptions.
Reinsurance Segment
- -------------------
For the reinsurance segment, the December 31, 2003 estimate of loss and
settlement expense reserves for accident years 2002 and prior decreased
$1,539,000 from the estimate at December 31, 2002. This decrease represents
1.5 percent of the December 31, 2002 carried reserves and is primarily
attributed to the 2002 accident year in the HORAD book of business, which
developed downward by $3,139,000. Much of this favorable development can be
attributed to reported policy year 2002 losses that were approximately
$3,200,000 below 2002 implicit projections. HORAD accident years 2001 and
prior developed upward approximately $1,190,000. Reserve strengthening
implemented in 2003 in response to an independent consultant's analysis of
the reinsurance segment's exposure to asbestos exposures resulted in $326,000
of adverse development. The remainder of the upward development arose from
the accident years 1997 - 2001, primarily from casualty and marine losses.
MRB reserves developed upward by $411,000 in 2003. Most of this
development arose from accident years 1995 - 1999 and is attributed to
construction defect claims arising from an account that has been in runoff
since 2000.
The reserve development experienced in 2003 did not result from any
changes in the key actuarial assumptions utilized to estimate loss and
settlement expense reserves.
Year ended December 31, 2002
- ----------------------------
Property and casualty insurance segment
- ---------------------------------------
For the property and casualty insurance segment, the December 31, 2002
estimate of loss and settlement expense reserves for accident years 2001 and
prior increased $4,645,000 from the estimate at December 31, 2001. This
increase represents 2.1 percent of the December 31, 2001 carried reserves and
is attributed to three sources: direct IBNR reserves, involuntary pools and
contingent salary plan reserves. None of the adverse development experienced
in 2002 is associated with changes in the key actuarial assumptions utilized
to estimate loss and settlement expense reserves.
<PAGE>
The emergence of IBNR claims in excess of carried IBNR reserves (before
consideration of IBNR reserve strengthening) resulted in approximately
$1,332,000 of adverse development in 2002. On a direct basis, adverse IBNR
development occurred in the surety bond ($914,000), workers' compensation
($905,000) and property ($587,000) lines of business. More than 90 percent of
the bond and property development arose from the latest two accident years
and about 85 percent of the workers' compensation development arose from the
latest five accident years. For all other lines, IBNR reserves developed
downward.
The Company also strengthened direct IBNR reserves in 2002, with
$945,000 of this strengthening allocated to prior accident years. This
reserve strengthening was implemented in response to an actuarial analysis
that indicated a higher ratio of IBNR emergence in relation to premiums
earned than the prior review completed in 2001. The largest indicated
increase was in the other liability line of business, with minor adjustments
being made in the other lines of business.
Reserves on previously reported claims developed downward by
approximately $2,411,000 in 2002. The favorable case reserve development was
primarily in the auto physical damage ($1,973,000) and property ($1,513,000)
lines of business, with smaller contributions from other liability ($844,000),
homeowners ($837,000) and bonds ($433,000). Only the workers' compensation
line of business showed substantial adverse case reserve development
($2,724,000), which partially offset the downward development in the other
lines. Over 90 percent of the workers' compensation adverse case reserve
development was from the latest two accident years. Excluding workers'
compensation, 70 percent of the other lines' favorable case reserve
development arose from accident years 1997 - 2001.
Reserves for asbestos and pollution exposures were strengthened by
$3,126,000 during 2002. The asbestos strengthening was implemented in
response to an independent consultant's ground up study of asbestos exposures
that was completed in early 2003 and increased total direct asbestos reserves
to the consultant's point estimate. Pollution reserves were increased to
achieve a targeted three-year survival ratio in the neighborhood of twelve.
The reserve strengthening for asbestos and pollution primarily affected the
other liability line of business. These reserves relate primarily to
exposures from mid-1980 and prior.
Settlement expense reserves were also strengthened during 2002. An
important assumption in the actuarial settlement expense methodology is
stability over time in the development pattern of the settlement expense to
loss ratio, which would result in stable projected ratios of ultimate
settlement expenses to ultimate losses from one evaluation to the next.
However, actuarial analyses in 2002 indicated generally higher estimated
ultimate ratios of settlement expense to loss for the other liability line of
business than in 2001. As a result, settlement expense reserves were
strengthened, with approximately $635,000 allocated to prior accident years.
This strengthening did not result from a change in assumptions, but rather
from a change in the indicated reserve arising from the data entering the
standard calculations.
Additional adverse development resulted from involuntary pool business
and the implementation of an employee contingent salary plan in 2002. The
Company records the reserves reported by the management of the involuntary
pools, along with a reserve for a lag in reporting. In 2002, these bookings
resulted in modest upward development of $400,000. This development affected
the auto and workers' compensation lines of business. Employers Mutual
implemented a contingent salary plan in 2002 and $400,000 of the reserve
established for this plan at December 31, 2002 was allocated to settlement
expenses for prior accident years. This reserve is allocated to all lines of
business.
<PAGE>
Reinsurance segment
- -------------------
For the reinsurance segment, the December 31, 2002 estimate of loss and
settlement expense reserves for accident years 2001 and prior increased
$2,353,000 from the estimate at December 31, 2001. This increase represents
2.6 percent of the December 31, 2001 carried reserves. Virtually all of the
increase came from the MRB pool. Accident years 1995 - 1999 accounted for
about 85 percent of the development, with the majority of it coming from
construction defect claims arising from an account that has been in runoff
since 2000.
HORAD reserves developed slightly upward ($61,000) in 2002. Accident
year 2001 developed upward by $2,160,000. This is partially due to reported
policy year 2001 losses that exceeded implicit 2001 projections by
approximately $1,000,000. The remainder can be attributed to a substantial
increase in estimated policy year 2001 premiums during 2002. Accident years
2000 and prior developed downward by $2,100,000. Accident years 1981 - 1987
contributed $500,000 of favorable development from reductions in indicated
development factors. Another $526,000 was due to a reduction in IBNR
reserves booked as reported for a large marine contract. Most of the
remainder can be attributed to a 2002 decision to reallocate a modest amount
of IBNR between accident years. The overall reinsurance target reserve level
is the upper quartile of the indicated reserve range; a decision was made in
2002 to reserve prior accident years nearer the middle of their respective
ranges and to reserve the latest policy year more conservatively. This
decision was made in recognition of the fact that the latest policy year has
the most uncertainty. This action did not affect the total reserve level
because the overall upper quartile target was maintained.
The reserve development experienced in 2002 did not result from any
changes in the key actuarial assumptions utilized to estimate loss and
settlement expense reserves.
Year ended December 31, 2001
- ----------------------------
Property and casualty insurance segment
- ---------------------------------------
During 2001, the property and casualty insurance segment experienced
modest adverse reserve development of $1,192,000. Before taking into account
a strengthening of IBNR reserves, the emergence of IBNR claims in excess of
carried IBNR reserves resulted in adverse development of $6,623,000. The
bulk of this adverse IBNR development occurred in the other liability
($4,849,000) and workers' compensation ($1,562,000) lines of business. More
than 80 percent of the workers' compensation development was from accident
years 1996 - 2000 and 90 percent of the other liability development arose
from accident years 1991 - 2000. The adverse development on IBNR claims is
not due to any change in actuarial assumptions; rather, emerged IBNR losses
during 2001 plus the year-end 2001 prior years' IBNR reserve (before IBNR
reserve strengthening), which is allocated to accident years by formula,
exceeded the 2000 IBNR reserve.
Reserves on previously reported claims developed downward by $7,304,000;
the lines of business with the greatest favorable case reserve development
were other liability ($4,427,000), property ($3,113,000), and auto physical
damage ($2,127,000). More than 90 percent of the property and auto physical
damage and two-thirds of the other liability favorable development came from
the latest three accident years. Case reserves for the commercial auto
liability and workers' compensation lines of business developed upward by
$2,827,000 and $926,000, respectively, offsetting a portion of the downward
development from other lines. Almost 95 percent of the commercial auto
liability adverse development arose from the latest three accident years, and
accident years 1999 and 2000 were responsible for the workers' compensation
adverse development, with prior accident years developing downward overall.
The overall favorable development on previously reported claims resulted from
the claim department's re-evaluation of individual claims during 2001 based
on the latest information available, not from any change in assumptions.
<PAGE>
In addition to the above, the Company strengthened direct IBNR reserves.
An assumption in estimating IBNR reserves is that the ratio of emerged IBNR
losses to prior year premiums earned (adjusted for rate level changes) will
remain constant. However, an actuarial analysis in 2001 indicated a higher
ratio than the prior review in 2000. In response to this analysis, IBNR
reserves were strengthened, with $2,086,000 of the strengthening allocated to
prior accident years. The vast majority of the increase occurred in the
other liability line of business ($2,056,000). This strengthening did not
result from a change in assumptions, but rather from a change in the
indicated reserve arising from the updated data entering the standard
calculations in 2001.
Reinsurance segment
- -------------------
The reinsurance segment experienced $3,975,000 of adverse reserve
development in 2001. Almost 75 percent of this development arose from the
MRB pool and is primarily associated with accident years 1998 - 2000.
Accident years 1997 and prior developed upward less than $200,000. The 1998
- - 1999 development was due largely to casualty losses, including construction
defect claims arising from one account which has been in runoff since 2000.
The accident year 2000 development included late 1999 winter storm losses
reported during 2000.
The HORAD book of business experienced upward development of $1,050,000.
Accident year 2000 developed upward by approximately $4,924,000, primarily
due to reported policy year losses that exceeded projections implicit in
year-end 2000 development factors by approximately $3,900,000. Accident
years 1999 and prior developed downward by $3,874,000 primarily due to
reductions in the industry development factors used for casualty projections
($1,500,000), reductions in projection factors for accident years
1981 - 1987 ($1,200,000) and a reduction in IBNR reserves that was
booked as reported for a large marine contract ($700,000).
The above development was not due to any change in actuarial assumptions
but instead resulted from reported losses and updated projection factors.
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 (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 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 (2) 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.
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
- --------------------------------------------------------------------------------------------------
(Dollars in thousands) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statutory reserves for losses
and settlement expenses ...... $182,072 191,514 196,293 191,892 205,606 230,937 257,201 276,103 303,643 321,945 354,200
Retroactive restatement of
reserves in conjunction with
admittance of new participants
into the pooling agreement ... 5,248 6,603 6,809 7,018 3,600 - - - - - -
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Statutory reserves after
reclassification ............. 187,320 198,117 203,102 198,910 209,206 230,937 257,201 276,103 303,643 321,945 354,200
GAAP adjustments ............... (2,405) (2,479) (3,098) (3,186) (858) (890) (948) (839) (973) (1,086) (1,084)
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Reserves for losses and
settlement expenses .......... 184,915 195,638 200,004 195,724 208,348 230,047 256,253 275,264 302,670 320,859 353,116
Paid (cumulative) as of:
One year later ............... 60,162 57,247 62,012 59,856 62,949 77,699 87,599 99,530 107,744 108,175 -
Two years later .............. 89,153 88,831 92,626 92,191 99,870 119,620 138,701 156,337 170,512 - -
Three years later ............ 107,372 106,691 112,985 113,343 122,455 147,561 173,840 196,400 - - -
Four years later ............. 116,856 118,705 124,450 126,507 136,975 167,529 198,221 - - - -
Five years later ............. 123,843 126,384 132,044 135,321 148,708 181,008 - - - - -
Six years later .............. 128,931 130,977 137,522 143,105 157,808 - - - - - -
Seven years later ............ 132,036 134,923 143,044 149,313 - - - - - - -
Eight years later ............ 135,007 139,263 147,994 - - - - - - - -
Nine years later ............. 137,630 143,345 - - - - - - - - -
Ten years later .............. 140,918 - - - - - - - - - -
Reserves reestimated as of:
End of year .................. 184,915 195,638 200,004 195,724 208,348 230,047 256,253 275,264 302,670 320,859 353,116
One year later ............... 179,527 179,818 183,760 188,579 197,271 224,313 254,350 280,431 309,668 328,335 -
Two years later .............. 170,653 173,162 182,285 185,465 194,287 225,288 256,111 288,465 321,761 - -
Three years later ............ 166,778 172,118 179,797 181,392 193,505 227,010 260,715 296,837 - - -
Four years later ............. 166,133 170,570 176,176 180,686 192,824 229,336 265,802 - - - -
Five years later ............. 165,548 167,763 175,465 179,898 195,910 232,446 - - - - -
Six years later .............. 163,406 166,764 174,695 181,567 198,162 - - - - - -
Seven years later ............ 161,985 166,280 176,012 182,690 - - - - - - -
Eight years later ............ 160,459 167,889 176,866 - - - - - - - -
Nine years later ............. 162,578 168,627 - - - - - - - - -
Ten years later .............. 163,251 - - - - - - - - - -
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cumulative redundancy
(Deficiency) ................. $ 21,664 27,011 23,138 13,034 10,186 (2,399) (9,549) (21,573) (19,091) (7,476) -
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross loss and settlement
expense reserves
- end of year (A) ............ $202,370 209,785 212,231 209,521 221,378 245,610 266,514 286,489 314,519 331,227 367,924
Reinsurance receivables ........ 17,455 14,147 12,227 13,797 13,030 15,563 10,261 11,225 11,849 10,368 14,808
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss and settlement expense
reserves - end of year ....... $184,915 195,638 200,004 195,724 208,348 230,047 256,253 275,264 302,670 320,859 353,116
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross re-estimated reserves
- latest (B) ................. $179,285 183,169 192,080 200,052 213,017 248,303 276,798 309,119 335,734 341,934 367,924
Re-estimated reinsurance
receivables - latest ......... 16,034 14,542 15,214 17,362 14,855 15,857 10,996 12,282 13,973 13,599 14,808
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net re-estimated reserves
- latest ..................... $163,251 168,627 176,866 182,690 198,162 232,446 265,802 296,837 321,761 328,335 353,116
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross cumulative redundancy
(deficiency) (A-B) ........... $ 23,085 26,616 20,151 9,469 8,361 (2,693) (10,284) (22,630) (21,215) (10,707) -
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
Asbestos and Environmental Claims
The Company has exposure to asbestos and environmental related claims
associated with the insurance business written by the parties to the pooling
agreement and the reinsurance business assumed from Employers Mutual by the
reinsurance subsidiary.
Estimating loss and settlement expense reserves for asbestos and
environmental claims 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.
During 2002, the Company re-evaluated the estimated ultimate losses for
direct asbestos and environmental exposures. Based on this re-evaluation, the
Company reallocated $752,000 of bulk IBNR reserves and $324,303 of settlement
expense reserves to these exposures. In addition, the Company diligently
evaluated the adequacy of its asbestos reserves by commissioning a "ground-up"
study to better quantify its exposure to asbestos liabilities. This study
concluded that the Company's exposure for direct asbestos claims ranged from
$1,000,000 to $5,100,000, with a point estimate of $3,000,000 at December 31,
2002. Based on the results of this study, the Company elected to increase
the IBNR and settlement expense reserves carried for direct asbestos exposures
by $2,068,705 at December 31, 2002, to $2,985,402. The study's results for
asbestos exposures on assumed reinsurance business were received during 2003,
and the Company elected to increase its IBNR reserves carried for assumed
asbestos exposures by $326,000 to the study's point estimate. The study and
its results assume no improvement in the current asbestos litigation
environment; however, federal legislation currently being considered could
reduce the ultimate losses from asbestos litigation below the levels currently
being projected for the industry.
<PAGE>
The following table presents asbestos and environmental related losses
and settlement expenses incurred and reserves outstanding for the Company:
Year ended December 31,
--------------------------------
2003 2002 2001
---------- ---------- ----------
Losses and settlement expenses incurred:
Asbestos:
Property and casualty insurance ........ $ - $2,377,631 $ 64,451
Reinsurance ............................ 293,413 (25,001) (9,167)
---------- ---------- ----------
293,413 2,352,630 55,284
---------- ---------- ----------
Environmental:
Property and casualty insurance ........ - 774,489 (120,610)
Reinsurance ............................ - 21,479 20,615
---------- ---------- ----------
- 795,968 (99,995)
---------- ---------- ----------
Total losses and settlement
expenses incurred ................ $ 293,413 $3,148,598 $ (44,711)
========== ========== ==========
Loss and settlement expense reserves:
Asbestos:
Property and casualty insurance ........ $2,885,148 $2,982,809 $ 719,590
Reinsurance ............................ 732,112 533,687 566,477
---------- ---------- ----------
3,617,260 3,516,496 1,286,067
---------- ---------- ----------
Environmental:
Property and casualty insurance ........ 1,164,756 1,175,541 454,460
Reinsurance ............................ 802,180 834,906 824,988
---------- ---------- ----------
1,966,936 2,010,447 1,279,448
---------- ---------- ----------
Total loss and settlement expense
reserves ......................... $5,584,196 $5,526,943 $2,565,515
========== ========== ==========
Based upon current facts, management believes the reserves established
for asbestos and environmental related claims at December 31, 2003 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.
EMPLOYEES
- ---------
EMC Insurance Group Inc. and its subsidiaries have no employees. The
Company's business activities are conducted by the 2,217 employees of
Employers Mutual. EMC Insurance Group Inc., EMC Reinsurance Company and
Underwriters, LLC are charged their proportionate share of salary and employee
benefit costs based on time allocations. Costs not allocated to these
companies and other subsidiaries of Employers Mutual outside the pooling
agreement are charged to the participants in the pooling agreement. 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 states 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.
<PAGE>
Premium rate regulation varies greatly among jurisdictions and lines of
insurance. In most states in which the Company's subsidiaries write
insurance, premium rates for their lines of insurance are subject to either
prior approval or limited review upon implementation. States require rates
for property and casualty insurance that are adequate, not excessive, and not
unfairly discriminatory.
The Company's insurance subsidiaries are required to file detailed annual
reports with the appropriate regulatory agency in each state where they do
business based on applicable statutory regulations, which differ from
generally accepted accounting principles. Their businesses and accounts are
subject to examination by such agencies at any time. Since EMC Insurance
Group Inc. and Employers Mutual are domiciled in Iowa, the State of Iowa
exercises principal regulatory supervision, and Iowa law requires periodic
examination. The Company's insurance subsidiaries are subject to examination
by state insurance departments on a periodic basis, as applicable law
requires.
State laws governing insurance holding companies also impose standards on
certain transactions with related companies, which include, among other
requirements, that all transactions be fair and reasonable and that an
insurer's surplus as regards policyholders be reasonable and adequate in
relation to its liabilities. Under Iowa law, dividends or distributions made
by registered insurers are restricted in amount and may be subject to approval
from the Iowa Commissioner of Insurance. "Extraordinary" dividends or
distributions are subject to prior approval and are defined as dividends or
distributions 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. North Dakota imposes similar restrictions on the payment of dividends
and distributions. At December 31, 2003, $22,244,303 was available for
distribution in 2004 to the Company without prior approval. See note 6 of
Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
The NAIC 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, 2003, the Company's
insurance subsidiaries had total adjusted statutory capital of $170,232,871,
which is well in excess of the minimum risk-based capital requirement of
$39,609,015.
<PAGE>
ITEM 2. PROPERTIES.
- ------- -----------
The Company does not own any real property. Lease costs of the Company's
office facilities in Bismarck, North Dakota, which total approximately
$384,000 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, 2003, which is included as
Exhibit 13(d) to this Form 10-K, is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
- ------- ------------------------
The "Selected Financial Data" section from the Company's Annual Report to
Stockholders for the year ended December 31, 2003, 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, 2003, which is included as
Exhibit 13(b) to this Form 10-K, is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- -------- -----------------------------------------------------------
The information under the caption "Market Risk" in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section from the Company's Annual Report to Stockholders for the year ended
December 31, 2003, which is included as Exhibit 13(b) to this Form 10-K, is
incorporated herein by reference.
<PAGE>
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, 2003, which is included as
Exhibit 13(c) to this Form 10-K, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------- ------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
------------------------------------
None.
ITEM 9A. CONTROLS AND PROCEDURES.
- -------- ------------------------
Within the 90 days prior to the filing date of this report, the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are functioning effectively to provide reasonable
assurance that the Company can meet its disclosure obligations. Since the
date of the most recent evaluation of the Company's internal controls by the
Chief Executive Officer and Chief Financial Officer there have been no
significant changes in the Company's internal controls or in other factors
that could significantly affect these controls.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- ---------------------------------------------------
See the information under the caption "Election of Directors" in the
Company's Proxy Statement in connection with its Annual Meeting to be held on
May 21, 2004, 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 50 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.
William A. Murray 57 Executive Vice President and Chief Operating
Officer of the Company and Employers Mutual
since 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 54 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.
<PAGE>
NAME AGE POSITION
---- --- --------
Raymond W. Davis 58 Senior Vice President - Investments of the
Company and Employers Mutual since 1998.
Treasurer of the Company since 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 58 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 51 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.
Steven C. Peck 56 Senior Vice President - Actuary of the
Company and of Employers Mutual since 2003.
He was Vice President of the Company and of
Employers Mutual from 1997 until 2003. He
has been employed by Employers Mutual since
1984.
Mark E. Reese 46 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.
The Company has adopted a code of ethics that applies to the Company's
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions. The code of
ethics is posted on the Investor Relations section of the Company's internet
website found at www.emcinsurance.com.
ITEM 11. EXECUTIVE COMPENSATION.
- -------- -----------------------
See the information under the caption "Compensation of Management" in the
Company's Proxy Statement in connection with its Annual Meeting to be held on
May 21, 2004, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- -------- ------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS.
----------------------------
The information under the captions "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management and Directors" in the
Company's Proxy Statement in connection with its Annual Meeting to be held on
May 21, 2004, which information is incorporated herein by reference.
<PAGE>
The following table presents information regarding Employers Mutual's
equity compensation plans as of December 31, 2003:
Number of
securities
remaining
available for
Number of future issuance
securities to under equity
be issued upon Weighted-average compensation
exercise of exercise price plans (excluding
outstanding of outstanding securities
options, warrants options, warrants reflected in
Plan category and rights and rights column (a))
- ------------- ----------------- ----------------- -----------------
(a) (b) (c)
----------------- ----------------- -----------------
Equity compensation
plans approved by
security holders 630,615 $12.86 386,775
Equity compensation
plans not
approved by
security holders - N/A N/A
----------------- ----------------- -----------------
Total 630,615 $12.86 386,775
================= ================= =================
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
See the information under the caption "Certain Relationships and Related
Transactions" in the Company's Proxy Statement in connection with its Annual
Meeting to be held on May 21, 2004, which information is incorporated herein
by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
- -------- ---------------------------------------
See the information under the captions "Audit Fees", "Audit Related
Fees", "Tax Fees" and "All Other Fees" in the Company's Proxy Statement in
connection with its Annual Meeting to be held on May 21, 2004, which
information is incorporated herein by reference.
<PAGE>
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- -------- -----------------------------------------------------------------
(a) List of Financial Statements and Schedules.
1. Financial Statements
Page
----
Report of Ernst & Young LLP, Independent Registered
Public Accounting Firm .................................... 32*
Consolidated Balance Sheets, December 31, 2003 and 2002 ..... 33*
Consolidated Statements of Income for the years ended
December 31, 2003, 2002 and 2001 ......................... 35*
Consolidated Statements of Comprehensive Income for the
Years ended December 31, 2003, 2002 and 2001 ............. 36*
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 2003, 2002 and 2001 ............. 37*
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 ......................... 38*
Notes to Consolidated Financial Statements .................. 40-68*
* Refers to the respective page of the financial information insert
of EMC Insurance Group Inc.'s 2003 Annual Report to Stockholders.
The Consolidated Financial Statements and Independent Auditor's
Report, which are included as Exhibit 13(c), are incorporated by
reference. With the exception of the portions of such Annual Report
specifically incorporated by reference in this Item and Items 5, 6,
7, 7A 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.
2. Schedules Form 10-K
Page
----
Report of Ernst & Young LLP, Independent Registered
Public Accounting Firm, On Schedules ....................... 36
Schedule I - Summary of Investments - Other Than
Investments in Related Parties ............... 37
Schedule II - Condensed Financial Information of Registrant 38
Schedule III - Supplementary Insurance Information .......... 41
Schedule IV - Reinsurance .................................. 42
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations ..... 43
All other schedules have been omitted for the reason that the items
required by such schedules are not present in the consolidated
financial statements, are covered in the notes to the consolidated
financial statements or are not significant in amount.
3. Management contracts and compensatory plan arrangements
Exhibit 10(b). 2003 Senior Executive Compensation Bonus Program.
Exhibit 10(d). Deferred Bonus Compensation Plans.
Exhibit 10(e). 2003 Executive Contingent Salary Plan -
EMC Reinsurance Company.
Exhibit 10(g). Employers Mutual Casualty Company Excess Retirement
Benefit Agreement.
Exhibit 10(h). Employers Mutual Casualty Company 1993 Employee
Stock Purchase Plan.
Exhibit 10(i). 1993 Employers Mutual Casualty Company Incentive
Stock Option Plan, as amended.
Exhibit 10(j). 2003 Employers Mutual Casualty Company Non-Employee
Director Stock Option Plan.
Exhibit 10(k). Employers Mutual Casualty Company Supplemental
Executive Retirement Plan.
Exhibit 10(l). EMCC Option It! Deferred Bonus Compensation Plan.
<PAGE>
Exhibit 10(m). EMCC Board of Directors Option It! Deferred
Compensation Plan.
Exhibit 10(n). Employers Mutual Casualty Company Executive Non-
Qualified Excess Plan.
Exhibit 10(o). 2003 Employers Mutual Casualty Company Incentive
Stock Option Plan.
(b) Reports on Form 8-K.
An 8-K was filed on November 4, 2003 announcing the Company's financial
results for the third quarter of 2003.
(c) Exhibits.
3. Articles of incorporation and by-laws:
(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) By-Laws of the Company, as amended. Incorporated by
reference to the Company's Form 10-K for the calendar
year ended December 31, 2001.)
10. Material contracts.
(a) Quota Share Reinsurance Contract between Employers Mutual
Casualty Company and EMC Reinsurance Company. (Incorporated by
reference to the Company's Form 10-K for the calendar year ended
December 31, 2000.)
(b) 2003 Senior Executive Compensation Bonus Program.
(c) EMC Insurance Companies reinsurance pooling agreements
between Employers Mutual Casualty Company and certain of its
affiliated companies, as amended.
(d) Deferred Bonus Compensation Plans. (Incorporated by reference
to the Company's Form 10-K for the calendar year ended December
31, 1998.)
(e) 2003 Executive Contingent Salary Plan - EMC Reinsurance Company.
(f) EMC Insurance Group Inc. Amended and Restated Dividend
Reinvestment and Common Stock Purchase Plan. (Incorporated by
reference to Registration No. 33-34499.)
(g) 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.)
(h) Employers Mutual Casualty Company 1993 Employee Stock Purchase
Plan. (Incorporated by reference to Registration No. 33-49335.)
(i) 1993 Employers Mutual Casualty Company Incentive Stock Option
Plan. (Incorporated by reference to Registration Nos. 33-49337
and 333-45279.)
(j) 2003 Employers Mutual Casualty Company Non-Employee Director
Stock Option Plan. (Incorporated by reference to Registration
No. 333-104469.)
<PAGE>
(k) Employers Mutual Casualty Company Supplemental Executive
Retirement Plan. (Incorporated by reference to the Company's
Form 10-K for the calendar year ended December 31, 2000.)
(l) EMCC Option It! Deferred Bonus Compensation Plan. (Incorporated
by reference to the Company's Form 10-K for the calendar year
ended December 31, 2001.)
(m) EMCC Board of Directors Option It! Deferred Compensation Plan.
(Incorporated by reference to the Company's Form 10-K for the
calendar year ended December 31, 2001.)
(n) Employers Mutual Casualty Company Executive Non-Qualified Excess
Plan.
(o) 2003 Employers Mutual Casualty Company Incentive Stock Option
Plan. (Incorporated by reference to Registration No.
333-103722.)
13. Annual Report to Security Holders.
(a) Selected Financial Data from the Company's 2003 Annual Report to
Stockholders.
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations from the Company's 2003 Annual Report to
Stockholders.
(c) Consolidated Financial Statements from the Company's 2003
Annual Report to Stockholders.
(d) Stockholder Information from the Company's 2003 Annual Report to
Stockholders.
14. Code of Ethics. (Incorporated by reference to the Investor Relations
section of the Company's internet website found at
www.emcinsurance.com.)
21. Subsidiaries of the Registrant.
23. Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm, with respect to Forms S-8
(Registration Nos. 33-49335, 33-49337, 333-104469, 333-45279
and 333-103722) and Form S-3 (Registration no. 33-34499).
24. Power of Attorney.
31.1 Certification of President and Chief Executive Officer as required
by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Vice President and Chief Financial Officer as
required by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the President and Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as
Adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of the Vice President and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as
Adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(d) Financial statements required by Regulation S-X which are excluded from
the Annual Report to Stockholders by Rule 14a-3(b)(1).
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on September 27,
2004.
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 September 27, 2004.
/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>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the consolidated financial statements of EMC Insurance
Group Inc. and Subsidiaries as of December 31, 2003 and 2002, and for each of
the three years in the period ended December 31, 2003, and have issued our
report thereon dated February 27, 2004 (included elsewhere in this Amended
Annual Report on Form 10-K/A). Our audits also included the financial
statement schedules listed in Item 15(a)2 of this Amended Annual Report on
Form 10-K/A. These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
February 27, 2004
Des Moines, Iowa
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule I - Summary of Investments -
Other Than Investments in Related Parties
December 31, 2003
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 .............. $ 47,547,267 $ 51,327,598 $ 47,547,267
Mortgage-backed securities ..... 2,298,081 2,526,826 2,298,081
------------ ------------ ------------
Total fixed maturity
securities ............. 49,845,348 53,854,424 49,845,348
------------ ------------ ------------
Securities available-for-sale:
Fixed maturities:
United States Government
and government agencies
and authorities .............. 170,445,955 171,149,194 171,149,194
States, municipalities and
political subdivisions ....... 140,694,351 146,775,232 146,775,232
Mortgage-backed securities ..... 19,311,455 21,278,600 21,278,600
Public utilities ............... 20,171,434 21,799,337 21,799,337
Corporate securities ........... 148,887,343 162,783,395 162,783,395
------------ ------------ ------------
Total fixed maturity
securities ............. 499,510,538 523,785,758 523,785,758
------------ ------------ ------------
Equity securities:
Common stocks
Banks, trusts and insurance
companies .................. 6,528,117 9,624,863 9,624,863
Industrial, miscellaneous and
all other .................. 31,969,958 38,855,135 38,855,135
Non-redeemable preferred
stocks ..................... 500,000 528,500 528,500
------------ ------------ ------------
Total equity securities ............ 38,998,075 49,008,498 49,008,498
------------ ------------ ------------
Other long-term investments ........ 4,758,019 4,758,019 4,758,019
Short-term investments ............. 63,568,064 63,568,064 63,568,064
------------ ------------ ------------
Total investments ...... $656,680,044 $694,974,763 $690,965,687
============ ============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31,
--------------------------
2003 2002
------------ ------------
ASSETS
Investment in common stock of
subsidiaries (equity method) .................. $176,087,397 $154,552,425
Fixed maturity investments:
Securities available-for-sale, at fair value .. 516,775 1,676,455
Short-term investments .......................... 3,768,427 1,455,824
Cash ............................................ 168,072 58,676
Accrued investment income ....................... 4,545 42,088
Income taxes recoverable ........................ 211,760 212,502
Deferred income taxes ........................... 204,310 12,764
------------ ------------
Total assets ............................... $180,961,286 $158,010,734
============ ============
LIABILITIES
Accounts payable ................................ $ 199,015 $ 227,207
Indebtedness to related party ................... 11,720 15,163
------------ ------------
Total liabilities .......................... 210,735 242,370
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 11,501,065 shares
in 2003 and 11,399,050 shares in 2002 ......... 11,501,065 11,399,050
Additional paid-in capital ...................... 69,113,228 67,270,591
Accumulated other comprehensive income .......... 22,285,668 14,218,330
Retained earnings ............................... 77,850,590 64,880,393
------------ ------------
Total stockholders' equity ................. 180,750,551 157,768,364
------------ ------------
Total liabilities and stockholders' equity $180,961,286 $158,010,734
============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant, Continued
Condensed Statements of Income
Years ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
REVENUES
Dividends received from subsidiaries .. $ 7,255,228 $ 6,250,016 $ 5,525,096
Investment income ..................... 30,368 113,843 194,326
Realized investment gains ............. - 5,313 -
----------- ----------- -----------
7,285,596 6,369,172 5,719,422
Operating expenses .................... 609,563 436,688 438,687
----------- ----------- -----------
Income before income tax benefit
and equity in undistributed net
income (loss) of subsidiaries ..... 6,676,033 5,932,484 5,280,735
Income tax benefit .................... (195,932) (101,747) (110,263)
----------- ----------- -----------
Income before equity in undistributed
net income (loss) of subsidiaries 6,871,965 6,034,231 5,390,998
Equity in undistributed net income
(loss) of subsidiaries .............. 13,477,158 10,067,507 (7,497,130)
----------- ----------- -----------
Net income (loss) ....... $20,349,123 $16,101,738 $(2,106,132)
=========== =========== ===========
Condensed Statements of Comprehensive Income
Years ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
Net income (loss) .................. $ 20,349,123 $ 16,101,738 $ (2,106,132)
------------ ------------ ------------
Other Comprehensive Income:
Unrealized holding gains arising
during the period, net of
deferred income tax expense .... 8,638,869 4,845,443 962,453
Reclassification adjustment for
(gains) losses included in net
income (loss), net of income tax
expense (benefit) .............. (759,797) 2,053,481 (506,701)
Adjustment for minimum pension
liability associated with
Employers Mutual's pension plan,
net of deferred income tax
expense (benefit) .............. 188,266 (188,266) -
------------ ------------ ------------
Other comprehensive income ....... 8,067,338 6,710,658 455,752
------------ ------------ ------------
Total comprehensive income
(loss) ..................... $ 28,416,461 $ 22,812,396 $ (1,650,380)
============ ============ ============
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant, Continued
Condensed Statements of Cash Flows
Years ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
Net cash provided by
operating activities ................ $ 6,691,273 $ 5,988,850 $ 5,316,361
----------- ----------- -----------
Cash flows from investing activities
Maturities of fixed maturity
securities available-for-sale ..... 1,665,000 1,505,313 -
Purchases of fixed maturity
securities available-for-sale ..... (500,000) (1,694,104) -
Net (purchases) sales of short-term
investments ...................... (2,312,603) (467,269) 1,169,110
----------- ----------- -----------
Net cash (used) provided by
investing activities ........... (1,147,603) (656,060) 1,169,110
----------- ----------- -----------
Cash flows from financing activities
Balances resulting from related
party transactions with Employers
Mutual:
Issuance of common stock ........ 1,944,652 1,326,451 502,007
Dividends paid to Employers
Mutual ........................ (5,522,994) (5,423,042) (5,275,938)
Dividends to Employers Mutual
(reimbursement for non-GAAP
expense) ...................... (505,196) - -
Dividends paid to stockholders ...... (1,350,736) (1,405,064) (1,511,382)
----------- ----------- -----------
Net cash used in financing
activities ..................... (5,434,274) (5,501,655) (6,285,313)
----------- ----------- -----------
Net increase (decrease) in cash ....... 109,396 (168,865) 200,158
Cash at beginning of year ............. 58,676 227,541 27,383
----------- ----------- -----------
Cash at end of year ................... $ 168,072 $ 58,676 $ 227,541
=========== =========== ===========
Income taxes received ................. $ - $ 2,253 $ 6,588
Interest received .................... $ - $ - $ 123
<PAGE>
<TABLE>
<CAPTION>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information
For Years Ended December 31, 2003, 2002 and 2001
Deferred Loss and
policy settlement Net
acquisition expense Unearned Premium investment
Segment costs reserves premiums revenue income
------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 2003:
Property and casualty insurance $22,844,736 $251,260,260 $107,136,936 $241,237,313 $20,724,017
Reinsurance ................... 3,893,048 116,663,621 17,695,671 89,385,497 8,948,076
Parent company ................ - - - - 30,368
----------- ------------ ------------ ------------ -----------
Consolidated ............. $26,737,784 $367,923,881 $124,832,607 $330,622,810 $29,702,461
=========== ============ ============ ============ ===========
Year ended December 31, 2002:
Property and casualty insurance $21,181,714 $229,876,996 $ 98,723,419 $225,013,076 $23,517,163
Reinsurance ................... 3,745,147 101,349,757 17,023,395 72,029,957 9,147,127
Parent company ................ - - - - 113,843
----------- ------------ ------------ ------------ -----------
Consolidated ............. $24,926,861 $331,226,753 $115,746,814 $297,043,033 $32,778,133
Year ended December 31, 2001:
Property and casualty insurance $18,536,512 $221,986,108 $ 86,532,102 $203,392,845 $22,457,799
Reinsurance ................... 2,827,016 92,532,480 12,850,074 61,887,013 8,317,505
Parent company ................ - - - - 194,326
----------- ------------ ------------ ------------ -----------
Consolidated ............. $21,363,528 $314,518,588 $ 99,382,176 $265,279,858 $30,969,630
=========== ============ ============ ============ ===========
Amortization
Losses and of deferred
settlement policy Other
expenses acquisition underwriting Premiums
Segment incurred costs expenses written (1)
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended December 31, 2003:
Property and casualty insurance $168,238,623 $ 52,932,215 $ 24,548,745 $249,591,675
Reinsurance ................... 58,265,927 19,027,017 5,376,197 90,057,773
Parent company ................ - - - -
------------ ------------ ------------ ------------
Consolidated ............. $226,504,550 $ 71,959,232 $ 29,924,942 $339,649,448
Year ended December 31, 2002:
Property and casualty insurance $156,152,022 $ 49,057,682 $ 20,447,874 $237,633,602
Reinsurance ................... 50,905,834 16,669,334 6,481,098 76,203,278
Parent company ................ - - - -
------------ ------------ ------------ ------------
Consolidated ............. $207,057,856 $ 65,727,016 $ 26,928,972 $313,836,880
============ ============ ============ ============
Year ended December 31, 2001:
Property and casualty insurance $168,344,370 $ 42,062,510 $ 17,990,128 $224,412,085
Reinsurance ................... 53,574,380 13,624,505 4,749,785 66,287,442
Parent company ................ - - - -
------------ ------------ ------------ ------------
Consolidated ............. $221,918,750 $ 55,687,015 $ 22,739,913 $290,699,527
============ ============ ============ ============
</TABLE>
(1) Written premiums for 2001 include $13,884,423 of additional premiums
from a change in the recording of installment-based policies.
