EMC Insurance Group Inc. Annual Report 2010

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FY2010 Annual Report · EMC Insurance Group Inc.

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STRENGTH. STABILITY. SERVICE.

2010 ANNUAL REPORT

In 1911, a group of Iowa businessmen formed a mutual insurance association

in anticipation of the passage of a workers’ compensation law in Iowa. Local

and cost-effective coverage of members was the underlying concept behind

the venture. Strength, stability and service became an early slogan.

As a mutual insurance organization, the focused approach to success was

long-term in nature, and the means of obtaining that success was by forging

lasting relationships with local insurance agencies. The company was

Employers Mutual Casualty Association, which was renamed Employers

Mutual Casualty Company, our parent organization, known today by the

trade name EMC Insurance Companies (EMC).

The company persevered through the Great Depression and two world wars and

exponentially increased in size. Numerous new products were developed, and branch

ofﬁces were established throughout the United States so that local presence could be an

integral part of the organization’s business model. This focused approach to success was

long-term in nature, and the number one priority was maintaining lasting relationships

with agents and policyholders through superior service and products.

Fast forward to 1974. In an effort to maximize its ﬁnancial strength, EMC began to

restructure itself and created a public entity for the purpose of accessing the capital

markets. In 1982, EMC Insurance Group Inc. (EMCI) conducted its initial public offering

and was listed on the NASDAQ stock market using the ticker symbol EMCI.

Today, EMC Insurance Group is a nearly one-third participant in a near-national property

and casualty insurance organization collectively known as EMC Insurance Companies. The

total organization has more than $3 billion in assets and is licensed in all 50 states and the

District of Columbia. The organization actively writes business in 42 states and partners with

more than 2,100 independent insurance agencies, its sole means of product distribution.

In 2011, our parent company, EMC, is celebrating its centennial anniversary. The organization

has seen and made many changes, but not everything has changed. EMC continues to

exhibit strength, stability and superior service. As a part of this entity, we share its

goals of effectively meeting our current ﬁnancial responsibilities and appropriately reserving

for future obligations. In the process, we strive to offer policyholders reasonable and fair

premiums while providing value to our stockholders through the payment of dividends,

stock appreciation and increases in book value.

For more information on our parent company’s history, refer to page 10.

COUNT ON EMC©

EMPLOYERS MUTUAL CASUALTY COMPANY

EMC PROPERTY &
CASUALTY COMPANY

EMC
RISK SERVICES, LLC

EMC INSURANCE
GROUP INC.

HAMILTON MUTUAL
INSURANCE COMPANY

UNION INSURANCE
COMPANY OF
PROVIDENCE

DAKOTA FIRE
INSURANCE COMPANY

EMCASCO INSURANCE
COMPANY

ILLINOIS EMCASCO
INSURANCE COMPANY

EMC REINSURANCE
COMPANY

EMC UNDERWRITERS, LLC

Afﬁliated with
EMC National Life Company

CORPORATE PROFILE

EMC Insurance Group Inc. (EMCI) is a publicly held insurance holding company

with operations in property and casualty insurance and reinsurance. EMCI was formed

in 1974 and became publicly held in 1982. The Company’s common stock trades on

the NASDAQ OMX Global Select Market tier of the NASDAQ OMX Stock Market under

the symbol EMCI. EMCI is a controlled company in that its parent owns greater than

50 percent of its outstanding stock. As of December 31, 2010, EMCI’s parent company,

Employers Mutual Casualty Company, owned 61 percent of EMCI’s outstanding stock

and public stockholders owned 39 percent. EMCI has no employees of its own.

Employers Mutual Casualty Company (EMCC)

is a mutual insurance company founded in 1911 and is

headquartered in Des Moines, Iowa. EMCC employs more

than 2,100 people countrywide and markets its products

exclusively through a network of independent insurance

agents. EMCI and EMCC, together with each entity’s

subsidiary and afﬁliated companies, operate collectively

under the trade name EMC Insurance Companies.

EMC Insurance Companies (EMC) focuses on the

sale of property and casualty insurance primarily to small

and midsize businesses. Products and services are offered

through independent insurance agents who are supported

by a network of 16 local branch ofﬁces. EMC is licensed

in all 50 states and the District of Columbia and actively

markets insurance products in 42 states; however, the

majority of its business is generated in the Midwest.

EMC OFFICES

EMC Branch Ofﬁces

EMC Service Ofﬁces

2010 ANNUAL REPORT

Letter to StockhoLderS . . . . . . . . . . . . . . 5

Year In revIew . . . . . . . . . . . . . . . . . . . . . . 8

eMc InSurance coMpanIeS 100 YearS . . 10

Board of dIrectorS and offIcerS . . . . . 12

10-k fInancIaL InforMatIon . . . . . . . . . . 13

StockhoLder InforMatIon . . . . . . . . . . .115

COUNT ON eMc©
Kevin J. Hovick, Bruce G. Kelley and Ronald W. Jean

2010 ANNUAL REPORT

TO OUR STOCKHOLDERS

2010 was a year of catch phrases in the insurance industry: “increased frequency of

A Most Trustworthy Company

low-severity perils,” “weaker results in the core commercial lines segment,” “sluggish

“Being transparent and honest in

economic recovery,” “continued price deterioration.” The reality is that the property

ﬁnancial reporting enhances our

and casualty insurance industry saw “more of the same.”

consistency, solid ﬁnancial results,

stockholder value and longevity,”

As stewards of the Company, our primary focus is to effectively manage through

stated EMC President and CEO Bruce

whatever conditions may exist. Our goal remains to meet our current ﬁnancial

Kelley when EMC Insurance Group

responsibilities and appropriately reserve for future obligations. In the process,

Inc. was included on the Forbes.com

we strive to offer policyholders reasonable and fair premiums while providing value

“100 Most Trustworthy Companies”

to stockholders. We are pleased to report that we met these goals in 2010,

list in 2010.

The list identiﬁed the most

transparent and trustworthy

companies that trade on American

exchanges. “This validates our core

values of honesty and integrity, which

have helped build our strong ﬁnancial

foundation and our company’s

success,” Kelley concluded.

despite a “sluggish economic recovery,” “increased frequency of low-severity

perils,” and “continued price deterioration.”

Operating income for 2010 was $2.21 per share, net income was $2.40 per share

and our GAAP combined ratio was 102.3 percent. Investment income increased,

and we experienced growth in total revenues, total assets, statutory surplus and

stockholders’ equity. We added to stockholder value in 2010 by increasing our

book value per share by 9.2 percent and our quarterly dividend by 5.6 percent

per share. Our dividend payout ratio for the year was 30.4 percent and our stock

price appreciation was 5.2 percent, closing at $22.64 per share at year-end.

We repurchased 244,400 shares of our common stock through our repurchase

program. And, in April 2010, Forbes.com named the Company as one of its 100 Most

Trustworthy Companies—we were one of only 39 small-cap companies and one of

only six insurance companies to make the list.

We attribute our success to a well-deﬁned strategic plan and our ability to manage

through adverse market conditions. Our decentralized branch ofﬁce structure affords

us the ability to monitor and quickly respond to changes in local market conditions

throughout the United States. It’s this local presence that continues to separate us

from our competitors.

2010 ANNUAL REPORT

William A. “Bill” Murray, executive

vice president and chief operating ofﬁcer,

retired from the Company in January 2011,

following a 25-year career with

EMC Insurance Companies.

Challenges remained, however. Premium rates in the

commercial lines of business continued to be competitive

in 2010 as over-capitalized companies vied for additional

market share. Nationally, rates continued to decline

3.0 percent to 5.0 percent for commercial lines, depending

on the line of business. The decline in our commercial lines

rates was not as signiﬁcant as the national averages, about

William A. Murray
CIC, AU

Murray joined EMC in 1985 as the

1.8 percent overall.

personal lines underwriting manager in

the Home Ofﬁce. He transferred to the

We recognize that both geographic and product

Charlotte Branch in 1991 to assume the position of assistant

diversiﬁcation are key to our success given the cyclical

manager and eventually become the branch manager in 1992.

nature of our business. This was quite evident in 2010.

In 2001, Murray returned to the Home Ofﬁce in Des Moines to

become executive vice president and COO, the position he held

until his retirement.

Murray was elected to the Employers Mutual Casualty Company

Board of Directors in 2008 and will continue in that capacity.

As rates in personal lines continued to see moderate

improvement, we focused on those geographic areas where

better proﬁt potential and economies of scale existed and

redistributed our resources accordingly. The net result was

an increase in new personal lines business of 33.9 percent.

Retention for personal lines declined slightly, but remained

above industry averages at approximately 85 percent.

EMC Choice® Products

13 select business coverages,

including auto services, boat dealers,

artisan contractors, equipment

dealers, ﬁnancial institutions, metal

manufacturers, motels, hospitals, dry

cleaners, wholesalers, printers, auto

repair and religious institutions.

Target Markets

Schools, municipalities, auto/

recreational vehicle dealers,

telecommunications, local towing,

milk haulers, petroleum dealers,

water/sanitation distribution and

manufactured housing programs

offered by speciﬁc branch ofﬁces.

Safety Groups

Target market programs that offer

dividends to the policyholders.

As mentioned before, premium rates for commercial lines remained competitive,

so new growth was more challenging; however, again in 2010, we concentrated

our efforts on our specialized program business, which now comprises

approximately 43.4 percent of our commercial lines written premiums.

We experienced growth of 7.7 percent in our EMC Choice® products and

3.7 percent in our Target Markets. Though Safety Groups remained relatively

ﬂat, we continued to experience overall underwriting proﬁtability in these

programs. Retention in our commercial lines was 86 percent.

Due to the mild 2009 and 2010 hurricane seasons, and a recovery in the

reinsurance industry’s capital level, premium rates in the reinsurance segment

remained generally ﬂat in 2010; however, premiums earned for the reinsurance

segment were up 9.9 percent due to the addition of new facility business, as

well as new property business in central and eastern Europe. The reinsurance

segment continues to create positive premium momentum through the addition

of strategically targeted broker business. Those efforts resulted in net written

premium growth of 10.7 percent in the reinsurance segment for the year.

Though the United States experienced another very mild hurricane season,

we experienced above-normal storm losses for the third consecutive year.

We have witnessed similar periods of increased storm losses in the past,

COUNT ON EMC©

and based on our research, we do not believe this represents a permanent trend.

Rather, it appears that in recent years more of the storms have occurred in more

heavily-populated urban areas rather than less populated rural areas, which has

impacted the number of claims submitted. We are monitoring weather patterns

and our exposures very carefully, and are prepared to make necessary

adjustments if warranted.

We saw some improvement in the economy in 2010, but investment opportunities

remained weak. Intermediate-maturity Treasury rates fell over half a percentage

Investment Portfolio

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began to rise in the latter half of 2010 and market sentiment began to improve.

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Despite the decline in interest rates, our investment income increased 3.6 percent

for the year due to a higher average invested balance in ﬁxed maturity securities.

Invested assets increased 3.3 percent in 2010 to $1.1 billion, and total assets

increased 1.9 percent to $1.2 billion.

In 2011, our parent organization, EMC, is celebrating its centennial anniversary.

Our brand promise, Count on EMC ® exempliﬁes our ongoing objectives of

meeting our current ﬁnancial responsibilities and appropriately reserving for future

obligations. And in the process, we strive to offer policyholders reasonable and

fair premiums while providing value to stockholders. These ambitions have

guided us in the past and will provide guidance in the future.

Thank you for your continued interest in EMC Insurance Group Inc.

Equity Portfolio

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Bruce G. Kelley
J.D., CPCU, CLU
President

Ronald W. Jean
FCAS, MAAA
Executive Vice President

Kevin J. Hovick
CPCU
Executive Vice President

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& Chief Executive Ofﬁcer

for Corporate Development

& Chief Operating Ofﬁcer

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2010 ANNUAL REPORT

YEAR IN REVIEW

5
1
.
6
2
$

4
4
.
2
2
$

2
3
.
1
2
$

2
5
.
8
2
$

1
1
.
6
2
$

2006

2007

2008

2009

2010

Book Value
EMCI has a long history of book value
growth. With the exception of 2001
(9/11 tragedy) and 2008 (ﬁnancial crisis in
the United States), our book value increased
year over year. For the period 2006 through
2010, the compound annual growth rate
was 6.2 percent, and for the period 2000
through 2010, the compound annual
growth rate was 8.1 percent.

5
6
.
0
$

9
6
.
0
$

2
7
.
0
$

3
7
.
0
$

2006

2007

2008

2009

2010

%
8

8
1

%
7

2
1

%
5

%
5
4
1

%
8
8

2006

2007

2008

2009

2010

Dividends Paid
EMCI has paid a quarterly dividend since its
initial public offering in 1982. The dividend
has never been waived or lowered.
The dividend payout ratio in 2010 was
30.4 percent and the dividend yield was
3.2 percent.

Return on Equity (ROE)
EMCI’s average return on equity (ROE)
for the period 2006 through 2010 was
10.9 percent. ROE for 2010 was
8.8 percent.

$30.00

$25.00

$20.00

$15.00

$10.00

$5.00

$1.00

$0.75

$0.50

$0.25

20.0%

15.0%

10.0%

5.0%

0.0%

-5.0%

COUNT ON EMC©

BOARD OF DIRECTORS CHANGES

Margaret A. Ball retired in 2010 after six years as an EMC Insurance

Jonathan R. Fletcher was elected a director in 2010. He is

Group Inc. Board member. She held the position of Vice-Chair at the

a Managing Director and Portfolio Manager of BTC Capital

time of her retirement. Prior to Board service, Ms. Ball was Senior Vice

Management Inc., a subsidiary of Bankers Trust Company. He has

President of Underwriting of the Company and of Employers Mutual

held this position since 2006, and previously served as a Trust

from 1997 until her retirement from the Company on Jan. 1, 2001,

Ofﬁcer at Bankers Trust in its wealth management division.

and Vice President of Employers Mutual from 1983 until 1997. She was

Mr. Fletcher currently serves as a director on the following boards:

employed by Employers Mutual from 1971 to 2001. Ms. Ball’s career

Ruan Transportation Management Systems, BTC Financial, Mercy

in the insurance industry spanned nearly 50 years. She was inducted

Hospital Foundation and St. Augustin Church Foundation.

into the Iowa Insurance Hall of Fame in 2002.

FINANCIAL HIGHLIGHTS

($ in thousands)

Revenues

Realized Investment Gains (Losses)

Income (Loss) Before Income Taxes

Net Income (Loss)

(per share)

Net Income (Loss)

Catastrophe and Storm Losses

Dividend Paid

Book Value

($ in thousands)

2010

2009

2008

2007

2006

$ 439,395

$ 432,525

$ 438,348

$ 442,086

3,869

42,445

31,346

2.40

2.10

0.73

28.52

17,922

$ (24,456)

62,525

45,371

(10,290)

(1,705)

3.44

1.55

0.72

(0.13)

$ 2.44

$ 0.72

26.11

$ 21.32

3,724

58,919

42,478

3.09

1.02

0.69

26.15

438,834

4,252

76,365

53,547

3.91

0.69

0.65

22.44

Average Return on Equity (ROE)

8.8%

14.5%

-0.5%

12.7%

18.8%

Total Assets

$ 1,187,795

$ 1,165,788

$ 1,108,099

$ 1,202,713

$ 1,206,159

Stockholders’ Equity

$ 368,641

$ 342,418

$ 282,916

$ 360,352

308,294

CAUTIONARY STATEMENT: The Private Securities Litigation Reform Act of 1995 provides issuers the
opportunity to make cautionary statements regarding forward-looking statements. Accordingly, any
forward-looking statement contained in this report is based on management’s current beliefs, assumptions
and expectations of the Company’s future performance, taking into account all information currently
available to management. These beliefs, assumptions and expectations can change as the result of many
possible events or factors, not all of which are known to management. If a change occurs, the Company’s
business, ﬁnancial condition, liquidity, results of operations, plans and objectives may vary materially from
those expressed in the forward-looking statements. The risks and uncertainties that may affect the actual
results of the Company include, but are not limited to, the following:
(cid:0)(cid:0)(cid:115) catastrophic events and the occurrence of signiﬁcant severe weather conditions;
(cid:0)(cid:0)(cid:115) the adequacy of loss and settlement expense reserves;

(cid:0)(cid:0)(cid:115) state and federal legislation and regulations;
(cid:0)(cid:0)(cid:115) changes in the property and casualty insurance industry, interest rates or the performance of ﬁnancial

markets and the general economy;

(cid:0)(cid:0)(cid:115) rating agency actions;
(cid:0)(cid:0)(cid:115) “other-than-temporary” investment impairment losses; and
(cid:0)(cid:0)(cid:115) other risks and uncertainties inherent to the Company’s business, including those discussed under the

heading “Risk Factors” in the Company’s Annual Report on Form 10-K.

Management intends to identify forward-looking statements when using the words “believe,” “expect,”
“anticipate,” “estimate,” “project” or similar expressions. Undue reliance should not be placed on these
forward-looking statements.

2010 ANNUAL REPORT

100 YEARS AND
STILL COUNTING

In 2011, EMC Insurance Companies celebrates

100 years in business—a century of successfully

providing comprehensive protection, ﬁnancial

stability and superior service to our policyholders,

agents and employees.

One hundred years ago, a group of businessmen known as the Iowa

Manufacturers Association joined together to form an insurance company in

anticipation of the passage of a workers’ compensation law in Iowa. The group

thought it would be better to insure Iowa companies locally, and that it would

cost less to establish their own mutual company to insure their members.

On April 24, 1911, Employers Mutual Casualty Association was born, known

today as EMC Insurance Companies.

Our company has stood the test of time, demonstrating the strength, stability

and service we are known for—proving that you can Count on EMC ®.

COUNT ON EMC©

STRENGTH

The strength of EMC Insurance Companies comes from the close, positive

relationships we maintain through our branch ofﬁces with our agents,

policyholders and the communities we serve, and from the complete range

of products and services we provide to meet the needs of policyholders.

STABILITY

EMC’s ﬁnancial statements consistently demonstrate our strong position.

Sound underwriting practices and a conservative investment philosophy

enabled EMC to survive 100 years of dynamic change, including two world

wars, the Great Depression, recessions, inﬂation and dramatic swings in the

stock market. And our planned geographic growth enabled us to remain

stable in the markets we serve.

SERVICE

EMC prides itself on the high quality of service we deliver to our customers.

We provide loss control services for our policyholders, technology services to

streamline the insurance process, and personalized services through our

local EMC branch ofﬁces. Our agents and policyholders know they

can Count on EMC ®.

To celebrate 100 years in business is a tremendous

milestone—an achievement that must be honored

by recognizing the expertise and commitment of

our more than 2,100 employees and our agency

partners. This century of success is a true testament

to the quality of our products, our innovative

services, our conservative ﬁnancial approach to

doing business and our exemplary customer

relationships. Our strength, stability and service

have sustained the success we’ve had over the

past 100 years, and will sustain our success for

the next 100.

EMC Insurance Companies is the trade name used by Employers Mutual
Casualty Company, the parent company of EMC Insurance Group Inc.

EMCI BOARD
OF DIRECTORS

CHAIRMAN OF THE BOARD
George C. Carpenter III
83, E, C, N
Chair – Compensation Committee
Retired Executive Director
Iowa Public Television (broadcasting)

DIRECTORS
Stephen A. Crane
65, A, C, I
Chair – Inter-Company Committee
Independent Consultant
Retired Chief Executive Ofﬁcer
AlphaStar Insurance Group Limited

Jonathan R. Fletcher
37, I
Managing Director and Portfolio Manager
BTC Capital Management, Inc.
(ﬁnance, investments)

Robert L. Howe*, CFE, CIE, CGFM, AIR
68, A, N, I
Consultant, Insurance Strategies
Consulting, LLC
Retired Deputy Commissioner and
Chief Examiner
Iowa Insurance Division

Bruce G. Kelley, J.D., CPCU, CLU
57, E
Chair – Executive Committee
President and CEO
EMC Insurance Group Inc.

Raymond A. Michel
85, C, N
Chair – Corporate Governance and
Nominating Committee
Director and Retired CEO
Koss Construction Company
(road construction)

Gretchen H. Tegeler
55, E, A
Chair – Audit Committee
Executive Director
Polk/Des Moines Taxpayers Association

INDEPENDENT DIRECTORS
George C. Carpenter III
Steven A. Crane
Jonathan R. Fletcher
Robert L. Howe
Raymond A. Michel
Gretchen H. Tegeler

BOARD COMMITTEES
A Audit Committee
C Compensation Committee
E Executive Committee
I Inter-Company Committee
N Corporate Governance and
Nominating Committee

EMCI
OFFICERS

Karey S. Anderson, CFA
Assistant Secretary

Jason R. Bogart, CPCU, ARM
Vice President
Branch Operations

Bradley J. Fredericks
Assistant Secretary

Richard L. Gass
Senior Vice President
Productivity & Technology

Richard W. Hoffmann, J.D.
Vice President
General Counsel & Secretary

Kevin J. Hovick, CPCU
Executive Vice President & COO

Ronald W. Jean, FCAS, MAAA
Executive Vice President
For Corporate Development

Scott R. Jean, FCAS, MAAA
Vice President & Chief Actuary

Bruce G. Kelley, J.D., CPCU, CLU
President & CEO

Robert L. Link, CAM
Vice President & Assistant Secretary

Mick A. Lovell, CPCU
Vice President
Director of Business Development

Anita L. Novak, MBA, CPCU, ARM
Assistant Secretary
Director of Investor Relations

Ronald A. Paine, CPA, CIA
Vice President
Internal Audit

Carla A. Prather
Assistant Vice President & Controller

Mark E. Reese, CPA
Senior Vice President & CFO

Richard K. Schulz
Senior Vice President
Claims

Kelvin B. Sederburg, ACAS, MAAA
Vice President
Appointed Actuary

Lisa A. Stange, CFA
Vice President, Chief Investment Ofﬁcer
& Treasurer

* EMCI’s Board designated ﬁnancial expert.

EMC Insurance Group Inc. Board of Directors

Seated (l to r): Gretchen H. Tegeler, George C. Carpenter III,

Raymond A. Michel

Standing (l to r): Robert L. Howe, Richard W. Hoffmann (Secretary),

Bruce G. Kelley, Jonathan R. Fletcher, Stephen A. Crane

2010

FINAN

NCIAL

INFOR

RMAT

ontents

Ele

even Year Su

ummary of Se

elected Financ

cial Data ........

.....................

anagement's D
and Results o

Discussion an
of Operations

nd Analysis o
s ...................

f Financial C
......................

Condition

.....................

ION

.....................

............... 1

.....................

............... 3

anagement's R

Report on Int

ernal Control

l Over Financ

cial Reporting

g ...................

............. 50

eport of Indep
on Internal C

pendent Regis
Control Over

stered Public A
Financial Rep

Accounting F
porting .........

Firm
.....................

eport of Indep
on Consolida

pendent Regis
ated Financia

stered Public A
al Statements

Accounting F
.....................

Firm
.....................

onsolidated B

alance Sheets

s ...................

......................

.....................

onsolidated St

tatements of I

Income ........

......................

.....................

onsolidated St

tatements of C

Comprehensiv

ve Income ...

.....................

onsolidated St

tatements of S

Stockholders'

Equity ........

.....................

onsolidated St

tatements of C

Cash Flows .

......................

.....................

otes to Conso

lidated Finan

cial Statemen

nts ................

.....................

ossary .........

.....................

......................

.....................

............. 51

.....................

............. 52

.....................

............. 53

.....................

............. 55

.....................

............. 56

.....................

............. 57

.....................

............. 58

.....................

............. 60

.....................

........... 110

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N

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The term “Company” is used below interchangeably to describe EMC Insurance Group Inc. (Parent Company
only) and EMC Insurance Group Inc. and its subsidiaries. The following discussion and analysis of the Company’s
financial condition and results of operations should be read in conjunction with the Consolidated Financial
Statements and Notes to Consolidated Financial Statements included under Part II, Item 8 of this Form 10-K.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides issuers the opportunity to make cautionary

statements regarding forward-looking statements. Accordingly, any forward-looking statement contained in this
report is based on management’s current beliefs, assumptions and expectations of the Company’s future
performance, taking all information currently available into account. These beliefs, assumptions and expectations
can change as the result of many possible events or factors, not all of which are known to management. If a change
occurs, the Company’s business, financial condition, liquidity, results of operations, plans and objectives may vary
materially from those expressed in the forward-looking statements. The risks and uncertainties that may affect the
actual results of the Company include, but are not limited to, the following:

(cid:120)
(cid:120)
(cid:120)
(cid:120)

(cid:120)
(cid:120)
(cid:120)

catastrophic events and the occurrence of significant severe weather conditions;
the adequacy of loss and settlement expense reserves;
state and federal legislation and regulations;
changes in the property and casualty insurance industry, interest rates or the performance of financial
markets and the general economy;
rating agency actions;
“other-than-temporary” investment impairment losses; and
other risks and uncertainties inherent to the Company’s business, including those discussed under the
heading “Risk Factors” in Part I, Item 1A, of this Form 10-K.

Management intends to identify forward-looking statements when using the words “believe”, “expect”,
“anticipate”, “estimate”, “project” or similar expressions. Undue reliance should not be placed on these forward-
looking statements.

COMPANY OVERVIEW

The Company, a 61 percent owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is

an insurance holding company with operations in property and casualty insurance and reinsurance.

Property and casualty insurance operations are conducted through three subsidiaries and represent the most
significant segment of the Company’s business, totaling approximately 79 percent of consolidated premiums earned
in 2010. The Company’s three property and casualty insurance subsidiaries and two subsidiaries and an affiliate of
Employers Mutual are parties to reinsurance pooling agreements with Employers Mutual (collectively the “pooling
agreement”). Under the terms of the pooling agreement, each company cedes to Employers Mutual all of its
insurance business, 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 premiums,
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. Employers Mutual negotiates reinsurance agreements that
provide protection to the pool and each of its participants, including protection against losses arising from
catastrophic events. The aggregate participation of the Company’s property and casualty insurance subsidiaries is
30 percent.

Operations of the pool give rise to inter-company balances with Employers Mutual, which are settled within 45

days after the end of each quarter. The investment and income tax activities of the pool participants are not subject
to the pooling agreement. The pooling agreement provides that Employers Mutual will make up any shortfall or
difference resulting from an error in its systems and/or computation processes that would otherwise result in the
required restatement of the pool participants’ financial statements.

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 seven companies.

Reinsurance operations are conducted through EMC Reinsurance Company, and represented approximately 21
percent of consolidated premiums earned in 2010. The Company’s reinsurance subsidiary is a party to a quota share
reinsurance retrocessional agreement with Employers Mutual (the “quota share agreement”). Under the terms of the
quota share agreement, the reinsurance subsidiary assumes a 100 percent quota share portion of Employers Mutual’s
assumed reinsurance business, exclusive of certain reinsurance contracts. This includes all premiums and related
losses, settlement expenses, and other underwriting and administrative expenses of this business, subject to a
maximum loss of $3,000,000 per event ($2,000,000 per event prior to 2010). The cost of the cap on losses assumed
per event, which is treated as a reduction to premiums written, is 10.5 percent. The reinsurance subsidiary does not
directly reinsure any of the insurance business written by Employers Mutual or the other pool participants; however,
the reinsurance subsidiary assumes reinsurance business from the Mutual Reinsurance Bureau (MRB) pool and this
pool provides a small amount of reinsurance protection to the EMC Insurance Companies. As a result, the
reinsurance subsidiary’s assumed exposures include a small portion of the EMC Insurance Companies’ direct
business, after ceded reinsurance protections purchased by the MRB pool are applied. In addition, the reinsurance
subsidiary does not reinsure any “involuntary” facility or pool business that Employers Mutual assumes pursuant to
state law. The reinsurance subsidiary assumes all foreign currency exchange gain/loss associated with contracts
incepting on January 1, 2006 and thereafter that are subject to the quota share agreement. Operations of the quota
share agreement give rise to inter-company balances with Employers Mutual, which are settled within 45 days after
the end of each quarter. The investment and income tax activities of the reinsurance subsidiary are not subject to the
quota share agreement.

Under the terms of the quota share agreement, the reinsurance subsidiary receives reinstatement premium
income that is collected by Employers Mutual from the ceding companies when reinsurance coverage is reinstated
after a loss event; however, the cap on losses assumed per event contained in the quota share agreement is
automatically reinstated without cost. This arrangement can produce unusual underwriting results for the
reinsurance subsidiary when a large loss event occurs because the reinstatement premium income received by the
reinsurance subsidiary may approximate, or even exceed, the amount of losses retained.

Effective January 1, 2009, the reinsurance subsidiary began writing German assumed reinsurance business on a

direct basis (outside the quota share agreement) as a result of regulatory changes in Germany.

Effective January 1, 2011, the terms of the quota share agreement were revised. Under the terms of the revised

agreement, the reinsurance subsidiary will assume 100 percent of Employers Mutual’s assumed reinsurance
business, with certain exceptions, on a gross basis (rather than the previous net basis), and will cede to Employers
Mutual all losses in excess of $3,000,000 per event under a separate excess-of-loss reinsurance agreement. The cost
of the $3,000,000 excess-of-loss reinsurance protection will be 10.0 percent of total assumed reinsurance premiums.
This new arrangement will allow the reinsurance subsidiary to have the $3,000,000 cap on losses assumed per event
apply to all assumed reinsurance business, including the direct reinsurance business written outside the quota share
agreement.

As previously reported on November 11, 2010, the Board of Directors of the MRB pool announced Country

Mutual Insurance Company terminated its participation in the MRB pool effective January 1, 2011. As a result,
Employers Mutual will become a one-fourth participant in the MRB pool, up from its current one-fifth participation.

INDUSTRY OVERVIEW

An insurance company’s underwriting results reflect the profitability of its insurance operations, excluding

investment income. Underwriting profit or loss is calculated by subtracting losses and expenses incurred from
premiums earned.

Insurance companies collect cash in the form of insurance premiums and pay out cash in the form of loss and
settlement expense payments. Additional cash outflows occur through the payment of acquisition and underwriting
costs such as commissions, premium taxes, salaries and general overhead. During the loss settlement period, which
varies by line of business and by the circumstances surrounding each claim and may cover several years, insurance
companies invest the cash premiums; thereby earning interest and dividend income. This investment income
supplements underwriting results and contributes to net earnings. Funds from called and matured fixed maturity
securities are reinvested at current interest rates. The low interest rate environment that has existed during the last
several years has had a negative impact on the insurance industry’s investment income.

Insurance pricing has historically been cyclical in nature. Periods of excess capital and increased competition
encourage price reductions and liberal underwriting practices (referred to as a soft market) as insurance companies
compete for market share, while attempting to cover the inevitable underwriting losses from these actions with
investment income. A prolonged soft market generally leads to a reduction in the adequacy of capital in the
insurance industry. To cure this condition, underwriting practices are tightened, premium pricing increases and
competition subsides as companies strive to strengthen their balance sheets (referred to as a hard market). The
insurance industry is currently in the sixth year of a soft market; however, premium rates have stabilized somewhat
during 2009 and 2010 as commercial lines decreases have declined and personal lines rates have increased. The
outlook for 2011 is that overall premium rate levels will remain relatively flat, or perhaps increase moderately if
commercial lines pricing continues to stabilize.

A substantial determinant of an insurance company’s underwriting results is its loss and settlement expense

reserving practices. Insurance companies must estimate the amount of losses and settlement expenses that will
ultimately be paid to settle claims that have occurred to date (loss and settlement expense reserves). This estimation
process is inherently subjective with the possibility of widely varying results, particularly for certain highly volatile
types of claims (asbestos, environmental and various casualty exposures, such as products liability, where the loss
amount and the parties responsible are difficult to determine). During a soft market, inadequate premium rates put
pressure on insurance companies to under-estimate their loss and settlement expense reserves in order to report
better results. Correspondingly, inadequate reserves play an integral part in bringing about a hard market, because
increased profitability from higher premium rate levels can be used to strengthen inadequate reserves.

The United States Congress is currently studying, or has placed on its agenda, several issues of importance to

the Company and the insurance industry. Most notably, these issues include Federal regulation of the insurance
industry in addition to, or in place of, current state regulation, and legislation (referred to as the Insurance Industry
Competition Act) that would amend the McCarran-Ferguson Act and permit the Federal Trade Commission and
United States Department of Justice to enforce Federal antitrust laws and regulations on the insurance industry. The
Company is closely monitoring the activity of the United States Congress on these issues through its membership in
various organizations.

MANAGEMENT ISSUES AND PERSPECTIVES

Low interest rate environment

The interest rate environment has an influence on several operational areas that have the potential to have a

material impact on the Company’s financial condition and results of operations. Following is a brief discussion of
the major operational areas being monitored by management in light of the current low interest rate environment.

Investment portfolio

The majority of the Company’s investment portfolio is invested in fixed maturity securities. The low interest

rate environment is currently having a positive impact on the Company’s financial condition because the portfolio of
fixed maturity securities available-for-sale had net unrealized holding gains, net of deferred taxes, of $20,770,000 at
December 31, 2010, reflecting the fact that the average yield on the Company’s portfolio is higher than the yields
currently available in the fixed maturity marketplace. However, the low interest rate environment has also resulted
in a high level of call activity on fixed maturity securities during 2010 and 2009. Proceeds from this call activity, as
well as proceeds from maturing securities and cash from operating activities, is being invested at the current lower
yields, which will have a negative impact on future investment income. If the low interest rate environment
continues as expected, future investment yield could decline substantially from the current level. To help minimize
the impact of the current low interest rate environment on the Company’s future results of operations, management
has been working to reduce the average duration of the investment portfolio to closer match the average duration of
the insurance liabilities.

Underwriting results

The Company’s portfolio of fixed maturity securities provides a substantial amount of investment income that
supplements underwriting results and contributes to net earnings. A prolonged low interest rate environment could
result in a significant decline in future investment income, which would increase the need to achieve an
underwriting profit. Management continually stresses the importance of striving for an underwriting profit, and is
working diligently with the branch offices to maintain prudent underwriting and pricing standards and establish
long-term business plans with the Company’s agency force.

Benefit plan liabilities

The low interest rate environment has resulted in a significant decline in the discount rates used to value the

obligations the Company has under Employers Mutual’s pension and postretirement benefit plans. As a result, the
valuation of the benefit obligations has increased, which has reduced the funded status of those plans and resulted in
higher annual cash contributions and increased expenses. Although Employers Mutual’s pension and
postretirement benefit plans are currently well funded, a prolonged low interest rate environment could result in a
continuation of higher cash contributions and increased expenses, both of which would have a negative impact on
the Company’s future results of operations.

Catastrophe and storm losses

The Company has experienced three consecutive years of higher than normal Midwest storm losses. Based on

an analysis of nationwide storm activity, management does not believe that overall storm activity or intensity is
trending upward. Rather, it appears that in recent years more of the storms have occurred in more heavily-populated
urban areas instead of less-populated rural areas, which has impacted the number of claims submitted. It should be
noted that the Company has experienced periods of increased Midwest storm losses in the past, the most recent
period being from 1998 to 2001. Management continues to monitor the Company’s Midwest exposures very
carefully, and is prepared to make necessary adjustments to those exposures if warranted.

Possible Convergence of U.S. generally accepted accounting principles (GAAP) and International Financial
Reporting Standards (IFRS)

The SEC is currently evaluating whether GAAP should be replaced by, or possibly converged with, IFRS in
the future. In addition, several significant changes to current GAAP accounting standards have been exposed for
public comment. Depending on the outcome of these initiatives, which is expected to be determined sometime in
2011, the accounting rules and required disclosures for public companies could change significantly. Management
is closely monitoring developments in this area and will be evaluating the proposed accounting standards that have
been exposed for public comment during 2011 to identify changes that would be required in the Company’s
data/systems to comply with the new accounting rules.

