UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 0-10956
EMC INSURANCE GROUP INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Iowa 42-6234555
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
717 Mulberry Street, Des Moines, Iowa 50309
- -------------------------------------- --------
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (515) 280-2902
---------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $1.00
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). [ ] Yes [X] No
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 30, 2003 was $40,895,145.
The number of shares outstanding of the registrant's common stock, $1.00
par value, on March 5, 2004, were 11,534,691.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's annual report to stockholders for the
year ended December 31, 2003 are incorporated by reference under Parts II and
IV.
2. Portions of the registrant's definitive proxy statement, which will
be filed with the Securities and Exchange Commission on or before April 16,
2004, are incorporated by reference under Part III.
TABLE OF CONTENTS
Part I
Item 1. Business ........................................................ 2
Item 2. Properties ...................................................... 23
Item 3. Legal Proceedings ............................................... 23
Item 4. Submission of Matters to a Vote of Security Holders ............. 23
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters .................................. 23
Item 6. Selected Financial Data ......................................... 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 23
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ...... 23
Item 8. Financial Statements and Supplementary Data ..................... 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .......................... 24
Item 9A. Controls and Procedures ......................................... 24
Part III
Item 10. Directors and Executive Officers of the Registrant .............. 24
Item 11. Executive Compensation .......................................... 25
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters ............... 25
Item 13. Certain Relationships and Related Transactions .................. 26
Item 14. Principal Accounting Fees and Services .......................... 26
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K .................................................. 27
Index to Financial Statement Schedules ................................... 27
Signatures ............................................................... 30
Index to Exhibits ........................................................ 39
PART I
ITEM 1. BUSINESS.
- ------- ---------
GENERAL
- -------
EMC Insurance Group Inc. is an insurance holding company incorporated in
Iowa in 1974. EMC Insurance Group Inc. is 80.9 percent owned by Employers
Mutual Casualty Company (Employers Mutual), a multiple-line property and
casualty insurance company organized as an Iowa mutual insurance company in
1911 that is licensed in all 50 states and the District of Columbia. The term
"Company" is used interchangeably to describe EMC Insurance Group Inc. (Parent
Company only) and EMC Insurance Group Inc. and its subsidiaries. Employers
Mutual and all of its subsidiaries (including the Company) and an affiliate,
are referred to as the "EMC Insurance Companies."
The Company conducts its insurance business through two business segments
as follows:
...............................
: :
: EMC INSURANCE GROUP INC. :
:.............................:
:
:
Property and :
Casualty Insurance : Reinsurance
......................:................................
: :
: :
Illinois EMCASCO Insurance Company (Illinois EMCASCO) EMC
Dakota Fire Insurance Company (Dakota Fire) Reinsurance
Farm and City Insurance Company (Farm and City) Company
EMCASCO Insurance Company (EMCASCO)
:
:
EMC Underwriters, LLC
Illinois EMCASCO was formed in Illinois in 1976 and was redomesticated to
Iowa in 2001, Dakota Fire was formed in North Dakota in 1957 and EMCASCO was
formed in Iowa in 1958 for the purpose of writing property and casualty
insurance. Farm and City was formed in Iowa in 1962 to write nonstandard risk
automobile insurance and was purchased by the Company in 1984. These
companies are licensed to write insurance in a total of 37 states and are
participants in a pooling agreement with Employers Mutual (see "Property and
Casualty Insurance - Pooling Agreement").
EMC Reinsurance Company was formed in 1981 to assume reinsurance business
from Employers Mutual. The company assumes a 100 percent quota share portion
of Employers Mutual's assumed reinsurance business, exclusive of certain
reinsurance contracts, and is licensed to do business in nine states.
The Company's excess and surplus lines insurance agency, EMC
Underwriters, LLC, was acquired in 1985. The company was formed in Iowa in
1975 as a broker for excess and surplus lines insurance. Effective December
31, 1998, the excess and surplus lines insurance agency was converted to a
limited liability company and the ownership was contributed to EMCASCO.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
- ---------------------------------------------
For information concerning the Company's revenues, operating income and
identifiable assets attributable to each of its industry segments over the
past three years, see note 7 of Notes to Consolidated Financial Statements
under Item 8 of this Form 10-K.
PROPERTY AND CASUALTY INSURANCE
- -------------------------------
POOLING AGREEMENT
The four property and casualty insurance subsidiaries of the Company and
two subsidiaries and an affiliate of Employers Mutual (Union Insurance Company
of Providence, EMC Property & Casualty Company and Hamilton Mutual Insurance
Company) are parties to reinsurance pooling agreements with Employers Mutual
(collectively the "pooling agreement"). Under the terms of the pooling
agreement, each company cedes to Employers Mutual all of its insurance
business, with the exception of any voluntary reinsurance business assumed
from nonaffiliated insurance companies, and assumes from Employers Mutual an
amount equal to its participation in the pool. All losses, settlement
expenses and other underwriting and administrative expenses, excluding the
voluntary reinsurance business assumed by Employers Mutual from nonaffiliated
insurance companies, are prorated among the parties on the basis of
participation in the pool. The aggregate participation of the Company's
property and casualty insurance subsidiaries is 23.5 percent. Operations of
the pool give rise to inter-company balances with Employers Mutual, which are
settled on a quarterly basis. Effective December 31, 2003, the pooling
agreement was amended to provide that Employers Mutual will make up any
shortfall or difference resulting from an error in its systems and/or
computational processes that would otherwise result in the required
restatement of the pool participants' financial statements. The investment
and income tax activities of the pool participants are not subject to the
pooling agreement.
On January 22, 2004, the Company announced that Farm and City Insurance
Company, its wholly-owned subsidiary, would discontinue writing nonstandard
risk automobile insurance and institute non-renewal procedures on all existing
business. Farm and City will continue to participate in the pooling agreement
even though it will no longer write any direct business.
The purpose of the pooling agreement is to spread the risk of an exposure
insured by any of the pool participants among all the companies. The pooling
agreement produces a more uniform and stable underwriting result from year to
year for all companies in the pool than might be experienced individually. In
addition, each company benefits from the capacity of the entire pool, rather
than being limited to policy exposures of a size commensurate with its own
assets, and from the wide range of policy forms, lines of insurance written,
rate filings and commission plans offered by each of the companies. A single
set of reinsurance treaties is maintained for the protection of all companies
in the pool. The pooling agreement is continuous, but may be amended or
terminated at the end of any calendar year as to any one or more parties.
PRINCIPAL PRODUCTS
The Company's property and casualty insurance subsidiaries and the other
parties to the pooling agreement underwrite both commercial and personal lines
of insurance. The following table sets forth the aggregate direct written
premiums of all parties to the pooling agreement for the three years ended
December 31, 2003.
Percent Percent Percent
of of of
Line of Business 2003 total 2002 total 2001 total
- ---------------- ---------- ----- ---------- ----- -------- -----
(Dollars in thousands)
Commercial Lines:
Automobile .......... $ 239,960 21.6% $ 224,321 21.5% $216,371 21.7%
Property ............ 202,124 18.2 180,622 17.3 162,670 16.4
Workers' compensation 209,171 18.8 194,853 18.7 208,652 21.0
Liability ........... 213,150 19.1 195,682 18.8 176,774 17.8
Other ............... 22,524 2.0 20,489 2.0 19,325 1.9
---------- ----- ---------- ----- -------- -----
Total commercial
lines ............ 886,929 79.7 815,967 78.3 783,792 78.8
---------- ----- ---------- ----- -------- -----
Personal Lines:
Automobile .......... 128,671 11.5 134,405 12.9 126,280 12.7
Property ............ 95,550 8.6 89,248 8.6 81,124 8.2
Liability ........... 1,972 0.2 1,815 0.2 3,284 0.3
---------- ----- ---------- ----- -------- -----
Total personal lines 226,193 20.3 225,468 21.7 210,688 21.2
---------- ----- ---------- ----- -------- -----
Total .......... $1,113,122 100.0% $1,041,435 100.0% $994,480 100.0%
========== ===== ========== ===== ======== =====
MARKETING
Marketing of insurance by the parties to the pooling agreement, excluding
the nonstandard risk automobile insurance sold by Farm and City, is conducted
through 16 branch offices located throughout the United States and
approximately 3,150 independent insurance agencies. These branch offices
allow the Company to respond quickly to changes in local market conditions.
Each branch office employs underwriting, claims, marketing and risk
improvement representatives, as well as field auditors and branch
administrative technicians. The branch offices are supported by technicians
and specialists that operate out of Employers Mutual's home office. Systems
are in place to monitor the underwriting results of each branch office and to
maintain guidelines and policies consistent with the underwriting and
marketing environment in each region.
Farm and City had specialized in insuring private passenger automobile
risks that are found to be unacceptable in the standard automobile insurance
market. Farm and City is licensed in a six state area that includes Iowa,
Kansas, Missouri, Nebraska, North Dakota and South Dakota. Private passenger
automobile policies were solicited through the Independent Agency System using
approximately 725 agencies.
The following table sets forth the geographic distribution of the
aggregate direct written premiums of all parties to the pooling agreement for
the three years ended December 31, 2003.
2003 2002 2001
---- ---- ----
Arizona ............................ 3.6 3.8 3.8
Illinois ........................... 4.3 4.7 5.1
Iowa ............................... 15.4 15.9 16.8
Kansas ............................. 8.9 8.8 8.8
Michigan ........................... 4.9 5.1 4.2
Minnesota .......................... 3.3 3.3 3.5
Nebraska ........................... 6.9 6.8 7.0
North Carolina ..................... 2.9 2.7 3.1
Pennsylvania ....................... 3.1 3.1 2.8
Texas .............................. 4.9 5.0 5.2
Wisconsin .......................... 5.5 5.0 5.0
Other * ............................ 36.3 35.8 34.7
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
* Includes all other jurisdictions, none of which accounted for more than
3 percent.
