ITEM 1. BUSINESS. - ------- ---------
GENERAL - -------
EMC Insurance Group Inc. is an insurance holding company incorporated in Iowa in 1974. EMC Insurance Group Inc. is approximately 67 percent owned by Employers Mutual Casualty Company (Employers Mutual), a multiple-line property and casualty insurance company organized as an Iowa mutual insurance company in 1911 that is licensed in all 50 states and the District of Columbia. The term "Company" is used interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC Insurance Group Inc. and its subsidiaries. Employers Mutual and all of its subsidiaries and an affiliate (including the Company), are referred to as the "EMC Insurance Companies."
The Company conducts its insurance business through four business segments as follows: ............................... : : : EMC INSURANCE GROUP INC. : :.............................: : Excess and Property and : Nonstandard Surplus Lines Casualty : Risk Automobile Insurance Insurance Reinsurance : Insurance Agency ................................:................................. : : : : : : : : EMCASCO Insurance EMC Farm and City EMC Company (EMCASCO) Reinsurance Insurance Underwriters, Illinois EMCASCO Company Company Ltd. Insurance Company (Illinois EMCASCO) Dakota Fire Insurance Company (Dakota Fire)
EMCASCO was formed in Iowa in 1958, Illinois EMCASCO was formed in Illinois in 1976 and Dakota Fire was formed in North Dakota in 1957 for the purpose of writing property and casualty insurance. These companies are licensed to write insurance in a total of 35 states and are participants in a pooling agreement with Employers Mutual. (See "Property and Casualty Insurance - Pooling Agreement").
The reinsurance subsidiary was formed in 1981 to assume reinsurance business from Employers Mutual. The company assumes a portion of Employers Mutual's assumed reinsurance business, exclusive of certain reinsurance contracts, and is licensed to do business in 11 states.
The nonstandard risk automobile insurance subsidiary was purchased in 1984. The company was formed in Iowa in 1962 to write nonstandard risk automobile insurance and is licensed in 6 states.
The excess and surplus lines insurance agency was acquired in 1985. The company was formed in Iowa in 1975 as a broker for excess and surplus lines insurance.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS - --------------------------------------------- For information concerning the Company's revenues, operating income and identifiable assets attributable to each of its industry segments over the past three years, see note 8 of Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
PROPERTY AND CASUALTY INSURANCE - ------------------------------- POOLING AGREEMENT
The three property and casualty insurance subsidiaries of the Company and two subsidiaries and an affiliate of Employers Mutual (Union Insurance Company of Providence, American Liberty Insurance Company and Hamilton Mutual Insurance Company) are parties to reinsurance pooling agreements with Employers Mutual (collectively the "pooling agreement"). Under the terms of the pooling agreement, each company cedes to Employers Mutual all of its insurance business, with the exception of any voluntary reinsurance business assumed from nonaffiliated insurance companies, and assumes from Employers Mutual an amount equal to its participation in the pool. All losses, settlement expenses and other underwriting and administrative expenses, excluding the voluntary reinsurance business assumed by Employers Mutual from nonaffiliated insurance companies, are prorated among the parties on the basis of participation in the pool. The aggregate participation of the Company's property and casualty insurance subsidiaries is 22 percent. Operations of the pool give rise to intercompany balances with Employers Mutual, which are settled on a quarterly basis. The investment activities and income tax liabilities of the pool participants are not subject to the pooling agreement.
The purpose of the pooling agreement is to spread the risk of an exposure insured by any of the pool participants among all the companies. The pooling agreement produces a more uniform and stable underwriting result from year to year for all companies in the pool than might be experienced individually. In addition, each company benefits from the capacity of the entire pool, rather than being limited to policy exposures of a size commensurate with its own assets, and from the wide range of policy forms, lines of insurance written, rate filings and commission plans offered by each of the companies. A single set of reinsurance treaties is maintained for the protection of all seven companies in the pool.
Effective January 1, 1997, Hamilton Mutual Insurance Company (Hamilton Mutual) became a participant in the pooling agreement. The addition of Hamilton Mutual did not impact the Company's aggregate participation in the pooling agreement. In connection with this change in the pooling agreement, the Company's liabilities increased $6,393,063 and invested assets increased $5,674,458. The Company reimbursed Employers Mutual $794,074 for commissions incurred to generate this business and Employers Mutual paid the Company $75,469 in interest income as the actual cash transfer did not occur until March 24, 1997.
On December 19, 1997, the Company announced that its nonstandard risk automobile insurance subsidiary will become a participant in the pooling agreement effective January 1, 1998. The nonstandard risk automobile insurance subsidiary will receive a 1.5 percent participation in the pool, which will increase the Company's aggregate participation in the pool to 23.5 percent. Revenues of the Company are expected to increase by approximately $2,000,000 due to the increase in the size of the pool.
PRINCIPAL PRODUCTS
The Company's property and casualty insurance subsidiaries and the other parties to the pooling agreement underwrite both commercial and personal lines of insurance. The following table sets forth the aggregate direct written premiums of all parties to the pooling agreement for the three years ended December 31, 1997. The pooling agreement is continuous, but may be amended or terminated at the end of any calendar year as to any one or more parties.
Percent Percent Percent of of of Line of Business 1997 total 1996 total 1995 total - ---------------- -------- ------ -------- ------ -------- ------ (Dollars in thousands) Commercial Lines: Automobile ............ $118,624 18.4% $107,786 18.9% $ 99,165 17.8% Property .............. 110,637 17.2 92,963 16.3 89,130 16.0 Workers' compensation 115,117 17.9 118,479 20.7 131,415 23.5 Liability ............. 110,647 17.2 105,889 18.5 105,571 18.9 Other ................. 15,139 2.4 13,998 2.5 13,975 2.5 -------- ------ -------- ------ -------- ------ Total commercial lines 470,164 73.1 439,115 76.9 439,256 78.7
Personal Lines: Automobile ............ 109,214 17.0 83,428 14.6 79,121 14.2 Property .............. 61,569 9.6 46,459 8.2 39,840 7.1 Liability ............. 2,026 0.3 1,946 0.3 - - Other ................. 50 - 53 - 54 - -------- ----- -------- ----- -------- ----- Total personal lines 172,859 26.9 131,886 23.1 119,015 21.3 -------- ----- -------- ----- -------- ----- Total ............ $643,023 100.0% $571,001 100.0% $558,271 100.0% ======== ===== ======== ===== ======== ===== MARKETING
Marketing of insurance by the parties to the pooling agreement is conducted through 18 offices located throughout the United States and approximately 2,700 independent agencies. These offices maintain close contact with the local market conditions and are able to react rapidly to change. Each office employs underwriting, claims, marketing and risk improvement representatives, as well as field auditors and branch administrative technicians. The offices are supported by Employers Mutual technicians and specialists. Systems are in place to monitor the underwriting results of each office and to maintain guidelines and policies consistent with the underwriting and marketing environment in each region.
The following table sets forth the geographic distribution of the aggregate direct written premiums of all parties to the pooling agreement for the three years ended December 31, 1997.
1997 1996 1995 ---- ---- ---- Alabama ............................ 3.6% 3.7% 3.1% Arizona ............................ 3.8 4.2 3.9 Illinois ........................... 5.4 6.5 6.5 Iowa ............................... 18.7 20.3 21.7 Kansas ............................. 8.2 9.0 8.8 Michigan ........................... 4.1 3.2 3.6 Minnesota .......................... 3.9 4.0 4.7 Nebraska ........................... 7.0 7.7 8.1 North Carolina ..................... 3.4 4.1 4.0 Ohio ............................... 3.2 - - Texas .............................. 4.4 3.9 2.9 Wisconsin .......................... 4.5 4.8 5.5 Other * ............................ 29.8 28.6 27.2 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== ===== * Includes all other jurisdictions, none of which accounted for more than 3%.
COMPETITION
The property and casualty insurance business is highly competitive. The Company's property and casualty insurance subsidiaries and the other pool members compete in the United States insurance market with numerous insurers, many of which have greater financial resources. Competition in the types of insurance in which the property and casualty insurance subsidiaries are engaged is based on many factors, including the perceived overall financial strength of the insurer, premiums charged, contract terms and conditions, services offered, speed of claim payments, reputation and experience. In this competitive environment, insureds have tended to favor large, financially strong insurers and the Company faces the risk that insureds may become more selective and may seek larger and/or more highly rated insurers.
BEST'S RATING
A.M. Best rates insurance companies based on their relative financial strength and ability to meet their contractual obligations. The A (Excellent) rating assigned to the Company's property and casualty insurance subsidiaries and the other pool members is based on the pool members' 1996 operating results and financial condition as of December 31, 1996. Best's reevaluates its ratings from time to time (normally on an annual basis) and there can be no assurance that the Company's property and casualty insurance subsidiaries and the other pool members will maintain their current rating in the future. Management believes that a Best's rating of "A (Excellent)" or better is important to the Company's business since many insureds require that companies with which they insure be so rated. Best's publications indicate that these ratings are assigned to companies which Best's believes have achieved excellent overall performance and have a strong ability to meet their obligations over a long period of time. Best's ratings are based upon factors of concern to policyholders and insurance agents and are not necessarily directed toward the protection of investors.
REINSURANCE CEDED
The parties to the pooling agreement cede insurance in the ordinary course of business for the purpose of limiting their maximum loss exposure through diversification of their risks. The pool participants also purchase catastrophe reinsurance to cover multiple losses arising from a single event.
