EMC INSURANCE GROUP INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]

For the Fiscal Year Ended December 31, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from___________to___________

Commission File Number: 0-10956

EMC INSURANCE GROUP INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)

Iowa 42-6234555
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

717 Mulberry Street, Des Moines, Iowa 50309
- -------------------------------------- ----------
(Address of Principal Executive Office) (Zip Code)

Registrant's telephone number, including area code: (515) 280-2902
------------------
Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $1.00
-----------------------------
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 1, 1999 was $40,938,766.

The number of shares outstanding of the registrant's common stock, $1.00
par value, on March 1, 1999, was 11,501,693.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the registrant's annual report to stockholders for the
year ended December 31, 1998 are incorporated by reference under Parts II and
IV.

2. Portions of the registrant's definitive proxy statement, which will be
filed with the Securities and Exchange Commission on or before April 30, 1999,
are incorporated by reference under Part III.

TABLE OF CONTENTS

Part I
Item 1. Business ........................................................ 2
Item 2. Properties ...................................................... 26
Item 3. Legal Proceedings ............................................... 26
Item 4. Submission of Matters to a Vote of Security Holders ............. 26

Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters .................................. 27
Item 6. Selected Financial Data ......................................... 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 27
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ...... 27
Item 8. Financial Statements and Supplementary Data ..................... 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .......................... 27

Part III
Item 10. Directors and Executive Officers of the Registrant .............. 28
Item 11. Executive Compensation .......................................... 29
Item 12. Security Ownership of Certain Beneficial Owners
and Management ............................................... 29
Item 13. Certain Relationships and Related Transactions .................. 29

Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K .................................................. 30
Index to Financial Statement Schedules ................................... 30
Signatures ............................................................... 33
Index to Exhibits ........................................................ 43

PART I
------
ITEM 1. BUSINESS.
- ------- ---------
GENERAL
- -------
EMC Insurance Group Inc. is an insurance holding company incorporated in
Iowa in 1974. EMC Insurance Group Inc. is approximately 68 percent owned by
Employers Mutual Casualty Company (Employers Mutual), a multiple-line property
and casualty insurance company organized as an Iowa mutual insurance company
in 1911 that is licensed in all 50 states and the District of Columbia. The
term "Company" is used interchangeably to describe EMC Insurance Group Inc.
(Parent Company only) and EMC Insurance Group Inc. and its subsidiaries.
Employers Mutual and all of its subsidiaries and an affiliate (including the
Company), are referred to as the "EMC Insurance Companies."

The Company conducts its insurance business through two business
segments as follows:
...............................
: :
: EMC INSURANCE GROUP INC. :
:.............................:
:
Property and :
Casualty Insurance : Reinsurance
......................:................................
: :
: :
Illinois EMCASCO Insurance Company (Illinois EMCASCO) EMC
Dakota Fire Insurance Company (Dakota Fire) Reinsurance
Farm and City Insurance Company (Farm and City) Company
EMCASCO Insurance Company (EMCASCO)
:
:
EMC Underwriters, LLC.

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. Farm and City was formed
in Iowa in 1962 to write nonstandard risk automobile insurance and was
purchased by the Company in 1984. These companies are licensed to write
insurance in a total of 35 states and are participants in a pooling agreement
with Employers Mutual. (See "Property and Casualty Insurance - Pooling
Agreement").

The reinsurance subsidiary was formed in 1981 to assume reinsurance
business from Employers Mutual. The company assumes a portion of Employers
Mutual's assumed reinsurance business, exclusive of certain reinsurance
contracts, and is licensed to do business in 11 states.

The Company's excess and surplus lines insurance agency, EMC
Underwriters, LLC., was acquired in 1985. The company was formed in Iowa in
1975 as a broker for excess and surplus lines insurance. Effective December
31, 1998, the excess and surplus lines insurance agency was converted to a
limited liability company and the ownership was contributed to EMCASCO.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
- ---------------------------------------------
The Company adopted Statement of Financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information" in the
fourth quarter of 1998. Implementation of this standard caused the Company to
redefine its reportable segments and restate prior years' segment information.

For information concerning the Company's revenues, operating income and
identifiable assets attributable to each of its industry segments over the
past three years, see note 8 of Notes to Consolidated Financial Statements
under Item 8 of this Form 10-K.

PROPERTY AND CASUALTY INSURANCE
- -------------------------------
POOLING AGREEMENT

The four property and casualty insurance subsidiaries of the Company and
two subsidiaries and an affiliate of Employers Mutual (Union Insurance Company
of Providence, American Liberty Insurance Company and Hamilton Mutual
Insurance Company) are parties to reinsurance pooling agreements with
Employers Mutual (collectively the "pooling agreement"). Under the terms of
the pooling agreement, each company cedes to Employers Mutual all of its
insurance business, with the exception of any voluntary reinsurance business
assumed from nonaffiliated insurance companies, and assumes from Employers
Mutual an amount equal to its participation in the pool. All losses,
settlement expenses and other underwriting and administrative expenses,
excluding the voluntary reinsurance business assumed by Employers Mutual from
nonaffiliated insurance companies, are prorated among the parties on the basis
of participation in the pool. Operations of the pool give rise to
intercompany balances with Employers Mutual, which are settled on a quarterly
basis. The investment and income tax activities of the pool participants are
not subject to the pooling agreement.

The purpose of the pooling agreement is to spread the risk of an exposure
insured by any of the pool participants among all the companies. The pooling
agreement produces a more uniform and stable underwriting result from year to
year for all companies in the pool than might be experienced individually. In
addition, each company benefits from the capacity of the entire pool, rather
than being limited to policy exposures of a size commensurate with its own
assets, and from the wide range of policy forms, lines of insurance written,
rate filings and commission plans offered by each of the companies. A single
set of reinsurance treaties is maintained for the protection of all companies
in the pool.

Effective January 1, 1998, Farm and City, a subsidiary of the Company
that writes nonstandard risk automobile insurance business, became a
participant in the pooling agreement. Farm and City assumes a 1.5 percent
participation in the pool, which increased the Company's aggregate
participation in the pool from 22 percent in 1997 and 1996 to 23.5 percent in
1998. In connection with this change in the pooling agreement, the Company's
liabilities increased $6,224,586 and invested assets increased $5,569,567.
The Company reimbursed Employers Mutual $726,509 for expenses that were
incurred to generate the additional business assumed by the Company and
Employers Mutual paid the Company $71,490 in interest income as the actual
cash transfer did not occur until March 25, 1998.

Effective January 1, 1997, Hamilton Mutual Insurance Company (Hamilton
Mutual) became a participant in the pooling agreement. The addition of
Hamilton Mutual did not impact the Company's aggregate participation in the
pooling agreement. In connection with this change in the pooling agreement,
the Company's liabilities increased $6,393,063 and invested assets increased
$5,674,458. The Company reimbursed Employers Mutual $794,074 for expenses
incurred to generate the additional business assumed by the Company and
Employers Mutual paid the Company $75,469 in interest income as the actual
cash transfer did not occur until March 24, 1997.

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, 1998. The pooling agreement is continuous, but may be amended or
terminated at the end of any calendar year as to any one or more parties.

Percent Percent Percent
of of of
Line of Business 1998 total 1997 total 1996 total
- ---------------- ---- ----- ---- ----- ---- -----
(Dollars in thousands)
Commercial Lines:
Automobile ............ $131,317 18.9% $118,624 18.2% $107,786 18.6%
Property .............. 115,815 16.6 110,637 17.0 92,963 16.0
Workers' compensation 117,120 16.8 115,117 17.6 118,479 20.4
Liability ............. 115,377 16.6 110,647 16.9 105,889 18.3
Other ................. 15,418 2.2 15,139 2.3 13,998 2.4
-------- ----- -------- ----- -------- -----
Total commercial lines 495,047 71.1 470,164 72.0 439,115 75.7
-------- ----- -------- ----- -------- -----

Personal Lines:
Automobile ............ 130,693 18.8 119,580 18.3 92,653 16.0
Property .............. 68,365 9.8 61,569 9.4 46,459 8.0
Liability ............. 2,134 0.3 2,026 0.3 1,946 0.3
Other ................. 52 - 51 - 53 -
-------- ----- -------- ----- -------- -----
Total personal lines 201,244 28.9 183,226 28.0 141,111 24.3
-------- ----- -------- ----- -------- -----
Total ............ $696,291 100.0% $653,390 100.0% $580,226 100.0%
======== ===== ======== ===== ======== =====

MARKETING

Marketing of insurance by the parties to the pooling agreement, excluding
the nonstandard risk automobile insurance sold by Farm and City, is conducted
through 18 offices located throughout the United States and approximately
2,900 independent agencies. These offices maintain close contact with the
local market conditions and are able to react rapidly to change. Each office
employs underwriting, claims, marketing and risk improvement representatives,
as well as field auditors and branch administrative technicians. The offices
are supported by Employers Mutual technicians and specialists. Systems are in
place to monitor the underwriting results of each office and to maintain
guidelines and policies consistent with the underwriting and marketing
environment in each region.

Farm and City specializes in insuring private passenger automobile risks
that are found to be unacceptable in the standard automobile insurance market.
Farm and City is licensed in a six state area that includes Iowa, Kansas,
Missouri, Nebraska, North Dakota and South Dakota. Private passenger
automobile policies are solicited through the American Agency System using
approximately 1,100 independent agencies.

The following table sets forth the geographic distribution of the
aggregate direct written premiums of all parties to the pooling agreement for
the three years ended December 31, 1998.

1998 1997 1996
------ ------ ------
Alabama ............................ 3.7% 3.6% 3.6%
Arizona ............................ 3.7 3.7 4.1
Colorado ........................... 2.6 2.8 3.1
Illinois ........................... 5.2 5.3 6.4
Iowa ............................... 19.3 19.0 20.6
Kansas ............................. 7.8 8.3 9.1
Michigan ........................... 3.6 4.1 3.2
Minnesota .......................... 3.8 3.8 4.0
Nebraska ........................... 7.1 7.2 8.0
North Carolina ..................... 3.2 3.3 4.0
North Dakota ....................... 3.1 2.4 2.3
Ohio ............................... 2.3 3.2 -
Rhode Island ....................... 2.6 2.6 3.1
Texas .............................. 4.4 4.4 3.8
Wisconsin .......................... 4.4 4.4 4.7
Other * ............................ 23.2 21.9 20.0
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====

* Includes all other jurisdictions, none of which accounted for more than 3%.

