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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission File Number: 0-10956
EMC INSURANCE GROUP INC.
(Exact Name of Registrant as Specified in its Charter)
Iowa 42-6234555
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
717 Mulberry Street, Des Moines, Iowa 50309
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (515) 280-2902
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $1.00
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 2, 1998 was $49,857,017.
The number of shares outstanding of the registrant's common stock, $1.00
par value, on March 2, 1998, was 11,354,129.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's annual report to stockholders for the
year ended December 31, 1997 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 30, 1998,
are incorporated by reference under Part III.
This document contains 130 sequentially numbered pages.
Index to Exhibits is on page number 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 approximately 67 percent owned by
Employers Mutual Casualty Company (Employers Mutual), a multiple-line property
and casualty insurance company organized as an Iowa mutual insurance company
in 1911 that is licensed in all 50 states and the District of Columbia. The
term "Company" is used interchangeably to describe EMC Insurance Group Inc.
(Parent Company only) and EMC Insurance Group Inc. and its subsidiaries.
Employers Mutual and all of its subsidiaries and an affiliate (including the
Company), are referred to as the "EMC Insurance Companies."
The Company conducts its insurance business through four business
segments as follows:
...............................
: :
: EMC INSURANCE GROUP INC. :
:.............................:
: Excess and
Property and : Nonstandard Surplus Lines
Casualty : Risk Automobile Insurance
Insurance Reinsurance : Insurance Agency
................................:.................................
: : : :
: : : :
EMCASCO Insurance EMC Farm and City EMC
Company (EMCASCO) Reinsurance Insurance Underwriters,
Illinois EMCASCO Company Company Ltd.
Insurance Company
(Illinois EMCASCO)
Dakota Fire Insurance
Company (Dakota Fire)
EMCASCO was formed in Iowa in 1958, Illinois EMCASCO was formed in
Illinois in 1976 and Dakota Fire was formed in North Dakota in 1957 for the
purpose of writing property and casualty insurance. These companies are
licensed to write insurance in a total of 35 states and are participants in a
pooling agreement with Employers Mutual. (See "Property and Casualty
Insurance - Pooling Agreement").
The reinsurance subsidiary was formed in 1981 to assume reinsurance
business from Employers Mutual. The company assumes a portion of Employers
Mutual's assumed reinsurance business, exclusive of certain reinsurance
contracts, and is licensed to do business in 11 states.
The nonstandard risk automobile insurance subsidiary was purchased in
1984. The company was formed in Iowa in 1962 to write nonstandard risk
automobile insurance and is licensed in 6 states.
The excess and surplus lines insurance agency was acquired in 1985. The
company was formed in Iowa in 1975 as a broker for excess and surplus lines
insurance.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
- ---------------------------------------------
For information concerning the Company's revenues, operating income and
identifiable assets attributable to each of its industry segments over the
past three years, see note 8 of Notes to Consolidated Financial Statements
under Item 8 of this Form 10-K.
PROPERTY AND CASUALTY INSURANCE
- -------------------------------
POOLING AGREEMENT
The three property and casualty insurance subsidiaries of the Company and
two subsidiaries and an affiliate of Employers Mutual (Union Insurance Company
of Providence, American Liberty Insurance 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 22 percent. Operations of the
pool give rise to intercompany balances with Employers Mutual, which are
settled on a quarterly basis. The investment activities and income tax
liabilities 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 seven
companies in the pool.
Effective January 1, 1997, Hamilton Mutual Insurance Company (Hamilton
Mutual) became a participant in the pooling agreement. The addition of
Hamilton Mutual did not impact the Company's aggregate participation in the
pooling agreement. In connection with this change in the pooling agreement,
the Company's liabilities increased $6,393,063 and invested assets increased
$5,674,458. The Company reimbursed Employers Mutual $794,074 for commissions
incurred to generate this business and Employers Mutual paid the Company
$75,469 in interest income as the actual cash transfer did not occur until
March 24, 1997.
On December 19, 1997, the Company announced that its nonstandard risk
automobile insurance subsidiary will become a participant in the pooling
agreement effective January 1, 1998. The nonstandard risk automobile
insurance subsidiary will receive a 1.5 percent participation in the pool,
which will increase the Company's aggregate participation in the pool to 23.5
percent. Revenues of the Company are expected to increase by approximately
$2,000,000 due to the increase in the size of the pool.
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, 1997. The pooling agreement is continuous, but may be amended or
terminated at the end of any calendar year as to any one or more parties.
Percent Percent Percent
of of of
Line of Business 1997 total 1996 total 1995 total
- ---------------- -------- ------ -------- ------ -------- ------
(Dollars in thousands)
Commercial Lines:
Automobile ............ $118,624 18.4% $107,786 18.9% $ 99,165 17.8%
Property .............. 110,637 17.2 92,963 16.3 89,130 16.0
Workers' compensation 115,117 17.9 118,479 20.7 131,415 23.5
Liability ............. 110,647 17.2 105,889 18.5 105,571 18.9
Other ................. 15,139 2.4 13,998 2.5 13,975 2.5
-------- ------ -------- ------ -------- ------
Total commercial lines 470,164 73.1 439,115 76.9 439,256 78.7
Personal Lines:
Automobile ............ 109,214 17.0 83,428 14.6 79,121 14.2
Property .............. 61,569 9.6 46,459 8.2 39,840 7.1
Liability ............. 2,026 0.3 1,946 0.3 - -
Other ................. 50 - 53 - 54 -
-------- ----- -------- ----- -------- -----
Total personal lines 172,859 26.9 131,886 23.1 119,015 21.3
-------- ----- -------- ----- -------- -----
Total ............ $643,023 100.0% $571,001 100.0% $558,271 100.0%
======== ===== ======== ===== ======== =====
MARKETING
Marketing of insurance by the parties to the pooling agreement is
conducted through 18 offices located throughout the United States and
approximately 2,700 independent agencies. These offices maintain close
contact with the local market conditions and are able to react rapidly to
change. Each office employs underwriting, claims, marketing and risk
improvement representatives, as well as field auditors and branch
administrative technicians. The offices are supported by Employers Mutual
technicians and specialists. Systems are in place to monitor the underwriting
results of each office and to maintain guidelines and policies consistent with
the underwriting and marketing environment in each region.
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, 1997.
1997 1996 1995
---- ---- ----
Alabama ............................ 3.6% 3.7% 3.1%
Arizona ............................ 3.8 4.2 3.9
Illinois ........................... 5.4 6.5 6.5
Iowa ............................... 18.7 20.3 21.7
Kansas ............................. 8.2 9.0 8.8
Michigan ........................... 4.1 3.2 3.6
Minnesota .......................... 3.9 4.0 4.7
Nebraska ........................... 7.0 7.7 8.1
North Carolina ..................... 3.4 4.1 4.0
Ohio ............................... 3.2 - -
Texas .............................. 4.4 3.9 2.9
Wisconsin .......................... 4.5 4.8 5.5
Other * ............................ 29.8 28.6 27.2
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
* Includes all other jurisdictions, none of which accounted for more than 3%.
COMPETITION
The property and casualty insurance business is highly competitive. The
Company's property and casualty insurance subsidiaries and the other pool
members compete in the United States insurance market with numerous insurers,
many of which have greater financial resources. Competition in the types of
insurance in which the property and casualty insurance subsidiaries are
engaged is based on many factors, including the perceived overall financial
strength of the insurer, premiums charged, contract terms and conditions,
services offered, speed of claim payments, reputation and experience. In this
competitive environment, insureds have tended to favor large, financially
strong insurers and the Company faces the risk that insureds may become more
selective and may seek larger and/or more highly rated insurers.
BEST'S RATING
A.M. Best rates insurance companies based on their relative financial
strength and ability to meet their contractual obligations. The A (Excellent)
rating assigned to the Company's property and casualty insurance subsidiaries
and the other pool members is based on the pool members' 1996 operating
results and financial condition as of December 31, 1996. Best's reevaluates
its ratings from time to time (normally on an annual basis) and there can be
no assurance that the Company's property and casualty insurance subsidiaries
and the other pool members will maintain their current rating in the future.
Management believes that a Best's rating of "A (Excellent)" or better is
important to the Company's business since many insureds require that companies
with which they insure be so rated. Best's publications indicate that these
ratings are assigned to companies which Best's believes have achieved
excellent overall performance and have a strong ability to meet their
obligations over a long period of time. Best's ratings are based upon factors
of concern to policyholders and insurance agents and are not necessarily
directed toward the protection of investors.
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 Employers Mutual.
The intercompany pooling arrangement aids efficient buying of reinsurance
since it allows for higher retention levels and correspondingly decreased
dependence on the reinsurance marketplace.
A summary of the reinsurance treaties benefitting the parties to the
pooling agreement is presented below. Retention amounts reflect the
accumulated retentions of all layers within a coverage.
Type of Coverage Retention Limits
---------------- ----------- --------------------------
Property per risk ........... $ 2,000,000 100 percent of $18,000,000
Property catastrophe ........ $11,550,000 95 percent of $51,000,000
Casualty .................... $ 2,000,000 100 percent of $38,000,000
Workers' Compensation excess $ - $20,000,000 excess of
$40,000,000
Umbrella .................... $ 1,400,000* 100 percent of $ 8,600,000
Fidelity and Surety ......... $ 750,000 100 percent of $ 3,250,000
Surety excess .............. $ 400,000 100 percent of $ 6,850,000
Boiler ...................... $ 0 100 percent of $50,000,000
* An annual aggregate deductible of $3,600,000 must be reached before the
reinsurers may be petitioned.
