UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the Fiscal Year Ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ___________ to ___________
Commission File Number: 0-10956
EMC INSURANCE GROUP INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Iowa 42-6234555
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
717 Mulberry Street, Des Moines, Iowa 50309
- -------------------------------------- -------
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (515) 280-2902
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $1.00
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [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. [ ]
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 March 3, 2003 was $41,606,199.
The number of shares outstanding of the registrant's common stock, $1.00
par value, on March 3, 2003, were 11,404,725.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's annual report to stockholders for the
year ended December 31, 2002 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 17,
2003, are incorporated by reference under Part III.
TABLE OF CONTENTS
Part I
Item 1. Business ........................................................ 2
Item 2. Properties ...................................................... 23
Item 3. Legal Proceedings ............................................... 23
Item 4. Submission of Matters to a Vote of Security Holders ............. 23
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters .................................. 23
Item 6. Selected Financial Data ......................................... 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 23
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ...... 23
Item 8. Financial Statements and Supplementary Data ..................... 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .......................... 24
Part III
Item 10. Directors and Executive Officers of the Registrant .............. 24
Item 11. Executive Compensation .......................................... 25
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters ............... 25
Item 13. Certain Relationships and Related Transactions .................. 25
Item 14. Controls and Procedures ......................................... 26
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K .................................................. 26
Index to Financial Statement Schedules ................................... 26
Signatures ............................................................... 30
Certifications ........................................................... 31
Index to Exhibits ........................................................ 42
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 79.9 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.
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. 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 pooling agreement is continuous, but may be amended or
terminated at the end of any calendar year as to any one or more parties.
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, 2002.
Percent Percent Percent
of of of
Line of Business 2002 total 2001 total 2000 total
- ---------------- ---------- ----- -------- ----- -------- -----
(Dollars in thousands)
Commercial Lines:
Automobile .......... $ 224,321 21.5% $216,371 21.7% $177,937 21.2%
Property ............ 180,622 17.3 162,670 16.4 135,639 16.2
Workers' compensation 194,853 18.7 208,652 21.0 155,752 18.6
Liability ........... 195,682 18.8 176,774 17.8 141,184 16.8
Other ............... 20,489 2.0 19,325 1.9 17,380 2.0
---------- ----- -------- ----- -------- -----
Total commercial
lines ............ 815,967 78.3 783,792 78.8 627,892 74.8
---------- ----- -------- ----- -------- -----
Personal Lines:
Automobile .......... 134,405 12.9 126,280 12.7 134,763 16.1
Property ............ 89,248 8.6 81,124 8.2 73,996 8.8
Liability ........... 1,815 0.2 3,284 0.3 2,634 0.3
---------- ----- -------- ----- -------- -----
Total personal lines 225,468 21.7 210,688 21.2 211,393 25.2
---------- ----- -------- ----- -------- -----
Total .......... $1,041,435 100.0% $994,480 100.0% $839,285 100.0%
========== ===== ======== ===== ======== =====
MARKETING
Marketing of insurance by the parties to the pooling agreement, excluding
the nonstandard risk automobile insurance sold by Farm and City, is conducted
through 17 branch offices located throughout the United States and
approximately 3,200 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 specializes in insuring private passenger automobile risks
that are found to be unacceptable in the standard automobile insurance market.
Farm and City is licensed in a six state area that includes Iowa, Kansas,
Missouri, Nebraska, North Dakota and South Dakota. Private passenger
automobile policies are solicited through the Independent Agency System using
approximately 725 agencies.
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, 2002.
2002 2001 2000
---- ---- ----
Alabama ............................ 2.9% 2.8% 3.2%
Arizona ............................ 3.8 3.8 3.8
Illinois ........................... 4.7 5.1 4.8
Iowa ............................... 15.9 16.8 17.4
Kansas ............................. 8.8 8.8 8.2
Michigan ........................... 5.1 4.2 4.0
Minnesota .......................... 3.3 3.5 3.5
Nebraska ........................... 6.8 7.0 6.9
North Carolina ..................... 2.7 3.1 2.9
North Dakota ....................... 2.6 2.6 3.1
Pennsylvania ....................... 3.1 2.8 2.6
Texas .............................. 5.0 5.2 5.3
Wisconsin .......................... 5.0 5.0 4.5
Other * ............................ 30.3 29.3 29.8
----- ----- -----
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.
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, 2001. 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.
A summary of the reinsurance treaties benefiting the parties to the
pooling agreement as of December 31, 2002 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 .................... $ 1,400,000(1) 100 percent of $ 8,600,000
Fidelity .................... $ 1,150,000(2) 95 percent of $ 3,000,000
Surety ...................... $ 2,200,000(3) 98 percent of $13,000,000
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
Workers' compensation -
terrorism ................. $14,000,000 100 percent of $46,000,000
Employment practices
liability ................. $ 500,000 50 percent of $ 1,000,000
(1) An annual aggregate deductible of $3,600,000 must be reached before the
reinsurers may be petitioned.
(2) Subject to annual aggregate limits for all losses of $14,000,000.
(3) Subject to annual aggregate limits for all losses of $14,000,000 in the
first layer and $15,000,000 in the second layer.
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 as of
December 31, 2002 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 40 domestic and
foreign reinsurers.
In formulating reinsurance programs, Employers Mutual is selective in its
choice of reinsurers. Employers Mutual selects reinsurers on the basis of
financial stability and long-term relationships, as well as price of the
coverage. Reinsurers are generally required to have a Best's rating of "A-"
or higher and policyholders' surplus of $50,000,000 ($100,000,000 for casualty
reinsurance).
Percent
of total 2002
Property per risk, property catastrophe reinsurance Best's
and casualty coverages: protection rating
- --------------------------------------- ---------- ------
Underwriters at Lloyd's of London .................... 29.0% A-
Mutual Reinsurance Bureau ............................ 19.8 (2)
XL Reinsurance America, Inc. ......................... 9.6 A+
Converium AG, Zurich ................................. 6.5 (1)
Transatlantic Reinsurance Company .................... 5.8 A++
Workers' compensation excess coverage:
- --------------------------------------
Underwriters at Lloyd's of London .................... 89.4% A-
Terra Nova Insurance Company, Ltd. ................... 7.7 (1)
Umbrella coverage:
- ------------------
General Reinsurance Corporation ...................... 100.0% A++
Fidelity and surety coverages:
- ------------------------------
SCOR Reinsurance Company ............................. 42.0% A
Hannover Ruckversicherung AG ......................... 18.0 (1)
Transatlantic Reinsurance Company .................... 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-
Workers' compensation - terrorism:
- ----------------------------------
Underwriters at Lloyd's of London .................... 49.0% A-
Axis Specialty LTD ................................... 11.7 (1)
Everest Reinsurance Company .......................... 8.4 A+
Odyssey America Reinsurance Corporation .............. 7.7 A
(1) Not rated.
