TAKING
ACTION
2016 Annual Report
LETTER TO OUR
STOCKHOLDERS
For 2016, we reported a GAAP combined ratio of 97.7
percent, our third best in the past 10 years. Having been in
business for more than 100 years, EMC Insurance Companies
has successfully navigated many market cycles and varying
economic conditions, so it was no surprise that we reported
another profitable year. Entering 2016 against the backdrop
of a challenging market, which included rate softening and
increased competition pressuring both of our operating
segments, we had to take action to lessen the impact on
operations. We rely on our guiding beliefs of honesty and
integrity, service, teamwork and continuous improvement
when we take action.
VALUED PARTNER FOR OUR
INDEPENDENT AGENTS
We market exclusively through the independent agency system
because independent agents bring real value and knowledge
to the insurance process and can best represent their
clients’ interests. We rely on our agents to represent us and
promote our products and services to their clients. We select
independent agents who provide us with the opportunity to
write profitable business within our risk appetite.
Our unique branch office structure, with 16 full-service branch
offices and 4 service offices located strategically throughout
the country, is ideal for cultivating close relationships with our
agents in the 41 states where we actively write business. Our
agents tell us that this is a true competitive advantage that sets
us apart. We are available in person, on the phone or online
anytime our agents need assistance or have questions.
Bruce G. Kelley, J.D., CPCU, CLU
President, Chief Executive Officer & Treasurer
Our goal is to offer a rich,
consistent experience to every
customer and provide our
stockholders with exceptional
value. And we know this doesn’t
just happen. It takes action,
dedication, innovation and a
vision to be the best.
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
The companies that comprise EMC write both
commercial and personal lines property and casualty
property and casualty insurance and reinsurance. EMCI
insurance, with a focus on small- and medium-sized
was formed in 1974, became publicly held in 1982, and
commercial accounts. Products and services are
is traded on the NASDAQ exchange under the symbol
offered through independent insurance agents who are
EMCI. EMCI is a controlled company in that its parent
supported by a network of 16 local branch offices. EMC
owns greater than 50 percent of its outstanding stock.
is licensed in all 50 states and the District of Columbia
As of December 31, 2016, EMCI’s parent company,
and actively markets insurance products in 41 states.
Employers Mutual Casualty Company, owned 55 percent
Reinsurance business is also written, with an emphasis
of EMCI’s outstanding stock, and public stockholders
owned the remaining 45 percent. EMCI has no
on property business.
employees of its own.
EMC LOCATIONS
Employers Mutual Casualty Company (EMCC)
is a mutual insurance company founded in 1911
and is headquartered in Des Moines, Iowa. EMCC
employs approximately 2,250 people countrywide
and markets its products exclusively through a
network of independent insurance agents.
EMC Insurance Companies (EMC) is the trade
name under which EMCI and EMCC, together with
each entity’s subsidiary and affiliated companies,
operate collectively.
Bismarck
Minneapolis
Des Moines
Corporate Office
Milwaukee
Chicago
Lansing
Providence
Valley Forge
Denver
Omaha
Davenport
Kansas City
Cincinnati
Wichita
Phoenix
Charlotte
Little Rock
Birmingham
Dallas
Jackson
Branch offices
Service offices
Corporate office
Taking Action 3
INITIATIVES
TAKING SHAPE
PERSONAL LINES
In order to be the carrier of choice for our independent agents, we
must have a comprehensive suite of products and services to meet the
insurance needs of policyholders. With this in mind, we took action
by developing new personal lines products and creating Personal
Lines Operations, which marked its first year in 2016. This centralized
operation includes underwriting, research, claims and marketing.
Our new personal auto and homeowners products were implemented
effectively in the 22 states where we write personal lines business. As
we re-underwrite our existing book of personal lines business, our
independent agents are enthusiastic about these new products and our
competitive position in the marketplace.
The personal lines new business premium trend is now positive after
several years of declining premium as we took action by reducing
exposure concentrations and limiting the impact of underperforming
business. We now have an opportunity to carefully grow personal lines
business and prudently achieve a more diversified book of business.
EMCI 2016 PREMIUMS EARNED
Reinsurance
1%
Bonds
Commercial
Auto
23%
19%
Personal
Lines
7%
18%
Commercial
Property
16%
16%
Workers’
Compensation
Commercial
Liability
High-Scoring Claims Service
We rely on our team members, and they
deliver. The proof is in our outstanding
customer service score for our claims
service: 4.6 in 2016 on a five-point
scale, which is a 92 percent satisfaction
rate. The survey is conducted by an
independent firm and asks questions
about professionalism, courtesy,
timeliness and whether or not the claims
process was thoroughly explained. Our
team members consistently give great
claims service, and for five years our
score has been 4.6 or above.
EMC Named No. 2 on 40 Best Public
Companies for Leaders
For the fourth consecutive year, EMC
is listed as one of the 40 best public
companies for leaders in the January/
February 2016 issue of Chief Executive
magazine. EMC ranked 2nd in 2016,
moving up from 4th in 2015.*
We encourage the development of
our team members through education
and training programs as we cultivate
the next generation of our company
leaders. This investment in professional
development enables us to fill a majority
of our open management positions
with internal candidates, and these
knowledgeable team members give
EMC a competitive advantage over
other companies.
*The annual ranking is based on a survey of
organizations worldwide conducted by Chief Executive
in cooperation with GrowthPlay. For more information
on the 40 Best Companies for Leaders, go to
http://chiefexecutive.net/2016‐best‐companies‐for‐leaders.
4
ACCELERATE COMMERCIAL
AUTO PROFITABILITY
INTERCOMPANY REINSURANCE
PROGRAMS
The commercial auto line of business is a challenge.
The new intercompany reinsurance agreement between
Increases in distracted drivers on the road and in miles
EMCI’s three property and casualty insurance subsidiaries
driven due to lower gas prices have resulted in higher
loss frequency. When coupled with an increase in loss
and EMCC was effective at the beginning of the year and is
in place to provide additional protection against excessive
severity, these macroeconomic and industry trends offset
catastrophe and storm losses. It performed as expected,
the benefits we gained from the efforts of our commercial
given the reported quarterly amount of catastrophe and
auto task force that was charged with improving the
storm losses. EMC Reinsurance Company also enhanced
performance of this business.
More intensive work is required to turn this line around, so
we took action by implementing the multiyear Accelerate
Commercial Auto Profitability project. It was developed
with the goal of returning commercial auto to profitability
by mid-2019. This would represent a big improvement to
our results, with incremental improvement anticipated
each year of the project. This comprehensive project
includes eight teams complementing local branch efforts,
each focusing on different opportunities to improve results
in areas such as pricing, claims handling and underwriting.
its existing intercompany reinsurance agreement with
EMCC and strengthened its protection from both the
frequency and severity of catastrophe and storm losses. We
expect our stockholders will continue to benefit from more
consistency in our quarterly results as the programs were
renewed for the 2017 calendar year.
50 Most Trustworthy Financial Companies List by Forbes
For the third consecutive year, EMCI was listed among the 50 Most Trustworthy Financial Companies, announced by Forbes
in 2016. EMCI was previously listed among the Forbes 100 Most Trustworthy Companies in 2013.*
*In 2014, MSCI ESG Research began compiling the 50 Most Trustworthy Financial Companies list separately from the Forbes 100 Most Trustworthy Companies list. To create the list,
MSCI ESG Research reviewed nearly 700 publicly-traded North American financial companies with market caps of $250 million or greater for the year ending December 2015. For more
information, go to http://www.forbes.com/sites/kathryndill/2016/08/02/americas-50-most-trustworthy-financial-companies-3/#5687140d567a.
Taking Action 5
INVESTING IN
INNOVATION
We’re focused on finding innovative solutions and
using technology to create products and services
that set our agents apart. That’s what makes EMC
different — our approach to innovation gives our
agents more to sell, and benefits our policyholders
and stockholders.
DATA-DRIVEN SOLUTIONS
In late 2015, we formed a Strategic Analytics department focused on
utilizing abundant high-quality data to make better decisions. We then
created an innovation lab, led by team members who are empowered to
collaborate, make quick decisions and take action. The first successful
outcome from the innovation lab is our telematics program, currently
being piloted with select agencies. While many telematics solutions
only focus on improving safety, we believe our unique solution will help
commercial auto insureds improve not only their safety records, but their
fuel economy, uptime and driver retention, representing significant cost
savings to our policyholders. Using the data and feedback gathered from
the pilot project will allow us to enhance the program so our agents can
differentiate themselves from non-EMC agents through special value-
added services.
GLOBAL INSURANCE ACCELERATOR
But our investment in innovation does not stop there. This past year,
EMC joined the Global Insurance Accelerator, a business accelerator
focused on developing and growing innovative insurance-centric
startups. It fosters innovation and builds solutions to solve contemporary
insurance issues such as data sharing, security and risk management.
The New Peak FleetTM Program
We are building a new platform, Peak
FleetTM, that will be agency-branded
and introduced to our agents in 2017.
We anticipate this unique platform
will help fleet managers improve
maintenance and uptime, increase fuel
economy and reduce costs associated
with replacing drivers.
6
As an investor, EMC is funding the insurance technology
Recent loss control innovations include:
startups accepted into the program. We have also
committed staff and company expertise to mentor these
startups through the critical early stages of growth to foster
their success.
Walkway CheckSM
The average cost of a slip and fall injury exceeds $12,000.*
With the Walkway Check app, organizations can easily
identify and report hazards that lead to slip and fall
incidents — the leading cause of unintentional injuries in
LOSS CONTROL INNOVATIONS
the United States.
We have been an innovator of loss control services for the
past 90 years. Early in our company’s history, we identified
the best way to control losses — prevent them before they
happen, which is why we invest more per dollar of premium
in loss control services than most of our competitors.
These value-added services are available to all commercial
policyholders, improve workplace safety and potentially
reduce future losses. Implementation of a strong loss
control program could lead to a future reduction in their
cost of insurance, while benefiting the independent agent
and EMC through improved underwriting results. These
services provide us with another competitive advantage and
differentiator in this complex business environment.
Sensors for Real-Time Monitoring in Schools
EMC, in partnership with Hartford Steam Boiler, started a
pilot program in late 2016 that uses a monitoring system to
help schools manage risks using real-time data. It features
remote-operated sensors that monitor doors, temperature,
humidity, vibration and water. If triggered, the sensors will
send alerts so policyholders can find solutions to improve
their work environment and safety.
MākuSafe Partnership
Recognizing the potential benefits offered from sensors
through real-time monitoring, EMC partnered with
MākuSafe in early 2017. MākuSafe is an innovative startup
that developed patent-pending wearable technology that
monitors environmental exposures to identify risks in
industrial workplaces.
*Occupational Safety and Health Administration
Taking Action 7
PILLAR OF
FINANCIAL
STRENGTH
Our balance sheet remains strong, with more than $1.4 billion
in invested assets; $1.2 billion of which is invested in a laddered
bond portfolio designed to meet day-to-day liquidity obligations
and generate a strong risk-adjusted return. The affirmation of the
A (Excellent) rating of EMC Insurance Companies pool members
and Reinsurance Company by A.M. Best Co. also demonstrates
our financial strength. This competitive advantage reassures
our independent agents and policyholders that we will fulfill the
promises made to pay the claims we owe.
We also have a responsibility to you, our stockholders, to be good
stewards of your investment in EMCI, which is why we have
increased our quarterly cash dividend at an 8.7 percent compound
annual growth rate since 2011. The fourth quarter dividend was
increased to $0.21 per share, representing a 10.5 percent increase
over the previous quarterly dividend of $0.19 per share, as this
remains our preferred way of returning excess capital to you.
It takes vision. It takes innovation. It takes dedication. It
takes every part of EMC taking action to deliver the best
value and service to our customers and stakeholders as
we strive to increase the value of your investment.
Thank you for your continued investment
in EMC Insurance Group Inc.
Proven Ability to Deliver Attractive
Returns to Stockholders
Book Value and Cumulative Dividends Per Share
Book Value Per Share
Cumulative Dividends
9 . 9 % C A G R
$26.46
$24.72
$27.69
$25.26
$29.28
$26.07
$21.26
$20.72
$23.92
$22.81*
2012
2013
2014
2015
2016
*Approximately $0.88 per share of the increase in 2013
is attributable to a change in EMCC’s postretirement
healthcare plan
Total Stockholder Return
EMCI
S&P 500
22.1%
17.1%
11.9%
8.9%
20.8%
14.6%
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$-
25%
20%
15%
10%
5%
0%
8
1-year
3-year
5-year
Sincerely,
Total stockholder return is the percentage change in the
stock price plus the amount of dividends paid, assuming
dividend reinvestment, to the stock price at the beginning
of the one-year, three-year and five-year periods ending
December 31, 2016.
Source: Bloomberg
Bruce G. Kelley, J.D., CPCU, CLU
President, Chief Executive Officer & Treasurer
FINANCIAL HIGHLIGHTS
( in thousands)
Revenues
Realized investment gains
Income before income taxes
Net income
(per share)
Net income
Catastrophe and storm losses (after tax)
Dividends paid
Book value
($ in thousands)
Average return on equity (ROE)
Total assets
Stockholders’ equity
2016
2015
2014
$
$
$
$
640,909
4,074
63,207
46,203
2.20
1.48
0.78
26.07
$
$
$
$
617,573
6,153
71,656
50,162
2.43
1.40
0.69
25.26
$
$
$
$
590,118
4,349
40,907
29,992
1.48
1.84
0.63
24.72
8.6%
$ 1,588,813
553,342
$
9.8%
$ 1,535,955
524,938
$
6.3%
$ 1,497,820
502,886
$
COMMON STOCK PRICE AND DIVIDEND DATA
2016
2015
Quarter:
High
Low
1st
2nd
3rd
4th
1st
2nd
3rd
4th
$ 25.99
$ 28.01
$ 29.01
$ 31.18
$ 23.93
$ 26.00
$ 26.52
$ 26.83
21.62
24.02
24.71
23.45
19.84
21.67
20.23
22.20
Period-end close
25.65
27.72
26.93
30.01
22.53
25.07
23.21
25.30
Cash dividends declared
$ 0.190
$ 0.190
$ 0.190
$ 0.210
$ 0.167
$ 0.167
$ 0.170
$ 0.190
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:
the adequacy of loss and settlement expense reserves;
• catastrophic events and the occurrence of significant severe weather conditions;
•
• 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.