Although reinsurance does not discharge the original insurer from its
primary liability to its policyholders, it is the practice of insurers for
accounting purposes to treat reinsured risks as risks of the reinsurer since
the primary insurer would only reassume liability in those situations where
the reinsurer is unable to meet the obligations it assumed under the
reinsurance agreements. The ability to collect reinsurance is subject to the
solvency of the reinsurers.
The major participants in the pool members' reinsurance programs are
presented below. The percentages represent the reinsurers' share of the total
reinsurance protection under all coverages. Each type of coverage is
purchased in layers, and an individual reinsurer may participate in more than
one coverage and at various layers within these coverages. The property per
risk, property catastrophe and casualty reinsurance programs are handled by a
reinsurance intermediary (broker). The reinsurance of those programs is
syndicated to approximately 50 domestic and foreign reinsurers.
Percent
of total 1997
Property per risk, property catastrophe reinsurance Best's
and casualty coverages: protection rating
- --------------------------------------- ----------- ------
Underwriters at Lloyd's of London .................... 20.2% A
Hannover Ruckversicherung AG ......................... 5.8 (1)
Zurich Reinsurance Centre ............................ 5.2 A
Hartford Fire Insurance Company ...................... 4.8 A+
AXA Reassurance Company .............................. 4.2 A+
St. Paul Fire and Marine ............................. 3.6 A+
NAC Reinsurance Corporation .......................... 3.6 A+
PMA Reinsurance Corporation .......................... 3.2 A+
Umbrella coverage:
- ------------------
General Reinsurance Corporation ...................... 100.0 A++
Fidelity and surety coverages:
- ------------------------------
SCOR Reinsurance Company ............................. 42.0 A+
Kemper Reinsurance Company ........................... 20.0 A
Signet Star Reinsurance Company ...................... 20.0 A
Winterthur Reinsurance Corporation of America ........ 18.0 A
Boiler coverage:
- ----------------
Hartford Steam Boiler Inspection and Insurance Company 100.0 A+
(1) Not rated.
Premiums ceded by all pool members and by the Company's property and
casualty insurance subsidiaries for the year ended December 31, 1997 are
presented below. Each type of reinsurance coverage is purchased in layers,
and an individual reinsurer may participate in more than one coverage and at
various layers within the coverages. Since each layer of each coverage is
priced separately, with the lower layers being more expensive than the upper
layers, a reinsurer's overall participation in a reinsurance program does not
necessarily correspond to the amount of premiums it receives.
Premiums ceded by
------------------------
Property
and casualty
All pool insurance
Reinsurer members subsidiaries
- --------- ----------- ------------
General Reinsurance Corporation...................... $ 3,568,951 $ 785,169
Hartford Steam Boiler Inspection & Insurance Company 1,605,214 353,147
Hartford Fire Insurance Company ..................... 882,352 194,118
SCOR Reinsurance Company ............................ 875,023 192,505
PMA Reinsurance Corporation ......................... 851,558 187,343
Kemper Reinsurance Company .......................... 631,642 138,961
AXA Reassurance Company ............................. 592,297 130,305
American Re-Insurance Company ....................... 494,472 108,784
Spreckley Villers Burnhope & Company ................ 451,669 99,367
PXRE Reinsurance Company ............................ 435,160 95,735
Other Reinsurers .................................... 7,117,222 1,565,789
----------- ------------
Total ............................................. $17,505,560 $ 3,851,223
=========== ============
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, 1997 are presented below.
Premiums ceded by
------------------------
Property
and casualty
All pool insurance
Reinsurer members subsidiaries
- --------- ----------- ------------
Wisconsin Compensation Rating Bureau ................ $ 4,214,988 $ 927,297
National Workers' Compensation Reinsurance Pool ..... 3,504,567 771,005
North Carolina Reinsurance Facility ................. 1,213,266 266,919
Mutual Reinsurance Bureau ........................... 493,270 108,519
Improved Risk Mutual ................................ 151,884 33,414
Minnesota Workers' Compensation Reinsurance Assn.(1) (1,720,064) (378,414)
Other Reinsurers .................................... 162,766 35,809
----------- -----------
$ 8,020,677 $ 1,764,549
=========== ===========
(1) The Minnesota Workers' Compensation Reinsurance Association
periodically reviews its financial position and distributes excess
funds to its members. Distributions totaling $1,712,074 were received
by the parties to the pooling agreement in 1997 and were recorded as a
return of ceded premium.
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).
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,
Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary -
Reinsurance Ceded."
RELATIONSHIP BETWEEN NET PREMIUMS WRITTEN AND SURPLUS
The amount of insurance a property and casualty insurance company writes
under industry standards is a multiple of its surplus calculated in accordance
with statutory accounting practices. Generally, a ratio of 3 to 1 or less is
considered satisfactory. The ratios of the pool members for the past three
years are as follows:
Year ended December 31,
------------------------------
1997 1996 1995
---- ---- ----
Employers Mutual .................. .80 .95 1.07
EMCASCO ........................... 1.62 1.67 1.91
Illinois EMCASCO .................. 1.68 1.73 1.95
Dakota Fire ....................... 1.59 1.61 1.80
American Liberty .................. 1.08 1.05 1.15
Union ............................. .72 .68 .73
Hamilton Mutual ................... 1.17 - -
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The property and casualty insurance subsidiaries' reserve information is
included in the property and casualty loss reserve development for 1997. See
"Property and Casualty Insurance Subsidiaries, Reinsurance Subsidiary and
Nonstandard Risk Automobile Insurance Subsidiary - Outstanding Losses and
Settlement Expenses."
REINSURANCE
- -----------
The reinsurance subsidiary is a property and casualty treaty reinsurer
with a concentration in property lines. The reinsurance subsidiary assumes a
quota share portion of Employers Mutual's assumed reinsurance business,
exclusive of certain reinsurance contracts. The reinsurance subsidiary
assumes its quota share portion of all premiums and related losses and
settlement expenses of this business, subject to a maximum loss per event.
The reinsurance subsidiary does not reinsure any of Employers Mutual's direct
insurance business, nor any "involuntary" facility or pool business that
Employers Mutual assumes pursuant to state law. In addition, the reinsurance
subsidiary is not liable for credit risk in connection with the insolvency of
any reinsurers of Employers Mutual.
Effective January 1, 1997, the reinsurance subsidiary's quota share
participation was increased from 95 percent to 100 percent and the maximum
loss per event assumed by the reinsurance subsidiary was increased from
$1,000,000 to $1,500,000. In connection with the change in the quota share
percentage, the Company's liabilities increased $3,173,647 and invested assets
increased $3,066,705. The Company reimbursed Employers Mutual $106,942 for
commissions incurred to generate this business.
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, 1997. The amounts for 1997 do not reflect an accounting
adjustment of $355 related to the change in quota share percentage. This
adjustment was made to offset the income statement effect that resulted from
the increase in the reinsurance subsidiary's reserve for unearned premiums on
January 1, 1997 in connection with this transaction.
Percent Percent Percent
of of of
Line of Business 1997 total 1996 total 1995 total
- ---------------- ------- ----- ------- ----- ------- -----
(Dollars in thousands)
Pro rata reinsurance:
Property ............... $15,499 45.1% $16,459 45.7% $19,417 53.3%
Crop ................... 3,101 9.0 3,704 10.3 3,085 8.5
Casualty ............... 2,911 8.5 2,796 7.7 2,879 7.9
Marine/aviation ........ 1,866 5.4 2,762 7.7 4,168 11.4
Other .................. 2,116 6.2 228 0.6 398 1.1
------- ----- ------- ----- ------- -----
Total pro rata reinsurance 25,493 74.2 25,949 72.0 29,947 82.2
Excess per risk reinsurance:
Property ............... 2,110 6.2 2,258 6.3 1,760 4.8
Casualty ............... 1,595 4.6 1,182 3.3 840 2.3
Marine/aviation ........ - - 9 - 21 0.1
Other .................. 647 1.9 628 1.7 341 0.9
------- ----- ------- ----- ------- -----
Total excess per
risk reinsurance ...... 4,352 12.7 4,077 11.3 2,962 8.1
------- ----- ------- ----- ------- -----
Excess catastrophe/
aggregate reinsurance:
Property ............... 4,293 12.5 5,671 15.7 3,178 8.7
Crop ................... 252 0.8 242 0.7 292 0.8
Marine/aviation ........ 8 - 29 0.1 52 0.2
Other .................. (62) (0.2) 84 0.2 2 -
------- ----- ------- ----- ------- -----
Total excess catastrophe/
aggregate reinsurance 4,491 13.1 6,026 16.7 3,524 9.7
------- ----- ------- ----- ------- -----
Total excess reinsurance 8,843 25.8 10,103 28.0 6,486 17.8
------- ----- ------- ----- ------- -----
$34,336 100.0% $36,052 100.0% $36,433 100.0%
======= ===== ======= ===== ======= =====
MARKETING
During 1997 and 1996, more emphasis was placed upon writing excess of
loss business and on increasing participation on existing contracts that had
favorable terms. This movement towards excess of loss business was prompted
by the continued deterioration of pro rata rates and greater control over the
pricing of excess of loss business. The reinsurance subsidiary strives to be
flexible and aggressive with opportunities that arise, while remaining
committed to profitability over premium volume.
COMPETITION
The reinsurance marketplace is very competitive. Employers Mutual
competes in the global reinsurance market with numerous reinsurers, many of
which have greater financial resources. In this competitive environment,
reinsurance brokers have tended to favor large, financially strong reinsurers
who are able to provide "mega" line capacity for all lines of business.
Employers Mutual is addressing this by accepting a larger share of coverage on
desirable programs and strengthening its relationships with reinsurance
intermediaries.
