2013 ANNUAL REPORT
FOCUSED ON STOCKHOLDER VALUE
EMPLOYERS MUTUAL CASUALTY COMPANY
Affiliated with
EMC National Life Company
EMC PROPERTY &
CASUALTY COMPANY*
EMC
RISK SERVICES, LLC
EMC INSURANCE
GROUP INC.
UNION INSURANCE
COMPANY OF
PROVIDENCE*
HAMILTON MUTUAL
INSURANCE COMPANY*
DAKOTA FIRE
INSURANCE COMPANY*
EMCASCO
INSURANCE COMPANY*
ILLINOIS EMCASCO
INSURANCE COMPANY*
EMC REINSURANCE
COMPANY
EMC
UNDERWRITERS, LLC
*Party to reinsurance pooling agreements with EMCC.
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, 2013, EMCI’s parent
company, Employers Mutual Casualty Company,
owned 59 percent of EMCI’s outstanding stock
and public stockholders owned the remaining
41 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
approximately 2,100 people countrywide
and markets its products exclusively through
a network of independent insurance agents.
EMC Insurance Companies (EMC)
EMCI and EMCC, together with each
entity’s subsidiary and affiliated
companies, operate collectively
under the trade name EMC Insurance
Companies. The companies that
comprise EMC write property and
casualty insurance in both commercial
and personal lines, with a focus on
medium-sized commercial accounts.
Reinsurance business is also written,
with an emphasis on property
business. 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 40 states;
however, the majority of its business
is generated in the Midwest.
LOCAL OFFICES
Bismarck
Providence
Minneapolis
Milwaukee
Lansing
Des Moines
Chicago
Omaha
Kansas City
Wichita
Davenport
Cincinnati
Little Rock
Birmingham
Dallas
Jackson
Valley Forge
Charlotte
Denver
Phoenix
Home Office and
Des Moines Branch
Branch Offices
Service Offices
LETTER TO OUR STOCKHOLDERS:
Underwriting profitability continued in 2013, marking
our second consecutive year of improved underwriting
profitability and a GAAP combined ratio below 100 percent.
The 1.7 point improvement to 97.9 percent resulted from
the exceptionally good year of our reinsurance segment
and property and casualty insurance results in line with
expectations. Operating income for the year was $2.88 per
share, which exceeded the high end of our range of operating
income guidance, while net income was $3.33 per share.
A.M. BEST COMPANY UPGRADE
In April, A.M. Best Company upgraded the financial strength
ratings for EMC Insurance Companies pool members and
EMC Reinsurance Company to “A” (Excellent) with a stable
outlook, from their previous rating of “A-“ (Excellent) with
a positive outlook. We worked hard through partnership
with our independent agents to achieve this upgrade.
A.M. Best Company cited our strong level of risk-adjusted
capital, consistently favorable development of prior years’
loss and loss adjustment expense reserves and favorable
core underwriting results as reasons for the upgrade.
In addition, they indicated we will continue to derive
benefits from strategic actions taken over the past several
years associated with pricing, risk selection and claims
management. These initiatives were designed to improve our
navigation through varying market conditions and enhance
underwriting profitability. The upgrade provides evidence
that our hard work and recent initiatives have made EMC
a better company and should continue to positively impact
long-term results.
PREMIUM GROWTH
Property and Casualty Insurance Segment net written
premiums increased 9.1 percent in 2013 to $405.0 million.
Within the property and casualty insurance segment,
rate level increases on renewal business of 7.4 percent
and growth in insured exposures fueled commercial lines
net written premium growth of 11.5 percent. Personal lines
also achieved rate level increases of 7.4 percent; however,
net written premiums decreased 5.7 percent due to our
intentional reduction in policy count to lessen exposure
concentrations.
Persistent low interest rates have decreased investment
income returns and heightened the importance of achieving
an underwriting profit. Coming out of the soft cycle in late
2010, we recognized rate levels were inadequate and pushed
for more adequate pricing. Our rate level increases continue
to outpace the industry average, as they have over the past
three years. We attribute this to the diligent efforts of our
branch offices and the strong and stable partnerships with
independent agents who sell our insurance products, along
with the tools developed to support our branch offices,
such as our rate compare system. This proprietary system
is a unique and powerful online system that rates current
exposures of commercial renewal policies at both current
and prior period rate levels. It provides a very accurate
measure of the actual rate increase obtained by policy,
underwriter, line of business or branch and gives us the
ability to drill down on aggregate results to whatever level of
detail we want in nearly real time. This allows us to better
determine the actual rate level change needed on each policy
based on past loss experience, current risk exposure and
future profit potential.
Retention levels based on policy count remain strong and
above the industry average, at an overall retention level of
85 percent. Although retention levels were down slightly
in both commercial and personal lines of business from
the prior year, the relatively consistent overall retention
level demonstrates continued support for ongoing premium
rate level increases in our renewal book of business. This
indicates we are not pricing ourselves out of the market. We
will continue to work with our independent agents to push
for more rate level increases in 2014, although we expect the
percentage increase to be at a somewhat lower level.
Reinsurance Segment net written premiums increased
20.3 percent in 2013 to $129.0 million, primarily from growth
in existing accounts, moderate rate level increases and new
business.
CATASTROPHE AND STORM LOSSES
The United States experienced a very mild hurricane season,
although losses from severe storms in the Midwest resulted
in an average catastrophe and storm loss year for our
Company. Catastrophe and storm losses accounted for
9.4 percentage points of the combined ratio, slightly below
the most recent 10-year average of 9.9 percentage points,
and lower than expectations set at the beginning of the year.
As extreme weather conditions become more commonplace,
we continue to adjust risk exposures across our book of
business by managing exposures in certain geographic
regions and accelerating growth outside our core market
in the Midwest to less catastrophe-prone areas. We review
our reinsurance programs annually to ensure they provide
adequate protection of capital against catastrophic loss at
a reasonable cost.
EMC CULTURE
For the second consecutive year, EMC Insurance Companies
was listed as one of the 40 best companies for leaders
by Chief Executive magazine. EMC ranks 26th in 2014,
jumping from 35th in 2013. The annual ranking is based
on a worldwide survey of organizations conducted by the
magazine. We are very proud to rank 26th and focus on
creating a culture that emphasizes leadership development,
nurtures talent and establishes teams at all levels of
our organization.
CAPITAL MANAGEMENT
During the fourth quarter, we increased the quarterly cash
dividend by 2 cents, or 9.5 percent, demonstrating the
confidence we have in the long-term outlook and strength
of our financial position. Investment income declined
2.5 percent during the year, which is attributable to the
prolonged low interest rate environment, but was mitigated
by an increase in dividend income in our equity portfolio.
While growth in investment income is important, growth
and stability in stockholders’ equity remains the primary goal
of our investment philosophy. Our balance sheet boasts an
investment portfolio with over $1.2 billion of invested assets,
which produced $43.0 million of investment income during
the year. This helped grow our stockholders’ equity balance
to $455.2 million, up 13.5 percent from the prior year.
We are well-capitalized and maintain financial leverage
and capital adequacy levels that are relatively conservative
and exceed amounts required by A.M. Best Company for an
“A” rating. This will provide the capital necessary to expand
our business over a long-term period and withstand the
volatility in the property and casualty insurance industry.
We remain committed to increasing long-term stockholder
value by providing an attractive return to our stockholders
through a strong dividend, increasing book value and stock
appreciation.
FOCUSED ON THE FUTURE
While we are pleased to report improvement in our
underwriting profitability and our second consecutive year
with a combined ratio below 100 percent, we know that we
can do better. We remain focused on our strategy of careful
risk selection at an adequate price. We believe there is
considerable opportunity for a well-capitalized near national
insurance carrier to grow profitably in the years ahead.
We will strive to be the carrier our independent agents
prefer to do business with by understanding the needs
of our policyholders, and in turn, providing them with
Count on EMC ® service. Furthermore, we are focused
on increasing the value of our stockholders’ investment.
Thank you for your continued interest in EMC Insurance
Group Inc.
Sincerely,
Bruce G. Kelley
J.D., CPCU, CLU
President & Chief
Executive Officer
Ronald W. Jean
M.S., FCAS, MAAA
Executive Vice President
for Corporate Development
Kevin J. Hovick
CPCU
Executive Vice President
& Chief Operating Officer
FINANCIAL HIGHLIGHTS
($ in thousands)
$
Revenues
Realized Investment Gains (Losses) $
Income (Loss) Before Income Taxes $
Net Income (Loss)
$
2013
2012
2011
2010
2009
2008
2007
559,354 $
8,997 $
60,853 $
43,519 $
503,851 $
8,017 $
51,634 $
37,966 $
463,341 $
9,303 $
(10,992) $
(2,737) $
439,394 $
3,869 $
42,449 $
31,349 $
432,526 $
17,922 $
61,427 $
44,657 $
438,348 $
(24,456) $
(11,240) $
(2,323) $
442,086
3,724
58,639
42,296
(per share)
Net Income (Loss)
Catastrophe and Storm Losses
Dividends Paid
Book Value
($ in thousands)
Average Return on Equity (ROE)
Total Assets
Stockholders' Equity
$
$
$
$
3.33 $
2.41 $
0.86 $
34.21 $
2.95 $
2.70 $
0.81 $
31.08 $
(0.21) $
4.04 $
0.77 $
27.37 $
2.40 $
2.10 $
0.73 $
28.07 $
3.38 $
1.55 $
0.72 $
25.67 $
(0.17) $
2.52 $
0.72 $
20.94 $
3.07
1.37
0.69
25.83
10.2%
10.1%
$ 1,378,933 $ 1,290,709 $
401,209 $
$
455,210 $
(0.8)%
1,224,031 $
352,341 $
9.0%
1,182,006 $
362,853 $
14.5%
1,159,997 $
336,627 $
(0.7)%
1,103,022 $
277,840 $
12.8%
1,198,254
355,893
COMMON STOCK PERFORMANCE
High
2013
Low
Dividend
High
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Close at Dec. 31
$
$
$
$
$
27.40
$
29.29
$
$
$
30.77
35.48
30.62
23.18
25.27
25.43
27.04
$
$
$
$
0.21
0.21
0.21
0.23
$
$
$
$
$
$
$
$
$
24.28
21.25
22.32
24.04
23.88
2012
Low
Dividend
19.48
19.08
19.05
19.85
$
$
$
$
0.20
0.20
0.20
0.21
CAUTIONARY STATEMENT
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 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:
• 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 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.
COMMON STOCK
EMC Insurance Group Inc.’s common stock trades on
the NASDAQ OMX Global Select Market tier of the
NASDAQ OMX Stock Market under the symbol EMCI.
As of February 24, 2014, the number of registered
stockholders was 792.
There are certain regulatory restrictions relating to
the payment of dividends by the Company’s insurance
subsidiaries (see Note 6 of Notes to Consolidated Financial
Statements in the Company’s 2013 Form 10-K). It is the
present intention of the Company’s Board of Directors
to declare quarterly cash dividends, but the amount and
timing thereof, if any, are determined by the Board of
Directors at its discretion.
DIVIDEND REINVESTMENT AND COMMON
STOCK PURCHASE PLAN
A dividend reinvestment and common stock purchase
plan provides stockholders with the option of receiving
additional shares of common stock instead of cash
dividends. Participants may also purchase additional shares
of common stock without incurring broker commissions
by making optional cash contributions to the plan, and
sell shares of common stock through the plan (see Note
13 of Notes to Consolidated Financial Statements in the
Company’s 2013 Form 10-K). Effective March 14, 2012,
the Company temporarily suspended the issuance of
shares of common stock under the dividend reinvestment
and common stock purchase plan due to the late filing of
an amendment to a Current Report on Form 8-K with the
Securities and Exchange Commission. On March 29, 2013,
the Company filed a Form S-3 Registration Statement
with the Securities and Exchange Commission registering
661,185 shares of common stock for use in this plan.
The plan was reinstated during the third quarter of 2013.
More information about the plan can be obtained by
calling American Stock Transfer & Trust Company, LLC, the
Company’s stock transfer agent and plan administrator.
STOCKHOLDER SERVICES
Corporate Headquarters
717 Mulberry Street
Des Moines, IA 50309
Phone: 515.280.2511
Transfer Agent
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Phone: 866.666.1597
www.amstock.com
SEC Counsel
Nyemaster Goode, 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
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
Steve Walsh, CPA
EMC Insurance Group Inc.
717 Mulberry Street
Des Moines, IA 50309
Phone: 515.345.2515
Fax: 515.345.2895
Email: EMCIns.Group@EMCIns.com
Website: www.emcins.com/ir
ANNUAL MEETING
We welcome attendance at our annual meeting
on May 22, 2014, at 1:30 p.m. CDT.
EMC Insurance Companies
700 Walnut Street
Des Moines, IA 50309
2013 FINANCIAL INFORMATION
CONTENTS
Seven Year Summary of Selected Financial Data .................................................................................................................................. 1
Management’s Discussion and Analysis of Financial Condition and Results of Operations ................................................................ 3
Management’s Report on Internal Control Over Financial Reporting .................................................................................................. 49
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting ......................................... 50
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements .................................................. 51
Consolidated Balance Sheets .............................................................................................................................................................. 52
Consolidated Statements of Income .................................................................................................................................................... 54
Consolidated Statements of Comprehensive Income .......................................................................................................................... 55
Consolidated Statements of Stockholders’ Equity .............................................................................................................................. 56
Consolidated Statements of Cash Flows ............................................................................................................................................. 57
Notes to Consolidated Financial Statements ...................................................................................................................................... 59
Glossary .............................................................................................................................................................................................. 105
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A
T
A
D
L
A
I
C
N
A
N
I
F
D
E
T
C
E
L
E
S
.
6
M
E
T
I
(cid:12)
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A
T
A
D
T
N
E
M
E
T
A
T
S
E
M
O
C
N
I
(cid:86)
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(cid:55)
A
T
A
D
T
E
E
H
S
E
C
N
A
L
A
B
(cid:92)
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(cid:76)
(cid:88)
(cid:84)
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A
T
A
D
R
E
H
T
O
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EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
($ in thousands, except per share amounts)
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 the Company's Annual Report on 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:
•
•
•
•
•
•
•
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 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.
COMPANY OVERVIEW
The Company, a majority owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is an
insurance holding company with operations in property and casualty insurance and reinsurance. The operations of the
Company are highly integrated with those of Employers Mutual through participation in a property and casualty reinsurance
pooling agreement (the "pooling agreement"), a reinsurance retrocessional quota share agreement (the "quota share agreement")
and an excess of loss reinsurance agreement (the “excess of loss agreement”). All transactions occurring under the pooling
agreement, quota share agreement and excess of loss agreement are based on statutory accounting principles. Certain
adjustments are made to the statutory-basis amounts assumed by the property and casualty insurance subsidiaries and the
reinsurance subsidiary to bring the amounts into compliance with U.S. generally accepted accounting principles (GAAP).
3
Property and casualty insurance operations are conducted through three subsidiaries and represent the most significant
segment of the Company’s business, totaling 76 percent of consolidated premiums earned in 2013. The Company’s three
property and casualty insurance subsidiaries and two subsidiaries and an affiliate of Employers Mutual (Union Insurance
Company of Providence, EMC Property & Casualty Company and Hamilton Mutual Insurance Company) are parties to a
pooling agreement with Employers Mutual. 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 pool 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 month. 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 companies.
Reinsurance operations are conducted through EMC Reinsurance Company and accounted for 24 percent of
consolidated premiums earned in 2013. The Company’s reinsurance subsidiary is party to a quota share agreement and an
excess of loss reinsurance agreement with Employers Mutual. Under the terms of the quota share agreement, the reinsurance
subsidiary assumes 100 percent of Employers Mutual’s assumed reinsurance business, subject to certain exceptions. The
reinsurance subsidiary also writes a small amount of reinsurance business on a direct basis outside the quota share agreement.
Under the terms of the excess of loss agreement (covering both the business assumed from Employers Mutual through the
quota share agreement, as well as the business obtained outside the quota share agreement), the reinsurance subsidiary retains
the first $4,000 of losses per event, and also retains 20.0 percent of any losses between $4,000 and $10,000 and 10.0 percent of
any losses between $10,000 and $50,000. During 2012 and 2011, all losses from any one event above $4,000 and $3,000,
respectively, were ceded to Employers Mutual. The cost of the excess of loss reinsurance protection is 9.0 percent (10.0
percent in 2012 and 2011) of the reinsurance subsidiary’s total assumed reinsurance premiums written.
The terms of the excess of loss agreement have been revised beginning January 1, 2014. Effective January 1, 2014, the
cost of the excess of loss coverage will decrease from the current 9.0 percent of total assumed reinsurance premiums written to
8.0 percent of total assumed reinsurance premiums written (no change to the amount of losses retained).
The reinsurance subsidiary does not directly reinsure any of the insurance business written by Employers Mutual or the
other pool participants; however, Employers Mutual assumes reinsurance business from the Mutual Reinsurance Bureau
underwriting association (MRB), which provides a small amount of reinsurance protection to the members of the EMC
Insurance Companies pooling agreement. 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 MRB 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 and excess of loss 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 or the excess of loss 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 excess of loss agreement is automatically reinstated without cost.
Country Mutual Insurance Company terminated its participation in MRB effective January 1, 2011. As a result,
Employers Mutual was a one-fourth participant in MRB in 2011 and 2012. Effective January 1, 2013, Church Mutual
Insurance Company (Church Mutual) became a member of MRB. As a result, Employers Mutual was a one-fifth participant in
2013.
4
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 past 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 rate levels increase and competition subsides as companies strive to strengthen
their balance sheets (referred to as a hard market). At the end of 2013, premium rate level increases were beginning to decline
slightly after increasing consistently during the last three years. The market hardening of the last few years was driven by a
persistent decline in investment income and an increase in severe weather events, not a reduction in capital adequacy. The
outlook for 2014 is that overall premium rate levels will continue to rise for most lines of business, but at a slower rate than the
last few years.
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 (i.e., 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 can 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 Company closely monitors the activities of the United States Congress and federal agencies through its membership
in various organizations. In particular, our trade organizations are actively seeking the renewal of federally funded terrorism
reinsurance, working to shape the activities of the Federal Insurance Office as it continues to evolve and exercise its authority
to monitor the insurance industry, and pursuing a legal remedy for the Department of Housing and Urban Development’s rule
making that suggests it could apply a "disparate impact" standard (discrimination in effect) to the provision and pricing of
homeowners insurance under the Fair Housing Act.
MANAGEMENT ISSUES AND PERSPECTIVES
Amendment to Employers Mutual's postretirement benefit plan
During the fourth quarter of 2013, Employers Mutual announced that effective January 1, 2015, it will be replacing its
retiree healthcare plan with a new Employers Mutual-funded Health Reimbursement Arrangement. As a result of this plan
amendment, the postretirement benefit plan's projected benefit obligation decreased $96,704 as of December 31, 2013. The
Company's share of this decline in projected benefit obligation ($26,937) was recognized as other comprehensive income in its
year-end financial statements. The prior service credit resulting from the plan amendment will be amortized into net periodic
benefit cost over ten years, beginning in 2014; however, as this amortization is reflected in net income it will be reclassified out
of accumulated other comprehensive income so that stockholders' equity will not be impacted. In addition, the service cost
and interest cost components of the net periodic benefit cost of the revised plan will decline significantly. The amortization of
the prior service credit, coupled with the declines in both the service cost and interest cost components will generate net
periodic benefit income in 2014, of which approximately $3,000 will be allocated to the Company, compared to approximately
$3,000 of net periodic benefit expense in 2013.
5
Low interest rate environment
The interest rate environment has an influence on several operational areas that have the potential to materially impact
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 prolonged low interest
rate environment has had a positive impact on the Company’s financial condition because the portfolio of fixed maturity
securities available-for-sale had net unrealized holding gains of $11,968 at December 31, 2013, 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, proceeds from maturing securities and cash from operating activities are being invested at the current low yields,
which has had a negative impact on investment income over the past several years. Interest rates increased approximately 100
basis points during 2013, which significantly reduced the amount of unrealized gains on the Company's fixed maturity
portfolio, but allowed the Company to earn some additional investment income. If the current low interest rate environment
continues, future growth in investment income will be negatively impacted. The Company targets a laddered fixed maturity
portfolio with intermediate duration in order to lessen reinvestment risk.
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
limited growth in future investment income, which would increase the need to achieve a consistent 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 during the past several years. During
this time period, the projected benefit obligation of these plans has increased, which negatively impacted the funded status of
those plans and resulted in a higher level of annual cash contributions and net periodic benefit expenses. As a result of the
moderate increase in interest rates during 2013, the discount rates used in the December 31, 2013 actuarial valuations of those
plans increased approximately 75 basis points, which had a positive impact on the funded status of those plans. Although
discount rates remain low by historical standards the impact of the low discount rates on the actuarial valuations is being
mitigated by the strong returns currently being experienced on the plan assets.
Equity portfolio market risk
Approximately 13.5 percent of the Company’s investment portfolio is invested in equity securities. Net unrealized
investment gains on the equity portfolio totaled approximately $3,640 at December 31, 2013, which is reflected as accumulated
other comprehensive income in the Company’s financial statements and represents $2.74 per share of the Company’s December
31, 2013 book value of $34.21 per share. To help protect the Company from a sudden and significant decline in the value of its
equity portfolio, management hired an outside manager during the first quarter of 2014 to implement an equity tail-risk hedging
strategy. When fully implemented, the hedging strategy will help protect the Company from significant monthly downside
price volatility in the equity markets. While there is a cost associated with this protection, which will reduce the amount of
investment income earned in future periods, management views this cost similar to the cost of an insurance policy. By
implementing this hedging strategy, management will reduce the level of risk contained in the Company’s financial statements,
which is a goal of the Company’s enterprise risk management strategy.
6
Catastrophe and storm losses
Prior to 2013, the Company experienced five consecutive years of above average catastrophe and storm losses, and
experienced record levels of catastrophe and storm losses in two of those five years (2008 and 2011). 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 catastrophe and storm losses in the past, the most recent period being from 1998 to 2001. Management continues
to monitor and make adjustments to the Company’s book of business to lessen exposure concentrations, and is prepared to
make additional adjustments to exposure concentrations if warranted.
Premium rate levels
Prior to 2011, the Company’s overall premium rate level had declined for five consecutive years. Management was able
to implement moderate rate increases in the personal lines of business during this time period, but rate levels in the commercial
lines of business, which account for more than 80 percent of the property and casualty insurance segment’s premium income,
remained very competitive. During 2011, in recognition of the above average amount of catastrophe and storm losses incurred
during the prior three years and a projected decline in investment income due to the persistent low interest rate environment,
the commercial lines marketplace began to harden and the Company was able to implement small rate level increases. Rate
levels continued to steadily improve throughout 2012, and this trend continued during 2013. During this time period,
management has worked diligently with the sixteen branch offices to stress the importance of achieving modest, but consistent,
commercial lines rate increases whenever possible. These efforts have been successful, and the Company has been able to
achieve high-single-digit rate increases during the past two years in the commercial lines of business. Commercial lines rate
levels are expected to continue to increase in 2014, but at a lower level. Management will continue to work with the branch
offices to ensure that all opportunities for additional rate increases are pursued.
Possible changes in GAAP
The Financial Accounting Standards Board (FASB) is expected to propose several significant changes to current GAAP
during the next several years, including the prescribed accounting for leases and financial instruments. Depending on the
outcome of these initiatives, the accounting rules and required disclosures for public companies could change significantly.
Management is closely monitoring developments in this area and will evaluate any proposed accounting standards that are
exposed for public comment during 2014 to identify changes that would be required in the Company’s data/systems to comply
with the new accounting standards.
The FASB issued an exposure draft on accounting for insurance contracts on June 27, 2013 that would have had a
significant impact on insurance companies that issue short-duration contracts, which would include most property and casualty
insurance contracts. On February 20, 2014, the FASB announced that it was scaling back the scope of its insurance contracts
project in response to feedback from constituents that the costs of implementation would outweigh any benefits to be achieved
from applying the proposed guidance to all contracts that met a new definition of an insurance contract. The FASB also noted
that insurers and users of the financial statements indicated the current accounting model for short-duration contracts provides
reasonable measurement and recognition guidance. As a result, the FASB indicated that it will focus on improving disclosures
for short-duration contracts. However, it should be noted that any change to the definition of insurance that the FASB makes
for long-duration contracts could affect an entity's ability to use the current short-duration accounting model.
Reserving methodology
The Company’s reserving methodology is focused on maintaining a consistent level of overall reserve adequacy.
Management does not use accident year loss picks to establish the property and casualty insurance segment's carried reserves.
Case loss and incurred but not reported (IBNR) loss reserves, as well as settlement expense reserves, are established
independently of each other and added together to get the total loss and settlement expense reserve. The property and casualty
insurance segment's reserving methodology also includes bulk case loss reserves, which supplement the aggregate case loss
reserves and are used by management to establish its best estimate of the liability for reported claims.
7
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, the property and casualty insurance
segment's 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.
The property and casualty insurance segment's bulk reserves (formula IBNR loss reserve, bulk case loss reserve and
settlement expense reserve) are initially established for all accident years combined, and the total is then allocated to the
various accident years. During this allocation process, a portion of the total bulk reserves may be reallocated from the current
accident year to prior accident years, or from prior accident years to the current accident year, to achieve the actuarial
department's desired reserve level by accident year. When reserves are moved to, or from, prior accident years, the change is
reported as development on prior years' reserves. However, this type of development is "mechanical" in nature, and does not
have an impact on earnings because the total amount of carried reserves did not change. Management identifies, quantifies and
discloses this "mechanical" development so that users of the Company's financial statements can better understand how
development on prior years' reserves impacts the Company's results of operations.
For the reasons noted above, development amounts reported on prior accident years’ reserves are less meaningful under
the property and casualty insurance segment’s reserving methodology than reserving methodologies utilized by other insurers.
Accordingly, from management’s perspective, whether the Company has maintained a consistent level of overall reserve
adequacy is more relevant to understanding the Company’s results of operations than the composition of the underwriting
results between the current and prior accident years.
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 reinsurance business assumed through
the quota share agreement (including “fronting” activities initiated by Employers Mutual) and 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.
8
Net Premiums Written. Net premiums written is calculated by summing direct premiums written, premiums written
assumed from affiliates and nonaffiliates, and then subtracting from that result premiums written ceded to affiliates and
nonaffiliates. For the property and casualty insurance segment, premiums written ceded to nonaffiliates is the portion of the
direct and assumed premiums written that is transferred to 1) reinsurers in accordance with the terms of the underlying
reinsurance contracts, based upon the risks they accept, and 2) state organizations on a mandatory basis in connection with
various workers' compensation and assigned risk programs. For the reinsurance segment, premiums written ceded to
nonaffiliates reflects reinsurance business that is ceded to other insurance companies in connection with “fronting” activities
initiated by Employers Mutual. Premiums written ceded to affiliates includes both the cession of the Company’s property and
casualty insurance subsidiaries’ direct business to Employers Mutual under the terms of the pooling agreement, and premiums
ceded by the Company’s reinsurance subsidiary to Employers Mutual under the terms of the excess of loss agreement with
Employers Mutual. 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.
