CONSOLIDATED FINANCIAL STATEMENTS. EXHIBIT 13(c)
- --------------------------------- -------------
Management's Responsibility for Financial Reporting
The management of EMC Insurance Group Inc. and Subsidiaries is responsible
for the preparation, integrity and objectivity of the accompanying financial
statements, as well as other financial information in this report. The
financial statements have been prepared in accordance with generally accepted
accounting principles and include amounts that are based on management's
estimates and judgments where necessary.
The Company's financial statements have been audited by KPMG LLP,
independent certified public accountants. Management has made available to
KPMG LLP all of the Company's financial records and related data, as well as
the minutes of the stockholders' and directors' meetings. Furthermore,
management believes that all representations made to KPMG LLP during its audit
were valid and appropriate. Their report appears elsewhere in this annual
report.
Management of the Company has established and continues to maintain a
system of internal controls that are designed to provide assurance as to the
integrity and reliability of the financial statements, the protection of assets
from unauthorized use or disposition, and the prevention and detection of
fraudulent financial reporting. The system of internal controls provides for
appropriate division of responsibility. Certain aspects of these systems and
controls are tested periodically by the Company's internal auditors. Management
considers the recommendations of its internal auditors and independent
accountants concerning the Company's internal controls and takes the necessary
actions that are cost-effective in the circumstances to respond appropriately
to the recommendations presented. Management believes that as of December 31,
1999, the Company's system of internal controls was adequate to accomplish the
above objectives.
The Audit Committee of the Board of Directors, composed solely of outside
directors, met during the year with management and the independent accountants
to review and discuss audit findings and other financial and accounting
matters. The independent accountants and the internal auditors have free
access to the Audit Committee, with and without management present, to discuss
the results of their audit work.
/s/ Bruce G. Kelley /s/ Mark E. Reese
- ------------------------------------ -------------------------------------
Bruce G. Kelley Mark E. Reese
President, Treasurer and Vice President and
Chief Executive Officer Chief Financial Officer
Independent Auditors' Report
The Board of Directors and Stockholders
EMC Insurance Group Inc.:
We have audited the accompanying consolidated balance sheets of EMC
Insurance Group Inc. and Subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EMC
Insurance Group Inc. and Subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Des Moines, Iowa
February 24, 2000
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
--------------------------
1999 1998
------------ ------------
ASSETS
Investments (note 9):
Fixed maturities:
Securities held-to-maturity, at amortized cost
(fair value $126,679,065 and $174,623,439) ... $127,204,160 $164,926,190
Securities available-for-sale, at fair value
(amortized cost $263,720,333 and $208,115,127) 256,181,429 217,499,600
Equity securities available-for-sale, at fair
value (cost $28,494,631 and $29,928,433) ...... 32,408,272 32,785,429
Short-term investments, at cost ................. 20,164,210 22,660,011
------------ ------------
Total investments ........................... 435,958,071 437,871,230
Cash .............................................. 1,508,678 2,133,056
Accrued investment income ......................... 6,886,939 5,865,307
Accounts receivable (net of allowance for
uncollectible accounts of $633,000 and $400,000) 3,293,537 2,779,041
Income taxes recoverable .......................... 1,537,000 3,224,000
Reinsurance receivables (note 3) .................. 11,129,365 16,627,791
Deferred policy acquisition costs ................. 13,619,192 12,355,482
Deferred income taxes (note 10) ................... 18,121,317 10,371,754
Intangible assets, including goodwill, at cost
less accumulated amortization of $2,347,208
and $2,212,695 .................................. 1,210,612 1,345,125
Prepaid reinsurance premiums (note 3) ............. 1,280,564 1,201,737
Other assets ...................................... 2,030,703 2,271,829
------------ ------------
Total assets ................................ $496,575,978 $496,046,352
============ ============
LIABILITIES
Losses and settlement expenses (notes 2, 4 and 5) $266,514,024 $245,610,323
Unearned premiums (note 2) ....................... 64,991,129 61,464,051
Other policyholders' funds ....................... 1,093,254 1,951,683
Indebtedness to related party (note 2) ........... 3,886,559 5,862,685
Postretirement benefits (note 12) ................ 6,768,219 6,017,565
Deferred income .................................. 158,831 277,854
Other liabilities ................................ 11,247,685 10,924,351
------------ ------------
Total liabilities ......................... 354,659,701 332,108,512
------------ ------------
STOCKHOLDERS' EQUITY (notes 6, 7 and 13)
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 11,265,232 shares
in 1999 and 11,496,389 shares in 1998 .......... 11,265,232 11,496,389
Additional paid-in capital ....................... 65,333,686 67,822,412
Accumulated other comprehensive (loss) income .... (3,625,263) 8,079,371
Retained earnings ................................ 68,942,622 76,539,668
------------ ------------
Total stockholders' equity ................ 141,916,277 163,937,840
------------ ------------
Contingent liabilities (notes 3 and 15)
Total liabilities and stockholders' equity $496,575,978 $496,046,352
============ ============
See accompanying Notes to Consolidated Financial Statements.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income
Year ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
REVENUES:
Premiums earned (notes 2 and 3) .... $211,098,141 $194,244,405 $177,218,246
Investment income, net (note 9) .... 25,760,561 24,859,063 23,780,303
Realized investment gains (note 9) 276,673 5,901,049 4,100,006
Other income ....................... 2,194,162 1,700,331 1,022,371
------------ ------------ ------------
239,329,537 226,704,848 206,120,926
------------ ------------ ------------
LOSSES AND EXPENSES (note 2):
Losses and settlement
expenses (notes 3, 4 and 5) ...... 176,876,248 157,876,094 129,853,304
Dividends to policyholders ......... 1,237,368 1,874,900 2,530,747
Amortization of deferred
policy acquisition costs ......... 48,056,918 44,662,641 35,942,092
Other underwriting expenses ........ 17,465,822 17,016,421 20,056,069
Other expenses ..................... 1,684,455 1,600,936 935,981
------------ ------------ ------------
245,320,811 223,030,992 189,318,193
------------ ------------ ------------
(Loss) income before income
tax (benefit) expense ...... (5,991,274) 3,673,856 16,802,733
------------ ------------ ------------
INCOME TAX (BENEFIT) EXPENSE
(note 10):
Current ........................ (1,599,826) (1,516,892) 4,266,959
Deferred ....................... (3,587,463) (822,117) (680,793)
------------ ------------ ------------
(5,187,289) (2,339,009) 3,586,166
------------ ------------ ------------
Net (loss) income ............ $ (803,985) $ 6,012,865 $ 13,216,567
============ ============ ============
Net (loss) income per common share
- basic and diluted .............. $ (0.07) $ 0.53 $ 1.18
============ ============ ============
Average number of shares outstanding
- basic and diluted .............. 11,330,705 11,440,592 11,193,243
============ ============ ============
Consolidated Statements of Comprehensive Income
Year ended December 31,
-------------------------------------
1999 1998 1997
------------ ----------- -----------
Net (loss) income ..................... $ (803,985) $ 6,012,865 $13,216,567
------------ ----------- -----------
OTHER COMPREHENSIVE INCOME (note 9):
Unrealized holding (losses) gains
arising during the period, before
deferred income tax (benefit)
expense ........................... (15,597,992) 6,460,974 9,696,600
Deferred income tax (benefit) expense (4,070,728) 2,196,732 3,296,843
------------ ----------- -----------
(11,527,264) 4,264,242 6,399,757
------------ ----------- -----------
Reclassification adjustment for gains
included in net (loss) income,
before income tax expense ......... (268,742) (5,866,610) (4,098,079)
Income tax expense .................. 91,372 1,994,647 1,393,347
------------ ----------- -----------
(177,370) (3,871,963) (2,704,732)
------------ ----------- -----------
Other comprehensive (loss) income (11,704,634) 392,279 3,695,025
------------ ----------- -----------
Total comprehensive (loss) income $(12,508,619) $ 6,405,144 $16,911,592
============ =========== ===========
See accompanying Notes to Consolidated Financial Statements.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
COMMON STOCK:
Beginning of year ...................$ 11,496,389 $ 11,351,119 $ 11,084,461
Issuance of common stock:
Stock option plans ................ 23,793 55,102 71,073
Dividend reinvestment
plan (note 13) .................. - 90,168 195,585
Repurchase of common stock (note 13) (254,950) - -
----------- ----------- -----------
End of year ......................... 11,265,232 11,496,389 11,351,119
----------- ----------- -----------
ADDITIONAL PAID-IN CAPITAL:
Beginning of year ................... 67,822,412 65,916,681 62,762,613
From issuance of common stock:
Stock option plans ................ 255,001 722,511 854,641
Dividend reinvestment plan ........ - 1,183,220 2,299,427