REINSURANCE CEDED
Prior to 1997, the reinsurance subsidiary had an aggregate excess of loss
reinsurance treaty with Employers Mutual which provided protection from a
large accumulation of retentions resulting from multiple catastrophes in any
one calendar year. The coverage provided was $2,000,000, excess of $3,000,000
aggregate losses retained, excess of $200,000 per event. Maximum recovery was
limited to $2,000,000 per accident year. The reinsurance subsidiary did not
have any recoveries under this treaty during 1996 or 1995. Premiums paid to
Employers Mutual amounted to $500,000 and $499,950 in 1996 and 1995,
respectively. This reinsurance treaty was canceled effective January 1, 1997.
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,
Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary -
Reinsurance Ceded."
BEST'S RATING
The most recent Best's Property Casualty Key Rating Guide gives the
reinsurance subsidiary a B++ (Very Good) policyholders' rating. Best's
ratings are based upon factors of concern to policyholders and insurance
agents and are not necessarily directed toward the protection of investors.
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The reinsurance subsidiary's reserve information is included in the
property and casualty loss reserve development for 1997. See "Property and
Casualty Insurance Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk
Automobile Insurance Subsidiary - Outstanding Losses and Settlement Expenses."
NONSTANDARD RISK AUTOMOBILE INSURANCE
- -------------------------------------
The Company's nonstandard risk automobile insurance subsidiary
specializes in insuring private passenger automobile risks that are found to
be unacceptable in the standard automobile insurance market.
MARKETING
The nonstandard risk automobile insurance subsidiary is licensed in a
six state area that includes Iowa, Kansas, Missouri, Nebraska, North Dakota
and South Dakota. Personal lines automobile policies are solicited through
the American Agency System using approximately 1,100 independent agencies and
are written for two, three or six month terms. Limits of liability are
offered equal to the various state financial responsibility laws. Physical
damage coverages are written at normal insurance deductibles. The nonstandard
risk automobile insurance subsidiary experienced an increase in premium volume
in 1997 for the first time since 1993. This increase is attributed to a
change in marketing philosophy that includes a closer alignment with EMC
Insurance Companies and improved marketing and business relationships with its
agency force.
The following table sets forth the geographic distribution of the direct
written premiums of the nonstandard risk automobile insurance subsidiary for
the three years ended December 31, 1997.
1997 1996 1995
----- ----- -----
Iowa ............................... 36.0% 37.2% 39.9%
Kansas ............................. 14.1 13.9 11.0
Missouri ........................... 2.1 - -
Nebraska ........................... 19.7 22.4 25.0
North Dakota........................ 6.5 4.6 3.8
South Dakota ....................... 21.6 21.9 20.3
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
COMPETITION
The nonstandard risk marketplace is very competitive. Policies are
written for relatively short periods of time and insureds continually search
for the best rates available. The larger standard insurance companies have
developed rate tiers geared toward retaining nonstandard risk customers,
rather than passing them into the nonstandard market. In addition, more
companies have been willing to write nonstandard coverage. This additional
availability in both the standard market and the nonstandard market has
resulted in increased competition within the nonstandard market. The
nonstandard risk automobile insurance subsidiary has responded with renewed
marketing efforts toward new and existing agents and a competitive rate
structure. The nonstandard risk automobile insurance subsidiary continues to
fine tune territories and classifications in order to maximize profit
potential.
REINSURANCE CEDED
The nonstandard risk automobile insurance subsidiary had a reinsurance
treaty on an excess of loss basis with Employers Mutual, which provided
reinsurance for 100 percent of each loss in excess of $100,000, up to
$1,000,000. There were no recoveries under this treaty during 1997, 1996 or
1995. Premiums paid to Employers Mutual amounted to $36,076 in 1997, $37,942
in 1996 and $45,232 in 1995.
This reinsurance treaty was canceled on December 31, 1997 in preparation
for the subsidiary's admittance into the pooling agreement on January 1, 1998
and all reinsurance recoverable amounts due from Employers Mutual were
commuted. In connection with this commutation, the Company's assets increased
$58,921 and liabilities increased $62,487. The Company reported incurred
settlement expenses of $3,566 from this transaction.
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,
Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary -
Reinsurance Ceded."
BEST'S RATING
The most recent Best's Property Casualty Key Rating Guide gives the
nonstandard risk automobile insurance 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 nonstandard risk automobile insurance subsidiary's reserve
information is included in the property and casualty loss reserve development
for 1996. See "Property and Casualty Insurance Subsidiaries, Reinsurance
Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary - Outstanding
Losses and Settlement Expenses."
PROPERTY AND CASUALTY INSURANCE SUBSIDIARIES, REINSURANCE SUBSIDIARY AND
- ------------------------------------------------------------------------
NONSTANDARD RISK AUTOMOBILE INSURANCE SUBSIDIARY.
- -------------------------------------------------
SERVICES PROVIDED BY EMPLOYERS MUTUAL
Employers Mutual provides various services to all of its subsidiaries.
Such services include data processing, claims, financial, actuarial, auditing,
marketing and underwriting. Costs of these services are allocated to the
subsidiaries outside the pooling agreement based upon a number of criteria,
including usage and number of transactions. Costs not allocated to these
subsidiaries are charged to the pool and each pool participant shares in the
total cost in proportion to its participation percentage.
STATUTORY COMBINED RATIOS
The following table sets forth the Company's insurance subsidiaries'
statutory combined ratios and the property and casualty insurance industry
averages for the five years ended December 31, 1997. 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,
--------------------------------------
1997 1996 1995 1994 1993
------ ----- ----- ----- -----
Property and casualty insurance
Loss ratio ................... 72.8% 69.1% 65.0% 67.2% 72.6%
Expense ratio ................ 33.2 34.9 33.1 31.1 30.9
----- ----- ----- ----- -----
Combined ratio ............. 106.0% 104.0% 98.1% 98.3% 103.5%
===== ===== ===== ===== =====
Reinsurance
Loss ratio ................... 68.4% 68.7% 66.3% 82.0% 77.7%
Expense ratio ................ 34.1 31.5 32.3 30.4 33.1
----- ----- ----- ----- -----
Combined ratio ............. 102.5% 100.2% 98.6% 112.4% 110.8%
===== ===== ===== ===== =====
Nonstandard risk
automobile insurance
Loss ratio ................... 92.8% 88.7% 94.5% 71.5% 94.3%
Expense ratio ................ 27.4 26.8 26.1 24.4 23.7
----- ----- ----- ----- -----
Combined ratio ............. 120.2% 115.5% 120.6% 95.9% 118.0%
===== ===== ===== ===== =====
Total insurance operations
Loss ratio ................... 73.1% 70.0% 67.1% 70.9% 75.6%
Expense ratio ................ 33.1 33.6 32.5 30.4 30.7
----- ----- ----- ----- -----
Combined ratio ............. 106.2% 103.6% 99.6% 101.3% 106.3%
===== ===== ===== ===== =====
Property and casualty insurance
industry averages (1)
Loss ratio ................... 73.7% 78.3% 78.9% 81.1% 79.5%
Expense ratio ................ 28.1 27.5 26.1 27.3 27.4
----- ----- ----- ----- -----
Combined ratio ............. 101.8% 105.8% 105.0% 108.4% 106.9%
===== ===== ===== ===== =====
(1) As reported by A.M. Best Company. The ratio for 1997 is an estimate; the
actual combined ratio is not currently available.
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, 1997:
1997
Amount Percent Best's
recoverable of total rating
----------- -------- ------
Wisconsin Compensation Rating Bureau .. $ 5,721,614 38.7% (1)
American Re-Insurance Company ......... 1,784,051 12.1 A+
National Workers' Compensation
Reinsurance Pool .................... 1,678,319 11.3 (1)
General Reinsurance Company............ 772,022 5.2 A++
Kemper Reinsurance Company ............ 448,801 3.0 A
Minnesota Workers' Compensation
Reinsurance Association ............ 388,411 2.6 (2)
Mutual Reinsurance Bureau (MRB)........ 361,890 2.5 (3)
North Carolina Reinsurance Facility.... 350,290 2.4 (4)
Hartford Fire Insurance Company ....... 306,245 2.1 A+
PMA Reinsurance Corporation ........... 287,359 1.9 A+
Other Reinsurers ...................... 2,697,754 18.2
----------- -----
Total ........................... $14,796,756(5) 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) The amount recoverable reflects the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to this
association by the pool members under a reinsurance contract that
provides protection for workers' compensation losses in excess of
$1,080,000 per occurrence. Credit risk associated with this amount is
minimal as all companies writing direct workers' compensation business in
the state of Minnesota are responsible for the liabilities of this
association on a pro rata basis.
(3) The amount recoverable reflects the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to this
underwriting organization by Employers Mutual. MRB is composed of
Employers Mutual and five other nonaffiliated mutual insurance
companies. Each of the six members cede primarily property insurance to
MRB and assume equal proportionate shares of this business. Each member
benefits from the increased capacity provided by MRB. MRB is backed by
the financial strength of the six member companies. All of the members
of MRB were assigned an A (Excellent) or better rating by the most recent
Best's Property Casualty Key Ratings Guide.
(4) The amount recoverable reflects the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to this
organization by the pool members in conjunction with the state run
assigned risk program ("state fund"). Under this program, all insurers
writing direct business in the state of North Carolina are required by
law to write insurance for risks that are not insurable in the normal
marketplace. Business written under this program is ceded 100 percent to
the state fund and each respective company assumes from the state fund
its share of such business in proportion to its direct writings in the
state. Credit risk associated with this amount is minimal as all
companies writing direct business in the state are responsible for the
liabilities of this organization on a pro rata basis.