COMPETITION
The property and casualty insurance business is very competitive. The
Company's property and casualty insurance subsidiaries and the other pool
members compete in the United States insurance market with numerous insurers,
many of which have greater financial resources. Competition in the types of
insurance in which the property and casualty insurance subsidiaries are
engaged is based on many factors, including the perceived overall financial
strength of the insurer, premiums charged, contract terms and conditions,
services offered, speed of claim payments, reputation and experience. Because
the insurance products of the pool members are marketed exclusively through
independent agencies, the Company faces competition to retain qualified
independent agencies, as well as competition within the agencies. The pool
members also compete with direct writers, who utilize salaried employees and
generally offer their products at a lower cost, exclusive agencies who write
insurance business for only one company, and to a lesser extent, Internet-
based enterprises. The pool members utilize a profit-sharing plan as an
incentive for the independent agencies to place high-quality insurance
business with them.
BEST'S RATING
A.M. Best Company rates insurance companies based on their relative
financial strength and ability to meet their contractual obligations. A.M.
Best announced on July 10, 2001 that their rating of the EMC Insurance
Companies, which includes the Company's property and casualty insurance
subsidiaries, was changed from "A" (Excellent) to "A-" (Excellent). This
rating action reflected A.M. Best's opinion of the EMC Insurance Companies'
underwriting performance and operating losses during the three years ended
December 31, 2000. Despite this rating action, A.M. Best stated that the EMC
Insurance Companies' "Excellent" rating reflects its strong capitalization,
conservative operating strategies and local-market presence. A.M. Best
reevaluates its ratings from time to time (normally on an annual basis) and
there can be no assurance that the Company's property and casualty insurance
subsidiaries and the other pool members will maintain their current rating in
the future. Management believes that a Best's rating of "A-" (Excellent) or
better is important to the Company's business since many insureds require that
companies with which they insure be so rated. Best's publications indicate
that these ratings are assigned to companies that have achieved excellent
overall performance and have a strong ability to meet their obligations over a
long period of time. Best's ratings are based upon factors of concern to
policyholders and insurance agents and are not necessarily directed toward the
protection of investors.
REINSURANCE CEDED
The parties to the pooling agreement cede insurance in the ordinary
course of business for the purpose of limiting their maximum loss exposure
through diversification of their risks. The pool participants also purchase
catastrophe reinsurance to cover multiple losses arising from a single event.
All major reinsurance treaties, with the exception of the pooling
agreement and a boiler treaty, are on an "excess of loss" basis whereby the
reinsurer agrees to reimburse the primary insurer for covered losses in excess
of a predetermined amount, up to a stated limit. The boiler treaty provides
for 100 percent reinsurance of the pool's direct boiler coverage written.
Facultative reinsurance from approved domestic markets, which provides
reinsurance on an individual risk basis and requires specific agreement of the
reinsurer as to the limits of coverage provided, is purchased when coverage by
an insured is required in excess of treaty capacity or where a high-risk type
policy could expose the treaty reinsurance programs.
Each type of reinsurance coverage is purchased in layers, and each layer
may have a separate retention level. Retention levels are adjusted according
to reinsurance market conditions and the surplus position of the EMC Insurance
Companies. The inter-company pooling arrangement aids efficient buying of
reinsurance since it allows for higher retention levels and correspondingly
decreased dependence on the reinsurance marketplace.
A summary of the reinsurance treaties benefiting the parties to the
pooling agreement during 2003 is presented below. Retention amounts reflect
the accumulated retentions of all layers within a treaty.
Type of Reinsurance Treaty Retention Limits
-------------------------- ----------- --------------------------
Property per risk ........... $ 3,000,000 100 percent of $37,000,000
Property catastrophe ........ $13,950,000 96 percent of $79,000,000
Casualty .................... $ 2,000,000 100 percent of $38,000,000
Workers' compensation excess $ - $20,000,000 excess of
$40,000,000
Umbrella .................... $ 2,000,000 100 percent of $ 8,000,000
Fidelity .................... $ 1,200,000(1) 95 percent of $ 4,000,000
Surety ...................... $ 2,200,000(1) 91 percent of $14,000,000
Non-obligatory surety
quota share ............... $10,500,000 70 percent of $35,000,000
Boiler ...................... $ - 100 percent of $50,000,000
Property terrorism .......... $10,000,000 100 percent of $30,000,000
Terrorism aggregate excess
of loss ................... $23,500,000 70 percent of $45,000,000
Employment practices
liability ................. $ 500,000 50 percent of $ 1,000,000
(1) Subject to annual aggregate limits for all losses of $14,000,000.
Although reinsurance does not discharge the original insurer from its
primary liability to its policyholders, it is the practice of insurers for
accounting purposes to treat reinsured risks as risks of the reinsurer since
the primary insurer would only reassume liability in those situations where
the reinsurer is unable to meet the obligations it assumed under the
reinsurance agreements. The ability to collect reinsurance is subject to the
solvency of the reinsurers.
The major participants in the pool members' reinsurance programs during
2003 are presented below. The percentages represent the reinsurers' share of
the total reinsurance protection under all coverages. Each type of coverage
is purchased in layers, and an individual reinsurer may participate in more
than one type of coverage and at various layers within these coverages. The
property per risk, property catastrophe and casualty reinsurance programs are
handled by a reinsurance intermediary (broker). The reinsurance of those
programs is syndicated to approximately 50 domestic and foreign reinsurers.
In formulating reinsurance programs, Employers Mutual is selective in its
choice of reinsurers. Employers Mutual selects reinsurers on the basis of
financial stability and long-term relationships, as well as price of the
coverage. Reinsurers are generally required to have a Best's rating of "A-"
(Excellent) or higher and a minimum policyholders' surplus of $250,000,000.
Percent
of total 2003
Property per risk, property catastrophe reinsurance Best's
and casualty coverages: protection rating
- --------------------------------------- ---------- ------
Underwriters at Lloyd's of London .................... 25.6% A-
Mutual Reinsurance Bureau ............................ 15.4 (1)
Converium AG, Zurich ................................. 7.8 A
Transatlantic Reinsurance Company .................... 5.4 A++
Hannover Ruckversicherung AG ......................... 5.3 A
Ace Tempest Reinsurance Company ...................... 2.7 A+
Workers' compensation excess coverage:
- --------------------------------------
Underwriters at Lloyd's of London .................... 74.6% A-
American National Insurance Company .................. 25.4 A+
Umbrella coverage:
- ------------------
January 1 - June 30, 2003
General Reinsurance Corporation ...................... 100.0% A++
July 1 - December 31, 2003
Partner Reinsurance Company .......................... 27.5% A+
Platinum Underwriters Reinsurance .................... 25.0 A
TOA Reinsurance Company .............................. 17.5 A+
Hannover Ruckversicherung AG ......................... 30.0 A
Fidelity and surety coverages:
- ------------------------------
Transatlantic Reinsurance Company .................... 40.0% A++
SCOR Reinsurance Company ............................. 20.0 A-
Hannover Ruckversicherung AG ......................... 18.0 A
Everest Reinsurance Company .......................... 17.0 A+
Berkley Insurance Company ............................ 5.0 A
Boiler coverage:
- ----------------
Hartford Steam Boiler Inspection and Insurance Company 100.0% A+
Property terrorism:
- -------------------
Underwriters at Lloyd's of London .................... 100.0% A-
Terrorism aggregate excess of loss:
- -----------------------------------
Axis Specialty LTD ................................... 40.0% A
Arch Reinsurance Company ............................. 20.0 A-
Everest Reinsurance Company .......................... 10.0 A+
Employment Practices Liability:
- -------------------------------
General Reinsurance Corporation (January 1 -
July 1, 2003) ...................................... 100.0% A++
(1) Mutual Reinsurance Bureau (MRB) is composed of Employers Mutual and three
other nonaffiliated mutual insurance companies. Each of the four members
cede primarily property insurance to MRB and assume, on an equal and
joint basis, proportionate shares of this business. Each member
benefits from the increased capacity provided by MRB. MRB is backed by
the financial strength of the four member companies. All of the members
of MRB were assigned an "A-" (Excellent) or better rating by A.M. Best.
Premiums ceded under the pool members' reinsurance programs by all pool
members and by the Company's property and casualty insurance subsidiaries for
the year ended December 31, 2003 are presented below. Each type of
reinsurance coverage is purchased in layers, and an individual reinsurer may
participate in more than one type of coverage and at various layers within the
coverages. Since each layer of coverage is priced separately, with the lower
layers being more expensive than the upper layers, a reinsurer's overall
participation in a reinsurance program does not necessarily correspond to the
amount of premiums it receives.
Premiums ceded by
------------------------
Property
and casualty
All pool insurance
Reinsurer members subsidiaries
- --------- ----------- ------------
Hartford Steam Boiler Inspection & Insurance Company $12,895,680 $ 3,030,485
General Reinsurance Corporation..................... 3,740,975 879,129
XL Reinsurance America Inc. ........................ 2,828,842 664,778
Axis Specialty Limited ............................. 2,494,011 586,093
Hannover Ruckversicherung AG ....................... 2,386,009 560,712
Transatlantic Reinsurance Company .................. 2,023,973 475,634
Converium AG, Zurich ............................... 1,474,996 346,624
Platinum Underwriters Reinsurance .................. 1,302,151 306,005
Managing Agency Partners ........................... 1,266,852 297,710
Partner Reinsurance Company of the US .............. 1,155,000 271,425
Other Reinsurers ................................... 15,114,903 3,552,002
----------- ------------
Total ............................................ $46,683,392 $ 10,970,597
=========== ============
The parties to the pooling agreement also cede reinsurance on both a
voluntary and a mandatory basis to state and national organizations in
connection with various workers' compensation and assigned risk programs and
to private organizations established to handle large risks. Premiums ceded by
all pool members and by the Company's property and casualty insurance
subsidiaries for the year ended December 31, 2003 are presented below.
Premiums ceded by
------------------------
Property
and casualty
All pool insurance
Reinsurer members subsidiaries
- --------- ----------- ------------
Wisconsin Compensation Rating Bureau ............... $16,032,519 $ 3,767,642
North Carolina Reinsurance Facility ................ 1,681,332 395,113
Michigan Catastrophe Claims Association ............ 1,355,025 318,431
Other Reinsurers ................................... 1,518,826 356,926
----------- ------------
Total ............................................ $20,587,702 $ 4,838,112
=========== ============
The Terrorism Risk Insurance Act of 2002 ("TRIA") provides a temporary
Federal backstop on losses from certified terrorism events from foreign
sources and is effective until December 31, 2005. Coverage includes most
direct commercial lines of business, including coverage for losses from
nuclear, biological, and chemical exposures. Each insurer has a deductible
amount, which is calculated as a percentage of the prior year's direct earned
commercial lines premium and a ten percent retention above the deductible.
