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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, 2001
[ ] 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 1, 2002 was $38,110,841.
The number of shares outstanding of the registrant's common stock, $1.00
par value, on March 1, 2002, were 11,342,700.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's annual report to stockholders for the
year ended December 31, 2001 are incorporated by reference under Parts II and
IV.
2. Portions of the registrant's definitive proxy statement, which will be
filed with the Securities and Exchange Commission on or before April 17, 2002,
are incorporated by reference under Part III.
TABLE OF CONTENTS
Part I
Item 1. Business ........................................................ 2
Item 2. Properties ...................................................... 25
Item 3. Legal Proceedings ............................................... 25
Item 4. Submission of Matters to a Vote of Security Holders ............. 25
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters .................................. 26
Item 6. Selected Financial Data ......................................... 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ...... 26
Item 8. Financial Statements and Supplementary Data ..................... 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .......................... 27
Part III
Item 10. Directors and Executive Officers of the Registrant .............. 28
Item 11. Executive Compensation .......................................... 29
Item 12. Security Ownership of Certain Beneficial Owners
and Management ............................................... 29
Item 13. Certain Relationships and Related Transactions .................. 29
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K .................................................. 30
Index to Financial Statement Schedules ................................... 30
Signatures ............................................................... 33
Index to Exhibits ........................................................ 43
PART I
------
ITEM 1. BUSINESS.
- ------- ---------
GENERAL
- -------
EMC Insurance Group Inc. is an insurance holding company incorporated in
Iowa in 1974. EMC Insurance Group Inc. is 79.5 percent owned by Employers
Mutual Casualty Company (Employers Mutual), a multiple-line property and
casualty insurance company organized as an Iowa mutual insurance company in
1911 that is licensed in all 50 states and the District of Columbia. The term
"Company" is used interchangeably to describe EMC Insurance Group Inc. (Parent
Company only) and EMC Insurance Group Inc. and its subsidiaries. Employers
Mutual and all of its subsidiaries (including the Company) and an affiliate,
are referred to as the "EMC Insurance Companies."
The Company conducts its insurance business through two business segments
as follows:
...............................
: :
: EMC INSURANCE GROUP INC. :
:.............................:
:
Property and :
Casualty Insurance : Reinsurance
......................:................................
: :
: :
Illinois EMCASCO Insurance Company (Illinois EMCASCO) EMC
Dakota Fire Insurance Company (Dakota Fire) Reinsurance
Farm and City Insurance Company (Farm and City) Company
EMCASCO Insurance Company (EMCASCO)
:
:
EMC Underwriters, LLC
Illinois EMCASCO was formed in Illinois in 1976 and was redomesticated to
Iowa in 2001, Dakota Fire was formed in North Dakota in 1957 and EMCASCO was
formed in Iowa in 1958 for the purpose of writing property and casualty
insurance. Farm and City was formed in Iowa in 1962 to write nonstandard risk
automobile insurance and was purchased by the Company in 1984. These
companies are licensed to write insurance in a total of 37 states and are
participants in a pooling agreement with Employers Mutual (see "Property and
Casualty Insurance - Pooling Agreement").
EMC Reinsurance Company was formed in 1981 to assume reinsurance
business from Employers Mutual. The company assumes a 100 percent quota share
portion of Employers Mutual's assumed reinsurance business, exclusive of
certain reinsurance contracts, and is licensed to do business in nine states.
The Company's excess and surplus lines insurance agency, EMC
Underwriters, LLC, was acquired in 1985. The company was formed in Iowa in
1975 as a broker for excess and surplus lines insurance. Effective December
31, 1998, the excess and surplus lines insurance agency was converted to a
limited liability company and the ownership was contributed to EMCASCO.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
- ---------------------------------------------
For information concerning the Company's revenues, operating income and
identifiable assets attributable to each of its industry segments over the
past three years, see note 8 of Notes to Consolidated Financial Statements
under Item 8 of this Form 10-K.
PROPERTY AND CASUALTY INSURANCE
- -------------------------------
POOLING AGREEMENT
The four property and casualty insurance subsidiaries of the Company and
two subsidiaries and an affiliate of Employers Mutual (Union Insurance Company
of Providence, EMC Property & Casualty Company and Hamilton Mutual Insurance
Company) are parties to reinsurance pooling agreements with Employers Mutual
(collectively the "pooling agreement"). Under the terms of the pooling
agreement, each company cedes to Employers Mutual all of its insurance
business, with the exception of any voluntary reinsurance business assumed
from nonaffiliated insurance companies, and assumes from Employers Mutual an
amount equal to its participation in the pool. All losses, settlement
expenses and other underwriting and administrative expenses, excluding the
voluntary reinsurance business assumed by Employers Mutual from nonaffiliated
insurance companies, are prorated among the parties on the basis of
participation in the pool. The aggregate participation of the Company's
property and casualty insurance subsidiaries is 23.5 percent. Operations of
the pool give rise to intercompany balances with Employers Mutual, which are
settled on a quarterly basis. The investment and income tax activities of the
pool participants are not subject to the pooling agreement.
The purpose of the pooling agreement is to spread the risk of an exposure
insured by any of the pool participants among all the companies. The pooling
agreement produces a more uniform and stable underwriting result from year to
year for all companies in the pool than might be experienced individually. In
addition, each company benefits from the capacity of the entire pool, rather
than being limited to policy exposures of a size commensurate with its own
assets, and from the wide range of policy forms, lines of insurance written,
rate filings and commission plans offered by each of the companies. A single
set of reinsurance treaties is maintained for the protection of all companies
in the pool. The pooling agreement is continuous, but may be amended or
terminated at the end of any calendar year as to any one or more parties.
PRINCIPAL PRODUCTS
The Company's property and casualty insurance subsidiaries and the other
parties to the pooling agreement underwrite both commercial and personal lines
of insurance. The following table sets forth the aggregate direct written
premiums of all parties to the pooling agreement for the three years ended
December 31, 2001.
Percent Percent Percent
of of of
Line of Business 2001 total 2000 total 1999 total
- ---------------- -------- ----- -------- ----- -------- -----
(Dollars in thousands)
Commercial Lines:
Automobile ............ $216,371 21.7% $177,937 21.2% $157,095 20.8%
Property .............. 162,670 16.4 135,639 16.2 118,939 15.8
Workers' compensation 208,652 21.0 155,752 18.6 126,285 16.7
Liability ............. 176,774 17.8 141,184 16.8 122,528 16.2
Other ................. 19,325 1.9 17,380 2.0 16,666 2.2
-------- ----- -------- ----- -------- -----
Total commercial lines 783,792 78.8 627,892 74.8 541,513 71.7
-------- ----- -------- ----- -------- -----
Personal Lines:
Automobile ............ 126,280 12.7 134,763 16.1 138,168 18.3
Property .............. 81,124 8.2 73,996 8.8 73,380 9.7
Liability ............. 3,284 0.3 2,634 0.3 2,280 0.3
-------- ----- -------- ----- -------- -----
Total personal lines 210,688 21.2 211,393 25.2 213,828 28.3
-------- ----- -------- ----- -------- -----
Total ............ $994,480 100.0% $839,285 100.0% $755,341 100.0%
======== ===== ======== ===== ======== =====
Effective January 1, 2001, the pool participants began recording the
full-term written premium at the inception of insurance policies that are
billed on an installment basis. Previously, such amounts were recorded as
each installment became due. As a result, written premiums for 2001 increased
$59,083,000, primarily in the commercial lines of business. Earned premiums
were not affected by this change, as unearned premiums were increased by the
same amount.
MARKETING
Marketing of insurance by the parties to the pooling agreement, excluding
the nonstandard risk automobile insurance sold by Farm and City, is conducted
through 17 branch offices located throughout the United States and
approximately 3,200 independent agents. These branch offices allow the
Company to respond quickly to changes in local market conditions. Each branch
office employs underwriting, claims, marketing and risk improvement
representatives, as well as field auditors and branch administrative
technicians. The branch offices are supported by technicians and specialists
that operate out of Employers Mutual's home office. Systems are in place to
monitor the underwriting results of each branch office and to maintain
guidelines and policies consistent with the underwriting and marketing
environment in each region.
Farm and City specializes in insuring private passenger automobile risks
that are found to be unacceptable in the standard automobile insurance market.
Farm and City is licensed in a six state area that includes Iowa, Kansas,
Missouri, Nebraska, North Dakota and South Dakota. Private passenger
automobile policies are solicited through the Independent Agency System using
approximately 725 agencies.
The following table sets forth the geographic distribution of the
aggregate direct written premiums of all parties to the pooling agreement for
the three years ended December 31, 2001.
2001 2000 1999
---- ---- ----
Alabama ............................ 2.8% 3.2% 3.7%
Arizona ............................ 3.8 3.8 3.7
Illinois ........................... 5.1 4.8 4.8
Iowa ............................... 16.8 17.4 18.1
Kansas ............................. 8.8 8.2 7.8
Michigan ........................... 4.2 4.0 3.7
Minnesota .......................... 3.5 3.5 3.6
Nebraska ........................... 7.0 6.9 6.9
North Carolina ..................... 3.1 2.9 2.9
North Dakota ....................... 2.6 3.1 3.2
Texas .............................. 5.2 5.3 4.9
Wisconsin .......................... 5.0 4.5 4.3
Other * ............................ 32.1 32.4 32.4
----- ----- -----
100.0% 100.0% 100.0%
* Includes all other jurisdictions, none of which accounted for more than
3 percent.
COMPETITION
The property and casualty insurance business is very competitive. The
Company's property and casualty insurance subsidiaries and the other pool
members compete in the United States insurance market with numerous insurers,
many of which have greater financial resources. Competition in the types of
insurance in which the property and casualty insurance subsidiaries are
engaged is based on many factors, including the perceived overall financial
strength of the insurer, premiums charged, contract terms and conditions,
services offered, speed of claim payments, reputation and experience.
Because the insurance products of the pool members are marketed exclusively
through independent agencies, the Company faces competition to retain
qualified independent agencies, as well as competition within the agencies.
The pool members also compete with direct writers, who utilize salaried
employees and generally offer their products at a lower cost, exclusive
agencies who write insurance business for only one company, and to a lesser
extent Internet-based enterprises. The pool members utilize a profit-sharing
plan as an incentive for the independent agencies to place high-quality
insurance business with them.
BEST'S RATING
A.M. Best Company rates insurance companies based on their relative
financial strength and ability to meet their contractual obligations. A.M.