COMPETITION

The property and casualty insurance business is highly competitive. The
Company's property and casualty insurance subsidiaries and the other pool
members compete in the United States insurance market with numerous insurers,
many of which have greater financial resources. Competition in the types of
insurance in which the property and casualty insurance subsidiaries are
engaged is based on many factors, including the perceived overall financial
strength of the insurer, premiums charged, contract terms and conditions,
services offered, speed of claim payments, reputation and experience. In this
competitive environment, insureds have tended to favor large, financially
strong insurers and the Company faces the risk that insureds may become more
selective and may seek larger and/or more highly rated insurers.

BEST'S RATING

A.M. Best rates insurance companies based on their relative financial
strength and ability to meet their contractual obligations. The A (Excellent)
rating assigned to the Company's property and casualty insurance subsidiaries
and the other pool members is based on the pool members' 1997 operating
results and financial condition as of December 31, 1997. Best's reevaluates
its ratings from time to time (normally on an annual basis) and there can be
no assurance that the Company's property and casualty insurance subsidiaries
and the other pool members will maintain their current rating in the future.
Management believes that a Best's rating of "A (Excellent)" or better is
important to the Company's business since many insureds require that companies
with which they insure be so rated. Best's publications indicate that these
ratings are assigned to companies which Best's believes have achieved
excellent overall performance and have a strong ability to meet their
obligations over a long period of time. Best's ratings are based upon factors
of concern to policyholders and insurance agents and are not necessarily
directed toward the protection of investors.

REINSURANCE CEDED

The parties to the pooling agreement cede insurance in the ordinary
course of business for the purpose of limiting their maximum loss exposure
through diversification of their risks. The pool participants also purchase
catastrophe reinsurance to cover multiple losses arising from a single event.

All major reinsurance treaties, with the exception of the pooling
agreement and a boiler treaty, are on an "excess of loss" basis whereby the
reinsurer agrees to reimburse the primary insurer for covered losses in excess
of a predetermined amount, up to a stated limit. The boiler treaty provides
for 100 percent reinsurance of the pool's direct boiler coverage written.
Facultative reinsurance from approved domestic markets, which provides
reinsurance on an individual risk basis and requires specific agreement of the
reinsurer as to the limits of coverage provided, is purchased when coverage by
an insured is required in excess of treaty capacity or where a high-risk type
policy could expose the treaty reinsurance programs.

Each type of reinsurance coverage is purchased in layers, and each layer
may have a separate retention level. Retention levels are adjusted according
to reinsurance market conditions and the surplus position of Employers Mutual.
The intercompany pooling arrangement aids efficient buying of reinsurance
since it allows for higher retention levels and correspondingly decreased
dependence on the reinsurance marketplace.

A summary of the reinsurance treaties benefitting the parties to the
pooling agreement is presented below. Retention amounts reflect the
accumulated retentions of all layers within a coverage.

Type of Coverage Retention Limits

Property per risk ........... $ 2,000,000 100 percent of $18,000,000
Property catastrophe ........ $11,550,000 95 percent of $51,000,000
Casualty .................... $ 2,000,000 100 percent of $38,000,000
Workers' Compensation excess $ - $20,000,000 excess of
$40,000,000
Umbrella .................... $ 1,400,000* 100 percent of $ 8,600,000
Fidelity and Surety ......... $ 750,000 100 percent of $ 3,250,000
Surety excess .............. $ 1,350,000 100 percent of $ 8,650,000
Boiler ...................... $ 0 100 percent of $50,000,000

* An annual aggregate deductible of $3,600,000 must be reached before the
reinsurers may be petitioned.

Although reinsurance does not discharge the original insurer from its
primary liability to its policyholders, it is the practice of insurers for
accounting purposes to treat reinsured risks as risks of the reinsurer since
the primary insurer would only reassume liability in those situations where
the reinsurer is unable to meet the obligations it assumed under the
reinsurance agreements. The ability to collect reinsurance is subject to the
solvency of the reinsurers.

The major participants in the pool members' reinsurance programs are
presented below. The percentages represent the reinsurers' share of the total
reinsurance protection under all coverages. Each type of coverage is
purchased in layers, and an individual reinsurer may participate in more than
one coverage and at various layers within these coverages. The property per
risk, property catastrophe and casualty reinsurance programs are handled by a
reinsurance intermediary (broker). The reinsurance of those programs is
syndicated to approximately 50 domestic and foreign reinsurers.

Percent
of total 1998
Property per risk, property catastrophe reinsurance Best's
and casualty coverages: protection rating
- --------------------------------------- ----------- ------
Underwriters at Lloyd's of London .................... 20.6% A
Hannover Ruckversicherung AG ......................... 5.7 (1)
Zurich Reinsurance (North America), Inc .............. 5.2 A
Hartford Fire Insurance Company ...................... 5.0 A+
AXA Reinsurance Company .............................. 5.1 A+
St. Paul Fire and Marine ............................. 3.7 A+
NAC Reinsurance Corporation .......................... 3.6 A+
PMA Reinsurance Corporation .......................... 3.2 A+

Umbrella coverage:
- ------------------
General Reinsurance Corporation ...................... 100.0 A++

Fidelity and surety coverages:
- ------------------------------
SCOR Reinsurance Company ............................. 42.0 A+
GE Reinsurance Corporation ........................... 20.0 A
Signet Star Reinsurance Company ...................... 20.0 A
Winterthur Reinsurance Corporation of America ........ 18.0 A

Boiler coverage:
- ----------------
Hartford Steam Boiler Inspection and Insurance Company 100.0 A+

(1) Not rated.

Premiums ceded by all pool members and by the Company's property and
casualty insurance subsidiaries for the year ended December 31, 1998 are
presented below. Each type of reinsurance coverage is purchased in layers,
and an individual reinsurer may participate in more than one coverage and at
various layers within the coverages. Since each layer of each coverage is
priced separately, with the lower layers being more expensive than the upper
layers, a reinsurer's overall participation in a reinsurance program does not
necessarily correspond to the amount of premiums it receives.

Premiums ceded by
------------------------
Property
and casualty
All pool insurance
Reinsurer members subsidiaries
- --------- ----------- ------------
General Reinsurance Corporation..................... $ 3,888,866 $ 913,884
Hartford Steam Boiler Inspection & Insurance Company 1,838,328 432,007
Hartford Fire Insurance Company .................... 971,749 228,361
PMA Reinsurance Corporation ........................ 891,740 209,559
AXA Reassurance Corporation ........................ 602,425 141,570
Spreckley Villers Burnhope & Company ............... 500,200 117,547
SCOR Reinsurance Company ........................... 486,576 114,345
Signet Star Reinsurance Company .................... 475,292 111,694
GE Reinsurance Corporation ......................... 433,793 101,941
American Re-Insurance Company ...................... 429,824 101,009
Other Reinsurers ................................... 6,505,393 1,528,767
----------- ------------
Total ............................................ $17,024,186 $ 4,000,684
=========== ============
The parties to the pooling agreement also cede reinsurance on both a
voluntary and a mandatory basis to state and national organizations in
connection with various workers' compensation and assigned risk programs and
to private organizations established to handle large risks. Premiums ceded by
all pool members and by the Company's property and casualty insurance
subsidiaries for the year ended December 31, 1998 are presented below.

Premiums ceded by
------------------------
Property
and casualty
All pool insurance
Reinsurer members subsidiaries
- --------- ----------- ------------
Wisconsin Compensation Rating Bureau ............... $ 3,896,652 $ 915,714
National Workers' Compensation Reinsurance Pool .... 3,259,776 766,047
North Carolina Reinsurance Facility ................ 1,222,227 287,223
Mutual Reinsurance Bureau .......................... 471,465 110,794
Michigan Catastrophe Claims Association (1) ........ (1,298,454) (305,137)
Other Reinsurers ................................... 140,540 33,027
----------- ------------
$ 7,692,206 $ 1,807,668
=========== ============
(1) The Michigan Catastrophe Claims Association distributed excess funds to
its members in 1998. Distributions totaling $1,294,560 were received by
the parties to the pooling agreement and were recorded as a return
of ceded premium.

In formulating reinsurance programs, Employers Mutual is selective in its
choice of reinsurers. Employers Mutual selects reinsurers on the basis of
financial stability and long-term relationships, as well as price of the
coverage. Reinsurers are generally required to have a Best's rating of "A-"
or higher and policyholders' surplus of $50,000,000 ($100,000,000 for casualty
reinsurance).

For information concerning amounts due the Company from reinsurers for
losses and settlement expenses and prepaid reinsurance premiums and the effect
of reinsurance on premiums written and earned, and losses and settlement
expenses incurred, see "Property and Casualty Insurance Subsidiaries and
Reinsurance Subsidiary - Reinsurance Ceded."

REINSURANCE ASSUMED

The parties to the pooling agreement assume insurance from involuntary
pools and associations in conjunction with direct business written in various
states. Through the Company's participation in the pooling agreement, it
assumes insurance business from the North Carolina Reinsurance Facility
(NCRF), which is a state run assigned risk program. The Company has not
previously recognized its share of certain surcharges reported by the NCRF.
During the fourth quarter of 1998, the Company received clarification
regarding such amounts and recorded its share of these cumulative surcharges.
As a result, the consolidated financial statements for the year ended December
31, 1998 reflect assumed premium income of $542,656 and assumed loss
recoveries of $661,818 related to prior years. Prospectively, these surcharges
will be recorded on a quarterly basis.

RELATIONSHIP BETWEEN NET PREMIUMS WRITTEN AND SURPLUS

The amount of insurance a property and casualty insurance company writes
under industry standards is a multiple of its surplus calculated in accordance
with statutory accounting practices. Generally, a ratio of 3 to 1 or less is
considered satisfactory by regulatory authorities. The ratios of the pool
members for the past three years are as follows:
Year ended December 31,
------------------------------
1998 1997 1996
---- ---- ----
Employers Mutual .................... .82 .80 .95
EMCASCO ............................. 1.66 1.62 1.67
Illinois EMCASCO .................... 1.87 1.68 1.73
Dakota Fire ......................... 1.79 1.59 1.61
American Liberty Insurance Company .. .65 1.08 1.05
Union Insurance Company of Providence .75 .72 .68
Hamilton Mutual ..................... 1.41 1.17 -
Farm and City ....................... 2.15 1.60 1.30

OUTSTANDING LOSSES AND SETTLEMENT EXPENSES

The property and casualty insurance subsidiaries' reserve information is
included in the property and casualty loss reserve development for 1998. See
"Property and Casualty Insurance Subsidiaries and Reinsurance Subsidiary -
Outstanding Losses and Settlement Expenses."