MEASUREMENT OF RESULTS

The Company’s consolidated financial statements are prepared on the basis of GAAP. The Company also
prepares financial statements for each of its insurance subsidiaries based on statutory accounting principles that are
filed with insurance regulatory authorities in the states where they do business. Statutory accounting principles are
designed to address the concerns of state regulators and stress the measurement of the insurer’s ability to satisfy its
obligations to its policyholders and creditors.

Management evaluates the Company’s operations by monitoring key measures of growth and profitability.

Management measures the Company’s growth by examining direct premiums written and, perhaps more
importantly, premiums written assumed from affiliates. Management generally measures the Company’s operating
results by examining the Company’s net income and return on equity as well as the loss and settlement expense,
acquisition expense and combined ratios. The following provides further explanation of the key measures
management uses to evaluate the Company’s results:

Direct Premiums Written. Direct premiums written is the sum of the total policy premiums, net of

cancellations, associated with policies underwritten and issued by the Company’s property and casualty insurance
subsidiaries. These direct premiums written are transferred to Employers Mutual under the terms of the pooling
agreement and are reflected in the Company’s consolidated financial statements as premiums written ceded to
affiliates. See note 3 of Notes to Consolidated Financial Statements.

Premiums Written Assumed From Affiliates and Premiums Written Assumed From Nonaffiliates. For the

property and casualty insurance segment, premiums written assumed from affiliates and nonaffiliates reflects the
property and casualty insurance subsidiaries’ aggregate 30 percent participation interest in 1) the total direct
premiums written by all the participants in the pooling arrangement, and 2) the involuntary business assumed by the
pool participants pursuant to state law, respectively. For the reinsurance segment, premiums written assumed from
nonaffiliates reflects the business assumed by the reinsurance subsidiary through the quota share agreement and,
beginning January 1, 2009, the German-based reinsurance business assumed outside the quota share agreement. See
note 3 of Notes to Consolidated Financial Statements. Management uses premiums written assumed from affiliates
and nonaffiliates, which excludes the impact of written premiums ceded to reinsurers, as a measure of the underlying
growth of the Company’s insurance business from period to period.

Net Premiums Written. Net premiums written is the sum of the premiums written assumed from affiliates plus
premiums written assumed from nonaffiliates less premiums written ceded to nonaffiliates. Premiums written ceded
to nonaffiliates is the portion of the Company’s direct and assumed premiums written that is transferred to reinsurers
in accordance with the terms of the underlying reinsurance contracts, based upon the risks they accept. See note 3 of
Notes to Consolidated Financial Statements. Management uses net premiums written to measure the amount of
business retained after cessions to reinsurers.

Loss and Settlement Expense Ratio. The loss and settlement expense ratio is the ratio (expressed as a
percentage) of losses and settlement expenses incurred to premiums earned, and measures the underwriting
profitability of a company’s insurance business. The loss and settlement expense ratio is generally measured on
both a gross (direct and assumed) and net (gross less ceded) basis. Management uses the gross loss and settlement
expense ratio as a measure of the Company’s overall underwriting profitability of the insurance business it writes
and to assess the adequacy of the Company’s pricing. The net loss and settlement expense ratio is meaningful in
evaluating the Company’s financial results, which are net of ceded reinsurance, as reflected in the consolidated
financial statements. The loss and settlement expense ratios are generally calculated in the same way for GAAP and
statutory accounting purposes.

Acquisition Expense Ratio. The acquisition expense ratio is the ratio (expressed as a percentage) of net
acquisition and other expenses incurred to premiums earned, and measures a company’s operational efficiency in
producing, underwriting and administering its insurance business. For statutory accounting purposes, acquisition
and other expenses of an insurance company exclude investment expenses. There is no such industry definition for
determining an acquisition expense ratio for GAAP purposes. As a result, management applies the statutory
definition to calculate the Company’s acquisition expense ratio on a GAAP basis. The net acquisition expense ratio
is meaningful in evaluating the Company’s financial results, which are net of ceded reinsurance, as reflected in the
consolidated financial statements.

GAAP Combined Ratio. The combined ratio (expressed as a percentage) is the sum of the loss and settlement
expense ratio and the acquisition expense ratio, and measures a company’s overall underwriting profit/loss. If the
combined ratio is at or above 100, an insurance company cannot be profitable without investment income (and may
not be profitable if investment income is insufficient). Management uses the GAAP combined ratio in evaluating
the Company’s overall underwriting profitability and as a measure for comparison of the Company’s profitability
relative to the profitability of its competitors who prepare GAAP-basis financial statements.

Statutory Combined Ratio. The statutory combined ratio (expressed as a percentage) is calculated in the same
manner as the GAAP combined ratio, but is based on results determined pursuant to statutory accounting rules and
regulations. The statutory “trade combined ratio” differs from the statutory combined ratio in that the acquisition
expense ratio is based on net premiums written rather than net premiums earned. Management uses the statutory
trade combined ratio as a measure for comparison of the Company’s profitability relative to the profitability of its
competitors, all of whom must file statutory-basis financial statements with insurance regulatory authorities.

CRITICAL ACCOUNTING POLICIES

The following accounting policies are considered by management to be critically important in the preparation
and understanding of the Company’s financial statements and related disclosures. The assumptions utilized in the
application of these accounting policies are complex and require subjective judgment.

Loss and settlement expense reserves

Processes and assumptions for establishing loss and settlement expense reserves

Liabilities for losses are based upon case-basis estimates of reported losses supplemented with bulk case loss

reserves, and estimates of incurred but not reported (IBNR) losses. Case loss reserves are established independently
of the IBNR loss reserves and the two amounts are added together to determine the total liability for losses. Under
this methodology, adjustments to the individual case loss reserve estimates do not result in a corresponding
adjustment in IBNR loss reserves. For direct insurance business, the Company’s IBNR loss reserves are estimates
of liability for events that have occurred, but have not yet been reported to the Company. For assumed reinsurance
business, IBNR loss reserves are also used to record anticipated increases in reserves for claims that have previously
been reported. An estimate of the expected expenses to be incurred in the settlement of the claims provided for in
the loss reserves is established as the liability for settlement expenses.

Property and Casualty Insurance Segment

The Company’s claims department establishes individual case loss reserves for direct business. Branch claims
personnel establish case loss reserves for individual claims, with mandatory home office claims department review
of reserves that exceed a specified threshold. The Company’s case loss reserve philosophy is exposure based and
implicitly assumes a consistent inflationary and legal environment. When claims department personnel establish
case loss reserves, they take into account various factors that influence the potential exposure.

The Company has implemented specific line-of-business guidelines that are used to establish the individual
case loss reserve estimates. These guidelines, which are used for both short-tail and long-tail claims, require the
claims department personnel to reserve for the probable (most likely) exposure for each claim. Probable exposure is
defined as what is likely to be awarded if the case were to be decided by a civil court in the applicable venue or, in
the case of a workers’ compensation case, by that state’s workers’ compensation commission. This evaluation
process is repeated throughout the life of the claim at regular intervals, and as additional information becomes
available. While performing these regular reviews, the branch claims personnel are able to make adjustments to the
case loss reserves for location and time specific factors, such as legal venue, severity of claim, inflation, and changes
in applicable laws.

To provide consistency in the reserving process, the Company utilizes established claims management

processes and an automated claims system. Claims personnel conduct periodic random case loss reserve reviews to
verify the accuracy of the reserve estimates and adherence to the reserving guidelines. In addition, the Company has
specific line-of-business management controls for case loss reserves. For example, all workers’ compensation claim
files are reviewed by management before benefits are declined, and all casualty case loss reserves are reviewed
every 60 days for reserve adequacy.

The Company’s automated claims system utilizes an automatic diary process that helps ensure that case loss
reserve estimates are reviewed on a regular basis. The claims system requires written documentation each time a
case loss reserve is established or modified, and provides management with the information necessary to perform
individual reserve reviews and monitor reserve development. In addition, the claims system produces monthly
reports that allow management to analyze case loss reserve development in the aggregate, by branch, by line of
business, or by claims adjuster.

The goal of the Company’s claims department is to establish and maintain case loss reserves that are sufficient,

but not excessive. Since specific guidelines are utilized for establishing case loss reserves, the Company does not
incorporate a provision for uncertainty (either implicitly or explicitly) when setting individual case loss reserve
estimates. The Company’s actuaries do, however, review the adequacy of the aggregate case loss reserves on a
quarterly basis and, if deemed appropriate, make recommendations for adjustments to management. Management
reviews all recommendations submitted by the Company’s actuaries and considers such recommendations in the
determination of its best estimate of the Company’s overall liability. Adjustments to the aggregate case loss
reserves, when approved by management, are accomplished through the establishment of bulk case loss reserves in
the applicable line(s) of business, which supplement the aggregate case loss reserves. For financial reporting
purposes, bulk case loss reserves are included in case loss reserves.

At December 31, 2010, IBNR loss reserves accounted for $65,609,000, or 16.3 percent, of the property and

casualty insurance segment’s total loss and settlement expense reserves, compared to $73,755,000, or 18.0 percent,
at December 31, 2009. IBNR loss reserves are, by nature, less precise than case loss reserves. A five percent
change in IBNR loss reserves at December 31, 2010 would equate to $2,132,000, net of tax, which represents 6.8
percent of the net income reported for 2010 and 0.6 percent of stockholders’ equity.

The property and casualty insurance segment’s formula IBNR loss reserves are established for each line of

business by applying actuarially derived “IBNR factors” to the latest twelve months premiums earned. These
factors are developed using a methodology that utilizes historical ratios of (1) actual IBNR claims that have emerged
after prior year-ends to (2) corresponding prior years’ premiums earned that have been adjusted to the current level
of rate adequacy. In order to minimize the volatility that naturally exists in the early stages of IBNR claims
emergence, IBNR claims are not utilized in this process until 18 months after the end of a respective calendar year.
For example, during 2010 the actual IBNR claims reported in the 18 months following year-end 2008 were
compared to the adjusted 2008 premiums earned. The 2008 ratios, together with the ratios for several prior years,
were then used to develop the 2010 “IBNR factors” that were applied to premiums earned for each line of business.
Included in the rate adequacy adjustment noted above is consideration of current frequency and severity trends
compared to the trends underlying prior years’ calculations. The selected trends are based on an analysis of industry
and Company loss data.

The methodology used in estimating formula IBNR loss reserves assumes consistency in claims reporting
patterns and immaterial changes in loss development patterns. Implicit in this assumption is that future IBNR
claims emergence, relative to IBNR claims that have emerged following prior year-ends, will reflect the change in
frequency and severity trends underlying the rate adequacy adjustments. If this projected relationship proves to be
inaccurate, future IBNR claims may differ substantially from the estimated IBNR loss reserves. The following table
displays the impact that a five percent variance in future IBNR emergence from the projected level reflected in the
December 31, 2010 IBNR factors would have on the Company’s results of operations. This variance in future IBNR
emergence could occur in one year or over multiple years, depending when the claims were reported. A variance in
future IBNR emergence would also affect the Company’s financial position in that the Company’s equity would be
impacted by an amount equivalent to the change in net income. A variance of this type would typically be
recognized in loss and settlement expense reserves and, accordingly, would not have a material effect on liquidity
because the claims have not been paid. A five percent variance in future IBNR emergence is considered reasonably
likely based on the range of actuarial indications developed during the analysis of the property and casualty
insurance segment’s carried reserves.

After-tax impact on
earnings from a five
percent variance in
future IBNR
emergence from
frequency and severity
trends underlying rate
adequacy adjustments

$(49) to $49
(315) to 315
(17) to 17
(416) to 416
(1,293) to 1,293
(63) to 63
(25) to 25
(20) to 20

Line of business
($ in thousands)
Personal auto liability
Commercial auto liability
Auto physical damage
Workers' compensation
Other liability
Property
Homeowners
All Other

Ceded loss reserves are derived by applying the ceded contract terms to the direct loss reserves. For excess-of-
loss contracts (excluding the catastrophe contract), this is accomplished by applying the ceded contract terms to the
case loss reserves of the ceded claims. For the catastrophe excess-of-loss contract, ceded loss reserves are calculated
by applying the contract terms to (1) the aggregate case loss reserves on claims stemming from catastrophes and (2)
the estimate of IBNR loss reserves developed for each individual catastrophe. For quota share contracts, ceded loss
reserves are calculated as the quota share percentage multiplied by both case and IBNR loss reserves on the direct
business.

The methodology used for reserving settlement expenses is based on an analysis of historical ratios of paid

expenses to paid losses. Assumptions underlying this methodology include stability in the mix of business,
consistent claims processing procedures, immaterial impact of loss cost trends on development patterns, and a
consistent philosophy regarding the defense of lawsuits. Based on this actuarial analysis, factors are derived for
each line of business, which are then applied to loss reserves to generate the settlement expense reserves. The
following table displays the impact on the Company’s results of operations, for the latest ten accident years, of a one
percent variance in the ratio of ultimate settlement expenses to ultimate losses due to departures from any of the
above assumptions. This variance in the ultimate settlement expense ratio could occur in one year or over multiple
years, depending on the loss and settlement expense payment patterns. A variance in the ultimate settlement
expense ratio would also affect the Company’s financial position in that the Company’s equity would be impacted
by an amount equivalent to the change in net income. A variance of this type would typically be recognized in loss
and settlement expense reserves and, accordingly, would not have a material effect on liquidity because the expenses
have not been paid. A one percent variance in the ratio of ultimate settlement expenses to ultimate losses is
considered reasonably likely based on the range of actuarial indications developed during the analysis of the
property and casualty insurance segment’s carried reserves.

Line of business
($ in thousands)
Personal auto liability
Commercial auto liability
Auto physical damage
Workers' compensation
Other liability
Property
Homeowners
All Other

After-tax impact on
earnings from a one
percent variance in the
ultimate settlement
expense ratio

$(43) to $43
(181) to 181
(25) to 25
(230) to 230
(629) to 629
(101) to 101
(69) to 69
(25) to 25

Following is a summary of the carried loss and settlement expense reserves for the property and casualty

insurance segment at December 31, 2010 and 2009.

Line of business

Case

IBNR

Settlement
expense

Total

December 31, 2010

Commercial lines:
Automobile ...................................
Property ........................................
Workers' compensation .................
Liability .........................................
Bonds ............................................
Total commercial lines ..............

44,428
15,279
116,430
53,064
2,788
231,989

($ in thousands)

9,293
1,131
14,996
38,699
(409)
63,710

10,032
2,764
17,885
46,769
800
78,250

63,753
19,174
149,311
138,532
3,179
373,949

Personal lines:
Automobile ...................................
Property ........................................
Total personal lines ...................
Total property and casualty
insurance segment .............

17,364
5,776
23,140

1,096
803
1,899

2,333
1,380
3,713

20,793
7,959
28,752

255,129

65,609

81,963

402,701

Line of business

Case

IBNR

Settlement
expense

Total

December 31, 2009

45,386
15,308
115,265
52,021
3,352
231,332

($ in thousands)

9,575
2,581
15,676
43,464
(1,607)
69,689

10,313
3,543
17,955
45,151
626
77,588

65,274
21,432
148,896
140,636
2,371
378,609

17,864
6,073
23,937

2,253
1,813
4,066

2,436
1,417
3,853

22,553
9,303
31,856

255,269

73,755

81,441

410,465

Internal actuarial evaluations of overall loss reserve levels are performed quarterly for all direct lines of
business. There is a certain amount of random variation in loss development patterns, which results in some
uncertainty regarding projected ultimate losses, particularly for longer-tail lines such as workers’ compensation,
other liability and commercial auto liability. Therefore, the reasonability of the actuarial projections is regularly
monitored through an examination of loss ratio and claims severity trends implied by these projections. Following
is a discussion of the major assumptions underlying the quarterly internal actuarial loss reserve evaluations.

One assumption underlying aggregate reserve estimation methods is that the claims inflation trends implicitly
built into the historical loss and settlement expense development patterns will continue into the future. To estimate
the sensitivity of the estimated ultimate loss and settlement expense payments to an unexpected change in
inflationary trends, the actuarial department derived expected payment patterns separately for each major line of
business. These patterns were applied to the December 31, 2010 loss and settlement expense reserves to generate
estimated annual incremental loss and settlement expense payments for each subsequent calendar year. Then, for
the purpose of sensitivity testing, an explicit annual inflationary variance of one percent was added to the
inflationary trend that is implicitly embedded in the estimated payment pattern, and revised incremental loss and
settlement expense payments were calculated. This unexpected claims inflation trend could arise from a variety of
sources including a change in economic inflation, social inflation and, especially for the workers’ compensation line
of business, the introduction of new medical technologies and procedures, changes in the utilization of procedures
and changes in life expectancy. The estimated cumulative impact that this unexpected one percent variance in the
inflationary trend would have on the Company’s results of operations over the lifetime of the underlying claims is
shown below. A variance in the inflationary trend would also affect the Company’s financial position in that the
Company’s equity would be impacted by an amount equivalent to the change in net income. A variance of this type
would typically be recognized in loss and settlement expense reserves and, accordingly, would not have a material
effect on liquidity because the claims have not been paid. A one percent variance in the projected inflationary trend
is considered reasonably likely based on the range of actuarial indications developed during the analysis of the
property and casualty insurance segment’s carried reserves.

Line of business
($ in thousands)
Personal auto liability
Commercial auto liability
Auto physical damage
Workers' compensation
Other liability
Property
Homeowners

After-tax impact on
earnings from a one
percent variance in the
projected inflationary
trend

$(67) to $65
(767) to 746
(15) to 15
(5,499) to 4,759
(3,000) to 2,809
(169) to 162
(46) to 45

A second assumption is that historical loss payment patterns have not changed. In other words, the percentage
of ultimate losses that are not yet paid at any given stage of accident year development is consistent over time. The
following table displays the impact on the Company’s results of operations, for the latest ten accident years, of a five
percent variance in unpaid losses to date from the percentages anticipated in the paid loss projection factors. That is,
future loss payments under this scenario would be expected to differ from the original actuarial loss reserve
estimates by these amounts. This variance in future loss payments could occur in one year or over multiple years. A
variance in future loss payments would also affect the Company’s financial position in that the Company’s equity
would be impacted by an amount equivalent to the change in net income. A variance of this type would typically be
recognized in loss and settlement expense reserves and, accordingly, would not have a material effect on liquidity
because the claims have not been paid. A five percent variance in projected future loss payments is considered
reasonably likely based on the range of actuarial indications developed during the analysis of the property and
casualty insurance segment’s carried reserves.

Line of business
($ in thousands)
Personal auto liability
Commercial auto liability
Auto physical damage
Workers' compensation
Other liability
Property
Homeowners
All Other

After-tax impact on
earnings from a five
percent variance in
future loss payments

$(609) to $553
(1,707) to 1,544
(91) to 82
(3,467) to 3,134
(2,946) to 2,665
(585) to 529
(212) to 193
(122) to 73

A third assumption is that individual case loss reserve adequacy is consistent over time. The following table

displays the impact on the Company’s results of operations, for the latest ten accident years, of a five percent
variance in individual case loss reserve adequacy from the level anticipated in the incurred loss projection factors.
In other words, future loss payments under this scenario would be expected to vary from actuarial reserve estimates
by these amounts. This variance in expected loss payments could occur in one year or over multiple years. A
change in individual case loss reserve adequacy would also affect the Company’s financial position in that the
Company’s equity would be impacted by an amount equivalent to the change in net income. A variance of this type
would typically be recognized in loss and settlement expense reserves and, accordingly, would not have a material
effect on liquidity because the claims have not been paid. A five percent variance in individual case loss reserve
adequacy is considered reasonably likely based on the range of actuarial indications developed during the analysis of
the property and casualty insurance segment’s carried reserves.

Line of business
($ in thousands)
Personal auto liability
Commercial auto liability
Auto physical damage
Workers' compensation
Other liability
Property
Homeowners
All Other

After-tax impact on
earnings from a five
percent variance in
individual case loss
reserve adequacy

$(581) to $526
(1,383) to 1,252
(72) to 64
(2,993) to 2,707
(2,368) to 2,144
(551) to 498
(173) to 158
(96) to 87

A fourth assumption is that IBNR emergence as a percentage of reported losses is historically consistent and

will continue at the historical level. The following table displays the estimated impact on the Company’s results of
operations, for the latest ten accident years, of a five percent variance in IBNR losses from the level anticipated in
the loss projection factors. Under this scenario, future loss payments would be expected to vary from actuarial
reserve estimates by these amounts. This variance in IBNR emergence could occur in one year or over multiple
years. A variance in IBNR emergence would also affect the Company’s financial position in that the Company’s
equity would be impacted by an amount equivalent to the change in net income. A variance of this type would
typically be recognized in loss and settlement expense reserves and, accordingly, would not have a material effect on
liquidity because the claims have not been paid. A five percent variance in IBNR emergence is considered
reasonably likely based on the range of actuarial indications developed during the analysis of the property and
casualty insurance segment’s carried reserves.

Line of business
($ in thousands)
Personal auto liability
Commercial auto liability
Auto physical damage
Workers' compensation
Other liability
Property
Homeowners

After-tax impact on
earnings from a five
percent variance in IBNR
emergence

$(54) to $54
(216) to 216
(21) to 21
(577) to 577
(1,109) to 1,109
(103) to 103
(41) to 41

An actuarial evaluation of the prior quarter’s case and bulk case loss reserve adequacy is performed each
quarter. If that analysis indicates that the aggregate reserves of the individual claim files established by the claims
department combined with the carried bulk case loss reserve (if any) is not within a few percentage points of a
benchmark established by the actuarial department, the actuarial department will recommend that an adjustment be
made to the current quarter’s bulk case loss reserve. Management reviews all recommendations submitted by the
actuarial department and considers such recommendations in the determination of its best estimate of the Company’s
overall liability.

One of the variables impacting the estimation of IBNR loss reserves is the assumption that the vast majority of
future construction defect losses will continue to occur in those states in which most construction defect claims have
historically arisen. Since the vast majority of these losses have been confined to a relatively small number of states,
which is consistent with industry experience, there is no provision in the IBNR loss reserve for a significant spread
of construction defect claims to other states. It is also assumed that various underwriting initiatives implemented in
recent years will gradually mitigate the amount of construction defect losses experienced. These initiatives include
exclusionary endorsements, increased care regarding additional insured endorsements, a general reduction in the
amount of contractor business written relative to the total commercial lines book of business, and underwriting
restrictions on the writing of residential contractors. The estimation of the Company’s IBNR loss reserves also does
not contemplate substantial losses from potential mass torts such as Methyl Tertiary Butyl Ether (a gasoline additive
that reduces emissions, but causes pollution), tobacco, silicosis, cell phones and lead. Further, consistent with
general industry practice, the IBNR loss reserve for all liability lines does not provide for any significant retroactive
expansion of coverage through judicial interpretation. If these assumptions prove to be incorrect, ultimate paid
amounts on emerged IBNR claims may differ substantially from the carried IBNR loss reserves.

As previously noted, the estimation of settlement expense reserves assumes a consistent claims department
philosophy regarding the defense of lawsuits. If the pool participants should in the future take a more aggressive
defense posture, defense costs would increase and it is likely that the Company’s carried settlement expense reserves
would be deficient. However, such a change in philosophy would likely reduce losses, generating some offsetting
redundancy in the loss reserves.

The property and casualty insurance subsidiaries have exposure to environmental and asbestos claims arising
primarily from the other liability line of business. This exposure is closely monitored by management, and IBNR
loss reserves have been established to cover estimated ultimate losses. These reserves were increased in each of the
last three years based on examinations of the implied three-year survival ratio (ratio of loss and settlement expense
reserves to the three-year average of loss and settlement expense payments), which has deteriorated due to an
increase in both paid losses and paid settlement expenses. The dollar amount of paid losses peaked in 2008, and
though subsequent years have fared better, payment activity remains significantly higher than pre-2008 levels.

Environmental reserves are established in consideration of the implied three-year survival ratio. Estimation of

ultimate liabilities for these exposures is unusually difficult due to unresolved issues such as whether coverage
exists, the definition of an occurrence, the determination of ultimate damages and the allocation of such damages to
financially responsible parties. Therefore, any estimation of these liabilities is subject to greater than normal
variation and uncertainty, and ultimate payments for losses and settlement expenses for these exposures may differ
significantly from the carried reserves.

Reinsurance Segment

The reinsurance book of business is comprised of two major components. The first is the Home Office

Reinsurance Assumed Department (“HORAD”), which is the reinsurance business that is underwritten by
Employers Mutual. The second is the MRB pool, which is a voluntary reinsurance pool in which Employers Mutual
participates with four other unaffiliated insurers.

The primary actuarial methods used to project ultimate policy year losses on the assumed reinsurance business

are paid development, incurred development and Bornhuetter-Ferguson. The assumptions underlying the various
projection methods include stability in the mix of business, consistent claims processing procedures, immaterial
impact of loss cost trends on development patterns, consistent case loss reserving practices and appropriate
Bornhuetter-Ferguson expected loss ratio selections.

For the HORAD component, Employers Mutual records the case and IBNR loss reserves reported by the

ceding companies. Since many ceding companies in the HORAD book of business do not report IBNR loss
reserves, Employers Mutual establishes a bulk IBNR loss reserve, which is based on an actuarial reserve analysis, to
cover a lag in reporting. For MRB, Employers Mutual records the case and IBNR loss reserves reported to it by the
management of the pool, along with a relatively small IBNR loss reserve to cover a one month reporting lag. To
verify the adequacy of the reported reserves, an actuarial evaluation of MRB’s reserves is performed at each year-
end.

At December 31, 2010, the carried reserves for HORAD and MRB combined were in the upper quartile of the
range of actuarial reserve indications. This selection reflects the fact that there are inherent uncertainties involved in
establishing reserves for assumed reinsurance business. Such uncertainties reflect the fact that a reinsurance
company generally has less knowledge than the ceding company about the underlying book of business and the
ceding company’s reserving practices. Because of these uncertainties, there is a risk that the reinsurance segment’s
reserves for losses and settlement expenses could prove to be inadequate, with a consequential adverse impact on the
Company’s future earnings and stockholders’ equity.

At December 31, 2010, there was no backlog in the processing of assumed reinsurance information.
Approximately $81,644,000, or 53 percent, of the reinsurance segment’s carried reserves were reported by the
ceding companies. Employers Mutual receives loss reserve and paid loss data from its ceding companies on
individual excess-of-loss business. If a claim involves a single or small group of claimants, a summary of the loss
and claim outlook is normally provided. Summarized data is provided for catastrophe claims and pro rata business,
which is subject to closer review if inconsistencies are suspected.

Carried reserves established in addition to those reported by the ceding companies totaled approximately
$71,796,000 at December 31, 2010. Since many ceding companies in the HORAD book of business do not report
IBNR loss reserves, Employers Mutual establishes a bulk IBNR loss reserve to cover the lag in reporting. For the
few ceding companies that do report IBNR loss reserves, Employers Mutual carries them as reported. These
reported IBNR loss reserves are subtracted from the total IBNR loss reserve calculated by Employers Mutual’s
actuaries, with the difference carried as bulk IBNR loss reserves. Except for the small IBNR loss reserve
established to cover the one-month lag in reporting, the MRB IBNR loss reserve is established by the management
of MRB. Employers Mutual rarely records additional case loss reserves.

Assumed reinsurance losses tend to be reported later than direct losses. This lag is reflected in loss projection

factors for assumed reinsurance that tend to be higher than for direct business. The result is that assumed
reinsurance IBNR loss reserves as a percentage of total reserves tend to be higher than for direct loss reserves.
IBNR loss reserves totaled $90,075,000 and $88,795,000 at December 31, 2010 and 2009, respectively, and
accounted for approximately 59 percent and 61 percent, respectively, of the reinsurance segment’s total loss and
settlement expense reserves. IBNR loss reserves are, by nature, less precise than case loss reserves. A five percent
change in IBNR loss reserves at December 31, 2010 would equate to $2,927,000 net of tax, which represents 9.3
percent of the net income reported for 2010 and 0.8 percent of stockholders’ equity.

Following is a summary of the carried loss and settlement expense reserves for the reinsurance segment at

December 31, 2010 and 2009.

Line of business

Case

IBNR

Settlement
expense

Total

December 31, 2010

Pro rata reinsurance:
Property and casualty ........................
Property .............................................
Crop ...................................................
Casualty .............................................
Marine/Aviation ................................
Total pro rata reinsurance ..............

2,834
11,634
1,046
306
970
16,790

($ in thousands)

1,128
11,803
114
4,799
1,778
19,622

284
610
20
122
116
1,152

Excess-of-loss reinsurance:
Property .............................................
Casualty .............................................
Surety ................................................
Total excess-of-loss
reinsurance ................................
Total reinsurance segment .....

4,246
24,047
1,180
5,227
2,864
37,564

34,184
80,489
1,203

16,448
25,649
855

16,946
53,217
290

790
1,623
58

42,952
59,742

70,453
90,075

2,471
3,623

115,876
153,440

Line of business

Case

IBNR

Settlement
expense

Total

December 31, 2009

3,046
11,535
737
1,438
1,133
17,889

($ in thousands)

1,602
13,571
12
5,138
1,584
21,907

222
577
22
72
121
1,014

13,041
22,114
851

12,044
54,477
367

534
1,429
20

36,006
53,895

66,888
88,795

1,983
2,997

104,877
145,687

4,870
25,683
771
6,648
2,838
40,810

25,619
78,020
1,238

As previously noted, the assumptions implicit in the methodologies utilized to establish reserves for the
reinsurance segment are stability in the mix of business, consistent claims processing procedures, immaterial impact
of loss cost trends on development patterns, consistent case loss reserving practices and appropriate Bornhuetter-
Ferguson expected loss ratio selections. The tables below display the impact on the Company’s results of operations
from (1) a five percent variance in case loss reserve adequacy from the level anticipated in the incurred loss
projection factors, (2) a one percent variance in the implicit annual claims inflation rate, (3) a five percent variance
in IBNR losses as a percentage of reported incurred losses (due, for example, to changes in mix of business or
claims processing procedures) and (4) a five percent variance in the expected loss ratios used with the Bornhuetter-
Ferguson method. In other words, under each scenario, future loss and settlement expense payments would be
expected to vary from actuarial reserve estimates by the amounts shown below. These variances in future loss and
settlement expense payments could occur in one year or over multiple years. Variances in future loss and settlement
payments would also affect the Company’s financial position in that the Company’s equity would be impacted by an
amount equivalent to the change in net income. Variances of this type would typically be recognized in loss and
settlement expense reserves and, accordingly, would not have a material effect on liquidity because the claims have
not been paid. Such variances are considered reasonably likely based on the range of actuarial indications
developed during the analysis of the reinsurance segment’s carried reserves.

The after-tax impact on the Company’s earnings under each scenario is as follows:

Reinsurance segment

MRB

HORAD

($ in thousands)

(1) Five percent variance in case loss reserve
adequacy from the level anticipated in the
incurred loss projection factors .............................

(590)

533

(2,829)

$
2,559

(2) One percent variance in the implicit annual
claims inflation rate ...............................................

(1,239)

1,067

(2,534)

2,333

(3) Five percent variance in IBNR losses from
the level anticipated in the loss projection
factors ...................................................................

(4) Five percent variance in the expected loss
ratios used with the Bornhuetter-Ferguson
method ..................................................................

(424)

424

(2,147)

2,147

(430)

430

(2,240)

2,240

To ensure the accuracy and completeness of the information received from the ceding companies, Employers

Mutual’s actuarial department carefully reviews the latest five HORAD policy years on a quarterly basis, and all
policy years on an annual basis. Any significant unexplained departures from historical reporting patterns are
brought to the attention of the reinsurance department’s staff, who contacts the ceding company or broker for
clarification.

Employers Mutual’s actuarial department annually reviews the MRB reserves for reasonableness. These
analyses use a variety of actuarial techniques, which are applied at a line-of-business level. MRB staff supplies the
reserve analysis data, which is verified for accuracy by Employers Mutual’s actuaries. This review process is
replicated by certain other MRB member companies, using actuarial techniques they deem appropriate. Based on
these reviews, Employers Mutual and the other MRB member companies have consistently found the MRB reserves
to be appropriate.

For the HORAD book of business, paid and incurred loss development patterns for relatively short-tail lines of

business (property and marine) are based on data reported by the ceding companies. Employers Mutual has
determined that there is sufficient volume and stability in the reported losses to base projections of ultimate losses
on these patterns. For longer tail lines of business (casualty), industry incurred development patterns are referenced
due to the instability of the development patterns based on reported historical losses.

For long-tail lines of business, unreliable estimates of unreported losses can result from the application of loss

projection factors to reported losses. To some extent, this is also true for short-tail lines of business in the early
stages of a policy year’s development. Therefore, in addition to loss-based projections, Employers Mutual generates
estimates of unreported losses based on premiums earned. The latter estimates are sometimes more stable and
reliable than projections based on losses.

Disputes with ceding companies do not occur often. Employers Mutual performs claims audits and encourages

prompt reporting of reinsurance claims. Employers Mutual also reviews claim reports for accuracy, completeness
and adequate reserving. Most reinsurance contracts contain arbitration clauses to resolve disputes, but such disputes
are generally resolved without arbitration due to the long-term and ongoing relationships that exist with those
companies. There were no matters in dispute at December 31, 2010.

Toxic tort (primarily asbestos), environmental and other uncertain exposures (property and casualty insurance
segment and reinsurance segment)

Toxic tort claims include those where the claimant seeks compensation for harm allegedly caused by exposure
to a toxic substance or a substance that increases the risk of contracting a serious disease, such as cancer. Typically
the injury is caused by latent effects of direct or indirect exposure to a substance or combination of substances
through absorption, contact, ingestion, inhalation, implantation or injection. Examples of toxic tort claims include
injuries arising out of exposure to asbestos, silica, mold, drugs, carbon monoxide, chemicals and lead.

Since 1989, the pool participants have included an asbestos exclusion in liability policies issued for most lines
of business. The exclusion prohibits liability coverage for “bodily injury”, “personal injury” or “property damage”
(including any associated clean-up obligations) arising out of the installation, existence, removal or disposal of
asbestos or any substance containing asbestos fibers. Therefore, the pool participants’ current asbestos exposures
are primarily limited to commercial policies issued prior to 1989. At present, the pool participants are defending
approximately 1,050 asbestos bodily injury lawsuits, some of which involve multiple plaintiffs. Seven former
policyholders and one current policyholder dominate the pool participants’ asbestos claims. Most of the lawsuits are
subject to express reservation of rights based upon the lack of an injury within the applicable policy periods, because
many asbestos lawsuits do not specifically allege dates of asbestos exposure or dates of injury. The pool
participants’ policyholders named as defendants in these asbestos lawsuits are typically peripheral defendants who
have little or no exposure and are routinely dismissed from asbestos litigation with nominal or no payment (i.e.,
small contractors, insulators, electrical welding suppliers, furnace manufacturers, and gasket and building supply
companies).

During 2003, the pool participants were presented with several hundred plaintiff lawsuits filed against three

former policyholders representing approximately 66,500 claimants related to exposure to asbestos or products
containing asbestos. The vast majority of the 66,500 claims are the result of multi-plaintiff lawsuits. These claims
are based upon nonspecific asbestos exposure and nonspecific injuries. As a result, management did not establish a
significant amount of case loss reserves for these claims. During the period 2006 through 2010, several of the multi-
plaintiff lawsuits (including the vast majority of those associated with one former policyholder) were dismissed. As
of December 31, 2010, approximately 2,750 of the claims remain open. During 2006, the pool participants received
notice that another former policyholder was a named defendant in approximately 33,000 claims nationwide. As of
December 31, 2010, approximately 4,710 of these claims remain open.