Best announced on July 10, 2001 that their rating of the EMC Insurance
Companies, which includes the Company's property and casualty insurance
subsidiaries, was changed from "A" (Excellent) to "A-" (Excellent). This
rating action reflects A.M. Best's opinion of the EMC Insurance Companies'
underwriting performance and operating losses during the three years ended
December 31, 2000. Despite this rating action, A.M. Best stated that the EMC
Insurance Companies' "Excellent" rating reflects its strong capitalization,
conservative operating strategies and local-market presence. A.M. Best
reevaluates its ratings from time to time (normally on an annual basis) and
there can be no assurance that the Company's property and casualty insurance
subsidiaries and the other pool members will maintain their current rating in
the future. Management believes that a Best's rating of "A-" (Excellent) or
better is important to the Company's business since many insureds require that
companies with which they insure be so rated. Best's publications indicate
that these ratings are assigned to companies that have achieved excellent
overall performance and have a strong ability to meet their obligations over a
long period of time. Best's ratings are based upon factors of concern to
policyholders and insurance agents and are not necessarily directed toward the
protection of investors.
REINSURANCE CEDED
The parties to the pooling agreement cede insurance in the ordinary
course of business for the purpose of limiting their maximum loss exposure
through diversification of their risks. The pool participants also purchase
catastrophe reinsurance to cover multiple losses arising from a single event.
All major reinsurance treaties, with the exception of the pooling
agreement and a boiler treaty, are on an "excess of loss" basis whereby the
reinsurer agrees to reimburse the primary insurer for covered losses in excess
of a predetermined amount, up to a stated limit. The boiler treaty provides
for 100 percent reinsurance of the pool's direct boiler coverage written.
Facultative reinsurance from approved domestic markets, which provides
reinsurance on an individual risk basis and requires specific agreement of the
reinsurer as to the limits of coverage provided, is purchased when coverage by
an insured is required in excess of treaty capacity or where a high-risk type
policy could expose the treaty reinsurance programs.
Each type of reinsurance coverage is purchased in layers, and each layer
may have a separate retention level. Retention levels are adjusted according
to reinsurance market conditions and the surplus position of EMC Insurance
Companies. The intercompany pooling arrangement aids efficient buying of
reinsurance since it allows for higher retention levels and correspondingly
decreased dependence on the reinsurance marketplace.
During 1999 the pool participants purchased aggregate property
catastrophe excess of loss reinsurance to cover losses arising from multiple
catastrophes. Due to substantial changes in both the terms and the cost of
the coverage, this reinsurance protection was not renewed for 2000 and
subsequent years.
A summary of the reinsurance treaties benefiting the parties to the
pooling agreement as of December 31, 2001 is presented below. Retention
amounts reflect the accumulated retentions of all layers within a treaty.
Type of Reinsurance Treaty Retention Limits
-------------------------- ----------- --------------------------
Property per risk ........... $ 2,000,000 100 percent of $18,000,000
Property catastrophe ........ $12,500,000 96 percent of $60,000,000
Casualty .................... $ 2,000,000 100 percent of $38,000,000
Workers' Compensation excess $ - $20,000,000 excess of
$40,000,000
Umbrella .................... $ 1,400,000(1) 100 percent of $ 8,600,000
Fidelity .................... $ 750,000(2) 95 percent of $ 4,250,000
Surety (other than select
accounts) ................. $ 1,750,000(3) 100 percent of $13,037,500
Surety (select accounts) .... $ 4,000,000(4) 100 percent of $26,000,000
Boiler ...................... $ 0 100 percent of $50,000,000
(1) An annual aggregate deductible of $3,600,000 must be reached before the
reinsurers may be petitioned.
(2) Subject to annual aggregate limits for all losses of $14,000,000.
(3) Subject to annual aggregate limits for all losses of $14,000,000 in the
first layer and $15,000,000 in the second layer.
(4) Subject to annual aggregate limits for all losses of $10,500,000 in the
first layer, $15,000,000 in the second layer and $15,000,000 in the third
layer.
Although reinsurance does not discharge the original insurer from its
primary liability to its policyholders, it is the practice of insurers for
accounting purposes to treat reinsured risks as risks of the reinsurer since
the primary insurer would only reassume liability in those situations where
the reinsurer is unable to meet the obligations it assumed under the
reinsurance agreements. The ability to collect reinsurance is subject to the
solvency of the reinsurers.
The major participants in the pool members' reinsurance programs as
of December 31, 2001 are presented below. The percentages represent the
reinsurers' share of the total reinsurance protection under all coverages.
Each type of coverage is purchased in layers, and an individual reinsurer may
participate in more than one type of coverage and at various layers within
these coverages. The property per risk, property catastrophe and casualty
reinsurance programs are handled by a reinsurance intermediary (broker). The
reinsurance of those programs is syndicated to approximately 40 domestic and
foreign reinsurers.
In formulating reinsurance programs, Employers Mutual is selective in its
choice of reinsurers. Employers Mutual selects reinsurers on the basis of
financial stability and long-term relationships, as well as price of the
coverage. Reinsurers are generally required to have a Best's rating of "A-"
or higher and policyholders' surplus of $50,000,000 ($100,000,000 for casualty
reinsurance).
Percent
of total 2001
Property per risk, property catastrophe reinsurance Best's
and casualty coverages: protection rating
- --------------------------------------- ---------- ------
Underwriters at Lloyd's of London .................... 20.3% A
Mutual Reinsurance Bureau ............................ 13.0 (2)
Transatlantic Reinsurance Company .................... 8.2 A++
AXA Corporate Solutions .............................. 7.5 A-
XL Reinsurance America, Inc. ......................... 6.8 A+
Zurich Reinsurance (North America), Inc .............. 6.0 A+
X.L. Mid Ocean Reinsurance Company, Ltd .............. 3.3 (1)
Workers' compensation excess coverage:
- --------------------------------------
American United Life Insurance Company ............... 50.0 A+
Transatlantic Reinsurance Company .................... 50.0 A++
Umbrella coverage:
- ------------------
General Reinsurance Corporation ...................... 100.0 A++
Fidelity and surety coverages:
- ------------------------------
SCOR Reinsurance Company ............................. 42.0 A+
Berkley Insurance Company ............................ 20.0 A
Partner Reinsurance Company of the U.S. .............. 20.0 A+
Gerling Global Reinsurance Corp of America ........... 18.0 A
Boiler coverage:
- ----------------
Hartford Steam Boiler Inspection and Insurance Company 100.0 A+
(1) Not rated.
(2) Mutual Reinsurance Bureau (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, on an equal and
joint basis, proportionate shares of this business. Each member
benefits from the increased capacity provided by MRB. MRB is backed by
the financial strength of the six member companies. All of the members
of MRB were assigned an "A-" (Excellent) or better rating by A.M. Best.
Premiums ceded under the pool members' reinsurance programs by all pool
members and by the Company's property and casualty insurance subsidiaries for
the year ended December 31, 2001 are presented below. Each type of
reinsurance coverage is purchased in layers, and an individual reinsurer may
participate in more than one type of coverage and at various layers within the
coverages. Since each layer of coverage is priced separately, with the lower
layers being more expensive than the upper layers, a reinsurer's overall
participation in a reinsurance program does not necessarily correspond to the
amount of premiums it receives.
Premiums ceded by
------------------------
Property
and casualty
All pool insurance
Reinsurer members subsidiaries
- --------- ----------- ------------
General Reinsurance Corporation..................... $ 6,806,274 $ 1,599,474
Hartford Steam Boiler Inspection & Insurance Company 4,178,787 982,015
AXA Reassurance Corporation ........................ 2,171,987 510,417
XL Reinsurance America Inc. ........................ 1,902,015 446,974
Gerling Global Reinsurance Corp of America ......... 1,367,106 321,270
SCOR Reinsurance Company ........................... 1,215,794 285,712
Hartford Fire Insurance Company .................... 1,203,987 282,937
Managing Agency Partners ........................... 687,804 161,634
Tempest Reinsurance Co., LTD ....................... 624,691 146,802
Amlin Underwriting ................................. 599,337 140,844
Other Reinsurers ................................... 8,462,742 1,988,744
----------- ------------
Total ............................................ $29,220,524 $ 6,866,823
=========== ============
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, 2001 are presented below.
Premiums ceded by
------------------------
Property
and casualty
All pool insurance
Reinsurer members subsidiaries
- --------- ----------- ------------
National Workers' Compensation Reinsurance Pool .... $ 8,618,024 $ 2,025,236
Wisconsin Compensation Rating Bureau ............... 8,203,016 1,927,709
North Carolina Reinsurance Facility ................ 1,494,757 351,268
Other Reinsurers ................................... 77,410 18,191
----------- ------------
Total ............................................ $18,393,207 $ 4,322,404
=========== ============
For information concerning amounts due the Company from reinsurers for
losses and settlement expenses and prepaid reinsurance premiums and the effect
of reinsurance on premiums written and earned, and losses and settlement
expenses incurred, see "Property and Casualty Insurance Subsidiaries and
Reinsurance Subsidiary - Reinsurance Ceded."
The September 11, 2001 terrorist attack on the World Trade Center has had
a significant impact on the pricing and terms of reinsurance coverage for
2002. The parties to the pooling agreement were not immune to these factors
and experienced significantly higher costs and increased retentions when their
reinsurance program was renewed in January 2002. In addition, the parties to
the pooling agreement elected to purchase separate terrorism coverage for
2002, in order to provide limited protection from future terrorist exposures,
as all standard reinsurance policies now excluded coverage for terrorist
activities.
RELATIONSHIP BETWEEN NET PREMIUMS WRITTEN AND SURPLUS
The amount of insurance a property and casualty insurance company writes
under industry standards is commonly expressed as a multiple of its surplus
calculated in accordance with statutory accounting practices. Generally, a
ratio of 3 to 1 or less is considered satisfactory by regulatory authorities.
The ratios of the pool members for the past three years are as follows:
Year ended December 31,
------------------------------
2001 2000 1999
---- ---- ----
Employers Mutual .................... 1.35 1.01 .86
EMCASCO ............................. 2.25 2.39 2.03
Illinois EMCASCO .................... 2.20 2.46 2.18
Dakota Fire ......................... 2.23 2.46 2.17
Farm and City ....................... 2.70 2.32 2.04
EMC Property & Casualty Company ..... .97 .87 .80
Union Insurance Company of Providence .96 .86 .79
Hamilton Mutual Insurance Company ... 2.34 1.94 1.69
The 2001 ratios for three of the Company's property and casualty
insurance subsidiaries (EMCASCO, Illinois EMCASCO and Dakota Fire) reflect the
issuance of an aggregate of $25,000,000 of surplus notes to Employers Mutual
on December 28, 2001. Surplus notes are considered to be a component of
surplus for statutory reporting purposes; however, under generally accepted
accounting principals, surplus notes are considered to be debt and are
reported as a liability in the Company's financial statements.