See note 11 of Notes to Consolidated Financial Statements which is
included as Exhibit 13(c) of this Form 10-K.
<TABLE>
<CAPTION>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule IV - Reinsurance
For years ended December 31, 2003, 2002 and 2001
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 2003:
Consolidated earned premiums ........... $221,662,098 $236,616,480 $345,577,192 $330,622,810 104.5%
============ ============ ============ ============ ==========
Year ended December 31, 2002:
Consolidated earned premiums ........... $241,939,466 $252,860,839 $307,964,406 $297,043,033 103.7%
============ ============ ============ ============ ==========
Year ended December 31, 2001:
Consolidated earned premiums ........... $255,764,274 $266,623,369 $276,138,953 $265,279,858 104.1%
============ ============ ============ ============ ==========
</TABLE>
<TABLE>
<CAPTION>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule VI - Supplemental Insurance Information Concerning
Property-Casualty Insurance Operations
For Years Ended December 31, 2003, 2002 and 2001
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, 2003: $26,737,784 $367,923,881 $ -0- $124,832,607 $330,622,810 $29,672,093
=========== ============ ======== ============ ============ ===========
Year ended December 31, 2002: $24,926,861 $331,226,753 $ -0- $115,746,814 $297,043,033 $32,664,290
=========== ============ ======== ============ ============ ===========
Year ended December 31, 2001: $21,363,528 $314,518,588 $ -0- $ 99,382,176 $265,279,858 $30,775,304
=========== ============ ======== ============ ============ ===========
</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 Written (1)
- ---------------------- ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 2003: $219,028,236 $ 7,476,314 $ 71,959,232 $194,247,192 $339,649,448
============ =========== ============ ============ ============
Year ended December 31, 2002: $200,059,798 $ 6,998,058 $ 65,727,016 $188,868,718 $313,836,880
============ =========== ============ ============ ============
Year ended December 31, 2001: $216,752,003 $ 5,166,747 $ 55,687,015 $194,512,990 $290,699,527
============ =========== ============ ============ ============
</TABLE>
(1) Written premiums for 2001 include $13,884,423 of additional premiums
from a change in the recording of installment-based policies.
See note 11 of Notes to Consolidated Financial Statements which is
included as Exhibit 13(c) of this Form 10-K.
<PAGE>
EMC Insurance Group Inc. and Subsidiaries
Index to Exhibits
Exhibit
number Item Page number
-------- ---- -----------
10(b) 2003 Senior Executive Compensation Bonus Program. 45-49
10(c) EMC Insurance Companies reinsurance
pooling agreement between Employers
Mutual Casualty Company and certain of
its affiliated companies, as amended. 50-77
10(e) 2003 Executive Contingent Salary Plan - EMC
Reinsurance Company. 78-79
10(n) Employers Mutual Casualty Company Executive
Non-Qualified Excess Plan. 80-109
13(a) Selected Financial Data. 110
13(b) Management's Discussion and Analysis
of Financial Condition and Results
of Operations. 111-149
13(c) Consolidated Financial Statements and
Supplementary Data. 150-187
13(d) Stockholder Information. 188
21 Subsidiaries of the Registrant. 189
23 Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm 190
24 Power of Attorney. 191
31.1 Certification of President and Chief Executive
Officer as required by Section 302 of the Sarbanes-
Oxley Act of 2002. 192-193
31.2 Certification of Vice President and Chief Financial
Officer as required by Section 302 of the Sarbanes-
Oxley Act of 2002. 194-195
32.1 Certification of the President and Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as
Adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002. 196
32.2 Certification of the Vice President and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as
Adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002. 197
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>2
<FILENAME>ech10b.txt
<DESCRIPTION>2003 SENIOR EXECUTIVE COMPENSATION BONUS PROGRAM
<TEXT>
EXHIBIT 10(b)
-------------
2003 SENIOR EXECUTIVE COMPENSATION BONUS PROGRAM
The Senior Executive Bonus Program is a measure of three areas often reviewed
when comparing results of different companies or in comparing current company
results from one year to the next.
PURPOSE
1. To provide a motivational tool in the form of compensation to help
executives focus on specific organizational goals to improve profits,
surplus and service in all areas of the corporation.
2. To maintain competitive advantage in terms of recruitment and retention
of senior executives.
3. To provide a plan based on EMC results and industry results, to provide
a better measure of performance.
4. Reward superior results more appropriately.
5. Provide a maximum bonus difficult to attain so there is incentive to
strive for better results.
6. To provide a measure of safety to the company so that senior officers'
total compensation is reduced if company performance declines.
GENERAL BONUS CALCULATION
The bonus plan uses production, surplus growth and the combined ratio, all
valid measures of performance, as follows:
1. EMC WRITTEN PREMIUM - Compares consolidated written premium to a goal
that is established each year.
2. CHANGE IN SURPLUS
3. COMBINED RATIO - Compares EMC combined ratio to a target ratio
established by the Committee each year. Also compares EMC's combined
ratio to that of the industry.
==============================================================================
Seventy-five percent of any bonus will be based on the Industry estimate
published in January by A.M. Best and paid at that time. The remaining
twenty-five percent will be paid when final numbers are released by A.M.
Best (generally in March).
==============================================================================
ALL CALCULATIONS ARE ROUNDED TO THE NEAREST ONE TENTH OF ONE PERCENT.
The factors in each of the formulas are subject to change each year with final
approval by the Senior Executive Compensation and Incentive Stock Option
Committee.
WRITTEN PREMIUM
This component is based on actual net written premium growth compared to a
consolidated written premium goal established each year and approved by the
Committee. (See page 44 for current factor)
<PAGE>
Achieving goal results in a bonus contribution of plus 7.5 percent of salary.
This changes by 1.5 percent for each 1.0 percent variation from goal, subject
to a maximum contribution of plus 15.0 percent and a minimum contribution of
minus 15.0 percent.
==============================================================================
The written premium component is determined as follows:
Percent of actual change, minus goal, plus 5.0, times 1.50.
==============================================================================
Example 1: The goal equals 8.5 percent premium growth.
The actual change equals 7.5 percent premium growth.
7.5 percent minus 8.5 percent equals minus 1 plus 5.0, equals 4.0 times 1.50
equals 6.0. The contribution in this example of written premium towards the
total bonus is equal to 6.0 percent.
Example 2: The goal equals 5.7 percent premium growth. The actual change
equals minus 1.3 percent premium growth.
Minus 1.3 percent minus 5.7 percent equals minus 7.0 plus 5.0 equals minus 2.0
times 1.50 equals minus 3.0.
Example 3: The goal equals 4.7 percent premium growth.
The actual change equals 9.8 percent premium growth.
9.8 percent minus 4.7 percent equals 5.1 percent plus 5.0 equals 10.1 times
1.50 equals 15.2 percent. The contribution in this example of written premium
towards the total bonus equals plus 15.0 percent.
(This component not to exceed plus or minus 15.0 percent of total bonus.)
SURPLUS
The component of surplus is based on the actual change in surplus. Each one
percent increase in surplus represents a change in bonus equal to 1.00 percent
of salary subject to a maximum of 25.0 percent. Each one percent decrease in
surplus represents a two percent decrease of salary subject to a maximum of
minus 20.0 percent.
==============================================================================
The surplus component is determined as follows:
Positive change in surplus times multiplier of 1.00
Negative change in surplus times multiplier of 2.00
==============================================================================
Example 1: Change in surplus equals plus 4.6 percent.
Contribution towards total bonus from surplus component equals
4.6 percent times 1.00 equals 4.6 percent.
Example 2: Change in surplus equals a minus 2.4 percent. Contribution
towards total bonus from surplus component equals minus 2.4
percent times 2.00 equals minus 4.8 percent.
Example 3: Change in surplus equals a plus 10.7 percent. Contribution
towards total bonus from surplus component equals 10.7 percent
times 1.00 equals 10.7 percent.
<PAGE>
COMBINED RATIO
The component for combined ratio is based on EMC's consolidated combined ratio
relative to a target combined ratio on a trade basis, adjusted by a comparison
of the EMC combined ratio to that of the industry.
Refer to page 44 for current target combined ratio and maximum combined ratio.
The target ratio is subject to Committee approval each year. For each 1.0
percent change in the combined ratio, the bonus contribution changes 5.0
percent subject to a maximum contribution of plus 65.0 percent and a minimum
contribution of minus 40.0 percent.
==============================================================================
First determine EMC's relationship to the industry by subtracting EMC's
combined ratio from that of the industry.
==============================================================================
The initial Industry estimate published in December or January by A.M. Best
will be the number used in the calculation. Adjustments will be made as
required when A.M. Best releases final numbers, generally in March.
If the result is a positive number, subtract result (not to exceed 3.0
percent) from EMC's combined ratio to obtain adjusted combined ratio.
Subtract adjusted combined ratio from target combined ratio, add 6.0, multiply
by 5.00 to equal the bonus produced by the combined ratio component.
If the result is a negative number or 0.0, no adjustment is necessary and the
EMC combined ratio is the adjusted combined ratio. Subtract the adjusted
combined ratio from the target combined ratio, add 6.0, multiply by 5.00 to
equal the bonus produced by the combined ratio component.
==============================================================================
The combined ratio formula is determined as follows:
Target combined ratio minus the adjusted combined ratio plus 6.0 times
5.00.
==============================================================================
In the examples below, a target combined ratio of 103.0 is used.
Example 1: Industry ratio equals 101.6 percent.
EMC ratio equals 97.1 percent.
Adjustment * 101.6 minus 97.1 equals 3.0 (maximum
adjustment allowed).
Adjusted ratio * 97.1 minus 3.0 equals 94.1 percent. Target
ratio equals 103.0 percent.
103.0 percent minus 94.1 percent equals 8.9 plus 6 equals 14.9
times 5.00 equals 74.5 percent. (Capped at 65.0)
The contribution towards total bonus from the combined ratio component equals
65.0 percent.
Example 2: Industry ratio equals 101.6 percent.
EMC ratio equals 100.1 percent.
Adjustment * 101.6 minus 100.1 equals 1.5 percent.
Adjusted ratio * 100.1 minus 1.5 equals 98.6 percent.
Target ratio equals 103.0 percent.
103.0 percent minus 98.6 percent equals 4.4 percent plus 6.0
equals 10.4 percent times 5.00 equals
52.0 percent.
The contribution towards the total bonus from the combined ratio component
equals 52.0 percent.
<PAGE>
Example 3: Industry ratio equals 101.6 percent.
EMC ratio equals 110.1 percent.
Adjustment - None (If EMC performance is worse than the
industry average, use the EMC ratio in the formula).
Adjusted ratio * 110.1.
Target ratio equals 103.0 percent.
103.0 percent minus 110.1 percent equals minus 7.1 plus 6.0
equals minus 1.1 times 5.00 equals
minus 5.5.
The contribution towards the total bonus from the combined ratio component
equals minus 5.5 percent.
Assuming each example represents one year, the bonus for the three years would
be as follows:
Component Example 1 Example 2 Example 3
Written Premium 6.0% -3.0% 15.0%
Surplus 4.6% -4.8% 10.7%
Combined Ratio 65.0% 52.0% -5.5%
Total Bonus 50.0% 44.2% 20.2%
* Maximum bonus for Vice President is 50.0 percent.
This represents the bonus for Vice Presidents. Factors would be applied as
follows to arrive at the bonus calculations for Senior Vice Presidents,
Executive Vice Presidents, and President.
Position Example 1 Example 2 Example 3
Vice President 50.0% 44.2% 20.2%
Senior VP Multiply by 1.10 55.0% 51.3% 22.2%
Executive VP Multiply by 1.20 60.0% 55.9% 24.2%
President Multiply by 1.30 65.0% 60.6% 26.3%
MAXIMUM BONUS
For Vice Presidents, the total bonus is the sum of the three components
subject to a maximum of 50 percent of salary.
Maximum Bonus
For Vice Presidents, the percent of salary is 50.0 %
For Senior Vice Presidents, multiply the bonus
percentage by 1.10. 55.0 %
For Executive Vice Presidents, multiply the bonus
percentage by 1.20. 60.0 %
For President, multiply the bonus percentage by
1.30. 65.0 %
EXECUTIVES ELIGIBLE FOR BONUS
Vice Presidents Senior VP Executive VP President
Mark E. Reese John D. Isenhart Ronald W. Jean Bruce G. Kelley
Richard W. Hoffmann David O. Narigon William A. Murray
Douglas J. Zmolek Raymond W. Davis
Steven C. Peck Donald D. Klemme
Richard L. Gass Kevin Hovick
A. Beech Turner
Jeffrey T. Dahms
<PAGE>
PLAN ADMINISTRATION
1. An executive must be on the payroll a minimum of six months
before he/she is eligible for a bonus payment.
2. An executive terminating employment with the companies before
the established date for the payment of bonuses will not be
paid a bonus.
3. Executives retiring or becoming deceased or disabled before
the established date for the payment of bonuses will receive
a bonus on the basis of the portion of the year he/she was on
the payroll.
4. If an executive becomes a member of the Policy Committee at
some time during the year, they will receive a prorata bonus
for that portion of the year they are a member.
5. If an executive is promoted during the year and/or given a
salary increase, the bonus will be prorated on the basis of
the position and/or the salaries paid for the specific
position.
6. Deductions for federal and state income taxes, and FICA, if
applicable, will be made from each bonus on the basis of IRS
regulations.
7. The Executive Compensation Committee may, at its discretion
adjust the bonus calculation for unusual or extenuating
circumstances.
8. The EMC Employee Contingent Salary Plan provides that
employees eligible under a separate "bonus" program will
receive the larger of the "bonus" and the "contingent salary"
for the plan year. In the unlikely event the "contingent
salary" is larger than the "senior executive bonus" the
Executive Compensation Committee may, at its discretion,
approve payment of the "contingent salary" in lieu of the
"senior executive bonus".
9. If there is a disagreement or misunderstanding of the basis
for the bonus or in the calculation in the amounts, the
decision of the Senior Executive Compensation and Incentive
Stock Option Committee will be final.
2003 EXECUTIVE BONUS PLAN
Approved Factors
*Written Premium Growth Target = +6.0%
*Target Combined Ratio = 99.5
*Maximum Combined Ratio = 105.5
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>exh10c.txt
<DESCRIPTION>POOLING AGREEMENT
<TEXT>
EXHIBIT 10(c)
-------------
EMPLOYERS MUTUAL COMPANIES
REINSURANCE POOLING AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY
AND
CERTAIN OF ITS AFFILIATED COMPANIES
REWRITTEN EFFECTIVE JANUARY 1, 1987
REINSURANCE POOLING AGREEMENT
This Agreement made by and between Employers Mutual Casualty Company and
certain of its affiliated or subsidiary companies such as are signatory hereto
by means of exhibits setting forth the interests and liabilities of the
parties, attached hereto and made a part of this Agreement. Employers Mutual
Casualty Company is hereinafter referred to as EMC, and the other companies
signatory hereto are hereinafter referred to as the Affiliated Companies or
as the Affiliated Company, as the context requires.
EMC and each Affiliated Company signatory to the Pooling Agreement agree
to honor the terms set forth herein as if this Agreement were solely between
EMC and each such Affiliated Company. Balances payable to or recoverable from
EMC and any such Affiliated Company shall not serve to offset any balances
payable to or recoverable from any other Affiliated Company signatory to this
Agreement. Reports and remittances between EMC and each Affiliated Company
shall be in sufficient detail to identify the individual premium and loss
obligation of each party to the other.
ARTICLE I
---------
The Companies are engaged in the insurance business and maintain a mutual
business relationship having certain incidents of common management, and
desire to bring about for each other added economies of operation, uniform
underwriting results, diversification as respects the classes of insurance
business written, and maximization of capacity. To accomplish the aforesaid,
the Companies do by means of this Agreement, pool all of their insurance
business then in force as of 12:01 A.M. of the date signatory hereto, and
thereafter to share in the fortunes of their pooled insurance business.
ARTICLE II
----------
EMC hereby reinsures and the Affiliated Company hereby cedes and
transfers to EMC all liabilities incurred under or in connections with all
contracts and policies of insurance issued by the Affiliated Company
outstanding and in force as of 12:01 A.M. of the date signatory hereto, or
thereafter issued by it. Such liabilities shall include the Affiliated
Companys reserves for unearned premiums, outstanding losses and loss expenses
(including unreported losses) and all other underwriting and administrative
expenses as evidenced by the Affiliated Companys books and records, but shall
not include inter-company balances, liabilities for Corporate Taxes including
Federal or State Income Taxes, or liabilities incurred in connection with
their respective investment transactions.
ARTICLE III
-----------
The Affiliated Company hereby assigns and transfers to EMC all right,
title and interest in and to reinsurance outstanding and in force with respect
to the liabilities reinsured by EMC under Article II hereof.
<PAGE>
ARTICLE IV
----------
The Affiliated Company assigns and transfers to EMC amounts equal to the
aggregate of all of its liabilities reinsured by EMC under Article II hereof,
less a commission allowance equal to the prepaid expenses of the Affiliated
Company but not in excess of 40 percent of the Affiliated Companys combined
ratio on a trade basis. Prepaid expenses is defined as those expenses records
in column 2, part 4, of the Underwriting and Expense Exhibit of the Affiliated
Companys convention statement. The trade combined ratio is the ratio of loss
and loss adjustment expense to earned premium, plus the ratio of underwriting
expenses to premiums written.
ARTICLE V
---------
The Affiliated Company hereby reinsures, and EMC hereby cedes and
transfers to the Affiliated Company a portion of its net liabilities under all
contracts and policies of insurance (including those reinsured by EMC under
Article II hereof) on which EMC is subject to liability and which are
outstanding and in force as of 12:01 A.M. of the date signatory hereto, or are
issued thereafter, in accordance with the exhibit attached hereto to which the
Affiliated Company is a signatory party. Such liabilities shall include
reserves for unearned premiums, outstanding losses and loss expenses
(including unreported losses) and all other underwriting and administrative
expenses, but shall not include inter-company balances, liabilities for
Corporate Taxes including Federal or State Income Taxes, or liabilities in
connection with investment transactions.
ARTICLE VI
----------
EMC hereby assigns and transfers to the Affiliated Company amounts equal
to the aggregate of all liabilities of EMC reinsured by the Affiliated Company
under contracts and policies of insurance which are outstanding and in force
as of 12:01 A.M. of the date signatory hereto under Article V hereof, less a
commission allowance equal to the prepaid expenses of EMC but not in excess of
40 percent of EMCs combined ratio on a trade basis. Prepaid expenses is
defined as those expenses recorded in column 2, part 4, of the Underwriting
and Expense Exhibit of EMCs convention statement. The trade combined ratio
is the ratio of loss and loss adjustment expense to earned premium, plus the
ratio of underwriting expenses to premiums written.
ARTICLE VII
-----------
EMC agrees to pay to the Affiliated Company it respective participation
of all premiums written by the companies after first deducting premiums on all
reinsurance ceded to reinsurers (other than the parties hereto). Similarly,
it is further agreed that all losses, loss expense and other underwriting and
administrative expenses (with the exceptions noted in Articles II and V
hereof) of the companies, less all losses and expense recovered and
recoverable under reinsurance ceded to reinsurers (other than the parties
hereto), shall be pro-rated between the parties on the basis of their
respective participation as reflected in the aforesaid exhibit.
<PAGE>
ARTICLE VIII
------------
The obligation of the companies under this Agreement to exchange
reinsurance between themselves may be offset by reciprocal obligation so that
the net amount only shall be required to be transferred, except no offset
shall be valid under circumstances prohibited by Section 7472, New York
Insurance Laws. An accounting on all transactions shall be rendered
quarterly, and the settling of balances shall be made within 30 days after the
rendering of the quarterly reports. Except as otherwise required by the
context of this Agreement, the amount of all payments between the companies
under this Agreement shall be determined on the basis of the convention form
of annual statements of the companies. Notwithstanding anything herein
contained, this Agreement shall not apply to the investment operations of the
companies.
ARTICLE IX
----------
The conditions of reinsurance hereunder shall in all cases be identical
with the conditions of the original insurance or as changed during the term of
insurance.
ARTICLE X
---------
This Agreement is a continuing one and is unlimited as to duration but
may be terminated upon mutual consent or by 30 day prior written notice by
either party.
ARTICLE XI
----------
Each of the companies hereto, as the assuming insurer, hereby agrees that
all reinsurance made, ceded, renewed or otherwise becoming effective under
this Agreement shall be payable by the assuming insurer on the basis of the
liability of the ceding insurer under the policy or contract reinsured without
diminution because of insolvency of the ceding insurer; provided that such
reinsurance shall be payable directly to the ceding insurer or to its
liquidator, receiver or other statutory successor, except as provided by
Section 4118 of New York Insurance Law or except (a) where the contract
specifically provides another payee for such reinsurance in the event of the
insolvency of the ceding insurer and (b) where the assuming insurer, with
consent of the direct insured or insureds, has assumed such policy obligations
of the ceding insurer as direct obligations of the assuming insurer to the
payees under such policies and in substitution for the obligations of the
ceding insurer to such payee; and further provided that the liquidator,
receiver or statutory successor of the ceding insurer shall give written
notice of the pendency of any claim against the insolvent ceding insurer on
the policy or contract reinsured within a reasonable time after such claim;
and the assuming insurer may investigate such claim and interpose, at its own
expense, in the proceeding where such claim is to be adjudicated any defense
or defenses which it may deem available to the ceding insurer or it
liquidator, receiver or statutory successor, the expense thus incurred by the
assuming insurer to be chargeable, subject to court approval against the
insolvent ceding insurer as part of the expense of liquidation to the extent
of proportionate share of the benefit which may accrue to the ceding insurer
solely as a result of the defense undertaken by the assuming insurer.
ARTICLE XII
-----------
Each party shall allow the other party to inspect, at reasonable times,
the records of the Company relevant to the business reinsured under this
Agreement, including files concerning claims, losses, or legal proceedings
which involve or are likely to involve the other party.
<PAGE>
ARTICLE XIII
------------
A. As a condition precedent to any right of action hereunder, any dispute
arising out of this Agreement shall be submitted to the decision of a
board of arbitration composed of two arbitrators and an umpire, meeting
in Des Moines, Iowa, unless otherwise agreed.
B. The members of the board of arbitration shall be active or retired
disinterested officials of insurance or reinsurance companies. Each
party shall appoint its arbitrator and the two arbitrators shall choose
an umpire before instituting the hearing. If the respondent fails to
appoint its arbitrator within four weeks after being requested to do so
by the claimant, the latter shall also appoint the second arbitrator. If
the two arbitrators fail to agree upon the appointment of an umpire
within four weeks after their nominations, each of them shall name three,
of whom the other shall decline two and the decision shall be made by
drawing lots.
C. The claimant shall submit its initial brief within 20 days from
appointment of the umpire. The respondent shall submit its brief within
20 days after receipt of the claimants brief and the claimant may submit
a reply brief within 10 days after receipt of the respondents brief.
D. The board shall make its decision with regard to the custom and usage of
the insurance and reinsurance business. The board shall issue its
decision in writing based upon a hearing in which evidence may be
introduced without following strict rules of evidence but in which cross
examination and rebuttal shall be allowed. The board shall make its
decision within 60 days following the termination of the hearings unless
the parties consent to an extension. The majority decision of the board
shall be final and binding upon all parties to the proceeding. Judgment
may be entered upon the award of the board in any court having
jurisdiction thereof.
E. Each party shall bear the expense of its own arbitrator and shall jointly
and equally bear with the other party the expense of the umpire. The
remaining costs of the arbitration proceedings shall be allocated by the
board.
ARTICLE XIV
-----------
By execution of this Agreement, the parties hereto simultaneously
terminate any and all reinsurance agreements by and between them heretofore
existing, upon the understanding that this Agreement shall supersede and exist
in substitution for any such prior agreements.
Executed by the parties hereto the day and year as reflected in the
exhibit attached hereto.
<PAGE>
ADDENDUM #I TO
EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY
AND
CERTAIN OF ITS AFFILIATED COMPANIES
This Pooling Agreement is amended by adding Article XV thereto, with effect
from January 1, 1993, as follows:
ARTICLE XV
----------
Notwithstanding the wording of this Agreement as contained in Articles
II through VIII, it is agreed and understood that the voluntary
reinsurance assumed business written by EMC and heretofore ceded to
the Affiliated Companies under this Pooling Agreement, is hereafter
not contracts and policies of insurance as used in this agreement,
and is not business subject to cession and transfer by EMC to the
Affiliated Companies.
On January 1, 1993, EMC and the Affiliated Companies shall make such asset and
reserve transfers as are required to give effect to the provisions of this
Article XV.
This Pooling Agreement is further amended by substituting EMC Insurance
Companies for Employers Mutual Companies wherever it appears, consistent
with and pursuant to action of the Board of Directors effecting this name
change.
<PAGE>
INTEREST AND LIABILITIES EXHIBIT # II
TO EMPLOYERS MUTUAL COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in the
Reinsurance Pooling Agreement to which this exhibit is attached, by and
between EMC and the Affiliated Company which is signatory to this exhibit, EMC
hereby cedes and transfers to the Affiliated Company, and the Affiliated
Company hereby accepts reinsurance thereon, 3% of EMCs net liabilities,
pursuant to Article V, effective January 1, 1987.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the date of this Addendum,
as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 3 %
EMCASCO Insurance Company 8 %
Illinois EMCASCO Insurance Company 6 %
Union Mutual Insurance Company
of Providence 2.5%
-----
24.5%
EMCs Net Retained Portions of
its Net Liabilities is 75.5%
-----
100.0%
Executed by the parties hereto this 25th day of November, 1986.
Employers Mutual Casualty Company
By:/s/Richard E. Haskins
---------------------------------
Dakota Fire Insurance Company
By:/s/Robb B. Kelley
---------------------------------
<PAGE>
AMENDMENT # I TO
INTEREST AND LIABILITIES EXHIBIT # II
TO EMPLOYERS MUTUAL COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in the
Reinsurance Pooling Agreement to which this exhibit is attached, by and
between EMC and the Affiliated Company which is signatory to this exhibit, EMC
hereby cedes and transfers to the Affiliated Company, and the Affiliated
Company hereby accepts reinsurance thereon, 5% of EMCs net liabilities,
pursuant to Article V, effective January 1, 1992.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the effective date of this
Amendment, as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 5 %
EMCASCO Insurance Company 9 %
Illinois EMCASCO Insurance Company 8 %
Union Mutual Insurance Company
of Providence 2.5%
-----
29.5%
EMCs Net Retained Portions of
its Net Liabilities is 70.5%
-----
100.0%
Executed by the parties hereto this 20th day of December, 1991.
Employers Mutual Casualty Company
By:/s/Richard E. Haskins
---------------------------------
Dakota Fire Insurance Company
By:/s/Bruce G. Kelley
---------------------------------
<PAGE>
ENDORSEMENT NO. I
TO
REINSURANCE POOLING AGREEMENT BETWEEN
DAKOTA FIRE INSURANCE CO. AND EMPLOYERS MUTUAL CASUALTY COMPANY
Whereby Dakota Fire Insurance Company does not desire to become licensed
in the State of Iowa which disallows credits taken by Employers Mutual
Casualty Company in their financial statements for unearned premium reserve
and loss reserve for reinsurance ceded to Dakota Fire Insurance Company. In
consideration of continuing with a reinsurance program between the companies,
Dakota Fire Insurance Company does place the Bond and Corporate Note portion
of their Custodial Account Number 1929009 at the Bankers Trust Company, Des
Moines, Iowa, under the control of Employers Mutual Casualty Company. The
market value of the account exceeds $9,000,000 and that amount or a greater
amount will be maintained there during the life of this Agreement.
It is further agreed that there will be no bonds cashed by Employers
Mutual Casualty Company for their benefit unless Dakota Fire Insurance Company
defaults on the reinsurance contract.
This contract may be terminated by either party at such a time as may be
mutually agreeable.
Executed by the parties hereto 25th Day of November 1986.
DAKOTA FIRE INSURANCE COMPANY
By:/s/Robb B. Kelley
---------------------------------
EMPLOYERS MUTUAL CASUALTY COMPANY
By:/s/Richard E. Haskins
---------------------------------
<PAGE>
ENDORSEMENT NO. II
TO
REINSURANCE POOLING AGREEMENT BETWEEN DAKOTA FIRE AND
EMPLOYERS MUTUAL CASUALTY COMPANY
Endorsement No. I is hereby deleted from this Agreement.
Executed by the Parties this 4th day of March, 1993.
Employers Mutual Casualty Company
By:/s/Fred A. Schiek
---------------------------------
Dakota Fire Insurance Company
By:/s/Bruce G. Kelley
---------------------------------
<PAGE>
AMENDMENT #II TO INTERESTS AND LIABILITY EXHIBIT II
TO EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in Addendum
#I to the Reinsurance Pooling Agreement to which this Exhibit is attached, EMC
and the affiliated company which is signatory to this Exhibit each do hereby
ratify Addendum #I as a part of the Pooling Agreement effective from January
1, 1993.
Executed by the parties this 23rd day of December, 1992.
Employers Mutual Casualty Company
By:/s/Bruce G. Kelley
---------------------------------
Dakota Fire Insurance Company
By:/s/Fred A. Schiek
---------------------------------
<PAGE>
AMENDMENT #III TO
INTEREST AND LIABILITIES EXHIBIT #II
TO EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
This Amendment is effective January 1, 1997.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the effective date of this
Amendment, as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 5 %
EMCASCO Insurance Company 9 %
Hamilton Mutual Insurance Company of Cincinnati, Ohio 5 %
Illinois EMCASCO Insurance Company 8 %
Union Insurance Company of Providence 2.5%
-----
34.5%
EMCs Net Retained Portion of its Net Liabilities is 65.5%
-----
100.0%
Executed by the parties hereto this 26th day of March, 1997.
Employers Mutual Casualty Company
By: /s/Bruce G. Kelley
---------------------------------
Dakota Fire Insurance Company
By: /s/Fred A. Schiek
---------------------------------
<PAGE>
AMENDMENT #IV TO
INTEREST AND LIABILITIES EXHIBIT #II
TO EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
This Amendment is effective January 1, 1998.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the effective date of this
Amendment, as follows:
American Liberty Insurance Company 3.5%
Dakota Fire Insurance Company 5 %
EMCASCO Insurance Company 9 %
Farm and City Insurance Company 1.5%
Hamilton Mutual Insurance Company Of
Cincinnati, Ohio 5 %
Illinois EMCASCO Insurance Company 8 %
Union Insurance Company of Providence 2.5%
34.5%
-----
EMCs Net Retained Portion of its Net
Liabilities is 65.5%
-----
100.0%
Executed by the parties hereto this 15th day of January, 1998.