REINSURANCE

The reinsurance subsidiary is a property and casualty treaty reinsurer
with a concentration in property lines. The reinsurance subsidiary assumes a
quota share portion of Employers Mutual's assumed reinsurance business,
exclusive of certain reinsurance contracts. The reinsurance subsidiary
assumes its quota share portion of all premiums and related losses and
settlement expenses of this business, subject to a maximum loss per event.
The reinsurance subsidiary does not reinsure any of Employers Mutual's direct
insurance business, nor any "involuntary" facility or pool business that
Employers Mutual assumes pursuant to state law. In addition, the reinsurance
subsidiary is not liable for credit risk in connection with the insolvency of
any reinsurers of Employers Mutual. Operations of the quota share agreement
give rise to intercompany balances with Employers Mutual, which are settled on
a quarterly basis.

Effective January 1, 1997, the reinsurance subsidiary's quota share
participation was increased from 95 percent to 100 percent and the maximum
loss per event assumed by the reinsurance subsidiary was increased from
$1,000,000 to $1,500,000. In connection with the change in the quota share
percentage, the Company's liabilities increased $3,173,647 and invested assets
increased $3,066,705. The Company reimbursed Employers Mutual $106,942 for
expenses that were incurred to generate the additional business assumed by the
Company.

PRINCIPAL PRODUCTS

The reinsurance subsidiary assumes both pro rata and excess of loss
reinsurance from Employers Mutual. The following table sets forth the assumed
written premiums of the reinsurance subsidiary for the three years ended
December 31, 1998. The amounts reported in the Company's financial statements
for the year 1997 reflect an adjustment of $354,735 related to the change in
quota share percentage. This adjustment was made to offset the income
statement effect that resulted from the increase in the reinsurance
subsidiary's reserve for unearned premiums on January 1, 1997 in connection
with this transaction.

Percent Percent Percent
of of of
Line of Business 1998 total 1997 total 1996 total
- ---------------- ------- ----- ------- ----- ------ -----
(Dollars in thousands)
Pro rata reinsurance:
Property and Casualty .. $15,105 38.7% $ 8,985 26.2% $ 7,724 21.4%
Property ............... 2,601 6.7 6,546 19.0 8,735 24.3
Crop ................... 3,967 10.2 3,101 9.0 3,704 10.3
Casualty ............... 3,919 10.0 2,879 8.4 2,796 7.7
Marine/aviation ........ 1,424 3.6 1,866 5.4 2,762 7.7
Other .................. 1,661 4.2 2,116 6.2 228 0.6
------- ----- ------- ----- ------- -----
Total pro rata reinsurance 28,677 73.4 25,493 74.2 25,949 72.0
------- ----- ------- ----- ------- -----
Excess per risk reinsurance:
Property ............... 2,099 5.4 2,110 6.2 2,258 6.3
Casualty ............... 2,104 5.4 1,595 4.6 1,182 3.3
Marine/aviation ........ - - - - 9 -
Other .................. 868 2.2 647 1.9 628 1.7
------- ----- ------- ----- ------- -----
Total excess per
risk reinsurance ...... 5,071 13.0 4,352 12.7 4,077 11.3
------- ----- ------- ----- ------- -----
Excess catastrophe/
aggregate reinsurance:
Property ............... 4,744 12.1 4,293 12.5 5,671 15.7
Crop ................... 284 0.7 252 0.8 242 0.7
Marine/aviation ........ 38 0.1 8 - 29 0.1
Other .................. 260 0.7 (62) (0.2) 84 0.2
------- ----- ------- ----- ------- -----
Total excess catastrophe/
aggregate reinsurance 5,326 13.6 4,491 13.1 6,026 16.7
------- ----- ------- ----- ------- -----
Total excess reinsurance 10,397 26.6 8,843 25.8 10,103 28.0
------- ----- ------- ----- ------- -----
$39,074 100.0% $34,336 100.0% $36,052 100.0%
======= ===== ======= ===== ======= =====

MARKETING

Over the last three years Employers Mutual has emphasized writing excess
of loss reinsurance business and has worked to increase its participation on
existing contracts that had favorable terms. Employers Mutual strives to be
flexible in the types of reinsurance products it offers, but generally limits
its writing to direct reinsurance business rather than providing
retrocessional covers. During the last two years there has been a trend in
the reinsurance marketplace for "across the board" participation on excess of
loss reinsurance contracts. As a result, reinsurance companies must be
willing to participate in all coverages and on all layers offered under a
specific contract in order to be considered a viable reinsurer.

COMPETITION

The reinsurance marketplace is very competitive. Employers Mutual
competes in the global reinsurance market with numerous reinsurers, many of
which have greater financial resources. In this competitive environment,
reinsurance brokers have tended to favor large, financially strong reinsurers
who are able to provide "mega" line capacity for all lines of business.
Employers Mutual is addressing this by accepting a larger share of coverage on
desirable programs and strengthening its relationships with reinsurance
intermediaries.

REINSURANCE CEDED

Prior to 1997, the reinsurance subsidiary had an aggregate excess of loss
reinsurance treaty with Employers Mutual which provided protection from a
large accumulation of retentions resulting from multiple catastrophes in any
one calendar year. The coverage provided was $2,000,000, excess of $3,000,000
aggregate losses retained, excess of $200,000 per event. Maximum recovery was
limited to $2,000,000 per accident year. The reinsurance subsidiary did not
have any recoveries under this treaty during 1996. Premiums paid to Employers
Mutual amounted to $500,000 in 1996. This reinsurance treaty was canceled
effective January 1, 1997.

For information concerning amounts due the Company from reinsurers for
losses and settlement expenses and prepaid reinsurance premiums and the effect
of reinsurance on premiums written and earned and losses and settlement
expenses incurred, see "Property and Casualty Insurance Subsidiaries and
Reinsurance Subsidiary - Reinsurance Ceded."

BEST'S RATING

The most recent Best's Property Casualty Key Rating Guide gives the
reinsurance subsidiary a B++ (Very Good) policyholders' rating. Best's
ratings are based upon factors of concern to policyholders and insurance
agents and are not necessarily directed toward the protection of investors.

OUTSTANDING LOSSES AND SETTLEMENT EXPENSES

The reinsurance subsidiary's reserve information is included in the
property and casualty loss reserve development for 1998. See "Property and
Casualty Insurance Subsidiaries and Reinsurance Subsidiary - Outstanding
Losses and Settlement Expenses."

PROPERTY AND CASUALTY INSURANCE SUBSIDIARIES AND REINSURANCE SUBSIDIARY
- -----------------------------------------------------------------------
Employers Mutual provides various services to all of its subsidiaries.
Such services include data processing, claims, financial, actuarial, auditing,
marketing and underwriting. Costs of these services are allocated to the
subsidiaries outside the pooling agreement based upon a number of criteria,
including usage and number of transactions. Costs not allocated to these
subsidiaries are charged to the pool and each pool participant shares in the
total cost in proportion to its participation percentage.

STATUTORY COMBINED RATIOS

The following table sets forth the Company's insurance subsidiaries'
statutory combined ratios and the property and casualty insurance industry
averages for the five years ended December 31, 1998. The combined ratios
below are the sum of the following: the loss ratio, calculated by dividing
losses and settlement expenses incurred by net premiums earned, and the
expense ratio, calculated by dividing underwriting expenses incurred by net
premiums written and policyholder dividends by net premiums earned.

Generally, if the combined ratio is below 100 percent, a company has an
underwriting profit; if it is above 100 percent, a company has an underwriting
loss.
Year ended December 31,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Property and casualty insurance
Loss ratio ................... 83.5% 74.3% 70.5% 67.3% 67.6%
Expense ratio ................ 33.3 32.8 34.3 32.6 30.4
------ ------ ------ ------ ------
Combined ratio ............. 116.8% 107.1% 104.8% 99.9% 98.0%
====== ====== ====== ====== ======
Reinsurance
Loss ratio ................... 75.4% 68.4% 68.7% 66.3% 82.0%
Expense ratio ................ 31.1 34.1 31.5 32.3 30.4
------ ------ ------ ------ ------
Combined ratio ............. 106.5% 102.5% 100.2% 98.6% 112.4%
====== ====== ====== ====== ======
Total insurance operations
Loss ratio ................... 81.9% 73.1% 70.0% 67.1% 70.9%
Expense ratio ................ 32.9 33.1 33.6 32.5 30.4
------ ------ ------ ------ ------
Combined ratio ............. 114.8% 106.2% 103.6% 99.6% 101.3%
====== ====== ====== ====== ======

Property and casualty insurance
industry averages (1)
Loss ratio ................... 76.2% 72.8% 78.3% 78.9% 81.1%
Expense ratio ................ 28.8 28.8 27.5 26.1 27.3
------ ------ ------ ------ ------
Combined ratio ............. 105.0% 101.6% 105.8% 105.0% 108.4%
====== ====== ====== ====== ======

(1) As reported by A.M. Best Company. The ratio for 1998 is an estimate; the
actual combined ratio is not currently available.

REINSURANCE CEDED

The following table presents amounts due to the Company from reinsurers for
losses and settlement expenses and prepaid reinsurance premiums as of December
31, 1998:
1998
Amount Percent Best's
recoverable of total rating
----------- -------- ------
Wisconsin Compensation Rating Bureau .. $ 5,327,161 29.9% (1)
National Workers' Compensation
Reinsurance Pool .................... 1,957,751 11.0 (1)
American Re-Insurance Company ......... 1,837,755 10.3 A++
General Reinsurance Corporation ....... 1,562,792 8.8 A++
Hartford Fire Insurance Company ....... 634,780 3.5 A+
PMA Reinsurance Corporation ........... 527,904 3.0 A+
Mutual Reinsurance Bureau (MRB)........ 482,520 2.7 (2)
AXA Reinsurance Corporation ........... 455,607 2.5 A+
GE Reinsurance Corporation ............ 449,394 2.5 A
Munchener Ruckversicherungs ........... 407,192 2.3 (3)
Other Reinsurers ...................... 4,186,672 23.5
----------- --------
Total ........................... $17,829,528(4) 100.0%
=========== ========
(1) Amounts recoverable reflect the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to these
organizations by Employers Mutual in connection with its role as "service
carrier." Under these arrangements, Employers Mutual writes business for
these organizations on a direct basis and then cedes 100 percent of the
business to these organizations. Credit risk associated with these
amounts is minimal as all companies participating in these organizations
are responsible for the liabilities of such organizations on a pro rata
basis.