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The property and casualty insurance subsidiaries' reserve information is
included in the property and casualty loss reserve development for 2001. See
"Property and Casualty Insurance Subsidiaries and Reinsurance Subsidiary -
Outstanding Losses and Settlement Expenses."
REINSURANCE
- -----------
The reinsurance subsidiary is a property and casualty treaty reinsurer
with a concentration in property lines. The reinsurance subsidiary assumes a
100 percent quota share portion of Employers Mutual's assumed reinsurance
business, exclusive of certain reinsurance contracts. The reinsurance
subsidiary assumes its quota share portion of all premiums and related losses
and settlement expenses of this business, subject to a maximum loss of
$1,500,000 per event. The reinsurance subsidiary does not reinsure any of
Employers Mutual's direct insurance business, or any "involuntary" facility or
pool business that Employers Mutual assumes pursuant to state law. In
addition, the reinsurance subsidiary is not liable for credit risk in
connection with the insolvency of any reinsurers of Employers Mutual.
Operations of the quota share agreement give rise to intercompany balances
with Employers Mutual, which are settled on a quarterly basis.
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, 2001.
Percent Percent Percent
of of of
Line of Business 2001 total 2000 total 1999 total
- ---------------- ------- ----- ------- ----- ------- -----
(Dollars in thousands)
Pro rata reinsurance:
Property and Casualty $18,975 28.6% $14,441 30.4% $12,642 29.0%
Property ............. 9,092 13.7 7,399 15.6 7,461 17.1
Crop ................. 2,372 3.6 4,188 8.8 4,727 10.8
Casualty ............. 8,720 13.1 5,319 11.2 4,771 11.0
Marine/aviation ...... 5,678 8.6 1,869 3.9 2,289 5.3
Other ................ 3,973 6.0 374 0.8 261 0.6
------- ----- ------- ----- ------- -----
Total pro rata
Reinsurance ...... 48,810 73.6 33,590 70.7 32,151 73.8
------- ----- ------- ----- ------- -----
Excess reinsurance:
Excess per risk
reinsurance:
Property ............. 3,430 5.2 3,011 6.3 2,298 5.3
Casualty ............. 3,981 6.0 3,882 8.2 1,979 4.6
Other ................ 1,571 2.4 856 1.8 754 1.7
------- ----- ------- ----- ------- -----
Total excess per
risk reinsurance 8,982 13.6 7,749 16.3 5,031 11.6
------- ----- ------- ----- ------- -----
Excess catastrophe/
aggregate reinsurance:
Property ............. 7,494 11.3 5,357 11.3 5,674 13.0
Crop ................. 392 0.6 297 0.6 330 0.8
Marine/aviation ...... 5 - 19 - 20 -
Other ................ 604 0.9 518 1.1 341 0.8
------- ----- ------- ----- ------- -----
Total excess
catastrophe/
aggregate
reinsurance ...... 8,495 12.8 6,191 13.0 6,365 14.6
------- ----- ------- ----- ------- -----
Total excess
Reinsurance ...... 17,477 26.4 13,940 29.3 11,396 26.2
------- ----- ------- ----- ------- -----
Total .............. $66,287 100.0% $47,530 100.0% $43,547 100.0%
======= ===== ======= ===== ======= =====
MARKETING
Over the last several years Employers Mutual has emphasized writing
excess of loss reinsurance business and has worked to increase its
participation on existing contracts that had favorable terms. Employers
Mutual strives to be flexible in the types of reinsurance products it offers,
but generally limits its writings to direct reinsurance business rather than
providing retrocessional covers. During the last three years there has been a
trend in the reinsurance marketplace for "across the board" participation on
excess of loss reinsurance contracts. As a result, reinsurance companies must
be willing to participate in all coverages and on all layers offered under a
specific contract in order to be considered a viable reinsurer.
COMPETITION
The reinsurance marketplace is generally considered to be very
competitive; however, competition for reinsurance business has declined
significantly as a result of the September 11, 2001 terrorist attack on the
World Trade Center. Industry wide rate increases for January 2002 renewals
averaged 20.5 percent for excess of loss business with increased retentions
and exclusions for terrorist activities being commonplace. The market for
terrorism coverage is still evolving, but is becoming more available with the
exclusion of nuclear, biological and chemical perils. The current trend is to
have terrorism coverage written on a stand-alone basis, but this may change in
the future. New reinsurance capacity, primarily from Bermuda, has entered the
reinsurance marketplace to take advantage of higher reinsurance pricing, which
could lead to increased rate competition in the future.
Employers Mutual competes in the global reinsurance market with numerous
reinsurance companies, many of which have greater financial resources.
Competition for reinsurance business is based on many factors, including
financial strength, industry ratings, stability in products offered and
licensing status. During the last several years, reinsurance brokers have
tended to favor large, financially strong reinsurance companies who are able
to provide "mega" line capacity for all lines of business. The Company faces
the risk that reinsurance brokers may become more selective and may seek
larger and/or more highly rated reinsurance companies.
REINSURANCE CEDED
The reinsurance subsidiary does not purchase outside reinsurance
protection due to the $1,500,000 cap on losses assumed per event under the
terms of the quota share agreement with Employers Mutual. The reinsurance
subsidiary pays an annual override commission to Employers Mutual for this
protection and also pays for 100 percent of the outside reinsurance protection
Employers Mutual purchases to protect itself from catastrophic losses on the
assumed reinsurance business. This cost is recorded as a reduction to the
premiums received by the reinsurance subsidiary and amounted to $2,496,000 in
2001.
BEST'S RATING
The most recent Best's Property Casualty Key Rating Guide gives the
reinsurance subsidiary an "A-" (Excellent) policyholders' rating. Best's
ratings are based upon factors of concern to policyholders and insurance
agents and are not necessarily directed toward the protection of investors.
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The reinsurance subsidiary's reserve information is included in the
property and casualty loss reserve development for 2001. See "Property and
Casualty Insurance Subsidiaries and Reinsurance Subsidiary - Outstanding
Losses and Settlement Expenses."
PROPERTY AND CASUALTY INSURANCE SUBSIDIARIES AND REINSURANCE SUBSIDIARY
- -----------------------------------------------------------------------
Employers Mutual provides various services to all of its subsidiaries.
Such services include data processing, claims, financial, actuarial, auditing,
marketing and underwriting. Costs of these services are allocated to the
subsidiaries outside the pooling agreement based upon a number of criteria,
including usage and number of transactions. Costs not allocated to these
subsidiaries are charged to the pool and each pool participant shares in the
total cost in proportion to its participation percentage.
STATUTORY COMBINED RATIOS
The following table sets forth the statutory combined ratios of the
Company's insurance subsidiaries and the property and casualty insurance
industry averages for the five years ended December 31, 2001. 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,
--------------------------------------
2001 2000 1999 1998 1997
Property and casualty insurance ------ ------ ------ ------ ------
Loss ratio ................... 83.0% 82.2% 83.6% 83.5% 74.3%
Expense ratio ................ 28.5 30.8 32.0 33.3 32.8
------ ------ ------ ------ ------
Combined ratio ............. 111.5% 113.0% 115.6% 116.8% 107.1%
====== ====== ====== ====== ======
Reinsurance
Loss ratio ................... 86.6% 86.1% 83.1% 75.4% 68.4%
Expense ratio ................ 29.1 29.1 30.6 31.1 34.1
------ ------ ------ ------ ------
Combined ratio ............. 115.7% 115.2% 113.7% 106.5% 102.5%
====== ====== ====== ====== ======
Total insurance operations
Loss ratio ................... 83.8% 83.0% 83.5% 81.9% 73.1%
Expense ratio ................ 28.6 30.5 31.7 32.9 33.1
------ ------ ------ ------ ------
Combined ratio ............. 112.4% 113.5% 115.2% 114.8% 106.2%
====== ====== ====== ====== ======
Property and casualty insurance
industry averages (1)
Loss ratio ................... 90.1% 81.5% 78.6% 76.3% 72.8%
Expense ratio ................ 26.9 28.9 29.2 29.4 28.8
------ ------ ------ ------ ------
Combined ratio ............. 117.0% 110.4% 107.8% 105.7% 101.6%
====== ====== ====== ====== ======
(1) As reported by A.M. Best Company. The ratio for 2001 is an estimate; the
actual combined ratio is not currently available.
The 2001 expense ratios for "property and casualty insurance" and "total
insurance operations" are distorted by $13,884,000 of additional written
premiums that were recorded in 2001 in connection with a change in the
recording of installment based insurance policies. Excluding this adjustment,
the expense ratios would have been 30.2 percent and 30.0 percent,
respectively.
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, 2001:
2001
Amount Percent Best's
recoverable of total rating
----------- -------- ------
Wisconsin Compensation Rating Bureau .. $ 3,707,762 22.1% (1)
National Workers' Compensation
Reinsurance Pool .................... 3,036,475 18.1 (1)
General Reinsurance Corporation ....... 1,592,911 9.5 A++
Hartford Fire Insurance Company ....... 790,892 4.7 A+
Hartford Steam Boiler Insp. & Ins. .... 547,484 3.3 A+
AXA Reassurance ....................... 527,281 3.1 A+
Minnesota Workers' Comp Reins Assoc ... 512,606 3.1 (2)
Zurich Reinsurance (North America) Inc. 492,468 2.9 A+
American Re-Insurance Company ......... 385,398 2.3 A++
XL Reinsurance America ................ 359,050 2.1 A+
Other Reinsurers ...................... 4,824,240 28.8
----------- ------
Total ........................... $16,776,567(3) 100.0%
=========== ======
(1) Amounts recoverable reflect the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to these
organizations by Employers Mutual in connection with its role as "service
carrier." Under these arrangements, Employers Mutual writes business for
these organizations on a direct basis and then cedes 100 percent of the
business to these organizations. Credit risk associated with these
amounts is minimal as all companies participating in these organizations
are responsible for the liabilities of such organizations on a pro rata
basis.
(2) Not rated.