(2) Mutual Reinsurance Bureau (MRB) is composed of Employers Mutual and four
other nonaffiliated mutual insurance companies. Each of the five 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 five member companies. All of the members
of MRB were assigned an "A-" (Excellent) or better rating by A.M. Best.
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, 2002 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
- --------- ----------- ------------
General Reinsurance Corporation..................... $ 6,498,922 $ 1,527,247
Hartford Steam Boiler Inspection & Insurance Company 6,266,751 1,472,686
XL Reinsurance America Inc. ........................ 2,281,111 536,061
Converium AG, Zurich ............................... 1,411,896 331,796
Managing Agency Partners ........................... 1,401,000 329,235
SCOR Reinsurance Company ........................... 1,278,935 300,550
Transatlantic Reinsurance Company .................. 1,175,209 276,174
Amlin Underwriting ................................. 963,432 226,407
Hannover Ruckversicherung AG ....................... 947,678 222,704
PXRE Reinsurance Company ........................... 638,964 150,157
Other Reinsurers ................................... 9,997,208 2,349,343
----------- ------------
Total ............................................ $32,861,106 $ 7,722,360
=========== ============
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, 2002 are presented below.
Premiums ceded by
------------------------
Property
and casualty
All pool insurance
Reinsurer members subsidiaries
- --------- ----------- ------------
Wisconsin Compensation Rating Bureau ............... $10,669,290 $ 2,507,283
North Carolina Reinsurance Facility ................ 1,434,632 337,139
Mutual Reinsurance Bureau .......................... 1,093,509 256,975
Other Reinsurers ................................... 1,128,870 265,284
----------- ------------
Total ............................................ $14,326,301 $ 3,366,681
=========== ============
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."
The September 11, 2001 terrorist attack on the World Trade Center had a
significant impact on the pricing and terms of reinsurance coverage for 2002.
The parties to the pooling agreement were not immune to these factors and
experienced significantly higher costs and increased retentions when their
reinsurance program was renewed in January 2002. In addition, the parties to
the pooling agreement elected to purchase separate terrorism coverage for 2002
in order to provide limited protection from future terrorist exposures, as all
standard reinsurance policies excluded coverage for terrorist activities.
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,
------------------------------
2002 2001 2000
---- ---- ----
Employers Mutual .................... 1.55 1.35 1.01
EMCASCO ............................. 2.41 2.25 2.39
Illinois EMCASCO .................... 2.36 2.20 2.46
Dakota Fire ......................... 2.41 2.23 2.46
Farm and City ....................... 2.49 2.70 2.32
EMC Property & Casualty Company ..... .94 .97 .87
Union Insurance Company of Providence .93 .96 .86
Hamilton Mutual Insurance Company ... 2.13 2.34 1.94
The 2002 and 2001 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 2002. 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.
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, 2002.
Percent Percent Percent
of of of
Line of Business 2002 total 2001 total 2000 total
- ---------------- ------- ----- ------- ----- ------- -----
(Dollars in thousands)
Pro rata reinsurance:
Property and Casualty $ 2,457 3.2% $ 3,864 5.8% $14,441 30.4%
Property ............. 20,379 26.8 16,694 25.1 7,399 15.6
Crop ................. 1,160 1.5 2,372 3.6 4,188 8.8
Casualty ............. 11,949 15.7 10,537 15.9 5,319 11.2
Marine/aviation ...... 11,765 15.4 6,143 9.3 1,869 3.9
Other ................ 211 0.3 122 0.2 374 0.8
------- ----- ------- ----- ------- -----
Total pro rata
Reinsurance ...... 47,921 62.9 39,732 59.9 33,590 70.7
------- ----- ------- ----- ------- -----
Excess reinsurance:
Excess per risk
reinsurance:
Property ............. 9,066 11.9 7,406 11.2 3,011 6.3
Casualty ............. 9,737 12.8 7,915 11.9 3,882 8.2
Other ................ 2,039 2.7 1,571 2.4 856 1.8
------- ----- ------- ----- ------- -----
Total excess per
risk reinsurance 20,842 27.4 16,892 25.5 7,749 16.3
------- ----- ------- ----- ------- -----
Excess catastrophe/
aggregate reinsurance:
Property ............. 6,076 8.0 8,662 13.1 5,357 11.3
Crop ................. 493 0.6 392 0.6 297 0.6
Other ................ 872 1.1 609 0.9 537 1.1
------- ----- ------- ----- ------- -----
Total excess
catastrophe/
aggregate
reinsurance ...... 7,441 9.7 9,663 14.6 6,191 13.0
------- ----- ------- ----- ------- -----
Total excess
Reinsurance ...... 28,283 37.1 26,555 40.1 13,940 29.3
------- ----- ------- ----- ------- -----
Total .............. $76,204 100.0% $66,287 100.0% $47,530 100.0%
======= ===== ======= ===== ======= =====
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.
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 retentions increased again this year
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, but this may
change in the future. 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, reinsurance brokers have
tended to favor large, financially strong reinsurance companies who are able
to provide "mega" line capacity for all lines of business. The Company faces
the risk of reinsurance brokers becoming less interested in diversity and
spread of reinsurance risk in favor of highly capitalized reinsurance
companies.
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 $3,429,148 in 2002. 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 $3,247,969 in 2002.
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 2002. See "Property and
Casualty Insurance Subsidiaries and Reinsurance Subsidiary - Outstanding
Losses and Settlement Expenses."
PROPERTY AND CASUALTY INSURANCE SUBSIDIARIES AND REINSURANCE SUBSIDIARY
- -----------------------------------------------------------------------
Employers Mutual provides various services to all of its subsidiaries 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
$1,765,179, $2,040,822 and $1,674,704 in 2002, 2001 and 2000, respectively.