Catastrophe and storm losses. For the property and casualty insurance segment, catastrophe and storm losses include
losses attributed to events that have occurred in the United States which have been assigned an occurrence number by Property
Loss Reinsurance Bureau (PLRB) Catastrophe Services. According to PLRB, an occurrence number is assigned when an event
has produced conditions severe enough to have caused, or to be likely to have caused, property damage. For the reinsurance
segment, catastrophe and storm losses include losses that have occurred in the United States, Puerto Rico and the U.S. Virgin
Islands which have been designated as catastrophes by Property Claims Services (PCS), as well as non-U.S. catastrophe and
storm losses reported by the ceding companies. According to PCS, catastrophe serial numbers are assigned to events that cause
$25,000 or more in direct insured losses to property, and affect a significant number of policyholders and insurers.
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.
9
Loss and settlement expense reserves
Processes and assumptions for establishing loss and settlement expense reserves
In the property and casualty insurance segment, liabilities for losses are based upon case-basis estimates of reported
losses supplemented with bulk case loss reserves, and estimates of 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. 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.
In the reinsurance segment, Employers Mutual records the case and IBNR loss reserves reported by the ceding
companies for the Home Office Reinsurance Assumed Department (“HORAD”). 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 association, 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.
Property and Casualty Insurance Segment
Following is a summary of the carried loss and settlement expense reserves for the property and casualty insurance
segment at December 31, 2013 and 2012.
Line of business
Commercial lines:
Automobile
Property
Workers' compensation
Liability
Bonds
Total commercial lines
Personal lines:
Automobile
Property
Total personal lines
Total property and casualty insurance
segment
December 31, 2013
Case
IBNR
Settlement
expense
Total
$
45,055
$
7,158
$
11,129
$
18,019
119,964
60,951
977
244,966
16,971
3,982
20,953
762
18,688
42,260
824
69,692
1,012
835
1,847
3,459
19,302
50,443
876
85,209
1,986
1,105
3,091
63,342
22,240
157,954
153,654
2,677
399,867
19,969
5,922
25,891
$
265,919
$
71,539
$
88,300
$
425,758
10
Line of business
Commercial lines:
Automobile
Property
Workers' compensation
Liability
Bonds
Total commercial lines
Personal lines:
Automobile
Property
Total personal lines
Total property and casualty insurance
segment
December 31, 2012
Case
IBNR
Settlement
expense
Total
$
41,381
$
7,084
$
10,475
$
14,816
118,074
57,405
3,953
235,629
16,227
4,118
20,345
590
20,255
41,911
(1,407)
68,433
1,267
621
1,888
3,129
19,757
48,425
1,002
82,788
1,998
1,236
3,234
58,940
18,535
158,086
147,741
3,548
386,850
19,492
5,975
25,467
$
255,974
$
70,321
$
86,022
$
412,317
The 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 philosophy utilized to establish case loss reserves 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 claims department 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,
inflation, and changes in applicable laws.
To provide consistency in the reserving process, the claims department 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 claims department 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 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 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 claims department does not incorporate a provision
for uncertainty (either implicitly or explicitly) when setting individual case loss reserve estimates. The Employers Mutual’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 actuaries
and considers such recommendations in the determination of its best estimate of 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.
11
At December 31, 2013, IBNR loss reserves accounted for $71,539, or 16.8 percent, of the property and casualty
insurance segment’s total loss and settlement expense reserves, compared to $70,321, or 17.1 percent, at December 31, 2012.
IBNR loss reserves are, by nature, less precise than case loss reserves. A five percent change in IBNR loss reserves at
December 31, 2013 would equate to $2,325, net of tax, which represents 5.3 percent of the net income reported for 2013 and
0.5 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 2013 the actual IBNR claims reported in the
18 months following year-end 2011 were compared to the adjusted 2011 premiums earned. The 2011 ratios, together with the
ratios for several prior years, were then used to develop the 2013 “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, 2013 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.
Line of business
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 IBNR emergence
from frequency and severity
trends underlying rate
adequacy adjustments
to
to
to
to
to
to
to
to
$(54)
(256)
(24)
(539)
(1,408)
(79)
(18)
(37)
$54
256
24
539
1,408
79
18
37
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.
12
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
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
to
to
to
to
to
to
to
to
$(33)
(182)
(25)
(233)
(631)
(129)
(65)
(32)
$33
182
25
233
631
129
65
32
Internal actuarial evaluations of the prior quarter’s overall loss reserve levels are performed each quarter 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, 2013 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.
13
Line of business
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
to
to
to
to
to
to
to
$(136)
(712)
(12)
(5,570)
(3,905)
(141)
(28)
$133
697
12
4,840
3,559
140
28
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
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
to
to
to
to
to
to
to
to
$(423)
(1,810)
(117)
(3,690)
(3,144)
(722)
(154)
(91)
$384
1,636
105
3,340
2,847
654
139
83
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.
14
Line of business
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
to
to
to
to
to
to
to
to
$(360)
(1,498)
(90)
(2,944)
(2,477)
(826)
(154)
(43)
$326
1,353
81
2,663
2,243
748
140
40
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
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
to
to
to
to
to
to
to
$(6)
(144)
(29)
(173)
(1,100)
(209)
(27)
$6
144
29
173
1,100
209
27
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.
15
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. These exposures are closely monitored by management, and IBNR loss reserves have
been established to cover estimated ultimate losses. The asbestos IBNR reserves were increased in each of the last six 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 since 2008 and have been the primary driver
behind recently implemented reserve increases.
Environmental IBNR 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
Following is a summary of the carried loss and settlement expense reserves for the reinsurance segment at December 31,
2013 and 2012.
Line of business
Pro rata reinsurance:
Property and liability
Property
Crop
Liability
Marine/Aviation
Total pro rata reinsurance
Excess of loss reinsurance:
Property
Liability
Surety
Total excess of loss reinsurance
December 31, 2013
Case
IBNR
Settlement
expense
Total
$
5,223
$
783
$
8,645
1,407
957
1,993
18,225
27,802
31,004
646
59,452
8,878
1,055
6,138
7,850
24,704
16,812
60,014
274
77,100
$
141
477
28
101
128
875
1,013
3,004
50
4,067
6,147
18,000
2,490
7,196
9,971
43,804
45,627
94,022
970
140,619
184,423
Total reinsurance segment
$
77,677
$
101,804
$
4,942
$
16
Line of business
Pro rata reinsurance:
Property and liability
Property
Crop
Liability
Marine/Aviation
Total pro rata reinsurance
Excess of loss reinsurance:
Property
Liability
Surety
Total excess of loss reinsurance
December 31, 2012
Case
IBNR
Settlement
expense
Total
$
4,233
$
647
$
10,794
1,605
729
1,455
18,816
25,944
29,567
648
56,159
9,381
745
5,111
4,602
20,486
17,778
52,264
250
70,292
$
282
558
26
134
93
1,093
1,018
2,866
50
3,934
5,162
20,733
2,376
5,974
6,150
40,395
44,740
84,697
948
130,385
170,780
Total reinsurance segment
$
74,975
$
90,778
$
5,027
$
The reinsurance book of business is comprised of two major components. The first is HORAD, which includes the
reinsurance business assumed by the reinsurance subsidiary through the quota share agreement and the business written directly
by the reinsurance subsidiary outside of the quota share agreement. The second is MRB, 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.
At December 31, 2013, 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 include 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, 2013, there was no backlog in the processing of assumed reinsurance information. Approximately
$114,256, or 62 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 contracts. 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 $70,167 at
December 31, 2013. 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.
17
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 $101,804 and
$90,778 at December 31, 2013 and 2012, respectively, and accounted for approximately 55 percent and 53 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, 2013 would equate to $3,308, net
of tax, which represents 7.6 percent of the net income reported for 2013 and 0.7 percent of stockholders’ equity.
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:
(1) Five percent variance in case loss reserve adequacy from the
level anticipated in the incurred loss projection factors
$(579)
(2) One percent variance in the implicit annual claims inflation rate
(835)
Reinsurance segment
MRB
HORAD
to
to
$524
$(3,398)
to
$3,074
754
(3,217)
to
2,923
(3) Five percent variance in IBNR losses from the level anticipated
in the loss projection factors
(451)
to
451
(2,219)
to
2,219
(4) Five percent variance in the expected loss ratios used with the
Bornhuetter-Ferguson method
(452)
to
452
(3,027)
to
3,027
To ensure the accuracy and completeness of the information received from the ceding companies, Employers Mutual’s
actuarial department 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 adequate.
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 supplement the data reported by ceding companies due to
the instability of the development patterns based on reported historical losses.
18
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, 2013.
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 1,717 asbestos bodily injury
lawsuits, some of which involve multiple plaintiffs. Five 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 were the result of multi-plaintiff lawsuits, and were 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. Several of the multi-plaintiff lawsuits (including the vast majority of those associated with one former
policyholder) were dismissed. As of December 31, 2013, approximately 2,000 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. The last of these claims were settled during 2012 for approximately $690 (the Company’s share).
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 since 2008 as a result of claims attributed to two
former policyholders. One of those former policyholders, a broker of various products, including asbestos, settled a claim for
approximately $450 (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, 2013, nine 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 $2,176 (the Company’s share) during the period 2009
through 2013. The asbestos exposure associated with this former policyholder has increased in recent 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 since 2008 and have been the primary driver behind recently implemented
reserve increases. The primary cause of this increase in paid settlement expenses is the retention of a national coordinating
counsel in 2008 due to this former policyholder’s exposure in numerous jurisdictions. The national coordinating counsel has
provided, and continues to provide, significant services in the areas of document review, discovery, deposition and trial
preparation. Approximately 646 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
expenses.
19
The pool participants are defending approximately 98 claim files 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, 2013, 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 for each of the six years
of alleged liability (approximately $600 in aggregate as the Company’s share) along with associated settlement expenses.
While the insured’s summary judgment motion was successful, future appeals are possible.
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, 2013, the Company carried asbestos and environmental reserves for direct insurance and assumed
reinsurance business totaling $9,643, which represents 1.6 percent of total loss and settlement expense reserves. The asbestos
and environmental reserves include $5,288 of case loss reserves, $2,690 of IBNR loss reserves and $1,665 of bulk settlement
expense reserves. Ceded reinsurance on these reserves totaled $692. Loss and settlement expense reserves were increased in
2013 because of deterioration in the implied survival ratio.
20
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’ manufacturing clients, 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 2013, 25 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 232, 209 and 383 in
2013, 2012 and 2011, respectively, and produced incurred losses and paid settlement expenses of approximately $5,066, $2,008
and $2,157 in each respective period. Incurred losses and paid settlement expenses on all construction defect claims totaled
approximately $6,922 in 2013. At December 31, 2013, the Company carried case loss reserves of approximately $8,414 on 427
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 and medical malpractice. Casualty excess business on large companies is written, but generally on a
“clash” basis only (layers above the limits written for any individual policyholder) or specialty casualty written with claims-
made forms.
21
Following is a summary of loss and settlement expense reserves and payments associated with asbestos, environmental,
products liability and casualty excess reinsurance exposures for 2013, 2012 and 2011:
Property and casualty insurance segment
Reinsurance segment
Case
IBNR
Settlement
expense
Case
IBNR
Settlement
expense
Reserves at:
December 31, 2013
Asbestos
$
4,737
$
1,375
$
Environmental
Products1
Casualty excess2
December 31, 2012
311
7,112
—
400
5,428
—
$
1,502
164
6,285
—
104
136
—
28,976
Asbestos
$
3,778
$
1,834
$
1,711
$
$
$
324
591
—
—
—
—
59,994
2,943
353
660
—
—
—
—
99
67
—
27,759
52,127
2,730
121
5,212
—
1,933
188
4,589
—
$
113
$
66
—
24,141
372
662
—
53,376
Environmental
Products1
Casualty excess2
December 31, 2011
Asbestos
Environmental
Products1
Casualty excess2
Paid during:
2013
Asbestos
Environmental
Products1
Casualty excess2
2012
Asbestos
Environmental
Products1
Casualty excess2
2011
Asbestos
Environmental
Products1
Casualty excess2
237
6,044
—
572
5,309
—
$
2,584
$
872
$
663
4,938
—
219
5,133
—
1,030
19
1,737
—
468
—
1,768
—
299
6
1,524
—
$
$
$
$
1,212
$
87
2,304
—
1,585
87
3,065
—
802
95
2,107
—
$
$
$
$
23
—
—
7,766
32
1
—
6,291
51
—
—
7,440
—
—
—
2,259
—
—
—
1,249
—
—
—
1,227
2
(8)
—
1,379
$
$
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.
22
Following is a summary of the claim activity associated with asbestos, environmental and products liability exposures
for 2013, 2012 and 2011:
2013
Open claims at year-end
Reported
Disposed
2012
Open claims at year-end
Reported
Disposed
2011
Open claims at year-end
Reported
Disposed
Asbestos
Environmental
Products
4,272
415
612
4,469
363
4,748
8,854
213
696
5
—
—
5
—
2
7
3
—
94
448
461
107
414
411
104
411
406
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 the reserves are established. During each quarter, however, an actuarially determined range of estimates is developed
for the major components of the loss and settlement expense reserves as of the preceding quarter-end. All reserves are
reviewed with the exception of reserves for involuntary workers’ compensation pools, which are set by the National Council on
Compensation Insurance (NCCI) and are assumed to be adequate (the impact of potential variability of this segment on overall
reserve adequacy is considered immaterial). Shown below are the actuarially determined ranges of reserve estimates as of
December 31, 2013 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.
Property and casualty
insurance segment
Reinsurance segment
Range of reserve estimates
After-tax impact on earnings
High
Low
Carried
Reserves at high
Reserves at low
$
$
418,850
183,465
602,315
$
$
364,673
144,765
509,438
$
$
405,534
178,944
584,478
$
$
(8,655) $
(2,939)
(11,594) $
26,560
22,216
48,776
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.
23
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 1 of the Company's Annual Report on 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 because observable inputs are not
available. 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 values of a majority of its securities,
subject to an internal validation. The fair values are based on quoted market prices, where available. This is typically the case
for equity securities and money market funds, which are accordingly classified as Level 1 fair value measurements. 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. Fixed maturity securities and various short-term investments in the Company’s portfolio may 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 by the independent pricing source
for different asset classes.
• 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.
• 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.
• Obligations of states and political subdivisions are priced by tracking and analyzing actively quoted issues and
reported trades, material event notices and benchmark yields. 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.
• Mortgage-backed and asset-backed securities are first reviewed for the appropriate pricing speed (if prepayable),
spread, yield and volatility. The 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 determine a tranche’s price, first the benchmark yield is determined and adjusted for collateral
performance, tranche level attributes and market conditions. Then the cash flow for each tranche is generated (using
consensus prepayment speed assumptions including, as appropriate, a prepayment projection based on historical
statistics of the underlying collateral). The tranche-level yield is used to discount the cash flows and generate the
price. Depending on the characteristics of the tranche, a volatility-driven, multi-dimensional single cash flow
stream model or an option-adjusted spread model may be used. When cash flows or other security structure or
market information is not available, broker quotes may be used.
24
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. For these securities, fair value may be determined using the broker quotes, or by
the Company using similar pricing techniques as the Company’s independent pricing service. Depending on the level of
observable inputs, these securities would be classified as Level 2 or Level 3 fair value measurements. At December 31, 2013
seven securities were priced solely from broker quotes (none at December 31, 2012), but those securities were reported as
Level 2 fair value measurements due to the broker quote prices approximating the Company's price estimates obtained by
applying pricing techniques with observable inputs.
Essentially all securities in the Company’s investment portfolios have transparent pricing. All equity securities (with one
exception) are traded on national exchanges with observable prices. Fixed maturity securities are typically high quality, liquid
issues with daily pricing from the Company’s independent pricing source. Prices are validated through a variety of techniques.
When performing these validations, the Company uses graduated tolerance levels for determining exceptions. Equity securities
and U.S. treasury and government-sponsored agency fixed maturity securities have the highest transparency in pricing, and
therefore have the smallest tolerance levels for variance. These are followed by (in order of decreasing transparency/increasing
tolerance levels) mortgage-backed, corporate, municipal, and finally high-yield fixed maturity securities. The validations
performed include:
1. Comparisons of the prices reported by the independent pricing source to daily runs of offerings and bids from
several brokers for a sample of securities.
2. Comparison of the prices reported by the independent pricing source to prices realized from the Company’s own
purchase and sale transactions.
3. Comparison of the prices reported by the independent pricing source to prices from the Company’s investment
custodian. It should be noted that the independent pricing source used by the Company is often the same source
used by the Company’s investment custodian (except for municipal fixed maturity securities), thus limiting the
confidence gained from this validation technique.
Rarely are the independent pricing source’s prices outside of tolerance levels. This is most likely to occur in less
frequently traded municipal fixed maturity securities, where the price reported by the independent pricing source may have
become stale due to a lack of recent trading activity. If it is believed that the price reported by the independent pricing source
does not reflect the quality, maturity, optionality and liquidity characteristics of the fixed maturity security, alternative pricing
sources are examined, including Bloomberg matrix pricing, regression pricing, and broker runs for offering prices of similar
securities. A judgment is then made as to what price best reflects the characteristics of the security, and if the result is
materially different than the fair value reported by the independent pricing source for that security, then management’s
judgment of the fair value is used in the financial statements.
Investment Impairments
The Company regularly monitors its investments which have a fair value that is less than the amortized cost for
indications of “other-than-temporary” impairment. Several factors are used to determine whether the amortized cost 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 amortized cost, (3) key corporate events, and (4) for equity securities, the ability and intent to hold the security until
recovery to its cost basis.
The evaluation of an impaired fixed maturity security includes an assessment of whether the Company has the intent to
sell the security, and whether it is more likely than not that the Company will 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 credit loss is recognized through earnings, and the portion of the impairment related to other factors,
if any, is recognized through “other comprehensive income”.
When an equity security is deemed to be “other-than-temporarily” impaired, the amortized cost is reduced to fair value
and a realized loss is recognized through earnings.
25
Deferred policy acquisition costs and related amortization
Acquisition costs, consisting of commissions, premium taxes, and salary and benefit expenses of employees directly
involved in the underwriting of insurance policies that are successfully issued, 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 methodology followed in computing deferred
policy acquisition costs limits the amount of such deferred costs to the estimated realizable value. In determining estimated
realizable value, the computation gives effect to the premium to be earned, related investment income, anticipated losses and
settlement expenses, anticipated policyholder dividends, and certain other costs expected to be incurred to administer the
insurance policies as the premium is earned. The anticipated losses and settlement expenses are based on the segment’s
projected loss and settlement expense ratios for the next twelve months, which include provisions for anticipated catastrophe
and storm losses based on historical results adjusted for recent trends. Utilizing these projections, deferred policy acquisition
costs for the property and casualty insurance segment and the reinsurance segment were not subject to limitation at
December 31, 2013. Based on an analysis performed by management, the actuarial projections of the expected loss and
settlement expense ratios for the next twelve months would have needed to increase 19.7 percentage points in the property and
casualty insurance segment and 10.3 percentage points in the reinsurance segment before deferred policy acquisition costs
would have been subject to limitation. Such increases in the expected loss and settlement expense ratios would likely be driven
by many factors, including higher provisions for anticipated catastrophe and storm losses.
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 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 non-qualified 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 obligation valuations at
December 31, 2013, 2012 and 2011 were 4.17 percent, 3.24 percent and 4.13 percent, respectively. The discount rates used in
the postretirement benefit obligation valuations at December 31, 2013, 2012 and 2011 were 4.71 percent, 4.03 percent and 4.59
percent, respectively. The discount rates used in the pension and postretirement benefit obligation valuations are also used in
the calculation of the net periodic benefit costs for the subsequent year. A 0.25 percentage point decrease in the discount rates
used in the 2013 valuations would decrease the Company’s net periodic pension and postretirement benefit costs for 2014 by
approximately $57. Conversely, a 0.25 percentage point increase in the 2013 discount rates would increase the Company’s net
periodic pension and postretirement benefit costs for 2014 by approximately $56.
26
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 calculation of the net periodic pension benefit costs for the years ended
December 31, 2013 and 2012 was 7.25 percent. The expected long-term rate of return on plan assets used in the calculation of
the net periodic postretirement benefit costs for the years ended December 31, 2013 and 2012 was 6.50 percent and 6.25
percent, respectively. The expected rate of return on plan assets to be used in the calculation of the 2014 net periodic benefit
costs for the pension and postretirement benefit plans will be 7.25 percent and 6.75 percent, respectively. The actual rate of
return earned on plan assets during 2013 was approximately 21 percent for both the pension and 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 expected
long-term rate of return assumption for 2014 would change the Company’s net periodic pension and postretirement benefit
costs by approximately $263. 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 the Company's
Annual Report on 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 2013 was 7.5 percent,
and is assumed to decrease gradually to 5 percent in 2024 and remain at that level thereafter. In 2012 and 2011, the
assumptions were 7.75 percent and 8.0 percent, respectively, both declining gradually to 5 percent and remaining at that level
thereafter. A one percentage point increase in the assumed health care cost trend rate would increase the Company’s net
periodic postretirement benefit cost for 2014 by approximately $797. Conversely, a one percentage point decrease in the
assumed health care cost trend rate would decrease the Company’s net periodic postretirement benefit cost for 2014 by
approximately $615.
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, 2013, all of the benefit plans except the qualified defined
benefit pension plan had accumulated actuarial losses in excess of the corridor that will be partially amortized into expense in
2014. The Company’s share of the accumulated actuarial losses that will be amortized into expense during 2014 amounts to
$544. Prior service costs/credits for plan amendments are also contained in the valuations, and are amortized into expense/
income over the future service periods of the participants. As of December 31, 2013, 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 2014 is $3,307.
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 are recognized through other comprehensive
income.
27
RESULTS OF OPERATIONS
Results of operations by segment and on a consolidated basis for the three years ended December 31, 2013 are as
follows:
Property and casualty insurance
Premiums earned
Losses and settlement expenses
Acquisition and other expenses
Underwriting loss
Loss and settlement expense ratio
Acquisition expense ratio
Combined ratio
Losses and settlement expenses:
Insured events of current year
Decrease in provision for insured events of prior years
Total losses and settlement expenses
Catastrophe and storm losses
Year ended December 31,
2013
2012
2011
$
392,719
$
357,139
$
321,649
260,917
142,237
(10,435)
66.4%
36.3%
102.7%
268,198
(7,281)
260,917
37,262
$
$
$
$
233,892
131,454
(8,207)
65.5%
36.8%
102.3%
246,949
(13,057)
233,892
34,372
$
$
$
$
251,449
116,588
(46,388)
78.2%
36.2%
114.4%
271,612
(20,163)
251,449
52,448
$
$
$
$
The following table presents the reported amounts of favorable development experienced on prior years’ reserves and the
portion of the reported development amounts that resulted solely from changes in the allocation of bulk reserves between the
current and prior accident years in the property and casualty insurance segment (no impact on earnings). The result is an
approximation of the implied amount of favorable development that had an impact on earnings.
Reported amount of favorable development experienced on prior years'
reserves
Adjustment for (adverse) favorable development included in the reported
development amount that had no impact on earnings
Approximation of the implied amount of favorable development that had
an impact on earnings
$
$
(7,281) $
(13,057) $
(20,163)
6,526
(4,551)
1,396
(755) $
(17,608) $
(18,767)
Year ended December 31,
2013
2012
2011
28
Reinsurance
Premiums earned
Losses and settlement expenses
Acquisition and other expenses
Underwriting profit (loss)
Loss and settlement expense ratio
Acquisition expense ratio
Combined ratio
Losses and settlement expenses:
Insured events of current year
Decrease in provision for insured events of prior years
Total losses and settlement expenses
Catastrophe and storm losses
Year ended December 31,
2013
2012
2011
$
122,787
$
101,707
$
72,370
29,109
21,308
58.9%
23.7%
82.6%
69,496
22,370
$
9,841
$
68.3%
22.0%
90.3%
94,753
91,525
20,501
(17,273)
96.6%
21.6%
118.2%
77,874
(5,504)
72,370
11,316
$
$
$
82,172
(12,676)
69,496
19,088
$
$
$
104,461
(12,936)
91,525
27,883
$
$
$
$
29
Consolidated
REVENUES
Premiums earned
Net investment income
Realized investment gains
Other income
LOSSES AND EXPENSES
Losses and settlement expenses
Acquisition and other expenses
Interest expense
Other expense
Income (loss) before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss)
Net income (loss) per share
Loss and settlement expense ratio
Acquisition expense ratio
Combined ratio
Losses and settlement expenses:
Insured events of current year
Decrease in provision for insured events of prior years
Total losses and settlement expenses
Catastrophe and storm losses
Year ended December 31,
2013
2012
2011
$
515,506
$
458,846
$
416,402
43,022
8,997
826
568,351
333,287
171,346
384
2,481
44,145
8,017
859
511,867
303,388
153,824
900
2,122
46,111
9,303
828
472,644
342,974
137,089
900
2,673
507,498
460,234
483,636
60,853
17,334
43,519
3.33
64.7%
33.2%
97.9%
346,072
(12,785)
333,287
48,578
$
$
$
$
$
51,633
13,667
37,966
2.95
66.1%
33.5%
99.6%
329,121
(25,733)
303,388
53,460
$
$
$
$
$
(10,992)
(8,255)
(2,737)
(0.21)
82.4%
32.9%
115.3%
376,073
(33,099)
342,974
80,331
$
$
$
$
$
The following table presents the reported amounts of favorable development experienced on prior years’ reserves and the
portion of the reported development amounts that resulted solely from changes in the allocation of bulk reserves between the
current and prior accident years in the property and casualty insurance segment (no impact on earnings). The result is an
approximation of the implied amount of favorable development that had an impact on earnings.
Reported amount of favorable development experienced on prior years'
reserves
Adjustment for (adverse) favorable development included in the reported
development amount that had no impact on earnings
Approximation of the implied amount of favorable development that had
an impact on earnings
$
$
(12,785) $
(25,733) $
(33,099)
6,526
(4,551)
1,396
(6,259) $
(30,284) $
(31,703)
Year ended December 31,
2013
2012
2011
30
Year ended December 31, 2013 compared to year ended December 31, 2012
The Company reported net income of $43,519 ($3.33 per share) in 2013 compared to $37,966 ($2.95 per share) in
2012. The reinsurance segment produced exceptionally good results in 2013, and the property and casualty insurance
segment's results were in line with expectations. The increase in net income is primarily attributed to an overall increase in
premium rate adequacy in 2013 as a result of the rate level increases implemented during 2012 and 2013. High-single-digit
rate level increases in the property and casualty insurance segment have outpaced the industry average and the increase in loss
costs. The Company continues to seek good opportunities for new business in the Northwest, Southwest and Southeast parts of
the United States. This growth outside of the Company's core market in the Midwest, if achieved, will help diversify the
Company's book of business geographically, while maintaining the current industry and line-of-business mix.