Taking Action 9
COMMON STOCK
STOCKHOLDER SERVICES
EMC Insurance Group Inc.’s common stock trades
on the Global Select Market tier of the NASDAQ Stock
Corporate Headquarters
717 Mulberry Street
Market under the symbol EMCI. As of February 20, 2017,
Des Moines, IA 50309
the number of registered stockholders was 672.
Phone: 515-280-2511 | 800-447-2295
There are certain regulatory restrictions relating to
the payment of dividends by the Company’s insurance
Transfer Agent
American Stock Transfer & Trust Company, LLC
subsidiaries (see Note 6 of Notes to Consolidated
6201 15th Avenue
Financial Statements in the Company’s 2016 Form
Brooklyn, NY 11219
10-K). It is the present intention of the Company’s
Phone: 866-666-1597
Board of Directors to declare quarterly cash dividends,
www.astfinancial.com
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
EMC Insurance Group Inc. makes available to holders
of its common stock an automatic dividend reinvestment
and stock purchase plan (see Note 13 of Notes to
Consolidated Financial Statements in the Company’s
2016 Form 10-K). For more information about the
plan, contact American Stock Transfer & Trust
Company, LLC, the Company’s stock transfer agent
and plan administrator.
ANNUAL MEETING
SEC Counsel
Nyemaster Goode, P.C.
700 Walnut Street, Suite 1600
Des Moines, IA 50309
Insurance Counsel
Bradshaw, Fowler, Proctor & 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 annual reports, Forms
10-Q and 10-K, proxy statements and other information
We welcome attendance at our annual meeting on
at no cost by contacting:
May 25, 2017, at 1:30 p.m. CDT.
EMC Insurance Companies
219 Eighth Street
Des Moines, IA 50309
Investor Relations
Steve Walsh, CPA
EMC Insurance Group Inc.
717 Mulberry Street
Des Moines, IA 50309
Phone: 515-345-2515
Fax: 515-345-2895
emcins.group@emcins.com
www.emcins.com/ir
10
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________to __________________
Commission File Number: 0-10956
EMC INSURANCE GROUP INC.
(Exact name of registrant as specified in its charter)
Iowa
(State or other jurisdiction of incorporation or organization)
42-6234555
(I.R.S. Employer Identification No.)
717 Mulberry Street, Des Moines, Iowa
(Address of principal executive offices)
50309
(Zip Code)
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
(515) - 345 - 2902
Common Stock, Par Value $1.00
(Title of Class)
The NASDAQ Global Select Market
(Name of each exchange on which registered)
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Yes
Yes
Yes
Yes
No
No
No
No
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2016 was $256,645,260.
The number of shares outstanding of the registrant's common stock, $1.00 par value, on February 28, 2017, was 21,269,368.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the Annual Meeting of Stockholders to be held on May 25,
2017, and to be filed pursuant to Regulation 14A within 120 days after the registrant’s fiscal year ended December 31, 2016,
are incorporated by reference under Part III.
TABLE OF CONTENTS
Part I
Item 1.
Business
Executive Officers of the Company
Item 1A.
Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 8.
Financial Statements and Supplementary Data
Item 9.
Item 9A.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Item 9B. Other Information
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Part IV
Item 15.
Exhibits, Financial Statement Schedules
Index to Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
Index to Exhibits
Page
2
36
38
48
48
48
48
48
51
53
95
96
171
171
171
171
172
172
172
172
173
173
175
176
177
1
PART I
ITEM 1.
BUSINESS
GENERAL
EMC Insurance Group Inc. is an insurance holding company that was incorporated in Iowa in 1974 by Employers
Mutual Casualty Company (Employers Mutual) and became a public company in 1982 following the initial public offering of
its common stock. EMC Insurance Group Inc. is approximately 55 percent owned by Employers Mutual, a multiple-line
property and casualty insurance company organized as an Iowa mutual insurance company in 1911 that is licensed in all 50
states and the District of Columbia. The term “Company” is used interchangeably to describe EMC Insurance Group Inc.
(Parent Company only) and EMC Insurance Group Inc. and its subsidiaries. Employers Mutual and all of its subsidiaries
(including the Company) and an affiliate are referred to as the “EMC Insurance Companies.”
The Company conducts operations in property and casualty insurance and reinsurance through its subsidiaries. The
Company primarily focuses on the sale of commercial lines of property and casualty insurance to small and medium-sized
businesses. These products are sold through independent insurance agents who are supported by a decentralized network of
branch offices. Although the Company actively markets its insurance products in 41 states, a large portion of its business is
marketed and generated in the Midwest.
The Company conducts its insurance business through two business segments as follows:
2
Illinois EMCASCO was formed in Illinois in 1976 (and was re-domesticated to Iowa in 2001), Dakota Fire was formed
in North Dakota in 1957 and EMCASCO was formed in Iowa in 1958, all for the purpose of writing property and casualty
insurance. EMC Reinsurance Company was formed in 1981 to assume reinsurance business from Employers Mutual. The
Company’s excess and surplus lines insurance agency, EMC Underwriters, LLC, was formed in Iowa in 1975 and was acquired
by the Company in 1985. Effective December 31, 1998, the excess and surplus lines insurance agency was converted to a
limited liability company and the ownership was contributed to EMCASCO.
Property and casualty insurance is the most significant segment of the Company’s business, totaling 77 percent of
consolidated premiums earned in 2016. The property and casualty insurance operations are integrated with the property and
casualty insurance operations of Employers Mutual through participation in a reinsurance pooling agreement. Because the
Company conducts its property and casualty insurance operations together with Employers Mutual through the reinsurance
pooling agreement, the Company shares the same business philosophy, management, employees and facilities as Employers
Mutual and offers the same types of insurance products. For a discussion of the reinsurance pooling agreement and its benefits,
please see “Organizational Structure – Property and Casualty Insurance” below.
Reinsurance operations are conducted through EMC Reinsurance Company and accounted for 23 percent of
consolidated premiums earned in 2016. The principal business activity of EMC Reinsurance Company is to assume, through a
quota share reinsurance agreement, 100 percent of Employers Mutual's assumed reinsurance business, subject to certain
exceptions. EMC Reinsurance Company also writes a relatively small amount of assumed reinsurance business on a direct
basis (outside the quota share reinsurance agreement). For a discussion of the quota share reinsurance agreement and its
benefits, please see “Organizational Structure – Reinsurance” below.
The Company’s insurance agency, EMC Underwriters, LLC, specializes in marketing excess and surplus lines of
insurance. The excess and surplus lines markets provide insurance coverage at negotiated rates for risks that are not acceptable
to licensed insurance companies. EMC Underwriters accesses this market by working through independent agents and
functions as managing underwriter for excess and surplus lines insurance for the pool participants. The Company derives
income from this business based on the fees and commissions earned through placement of the business, as opposed to the
underwriting of the risks associated with that business.
Organizational Structure
Property and Casualty Insurance
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 reinsurance pooling agreements with Employers Mutual (collectively the “pooling agreement").
Under the terms of the pooling agreement, each company cedes to Employers Mutual all of its insurance business, and assumes
from Employers Mutual an amount equal to its participation in the pool. All 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.
The Inter-Company Committees of the boards of directors of the Company and Employers Mutual approved a new inter-
company reinsurance program between the Company's insurance subsidiaries in the property and casualty insurance segment
and Employers Mutual for calendar year 2016. This reinsurance program is intended to reduce the volatility of the Company's
quarterly results caused by excessive catastrophe and storm losses, and provide protection from both the frequency and severity
of such losses. The reinsurance program consists of two semi-annual aggregate catastrophe excess of loss treaties. The first
treaty was effective from January 1, 2016 through June 30, 2016, and had a retention of $20.0 million and a limit of $24.0
million. The total cost of this treaty was approximately $6.3 million. The second treaty was effective from July 1, 2016
through December 31, 2016, and had a retention of $15.0 million and a limit of $12.0 million. The total cost of this treaty was
approximately $1.5 million. All catastrophe and storm losses assumed by the property and casualty insurance subsidiaries (net
of applicable reinsurance recoveries from external reinsurance protections purchased by the pool participants) were subject to
the terms of these treaties, and there was no co-participation provision.
All transactions occurring under the pooling agreement and the inter-company reinsurance program with Employers
Mutual are based on statutory accounting principles. Certain adjustments are made to these amounts to bring them into
compliance with U.S. generally accepted accounting principles (GAAP).
3
Operations of the pool and the inter-company reinsurance program give rise to inter-company balances with Employers
Mutual, which are generally settled during the subsequent 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 particular benefits that the Company’s property and casualty insurance subsidiaries realize from
participating in the pooling agreement include the following:
• the ability to produce a more uniform and stable underwriting result from year to year than might be experienced
individually, by spreading the risks over a wide range of geographic locations, lines of insurance written, rate filings,
commission plans and policy forms;
• the ability to benefit from the capacity of the entire pool (representing $1.6 billion in direct premiums written1 in 2016
and $1.4 billion in statutory surplus as of December 31, 2016) rather than being limited to policy exposures of a size
commensurate with each participant’s own surplus level;
• the achievement of an “A” (Excellent) rating from A.M. Best Company on a “group” basis;
• the ability to take advantage of a significant distribution network of independent agencies that the participants most
likely could not access on an individual basis;
• the ability to negotiate and purchase reinsurance from third-party reinsurers on a combined basis, thereby achieving
larger retentions and better pricing; and
• the ability to achieve and benefit from economies of scale in operations.
1 Premiums written is an industry metric used to quantify the amount of insurance sold during a specified reporting
period. Premiums earned is the recognition of the portion of premiums written directly related to the expired portion
of an insurance policy for a given reporting period.
The amount of insurance a property and casualty insurance company writes under industry standards is commonly
expressed as a multiple of its surplus calculated in accordance with statutory accounting practices. Generally, a ratio of 3 or
less is considered satisfactory by state insurance departments. The ratios of the pool participants for the past three years are as
follows:
Employers Mutual1
EMCASCO2
Illinois EMCASCO2
Dakota Fire2
EMC Property & Casualty Company1
Union Insurance Company of Providence1
Hamilton Mutual Insurance Company
Year ended December 31,
2016
2015
2014
0.81
1.44
1.44
1.51
(0.27)
(0.27)
0.88
0.74
1.54
1.52
1.59
0.65
0.65
0.89
0.74
1.57
1.52
1.61
0.64
0.65
0.90
1 The ratios for these companies reflect changes in their pool participation percentages in 2016. Effective January 1, 2016, the
pool participation rates for EMC Property & Casualty Company and Union Insurance Company of Providence declined to zero,
while Employers Mutual's pool participation rate increased to 68 percent.
2 The ratios for these companies reflect the issuance of an aggregate $25.0 million of surplus notes to Employers Mutual.
Surplus notes are considered to be a component of surplus for statutory reporting purposes; however, under GAAP, surplus
notes are considered to be debt and are reported as a liability in the Company’s financial statements.
4
Reinsurance
The Company’s reinsurance subsidiary is party to a quota share reinsurance retrocessional agreement (the “quota share
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. EMC Reinsurance Company also
writes a relatively small amount of assumed reinsurance business on a direct basis (outside the quota share reinsurance
agreement).
The Company's reinsurance subsidiary also has an inter-company reinsurance program in place with Employers Mutual,
covering both business assumed from Employers Mutual through the quota share agreement, as well as business obtained
outside the quota share agreement. The Inter-Company Committees of the boards of directors of the Company and Employers
Mutual approved a change in the inter-company reinsurance program between the Company's reinsurance subsidiary and
Employers Mutual for calendar year 2016. The 2016 reinsurance program consists of two treaties. The first was a per
occurrence catastrophe excess of loss treaty with a retention of $10.0 million, a limit of $10.0 million, 20 percent co-
participation, and no reinstatement. The total cost of this treaty was approximately $2.0 million. The second was an annual
aggregate catastrophe excess of loss treaty with a retention of $20.0 million, a limit of $100.0 million, and 20 percent co-
participation. The total cost of this treaty was approximately $3.1 million. Any losses recovered under the per occurrence
treaty inure to the benefit of the aggregate treaty, and only catastrophic events with total losses greater than $500,000 are
subject to the terms of the aggregate treaty. Prior to 2016, the reinsurance program with Employers Mutual consisted of a
single excess of loss reinsurance agreement. Under the terms of that agreement, the reinsurance subsidiary retained the first
$4.0 million of losses per event, and also retained 20.0 percent of any losses between $4.0 million and $10.0 million and 10.0
percent of any losses between $10.0 million and $50.0 million. The cost of the excess of loss reinsurance protection, which
included reimbursement for the cost of reinsurance protection purchased by Employers Mutual to protect itself from the
assumption of excessive losses in the event of a major catastrophe, was 8.0 percent of the reinsurance subsidiary’s total
assumed reinsurance premiums written in 2015 and 2014.
In connection with the change in the inter-company reinsurance program in 2016, the reinsurance subsidiary began
purchasing additional reinsurance protection in peak exposure territories from external parties in which coverage is triggered
when losses experienced by the insurance industry from a catastrophic event exceed a specified threshold. Any reinsurance
recoveries received from external parties reduces the amount of losses ceded to Employers Mutual under the inter-company
reinsurance program. The net cost of this external reinsurance protection was approximately $3.5 million in 2016.
All transactions occurring under the quota share agreement and the inter-company reinsurance program are based on
statutory accounting principles. Certain adjustments are made to the statutory-basis amounts assumed by the Company's
reinsurance subsidiary to bring the amounts into compliance with GAAP.