Employers Mutual Casualty Company
By:/s/ Bruce G. Kelley
------------------------------
Print Name and Title: Bruce G. Kelley
President and CEO
Dakota Fire Insurance Company
By:/s/ Ronald W. Jean
------------------------------
Print Name and Title: Ronald W. Jean
Vice President
and Actuary
<PAGE>
INTEREST AND LIABILITIES EXHIBIT #III
TO EMPLOYERS MUTUAL COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in the
Reinsurance Pooling Agreement to which this exhibit is attached, by and
between EMC and the Affiliated Company which is signatory to this exhibit, EMC
hereby cedes and transfer to the Affiliated Company, and the Affiliated
Company hereby accepts reinsurance thereon, 6% of EMCs net liabilities,
pursuant to Article V, effective January 1, 1987.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the date of this Addendum,
as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 3 %
EMCASCO Insurance Company 8 %
Illinois EMCASCO Insurance Company 6 %
Union Mutual Insurance Company
of Providence 2.5%
-----
24.5%
EMCs Net Retained Portions of
its Net Liabilities is 75.5%
-----
100.0%
Executed by the parties hereto this 25th day of November, 1986.
EMPLOYERS MUTUAL CASUALTY COMPANY
By:/s/Richard E. Haskins
---------------------------------
ILLINOIS EMCASCO INSURANCE COMPANY
By:/s/Robb B. Kelley
---------------------------------
<PAGE>
AMENDMENT # I TO
INTEREST AND LIABILITIES EXHIBIT # III
TO EMPLOYERS MUTUAL COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in the
Reinsurance Pooling Agreement to which this exhibit is attached, by and
between EMC and the Affiliated Company which is signatory to this exhibit, EMC
hereby cedes and transfers to the Affiliated Company, and the Affiliated
Company hereby accepts reinsurance thereon, 8% of EMCs net liabilities,
pursuant to Article V, effective January 1, 1992.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the effective date of this
Amendment, as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 5 %
EMCASCO Insurance Company 9 %
Illinois EMCASCO Insurance Company 8 %
Union Mutual Insurance Company
of Providence 2.5%
-----
29.5%
EMCs Net Retained Portions of
its Net Liabilities is 70.5%
-----
100.0%
Executed by the parties hereto this 20th day of December, 1991.
Employers Mutual Casualty Company
By:/s/Richard E. Haskins
---------------------------------
Illinois EMCASCO Insurance Company
By:/s/Bruce G. Kelley
---------------------------------
<PAGE>
AMENDMENT #II TO INTERESTS AND LIABILITY EXHIBIT III
TO EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in Addendum
#I to the Reinsurance Pooling Agreement to which this Exhibit is attached, EMC
and the affiliated company which is signatory to this Exhibit each do hereby
ratify Addendum #I as a part of the Pooling Agreement effective from January
1, 1993.
Executed by the parties this 23rd day of December, 1992.
Employers Mutual Casualty Company
By:/s/Bruce G. Kelley
---------------------------------
Illinois EMCASCO Insurance Company
By:/s/Fred A. Schiek
---------------------------------
<PAGE>
AMENDMENT #III TO
INTEREST AND LIABILITIES EXHIBIT #III
TO EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
This Amendment is effective January 1, 1997.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the effective date of this
Amendment, as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 5 %
EMCASCO Insurance Company 9 %
Hamilton Mutual Insurance Company of Cincinnati, Ohio 5 %
Illinois EMCASCO Insurance Company 8 %
Union Insurance Company of Providence 2.5%
-----
34.5%
EMCs Net Retained Portion of its Net Liabilities is 65.5%
-----
100.0%
Executed by the parties hereto this 26th day of March, 1997.
Employers Mutual Casualty Company
By: /s/Bruce G. Kelley
---------------------------------
Illinois EMCASCO Insurance Company
By: /s/Fred A. Schiek
---------------------------------
<PAGE>
AMENDMENT #IV TO
INTEREST AND LIABILITIES EXHIBIT #III
TO EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
This Amendment is effective January 1, 1998.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the effective date of this
Amendment, as follows:
American Liberty Insurance Company 3.5%
Dakota Fire Insurance Company 5 %
EMCASCO Insurance Company 9 %
Farm and City Insurance Company 1.5%
Hamilton Mutual Insurance Company Of
Cincinnati, Ohio 5 %
Illinois EMCASCO Insurance Company 8 %
Union Insurance Company of Providence 2.5%
-----
34.5%
EMCs Net Retained Portion of its Net
Liabilities is 65.5%
-----
100.0%
Executed by the parties hereto this 15th day of January, 1998.
Employers Mutual Casualty Company
By:/s/ Bruce G. Kelley
------------------------------
Print Name and Title: Bruce G. Kelley
President and CEO
Illinois EMCASCO Insurance Company
By:/s/ Ronald W. Jean
------------------------------
Print Name and Title: Ronald W. Jean
Vice President
and Actuary
<PAGE>
INTEREST AND LIABILITIES EXHIBIT #IV
TO EMPLOYERS MUTUAL COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in the
Reinsurance Pooling Agreement to which this exhibit is attached, by and
between EMC and the Affiliated Company which is signatory to this exhibit, EMC
hereby cedes and transfers to the Affiliated Company, and the Affiliated
Company hereby accepts reinsurance thereon, 8% of EMCs net liabilities,
pursuant to Article V, effective January 1, 1987. The Affiliated Companies
signatory to this Agreement and their assumed portions of the net liabilities
of EMC are, as of the date of this Addendum, as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 3 %
EMCASCO Insurance Company 8 %
Illinois EMCASCO Insurance Company 6 %
Union Mutual Insurance Company
of Providence 2.5%
-----
24.5%
EMCs Net Retained Portions of
its Net Liabilities is 75.5%
-----
100.0%
Executed by the parties hereto this 25th day of November, 1986.
Employers Mutual Casualty Company
By:/s/Richard E. Haskins
---------------------------------
EMCASCO Insurance Company
By:/s/Robb B. Kelley
---------------------------------
<PAGE>
AMENDMENT # I TO
INTEREST AND LIABILITIES EXHIBIT # IV
TO EMPLOYERS MUTUAL COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in the
Reinsurance Pooling Agreement to which this exhibit is attached, by and
between EMC and the Affiliated Company which is signatory to this exhibit, EMC
hereby cedes and transfers to the Affiliated Company, and the Affiliated
Company hereby accepts reinsurance thereon, 9% of EMCs net liabilities,
pursuant to Article V, effective January 1, 1992.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the effective date of this
Amendment, as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 5 %
EMCASCO Insurance Company 9 %
Illinois EMCASCO Insurance Company 8 %
Union Mutual Insurance Company
of Providence 2.5%
-----
29.5%
EMCs Net Retained Portions of
its Net Liabilities is 70.5%
-----
100.0%
Executed by the parties hereto this 20th day of December, 1991.
Employers Mutual Casualty Company
By:/s/Richard E. Haskins
----------------------------------
EMCASCO Insurance Company
By:/s/Bruce G. Kelley
----------------------------------
<PAGE>
AMENDMENT #II TO INTERESTS AND LIABILITY EXHIBIT IV
TO EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in Addendum
#I to the Reinsurance Pooling Agreement to which this Exhibit is attached, EMC
and the affiliated company which is signatory to this Exhibit each do hereby
ratify Addendum #I as a part of the Pooling Agreement effective from January
1, 1993.
Executed by the parties this 23rd day of December, 1992.
Employers Mutual Casualty Company
By:/s/Bruce G. Kelley
---------------------------------
EMCASCO Insurance Company
By:/s/Fred A. Schiek
---------------------------------
<PAGE>
AMENDMENT #III TO
INTEREST AND LIABILITIES EXHIBIT #IV
TO EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
This Amendment is effective January 1, 1997.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the effective date of this
Amendment, as follows:
American Liberty Insurance Company 5 %
Dakota Fire Insurance Company 5 %
EMCASCO Insurance Company 9 %
Hamilton Mutual Insurance Company of Cincinnati, Ohio 5 %
Illinois EMCASCO Insurance Company 8 %
Union Insurance Company of Providence 2.5%
-----
34.5%
EMCs Net Retained Portion of its Net Liabilities is 65.5%
-----
100.0%
Executed by the parties hereto this 26th day of March, 1997.
Employers Mutual Casualty Company
By: /s/Bruce G. Kelley
---------------------------------
EMCASCO Insurance Company
By: /s/Fred A. Schiek
---------------------------------
<PAGE>
AMENDMENT #IV TO
INTEREST AND LIABILITIES EXHIBIT #IV
TO EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
This Amendment is effective January 1, 1998.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the effective date of this
Amendment, as follows:
American Liberty Insurance Company 3.5%
Dakota Fire Insurance Company 5 %
EMCASCO Insurance Company 9 %
Farm and City Insurance Company 1.5%
Hamilton Mutual Insurance Company Of
Cincinnati, Ohio 5 %
Illinois EMCASCO Insurance Company 8 %
Union Insurance Company of Providence 2.5%
-----
34.5%
EMCs Net Retained Portion of its Net
Liabilities is 65.5%
-----
100.0%
Executed by the parties hereto this 15th day of January, 1998.
Employers Mutual Casualty Company
By:/s/ Bruce G. Kelley
------------------------------
Print Name and Title: Bruce G. Kelley
President and CEO
EMCASCO Insurance Company
By:/s/ Ronald W. Jean
------------------------------
Print Name and Title: Ronald W. Jean
Vice President
and Actuary
<PAGE>
INTEREST AND LIABILITIES EXHIBIT #VII
TO EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements reflected in the
Reinsurance Pooling Agreement to which this exhibit is attached, by and
between EMC and the Affiliated Company which is signatory to this exhibit,
EMC hereby accepts reinsurance thereon, 1.5% of EMCs net liabilities,
pursuant to Article V, effective January 1, 1998.
The Affiliated Companies signatory to this Agreement and their assumed
portions of the net liabilities of EMC are, as of the effective date of this
Amendment, as follows:
American Liberty Insurance Company 3.5%
Dakota Fire Insurance Company 5 %
EMCASCO Insurance Company 9 %
Farm and City Insurance Company 1.5%
Hamilton Mutual Insurance Company Of
Cincinnati, Ohio 5 %
Illinois EMCASCO Insurance Company 8 %
Union Insurance Company of Providence 2.5%
-----
34.5%
EMCs Net Retained Portion of its Net
Liabilities is 65.5%
-----
100.0%
Executed by the parties hereto this 15th day of January, 1998.
Employers Mutual Casualty Company
By:/s/ Bruce G. Kelley
------------------------------
Print Name and Title: Bruce G. Kelley
President and CEO
Farm and City Insurance Company
By:/s/ Ronald W. Jean
------------------------------
Print Name and Title: Ronald W. Jean
Vice President
and Actuary
<PAGE>
AMENDMENT #I TO
INTEREST AND LIABILITIES EXHIBIT #VII
TO EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
In consideration of the covenants and agreements as reflected in Addendum
#I to the Reinsurance Pooling Agreement to which this Exhibit is attached, EMC
and the Affiliated Company which is signatory to this Exhibit each do hereby
ratify Addendum #I as a part of the Reinsurance Pooling Agreement effective
from January 1, 1998.
Executed by the parties hereto this 15th day of January, 1998.
Employers Mutual Casualty Company
By:/s/ Bruce G. Kelley
------------------------------
Print Name and Title: Bruce G. Kelley
President and CEO
Farm and City Insurance Company
By:/s/ Ronald W. Jean
------------------------------
Print Name and Title: Ronald W. Jean
Vice President
and Actuary
<PAGE>
ADDENDUM #II TO
EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY
AND
CERTAIN OF ITS AFFILIATED COMPANIES
This EMC Insurance Companies Reinsurance Pooling Agreement, rewritten
effective January 1, 1987, including all Exhibits attached thereto, and as
previously amended, is further amended by adding thereto:
ARTICLE XVI
-----------
This Agreement, including its attached Addenda, Exhibits, Endorsements
and the Amendments thereto, constitutes the entire agreement between the
parties hereto, and there are no other oral or written agreements,
understandings or undertakings with respect to the subject matter hereof not
expressed in this Agreement and its Addenda, Exhibits, Endorsements and the
Amendments thereto.
Executed this 24th day of July, 1998.
EMPLOYERS MUTUAL CASUALTY COMPANY FARM AND CITY INSURANCE COMPANY
By /s/ Bruce G. Kelley By /s/ Bruce G. Kelley
- ----------------------------------- ----------------------------
Bruce G. Kelley Bruce G. Kelley
Its President, Treasurer & CEO Its Chairman, Treasurer & CEO
AMERICAN LIBERTY INSURANCE COMPANY THE HAMILTON MUTUAL INSURANCE COMPANY
OF CINCINNATI, OHIO
By /s/ Bruce G. Kelley By /s/ Bruce G. Kelley
- ----------------------------------- ----------------------------
Bruce G. Kelley Bruce G. Kelley
Its Chairman & CEO Its Chairman & CEO
DAKOTA FIRE INSURANCE COMPANY ILLINOIS EMCASCO INSURANCE COMPANY
By /s/ Bruce G. Kelley By /s/ Bruce G. Kelley
- ----------------------------------- ----------------------------
Bruce G. Kelley Bruce G. Kelley
Its Chairman & CEO Its Chairman
EMCASCO INSURANCE COMPANY UNION INSURANCE COMPANY OF PROVIDENCE
By /s/ Bruce G. Kelley By /s/ Bruce G. Kelley
- ----------------------------------- ----------------------------
Bruce G. Kelley Bruce G. Kelley
Its Chairman, President, Its Chairman, Treasurer & CEO
Treasurer & CEO
<PAGE>
ADDENDUM #III TO
EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY
AND
CERTAIN OF ITS AFFILIATED COMPANIES
This EMC Insurance Companies Reinsurance Pooling Agreement, rewritten
effective January 1, 1987, including all Exhibits attached thereto, and as
previously amended (the "Pooling Agreement"), is further amended by
substituting "Union Insurance Company of Providence" for "Union Mutual
Insurance Company of Providence" wherever it appears, consistent with and
pursuant to actions of the Board of Directors of such Affiliated Company
effecting that name change, with the effective date of such name change being
March 17, 1994.
This Pooling Agreement is further amended by substituting "EMC Property &
Casualty Company" for "American Liberty Insurance Company" wherever it
appears, consistent with and pursuant to actions of the Board of Directors of
such Affiliated Company effecting that name change, with the effective date of
such name change being January 1, 1999.
Executed this 19th day of January, 1999.
EMPLOYERS MUTUAL CASUALTY COMPANY
By /s/ Bruce G. Kelley
-------------------------------
Bruce G. Kelley
Its President, Treasurer & CEO
DAKOTA FIRE INSURANCE COMPANY
By /s/ Bruce G. Kelley
-------------------------------
Bruce G. Kelley
Its Chairman & CEO
EMC PROPERTY & CASUALTY COMPANY
(f/k/a American Liberty Insurance Company)
By /s/ Bruce G. Kelley
-------------------------------
Bruce G. Kelley
Its Chairman & CEO
EMCASCO INSURANCE COMPANY
By /s/ Bruce G. Kelley
-------------------------------
Bruce G. Kelley
Its Chairman, President, Treasurer & CEO
FARM AND CITY INSURANCE COMPANY
By /s/ Bruce G. Kelley
-------------------------------
Bruce G. Kelley
Its Chairman, Treasurer & CEO
THE HAMILTON MUTUAL INSURANCE COMPANY OF
CINCINNATI, OHIO
By /s/ Bruce G. Kelley
-------------------------------
Bruce G. Kelley
Its Vice Chairman & CEO
ILLINOIS EMCASCO INSURANCE COMPANY
By /s/ Bruce G. Kelley
-------------------------------
Bruce G. Kelley
Its Chairman
UNION INSURANCE COMPANY OF PROVIDENCE
(f/k/a Union Mutual Insurance Company of
Providence)
By /s/ Bruce G. Kelley
-------------------------------
Bruce G. Kelley
Its Chairman, Treasurer & CEO
<PAGE>
ADDENDUM #IV TO
EMC INSURANCE COMPANIES
REINSURANCE POOLING AGREEMENT
BETWEEN
EMPLOYERS MUTUAL CASUALTY COMPANY
AND
CERTAIN OF ITS AFFILIATED COMPANIES
This EMC Insurance Companies Reinsurance Pooling Agreement, rewritten
effective January 1, 1987, including all Exhibits attached thereto, and as
previously amended, is further amended by adding thereto:
ARTICLE XVII
Notwithstanding the wording of this Agreement as contained in Articles II
through VIII, it is agreed and understood that EMC is responsible for the
accuracy of the amounts produced by its various systems and computational
processes and utilized in the preparation of the financial statements of the
Affiliated Companies. In the event the amounts produced by EMCs systems
and/or computational processes, and relied upon by both EMC and the Affiliated
Companies in implementing this Agreement, subsequently prove to be inaccurate
or overstated to the extent that a restatement of the financial statements of
one or more of the Affiliated Companies would otherwise be required, EMC
hereby guarantees to make up the shortfall or difference resulting from such
error(s) in its systems and/or computational processes so that no such
restatement of the financial statement of any Affiliated Company is required.
Executed this 8th day of March, 2004 but retroactively effective to
December 31, 2003.
Employers Mutual Casualty Company Farm and City Insurance Company
By: /s/ Bruce G. Kelley By: /s/ Robert C. Morlan
- --------------------------------- ----------------------------
Bruce G. Kelley, Robert C. Morlan,
Its President & CEO Its President & COO
Dakota Fire Insurance Company The Hamilton Mutual Insurance Company
Of Cincinnati, Ohio
By: /s/ William A. Murray By: /s/ William A. Murray
- --------------------------------- ----------------------------
William A. Murray, William A. Murray
Its Executive Vice President Its Executive Vice President
EMC Property & Casualty Company Illinois EMCASCO Insurance Company
By: /s/ William A. Murray By: /s/ William A Murray
- --------------------------------- ----------------------------
William A. Murray, William A. Murray,
Its Executive Vice President Its Vice President and COO
& COO
EMCASCO Insurance Company Union Insurance Company of Providence
By: /s/ William A. Murray By: /s/ William B. Murray
- --------------------------------- ----------------------------
William A. Murray, William A. Murray,
Its Executive Vice President Its Vice Chairman &
& COO Executive Vice President
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<FILENAME>exh10e.txt
<DESCRIPTION>2003 EXECUTIVE CONTINGENT SALARY PLAN
<TEXT>
EXHIBIT 10(e)
-------------
2003 EXECUTIVE CONTINGENT SALARY PLAN(CSP)
EMC Reinsurance Company (EMC Re)
Purpose - To provide special incentive for participants to contribute to the
success of EMC Reinsurance Company and EMC Insurance Companies and to provide
a means to participate in the favorable underwriting results of the companies.
Plan Year - Calendar year beginning January 1, 2003 and ending December 31,
2003.
Eligible Participants -
Ronnie D. Hallenbeck, President - EMC Reinsurance Company
Subject Compensation - base salary and wages paid during the plan year in the
eligible position
Contingent Salary Percentage - based on (1) the Consolidated Combined Trade
Ratio for EMC Insurance Companies and (2) the adjusted Combined Trade Ratio
for EMC Re computed according to the formula below. Calculations will be to
the nearest 1/10th of 1%.
Determination of adjusted Combined Trade Ratio for EMC Re
Step One: The actual combined trade ratio is adjusted for the profit or loss
incurred by EMCC under the occurrence cap protection.
Step Two: The adjusted combined trade ratio from Step One is compared to
that of the reinsurance industry as published by the Reinsurance Association
of America. If it is greater than the RAA combined, no further adjustment
is made. If it is lower than the RAA combined ratio, the adjusted combined
trade ratio is reduced by the difference, subject to a maximum reduction of
three points.
Contingent Salary Percentage =
Consolidated Combined Trade Ratio Component (A)
+ Adjusted EMC Re Combined Trade Ratio Component (B)
(subject to maximum of 50.0%)
Where,
(A) = (105.5 - Consolidated Combined Trade Ratio) X 2.0%
(subject to maximum of 20.0% and minimum of 0.0%)
and
(B) = (105.5 - adjusted EMC Re Combined Trade Ratio) X 3.0%
(subject to maximum of 50.0% and minimum of -20.0%)
<PAGE>
The Contingent Salary Payment for the plan year will be made to eligible
participants as soon as all necessary information is available and
calculations have been completed and verified and will be equal to -
Contingent Salary Percentage X Subject Compensation
ADMINISTRATION:
1. An otherwise eligible participant will not be eligible to receive
payment if they are no longer employed by the Companies on the
established date for the contingent salary payment.
2. Exception - an eligible participant who retires or becomes deceased or
disabled before the established date for the contingent salary payment
will receive payment based on subject compensation for the plan year.
3. If there is a disagreement or misunderstanding of the basis for the CSP
or in the calculation of the amount payable, the decision of the
Executive Vice President for Corporate Development will be final
4. Deductions for Federal and State income taxes and FICA, if applicable,
will be made from the contingent salary payment on the basis of IRS
regulations.
5. Neither the adoption of the Executive Contingent Salary Plan nor any of
its provisions shall confer upon any participant any right to continued
employment with the Companies or affect in any way the right of the
Companies to terminate the employment of a participant at any time.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>5
<FILENAME>exh10n.txt
<DESCRIPTION>EMCC EXECUTIVE NON-QUALIFIED EXCESS PLAN
<TEXT>
EXHIBIT 10(n)
-------------
THE EXECUTIVE NON-QUALIFIED EXCESS PLAN
ADOPTION AGREEMENT
THIS AGREEMENT is made the 31st day of December, 2001, by Employers
Mutual Casualty Company (the "Employer"), having its principal office at 717
Mulberry, Des Moines, IA 50303 and EXECUTIVE BENEFIT SERVICES, INC. (the
"Sponsor"), having its principal office at 434 Fayetteville Street, Suite
1160, Raleigh, North Carolina 27601.
W I T N E S S E T H:
WHEREAS, the Sponsor has established The Executive Non-qualified Excess
Plan (the "Plan"); and
WHEREAS, the Employer desires to adopt the Plan as an unfunded,
non-qualified deferred compensation plan, for the benefit of the
Employer's X Employees and/or Independent Contractors;
--- ----
NOW, THEREFORE, the Employer hereby adopts the Plan in accordance with
the terms and conditions set forth in this Adoption Agreement:
ARTICLE I
Terms used in this Adoption Agreement shall have the same meaning as in
the Plan, unless some other meaning is expressly herein set forth. The
Employer hereby represents and warrants that the Plan has been adopted by
the Employer upon proper authorization and the Employer hereby elects to
adopt the Plan for the benefit of its Participants as referred to in the
Plan. By the execution of this Adoption Agreement, the Employer hereby
agrees to be bound by the terms of the Plan.
This Adoption Agreement may only be used in connection with The
Executive Non-qualified Excess Plan. The Sponsor will inform the Employer of
any amendments to the Plan or of the discontinuance or abandonment of the
Plan. For questions concerning the Plan, the Employer may call the Sponsor
at (919) 833-1042.
ARTICLE II
The Employer hereby makes the following designations or elections for
the purpose of the Plan [Section references below correspond to Section
references in the Plan]:
2.4 Adjustment Date: The Deferred Compensation Account of Participants
shall be adjusted for the amount of any Salary Deferral Credits, Employer
Matching Credits and Employer Performance Incentive Credits to such account
on the last business day of each Plan Year and such other times as may be
designated below [check any additional desired Adjustment Dates]:
___ (i) The last business day of each calendar quarter during the
Plan Year.
___ (ii) The last business day of each month during the Plan Year.
X (iii) The last business day of each payroll period during the Plan
--- Year.
<PAGE>
___ (iv) Each day securities are traded on a national stock exchange.
___ (v) Other [specify] _________________________________________
_____________________________________________________.
2.9 Compensation: The "Compensation" of a Participant shall mean all of
each Participant's [check desired option(s)]:
X (i) compensation received as an Employee reportable in box 1,
--- Wages, Tips and other Compensation, on Form W-2.
___ (ii) annual base salary.
___ (iii) annual bonus.
___ (iv) long term incentive plan compensation.
___ (v) compensation received as an Independent Contractor reportable
on Form 1099.
___ (vi) other [specify] _______________________________________
___________________________________________________.
Notwithstanding the foregoing, Compensation _X_ SHALL ____ SHALL NOT include
Salary Deferral Credits under this Plan and amounts contributed by the
Participant pursuant to a Salary Deferral Agreement to another employee
benefit plan of the Employer which are not includible in the gross income of
the Employee under Section 125, 402(e)(3), 402(h) or 403(b) of the Code.
2.13 Effective Date: [check desired option]:
___ (i) This is a newly-established Plan, and the Effective Date of
the Plan is ____________________.
X (ii) This is an amendment and restatement of the Plan (Employers
--- Mutual Casualty Company Excess Deferral Plan) with an
effective date of January 1, 2001, and the Effective Date of
this amended and restated Plan is January 1, 2002. This is
amendment number 1.
2.20 Normal Retirement Age: The Normal Retirement Age of a Participant
shall be [check desired option]:
X (i) Age 65.
---
___ (ii) The later of age ____ or the ______ anniversary of the
participation commencement date. The participation
commencement date is the first day of the first Plan Year in
which the Participant commenced participation in the Plan.
<PAGE>
2.22 Participating Employer(s): As of the Effective Date, the following
Participating Employer(s) are parties to the Plan [list all employer-
Parties, including the Employer]:
Name of Employer Address Telephone No. EIN
Employers Mutual Casualty P.O. Box 712 515-280-2772 42-0234980
Des Moines, IA 50303
Modern Life Company SAME
Farm & City Insurance Co. SAME
2.23 Plan: The name of the Plan as applied to the Employer is
Executive Non-qualified Excess Plan of Employers Mutual Casualty
2.24 Plan Administrator: The Plan Administrator shall be [check desired
option]:
___ (i) Committee.
X (ii) Employer.
---
___ (iii) Other (specify): .
2.25 Plan Year: The Plan Year shall be the 12 consecutive calendar
month period ending on the last day of the month of December, and each
anniversary thereof.
2.33 Trust: [check desired option]:
___ (i) The Employer does desire to establish a "rabbi" trust for the
purpose of setting aside assets of the Employer contributed
thereto for the payment of benefits under the Plan.
X (ii) The Employer does not desire to establish a "rabbi" trust for
--- the purpose of setting aside assets of the Employer
contributed thereto for the payment of benefits under the
Plan.
2.35 Years of Service: For vesting purposes, Years of Service of a
Participant shall be calculated from the date designated below [check
desired option]:
X (i) First Day of Service.
---
___ (ii) Effective Date of the Plan.
___ (iii) Plan Entry Date
___ (iiii) Each Contribution Date. Under this option (iiii), each
Employer Matching Credit or Performance Incentive Credit shall vest in
accordance with the applicable schedule selected in Section 7 of this
Adoption Agreement based on the Years of Service of a Participant from the
Adjustment Date on which each Employer Matching Credit or Performance
Incentive Credit is credited to his or her Deferred Compensation Account.
<PAGE>
3.1 Salary Deferral Credits: A Participant may elect to have his
Compensation (as selected in Section 2.9 of this Adoption Agreement) reduced
by the following percentage or amount per pay period, or for a specified pay
period or periods, as designated in writing to the Committee [check the
applicable options]:
X (i) annual base salary:
--- [complete the following blanks only if a minimum or maximum
deferral is desired]:
minimum deferral: $__________ or __________%
maximum deferral: $__________ or 25 %
___ (ii) annual bonus:
[complete the following blanks only if a minimum or maximum
deferral is desired]:
minimum deferral: $__________ or __________%
maximum deferral: $__________ or __________%
___ (iii) other [please specify type, as selected in Section 2.9 of
this Adoption Agreement]: ___________________:
[complete the following blanks only if a minimum or maximum
deferral is desired]:
minimum deferral: $__________ or __________%
maximum deferral: $__________ or __________%
___ (iv) no salary deferral provision.
3.1.3 Termination of Salary Deferrals: A Participant may terminate his
Salary Deferral Agreement effective as of [check desired option]:
X (i) the first full payroll period commencing after the date
--- written notice of the termination is received by the
Committee.
___ (ii) the January 1 occurring after the date written notice of the
termination is received by the Committee.
3.2 Employer Matching Credits: The Employer may make matching credits
to the Deferred Compensation Account of each eligible Participant in an
amount determined as follows [check desired option(s)]:
Participants eligible to receive an Employer Match are defined as follows:
o Title of EMPLOYERS MUTUAL CASUALTY COMPANY Vice President or above,
President of Employers Modern Life Company,
President of Farm & City Insurance Company.
o Earnings in the top 10% of employees.
o Currently deferring the maximum allowed into the 401(k) qualified plan.
___ (i) ____% of the Participant's Salary Deferral Credits.
X (ii) 100 % of the first 5 % of the Participant's Compensation which is
- --- elected as a Salary Deferral Credit.
___ (iii) An amount determined each Plan Year by the Employer.
<PAGE>
___ (iv) The Employer shall decide from year to year whether matching
credits will be made and shall notify Participants annually of the
manner in which matching credits will be calculated for the
subsequent year.
___ (v) The Employer shall not match amounts provided above in excess
of $______________, or in excess of ___% of the Participant's
Compensation per Plan Year.
___ (vi) No Employer matching credits provision.
3.3 Employer Performance Incentive Credits: The Employer may make
performance incentive credits to the Deferred Compensation Account of each
Active Participant in an amount determined as follows:
___ (i) Such amount out of the current or accumulated net profit of the
Employer for such year as the Employer in its sole discretion
shall determine.
___ (ii) Such amount as the Employer in its sole discretion shall determine
without regard to current or accumulated net profit.
___ (iii) The Employer shall not make Performance Incentive Credits in
excess of $__________, or in excess of ____% of the Participant's
Compensation per Plan Year.
X (iv) No Employer performance incentive credits provision.
- ---
4.1 Death of a Participant: If the Participant dies while in Service,
the Employer shall pay a benefit to the Beneficiary in an amount equal to
the Accrued Benefit of the Participant determined as of the date payments to
the Beneficiary commence, plus [check if desired]:
___ (i) An amount to be determined by the Committee.
___ (ii) A lump sum of $ ____________.
___ (iii) _____ times the annual base salary of the Participant at his date
of death.
___ (iv) Other [specify]:
________________________________________.
X (v) No additional benefits.
- ---
4.4.2 Early Retirement: The Employer may elect to provide for Early
Retirement. If Early Retirement is permitted, it shall be subject to the
following eligibility requirements [check desired option and fill in
appropriate blanks]:
___ (i) Completion of _____ Years of Service.
X (ii) Attainment of age 55 .
- ---
___ (iii) Completion of _____ Years of Service and attainment of age ____.
___ (iv) No Early Retirement provisions.
<PAGE>
5.1 Regular In-Service withdrawals: [check desired option]:
___ (i) The Employer does elect to permit regular in-service withdrawals
by a Participant from his Deferred Compensation Account.
X (ii) The Employer does not elect to permit regular in-service
- --- withdrawals by a Participant from his Deferred Compensation
Account.
5.3 "Haircut" Withdrawals: [check desired option]:
X (i) The Employer does elect to permit "haircut" withdrawals by a
- --- Participant from his Deferred Compensation Account.
Specify percentage (not less than 10%) of amount withdrawn that
shall be forfeited: 10 %
___ (ii) The Employer does not elect to permit "haircut" withdrawals by a
Participant from his Deferred Compensation Account.
5.4 College Education Withdrawals: [check desired option]:
___ (i) The Employer does elect to permit college education withdrawals
by a Participant from his Deferred Compensation Account.
X (ii) The Employer does not elect to permit college education
- --- withdrawals by a Participant from his Deferred Compensation
Account.
6.1 Payment Options: Any benefit payable under the Plan may be made to
the Participant or his Beneficiary (as applicable) in any of the following
payment forms, as selected by the Participant upon his entry into the Plan
[check desired option(s)]:
X (i) A lump sum in cash as soon as feasible following the date
- --- Participant's service with the Employer terminates for any reason
(including Retirement, Disability or death).
X (ii) Approximately equal annual installments over a term of 5 or 10
- --- years as elected by the Participant upon his entry into the Plan.
Payment of the benefit shall commence as of the following date
[select desired option]:
___ The first business day of the calendar year following the
date Participant's service with the Employer terminates for
any reason (including Retirement, Disability or death).
___ The first business day of the calendar quarter following the
date Participant's service with the Employer terminates for
any reason (including Retirement, Disability or death).
X The first business day of the calendar month following the
--- date Participant's service with the Employer terminates for
any reason (including Retirement, Disability or death).
<PAGE>
The payment of each annual installment shall be made on the
anniversary of the date selected for the commencement of the
installment payments in this subsection (ii). The amount of the
annual installment shall be adjusted on each anniversary date of
the commencement of the installment payments for credits or debits
to the Participant's account pursuant to Section 8 of the Plan.
Such adjustment shall be made by dividing the balance in the
Deferred Compensation Account on each such date (following
adjustment on such date) by the number of annual installments
remaining to be paid hereunder; provided that the last annual
installment due under the Plan shall be the entire amount credited
to the Participant's account on the date of payment.
___ (iii) Other [specify]: __________________________________
7. Vesting:
(i) Vesting of Employer Matching Credits: The nonforfeitable
percentage of each Participant in his Accrued Benefit attributable
to any applicable Employer Matching Credits shall be as follows
[check (a), (b), (c), (d), (e), (f) or (g)]:
___ (a) Immediate 100% vesting.
X (b) 100% vesting after 5 Years of Service.
---
___ (c) 100% vesting at age ____.
___ (d) Number of Years Vested
of Service Percentage
Less than 1 0%
1 20%
2 40%
3 60%
4 80%
5 or more 100%
___ (e) Number of Years Vested
of Service Percentage
Less than 3 0%
3 20%
4 40%
5 60%
6 80%
7 or more 100%
<PAGE>
___ (f) Number of Years Vested
of Service Percentage
Less than 1 %
1 %
2 %
3 %
4 %
5 %
6 %
7 %
8 %
9 %
10 or more %
___ (g) Not applicable
In addition, the nonforfeitable percentage of each Participant in his
Accrued Benefit attributable to any applicable Employer Matching Credits
__X__SHALL _______SHALL NOT become 100% vested at the Death, Disability or
Retirement of the Participant, or Plan Termination.