(3) The total amount recoverable at December 31, 2001 represented $2,652,739
in paid losses and settlement expenses, $11,848,597 in unpaid losses
and settlement expenses and $2,275,231 in unearned premiums.
The effect of reinsurance on premiums written and earned, and losses and
settlement expenses incurred for the three years ended December 31, 2001 is
presented below.
Year ended December 31,
----------------------------------------
2001 2000 1999
Premiums written: ------------ ------------ ------------
Direct ........................ $272,027,823 $249,896,499 $228,588,440
Assumed from nonaffiliates .... 1,898,509 1,220,442 781,225
Assumed from affiliates ....... 299,990,245 244,762,032 221,051,986
Ceded to nonaffiliates ........ (11,189,227) (8,347,822) (7,270,696)
Ceded to affiliates ........... (272,027,823) (249,896,499) (228,588,440)
------------ ------------ ------------
Net premiums written ........ $290,699,527 $237,634,652 $214,562,515
============ ============ ============
Premiums earned:
Direct ........................ $255,764,274 $245,078,165 $223,593,165
Assumed from nonaffiliates .... 1,786,132 1,194,835 873,710
Assumed from affiliates ....... 274,352,821 237,946,894 217,416,300
Ceded to nonaffiliates ........ (10,859,095) (7,683,287) (7,191,869)
Ceded to affiliates ........... (255,764,274) (245,078,165) (223,593,165)
------------ ------------ ------------
Net premiums earned ......... $265,279,858 $231,458,442 $211,098,141
============ ============ ============
Losses and settlement expenses
incurred:
Direct ........................ $221,314,633 $208,604,970 $183,031,797
Assumed from nonaffiliates .... 1,336,824 400,360 429,244
Assumed from affiliates ....... 227,650,959 194,017,734 182,375,574
Ceded to nonaffiliates ........ (7,069,033) (4,896,420) (5,928,570)
Ceded to affiliates ........... (221,314,633) (208,604,970) (183,031,797)
------------ ------------ ------------
Net losses and settlement
expenses incurred ......... $221,918,750 $189,521,674 $176,876,248
============ ============ ============
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The Company maintains reserves for losses and settlement expenses with
respect to both reported and unreported claims. The amount of reserves for
reported claims is primarily based upon a case-by-case evaluation of the
specific type of claim, knowledge of the circumstances surrounding each claim
and the policy provisions relating to the type of loss. Reserves on assumed
reinsurance business are the amounts reported by the ceding company.
The amount of reserves for unreported claims is determined on the basis
of statistical information for each line of insurance with respect to the
probable number and nature of claims arising from occurrences that have not
yet been reported. Established reserves are closely monitored and are
frequently recomputed using a variety of formulas and statistical techniques
for analyzing actual claim costs, frequency data and other economic and social
factors.
The Company does not discount reserves. Inflation is implicitly provided
for in the reserving function through analysis of cost trends, reviews of
historical reserving results and projections of future economic conditions.
Large ($100,000 and over) incurred and reported gross reserves are reviewed
regularly for adequacy. In addition, long-term and lifetime medical claims
are periodically reviewed for cost trends and the applicable reserves are
appropriately revised.
Loss reserves are estimates at a given time of what the insurer expects
to pay on incurred losses, based on facts and circumstances then known.
During the loss settlement period, which may be many years, additional facts
regarding individual claims become known, and accordingly, it often becomes
necessary to refine and adjust the estimates of liability on a claim.
Settlement expense reserves are intended to cover the ultimate cost of
investigating claims and defending lawsuits arising from claims. These
reserves are established each year based on previous years experience to
project the ultimate cost of settlement expenses. To the extent that
adjustments are required to be made in the amount of loss reserves each year,
settlement expense reserves are correspondingly revised.
Changes in reserves for losses and settlement expenses are reflected in
operating results in the year such changes are recorded.
Despite the inherent uncertainties of estimating insurance company loss
and settlement expense reserves, management believes that the Company's
reserves are being calculated in accordance with sound actuarial practices
and, based upon current information, that the Company's reserves for losses
and settlement expenses at December 31, 2001 are adequate.
The following table sets forth a reconciliation of beginning and ending
reserves for losses and settlement expenses of the property and casualty
insurance subsidiaries and the reinsurance subsidiary. Amounts presented are
on a net basis, with a reconciliation of beginning and ending reserves to the
gross amounts presented in the consolidated financial statements.
Year ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
Gross reserves at beginning of year $286,489,028 $266,514,024 $245,610,323
Ceded reserves at beginning of year (11,224,797) (10,260,815) (15,563,600)
------------ ------------ ------------
Net reserves at beginning of year .. 275,264,231 256,253,209 230,046,723
------------ ------------ ------------
Incurred losses and
settlement expenses:
Provision for insured events
of the current year ............ 216,752,003 191,425,036 182,609,687
Increase (decrease) in provision
for insured events of prior
years .......................... 5,166,747 (1,903,362) (5,733,439)
------------ ------------ ------------
Total incurred losses and
settlement expenses ...... 221,918,750 189,521,674 176,876,248
------------ ------------ ------------
Payments:
Losses and settlement expenses
attributable to insured events
of the current year ............ 94,983,112 82,912,082 72,970,531
Losses and settlement expenses
attributable to insured events
of prior years ................. 99,529,878 87,598,570 77,699,231
------------ ------------ ------------
Total payments ............. 194,512,990 170,510,652 150,669,762
------------ ------------ ------------
Net reserves at end of year ........ 302,669,991 275,264,231 256,253,209
Ceded reserves at end of year ...... 11,848,597 11,224,797 10,260,815
------------ ------------ ------------
Gross reserves at end of year ...... $314,518,588 $286,489,028 $266,514,024
============ ============ ============
The following table shows the calendar year development of loss and
settlement expense reserves of the property and casualty insurance
subsidiaries and the reinsurance subsidiary. Amounts presented are on a net
basis with, beginning in 1992, (i) a reconciliation of the net loss and
settlement expense reserves to the gross amounts presented in the consolidated
financial statements and (ii) disclosure of the gross re-estimated loss and
settlement expense reserves and the related re-estimated reinsurance
receivables.
Reflected in this table is (1) the increase in the property and casualty
insurance subsidiaries' collective participation in the pool from 17 percent
to 22 percent in 1992, (2) the change in the pooling agreement whereby
effective January 1, 1993 the voluntary reinsurance business written by
Employers Mutual is no longer subject to cession to the pool members, (3) the
commutation of two reinsurance contracts under the reinsurance subsidiary's
quota share agreement in 1993, (4) the gross-up of reserve amounts associated
with the National Workers' Compensation Reinsurance Pool at December 31, 1993,
(5) the reinsurance subsidiary's commutation of all outstanding reinsurance
balances ceded to Employers Mutual under catastrophe and aggregate excess of
loss reinsurance treaties related to accident years 1991 through 1993 in 1994,
and (6) the increase in the reinsurance subsidiary's quota share assumption of
Employers Mutual's assumed reinsurance business from 95 percent to 100 percent
in 1997. The table has been restated to reflect the addition of Hamilton
Mutual to the pooling agreement effective January 1, 1997 and the addition of
Farm and City to the pooling agreement effective January 1, 1998.
In evaluating the table, it should be noted that each cumulative
redundancy (deficiency) amount includes the effects of all changes in reserves
for prior periods. Conditions and trends that have affected development of
the liability in the past, such as a time lag in the reporting of assumed
reinsurance business, the high rate of inflation associated with medical
services and supplies and the reform measures implemented by several states to
control administrative costs for workers' compensation insurance, may not
necessarily occur in the future. Accordingly, it may not be appropriate to
project future development of reserves based on this table.
During the last three years the Company has experienced less favorable
development in the provision for insured events of prior years. The majority
of this decline in favorable development has come from the property and
casualty insurance subsidiaries, although the reinsurance subsidiary has
experienced similar declines. During 2001, both the property and casualty
insurance segment and the reinsurance segment experienced adverse development
in the provision for insured events of prior years. The adverse development
in the property and casualty insurance segment is attributed to the
revaluation
of individual claim liabilities in select lines of business, a revaluation of
formula based settlement expense reserves and an increase in paid settlement
expenses. The adverse development in the reinsurance segment is attributed to
construction defect claims arising from a reinsurance pool that the
reinsurance subsidiary participates in. The Company has historically
experienced favorable development in its reserves and reserving practices have
not been changed; however, the amount of development experienced will
fluctuate from year to year as individual claims are settled and additional
information becomes available on open claims.