Prior to 2008, actual losses paid for asbestos-related claims had been minimal due to the plaintiffs’ failure to
identify an exposure to any asbestos-containing products associated with the pool participants’ current and former
policyholders. However, paid losses and settlement expenses have increased significantly during the past three
years as a result of claims attributed to two former policyholders. One of these former policyholders, a broker of
various products, including asbestos, settled a claim for approximately $450,000 (the Company’s share) in 2008.
Prior to 2008, the asbestos exposure associated with this former policyholder had been thought to be relatively
small. At December 31, 2010, two additional claims associated with this former policyholder remain open, though
similar exposure on these claims is not anticipated. The other former policyholder, a furnace manufacturer, had
multiple claims settle for a total of approximately $719,000 (the Company’s share) in 2009 and 2010. The asbestos
exposure associated with this former policyholder has increased during the last two years, and this trend may
possibly continue into the future with increased per plaintiff settlements. Settlement expense payments associated
with this former policyholder have increased significantly over the past three years and have been the primary driver
behind recent implemented reserve increases. The primary cause of this increase in paid settlement expenses is the
retention of a National Coordinating Counsel (NCC) in 2008 due to this former policyholder’s exposure in
numerous jurisdictions. The NCC has provided, and continues to provide, significant services in the areas of
document review, discovery, deposition and trial preparation. Approximately 190 asbestos exposure claims
associated with this former policyholder remain open. Whenever possible, the pool participants have participated in
cost sharing agreements with other insurance companies to reduce overall asbestos claim expenses.

The pool participants are defending approximately 66 claims as a result of lawsuits alleging “silica” exposure
in Texas and Mississippi jurisdictions, some of which involve multiple plaintiffs. The plaintiffs allege employment
exposure to “airborne respirable silica dust,” causing “serious and permanent lung injuries” (i.e., silicosis). Silicosis
injuries are identified in the upper lobes of the lungs, while asbestos injuries are localized in the lower lobes.

The plaintiffs in the silicosis lawsuits are sandblasters, gravel and concrete workers, ceramic workers and road

construction workers. All of these lawsuits are subject to express reservation of rights based upon the lack of an
injury within the applicable policy periods because many silica lawsuits, like asbestos lawsuits, do not specifically
allege dates of exposure or dates of injury. The pool participants’ policyholders (a refractory product manufacturer,
small local concrete and gravel companies and a concrete cutting machine manufacturer) that have been named as
defendants in these silica lawsuits have had little or no exposure and are routinely dismissed from silica litigation
with nominal or no payment. While the expense of handling these lawsuits is high, it is not proportional to the
number of plaintiffs, and is mitigated through cost sharing agreements with other insurance companies.

Since 2004, the pool participants have included a “pneumoconiosis dust” exclusion to their commercial lines

liability policies in the majority of jurisdictions where such action was warranted. This exclusion precludes liability
coverage due to “mixed dust” pneumoconiosis, pleural plaques, pleural effusion, mesothelioma, lung cancer,
emphysema, bronchitis, tuberculosis or pleural thickening, or other pneumoconiosis-related ailments such as
arthritis, cancer (other than lung), lupus, heart, kidney or gallbladder disease. “Mixed dust” includes dusts
composed of asbestos, silica, fiberglass, coal, cement, or various other elements. It is anticipated that this mixed
dust exclusion will further limit the pool participants’ exposure in silica claims, and may be broad enough to limit
exposure in other dust claims.

The Company’s environmental claims are defined as 1) claims for bodily injury, personal injury, property
damage, loss of use of property, diminution of property value, etc., allegedly due to contamination of air, and/or
contamination of surface soil or surface water, and/or contamination of ground water, aquifers, wells, etc.; or 2)
any/all claims for remediation or clean-up of hazardous waste sites by the United States Environmental Protection
Agency, or similar state and local environmental or government agencies, usually presented in conjunction with
Federal or local clean up statutes (i.e., CERCLA, RCRA, etc.).

Examples include, but are not limited to: chemical waste; hazardous waste treatment, storage and/or disposal
facilities; industrial waste disposal facilities; landfills; superfund sites; toxic waste spills; and underground storage
tanks. Widespread use of pollution exclusions since 1970 in virtually all lines of business, except personal lines, has
resulted in limited exposure to environmental claims. Absolute pollution exclusions have been used since the
1980’s; however, the courts in the State of Indiana have ruled that the absolute pollution exclusion is ambiguous.

The Company’s current exposures to environmental claims include losses involving petroleum haulers, lead

contamination, and soil and groundwater contamination in the State of Indiana. Claims from petroleum haulers are
generally caused by overturned commercial vehicles and overfills at commercial and residential properties.
Exposures for accident year losses preceding the 1980s include municipality exposures for closed landfills, small
commercial businesses involved with disposing waste at landfills, leaking underground storage tanks and
contamination from dry cleaning operations. As of December 31, 2010, all Methyl Tertiary Butyl Ether (“MTBE”)
claims related to the pool participants’ policyholders had been dismissed.

During 2009, the Company completed a comprehensive policy search and coverage review, and began
defending (pursuant to policies issued 1969-1975) a lawsuit filed against a municipalities’ sewerage commission in
United States District Court in Wisconsin in 2008. The Company has a joint defense agreement with two other
companies but currently retains the majority share. The lawsuit is potentially one of the largest CERCLA actions
pending against numerous parties in the United States and seeks in excess of $1.5 billion from the defendants. The
Company has established reserves equal to policy limits for each of the six years of alleged liability (approximately
$90,000 in aggregate as the Company’s share) along with associated settlement expenses. While the insured’s
summary judgment motion was successful, future appeals are anticipated.

The Company’s exposure to asbestos and environmental claims through assumed reinsurance is very limited

due to the fact that the Company’s reinsurance subsidiary entered into the reinsurance marketplace in the early
1980’s, after much attention had already been brought to these issues.

At December 31, 2010, the Company carried asbestos and environmental reserves for direct insurance and
assumed reinsurance business totaling $8,044,000, which represents 1.4 percent of total loss and settlement expense
reserves. The asbestos and environmental reserves include $2,829,000 of case loss reserves, $2,706,000 of IBNR
loss reserves and $2,509,000 of bulk settlement expense reserves. Ceded reinsurance on these reserves totaled
$960,000. Settlement expense reserves were increased in 2010 because of deterioration in the implied survival ratio.

The pool participants’ non-asbestos direct product liability claims are considered to be highly uncertain
exposures due to the many uncertainties inherent in determining the loss, and the significant periods of time that can
elapse between the occurrence of the loss and the ultimate settlement of the claim. The majority of the pool
participants’ product liability claims arise from small to medium-sized manufacturers, contractors, petroleum
distributors, and mobile home and auto dealerships. No specific claim trends are evident from the pool participants’
manufacturers, as the claims activity on these policies is generally isolated and can be severe. Specific product
liability coverage is provided to the pool participants’ mobile home and auto dealership policyholders, and the
claims from these policies tend to be relatively small. Certain construction defect claims are also reported under
product liability coverage. During 2010, 46 of these claims were reported to the pool participants.

The Company has exposure to construction defect claims arising from general liability policies issued by the

pool participants to contractors. Most of the pool participants’ construction defect claims are concentrated in a
limited number of states, and the pool participants have taken steps to mitigate this exposure. Construction defect is
a highly uncertain exposure due to such issues as whether coverage exists, definition of an occurrence,
determination of ultimate damages, and allocation of such damages to financially responsible parties. Newly
reported construction defect claims numbered 469, 415 and 373 in 2010, 2009 and 2008, respectively, and produced
incurred losses and paid settlement expenses of approximately $3,276,000, $2,913,000 and $2,855,000 in each
respective period. Incurred losses and paid settlement expenses on all construction defect claims totaled
approximately $4,628,000 in 2010. At December 31, 2010, the Company carried case loss reserves of
approximately $6,087,000 on 737 open construction defect claims.

The Company’s assumed casualty excess reinsurance business is also considered a highly uncertain exposure

due to the significant periods of time that can elapse during the settlement of the underlying claims, and the fact that
a reinsurance company generally has less knowledge than the ceding company about the underlying book of
business and the ceding company’s reserving practices. Employers Mutual attempts to account for this uncertainty
by establishing bulk IBNR loss reserves, using conservative assumed treaty limits and, to a much lesser extent,
booking of individual treaty IBNR loss reserves (if reported by the ceding company) or establishing additional case
loss reserves if the reported case loss reserves appear inadequate on an individual claim. While Employers Mutual
is predominantly a property reinsurer, it does write casualty excess business oriented mainly towards shorter tail
casualty lines of coverage. Employers Mutual avoids reinsuring large company working layer casualty risks, and
does not write risks with heavy product liability exposures, risks with obvious latent injury manifestation, medical
malpractice, and “for profit” Directors and Officers coverage. A small amount of casualty excess business on large
companies is written, but generally on a “clash” basis only (layers above the limits written for any individual
policyholder).

Following is a summary of loss and settlement expense reserves and payments associated with asbestos,

environmental, products liability and casualty excess reinsurance exposures for 2010, 2009 and 2008:

Property and casualty
insurance segment

Reinsurance segment

Case

IBNR

Settlement
expense

Case

IBNR

Settlement
expense

($ in thousands)
Reserves at 12/31/10

Asbestos ......................

2,483

1,000

2,380

156

382

$
-

Environmental .............
Products1 .....................
Casualty excess2 ..........

125

5,532

668

4,759

128

6,209

656

23,715

53,217

1,575

Reserves at 12/31/09
Asbestos ......................
Environmental .............
Products1 .....................
Casualty excess2 ..........

Reserves at 12/31/08
Asbestos ......................
Environmental .............
Products1 .....................
Casualty excess2 ..........

1,796
146

2,128
679

201
282

144
63

429
659

$
-
-

6,098

4,990

6,141

21,453

54,478

1,431

1,562
82

1,731
756

1,128
292

139
61

442
660

-
$
-

5,418

4,816

7,488

20,223

52,693

1,513

Paid during 2010
Asbestos ......................
Environmental .............
Products1 .....................
Casualty excess2 ..........

461
17

2,564

Paid during 2009
Asbestos ......................
Environmental .............
Products1 .....................
Casualty excess2 ..........

323
30

1,898

Paid during 2008
Asbestos ......................
Environmental .............
Products1 .....................
Casualty excess2 ..........

863
169

2,436

1,022
179

34
-

2,124

5,040

921
213

8
$
-

2,302

7,317

625
24

16
4

1,829

7,230

1
$
-

1,107

-
$
-

1,149

1
$
1

945

1 Products includes the portion of asbestos and environmental claims reported that are non-premises/operations
claims.
2 Casualty excess includes the asbestos and environmental claims reported above.

Following is a summary of the claim activity associated with asbestos, environmental and products liability

exposures for 2010, 2009 and 2008:

Open claims, 12/31/10 ......................
Reported in 2010 ...............................
Disposed of in 2010 ..........................

Asbestos
9,337
207
24,347

Environmental
4
1
2

Products
99
387
1,407

Open claims, 12/31/09 ......................
Reported in 2009 ...............................
Disposed of in 2009 ..........................

Open claims, 12/31/08 ......................
Reported in 2008 ...............................
Disposed of in 2008 ..........................

33,477
3,149
1,317

31,645
240
3,069

5
-
2

7
2
4

1,119
399
374

1,094
381
356

Variability of loss and settlement expense reserves

The Company does not determine a range of estimates for all components of the loss and settlement expense

reserve at the time those reserves are established. At each quarter-end, however, an actuarially determined range of
estimates is developed for the major components of the loss and settlement expense reserve. All reserves are
reviewed, except for the involuntary workers’ compensation pools, for which reliance is placed on a reserve opinion
received from the National Council on Compensation Insurance certifying the reasonableness of those reserves.
Shown below are the actuarially determined ranges of reserve estimates as of December 31, 2010 along with the
statutory-basis carried reserves, which are displayed net of ceded reinsurance. The GAAP-basis loss and settlement
expense reserves contained in the Company’s financial statements are reported gross of ceded reinsurance and
contain a small number of adjustments from the statutory-basis amounts presented here. The last two columns
display the estimated after-tax impact on earnings if the reserves were moved to the high end-point or low end-point
of the ranges.

($ in thousands)
Property and casualty
insurance segment .............
Reinsurance segment .............

Range of reserve estimates

High

Low

Carried

After-tax impact on earnings
Reserves
Reserves
at low
at high

390,904
152,297
543,201

342,627
123,352
465,979

380,842
148,829
529,671

(6,540)
(2,254)
(8,794)

24,840
16,560
41,400

For the property and casualty insurance segment, total carried reserves for direct business equal the individual
case loss reserves established primarily by the claims adjusters in the sixteen branch offices, with assistance of the
home office claims department, plus bulk case loss reserves, IBNR loss reserves and settlement expense reserves
established by home office management. The precise location of total carried reserves within the actuarial range is
unknown at the time the reserves are established because the actuarial evaluation of reserve adequacy is conducted
after the establishment of the reserves.

Changes in loss and settlement expense reserve estimates of prior periods

Loss and settlement expense reserves are estimates at a given time of what an 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. Such changes in the reserves for losses and settlement
expenses are reflected in operating results in the year such changes are recorded.

For a detailed discussion of the development experienced on prior accident years’ reserves during the past
three years, see the discussion entitled “Loss and Settlement Expense Reserves” under the “Narrative Description of
Business” heading in the Business Section under Part I, Item I of this Form 10-K.

Investments

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an

orderly transaction between market participants at the measurement date. The following fair value hierarchy
prioritizes inputs to valuation techniques used to measure fair value:

Level 1 - Unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the

ability to access.

Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar

assets or liabilities in inactive markets; or valuations based on models where the significant inputs are
observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or
can be corroborated by observable market data.

Level 3 - Prices or valuation techniques that require significant unobservable inputs. The unobservable inputs
may reflect the Company’s own judgments about the assumptions that market participants would use.

The Company uses an independent pricing source to obtain the estimated fair value of a majority of its
securities. The fair value is based on quoted market prices, where available. This is typically the case for equity
securities and short-term investments, which are accordingly classified as Level 1 fair value measurements. In cases
where quoted market prices are not available, fair value is based on a variety of valuation techniques depending on
the type of security. Many of the fixed maturity securities in the Company’s portfolio do not trade on a daily basis;
however, observable inputs are utilized in their valuations, and these securities are therefore classified as Level 2 fair
value measurements. Following is a brief description of the various pricing techniques used for different asset
classes.

(cid:120) U.S. Treasury securities (including bonds, notes, and bills) are priced according to a number of live data

sources, including active market makers and inter-dealer brokers. Prices from these sources are reviewed
based on the sources’ historical accuracy for individual issues and maturity ranges.

(cid:120) U.S. government-sponsored agencies and corporate securities (including fixed-rate corporate bonds and

medium-term notes) are priced by determining a bullet (non-call) spread scale for each issuer for maturities
going out to forty years. These spreads represent credit risk and are obtained from the new issue market,
secondary trading, and dealer quotes. An option adjusted spread model is incorporated to adjust spreads of
issues that have early redemption features. The final spread is then added to the U.S. Treasury curve. For
notes with odd coupon payment dates, a cash discounting yield/price routine calculates prices from final
yields.

(cid:120) Obligations of states and political subdivisions are priced by tracking and analyzing actively quoted issues
and trades reported by the Municipal Securities Rulemaking Board (MSRB). Municipal bonds with similar
characteristics are grouped together into market sectors, and internal yield curves are constructed daily for
these sectors. Individual bond evaluations are extrapolated from these sectors, with the ability to make
individual spread adjustments for attributes such as discounts, premiums, alternative minimum tax, and/or
whether or not the bond is callable.

(cid:120) Mortgage-backed securities are priced with models using spreads and other information solicited from Wall

Street buy- and sell-side sources, including primary and secondary dealers, portfolio managers, and
research analysts, to produce pricing for each tranche. To determine a tranche’s price, first the cash flow
for each tranche is generated (using consensus prepayment speed assumptions including, as appropriate, a
proprietary prepayment projection based on historical statistics of the underlying collateral), then a
benchmark yield is determined (in relation to the U.S. Treasury curve for the maturity corresponding to the
tranche’s average life estimate), and finally collateral performance and tranche level attributes are
incorporated to adjust the benchmark yield to determine the tranche-specific spread. This is then used to
discount the cash flows to generate the price. When cash flows, or other security structure or market
information, is not available to appropriately price a security, broker quotes may be used with a zero spread
bid-side valuation, resulting in the same values for the mean and ask prices.

On a quarterly basis, the Company receives from its independent pricing service a list of fixed maturity

securities that were priced solely from broker quotes. Since this is not an observable input, any fixed maturity
security in the Company’s portfolio that is on this list is classified as a Level 3 fair value measurement. At
December 31, 2010, the Company did not hold any fixed maturity securities that were priced solely from broker
quotes.

The estimated fair values obtained from the independent pricing sources are reviewed by the Company for
reasonableness and any discrepancies are investigated for final valuation. This includes comparing valuations from
the independent pricing source, the Company’s investment custodian and the SVO. From these comparisons,
material variances are identified and resolved to determine the final valuations used in the financial statements.

Investment Impairments

The Company regularly monitors its investments which have a fair value that is less than the carrying value for
indications of “other-than-temporary” impairment. Several factors are used to determine whether the carrying value
of an individual security has been “other-than-temporarily” impaired. Such factors include, but are not limited to (1)
the security’s value and performance in the context of the overall markets, (2) length of time and extent the
security’s fair value has been below carrying value, (3) key corporate events, and (4) for equity securities, the ability
and intent to hold the security until recovery to its cost basis. Prior to April 1, 2009, the Company’s ability and
intent to hold fixed maturity securities in an unrealized loss position until recovery was also considered in the
determination of “other-than-temporary” impairments.

Effective April 1, 2009, the Company adopted the requirements for recognition, presentation, and disclosure of

“other-than-temporary” impairments on fixed maturity securities from Investments-Debt and Equity Securities
Topic 310 of the Financial Accounting Standards Board (FASB) FASB Accounting Standards Codification TM
(ASC). Under these requirements, the evaluation of an impaired fixed maturity security includes an assessment of
whether the entity has the intent to sell the security and if it is more likely than not to be required to sell the security
before recovery of its amortized cost basis. In addition, if the present value of cash flows expected to be collected is
less than the amortized cost of the security, a credit loss is deemed to exist and the security is considered “other-
than-temporarily” impaired. The portion of the impairment related to a credit loss is recognized through earnings
and the portion of the impairment related to other factors, if any, is recognized through “other comprehensive
income”. These requirements became effective for interim and annual reporting periods ending after June 15, 2009.

When an equity security is deemed “other-than-temporarily” impaired, the carrying value is reduced to fair

value and a realized loss is recognized and charged to income.

Deferred policy acquisition costs and related amortization

Acquisition costs consisting of commissions, premium taxes and other underwriting expenses that vary with,
and are directly related to, the production of business are deferred and amortized to expense as premium revenue is
recognized.

Deferred policy acquisition costs and related amortization are calculated separately for the property and
casualty insurance segment and the reinsurance segment. The method followed in computing deferred policy
acquisition costs limits the amount of such deferred costs to the estimated realizable value, which gives effect to the
premium to be earned, related investment income, losses and settlement expenses and certain other costs expected to
be incurred as the premium is earned. Deferred policy acquisition costs were not subject to limitation at December
31, 2010, and management does not anticipate that any limitation will occur in 2011 due to the current level of rate
adequacy in both the insurance and reinsurance marketplaces.

Deferred income taxes

The realization of the deferred income tax asset is based upon projections indicating that a sufficient amount of

future taxable income will be earned to utilize the tax deductions that will reverse in the future. These projections
are based on the Company’s history of producing significant amounts of taxable income, the current premium rate
environment for both the property and casualty insurance segment and the reinsurance segment, and loss and
expense control initiatives that have been implemented in recent years. In addition, management has formulated
tax-planning strategies that could be implemented to generate taxable income if needed. Should the projected
taxable income and tax planning strategies not provide sufficient taxable income to recover the deferred tax asset, a
valuation allowance would be required.

Benefit Plans

Employers Mutual sponsors two defined benefit pension plans (a qualified plan and a nonqualified

supplemental plan) and two postretirement benefit plans that provide retiree healthcare and life insurance coverage.
Although the Company has no employees of its own, it is responsible for its share of the expenses and related
prepaid assets and liabilities of these plans, as determined under the terms of the pooling agreement and the cost
allocation methodologies applicable to its subsidiaries that do not participate in the pooling agreement.

The net periodic pension and postretirement benefit costs, as well as the prepaid assets and liabilities of these

plans, are determined by actuarial valuations. Inherent in these valuations are key assumptions regarding the
discount rate, the expected long-term rate of return on plan assets, the rate of future compensation increases (pension
plans only), and the health care cost trend rate (healthcare postretirement plan only). The assumptions used in the
actuarial valuations are updated annually. Material changes in the net periodic pension and postretirement benefit
costs may occur in the future due to changes in these assumptions or changes in other factors, such as the number of
plan participants, the level of benefits provided, asset values and applicable legislation or regulations.

The discount rate utilized in the valuations is based on an analysis of the total rate of return that could be
generated by a hypothetical portfolio of high-quality bonds created to generate cash flows that match the plans’
expected benefit payments. No callable bonds are used in this analysis and the discount rate produced by this
analysis is compared to interest rates of applicable published indices for reasonableness. The discount rates used in
the pension benefit valuations at December 31, 2010, 2009 and 2008 were 5.00 percent, 5.75 percent and 6.25
percent, respectively. The discount rates used in the postretirement benefit valuations at December 31, 2010, 2009
and 2008 were 5.50 percent, 6.00 percent and 6.25 percent, respectively. A 0.25 percentage point decrease in the
discount rates used in the 2010 valuations would increase the Company’s net periodic pension and postretirement
benefit costs for 2011 by approximately $117,000. Conversely, a 0.25 percentage point increase in the 2010
discount rates would decrease the Company’s net periodic pension and postretirement benefit costs for 2011 by
approximately $112,000.

The expected long-term rate of return on plan assets is developed considering actual historical results, current

and expected market conditions, the mix of plan assets and investment strategy. The expected long-term rate of
return on plan assets produced by this analysis and used in the pension valuations at December 31, 2010, 2009 and
2008 was 7.50 percent. The expected long-term rate of return on plan assets used in the postretirement benefit
valuations was 6.75 percent at December 31, 2010, and 6.00 percent in both 2009 and 2008. The actual rate of
return earned on plan assets during 2010 was approximately 16 percent for the pension plan and 14 percent for the
postretirement benefit plans. The expected long-term rate of return assumption is subject to the general movement
of the economy, but is generally less volatile than the discount rate assumption. A decrease in the expected long-
term rate of return assumption increases future expenses, whereas an increase in the assumption reduces future
expenses. A 0.25 percentage point change in the 2010 expected long-term rate of return assumption would change
the Company’s net periodic pension and postretirement benefit costs for 2011 by $190,000. For detailed
information regarding the current allocation of assets within the pension and postretirement benefit plans, see note
12 of Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.

The health care cost trend rate assumption represents the anticipated change in the cost of health care benefits
due to factors outside of the plan. These factors include health care inflation, changes in health care utilization and
delivery patterns, technological advances, and the overall health of the plan participants. The health care cost trend
rate assumption is based on published information and general economic conditions. The health care cost trend rate
assumption for 2010 was 8.5 percent, and is assumed to decrease gradually to 5 percent in 2018 and remain at that
level thereafter.

In accordance with GAAP, actuarial gains/losses contained in the valuations that result from (1) actual
experience that differs from that assumed, or (2) a change in actuarial assumptions, is accumulated and, if in excess
of a specified corridor, amortized to expense over future periods. As of December 31, 2010, all of the benefit plans
had accumulated actuarial losses in excess of the corridor that will be amortized into expense in 2011. The
Company’s share of the accumulated actuarial losses that will be amortized into expense during 2011 amounts to
$1,541,000. Prior service costs/credits for plan amendments are also contained in the valuations, and are amortized
into expense/income over the future service periods. As of December 31, 2010, the postretirement benefit plans
have prior service credits that are being amortized into income in future periods, while the qualified defined benefit
pension plan has prior service costs that are being amortized into expense in future periods. The net amount of prior
service credit being amortized into income during 2011 is $481,000.

In accordance with GAAP, the funded status of defined benefit pension or other postretirement plans is

recognized as an asset or liability on the balance sheet. Changes in the funded status of the plans is recognized
through other comprehensive income.

RESULTS OF OPERATIONS

Segment information and consolidated net income for the three years ended December 31, 2010 are as follows:

($ in thousands)
Property and casualty insurance
Premiums earned .....................................................
Losses and settlement expenses ...............................
Acquisition and other expenses ...............................
Underwriting loss .....................................................

Year ended December 31,
2009

2008

2010

305,647
208,114
116,496
(18,963)

308,079
199,124
119,342
(10,387)

315,598
232,538
109,877
(26,817)

Loss and settlement expense ratio ............................
Acquisition expense ratio .........................................
Combined ratio ........................................................

68.1%
38.1%
106.2%

64.6%
38.8%
103.4%

73.7%
34.8%
108.5%

Losses and settlement expenses:
Insured events of current year ..............................
Decrease in provision for insured
events of prior years .........................................

236,840

233,765

254,102

(28,726)

(34,641)

(21,564)

Total losses and settlement expenses ...........

208,114

199,124

Catastrophe and storm losses ...................................

33,062

27,899

232,538

44,439

($ in thousands)
Reinsurance
Premiums earned .....................................................
Losses and settlement expenses ...............................
Acquisition and other expenses ...............................
Underwriting profit (loss) ........................................

83,475
46,527
27,040
9,908

75,932
49,625
16,758
9,549

Year ended December 31,
2009

2008

2010

55.7%
32.4%
88.1%

65.4%
22.0%
87.4%

73,720
61,727
17,508
(5,515)

83.7%
23.8%
107.5%

Losses and settlement expenses:
Insured events of current year ..............................
Decrease in provision for insured
events of prior years .........................................

68,550

63,606

75,471

(22,023)

(13,981)

(13,744)

Total losses and settlement expenses ...........

46,527

49,625

Catastrophe and storm losses ...................................

9,082

3,566

61,727

8,045

($ in thousands)
Consolidated
REVENUES
Premiums earned .....................................................
Net investment income ............................................
Realized investment gains (losses) ...........................
Other income ...........................................................

LOSSES AND EXPENSES
Losses and settlement expenses ...............................
Acquisition and other expenses ...............................
Interest expense .......................................................
Other expense ..........................................................

Year ended December 31,
2009

2008

2010

389,122
49,489
3,869
783
443,263

384,011
47,759
17,922
755
450,447

389,318
48,403
(24,456)
626
413,891

254,641
143,536
900
1,741
400,818

248,749
136,100
900
2,173
387,922

294,265
127,385
889
1,642
424,181

Income (loss) before income tax
expense (benefit) ………………………………… 42,445
11,099
Income tax expense (benefit) ...................................
31,346
Net income (loss) .....................................................

62,525
17,154
45,371

(10,290)
(8,585)
(1,705)

Net income (loss) per share .....................................

2.40

3.44

(0.13)

65.4%
36.9%
102.3%

64.8%
35.4%
100.2%

75.6%
32.7%
108.3%

Losses and settlement expenses:
Insured events of current year ..............................
Decrease in provision for insured
events of prior years .........................................

305,390

297,371

329,573

(50,749)

(48,622)

(35,308)

Total losses and settlement expenses ...........

254,641

248,749

294,265

Catastrophe and storm losses ...................................

42,144

31,465

52,484

Year ended December 31, 2010 compared to year ended December 31, 2009

The Company reported net income of $31,346,000 and $45,371,000 ($2.40 and $3.44 per share) in 2010 and

2009, respectively. The decline in net income is primarily attributed to a decrease in realized investment gains and a
decline in the property and casualty insurance segment’s underwriting results. The realized investment gains for
2009 include a $22,474,000 ($14,608,000 net of tax) gain recognized from the sale of the Company’s holdings of
Verisk Analytics, Inc. common stock. The decline in the property and casualty insurance segment’s underwriting
results is primarily attributed to an increase in catastrophe and storm losses and a decline in the amount of favorable
development experienced on prior years’ reserves. Storm losses increased 33.9 percent in 2010 due to active
weather patterns in the Midwest and Eastern sections of the country. Net income did, however, benefit from a
decline in the amount of “other-than-temporary” investment impairment losses recognized compared to 2009.

Premium income

Premiums earned increased 1.3 percent to $389,122,000 in 2010 from $384,011,000 in 2009. The reinsurance

segment was able to increase premium income through the addition of several new reinsurance contracts and
increased participation on existing reinsurance business; however, this increase was partially offset by a decline in
premium income in the property and casualty insurance segment. While premium rate levels for the property and
casualty insurance segment stabilized during 2009, the use of discretionary rate credits increased, keeping overall
premium rate levels flat to slightly lower. Competition remains very strong in the commercial lines of business;
however, moderate rate increases have been implemented in personal lines during the past several years.
Management continues to implement commercial lines rate increases where warranted, but overall rate levels are not
expected to improve until the economy recovers, which is now projected to occur in 2012. Pricing in the
reinsurance marketplace was essentially flat during the year, and is expected to remain flat in 2011.

Premiums earned for the property and casualty insurance segment decreased 0.8 percent to $305,647,000 in
2010 from $308,079,000 in 2009, primarily as a result of a decline in earned premium rate levels resulting from rate
decreases implemented in 2008 and 2009. Premium rates have improved somewhat in the personal lines of
business, but the commercial lines of business, which account for more than 80 percent of the property and casualty
insurance segment’s premiums, remain very competitive. Filed rates for 2010 were up 0.9 percent; however, these
increases were more than offset by increased use of discretionary credits. Overall, the industry has continued to
report average rate declines of three to five percent in commercial lines of business, depending on policy size and
line of business; however, the Company’s average rate decline for commercial lines has been relatively steady at
approximately 1.1 percent. Rate competition in the commercial lines of business is being driven, at least in part, by
the weak economy. Most companies are content to retain their good business at current pricing levels and wait for
the economy to improve. As a result, management expects the current level of rate competition to continue through
2011 and probably into 2012. New business premium increased approximately two percent during 2010 and
accounted for approximately 17 percent of net written premiums; however, the increase in premium income from
this new business was largely offset by a decline in premium income associated with prior years’ rate reductions and
policies not retained. Policy retention rates remained relatively stable at approximately 86 percent, though the
personal lines retention rate was somewhat lower due to management’s decision in 2009 to exit personal lines
business in certain regions of the country. Policy counts increased slightly in both the commercial and personal
lines of business during 2010.

Premiums earned for the reinsurance segment increased 9.9 percent to $83,475,000 in 2010 from $75,932,000

in 2009. This increase was primarily associated with the addition of new facility business during 2010 (includes
facultative and property and casualty reinsurance business from small to mid-size insurance companies), as well as
new property business in central and eastern Europe. Due to the mild 2009 and 2010 hurricane seasons and a
recovery in the reinsurance industry’s capital level, premium rate levels were generally flat in 2010, and declined
slightly during the January 1, 2011 renewal season.

Losses and settlement expenses

Losses and settlement expenses increased 2.4 percent to $254,641,000 in 2010 from $248,749,000 in 2009,
and the loss and settlement expense ratio increased to 65.4 percent in 2010 from 64.8 percent in 2009. The property
and casualty insurance segment reported an increase in its loss and settlement expense ratio, primarily from higher
catastrophe and storm losses and a decline in the amount of favorable development experienced on prior years’
reserves. However, much of the increase in the property and casualty insurance segment’s loss and settlement
expense ratio was offset by a large decline in the reinsurance segment’s loss and settlement expense ratio. The
decline in the reinsurance segment’s ratio is largely attributed to a reclassification by MRB of $6,065,000 from
IBNR reserves to contingent commission reserves. The actuarial analysis of the Company’s carried reserves as of
December 31, 2010 indicates that the level of reserve adequacy is consistent with other recent evaluations. From
management’s perspective, this measure is more relevant to an understanding of the Company’s results of operations
than the composition of the underwriting results between the current and prior accident years.

The loss and settlement expense ratio for the property and casualty insurance segment increased to 68.1
percent in 2010 from 64.6 percent in 2009. Catastrophe and storm losses were well above average in both 2010 and
2009, adding 10.8 and 9.1 percentage points, respectively, to the loss and settlement expense ratios. The high level
of storm activity experienced during 2010 was largely from the Midwest and Eastern sections of the country.
Favorable development on prior years’ reserves declined in 2010, with the decline primarily driven by a relatively
large amount of favorable development experienced in 2009 on the record amount of catastrophe and storm losses
reported in 2008, and the strengthening of asbestos and environmental settlement expense reserves during 2010.
Included in the reported amounts of favorable development for 2010 and 2009 is $32,000 and $3,476,000,
respectively, of favorable development experienced on prior years’ catastrophe and storm loss reserves. Asbestos
and environmental loss and settlement expense reserves were strengthened by $3,420,000 and $1,020,000 during
2010 and 2009, respectively, which is largely due to an increase in paid asbestos settlement expenses in recent years
(particularly on one policyholder with exposure in numerous jurisdictions). In aggregate, the favorable development
experienced in 2010 continues to be associated with closed claims. To a lesser extent, the increase in the loss and
settlement expense ratio also reflects increased claim frequency in several lines of business, increased severity
(including large losses) in the workers’ compensation and other liability lines of business, as well as previously
implemented premium rate level reductions.

The loss and settlement expense ratio for the reinsurance segment decreased to 55.7 percent in 2010 from 65.4
percent in 2009. This decrease is primarily due to the reclassification of $6,065,000 out of the IBNR reserve to the
reserve for contingent commissions, which decreased the reinsurance segment’s loss and settlement expense ratio by
7.3 percentage points. Since this amount was reflected in prior years’ IBNR reserves, it also increased the
reinsurance segment’s favorable development on prior years’ reserves by the same amount. Also contributing to the
decrease in the loss and settlement expense ratio is a decline in large loss activity from the high level experienced in
2009 (an industry-wide occurrence in 2009), as well as an increase in the amount of favorable development
experienced on prior years’ reserves (excluding the $6,065,000 associated with the reclassification of the IBNR
reserves), primarily on accident year 2009. The favorable development amounts reported in 2010 and 2009 are
primarily attributed to changes in IBNR reserves during those years, with the 2010 change predominantly attributed
to the property pro rata and catastrophe and casualty excess business. An increase in catastrophe and storm losses
partially offset these decreases.

Acquisition and other expenses

Acquisition and other expenses increased 5.5 percent to $143,536,000 in 2010 from $136,100,000 in 2009.

The acquisition expense ratio increased to 36.9 percent in 2010 from 35.4 percent in 2009. This increase is
attributed to an increase in contingent commission expense in the reinsurance segment, including the $6,065,000
reclassification previously noted. This increased the 2010 acquisition expense ratio, with a corresponding decrease
to the loss and settlement expense ratio. Declines in policyholder dividends, contingent salaries, executive bonuses,
and agents’ profit bonuses in the property and casualty insurance segment were largely offset by an increase in
commission expense in the reinsurance segment.

For the property and casualty insurance segment, the acquisition expense ratio decreased to 38.1 percent in

2010 from 38.8 percent in 2009. The decrease is attributed to a decline in underwriting results in 2010, which
produced declines in several expenses that are based on loss experience or overall underwriting results, such as
reduced dividends on some of the pool’s larger safety dividend groups, reduced agents’ profit bonuses, and reduced
accruals for contingent salaries and executive bonuses.

For the reinsurance segment, the acquisition expense ratio increased to 32.4 percent in 2010 from 22.0 percent

in 2009. This increase is primarily attributed to an increase in contingent commission expense associated with the
$6,065,000 reclassification of IBNR reserves to contingent commissions, which increased the 2010 acquisition
expense ratio by 7.3 percentage points. Also contributing to the increase in the reinsurance segment’s acquisition
expense ratio were increases in contingent commission expense (excluding the $6,065,000 reclassification) from
favorable underwriting performance in the assumed book of business, and an increase in commission expense
associated with the new facility business, which carries a higher commission rate than the reinsurance segment’s
other business.