(5) The total amount at December 31, 1997 represented $571,541 in paid
losses and settlement expenses recoverable, $13,030,150 in unpaid losses
and settlement expenses recoverable and $1,195,065 in unearned premiums
recoverable.
The effect of reinsurance on premiums written and earned, and losses and
settlement expenses incurred for the three years ended December 31, 1997 is
presented below.
Year ended December 31,
----------------------------------------
1997 1996 1995
Premiums written: ------------ ------------ ------------
Direct ........................ $175,350,677 $156,161,030 $152,579,014
Assumed from nonaffiliates .... 1,219,564 1,951,071 3,282,699
Assumed from affiliates ....... 178,624,357 161,671,754 159,253,136
Ceded to nonaffiliates ........ (5,615,772) (7,930,381) (8,365,648)
Ceded to affiliates ........... (164,978,055) (147,467,508) (143,259,942)
------------ ------------ ------------
Net premiums written ........ $184,600,771 $164,385,966 $163,489,259
============ ============ ============
Premiums earned:
Direct ........................ $169,304,584 $154,859,778 $151,450,871
Assumed from nonaffiliates .... 1,403,778 2,350,321 3,548,647
Assumed from affiliates ....... 171,514,339 162,326,189 157,897,322
Ceded to nonaffiliates ........ (5,937,679) (8,219,290) (8,680,800)
Ceded to affiliates ........... (159,066,776) (146,126,332) (141,949,790)
------------ ------------ ------------
Net premiums earned ......... $177,218,246 $165,190,666 $162,266,250
============ ============ ============
Losses and settlement expenses
incurred:
Direct ........................ $126,922,536 $117,368,771 $ 98,651,399
Assumed from nonaffiliates .... 926,403 948,218 608,796
Assumed from affiliates ....... 122,827,934 113,083,014 100,098,436
Ceded to nonaffiliates ........ (3,364,737) (6,817,132) (2,036,962)
Ceded to affiliates ........... (117,458,832) (109,215,656) (89,169,391)
------------ ------------ ------------
Net losses and settlement
expenses incurred ......... $129,853,304 $115,367,215 $108,152,278
============ ============ ============
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The Company maintains reserves for losses and settlement expenses with
respect to both reported and unreported claims. The amount of reserves for
reported claims is primarily based upon a case-by-case evaluation of the
specific type of claim, knowledge of the circumstances surrounding each claim
and the policy provisions relating to the type of loss. Reserves on assumed
business are the amounts reported by the ceding company.
The amount of reserves for unreported claims is determined on the basis
of statistical information for each line of insurance with respect to the
probable number and nature of claims arising from occurrences which have not
yet been reported. Established reserves are closely monitored and are
frequently recomputed using a variety of formulas and statistical techniques
for analyzing actual claim costs, frequency data and other economic and social
factors.
The Company does not discount reserves. Inflation is implicitly provided
for in the reserving function through analysis of cost trends, reviews of
historical reserving results and projections of future economic conditions.
Large ($25,000 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.
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, 1997 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, the reinsurance subsidiary and the nonstandard risk
automobile insurance 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,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Gross reserves for losses and
settlement expenses, beginning
of year .......................... $202,502,986 $205,422,109 $203,181,615
Ceded reserves for losses and
settlement expenses, beginning
of year .......................... 13,796,769 12,226,680 14,146,874
------------ ------------ ------------
Net reserves for losses and
settlement expenses, beginning
of year, before adjustments ...... 188,706,217 193,195,429 189,034,741
------------ ------------ ------------
Adjustment to beginning reserves
due to the change in the
property and casualty insurance
subsidiaries' pooling agreement... 3,795,453 - -
Adjustment to beginning reserves
due to the change in the
reinsurance subsidiary's quota
share percentage ................. 2,726,913 - -
------------ ------------ ------------
Net reserves for losses and
settlement expenses, beginning
of year, after adjustments ....... 195,228,583 193,195,429 189,034,741
Incurred losses and
settlement expenses:
- ----------------------
Provision for insured events
of the current year .......... 137,300,762 131,375,234 123,876,601
Decrease in provision for
insured events of prior years (7,447,458) (16,008,019) (15,724,323)
------------ ------------ ------------
Total incurred losses and
settlement expenses ...... 129,853,304 115,367,215 108,152,278
------------ ------------ ------------
Payments:
- ---------
Losses and settlement expenses
attributable to insured events
of the current year ............ 57,649,830 59,948,110 48,237,715
Losses and settlement expenses
attributable to insured events
of prior years ................. 62,684,265 59,908,317 55,753,875
------------ ------------ ------------
Total payments (1) ......... 120,334,095 119,856,427 103,991,590
------------ ------------ ------------
Net reserves for losses and
settlement expenses, end of year 204,747,792 188,706,217 193,195,429
Ceded reserves for losses and
settlement expenses, end of year 13,030,150 13,796,769 12,226,680
------------ ------------ ------------
Gross reserves for losses and
settlement expenses, end of year $217,777,942 $202,502,986 $205,422,109
============ ============ ============
(1) Loss and settlement expense payments reported in the Company's financial
statements for the year 1997 totaled $113,811,729. This amount reflects
an adjustment of ($3,795,453) related to the change in the property and
casualty insurance subsidiaries' pooling agreement and ($2,726,913)
related to the change in the reinsurance subsidiary's quota share
percentage. These adjustments were made to offset the income statement
effect that resulted from the $6,522,366 increase in reserves for losses
and settlement expenses on January 1, 1997 related to these transactions.
The following table shows the calendar year development of loss and
settlement expense reserves of the property and casualty insurance
subsidiaries, the reinsurance subsidiary and the nonstandard risk automobile
insurance subsidiary. Amounts presented are on a net basis with, beginning in
1992, (i) a reconciliation of the net loss and settlement expense reserves, to
the gross amounts presented in the consolidated financial statements and (ii)
disclosure of the gross re-estimated loss and settlement expense reserves and
the related re-estimated reinsurance receivables.
Reflected in this table is (1) the increase in the reinsurance
subsidiary's quota share assumption of Employers Mutual's assumed reinsurance
business from 75 percent to 95 percent in 1988, (2) the increase in the
property and casualty insurance subsidiaries' collective participation in the
pool from 17 percent to 22 percent in 1992, (3) 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, (4) the commutation of two reinsurance contracts under the
reinsurance subsidiary's quota share agreement in 1993, (5) the gross-up of
reserve amounts associated with the National Workers' Compensation Reinsurance
Pool at December 31, 1993, (6) 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, (7) 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 and (8) the addition of a new participant to
the pooling agreement effective January 1, 1997.
In evaluating the table, it should be noted that each cumulative
redundancy (deficiency) amount includes the effects of all changes in reserves
for prior periods. Conditions and trends that have affected development of
the liability in the past, such as a time lag in the reporting of assumed
reinsurance business, the high rate of inflation associated with medical
services and supplies and the reform measures implemented by several states to
control administrative costs for workers' compensation insurance, may not
necessarily occur in the future. Accordingly, it may not be appropriate to
project future development of reserves based on this table.
During the last three years the Company has experienced favorable
development in the provision for insured events of prior years. The majority
of the favorable development has come from the property and casualty insurance
subsidiaries, which have benefitted from state reform measures in workers'
compensation insurance and various loss control functions implemented by
Employers Mutual. Favorable development has also been experienced in the
reinsurance subsidiary and the nonstandard risk auto insurance subsidiary, but
to a lesser degree.
The property and casualty insurance subsidiaries have historically
experienced favorable development in their reserves and current reserving
practices have not been relaxed; however, the level of redundancies
experienced in 1996 and 1995 is not expected to continue.