All major reinsurance treaties, with the exception of the pooling agreement and a boiler treaty, are on an "excess of loss" basis whereby the reinsurer agrees to reimburse the primary insurer for covered losses in excess of a predetermined amount, up to a stated limit. The boiler treaty provides for 100 percent reinsurance of the pool's direct boiler coverage written. Facultative reinsurance from approved domestic markets, which provides reinsurance on an individual risk basis and requires specific agreement of the reinsurer as to the limits of coverage provided, is purchased when coverage by an insured is required in excess of treaty capacity or where a high-risk type policy could expose the treaty reinsurance programs.
Each type of reinsurance coverage is purchased in layers, and each layer may have a separate retention level. Retention levels are adjusted according to reinsurance market conditions and the surplus position of Employers Mutual. The intercompany pooling arrangement aids efficient buying of reinsurance since it allows for higher retention levels and correspondingly decreased dependence on the reinsurance marketplace.
A summary of the reinsurance treaties benefitting the parties to the pooling agreement is presented below. Retention amounts reflect the accumulated retentions of all layers within a coverage.
Type of Coverage Retention Limits ---------------- ----------- -------------------------- Property per risk ........... $ 2,000,000 100 percent of $18,000,000 Property catastrophe ........ $11,550,000 95 percent of $51,000,000 Casualty .................... $ 2,000,000 100 percent of $38,000,000 Workers' Compensation excess $ - $20,000,000 excess of $40,000,000 Umbrella .................... $ 1,400,000* 100 percent of $ 8,600,000 Fidelity and Surety ......... $ 750,000 100 percent of $ 3,250,000 Surety excess .............. $ 400,000 100 percent of $ 6,850,000 Boiler ...................... $ 0 100 percent of $50,000,000
* An annual aggregate deductible of $3,600,000 must be reached before the reinsurers may be petitioned.
Although reinsurance does not discharge the original insurer from its primary liability to its policyholders, it is the practice of insurers for accounting purposes to treat reinsured risks as risks of the reinsurer since the primary insurer would only reassume liability in those situations where the reinsurer is unable to meet the obligations it assumed under the reinsurance agreements. The ability to collect reinsurance is subject to the solvency of the reinsurers.
The major participants in the pool members' reinsurance programs are presented below. The percentages represent the reinsurers' share of the total reinsurance protection under all coverages. Each type of coverage is purchased in layers, and an individual reinsurer may participate in more than one coverage and at various layers within these coverages. The property per risk, property catastrophe and casualty reinsurance programs are handled by a reinsurance intermediary (broker). The reinsurance of those programs is syndicated to approximately 50 domestic and foreign reinsurers.
Percent of total 1997 Property per risk, property catastrophe reinsurance Best's and casualty coverages: protection rating - --------------------------------------- ----------- ------ Underwriters at Lloyd's of London .................... 20.2% A Hannover Ruckversicherung AG ......................... 5.8 (1) Zurich Reinsurance Centre ............................ 5.2 A Hartford Fire Insurance Company ...................... 4.8 A+ AXA Reassurance Company .............................. 4.2 A+ St. Paul Fire and Marine ............................. 3.6 A+ NAC Reinsurance Corporation .......................... 3.6 A+ PMA Reinsurance Corporation .......................... 3.2 A+
Umbrella coverage: - ------------------ General Reinsurance Corporation ...................... 100.0 A++
Fidelity and surety coverages: - ------------------------------ SCOR Reinsurance Company ............................. 42.0 A+ Kemper Reinsurance Company ........................... 20.0 A Signet Star Reinsurance Company ...................... 20.0 A Winterthur Reinsurance Corporation of America ........ 18.0 A
Boiler coverage: - ---------------- Hartford Steam Boiler Inspection and Insurance Company 100.0 A+
(1) Not rated.
Premiums ceded by all pool members and by the Company's property and casualty insurance subsidiaries for the year ended December 31, 1997 are presented below. Each type of reinsurance coverage is purchased in layers, and an individual reinsurer may participate in more than one coverage and at various layers within the coverages. Since each layer of each coverage is priced separately, with the lower layers being more expensive than the upper layers, a reinsurer's overall participation in a reinsurance program does not necessarily correspond to the amount of premiums it receives.
Premiums ceded by ------------------------ Property and casualty All pool insurance Reinsurer members subsidiaries - --------- ----------- ------------ General Reinsurance Corporation...................... $ 3,568,951 $ 785,169 Hartford Steam Boiler Inspection & Insurance Company 1,605,214 353,147 Hartford Fire Insurance Company ..................... 882,352 194,118 SCOR Reinsurance Company ............................ 875,023 192,505 PMA Reinsurance Corporation ......................... 851,558 187,343 Kemper Reinsurance Company .......................... 631,642 138,961 AXA Reassurance Company ............................. 592,297 130,305 American Re-Insurance Company ....................... 494,472 108,784 Spreckley Villers Burnhope & Company ................ 451,669 99,367 PXRE Reinsurance Company ............................ 435,160 95,735 Other Reinsurers .................................... 7,117,222 1,565,789 ----------- ------------ Total ............................................. $17,505,560 $ 3,851,223 =========== ============ The parties to the pooling agreement also cede reinsurance on both a voluntary and a mandatory basis to state and national organizations in connection with various workers' compensation and assigned risk programs and to private organizations established to handle large risks. Premiums ceded by all pool members and by the Company's property and casualty insurance subsidiaries for the year ended December 31, 1997 are presented below.
Premiums ceded by ------------------------ Property and casualty All pool insurance Reinsurer members subsidiaries - --------- ----------- ------------ Wisconsin Compensation Rating Bureau ................ $ 4,214,988 $ 927,297 National Workers' Compensation Reinsurance Pool ..... 3,504,567 771,005 North Carolina Reinsurance Facility ................. 1,213,266 266,919 Mutual Reinsurance Bureau ........................... 493,270 108,519 Improved Risk Mutual ................................ 151,884 33,414 Minnesota Workers' Compensation Reinsurance Assn.(1) (1,720,064) (378,414) Other Reinsurers .................................... 162,766 35,809 ----------- ----------- $ 8,020,677 $ 1,764,549 =========== =========== (1) The Minnesota Workers' Compensation Reinsurance Association periodically reviews its financial position and distributes excess funds to its members. Distributions totaling $1,712,074 were received by the parties to the pooling agreement in 1997 and were recorded as a return of ceded premium.
In formulating reinsurance programs, Employers Mutual is selective in its choice of reinsurers. Employers Mutual selects reinsurers on the basis of financial stability and long-term relationships, as well as price of the coverage. Reinsurers are generally required to have a Best's rating of "A-" or higher and policyholders' surplus of $50,000,000 ($100,000,000 for casualty reinsurance).
For information concerning amounts due the Company from reinsurers for losses and settlement expenses and prepaid reinsurance premiums and the effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, see "Property and Casualty Insurance Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary - Reinsurance Ceded."
RELATIONSHIP BETWEEN NET PREMIUMS WRITTEN AND SURPLUS
The amount of insurance a property and casualty insurance company writes under industry standards is a multiple of its surplus calculated in accordance with statutory accounting practices. Generally, a ratio of 3 to 1 or less is considered satisfactory. The ratios of the pool members for the past three years are as follows: Year ended December 31, ------------------------------ 1997 1996 1995 ---- ---- ---- Employers Mutual .................. .80 .95 1.07 EMCASCO ........................... 1.62 1.67 1.91 Illinois EMCASCO .................. 1.68 1.73 1.95 Dakota Fire ....................... 1.59 1.61 1.80 American Liberty .................. 1.08 1.05 1.15 Union ............................. .72 .68 .73 Hamilton Mutual ................... 1.17 - -
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The property and casualty insurance subsidiaries' reserve information is included in the property and casualty loss reserve development for 1997. See "Property and Casualty Insurance Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary - Outstanding Losses and Settlement Expenses."
REINSURANCE - ----------- The reinsurance subsidiary is a property and casualty treaty reinsurer with a concentration in property lines. The reinsurance subsidiary assumes a quota share portion of Employers Mutual's assumed reinsurance business, exclusive of certain reinsurance contracts. The reinsurance subsidiary assumes its quota share portion of all premiums and related losses and settlement expenses of this business, subject to a maximum loss per event. The reinsurance subsidiary does not reinsure any of Employers Mutual's direct insurance business, nor any "involuntary" facility or pool business that Employers Mutual assumes pursuant to state law. In addition, the reinsurance subsidiary is not liable for credit risk in connection with the insolvency of any reinsurers of Employers Mutual.
Effective January 1, 1997, the reinsurance subsidiary's quota share participation was increased from 95 percent to 100 percent and the maximum loss per event assumed by the reinsurance subsidiary was increased from $1,000,000 to $1,500,000. In connection with the change in the quota share percentage, the Company's liabilities increased $3,173,647 and invested assets increased $3,066,705. The Company reimbursed Employers Mutual $106,942 for commissions incurred to generate this business.
PRINCIPAL PRODUCTS
The reinsurance subsidiary assumes both pro rata and excess of loss reinsurance from Employers Mutual. The following table sets forth the assumed written premiums of the reinsurance subsidiary for the three years ended December 31, 1997. The amounts for 1997 do not reflect an accounting adjustment of $355 related to the change in quota share percentage. This adjustment was made to offset the income statement effect that resulted from the increase in the reinsurance subsidiary's reserve for unearned premiums on January 1, 1997 in connection with this transaction.