Repurchase of common stock .......... (2,743,727) - -
----------- ----------- -----------
End of year ......................... 65,333,686 67,822,412 65,916,681
----------- ----------- -----------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Beginning of year ................... 8,079,371 7,687,092 3,992,067
Change in other comprehensive
income ............................ (11,704,634) 392,279 3,695,025
----------- ----------- -----------
End of year ......................... (3,625,263) 8,079,371 7,687,092
----------- ----------- -----------
RETAINED EARNINGS:
Beginning of year ................... 76,539,668 77,391,564 70,889,887
Net (loss) income ................... (803,985) 6,012,865 13,216,567
Dividends on common stock
($.60 per share in 1999, 1998 and
1997):
Cash dividends .................. (6,793,061) (5,637,687) (4,314,083)
Dividends reinvested in shares
of common stock ............... - (1,227,074) (2,400,807)
----------- ----------- -----------
End of year ......................... 68,942,622 76,539,668 77,391,564
----------- ----------- -----------
Total stockholders' equity ........$141,916,277 $163,937,840 $162,346,456
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ................... $ (803,985) $ 6,012,865 $13,216,567
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Losses and settlement expenses .. 20,903,701 24,524,043 9,356,859
Unearned premiums ............... 3,527,078 4,345,359 4,125,443
Other policyholders' funds ...... (858,429) (829,861) (685,905)
Deferred policy acquisition costs (1,263,710) (1,794,825) (1,538,794)
Indebtedness of related party ... (1,976,126) 5,346,899 (7,707,448)
Accrued investment income ....... (1,021,632) (113,012) 814,891
Accrued income taxes:
Current ....................... 1,687,000 (6,772,000) 606,000
Deferred ...................... (3,587,463) (822,116) (680,794)
Realized investment gains ....... (276,673) (5,901,049) (4,100,006)
Postretirement benefits ......... 750,654 588,652 496,079
Reinsurance receivables ......... 5,498,426 (3,026,100) 1,134,095
Prepaid reinsurance premiums .... (78,827) (6,672) 321,907
Amortization of deferred income (119,023) (168,824) (218,872)
Other, net ...................... 76,476 (1,388,392) (1,316,735)
----------- ----------- -----------
23,261,452 13,982,102 606,720
Cash provided by the change in
the property and casualty
insurance subsidiaries' pooling
agreement (note 2) ............ - 5,569,567 5,674,458
Cash provided by the change in
the reinsurance subsidiary's
quota share agreement (note 2) - - 3,066,705
----------- ----------- -----------
Net cash provided by
operating activities .... $22,457,467 $25,564,534 $22,564,450
----------- ----------- -----------
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Year ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity
securities held-to-maturity .... $(13,459,272) $(20,959,844) $(35,504,382)
Maturities of fixed maturity
securities held-to-maturity .... 51,260,724 42,025,415 38,138,196
Purchases of fixed maturity
securities available-for-sale .. (135,872,298) (57,514,297) (46,586,660)
Disposals of fixed maturity
securities available-for-sale .. 81,893,552 22,210,930 20,769,810
Purchases of equity securities
available-for-sale ............. (24,924,562) (40,789,067) (5,024,876)
Disposals of equity securities
available-for-sale ............. 25,037,159 42,941,862 4,010,683
Net sales (purchases) of
short-term investments ......... 2,495,796 (7,733,017) 2,626,614
------------ ------------ -----------
Net cash used in investing
activities .............. (13,568,901) (19,818,018) (21,570,615)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ......... 278,794 823,927 1,019,919
Dividends paid to
stockholders (note 13) ......... (6,793,061) (5,637,687) (4,314,083)
Repurchase of common
stock (note 13) ................ (2,998,677) - -
------------ ------------ ------------
Net cash used in financing
activities .............. (9,512,944) (4,813,760) (3,294,164)
------------ ------------ ------------
Net (decrease) increase in cash .... (624,378) 932,756 (2,300,329)
Cash at beginning of year .......... 2,133,056 1,200,300 3,500,629
------------ ------------ ------------
Cash at end of year ................ $ 1,508,678 $ 2,133,056 $ 1,200,300
============ ============ ============
Income taxes (recovered) paid ...... $ (3,294,499) $ 5,236,047 $ 3,660,959
Interest paid ...................... $ 89,032 $ - $ 88,922
See accompanying Notes to Consolidated Financial Statements
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
EMC Insurance Group Inc., an approximately 72 percent owned subsidiary of
Employers Mutual Casualty Company (Employers Mutual), is an insurance holding
company with operations in property and casualty insurance and reinsurance.
Both commercial and personal lines of insurance are written, with the focus on
medium-sized commercial accounts. About one-half of the premiums written are
in Iowa and contiguous states. The term "Company" is used interchangeably to
describe EMC Insurance Group Inc.(Parent Company only) and EMC Insurance Group
Inc. and its subsidiaries.
The Company's subsidiaries include EMCASCO Insurance Company, Illinois
EMCASCO Insurance Company, Dakota Fire Insurance Company, Farm and City
Insurance Company, EMC Reinsurance Company and EMC Underwriters, LLC.
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles (GAAP), which differ in some respects
from those followed in reports to insurance regulatory authorities. All
significant intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
PROPERTY AND CASUALTY INSURANCE AND REINSURANCE OPERATIONS
Premiums are recognized as revenue ratably over the terms of the
respective policies. Unearned premiums are calculated on the daily pro rata
method. Amounts paid as ceded reinsurance premiums are reported as prepaid
reinsurance premiums and amortized over the remaining contract period in
proportion to the amount of insurance protection provided.
Certain costs of acquiring new business, principally commissions, premium
taxes and other underwriting expenses that vary with and are directly related
to the production of business have been deferred. Such deferred costs are
being amortized as premium revenue is recognized. The method followed in
computing deferred policy acquisition costs limits the amount of such deferred
costs to their estimated realizable value, which gives effect to the premium to
be earned, related investment income, losses and settlement expenses and
certain other costs expected to be incurred as the premium is earned.
Liabilities for losses are based upon case-basis estimates of reported
losses, estimates of unreported losses based upon prior experience adjusted for
current trends, and estimates of losses expected to be paid under assumed
reinsurance contracts. Liabilities for settlement expenses are provided by
estimating expenses expected to be incurred in settling the claims provided for
in the loss reserves. Changes in estimates are reflected in current operating
results (see note 4).
Ceded reinsurance amounts with nonaffiliated reinsurers relating to
reinsurance receivables for paid and unpaid losses and loss settlement expenses
and prepaid reinsurance are reported on the balance sheet on a gross basis.
Amounts ceded to Employers Mutual relating to the affiliated reinsurance
pooling agreement have not been grossed up because the contracts provide that
receivables and payables may be offset upon settlement.
The liabilities for losses and settlement expenses are considered adequate
to cover the ultimate net cost of losses and claims incurred to date. Since
the provisions are necessarily based on estimates, the ultimate liability may
be more or less than such provisions.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
INVESTMENTS
Securities classified as held-to-maturity are purchased with the intent
and ability to be held to maturity and are carried at amortized cost.
Unrealized holding gains and losses on securities held-to-maturity are not
reflected in the financial statements. All other securities have been
classified as securities available-for-sale and are carried at fair value, with
unrealized holding gains and losses reported as accumulated other comprehensive
income in stockholders' equity, net of deferred income taxes. Short-term
investments represent money market funds and are carried at cost.
The Company's carrying value for investments is reduced to its estimated
realizable value if a decline in the fair value is deemed other than temporary.
Such reductions in carrying value are recognized as realized losses and charged
to income. Premiums and discounts on debt securities are amortized over the
life of the security as an adjustment to yield using the effective interest
method. Realized gains and losses on disposition of investments are included
in net income. The cost of investments sold is determined on the specific
identification method using the highest cost basis first. Included in
investments at December 31, 1999 and 1998 are securities on deposit with
various regulatory authorities as required by law amounting to $12,011,143 and
$11,958,675, respectively.
During the third quarter of 1999, the Company began participating in a
securities lending program whereby certain fixed-maturity securities from the
investment portfolio are loaned to other institutions for a short period of
time. The Company receives a fee in exchange for the loan of securities and
requires initial collateral equal to 102 percent of the market value of the
loaned securities.
INSURANCE-RELATED ASSESSMENTS
Effective January 1, 1999, the Company adopted Statement of Position (SOP)
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments", issued by the American Institute of Certified Public Accountants.