Premium income
Premiums earned increased 12.3 percent to $515,506 in 2013 from $458,846 in 2012. In the property and casualty
insurance segment, the majority of the increase is attributable to rate level increases on renewal business and growth in insured
exposures on existing accounts. In the reinsurance segment, the increase is attributable to a large increase in the amount of
premiums earned on the offshore energy and liability proportional account, moderate rate level increases and the addition of
some new business. Premium rates in the property and casualty insurance market are expected to continue to rise in 2014,
though at a somewhat lower level than seen during 2013, which should position the property and casualty insurance segment
for improved performance as the higher premiums become earned. Premium rates in the reinsurance market are expected to
decline during 2014, especially for catastrophe excess business; however, this business only accounts for approximately 20
percent of the reinsurance segment's total book of business. Despite the decline in premium rate levels, premium income for
the reinsurance segment is expected to grow in 2014, but at a more modest level than 2013.
Premiums earned for the property and casualty insurance segment increased 10.0 percent to $392,719 in 2013 from
$357,139 in 2012. The increase in premiums earned is primarily associated with renewal business, which increased nine
percent, and reflects a combination of rate level increases, growth in insured exposures and an increase in retained policies.
Renewal rates across both commercial and personal lines of business increased approximately 7.4 percent during 2013, and are
expected to continue to rise in 2014, though at a lower level. The pool participants have not implemented broad-based rate
level increases across the entire book of business, but have instead implemented rate level increases based on the loss history
and risk exposures associated with each renewing policy, in order to achieve a more adequate overall rate level. This approach
has allowed the property and casualty insurance segment to retain its core book of business, while improving underwriting
margins. While renewal rates for personal lines of business increased, premiums were down slightly due to an intentional
reduction in policy count to lessen exposure concentrations. Due to the decrease in personal lines policy count and the
continued emphasis on rate increases, overall policy retention declined slightly during 2013, but remained strong at 85.0
percent (commercial lines at 86.3 percent and personal lines at 83.5 percent). New business continues to account for a
relatively small portion (just 14 percent) of the pool participants’ direct written premiums. New business premium increased
eight percent in the commercial lines of business (policy count increased one percent), but total new business premium only
increased six percent due to a significant decline in personal lines new business premium.
Premiums earned for the reinsurance segment increased 20.7 percent to $122,787 in 2013 from $101,707 in 2012. The
increase is primarily attributed to a large increase in the amount of premiums earned on the offshore energy and liability
proportional account, moderate rate level increases implemented during the January 1 renewal season, and the addition of some
new business. Premiums earned during 2013 reflect a reduction in the cost of the excess of loss coverage provided by
Employers Mutual from 10.0 percent of total assumed reinsurance premiums written in 2012 to 9.0 percent in 2013; however,
the total amount of premiums ceded to Employers Mutual for this coverage increased due to a large increase in assumed
reinsurance premiums written.
Effective January 1, 2013, Church Mutual Insurance Company (Church Mutual) became a member of MRB. As a result,
Employers Mutual became a one-fifth participant in MRB, down from its previous one-fourth participation. This resulted in a
11.3 percent decline in earned premiums assumed from MRB in 2013. In connection with Employers Mutual’s decreased
participation in MRB, the reinsurance segment recorded a $585 portfolio adjustment decrease in premiums written in the first
quarter of 2013. This portfolio adjustment did not affect earned premium since there was a corresponding decrease in unearned
premiums. Nine percent of this amount ($53) was recorded as a reduction in the cost of the excess of loss coverage provided
by Employers Mutual, and the reinsurance segment recognized $223 of negative commission allowance (commission income)
to compensate for the acquisition costs incurred to generate the business ceded to Church Mutual.
31
Effective January 1, 2012, MRB canceled a large pro rata account with poor experience. As a result, the reinsurance
segment recorded a $3,406 portfolio adjustment decrease in premiums written in the first quarter of 2012 that offset a
corresponding decrease in unearned premiums. Ten percent of this amount ($341) was recorded as a reduction in the cost of
the excess of loss coverage provided by Employers Mutual, and the reinsurance segment recognized $1,362 of negative
commission allowance (commission income) to compensate for the acquisition costs incurred to generate this business.
Losses and settlement expenses
Losses and settlement expenses increased 9.9 percent to $333,287 in 2013 from $303,388 in 2012, but the loss and
settlement expense ratio decreased to 64.7 percent in 2013 from 66.1 percent in 2012. The decrease in the loss and settlement
expense ratio is attributed to an overall improvement in rate adequacy, as well as a decline in catastrophe and storm losses;
however, these improvements were partially offset by a decline in favorable development on prior years' reserves.
Development amounts can vary significantly from year to year depending on a number of factors, including the number of
claims settled and the settlement terms, and should therefore not be considered a reliable factor in assessing the adequacy of the
Company's carried reserves. The actuarial analysis of the Company's carried reserves as of December 31, 2013 indicates that
the level of reserve adequacy is consistent with other recent evaluations.
The loss and settlement expense ratio for the property and casualty insurance segment increased to 66.4 percent in 2013
from 65.5 percent in 2012. This increase is primarily attributed to a decline in the implied amount of favorable development on
prior years' reserves that had an impact on earnings, which totaled $755 (0.2 percent of earned premiums) in 2013 compared to
$17,608 (4.9 percent of earned premiums) in 2012. The lower amount of favorable development in 2013 is primarily attributed
to unfavorable outcomes on a few large prior year claims. The implied amounts of favorable development that had an impact
on earnings do not include $6,526 of favorable development in 2013 and $4,551 of adverse development in 2012 that are
included in the reported amounts of favorable development, because these amounts resulted solely from changes in the
allocation of bulk reserves between the current and prior accident years, and therefore did not have an impact on earnings.
Earnings are only impacted by changes in the total amount of carried reserves. The increase in the loss and settlement expense
ratio was mitigated by an improvement in overall premium rate adequacy. Excluding the impact of catastrophe and storm
losses, large losses, and related development, claims frequency increased 0.6 percent, and claims severity increased 2.9 percent
during 2013. As a result, the increase in loss costs was more than offset by the rate level increases implemented during the
year. Catastrophe and storm losses, while higher in amount, declined as a percentage of premiums earned (9.5 percentage
points in 2013, compared to 9.6 percentage points in 2012 and 9.4 percentage points for the most recent 10-year average).
Large losses (which the Company defines as losses greater than $500 for the EMC Insurance Companies’ pool, excluding
catastrophe and storm losses) increased to $22,240 in 2013 (5.7 percent of premiums earned) from $21,241 in 2012 (5.9 percent
of premiums earned).
The loss and settlement expense ratio for the reinsurance segment decreased to 58.9 percent in 2013 from 68.3 percent in
2012. This decrease is primarily attributed to significant declines in both crop reinsurance losses and catastrophe and storm
losses; however, the impact of these declines on the loss and settlement expense ratio was partially offset by a decline in the
amount of favorable development experienced on prior years' reserves. The decline in favorable development is primarily
attributed to three factors. First, a large amount of favorable development was experienced in 2012 due to a reduction in the
amount of IBNR reserves carried for the unusually large number of catastrophe and storm events that occurred in 2011.
Second, reported losses associated with prior accident years' were higher in 2013 than 2012. And third, the "expected loss
ratios" used in the development methodologies applied to the 2012 contract year were somewhat lower than previous contract
years due to an extensive actuarial study completed during 2012 (prior contract years' "expected loss ratios" were not adjusted).
Carried reserves for the 2013 contract year were also established using the lower "expected loss ratios" produced by the new
development methodology, and will continue to be used to establish carried reserves for subsequent contract years (pending
actuarial review). This is expected to result in a decline in the amount of favorable development reported by the reinsurance
segment in future years. Catastrophe and storm losses were above average in 2012, as the reinsurance segment had three
events, including Superstorm Sandy, which exceeded the $4,000 retention amount under the excess of loss agreement. Losses
from these three events totaled $23,722, with $12,000 retained by the reinsurance segment and the remaining $11,722 ($11,000
from Superstorm Sandy alone) ceded to Employers Mutual. During 2012, the reinsurance segment also incurred $6,057 of
losses on U.S. multi-peril crop reinsurance programs that resulted from the severe drought conditions that existed in much of
the United States. Because the losses from the crop reinsurance programs were not attributed to a specific event, they were not
subject to the $4,000 cap on losses per event under the excess of loss agreement.
32
Acquisition and other expenses
Acquisition and other expenses increased 11.4 percent to $171,346 in 2013 from $153,824 in 2012. However, the
acquisition expense ratio decreased to 33.2 percent in 2013 from 33.5 percent in 2012. The increase in acquisition expenses is
primarily attributed to an increase in commission expense (including contingent commissions) and policyholder dividend
expense; however, the acquisition expense ratio declined due to the increase in premium income. The decrease in the
acquisition expense ratio was limited somewhat by a large negative commission adjustment recorded in the reinsurance
segment during the first quarter of 2012 in connection with the cancellation of a large MRB account.
For the property and casualty insurance segment, the acquisition expense ratio decreased to 36.3 percent in 2013 from
36.8 percent in 2012. This decrease is primarily attributed to the increase in premium income; however, the decrease was
somewhat limited by higher policyholder dividend expense, and to a lesser extent, higher contingent commission expense. The
higher policyholder dividend expense was produced by large increases in a few safety dividend groups that experienced
improved underwriting results in 2013.
For the reinsurance segment, the acquisition expense ratio increased to 23.7 percent in 2013 from 22.0 percent in
2012. The increase is primarily attributed to the combination of higher contingent commission expense and a $1,362 negative
commission allowance recorded in the first quarter of 2012 in connection with the cancellation of a large MRB account.
However, a portion of this negative commission allowance was offset by the amortization of the related deferred policy
acquisition cost asset, resulting in an immediate expense reduction of approximately $654 during the first quarter of 2012.
During the first quarter of 2013, the reinsurance segment recognized a $223 negative commission allowance in conjunction
with the addition of Church Mutual to MRB. A portion of this negative commission allowance was offset by the amortization
of the related deferred policy acquisition cost asset, resulting in an immediate expense reduction of approximately $105 during
the first quarter of 2013. The higher contingent commission expense is largely from new contracts that carry contingent
commission provisions. The increase in premium income helped mitigate the impact that the increased expenses had on the
acquisition expense ratio.
Investment results
Net investment income decreased 2.5 percent to $43,022 in 2013 from $44,145 in 2012. This decline is primarily
attributable to the prolonged low interest rate environment, but was mitigated by considerable growth in the fixed maturity
portfolio, strong dividend earnings on the equity portfolio, and a slight increase in interest rates. Current interest rate levels
remain below the average coupon rate of the fixed maturity portfolio, and will therefore likely limit future growth in net
investment income. It should be noted that the decline in investment income reported for 2013 reflects a $160 increase in the
amount of funds received from settlements of securities litigation. Excluding this amount from the calculation, the decline in
investment income would have been 2.9 percent. The average coupon rate on the fixed maturity portfolio, excluding interest-
only securities, declined slightly to 4.03 percent at December 31, 2013 from 4.23 percent at December 31, 2012. Management
is actively pursuing ways to minimize the decline in investment income without increasing overall risk, such as the
implementation of the new equity strategy in 2012 that emphasizes dividend income (see discussion below). The effective
duration of the fixed maturity portfolio, excluding interest-only securities, increased to 5.65 at December 31, 2013 from 4.20 at
December 31, 2012. Duration extended as interest rates rose during 2013.
At the end of the first quarter of 2012, management reinvested approximately $35,000 from the core equity portfolio and
$10,000 of cash into a new equity portfolio with an emphasis on dividend income. In addition to a higher dividend return, this
new equity strategy has less price volatility than the overall market. The Company’s equity security holdings produced
dividend income of $4,619 in 2013 and $3,852 in 2012.
The Company reported net realized investment gains of $8,997 in 2013 compared to $8,017 in 2012. During the fourth
quarter of 2013, the Company took advantage of the outsized equity returns realized during the year by selling some stocks.
The Company experienced an unusually large amount of realized investment gains in the first quarter of 2012, primarily from
the sale of securities from the core equity portfolio to fund the new equity portfolio that emphasizes dividend income.
As previously noted, management hired an outside manager during the first quarter of 2014 to implement an equity tail-
risk hedging strategy to help protect the Company from a sudden and significant decline in the value of its equity portfolio.
When fully implemented, the hedging strategy will help protect the Company from significant monthly downside price
volatility in the equity markets. There is a cost associated with this protection, which will reduce the amount of investment
income earned in 2014, and future periods if the strategy is continued.
33
Interest and other expense
The decline in interest expense during 2013 is due to a reduction in the interest rate on the property and casualty
insurance segment's outstanding surplus notes from 3.60 percent to 1.35 percent that became effective February 1,
2013. Included in other expense is foreign currency exchange gains and losses recognized on the reinsurance segment’s foreign
currency denominated reinsurance business. The reinsurance segment had foreign currency exchange losses of $366 and $25 in
2013 and 2012, respectively.
Income tax
Income tax expense increased 26.8 percent to $17,334 in 2013 from $13,667 in 2012. The effective tax rate for 2013
was 28.5 percent, compared to 26.5 percent in 2012. The primary contributor to the differences between these effective tax
rates and the United States federal corporate tax rate of 35 percent is tax-exempt interest income earned.
Year ended December 31, 2012 compared to year ended December 31, 2011
The Company reported net income of $37,966 ($2.95 per share) in 2012, a significant improvement from the $2,737
($0.21 per share) net loss reported in 2011. Both the property and casualty insurance segment and the reinsurance segment
experienced good operating results during the second half of 2012. The primary drivers of these good results were an increase
in premium income, and a significant decline in catastrophe and storm losses from the record amount experienced in
2011. Management had expended a great deal of time and resources into implementing much needed rate level increases in the
commercial lines of business during the previous two years, and those efforts were successful. Those rate level increases had
an increasingly positive impact on operating results during 2012 as they became earned. Future operating results will continue
to be positively impacted as the rate level increases become fully earned.
Premium income
Premiums earned increased 10.2 percent to $458,846 in 2012 from $416,402 in 2011. A number of factors contributed to
the increase in premium income. In the property and casualty insurance segment, the majority of the increase was attributed to
rate level increases, growth in insured exposures and an increase in retained policies. In the reinsurance segment, the increases
were attributed to rate level increases and a new offshore energy and liability account. Premium rate levels improved in all
lines of business, and were expected to continue to improve in 2013.
Premiums earned for the property and casualty insurance segment increased 11.0 percent to $357,139 in 2012 from
$321,649 in 2011. The vast majority of the increase in premiums earned was associated with renewal business, and reflected a
combination of rate level increases, growth in insured exposures and an increase in retained policies. Renewal business
premium increased 9.5 percent during 2012. Renewal rates on the six major lines of commercial business increased steadily
during 2012 and ended the year at approximately 6 percent. Management anticipated that overall rate level increases of
approximately 6 percent would continue to be achieved at least through 2013. Renewal rates for personal lines of business also
increased, but did not have a significant impact on premiums earned due to an intentional reduction in policy count. Overall
policy retention remained stable at approximately 87 percent. New business continued to account for a relatively small portion
(just 14 percent) of the pool participants’ direct written premiums. New business premium increased 19 percent in the
commercial lines of business (the associated policy count increased 8.5 percent), but total new business premium increased
only 7 percent due to a significant decline in personal lines new business premium. New business applications in the
commercial lines of business were up significantly during 2012, but careful underwriting resulted in a large number of
declinations.
34
Premiums earned for the reinsurance segment declined 14.4 percent in the fourth quarter, but increased 7.3 percent to
$101,707 for the year from $94,753 in 2011. The decrease in the fourth quarter was primarily attributed to a significant decline
in the year-end estimate of “earned but not reported” premiums on several pro rata accounts, including the new offshore energy
and liability account. The increase for the year was primarily attributed to rate level increases implemented during the January
1 renewal season and the new offshore energy and liability proportional account; however, the increase was limited by the
cancellation of a large pro rata account written by MRB. Rate levels, which had previously been declining, began trending
higher during 2011 due to the large number of severe catastrophic events that occurred during the year. This improved pricing
continued through the January 1, 2012 renewal season, with rate increases averaging approximately 10 percent, and larger
increases being achieved on contracts containing catastrophe exposures. However, the pace of rate increases slowed somewhat
during 2012, with July 1 renewal rates increasing approximately five to seven percent. The new offshore energy and liability
account generated approximately $12,375 of annual premiums (after the 10.0 percent charge for the excess of loss coverage)
during the 2012 underwriting year. Since the underlying policies had effective dates throughout the 2012 underwriting year,
approximately 48.0 percent of this amount was earned during calendar year 2012, with the balance to be earned during calendar
year 2013. Annual premiums for the 2013 underwriting year were projected to be approximately $14,000. The account
covered oil rigs, platforms, and floating production, storage and offloading systems worldwide, with 56 percent of the
premiums coming from the United States and United Kingdom. The focus was on small to medium-sized enterprises involved
with energy exploration and production, which comprised approximately 75 percent of the account. The account also included
a small number of larger enterprises and a number of state-owned oil and gas companies. Specialized underwriting and
engineering areas worked closely together to technically analyze each risk. Gulf of Mexico windstorm exposure was minimal
and first party removal of wreck was restricted in liability policies.
Effective January 1, 2012, MRB cancelled a large pro rata account with poor experience. As a result, the reinsurance
segment recorded a $3,406 portfolio adjustment decrease in premiums written in the first quarter of 2012 that offset a
corresponding decrease in unearned premiums. Ten percent of this amount ($341) was recorded as a reduction in the cost of
the excess of loss coverage provided by Employers Mutual, and the reinsurance segment recognized $1,362 of negative
commission allowance (commission income) to compensate for the acquisition costs incurred to generate this business.
Effective January 1, 2011, Country Mutual Insurance Company (Country Mutual) discontinued its participation in
MRB. As a result, Employers Mutual became a one-fourth participant in MRB, up from its previous approximate one-fifth
participation. In connection with Employers Mutual’s increased participation in MRB, the reinsurance segment recorded a
$1,023 portfolio adjustment increase in premiums written in the first quarter of 2011 that offset a corresponding increase in
unearned premium. The reinsurance segment ceded ten percent of this amount ($102) to Employers Mutual under the terms of
the excess of loss agreement, and recognized $399 of commission expense to compensate Country Mutual for the acquisition
costs incurred to generate this business.
Effective January 1, 2013, Church Mutual Insurance Company (Church Mutual) became a member of MRB. As a
result, Employers Mutual would once again become a one-fifth participant in MRB. The addition of Church Mutual was
expected to strengthen the association’s surplus base and favorably impact future marketing efforts. However, there would be a
short-term negative impact on the Company’s earned premiums since the association’s business would now be split between
five participants rather than four.
Under the terms of the quota share agreement, the reinsurance subsidiary received reinstatement premium income that
was collected by Employers Mutual from the ceding companies when reinsurance coverage was reinstated after a loss event;
however, the cap on losses assumed per event contained in the excess of loss agreement was automatically reinstated without
cost. This arrangement could 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. The reinsurance subsidiary recognized $2,344 and $3,139 of reinstatement premium income (net
amount after 10 percent was ceded back to Employers Mutual under the terms of the excess of loss agreement) in 2012 and
2011, respectively.
35
Losses and settlement expenses
Losses and settlement expenses decreased 11.5 percent to $303,388 in 2012 from $342,974 in 2011, and the loss and
settlement expense ratio decreased to 66.1 percent in 2012 from 82.4 percent in 2011. The significant improvement in the 2012
loss and settlement expense ratio was primarily attributed to a decline in catastrophe and storm losses, as well as the increase in
premium income previously noted. Catastrophe and storm losses declined from the record amount experienced in 2011 to a
more normal level of 11.7 percentage points of the 2012 loss and settlement expense ratio. The most recent 10-year average for
this period (which included the record catastrophe and storm losses experienced in 2008 and 2011) was 9.7 percentage
points. In comparison, catastrophe and storm losses accounted for 19.3 percentage points of the loss and settlement expense
ratio in 2011. Losses associated with Superstorm Sandy were capped at $4,000 in the reinsurance segment and totaled only
$907 in the property and casualty insurance segment. Since premiums earned were utilized in the calculation of the loss and
settlement expense ratio, the rate level increases implemented during the previous two years also had a favorable impact on the
2012 ratio. The actuarial analysis of the Company’s carried reserves as of December 31, 2012 indicated that the level of
reserve adequacy was consistent with other recent evaluations. From management’s perspective, this measure was 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 decreased to 65.5 percent in 2012
from 78.2 percent in 2011. This decrease was primarily attributed to a significant decline in catastrophe and storm losses and
an increase in premium income. Catastrophe and storm losses declined in 2012 to a more normal level of 9.6 percentage points
of the loss and settlement expense ratio, which was slightly higher than the most recent 10-year average of 9.2 percentage
points (which included the record catastrophe and storm losses experienced in 2008 and 2011). In comparison, catastrophe and
storm losses accounted for 16.3 percentage points of the 2011 loss and settlement expense ratio. Claim frequency declined in
nearly all lines of business; however, the savings associated with this decline was largely offset by an increase in loss severity.
Large losses (which the Company defined as losses greater than $500 for the EMC Insurance Companies’ pool, excluding
catastrophe and storm losses) decreased to $21,241 in 2012 from $24,044 in 2011. The property and casualty insurance
segment experienced $13,057 of favorable development on prior years’ reserves in 2012, compared to $20,163 in 2011. The
development amount for 2012 included $4,551 of adverse development stemming from changes in the allocation of bulk
reserves between the current and prior accident years, while the 2011 amount included $1,396 of favorable development
stemming from similar changes in the allocation of bulk reserves. Development on prior years’ reserves resulting solely from
changes in the allocation of bulk reserves between the current and prior accident years did not have an impact on earnings.
This was due to the fact that such development was simply a mathematical by-product of the mechanical process used to
reallocate bulk reserves to the various accident years for financial reporting purposes. Earnings were only impacted by changes
in the total amount of carried reserves.
The loss and settlement expense ratio for the reinsurance segment decreased to 68.3 percent in 2012 from 96.6 percent in
2011. This decrease was primarily attributed to the rate level increases previously noted and a decline in catastrophe and storm
losses. While less than 2011, catastrophe and storm losses were well above average in 2012. During 2012, the reinsurance
segment had three events, including Superstorm Sandy, which exceeded the $4,000 retention amount under the excess of loss
agreement. Losses from these three events totaled $23,722, with $12,000 retained by the reinsurance segment and the
remaining $11,722 ($11,000 from Superstorm Sandy alone) ceded to Employers Mutual. During 2011, the reinsurance segment
experienced an unprecedented five events with losses greater than the $3,000 retention amount. Losses from those five events
totaled $31,500 at December 31, 2011, with $15,000 retained by the reinsurance segment and the remaining $16,500 ceded to
Employers Mutual. During 2012, the reinsurance segment also incurred $6,057 of losses on U.S. multi-peril crop reinsurance
programs that resulted from the severe drought conditions that existed in much of the United States. Because the losses from
the crop reinsurance programs were not attributable to a specific event, they were not subject to the $4,000 cap on losses per
event under the excess of loss agreement. The favorable development experienced on prior years’ reserves in 2012 was
primarily from the HORAD book of business, and reflected a reduction in IBNR reserves for prior accident years that was
greater than the actual losses reported for those accident years.
Acquisition and other expenses
Acquisition and other expenses increased 12.2 percent to $153,824 in 2012 from $137,089 in 2011. The acquisition
expense ratio also increased, totaling 33.5 percent in 2012 compared to 32.9 percent in 2011. The large increase in acquisition
and other expenses was primarily attributed to significant increases in both contingent commission and policyholder dividend
expenses, both of which were reflective of the better underwriting results experienced in 2012. The increase in the acquisition
expense ratio was tempered by the significant increase in premium income.
36
For the property and casualty insurance segment, the acquisition expense ratio increased to 36.8 percent in 2012 from
36.2 percent in 2011. The increase reflected higher contingent commission and policyholder dividend expenses resulting from
the better underwriting results experienced in 2012, but was moderated by the significant increase in premium income.
For the reinsurance segment, the acquisition expense ratio increased to 22.0 percent in 2012 from 21.6 percent in 2011.
While the increase was primarily attributed to higher contingent commission expense, the impact on the acquisition expense
ratio was limited by non-recurring commission adjustments recorded in 2012 and 2011. During 2012, a $1,362 negative
commission allowance was recorded in connection with the cancellation of a large MRB account. However, a portion of this
negative commission allowance was offset by the resulting release (amortization) of the related deferred policy acquisition cost
asset, resulting in an immediate expense reduction of approximately $654 during the first quarter of 2012. In 2011, the
reinsurance segment recognized $399 of commission expense in conjunction with Country Mutual’s withdrawal from MRB. A
portion of this commission expense was capitalized as part of the deferred policy acquisition cost asset (to be expensed as the
related premiums was earned), resulting in an immediate expense recognition of approximately $181 during the first quarter of
2011.
Investment results
Net investment income decreased 4.3 percent to $44,145 in 2012 from $46,111 in 2011. The decrease was primarily
attributed to the low interest rate environment that had persisted during the previous several years. During that time period,
available cash flow was invested in fixed maturity securities with progressively lower yields, resulting in a decline in the
annualized yield of the fixed maturity portfolio. The average coupon on the fixed maturity portfolio was 4.23 percent at
December 31, 2012, compared to 4.58 percent and 4.98 percent at December 31, 2011 and 2010, respectively. Management
was actively pursuing ways to minimize the decline in investment income without increasing overall risk, such as the
implementation of the new equity strategy during 2012 that emphasized dividend income (see discussion below); however,
investment income was projected to decline an additional 5.0 percent in 2013. The effective duration of the Company’s fixed
maturity portfolio was 4.20 at December 31, 2012, compared to 4.65 at December 31, 2011.
At the end of the first quarter of 2012, management reinvested approximately $35,000 from the current equity portfolio
and $10,000 of cash into a new equity portfolio with an emphasis on dividend income. In addition to a higher dividend return,
this new equity strategy was expected to carry less market volatility. The Company’s equity security holdings produced
dividend income of $3,852 in 2012, compared to $2,362 in 2011.
The Company reported a net realized investment gain of $8,017 in 2012 compared to $9,303 in 2011. The Company
experienced an unusually large amount of realized investment gains in the first quarters of both 2012 and 2011, totaling $8,918
and $8,258, respectively. The realized investment gains recognized in the first quarter of 2012 primarily resulted from the sale
of equity securities. Proceeds from those sales were used to fund the purchase of equity securities in the new portfolio that
emphasized dividend income. The realized investment gains recognized during the first quarter of 2011 resulted from normal
activity in the equity portfolio when market prices were at elevated levels. “Other-than-temporary” investment impairment
losses totaled $186 during 2012 compared to $5,960 in 2011. The impairment losses in 2012 were recognized on four equity
securities, while the impairment losses in 2011 were recognized on four residential mortgage-backed securities (all resulting
from the intent to sell) and 36 equity securities.