Investment results

Net investment income increased 3.6 percent to $49,489,000 in 2010 from $47,759,000 in 2009. This increase

is the result of a higher average invested balance in fixed maturity securities, which reflects the reinvestment of
short-term holdings into Build America Bonds and other securities in the fourth quarter of 2009.

The Company reported net realized investment gains of $3,869,000 and $17,922,000 in 2010 and 2009,
respectively. The 2009 amount includes a $22,474,000 realized gain recognized on the disposal of the Company’s
holdings of Verisk common stock, and $10,108,000 of “other-than-temporary” investment impairment losses. The
amount of “other-than-temporary” investment impairment losses declined substantially in 2010, with $2,180,000
impaired on 23 equity securities and $204,000 impaired on two residential mortgage-backed securities ($121,000
from the determination of credit loss on one residential mortgage-backed security, and $83,000 associated with
management’s intent to sell another residential mortgage-backed security in an unrealized loss position). The
impairment losses recognized in 2009 were on 34 equity securities and three fixed maturity securities.

The Company’s equity portfolio had a return of 14.31 percent during 2010, compared to 15.06 percent for the

S&P 500. The current annualized yield on the bond portfolio is 4.98 percent and the effective duration is 5.75 years,
compared to 5.27 percent and 6.12 years at December 31, 2009.

Income tax

The Company reported income tax expense of $11,099,000 in 2010, down from $17,154,000 in 2009. The
effective tax rate was 26.1 percent in 2010, compared to 27.4 percent in 2009. The decrease in the effective tax rate
for 2010 primarily reflects the decline in the amount of pre-tax income earned relative to the amount of tax-exempt
interest income earned. The effective tax rate for 2010 also reflects tax law changes included in the Patient
Protection and Affordable Care Act (H.R. 3590) and the follow-up Health Care and Education Reconciliation Act of
2010 (H.R. 4872) signed into law on March 23, 2010 and March 30, 2010, respectively (the “Acts”). In accordance
with these Acts, beginning in 2013 the Company will no longer be able to claim a tax deduction for drug expenses
that are reimbursed under the Medicare Part D retiree drug subsidy program. Although this tax change does not take
effect until 2013, the Company is required to recognize the financial impact of the change beginning in the period in
which the Acts were signed. As a result of the Acts, the Company recognized a decrease in its deferred tax asset of
$794,000 during 2010.

Year ended December 31, 2009 compared to year ended December 31, 2008

The Company reported net income of $45,371,000 ($3.44 per share) in 2009 compared to a net loss of

$1,705,000 ($0.13 per share) in 2008. This improvement was attributed to several factors: a record amount of
catastrophe and storm losses in 2008, a record amount of “other-than-temporary” investment impairment losses
recognized in 2008 as a result of the financial crisis, and a realized investment gain of $22,474,000 recognized in
2009 from the sale of the Company’s holdings of Verisk common stock. Another factor contributing to the
improvement in net income was improved underwriting performance by the Company’s reinsurance subsidiary in
2009.

Premium income

Premiums earned decreased 1.4 percent to $384,011,000 in 2009 from $389,318,000 in 2008. This decrease
was primarily attributed to a moderate, but steady, decline in overall premium rate levels during the preceding two
years as a result of competitive market conditions associated with the soft market. Premium rates stabilized during
2009, but did not improve to the extent anticipated due to the lagging effects of the weak economy, the very mild
2009 hurricane season, and a general strengthening in the capital base of the industry. The pool participants were
able to achieve some increases in rates, though those increases were generally small and targeted to specific local
markets and individual accounts. Pricing in the reinsurance marketplace improved with the January 1 renewals, but
declined somewhat as the year progressed.

Premiums earned for the property and casualty insurance segment decreased 2.4 percent to $308,079,000 in

2009 from $315,598,000 in 2008, primarily due to a 4.1 percent decline in premium rate levels implemented in
2008. Premium rates did improve somewhat in the personal lines of business during the second half of the year, but
the commercial lines of business, which account for more than 80 percent of the property and casualty insurance
segment’s premiums, remained very competitive. Filed rates for 2009 were up a modest 0.4 percent, representing
the first positive change in four years. Competition in the commercial lines of business is being driven, at least in
part, by the weak economy. Companies know that any proposed rate increases on good business will likely be
challenged by the insured and could result in the loss of the account. As a result, most companies are content to
retain their good business at current pricing levels and wait for the economy to improve. New business premium
increased approximately 13 percent in 2009 and accounted for approximately 13 percent of net written premiums,
but was not sufficient to cover premium declines resulting from prior year rate reductions and policies not retained.
Approximately 39 percent of the new business came from the pool participants’ “Premier” and “Leading” agents
(representing about 18 percent of the total agency force), which once again emphasizes the importance of building
and strengthening agency relationships. Policy retention rates for the year declined slightly to approximately 86
percent in both commercial and personal lines, but continued to exceed industry averages. These declines were
attributed to management’s willingness to walk away from underpriced business, efforts to limit exposures in coastal
regions, and management’s decision to exit personal lines in certain regions of the country. Policy counts increased
slightly in both the commercial and personal lines of business in 2009.

Premiums earned for the reinsurance segment increased 3.0 percent to $75,932,000 in 2009 from $73,720,000
in 2008. This increase was primarily associated with a moderate increase in reinsurance premium rate levels and the
addition of a few new accounts. However, premium growth was limited by a decrease in reinstatement premium
income, a decline in business assumed from the MRB pool, and a decrease in the amount of earned but not reported
(EBNR) premium recognized. Due to a loss of capital in the reinsurance industry in 2008 as a result of the
economic crisis, reinsurance premium rate levels firmed somewhat in the first part of 2009 and the reinsurance
segment was able to obtain moderate rate increases on most of its renewals (including the January 1 renewals).
However, due to the mild hurricane season and a recovery in reinsurance company capital levels during the year,
premium rate levels subsided in the second half of 2009. Premium rate levels for the January 1, 2010 renewal
season were generally flat, with some moderate declines on certain accounts.

Losses and settlement expenses

Losses and settlement expenses decreased 15.5 percent to $248,749,000 in 2009 from $294,265,000 in 2008,

while the loss and settlement expense ratio decreased to 64.8 percent in 2009 from 75.6 percent in 2008. Storm
losses, while higher than average due to active Midwest weather patterns, were significantly lower than the record
amount experienced in 2008. Catastrophe and storm losses accounted for 8.2 percentage points of the combined
ratio for the year ended December 31, 2009, which was higher than the 8-year average of 6.5 percentage points for
the period 2000 to 2007, but significantly lower than the record 13.5 percentage points experienced in 2008. Other
factors contributing to the improvement in the loss and settlement expense ratio were a decline in large losses, an
increase in the amount of favorable development experienced on prior years’ reserves, and strong underwriting
performance in the reinsurance segment. The actuarial analysis of the Company’s carried reserves as of December
31, 2009 indicated that the level of reserve adequacy was consistent with other recent evaluations. From
management’s perspective, this measure is more relevant to an understanding of the Company’s results of operation
than the composition of the underwriting results between the current and prior accident years.

The loss and settlement expense ratio for the property and casualty insurance segment decreased to 64.6

percent in 2009 from 73.7 percent in 2008. A record amount of Midwest storm losses in 2008, along with losses
associated with Hurricanes Gustav and Ike, produced record levels of catastrophe and storm losses and elevated the
loss and settlement expense ratio in 2008. The loss and settlement expense ratio returned to a more normal level in
2009, even though catastrophe and storm losses remained above long-term historical averages. While there were no
reported hurricane losses in the United States in 2009, there was an elevated level of claims activity due to a high
frequency of Midwestern storms. For the year, catastrophe and storm losses in the property and casualty insurance
segment amounted to 9.1 percent of earned premiums compared to 14.1 percent in 2008. Other factors contributing
to the improvement in the loss and settlement expense ratio included a general decline in claim frequency and
severity (including large loss activity) and an increase in the amount of favorable development experienced on prior
years’ catastrophe and storm loss reserves. Large losses, which the Company then defined as losses greater than
$250,000, excluding catastrophe and storm losses, declined to $22,938,000 in 2009 from $24,895,000 in 2008 (a
decrease of 0.5 percentage points in the loss and settlement expense ratio). Previously implemented premium rate
level reductions continued to have a negative impact on the loss and settlement expense ratio, but to a lesser extent
due to a reduction in the magnitude of the rate decreases implemented in 2008 and 2009.

The loss and settlement expense ratio for the reinsurance segment decreased to 65.4 percent in 2009 from 83.7

percent in 2008. Factors contributing to the reinsurance segment’s improvement included moderate rate increases,
good results from the MRB pool, an increase in the amount of favorable development experienced on prior accident
years’ reserves due to a reduction in bulk IBNR reserves and the winding down of the MAERP Reinsurance
Association (formerly known as Mutual Atomic Energy Reinsurance Pool), and a decline in catastrophe and storm
losses from the large amount reported in 2008 (including $2,000,000 of losses associated with Hurricane Ike).

Acquisition and other expenses

Acquisition and other expenses increased 6.8 percent to $136,100,000 in 2009 from $127,385,000 in 2008.
The acquisition expense ratio increased to 35.4 percent in 2009 from 32.7 percent in 2008. These increases were
attributed to the property and casualty insurance segment and reflected increases in net periodic pension benefit cost,
executive bonuses and contingent salaries, and policyholder dividends. These increases were partially offset by a
decline in commission and contingent commission expense in the reinsurance segment.

For the property and casualty insurance segment, the acquisition expense ratio increased to 38.8 percent in

2009 from 34.8 percent in 2008. This increase was attributed to increases in net periodic pension benefit cost,
executive bonuses, contingent salaries, and policyholder dividends. The increase in executive bonuses and
contingent salaries was due to the improved underwriting results in 2009 (no expense was incurred for these items in
2008). The increase in net periodic pension benefit cost was due to a significant increase in the amount of actuarial
losses being amortized and a decrease in the expected return on plan assets, both resulting from the severe decline in
the financial markets during 2008. The increase in policyholder dividend expense was largely due to an increase in
the estimated dividend payable on several safety dividend groups, as well as an increase in the estimated aggregate
amount of dividends payable on individual workers’ compensation policies as a result of good loss experience.

For the reinsurance segment, the acquisition expense ratio decreased to 22.0 percent in 2009 from 23.8 percent

in 2008. This decline was primarily associated with decreases in commission expense (driven largely by
fluctuations in the estimate of commission expense relative to the associated estimate of earned but not reported
premiums) and contingent commission expense (reflecting a decline from the relatively high amount reported in
2008).

Investment results

Net investment income declined 1.3 percent to $47,759,000 in 2009 from $48,403,000 in 2008. Investment

income was negatively impacted by a high level of call activity on the Company’s U.S. government agency
securities during 2009 as a result of the declining interest rate environment, a decline in yield on short-term
investments and the elimination of dividends on the perpetual preferred stocks of Federal Home Loan Mortgage
Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) during 2008. As of
December 31, 2009, the majority of the proceeds received from the called securities had been reinvested.

The Company reported a net realized investment gain of $17,922,000 in 2009 compared to a net realized
investment loss of $24,456,000 in 2008. The 2009 amount reflected a $22,474,000 realized gain recognized on the
disposal of the Company’s holdings of Verisk common stock, and $10,108,000 of “other-than-temporary”
investment impairment losses recognized on 34 equity securities and three fixed maturity securities. The
impairment losses on the three fixed maturity securities totaled $2,657,000, and were attributed to a bankruptcy
filing made by Great Lakes Chemical Corporation, later known as Chemtura Corporation ($2,220,000), a planned
disposal of US Freightways Corporation securities ($350,000) and the determination of a credit loss (all contractual
cash flows were not expected to be collected) on a residential mortgage-backed security ($87,000). Included in the
2008 loss amount was $16,017,000 of “other-than-temporary” investment impairment losses recognized on 38
equity securities as a result of the severe and prolonged turmoil in the financial markets, and $14,904,000 of losses
recognized on the perpetual preferred stocks of Freddie Mac and Fannie Mae when those companies were placed
under conservatorship by the U.S. government.

The total rate of return on the Company’s equity portfolio during 2009 was 21.80 percent, compared to 26.46
percent for the S&P 500. At December 31, 2009, the annualized yield on the bond portfolio was 5.27 percent and
the effective duration was 6.12 years, which was up from 5.57 years at December 31, 2008.

Other expense

Other expense increased 32.3 percent to $2,173,000 in 2009 from $1,642,000 in 2008. This increase primarily
reflected an increase in uncollectible premiums allocated to the property and casualty insurance subsidiaries through
the pooling agreement, and a decrease in foreign currency exchange gains associated with the reinsurance
subsidiary’s foreign currency denominated reinsurance business.

Income tax

The Company reported income tax expense of $17,154,000 in 2009, compared to an income tax benefit of

$8,585,000 in 2008. The effective tax rate was 27.4 percent in 2009, compared to 83.4 percent in 2008. The high
effective tax rate for 2008 reflects the fact that a significant amount of the Company’s investment income was
received in the form of tax-exempt interest income. Due to the much larger amount of pretax income in 2009, tax
exempt interest had less of an impact on the effective tax rate.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet cash obligations. The

Company had positive cash flows from operations of $30,322,000 in 2010, $34,116,000 in 2009 and $30,684,000 in
2008. The Company typically generates substantial positive cash flows from operations because cash from premium
payments is generally received in advance of cash payments made to settle claims. These positive cash flows
provide the foundation of the Company’s asset/liability management program and are the primary drivers of the
Company’s liquidity. When investing funds made available from operations, the Company invests in securities with
maturities that approximate the anticipated payments of losses and settlement expenses of the underlying insurance
policies. In addition, the Company maintains a portion of its investment portfolio in relatively short-term and highly
liquid assets as a secondary source of liquidity should net cash flows from operating activities prove insufficient to
fund current operating needs. As of December 31, 2010, the Company did not have any significant variations
between the maturity dates of its investments and the expected payment of its loss and settlement expense reserves.

The Company is a holding company whose principal asset is its investment in its insurance subsidiaries. As a
holding company, the Company is dependent upon cash dividends from its insurance company subsidiaries to meet
all its obligations, including cash dividends to stockholders and the funding of the Company’s stock repurchase
program. State insurance regulations restrict the maximum amount of dividends insurance companies can pay
without prior regulatory approval. See note 6 of Notes to Consolidated Financial Statements for additional
information regarding dividend restrictions. The maximum amount of dividends that the insurance company
subsidiaries can pay to the Company in 2011 without prior regulatory approval is approximately $39,271,000. The
Company received $17,000,000, $12,500,000 and $25,005,000 of dividends from its insurance company subsidiaries
and paid cash dividends to its stockholders totaling $9,512,000, $9,507,000 and $9,731,000 in 2010, 2009 and 2008,
respectively. The excess dividends received from the insurance company subsidiaries were used to partially fund
the Company’s $25,000,000 stock repurchase program. At December 31, 2010, approximately $1,852,000 of the
authorized stock repurchase program remains available for the purchase of additional shares.

The Company’s insurance and reinsurance company subsidiaries must maintain adequate liquidity to ensure
that their cash obligations are met; however, because of their participation in the pooling agreement and the quota
share agreement, they do not have the daily liquidity concerns normally associated with an insurance or reinsurance
company. This is because under the terms of the pooling and quota share agreements, Employers Mutual receives
all premiums and pays all losses and expenses associated with the insurance business produced by the pool
participants and the assumed reinsurance business ceded to the Company’s reinsurance subsidiary, and then settles
the inter-company balances generated by these transactions with the participating companies within 45 days after the
end of each quarter.

At the insurance company subsidiary level, the primary sources of cash are premium income, investment
income and maturing investments. The principal outflows of cash are payments of claims, commissions, premium
taxes, operating expenses, income taxes, dividends, interest and principal payments on debt, and investment
purchases. Cash outflows vary because of uncertainties regarding settlement dates for unpaid losses and the
potential for large losses, either individually or in the aggregate. Accordingly, the insurance company subsidiaries
maintain investment and reinsurance programs intended to provide adequate funds to pay claims without forced
sales of investments. In addition, the insurance company subsidiaries have access to a line of credit maintained by
Employers Mutual with the Federal Home Loan Bank to provide additional liquidity if needed.

The Company maintains a portion of its investment portfolio in relatively short-term and highly liquid

investments to ensure the availability of funds to pay claims and expenses. A variety of maturities are maintained in
the Company’s investment portfolio to assure adequate liquidity. The maturity structure of the fixed maturity
portfolio is also established by the relative attractiveness of yields on short, intermediate and long-term securities.
The Company does not invest in high-yield, non-investment grade debt securities. Any non-investment grade
securities held by the Company are the result of rating downgrades subsequent to their purchase.

The Company invests for the long term and generally purchases fixed maturity securities with the intent to hold

them to maturity. Despite this intent, the Company currently classifies purchases of fixed maturity securities as
available-for-sale to provide flexibility in the management of its investment portfolio. At December 31, 2010 and
2009, the Company had net unrealized holding gains, net of deferred taxes, on its fixed maturity securities available-
for-sale of $20,770,000 and $17,541,000, respectively. The fluctuation in the fair value of these investments is
primarily due to changes in the interest rate environment during this time period, but also reflects fluctuations in risk
premium spreads over U.S. Treasuries for corporate and U.S. government-sponsored agency securities. Since the
Company does not actively trade in the bond market, such fluctuations in the fair value of these investments are not
expected to have a material impact on the operations of the Company, as forced liquidations of investments are not
anticipated. The Company closely monitors the bond market and makes appropriate adjustments in its portfolio as
conditions warrant.

The majority of the Company’s assets are invested in fixed maturity securities. These investments provide a

substantial amount of investment income that supplements underwriting results and contributes to net earnings. As
these investments mature, or are called, the proceeds are reinvested at current interest rates, which may be higher or
lower than those now being earned; therefore, more or less investment income may be available to contribute to net
earnings. Due to the declining interest rate environment, the Company experienced a high level of call activity on
fixed maturity securities during 2010 and 2009. The proceeds from these called securities have been reinvested at
lower yields, which will have a negative impact on future investment income.

The Company previously participated in a securities lending program administered by Mellon Bank, N.A.

whereby certain fixed maturity securities from the investment portfolio were loaned to other institutions for short
periods of time. The Company received a fee for each security loaned out under this program and required initial
collateral equal to 102 percent of the fair value of the loaned securities. The securities on loan to others were
segregated from the other invested assets on the Company’s balance sheet. In accordance with relevant accounting
literature, the collateral held by the Company was accounted for as a secured borrowing and was recorded as an
asset on the Company’s balance sheet, with a corresponding liability reflecting the Company’s obligation to return
this collateral upon the return of the loaned securities. During the fourth quarter of 2009, management decided to
discontinue its participation in the securities lending program and as a result, began to unwind the program. The
Company terminated its participation in the securities lending program as of December 31, 2010.

The Company held $30,000 and $47,000 in minority ownership interests in limited partnerships and limited

liability companies at December 31, 2010 and 2009, respectively. The Company does not hold any other
unregistered securities.

The Company’s cash balance was $492,000 and $279,000 at December 31, 2010 and 2009, respectively.

Employers Mutual contributed $26,000,000, $17,000,000 and $15,000,000 to its qualified pension plan in
2010, 2009 and 2008, respectively, and plans to contribute approximately $22,000,000 to the qualified pension plan
in 2011. The Company reimbursed Employers Mutual $7,973,000, $5,204,000 and $4,555,000 for its share of the
pension contributions in 2010, 2009 and 2008, respectively. Employers Mutual contributed $2,480,000, $2,550,000
and $12,200,000 to its postretirement benefit plans in 2010, 2009 and 2008, respectively, and expects to contribute
approximately $4,000,000 to the postretirement benefit plans in 2011. The Company reimbursed Employers Mutual
$697,000, $724,000 and $3,495,000 for its share of the postretirement benefit plan contributions in 2010, 2009 and
2008, respectively.

Capital Resources

Capital resources consist of stockholders’ equity and debt, representing funds deployed or available to be
deployed to support business operations. For the Company’s insurance and reinsurance company subsidiaries,
capital resources are required to support premium writings. Regulatory guidelines suggest that the ratio of a
property and casualty insurer’s annual net premiums written to its statutory surplus should not exceed three to one.
All of the Company’s property and casualty insurance subsidiaries were well under this guideline at December 31,
2010.

The Company’s insurance subsidiaries are required to maintain a certain minimum level of surplus on a
statutory basis, and are subject to regulations under which the payment of dividends from statutory surplus is
restricted and may require prior approval of their domiciliary insurance regulatory authorities. The Company’s
insurance subsidiaries are also subject to Risk Based Capital (RBC) requirements that may further impact their
ability to pay dividends. RBC requirements attempt to measure minimum statutory capital needs based upon the
risks in a company’s mix of products and investment portfolio. At December 31, 2010, the Company’s insurance
subsidiaries had total adjusted statutory capital of $347,133,000, which was well in excess of the minimum RBC
requirement of $58,048,000.

The Company’s total cash and invested assets at December 31, 2010 and 2009 are summarized as follows:

December 31, 2010

Fair
value
$

390
941,537
101,139
492
36,616
30
1,080,204

Percent of
total
fair value
-
%
87.2
9.4
-
3.4
-
100.0

Carrying
value
$

341
941,537
101,139
492
36,616
30
1,080,155

December 31, 2009

Fair
value
$

461
899,181
90,190
279
55,390
47
1,045,548

Percent of
total
fair value
0.1
86.0
8.6
-
5.3
-
100.0

Carrying
value
$

410
899,181
90,190
279
55,390
47
1,045,497

($ in thousands)
Fixed maturity securities held-to-maturity ....
Fixed maturity securities available-for-sale ..
Equity securities available-for-sale ...............
Cash ..............................................................
Short-term investments .................................
Other long-term investments .........................

Amortized
cost
$

341
909,583
75,721
492
36,616
30
1,022,783

Amortized
cost
$

410
872,195
73,115
279
55,390
47
1,001,436

The amortized cost and estimated fair value of fixed maturity and equity securities at December 31, 2010 were

as follows:

($ in thousands)
Securities held-to-maturity:
Fixed maturity securities:
Residential mortgage-backed ......................
Total securities held-to-maturity ...............

Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

Estimated
fair value

$
$

341
341

$
$

49
49

$
-
$
-

$
$

390
390

Securities available-for-sale:
Fixed maturity securities:
U.S. treasury ................................................
4,748
US government-sponsored agencies ............ 167,976
Obligations of states and
political subdivisions ................................. 384,164
Commercial mortgage-backed .....................
82,907
32,801
Residential mortgage-backed ......................
Other asset-backed ......................................
12,101
Corporate ..................................................... 224,886
909,583

Total fixed maturity securities ..................

Equity securities:
Common stocks:
8,630
Financial services ......................................
11,215
Information technology .............................
10,200
Healthcare .................................................
Consumer staples .......................................
6,011
Consumer discretionary .............................
7,637
6,350
Energy .......................................................
Industrials ..................................................
5,396
11,282
Other .........................................................
Non-redeemable preferred stocks ................
9,000
Total equity securities ...............................
75,721
Total securities available-for-sale ............ 985,304

54
1,996

-
$
1,899

4,802
168,073

11,650
10,342
1,664
1,057
12,954
39,717

2,668
6,163
2,706
1,834
4,535
3,031
2,097
3,351
100
26,485
66,202

4,882
27
179
57
719
7,763

52
28
120
60
9
-
27
3
768
1,067
8,830

390,932
93,222
34,286
13,101
237,121
941,537

11,246
17,350
12,786
7,785
12,163
9,381
7,466
14,630
8,332
101,139
1,042,676

The Company’s property and casualty insurance subsidiaries have $25,000,000 of surplus notes issued to

Employers Mutual at an interest rate of 3.60 percent. Reviews of the interest rate are conducted by the Inter-
Company Committees of the Boards of Directors of the Company and Employers Mutual every five years, with the
next review due in 2013. Payments of interest and repayments of principal can only be made out of the applicable
subsidiary’s statutory surplus and is subject to prior approval by the insurance commissioner of the respective states
of domicile. The surplus notes are subordinate and junior in right of payment to all obligations or liabilities of the
applicable insurance subsidiaries. Total interest expense incurred on these surplus notes was $900,000, $900,000
and $889,000 in 2010, 2009 and 2008, respectively. At December 31, 2010, the Company’s property and casualty
insurance subsidiaries had received approval for the payment of interest accrued on the surplus notes during 2010.

As of December 31, 2010, the Company had no material commitments for capital expenditures.

Off-Balance Sheet Arrangements

Employers Mutual collects from agents, policyholders and reinsureds all premiums associated with the
insurance business produced by the pool participants and the assumed reinsurance business ceded to the reinsurance
subsidiary. Quarterly, Employers Mutual settles with the pool participants and the reinsurance subsidiary the
premiums written from these insurance policies and reinsurance contracts, providing full credit for the premiums
written during the quarter (not just the collected portion). Due to this arrangement, and since a significant portion of
these premium balances are collected over the course of the coverage period, Employers Mutual carries a substantial
receivable balance for insurance and reinsurance premiums in process of collection. Any of these receivable
amounts that are ultimately deemed to be uncollectible are charged-off by Employers Mutual and the expense is
charged to the reinsurance subsidiary or allocated to the pool members on the basis of pool participation. As a
result, the Company has an off-balance sheet arrangement with an unconsolidated entity that results in a credit-risk
exposure (Employers Mutual’s insurance and reinsurance premium receivable balances) that is not reflected in the
Company’s financial statements. The ten-year average annual charge-off expense allocated to the Company is
$313,000. Based on historical data, this credit-risk exposure is not considered to be material to the Company’s
results of operations or financial position, and accordingly, no loss contingency liability has been recorded.

Investment Impairments and Considerations

The Company recorded “other-than-temporary” investment impairment losses totaling $2,384,000 on 23
equity securities and two fixed maturity securities during 2010, compared to $10,108,000 on 34 equity securities and
three fixed maturity securities during 2009.

The Company has no direct exposure to sub-prime residential lending, and holds no sub-prime residential

collateralized debt obligations or sub-prime collateralized mortgage obligations. The Company does have indirect
exposure to sub-prime residential lending markets as it has significant holdings of government agency securities,
prime and Alt-A collateralized mortgage obligations, as well as fixed maturity and equity securities in both the
banking and financial services sectors. While these holdings do not include companies engaged in originating
residential lending as their primary business, they do include companies that may be indirectly engaged in this type
of lending.

During the second quarter of 2008, management evaluated and implemented a new investment strategy
targeting high-quality residential mortgage-backed securities. This investment strategy, which is being administered
by Harris Investment Management, Inc., was designed to take advantage of the liquidity-induced market dislocation
that existed in the securitized residential mortgage marketplace at that time, and targeted AAA rated residential
mortgage-backed securities (no securities backed by subprime mortgages were purchased). The investments were
appropriately diversified with respect to key risk factors (such as vintage, originator and geography).

At December 31, 2010, the Company had unrealized losses on available-for-sale securities as presented in the

table below. The estimated fair value is based on quoted market prices, where available. In cases where quoted
market prices are not available, fair values are based on a variety of valuation techniques depending on the type of
security. None of these securities are considered to be in concentrations by either security type or industry. The
Company uses several factors to determine whether the carrying value of an individual security has been “other-
than-temporarily” impaired. Such factors include, but are not limited to, the security’s value and performance in the
context of the overall markets, length of time and extent the security’s fair value has been below carrying value, key
corporate events and collateralization of fixed maturity securities. Based on these factors, the absence of
management’s intent to sell these securities prior to recovery or maturity, and the fact that management does not
anticipate that it will be forced to sell these securities prior to recovery or maturity, it was determined that the
carrying value of these securities were not “other-than-temporarily” impaired at December 31, 2010. Risks and
uncertainties inherent in the methodology utilized in this evaluation process include interest rate risk, equity price
risk, and the overall performance of the economy, all of which have the potential to adversely affect the value of the
Company’s investments. Should a determination be made at some point in the future that these unrealized losses are
“other-than-temporary”, the Company’s earnings would be reduced by approximately $5,740,000, net of tax;
however, the Company’s financial position would not be affected because unrealized losses on available-for-sale
securities are reflected in the Company’s financial statements as a component of stockholders’ equity, net of
deferred taxes.

Following is a schedule of the length of time securities have continuously been in an unrealized loss position as

of December 31, 2010.

($ in thousands)
Fixed maturity securities:
U.S. government-sponsored
agencies ……………………………
Obligations of states and
political subdivisions ………………
Commercial mortgage-backed .........
Residential mortgage-backed ………
Other asset-backed …………………
Corporate ……………………………
Subtotal, fixed
maturity securities ……………

Equity securities:
Common stocks:
Financial services …………………
Information technology ..................
Healthcare …………………………
Consumer staples …………………
Consumer discretionary ……………
Industrials …………………………
Other ………………………………
Non-redeemable preferred
stocks ………………………………
Subtotal, equity
securities ………………………
Total temporarily
impaired securities .............

Less than twelve months

Fair
value

Unrealized
losses

Twelve months or longer
Unrealized
losses

Fair
value

Total

Fair
value

Unrealized
losses

64,030

1,899

$
-

64,030

1,899

97,770
3,999
11,347
3,331
38,271

218,748

1,608
880
3,552
1,218
253
761
43

8,315

4,882
27
158
57
719

7,742

52
28
120
60
9
27
3

299

-
-
1,223
-
-

1,223

-
-
-
-
-
-
-

4,232

-
-
21
-
-

-
-
-
-
-
-
-

768

97,770
3,999
12,570
3,331
38,271

219,971

1,608
880
3,552
1,218
253
761
43

4,232

4,882
27
179
57
719

7,763

52
28
120
60
9
27
3

768

12,547

1,067

227,063

8,041

5,455

789

232,518

8,830

Following is a schedule of the maturity dates of the fixed maturity securities presented in the above table.
Note that this schedule includes only fixed maturity securities available-for-sale, as the Company does not have any
fixed maturity securities held-to-maturity with unrealized losses.

($ in thousands)
Due in one year or less .................................
Due after one year through five years ...........
Due after five years through ten years ..........
Due after ten years ........................................
Mortgage-backed securities ..........................

Book
value
-
$
12,987
20,107
177,865
16,775
227,734

Fair
value
$
-
12,815
19,874
170,713
16,569
219,971

Gross
unrealized
loss

-
172
233
7,152
206
7,763

The Company does not purchase non-investment grade securities. Any non-investment grade securities held

are the result of rating downgrades that occurred subsequent to their purchase. At December 31, 2010, non-
investment grade fixed maturity securities held by the Company included American Airlines, Weyerhaeuser
Company and ten residential mortgage-backed securities. Of these securities, only three of the residential mortgage-
backed securities were in an unrealized loss position with an aggregate unrealized loss of $136,000.

Following is a schedule of gross realized losses recognized in 2010 from the sale of securities and from “other-

than-temporary” investment impairments. The schedule is aged according to the length of time the underlying
securities were in an unrealized loss position. This schedule does not include realized losses stemming from
corporate actions such as calls, pay-downs, redemptions, etc.

($ in thousands)
Fixed maturity securities:
Three months or less ............................
Over three months to six months .........
Over six months to nine months ..........
Over nine months to twelve months .....
Over twelve months .............................

Equity securities:
Three months or less ............................
Over three months to six months .........
Over six months to nine months ..........
Over nine months to twelve months .....
Over twelve months .............................

Realized losses from sales

Book
value

Sales
price

-
$
4,760
-
-
-
4,760

-
$
4,673
-
-
-
4,673

Gross
realized
losses

-
$
87
-
-
-
87

"Other-than-
temporary"
impairment
losses

-
$
-
-
-
204
204

9,525
828
-
-
-
10,353

8,778
795
-
-
-
9,573

747
33
-
-
-
780

1,971
181
28
-
-
2,180

Total
gross
realized
losses

-
$
87
-
-
204
291

2,718
214
28
-
-
2,960

LEASES, COMMITMENTS AND CONTINGENT LIABILITIES

The following table reflects the Company’s contractual obligations as of December 31, 2010. Included in the

table are the estimated payments that the Company expects to make in the settlement of its loss reserves and with
respect to its long-term debt. One of the Company’s property and casualty insurance subsidiaries leases office
facilities in Bismarck, North Dakota with lease terms expiring in 2014. Employers Mutual has entered into various
leases for branch and service office facilities with lease terms expiring through 2021. All of these lease costs are
included as expenses under the pooling agreement. Included in the following table is the Company’s current 30.0
percent aggregate participation percentage of all operating lease obligations of the parties to the pooling agreement.

Contractual obligations
Loss and settlement expense
reserves (1) .....................................
Long-term debt (2) .............................
Interest expense on
long-term debt (3) ..........................
Real estate operating leases ................
Total ...................................................

Total

Less than
1 year

Payments due by period
1 - 3
years
($ in thousands)

4 - 5
years

More than
5 years

556,141
25,000

218,556
-

204,080
-

81,190
-

52,315
25,000

9,000
9,326
599,467

900
1,233
220,689

1,800
2,553
208,433

1,800
2,249
85,239

4,500
3,291
85,106

(1) The amounts presented are estimates of the dollar amounts and time period in which the Company expects to

pay out its gross loss and settlement expense reserves. These amounts are based on historical payment patterns
and do not represent actual contractual obligations. The actual payment amounts and the related timing of
those payments could differ significantly from these estimates.

(2) Long-term debt reflects the surplus notes issued by the Company’s property and casualty insurance

subsidiaries to Employer Mutual, which have no maturity date. Excluded from long-term debt are pension and
other postretirement benefit obligations.

(3)

Interest expense on long-term debt reflects the interest expense on the surplus notes issued by the Company’s
property and casualty insurance subsidiaries to Employers Mutual. The interest rate on the surplus notes is
subject to change every five years, with the next review scheduled for 2013. Interest payments on the surplus
notes are subject to prior approval by the issuing company’s state of domicile regulatory authority. The
balance shown under the heading “More than 5 years” represents estimated interest expense for years six
through ten. Since the surplus notes have no maturity date and the interest rate is subject to change every five
years, interest expense could be greater than the amounts shown.

The participants in the pooling agreement are subject to guaranty fund assessments by states in which they
write business. Guaranty fund assessments are used by states to pay policyholder liabilities of insolvent insurers
domiciled in those states. Many states allow assessments to be recovered through premium tax offsets. Estimated
guaranty fund assessments of $1,269,000 and $1,236,000 have been accrued as of December 31, 2010 and 2009,
respectively. Premium tax offsets of $758,000 and $692,000, which are related to prior guarantee fund payments
and current assessments, have been accrued as of December 31, 2010 and 2009, respectively. The guaranty fund
assessments are expected to be paid over the next two years and the premium tax offsets are expected to be realized
within ten years of the payments. The participants in the pooling agreement are also subject to second-injury fund
assessments, which are designed to encourage employers to employ workers with pre-existing disabilities.
Estimated second-injury fund assessments of $1,613,000 and $1,709,000 have been accrued as of December 31,
2010 and 2009, respectively. The second-injury fund assessment accruals are based on projected loss payments.
The periods over which the assessments will be paid is not known.

The participants in the pooling agreement have purchased annuities from life insurance companies, under
which the claimant is payee, to fund future payments that are fixed pursuant to specific claim settlement provisions.
The Company’s share of case loss reserves eliminated by the purchase of these annuities was $1,615,000 at
December 31, 2010. The Company has a contingent liability of $1,615,000 at December 31, 2010 should the issuers
of these annuities fail to perform. The probability of a material loss due to failure of performance by the issuers of
these annuities is considered remote. The Company’s share of the amount due from any one life insurance company
does not equal or exceed one percent of its subsidiaries’ aggregate policyholders’ surplus.

MARKET RISK

The main objectives in managing the Company’s investment portfolios are to maximize after-tax investment

return while minimizing credit risk, in order to provide maximum support for the underwriting operations.
Investment strategies are developed based upon many factors including underwriting results, regulatory
requirements, fluctuations in interest rates and consideration of other market risks. Investment decisions are
centrally managed by investment professionals and are supervised by the investment committees of the respective
boards of directors for each of the Company’s subsidiaries.

Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments,

and is directly influenced by the volatility and liquidity in the markets in which the related underlying assets are
traded. The market risks of the financial instruments of the Company relate to the investment portfolio, which
exposes the Company to interest rate (inclusive of credit spreads) and equity price risk and, to a lesser extent, credit
quality and prepayment risk. Monitoring systems and analytical tools are in place to assess each of these elements
of market risk; however, there can be no assurance that future changes in interest rates, creditworthiness of issuers,
prepayment activity, liquidity available in the market and other general market conditions will not have a material
adverse impact on the Company’s results of operations, liquidity or financial position.

Interest rate risk (inclusive of credit spreads) includes the price sensitivity of a fixed maturity security to
changes in interest rates, and the affect on the Company’s future earnings from short-term investments and maturing
long-term investments given a change in interest rates. The following table illustrates the sensitivity of the
Company’s portfolio of fixed maturity securities available-for-sale to hypothetical changes in market rates and
prices.

Estimated fair
value at
December 31,
2010

Hypothetical
change in
interest rate
(bp=basis points)

Estimated
fair value
after
hypothetical
change in
interest rate

Hypothetical
percentage
increase
(decrease) in
Stockholders'
Equity

($ in thousands)

Fixed maturity securities:
U.S. treasury

4,802

U.S. government-sponsored agencies

168,073

Obligations of states and political subdivisions

390,932

Commercial mortgage-backed

93,222

Residential mortgage-backed

34,286

Other asset-backed

13,101

Corporate

237,121

Total fixed maturity securities

941,537

200 bp decrease
100 bp decrease
100 bp increase
200 bp increase

5,167
4,977
4,640
4,490

174,940
169,450
159,830
155,599

435,803
408,604
362,849
343,449

98,843
95,966
90,610
88,115

37,307
35,780
33,102
31,922

14,493
13,758
12,456
11,878

258,575
247,286
227,024
217,938

1,025,128
975,821
890,511
853,391

0.06
0.03
(0.03)
(0.06)

1.21
0.24
(1.45)
(2.20)

7.91
3.12
(4.95)
(8.37)

0.99
0.48
(0.46)
(0.90)

0.53
0.26
(0.21)
(0.42)

0.25
0.12
(0.11)
(0.22)

3.78
1.79
(1.78)
(3.38)

14.73
6.04
(8.99)
(15.55)

The Company monitors interest rate risk through an analysis of interest rate simulations, and adjusts the
average duration of its fixed maturity portfolio by investing in either longer or shorter term instruments given the
results of interest rate simulations and judgments of cash flow needs. The effective duration of the Company’s fixed
maturity portfolio at December 31, 2010 was 5.75 years.

The valuation of the Company’s marketable equity portfolio is subject to equity price risk. In general, equities
have more year-to-year price variability than bonds. However, returns from equity securities have been consistently
higher over longer time frames. The Company invests in a diversified portfolio of readily marketable equity
securities. A hypothetical 10 percent decrease in the S&P 500 index as of December 31, 2010 would result in a
corresponding pre-tax decrease in the fair value of the Company’s equity portfolio of approximately $9,281,000.

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, 2010.

($ in thousands)
Rating:
AAA ..................................
AA .....................................
A .......................................
BAA ..................................
BA .....................................
B ........................................
CAA ..................................
Total fixed maturities

Securities
held-to-maturity
(at amortized cost)
Percent

Amount

Securities
available-for-sale
(at fair value)

Amount

Percent

341
-
-
-
-
-
-
341

100.0
-
-
-
-
-
-
100.0

332,321
356,626
211,004
29,538
2,064
4,107
5,877
941,537

35.3
37.9
22.4
3.1
0.2
0.5
0.6
100.0

As of December 31, 2010, the Company held approximately $189,284,000 of municipal securities that are
guaranteed by financial guaranty insurers, which represents approximately 20.1 percent of the Company’s total fixed
maturity portfolio. Municipal security insurance guarantees the payment of principal and interest if the issuer
defaults; however, most of these insurers are no longer considered financially viable due to their exposure to
subprime mortgage losses. The portion of the guaranteed municipal securities that are still considered to be insured
by a financially viable insurer is estimated at $76,409,000. Credit ratings of guaranteed municipal securities can be
based on the credit rating of either the issuer or the insurer, though presently most ratings are based on that of the
issuer. The Company makes its investment decisions based on the creditworthiness of the issuing entities, not the
guarantor (with the exception of the Texas Permanent School Fund and Federal Housing Agencies), and its
guaranteed municipal securities have an average rating of “AA”. Approximately $50,312,000 of the Company’s
guaranteed municipal securities have been pre-refunded, which means that funds have been set aside in escrow to
satisfy the future interest and principal obligations of the securities. A summary of the financial guaranty insurers
backing the Company’s insurance enhanced municipal securities, including the pre-refunded bonds that are
escrowed, is as follows.

Total

($ in thousands)
Ambac Financial Group, Inc. ………………
Assured Guaranty Corp. (FSA) ……………
Financial Guaranty Ins. Co. …………………
Financial Guaranty Ins. Co.
Reinsured (FGRMB) ……………………
MBIA Inc. …………………………………
PSF - Texas Permanent School Fund ………
Other …………………………………………
Total Guaranteed …………………………

36,092
29,895
8,561

18,877
48,331
37,248
10,280
189,284

Pre-refunded
securities

11,350
5,347
3,972

-
13,064
13,587
2,992
50,312

Exposure net of
pre-refunded
securities

24,742
24,548
4,589

18,877
35,267
23,661
7,288
138,972

The following table shows the total fair value of the Company’s municipal securities by rating, both with and

without insurance enhancement.

($ in thousands)
Rating:
AAA .......................................................
AA .........................................................
A ............................................................
BAA .......................................................
No rating ................................................
Total ....................................................

With
insurance
enhancements

Without
insurance
enhancements

49,635
112,302
24,962
2,385
-
189,284

12,471
136,196
36,055
2,385
2,177
189,284

The Company has no insurance enhanced asset-backed securities. As of December 31, 2010, the Company
had no direct investment in the entities that provided financial guarantees to any security held by the Company, with
the exception of Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association
(FNMA).

Ratings for preferred stocks and fixed maturity securities with initial maturities greater than one year are

assigned by nationally recognized statistical rating organizations (referred to generically as NRSROs, which
includes such organizations as Moody’s Investor’s Services, Inc., Standard and Poor, etc.). The NRSROs’ rating
processes seek to evaluate the quality of a security by examining the factors that affect returns to investors.
NRSROs’ ratings are based on quantitative and qualitative factors, as well as the economic, social and political
environment in which the issuing entity operates. 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 ratings of NRSROs, or the credit rating of the issuer’s parent company. For further discussion of credit
risk and related topics (i.e., impairment losses on equity securities, residential mortgage-backed securities,
unrealized losses in the investment portfolios, and non-investment grade securities held by the Company) see the
section entitled "Investment Impairments and Considerations” within this Management’s Discussion and Analysis of
Financial Condition and Results of Operations.

Prepayment risk refers to changes in prepayment patterns that can shorten or lengthen the expected timing of

principal repayments and thus the average life and the effective yield of a security. Such risk exists primarily within
the portfolio of mortgage-backed securities. Prepayment risk is monitored regularly through the analysis of interest
rate simulations. At December 31, 2010, the effective duration of the mortgage-backed securities is 3.3 years with
an average life of 3.8 years and a yield to maturity of 4.1 percent. At December 31, 2009, the effective duration of
the mortgage-backed securities was 3.9 years, with an average life of 4.0 years and a yield to maturity of 6.2 percent.

IMPACT OF INFLATION

Inflation has a widespread effect on the Company’s results of operations, primarily through increased losses
and settlement expenses. The Company considers inflation, including social inflation that reflects an increasingly
litigious society and increasing jury awards, when setting loss and settlement expense reserve amounts. Premiums
are also affected by inflation, although they are often restricted or delayed by competition and the regulatory rate-
setting environment.

NEW ACCOUNTING PRONOUNCEMENTS

In October 2010, the FASB updated its guidance related to Insurance Topic 944 of the ASC to clarify which

costs associated with the acquisition of insurance contracts should be capitalized and deferred for recognition during
the coverage period. This guidance specifies that only incremental costs or costs directly related to the successful
acquisition of new or renewal insurance contracts are to be capitalized as a deferred acquisition cost. Currently,
industry practice is such that deferred costs typically also include costs related to unsuccessful insurance contract
acquisitions. This guidance is effective for annual reporting periods (and interim reporting periods of those annual
reporting periods) beginning on or after December 15, 2011, and may be adopted prospectively or retrospectively.
Adoption of this guidance will have an impact on the consolidated financial position and operating results of the
Company since certain costs associated with contract acquisition that are currently deferred will not likely meet the
criteria for deferral under the new guidance. The Company has not yet established an estimate of the impact this
statement will have on its financial statements.

In July 2010, the FASB updated its guidance related to Receivables Topic 310 of the ASC to require additional

disclosures regarding credit risk exposures and the allowance for credit losses, as well as a description of the
accounting policies and methodology used to estimate the liability for off-balance-sheet credit risk exposures and
related charges. The additional disclosures required at the end of a reporting period are effective for interim and
annual reporting periods ending on or after December 15, 2010, and the additional disclosures required about
activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or
after December 15, 2010. Adoption of this guidance resulted in some additional disclosures at year-end 2010, but
had no effect on the consolidated financial position or operating results of the Company.

In January 2010, the FASB updated its guidance related to the Fair Value Measurements and Disclosures
Topic 820 of the ASC to require additional disclosures regarding transfers in and out of fair value measurement
Levels 1 and 2, the display of Level 3 activity on a gross basis (rather than net), fair value measurement disclosures
for each class of assets and liabilities (rather than by line item within the statement of financial position), and
additional disclosures about inputs and valuation techniques. This guidance was effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective for fiscal years
(and interim periods of those fiscal years) beginning after December 15, 2010. Adoption of this guidance had no
effect on the consolidated financial position or operating results of the Company.

In May 2009, the FASB updated its guidance related to the Subsequent Events Topic 855 of the ASC (issued

as Statement of Financial Accounting Standards (SFAS) No. 165, “Subsequent Events”), which sets forth the period
after the balance sheet date during which management shall evaluate events or transactions for potential recognition
or disclosure, the circumstances under which an entity shall recognize events or transactions occurring after the
balance sheet date, and disclosures to make about events or transactions that occur after the balance sheet date. This
guidance was effective for interim and annual reporting periods ending after June 15, 2009. In February 2010, the
FASB updated its guidance related to the Subsequent Events Topic 855 to remove the requirement to disclose the
date through which subsequent events were evaluated for Securities and Exchange Commission filers. This updated
guidance was effective immediately. Adoption of this updated guidance had no effect on the consolidated financial
position or operating results of the Company.

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Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting

The Board of Directors and Stockholders
EMC Insurance Group Inc.

We have audited EMC Insurance Group Inc. and Subsidiaries’ internal control over financial reporting as of

December 31, 2010, based on criteria established in “Internal Control—Integrated Framework” issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The management of
EMC Insurance Group Inc. and Subsidiaries’ (the Company) is responsible for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board

(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our opinion, EMC Insurance Group Inc. and Subsidiaries maintained, in all material respects, effective

internal control over financial reporting as of December 31, 2010, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), the consolidated balance sheets as of December 31, 2010 and 2009, and the related consolidated
statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2010 of EMC Insurance Group Inc. and Subsidiaries and our report dated March 10,
2011 expressed an unqualified opinion thereon.

Des Moines, Iowa
March 10, 2011

Report of Independent Registered Public Accounting Firm
On Consolidated Financial Statements

The Board of Directors and Stockholders
EMC Insurance Group Inc.

We have audited the accompanying consolidated balance sheets of EMC Insurance Group Inc. and Subsidiaries

as of December 31, 2010 and 2009, and the related consolidated statements of income, comprehensive income,
stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board

(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the

consolidated financial position of EMC Insurance Group Inc. and Subsidiaries at December 31, 2010 and 2009, and
the consolidated results of their operations and their cash flows for each of the three years in the period ended
December 31, 2010, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, in response to new accounting standards, the
Company changed its methods of accounting for other-than-temporary impairments effective April 1, 2009 and for
the accounting for its pension and other post-retirement benefits effective January 1, 2008.

We also have audited, in accordance with standards of the Public Company Accounting Oversight Board

(United States), EMC Insurance Group Inc. and Subsidiaries’ internal control over financial reporting as of
December 31, 2010, based on criteria established in “Internal Control - Integrated Framework” issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2011
expressed an unqualified opinion thereon.

Des Moines, Iowa
March 10, 2011

EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

ASSETS
Investments:
Fixed maturities:
Securities held-to-maturity, at amortized cost
(fair value $389,679 and $460,877) ……………………………
Securities available-for-sale, at fair value
(amortized cost $909,582,782 and $858,129,177) ……………
Fixed maturity securities on loan:
Securities available-for-sale, at fair value
(amortized cost $0 and $14,065,597) ……………………………
Equity securities available-for-sale, at fair value
(cost $75,721,039 and $73,114,920) ………………………………
Other long-term investments, at cost …………………………………
Short-term investments, at cost ………………………………………
Total investments ………………………………………………

December 31,

2010

2009

340,803

410,005

941,537,026

884,688,114

14,492,872

101,138,982
29,827
36,616,111
1,079,662,749

Cash ……………………………………………………………………
491,994
Reinsurance receivables due from affiliate ……………………………
30,256,586
Prepaid reinsurance premiums due from affiliate ………………………
9,530,426
Deferred policy acquisition costs (all affiliated) ………………………
37,584,448
Prepaid pension benefits due from affiliate ……………………………
5,125,701
Accrued investment income ……………………………………………
10,925,854
Accounts receivable ……………………………………………………
1,716,150
Income taxes recoverable ………………………………………………
2,350,864
Deferred income taxes …………………………………………………
6,690,218
Goodwill …………………………………………………………………
941,586
Securities lending collateral ……………………………………………
-
Other assets (affiliated $2,433,445 and $2,058,189) ……………………
2,517,922
Total assets ……………………………………………………… 1,187,794,498
$

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

90,189,979
47,083
55,390,096
1,045,218,149

278,534
30,544,558
5,112,386
36,650,628
-
11,082,132
1,611,740
-
15,044,357
941,586
14,941,880
4,361,843
1,165,787,793

CONSOLIDATED BALANCE SHEETS

LIABILITIES
Losses and settlement expenses (affiliated $553,125,183
and $553,787,770) ……………………………………………………
$
Unearned premiums due to affiliate ……………………………………
Other policyholders' funds due to affiliate ……………………………
Surplus notes payable to affiliate ………………………………………
Amounts due affiliate to settle quarterly transaction balances …………
Pension and postretirement benefits payable to affiliate ………………
Income taxes payable ……………………………………………………
Securities lending obligation ……………………………………………
Other liabilities (affiliated $22,861,092 and $20,335,197) ……………
Total liabilities …………………………………………………

STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000
shares; issued and outstanding, 12,927,678
shares in 2010 and 13,114,481 shares in 2009 ………………………
Additional paid-in capital ………………………………………………
Accumulated other comprehensive income (loss):
Net unrealized losses on fixed maturity securities
with "other-than-temporary" impairments …………………………
Other net unrealized gains ……………………………………………
Pension and postretirement benefits payable to affiliate ……………
Total accumulated other comprehensive income …………………
Retained earnings ………………………………………………………
Total stockholders' equity ………………………………………
Total liabilities and stockholders' equity ………………………

December 31,

2010

2009

556,140,956
167,896,119
8,315,751
25,000,000
18,380,813
20,418,716
-
-
23,001,141
819,153,496

556,151,577
159,486,096
7,918,665
25,000,000
13,488,724
18,176,720
5,488,760
14,941,880
22,717,686
823,370,108

12,927,678
88,937,294

13,114,481
92,804,282

(69,852)
37,361,774
(12,796,435)
24,495,487
242,280,543
368,641,002
1,187,794,498

(104,847)
28,744,673
(12,587,484)
16,052,342
220,446,580
342,417,685
1,165,787,793

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF INCOME

REVENUES
Premiums earned (affiliated $384,335,196,
$380,315,958 and $389,317,798) .............................................
Investment income, net ..................................................................
Net realized investment gains, excluding
impairment losses on available-for-sale securities ....................
Total "other-than-temporary" impairment losses on
available-for-sale securities .......................................................
Portion of impairment losses on fixed maturity
available-for-sale securities recognized in other
comprehensive income (before taxes) .......................................
Net impairment losses on available-for-sale securities ..........
Net realized investment gains (losses) ...........................................
Other income (all affiliated) ..........................................................

LOSSES AND EXPENSES
Losses and settlement expenses (affiliated $252,186,372,
$246,218,424 and $294,265,293) .............................................
Dividends to policyholders (all affiliated)......................................
Amortization of deferred policy acquisition costs
(affiliated $90,795,728, $87,087,782 and $87,863,949) ...........
Other underwriting expenses (affiliated $43,516,199,
$39,016,979 and $33,698,721) .................................................
Interest expense (all affiliated) ......................................................
Other expense (affiliated $1,822,758, $2,200,795 and
$1,642,326) ................................................................................

Income (loss) before income tax expense (benefit) .....................

INCOME TAX EXPENSE (BENEFIT)
Current ..........................................................................................
Deferred ........................................................................................

2010

Year ended December 31,
2009

2008

389,122,150
49,489,215

384,010,901
47,759,306

389,317,798
48,403,373

6,253,079

28,030,648

6,465,320

(2,263,737)

(10,269,680)

(30,920,859)

(120,539)
(2,384,276)
3,868,803
783,346
443,263,514

161,303
(10,108,377)
17,922,271
755,178
450,447,656

-
(30,920,859)
(24,455,539)
626,499
413,892,131

254,640,519
8,013,843

248,749,459
9,090,655

294,265,293
5,822,521

92,098,219

87,992,749

87,863,949

43,424,439
900,000

39,016,979
900,000

33,698,721
889,375

1,741,270
400,818,290
42,445,224

2,172,997
387,922,839
62,524,817

1,642,326
424,182,185
(10,290,054)

Net income (loss) ............................................................

Net income (loss) per common share
-basic and diluted ..........................................................................

2.40

3.44

7,291,068
3,807,833
11,098,901
31,346,323

15,716,019
1,438,184
17,154,203
45,370,614

(8,048,404)
(536,277)
(8,584,681)
(1,705,373)

(0.13)

Average number of common shares outstanding
-basic and diluted ..........................................................................

13,038,263

13,207,105

13,534,147

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year ended December 31,
2009

2010

2008

Net income (loss) .....................................................................

31,346,323

45,370,614

(1,705,373)

OTHER COMPREHENSIVE INCOME (LOSS)
Change in unrealized holding gains (losses) on
investment securities, net of deferred income
tax expense (benefit) of $6,036,247, $19,726,915
and ($28,007,475) ............................................................

Reclassification adjustment for realized
investment (gains) losses included in net income
(loss), net of income tax (expense) benefit of
($1,396,270), ($5,976,170) and $8,559,439 ....................

Change in unrealized holding gains (losses) on fixed
maturity securities with "other-than-temporary"
impairment, net of deferred income tax expense
(benefit) of ($23,345), $586,669 and $0 ..........................

Reclassification adjustment for realized investment
(gains) losses from fixed maturity securities with
"other-than-temporary" impairment included in
net income (loss), net of income tax (expense)
benefit of $42,188, ($296,625) and $0 .............................

Adjustment associated with affiliate's pension and
postretirement benefit plans, net of deferred income
tax expense (benefit) of ($112,514), $296,262 and
($9,007,478):
Net actuarial gain (loss) ................................................
Prior service credit .......................................................

11,210,173

36,635,698

(52,013,882)

(2,593,072)

(11,098,601)

15,896,100

(43,356)

1,089,528

78,351

(550,875)

65,206
(274,157)
(208,951)

839,077
(288,873)
550,204

(16,400,635)
(327,542)
(16,728,177)

Other comprehensive income (loss) .........................

8,443,145

26,625,954

(52,845,959)

Total comprehensive income (loss) ..........................

39,789,468

71,996,568

(54,551,332)

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

2010

Year ended December 31,
2009

2008

COMMON STOCK
Beginning of year ............................................................................................
Issuance of common stock through affiliate's stock option plans ....................
Repurchase of common stock ..........................................................................
End of year .........................................................................................

13,114,481
57,597
(244,400)
12,927,678

13,267,668
17,383
(170,570)
13,114,481

13,777,880
55,351
(565,563)
13,267,668

ADDITIONAL PAID-IN CAPITAL
Beginning of year ............................................................................................
Issuance of common stock through affiliate's stock option plans ....................
Increase resulting from stock-based compensation expense associated
with affiliate's stock option plans allocated to the Company .......................
Repurchase of common stock ..........................................................................
End of year .........................................................................................

92,804,282
1,048,008

137,141
(5,052,137)
88,937,294

95,639,349
301,489

108,030,228
1,073,485

282,528
(3,419,084)
92,804,282

232,318
(13,696,682)
95,639,349

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Beginning of year ............................................................................................
Cumulative effect adjustment resulting from adoption of ASC
Topic 310 impairment loss provision, net of deferred income taxes ...........
Change in unrealized gains (losses) on investment
securities, net of deferred income taxes .......................................................
Change in unrealized gains on fixed maturity securities with "other-
than-temporary" impairment, net of deferred income taxes .........................
Adjustments associated with affiliate's pension and postretirement
benefit plans, net of deferred income taxes:
Change in funded status .............................................................................
Adoption of ASC Topic 715 measurement date provision, net
of deferred income taxes .........................................................................
End of year .........................................................................................

RETAINED EARNINGS
Beginning of year ............................................................................................
Adjustment resulting from adoption of ASC Topic 715
measurement date provision, net of deferred income taxes .........................
Net income (loss) .............................................................................................
Dividends paid to public stockholders ($.73, $.72, $.72
per share in 2010, 2009 and 2008) ..............................................................
Dividends paid to affiliate ($.73, $.72, $.72
per share in 2010, 2009 and 2008) ..............................................................
Cumulative effect adjustment resulting from adoption of ASC
Topic 310 impairment loss provision, net of deferred income taxes ...........
End of year .........................................................................................

16,052,342

(9,930,112)

42,961,904

(643,500)

8,617,101

25,537,097

(36,117,782)

34,995

538,653

(208,951)

550,204

(16,728,177)

-
24,495,487

-
16,052,342

(46,057)
(9,930,112)

220,446,580

183,939,453

195,581,980

-
31,346,323

-
45,370,614

(205,751)
(1,705,373)

(3,783,428)

(3,856,533)

(4,080,949)

(5,728,932)

(5,650,454)

-
242,280,543

643,500
220,446,580

-
183,939,453

Total stockholders' equity ................................................................

368,641,002

342,417,685

282,916,358

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ……………………………………………… 31,346,323

45,370,614

(1,705,373)

2010

Year ended December 31,
2009

2008

(10,621)

8,410,023
397,086

Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Losses and settlement expenses (affiliated ($662,587),
($19,244,083) and $21,429,847) .……….………………
Unearned premiums (affiliated $8,410,023, $5,039,891
and ($3,710,478)) ………………………………………
Other policyholders' funds due to affiliate …………………
Amounts due affiliate to settle quarterly
transaction balances ……………………………………
4,892,089
Pension and postretirement benefits payable to affiliate …
(3,205,170)
Reinsurance receivables due from affiliate ………………
287,972
Prepaid reinsurance premiums due from affiliate ………… (4,418,040)
Commission payable (affiliated $4,923,984,
($179,246) and ($2,391,417)) …………………………
Interest payable to affiliate …………………………………
Deferred policy acquisition costs (affiliated ($933,820),
($2,021,199) and $58,375) ……………………………
Stock-based compensation payable to affiliate ……………
Accrued investment income ………………………………
Accrued income tax:
Current …………………………………………………
(7,839,082)
Deferred ………………………………………………… 3,807,833
Realized investment (gains) losses ………..……………… (3,868,803)
Accounts receivable ………………………………………
(104,410)
Amortization of premium/discount on fixed
maturity securities ………………………………………
Other, net (affiliated ($2,773,887), $4,082,250
and ($2,914,152)) ……………………………………… (2,788,540)
(1,024,788)
30,321,535

Net cash provided by operating activities ………………

(933,820)
136,599
156,278

4,927,212
-

(871,394)

(16,880,276)

21,429,847

5,039,891
1,499,795

(7,178,472)
(307,821)
5,810,489
(955,331)

(179,246)
10,625

(2,021,199)
282,528
1,025,997

17,348,299
1,438,184
(17,922,271)
(1,588,699)

(3,710,478)
(1,854,317)

14,748,800
(5,899,941)
(3,082,642)
308,781

(2,391,417)
116,875

58,375
232,318
(820,124)

(8,232,206)
(536,277)
24,455,539
58,100

(759,488)

422,783

4,082,250
(11,254,745)
34,115,869

(2,914,152)
32,389,864
30,684,491

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

2010

Year ended December 31,
2009

2008

CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of fixed maturity securities held-to-maturity ………
69,672
Purchases of fixed maturity securities available-for-sale ……… (211,632,995)
Disposals of fixed maturity securities available-for-sale ……… 176,138,289
Purchases of equity securities available-for-sale ……………… (35,975,193)
Disposals of equity securities available-for-sale ………………
36,203,661
Disposals of other long-term investments ………………………
17,256
Net (purchases) disposals of short-term investments …………… 18,773,985
Net cash used in investing activities …………………… (16,405,325)

125,104
(394,329,176)
353,055,272
(58,392,638)
79,296,458
19,891
(1,017,015)
(21,242,104)

102,708
(334,445,914)
329,392,042
(49,809,546)
47,903,365
35,014
(1,077,773)
(7,900,104)

CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock through affiliate's
stock option plans ……………………………………………
Excess tax benefit associated with affiliate's
stock option plans ……………………………………………
Repurchase of common stock …………………………………
Dividends paid to stockholders (affiliated ($5,728,932),
($5,650,454) and ($5,650,454)) ……..……………..………… (9,512,360)
Net cash used in financing activities …………………… (13,702,750)

542
(5,296,537)

1,105,605

318,872

1,128,836

-
(3,589,654)

-
(14,262,245)

(9,506,987)
(12,777,769)

(9,731,403)
(22,864,812)

NET INCREASE (DECREASE) IN CASH ……………………
Cash at the beginning of the year …………………………………

213,460
278,534

95,996
182,538

Cash at the end of the year …………………………………………

491,994

278,534

Income taxes paid (recovered) .…………………………………… 15,130,150
Interest paid to affiliate ……………………………………………
900,000

$
$

(1,632,280)
889,375

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

(80,425)
262,963

182,538

172,823
782,402

$
$

See accompanying Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

EMC Insurance Group Inc., a 61 percent owned subsidiary of Employers Mutual Casualty Company
(Employers Mutual), is an insurance holding company with operations in property and casualty insurance and
reinsurance. Both commercial and personal lines of insurance are written, with a focus on medium-sized
commercial accounts. Approximately 38 percent of the premiums written are in Iowa and contiguous states. The
term “Company” is used interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC
Insurance Group Inc. and its subsidiaries.

The Company’s subsidiaries include EMCASCO Insurance Company, Illinois EMCASCO Insurance
Company, Dakota Fire Insurance Company, EMC Reinsurance Company and EMC Underwriters, LLC.

The consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting

principles (GAAP), which differ in some respects from those followed in reports to insurance regulatory authorities.
All significant inter-company balances and transactions have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and

assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. The Company has evaluated all subsequent
events through the date the financial statements were issued.

Property and Casualty Insurance and Reinsurance Operations

Property and casualty insurance premiums are recognized as revenue ratably over the terms of the respective

policies. Unearned premiums are calculated on the daily pro rata method. Both domestic and foreign assumed
reinsurance premiums are recognized as revenues ratably over the terms of the contract period. Amounts paid as
ceded reinsurance premiums are reported as prepaid reinsurance premiums and are amortized over the remaining
contract period in proportion to the amount of reinsurance protection provided. Reinsurance reinstatement
premiums are recognized in the same period as the loss event that gave rise to the reinstatement premiums.

Acquisition costs consisting of commissions, premium taxes and other underwriting expenses that vary with

and are directly related to the production of business have been deferred and are being amortized as premium
revenue is recognized. The method followed in computing deferred policy acquisition costs limits the amount of
such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related
investment income, losses and settlement expenses and certain other costs expected to be incurred as the premium is
earned.

Certain commercial lines of business, including workers’ compensation, are eligible for policyholder dividends

in accordance with provisions of the underlying insurance policies. Net premiums written subject to policyholder
dividends represented approximately 55 percent of the Company’s total net premiums written in 2010. Policyholder
dividends are accrued over the terms of the underlying policy periods.

Liabilities for losses are based upon case-basis estimates of reported losses supplemented with bulk case loss

reserves, estimates of unreported losses based upon prior experience adjusted for current trends, and estimates of
losses expected to be paid under assumed reinsurance contracts. Liabilities for settlement expenses are provided by
estimating expenses expected to be incurred in settling the claims provided for in the loss reserves. Changes in
estimates are reflected in current operating results (see note 4).

Ceded reinsurance amounts with nonaffiliated reinsurers relating to reinsurance receivables for paid and unpaid
losses and settlement expenses and prepaid reinsurance premiums are reported on the balance sheet on a gross basis.
Amounts ceded to Employers Mutual relating to the affiliated reinsurance pooling agreement (see note 2) have not
been grossed up because the contracts provide that receivables and payables may be offset upon settlement.

Based on current information, the liabilities for losses and settlement expenses are considered to be adequate.

Since the provisions are necessarily based on estimates, the ultimate liability may be more or less than such
provisions.

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 available-for-sale and are carried at fair value, with
unrealized holding gains and losses reported as a component of accumulated other comprehensive income (loss) in
stockholders’ equity, net of deferred income taxes. Other long-term investments represent minor ownership
interests in limited partnerships and limited liability companies and are carried at cost. Short-term investments
represent money market funds, U.S. Treasury bills and commercial paper that are carried at cost, which
approximates fair value.

The Company uses independent pricing sources to obtain the estimated fair value of securities. The fair value

is based on quoted market prices, where available. In cases where quoted market prices are not available, the fair
value is based on a variety of valuation techniques depending on the type of investment. The fair values obtained
from independent pricing sources are reviewed for reasonableness and any discrepancies are investigated for final
valuation (see note 8).

Premiums and discounts on fixed maturity securities are amortized over the life of the security as an

adjustment to yield using the effective interest method. Gains and losses realized on the disposition of investments
are included in net income. The cost of investments sold is determined on the specific identification method using
the highest cost basis first. Included in investments at December 31, 2010 and 2009 are securities on deposit with
various regulatory authorities as required by law amounting to $11,924,832 and $11,725,251, respectively.

The Company regularly monitors its investments that have a fair value that is less than the carrying value for

indications of “other-than-temporary” impairment. Several factors are used to determine whether the carrying value
of an individual security has been “other-than-temporarily” impaired. Such factors include, but are not limited to (1)
the security’s value and performance in the context of the overall markets, (2) length of time and extent the
security’s fair value has been below carrying value, (3) key corporate events, and (4) for equity securities, the ability
and intent to hold the security until recovery to its cost basis. Prior to April 1, 2009, the Company’s ability and
intent to hold fixed maturity securities in an unrealized loss position until recovery was also considered in the
determination of “other-than-temporary” impairments for those securities.

In April 2009, the Financial Accounting Standards Board (FASB) updated its guidance related to the

Investments - Debt and Equity Securities Topic 310 of the FASB Accounting Standards CodificationTM
(Codification or ASC). This pronouncement established guidance for evaluating “other-than-temporary”
impairments for fixed maturity securities, and required changes to the financial statement presentation and
disclosure of fixed maturity and equity security “other-than-temporary” impairments. Included is a requirement that
the evaluation of an impaired fixed maturity security include an assessment of whether the entity has the intent to
sell the security and if it is more likely than not to be required to sell the security before recovery of its amortized
cost basis. In addition, if the present value of cash flows expected to be collected is less than the amortized cost of
the security, a credit loss is deemed to exist and the security is considered “other-than-temporarily” impaired. The
portion of the impairment related to a credit loss is recognized through earnings and the portion of the impairment
related to other factors is recognized through “other comprehensive income”. This pronouncement was effective for
interim and annual reporting periods ending after June 15, 2009. A cumulative effect adjustment from retained
earnings to “accumulated other comprehensive income” was required for the non-credit component of previous
“other-than-temporary” impairment losses recognized on fixed maturity securities still owned as of the date of
adoption. Adoption resulted in a cumulative effect adjustment to increase retained earnings and decrease
“accumulated other comprehensive income” by $643,500, net of tax. Adoption also resulted in additional
disclosures for fixed maturity and equity securities.

When an equity security is deemed “other-than-temporarily” impaired, the carrying value is reduced to fair

value and a realized loss is recognized and charged to income.

The Company previously participated in a securities lending program administered by Mellon Bank, N.A.

Income Taxes

The Company files a consolidated Federal income tax return with its subsidiaries. Consolidated income

taxes/benefits are allocated among the entities based upon separate tax liabilities.

Deferred income taxes are provided for temporary differences between the tax basis of assets and liabilities and

the reported amounts of those assets and liabilities for financial reporting purposes. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Income tax expense provisions increase or decrease
in the same period in which a change in tax rates is enacted. A valuation allowance is established to reduce deferred
tax assets to their net realizable value if it is “more likely than not” that a tax benefit will not be realized.

An assessment of the Company’s current tax positions indicated no uncertainties that would warrant different

recognition and valuation from that applied in the Company’s tax returns.

Stock-Based Compensation

The Company has no stock-based compensation plans of its own; however, Employers Mutual has several
stock plans that utilize the common stock of the Company. The Company receives the current fair value for all
shares issued under these plans. Employers Mutual also has a stock appreciation rights (SAR) agreement in effect
with an executive officer of the Company. The SAR agreement is based upon the market price of the Company’s
common stock and is considered to be a liability-classified award because it will be settled in cash. A portion of the
compensation expense recognized by Employers Mutual, as the requisite service period for granted options and
SARs is rendered, is allocated to the Company’s property and casualty insurance subsidiaries though their
participation in the pooling agreement (see note 2). Because a portion of Employers Mutual’s stock compensation
expense is reflected in the Company’s financial statements and issuances of the Company’s stock under Employers
Mutual’s stock option plans have an impact on the Company’s capital accounts, the disclosures required by the
Compensation – Stock Compensation Topic 718 of the ASC are included in the Company’s consolidated financial
statements.

Employee Retirement Plans

Employers Mutual has various employee benefit plans, including two defined benefit pension plans, and two

postretirement benefit plans that provide retiree healthcare and life insurance coverage. Although the Company has
no employees of its own, it is responsible for its share of the expenses and related prepaid assets and liabilities of
these plans as determined under the terms of the pooling agreement, and the costs allocated by Employers Mutual to
subsidiaries that do not participate in the pooling agreement (see note 2). Accordingly, the Company recognizes its
share of the funded status of Employers Mutual’s pension and postretirement benefit plans on its balance sheet, with
changes in the funded status of the plans recognized through “other comprehensive income.”

Effective January 1, 2008, the Company adopted the measurement date provision of the Compensation-
Retirement Benefits Topic 715 of the FASB ASC. This guidance included a requirement, which was effective for
fiscal years ending after December 15, 2008, to measure the plans’ assets and obligations as of the end of the
employer’s fiscal year. This guidance provided two approaches to measure the adjustment from a previously
reported non-fiscal year-end measurement date to a fiscal year-end measurement date, both of which required the
adjustment be recorded to beginning retained earnings and “accumulated other comprehensive income”, as
applicable. The Company elected to apply the approach under which the previous November 1, 2007 measurement
date was used to obtain the adjustment for the two month transition period. As a result, on January 1, 2008, the
Company recorded a $205,751 decrease to retained earnings and a $46,057 decrease to “accumulated other
comprehensive income” to record the net periodic cost associated with the two month transition period.