This statement provides accounting guidance for insurance and other types of
entities that are subject to guaranty fund and other insurance-related
assessments. The Company's accounting policies were previously in compliance
with the provisions of this statement. As a result, adoption of this statement
did not have a material effect on operating results.
BENEFIT PLANS
The Company participates in Employers Mutual's defined benefit retirement
plan covering substantially all employees. The plan is funded by employer
contributions and provides benefits based on the employee's years of service
and compensation level. Benefits generally vest after five years of service.
It is Employers Mutual's policy to fund pension costs according to regulations
provided under the Internal Revenue Code. Assets held in the plan are a mix of
equity, debt and guaranteed interest securities and real estate funds.
The Company also participates in Employers Mutual's postretirement benefit
plans, which provide certain health care and life insurance benefits for
retired employees. Substantially all employees may become eligible for those
benefits if they reach normal retirement age and have attained the required
length of service while working for Employers Mutual or its subsidiaries. The
health care postretirement plan requires contributions from participants and
contains certain cost sharing provisions such as coinsurance and deductibles.
The life insurance plan is noncontributory. The benefits provided under both
plans are subject to change.
During 1998, Employers Mutual established two Voluntary Employee
Beneficiary Association (VEBA) trusts to accumulate funds for the payment of
postretirement health care and life insurance benefits. Contributions to the
VEBA trusts are used to fund the accumulated postretirement benefit obligation
as well as pay current year benefits. Assets held in the VEBA trusts are
primarily invested in life insurance products purchased from Employers Modern
Life Company, a subsidiary of Employers Mutual.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
INCOME TAXES
The Company files a consolidated Federal income tax return with its
subsidiaries. Consolidated income taxes/benefits are allocated among the
entities based upon separate tax liabilities.
Deferred income taxes are provided for temporary differences between the
tax basis of assets and liabilities and the reported amounts of those assets
and liabilities for financial reporting purposes. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Income tax expense provisions increase or decrease in
the same period in which a change in tax rates is enacted. A valuation
allowance is established to reduce deferred tax assets to their net realizable
value if it is "more likely than not" that a tax benefit will not be realized.
NET INCOME PER SHARE - BASIC AND DILUTED
The Company's basic and diluted net income per share are computed by
dividing net income by the weighted average number of common shares outstanding
during each year. The Company had no potential common shares outstanding
during 1999, 1998 and 1997 that would have been dilutive to net income per
share.
INTANGIBLE ASSETS
Goodwill, which represents the excess of cost over the fair value of net
assets of acquired subsidiaries, is being amortized on a straight-line basis
over 25 years. The Company reviews the recoverability of the unamortized
balance of goodwill on a periodic basis using projected cash flows. The
assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
RECLASSIFICATIONS
Certain amounts previously reported in prior years' consolidated financial
statements have been reclassified to conform to current year presentation.
2. AFFILIATION AND TRANSACTIONS WITH AFFILIATES
PROPERTY AND CASUALTY INSURANCE SUBSIDIARIES
The Company's four property and casualty insurance subsidiaries and two
subsidiaries and an affiliate of Employers Mutual are parties to reinsurance
pooling agreements with Employers Mutual (collectively the "pooling
agreement"). Under the terms of the pooling agreement, each company cedes to
Employers Mutual all of its insurance business, with the exception of any
voluntary reinsurance business assumed from nonaffiliated insurance companies,
and assumes from Employers Mutual an amount equal to its participation in the
pool. All losses, settlement expenses and other underwriting and
administrative expenses, excluding the voluntary reinsurance business assumed
by Employers Mutual from nonaffiliated insurance companies, are prorated among
the parties on the basis of participation in the pool. Operations of the pool
give rise to intercompany balances with Employers Mutual, which are settled on
a quarterly basis. The investment and income tax activities of the pool
participants are not subject to the pooling agreement.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Effective January 1, 1998, Farm and City Insurance Company (Farm and
City), a subsidiary of the Company that writes nonstandard risk automobile
insurance business, became a participant in the pooling agreement. Farm and
City assumes a 1.5 percent participation in the pool, which increased the
Company's aggregate participation in the pool from 22 percent in 1997 to 23.5
percent in 1998 and 1999. In connection with this change in the pooling
agreement, the Company's liabilities increased $6,224,586 and invested assets
increased $5,569,567. The Company reimbursed Employers Mutual $726,509 for
expenses that were incurred to generate the additional business assumed by the
Company and Employers Mutual paid the Company $71,490 in interest income as the
actual cash transfer did not occur until March 25, 1998.
Effective January 1, 1997, a new affiliate of Employers Mutual became a
participant in the pooling agreement. In connection with this change in the
pooling agreement, the Company's liabilities increased $6,393,063 and invested
assets increased $5,674,458. The Company reimbursed Employers Mutual $794,074
for expenses that were incurred to generate the additional business assumed by
the Company and Employers Mutual paid the Company $75,469 in interest income as
the actual cash transfer did not occur until March 24, 1997.
REINSURANCE SUBSIDIARY
Employers Mutual voluntarily assumes reinsurance business from
nonaffiliated insurance companies and cedes a portion of this business to the
Company's reinsurance subsidiary, exclusive of certain reinsurance contracts.
The reinsurance subsidiary assumes its share of all premiums and related losses
and settlement expenses of this business, subject to a maximum loss per event.
The reinsurance subsidiary does not reinsure any of Employers Mutual's direct
insurance business, nor any "involuntary" facility or pool business that
Employers Mutual assumes pursuant to state law. In addition, the
reinsurance subsidiary is not liable for credit risk in connection with the
insolvency of any reinsurers of Employers Mutual. Operations of the quota
share agreement give rise to intercompany balances with Employers Mutual, which
are settled on a quarterly basis.
Effective January 1, 1997, the reinsurance subsidiary's quota share
participation was increased from 95 percent to 100 percent and the maximum loss
per event assumed by the reinsurance subsidiary was increased from $1,000,000
to $1,500,000. In connection with this change in the quota share percentage,
the Company's liabilities increased $3,173,647 and invested assets increased
$3,066,705. The Company reimbursed Employers Mutual $106,942 for expenses that
were incurred to generate the additional business assumed by the Company.
Premiums assumed by the reinsurance subsidiary from Employers Mutual
amounted to $43,546,796, $39,074,384 and $34,690,846 in 1999, 1998 and 1997,
respectively. It is customary in the reinsurance business for the assuming
company to compensate the ceding company for the acquisition expenses incurred
in the generation of the business. Commissions paid by the reinsurance
subsidiary to Employers Mutual amounted to $10,156,159, $9,862,675 and
$8,134,202 in 1999, 1998 and 1997, respectively.
The reinsurance subsidiary pays an annual override commission to Employers
Mutual in connection with the $1,500,000 cap on losses assumed per event, which
totaled $2,286,207, $2,051,405 and $1,821,270 in 1999, 1998 and 1997,
respectively. Employers Mutual retained losses and settlement expenses
totaling ($6,484) in 1999, $144,329 in 1998 and ($93,621) in 1997 under this
agreement. The reinsurance subsidiary also pays for 100 percent of the outside
reinsurance protection Employers Mutual purchases to protect itself from
catastrophic losses on the assumed reinsurance business. This cost is recorded
as a reduction to the premiums received by the reinsurance subsidiary and
amounted to $1,660,950, $1,648,583 and $1,841,000 in 1999, 1998 and 1997,
respectively.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
SERVICES PROVIDED BY EMPLOYERS MUTUAL
Employers Mutual provides various services to all of its subsidiaries.
Such services include data processing, claims, financial, actuarial, auditing,
marketing and underwriting. Costs of these services are allocated to the
subsidiaries outside the pooling agreement based upon a number of criteria,
including usage and number of transactions. Costs not allocated to these
subsidiaries are charged to the pool and each pool participant shares in the
total cost in proportion to its participation percentage.
3. REINSURANCE
The parties to the pooling agreement cede insurance business to other
insurers in the ordinary course of business for the purpose of limiting their
maximum loss exposure through diversification of their risks. In its
consolidated financial statements, the Company treats risks to the extent they
are reinsured as though they were risks for which the Company is not liable.
Insurance ceded by the pool participants does not relieve their primary
liability as the originating insurers. Employers Mutual evaluates the
financial condition of the reinsurers of the parties to the pooling agreement
and monitors concentrations of credit risk arising from similar geographic
regions, activities or economic characteristics of the reinsurers to minimize
exposure to significant losses from reinsurer insolvencies.