Costs allocated to the Company through the operation of the pooling agreement
amounted to $56,897,066, $51,041,812 and $46,796,784 in 2002, 2001 and 2000,
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, 2002. 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,
--------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Property and casualty insurance
Loss ratio ................... 69.8% 83.0% 82.2% 83.6% 83.5%
Expense ratio ................ 31.2 28.5 30.8 32.0 33.3
------ ------ ------ ------ ------
Combined ratio ............. 101.0% 111.5% 113.0% 115.6% 116.8%
====== ====== ====== ====== ======
Reinsurance
Loss ratio ................... 70.7% 86.6% 86.1% 83.1% 75.4%
Expense ratio ................ 31.6 29.1 29.1 30.6 31.1
------ ------ ------ ------ ------
Combined ratio ............. 102.3% 115.7% 115.2% 113.7% 106.5%
====== ====== ====== ====== ======
Total insurance operations
Loss ratio ................... 70.0% 83.8% 83.0% 83.5% 81.9%
Expense ratio ................ 31.3 28.6 30.5 31.7 32.9
------ ------ ------ ------ ------
Combined ratio ............. 101.3% 112.4% 113.5% 115.2% 114.8%
====== ====== ====== ====== ======
Property and casualty insurance
industry averages (1)
Loss ratio ................... 79.6% 88.5% 81.5% 78.6% 76.3%
Expense ratio ................ 26.1 27.5 28.9 29.2 29.4
------ ------ ------ ------ ------
Combined ratio ............. 105.7% 116.0% 110.4% 107.8% 105.7%
====== ====== ====== ====== ======
(1) As reported by A.M. Best Company. The ratio for 2002 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.
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, 2002:
2002
Amount Percent Best's
recoverable of total rating
----------- -------- ------
Wisconsin Compensation Rating Bureau .. $ 3,797,448 27.1% (1)
National Workers' Compensation
Reinsurance Pool .................... 2,003,320 14.3 (1)
General Reinsurance Corporation ....... 1,723,130 12.3 A++
Hartford Steam Boiler Insp. & Ins. .... 883,109 6.3 A+
PXRE Reinsurance Company .............. 508,533 3.6 A
XL Reinsurance America ................ 459,721 3.3 A+
Hartford Fire Insurance Company ....... 426,556 3.0 A+
SCOR Reinsurance Company .............. 382,242 2.7 A
American Re-Insurance Company ......... 381,273 2.7 A++
Minnesota Workers' Comp Reins Assoc ... 374,220 2.7 (2)
Other Reinsurers ...................... 3,085,483 22.0
----------- -----
Total ........................... $14,025,035(3) 100.0%
=========== =====
(1) Amounts recoverable reflect the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to these
organizations by Employers Mutual in connection with its role as "service
carrier." Under these arrangements, Employers Mutual writes business for
these organizations on a direct basis and then cedes 100 percent of the
business to these organizations. Credit risk associated with these
amounts is minimal as all companies participating in these organizations
are responsible for the liabilities of such organizations on a pro rata
basis.
(2) Not rated.
(3) The total amount recoverable at December 31, 2002 represented $1,214,512
in paid losses and settlement expenses, $10,367,624 in unpaid losses
and settlement expenses and $2,442,899 in unearned premiums.
The effect of reinsurance on premiums written and earned, and losses and
settlement expenses incurred for the three years ended December 31, 2002 is
presented below.
Year ended December 31,
----------------------------------------
2002 2001 2000
------------ ------------ ------------
Premiums written:
Direct ........................ $235,596,547 $272,027,823 $249,896,499
Assumed from nonaffiliates .... 3,985,370 1,898,509 1,220,442
Assumed from affiliates ....... 320,940,551 299,990,245 244,762,032
Ceded to nonaffiliates ........ (11,089,041) (11,189,227) (8,347,822)
Ceded to affiliates ........... (235,596,547) (272,027,823) (249,896,499)
------------ ------------ ------------
Net premiums written ........ $313,836,880 $290,699,527 $237,634,652
============ ============ ============
Premiums earned:
Direct ........................ $241,939,466 $255,764,274 $245,078,165
Assumed from nonaffiliates .... 3,501,616 1,786,132 1,194,835
Assumed from affiliates ....... 304,462,790 274,352,821 237,946,894
Ceded to nonaffiliates ........ (10,921,373) (10,859,095) (7,683,287)
Ceded to affiliates ........... (241,939,466) (255,764,274) (245,078,165)
------------ ------------ ------------
Net premiums earned ......... $297,043,033 $265,279,858 $231,458,442
============ ============ ============
Losses and settlement expenses
incurred:
Direct ........................ $165,218,514 $221,314,633 $208,604,970
Assumed from nonaffiliates .... 2,876,808 1,336,824 400,360
Assumed from affiliates ....... 206,614,356 227,650,959 194,017,734
Ceded to nonaffiliates ........ (2,433,308) (7,069,033) (4,896,420)
Ceded to affiliates ........... (165,218,514) (221,314,633) (208,604,970)
------------ ------------ ------------
Net losses and settlement
expenses incurred ......... $207,057,856 $221,918,750 $189,521,674
============ ============ ============
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.
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, 2002 are adequate.
The following table sets forth a reconciliation of beginning and ending
reserves for losses and settlement expenses of the property and casualty
insurance subsidiaries and the reinsurance subsidiary. Amounts presented are
on a net basis, with a reconciliation of beginning and ending reserves to the
gross amounts presented in the consolidated financial statements.
Year ended December 31,
----------------------------------------
2002 2001 2000
------------ ------------ ------------
Gross reserves at beginning of year $314,518,588 $286,489,028 $266,514,024
Ceded reserves at beginning of year (11,848,597) (11,224,797) (10,260,815)
------------ ------------ ------------
Net reserves at beginning of year .. 302,669,991 275,264,231 256,253,209
------------ ------------ ------------
Incurred losses and
settlement expenses
- ---------------------
Provision for insured events
of the current year ............ 200,059,798 216,752,003 191,425,036
Increase (decrease) in provision
for insured events of prior
years .......................... 6,998,058 5,166,747 (1,903,362)
------------ ------------ ------------
Total incurred losses and
settlement expenses ...... 207,057,856 221,918,750 189,521,674
------------ ------------ ------------
Payments
- --------
Losses and settlement expenses
attributable to insured events
of the current year ............ 81,124,276 94,983,112 82,912,082
Losses and settlement expenses
attributable to insured events
of prior years ................. 107,744,442 99,529,878 87,598,570
------------ ------------ ------------
Total payments ............. 188,868,718 194,512,990 170,510,652
------------ ------------ ------------
Net reserves at end of year ........ 320,859,129 302,669,991 275,264,231
Ceded reserves at end of year ...... 10,367,624 11,848,597 11,224,797
------------ ------------ ------------
Gross reserves at end of year ...... $331,226,753 $314,518,588 $286,489,028
============ ============ ============
<Page>
The following table shows the calendar year development of loss and
settlement expense reserves of the property and casualty insurance
subsidiaries and the reinsurance subsidiary. Amounts presented are on a net
basis with (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 change in the pooling agreement
whereby effective January 1, 1993 the voluntary reinsurance business written
by Employers Mutual is no longer subject to cession to the pool members, (2)
the commutation of two reinsurance contracts under the reinsurance
subsidiary's quota share agreement in 1993, (3) the gross-up of reserve
amounts associated with the National Workers' Compensation Reinsurance Pool at
December 31, 1993, (4) 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 (5) the increase in the reinsurance
subsidiary's quota share assumption of Employers Mutual's assumed reinsurance
business from 95 percent to 100 percent in 1997. The table has been restated
to reflect the addition of Hamilton Mutual to the pooling agreement effective
January 1, 1997 and the addition of Farm and City to the pooling agreement
effective January 1, 1998.