Accounts Receivable

The accounts receivable balance consists of assumed reinsurance premiums receivable (net of any

commissions) on business written directly by the reinsurance subsidiary, and commission income receivable on
excess and surplus lines business marketed by EMC Underwriters, LLC. These receivables are carried at their initial
recognition amounts. It is the Company’s policy to reflect the impairment of receivables through a valuation
allowance until ultimately collected or charged-off. No valuation allowance is currently carried as no amounts are
deemed impaired. No interest income, other fees, or deferred costs related to these receivables are assessed or
recognized.

Employers Mutual collects from agents, policyholders and reinsureds all premiums associated with the
insurance business produced by the pool participants and the assumed reinsurance business ceded to the reinsurance
subsidiary. Quarterly, Employers Mutual settles with the pool participants and the reinsurance subsidiary the
premiums written from these insurance policies and reinsurance contracts, providing full credit for the premiums
written during the quarter (not just the collected portion). Due to this arrangement, and since a significant portion of
these premium balances are collected over the course of the coverage period, Employers Mutual carries a substantial
receivable balance for insurance and reinsurance premiums in process of collection. Any of these receivable
amounts that are ultimately deemed to be uncollectible are charged-off by Employers Mutual and the expense is
allocated to the pool members on the basis of pool participation or charged to the reinsurance subsidiary. As a
result, the Company has an off-balance sheet arrangement with an unconsolidated entity that results in a credit-risk
exposure (Employers Mutual’s insurance and reinsurance premium receivable balances) that is not reflected in the
Company’s financial statements. The ten-year average annual expense for such charge-offs allocated to the
Company is $312,926. Based on this historical data, this credit-risk exposure is not considered to be material to the
Company’s results of operations or financial position, and no loss contingency liability has been recorded.

Foreign Currency Transactions

Included in the underlying reinsurance business assumed by Employers Mutual and the reinsurance subsidiary

are reinsurance transactions conducted with foreign cedants denominated in their local functional currencies. In
accordance with the terms of the quota share agreement (see note 2), the reinsurance subsidiary assumes all foreign
currency exchange gains/losses associated with contracts incepting on January 1, 2006 and thereafter that are subject
to the quota share agreement. The assets and liabilities resulting from these foreign reinsurance transactions are
reported in U.S. dollars based on the foreign currency exchange rates that existed at the balance sheet dates. The
foreign currency exchange rate gains/losses reported in the consolidated statements of income that resulted from
these foreign reinsurance transactions are reported in U.S. dollars re-measured from the foreign currency exchange
rates that existed at the inception of each reinsurance contract. The foreign currency exchange rate gains/losses
resulting from these re-measurements to U.S. dollars are reported as other income/expense in the consolidated
statements of income.

Net Income Per Share - Basic and Diluted

The Company’s basic and diluted net income per share is computed by dividing net income by the weighted

average number of common shares outstanding during each period. As previously noted, the Company receives the
current fair value for all shares issued under Employers Mutual’s stock plans. As a result, the Company had no
potential common shares outstanding during 2010, 2009 and 2008 that would have been dilutive to the calculation of
net income per share.

Goodwill

Goodwill represents the excess of cost over the fair value of net assets of acquired subsidiaries. Goodwill is

not amortized, but is subject to annual impairment testing to determine if the carrying value of the goodwill exceeds
the estimated fair value of net assets. If the carrying amount of the subsidiary (including goodwill) exceeds the
computed fair value, an impairment loss is recognized through earnings equal to the excess amount, but not greater
than the balance of the goodwill. An annual impairment test is completed in the fourth quarter of each year and
goodwill was not deemed to be impaired in 2010, 2009 or 2008.

New Accounting Pronouncements

In October 2010, the FASB updated its guidance related to Insurance Topic 944 of the ASC to clarify which

In July 2010, the FASB updated its guidance related to Receivables Topic 310 of the ASC to require additional

In May 2009, the FASB updated its guidance related to the Subsequent Events Topic 855 of the ASC, which
sets forth the period after the balance sheet date during which management shall evaluate events or transactions for
potential recognition or disclosure, the circumstances under which an entity shall recognize events or transactions
occurring after the balance sheet date, and disclosures to make about events or transactions that occur after the
balance sheet date. This guidance was effective for interim and annual reporting periods ending after June 15, 2009.
In February 2010, the FASB updated its guidance related to the Subsequent Events Topic 855 to remove the
requirement to disclose the date through which subsequent events were evaluated for Securities and Exchange
Commission filers. This updated guidance was effective immediately. Adoption of this updated guidance had no
effect on the consolidated financial position or operating results of the Company.

2. AFFILIATION AND TRANSACTIONS WITH AFFILIATES

Property and Casualty Insurance Subsidiaries

The Company’s three property and casualty insurance subsidiaries and two subsidiaries and an affiliate of
Employers Mutual are parties to reinsurance pooling agreements with Employers Mutual (collectively the “pooling
agreement”). Under the terms of the pooling agreement, each company cedes to Employers Mutual all of its
insurance business, 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 premiums,
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. Employers Mutual negotiates reinsurance agreements that
provide protection to the pool and each of its participants, including protection against losses arising from
catastrophic events. The aggregate participation of the Company’s property and casualty insurance subsidiaries in
the pooling agreement is 30 percent.

Operations of the pool give rise to inter-company balances with Employers Mutual, which are settled within 45

days after the end of each quarter. The investment and income tax activities of the pool participants are not subject
to the pooling agreement. The pooling agreement provides that Employers Mutual will make up any shortfall or
difference resulting from an error in its systems and/or computational processes that would otherwise result in the
required restatement of the pool participants’ financial statements.

Reinsurance Subsidiary

The Company’s reinsurance subsidiary is a party to a quota share retrocessional agreement with Employers
Mutual (the “quota share agreement”). Under the terms of the quota share agreement, the reinsurance subsidiary
assumes a 100 percent quota share portion of Employers Mutual’s assumed reinsurance business, exclusive of
certain reinsurance contracts. This includes all premiums and related losses, settlement expenses, and other
underwriting and administrative expense of this business, subject to a maximum loss of $3,000,000 per event
($2,000,000 per event prior to January 1, 2010), with the cost of this protection treated as a reduction to the assumed
premiums written. The reinsurance subsidiary does not directly reinsure any of the insurance business written by
Employers Mutual or the other pool participants; however, the reinsurance subsidiary assumes reinsurance business
from the Mutual Reinsurance Bureau (MRB) pool and this pool provides a small amount of reinsurance protection to
the EMC Insurance Companies. As a result, the reinsurance subsidiary’s assumed exposures include a small portion
of the EMC Insurance Companies’ direct business, after ceded reinsurance protections purchased by the MRB pool
are applied. In addition, the reinsurance subsidiary does not reinsure any “involuntary” facility or pool business that
Employers Mutual assumes pursuant to state law. Operations of the quota share agreement give rise to inter-
company balances with Employers Mutual, which are settled within 45 days after the end of each quarter. The
investment and income tax activities of the reinsurance subsidiary are not subject to the quota share agreement.

Under the terms of the quota share agreement, the reinsurance subsidiary receives reinstatement premium
income that is collected by Employers Mutual from the ceding companies when reinsurance coverage is reinstated
after a loss event; however, the cap on losses assumed per event contained in the quota share agreement is
automatically reinstated without cost. This arrangement can produce unusual underwriting results for the
reinsurance subsidiary when a large event occurs because the reinstatement premium income received by the
reinsurance subsidiary may approximate, or even exceed, the amount of losses retained.

Premiums assumed by the reinsurance subsidiary from Employers Mutual amounted to $79,267,865,

$72,206,486 and $73,617,740 in 2010, 2009 and 2008, respectively. It is customary in the reinsurance business for
the assuming company to compensate the ceding company for the acquisition expenses incurred in the generation of
the business. Commissions paid by the reinsurance subsidiary to Employers Mutual amounted to $23,797,182,
$14,111,273 and $15,766,979 in 2010, 2009 and 2008, respectively. The large increase in commissions during 2010
reflects a reclassification by MRB of $6,065,000 from incurred but not reported (IBNR) loss reserves to contingent
commission reserves. This reclassification had no impact on net income.

Employers Mutual retains 10.5 percent of the net assumed premiums written subject to cession to the
reinsurance subsidiary as compensation for the cap on losses assumed per event, which totaled $9,299,582,
$8,471,152 and $8,636,718 in 2010, 2009 and 2008, respectively. Employers Mutual retained losses and settlement
expenses in excess of the cap totaling $92,368 in 2010, ($7,467) in 2009 and $11,195,887 in 2008.

As a result of regulatory changes in Germany, Employers Mutual ceased being an approved reinsurer in
Germany beginning January 1, 2009. To avoid the loss of this assumed reinsurance business, the Company’s
reinsurance subsidiary began writing this business on a direct basis (outside the quota share agreement) effective
January 1, 2009. Since this business is written outside the quota share agreement, it is not subject to the cap on
losses per event. Management has determined that this business has a low risk of generating losses above the cap
per event and has therefore elected to not purchase stand-alone reinsurance coverage for these risks. Premium
income on this business amounted to $4,786,954 in 2010 and $3,694,943 in 2009.

The reinsurance subsidiary assumes all foreign currency exchange gain/loss associated with contracts incepting

on January 1, 2006 and thereafter that are subject to the quota share agreement, as well as the German business
written directly. The net foreign currency exchange gain assumed by the reinsurance subsidiary was $345,978 in
2010, $29,238 in 2009 and $256,606 in 2008.

Effective January 1, 2011, the terms and coverage of the quota share reinsurance agreement were revised.

Under the revised quota share reinsurance agreement, the reinsurance subsidiary will assume 100 percent of
Employers Mutual’s assumed reinsurance business, with certain exceptions, on a gross basis, and under a separate
excess of loss reinsurance agreement, will cede to Employers Mutual all losses in excess of $3,000,000 per event.
This new arrangement will allow the reinsurance subsidiary to have the $3,000,000 cap on losses per event on all
assumed reinsurance business, including the reinsurance business written directly by the reinsurance subsidiary
outside the quota share agreement. In addition, the cost of the $3,000,000 cap on losses assumed per event under the
excess of loss reinsurance agreement decreased from 10.5 percent to 10.0 percent of assumed premiums written.
This change is a result of efforts to ensure that the terms of the agreement are fair and equitable to both parties.

Services Provided by Employers Mutual

The Company does not have any employees of its own. Employers Mutual performs all operations for all of its

subsidiaries and affiliate. Such services include data processing, claims, financial, actuarial, legal, auditing,
marketing and underwriting. Employers Mutual allocates a portion of the cost of these services to its subsidiaries
that do not participate in the pooling agreement based upon a number of criteria, including usage of the services and
the number of transactions. The remaining costs are charged to the pooling agreement and each pool participant
shares in the total cost in accordance with its pool participation percentage. Costs allocated to the Company by
Employers Mutual for services provided to the holding company and its subsidiaries that do not participate in the
pooling agreement amounted to $3,470,772, $2,597,523 and $2,643,930 in 2010, 2009 and 2008, respectively.
Costs allocated to the Company through the operation of the pooling agreement amounted to $71,724,663,
$72,480,519 and $63,887,041 in 2010, 2009 and 2008, respectively.

Investment expenses are based on actual expenses incurred by the Company 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. Investment expenses allocated to the Company by Employers Mutual
amounted to $1,049,702, $1,217,193 and $1,464,337 in 2010, 2009 and 2008, respectively.

REINSURANCE

The parties to the pooling agreement cede insurance business to other insurers in the ordinary course of
business for the purpose of limiting their maximum loss exposure through diversification of their risks. In its
consolidated financial statements, the Company treats risks to the extent they are reinsured as though they were risks
for which the Company is not liable. Insurance ceded by the pool participants does not relieve their primary liability
as the originating insurers. Employers Mutual evaluates the financial condition of the reinsurers of the parties to the
pooling agreement and monitors concentrations of credit risk arising from similar geographic regions, activities or
economic characteristics of the reinsurers to minimize exposure to significant losses from reinsurer insolvencies.

As of December 31, 2010, reinsurance premiums ceded to three nonaffiliated reinsurers totaled $21,833,644,

which represents a significant portion of the total prepaid reinsurance premiums and reinsurance receivables for
losses and settlement expenses. For two of these nonaffiliated reinsurers, the amounts reflect the property and
casualty insurance subsidiaries’ aggregate pool participation percentage of amounts ceded by Employers Mutual to
these organizations on a mandatory basis. 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. The
third reinsurer is MRB. The total amount due from MRB for prepaid reinsurance premiums and reinsurance
receivables for losses and settlement expenses primarily includes amounts ceded to it by the reinsurance subsidiary
as part of a fronting arrangement initiated in 2010. Through Employers Mutual’s membership in MRB, the
reinsurance subsidiary assumes back an approximate one-fifth portion of these amounts through the quota share
agreement (after ceded reinsurance protections purchased by the MRB pool are applied).

The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the

three years ended December 31, 2010 is presented below.

Year ended December 31, 2010

Property and
casualty
insurance

Reinsurance

Total

Premiums written
Direct .......................................................
Assumed from nonaffiliates .....................
Assumed from affiliates ...........................
Ceded to nonaffiliates ..............................
Ceded to affiliates ....................................
Net premiums written ..........................

Premiums earned
Direct .......................................................
Assumed from nonaffiliates .....................
Assumed from affiliates ...........................
Ceded to nonaffiliates ..............................
Ceded to affiliates ....................................
Net premiums earned ...........................

Losses and settlement expenses incurred
Direct .......................................................
Assumed from nonaffiliates .....................
Assumed from affiliates ...........................
Ceded to nonaffiliates ..............................
Ceded to affiliates ....................................
Net losses and settlement
expenses incurred ............................

261,451,268
1,803,365
332,195,425
(23,204,501)
(261,451,268)
310,794,289

249,254,444
1,907,337
326,744,028
(23,004,707)
(249,254,444)
305,646,658

$
-
112,255,735
-
(28,200,915)
-
84,054,820

$
-
107,458,179
-
(23,982,687)
-
83,475,492

177,642,699
1,718,591
210,780,608
(4,385,038)
(177,642,699)

$
-
55,989,808
1,166,006
(10,629,456)
-

261,451,268
114,059,100
332,195,425
(51,405,416)
(261,451,268)
394,849,109

249,254,444
109,365,516
326,744,028
(46,987,394)
(249,254,444)
389,122,150

177,642,699
57,708,399
211,946,614
(15,014,494)
(177,642,699)

208,114,161

46,526,358

254,640,519

Year ended December 31, 2009

Property and
casualty
insurance

Reinsurance

Total

247,722,866
2,251,157
333,862,328
(23,298,602)
(247,722,866)
312,814,883

230,497,985
2,364,787
328,927,476
(23,213,227)
(230,497,985)
308,079,036

$
-
78,094,405
-
(2,192,976)
-
75,901,429

$
-
77,741,189
-
(1,809,324)
-
75,931,865

154,142,419
1,523,446
202,616,957
(5,016,118)
(154,142,419)

$
-
51,256,602
673,957
(2,305,385)
-

247,722,866
80,345,562
333,862,328
(25,491,578)
(247,722,866)
388,716,312

230,497,985
80,105,976
328,927,476
(25,022,551)
(230,497,985)
384,010,901

154,142,419
52,780,048
203,290,914
(7,321,503)
(154,142,419)

199,124,285

49,625,174

248,749,459

Year ended December 31, 2008

Property and
casualty
insurance

Reinsurance

Total

225,800,262
2,363,372
334,003,825
(23,379,828)
(225,800,262)
312,987,369

216,190,918
2,518,711
336,767,947
(23,688,609)
(216,190,918)
315,598,049

$
-
74,828,903
-
(1,211,163)
-
73,617,740

$
-
74,826,573
-
(1,106,824)
-
73,719,749

167,303,334
2,119,545
240,123,192
(9,704,486)
(167,303,334)

$
-
62,585,778
756,424
(1,615,160)
-

225,800,262
77,192,275
334,003,825
(24,590,991)
(225,800,262)
386,605,109

216,190,918
77,345,284
336,767,947
(24,795,433)
(216,190,918)
389,317,798

167,303,334
64,705,323
240,879,616
(11,319,646)
(167,303,334)

232,538,251

61,727,042

294,265,293

Individual lines in the above tables are defined as follows:

(cid:120)
(cid:120)

(cid:120)

“Direct” represents business produced by the property and casualty insurance subsidiaries.
“Assumed from nonaffiliates” for the property and casualty insurance subsidiaries represents their
aggregate 30 percent pool participation percentage of involuntary business assumed by the pool
participants pursuant to state law. For the reinsurance subsidiary, this represents the reinsurance business
assumed through the quota share agreement (including “fronting” activities which were expanded
significantly during 2010, most notably with MRB) and the business assumed outside the quota share
agreement.
“Assumed from affiliates” for the property and casualty insurance subsidiaries represents their aggregate
30 percent pool participation percentage of all the pool members’ direct business. Losses and settlement
expenses incurred also includes claim-related services provided by Employers Mutual that is allocated to
the property and casualty insurance subsidiaries and the reinsurance subsidiary.
“Ceded to nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30
percent pool participation percentage of the ceded reinsurance agreements that provide protection to the
pool and each of its participants. For the reinsurance subsidiary, this line includes reinsurance business
that is ceded to other insurance companies in connection with “fronting” activities (expanded
significantly during 2010 with new fronting arrangements, most notably with MRB).
“Ceded to affiliates” represents the cession of the property and casualty insurance subsidiaries’ direct
business to Employers Mutual under the terms of the pooling agreement.

LIABILITY FOR LOSSES AND SETTLEMENT EXPENSES

The following table sets forth a reconciliation of beginning and ending reserves for losses and settlement

expenses of the Company. 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.

Gross reserves at beginning of year .........................................
Re-valuation due to foreign currency exchange rates ..............
Ceded reserves at beginning of year ........................................

2010
556,151,577
(166,051)
(28,170,575)

Year ended December 31,
2009
573,031,853
(227,385)
(33,009,340)

2008
551,602,006
(597,023)
(31,878,286)

Net reserves at beginning of year .............................................

527,814,951

539,795,128

519,126,697

Incurred losses and settlement expenses
Provision for insured events of the current year ..................
Decrease in provision for insured events of prior years .......
Total incurred losses and
settlement expenses ..................................................

305,389,389
(50,748,870)

297,371,751
(48,622,292)

329,573,313
(35,308,020)

254,640,519

248,749,459

294,265,293

Payments
Losses and settlement expenses attributable to insured
events of the current year .................................................
Losses and settlement expenses attributable to insured
events of prior years .........................................................
Total payments ............................................................

Net reserves at end of year .......................................................
Ceded reserves at end of year ..................................................
Gross reserves at end of year, before
foreign currency re-valuation ...............................................
Re-valuation due to foreign currency exchange rates ..............
Gross reserves at end of year ...................................................

122,330,309

111,501,112

133,469,612

132,654,482
254,984,791

149,228,524
260,729,636

140,127,250
273,596,862

527,470,679
29,062,553

527,814,951
28,170,575

539,795,128
33,009,340

556,533,232
(392,276)
556,140,956

555,985,526
166,051
556,151,577

572,804,468
227,385
573,031,853

There is an inherent amount of uncertainty involved in the establishment of insurance liabilities. This
uncertainty is greatest in the current and more recent accident years because a smaller percentage of the expected
ultimate claims have been reported, adjusted and settled compared to more mature accident years. For this reason,
carried reserves for these accident years reflect prudently conservative assumptions. As the carried reserves for
these accident years run off, the overall expectation is that, more often than not, favorable development will occur.
However, there is also the possibility that the ultimate settlement of liabilities associated with these accident years
will show adverse development, and such adverse development could be substantial.

Changes in reserve estimates are reflected in operating results in the year such changes are recorded.

Following is an analysis of the reserve development the Company has experienced during the past three years. Care
should be exercised when attempting to analyze the financial impact of the reported development amounts because,
as noted above, the overall expectation is that, more often than not, favorable development will occur as the prior
accident year reserves run off.

2010 Development

For the property and casualty insurance segment, the December 31, 2010 estimate of loss and settlement
expense reserves for accident years 2009 and prior decreased $28,726,238 from the estimate at December 31, 2009.
This decrease represented 7.0 percent of the December 31, 2009 gross carried reserves and is primarily attributed to
decreased severity associated with the final settlement of closed claims, lower than expected IBNR emergence, as
well as favorable development on settlement expense reserves.

For the reinsurance segment, the December 31, 2010 estimate of loss and settlement expense reserves for
accident years 2009 and prior decreased $22,022,632 from the estimate at December 31, 2009. This decrease
represented 15.1 percent of the December 31, 2009 gross carried reserves and is largely attributed to the 2009
accident year in the Home Office Reinsurance Assumed Department (also known as “HORAD”) book of business,
as well as a $6,065,000 reclassification of prior accident years’ IBNR loss reserves to contingent commission
reserves by MRB in the third and fourth quarters. This reclassification had no impact on net income.

2009 Development

For the property and casualty insurance segment, the December 31, 2009 estimate of loss and settlement
expense reserves for accident years 2008 and prior decreased $34,641,246 from the estimate at December 31, 2008.
This decrease represented 8.1 percent of the December 31, 2008 gross carried reserves and was primarily attributed
to decreased severity associated with the final settlement of closed claims, lower than expected IBNR emergence, as
well as favorable development on settlement expense reserves.

For the reinsurance segment, the December 31, 2009 estimate of loss and settlement expense reserves for
accident years 2008 and prior decreased $13,981,046 from the estimate at December 31, 2008. This decrease
represented 9.7 percent of the December 31, 2008 gross carried reserves and was largely attributed to the 2008
accident year in the HORAD book of business. During the fourth quarter, the reinsurance segment experienced
$4,160,000 of favorable development associated with a reduction in bulk IBNR reserves and the winding down of
the MAERP Reinsurance Association (formerly known as Mutual Atomic Energy Reinsurance Pool).

2008 Development

For the property and casualty insurance segment, the December 31, 2008 estimate of loss and settlement
expense reserves for accident years 2007 and prior decreased $21,564,256 from the estimate at December 31, 2007.
This decrease represented 5.3 percent of the December 31, 2007 gross carried reserves and was primarily attributed
to lower than expected emergence during 2008 of losses estimated to have been incurred but not reported (IBNR) at
December 31, 2007, as well as favorable development on settlement expense reserves and decreased severity
associated with the final settlement of closed claims.

For the reinsurance segment, the December 31, 2008 estimate of loss and settlement expense reserves for
accident years 2007 and prior decreased $13,743,764 from the estimate at December 31, 2007. This decrease
represented 9.7 percent of the December 31, 2007 gross carried reserves and was largely attributed to the 2005, 2006
and 2007 accident years in the HORAD book of business.

5. ASBESTOS AND ENVIRONMENTAL RELATED CLAIMS

The Company has exposure to asbestos and environmental related claims associated with the insurance

business written by the parties to the pooling agreement and the reinsurance business assumed from Employers
Mutual by the reinsurance subsidiary. These exposures are not considered to be significant. Asbestos and
environmental losses paid by the Company have averaged $1,171,355 per year over the past five years, but have
increased during the past three years. Reserves for asbestos and environmental related claims for direct insurance
and assumed reinsurance business totaled $8,043,534 and $6,526,964 ($7,083,222 and $6,219,546 net of
reinsurance) at December 31, 2010 and 2009, respectively.

At present, the pool participants are defending approximately 1,050 asbestos bodily injury lawsuits, some of

which involve multiple plaintiffs. Seven former policyholders and one current policyholder dominate the pool
participants’ asbestos claims. Most of the lawsuits are subject to express reservation of rights based upon the lack of
an injury within the applicable policy periods, because many asbestos lawsuits do not specifically allege dates of
asbestos exposure or dates of injury. During 2003, the pool participants were presented with several hundred
plaintiff lawsuits (primarily multi-plaintiff lawsuits) filed against three former policyholders representing
approximately 66,500 claimants related to exposure to asbestos or products containing asbestos. These claims are
based upon nonspecific asbestos exposure and nonspecific injuries. As a result, management did not establish a
significant amount of case loss reserves for these claims. During the period 2006 through 2010, several of the multi-
plaintiff lawsuits (including the vast majority of those associated with one former policyholder) were dismissed. As
of December 31, 2010, approximately 2,750 of the claims remain open. During 2006, the pool participants received
notice that another former policyholder was a named defendant in approximately 33,000 claims nationwide. As of
December 31, 2010, approximately 4,710 of these claims remain open.

Prior to 2008, actual losses paid for asbestos-related claims had been minimal due to the plaintiffs’ failure to
identify an exposure to any asbestos-containing product associated with the pool participants’ current and former
policyholders. However, paid losses and settlement expenses have increased significantly from 2008 to present as a
result of claims attributed to two former policyholders. One of these former policyholders, a broker of various
products, including asbestos, settled a claim for approximately $450,000 (the Company’s share) in 2008. At
December 31, 2010, two additional claims associated with this former policyholder remain open, though similar
exposure on these claims is not anticipated. The other former policyholder, a furnace manufacturer, had multiple
claims settle for a total of approximately $719,000 (the Company’s share) in 2009 and 2010. The asbestos exposure
associated with this former policyholder increased during this time period, and this trend may possibly continue into
the future with increased per plaintiff settlements. Approximately 190 asbestos exposure claims associated with this
former policyholder remain open.

IBNR loss reserves have been established to cover estimated ultimate losses. These reserves were increased in

each of the last three years based on examinations of the implied three-year survival ratio (ratio of loss and
settlement expense reserves to the three-year average of loss and settlement expense payments), which has
deteriorated due to an increase in both paid losses and paid settlement expenses. Settlement expense payments have
increased significantly over the past three years and have been the primary driver behind the implemented reserve
increases. The primary cause of the increase in paid settlement expenses is the retention of a National Coordinating
Counsel (NCC) in 2008 for a policyholder having exposure in numerous jurisdictions. The NCC has provided, and
continues to provide, significant services in the areas of document review, discovery, deposition and trial
preparation. The dollar amount of paid losses peaked in 2008, and though subsequent years have fared better,
payment activity remains significantly higher than pre-2008 levels. Environmental reserves are established in
consideration of the implied three-year survival ratio.

Estimating loss and settlement expense reserves for asbestos and environmental claims is very difficult due to

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

STATUTORY INFORMATION AND DIVIDEND RESTRICTIONS

The Company’s insurance subsidiaries are required to file financial statements with state regulatory authorities.

The accounting principles used to prepare these statutory financial statements follow prescribed or permitted
accounting practices that differ from GAAP. Prescribed statutory accounting principles include state laws,
regulations and general administrative rules issued by the state of domicile, as well as a variety of publications and
manuals of the National Association of Insurance Commissioners (NAIC). Permitted accounting practices
encompass all accounting practices not prescribed, but allowed by the state of domicile. The Company’s insurance
subsidiaries had no permitted accounting practices during 2010, 2009 or 2008.

Statutory surplus of the Company’s insurance subsidiaries was $347,132,678 and $327,244,159 at December

31, 2010 and 2009, respectively. Statutory net income (loss) of the Company’s insurance subsidiaries was
$34,459,093, $46,824,981 and ($3,961,799) for 2010, 2009 and 2008, respectively.

The NAIC utilizes a risk-based capital model to help state regulators assess the capital adequacy of insurance

companies and identify insurers that are in, or are perceived as approaching, financial difficulty. This model
establishes minimum capital needs based on the risks applicable to the operations of the individual insurer. The
risk-based capital requirements for property and casualty insurance companies measure three major areas of risk:
asset risk, credit risk and underwriting risk. Companies having less statutory surplus than required by the risk-based
capital requirements are subject to varying degrees of regulatory scrutiny and intervention, depending on the
severity of the inadequacy. At December 31, 2010, the Company’s insurance subsidiaries had total adjusted
statutory capital well in excess of the minimum risk-based capital requirement.

The amount of dividends available for distribution to the Company by its insurance subsidiaries is limited by
law to a percentage of the statutory unassigned surplus of each of the subsidiaries as of the previous December 31,
as determined in accordance with accounting practices prescribed by insurance regulatory authorities of the state of
domicile of each subsidiary. Subject to this limitation, the maximum dividend that may be paid within a 12 month
period without prior approval of the insurance regulatory authorities is generally restricted to the greater of 10
percent of statutory surplus as regards policyholders as of the preceding December 31, or net income of the
preceding calendar year on a statutory basis, not greater than earned statutory surplus. At December 31, 2010,
$39,271,481 was available for distribution to the Company in 2011 without prior approval.

SEGMENT INFORMATION

The Company’s operations consist of a property and casualty insurance segment and a reinsurance segment.
The property and casualty insurance segment writes both commercial and personal lines of insurance, with a focus
on medium-sized commercial accounts. The reinsurance segment provides reinsurance for other insurers and
reinsurers. The segments are managed separately due to differences in the insurance products sold and the business
environment in which they operate. The accounting policies of the segments are described in note 1, Summary of
Significant Accounting Policies.

Summarized financial information for the Company’s segments is as follows:

Year ended
December 31, 2010
Premiums earned ……………………… 305,646,658

Property and
casualty
insurance

Reinsurance

83,475,492

Parent
company
$
-

Consolidated

389,122,150

Underwriting profit (loss) …………… (18,963,921)
36,966,159
Net investment income ………………
Realized investment gains ……………
3,078,289
Other income …………………………
783,346
Interest expense ………………………
900,000
Other expenses ………………………
753,014
Income (loss) before income
tax expense (benefit) …………… 20,210,859

9,909,051
12,523,505
790,514
-
-
(345,978)

-
(449)
-
-
-
1,334,234

23,569,048

(1,334,683)

Assets ………………………………… 876,034,367
-
Eliminations …………………………
Reclassifications ………………………
-
Net assets …………………………… 876,034,367

310,104,843
-
(3,534,230)
306,570,613

369,116,425
(363,926,907)
-
5,189,518

(9,054,870)
49,489,215
3,868,803
783,346
900,000
1,741,270

42,445,224

1,555,255,635
(363,926,907)
(3,534,230)
1,187,794,498

Year ended
December 31, 2009
Premiums earned ……………………… 308,079,036

Property and
casualty
insurance

Reinsurance

75,931,865

Parent
company
$
-

Consolidated

384,010,901

(838,941)
47,759,306
17,922,271
755,178
900,000
2,172,997

62,524,817

1,506,525,297
(340,269,959)
(467,545)
1,165,787,793

Underwriting profit (loss) …………… (10,387,142)
Net investment income ………………
35,679,586
Realized investment gains (losses) …… 19,581,814
752,635
Other income …………………………
900,000
Interest expense ………………………
855,846
Other expenses ………………………
Income (loss) before income
tax expense (benefit) …………… 43,871,047

9,548,201
12,069,177
(1,659,543)
2,543
-
(29,237)

-
10,543
-
-
-
1,346,388

19,989,615

(1,335,845)

Assets ………………………………… 883,361,416
-
Eliminations …………………………
Reclassifications ………………………
-
Net assets …………………………… 883,361,416

342,901,891
(340,269,959)
(467,545)
2,164,387

280,261,990
-
-
280,261,990

Year ended
December 31, 2008
Premiums earned ……………………… 315,598,049

Property and
casualty
insurance

Underwriting loss …………………… (26,817,043)
Net investment income ………………
36,329,609
Realized investment losses …………… (16,811,900)
Other income …………………………
626,499
Interest expense ………………………
889,375
Other expenses ………………………
568,848
Loss before income
tax benefit ………………………

(8,131,058)

Reinsurance

73,719,749

Parent
company
$
-

Consolidated

389,317,798

(5,515,643)
11,912,452
(7,643,639)
-
-
(256,599)

-
161,312
-
-
-
1,330,077

(32,332,686)
48,403,373
(24,455,539)
626,499
889,375
1,642,326

(990,231)

(1,168,765)

(10,290,054)

The following table displays the net premiums earned of the property and casualty insurance segment and the

reinsurance segment for the three years ended December 31, 2010, by line of insurance.

2010

Year ended December 31,
2009

2008

Property and casualty insurance segment
Commercial lines:
Automobile ………………………………………
Property …………………………………………
Workers' compensation …………………………
Liability …………………………………………
Other ……………………………………………
Total commercial lines ………………………

65,097,220
65,380,689
63,539,473
58,180,559
8,429,630
260,627,571

Personal lines:
Automobile ………………………………………
Property …………………………………………
Liability …………………………………………
Total personal lines ……………………………
Total property and casualty insurance ……

25,383,097
19,099,403
536,587
45,019,087
305,646,658

Reinsurance segment
Pro rata reinsurance:
Property and casualty ……………………………
Property …………………………………………
Crop ………………………………………………
Casualty …………………………………………
Marine/Aviation …………………………………
Total pro rata reinsurance ……………………

7,752,937
14,650,486
3,246,597
666,791
668,275
26,985,086

65,721,232
62,114,549
65,612,659
62,872,730
8,820,064
265,141,234

23,516,997
18,844,395
576,410
42,937,802
308,079,036

68,931,452
61,312,130
65,233,460
68,265,379
8,960,806
272,703,227

22,838,791
19,434,328
621,703
42,894,822
315,598,049

7,379,461
19,978,045
2,176,737
1,086,934
373,016
30,994,193

8,710,942
18,236,058
4,208,882
1,334,915
615,602
33,106,399

Excess-of-loss reinsurance:
Property …………………………………………
Casualty …………………………………………
Surety ……………………………………………
Total excess-of-loss reinsurance ………………
Total reinsurance ……………………………

45,540,294
10,929,859
20,253
56,490,406
83,475,492

35,221,000
9,741,047
(24,375)
44,937,672
75,931,865

Consolidated ………………………………………

389,122,150

384,010,901

29,385,844
11,220,250
7,256
40,613,350
73,719,749

389,317,798

DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount and the estimated fair value of the Company’s financial instruments is summarized

below.

Carrying
amount

Estimated
fair value

340,803
340,803

389,679
389,679

December 31,2010
Assets:
Fixed maturity securities held-to-maturity:
Residential mortgage-backed .....................................................
Total fixed maturity securities held-to-maturity .....................

Fixed maturity securities available-for-sale:
U.S. treasury ...............................................................................
U.S. government-sponsored agencies ........................................
Obligations of states and political subdivisions .........................
Commercial mortgage-backed ....................................................
Residential mortgage-backed .....................................................
Other asset-backed .....................................................................
Corporate ...................................................................................
Total fixed maturity securities available-for-sale ...................

Equity securities available-for-sale:
Common stocks:
Financial services .................................................................
Information technology ........................................................
Healthcare ............................................................................
Consumer staples .................................................................
Consumer discretionary .......................................................
Energy ..................................................................................
Industrials ............................................................................
Other ....................................................................................
Non-redeemable preferred stocks ...............................................
Total equity securities available-for-sale ........................

4,801,766
168,072,840
390,932,504
93,222,219
34,285,838
13,100,849
237,121,010
941,537,026

11,246,421
17,350,652
12,785,689
7,784,286
12,162,474
9,381,310
7,466,153
14,630,005
8,331,992
101,138,982

4,801,766
168,072,840
390,932,504
93,222,219
34,285,838
13,100,849
237,121,010
941,537,026

11,246,421
17,350,652
12,785,689
7,784,286
12,162,474
9,381,310
7,466,153
14,630,005
8,331,992
101,138,982

36,616,111
29,827

Short-term investments ..................................................................
Other long-term investments ..........................................................

36,616,111
29,827

Liabilities:
Surplus notes ..................................................................................

25,000,000

23,893,033

December 31, 2009
Assets:
Fixed maturity securities held-to-maturity:
Residential mortgage-backed .....................................................
Total fixed maturity securities held-to-maturity .....................

Short-term investments ..................................................................
Other long-term investments ..........................................................
Securities lending collateral ...........................................................