As of December 31, 1999, reinsurance ceded to two nonaffiliated reinsurers
aggregated $5,283,422, which represents a significant portion of the total
prepaid reinsurance premiums and reinsurance receivables for losses and
settlement expenses. These amounts reflect the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded by Employers
Mutual to these organizations in connection with its role as "service carrier".
Under these arrangements, Employers Mutual writes business for these
organizations on a direct basis and then cedes 100 percent of this business to
these organizations. Credit risk associated with these amounts is minimal, as
all companies participating in these organizations are responsible for the
liabilities of such organizations on a pro rata basis.
The parties to the pooling agreement also assume insurance from
involuntary pools and associations in conjunction with direct business written
in various states. Through its participation in the pooling agreement, the
Company assumes insurance business from the North Carolina Reinsurance Facility
(NCRF), which is a state run assigned risk program. Prior to 1998 the Company
had not recognized its share of certain surcharges reported by the NCRF.
During the fourth quarter of 1998, the Company received clarification regarding
such amounts and recorded its share of these cumulative surcharges. As a
result, the consolidated financial statements for the year ended December 31,
1998 reflect assumed premium income of $542,656 and assumed loss recoveries of
$661,818 related to prior years. Beginning in 1999, these surcharges are being
recorded on a quarterly basis.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The effect of reinsurance on premiums written and earned, and losses and
settlement expenses incurred, for the three years ended December 31, 1999 is
presented below.
Year ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
PREMIUMS WRITTEN
Direct ......................... $228,588,440 $213,134,588 $175,350,677
Assumed from nonaffiliates ..... 781,225 1,888,951 1,219,564
Assumed from affiliates ........ 221,051,986 204,964,038 178,624,357
Ceded to nonaffiliates ......... (7,270,696) (5,808,352) (5,615,772)
Ceded to affiliates ............ (228,588,440) (213,249,508) (164,978,055)
------------ ------------ ------------
Net premiums written ......... $214,562,515 $200,929,717 $184,600,771
============ ============ ============
PREMIUMS EARNED
Direct ......................... $223,593,165 $202,514,027 $169,304,584
Assumed from nonaffiliates ..... 873,710 1,969,067 1,403,778
Assumed from affiliates ........ 217,416,300 197,166,272 171,514,339
Ceded to nonaffiliates ......... (7,191,869) (5,801,680) (5,937,679)
Ceded to affiliates ............ (223,593,165) (201,603,281) (159,066,776)
------------ ------------ ------------
Net premiums earned .......... $211,098,141 $194,244,405 $177,218,246
============ ============ ============
LOSSES AND SETTLEMENT EXPENSES
INCURRED
Direct ......................... $183,031,797 $171,209,604 $126,922,536
Assumed from nonaffiliates ..... 429,244 1,298,167 926,403
Assumed from affiliates ........ 182,375,574 171,681,607 122,827,934
Ceded to nonaffiliates ......... (5,928,570) (7,395,934) (3,364,737)
Ceded to affiliates ............ (183,031,797) (178,917,350) (117,458,832)
------------ ----------- ------------
Net losses and settlement
expenses incurred .......... $176,876,248 $157,876,094 $129,853,304
============ ============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
4. LIABILITY FOR LOSSES AND SETTLEMENT EXPENSES
The following table sets forth a reconciliation of beginning and ending
reserves for losses and settlement expenses of the Company. Amounts presented
are on a net basis, with a reconciliation of beginning and ending reserves to
the gross amounts presented in the consolidated financial statements.
Year ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Gross reserves at beginning of year $245,610,323 $217,777,942 $202,502,986
Ceded reserves at beginning of year (15,563,600) (13,030,150) (13,796,769)
------------ ------------ ------------
Net reserves at beginning of year,
before adjustments ............... 230,046,723 204,747,792 188,706,217
Adjustment to beginning reserves
due to change in pooling
agreement (note 2) ............... - 3,600,220 3,795,453
Adjustment to beginning reserves
due to change in quota share
percentage (note 2) .............. - - 2,726,913
------------ ------------ ------------
Net reserves at beginning of year,
after adjustments ................ 230,046,723 208,348,012 195,228,583
------------ ------------ ------------
Incurred losses and
settlement expenses:
- ----------------------
Provision for insured events
of the current year ............ 182,609,687 168,953,309 137,300,762
Decrease in provision for
insured events of prior years .. (5,733,439) (11,077,215) (7,447,458)
------------ ------------ ------------
Total incurred losses and
settlement expenses ...... 176,876,248 157,876,094 129,853,304
------------ ------------ ------------
Payments:
- ---------
Losses and settlement expenses
attributable to insured events
of the current year ............ 72,970,531 73,228,354 57,649,830
Losses and settlement expenses
attributable to insured events
of prior years ................. 77,699,231 62,949,029 62,684,265
------------ ------------ ------------
Total payments ............. 150,669,762 136,177,383 120,334,095
------------ ------------ ------------
Net reserves at end of year ........ 256,253,209 230,046,723 204,747,792
Ceded reserves at end of year ...... 10,260,815 15,563,600 13,030,150
------------ ------------ ------------
Gross reserves at end of year ...... $266,514,024 $245,610,323 $217,777,942
============ ============ ============
Underwriting results of the Company are significantly influenced by
estimates of loss and settlement expense reserves. Changes in reserve
estimates are reflected in operating results in the year such changes are
recorded. During the last three years, the Company has experienced favorable
development in the provision for insured events of prior years. The majority
of the favorable development has come from the property and casualty insurance
subsidiaries. Favorable development has also been experienced in the
reinsurance subsidiary. The Company has historically experienced favorable
development in its reserves; however, the amount of favorable development
experienced is expected to fluctuate from year to year.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
5. ASBESTOS AND ENVIRONMENTAL RELATED CLAIMS
The Company has exposure to asbestos and environmental related claims
associated with the insurance business written by the parties to the pooling
agreement and the reinsurance business assumed from Employers Mutual by the
reinsurance subsidiary. Reserves for asbestos and environmental related claims
totaled $2,447,811 and $2,372,098 at December 31, 1999 and 1998, respectively.
Estimating loss and settlement expense reserves for asbestos and
environmental claims is very difficult due to the many uncertainties
surrounding these types of claims. These uncertainties exist because the
assignment of responsibility varies widely by state and claims often emerge
long after the policy has expired, which makes assignment of damages to the
appropriate party and to the time period covered by a particular policy
difficult. In establishing reserves for these types of claims, management
monitors the relevant facts concerning each claim, the current status of the
legal environment, the social and political conditions, and the claim history
and trends within the Company and the industry.
6. RETAINED EARNINGS
Retained earnings of the Company's insurance subsidiaries available for
distribution as dividends are limited by law to the statutory unassigned
surplus of each of the subsidiaries as of the previous December 31, as
determined in accordance with accounting practices prescribed by insurance
regulatory authorities of the state of domicile of each subsidiary. Subject to
this limitation, the maximum dividend that may be paid within a 12 month period
by Iowa corporations without prior approval of the insurance regulatory
authorities is restricted to the greater of 10 percent of statutory surplus as
regards policyholders as of the preceding December 31, or net income of the
preceding calendar year on a statutory basis. Both Illinois and North Dakota
impose restrictions, which are similar to those of Iowa, on the payment of
dividends and distributions. At December 31, 1999, $11,505,996 was available
for distribution to the Company in 2000 without prior approval.
