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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the Fiscal Year Ended December 31, 1993
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
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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) 280-2581
---------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $1.00
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 1, 1994 was $31,263,947.
The number of shares outstanding of the registrant's common stock, $1.00
par value, on March 1, 1994, was 10,331,693.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement, which will be
filed with the Securities and Exchange Commission on or before April 30, 1994,
are incorporated by reference under Part III.
This document contains 162 sequentially numbered pages.
Index to Exhibits is on page number 95.
1
PART I
------
ITEM 1. BUSINESS.
- ------- --------
GENERAL
- -------
EMC Insurance Group Inc. is an insurance holding company incorporated in
Iowa in 1974. EMC Insurance Group Inc. is approximately 67 percent owned by
Employers Mutual Casualty Company ("Employers Mutual"), a multiple-line
property and casualty insurance company organized as an Iowa mutual insurance
company in 1911 that is licensed in all 50 states and the District of
Columbia. EMC Insurance Group Inc. and its subsidiaries are referred to herein
as the "Company". Employers Mutual and all of its subsidiaries (including the
Company), which collectively have assets totaling $1,228,334,000 and written
premiums of $562,817,000, are referred to as the "EMC Insurance Companies".
The Company conducts its insurance business through four business
segments as follows:
...............................
: :
: EMC INSURANCE GROUP INC. :
:.............................:
: Excess and
Property and : Nonstandard Surplus Lines
Casualty : Risk Automobile Insurance
Insurance Reinsurance : Insurance Agency
................................:.................................
: : : :
: : : :
EMCASCO Insurance EMC Farm and City EMC
Company (EMCASCO) Reinsurance Insurance Underwriters,
Illinois EMCASCO Company Company Ltd.
Insurance Company (EMC Re) (Farm and (Underwriters,
(Illinois EMCASCO) City) Ltd.)
Dakota Fire Insurance
Company (Dakota Fire)
EMCASCO was formed in Iowa in 1958, Illinois EMCASCO was formed in
Illinois in 1976, and Dakota Fire was formed in North Dakota in 1957 for the
purpose of writing property and casualty insurance lines. These companies are
licensed to write insurance in a total of 35 states and are participants in a
pooling agreement with Employers Mutual. (See "Property and Casualty Insurance
- - Pooling Agreement").
EMC Re was formed in 1981 to assume reinsurance business of Employers
Mutual. EMC Re assumes 95 percent of Employers Mutual's assumed reinsurance
business, exclusive of certain reinsurance contracts, and is licensed to do
business in 11 states.
Farm and City was purchased in January of 1984. Farm and City was formed
in Iowa in 1962 to write nonstandard risk automobile insurance and is licensed
in 5 states.
2
Underwriters, Ltd. was acquired in January of 1985. Underwriters, Ltd.
was formed in Iowa in 1975 as a broker for excess and surplus lines insurance
and acts as managing underwriter for such lines for several of the property and
casualty pool members. (See "Property and Casualty Insurance - Pooling
Agreement").
The Company sold its life insurance subsidiary to Employers Mutual on
December 31, 1991. All information presented in this report reflects the life
segment as a discontinued operation. Additional information regarding the
discontinued operation is included in note 5 of Notes to Consolidated Financial
Statements under Item 8 of this Form 10-K.
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 9 of Notes to Consolidated Financial Statements under
Item 8 of this Form 10-K.
PROPERTY AND CASUALTY INSURANCE
- -------------------------------
POOLING AGREEMENT
The three property and casualty insurance subsidiaries of the Company and
two subsidiaries of Employers Mutual (Union Insurance Company of Providence and
American Liberty 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 and assumes from Employers Mutual an amount equal to
its participation in the pool. All losses, settlement expenses and other
underwriting and administrative expenses are prorated among the parties on the
basis of participation in the pool. The investment programs and income tax
liabilities of the pool participants are not subject to the pooling agreement.
The purpose of the pooling agreement is to reduce the risk of an exposure
insured by any of the pool participants by spreading it 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
and lines of insurance written and the variety of rate filings and commission
plans offered by each of the companies. A single set of reinsurance treaties
is maintained for the protection of all six companies in the pool.
Effective January 1, 1992, the aggregate participation of the property and
casualty insurance subsidiaries was increased to 22 percent from 17 percent.
In connection with this change in pool participation, the Company's liabilities
increased $31,427,861 and invested assets increased $29,402,411. The Company
reimbursed Employers Mutual $2,025,450 for commissions incurred to generate
this business.
3
Employers Mutual voluntarily assumes reinsurance business from
nonaffiliated insurance companies and cedes 95 percent of this business to the
Company's reinsurance subsidiary, exclusive of certain reinsurance contracts.
Amounts not ceded to the reinsurance subsidiary have historically been retained
by Employers Mutual and have been subject to cession to the pool members.
Under the terms of the pooling agreement, the property and casualty
subsidiaries had a 22 percent participation (17 percent in 1991) in the amounts
assumed from these nonaffiliated companies.
Effective January 1, 1993, the pooling agreement was amended so that the
voluntary assumed reinsurance business written by Employers Mutual is no longer
subject to cession to the pool members. In connection with this change in the
pooling agreement, the Company's liabilities decreased $4,470,204 and invested
assets decreased $4,426,945. Employers Mutual reimbursed the Company $43,259
for commissions incurred to generate this business.
The parties to the pooling agreement have historically recorded amounts
assumed from the National Workers' Compensation Reinsurance Pool on a net
basis. Under this approach, reserves for outstanding losses and unearned
premiums were reported as liabilities under "Indebtedness to Related Party" in
the Company's consolidated financial statements. Effective December 31, 1993,
the parties to the pooling agreement began recording these amounts as
outstanding losses and unearned premiums. As a result, outstanding losses
increased $11,436,543, unearned premiums increased $1,711,288 and indebtedness
to related party decreased $13,147,831. There was no income effect from this
reclassification. Prior year consolidated financial statements have been
restated for comparative purposes.
SERVICES PROVIDED BY EMPLOYERS MUTUAL
Employers Mutual and the Company's property and casualty insurance
subsidiaries utilize many common services and facilities. These services are
provided to all parties to the pooling agreement by Employers Mutual. The
parties receive the benefit of greater expertise in a broader range of services
at a lower cost than would otherwise be possible if each party was individually
required to provide these services. Costs of these services are charged by
Employers Mutual to the pool, and each party shares in the total cost in
proportion to its participation percentage. Common data processing, claims,
financial, investment, actuarial, auditing, risk management, risk improvement,
marketing and underwriting services are among the services provided by
Employers Mutual for the Company's property and casualty insurance
subsidiaries. This interrelationship means that Employers Mutual has the
ability to determine the types and extent of services available to the property
and casualty insurance subsidiaries.
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, 1993. 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.
4
Percent Percent Percent
of of of
Line of Business 1993 Total 1992 Total 1991 Total
- ---------------- -------- ----- -------- ----- -------- -----
(Dollars in thousands)
Commercial Lines:
Automobile ............ $ 83,415 16.0% $ 77,102 14.9% $ 70,406 14.2%
Property .............. 72,743 13.9 71,856 13.9 68,710 13.8
Workers' compensation 134,529 25.8 141,245 27.2 136,594 27.5
Liability ............. 99,976 19.1 98,029 18.9 92,721 18.7
Other ................. 11,948 2.3 11,858 2.3 10,016 2.0
-------- ----- -------- ----- -------- -----
Total commercial lines 402,611 77.1 400,090 77.2 378,447 76.2
-------- ----- -------- ----- -------- -----
Personal Lines:
Automobile ............ 83,068 15.9 82,346 15.9 81,178 16.4
Property .............. 36,515 7.0 35,785 6.9 35,912 7.2
Liability ............. - - 200 - 988 .2
Other ................. 56 - 57 - 58 -
-------- ----- -------- ----- -------- -----
Total personal lines 119,639 22.9 118,388 22.8 118,136 23.8
-------- ----- -------- ----- -------- -----
Total ............ $522,250 100.0% $518,478 100.0% $496,583 100.0%
======== ===== ======== ===== ======== =====
MARKETING
Marketing of insurance by the parties to the pooling agreement is
conducted through 18 offices located throughout the United States and
approximately 2,400 independent agents. These offices maintain close contact
with the local market conditions and are able to react rapidly to change. Each
office employs underwriting, claims, marketing, and risk improvement
representatives, as well as field auditors and branch administrative
technicians. The offices are supported by Employers Mutual technicians and
specialists. Systems are in place to monitor the underwriting results of each
office and to maintain guidelines and policies consistent with the underwriting
and marketing environment in each region.
The following table sets forth the geographic distribution of the
aggregate direct written premiums of all parties to the pooling agreement for
the three years ended December 31, 1993.
1993 1992 1991
---- ---- ----
Arizona ............................ 3.7% 3.6% 3.6%
Illinois ........................... 6.8 7.0 6.6
Iowa ............................... 26.2 26.7 26.4
Kansas ............................. 7.4 7.1 6.0
Michigan ........................... 3.1 2.8 2.4
Minnesota .......................... 5.3 5.3 5.4
Nebraska ........................... 7.5 7.6 7.1
North Carolina ..................... 3.3 3.3 3.8
Rhode Island ....................... 3.2 2.9 3.2
Texas .............................. 2.8 3.2 4.3
Wisconsin .......................... 6.7 7.0 7.1
Other * ............................ 24.0 23.5 24.1
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
* Includes all other jurisdictions, none of which accounted for more than 3%.
5
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, 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. 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.
Retention levels are adjusted according to reinsurance market conditions
and the surplus position of Employers Mutual. The intercompany pooling
arrangement aids efficient buying of reinsurance since it allows for higher
retention levels and correspondingly decreased dependence on the reinsurance
marketplace.
A summary of the reinsurance treaties benefiting the parties to the
pooling agreement follows:
Type of Coverage Retention Limits
---------------- --------- ------
Property per risk ....... $2,000,000 100 percent of $18,000,000
Property catastrophe .... $9,000,000 95 percent of $51,000,000
Casualty ................ $2,000,000 100 percent of $43,000,000
Umbrella ................ $5,000,000 100 percent of $ 5,000,000
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 90 domestic and foreign
reinsurers that meet Employers Mutual's financial security guidelines. The
umbrella reinsurance is written by one large domestic direct writing reinsurer
(General Reinsurance Corporation).
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 collectability of reinsurance is subject to the solvency of
the reinsurers.
6
The major participants in the pool members' reinsurance program are
presented below. These percentages represent the reinsurers' share of the
total reinsurance protection under all coverages. Each type of coverage is
purchased in layers, and an individual reinsurer may participate in more than
one coverage and at various layers within these coverages.
Percent
of Total 1993
Reinsurance Best's
Reinsurer Protection Rating
- --------- ----------- ------
Underwriters at Lloyd's of London .................. 19.9% (1)
Insurance Company of North America ................. 7.2 A-
Prudential Reinsurance Company ..................... 6.0 A
General Reinsurance Corporation .................... 3.6 A++
NAC Reinsurance Corporation ........................ 3.3 A
Hartford Fire Insurance Company .................... 3.0 A+
AXA Reinsurance Company ............................ 2.7 A
(1) Not rated; however, the individual members of the Lloyd's organization are
required to pledge their entire net worth toward the satisfaction of their
liabilities. In response to reported losses of $3.8 billion, $4.2 billion,
$1.9 billion (estimated) and $758 million (estimated) in 1989, 1990, 1991
and 1992, respectively, Lloyd's has developed a business plan to improve
its profitability. The plan is described in detail in the "Rowland" report
published by Lloyd's in April, 1993. This plan outlines several
significant changes: a new management team will play a more active role in
the administration of affairs, corporate capital will be allowed, names are
to continue with unlimited liability, "NewCo" will be incorporated with
assets of 4.0 billion pounds sterling to manage old liabilities, a table
will be published on an annual basis of the best syndicate performers, and
independent regulations will be enforced. All of these changes may help to
reduce the risk of doing business with Lloyd's. In addition, standing
behind the means of individual members is the Lloyd's Central Fund. This
Fund is considered by Lloyd's to be a safety net, whereby Lloyd's
membership as a whole can be compelled to make up deficiencies caused by
individual names defaulting. There is also a multi-billion dollar trust
fund to secure Lloyd's obligations to United States policyholders.
The Company has not experienced any difficulty in collecting its
reinsurance receivables from any Lloyd's syndicates. However, the
substantial losses noted above could affect the ability of certain
syndicates to continue to trade and the ability of the Company to continue
to place business with the syndicates.
Premiums ceded by all parties to the pooling agreement and by the property
and casualty insurance subsidiaries for the year ended December 31, 1993 are
presented below. Each type of reinsurance coverage is purchased in layers, and
an individual reinsurer may participate in more than one coverage and at
various layers within these coverages. Since each layer of each coverage is
priced separately, with the lower layers being more expensive than the upper
layers, a reinsurer's overall participation in a reinsurance program does not
necessarily correspond to the amount of premiums it receives.
7
Premiums Ceded By
------------------------
Property
All Pool and Casualty
Reinsurer Members Subsidiaries
- --------- ----------- ------------
General Reinsurance Corporation ...................... $ 3,517,725 $ 773,900
Underwriters at Lloyd's London ....................... 1,670,393 367,486
Hartford Steam Boiler Inspection and Insurance Company 1,138,371 250,442
Hartford Fire Insurance Company ...................... 632,192 139,082
Michigan Mutual Insurance Company .................... 629,529 138,496
Pennsylvania Mfg. Assn. Insurance Company ............ 629,529 138,496
Transamerica Insurance Company ....................... 553,987 121,877
Utica Mutual Insurance Company ....................... 497,328 109,412
Other Reinsurers ..................................... 9,734,638 2,141,621
----------- ------------
Total ............................................. $19,003,692 $ 4,180,812
=========== ============
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.
Premiums ceded by all parties to the pooling agreement and by the property and
casualty insurance subsidiaries for the year ended December 31, 1993 are
presented below.
Premiums Ceded By
------------------------
Property
All Pool and Casualty
Reinsurer Members Subsidiaries
- --------- ----------- ------------
Wisconsin Compensation Rating Bureau ................. $13,887,977 $ 3,055,355
National Workers' Compensation Reinsurance Pool ...... 13,297,246 2,925,394
North Carolina Reinsurance Facility .................. 1,387,107 305,164
Michigan Catastrophe Claims Association .............. 814,504 179,191
Other reinsurers ..................................... 252,574 55,566
----------- ------------
$29,639,408 $ 6,520,670
=========== ============
In formulating reinsurance programs, Employers Mutual is selective in its
choice of reinsurers. Employers Mutual selects reinsurers on the basis of
financial stability and long-term relationships, as well as price of the
coverage. Reinsurers are generally required to have a Best's rating of "A-" or
higher and policyholders surplus of $50,000,000 ($100,000,000 for casualty
reinsurance).
For information concerning amounts due the Company from reinsurers for
losses and settlement expenses and prepaid reinsurance premiums and the effect
of reinsurance on premiums written and earned and losses and settlement
expenses incurred, see "Property and Casualty Insurance Subsidiaries,
Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary -
Reinsurance Ceded".
8
RELATIONSHIP BETWEEN NET PREMIUMS WRITTEN AND SURPLUS
The volume of insurance which a property and casualty insurance company
writes under industry standards is a multiple of its surplus calculated in
accordance with statutory accounting practices. Generally, a ratio of 3 to 1
or less is considered satisfactory. The ratios of the pool members for the
past three years are as follows:
Year ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
Employers Mutual .................. 1.33 1.32 1.43
EMCASCO ........................... 2.51 2.56 2.06
Illinois EMCASCO .................. 2.44 2.65 2.17
Dakota Fire ....................... 2.18 2.49 2.26
American Liberty .................. 1.38 1.38 1.40
Union Mutual ...................... 1.63 1.68 1.70
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The property and casualty insurance subsidiaries' reserve information is
included in the property and casualty loss reserve development for 1993. See
"Property and Casualty Insurance Subsidiaries, Reinsurance Subsidiary and
Nonstandard Risk Automobile Insurance Subsidiary - Outstanding Losses and
Settlement Expenses".
COMPETITION
The property and casualty insurance business is highly competitive. The
Company competes in the United States insurance market with numerous insurers,
many of which have greater financial resources than the Company. Competition
in the types of insurance in which the Company is engaged is based on many
factors, including the perceived overall financial strength of the insurer,
premiums charged, contract terms and conditions, services offered, speed of
claim payments, reputation and experience. In this competitive environment,
insureds have tended to favor large, financially strong insurers and the
Company faces the risk that insureds may become more selective and may seek
larger and/or more highly rated insurers.
BEST'S RATING
A.M. Best rates insurance companies based on their relative financial
strength and ability to meet their contractual obligations. The "A
(Excellent)" rating assigned to the Company's property and casualty insurance
subsidiaries and the other pool members is based on the pool members' 1992
operating results and financial condition as of December 31, 1992. Best's
reevaluates its ratings from time to time (normally on an annual basis) and
there can be no assurance that the Company's property and casualty insurance
subsidiaries and the other pool members will maintain their current rating in
the future. Management believes that a Best's rating of "A (Excellent)" or
better is important to the Company's business since many insureds require that
companies with which they insure be so rated. Best's defines both "A" and "A-"
as "Excellent". Best's publications indicate that these ratings are assigned
to companies which Best's believes have achieved excellent overall performance
and have a strong ability to meet their obligations over a long period of time.
Best's ratings are based upon factors of concern to policyholders and insurance
agents and are not necessarily directed toward the protection of investors.
9
REINSURANCE
- -----------
EMC Re is a property and casualty treaty reinsurer with a concentration in
property lines. EMC Re began its operations in 1981 with a five percent quota
share assumption of Employers Mutual's assumed reinsurance business. The quota
share percentage has been gradually increased over the years and since 1988 EMC
Re has assumed a 95 percent quota share of Employers Mutual's assumed
reinsurance business. EMC Re receives 95 percent of all premiums and assumes
95 percent of all related losses and expenses of this business. EMC Re does
not reinsure any of Employers Mutual's direct insurance business, nor any
"involuntary" facility or pool business that Employers Mutual assumes pursuant
to state law. In addition, EMC Re is not liable for credit risk in connection
with the insolvency of any reinsurers of Employers Mutual.
Effective January 1, 1993, the quota share agreement with Employers Mutual
was amended so that losses in excess of $1,000,000 per event are retained by
Employers Mutual. EMC Re pays an annual override commission to Employers
Mutual for this additional protection, which totaled $1,808,527 in 1993.
Employers Mutual retained losses totaling $615,000 under this agreement in
1993.
Effective June 30, 1993, Employers Mutual commuted the portion of the
quota share agreement that pertains to a casualty pool that is in a run-off
position. In connection with this change in the quota share agreement, the
Company's liabilities decreased $19,783,037 and invested assets decreased
$17,806,179. The reserve discount amount of $1,976,858 was recorded as
deferred income and is being amortized into operations over the estimated
settlement period of the reserves, which is ten years. During 1993, $259,217
was recognized as income.
Effective October 31, 1993, Employers Mutual commuted the portion of the
quota share agreement that pertains to a voluntary pool that handles large
"highly protected" risks. This pool has experienced deteriorating underwriting
results over the last several years and Employers Mutual is presently
considering whether to continue its participation in the pool beyond 1994. In
connection with this change in the quota share agreement, the Company's
liabilities decreased $3,827,201 and invested assets decreased $2,619,776.
Employers Mutual reimbursed the Company $1,207,425 for commissions incurred to
generate this business. No reserve discount was calculated as this business
involves short-tail property coverage.
REINSURANCE CEDED
In conjunction with the change in the quota share agreement noted above,
EMC Re terminated its catastrophe reinsurance treaties with Employers Mutual
and other nonaffiliated reinsurers effective January 1, 1993. The reinsurance
treaty with Employers Mutual paid losses in excess of $1,000,000 resulting from
any one catastrophe, subject to a maximum loss of $3,000,000. Maximum recovery
was limited to $6,000,000. The catastrophe protection placed on the open
market amounted to 95 percent of $8,000,000 in excess of $4,000,000. Ceded
reinsurance on the books at December 31, 1992 is being allowed to run-off.
10
EMC Re has an aggregate "excess of loss" treaty with Employers Mutual
which provides protection from a large accumulation of retentions resulting
from multiple catastrophes in any one calendar year. The coverage provided is
$2,000,000 excess of $2,500,000 ($2,000,000 in 1991) aggregate losses retained,
excess of $200,000 per event. Maximum recovery is limited to $4,000,000 per
accident year.
For information concerning amounts due the Company from reinsurers for
losses and settlement expenses and prepaid reinsurance premiums and the effect
of reinsurance on premiums written and earned and losses and settlement
expenses incurred, see "Property and Casualty Insurance Subsidiaries,
Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary -
Reinsurance Ceded".
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
EMC Re's reserve information is included in the property and casualty loss
reserve development for 1993. See "Property and Casualty Insurance
Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance
Subsidiary - Outstanding Losses and Settlement Expenses".
COMPETITION
Competition for reinsurance business abated somewhat in 1993. This
reduction in competition is primarily due to reduced market capacity for
catastrophe reinsurance, which has resulted in higher rates for this segment of
business.
EMC Re continues to reduce its aggregate liabilities in hurricane exposed
areas in favor of writing new business away from coastal areas. Despite a
decrease in overall exposure, written premiums are expected to increase in 1994
due to the increased rates currently available.
BEST'S RATING
The most recent Best's Property Casualty Key Rating Guide gives EMC Re 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.
NONSTANDARD RISK AUTOMOBILE INSURANCE
- -------------------------------------
Farm and City was acquired by the Company in January of 1984. Farm and
City specializes in insuring private passenger automobile risks that are found
to be unacceptable in the normal automobile market.
MARKETING
Farm and City is admitted in a five state area which includes Iowa,
Kansas, Nebraska, North Dakota and South Dakota. Personal automobile policies
are solicited through the American Agency System and are written for two, three
or six month terms. Limits of liability are offered equal to the state
responsibility laws. Physical damage coverages are written at normal insurance
deductibles.
11
REINSURANCE CEDED
Farm and City has a reinsurance treaty on an "excess of loss" basis with
Employers Mutual, which provides reinsurance for 100 percent of each loss in
excess of $100,000, up to $1,000,000. No recoveries have been made under this
treaty.
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
Farm and City's reserve information is included in the property and
casualty loss reserve development for 1993. See "Property and Casualty
Insurance Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk Automobile
Insurance Subsidiary - Outstanding Losses and Settlement Expenses".
For information concerning amounts due the Company from reinsurers for
losses and settlement expenses and prepaid reinsurance premiums and the effect
of reinsurance on premiums written and earned and losses and settlement
expenses incurred, see "Property and Casualty Insurance Subsidiaries,
Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary -
Reinsurance Ceded".
COMPETITION
The nonstandard risk marketplace is very competitive. Policies are
written for relatively short periods of time and insureds continually search
for the most attractive rates. The number of companies willing to write
nonstandard coverage remained fairly constant during 1993, as did availability
in the standard market. Nevertheless, Farm and City was able to increase its
market share through competitive pricing.
Demand for nonstandard coverage, which is primarily a result of
availability in the standard market, is expected to remain fairly constant in
1994. Future premium growth will therefore continue to be dependent upon
competitive pricing and expansion into new markets.