Carrying
amount

Estimated
fair value

410,005
410,005

460,877
460,877

4,983,045
150,415,530
391,764,812
82,391,701
31,055,295
9,885,609
228,684,994
899,180,986

10,666,469
19,693,053
12,935,253
7,043,221
7,581,367
8,811,055
5,826,770
9,370,291
8,262,500
90,189,979

55,390,096
47,083
14,941,880

4,983,045
150,415,530
391,764,812
82,391,701
31,055,295
9,885,609
228,684,994
899,180,986

10,666,469
19,693,053
12,935,253
7,043,221
7,581,367
8,811,055
5,826,770
9,370,291
8,262,500
90,189,979

55,390,096
47,083
14,941,880

Liabilities:
Surplus notes ..................................................................................
Securities lending obligation ..........................................................

25,000,000
14,941,880

22,752,800
14,941,880

The estimated fair value of fixed maturity securities, equity securities, short-term investments, securities
lending collateral and securities lending obligation is based on quoted market prices, where available. In cases
where quoted market prices are not available, fair values are based on a variety of valuation techniques depending
on the type of security.

Other long-term investments, consisting primarily of holdings in limited partnerships and limited liability

companies, are valued by the various fund managers. In management’s opinion, these values reflect fair value at
December 31, 2010 and 2009.

The fair value of the surplus notes is estimated using discounted cash flow analysis based on what the

Company’s current incremental borrowing rate would be for similar debt obligations.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. The following fair value hierarchy
prioritizes inputs to valuation techniques used to measure fair value:

Level 1 - Unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the

ability to access.

Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar

(cid:120) U.S. Treasury securities (including bonds, notes, and bills) are priced according to a number of live data

sources, including active market makers and inter-dealer brokers. Prices from these sources are reviewed
based on the sources’ historical accuracy for individual issues and maturity ranges.

(cid:120) U.S. government-sponsored agencies and corporate securities (including fixed-rate corporate bonds and

(cid:120) Mortgage-backed securities are priced with models using spreads and other information solicited from Wall

Street buy- and sell-side sources, including primary and secondary dealers, portfolio managers, and
research analysts, to produce pricing for each tranche. To determine a tranche’s price, first the cash flow
for each tranche is generated (using consensus prepayment speed assumptions including, as appropriate, a
proprietary prepayment projection based on historical statistics of the underlying collateral), then a
benchmark yield is determined (in relation to the U.S. Treasury curve for the maturity corresponding to the
tranche’s average life estimate), and finally collateral performance and tranche level attributes are
incorporated to adjust the benchmark yield to determine the tranche-specific spread. This is then used to
discount the cash flows to generate the price. When cash flows or other security structure or market
information is not available to appropriately price a security, broker quotes may be used with a zero spread
bid-side valuation, resulting in the same values for the mean and ask prices.

On a quarterly basis, the Company receives from its independent pricing service a list of fixed maturity
securities, if any, that were priced solely from broker quotes. Since this is not an observable input, any fixed
maturity security in the Company’s portfolio that is on this list is classified as a Level 3 fair value measurement. At
December 31, 2010, the Company did not hold any fixed maturity securities that were priced solely from broker
quotes.

A small number of the Company’s securities are not priced by the independent pricing service. One is an

equity security that is reported as a Level 3 fair value measurement at December 31, 2010 and 2009, since no
reliable observable inputs are used in its valuation. This equity security continues to be reported at the fair value
obtained from the Securities Valuation Office (SVO) of the National Association of Insurance Commissioners
(NAIC). The SVO establishes a per share price for this security based on an annual review of that company’s
financial statements. This review is typically performed during the second quarter, and resulted in a fair value for
the shares held by the Company of $2,130 at December 31, 2010 and $2,014 at December 31, 2009. The remaining
three securities (two at December 31, 2009) not priced by the Company’s independent pricing service are fixed
maturity securities. These fixed maturity securities are classified as Level 2 fair value measurements and are carried
at aggregate fair values of $12,914,542 at December 31, 2010 and $7,722,288 at December 31, 2009. The fair
values for these fixed maturity securities were obtained from the Company’s investment custodian using
independent pricing services which utilize similar pricing techniques as the Company’s independent pricing service.

The Company’s fixed maturity and equity securities available-for-sale, as well as short-term investments, are

measured at fair value on a recurring basis. No assets or liabilities are currently measured at fair value on a non-
recurring basis. Presented in the table below are the Company’s assets that are measured at fair value on a recurring
basis, as of December 31, 2010 and 2009.

Fair value measurements at December 31, 2010 using

Quoted
prices in
active markets
for identical
assets
(Level 1)

Significant
other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

Total

4,801,766

$
-

-
-
-
-
-

2,130
-
-
-
-
-
-
-
-

2,130

-
2,130

Description
Fixed maturity securities
available-for-sale:
U.S. treasury .......................................
U.S. government-sponsored
agencies ..........................................
Obligations of states and
political subdivisions ......................
Commercial mortgage-backed ............
Residential mortgage-backed .............
Other asset-backed .............................
Corporate ............................................
Total fixed maturity securities
available-for-sale........................

Equity securities
available-for-sale:
Common stocks:
Financial services ...........................
Information technology ..................
Healthcare ......................................
Consumer staples ............................
Consumer discretionary ..................
Energy ............................................
Industrials .......................................
Other ...............................................
Non-redeemable preferred stocks .......
Total equity securities
available-for-sale........................

168,072,840

390,932,504
93,222,219
34,285,838
13,100,849
237,121,010

941,537,026

11,246,421
17,350,652
12,785,689
7,784,286
12,162,474
9,381,310
7,466,153
14,630,005
8,331,992

-
-
-
-
-

168,072,840

390,932,504
93,222,219
34,285,838
13,100,849
237,121,010

941,537,026

11,244,291
17,350,652
12,785,689
7,784,286
12,162,474
9,381,310
7,466,153
14,630,005
8,331,992

-
-
-
-
-
-
-
-
-

101,138,982

101,136,852

Short-term investments .............................

36,616,111
1,079,292,119

36,616,111
137,752,963

-
941,537,026

Fair value measurements at December 31, 2009 using

Quoted
prices in
active markets
for identical
assets
(Level 1)

Significant
other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

Total

4,983,045

$
-

-
-
-
-
-

2,014
-
-
-
-
-
-
-
-

2,014

-
2,014

150,415,530

391,764,812
82,391,701
31,055,295
9,885,609
228,684,994

899,180,986

10,666,469
19,693,053
12,935,253
7,043,221
7,581,367
8,811,055
5,826,770
9,370,291
8,262,500

-
-
-
-
-

150,415,530

391,764,812
82,391,701
31,055,295
9,885,609
228,684,994

899,180,986

10,664,455
19,693,053
12,935,253
7,043,221
7,581,367
8,811,055
5,826,770
9,370,291
8,262,500

-
-
-
-
-
-
-
-
-

Short-term investments .............................

55,390,096
1,044,761,061

55,390,096
145,578,061

-
899,180,986

90,189,979

90,187,965

Presented in the table below is a reconciliation of the assets measured at fair value on a recurring basis using

significant unobservable inputs (Level 3) for the years ended December 31, 2009 and 2010. Any unrealized gains or
losses on these securities are recognized in other comprehensive income. Any gains or losses from disposals or
impairments of these securities are reported as realized investment gains or losses in net income.

Balance at December 31, 2008 ……………………
Total unrealized losses included in
other comprehensive income …………………
Total realized investment gains included
in net income …………………………………
Sales ……………………………………………
Balance at December 31, 2009 ……………………
Total unrealized gains included in
other comprehensive income …………………
Balance at December 31, 2010 ……………………

Fair value measurements using significant
unobservable inputs (Level 3)

Equity securities
available-for-sale,
financial services

Total

14,969,143

(14,967,129)

22,473,792
(22,473,792)
2,014

116
2,130

At December 31, 2008, the Company held Class B shares of Insurance Services Office Inc. (now known as

Verisk Analytics, Inc. (“Verisk”) following its Initial Public Offering on October 7, 2009). The Company was
reporting this investment as a Level 3 fair value measurement at the fair value obtained from applying a 20 percent
marketability discount to the quarterly valuations of the Class A shares produced by a nationally recognized
independent financial advisory firm. This resulted in a fair value of $14,965,502 for the Class B shares at December
31, 2008. The Company sold its entire holding of Verisk during the fourth quarter of 2009 in conjunction with
Verisk’s Initial Public Offering. This sale resulted in a realized capital gain of $22,473,792 (before tax).

There were no transfers into or out of Levels 1 or 2 for the year ended December 31, 2010. It is the

Company’s policy to recognize transfers between levels at the beginning of the reporting period.

INVESTMENTS

Investments of the Company’s insurance subsidiaries are subject to the insurance laws of the state of their

incorporation. These laws prescribe the kind, quality and concentration of investments that may be made by
insurance companies. In general, these laws permit investments, within specified limits and subject to certain
qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks and real
estate mortgages. The Company believes that it is in compliance with these laws.

The amortized cost and estimated fair value of securities held-to-maturity and available-for-sale as of

December 31, 2010 and 2009 are as follows. Securities classified as held-to-maturity are carried at amortized cost.
All other securities have been classified as available-for-sale and are carried at fair value.

December 31, 2010
Securities held-to-maturity:
Fixed maturity securities:
Residential mortgage-backed ......................................
Total securities held-to-maturity ...............................

Securities available-for-sale:
Fixed maturity securities:
U.S. treasury ...............................................................
U.S. government-sponsored agencies .........................
Obligations of states and political subdivisions ..........
Commercial mortgage-backed ....................................
Residential mortgage-backed ......................................
Other asset-backed ......................................................
Corporate ....................................................................
Total fixed maturity securities ..................................

Equity securities:
Common stocks:
Financial services .....................................................
Information technology ............................................
Healthcare .................................................................
Consumer staples ......................................................
Consumer discretionary ............................................
Energy .......................................................................
Industrials .................................................................
Other .........................................................................
Non-redeemable preferred stocks ...............................
Total equity securities ...............................................
Total securities available-for-sale ...........................

Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

Estimated
fair value

$
$

340,803
340,803

$
$

48,876
48,876

$
-
$
-

4,747,814
167,976,167
384,164,252
82,906,928
32,801,281
12,100,433
224,885,907
909,582,782

53,952
1,995,829
11,650,499
10,341,728
1,664,155
1,056,995
12,954,535
39,717,693

$
-
1,899,156
4,882,247
26,437
179,598
56,579
719,432
7,763,449

8,630,273
11,215,431
10,200,062
6,010,692
7,636,589
6,350,228
5,395,949
11,281,815
9,000,000
75,721,039
985,303,821

2,667,761
6,163,395
2,705,556
1,834,157
4,535,110
3,031,082
2,096,834
3,350,963
100,000
26,484,858
66,202,551

51,613
28,174
119,929
60,563
9,225
-
26,630
2,773
768,008
1,066,915
8,830,364

$
$

389,679
389,679

4,801,766
168,072,840
390,932,504
93,222,219
34,285,838
13,100,849
237,121,010
941,537,026

11,246,421
17,350,652
12,785,689
7,784,286
12,162,474
9,381,310
7,466,153
14,630,005
8,331,992
101,138,982
1,042,676,008

December 31, 2009
Securities held-to-maturity:
Fixed maturity securities:
Residential mortgage-backed ......................................
Total securities held-to-maturity ...............................

Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

Estimated
fair value

$
$

410,005
410,005

$
$

50,872
50,872

$
-
$
-

4,739,194
151,440,800
380,605,547
75,563,896
31,017,352
9,164,445
219,663,540
872,194,774

243,851
1,011,484
15,604,731
6,827,805
961,646
739,434
10,284,043
35,672,994

$
-
2,036,754
4,445,466
-
923,703
18,270
1,262,589
8,686,782

7,447,765
13,366,462
10,066,840
6,323,889
6,100,052
6,995,036
5,239,316
8,075,560
9,500,000
73,114,920
945,309,694

3,276,169
6,326,591
2,901,926
768,181
1,499,876
1,858,794
683,747
1,324,137
15,500
18,654,921
54,327,915

57,465
-
33,513
48,849
18,561
42,775
96,293
29,406
1,253,000
1,579,862
10,266,644

$
$

460,877
460,877

4,983,045
150,415,530
391,764,812
82,391,701
31,055,295
9,885,609
228,684,994
899,180,986

10,666,469
19,693,053
12,935,253
7,043,221
7,581,367
8,811,055
5,826,770
9,370,291
8,262,500
90,189,979
989,370,965

The following table sets forth the estimated fair value and gross unrealized losses associated with investment

securities that were in an unrealized loss position as of December 31, 2010 and 2009, listed by length of time the
securities were in an unrealized loss position.

December 31, 2010

Fixed maturity securities:
U.S. government-sponsored
agencies .......................................
Obligations of states and
political subdivisions ...................
Commercial mortgage-backed .......
Residential mortgage-backed .........
Other asset-backed ........................
Corporate .......................................
Total, fixed
maturity securities .................

Equity securities:
Common stocks:
Financial services ........................
Information technology ................
Healthcare ....................................
Consumer staples .........................
Consumer discretionary ...............
Industrials ....................................
Other ............................................
Non-redeemable preferred
stocks ...........................................
Total, equity
securities .................................
Total temporarily
impaired securities ...........

Less than twelve months
Fair
value

Unrealized
losses

Twelve months or longer

Total

Fair
value

Unrealized
losses

Fair
value

Unrealized
losses

64,030,427

1,899,156

$
-

64,030,427

1,899,156

97,769,789
3,998,831
11,346,913
3,331,324
38,270,674

4,882,247
26,437
157,798
56,579
719,432

-
-
1,222,717
-
-

-
-
21,800
-
-

97,769,789
3,998,831
12,569,630
3,331,324
38,270,674

4,882,247
26,437
179,598
56,579
719,432

218,747,958

7,741,649

1,222,717

21,800

219,970,675

7,763,449

1,608,012
879,805
3,551,623
1,218,294
253,023
761,616
42,752

51,613
28,174
119,929
60,563
9,225
26,630
2,773

-
-
-
-
-
-
-

1,608,012
879,805
3,551,623
1,218,294
253,023
761,616
42,752

51,613
28,174
119,929
60,563
9,225
26,630
2,773

4,231,992

768,008

4,231,992

768,008

8,315,125

298,907

4,231,992

768,008

12,547,117

1,066,915

227,063,083

8,040,556

5,454,709

789,808

232,517,792

8,830,364

December 31, 2009

Fixed maturity securities:
U.S. government-sponsored
agencies .......................................
Obligations of states and
political subdivisions ...................
Residential mortgage-backed .........
Other asset-backed ........................
Corporate .......................................
Total, fixed
maturity securities .................

Equity securities:
Common stocks:
Financial services ........................
Healthcare ....................................
Consumer staples .........................
Consumer discretionary ...............
Energy .........................................
Industrials ....................................
Other ............................................
Non-redeemable preferred
stocks ...........................................
Total, equity
securities .................................
Total temporarily
impaired securities ...........

Less than twelve months
Fair
value

Unrealized
losses

Twelve months or longer

Total

Fair
value

Unrealized
losses

Fair
value

Unrealized
losses

102,035,965

2,036,754

$
-

102,035,965

2,036,754

83,487,876
3,317,513
-
43,994,473

3,832,182
93,216
-
684,520

6,314,420
10,535,690
503,730
18,830,648

613,284
830,487
18,270
578,069

89,802,296
13,853,203
503,730
62,825,121

4,445,466
923,703
18,270
1,262,589

232,835,827

6,646,672

36,184,488

2,040,110

269,020,315

8,686,782

1,092,716
1,550,018
1,901,671
406,500
1,502,064
1,387,906
2,078,197

57,465
33,513
48,849
18,561
42,775
96,293
29,406

-
-
-
-
-
-
-

1,092,716
1,550,018
1,901,671
406,500
1,502,064
1,387,906
2,078,197

57,465
33,513
48,849
18,561
42,775
96,293
29,406

5,247,000

1,253,000

5,247,000

1,253,000

9,919,072

326,862

5,247,000

1,253,000

15,166,072

1,579,862

242,754,899

6,973,534

41,431,488

3,293,110

284,186,387

10,266,644

Unrealized losses on fixed maturity securities totaled $7,763,449 (includes $107,465 related to the non-credit

component of an “other-than-temporary” impairment of a residential mortgage-backed security) at December 31,
2010 and were primarily associated with municipal securities and U.S. government-sponsored agency securities.
The primary factor contributing to these unrealized losses was an increase in interest rates since purchase. In
addition, certain municipal securities experienced a widening of risk premium spread over U.S. Treasuries. Of all
the securities that are in an unrealized loss position, all but three residential mortgage-backed securities are
considered investment grade by credit rating agencies. Because management does not intend to sell these securities,
does not believe it will be required to sell these securities before recovery, and believes it will collect the amounts
due on these securities, it was determined that these securities were not “other-than-temporarily” impaired at
December 31, 2010.

The unrealized losses on common stocks at December 31, 2010 are not concentrated in a particular sector or an

individual security. The Company believes the unrealized losses on common stocks are primarily due to general
fluctuations in the equity markets. Because the Company has the ability and intent to hold these securities for a
reasonable amount of time to allow for recovery, it was determined that these securities were not “other-than-
temporarily” impaired at December 31, 2010.

All of the Company’s preferred stock holdings are perpetual preferred stocks. The Company evaluates

perpetual preferred stocks for “other-than-temporary” impairment similar to fixed maturity securities since they have
debt-like characteristics such as periodic cash flows in the form of dividends and call features, are rated by rating
agencies and are priced like other long-term callable fixed maturity securities. There was no evidence of any credit
deterioration in the issuers of the preferred stocks and the Company does not intend to sell these securities before
recovery, nor does it believe it will be required to sell these securities before recovery; therefore, it was determined
that these securities were not “other-than-temporarily” impaired at December 31, 2010.

The amortized cost and estimated fair value of fixed maturity securities at December 31, 2010, by contractual

maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations, with or without call or prepayment penalties.

Amortized
cost

Estimated
fair value

Securities held-to-maturity:
Due in one year or less ……………………
Due after one year through five years ………
Due after five years through ten years ………
Due after ten years …………………………
Mortgage-backed securities …………………
Totals ……………………………………

-
$
-
-
-
340,803
340,803

Securities available-for-sale:
Due in one year or less ……………………
29,607,752
Due after one year through five years ……… 79,964,156
Due after five years through ten years ……… 156,508,518
Due after ten years ………………………… 527,794,147
Mortgage-backed securities ………………… 115,708,209
Totals …………………………………… 909,582,782

-
$
-
-
-
389,679
389,679

29,921,578
83,963,583
164,598,759
535,545,049
127,508,057
941,537,026

A summary of realized investment gains and (losses) is as follows:

Year ended December 31,
2009

2010

2008

Fixed maturity securities
available-for-sale:
Gross realized investment gains …………
Gross realized investment losses …………
"Other-than-temporary" impairments ……

1,325,345
(87,082)
(204,045)

1,636,291
(50,000)
(2,657,094)

272,522
-
-

Equity securities
available-for-sale:
Gross realized investment gains …………
5,794,677
Gross realized investment losses …………
(779,861)
"Other-than-temporary" impairments …… (2,180,231)
Totals …………………………………
3,868,803

29,173,686
(2,729,329)
(7,451,283)
17,922,271

9,433,726
(3,240,928)
(30,920,859)
(24,455,539)

The amounts reported as “other-than-temporary” impairments on equity securities available-for-sale reflect the

impairment of 23 equity securities for the year ended December 31, 2010, compared to 34 equity securities for the
year ended December 31, 2009 and 40 equity securities for the year ended December 31, 2008. The large amount of
impairment losses recognized on equity securities during 2009 and 2008 was a result of the severe and prolonged
turmoil in the financial markets resulting from the 2008 financial crisis. Included in the amount for 2008 is
$14,904,000 of losses recognized on the perpetual preferred stocks of Freddie Mac and Fannie Mae when those
companies were placed under conservatorship by the U.S. government.

On April 1, 2009, the Company adopted updated guidance related to the Investments - Debt and Equity
Securities Topic 310 of the FASB ASC. This pronouncement required a cumulative effect adjustment from retained
earnings to “accumulated other comprehensive income” for the non-credit component of previous “other-than-
temporary” impairment losses recognized on fixed maturity securities still held as of the date of adoption. The only
“other-than-temporarily” impaired fixed maturity security held by the Company as of the adoption date was
Chemtura Corporation securities. On the date of adoption the credit component of the loss amounted to $1,229,779,
which was measured as the difference between the present value of the estimated cash flows ($1,770,000) and the
original amortized cost basis ($2,999,779). The non-credit component of the loss ($990,000) was measured as the
difference between the fair value ($780,000) and the present value of the estimated cash flows ($1,770,000). This
non-credit component of the loss ($643,000 after taxes) was treated as a change in accounting principle, and was
reclassified from retained earnings to “accumulated other comprehensive income” as of April 1, 2009. This security
was subsequently sold during the third quarter of 2009 for proceeds of $2,617,500, resulting in a realized gain of
$847,500.

The Company also recognized an “other-than-temporary” impairment loss on a residential mortgage-backed
security during 2009. The total impairment on this security was $248,618, with $87,315 determined as the credit
loss component recognized in earnings and the remaining $161,303 recognized in other comprehensive income.

During the first quarter of 2010, the Company determined that the credit loss associated with the previously

impaired residential mortgage-backed security increased, resulting in an additional $120,539 impairment loss
recognized in earnings in the first quarter of 2010. The Company also recognized $83,506 of “other-than-
temporary” impairment loss on a second residential mortgage-backed security during the first quarter of 2010 due to
management’s intent to sell the security, which was completed during the second quarter.

The following table is a roll forward of the amount of credit losses recognized in earnings from “other-than-
temporary” impairments. Note that this table only includes the credit loss component of “other-than-temporary”
impairments, and does not include the non-credit loss component of impairments (which is recognized through
“other comprehensive income”) or impairments that are recognized through earnings in their entirety (not subject to
bifurcation between credit and non-credit components).

Year ended December 31,

Balance at beginning of year …………………………………………………

87,315

2010

Credit loss for which an "other-than-temporary" impairment
loss was previously recognized ……………………………………………
Credit loss for which an "other-than-temporary" impairment
was not previously recognized ………………………………………………
Reduction for credit losses previously recognized on securities
sold during the period ………………………………………………………
-
Balance at end of year ……………………………………….………………… 207,854

120,539

2009
$

1,317,094

(1,229,779)
$
87,315

A summary of net investment income is as follows:

Year ended December 31,
2009

2010

Interest on fixed maturity securities ……… 48,661,716
Dividends on equity securities …………… 1,969,281
Interest on short-term investments ………
137,745
Interest on long-term investments ………
26,437
Fees from securities lending ……………
195
Total investment income ……………… 50,795,374
Investment expenses ……………………
(1,306,159)
49,489,215
Net investment income ………………

46,560,740
1,938,189
606,399
26,437
104,786
49,236,551
(1,477,245)
47,759,306

2008

44,419,493
2,933,835
2,690,427
42,649
166,926
50,253,330
(1,849,957)
48,403,373

The large amount of interest income on short-term investments and the corresponding reduced amount of
interest on fixed maturity securities in 2008 is the result of a significant amount of call activity on U.S. government-
sponsored agency securities due to the declining interest rate environment. The proceeds from these called
securities were initially invested in short-term securities, until suitable long-term investment opportunities were later
identified.

A summary of net changes in unrealized holding gains (losses) on securities available-for-sale is as follows:

Fixed maturity securities ………………………
Deferred income tax expense (benefit) ..............
Total fixed maturity securities ……………

Year ended December 31,
2009
35,398,021
12,389,307
23,008,714

2010
4,968,032
1,738,811
3,229,221

2008
(27,332,178)
(9,566,262)
(17,765,916)

Equity securities ………………………………… 8,342,884
2,920,009
Deferred income tax expense (benefit) ..............
Total equity securities ……………………
5,422,875
Total available-for-sale securities ……… 8,652,096

3,728,518
1,304,982
2,423,536
25,432,250

(28,233,640)
(9,881,774)
(18,351,866)
(36,117,782)

10.

INCOME TAXES

Temporary differences between the consolidated financial statement carrying amount and tax basis of assets
and liabilities that give rise to significant portions of the deferred income tax asset at December 31, 2010 and 2009
are as follows:

Loss reserve discounting .........................................................
Unearned premium reserve limitation .....................................
Retirement benefits .................................................................
Other policyholders' funds payable .........................................
"Other-than-temporarily" impaired securities held .................
Other, net ................................................................................
Total deferred income tax asset ......................................
Net unrealized holding gains on investment securities ...........
Deferred policy acquisition costs ............................................
Other, net ................................................................................
Total deferred income tax liability ..................................
Net deferred income tax asset .....................................

December 31,

2010

19,811,790
11,082,443
4,822,987
2,910,513
1,701,888
1,051,419
41,381,040
(20,080,265)
(13,154,557)
(1,456,000)
(34,690,822)
6,690,218

2009

19,949,865
10,803,318
6,763,636
2,771,533
2,949,395
1,292,761
44,530,508
(15,421,445)
(12,827,720)
(1,236,986)
(29,486,151)
15,044,357

Based upon anticipated future taxable income and consideration of all other available evidence, management

believes that it is “more likely than not” that the Company’s net deferred income tax asset will be realized.

The actual income tax expense (benefit) for the years ended December 31, 2010, 2009 and 2008 differed from

the “expected” income tax expense (benefit) for those years (computed by applying the United States federal
corporate tax rate of 35 percent to income (loss) before income tax expense (benefit)) as follows:

Computed "expected" income tax expense (benefit) .........
Increases (decreases) in tax resulting from:
Tax-exempt interest income ...........................................
Dividends received deduction ........................................
Proration of tax-exempt interest and
dividends received deduction .....................................
Elimination of deduction for Medicare Part D
retiree drug subsidy ....................................................
Other, net .......................................................................
Income tax expense (benefit) .............................................

Year ended December 31,
2009

2008

2010

14,855,828

21,883,686

(3,601,519)

(4,931,396)
(478,528)

(5,139,443)
(485,035)

(5,012,548)
(728,769)

811,489

843,672

861,198

794,383
47,125
11,098,901

-
51,323
17,154,203

-
(103,043)
(8,584,681)

As a result of the Patient Protection and Affordable Care Act (H.R. 3590) and the follow-up Health Care and

Education Reconciliation Act of 2010 (H.R. 4872) signed into law on March 23, 2010 and March 30, 2010,
respectively (the “Acts”), beginning in 2013 the Company will no longer be able to claim a tax deduction for drug
expenses that are reimbursed under the Medicare Part D retiree drug subsidy program. Although this tax change
does not take effect until 2013, the Company is required to recognize the financial impact of this tax change in the
period in which the Acts were signed. As a result of the Acts, the Company recognized a decrease in its deferred tax
asset of $794,383 during the first quarter of 2010.

Comprehensive income tax expense (benefit) included in the consolidated financial statements for the years

ended December 31, 2010, 2009 and 2008 is as follows:

Income tax expense (benefit) on:
Operations ..............................................................................
Change in unrealized holding gains (losses) on
investment securities ..........................................................
Adjustment for retirement benefit plans:
Pension plans .....................................................................
Postretirement benefit plans ...............................................
Comprehensive income tax expense (benefit) ................
Adoption of ASC Topic 715 measurement date provision:
Pension plans .....................................................................
Postretirement benefit plans ...............................................
Income tax expense (benefit) reflected
in accumulated other comprehensive
income (loss) ..........................................................

Year ended December 31,
2009

2008

2010

11,098,901

17,154,203

(8,584,681)

4,658,820

14,040,789

(19,448,036)

668,041
(780,555)
15,645,207

2,183,000
(1,886,738)
31,491,254

(8,196,274)
(811,204)
(37,040,195)

-
-

11,321
(36,121)

15,645,207

31,491,254

(37,064,995)

The Company had no provision for uncertain tax positions at December 31, 2010 or 2009. The Company did

not recognize any interest or other penalties related to U.S. federal or state income taxes during 2010, 2009 or 2008.
It is the Company’s accounting policy to reflect income tax penalties as other expense, and interest as interest
expense.

The Company files U.S. federal tax returns, along with various states income tax returns. The Company is no

longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2005. The
Company is currently under audit for tax years 2005 through 2008. No additional tax liability is expected from this
audit.

11. SURPLUS NOTES

The Company’s property and casualty insurance subsidiaries have $25,000,000 of surplus notes issued to
Employers Mutual. Effective February 1, 2008, the interest rate on these surplus notes was increased from 3.09
percent to 3.60 percent. Reviews of the interest rate are conducted by the Inter-Company Committees of the Boards
of Directors of the Company and Employers Mutual every five years, with the next review due in 2013. Payment of
interest and repayment of principal can only be made out of the applicable subsidiary’s statutory surplus and is
subject to prior approval by the insurance commissioner of the respective state of domicile. The surplus notes are
subordinate and junior in right of payment to all obligations or liabilities of the applicable insurance subsidiaries.
Total interest expense incurred on these surplus notes was $900,000, $900,000 and $889,375 in 2010, 2009 and
2008, respectively. At December 31, 2010, the Company’s property and casualty insurance subsidiaries had
received approval for the payment of interest accrued on the surplus notes during 2010.

12.

EMPLOYEE RETIREMENT PLANS

Employers Mutual has various employee benefit plans, including two defined benefit pension plans and two

postretirement benefit plans that provide retiree healthcare and life insurance coverage.

Employers Mutual’s pension plans include a qualified defined benefit pension plan and a nonqualified defined
benefit supplemental pension plan. The qualified defined benefit plan covers substantially all of its employees. This
plan is funded by employer contributions and provides benefits under two different formulas, depending on an
employee’s age and date of service. Benefits generally vest after three years of service or the attainment of 55 years
of age. It is Employers Mutual’s funding policy to make contributions that meet minimum regulatory funding
requirements plus additional amounts as determined by management.

Employers Mutual’s nonqualified defined benefit supplemental pension plan provides retirement benefits for a

select group of management and highly-compensated employees. This plan enables select employees to receive
retirement benefits without the limit on compensation imposed on qualified defined benefit pension plans by the
Internal Revenue Service (IRS) and to recognize compensation that has been deferred in the determination of
retirement benefits. The plan is unfunded and benefits generally vest after three years of service.

Employers Mutual also offers postretirement benefit plans which provide certain health care and life insurance

benefits for retired employees. Substantially all of its employees may become eligible for those benefits if they
reach normal retirement age and have attained the required length of service while working for Employers Mutual.
The health care postretirement plan requires contributions from participants and contains certain cost sharing
provisions such as coinsurance and deductibles. The life insurance plan is noncontributory. The benefits provided
under both plans are subject to change.

Employers Mutual maintains a Voluntary Employee Beneficiary Association (VEBA) trust which accumulates
funds for the payment of postretirement health care and life insurance benefits. Contributions to the VEBA trust are
used to fund the projected postretirement benefit obligation, as well as pay current year benefits.

The following table sets forth the funded status of Employers Mutual’s pension and postretirement benefit

plans as of December 31, 2010 and 2009, based upon measurement dates of December 31, 2010 and 2009,
respectively.

Pension plans

2010

2009

Postretirement benefit plans

2010

2009

Change in projected benefit obligation:
Benefit obligation at beginning of year …… 181,630,998
Service cost …………………………………
10,717,698
Interest cost …………………………………
9,970,477
Actuarial (gain) loss ………………………… 10,137,667
Benefits paid ………………………………
(10,117,887)
Medicare subsidy reimbursements …………
-
Projected benefit obligation at end
of year ……………………………… 202,338,953

Change in plan assets:
Fair value of plan assets at beginning
of year …………………………………… 167,142,158
Actual return on plan assets ………………… 25,080,476
Employer contributions ……………………
26,314,733
Benefits paid ………………………………
(10,117,887)
Fair value of plan assets at end
of year ……………………………… 208,419,480
Funded status ………………………………
6,080,527

171,276,329
9,886,960
9,804,408
(1,411,417)
(7,925,282)
-

93,768,069
3,931,601
5,533,758
10,129,942
(2,720,150)
228,017

69,835,445
2,771,480
4,281,570
19,044,244
(2,392,373)
227,703

181,630,998

110,871,237

93,768,069

134,613,308
23,192,301
17,261,831
(7,925,282)

43,216,841
5,707,753
2,480,000
(2,720,150)

39,430,673
3,628,541
2,550,000
(2,392,373)

167,142,158
(14,488,840)

48,684,444
(62,186,793)

43,216,841
(50,551,228)

The following tables set forth the amounts recognized in the Company’s financial statements as a result of the

property and casualty insurance subsidiaries’ aggregate 30 percent participation in the pooling agreement and
amounts allocated to the reinsurance subsidiary as of December 31, 2010 and 2009:

Amounts recognized in the Company’s consolidated balance sheets:

Pension plans

2010

2009

Postretirement benefit plans

2010

2009

Assets:
Prepaid pension benefits …………………
Liability:
Pension and postretirement benefits ……… (3,462,118)
Net amount recognized ……………… 1,663,583

5,125,701

$
-

(4,458,896)
(4,458,896)

(16,956,598)
(16,956,598)

(13,717,824)
(13,717,824)

Amounts recognized in the Company’s consolidated balance sheets under the caption “accumulated other

comprehensive income”:

Net actuarial loss ………………………… (15,838,345)
$
Prior service (cost) credit …………………
(267,517)
Net amount recognized ………………… (16,105,862)
$

(17,612,562)
(401,988)
(18,014,550)

Pension plans

2010

2009

Postretirement benefit plans

2010
(8,191,312)
4,610,349
(3,580,963)

2009
(6,517,412)
5,166,602
(1,350,810)

During 2011, the Company will amortize $1,036,705 of net actuarial loss and $138,189 of prior service cost
associated with the pension plans into net periodic benefit cost. In addition, the Company will amortize $619,217 of
prior service credit and $504,029 of net actuarial loss associated with the postretirement benefit plans into net
periodic postretirement benefit cost in 2011.

Amounts recognized in the Company’s consolidated statements of comprehensive income:

Net actuarial gain (loss) …………………
Prior service (cost) credit …………………
Net amount recognized …………………
$

2010
1,774,217
134,471
1,908,688

2009
6,101,657
135,487
6,237,144

Pension plans

Postretirement benefit plans

2010
(1,673,900)
(556,253)
(2,230,153)

2009
(4,810,770)
(579,908)
(5,390,678)

The following table sets forth the projected benefit obligation, accumulated benefit obligation and fair value of

plan assets of Employers Mutual’s pension plans. For 2010, the amounts relate only to the nonqualified pension
plan since the qualified pension plan’s assets exceeded the accumulated benefit obligation.

Projected benefit obligation ………………
Accumulated benefit obligation ……………
Fair value of plan assets ……………………

Year ended December 31,
2009
2010
181,630,998
172,874,247
167,142,158

10,924,975
9,211,098
-

The components of net periodic benefit cost for Employers Mutual’s pension and postretirement benefit plans

is as follows:

Year ended December 31,
2009

2010

2008

Pension plans:
Service cost ……………………………………… 10,717,698
Interest cost ……………………………………… 9,970,477
Expected return on plan assets …………………… (12,676,990)
3,995,656
Amortization of net actuarial loss ………………
452,080
Amortization of prior service cost ………………
Net periodic pension benefit cost ……………… 12,458,921

Postretirement benefit plans:
Service cost ……………………………………… 3,931,601
Interest cost ……………………………………… 5,533,758
Expected return on plan assets …………………… (2,952,489)
Amortization of net actuarial loss ………………
1,350,949
Amortization of prior service credit ……………… (2,131,256)
Net periodic postretirement benefit cost ……… 5,732,563

9,886,960
9,804,408
(9,654,133)
5,432,367
452,297
15,921,899

2,771,480
4,281,570
(2,412,020)
98,054
(2,131,256)
2,607,828

8,723,908
9,422,592
(14,180,913)
187,618
454,561
4,607,766

2,838,155
4,000,706
(2,029,308)
-
(2,131,256)
2,678,297

Net periodic pension benefit cost allocated to the Company amounted to $3,842,291, $4,888,759 and
$1,419,827 in 2010, 2009 and 2008, respectively. Net periodic postretirement benefit cost allocated to the
Company for the years ended December 31, 2010, 2009 and 2008 was $1,639,727, $732,969 and $752,309,
respectively.