In evaluating the table, it should be noted that each cumulative
redundancy (deficiency) amount includes the effects of all changes in reserves
for prior periods. Conditions and trends that have affected development of
the liability in the past, such as a time lag in the reporting of assumed
reinsurance business, the high rate of inflation associated with medical
services and supplies and the reform measures implemented by several states to
control administrative costs for workers' compensation insurance, may not
necessarily occur in the future. Accordingly, it may not be appropriate to
project future development of reserves based on this table.
During the last three years the Company has experienced 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
subsidiaries, although the reinsurance subsidiary has experienced similar
declines. The adverse development in the property and casualty insurance
segment is primarily attributed to an increase in IBNR reserves, the
establishment of $2,100,000 of additional IBNR asbestos reserves, a
revaluation of individual claim liabilities in select lines of business, a
revaluation of formula based settlement expense reserves and an increase in
paid settlement expenses. The adverse development in the reinsurance segment
is attributed to construction defect claims arising from a reinsurance pool
that the reinsurance subsidiary participates in. The company has historically
experienced favorable development in its reserves and its reserving practices
have not changed; however, the amount of development experienced will
fluctuate from year to year as individual claims are settled and new
information becomes available on open claims.
Year ended December 31,
--------------------------------------------------------------------------------------------------
(Dollars in thousands) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Statutory reserves for losses
and settlement expenses ...... $180,797 182,072 191,514 196,293 191,892 205,606 230,937 257,201 276,103 303,643 321,945
Reclassification of reserve
amounts associated with the
National Workers' Compensation
Reinsurance Pool ............. 11,364 - - - - - - - - - -
Retroactive restatement of
reserves in conjunction with
admittance of new participants
into the pooling agreement ... 5,314 5,248 6,603 6,809 7,018 3,600 - - - -
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Statutory reserves after
reclassification ............. 197,475 187,320 198,117 203,102 198,910 209,206 230,937 257,201 276,103 303,643 321,945
GAAP adjustments ............... (2,026) (2,405) (2,479) (3,098) (3,186) (858) (890) (948) (839) (973) (1,086)
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Reserves for losses and
settlement expenses .......... 195,449 184,915 195,638 200,004 195,724 208,348 230,047 256,253 275,264 302,670 320,859
Paid (cumulative) as of:
One year later ............... 78,000 60,162 57,247 62,012 59,856 62,949 77,699 87,599 99,530 107,744 -
Two years later .............. 109,985 89,153 88,831 92,626 92,191 99,870 119,620 138,701 156,337 - -
Three years later ............ 127,885 107,372 106,691 112,985 113,343 122,455 147,561 173,840 - - -
Four years later ............. 137,783 116,856 118,705 124,450 126,507 136,975 167,529 - - - -
Five years later ............. 143,876 123,843 126,384 132,044 135,321 148,708 - - - - -
Six years later .............. 148,518 128,931 130,977 137,522 143,105 - - - - - -
Seven years later ............ 151,895 132,036 134,923 143,044 - - - - - - -
Eight years later ............ 154,160 135,007 139,263 - - - - - - - -
Nine years later ............. 156,276 137,630 - - - - - - - - -
Ten years later .............. 158,358 - - - - - - - - - -
Reserves reestimated as of:
End of year .................. 195,449 184,915 195,638 200,004 195,724 208,348 230,047 256,253 275,264 302,670 320,859
One year later ............... 197,008 179,527 179,818 183,760 188,579 197,271 224,313 254,350 280,431 309,668 -
Two years later .............. 192,318 170,653 173,162 182,285 185,465 194,287 225,288 256,111 288,465 - -
Three years later ............ 186,730 166,778 172,118 179,797 181,392 193,505 227,010 260,715 - - -
Four years later ............. 186,133 166,133 170,570 176,176 180,686 192,824 229,336 - - - -
Five years later ............. 186,319 165,548 167,763 175,465 179,898 195,910 - - - - -
Six years later .............. 186,095 163,406 166,764 174,695 181,567 - - - - - -
Seven years later ............ 184,174 161,985 166,280 176,012 - - - - - - -
Eight years later ............ 183,821 160,459 167,889 - - - - - - - -
Nine years later ............. 181,840 162,578 - - - - - - - - -
Ten years later .............. 184,146 - - - - - - - - - -
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cumulative redundancy
(Deficiency) ................. $ 11,303 22,337 27,749 23,992 14,157 12,438 711 (4,462) (13,201) (6,998) -
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross loss and settlement
expense reserves
- end of year (A) ............ $220,703 202,370 209,785 212,231 209,521 221,378 245,610 266,514 286,489 314,519 329,158
Reinsurance receivables ........ 25,254 17,455 14,147 12,227 13,797 13,030 15,563 10,261 11,225 11,849 10,368
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss and settlement expense
reserves - end of year ....... $195,449 184,915 195,638 200,004 195,724 208,348 230,047 256,253 275,264 302,670 318,790
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross re-estimated reserves
- latest (B) ................. $206,364 178,021 181,813 190,493 198,257 210,400 244,577 270,710 299,749 320,604 331,227
Re-estimated reinsurance
receivables - latest ......... 22,218 15,443 13,924 14,481 16,690 14,490 15,241 9,995 11,284 10,936 10,368
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net re-estimated reserves
- latest ..................... $184,146 162,578 167,889 176,012 181,567 195,910 229,336 260,715 288,465 309,668 320,859
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross cumulative redundancy
(deficiency) (A-B) ........... $ 14,339 24,349 27,972 21,738 11,264 10,978 1,033 (4,196) (13,260) (6,085) -
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
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 $324,000 of settlement
expense reserves to these exposures. In addition, the company took a
proactive approach to evaluate the adequacy of its asbestos reserves and
commissioned 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 this study, the Company elected to
increase the IBNR reserves carried for direct asbestos exposures by $2,100,000
at December 31, 2002, to $3,000,000. 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.