Year ended December 31,
------------------------------------------------------------------------------------------------
(Dollars in thousands) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Statutory reserves for losses
and settlement expenses .... $139,317 180,797 182,072 191,514 196,293 191,892 205,606 230,937 257,201 276,103 303,643
Reclassification of reserve
amounts associated with the
National Workers'
Compensation Reinsurance
Pool ....................... 6,830 11,364 - - - - - - - - -
Retroactive restatement of
reserves in conjunction with
admittance of new
participants into the
pooling agreement .......... 4,364 5,314 5,248 6,603 6,809 7,018 3,600 - - - -
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Statutory reserves after
reclassification ........... 150,511 197,475 187,320 198,117 203,102 198,910 209,206 230,937 257,201 276,103 303,643
GAAP adjustments:
Salvage and subrogation .... (1,284) (2,026) (1,804) (1,799) (2,369) (2,400) - - - - -
Reclass of statutory
settlement expense portion
of retirement benefit
liability ................ - - (601) (680) (729) (786) (858) (890) (948) (839) (973)
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Reserves for losses and
settlement expenses ........ 149,227 195,449 184,915 195,638 200,004 195,724 208,348 230,047 256,253 275,264 302,670
Paid (cumulative) as of:
One year later ............. 31,577 78,000 60,162 57,247 62,012 59,856 62,949 77,699 87,599 99,530 -
Two years later ............ 79,619 109,985 89,153 88,831 92,626 92,191 99,870 119,620 138,701 - -
Three years later .......... 97,152 127,885 107,372 106,691 112,985 113,343 122,455 147,561 - - -
Four years later ........... 107,114 137,783 116,856 118,705 124,450 126,507 136,975 - - - -
Five years later ........... 112,598 143,876 123,843 126,384 132,044 135,321 - - - - -
Six years later ............ 116,670 148,518 128,931 130,977 137,522 - - - - - -
Seven years later .......... 119,699 151,895 132,036 134,923 - - - - - - -
Eight years later .......... 121,817 154,160 135,007 - - - - - - - -
Nine years later ........... 123,494 156,276 - - - - - - - - -
Ten years later ............ 125,129 - - - - - - - - - -
Reserves reestimated as of:
End of year ................ 149,227 195,449 184,915 195,638 200,004 195,724 208,348 230,047 256,253 275,264 302,670
One year later ............. 155,537 197,008 179,527 179,818 183,760 188,579 197,271 224,313 254,350 280,431 -
Two years later ............ 152,771 192,318 170,653 173,162 182,285 185,465 194,287 225,288 256,111 - -
Three years later .......... 148,867 186,730 166,778 172,118 179,797 181,392 193,505 227,010 - - -
Four years later ........... 148,017 186,133 166,133 170,570 176,176 180,686 192,824 - - - -
Five years later ........... 148,098 186,319 165,548 167,763 175,465 179,898 - - - - -
Six years later ............ 148,686 186,095 163,406 166,764 174,695 - - - - - -
Seven years later .......... 148,991 184,174 161,985 166,280 - - - - - - -
Eight years later .......... 147,579 183,821 160,459 - - - - - - - -
Nine years later ........... 147,260 181,840 - - - - - - - - -
Ten years later ............ 145,903 - - - - - - - - - -
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cumulative redundancy
(Deficiency) ............... $ 3,324 13,609 24,456 29,358 25,309 15,826 15,524 3,037 142 (5,167) -
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross loss and settlement
expense reserves - end of
year (A) ............................ $220,703 202,370 209,785 212,231 209,521 221,378 245,610 266,514 286,489 314,519
Reinsurance receivables ............... 25,254 17,455 14,147 12,227 13,797 13,030 15,563 10,261 11,225 11,849
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss and settlement expense
reserves - end of year .............. $195,449 184,915 195,638 200,004 195,724 208,348 230,047 256,253 275,264 302,670
======== ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross re-estimated reserves -
latest (B) .......................... $204,016 175,860 180,307 189,431 196,740 208,006 242,663 265,929 291,609 314,519
Re-estimated reinsurance receivables -
latest .............................. 22,176 15,401 14,027 14,736 16,842 15,182 15,653 9,818 11,178 11,849
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net re-estimated reserves - latest .... $181,840 160,459 166,280 174,695 179,898 192,824 227,010 256,111 280,431 302,670
======== ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross cumulative redundancy
(deficiency) (A-B) .................. $ 16,687 26,510 29,478 22,800 12,781 13,372 2,947 585 (5,120) -
======== ======= ======= ======= ======= ======= ======= ======= ======= =======
Asbestos and Environmental Claims
The Company has exposure to asbestos and environmental related claims
associated with the insurance business written by the parties to the pooling
agreement and the reinsurance business assumed from Employers Mutual by the
reinsurance subsidiary.
Estimating loss and settlement expense reserves for asbestos and
environmental claims is very difficult due to the many uncertainties
surrounding these types of claims. These uncertainties exist because the
assignment of responsibility varies widely by state and claims often emerge
long after a policy has expired, which makes assignment of damages to the
appropriate party and to the time period covered by a particular policy
difficult. In establishing reserves for these types of claims, management
monitors the relevant facts concerning each claim, the current status of the
legal environment, the social and political conditions and the claim history
and trends within the Company and the industry.
Based upon current facts, management believes the reserves established
for asbestos and environmental related claims at December 31, 2001 are
adequate. Although future changes in the legal and political environment may
result in adjustments to these reserves, management believes any adjustments
will not have a material impact on the financial condition or results of
operations of the Company.
The following table presents asbestos and environmental related losses
and settlement expenses incurred and reserves outstanding for the Company:
Year ended December 31,
--------------------------------
2001 2000 1999
Losses and settlement expenses incurred: ---------- ---------- ----------
Asbestos:
Property and casualty insurance ........ $ 64,451 $ 518,480 $ 125,687
Reinsurance ............................ (9,167) (135,695) (25,971)
---------- ---------- ----------
55,284 382,785 99,716
---------- ---------- ----------
Environmental:
Property and casualty insurance ........ (120,610) 96,828 11,227
Reinsurance ............................ 20,615 167,238 223,996
---------- ---------- ----------
(99,995) 264,066 235,223
---------- ---------- ----------
Total losses and settlement
expenses incurred ................ $ (44,711)$ 646,851 $ 334,939
========== ========== ==========
Loss and settlement expense reserves:
Asbestos:
Property and Casualty insurance ........ $ 719,590 $ 715,472 $ 259,148
Reinsurance ............................ 566,477 589,518 753,481
---------- ---------- ----------
1,286,067 1,304,990 1,012,629
---------- ---------- ----------
Environmental:
Property and casualty insurance ........ 454,460 711,690 724,662
Reinsurance ............................ 824,988 812,572 710,520
---------- ---------- ----------
1,279,448 1,524,262 1,435,182
---------- ---------- ----------
Total loss and settlement expense
reserves ......................... $2,565,515 $2,829,252 $2,447,811
========== ========== ==========
INVESTMENTS
- -----------
Securities classified as held-to-maturity are purchased with the intent
and ability to be held to maturity and are carried at amortized cost.
Unrealized holding gains and losses on securities held-to-maturity are not
reflected in the financial statements. All other securities have been
classified as securities available-for-sale and are carried at fair value,
with unrealized holding gains and losses reported as accumulated other
comprehensive income in stockholders' equity, net of deferred income taxes.
At December 31, 2001, approximately 46 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 participates in a securities lending program whereby certain
fixed maturity securities from the investment portfolio are loaned to other
institutions for short periods of time. The Company receives a fee for each
security loaned out under this program and requires initial collateral,
primarily cash, equal to 102 percent of the market value of the loaned
securities. The securities on loan to others have been segregated from the
other invested assets on the Company's balance sheet. In addition, the assets
and liabilities of the Company have been grossed up to reflect the collateral
held under the securities lending program and the obligation to return this
collateral upon the return of the loaned securities.
During 2000 and 1999, the Company sold approximately $55,000,000 and
$14,000,000, respectively, of investments in tax-exempt fixed maturity
securities and reinvested the proceeds into taxable fixed maturity securities
that pay a higher interest rate. This change in asset allocation was
implemented to increase the Company's after-tax rate of return on its
investment portfolio.
The Company's equity investment holdings include common stocks 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 that may be made by insurance
companies. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks and real estate
mortgages. The Company believes that it is in compliance with these laws.
The investments of EMC Insurance Group Inc. and its subsidiaries are
supervised by an investment committee of each entity's respective board of
directors. The investment portfolios are managed by an internal staff that is
composed of employees of Employers Mutual.
Investment expenses are based on actual expenses incurred plus an
allocation of other investment expenses incurred by Employers Mutual, which is
based on a weighted average of total invested assets and number of investment
transactions.
The following table shows the composition of the Company's investment
portfolio (at amortized cost), by type of security, as of December 31, 2001
and 2000. 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,
--------------------------------------------
2001 2000
--------------------- ---------------------
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 ............. $ 57,443,480 11.0% $102,230,946 22.4%
Mortgage-backed securities 8,634,427 1.6 13,480,647 2.9
Total securities held- ------------ ------- ------------ -------
to-maturity ............ 66,077,907 12.6 115,711,593 25.3
------------ ------- ------------ -------
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury securities
and obligations of U.S.
government corporations
and agencies ............. 53,080,155 10.1 6,603,794 1.4
Obligations of states and
political subdivisions ... 77,746,658 14.8 79,782,459 17.5
Mortgage-backed
securities ............... 24,993,733 4.8 43,416,386 9.5
Debt securities issued by
foreign governments ...... 6,481,973 1.2 6,480,421 1.4
Public utilities ........... 59,510,559 11.4 16,540,299 3.6
Corporate securities ....... 189,923,283 36.2 136,626,121 29.9
Total fixed maturity ------------ ------- ------------ -------
securities ............. 411,736,361 78.5 289,449,480 63.3
------------ ------- ------------ -------
Equity securities:
Common stocks .............. 27,689,811 5.3 26,748,905 5.9
Non-redeemable preferred
stocks ................... 996,510 0.2 1,994,010 0.4
------------ ------- ------------ -------
Total equity securities .. 28,686,321 5.5 28,742,915 6.3
------------ ------- ------------ -------
Total securities
available-for-sale ..... 440,422,682 84.0 318,192,395 69.6
------------ ------- ------------ -------
Short-term investments ......... 17,724,458 3.4 23,388,027 5.1
------------ ------- ------------ -------
Total investments ........ $524,225,047 100.0% $457,292,015 100.0%
============ ======= ============ =======
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, 2001.
Securities Securities
held-to-maturity available-for-sale
(at amortized cost) (at fair value)
--------------------- ---------------------
Amount Percent Amount Percent
Rating(1) ------------ ------- ------------ -------
AAA ..................... $ 66,077,907 100.0% $129,630,035 31.0%
AA ...................... - - 94,485,422 22.6
A ....................... - - 157,808,230 37.7
BAA ..................... - - 33,521,121 8.0
BA ...................... - - 1,805,377 .4
CAA ..................... - - 1,400,000 .3
------------ ------- ------------ -------
Total fixed maturities $ 66,077,907 100.0% $418,650,185 100.0%
============ ======= ============ =======
(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, 2001, 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 ................... $ - $ -
Due after one year through five years ..... 39,962,077 44,168,660
Due after five years through ten years .... 11,489,373 12,098,320
Due after ten years ....................... 5,992,032 6,115,170
Mortgage-backed securities ................ 8,634,425 9,082,738
------------ ------------
Totals .................................. $ 66,077,907 $ 71,464,888
============ ============
Securities available-for-sale:
Due in one year or less ................... $ 39,266,534 $ 39,333,099
Due after one year through five years ..... 16,524,878 17,064,621
Due after five years through ten years .... 104,477,883 108,344,057
Due after ten years ....................... 226,473,331 227,679,715
Mortgage-backed securities ................ 24,993,735 26,228,693
------------ ------------
Totals .................................. $411,736,361 $418,650,185
============ ============
The mortgage-backed securities shown in the above table include
$32,181,060 of securities issued by government corporations and agencies and
$1,447,100 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,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
Average invested assets (1) ........ $490,758,529 $448,437,675 $432,606,548
Investment income (2) .............. $ 30,969,630 $ 29,006,316 $ 25,760,561
Average yield ...................... 6.31% 6.47% 5.96%
Realized investment gains (3) ...... $ 800,582 $ 1,557,870 $ 276,673
(1) Average of the aggregate invested amounts (amortized cost) at the
beginning and end of the year.