Other expense
Other expense decreased 20.6 percent to $2,122 in 2012 from $2,673 in 2011. The decrease was attributed to changes in
the foreign currency exchange gains and losses recognized on the reinsurance segment’s foreign currency denominated
reinsurance business. Foreign currency exchange losses of $25 and $592 were recognized during 2012 and 2011, respectively.
Income tax
The Company had income tax expense of $13,667 in 2012 compared to an income tax benefit of $8,255 in 2011. The
effective tax rate for 2012 was 26.5 percent compared to 75.1 percent in 2011. Note that the effective tax rate for 2011 was
based on a tax benefit relative to pre-tax loss, thus an effective tax rate greater than the United States federal corporate tax rate
of 35 percent was indicative of a favorable or “low” effective tax rate. The fluctuation in the effective tax rate primarily
reflected the variation in the amount of pre-tax income (loss) reported relative to the amount of tax-exempt interest income
earned.
37
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 $86,833 in 2013, $55,038 in 2012 and $11,765 in 2011. 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. The Company invests in high quality,
liquid securities to match the anticipated payments of losses and settlement expenses of the underlying insurance policies.
Because the timing of the losses is uncertain, the majority of the portfolio is maintained in short to intermediate maturity
securities that can be easily liquidated or that generate adequate cash flow to meet liabilities.
The Company is a holding company whose principal asset is its investment in its property and casualty insurance
subsidiaries and its reinsurance subsidiary (“insurance subsidiaries”). As a holding company, the Company is dependent upon
cash dividends from its insurance subsidiaries to meet all its obligations, including cash dividends to stockholders and the
funding of the Company’s stock repurchase programs. State insurance regulations restrict the maximum amount of dividends
insurance companies can pay without prior regulatory approval. The maximum amount of dividends that the insurance
subsidiaries can pay to the Company in 2014 without prior regulatory approval is approximately $47,976. The Company
received $9,974, $12,050 and $10,000 of dividends from its insurance subsidiaries and paid cash dividends to its stockholders
totaling $11,275, $10,439 and $9,941 in 2013, 2012 and 2011, respectively.
The Company’s insurance subsidiaries must maintain adequate liquidity to ensure that their cash obligations are met;
however, because of the property and casualty insurance subsidiaries’ participation in the pooling agreement and the
reinsurance subsidiary’s participation in the quota share agreement, they do not have the daily liquidity concerns normally
associated with an insurance 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 inter-
company balances generated by these transactions with the participating companies on a monthly (pool participants) or
quarterly (reinsurance subsidiary) basis.
At the insurance subsidiary level, the primary sources of cash are premium income, investment income and proceeds
from called or matured 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 subsidiaries maintain investment and reinsurance programs
intended to provide adequate funds to pay claims without forced sales of investments. In addition, the insurance 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 insurance subsidiaries also have the ability to borrow funds on a short-term basis (180 days) from
Employers Mutual and its subsidiaries and affiliate under an Inter-Company Loan Agreement.
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 fixed maturity securities as available-for-sale to provide
flexibility in the management of its investment portfolio. At December 31, 2013 and 2012, the Company had net unrealized
holding gains, net of deferred taxes, on its fixed maturity securities available-for-sale of $11,968 and $51,318, 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. 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.
38
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 prolonged low
interest rate environment, proceeds from calls and maturities in recent years have been reinvested at lower yields, which has
had a negative impact on investment income.
The Company held $2,392 and $863 in minority ownership interests in limited partnerships and limited liability
companies at December 31, 2013 and 2012, respectively. The Company does not hold any other unregistered securities.
The Company’s cash balance was $239 and $330 at December 31, 2013 and 2012, respectively.
Employers Mutual contributed $14,000, $15,000 and $17,400 to its qualified pension plan in 2013, 2012 and 2011,
respectively, and plans to contribute approximately $15,000 to the qualified pension plan in 2014. The Company reimbursed
Employers Mutual $4,321, $4,589 and $5,348 for its share of the pension contributions in 2013, 2012 and 2011, respectively.
Employers Mutual contributed $500, $1,500 and $8,000 to its postretirement benefit plans in 2013, 2012 and 2011,
respectively, but does not expect to make any contributions to the postretirement benefit plans in 2014 due to the plan
amendment that was announced during 2013. The Company reimbursed Employers Mutual $144, $434 and $2,244 for its
share of the postretirement benefit plan contributions in 2013, 2012 and 2011, 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 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, 2013.
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 annual
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, 2013, the Company’s insurance subsidiaries had total adjusted statutory capital well in excess of the minimum
RBC requirement.
The Company’s total cash and invested assets at December 31, 2013 and 2012 are summarized as follows:
December 31, 2013
Amortized
cost
Fair
value
Percent of
total
fair value
Carrying
value
Fixed maturity securities available-for-sale
$
1,009,572
$
1,027,984
81.8% $
1,027,984
Equity securities available-for-sale
Cash
Short-term investments
Other long-term investments
113,835
239
56,166
2,392
169,848
239
56,166
2,392
13.5
—
4.5
0.2
169,848
239
56,166
2,392
$
1,182,204
$
1,256,629
100.0% $
1,256,629
39
Fixed maturity securities available-for-sale
Equity securities available-for-sale
Cash
Short-term investments
Other long-term investments
December 31, 2012
Amortized
cost
920,844
111,852
330
53,419
863
1,087,308
$
$
$
$
Fair
value
999,795
140,294
330
53,419
863
1,194,701
Percent of
total
fair value
83.7% $
11.7
—
4.5
0.1
100.0% $
Carrying
value
999,795
140,294
330
53,419
863
1,194,701
The amortized cost and estimated fair value of fixed maturity and equity securities at December 31, 2013 were as
follows:
December 31, 2013
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
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Estimated
fair value
$
9,540
$
191
$
319
$
156,981
346,554
63,185
96,058
11,456
325,798
1,009,572
19,273
12,645
12,801
9,162
10,722
14,102
11,190
13,358
10,582
113,835
1,356
15,040
5,842
1,073
1,192
16,542
41,236
9,374
6,301
9,144
3,849
10,309
7,341
6,075
4,489
316
57,198
11,391
4,542
88
2,952
—
3,532
22,824
149
29
—
—
—
326
1
36
644
1,185
9,412
146,946
357,052
68,939
94,179
12,648
338,808
1,027,984
28,498
18,917
21,945
13,011
21,031
21,117
17,264
17,811
10,254
169,848
Total securities available-for-sale
$
1,123,407
$
98,434
$
24,009
$
1,197,832
40
The Company’s property and casualty insurance subsidiaries have $25,000 of surplus notes issued to Employers
Mutual. Effective February 1, 2013, the interest rate on the surplus notes was reduced to 1.35 percent from the previous 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 2018. 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
$384, $900 and $900 in 2013, 2012 and 2011, respectively. At December 31, 2013, the Company’s property and casualty
insurance subsidiaries had received approval for the payment of interest accrued on the surplus notes during 2013.
As of December 31, 2013, the Company had no material commitments for capital expenditures.
Off-Balance Sheet Arrangements
Employers Mutual collects from agents, policyholders and ceding companies all premiums associated with the insurance
business produced by the pool participants and the assumed reinsurance business ceded to the reinsurance subsidiary.
Employers Mutual also collects from its reinsurers all ceded paid losses and settlement expenses associated with reinsurance
contracts covering the pool participants' business and the fronting business ceded to the reinsurance subsidiary. Employers
Mutual settles with the pool participants (monthly) and the reinsurance subsidiary (quarterly) the premiums written and ceded
paid losses and settlement expenses from these insurance policies and reinsurance contracts, providing full credit for the
premiums written and ceded paid losses and settlement expenses generated during the period (not just the collected
portion). Due to this arrangement, and since a significant portion of the 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, and to a lesser extent, ceded paid losses and settlement expenses recoverable. 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 off-
balance sheet arrangements with an unconsolidated entity that results in credit-risk exposures (Employers Mutual’s insurance
and reinsurance premium receivable balances, and ceded paid loss and settlement expense recoverable amounts) that are not
reflected in the Company’s financial statements. The average annual expense for such charge-offs allocated to the Company
over the past ten years is $332. 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 accordingly, no loss contingency liability has been recorded.
Investment Impairments and Considerations
The Company recorded “other-than-temporary” investment impairment losses totaling $64 on three equity securities
during 2013, compared to $186 on four equity securities during 2012.
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.
41
At December 31, 2013, 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 amortized cost 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 amortized cost, 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 amortized cost of these securities were not “other-than-temporarily” impaired at December 31, 2013. 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 $15,606, 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, 2013.
December 31, 2013
Less than twelve months
Twelve months or longer
Total
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fixed maturity securities:
U.S. treasury
$
4,507
$
319
$
— $
— $
4,507
$
319
Total, fixed maturity securities
308,972
18,048
U.S. government-sponsored
agencies
Obligations of states and political
subdivisions
Commercial mortgage-backed
Residential mortgage-backed
Corporate
Equity securities:
Common stocks:
Financial services
Information technology
Consumer staples
Energy
Industrials
Other
Non-redeemable preferred stocks
Total, equity securities
Total temporarily impaired
securities
93,856
8,120
24,053
3,271
117,909
11,391
74,523
10,551
44,243
81,292
4,335
88
2,482
2,704
2,801
610
30
1,450
625
1,499
2,121
9,136
149
29
—
326
1
36
128
669
3,008
—
4,600
10,547
42,208
—
—
—
—
—
—
1,484
1,484
207
—
470
828
77,531
10,551
48,843
91,839
4,542
88
2,952
3,532
4,776
351,180
22,824
—
—
—
—
—
—
516
516
2,801
610
30
1,450
625
1,499
3,605
10,620
149
29
—
326
1
36
644
1,185
$
318,108
$
18,717
$
43,692
$
5,292
$
361,800
$
24,009
42
Following is a schedule of the maturity dates of the fixed maturity securities presented in the above table.
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
Fair value
Gross
unrealized
loss
$
— $
— $
26,033
60,512
225,025
62,434
25,603
58,138
208,045
59,394
—
430
2,374
16,980
3,040
$
374,004
$
351,180
$
22,824
The Company does not purchase non-investment grade fixed maturity securities. Any non-investment grade fixed
maturity securities held are the result of rating downgrades that occurred subsequent to their purchase. At December 31, 2013,
non-investment grade fixed maturity securities held by the Company included nine securities, all of which were residential
mortgage-backed securities. All of these securities were in an unrealized gain position at December 31, 2013.
Following is a schedule of gross realized losses recognized in 2013 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.
Realized losses from sales
Book
value
Sales
price
Gross
realized
losses
"Other-
than-
temporary"
impairment
losses
Total
gross
realized
losses
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
$
3,990
$
3,687
$
4,985
4,563
—
—
—
—
—
—
Subtotal, fixed maturity securities
8,975
8,250
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
Subtotal, equity securities
11,326
93
—
624
—
10,547
77
—
521
—
12,043
11,145
303
422
—
—
—
725
779
16
—
103
—
898
$
— $
—
—
—
—
—
61
—
—
—
3
64
303
422
—
—
—
725
840
16
—
103
3
962
Total realized losses in earnings
$
21,018
$
19,395
$
1,623
$
64
$
1,687
43
LEASES, COMMITMENTS AND CONTINGENT LIABILITIES
The following table reflects the Company's contractual obligations as of December 31, 2013. Included in the table are
the estimated payments that the Company expects to make in the settlement of its loss and settlement expense 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 2023. 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.
Payments due by period
Total
Less than 1
year
1 - 3 years
4 - 5 years
More than 5
years
Contractual obligations
Loss and settlement expense reserves (1)
$
610,181
$
246,523
$
226,991
$
81,436
$
Long-term debt (2)
Interest expense on long-term debt (3)
Real estate operating leases
25,000
3,422
7,641
—
384
1,366
—
675
2,480
—
675
1,805
55,231
25,000
1,688
1,990
Total
(1)
(2)
(3)
$
646,244
$
248,273
$
230,146
$
83,916
$
83,909
The amounts presented are estimates of the dollar amounts and time periods 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.
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.
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 (rate was decreased to 1.35 percent effective February 1, 2013, with the next review scheduled for
2018). Interest payments on the surplus notes are subject to prior approval of the regulatory authorities of the issuing
company’s state of domicile. 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. The Company has accrued estimated
guaranty fund assessments of $894 and $1,016 as of December 31, 2013 and 2012, respectively. Premium tax offsets of $894
and $996, which are related to prior guarantee fund payments and current assessments, have been accrued as of December 31,
2013 and 2012, 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. The Company has accrued estimated second-injury fund assessments of $1,747 and $1,579 as of December 31,
2013 and 2012, 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 those annuities was $178 at December 31, 2013. The Company had a
contingent liability for the aggregate guaranteed amount of the annuities of $245 at December 31, 2013 should the issuers of
those annuities fail to perform. The probability of a material loss due to failure of performance by the issuers of these annuities
is considered remote.
44
MARKET RISK
The main objectives in managing the Company’s investment portfolios are to maximize after-tax investment return while
minimizing 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.
45
Hypothetical
change in
interest rate
(bp=basis
points)
Estimated fair
value after
hypothetical
change in
interest rate
Hypothetical
percentage
increase
(decrease) in
stockholders'
equity
Estimated fair
value
December 31, 2013
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury
$
9,412
200 bp decrease
$
100 bp decrease
100 bp increase
200 bp increase
U.S. government-sponsored agencies
$
146,946
200 bp decrease
$
100 bp decrease
100 bp increase
200 bp increase
Obligations of states and political
subdivisions
$
357,052
200 bp decrease
$
Commercial mortgage-backed
Residential mortgage-backed
Other asset-backed
$
$
$
100 bp decrease
100 bp increase
200 bp increase
68,939
200 bp decrease
$
100 bp decrease
100 bp increase
200 bp increase
100 bp decrease
100 bp increase
200 bp increase
12,648
200 bp decrease
100 bp decrease
$
100 bp increase
200 bp increase
94,179
200 bp decrease
$
100,758
Corporate
$
338,808
200 bp decrease
$
100 bp decrease
100 bp increase
200 bp increase
Total fixed maturity securities
$
1,027,984
200 bp decrease
$
100 bp decrease
100 bp increase
200 bp increase
46
10,503
9,935
8,932
8,488
164,108
158,899
134,096
121,875
403,608
382,043
329,761
304,746
72,424
70,634
67,327
65,795
98,102
89,439
84,458
13,714
13,164
12,166
11,712
371,321
354,495
324,173
310,501
1,136,436
1,087,272
965,894
907,575
0.16%
0.07
(0.07)
(0.13)
2.45%
1.71
(1.83)
(3.58)
6.65%
3.57
(3.90)
(7.47)
0.50%
0.24
(0.23)
(0.45)
0.94%
0.56
(0.68)
(1.39)
0.15%
0.07
(0.07)
(0.13)
4.64%
2.24
(2.09)
(4.04)
15.49%
8.47
(8.87)
(17.19)
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, 2013 was 5.65, excluding interest-only securities. Duration extended as interest rates rose during 2013.
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, 2013 would result in a corresponding pre-tax decrease in the fair
value of the Company’s equity portfolio of approximately $15,959.
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, 2013.
December 31, 2013
Rating:
AAA
AA
A
BAA
BA
B
CAA
CA
Total fixed maturities
Securities available-for-sale
(at fair value)
Amount
Percent
$
$
350,283
345,784
271,902
56,185
1,563
1,254
828
185
1,027,984
34.1%
33.6
26.4
5.5
0.2
0.1
0.1
—
100.0%
Ratings for preferred stocks and fixed maturity securities are assigned by nationally recognized statistical rating
organizations (referred to generically as NRSROs, which includes such organizations as Moody’s Investors Services, Inc.,
Standard and Poor's, 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. For further discussion of credit risk and related topics
(i.e., “other-than-temporary” impairment losses, 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.
Municipal fixed maturity securities, including taxable, tax-exempt and pre-refunded securities, totaled $357,052 as of
December 31, 2013. Municipal securities are well diversified between general obligation and revenue bonds, as well as
geographically. The Company’s credit analysis of municipal securities is predominantly based on the underlying credit quality
of the obligor. Therefore, although a portion of the Company’s municipal securities are guaranteed by financial guaranty
insurers, reliance is placed on the underlying obligor to pay all contractual cash flows. The ratings of insured municipal
securities generally reflect the rating of the underlying primary obligor. The average quality of the municipal fixed maturity
securities portfolio is Aa2/AA with over 99 percent of securities rated A3/A- or higher. Approximately $68,023 of the
Company’s 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.
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, 2013, the effective duration of the mortgage-backed securities, excluding interest-only securities, is 3.9 with an
average life of 4.6 years and a yield to worst of 3.0 percent. At December 31, 2012, the effective duration of the mortgage-
backed securities was 2.6, with an average life of 3.3 years and a yield to worst of 1.4 percent.
47
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 January 2014, the Financial Accounting Standards Board (FASB) updated its guidance related to the Investments-
Equity Method and Joint Ventures Topic 323 of the Accounting Standards CodificationTM (Codification or ASC). The objective
of this update is to improve the reporting of investments in flow-through limited liability entities that manage or invest in
affordable housing projects that qualify for low-income housing tax credits. This updated guidance allows an entity to elect to
account for its investments in qualified affordable housing projects using the proportional amortization method if certain
conditions are met. Current accounting guidance contains similar, but more restrictive, conditions to elect to use the effective
yield method to account for these investments. This guidance is to be applied retrospectively to annual and interim reporting
periods beginning after December 15, 2014. Early adoption is permitted. The Company will adopt this guidance during the
first quarter of 2015. Adoption of this guidance is not expected to have an impact on the consolidated financial condition or
operating results of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption “Market Risk” in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations”, which is included in Part II, Item 7 of the Company's Annual Report on Form 10-K, is incorporated herein
by reference.
48
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Report on Internal Control Over Financial Reporting
The management of EMC Insurance Group Inc. and Subsidiaries is responsible for the preparation, integrity and
objectivity of the accompanying Consolidated Financial Statements, as well as all other financial information in this
report. The Consolidated Financial Statements and the accompanying notes have been prepared in accordance with U.S.
generally accepted accounting principles and include amounts that are based on management’s estimates and judgments where
necessary.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, including
safeguarding of assets and reliability of financial records. The Company’s internal control over financial reporting, designed by
or under the supervision of management, 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. This control structure is further reinforced by a program of internal
audits, including audits of the Company’s decentralized branch locations, which requires responsive management action.
There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and
the circumvention or overriding of controls. Accordingly, adequate internal controls can provide only reasonable assurance
with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control
may vary over time.
Management assessed the effectiveness of the Company’s internal control over financial reporting based on criteria
established in “Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this assessment, management believes that, as of December 31, 2013, the Company
maintained effective internal control over financial reporting.
The Audit Committee of the Board of Directors is comprised of three directors who are independent of the Company’s
management. The Audit Committee is responsible for the selection of the independent registered public accounting firm. It
meets periodically with management, the independent registered public accounting firm, and the internal auditors to ensure that
they are carrying out their responsibilities. In addition to reviewing the Company’s financial reports, the Audit Committee is
also responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing
procedures of the Company. The independent registered public accounting firm and the internal auditors have full and free
access to the Audit Committee, with or without the presence of management, to discuss the adequacy of internal control over
financial reporting and any other matters which they believe should be brought to the attention of the Audit Committee.
The Company’s financial statements and internal control over financial reporting have been audited by Ernst & Young
LLP, an independent registered public accounting firm. Management has made available to Ernst & Young LLP all of the
Company’s financial records and related data, as well as the minutes of the stockholders’ and directors’ meetings. Furthermore,
management believes that all representations made to Ernst & Young LLP during its audit were valid and appropriate. Their
reports with respect to the fairness of presentation of the Company’s financial statements and the effectiveness of the
Company’s internal control over financial reporting appear elsewhere in this annual report.
/s/ Bruce G. Kelley
Bruce G. Kelley
President and Chief Executive Officer
/s/ Mark E. Reese
Mark E. Reese
Senior Vice President and Chief Financial Officer
49
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, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). EMC Insurance Group Inc.
and Subsidiaries’ (the Company) management 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
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 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, 2013, 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 of EMC Insurance Group Inc. and Subsidiaries as of December 31, 2013 and 2012, 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, 2013 of EMC Insurance Group Inc. and Subsidiaries and our report dated
March 12, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Des Moines, Iowa
March 12, 2014
50
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 (the
Company) as of December 31, 2013 and 2012, 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, 2013. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with 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, 2013 and 2012, and the consolidated results
of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with
U.S. generally accepted accounting principles.
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, 2013, based on
criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (1992 framework) and our report dated March 12, 2014 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Des Moines, Iowa
March 12, 2014
51
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Investments:
Fixed maturity securities available-for-sale, at fair value (amortized cost
$1,009,572,325 and $920,843,939)
Equity securities available-for-sale, at fair value (cost $113,835,488 and
$111,851,963)
Other long-term investments
Short-term investments
Total investments
Cash
Reinsurance receivables due from affiliate
Prepaid reinsurance premiums due from affiliate
Deferred policy acquisition costs (affiliated $37,413,643 and $34,425,593)
Prepaid pension and postretirement benefits due from affiliate
Accrued investment income
Accounts receivable
Income taxes recoverable
Goodwill
Other assets (affiliated $4,780,053 and $5,760,369)
Total assets
December 31,
2013
2012
$ 1,027,984,013
$
999,794,857
169,848,274
140,293,825
2,391,987
56,165,534
863,257
53,418,914
1,256,389,808
1,194,370,853
238,821
34,759,721
9,717,368
37,792,442
23,120,558
9,984,651
1,079,693
—
941,586
4,908,273
330,392
34,277,728
5,195,892
34,425,593
1,413,104
9,938,714
2,390,955
1,588,089
941,586
5,836,200
$ 1,378,932,921
$ 1,290,709,106
All affiliated balances presented above are the result of related party transactions with Employers Mutual.
See accompanying Notes to Consolidated Financial Statements.
52
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES
Losses and settlement expenses (affiliated $600,313,349 and $577,476,988)
$
610,180,850
$
583,096,965
Unearned premiums (affiliated $218,787,684 and $196,215,465)
220,627,284
196,215,465
December 31,
2013
2012
Other policyholders' funds (all affiliated)
Surplus notes payable to affiliate
Amounts due affiliate to settle inter-company transaction balances
Pension and postretirement benefits payable to affiliate
Income taxes payable
Deferred income taxes
Other liabilities (affiliated $25,160,554 and $22,794,304)
Total liabilities
STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding,
13,306,027 shares in 2013 and 12,909,457 shares in 2012
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total stockholders' equity
8,491,035
25,000,000
13,521,861
3,401,045
1,530,131
12,821,660
28,148,819
6,055,111
25,000,000
19,127,010
30,714,633
—
6,352,690
22,938,068
923,722,685
889,499,942
13,306,027
99,308,749
59,010,489
283,584,971
455,210,236
12,909,457
89,205,881
47,752,375
251,341,451
401,209,164
Total liabilities and stockholders' equity
$ 1,378,932,921
$ 1,290,709,106
All affiliated balances presented above are the result of related party transactions with Employers Mutual.
See accompanying Notes to Consolidated Financial Statements.
53
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
REVENUES
Premiums earned (affiliated $509,703,737, $452,334,205 and
$410,955,792)
Investment income, net
Net realized investment gains, excluding impairment losses on
securities available-for-sale
Total "other-than-temporary" impairment losses on securities available-
for-sale
Portion of "other-than-temporary" impairment losses on fixed maturity
securities available-for-sale reclassified from other comprehensive
income (before taxes)
Net impairment losses on securities available-for-sale
Net realized investment gains
Other income (all affiliated)
Total revenues
LOSSES AND EXPENSES
Losses and settlement expenses (affiliated $326,129,688, $298,798,399
and $338,658,534)
Dividends to policyholders (all affiliated)
Amortization of deferred policy acquisition costs (affiliated
$93,115,663, $82,539,551 and $75,900,854)
Other underwriting expenses (affiliated $65,574,694, $60,981,322 and
$54,541,637)
Interest expense (all affiliated)
Other expense (affiliated $1,347,885, $2,044,343 and $2,830,745)
Total losses and expenses
Income (loss) before income tax expense (benefit)
INCOME TAX EXPENSE (BENEFIT)
Year ended December 31,
2013
2012
2011
$ 515,506,266
$ 458,845,999
$ 416,402,313
43,022,175
44,145,074
46,110,925
9,060,192
8,202,651
15,263,426
(63,647)
(185,623)
(5,874,116)
—
(63,647)
8,996,545
826,361
—
(185,623)
8,017,028
859,426
(86,017)
(5,960,133)
9,303,293
828,110
568,351,347
511,867,527
472,644,641
333,287,449
303,387,715
342,974,437
10,863,688
8,630,580
5,255,568
94,727,668
84,274,773
77,318,057
65,754,441
60,918,591
54,515,442
384,375
2,481,306
900,000
2,122,254
507,498,927
460,233,913
60,852,420
51,633,614
900,000
2,672,654
483,636,158
(10,991,517)
Current
Deferred
Total income tax expense (benefit)
Net income (loss)
16,926,838
406,909
17,333,747
11,594,581
2,072,604
13,667,185
$ 43,518,673
$ 37,966,429
Net income (loss) per common share - basic and diluted
$
3.33
$
2.95
(9,818,259)
1,564,021
(8,254,238)
(2,737,279)
(0.21)
$
$
Average number of common shares outstanding - basic and diluted
13,086,612
12,886,667
12,912,718
All affiliated balances presented above are the result of related party transactions with Employers Mutual.
See accompanying Notes to Consolidated Financial Statements.
54
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income (loss)
OTHER COMPREHENSIVE INCOME (LOSS)
Change in unrealized holding gains (losses) on investment securities,
net of deferred income tax expense (benefit) of ($8,390,117),
$12,849,174 and $10,712,640
Reclassification adjustment for realized investment gains included in
net income (loss), net of income tax expense of ($3,148,791),
($2,805,959) and ($3,286,258)
Change in unrealized holding gains on fixed maturity securities with
"other-than-temporary" impairment, net of deferred income tax
expense of $0, $0 and $7,507
Reclassification adjustment for realized investment losses from fixed
maturity securities with "other-than-temporary" impairment included
in net income (loss), net of income tax benefit of $0, $0 and $30,106
Reclassification adjustment for amounts amortized into net periodic
pension and postretirement benefit cost, net of deferred income tax
benefit of $765,273, $949,985 and $386,606:
Net actuarial loss
Prior service credit
Total reclassification adjustment associated with affiliate's
pension and postretirement benefit plans
Change in funded status of affiliate's pension and postretirement benefit
plans, net of deferred income tax expense (benefit) of $16,835,696,
($2,195) and ($6,318,661):
Year ended December 31,
2013
2012
$ 43,518,673
$ 37,966,429
$
2011
(2,737,279)
(15,581,644)
23,862,752
19,894,900
(5,847,754)
(5,211,069)
(6,103,052)
—
—
—
—
13,941
55,911
1,881,540
(460,319)
2,108,504
(344,247)
1,034,037
(316,050)
1,421,221
1,764,257
717,987
Net actuarial gain (loss)
Prior service credit
Total change in funded status of affiliate's pension and
postretirement benefit plans
13,718,056
17,548,235
(735,887)
731,812
(11,768,434)
33,770
31,266,291
(4,075)
(11,734,664)
Other comprehensive income
11,258,114
20,411,865
2,845,023
Total comprehensive income
$ 54,776,787
$ 58,378,294
$
107,744
All affiliated balances presented above are the result of related party transactions with Employers Mutual.