BEST'S RATING
The most recent Best's Property Casualty Key Rating Guide gives Farm and
City an A+ (Superior) 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.
PROPERTY AND CASUALTY INSURANCE SUBSIDIARIES, REINSURANCE SUBSIDIARY AND
- ------------------------------------------------------------------------
NONSTANDARD RISK AUTOMOBILE INSURANCE SUBSIDIARY.
- ------------------------------------------------
STATUTORY COMBINED RATIOS
The following table sets forth the Company's subsidiaries' statutory
combined ratios and the property and casualty insurance industry average for
the five years ended December 31, 1993. The combined ratios below are the sum
of the following: the loss ratio, calculated by dividing losses and settlement
expenses by net premiums earned, and the expense ratio, calculated by dividing
underwriting expenses and policyholder dividends by net premiums written.
12
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,
--------------------------------------
1993 1992 1991 1990 1989
------ ------ ------ ------ ------
Property and casualty insurance
Loss ratio .................... 72.6% 76.1% 76.8% 73.8% 68.1%
Expense ratio ................. 30.9 30.1 30.5 30.8 32.9
------ ------ ------ ------ ------
Combined ratio .............. 103.5% 106.2% 107.3% 104.6% 101.0%
====== ====== ====== ====== ======
Reinsurance
Loss ratio .................... 77.7% 109.1% 82.9% 92.6% 126.1%
Expense ratio ................. 33.1 34.8 36.6 37.2 37.4
------ ------ ------ ------ ------
Combined ratio .............. 110.8% 143.9% 119.5% 129.8% 163.5%
====== ====== ====== ====== ======
Nonstandard risk automobile insurance
Loss ratio .................... 94.3% 92.3% 72.4% 77.8% 67.4%
Expense ratio ................. 23.7 23.7 25.2 24.7 29.7
------ ------ ------ ------ ------
Combined ratio .............. 118.0% 116.0% 97.6% 102.5% 97.1%
====== ====== ====== ====== ======
Total insurance operations
Loss ratio .................... 75.6% 83.4% 77.8% 78.0% 79.3%
Expense ratio ................. 30.7 30.5 31.4 31.5 33.4
------ ------ ------ ------ ------
Combined ratio .............. 106.3% 113.9% 109.2% 109.5% 112.7%
====== ====== ====== ====== ======
Property and casualty insurance
industry averages (1)
Loss ratio .................... 81.8% 88.1% 81.2% 82.3% 82.0%
Expense ratio ................. 27.4 27.6 27.7 27.3 27.2
------ ------ ------ ------ ------
Combined ratio .............. 109.2% 115.7% 108.9% 109.6% 109.2%
====== ====== ====== ====== ======
(1) As reported by A.M. Best Company. The ratio for 1993 is an estimate; the
actual combined ratio is not currently available.
13
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, 1993:
1993
Amount Percent Best's
Recoverable of Total Rating
----------- -------- ------
Wisconsin Compensation Rating Bureau .. $ 9,328,318 43.8% (1)
National Workers' Compensation
Reinsurance Pool .................... 2,862,700 13.4 (1)
Employers Mutual Casualty Company ..... 1,250,209 5.9 A
General Reinsurance Corporation ....... 1,074,942 5.0 A++
North Carolina Reinsurance Facility ... 618,930 2.9 (2)
American Re-Insurance Company ......... 596,830 2.8 A+
New England Reinsurance Corporation ... 474,113 2.2 (3)
Old Republic Insurance Company ........ 442,972 2.1 A+
Minnesota Workers' Compensation
Reinsurance Association ............. 398,992 1.9 (4)
Allstate Insurance Company ............ 351,076 1.6 A-
Underwriters at Lloyd's London ........ 341,961 1.6 (3)
Other Reinsurers ...................... 3,568,547 16.8
----------- --------
Total ........................... $21,309,590(5) 100.0%
=========== ========
(1) Amounts recoverable reflect the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to these
organizations by Employers Mutual in connection with its role as "service
carrier". Under these arrangements, Employers Mutual writes business for
these organizations on a direct basis and then cedes 100 percent of the
business to these organizations. Credit risk associated with these
amounts is minimal as all companies writing direct business in the states
that participate in these organizations are responsible for the
liabilities of such organizations on a pro rata basis.
(2) The amount recoverable reflects the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to this
organization by the pool members in conjunction with the state run
assigned risk program ("state fund"). Under this program, all insurers
writing direct business in the state of North Carolina are required by law
to write insurance for risks that are not insurable in the normal
marketplace. Business written under this program is ceded 100 percent to
the state fund and each respective company assumes from the state fund its
share of such business in proportion to its direct writings in the state.
Credit risk associated with this amount is minimal as all companies
writing direct business in the state are responsible for the liabilities
of this organization on a pro rata basis.
(3) Not rated.
14
(4) The amount recoverable reflects the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to this
association by the pool members under a reinsurance contract that provides
protection for workers' compensation losses in excess of $430,000 per
occurrence. Credit risk associated with this amount is minimal as all
companies writing direct workers' compensation business in the state of
Minnesota are responsible for the liabilities of this association on a pro
rata basis.
(5) The total amount at December 31, 1993 represented $1,234,983 in paid
losses and settlement expenses recoverable, $17,242,423 in unpaid losses
and settlement expenses recoverable and $2,832,184 in unearned premiums
recoverable.
The effect of reinsurance on premiums written and earned and losses and
settlement expenses incurred for the years ended December 31, 1993, 1992 and
1991 is presented below. Amounts for the year ended December 31, 1993 reflect
(1) the change in the property and casualty insurance subsidiaries' pooling
agreement whereby effective January 1, 1993, the voluntary assumed reinsurance
business written by Employers Mutual is no longer subject to cession to the
pool members and (2) the change in the reinsurance subsidiary's quota share
agreement whereby effective January 1, 1993 losses in excess of $1,000,000 per
event are retained by Employers Mutual and the reinsurance subsidiary therefore
no longer purchases catastrophe protection. (See notes 2 and 3 of Notes to
Consolidated Financial Statements under Item 8 of this Form 10-K).
Year ended December 31,
----------------------------------------
1993 1992 1991
------------ ------------ ------------
Premiums written:
Direct ........................ $135,277,129 $138,829,576 $139,292,883
Assumed from nonaffiliates .... 6,636,942 16,467,613 9,477,850
Assumed from affiliates ....... 147,620,705 150,070,741 108,847,230
Ceded to nonaffiliates ........ (10,701,482) (17,721,207) (11,113,238)
Ceded to affiliates ........... (120,898,914) (129,826,840) (130,675,014)
------------ ------------ ------------
Net premiums written ....... $157,934,380 $157,819,883 $115,829,711
============ ============ ============
Premiums earned:
Direct ........................ $137,141,457 $142,391,771 $134,675,865
Assumed from nonaffiliates .... 6,758,364 14,980,642 9,056,890
Assumed from affiliates ....... 148,366,487 140,442,245 106,783,050
Ceded to nonaffiliates ........ (11,507,217) (16,775,394) (11,051,459)
Ceded to affiliates ........... (124,321,553) (133,628,977) (126,045,108)
------------ ------------ ------------
Net premiums earned ........ $156,437,538 $147,410,287 $113,419,238
============ ============ ============
Losses and settlement expenses
incurred:
Direct ........................ $ 97,842,980 $112,579,261 $101,910,680
Assumed from nonaffiliates .... 6,575,099 17,415,319 8,671,495
Assumed from affiliates ....... 107,369,274 114,359,445 77,845,953
Ceded to nonaffiliates ........ (5,845,414) (16,862,082) (4,735,272)
Ceded to affiliates ........... (85,586,640) (105,404,110) (95,587,937)
------------ ------------ ------------
Net losses and settlement
expenses incurred ........ $120,355,299 $122,087,833 $ 88,104,919
============ ============ ============
15
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The Company maintains reserves for losses and settlement expenses with
respect to both reported and unreported claims. The amount of reserves for
reported claims is primarily based upon a case-by-case evaluation of the
specific type of claim, knowledge of the circumstances surrounding each claim
and the policy provisions relating to the type of loss. Reserves on assumed
business are the amounts reported by the ceding company.
The amount of reserves for unreported claims is determined on the basis
of statistical information for each line of insurance with respect to the
probable number and nature of claims arising from occurrences which have not
yet been reported. Established reserves are closely monitored and are
frequently recomputed using a variety of formulas and statistical techniques
for analyzing current actual claim cost, frequency data and other economic and
social factors.
The Company does not discount reserves. Inflation is implicitly provided
for in the reserving function through analysis of cost trends, reviews of
historical reserving results and projections of future economic conditions.
Large ($25,000 and over) incurred and reported gross reserves are reviewed
regularly for adequacy. In addition, long-term and lifetime medical claims are
periodically reviewed for cost trends and the applicable reserves are
appropriately revised.
Loss reserves are estimates at a given time of what the insurer expects
to pay on incurred losses, based on facts and circumstances then known.
During the loss settlement period, which may be many years, additional facts
regarding individual claims become known, and accordingly, it often becomes
necessary to refine and adjust the estimates of liability on a claim.
Settlement expense reserves are intended to cover the ultimate cost
of investigating claims and defending lawsuits arising from claims. These
reserves are established each year based on previous years' experience to
project the ultimate cost of settlement expenses. To the extent that
adjustments are required to be made in the amount of outstanding loss reserves
each year, settlement expense reserves are correspondingly revised.
Despite the inherent uncertainties of estimating insurance company loss
and settlement expense reserves, management believes that the Company's
reserves are being calculated in accordance with sound actuarial practices and,
based upon current information, that the Company's reserves for losses and
settlement expenses at December 31, 1993 are adequate.
Over the past several years, the Company's financial results have been
affected by losses associated with environmental exposures. The Company's
environmental claims activity is predominately from hazardous waste and
pollution-related claims. The parties to the pooling agreement have not
written primary coverage for the major oil or chemical companies; the greatest
exposure arises out of commercial general liability and umbrella policies
issued to municipalities during the 1970s which allegedly cover contamination
emanating from closed landfills. The remaining exposure is from claims from
small regional operations or local businesses involved with disposing wastes at
dump sites or having pollution on their own property due to hazardous material
use or leaking underground storage tanks. These insureds include small
manufacturing operations, tool makers, automobile dealerships, contractors,
gasoline stations and real estate developers.
16
Prior to July 1, 1993, the Company's reinsurance subsidiary assumed
reinsurance business that included environmental exposures from a casualty pool
that is in a run-off position. Effective June 30, 1993, Employers Mutual
commuted the portion of the quota share agreement that pertains to this pool.
As a result of this commutation, the Company's environmental reserves decreased
$502,818 on June 30, 1993. Environmental losses associated with this pool
totaled $197,859, $161,693 and $152,384 in 1993, 1992 and 1991, respectively.
The following table presents selected data on environmental losses and
settlement expenses incurred and reserves outstanding for the Company:
Year Ended December 31,
--------------------------------
1993 1992 1991
---------- ---------- ----------
Total losses incurred ....................... $ 485,197 $ 563,652 $ 304,833
Total settlement expenses incurred .......... 85,282 43,845 82,345
---------- ---------- ----------
Total losses and settlement expenses
incurred ................................ $ 570,479 $ 607,497 $ 387,178
========== ========== ==========
Loss reserves ............................... $ 676,511 $ 873,292 $ 676,398
Settlement expense reserves ................. 235,426 197,808 173,274
---------- ---------- ----------
Total loss and settlement expense reserves $ 911,937 $1,071,100 $ 849,672
========== ========== ==========
Number of outstanding claims ................ 63 74 78
========== ========== ==========
Estimating environmental reserves is one of the most difficult aspects of
the reserving process. The legal definition of environmental damage is still
evolving, the assignment of responsibility varies widely by state, defense
costs are often much greater than the claim costs and claims often emerge long
after the policy has expired, making assignment of damages to the time period
covered by a particular policy difficult. Management periodically reviews the
adequacy of environmental reserves as part of the reserve review process and
believes that the stated reserves are adequate.
The Company has two policyholders which have filed claims at three
separate sites in connection with the transportation of hazardous waste to
landfills. Included in the above table at December 31, 1993 are five pollution
sites which involve multiple claims as follows:
Number
Pollution site of claims
-------------- ---------
Closed landfill ................... 4
Closed landfill ................... 2
Oil recycling facility ............ 2
Battery reclamation site .......... 2
Battery reclamation site .......... 2
Pollution coverage is being disputed in 40 of the 63 claims which were
outstanding at December 31, 1993. Coverage is disputed in all claims involving
the removal of underground storage tanks or the clean up of (i) underground
storage tank sites, (ii) landfills based on ownership of the landfill or the
generation of waste disposed of at landfills or (iii) insured property.
17
Pollution coverage is not being disputed in the remaining 23 claims which
were outstanding as of December 31, 1993. These claims are the result of
petroleum misdeliveries or spills where coverage has been accepted under a
commercial automobile policy that had an applicable endorsement.
The Company has 39 bodily injury claims involving asbestosis as of
December 31, 1993. In each case, a former insured has been named as one of
multiple defendants covering exposure over many years. The Company has not
paid any defense costs or loss payments and there is no evidence of injury as a
result of exposure to the Company's insured's products during the policy
periods.
Prior to July 1, 1993, the Company's reinsurance subsidiary assumed
reinsurance business that included asbestosis related exposures from a casualty
pool that is in a run-off position. Effective June 30, 1993, Employers Mutual
commuted the portion of the quota share agreement that pertains to this pool.
As a result of this commutation, the Company's asbestosis related reserves
decreased $1,037,738 on June 30, 1993. Asbestosis related losses associated
with this pool totaled $226,470, $330,653 and $292,478 in 1993, 1992 and 1991,
respectively.
The following table presents selected data on asbestosis related losses
and settlement expenses incurred and reserves outstanding for the Company:
Year Ended December 31,
--------------------------------
1993 1992 1991
---------- ---------- ----------
Total losses incurred ....................... $ 198,267 $ 347,764 $ 262,575
Total settlement expenses incurred .......... (3,299) 7,995 (5,690)
---------- ---------- ----------
Total losses and settlement expenses
incurred ................................ $ 194,968 $ 355,759 $ 256,885
========== ========== ==========
Loss reserves ............................... $ 49,161 $ 982,197 $ 646,022
Settlement expense reserves ................. 16,616 20,966 11,767
---------- ---------- ----------
Total loss and settlement expense reserves $ 65,777 $1,003,163 $ 657,789
========== ========== ==========
Number of outstanding claims ................ 39 44 44
========== ========== ==========
18
The following table sets forth a reconciliation of beginning and ending
reserves for losses and settlement expenses of the property and casualty
insurance subsidiaries, the reinsurance subsidiary and the nonstandard risk
automobile insurance subsidiary. Amounts presented are on a net basis, with a
reconciliation of beginning and ending reserves to the gross amounts presented
in the consolidated financial statements in accordance with SFAS 113. (See
note 1 of Notes to Consolidated Financial Statements.)
Year ended December 31,
----------------------------------------
1993 1992 1991
------------ ------------ ------------
Gross reserves for losses and
settlement expenses, beginning
of year .......................... $215,388,865 $158,814,130 $151,242,287
Ceded reserves for losses and
settlement expenses, beginning
of year .......................... 25,253,507 13,951,033 16,484,739
------------ ------------ ------------
Net reserves for losses and
settlement expenses, beginning
of year .......................... 190,135,358 144,863,097 134,757,548
------------ ------------ ------------
Incurred losses and
settlement expenses:
- -------------------------
Provision for insured events
of the current year .............. 119,896,526 116,615,951 83,477,534
Increase in provision for
insured events of prior years .... 458,773 5,471,882 4,627,385
------------ ------------ ------------
Total incurred losses and
settlement expenses ...... $120,355,299 $122,087,833 $ 88,104,919
------------ ------------ ------------
19
Year ended December 31,
----------------------------------------
1993 1992 1991
------------ ------------ ------------
Payments:
- ---------
Losses and settlement expenses
attributable to insured events
of the current year .............. $ 47,600,851 $ 46,436,360 $ 35,398,095
Losses and settlement expenses
attributable to insured events
of prior years ................... 45,508,460 53,810,715 42,601,275
Adjustment to beginning reserves
due to the change in the
property and casualty insurance
subsidiaries' pooling agreement .. 4,373,629 (23,431,503) -
Adjustment to reserves due to the
commutation of two reinsurance
contracts under the reinsurance
subsidiary's quota share agreement 21,904,001 - -
Adjustment to reserves due to the
gross-up of amounts associated
with the National Workers'
Compensation Reinsurance Pool .... 11,436,543 - -
------------ ------------ ------------
Total payments .............. 130,823,484 76,815,572 77,999,370
------------ ------------ ------------
Net reserves for losses and
settlement expenses, end of year 179,667,173 190,135,358 144,863,097
Ceded reserves for losses and
settlement expenses, end of year 17,454,679 25,253,507 13,951,033
------------ ------------ ------------
Gross reserves for losses and
settlement expenses, end of year $197,121,852 $215,388,865 $158,814,130
============ ============ ============
20
The following table shows the calendar year development of the unpaid loss
and settlement expense reserves of the property and casualty insurance
subsidiaries, the reinsurance subsidiary and the nonstandard risk automobile
insurance subsidiary (beginning in 1984). Amounts presented are on a net basis
with (i) a reconciliation of the net loss and settlement expense reserves at
the end of 1992 and 1993 to the gross amounts presented in the consolidated
financial statements in accordance with SFAS 113 and (ii) disclosure of the
gross re-estimated loss and settlement expense reserves as of the end of 1993
and the related re-estimated reinsurance receivables.
Reflected in this table is (1) the increase in the reinsurance
subsidiary's quota share assumption of Employers Mutual's assumed reinsurance
business from 50 percent in 1983 to 75 percent in 1984 and 95 percent in 1988,
(2) the increase in the property and casualty insurance subsidiaries'
collective participation in the pool from 17 percent to 22 percent in 1992, (3)
the change in the pooling agreement whereby effective January 1, 1993 the
voluntary reinsurance business written by Employers Mutual is no longer subject
to cession to the pool members, and (4) the commutation of two reinsurance
contracts under the reinsurance subsidiary's quota share agreement in 1993. In
addition, prior year amounts have been restated to reflect the gross-up of
reserve amounts associated with the National Workers' Compensation Reinsurance
Pool.
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 the time lag in the reporting of assumed
reinsurance business and the high rate of inflation associated with medical
services and supplies, may not necessarily occur in the future. Accordingly,
it may not be appropriate to project future development of reserves based on
this table.
21
Year ended December 31,
-------------------------------------------------------------------------------------------------
(Dollars in thousands) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
STATUTORY RESERVES FOR LOSSES
AND SETTLEMENT EXPENSES ...... $ 57,001 71,775 67,921 90,357 109,088 121,667 127,870 131,623 139,317 180,797 181,471
NATIONAL WORKERS' COMPENSATION
REINSURANCE POOL
RECLASSIFICATION ............. 1,007 949 1,028 1,561 2,378 2,911 3,855 4,338 6,830 11,364 -
STATUTORY RESERVES AFTER
RECLASSIFICATION ............. 58,008 72,724 68,949 91,918 111,466 124,578 131,725 135,961 146,147 192,161 181,471
GAAP ADJUSTMENTS:
SALVAGE AND SUBROGATION ...... (880) (950) (1,130) (1,000) (930) (930) (930) (1,203) (1,284) (2,026) (1,804)
RESERVES FOR LOSSES AND
SETTLEMENT EXPENSES .......... 57,128 71,774 67,819 90,918 110,536 123,648 130,795 134,758 144,863 190,135 179,667
PAID (CUMULATIVE) AS OF:
One year later ............... 13,638 34,055 27,040 25,874 23,805 34,648 42,357 42,601 30,379 77,589 -
Two years later .............. 31,594 47,026 41,667 36,199 44,662 57,511 65,965 58,242 78,096 - -
Three years later ............ 37,840 56,283 48,477 52,014 61,052 72,121 76,356 95,154 - - -
Four years later ............. 42,902 59,882 59,885 63,902 71,550 79,092 106,432 - - - -
Five years later ............. 45,297 68,147 69,214 71,859 77,230 105,513 - - - - -
Six years later .............. 51,510 72,860 75,371 76,748 101,714 - - - - - -
Seven years later ............ 54,236 76,570 79,141 97,533 - - - - - - -
Eight years later ............ 56,316 78,102 96,470 - - - - - - - -
Nine years later ............. 56,892 88,952 - - - - - - - - -
Ten years later .............. 62,426 - - - - - - - - - -
RESERVES REESTIMATED AS OF:
End of year .................. 57,128 71,774 67,819 90,918 110,536 123,648 130,795 134,758 144,863 190,135 179,667
One year later ............... 57,343 73,823 80,888 98,127 109,099 123,628 134,453 139,385 150,335 190,594 -
Two years later .............. 56,084 79,445 91,452 97,465 111,212 124,011 136,972 140,764 147,388 - -
Three years later ............ 58,584 85,566 91,927 100,437 113,588 125,957 136,902 139,421 - - -
Four years later ............. 61,737 86,460 95,199 104,024 116,995 127,964 137,510 - - - -
Five years later ............. 62,327 88,958 99,649 107,784 119,332 128,434 - - - - -
Six years later .............. 64,442 92,681 103,157 110,961 120,147 - - - - - -
Seven years later ............ 66,715 95,051 106,671 111,988 - - - - - - -
Eight years later ............ 67,694 97,294 107,681 - - - - - - - -
Nine years later ............. 68,417 97,799 - - - - - - - - -
Ten years later .............. 68,684 - - - - - - - - - -
CUMULATIVE REDUNDANCY
(DEFICIENCY) ................. $(11,556) (26,025) (39,862) (21,070) (9,611) (4,786) (6,715) (4,663) (2,525) (459) -
=================================================================================================
GROSS LOSS AND SETTLEMENT EXPENSE RESERVES - END OF YEAR ........................................................ $215,389 197,122
REINSURANCE RECEIVABLES ......................................................................................... 25,254 17,455
-----------------
NET LOSS AND SETTLEMENT EXPENSE RESERVES - END OF YEAR .......................................................... $190,135 179,667
=================
GROSS RE-ESTIMATED RESERVES - LATEST ............................................................................ $214,997 197,122
RE-ESTIMATED REINSURANCE RECEIVABLES - LATEST ................................................................... 24,403 17,455
-----------------
NET RE-ESTIMATED RESERVES - LATEST .............................................................................. $190,594 179,667
=================
GROSS CUMULATIVE REDUNDANCY (DEFICIENCY) ........................................................................ $ 392 -
==================
22
The increase in reserves for losses and settlement expenses for prior year
claims was $5,472,000 in 1992 and $459,000 in 1993. The large increase in 1992
primarily relates to a strengthening of workers' compensation reserves in the
property and casualty insurance subsidiaries, a time lag in the reporting of
assumed reinsurance business in the reinsurance subsidiary and a strengthening
of reserves in the nonstandard risk automobile insurance subsidiary. The
increase in 1993 is primarily related to development on reserves associated
with Hurricane Andrew in the reinsurance subsidiary. Additional strengthening
of workers' compensation reserves in the property and casualty insurance
subsidiaries was offset by savings in the products liability line of business.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations".