Year ended December 31,
--------------------------------------------------------------------------------------------------
(Dollars in thousands) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Statutory reserves for losses
and settlement expenses ...... $109,088 121,667 127,870 131,623 139,317 180,797 182,072 191,514 196,293 191,892 205,606
Reclassification of reserve
amounts associated with the
National Workers' Compensation
Reinsurance Pool ............. 2,378 2,911 3,855 4,338 6,830 11,364 - - - - -
Retroactive restatement of
reserves in conjunction with
admittance of a new participant
into the pooling agreement ... 1,639 1,469 1,777 2,184 2,461 2,621 2,852 3,039 3,515 3,796 -
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Statutory reserves after
reclassification ............. 113,105 126,047 133,502 138,145 148,608 194,782 184,924 194,553 199,808 195,688 205,606
GAAP adjustments:
Salvage and subrogation ...... (930) (930) (930) (1,203) (1,284) (2,026) (1,804) (1,799) (2,369) (2,400) -
Reclass of statutory settlement
expense portion of
retirement benefit liability - - - - - - (601) (680) (729) (786) (858)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Reserves for losses and
settlement expenses .......... 112,175 125,117 132,572 136,942 147,324 192,756 182,519 192,074 196,710 192,502 204,748
Paid (cumulative) as of:
One year later ............... 25,462 36,488 44,341 44,694 32,647 80,171 61,738 59,136 63,613 63,494 -
Two years later .............. 46,154 57,836 66,075 59,033 78,792 109,023 88,056 87,480 91,951 - -
Three years later ............ 63,144 72,343 77,146 95,435 95,149 125,856 105,173 104,805 - - -
Four years later ............. 71,616 79,183 106,557 104,502 104,531 135,099 114,377 - - - -
Five years later ............. 77,271 105,572 112,201 109,990 109,662 141,023 - - - - -
Six years later .............. 101,726 108,794 115,213 113,479 113,663 - - - - - -
Seven years later ............ 103,955 110,746 117,797 116,340 - - - - - - -
Eight years later ............ 105,486 112,626 119,674 - - - - - - - -
Nine years later ............. 107,001 114,260 - - - - - - - - -
Ten years later .............. 108,586 - - - - - - - - - -
Reserves reestimated as of:
End of year .................. 112,175 125,117 132,572 136,942 147,324 192,756 182,519 192,074 196,710 192,502 204,748
One year later ............... 109,865 124,455 135,523 140,794 151,771 191,986 174,865 175,065 179,240 185,054 -
Two years later .............. 111,571 124,404 137,408 141,353 147,993 187,185 165,481 168,254 176,280 - -
Three years later ............ 113,724 126,140 137,138 139,774 144,649 181,915 161,805 167,485 - - -
Four years later ............. 117,060 128,087 137,656 139,233 144,144 181,783 161,803 - - - -
Five years later ............. 119,352 128,491 136,945 139,989 144,449 182,477 - - - - -
Six years later .............. 120,165 127,944 138,758 140,679 145,503 - - - - - -
Seven years later ............ 120,354 130,086 140,372 141,731 - - - - - - -
Eight years later ............ 122,579 131,700 141,746 - - - - - - - -
Nine years later ............. 124,121 133,171 - - - - - - - - -
Ten years later .............. 125,665 - - - - - - - - - -
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cumulative redundancy
(Deficiency) ................. $(13,490) (8,054) (9,174) (4,789) 1,821 10,279 20,716 24,589 20,430 7,448 -
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross loss and settlement expense reserves - end of year (A) ........................ $199,974 206,221 208,937 206,298 217,778
Reinsurance receivables .............................................................. 17,455 14,147 12,227 13,797 13,030
-------- ------- ------- ------- -------
Net loss and settlement expense reserves - end of year ............................... $182,519 192,074 196,710 192,501 204,748
======== ======= ======= ======= =======
Gross re-estimated reserves - latest (B) ............................................. $176,159 180,531 190,073 200,031 217,778
Re-estimated reinsurance receivables - latest ........................................ 14,356 13,046 13,793 14,977 13,030
-------- ------- ------- ------- -------
Net re-estimated reserves - latest ................................................... $161,803 167,485 176,280 185,054 204,748
======== ======= ======= ======= =======
Gross cumulative redundancy (deficiency) (A-B) ....................................... $ 23,815 25,690 18,864 6,267 -
======== ======= ======= ======= =======
Asbestos and Environmental Claims
The Company has exposure to asbestos and environmental related claims
associated with the insurance business wriiten 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. Such uncertainties include the fact that
the assignment of responsibility varies widely by state and claims often
emerge long after the policy has expired, which makes assignment of damages to
the appropriate party and to the time period covered by a particular policy
difficult. In establishing reserves for these types of claims, management
monitors the relevant facts concerning each claim, the current status of the
legal environment, the social and political conditions and the claim history
and trends within the Company and the industry.
Based upon current facts, management believes the reserves established
for asbestos and environmental related claims at December 31, 1997 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.
Asbestos Claims
The Company's asbestos claim activity primarily relates to bodily injury
claims where a former insured has been named as one of multiple defendants
covering exposure over many years.
The following table presents selected data on asbestos related losses
and settlement expenses incurred and reserves outstanding for the Company:
Year ended December 31,
-------------------------------
1997 1996 1995
---------- ---------- ---------
Total losses incurred ....................... $ 394,524 $ 100,090 $ 336,899
Total settlement expenses incurred .......... 25,246 5,847 (31,667)
Total losses and settlement expenses ---------- ---------- ---------
incurred ................................ $ 419,770 $ 105,937 $ 305,232
========== ========== =========
Loss reserves ............................... $ 942,822 $ 662,910 $ 581,549
Settlement expense reserves ................. 32,909 28,089 32,117
---------- ---------- ---------
Total loss and settlement expense reserves $ 975,731 $ 690,999 $ 613,666
========== ========== =========
Number of outstanding claims ................ 92 57 71
========== ========== =========
The incurred and reserve amounts for 1997, 1996 and 1995 reflect 63, 40
and 25 claims, respectively, by individuals asserting asbestos exposure to
products allegedly manufactured by a former insured.
Environmental Claims
The Company's environmental claims activity is predominately related to
pollution from hazardous waste of former insureds. The parties to the pooling
agreement have not written primary coverage for the major oil or chemical
companies. The greatest exposure arises out of claims from small regional
operations or local businesses having pollution on their own property due to
hazardous material use or leaking underground storage tanks. These insureds
include small manufacturing operations, tool makers, automobile dealerships,
contractors and gasoline stations. The remaining exposure arises out of
commercial general liability and umbrella policies issued during the 1970's
and early 1980's which allegedly cover contamination emanating from closed
landfills. Claims related to misdeliveries or minor spills of petroleum
products covered under properly endorsed commercial auto policies are not
considered environmental claims since coverage is normally not disputed,
damages are readily determinable and settlement normally occurs over a short
period of time.
The following table presents selected data on environmental losses and
settlement expenses incurred and reserves outstanding for the Company.
Year ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Total losses incurred .................... $ 374,822 $ 85,454 $ 892,250
Total settlement expenses incurred ....... 25,615 (27,761) 185,412
---------- ---------- ----------
Total losses and settlement expenses
incurred ............................. $ 400,437 $ 57,693 $1,077,662
========== ========== ==========
Loss reserves ............................ $1,184,569 $1,103,466 $1,109,072
Settlement expense reserves .............. 252,435 308,145 345,897
---------- ---------- ----------
Total loss and settlement expense
reserves ............................. $1,437,004 $1,411,611 $1,454,969
========== ========== ==========
Number of outstanding claims ............. 46 63 58
========== ========== ==========
Included in the above table at December 31, 1997, 1996 and 1995 are two
closed landfills which involve three and six policyholders, respectively.
Coverage is disputed in all 46 of the claims which were outstanding at
December 31, 1997. The coverage disputes relate to claims involving
contamination at or from (i) insured property and (ii) closed landfills based
on the generation of waste disposed of at these sites.
EXCESS AND SURPLUS LINES INSURANCE AGENCY
- -----------------------------------------
The excess and surplus lines insurance agency provides access to the
excess and surplus lines markets through independent agents and managing
general agents and represents several major excess and surplus lines
companies, including Lloyd's of London. Lines of insurance handled range from
relatively straightforward property and casualty insurance to the more exotic
hole-in-one, kidnap and ransom, ocean marine, aircraft and professional
liability lines. Income is derived from fees and commissions and not from
underwriting the risk.
INVESTMENTS
- -----------
Securities classified as held-to-maturity are purchased with the intent
and ability to be held to maturity and are carried at amortized cost.
Unrealized holding gains and losses on securities held-to-maturity are not
reflected in the financial statements. All other securities have been
classified as securities available-for-sale and are carried at fair value,
with unrealized holding gains and losses reported as a separate component of
stockholders' equity, net of tax.
At December 31, 1997, approximately 90 percent of the Company's bonds
were invested in government or government agency issued securities. A variety
of maturities are maintained in the Company's portfolio to assure adequate
liquidity. The maturity structure of bond investments is also established by
the relative attractiveness of yields on short, intermediate and long-term
bonds. The Company does not invest in any high-yield debt investments
(commonly referred to as junk bonds).
The Company's equity investment holdings include common stock mutual
funds and preferred stocks.
Investments of the Company's insurance subsidiaries are subject to the
insurance laws of the state of their incorporation. These laws prescribe the
kind, quality and concentration of investments which may be made by insurance
companies. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks and real estate
mortgages. The Company believes it is in compliance with these laws.
In 1996 the National Association of Insurance Commissioners (NAIC)
adopted model legislation governing insurance company investments. This model
investment law has been adopted by one state (Illinois) and is not expected to
have a material impact on the operations of the Company's insurance
subsidiaries.
The investments of EMC Insurance Group Inc. and its subsidiaries are
supervised by investment committees of each entity's respective board of
directors. The bond and preferred stock portfolios are managed by an internal
staff which is composed of employees of Employers Mutual. The mutual fund
equity portfolios are managed by outside fund managers.
Investment expenses are based on actual expenses incurred plus an
allocation of other investment expenses incurred by Employers Mutual, which is
based on a weighted average of total invested assets and number of investment
transactions.
The following table shows the composition of the Company's investment
portfolio (at amortized cost), by type of security, as of December 31, 1997
and 1996. In the Company's consolidated financial statements, securities
held-to-maturity are carried at amortized cost; securities available-for-sale
are carried at fair value.
Year ended December 31,
--------------------------------------------
1997 1996
--------------------- ---------------------
Amortized Amortized
cost Percent cost Percent
------------ ------- ------------ -------
Securities held-to-maturity:
Fixed maturity securities:
U.S. treasury securities
and obligations of U.S.
government corporations
and agencies ............. $103,826,052 26.0% $113,288,092 30.3%
Obligations of states and
political subdivisions ... 41,989,442 10.5 30,975,611 8.3
Mortgage-backed securities 40,013,569 10.0 44,122,018 11.8
------------ ------- ------------ ------
Total securities held-
to-maturity ............ 185,829,063 46.5 188,385,721 50.4
------------ ------- ------------ ------
Securities available-for-sale:
Fixed maturity securities:
Obligations of states and
political subdivisions ... 130,945,594 32.8 114,538,500 30.6
Foreign governments ........ - - 2,573,101 .7
Public utilities ........... 8,760,899 2.2 8,970,242 2.4
Corporate securities ....... 32,861,713 8.2 20,023,965 5.3
Redeemable preferred stocks 149,000 - 688,350 .2
------------ ------- ------------ ------
Total fixed maturity
securities ............. 172,717,206 43.2 146,794,158 39.2
Equity securities:
Common stock mutual funds .. 20,988,146 5.3 15,963,269 4.3
Non-redeemable preferred
stocks ................... 5,273,011 1.3 5,273,012 1.4
------------ ------ ------------ ------
Total equity securities .. 26,261,157 6.6 21,236,281 5.7
------------ ------ ------------ ------
Total securities
available-for-sale ..... 198,978,363 49.8 168,030,439 44.9
------------ ------ ------------ ------
Short-term investments ......... 14,926,994 3.7 17,553,606 4.7
------------ ------ ------------ ------
Total investments ........ $399,734,420 100.0% $373,969,766 100.0%
============ ====== ============ ======
Fixed maturity securities held by the Company generally have an
investment quality rating of "A" or better by independent rating agencies.