(2) Investment income is net of investment expenses and does not include
realized gains or income tax provisions.
(3) The amounts for 2000 and 1999 reflect realized gains of $531,352 and
$1,589,953, respectively, resulting from the sale of tax-exempt fixed
maturity securities. The proceeds from the sale of these tax-exempt fixed
maturity securities were reinvested in taxable fixed maturity securities
that pay a higher interest rate. This change in asset allocation was
implemented to increase the Company's after-tax rate of return on its
investment portfolio.
EMPLOYEES
- ---------
EMC Insurance Group Inc. and its subsidiaries have no employees. The
Company's business activities are conducted by the 2,128 employees of
Employers Mutual. EMC Insurance Group Inc., EMC Reinsurance Company and
Underwriters, LLC are charged their proportionate share of salary and employee
benefit costs based on time allocations. Costs not allocated to these
companies are charged to the participants in the pooling agreement. The
property and casualty insurance subsidiaries share the costs charged to the
pooling agreement in accordance with their pool participation percentages.
See "Property and Casualty Insurance - Pooling Agreement."
REGULATION
- ----------
The Company's insurance subsidiaries are subject to extensive regulation
and supervision by their state of domicile, as well as those in which they do
business. The purpose of such regulation and supervision is primarily to
provide safeguards for policyholders rather than to protect the interests of
stockholders. The insurance laws of the various states establish regulatory
agencies with broad administrative powers, including the power to grant or
revoke operating licenses and to regulate trade practices, investments,
premium rates, deposits of securities, the form and content of financial
statements and insurance policies, accounting practices and the maintenance of
specified reserves and capital for the protection of policyholders.
Premium rate regulation varies greatly among jurisdictions and lines of
insurance. In most states in which the Company's subsidiaries write
insurance, premium rates for their lines of insurance are subject to either
prior approval or limited review upon implementation. States require rates
for property and casualty insurance that are adequate, not excessive, and not
unfairly discriminatory.
The Company's insurance subsidiaries are required to file detailed annual
reports with the appropriate regulatory agency in each state where they do
business based on applicable statutory regulations, which differ from
generally accepted accounting principles. Their businesses and accounts are
subject to examination by such agencies at any time. Since EMC Insurance
Group Inc. and Employers Mutual are domiciled in Iowa, the State of Iowa
exercises principal regulatory supervision, and Iowa law requires periodic
examination. The Company's insurance subsidiaries are subject to examination
by state insurance departments on a periodic basis, as applicable law
requires.
In 1998, the National Association of Insurance Commissioners (NAIC)
adopted a comprehensive Codification of Statutory Accounting Principles
(Codification) to replace the Accounting Practices and Procedures Manual as
the NAIC's primary guidance on statutory accounting. Codification is intended
to provide a consistent and comprehensive basis of statutory accounting for
all insurance companies and became effective in most states, including the
states of domicile of the Company's insurance subsidiaries, on January 1,
2001. The adoption of Codification resulted in changes to the accounting
practices that the Company's insurance subsidiaries use to prepare their
statutory financial statements. One of the more significant changes was the
recording of deferred income taxes. As a result of the adoption of
Codification, the statutory surplus of the Company's insurance subsidiaries
increased by approximately $9,110,000 on January 1, 2001.
State laws governing insurance holding companies also impose standards on
certain transactions with related companies, which include, among other
requirements, that all transactions be fair and reasonable and that an
insurer's surplus as regards policyholders be reasonable and adequate in
relation to its liabilities. Under Iowa law, dividends or distributions made
by registered insurers are restricted in amount and may be subject to approval
from the Iowa Commissioner of Insurance. "Extraordinary" dividends or
distributions are subject to prior approval and are defined as dividends or
distributions made within a 12 month period which exceed the greater of 10
percent of statutory surplus as regards policyholders as of the preceding
December 31, or net income of the preceding calendar year on a statutory
basis. North Dakota imposes similar restrictions on the payment of dividends
and distributions. At December 31, 2001, $12,647,639 was available for
distribution in 2002 to the Company without prior approval. See note 6 of
Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
The NAIC utilizes a risk-based capital model to help state regulators
assess the capital adequacy of insurance companies and identify
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,
2001, each of the Company's insurance subsidiaries ratio of total adjusted
capital to risk-based capital is well in excess of the minimum level required.
ITEM 2. PROPERTIES.
- ------- -----------
The Company does not own any real property. Lease costs of the Company's
office facilities in Oak Brook, Illinois and Bismarck, North Dakota, which
total approximately $382,000 and $283,000 annually, are included as expenses
under the pooling agreement. Expenses of office facilities owned and leased
by Employers Mutual are borne by the parties to the pooling agreement, less
the rent received from the space used and paid for by non-insurance
subsidiaries and outside tenants. See "Property and Casualty Insurance -
Pooling Agreement" under Item 1 of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS.
- ------- ------------------
The Company and Employers Mutual and its other subsidiaries are parties
to numerous lawsuits arising in the normal course of the insurance business.
The Company believes that the resolution of these lawsuits will not have a
material adverse effect on its financial condition or its results of
operations. The companies involved have reserves that are believed adequate
to cover any potential liabilities arising out of all such pending or
threatened proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
None.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ------- -------------------------------------------------
STOCKHOLDER MATTERS.
--------------------
The "Stockholder Information" section from the Company's Annual Report to
Stockholders for the year ended December 31, 2001, which is included as
Exhibit 13(d) to this Form 10-K, is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
- ------- ------------------------
The "Selected Financial Data" section from the Company's Annual Report to
Stockholders for the year ended December 31, 2001, 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, 2001, which is included as
Exhibit 13(b) to this Form 10-K, is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- -------- -----------------------------------------------------------
The information under the caption "Market Risk" in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section from the Company's Annual Report to Stockholders for the year ended
December 31, 2001, 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, 2001, which is included as
Exhibit 13(c) to this Form 10-K, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------- ------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
------------------------------------
On October 18, 2000, the Board of Directors of EMC Insurance Group Inc.
(the "Company") approved the dismissal of KPMG LLP (KPMG) as the Company's
independent auditors. This dismissal was recommended by the Audit Committee
of the Board of Directors and was effective upon issuance of KPMG's reports on
the consolidated financial statements of the Company and Subsidiaries for the
year ended December 31, 2000.
The audit reports of KPMG on the consolidated financial statements of the
Company and Subsidiaries for the years ended December 31, 2000 and 1999 did
not contain an adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting
principles.
During the audits of the years ended December 31, 2000 and 1999 and the
interim periods preceding their dismissal, there were no disagreements with
KPMG on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
The Company requested that KPMG furnish it with a letter addressed to the
Securities and Exchange Commission (SEC) stating whether or not KPMG agrees
with the above statements. A copy of KPMG's letter to the SEC dated March 23,
2001 is filed as Exhibit 16 to this Form 10-K.
The Board of Directors of EMC Insurance Group Inc. approved the
engagement of Ernst & Young LLP as the Company's new independent auditors
effective January 1, 2001.
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, 2002, 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 48 President and Chief Executive Officer of the
Company and of Employers Mutual since 1992.
Treasurer of Employers Mutual from 1996 until
2000 and the Company from 1996 until February
2001. He was President and Chief Operating
Officer of the Company and Employers Mutual
from 1991 to 1992 and was Executive Vice
President of the Company and Employers Mutual
from 1989 to 1991. He has been employed by
Employers Mutual since 1985.
William A. Murray 55 Executive Vice President and Chief Operating
Officer of the Company and Employers Mutual
since 2001. He was Resident Vice President
and Branch Manager of Employers Mutual from
1992 until 2001. He has been employed by
Employers Mutual since 1985.
Ronald W. Jean 52 Executive Vice President for Corporate
Development of the Company and Employers
Mutual since 2000. He was Senior Vice
President - Actuary of the Company and
Employers Mutual from 1997 until 2000. He
was Vice President - Actuary of the Company
and Employers Mutual from 1985 until 1997.
He has been employed by Employers Mutual
since 1979.
John D. Isenhart 64 Senior Vice President of the Company since
1997 and of Employers Mutual since 1992.
He has been employed by Employers Mutual
since 1963.
Raymond W. Davis 56 Senior Vice President - Investments of the
Company and Employers Mutual since 1998.
Treasurer of the Company since 2001 and of
Employers Mutual since 2000. He was Vice
President - Investments of the Company and of
Employers Mutual from 1985 until 1998. He
has been employed by Employers Mutual since
1979.
NAME AGE POSITION
Donald D. Klemme 56 Senior Vice President - Administration and
Secretary of the Company since 1998. Senior
Vice President - Administration of Employers
Mutual since 1998. He was Vice President -
Administration and Secretary of the Company
from 1996 until 1998 and was Vice President -
Director of Internal Audit prior to that. He
has been employed by Employers Mutual since
1972.
David O. Narigon 49 Senior Vice President - Claims of the Company
and of Employers Mutual since 1998. He was
Vice President - Claims of the Company from
1988 until 1998. He has been employed by
Employers Mutual since 1983.
Mark E. Reese 44 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
Dr. John H. Kelley, a director of Employers Mutual, was designated as a
Section 16 reporting person in 1991. In June of 1992, the transfer agent was
directed to distribute 30 shares from his account and a Form 4 was filed to
reflect this. Due to an error, this transaction never took place and his
direct holdings have been understated since that date. This was corrected
with a late report filed in February 2002.
For the period from January 1997 to January 2002, Dr. Kelley also held an
indirect ownership interest in 5,233 shares that participated in the Company's
Amended and Restated Dividend Reinvestment and Common Stock Purchase Plan and
were inadvertently not reported on Form 4. As a result, twenty dividend
reinvestment purchase transactions were not reported. In February 2002,
Dr. Kelley filed a report reflecting the purchase of 1,497 shares and his
current indirect ownership of 6,730 shares.
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, 2002, 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 and Directors" in the
Company's
Proxy Statement in connection with its Annual Meeting to be held on May 21,
2002, 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, 2002, 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.
1. Financial Statements
Page
------
Report of Ernst & Young LLP, Independent Auditor ............ 15*
Report of KPMG LLP, Independent Auditor ..................... 16*
Consolidated Balance Sheets, December 31, 2001 and 2000 ..... 17*
Consolidated Statements of Income for the Years ended
December 31, 2001, 2000 and 1999 ......................... 18*
Consolidated Statements of Comprehensive Income for the
Years ended December 31, 2001, 2000 and 1999 ............. 18*
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 2001, 2000 and 1999 ............. 19*
Consolidated Statements of Cash Flows for the Years ended
December 31, 2001, 2000 and 1999 ......................... 20*
Notes to Consolidated Financial Statements .................. 22-41*
* Refers to the respective page of the financial information insert
of EMC Insurance Group Inc.'s 2001 Annual Report to Stockholders.