Based upon current facts, management believes the reserves established
for asbestos and environmental related claims at December 31, 2002 are
adequate. Although future changes in the legal and political environment may
result in adjustments to these reserves, management believes any adjustments
will not have a material impact on the financial condition or results of
operations of the Company.
The following table presents asbestos and environmental related losses
and settlement expenses incurred and reserves outstanding for the Company:
Year ended December 31,
--------------------------------
2002 2001 2000
---------- ---------- ----------
Losses and settlement expenses incurred:
Asbestos:
Property and casualty insurance ........ $2,377,631 $ 64,451 $ 518,480
Reinsurance ............................ (25,001) (9,167) (135,695)
---------- ---------- ----------
2,352,630 55,284 382,785
---------- ---------- ----------
Environmental:
Property and casualty insurance ........ 774,489 (120,610) 96,828
Reinsurance ............................ 21,479 20,615 167,238
---------- ---------- ----------
795,968 (99,995) 264,066
---------- ---------- ----------
Total losses and settlement
expenses incurred ................ $3,148,598 $ (44,711)$ 646,851
========== ========== ==========
Loss and settlement expense reserves:
Asbestos:
Property and casualty insurance ........ $2,982,809 $ 719,590 $ 715,472
Reinsurance ............................ 533,687 566,477 589,518
---------- ---------- ----------
3,516,496 1,286,067 1,304,990
---------- ---------- ----------
Environmental:
Property and casualty insurance ........ 1,175,541 454,460 711,690
Reinsurance ............................ 834,906 824,988 812,572
---------- ---------- ----------
2,010,447 1,279,448 1,524,262
---------- ---------- ----------
Total loss and settlement expense
reserves ......................... $5,526,943 $2,565,515 $2,829,252
========== ========== ==========
EMPLOYEES
- ---------
EMC Insurance Group Inc. and its subsidiaries have no employees. The
Company's business activities are conducted by the 2,165 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.
Premium rate regulation varies greatly among jurisdictions and lines of
insurance. In most states in which the Company's subsidiaries write
insurance, premium rates for their lines of insurance are subject to either
prior approval or limited review upon implementation. States require rates
for property and casualty insurance that are adequate, not excessive, and not
unfairly discriminatory.
The Company's insurance subsidiaries are required to file detailed annual
reports with the appropriate regulatory agency in each state where they do
business based on applicable statutory regulations, which differ from
generally accepted accounting principles. Their businesses and accounts are
subject to examination by such agencies at any time. Since EMC Insurance
Group Inc. and Employers Mutual are domiciled in Iowa, the State of Iowa
exercises principal regulatory supervision, and Iowa law requires periodic
examination. The Company's insurance subsidiaries are subject to examination
by state insurance departments on a periodic basis, as applicable law
requires.
In 1998, the National Association of Insurance Commissioners (NAIC)
adopted a comprehensive Codification of Statutory Accounting Principles
(Codification) to replace the Accounting Practices and Procedures Manual as
the NAIC's primary guidance on statutory accounting. Codification is intended
to provide a consistent and comprehensive basis of statutory accounting for
all insurance companies and became effective in most states, including the
states of domicile of the Company's insurance subsidiaries, on January 1,
2001. The adoption of Codification resulted in changes to the accounting
practices that the Company's insurance subsidiaries use to prepare their
statutory financial statements. One of the more significant changes 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.
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, 2002, $16,784,451 was available for
distribution in 2003 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, 2002, the Company's
insurance subsidiaries had total adjusted statutory capital of $140,323,534,
which is well in excess of the minimum risk-based capital requirement of
$35,865,587.
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
$332,000 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, 2002, 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, 2002, 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, 2002, 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, 2002, which is included as Exhibit 13(b) to this Form 10-K, is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
The consolidated financial statements from the Company's Annual Report to
Stockholders for the year ended December 31, 2002, 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.
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 20, 2003, 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 49 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 56 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 53 Executive Vice President for Corporate
Development of the Company and Employers
Mutual since 2000. He was Senior Vice
President - Actuary of the Company and
Employers Mutual from 1997 until 2000. He
was Vice President - Actuary of the Company
and Employers Mutual from 1985 until 1997.
He has been employed by Employers Mutual
since 1979.
John D. Isenhart 65 Senior Vice President of the Company since
1997 and of Employers Mutual since 1992.
He has been employed by Employers Mutual
since 1963.
Raymond W. Davis 57 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.
NAME AGE POSITION
Donald D. Klemme 57 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 50 Senior Vice President - Claims of the Company
and of Employers Mutual since 1998. He was
Vice President - Claims of the Company from
1988 until 1998. He has been employed by
Employers Mutual since 1983.
Mark E. Reese 45 Vice President of the Company and Employers
Mutual since 1996 and Chief Financial Officer
of the Company and Employers Mutual since
1997. He has been employed by Employers
Mutual since 1984.
Section 16(a) Beneficial Ownership Reporting Compliance
During 2002, there were two occasions when Form 4 was not filed on a
timely basis for directors of Employers Mutual Casualty Company. In both
instances, the information was inadvertently sent late to the Company and the
filings were not made on a timely basis. Mr. Lanning Macfarland, Jr. sold
2,000 shares in March and Dr. John Kelley sold 6,782 shares in May. The Form
4 on these two transactions were filed nine days and eleven days late,
respectively. The Company has taken the appropriate steps that should prevent
this from happening in the future.
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 20, 2003, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- -------- ------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS.
----------------------------
See 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 20, 2003, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
See the information under the caption "Certain Relationships and Related
Transactions" in the Company's Proxy Statement in connection with its Annual
Meeting to be held on May 20, 2003, which information is incorporated herein
by reference.