(ii) Vesting of Employer Performance Incentive Credits: The
nonforfeitable percentage of each Participant in his Accrued
Benefit attributable to any applicable Employer Performance
Incentive Credits shall be as follows [check (a), (b), (c), (d),
(e), (f) or (g)]:
___ (a) Immediate 100% vesting.
___ (b) 100% vesting after ____ Years of Service.
___ (c) 100% vesting at age ____.
___ (d) Number of Years Vested
of Service Percentage
Less than 1 0%
1 20%
2 40%
3 60%
4 80%
5 or more 100%
___ (e) Number of Years Vested
of Service Percentage
Less than 3 0%
3 20%
4 40%
5 60%
6 80%
7 or more 100%
<PAGE>
___ (f) Number of Years Vested
of Service Percentage
Less than 1 %
1 %
2 %
3 %
4 %
5 %
6 %
7 %
8 %
9 %
10 or more %
X (g) Not applicable
---
In addition, the nonforfeitable percentage of each Participant in his
Accrued Benefit attributable to any applicable Employer Performance
Incentive Credits ____ SHALL __X__ SHALL NOT become 100% vested at the
Death or Disability of the Participant.
14. Amendment or Termination of Plan: [check or complete all that apply]:
___ (i) Notwithstanding any provision in this Adoption Agreement or the
Plan to the contrary, Section _____ of the Plan shall be
amended to read as follows:
See attached Exhibit ____.
X (ii) The Plan shall be terminated upon the occurrence of one or more
--- of the following events [check if desired]:
___ (a) The amount of shareholders equity shown on the
financial statements of the Employer for each of the
two most recent fiscal years is less than $__________.
___ (b) The aggregate net loss (after tax) as reported on the
financial statements of the Employer for the two most
recent fiscal years is greater than $____________.
___ (c) There is a change of control of the Employer. For
this purpose, a "change of control" shall be deemed to
have occurred if: (A) any person other than an officer
who is an employee of the Employer for at least one
year preceding the change of control, acquires or
becomes the beneficial owner, directly or indirectly,
of securities of the Employer representing _____ %
[insert percentage] or more of the combined voting
power of the Employer's then outstanding
securities and thereafter, the membership of the Board
becomes such that a majority are persons who were not
members of the Board at the time of the acquisition of
securities; or (B) the Employer, or its assets, are
acquired by or combined with another entity and less
than a majority of the outstanding voting shares of
<PAGE>
such entity after the acquisition or combination are
owned, immediately after the acquisition or
combination, by the owners of voting shares of the
Employer immediately prior to the acquisition or
combination.
X (d) Other [specify]:
--- The Board may at anytime terminate the Plan with
respect to new Contributions or in its entirety if the
continuance of the Plan would not be in the best
interest of the Employer.
17.9 Construction: The provisions of the Plan and Trust (if any) shall be
construed and enforced according to the laws of the State of Iowa, except to
the extent that such laws are superseded by ERISA.
IN WITNESS WHEREOF, this Agreement has been executed as of the
day and year first above stated.
Employers Mutual Casualty Company
---------------------------------
Name of Employer
By: /s/ Douglas J. Zmolek
-------------------------
Authorized Person
NOTE: Execution of this Adoption Agreement creates a legal liability of the
Employer with significant tax consequences to the Employer and Participants.
The Employer should obtain legal and tax advice from its professional
advisors before adopting the Plan. The Sponsor disclaims all liability for
the legal and tax consequences which result from the elections made by the
Employer in this Adoption Agreement.
The Plan is adopted by the following Participating Employers:
Employers Mutual Casualty
-------------------------
Name of Employer
By: /s/ Douglas J. Zmolek
-------------------------
Authorized Person
Modern Life Company
-------------------
Name of Employer
By:
-------------------------
Authorized Person
Farm & City Insurance Co.
-------------------------
Name of Employer
By:
-------------------------
Authorized Person
<PAGE>
THE EXECUTIVE NON-QUALIFIED EXCESS PLAN
PLAN DOCUMENT
TABLE OF CONTENTS
THE EXECUTIVE NON-QUALIFIED EXCESS PLAN
Page
Section 1. Purpose ............................................... 93
Section 2. Definitions ........................................... 93
2.1 "Accrued Benefit" ..................................... 93
2.2 "Active Participant" .................................. 93
2.3 "Adoption Agreement" .................................. 93
2.4 "Adjustment Date" ..................................... 93
2.5 "Beneficiary" ......................................... 93
2.6 "Board" ............................................... 93
2.7 "College Education Account" ........................... 93
2.8 "Committee" ........................................... 93
2.9 "Compensation" ........................................ 93
2.10 "Deferred Compensation Account" ....................... 94
2.11 "Dependent Subaccount" ................................ 94
2.12 "Disability" .......................................... 94
2.13 "Effective Date" ...................................... 94
2.14 "Eligible Dependent" .................................. 94
2.15 "Employee" ............................................ 94
2.16 "Employer" ............................................ 94
2.17 "Employer Matching Credits" ........................... 94
2.18 "Employer Performance Incentive Credits" .............. 94
2.19 "Independent Contractor" .............................. 95
2.20 "Normal Retirement Age" ............................... 95
2.21 "Participant" ......................................... 95
2.22 "Participating Employer" .............................. 95
2.23 "Plan" ................................................ 95
2.24 "Plan Administrator" .................................. 95
2.25 "Plan Year" ........................................... 95
2.26 "Qualified Distribution Event" ........................ 95
2.27 "Regular In-Service Withdrawals Account" .............. 95
2.28 "Retire" of "Retirement" .............................. 95
2.29 "Salary Deferral Agreement" ........................... 95
2.30 "Salary Deferral Credits" ............................. 96
2.31 "Service" ............................................. 96
2.32 "Sponsor" ............................................. 96
2.33 "Spouse" or "Surviving Spouse" ........................ 96
2.34 "Trust" ............................................... 96
2.35 "Trustee" ............................................. 96
2.36 "Years of Service" .................................... 96
Section 3. Credits to Deferred Compensation Account .............. 96
3.1 Salary Deferral Credits ............................... 96
3.2 Employer Matching Credits ............................. 97
3.3 Employer Performance Incentive Credits ................ 97
Section 4. Qualifiying Distribution Events ....................... 97
4.1 Death of a Participant ................................ 97
4.2 Disability ............................................ 97
4.3 Termination of Service ................................ 97
4.4 Retirement ............................................ 98
<PAGE>
Section 5. In-Service Withdrawals ................................ 98
5.1 Regular In-Service Withdrawals ........................ 98
5.2 Financial Hardship Withdrawals ........................ 99
5.3 "Haircut" Withdrawals ................................. 100
5.4 College Education Withdrawals ......................... 100
Section 6. Qualified Distribution Events Payment Options ......... 101
6.1 Payment Options ....................................... 101
6.2 Prepayment ............................................ 101
6.3 Benefit Exchange ...................................... 101
Section 7. Vesting ............................................... 101
Section 8. Account; Deemed Investment; Adjustment of Accounts .... 101
8.1 Account ............................................... 101
8.2 Deemed Investments .................................... 102
8.3 Adjustments to Deferred Compensation Accounts ......... 102
Section 9. Administration by Committee ........................... 102
9.1 Membership of Committee ............................... 102
9.2 Committee officers; Subcommittee ...................... 102
9.3 Committee meetings .................................... 103
9.4 Transaction of business ............................... 103
9.5 Committee records ..................................... 103
9.6 Establishment of rules ................................ 103
9.7 Conflicts of interest ................................. 103
9.8 Correction of errors .................................. 103
9.9 Authority to interpret Plan ........................... 103
9.10 Third party advisors .................................. 103
9.11 Compensation of members ............................... 104
9.12 Expense reimbursement ................................. 104
9.13 Indemnification ....................................... 104
Section 10. Contractual Liability; Trust .......................... 104
10.1 Contractual Liability ................................. 104
10.2 Trust ................................................. 104
Section 11. Allocation of Responsibilities ........................ 104
11.1 Board ................................................. 104
11.2 Committee ............................................. 105
11.3 Plan Administrator .................................... 105
Section 12. Benefits Not Assignable; Facility of Payments ......... 105
12.1 Benefits not assignable ............................... 105
12.2 Payments to minors and others ......................... 105
Section 13. Beneficiary ........................................... 106
Section 14. Amendment and Termination of Plan ..................... 106
Section 15. Communication to Participants ......................... 106
<PAGE>
Section 16. Claims Procedure ...................................... 106
16.1 Filing of a claim for benefits ........................ 106
16.2 Notification to claimant of decision .................. 107
16.3 Procedure for review .................................. 107
16.4 Decision on review .................................... 107
16.5 Action by authorized representative of claimant ....... 107
Section 17. Miscellaneous Provisions .............................. 108
17.1 Set off ............................................... 108
17.2 Notices ............................................... 108
17.3 Lost distributees ..................................... 108
17.4 Reliance on data ...................................... 108
17.5 Receipt and release for payments ...................... 108
17.6 Headings .............................................. 108
17.7 Continuation of employment ............................ 108
17.8 Merger or consolidation ............................... 109
17.9 Construction .......................................... 109
<PAGE>
THE EXECUTIVE NON-QUALIFIED EXCESS PLAN
Section 1. Purpose:
By execution of the Adoption Agreement, the Employer has adopted the
Plan set forth herein to provide a means by which certain management
Employees and Independent Contractors of the Employer may elect to defer
receipt of current Compensation from the Employer in order to provide
Retirement and other benefits on behalf of such Employees and Independent
Contractors. The Plan is not intended to be a tax-qualified retirement plan
under Section 401(a) of the Internal Revenue Code (the "Code"). The Plan is
intended to be an unfunded plan maintained primarily for the purpose of
providing deferred compensation benefits for a select group of management or
highly compensated Employees under Sections 201(2), 301(a)(3) and 401(a)(1)
of the Employee Retirement Income Security Act of 1974.
Section 2. Definitions:
As used in the Plan, including this Section 2, references to one gender
shall include the other and, unless otherwise indicated by the context:
2.1 "Accrued Benefit" shall mean, with respect to each Participant, the
balance credited to his Deferred Compensation Account.
2.2 "Active Participant" shall mean, with respect to any day or date, a
Participant who is in Service on such day or date; provided, that a
Participant who is in Service shall cease to be an Active Participant
immediately upon a determination by the Committee that the Participant has
ceased to be an Employee or Independent Contractor.
2.3 "Adoption Agreement" shall mean the written agreement pursuant to
which the Employer adopts the Plan. The Adoption Agreement is a part of the
Plan as applied to the Employer.
2.4 "Adjustment Date" shall mean the date designated in the Adoption
Agreement for crediting the amount of any Salary Deferral Credits, Employer
Matching Credits and Employer Performance Incentive Credits to each Deferred
Compensation Account.
2.5 "Beneficiary" shall mean the person, persons, entity or entities
designated or determined pursuant to the provisions of Section 13 of the
Plan.
2.6 "Board" shall mean the Board of Directors of the Employer, if the
Employer is a corporation. If the Employer is not a corporation, "Board"
shall mean the Employer.
2.7 "College Education Account" shall mean the separate account to be kept
for each Participant and to be divided into one or more Dependent
Subaccounts, as described in Section 5.4.
2.8 "Committee" shall mean the administrative committee provided for in
Section 9.
2.9 "Compensation" shall have the meaning designated in the Adoption
Agreement.
<PAGE>
2.10 "Deferred Compensation Account" shall mean the separate account to
be kept for each Participant, as described in Sections 3 and 8. To the
extent applicable, the Deferred Compensation Account may be credited with
Salary Deferral Credits, Employer Matching Credits and Employer Performance
Incentive Credits.
2.11 "Dependent Subaccount" shall mean each separate subaccount to be kept
for each Participant as part of his College Education Account, as described
in Section 5.4. To the extent applicable, each Dependent Subaccount may be
credited with Salary Deferral Credits, Employer Matching Credits, and
Employer Performance Incentive Credits.
2.12 "Disability" shall mean the inability of a Participant to perform his
regular duties with the Employer or any other duties which the Employer is
willing to assign to him by reason of any medically determinable physical or
mental impairment that can be expected to result in death or to be of long
continued or indefinite duration. The determination of the existence or
nonexistence of Disability shall be made by the Committee in a
nondiscriminatory manner pursuant to an examination by a medical doctor
selected or approved by the Committee.
2.13 "Effective Date" shall be the date designated in the Adoption Agreement
as of which the Plan first becomes effective.
2.14 "Eligible Dependent" shall mean any child (including any legally
adopted child) of a Participant who has not attained age 18 and who the
Participant designates as an Eligible Dependent in his Salary Deferral
Agreement; provided, however, that the Committee in its discretion may
approve the designation of an individual other than the child of a
Participant as an Eligible Dependent.
2.15 "Employee" shall mean an individual in the Service of the Employer if
the relationship between the individual and the Employer is the legal
relationship of employer and employee and if the individual is a highly
compensated or management employee of the Employer. An individual shall
cease to be an Employee upon the first to occur of the following:
(i) the Employee's termination of Service; or (ii) a determination by the
Committee that the Employee no longer meets the eligibility requirements for
participation in the Plan.
2.16 "Employer" shall mean the Employer identified in the Adoption
Agreement, and any Participating Employer which adopts this Plan. The
Employer may be a corporation, a partnership or sole proprietorship. All
references herein to the Employer shall be applied separately to each such
Employer as if the Plan were solely the Plan of that Employer.
2.17 "Employer Matching Credits" shall mean the amounts credited to the
Participant's Deferred Compensation Account by the Employer pursuant to the
provisions of Section 3.2.
2.18 "Employer Performance Incentive Credits" shall mean the amounts
credited to the Participant's Deferred Compensation Account by the Employer
pursuant to the provisions of Section 3.3.
<PAGE>
2.19 "Independent Contractor" shall mean an individual in the Service of the
Employer if the relationship between the individual and the Employer is not
the legal relationship of employer and employee. An individual shall cease
to be an Independent Contractor upon the termination of the Independent
Contractor's Service. An Independent Contractor shall include a director of
the Employer who is not an Employee.
2.20 "Normal Retirement Age" of a Participant shall mean the age designated
in the Adoption Agreement. The "Normal Retirement Date" of a Participant
shall mean the date the Participant attains his Normal Retirement Age.
2.21 "Participant" shall mean with respect to any Plan Year an Employee or
Independent Contractor who has been designated by the Committee as a
Participant and who has entered the Plan or who has an Accrued Benefit under
the Plan. An Employee or Independent Contractor designated by the Committee
as a Participant who has not otherwise entered the Plan shall enter the Plan
and become a Participant as of the date determined by the Committee. A
Participant who separates from Service with the Employer and who later
returns to Service will not be eligible to defer Compensation under the Plan
except upon satisfaction of such terms and conditions as the Committee shall
establish upon the Participant's return to Service, whether or not the
Participant shall have an Accrued Benefit remaining under the Plan on the
date of his return to Service.
2.22 "Participating Employer" shall mean any trade or business (whether or
not incorporated) which adopts this Plan with the consent of the Employer
identified in the Adoption Agreement.
2.23 "Plan" shall mean The Executive Non-qualified Excess Plan, as herein set
out or as duly amended. The name of the Plan as applied to the Employer
shall be designated in the Adoption Agreement.
2.24 "Plan Administrator" shall mean the person designated in the Adoption
Agreement. If the Plan Administrator designated in the Adoption Agreement is
unable to serve, the Employer shall be the Plan Administrator.
2.25 "Plan Year" shall mean the twelve-month period ending on the last day
of the month designated in the Adoption Agreement.
2.26 "Qualifying Distribution Event" shall mean the Participant's Retirement
or the termination of Participant's Service with the Employer for any
reason, including as a result of his death or Disability.
2.27 "Regular In-Service Withdrawals Account" shall mean the separate
account to be kept for each Participant, as described in Section 5.1. To the
extent applicable, the Regular In-Service Withdrawals Account may be
credited with Salary Deferral Credits.
2.28 "Retire" or "Retirement" shall mean Retirement within the meaning of
Section 4.4.
2.29 "Salary Deferral Agreement" shall mean a written agreement entered
into between a Participant and the Employer pursuant to the provisions of
Section 3.
<PAGE>
2.30 "Salary Deferral Credits" shall mean the amounts credited to the
Participant's Deferred Compensation Account by the Employer pursuant to the
provisions of Section 3.
2.31 "Service" shall mean employment by the Employer as an Employee. If
the Participant is an Independent Contractor, "Service" shall mean the
period during which the contractual relationship exists between the Employer
and the Participant.
2.32 "Sponsor" shall mean Executive Benefit Services, Inc.
2.33 "Spouse" or "Surviving Spouse" shall mean, except as otherwise
provided in the Plan, the legally married spouse or surviving spouse of a
Participant.
2.34 "Trust" shall mean the trust fund established pursuant to Section 10.2,
if designated by the Employer in the Adoption Agreement.
2.35 "Trustee" shall mean the trustee, if any, named in the agreement
establishing the Trust and such successor or additional trustee as may be
named pursuant to the terms of the agreement establishing the Trust.
2.36 "Years of Service" shall mean each Plan Year of Service completed by
the Participant. For vesting purposes, Years of Service shall be calculated
from the date designated in the Adoption Agreement.
Section 3. Credits to Deferred Compensation Account:
3.1 Salary Deferral Credits: To the extent provided in the Adoption
Agreement, each Active Participant may elect, by entering into a Salary
Deferral Agreement with the Employer, to reduce his Compensation from the
Employer by a dollar amount or percentage specified in the Salary Deferral
Agreement. The amount of the Participant's Salary Reduction Credit shall be
credited by the Employer to the Deferred Compensation Account maintained for
the Participant pursuant to Section 8. The following special provisions
shall apply with respect to the Salary Deferral Credits of a Participant:
3.1.1 The Employer shall credit to the Participant's Deferred
Compensation Account on each Adjustment Date an amount equal to the total
Salary Reduction Credit for the period ending on such Adjustment Date.
3.1.2 An election pursuant to Section 3.1 shall be made by the
Participant by executing and delivering a Salary Deferral Agreement to the
Committee. The Salary Deferral Agreement shall become effective with respect
to such Participant as of the first full payroll period commencing on or
immediately following the January 1 which occurs after the date such Salary
Deferral Agreement is received by the Committee; provided, that a
Participant who first becomes a Participant in the Plan during a Plan Year
may enter into a Salary Deferral Agreement to be effective as of the first
payroll period next following the date he enters the Plan. A Participant's
election shall continue in effect, unless earlier modified by the
Participant, until the Service of the Participant is terminated, or, if
earlier, until the Participant ceases to be an Active Participant under the
Plan.
<PAGE>
3.1.3 A Participant may unilaterally modify a Salary Deferral Agreement
(either to increase or decrease the portion of his future Compensation which
is subject to salary deferral within the percentage limits set forth in
Section 3.1) by providing a written modification of the Salary Deferral
Agreement to the Employer. The modification shall become effective as of the
first full payroll period commencing on or immediately following the January
1 which occurs after the date such written modification is received by the
Committee. The Participant may terminate the Salary Deferral Agreement
effective as of the date designated in the Adoption Agreement.
3.1.4 The Committee may from time to time establish policies or rules
governing the manner in which Salary Deferral Credits may be made.
3.2 Employer Matching Credits: If designated by the Employer in the
Adoption Agreement, as of each Adjustment Date, the Employer shall cause the
Committee to credit to the Deferred Compensation Account of each Participant
an Employer matching credit in accordance with the Adoption Agreement.
3.3 Employer Performance Incentive Credits: If designated by the Employer in
the Adoption Agreement, the Employer may credit to the Plan for such Plan
Year any amount as the Board in its discretion shall determine. The
Committee shall have the discretion to credit to the Deferred Compensation
Account of each Active Participant an amount of the Employer Performance
Incentive Credit for the Plan Year as directed by the Employer.
Section 4. Qualifying Distribution Events:
4.1 Death of a Participant: If a Participant dies while in Service, the
Employer shall pay a benefit to the Participant's Beneficiary in the amount
designated in the Adoption Agreement. Payment of such benefit shall be made
by the Employer pursuant to Section 6. If a Participant dies following his
Retirement or termination of Service for any reason, including Disability,
and before all payments to him under the Plan have been made, the balance of
the Participant's vested Accrued Benefit shall be paid by the Employer to
the Participant's Beneficiary pursuant to Section 6, and such balance shall
be determined as of the commencement date of the payments.
4.2 Disability: If a Participant suffers a Disability while in Service prior
to his Normal Retirement Date, he shall terminate Service with the Employer
as of the date of the establishment of his Disability, whereupon he shall
commence receiving payment of his vested Accrued Benefit, determined as of
the commencement date of the payments. Such benefit shall be paid by the
Employer as provided in Section 6.
4.3 Termination of Service: If the Service of a Participant with the
Employer shall be terminated for any reason other than Retirement,
Disability or death, his vested Accrued Benefit shall be paid to him by the
Employer as provided in Section 6, and such Accrued Benefit shall be
determined as of the commencement date of the payments. If a Participant's
Accrued Benefit is not fully vested at his termination of employment, he
shall forfeit that portion of his Accrued Benefit that is not fully vested.
If he subsequently returns to Service with the Employer, he shall be treated
as a new Participant for purposes of determining the vested portion of his
Accrued Benefit.
<PAGE>
4.4 Retirement:
4.4.1 Normal Retirement: A Participant who is in Service shall be
eligible to Retire from Service at his Normal Retirement Date and commence
receiving payment of his Accrued Benefit, determined as of the commencement
date of the payments. Payment of such benefit shall be made by the Employer
pursuant to Section 6.
4.4.2 Early Retirement: If so designated by the Employer in the
Adoption Agreement, and subject to the requirements for early retirement set
forth therein, a Participant may elect early retirement effective on any
date prior to his Normal Retirement Date by filing 30 days' written notice
with the Committee before such date. The Participant shall commence
receiving payment of his Accrued Benefit determined as of the commencement
date of the payments. Such benefit shall be paid by the Employer as provided
in Section 6.
4.4.3 Delayed Retirement: If a Participant shall remain in Service
following his Normal Retirement Date, his Retirement date shall be the date
he actually terminates Service for reasons other than death or Disability,
whereupon he shall commence receiving payment of his Accrued Benefit,
determined as of the commencement date of the payments. Payment of such
benefit shall be made by the Employer pursuant to Section 6. During the
period that such Participant remains in Service pursuant to this Section
4.4.3, he shall continue to be a Participant for each Plan Year in which he
meets the requirements therefor. If an Employee or Independent Contractor
not otherwise a Participant becomes eligible to enter the Plan following his
Normal Retirement Date, the provisions of this Section 4.4.3 shall apply in
determining his Retirement date.
Section 5. In-Service Withdrawals:
5.1 Regular In-Service Withdrawals: If the Employer designates in the
Adoption Agreement that regular in-service withdrawals shall be permitted
under the Plan, a Participant may make an irrevocable election in the Salary
Deferral Agreement to withdraw a designated amount from his Deferred
Compensation Account at the specified time or times designated by the
Participant in the Salary Deferral Agreement, and the Participant's Regular
In-Service Withdrawals Account shall be credited in an amount equal to the
amount so designated for regular in-service withdrawals. The following
special provisions shall apply with respect to the regular in-service
withdrawals:
5.1.1 The Regular In-Service Withdrawals Account shall be established,
adjusted for payments, credited with Salary Deferral Credits, Employer
Matching Credits, and Employer Performance Incentive Credits, and credited
or debited for deemed investment gains or losses in the same manner and at
the same time as such adjustments are made to the Deferred Compensation
Account under Section 8 and in accordance with the rules and elections in
effect under Section 8.
<PAGE>
5.1.2 Notwithstanding any provision in this Section 5 to the contrary,
if Participant incurs a Qualifying Distribution Event prior to the date on
which the entire balance of his Regular In-Service Withdrawals Account has
been distributed to him, then the balance in the Regular In-Service
Withdrawals Account on the date of the Qualifying Distribution Event shall
be combined with the Participant's Deferred Compensation Account and
distributed to him in the same manner and at the same time as his Deferred
Compensation Account is distributed to him under Section 6 and in accordance
with the rules and elections in effect under Section 6.
5.2 Financial Hardship Withdrawals: A distribution of the Deferred
Compensation Account may be made to a Participant on account of financial
hardship, subject to the following provisions:
5.2.1 A Participant may, at any time prior to his Retirement or
termination of Service for any reason, including Disability, make
application to the Committee to receive a distribution in a lump sum of all
or a portion of the total vested amount credited to his Deferred
Compensation Account (determined as of the date the distribution, if any, is
made under this Section 5.2) because of an unforeseeable emergency that
results in severe financial hardship to the Participant. A distribution
because of an unforeseeable emergency shall not exceed the amount required
to meet the immediate financial need created by the unforeseeable emergency
and not otherwise reasonably available from other resources of the
Participant. Examples of an unforeseeable emergency shall include but shall
not be limited to those financial needs arising on account of a sudden or
unexpected illness or accident of the Participant or of a dependent of
the Participant, loss of the Participant's property due to casualty, or
other similar extraordinary and unforeseeable circumstances arising as a
result of events beyond the control of the Participant.
5.2.2 The Participant's request for a distribution on account of
financial hardship must be made in writing to the Committee. The request
must specify the nature of the financial hardship, the total amount
requested to be distributed from the Deferred Compensation Account, and the
total amount of the actual expense incurred or to be incurred on account of
financial hardship.
5.2.3 If a distribution under this Section 5.2 is approved by the
Committee, such distribution will be made as soon as practicable following
the date it is approved. The processing of the request shall be completed as
soon as practicable from the date on which the Committee receives the
properly completed written request for a distribution on account of a
financial hardship. If a Participant's termination of Service occurs after a
request is approved in accordance with this Section 5.2.3, but prior to
distribution of the full amount approved, the approval of the request shall
be automatically null and void and the benefits which the Participant is
entitled to receive under the Plan shall be distributed in accordance with
the applicable distribution provisions of the Plan. Only one financial
hardship distribution shall be made within any Plan Year.
5.2.4 The Committee may from time to time adopt additional policies or
rules governing the manner in which such distributions may be made so that
the Plan may be conveniently administered.
<PAGE>
5.3 "Haircut" Withdrawals: If the Employer designates in the Adoption
Agreement that "haircut" withdrawals shall be permitted under the Plan, a
Participant in Service may at his option make one or more withdrawals from
his Deferred Compensation Account by written request to the Committee;
provided, however, that a Participant who requests a withdrawal under this
Section 5.3 shall incur a penalty (the "haircut") equal to a percentage (not
less than 10%), as designated by the Employer in the Adoption Agreement, of
the amount withdrawn, and this penalty shall be forfeited from the Deferred
Compensation Account of the Participant notwithstanding the provisions of
Section 7.
5.4 College Education Withdrawals: If the Employer designates in the
Adoption Agreement that college education withdrawals shall be permitted
under the Plan, a Participant may elect in the Salary Deferral Agreement for
a designated percentage or dollar amount of the Salary Deferral Credits to
be credited to a College Education Account to be used to fund the college
education of the Participant's Eligible Dependent or Eligible Dependents.
The College Education Account shall be divided into Dependent Subaccounts
for each of the Participant's Eligible Dependents, and the Participant may
designate in the Salary Deferral Agreement the percentage or dollar amount
of each Salary Deferral Credit to be credited to each Dependent Subaccount;
provided, however, that the minimum credit that a Participant may elect
to make to any Dependent Subaccount is $1,000. In the absence of a clear
designation, all credits made to the College Education Subaccount shall be
equally allocated to each Dependent Subaccount. As soon as practicable after
an Eligible Dependent of the Participant attains age 18, the Employer shall
pay to the Participant the balance in the Dependent Subaccount with respect
to such Eligible Dependent in annual installments over a period of four,
five or six years, as designated by the Participant in the Salary Deferral
Agreement. The following special provisions shall apply with respect to the
Dependent Subaccounts:
5.4.1 The Dependent Subaccounts shall be established, adjusted for
payments, credited with Salary Deferral Credits, Employer Matching Credits,
and Employer Performance Incentive Credits, and credited or debited for
deemed investment gains or losses in the same manner and at the same time as
such adjustments are made to the Deferred Compensation Account under Section
8 and in accordance with the rules and elections in effect under Section 8.
5.4.2 Notwithstanding any provision in this Section 5 to the contrary,
if Participant incurs a Qualifying Distribution Event prior to the date on
which the entire balance of his College Education Account has been
distributed to him, then the balance in the College Education Account on the
date of the Qualifying Distribution Event shall be combined with the
Participant's Deferred Compensation Account and distributed to him in the
same manner and at the same time as his Deferred Compensation Account is
distributed to him under Section 6 and in accordance with the rules and
elections in effect under Section 6.
<PAGE>
Section 6. Qualifying Distribution Events Payment Options:
6.1 Payment Options: The Employer shall designate in the Adoption
Agreement the payment options available upon a Qualifying Distribution
Event. Upon a Participant's entry into the Plan, the Participant shall elect
among these designated payment options the method under which his vested
Accrued Benefit or, in the event of his death, any benefit payable as a
result, will be distributed; provided, however, that the Participant may
change the method of payment with the consent of the Committee by filing a
written election with the Committee at least one year prior to the
commencement date of the payments.
6.2 Prepayment: Notwithstanding any other provisions of this Plan, if a
Participant or any other person (a "recipient") is entitled to receive
payments under the Plan, the Committee in its sole discretion may direct the
Employer to prepay all or any part of the payments remaining to be made to
or on behalf of the recipient, or to shorten the payment period. The amount
of such prepayment shall be in full satisfaction of the Employer's
obligations hereunder to the recipient and to all persons claiming under or
through the recipient with respect to the payments being prepaid. In the
event of a partial prepayment, the Committee shall designate which
installments are being prepaid and, if applicable, the accounts of the
Participant from which such prepayments shall be debited. The Committee's
determinations under this Section 6.2 shall be final and conclusive upon all
parties claiming benefits under this Plan.
6.3 Benefit Exchange: Notwithstanding any other provisions of this Plan, the
Employer and the Participant may enter into an agreement under which, in
lieu of the payment of the Participant's vested Accrued Benefit upon a
Qualifying Distribution Event, the Participant's vested Accrued Benefit will
be exchanged for another non-qualified benefit in accordance with rules
established by the Committee.
Section 7. Vesting:
A Participant shall be fully vested (that is, nonforfeitable) in the portion
of his Deferred Compensation Account attributable to Salary Deferral
Credits, and all income, gains and losses attributable thereto. A
Participant shall become fully vested in the portion of his Deferred
Compensation Account attributable to Employer Matching Credits, Employer
Performance Incentive Credits, and income, gains and losses attributable
thereto, on the first to occur of: (i) normal Retirement; (ii) Early
Retirement; (iii) death while in Service; or (iv) in accordance with the
vesting schedule and provisions designated by the Employer in the Adoption
Agreement.
Section 8. Account; Deemed Investment; Adjustment of Accounts:
8.1 Account: The Committee shall establish a book reserve account, entitled
the "Deferred Compensation Account," on behalf of each Participant. Such
account shall be adjusted pursuant to the provisions of Section 8.3.
<PAGE>
8.2 Deemed Investments: The Deferred Compensation Account of a Participant
shall be credited with an investment return determined as if the account
were invested in one or more investment funds made available by the
Committee. The Participant shall elect the investment funds in which his
Deferred Compensation Account shall be deemed to be invested. Such election
shall be made in the manner prescribed by the Committee and shall take
effect upon the entry of the Participant into the Plan. The investment
election of the Participant shall remain in effect until a new election is
made by the Participant. In the event the Participant fails for any reason
to make an effective election of the investment return to be credited to his
account, the investment return shall be determined by the Committee.
8.3 Adjustments to Deferred Compensation Accounts: With respect to each
Participant who has a Deferred Compensation Account under the Plan, the
amount credited to such account shall be adjusted by the following debits
and credits, at the times and in the order stated:
8.3.1 The Deferred Compensation Account shall be debited each business
day with the total amount of any payments made from such account since the
last preceding business day to him or for his benefit.
8.3.2 The Deferred Compensation Account shall be credited on each
Adjustment Date with the total amount of any Salary Deferral Credits,
Employer Matching Credits and Employer Performance Incentive Credits to such
account since the last preceding Adjustment Date.
8.3.3 The Deferred Compensation Account shall be credited or debited
on each day securities are traded on a national stock exchange with the
amount of deemed investment gain or loss resulting from the performance of
the investment funds elected by the Participant in accordance with Section
8.2. The amount of such deemed investment gain or loss shall be determined
by the Committee and such determination shall be final and conclusive upon
all concerned.
Section 9. Administration by Committee:
9.1 Membership of Committee: The Committee shall consist of at least
three individuals who shall be appointed by the Board to serve at the
pleasure of the Board. Any member of the Committee may resign, and his
successor, if any, shall be appointed by the Board. The Committee shall be
responsible for the general administration and interpretation of the Plan
and for carrying out its provisions, except to the extent all or any of such
obligations are specifically imposed on the Board.
9.2 Committee officers; Subcommittee: The members of the Committee
shall elect a Chairman and may elect an acting Chairman. They shall also
elect a Secretary and may elect an acting Secretary, either of whom may be
but need not be a member of the Committee. The Committee may appoint from
its membership such subcommittees with such powers as the Committee shall
determine, and may authorize one or more of its members or any agent to
execute or deliver any instruments or to make any payment on behalf of the
Committee.
<PAGE>
9.3 Committee meetings: The Committee shall hold such meetings upon
such notice, at such places and at such intervals as it may from time to
time determine. Notice of meetings shall not be required if notice is waived
in writing by all the members of the Committee at the time in office, or if
all such members are present at the meeting.
9.4 Transaction of business: A majority of the members of the Committee
at the time in office shall constitute a quorum for the transaction of
business. All resolutions or other actions taken by the Committee at any
meeting shall be by vote of a majority of those present at any such meeting
and entitled to vote. Resolutions may be adopted or other action taken
without a meeting upon written consent thereto signed by all of the members
of the Committee.
9.5 Committee records: The Committee shall maintain full and complete
records of its deliberations and decisions. The minutes of its proceedings
shall be conclusive proof of the facts of the operation of the Plan.
9.6 Establishment of rules: Subject to the limitations of the Plan, the
Committee may from time to time establish rules or by-laws for the
administration of the Plan and the transaction of its business.
9.7 Conflicts of interest: No individual member of the Committee shall
have any right to vote or decide upon any matter relating solely to himself
or to any of his rights or benefits under the Plan (except that such member
may sign unanimous written consent to resolutions adopted or other action
taken without a meeting), except relating to the terms of his Salary
Deferral Agreement.
9.8 Correction of errors: The Committee may correct errors and, so far as
practicable, may adjust any benefit or credit or payment accordingly. The
Committee may in its discretion waive any notice requirements in the Plan;
provided, that a waiver of notice in one or more cases shall not be deemed
to constitute a waiver of notice in any other case. With respect to any
power or authority which the Committee has discretion to exercise under the
Plan, such discretion shall be exercised in a nondiscriminatory manner.