(2) The amount recoverable reflects the property and casualty insurance
subsidiaries' pool participation percentage of amounts ceded to this
underwriting organization by Employers Mutual. MRB is composed of
Employers Mutual and five other nonaffiliated mutual insurance
companies. Each of the six members cede primarily property insurance
to MRB and assume equal proportionate shares of this business. Each
member benefits from the increased capacity provided by MRB. MRB is
backed by the financial strength of the six member companies. All of
the members of MRB were assigned an A (Excellent) or better rating by
A.M. Best.

(3) Not rated.

(4) The total amount at December 31, 1998 represented $1,064,191 in paid
losses and settlement expenses recoverable, $15,563,600 in unpaid losses
and settlement expenses recoverable and $1,201,737 in unearned premiums
recoverable.

The effect of reinsurance on premiums written and earned, and losses and
settlement expenses incurred for the three years ended December 31, 1998 is
presented below.
Year ended December 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
Premiums written:
Direct ........................ $213,134,588 $175,350,677 $156,161,030
Assumed from nonaffiliates .... 1,888,951 1,219,564 1,951,071
Assumed from affiliates ....... 204,964,038 178,624,357 161,671,754
Ceded to nonaffiliates ........ (5,808,352) (5,615,772) (7,930,381)
Ceded to affiliates ........... (213,249,508) (164,978,055) (147,467,508)
------------ ------------ ------------
Net premiums written ........ $200,929,717 $184,600,771 $164,385,966
============ ============ ============

Premiums earned:
Direct ........................ $202,514,027 $169,304,584 $154,859,778
Assumed from nonaffiliates .... 1,969,067 1,403,778 2,350,321
Assumed from affiliates ....... 197,166,272 171,514,339 162,326,189
Ceded to nonaffiliates ........ (5,801,680) (5,937,679) (8,219,290)
Ceded to affiliates ........... (201,603,281) (159,066,776) (146,126,332)
------------ ------------ ------------
Net premiums earned ......... $194,244,405 $177,218,246 $165,190,666
============ ============ ============

Losses and settlement expenses
incurred:
Direct ........................ $171,209,604 $126,922,536 $117,368,771
Assumed from nonaffiliates .... 1,298,167 926,403 948,218
Assumed from affiliates ....... 171,681,607 122,827,934 113,083,014
Ceded to nonaffiliates ........ (7,395,934) (3,364,737) (6,817,132)
Ceded to affiliates ........... (178,917,350) (117,458,832) (109,215,656)
------------ ------------ ------------
Net losses and settlement
expenses incurred ......... $157,876,094 $129,853,304 $115,367,215
============ ============ ============

OUTSTANDING LOSSES AND SETTLEMENT EXPENSES

The Company maintains reserves for losses and settlement expenses with
respect to both reported and unreported claims. The amount of reserves for
reported claims is primarily based upon a case-by-case evaluation of the
specific type of claim, knowledge of the circumstances surrounding each claim
and the policy provisions relating to the type of loss. Reserves on assumed
business are the amounts reported by the ceding company.

The amount of reserves for unreported claims is determined on the basis
of statistical information for each line of insurance with respect to the
probable number and nature of claims arising from occurrences which have not
yet been reported. Established reserves are closely monitored and are
frequently recomputed using a variety of formulas and statistical techniques
for analyzing actual claim costs, frequency data and other economic and social
factors.

The Company does not discount reserves. Inflation is implicitly provided
for in the reserving function through analysis of cost trends, reviews of
historical reserving results and projections of future economic conditions.
Large ($100,000 and over) incurred and reported gross reserves are reviewed
regularly for adequacy. In addition, long-term and lifetime medical claims
are periodically reviewed for cost trends and the applicable reserves are
appropriately revised.

Loss reserves are estimates at a given time of what the insurer expects to
pay on incurred losses, based on facts and circumstances then known. During
the loss settlement period, which may be many years, additional facts
regarding individual claims become known, and accordingly, it often becomes
necessary to refine and adjust the estimates of liability on a claim.

Settlement expense reserves are intended to cover the ultimate cost of
investigating claims and defending lawsuits arising from claims. These
reserves are established each year based on previous years experience to
project the ultimate cost of settlement expenses. To the extent that
adjustments are required to be made in the amount of loss reserves each year,
settlement expense reserves are correspondingly revised.

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, 1998 are adequate.

The following table sets forth a reconciliation of beginning and ending
reserves for losses and settlement expenses of the property and casualty
insurance subsidiaries and the reinsurance subsidiary. Amounts presented are
on a net basis, with a reconciliation of beginning and ending reserves to the
gross amounts presented in the consolidated financial statements.

Year ended December 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
Gross reserves at beginning of year $217,777,942 $202,502,986 $205,422,109

Ceded reserves at beginning of year (13,030,150) (13,796,769) (12,226,680)
------------ ------------ ------------
Net reserves at beginning of year,
before adjustments ............... 204,747,792 188,706,217 193,195,429

Adjustment to beginning reserves
due to change in pooling
agreement ........................ 3,600,220 3,795,453 -

Adjustment to beginning reserves
due to change in quota share
percentage ....................... - 2,726,913 -
------------ ------------ ------------
Net reserves at beginning of year,
after adjustments ................ 208,348,012 195,228,583 193,195,429

Incurred losses and
settlement expenses:
- ----------------------
Provision for insured events
of the current year .......... 168,953,309 137,300,762 131,375,234

Decrease in provision for
insured events of prior years (11,077,215) (7,447,458) (16,008,019)
------------ ------------ ------------
Total incurred losses and
settlement expenses ...... 157,876,094 129,853,304 115,367,215
------------ ------------ ------------
Payments:
- ---------
Losses and settlement expenses
attributable to insured events
of the current year ............ 73,228,354 57,649,830 59,948,110

Losses and settlement expenses
attributable to insured events
of prior years ................. 62,949,029 62,684,265 59,908,317
------------ ------------ ------------
Total payments ............. 136,177,383 120,334,095 119,856,427
------------ ------------ ------------

Net reserves at end of year ........ 230,046,723 204,747,792 188,706,217

Ceded reserves at end of year ...... 15,563,600 13,030,150 13,796,769
------------ ------------ ------------
Gross reserves at end of year ...... $245,610,323 $217,777,942 $202,502,986
============ ============ ============

The following table shows the calendar year development of loss and
settlement expense reserves of the property and casualty insurance
subsidiaries and the reinsurance subsidiary. Amounts presented are on a net
basis with, beginning in 1992, (i) a reconciliation of the net loss and
settlement expense reserves, to the gross amounts presented in the
consolidated financial statements and (ii) disclosure of the gross
re-estimated loss and settlement expense reserves and the related re-estimated
reinsurance receivables.

Reflected in this table is (1) the increase in the property and casualty
insurance subsidiaries' collective participation in the pool from 17 percent
to 22 percent in 1992, (2) the change in the pooling agreement whereby
effective January 1, 1993 the voluntary reinsurance business written by
Employers Mutual is no longer subject to cession to the pool members, (3) the
commutation of two reinsurance contracts under the reinsurance subsidiary's
quota share agreement in 1993, (4) the gross-up of reserve amounts associated
with the National Workers' Compensation Reinsurance Pool at December 31, 1993,
(5) the reinsurance subsidiary's commutation of all outstanding reinsurance
balances ceded to Employers Mutual under catastrophe and aggregate excess of
loss reinsurance treaties related to accident years 1991 through 1993 in 1994,
and (6) the increase in the reinsurance subsidiary's quota share assumption of
Employers Mutual's assumed reinsurance business from 95 percent to 100 percent
in 1997. The table has been restated to reflect the addition of Hamilton
Mutual to the pooling agreement effective January 1, 1997 and the addition of
Farm and City to the pooling agreement effective January 1, 1998.

In evaluating the table, it should be noted that each cumulative
redundancy (deficiency) amount includes the effects of all changes in reserves
for prior periods. Conditions and trends that have affected development of
the liability in the past, such as a time lag in the reporting of assumed
reinsurance business, the high rate of inflation associated with medical
services and supplies and the reform measures implemented by several states to
control administrative costs for workers' compensation insurance, may not
necessarily occur in the future. Accordingly, it may not be appropriate to
project future development of reserves based on this table.

During the last three years the Company has experienced favorable
development in the provision for insured events of prior years. The majority
of the favorable development has come from the property and casualty insurance
subsidiaries, which have benefitted from state reform measures in workers'
compensation insurance and various loss control functions implemented by
Employers Mutual. Favorable development has also been experienced in the
reinsurance subsidiary.

The property and casualty insurance subsidiaries have historically
experienced favorable development in their reserves and current reserving
practices have not been relaxed; however, the amount of favorable development
experienced in recent years is not expected to continue.

Year ended December 31,
-------------------------------------------------------------------------------------------------
(Dollars in thousands) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Statutory reserves for losses
and settlement expenses ...... $121,667 127,870 131,623 139,317 180,797 182,072 191,514 196,293 191,892 205,606 230,937

Reclassification of reserve
amounts associated with the
National Workers' Compensation
Reinsurance Pool ............. 2,911 3,855 4,338 6,830 11,364 - - - - - -

Retroactive restatement of
reserves in conjunction with
admittance of new participants
into the pooling agreement ... 219 2,182 3,334 4,364 5,314 5,248 6,603 6,809 7,018 3,600 -
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Statutory reserves after
reclassification ............. 124,797 133,907 139,295 150,511 197,475 187,320 198,117 203,102 198,910 209,206 230,937

GAAP adjustments:
Salvage and subrogation ...... (930) (930) (1,203) (1,284) (2,026) (1,804) (1,799) (2,369) (2,400) - -

Reclass of statutory settlement
expense portion of
retirement benefit liability - - - - - (601) (680) (729) (786) (858) (890)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Reserves for losses and
settlement expenses .......... 123,867 132,977 138,092 149,227 195,449 184,915 195,638 200,004 195,724 208,348 230,047

Paid (cumulative) as of:
One year later ............... 33,346 42,480 42,990 31,577 78,000 60,162 57,247 62,012 59,856 62,949 -
Two years later .............. 56,293 66,185 59,579 79,619 109,985 89,153 88,831 92,626 92,191 - -
Three years later ............ 71,002 77,009 96,796 97,152 127,885 107,372 106,691 112,985 - - -
Four years later ............. 78,278 107,215 106,391 107,114 137,783 116,856 118,705 - - - -
Five years later ............. 104,753 113,112 112,200 112,598 143,876 123,843 - - - - -
Six years later .............. 108,134 116,338 115,858 116,670 148,518 - - - - - -
Seven years later ............ 110,193 119,039 118,725 119,699 - - - - - - -
Eight years later ............ 112,154 120,879 120,122 - - - - - - - -
Nine years later ............. 113,761 121,758 - - - - - - - - -
Ten years later .............. 114,400 - - - - - - - - - -