The National Association of Insurance Commissioners utilizes a risk-based
capital model to help state regulators assess the capital adequacy of insurance
companies and identify insurers that are in (or are perceived as approaching)
financial difficulty by establishing minimum capital needs based on the risks
applicable to the operations of the individual insurer. The risk-based capital
requirements for property and casualty insurance companies measure three major
areas of risk: asset risk, credit risk and underwriting risk. Companies having
less statutory surplus than required by the risk-based capital requirements are
subject to varying degrees of regulatory scrutiny and intervention, depending
on the severity of the inadequacy. At December 31, 1999, each of the Company's
insurance subsidiaries' ratio of total adjusted capital to risk-based capital
is well in excess of the minimum level required.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
7. RECONCILIATION OF STATUTORY NET INCOME AND SURPLUS
A reconciliation of net income and surplus from that reported on a
statutory basis to that reported in the accompanying consolidated financial
statements on a GAAP basis is as follows:
Year ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Net (loss) income from insurance
subsidiaries, statutory basis .... $ (5,439,665) $ 2,117,464 $ 10,389,599
Change in deferred policy
acquisition costs ................ 1,263,710 1,794,825 1,538,794
Change in salvage and subrogation
accrual .......................... - - (419,578)
Change in other policyholders' funds 858,429 829,861 685,905
Change in pension accrual .......... (516,880) (33,749) 476,705
GAAP postretirement benefit cost
in excess of statutory cost ...... (583,380) (368,061) (235,916)
Deferred income tax benefit ........ 3,585,061 815,135 683,349
Prior years' income tax expense and
related interest ................. (96,134) - (117,948)
GAAP basis amortization of reserve
discount on commutation of
reinsurance contract ............. 119,023 168,824 218,872
Prior years' NCRF surcharges
(note 3) ......................... - 1,204,474 -
Other, net ......................... 32,487 (568,494) (92,713)
------------ ------------ ------------
Net (loss) income from insurance
subsidiaries, GAAP basis ......... (777,349) 5,960,279 13,127,069
Net (loss) income from Parent
Company........................... (26,636) 52,586 89,498
------------ ------------ ------------
Net (loss) income, GAAP basis .... $ (803,985) $ 6,012,865 $ 13,216,567
============ ============ ============
Surplus from insurance subsidiaries,
statutory basis .................. $116,151,399 $127,251,446 $129,258,305
Deferred policy acquisition costs .. 13,619,192 12,355,482 10,560,657
Other policyholders' funds payable (1,093,254) (1,951,683) (2,781,544)
Prepaid pension cost ............... 1,012,770 1,529,650 1,566,343
GAAP postretirement benefit
liability in excess of statutory
liability ........................ (3,351,848) (2,768,468) (2,400,407)
Deferred income tax asset .......... 18,115,065 10,367,904 9,754,853
Goodwill ........................... 1,210,612 1,345,125 1,479,638
Excess of statutory reserves
over statement reserves .......... 37,491 40,847 677,975
GAAP basis reserve discount on
commutation of reinsurance
contract in excess of statutory
recognition ...................... (158,831) (277,854) (446,678)
Unrealized holding (losses) gains on
available-for-sale securities .... (7,495,349) 9,398,727 6,940,501
Other, net ......................... 120,141 125,765 229,775
------------ ------------ ------------
Equity from insurance
subsidiaries, GAAP basis ......... 138,167,388 157,416,941 154,839,418
Equity from Parent Company ......... 3,748,889 6,520,899 7,507,038
----------- ----------- -----------
Stockholders' equity, GAAP basis .. $141,916,277 $163,937,840 $162,346,456
============ ============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
8. SEGMENT INFORMATION
The Company's operations consist of a property and casualty insurance
segment and a reinsurance segment. The property and casualty insurance segment
writes both commercial and personal lines of insurance, with a focus on medium
sized commercial accounts. The reinsurance segment provides reinsurance for
other insurers and reinsurers. The segments are managed separately due to
differences in the insurance products sold and the business environment in
which they operate. The accounting policies of the segments are described in
the summary of significant accounting policies.
Summarized financial information for the Company's segments is as
follows:
Property
Year ended and casualty Parent
December 31, 1999 insurance Reinsurance company Consolidated
- ----------------- ------------ ------------ ------------ ------------
Premiums earned ......... $167,265,093 $ 43,833,048 $ - $211,098,141
Underwriting loss ....... (26,526,524) (6,011,691) - (32,538,215)
Net investment income ... 18,282,642 7,113,877 364,042 25,760,561
Realized (losses) gains (4,127) 280,800 - 276,673
Other income ............ 2,075,087 119,023 52 2,194,162
Other expenses .......... (1,293,561) - (390,894) (1,684,455)
------------ ------------ ------------ ------------
(Loss) income before
income tax (benefit)
expense ............... $ (7,466,483)$ 1,502,009 $ (26,800)$ (5,991,274)
============ ============ ============ ============
Assets .................. $372,378,937 $123,658,090 $142,076,106 $638,113,133
Eliminations ............ - - (141,537,155)(141,537,155)
------------ ------------ ------------ ------------
Net assets ......... $372,378,937 $123,658,090 $ 538,951 $496,575,978
============ ============ ============ ============
Year ended
December 31, 1998
- -----------------
Premiums earned ......... $155,523,486 $ 38,720,919 $ - $194,244,405
Underwriting loss ....... (24,602,885) (2,582,766) - (27,185,651)
Net investment income ... 17,635,076 6,760,098 463,889 24,859,063
Realized gains .......... 5,870,125 30,924 - 5,901,049
Other income ............ 1,531,507 168,824 - 1,700,331
Other expenses .......... (1,213,880) - (387,056) (1,600,936)
------------ ------------ ------------ ------------
(Loss) income before
income tax (benefit)
expense ............... $ (780,057)$ 4,377,080 $ 76,833 $ 3,673,856
============ ============ ============ ============
Assets .................. $372,974,038 $117,739,839 $164,085,954 $654,799,831
Eliminations ............ - - (158,753,479)(158,753,479)
------------ ------------ ------------ ------------
Net assets ......... $372,974,038 $117,739,839 $ 5,332,475 $496,046,352
============ ============ ============ ============
Year ended
December 31, 1997
- -----------------
Premiums earned ......... $143,112,560 $ 34,105,686 $ - $177,218,246
Underwriting loss ....... (10,212,002) (951,964) - (11,163,966)
Net investment income ... 16,719,458 6,615,029 445,816 23,780,303
Realized gains .......... 4,077,083 22,923 - 4,100,006
Other income ............ 803,499 218,872 - 1,022,371
Other expenses .......... (622,219) - (313,762) (935,981)
------------ ------------ ------------ ------------
Income before income
tax expense ........... $ 10,765,819 $ 5,904,860 $ 132,054 $16,802,733
============ ============ ============ ============
Assets .................. $340,552,986 $111,568,145 $162,519,792 $614,640,923
Eliminations ............ - - (155,531,127)(155,531,127)
------------ ------------ ------------ ------------
Net assets ......... $340,552,986 $111,568,145 $ 6,988,665 $459,109,796
============ ============ ============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
9. INVESTMENTS
The amortized cost and estimated fair value of securities held-to-
maturity and available-for-sale as of December 31, 1999 and 1998 are as
follows. The estimated fair value is based on quoted market prices, where
available, or on values obtained from independent pricing services.