The Consolidated Financial Statements and Independent Auditors'
Reports which are included as Exhibit 13(c), are incorporated by
reference. With the exception of the portions of such Annual Report
specifically incorporated by reference in this Item and Items 5, 6, 7
and 8, such Annual Report shall not be deemed filed as part of this
Form 10-K or otherwise subject to the liabilities of Section 18 of
the Securities Exchange Act of 1934.
2. Schedules Form 10-K
Page
------
Report of Ernst & Young LLP, Independent Auditors,
On Schedules .............................................. 34
Report of KPMG LLP, Independent Auditors, On Schedules ...... 35
Schedule I - Summary of Investments ....................... 36
Schedule II - Condensed Financial Information of Registrant 37
Schedule III - Supplementary Insurance Information .......... 40
Schedule IV - Reinsurance .................................. 44
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations ..... 42
All other schedules have been omitted for the reason that the items
required by such schedules are not present in the consolidated
financial statements, are covered in the notes to the consolidated
financial statements or are not significant in amount.
3. Management contracts and compensatory plan arrangements
Exhibit 10(b). 1999 Senior Executive Compensation Bonus Program.
Exhibit 10(d). 1982 Employers Mutual Casualty Company Incentive
Stock Option Plan, as amended.
Exhibit 10(e). Deferred Bonus Compensation Plans.
Exhibit 10(f). EMC Reinsurance Company Executive Bonus Program.
Exhibit 10(h). Employers Mutual Casualty Company Excess Retirement
Benefit Agreement.
Exhibit 10(i). Employers Mutual Casualty Company 1993 Employee
Stock Purchase Plan.
Exhibit 10(j). 1993 Employers Mutual Casualty Company Incentive
Stock Option Plan, as amended.
Exhibit 10(k). Employers Mutual Casualty Company Non-Employee
Director Stock Option Plan.
Exhibit 10(l). Employers Mutual Casualty Company Supplemental
Executive Retirement Plan.
Exhibit 10(m). EMCC Option It! Deferred Bonus Compensation Plan.
Exhibit 10(n). EMCC Board of Directors Option It! Deferred
Compensation Plan.
Exhibit 10(o). Employers Mutual Casualty Company Excess Deferral
Plan.
(b) Reports on Form 8-K.
None
(c) Exhibits.
3. Articles of incorporation and bylaws:
(a) Articles of Incorporation of the Company, as amended.
(Incorporated by reference to the Company's Form 10-K
for the calendar year ended December 31, 1998.)
(b) By-Laws of the Company, as amended.
10. Material contracts.
(a) Quota Share Reinsurance Contract between Employers Mutual
Casualty Company and EMC Reinsurance Company. (Incorporated by
reference to the Company's Form 10-K for the calendar year ended
December 31, 2000.)
(b) 1999 Senior Executive Compensation Bonus Program. (Incorporated
by reference to the Company's Form 10-K for the calendar year
ended December 31, 1999.)
(c) EMC Insurance Companies reinsurance pooling agreements
between Employers Mutual Casualty Company and certain of its
affiliated companies, as amended. (Incorporated by reference
to the Company's Form 10-K for the calendar year ended December
31, 1998.)
(d) 1982 Employers Mutual Casualty Company Incentive Stock Option
Plan, as amended. (Incorporated by reference to the Company's
Form 10-K for the calendar year ended December 31, 1998.)
(e) Deferred Bonus Compensation Plans. (Incorporated by reference
to the Company's Form 10-K for the calendar year ended December
31, 1998.)
(f) EMC Reinsurance Company Executive Bonus Program. (Incorporated
by reference to the Company's Form 10-K for the calendar year
ended December 31, 1998.)
(g) EMC Insurance Group Inc. Amended and Restated Dividend
Reinvestment and Common Stock Purchase Plan. (Incorporated by
reference to Registration No. 33-34499.)
(h) Employers Mutual Casualty Company Excess Retirement Benefit
Agreement. (Incorporated by reference to the Company's
Form 10-K for the calendar year ended December 31, 1998.)
(i) Employers Mutual Casualty Company 1993 Employee Stock Purchase
Plan. (Incorporated by reference to Registration No. 33-49335.)
(j) 1993 Employers Mutual Casualty Company Incentive Stock Option
Plan. (Incorporated by reference to Registration Nos.33-49337
and 333-45279.)
(k) Employers Mutual Casualty Company Non-Employee Director Stock
Option Plan. (Incorporated by reference to Registration No.
33-49339.)
(l) Employers Mutual Casualty Company Supplemental Executive
Retirement Plan. (Incorporated by reference to the Company's
Form 10-K for the calendar year ended December 31, 2000.)
(m) EMCC Option It! Deferred Bonus Compensation Plan.
(n) EMCC Board of Directors Option It! Deferred Compensation Plan.
(o) Employers Mutual Casualty Company Excess Deferral Plan.
13. Annual Report to Security Holders.
(a) Selected Financial Data from the Company's 2001 Annual Report to
Stockholders.
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations from the Company's 2001 Annual Report to
Stockholders.
(c) Consolidated Financial Statements from the Company's 2001
Annual Report to Stockholders.
(d) Stockholder Information from the Company's 2001 Annual Report to
Stockholders.
16. Letter from KPMG LLP to Securities and Exchange Commission.
21. Subsidiaries of the Registrant.
23. Consent of Experts and Counsel.
(a) Consent of Ernst & Young 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).
(b) Consent of KPMG LLP with respect to Forms S-8 (Registration
Nos. 2-93738, 33-49335, 33-49337, 33-49339 and 333-45279) and
Form S-3 (Registration No. 33-34499).
24. Power of Attorney.
(d) Financial statements required by Regulation S-X which are excluded from
the Annual Report to Stockholders by Rule 14a-3(b)(1).
None.
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 28,
2002.
EMC INSURANCE GROUP INC.
/s/ Bruce G. Kelley
-------------------------
Bruce G. Kelley
President and
Chief Executive Officer
/s/ Mark E. Reese
-------------------------
Mark E. Reese
Vice President - Chief Financial Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 28, 2002.
/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
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS, ON SCHEDULES
We have audited the consolidated financial statements of EMC Insurance
Group Inc. and subsidiaries as of December 31, 2001, and for the year then
ended, and have issued our report thereon dated February 26, 2002 (included
elsewhere in this Annual Report on Form 10-K). Our audits also included the
financial statement schedules listed in Item 14.(a)2. of this Annual Report on
Form 10-K. These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
The financial statement schedules as of December 31, 2000 and for each of two
years in the period ended December 31, 2000, were audited by other auditors
whose report dated February 27, 2001, expressed an opinion that such financial
statement schedules, when considered in relation to the consolidated financial
statements taken as a whole, presented fairly, in all material respects, the
information set forth therein.
In our opinion, the 2001 financial statement schedules referred to above,
when considered in relation to the 2001 basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
February 26, 2002
Des Moines, Iowa
REPORT OF KPMG LLP, INDEPENDENT AUDITORS, ON SCHEDULES
The Board of Directors and Stockholders
EMC Insurance Group Inc.:
Under date of February 27, 2001, we reported on the consolidated balance
sheet of EMC Insurance Group Inc. and Subsidiaries as of December 31, 2000,
and the related consolidated statements of income, comprehensive
income, stockholders' equity and cash flows for each of the years in the
two-year period ended December 31, 2000, as contained in Part II, Item 8 of
Form 10-K for the year 2001. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedules listed in Part IV, Item 14(a)2.