The percentage used in the deductible calculation will increase from seven
percent in 2003 to ten percent in 2004 and to fifteen percent in 2005. TRIA
caps losses at $100 billion annually; no insurer that has met its deductible
will be liable for payment of any portion above that amount. Though it is
uncertain whether TRIA will be extended beyond 2005, it has and continues to
provide marketplace stability. As a result, coverage for terrorist events in
both the insurance and reinsurance markets is often available. For the
Company, the TRIA deductible was approximately $13,000,000 in 2003. The March
1, 2003 renewal of Employers Mutual's reinsurance coverage for terrorism
claims saw a broadening of coverage with limits corresponding to the TRIA
deductible (approximately $55,000,000 for the EMC Insurance Companies).
Coverage includes all commercial lines of business, losses from both certified
and non-certified terrorist events, and nuclear, biological and chemical
coverage.
For information concerning amounts due the Company from reinsurers for
losses and settlement expenses and prepaid reinsurance premiums and the effect
of reinsurance on premiums written and earned, and losses and settlement
expenses incurred, see "Property and Casualty Insurance Subsidiaries and
Reinsurance Subsidiary - Reinsurance Ceded."
RELATIONSHIP BETWEEN NET PREMIUMS WRITTEN AND SURPLUS
The amount of insurance a property and casualty insurance company writes
under industry standards is commonly expressed as a multiple of its surplus
calculated in accordance with statutory accounting practices. Generally, a
ratio of 3 to 1 or less is considered satisfactory by regulatory authorities.
The ratios of the pool members for the past three years are as follows:
Year ended December 31,
------------------------------
2003 2002 2001
---- ---- ----
Employers Mutual .................... 1.26 1.55 1.35
EMCASCO ............................. 2.15 2.41 2.25
Illinois EMCASCO .................... 2.07 2.36 2.20
Dakota Fire ......................... 2.11 2.41 2.23
Farm and City ....................... 2.35 2.49 2.70
EMC Property & Casualty Company ..... .92 .94 .97
Union Insurance Company of Providence .91 .93 .96
Hamilton Mutual Insurance Company ... 2.02 2.13 2.34
The ratios for three of the Company's property and casualty insurance
subsidiaries (EMCASCO, Illinois EMCASCO and Dakota Fire) reflect the issuance
of an aggregate of $25,000,000 of surplus notes to Employers Mutual on
December 28, 2001. Surplus notes are considered to be a component of surplus
for statutory reporting purposes; however, under generally accepted accounting
principals, surplus notes are considered to be debt and are reported as a
liability in the Company's financial statements.
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The property and casualty insurance subsidiaries' reserve information is
included in the property and casualty loss reserve development for 2003. See
"Property and Casualty Insurance Subsidiaries and Reinsurance Subsidiary -
Outstanding Losses and Settlement Expenses."
REINSURANCE
The reinsurance subsidiary is a property and casualty treaty reinsurer
with a concentration in property lines. The reinsurance subsidiary assumes a
100 percent quota share portion of Employers Mutual's assumed reinsurance
business, exclusive of certain reinsurance contracts. The reinsurance
subsidiary assumes its quota share portion of all premiums and related losses
and settlement expenses of this business, subject to a maximum loss of
$1,500,000 per event. The reinsurance subsidiary does not reinsure any of
Employers Mutual's direct insurance business, or any "involuntary" facility or
pool business that Employers Mutual assumes pursuant to state law. In
addition, the reinsurance subsidiary is not liable for credit risk in
connection with the insolvency of any reinsurers of Employers Mutual.
Operations of the quota share agreement give rise to inter-company balances
with Employers Mutual, which are settled on a quarterly basis. The investment
and income tax activities of the reinsurance subsidiary are not subject to the
quota share agreement.
PRINCIPAL PRODUCTS
The reinsurance subsidiary assumes both pro rata and excess of loss
reinsurance from Employers Mutual. The following table sets forth the assumed
written premiums of the reinsurance subsidiary for the three years ended
December 31, 2003.
Percent Percent Percent
of of of
Line of Business 2003 total 2002 total 2001 total
- ---------------- ------- ----- ------- ----- ------- -----
(Dollars in thousands)
Pro rata reinsurance:
Property and Casualty $20,025 22.2% $17,856 23.4% $10,716 16.2%
Property ............. 15,282 17.0 11,417 15.0 12,935 19.5
Crop ................. 2,693 3.0 1,535 2.0 2,605 3.9
Casualty ............. 1,771 2.0 2,886 3.8 2,819 4.3
Marine/aviation ...... 12,377 13.7 12,073 15.8 6,380 9.6
------- ----- ------- ----- ------- -----
Total pro rata
Reinsurance ...... 52,148 57.9 45,767 60.0 35,455 53.5
------- ----- ------- ----- ------- -----
Excess reinsurance:
Excess per risk
reinsurance:
Property ............. 23,744 26.4 18,925 24.9 20,050 30.2
Casualty ............. 12,954 14.4 10,610 13.9 10,124 15.3
Surety ............... 1,212 1.3 902 1.2 658 1.0
------- ----- ------- ----- ------- -----
Total excess per
risk reinsurance 37,910 42.1 30,437 40.0 30,832 46.5
------- ----- ------- ----- ------- -----
Total .............. $90,058 100.0% $76,204 100.0% $66,287 100.0%
======= ===== ======= ===== ======= =====
MARKETING
Over the last several years Employers Mutual has emphasized writing
excess of loss reinsurance business and has worked to increase its
participation on existing contracts that had favorable terms. Employers
Mutual strives to be flexible in the types of reinsurance products it offers,
but generally limits its writings to direct reinsurance business rather than
providing retrocessional covers. During the last three years there has been a
trend in the reinsurance marketplace for "across the board" participation on
excess of loss reinsurance contracts. As a result, reinsurance companies must
be willing to participate on all layers offered under a specific contract in
order to be considered a viable reinsurer.
COMPETITION
The reinsurance marketplace is generally considered to be competitive;
however, competition for reinsurance business has declined significantly as a
result of the September 11, 2001 terrorist attack on the World Trade Center.
Industry-wide premium increases for January 2003 renewals averaged 11.2
percent for excess of loss business and retention levels increased again as
well. Exclusions for terrorist activities remained commonplace. The market
for terrorism coverage is still evolving, but is becoming more available
(sometimes including nuclear, biological and chemical perils). Terrorism
coverage is still being written on a stand-alone basis. New reinsurance
capacity, primarily from Bermuda, has entered the reinsurance marketplace to
take advantage of higher reinsurance pricing, which could lead to increased
rate competition in the future.
Employers Mutual competes in the global reinsurance market with numerous
reinsurance companies, many of which have greater financial resources.
Competition for reinsurance business is based on many factors, including
financial strength, industry ratings, stability in products offered and
licensing status. During the last several years, some ceding companies have
tended to favor large, financially strong reinsurance companies who are able
to provide "mega" line capacity for multiple lines of business. The Company
faces the risk of ceding companies becoming less interested in diversity and
spread of reinsurance risk in favor of having fewer well capitalized
reinsurance companies on their program.
REINSURANCE CEDED
The reinsurance subsidiary does not purchase outside reinsurance
protection due to the $1,500,000 cap on losses assumed per event under the
terms of the quota share agreement with Employers Mutual. The reinsurance
subsidiary pays an annual override commission to Employers Mutual for this
protection, which amounted to $4,052,600 in 2003. The reinsurance subsidiary
also pays for 100 percent of the outside reinsurance protection Employers
Mutual purchases to protect itself from catastrophic losses on the assumed
reinsurance business. This cost is recorded as a reduction to the premiums
received by the reinsurance subsidiary and amounted to $3,802,878 in 2003.
BEST'S RATING
The most recent Best's Property Casualty Key Rating Guide gives the
reinsurance subsidiary an "A-" (Excellent) policyholders' rating. Best's
ratings are based upon factors of concern to policyholders and insurance
agents and are not necessarily directed toward the protection of investors.
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The reinsurance subsidiary's reserve information is included in the
property and casualty loss reserve development for 2003. See "Property and
Casualty Insurance Subsidiaries and Reinsurance Subsidiary - Outstanding
Losses and Settlement Expenses."
PROPERTY AND CASUALTY INSURANCE SUBSIDIARIES AND REINSURANCE SUBSIDIARY
- -----------------------------------------------------------------------
Employers Mutual provides various services to all of its subsidiaries and
affiliates. Such services include data processing, claims, financial,
actuarial, auditing, marketing and underwriting. Employers Mutual allocates a
portion of the cost of these services to the subsidiaries that do not
participate in the pooling agreement based upon a number of criteria,
including usage and number of transactions. The remaining costs are charged
to the pooling agreement and each pool participant shares in the total cost in
accordance with its pool participation percentage. Costs allocated to the
Company by Employers Mutual for services provided to the holding company and
its subsidiaries that do not participate in the pooling agreement amounted to
$2,097,057, $1,765,287 and $2,040,822 in 2003, 2002 and 2001, respectively.
Costs allocated to the Company through the operation of the pooling agreement
amounted to $63,293,517, $56,897,066 and $51,041,812 in 2003, 2002 and 2001,
respectively.
STATUTORY COMBINED RATIOS
The following table sets forth the statutory combined ratios of the
Company's insurance subsidiaries and the property and casualty insurance
industry averages for the five years ended December 31, 2003. The combined
ratios below are the sum of the following: the loss ratio, calculated by
dividing losses and settlement expenses incurred by net premiums earned, and
the expense ratio, calculated by dividing underwriting expenses incurred by
net premiums written and policyholder dividends by net premiums earned.
Generally, if the combined ratio is below 100 percent, a company has an
underwriting profit; if it is above 100 percent, a company has an underwriting
loss.