ITEM 14. 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 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 Auditor ............ 29*
Report of KPMG LLP, Independent Auditor ..................... 30*
Consolidated Balance Sheets, December 31, 2002 and 2001 ..... 31*
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000 ......................... 33*
Consolidated Statements of Comprehensive Income for the
Years ended December 31, 2002, 2001 and 2000 ............. 34*
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 2002, 2001 and 2000 ............. 35*
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 ......................... 36*
Notes to Consolidated Financial Statements .................. 38-65*
* Refers to the respective page of the financial information insert
of EMC Insurance Group Inc.'s 2002 Annual Report to Stockholders.
The Consolidated Financial Statements and Independent Auditors'
Reports, 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 Auditors,
On Schedules .............................................. 33
Report of KPMG LLP, Independent Auditors, On Schedules ...... 34
Schedule I - Summary of Investments - Other Than
Investments in Related Parties ............... 35
Schedule II - Condensed Financial Information of Registrant 36
Schedule III - Supplementary Insurance Information .......... 39
Schedule IV - Reinsurance .................................. 40
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations ..... 41
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). 2002 Senior Executive Compensation Bonus Program.
Exhibit 10(d). 1982 Employers Mutual Casualty Company Incentive
Stock Option Plan, as amended.
Exhibit 10(e). Deferred Bonus Compensation Plans.
Exhibit 10(f). 2002 Executive Bonus Program - EMC Reinsurance
Company.
Exhibit 10(h). Employers Mutual Casualty Company Excess Retirement
Benefit Agreement.
Exhibit 10(i). Employers Mutual Casualty Company 1993 Employee
Stock Purchase Plan.
Exhibit 10(j). 1993 Employers Mutual Casualty Company Incentive
Stock Option Plan, as amended.
Exhibit 10(k). Employers Mutual Casualty Company Non-Employee
Director Stock Option Plan.
Exhibit 10(l). Employers Mutual Casualty Company Supplemental
Executive Retirement Plan.
Exhibit 10(m). EMCC Option It! Deferred Bonus Compensation Plan.
Exhibit 10(n). EMCC Board of Directors Option It! Deferred
Compensation Plan.
Exhibit 10(o). Employers Mutual Casualty Company Excess Deferral
Plan.
Exhibit 10(p). 2003 Employers Mutual Casualty Company Incentive
Stock Option Plan.
(b) Reports on Form 8-K.
None
(c) Exhibits.
3. Articles of incorporation and bylaws:
(a) Articles of Incorporation of the Company, as amended.
(Incorporated by reference to the Company's Form 10-K
for the calendar year ended December 31, 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) 2002 Senior Executive Compensation Bonus Program.
(c) EMC Insurance Companies reinsurance pooling agreements
between Employers Mutual Casualty Company and certain of its
affiliated companies, as amended. (Incorporated by reference
to the Company's Form 10-K for the calendar year ended December
31, 1998.)
(d) 1982 Employers Mutual Casualty Company Incentive Stock Option
Plan, as amended. (Incorporated by reference to the Company's
Form 10-K for the calendar year ended December 31, 1998.)
(e) Deferred Bonus Compensation Plans. (Incorporated by reference
to the Company's Form 10-K for the calendar year ended December
31, 1998.)
(f) 2002 Executive Bonus Program - EMC Reinsurance Company.
(g) EMC Insurance Group Inc. Amended and Restated Dividend
Reinvestment and Common Stock Purchase Plan. (Incorporated by
reference to Registration No. 33-34499.)
(h) Employers Mutual Casualty Company Excess Retirement Benefit
Agreement. (Incorporated by reference to the Company's
Form 10-K for the calendar year ended December 31, 1998.)
(i) Employers Mutual Casualty Company 1993 Employee Stock Purchase
Plan. (Incorporated by reference to Registration No. 33-49335.)
(j) 1993 Employers Mutual Casualty Company Incentive Stock Option
Plan. (Incorporated by reference to Registration Nos.33-49337
and 333-45279.)
(k) Employers Mutual Casualty Company Non-Employee Director Stock
Option Plan. (Incorporated by reference to Registration No.
33-49339.)
(l) Employers Mutual Casualty Company Supplemental Executive
Retirement Plan. (Incorporated by reference to the Company's
Form 10-K for the calendar year ended December 31, 2000.)
(m) 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.)
(n) 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.)
(o) Employers Mutual Casualty Company Excess Deferral Plan.
(Incorporated by reference to the Company's Form 10-K for the
calendar year ended December 31, 2001.)
(p) 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 2002 Annual Report to
Stockholders.
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations from the Company's 2002 Annual Report to
Stockholders.
(c) Consolidated Financial Statements from the Company's 2002
Annual Report to Stockholders.
(d) Stockholder Information from the Company's 2002 Annual Report to
Stockholders.
21. Subsidiaries of the Registrant.
23. Consent of Experts and Counsel.
(a) Consent of Ernst & Young LLP, Independent Auditors.
(b) Consent of KPMG LLP, Independent Auditors.
24. Power of Attorney.
99.1 Certification of 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.
99.2 Certification of 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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 27,
2003.
EMC INSURANCE GROUP INC.
/s/ Bruce G. Kelley
-----------------------
Bruce G. Kelley
President and
Chief Executive Officer
/s/ Mark E. Reese
-----------------------
Mark E. Reese
Vice President - Chief Financial Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 27, 2003.
/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
CERTIFICATIONS
I, Bruce G. Kelley, certify that:
1. I have reviewed this annual report on Form 10-K of EMC Insurance
Group Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 27, 2003
---------------
/s/ Bruce G. Kelley
-----------------------------
Bruce G. Kelley, President
and Chief Executive Officer
CERTIFICATIONS
I, Mark Reese, certify that:
1. I have reviewed this annual report on Form 10-K of EMC Insurance Group
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 27, 2003
--------------
/s/ Mark E. Reese
-----------------------------
Mark E. Reese, Vice President
and Chief Financial Officer
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS, ON SCHEDULES
We have audited the consolidated financial statements of EMC Insurance
Group Inc. and Subsidiaries as of December 31, 2002 and 2001, and for the
years then ended, and have issued our report thereon dated February 25, 2003
(included elsewhere in this Annual Report on Form 10-K). Our audits also
included the financial statement schedules listed in Item 15(a)2 of this
Annual Report on Form 10-K. These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits. The financial statement schedules as of December 31, 2000 and for
the year then ended were audited by other auditors whose report dated February
27, 2001, expressed an opinion that such financial statement schedules, when
considered in relation to the consolidated financial statements taken as a
whole, presented fairly, in all material respects, the information set forth
therein.