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 the inter-company reinsurance program give rise to inter-company balances
with Employers Mutual, which are generally settled during the month following the end of each quarter. The investment and
income tax activities of the reinsurance subsidiary are not subject to the quota share agreement.
Property and Casualty Insurance and Reinsurance
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.
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.
5
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
For information concerning the Company’s revenues, results of operations and identifiable assets attributable to each of
its industry segments over the past three years, see note 7 of Notes to Consolidated Financial Statements under Part II, Item 8
of this Form 10-K.
NARRATIVE DESCRIPTION OF BUSINESS
Principal Products
Property and Casualty Insurance
The Company’s property and casualty insurance subsidiaries and the other parties to the pooling agreement underwrite
both commercial and personal lines of property and casualty insurance. Those coverages consist of the following types of
insurance:
Commercial Lines
•
•
Automobile - policies purchased by insureds engaged in a commercial activity that provide protection against liability
for bodily injury and property damage arising from automobile accidents, and protection against loss from damage to
automobiles owned by the insured.
Property - policies purchased by insureds engaged in a commercial activity that provide protection against damage or
loss to property (other than autos) owned by the insured.
• Workers’ Compensation - policies purchased by employers to provide benefits to employees for injuries incurred
during the course of employment. The extent of coverage is established by the workers’ compensation laws of each
state.
•
•
Liability - policies purchased by insureds engaged in a commercial activity that provide protection against liability for
bodily injury or property damage to others resulting from acts or omissions of the insured or its employees.
Other - includes a broad range of policies purchased by insureds engaged in a commercial activity that provide
protection with respect to burglary and theft loss, aircraft, marine and other types of losses. This category also
includes fidelity and surety bonds issued to secure performance.
Personal Lines
•
Includes automobile policies purchased by individuals that provide protection against liability for bodily injury and
property damage arising from automobile accidents, and protection against loss from damage to automobiles owned
by the insured; homeowners policies purchased by individuals that provide protection against damage or loss to
property (other than autos) owned by the individual; and umbrella policies purchased by individuals that provide
protection against liability for bodily injury or property damage to others resulting from acts or omissions of the
insured.
6
The following table sets forth the aggregate direct premiums written of all parties to the pooling agreement for the three
years ended December 31, 2016, by line of business.
Year ended December 31,
2016
2015
2014
Amount
Percent
of total
Amount
Percent
of total
Amount
Percent
of total
$
383,503
23.4% $
367,559
23.2% $
344,013
22.7%
421,792
327,663
340,337
31,725
1,505,020
25.8
20.0
20.8
1.9
91.9
403,567
309,654
329,045
29,704
1,439,529
25.5
19.6
20.8
1.9
91.0
387,408
293,140
311,516
28,236
1,364,313
25.5
19.3
20.5
1.9
89.9
132,697
8.1
141,546
9.0
152,964
10.1
$ 1,637,717
100.0% $ 1,581,075
100.0% $ 1,517,277
100.0%
($ in thousands)
Line of business
Commercial lines:
Automobile
Property
Workers' compensation
Liability
Other
Total commercial lines
Personal lines
Total
Reinsurance
As previously noted, the reinsurance subsidiary primarily assumes the voluntary reinsurance business written directly by
Employers Mutual with unaffiliated insurance companies (subject to certain limited exceptions). Employers Mutual writes
both pro rata and excess of loss reinsurance for unaffiliated insurance companies. Pro rata reinsurance is a form of reinsurance
in which the reinsurer assumes a stated percentage of all premiums, losses and related expenses in a given class of business. In
contrast, excess of loss reinsurance provides coverage for a portion of losses incurred by an insurer which exceed
predetermined retention limits.
The following table sets forth the net premiums written of the reinsurance subsidiary for the three years ended December
31, 2016. During 2016, $5.1 million of premiums written were ceded to Employers Mutual in accordance with the terms of the
revised inter-company reinsurance program and $5.1 million of premiums written were ceded to external parties. In contrast,
during 2015 and 2014, $10.8 million and $10.3 million, respectively, of premiums written (representing 8.0 percent of the
reinsurance subsidiary’s total assumed reinsurance premiums written for those years) were ceded to Employers Mutual in
accordance with the terms of the prior inter-company reinsurance program. The premium associated with the 2016 inter-
company reinsurance program was allocated entirely to the excess of loss line of business, while the premium associated with
the 2015 and 2014 inter-company reinsurance programs was allocated to all lines of business.
($ in thousands)
Line of business
Pro rata reinsurance
Excess of loss reinsurance
Total
Year ended December 31,
2016
2015
2014
Amount
Percent
of total
Amount
Percent
of total
Amount
52,996
78,034
40.4% $
59.6
48,652
75,852
39.1% $
60.9
42,577
76,326
Percent
of total
35.8%
64.2
131,030
100.0% $
124,504
100.0% $
118,903
100.0%
$
$
7
Marketing and Distribution
Property and Casualty Insurance
The pool participants market a wide variety of commercial and personal lines insurance products through 16 branch
offices, which actively write business through independent agents in 41 states. Beginning in 2016, the accountability and
responsibility for personal lines business was taken out of the branch offices and assigned to a new personal lines operation in
the home office. The pool participants’ products are marketed exclusively through a network of 2,121 local independent
agency relationships through 4,114 offices. The pool participants primarily focus on the sale of commercial lines of property
and casualty insurance to small and medium-sized businesses, which are considered to be policyholders that pay less than
$100,000 in annual premiums. The pool participants also seek to provide more than one policy to a given customer, because
this “account selling” strategy diversifies risks and generally improves underwriting results.
The pool participants wrote approximately $1.6 billion in direct premiums in 2016, with 92 percent of this business
coming from commercial lines products and 8 percent coming from personal lines products. Although a large portion of the
pool participants’ business is generated by sales in the Midwest, Employers Mutual’s branch offices are located across the
country to take advantage of local market conditions and opportunities, as well as to spread risk geographically. Each branch
office performs its own underwriting, claims, marketing and risk management functions according to policies and procedures
established and monitored by the home office. This decentralized network of branch offices allows the pool participants to
develop marketing strategies, products and pricing that target the needs of individual marketing territories and take advantage
of different opportunities for profit in each market. This operating structure also enables the pool participants to develop close
relationships with their agents and customers.
Although each branch office offers a slightly different combination of products, the branches generally target three
customer segments:
•
•
•
a wide variety of small to medium-sized businesses, through a comprehensive package of property and liability
coverages;
businesses and institutions eligible for the pool participants’ target market, safety dividend group and EMC Choice
programs (described below), which offer specialized products geared to their members’ unique protection needs; and
individual consumers, through a number of personal lines products such as homeowners, automobile and umbrella
coverages.
The pool participants write a number of target market, safety dividend group and EMC Choice programs throughout the
country, and have developed a strong reputation for these programs within the marketplace. These programs provide enhanced
insurance protection to businesses or institutions that have similar hazards and exposures, and are willing to implement loss
prevention programs. These groups include public schools, small municipalities, petroleum marketers, and contractors. As an
example, the pool participants write coverage for approximately 1,500 school districts throughout the Midwest. These
programs have been successful because they offer loss control products and services that are targeted to the needs of the group
members through a local independent agent.
8
The following table sets forth the geographic distribution of the aggregate direct premiums written by all parties to the
pooling agreement for the three years ended December 31, 2016.
Illinois
Iowa
Kansas
Michigan
Minnesota
Nebraska
North Carolina
Texas
Wisconsin
Other *
Year ended December 31,
2016
2015
2014
4.2%
12.5
4.2%
13.0
4.3%
13.3
8.0
4.9
5.1
5.4
3.5
4.3
5.9
8.5
4.6
4.7
5.3
3.1
4.1
5.6
9.2
4.3
4.6
5.2
2.8
3.9
5.4
46.2
100.0%
46.9
100.0%
47.0
100.0%
* Includes all other jurisdictions, none of which accounted for more than 3 percent.
Reinsurance
The reinsurance subsidiary currently obtains 95 percent of its business from Employers Mutual through the quota share
agreement, and writes 5 percent directly. The reinsurance subsidiary relies on the financial strength of Employers Mutual to
write reinsurance business, as well as the competitive advantage that Employers Mutual has by virtue of being licensed in all 50
states and the District of Columbia. Reinsurance marketing is undertaken by Employers Mutual in its role as the direct writer
of the reinsurance business; however, the reinsurance subsidiary is utilized in the marketing efforts to help differentiate the
reinsurance business from the direct insurance business that is written by Employers Mutual and the other pool participants.
The reinsurance business is derived from two sources. Approximately 84 percent of the reinsurance subsidiary’s
assumed reinsurance premiums written in 2016 were generated through the activities of Employers Mutual’s Home Office
Reinsurance Assumed Department (also known as “HORAD”). The reinsurance business written by HORAD is primarily
generated through independent intermediaries. The risks assumed through HORAD are directly underwritten by Employers
Mutual. As such, Employers Mutual has discretion with respect to the type and size of risks which it assumes and services
through these activities. Since the reinsurance subsidiary utilizes Employers Mutual’s underwriting personnel and systems to
process its direct business, HORAD also includes the business written directly by the reinsurance subsidiary.
The remaining 16 percent of the reinsurance subsidiary’s assumed reinsurance premiums written in 2016 were generated
through Employers Mutual’s participation in MRB, an unincorporated association through which Employers Mutual and four
other unaffiliated insurance companies participate in a voluntary reinsurance pool to meet the reinsurance needs of small and
medium-sized, unaffiliated mutual insurance companies. Employers Mutual has participated in MRB since 1957. MRB is
controlled by a board of directors composed of the five member companies, including one representative designated by
Employers Mutual. As a member of this organization, Employers Mutual assumes its proportionate share of the risks assumed
by MRB from unaffiliated insurers. Since MRB is structured on a joint liability basis, Employers Mutual, and therefore the
Company’s reinsurance subsidiary, would be obligated with respect to the proportionate share of risks assumed by the other
participants in the event they were unable to perform. MRB, which is operated by an independent management team, manages
assumed risks through typical underwriting practices, including loss exposure controls provided through reinsurance coverage
obtained for the benefit of MRB. The reinsurance risks for MRB arise primarily from the Northeast and Midwest markets.
Underwriting of risks and pricing of coverage is performed by MRB management under general guidelines established by
Employers Mutual and the other participating insurers. Except for this general oversight, Employers Mutual has only limited
control over the risks assumed by, and the operating results of, MRB. Because of the joint liability structure, MRB
participating companies must generally maintain a rating of “A-” (Excellent) or above from A.M. Best Company, Inc. and meet
certain other standards. During 2012, the rating of one of the members was reduced to "B++". The other four participating
companies continue to monitor the financial strength of this member, and have determined that removal of this member is not
warranted at this time.
9
The following table sets forth the geographic distribution of the assumed premiums written of the reinsurance subsidiary
(gross of the amounts ceded to Employers Mutual in connection with the inter-company reinsurance program and, beginning in
2016, the cost of additional reinsurance protection from external parties) for the three years ended December 31, 2016.
($ in thousands)
Domiciliary jurisdiction
Germany
Other foreign jurisdictions1
Domestic
Year ended December 31,
2016
2015
2014
$
Amount
6,724
13,749
120,690
Percent
of total
4.8% $
9.7
85.5
Amount
3,672
14,018
117,641
Percent
of total
2.7% $
10.4
86.9
Amount
6,444
14,261
108,537
Percent
of total
5.0%
11.0
84.0
Total
$
141,163
100.0% $
135,331
100.0% $
129,242
100.0%
1 Includes all other foreign jurisdictions, none of which accounted for more than 3 percent during any of the three years
presented.
Employers Mutual emphasizes writing excess of loss reinsurance business in its HORAD operation and works to
increase its participation on existing contracts that have had favorable terms and/or results. Employers Mutual strives to be
flexible in the types of reinsurance products it offers, but generally limits its writings to direct reinsurance business, rather than
providing retrocessional covers. The reinsurance marketplace tends to favor “across the board” participation on excess of loss
reinsurance contracts. As a result, reinsurance companies must be willing to participate on all layers offered under a specific
contract in order to be considered viable reinsurers.
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 $27.4 million in 2016. During 2016, the reinsurance subsidiary
ceded to Employers Mutual $5.1 million of premiums under the inter-company reinsurance program. The reinsurance
subsidiary also 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. The net foreign currency exchange gain assumed by the reinsurance
subsidiary through the quota share agreement in 2016 was $367,000.
Competition
Property and Casualty Insurance
The property and casualty insurance marketplace is very competitive. The pool participants compete in the United
States insurance market with numerous insurers, many of which have substantially greater financial resources. Competition in
the types of insurance in which the pool participants are engaged is based on many factors, including the perceived overall
financial strength of the insurer, industry ratings, premiums charged, contract terms and conditions, services offered, speed of
claim payments, reputation and experience. Because the pool participants’ insurance products are marketed exclusively
through independent agencies, they face competition to retain qualified agencies, as well as competition within the agencies.
The pool participants also compete with direct writers, who utilize salaried employees and generally offer their products at a
lower cost; exclusive agencies, who write insurance business for only one company; and to a lesser extent, internet-based
enterprises. Employers Mutual’s decentralized network of 16 branch offices allows the pool participants to enhance business
relationships with agents and customers and develop products, marketing strategies and pricing parameters targeted to
individual territories. The pool participants also utilize a company-paid trip for qualified agents and a profit-sharing plan as
incentives for the independent agencies to place high-quality insurance business with them.
Reinsurance
Employers Mutual, in writing reinsurance business through its HORAD operation, competes in the global reinsurance
market with numerous reinsurance companies, many of which have substantially greater financial resources. Competition for
reinsurance business is based on many factors, including the perceived financial strength of the reinsurer, industry ratings,
stability in products offered and licensing status. There is a segment of the market that favors large, highly-capitalized
reinsurance companies who are able to provide “mega” line capacity for multiple lines of business.