Time lags in the reporting of assumed reinsurance business do not have a
material affect on the income of the Company since the premium income
associated with this business is recorded at the same time the losses are
recorded. However, management recognizes the financial reporting problems
associated with such time lags and procedures are now in place to monitor the
reporting of assumed reinsurance business and to record estimates for the time
periods not yet reported.
EXCESS AND SURPLUS LINES INSURANCE AGENCY
- -----------------------------------------
Underwriters, Ltd. is an excess and surplus lines insurance agency
providing brokerage and underwriting facilities.
Underwriters, Ltd. was acquired by the Company in January of 1985.
Incorporated in 1974, Underwriters, Ltd. provides access to the excess and
surplus lines markets through independent agents and managing general agents.
Underwriters, Ltd. also functions as managing underwriter for such lines for
several of the pool members and represents several major excess and surplus
lines companies, including Lloyds of London. Lines of insurance handled range
from relatively straight forward property and casualty insurance to the more
exotic hole-in-one, kidnap and ransom, ocean marine, aircraft and professional
liability lines. Income is derived from fees and commissions and not from
underwriting the risk.
INVESTMENTS
- -----------
Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115) "Accounting for Certain Investments in
Debt and Equity Securities." SFAS 115 requires that investments in all debt
securities and those equity securities with readily determinable market values
be classified into one of three categories: held-to-maturity, trading or
available-for-sale. Classification of investments is based upon management's
current intent. Debt securities that management has the intent and ability to
hold until maturity are classified as securities held-to-maturity and are
carried at amortized cost. Unrealized holding gains and losses on securities
held-to-maturity are not reflected in the consolidated financial statements.
Debt and equity securities that are purchased for short-term resale are
classified as trading securities. Trading securities are carried at market
value, with unrealized holding gains and losses included in earnings. All
other debt and equity securities not included in the above two categories are
classified as securities available-for-sale. Securities available-for-sale are
carried at market value, with unrealized holding gains and losses reported as a
separate component of stockholders' equity, net of tax.
23
At December 31, 1993, the Company did not have any investments categorized
as trading securities. Adoption of this statement had no effect on the income
of the Company. Unrealized holding gains associated with fixed maturity
securities available-for-sale increased stockholders' equity by $2,068,451, net
of deferred income taxes of $1,065,565.
Prior to December 31, 1993, investments in fixed maturities were carried
at amortized cost, equity securities were carried at market value and short-
term investments were carried at cost. Changes in the unrealized holding gains
and losses resulting from the revaluation of equity securities were reported as
direct increases and decreases in stockholders' equity. Unrealized holding
gains and losses on fixed maturities and short-term investments were not
recognized in the consolidated financial statements.
The assets of the property and casualty insurance subsidiaries, the
reinsurance subsidiary and the nonstandard risk automobile insurance subsidiary
are primarily invested in government bonds. At December 31, 1993,
approximately 89 percent of the Company's fixed maturity bonds were invested in
government backed securities. Investments in bonds categorized as held-to-
maturity are purchased with the intent of being held to maturity. A variety of
maturities are maintained in the Company's portfolio to assure adequate
liquidity. The maturity structure of bond investments is also established by
the relative attractiveness of yields on short, intermediate, and long-term
bonds. The Company does not invest in any high-yield debt investments
(commonly referred to as junk bonds).
Investments of the Company's insurance subsidiaries are subject to the
insurance laws of the state of their incorporation. These laws prescribe the
kind, quality and concentration of investments which may be made by insurance
companies. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks and real estate
mortgages. The Company believes it is in compliance with these laws. Failure
to comply could result in administrative supervision.
A committee of the National Association of Insurance Commissioners (NAIC)
is developing model legislation to govern insurance company investments. A
discussion draft was released at the September 1993 NAIC meeting to which the
industry is in the process of responding. Management believes that if the
discussion draft were adopted without modification it would not have a material
impact on the Company. The model law is not scheduled for adoption by the NAIC
until September, 1994.
The investments of the Company are supervised by an investment committee
of the Board of Directors of the Company, which includes one individual who is
an officer of the Company. The bond portfolios for each of the subsidiaries
are managed by an internal staff which is composed of employees of Employers
Mutual.
Investment expenses are based on actual expenses incurred by each of the
Company's subsidiaries plus an allocation of other investment expenses incurred
by Employers Mutual, which is based on a weighted average of total assets and
investment transactions of each subsidiary.
24
The following table shows the composition of the Company's investment
portfolio (at amortized cost), by type of security, as of December 31, 1993.
In the Company's consolidated financial statements, securities held-to-maturity
are carried at amortized cost; securities available-for-sale are carried at
market value.
Amortized
Cost Percent
------------ -------
Securities held-to-maturity:
United States government agencies and authorities $109,895,914 36.4%
States and political subdivisions ................ 18,374,003 6.1
Foreign governments .............................. 587,060 .2
Public utilities ................................. 8,813,202 2.9
Corporate securities ............................. 17,050,988 5.7
Mortgage-backed securities ....................... 36,289,456 12.0
------------ -------
Total fixed maturity securities held-to-maturity 191,010,623 63.3
------------ -------
Securities available-for-sale:
States and political subdivisions ................ 58,431,008 19.4
Short-term investments ........................... 51,029,615 16.9
Other debt securities ............................ 486,941 .2
------------ -------
Total fixed maturity securities
available-for-sale ........................... 109,947,564 36.5
------------ -------
Equity securities available-for-sale ............. 505,000 .2
------------ -------
Total investments .......................... $301,463,187 100.0%
============ =======
The following table shows the composition of the Company's investment
portfolio (at amortized cost), by type of security, as of December 31, 1992.
In the Company's consolidated financial statements, fixed maturities are
carried at amortized cost, equity securities are carried at market value and
short-term investments are carried at cost.
Amortized
Cost Percent
------------ -------
Fixed maturity securities held-to-maturity:
United States government agencies and authorities $144,419,244 46.4%
States and political subdivisions ................ 51,188,090 16.4
Debt securities issued by foreign governments .... 590,502 .2
Public utilities ................................. 9,693,693 3.1
Corporate securities ............................. 16,560,387 5.3
Mortgage-backed securities ....................... 26,983,821 8.7
Other debt securities ............................ 1,117,121 .4
------------ -------
Total fixed maturity securities held-to-maturity 250,552,858 80.5
------------ -------
Equity securities available-for-sale ................. 1,560,000 .5
------------ -------
Short-term investments ............................... 59,198,070 19.0
------------ -------
Total investments .......................... $311,310,928 100.0%
============ =======
25
Fixed maturity investments held by the Company generally have an
investment quality rating of "A" or better by independent rating agencies. The
following table shows the composition of the Company's fixed maturity
investments, by rating, as of December 31, 1993. Securities held-to-maturity
are carried at amortized cost; securities available-for-sale are carried at
market value.
Securities Securities
held-to-maturity available-for-sale
--------------------- ---------------------
Amount Percent Amount Percent
------------ ------- ------------ -------
Rating(1)
Aaa ..................... $153,843,269 80.5% $ 60,876,041 53.8%
Aa ...................... 6,221,433 3.3 36,855,004 32.6
A ....................... 24,733,496 12.9 15,350,535 13.6
Baa ..................... 5,714,089 3.0 - -
Ba ...................... 498,336 .3 - -
------------ ------- ------------ -------
Total fixed maturities $191,010,623 100.0% $113,081,580 100.0%
============ ======= ============ =======
(1) Ratings for preferred stocks and fixed maturity securities with initial
maturities greater than one year are assigned by Moody's Investor's
Services, Inc. Moody's rating process seeks to evaluate the quality of a
security by examining the factors that affect returns to investors.
Moody's ratings are based on quantitative and qualitative factors, as well
as the economic, social and political environment in which the issuing
entity exists. The quantitative factors include debt coverage, sales and
income growth, cash flows and liquidity ratios. Qualitative factors
include management quality, access to capital markets and the quality of
earnings and balance sheet items. Ratings for securities with initial
maturities less than one year are based on an evaluation of the underlying
assets or the credit rating of the issuer's parent company.
The amortized cost and estimated market value of fixed maturity securities
held-to-maturity and available-for-sale at December 31, 1993, by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
------------ ------------
Fixed maturity securities held-to-maturity:
Due in one year or less ................... $ 14,613,909 $ 14,887,469
Due after one year through five years ..... 55,951,990 61,054,939
Due after five years through ten years .... 73,944,312 80,286,921
Due after ten years ....................... 10,210,956 11,582,035
Mortgage-backed securities ................ 36,289,456 38,494,233
------------ ------------
Totals .................................. $191,010,623 $206,305,597
============ ============
Fixed maturity securities available-for-sale:
Due in one year or less ................... $ 51,429,559 $ 51,599,338
Due after one year through five years ..... 10,168,440 10,476,611
Due after five years through ten years .... 31,194,883 33,453,428
Due after ten years ....................... 17,154,682 17,552,203
------------ ------------
Totals .................................. $109,947,564 $113,081,580
============ ============
26
The mortgage-backed securities shown on the above table include
$14,616,836 of securities issued by government corporations and agencies and
$21,672,620 of collateralized mortgage obligations ("CMOs"). CMOs are
securities backed by mortgages on real estate which come due at various times.
The Company has attempted to minimize the prepayment risks associated with
mortgage-backed securities by not investing in "principal only" and "interest
only" CMOs. The CMOs that the Company has invested in are designed to reduce
the risk of prepayment by providing predictable principal payment schedules
within a designated range of prepayments. Investment yields may vary from
those anticipated due to changes in prepayment patterns of the underlying
collateral.
Investment results of the Company for the periods indicated are shown in
the following table:
Year Ended December 31,
----------------------------------------
1993 1992 1991
------------ ------------ ------------
Average invested assets (1) ........ $306,387,058 $288,433,650 $252,909,481
Investment income (2) .............. 20,779,951 21,539,597 20,201,993
Average yield ...................... 6.78% 7.47% 7.99%
Realized investment gains .......... $ 684,445 $ 384,283 $ 64,418
(1) Average of the aggregate invested amounts (amortized cost) at the beginning
and end of the year.
(2) Investment income is net of investment expenses and does not include
realized gains or provision for income taxes.
EMPLOYEES
- ---------
EMC Insurance Group Inc. has no full-time employees, although
approximately 12 employees of Employers Mutual perform administrative duties on
a part-time basis. Otherwise, the Company's business activities are conducted
by employees of Employers Mutual, Farm and City, and Illinois EMCASCO, which
have 1,486 (plus 30 part-time), 14 (plus 1 part-time), and 60 (plus 1 part
time) employees, respectively. Dakota Fire, EMCASCO, EMC Re and Underwriters,
Ltd. have no employees of their own; they transact business through Employers
Mutual and Illinois EMCASCO employees. The property and casualty insurance
subsidiaries share the costs associated with the pooling agreement in
accordance with their pool participation percentages. See "Property and
Casualty Insurance -- Pooling Agreement" and "Property and Casualty Insurance
- -- Services Provided by Employers Mutual".
REGULATION
- ----------
The Company's insurance subsidiaries are subject to extensive regulation
and supervision by their home states, as well as those in which they do
business. The purpose of such regulation and supervision is primarily to
provide safeguards for policyholders rather than to protect the interests of
stockholders. The insurance laws of the various states establish regulatory
agencies with broad administrative powers, including the power to grant or
revoke operating licenses and to regulate trade practices, investments, premium
rates, deposits of securities, the form and content of financial statements and
insurance policies, accounting practices and the maintenance of specified
reserves and capital for the protection of policyholders.
27
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 subsidiaries are subject to examination by state insurance
departments on a periodic basis as applicable law requires.
State laws governing insurance holding companies also impose standards on
certain transactions with related companies, which include, among other
requirements, that all transactions be fair and reasonable and that an
insurer's surplus as regards policyholders be reasonable and adequate in
relation to its liabilities. Under Iowa law, dividends or distributions made
by registered insurers are restricted in amount and may be subject to approval
from the Iowa Commissioner of Insurance. "Extraordinary" dividends or
distributions are subject to prior approval and are defined as dividends or
distributions which exceed the greater of 10 percent of statutory surplus as
regards policyholders as of the preceding December 31, or net income of the
preceding calendar on a statutory basis. Both Illinois and North Dakota impose
restrictions which are similar to those of Iowa on the payment of extraordinary
dividends and restrictions. At December 31, 1993, $10,113,818 was available
for distribution in 1994 to EMC Insurance Group Inc. without prior approval.
See note 8 of Notes to Consolidated Financial Statements under Item 8 of this
Form 10-K.
Under the insurance laws of all states in which the Company's insurance
subsidiaries and Employers Mutual operate, insurers can be assessed up to
prescribed limits for policyholder losses occasioned by the insolvency or
liquidation of other insurance companies. Under these laws, the extent of any
future assessments against the Company is uncertain. Most laws do provide,
however, that an assessment may be excused or deferred if it would threaten a
solvent insurer's financial strength. Such assessments totaled $86,200,
$132,996 and $41,736 in 1993, 1992 and 1991, respectively.
The NAIC has recently adopted certain risk-based capital standards for
property and casualty insurance companies which will be implemented in 1994.
Risk-based capital requirements attempt to measure minimum statutory capital
needs based upon the risks in a company's mix of products and investment
portfolio. The formula has been designed to help state regulators assess
capital adequacy of insurance companies and identify property/casualty insurers
that are in (or are perceived as approaching) financial difficulty by
establishing minimum capital needs based upon the risks applicable to the
operations of the individual insurer. The formula takes into consideration
industry performance and individual insurer financial characteristics by
examining a number of financial criteria to test its perceived levels of risk
against assets available to bear such risks.
28
The model act adopted by the NAIC provides a minimum level of capital at
which a State Commissioner of Insurance may act to place an insurer under
certain restraints or in the worst case, to place an insurer under his or her
control. These risk-based capital rules are a quantitative measurement
technique which purport to quantify the minimum amount of capital necessary to
match the degree of financial risk. It is a method for specifying how much
minimum capital an insurer must have, based on the risks it has assumed, to
assure that it maintains an acceptably low probability of financial impairment.
The risk-based capital requirements for property and casualty insurance
companies will measure three major areas of risk facing property and casualty
insurers: 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. The Company's insurance subsidiaries' ratio
of total adjusted capital to risk-based capital at December 31, 1993 is well in
excess of the level which would prompt regulatory action.
ITEM 2. PROPERTIES.
- ------- -----------
Lease costs of the Company's two office facilities in West Des Moines,
Iowa total approximately $71,000 and $31,000 annually. These leases expire
March 31, 1998 and November 30, 1995, respectively.
Lease costs of the Company's office facilities in Oak Brook, Illinois, and
Bismarck, North Dakota, which total approximately $187,000 and $137,000
annually, are included as expenses under the pooling agreement. See note 2 of
Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
Expenses of office facilities owned 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. Expenses
totaling $1,784,868, $1,699,591 and $1,457,824 for the three years ended
December 31, 1993, 1992 and 1991, respectively, were charged to the pool in
connection with the rental of 130,433 and 63,450 square feet located in Des
Moines and Ames, Iowa, respectively.
ITEM 3. LEGAL PROCEEDINGS.
- ------- ------------------
The Company and Employers Mutual and its other subsidiaries are parties to
numerous lawsuits arising in the normal course of the insurance business. The
Company believes that the resolution of these lawsuits will not have a material
adverse effect on its financial condition or its results of operations. The
companies involved have reserves which are believed adequate to cover any
potential liabilities arising out of all such pending or threatened
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
None.
29
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ------- -------------------------------------------------
STOCKHOLDER MATTERS.
--------------------
The Company's common stock is traded on the NASDAQ National Market System
under the symbol EMCI.
The following table shows the range of high and low bid quotations and
dividends paid for each quarter within the two most recent years.
1993 1992
---------------------------- ----------------------------
High Low Dividends High Low Dividends
------- ------- --------- ------- ------- ---------
1st Quarter $10 3/4 $ 8 $.13 $10 1/4 $ 8 3/4 $.13
2nd Quarter 11 1/4 9 1/2 .13 10 1/2 9 1/4 .13
3rd Quarter 10 1/4 9 1/4 .13 9 3/4 8 .13
4th Quarter 10 1/4 8 3/4 .13 8 3/4 7 7/8 .13
At December 31 9 1/2 8 1/2
On March 9, 1994, there were approximately 958 holders of record of the
Company's common stock.
There are certain regulatory restrictions relating to the payment of
dividends (see note 8 of Notes to Consolidated Financial Statements under Item
8 of this Form 10-K). It is the present intention of the Company's Board of
Directors to declare quarterly cash dividends.
A dividend reinvestment and common stock purchase plan provides
stockholders with the option of receiving additional shares of common stock
instead of cash dividends. Participants may also purchase additional shares of
common stock without incurring broker commissions by making optional cash
contributions to the Plan. See note 6(c) of Notes to Consolidated Financial
Statements under Item 8 of this Form 10-K. During 1993, Employers Mutual
elected to receive 50 percent of it's dividends in common stock under this plan.
30
ITEM 6. SELECTED FINANCIAL DATA.
- ------- ------------------------
Year ended December 31,*
--------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(In thousands except per share amounts)
Insurance premiums earned ...... $156,438 $147,410 $113,419 $101,323 $ 91,728
Investment income, net ......... 20,780 21,540 20,202 19,884 19,309
Realized investment gains ...... 684 384 65 48 257
Other income ................... 259 - - - -
-------- -------- -------- -------- --------
Total revenues ............ 178,161 169,334 133,686 121,255 111,294
Losses and expenses ............ 169,142 168,359 123,254 110,415 102,517
-------- -------- -------- -------- --------
Income before income taxes ..... 9,019 975 10,432 10,840 8,777
Income taxes ................... 1,885 759 3,124 2,894 2,055
-------- -------- -------- -------- --------
Income from continuing
operations ................... 7,134 216 7,308 7,946 6,722
Income from discontinued
operations ................... - - 1,853 319 274
Income from accounting changes 2,621 - - - -
-------- -------- -------- -------- --------
Net income ................ $ 9,755 $ 216 $ 9,161 $ 8,265 $ 6,996
======== ======== ======== ======== ========
Earnings per common share:
Income from continuing
operations ................. $ .70 $ .02 $ .73 $ .80 $ .71
Income from discontinued
operations ................. - - .18 .03 .03
Income from accounting
changes .................... .26 - - - -
-------- -------- -------- -------- --------
Net income ................ $ .96 $ .02 $ .91 $ .83 $ .74
======== ======== ======== ======== ========
Premiums earned by segment:
Property and casualty ........ $109,585 $109,139 $ 78,413 $ 70,597 $ 62,517
Reinsurance .................. 33,324 26,615 25,009 20,696 18,621
Nonstandard risk automobile .. 13,529 11,656 9,997 10,030 10,590
-------- -------- -------- -------- --------
Total ..................... $156,438 $147,410 $113,419 $101,323 $ 91,728
======== ======== ======== ======== ========
Total assets ................... $368,936 $372,807 $311,001 $296,126 $284,396
======== ======== ======== ======== ========
Stockholders' equity ........... $109,634 $100,911 $105,144 $100,615 $ 95,911
======== ======== ======== ======== ========
Average return on equity ....... 9.3% .2% 8.9% 8.4% 7.5%
======== ======== ======== ======== ========
Book value per share ........... $ 10.63 $ 9.98 $ 10.47 $ 10.04 $ 9.82
======== ======== ======== ======== ========
Cash dividends paid per share .. $ .52 $ .52 $ .52 $ .52 $ .52
======== ======== ======== ======== ========
* Prior year assets have been restated to reflect the reporting of ceded
reinsurance balances as assets in accordance with SFAS 113. See note 1 of
Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS.
------------------------------------
OVERVIEW
EMC Insurance Group Inc. (the "Company"), an approximately 67 percent
owned subsidiary of Employers Mutual Casualty Company ("Employers Mutual"), is
an insurance holding company with operations in property and casualty
insurance, reinsurance, nonstandard risk automobile insurance and excess and
surplus lines insurance management. Property and casualty insurance is the
most significant segment, representing 70.1 percent of consolidated premium
income.
The three property and casualty insurance subsidiaries of the Company and
two subsidiaries of Employers Mutual are parties to reinsurance pooling
agreements with Employers Mutual (collectively the "pooling agreement"). Under
the terms of the pooling agreement, each company cedes to Employers Mutual all
of its insurance business and assumes from Employers Mutual an amount equal to
its participation in the pool. All losses, settlement expenses and other
underwriting and administrative expenses are prorated among the parties on the
basis of participation in the pool. The investment programs and income tax
liabilities of the pool participants are not subject to the pooling agreement.
The purpose of the pooling agreement is to reduce the risk of an exposure
insured by any of the pool participants by spreading it 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
and lines of insurance written and the variety of rate filings and commission
plans offered by each of the companies. A single set of reinsurance treaties
is maintained for the protection of all six companies in the pool.
Effective January 1, 1992, the aggregate participation of the property and
casualty insurance subsidiaries was increased to 22 percent from 17 percent.
In connection with this change in pool participation, the Company's
liabilities increased $31,428,000 and invested assets increased $29,402,000.
The Company reimbursed Employers Mutual $2,026,000 for commissions incurred to
generate this business.
Employers Mutual voluntarily assumes reinsurance business from
nonaffiliated insurance companies and cedes 95 percent of this business to the
Company's reinsurance subsidiary, exclusive of certain reinsurance contracts.
Amounts not ceded to the reinsurance subsidiary have historically been retained
by Employers Mutual and have been subject to cession to the pool members.
Under the terms of the pooling agreement, the property and casualty insurance
subsidiaries had a 22 percent (17 percent in 1991) participation in the amounts
assumed from these nonaffiliated companies.
32
Effective January 1, 1993, the pooling agreement was amended so that the
voluntary assumed reinsurance business written by Employers Mutual is no longer
subject to cession to the pool members. As a result, amounts assumed from
nonaffiliates have declined from amounts assumed in prior years. In connection
with this change in the pooling agreement, the Company's liabilities decreased
$4,470,000 and invested assets decreased $4,427,000. Employers Mutual
reimbursed the Company $43,000 for commissions incurred to generate this
business.
The parties to the pooling agreement have historically recorded amounts
assumed from the National Workers' Compensation Reinsurance Pool on a net
basis. Under this approach, reserves for outstanding losses and unearned
premiums were reported as liabilities under "Indebtedness to Related Party" in
the Company's consolidated financial statements. Effective December 31, 1993,
the parties to the pooling agreement began recording these amounts as
outstanding losses and unearned premiums. As a result, outstanding losses
increased $11,437,000, unearned premiums increased $1,711,000 and indebtedness
to related party decreased $13,148,000. There was no income effect from this
reclassification. Prior year consolidated financial statements have been
restated for comparative purposes.
As noted above, the Company's reinsurance subsidiary assumes a 95 percent
quota share portion of Employers Mutual's assumed reinsurance business,
exclusive of certain reinsurance contracts. The reinsurance subsidiary
receives 95 percent of all premiums and assumes 95 percent of all related
losses and settlement expenses of this business. The reinsurance subsidiary
does not reinsure any of Employers Mutual's direct insurance business, nor any
"involuntary" facility or pool business that Employers Mutual assumes pursuant
to state law. In addition, the reinsurance subsidiary is not liable for credit
risk in connection with the insolvency of any reinsurers of Employers Mutual.
The following changes were made to the quota share agreement during 1993:
(1) Effective January 1, 1993, the quota share agreement was amended so that
losses in excess of $1,000,000 per event are retained by Employers Mutual.