In our opinion, the 2002 and 2001 financial statement schedules referred
to above, when considered in relation to the 2002 and 2001 basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
February 25, 2003
Des Moines, Iowa
REPORT OF KPMG LLP, INDEPENDENT AUDITORS, ON SCHEDULES
The Board of Directors and Stockholders
EMC Insurance Group Inc.:
Under date of February 27, 2001, we reported on the consolidated
balance sheet of EMC Insurance Group In. and Subsidiaries as of December 31,
2000 and the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for the year then ended, as
contained in Part II, Item 8 of the annual report on Form 10-K for the year
2000. In connection with our audit of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedules listed in Part IV, Item 15(a)2. These financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audit.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Des Moines, Iowa
February 27, 2001
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule I - Summary of Investments -
Other Than Investments in Related Parties
December 31, 2002
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 .............. $ 49,956,691 $ 56,147,115 $ 49,956,691
Mortgage-backed securities ..... 5,076,984 5,491,922 5,076,984
------------ ------------ ------------
Total fixed maturity
securities ............. 55,033,675 61,639,037 55,033,675
------------ ------------ ------------
Securities available-for-sale:
Fixed maturities:
United States Government
and government agencies
and authorities .............. 110,033,485 111,381,047 111,381,047
States, municipalities and
political subdivisions ....... 81,425,249 87,116,088 87,116,088
Mortgage-backed securities ..... 12,594,103 13,641,956 13,641,956
Debt securities issued by
foreign governments .......... 6,483,656 7,587,710 7,587,710
Public utilities ............... 46,979,003 49,106,908 49,106,908
Corporate securities ........... 202,329,432 217,022,257 217,022,257
------------ ------------ ------------
Total fixed maturity
securities ............. 459,844,928 485,855,966 485,855,966
------------ ------------ ------------
Equity securities:
Common stocks
Banks, trusts and insurance
companies .................. 5,059,135 5,545,442 5,545,442
Industrial, miscellaneous and
all other .................. 32,884,895 28,593,543 28,593,543
Non-redeemable preferred
stocks ..................... 500,000 458,000 458,000
------------ ------------ ------------
Total equity securities .. 38,444,030 34,596,985 34,596,985
------------ ------------ ------------
Other long-term investments ........ 3,057,000 3,057,000 3,057,000
Short-term investments ............. 29,650,230 29,650,230 29,650,230
------------ ------------ ------------
Total investments ...... $586,029,863 $614,799,218 $608,193,856
============ ============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31,
--------------------------
2002 2001
------------ ------------
ASSETS
Investment in common stock of
subsidiaries (equity method) .................. $154,552,425 $137,738,931
Fixed maturity investments:
Securities available-for-sale, at fair value .. 1,676,455 1,556,475
Short-term investments .......................... 1,455,824 988,555
Cash ............................................ 58,676 227,541
Accrued investment income ....................... 42,088 41,333
Income taxes recoverable ........................ 212,502 3,259
Deferred income taxes ........................... 12,764 103,490
------------ ------------
Total assets ............................... $158,010,734 $140,659,584
============ ============
LIABILITIES
Accounts payable ................................ $ 227,207 $ 163,416
Indebtedness to related party ................... 15,163 38,545
------------ ------------
Total liabilities .......................... 242,370 201,961
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 11,399,050 shares
in 2002 and 11,329,987 shares in 2001 ......... 11,399,050 11,329,987
Additional paid-in capital ...................... 67,270,591 66,013,203
Accumulated other comprehensive income .......... 14,218,330 7,507,672
Retained earnings ............................... 64,880,393 55,606,761
------------ ------------
Total stockholders' equity ................. 157,768,364 140,457,623
------------ ------------
Total liabilities and stockholders' equity $158,010,734 $140,659,584
============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant, Continued
Condensed Statements of Income
Years ended December 31,
-------------------------------------
2002 2001 2000
----------- ----------- -----------
REVENUES
Dividends received from subsidiaries .. $ 6,250,016 $ 5,525,096 $ 6,375,104
Investment income ..................... 113,843 194,326 345,597
Realized investment gains ............. 5,313 - 536
----------- ----------- -----------
6,369,172 5,719,422 6,721,237
Operating expenses .................... 436,688 438,687 401,527
----------- ----------- -----------
Income before income tax benefit
and equity in undistributed net
income (loss) of subsidiaries ..... 5,932,484 5,280,735 6,319,710
Income tax benefit .................... (101,747) (110,263) (4,399)
----------- ----------- -----------
Income before equity in undistributed
net income (loss) of subsidiaries 6,034,231 5,390,998 6,324,109
Equity in undistributed net income
(loss) of subsidiaries .............. 10,067,507 (7,497,130) (3,995,078)
----------- ----------- -----------
Net income (loss) ....... $16,101,738 $(2,106,132) $ 2,329,031
=========== =========== ===========
Condensed Statements of Comprehensive Income
Years ended December 31,
----------------------------------------
2002 2001 2000
------------ ------------ ------------
Net income (loss) .................. $ 16,101,738 $ (2,106,132) $ 2,329,031
------------ ------------ ------------
Other Comprehensive Income:
Unrealized holding gains arising
during the period, net of
deferred income tax expense .... 4,845,443 962,453 11,708,349
Reclassification adjustment for
losses (gains) included in net
income (loss), net of income tax
(benefit) expense .............. 2,053,481 (506,701) (1,031,166)
Adjustment for minimum pension
liability, net of deferred
income tax benefit ............. (188,266) - -
------------ ------------ ------------
Other comprehensive income ....... 6,710,658 455,752 10,677,183
------------ ------------ ------------
Total comprehensive income
(loss) ..................... $ 22,812,396 $ (1,650,380) $ 13,006,214
============ ============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant, Continued
Condensed Statements of Cash Flows
Years ended December 31,
-------------------------------------
2002 2001 2000
----------- ----------- -----------
Net cash provided by
operating activities ................ $ 5,988,850 $ 5,316,361 $ 6,371,690
----------- ----------- -----------
Cash flows from investing activities
Disposals of fixed maturity
securities held-to-maturity ....... - - 2,000,000
Maturities of fixed maturity
securities available-for-sale ..... 1,505,313 - -
Purchases of fixed maturity
securities available-for-sale ..... (1,694,104) - -
Net (purchases) sales of short-term