Reserves reestimated as of:
End of year .................. 123,867 132,977 138,092 149,227 195,449 184,915 195,638 200,004 195,724 208,348 230,047
One year later ............... 125,971 137,442 143,884 155,537 197,008 179,527 179,818 183,760 188,579 197,271 -
Two years later .............. 126,577 140,272 145,101 152,771 192,318 170,653 173,162 182,285 185,465 - -
Three years later ............ 128,460 139,949 143,413 148,867 186,730 166,778 172,118 179,797 - - -
Four years later ............. 130,226 140,315 142,496 148,017 186,133 166,133 170,570 - - - -
Five years later ............. 130,505 139,380 143,063 148,098 186,319 165,548 - - - - -
Six years later .............. 129,779 141,133 143,638 148,686 186,095 - - - - - -
Seven years later ............ 131,899 142,650 144,318 148,991 - - - - - - -
Eight years later ............ 133,466 143,763 144,679 - - - - - - - -
Nine years later ............. 134,735 143,051 - - - - - - - - -
Ten years later .............. 132,564 - - - - - - - - - -
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cumulative redundancy
(Deficiency) ................. $ (8,697) (10,074) (6,587) 236 9,354 19,367 25,068 20,207 10,259 11,077 -
======== ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Gross loss and settlement expense reserves - end of year (A) ...... $220,703 202,370 209,785 212,231 209,521 221,378 245,610

Reinsurance receivables ............................................ 25,254 17,455 14,147 12,227 13,797 13,030 15,563
-------- ------- ------- ------- ------- ------- -------
Net loss and settlement expense reserves - end of year ............. $195,449 184,915 195,638 200,004 195,724 208,348 230,047
======== ======= ======= ======= ======= ======= =======
Gross re-estimated reserves - latest (B) ........................... $209,226 180,809 184,698 194,770 202,561 212,031 245,610
Re-estimated reinsurance receivables - latest ...................... 23,131 15,261 14,128 14,973 17,096 14,760 15,563
-------- ------- ------- ------- ------- ------- -------
Net re-estimated reserves - latest ................................. $186,095 165,548 170,570 179,797 185,465 197,271 230,047
======== ======= ======= ======= ======= ======= =======
Gross cumulative redundancy (deficiency) (A-B) ..................... $ 11,477 21,561 25,087 17,461 6,960 9,347 -
======== ======= ======= ======= ======= ======= =======

Asbestos and Environmental Claims

The Company has exposure to asbestos and environmental related claims
associated with the insurance business written by the parties to the pooling
agreement and the reinsurance business assumed from Employers Mutual by the
reinsurance subsidiary.

Estimating loss and settlement expense reserves for asbestos and
environmental claims is very difficult due to the many uncertainties
surrounding these types of claims. These uncertainties exist because the
assignment of responsibility varies widely by state and claims often emerge
long after the policy has expired, which makes assignment of damages to the
appropriate party and to the time period covered by a particular policy
difficult. In establishing reserves for these types of claims, management
monitors the relevant facts concerning each claim, the current status of the
legal environment, the social and political conditions and the claim history
and trends within the Company and the industry.

Based upon current facts, management believes the reserves established
for asbestos and environmental related claims at December 31, 1998 are
adequate. Although future changes in the legal and political environment may
result in adjustments to these reserves, management believes any adjustments
will not have a material impact on the financial condition or results of
operations of the Company.

Asbestos Claims

The Company's asbestos claim activity primarily relates to bodily injury
claims where a former insured has been named as one of multiple defendants
covering exposure over many years.

The following table presents selected data on asbestos related losses
and settlement expenses incurred and reserves outstanding for the Company:

Year ended December 31,
-------------------------------
1998 1997 1996
---------- ---------- ---------
Total losses incurred ....................... $ - $ 394,524 $ 100,090
Total settlement expenses incurred .......... 34,287 25,246 5,847
---------- ---------- ---------
Total losses and settlement expenses
incurred ................................ $ 34,287 $ 419,770 $ 105,937
========== ========== =========

Loss reserves ............................... $ 932,227 $ 942,822 $ 662,910
Settlement expense reserves ................. 48,237 32,909 28,089
---------- ---------- ---------
Total loss and settlement expense reserves $ 980,464 $ 975,731 $ 690,999
========== ========== =========

Number of outstanding claims ................ 145 92 57
========== ========== =========

The incurred and reserve amounts for 1998, 1997 and 1996 reflect 88, 63
and 40 claims, respectively, by individuals asserting asbestos exposure to
products allegedly manufactured by a former insured.

Environmental Claims

The Company's environmental claims activity is predominately related to
pollution from hazardous waste of former insureds. The parties to the pooling
agreement have not written primary coverage for the major oil or chemical
companies. The greatest exposure arises out of claims from small regional
operations or local businesses having pollution on their own property due to
hazardous material use or leaking underground storage tanks. These insureds
include small manufacturing operations, tool makers, automobile dealerships,
contractors and gasoline stations. The remaining exposure arises out of
commercial general liability and umbrella policies issued during the 1970's
and early 1980's which allegedly cover contamination emanating from closed
landfills. Claims related to misdeliveries or minor spills of petroleum
products covered under properly endorsed commercial auto policies are not
considered environmental claims since coverage is normally not disputed,
damages are readily determinable and settlement normally occurs over a short
period of time.

The following table presents selected data on environmental losses and
settlement expenses incurred and reserves outstanding for the Company.

Year ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Total losses incurred .................... $ - $ 374,822 $ 85,454
Total settlement expenses incurred ....... 18,288 25,615 (27,761)
---------- ---------- ----------
Total losses and settlement expenses
incurred ............................. $ 18,288 $ 400,437 $ 57,693
========== ========== ==========

Loss reserves ............................ $1,132,412 $1,184,569 $1,103,466
Settlement expense reserves .............. 259,222 252,435 308,145
---------- ---------- ----------
Total loss and settlement expense
reserves ............................. $1,391,634 $1,437,004 $1,411,611
========== ========== ==========
Number of outstanding claims ............. 53 46 63
========== ========== ==========

Included in the above table at December 31, 1998, 1997 and 1996 are two
closed landfills which involve three and six policyholders, respectively.
Coverage is disputed in all 53 of the claims which were outstanding at
December 31, 1998. The coverage disputes relate to claims involving
contamination at or from (i) insured property and (ii) closed landfills based
on the generation of waste disposed of at these sites.

INVESTMENTS

Securities classified as held-to-maturity are purchased with the intent
and ability to be held to maturity and are carried at amortized cost.
Unrealized holding gains and losses on securities held-to-maturity are not
reflected in the financial statements. All other securities have been
classified as securities available-for-sale and are carried at fair value,
with unrealized holding gains and losses reported as accumulated other
comprehensive income in stockholders' equity, net of deferred income taxes.

At December 31, 1998, approximately 87 percent of the Company's bonds
were invested in government or government agency issued securities. A variety
of maturities are maintained in the Company's portfolio to assure adequate
liquidity. The maturity structure of bond investments is also established by
the relative attractiveness of yields on short, intermediate and long-term
bonds. The Company does not invest in any high-yield debt investments
(commonly referred to as junk bonds).

The Company's equity investment holdings include common stock and
preferred stock. During 1998 the Company liquidated its common stock mutual
fund portfolio and reinvested the proceeds in individual stock issues that are
being managed on a tax-aware basis.

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.

The investments of EMC Insurance Group Inc. and its subsidiaries are
supervised by investment committees of each entity's respective board of
directors. The investment portfolios are managed by an internal staff which
is composed of employees of Employers Mutual.

Investment expenses are based on actual expenses incurred plus an
allocation of other investment expenses incurred by Employers Mutual, which is
based on a weighted average of total invested assets and number of investment
transactions.

The following table shows the composition of the Company's investment
portfolio (at amortized cost), by type of security, as of December 31, 1998
and 1997. In the Company's consolidated financial statements, securities
held-to-maturity are carried at amortized cost; securities available-for-sale
are carried at fair value.
Year ended December 31,
--------------------------------------------
1998 1997
--------------------- ---------------------
Amortized Amortized
Cost Percent Cost Percent
------------ ------- ------------ -------
Securities held-to-maturity:
Fixed maturity securities:
U.S. treasury securities
and obligations of U.S.
government corporations
and agencies ............. $ 90,851,839 21.4% $103,826,052 26.0%
Obligations of states and
political subdivisions ... 49,189,315 11.6 41,989,442 10.5
Mortgage-backed securities 24,885,036 5.8 40,013,569 10.0
------------ ------- ------------ -------
Total securities held-
to-maturity ............ 164,926,190 38.8 185,829,063 46.5
------------ ------- ------------ -------
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury securities
and obligations of U.S.
government corporations
and agencies ............. 3,491,259 0.8% - -
Obligations of states and
political subdivisions ... 155,138,275 36.5 130,945,594 32.8
Public utilities ........... 7,304,015 1.7 8,760,899 2.2
Corporate securities ....... 42,181,578 9.9 32,861,713 8.2
Redeemable preferred stocks - - 149,000 -
------------ ------- ------------ -------
Total fixed maturity
securities ............. 208,115,127 48.9 172,717,206 43.2

Equity securities:
Common stock ............... 26,782,547 6.3 - -
Common stock mutual funds .. - - 20,988,146 5.3
Non-redeemable preferred
stocks ................... 3,145,886 0.7 5,273,011 1.3
------------ ------- ------------ -------
Total equity securities .. 29,928,433 7.0 26,261,157 6.6
------------ ------- ------------ -------
Total securities
available-for-sale ..... 238,043,560 55.9 198,978,363 49.8
------------ ------- ------------ -------
Short-term investments ......... 22,660,011 5.3 14,926,994 3.7
------------ ------- ------------ -------
Total investments ........ $425,629,761 100.0% $399,734,420 100.0%
============ ======= ============ =======

Fixed maturity securities held by the Company generally have an
investment quality rating of "A" or better by independent rating agencies.
The following table shows the composition of the Company's fixed maturity
securities, by rating, as of December 31, 1998.