The reinsurance subsidiary pays an annual override commission to Employers
Mutual for this additional protection, which totaled $1,809,000 in 1993.
In conjunction with this change in the quota share agreement, the
reinsurance subsidiary terminated its catastrophe reinsurance contracts
with Employers Mutual and other nonaffiliated reinsurers. Effective
January 1, 1993, the reinsurance subsidiary no longer cedes reinsurance to
nonaffiliated reinsurers and only cedes reinsurance to Employers Mutual
under an aggregate "excess of loss" treaty. As a result, reinsurance
receivables and prepaid reinsurance premiums for the Company have
decreased from prior year amounts. Ceded reinsurance on the books at
December 31, 1992 is being allowed to run-off.
(2) Effective June 30, 1993, Employers Mutual commuted the portion of the
quota share agreement that pertains to a casualty pool that is in a run-
off position. In connection with this change in the quota share
agreement, the Company's liabilities decreased $19,783,000 and invested
assets decreased $17,806,000. The reserve discount amount of $1,977,000
was recorded as deferred income and is being amortized into operations
over the estimated settlement period of the reserves, which is ten years.
During 1993, $259,000 was recognized as income.
33
(3) Effective October 31, 1993, Employers Mutual commuted the portion of the
quota share agreement that pertains to a voluntary pool that handles
large "highly protected" risks. This pool has experienced deteriorating
underwriting results over the last several years and Employers Mutual is
presently considering whether to continue its participation in the pool
beyond 1994. In connection with this change in the quota share agreement,
the Company's liabilities decreased $3,827,000 and invested assets
decreased $2,620,000. Employers Mutual reimbursed the Company $1,207,000
for commissions incurred to generate this business. No reserve discount
was calculated as this business involves short-tail property coverage.
The Company sold its life insurance subsidiary to Employers Mutual on
December 31, 1991. All information presented in this report reflects the life
segment as a discontinued operation.
RESULTS OF OPERATIONS
Operating income before income taxes was $9,019,000 in 1993, $975,000 in
1992 and $10,432,000 in 1991. Results for 1992 were significantly affected by
catastrophe losses, which totaled $16,569,000. This compares to catastrophe
losses of $8,513,000 in 1993 (which includes $1,283,000 of development on
Hurricane Andrew) and $3,652,000 in 1991. Results for 1993 and 1992 were
negatively impacted by poor experience in the nonstandard risk automobile
insurance subsidiary and declining production in the excess and surplus lines
insurance management agency.
Premiums earned totaled $156,438,000 in 1993, 147,410,000 in 1992 and
$113,419,000 in 1991. The large increase in 1992 reflects the change in the
property and casualty insurance subsidiaries' pool participation. Premium
volume increased substantially in the reinsurance subsidiary and the
nonstandard risk automobile insurance subsidiary in 1993 while the property and
casualty insurance subsidiaries remained relatively flat.
Net investment income totaled $20,780,000 in 1993, $21,540,000 in 1992 and
$20,202,000 in 1991. The large increase in 1992 reflects investment income
earned on $29,402,000 transferred to the property and casualty insurance
subsidiaries in connection with the change in pool participation. The decrease
in 1993 is primarily due to a decline in invested assets resulting from the
transfer of $24,853,000 to Employers Mutual in connection with the change in
the property and casualty insurance subsidiaries' pooling agreement relating to
the voluntary assumed reinsurance business and the commutation of two
reinsurance contracts under the reinsurance subsidiary's quota share agreement.
Losses and expenses totaled $169,142,000 in 1993, $168,359,000 in 1992 and
$123,254,000 in 1991. The large increase in 1992 reflects the change in the
property and casualty insurance subsidiaries' pool participation and a record
amount of catastrophe losses.
The Company adopted four new accounting standards and implemented an
accounting change in 1993. The net impact of these items was an increase in
net income of $2,621,000 ($.26 per share). Following is a brief explanation of
each item:
34
* Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The Company adopted SFAS 106
by recognizing the transition obligation as a cumulative effect adjustment
to income. The Company's transition obligation amounted to $2,166,000 ($.21
per share), net of income tax benefits of $1,116,000.
* Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes".
The Company adopted SFAS 109 as a cumulative effect adjustment to income.
The Company recognized a benefit of $5,595,000 ($.55 per share), net of a
valuation allowance of $1,000,000.
* Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 113 (SFAS 113), "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts". SFAS 113
requires a gross (rather than net) balance sheet presentation for ceded
reinsurance amounts and addresses the recognition of gain or loss resulting
from reinsurance transactions and appropriate financial statement disclosure
of reinsurance activities. Ceded reinsurance amounts previously reported on
a net basis in the December 31, 1992 balance sheet have been reclassified
for comparative purposes. Assets and liabilities increased $20,075,000 and
$28,891,000 at December 31, 1993 and 1992, respectively, as a result of the
gross-up of ceded balances related to reinsurance receivables on losses and
settlement expenses and prepaid reinsurance premiums. Adoption of this
statement had no effect on the income of the Company.
* Effective January 1, 1993, the property and casualty insurance subsidiaries
changed their method of calculating unearned premiums from the monthly pro
rata method to the daily method. The property and casualty insurance
subsidiaries changed their accounting method because of management's belief
that the new method provides for a more accurate matching of revenues and
expenses over the terms of the underlying insurance policies. This change
resulted in a cumulative increase in unearned premiums of $1,110,000 and a
decrease in income of $808,000 ($.08 per share), net of income tax benefits
of $302,000.
35
* Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities". SFAS 115 provides that
investments in all debt securities and those equity securities with readily
determinable market values are to be classified in one of three categories:
held-to-maturity, trading or available-for-sale. Classification of
investments is based upon management's current intent. Debt securities
which management has a positive intent and ability to hold to maturity are
classified as "securities held-to-maturity" and are carried at amortized
cost. Unrealized holding gains and losses on securities held-to-maturity
are not reflected in the consolidated financial statements. Debt and equity
securities that are held for current resale are classified as "trading
securities" and are reported at market value, with unrealized holding gains
and losses included in earnings. All other debt and equity securities are
classified as "securities available-for-sale" and are carried at market
value, with unrealized holding gains and losses excluded from earnings and
reported as a separate component of stockholders' equity, net of tax. The
Company has historically held its investment portfolio to maturity and has
classified the majority of its portfolio at December 31, 1993 (63.3 percent)
as "securities held-to-maturity". The remainder of the portfolio has been
classified as "securities available-for-sale". Adoption of this statement
had no effect on the income of the Company. Net unrealized holding gains
reflected in stockholders' equity at December 31, 1993 totaled $2,049,000,
net of deferred income taxes of $1,055,000.
SEGMENT RESULTS
Property and Casualty Insurance
Operating income before income taxes increased 59.6 percent to $9,835,000
in 1993, increased 2.1 percent to $6,164,000 in 1992 and decreased 17.3 percent
to $6,037,000 in 1991. Underwriting loss decreased significantly in 1993.
Results for 1992 reflect an increase in catastrophe losses, which was
compounded by the increase in the pool participation. Results for 1991 reflect
a substantial increase in reserves reported by the National Workers'
Compensation Reinsurance Pool. Investment income increased 2.9 percent to
$13,243,000 in 1993, 17.0 percent to $13,048,000 in 1992 and 9.6 percent to
$11,153,000 in 1991. Results for 1993 reflect the transfer of $4,427,000 to
Employers Mutual in connection with the change in the pooling agreement and the
general decline in interest rates for current investments. The large increase
in 1992 reflects investment income earned on $29,402,000 received from
Employers Mutual in connection with the change in pool participation and
$10,000,000 received from the parent company to support this increased
participation.
Premiums earned increased .4 percent to $109,585,000 in 1993, 39.2 percent
to $109,139,000 in 1992 and 11.1 percent to $78,413,000 in 1991. The large
increase in 1992 reflects $24,821,000 from the change in pool participation.
Depressed rates caused by the soft market, a shift of large commercial insureds
to alternative risk mechanisms and the generally weak economy contributed to
the small increase in 1993. In addition to these factors, results for 1993
reflect the change in the pooling agreement whereby effective January 1, 1993,
the voluntary assumed reinsurance business written by Employers Mutual is no
longer subject to cession to the pool members. This business accounted for
$1,442,000 of earned premiums (including reinstatement premiums) in 1992.
36
Underwriting loss decreased 46.8 percent to $3,813,000 in 1993, increased
39.3 percent to $7,169,000 in 1992 and increased 76.5 percent to $5,147,000 in
1991. Catastrophe losses had a significant impact on these results, totaling
$3,372,000 in 1993, $4,631,000 in 1992 and $2,980,000 in 1991. Results for the
last three years have been negatively impacted by a strengthening of workers'
compensation reserves. The Company had underestimated the cost of medical
expenses associated with workers' compensation claims due to greater than
expected increases in the price and usage of drugs, medical durables and
medical services. Losses totaling $1,998,000, $1,026,000 and $1,272,000 were
charged to operations during 1993, 1992 and 1991, respectively. Employers
Mutual has assigned additional staff to supervise the reserving process for
workers' compensation claims and to more closely monitor the development of
such reserves. In addition, Employers Mutual now employs medically trained
persons to assist in determining proper reserve levels based on the future
medical needs of the insureds. All major claims have been reviewed and the
Company believes that the reserves are now adequate. Results for 1993 reflect
$880,000 of losses related to the Midwest summer floods and the change in the
pooling agreement whereby effective January 1, 1993, the voluntary reinsurance
business written by Employers Mutual is no longer subject to cession to the
pool members. Underwriting losses associated with the voluntary reinsurance
business (including catastrophe losses) amounted to $1,427,000 in 1992.
Inadequate rate increases and the increasing burden of residual markets in
some states reduces the profit potential for the workers' compensation line of
business in those states. The parties to the pooling agreement have adjusted
rates, policyholder dividends and underwriting standards in these problem
states and have experienced a planned overall decline in writings for this line
of business. Workers' compensation will continue to be an important line of
business for the parties to the pooling agreement; however, the percentage of
workers' compensation written premiums to total written premiums is expected to
decline gradually as the parties to the pooling agreement refine their
underwriting standards based on current conditions in each state.
Reinsurance
Operating income before income taxes increased 110.0 percent to $510,000
in 1993, decreased 332.8 percent to a loss of $5,089,000 in 1992 and increased
71.8 percent to $2,186,000 in 1991. Results for 1993 and 1992 were
significantly impacted by catastrophe losses, poor experience in two voluntary
pools and continued development in a casualty pool that is in a run-off
position. Investment income declined 10.0 percent to $6,090,000 in 1993, 5.4
percent to $6,763,000 in 1992 and 2.6 percent to $7,149,000 in 1991. The large
decline in 1993 is primarily attributable to the transfer of $20,426,000 to
Employers Mutual in connection with the commutation of two reinsurance
contracts. Declining interest rates for current investments contributed to the
decline in 1992 and 1991.
The following changes were implemented in 1993 to improve the future
operating results of the reinsurance subsidiary: (1) the quota share agreement
was amended so that effective January 1, 1993, losses in excess of $1,000,000
per event are retained by Employers Mutual; (2) management reduced the
aggregate liability in hurricane prone areas by moving to a higher attachment
point in nationally exposed programs and by terminating several reinsurance
arrangements with other reinsurers that had severe hurricane losses; (3)
Employers Mutual commuted two reinsurance contracts under the quota share
agreement that have produced very poor results over the last several years.
37
Premiums earned increased 25.2 percent to $33,324,000 in 1993, 6.4 percent
to $26,615,000 in 1992 and 20.8 percent to $25,009,000 in 1991. Amounts earned
in 1992 and 1991 reflect $1,220,000 and $1,286,000, respectively, in premiums
ceded (excluding reinstatement premiums) to Employers Mutual for catastrophe
reinsurance protection. This coverage was terminated in 1993 in conjunction
with the change in the quota share agreement noted above. The reinsurance
subsidiary pays Employers Mutual an annual override commission for retaining
losses in excess of $1,000,000 per event, which totaled $1,809,000 in 1993.
The amount earned in 1992 also reflects $3,859,000 of reinstatement premiums
paid to reinsurers (including Employers Mutual) to reinstate reinsurance
coverage which was exhausted by Hurricanes Andrew and Iniki. Results for 1993
reflect a shift from catastrophe "excess of loss" business to "pro rata"
business and a general improvement in rates. Under catastrophe "excess of
loss" contracts, the reinsurance subsidiary provided coverage for catastrophe
losses which exceeded a specified amount. Premiums associated with this type
of business are generally lower as the coverage provided is not often exposed.
However, the last few years have demonstrated that the exposure under this type
of business can far exceed the premiums received. With "pro rata" business,
the reinsurance subsidiary receives a specified portion of all premiums on each
contract and then shares in all losses in the same proportion as the premium.
Although the reinsurance subsidiary has a share in each loss under this type of
business, the premium received is believed to be more adequate.
Underwriting loss decreased 49.3 percent to $6,040,000 in 1993, increased
138.5 percent to $11,904,000 in 1992 and decreased 17.9 percent to $4,991,000
in 1991. The large loss in 1992 is primarily related to catastrophe losses,
which totaled $11,609,000. This compares to catastrophe losses of $5,141,000
in 1993 (including development on Hurricane Andrew of $1,283,000) and
$2,403,000 in 1991. Operating results for the last three years have been
significantly impacted by losses from two voluntary pools in which the
subsidiary participates and by losses from a casualty pool that is in a run-off
position. The voluntary pools reported combined losses of $2,425,000 in 1993,
$2,007,000 in 1992 and $1,571,000 in 1991. Effective October 31, 1993,
Employers Mutual commuted the portion of the quota share agreement that
pertains to one of these pools. Losses associated with this pool totaled
$2,017,000 in 1993 and $1,294,000 in 1992. No reserve discount was calculated
as this business involves short-tail property coverage. Losses associated with
the casualty pool that is in a run-off position totaled $868,000 in 1993,
$952,000 in 1992 and $2,376,000 in 1991. Employers Mutual commuted the portion
of the quota share agreement that pertains to this pool effective June 30,
1993. The reserve discount amount of $1,977,000 was recorded as deferred
income and is being amortized into operations over the estimated settlement
period of the reserves, which is ten years. During 1993, $259,000 was
recognized as income. Results for 1993 also reflect $1,000,000 of losses
associated with severe east coast winter storms and $398,000 of losses
associated with the World Trade Center explosion.
38
Nonstandard Risk Automobile Insurance
Operating results before income taxes decreased 65.4 percent to a loss of
$1,268,000 in 1993, decreased 153.1 percent to a loss of $767,000 in 1992 and
increased 51.9 percent to a profit of $1,444,000 in 1991. Results for 1993 and
1992 were significantly impacted by increased loss frequency and severity
associated with a new book of business and a strengthening of loss and
settlement expense reserves. Investment income decreased 1.1 percent to
$1,166,000 in 1993, 11.3 percent to $1,179,000 in 1992 and 2.1 percent to
$1,329,000 in 1991 due to the declining interest rates available for current
investments.
The nonstandard risk marketplace is very competitive. Policies are
written for relatively short periods of time and insureds continually search
for the most attractive rates. In response to the favorable results achieved
in 1991, the company began increasing market share in 1992 by offering more
competitive rates. The company experienced adverse selection in this new
business as the standard market began to accept marginal risks during this same
time period. As a result, losses associated with this new business exceeded
the premiums received.
Premiums earned increased 16.1 percent to $13,528,000 in 1993, increased
16.6 percent to $11,656,000 in 1992 and decreased .3 percent to $9,997,000 in
1991. The large increases in 1993 and 1992 reflect the increase in market
share discussed above.
Underwriting results decreased 27.6 percent to a loss of $2,543,000 in
1993, decreased 1,911.8 percent to a loss of $1,993,000 in 1992 and increased
126.7 percent to a profit of $110,000 in 1991. In addition to the adverse
selection experienced in 1993 and 1992, the company also strengthened its loss
and expense reserves in each of these years.
The company has applied for rate increases in all states and is currently
reviewing its book of business to identify those risks with unacceptable loss
experience. The company will take appropriate action, up to and including the
cancellation of specific risks, to improve future loss experience. Rate
increases are not expected to have a significant impact on the company's market
share in 1994.
Excess and Surplus Lines Insurance Management Agency
Operating income before income taxes decreased 79.1 percent to $103,000 in
1993, 22.7 percent to $496,000 in 1992 and 12.3 percent to $641,000 in 1991.
Operating results continue to be effected by the termination of business with a
large agency that had previously represented over 50 percent of this segment's
volume. Management continues to search for new business, but a large portion
of excess and surplus lines insurance is currently being written by standard
carriers due to the soft market conditions.
39
Parent Company
Operating income before income taxes decreased 194.1 percent to a loss of
$161,000 in 1993, increased 39.2 percent to $171,000 in 1992 and decreased 79.1
percent to $123,000 in 1991. The loss in 1993 is primarily due to a decline in
investment income. Invested assets decreased in 1993 as a result of a capital
contribution made to the reinsurance subsidiary in December of 1992 and the
payment of stockholder dividends.
NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 112 (SFAS 112), "Employers' Accounting for
Postemployment Benefits". SFAS 112 requires that the cost of certain
postemployment benefits that vest or accumulate be accrued over the period of
an employee's service. SFAS 112 is effective for fiscal years beginning after
December 15, 1993. The Company will adopt this standard in the first quarter
of 1994. Adoption of this standard is not expected to have a material effect
on the income of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a portion of the investment portfolio in relatively
short-term and highly liquid investments to ensure the availability of funds to
meet claims and expenses. The remainder of the investment portfolio is
invested in securities with maturities that approximate the anticipated
liabilities of the insurance issued. The major ongoing sources of the
Company's liquidity are insurance premium income, investment income and cash
provided from maturing or liquidated investments. The principal outflows of
cash are payments of claims, commissions, premium taxes, operating expenses,
income taxes, dividends and investment purchases.
The Company has historically generated positive cash flows from
operations. During 1993, the Company had a negative operating cash flow of
$8,794,000, which reflects $24,853,000 paid to Employers Mutual in connection
with the change in the property and casualty insurance subsidiaries' pooling
agreement and the commutation of two reinsurance contracts under the
reinsurance subsidiary's quota share agreement. This compares to operating
cash flows of $50,826,000 for 1992, which included $29,402,000 received from
Employers Mutual in connection with the increase in the property and casualty
insurance subsidiaries' pool participation.
40
The National Association of Insurance Commissioners (NAIC) has recently
adopted certain risk-based capital standards for property and casualty
insurance companies which will be implemented in 1994. Risk-based capital
requirements attempt to measure minimum statutory capital needs based upon the
risks in a company's mix of products and investment portfolio. The formula has
been designed to help state regulators assess capital adequacy of insurance
companies and identify property/casualty insurers that are in (or perceived as
approaching) financial difficulty by establishing minimum capital needs based
upon the risks applicable to the operations of the individual insurer. The
formula takes into consideration industry performance and individual insurer
financial characteristics by examining a number of financial criteria to test
its perceived levels of risk against assets available to bear such risks. The
model act adopted by the NAIC provides a minimum level of capital at which a
State Commissioner of Insurance may act to place an insurer under certain
restraints or in the worst case, to place an insurer under his or her control.
These risk-based capital rules are a quantitative measurement technique which
purport to quantify the minimum amount of capital necessary to match the degree
of financial risk. It is a method for specifying how much minimum capital an
insurer must have, based on the risks it has assumed, to assure that it
maintains an acceptably low probability of financial impairment.
The risk-based capital requirements for property and casualty insurance
companies will measure three major areas of risk facing property and casualty
insurers: 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. The Company's insurance subsidiaries' ratio
of total adjusted capital to risk-based capital at December 31, 1993 is well in
excess of the level which would prompt regulatory action.
The majority of the Company's assets are invested in fixed maturities.
These investments provide a substantial amount of income which offsets
underwriting losses and contributes to net earnings. As these investments
mature the proceeds will be reinvested at current rates, which are
significantly lower than those now being earned; therefore, less investment
income will be available to contribute to net earnings.
41
The Company contributed $10,000,000 of the proceeds received from the sale
of the life subsidiary to increase the surplus of the property and casualty
insurance subsidiaries in 1992 in connection with the increase in pool
participation. The Company contributed $3,000,000 to the surplus of the
reinsurance subsidiary in 1992 in order to retain its status as an authorized
reinsurance company in several states.
As of December 31, 1993, the Company had no material commitments for
capital expenditures.
A source of cash flows for the holding company is dividend payments from
its subsidiaries. State insurance regulations restrict the maximum amount of
dividends insurance companies can pay without prior regulatory approval. See
note 8 of Notes to Consolidated Financial Statements for additional information
regarding dividend restrictions. The Company collected $860,000, $3,288,000
and $3,600,000 of dividends from its insurance subsidiaries in 1993, 1992 and
1991, respectively and $106,000 of dividends from its excess and surplus lines
insurance agency in 1991. The Company paid cash dividends to stockholders
totaling $3,443,000, $5,104,000 and $5,082,000 in 1993, 1992 and 1991,
respectively. The decrease in 1993 is due to the fact that Employers Mutual
received 50 percent of its dividends in common stock under the Company's
dividend reinvestment and common stock purchase plan.
Inflation has a widespread effect on the Company's results of operations,
primarily through increased losses and settlement expenses. The Company
considers inflation, including social inflation which reflects an increasingly
litigious society and increasing jury awards, when setting reserve amounts.
Premiums are also affected by inflation, although they are often restricted or
delayed by competition and the regulatory rate-setting environment.
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
Management's Responsibility for Financial Reporting
The consolidated financial statements and related financial information in
this annual report are the responsibility of management. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles and necessarily include certain amounts that are based on
management's best estimates and judgments.
In discharging its responsibility both for the integrity and fairness of
these statements and the related financial information, and for the examination
of the accounting systems from which they are derived, management maintains a
system of internal control designed to provide reasonable assurance, weighing
the costs with the benefits sought, that transactions are executed in
accordance with management's authorization, assets are safeguarded, and proper
records are maintained. Management believes that the system of internal
control, which is subject to close scrutiny by management and by internal
auditors and is revised as considered necessary, supports the integrity and
reliability of the consolidated financial statements. Further, in accordance
with generally accepted auditing standards, the independent certified public
accountants obtained a sufficient understanding of the Company's internal
control structure to plan their audit and determine the nature, timing and
extent of tests to be performed.
The Audit Committee of the Board of Directors, composed solely of outside
directors, met during the year with management, the Company's internal auditors
and the independent certified public accountants to review the scope of the
audits, discuss the evaluation of internal accounting controls and discuss
financial reporting matters. The independent auditors and internal auditors
have free access to the Audit Committee and meet with it, without management
present, to discuss any appropriate matters.
The consolidated financial statements are examined by KPMG Peat Marwick,
independent certified public accountants. Their report appears elsewhere in
this annual report.
/s/ E.H. Creese
- ------------------------------------
E. H. Creese, C.P.A.
Senior Vice President, Treasurer and
Chief Financial Officer
43
Independent Auditor's Report
The Board of Directors and Stockholders
EMC Insurance Group Inc.:
We have audited the accompanying consolidated balance sheets of EMC
Insurance Group Inc. and Subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1993. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EMC
Insurance Group Inc. and Subsidiaries as of December 31, 1993 and 1992, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1993, in conformity with generally
accepted accounting principles.