The following table shows the composition of the Company's fixed maturity
securities, by rating, as of December 31, 1997.
Securities Securities
held-to-maturity available-for-sale
(at amortized cost) (at fair value)
--------------------- ---------------------
Amount Percent Amount Percent
Rating(1) ------------ ------- ------------ -------
Aaa ..................... $185,829,063 100.0% $ 46,374,134 25.8%
Aa ...................... - - 56,387,608 31.4
A ....................... - - 76,037,537 42.3
Baa ..................... - - 352,209 .2
Ba ...................... - - 501,250 .3
------------ ------ ------------ ------
Total fixed maturities $185,829,063 100.0% $179,652,738 100.0%
============ ====== ============ ======
(1) Ratings for preferred stocks and fixed maturity securities with initial
maturities greater than one year are assigned by Moody's Investor's
Services, Inc. Moody's rating process seeks to evaluate the quality of a
security by examining the factors that affect returns to investors.
Moody's ratings are based on quantitative and qualitative factors, as
well as the economic, social and political environment in which the
issuing entity exists. The quantitative factors include debt coverage,
sales and income growth, cash flows and liquidity ratios. Qualitative
factors include management quality, access to capital markets and the
quality of earnings and balance sheet items. Ratings for securities with
initial maturities less than one year are based on an evaluation of the
underlying assets or the credit rating of the issuer's parent company.
The amortized cost and estimated fair value of fixed maturity securities
at December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Estimated
Amortized fair
cost value
------------ ------------
Securities held-to-maturity:
Due in one year or less ................... $ 13,989,831 $ 14,142,820
Due after one year through five years ..... 50,088,102 51,876,854
Due after five years through ten years .... 66,752,623 70,871,137
Due after ten years ....................... 14,984,941 15,354,268
Mortgage-backed securities ................ 40,013,566 41,589,934
------------ ------------
Totals .................................. $185,829,063 $193,835,013
============ ============
Securities available-for-sale:
Due in one year or less ................... $ 13,803,121 $ 13,816,747
Due after one year through five years ..... 56,240,665 57,182,974
Due after five years through ten years .... 42,789,912 45,216,266
Due after ten years ....................... 59,883,508 63,436,751
------------ ------------
Totals .................................. $172,717,206 $179,652,738
============ ============
The mortgage-backed securities shown in the above table include
$22,523,833 of securities issued by government corporations and agencies and
$17,489,733 of collateralized mortgage obligations (CMOs). CMOs are
securities backed by mortgages on real estate which come due at various times.
The Company has attempted to minimize the prepayment risks associated with
mortgage-backed securities by not investing in "principal only" and "interest
only" CMOs. The CMOs that the Company has invested in are designed to reduce
the risk of prepayment by providing predictable principal payment schedules
within a designated range of prepayments. Investment yields may vary from
those anticipated due to changes in prepayment patterns of the underlying
collateral.
Investment results of the Company for the periods indicated are shown in
the following table:
Year ended December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Average invested assets (1) ........ $386,852,093 $367,276,871 $349,036,057
Investment income (2) .............. 23,759,988 23,907,599 23,173,794
Average yield ...................... 6.14% 6.51% 6.64%
Realized investment gains .......... $ 4,100,006 $ 1,890,923 $ 1,043,730
(1) Average of the aggregate invested amounts (amortized cost) at the
beginning and end of the year.
(2) Investment income is net of investment expenses and does not include
realized gains or provision for income taxes.
EMPLOYEES
- ---------
EMC Insurance Group Inc. has no employees of its own, although
approximately 15 employees of Employers Mutual perform administrative duties
on a part-time basis. Otherwise, the Company's business activities are
conducted by employees of Employers Mutual, the nonstandard risk automobile
insurance subsidiary and one of the property and casualty insurance
subsidiaries, which have 1,782, 13 and 67 employees, respectively. The
property and casualty insurance subsidiaries share the costs associated with
the pooling agreement in accordance with their pool participation percentages.
See "Property and Casualty Insurance - Pooling Agreement."
REGULATION
- ----------
The Company's insurance subsidiaries are subject to extensive regulation
and supervision by their home states, as well as those in which they do
business. The purpose of such regulation and supervision is primarily to
provide safeguards for policyholders rather than to protect the interests of
stockholders. The insurance laws of the various states establish regulatory
agencies with broad administrative powers, including the power to grant or
revoke operating licenses and to regulate trade practices, investments,
premium rates, deposits of securities, the form and content of financial
statements and insurance policies, accounting practices and the maintenance of
specified reserves and capital for the protection of policyholders.
Premium rate regulation varies greatly among jurisdictions and lines of
insurance. In most states in which the Company's subsidiaries write
insurance, premium rates for their lines of insurance are subject to either
prior approval or limited review upon implementation. States require rates
for property and casualty insurance that are adequate, not excessive, and not
unfairly discriminatory.
The Company's insurance subsidiaries are required to file detailed annual
reports with the appropriate regulatory agency in each state where they do
business based on applicable statutory regulations, which differ from
generally accepted accounting principles. Their businesses and accounts are
subject to examination by such agencies at any time. Since EMC Insurance
Group Inc. and Employers Mutual are domiciled in Iowa, the State of Iowa
exercises principal regulatory supervision, and Iowa law requires periodic
examination. The Company's insurance subsidiaries are subject to examination
by state insurance departments on a periodic basis as applicable law requires.
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 which exceed the greater of 10 percent of statutory surplus as
regards policyholders as of the preceding December 31, or net income of the
preceding calendar year on a statutory basis. Both Illinois and North Dakota
impose restrictions which are similar to those of Iowa on the payment of
dividends and distributions. At December 31, 1997, $12,722,219 was available
for distribution in 1998 to EMC Insurance Group Inc. 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
property/casualty insurers that are in (or are perceived as approaching)
financial difficulty by establishing minimum capital needs based on the risks
applicable to the operations of the individual insurer. The risk-based
capital requirements for property and casualty insurance companies measure
three major areas of risk: asset risk, credit risk and underwriting risk.
Companies having less statutory surplus than required by the risk-based
capital requirements are subject to varying degrees of regulatory scrutiny and
intervention, depending on the severity of the inadequacy. At December 31,
1997, each of the Company's insurance subsidiaries has a ratio of total
adjusted capital to risk-based capital well in excess of the minimum level
required.
ITEM 2. PROPERTIES.
- ------- -----------
Lease costs of the Company's two office facilities in West Des Moines,
Iowa total approximately $71,000 and $31,000 annually. These leases expire on
February 28, 1998 and November 30, 1998, at which time the operations will
move into facilities owned by Employers Mutual.
Lease costs of the Company's office facilities in Oak Brook, Illinois,
and Bismarck, North Dakota, which total approximately $288,000 and $128,000
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 which 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 "Market for Common Stock and Related Security Holder Matters" section
from the Company's Annual Report to Stockholders for the year ended December
31, 1997, which is included as Exhibit 13(d) to this Form 10-K, is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
- ------- ------------------------
The "Selected Consolidated Financial Data" section from the Company's
Annual Report to Stockholders for the year ended December 31, 1997, 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, 1997, 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, 1997, 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 21, 1998, 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 44 President and Chief Executive Officer of the
Company and of Employers Mutual since 1992
and Treasurer of both organizations since
1996. He was elected President of the
Company and Employers Mutual in 1991.
Mr. Kelley was Executive Vice President of
the Company and Employers Mutual from 1989
to 1991. He has been employed by Employers
Mutual since 1985.
Fred A. Schiek 63 Executive Vice President and Chief Operating
Officer of the Company and of Employers
Mutual since 1992. He was Vice President of
Employers Mutual from 1983 until 1992. He
has been employed by Employers Mutual since
1959.
John D. Isenhart 60 Senior Vice President of the Company since
1997 and of Employers Mutual since 1992.
He has been employed by Employers Mutual
since 1963.
Margaret A. Ball 59 Senior Vice President of the Company since
February 1998 and of Employers Mutual since
1997. She has been employed by Employers
Mutual since 1971.
Ronald W. Jean 49 Senior Vice President of the Company and
Employers Mutual since 1997. He has been
employed by Employers Mutual since 1979.
Raymond W. Davis 52 Vice President of the Company and Employers
Mutual since 1985. He has been employed by
Employers Mutual since 1979.
NAME AGE POSITION
Donald D. Klemme 52 Vice President and Secretary of the Company
since 1996. Vice President of Employers
Mutual since 1987. He has been employed by
Employers Mutual since 1972.
David O. Narigon 45 Vice President of the Company and of
Employers Mutual since 1989. He has been
employed by Employers Mutual since 1983.