10
While reinsurer competition for national and regional company business is growing, management believes that MRB has
a competitive advantage in the smaller mutual company market that it serves due to its low operating costs. MRB understands
the needs of the smaller company market and operates at a very low expense ratio, enabling it to offer reinsurance coverage (on
business that generally presents less risk) to an under-served market at lower margins. However, due to growth in the
reinsurance intermediary marketplace, the size of this under-served market has declined.
A.M. Best Company, Inc. Ratings
Property and Casualty Insurance
A.M. Best Company, Inc. (A.M. Best) rates insurance companies based on their relative financial strength and ability to
meet their contractual obligations. During 2013, the Company’s property and casualty insurance subsidiaries' financial strength
rating was raised from "A-" to “A” (Excellent) in their capacity as participants in the pooling agreement. A.M. Best re-
evaluates its ratings from time to time (normally on an annual basis) and there can be no assurance that the Company’s property
and casualty insurance subsidiaries and the other pool participants will maintain their current rating in the future. Management
believes that an A.M. Best rating of “A-” (Excellent) or better is important to the Company’s business since many insureds
require that companies with which they insure be so rated. A.M. Best’s publications indicate that the “A“ (Excellent) rating is
assigned to companies that have achieved excellent overall performance and have a strong ability to meet their obligations over
a long period of time. A downgrade of the Company’s property and casualty insurance subsidiaries’ rating (particularly below
"A-") would adversely affect the Company’s competitive position and make it more difficult for it to market its products, and
retain its existing agents and policyholders. A.M. Best’s ratings are based upon factors of concern to policyholders and
insurance agents, and are not directed toward the protection of investors.
Reinsurance
The most recent A.M. Best Property Casualty Key Rating Guide gives the Company’s reinsurance subsidiary a financial
strength rating of “A” (Excellent). However, because the majority of the reinsurance business assumed by the reinsurance
subsidiary is produced by Employers Mutual, the rating of the reinsurance subsidiary is not critical to the Company’s
reinsurance operations. The rating of Employers Mutual is, however, critical to the Company’s reinsurance operations, as the
unaffiliated insurance companies that cede business to Employers Mutual view the rating as an indication of Employers
Mutual’s ability to meet its obligations to those insurance companies. Employers Mutual’s rating was increased from "A-" to
"A" (Excellent) during 2013. This rating increase aids in marketing efforts because some insurance companies require a rating
of “A” (Excellent) or higher. A downgrade of Employers Mutual’s rating (particularly below "A-") would have a material
adverse impact on the Company’s reinsurance subsidiary, as a downgrade would negatively impact Employers Mutual’s ability
to write reinsurance business and, consequently, to cede that business to the Company’s reinsurance subsidiary.
11
Statutory Combined Trade Ratios
The following table sets forth the statutory combined trade ratios of the Company’s insurance subsidiaries, and the
property and casualty insurance industry averages, for the five years ended December 31, 2016. The combined trade ratios
below are the sum of the following: the loss and settlement expense ratio, calculated by dividing losses and settlement
expenses incurred by net premiums earned, and the expense ratio, calculated by dividing underwriting expenses incurred by net
premiums written and policyholder dividends by net premiums earned. Generally, if the combined trade ratio is below 100
percent, a company has an underwriting profit; if it is above 100 percent, a company has an underwriting loss.
Property and casualty insurance1
Loss and settlement expense ratio
Expense ratio
Combined trade ratio
Reinsurance1
Loss and settlement expense ratio
Expense ratio
Combined trade ratio
Total insurance operations1
Loss and settlement expense ratio
Expense ratio
Combined trade ratio
Property and casualty insurance industry
averages2
Loss and settlement expense ratio
Expense ratio
Combined trade ratio
Year ended December 31,
2016
2015
2014
2013
2012
64.6%
33.9%
98.5%
68.0%
24.4%
92.4%
65.5%
31.8%
97.3%
73.0%
27.7%
100.7%
65.5%
33.4%
98.9%
64.1%
24.9%
89.0%
65.2%
31.6%
96.8%
69.8%
28.5%
98.3%
70.5%
32.0%
102.5%
73.9%
24.5%
98.4%
71.2%
30.4%
101.6%
69.3%
28.1%
97.4%
67.2%
35.0%
102.2%
66.2%
35.3%
101.5%
59.0%
23.7%
82.7%
65.2%
32.3%
97.5%
67.7%
28.7%
96.4%
68.4%
21.8%
90.2%
66.7%
32.3%
99.0%
73.4%
28.8%
102.2%
1 Beginning in 2014, the expense ratios for the Company's property and casualty insurance subsidiaries reflect net periodic
postretirement benefit income allocated to them as a result of a plan amendment to Employers Mutual's postretirement medical
plan, which created a large prior service credit that is being amortized into benefit expense over a period of 10 years. In
addition, the service cost and interest cost components of the revised plan's net periodic benefit cost are significantly lower than
those of the prior plan. The 2013 expense ratio and combined trade ratio for “reinsurance” and “total insurance operations”
reflect $532,000 of negative premiums written (net of $53,000 reduction in the amount ceded to Employers Mutual under the
inter-company reinsurance program) and $223,000 of negative commission expense that were recorded in connection with the
change in Employers Mutual’s participation in MRB. Excluding these adjustments, the expense ratio and combined trade ratio
for “reinsurance” would have been 23.8 percent and 82.8 percent, respectively, and for “total insurance operations” would have
been unchanged at 32.3 percent and 97.5 percent, respectively. The 2012 expense ratio and combined trade ratio for
“reinsurance” and “total insurance operations” reflect $3.1 million of negative premiums written (net of $341,000 reduction in
the amount ceded to Employers Mutual under the inter-company reinsurance program) and $1.4 million of negative
commission expense that were recorded in connection with the cancellation of a large pro rata account written by MRB.
Excluding these adjustments, the expense ratio and combined trade ratio for “reinsurance” would have been 22.4 percent and
90.8 percent, respectively, and for “total insurance operations” would have been 32.4 percent and 99.1 percent, respectively.
2 As reported by A.M. Best. The ratio for 2016 is an estimate; the actual combined trade ratio is not currently available.
12
Claims Management
Effective claims management is critical to the success of the pool participants. To this end, the pool participants have
adopted a customer-focused claims management process that is cost efficient, and delivers a high level of claims service that
produces superior results. The claims management process is focused on handling claims from their inception, accelerating
communication to insureds and claimants, and compressing the cycle time of claims to control both loss costs and claims-
handling costs. This process provides quality service and results in the appropriate handling of claims, allowing the pool
participants to cost-effectively pay valid claims and contest fraudulent claims.
The claims management operation includes adjusters, appraisers, special investigators, attorneys and claims
administrative personnel. The pool participants conduct their claims management operations out of 16 branch offices and four
service offices located throughout the United States. The home office claims group provides advice and counsel for branch
claims staff in investigating, reserving and settling claims. The home office claims staff also evaluates branch claims
operations and makes recommendations for improvements in performance. Additional home office services provided include:
complex claim handling, physical damage and property review, medical case management, medical bill review, legal coverage
analysis, a special investigative unit, litigation management and subrogation. Management believes these home office services
assist the branch claims personnel in producing greater efficiencies than can be achieved at the local level.
Each branch office is responsible for evaluating and settling claims within the authority provided by home office
claims. Authority levels within the branch offices are granted based upon an adjuster’s experience and expertise. A branch
office must request input from home office claims once a case exceeds its authority level. The Senior Vice President of Claims
participates in a claims committee that exists within the home office. This committee meets on a weekly basis to assist the
branches in evaluating and settling claims beyond their authority level.
The pool participants manage litigated claims arising from value disputes and questionable liability, and will defend
appropriate denials of coverage. The pool participants retain outside defense counsel to defend such matters; however, internal
claims professionals manage the litigation process. The pool participants have implemented an internally developed litigation
management system that allows the claims staff to evaluate the quality and cost effectiveness of outside legal services. Cases
are constantly reviewed to adjust the litigation plan as necessary, and all cases going to trial are carefully reviewed to assess the
value of a trial verses a settlement.
Loss and Settlement Expense Reserves
The Company's liabilities for losses and settlement expenses represent management's best estimate at a given point in
time of ultimate unpaid losses and settlement expenses for both reported and unreported claims. The estimates of the liabilities
for losses and settlement expenses include assumptions of future trends and claims severity, judicial theories of liability,
historic loss emergence and other factors. Because of the inherent uncertainties involved in the establishment of reserves for
less mature accident years, management’s reserving methodology for the current and more recent accident years utilizes
prudently conservative assumptions. During the loss settlement period, which may cover many years in some cases, the
inherent uncertainty associated with these accident years declines as the Company learns additional facts regarding individual
claims and potential future claims, and consequently it often becomes necessary to refine and adjust its estimates of
liability. The Company reflects any adjustments to its liabilities for losses and settlement expenses in its operating results in the
period in which the changes in estimates are made.
The amount of reserves for reported claims, known as “case loss reserves”, is primarily based upon a case-by-case
evaluation of the specific type of claim, knowledge of the circumstances surrounding each claim and the policy provisions
relating to the type of loss. Case loss reserves on assumed reinsurance business are the amounts reported by the ceding
companies.
Beginning in 2016, the amount of reserves for unreported claims, known as “Incurred But Not Reported (IBNR) loss
reserves”, is generally determined by subtracting paid loss amounts and the case loss reserves carried on reported claims from
the estimated ultimate loss amounts established by line of business and accident year. Prior to 2016, IBNR loss reserves were
determined on the basis of statistical information for each line of insurance with respect to expected loss emergence arising
from occurrences that had not yet been reported. Established reserves (for both reported and unreported claims) are closely
monitored and are frequently examined using a variety of formulas and statistical techniques for analyzing loss development, as
well as other economic and social factors.
Settlement expense reserves are intended to cover the ultimate cost of investigating claims and defending lawsuits
arising from claims. Reserves are established separately for expenses specifically associated with a claim (allocated) and
expenses not specifically associated with a claim (unallocated). To the extent that adjustments are required to be made in the
amount of loss reserves each year, settlement expense reserves are correspondingly revised, if necessary.
13
The Company does not discount reserves. Inflation is implicitly provided for in the reserving function through analysis
of cost trends, reviews of historical reserving results and projections of future economic conditions. Estimates of individual
case loss reserves are monitored and reviewed on a regular basis by claim staff members. Special attention is given to claims
of $100,000 or greater, and long-term and lifetime medical claims. Based on currently available information, individual case
loss reserves are revised to reflect changes in estimated ultimate settlement values.
Despite the inherent uncertainties of estimating loss and settlement expense reserves, management believes that the
Company’s reserves are being calculated in accordance with sound actuarial practices and, based upon current information, that
the reserve for losses and settlement expenses at December 31, 2016 represents management’s best estimate of the Company’s
overall liability.
Reserving Methodology and Determination of Management’s Best Estimate of Overall Liability
Property and casualty insurance
The property and casualty insurance segment establishes case loss, IBNR loss and settlement expense reserves separately
for three categories of losses, which are (1) all claims other than those stemming from storms, catastrophic events, asbestos and
environmental exposures (general claims), (2) storms and catastrophic events, and (3) asbestos and environmental claims. Case
loss reserves are established on a common basis for all three categories based on the specific facts for each reported claim.
Individual case loss reserves are based on the probable, or most likely, outcome for each claim, with probable outcome defined
as what is most 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. IBNR loss and settlement expense reserves
are established differently for the three categories of losses as discussed below.
Reserves for General Claims
Effective September 30, 2016, IBNR loss reserves for general claims are calculated by subtracting paid loss
amounts and the case loss reserves carried on reported claims from the estimated ultimate loss amounts established by line
of business and accident year. Allocated settlement expense reserves are established in a similar manner, except that only
paid expenses to date are subtracted from the estimated ultimates, as adjusters do not establish case-basis settlement
expense reserves. Unallocated settlement expenses reserves are determined through a study of historical paid expenses
compared to paid loses. The unallocated settlement expense reserve established through this process is for all accident
years combined, and the total is allocated to the various accident years proportional to the loss reserves.
Lines of Business and Process Overview
Reserves are evaluated for adequacy on a quarterly basis, and are the end-product of a broader process by which
management establishes estimated ultimate loss (net of salvage, subrogation and reimbursement recoveries) and allocated
settlement expense amounts by line of business and accident year. At quarter-end, carried bulk reserves are established as
the difference between management's estimated ultimate amounts, and the reported amounts incurred to date. At the
highest level, the actuarial department establishes estimated ultimate loss and allocated settlement expense amounts by
accident year for claims aggregated into eight reserving lines of business: personal auto liability, commercial auto liability,
auto physical damage, workers' compensation, other liability, commercial property, homeowners, and an “all other”
category, which consists mostly of fidelity and surety bonds.
For each line of business, the establishment of IBNR loss and allocated settlement expense reserves begins with a
review of historical experience as of the end of the previous quarter. The actuarial department utilizes standard actuarial
incurred and paid chain ladder (triangle) development methods, expected loss and settlement expense ratio methods, and
various methodologies which blend the development and expected ratio methods, such as the Bornhuetter-Ferguson
method. The actuarial department employs these methods using incurred and paid losses and paid allocated settlement
expenses aggregated on both a calendar/accident year basis and an accident quarter basis. The calendar/accident year
development triangles generated in this process contain thirty-five years of historic data, and provide the tail development
factors used in the accident quarter development triangles, which only utilize ten years of historic data. The end result of
the process is a separate set of estimated ultimate ratios to earned premiums for losses and allocated settlement expenses
by reserving line of business and accident year/quarter. At the end of each quarter, the selected estimated ultimate ratios
are applied to the corresponding calendar year/quarter earned premiums to produce the estimated ultimate dollar amounts,
from which the amounts reported to date are subtracted to produce the IBNR loss reserves and allocated settlement
expense reserves to be recorded.