As discussed in notes 1, 10, 12 and 13 to the consolidated financial
statements, the Company changed its method of computing unearned premiums in
1993 and implemented the provisions of the Financial Accounting Standards
Board's Statements No. 106, "Employers Accounting for Postretirement Benefits
Other Than Pensions", No. 109, "Accounting for Income Taxes", No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts" and No. 115, "Accounting for Certain Investments in Debt and Equity
Securities".
/s/ KPMG Peat Marwick
Des Moines, Iowa
February 21, 1994
44
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
--------------------------
1993 1992
------------ ------------
ASSETS
Investments (note 10):
Fixed maturities:
Securities held-to-maturity, at amortized cost
(market value $206,305,597 and $266,719,495) $191,010,623 $250,552,858
Securities available-for-sale, at market value
(amortized cost $109,947,564) ............... 113,081,580 -
Equity securities available-for-sale, at market
value (cost $505,000 and $1,560,000) .......... 475,000 1,418,000
Short-term investments, at cost which
approximates market value ..................... - 59,198,070
------------ ------------
Total investments .......................... 304,567,203 311,168,928
------------ ------------
Cash .............................................. 675,203 2,009,512
Indebtedness of related party (note 4) ............ 12,291,512 3,652,076
Accrued investment income ......................... 4,835,451 4,592,856
Accounts receivable ............................... 415,215 576,155
Deferred policy acquisition costs ................. 7,698,864 8,112,831
Deferred income taxes (note 13) ................... 13,040,693 7,065,221
Intangible assets, including goodwill, at cost
less accumulated amortization of $1,540,130
and $1,405,617 ................................. 2,017,690 2,152,203
Reinsurance receivables (note 3) .................. 18,477,406 27,866,790
Prepaid reinsurance premiums (note 3) ............. 2,832,184 3,637,917
Other assets ...................................... 2,084,102 1,972,611
------------ ------------
Total assets ............................... $368,935,523 $372,807,100
============ ============
See accompanying Notes to Consolidated Financial Statements.
45
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
--------------------------
1993 1992
------------ ------------
LIABILITIES
Losses and settlement expenses (notes 2, 3 and 4) . $197,121,852 $215,388,865
Unearned premiums (notes 2, 3 and 4) .............. 45,941,056 45,984,474
Other policyholders' funds ........................ 2,854,793 3,695,397
Income taxes payable .............................. 550,000 668,000
Postretirement benefits (note 12) ................. 3,537,449 -
Deferred income (note 2) .......................... 1,717,641 -
Other liabilities ................................. 7,578,963 6,159,587
------------ ------------
Total liabilities .......................... 259,301,754 271,896,323
------------ ------------
STOCKHOLDERS' EQUITY (notes 6, 7, 8 and 10)
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 10,325,329 shares
in 1993 and 10,161,760 shares in 1992 ........... 10,325,329 10,161,760
Additional paid-in capital ........................ 55,021,926 53,507,459
Unrealized holding gains on fixed maturity
securities available-for-sale, net of tax ....... 2,068,451 -
Unrealized holding losses on equity securities
available-for-sale, net of tax .................. (19,800) (142,000)
Retained earnings ................................. 42,319,249 37,866,902
Treasury stock, at cost (8,090 shares in 1993
and 49,392 shares in 1992) ...................... (81,386) (483,344)
------------ ------------
Total stockholders' equity ................. 109,633,769 100,910,777
------------ ------------
Contingent liabilities (notes 3, 13 and 16)
Total liabilities and stockholders' equity $368,935,523 $372,807,100
============ ============
See accompanying Notes to Consolidated Financial Statements.
46
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income
Year ended December 31,
----------------------------------------
1993 1992 1991
------------ ------------ ------------
Revenues:
Premiums earned (notes 2 and 3) ... $156,437,538 $147,410,287 $113,419,238
Investment income, net (note 10) .. 20,779,951 21,539,597 20,201,993
Realized investment gains (note 10) 684,445 384,283 64,418
Other income (note 2) ............. 259,217 - -
------------ ------------ ------------
178,161,151 169,334,167 133,685,649
------------ ------------ ------------
Losses and expenses:
Losses and settlement
expenses (notes 2 and 3) ........ 120,355,299 122,087,833 88,104,919
Dividends to policyholders ........ 2,494,284 3,382,736 1,757,923
Amortization of deferred
policy acquisition costs ........ 30,717,175 29,291,362 24,255,722
Other underwriting expenses ....... 15,575,257 13,597,179 9,135,247
------------ ------------ ------------
169,142,015 168,359,110 123,253,811
------------ ------------ ------------
Income from continuing operations
before income taxes and
cumulative effect of changes
in accounting principles ....... 9,019,136 975,057 10,431,838
------------ ------------ ------------
Income taxes (note 13):
Current ........................... 1,903,128 2,260,795 3,905,736
Deferred .......................... (18,027) (1,501,430) (781,719)
------------ ------------ ------------
1,885,101 759,365 3,124,017
------------ ------------ ------------
Income from continuing operations
before cumulative effect of
changes in accounting principles 7,134,035 215,692 7,307,821
Income from discontinued
operations (note 5) ............... - - 1,853,234
------------ ------------ ------------
Income before cumulative effect of
changes in accounting principles 7,134,035 215,692 9,161,055
CUMULATIVE EFFECT OF CHANGES
IN ACCOUNTING PRINCIPLES FOR:
Income taxes (note 13) .......... 5,595,177 - -
Postretirement benefits (note 12) (2,165,900) - -
Unearned premiums (note 1) ...... (807,933) - -
------------ ------------ ------------
Net income ................. $ 9,755,379 $ 215,692 $ 9,161,055
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
47
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income, Continued
Year ended December 31,
----------------------------------------
1993 1992 1991
------------ ------------ ------------
EARNINGS PER COMMON SHARE:
Income from continuing operations
before cumulative effect of
changes in accounting principles $ .70 $ .02 $ .73
Income from discontinued
operations .................... - - .18
------------ ------------ ------------
Income before cumulative effect of
changes in accounting principles .70 .02 .91
Cumulative effect of changes in
accounting principles for:
Income taxes ................. .55 - -
Postretirement benefits ...... (.21) - -
Unearned premiums ............ (.08) - -
------------ ------------ ------------
Net income ................. $ .96 $ .02 $ .91
============ ============ ============
Average number of shares outstanding 10,197,999 10,071,901 10,054,899
============ ============ ============
Pro forma amounts, assuming retroactive application of new method of
calculating unearned premiums:
Net income ................. $ 10,563,312 $ 344,420 $ 8,971,387
============ ============ ============
Earnings per common share ......... $1.04 $ .03 $ .89
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
48
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Year ended December 31,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
Common stock, beginning of year ........ $10,161,760 $10,082,675 $10,023,435
Issuance of common stock:
Stock option plans ................. 31,252 79,085 59,240
Dividend reinvestment plan ......... 132,317 - -
----------- ----------- -----------
Common stock, end of year .............. 10,325,329 10,161,760 10,082,675
----------- ----------- -----------
Additional paid-in capital,
beginning of year .................... 53,507,459 52,838,624 52,332,954
Additional paid-in capital from
issuance of common stock:
Stock option plans ................. 279,234 669,320 490,783
Dividend reinvestment plan ......... 1,211,972 - -
Gain (loss) on sale of treasury stock .. 23,261 (485) 14,887
----------- ----------- -----------
Additional paid-in capital, end of year 55,021,926 53,507,459 52,838,624
----------- ----------- -----------
Unrealized holding gains on fixed
maturity securities available-for-
sale, beginning of year .............. - - -
Unrealized holding gains on revaluation
of fixed maturity securities available
-for-sale, net of tax (note 10) ...... 2,068,451 - -
----------- ----------- -----------
Unrealized holding gains on fixed
maturity securities available-for-
sale, net of tax, end of year ........ 2,068,451 - -
----------- ----------- -----------
Unrealized holding losses on equity
securities available-for-sale,
net of tax, beginning of year ........ (142,000) (326,375) (625,000)
Unrealized holding gains on revaluation
of equity securities available-for-
sale, net of tax ..................... 122,200 184,375 298,625
----------- ----------- -----------
Unrealized holding losses on equity
securities available-for-sale,
net of tax, end of year .............. $ (19,800) $ (142,000) $ (326,375)
----------- ----------- -----------
49
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity, Continued
Year ended December 31,
----------------------------------------
1993 1992 1991
------------ ------------ ------------
Retained earnings, beginning of year $ 37,866,902 $ 42,891,128 $ 38,947,265
Net income .......................... 9,755,379 215,692 9,161,055
Dividends on common stock ($.52 per
share in 1993, 1992 and 1991):
Cash dividends .................. (3,443,465) (5,103,890) (5,081,607)
Dividends reinvested in shares
of common stock .............. (1,859,567) (136,028) (135,585)
------------ ------------ ------------
Retained earnings, end of year ...... 42,319,249 37,866,902 42,891,128
------------ ------------ ------------
Treasury stock at cost,
beginning of year ................. (483,344) (341,616) (63,207)
Purchase of shares for the treasury (126,948) (315,749) (420,799)
Sale of shares from the treasury .... 528,906 174,021 142,390
------------ ------------ ------------
Treasury stock at cost, end of year (81,386) (483,344) (341,616)
------------ ------------ ------------
Total stockholders' equity ..... $109,633,769 $100,910,777 $105,144,436
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
50
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended December 31,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
Cash flows from operating activities:
Income from continuing operations .... $ 9,755,379 $ 215,692 $ 7,307,821
----------- ----------- -----------
Adjustments to reconcile
income to net cash (used in)
provided by operating activities:
Cumulative effect of changes in
accounting principles, net of tax (2,621,344) - -
Losses and settlement expenses .... 8,010,617 33,143,232 7,571,843
Unearned premiums ................. 650,196 4,122,176 2,472,252
Other policyholders' funds ........ (840,604) 880,866 (217,686)
Deferred policy acquisition costs 413,967 (2,189,375) (523,277)
Indebtedness of related party ..... (8,639,436) 2,261,884 (5,269,702)
Accrued investment income ......... (242,595) (168,511) 29,659
Accrued income taxes:
Current ......................... (118,000) (2,390,000) 951,000
Deferred ........................ (18,027) (1,501,430) (781,719)
Provision for amortization ........ (23,072) 23,660 65,284
Realized investment gains ......... (684,445) (384,283) (64,418)
Postretirement benefits ........... 255,782 - -
Reinsurance receivables ........... 9,389,384 (12,828,945) 3,004,446
Prepaid reinsurance premiums ...... 805,733 (945,813) (61,779)
Amortization of deferred income ... (259,217) - -
Other, net ........................ 225,040 1,184,844 (961,824)
----------- ----------- -----------
6,303,979 21,208,305 6,214,079
Cash (used in) provided by the
change in the property and
casualty insurance subsidiaries'
pooling agreement (note 2) ...... (4,426,945) 29,402,411 -
Cash used in the commutation of
two reinsurance contracts under
the reinsurance subsidiary's
quota share agreement (note 2) .. (20,425,955) - -
----------- ----------- -----------
Total adjustment .............. (18,548,921) 50,610,716 6,214,079
----------- ----------- -----------
Net cash (used in) provided
by operating activities ... $(8,793,542) $50,826,408 $13,521,900
----------- ----------- -----------
51
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Year ended December 31,
----------------------------------------
1993 1992 1991
------------ ------------ ------------
Cash flows from investing activities:
Purchases of fixed maturities ..... $(55,851,708) $(62,701,348) $(35,475,949)
Maturities of fixed maturities .... 57,329,956 37,285,914 31,844,948
Sale of equity securities ......... 1,043,068 - -
Purchases of short-term investments (308,953,569) (357,300,319) (163,308,142)
Sales of short-term investments ... 317,122,024 337,456,332 141,779,010
Sale of life subsidiary ........... - 474,356 15,500,000
------------ ------------ ------------
Net cash provided by (used
in) investing activities 10,689,771 (44,785,065) (9,660,133)
------------ ------------ ------------
Cash flows from financing activities:
Issuance of common stock .......... 331,568 748,405 550,023
Dividends paid to
stockholders (note 6(c)) ........ (3,443,465) (5,103,890) (5,081,607)
Purchase of treasury stock, net ... (118,641) (278,241) (399,107)
------------ ------------ ------------
Net cash used in financing
activities ............... (3,230,538) (4,633,726) (4,930,691)
------------ ------------ ------------
Net (decrease) increase in cash ..... (1,334,309) 1,407,617 (1,068,924)
Cash at beginning of year ........... 2,009,512 601,895 1,670,819
------------ ------------ ------------
Cash at end of year ................. $ 675,203 $ 2,009,512 $ 601,895
============ ============ ============
Income taxes paid ................... $ 4,656,213 $ 4,650,795 $ 2,954,736
Interest paid ....................... 1,696 387,351 15,874
See accompanying Notes to Consolidated Financial Statements.
52
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
EMC Insurance Group Inc., an approximately 67 percent owned subsidiary of
Employers Mutual Casualty Company (Employers Mutual), is an insurance holding
company with operations in property and casualty insurance, reinsurance,
nonstandard risk automobile insurance and excess and surplus lines insurance
management. EMC Insurance Group Inc. and its subsidiaries are referred to
herein as the "Company".
The Company's subsidiaries include EMCASCO Insurance Company, Illinois
EMCASCO Insurance Company, Dakota Fire Insurance Company, EMC Reinsurance
Company, Farm and City Insurance Company and EMC Underwriters, Ltd.
The Company sold its life insurance subsidiary to Employers Mutual on
December 31, 1991. All information presented in this report reflects the life
segment as a discontinued operation (see note 5).
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles (GAAP) which differ in some respects
from those followed in reports to insurance regulatory authorities. All
significant intercompany balances and transactions have been eliminated.
PROPERTY AND CASUALTY INSURANCE, REINSURANCE AND NONSTANDARD RISK AUTOMOBILE
INSURANCE OPERATIONS
Premiums are recognized as revenue ratably over the terms of the
respective policies. Effective January 1, 1993, the property and casualty
insurance subsidiaries changed their method of calculating unearned premiums
from the monthly pro rata method to the daily pro rata method. The property
and casualty insurance subsidiaries changed their accounting method because of
management's belief that the new method provides for a more accurate matching
of revenues and expenses over the terms of the underlying insurance policies.
This change resulted in a cumulative increase in unearned premiums of
$1,109,799 and a decrease in income of $807,933 ($.08 per share), net of income
tax benefits of $301,866.
Certain costs of acquiring new business, principally commissions, premium
taxes and variable underwriting expenses, have been deferred. Such costs are
being amortized as premium revenue is recognized. The method followed in
computing deferred policy acquisition costs limits the amount of such deferred
costs to their estimated realizable value, which gives effect to the premium to
be earned, related investment income, losses and loss settlement expenses and
certain other costs expected to be incurred as the premium is earned.
Unpaid losses and settlement expenses are based on estimates of reported
and unreported claims and related settlement expenses. Changes in estimates
are reflected in current operating results. The provisions for losses and
settlement expenses are considered adequate to cover the ultimate net cost of
losses and claims incurred to date net of estimated salvage and subrogation
recoverable. Since the provisions are necessarily based on estimates, the
ultimate liability may be more or less than such provisions.
53
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
EXCESS AND SURPLUS LINES OPERATIONS
Income is derived from fees and commissions which are realized when
earned. Costs of doing business are expensed as incurred.
REINSURANCE CEDED
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 113 (SFAS 113), "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts". SFAS 113 requires
a gross (rather than net) balance sheet presentation for ceded reinsurance
amounts and addresses the recognition of gain or loss resulting from
reinsurance transactions and appropriate financial statement disclosure of
reinsurance activities. Ceded reinsurance amounts previously reported on a net
basis in the December 31, 1992 consolidated financial statements have been
reclassified for comparative purposes. Assets and liabilities increased
$20,074,607 and $28,891,424 at December 31, 1993 and 1992, respectively, as a
result of the gross-up of ceded balances related to reinsurance receivables on
losses and settlement expenses and prepaid reinsurance premiums. Adoption of
this statement had no effect on the income of the Company.
INVESTMENTS
Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115) "Accounting for Certain Investments in
Debt and Equity Securities." SFAS 115 requires that investments in all debt
securities and those equity securities with readily determinable market values
be classified into one of three categories: held-to-maturity, trading or
available-for-sale. Classification of investments is based upon management's
current intent. Debt securities which management has a positive intent and
ability to hold until maturity are classified as securities held-to-maturity
and are carried at amortized cost. Unrealized holding gains and losses on
securities held-to-maturity are not reflected in the consolidated financial
statements. Debt and equity securities that are purchased for short-term
resale are classified as trading securities. Trading securities are carried at
market value, with unrealized holding gains and losses included in earnings.
All other debt and equity securities not included in the above two categories
are classified as securities available-for-sale. Securities available-for-sale
are carried at market value, with unrealized holding gains and losses reported
as a separate component of stockholders' equity, net of tax. At December 31,
1993 the Company did not have any investments categorized as trading
securities. Adoption of this statement had no effect on the income of the
Company.
Prior to December 31, 1993, investments in fixed maturities were carried
at amortized cost, equity securities were carried at market value and short-
term investments were carried at cost. Changes in unrealized holding gains and
losses resulting from the revaluation of equity securities were reported as
direct increases and decreases in stockholders' equity. Unrealized holding
gains and losses on fixed maturities and short-term investments were not
recognized in the consolidated financial statements.
54
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company's carrying value for investments in the held-to-maturity and
available-for-sale categories is reduced to its estimated realizable value if a
decline in the market value is deemed other than temporary. Such reductions in
carrying value are recognized as realized losses and charged to income.
Premiums and discounts on debt securities are amortized over the life of the
security as an adjustment to yield using the effective interest method.
Realized gains and losses on disposition of investments are included in net
income. The cost of investments sold is determined on the first-in, first-out
method. Included in investments at December 31, 1993 and 1992 are securities
on deposit with various regulatory authorities as required by law amounting to
$11,329,402 and $10,774,732, respectively.
PENSION COSTS
Net periodic pension cost relating to the Company's employee participation
in Employers Mutual's Retirement Plan is computed on the basis of Statement of
Financial Accounting Standards No. 87, "Employers' Accounting for Pensions",
and includes the following components: service cost, interest cost, actual
return on assets for the period and amortization of unrealized gain/loss from
past experience. It is the Company's policy to fund pension costs according to
regulations provided under the Internal Revenue Code. Assets held in the Plan
are a mix of equity, debt and guaranteed interest securities.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for
Postretirement Benefits Other Than Pensions". Under SFAS 106, the cost of
postretirement benefits other than pensions must be recognized on an accrual
basis as employees perform services to earn the benefits. Prior to 1993, the
cost of retiree health care and life insurance benefits were recognized as
expenses when paid.
INCOME TAXES
The Company files a consolidated Federal income tax return with its
subsidiaries. Consolidated income taxes/benefit are allocated among the
entities based upon separate tax liabilities.
Deferred income taxes are provided for temporary differences between
financial statement carrying values of assets and liabilities and their
respective tax bases. Effective January 1, 1993, the Company adopted Statement
of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes". Under SFAS 109, deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carryforwards, and then
a valuation allowance is established to reduce that deferred tax asset if it is
"more likely than not" that the related tax benefits will not be realized.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities from a change in tax rates is recognized in income
in the period that includes the enactment date. Prior to 1993, the Company
computed deferred income taxes in accordance with Statement of Financial
Accounting Standards No. 96.
55
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
EARNINGS PER SHARE
Earnings per common share are computed by dividing earnings by the
weighted average number of common shares outstanding during each year.
INTANGIBLE ASSETS
Goodwill, which represents the excess of cost over the fair value of net
assets of acquired subsidiaries, is being amortized on a straight-line basis
over 25 years.
RECLASSIFICATIONS
Certain amounts previously reported in prior years' consolidated financial
statements have been reclassified to conform to current year presentation.
2. AFFILIATION AND TRANSACTIONS WITH AFFILIATES
Property and Casualty Insurance Subsidiaries
The three property and casualty insurance subsidiaries of the Company and
two subsidiaries of Employers Mutual are parties to reinsurance pooling
agreements with Employers Mutual (collectively the "pooling agreement"). Under
the terms of the pooling agreement, each company cedes to Employers Mutual all
of its insurance business and assumes from Employers Mutual an amount equal to
its participation in the pool. All losses, settlement expenses and other
underwriting and administrative expenses are prorated among the parties on the
basis of participation in the pool. The investment programs and income tax
liabilities of the pool participants are not subject to the pooling agreement.
Effective January 1, 1992, the aggregate participation of the property and
casualty insurance subsidiaries was increased to 22 percent from 17 percent. In
connection with this change in pool participation, the Company's liabilities
increased $31,427,861 and invested assets increased $29,402,411. The Company
reimbursed Employers Mutual $2,025,450 for commissions incurred to generate
this business.
Employers Mutual voluntarily assumes reinsurance from nonaffiliated
insurance companies and cedes 95 percent of this business to the Company's
reinsurance subsidiary, exclusive of certain reinsurance contracts. Amounts
not ceded to the reinsurance subsidiary have historically been retained by
Employers Mutual and have been subject to cession to the pool members. Under
the terms of the pooling agreement, the property and casualty insurance
subsidiaries had a 22 percent (17 percent in 1991) participation in the amounts
assumed from these nonaffiliated companies.
Effective January 1, 1993, the pooling agreement was amended so that the
voluntary assumed reinsurance business written by Employers Mutual is no longer
subject to cession to the pool members. As a result, amounts assumed from
nonaffiliates have declined from amounts assumed in prior years. In connection
with this change in the pooling agreement, the Company's liabilities decreased
$4,470,204 and invested assets decreased $4,426,945. Employers Mutual
reimbursed the Company $43,259 for commissions incurred to generate this
business.
56
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Reinsurance Subsidiary
As noted above, the reinsurance subsidiary assumes a 95 percent quota
share portion of Employers Mutual's assumed reinsurance business, exclusive of
certain reinsurance contracts. The reinsurance subsidiary receives 95 percent
of all premiums and assumes 95 percent of all related losses and settlement
expenses of this business. The reinsurance subsidiary does not reinsure any of
Employers Mutual's direct insurance business, nor any "involuntary" facility or
pool business that Employers Mutual assumes pursuant to state law. In
addition, the reinsurance subsidiary is not liable for credit risk in
connection with the insolvency of any reinsurers of Employers Mutual.
Effective January 1, 1993, the quota share agreement was amended so that
losses in excess of $1,000,000 per event are retained by Employers Mutual. EMC
Re pays an annual override commission to Employers Mutual for this additional
protection, which totaled $1,808,527 in 1993. Employers Mutual retained
$615,000 of losses under this agreement in 1993.
Effective June 30, 1993, Employers Mutual commuted the portion of the
quota share agreement that pertains to a casualty pool that is in a run-off
position. In connection with this change in the quota share agreement, the
Company's liabilities decreased $19,783,037 and invested assets decreased
$17,806,179. The reserve discount amount of $1,976,858 was recorded as
deferred income and is being amortized into operations over the estimated
settlement period of the reserves, which is ten years. During 1993, $259,217
was recognized as income.