Percent Percent Percent of of of Line of Business 1997 total 1996 total 1995 total - ---------------- ------- ----- ------- ----- ------- ----- (Dollars in thousands) Pro rata reinsurance: Property ............... $15,499 45.1% $16,459 45.7% $19,417 53.3% Crop ................... 3,101 9.0 3,704 10.3 3,085 8.5 Casualty ............... 2,911 8.5 2,796 7.7 2,879 7.9 Marine/aviation ........ 1,866 5.4 2,762 7.7 4,168 11.4 Other .................. 2,116 6.2 228 0.6 398 1.1 ------- ----- ------- ----- ------- ----- Total pro rata reinsurance 25,493 74.2 25,949 72.0 29,947 82.2
Excess per risk reinsurance: Property ............... 2,110 6.2 2,258 6.3 1,760 4.8 Casualty ............... 1,595 4.6 1,182 3.3 840 2.3 Marine/aviation ........ - - 9 - 21 0.1 Other .................. 647 1.9 628 1.7 341 0.9 ------- ----- ------- ----- ------- ----- Total excess per risk reinsurance ...... 4,352 12.7 4,077 11.3 2,962 8.1 ------- ----- ------- ----- ------- ----- Excess catastrophe/ aggregate reinsurance: Property ............... 4,293 12.5 5,671 15.7 3,178 8.7 Crop ................... 252 0.8 242 0.7 292 0.8 Marine/aviation ........ 8 - 29 0.1 52 0.2 Other .................. (62) (0.2) 84 0.2 2 - ------- ----- ------- ----- ------- ----- Total excess catastrophe/ aggregate reinsurance 4,491 13.1 6,026 16.7 3,524 9.7 ------- ----- ------- ----- ------- ----- Total excess reinsurance 8,843 25.8 10,103 28.0 6,486 17.8 ------- ----- ------- ----- ------- ----- $34,336 100.0% $36,052 100.0% $36,433 100.0% ======= ===== ======= ===== ======= =====
MARKETING
During 1997 and 1996, more emphasis was placed upon writing excess of loss business and on increasing participation on existing contracts that had favorable terms. This movement towards excess of loss business was prompted by the continued deterioration of pro rata rates and greater control over the pricing of excess of loss business. The reinsurance subsidiary strives to be flexible and aggressive with opportunities that arise, while remaining committed to profitability over premium volume.
COMPETITION
The reinsurance marketplace is very competitive. Employers Mutual competes in the global reinsurance market with numerous reinsurers, many of which have greater financial resources. In this competitive environment, reinsurance brokers have tended to favor large, financially strong reinsurers who are able to provide "mega" line capacity for all lines of business. Employers Mutual is addressing this by accepting a larger share of coverage on desirable programs and strengthening its relationships with reinsurance intermediaries.
REINSURANCE CEDED
Prior to 1997, the reinsurance subsidiary had an aggregate excess of loss reinsurance treaty with Employers Mutual which provided protection from a large accumulation of retentions resulting from multiple catastrophes in any one calendar year. The coverage provided was $2,000,000, excess of $3,000,000 aggregate losses retained, excess of $200,000 per event. Maximum recovery was limited to $2,000,000 per accident year. The reinsurance subsidiary did not have any recoveries under this treaty during 1996 or 1995. Premiums paid to Employers Mutual amounted to $500,000 and $499,950 in 1996 and 1995, respectively. This reinsurance treaty was canceled effective January 1, 1997.
For information concerning amounts due the Company from reinsurers for losses and settlement expenses and prepaid reinsurance premiums and the effect of reinsurance on premiums written and earned and losses and settlement expenses incurred, see "Property and Casualty Insurance Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary - Reinsurance Ceded."
BEST'S RATING
The most recent Best's Property Casualty Key Rating Guide gives the reinsurance subsidiary a B++ (Very Good) policyholders' rating. Best's ratings are based upon factors of concern to policyholders and insurance agents and are not necessarily directed toward the protection of investors.
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The reinsurance subsidiary's reserve information is included in the property and casualty loss reserve development for 1997. See "Property and Casualty Insurance Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary - Outstanding Losses and Settlement Expenses."
NONSTANDARD RISK AUTOMOBILE INSURANCE - ------------------------------------- The Company's nonstandard risk automobile insurance subsidiary specializes in insuring private passenger automobile risks that are found to be unacceptable in the standard automobile insurance market.
MARKETING
The nonstandard risk automobile insurance subsidiary is licensed in a six state area that includes Iowa, Kansas, Missouri, Nebraska, North Dakota and South Dakota. Personal lines automobile policies are solicited through the American Agency System using approximately 1,100 independent agencies and are written for two, three or six month terms. Limits of liability are offered equal to the various state financial responsibility laws. Physical damage coverages are written at normal insurance deductibles. The nonstandard risk automobile insurance subsidiary experienced an increase in premium volume in 1997 for the first time since 1993. This increase is attributed to a change in marketing philosophy that includes a closer alignment with EMC Insurance Companies and improved marketing and business relationships with its agency force.
The following table sets forth the geographic distribution of the direct written premiums of the nonstandard risk automobile insurance subsidiary for the three years ended December 31, 1997.
1997 1996 1995 ----- ----- ----- Iowa ............................... 36.0% 37.2% 39.9% Kansas ............................. 14.1 13.9 11.0 Missouri ........................... 2.1 - - Nebraska ........................... 19.7 22.4 25.0 North Dakota........................ 6.5 4.6 3.8 South Dakota ....................... 21.6 21.9 20.3 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== =====
COMPETITION
The nonstandard risk marketplace is very competitive. Policies are written for relatively short periods of time and insureds continually search for the best rates available. The larger standard insurance companies have developed rate tiers geared toward retaining nonstandard risk customers, rather than passing them into the nonstandard market. In addition, more companies have been willing to write nonstandard coverage. This additional availability in both the standard market and the nonstandard market has resulted in increased competition within the nonstandard market. The nonstandard risk automobile insurance subsidiary has responded with renewed marketing efforts toward new and existing agents and a competitive rate structure. The nonstandard risk automobile insurance subsidiary continues to fine tune territories and classifications in order to maximize profit potential.
REINSURANCE CEDED
The nonstandard risk automobile insurance subsidiary had a reinsurance treaty on an excess of loss basis with Employers Mutual, which provided reinsurance for 100 percent of each loss in excess of $100,000, up to $1,000,000. There were no recoveries under this treaty during 1997, 1996 or 1995. Premiums paid to Employers Mutual amounted to $36,076 in 1997, $37,942 in 1996 and $45,232 in 1995.
This reinsurance treaty was canceled on December 31, 1997 in preparation for the subsidiary's admittance into the pooling agreement on January 1, 1998 and all reinsurance recoverable amounts due from Employers Mutual were commuted. In connection with this commutation, the Company's assets increased $58,921 and liabilities increased $62,487. The Company reported incurred settlement expenses of $3,566 from this transaction.
For information concerning amounts due the Company from reinsurers for losses and settlement expenses and prepaid reinsurance premiums and the effect of reinsurance on premiums written and earned and losses and settlement expenses incurred, see "Property and Casualty Insurance Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary - Reinsurance Ceded."
BEST'S RATING
The most recent Best's Property Casualty Key Rating Guide gives the nonstandard risk automobile insurance subsidiary an A- (Excellent) policyholders' rating. Best's ratings are based upon factors of concern to policyholders and insurance agents and are not necessarily directed toward the protection of investors.
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The nonstandard risk automobile insurance subsidiary's reserve information is included in the property and casualty loss reserve development for 1996. See "Property and Casualty Insurance Subsidiaries, Reinsurance Subsidiary and Nonstandard Risk Automobile Insurance Subsidiary - Outstanding Losses and Settlement Expenses."
PROPERTY AND CASUALTY INSURANCE SUBSIDIARIES, REINSURANCE SUBSIDIARY AND - ------------------------------------------------------------------------ NONSTANDARD RISK AUTOMOBILE INSURANCE SUBSIDIARY. - -------------------------------------------------
SERVICES PROVIDED BY EMPLOYERS MUTUAL
Employers Mutual provides various services to all of its subsidiaries. Such services include data processing, claims, financial, actuarial, auditing, marketing and underwriting. Costs of these services are allocated to the subsidiaries outside the pooling agreement based upon a number of criteria, including usage and number of transactions. Costs not allocated to these subsidiaries are charged to the pool and each pool participant shares in the total cost in proportion to its participation percentage.
STATUTORY COMBINED RATIOS
The following table sets forth the Company's insurance subsidiaries' statutory combined ratios and the property and casualty insurance industry averages for the five years ended December 31, 1997. The combined ratios below are the sum of the following: the loss ratio, calculated by dividing losses and settlement expenses incurred by net premiums earned, and the expense ratio, calculated by dividing underwriting expenses incurred by net premiums written and policyholder dividends by net premiums earned.
Generally, if the combined ratio is below 100 percent, a company has an underwriting profit; if it is above 100 percent, a company has an underwriting loss.