Year ended December 31,
--------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Property and casualty insurance
Loss ratio ................... 70.3% 69.8% 83.0% 82.2% 83.6%
Expense ratio ................ 32.2 31.2 28.5 30.8 32.0
------ ------ ------ ------ ------
Combined ratio ............. 102.5% 101.0% 111.5% 113.0% 115.6%
====== ====== ====== ====== ======
Reinsurance
Loss ratio ................... 65.2% 70.7% 86.6% 86.1% 83.1%
Expense ratio ................ 27.2 31.6 29.1 29.1 30.6
------ ------ ------ ------ ------
Combined ratio ............. 92.4% 102.3% 115.7% 115.2% 113.7%
====== ====== ====== ====== ======
Total insurance operations
Loss ratio ................... 68.9% 70.0% 83.8% 83.0% 83.5%
Expense ratio ................ 30.9 31.3 28.6 30.5 31.7
------ ------ ------ ------ ------
Combined ratio ............. 99.8% 101.3% 112.4% 113.5% 115.2%
====== ====== ====== ====== ======
Property and casualty insurance
industry averages (1)
Loss ratio ................... 76.1% 81.7% 88.5% 81.5% 78.6%
Expense ratio ................ 25.0 25.7 27.5 28.9 29.2
------ ------ ------ ------ ------
Combined ratio ............. 101.1% 107.4% 116.0% 110.4% 107.8%
====== ====== ====== ====== ======
(1) As reported by A.M. Best Company. The ratio for 2003 is an estimate; the
actual combined ratio is not currently available.
The 2001 expense ratios and combined ratios for "property and casualty
insurance" and "total insurance operations" are distorted by $13,884,000 of
additional written premiums that were recorded in 2001 in connection with a
change in the recording of installment-based insurance policies. Excluding
this adjustment, the expense ratios would have been 30.2 percent and 30.0
percent, respectively, and the combined ratios would have been 113.2 percent
and 113.8 percent, respectively.
REINSURANCE CEDED
The following table presents amounts due to the Company from reinsurers
for losses and settlement expenses and prepaid reinsurance premiums as of
December 31, 2003:
2003
Amount Percent Best's
recoverable of total rating
----------- -------- ------
Wisconsin Compensation Rating Bureau .. $ 4,862,984 25.4% (1)
XL Reinsurance America ................ 2,180,744 11.4 A+
Minnesota Workers' Comp Reins Assoc ... 1,857,178 9.7 (1)
Hartford Steam Boiler Insp. & Ins. .... 1,772,704 9.3 A+
General Reinsurance Corporation ....... 1,576,805 8.2 A++
National Workers' Compensation
Reinsurance Pool .................... 1,516,420 7.9 (1)
Mutual Reinsurance Bureau ............. 389,681 2.0 (2)
Converium Rens North America Inc ...... 376,509 2.0 A
North Carolina Reins Faculity ......... 344,435 1.8 (1)
Hartford Fire Insurance Company ....... 332,775 1.7 A+
Other Reinsurers ...................... 3,948,747 20.6
----------- --------
Total ........................... $19,158,982(3) 100.0%
=========== ========
(1) Amounts recoverable reflect the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to these
organizations by Employers Mutual in connection with its role as "service
carrier." Under these arrangements, Employers Mutual writes business for
these organizations on a direct basis and then cedes 100 percent of the
business to these organizations. Credit risk associated with these
amounts is minimal as all companies participating in these organizations
are responsible for the liabilities of such organizations on a pro rata
basis.
(2) Mutual Reinsurance Bureau (MRB) is composed of Employers Mutual and three
other nonaffiliated mutual insurance companies. Each of the four members
cede primarily property insurance to MRB and assume, on an equal and
joint basis, proportionate shares of this business. Each member
benefits from the increased capacity provided by MRB. MRB is backed by
the financial strength of the four member companies. All of the members
of MRB were assigned an "A-" (Excellent) or better rating by A.M. Best.
(3) The total amount recoverable at December 31, 2003 represented $1,054,360
in paid losses and settlement expenses, $14,807,394 in unpaid losses
and settlement expenses and $3,297,228 in unearned premiums.
The effect of reinsurance on premiums written and earned, and losses and
settlement expenses incurred for the three years ended December 31, 2003 is
presented below.
Year ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
Premiums written:
Direct ........................ $220,741,419 $235,596,547 $272,027,823
Assumed from nonaffiliates .... 3,816,789 3,985,370 1,898,509
Assumed from affiliates ....... 351,641,368 320,940,551 299,990,245
Ceded to nonaffiliates ........ (15,808,709) (11,089,041) (11,189,227)
Ceded to affiliates ........... (220,741,419) (235,596,547) (272,027,823)
------------ ------------ ------------
Net premiums written ........ $339,649,448 $313,836,880 $290,699,527
============ ============ ============
Premiums earned:
Direct ........................ $221,662,098 $241,939,466 $255,764,274
Assumed from nonaffiliates .... 3,629,346 3,501,616 1,786,132
Assumed from affiliates ....... 341,947,846 304,462,790 274,352,821
Ceded to nonaffiliates ........ (14,954,382) (10,921,373) (10,859,095)
Ceded to affiliates ........... (221,662,098) (241,939,466) (255,764,274)
------------ ------------ ------------
Net premiums earned ......... $330,622,810 $297,043,033 $265,279,858
============ ============ ============
Losses and settlement expenses
incurred:
Direct ........................ $157,500,290 $165,218,514 $221,314,633
Assumed from nonaffiliates .... 3,270,406 2,876,808 1,336,824
Assumed from affiliates ....... 233,823,801 206,614,356 227,650,959
Ceded to nonaffiliates ........ (10,589,657) (2,433,308) (7,069,033)
Ceded to affiliates ........... (157,500,290) (165,218,514) (221,314,633)
------------ ------------ ------------
Net losses and settlement
expenses incurred ......... $226,504,550 $207,057,856 $221,918,750
============ ============ ============
Effective January 1, 2001, the Company began recording the full-term
written premium at the inception of insurance policies that are billed on an
installment basis. Previously, such amounts were recorded as each installment
became due. As a result, written premiums assumed from affiliates for 2001
increased $13,884,423. Earned premiums were not affected by this change, as
unearned premiums were increased by the same amount.
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The Company maintains reserves for losses and settlement expenses with
respect to both reported and unreported claims. The amount of reserves for
reported claims is primarily based upon a case-by-case evaluation of the
specific type of claim, knowledge of the circumstances surrounding each claim
and the policy provisions relating to the type of loss. Reserves on assumed
reinsurance business are the amounts reported by the ceding company.
The amount of reserves for unreported claims is determined on the basis
of statistical information for each line of insurance with respect to the
probable number and nature of claims arising from occurrences that have not
yet been reported. Established reserves are closely monitored and are
frequently recomputed using a variety of formulas and statistical techniques
for analyzing actual claim costs, frequency data and other economic and social
factors.
The Company does not discount reserves. Inflation is implicitly provided
for in the reserving function through analysis of cost trends, reviews of
historical reserving results and projections of future economic conditions.
Large ($100,000 and over) incurred and reported gross reserves are reviewed
regularly for adequacy. In addition, long-term and lifetime medical claims
are periodically reviewed for cost trends and the applicable reserves are
appropriately revised.
Loss reserves are estimates at a given time of what the insurer expects
to pay on incurred losses, based on facts and circumstances then known.
During the loss settlement period, which may be many years, additional facts
regarding individual claims become known, and accordingly, it often becomes
necessary to refine and adjust the estimates of liability on a claim.
Settlement expense reserves are intended to cover the ultimate cost of
investigating claims and defending lawsuits arising from claims. These
reserves are established each year based on previous years experience to
project the ultimate cost of settlement expenses. To the extent that
adjustments are required to be made in the amount of loss reserves each year,
settlement expense reserves are correspondingly revised.
Changes in reserves for losses and settlement expenses are reflected in
operating results in the year such changes are recorded.
Despite the inherent uncertainties of estimating insurance company loss
and settlement expense reserves, management believes that the Company's
reserves are being calculated in accordance with sound actuarial practices
and, based upon current information, that the Company's reserves for losses
and settlement expenses at December 31, 2003 are adequate.
The following table sets forth a reconciliation of beginning and ending
reserves for losses and settlement expenses of the property and casualty
insurance subsidiaries and the reinsurance subsidiary. Amounts presented are
on a net basis, with a reconciliation of beginning and ending reserves to the
gross amounts presented in the consolidated financial statements.
Year ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
Gross reserves at beginning of year $331,226,753 $314,518,588 $286,489,028
Ceded reserves at beginning of year (10,367,624) (11,848,597) (11,224,797)
------------ ------------ ------------
Net reserves at beginning of year .. 320,859,129 302,669,991 275,264,231
------------ ------------ ------------
Incurred losses and
settlement expenses
- ---------------------
Provision for insured events
of the current year ............ 219,028,236 200,059,798 216,752,003
Increase in provision for
insured events of prior years .. 7,476,314 6,998,058 5,166,747
------------ ------------ ------------
Total incurred losses and
settlement expenses ...... 226,504,550 207,057,856 221,918,750
------------ ------------ ------------
Payments
- --------
Losses and settlement expenses
attributable to insured events
of the current year ............ 86,072,127 81,124,276 94,983,112
Losses and settlement expenses
attributable to insured events
of prior years ................. 108,175,065 107,744,442 99,529,878
------------ ------------ ------------
Total payments ............. 194,247,192 188,868,718 194,512,990
------------ ------------ ------------
Net reserves at end of year ........ 353,116,487 320,859,129 302,669,991
Ceded reserves at end of year ...... 14,807,394 10,367,624 11,848,597
------------ ------------ ------------
Gross reserves at end of year ...... $367,923,881 $331,226,753 $314,518,588
============ ============ ============
The following table shows the calendar year development of loss and
settlement expense reserves of the property and casualty insurance
subsidiaries and the reinsurance subsidiary. Amounts presented are on a net
basis with (i) a reconciliation of the net loss and settlement expense
reserves to the gross amounts presented in the consolidated financial
statements and (ii) disclosure of the gross re-estimated loss and settlement
expense reserves and the related re-estimated reinsurance receivables.
Reflected in this table is (1) the reinsurance subsidiary's commutation
of all outstanding reinsurance balances ceded to Employers Mutual under
catastrophe and aggregate excess of loss reinsurance treaties related to
accident years 1991 through 1993 in 1994, and (2) the increase in the
reinsurance subsidiary's quota share assumption of Employers Mutual's assumed
reinsurance business from 95 percent to 100 percent in 1997. The table has
been restated to reflect the addition of Hamilton Mutual to the pooling
agreement effective January 1, 1997 and the addition of Farm and City to the
pooling agreement effective January 1, 1998.