See accompanying Notes to Consolidated Financial Statements.
55
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common
stock
Additional
paid-in capital
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Total
stockholders'
equity
Balance at December 31, 2010
$ 12,927,678
$ 88,937,294
$
24,495,487
$ 236,492,458
$ 362,852,917
Balance at December 31, 2011
12,875,591
88,310,632
27,340,510
Issuance of common stock through
affiliate's stock plans
Repurchase of common stock
Increase resulting from stock-based
compensation expense associated
with affiliate's stock plans
allocated to the Company
Other comprehensive income
Net income (loss)
Dividends paid to public
stockholders ($.77 per share)
Dividends paid to affiliate ($.77 per
share)
Issuance of common stock through
affiliate's stock plans
Increase resulting from stock-based
compensation expense associated
with affiliate's stock plans
allocated to the Company
Other comprehensive income
Net income (loss)
Dividends paid to public
stockholders ($.81 per share)
Dividends paid to affiliate ($.81 per
share)
Issuance of common stock through
affiliate's stock plans
Increase resulting from stock-based
compensation expense associated
with affiliate's stock plans
allocated to the Company
Other comprehensive income
Net income (loss)
Dividends paid to public
stockholders ($.86 per share)
Dividends paid to affiliate ($.86 per
share)
46,113
(98,200)
928,380
(1,751,696)
196,654
2,845,023
(2,737,279)
974,493
(1,849,896)
196,654
2,845,023
(2,737,279)
33,866
657,686
237,563
20,411,865
37,966,429
691,552
237,563
20,411,865
37,966,429
(3,898,471)
(3,898,471)
(6,042,846)
223,813,862
(6,042,846)
352,340,595
(4,082,080)
(4,082,080)
(6,356,760)
251,341,451
(6,356,760)
401,209,164
396,570
9,811,882
290,986
11,258,114
43,518,673
10,208,452
290,986
11,258,114
43,518,673
(4,526,000)
(4,526,000)
(6,749,153)
$ 283,584,971
(6,749,153)
$ 455,210,236
Balance at December 31, 2012
12,909,457
89,205,881
47,752,375
Balance at December 31, 2013
$ 13,306,027
$ 99,308,749
$
59,010,489
All affiliated balances presented above are the result of related party transactions with Employers Mutual.
See accompanying Notes to Consolidated Financial Statements.
56
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
$
43,518,673
$
37,966,429
$
(2,737,279)
Year ended December 31,
2013
2012
2011
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Losses and settlement expenses (affiliated $22,836,361,
($11,369,598) and $35,721,403)
Unearned premiums (affiliated $22,572,219, $15,526,088 and
$12,793,258)
Other policyholders' funds due to affiliate
Amounts due to/from affiliate to settle inter-company transaction
balances
Net pension and postretirement benefits payable to affiliate
Reinsurance receivables due from affiliate
Prepaid reinsurance premiums due from affiliate
Commissions payable (affiliated $2,078,026, $2,606,348 and
($5,326,118))
Deferred policy acquisition costs (affiliated ($2,988,050),
($3,575,876) and ($2,170,016))
Accrued investment income
Current income tax
Deferred income tax
Net realized investment gains
Other, net (affiliated $1,369,372, $509,256 and ($755,075))
Total adjustments to reconcile net income (loss) to net cash
provided by operating activities
27,083,885
(10,203,282)
37,159,291
24,411,819
2,435,924
15,526,088
993,951
12,793,258
(3,254,591)
(5,605,149)
1,267,439
(481,993)
(4,521,476)
(1,906,617)
2,337,666
5,239,380
4,182,134
2,652,814
(2,569,912)
(9,260,522)
152,400
2,226,816
2,586,605
(5,231,377)
(3,366,849)
(45,937)
3,213,297
406,909
(8,996,545)
5,286,133
(3,575,876)
317,785
8,080,149
2,072,604
(8,017,028)
(561,848)
(2,170,016)
669,355
(7,312,973)
1,564,021
(9,303,293)
(1,385,685)
43,314,273
17,071,711
14,502,770
Net cash provided by operating activities
$
86,832,946
$
55,038,140
$
11,765,491
All affiliated balances presented above are the result of related party transactions with Employers Mutual.
See accompanying Notes to Consolidated Financial Statements.
57
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Year ended December 31,
2013
2012
2011
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturity securities available-for-sale
Disposals of fixed maturity securities available-for-sale
Purchases of equity securities available-for-sale
Disposals of equity securities available-for-sale
Purchases of other long-term investments
Disposals of other long-term investments
Disposals of fixed maturity securities held-to-maturity
Net purchases of short-term investments
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock through affiliate’s stock plans
Excess tax benefit associated with affiliate’s stock plans
Repurchase of common stock
Dividends paid to stockholders (affiliated ($6,749,153),
($6,356,760) and ($6,042,846))
Net cash used in financing activities
NET INCREASE (DECREASE) IN CASH
Cash at the beginning of the year
Cash at the end of the year
Income taxes paid (recovered)
Interest paid to affiliate
—
15,300
388,012
(6,012,815)
(1,192,345)
974,493
6,622
(1,849,896)
$ (264,177,959) $ (246,492,328) $ (210,127,051)
220,875,360
(104,379,504)
98,048,353
175,663,715
(40,579,581)
47,479,217
(1,798,225)
246,134
226,671,993
(84,761,903)
71,007,675
(855,226)
6,496
—
(2,786,194)
(85,952,893)
—
(10,789,988)
(45,213,281)
10,208,452
95,077
—
(11,275,153)
(971,624)
(91,571)
330,392
238,821
13,713,541
900,000
$
$
$
691,552
(2,221)
—
(10,438,840)
(9,749,509)
75,350
255,042
330,392
3,514,432
900,000
$
$
$
(9,941,317)
(10,810,098)
(236,952)
491,994
255,042
(1,759,507)
900,000
$
$
$
All affiliated balances presented above are the result of related party transactions with Employers Mutual.
See accompanying Notes to Consolidated Financial Statements.
58
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
EMC Insurance Group Inc., a majority owned subsidiary of Employers Mutual Casualty Company (Employers Mutual),
is an insurance holding company with operations in property and casualty insurance and reinsurance. The Company conducts
its property and casualty insurance operations through the following subsidiaries: EMCASCO Insurance Company, Illinois
EMCASCO Insurance Company and Dakota Fire Insurance Company, and its reinsurance operations through its subsidiary,
EMC Reinsurance Company. The Company also has an excess and surplus lines insurance agency subsidiary, EMC
Underwriters, LLC. 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 writes property and casualty insurance in both commercial and personal lines of insurance, with a focus
on medium-sized commercial accounts. Approximately 37 percent of the premiums written are in Iowa and contiguous
states. The Company’s reinsurance business is primarily written through a quota share reinsurance agreement with Employers
Mutual. A small portion of the assumed reinsurance business is written on a direct basis, outside the quota share reinsurance
agreement.
Principles of Consolidation and Basis of Presentation
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.
Costs related to the acquisition of insurance contracts are deferred and amortized to expense as the associated premium
revenue is recognized. Only incremental costs or costs directly related to the successful acquisition of new or renewal
insurance contracts are to be capitalized. Accordingly, acquisition costs consist of commissions, premium taxes, and salary and
benefit expenses of employees directly involved in the underwriting of insurance policies that are successfully issued.
The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to the
estimated realizable value. In determining estimated realizable value, the computation gives effect to the premium to be
earned, related investment income, anticipated losses and settlement expenses, anticipated policyholder dividends, and certain
other costs expected to be incurred to administer the insurance policies as the premium is earned. The anticipated losses and
settlement expenses are not discounted and are based on the Company’s projected loss and settlement expense ratios for the
next twelve months, which include catastrophe loads based on historical results adjusted for recent trends. The occurrence of a
significant catastrophe, and/or accumulation of catastrophes would not have a direct impact on the determination of premium
deficiencies; however, such occurrences would be included in the historical results that are used to establish the catastrophe
loads. A premium deficiency is first recognized by expensing the amount of unamortized deferred policy acquisition costs
necessary to eliminate the deficiency. If the premium deficiency is greater than the unamortized deferred policy acquisition
costs, a liability is accrued for the excess deficiency. The Company did not record a premium deficiency for the years ended
December 31, 2013, 2012 and 2011.
59
Certain commercial lines of business written by the property and casualty insurance subsidiaries, 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 28 percent of the property and casualty
insurance subsidiaries’ total net commercial premiums written in 2013. Policyholder dividends are accrued over the terms of
the underlying policy periods.
Liabilities for losses reflect losses incurred through the balance sheet date and 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 and excess of loss agreements (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
Currently, all securities are 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 consist of a holding in a limited partnership that is carried under the equity method
of accounting, and holdings in limited partnerships and limited liability companies designed for the distribution of tax credits
that are carried at amortized cost. Short-term investments generally include money market funds, U.S. Treasury bills and
commercial paper that are carried at fair value, which approximates cost.
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. Amortization of premiums and discounts on mortgage-backed securities incorporates
prepayment assumptions to estimate expected lives. 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, 2013 and 2012 are securities on deposit with various regulatory authorities as
required by law amounting to $11,533,168 and $11,557,194, 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. When an equity security is deemed to be “other-than-temporarily” impaired, the carrying value is reduced to fair
value and a realized loss is recognized and charged to income. For fixed maturity securities, 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”. Alternatively, if the Company has the intent to sell a fixed maturity security that is in an unrealized loss position, or
assesses that it will "more likely than not" be required to sell a fixed maturity security that is in an unrealized loss position
before recovery of its amortized cost basis, then the carrying value is reduced to fair value and the entire amount of the
impairment is recognized through earnings.
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.
60
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 a former 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 restricted stock awards is rendered, or the fair value of the SAR
agreement changes) 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 plans have an impact
on the Company’s capital accounts, the disclosures required by the Compensation – Stock Compensation Topic 718 of the
Financial Accounting Standards Board (FASB) Accounting Standards Codification™ (Codification or 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.”
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.
61
Off-Balance-Sheet Credit Exposure
Employers Mutual collects from agents, policyholders and ceding companies all premiums associated with the insurance
business produced by the pool participants and the assumed reinsurance business ceded to the reinsurance subsidiary.
Employers Mutual also collects from its reinsurers all ceded paid losses and settlement expenses associated with reinsurance
contracts covering the pool participants' business and the fronting business ceded to the reinsurance subsidiary. Employers
Mutual settles with the pool participants (monthly) and the reinsurance subsidiary (quarterly) the premiums written and ceded
paid losses and settlement expenses from these insurance policies and reinsurance contracts, providing full credit for the
premiums written and ceded paid losses and settlement expenses generated during the period (not just the collected
portion). Due to this arrangement, and since a significant portion of the 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, and to a lesser extent, ceded paid losses and settlement expenses recoverable. 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 off-
balance sheet arrangements with an unconsolidated entity that results in credit-risk exposures (Employers Mutual’s insurance
and reinsurance premium receivable balances, and ceded paid loss and settlement expense recoverable amounts) that are not
reflected in the Company’s financial statements. The average annual expense for such charge-offs allocated to the Company
over the past ten years is $332,444. 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 accordingly, no loss contingency liability has been recorded.
Foreign Currency Transactions
Included in the underlying reinsurance business assumed by 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 reinsurance subsidiary
also has foreign currency exchange gains/losses associated with the business assumed outside 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 a component of other
expense in the consolidated statements of income.
Net Income (Loss) Per Share - Basic and Diluted
The Company’s basic and diluted net income (loss) per share is computed by dividing net income (loss) 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 2013, 2012 and 2011 that would have been dilutive to the calculation of net income (loss) 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 impairment 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 the income statement equal to the excess amount, but not greater than the balance of the goodwill. Goodwill was not
deemed to be impaired in 2013, 2012 or 2011.
62
Recent Accounting Pronouncements
In February 2013, the FASB updated its guidance related to the Comprehensive Income Topic 220 of the ASC. The
objective of this update was to improve the reporting of reclassifications out of accumulated other comprehensive income. This
updated guidance requires an entity to report the impact of the reclassified amounts on the respective line items of the statement
of income if the amount is required to be reclassified in its entirety. For items that are not reclassified in their entirety on the
statement of income in the same reporting period, cross-referencing to other existing disclosures that provide additional detail
about those amounts is required. This guidance was effective for the Company beginning January 1, 2013, and did not have a
material impact on the consolidated financial statements. This guidance did not impact the requirements for reporting of
comprehensive income under FASB guidance issued in June 2011 (effective for the Company on January 1, 2012), which
changed the presentation of comprehensive income in the financial statements. That guidance eliminated the presentation
options contained in previous guidance, and instead required entities to report components of comprehensive income in either a
continuous statement of comprehensive income or two separate but consecutive statements that show the components of net
income and other comprehensive income ("OCI"), including adjustments for items that are reclassified from OCI to net income.
Neither guidance changed the items that must be reported in OCI, or when an item of OCI must be reclassified to net income.
See Note 14, Accumulated Other Comprehensive Income, for further details.
New Accounting Pronouncements
In January 2014, the FASB updated its guidance related to the Investments-Equity Method and Joint Ventures Topic 323
of the ASC. The objective of this update is to improve the reporting of investments in flow-through limited liability entities
that manage or invest in affordable housing projects that qualify for low-income housing tax credits. This updated guidance
allows an entity to elect to account for its investments in qualified affordable housing projects using the proportional
amortization method if certain conditions are met. Current accounting guidance contains similar, but more restrictive,
conditions to elect to use the effective yield method to account for these investments. This guidance is to be applied
retrospectively to annual and interim reporting periods beginning after December 15, 2014. Early adoption is permitted. The
Company will adopt this guidance during the first quarter of 2015. Adoption of this guidance is not expected to have an impact
on the consolidated financial condition or operating results of the Company.
2.
AFFILIATION AND TRANSACTIONS WITH AFFILIATES
The operations of the Company are highly integrated with those of Employers Mutual through participation in a property
and casualty reinsurance pooling agreement (the "pooling agreement"), a reinsurance retrocessional quota share agreement (the
"quota share agreement") and an excess of loss reinsurance agreement (the “excess of loss agreement”). All transactions
occurring under the pooling agreement, quota share agreement and excess of loss agreement are based on statutory accounting
principles. Certain adjustments are made to the statutory-basis amounts assumed by the property and casualty insurance
subsidiaries and the reinsurance subsidiary to bring the amounts into compliance with GAAP.
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 a pooling agreement with Employers Mutual. 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 pool 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 month. 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.
63
The purpose of the pooling agreement is to spread the risk of an exposure insured by any of the pool participants among
all the companies. The pooling agreement produces a more uniform and stable underwriting result from year to year for all
companies in the pool than might be experienced individually. In addition, each company benefits from the capacity of the
entire pool, rather than being limited to policy exposures of a size commensurate with its own assets, and from the wide range
of policy forms, lines of insurance written, rate filings and commission plans offered by each of the companies.
Reinsurance Subsidiary
The Company’s reinsurance subsidiary is party to a quota share agreement and an excess of loss reinsurance agreement
with Employers Mutual. Under the terms of the quota share agreement, the reinsurance subsidiary assumes 100 percent of
Employers Mutual’s assumed reinsurance business, subject to certain exceptions. Under the terms of the excess of loss
agreement (covering both business assumed from Employers Mutual through the quota share agreement, as well as business
obtained outside the quota share agreement), the reinsurance subsidiary retains the first $4,000,000 of losses per event, and also
retains 20.0 percent of any losses between $4,000,000 and $10,000,000 and 10.0 percent of any losses between $10,000,000
and $50,000,000. During 2012 and 2011, all losses associated with any one event above $4,000,000 and $3,000,000,
respectively, were ceded to Employers Mutual. The cost of the excess of loss reinsurance protection is 9.0 percent (10.0
percent in 2012 and 2011) of the reinsurance subsidiary’s total assumed reinsurance premiums written.
The terms of the excess of loss agreement have been revised beginning January 1, 2014. Effective January 1, 2014, the
cost of the excess of loss coverage will decrease from the current 9.0 percent of total assumed reinsurance premiums written to
8.0 percent of total assumed reinsurance premiums written (no changes to the amount of losses retained).
The reinsurance subsidiary does not directly reinsure any of the insurance business written by Employers Mutual or the
other pool participants; however, Employers Mutual assumes reinsurance business from the Mutual Reinsurance Bureau
(MRB) underwriting association, which provides a small amount of reinsurance protection to the members of the EMC
Insurance Companies pooling agreement. 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 MRB 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 and excess of loss 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 either the quota share agreement or the excess of loss 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 excess of loss agreement is automatically reinstated without cost. The
reinsurance subsidiary recognized $2,542,199, $2,343,630 and $3,139,205 of reinstatement premium in 2013, 2012 and 2011,
respectively.
Premiums earned assumed by the reinsurance subsidiary from Employers Mutual, including reinstatement premiums,
amounted to $129,745,885, $107,111,745 and $100,028,061 in 2013, 2012 and 2011, respectively. The reinsurance subsidiary
ceded 9.0 percent (10.0 percent in 2012 and 2011) of its total assumed reinsurance premiums written to Employers Mutual as
payment for the excess of loss protection, which totaled $12,760,996, $11,916,226 and $10,721,484 in 2013, 2012 and 2011,
respectively. Losses and settlement expenses assumed by the reinsurance subsidiary from Employers Mutual amounted to
$66,125,725, $74,832,154 and $103,086,914 in 2013, 2012 and 2011, respectively. Losses and settlement expenses ceded to
Employers Mutual under the excess of loss agreement totaled $822,553, $9,926,034 and $15,877,627 in 2013, 2012 and 2011,
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 incurred by the reinsurance subsidiary under the
quota share agreement with Employers Mutual amounted to $26,113,939, $19,536,634 and $17,413,284 in 2013, 2012 and
2011, respectively.
The net foreign currency exchange gain/(loss) assumed by the reinsurance subsidiary from Employers Mutual was
$7,644 in 2013, $53,081 in 2012 and $(749,938) in 2011. The total amount of net foreign currency exchange gain/(loss)
assumed by the reinsurance subsidiary, including the business written on a direct basis outside the quota share agreement, was
$(366,338) in 2013, $(24,830) in 2012 and $(591,848) in 2011.
64
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 $3,587,989, $3,324,922 and
$2,835,005 in 2013, 2012 and 2011, respectively. Costs allocated to the Company through the operation of the pooling
agreement amounted to $83,331,669, $76,074,327 and $73,061,011 in 2013, 2012 and 2011, 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 $1,567,914,
$1,297,277 and $1,182,482 in 2013, 2012 and 2011, respectively.
3.
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, 2013, reinsurance ceded to four nonaffiliated reinsurers (two at December 31, 2012) totaled
$24,261,121 and $16,783,964 respectively, which represents a significant portion of the total prepaid reinsurance premiums and
reinsurance receivables for losses and settlement expenses. The largest balance due is from the Mutual Reinsurance Bureau
(MRB) underwriting association, of which the Company (through Employers Mutual) is a member with other unaffiliated
reinsurers. All members of MRB have joint and several liability for MRB's obligations. For two of the other 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.
65
The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the three
years ended December 31, 2013 is presented below. The classification of the assumed and ceded reinsurance amounts between
affiliates and nonaffiliates is based on the participants in the underlying reinsurance agreements, and is intended to provide an
understanding of the actual source of the reinsurance activities. This presentation differs from the classifications used in the
consolidated financial statements, where all amounts flowing through the pooling, quota share and excess of loss agreements
with Employers Mutual are reported as “affiliated” balances.
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
Year ended December 31, 2013
Property and
casualty
insurance
Reinsurance
Total
$ 368,532,466
$
— $
368,532,466
3,501,067
162,291,009
165,792,076
425,218,093
(23,670,306)
(368,532,466)
$ 405,048,854
—
(20,502,167)
(12,760,996)
$ 129,027,846
$
425,218,093
(44,172,473)
(381,293,462)
534,076,700
$ 361,009,971
$
— $
361,009,971
3,275,147
151,978,261
155,253,408
412,664,850
(23,221,149)
(361,009,971)
$ 392,718,848
—
(16,429,847)
(12,760,996)
$ 122,787,418
$
412,664,850
(39,650,996)
(373,770,967)
515,506,266
$ 237,108,829
$
— $
237,108,829
2,280,529
80,854,436
83,134,965
267,292,454
(8,655,974)
(237,108,829)
$ 260,917,009
$
1,199,022
(8,860,465)
(822,553)
72,370,440
$
268,491,476
(17,516,439)
(237,931,382)
333,287,449
66
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
Year ended December 31, 2012
Property and
casualty
insurance
$
$
$
$
$
$
341,306,420
2,459,427
390,982,516
(22,206,486)
(341,306,420)
371,235,457
328,227,401
2,296,360
377,690,009
(22,847,683)
(328,227,401)
357,138,686
191,281,648
1,718,484
237,723,061
(5,549,265)
(191,281,648)
233,892,280
$
$
$
$
$
$
Reinsurance
Total
— $
121,500,482
—
(2,338,228)
(11,916,226)
107,246,028
$
341,306,420
123,959,909
390,982,516
(24,544,714)
(353,222,646)
478,481,485
— $
119,502,706
—
(5,879,167)
(11,916,226)
101,707,313
$
328,227,401
121,799,066
377,690,009
(28,726,850)
(340,143,627)
458,845,999
— $
83,987,064
962,408
(5,528,003)
(9,926,034)
69,495,435
$
191,281,648
85,705,548
238,685,469
(11,077,268)
(201,207,682)
303,387,715
67
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
Individual lines in the above tables are defined as follows:
Year ended December 31, 2011
Property and
casualty
insurance
Reinsurance
Total
$
301,829,277
$
— $
301,829,277
1,610,872
123,274,743
124,885,615
356,622,503
(24,939,233)
(301,829,277)
333,294,142
$
$
—
(16,059,909)
(10,721,484)
96,493,350
$
356,622,503
(40,999,142)
(312,550,761)
429,787,492
$
283,482,713
$
— $
283,482,713
1,541,807
122,064,711
123,606,518
344,668,820
(24,561,412)
(283,482,713)
321,649,215
$
$
—
(16,590,129)
(10,721,484)
94,753,098
$
344,668,820
(41,151,541)
(294,204,197)
416,402,313
$
247,585,728
$
— $
247,585,728
1,619,025
122,680,597
124,299,622
264,217,463
(14,387,241)
(247,585,728)
251,449,247
$
$
732,478
(16,010,258)
(15,877,627)
91,525,190
$
264,949,941
(30,397,499)
(263,463,355)
342,974,437
•
•
•
•
•
“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 line represents the reinsurance business assumed through the quota share
agreement (including “fronting” activities initiated by Employers Mutual) and the business assumed outside the quota
share agreement. Contractual changes in 2012 on selected accounts resulted in a reduction in "fronting" activity.
“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. The amounts reported under the caption
“Losses and settlement expenses incurred” also include claim-related services provided by Employers Mutual that are
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 1) the amounts ceded to nonaffiliated reinsurance companies in accordance with the
terms of the reinsurance agreements providing protection to the pool and each of its participants, and 2) the amounts
ceded on a mandatory basis to state organizations in connection with various programs. For the reinsurance
subsidiary, this line includes reinsurance business that is ceded to other insurance companies in connection with
“fronting” activities initiated by Employers Mutual. Contractual changes in 2012 on selected accounts resulted in a
reduction in "fronting" activity.
“Ceded to affiliates” for the property and casualty insurance subsidiaries represents the cession of their direct business
to Employers Mutual under the terms of the pooling agreement. For the reinsurance subsidiary this line represents
amounts ceded to Employers Mutual under the terms of the excess of loss reinsurance agreement.
68
4.
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
Less re-valuation due to foreign currency exchange rates
Less ceded reserves at beginning of year
Net reserves at beginning of year
Incurred losses and settlement expenses related to:
Current year
Prior years
Total incurred losses and settlement expenses
Paid losses and settlement expenses related to:
Current year
Prior years
Total paid losses and settlement expenses
Year ended December 31,
2013
2012
2011
$ 583,096,965
(1,569)
31,389,594
$ 593,300,247
(386)
36,842,204
$ 556,140,956
(392,276)
29,062,553
551,708,940
556,458,429
527,470,679
346,072,934
(12,785,485)
333,287,449
329,120,220
(25,732,505)
303,387,715
376,073,620
(33,099,183)
342,974,437
137,998,060
145,102,723
167,793,377
167,268,783
163,034,481
146,193,310
305,266,843
308,137,204
313,986,687
Net reserves at end of year
Plus ceded reserves at end of year
Plus re-valuation due to foreign currency exchange rates
Gross reserves at end of year
579,729,546
551,708,940
556,458,429
30,118,493
332,811
$ 610,180,850
31,389,594
(1,569)
$ 583,096,965
36,842,204
(386)
$ 593,300,247
Development on prior years’ reserves resulting solely from changes in the allocation of bulk reserves between the current
and prior accident years in the property and casualty insurance segment does not have an impact on earnings. This is due to the
fact that such development is simply a mathematical by-product of the mechanical process used to reallocate bulk reserves to
the various accident years. Earnings are only impacted by changes in the total amount of carried reserves.
The following table presents the reported amounts of favorable development experienced on prior years’ reserves and the
portion of the reported development amounts that resulted solely from changes in the allocation of bulk reserves between the
current and prior accident years in the property and casualty insurance segment (no impact on earnings). The result is an
approximation of the implied amounts of favorable development that had an impact on earnings.
Reported amount of favorable development experienced on prior
years' reserves
Adjustment for (adverse) favorable development included in the
reported development amount that had no impact on earnings
Approximation of the implied amount of favorable development that
had an impact on earnings
$
(12,785,485) $
(25,732,505) $
(33,099,183)
6,526,000
(4,551,000)
1,396,000
$
(6,259,485) $
(30,283,505) $
(31,703,183)
Year ended December 31,
2013
2012
2011
69
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 years’ reserves run off.
2013 Development
For the property and casualty insurance segment, the December 31, 2013 estimate of loss and settlement expense
reserves for accident years 2012 and prior decreased $7,281,009 from the estimate at December 31, 2012. This decrease
represents 1.8 percent of the December 31, 2012 gross carried reserves and is primarily attributed to favorable development on
settlement expense reserves and ceded reinsurance reserves. No changes were made in the key actuarial assumptions utilized to
estimate loss and settlement expense reserves during 2013; however, the accident year allocation factors applied to IBNR loss,
bulk case loss and a portion of defense and cost containment expense reserves were revised at December 31, 2013 as part of the
annual review. This change resulted in the movement of $6,526,000 of reserves from prior accident years to the current
accident year, and hence, was reported as favorable development on prior years' reserves. Development on prior years’ reserves
resulting solely from changes in the allocation of bulk reserves between the current and prior accident years does not have an
impact on earnings.