Year ended December 31, -------------------------------------- 1997 1996 1995 1994 1993 ------ ----- ----- ----- ----- Property and casualty insurance Loss ratio ................... 72.8% 69.1% 65.0% 67.2% 72.6% Expense ratio ................ 33.2 34.9 33.1 31.1 30.9 ----- ----- ----- ----- ----- Combined ratio ............. 106.0% 104.0% 98.1% 98.3% 103.5% ===== ===== ===== ===== ===== Reinsurance Loss ratio ................... 68.4% 68.7% 66.3% 82.0% 77.7% Expense ratio ................ 34.1 31.5 32.3 30.4 33.1 ----- ----- ----- ----- ----- Combined ratio ............. 102.5% 100.2% 98.6% 112.4% 110.8% ===== ===== ===== ===== ===== Nonstandard risk automobile insurance Loss ratio ................... 92.8% 88.7% 94.5% 71.5% 94.3% Expense ratio ................ 27.4 26.8 26.1 24.4 23.7 ----- ----- ----- ----- ----- Combined ratio ............. 120.2% 115.5% 120.6% 95.9% 118.0% ===== ===== ===== ===== ===== Total insurance operations Loss ratio ................... 73.1% 70.0% 67.1% 70.9% 75.6% Expense ratio ................ 33.1 33.6 32.5 30.4 30.7 ----- ----- ----- ----- ----- Combined ratio ............. 106.2% 103.6% 99.6% 101.3% 106.3% ===== ===== ===== ===== ===== Property and casualty insurance industry averages (1) Loss ratio ................... 73.7% 78.3% 78.9% 81.1% 79.5% Expense ratio ................ 28.1 27.5 26.1 27.3 27.4 ----- ----- ----- ----- ----- Combined ratio ............. 101.8% 105.8% 105.0% 108.4% 106.9% ===== ===== ===== ===== =====
(1) As reported by A.M. Best Company. The ratio for 1997 is an estimate; the actual combined ratio is not currently available.
REINSURANCE CEDED
The following table presents amounts due to the Company from reinsurers for losses and settlement expenses and prepaid reinsurance premiums as of December 31, 1997: Amount Percent Best's recoverable of total rating ----------- -------- ------ Wisconsin Compensation Rating Bureau .. $ 5,721,614 38.7% (1) American Re-Insurance Company ......... 1,784,051 12.1 A+ National Workers' Compensation Reinsurance Pool .................... 1,678,319 11.3 (1) General Reinsurance Company............ 772,022 5.2 A++ Kemper Reinsurance Company ............ 448,801 3.0 A Minnesota Workers' Compensation Reinsurance Association ............ 388,411 2.6 (2) Mutual Reinsurance Bureau (MRB)........ 361,890 2.5 (3) North Carolina Reinsurance Facility.... 350,290 2.4 (4) Hartford Fire Insurance Company ....... 306,245 2.1 A+ PMA Reinsurance Corporation ........... 287,359 1.9 A+ Other Reinsurers ...................... 2,697,754 18.2 ----------- ----- Total ........................... $14,796,756(5) 100.0% =========== =====
(1) Amounts recoverable reflect the property and casualty insurance subsidiaries' pool participation percentage of amounts ceded to these organizations by Employers Mutual in connection with its role as "service carrier." Under these arrangements, Employers Mutual writes business for these organizations on a direct basis and then cedes 100 percent of the business to these organizations. Credit risk associated with these amounts is minimal as all companies participating in these organizations are responsible for the liabilities of such organizations on a pro rata basis.
(2) The amount recoverable reflects the property and casualty insurance subsidiaries' pool participation percentage of amounts ceded to this association by the pool members under a reinsurance contract that provides protection for workers' compensation losses in excess of $1,080,000 per occurrence. Credit risk associated with this amount is minimal as all companies writing direct workers' compensation business in the state of Minnesota are responsible for the liabilities of this association on a pro rata basis.
(3) The amount recoverable reflects the property and casualty insurance subsidiaries' pool participation percentage of amounts ceded to this underwriting organization by Employers Mutual. MRB is composed of Employers Mutual and five other nonaffiliated mutual insurance companies. Each of the six members cede primarily property insurance to MRB and assume equal proportionate shares of this business. Each member benefits from the increased capacity provided by MRB. MRB is backed by the financial strength of the six member companies. All of the members of MRB were assigned an A (Excellent) or better rating by the most recent Best's Property Casualty Key Ratings Guide.
(4) The amount recoverable reflects the property and casualty insurance subsidiaries' pool participation percentage of amounts ceded to this organization by the pool members in conjunction with the state run assigned risk program ("state fund"). Under this program, all insurers writing direct business in the state of North Carolina are required by law to write insurance for risks that are not insurable in the normal marketplace. Business written under this program is ceded 100 percent to the state fund and each respective company assumes from the state fund its share of such business in proportion to its direct writings in the state. Credit risk associated with this amount is minimal as all companies writing direct business in the state are responsible for the liabilities of this organization on a pro rata basis.
(5) The total amount at December 31, 1997 represented $571,541 in paid losses and settlement expenses recoverable, $13,030,150 in unpaid losses and settlement expenses recoverable and $1,195,065 in unearned premiums recoverable.
The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred for the three years ended December 31, 1997 is presented below. Year ended December 31, ---------------------------------------- 1997 1996 1995 Premiums written: ------------ ------------ ------------ Direct ........................ $175,350,677 $156,161,030 $152,579,014 Assumed from nonaffiliates .... 1,219,564 1,951,071 3,282,699 Assumed from affiliates ....... 178,624,357 161,671,754 159,253,136 Ceded to nonaffiliates ........ (5,615,772) (7,930,381) (8,365,648) Ceded to affiliates ........... (164,978,055) (147,467,508) (143,259,942) ------------ ------------ ------------ Net premiums written ........ $184,600,771 $164,385,966 $163,489,259 ============ ============ ============ Premiums earned: Direct ........................ $169,304,584 $154,859,778 $151,450,871 Assumed from nonaffiliates .... 1,403,778 2,350,321 3,548,647 Assumed from affiliates ....... 171,514,339 162,326,189 157,897,322 Ceded to nonaffiliates ........ (5,937,679) (8,219,290) (8,680,800) Ceded to affiliates ........... (159,066,776) (146,126,332) (141,949,790) ------------ ------------ ------------ Net premiums earned ......... $177,218,246 $165,190,666 $162,266,250 ============ ============ ============
Losses and settlement expenses incurred: Direct ........................ $126,922,536 $117,368,771 $ 98,651,399 Assumed from nonaffiliates .... 926,403 948,218 608,796 Assumed from affiliates ....... 122,827,934 113,083,014 100,098,436 Ceded to nonaffiliates ........ (3,364,737) (6,817,132) (2,036,962) Ceded to affiliates ........... (117,458,832) (109,215,656) (89,169,391) ------------ ------------ ------------ Net losses and settlement expenses incurred ......... $129,853,304 $115,367,215 $108,152,278 ============ ============ ============
OUTSTANDING LOSSES AND SETTLEMENT EXPENSES
The Company maintains reserves for losses and settlement expenses with respect to both reported and unreported claims. The amount of reserves for reported claims is primarily based upon a case-by-case evaluation of the specific type of claim, knowledge of the circumstances surrounding each claim and the policy provisions relating to the type of loss. Reserves on assumed business are the amounts reported by the ceding company.
The amount of reserves for unreported claims is determined on the basis of statistical information for each line of insurance with respect to the probable number and nature of claims arising from occurrences which have not yet been reported. Established reserves are closely monitored and are frequently recomputed using a variety of formulas and statistical techniques for analyzing actual claim costs, frequency data and other economic and social factors.
The Company does not discount reserves. Inflation is implicitly provided for in the reserving function through analysis of cost trends, reviews of historical reserving results and projections of future economic conditions. Large ($25,000 and over) incurred and reported gross reserves are reviewed regularly for adequacy. In addition, long-term and lifetime medical claims are periodically reviewed for cost trends and the applicable reserves are appropriately revised.
Loss reserves are estimates at a given time of what the insurer expects to pay on incurred losses, based on facts and circumstances then known. During the loss settlement period, which may be many years, additional facts regarding individual claims become known, and accordingly, it often becomes necessary to refine and adjust the estimates of liability on a claim.
Settlement expense reserves are intended to cover the ultimate cost of investigating claims and defending lawsuits arising from claims. These reserves are established each year based on previous years experience to project the ultimate cost of settlement expenses. To the extent that adjustments are required to be made in the amount of loss reserves each year, settlement expense reserves are correspondingly revised.
Despite the inherent uncertainties of estimating insurance company loss and settlement expense reserves, management believes that the Company's reserves are being calculated in accordance with sound actuarial practices and, based upon current information, that the Company's reserves for losses and settlement expenses at December 31, 1997 are adequate.
The following table sets forth a reconciliation of beginning and ending reserves for losses and settlement expenses of the property and casualty insurance subsidiaries, the reinsurance subsidiary and the nonstandard risk automobile insurance subsidiary. Amounts presented are on a net basis, with a reconciliation of beginning and ending reserves to the gross amounts presented in the consolidated financial statements.