In evaluating the table, it should be noted that each cumulative
redundancy (deficiency) amount includes the effects of all changes in reserves
for prior periods. Conditions and trends that have affected development of
the liability in the past, such as a time lag in the reporting of assumed
reinsurance business, the high rate of inflation associated with medical
services and supplies and the reform measures implemented by several states to
control administrative costs for workers' compensation insurance, may not
necessarily occur in the future. Accordingly, it may not be appropriate to
project future development of reserves based on this table.
During the last three years the Company has experienced adverse
development in the provision for insured events of prior years. The majority
of this adverse development has come from the property and casualty insurance
subsidiaries and is attributed to a combination of bulk reserve strengthening,
an increase in incurred but not reported (IBNR) reserves, the revaluation of
individual claim liabilities in select lines of business, newly reported
claims in excess of carried IBNR reserves, the establishment of additional
asbestos reserves and an increase in paid settlement expenses. The
reinsurance subsidiary experienced favorable development during 2003, but
experienced adverse development for the two prior years. The favorable
development for 2003 is primarily from the 2002 accident year on the Home
Office Reinsurance Assumed Department book of business, which has experienced
very low reported loss activity. The adverse development for the two prior
years is primarily attributed to construction defect claims arising from a
reinsurance pool that the reinsurance subsidiary participates in.
Year ended December 31,
--------------------------------------------------------------------------------------------------
(Dollars in thousands) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Statutory reserves for losses
and settlement expenses ...... $182,072 191,514 196,293 191,892 205,606 230,937 257,201 276,103 303,643 321,945 354,200
Retroactive restatement of
reserves in conjunction with
admittance of new participants
into the pooling agreement ... 5,248 6,603 6,809 7,018 3,600 - - - - - -
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Statutory reserves after
reclassification ............. 187,320 198,117 203,102 198,910 209,206 230,937 257,201 276,103 303,643 321,945 354,200
GAAP adjustments ............... (2,405) (2,479) (3,098) (3,186) (858) (890) (948) (839) (973) (1,086) (1,084)
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Reserves for losses and
settlement expenses .......... 184,915 195,638 200,004 195,724 208,348 230,047 256,253 275,264 302,670 320,859 353,116
Paid (cumulative) as of:
One year later ............... 60,162 57,247 62,012 59,856 62,949 77,699 87,599 99,530 107,744 108,175 -
Two years later .............. 89,153 88,831 92,626 92,191 99,870 119,620 138,701 156,337 170,512 - -
Three years later ............ 107,372 106,691 112,985 113,343 122,455 147,561 173,840 196,400 - - -
Four years later ............. 116,856 118,705 124,450 126,507 136,975 167,529 198,221 - - - -
Five years later ............. 123,843 126,384 132,044 135,321 148,708 181,008 - - - - -
Six years later .............. 128,931 130,977 137,522 143,105 157,808 - - - - - -
Seven years later ............ 132,036 134,923 143,044 149,313 - - - - - - -
Eight years later ............ 135,007 139,263 147,994 - - - - - - - -
Nine years later ............. 137,630 143,345 - - - - - - - - -
Ten years later .............. 140,918 - - - - - - - - - -
Reserves reestimated as of:
End of year .................. 184,915 195,638 200,004 195,724 208,348 230,047 256,253 275,264 302,670 320,859 353,116
One year later ............... 179,527 179,818 183,760 188,579 197,271 224,313 254,350 280,431 309,668 328,335 -
Two years later .............. 170,653 173,162 182,285 185,465 194,287 225,288 256,111 288,465 321,761 - -
Three years later ............ 166,778 172,118 179,797 181,392 193,505 227,010 260,715 296,837 - - -
Four years later ............. 166,133 170,570 176,176 180,686 192,824 229,336 265,802 - - - -
Five years later ............. 165,548 167,763 175,465 179,898 195,910 232,446 - - - - -
Six years later .............. 163,406 166,764 174,695 181,567 198,162 - - - - - -
Seven years later ............ 161,985 166,280 176,012 182,690 - - - - - - -
Eight years later ............ 160,459 167,889 176,866 - - - - - - - -
Nine years later ............. 162,578 168,627 - - - - - - - - -
Ten years later .............. 163,251 - - - - - - - - - -
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cumulative redundancy
(Deficiency) ................. $ 21,664 27,011 23,138 13,034 10,186 (2,399) (9,549) (21,573) (19,091) (7,476) -
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross loss and settlement
expense reserves
- end of year (A) ............ $202,370 209,785 212,231 209,521 221,378 245,610 266,514 286,489 314,519 331,227 367,924
Reinsurance receivables ........ 17,455 14,147 12,227 13,797 13,030 15,563 10,261 11,225 11,849 10,368 14,808
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss and settlement expense
reserves - end of year ....... $184,915 195,638 200,004 195,724 208,348 230,047 256,253 275,264 302,670 320,859 353,116
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross re-estimated reserves
- latest (B) ................. $179,285 183,169 192,080 200,052 213,017 248,303 276,798 309,119 335,734 341,934 367,924
Re-estimated reinsurance
receivables - latest ......... 16,034 14,542 15,214 17,362 14,855 15,857 10,996 12,282 13,973 13,599 14,808
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net re-estimated reserves
- latest ..................... $163,251 168,627 176,866 182,690 198,162 232,446 265,802 296,837 321,761 328,335 353,116
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross cumulative redundancy
(deficiency) (A-B) ........... $ 23,085 26,616 20,151 9,469 8,361 (2,693) (10,284) (22,630) (21,215) (10,707) -
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Asbestos and Environmental Claims
The Company has exposure to asbestos and environmental related claims
associated with the insurance business written by the parties to the pooling
agreement and the reinsurance business assumed from Employers Mutual by the
reinsurance subsidiary.
Estimating loss and settlement expense reserves for asbestos and
environmental claims is very difficult due to the many uncertainties
surrounding these types of claims. These uncertainties exist because the
assignment of responsibility varies widely by state and claims often emerge
long after a policy has expired, which makes assignment of damages to the
appropriate party and to the time period covered by a particular policy
difficult. In establishing reserves for these types of claims, management
monitors the relevant facts concerning each claim, the current status of the
legal environment, the social and political conditions and the claim history
and trends within the Company and the industry.
During 2002, the Company re-evaluated the estimated ultimate losses for
direct asbestos and environmental exposures. Based on this re-evaluation, the
Company reallocated $752,000 of bulk IBNR reserves and $324,303 of settlement
expense reserves to these exposures. In addition, the Company diligently
evaluated the adequacy of its asbestos reserves by commissioning a "ground-up"
study to better quantify its exposure to asbestos liabilities. This study
concluded that the Company's exposure for direct asbestos claims ranged from
$1,000,000 to $5,100,000, with a point estimate of $3,000,000 at December 31,
2002. Based on the results of this study, the Company elected to increase
the IBNR and settlement expense reserves carried for direct asbestos exposures
by $2,068,705 at December 31, 2002, to $2,985,402. The study's results for
asbestos exposures on assumed reinsurance business were received during 2003,
and the Company elected to increase its IBNR reserves carried for assumed
asbestos exposures by $326,000 to the study's point estimate. The study and
its results assume no improvement in the current asbestos litigation
environment; however, federal legislation currently being considered could
reduce the ultimate losses from asbestos litigation below the levels currently
being projected for the industry.
The following table presents asbestos and environmental related losses
and settlement expenses incurred and reserves outstanding for the Company:
Year ended December 31,
--------------------------------
2003 2002 2001
---------- ---------- ----------
Losses and settlement expenses incurred:
Asbestos:
Property and casualty insurance ........ $ - $2,377,631 $ 64,451
Reinsurance ............................ 293,413 (25,001) (9,167)
---------- ---------- ----------
293,413 2,352,630 55,284
---------- ---------- ----------
Environmental:
Property and casualty insurance ........ - 774,489 (120,610)
Reinsurance ............................ - 21,479 20,615
---------- ---------- ----------
- 795,968 (99,995)
---------- ---------- ----------
Total losses and settlement
expenses incurred ................ $ 293,413 $3,148,598 $ (44,711)
========== ========== ==========
Loss and settlement expense reserves:
Asbestos:
Property and casualty insurance ........ $2,885,148 $2,982,809 $ 719,590
Reinsurance ............................ 732,112 533,687 566,477
---------- ---------- ----------
3,617,260 3,516,496 1,286,067
---------- ---------- ----------
Environmental:
Property and casualty insurance ........ 1,164,756 1,175,541 454,460
Reinsurance ............................ 802,180 834,906 824,988
---------- ---------- ----------
1,966,936 2,010,447 1,279,448
---------- ---------- ----------
Total loss and settlement expense
reserves ......................... $5,584,196 $5,526,943 $2,565,515
========== ========== ==========
Based upon current facts, management believes the reserves established
for asbestos and environmental related claims at December 31, 2003 are
adequate. Although future changes in the legal and political environment may
result in adjustments to these reserves, management believes any adjustments
will not have a material impact on the financial condition or results of
operations of the Company.
EMPLOYEES
- ---------
EMC Insurance Group Inc. and its subsidiaries have no employees. The
Company's business activities are conducted by the 2,217 employees of
Employers Mutual. EMC Insurance Group Inc., EMC Reinsurance Company and
Underwriters, LLC are charged their proportionate share of salary and employee
benefit costs based on time allocations. Costs not allocated to these
companies and other subsidiaries of Employers Mutual outside the pooling
agreement are charged to the participants in the pooling agreement. The
property and casualty insurance subsidiaries share the costs charged to the
pooling agreement in accordance with their pool participation percentages.
See "Property and Casualty Insurance - Pooling Agreement."
REGULATION
- ----------
The Company's insurance subsidiaries are subject to extensive regulation
and supervision by their state of domicile, as well as those states in which
they do business. The purpose of such regulation and supervision is primarily
to provide safeguards for policyholders rather than to protect the interests
of stockholders. The insurance laws of the various states establish
regulatory agencies with broad administrative powers, including the power to
grant or revoke operating licenses and to regulate trade practices,
investments, premium rates, deposits of securities, the form and content of
financial statements and insurance policies, accounting practices and the
maintenance of specified reserves and capital for the protection of
policyholders.