Securities Securities
held-to-maturity available-for-sale
(at amortized cost) (at fair value)
--------------------- ---------------------
Amount Percent Amount Percent
------------ ------- ------------ -------
Rating(1)
AAA ..................... $164,926,190 100.0% $ 67,211,897 30.9%
AA ...................... - - 102,611,869 47.2
A ....................... - - 47,329,666 21.8
BAA ..................... - - 346,168 .1
------------ ------- ------------ -------
Total fixed maturities $164,926,190 100.0% $217,499,600 100.0%
============ ======= ============ =======

(1) Ratings for preferred stocks and fixed maturity securities with initial
maturities greater than one year are assigned by Moody's Investor's
Services, Inc. Moody's rating process seeks to evaluate the quality of a
security by examining the factors that affect returns to investors.
Moody's ratings are based on quantitative and qualitative factors, as
well as the economic, social and political environment in which the
issuing entity exists. The quantitative factors include debt coverage,
sales and income growth, cash flows and liquidity ratios. Qualitative
factors include management quality, access to capital markets and the
quality of earnings and balance sheet items. Ratings for securities with
initial maturities less than one year are based on an evaluation of the
underlying assets or the credit rating of the issuer's parent company.

The amortized cost and estimated fair value of fixed maturity securities
at December 31, 1998, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Estimated
Amortized fair
cost value
------------ ------------
Securities held-to-maturity:
Due in one year or less ................... $ 31,987,844 $ 32,501,255
Due after one year through five years ..... 26,101,561 27,331,391
Due after five years through ten years .... 72,229,770 78,512,195
Due after ten years ....................... 9,721,979 10,375,963
Mortgage-backed securities ................ 24,885,036 25,902,635
------------ ------------
Totals .................................. $164,926,190 $174,623,439
============ ============
Securities available-for-sale:
Due in one year or less ................... $ 22,931,915 $ 23,009,649
Due after one year through five years ..... 49,120,202 50,518,753
Due after five years through ten years .... 56,627,240 60,522,488
Due after ten years ....................... 79,435,770 83,448,710
------------ ------------
Totals .................................. $208,115,127 $217,499,600
============ ============

The mortgage-backed securities shown in the above table include
$14,533,676 of securities issued by government corporations and agencies and
$10,351,360 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,
1998 1997 1996
------------ ------------ ------------
Average invested assets (1) ........ $412,682,091 $386,852,093 $367,276,871
Investment income (2) .............. 24,859,063 23,780,303 24,006,977
Average yield ...................... 6.02% 6.15% 6.54%
Realized investment gains (3) ...... $ 5,901,049 $ 4,100,006 $ 1,890,923

(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.

(3) The amount for 1998 reflects realized gains of $7,585,293 resulting from
the liquidation of the Company's common stock mutual fund portfolio. The
Company reinvested the proceeds from the liquidation into individual stock
issues that are being managed on a tax-aware basis. The change in the
Company's investment strategy for equity securities, from a common stock
mutual fund portfolio to individual stock issues, will allow the Company
to control both the timing and the amount of sales that occur in these
investments. As a result, realized investment gains reported in future
periods are expected to decline significantly from the amounts reported
during the last several years. The amounts for 1997 and 1996 reflect
capital gain distributions of $4,010,683 and $1,655,564, respectively,
related to the Company's common stock mutual fund portfolio.

EMPLOYEES
- ---------
EMC Insurance Group Inc. has no employees of its own, although
approximately 15 employees of Employers Mutual perform administrative duties
on a part-time basis. Otherwise, the Company's business activities are
conducted by employees of Employers Mutual and one of the property and
casualty insurance subsidiaries, which have 1,886 and 67 employees,
respectively. The property and casualty insurance subsidiaries share the
costs associated with the pooling agreement in accordance with their pool
participation percentages. See "Property and Casualty Insurance - Pooling
Agreement."

REGULATION
- ----------
The Company's insurance subsidiaries are subject to extensive regulation
and supervision by their home states, as well as those in which they do
business. The purpose of such regulation and supervision is primarily to
provide safeguards for policyholders rather than to protect the interests of
stockholders. The insurance laws of the various states establish regulatory
agencies with broad administrative powers, including the power to grant or
revoke operating licenses and to regulate trade practices, investments,
premium rates, deposits of securities, the form and content of financial
statements and insurance policies, accounting practices and the maintenance of
specified reserves and capital for the protection of policyholders.

Premium rate regulation varies greatly among jurisdictions and lines of
insurance. In most states in which the Company's subsidiaries write
insurance, premium rates for their lines of insurance are subject to either
prior approval or limited review upon implementation. States require rates
for property and casualty insurance that are adequate, not excessive, and not
unfairly discriminatory.

The Company's insurance subsidiaries are required to file detailed annual
reports with the appropriate regulatory agency in each state where they do
business based on applicable statutory regulations, which differ from
generally accepted accounting principles. Their businesses and accounts are
subject to examination by such agencies at any time. Since EMC Insurance
Group Inc. and Employers Mutual are domiciled in Iowa, the State of Iowa
exercises principal regulatory supervision, and Iowa law requires periodic
examination. The Company's insurance subsidiaries are subject to examination
by state insurance departments on a periodic basis as applicable law requires.

State laws governing insurance holding companies also impose standards on
certain transactions with related companies, which include, among other
requirements, that all transactions be fair and reasonable and that an
insurer's surplus as regards policyholders be reasonable and adequate in
relation to its liabilities. Under Iowa law, dividends or distributions made
by registered insurers are restricted in amount and may be subject to approval
from the Iowa Commissioner of Insurance. "Extraordinary" dividends or
distributions are subject to prior approval and are defined as dividends or
distributions which exceed the greater of 10 percent of statutory surplus as
regards policyholders as of the preceding December 31, or net income of the
preceding calendar year on a statutory basis. Both Illinois and North Dakota
impose restrictions which are similar to those of Iowa on the payment of
dividends and distributions. At December 31, 1998, $12,725,145 was available
for distribution in 1999 to EMC Insurance Group Inc. without prior approval.
See note 6 of Notes to Consolidated Financial Statements under Item 8 of this
Form 10-K.

The National Association of Insurance Commissioners (NAIC) utilizes a
risk-based capital model to help state regulators assess the capital adequacy
of insurance companies and identify property/casualty insurers that are in (or
are perceived as approaching) financial difficulty by establishing minimum
capital needs based on the risks applicable to the operations of the
individual insurer. The risk-based capital requirements for property and
casualty insurance companies measure three major areas of risk: asset risk,
credit risk and underwriting risk. Companies having less statutory surplus
than required by the risk-based capital requirements are subject to varying
degrees of regulatory scrutiny and intervention, depending on the severity of
the inadequacy. At December 31, 1998, each of the Company's insurance
subsidiaries has a ratio of total adjusted capital to risk-based capital well
in excess of the minimum level required.

ITEM 2. PROPERTIES.
- ------- -----------
The Company does not own any real property. Lease costs of the Company's
two office facilities in West Des Moines, Iowa totaled approximately $12,000
and $28,500 in 1998. These leases expired on February 28, 1998 and November
30, 1998, at which time the operations were moved into facilities owned by
Employers Mutual.

Lease costs of the Company's office facilities in Oak Brook, Illinois,
and Bismarck, North Dakota, which total approximately $293,000 and $275,000
annually, are included as expenses under the pooling agreement. Expenses of
office facilities owned and leased by Employers Mutual are borne by the
parties to the pooling agreement, less the rent received from the space used
and paid for by non-insurance subsidiaries and outside tenants. See "Property
and Casualty Insurance - Pooling Agreement" under Item 1 of this Form 10-K.

ITEM 3. LEGAL PROCEEDINGS.
- ------- ------------------
The Company and Employers Mutual and its other subsidiaries are parties
to numerous lawsuits arising in the normal course of the insurance business.
The Company believes that the resolution of these lawsuits will not have a
material adverse effect on its financial condition or its results of
operations. The companies involved have reserves which are believed adequate
to cover any potential liabilities arising out of all such pending or
threatened proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
None.

PART II
-------

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ------- -------------------------------------------------
STOCKHOLDER MATTERS.
--------------------
The "Market for Common Stock and Related Security Holder Matters" section
from the Company's Annual Report to Stockholders for the year ended December
31, 1998, which is included as Exhibit 13(d) to this Form 10-K, is
incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA.
- ------- ------------------------
The "Selected Consolidated Financial Data" section from the Company's
Annual Report to Stockholders for the year ended December 31, 1998, which is
included as Exhibit 13(a) to this Form 10-K, is incorporated herein by
reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section from the Company's Annual Report to
Stockholders for the year ended December 31, 1998, which is included as
Exhibit 13(b) to this Form 10-K, is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- -------- -----------------------------------------------------------
The information under the caption "Market Risk" in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section from the Company's Annual Report to Stockholders for the year ended
December 31, 1998, which is included as Exhibit 13(b) to this Form 10-K, is
incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
The consolidated financial statements from the Company's Annual Report to
Stockholders for the year ended December 31, 1998, which is included as
Exhibit 13(c) to this Form 10-K, are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------- ------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
------------------------------------
None.

PART III
--------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- ---------------------------------------------------
See the information under the caption "Election of Directors" in the
Company's Proxy Statement in connection with its Annual Meeting to be held on
May 24, 1999, 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 45 President and Chief Executive Officer of the
Company and of Employers Mutual since 1992
and Treasurer of both organizations since
1996. He was elected President of the
Company and Employers Mutual in 1991.
Mr. Kelley was Executive Vice President of
the Company and Employers Mutual from 1989
to 1991. He has been employed by Employers
Mutual since 1985.

Fred A. Schiek 64 Executive Vice President and Chief Operating
Officer of the Company and of Employers
Mutual since 1992. He was Vice President of
Employers Mutual from 1983 until 1992. He
has been employed by Employers Mutual since
1959.

John D. Isenhart 61 Senior Vice President of the Company since
1997 and of Employers Mutual since 1992.
He has been employed by Employers Mutual
since 1963.

Margaret A. Ball 60 Senior Vice President of the Company since
1998 and of Employers Mutual since 1997.
She has been employed by Employers Mutual
since 1971.

Ronald W. Jean 50 Senior Vice President of the Company and
Employers Mutual since 1997. He has been
employed by Employers Mutual since 1979.

Raymond W. Davis 53 Senior Vice President of the Company and
Employers Mutual since 1998. He has been
employed by Employers Mutual since 1979.