9.9 Authority to interpret Plan: Subject to the claims procedure set forth
in Section 16, the Plan Administrator and the Committee shall have the duty
and discretionary authority to interpret and construe the provisions of the
Plan and to decide any dispute which may arise regarding the rights of
Participants hereunder, including the discretionary authority to construe
the Plan and to make determinations as to eligibility and benefits under the
Plan. Determinations by the Plan Administrator and the Committee shall
apply uniformly to all persons similarly situated and shall be binding and
conclusive upon all interested persons.
9.10 Third party advisors: The Committee may engage an attorney,
accountant, actuary or any other technical advisor on matters regarding the
operation of the Plan and to perform such other duties as shall be required
in connection therewith, and may employ such clerical and related personnel
as the Committee shall deem requisite or desirable in carrying out the
provisions of the Plan. The Committee shall from time to time, but no less
frequently than annually, review the financial condition of the Plan and
determine the financial and liquidity needs of the Plan. The Committee shall
communicate such needs to the Employer so that its policies may be
appropriately coordinated to meet such needs.
<PAGE>
9.11 Compensation of members: No fee or compensation shall be paid to any
member of the Committee for his Service as such.
9.12 Expense reimbursement: The Committee shall be entitled to
reimbursement by the Employer for its reasonable expenses properly and
actually incurred in the performance of its duties in the administration of
the Plan.
9.13 Indemnification: No member of the Committee shall be personally liable
by reason of any contract or other instrument executed by him or on his
behalf as a member of the Committee nor for any mistake of judgment made in
good faith, and the Employer shall indemnify and hold harmless, directly
from its own assets (including the proceeds of any insurance policy the
premiums for which are paid from the Employer's own assets), each
member of the Committee and each other officer, employee, or director of the
Employer to whom any duty or power relating to the administration or
interpretation of the Plan may be delegated or allocated, against any
unreimbursed or uninsured cost or expense (including any sum paid in
settlement of a claim with the prior written approval of the Board) arising
out of any act or omission to act in connection with the Plan unless arising
out of such person's own fraud, bad faith, willful misconduct or gross
negligence.
Section 10. Contractual Liability; Trust:
10.1 Contractual Liability: The obligation of the Employer to make payments
hereunder shall constitute a contractual liability of the Employer to the
Participant. Such payments shall be made from the general funds of the
Employer, and the Employer shall not be required to establish or maintain
any special or separate fund, or otherwise to segregate assets to assure
that such payments shall be made, and the Participant shall not have any
interest in any particular assets of the Employer by reason of its
obligations hereunder. To the extent that any person acquires a right to
receive payment from the Employer, such right shall be no greater than the
right of an unsecured creditor of the Employer.
10.2 Trust: If so designated in Section 2.34 of the Adoption Agreement, the
Employer may establish a Trust with the Trustee, pursuant to such terms and
conditions as are set forth in the Trust Agreement. The Trust, if and when
established, is intended to be treated as a grantor trust for purposes of
the Code. The establishment of the Trust is not intended to cause
Participants to realize current income on amounts contributed thereto, and
the Trust shall be so interpreted and administered.
Section 11. Allocation of Responsibilities:
The persons responsible for the Plan and the duties and responsibilities
allocated to each are as follows:
11.1 Board:
(i) To amend the Plan;
(ii) To appoint and remove members of the Committee;
and
(iii) To terminate the Plan.
<PAGE>
11.2 Committee:
(i) To designate Participants;
(ii) To interpret the provisions of the Plan and to determine the
rights of the Participants under the Plan, except to the extent otherwise
provided in Section 16 relating to claims procedure;
(iii) To administer the Plan in accordance with its terms, except to the
extent powers to administer the Plan are specifically delegated to another
person or persons as provided in the Plan;
(iv) To account for the Accrued Benefits of Participants;
and
(v) To direct the Employer in the payment of benefits.
11.3 Plan Administrator:
(i) To file such reports as may be required with the United States
Department of Labor, the Internal Revenue Service and any other government
agency to which reports may be required to be submitted from time to time;
and
(ii) To administer the claims procedure to the extent provided in
Section 16.
Section 12. Benefits Not Assignable; Facility of Payments:
12.1 Benefits not assignable: No portion of any benefit credited or paid
under the Plan with respect to any Participant shall be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge, and any attempt so to anticipate, alienate, sell,
transfer, assign, pledge, encumber or charge the same shall be void, nor
shall any portion of such benefit be in any manner payable to any assignee,
receiver or any one trustee, or be liable for his debts, contracts,
liabilities, engagements or torts.
12.2 Payments to minors and others: If any individual entitled to receive a
payment under the Plan shall be physically, mentally or legally incapable of
receiving or acknowledging receipt of such payment, the Committee, upon the
receipt of satisfactory evidence of his incapacity and satisfactory evidence
that another person or institution is maintaining him and that no guardian
or committee has been appointed for him, may cause any payment otherwise
payable to him to be made to such person or institution so maintaining him.
Payment to such person or institution shall be in full satisfaction of all
claims by or through the Participant to the extent of the amount thereof.
<PAGE>
Section 13. Beneficiary:
The Participant's beneficiary shall be the person or persons designated by
the Participant on the beneficiary designation form provided by and filed
with the Committee or its designee. If the Participant does not designate a
beneficiary, the beneficiary shall be his Surviving Spouse. If the
Participant does not designate a beneficiary and has no Surviving Spouse,
the beneficiary shall be the Participant's estate. The designation of a
beneficiary may be changed or revoked only by filing a new beneficiary
designation form with the Committee or its designee. If a beneficiary (the
"primary beneficiary") is receiving or is entitled to receive payments under
the Plan and dies before receiving all of the payments due him, the balance
to which he is entitled shall be paid to the contingent beneficiary, if any,
named in the Participant's current beneficiary designation form. If there is
no contingent beneficiary, the balance shall be paid to the estate of the
primary beneficiary. Any beneficiary may disclaim all or any part of any
benefit to which such beneficiary shall be entitled hereunder by filing a
written disclaimer with the Committee before payment of such benefit is to
be made. Such a disclaimer shall be made in a form satisfactory to the
Committee and shall be irrevocable when filed. Any benefit disclaimed shall
be payable from the Plan in the same manner as if the beneficiary who filed
the disclaimer had died on the date of such filing.
Section 14. Amendment and Termination of Plan:
The Board may amend any provision of the Plan or terminate the Plan at any
time; provided, that in no event shall such amendment or termination reduce
any Participant's Accrued Benefit as of the date of such amendment or
termination, nor shall any such amendment affect the terms of the Plan
relating to the payment of such Accrued Benefit. Notwithstanding the
foregoing, the Plan shall be terminated upon the occurrence of one or more
of the events designated in the Adoption Agreement. Upon the occurrence of a
termination event, the Accrued Benefit of each Participant shall become
fully vested and payable to the Participant in a lump sum.
Section 15. Communication to Participants:
The Employer shall make a copy of the Plan available for inspection by
Participants and their beneficiaries during reasonable hours at the
principal office of the
Employer.
Section 16. Claims Procedure:
The following claims procedure shall apply with respect to the Plan:
16.1 Filing of a claim for benefits: If a Participant or beneficiary (the
"claimant") believes that he is entitled to benefits under the Plan which
are not being paid to him or which are not being accrued for his benefit, he
shall file a written claim therefor with the Plan Administrator. In the
event the Plan Administrator shall be the claimant, all actions which are
required to be taken by the Plan Administrator pursuant to this Section 16
shall be taken instead by another member of the Committee designated by the
Committee.
<PAGE>
16.2 Notification to claimant of decision: Within 90 days after receipt of a
claim by the Plan Administrator (or within 180 days if special circumstances
require an extension of time), the Plan Administrator shall notify the
claimant of his decision with regard to the claim. In the event of such
special circumstances requiring an extension of time, there shall be
furnished to the claimant prior to expiration of the initial 90-day period
written notice of the extension, which notice shall set forth the special
circumstances and the date by which the decision shall be furnished. If such
claim shall be wholly or partially denied, notice thereof shall be in
writing and worded in a manner calculated to be understood by the claimant,
and shall set forth: (i) the specific reason or reasons for the denial; (ii)
specific reference to pertinent provisions of the Plan on which the denial
is based; (iii) a description of any additional material or information
necessary for the claimant to perfect the claim and an explanation of why
such material or information is necessary; and (iv) an explanation of the
procedure for review of the denial. If the Plan Administrator fails to
notify the claimant of the decision in timely manner, the claim shall be
deemed denied as of the close of the initial 90-day period (or the close of
the extension period, if applicable).
16.3 Procedure for review: Within 60 days following receipt by the claimant
of notice denying his claim, in whole or in part, or, if such notice shall
not be given, within 60 days following the latest date on which such notice
could have been timely given, the claimant shall appeal denial of the claim
by filing a written application for review with the Committee. Following
such request for review, the Committee shall fully and fairly review the
decision denying the claim. Prior to the decision of the Committee, the
claimant shall be given an opportunity to review pertinent documents and to
submit issues and comments in writing.
16.4 Decision on review: The decision on review of a claim denied in whole
or in part by the Plan Administrator shall be made in the following manner:
16.4.1 Within 60 days following receipt by the Committee of the request
for review (or within 120 days if special circumstances require an extension
of time), the Committee shall notify the claimant in writing of its decision
with regard to the claim. In the event of such special circumstances
requiring an extension of time, written notice of the extension shall be
furnished to the claimant prior to the commencement of the extension. If the
decision on review is not furnished in a timely manner, the claim shall be
deemed denied as of the close of the initial 60-day period (or the close of
the extension period, if applicable).
16.4.2 With respect to a claim that is denied in whole or in part, the
decision on review shall set forth specific reasons for the decision, shall
be written in a manner calculated to be understood by the claimant, and
shall cite specific references to the pertinent Plan provisions on which the
decision is based.
16.4.3 The decision of the Committee shall be final and conclusive.
16.5 Action by authorized representative of claimant: All actions set forth
in this Section 16 to be taken by the claimant may likewise be taken by a
representative of the claimant duly authorized by him to act in his behalf
on such matters. The Plan Administrator and the Committee may require such
evidence as either may reasonably deem necessary or advisable of the
authority to act of any such representative.
<PAGE>
Section 17. Miscellaneous Provisions:
17.1 Set off: Notwithstanding any other provision of this Plan, the Employer
may reduce the amount of any payment otherwise payable to or on behalf of a
Participant hereunder by the amount of any loan, cash advance, extension of
credit or other obligation of the Participant to the Employer that is then
due and payable, and the Participant shall be deemed to have consented to
such reduction.
17.2 Notices: Each Participant who is not in Service and each beneficiary
shall be responsible for furnishing the Committee or its designee with his
current address for the mailing of notices and benefit payments. Any notice
required or permitted to be given to such Participant or beneficiary shall
be deemed given if directed to such address and mailed by regular United
States mail, first class, postage prepaid. If any check mailed to such
address is returned as undeliverable to the addressee, mailing of checks
will be suspended until the Participant or beneficiary furnishes the proper
address. This provision shall not be construed as requiring the mailing of
any notice or notification otherwise permitted to be given by posting or
by other publication.
17.3 Lost distributees: A benefit shall be deemed forfeited if the Plan
Administrator is unable to locate the Participant or beneficiary to whom
payment is due on or before the fifth anniversary of the date payment is to
be made or commence; provided, that the deemed investment rate of return
pursuant to Section 8.2 shall cease to be applied to the Participant's
account following the first anniversary of such date; provided further,
however, that such benefit shall be reinstated if a valid claim is made by
or on behalf of the Participant or beneficiary for all or part of the
forfeited benefit.
17.4 Reliance on data: The Employer, the Committee and the Plan
Administrator shall have the right to rely on any data provided by the
Participant or by any beneficiary. Representations of such data shall be
binding upon any party seeking to claim a benefit through a Participant, and
the Employer, the Committee and the Plan Administrator shall have no
obligation to inquire into the accuracy of any representation made at any
time by a Participant or beneficiary.
17.5 Receipt and release for payments: Subject to the provisions of
Section 17.1, any payment made from the Plan to or with respect to any
Participant or beneficiary, or pursuant to a disclaimer by a beneficiary,
shall, to the extent thereof, be in full satisfaction of all claims
hereunder against the Plan and the Employer with respect to the Plan.
The recipient of any payment from the Plan may be required by the Committee,
as a condition precedent to such payment, to execute a receipt and release
with respect thereto in such form as shall be acceptable to the Committee.
17.6 Headings: The headings and subheadings of the Plan have been inserted
for convenience of reference and are to be ignored in any construction of
the provisions hereof.
17.7 Continuation of employment: The establishment of the Plan shall not
be construed as conferring any legal or other rights upon any Employee or
any persons for continuation of employment, nor shall it interfere with the
right of the Employer to discharge any Employee or to deal with him without
regard to the effect thereof under the Plan.
<PAGE>
17.8 Merger or consolidation: No employer-party to the Plan shall
consolidate or merge into or with another corporation or entity, or transfer
all or substantially all of its assets to another corporation, partnership,
trust or other entity (a "Successor Entity") unless such Successor Entity
shall assume the rights, obligations and liabilities of the employer-party
under the Plan and upon such assumption, the Successor Entity shall become
obligated to perform the terms and conditions of the Plan.
17.9 Construction: The Employer shall designate in the Adoption Agreement
the state according to whose laws the provisions of the Plan shall be
construed and enforced, except to the extent that such laws are superseded
by ERISA.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>6
<FILENAME>exh13a.txt
<DESCRIPTION>SELECTED FINANCIAL DATA
<TEXT>
<TABLE>
SELECTED FINANCIAL DATA. EXHIBIT 13(a)
- ------------------------ -------------
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
($ in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Insurance premiums
earned ................... $330,623 $297,043 $265,280 $231,459 $211,098 $194,244 $177,218 $165,191 $162,266 $164,829 $156,438
Investment income, net ..... 29,702 32,778 30,970 29,006 25,761 24,859 23,780 24,007 23,204 21,042 20,936
Realized investment gains
(losses) ................. 1,170 (3,159) 800 1,558 277 5,901 4,100 1,891 1,043 520 684
Other income ............... 862 866 774 1,473 2,194 1,701 1,023 904 1,005 1,128 668
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total revenues ........ 362,357 327,528 297,824 263,496 239,330 226,705 206,121 191,993 187,518 187,519 178,726
Losses and expenses ........ 334,375 305,636 303,366 262,431 245,321 223,031 189,318 171,324 163,202 168,842 169,707
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income
tax expense (benefit) .... 27,982 21,892 (5,542) 1,065 (5,991) 3,674 16,803 20,669 24,316 18,677 9,019
Income tax expense (benefit) 7,633 5,790 (3,436) (1,264) (5,187) (2,339) 3,586 5,635 6,967 5,171 1,885
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from:
Continuing operations ... 20,349 16,102 (2,106) 2,329 (804) 6,013 13,217 15,034 17,349 13,506 7,134
Accounting changes ...... - - - - - - - - - - 2,621
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) .... $ 20,349 $ 16,102 $ (2,106)$ 2,329 $ (804)$ 6,013 $ 13,217 $ 15,034 $ 17,349 $ 13,506 $ 9,755
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per common
share - basic and diluted:
Continuing operations $ 1.78 $ 1.42 $ (.19)$ .21 $ (.07)$ .53 $ 1.18 $ 1.37 $ 1.62 $ 1.29 $ .70
Accounting changes .... - - - - - - - - - - .26
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total ................ $ 1.78 $ 1.42 $ (.19)$ .21 $ (.07)$ .53 $ 1.18 $ 1.37 $ 1.62 $ 1.29 $ .96
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Premiums earned by segment:
Property and casualty
insurance .............. $241,237 $225,013 $203,393 $184,986 $167,265 $155,523 $143,113 $128,516 $126,440 $127,573 $123,114
Reinsurance .............. 89,386 72,030 61,887 46,473 43,833 38,721 34,105 36,675 35,826 37,256 33,324
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total ................ $330,623 $297,043 $265,280 $231,459 $211,098 $194,244 $177,218 $165,191 $162,266 $164,829 $156,438
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA
Total assets ............... $899,712 $674,864 $671,565 $587,676 $542,395 $496,046 $459,110 $430,328 $412,881 $387,370 $368,936
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Stockholders' equity ....... $180,751 $157,768 $140,458 $148,393 $141,916 $163,938 $162,346 $148,729 $136,889 $116,727 $109,634
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
OTHER DATA
Average return on equity ... 12.0% 10.8% (1.5)% 1.6% (.5)% 3.7% 8.5% 10.5% 13.7% 11.9% 9.3%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Book value per share ....... $ 15.72 $ 13.84 $ 12.40 $ 13.14 $ 12.60 $ 14.26 $ 14.30 $ 13.42 $ 12.66 $ 11.03 $ 10.63
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Dividends paid per share ... $ .60 $ .60 $ .60 $ .60 $ .60 $ .60 $ .60 $ .57 $ .53 $ .52 $ .52
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Property and casualty
insurance subsidiaries
aggregate pool percentage 23.5% 23.5% 23.5% 23.5% 23.5% 23.5% 22% 22% 22% 22% 22%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Reinsurance subsidiary quota
share percentage ......... 100% 100% 100% 100% 100% 100% 100% 95% 95% 95% 95%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Closing stock price ........ $ 21.14 $ 17.87 $ 17.15 $ 11.75 $ 9.13 $ 12.75 $ 13.25 $ 12.00 $ 13.75 $ 9.50 $ 9.50
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Net investment yield
(pre-tax) ................ 4.81% 5.92% 6.31% 6.47% 5.96% 6.02% 6.15% 6.54% 6.65% 6.59% 6.83%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Cash dividends to
closing stock price ...... 2.8% 3.4% 3.5% 5.1% 6.6% 4.7% 4.5% 4.8% 3.9% 5.5% 5.5%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Common shares outstanding .. 11,501 11,399 11,330 11,294 11,265 11,496 11,351 11,084 10,814 10,577 10,317
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Statutory trade combined
ratio .................... 99.8% 101.3% 112.4% 113.5% 115.2% 114.8% 106.2% 103.6% 99.6% 101.3% 106.3%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Amounts previously reported in prior consolidated financial statements have
been reclassified to conform to current presentation.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>7
<FILENAME>exh13b.txt
<DESCRIPTION>MANAGEMENT'S DISCUSSION AND ANALYSIS
<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.
COMPANY OVERVIEW
EMC Insurance Group Inc., an 80.9 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 73.0
percent of consolidated premiums earned. For purposes of this discussion, the
term "Company" is used interchangeably to describe EMC Insurance Group Inc.
(Parent Company only) and EMC Insurance Group Inc. and its subsidiaries.
Employers Mutual and all of its subsidiaries (including the Company) and an
affiliate are referred to as the "EMC Insurance Companies."
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. The aggregate
participation of the Company's property and casualty insurance subsidiaries is
23.5 percent. Effective December 31, 2003, the pooling agreement was amended
to provide that Employers Mutual will make up any shortfall or difference
resulting from an error in its systems and/or computational processes that
would otherwise result in the required restatement of the pool participants'
financial statements. 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.
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. The investment
and income tax activities of the reinsurance subsidiary are not subject to the
quota share agreement.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The reinsurance subsidiary pays an annual override commission to
Employers Mutual in connection with the $1,500,000 cap on losses assumed per
event. The override commission rate is charged at 4.50 percent of written
premiums. 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, excluding
reinstatement premiums. This cost is recorded as a reduction to the premiums
received by the reinsurance subsidiary.
INDUSTRY OVERVIEW
An insurance company's underwriting results reflect the profitability of
its insurance operations, excluding investment income. Underwriting results
are calculated by subtracting losses and expenses incurred from premiums
earned. An underwriting profit indicates that a sufficient amount of premium
income was received to cover the risks insured. An underwriting loss
indicates that premium income was not adequate. The combined ratio is another
measure utilized by insurance companies to gauge underwriting profitability
and is calculated by dividing losses and expenses incurred by premiums earned.
A number less than 100 generally indicates an underwriting gain; a number
greater than 100 generally indicates an underwriting loss.
Insurance companies collect cash in the form of insurance premiums and pay
out cash in the form of loss and settlement expense payments. Additional cash
outflows occur through the payment of acquisition and underwriting costs such
as commissions, premium taxes, salaries and general overhead. During the loss
settlement period, which varies by line of business and by the circumstances
surrounding each claim and may cover several years, insurance companies invest
the cash premiums and earn interest and dividend income. This investment
income supplements underwriting results and contributes to net earnings. The
weakening economy during the period of 2000 through 2002 prompted the Federal
Reserve Bank to reduce interest rates several times, to the point of historic
lows. As a result, called and matured fixed maturity securities have been
reissued at much lower interest rates, which has had a negative impact on the
insurance industry's investment income.
Insurance pricing has historically been cyclical in nature. Periods of
excess capital and increased competition encourage price cutting and liberal
underwriting practices (referred to as a soft market) as insurance companies
compete for market share, while attempting to cover the inevitable
underwriting losses from these actions with investment income. As capital
decreases and competition begins to subside in the interest of strengthening
the balance sheet, premium pricing rises, sometimes dramatically, and
underwriting practices are tightened (referred to as a hard market). During
the late 1990's the insurance industry had hit the depths of an extremely long
soft market. High interest rates and a strong stock market allowed insurers
to cover ever growing underwriting losses with investment income. As the year
2000 approached, declining interest rates and a weakening stock market
prompted the insurance industry to begin a movement toward increased pricing.
This movement was dramatically accelerated by the terrorist attacks of
September 11, 2001, pushing the industry toward a hard market. The ensuing
plunge in the stock market, a further decline in interest rates, high profile
bankruptcies and rising concerns about reserve deficiencies lead the insurance
industry to implement large premium rate increases in an effort to improve
capitalization. This hard market continued throughout 2002, but began to
level off somewhat during 2003 as premium rate increases slowed, or even
flattened, in most lines of business. Overall premium rate levels are
expected to remain firm in 2004, but the recent improvement in the industry's
capitalization may result in increased competition and less adequate rate
levels in the future.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Insurance companies must estimate the amount of losses and settlement
expenses that will ultimately be paid to settle claims that have occurred to
date (loss and settlement expense reserves). This estimation process is
inherently subjective with the possibility of widely varying results,
particularly for certain highly volatile types of claims (asbestos,
environmental, and various casualty exposures, such as products liability,
where the loss amount and the parties responsible are difficult to determine).
During a soft market, inadequate premium rates put pressure on insurance
companies to under-estimate their loss and settlement expense reserves in
order to show a profit. Correspondingly, inadequate reserves play an integral
part in bringing about a hard market, because increased profitability from
higher premium rate levels can be used to strengthen an insurance company's
loss and settlement expense reserves. One of the major issues confronting the
insurance industry today is a concern about large reserve deficiencies. A.M.
Best Company, which is considered to be the leading insurance rating agency,
estimates industry reserve deficiencies to be approximately $65.6 billion at
year-end 2003. This includes reserve deficiencies for asbestos and pollution
exposures of $11.6 billion and $25 billion, respectively.
MANAGEMENT ISSUES AND PERSPECTIVES
The insurance industry is highly regulated and very competitive, and its
operations are impacted by many economic and social factors. In order to be a
viable source of insurance protection in today's marketplace, an insurance
company must be strongly capitalized, carry a secure rating from A.M. Best
Company and offer competitive products and excellent service. Management
recognizes that insurance agents and their customers have many options to
choose from when selecting an insurance carrier and continually emphasizes the
need to meet and exceed customers' expectations in these areas.
Management has long recognized the importance of an insurance company's
capitalization and has always strived to maintain a strong capital position by
investing its assets conservatively and, more importantly, maintaining a
consistent level of reserve adequacy. Carried reserves are analyzed on a
regular basis and adjustments, if necessary, are implemented on a timely
basis. This procedure not only assures a consistent level of reserve
adequacy, it also minimizes the impact that any required adjustment will have
on current operations. This dedication to reserve adequacy was again
demonstrated during 2003 as the Company strengthened loss and settlement
reserves in the property and casualty insurance segment in response to the
findings of regularly-scheduled actuarial evaluations.
The participants in the EMC Insurance Companies pooling agreement
currently carry an "A-" (Excellent) rating from A.M. Best Company. Management
has worked diligently over the last several years to improve profitability
through a combination of adequate pricing and focused underwriting practices.
These efforts have been successful to date and management has taken the
necessary steps to prepare for market changes that will inevitably occur.
Maintaining a consistent level of profitability is a primary goal of
management that will assist the Company in its quest to achieve an even higher
rating from A.M. Best Company.
The products offered by an insurance company must be priced so that they
are competitive in the marketplace, yet offer the prospect of producing an
underwriting profit. This fact has become increasingly important during the
last several years as investment income, which is used to supplement
underwriting results and contribute to net earnings, has been negatively
impacted by the lingering low interest rate environment. Management is keenly
aware of the need to achieve an underwriting profit in today's marketplace and
has implemented focused underwriting initiatives that stress profitability
over production.
<PAE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Workers' compensation is a significant line of business for the Company,
representing 13.7 percent of premiums earned. Underwriting results for the
workers' compensation line of business are difficult to control because
premium rates are highly regulated and are often subject to political
pressures. In addition, reserves established for workers' compensation claims
often reflect long-term or life-time medical care that may increase
significantly in cost due to inflationary pressures, increases in utilization
of medical procedures and advancements in technology. Management has many
years of experience in the workers' compensation business and continuously
monitors these issues. It is also important to recognize that workers'
compensation coverage is not issued on a stand-alone basis, but is provided in
combination with other coverages in commercial package policies that are
priced on a total coverage basis.
Catastrophe and storm losses are unpredictable and, as demonstrated
during the last three years, can vary significantly from year to year.
Management uses modeling software to help identify and estimate its potential
loss exposure to a variety of events, both natural and manmade. Natural
events that are modeled include hurricanes, tornados and windstorms, and
earthquakes. Modeling activities for manmade events are primarily directed
toward identifying concentrations of risk, such as workers' compensation
coverage for a business or property that is subject to a terrorist attack or
other manmade event. Management purchases reinsurance protection to mitigate
the Company's loss potential to these types of exposures.
Losses from mold related claims continue to hamper the insurance industry
as a whole, but are not considered to be significant exposures to the Company.
The Company is using exclusionary endorsements and sub-limits to control mold
losses. In addition, an improved understanding of these types of claims has
resulted in prompt attention to water damage losses.
CRITICAL ACCOUNTING POLICIES
The following accounting policies are considered by management to be
critically important in the preparation and understanding of the Company's
financial statements and related disclosures. The assumptions utilized in the
application of these accounting policies are complex and require subjective
judgment.
Loss and settlement expense reserves
Processes and assumptions for establishing loss and settlement expense
reserves
Liabilities for losses are based upon case-basis estimates of reported
losses and estimates of incurred but not reported ("IBNR") losses. For direct
insurance business, the Company's IBNR reserves are estimates of liability for
accidents that have occurred, but have not yet been reported to the Company.
For assumed reinsurance business, IBNR reserves are also used to record
anticipated increases in reserves for claims that have previously been
reported. An estimate of the expected expenses to be incurred in the
settlement of the claims provided for in the loss reserves is established as
the liability for settlement expenses.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Property and Casualty Insurance Segment
- ---------------------------------------
The Company's claims department establishes case loss reserves for direct
business. Branch claims personnel establish case reserves for individual
claims, with mandatory home office claims department review of reserves that
exceed a specified threshold. The Company's case loss reserve philosophy is
exposure-based and implicitly assumes a stable inflationary and legal
environment. When claims department personnel establish loss reserves
they take into account various factors that influence the potential exposure,
such as the types of injuries being claimed, whether the insured is a target
defendant, the jurisdiction in which a potential court case would be litigated
and negligence of other parties. The goal of the claims department is to
establish and maintain loss reserves that are sufficient, but not excessive.
Most of the IBNR reserves for direct business are established through an
actuarial analysis of IBNR claims that have emerged after the end of recent
calendar years compared to the corresponding calendar year premiums earned
(adjusted for changes in rate level adequacy). The methodology used in
estimating these formula IBNR reserves assumes consistency in claims reporting
patterns and immaterial changes in loss development patterns due to loss cost
trends. From this analysis, IBNR factors are derived for each line of
business and are applied to the latest twelve months of premiums earned to
generate the formula IBNR reserves.
Ceded reserves are derived by applying the ceded contract terms to the
direct reserves. For excess-of-loss contracts (excluding the catastrophe
contract), this is accomplished by applying the ceded contract terms to the
case reserves of the ceded claims. For the catastrophe excess-of-loss
contract, ceded reserves are calculated by applying the contract terms to both
the aggregate case reserves on claims stemming from catastrophes and the
estimate of IBNR reserves developed for each individual catastrophe. For
pro rata contracts, ceded reserves are calculated as the pro rata percentage
multiplied by both case and IBNR reserves on the direct business.
The methodology used for reserving settlement expenses is based on an
analysis of historical ratios of paid settlement expenses to paid losses.
Assumptions underlying this methodology include stability in the mix of
business, consistent claims processing procedures, immaterial impact of loss
cost trends on development patterns and a consistent philosophy regarding the
defense of lawsuits. Based on this actuarial analysis, factors are derived
for each line of business, which are applied to loss reserves to generate
the settlement expense reserves.
As of December 31, 2003, IBNR reserves accounted for $49,259,000, or
approximately 20 percent, of the property and casualty insurance segment's
total loss reserves, compared to $39,881,000, or approximately 17.0 percent at
December 31, 2002. IBNR reserves are, by nature, less precise than case
reserves. A five percent change in IBNR reserves at December 31, 2003 would
equate to a $2,463,000 change in loss reserves, which would represent 7.9
percent of net income and 0.9 percent of stockholders' equity.
The Company's direct IBNR reserves are established by applying factors to
the latest twelve months premiums earned. These factors are developed using a
methodology that compares (1) IBNR claims that have emerged after prior year-
ends to (2) corresponding prior years' premiums earned that have been adjusted
to the current level of rate adequacy. Included in the rate adequacy
adjustment is consideration of current frequency and severity trends compared
to the trends underlying prior years' calculations. The selected trends are
based on an analysis of industry and Company loss data. This methodology
assumes that future emerged IBNR claims relative to IBNR claims that have
emerged after prior year-ends will reflect the change in frequency and
severity trends underlying the rate adequacy adjustments. If this projected
relationship proves to be inaccurate, future IBNR claims may differ
substantially from the estimated IBNR reserves.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Following is a summary of the carried loss and settlement expense
reserves for the property and casualty insurance segment at December 31, 2003
and 2002.
December 31, 2003
-----------------------------------------
Settlement
Line of Business Case IBNR Expense Total
- ---------------- -------- ------- ------- --------
($ in thousands)
Commercial lines:
Automobile ..................... $ 27,807 $ 5,784 $ 6,427 $ 40,018
Property ....................... 7,582 2,372 1,690 11,644
Workers' compensation .......... 63,275 13,348 10,220 86,843
Liability ...................... 38,241 22,457 25,542 86,240
Other .......................... 889 656 436 1,981
-------- ------- ------- --------
Total commercial lines ....... 137,794 44,617 44,315 226,726
-------- ------- ------- --------
Personal lines:
Automobile ..................... 11,968 2,468 2,260 16,696
Property ....................... 4,566 2,174 1,098 7,838
-------- ------- ------- --------
Total personal lines ......... 16,534 4,642 3,358 24,534
-------- ------- ------- --------
Total ............................ $154,328 $49,259 $47,673 $251,260
======== ======= ======= ========
December 31, 2002
-----------------------------------------
Commercial lines:
Automobile ..................... $ 28,932 $ 5,344 $ 6,960 $ 41,236
Property ....................... 7,584 1,330 1,672 10,586
Workers' compensation .......... 53,224 8,312 8,049 69,585
Liability ...................... 37,241 20,303 22,289 79,833
Other .......................... 1,621 99 784 2,504
-------- ------- ------- --------
Total commercial lines ....... 128,602 35,388 39,754 203,744
-------- ------- ------- --------
Personal lines:
Automobile ..................... 13,528 2,572 2,359 18,459
Property ....................... 4,614 1,921 1,139 7,674
-------- ------- ------- --------
Total personal lines ......... 18,142 4,493 3,498 26,133
-------- ------- ------- --------
Total ........................ $146,744 $39,881 $43,252 $229,877
======== ======= ======= ========
Internal actuarial evaluations of overall loss reserve levels are
performed quarterly for all direct lines of business. There is a certain
amount of random variation in loss development patterns, which results in some
uncertainty regarding projected ultimate losses, particularly for longer tail
lines such as workers' compensation, other liability and commercial auto
liability. Therefore, the reasonability of the actuarial projections is
regularly monitored through an examination of loss ratio and claims severity
trends implied by these projections.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Historically, individual case reserves established by the claims
department have been adequate. However, actuarial analyses performed during
2003 indicated that overall case reserves appeared to be somewhat inadequate.
This apparent inadequacy was driven by the workers' compensation line of
business, where adverse development more than offset the favorable development
experienced on all other lines of business combined. Further analysis
revealed that most of the adverse development experienced in the workers'
compensation line of business was arising from the indemnity, rather than the
medical, portion of the claims. The underlying data indicated that the
aggregate liability associated with time away from work was somewhat
underestimated and that permanent injury awards were somewhat underestimated
and/or not anticipated when the reserves were established. In response to
these findings, the Company established a bulk case reserve for the workers'
compensation line of business to supplement the individual case reserves. An
actuarial evaluation of case reserve adequacy is now performed each quarter
and adjustments to the bulk reserve, if necessary, are made in response to
these evaluations.
One of the variables impacting the estimation of IBNR reserves is the
assumption that the vast majority of future construction defect losses will
continue to occur in those states in which most construction defect claims
have historically arisen. Since the vast majority of these losses have been
confined to a relatively small number of states, which is consistant with
industry experience, there is no provision in the IBNR reserve for a
significant spread of construction defect claims to other states. It is also
assumed that the various underwriting initiatives implemented in recent years
will gradually mitigate the amount of construction defect losses experienced.
These initiatives include exclusionary endorsements, increased care regarding
additional insured endorsements, a general reduction in the amount of
contractor business written relative to the total commercial lines book of
business and underwriting restrictions on the writing of residential
contractors. The estimation of the Company's IBNR reserves also does not
contemplate substantial losses from potential mass torts such as MTBE (a
gasoline additive that reduces emissions but causes pollution), tobacco,
silicosis, cell phones and lead. Further, consistent with general industry
practice, the IBNR reserve for all liability lines does not provide for any
significant retroactive expansion of coverage through judicial interpretation.
If these assumptions prove to be incorrect, ultimate paid amounts on emerged
IBNR claims may differ substantially from the carried IBNR reserves.