For the reinsurance segment, the December 31, 2013 estimate of loss and settlement expense reserves for accident years
2012 and prior decreased $5,504,476 from the estimate at December 31, 2012. This decrease represents 3.2 percent of the
December 31, 2012 gross carried reserves and is largely attributed to reported losses that were below the December 2012
implicit projections for policy year 2012 in the Home Office Reinsurance Assumed Department (also known as “HORAD”)
book of business.
2012 Development
For the property and casualty insurance segment, the December 31, 2012 estimate of loss and settlement expense
reserves for accident years 2011 and prior decreased $13,056,836 from the estimate at December 31, 2011. This decrease
represented 3.1 percent of the December 31, 2011 gross carried reserves and was primarily attributed to decreased severity
associated with the final settlement of prior accident years’ claims, and favorable development on settlement expense
reserves. No changes were made in the key actuarial assumptions utilized to estimate loss and settlement expense reserves
during 2012; however, the accident year allocation factors applied to IBNR loss, bulk case loss and a portion of defense and
cost containment expense reserves were revised at December 31, 2012 as part of the annual review. This change resulted in the
movement of $4,551,000 of reserves from the current accident year to prior accident years, and hence, was reported as adverse
development on prior years' reserves. Development on prior years’ reserves resulting solely from changes in the allocation of
bulk reserves between the current and prior accident years does not have an impact on earnings.
For the reinsurance segment, the December 31, 2012 estimate of loss and settlement expense reserves for accident years
2011 and prior decreased $12,675,669 from the estimate at December 31, 2011. This decrease represented 7.3 percent of the
December 31, 2011 gross carried reserves and was largely attributed to reported losses that were below the December 2011
implicit projections for policy year 2011 in the HORAD book of business.
70
2011 Development
For the property and casualty insurance segment, the December 31, 2011 estimate of loss and settlement expense
reserves for accident years 2010 and prior decreased $20,162,952 from the estimate at December 31, 2010. This decrease
represented 5.0 percent of the December 31, 2010 gross carried reserves and was primarily attributed to decreased severity
associated with the final settlement of prior accident years’ claims, as well as favorable development on settlement expense
reserves and ceded reinsurace reserves. No changes were made in the key actuarial assumptions utilized to estimate loss and
settlement expense reserves during 2011; however, the accident year allocation factors applied to IBNR loss, bulk case loss and
a portion of defense and cost containment expense reserves were revised at December 31, 2011 as part of the annual
review. This change resulted in the movement of $1,396,000 of reserves from prior accident years to the current accident year,
and hence, was reported as favorable development on prior years' reserves. Development on prior years’ reserves resulting
solely from changes in the allocation of bulk reserves between the current and prior accident years does not have an impact on
earnings.
For the reinsurance segment, the December 31, 2011 estimate of loss and settlement expense reserves for accident years
2010 and prior decreased $12,936,231 from the estimate at December 31, 2010. This decrease represented 8.4 percent of the
December 31, 2010 gross carried reserves and was largely attributed to reported losses that were below the December 2010
implicit projections for policy year 2010 in the HORAD book of business.
5.
ASBESTOS AND ENVIRONMENTAL CLAIMS
The Company has exposure to asbestos and environmental related claims associated with the insurance business written
by the parties to the pooling agreement and the reinsurance business assumed from Employers Mutual by the reinsurance
subsidiary. These exposures are not considered to be significant. Asbestos and environmental losses paid by the Company
have averaged $1,770,660 per year over the past five years. Reserves for asbestos and environmental related claims for direct
insurance and assumed reinsurance business totaled $9,642,785 and $9,432,926 ($8,950,485 and $8,777,876 net of reinsurance)
at December 31, 2013 and 2012, respectively.
At present, the pool participants are defending approximately 1,717 asbestos bodily injury lawsuits, some of which
involve multiple plaintiffs. Five 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 are defending several hundred plaintiff lawsuits (primarily multi-plaintiff lawsuits) filed against three former
policyholders 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. As of December 31, 2013, approximately 2,000 of the claims remain open. The pool participants defended
another former policyholder that was a named defendant in approximately 33,000 claims nationwide. The last of these claims
were settled during 2012 for approximately $690,000 (the Company’s share).
Historically, actual losses paid for asbestos-related claims has 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, in recent years paid losses and settlement expenses have increased significantly as a result of claims attributed to two
former policyholders. At December 31, 2013, nine claims associated with one of these policyholders remain open, though
exposure on these claims is not expected to be material. The other former policyholder, a furnace manufacturer, had multiple
claims settle for a total of approximately $2,176,000 (the Company’s share) during the period 2009 through 2013. The asbestos
exposure associated with this former policyholder has increased in recent years, and this trend may possibly continue into the
future with increased per plaintiff settlements. Approximately 646 asbestos exposure claims associated with this former
policyholder remain open.
The Company continues to run-off ultimate asbestos and environmental reserves established from an outside consultant’s
ground-up study completed a number of years ago. The direct IBNR and bulk settlement expense reserves associated with
asbestos has been increased in each of the most recent six years in response to new information. In particular, bulk settlement
expense reserves have been increased to cover the costs associated with the retention of a national coordinating counsel to
address the multi-state litigation issues of the Company’s largest asbestos defendant. Additionally, in 2012 the Company
jointly settled a long-term asbestos case representing the Company’s share of 20 years’ worth of defense costs. Increased
settlement expense payments have been the main driver of the reserve increases over the past several years.
71
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.
6.
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 2013, 2012 or 2011.
Statutory surplus of the Company’s insurance subsidiaries was $416,718,048 and $354,590,598 at December 31, 2013
and 2012, respectively. Statutory net income (loss) of the Company’s insurance subsidiaries was $41,162,157, $38,101,856 and
$(5,274,698) for 2013, 2012 and 2011, 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, 2013, 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, 2013, $47,976,330 was available for distribution to the Company in 2014
without prior approval.
72
7.
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 environments 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, 2013
Premiums earned
Underwriting profit (loss)
Net investment income (loss)
Realized investment gains
Other income
Interest expense
Other expenses
Income (loss) before income tax expense
(benefit)
Assets
Eliminations
Reclassifications
Net assets
Property and
casualty
insurance
392,718,848
$
Reinsurance
Parent
company
Consolidated
$
122,787,418
$
— $
515,506,266
(10,435,392)
31,396,676
7,525,063
765,343
384,375
750,853
28,116,462
978,745,563
—
—
$
$
21,308,412
11,634,972
1,471,482
61,018
—
366,338
34,109,546
387,284,346
—
—
$
$
$
$
$
978,745,563
$
387,284,346
$
—
(9,473)
—
—
—
1,364,115
10,873,020
43,022,175
8,996,545
826,361
384,375
2,481,306
(1,373,588) $
60,852,420
455,367,743
(441,983,975)
(480,756)
12,903,012
$ 1,821,397,652
(441,983,975)
(480,756)
$ 1,378,932,921
Year ended December 31, 2012
Premiums earned
Underwriting profit (loss)
Net investment income (loss)
Realized investment gains
Other income
Interest expense
Other expenses
Income (loss) before income tax expense
(benefit)
Assets
Eliminations
Reclassifications
Net assets
Property and
casualty
insurance
Reinsurance
Parent
company
Consolidated
$
357,138,686
$
101,707,313
$
— $
458,845,999
(8,207,255)
32,214,705
7,347,944
774,210
900,000
798,046
30,431,558
934,876,596
—
—
$
$
9,841,595
11,940,123
669,084
85,216
—
24,829
22,511,189
350,867,500
—
—
$
$
$
$
$
934,876,596
$
350,867,500
$
—
(9,754)
—
—
—
1,299,379
1,634,340
44,145,074
8,017,028
859,426
900,000
2,122,254
(1,309,133) $
51,633,614
401,319,530
(396,288,097)
(66,423)
4,965,010
$ 1,687,063,626
(396,288,097)
(66,423)
$ 1,290,709,106
73
Year ended December 31, 2011
Premiums earned
Underwriting profit (loss)
Net investment income (loss)
Realized investment gains
Other income
Interest expense
Other expenses
Property and
casualty
insurance
Reinsurance
Parent
company
Consolidated
$
321,649,215
$
94,753,098
$
— $
416,402,313
(46,387,960)
33,718,436
6,970,028
790,802
900,000
750,675
(17,273,231)
12,395,350
2,333,265
37,308
—
591,850
—
(2,861)
—
—
—
1,330,129
(63,661,191)
46,110,925
9,303,293
828,110
900,000
2,672,654
Income (loss) before income tax expense
(benefit)
$
(6,559,369) $
(3,099,158) $
(1,332,990) $
(10,991,517)
74
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, 2013, by line of insurance.
Property and casualty insurance segment
Commercial lines:
Automobile
Property
Workers' compensation
Liability
Other
Total commercial lines
Personal lines:
Automobile
Property
Liability
Total personal lines
Year ended December 31,
2013
2012
2011
$
86,230,496
$
76,361,648
$
67,110,580
87,445,736
83,171,963
77,982,518
7,487,462
77,726,271
75,696,890
68,661,112
7,613,899
69,239,781
68,323,060
60,455,101
7,626,542
342,318,175
306,059,820
272,755,064
27,408,367
22,284,652
707,654
50,400,673
28,436,720
22,020,416
621,730
51,078,866
27,514,345
20,824,263
555,543
48,894,151
Total property and casualty insurance
$
392,718,848
$
357,138,686
$
321,649,215
Reinsurance segment
Pro rata reinsurance:
Property and liability
Property
Crop
Liability
Marine/Aviation
Total pro rata reinsurance
Excess of loss reinsurance:
Property
Liability
Surety
Total excess of loss reinsurance
Total reinsurance
Consolidated
$
7,489,202
$
6,231,955
$
9,398,123
15,774,885
13,508,911
13,798,857
4,454,582
5,172,213
14,757,244
47,648,126
3,840,893
1,171,245
5,708,220
5,681,196
1,261,047
889,350
30,461,224
31,028,573
64,068,912
11,070,281
99
75,139,292
122,787,418
515,506,266
$
$
59,537,028
11,698,372
10,689
71,246,089
101,707,313
458,845,999
$
$
53,170,244
10,561,260
(6,979)
63,724,525
94,753,098
416,402,313
$
$
75
8.
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.
December 31, 2013
Assets:
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
Short-term investments
Liabilities:
Surplus notes
Carrying
amount
Estimated
fair value
$
9,412,497
$
9,412,497
146,945,719
357,051,689
68,939,577
94,179,189
12,647,636
146,945,719
357,051,689
68,939,577
94,179,189
12,647,636
338,807,706
338,807,706
1,027,984,013
1,027,984,013
28,498,329
18,917,368
21,944,614
13,010,682
21,031,295
21,117,265
17,264,144
17,811,177
10,253,400
28,498,329
18,917,368
21,944,614
13,010,682
21,031,295
21,117,265
17,264,144
17,811,177
10,253,400
169,848,274
169,848,274
56,165,534
56,165,534
25,000,000
10,040,013
76
December 31, 2012
Assets:
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
Short-term investments
Liabilities:
Surplus notes
Carrying
amount
Estimated
fair value
$
4,984,902
$
4,984,902
162,442,630
370,962,114
80,349,182
47,789,604
11,286,848
321,979,577
999,794,857
162,442,630
370,962,114
80,349,182
47,789,604
11,286,848
321,979,577
999,794,857
18,093,388
16,925,764
19,023,849
13,609,527
17,090,547
19,430,330
8,574,816
18,681,440
8,864,164
18,093,388
16,925,764
19,023,849
13,609,527
17,090,547
19,430,330
8,574,816
18,681,440
8,864,164
140,293,825
140,293,825
53,418,914
53,418,914
25,000,000
18,835,954
The estimated fair value of fixed maturity and equity securities 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.
Short-term investments generally include money market funds, U.S. Treasury bills and commercial paper. Short-term
investments are carried at fair value, which approximates cost, due to the highly liquid nature of the securities. Short-term
securities are classified as Level 1 fair value measurements when the fair value can be validated by recent trades. When recent
trades are not available, fair value is deemed to be the cost basis and the securities are classified as Level 2 fair value
measurements.
The estimated fair value of the surplus notes is derived by discounting future expected cash flows at a rate deemed
appropriate. The discount rate was set at the average of current yields-to-maturity on several insurance company surplus notes
that are traded in observable markets, adjusted upward by 50 basis points to reflect illiquidity and perceived risk premium
differences. Other assumptions include a 25-year term (the surplus notes have no stated maturity date) and an interest rate that
continues at the current 1.35 percent interest rate (3.60 percent at December 31, 2012). The rate is typically adjusted every five
years and is based upon the then-current Federal Home Loan Bank borrowing rate for 5-year funds available to Employers
Mutual.
77
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 because observable inputs are not
available. 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 values of a majority of its securities,
subject to an internal validation. The fair values are based on quoted market prices, where available. This is typically the case
for equity securities and money market funds, which are accordingly classified as Level 1 fair value measurements. 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. Fixed maturity securities and various short-term investments in the Company’s portfolio may 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 by the independent pricing source
for different asset classes.
• 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.
• 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.
• Obligations of states and political subdivisions are priced by tracking and analyzing actively quoted issues and
reported trades, material event notices and benchmark yields. 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.
• Mortgage-backed and asset-backed securities are first reviewed for the appropriate pricing speed (if prepayable),
spread, yield and volatility. The 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 determine a tranche’s price, first the benchmark yield is determined and adjusted for collateral
performance, tranche level attributes and market conditions. Then the cash flow for each tranche is generated (using
consensus prepayment speed assumptions including, as appropriate, a prepayment projection based on historical
statistics of the underlying collateral). The tranche-level yield is used to discount the cash flows and generate the
price. Depending on the characteristics of the tranche, a volatility-driven, multi-dimensional single cash flow
stream model or an option-adjusted spread model may be used. When cash flows or other security structure or
market information is not available, broker quotes may be used.
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. For these securities, fair value may be determined using the broker quotes, or by
the Company using similar pricing techniques as the Company’s independent pricing service. Depending on the level of
observable inputs, these securities would be classified as Level 2 or Level 3 fair value measurements. At December 31, 2013
seven securities were priced solely from broker quotes (none at December 31, 2012), but those securities were reported as
Level 2 fair value measurements due to the broker quote prices approximating the Company's price estimates obtained by
applying pricing techniques with observable inputs.
78
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, 2013 and 2012, 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, typically performed during the second quarter. The
other securities not priced by the Company’s independent pricing service at December 31, 2013 include six fixed maturity
securities (three at December 31, 2012). Two of these fixed maturity securities, classified as Level 3 fair value measurements,
are corporate securities that convey premium tax benefits and are not publicly traded. The fair values for these securities are
based on discounted cash flow analyses. The other fixed maturity securities are classified as Level 2 fair value measurements.
The fair values for these fixed maturity securities were obtained from either the SVO or the Company’s investment custodian
using similar pricing techniques as the Company’s independent pricing service.
79
Presented in the table below are the estimated fair values of the Company’s financial instruments as of December 31,
2013 and 2012.
Fair value measurements using
Quoted
prices in
active markets
for identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
December 31, 2013
Total
Financial instruments reported at fair value on
recurring basis:
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury
$
9,412,497
$
— $
9,412,497
$
U.S. government-sponsored agencies
146,945,719
Obligations of states and political subdivisions
357,051,689
Commercial mortgage-backed
Residential mortgage-backed
Other asset-backed
Corporate
68,939,577
94,179,189
12,647,636
338,807,706
— 146,945,719
— 357,051,689
—
—
—
68,939,577
94,179,189
12,647,636
— 336,832,053
1,975,653
—
—
—
—
—
—
Total fixed maturity securities available-for-
sale
1,027,984,013
— 1,026,008,360
1,975,653
Equity securities available-for-sale:
Common stocks:
Financial services
Information technology
Healthcare
Consumer staples
Consumer discretionary
Energy
Industrials
Other
Non-redeemable preferred stocks
28,498,329
18,917,368
21,944,614
13,010,682
21,031,295
21,117,265
17,264,144
17,811,177
10,253,400
28,495,722
18,917,368
21,944,614
13,010,682
21,031,295
21,117,265
17,264,144
17,811,177
10,253,400
Total equity securities available-for-sale
169,848,274
169,845,667
Short-term investments
56,165,534
56,165,534
—
—
—
—
—
—
—
—
—
—
—
2,607
—
—
—
—
—
—
—
—
2,607
—
Financial instruments not reported at fair value:
Liabilities:
Surplus notes
10,040,013
—
—
10,040,013
80
Fair value measurements using
Quoted
prices in
active markets
for identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
December 31, 2012
Total
Financial instruments reported at fair value on
recurring basis:
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury
$
4,984,902
$
— $
4,984,902
$
U.S. government-sponsored agencies
162,442,630
Obligations of states and political subdivisions
370,962,114
Commercial mortgage-backed
Residential mortgage-backed
Other asset-backed
Corporate
Total fixed maturity securities available-for-
sale
80,349,182
47,789,604
11,286,848
321,979,577
999,794,857
—
—
—
—
—
—
—
162,442,630
370,962,114
80,349,182
47,789,604
11,286,848
321,979,577
999,794,857
Equity securities available-for-sale:
Common stocks:
Financial services
Information technology
Healthcare
Consumer staples
Consumer discretionary
Energy
Industrials
Other
Non-redeemable preferred stocks
18,093,388
16,925,764
19,023,849
13,609,527
17,090,547
19,430,330
8,574,816
18,090,987
16,925,764
19,023,849
13,609,527
17,090,547
19,430,330
8,574,816
18,681,440
18,681,440
8,864,164
8,864,164
Total equity securities available-for-sale
140,293,825
140,291,424
—
—
—
—
—
—
—
—
—
—
Short-term investments
53,418,914
42,062,664
11,356,250
—
—
—
—
—
—
—
—
2,401
—
—
—
—
—
—
—
—
2,401
—
Financial instruments not reported at fair value:
Liabilities:
Surplus notes
18,835,954
—
—
18,835,954
81
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, 2013 and 2012. 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.
Fair value measurements using significant unobservable
inputs (Level 3)
Fixed maturity
securities
available-for-
sale, corporate
Equity securities
available-for-
sale,
financial
services
Balance at December 31, 2011
$
— $
2,250
$
Unrealized gains included in other comprehensive income
Balance at December 31, 2012
Purchases
Settlements
Unrealized gains included in other comprehensive income
—
—
1,971,303
(944)
5,294
151
2,401
—
—
206
Total
2,250
151
2,401
1,971,303
(944)
5,500
Balance at December 31, 2013
$
1,975,653
$
2,607
$
1,978,260
There were no transfers into or out of Levels 1 or 2 during 2013 or 2012. It is the Company’s policy to recognize
transfers between levels at the beginning of the reporting period.
9.
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.
82
The amortized cost and estimated fair value of securities available-for-sale as of December 31, 2013 and 2012 are as
follows. All securities are classified as available-for-sale and are carried at fair value.
December 31, 2013
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
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Estimated
fair value
$
9,539,657
$
191,560
$
318,720
$
9,412,497
156,980,739
346,554,566
63,184,992
96,058,330
11,455,608
325,798,433
1,009,572,325
19,272,973
12,644,716
12,801,287
9,162,313
10,722,050
14,102,214
11,189,958
13,357,539
10,582,438
1,355,805
15,039,209
5,842,361
1,073,040
1,192,028
16,541,906
41,235,909
9,374,101
6,301,287
9,143,327
3,848,590
10,309,245
7,341,182
6,075,540
4,489,391
315,662
11,390,825
146,945,719
4,542,086
357,051,689
87,776
2,952,181
—
68,939,577
94,179,189
12,647,636
3,532,633
338,807,706
22,824,221
1,027,984,013
148,745
28,635
—
221
—
326,131
1,354
35,753
644,700
28,498,329
18,917,368
21,944,614
13,010,682
21,031,295
21,117,265
17,264,144
17,811,177
10,253,400
113,835,488
57,198,325
1,185,539
169,848,274
Total securities available-for-sale
$ 1,123,407,813
$
98,434,234
$
24,009,760
$ 1,197,832,287
83
December 31, 2012
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Estimated
fair value
$
4,697,762
$
287,140
$
— $
4,984,902
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
159,548,303
335,188,220
69,952,036
46,286,598
9,720,662
295,450,358
920,843,939
3,228,302
35,776,373
10,412,989
1,777,113
1,566,186
26,774,604
79,822,707
Equity securities:
Common stocks:
Financial services
Information technology
Healthcare
Consumer staples
Consumer discretionary
Energy
Industrials
Other
Non-redeemable preferred stocks
Total equity securities
14,496,766
12,331,378
14,823,967
12,019,892
10,829,547
14,629,926
7,638,633
16,749,417
8,332,437
3,630,544
4,722,076
4,199,882
1,593,039
6,261,000
4,800,404
936,183
2,215,172
647,727
111,851,963
29,006,027
333,975
162,442,630
2,479
15,843
274,107
—
245,385
871,789
33,922
127,690
—
3,404
—
—
—
283,149
116,000
564,165
370,962,114
80,349,182
47,789,604
11,286,848
321,979,577
999,794,857
18,093,388
16,925,764
19,023,849
13,609,527
17,090,547
19,430,330
8,574,816
18,681,440
8,864,164
140,293,825
Total securities available-for-sale
$ 1,032,695,902
$ 108,828,734
$
1,435,954
$ 1,140,088,682
84
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, 2013 and 2012, listed by length of time the securities were in an
unrealized loss position.
December 31, 2013
Less than twelve months
Twelve months or longer
Total
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fixed maturity securities:
U.S. treasury
$
4,506,640
$
318,720
$
— $
— $
4,506,640
$
318,720
U.S. government-
sponsored agencies
Obligations of states and
political subdivisions
Commercial mortgage-
backed
Residential mortgage-
backed
Corporate
Total, fixed maturity
securities
Equity securities:
Common stocks:
Financial services
Information technology
Consumer staples
Energy
Industrials
Other
Non-redeemable
preferred stocks
Total, equity
securities
Total temporarily
impaired
securities
93,855,585
8,119,934
24,053,560
3,270,891
117,909,145
11,390,825
74,522,866
4,335,400
3,008,580
206,686
77,531,446
4,542,086
10,550,634
87,776
—
—
10,550,634
87,776
44,243,259
81,291,981
2,481,862
2,704,297
4,599,942
10,547,054
470,319
828,336
48,843,201
91,839,035
2,952,181
3,532,633
308,970,965
18,047,989
42,209,136
4,776,232
351,180,101
22,824,221
2,801,525
609,630
29,648
1,450,037
625,124
1,498,700
148,745
28,635
221
326,131
1,354
35,753
—
—
—
—
—
—
—
—
—
—
—
—
2,801,525
609,630
29,648
1,450,037
625,124
1,498,700
148,745
28,635
221
326,131
1,354
35,753
2,121,300
128,700
1,484,000
516,000
3,605,300
644,700
9,135,964
669,539
1,484,000
516,000
10,619,964
1,185,539
$ 318,106,929
$ 18,717,528
$ 43,693,136
$ 5,292,232
$ 361,800,065
$ 24,009,760
85
December 31, 2012
Less than twelve months
Twelve months or longer
Total
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fixed maturity securities:
U.S. government-
sponsored agencies
Obligations of states and
political subdivisions
Commercial mortgage-
backed
Residential mortgage-
backed
Corporate
Total, fixed maturity
securities
Equity securities:
Common stocks:
Financial services
Information technology
Consumer staples
Other
Non-redeemable
preferred stocks
Total, equity
securities
Total temporarily
impaired
securities
$ 33,950,271
$
333,975
$
— $
— $ 33,950,271
$
333,975
3,234,180
2,479
3,773,043
15,843
5,303,741
17,567,579
274,107
245,385
63,828,814
871,789
881,580
1,435,122
90,080
2,403,683
33,922
127,690
3,404
283,149
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,234,180
2,479
3,773,043
15,843
5,303,741
17,567,579
274,107
245,385
63,828,814
871,789
881,580
1,435,122
90,080
2,403,683
33,922
127,690
3,404
283,149
—
—
1,884,000
116,000
1,884,000
116,000
4,810,465
448,165
1,884,000
116,000
6,694,465
564,165
$ 68,639,279
$ 1,319,954
$
1,884,000
$
116,000
$ 70,523,279
$ 1,435,954
Unrealized losses on fixed maturity securities increased in nearly every asset class at December 31, 2013 due to the rise
in interest rates during 2013. Most of these 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, 2013.
No particular sector or individual security accounted for a material amount of unrealized losses on commons stocks at
December 31, 2013. 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, 2013.
All of the Company’s preferred stock holdings are perpetual preferred stocks. The Company evaluates perpetual
preferred stocks with unrealized losses 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, 2013.
86
The amortized cost and estimated fair value of fixed maturity securities at December 31, 2013, 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.
Securities available-for-sale:
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
A summary of realized investment gains and (losses) is as follows:
Fixed maturity securities held-to-maturity:
Gross realized investment gains
Fixed maturity securities available-for-sale:
Gross realized investment gains
Gross realized investment losses
"Other-than-temporary" impairments
Equity securities available-for-sale:
Gross realized investment gains
Gross realized investment losses
"Other-than-temporary" impairments
Totals
Amortized
cost
Estimated
fair value
$
4,081,655
$
4,129,740
208,280,054
144,873,434
493,093,860
159,243,322
220,054,211
148,508,936
492,172,360
163,118,766
$ 1,009,572,325
$ 1,027,984,013
Year ended December 31,
2013
2012
2011
$
— $
— $
47,077
1,225,954
(725,062)
—
795,199
(9,777)
—
1,236,302
(572,071)
(221,956)
9,457,892
(898,592)
(63,647)
8,996,545
$
9,983,532
(2,566,303)
(185,623)
8,017,028
$
18,604,135
(4,052,016)
(5,738,178)
9,303,293
$
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. During the fourth quarter of 2011, the
Company sold all of its held-to-maturity securities, which consisted solely of small balances remaining on Government
National Mortgage Association (GNMA) securities. These securities were ultimately purchased by GNMA, who repackaged
them into a single security and resold them through a broker to the Company on the same day. The transaction was conducted
to improve administrative efficiency, increase liquidity and reduce custodial costs. The amounts reported as “other-than-
temporary” impairments do not include any individually significant items.
The following table is a roll forward of the cumulative credit losses on fixed maturity securities that have been
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). During the second quarter of 2011, management determined
that it would sell certain residential mortgage-backed securities that were in an unrealized loss position, resulting in the
recognition of the non-credit loss component of the impairments through earnings.