Gross Gross Estimated
Amortized unrealized unrealized fair
December 31, 1999 cost gains losses value
----------------- ------------ ---------- ------------ ------------
Securities held-to-maturity:
Fixed maturity securities:
U.S. treasury securities
and obligations of
U.S. government
corporations and
agencies ............. $109,055,239 $2,043,252 $ (2,778,141)$108,320,350
Mortgage-backed
securities ........... 18,148,921 334,351 (124,557) 18,358,715
------------ ---------- ------------ ------------
Total securities
held-to-maturity $127,204,160 $2,377,603 $ (2,902,698)$126,679,065
============ ========== ============ ============
Securities available-for-
sale:
Fixed maturity securities:
U.S. treasury securities
and obligations of
U.S. government
corporations and
agencies ............. $ 4,419,411 $ - $ (58,327)$ 4,361,084
Obligations of states
and political
subdivisions ......... 96,077,294 1,305,302 (4,168,832) 93,213,764
Mortgage-backed
securities ........... 49,440,943 175,699 (182,436) 49,434,206
Debt securities issued by
foreign governments .. 6,479,135 89,895 - 6,569,030
Public utilities ....... 8,890,108 2,050 (54,702) 8,837,456
Corporate securities ... 98,413,442 143,084 (4,790,637) 93,765,889
------------ ---------- ------------ ------------
Total fixed maturity
securities ....... 263,720,333 1,716,030 (9,254,934) 256,181,429
------------ ---------- ------------ ------------
Equity securities:
Common stocks .......... 25,853,745 6,798,240 (2,848,220) 29,803,765
Non-redeemable
preferred stocks ..... 2,640,886 65,497 (101,876) 2,604,507
------------ ---------- ------------ ------------
Total equity
securities ....... 28,494,631 6,863,737 (2,950,096) 32,408,272
------------ ---------- ------------ ------------
Total securities
available-for-sale $292,214,964 $8,579,767 $(12,205,030)$288,589,701
============ ========== ============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Gross Gross Estimated
Amortized unrealized unrealized fair
December 31, 1998 cost gains losses value
----------------- ------------ ----------- ----------- ------------
Securities held-to-maturity:
Fixed maturity securities:
U.S. treasury securities
and obligations of
U.S. government
corporations and
agencies ............. $140,041,154 $ 8,696,984 $ (17,335)$148,720,803
Mortgage-backed
securities ........... 24,885,036 1,017,600 - 25,902,636
------------ ----------- ----------- ------------
Total securities
held-to-maturity $164,926,190 $ 9,714,584 $ (17,335)$174,623,439
============ =========== =========== ============
Securities available-for-
sale:
Fixed maturity securities:
U.S. treasury securities
and obligations of
U.S. government
corporations and
agencies ............. $ 3,491,259 $ - $ (4,354)$ 3,486,905
Obligations of states
and political
subdivisions ......... 155,138,275 8,026,883 (86,485) 163,078,673
Public utilities ....... 7,304,015 212,312 (17) 7,516,310
Corporate securities ... 42,181,578 1,243,951 (7,817) 43,417,712
------------ ----------- ----------- ------------
Total fixed maturity
securities ....... 208,115,127 9,483,146 (98,673) 217,499,600
------------ ----------- ----------- ------------
Equity securities:
Common stocks .......... 26,782,547 4,293,187 (1,551,293) 29,524,441
Non-redeemable
preferred stocks ..... 3,145,886 129,164 (14,062) 3,260,988
------------ ----------- ----------- ------------
Total equity
securities ....... 29,928,433 4,422,351 (1,565,355) 32,785,429
------------ ----------- ----------- ------------
Total securities
available-for-sale $238,043,560 $13,905,497 $(1,664,028)$250,285,029
============ =========== =========== ============
The amortized cost and estimated fair value of fixed maturity securities
at December 31, 1999, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Estimated
Amortized fair
cost value
------------ ------------
Securities held-to-maturity:
Due in one year or less ................... $ 4,498,477 $ 4,562,505
Due after one year through five years ..... 32,067,841 33,088,104
Due after five years through ten years .... 63,257,577 62,077,061
Due after ten years ....................... 9,231,344 8,592,680
Mortgage-backed securities ................ 18,148,921 18,358,715
------------ ------------
Totals ................................ $127,204,160 $126,679,065
============ ============
Securities available-for-sale:
Due in one year or less ................... $ 1,753,344 $ 1,756,937
Due after one year through five years ..... 25,307,861 25,259,693
Due after five years through ten years .... 54,694,520 53,277,920
Due after ten years ....................... 132,523,665 126,452,673
Mortgage-backed securities ................ 49,440,943 49,434,206
------------ ------------
Totals ................................ $263,720,333 $256,181,429
============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Realized investment gains and losses from calls and prepayments of fixed
maturity securities held-to-maturity and available-for-sale and sales of fixed
maturity securities and equity securities available-for-sale are presented
below.
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Fixed maturity securities
held-to-maturity:
Gross realized investment gains ... $ 7,931 $ 34,439 $ 1,927
Gross realized investment losses .. - - -
Fixed maturity securities
available-for-sale:
Gross realized investment gains ... 1,593,437 46,620 110,304
Gross realized investment losses .. (3,490) (81) (22,908)
Equity securities
available-for-sale:
Gross realized investment gains ... 2,299,740 7,865,619 4,010,683
Gross realized investment losses .. (3,620,945) (2,045,548) -
---------- ---------- ----------
Totals .......................... $ 276,673 $5,901,049 $4,100,006
========== ========== ==========
During the second and third quarters of 1999, the Company sold
approximately $55,000,000 of investments in tax-exempt fixed maturity
securities available-for-sale and reinvested the proceeds into taxable fixed
maturity securities available-for-sale that pay a higher interest rate. This
change in asset allocation was implemented to increase the Company's after-tax
rate of return on its investment portfolio. Realized investment gains for 1999
reflect $1,589,953 of gains from the disposal of these tax-exempt fixed
maturity securities.
During 1998, the Company liquidated its common stock mutual fund portfolio.
Total proceeds amounted to $28,675,920 and included realized investment gains
of $7,585,293. Realized investment gains for 1997 reflect capital gain
distributions of $4,010,683 related to the Company's common stock mutual fund
portfolio.
A summary of net investment income is as follows:
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Interest on fixed maturities .......... $24,504,253 $23,496,941 $22,876,491
Dividends on equity securities ........ 582,496 547,238 599,043
Interest on short-term investments .... 1,387,774 1,483,167 1,250,492
Securities lending .................... 21,313 - -
----------- ----------- -----------
Total investment income ........... 26,495,836 25,527,346 24,726,026
Investment expenses ................... (735,275) (668,283) (945,723)
----------- ----------- -----------
Net investment income ............. $25,760,561 $24,859,063 $23,780,303
=========== =========== ===========
A summary of net changes in unrealized holding gains (losses) on
securities available-for-sale is as follows:
Year ended December 31,
-------------------------------------
1999 1998 1997
------------ ----------- -----------
Fixed maturity securities ........... $(16,923,379) $ 2,448,942 $ 3,691,046
Applicable income tax (benefit)
expense ........................... (5,753,949) 832,641 1,254,955
------------ ----------- -----------
Total fixed maturity securities (11,169,430) 1,616,301 2,436,091
------------ ----------- -----------
Equity securities ................... 1,056,645 (1,854,578) 1,907,475
Applicable income tax expense
(benefit) ......................... 359,259 (630,556) 648,541
------------ ----------- -----------
Total equity securities ......... 697,386 (1,224,022) 1,258,934
------------ ----------- -----------
Valuation allowance ................. 1,232,590 - -
------------ ----------- -----------
Total available-for-sale
securities .................... $(11,704,634) $ 392,279 $ 3,695,025
============ =========== ===========
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
10. INCOME TAXES
Temporary differences between the consolidated financial statement
carrying amount and tax basis of assets and liabilities that give rise to
significant portions of the deferred tax asset at December 31, 1999 and 1998
relate to the following:
Year ended December 31,
------------------------
1999 1998
----------- -----------
Loss reserve discounting ........................... $13,587,146 $12,514,967
Unearned premium reserve limitation ................ 4,295,775 4,060,198
Postretirement benefits ............................ 1,935,776 1,743,193
Other policyholders' funds payable ................. 371,706 663,572
Prepayment of tax on commutation of loss reserves .. 54,003 94,470
Minimum tax credit ................................. 2,200,598 560,719
Net unrealized holding losses ...................... 1,232,590 -
Other, net ......................................... 843,766 613,221
----------- -----------
Total gross deferred income tax asset ........ 24,521,360 20,250,340
Less valuation allowance ........................... (1,232,590) (800,000)
----------- -----------
Total deferred income tax asset .............. 23,288,770 19,450,340
----------- -----------
Deferred policy acquisition costs .................. (4,630,525) (4,200,864)
Net unrealized holding gains ....................... - (4,162,100)
Other, net ......................................... (536,928) (715,622)
----------- -----------
Total gross deferred income tax liability .... (5,167,453) (9,078,586)
----------- -----------
Net deferred income tax asset .............. $18,121,317 $10,371,754
=========== ===========
The valuation allowance at December 31, 1999 consists of $1,232,590
related to the tax benefits associated with unrealized holding losses on fixed
maturity securities available-for-sale. The valuation allowance at December
31, 1998 relates to the tax benefits associated with postretirement benefit
deductions that are scheduled to reverse more than fifteen years into the
future. These valuation allowances were established due to the uncertainty
concerning the future realization of the tax benefits.
Based upon anticipated future taxable income and consideration of all
other available evidence, management believes that it is "more likely than not"
that the Company's net deferred income tax asset will be realized.
The actual income tax (benefit) expense for the years ended December 31,
1999, 1998 and 1997 differed from the "expected" tax (benefit) expense for
those years (computed by applying the United States federal corporate tax rate
of 34 percent to (loss) income before income tax (benefit) expense) as follows:
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Computed "expected" tax (benefit)
expense ............................ $(2,037,033) $ 1,249,111 $ 5,712,929
Increases (decreases) in
tax resulting from:
Tax-exempt interest income ....... (2,306,517) (2,464,971) (2,330,842)
Change in accrual of prior year
taxes .......................... - (550,000) (424,161)
Change in valuation allowance .... (800,000) (400,000) -
Settlement of tax examinations ... - - 29,026
Proration of tax-exempt interest
and dividends received deduction 150,159 239,147 226,175
Other, net ....................... (193,898) (412,296) 373,039
----------- ----------- -----------
Income tax (benefit) expense ... $(5,187,289) $(2,339,009) $ 3,586,166
=========== =========== ===========
During 1999 and 1998, the valuation allowance was reduced as the result of
the establishment of VEBA trusts that will accelerate the postretirement
benefit deductions and reduce the uncertainty of future realization of the tax
benefits (note 1).