14
Fifteen different averaging periods/methods are used in the incurred and paid chain ladder methods to produce
development factors to ultimate, from which the five medial estimates are generally selected to produce the chain ladder
ultimate estimates. Thus, using both the incurred and paid chain ladder methods, ten ultimate loss estimates are produced
for each accident year and accident quarter. Since the pool participants do not establish settlement expense reserves on an
individual claim basis, there is no corresponding incurred allocated settlement expense data upon which to apply the chain
ladder method. Therefore, only five ultimate allocated settlement expense estimates are produced for each accident year
and accident quarter as only the paid chain ladder method can be applied.
In addition to the accident year and accident quarter ultimate loss and allocated settlement expense estimates
produced from the chain ladder methods, the actuarial department employs the following methodologies on an incurred
and paid basis: Bornhuetter-Ferguson, Benktander (iterative Bornhuetter-Ferguson), Ultimate Frequency-Severity and
Generalized Cape Cod. The actuarial department will also sometimes apply the Expected Loss Ratio Method for
extremely immature accident years/quarters. For allocated settlement expenses, the actuarial department also produces
ultimate estimates by applying the chain ladder approach to the ratio of paid allocated settlement expenses to paid losses.
The ultimate factors from these paid-to-paid ratios are applied to the ultimate losses determined by the paid chain ladder
method to produce ultimate allocated settlement expense dollar amounts.
Range of Reasonable Ultimates and Management's Best Estimate: Except for the Expected Loss Ratio Method,
each of the above listed methods are employed, where applicable, using each of the five factors to ultimate from the
incurred and paid chain ladder methods. This results in forty-five ultimate loss estimates and thirty-five ultimate allocated
settlement expense estimates, exclusive of the special situations where the Expected Loss Ratio Method is also applied.
The actuarial department examines the indicated ultimate amounts for each category (losses and allocated settlement
expenses) and each accident year/quarter, and applies judgment and knowledge of each method’s biases (if any) to exclude
unreasonable estimates. The maximum and minimum of the remaining estimates define the range of reasonable ultimates.
The point estimates within the range are further scrutinized for evenness of spread or for evidence of clustering around
specific estimates. A comparison is also made to previous estimates. For the latest accident years, management generally
selects an estimate in the third, or possibly fourth, quartile of the reasonable range as the best estimate. For more mature
years, the mean is generally selected to be management's best estimate.
The selected point estimate for each accident year/quarter is divided by its corresponding earned premiums to
produce the expected ultimate loss and allocated settlement expense ratios. At quarter end, the ratios are applied to the
corresponding calendar year/quarter earned premiums to produce the ultimate estimated dollar amounts, from which the
amounts incurred to date are subtracted to produce the IBNR loss and allocated settlement expense reserves to be recorded.
Reserves for Storms and Catastrophic Events
IBNR loss reserves for storms and catastrophic events are established by the branch offices in conjunction with the
home office claims department. IBNR loss reserves associated with storms and catastrophic events are event-specific. The
pool participants define a storm or catastrophic event as any event for which the Property Liability Research Bureau
(PLRB) assigns an occurrence number. When a storm or catastrophic event occurs, the location of the event is overlaid
with a map of the pool participants’ exposures. Using this information and other factors (such as wind speed and the size
of any hail), the affected branch office(s) are contacted and requested to develop a loss estimate based on projections of
loss frequency and severity in their location. To develop this loss estimate, large accounts located in the affected areas are
contacted. Based on this information and discussions with local agents, both the number and severity of estimated losses
are projected by location. Management then compiles and analyzes this information and calculates a total loss
estimate. The total loss estimate is generally established within two weeks of an event and is adjusted, if necessary, as the
actual claims are inspected. At each reporting date, the total amount of reported losses associated with each storm/
catastrophic event is compared to the most recent total loss estimate for that event, and the difference is recorded as the
storm/catastrophe IBNR loss reserve. Since the pool participants do not establish separate settlement expense reserves for
individual storm and catastrophe claims, the reserving methodology for settlement expenses on these claims is included in
the settlement expense reserving process for general claims.
Reserves for Asbestos and Environmental Claims
The IBNR loss and settlement expense reserves are established jointly for asbestos and environmental liabilities as
the available estimation methodologies require the consideration of both loss and settlement expense payments together.
Management's internal ultimate loss and settlement expense evaluations consist of runoff scenarios based on recent
payment activity and various future payout decay assumptions. The assumptions include published research on industry
payout curves as well as reasonable alternative assumptions selected by the actuarial department. Internal and industry
survival ratios are also monitored to assist in validating assumptions underlying the payout scenarios.
15
Reinsurance
The IBNR loss reserves for the HORAD book of business are determined and booked each quarter along with the ceding
companies’ reported reserves. The methodologies used to establish the IBNR loss reserves produce a range of indicated
reserves for each contract type and contract year. Employers Mutual’s actuaries examine the reasonableness of each range, and
then select a point estimate within those ranges. For the more recent contract years, the selected IBNR loss reserve estimate
tends to be higher in the range, typically in the fourth quartile, due to the considerable uncertainty associated with these
immature contract years. The IBNR loss reserve selected for the more mature contract years tends to be at, or slightly above,
the midpoint of the range of reasonable reserves. In addition to the actuarially determined reserves, an additional IBNR loss
reserve is established when large catastrophic events occur, based on an examination of impacted contracts/exposures and
reported industry-wide loss estimates. In aggregate, the IBNR loss reserve selected using these methods and procedures,
combined with reserves reported by the ceding companies, becomes management’s best estimate of the reinsurance segment’s
overall liability. The next several paragraphs provide addition detail on the HORAD reserving process.
Reserves for the HORAD book of business are reviewed quarterly. Contract years 1988 and subsequent are reviewed
every quarter, while accident years 1981-1987, for which detailed contract year information is not available, are reviewed
separately during the fourth quarter. Management segregates claims data associated with specified catastrophe occurrences
expected to exceed $2.0 million in losses, and establishes a catastrophe specific IBNR loss reserve based upon an evaluation of
the exposed reinsurance contracts. Once established, catastrophe specific IBNR reserves are taken down as claims are
reported, unless the ultimate expected loss is adjusted by management.
Premium, loss and settlement expense data is generally reported by ceding companies on a contract year basis; however,
some loss and settlement expense data is reported on an accident year basis. Some ceding companies also report IBNR loss
reserves. The reinsurance segment books these IBNR loss reserve amounts, and then deducts them from the indicated IBNR
loss reserves calculated by Employers Mutual’s actuaries. The reinsurance segment may also book “additional case loss
reserves” for ceding companies whose reported case loss reserves related to certain claims are believed to be less than
adequate.
Using the reported data, excluding the reported IBNR loss reserves, Employers Mutual's actuaries develop an indicated
ultimate loss, and corresponding IBNR loss reserve, by type of contract (property/casualty/excess/pro rata/multi-line) and by
contract year. The actuaries employ the standard paid and incurred chain ladder (triangle) development methods and the
Bornheutter-Furguson method to produce the indicated ultimate loss, and corresponding IBNR loss reserves. In addition, a loss
ratio approach and judgment are applied to a few minor contract types which represent an insignificant portion of the totals.
For the major contract types, the reinsurance subsidiary uses its own paid and incurred development data aggregated on
a contract year basis. The reason for aggregating by contract year, rather than accident year, is to ensure an accurate
aggregation, as ceding companies have not always provided sufficient detail to determine the proper accident year assignment.
In addition, the reinsurance subsidiary uses Reinsurance Association of America (RAA) development triangles to assist in
estimating reserves for casualty excess contracts.
The expected loss ratios used in the Bornheutter-Ferguson method for the current contract year are calculated by contract
type during the first quarter. Once established, the expected loss ratios for the various contract years are generally not revised.
The expected loss ratios are calculated by dividing the projected ultimate losses for contract years having at least five years of
maturity by the contract-year earned premiums brought to the current rate-level. The current rate-level loss ratios are then
trended to the current contract period. In addition, when large accounts are first written, there is generally some underwriting
or reserving data available from which an expected loss ratio may be determined.
After establishing the ultimate loss, and corresponding IBNR loss reserve, by treaty type and contract year, an allocation
must be made in order to book the IBNR loss reserves by accident year and line-of-business. This is accomplished by a
historical study of the ultimate accident year distribution of reported losses and reported loss types (for those treaty types which
may cover multiple lines of business). For the latest contract years, consideration is also given to the distribution of the
contract effective dates and the expected earnings patterns of the contract types (occurrence vs. risks attaching contracts).
The reinsurance subsidiary also books earned but not reported (EBNR) premiums on pro rata contracts, and accrued
reinstatement premiums on catastrophe excess contracts. EBNR premium is estimated by applying selected earnings patterns
to the expected ultimate contract year premium associated with each individual pro rata account, and netting the reported-to-
date amount from the estimated earned-to-date amount. The account level earnings patterns are selected from an examination
of all available information regarding distribution of risk attachment dates during the contract period and a review of each
ceding company's historical reporting patterns. It is important to note that whenever EBNR premium is booked, there is an
associated IBNR loss reserve established as well. Accrued reinstatement premiums are estimated by applying a historically
selected ratio of ultimate reinstatement premiums to incurred losses to the expected ultimate incurred catastrophe loss by
contract year. Netting the reported reinstatement premiums-to-date from this ultimate produces the recorded amount.
16
Reported case and IBNR loss reserves associated with the MRB book of business are established by that entity’s
management, and booked by the reinsurance subsidiary on a monthly basis. MRB claims files are audited annually by the
member companies’ reinsurance claim departments, and the member companies' actuarial departments perform an annual
reserve adequacy review. The reinsurance subsidiary estimates and books a relatively small IBNR loss reserve and EBNR
premium amount to account for a one month lag in reporting. The booking of the lag IBNR loss reserve may be suspended,
and a negative bulk IBNR loss reserve may be booked, during periods when the Company's actuarial reviews indicate MRB's
carried reserves are more than adequate to cover its liabilities.
Reserve Development
Property and casualty insurance
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 and have a negative impact on the Company's financial condition and results of operations.
Reinsurance
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 companies about the underlying book
of business and the ceding companies' reserving practices. For this reason, the carried reserves for the reinsurance segment are
generally in the upper quartile of the range of actuarial reserve indications. As the carried reserves 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 will show adverse development, and such adverse development could be substantial and have a
negative impact on the Company's financial condition and results of operations.
See note 4 of Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for a reconciliation of
beginning and ending reserves for losses and settlement expenses for the three years ended December 31, 2016, as well as ten
years of incurred and paid development information for each major line of business. Following is a detailed analysis of the
development the Company has experienced on its prior accident years’ reserves during the past three years. Care should be
exercised when attempting to analyze the financial impact of the reported development amounts because, as previously noted,
1) the overall expectation is that, more often than not, favorable development will occur as the prior accident years’ reserves
run off, and 2) 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 any impact on earnings.
17
Year ended December 31, 2016
Property and casualty insurance segment
For the property and casualty insurance segment, the December 31, 2016 estimate of loss and settlement expense
reserves for accident years 2015 and prior decreased $30.0 million from the estimate at December 31, 2015. This decrease
represents 6.2 percent of the December 31, 2015 carried reserves. During the third quarter of 2016, management implemented
a new reserving methodology for the determination of direct bulk reserves in the property and casualty insurance segment. The
new methodology produces specific line of business and accident year estimated ultimate loss and allocated settlement expense
amounts based on explicit loss frequency and severity assumptions. The previous methodology used one process to determine
the aggregate amount of IBNR loss and settlement expense reserves, and a separate process to allocate those reserves to the
various accident years. The implementation of the new reserving methodology did not have a material impact on total carried
reserves for the property and casualty insurance segment; however, there was some movement of allocated settlement expense
reserves to IBNR loss reserves, and a reallocation of loss and allocated settlement expense reserves by accident year to align
those reserves with the estimated ultimate loss and allocated settlement expense ratios. In connection with this reallocation of
reserves by accident year, approximately $5.6 million of IBNR loss and allocated settlement expense reserves were moved
from prior accident years to the current accident year in multiple lines of business. This reduction in prior accident years'
reserves is reported as favorable development; however, this development is "mechanical in nature", and did not have any
impact on earnings because the total amount of carried reserves did not change. The following table displays development on
prior years' reserves by line of business and type of reserve.
($ in thousands)
Line of business
Personal lines
Commercial auto liability
Auto physical damage
Workers' compensation
Other liability
Commercial property
Other
Total
Reported and
unreported loss
reserves
Allocated
settlement
expense reserves
Unallocated
settlement
expense reserves
Total
$
(1,242) $
6,807
(1,850)
(11,271)
(2,709)
1,296
(1,426)
(302) $
(33) $
(3,236)
(34)
(4,205)
(9,936)
982
(163)
(1,222)
205
(844)
(523)
174
(481)
(1,577)
2,349
(1,679)
(16,320)
(13,168)
2,452
(2,070)
$
(10,395) $
(16,894) $
(2,724) $
(30,013)
The favorable development reported for 2016 is generally attributed to lower explicit loss frequency and severity
assumptions underlying the loss and allocated settlement expense reserves carried at year-end 2016 than the implicit
assumptions underlying the reserves carried at year-end 2015. The favorable development associated with the loss and
allocated settlement expense reserves total $27.3 million, with $10.4 million coming from favorable loss reserve development
and $16.9 million coming from favorable allocated settlement expense reserve development.
Favorable development on loss and allocated settlement expense reserves represents 91 percent of the property and
casualty insurance segment’s total reported favorable development of $30.0 million. The following table displays the
development experienced in 2016 on reported and unreported loss reserves and allocated settlement expense reserves for the
five most recent accident years, by line of business.