These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Des Moines, Iowa
February 27, 2001
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule I - Summary of Investments -
Other Than Investments in Related Parties
December 31, 2001
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 .............. $ 57,443,480 $ 62,382,150 $ 57,443,480
Mortgage-backed securities ..... 8,634,427 9,082,738 8,634,427
Total fixed maturity ------------ ------------ ------------
securities ............. 66,077,907 71,464,888 66,077,907
------------ ------------ ------------
Securities available-for-sale:
Fixed maturities:
United States Government
and government agencies
and authorities .............. 53,080,155 53,171,059 53,171,059
States, municipalities and
political subdivisions ....... 77,746,658 79,765,300 79,765,300
Mortgage-backed securities ..... 24,993,733 26,228,693 26,228,693
Debt securities issued by
foreign governments .......... 6,481,973 7,144,865 7,144,865
Public utilities ............... 59,510,559 58,905,987 58,905,987
Corporate securities ........... 189,923,283 193,434,281 193,434,281
Total fixed maturity ------------ ------------ ------------
securities ............. 411,736,361 418,650,185 418,650,185
------------ ------------ ------------
Equity securities:
Common stocks
Public utilities ............. 585,337 698,077 698,077
Banks, trusts and insurance
companies .................. 2,665,914 3,530,354 3,530,354
Industrial, miscellaneous and
all other .................. 24,438,560 28,159,271 28,159,271
Non-redeemable preferred
stocks ..................... 996,510 935,065 935,065
------------ ------------ ------------
Total equity securities .. 28,686,321 33,322,767 33,322,767
------------ ------------ ------------
Short-term investments ............. 17,724,458 17,724,458 17,724,458
------------ ------------ ------------
Total investments ...... $524,225,047 $541,162,298 $535,775,317
============ ============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31,
--------------------------
2001 2000
ASSETS ------------ ------------
- ------
Investment in common stock of
subsidiaries (equity method) .................. $137,738,931 $144,797,218
Fixed maturity investments:
Securities available-for-sale, at market value 1,556,475 1,530,000
Short-term investments .......................... 988,555 2,157,665
Cash ............................................ 227,541 27,383
Accrued investment income ....................... 41,333 41,333
Income taxes recoverable ........................ 3,259 6,000
Accounts receivable ............................. - 216
Deferred income taxes ........................... 103,490 6,640
------------ ------------
Total assets ............................... $140,659,584 $148,566,455
============ ============
LIABILITIES
- -----------
Accounts payable ................................ $ 163,416 $ 142,103
Indebtedness to related party ................... 38,545 31,036
------------ ------------
Total liabilities .......................... 201,961 173,139
------------ ------------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 11,329,987 shares
in 2001 and 11,294,220 shares in 2000 ......... 11,329,987 11,294,220
Additional paid-in capital ...................... 66,013,203 65,546,963
Accumulated other comprehensive income .......... 7,507,672 7,051,920
Retained earnings ............................... 55,606,761 64,500,213
------------ ------------
Total stockholders' equity ................. 140,457,623 148,393,316
------------ ------------
Total liabilities and stockholders' equity $140,659,584 $148,566,455
============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant, Continued
Condensed Statements of Income
Years ended December 31,
-------------------------------------
2001 2000 1999
----------- ----------- -----------
Equity in undistributed losses
of subsidiaries ..................... $(7,497,130) $(3,995,078) $(7,577,404)
Dividends received from subsidiaries .. 5,525,096 6,375,104 6,800,055
Investment income ..................... 194,326 345,597 364,042
Realized investment gains ............. - 536 -
Other income .......................... - - 52
----------- ----------- -----------
(1,777,708) 2,726,159 (413,255)
Operating expenses .................... 438,687 401,527 390,894
----------- ----------- -----------
(Loss) income before income tax
benefit .......................... (2,216,395) 2,324,632 (804,149)
Income tax benefit .................... (110,263) (4,399) (164)
----------- ----------- -----------
Net (loss) income ....... $(2,106,132) $ 2,329,031 $ (803,985)
=========== =========== ===========
Condensed Statements of Comprehensive Income
Years ended December 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
Net (loss) income .................. $ (2,106,132) $ 2,329,031 $ (803,985)
------------ ------------ ------------
Other Comprehensive Income:
Unrealized holding gains (losses)
arising during the period, net
of deferred income tax expense
(benefit) ...................... 962,453 11,708,349 (11,527,264)
Reclassification adjustment for
gains included in net (loss)
income, net of income tax
expense ........................ (506,701) (1,031,166) (177,370)
------------ ------------ ------------
Other comprehensive income
(loss) ..................... 455,752 10,677,183 (11,704,634)
------------ ------------ ------------
Total comprehensive (loss)
income ..................... $ (1,650,380) $ 13,006,214 $(12,508,619)
============ ============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant, Continued
Condensed Statements of Cash Flows
Years ended December 31,
-------------------------------------
2001 2000 1999
Net cash provided by ----------- ----------- -----------
operating activities ................ $ 5,316,361 $ 6,371,690 $ 6,740,085
Cash flows from investing activities:
Disposals of fixed maturity
securities held-to-maturity ....... - 2,000,000 2,000,000
Purchases of fixed maturity
securities available-for-sale ..... - - (1,500,000)
Net sales (purchases) of short-term
investments ...................... 1,169,110 (1,820,140) 2,215,419
----------- ----------- -----------
Net cash provided by
investing activities ........... 1,169,110 179,860 2,715,419
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock ........... 502,007 242,265 278,794
Dividends paid to stockholders ..... (6,787,320) (6,771,440) (6,793,061)
Repurchase of common stock ......... - - (2,998,677)
----------- ----------- -----------
Net cash used in financing
activities ..................... (6,285,313) (6,529,175) (9,512,944)
----------- ----------- -----------
Net increase (decrease) in cash ....... 200,158 22,375 (57,440)
Cash at beginning of year ............. 27,383 5,008 62,448
----------- ----------- -----------
Cash at end of year ................... $ 227,541 $ 27,383 $ 5,008
=========== =========== ===========
Income taxes (received) paid .......... $ (6,588) $ 189 $ 31,952
Interest (received) paid .............. $ (123) $ - $ 285
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information
For Years Ended December 31, 2001, 2000 and 1999
Deferred Loss and
policy settlement
acquisition expense Unearned
Segment costs reserves premiums
------- ----------- ------------ -----------
Year ended December 31, 2001:
Property and casualty insurance $18,536,512 $221,986,108 $86,532,102
Reinsurance ................... 2,827,016 92,532,480 12,850,074
Parent company ................ - - -
----------- ------------ -----------
Consolidated ............. $21,363,528 $314,518,588 $99,382,176
=========== ============ ===========
Year ended December 31, 2000:
Property and casualty insurance $13,777,831 $209,365,347 $65,228,769
Reinsurance ................... 1,858,922 77,123,681 8,449,645
Parent company ................ - - -
----------- ------------ -----------
Consolidated ............. $15,636,753 $286,489,028 $73,678,414
=========== ============ ===========
Year ended December 31, 1999:
Property and casualty insurance $11,992,874 $194,872,984 $57,598,773
Reinsurance ................... 1,626,318 71,641,040 7,392,356
Parent company ................ - - -
----------- ------------ -----------
Consolidated ............. $13,619,192 $266,514,024 $64,991,129
=========== ============ ===========
Losses and
Net settlement
Premium investment expenses
Segment revenue income incurred
------- ------------ ----------- ------------
Year ended December 31, 2001:
Property and casualty insurance $203,392,845 $22,457,799 $168,344,370
Reinsurance ................... 61,887,013 8,317,505 53,574,380
Parent company ................ - 194,326 -
------------ ----------- ------------
Consolidated ............. $265,279,858 $30,969,630 $221,918,750
============ =========== ============
Year ended December 31, 2000:
Property and casualty insurance $184,985,620 $20,787,679 $149,518,346
Reinsurance ................... 46,472,822 7,873,040 40,003,328
Parent company ................ - 345,597 -
------------ ----------- ------------
Consolidated ............. $231,458,442 $29,006,316 $189,521,674
============ =========== ============
Year ended December 31, 1999:
Property and casualty insurance $167,265,093 $18,282,642 $140,481,323
Reinsurance ................... 43,833,048 7,113,877 36,394,925
Parent company ................ - 364,042 -
------------ ----------- ------------
Consolidated ............. $211,098,141 $25,760,561 $176,876,248
============ =========== ============
Amortization
of deferred
policy Other
acquisition underwriting Premiums
Segment costs expenses written (1)
------- ------------ ------------ ------------
Year ended December 31, 2001:
Property and casualty insurance $ 42,062,510 $ 17,990,128 $224,412,085
Reinsurance ................... 13,624,505 4,749,785 66,287,442
Parent company ................ - - -
------------ ------------ ------------
Consolidated ............. $ 55,687,015 $ 22,739,913 $290,699,527
============ ============ ============
Year ended December 31, 2000:
Property and casualty insurance $ 40,675,773 $ 15,439,286 $190,104,541
Reinsurance ................... 10,612,706 3,040,206 47,530,111
Parent company ................ - - -
------------ ------------ ------------
Consolidated ............. $ 51,288,479 $ 18,479,492 $237,634,652
============ ============ ============
Year ended December 31, 1999:
Property and casualty insurance $ 38,374,266 $ 13,698,660 $171,015,719
Reinsurance ................... 9,682,652 3,767,162 43,546,796
Parent company ................ - - -
------------ ------------ ------------
Consolidated ............. $ 48,056,918 $ 17,465,822 $214,562,515
============ ============ ============
(1) Written premiums for 2001 include $13,884,423 of additional premiums from
a change in the recording of installment based policies. See note 12 of
Notes to Consolidated Financial Statements which is included as Exhibit
13(c) of this Form 10-K.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule IV - Reinsurance
For years ended December 31, 2001, 2000 and 1999
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
------------ ------------ ------------ ------------ ----------
Year ended December 31, 2001:
Consolidated earned premiums ........... $255,764,274 $266,623,369 $276,138,953 $265,279,858 104.1%
============ ============ ============ ============ ==========
Year ended December 31, 2000:
Consolidated earned premiums ........... $245,078,165 $252,761,452 $239,141,729 $231,458,442 103.3%
============ ============ ============ ============ ==========
Year ended December 31, 1999:
Consolidated earned premiums ........... $223,593,165 $230,785,034 $218,290,010 $211,098,141 103.4%
============ ============ ============ ============ ==========
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule VI - Supplemental Insurance Information Concerning
Property-Casualty Insurance Operations
For Years Ended December 31, 2001, 2000 and 1999
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, 2001: $21,363,528 $314,518,588 $ -0- $99,382,176 $265,279,858 $30,775,304
=========== ============ ======== =========== ============ ===========
Year ended December 31, 2000: $15,636,753 $286,489,028 $ -0- $73,678,414 $231,458,442 $28,660,719
=========== ============ ======== =========== ============ ===========
Year ended December 31, 1999: $13,619,192 $266,514,024 $ -0- $64,991,129 $211,098,141 $25,396,519
=========== ============ ======== =========== ============ ===========
Losses and
settlement expenses Amortization
incurred related to of deferred Paid
-------------------------- policy losses and
Consolidated property- Current Prior acquisition settlement Premiums
casualty entities Year Years costs expenses Written(1)
- ---------------------- ------------ ----------- ------------ ------------ ------------
Year ended December 31, 2001: $216,752,003 $ 5,166,747 $ 55,687,015 $194,512,990 $290,699,527
============ =========== ============ ============ ============
Year ended December 31, 2000: $191,425,036 ($ 1,903,362) $ 51,288,479 $170,510,652 $237,634,652
============ =========== ============ ============ ============
Year ended December 31, 1999: $182,609,687 ($ 5,733,439) $ 48,056,918 $150,669,762 $214,562,515
============ =========== ============ ============ ============
(1) Written premiums for 2001 include $13,884,423 of additional premiums from
a change in the recording of installment based policies. See note 12 of
Notes to Consolidated Financial Statements which is included as Exhibit
13(c) of this Form 10-K.
EMC Insurance Group Inc. and Subsidiaries
Index to Exhibits
Exhibit
number Item Page number
------ ---- -----------
3(b) By-Laws of the Company. 44-55
10(m) EMCC Option It! Deferred Bonus
Compensation Plan. 56-62
10(n) EMCC Board of Directors Option It!
Deferred Compensation Plan. 63-70
10(o) Employers Mutual Casualty Company
Excess Deferral Plan. 71-87
13(a) Selected Financial Data. 88
13(b) Management's Discussion and Analysis
of Financial Condition and Results
of Operations. 89-103
13(c) Consolidated Financial Statements and
Supplementary Data. 104-139
13(d) Stockholder Information. 140
16 Letter from KPMG LLP to Securities and
Exchange Commission. 141
21 Subsidiaries of the Registrant. 142
23(a) Consent of Ernst & Young LLP with respect to
Forms S-8 and Form S-3. 143
23(b) Consent of KPMG LLP with respect to
Forms S-8 and Form S-3. 144
24 Power of Attorney. 145