As previously noted, the estimation of settlement expense reserves
assumes a consistent claims department philosophy regarding the defense of
lawsuits. If the Company should in the future take a more aggressive defense
posture, defense costs would increase and it is likely that carried settlement
expense reserves would be deficient. However, such a change in philosophy
could be expected to reduce losses, generating some offsetting redundancy in
the loss reserves.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
An important assumption underlying aggregate reserve estimation methods
is that claims inflation trends implicitly built into loss and settlement
expense development patterns will continue into the future. To estimate the
sensitivity of estimated ultimate loss and settlement expense payments to an
unexpected change in inflationary trends, the actuarial department derived
expected payment patterns separately for each major line of business. These
patterns were applied to the December 31, 2003 loss and settlement expense
reserves to generate estimated annual incremental loss and settlement expense
payments for each subsequent calendar year. Then, for the purpose of
sensitivity testing, an explicit annual inflationary trend of one percent was
added to the inflationary trend that is implicitly embedded in the estimated
payment pattern, and revised incremental loss and settlement expense payments
were calculated. This additional unexpected claims inflation trend could
arise from a variety of sources including a general increase in economic
inflation, social inflation and, especially for the workers' compensation
line of business, introduction of new medical technologies and procedures,
changes in utilization of procedures and changes in life expectancy. The
estimated cumulative impact that this additional unexpected one percent
increase in the inflationary trend would have on the Company's results of
operations over the lifetime of the underlying claims is shown below.
After-tax
Line of business impact on earnings
---------------- ------------------
($ in thousands)
Personal auto liability ........... $ 153
Commercial auto liability ......... 456
Auto physical damage .............. 14
Workers' compensation ............. 2,616
Other liability ................... 2,318
Property .......................... 81
Homeowners ........................ 48
The property and casualty insurance segment has exposure to environmental
and asbestos claims arising primarily from the other liability line of
business. This exposure is closely monitored by management, and the Company
has established IBNR reserves to cover estimated ultimate losses. Currently,
asbestos reserves are based on the results of an independent consultant's
ground-up study of our asbestos exposures, which was completed in early 2003.
Environmental reserves are established with consideration to the implied
three-year survival ratio (ratio of loss reserves to the three-year average
of loss payments). Estimation of ultimate liabilities for these exposures is
unusually difficult due to outstanding issues such as whether coverage exists,
the definition of an occurrence, the determination of ultimate damages and
the allocation of such damages to financially responsible parties.
Therefore, any estimation of these liabilities is subject to greater than
normal variation and uncertainty, and ultimate payments for losses and
settlement expenses for these exposures may differ significantly from carried
reserves.
Reinsurance Segment
- ------------------
The reinsurance book of business is comprised of two major components.
The first is Home Office Reinsurance Assumed Department ("HORAD"), which is
the reinsurance business that is underwritten by Employers Mutual. The second
is the Mutual Reinsurance Bureau pool ("MRB"), which is a voluntary pool in
which Employers Mutual participates with other unaffiliated insurers.
The primary actuarial methods used to project ultimate policy year losses
on the assumed reinsurance business are paid development, incurred development
and Bornhuetter-Ferguson, a recognized actuarial methodology. The assumptions
underlying the various projection methods include stability in the mix of
business, consistent claims processing procedures, immaterial impact of loss
cost trends on development patterns, consistent case reserving practices and
appropriate Bornhuetter-Ferguson expected loss ratio selections.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the HORAD component, Employers Mutual records the case and IBNR
reserves reported by the ceding companies. Since many ceding companies in
the HORAD book of business do not report IBNR reserves, Employers Mutual
establishes a bulk IBNR reserve, which is based on an actuarial reserve
analysis, to cover the lag in reporting. For MRB, Employers Mutual records
the case and IBNR reserves reported to it by the management of the pool,
along with a relatively small IBNR reserve to cover a one-month reporting lag.
To verify the adequacy of the reported reserves, an actuarial evaluation of
MRB's reserves is performed at each year-end.
Settlement expense reserves for both the HORAD and MRB books of business
are developed through the application of factors to carried loss reserves.
The factors are derived from an analysis of paid settlement expenses
to paid losses. The assumptions described for the property and casualty
insurance segment also apply to the reinsurance segment settlement expense
reserving process.
At December 31, 2003, the carried reserves for HORAD and MRB combined
were in the upper quarter of the range of actuarial reserve indications. This
conservative selection reflects the fact that there are inherent uncertainties
involved in establishing reserves for assumed reinsurance business. Such
uncertainties include the fact that a reinsurance company generally has less
knowledge than the ceding company about the underlying book of business and
the ceding company's reserving practices. Because of these uncertainties,
there is a risk that the reinsurance segment's reserves for losses and
settlement expenses could prove to be inadequate, with a consequent adverse
impact on the Company's future earnings and stockholders' equity.
At December 31, 2003, there was no backlog in the processing of assumed
reinsurance information. Approximately $75,107,000 or 64 percent of the
reinsurance segment's carried reserves were reported by the ceding companies.
Employers Mutual receives loss reserve and paid loss data from the ceding
companies on individual excess-of-loss business. If a claim involves a
single or small group of claimants, a summary of the loss and claim outlook
is normally provided. Summarized data is provided for catastrophe claims and
pro rata business, which is subject to closer review if inconsistencies are
suspected. Unearned premiums are generally reported on pro rata accounts,
but are usually calculated by Employers Mutual on excess-of-loss business.
Carried reserves established in addition to those reported by the ceding
companies totaled approximately $41,557,000 at December 31, 2003. Since many
ceding companies in the HORAD book of business do not report IBNR reserves,
Employers Mutual establishes a bulk IBNR reserve to cover the lag in
reporting. For the few ceding companies that do report IBNR reserves,
Employers Mutual carries them as reported. These reported IBNR reserves are
subtracted from the total IBNR reserve calculated by Employers Mutual's
actuaries, with the difference carried as bulk IBNR reserves. Except for a
small IBNR reserve established to cover a one-month lag in reporting, the MRB
IBNR reserve is established by the management of MRB. Employers Mutual rarely
records additional case reserves.
Assumed reinsurance losses tend to be reported later than direct losses.
This lag is reflected in loss projection factors for assumed reinsurance that
tend to be higher than for direct business. The result is that assumed
reinsurance IBNR reserves as a percentage of total reserves tend to be higher
than for direct reserves. IBNR reserves totaled $58,427,000 and $50,234,000
at December 31, 2003 and 2002, respectively, and accounted for approximately
50.0 percent of the reinsurance segment's total loss reserves. IBNR reserves
are, by nature, less precise than case reserves. A five percent change in
IBNR reserves at December 31, 2003 would equate to a $2,921,000 change in loss
reserves, which would represent 9.3 percent of net income and 1.1 percent of
stockholders' equity.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Following is a summary of the carried loss and settlement expense
reserves for the reinsurance segment at December 31, 2003 and 2002.
December 31, 2003
-----------------------------------------
Settlement
Line of Business Case IBNR Expense Total
- ---------------- -------- ------- ------- --------
($ in thousands)
Pro Rata Reinsurance:
Property and casualty ........ $ 3,881 $ 2,564 $ 206 $ 6,651
Property ..................... 6,824 9,031 276 16,131
Crop ......................... 683 35 18 736
Casualty ..................... 2,703 4,714 237 7,654
Marine/Aviation .............. 8,273 5,599 1,049 14,921
-------- ------- ------- --------
Total pro rata reinsurance 22,364 21,943 1,786 46,093
-------- ------- ------- --------
Excess-of-Loss Reinsurance:
Property ..................... 18,959 24,835 1,859 45,653
Casualty ..................... 11,190 10,695 373 22,258
Surety ....................... 1,690 954 16 2,660
-------- ------- ------- --------
Total excess-of-loss
reinsurance .............. 31,839 36,484 2,248 70,571
-------- ------- ------- --------
Total ...................... $ 54,203 $58,427 $ 4,034 $116,664
======== ======= ======= ========
December 31, 2002
-----------------------------------------
Pro Rata Reinsurance:
Property and casualty ........ $ 2,786 $ 2,254 $ 149 $ 5,189
Property ..................... 8,083 7,709 282 16,074
Crop ......................... 352 17 9 378
Casualty ..................... 3,148 4,957 315 8,420
Marine/Aviation .............. 4,064 4,697 478 9,239
-------- ------- ------- --------
Total pro rata reinsurance 18,433 19,634 1,233 39,300
-------- ------- ------- --------
Excess-of-Loss Reinsurance:
Property ..................... 13,393 21,472 1,379 36,244
Casualty ..................... 14,003 8,349 375 22,727
Surety ....................... 2,284 779 16 3,079
-------- ------- ------- --------
Total excess-of-loss
reinsurance .............. 29,680 30,600 1,770 62,050
-------- ------- ------- --------
Total ...................... $ 48,113 $50,234 $ 3,003 $101,350
======== ======= ======= ========
To ensure the accuracy and completeness of the information received from
the ceding companies, Employers Mutual's actuarial department carefully
reviews the latest four HORAD policy years on a quarterly basis, and all
policy years on an annual basis. Any significant departures from historical
reporting patterns are brought to the attention of the reinsurance department
staff, who check the bookings for accuracy and, if necessary, contact the
ceding company or broker for clarification.
Employers Mutual's actuarial department annually reviews the MRB reserves
for reasonableness. These analyses use a variety of actuarial techniques,
which are applied at a line-of-business level. MRB staff supplies the reserve
analysis data, which is verified for accuracy by Employers Mutual's actuaries.
This review process is replicated by certain other MRB member companies, using
actuarial techniques they deem appropriate. Based on these reviews,
Employers Mutual and the other MRB member companies have consistently found
the MRB reserves to be appropriate.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the HORAD book of business, paid and incurred loss development
patterns for relatively short-tail lines of business (property and marine) are
based on data reported by the ceding companies. Employers Mutual has
determined that there is sufficient volume and stability in the reported
losses to base projections of ultimate losses on these patterns. For longer
tail lines of business (casualty), industry incurred development patterns are
referenced due to the instability of the development patterns based on
reported historical losses.
For long-tail lines of business, unreliable estimates of unreported
losses can result from the application of loss projection factors to reported
losses. To some extent, this is also true for short-tail lines of business in
the early stages of a policy year's development. Therefore, in addition to
loss-based projections, Employers Mutual generates estimates of unreported
losses based on premiums earned. These estimates are sometimes more
stable and reliable than projections based on losses.
Disputes with ceding companies do not occur often. Employers Mutual
performs claims audits and reviews claim reports for accuracy, completeness
and adequate reserving. Most reinsurance contracts contain arbitration
clauses to resolve disputes, but such disputes are generally resolved without
arbitration due to the long-term and ongoing relationships that exist with
those companies. There were no matters in dispute at December 31, 2003.
Asbestos, environmental and other uncertain exposures
- -----------------------------------------------------
Asbestos and environmental losses paid by the Company totaled $236,000
in 2003, $187,000 in 2002 and $219,000 in 2001. During 2002, the Company re-
evaluated the estimated ultimate loss projections for asbestos exposures.
Based on this re-evaluation, the Company reallocated $176,000 of bulk IBNR
reserves and $74,000 of settlement expense reserves to direct asbestos
exposures. In addition, the Company diligently evaluated the adequacy of its
asbestos reserves by commissioning a "ground-up" study to better quantify its
exposure to asbestos liabilities. This study concluded that the Company's
exposure for direct asbestos claims ranged from $1,100,000 to $5,100,000, with
a point estimate of $3,000,000. Based on the results of this study, the
Company elected to increase the IBNR and settlement expense reserves carried
for direct asbestos exposures by $2,069,000, to $2,985,000 at December 31,
2002. The study's results for asbestos exposures on assumed reinsurance
business were received during 2003, and the Company elected to increase its
IBNR reserves carried for assumed asbestos exposures by $326,000 to the
study's point estimate. The study and its results assume no improvement in
the current asbestos litigation environment; however, continued efforts for
federal legislation could reduce the ultimate loss projections for asbestos
litigation below the levels currently projected for the industry.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Since 1989, the Company has consistently included an asbestos exclusion
in liability policies issued for most lines of business. The exclusion
prohibits liability coverage for "bodily injury," "personal injury" or
"property damage" (including any associated clean-up obligations) arising out
of the installation, existence, removal or disposal of asbestos or any
substance containing asbestos fibers. Therefore, the Company's present
asbestos exposures are primarily limited to commercial policies issued prior
to 1989. At present, the Company is defending several hundred asbestos bodily
injury lawsuits under express reservation of rights in a number of states for
injuries caused by asbestos containing products allegedly "mined, milled,
manufactured, and/or distributed" by the Company's past and present
policyholders. The plaintiffs in these cases may suffer latent injuries,
which can take years to detect. As a result, courts have allowed the trigger
of more than one policy period (and carrier) to apply to these claims. The
Company's policyholders that have been named as defendants in these asbestos
lawsuits are peripheral defendants (i.e., small contractors, insulators and
electrical and building supply companies).
During 2003, as a direct result of proposed federal legislation in the
areas of asbestos and class action reform, the Company was presented with
several hundred additional lawsuits filed against three former policyholders
representing approximately 40,500 claims related to exposure to asbestos or
asbestos-containing products. These claims are based upon mere exposure to
asbestos or asbestos-containing products, with no actual injuries reported
to date. As a result, management did not establish a significant amount of
loss reserves associated with these claims. The vast majority of the 40,500
claims are contained in four lawsuits. One lawsuit lists multiple named
plaintiffs of approximately 20,000 individuals. While the expense of
handling these lawsuits is higher than what the Company has averaged in the
past, it is not proportional to the number of plaintiffs. The
Company's settlement expense reserve adequately accounts for these additional
expenses.
The Company has denied coverage to one of the former policyholders,
representing approximately 10,000 claims, because of express asbestos
exclusion language contained in the policy. Minimal expense payments have
been made to date on the lawsuits related to the other two former
policyholders and no payments have been made for either defense or indemnity.
Four former policyholders and one current policyholder dominate the Company's
asbestos claims. To date, actual losses paid have been minimal due to the
plaintiffs' failure to identify an asbestos-containing product to which they
were exposed that is associated with the Company's policyholders. Defense
costs, on the other hand, have typically increased due to the increased number
of parties involved in the litigation and the length of time required to
obtain a favorable judgment. Whenever possible, the Company has participated
in cost sharing agreements with other liability carriers to reduce overall
asbestos claim expenses.
The Company's overall case reserves dropped from 2002 to 2003 as a result
of settling cases where even though our insureds were peripheral defendants,
there were malignant cancer claims involved. Other claims were resolved
without making payments. The Company has not received a corresponding
increase in the number of claims alleging malignancy.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company's direct environmental claims have been defined as "any loss
or potential loss (including third party claims) related directly or
indirectly to the remediation of a site arising from past operations or waste
disposal." Examples include, but are not limited to: chemical waste;
hazardous waste treatment, storage and/or disposal facilities; industrial
waste disposal facilities; landfills; superfund sites; toxic waste spills; and
underground storage tanks. Widespread use of pollution exclusions since 1970
in virtually all lines of business, except personal lines, has resulted in
limited exposure to environmental claims. Absolute pollution exclusions have
been used since the 1980's. The Company's exposure to environmental claims
is, therefore, limited primarily to accident years preceding the 1980s. The
pre-1980's exposures include municipality exposures for closed landfills,
small commercial businesses involved with disposing waste at landfills or
leaking underground storage tanks. During 2002, the Company re-evaluated the
estimated ultimate losses for direct environmental exposures. Based on this
re-evaluation, the Company reallocated $576,000 of bulk IBNR reserves and
$191,000 of settlement expense reserves to direct environmental exposures. No
additional IBNR reserves were established for these exposures.
The Company's exposure to asbestos and environmental claims through
assumed reinsurance is very limited due to the fact that the Company's
reinsurance subsidiary entered into the reinsurance marketplace in the early
1980s after much attention had already been brought to these issues. The
Company took action to commute one reinsurance contract during the first
quarter of 2003 that had some asbestos and environmental reserves associated
with it.
At December 31, 2003, the Company carried asbestos and environmental
reserves for direct insurance and assumed reinsurance business totaling
$5,584,000, which represents 1.5 percent of total loss and settlement expense
reserves. The asbestos and environmental reserves include $1,289,000 of case
reserves, $3,223,000 of IBNR reserves and $1,072,000 of bulk settlement
expense reserves.
The Company's direct product liability claims are considered to be highly
uncertain exposures due to the many uncertainties inherent in determining the
loss, and the significant periods of time that can elapse between the
occurrence of the loss and the ultimate settlement of the claim. The majority
of the Company's product liability claims arise from small to medium sized
manufacturers, contractors, petroleum distributors, and mobile home and auto
dealerships. No specific claim trends are evident from the Company's
manufacturer policies, as the claims activity on these policies is generally
isolated and can be severe. Claims involving petroleum products can range
from small to severe, and are generally isolated and tend to occur when the
product is placed into use. Specific product coverage is provided to the
Company's mobile home and auto dealership policyholders, and the claims from
these policies tend to be relatively small. Certain construction defect
claims are reported under product liability coverage. During 2003, 110 of
these claims were reported to the Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company's assumed casualty excess reinsurance is also considered to
be a highly uncertain exposure due to the significant periods of time that can
elapse during the settlement of the underlying claims and the fact that a
reinsurance company generally has less knowledge than the ceding company about
the underlying book of business and the ceding company's reserving practices.
While the Company's reinsurance subsidiary is predominantly a property
reinsurer, it does write some casualty excess business that includes most of
the standard casualty lines of business. Casualty excess business that is
written is generally considered to be either working layer (exposed to loss on
a policy limit basis) or clash (reinsurance attaches above the typical
original policy limits that are provided). The working layer casualty excess
reinsurance is written for smaller companies, while clash casualty excess is
provided to all sizes of companies. No contracts are currently written for
specialty casualty lines such as medical malpractice or for-profit directors
and officers.
The Company has exposure to construction defect claims arising from
general liability policies issued to contractors. Most of the Company's
construction defect claims are concentrated in a limited number of states, and
the Company has taken steps to mitigate this exposure. Construction defect is
a highly uncertain exposure due to issues such as whether coverage exists,
definition of an occurrence, determination of ultimate damages, and allocation
of such damages to financially responsible parties. The Company has recently
implemented additional coding to identify construction defect claims. In
2002, incurred losses and paid settlement expenses on 555 newly reported
construction defect claims totaled approximately $1,913,000. In 2003, 668
newly reported construction defect claims accounted for approximately
$3,200,000 of incurred losses and paid settlement expenses. Incurred losses
and paid settlement expenses on all construction defect claims totaled
approximately $4,738,000 in 2003. At year-end 2003, the Company carried case
reserves of approximately $4,872,000 on 765 open construction defect claims.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Following is a schedule of claims activity for asbestos, environmental,
products liability and casualty excess reinsurance for 2003, 2002 and 2001.
Property and casualty
insurance segment Reinsurance segment
--------------------------- --------------------------
Settlement Settlement
($ in thousands) Case IBNR expense Case IBNR expense
------- ------- ------- ------- ------- -------
Reserves at 12/31/03
Asbestos ...........$ 1,138 $ 991 $ 756 $ 86 $ 646 $ -
Environmental ...... 13 836 316 52 750 -
Products(1) ........ 4,235 2,557 4,657 - - -
Casualty excess(2) - - - 18,959 24,834 1,866
Reserves at 12/31/02
Asbestos ...........$ 451 $ 1,693 $ 839 $ 80 $ 454 $ -
Environmental ...... 14 839 322 49 786 -
Products(1) ........ 2,314 1,856 2,000 - - -
Casualty excess(2) - - - 13,393 21,472 1,385
Reserves at 12/31/01
Asbestos ...........$ 353 $ 147 $ 220 $ 86 $ 480 $ -
Environmental ...... 11 312 131 52 773 -
Products(1) ........ 1,890 1,230 1,364 - - -
Casualty excess(2) - - - 15,040 21,034 1,575
Paid during 2003
Asbestos ...........$ 14 $ 83 $ 93 $ 2
Environmental ...... 5 6 33 -
Products(1) ........ 705 959 - -
Casualty excess(2) - - 4,523 386
Paid during 2002
Asbestos ...........$ 18 $ 97 $ 8 $ -
Environmental ...... 44 10 12 -
Products(1) ........ 577 586 - -
Casualty excess(2) - - 5,019 498
Paid during 2001
Asbestos ...........$ 11 $ 49 $ 13 $ 1
Environmental ...... 109 27 8 -
Products(1) ........ 967 562 - -
Casualty excess(2) - - 4,436 534
(1) Products includes the portion of asbestos and environmental claims
reported above that are non-premises/operations claims.
(2) Casualty excess includes the asbestos and environmental
claims reported above.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Environ-
Asbestos mental Products
-------- -------- --------
Open claims, 12/31/03 ... 41,076 7 1,784
Reported in 2003 ........ 40,893 7 1,008
Disposed of in 2003 ..... 123 6 304
Open claims, 12/31/02 ... 306 6 1,080
Reported in 2002 ........ 123 - 781
Disposed of in 2002 ..... 83 3 260
Open claims, 12/31/01 ... 266 9 559
Reported in 2001 ........ 104 1 454
Disposed of in 2001 ..... 95 8 371
Variability of loss and settlement expense reserves
The Company does not determine a range of estimates for all components of
the loss and settlement expense reserves at the time those reserves are
established. However, at each year-end an actuarially determined range of
estimates is developed for the major components of the loss and settlement
expense reserves. All reserves are reviewed, except for the involuntary
workers' compensation pools, for which reliance is placed on a reserve opinion
received from the National Council on Compensation Insurance certifying the
reasonableness of those reserves. Shown below are the actuarially determined
ranges of reserve estimates as of December 31, 2003, along with the carried
reserves. The last two columns display the estimated after-tax impact on
earnings if the reserves were moved to the high endpoint and the low endpoint
of the ranges.
After-Tax Impact
Range of Reserve Estimates on Earnings
-------------------------- ------------------
Reserves Reserves
($ in thousands) High Low Carried at High at Low
-------- -------- -------- -------- --------
Property and casualty
insurance segment .........$262,677 $226,527 $251,260 $ (7,421) $ 16,076
Reinsurance segment ......... 121,418 98,341 116,664 (3,090) 11,910
-------- -------- -------- -------- --------
$384,095 $324,868 $367,924 $(10,511) $ 27,986
======== ======== ======== ======== ========
Changes in loss and settlement expense reserve estimates of prior periods
Loss and settlement expense reserves are estimates at a given time of
what an 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. Such changes in reserves for losses and settlement
expenses are reflected in operating results in the year such changes are
recorded.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During the last three years the Company has experienced adverse
development in the provision for insured events of prior years. The majority
of this adverse development has come from the property and casualty insurance
segment and is attributed to a combination of bulk reserve strengthening,
an increase in IBNR reserves, the revaluation of individual claim liabilities
in select lines of business, newly reported claims in excess of carried IBNR
reserves, the establishment of additional asbestos reserves and an increase
in paid settlement expenses. The reinsurance segment experienced favorable
development in 2003, but experienced adverse development in the two prior
years. The favorable development for 2003 is primarily from the 2002 accident
year on the HORAD book of business, which has experienced very low reported
loss activity. The adverse development for the two prior years is primarily
attributed to construction defect claims arising from the MRB pool. For a
detailed discussion of the factors influencing the adverse development on
prior years' reserves, see the discussion entitled "Outstanding Losses and
Settlement Expenses" under the "Property and Casualty Insurance Subsidiaries
and Reinsurance Subsidiary" heading in the Business Section under Item I of
this Form 10-K.
Deferred policy acquisition costs and related amortization
Deferred policy acquisition costs are used to match the expenses incurred
in the production of insurance business to the income earned on this business.
This adjustment is necessary because statutory accounting principals require
that expenses incurred in the production of insurance business be expensed
immediately, while premium income is recognized ratably over the terms of the
underlying insurance policies.
Amortization of deferred policy acquisition costs is calculated as the
difference between the beginning and ending amounts of deferred policy
acquisition costs plus the amount of costs deferred during the current year.
Deferred policy acquisition costs and related amortization are calculated
separately for the property and casualty insurance segment and the reinsurance
segment. 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. Deferred policy acquisition costs were not subject
to limitation at December 31, 2003, and management does not anticipate future
limitations to be likely due to the improved premium rate environment in both
the insurance and reinsurance marketplaces.
Deferred income taxes
The realization of the deferred income tax asset is based upon
projections that indicate that a sufficient amount of future taxable income
will be earned to utilize the tax deductions that will reverse in the future.
These projections are based on the Company's history of producing significant
amounts of taxable income, the improved premium rate environment for both the
property and casualty insurance segment and the reinsurance segment and loss
and expense control initiatives that have been implemented in recent years.
In addition, management has formulated tax-planning strategies that could be
implemented to generate taxable income if needed. Should the projected
taxable income and tax planning strategies not provide sufficient taxable
income to recover the deferred tax asset, a valuation allowance would be
required.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
Segment information and consolidated net income for the three years ended
December 31, 2003 are as follows:
($ in thousands) 2003 2002 2001
-------- -------- --------
Property and Casualty Insurance
Premiums earned .......................... $241,237 $225,013 $203,393
Losses and settlement expenses ........... 168,239 156,152 168,344
Acquisition and other expenses ........... 80,493 72,483 61,877
-------- -------- --------
Underwriting loss ........................ $ (7,495) $ (3,622) $(26,828)
======== ======== ========
Loss and settlement expense ratio ........ 69.7% 69.4% 82.8%
Acquisition expense ratio ................ 33.4 32.2 30.4
-------- -------- --------
Combined ratio ........................... 103.1% 101.6% 113.2%
======== ======== ========
Losses and settlement expenses:
Insured events of current year ....... $159,224 $151,507 $167,152
Increase in provision for insured
events of prior years .............. 9,015 4,645 1,192
-------- -------- --------
Total losses and settlement
expenses ....................... $168,239 $156,152 $168,344
======== ======== ========
Catastrophe and storm losses ............. $ 17,531 $ 8,055 $ 15,813
======== ======== ========
Reinsurance
Premiums earned .......................... $ 89,386 $ 72,030 $ 61,887
Losses and settlement expenses ........... 58,266 50,906 53,575
Acquisition and other expenses ........... 24,403 23,150 18,374
-------- -------- --------
Underwriting income (loss) ............... $ 6,717 $ (2,026) $(10,062)
======== ======== ========
Loss and settlement expense ratio ........ 65.2% 70.7% 86.6%
Acquisition expense ratio ................ 27.3 32.1 29.7
-------- -------- --------
Combined ratio ........................... 92.5% 102.8% 116.3%
======== ======== ========
Losses and settlement expenses:
Insured events of current year ....... $ 59,805 $ 48,553 $ 49,600
(Decrease) increase in provision for
insured events of prior years ...... (1,539) 2,353 3,975
-------- -------- --------
Total losses and settlement
expenses ....................... $ 58,266 $ 50,906 $ 53,575
======== ======== ========
Catastrophe and storm losses ............. $ 3,411 $ 249 $ 7,134
======== ======== ========
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
($ in thousands) 2003 2002 2001
-------- -------- --------
Consolidated
REVENUES
Premiums earned .......................... $330,623 $297,043 $265,280
Net investment income .................... 29,702 32,778 30,970
Realized investment gains (losses) ....... 1,170 (3,159) 800
Other income ............................. 862 866 774
-------- -------- --------
362,357 327,528 297,824
-------- -------- --------
LOSSES AND EXPENSES
Losses and settlement expenses ........... 226,505 207,058 221,919
Acquisition and other expenses ........... 104,896 95,633 80,251
Interest expense ......................... 1,320 1,639 11
Other expense ............................ 1,654 1,306 1,185
-------- -------- --------
334,375 305,636 303,366
-------- -------- --------
Income (loss) before income tax
expense (benefit) ...................... 27,982 21,892 (5,542)
Income tax expense (benefit) ............. 7,633 5,790 (3,436)
-------- -------- --------
Net income (loss) ........................ $ 20,349 $ 16,102 $ (2,106)
======== ======== ========
Loss and settlement expense ratio ........ 68.5% 69.7% 83.7%
Acquisition expense ratio ................ 31.7 32.2 30.2
-------- -------- --------
Combined ratio ........................... 100.2% 101.9% 113.9%
======== ======== ========
Losses and settlement expenses:
Insured events of current year ....... $219,029 $200,060 $216,752
Increase in provision for insured
events of prior years .............. 7,476 6,998 5,167
-------- -------- --------
Total losses and settlement
expenses ....................... $226,505 $207,058 $221,919
======== ======== ========
Catastrophe and storm losses ............. $ 20,942 $ 8,304 $ 22,947
======== ======== ========
Year ended December 31, 2003 compared to year ended December 31, 2002
- ---------------------------------------------------------------------
Net income increased 26.4 percent to a record $20,349,000 ($1.78 per
share) in 2003 from $16,102,000 ($1.42 per share) in 2002. This increase is
attributed to improved premium rate adequacy, an improvement in the quality of
the Company's book of business and strong second half earnings in the
reinsurance segment. The improvement in 2003 net income was achieved even
though the Company experienced an unusually high level of catastrophe and
storm losses and performed some necessary reserve strengthening in the
property and casualty insurance segment.
Premium income
Premiums earned increased 11.3 percent to $330,623,000 in 2003 from
$297,043,000 in 2002. This increase is attributed to rate increases that were
implemented in the property and casualty insurance segment during the last two
years as well as significant growth and improved pricing in the reinsurance
segment. The market for property and casualty insurance softened somewhat
during 2003 but was considered to be firm at year-end, and no significant
changes are forecasted for 2004. The Company will continue to implement rate
increases in those lines of business and/or territories where such action is
warranted; however, the overall level of these rate increases is expected to
be smaller than what was implemented during 2003.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Premiums earned for the property and casualty insurance segment increased
7.2 percent to $241,237,000 in 2003 from $225,013,000 in 2002, primarily as a
result of rate increases that have been implemented during the last three
years. The rate increases implemented in 2002 and 2001 were broad based in
nature and resulted in premium rate levels for most lines of business that
were considered to be at, or near, adequate levels at December 31, 2002.
Accordingly, moderate and more targeted rate increases were implemented during
2003. This fine tuning of the Company's rate structure was directed toward
specific accounts, territories and lines of business where additional rate
increases were warranted. Due to the timing of policy renewals and the
earning of premiums ratably over the terms of the underlying policies, a time
delay exists for implemented rate increases to have a noticeable impact on
premiums earned. Premiums earned for 2003 reflect this delay and continued to
show strong growth as the rate increases obtained in 2002 became earned;
however, the growth rate in 2003 was limited by a decline in policy count
(overall approximately 5.8 percent from December 31, 2002) that resulted from
a decrease in new business associated with a moderate increase in rate
competition and a reluctance to accept new risks in under-priced lines of
business, and the non-renewal of existing business that was under-priced
and/or under-performing. Premium rate levels for most lines of business are
not expected to change significantly in 2004, with the notable exception of
the homeowners and workers' compensation lines of business, where premium
rates remain inadequate. In light of the improvements that have been achieved
in both the pricing and the quality of the book of business, management is
looking more favorably at the prospect of writing new business, but will
continue to stress profitability over production.
Premiums earned for the reinsurance segment increased 24.1 percent to
$89,386,000 in 2003 from $72,030,000 in 2002, primarily as a result of
improved premium rate levels and increased participation in the MRB
reinsurance pool. Following the large across-the-board rate increases
implemented in 2002, premium rate increases on excess of loss contracts
moderated in 2003 due to the influx of new capital into the reinsurance
marketplace; however, contracts with poor loss experience continued to receive
exceptionally large rate increases. The rate increases implemented during the
last two years have been realized in conjunction with moderate declines in the
related exposure base due to increased retention levels and coverage
exclusions for terrorist activities. In addition, both excess of loss and
pro-rata contracts are benefiting from improved industry-wide rate levels at
the primary company level. For 2003, Employers Mutual's participation in the
MRB reinsurance pool (which is ceded to the reinsurance segment under the
terms of the quota share agreement) increased to 25 percent from 20 percent in
2002, producing $7,262,000 of additional earned premium. Employers Mutual's
participation in the MRB pool will increase to 33 percent in 2004; however,
earned premiums are not expected to increase due to the discontinuance of some
business within the pool. In addition to these factors, the growth in earned
premiums for 2003 reflects an increase in the estimate of earned but not
reported premiums of $3,125,000, compared to a decrease in this estimate of
approximately $1,135,000 in 2002.
Losses and settlement expenses
Losses and settlement expenses increased 9.4 percent to $226,505,000 in
2003 from $207,058,000 in 2002. The loss and settlement expense ratio (losses
and settlement expenses expressed as a percentage of premiums earned)
decreased to 68.5 percent in 2003 from 69.7 percent in 2002, despite an
unusually high level of catastrophe and storm losses that was second only to
the record amount reported in storm-plagued 2001, and some necessary reserve
strengthening. This decline in the loss and settlement expense ratio is
attributed to improved premium rate adequacy, an improvement in the quality of
the Company's book of business and unusually good loss experience in the
reinsurance segment during the second half of the year.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The loss and settlement expense ratio for the property and casualty
segment increased slightly to 69.7 percent in 2003 from 69.4 percent in 2002.
Despite an unusually high level of catastrophe and storm losses ($17,531,000
in 2003 compared to $8,055,000 in 2002) and some necessary reserve
strengthening, the loss and settlement expense ratio did not increase
appreciably during 2003. This is due to management's diligent efforts over
the last several years to improve both premium rate adequacy and the quality
of the risks insured. Those efforts have been successful and the financial
benefits of those initiatives are now being realized. Loss frequency
continued to trend downward in 2003 while loss severity continued to increase.
The reserve strengthening performed in 2003 amounted to approximately
$12,825,000, which represents only 5.6 percent of the property and casualty
insurance segment's carried reserves at December 31, 2002. Actuarial
evaluations of the Company's carried reserves are performed on a regularly-
scheduled basis and it is the Company's standard practice to adjust its
carried reserves as necessary in response to these evaluations in order to
maintain a consistent level of reserve adequacy.
The loss and settlement expense ratio for the reinsurance segment
decreased to 65.2 percent in 2003 from 70.7 percent in 2002. This improvement
is attributed to an unusually low level of reported loss activity from both
proportional and excess of loss business, and from favorable development on
prior years' reserves. However, this improvement was partially offset by a
significant increase in catastrophe losses ($3,411,000 in 2003 compared to
$249,000 in 2002). During 2003, two events (Midwest storms in the month of
May and hurricane Isabel) reached the $1,500,000 cap on losses assumed per
event from Employers Mutual. In addition, the reinsurance segment established
$326,000 of additional IBNR reserves in 2003 in response to the findings of an
independent study conducted on the Company's asbestos exposures.