18
($ in thousands)
Calendar
accident
year
Personal
lines
Commercial
auto
liability
Auto
physical
damage
Workers'
compensation
Other
liability
Commercial
property
Other
Total
Prior
2011
2012
2013
2014
2015
$
(96) $
(490) $
(145) $
(182)
(243)
(199)
(211)
(613)
(277)
(67)
126
1,129
3,150
(37)
(72)
(116)
(204)
(1,310)
218
(770)
(1,910)
(2,940)
(3,643)
(6,431)
$
2,681
(1,654)
(3,435)
(495)
(2,231)
(7,511)
$
(158) $
672
296
557
(332)
1,243
(361) $
(83)
(200)
(142)
(163)
(640)
1,649
(2,331)
(5,631)
(3,209)
(5,655)
(12,112)
Total
$ (1,544) $
3,571
$ (1,884) $
(15,476) $ (12,645) $
2,278
$ (1,589) $ (27,289)
The property and casualty insurance segment's new bulk reserving methodology is based on explicit assumptions
concerning the ultimate number (frequency) and average size (severity) of claims expected to be incurred. The prior
methodology separated the calculation of the aggregate reserves from the allocation of those reserves to the various accident
years, and thus did not utilize explicit claim frequency and severity assumptions. Under the new reserving methodology,
management seeks to better align expected and actual development by line of business and accident year. As this is a
transitional year, there are some discontinuities in the development amounts reported for 2016. The following comments are
based on a comparison of the explicit assumptions underlying the December 31, 2016 carried reserves to the implicit
assumptions underlying the December 31, 2015 carried reserves.
In the table above, five of the seven lines of business exhibited favorable development on a fairly consistent basis over
the prior five accident years, those being personal lines, auto physical damage, workers’ compensation, other liability and other.
For these lines of business, favorable development for most accident years was driven by decreases in the frequency and/or
severity assumptions underlying the estimated ultimate accident year loss and allocated settlement expense ratios. The
workers’ compensation line of business experienced adverse development on accident years prior to 2011, as management
strengthened those reserves in response to increases in the severity assumptions for those years due to the expansion of the
experience review period to thirty-five accident years.
The commercial auto liability line of business experienced adverse development in each of the latest three accident
years. Comparing the explicit assumptions utilized at December 31, 2016 to the implicit assumptions underlying the December
31, 2015 reserves, the ultimate claim frequency and severity assumptions for accident year 2015 were underestimated by 1.8
percent and 9.7 percent, respectively. Using the same comparison, claims severity for accident year 2014 was underestimated
by 3.4 percent, and for accident year 2013, claim frequency was slightly underestimated.
The commercial property line of business experienced the greatest number of development discontinuities by accident
year in connection with the change in reserving methodology. Under the previous methodology, negative bulk case loss
reserves were often carried in the commercial property line of business due to the perceived strength of the case loss reserves
relative to the other lines of business. With the elimination of the bulk case loss reserves under the new methodology, the
reserves for the commercial property line of business were reallocated in total and by accident year in accordance with the
explicit claim frequency and severity assumptions developed during 2016. The implicit assumptions utilized at year-end 2015
underestimated claim frequency for each of the five most recent accident years, and underestimated loss severity for all of those
years except 2014.
The Company increased asbestos and environmental IBNR loss and settlement expense reserves by $3.5 million during
2016, which is primarily reflected in the other liability line of business. The increase was in response to an indicated increase
in the ultimate asbestos liability produced by internal payout decay models. Management also notes that A.M. Best increased
the industry’s estimated ultimate liability by $15 billion during 2016. Newly reported asbestos claims have decreased slightly
for the last two calendar years. Asbestos and environmental reserves constitute less than 3 percent of the property and casualty
insurance segment’s total direct reserves.
19
Reinsurance segment
For the reinsurance segment, the December 31, 2016 estimate of loss and settlement expense reserves for accident years
2015 and prior decreased $10.9 million from the estimate at December 31, 2015. This decrease represents 5.5 percent of the
December 31, 2015 carried reserves. Approximately $7.1 million of favorable development is attributable to the HORAD book
of business, with the remaining $3.8 million of favorable development associated with MRB.
In the HORAD book of business, $7.4 million of favorable development occurred in the pro rata line of business and
$0.3 million of adverse development occurred in the excess of loss line of business. The favorable development in the pro rata
line of business primarily occurred in the 2015 accident year, with accident years 2012 - 2014 generating $1.4 million of
adverse development and the remaining prior accident years experiencing little development in the aggregate. In the excess of
loss line of business, the 2015 accident year experienced over $3.0 million of favorable development; however, this favorable
development was more than offset by adverse development in many of the prior 21 accident years, with the greatest amount of
adverse development concentrated in accident years 2005 - 2014.
The favorable development experienced on the MRB business is mostly attributed to an increase in the amount of
negative bulk IBNR loss reserve carried on prior years' reserves. Recent actuarial reviews of MRB's reported reserves have
consistently indicated that those reserves challenged the upper level of the range of reasonable reserves. To address this issue, a
$2.0 million negative bulk IBNR loss reserve was established in 2015 for this business. During 2016, the negative bulk IBNR
loss reserve was increased to $4.0 million, with $5.3 million of negative IBNR loss reserve carried on prior accident years and
$1.3 million of positive lag IBNR loss reserve carried on the 2016 accident year. The recognition of the additional negative
IBNR loss reserve accounts for $3.3 million of the $3.8 million of favorable development experienced during 2016.
During 2016, the expected loss ratios utilized for prior contract years remained unchanged, except for ocean marine pro
rata business. The expected loss ratios associated with this contract type were decreased by approximately 2.5, 4.0 and 5.0
percentage points for contract years 2012, 2014 and 2015, respectively, from the ratios utilized during 2015. Additionally, the
expected loss ratio for contract year 2013 was increased by approximately 2.0 percentage points relative to the 2015 value.
These changes were made in response to reserving information supplied by the ceding company, a large writer of ocean marine
pro rata business.
The expected loss ratios utilized for the 2016 contract year were based on an extensive actuarial analysis of trended
historic ultimate loss ratios based on current-level earned premiums. Where applicable, new contract loss information or loss
histories were also incorporated into the reserving process. Compared to the 2015 contract year selections, the 2016 contract
year expected loss ratios for per risk excess and casualty excess business increased by 2.5 percentage points, while the expected
loss ratio for aggregate excess business decreased by 5.0 percentage points. The 2016 contract year expected loss ratio for
ocean marine pro rata business increased approximately 2.5 percentage points above the initial 2015 contract year selection, but
is now approximately 7.5 percentage points above the revised ratio.
Year ended December 31, 2015
Property and casualty insurance segment
For the property and casualty insurance segment, the December 31, 2015 estimate of loss and settlement expense
reserves for accident years 2014 and prior decreased $13.8 million from the estimate at December 31, 2014. This decrease
represented 3.0 percent of the December 31, 2014 carried reserves. No changes were made in the key actuarial assumptions
utilized to estimate loss and settlement expense reserves during 2015; however, the accident year allocation factors applied to
IBNR loss reserves, bulk case loss reserves, and the defense and cost containment portion of settlement expense reserves were
revised at December 31, 2015 as part of the annual review. This change resulted in the movement of $423,000 of reserves from
prior accident years to the current accident year, and hence, was reported as favorable development on prior years' reserves.
Reserves on previously reported claims developed favorably in 2015 by approximately $8.5 million. This includes
$514,000 of adverse development attributable to revised accident year allocation factors for bulk case loss reserves, which was
offset by $7.5 million of favorable development experienced on prior years’ reported claims (exclusive of the bulk case loss
reserve) and $1.5 million of favorable development from changes in the line of business distribution of the bulk case loss
reserves. Of the $8.5 million of favorable development, accident years 2012-2014 experienced favorable development of $7.0
million. While all lines of business continued to experience very favorable development on claims which “closed” during
2015, adverse development on claims remaining “open” in the commercial auto liability line outpaced the favorable
development experienced on "closed" claims by $6.5 million. Favorable development on the combined "case plus bulk case
loss reserves" occurred in all lines of business except commercial auto liability, which experienced adverse development of
$2.5 million, and homeowners, which experienced adverse development of $28,000 mostly attributable to a reallocation of the
bulk case reserve. The following table displays the development experienced on previously reported claims, as well as the
development amounts generated by the change in accident year allocation factors, by line of business:
20
Development
experienced on
previously
reported claims
which closed
during the year
Development
experienced on
previously
reported claims
remaining open
at year end
Development
associated with
changes in bulk
case loss
reserve line of
business
distribution
Development
associated with
the change in
bulk case loss
reserve
accident year
allocation
factors
($ in thousands)
Line of business
Personal auto liability
$
(1,303) $
1,110
$
Commercial auto liability
Auto physical damage
Workers' compensation
Other liability
Commercial property
Homeowners
Bonds
(4,773)
(1,376)
(16,106)
(12,938)
(6,743)
(987)
7
11,279
(266)
11,668
12,432
1,168
80
(761)
(1,389) $
(4,418)
35
1,253
(1,861)
3,946
935
16
13
384
11
166
(60)
—
—
—
$
Total
development
on previously
reported claims
(1,569)
2,472
(1,596)
(3,019)
(2,427)
(1,629)
28
(738)
Total
$
(44,219) $
36,710
$
(1,483) $
514
$
(8,478)
The favorable development of $8.5 million on previously reported claims during 2015 was an increase of $2.6 million
over the $5.9 million of favorable development reported in 2014. Five of the eight lines of business contributed to the
aggregate increase in favorable development. Commercial auto liability was the largest contributor, having $3.4 million less
adverse development during 2015 compared to 2014. The four remaining contributing lines, and the increase in favorable
development attributed to them, were; other liability ($1.8 million), commercial property ($954,000), all other lines (mostly
surety bonds) ($472,000), and auto physical damage ($316,000). Personal auto liability experienced $3.0 million less favorable
development during 2015 as the 2014 development was impacted by reserve decreases on two very large unlimited personal
injury protection claims reinsured through the Michigan Catastrophic Claims Association. Workers' compensation continued to
experience favorable development; however, the development was $1.0 million less than in 2014. The $28,000 of adverse
development experienced on the homeowners' line of business represented a $265,000 increase over the amount experienced
during 2014. As previously stated, this was primarily caused by a line of business redistribution of the bulk case reserve.
While the adverse development experienced in commercial auto liability remained significant, the decline from the
amount reported in 2014 was also significant. Similar to 2014, the adverse development was driven by large claim amounts
associated with a very small percentage (1.8 percent) of the total claims experiencing development of any type. The
development associated with this group of claims increased 13.0 percent, which partially offset a 293.0 percent increase in
favorable development on all other commercial auto claims experiencing development of any type in 2015. Internally
monitored claims diagnostics, such as accident year ratios of average opened to average closed claims, appeared to indicate
continued strengthening of case loss reserves for claims reported during 2015 relative to 2014. Management continued to
allocate a significant amount of time and resources on the commercial auto liability book of business, focusing on claims,
underwriting and pricing processes.
IBNR loss reserves experienced $4.3 million of adverse development, which was attributed to higher than expected loss
emergence ($5.5 million) and exposure growth ($1.9 million). These adverse development amounts were partially offset by
favorable development from changes in the IBNR accident year allocation factors ($698,000), and reserve decreases taken as
the result of scheduled reserve reviews ($2.0 million). Approximately $2.6 million of the $5.5 million of higher than expected
loss emergence was due to IBNR loss reserve strengthening in the other liability line of business necessitated by the continuing
emergence of asbestos claims at a rate not previously anticipated. Six of the eight reserving lines experienced adverse IBNR
loss reserve development, with higher than expected loss emergence being the main driver for each. The lines experiencing
adverse development included commercial property ($5.3 million), auto physical damage ($844,000), commercial auto liability
($443,000), workers' compensation ($420,000), homeowners ($381,000), and personal auto liability ($264,000). Adverse
development on the property lines of business was not totally unexpected. Favorable development was consistently observed
on reported property claims, therefore, lower levels of IBNR loss reserves were generally carried to offset perceived
redundancies. Favorable development, generally driven by lower than expected emergence and decreases in carried reserves
from scheduled reviews, was experienced in other liability ($2.8 million) and surety bonds ($596,000). The following table
displays the development experienced on IBNR loss reserves from each of these factors, by line of business:
21
Development on IBNR loss reserves resulting from:
($ in thousands)
Line of business
Loss
emergence
different than
expected
Personal auto liability
$
Commercial auto liability
Auto physical damage
Workers' compensation
Other liability
Commercial property
Homeowners
Bonds
359
890
838
769
(2,102)
5,014
363
(593)
Actions
taken as a
result of
scheduled
reserve
reviews
$
(35) $
(263)
8
(368)
(1,713)
253
29
62
Change in
underlying
exposures
Change in
accident year
allocation
factors
Change in
line-of-
business
distribution
(49) $
172
2
414
1,323
35
(14)
21
— $
(336)
1
(414)
42
46
14
(51)
(11) $
(20)
(5)
19
(302)
(59)
(11)
(35)
Total
264
443
844
420
(2,752)
5,289
381
(596)
Total
$
5,538
$
(2,027) $
1,904
$
(698) $
(424) $
4,293
Total settlement expense reserves developed favorably in 2015 by $7.9 million. Approximately 73.0 percent of the
favorable development is attributed to defense and cost containment expenses. The reserves associated with these expenses
were established in bulk, and were allocated to the various accident years in proportion to the accident year distribution of the
underlying loss reserves. During 2015, the underlying loss reserves experienced favorable development, which generated
favorable development in the settlement expense reserves. However, the portion of this reserve associated with asbestos and
environmental claims experienced adverse development of $1.6 million due to additional reserve strengthening necessitated by
the continuing emergence of asbestos claims at a rate not previously anticipated. Changes in the IBNR loss reserve and bulk
case loss reserve accident year allocation factors accounted for $239,000 of the favorable development in the defense and cost
containment expense reserves. The remaining 27.0 percent of favorable development was attributed to adjusting and other
expenses (i.e., internal claims department, independent adjuster and miscellaneous settlement expenses). Differences in the
allocation factors used to distribute the reserves for these expenses at year-end 2015 compared to year-end 2014 generated
$234,000 of adverse development. The majority of the remaining favorable development resulted from settlement expense
payments that were lower than anticipated in the payment patterns used in the December 31, 2014 accident year allocations.