The weighted-average assumptions used to measure the benefit obligations are as follows:

Year ended December 31,

2010

2009

Pension plans:
Discount rate ……………………………… 5.00%
Rate of compensation increase:
Qualified pension plan …………………
4.73%
Nonqualified pension plan ……………… 4.68%

Postretirement benefit plans:
Discount rate ……………………………… 5.50%

5.75%

4.73%
4.68%

6.00%

The weighted-average assumptions used to measure the net periodic benefit cost are as follows:

Year ended December 31,
2009

2008

2010

Pension plans:
Discount rate …………………………………………
Expected long-term rate of return on plan assets ……
Rate of compensation increase:
Qualified pension plan ……………………………
4.73%
Nonqualified pension plan ………………………… 4.68%

5.75%
7.50%

Postretirement benefit plans:
Discount rate …………………………………………
Expected long-term rate of return on plan assets ……

6.00%
6.75%

6.25%
7.50%

4.73%
4.68%

6.25%
6.00%

6.00%
7.50%

4.73%
4.68%

6.25%
6.00%

The expected long-term rates of return on plan assets were developed considering actual historical results,

current and expected market conditions, plan asset mix and management’s investment strategy.

Assumed health care cost trend rate:
Health care cost trend rate assumed for next year ………
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate) ………………………
Year that the rate reaches the ultimate trend rate ………

Year ended December 31,
2009

2010

8.50%

5.00%
2018

9.00%

5.00%
2018

The assumed health care cost trend rate has a significant effect on the service and interest cost components of

the net periodic benefit cost and the benefit obligation reported for the postretirement benefit plans. A one-
percentage-point change in assumed health care cost trend rate would have the following effects:

Effect on total of service and interest cost ………………… 1,671,488
Effect on postretirement benefit obligation ……………… 16,390,927

$
$

Increase

Decrease
(1,327,827)
(13,244,366)

$
$

One-percentage-point

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid

from the plans over the next ten years:

2011 ……………
2012 ……………
2013 ……………
2014 ……………
2015 ……………
2016 - 2020 ……

Pension benefits
19,734,161
$
25,353,199
22,470,827
21,885,305
22,692,845
113,492,844

Gross
4,010,951
4,462,376
4,957,315
5,572,598
6,186,528
39,712,284

Postretirement benefits
Medicare subsidy
398,671
$
479,828
565,849
661,750
766,250
5,551,852

Net
3,612,280
3,982,548
4,391,466
4,910,848
5,420,278
34,160,432

Employers Mutual manages the VEBA trust assets internally. The portfolio is currently in the funding stage,

with the expectation that over time contributions and life insurance death benefits will be large enough to cover
current and future expenses. As such, an emphasis is placed on asset accumulation, with current income generation
secondary.

Assets contained in the VEBA trust to fund the Company's postretirement benefit obligations are currently

invested in universal life insurance policies (issued by EMC National Life Company, an affiliate of Employers
Mutual, that have a guaranteed interest rate of 4.5%), mutual funds and an exchange-traded fund (ETF). The mutual
funds include funds that are invested in fixed income, international equity and domestic equity securities. The ETF
is an emerging markets fund.

Following is a description of the valuation methodologies used for the assets classes of Employers Mutual’s

VEBA trust.

(cid:120) Money Market Fund: Valued at amortized cost, which approximates fair value. Under this method,
investments purchased at a discount or premium are valued by accreting or amortizing the difference
between the original purchase price and maturity value of the issue over the period to maturity. The net
asset value of each share held by the trust at year-end was $1.00.

(cid:120) Mutual Funds: Valued at the net asset value of shares held by the trust at year-end. For purposes of

calculating the net asset value, portfolio securities and other assets for which market quotes are readily
available are valued at fair value. Fair value is generally determined on the basis of last reported sales
prices, or if no sales are reported, based on quotes obtained from a quotation reporting system, established
market makers, or independent pricing services.

(cid:120)

ETF: Valued at the closing price from the applicable exchange.

Life Insurance Contract: Valued at the cash accumulation value, which approximates fair value.

The fair values of the assets held in Employers Mutual’s VEBA trust are as follows:

Description

Total

Fair value measurements at December 31, 2010 using

Quoted prices in
active markets for
identical assets
(Level 1)

Significant
other observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

Money market fund ....................................
Emerging markets ETF ..............................
Mutual funds:
Equity .......................................................
Tax exempt fixed income .........................
International equity ..................................
Life insurance contracts .............................

3,277,205
2,662,955

$
-
-

16,581,112
2,335,575
11,701,729
12,125,868
48,684,444

16,581,112
2,335,575
11,701,729
-
36,558,576

-
-
-
-
$
-

-
-

-
-
-
12,125,868
12,125,868

Description

Total

Fair value measurements at December 31, 2009 using

Quoted prices in
active markets for
identical assets
(Level 1)

Significant
other observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

7,861,202
701,100

$
-
-

14,449,209
2,068,857
6,017,556
12,118,917
43,216,841

14,449,209
2,068,857
6,017,556
-
31,097,924

-
-
-
-
$
-

-
-

-
-
-
12,118,917
12,118,917

100

Presented below is a reconciliation of the assets measured at fair value using significant unobservable inputs

(Level 3) for the years ended December 31, 2010 and 2009.

Fair value measurements
using significant
unobservable inputs (Level 3)
Life insurance contracts
2009
2010

Balance at beginning of year ....................................

12,118,917

11,749,936

Actual return on plan assets:
Increase in cash accumulation value
of life insurance contracts .................................
Gain on life insurance death benefit .....................
Settlement of life insurance death benefit .................
Balance at end of year ..............................................

361,459
657,667
(1,012,175)
12,125,868

368,981
-
-
12,118,917

Employers Mutual uses Global Portfolio Strategies, Inc. to advise on the asset allocation strategy for its

qualified pension plan. The asset allocation strategy and process of Global Portfolio Strategies, Inc. uses a
diversified allocation of equity, debt and real estate exposures that is customized to the plan’s payment risk and
return targets.

Global Portfolio Strategies, Inc. reviews the plan’s assets and liabilities in relation to expectations of long-term

market performance and liability development to determine the appropriate asset allocation. The data for the
contributions and emerging liabilities is provided from the plan’s actuarial valuation, while the current asset and
monthly benefit payment data is provided by the plan administrator.

Following is a description of the valuation methodologies used for the assets classes of Employers Mutual’s

qualified pension plan.

(cid:120)

Pooled Separate Accounts: Each of the funds held by the Plan is in a pooled or commingled investment
vehicle that is maintained by the fund sponsor, each with many investors. The Plan asset is represented by
a “unit of account” and a per unit value, much like a mutual fund, whose value is the accumulated value of
the underlying investments. The sponsor of the fund specifies the source(s) used for the underlying
investment asset prices and the protocol used to value each fund. These underlying investments are valued
in the following ways:

o Short-Term Funds are comprised of short-term securities that are valued initially at cost and

thereafter adjusted for amortization of any discount or premium.

o U.S. Stock Funds are comprised of domestic equity securities that are priced using the closing

price from the applicable exchange.

o International Stock Funds are comprised of international equity securities that are priced using the
closing price from the appropriate local stock exchange(s). An independent pricing service is also
used to seek updated prices in the event there are material market movements between local stock
exchange closing time and portfolio valuation time.

o U.S. Bond Funds are comprised of domestic fixed income securities. These securities are priced
using inputs such as benchmark yields, reported trades, broker/dealer quotes, and issuer spreads.
Market indices and industry and economic events are monitored.

(cid:120)

Real Estate Securities Fund: Valued at the net asset value of shares held by the Plan at year-end. For
purposes of calculating the net asset value, portfolio securities and other assets for which market quotes are
readily available are valued at fair value. Fair value is generally determined on the basis of last reported
sales prices, or if no sales are reported, based on quotes obtained from a quotation reporting system,
established market makers, or independent pricing services.

101

(cid:120) Money Market Separate Account: Invests mainly in short-term securities such as commercial paper.

Valued by an independent pricing service.

(cid:120)

Bond and Mortgage Separate Account: Invests mainly in fixed income securities such as asset-backed
securities, residential mortgage-backed securities, commercial mortgage-backed securities and corporate
bonds. Securities are priced by an independent pricing service using inputs such as benchmark yields,
reported trades, broker/dealer quotes, and issuer spreads. Market indices and industry and economic events
are also monitored.

The fair values of the assets held in Employers Mutual’s defined benefit retirement plan are as follows:

Description

Total

Fair value measurements at December 31, 2010 using

Quoted prices in
active markets for
identical assets
(Level 1)

Significant
other observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

Bond and mortgage separate account ................
Pooled separate accounts:
U.S. stock funds ............................................
International stock funds ...............................
U.S. bond funds .............................................
Short-term funds ............................................
Real estate securities fund .................................

30,272,703

$
-

30,272,703

$
-

110,075,754
39,572,143
12,537,854
8,875,768
7,085,258
208,419,480

-
-
-
-
7,085,258
7,085,258

110,075,754
39,572,143
12,537,854
8,875,768
-
201,334,222

-
-
-
-
-
$
-

Description

Total

Fair value measurements at December 31, 2009 using

Quoted prices in
active markets for
identical assets
(Level 1)

Significant
other observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

Money market separate account ........................
Bond and mortgage separate account ................
Pooled separate accounts:
U.S. stock funds ............................................
International stock funds ...............................
U.S. bond funds .............................................
Short-term funds ............................................
Real estate securities fund .................................

2,019,808
27,520,387

-
$
-

2,019,808
27,520,387

-
$
-

79,414,339
18,509,742
29,447,314
7,341,906
2,888,662
167,142,158

-
-
-
-
2,888,662
2,888,662

79,414,339
18,509,742
29,447,314
7,341,906
-
164,253,496

-
-
-
-
-
$
-

Employers Mutual plans to contribute approximately $22,000,000 to the pension plan and $4,000,000 to the

VEBA trust in 2011.

The Company participates in other benefit plans sponsored by Employers Mutual, including its 401(k) Plan,
Board and Executive Non-Qualified Excess Plans and Defined Contribution Supplemental Executive Retirement
Plan. The Company’s share of expenses for these plans amounted to $1,428,369, $1,380,945 and $1,085,173 in
2010, 2009 and 2008, respectively.

102

13. STOCK PLANS

The Company has no stock-based compensation plans of its own; however, Employers Mutual has several
stock plans which utilize the common stock of the Company. Employers Mutual can provide the common stock
required under its plans by: 1) using shares of common stock that it currently owns; 2) purchasing common stock on
the open market; or 3) directly purchasing common stock from the Company at the current fair value. Employers
Mutual has historically purchased common stock from the Company for use in its stock option plans and its non-
employee director stock purchase plan. Employers Mutual generally purchases common stock on the open market
to fulfill its obligations under its employee stock purchase plan.

Stock Option Plans

Employers Mutual maintains three separate stock option plans for the benefit of officers and key employees of

Employers Mutual and its subsidiaries. A total of 1,000,000 shares of the Company’s common stock have been
reserved for issuance under the 1993 Employers Mutual Casualty Company Incentive Stock Option Plan (1993
Plan), a total of 1,500,000 shares have been reserved for issuance under the 2003 Employers Mutual Casualty
Company Incentive Stock Option Plan (2003 Plan) and a total of 2,000,000 shares have been reserved for issuance
under the 2007 Employers Mutual Casualty Company Stock Incentive Plan (2007 Plan).

The 1993 Plan and the 2003 Plan permit the issuance of incentive stock options only, while the 2007 Plan

permits the issuance of performance shares, performance units, and other stock-based awards, in addition to
qualified (incentive) and non-qualified stock options, stock appreciation rights, restricted stock and restricted stock
units. All three plans provide for a ten-year time limit for granting awards. Options can no longer be granted under
the 1993 Plan and no additional options will be granted under the 2003 Plan now that Employers Mutual is utilizing
the 2007 Plan. Options granted under the plans generally have a vesting period of five years, with options becoming
exercisable in equal annual cumulative increments commencing on the first anniversary of the option grant. Option
prices cannot be less than the fair value of the common stock on the date of grant.

The Senior Executive Compensation and Stock Option Committee (the “Committee”) of Employers Mutual’s

Board of Directors (the “Board”) grants the awards and is the administrator of the plans. The Company’s
Compensation Committee must consider and approve all awards granted to the Company’s senior executive officers.

The Company recognized compensation expense from these plans of $136,599 ($112,137 net of tax), $282,528

($237,605 net of tax) and $232,318 ($226,624 net of tax) in 2010, 2009 and 2008, respectively.

103

During the first quarter of 2010, 216,976 non-qualified stock options were granted under the 2007 Plan to
eligible participants at a price of $20.675. During the second quarter of 2010, 2,500 non-qualified stock options
were granted under the 2007 Plan to an eligible participant at a price of $24.375. During 2010, 73,086 options were
exercised under the plans at prices ranging from $9.25 to $20.675. A summary of the activity under Employers
Mutual’s stock option plans for 2010, 2009 and 2008 is as follows:

Year ended December 31,

2010

2009

2008

Number
of
options

Outstanding, beginning of year …… 1,172,614
Granted ……………………………… 219,476
Exercised …………………………… (73,086)
Expired ……………………………… (50,315)
Forfeited …………………………… (17,200)
Surrendered …………………………
-
Outstanding, end of year …………… 1,251,489

Weighted-
average
exercise
price
20.96
20.72
15.70
20.26
21.68
-
21.25

Number
of
options
929,716
304,400
(37,271)
(12,430)
(9,125)
(2,676)
1,172,614

Weighted-
average
exercise
price
21.57
18.87
17.10
23.86
22.91
25.46
20.96

Number
of
options
817,268
221,875
(93,415)
(13,887)
(2,125)
-
929,716

Weighted-
average
exercise
price
20.37
23.47
15.38
22.80
22.08
-
21.57

Exercisable, end of year …………… 638,788

21.40

537,786

20.48

405,731

19.39

The weighted average fair value of options granted in 2010, 2009 and 2008 amounted to $1.77, $2.30 and
$2.77, respectively. The Company estimated the fair value of each option grant on the date of grant using the Black-
Scholes-Merton option-pricing model and the following assumptions:

Year ended December 31,

2010

2009

2008

3.07%
Weighted-average dividend yield …………
Expected volatility ………………………… 16.7% - 23.6% 22.7% - 43.8% 21.0% - 30.1%
26.09%
Weighted-average volatility ………………
Risk-free interest rate …………………… 0.16% - 2.99% 0.38% - 2.81% 1.45% - 3.17%
Expected term (years) ……………………
0.25 - 6.25

0.25 - 6.30

19.17%

35.24%

3.47%

3.82%

The expected term of the options granted in 2010 was estimated using historical data that excluded option
exercises that occurred prior to the normal vesting period due to the retirement of the option holders. The expected
term of options granted to individuals who are, or will be, eligible to retire prior to the completion of the normal
vesting period has been adjusted to reflect the potential accelerated vesting period. This produced a weighted-
average expected term of 2.63 years.

The expected volatility of options for the 2010 option grant was computed by using the historical high and low

average monthly prices of the Company’s common stock for a period covering 6.3 years, which approximates the
average term of the options, which produced an expected volatility of 21.8 percent. The expected volatility of
options granted to individuals who are, or will be, eligible to retire prior to the completion of the normal vesting
period was computed by using the historical high and low daily, weekly, or monthly average prices for the period
approximating the expected term of those options. This produced expected volatility ranging from 16.7 percent to
23.6 percent.

104

At December 31, 2010, the Company’s portion of the unrecognized compensation cost associated with option
awards issued under Employers Mutual’s stock option plans that are not currently vested was $208,626, with a 1.6
year weighted-average period over which the compensation expense is expected to be recognized. A summary of
non-vested option activity under Employers Mutual’s stock option plans for 2010, 2009 and 2008 is as follows:

2010

Year ended December 31,
2009

2008

Number
of
options
634,828
219,476
(224,403)
(17,200)
-
612,701

Weighted-
average
grant-date
fair value
2.91
$
1.77
3.14
4.15
-
2.45

Number
of
options
523,985
304,400
(189,006)
(1,875)
(2,676)
634,828

Weighted-
average
grant-date
fair value
3.55
$
2.30
3.70
2.30
3.82
2.91

Number
of
options
457,204
221,875
(155,094)
-
-
523,985

Weighted-
average
grant-date
fair value
4.09
$
2.77
4.03
-
-
3.55

Non-vested, beginning of year ............
Granted ...............................................
Vested .................................................
Forfeited .............................................
Surrendered ........................................
Non-vested, end of year ......................

The Company’s portion of the total intrinsic value of options exercised under Employers Mutual’s stock option

plans was $125,939, $51,461 and $310,210 in 2010, 2009 and 2008, respectively. Under the terms of the pooling
and quota share agreements, these amounts were paid to Employers Mutual. The Company received the full fair
value for all shares issued under these plans. The Company’s portion of the total fair value of options that vested in
2010, 2009 and 2008 was $211,507, $282,528 and $232,318, respectively. Additional information relating to
options outstanding and options vested (exercisable) at December 31, 2010 is as follows:

Number
of
options

December 31, 2010
Weighted-
average
exercise
price

Aggregate
intrinsic
value
2,491,808
1,269,025

$
$

Weighted-
average
remaining
term

6.29
4.61

Options outstanding ........................
Options exercisable ........................

1,251,489
638,788

$
$

21.25
21.40

The 1993 Plan and 2003 Plan do not generally generate tax deductions for the Company because only incentive

stock options could be issued under these plans. The Company has recorded a deferred tax benefit for a portion of
the March 2008 grant and for all subsequent grants (all made under the 2007 Plan) because non-qualified options
were issued. The Company’s portion of the current tax deduction realized from exercises of stock options was
$2,644 and $1,970 in 2010 and 2009, respectively (no realized tax deduction prior to 2009). These actual
deductions were in excess of the deferred tax benefits recorded in conjunction with the compensation expense
(referred to as excess tax benefits) and are reflected in the statement of cash flows as a financing cash inflow and a
corresponding cash outflow from operating activities ($542 as the Company’s portion in 2010). The income tax
benefit that results from disqualifying dispositions of stock purchased through incentive stock options is deemed
immaterial.

Employee Stock Purchase Plan

A total of 500,000 shares of the Company’s common stock were reserved for issuance under the Employers
Mutual Casualty Company 1993 Employee Stock Purchase Plan. Any eligible employee who was employed by
Employers Mutual on the first day of the month immediately preceding any option period was eligible to participate
in the plan. Participants paid 85 percent of the fair market value of the stock on the date of purchase. This plan was
replaced by a new plan during 2008, and the 217,862 shares that were unused as of December 31, 2008 were de-
registered in 2009.

105

On May 30, 2008, the Company registered 500,000 shares of the Company’s common stock for use in the
Employers Mutual Casualty Company 2008 Employee Stock Purchase Plan. Any eligible employee may participate
in the plan by delivering, during the first twenty days of the calendar month preceding the first day of an election
period, a payroll deduction authorization to the plan administrator; or making a cash contribution. Participants pay
85 percent of the fair market value of the stock on the date of purchase. The plan is administered by the Board of
Employers Mutual, and the Board has the right to amend or terminate the plan at any time; however, no such
amendment or termination shall adversely affect the rights and privileges of participants with unexercised options.
Expenses allocated to the Company in connection with these plans totaled $26,657, $25,892 and $9,695 in 2010,
2009 and 2008, respectively.

During 2010, a total of 26,699 options were exercised at prices ranging from $18.19 to $19.51. Activity under

the plans was as follows:

Shares available for purchase, beginning of year ...........
Shares registered for use in the 2008 plan .....................
Shares deregistered under the 1993 plan .......................
Shares purchased under the plans ..................................
Shares available for purchase, end of year .....................

Non-Employee Director Stock Option Plan

Year ended December 31,
2009
709,381
-
(217,862)
(23,397)
468,122

2010
468,122
-
-
(26,699)
441,423

2008
229,163
500,000
-
(19,782)
709,381

A total of 200,000 shares of the Company’s common stock have been reserved for issuance under the 2003

Employers Mutual Casualty Company Non-Employee Director Stock Option Plan. All non-employee directors of
Employers Mutual and its subsidiaries and affiliates who are not serving on the “Disinterested Director Committee”
of the Board of Employers Mutual as of the beginning of an option period are eligible to participate in the plan.
Each eligible director can purchase shares of common stock at 75 percent of the fair value of the stock on the option
exercise date in an amount equal to a minimum of 25 percent and a maximum of 100 percent of their annual cash
retainer. The plan will continue through the option period for options granted at the 2012 annual meetings. The
plan is administered by the Disinterested Director Committee of the Board. The Board may amend or terminate the
plan at any time; however, no such amendment or termination shall adversely affect the rights and privileges of
participants with unexercised options. Expenses allocated to the Company in connection with this plan totaled
$10,931, $15,326 and $27,121 in 2010, 2009 and 2008, respectively.

During 2010, a total of 4,782 options were exercised at prices ranging from $15.93 to $16.65. Activity under

the plan was as follows:

Shares available for purchase, beginning of year ……… 172,630
Shares purchased under the plan ……………………… (4,782)
Shares available for purchase, end of year ……………… 167,848

2010

Year ended December 31,
2009
176,508
(3,878)
172,630

2008
181,668
(5,160)
176,508

106

Dividend Reinvestment Plan

The Company maintains a dividend reinvestment and common stock purchase plan which provides

stockholders with the option of reinvesting cash dividends in additional shares of the Company’s common stock.
Participants may also purchase additional shares of common stock without incurring broker commissions by making
optional cash contributions to the plan, and may sell shares of common stock through the plan. Employers Mutual
did not participate in this plan in 2010, 2009 or 2008. Activity under the plan was as follows:

Shares available for purchase, beginning of year ……… 175,609
Shares purchased under the plan ……………………… (6,226)
Shares available for purchase, end of year ……………… 169,383

2010

Year ended December 31,
2009
182,141
(6,532)
175,609

2008
188,973
(6,832)
182,141

Range of purchase prices ………………………………

20.48

$
to
$

23.62

20.44

$
to
$

22.62

20.93

$
to
$

29.75

Stock Appreciation Right (SAR) agreement

On October 19, 2006, Employers Mutual entered into a stock appreciation rights (SAR) agreement with the

Company’s Executive Vice President and Chief Operating Officer (Mr. Murray). This SAR agreement is a
substitute for an incentive stock option grant Mr. Murray was initially authorized to receive as part of his 2006
compensation arrangement, but was not issued to him due to certain limitations contained in Employers Mutual’s
incentive stock option plan. The grant-date fair value of this award was $546,300. Because the SAR agreement will
be settled in cash, it is considered to be a liability-classified award under ASC Topic 718. As a result, the value of
this agreement must be re-measured at fair value at each financial statement reporting date, subject to a minimum
fair value of $318,825 stipulated in the SAR agreement. The fair value of this agreement at December 31, 2010,
2009 and 2008 was $318,825 ($95,648 for the Company). The full value of this agreement was expensed in 2006
because Mr. Murray was eligible for retirement and was entitled to keep the award at retirement. As a result, the
award did not have any subsequent service requirements. Subsequent changes in the fair value of this agreement
will be reflected as compensation expense until the agreement is ultimately settled in 2016. During 2010, 2009 and
2008, the Company did not recognize any compensation expense related to this award as the fair value of the award
did not change.

Stock Repurchase Plan

On March 10, 2008, the Company’s Board of Directors authorized a $15,000,000 stock repurchase program.
On October 31, 2008, the Company’s Board of Directors announced an extension of the stock repurchase program,
authorizing an additional $10,000,000. This program became effective immediately and does not have an expiration
date. The timing and terms of the purchases are determined by management based on market conditions and are
conducted in accordance with the applicable rules of the Securities and Exchange Commission. Common stock
purchased under this program is being retired by the Company. During 2010, the Company repurchased 244,400
shares of its common stock at an average cost of $21.67 per share. Since the inception of the repurchase program
the Company has repurchased 980,533 shares of common stock at a cost of $23,148,435, leaving $1,851,565
available for the repurchase of additional shares.

107

Stock Purchase Plan

During the second quarter of 2005, Employers Mutual initiated a $15,000,000 stock purchase program under
which Employers Mutual will purchase shares of the Company’s common stock in the open market. This purchase
program does not have an expiration date, however, this program is currently dormant and will remain so while the
Company’s repurchase program is active. The timing and terms of the purchases are determined by management
based on market conditions and are conducted in accordance with the applicable rules of the Securities and
Exchange Commission. No purchases were made during 2010, 2009 and 2008. As of December 31, 2010,
$4,490,561 remained available under this plan for additional purchases.

14. LEASES, COMMITMENTS AND CONTINGENT LIABILITIES

One of the Company’s property and casualty insurance subsidiaries leases office facilities in Bismarck, North

Dakota, with lease terms expiring in 2014. Employers Mutual has entered into various leases for branch and service
office facilities with lease terms expiring through 2021. All lease costs are included as expenses under the pooling
agreement. The following table reflects the lease commitments of the Company as of December 31, 2010.

Payments due by period
1 - 3
years

Less than
1 year

4 - 5
years

More than
5 years

Total

Lease commitments
Real estate operating leases ……… 9,325,829

1,232,933

2,552,560

2,249,198

3,291,138

The participants in the pooling agreement are subject to guaranty fund assessments by states in which they
write business. Guaranty fund assessments are used by states to pay policyholder liabilities of insolvent insurers
domiciled in those states. Many states allow assessments to be recovered through premium tax offsets. Estimated
guaranty fund assessments of $1,269,022 and $1,236,315 have been accrued as of December 31, 2010 and 2009,
respectively. Premium tax offsets of $758,362 and $692,233, which are related to prior guarantee fund payments
and estimated assessments, have been accrued as of December 31, 2010 and 2009, respectively. The guaranty fund
assessments are expected to be paid over the next two years and the premium tax offsets are expected to be realized
within ten years of the payments. The participants in the pooling agreement are also subject to second-injury fund
assessments, which are designed to encourage employers to employ workers with pre-existing disabilities.
Estimated second-injury fund assessments of $1,613,021 and $1,709,015 have been accrued as of December 31,
2010 and 2009, respectively. The second-injury fund assessment accruals are based on projected loss payments.
The periods over which the assessments will be paid is not known.

The participants in the pooling agreement have purchased annuities from life insurance companies, under
which the claimant is payee, to fund future payments that are fixed pursuant to specific claim settlement provisions.
The Company’s share of case loss reserves eliminated by the purchase of these annuities was $1,614,711 at
December 31, 2010. The Company has a contingent liability of $1,614,711 at December 31, 2010 should the issuers
of these annuities fail to perform. The probability of a material loss due to failure of performance by the issuers of
these annuities is considered remote. The Company’s share of the amount due from any one life insurance company
does not equal or exceed one percent of its subsidiaries’ aggregate policyholders’ surplus.

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
established reserves which are believed adequate to cover any potential liabilities arising out of all such pending or
threatened proceedings.

108

15. UNAUDITED INTERIM FINANCIAL INFORMATION

March 31

June 30

September 30

December 31

Three months ended,

2010
Total revenues …………………… 105,593,652
Income before income
tax expense ……………………
Income tax expense ………………
Net income …………………
Net income per share
- basic and diluted* ……………

14,543,054
4,664,962
9,878,092

0.75

108,467,951

111,498,694

3,495,632
197,159
3,298,473

9,816,451
2,357,876
7,458,575

117,703,217

14,590,087
3,878,904
10,711,183

0.25

0.57

0.83

2009
Total revenues ……………………
Income before income
tax expense ……………………
Income tax expense ………………
Net income …………………
Net income per share
- basic and diluted* ……………

96,292,459

108,374,063

111,683,128

6,927,018
1,123,155
5,803,863

8,890,941
1,923,809
6,967,132

6,470,929
1,420,154
5,050,775

134,098,006

40,235,929
12,687,085
27,548,844

0.44

0.53

0.38

2.10

* Since the weighted-average number of shares outstanding for the quarters are calculated independently of the
weighted-average number of shares outstanding for the year, quarterly net income (loss) per share may not total to
annual net income (loss) per share.

109

GLOSSARY

Assumed Reinsurance - When one or more insurers, in exchange for a share of the premium, accepts responsibility
to indemnify risk underwritten by another as reinsurance. See “Reinsurance.”

Catastrophe and Storm Losses - Losses from the occurrence of an earthquake, hurricane, explosion, flood, hail
storm or other similar event which results in substantial loss.

Ceded Reinsurance - The transfer of all or part of the risk of insurance loss from an insurer to another as
reinsurance. See “Reinsurance.”

Combined Ratio - A measure of property/casualty underwriting results. It is the ratio of claims, settlement and
underwriting expenses to insurance premiums. When the combined ratio is under 100%, underwriting results are
generally profitable; when the ratio is over 100%, underwriting results are generally unprofitable. Underwriting
results do not include net investment income, which may make a significant contribution to overall profitability.

Deferred Policy Acquisition Costs - The capitalization of commissions, premium taxes and other expenses related
to the production of insurance business. These costs are deferred and amortized in proportion to related premium
revenue.

Excess of Loss Reinsurance - Coverage for the portion of losses which exceed predetermined retention limits.

Generally Accepted Accounting Principles (GAAP) - The set of practices and procedures that provides the
framework for financial statement measurement and presentation. Financial statements in this report were prepared
in accordance with U.S. GAAP.

Incurred But Not Reported (IBNR) – An estimate of liability for losses that have occurred but not yet been
reported to the insurer. For reinsurance business IBNR may also include anticipated increases in reserves for claims
that have previously been reported.

Incurred Losses and Settlement Expenses - Claims and settlement expenses paid or unpaid for which the
Company has become liable for during a given reporting period.

Loss Reserve Development - A measure of how the latest estimate of an insurance company's claim obligations
compares to an earlier projection. This is also referred to as the increase or decrease in the provision for insured
events of prior years.

Net Investment Income - Dividends and interest earned during a specified period from cash and invested assets,
reduced by related investment expenses.

Net Investment Yield - Net investment income divided by average invested assets.

Other-Than-Temporary Investment Impairment Loss – A realized investment loss that is recognized when an
investment’s fair value declines below its carrying value and the decline is deemed to be other-than-temporary.

Pooling Agreement - A joint underwriting operation in which the participants assume a predetermined and fixed
interest in the premiums, losses, expenses and profits of insurance business.

110

Premiums - Amounts paid by policyholders to purchase insurance coverages.

Earned Premium - The recognition of the portion of written premiums directly related to the expired
portion of an insurance policy for a given reporting period.

Net Written Premiums - Premiums written during a given reporting period, net of assumed and ceded
reinsurance, which correlate directly to the insurance coverage provided.

Unearned Premium - The portion of written premium which would be returned to a policyholder upon
cancellation.

Written Premium - The cost of insurance coverage. Written premiums refer to premiums for all policies
sold during a specified accounting period.

Quota Share Reinsurance Agreement – A form of reinsurance in which the reinsurer assumes a stated percentage
of all premiums, losses and related expenses in a given class of business.

Realized Investment Gains/Losses - The amount of net gains/losses realized when an investment is sold at a price
higher or lower than its original cost or carrying amount. Also the amount of loss recognized when an investment’s
carrying value is reduced to fair value due to a other-than-temporary impairment in the fair value of that investment.

Reinsurance - The contractual arrangement by which one or more insurers, called reinsurers, in exchange for
premium payments, agree to assume all or part of a risk originally undertaken by another insurer. Reinsurance
"spreads risk" among insurance enterprises, allowing individual companies to reduce exposure to losses and provide
additional capacity to write insurance.

Reserves - The provision for the estimated future cost of all unpaid claims. The total includes known claims as well
as amounts for claims that have occurred but have not been reported to the insurer (IBNR).

Return on Equity (ROE) - Net income divided by average stockholders' equity.

Risk-Based Capital - A model developed by the National Association of Insurance Commissioners which attempts
to measure the minimum statutory capital needs of property and casualty insurance companies based upon the risks
in a company's mix of products and investment portfolio.

Settlement Expenses - Expenses incurred in the process of investigating and settling claims.

Statutory Accounting - Accounting practices used by insurance companies to prepare financial statements
submitted to state regulatory authorities. Statutory accounting differs from GAAP in that it stresses insurance
company solvency rather than the matching of revenues and expenses.

Underwriting Gain/Loss - Represents insurance premium income less insurance claims, settlement and
underwriting expenses.

Unrealized Holding Gains/Losses on Investments - Represents the difference between the current market value of
investments and the basis at the end of a reporting period.

111

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STOCKHOLDER INFORMATION

STOCK PRICES AND DIVIDENDS PAID
(by quarter as reported by NASDAQ OMX)

2 0 1 0

2 0 0 9

HIGH

LOW

DIVIDEND

HIGH

LOW

DIVIDEND

1st Quarter

$23.08

$19.96

$ 0.18

$25.17

$18.01

$ 0.18

2nd Quarter

$24.89

$20.84

$ 0.18

$22.86

$20.07

$ 0.18

3rd Quarter

$22.75

$20.11

$ 0.18

$25.12

$20.04

$ 0.18

4th Quarter

$23.39

$21.00

$ 0.19

$23.60

$20.03

$ 0.18

Close on Dec. 31

$22.64

$21.51

Common Stock
EMC Insurance Group Inc.’s common stock trades on the

NASDAQ OMX Global Select Market tier of the NASDAQ

Dividend Reinvestment and
Common Stock Purchase Plan
A dividend reinvestment and common stock purchase

OMX Stock Market under the symbol EMCI. As of February

plan provides stockholders with the option of receiving

25, 2011, the number of registered stockholders was 906.

additional shares of common stock instead of cash

dividends. Participants may also purchase additional shares

There are certain regulatory restrictions relating to the

of common stock without incurring broker commissions

payment of dividends by the Company’s insurance

by making optional cash contributions to the plan and

subsidiaries. (See note 6 of Notes to Consolidated Financial

may sell shares of common stock through the plan.

Statements.) It is the present intention of the Company’s

(See note 13 of Notes to Consolidated Financial Statements.)

Board of Directors to declare quarterly cash dividends,

More information about the plan can be obtained by

but the amount and timing thereof, if any, are determined

calling American Stock Transfer & Trust Company, LLC,

by the Board of Directors at its discretion.

the Company’s stock transfer agent and plan administrator.

STOCKHOLDER SERVICES

Corporate Headquarters
717 Mulberry Street
Des Moines, IA 50309
515-280-2511
EMCIns.Group@emcins.com

Transfer Agent
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
866-666-1597
www.amstock.com

SEC Counsel
Nyemaster, Goode, West,
Hansell & O’Brien P.C.
700 Walnut Street, Suite 1600
Des Moines, IA 50309

Insurance Counsel
Bradshaw, Fowler, Proctor
and Fairgrave P.C.
801 Grand Avenue, Suite 3700
Des Moines, IA 50309

Independent Registered
Public Accounting Firm
Ernst & Young LLP
801 Grand Avenue, Suite 3000
Des Moines, IA 50309

Annual Meeting
We welcome attendance at our
annual meeting on May 26,
2011, at 1:30 p.m. CDT.
EMC Insurance Companies
700 Walnut Street
Des Moines, IA 50309

Information Availability
Interested parties can request
news releases, annual reports,
Forms 10-Q and 10-K, quarterly
ﬁnancial brochures and other
information at no cost by
contacting:

Investor Relations
Anita L. Novak, M.B.A., CPCU, ARM
EMC Insurance Group Inc.
717 Mulberry Street
Des Moines, IA 50309
phone: 515-345-2515
fax: 515-345-2895
EMCIns.Group@emcins.com
www.emcins.com

115

2010 ANNUAL REPORT

EMC Insurance Group Inc.