Effective October 31, 1993, Employers Mutual commuted the portion of the
quota share agreement that pertains to a voluntary pool that handles large
"highly protected" risks. This pool has experienced deteriorating underwriting
results over the last several years and Employers Mutual is presently
considering whether to continue its participation in the pool beyond 1994. In
connection with this change in the quota share agreement, the Company's
liabilities decreased $3,827,201 and invested assets decreased $2,619,776.
Employers Mutual reimbursed the Company $1,207,425 for commissions incurred to
generate this business. No reserve discount was calculated as this business
involves short-tail property coverage.
Premiums assumed by the reinsurance subsidiary from Employers Mutual
amounted to $34,445,978, $35,777,710 and $29,291,685 in 1993, 1992 and 1991,
respectively. It is customary in the reinsurance business for the assuming
company to compensate the ceding company for the acquisition expenses it
incurred in the generation of the business. Commissions paid by the
reinsurance subsidiary to Employers Mutual amounted to $8,979,309, $10,242,650
and $8,873,078 in 1993, 1992 and 1991, respectively.
In conjunction with the change in the quota share agreement noted above,
the reinsurance subsidiary terminated its catastrophe reinsurance treaty with
Employers Mutual. This treaty paid losses in excess of $1,000,000 resulting
from any one catastrophe, subject to a maximum loss of $3,000,000. Maximum
recovery was limited to $6,000,000. Ceded reinsurance on the books at December
31, 1992 is being allowed to run-off. The reinsurance subsidiary recovered
$306,250, $4,125,000 and $485,000 under this treaty and paid reinstatement
premiums of $0, $1,033,330 and $47,025 in 1993, 1992 and 1991, respectively.
Total premiums paid to Employers Mutual amounted to $0, $2,253,579 and
$1,332,957 in 1993, 1992 and 1991, respectively.
57
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The reinsurance subsidiary has an aggregate excess of loss treaty with
Employers Mutual which provides protection from a large accumulation of
retentions resulting from multiple catastrophes in any one calendar year. The
coverage provided is $2,000,000 excess of $2,500,000 ($2,000,000 in 1991)
aggregate losses retained, excess of $200,000 per event. Maximum recovery is
limited to $4,000,000 per accident year. EMC Re recovered $143,501, $4,221,444
and $607,306 under this treaty and paid reinstatement premiums of $208,470,
$744,561 and $0 in 1993, 1992 and 1991, respectively. Total premiums paid to
Employers Mutual amounted to $708,445, $1,124,561 and $320,000 in 1993, 1992
and 1991, respectively.
Nonstandard Risk Automobile Insurance Subsidiary
The nonstandard risk automobile insurance subsidiary has a reinsurance
treaty on an excess of loss basis with Employers Mutual which provides
reinsurance for 100 percent of each loss in excess of $100,000, up to
$1,000,000. No recoveries have been made under this treaty. Premiums paid to
Employers Mutual amounted to $42,065, $35,377 and $34,827 in 1993, 1992 and
1991, respectively.
3. REINSURANCE CEDED
The parties to the pooling agreement cede insurance business to other
insurers in the ordinary course of business for the purpose of limiting their
maximum loss exposure through diversification of their risks. In its
consolidated financial statements, the Company treats risks to the extent they
are reinsured as though they were risks for which the Company is not liable.
Insurance ceded by the pool participants does not relieve their primary
liability as the originating insurers. Employers Mutual evaluates the
financial condition of the reinsurers of the parties to the pooling agreement
and monitors concentrations of credit risk arising from similar geographic
regions, activities, or economic characteristics of the reinsurers to minimize
exposure to significant losses from reinsurer insolvencies. The parties to the
pooling agreement also assume insurance from involuntary pools and associations
in conjunction with direct business written in various states.
Prior to 1993, the reinsurance subsidiary ceded reinsurance business to
Employers Mutual and other nonaffiliated reinsurers in the ordinary course of
business for the purpose of limiting its maximum loss exposure. Effective
January 1, 1993, the quota share agreement with Employers Mutual was amended so
that losses in excess of $1,000,000 per event are retained by Employers Mutual.
In conjunction with this change in the quota share agreement, the reinsurance
subsidiary terminated its catastrophe reinsurance contracts with Employers
Mutual and the nonaffiliated reinsurers. Effective January 1, 1993, the
reinsurance subsidiary no longer cedes reinsurance to unaffiliated reinsurers
and only cedes reinsurance to Employers Mutual under an aggregate "excess of
loss" treaty. As a result, reinsurance receivables and prepaid reinsurance
premiums for the Company have decreased from prior year amounts. Ceded
reinsurance on the books at December 31, 1992 is being allowed to run-off.
58
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
As of December 31, 1993, deductions for reinsurance ceded to two
unaffiliated reinsurers aggregated $12,191,018, which represented a significant
portion of the total prepaid reinsurance premiums and reinsurance receivables
for losses and settlement expenses. These amounts reflect the property and
casualty insurance subsidiaries' pool participation percentage of amounts ceded
by Employers Mutual to these organizations in connection with its role as
"service carrier". Under these arrangements, Employers Mutual writes business
for these organizations on a direct basis and then cedes 100 percent of this
business to these organizations. Credit risk associated with these amounts is
minimal as all companies writing direct business in the states that participate
in these organizations are responsible for the liabilities of such
organizations on a pro rata basis.
The effect of reinsurance on premiums written and earned and losses and
settlement expenses incurred for the years ended December 31, 1993, 1992 and
1991 is presented below. Amounts for the year ended December 31, 1993 reflect
(1) the change in the property and casualty insurance subsidiaries' pooling
agreement whereby effective January 1, 1993, the voluntary assumed reinsurance
business written by Employers Mutual is no longer subject to cession to the
pool members and (2) the change in the reinsurance subsidiary's quota share
agreement whereby effective January 1, 1993, losses in excess of $1,000,000 per
event are retained by Employers Mutual and the reinsurance subsidiary therefore
no longer purchases catastrophe protection (see note 2).
Year ended December 31,
----------------------------------------
1993 1992 1991
------------ ------------ ------------
Premiums written
Direct ......................... $135,277,129 $138,829,576 $139,292,883
Assumed from nonaffiliates ..... 6,636,942 16,467,613 9,477,850
Assumed from affiliates ........ 147,620,705 150,070,741 108,847,230
Ceded to nonaffiliates ......... (10,701,482) (17,721,207) (11,113,238)
Ceded to affiliates ............ (120,898,914) (129,826,840) (130,675,014)
------------ ------------ ------------
Net premiums written ......... $157,934,380 $157,819,883 $115,829,711
============ ============ ============
Premiums earned
Direct ......................... $137,141,457 $142,391,771 $134,675,865
Assumed from nonaffiliates ..... 6,758,364 14,980,642 9,056,890
Assumed from affiliates ........ 148,366,487 140,442,245 106,783,050
Ceded to nonaffiliates ......... (11,507,217) (16,775,394) (11,051,459)
Ceded to affiliates ............ (124,321,553) (133,628,977) (126,045,108)
------------ ------------ ------------
Net premiums earned .......... $156,437,538 $147,410,287 $113,419,238
============ ============ ============
Losses and settlement expenses
incurred
Direct ......................... $ 97,842,980 $112,579,261 $101,910,680
Assumed from nonaffiliates ..... 6,575,099 17,415,319 8,671,495
Assumed from affiliates ........ 107,369,274 114,359,445 77,845,953
Ceded to nonaffiliates ......... (5,845,414) (16,862,082) (4,735,272)
Ceded to affiliates ............ (85,586,640) (105,404,110) (95,587,937)
------------ ------------ ------------
Net losses and settlement
expenses incurred .......... $120,355,299 $122,087,833 $ 88,104,919
============ ============ ============
59
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
4. REINSURANCE ASSUMED
The parties to the pooling agreement have historically recorded amounts
assumed from the National Workers' Compensation Reinsurance Pool on a net
basis. Under this approach, reserves for outstanding losses and unearned
premiums were reported as liabilities under "Indebtedness to Related Party" in
the Company's consolidated financial statements. Effective December 31, 1993,
the parties to the pooling agreement began recording these amounts as
outstanding losses and unearned premiums. As a result, outstanding losses
increased $11,436,543, unearned premiums increased $1,711,288 and indebtedness
to related party decreased $13,147,831. There was no income effect from this
reclassification. Prior year consolidated financial statements have been
restated for comparative purposes.
5. DISCONTINUED OPERATIONS
On December 31, 1991 the Company's life insurance subsidiary was sold to
Employers Mutual pursuant to a stock acquisition agreement dated December 9,
1991. The Company received $15,500,000 in cash on December 31, 1991 with final
settlement of $474,356 on March 2, 1992 based on the GAAP book value on
December 31, 1991, which totaled $15,974,356. No income statement gain was
recognized on the sale.
The consolidated financial statements report the life segment's results as
discontinued operations on a separate line in the 1991 statement of income.
Income from discontinued operations is net of applicable income tax benefit of
$150,939.
6. COMMON STOCK
(a) EMPLOYEE STOCK PURCHASE PLANS
1987 Employee Stock Purchase Plan
Under the Employers Mutual 1987 Employee Stock Purchase Plan, Employers
Mutual could purchase up to 200,000 shares of EMC Insurance Group Inc. common
stock for resale to eligible employees. The plan provided for two option
periods each calendar year; from January 1 until the last business day of June,
and from July 1 until the last business day of December, with the last business
day in each option period being the option exercise date. Any employee who was
employed by Employers Mutual, its affiliates, or its subsidiaries on the first
day of the month immediately preceding any option period was eligible to
participate in the plan. Eligible employees could elect to participate in the
plan either through payroll deduction or by lump sum contributions, but in no
case could the participation level exceed 10 percent of the employee's base
annual compensation amount. The option price was 85 percent of the fair market
value of the stock on the exercise date. The plan was terminated in August of
1993 and the remaining shares were deregistered. For the first option period
of 1993, 101 employees participated in the plan and exercised a total of 10,706
options at a price of $8.08. Activity under the plan was as follows:
60
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Year ended December 31,
---------------------------
1993 1992 1991
------- ------- -------
Shares available for purchase, beginning of year 55,720 85,765 110,564
Shares purchased under plan ................... (10,706) (30,045) (24,799)
Shares deregistered ........................... (45,014) - -
------- ------- -------
Shares available for purchase, end of year ...... - 55,720 85,765
======= ======= =======
1993 Employee Stock Purchase Plan
On February 12, 1993, the Company filed a registration statement with the
Securities and Exchange Commission authorizing the issuance of up to 500,000
shares of the Company's common stock for use in the Employers Mutual Casualty
Company 1993 Employee Stock Purchase Plan. The plan provides for two option
periods each calendar year; from January 1 until the last business day of June,
and from July 1 until the last business day of December, with the last business
day in each option period being the option exercise date. Any employee who is
employed by Employers Mutual, its affiliates, or its subsidiaries on the first
day of the month immediately preceding any option period is eligible to
participate in the plan. Eligible employees may elect to participate in the
plan either through payroll deduction or by lump sum contributions, but in no
case can the participation level exceed 10 percent of the employee's base
annual compensation amount. The option price is 85 percent of the fair market
value of the stock on the exercise date. Upon exercise of an option, the
Company shall issue a stock certificate evidencing the ownership of the
participant in the shares of stock so purchased. The certificate, however,
will be held in custody by the stock transfer agent for a period of one year
from the exercise date. During such one year period, the participant shall
have the rights and privileges of a shareholder, including the right to vote,
to receive dividends, and to have such shares participate in the dividend
reinvestment and common stock purchase plan. However, the participant shall
not be able to sell, transfer, assign, pledge or otherwise encumber or dispose
of such shares during such one year period. Upon expiration of the one year
period or upon any earlier termination of employment of the participant for
any reason, including death, such participant shall, within thirty days of such
expiration or termination, receive the stock certificate(s) evidencing his or
her shares of stock. The plan is administered by the Board of Directors of
Employers Mutual and the Board has the right to amend or terminate the plan at
any time; however, no such amendment or termination shall adversely affect the
rights and privileges of participants with unexercised options. For the second
option period of 1993, 104 employees participated in the plan and exercised a
total of 13,454 options at a price of $8.19. Activity under the plan was as
follows:
Year ended
December 31,
1993
------------
Shares available for purchase, beginning of year .......... -
Shares registered for use in plan ....................... 500,000
Shares purchased under plan ............................. (13,454)
------------
Shares available for purchase, end of year ................ 486,546
============
61
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(b) 1993 NON-EMPLOYEE DIRECTOR STOCK PURCHASE PLAN
On February 12, 1993, the Company filed a registration statement with the
Securities and Exchange Commission authorizing the issuance of up to 200,000
shares of the Company's common stock for use in the 1993 Employers Mutual
Casualty Company Non-Employee Director Stock Purchase Plan. All non-employee
directors of Employers Mutual and its subsidiaries and affiliates who are not
serving on the "Disinterested Director Committee" of Employers Mutual's Board
of Directors (the "Board") as of the beginning of the option period are
eligible for participation in the plan. The option period is from the date of
each eligible director's respective Annual Meeting to the day immediately prior
to the next and subsequent Annual Meeting. Each eligible director is granted
an option at the beginning of the option period to purchase stock at an option
price equal to 75 percent of the fair market value of the stock on the option
exercise date. The option may be exercised anytime during the option period.
An eligible director can purchase shares of common stock in an amount equal to
a minimum of 25 percent to a maximum of 100 percent of their annual cash
retainer. Eligible directors may not have sold any of the Company's common
stock in the six month period preceding the exercise date and may not sell any
shares of the Company's common stock in the six month period following the
exercise of an option. The plan is administered by the Disinterested Director
Committee of the Board. The Board may amend or terminate the plan at any time;
however, no such amendment or termination shall adversely affect the rights and
privileges of participants with unexercised options. The plan will continue
through the option period for options granted at the 2002 Annual Meeting.
During 1993, five directors participated in the plan and exercised a total of
5,952 options at prices ranging from $6.56 to $7.69. Activity under the plan
was as follows:
Year ended
December 31,
1993
------------
Shares available for purchase, beginning of year .......... -
Shares registered for use in plan ....................... 200,000
Shares purchased under plan ............................. (5,952)
------------
Shares available for purchase, end of year ................ 194,048
============
62
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(c) DIVIDEND REINVESTMENT PLAN
The Company maintains a Dividend Reinvestment and Common Stock Purchase
Plan which provides stockholders with the option of reinvesting cash dividends
in additional shares of the Company's common stock. Participants may also
purchase additional shares of common stock without incurring broker commissions
by making optional cash contributions to the plan. Any holder of shares of
common stock is eligible to participate in the plan. During 1993, Employers
Mutual elected to participate in the Dividend Reinvestment Plan by reinvesting
50 percent of its dividends in additional shares of the Company's common stock.
Activity under the plan was as follows:
Year ended December 31,
-------------------------
1993 1992 1991
------- ------- -------
Shares available for purchase, beginning of year 955,069 973,901 991,575
Shares purchased under plan ................... (186,187) (18,832) (17,674)
------- ------- -------
Shares available for purchase, end of year ...... 768,882 955,069 973,901
======= ======= =======
Range of purchase prices ........................ $10.00 $8.00 $8.50
to to to
$10.25 $10.25 $9.50
(d) TREASURY STOCK
The Company from time to time repurchases shares of its outstanding common
stock in the open market or through negotiated purchases for the purpose of
providing shares for use in the Company's Dividend Reinvestment and Common
Stock Purchase Plan. The Company repurchased 7,000 shares and 10,000 shares
for this purpose during 1992 and 1991 at an average cost of $10.47 and $9.00,
respectively. The Company also repurchases shares of its outstanding common
stock in connection with the issuance of new shares under Employers Mutual's
stock option plans.
Treasury stock activity was as follows:
Year ended December 31,
-------------------------
1993 1992 1991
------- ------- -------
Treasury shares, beginning of year ............... 49,392 36,685 8,863
Repurchased shares ............................ 12,568 31,539 45,496
Reissued shares ............................... (53,870) (18,832) (17,674)
------- ------- -------
Treasury shares, end of year ..................... 8,090 49,392 36,685
======= ======= =======
Average cost ..................................... $ 10.06 $ 9.79 $ 9.31
======= ======= =======
Gain (loss) on sale .............................. $23,261 $ (485) $14,887
======= ======= =======
63
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
7. STOCK OPTIONS
During 1993, Employers Mutual maintained three separate stock option plans
which utilize the common stock of the Company. The Company receives the
current fair market value for any shares issued under the plans and all costs
of the plans are borne by Employers Mutual or the company employing the
individual optionees.
(a) 1979 STOCK OPTION PLAN
Under Employers Mutual's 1979 Stock Option Plan, 480,000 shares of the
Company's common stock were reserved for issuance to certain officers and key
management employees of Employers Mutual and its subsidiaries as determined by
its Board of Directors. Options were granted to 37 individuals. For the one
remaining eligible participant at February 21, 1994 the option price is the
greater of statutory book value or fair market value at the date of grant,
which was $6.38 per share and which must be exercised by no later than March
14, 1994. The period for granting options under the plan expired on March 31,
1984. Options granted vest at an annual rate of 10 percent on a cumulative
basis. Upon death, retirement, or permanent disability, all options granted
become exercisable. During 1993, 960 options were exercised at a price of
$6.38. Stock options under the plan were as follows:
Year ended December 31,
------------------------
1993 1992 1991
------ ------ ------
Outstanding, beginning of year ............ 5,760 44,440 74,290
Exercised .............................. (960) (38,200) (29,850)
Expired ................................ - (480) -
------ ------- -------
Outstanding, end of year .................. 4,800 5,760 44,440
====== ======= =======
Shares exercisable, end of year ........... 4,800 3,840 40,600
====== ======= =======
(b) 1982 INCENTIVE STOCK OPTION PLAN
Under the terms of Employers Mutual's 1982 Incentive Stock Option Plan,
600,000 shares of the Company's common stock were reserved for issuance to
officers and key employees of Employers Mutual and its subsidiaries. The Board
of Directors of Employers Mutual is the administrator of the plan. Options
have been granted to 57 individuals. For the 35 remaining eligible
participants at February 21, 1994, the option price is the fair market value at
dates of grant ranging from $7.81 to $10.25 per share. Options granted under
the plan are for a term of two to ten years. Each option shall have a vesting
period of two, three, four or five years, with such vesting to commence one
year from the date of grant, except in the event of termination of employment
when all such granted options are exercisable within three, six or twelve
months depending upon the circumstances of such termination. The period for
granting options under the plan expired on August 30, 1992. Once granted, the
period for exercising the options can not exceed ten years from date of grant.
The option price was determined by the Board of Directors but could not be less
than the fair market value of the stock on the date of grant. During 1993,
24,820 options were exercised at prices ranging from $6.88 to $8.75. Stock
options under the plan were as follows:
64
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Year ended December 31,
-------------------------------
1993 1992 1991
------- ------- -------
Outstanding, beginning of year ............ 387,093 447,393 431,193
Granted ............................... - 82,900 62,500
Exercised ............................. (24,820) (58,540) (41,300)
Expired ............................... (10,200) (84,660) (5,000)
------- ------- -------
Outstanding, end of year .................. 352,073 387,093 447,393
======= ======= =======
Shares exercisable, end of year ........... 214,680 168,082 195,644
======= ======= =======
(c) 1993 INCENTIVE STOCK OPTION PLAN
On February 12, 1993 the Company filed a registration statement with the
Securities and Exchange Commission authorizing the issuance of up to 500,000
shares of the Company's common stock for use in the 1993 Employers Mutual
Casualty Company Incentive Stock Option Plan. Options granted under the plan
will be for a term of two to ten years. Each option shall have a vesting
period of two, three, four or five years, with such vesting to commence one
year from the date of grant, with the exception of an option with a two year
vesting period for which the vesting period shall commence on the date of
grant. The time limit for granting options under the plan is December 31,
2002. The Senior Executive Compensation and Stock Option Committee of
Employers Mutual's Board of Directors is the administrator of the plan.
Options have been granted to 52 individuals under the plan. For the 51
eligible participants at February 21, 1994, the option price is the fair market
value at dates of grant ranging from $9.38 to $9.56 per share. Option prices
are determined by the Committee but can not be less than the fair market value
of the stock on the date of grant. During 1993, 163,650 options were granted
to eligible participants and no options were exercised. Stock options under
the plan were as follows:
Year ended
December 31,
1993
------------
Outstanding, beginning of year ............................ -
Granted ................................................. 163,650
Exercised ............................................... -
Expired ................................................. (2,500)
------------
Outstanding, end of year .................................. 161,150
============
Shares exercisable, end of year ........................... -
============
65
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) RETAINED EARNINGS
Retained earnings of the Company's insurance subsidiaries available for
distribution as dividends to EMC Insurance Group Inc. are limited by law to the
statutory unassigned surplus of each of the subsidiaries as of the previous
December 31, as determined in accordance with accounting practices prescribed
by insurance regulatory authorities of the state of domicile of each
subsidiary. Subject to this limitation, the maximum dividend that may be paid
by Iowa corporations without prior approval of the insurance regulatory
authorities is restricted to the greater of 10 percent of statutory surplus as
regards policyholders as of the preceding December 31, or net income of the
preceding calendar year on a statutory basis. Both Illinois and North Dakota
impose restrictions which are similar to those of Iowa on the payment of
extraordinary dividends and distributions. At December 31, 1993, $10,113,818
was available for distribution in 1994 to EMC Insurance Group Inc. without
prior approval.
Illinois and North Dakota are currently exploring changes to the
definition of extraordinary dividends; however, no legislation has been
finalized at this time.
Statutory policyholders' surplus of the Company's insurance subsidiaries
was $78,681,248 and $73,638,088 at December 31, 1993 and 1992, respectively.
Statutory net income (loss) of the Company's insurance subsidiaries was
$8,788,458, ($3,960,393) and $4,852,271 for the three years ended December 31,
1993.
The Company contributed $10,000,000 of the proceeds received from the sale
of the life subsidiary to increase the surplus of the property and casualty
insurance subsidiaries in 1992 in connection with the increase in the pool
participation. The Company contributed $3,000,000 to the surplus of the
reinsurance subsidiary in 1992 in order to retain its status as an authorized
reinsurance company in several states.