Prior accident years’ reserves for non-voluntary assumed business developed favorably by $464,000, attributed primarily
to assigned risk pools.
The above results reflect prior accident year reserve development on a direct and assumed basis. During 2015, ceded
losses and settlement expenses for prior accident years increased $1.6 million. This increase in reinsurance recoveries is
reported as favorable development.
Reinsurance segment
For the reinsurance segment, the December 31, 2015 estimate of loss and settlement expense reserves for accident years
2014 and prior decreased $21.3 million from the estimate at December 31, 2014. This decrease represented 10.8 percent of the
December 31, 2014 carried reserves. No changes were made in the key actuarial assumptions utilized to estimate loss and
settlement expense reserves during 2015; however, the accident year allocation factors applied to IBNR loss reserves were
revised during 2015. This change resulted in the movement of $1.0 million of reserves from the current accident year to prior
accident years, and hence, was reported as adverse development on prior years' reserves. The HORAD portion of the book
experienced favorable development of approximately $18.1 million, while MRB experienced favorable development of
approximately $3.2 million.
22
The vast majority of HORAD’s favorable development occurred in four contract types; ocean marine pro rata ($8.5
million), casualty excess ($5.1 million), per risk excess ($3.3 million), and property pro rata with wind ($2.0 million).
Approximately 15.0 percent of the favorable development experienced in ocean marine pro rata is attributable to a large
negative premium adjustment (for contracts effective during the three previous years) reported by the ceding company for the
offshore energy and liability proportional account, which reduced the amount of IBNR loss reserves carried for those years. In
addition, as this particular set of contracts has matured, carried IBNR loss reserves have declined because emerged loss
experience has been better than expected. The development in the remaining contract types experiencing favorable
development is attributable to the reinsurance segment's prudently conservative reserving approach, and reflects a reduction in
carried IBNR loss reserves that could no longer be justified. Three contract types experienced adverse development; property/
casualty global pro rata ($3.0 million), property/casualty global excess ($389,000), and crop/hail pro rata ($86,000). For the
property/casualty global contracts, increases in cedants’ reported losses exceeded the decrease in IBNR loss reserves.
Significant IBNR loss reserves remain for these contract types, so the possibility for improved profitability on prior accident
years still exists.
Historically, the MRB book of business has experienced very little development on prior years' loss and settlement
expense reserves. The Company’s actuarial reviews of MRB's reported reserves have consistently indicated that those reserves
challenge the upper level of the range of reasonable reserves. To address this issue, a negative bulk IBNR loss reserve was
established in 2015 for this business. This negative IBNR loss reserve is responsible for approximately $3.0 million of the $3.2
million of favorable development reported on prior years’ reserves.
No changes were made in the "expected loss ratios" utilized for prior contract years. The "expected loss ratios" utilized
for the 2015 contract year were based on an extensive actuarial analysis of trended historic ultimate loss ratios based on
current-level earned premiums. Where applicable, new contract loss information or loss histories were also incorporated into
the "expected loss ratio" selection process. Compared to the 2014 contract year selections, the 2015 contract year expected loss
ratios for the per risk excess and casualty excess lines of business increased by 7.5 percentage points and 2.5 percentage points,
respectively. The 2015 contract year expected loss ratio for the ocean marine pro rata line of business decreased 5.5 percentage
points due to the favorable experience that has occurred during the previous three contract years.
Year ended December 31, 2014
Property and casualty insurance segment
For the property and casualty insurance segment, the December 31, 2014 estimate of loss and settlement expense
reserves for accident years 2013 and prior decreased $8.1 million from the estimate at December 31, 2013. This decrease
represented 1.9 percent of the December 31, 2013 carried reserves. No changes were made in the key actuarial assumptions
utilized to estimate loss and settlement expense reserves during 2014; however, the accident year allocation factors applied to
IBNR loss reserves, bulk case loss reserves, and the defense and cost containment portion of settlement expense reserves were
revised at December 31, 2014 as part of the annual review. This change resulted in the movement of $2.2 million of reserves
from prior accident years to the current accident year, and hence, was reported as favorable development on prior years’
reserves.
Reserves on previously reported claims developed favorably in 2014 by approximately $5.9 million. This included
$432,000 of adverse development attributable to revised accident year allocation factors for bulk case loss reserves, which was
offset by $5.0 million of favorable development experienced on prior years’ reported claims (exclusive of the bulk case loss
reserve) and $1.3 million of favorable development from changes in the line of business distribution of the bulk case loss
reserves. Of the $5.9 million of favorable development, accident years 2011-2013 experienced adverse development of $3.6
million, while all remaining accident years experienced aggregate favorable development of $9.5 million. While all lines of
business continued to experience very favorable development on claims which “closed” during 2014, adverse development on
claims remaining “open” in the commercial auto liability line outpaced the favorable development experienced on "closed"
claims by $9.4 million. Favorable development on the combined "case plus bulk case loss reserves" occurred in all lines of
business except commercial auto liability, which experienced adverse development of $5.8 million. The following table
displays the development experienced on previously reported claims, as well as the development amounts generated by the
change in accident year allocation factors, by line of business:
23
Development
experienced on
previously
reported claims
which closed
during the year
Development
experienced on
previously
reported claims
remaining open
at year end
Development
associated with
changes in bulk
case loss
reserve line of
business
distribution
Development
associated with
the change in
bulk case loss
reserve
accident year
allocation
factors
($ in thousands)
Line of business
Personal auto liability
$
(1,184) $
Commercial auto liability
Auto physical damage
Workers' compensation
Other liability
Commercial property
Homeowners
Bonds
(2,000)
(1,145)
(15,116)
(8,462)
(5,096)
(1,105)
(40)
(3,648) $
11,415
(91)
12,051
8,029
1,422
192
(221)
$
234
(3,583)
(45)
(997)
(210)
2,669
604
(5)
29
—
1
—
—
330
72
—
$
Total
development
on previously
reported claims
(4,569)
5,832
(1,280)
(4,062)
(643)
(675)
(237)
(266)
Total
$
(34,148) $
29,149
$
(1,333) $
432
$
(5,900)
Approximately 98 percent of the favorable development experience for personal auto liability stemmed from reserve
take-downs on two large Michigan Catastrophic Claims Association unlimited personal injury protection claims which were
reported in 2002 and 2003. Similar to 2013, commercial auto liability’s adverse development is associated with a small number
of previously reported claims which experienced very significant upwards revisions in carried reserves and payments. Of the
total number of reported claims for this line, 1.8 percent developed adversely by more than $100,000, representing $11.2
million of adverse development. The development on the remaining 98.2 percent of commercial auto liability claims was a
favorable $1.7 million. Management believes prior accident years underwent significant strengthening during 2014, and that
the 2014 accident year is more adequately reserved than the 2013 accident year was at year-end 2013. Both workers'
compensation and other liability, which experienced adverse development on combined open and closed previously reported
claims at year-end 2013, exhibited favorable development as of year-end 2014, similar to year-end 2012. The remaining lines
of business experienced favorable development, though somewhat less than in 2013 which had a larger favorable impact from
the revision of the bulk case loss reserve accident year allocation factors.
IBNR loss reserves experienced $201,000 of adverse development, which was attributed to higher than expected
emergence ($1.4 million) and exposure growth ($1.9 million). These items were almost completely offset by favorable
development from changes in the IBNR accident year allocation factors ($1.8 million), and reserve decreases taken as the result
of scheduled reserve reviews ($1.2 million). Four of the eight reserving lines experienced adverse IBNR loss reserve
development, with higher than expected emergence being the main driver for each. The lines experiencing adverse
development included commercial property ($3.4 million), auto physical damage ($970,000), homeowners ($886,000) and
commercial auto liability ($291,000). Adverse development on the property lines of business is not totally unexpected.
Favorable development is consistently observed on reported property claims, therefore, lower levels of IBNR loss reserves are
generally carried to offset perceived redundancies. Favorable development, generally driven by lower than expected
emergence and/or decreases in carried reserves from scheduled reviews, was experienced in other liability ($4.3 million),
workers' compensation ($846,000), surety bonds ($250,000) and personal auto liability ($3,000). The following table displays
the development experienced on IBNR loss reserves from each of these factors, by line of business:
24
Development on IBNR loss reserves resulting from:
($ in thousands)
Line of business
Loss
emergence
different than
expected
Actions
taken as a
result of
scheduled
reserve
reviews
Personal auto liability
$
80
$
(23) $
Commercial auto liability
Auto physical damage
Workers' compensation
Other liability
Commercial property
Homeowners
Bonds
658
950
(531)
(4,028)
3,354
933
(43)
(148)
(1)
(576)
(525)
69
(15)
(1)
Change in
underlying
exposures
Change in
accident year
allocation
factors
Change in
line-of-
business
distribution
(70) $
190
1
254
1,540
32
(25)
(2)
$
21
(434)
19
—
(1,226)
—
(10)
(204)
(11) $
25
1
7
(34)
(29)
3
—
Total
(3)
291
970
(846)
(4,273)
3,426
886
(250)
Total
$
1,373
$
(1,220) $
1,920
$
(1,834) $
(38) $
201
Total settlement expense reserves developed favorably in 2014 by $6.5 million. Approximately 87 percent of the
favorable development was attributed to defense and cost containment expenses. The reserves associated with these expenses
were established in bulk, and were allocated to the various accident years in proportion to the accident year distribution of the
underlying loss reserves. During 2013, the underlying loss reserves experienced favorable development, which generated
favorable development in the settlement expense reserves. However, the portion of this reserve associated with asbestos claims
experienced adverse development of $1.2 million due to additional strengthening. Changes in the IBNR loss reserve and bulk
case loss reserve accident year allocation factors accounted for $749,000 of the favorable development in the defense and cost
containment expense reserves. The remaining 13 percent of favorable development was attributed to adjusting and other
expenses (i.e., internal claims department, independent adjuster and miscellaneous settlement expenses). Differences in the
allocation factors used to distribute the reserves for these expenses at year-end 2014 compared to year-end 2013 generated
$716,000 of favorable development. The majority of the remaining favorable development resulted from settlement expense
payments that were lower than anticipated in the payment patterns used in the December 31, 2013 accident year allocations.
Prior accident years’ reserves for non-voluntary assumed business developed favorably by $346,000, attributed primarily
to assigned risk pools.
The above results reflect prior accident year reserve development on a direct and assumed basis. During 2013, ceded
losses and settlement expenses for prior accident years decreased $4.2 million. This decrease in reinsurance recoveries was
reported as adverse development.
Reinsurance segment
For the reinsurance segment, the December 31, 2014 estimate of loss and settlement expense reserves for accident years
2013 and prior decreased $12.7 million from the estimate at December 31, 2013. This decrease represented 6.9 percent of the
December 31, 2013 carried reserves. The HORAD portion of the book experienced favorable development of approximately
$11.8 million, while MRB experienced favorable development of approximately $833,000. MRB accident year 2013
experienced adverse development of $277,000. This adverse development was more than offset by favorable development on
accident years 2011 ($237,000) and 2009 ($638,000), plus favorable development on most of the remaining prior accident
years. For the HORAD book of business, accident years 2010 and prior accounted for approximately 80 percent of the
favorable development, with less significant amounts of favorable development occurring in most of the remaining prior
accident years. Development for accident year 2013 was an adverse $1.8 million due to reserve strengthening. The increase in
favorable development in the HORAD book of business in 2014 compared to 2013 was greater than expected, and was driven
mostly by a reduction of IBNR loss reserves for accident years 2010 and prior because the amount previously carried was no
longer indicated in the actuarial analysis.
25
No changes were made in the key actuarial assumptions utilized to estimate loss and settlement expense reserves during
2014, including the "expected loss ratios" utilized for prior contract years. The "expected loss ratios" utilized for the 2014
contract year were based on an extensive actuarial analysis of trended historic ultimate loss ratios based on current-level earned
premiums. Where applicable, new contract loss information or loss histories were also incorporated into the selection process.
Compared to the 2013 contract year selections, the property per risk "expected loss ratios" increased moderately. The casualty
excess and property/casualty global pro rata "expected loss ratios" decreased slightly from the 2013 selections.
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. With regard to the assumed reinsurance business, however, all asbestos and environmental exposures related to
1980 and prior accident years are retained by Employers Mutual.
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 the claim history and trends within the Company and the industry.
The following table presents asbestos and environmental-related losses and settlement expenses incurred and reserves
outstanding, net of reinsurance, for the Company:
($ in thousands)
Losses and settlement expenses incurred:
Asbestos:
Year ended December 31,
2016
2015
2014
Property and casualty insurance
$
3,475
$
3,584
$
1,614
Reinsurance
Environmental:
Property and casualty insurance
Reinsurance
—
3,475
652
—
652
—
3,584
304
—
304
—
1,614
(42)
—
(42)
Total losses and settlement expenses
incurred
$
4,127
$
3,888
$
1,572
($ in thousands)
Loss and settlement expense reserves:
Asbestos:
Year ended December 31,
2016
2015
2014
Property and casualty insurance
$
11,134
$
9,248
$
7,587
Reinsurance
Environmental:
Property and casualty insurance
Reinsurance
359
11,493
846
666
1,512
385
9,633
858
686
1,544
412
7,999
559
738
1,297
Total loss and settlement expense
reserves
$
13,005
$
11,177
$
9,296
26
The property and casualty insurance subsidiaries have exposure to asbestos and environmental 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 loss and settlement expense reserves associated with asbestos claims
have been increased each year for the last several years due to continued reporting of new claims at a rate not previously
anticipated, as well as updated internal ultimate loss and settlement expense evaluations. In 2016, the loss and settlement
expense reserves for asbestos claims were strengthened approximately $3.5 million.
Reserves for environmental claims 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.