Mark E. Reese 40 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
On February 28, 1995, Mr. Ronnie D. Hallenbeck was designated as a
Section 16 reporting person, however, the Company failed to inform him of this
status until February 23, 1998. Due to this lack of notice, Mr. Hallenbeck
was not aware of his obligation to file appropriate reports required by
Section 16(a) of the Securities Exchange Act of 1934. Since being advised of
this designation, Mr. Hallenbeck has filed two late reports identifying his
status as a reporting person and nine events which were not reported on a
timely basis. All of Mr. Hallenbeck's activities during this period of non-
reporting involved purchases of Company stock resulting in his current
holdings of 610 shares and periodic awards of options under Employers Mutual's
Incentive Stock Option Plan.
ITEM 11. EXECUTIVE COMPENSATION.
- -------- -----------------------
See the information under the caption "Compensation of Management" in the
Company's Proxy Statement in connection with its Annual Meeting to be held on
May 21, 1998, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- ---------------------------------------------------------------
See the information under the captions "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Company's
Proxy Statement in connection with its Annual Meeting to be held on May 21,
1998, 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 21, 1998, which information is incorporated herein
by reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- -------- -----------------------------------------------------------------
(a) List of Financial Statements and Schedules.
Page
----
1. Financial Statements
Independent Auditors' Report ................................ 8*
Consolidated Balance Sheets, December 31, 1997 and 1996 ..... 21-22*
Consolidated Statements of Income for the Years ended
December 31, 1997, 1996 and 1995 ......................... 23*
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 1997, 1996 and 1995 ............. 24*
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1996 and 1995 ......................... 25-26*
Notes to Consolidated Financial Statements .................. 27-48*
Form 10-K
2. Schedules Page
-------
Independent Auditors' Report on Schedules ................... 33
Schedule I - Summary of Investments ....................... 34
Schedule II - Condensed Financial Information of Registrant 35
Schedule III - Supplementary Insurance Information .......... 38
Schedule IV - Reinsurance .................................. 39
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations ..... 40
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 notes to consolidated financial
statements or are not significant in amount.
* Refers to the respective page of EMC Insurance Group Inc.'s 1997
Annual Report to Stockholders. The Consolidated Financial Statements
and Independent Auditors' Report, which are included as Exhibit
13(c), are incorporated by reference. With the exception of the
portions of such Annual Report specifically incorporated by reference
in this Item and Items 5, 6, 7 and 8, such Annual Report shall not be
deemed filed as part of this Form 10-K or otherwise subject to the
liabilities of Section 18 of the Securities Exchange Act of 1934.
3. Management contracts and compensatory plan arrangements
Exhibit 10(b). Management Incentive Compensation Plan.
Exhibit 10(d). Employers Mutual Casualty Company 1982 Incentive
Stock Option Plan, as amended.
Exhibit 10(f). Deferred Bonus Compensation Plans.
Exhibit 10(g). EMC Reinsurance Company Executive Bonus Program.
Exhibit 10(i). Employers Mutual Casualty Company Excess Retirement
Benefit Agreement.
Exhibit 10(k). Employers Mutual Casualty Company 1993 Employee
Stock Purchase Plan.
Exhibit 10(l). 1993 Employers Mutual Casualty Company Incentive
Stock Option Plan.
Exhibit 10(m). Employers Mutual Casualty Company Non-Employee
Director Stock Option Plan.
Exhibit 10(n). Employers Mutual Casualty Company Supplemental
Executive Retirement 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, 1988.)
(b) Bylaws of the Company, as amended. (Incorporated by
reference to the Company's Form 10-K for the calendar
year ended December 31, 1992.)
10. Material contracts.
(a) Quota Share Reinsurance Contract between Employers Mutual
Casualty Company and EMC Reinsurance Company, as amended.
(b) Management Incentive Compensation Plan. (Incorporated by
reference to the Company's Form 10-K for the calendar year
ended December 31, 1983.)
(c) EMC Insurance Companies reinsurance pooling agreements
between Employers Mutual Casualty Company and certain of its
affiliated companies, as amended.
(d) Employers Mutual Casualty Company 1982 Incentive Stock Option
Plan, as amended. (Incorporated by reference to the Company's
Form 10-K for the calendar year ended December 31, 1986.)
(e) Excess of loss reinsurance contract between Employers Mutual
Casualty Company and Farm and City Insurance Company.
(Incorporated by reference to the Company's Form 10-K for the
calendar year ended December 31, 1985.)
(f) Deferred Bonus Compensation Plans. (Incorporated by reference
to the Company's Form 10-K for the calendar year ended December
31, 1986.)
(g) EMC Reinsurance Company Executive Bonus Program. (Incorporated
by reference to the Company's Form 10-K for the calendar year
ended December 31, 1989.)
(h) EMC Insurance Group Inc. Amended and Restated Dividend
Reinvestment and Common Stock Purchase Plan. (Incorporated by
reference to Registration No. 33-34499.)
(i) 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, 1989.)
(j) Aggregate Catastrophe Excess of Loss Retrocession Agreement
between EMC Reinsurance Company and Employers Mutual Casualty
Company. (Incorporated by reference to the Company's Form
10-K for the calendar year ended December 31, 1995.)
(k) Employers Mutual Casualty Company 1993 Employee Stock Purchase
Plan. (Incorporated by reference to Registration No. 33-49335.)
(l) 1993 Employers Mutual Casualty Company Incentive Stock Option
Plan. (Incorporated by reference to Registration Nos. 33-49337
and 333-45279.)
(m) Employers Mutual Casualty Company Non-Employee Director Stock
Option Plan. (Incorporated by reference to Registration No.
33-49339.)
(n) Employers Mutual Casualty Company Supplemental Executive
Retirement Plan. (Incorporated by reference to the Company's
Form 10-K for the calendar year ended December 31, 1995.)
13. Annual Report to Security Holders.
(a) Selected Financial Data from the Company's 1997 Annual Report to
Stockholders.
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations from the Company's 1997 Annual Report to
Stockholders.
(c) Consolidated Financial Statements from the Company's 1997
Annual Report to Stockholders.
(d) Market for Common Stock and Related Security Holder Matters from
the Company's 1997 Annual Report to Stockholders.
21. Subsidiaries of the Registrant.
23. Consent of KPMG Peat Marwick LLP with respect to Forms S-8
(Registration Nos. 2-93738, 33-49335, 33-49337, 33-49339 and
333-45279) and Form S-3 (Registration No. 33-34499).
24. Power of Attorney.
(d) Financial statements required by Regulation S-X which are excluded from
the Annual Report to Stockholders by Rule 14a-3(b)(1).
None.
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 20,
1998.
EMC INSURANCE GROUP INC.
/s/ Bruce G. Kelley
------------------------
Bruce G. Kelley
President, Treasurer and
Chief Executive Officer
/s/ Mark E. Reese
------------------------
Mark E. Reese
Vice President - Chief Financial Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 20, 1998.
/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
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
The Board of Directors and Stockholders
EMC Insurance Group Inc.:
Under date of February 26, 1998, we reported on the consolidated balance
sheets of EMC Insurance Group Inc. and Subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997, as contained in Part II, Item 8 of the Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related supplementary financial statement
schedules listed in Part IV, Item 14(a)2. These supplementary financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplementary financial
statement schedules based on our audits.