NAME AGE POSITION

Donald D. Klemme 53 Senior Vice President and Secretary of the
Company since 1998. Senior Vice President
of Employers Mutual since 1998. He has been
employed by Employers Mutual since 1972.

David O. Narigon 46 Senior Vice President of the Company and of
Employers Mutual since 1998. He has been
employed by Employers Mutual since 1983.

Mark E. Reese 41 Vice President of the Company and Employers
Mutual since 1996 and Chief Financial Officer
of the Company and Employers Mutual since
1997. He has been employed by Employers
Mutual since 1984.

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 24, 1999, which information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- ---------------------------------------------------------------
See the information under the captions "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Company's
Proxy Statement in connection with its Annual Meeting to be held on May 24,
1999, 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 24, 1999, which information is incorporated herein
by reference.

PART IV
-------

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- -------- -----------------------------------------------------------------
(a) List of Financial Statements and Schedules.
Page
------
1. Financial Statements

Independent Auditors' Report ................................ 11*
Consolidated Balance Sheets, December 31, 1998 and 1997 ..... 26-27*
Consolidated Statements of Income for the Years ended
December 31, 1998, 1997 and 1996 ......................... 28*
Consolidated Statements of Comprehensive Income for the
Years ended December 31, 1998, 1997 and 1996 ............. 28*
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 1998, 1997 and 1996 ............. 29*
Consolidated Statements of Cash Flows for the Years ended
December 31, 1998, 1997 and 1996 ......................... 30-31*
Notes to Consolidated Financial Statements .................. 32-52*

Form 10-K
2. Schedules Page
------
Independent Auditors' Report on Schedules ................... 34
Schedule I - Summary of Investments ....................... 35
Schedule II - Condensed Financial Information of Registrant 36
Schedule III - Supplementary Insurance Information .......... 39
Schedule IV - Reinsurance .................................. 40
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations ..... 41

All other schedules have been omitted for the reason that the items
required by such schedules are not present in the consolidated
financial statements, are covered in notes to consolidated financial
statements or are not significant in amount.

* Refers to the respective page of EMC Insurance Group Inc.'s 1998
Annual Report to Stockholders. The Consolidated Financial Statements
and Independent Auditors' Report, which are included as Exhibit
13(c), are incorporated by reference. With the exception of the
portions of such Annual Report specifically incorporated by reference
in this Item and Items 5, 6, 7 and 8, such Annual Report shall not be
deemed filed as part of this Form 10-K or otherwise subject to the
liabilities of Section 18 of the Securities Exchange Act of 1934.

3. Management contracts and compensatory plan arrangements

Exhibit 10(b). Management Incentive Compensation Plan.
Exhibit 10(d). 1982 Employers Mutual Casualty Company Incentive
Stock Option Plan, as amended.
Exhibit 10(e). Deferred Bonus Compensation Plans.
Exhibit 10(f). EMC Reinsurance Company Executive Bonus Program.
Exhibit 10(h). Employers Mutual Casualty Company Excess Retirement
Benefit Agreement.
Exhibit 10(i). Employers Mutual Casualty Company 1993 Employee
Stock Purchase Plan.
Exhibit 10(j). 1993 Employers Mutual Casualty Company Incentive
Stock Option Plan, as amended.
Exhibit 10(k). Employers Mutual Casualty Company Non-Employee
Director Stock Option Plan.
Exhibit 10(l). Employers Mutual Casualty Company Supplemental
Executive Retirement Plan.

(b) Reports on Form 8-K.

On November 20, 1998, EMC Insurance Group Inc. filed a report on
Form 8-K related to a November 20, 1998 press release announcing a
repurchase plan for up to $3,000,000 of its common stock.

(c) Exhibits.

3. Articles of incorporation and bylaws:

(a) Articles of Incorporation of the Company, as amended.

(b) Bylaws of the Company, as amended.

10. Material contracts.

(a) Quota Share Reinsurance Contract between Employers Mutual
Casualty Company and EMC Reinsurance Company. (Incorporated
by reference to the Company's Form 10-K for the calendar year
ended December 31, 1997.)

(b) Management Incentive Compensation Plan.

(c) EMC Insurance Companies reinsurance pooling agreements
between Employers Mutual Casualty Company and certain of its
affiliated companies, as amended.

(d) 1982 Employers Mutual Casualty Company Incentive Stock Option
Plan, as amended.

(e) Deferred Bonus Compensation Plans.

(f) EMC Reinsurance Company Executive Bonus Program.

(g) EMC Insurance Group Inc. Amended and Restated Dividend
Reinvestment and Common Stock Purchase Plan. (Incorporated by
reference to Registration No. 33-34499.)

(h) Employers Mutual Casualty Company Excess Retirement Benefit
Agreement.

(i) Employers Mutual Casualty Company 1993 Employee Stock Purchase
Plan. (Incorporated by reference to Registration No. 33-49335.)

(j) 1993 Employers Mutual Casualty Company Incentive Stock Option
Plan. (Incorporated by reference to Registration Nos.33-49337
and 333-45279.)

(k) Employers Mutual Casualty Company Non-Employee Director Stock
Option Plan. (Incorporated by reference to Registration No.
33-49339.)

(l) Employers Mutual Casualty Company Supplemental Executive
Retirement Plan. (Incorporated by reference to the Company's
Form 10-K for the calendar year ended December 31, 1995.)

13. Annual Report to Security Holders.

(a) Selected Financial Data from the Company's 1998 Annual Report to
Stockholders.

(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations from the Company's 1998 Annual Report to
Stockholders.

(c) Consolidated Financial Statements from the Company's 1998
Annual Report to Stockholders.

(d) Market for Common Stock and Related Security Holder Matters from
the Company's 1998 Annual Report to Stockholders.

21. Subsidiaries of the Registrant.

23. Consent of KPMG Peat Marwick LLP with respect to Forms S-8
(Registration Nos. 2-93738, 33-49335, 33-49337, 33-49339 and
333-45279) and Form S-3 (Registration No. 33-34499).

24. Power of Attorney.

(d) Financial statements required by Regulation S-X which are excluded from
the Annual Report to Stockholders by Rule 14a-3(b)(1).

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 26,
1999.

EMC INSURANCE GROUP INC.

/s/ Bruce G. Kelley
------------------------
Bruce G. Kelley
President, Treasurer and
Chief Executive Officer

/s/ Mark E. Reese
------------------------
Mark E. Reese
Vice President - Chief Financial Officer
(Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 26, 1999.

/s/ Mark E. Reese
------------------------
George C. Carpenter III*
Director

/s/ Mark E. Reese
------------------------
E. H. Creese*
Director

/s/ Mark E. Reese
------------------------
David J. Fisher*
Director

/s/ Bruce G. Kelley
------------------------
Bruce G. Kelley
Director

/s/ Mark E. Reese
------------------------
George W. Kochheiser*
Chairman of the Board

/s/ Mark E. Reese
------------------------
Raymond A. Michel*
Director

/s/ Mark E. Reese
------------------------
Fredrick A. Schiek*
Director

* by power of attorney

INDEPENDENT AUDITORS' REPORT ON SCHEDULES

The Board of Directors and Stockholders
EMC Insurance Group Inc.:

Under date of February 25, 1999, we reported on the consolidated balance
sheets of EMC Insurance Group Inc. and Subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, comprehensive
income, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998, as contained in Part II, Item 8 of
the Form 10-K. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related supplementary
financial statement schedules listed in Part IV, Item 14(a)2. These
supplementary financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
supplementary financial statement schedules based on our audits.

In our opinion, such supplementary financial statement schedules, when
considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set
forth therein.

/s/ KPMG Peat Marwick LLP

Des Moines, Iowa
February 25, 1999

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

Schedule I - Summary of Investments -
Other Than Investments in Related Parties

December 31, 1998

Amount at
which shown
Fair in the
Type of investment Cost value balance sheet
------------------ ------------ ------------ -------------
Securities held-to-maturity:
Fixed maturities:
United States Government
and government agencies
and authorities .............. $ 90,851,839 $ 98,636,188 $ 90,851,839
States, municipalities and
political subdivisions ....... 49,189,315 50,084,616 49,189,315
Mortgage - backed securities ... 24,885,036 25,902,635 24,885,036
------------ ------------ ------------
Total fixed maturity securities 164,926,190 174,623,439 164,926,190
------------ ------------ ------------
Securities available-for-sale:
Fixed maturities:
United States Government
and government agencies
and authorities .............. 3,491,259 3,486,905 3,486,905
States, municipalities and
political subdivisions ....... 155,138,275 163,078,673 163,078,673
Public utilities ............... 7,304,015 7,516,310 7,516,310
Corporate securities ........... 42,181,578 43,417,712 43,417,712
------------ ------------ ------------
Total fixed maturity securities 208,115,127 217,499,600 217,499,600

Equity securities:
Common stocks .................. 26,782,547 29,524,441 29,524,441
Non-redeemable preferred stocks 3,145,886 3,260,988 3,260,988
------------ ------------ ------------
Total equity securities ...... 29,928,433 32,785,429 32,785,429

Short-term investments ............. 22,660,011 22,660,011 22,660,011
------------ ------------ ------------

Total investments ...... $425,629,761 $447,568,479 $437,871,230
============ ============ ============

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

Schedule II - Condensed Financial Information of Registrant

Condensed Balance Sheets

December 31,
--------------------------
1998 1997
------------ ------------
ASSETS
- ------
Investment in common stock of
subsidiaries (equity method) .................. $157,416,941 $154,839,418
Fixed maturity securities held-to-maturity,
at amortized cost ............................. 3,999,138 6,494,491
Short-term investments .......................... 2,552,944 909,698
Cash ............................................ 62,448 3,884
Accrued investment income ....................... 50,417 108,945
Accounts receivable ............................. 216 166,488
Deferred tax asset .............................. 3,850 -
------------ ------------
Total assets ............................... $164,085,954 $162,522,924
============ ============

LIABILITIES
- -----------
Accounts payable ................................ $ 128,245 $ 127,846
Income taxes payable ............................ 18,000 37,000
Indebtedness to related party ................... 1,869 8,490
Deferred tax liability .......................... - 3,132
------------ ------------
Total liabilities .......................... 148,114 176,468
------------ ------------

STOCKHOLDERS' EQUITY
- --------------------
Common stock, $1 par value,
authorized 20,000,000 shares;
issued and outstanding, 11,496,389 shares
in 1998 and 11,351,119 shares in 1997 ......... 11,496,389 11,351,119
Additional paid-in capital ...................... 67,822,412 65,916,681
Accumulated other comprehensive income .......... 8,079,371 7,687,092
Retained earnings ............................... 76,539,668 77,391,564
------------ ------------
Total stockholders' equity ................. 163,937,840 162,346,456
------------ ------------
Total liabilities and stockholders' equity $164,085,954 $162,522,924
============ ============