87
Balance at beginning of year
Reduction for credit loss associated with previously recognized "other-than-
temporary" impairment due to management's intent to sell the security
Balance at end of year
$
$
— $
—
— $
A summary of net investment income is as follows:
Year ended December 31,
2012
2013
2011
207,854
— $
—
— $
(207,854)
—
Interest on fixed maturity securities
Dividends on equity securities
Interest on short-term investments
Return on long-term investments
Total investment income
Security litigation income
Investment expenses
Net investment income
2013
Year ended December 31,
2012
$ 41,699,293
3,851,932
128,769
11,584
45,691,578
58,711
(1,605,215)
$ 44,145,074
2011
$ 44,874,829
2,361,929
56,581
27,472
47,320,811
86,948
(1,296,834)
$ 46,110,925
$ 40,062,086
4,619,367
27,083
21,866
44,730,402
219,199
(1,927,426)
$ 43,022,175
A summary of net changes in unrealized holding gains (losses) on securities available-for-sale is as follows:
Year ended December 31,
2013
2012
2011
Fixed maturity securities
Deferred income tax expense (benefit)
Total fixed maturity securities
Equity securities
Deferred income tax expense (benefit)
Total equity securities
Total available-for-sale securities
$(60,539,230) $ 20,686,958
7,240,435
$ 26,309,716
9,208,402
(21,188,730)
(39,350,500)
13,446,523
17,101,314
27,570,924
9,649,822
8,007,940
2,802,780
17,921,102
5,205,160
$(21,429,398) $ 18,651,683
(4,984,021)
(1,744,407)
(3,239,614)
$ 13,861,700
88
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 (liability) at December 31, 2013 and 2012 are as
follows:
Loss reserve discounting
Unearned premium reserve limitation
Retirement benefits
Other policyholders' funds payable
Other, net
Total deferred income tax asset
Net unrealized holding gains on investment securities
Deferred policy acquisition costs
Retirement benefits
Other, net
Total deferred income tax liability
Net deferred income tax liability
December 31,
2013
$
17,689,763
14,764,266
—
2,971,863
1,761,100
37,186,992
(26,048,567)
(13,227,355)
(8,234,255)
(2,498,475)
(50,008,652)
(12,821,660) $
2012
18,669,516
13,372,124
9,388,387
2,119,289
1,726,687
45,276,003
(37,587,475)
(12,048,958)
—
(1,992,260)
(51,628,693)
(6,352,690)
$
$
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 deferred income tax assets will be realized.
The actual income tax expense (benefit) for the years ended December 31, 2013, 2012 and 2011 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
Other, net
Total income tax expense (benefit)
$
$
Year ended December 31,
2012
18,071,765
$
$
2013
21,298,347
(3,828,441)
(876,421)
705,729
34,533
17,333,747
$
(4,432,861)
(722,900)
773,364
(22,183)
13,667,185
$
2011
(3,847,032)
(4,636,716)
(516,691)
773,011
(26,810)
(8,254,238)
Comprehensive income tax expense (benefit) included in the consolidated financial statements for the years ended
December 31, 2013, 2012 and 2011 is as follows:
Income tax expense (benefit) on:
Operations
Change in unrealized holding gains on investment securities
Change in funded status of retirement benefit plans:
Pension plans
Postretirement benefit plans
Comprehensive income tax expense (benefit)
89
Year ended December 31,
2012
2011
2013
$
$
17,333,747
(11,538,908)
$
13,667,185
10,043,215
5,497,946
12,103,023
23,395,808
$
597,802
349,988
24,658,190
$
$
(8,254,238)
7,463,995
(3,132,777)
(2,799,278)
(6,722,298)
The Company had no provision for uncertain income tax positions at December 31, 2013 or 2012. The Company
recognized $3,359 of interest income related to U.S. federal income taxes during 2012. The Company did not recognize any
interest expense or other penalties related to U.S. federal or state income taxes during 2013, 2012 or 2011. It is the Company’s
accounting policy to reflect income tax penalties as other expense, and interest as interest expense.
The Company files a U.S. federal income tax return, 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 2010. The Company's 2011
income tax return has been audited and no adjustments were proposed.
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, 2013, the interest rate on the surplus notes was reduced to 1.35 percent from the previous 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 2018. 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
$384,375 in 2013, $900,000 in 2012 and $900,000 in 2011. At December 31, 2013, the Company’s property and casualty
insurance subsidiaries had received approval for the payment of interest accrued on the surplus notes during 2013.
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 non-qualified 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 sufficient to be in compliance with minimum regulatory funding requirements plus
additional amounts as determined by management.
Employers Mutual’s non-qualified 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. On
December 2, 2013, Employers Mutual notified its employees and retirees that effective January 1, 2015 this plan will be
replaced with a new Employers Mutual-funded Health Reimbursement Arrangement (HRA). Under the HRA, Employers
Mutual will deposit a pre-determined amount of money into an account established for each participant that they can use to
enroll in a variety of publicly available health plans and pay for qualifying out-of-pocket health care costs. As a result of this
change, the postretirement benefit plans' benefit obligation decreased $96,704,413 (Company's share was $26,936,515) as of
December 31, 2013. 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.
90
The following table sets forth the funded status of Employers Mutual’s pension and postretirement benefit plans as of
December 31, 2013 and 2012, based upon measurement dates of December 31, 2013 and 2012, respectively.
Change in projected benefit obligation:
Benefit obligation at beginning of year
$
247,290,081
$
225,100,396
$
155,102,015
$
144,354,348
Pension plans
Postretirement benefit plans
2013
2012
2013
2012
Service cost
Interest cost
Actuarial loss
Benefits paid
Medicare subsidy reimbursements
Plan amendments
13,212,796
7,656,037
(14,458,374)
(14,591,200)
—
—
12,386,021
8,818,790
14,251,377
(13,266,503)
—
—
Projected benefit obligation at end of year
239,109,340
247,290,081
Change in plan assets:
Fair value plan of plan assets at beginning of
year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
240,033,882
209,926,692
48,623,187
27,715,290
14,684,459
(14,591,200)
288,750,328
15,658,403
(13,266,503)
240,033,882
(7,256,199)
Funded status
$
49,640,988
$
6,299,916
6,171,884
(18,581,923)
(2,587,765)
305,971
(96,704,413)
50,005,685
57,815,079
11,548,326
500,000
(2,587,765)
67,275,640
$
17,269,955
$
6,150,118
6,536,842
4,086,259
(2,787,354)
579,650
(3,817,848)
155,102,015
53,446,305
5,656,128
1,500,000
(2,787,354)
57,815,079
(97,286,936)
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, 2013 and 2012:
Amounts recognized in the Company’s consolidated balance sheets:
Pension plans
Postretirement benefit plans
2013
2012
2013
2012
Assets:
Prepaid pension and postretirement benefits
$
18,310,029
$
1,413,104
$
4,810,529
$
—
Liability:
Pension and postretirement benefits
Net amount recognized
(3,401,045)
14,908,984
$
(3,800,987)
(2,387,883)
$
—
$
4,810,529
$
(26,913,646)
(26,913,646)
Amounts recognized in the Company’s consolidated balance sheets under the caption “accumulated other comprehensive
income”, before deferred income taxes:
Net actuarial loss
Prior service (cost) credit
Net amount recognized
Pension plans
Postretirement benefit plans
2013
(7,605,752) $
(34,482)
(7,640,234) $
2012
(23,299,008)
(49,643)
(23,348,651)
$
$
2013
(6,827,263) $
30,828,393
24,001,130
$
2012
(15,133,387)
4,554,453
(10,578,934)
$
$
91
During 2014, the Company will amortize $81,483 of net actuarial loss and $9,695 of prior service cost associated with
the pension plans into net periodic benefit cost. In addition, the Company will amortize $462,971 of net actuarial loss and
$3,316,777 of prior service credit associated with the postretirement benefit plans into net periodic postretirement benefit cost
in 2014.
Amounts recognized in the Company’s consolidated statements of comprehensive income, before deferred income taxes:
Net actuarial gain (loss)
Prior service (cost) credit
Net amount recognized
Pension plans
Postretirement benefit plans
2013
2012
2013
2012
$
$
15,693,256
15,161
15,708,417
$
$
1,620,026
87,981
1,708,007
$
$
8,306,124
26,273,940
34,580,064
$
$
491,692
508,273
999,965
The following table sets forth the projected benefit obligation, accumulated benefit obligation and fair value of plan
assets of Employers Mutual’s non-qualified pension plan. The amounts related to the qualified pension plan are not included
since the plan assets exceeded the accumulated benefit obligation.
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Year ended December 31,
2013
2012
$
10,856,004
$
11,931,828
10,485,220
10,889,563
—
—
The components of net periodic benefit cost for Employers Mutual’s pension and postretirement benefit plans is as
follows:
Pension plans:
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial loss
Amortization of prior service cost
Net periodic pension benefit cost
Postretirement benefit plans:
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial loss
Amortization of prior service credit
Net periodic postretirement benefit cost
Year ended December 31,
2013
2012
2011
$
13,212,796
$
12,386,021
$
11,527,452
7,656,037
(17,150,462)
5,962,361
50,329
8,818,790
(14,925,445)
6,808,576
291,152
9,703,193
(15,506,042)
3,528,096
432,134
9,731,061
$
13,379,094
$
9,684,833
6,299,916
$
6,150,118
$
4,602,488
6,171,884
(3,631,000)
3,694,018
(2,491,125)
10,043,693
$
6,536,842
(3,219,175)
4,008,614
(2,131,256)
11,345,143
$
5,998,581
(2,929,894)
1,776,849
(2,131,256)
7,316,768
$
$
$
Net periodic pension benefit cost allocated to the Company amounted to $3,013,316, $4,115,440 and $2,983,679 in
2013, 2012 and 2011, respectively. Net periodic postretirement benefit cost allocated to the Company for the years ended
December 31, 2013, 2012 and 2011 was $2,911,785, $3,287,184, and $2,111,176, respectively.
92
The weighted-average assumptions used to measure the benefit obligations are as follows:
Pension plans:
Discount rate
Rate of compensation increase:
Qualified pension plan
Non-qualified pension plan
Postretirement benefit plans:
Discount rate
Year ended December 31,
2013
2012
4.17%
4.73%
4.68%
3.24%
4.73%
4.68%
4.71%
4.03%
The weighted-average assumptions used to measure the net periodic benefit costs are as follows:
Pension plans:
Discount rate
Expected long-term rate of return on plan assets
Rate of compensation increase:
Qualified pension plan
Non-qualified pension plan
Postretirement benefit plans:
Discount rate
Expected long-term rate of return on plan assets
Year ended December 31,
2012
2011
2013
3.24%
7.25%
4.73%
4.68%
4.03%
6.50%
4.13%
7.25%
4.73%
4.68%
4.59%
6.25%
5.00%
7.50%
4.73%
4.68%
5.50%
6.25%
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,
2013
2012
7.50%
5.00%
2024
7.75%
5.00%
2024
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
the assumed health care cost trend rate would have the following effects on the plan:
Effect on total of service and interest cost
Effect on postretirement benefit obligation
93
One-percentage-point
Increase
Decrease
$
$
2,655,000
60,276
$
$
(2,048,969)
(60,276)
The following benefit payments, which reflect expected future service, are expected to be paid from the plans over the
next ten years:
2014
2015
2016
2017
2018
Pension benefits
Gross
Medicare subsidy
Net
Postretirement benefits
$
21,632,278
$
4,863,986
$
566,889
$
24,410,864
19,469,861
20,228,563
20,981,451
3,030,138
3,095,475
3,210,403
3,339,653
—
—
—
—
—
4,297,097
3,030,138
3,095,475
3,210,403
3,339,653
17,222,818
2019 - 2023
113,113,599
17,222,818
The Company manages its VEBA trust assets internally. The asset allocation strategy has concentrated on funding the
postretirement benefit plan with the expectation that over time, contributions, investment returns and life insurance death
benefits will be large enough to cover current and future expenses. The VEBA trust assets are reviewed relative to liabilities to
determine the optimum allocation, focusing on both asset accumulation and income generation.
Assets contained in the VEBA trust to fund Employers Mutual’s postretirement benefit obligations are currently invested
in universal life insurance policies (issued by EMC National Life Company, an affiliate of Employers Mutual), mutual funds
and an exchange-traded fund (ETF). The mutual funds are fixed income, international equity and domestic equity funds. The
ETF is an emerging markets fund.
See Note 8 for a discussion on fair value measurement. The following is a description of the fair value pricing
techniques used for the asset classes of Employers Mutual’s VEBA trust.
• 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.
• 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.
• 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:
December 31, 2013
Money market fund
Emerging markets ETF
Mutual funds:
Equity
Tax-exempt fixed income
International equity
Life insurance contracts
Fair value measurements using
Quoted
prices in
active markets
for identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
$
574,763
$
574,763
$
— $
3,224,265
3,224,265
39,709,720
2,865,017
7,674,589
13,227,286
39,709,720
2,865,017
7,674,589
—
—
—
—
—
—
—
—
—
—
—
13,227,286
Total benefit plan assets
$
67,275,640
$
54,048,354
$
— $
13,227,286
94
December 31, 2012
Money market fund
Emerging markets ETF
Mutual funds:
Equity
Tax-exempt fixed income
International equity
Life insurance contracts
Fair value measurements using
Quoted
prices in
active markets
for identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
$
2,478,233
$
2,478,233
$
— $
3,489,949
3,489,949
29,398,816
29,398,816
2,908,889
6,666,766
12,872,426
2,908,889
6,666,766
—
—
—
—
—
—
—
—
—
—
—
12,872,426
Total benefit plan assets
$
57,815,079
$
44,942,653
$
— $
12,872,426
Presented below is a reconciliation of the assets measured at fair value using significant unobservable inputs (Level 3)
for the years ended December 31, 2013 and 2012.
Balance at beginning of year
Actual return on plan assets:
Increase in cash accumulation value of life insurance contracts
Balance at end of year
Fair value measurements
using significant
unobservable inputs (Level 3)
Life insurance contracts
2013
2012
12,872,426
$
12,490,608
354,860
381,818
13,227,286
$
12,872,426
$
$
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 record keeper.
95
The following is a description of the fair value pricing techniques used for the asset classes of Employers Mutual’s
qualified pension plan.
•
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:
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.
U.S. Stock Funds are comprised of domestic equity securities that are priced using the closing price from
the applicable exchange.
International Stock Funds are comprised of international equity securities that are priced using the closing
price from the appropriate local stock exchanges(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.
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.
• 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.
• 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:
Fair value measurements using
Quoted
prices in
active markets
for identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
— $
32,842,844
$
December 31, 2013
Bond and mortgage separate account
$
Total
32,842,844
$
Pooled separate accounts:
U.S. stock funds
International stock funds
U.S. bond funds
Real estate fund
Short-term funds
Real estate securities fund
110,278,544
62,839,927
60,200,104
13,758,266
7,672,422
1,158,221
—
—
—
—
—
1,158,221
110,278,544
62,839,927
60,200,104
13,758,266
7,672,422
—
Total benefit plan assets
$
288,750,328
$
1,158,221
$
287,592,107
$
96
—
—
—
—
—
—
—
—
December 31, 2012
Total
Fair value measurements 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
$
29,689,019
$
— $
29,689,019
$
Pooled separate accounts:
U.S. stock funds
International stock funds
U.S. bond funds
Short-term funds
Real estate securities fund
123,183,685
46,927,216
34,412,351
1,199,931
4,621,680
—
—
—
—
4,621,680
123,183,685
46,927,216
34,412,351
1,199,931
—
Total benefit plan assets
$
240,033,882
$
4,621,680
$
235,412,202
$
—
—
—
—
—
—
—
Employers Mutual plans to contribute approximately $15,000,000 to the pension plan. No contributions are expected to
be made to the VEBA trust in 2014.
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 $1,457,211, $1,822,925 and $1,523,675 in 2013, 2012 and 2011, respectively.
13.
STOCK-BASED COMPENSATION
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 plans and its non-employee director stock plans. Employers Mutual generally
purchases common stock on the open market to fulfill its obligations under its employee stock purchase plan.
Stock Plans
Employers Mutual currently maintains two separate stock plans for the benefit of officers and key employees of
Employers Mutual and its subsidiaries. A total of 1,500,000 shares of the Company’s common stock 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). A third stock plan, the 1993 Employers Mutual Casualty Company Incentive Stock Option Plan (1993 Plan), is no
longer active. The time period for exercising options granted under the 1993 Plan expired during 2012. A total of 105,120
shares reserved for issuance under the 1993 Plan were deregistered on April 26, 2013.
The 2003 Plan permits 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. Both plans provide for a ten-year time limit
for granting awards. No additional options can be granted under the 2003 Plan due to the expiration of the term of the 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. Restricted stock awards granted under the 2007 Plan generally have a
vesting period of four years, with shares vesting in equal annual cumulative increments commencing on the first anniversary of
the grant. Holders of unvested shares are compensated for any dividends declared.
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 executive officers.
The Company recognized compensation expense from these plans of $289,128 ($189,540 net of tax), $239,784
($173,894 net of tax) and $190,032 ($136,281 net of tax) in 2013, 2012 and 2011, respectively.
97
A summary of the stock option activity under Employers Mutual’s stock plans for 2013, 2012 and 2011 is as follows:
2013
Year ended December 31,
2012
2011
Outstanding, beginning of year
Granted
Exercised
Expired
Forfeited
Outstanding, end of year
Number
of
options
1,588,957
—
(406,532)
(47,219)
—
1,135,206
Exercisable, end of year
686,863
$
$
$
Weighted-
average
exercise
price
21.89
—
21.26
20.35
—
22.17
Number
of
options
1,437,095
263,161
(42,619)
(68,680)
—
1,588,957
Weighted-
average
exercise
price
21.92
20.98
17.97
21.51
—
21.89
$
$
$
Number
of
options
1,251,489
277,180
(38,631)
(50,918)
(2,025)
1,437,095
Weighted-
average
exercise
price
$
$
$
21.25
24.40
18.67
21.51
19.13
21.92
21.64
22.37
894,706
21.96
762,888
Employers Mutual uses the average of the high and low trading prices of the Company's stock on the date of grant to
determine the fair value of its restricted stock awards, and estimated the fair value of each option grant on the date of grant
using the Black-Scholes-Merton option-pricing model with the following weighted-average assumptions:
Estimated dividend yield
Expected volatility
Weighted-average volatility
Risk-free interest rate
Expected term (years)
Year ended December 31,
2012
2011
2013
—
3.81%
— 25.2% - 44.7%
—
35.61%
— 0.06% - 1.51%
—
0.25 - 6.40
3.11%
20.9% - 51.2%
32.76%
0.17% - 2.75%
0.25 - 6.40
The expected term of the options granted to individuals who were not eligible to retire as of the grant date was estimated
using historical data that excluded certain option exercises that occurred prior to the normal vesting period due to the retirement
of the option holders. The expected term used for options granted to individuals who were eligible to retire as of the grant date
was three months, reflecting the fact that upon retirement all unvested options immediately become vested, and the option
holder has 90 days to exercise his or her outstanding options.
The expected volatility of options granted to individuals who were not eligible to retire as of the grant date was
computed by using the historical daily prices of the Company’s common stock for a period covering the most recent 6.4 years,
which approximates the average term of the options. The expected volatility of options granted to individuals who were
eligible to retire as of the grant date was computed by using the historical daily prices for the most recent 90 days.
Beginning in 2013, Employers Mutual's compensation committee began issuing restricted stock, rather than stock
options. Holders of unvested shares of restricted stock receive compensation income in the amount of any dividends declared.
With the exception of death or permanent disability, any unvested shares of restricted stock are forfeited on termination of
employment, including retirement.
At December 31, 2013, the Company’s portion of the unrecognized compensation cost associated with restricted stock
awards issued under Employers Mutual’s stock plans that are not currently vested was $352,934, with a 3.16 year weighted-
average period over which the compensation expense is expected to be recognized. A summary of non-vested restricted stock
activity under Employers Mutual’s stock plans for 2013 is as follows:
98
Non-vested, beginning of year
Granted
Vested
Forfeited
Non-vested, end of year
Year ended December 31,
2013
Number
of
awards
Weighted-
average
grant-date
fair value
— $
57,720
—
(300)
57,420
$
—
25.90
—
25.90
25.90
At December 31, 2013, the Company’s portion of the unrecognized compensation cost associated with option awards
issued under Employers Mutual’s stock plans that are not currently vested was $351,103, with a 1.2 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 plans for 2013, 2012 and 2011 is as follows:
2013
Number
of
options
Weighted-
average
grant-date
fair value
Non-vested, beginning of year
694,251
$
Granted
Vested
Forfeited
—
(245,908)
—
Non-vested, end of year
448,343
$
3.86
—
3.35
—
4.14
Year ended December 31,
2012
Number
of
options
Weighted-
average
grant-date
fair value
674,207
$
263,161
(243,117)
—
694,251
$
3.58
3.83
3.05
—
3.86
2011
Number
of
options
Weighted-
average
grant-date
fair value
612,701
$
277,180
(213,649)
(2,025)
674,207
$
2.64
5.01
2.75
3.03
3.58
The Company’s portion of the total intrinsic value of options exercised under Employers Mutual’s stock plans was
$843,685, $54,489 and $54,932 in 2013, 2012 and 2011, respectively. Under the terms of the pooling and quota share
agreements, these amounts were paid to Employers Mutual. The Company receives the full fair value, as of the exercise date,
for all shares issued in connection with option exercises. The Company receives the full fair value, as of the grant date, for all
shares issued in connection with the grant of restricted stock awards. The Company’s portion of the total fair value of options
that vested in 2013, 2012 and 2011 was $247,063, $222,180 and $176,131, respectively (no restricted stock awards have vested
as of December 31, 2013). Additional information relating to restricted stock awards and options outstanding, and options
vested (exercisable) at December 31, 2013 is as follows:
Restricted stock awards outstanding
Options outstanding
Options exercisable
Number of
options/awards
57,420
1,135,206
686,863
December 31, 2013
Weighted-
average exercise
price
Aggregate
intrinsic value
$
$
N/A $
$
$
22.17
22.37
1,758,200
9,586,944
5,664,006
Weighted-
average
remaining term
3.16
5.35
4.12
99
The 2003 Plan does not generally generate income tax deductions for the Company because only incentive stock options
could be issued under the plan. The Company has recorded a deferred income tax benefit for a portion of the compensation
expense associated with the March 2008 grant and for all subsequent grants (all made under the 2007 Plan) because non-
qualified options and restricted stock awards were issued. The Company’s portion of the current income tax deduction realized
from exercises of non-qualified stock options was $164,715, $2,026 and $11,341 in 2013, 2012 and 2011, respectively. These
actual deductions are generally 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 (outflow if less)
with an offsetting cash flow from operating activities $95,077, $(2,221) and $6,622 as the Company’s portion in 2013, 2012
and 2011, respectively. The income tax benefit that results from disqualifying dispositions of stock purchased through the
exercise of incentive stock options is deemed immaterial.
Employee Stock Purchase Plan
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. All employees are given an option to participate in the plan.
An 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 (employees
designated as “Insiders” are required to give six months advance notice prior to participating in the plan). 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 this plan totaled $45,106, $38,755 and $39,150 in 2013, 2012 and 2011, respectively.
During 2013, options were exercised at prices ranging from $21.98 to $26.01. Activity under the plan was as follows:
Shares available for purchase, beginning of year
Shares purchased under the plan
Shares available for purchase, end of year
Non-Employee Director Stock Purchase Plan
Year ended December 31,
2012
2011
2013
370,400
(31,234)
339,166
407,102
(36,702)
370,400
441,423
(34,321)
407,102
On March 14, 2013, the Company registered 200,000 shares of the Company’s common stock for issuance under the
2013 Employers Mutual Casualty Company Non-Employee Director Stock Purchase Plan. All non-employee directors of
Employers Mutual and its subsidiaries and affiliates 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 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 period the 2023 annual
meetings. The plan is administered by the Corporate Governance and Nominating Committee of the Board of Employers
Mutual. 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 the participants. The 2003 Employers Mutual Casualty Company Non-Employee Director
Stock Option Plan is no longer active. All outstanding options granted under this plan expired in May, 2013, and no further
options can be granted due to the expiration of the term of the plan. On April 26, 2013, a total of 148,204 shares reserved for
issuance under the 2003 Employers Mutual Casualty Company Non-Employee Director Stock Option Plan were deregistered.
Expenses allocated to the Company in connection with this plan totaled $35,877, $22,138 and $48,877 in 2013, 2012 and 2011,
respectively.
During 2013, options were exercised at prices ranging from $19.25 to $22.28. Activity under the plan was as follows:
Shares available for purchase, beginning of year
Shares registered for use in the 2013 plan
Shares deregistered under the 2003 plan
Shares purchased under the plan
Shares available for purchase, end of year
100
Year ended December 31,
2012
155,467
—
—
(6,063)
149,404
2013
149,404
200,000
(148,204)
(5,035)
196,165
2011
167,848
—
—
(12,381)
155,467
Dividend Reinvestment Plan
The Company maintains a dividend reinvestment and common stock purchase plan (the “Plan”) which provides
stockholders with the option of reinvesting cash dividends in additional shares of the Company’s common stock. Participants
can also purchase additional shares of common stock without incurring broker commissions by making optional cash
contributions to the plan, and sell shares of common stock through the plan.
Effective March 14, 2012, the Company’s Board of Directors temporarily suspended the issuance of shares of common
stock under the Plan. Accordingly, on March 26, 2012, a total of 161,185 shares reserved under the Company's dividend
reinvestment and common stock purchase plan were deregistered. As a result, dividend reinvestments and optional cash
purchases were temporarily not permitted under the Plan. The temporary suspension of the issuance of shares of common stock
under the Plan was due to a late filing of an amendment to a Current Report on Form 8-K. On March 29, 2013, the Company
filed a Form S-3 Registration Statement with the Securities and Exchange Commission registering 661,185 shares of common
stock for use in the Plan, which was reinstated for the third quarter dividend payment.
Employers Mutual did not participate in this plan in 2013, 2012 or 2011. Activity under the plan was as follows:
Shares available for purchase, beginning of year
Shares registered for use in the plan
Shares deregistered under the plan
Shares purchased under the plan
Shares available for purchase, end of year
Lowest purchase price
Highest purchase price
Stock Appreciation Rights (SAR) agreement
$
$
2013
Year ended December 31,
2012
161,236
—
(161,185)
(51)
—
21.38
23.22
—
661,185
—
(2,228)
658,957
28.11
31.47
$
$
$
$
2011
169,383
—
—
(8,147)
161,236
18.13
24.25
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) at that time. 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 stipulated in the SAR
agreement. 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, and as a result, the award did not have any subsequent service requirements.
Subsequent changes in the fair value of this agreement are reflected as compensation expense, until the agreement is ultimately
settled in 2016. During 2013, 2012 and 2011, the Company did not recognize any compensation expense related to this award
because the fair value of the award did not exceed the floor amount in the agreement.
14. ACCUMULATED OTHER COMPREHENSIVE INCOME
The Company has available-for-sale securities and receives an allocation of the actuarial losses and net prior service
credits associated with Employers Mutual’s pension and postretirement benefit plans, both of which generate accumulated
other comprehensive income (loss) amounts. The following table reconciles, by component, the beginning and ending balances
of accumulated other comprehensive income.