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Comprehensive income tax (benefit) expense included in the consolidated
financial statements for the years ended December 31, 1999, 1998 and 1997 is as
follows:
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Income tax (benefit) expense on:
Operations .......................... $(5,187,289) $(2,339,009) $ 3,586,166
Unrealized holding (losses) gains on
revaluation of securities
available-for-sale ................ (4,162,100) 202,085 1,903,496
----------- ----------- -----------
Comprehensive income tax
(benefit) expense ............. $(9,349,389) $(2,136,924) $ 5,489,662
=========== =========== ===========
11. EMPLOYEE RETIREMENT PLAN
The following table sets forth the funded status of the Employers Mutual
defined benefit retirement plan, based upon a measurement date of November 1,
1999 and 1998, respectively:
Year ended December 31,
------------------------
1999 1998
----------- -----------
Change in projected benefit obligation:
Projected benefit obligation at beginning of year... $82,478,544 $68,560,979
Service cost ....................................... 4,359,955 3,482,226
Interest cost ...................................... 5,426,633 4,835,259
Actuarial (gain) loss .............................. (6,565,958) 10,571,289
Benefits paid ...................................... (5,713,244) (5,005,271)
Amendments ......................................... 1,552,384 34,062
----------- -----------
Projected benefit obligation at end of year ...... 81,538,314 82,478,544
----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of year...... 90,099,993 85,475,793
Actual return on plan assets ....................... 11,437,594 9,629,471
Benefits paid ...................................... (5,713,244) (5,005,271)
----------- -----------
Fair value of plan assets at end of year ......... 95,824,343 90,099,993
----------- -----------
Funded status ...................................... 14,286,029 7,621,449
Unrecognized net actuarial gain .................... (11,562,801) (600,529)
Unrecognized initial net asset ..................... (755,787) (1,805,492)
Unrecognized prior service costs ................... 3,602,821 2,485,365
----------- -----------
Prepaid pension cost ............................. $ 5,570,262 $ 7,700,793
=========== ===========
The components of net periodic pension cost for the Employers Mutual defined
benefit retirement plan is as follows:
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Service cost .......................... $ 4,359,955 $ 3,482,226 $ 3,174,041
Interest cost ......................... 5,426,633 4,835,259 4,673,368
Expected return on plan assets ........ (7,041,280) (6,980,310) (6,168,223)
Amortization of initial net asset ..... (1,049,705) (1,075,440) (1,075,440)
Amortization of prior service costs ... 434,928 437,957 437,957
----------- ----------- -----------
Net periodic pension cost ........... $ 2,130,531 $ 699,692 $ 1,041,703
=========== =========== ===========
The weighted average discount rate used to measure the projected benefit
obligation was 7.75 percent for 1999, 6.75 percent for 1998 and 7.25 percent
for 1997. The assumed long-term rate of return on plan assets was 8.00 percent
for 1999, 1998 and 1997. The rate of increase in future compensation levels
used in measuring the projected benefit obligation was 5.95 percent in 1999,
5.96 percent in 1998 and 5.26 percent in 1997. Pension expense for the Company
amounted to $516,880, $172,985 and $257,812 in 1999, 1998 and 1997,
respectively.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
12. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The following tables set forth the funded status of the Employers Mutual
postretirement benefit plans based upon a measurement date of November 1, 1999
and 1998, respectively.
Year ended December 31,
-------------------------
1999 1998
------------ ------------
Change in postretirement benefit obligation:
Benefit obligation at beginning of year ........... $ 35,326,000 $ 26,242,000
Service cost ...................................... 2,370,000 1,321,000
Interest cost ..................................... 2,350,000 1,871,000
Actuarial (gain) loss ............................. (7,565,000) 6,499,000
Benefits paid ..................................... (1,021,000) (607,000)
------------ ------------
Postretirement benefit obligation at end of year 31,460,000 35,326,000
------------ ------------
Change in plan assets:
Fair value of plan assets at beginning of year .... - -
Actual return on plan assets ...................... 222,000 -
Employer contribution ............................. 3,671,000 607,000
Benefits paid ..................................... (1,021,000) (607,000)
------------ ------------
Fair value of plan assets at end of year ........ 2,872,000 -
------------ ------------
Funded status ..................................... (28,588,000) (35,326,000)
Unrecognized net actuarial (gain) loss ............ (1,988,000) 5,904,000
Unrecognized prior service costs .................. 1,678,000 2,249,000
Employer contributions ............................ - 1,471,000
------------ ------------
Liability for postretirement benefits ........... $(28,898,000)$(25,702,000)
============ ============
The components of net periodic postretirement benefit cost for the Employers
Mutual postretirement benefit plans is as follows:
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Service cost ......................... $ 2,370,000 $ 1,321,000 $ 1,040,000
Interest cost ........................ 2,350,000 1,871,000 1,518,000
Expected return on assets ............ (38,000) - -
Amortization of net gain ............. 191,000 - (147,000)
Amortization of prior service costs .. 571,000 571,000 571,000
------------ ------------ ------------
Net periodic postretirement benefit
cost ............................. $ 5,444,000 $ 3,763,000 $ 2,982,000
============ ============ ============
The assumed weighted average annual rate of increase in the per capita
cost of covered health care benefits (i.e. the health care cost trend rate) for
1999 is 8 percent, and is assumed to decrease gradually to 5 percent in 2002
and remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example, a
one-percentage-point increase in the assumed health care cost trend rate for
each future year would increase the accumulated postretirement benefit
obligation as of December 31, 1999 by $4,656,000 and the aggregate of the
service and interest cost components of net periodic postretirement benefit
cost for the year ended December 31, 1999 by $938,000. The weighted average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.75 percent for 1999, 6.75 percent for 1998 and 7.25 percent
for 1997. The Company's net periodic postretirement benefit cost for the years
ended December 31, 1999, 1998 and 1997 was $1,278,700, $883,270 and $677,336,
respectively.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
13. STOCK PLANS
STOCK BASED COMPENSATION
The Company has no stock based compensation plans of its own; however,
Employers Mutual has several stock plans which utilize the common stock of the
Company. The Company receives the current fair value for any shares issued
under the plans and all expenses (the excess of current fair value over the
participant's price) of the plans are borne by Employers Mutual or the company
employing the individual optionees. As a result of this arrangement, the
Company is not subject to the accounting requirements of Accounting Principles
Board Opinion No. 25 or SFAS 123, "Accounting for Stock-Based Compensation."
Under the current terms of the pooling agreement (note 2), the Company's
property and casualty insurance subsidiaries incur 23.5 percent of the expenses
recognized by Employers Mutual relating to these plans. The Company also
incurs 100 percent of any expense of these plans that is associated with
optionees working for its other subsidiaries. Total expenses incurred by the
Company relating to the Employers Mutual stock plans amounted to $59,379,
$97,763, and $84,058 for 1999, 1998 and 1997, respectively.
(a) INCENTIVE STOCK OPTION PLANS
During 1999, Employers Mutual maintained two separate stock option plans
for the benefit of officers and key employees of Employers Mutual and its
subsidiaries. A total of 600,000 shares have been reserved for the 1982
Employers Mutual Casualty Company Incentive Stock Option Plan (1982 Plan) and a
total of 500,000 shares of the Company's common stock were initially reserved
for issuance under the 1993 Employers Mutual Casualty Company Incentive Stock
Option Plan (1993 Plan). Effective January 30, 1998, an additional 500,000
shares were registered under the 1993 Plan.
There is a ten year time limit for granting options under the plans.
Options can no longer be granted under the 1982 Plan and the time period for
granting options under the 1993 Plan expires on December 31, 2002. Options
granted under the plans have a vesting period of two, three, four or five years
with options becoming exercisable in equal annual cumulative increments.
Options have been granted to 57 individuals under the 1982 Plan and 95
individuals under the 1993 Plan. As of February 24, 2000, 20 eligible
participants remained in the 1982 Plan and 71 eligible participants remained in
the 1993 Plan.
The Senior Executive Compensation and Stock Option Committee (the
"Committee") of Employers Mutual's Board of Directors (the "Board") is the
administrator of the plans. Option prices are determined by the Committee but
can not be less than the fair value of the stock on the date of grant.