Acquisition and other expenses
Acquisition and other expenses increased 9.7 percent to $104,896,000 in
2003 from $95,633,000 in 2002. The expense ratio (acquisition and other
expenses expressed as a percentage of premiums earned) decreased to 31.7
percent in 2003 from 32.2 percent in 2002, primarily due to the improvement in
premium rate adequacy achieved in 2003.
For the property and casualty insurance segment, the expense ratio
increased to 33.4 percent in 2003 from 32.2 percent in 2002. This increase is
primarily due to an increase in contingent commission expense and higher
employee benefit costs. The increase in contingent commission expense is a
direct result of the fundamental improvement that has been achieved in
underwriting results. The increase in employee benefit costs is associated
with a 50 basis-point decrease in the discount rate and expected long-term
rate of return on plan assets assumptions utilized in the pension plan and
postretirement benefit plans actuarial valuations.
For the reinsurance segment, the expense ratio decreased to 27.3 percent
in 2003 from 32.1 percent in 2002. The decrease in 2003 is attributed to a
decline in contingent commission expense and a shift in the mix of business
towards property excess, which carries a lower commission rate. The decline
in contingent commission expense is attributed to several sources, including a
decline of approximately $413,000 associated with the MRB pool and a marine
syndicate account, a decline of approximately $400,000 associated with the
commutation of a retrocession contract related to the World Trade Center
catastrophe, and a general trend toward a reduction in the number of contracts
with contingent commission provisions. Commission expense for 2003 and 2002
includes $782,000 and $379,000, respectively, of commissions incurred in
connection with the increased participation in the MRB reinsurance pool noted
above.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Investment results
Net investment income decreased 9.4 percent to $29,702,000 in 2003 from
$32,778,000 in 2002, despite an increase in invested assets. This decrease is
primarily attributed to the lingering low interest rate environment, which has
negatively impacted the rate of return earned on the Company's investments,
but also reflects an increase in investment expenses. During this period of
low interest rates, many of the Company's higher yielding securities have been
called. The proceeds from these called securities, and from maturing
securities, have been reinvested at the current lower interest rates,
resulting in less investment income. In addition, the Company has been
reluctant to invest in long-term securities in this current low interest rate
environment and has therefore accumulated a significant amount of short-term
and cash equivalent investments. Since these investments carry lower interest
rates than long-term fixed maturity securities, the decline in the Company's
rate of return has been magnified.
Realized investment gains totaled $1,170,000 in 2003 compared to a loss
of $3,159,000 in 2002. Reflected in the gains of 2003 are $1,567,000 of
other-than-temporary impairment losses recognized in the Company's equity
portfolio during the first quarter of 2003, $2,689,000 of net losses
recognized by the Company's equity managers during the first quarter as they
rebalanced the Company's portfolios to enhance future returns and $4,342,000
of losses recognized on the sale of American Airlines and United Airlines
bonds during the first quarter. These bonds were collateralized by aircraft
with an appraised value sufficient to recover the Company's investment at
December 31, 2002; however, during the first quarter of 2003 the value of this
collateral declined below the Company's investment as a result of the war with
Iraq, a significant decline in air travel, and the prospects of a bankruptcy
filing by American Airlines and a liquidation of United Airlines. The losses
recognized in the first quarter were more than offset by gains recognized on
the sale of certain bond and equity investments during the remainder of 2003.
The Company did not recognize any additional other-than-temporary impairment
losses during 2003 and all the impaired equity securities were sold before
year-end, generating gross realized gains of $619,000 and gross realized
losses of $48,000. The realized investment loss for 2002 primarily reflects a
$3,821,000 impairment loss on the Company's investment in MCI Communications
Corporation bonds.
Other information
The Company refinanced its $36,000,000 of surplus notes with Employers
Mutual effective April 1, 2003 at an interest rate of 3.09 percent, resulting
in a 19.4 percent decline in interest expense in 2003. The interest expense
incurred on these surplus notes does not have a material impact on the
Company's results of operations as the proceeds of the surplus notes have been
invested and earn a similar amount of interest income. It should be noted
that surplus notes are considered to be a component of surplus for statutory
reporting purposes because the notes have no maturity date and all payments of
interest and principal must be approved in advance by the insurance
commissioner of the state of domicile of the issuing insurance company;
however, under generally accepted accounting principals (GAAP), surplus notes
are considered to be debt and are reported as a liability in the Company's
financial statements.
Income tax expense increased 31.8 percent to $7,633,000 in 2003 from
$5,790,000 in 2002. The effective tax rate increased slightly to 27.3 percent
in 2003 from 26.4 percent in 2002. Effective April 1, 2003, the Company was
included in Employers Mutual's consolidated tax return due to the fact that
Employers Mutual attained 80 percent ownership of the Company at the end of
March. The Company will file a short-period tax return for the period January
1, 2003 through March 31, 2003.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On January 22, 2004, the Company announced that its wholly-owned
subsidiary Farm and City Insurance Company would discontinue writing
nonstandard risk automobile insurance and institute non-renewal procedures on
all existing business. Due to the fact that Farm and City will continue to
participate in the pooling agreement, it will continue to generate sufficient
cash flows to support the unamortized balance of goodwill currently carried in
the Company's financial statements. As a result, no impairment loss was
recognized on the goodwill at December 31, 2003.
In response to the declining interest rate environment, Employers Mutual
has changed several key assumptions utilized in the preparation of the
actuarial valuation reports for its pension and postretirement benefit plans
during the last two years. Key assumption changes include a reduction in the
discount rate from 7.0 percent in 2001 to 6.5 percent in 2002 and 6.0 percent
in 2003 and a reduction in the expected long-term rate of return on plan
assets for the pension plan from 8.5 percent in 2001 to 8.0 percent in 2002
and 7.5 percent in 2003 and for the postretirement benefit plans from 6.0
percent in 2001 and 2002 to 5.0 percent in 2003. In addition, due to the
continued escalation in the price of prescription drugs, the assumed health
care cost trend rate utilized in the postretirement benefit plan valuation
report was increased from 9 percent in 2001 to 12 percent in 2002 and 11
percent in 2003.
Pension liabilities reflected in the Company's financial statements
totaled $1,453,000 (including $1,016,000 of additional minimum liability) at
December 31, 2003 and $2,488,000 (including $1,701,000 of additional minimum
liability) at December 31, 2002. The intangible asset reflected in the
Company's financial statements totaled $1,016,000 and $1,411,000 at December
31, 2003 and 2002, respectively. Postretirement benefit liabilities reflected
in the Company's financial statements totaled $8,512,000 and $7,527,000 at
December 31, 2003 and 2002, respectively.
Prior to 2002, the Company had concluded that it was not subject to the
accounting requirements of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations, since
it receives the current fair value for any common stock issued under Employers
Mutual's stock option plans. As a result, the Company was recognizing as
compensation expense its pool participation share of the stock option expense
recorded by Employers Mutual for these plans. During 2002, the Company
concluded that it is subject to the accounting requirements of APB 25 and,
accordingly, should not be recognizing compensation expense from Employers
Mutual's stock option plans since the exercise price of the options is equal
to the fair value of the stock at the date of grant. Accordingly, during 2002
the Company reversed the accrual for stock option expense allocated to it by
Employers Mutual, resulting in $349,000 of pre-tax income. Pre-tax
compensation expense recognized in the Company's financial statement in 2001
amounted to $355,000. Since this amount is not material, the financial
statements for 2001 were not restated.
The Company's insurance subsidiaries reimburse Employers Mutual for their
share of the statutory-basis compensation expense associated with stock option
exercises under the terms of the pooling and quota share agreements.
Beginning in 2003, the statutory-basis compensation expense that is paid by
the Company's subsidiaries to Employers Mutual ($505,000 in 2003) is being
reclassified as a dividend payment to Employers Mutual in these GAAP-basis
financial statements. Since the corresponding amounts for 2002 and 2001 were
not material, the financial statements for such years were not restated.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act expanded
Medicare to include, for the first time, coverage for prescription drugs.
This legislation is expected to eventually reduce the cost of Employers
Mutual's health care postretirement benefit plan. Because of various
uncertainties, including Employers Mutual's response to this legislation and
the appropriate accounting methodology for this event, the Company has elected
to defer financial recognition of this legislation until the Financial
Accounting Standards Board (FASB) issues final accounting guidance. When
issued, that guidance could require the Company to change previously reported
information. This deferral election is permitted under FASB Staff Position
No. FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003."
On November 26, 2002, President Bush signed into law the Terrorism Risk
Insurance Act of 2002 ("TRIA"). TRIA provides a temporary Federal backstop on
losses from certified terrorism events from foreign sources and is effective
until December 31, 2005. Coverage includes most direct commercial lines of
business, including coverage for losses from nuclear, biological, and chemical
exposures. Each insurer has a deductible amount, which is calculated as a
percentage of the prior year's direct earned commercial lines premium and a
ten percent retention above the deductible. The percentage used in the
deductible calculation will increase from seven percent in 2003 to ten percent
in 2004 and to fifteen percent in 2005. TRIA caps losses at $100 billion
annually; no insurer that has met its deductible will be liable for payment of
any portion above that amount. Management views this legislation as being
favorable to both the Company and the industry. Though it is uncertain
whether TRIA will be extended beyond 2005, it has and continues to provide
marketplace stability. As a result, coverage for terrorist events in both the
insurance and reinsurance markets is often available. For the Company, the
TRIA deductible will be approximately $20,000,000 in 2004. The January 1,
2004 renewal of Employers Mutual's property and casualty treaty reinsurance
programs included expanded coverage to include domestic terrorism events
(excluding nuclear, biological, and chemical). The January 1, 2004 renewal of
Employers Mutual's standalone reinsurance coverage for terrorism claims saw an
increase in coverage with limits corresponding to the TRIA deductible
(approximately $85,000,000 for the EMC Insurance Companies). The contract
terms provide for 70 percent coverage of $70,000,000 of terrorism losses in
excess of $15,000,000. Coverage includes all commercial lines of business,
losses from both certified and non-certified terrorist events, and nuclear,
biological and chemical coverage.
Year ended December 31, 2002 compared to year ended December 31, 2001
- ---------------------------------------------------------------------
Net income increased dramatically to $16,102,000 in 2002 from a loss of
$2,106,000 in 2001. This improvement is attributed to improved premium rate
adequacy, focused underwriting initiatives and a significant decline in
catastrophe and storm losses. The Company was successful in executing a
corporate operating plan that focused on improved profitability. Although
significant improvements had been achieved in pricing and loss experience in
2001, they were masked by an unusually large amount of storm losses.
Premium income
Premiums earned increased 12.0 percent to $297,043,000 in 2002 from
$265,280,000 in 2001. This increase is primarily attributed to rate increases
that were implemented during the last two years in the property and casualty
insurance segment, as well as growth and improved pricing in the reinsurance
segment. Despite rising premium rates, retention levels remained fairly
constant, evidence of the movement of the insurance industry toward more
adequate rate levels.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Premiums earned for the property and casualty insurance segment increased
10.6 percent to $225,013,000 in 2002 from $203,393,000 in 2001. This increase
is primarily the result of rate increases that grew progressively larger
during the last three years as a result of the industry's movement toward
premium rate adequacy. Premium rate levels for property and casualty
insurance segment continued to improve during 2002 as average rate level
increases ranging from five to eighteen percent were implemented in most lines
of business. As a result of these rate increases, the Company's premium rate
levels for most lines of business were considered to be at, or near, adequate
levels at December 31, 2002.
Premiums earned for the reinsurance segment increased 16.4 percent to
$72,030,000 in 2002 from $61,887,000 in 2001. This increase is attributed to
rate increases implemented during the January 2002 renewal season, increased
participation in the MRB reinsurance pool and growth in a marine syndicate
account; however, this increase was tempered by the recognition in 2001 of
approximately $2,001,000 of reinstatement premiums associated with the World
Trade Center catastrophe. During 2002, this estimate of reinstatement
premiums was reduced by approximately $677,000, reflecting a decline in
Employers Mutual's estimate of the loss. The reinsurance segment lost several
accounts in 2002 due to the 2001 decline in Employers Mutual's A.M. Best
rating from "A" (Excellent) to "A-" (Excellent) and a decline in Employers
Mutual's surplus level at December 31, 2001. Some of the lost business was
replaced by several new working layer programs, which typically have smaller
profit margins but offer greater loss predictability. Reflected in earned
premiums for 2002 is a decline in the estimate of earned but not reported
premium of approximately $1,135,000 compared to an increase of approximately
$1,350,000 in this estimate in 2001.
Losses and settlement expenses
Losses and settlement expenses decreased 6.7 percent to $207,058,000 in
2002 from $221,919,000 in 2001. The loss and settlement expense ratio
decreased to 69.7 percent in 2002 from 83.7 percent in 2001. This decline in
the loss and settlement expense ratio is primarily attributed to a significant
decline in catastrophe and storm losses from the unusually large amount
experienced in 2001, when active weather patterns produced a record amount of
storm losses. Other factors contributing to this improvement include the
implementation of more stringent underwriting standards, a substantial
decrease in loss frequency and a decline in large losses. Both 2002 and 2001
were negatively impacted by adverse development on prior years' reserves.
The loss and settlement expense ratio for the property and casualty
segment decreased to 69.4 percent in 2002 from 82.8 percent in 2001. This
decline is primarily attributed to a significant decline in catastrophe and
storm losses. Other factors include more stringent underwriting standards, a
substantial decline in loss frequency and a decline in large losses.
Offsetting these improvements were an increase in loss severity and a second
consecutive year of adverse development on prior years' reserves. The adverse
development reported for 2002 includes $2,069,000 of additional asbestos
reserves established in response to the findings of an independent study
conducted on the Company's asbestos exposures.
The loss and settlement expense ratio for the reinsurance segment
decreased to 70.7 percent in 2002 from 86.6 percent in 2001. This improvement
is attributed to a significant decline in storm losses, more favorable weather
conditions and decreased casualty losses. The reinsurance segment experienced
adverse reserve development in 2002, but at a lower level than 2001. The
majority of the adverse development came from the MRB reinsurance pool, which
experienced a high level of construction defect claims on an account that was
discontinued on December 31, 1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Acquisition and other expenses
Acquisition and other expenses increased 19.2 percent to $95,633,000 in
2002 from $80,251,000 in 2001. The expense ratio increased to 32.2 percent in
2002 from 30.2 percent in 2001. This increase reflects an increase in
contingent commission expense and policyholder dividends resulting from the
significant improvement in underwriting results, the discontinuation of an
assigned risk program during 2001 that produced commission income and an
increase in employee benefit costs.
For the property and casualty segment, the expense ratio increased to
32.2 percent in 2002 from 30.4 percent in 2001. This increase is attributed
to an increase in contingent commission expense and higher employee benefit
costs. The increase for 2002 also includes a large growth in policyholder
dividend expense. The increases in contingent commission expense and
policyholder dividend expense are a direct result of the fundamental
improvement in underwriting results experienced during the last two years.
For the reinsurance segment, the expense ratio increased to 32.1 percent
in 2002 from 29.7 percent in 2001. This increase is attributed to an increase
in contingent commission expense that resulted from good loss experience on
certain reinsurance contracts. Commission expense for 2002 includes $379,000
of commissions incurred in connection with the increased participation in the
MRB reinsurance pool.
Investment results
Net investment income increased 5.8 percent to $32,778,000 in 2002 from
$30,970,000 in 2001. This increase is primarily attributable to an increase
in fixed maturity security investments that resulted from the issuance of
$25,000,000 of surplus notes to Employers Mutual in December 2001 and
$11,000,000 of surplus notes in June 2002; however, the increase in investment
income was tempered somewhat by the declining interest rate environment. In
addition, the Company experienced a significant amount of call activity in its
portfolio of fixed maturity securities during 2001 due to a large decline in
interest rates. Proceeds from this call activity, and from maturing
securities, were reinvested at lower current rates, resulting in a lower rate
of return in 2002. The surplus notes were issued in response to statutory
capital adequacy concerns raised by certain rating agencies because the
statutory surplus position of the Company's insurance and reinsurance
subsidiaries had declined over the preceding three years due to unfavorable
operating results and the payment of dividends to the parent company.
Realized investment losses totaled $3,159,000 in 2002 compared to a gain
of $800,000 in 2002. The loss for 2002 reflects a $3,821,000 other-than-
temporary impairment write-down of the Company's investment in MCI
Communications Corporation bonds.
Other information
The income tax expense for 2002 totaled $5,790,000 compared to a benefit
of $3,436,000 in 2001. The effective tax rate for 2002 was 26.5 percent
compared to 62.0 percent in 2001. Due to the significant improvement in 2002
operating results, the Company was able to utilize its entire net operating
loss carry forward from calendar years 2001 and 2000.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effective January 1, 2001, the Company began recording the full-term
written premium and related commission expense at the inception of insurance
policies that are billed on an installment basis. Previously, such amounts
were recorded as each installment became due. As a result, written premiums
and unearned premiums increased $13,884,000, invested assets increased
$11,881,000 and the Company incurred $1,706,000 of commission expense and
$297,000 of premium tax expense. These expenses were offset by a $3,054,000
increase in deferred policy acquisition costs, resulting in $1,051,000 of non-
recurring income.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity is a measure of a company's ability to generate sufficient cash
to meet cash obligations as they come due. The Company generated positive
cash flows from operations of $63,095,000 in 2003, $56,566,000 in 2002 and
$47,087,000 in 2001. The amount for 2001 included $11,881,000 received from
Employers Mutual in connection with a change in the recording of written
premiums and commissions on policies billed on an installment basis. The
Company typically generates substantial positive cash flows from operations
because cash from premium payments is generally received in advance of cash
payments made to settle claims. These positive cash flows provide the
foundation of the Company's asset/liability management program and are the
primary drivers of the Company's liquidity. When investing funds made
available from operations, the Company invests in securities with maturities
that approximate the anticipated liabilities of the insurance issued. In
addition, the Company maintains a portion of its investment portfolio in
relatively short-term and highly liquid assets as a secondary source of
liquidity should net cash flows from operating activities prove inadequate
to fund current operating needs. As of December 31, 2003, the Company did
not have any significant variations between the maturity dates of its
investments and the expected payment of its loss and settlement expense
reserves.
The Company is a holding company whose principal assets are its
investments in its insurance subsidiaries. As a holding company, the Company
is dependent upon cash dividends from its insurance company subsidiaries to
meet its obligations and to pay cash dividends to its stockholders. 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 maximum amount of dividends that the insurance
company subsidiaries can pay to the Company in 2004 without prior regulatory
approval is approximately $22.2 million. The Company received $7,255,000,
$6,250,000 and $5,525,000 of dividends from its insurance company subsidiaries
and paid cash dividends to its stockholders totaling $6,874,000, $6,828,000
and $6,787,000 in 2003, 2002 and 2001, respectively.
The Company's insurance company subsidiaries must have adequate liquidity
to ensure that their cash obligations are met; however, because of their
participation in the pooling agreement and the quota share agreement, they do
not have the daily liquidity concerns normally associated with an insurance or
reinsurance company. This is due to the fact that under the terms of the
pooling and quota share agreements, Employers Mutual receives all premiums and
pays all losses and expenses associated with the insurance business produced
by the pool participants and the assumed reinsurance business and then settles
the inter-company balances generated by these transactions with the
participating companies on a quarterly basis.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
At the insurance company subsidiary level, the primary sources of cash
are premium income, investment income and maturing investments. The principal
outflows of cash are payments of claims, commissions, premium taxes, operating
expenses, income taxes, dividends, interest and principal payments on debt
and investment purchases. Cash outflows can be variable because of
uncertainties regarding settlement dates for unpaid losses and because of the
potential for large losses, either individually or in the aggregate.
Accordingly, the insurance company subsidiaries maintain investment and
reinsurance programs generally intended to provide adequate funds to pay
claims without forced sales of 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 pay 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
written. At December 31, 2003, approximately 40 percent of the Company's
fixed maturity securities were in U.S. government or U.S. government agency
issued securities. A variety of maturities are maintained in the Company's
portfolio to assure adequate liquidity. The maturity structure of the fixed
maturity investments is also established by the relative attractiveness of
yields on short, intermediate and long-term securities. The Company does not
invest in any high-yield debt investments (commonly referred to as junk
bonds.)
The Company considers itself to be a long-term investor and generally
purchases fixed maturity investments with the intent to hold them to maturity.
Despite this intent, the Company has historically classified a portion of its
fixed maturity investments as available-for-sale securities to provide
flexibility in the management of the portfolio. Since the third quarter of
1999, all newly acquired fixed maturity investments have been classified as
available-for-sale securities to provide increased management flexibility.
The Company had unrealized holding gains, net of deferred taxes, on fixed
maturity securities available-for-sale totaling $15,779,000 and $16,907,000 at
December 31, 2003 and 2002, respectively. 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
its portfolio as changing conditions warrant.
The majority of the Company's assets are invested in fixed maturity
securities. These investments provide a substantial amount of investment
income that supplements underwriting results and contributes to net earnings.
As these investments mature, or are called, the proceeds will be reinvested at
current rates, which may be higher or lower than those now being earned;
therefore, more or less investment income may be available to contribute to
net earnings depending on the interest rate level.
The Company participates in a securities lending program administered by
Mellon Bank, N.A. 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 cash collateral that
secures the Company's loaned securities is invested in a Delaware statutory
trust that is managed by Mellon Bank. The earnings from this trust are used
in part, to pay the fee the Company receives for each security loaned under
the program.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company held $4,758,000 and $3,057,000 in minority ownership
interests in limited partnerships and limited liability companies at December
31, 2003 and 2002, respectively. The Company does not hold any other
unregistered securities.
The Company's cash balance was ($14,069,000) and ($119,000) at December
31, 2003 and 2002, respectively. The balance at December 31, 2003 reflects a
$14,346,000 transfer of funds out of the cash account on December 31, 2003 to
purchase a fixed maturity security; however, due to timing, the account does
not reflect the corresponding transfer of cash into the account to fund the
purchase. This timing difference resulted in the negative balance in the
account.
Pension liabilities reflected in the Company's financial statements
totaled $1,453,000 (including $1,016,000 of additional minimum liability) at
December 31, 2003 and $2,488,000 (including $1,701,000 of additional minimum
liability) at December 31, 2002. The intangible asset reflected in the
Company's financial statements totaled $1,016,000 and $1,411,000 at December
31, 2003 and 2002, respectively. Postretirement benefit liabilities reflected
in the Company's financial statements totaled $8,512,000 and $7,527,000 at
December 31, 2003 and 2002, respectively.
Capital Resources
Capital resources consist of stockholders' equity and debt, representing
funds deployed or available to be deployed to support business operations.
For the Company's insurance subsidiaries, capital resources are required to
support premium writings. Regulatory guidelines suggest that the ratio of a
property and casualty insurer's annual net premiums written to its statutory
surplus should not exceed 3 to 1. All of the Company's insurance subsidiaries
were well under this guideline at December 31, 2003.
The Company's insurance subsidiaries are required to maintain certain
minimum surplus on a statutory basis and are subject to regulations under
which payment of dividends from statutory surplus is restricted and may
require prior approval of their domiciliary insurance regulatory authorities.
The Company's insurance subsidiaries are also subject to Risk Based Capital
(RBC) requirements that may further impact their ability to pay dividends.
RBC 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, 2003, the Company's insurance subsidiaries had total adjusted
statutory capital of $170,233,000, which is well in excess of the minimum RBC
requirement of $39,609,000.
The Company had total cash and invested assets with a carrying value of
$676.9 million and $608.1 million as of December 31, 2003 and 2002,
respectively. The following table summarizes the Company's cash and invested
assets as of the dates indicated:
December 31, 2003
-----------------------------------
Percent of
Amortized total at
($ in thousands) cost Fair value fair value
--------- ---------- ----------
Fixed maturities, held-to-maturity .... $ 49,845 $ 53,854 7.9%
Fixed maturities, available-for-sale .. 499,511 523,786 76.9
Equity securities, available-for-sale 38,998 49,008 7.2
Cash .................................. (14,069) (14,069) (2.0)
Short-term investments ................ 63,568 63,568 9.3
Other long-term investments ........... 4,758 4,758 0.7
-------- -------- -----
$642,611 $680,905 100.0%
======== ======== =====
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
December 31, 2002
-----------------------------------
Percent of
Amortized total at
($ in thousands) cost Fair value fair value
-------- ---------- ----------
Fixed maturities, held-to-maturity .... $ 55,034 $ 61,639 10.0%
Fixed maturities, available-for-sale .. 459,845 485,856 79.1
Equity securities, available-for-sale 38,444 34,597 5.6
Cash .................................. (119) (119) (0.0)
Short-term investments ................ 29,650 29,650 4.8
Other long-term investments ........... 3,057 3,057 0.5
-------- -------- -----
$585,911 $614,680 100.0%
======== ======== =====
The amortized cost and estimated fair value of fixed maturities and
equity securities at December 31, 2003 were as follows:
Held-to maturity
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
($ in thousands) cost gains losses value
--------- ---------- ---------- ---------
U.S. treasury securities and
obligations of U.S.
government corporations
and agencies ............. $ 47,547 $ 3,780 $ - $ 51,327
Mortgage-backed securities 2,298 229 - 2,527
--------- ---------- ---------- ---------
Total securities
held-to-maturity ..... $ 49,845 $ 4,009 $ - $ 53,854
========= ========== ========== =========
Available-for sale
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
($ in thousands) cost gains losses value
--------- ---------- ---------- ---------
U.S. treasury securities and
obligations of U.S.
government corporations
and agencies ............. $ 170,446 $ 703 $ - $ 171,149
Obligations of states and
political subdivisions ... 140,694 6,381 300 146,775
Mortgage-backed securities 19,312 1,967 - 21,279
Public utilities ........... 20,172 1,714 86 21,800
Corporate securities ....... 148,887 14,195 299 162,783
---------- ---------- ---------- ---------
Total fixed maturity
securities ........... 499,511 24,960 685 523,786
---------- ---------- ---------- ---------
Equity securities .......... 38,998 10,217 207 49,008
---------- ---------- ---------- ---------
Total securities
available-for-sale $ 538,509 $ 35,177 $ 892 $ 572,794
========== ========== ========== =========
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In December 2001, three of the Company's property and casualty insurance
subsidiaries issued surplus notes totaling $25.0 million to Employers Mutual
at an annual interest rate of 5.38 percent. In June, 2002, the Company's
reinsurance subsidiary issued an $11.0 million surplus note to Employers
Mutual at an annual interest rate of 5.25 percent. Effective April 1, 2003,
these surplus notes were reissued at an annual interest rate of 3.09 percent.
These notes do not have a maturity date. Payment of interest and repayment
of principal can only be made out of the applicable subsidiary's statutory
surplus and is subject to prior approval by the insurance commissioner of the
respective state of domicile. The surplus notes are subordinate and junior in
right of payment to all obligations or liabilities of the applicable
insurance subsidiaries. The Company's subsidiaries incurred interest expense
of $11,000 in 2001, $1,639,000 in 2002 and $1,320,000 in 2003 with respect to
the surplus notes. The surplus notes were issued in response to statutory
capital adequacy concerns raised by certain rating agencies because the
statutory surplus position of the subsidiaries had declined over the preceding
three years due to unfavorable operating results and the payment of dividends
to the parent corporation.
As of December 31, 2003, the Company had no material commitments for
capital expenditures.
Off-Balance Sheet Arrangements
Employers Mutual receives all premiums and pays all losses and expenses
associated with the insurance business produced by the pool participants and
the assumed reinsurance business and then settles the inter-company balances
generated by these transactions with the participating companies on a
quarterly basis. When settling the inter-company balances, Employers Mutual
provides the pool participants with full credit for the premiums written
during the quarter and retains all agent balance receivable amounts. Any
receivable amounts that are ultimately deemed to be uncollectible are charged-
off by Employers Mutual and the expense is allocated to the pool members on
the basis of pool participation. As a result, the Company has an off-balance
sheet arrangement with an unconsolidated entity that results in a credit-risk
exposure that is not reflected in the Company's financial statements. Based
on historical data, this credit-risk exposure is not considered to be material
to the Company's results of operations or financial position.
Investment Impairments and Considerations
As of December 31, 2003, the Company has had one fixed maturity security
series, MCI Communications Corporation, that has been determined to be other-
than-temporarily impaired. MCI Communications Corporation is owned by
WorldCom Inc. (currently conducting business under the MCI, Inc. brand name),
whose corporate bonds were downgraded to junk status in May 2002 when it
reported the detection of accounting irregularities. On June 30, 2002 the
Company recognized $3,821,000 of realized loss when the carrying value of this
investment was reduced from an aggregate book value of $5,604,000 to the then
current fair value of $1,783,000. As of December 31, 2003, the fair value of
the MCI bonds had partially recovered, resulting in pre-tax unrealized gains
of $1,035,000 recognized during 2002 and $1,811,000 recognized during 2003.
The MCI Communications bonds were awarded a payout of 79.2 cents per dollar in
a "Plan of Reorganization" that was approved by the bankruptcy court on
October 31, 2003. The factors surrounding this other-than-temporary
impairment did not have any impact on the carrying value of any other
investments held by the Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
At December 31, 2003, the Company had unrealized losses on held-to-
maturity and available-for-sale securities as presented in the table below.
The estimated fair value is based on quoted market prices, where available, or
on values obtained from independent pricing services. None of these
securities are considered to be in concentrations by either security type or
industry. The Company uses several factors to determine whether the carrying
value of an individual security has been other-than-temporarily impaired.
Such factors include, but are not limited to, the security's value and
performance in the context of the overall markets, length of time and extent
the security's fair value has been below carrying value, key corporate events
and collateralization of fixed maturity securities. Based on these factors,
and the Company's ability and intent to hold the fixed maturity securities
until maturity, it was determined that the carrying value of these securities
was not other-than-temporarily impaired at December 31, 2003. Risks and
uncertainties inherent in the methodology utilized in this evaluation process
include interest rate risk, equity price risk and the overall performance of
the economy, all of which have the potential to adversely affect the value of
the Company's investments. Should a determination be made at some point in
the future that these unrealized losses are other-than-temporary, the
Company's earnings would be reduced by approximately $580,000, net of tax;
however, the Company's financial position would not be affected due to the
fact that unrealized losses on available-for-sale securities are reflected in
the Company's financial statements as a component of stockholders' equity, net
of deferred taxes.
Following is a schedule of the length of time securities have
continuously been in an unrealized loss position as of December 31, 2003.
Less than twelve Twelve months
($ in thousands) months or longer Total
----------------- ----------------- ------------------
Description of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
- --------------- ----------------- ----------------- ------------------
Obligations of
states and
political
subdivisions ... $22,801 $300 $ - - $22,801 $300
Public
utilities ...... 2,487 86 - - 2,487 86
Corporate
securities ..... 11,519 130 5,679 169 17,198 299
------- ---- ------ ---- ------- ----
Subtotal, debt
securities ..... 36,807 516 5,679 169 42,486 685
------- ---- ------ ---- ------- ----
Common stock ..... 2,041 77 1,134 130 3,175 207
------- ---- ------ ---- ------- ----
Total temporarily
impaired
securities ..... $38,848 $593 $6,813 $299 $45,661 $892
======= ==== ====== ==== ======= ====
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Following is a schedule of the maturity dates of the fixed maturity
securities presented in the above table. Note that this schedule includes
only fixed maturity securities available-for-sale, as the Company does not
have any fixed maturity securities held-to-maturity with unrealized losses.
Gross
Book Fair unrealized
($ in thousands) value value loss
------- ------- ----------
Due in one year or less ................. $ 2,606 $ 2,601 $ 5
Due after one year through five years ... 199 192 7
Due after five years through ten years .. 10,041 9,851 190
Due after ten years ..................... 30,325 29,842 483
------- ------- ----
$43,171 $42,486 $685
======= ======= ====
Following is a schedule of fixed maturity securities available-for-sale
that are non-investment grade and have unrealized losses at December 31, 2003.
As previously noted, the Company does not invest in junk bonds. The non-
investment grade securities held by the Company are the result of rating
downgrades that occurred subsequent to their purchase. The percentages
displayed are of the fair values of these securities to the total fair value
of fixed maturity securities available-for-sale, and of the unrealized losses
on these securities to the total gross unrealized losses on fixed maturity
securities available-for-sale. This schedule does not include fixed maturity
securities held-to-maturity due to the fact that none of these securities have
unrealized losses or are below investment grade at December 31, 2003. This
schedule also does not include the Company's MCI bonds, which carry a Moody's
Bond Rating of CA, due to the fact that these bonds were written-down to their
fair value in the second quarter of 2002 and have since partially recovered,
resulting in unrealized gains of $2,846,000 as of December 31,
2003.
Percent Percent
Moody's of of gross
bond Carrying Unrealized market unrealized
($ in thousands) rating value Loss value losses
------- ---------- ---------- ----- ----------
Potomac Edison .......... BA $ 2,487 $ 86 5.9% 12.6%
---------- ---------- ----- ---------
$ 2,487 $ 86 5.9% 12.6%
========== ========== ===== =========
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Following is a schedule of gross realized losses recognized in 2003 along
with the associated book values and sales prices aged according to the length
of time the underlying securities were in an unrealized loss position. This
schedule does not include realized losses stemming from corporate actions such
as calls, pay-downs, redemptions, etc. The Company's equity portfolio is
managed on a "tax-aware" basis, which generally results in sales of securities
at a loss to offset sales of securities at a gain, thus minimizing the
Company's income tax expense. Fixed maturity securities are generally held
until maturity.
Gross
Book Sales realized
($ in thousands) value price loss
------- ------- --------
Fixed maturity securities
available-for-sale:
Three months or less ............... $17,830 $17,508 $ 322
Over three months to six months .... - - -
Over six months to nine months ..... - - -
Over nine months to twelve months .. - - -
Over twelve months ................. 11,099 6,544 4,555
------- ------- -------
$28,929 $24,052 $ 4,877
======= ======= =======
Equity securities:
Three months or less ............... $ 7,689 $ 6,490 $ 1,199
Over three months to six months .... 3,152 2,737 415
Over six months to nine months ..... 6,359 4,162 2,197
Over nine months to twelve months .. 4,312 3,102 1,210
Over twelve months ................. 1,392 949 443
------- ------- -------
$22,904 $17,440 $ 5,464
======= ======= =======
The $4,555,000 of realized losses recognized on fixed maturity securities
that were in an unrealized loss position for over twelve months include
$4,342,000 of losses from the sale of American Airlines and United Airlines
bonds in the first quarter of 2003 and $213,000 of losses from the sale of
Northwestern Public Service bonds. The airline bonds were collateralized by
aircraft with an appraised value sufficient to recover the Company's
investment at December 31, 2002; however, during the first quarter of 2003 the
value of this collateral declined below the Company's investment as a result
of the war with Iraq, a significant decline in air travel, and the prospects
of a bankruptcy filing by American Airlines and a liquidation of United
Airlines. As a result of this change in collateral value, the Company elected
to sell the bonds, rather than record an other-than-temporary impairment loss.