101
Balance at December 31, 2012
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
Other comprehensive income
Balance at December 31, 2013
$
$
69,805,305
(15,581,644)
(5,847,754)
(21,429,398)
48,375,907
(1) All amounts are net of tax. Amounts in parentheses indicate debits.
Accumulated other comprehensive income by
component (1)
Unrealized
gains (losses)
on
available-for-
sale securities
Unrecognized
pension and
postretirement
benefit
obligations
$
(22,052,930) $
31,266,291
1,421,221
32,687,512
Total
47,752,375
15,684,647
(4,426,533)
11,258,114
$
10,634,582
$
59,010,489
The following table displays amounts reclassified out of accumulated other comprehensive income (loss) during the year
ended December 31, 2013.
Accumulated other comprehensive
income (loss) components
Unrealized gains on investments:
Reclassification adjustment for realized investment gains
included in net income (loss)
Deferred income tax expense
Net reclassification adjustment
Unrecognized pension and postretirement benefit
obligations:
Reclassification adjustment for amounts amortized into
net periodic pension and postretirement benefit cost:
Net actuarial loss
Prior service credit
Total before tax
Deferred income tax expense
Net reclassification adjustment
Amounts
reclassified from
accumulated other
comprehensive
income (loss) (1)
Twelve months
ended
December 31, 2013
Affected line item in the
consolidated statements
of income
$
8,996,545 Net realized investment gains
(3,148,791)
5,847,754
Income tax (expense) benefit, current
(2,894,677)
708,183
(2,186,494)
765,273
(1,421,221)
(2)
(2)
Income tax (expense) benefit, current
Total reclassification adjustment
$
4,426,533
(1) Amounts in parentheses indicate debits to net income
(2)
These accumulated other comprehensive income components are included in the computation of net periodic pension
and postretirement benefit costs (see Note 12, Employee Retirement Plans, for additional details).
102
15.
STOCK REPURCHASE PROGRAMS
Stock Repurchase Plans
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. The Company completed the program during 2011. In total, the Company repurchased 1,078,733
shares of its common stock at a cost of $24,998,330 under the program.
On November 3, 2011, the Company’s Board of Directors authorized a $15,000,000 stock repurchase program. 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 repurchased under this program will be retired by the Company. No
purchases have been made under this program.
Stock Purchase Plan
During the second quarter of 2005, Employers Mutual initiated a new $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 in effect. 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 2013, 2012 and 2011. As of December 31, 2013, $4,490,561 remained available under this plan for additional
purchases.
16. 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 2023. All of these lease costs are included as expenses under the pooling agreement. The
following table reflects the lease commitments of the Company as of December 31, 2013.
Payments due by period
Total
Less than
1 year
1 - 3
years
4 - 5
years
More than
5 years
Lease commitments
Real estate operating leases
$
7,640,978
$
1,366,288
$
2,479,379
$
1,805,215
$
1,990,096
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. The Company has accrued estimated
guaranty fund assessments of $893,769 and $1,016,334 as of December 31, 2013 and 2012, respectively. Premium tax offsets
of $894,275 and $995,545, which are related to prior guarantee fund payments and current assessments, have been accrued as
of December 31, 2013 and 2012, 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. The Company has accrued estimated second-injury fund assessments of $1,746,605 and
$1,578,802 as of December 31, 2013 and 2012, 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 those annuities was $178,101 at December 31, 2013. The Company
had a contingent liability for the aggregate guaranteed amount of the annuities of $244,998 at December 31, 2013 should the
issuers of those annuities fail to perform. The probability of a material loss due to failure of performance by the issuers of these
annuities is considered remote.
103
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.
17. UNAUDITED INTERIM FINANCIAL INFORMATION
2013
Total revenues
Three months ended,
March 31
June 30
September 30
December 31
$ 133,842,713
$ 138,566,944
$ 144,109,477
$ 146,686,003
Income (loss) before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss)
Net income (loss) per common share - basic and
diluted (1)
$
$
$
20,508,964
6,236,447
14,272,517
$
$
7,948,655
1,736,419
6,212,236
$
$
9,564,866
2,365,223
7,199,643
$
$
22,829,935
6,995,658
15,834,277
1.10
$
0.48
$
0.55
$
1.20
2012
Total revenues
Three months ended,
March 31
June 30
September 30
December 31
$ 130,073,865
$ 120,503,570
$ 132,562,158
$ 128,727,934
Income (loss) before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss)
Net income (loss) per common share - basic and
diluted (1)
$
$
$
27,898,287
8,674,552
19,223,735
$
$
(5,511,804) $
(2,935,333)
(2,576,471) $
10,750,356
2,429,112
8,321,244
$
$
18,496,775
5,498,854
12,997,921
1.49
$
(0.20) $
0.65
$
1.01
(1)
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.
104
GLOSSARY
Assumed Reinsurance(cid:3)(cid:16)(cid:3)(cid:58)(cid:75)(cid:72)(cid:81)(cid:3)(cid:82)(cid:81)(cid:72)(cid:3)(cid:82)(cid:85)(cid:3)(cid:80)(cid:82)(cid:85)(cid:72)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:72)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:15)(cid:3)(cid:68)(cid:70)(cid:70)(cid:72)(cid:83)(cid:87)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:82)(cid:81)(cid:86)(cid:76)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)
(cid:87)(cid:82)(cid:3)(cid:76)(cid:81)(cid:71)(cid:72)(cid:80)(cid:81)(cid:76)(cid:73)(cid:92)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:90)(cid:85)(cid:76)(cid:87)(cid:87)(cid:72)(cid:81)(cid:3)(cid:69)(cid:92)(cid:3)(cid:68)(cid:81)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:68)(cid:86)(cid:3)(cid:85)(cid:72)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:17)(cid:3)(cid:3)(cid:54)(cid:72)(cid:72)(cid:3)(cid:166)(cid:53)(cid:72)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:17)(cid:167)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
(cid:3)
Catastrophe and Storm Losses(cid:3)(cid:16)(cid:3)(cid:47)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:70)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:81)(cid:3)(cid:72)(cid:68)(cid:85)(cid:87)(cid:75)(cid:84)(cid:88)(cid:68)(cid:78)(cid:72)(cid:15)(cid:3)(cid:75)(cid:88)(cid:85)(cid:85)(cid:76)(cid:70)(cid:68)(cid:81)(cid:72)(cid:15)(cid:3)(cid:72)(cid:91)(cid:83)(cid:79)(cid:82)(cid:86)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:73)(cid:79)(cid:82)(cid:82)(cid:71)(cid:15)(cid:3)(cid:75)(cid:68)(cid:76)(cid:79)(cid:3)
(cid:86)(cid:87)(cid:82)(cid:85)(cid:80)(cid:3)(cid:82)(cid:85)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:86)(cid:76)(cid:80)(cid:76)(cid:79)(cid:68)(cid:85)(cid:3)(cid:72)(cid:89)(cid:72)(cid:81)(cid:87)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:87)(cid:68)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:3)
Ceded Reinsurance(cid:3)(cid:16)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:73)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:82)(cid:85)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:68)(cid:81)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:72)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:81)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:68)(cid:86)(cid:3)
(cid:85)(cid:72)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:17)(cid:3)(cid:3)(cid:54)(cid:72)(cid:72)(cid:3)(cid:166)(cid:53)(cid:72)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:17)(cid:167)(cid:3)
(cid:3)
Combined Ratio(cid:3)(cid:16)(cid:3)(cid:36)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:92)(cid:18)(cid:70)(cid:68)(cid:86)(cid:88)(cid:68)(cid:79)(cid:87)(cid:92)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:90)(cid:85)(cid:76)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:17)(cid:3)(cid:3)(cid:44)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:15)(cid:3)(cid:86)(cid:72)(cid:87)(cid:87)(cid:79)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:90)(cid:85)(cid:76)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:83)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:86)(cid:17)(cid:3)(cid:3)(cid:58)(cid:75)(cid:72)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:69)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:3)(cid:76)(cid:86)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:20)(cid:19)(cid:19)(cid:8)(cid:15)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:90)(cid:85)(cid:76)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)
(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:83)(cid:85)(cid:82)(cid:73)(cid:76)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:30)(cid:3)(cid:90)(cid:75)(cid:72)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:3)(cid:76)(cid:86)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:20)(cid:19)(cid:19)(cid:8)(cid:15)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:90)(cid:85)(cid:76)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:88)(cid:81)(cid:83)(cid:85)(cid:82)(cid:73)(cid:76)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:17)(cid:3)(cid:3)(cid:56)(cid:81)(cid:71)(cid:72)(cid:85)(cid:90)(cid:85)(cid:76)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)
(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:71)(cid:82)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:80)(cid:68)(cid:78)(cid:72)(cid:3)(cid:68)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:73)(cid:76)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:68)(cid:79)(cid:79)(cid:3)(cid:83)(cid:85)(cid:82)(cid:73)(cid:76)(cid:87)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:3)
Deferred Policy Acquisition Costs(cid:3)(cid:16)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:76)(cid:93)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:76)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:83)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:3)(cid:87)(cid:68)(cid:91)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)
(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:71)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:80)(cid:82)(cid:85)(cid:87)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:83)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:3)
(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:3)
Excess of Loss Reinsurance(cid:3)(cid:16)(cid:3)(cid:38)(cid:82)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:72)(cid:71)(cid:3)(cid:83)(cid:85)(cid:72)(cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:85)(cid:72)(cid:87)(cid:72)(cid:81)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:79)(cid:76)(cid:80)(cid:76)(cid:87)(cid:86)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:3)
Generally Accepted Accounting Principles (GAAP)(cid:3)(cid:16)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:86)(cid:72)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:85)(cid:68)(cid:70)(cid:87)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:71)(cid:88)(cid:85)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
(cid:73)(cid:85)(cid:68)(cid:80)(cid:72)(cid:90)(cid:82)(cid:85)(cid:78)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:83)(cid:85)(cid:72)(cid:83)(cid:68)(cid:85)(cid:72)(cid:71)(cid:3)
(cid:76)(cid:81)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:85)(cid:71)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:56)(cid:17)(cid:54)(cid:17)(cid:3)(cid:42)(cid:36)(cid:36)(cid:51)(cid:17)(cid:3)(cid:3)
(cid:3)
Incurred But Not Reported (IBNR)(cid:3)(cid:164)(cid:3)(cid:36)(cid:81)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:82)(cid:70)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:88)(cid:87)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:92)(cid:72)(cid:87)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3)
(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:72)(cid:85)(cid:17)(cid:3)(cid:3)(cid:41)(cid:82)(cid:85)(cid:3)(cid:85)(cid:72)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:44)(cid:37)(cid:49)(cid:53)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:68)(cid:79)(cid:86)(cid:82)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:3)(cid:68)(cid:81)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:85)(cid:72)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:3)
(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:83)(cid:85)(cid:72)(cid:89)(cid:76)(cid:82)(cid:88)(cid:86)(cid:79)(cid:92)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:72)(cid:71)(cid:17)(cid:3)
(cid:3)
Incurred Losses and Settlement Expenses(cid:3)(cid:16)(cid:3)(cid:38)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:72)(cid:87)(cid:87)(cid:79)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:3)(cid:83)(cid:68)(cid:76)(cid:71)(cid:3)(cid:82)(cid:85)(cid:3)(cid:88)(cid:81)(cid:83)(cid:68)(cid:76)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:69)(cid:72)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:3)(cid:74)(cid:76)(cid:89)(cid:72)(cid:81)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:3)
Loss Reserve Development(cid:3)(cid:16)(cid:3)(cid:36)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:75)(cid:82)(cid:90)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:79)(cid:68)(cid:87)(cid:72)(cid:86)(cid:87)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:81)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:10)(cid:86)(cid:3)(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:3)(cid:82)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)
(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:81)(cid:3)(cid:72)(cid:68)(cid:85)(cid:79)(cid:76)(cid:72)(cid:85)(cid:3)(cid:83)(cid:85)(cid:82)(cid:77)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:79)(cid:86)(cid:82)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:82)(cid:85)(cid:3)(cid:71)(cid:72)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)
(cid:72)(cid:89)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:85)(cid:76)(cid:82)(cid:85)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:3)
Net Investment Income(cid:3)(cid:16)(cid:3)(cid:39)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:72)(cid:71)(cid:3)(cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:3)(cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:15)(cid:3)
(cid:85)(cid:72)(cid:71)(cid:88)(cid:70)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:3)
Net Investment Yield(cid:3)(cid:16)(cid:3)(cid:49)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:68)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:3)
Other-Than-Temporary Investment Impairment Loss(cid:3)(cid:164)(cid:3)(cid:36)(cid:3)(cid:85)(cid:72)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:90)(cid:75)(cid:72)(cid:81)(cid:3)(cid:68)(cid:81)(cid:3)
(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:169)(cid:86)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:71)(cid:72)(cid:70)(cid:79)(cid:76)(cid:81)(cid:72)(cid:86)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:70)(cid:68)(cid:85)(cid:85)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:72)(cid:70)(cid:79)(cid:76)(cid:81)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:71)(cid:72)(cid:72)(cid:80)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:16)(cid:87)(cid:75)(cid:68)(cid:81)(cid:16)(cid:87)(cid:72)(cid:80)(cid:83)(cid:82)(cid:85)(cid:68)(cid:85)(cid:92)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:3)
Pooling Agreement(cid:3)(cid:16)(cid:3)(cid:36)(cid:3)(cid:77)(cid:82)(cid:76)(cid:81)(cid:87)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:90)(cid:85)(cid:76)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:86)(cid:86)(cid:88)(cid:80)(cid:72)(cid:3)(cid:68)(cid:3)(cid:83)(cid:85)(cid:72)(cid:71)(cid:72)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:73)(cid:76)(cid:91)(cid:72)(cid:71)(cid:3)
(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:86)(cid:15)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:15)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:73)(cid:76)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:17)(cid:3)(cid:3)
105
Premiums(cid:3)(cid:16)(cid:3)(cid:36)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:3)(cid:83)(cid:68)(cid:76)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:83)(cid:82)(cid:79)(cid:76)(cid:70)(cid:92)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:86)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:3)
Earned Premium(cid:3)(cid:16)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:90)(cid:85)(cid:76)(cid:87)(cid:87)(cid:72)(cid:81)(cid:3)(cid:83)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:86)(cid:3)(cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:79)(cid:92)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:91)(cid:83)(cid:76)(cid:85)(cid:72)(cid:71)(cid:3)
(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:81)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:83)(cid:82)(cid:79)(cid:76)(cid:70)(cid:92)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:3)(cid:74)(cid:76)(cid:89)(cid:72)(cid:81)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:3)
(cid:3)
(cid:3)
Net Written Premiums(cid:3)(cid:16)(cid:3)(cid:51)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:86)(cid:3)(cid:90)(cid:85)(cid:76)(cid:87)(cid:87)(cid:72)(cid:81)(cid:3)(cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:3)(cid:74)(cid:76)(cid:89)(cid:72)(cid:81)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:15)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:86)(cid:86)(cid:88)(cid:80)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:72)(cid:71)(cid:72)(cid:71)(cid:3)
(cid:85)(cid:72)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:70)(cid:82)(cid:85)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:3)(cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:79)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:71)(cid:17)(cid:3)(cid:3)(cid:3)
Unearned Premium(cid:3)(cid:16)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:90)(cid:85)(cid:76)(cid:87)(cid:87)(cid:72)(cid:81)(cid:3)(cid:83)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:90)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:69)(cid:72)(cid:3)(cid:85)(cid:72)(cid:87)(cid:88)(cid:85)(cid:81)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:83)(cid:82)(cid:79)(cid:76)(cid:70)(cid:92)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:3)(cid:88)(cid:83)(cid:82)(cid:81)(cid:3)
(cid:70)(cid:68)(cid:81)(cid:70)(cid:72)(cid:79)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3)(cid:3)(cid:3)
Written Premium(cid:3)(cid:16)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:17)(cid:3)(cid:3)(cid:58)(cid:85)(cid:76)(cid:87)(cid:87)(cid:72)(cid:81)(cid:3)(cid:83)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:86)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:83)(cid:82)(cid:79)(cid:76)(cid:70)(cid:76)(cid:72)(cid:86)(cid:3)
(cid:86)(cid:82)(cid:79)(cid:71)(cid:3)(cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:3)(cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:73)(cid:76)(cid:72)(cid:71)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:17)(cid:3)(cid:3)(cid:3)
Quota Share Reinsurance Agreement(cid:3)(cid:164)(cid:3)(cid:36)(cid:3)(cid:73)(cid:82)(cid:85)(cid:80)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:72)(cid:85)(cid:3)(cid:68)(cid:86)(cid:86)(cid:88)(cid:80)(cid:72)(cid:86)(cid:3)(cid:68)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:83)(cid:72)(cid:85)(cid:70)(cid:72)(cid:81)(cid:87)(cid:68)(cid:74)(cid:72)(cid:3)
(cid:82)(cid:73)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:83)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:86)(cid:15)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:74)(cid:76)(cid:89)(cid:72)(cid:81)(cid:3)(cid:70)(cid:79)(cid:68)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:17)(cid:3)
(cid:3)
Realized Investment Gains/Losses(cid:3)(cid:16)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:74)(cid:68)(cid:76)(cid:81)(cid:86)(cid:18)(cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:85)(cid:72)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:90)(cid:75)(cid:72)(cid:81)(cid:3)(cid:68)(cid:81)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:86)(cid:82)(cid:79)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:68)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:3)
(cid:75)(cid:76)(cid:74)(cid:75)(cid:72)(cid:85)(cid:3)(cid:82)(cid:85)(cid:3)(cid:79)(cid:82)(cid:90)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:76)(cid:87)(cid:86)(cid:3)(cid:82)(cid:85)(cid:76)(cid:74)(cid:76)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:3)(cid:82)(cid:85)(cid:3)(cid:70)(cid:68)(cid:85)(cid:85)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:17)(cid:3)(cid:3)(cid:36)(cid:79)(cid:86)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:90)(cid:75)(cid:72)(cid:81)(cid:3)(cid:68)(cid:81)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:169)(cid:86)(cid:3)
(cid:70)(cid:68)(cid:85)(cid:85)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:71)(cid:88)(cid:70)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:71)(cid:88)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:16)(cid:87)(cid:75)(cid:68)(cid:81)(cid:16)(cid:87)(cid:72)(cid:80)(cid:83)(cid:82)(cid:85)(cid:68)(cid:85)(cid:92)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:76)(cid:85)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:3)
Reinsurance(cid:3)(cid:16)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:88)(cid:68)(cid:79)(cid:3)(cid:68)(cid:85)(cid:85)(cid:68)(cid:81)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:69)(cid:92)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:82)(cid:81)(cid:72)(cid:3)(cid:82)(cid:85)(cid:3)(cid:80)(cid:82)(cid:85)(cid:72)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:70)(cid:68)(cid:79)(cid:79)(cid:72)(cid:71)(cid:3)(cid:85)(cid:72)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:72)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)
(cid:83)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:15)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:86)(cid:86)(cid:88)(cid:80)(cid:72)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:82)(cid:85)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:82)(cid:85)(cid:76)(cid:74)(cid:76)(cid:81)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:87)(cid:68)(cid:78)(cid:72)(cid:81)(cid:3)(cid:69)(cid:92)(cid:3)(cid:68)(cid:81)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:72)(cid:85)(cid:17)(cid:3)(cid:3)(cid:53)(cid:72)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)
(cid:5)(cid:86)(cid:83)(cid:85)(cid:72)(cid:68)(cid:71)(cid:86)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:5)(cid:3)(cid:68)(cid:80)(cid:82)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:83)(cid:85)(cid:76)(cid:86)(cid:72)(cid:86)(cid:15)(cid:3)(cid:68)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:88)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:76)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:71)(cid:88)(cid:70)(cid:72)(cid:3)(cid:72)(cid:91)(cid:83)(cid:82)(cid:86)(cid:88)(cid:85)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:3)
(cid:68)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:68)(cid:83)(cid:68)(cid:70)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:90)(cid:85)(cid:76)(cid:87)(cid:72)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:17)(cid:3)(cid:3)(cid:3)(cid:3)
(cid:3)
Reserves(cid:3)(cid:16)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:86)(cid:87)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:88)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:88)(cid:81)(cid:83)(cid:68)(cid:76)(cid:71)(cid:3)(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:86)(cid:3)(cid:78)(cid:81)(cid:82)(cid:90)(cid:81)(cid:3)(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)
(cid:68)(cid:86)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:82)(cid:70)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:69)(cid:88)(cid:87)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:72)(cid:85)(cid:3)(cid:11)(cid:44)(cid:37)(cid:49)(cid:53)(cid:12)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:3)
Return on Equity (ROE)(cid:3)(cid:16)(cid:3)(cid:49)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:68)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:10)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:17)(cid:3)
(cid:3)
Risk-Based Capital(cid:3)(cid:16)(cid:3)(cid:36)(cid:3)(cid:80)(cid:82)(cid:71)(cid:72)(cid:79)(cid:3)(cid:71)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:49)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:36)(cid:86)(cid:86)(cid:82)(cid:70)(cid:76)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:44)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:76)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:72)(cid:85)(cid:86)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:68)(cid:87)(cid:87)(cid:72)(cid:80)(cid:83)(cid:87)(cid:86)(cid:3)
(cid:87)(cid:82)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:76)(cid:81)(cid:76)(cid:80)(cid:88)(cid:80)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:88)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:81)(cid:72)(cid:72)(cid:71)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:86)(cid:88)(cid:68)(cid:79)(cid:87)(cid:92)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:76)(cid:72)(cid:86)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:88)(cid:83)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:86)(cid:3)
(cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:10)(cid:86)(cid:3)(cid:80)(cid:76)(cid:91)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:73)(cid:82)(cid:79)(cid:76)(cid:82)(cid:17)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
(cid:3)
Settlement Expenses(cid:3)(cid:16)(cid:3)(cid:40)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:72)(cid:87)(cid:87)(cid:79)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:3)
Statutory Accounting(cid:3)(cid:16)(cid:3)(cid:36)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:68)(cid:70)(cid:87)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3)(cid:88)(cid:86)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:76)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:85)(cid:72)(cid:83)(cid:68)(cid:85)(cid:72)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)
(cid:86)(cid:88)(cid:69)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:68)(cid:88)(cid:87)(cid:75)(cid:82)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:17)(cid:3)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:88)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:71)(cid:76)(cid:73)(cid:73)(cid:72)(cid:85)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:42)(cid:36)(cid:36)(cid:51)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:76)(cid:87)(cid:3)(cid:86)(cid:87)(cid:85)(cid:72)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)
(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:86)(cid:82)(cid:79)(cid:89)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:85)(cid:68)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:68)(cid:87)(cid:70)(cid:75)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:3)
Underwriting Gain/Loss(cid:3)(cid:16)(cid:3)(cid:53)(cid:72)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:83)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:79)(cid:72)(cid:86)(cid:86)(cid:3)(cid:76)(cid:81)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:70)(cid:79)(cid:68)(cid:76)(cid:80)(cid:86)(cid:15)(cid:3)(cid:86)(cid:72)(cid:87)(cid:87)(cid:79)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:90)(cid:85)(cid:76)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:3)
Unrealized Holding Gains/Losses on Investments(cid:3)(cid:16)(cid:3)(cid:53)(cid:72)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:76)(cid:73)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:69)(cid:72)(cid:87)(cid:90)(cid:72)(cid:72)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)
(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:68)(cid:86)(cid:76)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:17)(cid:3)(cid:3)(cid:3)
(cid:3)(cid:3)
106
EMCI BOARD OF DIRECTORS
CHAIRMAN OF THE BOARD
Stephen A. Crane
68, A, C, E, N
Chair – Corp. Gov./Nominating Committee
Independent Consultant
Retired Chief Executive Officer
AlphaStar Insurance Group Ltd.
DIRECTORS
Jonathan R. Fletcher
40, C, I, N
Chair – Compensation Committee
Managing Director and Portfolio Manager
BTC Capital Management, Inc.
(finance, investments)
Robert L. Howe*, CFE, CIE, CGFM, AIR
71, A, C, I, N
Chair – Inter-Company Committee
Consultant, Insurance Strategies Consulting, LLC
Retired Deputy Commissioner and Chief Examiner,
Iowa Insurance Division
Bruce G. Kelley, J.D., CPCU, CLU
60, E
Chair – Executive Committee
President and Chief Executive Officer
EMC Insurance Group Inc.
EMCI OFFICERS
Karey S. Anderson, CFA
Assistant Secretary
Jason R. Bogart, CPCU, ARM
Senior Vice President, Branch Operations
Bradley J. Fredericks, M.B.A., FLMI
Assistant Vice President
Rodney D. Hanson, CPCU
Senior Vice President, Productivity and Technology
Richard W. Hoffmann, J.D.
Vice President, General Counsel & Secretary
Kevin J. Hovick, CPCU
Executive Vice President and COO
Gretchen H. Tegeler
58, E, A, I
Chair – Audit Committee
Executive Director
Taxpayers Association of Central Iowa
INDEPENDENT DIRECTORS
Stephen A. Crane
Jonathan R. Fletcher
Robert L. Howe
Gretchen H. Tegeler
BOARD COMMITTEES
A Audit Committee
C Compensation Committee
E Executive Committee
I
N Corporate Governance and Nominating Committee
Inter-Company Committee
EMCI’s Board-designated financial expert *
In Memory of:
George C. Carpenter III, Des Moines, IA
The Board of Directors and Officers of EMCI mourn the passing
of George C. Carpenter III, who served as a director since 1981,
most recently as Chairman of the Board until his retirement
in May of 2013.
Robert L. Link, CAM, CM
Senior Vice President & Assistant Secretary
Mick A. Lovell, CPCU
Vice President, Director of Business Development
Elizabeth A. Nigut, J.D.
Vice President, Human Resources
Ronald A. Paine, CPA, CIA
Senior Vice President, Internal Audit
Carla A. Prather
Assistant Vice President & Controller
Mark E. Reese, CPA
Senior Vice President & CFO
Ronald W. Jean, M.S., FCAS, MAAA
Executive Vice President for Corporate Development
Kelvin B. Sederburg, ACAS, MAAA
Vice President & Appointed Actuary
Scott R. Jean, FCAS, MAAA
Vice President & Chief Actuary
Bruce G. Kelley, J.D., CPCU, CLU
President and CEO
Lisa A. Simonetta, J.D.
Senior Vice President, Claims
Lisa A. Stange, M.B.A., CFA, FLMI
Vice President, Chief Investment Officer & Treasurer
EMC Insurance Group Inc.
Dakota Fire Insurance Company
EMC Reinsurance Company
EMC Underwriters, LLC
EMCASCO Insurance Company
llinois EMCASCO Insurance Company
717 Mulberry Street | Des Moines, IA 50309 | 515-280-2511 | 800-447-2295 | emcins.group@emcins.com | www.emcins.com/ir
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