During 1999, 71,700 options were granted under the 1993 Plan to eligible
participants at a price of $12.69 and 43,336 options were exercised under the
plans at prices ranging from $11.09 to $13.31. A summary of Employers Mutual's
incentive stock option plans is as follows:
Year ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
Options outstanding, beginning of year .. 574,391 550,444 538,012
Granted ................................. 71,700 87,700 88,050
Exercised ............................... (43,336) (63,753) (71,068)
Expired ................................. (7,500) - (4,550)
-------- -------- --------
Options outstanding, end of year ........ 595,255 574,391 550,444
======== ======== ========
Options exercisable, end of year ........ 361,055 331,771 308,354
======== ======== ========
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(b) EMPLOYEE STOCK PURCHASE PLAN
A total of 500,000 shares of the Company's common stock have been reserved
for issuance under the Employers Mutual Casualty Company 1993 Employee Stock
Purchase Plan. Any employee who is employed by Employers Mutual or its
subsidiaries on the first day of the month immediately preceding any option
period is eligible to participate in the plan. Participants pay 85 percent of
the fair market value of the stock purchased, which is fully vested on the date
purchased. The plan is administered by the Board of Employers Mutual and the
Board has the right to amend or terminate the plan at any time; however, no
such amendment or termination shall adversely affect the rights and privileges
of participants with unexercised options.
During 1999, 148 employees participated in the plan and exercised a total
of 27,655 options at prices of $11.88 and $9.16. Activity under the plan was
as follows:
Year ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
Shares available for purchase,
beginning of year ...................... 380,009 402,982 424,922
Shares purchased under plan .............. (27,655) (22,973) (21,940)
-------- -------- --------
Shares available for purchase, end of year 352,354 380,009 402,982
======== ======== ========
(c) NON-EMPLOYEE DIRECTOR STOCK PURCHASE PLAN
A total of 200,000 shares of the Company's common stock have been reserved
for issuance under the Employers Mutual Casualty Company Non-Employee Director
Stock Purchase Plan. All non-employee directors of Employers Mutual and its
subsidiaries who are not serving on the "Disinterested Director Committee" of
the Board as of the beginning of the option period are eligible for
participation in the plan. Each eligible director can purchase shares of
common stock at 75 percent of the fair value of the stock in an amount equal to
a minimum of 25 percent to a maximum of 100 percent of their annual cash
retainer. The plan will continue through the option period for options granted
at the 2002 annual meetings. The plan is administered by the Disinterested
Director Committee of the Board. The Board may amend or terminate the plan at
any time; however, no such amendment or termination shall adversely affect the
rights and privileges of participants with unexercised options. During 1999,
nine directors participated in the plan and exercised a total of 10,738 options
at prices ranging from $9.50 to $12.41. Activity under the plan was as
follows:
Year ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
Shares available for purchase,
beginning of year ...................... 162,928 170,368 176,252
Shares purchased under plan .............. (10,738) (7,440) (5,884)
-------- -------- --------
Shares available for purchase, end of year 152,190 162,928 170,368
======== ======== ========
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
DIVIDEND REINVESTMENT PLAN
The Company maintains a dividend reinvestment and common stock purchase
plan which provides stockholders with the option of reinvesting cash dividends
in additional shares of the Company's common stock. Participants may also
purchase additional shares of common stock without incurring broker commissions
by making optional cash contributions to the plan and may sell shares of common
stock through the plan. Since the third quarter of 1998, all shares of common
stock issued under the plan have been purchased in the open market through the
Company's transfer agent. On December 17, 1997, an additional 1,000,000 shares
of stock were registered for issuance under the dividend reinvestment plan.
During the second quarter of 1999, Employers Mutual elected to increase its
participation in the Company's dividend reinvestment plan. As a result,
Employers Mutual is now reinvesting 100 percent of its dividends in additional
shares of the Company's common stock. Prior to the second quarter of 1999,
Employers Mutual was reinvesting 50 percent of its dividends in additional
shares of the Company's common stock. Activity under the plan was as follows:
Year ended December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
Shares available for purchase,
beginning of year .................. 792,325 980,904 176,489
Additional shares registered ......... - - 1,000,000
Shares purchased under plan .......... (392,696) (188,579) (195,585)
--------- --------- ---------
Shares available for purchase,
end of year ........................ 399,629 792,325 980,904
========= ========= =========
Range of purchase prices ............. $ 9.47 $11.25 $11.88
to to to
$12.81 $15.13 $13.50
STOCK REPURCHASE PLAN
During the second quarter of 1999 the Company completed a $3,000,000
common stock repurchase plan that was approved by the Company's Board of
Directors on November 20, 1998. The repurchase plan authorized the Company to
make repurchases in the open market or through privately negotiated
transactions. The timing and terms of the purchases were determined by
management based on market conditions and were conducted in accordance with the
applicable rules of the Securities and Exchange Commission. During 1999,
254,950 shares of common stock were repurchased under this plan at an average
cost of $11.76 per share. There were no repurchases of common stock during
1998.
14. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, indebtedness of/to related party, accounts
receivable and accounts payable approximate fair value because of the short
maturity of these instruments.
The estimated fair value of the Company's investments are summarized as
follows. The estimated fair value is based on quoted market prices, where
available, or on values obtained from independent pricing services (note 9).
Carrying Estimated
December 31, 1999 amount fair value
----------------- ------------ ------------
Fixed maturity securities:
Held-to-maturity ......................... $127,204,160 $126,679,065
Available-for-sale ....................... 256,181,429 256,181,429
Equity securities available-for-sale ....... 32,408,272 32,408,272
Short-term investments ..................... 20,164,210 20,164,210
December 31, 1998
-----------------
Fixed maturity securities:
Held-to-maturity ......................... $164,926,190 $174,623,439
Available-for-sale ....................... 217,499,600 217,499,600
Equity securities available-for-sale ....... 32,785,429 32,785,429
Short-term investments ..................... 22,660,011 22,660,011
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
15. CONTINGENT LIABILITIES
The Company and Employers Mutual and its other subsidiaries are parties to
numerous lawsuits arising in the normal course of the insurance business. The
Company believes that the resolution of these lawsuits will not have a material
adverse effect on its financial condition or its results of operations. The
companies involved have reserves which are believed adequate to cover any
potential liabilities arising out of all such pending or threatened
proceedings.
The members of the pooling agreement have purchased annuities to fund
future payments that are fixed pursuant to specific claim settlement
provisions. The Company, under the current terms of the pooling agreement, is
a 23.5 percent participant in these annuities (note 2). The Company is
contingently liable to various claimants in the amount of $734,586 in the event
that the issuing company would be unable to fulfill its obligations.
16. UNAUDITED INTERIM FINANCIAL INFORMATION
Three months ended,
-----------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
1999
- ----
Total revenues (1) .... $56,872,232 $57,711,432 $61,284,746 $63,461,127
=========== =========== =========== ===========
Income (loss) before
income tax benefit .. $ 1,572,517 $(3,638,168) $ 85,728 $(4,011,351)
Income tax benefit .... (209,226) (1,906,001) (706,930) (2,365,132)
----------- ----------- ----------- -----------
Net income (loss) $ 1,781,743 $(1,732,167) $ 792,658 $(1,646,219)
=========== =========== =========== ===========
Net income (loss) per
share
- basic and diluted* $ .15 $ (.15) $ .07 $ (.15)
=========== =========== =========== ===========
1998
- ----
Total revenues (1) .... $52,301,140 $53,276,556 $62,864,880 $58,262,272
=========== =========== =========== ===========
Income (loss) before
income tax expense
(benefit) ........... $ 6,013,327 $(4,824,800) $ 3,367,120 $ (881,791)
Income tax expense
(benefit) ........... 1,534,693 (2,058,639) 578,621 (2,393,684)
----------- ----------- ----------- -----------
Net income (loss) $ 4,478,634 $(2,766,161) $ 2,788,499 $ 1,511,893
=========== =========== =========== ===========
Net income (loss) per
share
- basic and diluted* $ .39 $ (.24) $ .24 $ .13
=========== =========== =========== ===========
1997
- ----
Total revenues (1) .... $48,478,016 $50,302,117 $52,561,207 $54,779,586
=========== =========== =========== ===========
Income before income
tax expense ......... $ 2,070,552 $ 1,922,904 $ 3,064,442 $ 9,744,835
Income tax expense .... 322,653 231,301 399,790 2,632,422
----------- ----------- ----------- -----------
Net income ....... $ 1,747,899 $ 1,691,603 $ 2,664,652 $ 7,112,413
=========== =========== =========== ===========
Net income per share
- basic and diluted* $ .16 $ .15 $ .24 $ .63
=========== =========== =========== ===========
(1) Amounts previously reported in prior consolidated financial statements have
been reclassified to conform to current presentation.
* Since the weighted average shares for the quarters are calculated independent
of the weighted average shares for the year, quarterly net income (loss) per
share may not total to annual net income (loss) per share.