The Northwestern Public Service bonds were sold when it was disclosed that its
non-utility subsidiaries had lost value, resulting in negative equity for the
parent company.
The $5,464,000 of realized losses recognized on equity securities
includes $2,785,000 of losses recognized by the Company's equity managers as
they rebalanced the Company's portfolios to enhance future returns and
$1,567,000 of other-than-temporary impairment losses. The $443,000 of
realized losses recognized that were in an unrealized position for over twelve
months includes $125,000 from the rebalancing of the portfolios and $206,000
of other-than-temporary impairment losses.
<PAGEE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LEASES, COMMITMENTS AND CONTINGENT LIABILITIES
The following table reflects the Company's contractual obligations.as of
December 31, 2003. Included in the table are the estimated payments that the
Company expects to make in the settlement of its loss reserves and with
respect to its long-term debt. Employers Mutual has entered into various
leases for branch office facilities with lease terms expiring through 2013.
Employers Mutual also leases computer software under various operating lease
agreements expiring through 2005. All lease costs are included as expenses
under the pooling agreement after allocation of the portion of these expenses
to the subsidiaries that do not participate in the pool.
Payments Due by Period
---------------------------------------------------
Less than 1-3 4-5 More than
Contractual Obligations Total 1 year years years 5 years
- ----------------------- -------- -------- -------- -------- --------
($ in thousands)
Loss and Settlement
Expense Reserves (1) .. $367,924 $123,516 $142,615 $ 33,461 $ 68,332
Long-Term Debt (2) ...... 36,000 - - - 36,000
Real Estate Operating
Leases ................ 7,335 - 3,136 1,654 2,545
Software Operating
Leases ................ 1,183 - 1,183 - -
-------- -------- -------- -------- --------
Total ................... $412,442 $123,516 $146,934 $ 35,115 $106,877
======== ======== ======== ======== ========
1) The amounts presented are estimates of the dollar amounts and time periods
in which the Company expects to pay out its gross loss and settlement expense
reserves. These amounts are based on historical payment patterns and do not
represent actual contractual obligations. The actual payment amounts and the
related timing of those payments could differ significantly from these
estimates.
(2) Long-term debt reflects the surplus notes issued by the Company's
insurance subsidiaries to Employers Mutual, which have no maturity date.
Excluded from long-term debt are pension and other postretirement benefit
obligations.
Estimated guaranty fund assessments of $1,253,000 and $1,079,000, which
are used by states to pay claims of insolvent insurers domiciled in that
state, have been accrued as of December 31, 2003 and 2002, respectively. The
guaranty fund assessments are expected to be paid over the next two years with
premium tax offsets of $1,498,000 expected to be realized within ten years of
the payments. Estimated second injury fund assessments of $1,109,000 and
$1,162,000, which are designed to encourage employers to employ a worker with
a pre-existing disability, have been accrued as of December 31, 2003 and 2002,
respectively. The second injury fund assessment accruals are based on
projected loss payments. The periods over which the assessments will be paid
is not known.
The participants in the pooling arrangement have purchased annuities
from life insurance companies, under which the claimant is payee, to fund
future payments that are fixed pursuant to specific claim settlement
provisions. The Company's share of loss reserves eliminated by the purchase
of these annuities is $753,000. The Company has a contingent liability of
$753,000 should the issuers of these annuities fail to perform under the
terms of the annuities. The Company's share of the amount due from any one
life insurance company does not equal or exceed one percent of the Company's
subsidiaries' policyholders' surplus.
<PAGE>
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 for each of the Company's
subsidiaries.
Market risk represents the potential for loss due to adverse changes in
the fair value of financial instruments. The market risks of the financial
instruments of the Company relate to the investment portfolio, which exposes
the Company to interest rate and equity price risk, and to a lesser extent
credit quality and prepayment risk. Monitoring systems and analytical tools
are in place to assess each of these elements of market risk.
Interest rate risk includes the price sensitivity of a fixed maturity
security to changes in interest rates, and the affect on future earnings from
short-term investments and maturing long-term investments given a change in
interest rates. The following analysis illustrates the sensitivity of the
Company's financial instruments to selected changes in market rates and
prices. A hypothetical one percent increase in interest rates as of December
31, 2003 would result in a corresponding pre-tax decrease in the fair value of
the fixed maturity portfolio of approximately $28,108,000, or 4.5 percent. In
addition, a hypothetical one percent decrease in interest rates at December
31, 2003 would result in a corresponding decrease in pre-tax income over the
next twelve months of approximately $1,604,000, 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 Company's fixed maturity
portfolio at December 31, 2003 was 4.15 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 have been
consistently higher over longer time frames. The Company invests in a
diversified portfolio of readily marketable equity securities. A hypothetical
10 percent decrease in the S&P 500 index as of December 31, 2003 would result
in a corresponding pre-tax decrease in the fair value of the Company's equity
portfolio of approximately $4,137,000.
The Company invests in high quality fixed maturity securities, thus
minimizing credit quality risk. At December 31, 2003, the portfolio of long-
term fixed maturity securities consists of 26.7 percent U.S. Treasury, 13.0
percent government agency, 2.8 percent mortgage-backed, 25.6 percent
municipal, and 31.9 percent corporate securities. At December 31, 2002, the
portfolio of long-term fixed maturity securities consisted of 15.7 percent
U.S. Treasury, 13.4 percent government agency, 3.2 percent mortgage-backed,
14.8 percent municipal, and 52.9 percent corporate securities.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Fixed maturity securities held by the Company generally have an
investment quality rating of "A" or better by independent rating agencies.
The following table shows the composition of the Company's fixed maturity
securities, by rating, as of December 31, 2003.
Securities Securities
held-to-maturity available-for-sale
(at amortized cost) (at fair value)
------------------- ------------------
($ in thousands) Amount Percent Amount Percent
Rating: -------- ------- -------- -------
AAA ..................... $ 49,845 100.0% $282,652 54.0%
AA ...................... - - 75,633 14.4
A ....................... - - 136,614 26.1
BAA ..................... - - 21,578 4.1
BA ...................... - - 2,488 0.5
CA ...................... - - 4,821 0.9
-------- ------- -------- -------
Total fixed maturities $ 49,845 100.0% $523,786 100.0%
======== ======= ======== =======
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.
Prepayment risk refers to the changes in prepayment patterns that can
shorten or lengthen the expected timing of 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, 2003, the effective duration of the mortgage-
backed securities is 1.6 years with an average life and current yield of 2.4
years and 7.0 percent, respectively. At December 31, 2002, the effective
duration of the mortgage-backed securities was 1.2 years with an average life
and current yield of 0.2 years and 7.6 percent, respectively.
IMPACT OF INFLATION
Inflation has a widespread effect on the Company's results of operations,
primarily through increased losses and settlement expenses. The Company
considers inflation, including social inflation that reflects an increasingly
litigious society and increasing jury awards, when setting reserve amounts.
Premiums are also affected by inflation, although they are often restricted or
delayed by competition and the regulatory rate-setting environment.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." This statement is generally
effective for contracts entered into or modified after June 30, 2003.
Currently, the Company's investment strategy does not include investments in
derivative instruments or hedging activities. Therefore, adoption of this
statement did not have any effect on the operating results of the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS 150 establishes standards for how an issuer measures certain financial
instruments with characteristics of both liabilities and equity and it
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). This Statement is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. Adoption of this statement did not have any
effect on the operating results of the Company.
In November 2003, the Emerging Issues Task Force (EITF) of the FASB
reached a consensus on certain disclosures required by EITF Issue 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments," which is effective for fiscal years ending after December 15,
2003. EITF Issue 03-1 requires certain quantitative and qualitative
disclosures for debt and equity securities classified as available-for-sale or
held-to-maturity that are impaired at the balance sheet date but have not been
recognized as other-than-temporary impairments. The Company's adoption of
this EITF, which only requires additional disclosures, did not have any effect
on the operating results of the Company.
In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The revised standard
requires new disclosures in addition to those required by the original
standard about the assets, obligations, cash flows and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. SFAS No. 132, as revised, is effective for financial statements for
fiscal years ending after December 15, 2003, except disclosure of estimated
benefit payments, which is effective for fiscal years ended after June 15,
2004. The Company's adoption of this revised statement, which only requires
additional disclosures, did not have any effect on the operating results of
the Company.
DEVELOPMENTS IN INSURANCE REGULATION
The NAIC has taken initial steps toward adopting selected provisions of
the Sarbanes-Oxley Act of 2002 into its model audit rule. Adoption of these
provisions would likely affect the resources spent by insurers on internal
controls through the requirements that insurers include in their annual
statutory financial statements a statement of management's responsibility for
establishing and maintaining adequate internal control over financial
reporting, a report of management's assessment of the company's internal
control over financial reporting, and an attestation report by the external
auditor on the assessment. A working group is holding a series of meetings
preceding the NAIC's spring meeting on March 15, 2004, at which time it is
expected to promote that the model audit rule be revised to incorporate the
Sarbanes-Oxley Act of 2002 Section 404-type requirements. The requirements
will likely be variable based upon insurer size, with small insurers to be
exempt from a portion or all of the requirements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In 1998, in a move to provide a consistent and comprehensive basis of
statutory accounting for all insurance companies, the NAIC adopted a
comprehensive Codification of Statutory Accounting Principles (Codification).
Codification became effective in most states, including the states of domicile
of the Company's insurance subsidiaries, on January 1, 2001, and replaced the
then current Accounting Practices and Procedures Manual as the NAIC's primary
guidance on statutory accounting. The adoption of Codification resulted in
changes to the accounting practices that the Company's insurance subsidiaries
were using to prepare their statutory financial statements. One of the more
significant changes was the recording of deferred income taxes. As a result
of the adoption of Codification, the statutory surplus of the Company's
insurance subsidiaries increased by approximately $9,110,000 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; rate competition; changes in interest rates and the performance
of financial markets; the adequacy of loss and settlement expense reserves,
including asbestos and environmental claims; terrorist activities and federal
solutions to make available insurance coverage for acts of terrorism; timely
collection of amounts due under ceded reinsurance contracts; rating agency
actions; and other risks and uncertainties inherent in the Company's business.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>8
<FILENAME>exh13c.txt
<DESCRIPTION>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 and include amounts that
are based on management's estimates and judgments where necessary.
The Company's financial statements have been audited by Ernst & Young
LLP, Independent Registered Public Accounting Firm. Management has made
available to Ernst & Young 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
Ernst & Young 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 the
independent auditors 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, 2003, 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 auditors to
review and discuss audit findings and other financial and accounting matters.
The independent auditors 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>
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
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, 2003 and 2002, and
the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of EMC
Insurance Group Inc. and Subsidiaries at December 31, 2003 and 2002 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, in conformity with U.S
generally accepted accounting principles.
/s/Ernst & Young LLP
February 27, 2004
Des Moines, Iowa
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
2003 2002
------------ ------------
ASSETS
Investments:
Fixed maturities:
Securities held-to-maturity, at amortized cost
(fair value $21,167,655 and $61,639,037) .... $ 19,423,013 $ 55,033,675
Securities available-for-sale, at fair value
(amortized cost $382,326,388 and
$459,844,928) ............................... 405,758,798 485,855,966
Fixed maturity securities on loan:
Securities held-to-maturity, at amortized cost
(fair value $32,686,769 and $0) ............ 30,422,335 -
Securities available-for-sale, at fair value
(amortized cost $117,184,150 and $0) ....... 118,026,960 -
Equity securities available-for-sale, at fair
value (cost $38,998,075 and $38,444,030) ..... 49,008,498 34,596,985
Other long-term investments, at cost ........... 4,758,019 3,057,000
Short-term investments, at cost ................ 63,568,064 29,650,230
------------ ------------
Total investments .......................... 690,965,687 608,193,856
Balances resulting from related party transactions
with Employers Mutual:
Reinsurance receivables ..................... 15,861,754 11,582,136
Prepaid reinsurance premiums ................ 3,297,228 2,442,899
Intangible asset, defined benefit
retirement plan ........................... 1,016,492 1,411,716
Other assets ................................ 1,857,284 1,331,816
Cash ............................................. (14,069,102) (119,097)
Accrued investment income ........................ 7,821,652 9,179,555
Accounts receivable (net of allowance for
uncollectible accounts of $0 and $7,297) ....... 379,423 772,944
Income taxes recoverable ......................... - 213,504
Deferred policy acquisition costs ................ 26,737,784 24,926,861
Deferred income taxes ............................ 10,345,429 13,986,172
Goodwill, at cost less accumulated amortization
of $2,616,234 and $2,616,234 ................... 941,586 941,586
Securities lending collateral .................... 154,556,758 -
------------ ------------
Total assets .............................. $899,711,975 $674,863,948
============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
2003 2002
------------ ------------
LIABILITIES
Balances resulting from related party transactions
with Employers Mutual:
Losses and settlement expenses ............. $367,923,881 $331,226,753
Unearned premiums .......................... 124,832,607 115,746,814
Other policyholders' funds ................. 1,390,594 1,035,622
Surplus notes payable ...................... 36,000,000 36,000,000
Indebtedness to related party .............. 2,175,118 3,304,539
Employee retirement plans .................. 9,965,600 10,014,349
Other liabilities .......................... 19,336,366 19,767,507
Income taxes payable ............................. 2,780,500 -
Securities lending obligation .................... 154,556,758 -
------------ ------------
Total liabilities ........................ 718,961,424 517,095,584
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 11,501,065 shares
in 2003 and 11,399,050 shares in 2002 .......... 11,501,065 11,399,050
Additional paid-in capital ....................... 69,113,228 67,270,591
Accumulated other comprehensive income ........... 22,285,668 14,218,330
Retained earnings ................................ 77,850,590 64,880,393
------------ ------------
Total stockholders' equity ................. 180,750,551 157,768,364
------------ ------------
Total liabilities and stockholders' equity $899,711,975 $674,863,948
============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
All balances presented below, with the exception of investment income,
realized investment gains (losses) and income tax expense (benefit), are the
result of related party transactions with Employers Mutual.
Year ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
REVENUES
Premiums earned .................... $330,622,810 $297,043,033 $265,279,858
Investment income, net ............. 29,702,461 32,778,133 30,969,630
Realized investment gains (losses) 1,169,698 (3,159,201) 800,582
Other income ....................... 862,070 865,819 774,169
------------ ------------ ------------
362,357,039 327,527,784 297,824,239
------------ ------------ ------------
LOSSES AND EXPENSES
Losses and settlement expenses ..... 226,504,550 207,057,856 221,918,750
Dividends to policyholders ......... 3,011,433 2,977,154 1,823,970
Amortization of deferred
policy acquisition costs ......... 71,959,232 65,727,016 55,687,015
Other underwriting expenses ........ 29,924,942 26,928,972 22,739,913
Interest expense ................... 1,320,266 1,638,716 11,055
Other expenses ..................... 1,654,320 1,306,034 1,185,415
------------ ------------ ------------
334,374,743 305,635,748 303,366,118
------------ ------------ ------------
Income (loss) before income
tax expense (benefit) ...... 27,982,296 21,892,036 (5,541,879)
------------ ------------ ------------
INCOME TAX EXPENSE (BENEFIT)
Current .......................... 8,336,381 5,061,093 (142,405)
Deferred ......................... (703,208) 729,205 (3,293,342)
------------ ------------ ------------
7,633,173 5,790,298 (3,435,747)
------------ ------------ ------------
Net income (loss) ............ $ 20,349,123 $ 16,101,738 $ (2,106,132)
============ ============ ============
Net income (loss) per common share
- basic and diluted .............. $ 1.78 $ 1.42 $ (.19)
============ ============ ============
Average number of shares outstanding
- basic and diluted .............. 11,453,324 11,375,779 11,312,063
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
Net income (loss) .................. $ 20,349,123 $ 16,101,738 $ (2,106,132)
------------ ------------ ------------
OTHER COMPREHENSIVE INCOME
Unrealized holding gains
arising during the period,
before deferred income tax
expense ........................ 13,290,568 7,454,522 1,645,082
Deferred income tax expense ...... 4,651,699 2,609,079 682,629
------------ ------------ ------------
8,638,869 4,845,443 962,453
------------ ------------ ------------
Reclassification adjustment for
(gains) losses included in net
income (loss), before income
tax expense (benefit) .......... (1,168,918) 3,159,201 (779,540)
Income tax expense (benefit) ..... 409,121 (1,105,720) 272,839
------------ ------------ ------------
(759,797) 2,053,481 (506,701)
------------ ------------ ------------
Adjustment for minimum pension
liability associated with
Employers Mutual's pension plan 289,639 (289,639) -
Deferred income tax expense
(benefit) ...................... 101,373 (101,373) -
------------ ------------ ------------
188,266 (188,266) -
------------ ------------ ------------
Other comprehensive income ... 8,067,338 6,710,658 455,752
------------ ------------ ------------
Total comprehensive income
(loss) ..................... $ 28,416,461 $ 22,812,396 $ (1,650,380)
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31,
--------------------------------------
2003 2002 2001
------------ ------------ ------------
COMMON STOCK
Beginning of year .................. $ 11,399,050 $ 11,329,987 $ 11,294,220
Issuance of common stock through
Employers Mutual's stock option
plans ............................ 102,015 69,063 35,767
------------ ------------ ------------
End of year ........................ 11,501,065 11,399,050 11,329,987
------------ ------------ ------------
ADDITIONAL PAID-IN CAPITAL
Beginning of year .................. 67,270,591 66,013,203 65,546,963
Issuance of common stock through
Employers Mutual's stock option
plans ............................ 1,842,637 1,257,388 466,240
------------ ------------ ------------
End of year ........................ 69,113,228 67,270,591 66,013,203
------------ ------------ ------------
ACCUMULATED OTHER COMPREHENSIVE
INCOME
Beginning of year .................. 14,218,330 7,507,672 7,051,920
Unrealized gains on
available-for-sale securities .... 7,879,072 6,898,924 455,752
Minimum pension liability associated
with Employers Mutual's pension
plan ............................. 188,266 (188,266) -
------------ ------------ ------------
End of year ........................ 22,285,668 14,218,330 7,507,672
------------ ------------ ------------
RETAINED EARNINGS
Beginning of year .................. 64,880,393 55,606,761 64,500,213
Net income (loss) .................. 20,349,123 16,101,738 (2,106,132)
Dividends paid to stockholders
($.60 per share in 2003, 2002 and
2001) ............................ (1,350,736) (1,405,064) (1,511,382)
Dividends paid to Employers Mutual
($.60 per share in 2003, 2002 and
2001) ............................ (5,522,994) (5,423,042) (5,275,938)
Dividends to Employers Mutual
(reimbursement for non-GAAP
expenses) ........................ (505,196) - -
------------ ------------ ------------
End of year ........................ 77,850,590 64,880,393 55,606,761
------------ ------------ ------------
Total stockholders' equity ....... $180,750,551 $157,768,364 $140,457,623
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ................... $20,349,123 $16,101,738 $(2,106,132)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Balances resulting from related
party transactions with
Employers Mutual:
Losses and settlement
expenses .................. 36,697,128 16,708,165 28,029,560
Unearned premiums ........... 9,085,793 16,364,638 13,822,959
Other policyholders' funds .. 354,972 562,670 (255,701)
Indebtedness of related party (1,129,421) 620,121 6,484,089
Employee retirement plans ... 636,114 774,079 1,180,566
Reinsurance receivables ..... (4,279,618) 2,919,200 (2,575,981)
Prepaid reinsurance premiums (854,329) (167,668) (330,132)
Amortization of deferred
income .................... - - (78,212)
Commission payable .......... 2,470,516 2,732,425 285,221
Interest payable ............ (1,003,066) 1,641,205 (967)
Prepaid assets .............. (87,676) 27,894 (113,264)
Deferred policy acquisition costs (1,810,923) (3,563,333) (5,726,775)
Accrued investment income ....... 1,357,903 (520,547) (1,313,645)
Accrued income taxes:
Current ....................... 2,994,004 (112,890) 635,297
Deferred ...................... (703,208) 729,205 (3,293,342)
Realized investment (gains)
losses ........................ (1,169,698) 3,159,201 (800,582)
Accounts receivable ............. 393,521 308,080 (807,010)
Other, net ...................... (206,551) (1,717,779) 2,170,440
----------- ----------- -----------
42,745,461 40,464,666 37,312,521
Balances resulting from related
party transactions with
Employers Mutual:
Cash provided by the property
and casualty insurance
subsidiaries' change in
recording of full-term
premium amount on policies
billed on an installment
basis ....................... - - 11,880,803
----------- ----------- -----------
Net cash provided by
operating activities .... $63,094,584 $56,566,404 $47,087,192
----------- ----------- -----------
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Year ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of fixed maturity
securities held-to-maturity .... $ 5,293,717 $ 11,074,685 $ 49,692,313
Purchases of fixed maturity
securities available-for-sale .. (791,156,969) (229,504,732) (166,403,259)
Disposals of fixed maturity
securities available-for-sale .. 753,004,136 180,717,143 44,693,688
Purchases of equity securities
available-for-sale ............. (34,283,972) (43,930,432) (26,769,001)
Disposals of equity securities
available-for-sale ............. 31,151,627 33,884,190 27,388,659
Purchase of other long-term
investments .................... (2,040,000) (4,057,004) -
Disposals of other long-term
investments .................... 338,981 1,000,004 -
Net (purchases) sales of
short-term investments ......... (33,917,835) (11,925,773) 5,663,568
------------ ------------ ------------
Net cash used in investing
activities ............. (71,610,315) (62,741,919) (65,734,032)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Balances resulting from related
party transactions with
Employers Mutual:
Issuance of common stock ..... 1,944,652 1,326,451 502,007
Dividends paid to
Employers Mutual ........... (5,522,994) (5,423,042) (5,275,938)
Dividends to Employers Mutual
(reimbursement for non-GAAP
expense) ................... (505,196) - -
Issuance of surplus notes .... - 11,000,000 25,000,000
Dividends paid to stockholders ... (1,350,736) (1,405,064) (1,511,382)
------------ ------------ ------------
Net cash (used) provided in
financing activities .... (5,434,274) 5,498,345 18,714,687
------------ ------------ ------------
Net (decrease) increase in cash .... (13,950,005) (677,170) 67,847
Cash at beginning of year .......... (119,097) 558,073 490,226
------------ ------------ ------------
Cash at end of year ................ $(14,069,102) $ (119,097) $ 558,073
============ ============ ============
Income taxes paid (recovered) ...... $ 5,400,010 $ 4,755,010 $ (778,316)
Interest paid (received) ........... $ 615,709 $ 19,232 $ (79,232)
See accompanying Notes to Consolidated Financial Statements
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
EMC Insurance Group Inc., an 80.9 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 a 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 (GAAP), which
differ in some respects from those followed in reports to insurance regulatory
authorities. All significant inter-company 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
Property and casualty insurance premiums are recognized as revenue
ratably over the terms of the respective policies. Unearned premiums are
calculated on the daily pro rata method. Both domestic and foreign assumed
reinsurance premiums are recognized as revenues ratably over the terms of the
contract period. 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 reinsurance protection provided. Reinsurance
reinstatement premiums are recognized in the same period as the loss event
that gave rise to the reinstatement premiums.
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.
Certain commercial lines of business, primarily workers' compensation,
are eligible for policyholder dividends in accordance with provisions of the
underlying insurance policies. Net written premiums subject to policyholder
dividends represented approximately 47 percent of the Company's total net
written premiums in 2003. Policyholder dividends are accrued over the terms
of the underlying policies.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 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 (see note 2) have not been grossed up because the contracts
provide that receivables and payables may be offset upon settlement.
Based on current information, the liabilities for losses and settlement
expenses are considered to be adequate. Since the provisions are necessarily
based on estimates, the ultimate liability may be more or less than such
provisions.
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.
Other long-term investments represent minor ownership interests in limited
partnerships and limited liability companies and are carried at cost. Short-
term investments represent money market funds and are carried at cost, which
approximates fair value.
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 are 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, 2003 and 2002 are securities
on deposit with various regulatory authorities as required by law amounting to
$12,960,435 and $12,648,887, respectively.
The Company participates 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 requires initial
collateral equal to 102 percent of the market value of the loaned securities.
The collateral is invested by the lending agent, in accordance with the
Company's guidelines, and generates fee income for the Company that is
recognized ratably over the time period the security is on loan. The
securities on loan to others are segregated from the other invested assets on
the Company's balance sheet. In accordance with the relevant accounting
literature, the collateral held by the Company is accounted for as a secured
borrowing and is recorded as an asset on the Company's balance sheet with a
corresponding liability reflecting the Company's obligation to return this
collateral upon the return of the loaned securities. The securities lending
program was temporarily suspended at December 31, 2002 to eliminate financial
ratio concerns expressed by certain regulatory authorities.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Income Taxes
Effective April 1, 2003, the Company was included in Employers Mutual's
consolidated tax return due to the fact that Employers Mutual attained 80
percent ownership of the Company at the end of March. The Company will file a
short-period tax return with its subsidiaries for the period January 1, 2003
through March 31, 2003. 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.
Stock Based Compensation
The Company has no stock based compensation plans of its own; however,
Employers Mutual has several stock plans that utilize the common stock of the
Company. The Company receives the current fair value for any shares issued
under these plans. Under the terms of the pooling and quota share agreements
(see note 2), stock option expense is allocated to the Company as determined
on a statutory basis of accounting; however, for these GAAP basis financial
statements the Company accounts for the stock option plans using the intrinsic
value method of accounting as prescribed by Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Under the provisions of APB 25, no compensation expense is
recognized from the operation of Employers Mutual's stock option plans since
the exercise price of the options is equal to the fair value of the stock on
the date of grant.
Prior to 2002, the Company had concluded that it was not subject to the
accounting requirements of APB 25 since it receives the current fair value for
any common stock issued under Employers Mutual's stock option plans. As a
result, the Company was recognizing as compensation expense its pool
participation share of the statutory-basis stock option expense allocated to
it by Employers Mutual for these plans. During 2002, the Company concluded
that it is subject to the accounting requirements of APB 25 and, accordingly,
should not be recognizing compensation expense from Employers Mutual's stock
option plans as discussed above. Accordingly, during 2002 the Company
reversed the accrual for stock option expense allocated to it by Employers
Mutual, resulting in $349,273 of pre-tax income. Pre-tax compensation expense
recognized in the Company's financial statements for the year 2001 amounted to
$354,703. Since this amount is not material, the financial statements for
2001 were not restated.
The Company's insurance subsidiaries reimburse Employers Mutual for their
share of the statutory-basis compensation expense associated with stock option
exercises under the terms of the pooling and quota share agreements.
Beginning in 2003, the statutory-basis compensation expense that is paid by
the Company's subsidiaries to Employers Mutual ($505,196 in 2003) is being
reclassified as a dividend payment to Employers Mutual in these GAAP-basis
financial statements. Since the corresponding amounts for 2002 and 2001 were
not material, the financial statements for such years were not restated.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which was effective for
fiscal years ending after December 15, 2002. SFAS 148 amended SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amended the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation, and the effect of the method used on
reported results. The Company adopted the disclosure requirements of SFAS 148
and elected to continue to follow the recognition and measurement principles
of APB 25.
The following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value
recognition provisions of SFAS 123 to Employers Mutual's stock option plans:
2003 2002 2001
----------- ----------- -----------
Net income (loss), as reported $20,349,123 $16,101,738 $(2,106,132)
Add (deduct):
Stock-based compensation
expense reported in net
income (loss) .............. - - 230,557
Stock-based compensation
expense determined under the
fair value method for all
awards, net of related
tax effects ................ (25,383) (18,992) (16,287)
----------- ----------- -----------
Pro forma net income (loss) .... $20,323,740 $16,082,746 $(1,891,862)
=========== =========== ===========
Net income (loss) per share:
Basic and diluted -
As reported ................ $1.78 $1.42 $(0.19)
Basic and diluted -
Pro forma .................. $1.77 $1.41 $(0.17)
The weighted average fair value of options granted amounted to $2.93,
$3.28 and $1.59 for 2003, 2002 and 2001, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions used for the
grants:
2003 2002 2001
------ ------ ------
Dividend yield .......................... 3.56% 3.28% 5.22%
Expected volatility ..................... .247 .218 .215
Risk-free interest rate ................. 2.99% 4.37% 4.78%
Expected life (years) ................... 5.35 5 5
Net Income (loss) Per Share - Basic and Diluted
The Company's basic and diluted net income (loss) per share are computed
by dividing net income (loss) by the weighted average number of common shares
outstanding during each year. As previously noted, the Company receives the
current fair value for any shares issued under Employers Mutual's stock plans.
As a result, the Company had no potential common shares outstanding during
2003, 2002 and 2001 that would have been dilutive to net income (loss) per
share.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Goodwill
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS 142 eliminated the amortization of
goodwill, which represents the excess of cost over the fair value of net
assets of acquired subsidiaries, and provides specific steps for testing the
impairment of goodwill. The initial adoption of SFAS 142 did not have an
impact on the operating results of the Company. The annual impairment test
was completed in the fourth quarter of 2003 and 2002 and goodwill was not
deemed to be impaired.
Prior to January 1, 2002, goodwill was being amortized on a straight-line
basis over 25 years. The Company reviewed the recoverability of the
unamortized balance of goodwill on a periodic basis using projected cash
flows. Goodwill amortization expense amounted to approximately $135,000
($87,000 after tax) per year. Due to the immaterial amounts involved, the
Company has not presented 2001 net income or earnings per share information
that has been adjusted to exclude this expense.
Reclassifications
Certain amounts previously reported in prior years' consolidated
financial statements have been reclassified to conform to current year
presentation.
2. AFFILIATION AND TRANSACTIONS WITH AFFILIATES
Property and Casualty Insurance Subsidiaries
The Company's four property and casualty insurance subsidiaries and two
subsidiaries and an affiliate of Employers Mutual are parties to reinsurance
pooling agreements with Employers Mutual (collectively the "pooling
agreement"). Under the terms of the pooling agreement, each company cedes to
Employers Mutual all of its insurance business, with the exception of any
voluntary reinsurance business assumed from nonaffiliated insurance companies,
and assumes from Employers Mutual an amount equal to its participation in the
pool. All losses, settlement expenses and other underwriting and
administrative expenses, excluding the voluntary reinsurance business assumed
by Employers Mutual from nonaffiliated insurance companies, are prorated among
the parties on the basis of participation in the pool. The aggregate
participation of the Company's property and casualty insurance subsidiaries is
23.5 percent. Operations of the pool give rise to inter-company balances with
Employers Mutual, which are settled on a quarterly basis. Effective December
31, 2003, the pooling agreement was amended to provide that Employers Mutual
will make up any shortfall or difference resulting from an error in its
systems and/or computational processes that would otherwise result in the
required restatement of the pool participants' financial statements. The
investment and income tax activities of the pool participants are not subject
to the pooling agreement.
On January 22, 2004, the Company announced that Farm and City Insurance
Company, its wholly-owned subsidiary, would discontinue writing nonstandard
risk automobile insurance and institute non-renewal procedures on all existing
business. Farm and City will continue to participate in the pooling agreement
even though it will no longer write any direct business.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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. 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.
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 inter-company balances
with Employers Mutual, which are settled on a quarterly basis. The investment
and income tax activities of the reinsurance subsidiary are not subject to the
quota share agreement.
Premiums assumed by the reinsurance subsidiary from Employers Mutual
amounted to $90,057,773, $76,203,278 and $66,287,442 in 2003, 2002 and 2001,
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 $18,936,008, $18,117,058 and
$15,892,684 in 2003, 2002 and 2001, 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. Total override commission paid to Employers Mutual amounted to
$4,052,600, $3,429,148 and $2,982,935 in 2003, 2002 and 2001, respectively.
Employers Mutual retained losses and settlement expenses under this agreement
totaling $2,747,334 in 2003, $1,186,598 in 2002 and $14,442,561 in 2001. 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, excluding reinstatement premiums.
This cost is recorded as a reduction to the premiums received by the
reinsurance subsidiary and amounted to $3,802,878, $3,247,969 and $2,495,794
in 2003, 2002 and 2001, respectively.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Services Provided by Employers Mutual
Employers Mutual provides various services to all of its subsidiaries and
affiliates. Such services include data processing, claims, financial,
actuarial, auditing, marketing and underwriting. Employers Mutual allocates a
portion of the cost of these services to the subsidiaries that do not
participate in the pooling agreement based upon a number of criteria,
including usage and number of transactions. The remaining costs are charged
to the pooling agreement and each pool participant shares in the total cost in
accordance with its pool participation percentage. Costs allocated to the
Company by Employers Mutual for services provided to the holding company and
its subsidiaries that do not participate in the pooling agreement amounted to
$2,097,057, $1,765,287 and $2,040,822 in 2003, 2002 and 2001, respectively.
Costs allocated to the Company through the operation of the pooling agreement
amounted to $63,293,517, $56,897,066 and $51,041,812 in 2003, 2002 and 2001,
respectively.
Investment expenses are based on actual expenses incurred by the Company
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. Investment expenses allocated to the Company by
Employers Mutual amounted to $699,954, $559,136 and $494,142 in 2003, 2002 and
2001, respectively.
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, 2003, reinsurance ceded to two nonaffiliated
reinsurers aggregated $7,043,728, 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.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The effect of reinsurance on premiums written and earned, and losses and
settlement expenses incurred, for the three years ended December 31, 2003 is
presented below.
Year ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
Premiums written
Direct ......................... $220,741,419 $235,596,547 $272,027,823
Assumed from nonaffiliates ..... 3,816,789 3,985,370 1,898,509
Assumed from affiliates
(note 11) .................... 351,641,368 320,940,551 299,990,245
Ceded to nonaffiliates ......... (15,808,709) (11,089,041) (11,189,227)
Ceded to affiliates ............ (220,741,419) (235,596,547) (272,027,823)
------------ ------------ ------------
Net premiums written ......... $339,649,448 $313,836,880 $290,699,527
============ ============ ============
Premiums earned
Direct ......................... $221,662,098 $241,939,466 $255,764,274
Assumed from nonaffiliates ..... 3,629,346 3,501,616 1,786,132
Assumed from affiliates ........ 341,947,846 304,462,790 274,352,821
Ceded to nonaffiliates ......... (14,954,382) (10,921,373) (10,859,095)
Ceded to affiliates ............ (221,662,098) (241,939,466) (255,764,274)
------------ ------------ ------------
Net premiums earned .......... $330,622,810 $297,043,033 $265,279,858
============ ============ ============
Losses and settlement expenses
incurred
Direct ......................... $157,500,290 $165,218,514 $221,314,633
Assumed f