In our opinion, such supplementary 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 Peat Marwick LLP
Des Moines, Iowa
February 26, 1998
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule I - Summary of Investments -
Other Than Investments in Related Parties
December 31, 1997
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 .............. $103,826,052 $109,820,127 $103,826,052
States, municipalities and
political subdivisions ....... 41,989,442 42,424,949 41,989,442
Mortgage - backed securities ... 40,013,569 41,589,937 40,013,569
------------ ------------ ------------
Total fixed maturity securities 185,829,063 193,835,013 185,829,063
------------ ------------ ------------
Securities available-for-sale:
Fixed maturities:
States, municipalities and
political subdivisions ....... 130,945,594 137,218,479 137,218,479
Public utilities ............... 8,760,899 8,832,942 8,832,942
Corporate securities ........... 32,861,713 33,446,729 33,446,729
Redeemable preferred stocks .... 149,000 154,588 154,588
------------ ------------ ------------
Total fixed maturity securities 172,717,206 179,652,738 179,652,738
Equity securities:
Common stock mutual funds ...... 20,988,146 25,075,965 25,075,965
Non-redeemable preferred stocks 5,273,011 5,896,767 5,896,767
------------ ------------ ------------
Total equity securities ...... 26,261,157 30,972,732 30,972,732
Short-term investments ............. 14,926,994 14,926,994 14,926,994
------------ ------------ ------------
Total investments ...... $399,734,420 $419,387,477 $411,381,527
============ ============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31,
--------------------------
1997 1996
ASSETS ------------ ------------
- ------
Investment in common stock of
subsidiaries (equity method) .................. $154,839,418 $141,767,346
Fixed maturity securities held-to-maturity,
at amortized cost ............................. 6,494,491 4,488,040
Short-term investments .......................... 909,698 2,323,602
Cash ............................................ 3,884 180,917
Accrued investment income ....................... 108,945 74,259
Accounts receivable ............................. 166,488 30,234
Indebtedness of related party ................... - 14,375
------------ ------------
Total assets ............................... $162,522,924 $148,878,773
============ ============
LIABILITIES
- -----------
Accounts payable ................................ $ 127,846 $ 112,169
Income taxes payable ............................ 37,000 37,000
Indebtedness to related party ................... 8,490 -
Deferred tax liability .......................... 3,132 576
------------ ------------
Total liabilities .......................... 176,468 149,745
------------ ------------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 11,351,119 shares
in 1997 and 11,084,461 shares in 1996 ......... 11,351,119 11,084,461
Additional paid-in capital ...................... 65,916,681 62,762,613
Retained earnings ............................... 85,078,656 74,881,954
------------ ------------
Total stockholders' equity ................. 162,346,456 148,729,028
------------ ------------
Total liabilities and stockholders' equity $162,522,924 $148,878,773
============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Condensed Statements of Income
Years ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Equity in undistributed earnings ...... $ 9,377,037 $11,914,842 $13,123,772
Dividends received from
consolidated subsidiaries ........... 3,750,032 3,060,026 4,200,019
Investment income ..................... 445,816 406,952 357,408
----------- ----------- -----------
13,572,885 15,381,820 17,681,199
Operating expenses .................... 313,762 313,087 307,713
----------- ----------- -----------
Income from operations before
income taxes ..................... 13,259,123 15,068,733 17,373,486
Income taxes .......................... 42,556 34,569 24,658
----------- ----------- -----------
Net income............... $13,216,567 $15,034,164 $17,348,828
=========== =========== ===========
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Condensed Statements of Cash Flows
Years ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Net cash provided by
operating activities ................ $ 3,702,567 $ 3,178,773 $ 4,269,852
----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed maturity
securities held-to-maturity ....... (3,999,340) (2,485,938) (2,002,500)
Disposals of fixed maturity
securities held-to-maturity ....... 2,000,000 2,000,000 -
Disposals of fixed maturity
securities available-for-sale ..... - - 1,000,000
Net sales (purchases) of short-term
investments ...................... 1,413,904 364,526 (515,869)
----------- ----------- -----------
Net cash used in
investing activities ........... (585,436) (121,412) (1,518,369)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock ........... 1,019,919 1,251,119 850,317
Dividends paid to stockholders ..... (4,314,083) (4,017,222) (3,653,299)
(Purchases) sales of treasury
stock, net ....................... - (129,877) 9,646
----------- ----------- -----------
Net cash used in financing
activities ..................... (3,294,164) (2,895,980) (2,793,336)
------------ ----------- -----------
Net (decrease) increase in cash ....... (177,033) 161,381 (41,853)
Cash at beginning of year ............. 180,917 19,536 61,389
----------- ----------- -----------
Cash at end of year ................... $ 3,884 $ 180,917 $ 19,536
=========== =========== ===========
Income taxes paid ..................... $ 40,000 $ 20,993 $ 31,342
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information
For Years Ended December 31, 1997, 1996 and 1995
Amortization
Deferred of deferred
policy Losses and Net Losses and policy
acquisition settlement Unearned Premium investment settlement acquisition
Segment costs expenses premiums revenue income expenses costs
------- ----------- ------------ ----------- ------------ ----------- ------------ ------------
Year ended December 31, 1997:
Property and casualty insurance $ 8,711,171 $151,738,249 $46,506,654 $132,874,752 $15,528,726 $ 97,083,777 $ 25,328,393
Reinsurance ................... 1,611,531 58,374,665 7,325,143 34,105,686 6,615,029 23,305,824 8,253,329
Nonstandard risk automobile
insurance ................... 237,955 7,665,028 1,025,666 10,237,808 1,011,799 9,463,703 2,360,370
Excess and surplus lines
insurance agency ............ - - - - 158,618 - -
Parent company ................ - - - - 445,816 - -
----------- ------------ ----------- ------------ ----------- ------------ ------------
Consolidated ............. $10,560,657 $217,777,942 $54,857,463 $177,218,246 $23,759,988 $129,853,304 $ 35,942,092
=========== ============ =========== ============ =========== ============ ============
Year ended December 31, 1996:
Property and casualty insurance $ 7,335,953 $142,948,679 $40,278,119 $119,282,389 $15,828,102 $ 82,034,078 $ 22,505,659
Reinsurance ................... 1,482,796 51,816,998 6,739,983 36,674,831 6,436,095 25,180,022 7,951,458
Nonstandard risk automobile
insurance ................... 203,114 7,737,309 890,852 9,233,446 1,111,896 8,153,115 2,097,616
Excess and surplus lines
insurance agency ............ - - - - 124,554 - -
Parent company ................ - - - - 406,952 - -
----------- ------------ ----------- ------------ ----------- ------------ ------------
Consolidated ............. $ 9,021,863 $202,502,986 $47,908,954 $165,190,666 $23,907,599 $115,367,215 $ 32,554,733
=========== ============ =========== ============ =========== ============ ============
Year ended December 31, 1995:
Property and casualty insurance $ 6,777,303 $146,575,010 $39,973,174 $116,439,266 $15,428,401 $ 74,926,023 $ 21,742,128
Reinsurance ................... 1,729,903 50,748,972 7,863,197 35,825,953 6,067,678 23,744,247 8,191,751
Nonstandard risk automobile
insurance ................... 207,563 8,098,127 930,776 10,001,031 1,175,392 9,482,008 2,218,737
Excess and surplus lines
insurance agency ............ - - - - 144,915 - -
Parent company ................ - - - - 357,408 - -
----------- ------------ ----------- ------------ ----------- ------------ ------------
Consolidated ............. $ 8,714,769 $205,422,109 $48,767,147 $162,266,250 $23,173,794 $108,152,278 $ 32,152,616
=========== ============ =========== ============ =========== ============ ============
Other
underwriting Premiums
Segment expenses written
------- ----------- ------------
Year ended December 31, 1997
Property and casualty insurance $16,168,332 $139,537,302
Reinsurance ................... 3,498,497 34,690,846
Nonstandard risk automobile
insurance ................... 604,897 10,372,622
Excess and surplus lines
insurance agency ............ (417,252) -
Parent company ................ 313,762 -
----------- ------------
Consolidated ............. $20,168,236 $184,600,771
=========== ============
Year ended December 31, 1996
Property and casualty insurance $15,399,752 $119,640,828
Reinsurance ................... 3,506,366 35,551,617
Nonstandard risk automobile
insurance ................... 541,985 9,193,521
Excess and surplus lines
insurance agency ............ (333,880) -
Parent company ................ 313,087 -
----------- ------------
Consolidated ............. $19,427,310 $164,385,966
=========== ============
Year ended December 31, 1995
Property and casualty insurance $14,548,773 $117,736,744
Reinsurance ................... 3,391,578 35,933,493
Nonstandard risk automobile
insurance ................... 557,028 9,819,022
Excess and surplus lines
insurance agency ............ (338,001) -
Parent company ................ 307,713 -
----------- ------------
Consolidated ............. $18,467,091 $163,489,259
=========== ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule IV - Reinsurance
For years ended December 31, 1997, 1996 and 1995
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
------------ ------------ ------------ ------------ ----------
Year ended December 31, 1997:
Earned premiums:
Consolidated property and casualty
insurance .......................... $169,304,584 $165,004,455 $172,918,117 $177,218,246 97.6%
============ ============ ============ ============ ==========
Year ended December 31, 1996:
Earned premiums:
Consolidated property and casualty
insurance .......................... $154,859,778 $154,345,622 $164,676,510 $165,190,666 99.7%
============ ============ ============ ============ ==========
Year ended December 31, 1995:
Earned premiums:
Consolidated property and casualty
insurance .......................... $151,450,871 $150,630,590 $161,445,969 $162,266,250 99.5%
============ ============ ============ ============ ==========
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule VI - Supplemental Insurance Information Concerning
Property-Casualty Insurance Operations
For Years Ended December 31, 1997, 1996 and 1995
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, 1997: $10,560,657 $217,777,942 $ -0- $54,857,463 $177,218,246 $23,155,554
=========== ============ ======== =========== ============ ===========
Year ended December 31, 1996: $ 9,021,863 $202,502,986 $ -0- $47,908,954 $165,190,666 $23,376,093
=========== ============ ======== =========== ============ ===========
Year ended December 31, 1995: $ 8,714,769 $205,422,109 $ -0- $48,767,147 $162,266,250 $22,671,471
=========== ============ ======== =========== ============ ===========
Losses and
settlement expenses Amortization
incurred related to of deferred Paid
(1) (2) policy losses and
Consolidated property- Current Prior acquisition settlement Premiums
casualty entities Year Years costs expenses Written
- ----------------------------- ------------ ----------- ------------ ------------ ------------
Year ended December 31, 1997: $137,300,762 ($ 7,447,458) $ 35,942,092 $113,811,729 $184,600,771
============ =========== ============ ============ ============
Year ended December 31, 1996: $131,375,234 ($16,008,019) $ 32,554,733 $119,856,427 $164,385,966
============ =========== ============ ============ ============
Year ended December 31, 1995: $123,876,601 ($15,724,323) $ 32,152,616 $103,991,590 $163,489,259
============ =========== ============ ============ ============
Difference between Electronic and Circulated 10-k
- --------------------------------------------------
The index to exhibits in the electronic format indicates the exhibits
are included in the direct transmission. The circulated document
contains the page numbers of the exhibits.
EMC Insurance Group Inc. and Subsidiaries
Index to Exhibits
Exhibit
number Item
- ------- ----
10(a) Quota Share Reinsurance Contract Included in
between Employers Mutual Casualty direct transmission
Company and EMC Reinsurance Company.
10(c) EMC Insurance Companies reinsurance Included in
pooling agreements between Employers direct transmission
Mutual Casualty Company and certain of
its affiliated companies.
13(a) Selected Financial Data. Included in
direct transmission
13(b) Management's Discussion and Analysis Included in
of Financial Condition and Results direct transmission
of Operations.
13(c) Financial Statements and Supplementary Included in
Data. direct transmission
13(d) Market for Registrant's Common Equity Included in
and Related Stockholder Matters. direct transmission
21 Subsidiaries of the Registrant. Included in
direct transmissin
23 Consent of KPMG Peat Marwick LLP with Included in
respect to Forms S-8 and Form S-3. direct transmission
24 Power of Attorney. Included in
direct transmission