Year ended December 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Gross reserves for losses and settlement expenses, beginning of year .......................... $202,502,986 $205,422,109 $203,181,615
Ceded reserves for losses and settlement expenses, beginning of year .......................... 13,796,769 12,226,680 14,146,874 ------------ ------------ ------------ Net reserves for losses and settlement expenses, beginning of year, before adjustments ...... 188,706,217 193,195,429 189,034,741 ------------ ------------ ------------ Adjustment to beginning reserves due to the change in the property and casualty insurance subsidiaries' pooling agreement... 3,795,453 - -
Adjustment to beginning reserves due to the change in the reinsurance subsidiary's quota share percentage ................. 2,726,913 - - ------------ ------------ ------------ Net reserves for losses and settlement expenses, beginning of year, after adjustments ....... 195,228,583 193,195,429 189,034,741
Incurred losses and settlement expenses: - ---------------------- Provision for insured events of the current year .......... 137,300,762 131,375,234 123,876,601
Decrease in provision for insured events of prior years (7,447,458) (16,008,019) (15,724,323) ------------ ------------ ------------ Total incurred losses and settlement expenses ...... 129,853,304 115,367,215 108,152,278 ------------ ------------ ------------ Payments: - --------- Losses and settlement expenses attributable to insured events of the current year ............ 57,649,830 59,948,110 48,237,715
Losses and settlement expenses attributable to insured events of prior years ................. 62,684,265 59,908,317 55,753,875 ------------ ------------ ------------ Total payments (1) ......... 120,334,095 119,856,427 103,991,590 ------------ ------------ ------------ Net reserves for losses and settlement expenses, end of year 204,747,792 188,706,217 193,195,429
Ceded reserves for losses and settlement expenses, end of year 13,030,150 13,796,769 12,226,680 ------------ ------------ ------------ Gross reserves for losses and settlement expenses, end of year $217,777,942 $202,502,986 $205,422,109 ============ ============ ============
(1) Loss and settlement expense payments reported in the Company's financial statements for the year 1997 totaled $113,811,729. This amount reflects an adjustment of ($3,795,453) related to the change in the property and casualty insurance subsidiaries' pooling agreement and ($2,726,913) related to the change in the reinsurance subsidiary's quota share percentage. These adjustments were made to offset the income statement effect that resulted from the $6,522,366 increase in reserves for losses and settlement expenses on January 1, 1997 related to these transactions.
The following table shows the calendar year development of loss and settlement expense reserves of the property and casualty insurance subsidiaries, the reinsurance subsidiary and the nonstandard risk automobile insurance subsidiary. Amounts presented are on a net basis with, beginning in 1992, (i) a reconciliation of the net loss and settlement expense reserves, to the gross amounts presented in the consolidated financial statements and (ii) disclosure of the gross re-estimated loss and settlement expense reserves and the related re-estimated reinsurance receivables.
Reflected in this table is (1) the increase in the reinsurance subsidiary's quota share assumption of Employers Mutual's assumed reinsurance business from 75 percent to 95 percent in 1988, (2) the increase in the property and casualty insurance subsidiaries' collective participation in the pool from 17 percent to 22 percent in 1992, (3) the change in the pooling agreement whereby effective January 1, 1993 the voluntary reinsurance business written by Employers Mutual is no longer subject to cession to the pool members, (4) the commutation of two reinsurance contracts under the reinsurance subsidiary's quota share agreement in 1993, (5) the gross-up of reserve amounts associated with the National Workers' Compensation Reinsurance Pool at December 31, 1993, (6) the reinsurance subsidiary's commutation of all outstanding reinsurance balances ceded to Employers Mutual under catastrophe and aggregate excess of loss reinsurance treaties related to accident years 1991 through 1993 in 1994, (7) the increase in the reinsurance subsidiary's quota share assumption of Employers Mutual's assumed reinsurance business from 95 percent to 100 percent in 1997 and (8) the addition of a new participant to the pooling agreement effective January 1, 1997.
In evaluating the table, it should be noted that each cumulative redundancy (deficiency) amount includes the effects of all changes in reserves for prior periods. Conditions and trends that have affected development of the liability in the past, such as a time lag in the reporting of assumed reinsurance business, the high rate of inflation associated with medical services and supplies and the reform measures implemented by several states to control administrative costs for workers' compensation insurance, may not necessarily occur in the future. Accordingly, it may not be appropriate to project future development of reserves based on this table.
During the last three years the Company has experienced favorable development in the provision for insured events of prior years. The majority of the favorable development has come from the property and casualty insurance subsidiaries, which have benefitted from state reform measures in workers' compensation insurance and various loss control functions implemented by Employers Mutual. Favorable development has also been experienced in the reinsurance subsidiary and the nonstandard risk auto insurance subsidiary, but to a lesser degree.
The property and casualty insurance subsidiaries have historically experienced favorable development in their reserves and current reserving practices have not been relaxed; however, the level of redundancies experienced in 1996 and 1995 is not expected to continue.
Asbestos and Environmental Claims
The Company has exposure to asbestos and environmental related claims associated with the insurance business wriiten by the parties to the pooling agreement and the reinsurance business assumed from Employers Mutual by the reinsurance subsidiary.
Estimating loss and settlement expense reserves for asbestos and environmental claims is very difficult due to the many uncertainties surrounding these types of claims. Such uncertainties include the fact that the assignment of responsibility varies widely by state and claims often emerge long after the policy has expired, which makes assignment of damages to the appropriate party and to the time period covered by a particular policy difficult. In establishing reserves for these types of claims, management monitors the relevant facts concerning each claim, the current status of the legal environment, the social and political conditions and the claim history and trends within the Company and the industry.
Based upon current facts, management believes the reserves established for asbestos and environmental related claims at December 31, 1997 are adequate. Although future changes in the legal and political environment may result in adjustments to these reserves, management believes any adjustments will not have a material impact on the financial condition or results of operations of the Company.
Asbestos Claims
The Company's asbestos claim activity primarily relates to bodily injury claims where a former insured has been named as one of multiple defendants covering exposure over many years.
The following table presents selected data on asbestos related losses and settlement expenses incurred and reserves outstanding for the Company:
Year ended December 31, ------------------------------- 1997 1996 1995 ---------- ---------- --------- Total losses incurred ....................... $ 394,524 $ 100,090 $ 336,899 Total settlement expenses incurred .......... 25,246 5,847 (31,667) Total losses and settlement expenses ---------- ---------- --------- incurred ................................ $ 419,770 $ 105,937 $ 305,232 ========== ========== ========= Loss reserves ............................... $ 942,822 $ 662,910 $ 581,549 Settlement expense reserves ................. 32,909 28,089 32,117 ---------- ---------- --------- Total loss and settlement expense reserves $ 975,731 $ 690,999 $ 613,666 ========== ========== ========= Number of outstanding claims ................ 92 57 71 ========== ========== =========
The incurred and reserve amounts for 1997, 1996 and 1995 reflect 63, 40 and 25 claims, respectively, by individuals asserting asbestos exposure to products allegedly manufactured by a former insured.
Environmental Claims
The Company's environmental claims activity is predominately related to pollution from hazardous waste of former insureds. The parties to the pooling agreement have not written primary coverage for the major oil or chemical companies. The greatest exposure arises out of claims from small regional operations or local businesses having pollution on their own property due to hazardous material use or leaking underground storage tanks. These insureds include small manufacturing operations, tool makers, automobile dealerships, contractors and gasoline stations. The remaining exposure arises out of commercial general liability and umbrella policies issued during the 1970's and early 1980's which allegedly cover contamination emanating from closed landfills. Claims related to misdeliveries or minor spills of petroleum products covered under properly endorsed commercial auto policies are not considered environmental claims since coverage is normally not disputed, damages are readily determinable and settlement normally occurs over a short period of time.
The following table presents selected data on environmental losses and settlement expenses incurred and reserves outstanding for the Company.
Year ended December 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- Total losses incurred .................... $ 374,822 $ 85,454 $ 892,250 Total settlement expenses incurred ....... 25,615 (27,761) 185,412 ---------- ---------- ---------- Total losses and settlement expenses incurred ............................. $ 400,437 $ 57,693 $1,077,662 ========== ========== ========== Loss reserves ............................ $1,184,569 $1,103,466 $1,109,072 Settlement expense reserves .............. 252,435 308,145 345,897 ---------- ---------- ---------- Total loss and settlement expense reserves ............................. $1,437,004 $1,411,611 $1,454,969 ========== ========== ========== Number of outstanding claims ............. 46 63 58 ========== ========== ==========
Included in the above table at December 31, 1997, 1996 and 1995 are two closed landfills which involve three and six policyholders, respectively. Coverage is disputed in all 46 of the claims which were outstanding at December 31, 1997. The coverage disputes relate to claims involving contamination at or from (i) insured property and (ii) closed landfills based on the generation of waste disposed of at these sites.
EXCESS AND SURPLUS LINES INSURANCE AGENCY - ----------------------------------------- The excess and surplus lines insurance agency provides access to the excess and surplus lines markets through independent agents and managing general agents and represents several major excess and surplus lines companies, including Lloyd's of London. Lines of insurance handled range from relatively straightforward property and casualty insurance to the more exotic hole-in-one, kidnap and ransom, ocean marine, aircraft and professional liability lines. Income is derived from fees and commissions and not from underwriting the risk.
INVESTMENTS - ----------- Securities classified as held-to-maturity are purchased with the intent and ability to be held to maturity and are carried at amortized cost. Unrealized holding gains and losses on securities held-to-maturity are not reflected in the financial statements. All other securities have been classified as securities available-for-sale and are carried at fair value, with unrealized holding gains and losses reported as a separate component of stockholders' equity, net of tax.