investments ...................... (467,269) 1,169,110 (1,820,140)
----------- ----------- -----------
Net cash (used) provided by
investing activities ........... (656,060) 1,169,110 179,860
----------- ----------- -----------
Cash flows from financing activities
Issuance of common stock ........... 1,326,451 502,007 242,265
Dividends paid to stockholders ..... (6,828,106) (6,787,320) (6,771,440)
----------- ----------- -----------
Net cash used in financing
activities ..................... (5,501,655) (6,285,313) (6,529,175)
----------- ----------- -----------
Net (decrease) increase in cash ....... (168,865) 200,158 22,375
Cash at beginning of year ............. 227,541 27,383 5,008
----------- ----------- -----------
Cash at end of year ................... $ 58,676 $ 227,541 $ 27,383
=========== =========== ===========
Income taxes (received) paid .......... $ (2,253) $ (6,588) $ 189
Interest (received) paid .............. $ - $ (123) $ -
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information
For Years Ended December 31, 2002, 2001 and 2000
Deferred Loss and
policy settlement
acquisition expense Unearned
Segment costs reserves premiums
------- ----------- ------------ ------------
Year ended December 31, 2002:
Property and casualty insurance $21,181,714 $229,876,996 $ 98,723,419
Reinsurance ................... 3,745,147 101,349,757 17,023,395
Parent company ................ - - -
----------- ------------ ------------
Consolidated ............. $24,926,861 $331,226,753 $115,746,814
=========== ============ ============
Year ended December 31, 2001:
Property and casualty insurance $18,536,512 $221,986,108 $ 86,532,102
Reinsurance ................... 2,827,016 92,532,480 12,850,074
Parent company ................ - - -
----------- ------------ ------------
Consolidated ............. $21,363,528 $314,518,588 $ 99,382,176
=========== ============ ============
Year ended December 31, 2000:
Property and casualty insurance $13,777,831 $209,365,347 $ 65,228,769
Reinsurance ................... 1,858,922 77,123,681 8,449,645
Parent company ................ - - -
----------- ------------ ------------
Consolidated ............. $15,636,753 $286,489,028 $ 73,678,414
=========== ============ ============
Losses and
Net settlement
Premium investment expenses
Segment revenue income incurred
------- ------------ ----------- ------------
Year ended December 31, 2002:
Property and casualty insurance $225,013,076 $23,517,163 $156,152,022
Reinsurance ................... 72,029,957 9,147,127 50,905,834
Parent company ................ - 113,843 -
------------ ----------- ------------
Consolidated ............. $297,043,033 $32,778,133 $207,057,856
============ =========== ============
Year ended December 31, 2001:
Property and casualty insurance $203,392,845 $22,457,799 $168,344,370
Reinsurance ................... 61,887,013 8,317,505 53,574,380
Parent company ................ - 194,326 -
------------ ----------- ------------
Consolidated ............. $265,279,858 $30,969,630 $221,918,750
============ =========== ============
Year ended December 31, 2000:
Property and casualty insurance $184,985,620 $20,787,679 $149,518,346
Reinsurance ................... 46,472,822 7,873,040 40,003,328
Parent company ................ - 345,597 -
------------ ----------- ------------
Consolidated ............. $231,458,442 $29,006,316 $189,521,674
============ =========== ============
Amortization
of deferred
policy Other
acquisition underwriting Premiums
Segment costs expenses written (1)
------- ------------ ------------ ------------
Year ended December 31, 2002:
Property and casualty insurance $ 49,057,682 $ 20,447,874 $237,633,602
Reinsurance ................... 16,669,334 6,481,098 76,203,278
Parent company ................ - - -
------------ ------------ ------------
Consolidated ............. $ 65,727,016 $ 26,928,972 $313,836,880
============ ============ ============
Year ended December 31, 2001:
Property and casualty insurance $ 42,062,510 $ 17,990,128 $224,412,085
Reinsurance ................... 13,624,505 4,749,785 66,287,442
Parent company ................ - - -
------------ ------------ ------------
Consolidated ............. $ 55,687,015 $ 22,739,913 $290,699,527
============ ============ ============
Year ended December 31, 2000:
Property and casualty insurance $ 40,675,773 $ 15,439,286 $190,104,541
Reinsurance ................... 10,612,706 3,040,206 47,530,111
Parent company ................ - - -
------------ ------------ ------------
Consolidated ............. $ 51,288,479 $ 18,479,492 $237,634,652
============ ============ ============
(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.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule IV - Reinsurance
For years ended December 31, 2002, 2001 and 2000
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
------------ ------------ ------------ ------------ ----------
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%
============ ============ ============ ============ =====
Year ended December 31, 2000:
Consolidated earned premiums ........... $245,078,165 $252,761,452 $239,141,729 $231,458,442 103.3%
============ ============ ============ ============ =====
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule VI - Supplemental Insurance Information Concerning
Property-Casualty Insurance Operations
For Years Ended December 31, 2002, 2001 and 2000
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
- ---------------------- ----------- ------------ -------- ------------ ---------- -----------
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
=========== ============ ======== ============ ============ ===========
Year ended December 31, 2000: $15,636,753 $286,489,028 $ -0- $ 73,678,414 $231,458,442 $28,660,719
=========== ============ ======== ============ ============ ===========
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)
- ---------------------- ------------ ----------- ------------ ------------ ------------
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
============ =========== ============ ============ ============
Year ended December 31, 2000: $191,425,036 ($ 1,903,362) $ 51,288,479 $170,510,652 $237,634,652
============ =========== ============ ============ ============
(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.
EMC Insurance Group Inc. and Subsidiaries
Index to Exhibits
Exhibit
number Item Page number
-------- ---- -----------
10(b) 2002 Senior Executive Compensation
Bonus Program. 43
10(f) 2002 Executive Bonus Program - EMC
Reinsurance Company 48
13(a) Selected Financial Data. 50
13(b) Management's Discussion and Analysis
of Financial Condition and Results
of Operations. 51-76
13(c) Consolidated Financial Statements and
Supplementary Data. 77-114
13(d) Stockholder Information. 115
21 Subsidiaries of the Registrant. 116
23(a) Consent of Ernst & Young LLP, Independent
Auditors. 117
23(b) Consent of KPMG LLP, Independent Auditors. 118
24 Power of Attorney. 119
99.1 Certification of President and Chief
Executive Officer. 120
99.2 Certification of Vice President and Chief
Financial Officer. 121