Premium rate regulation varies greatly among jurisdictions and lines of
insurance. In most states in which the Company's subsidiaries write
insurance, premium rates for their lines of insurance are subject to either
prior approval or limited review upon implementation. States require rates
for property and casualty insurance that are adequate, not excessive, and not
unfairly discriminatory.
The Company's insurance subsidiaries are required to file detailed annual
reports with the appropriate regulatory agency in each state where they do
business based on applicable statutory regulations, which differ from
generally accepted accounting principles. Their businesses and accounts are
subject to examination by such agencies at any time. Since EMC Insurance
Group Inc. and Employers Mutual are domiciled in Iowa, the State of Iowa
exercises principal regulatory supervision, and Iowa law requires periodic
examination. The Company's insurance subsidiaries are subject to examination
by state insurance departments on a periodic basis, as applicable law
requires.
State laws governing insurance holding companies also impose standards on
certain transactions with related companies, which include, among other
requirements, that all transactions be fair and reasonable and that an
insurer's surplus as regards policyholders be reasonable and adequate in
relation to its liabilities. Under Iowa law, dividends or distributions made
by registered insurers are restricted in amount and may be subject to approval
from the Iowa Commissioner of Insurance. "Extraordinary" dividends or
distributions are subject to prior approval and are defined as dividends or
distributions made within a 12 month period which exceed the greater of 10
percent of statutory surplus as regards policyholders as of the preceding
December 31, or net income of the preceding calendar year on a statutory
basis. North Dakota imposes similar restrictions on the payment of dividends
and distributions. At December 31, 2003, $22,244,303 was available for
distribution in 2004 to the Company without prior approval. See note 6 of
Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
The NAIC utilizes a risk-based capital model to help state regulators
assess the capital adequacy of insurance companies and identify insurers that
are in, or are perceived as approaching, financial difficulty. This model
establishes minimum capital needs based on the risks applicable to the
operations of the individual insurer. The risk-based capital requirements for
property and casualty insurance companies measure three major areas of risk:
asset risk, credit risk and underwriting risk. Companies having less
statutory surplus than required by the risk-based capital requirements are
subject to varying degrees of regulatory scrutiny and intervention, depending
on the severity of the inadequacy. At December 31, 2003, the Company's
insurance subsidiaries had total adjusted statutory capital of $170,232,871,
which is well in excess of the minimum risk-based capital requirement of
$39,609,015.
ITEM 2. PROPERTIES.
- ------- -----------
The Company does not own any real property. Lease costs of the Company's
office facilities in Bismarck, North Dakota, which total approximately
$384,000 annually, are included as expenses under the pooling agreement.
Expenses of office facilities owned and leased by Employers Mutual are borne
by the parties to the pooling agreement, less the rent received from the space
used and paid for by non-insurance subsidiaries and outside tenants. See
"Property and Casualty Insurance - Pooling Agreement" under Item 1 of this
Form 10-K.
ITEM 3. LEGAL PROCEEDINGS.
- ------- ------------------
The Company and Employers Mutual and its other subsidiaries are parties
to numerous lawsuits arising in the normal course of the insurance business.
The Company believes that the resolution of these lawsuits will not have a
material adverse effect on its financial condition or its results of
operations. The companies involved have reserves that are believed adequate
to cover any potential liabilities arising out of all such pending or
threatened proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
None.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ------- -------------------------------------------------
STOCKHOLDER MATTERS.
--------------------
The "Stockholder Information" section from the Company's Annual Report to
Stockholders for the year ended December 31, 2003, which is included as
Exhibit 13(d) to this Form 10-K, is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
- ------- ------------------------
The "Selected Financial Data" section from the Company's Annual Report to
Stockholders for the year ended December 31, 2003, which is included as
Exhibit 13(a) to this Form 10-K, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section from the Company's Annual Report to
Stockholders for the year ended December 31, 2003, which is included as
Exhibit 13(b) to this Form 10-K, is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- -------- -----------------------------------------------------------
The information under the caption "Market Risk" in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section from the Company's Annual Report to Stockholders for the year ended
December 31, 2003, which is included as Exhibit 13(b) to this Form 10-K, is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
The consolidated financial statements from the Company's Annual Report to
Stockholders for the year ended December 31, 2003, which is included as
Exhibit 13(c) to this Form 10-K, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------- ------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
------------------------------------
None.
ITEM 9A. CONTROLS AND PROCEDURES.
- -------- ------------------------
Within the 90 days prior to the filing date of this report, the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are functioning effectively to provide reasonable
assurance that the Company can meet its disclosure obligations. Since the
date of the most recent evaluation of the Company's internal controls by the
Chief Executive Officer and Chief Financial Officer there have been no
significant changes in the Company's internal controls or in other factors
that could significantly affect these controls.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- ---------------------------------------------------
See the information under the caption "Election of Directors" in the
Company's Proxy Statement in connection with its Annual Meeting to be held on
May 21, 2004, which information is incorporated herein by reference.
The following sets forth information regarding all executive officers of
the Company.
NAME AGE POSITION
---- --- --------
Bruce G. Kelley 50 President and Chief Executive Officer of the
Company and of Employers Mutual since 1992.
Treasurer of Employers Mutual from 1996 until
2000 and the Company from 1996 until February
2001. He was President and Chief Operating
Officer of the Company and Employers Mutual
from 1991 to 1992 and was Executive Vice
President of the Company and Employers Mutual
from 1989 to 1991. He has been employed by
Employers Mutual since 1985.
William A. Murray 57 Executive Vice President and Chief Operating
Officer of the Company and Employers Mutual
since 2001. He was Resident Vice President
and Branch Manager of Employers Mutual from
1992 until 2001. He has been employed by
Employers Mutual since 1985.
Ronald W. Jean 54 Executive Vice President for Corporate
Development of the Company and Employers
Mutual since 2000. He was Senior Vice
President - Actuary of the Company and
Employers Mutual from 1997 until 2000. He
was Vice President - Actuary of the Company
and Employers Mutual from 1985 until 1997.
He has been employed by Employers Mutual
since 1979.
NAME AGE POSITION
---- --- --------
Raymond W. Davis 58 Senior Vice President - Investments of the
Company and Employers Mutual since 1998.
Treasurer of the Company since 2001 and of
Employers Mutual since 2000. He was Vice
President - Investments of the Company and of
Employers Mutual from 1985 until 1998. He
has been employed by Employers Mutual since
1979.
Donald D. Klemme 58 Senior Vice President - Administration and
Secretary of the Company since 1998. Senior
Vice President - Administration of Employers
Mutual since 1998. He was Vice President -
Administration and Secretary of the Company
from 1996 until 1998 and was Vice President -
Director of Internal Audit prior to that. He
has been employed by Employers Mutual since
1972.
David O. Narigon 51 Senior Vice President - Claims of the Company
and of Employers Mutual since 1998. He was
Vice President - Claims of the Company from
1988 until 1998. He has been employed by
Employers Mutual since 1983.
Steven C. Peck 56 Senior Vice President - Actuary of the
Company and of Employers Mutual since 2003.
He was Vice President of the Company and of
Employers Mutual from 1997 until 2003. He
has been employed by Employers Mutual since
1984.
Mark E. Reese 46 Vice President of the Company and Employers
Mutual since 1996 and Chief Financial Officer
of the Company and Employers Mutual since
1997. He has been employed by Employers
Mutual since 1984.
The Company has adopted a code of ethics that applies to the Company's
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions. The code of
ethics is posted on the Investor Relations section of the Company's internet
website found at www.emcinsurance.com.
ITEM 11. EXECUTIVE COMPENSATION.
- -------- -----------------------
See the information under the caption "Compensation of Management" in the
Company's Proxy Statement in connection with its Annual Meeting to be held on
May 21, 2004, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- -------- ------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS.
----------------------------
The information under the captions "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management and Directors" in the
Company's Proxy Statement in connection with its Annual Meeting to be held on
May 21, 2004, which information is incorporated herein by reference.
The following table presents information regarding Employers Mutual's
equity compensation plans as of December 31, 2003:
Number of
securities
remaining
available for
Number of future issuance
securities to under equity
be issued upon Weighted-average compensation
exercise of exercise price plans (excluding
outstanding of outstanding securities
options, warrants options, warrants reflected in
Plan category and rights and rights column (a))
- ------------- ----------------- ----------------- -----------------
(a) (b) (c)
----------------- ----------------- -----------------
Equity compensation
plans approved by
security holders 630,615 $12.86 386,775
Equity compensation
plans not
approved by
security holders - N/A N/A
----------------- ----------------- -----------------
Total 630,615 $12.86 386,775
================= ================= =================
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
See the information under the caption "Certain Relationships and Related
Transactions" in the Company's Proxy Statement in connection with its Annual
Meeting to be held on May 21, 2004, which information is incorporated herein
by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
- -------- ---------------------------------------
See the information under the captions "Audit Fees", "Audit Related
Fees", "Tax Fees" and "All Other Fees" in the Company's Proxy Statement in
connection with its Annual Meeting to be held on May 21, 2004, which
information is incorporated herein by reference.
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- -------- -----------------------------------------------------------------
(a) List of Financial Statements and Schedules.
1. Financial Statements
Page
----
Report of Ernst & Young LLP, Independent Auditors ........... 32*
Consolidated Balance Sheets, December 31, 2003 and 2002 ..... 33*
Consolidated Statements of Income for the years ended
December 31, 2003, 2002 and 2001 ......................... 35*
Consolidated Statements of Comprehensive Income for the
Years ended December 31, 2003, 2002 and 2001 ............. 36*
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 2003, 2002 and 2001 ............. 37*
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 ......................... 38*
Notes to Consolidated Financial Statements .................. 40-68*
* Refers to the respective page of the financial information insert
of EMC Insurance Group Inc.'s 2003 Annual Report to Stockholders.
The Consolidated Financial Statements and Independent Auditor's
Report, which are included as Exhibit 13(c), are incorporated by
reference. With the exception of the portions of such Annual Report
specifically incorporated by reference in this Item and Items 5, 6,
7, 7A and 8, such Annual Report shall not be deemed filed as part of
this Form 10-K or otherwise subject to the liabilities of Section 18
of the Securities Exchange Act of 1934.