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

Condensed Statements of Income

Years ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------

Equity in undistributed earnings ...... $ 1,685,244 $ 9,377,037 $11,914,842
Dividends received from
consolidated subsidiaries ........... 4,275,035 3,750,032 3,060,026
Investment income ..................... 463,889 445,816 406,952
----------- ----------- -----------
6,424,168 13,572,885 15,381,820

Operating expenses .................... 387,056 313,762 313,087
----------- ----------- -----------
Income from operations before
income taxes ..................... 6,037,112 13,259,123 15,068,733

Income taxes .......................... 24,247 42,556 34,569
----------- ----------- -----------
Net income............... $ 6,012,865 $13,216,567 $15,034,164
=========== =========== ===========

Condensed Statements of Comprehensive Income

Years ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------

Net income ............................ $ 6,012,865 $13,216,567 $15,034,164
----------- ----------- -----------
Other Comprehensive Income:
Unrealized holding gains arising
during the period, net of
income taxes ...................... 4,264,242 6,399,757 931,486

Reclassification adjustment for gains
included in net income, net of
income taxes ...................... (3,871,963) (2,704,732) (1,229,400)
----------- ----------- -----------
Other comprehensive income (loss) 392,279 3,695,025 (297,914)
----------- ----------- -----------
Total comprehensive income ...... $ 6,405,144 $16,911,592 $14,736,250
=========== =========== ===========

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

Condensed Statements of Cash Flows

Years ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
Net cash provided by
operating activities ................ $ 4,015,569 $ 3,702,567 $ 3,178,773
----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed maturity
securities held-to-maturity ....... - (3,999,340) (2,485,938)
Disposals of fixed maturity
securities held-to-maturity ....... 2,500,000 2,000,000 2,000,000
Net (purchases) sales of short-term
investments ...................... (1,643,245) 1,413,904 364,526
----------- ----------- -----------
Net cash provided by (used in)
investing activities ........... 856,755 (585,436) (121,412)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock ........... 823,927 1,019,919 1,251,119
Dividends paid to stockholders ..... (5,637,687) (4,314,083) (4,017,222)
Purchases of treasury stock, net ... - - (129,877)
----------- ----------- -----------
Net cash used in financing
activities ..................... (4,813,760) (3,294,164) (2,895,980)
----------- ----------- -----------

Net increase (decrease) in cash ....... 58,564 (177,033) 161,381

Cash at beginning of year ............. 3,884 180,917 19,536
----------- ----------- -----------

Cash at end of year ................... $ 62,448 $ 3,884 $ 180,917
=========== =========== ===========

Income taxes paid ..................... $ 50,229 $ 40,000 $ 20,993

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

Schedule III - Supplementary Insurance Information

For Years Ended December 31, 1998, 1997 and 1996

Deferred
policy Losses and Net Losses and
acquisition settlement Unearned Premium investment settlement
Segment costs expenses premiums revenue income expenses
------- ----------- ------------ ----------- ------------ ----------- ------------

Year ended December 31, 1998:
Property and casualty insurance $10,666,188 $182,529,015 $53,785,443 $155,523,486 $17,635,076 $128,666,666
Reinsurance ................... 1,689,294 63,081,308 7,678,608 38,720,919 6,760,098 29,209,428
Parent company ................ - - - - 463,889 -
----------- ------------ ----------- ------------ ----------- ------------
Consolidated ............. $12,355,482 $245,610,323 $61,464,051 $194,244,405 $24,859,063 $157,876,094
=========== ============ =========== ============ =========== ============

Year ended December 31, 1997:
Property and casualty insurance $ 8,949,126 $159,403,277 $47,532,320 $143,112,560 $16,719,458 $106,547,480
Reinsurance ................... 1,611,531 58,374,665 7,325,143 34,105,686 6,615,029 23,305,824
Parent company ................ - - - - 445,816 -
----------- ------------ ----------- ------------ ----------- ------------
Consolidated ............. $10,560,657 $217,777,942 $54,857,463 $177,218,246 $23,780,303 $129,853,304
=========== ============ =========== ============ =========== ============

Year ended December 31, 1996:
Property and casualty insurance $ 7,539,067 $150,685,988 $41,168,971 $128,515,835 $17,163,930 $ 90,187,193
Reinsurance ................... 1,482,796 51,816,998 6,739,983 36,674,831 6,436,095 25,180,022
Parent company ................ - - - - 406,952 -
----------- ------------ ----------- ------------ ----------- ------------
Consolidated ............. $ 9,021,863 $202,502,986 $47,908,954 $165,190,666 $24,006,977 $115,367,215
=========== ============ =========== ============ =========== ============

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

Schedule III - Supplementary Insurance Information

For year ended December 31, 1998, 1997 and 1996

Amortization
of deferred
policy Other
acquisition underwriting Premiums
Segment costs expenses written
------- ------------ ------------ ------------
Year ended December 31, 1998:
Property and casualty insurance $ 35,754,919 $ 13,829,886 $161,855,333
Reinsurance ................... 8,907,722 3,186,535 39,074,384
Parent company ................ - - -
------------ ------------ ------------
Consolidated .............. $ 44,662,641 $ 17,016,421 $200,929,717
============ ============ ============

Year ended December 31, 1997:
Property and casualty insurance $ 27,688,763 $ 16,557,572 $149,909,925
Reinsurance ................... 8,253,329 3,498,497 34,690,846
Parent company ................ - - -
------------ ------------ ------------
Consolidated $ 35,942,092 $ 20,056,069 $184,600,771
============ ============ ============

Year ended December 31, 1996:
Property and casualty insurance $ 24,603,275 $ 15,773,051 $128,834,349
Reinsurance ................... 7,951,458 3,506,366 35,551,617
Parent company ................ - - -
------------ ------------ ------------
Consolidated $ 32,554,733 $ 19,279,417 $164,385,966
============ ============ ============

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

Schedule IV - Reinsurance

For years ended December 31, 1998, 1997 and 1996

Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
------------ ------------ ------------ ------------ ----------

Year ended December 31, 1998:
Earned premiums:
Consolidated property and casualty
insurance .......................... $202,514,027 $207,404,961 $199,135,339 $194,244,405 102.5%
============ ============ ============ ============ ==========
Year ended December 31, 1997:
Earned premiums:
Consolidated property and casualty
insurance .......................... $169,304,584 $165,004,455 $172,918,117 $177,218,246 97.6%
============ ============ ============ ============ ==========
Year ended December 31, 1996:
Earned premiums:
Consolidated property and casualty
insurance .......................... $154,859,778 $154,345,622 $164,676,510 $165,190,666 99.7%
============ ============ ============ ============ ==========

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

Schedule VI - Supplemental Insurance Information Concerning
Property-Casualty Insurance Operations

For Years Ended December 31, 1998, 1997 and 1996

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, 1998: $12,355,482 $245,610,323 $ -0- $61,464,051 $194,244,405 $24,395,174
=========== ============ ======== =========== ============ ===========
Year ended December 31, 1997: $10,560,657 $217,777,942 $ -0- $54,857,463 $177,218,246 $23,334,487
=========== ============ ======== =========== ============ ===========
Year ended December 31, 1996: $ 9,021,863 $202,502,986 $ -0- $47,908,954 $165,190,666 $23,600,025
=========== ============ ======== =========== ============ ===========

Losses and Amortization
settlement expenses of deferred Paid
incurred related to policy losses and
Consolidated property- Current Prior acquisition settlement Premiums
casualty entities Year Years costs expenses (1) Written
- ---------------------- ------------ ------------ ------------ ------------ ------------

Year ended December 31, 1998: $168,953,309 ($11,077,215) $ 44,662,641 $132,577,163 $200,929,717
============ ============ ============ ============ ============
Year ended December 31, 1997: $137,300,762 ($ 7,447,458) $ 35,942,092 $113,811,729 $184,600,771
============ ============ ============ ============ ============
Year ended December 31, 1996: $131,375,234 ($16,008,019) $ 32,554,733 $119,856,427 $164,385,966
============ ============ ============ ============ ============

(1) The amount for 1998 reflects an adjustment of ($3,600,220) related to
the 1998 change in the property and casualty insurance subsidiaries'
pooling agreement. This adjustment was made to offset the income
statement effect that resulted from the $3,600,220 increase in reserves
for losses and settlement expenses on January 1,1998 related to this
transaction.

The 1997 amount reflects an adjustment of ($3,795,453) related to the
1997 change in the property and casualty insurance subsidiaries' pooling
agreement and ($2,726,913) related to the change in the reinsurance
subsidiary's quota share percentage. These adjustments were made to
offset the income statement effect that resulted from the $6,522,366
increase in reserves for losses and settlement expenses on January 1,
1997 related to these transactions.

The index to exhibits in the electronic format indicates the exhibits are
included in the direct transmission. The circulated document contains
the page numbers of the exhibits.

EMC Insurance Group Inc. and Subsidiaries

Index to Exhibits

Exhibit
number Item
------ ----
3(a) Articles of Incorporation of the Company Included in
direct transmission

3(b) Bylaws of the Company Included in
direct transmission

10(b) Management Incentive Compensation Plan Included in
direct transmission

10(c) EMC Insurance Companies reinsurance Included in
pooling agreements between Employers direct transmission
Mutual Casualty Company and certain of
its affiliated companies.

10(d) 1982 Employers Mutual Casualty Company Included in
Incentive Stock Option Plan direct transmission

10(e) Deferred Bonus Compensation Plans Included in
direct transmission

10(f) EMC Reinsurance Company Executive Bonus Included in
Program direct transmission

10(h) Employers Mutual Casualty Company Excess Included in
Retirement Benefit Agreement direct transmission

13(a) Selected Financial Data. Included in
direct transmission

13(b) Management's Discussion and Analysis Included in
of Financial Condition and Results direct transmission
of Operations.

13(c) Financial Statements and Supplementary Included in
Data. direct transmission

13(d) Market for Registrant's Common Equity Included in
and Related Stockholder Matters. direct transmission

21 Subsidiaries of the Registrant. Included in
direct transmission

23 Consent of KPMG Peat Marwick LLP with Included in
respect to Forms S-8 and Form S-3 direct transmission

24 Power of Attorney. Included in
direct transmission