66
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) SEGMENT INCOME
The Company's operations include the following major segments: property and casualty insurance, reinsurance,
nonstandard risk automobile insurance and excess and surplus lines insurance management. No single source
accounted for 10 percent or more of consolidated revenues. Summarized financial information for these segments is
as follows:
Net Realized Operating
Premiums Underwriting Investment Gains Other Income
Earned Gain (Loss) Income (Losses) Income (Loss) Assets
------------ ------------ ----------- -------- -------- ----------- ------------
Year Ended December 31, 1993
Property and casualty insurance $109,584,986 $ (3,812,671) $13,242,584 $405,193 $ - $ 9,835,106 $266,070,386
Reinsurance ................... 33,324,202 (6,040,296) 6,090,294 200,612 259,217 509,827 76,743,953
Nonstandard risk automobile
insurance ................... 13,528,350 (2,542,690) 1,165,684 108,640 - (1,268,366) 20,821,495
Excess and surplus lines
insurance management ........ - 36,858 66,564 - - 103,422 2,765,076
Parent company ................ - (345,678) 214,825 (30,000) - (160,853) 109,731,870
Eliminations .................. - - - - - - (107,197,257)
------------ ------------ ----------- -------- -------- ----------- ------------
Consolidated ............. $156,437,538 $(12,704,477) $20,779,951 $684,445 $259,217 $ 9,019,136 $368,935,523
============ ============ =========== ======== ======== =========== ============
Year Ended December 31, 1992
Property and casualty insurance $109,138,829 $ (7,168,779) $13,047,540 $285,367 $ - $ 6,164,128 $265,598,463
Reinsurance ................... 26,615,180 (11,904,373) 6,763,257 51,649 - (5,089,467) 98,293,214
Nonstandard risk automobile
insurance ................... 11,656,278 (1,992,649) 1,178,748 47,267 - (766,634) 18,681,308
Excess and surplus lines
insurance management ........ - 429,756 66,266 - - 496,022 2,940,889
Parent company ................ - (312,778) 483,786 - - 171,008 100,995,033
Eliminations .................. - - - - - - (113,701,807)
------------ ------------ ----------- -------- -------- ----------- ------------
Consolidated ............. $147,410,287 $(20,948,823) $21,539,597 $384,283 $ - $ 975,057 $372,807,100
============ ============ =========== ======== ======== =========== ============
Year Ended December 31, 1991
Property and casualty insurance $ 78,413,029 $ (5,147,254) $11,153,452 $ 30,703 $ - $ 6,036,901 $190,514,870
Reinsurance ................... 25,009,419 (4,991,158) 7,148,790 28,811 - 2,186,443 88,120,312
Nonstandard risk automobile
insurance ................... 9,996,790 110,047 1,329,300 4,904 - 1,444,251 18,132,233
Excess and surplus lines
insurance management ........ - 554,984 86,374 - - 641,358 3,361,866
Parent company ................ - (361,192) 484,077 - - 122,885 105,229,305
Eliminations .................. - - - - - - (94,357,375)
------------ ------------ ----------- -------- -------- ----------- ------------
Consolidated ............. $113,419,238 $ (9,834,573) $20,201,993 $ 64,418 $ - $10,431,838 $311,001,211
============ ============ =========== ======== ======== =========== ============
67
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) INVESTMENTS
As discussed in note 1, Summary of Significant Accounting Policies, the
Company adopted SFAS 115 as of December 31, 1993. In conjunction with the
adoption of SFAS 115, the Company changed its intent with respect to holding
certain debt securities to maturity and reclassified $61,885,165 of securities
held-to-maturity and $51,196,415 of short-term investments to securities
available-for-sale. Unrealized holding gains related to this reclassification
increased stockholders' equity by $2,068,451, net of deferred income taxes of
$1,065,565. Unrealized holding losses associated with equity securities
available-for-sale totaled $19,800, net of defered tax benefits of $10,200.
The amortized cost and estimated market value of securities held-to-
maturity and available-for-sale as of December 31, 1993 are as follows. The
estimated market value is based on quoted market prices, where available, or
on values obtained from independent pricing services.
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1993 Cost Gains Losses Value
----------------- ------------ ----------- ----------- ------------
Securities held-to-maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies ........... $109,895,914 $ 9,931,812 $ (630) $119,827,096
Obligations of states
and political
subdivisions ........... 18,374,003 1,936,083 (2,129) 20,307,957
Debt securities issued
by foreign governments 587,060 70,343 - 657,403
Public utilities ......... 8,813,202 336,199 (910) 9,148,491
Corporate securities ..... 17,050,988 819,896 (467) 17,870,417
Mortgage-backed securities 36,289,456 2,204,777 - 38,494,233
------------ ----------- ----------- ------------
Total fixed maturity
securities held-to-
maturity ........... $191,010,623 $15,299,110 $ (4,136) $206,305,597
============ =========== =========== ============
Securities available-for-sale:
Obligations of states
and political
subdivisions ........... $ 58,431,008 $ 3,038,591 $ (74,084) $ 61,395,515
Other debt securities .... 486,941 4,779 (2,070) 489,650
Short-term investments ... 51,029,615 166,800 - 51,196,415
------------ ----------- ----------- ------------
Total fixed maturity
securities
available-for-sale $109,947,564 $ 3,210,170 $ (76,154) $113,081,580
============ =========== =========== ============
Equity securities
available-for-sale $ 505,000 $ - $ (30,000) $ 475,000
============ =========== =========== ============
68
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The amortized cost and estimated market value of fixed maturity securities
held-to-maturity and equity securities available-for-sale as of December 31,
1992 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1992 Cost Gains Losses Value
----------------- ------------ ----------- ----------- ------------
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies ............ $144,419,244 $ 9,242,068 $ (281,096) $153,380,216
Obligations of states
and political
subdivisions ............ 51,188,090 4,393,165 (99,395) 55,481,860
Debt securities issued
by foreign governments .. 590,502 50,452 - 640,954
Public utilities .......... 9,693,693 191,934 (37,746) 9,847,881
Corporate securities ...... 16,560,387 405,443 (183,348) 16,782,482
Mortgage-backed securities 26,983,821 2,500,728 (309) 29,484,240
Other debt securities ..... 1,117,121 19,400 (34,659) 1,101,862
------------ ----------- ----------- ------------
Total fixed maturity
securities held-to-
maturity ............ $250,552,858 $16,803,190 $ (636,553) $266,719,495
============ =========== =========== ============
Equity securities
available-for-sale .. $ 1,560,000 $ - $ (142,000) $ 1,418,000
============ =========== =========== ============
The amortized cost and estimated market value of fixed maturity securities
held-to-maturity and available-for-sale at December 31, 1993, by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
------------ ------------
Fixed maturity securities held-to-maturity:
Due in one year or less ................... $ 14,613,909 $ 14,887,469
Due after one year through five years ..... 55,951,990 61,054,939
Due after five years through ten years .... 73,944,312 80,286,921
Due after ten years ....................... 10,210,956 11,582,035
Mortgage-backed securities ................ 36,289,456 38,494,233
------------ ------------
Totals .................................. $191,010,623 $206,305,597
============ ============
Fixed maturity securities available-for-sale:
Due in one year or less ................... $ 51,429,559 $ 51,599,338
Due after one year through five years ..... 10,168,440 10,476,611
Due after five years through ten years .... 31,194,883 33,453,428
Due after ten years ....................... 17,154,682 17,552,203
------------ ------------
Totals .................................. $109,947,564 $113,081,580
============ ============
69
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Proceeds from calls and prepayments of fixed maturity securities and
realized investment gains and losses were as follows:
Year ended December 31,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
Proceeds from calls and prepayments ... $37,579,956 $18,640,915 $ 6,504,948
Gross realized investment gains ....... 706,059 388,692 64,514
Gross realized investment losses ...... 9,682 4,409 96
A summary of net investment income is as follows:
Year ended December 31,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
Interest on fixed maturities .......... $19,701,641 $19,754,718 $19,297,727
Dividends on equity securities ........ 65,065 119,989 124,777
Interest on short-term investments .... 1,602,740 2,172,983 1,110,513
----------- ----------- -----------
Total investment income ........... 21,369,446 22,047,690 20,533,017
Investment expense .................... 589,495 508,093 331,024
----------- ----------- -----------
Net investment income ............. $20,779,951 $21,539,597 $20,201,993
=========== =========== ===========
A summary of realized investment gains (losses) and net changes in
unrealized holding gains (losses) is as follows:
Year ended December 31,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
Realized investment gains (losses):
Fixed maturities .................. $ 696,377 $ 384,283 $ 64,418
Equity securities ................. (11,932) - -
----------- ----------- -----------
Total realized investment gains 684,445 384,283 64,418
Applicable income taxes ........... (232,711) (130,656) (21,902)
----------- ----------- -----------
Net realized investment gains 451,734 253,627 42,516
----------- ----------- -----------
Net changes in unrealized holding
gains (losses):
Fixed maturity securities
held-to-maturity ................ (871,663) (2,088,038) 11,501,606
Fixed maturity securities
available-for-sale .............. 3,134,016 - -
Equity securities
available-for-sale .............. 112,000 184,375 298,625
Applicable income taxes ........... (807,280) 647,245 (4,012,079)
----------- ----------- -----------
Net changes in unrealized
holding gains (losses) ...... 1,567,073 (1,256,418) 7,788,152
----------- ----------- -----------
Net realized investment gains and
changes in unrealized holding
gains (losses) ...................... $ 2,018,807 $(1,002,791) $ 7,830,668
=========== =========== ===========
70
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) EMPLOYEE RETIREMENT PLAN
The Company participates in Employers Mutual's defined benefit retirement
plan covering substantially all employees. The plan is funded by employer
contributions and provides a monthly income for life upon retirement or upon
total and permanent disability.
The following table sets forth the funded status and the net periodic
pension cost (benefit) for the Employers Mutual defined benefit retirement
plan, based upon a measurement date of November 1, 1993, 1992 and 1991,
respectively:
Year ended December 31,
----------------------------------------
1993 1992 1991
------------ ------------ ------------
Actuarial present value of
benefit obligations:
Accumulated benefit obligation,
including vested benefits of
$27,245,933, $23,739,308 and
$16,922,064 .................. $ 29,713,282 $ 24,695,567 $ 18,600,097
============ ============ ============
Projected benefit obligation for
service rendered to date ......... $(44,579,398) $(36,103,055) $(27,610,564)
Plan assets at fair value .......... 51,625,386 48,365,122 46,915,274
------------ ------------ ------------
Plan assets in excess of projected
benefit obligation ............... 7,045,988 12,262,067 19,304,710
Unrecognized net loss (gain) from
past experience different from
that assumed and effects of
changes in assumptions ........... 4,440,487 (754,346) (3,715,134)
Prior service cost not yet recog-
nized in net periodic pension cost 4,374,510 4,941,220 653,767
Unrecognized portion of initial
net asset ........................ (7,182,692) (8,072,193) (9,123,946)
------------ ------------ ------------
Prepaid pension cost ........ $ 8,678,293 $ 8,376,748 $ 7,119,397
============ ============ ============
Net periodic pension cost (benefit) included the following components:
Year ended December 31,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
Service cost - benefits earned
during the period ................... $ 2,347,984 $ 1,691,648 $ 1,368,932
Interest cost on projected
benefit obligation .................. 2,533,587 2,053,584 1,818,023
Actual gain on plan assets ............ (5,229,721) (4,386,821) (9,440,576)
Net amortization and deferral ......... 647,291 (615,762) 4,791,814
----------- ----------- -----------
Net periodic pension cost (benefit) $ 299,141 $(1,257,351) $(1,461,807)
=========== =========== ===========
71
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The unrecognized net asset is being recognized over 12.5 to 15.2 years
beginning January 1, 1987. The weighted average discount rate used to measure
the projected benefit obligation was 6.75 percent, 7.00 percent and 7.75
percent and the assumed long-term rate of return on plan assets was 8.00
percent, 8.00 percent and 8.75 percent for 1993, 1992 and 1991, respectively.
The rate of increase in future compensation levels used in measuring the
projected benefit obligation was 5.30 percent in 1993, 5.50 percent in 1992 and
6.00 percent in 1991. Pension expense (benefit) for the Company amounted to
$103,846, ($622,177) and ($275,628) in 1993, 1992 and 1991, respectively.
Effective November 1, 1992, the Plan was amended to comply with the
requirements of the Tax Reform Act of 1986, which placed limits on the benefits
for highly compensated employees. This change in the benefit formula
represents a prior service cost of $4,354,553, which is being amortized over 12
to 14 years beginning January 1, 1993. The Company's share of this prior
service cost amounted to $1,003,257.
12. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company participates in Employers Mutual's postretirement benefit
plans which provide certain health care and life insurance benefits for retired
employees. Substantially all of the Company's employees may become eligible
for those benefits if they reach normal retirement age while working for the
Company.
The health care postretirement plan requires contributions from
participants and contains certain cost sharing provisions such as coinsurance
and deductibles. The life insurance plan is noncontributory. Both plans are
unfunded and benefits provided are subject to change.
As discussed in note 1, Summary of Significant Accounting Policies, the
Company adopted SFAS 106 as of January 1, 1993. The Company's transition
obligation as of January 1, 1993 amounted to $2,165,900 ($.21 per share), net
of income tax benefits of $1,115,767, and was recorded as a cumulative effect
adjustment to income. Prior year financial statements have not been restated
to apply the provisions of SFAS 106.
The following table sets forth the status and the net periodic
postretirement benefit cost of the Employers Mutual postretirement benefit
plans at December 31, 1993, based upon a measurement date of November 1, 1993:
Actuarial present value of benefit obligations:
Retirees ............................................... $ 7,874,628
Fully eligible active plan participants ................ 5,681,430
Other active plan participants ......................... 7,783,183
-----------
Total .............................................. 21,339,241
-----------
Unrecognized net loss from past experience different
from that assumed and effects of changes in assumptions .. 447,778
Prior service cost not yet recognized in net periodic
postretirement benefit cost .............................. 5,105,109
-----------
Postretirement benefit obligation .................. $15,786,354
===========
72
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Net periodic postretirement benefit cost for the year ended December 31,
1993 included the following components:
Service cost - benefits earned during the period ............ $ 596,498
Interest cost on accumulated postretirement
benefit obligation ........................................ 999,526
----------
Net periodic postretirement benefit cost ............ $1,596,024
==========
The assumed weighted average annual rate of increase in the per capita
cost of covered health care benefits (i.e. the health care cost trend rate) is
12.5 percent for 1994 (compared to 13 percent assumed for 1993) and is assumed
to decrease gradually to 6 percent in 2007 and remain at that level thereafter.
The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, a one-percentage-point increase in the assumed
health care cost trend rate for each future year would increase the accumulated
postretirement benefit obligation as of December 31, 1993 by $3,269,053 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year ended December 31, 1993 by $281,964.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation at December 31, 1993 and January 1, 1993 was
6.75 percent and 7.00 percent, respectively.
Effective January 1, 1993, the health care postretirement plan was amended
to provide additional benefits under the prescription drug coverage. The
amendment substantially reduced the retired employee's cost sharing provisions
for prescription drug coverage. The amendment resulted in a prior service
cost of $5,105,109, which will be amortized over 8.9 to 10.0 years beginning
January 1, 1994. The Company's share of the prior service cost amounted to
$1,156,028.
The Company's net periodic postretirement benefit cost for the year ended
December 31, 1993 was $359,747. The postretirement benefit cost of $78,807 and
$53,180 for the years ended December 31, 1992 and 1991, respectively, which
were recorded on a cash basis, have not been restated.
(13) INCOME TAXES
As discussed in note 1, Summary of Significant Accounting Policies, the
Company adopted SFAS 109 as of January 1, 1993. The cumulative effect of this
change in accounting for income taxes as of January 1, 1993 increased income by
$5,595,177 ($.55 per share), net of a valuation allowance of $1,000,000, and is
reported separately in the consolidated statement of income for the year ended
December 31, 1993. Excluding the amount recognized as the cumulative effect of
the change, the effect of applying SFAS 109 on net income for the year ended
December 31, 1993 was a decrease of $174,483 ($.02 per share). Prior year
consolidated financial statements have not been restated to apply the
provisions of SFAS 109.
73
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Temporary differences between the consolidated financial statement
carrying amount and tax basis of assets and liabilities that give rise to
significant portions of the deferred tax asset at December 31, 1993 and 1992
relate to the following:
Year ended December 31,
------------------------
1993 1992
----------- -----------
Loss reserve discounting .......................... $12,549,200 $ 7,239,227
Unearned premium reserve limitation ............... 2,953,491 2,886,863
Postretirement benefits ........................... 1,202,733 -
Policyholder dividends payable .................... 970,630 1,209,346
Prepayment of tax on commutation of loss reserves 583,998 -
Other, net ........................................ 617,529 201,763
----------- -----------
Total gross deferred income tax asset ......... 18,877,581 11,537,199
Less valuation allowance .......................... (1,000,000) -
----------- -----------
Total deferred income tax asset ............... 17,877,581 11,537,199
----------- -----------
Deferred policy acquisition costs ................. (2,617,614) (2,758,363)
Net unrealized holding gains ...................... (1,055,365) -
Other, net ........................................ (1,163,909) (1,713,615)
----------- -----------
Total gross deferred income tax liability ..... (4,836,888) (4,471,978)
----------- -----------
Net deferred income tax asset ............. $13,040,693 $ 7,065,221
=========== ===========
The valuation allowance primarily relates to the tax benefit of future
postretirement benefit deductions that are scheduled to reverse more than
fifteen years into the future. The valuation allowance was established for
these future deductions due to the uncertainty of the timing of these
deductions. There was no change in the valuation allowance during the year
ended December 31, 1993.
Management believes the Company will generate sufficient taxable income
in the future to recognize the benefits of future tax deductions. The Company
has had cumulative taxable income in the five-year period of 1989 - 1993 of
approximately $37,500,000.
74
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The actual income tax expense for the years ended December 31, 1993, 1992
and 1991 differed from the "expected" tax expense for those years (computed by
applying the United States federal corporate tax rate of 34 percent to income
from continuing operations before income taxes and cumulative effect of changes
in accounting principles) as follows:
Year ended December 31,
----------------------------------
1993 1992 1991
---------- ---------- ----------
Computed "expected" tax expense ......... $3,066,506 $ 331,519 $3,546,825
Increases (decreases) in
taxes resulting from:
Tax-exempt interest income .......... (1,171,612) (1,312,568) (1,464,296)
Unrecognized future temporary
differences ....................... - 1,745,003 480,042
(Under) over accrual ................ (252,839) - 620,500
Settlement of IRS examination ....... 117,497 - -
Other, net .......................... 125,549 (4,589) (59,054)
---------- ---------- ----------
Income taxes ...................... $1,885,101 $ 759,365 $3,124,017
========== ========== ==========
The Internal Revenue Service is currently examining the Company's 1990 and
1991 tax returns. The Company does not expect any material assessments related
to these examinations.
75
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) RECONCILIATION OF STATUTORY NET INCOME AND SURPLUS
A reconciliation of net income and stockholders' equity from that reported
on a statutory basis to that reported in the accompanying consolidated
financial statements on a GAAP basis is as follows:
Year ended December 31,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
Statutory net income (loss) ........... $ 8,761,472 $(3,118,589) $15,271,311
Change in deferred policy
acquisition costs ................... (413,967) 2,189,375 523,277
Change in salvage and subrogation
accrual ............................. (232,760) 742,233 81,119
Change in other policyholders' funds .. 840,604 (880,866) 217,686
Change in pension accrual ............. (103,846) 622,177 275,628
GAAP postretirement benefit cost
in excess of statutory cost ......... (216,091) - -
Deferred income tax benefit ........... 18,027 1,501,430 781,719
Income from discontinued
operations (note 4) ................. - - 1,853,234
Statutory gain on sale of
life subsidiary ..................... - (474,356) (9,900,000)
Statutory reserve discount on
commutation of reinsurance contract
in excess of GAAP amortization ...... (1,717,641) - -
Other, net ............................ 198,237 (365,712) 57,081
----------- ----------- -----------
Income before cumulative effect of
changes in accounting principles,
GAAP basis .......................... 7,134,035 215,692 9,161,055
Cumulative effect of changes in
accounting principles for:
Income taxes ...................... 5,595,177 - -
Postretirement benefits ........... (2,165,900) - -
Unearned premiums ................. (807,933) - -
----------- ----------- -----------
Net income, GAAP basis ................ $ 9,755,379 $ 215,692 $ 9,161,055
=========== =========== ===========
76
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Year ended December 31,
----------------------------------------
1993 1992 1991
------------ ------------ ------------
Statutory stockholders' equity ..... $ 85,830,140 $ 83,331,013 $ 91,670,358
Deferred policy acquisition costs .. 7,698,864 8,112,831 5,923,456
Accrued salvage and subrogation .... 1,793,592 2,026,352 1,284,119
Other policyholders' funds payable (2,854,793) (3,695,397) (2,814,531)
Pension asset ...................... 1,705,735 1,809,581 1,187,404
GAAP postretirement benefit
liability in excess of statutory
liability ........................ (1,358,197) - -
Deferred income tax asset .......... 13,040,693 7,065,221 5,563,791
Goodwill ........................... 2,017,690 2,152,203 2,286,716
Statutory reserve discount on
commutation of reinsurance
contract in excess of GAAP
amortization ..................... (1,717,641) - -
Unrealized holding gains on
fixed maturity securities
available-for-sale ............... 3,134,016 - -
Other .............................. 343,670 108,973 43,123
------------ ------------ ------------
Stockholders' equity, GAAP basis ... $109,633,769 $100,910,777 $105,144,436
============ ============ ============
(15) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of (1) cash, (2) accounts receivable, (3) indebtedness
of related party, (4) accounts payable and (5) accrued expenses approximate
fair value because of the short maturity of these instruments.
The estimated fair value of the Company's investments at December 31,
1993 are summarized as follows. The estimated fair value is based on quoted
market prices, where available, or on values obtained from independent pricing
services (see note 10).
Carrying Estimated
Amount Fair Value
------------ ------------
Fixed maturity securities held-to-maturity ...... $191,010,623 $206,305,597
Fixed maturity securities available-for-sale .... $113,081,580 $113,081,580
Equity securities available-for-sale ............ $ 475,000 $ 475,000
(16) CONTINGENT LIABILITIES
The Company and Employers Mutual and its other subsidiaries are parties to
numerous lawsuits arising in the normal course of the insurance business. The
Company believes that the resolution of these lawsuits will not have a material
adverse effect on its financial condition or its results of operations. The
companies involved have reserves which are believed adequate to cover any
potential liabilities arising out of all such pending or threatened
proceedings.
77
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Employers Mutual has entered into unsecured financing arrangements with
several large commercial policyholders. The Company, under terms of the
pooling agreement, is a 22 percent participant in these policies (note 2). At
December 31, 1993, the Company is contingently liable for $1,738,000 of
unsecured receivables held by Employers Mutual.
(17) NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No 112 (SFAS 112), "Employers' Accounting for
Postemployment Benefits". SFAS 112 requires that the cost of certain
postemployment benefits that vest or accumulate be accrued over the period of
an employee's service. SFAS 112 is effective for fiscal years beginning after
December 31, 1993. The Company will adopt this standard in the first quarter
of 1994. Adoption of this standard is not expected to have a material effect
on the income of the Company.