At December 31, 1997, approximately 90 percent of the Company's bonds were invested in government or government agency issued securities. A variety of maturities are maintained in the Company's portfolio to assure adequate liquidity. The maturity structure of bond investments is also established by the relative attractiveness of yields on short, intermediate and long-term bonds. The Company does not invest in any high-yield debt investments (commonly referred to as junk bonds).
The Company's equity investment holdings include common stock mutual funds and preferred stocks.
Investments of the Company's insurance subsidiaries are subject to the insurance laws of the state of their incorporation. These laws prescribe the kind, quality and concentration of investments which may be made by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks and real estate mortgages. The Company believes it is in compliance with these laws.
In 1996 the National Association of Insurance Commissioners (NAIC) adopted model legislation governing insurance company investments. This model investment law has been adopted by one state (Illinois) and is not expected to have a material impact on the operations of the Company's insurance subsidiaries.
The investments of EMC Insurance Group Inc. and its subsidiaries are supervised by investment committees of each entity's respective board of directors. The bond and preferred stock portfolios are managed by an internal staff which is composed of employees of Employers Mutual. The mutual fund equity portfolios are managed by outside fund managers.
Investment expenses are based on actual expenses incurred plus an allocation of other investment expenses incurred by Employers Mutual, which is based on a weighted average of total invested assets and number of investment transactions.
The following table shows the composition of the Company's investment portfolio (at amortized cost), by type of security, as of December 31, 1997 and 1996. In the Company's consolidated financial statements, securities held-to-maturity are carried at amortized cost; securities available-for-sale are carried at fair value.
Year ended December 31, -------------------------------------------- 1997 1996 --------------------- --------------------- Amortized Amortized cost Percent cost Percent ------------ ------- ------------ ------- Securities held-to-maturity: Fixed maturity securities: U.S. treasury securities and obligations of U.S. government corporations and agencies ............. $103,826,052 26.0% $113,288,092 30.3% Obligations of states and political subdivisions ... 41,989,442 10.5 30,975,611 8.3 Mortgage-backed securities 40,013,569 10.0 44,122,018 11.8 ------------ ------- ------------ ------ Total securities held- to-maturity ............ 185,829,063 46.5 188,385,721 50.4 ------------ ------- ------------ ------ Securities available-for-sale: Fixed maturity securities: Obligations of states and political subdivisions ... 130,945,594 32.8 114,538,500 30.6 Foreign governments ........ - - 2,573,101 .7 Public utilities ........... 8,760,899 2.2 8,970,242 2.4 Corporate securities ....... 32,861,713 8.2 20,023,965 5.3 Redeemable preferred stocks 149,000 - 688,350 .2 ------------ ------- ------------ ------ Total fixed maturity securities ............. 172,717,206 43.2 146,794,158 39.2
Equity securities: Common stock mutual funds .. 20,988,146 5.3 15,963,269 4.3 Non-redeemable preferred stocks ................... 5,273,011 1.3 5,273,012 1.4 ------------ ------ ------------ ------ Total equity securities .. 26,261,157 6.6 21,236,281 5.7 ------------ ------ ------------ ------ Total securities available-for-sale ..... 198,978,363 49.8 168,030,439 44.9 ------------ ------ ------------ ------
Short-term investments ......... 14,926,994 3.7 17,553,606 4.7 ------------ ------ ------------ ------ Total investments ........ $399,734,420 100.0% $373,969,766 100.0% ============ ====== ============ ======
Fixed maturity securities held by the Company generally have an investment quality rating of "A" or better by independent rating agencies. The following table shows the composition of the Company's fixed maturity securities, by rating, as of December 31, 1997.
Securities Securities held-to-maturity available-for-sale (at amortized cost) (at fair value) --------------------- --------------------- Amount Percent Amount Percent Rating(1) ------------ ------- ------------ ------- Aaa ..................... $185,829,063 100.0% $ 46,374,134 25.8% Aa ...................... - - 56,387,608 31.4 A ....................... - - 76,037,537 42.3 Baa ..................... - - 352,209 .2 Ba ...................... - - 501,250 .3 ------------ ------ ------------ ------ Total fixed maturities $185,829,063 100.0% $179,652,738 100.0% ============ ====== ============ ======
(1) Ratings for preferred stocks and fixed maturity securities with initial maturities greater than one year are assigned by Moody's Investor's Services, Inc. Moody's rating process seeks to evaluate the quality of a security by examining the factors that affect returns to investors. Moody's ratings are based on quantitative and qualitative factors, as well as the economic, social and political environment in which the issuing entity exists. The quantitative factors include debt coverage, sales and income growth, cash flows and liquidity ratios. Qualitative factors include management quality, access to capital markets and the quality of earnings and balance sheet items. Ratings for securities with initial maturities less than one year are based on an evaluation of the underlying assets or the credit rating of the issuer's parent company.
The amortized cost and estimated fair value of fixed maturity securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Estimated Amortized fair cost value ------------ ------------ Securities held-to-maturity: Due in one year or less ................... $ 13,989,831 $ 14,142,820 Due after one year through five years ..... 50,088,102 51,876,854 Due after five years through ten years .... 66,752,623 70,871,137 Due after ten years ....................... 14,984,941 15,354,268 Mortgage-backed securities ................ 40,013,566 41,589,934 ------------ ------------ Totals .................................. $185,829,063 $193,835,013 ============ ============ Securities available-for-sale: Due in one year or less ................... $ 13,803,121 $ 13,816,747 Due after one year through five years ..... 56,240,665 57,182,974 Due after five years through ten years .... 42,789,912 45,216,266 Due after ten years ....................... 59,883,508 63,436,751 ------------ ------------ Totals .................................. $172,717,206 $179,652,738 ============ ============
The mortgage-backed securities shown in the above table include $22,523,833 of securities issued by government corporations and agencies and $17,489,733 of collateralized mortgage obligations (CMOs). CMOs are securities backed by mortgages on real estate which come due at various times. The Company has attempted to minimize the prepayment risks associated with mortgage-backed securities by not investing in "principal only" and "interest only" CMOs. The CMOs that the Company has invested in are designed to reduce the risk of prepayment by providing predictable principal payment schedules within a designated range of prepayments. Investment yields may vary from those anticipated due to changes in prepayment patterns of the underlying collateral.
Investment results of the Company for the periods indicated are shown in the following table:
Year ended December 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Average invested assets (1) ........ $386,852,093 $367,276,871 $349,036,057 Investment income (2) .............. 23,759,988 23,907,599 23,173,794 Average yield ...................... 6.14% 6.51% 6.64% Realized investment gains .......... $ 4,100,006 $ 1,890,923 $ 1,043,730
(1) Average of the aggregate invested amounts (amortized cost) at the beginning and end of the year.
(2) Investment income is net of investment expenses and does not include realized gains or provision for income taxes.
EMPLOYEES - --------- EMC Insurance Group Inc. has no employees of its own, although approximately 15 employees of Employers Mutual perform administrative duties on a part-time basis. Otherwise, the Company's business activities are conducted by employees of Employers Mutual, the nonstandard risk automobile insurance subsidiary and one of the property and casualty insurance subsidiaries, which have 1,782, 13 and 67 employees, respectively. The property and casualty insurance subsidiaries share the costs associated with the pooling agreement in accordance with their pool participation percentages. See "Property and Casualty Insurance - Pooling Agreement."
REGULATION - ---------- The Company's insurance subsidiaries are subject to extensive regulation and supervision by their home states, as well as those in which they do business. The purpose of such regulation and supervision is primarily to provide safeguards for policyholders rather than to protect the interests of stockholders. The insurance laws of the various states establish regulatory agencies with broad administrative powers, including the power to grant or revoke operating licenses and to regulate trade practices, investments, premium rates, deposits of securities, the form and content of financial statements and insurance policies, accounting practices and the maintenance of specified reserves and capital for the protection of policyholders.
Premium rate regulation varies greatly among jurisdictions and lines of insurance. In most states in which the Company's subsidiaries write insurance, premium rates for their lines of insurance are subject to either prior approval or limited review upon implementation. States require rates for property and casualty insurance that are adequate, not excessive, and not unfairly discriminatory.
The Company's insurance subsidiaries are required to file detailed annual reports with the appropriate regulatory agency in each state where they do business based on applicable statutory regulations, which differ from generally accepted accounting principles. Their businesses and accounts are subject to examination by such agencies at any time. Since EMC Insurance Group Inc. and Employers Mutual are domiciled in Iowa, the State of Iowa exercises principal regulatory supervision, and Iowa law requires periodic examination. The Company's insurance subsidiaries are subject to examination by state insurance departments on a periodic basis as applicable law requires.
State laws governing insurance holding companies also impose standards on certain transactions with related companies, which include, among other requirements, that all transactions be fair and reasonable and that an insurer's surplus as regards policyholders be reasonable and adequate in relation to its liabilities. Under Iowa law, dividends or distributions made by registered insurers are restricted in amount and may be subject to approval from the Iowa Commissioner of Insurance. "Extraordinary" dividends or distributions are subject to prior approval and are defined as dividends or distributions which exceed the greater of 10 percent of statutory surplus as regards policyholders as of the preceding December 31, or net income of the preceding calendar year on a statutory basis. Both Illinois and North Dakota impose restrictions which are similar to those of Iowa on the payment of dividends and distributions. At December 31, 1997, $12,722,219 was available for distribution in 1998 to EMC Insurance Group Inc. without prior approval. See note 6 of Notes to Consolidated Financial Statements under Item 8 of this Form 10-K.