2. Schedules Form 10-K
Page
----
Report of Ernst & Young LLP, Independent Auditors,
On Schedules .............................................. 31
Schedule I - Summary of Investments - Other Than
Investments in Related Parties ............... 32
Schedule II - Condensed Financial Information of Registrant 33
Schedule III - Supplementary Insurance Information .......... 36
Schedule IV - Reinsurance .................................. 37
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations ..... 38
All other schedules have been omitted for the reason that the items
required by such schedules are not present in the consolidated
financial statements, are covered in the notes to the consolidated
financial statements or are not significant in amount.
3. Management contracts and compensatory plan arrangements
Exhibit 10(b). 2003 Senior Executive Compensation Bonus Program.
Exhibit 10(d). Deferred Bonus Compensation Plans.
Exhibit 10(e). 2003 Executive Contingent Salary Plan -
EMC Reinsurance Company.
Exhibit 10(g). Employers Mutual Casualty Company Excess Retirement
Benefit Agreement.
Exhibit 10(h). Employers Mutual Casualty Company 1993 Employee
Stock Purchase Plan.
Exhibit 10(i). 1993 Employers Mutual Casualty Company Incentive
Stock Option Plan, as amended.
Exhibit 10(j). 2003 Employers Mutual Casualty Company Non-Employee
Director Stock Option Plan.
Exhibit 10(k). Employers Mutual Casualty Company Supplemental
Executive Retirement Plan.
Exhibit 10(l). EMCC Option It! Deferred Bonus Compensation Plan.
Exhibit 10(m). EMCC Board of Directors Option It! Deferred
Compensation Plan.
Exhibit 10(n). Employers Mutual Casualty Company Executive Non-
Qualified Excess Plan.
Exhibit 10(o). 2003 Employers Mutual Casualty Company Incentive
Stock Option Plan.
(b) Reports on Form 8-K.
An 8-K was filed on November 4, 2003 announcing the Company's financial
results for the third quarter of 2003.
(c) Exhibits.
3. Articles of incorporation and by-laws:
(a) Articles of Incorporation of the Company, as amended.
(Incorporated by reference to the Company's Form 10-K
for the calendar year ended December 31, 1998.)
(b) By-Laws of the Company, as amended. Incorporated by
reference to the Company's Form 10-K for the calendar
year ended December 31, 2001.)
10. Material contracts.
(a) Quota Share Reinsurance Contract between Employers Mutual
Casualty Company and EMC Reinsurance Company. (Incorporated by
reference to the Company's Form 10-K for the calendar year ended
December 31, 2000.)
(b) 2003 Senior Executive Compensation Bonus Program.
(c) EMC Insurance Companies reinsurance pooling agreements
between Employers Mutual Casualty Company and certain of its
affiliated companies, as amended.
(d) Deferred Bonus Compensation Plans. (Incorporated by reference
to the Company's Form 10-K for the calendar year ended December
31, 1998.)
(e) 2003 Executive Contingent Salary Plan - EMC Reinsurance Company.
(f) EMC Insurance Group Inc. Amended and Restated Dividend
Reinvestment and Common Stock Purchase Plan. (Incorporated by
reference to Registration No. 33-34499.)
(g) Employers Mutual Casualty Company Excess Retirement Benefit
Agreement. (Incorporated by reference to the Company's
Form 10-K for the calendar year ended December 31, 1998.)
(h) Employers Mutual Casualty Company 1993 Employee Stock Purchase
Plan. (Incorporated by reference to Registration No. 33-49335.)
(i) 1993 Employers Mutual Casualty Company Incentive Stock Option
Plan. (Incorporated by reference to Registration Nos. 33-49337
and 333-45279.)
(j) 2003 Employers Mutual Casualty Company Non-Employee Director
Stock Option Plan. (Incorporated by reference to Registration
No. 333-104469.)
(k) Employers Mutual Casualty Company Supplemental Executive
Retirement Plan. (Incorporated by reference to the Company's
Form 10-K for the calendar year ended December 31, 2000.)
(l) EMCC Option It! Deferred Bonus Compensation Plan. (Incorporated
by reference to the Company's Form 10-K for the calendar year
ended December 31, 2001.)
(m) EMCC Board of Directors Option It! Deferred Compensation Plan.
(Incorporated by reference to the Company's Form 10-K for the
calendar year ended December 31, 2001.)
(n) Employers Mutual Casualty Company Executive Non-Qualified Excess
Plan.
(o) 2003 Employers Mutual Casualty Company Incentive Stock Option
Plan. (Incorporated by reference to Registration No.
333-103722.)
13. Annual Report to Security Holders.
(a) Selected Financial Data from the Company's 2003 Annual Report to
Stockholders.
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations from the Company's 2003 Annual Report to
Stockholders.
(c) Consolidated Financial Statements from the Company's 2003
Annual Report to Stockholders.
(d) Stockholder Information from the Company's 2003 Annual Report to
Stockholders.
14. Code of Ethics. (Incorporated by reference to the Investor Relations
section of the Company's internet website found at
www.emcinsurance.com.)
21. Subsidiaries of the Registrant.
23. Consent of Ernst & Young LLP with respect to Forms S-8 (Registration
Nos. 33-49335, 33-49337, 333-104469, 333-45279 and 333-103722) and
Form S-3 (Registration no. 33-34499).
24. Power of Attorney.
31.1 Certification of President and Chief Executive Officer as required
by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Vice President and Chief Financial Officer as
required by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the President and Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as
Adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of the Vice President and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as
Adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(d) Financial statements required by Regulation S-X which are excluded from
the Annual Report to Stockholders by Rule 14a-3(b)(1).
None.
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 29,2004.
EMC INSURANCE GROUP INC.
/s/ Bruce G. Kelley
-----------------------
Bruce G. Kelley
President and
Chief Executive Officer
/s/ Mark E. Reese
-----------------------
Mark E. Reese
Vice President - Chief Financial Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 29,2004.
/s/ Mark E. Reese
------------------------
George C. Carpenter III*
Director
/s/ Mark E. Reese
------------------------
E. H. Creese*
Director
/s/ Mark E. Reese
------------------------
David J. Fisher*
Director
/s/ Bruce G. Kelley
------------------------
Bruce G. Kelley
Director
/s/ Mark E. Reese
------------------------
George W. Kochheiser*
Chairman of the Board
/s/ Mark E. Reese
------------------------
Raymond A. Michel*
Director
/s/ Mark E. Reese
------------------------
Fredrick A. Schiek*
Director
* by power of attorney
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS, ON SCHEDULES
We have audited the consolidated balance sheets of EMC Insurance Group
Inc. and Subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of income, comprehensive income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2003, and have issued our report thereon dated February 27, 2004 (included
elsewhere in this Annual Report on Form 10-K). Our audits also included the
financial statement schedules listed in Item 15(a)2 of this Annual Report on
Form 10-K. These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
February 27, 2004
Des Moines, Iowa
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule I - Summary of Investments -
Other Than Investments in Related Parties
December 31, 2003
Amount at
which shown
Fair in the
Type of investment Cost value balance sheet
------------------ ------------ ------------ -------------
Securities held-to-maturity:
Fixed maturities:
United States Government
and government agencies
and authorities .............. $ 47,547,267 $ 51,327,598 $ 47,547,267
Mortgage-backed securities ..... 2,298,081 2,526,826 2,298,081
------------ ------------ ------------
Total fixed maturity
securities ............. 49,845,348 53,854,424 49,845,348
------------ ------------ ------------
Securities available-for-sale:
Fixed maturities:
United States Government
and government agencies
and authorities .............. 170,445,955 171,149,194 171,149,194
States, municipalities and
political subdivisions ....... 140,694,351 146,775,232 146,775,232
Mortgage-backed securities ..... 19,311,455 21,278,600 21,278,600
Public utilities ............... 20,171,434 21,799,337 21,799,337
Corporate securities ........... 148,887,343 162,783,395 162,783,395
------------ ------------ ------------
Total fixed maturity
securities ............. 499,510,538 523,785,758 523,785,758
------------ ------------ ------------
Equity securities:
Common stocks
Banks, trusts and insurance
companies .................. 6,528,117 9,624,863 9,624,863
Industrial, miscellaneous and
all other .................. 31,969,958 38,855,135 38,855,135
Non-redeemable preferred
stocks ..................... 500,000 528,500 528,500
------------ ------------ ------------
Total equity securities ............ 38,998,075 49,008,498 49,008,498
------------ ------------ ------------
Other long-term investments ........ 4,758,019 4,758,019 4,758,019
Short-term investments ............. 63,568,064 63,568,064 63,568,064
------------ ------------ ------------
Total investments ...... $656,680,044 $694,974,763 $690,965,687
============ ============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31,
--------------------------
2003 2002
------------ ------------
ASSETS
Investment in common stock of
subsidiaries (equity method) .................. $176,087,397 $154,552,425
Fixed maturity investments:
Securities available-for-sale, at fair value .. 516,775 1,676,455
Short-term investments .......................... 3,768,427 1,455,824
Cash ............................................ 168,072 58,676
Accrued investment income ....................... 4,545 42,088
Income taxes recoverable ........................ 211,760 212,502
Deferred income taxes ........................... 204,310 12,764
------------ ------------
Total assets ............................... $180,961,286 $158,010,734
============ ============
LIABILITIES
Accounts payable ................................ $ 199,015 $ 227,207
Indebtedness to related party ................... 11,720 15,163
------------ ------------
Total liabilities .......................... 210,735 242,370
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 11,501,065 shares
in 2003 and 11,399,050 shares in 2002 ......... 11,501,065 11,399,050
Additional paid-in capital ...................... 69,113,228 67,270,591
Accumulated other comprehensive income .......... 22,285,668 14,218,330
Retained earnings ............................... 77,850,590 64,880,393
------------ ------------
Total stockholders' equity ................. 180,750,551 157,768,364
------------ ------------
Total liabilities and stockholders' equity $180,961,286 $158,010,734
============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant, Continued
Condensed Statements of Income
Years ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
REVENUES
Dividends received from subsidiaries .. $ 7,255,228 $ 6,250,016 $ 5,525,096
Investment income ..................... 30,368 113,843 194,326