(18) UNAUDITED INTERIM FINANCIAL INFORMATION
Three months ended,
--------------------------------------------------
March 31 June 30 September 30 December 31
----------- ----------- ----------- -----------
1993
- ----
Total revenues ........... $42,369,391 $45,480,653 $45,386,046 $44,665,844
=========== =========== =========== ===========
Income before income
taxes (benefit) ........ $ 3,375,144 $ 476,062 $ 627,295 $ 4,540,635
Income taxes (benefit) ... 1,262,205 (963,626) 392,546 1,193,976
----------- ----------- ----------- -----------
Income from operations ... 2,112,939 1,439,688 234,749 3,346,659
Income from accounting
changes ................ 2,621,344 - - -
----------- ----------- ----------- -----------
Net income .......... $ 4,734,283 $ 1,439,688 $ 234,749 $ 3,346,659
=========== =========== =========== ===========
Earnings per share:*
Income from operations $ .21 $ .14 $ .02 $ .33
Income from accounting
changes .............. .26 - - -
----------- ----------- ----------- -----------
Net income .......... $ .47 $ .14 $ .02 $ .33
=========== =========== =========== ===========
78
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three months ended,
--------------------------------------------------
March 31 June 30 September 30 December 31
----------- ----------- ----------- -----------
1992
- ----
Total revenues ........... $40,592,007 $41,298,060 $42,664,483 $44,779,617
=========== =========== =========== ===========
Income (loss) before
income taxes (benefit) $ 2,315,687 $ 1,015,692 $(2,472,573) $ 116,251
Income taxes (benefit) ... 299,983 516,923 (879,335) 821,794
----------- ----------- ----------- -----------
Net income (loss) ... $ 2,015,704 $ 498,769 $(1,593,238) $ (705,543)
=========== =========== =========== ===========
Earnings (loss) per share* $ .20 $ .05 $ (.16) $ (.07)
=========== =========== =========== ===========
1991
- ----
Total revenues ........... $31,545,776 $33,059,727 $34,818,761 $34,261,385
=========== =========== =========== ===========
Income before income taxes $ 3,089,115 $ 773,182 $ 2,070,921 $ 4,498,620
Income taxes ............. 614,989 170,077 622,519 1,716,432
----------- ----------- ----------- -----------
Income from continuing
operations ............. 2,474,126 603,105 1,448,402 2,782,188
Income from discontinued
operations ............. 458,529 469,056 637,317 288,332
----------- ----------- ----------- -----------
Net income .......... $ 2,932,655 $ 1,072,161 $ 2,085,719 $ 3,070,520
=========== =========== =========== ===========
Earnings per share:*
Income from continuing
operations ............. $ .25 $ .06 $ .15 $ .27
Income from discontinued
operations ............. .04 .05 .06 .03
----------- ----------- ----------- -----------
Net income .......... $ .29 $ .11 $ .21 $ .30
=========== =========== =========== ===========
* Since the weighted average shares for the quarters are calculated independent
of the weighted average shares for the year, quarterly earnings per share may
not total to annual earnings per share.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------- ------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
------------------------------------
None.
79
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 25, 1994, 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 40 President and Chief Executive Officer of the
Company and of Employers Mutual since 1992.
He was elected President of the Company and
Employers Mutual in 1991. Mr. Kelley was
Executive Vice President of the Company and
Employers Mutual from 1989 to 1991. He has
been employed with Employers Mutual since
1985 and has been a Director since 1984.
Fredrick A. Schiek 59 Executive Vice President and Chief Operating
Officer of the Company and of Employers
Mutual since 1992. He was Vice President of
Employers Mutual from 1983 until 1992. He
has been employed by Employers Mutual since
1959.
E. H. Creese 62 Senior Vice President and Treasurer of the
Company since 1993 and Senior Vice President
and Treasurer of Employers Mutual since 1992.
He was Vice President and Treasurer of the
Company from 1983 until 1993 and of Employers
Mutual from 1985 until 1992. He has been
employed by Employers Mutual since 1984.
Philip T. Van Ekeren 63 Senior Vice President and Secretary of the
Company since 1993 and Senior Vice President
and Secretary of Employers Mutual since 1992.
He was Vice President and Secretary of the
Company from 1978 until 1993 and of Employers
Mutual from 1978 until 1992. He has been
employed by Employers Mutual since 1961.
David O. Narigon 41 Vice President of the Company since 1989.
Vice President of Employers Mutual since
1989 and Assistant Secretary from 1986 to
1989. He has been employed by Employers
Mutual since 1983.
Raymond W. Davis 48 Vice President of the Company and Employers
Mutual since 1985. He has been employed by
Employers Mutual since 1979.
80
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 25, 1994, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- ---------------------------------------------------------------
See the information under the captions "Voting Securities and Principal
Stockholder" and "Security Ownership of Management" in the Company's Proxy
Statement in connection with its Annual Meeting to be held on May 25, 1994,
which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
See the information under the caption "Certain Relationships and Related
Transactions" in the Company's Proxy Statement in connection with its Annual
Meeting to be held on May 25, 1994, which information is incorporated herein
by reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- -------- -----------------------------------------------------------------
(a) List of Financial Statements and Schedules. Form 10-K
Page
------
1. Financial Statements
Independent Auditor's Report ................................ 44
Consolidated Balance Sheets, December 31, 1993 and 1992 ..... 45
Consolidated Statements of Income for the Years ended
December 31, 1993, 1992 and 1991 ......................... 47
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 1993, 1992 and 1991 ............. 49
Consolidated Statements of Cash Flows for the Years ended
December 31, 1993, 1992 and 1991 ......................... 51
Notes to Consolidated Financial Statements .................. 53
2. Schedules
Independent Auditor's Report on Schedules ................... 86
Schedule I - Summary of Investments ....................... 87
Schedule III - Condensed Financial Information of Registrant 88
Schedule V - Supplementary Insurance Information .......... 91
Schedule VI - Reinsurance .................................. 92
Schedule X - Supplemental Information Concerning
Property-Casualty Insurance Operations ..... 93
All other schedules have been omitted for the reason that the items
required by such schedules are not present in the consolidated
financial statements, are covered in notes to consolidated financial
statements or are not significant in amount.
81
3. Management contracts and compensatory plan arrangements
Exhibit 10(b). Management Incentive Compensation Plan.
Exhibit 10(d). Employers Mutual Casualty Company 1979 Stock
Option Plan.
Exhibit 10(e). Employers Mutual Casualty Company 1982 Incentive
Stock Option Plan.
Exhibit 10(g). Deferred Bonus Compensation Plans.
Exhibit 10(h). EMC Reinsurance Company Executive Bonus Program.
Exhibit 10(j). Employers Mutual Casualty Company Excess Retirement
Benefit Agreement.
Exhibit 10(l). Employers Mutual Casualty Company 1993 Employee
Stock Purchase Plan.
Exhibit 10(m). 1993 Employers Mutual Casualty Company Incentive
Stock Option Plan.
Exhibit 10(n). Employers Mutual Casualty Company Non-Employee
Director Stock Option Plan.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
2. Plan of Acquisition, Reorganization, Arrangement, Liquidation,
or Succession.
(a) Stock Purchase Plan between Employers Mutual Casualty
Company and EMC Insurance Group Inc. dated December 9, 1991.
(Incorporated by reference to Exhibit 2.1 to the Company's
December 31, 1991 Form 8-K on file with the Commission).
3. Articles of incorporation and bylaws:
(a) Articles of Incorporation of the Company, as amended.
(Incorporated by reference to the Company's Form 10-K
for the calendar year ended December 31, 1988.)
(b) Bylaws of the Company, as amended. (Incorporated by
reference to the Company's Form 10-K for the calendar
year ended December 31, 1992.)
10. Material contracts.
(a) Quota Share Reinsurance Contract between Employers Mutual
Casualty Company and EMC Reinsurance Company, as amended.
82
(b) Management Incentive Compensation Plan. (Incorporated by
reference to the Company's Form 10-K for the calendar year
ended December 31, 1983.)
(c) Employers Mutual Companies reinsurance pooling agreements
between Employers Mutual Casualty Company and certain of its
affiliated companies, as amended.
(d) Employers Mutual Casualty Company 1979 Stock Option Plan.
(Incorporated by reference to Registration No. 2-81486.)
(e) Employers Mutual Casualty Company 1982 Incentive Stock Option
Plan, as amended. (Incorporated by reference to the Company's
Form 10-K for the calendar year ended December 31, 1986.)
(f) Excess of loss reinsurance contract between Employers Mutual
Casualty Company and Farm and City Insurance Company.
(Incorporated by reference to the Company's Form 10-K for the
calendar year ended December 31, 1985.)
(g) Deferred Bonus Compensation Plans. (Incorporated by reference
to the Company's Form 10-K for the calendar year ended December
31, 1986.)
(h) EMC Reinsurance Company Executive Bonus Program. (Incorporated
by reference to the Company's Form 10-K for the calendar year
ended December 31, 1989.)
(i) EMC Insurance Group Inc. Amended and Restated Dividend
Reinvestment and Common Stock Purchase Plan. (Incorporated by
reference to Registration No. 33-34499.)
(j) Employers Mutual Casualty Company Excess Retirement Benefit
Agreement. (Incorporated by reference to the Company's Form
10-K for the calendar year ended December 31, 1989.)
(k) Aggregate Catastrophe Excess of Loss Retrocession Agreement
between EMC Reinsurance Company and Employers Mutual Casualty
Company. (Incorporated by reference to the Company's Form 10-K
for the calendar year ended December 31, 1991.)
83
(l) Employers Mutual Casualty Company 1993 Employee Stock Purchase
Plan. (Incorporated by reference to Registration No. 33-49335.)
(m) 1993 Employers Mutual Casualty Company Incentive Stock Option
Plan. (Incorporated by reference to Registration No. 33-49337.)
(n) Employers Mutual Casualty Company Non-Employee Director Stock
Option Plan. (Incorporated by reference to Registration No.
33-49339.)
13. 1993 Annual Report to Stockholders. (All information called for by
Parts I and II of this Form 10-K has been included in this document
under the respective item numbers (Items 1 through 9).
18. Letter re change in calculation of unearned premiums. (Incorporated
by reference to the Company's Form 10-Q for the quarter ended
March 31, 1993.)
21. Subsidiaries of the Registrant.
23. Consent of KPMG Peat Marwick with respect to Forms S-8 (Registration
No's. 2-81486, 2-93738, 33-49335, 33-49337 and 33-49339) and Form S-3
(Registration No. 33-34499).
24. Power of Attorney.
28. Consolidated Schedule P of Annual Statements provided to state
regulatory authorities.
(d) Financial statements required by Regulation S-X which are excluded from
the Annual Report to Stockholders by Rule 14a-3(b)(1).
None.
84
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 25, 1994.
EMC INSURANCE GROUP INC.
/s/ E. H. Creese
---------------------------
E. H. Creese
Senior Vice President, Treasurer &
Chief Financial 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 25, 1994.
/s/ E. H. Creese
----------------------------------
Robb B. Kelley*
Chairman of the Board and Director
/s/ E. H. Creese
-----------------------------------
Bruce G. Kelley*
President and Director (Chief Executive Officer)
/s/ E. H. Creese
-----------------------------------
George C. Carpenter III*
Director
/s/ E. H. Creese
-----------------------------------
David J. Fisher*
Director
/s/ E. H. Creese
-----------------------------------
George W. Kochheiser*
Director
/s/ E. H. Creese
-----------------------------------
Raymond A. Michel*
Director
/s/ E. H. Creese
-----------------------------------
Therese M. Vaughan*
Director
/s/ E. H. Creese
-----------------------------------
E. H. Creese
Senior Vice President & Treasurer (Chief
Financial and Accounting Officer)
* by power of attorney
85
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
The Board of Directors and Stockholders
EMC Insurance Group Inc.:
Under date of February 21, 1994, we reported on the consolidated balance
sheets of EMC Insurance Group Inc. and Subsidiaries as of December 31, 1993
and 1992, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1993, as contained in Part II, Item 8 of the Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related supplementary financial statement
schedules listed in Part IV, Item 14(a)2. These supplementary financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplementary financial
statement schedules based on our audits.
In our opinion, such supplementary financial statement schedules, when
considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set
forth therein.
As discussed in notes 1, 10, 12 and 13 to the consolidated financial
statements, the Company changed its method of computing unearned premiums in
1993 and implemented the provisions of the Financial Accounting Standards
Board's Statements No. 106, "Employers Accounting for Postretirement Benefits
Other Than Pensions", No. 109, "Accounting for Income Taxes", No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts" and No. 115, "Accounting for Certain Investments in Debt and Equity
Securities".
/s/ KPMG Peat Marwick
Des Moines, Iowa
February 21, 1994
86
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule I - Summary of Investments -
Other Than Investments in Related Parties
December 31, 1993
Amount at
which shown
Market in the
Type of investment Cost value balance sheet
------------------ ------------ ------------ ------------
Fixed maturities:
Securities held-to-maturity:
United States Government
and government agencies
and authorities ............... $146,185,370 $158,321,329 $146,185,370
States, municipalities and
political subdivisions ........ 18,374,003 20,307,957 18,374,003
Foreign governments ............. 587,060 657,403 587,060
Public utilities ................ 8,813,202 9,148,491 8,813,202
All other corporate bonds ....... 17,050,988 17,870,417 17,050,988
------------ ------------ ------------
Total fixed maturity
securities held-to-maturity 191,010,623 206,305,597 191,010,623
------------ ------------ ------------
Securities available-for-sale:
States, municipalities and
political subdivisions ........ 58,431,008 61,395,515 61,395,515
Redeemable preferred stock ...... 486,941 489,650 489,650
Short-term investments .......... 51,029,615 51,196,415 51,196,415
------------ ------------ ------------
Total fixed maturity
securities available-for-sale 109,947,564 113,081,580 113,081,580
------------ ------------ ------------
Equity securities available-for-sale:
Nonredeemable preferred stock ..... 505,000 475,000 475,000
------------ ------------ ------------
Total equity securities
available-for-sale .......... 505,000 475,000 475,000
------------ ------------ ------------
Total investments ....... $301,463,187 $319,862,177 $304,567,203
============ ============ ============
87
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule III - Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31,
--------------------------
1993 1992
------------ ------------
ASSETS
- ------
Investment in common stock of
subsidiaries (equity method) .................. $104,350,390 $ 93,290,152
Fixed maturity securities available-for-sale,
at market value ............................... 4,785,692 -
Equity securities available-for-sale, at
market value .................................. 475,000 882,500
Short-term investments, at cost which
approximates market value ..................... - 6,723,101
Cash ............................................ 35,414 66,870
Accrued investment income ....................... 13,750 10,410
Income taxes recoverable ........................ 67,000 22,000
Indebtedness of related party ................... 4,624 -
------------ ------------
Total assets ............................... $109,731,870 $100,995,033
============ ============
LIABILITIES
- -----------
Accounts payable ................................ $ 98,101 $ 71,426
Indebtedness to related party ................... - 12,830
------------ ------------
Total liabilities .......................... 98,101 84,256
------------ ------------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 10,325,329 shares
in 1993 and 10,161,760 shares in 1992 ......... 10,325,329 10,161,760
Additional paid-in capital ...................... 55,021,926 53,507,459
Unrealized holding losses on equity securities
available-for-sale, net of tax ................ (19,800) (142,000)
Retained earnings ............................... 44,387,700 37,866,902
Treasury stock, at cost (49,392 shares in 1993
and 36,685 shares in 1992) .................... (81,386) (483,344)
------------ ------------
Total stockholders' equity ................. 109,633,769 100,910,777
------------ ------------
Total liabilities and stockholders' equity $109,731,870 $100,995,033
============ ============
88
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Condensed Statements of Income
Years ended December 31,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
Equity in undistributed earnings (loss) $ 6,370,743 $(3,142,782) $ 3,505,464
Dividends received from
consolidated subsidiaries ........... 860,000 3,288,010 3,706,016
Investment income ..................... 214,825 483,786 484,077
Loss on sale of stock ................. (30,000) - -
----------- ----------- -----------
7,415,568 629,014 7,695,557
Operating expenses .................... 345,678 312,778 361,192
----------- ----------- -----------
Income from continuing operations
before income taxes (benefit) .... 7,069,890 316,236 7,334,365
Income taxes (benefit) ................ (64,145) 100,544 26,544
----------- ----------- -----------
Income from continuing operations .. 7,134,035 215,692 7,307,821
Income from discontinued operations ... - - 1,853,234
Income from accounting changes ........ 2,621,344 - -
----------- ----------- -----------
Net income .............. $ 9,755,379 $ 215,692 $ 9,161,055
=========== =========== ===========
89
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Condensed Statements of Cash Flows
Years ended December 31,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
Net cash provided by
operating activities ................ $ 761,673 $ 3,370,212 $ 3,905,045
----------- ----------- -----------
Cash flows from investing activities:
Fixed maturities ................... - - 5,000,000
Short-term investments ............. 1,937,409 13,815,080 (19,449,054)
Sale of life subsidiary ............ - 474,356 15,500,000
Sale of stock ...................... 500,000 - -
----------- ----------- -----------
Net cash provided by
investing activities ........... 2,437,409 14,289,436 1,050,946
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock ........... 331,568 748,405 550,023
Dividends paid to stockholders ..... (3,443,465) (5,103,890) (5,081,607)
Capital contribution to subsidiaries - (13,000,000) -
Purchase of treasury stock, net .... (118,641) (278,241) (399,107)
----------- ----------- -----------
Net cash used in financing
activities ..................... ( 3,230,538) (17,633,726) (4,930,691)
----------- ----------- -----------
Net (decrease) increase in cash ....... (31,456) 25,922 25,300
Cash at beginning of year ............. 66,870 40,948 15,648
----------- ----------- -----------
Cash at end of year ................... $ 35,414 $ 66,870 $ 40,948
=========== =========== ===========
Income taxes paid ..................... $ 14,000 $ 86,544 $ 120,544
Interest paid ......................... - - -
90
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule V - Supplementary Insurance Information
For Years Ended December 31, 1993, 1992 and 1991
Deferred
policy Losses and
acquisition settlement Unearned Premium
Segment costs expenses premiums revenue
------- ---------- ------------ ----------- ------------
Year ended December 31, 1993:
Property and casualty insurance $6,275,214 $146,305,725 $38,898,256 $109,584,986
Reinsurance ................... 1,134,185 42,063,802 5,670,927 33,324,202
Nonstandard risk automobile
insurance ................... 289,465 8,752,325 1,371,873 13,528,350
Excess and surplus lines
insurance management ........ - - - -
Parent company ................ - - - -
---------- ------------ ----------- ------------
Consolidated .............. $7,698,864 $197,121,852 $45,941,056 $156,437,538
========== ============ =========== ============
Year ended December 31, 1992:
Property and casualty insurance $5,824,597 $156,531,043 $39,252,263 $109,138,829
Reinsurance ................... 2,006,408 68,136,494 6,918,647 26,615,180
Nonstandard risk automobile
insurance ................... 281,826 6,731,101 1,335,666 11,656,278
Excess and surplus lines
insurance management ........ - - - -
Parent company................. - - - -
Eliminations................... - (16,009,773) (1,522,102) -
---------- ------------ ----------- ------------
Consolidated .............. $8,112,831 $215,388,865 $45,984,474 $147,410,287
========== ============ =========== ============
Year ended December 31, 1991:
Property and casualty insurance $4,352,295 $106,250,335 $29,112,480 $ 78,413,029
Reinsurance ................... 1,331,585 57,636,564 5,326,339 25,009,419
Nonstandard risk automobile
insurance ................... 239,576 4,984,531 1,095,724 9,996,790
Excess and surplus lines
insurance management ........ - - - -
Parent company ................ - - - -
Eliminations .................. - (10,057,300) (905,478) -
---------- ------------ ----------- ------------
Consolidated .............. $5,923,456 $158,814,130 $34,629,065 $113,419,238
========== ============ =========== ============
Amortization
of deferred
Net Losses and policy Other
investment settlement acquisition underwriting Premiums
Segment income expenses costs expenses written
------- ----------- ------------ ----------- ----------- ------------
Year ended December 31, 1993:
Property and casualty insurance $13,242,584 $ 79,777,312 $19,528,117 $11,597,944 $112,293,341
Reinsurance ................... 6,090,294 27,871,896 8,331,595 3,161,007 $ 32,076,482
Nonstandard risk automobile
insurance ................... 1,165,684 12,706,091 2,857,463 507,486 $ 13,564,557
Excess and surplus lines
insurance management ........ 66,564 - - (36,858)
Parent company ................ 214,825 - - 345,678
----------- ------------ ----------- -----------
Consolidated .............. $20,779,951 $120,355,299 $30,717,175 $15,575,257
=========== ============ =========== ===========
Year ended December 31, 1992:
Property and casualty insurance $13,047,540 $ 82,313,897 $18,050,053 $12,560,922 $117,716,175
Reinsurance ................... 6,763,257 29,046,587 8,784,715 688,251 $ 28,207,488
Nonstandard risk automobile
insurance ................... 1,178,748 10,727,349 2,456,594 464,984 $ 11,896,220
Excess and surplus lines
insurance management ........ 66,266 - - (429,756)
Parent company ................ 483,786 - - 312,778
Eliminations .................. - - - -
----------- ------------ ----------- -----------
Consolidated .............. $21,539,597 $122,087,833 $29,291,362 $13,597,179
=========== ============ =========== ===========
Year ended December 31, 1991:
Property and casualty insurance $11,153,452 $60,138,955 $13,810,069 $ 7,853,336 $ 79,948,955
Reinsurance ................... 7,148,790 20,733,122 8,267,753 999,702 $ 25,896,854
Nonstandard risk automobile
insurance ................... 1,329,300 7,232,842 2,177,900 476,001 $ 9,983,902
Excess and surplus lines
insurance management ........ 86,374 - - (554,984)
Parent company ................ 484,077 - - 361,192
Eliminations .................. - - - -
----------- ----------- ----------- -----------
Consolidated .............. $20,201,993 $88,104,919 $24,255,722 $ 9,135,247
=========== =========== =========== ===========
91
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule VI - Reinsurance
For years ended December 31, 1993, 1992, and 1991
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
------------ ------------ ------------ ------------ ------
Year ended December 31, 1993:
Earned premiums:
Property and casualty insurance ..... $137,141,457 $135,828,770 $155,124,851 $156,437,538 99.2%
============ ============ ============ ============ ======
Year ended December 31, 1992:
Earned premiums:
Property and casualty insurance ..... $142,391,771 $150,404,371 $155,422,887 $147,410,287 105.4%
============ ============ ============ ============ ======
Year ended December 31, 1991:
Earned premiums:
Property and casualty insurance ..... $134,675,865 $137,096,567 $115,839,940 $113,419,238 102.1%
============ ============ ============ ============ ======
92
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule X - Supplemental Insurance Information Concerning
Property-Casualty Insurance Operations
For Years Ended December 31, 1993, 1992 and 1991
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, 1993: $7,698,864 $197,121,852 $ -0- $45,941,056 $156,437,538 $20,498,562
========== ============ ======== =========== ============ ==========
Year ended December 31, 1992: $8,112,831 $215,388,865 $ -0- $45,984,474 $147,410,287 $20,989,545
========== ============ ======== =========== ============ ===========
Year ended December 31, 1991: $5,923,456 $158,814,130 $ -0- $34,629,065 $113,419,238 $19,631,542
========== ============ ======== =========== ============ ===========
Losses and
settlement expenses Amortization
incurred related to of deferred Paid
(1) (2) policy losses and
Consolidated property- Current Prior acquisition settlement Premiums
casualty entities Year Years costs expenses Written
----------------- ------------ ---------- ----------- ------------ ------------
Year ended December 31, 1993: $119,896,526 $ 458,773 $30,717,175 $130,823,484 $157,934,380
============ ========== =========== ============ ============
Year ended December 31, 1992: $116,615,951 $5,471,882 $29,291,362 $ 76,815,572 $157,819,883
============ ========== =========== ============ ============
Year ended December 31, 1991: $ 83,477,534 $4,627,385 $24,255,722 $ 77,999,370 $115,829,711
============ ========== =========== ============ ============
93
Differences between Electronic and Circulated 10-K's
- ----------------------------------------------------
1) The index to exhibits in the electronic format indicates if the exhibits
are included in the direct transmission or are filed under Form SE. The
circulated document contains the page numbers of the exhibits.
94