The NAIC utilizes a risk-based capital model to help state regulators assess the capital adequacy of insurance companies and identify property/casualty insurers that are in (or are perceived as approaching) financial difficulty by establishing minimum capital needs based on the risks applicable to the operations of the individual insurer. The risk-based capital requirements for property and casualty insurance companies measure three major areas of risk: asset risk, credit risk and underwriting risk. Companies having less statutory surplus than required by the risk-based capital requirements are subject to varying degrees of regulatory scrutiny and intervention, depending on the severity of the inadequacy. At December 31, 1997, each of the Company's insurance subsidiaries has a ratio of total adjusted capital to risk-based capital well in excess of the minimum level required.
ITEM 2.
ITEM 2. PROPERTIES. - ------- ----------- Lease costs of the Company's two office facilities in West Des Moines, Iowa total approximately $71,000 and $31,000 annually. These leases expire on February 28, 1998 and November 30, 1998, at which time the operations will move into facilities owned by Employers Mutual.
Lease costs of the Company's office facilities in Oak Brook, Illinois, and Bismarck, North Dakota, which total approximately $288,000 and $128,000 annually, are included as expenses under the pooling agreement. Expenses of office facilities owned and leased by Employers Mutual are borne by the parties to the pooling agreement, less the rent received from the space used and paid for by non-insurance subsidiaries and outside tenants. See "Property and Casualty Insurance - Pooling Agreement" under Item 1 of this Form 10-K.
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------- ----------------------------------------------------
None.
PART II -------
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED - ------- ------------------------------------------------- STOCKHOLDER MATTERS. --------------------
The "Market for Common Stock and Related Security Holder Matters" section from the Company's Annual Report to Stockholders for the year ended December 31, 1997, which is included as Exhibit 13(d) to this Form 10-K, is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA. - ------- ------------------------
The "Selected Consolidated Financial Data" section from the Company's Annual Report to Stockholders for the year ended December 31, 1997, which is included as Exhibit 13(a) to this Form 10-K, is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------- --------------------------------------------------------------- RESULTS OF OPERATIONS. ----------------------
The "Management's Discussion and Analysis of Financial Condition and Results of Operations" section from the Company's Annual Report to Stockholders for the year ended December 31, 1997, which is included as Exhibit 13(b) to this Form 10-K, is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ------- --------------------------------------------
The consolidated financial statements from the Company's Annual Report to Stockholders for the year ended December 31, 1997, which is included as Exhibit 13(c) to this Form 10-K, are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON - ------- ------------------------------------------------ ACCOUNTING AND FINANCIAL DISCLOSURE. ------------------------------------ None.
PART III -------- ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - -------- ---------------------------------------------------
See the information under the caption "Election of Directors" in the Company's Proxy Statement in connection with its Annual Meeting to be held on May 21, 1998, which information is incorporated herein by reference.
The following sets forth information regarding all executive officers of the Company.
NAME AGE POSITION
Bruce G. Kelley 44 President and Chief Executive Officer of the Company and of Employers Mutual since 1992 and Treasurer of both organizations since 1996. He was elected President of the Company and Employers Mutual in 1991. Mr. Kelley was Executive Vice President of the Company and Employers Mutual from 1989 to 1991. He has been employed by Employers Mutual since 1985.
Fred A. Schiek 63 Executive Vice President and Chief Operating Officer of the Company and of Employers Mutual since 1992. He was Vice President of Employers Mutual from 1983 until 1992. He has been employed by Employers Mutual since 1959.
John D. Isenhart 60 Senior Vice President of the Company since 1997 and of Employers Mutual since 1992. He has been employed by Employers Mutual since 1963.
Margaret A. Ball 59 Senior Vice President of the Company since February 1998 and of Employers Mutual since 1997. She has been employed by Employers Mutual since 1971.
Ronald W. Jean 49 Senior Vice President of the Company and Employers Mutual since 1997. He has been employed by Employers Mutual since 1979.
Raymond W. Davis 52 Vice President of the Company and Employers Mutual since 1985. He has been employed by Employers Mutual since 1979.
NAME AGE POSITION
Donald D. Klemme 52 Vice President and Secretary of the Company since 1996. Vice President of Employers Mutual since 1987. He has been employed by Employers Mutual since 1972.
David O. Narigon 45 Vice President of the Company and of Employers Mutual since 1989. He has been employed by Employers Mutual since 1983.
Mark E. Reese 40 Vice President of the Company and Employers Mutual since 1996 and Chief Financial Officer of the Company and Employers Mutual since 1997. He has been employed by Employers Mutual since 1984.
Section 16(a) Beneficial Ownership Reporting Compliance
On February 28, 1995, Mr. Ronnie D. Hallenbeck was designated as a Section 16 reporting person, however, the Company failed to inform him of this status until February 23, 1998. Due to this lack of notice, Mr. Hallenbeck was not aware of his obligation to file appropriate reports required by Section 16(a) of the Securities Exchange Act of 1934. Since being advised of this designation, Mr. Hallenbeck has filed two late reports identifying his status as a reporting person and nine events which were not reported on a timely basis. All of Mr. Hallenbeck's activities during this period of non- reporting involved purchases of Company stock resulting in his current holdings of 610 shares and periodic awards of options under Employers Mutual's Incentive Stock Option Plan.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION. - -------- -----------------------
See the information under the caption "Compensation of Management" in the Company's Proxy Statement in connection with its Annual Meeting to be held on May 21, 1998, which information is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - -------- ---------------------------------------------------------------
See the information under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the Company's Proxy Statement in connection with its Annual Meeting to be held on May 21, 1998, which information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------- -----------------------------------------------
See the information under the caption "Certain Relationships and Related Transactions" in the Company's Proxy Statement in connection with its Annual Meeting to be held on May 21, 1998, which information is incorporated herein by reference.
PART IV -------
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. - -------- -----------------------------------------------------------------
(a) List of Financial Statements and Schedules. Page ---- 1. Financial Statements
Independent Auditors' Report ................................ 8* Consolidated Balance Sheets, December 31, 1997 and 1996 ..... 21-22* Consolidated Statements of Income for the Years ended December 31, 1997, 1996 and 1995 ......................... 23* Consolidated Statements of Stockholders' Equity for the Years ended December 31, 1997, 1996 and 1995 ............. 24* Consolidated Statements of Cash Flows for the Years ended December 31, 1997, 1996 and 1995 ......................... 25-26* Notes to Consolidated Financial Statements .................. 27-48*
Form 10-K 2. Schedules Page ------- Independent Auditors' Report on Schedules ................... 33 Schedule I - Summary of Investments ....................... 34 Schedule II - Condensed Financial Information of Registrant 35 Schedule III - Supplementary Insurance Information .......... 38 Schedule IV - Reinsurance .................................. 39 Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations ..... 40
All other schedules have been omitted for the reason that the items required by such schedules are not present in the consolidated financial statements, are covered in notes to consolidated financial statements or are not significant in amount.
* Refers to the respective page of EMC Insurance Group Inc.'s 1997 Annual Report to Stockholders. The Consolidated Financial Statements and Independent Auditors' Report, which are included as Exhibit 13(c), are incorporated by reference. With the exception of the portions of such Annual Report specifically incorporated by reference in this Item and Items 5, 6, 7 and 8, such Annual Report shall not be deemed filed as part of this Form 10-K or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934.
3. Management contracts and compensatory plan arrangements
Exhibit 10(b). Management Incentive Compensation Plan. Exhibit 10(d). Employers Mutual Casualty Company 1982 Incentive Stock Option Plan, as amended. Exhibit 10(f). Deferred Bonus Compensation Plans. Exhibit 10(g). EMC Reinsurance Company Executive Bonus Program. Exhibit 10(i). Employers Mutual Casualty Company Excess Retirement Benefit Agreement. Exhibit 10(k). Employers Mutual Casualty Company 1993 Employee Stock Purchase Plan. Exhibit 10(l). 1993 Employers Mutual Casualty Company Incentive Stock Option Plan. Exhibit 10(m). Employers Mutual Casualty Company Non-Employee Director Stock Option Plan. Exhibit 10(n). Employers Mutual Casualty Company Supplemental Executive Retirement Plan.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
3. Articles of incorporation and bylaws:
(a) Articles of Incorporation of the Company, as amended. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1988.)
(b) Bylaws of the Company, as amended. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1992.)
10. Material contracts.
(a) Quota Share Reinsurance Contract between Employers Mutual Casualty Company and EMC Reinsurance Company, as amended.
(b) Management Incentive Compensation Plan. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1983.)
(c) EMC Insurance Companies reinsurance pooling agreements between Employers Mutual Casualty Company and certain of its affiliated companies, as amended.
(d) Employers Mutual Casualty Company 1982 Incentive Stock Option Plan, as amended. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1986.)
(e) Excess of loss reinsurance contract between Employers Mutual Casualty Company and Farm and City Insurance Company. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1985.)
(f) Deferred Bonus Compensation Plans. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1986.)
(g) EMC Reinsurance Company Executive Bonus Program. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1989.)
(h) EMC Insurance Group Inc. Amended and Restated Dividend Reinvestment and Common Stock Purchase Plan. (Incorporated by reference to Registration No. 33-34499.)