Realized investment gains ............. - 5,313 -
----------- ----------- -----------
7,285,596 6,369,172 5,719,422
Operating expenses .................... 609,563 436,688 438,687
----------- ----------- -----------
Income before income tax benefit
and equity in undistributed net
income (loss) of subsidiaries ..... 6,676,033 5,932,484 5,280,735
Income tax benefit .................... (195,932) (101,747) (110,263)
----------- ----------- -----------
Income before equity in undistributed
net income (loss) of subsidiaries 6,871,965 6,034,231 5,390,998
Equity in undistributed net income
(loss) of subsidiaries .............. 13,477,158 10,067,507 (7,497,130)
----------- ----------- -----------
Net income (loss) ....... $20,349,123 $16,101,738 $(2,106,132)
=========== =========== ===========
Condensed Statements of Comprehensive Income
Years ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
Net income (loss) .................. $ 20,349,123 $ 16,101,738 $ (2,106,132)
------------ ------------ ------------
Other Comprehensive Income:
Unrealized holding gains arising
during the period, net of
deferred income tax expense .... 8,638,869 4,845,443 962,453
Reclassification adjustment for
(gains) losses included in net
income (loss), net of income tax
expense (benefit) .............. (759,797) 2,053,481 (506,701)
Adjustment for minimum pension
liability associated with
Employers Mutual's pension plan,
net of deferred income tax
expense (benefit) .............. 188,266 (188,266) -
------------ ------------ ------------
Other comprehensive income ....... 8,067,338 6,710,658 455,752
------------ ------------ ------------
Total comprehensive income
(loss) ..................... $ 28,416,461 $ 22,812,396 $ (1,650,380)
============ ============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant, Continued
Condensed Statements of Cash Flows
Years ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
Net cash provided by
operating activities ................ $ 6,691,273 $ 5,988,850 $ 5,316,361
----------- ----------- -----------
Cash flows from investing activities
Maturities of fixed maturity
securities available-for-sale ..... 1,665,000 1,505,313 -
Purchases of fixed maturity
securities available-for-sale ..... (500,000) (1,694,104) -
Net (purchases) sales of short-term
investments ...................... (2,312,603) (467,269) 1,169,110
----------- ----------- -----------
Net cash (used) provided by
investing activities ........... (1,147,603) (656,060) 1,169,110
----------- ----------- -----------
Cash flows from financing activities
Balances resulting from related
party transactions with Employers
Mutual:
Issuance of common stock ........ 1,944,652 1,326,451 502,007
Dividends paid to Employers
Mutual ........................ (5,522,994) (5,423,042) (5,275,938)
Dividends to Employers Mutual
(reimbursement for non-GAAP
expense) ...................... (505,196) - -
Dividends paid to stockholders ...... (1,350,736) (1,405,064) (1,511,382)
----------- ----------- -----------
Net cash used in financing
activities ..................... (5,434,274) (5,501,655) (6,285,313)
----------- ----------- -----------
Net increase (decrease) in cash ....... 109,396 (168,865) 200,158
Cash at beginning of year ............. 58,676 227,541 27,383
----------- ----------- -----------
Cash at end of year ................... $ 168,072 $ 58,676 $ 227,541
=========== =========== ===========
Income taxes received ................. $ - $ 2,253 $ 6,588
Interest received .................... $ - $ - $ 123
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information
For Years Ended December 31, 2003, 2002 and 2001
Deferred Loss and
policy settlement Net
acquisition expense Unearned Premium investment
Segment costs reserves premiums revenue income
------- ----------- ------------ ------------ ------------ -----------
Year ended December 31, 2003:
Property and casualty insurance $22,844,736 $251,260,260 $107,136,936 $241,237,313 $20,724,017
Reinsurance ................... 3,893,048 116,663,621 17,695,671 89,385,497 8,948,076
Parent company ................ - - - - 30,368
----------- ------------ ------------ ------------ -----------
Consolidated ............. $26,737,784 $367,923,881 $124,832,607 $330,622,810 $29,702,461
=========== ============ ============ ============ ===========
Year ended December 31, 2002:
Property and casualty insurance $21,181,714 $229,876,996 $ 98,723,419 $225,013,076 $23,517,163
Reinsurance ................... 3,745,147 101,349,757 17,023,395 72,029,957 9,147,127
Parent company ................ - - - - 113,843
----------- ------------ ------------ ------------ -----------
Consolidated ............. $24,926,861 $331,226,753 $115,746,814 $297,043,033 $32,778,133
Year ended December 31, 2001:
Property and casualty insurance $18,536,512 $221,986,108 $ 86,532,102 $203,392,845 $22,457,799
Reinsurance ................... 2,827,016 92,532,480 12,850,074 61,887,013 8,317,505
Parent company ................ - - - - 194,326
----------- ------------ ------------ ------------ -----------
Consolidated ............. $21,363,528 $314,518,588 $ 99,382,176 $265,279,858 $30,969,630
=========== ============ ============ ============ ===========
Amortization
Losses and of deferred
settlement policy Other
expenses acquisition underwriting Premiums
Segment incurred costs expenses written (1)
------- ------------ ------------ ------------ ------------
Year ended December 31, 2003:
Property and casualty insurance $168,238,623 $ 52,932,215 $ 24,548,745 $249,591,675
Reinsurance ................... 58,265,927 19,027,017 5,376,197 90,057,773
Parent company ................ - - - -
------------ ------------ ------------ ------------
Consolidated ............. $226,504,550 $ 71,959,232 $ 29,924,942 $339,649,448
Year ended December 31, 2002:
Property and casualty insurance $156,152,022 $ 49,057,682 $ 20,447,874 $237,633,602
Reinsurance ................... 50,905,834 16,669,334 6,481,098 76,203,278
Parent company ................ - - - -
------------ ------------ ------------ ------------
Consolidated ............. $207,057,856 $ 65,727,016 $ 26,928,972 $313,836,880
============ ============ ============ ============
Year ended December 31, 2001:
Property and casualty insurance $168,344,370 $ 42,062,510 $ 17,990,128 $224,412,085
Reinsurance ................... 53,574,380 13,624,505 4,749,785 66,287,442
Parent company ................ - - - -
------------ ------------ ------------ ------------
Consolidated ............. $221,918,750 $ 55,687,015 $ 22,739,913 $290,699,527
============ ============ ============ ============
(1) Written premiums for 2001 include $13,884,423 of additional premiums
from a change in the recording of installment-based policies.
See note 11 of Notes to Consolidated Financial Statements which is
included as Exhibit 13(c) of this Form 10-K.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule IV - Reinsurance
For years ended December 31, 2003, 2002 and 2001
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
------------ ------------ ------------ ------------ -----------
Year ended December 31, 2003:
Consolidated earned premiums ........... $221,662,098 $236,616,480 $345,577,192 $330,622,810 104.5%
============ ============ ============ ============ ==========
Year ended December 31, 2002:
Consolidated earned premiums ........... $241,939,466 $252,860,839 $307,964,406 $297,043,033 103.7%
============ ============ ============ ============ ==========
Year ended December 31, 2001:
Consolidated earned premiums ........... $255,764,274 $266,623,369 $276,138,953 $265,279,858 104.1%
============ ============ ============ ============ ==========
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule VI - Supplemental Insurance Information Concerning
Property-Casualty Insurance Operations
For Years Ended December 31, 2003, 2002 and 2001
Discount,
Deferred Reserves for if any,
policy losses and deducted Net
Consolidated property- acquisition settlement from Unearned Earned investment
casualty entities costs expenses reserves premiums premiums income
- ---------------------- ----------- ------------ -------- ------------ ------------ -----------
Year ended December 31, 2003: $26,737,784 $367,923,881 $ -0- $124,832,607 $330,622,810 $29,672,093
=========== ============ ======== ============ ============ ===========
Year ended December 31, 2002: $24,926,861 $331,226,753 $ -0- $115,746,814 $297,043,033 $32,664,290
=========== ============ ======== ============ ============ ===========
Year ended December 31, 2001: $21,363,528 $314,518,588 $ -0- $ 99,382,176 $265,279,858 $30,775,304
=========== ============ ======== ============ ============ ===========
Losses and Amortization
settlement expenses of deferred Paid
incurred related to policy losses and
Consolidated property- Current Prior acquisition settlement Premiums
casualty entities Year Years costs expenses Written (1)
- ---------------------- ------------ ----------- ------------ ------------ ------------
Year ended December 31, 2003: $219,028,236 $ 7,476,314 $ 71,959,232 $194,247,192 $339,649,448
============ =========== ============ ============ ============
Year ended December 31, 2002: $200,059,798 $ 6,998,058 $ 65,727,016 $188,868,718 $313,836,880
============ =========== ============ ============ ============
Year ended December 31, 2001: $216,752,003 $ 5,166,747 $ 55,687,015 $194,512,990 $290,699,527
============ =========== ============ ============ ============
(1) Written premiums for 2001 include $13,884,423 of additional premiums
from a change in the recording of installment-based policies.
See note 11 of Notes to Consolidated Financial Statements which is
included as Exhibit 13(c) of this Form 10-K.
EMC Insurance Group Inc. and Subsidiaries
Index to Exhibits
Exhibit
number Item Page number
-------- ---- -----------
10(b) 2003 Senior Executive Compensation Bonus Program. 40-44
10(c) EMC Insurance Companies reinsurance
pooling agreement between Employers
Mutual Casualty Company and certain of
its affiliated companies, as amended. 45-72
10(e) 2003 Executive Contingent Salary Plan - EMC
Reinsurance Company. 73-74
10(n) Employers Mutual Casualty Company Executive
Non-Qualified Excess Plan. 75-104
13(a) Selected Financial Data. 105
13(b) Management's Discussion and Analysis
of Financial Condition and Results
of Operations. 106-134
13(c) Consolidated Financial Statements and
Supplementary Data. 135-172
13(d) Stockholder Information. 173
21 Subsidiaries of the Registrant. 174
23 Consent of Ernst & Young LLP, Independent
Auditors. 175
24 Power of Attorney. 176
31.1 Certification of President and Chief Executive
Officer as required by Section 302 of the Sarbanes-
Oxley Act of 2002. 177-178
31.2 Certification of Vice President and Chief Financial
Officer as required by Section 302 of the Sarbanes-
Oxley Act of 2002. 179-180
32.1 Certification of the President and Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as
Adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002. 181
32.2 Certification of the Vice President and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as
Adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002. 182