(i) Employers Mutual Casualty Company Excess Retirement Benefit Agreement. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1989.)
(j) Aggregate Catastrophe Excess of Loss Retrocession Agreement between EMC Reinsurance Company and Employers Mutual Casualty Company. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1995.)
(k) Employers Mutual Casualty Company 1993 Employee Stock Purchase Plan. (Incorporated by reference to Registration No. 33-49335.)
(l) 1993 Employers Mutual Casualty Company Incentive Stock Option Plan. (Incorporated by reference to Registration Nos. 33-49337 and 333-45279.)
(m) Employers Mutual Casualty Company Non-Employee Director Stock Option Plan. (Incorporated by reference to Registration No. 33-49339.)
(n) Employers Mutual Casualty Company Supplemental Executive Retirement Plan. (Incorporated by reference to the Company's Form 10-K for the calendar year ended December 31, 1995.)
13. Annual Report to Security Holders.
(a) Selected Financial Data from the Company's 1997 Annual Report to Stockholders.
(b) Management's Discussion and Analysis of Financial Condition and Results of Operations from the Company's 1997 Annual Report to Stockholders.
(c) Consolidated Financial Statements from the Company's 1997 Annual Report to Stockholders.
(d) Market for Common Stock and Related Security Holder Matters from the Company's 1997 Annual Report to Stockholders.
21. Subsidiaries of the Registrant.
23. Consent of KPMG Peat Marwick LLP with respect to Forms S-8 (Registration Nos. 2-93738, 33-49335, 33-49337, 33-49339 and 333-45279) and Form S-3 (Registration No. 33-34499).
24. Power of Attorney.
(d) Financial statements required by Regulation S-X which are excluded from the Annual Report to Stockholders by Rule 14a-3(b)(1).
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 20, 1998.
EMC INSURANCE GROUP INC.
/s/ Bruce G. Kelley ------------------------ Bruce G. Kelley President, Treasurer and Chief Executive Officer
/s/ Mark E. Reese ------------------------ Mark E. Reese Vice President - Chief Financial Officer (Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 20, 1998.
/s/ Mark E. Reese ------------------------ George C. Carpenter III* Director
/s/ Mark E. Reese ------------------------ E. H. Creese* Director
/s/ Mark E. Reese ------------------------ David J. Fisher* Director
/s/ Bruce G. Kelley ------------------------ Bruce G. Kelley Director
/s/ Mark E. Reese ------------------------ George W. Kochheiser* Chairman of the Board
/s/ Mark E. Reese ------------------------ Raymond A. Michel* Director
/s/ Mark E. Reese ------------------------ Fredrick A. Schiek* Director
* by power of attorney
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
The Board of Directors and Stockholders EMC Insurance Group Inc.:
Under date of February 26, 1998, we reported on the consolidated balance sheets of EMC Insurance Group Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, as contained in Part II, Item 8 of the Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related supplementary financial statement schedules listed in Part IV, Item 14(a)2. These supplementary financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these supplementary financial statement schedules based on our audits.
In our opinion, such supplementary financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Des Moines, Iowa February 26, 1998
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule I - Summary of Investments - Other Than Investments in Related Parties
December 31, 1997
Amount at which shown Fair in the Type of investment Cost value balance sheet ------------------ ------------ ------------ ------------- Securities held-to-maturity: Fixed maturities: United States Government and government agencies and authorities .............. $103,826,052 $109,820,127 $103,826,052 States, municipalities and political subdivisions ....... 41,989,442 42,424,949 41,989,442 Mortgage - backed securities ... 40,013,569 41,589,937 40,013,569 ------------ ------------ ------------ Total fixed maturity securities 185,829,063 193,835,013 185,829,063 ------------ ------------ ------------ Securities available-for-sale: Fixed maturities: States, municipalities and political subdivisions ....... 130,945,594 137,218,479 137,218,479 Public utilities ............... 8,760,899 8,832,942 8,832,942 Corporate securities ........... 32,861,713 33,446,729 33,446,729 Redeemable preferred stocks .... 149,000 154,588 154,588 ------------ ------------ ------------ Total fixed maturity securities 172,717,206 179,652,738 179,652,738
Equity securities: Common stock mutual funds ...... 20,988,146 25,075,965 25,075,965 Non-redeemable preferred stocks 5,273,011 5,896,767 5,896,767 ------------ ------------ ------------ Total equity securities ...... 26,261,157 30,972,732 30,972,732
Short-term investments ............. 14,926,994 14,926,994 14,926,994 ------------ ------------ ------------
Total investments ...... $399,734,420 $419,387,477 $411,381,527 ============ ============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31, -------------------------- 1997 1996 ASSETS ------------ ------------ - ------ Investment in common stock of subsidiaries (equity method) .................. $154,839,418 $141,767,346 Fixed maturity securities held-to-maturity, at amortized cost ............................. 6,494,491 4,488,040 Short-term investments .......................... 909,698 2,323,602 Cash ............................................ 3,884 180,917 Accrued investment income ....................... 108,945 74,259 Accounts receivable ............................. 166,488 30,234 Indebtedness of related party ................... - 14,375 ------------ ------------ Total assets ............................... $162,522,924 $148,878,773 ============ ============
LIABILITIES - ----------- Accounts payable ................................ $ 127,846 $ 112,169 Income taxes payable ............................ 37,000 37,000 Indebtedness to related party ................... 8,490 - Deferred tax liability .......................... 3,132 576 ------------ ------------ Total liabilities .......................... 176,468 149,745 ------------ ------------
STOCKHOLDERS' EQUITY - -------------------- Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding, 11,351,119 shares in 1997 and 11,084,461 shares in 1996 ......... 11,351,119 11,084,461 Additional paid-in capital ...................... 65,916,681 62,762,613 Retained earnings ............................... 85,078,656 74,881,954 ------------ ------------ Total stockholders' equity ................. 162,346,456 148,729,028 ------------ ------------ Total liabilities and stockholders' equity $162,522,924 $148,878,773 ============ ============
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Condensed Statements of Income
Years ended December 31, ------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Equity in undistributed earnings ...... $ 9,377,037 $11,914,842 $13,123,772 Dividends received from consolidated subsidiaries ........... 3,750,032 3,060,026 4,200,019 Investment income ..................... 445,816 406,952 357,408 ----------- ----------- ----------- 13,572,885 15,381,820 17,681,199
Operating expenses .................... 313,762 313,087 307,713 ----------- ----------- ----------- Income from operations before income taxes ..................... 13,259,123 15,068,733 17,373,486
Income taxes .......................... 42,556 34,569 24,658 ----------- ----------- ----------- Net income............... $13,216,567 $15,034,164 $17,348,828 =========== =========== ===========
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Condensed Statements of Cash Flows
Years ended December 31, ------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Net cash provided by operating activities ................ $ 3,702,567 $ 3,178,773 $ 4,269,852 ----------- ----------- ----------- Cash flows from investing activities: Purchases of fixed maturity securities held-to-maturity ....... (3,999,340) (2,485,938) (2,002,500) Disposals of fixed maturity securities held-to-maturity ....... 2,000,000 2,000,000 - Disposals of fixed maturity securities available-for-sale ..... - - 1,000,000 Net sales (purchases) of short-term investments ...................... 1,413,904 364,526 (515,869) ----------- ----------- ----------- Net cash used in investing activities ........... (585,436) (121,412) (1,518,369) ----------- ----------- ----------- Cash flows from financing activities: Issuance of common stock ........... 1,019,919 1,251,119 850,317 Dividends paid to stockholders ..... (4,314,083) (4,017,222) (3,653,299) (Purchases) sales of treasury stock, net ....................... - (129,877) 9,646 ----------- ----------- ----------- Net cash used in financing activities ..................... (3,294,164) (2,895,980) (2,793,336) ------------ ----------- -----------
Net (decrease) increase in cash ....... (177,033) 161,381 (41,853)
Cash at beginning of year ............. 180,917 19,536 61,389 ----------- ----------- -----------
Cash at end of year ................... $ 3,884 $ 180,917 $ 19,536 =========== =========== ===========
Income taxes paid ..................... $ 40,000 $ 20,993 $ 31,342
Difference between Electronic and Circulated 10-k - -------------------------------------------------- The index to exhibits in the electronic format indicates the exhibits are included in the direct transmission. The circulated document contains the page numbers of the exhibits.
EMC Insurance Group Inc. and Subsidiaries
Index to Exhibits
Exhibit number Item - ------- ---- 10(a) Quota Share Reinsurance Contract Included in between Employers Mutual Casualty direct transmission Company and EMC Reinsurance Company.
10(c) EMC Insurance Companies reinsurance Included in pooling agreements between Employers direct transmission Mutual Casualty Company and certain of its affiliated companies.
13(a) Selected Financial Data. Included in direct transmission
13(b) Management's Discussion and Analysis Included in of Financial Condition and Results direct transmission of Operations.
13(c) Financial Statements and Supplementary Included in Data. direct transmission
13(d) Market for Registrant's Common Equity Included in and Related Stockholder Matters. direct transmission
21 Subsidiaries of the Registrant. Included in direct transmissin
23 Consent of KPMG Peat Marwick LLP with Included in respect to Forms S-8 and Form S-3. direct transmission
24 Power of Attorney. Included in direct transmission