Based upon current facts, management believes the reserves carried for asbestos and environmental-related claims at
December 31, 2016 are adequate. Although future changes in the legal and political environment may result in adjustment to
these reserves, management believes any adjustment will not have a material impact on the Company's financial condition or
results of operations.
Reinsurance Ceded
Property and Casualty Insurance
The pool participants cede insurance in the ordinary course of business for the primary purpose of limiting their
maximum loss exposure. The pool participants also purchase catastrophe reinsurance to cover multiple losses arising from a
single event.
All major reinsurance treaties, with the exception of the pooling agreement, the personal and commercial boiler treaties,
the employment practices liability contract, and the data compromise, cyber liability and identity recovery contracts, are on an
“excess of loss” basis whereby the reinsurer agrees to reimburse the pool participants for covered losses in excess of a
predetermined amount, up to a stated limit. The boiler treaties, data compromise, cyber liability and identity recovery
contracts, and the employment practices liability contract provide for 100 percent reinsurance of the pool’s applicable direct
exposures. Facultative reinsurance from approved markets, which provides reinsurance on an individual risk basis and requires
specific agreement of the reinsurer as to the limits of coverage provided, is purchased when coverage by an insured is required
in excess of treaty capacity, where a high-risk type policy could expose the treaty reinsurance programs, or other reasons where
the pool participants wish to reduce their net loss exposure from a particular risk.
Each type of reinsurance coverage is purchased in layers, and each layer may have a separate retention level. Retention
levels are determined according to reinsurance market conditions and the surplus position of the EMC Insurance
Companies. The pooling agreement aids efficient buying of reinsurance since it allows for higher retention levels and
correspondingly decreased dependence on the reinsurance marketplace.
27
A summary of the reinsurance treaties benefiting the pool participants during 2016 is presented below. Retention
amounts reflect the accumulated retentions, co-participation and non-placed portions of all layers within a treaty. The retention
amount for property catastrophe losses excludes a $10.0 million annual aggregate deductible that applies to losses after the
initial $10.0 million retention in the first layer of coverage.
($ in thousands)
Type of reinsurance treaty
Property catastrophe
Property per risk
Casualty
Workers' compensation excess
Fidelity
Surety
Boiler - commercial lines
Boiler - personal lines
Employment practices liability
Data compromise
Identity recovery
Cyber liability
Retention
Limits
15,000
98 percent of $205,000
4,000
100 percent of $76,000
4,000
100 percent of $36,000
— $40,000 excess of $40,000
2,250
95 percent of $5,000
3,050
97 percent of $38,000
— 100 percent of $100,000
— 100 percent of $50 ($100 starting 10/1)
— 100 percent of $1,000
— 100 percent of $1,000
— 100 percent of $25
— 100 percent of $250
$
$
$
$
$
$
$
$
$
$
$
$
Although reinsurance does not discharge the original insurer from its primary liability to its policyholders, it is the
practice of insurers for accounting purposes to treat reinsured risks as risks of the reinsurer since the primary insurer would
only re-assume liability in those situations where the reinsurer is unable to meet the obligations it assumes under the
reinsurance agreements. The ability to collect reinsurance is subject to the solvency of the reinsurers.
The major reinsurers in the pool participants’ reinsurance programs during 2016 are presented below. The percentages
represent the reinsurers’ share of the total reinsurance protection under all coverages. Each type of coverage is purchased in
layers, and an individual reinsurer may participate in more than one type of coverage and at various layers within these
coverages. All programs (except the boiler, data compromise, cyber liability, identity recovery, and employment practice
liability programs, as well as the top layer of the property catastrophe program) are handled by reinsurance brokers. The
reinsurance of those programs is syndicated to 53 domestic and foreign reinsurers.
In formulating reinsurance programs, Employers Mutual is selective in its choice of reinsurers. Employers Mutual
selects reinsurers on the basis of financial stability and long-term relationships, as well as the price and coverage terms.
Reinsurers are generally required to have an A.M. Best rating of “A” (Excellent) or higher and a minimum policyholders’
surplus of $500.0 million.
28
($ in thousands)
Property catastrophe, property per risk and casualty coverages
Percent of total
reinsurance
protection
A.M. Best
rating
Underwriters at Lloyd's of London
Mutual Reinsurance Bureau
Hannover Ruckversicherung AG
Swiss Reinsurance America Corporation
R + V Versicherung AG
Renaissance Reinsurance US Inc.
Tokio Millennium Re Ltd.
QBE Reinsurance Corporation
MAPFRE Re Compania De Reaseguros, SA
Fidelity and surety coverages
Transatlantic Reinsurance Company
Hannover Ruckversicherung AG
Axis Reinsurance Company
Odyssey America Reinsurance Corp.
Everest Reinsurance Company
Endurance Reinsurance Corporation of America
Boiler - commercial lines coverage
26.4%
13.3%
9.0%
5.5%
5.5%
4.8%
4.0%
3.9%
3.9%
31.6%
20.7%
14.1%
12.1%
12.1%
9.4%
A
(1)
A+
A+
(2)
A
A++
A
A
A+
A+
A+
A
A+
A
Hartford Steam Boiler Inspection and Insurance Company
100.0%
A++
Boiler - personal lines coverage
Factory Mutual Insurance Company
Employment practices liability coverage
100.0%
A+
Hartford Steam Boiler Inspection and Insurance Company
100.0%
A++
Data compromise, cyber liability and identity recovery
Hartford Steam Boiler Inspection and Insurance Company
100.0%
A++
(1) MRB is composed of Employers Mutual and four other unaffiliated mutual insurance companies. MRB is backed by the
financial strength of the five member companies. Three of the other member companies have an “A” (Excellent) rating
and the fourth has a “B++” (Good) rating from A.M. Best.
(2) R + V Versicherung AG is not rated by A.M. Best, but maintains an AA- rating from Standard & Poor’s.
The Terrorism Risk Insurance Program Reauthorization Act of 2015 (effective through December 31, 2020, referred to
herein as the "TRIA Reauthorization Act") continues the Federal backstop on losses from certified terrorism events from
foreign sources, and includes coverage for domestic terrorism as well. The TRIA Reauthorization Act covers most direct
commercial lines of business, including coverage for losses from nuclear, biological and chemical exposures if coverage was
afforded by an insurer, but with exclusions for commercial automobile insurance, burglary and theft insurance, surety
insurance, professional liability insurance, and farm owners multiple peril insurance.
29
The program trigger threshold for federal participation in losses was $120.0 million in 2016, and increases $20.0 million
per year until reaching $200.0 million on January 1, 2020. A loss must be $5.0 million or more to count towards the program
trigger threshold. Each insurer has a deductible amount (20 percent of the prior year’s direct commercial lines premiums
earned for the applicable lines of business) and a retention above the deductible (16 percent in 2016, increasing by one
percentage point each year until reaching 20 percent on January 1, 2020). The TRIA Reauthorization Act caps losses at $100.0
billion annually; no insurer that has met its deductible will be liable for payment of any portion of losses above that amount.
For the Company, the TRIA Reauthorization Act deductible is approximately $60.9 million.
Coverage for terrorism losses is included in the pool participants’ reinsurance programs for property and casualty risks
(including coverage for the aggregation of property claims from catastrophic losses). In summary, coverage under the property
contracts includes both domestic and foreign terrorism, though it is restricted to exclude from coverage nuclear, biological,
chemical and radiation (NBCR) losses. Coverage under the casualty contracts also includes both domestic and foreign
terrorism, though NBCR terrorism is covered for one limit per layer.
Reinsurance
In connection with the change in the inter-company reinsurance program in 2016, the reinsurance subsidiary began
purchasing additional reinsurance protection in peak exposure territories from external parties in which coverage is triggered
when losses experienced by the insurance industry from a catastrophic event exceed a specified threshold. Any reinsurance
recoveries received from external parties reduces the amount of losses ceded to Employers Mutual under the inter-company
reinsurance program. The net cost of this external reinsurance protection was approximately $3.5 million in 2016.
The reinsurance subsidiary also assumes and cedes some selected reinsurance business through the quota share
agreement in connection with “fronting” activities initiated by Employers Mutual whereby an agreed upon percentage of the
selected assumed business is ceded to other reinsurer(s) on a pro rata basis. Ceded earned premiums associated with this
fronting activity amounted to $3.7 million during 2016. The ceding of this reinsurance business through these fronting
activities does not discharge the reinsurance subsidiary from its assumed liability to the original cedants, and the ability to
collect reinsurance is subject to the solvency of the reinsurers.
30
Property and Casualty Insurance and Reinsurance
The Company’s portion of premiums written ceded (unaffiliated and excluding premiums ceded to mandatory pools) by
the property and casualty insurance segment and the reinsurance segment for the year ended December 31, 2016 is presented
below. Reinsurance coverage for the property and casualty insurance segment is often purchased in layers, and an individual
reinsurer may participate in more than one type of coverage and at various layers within the coverages. Since each layer of
coverage is priced separately, with the lower layers being more expensive than the upper layers, a reinsurer’s overall
participation in a reinsurance program does not necessarily correspond to the amount of premiums it receives. The premium
amounts ceded by the reinsurance subsidiary reflect the purchase of additional reinsurance protection from external parties and
fronting transactions handled through the quota share agreement, and excludes premiums written ceded to Employers Mutual
under the inter-company reinsurance program.
($ in thousands)
Reinsurer
Premiums written ceded
Property and
casualty insurance
segment
Reinsurance
segment
Total
Hartford Steam Boiler Inspection and Insurance Company
$
11,298
$
— $
11,298
Underwriters at Lloyd's of London
Transatlantic Reinsurance Company
Country Mutual Insurance Company
Hannover Ruckversicherung AG
Tokio Millenium Re Ltd.
QBE Reinsurance Corporation
TOA Reinsurance Company of America
Navigators Insurance Company
Mutual Reinsurance Bureau
Other Reinsurers
Total
1,358
1,503
—
1,717
170
921
666
—
627
$
5,041
23,301
$
2,887
1,750
2,995
—
1,100
—
—
650
16
728
10,126
$
4,245
3,253
2,995
1,717
1,270
921
666
650
643
5,769
33,427
The property and casualty insurance segment also cedes reinsurance on a mandatory basis to state organizations in
connection with various workers’ compensation and assigned risk programs. The Company’s portion of premiums written
ceded to these organizations for the year ended December 31, 2016 is presented below.
($ in thousands)
Reinsurer
Michigan Catastrophic Claims Association
Other Reinsurers
Total
Property and
casualty insurance
segment
$
$
807
238
1,045
31
The following table presents amounts due to the Company from reinsurers for losses and settlement expenses, contingent
commissions, and prepaid reinsurance premiums as of December 31, 2016. This presentation differs from the presentation
utilized in the consolidated financial statements, where all amounts flowing through the pooling and quota share agreements
and inter-company reinsurance programs with Employers Mutual are reported as “affiliated” balances.
($ in thousands)
Hartford Steam Boiler Inspection and
Insurance Company
Country Mutual Insurance Company
Mutual Reinsurance Bureau
Wisconsin Compensation Rating Bureau
Michigan Catastrophic Claims
Association
Hannover Ruckversicherung AG
Underwriters at Lloyd's of London
Transatlantic Reinsurance Company
Workers' Compensation Reinsurance
Association of Minnesota
General Reinsurance Corporation
Other Reinsurers
Amount recoverable
Property and
casualty
insurance
segment
Reinsurance
segment
Total
Percent of
total
A.M. Best
rating
$
7,247
$
— $
—
465
2,590
2,215
1,350
354
543
1,139
807
6,313
3,136
2,126
—
—
—
976
729
—
—
645
7,247
3,136
2,591
2,590
2,215
1,350
1,330
1,272
1,139
807
6,958
$
23,023
$
7,612
$
30,635 (3)
A++
A+
(1)
(2)
(2)
A+
A
A+
(2)
A++
23.7%
10.2
8.5
8.5
7.2
4.4
4.3
4.2
3.7
2.6
22.7
100.0%
(1) MRB is composed of Employers Mutual and four other unaffiliated mutual insurance companies. MRB is backed by the
financial strength of the five member companies. Three of the other member companies have an “A” (Excellent) rating
and the fourth has a “B++” (Good) rating from A.M. Best.
(2) Amounts recoverable reflect the property and casualty insurance subsidiaries’ aggregate pool participation percentage of
amounts ceded to these organizations by Employers Mutual in connection with its role as “service carrier.” Under these
arrangements, Employers Mutual writes business for these organizations on a direct basis and then cedes the business
(typically at 100 percent) to these organizations. Credit risk associated with these amounts is minimal as all companies
participating in these organizations are responsible for the liabilities of such organizations on a pro rata basis.
(3) The total amount recoverable at December 31, 2016 represents $20.7 million in unpaid losses and settlement expenses,
$662,000 in unpaid contingent commissions, and $9.3 million in prepaid reinsurance premiums. Employers Mutual settles
with the pool participants (monthly) and the reinsurance subsidiary (quarterly) ceded paid losses and settlement expenses
under the reinsurance contracts and provides full credit for the ceded paid losses and settlement expenses generated during
the period (not just the collected portion). As a result, Employers Mutual's recoverable for paid losses and settlement
expenses represents, to the Company, an off-balance sheet arrangement with an unconsolidated entity that results in credit-
risk exposure that is not reflected in the Company’s financial statements. See note 1 of Notes to Consolidated Financial
Statements under Part II, Item 8 of this Form 10-K for further discussion of off-balance sheet credit exposures.
32
Investments
The Company’s total invested assets at December 31, 2016 are summarized in the following table:
($ in thousands)
December 31, 2016
Amortized
cost
Fair
value
Percent of
total
fair value
Carrying
value
Fixed maturity securities available-for-sale
$ 1,189,525
$ 1,199,699
81.7% $ 1,199,699
Equity securities available-for-sale
Short-term investments
Other long-term investments
147,479
213,839
39,670
12,506
39,670
12,506
14.6
2.8
0.9
213,839
39,670
12,506
$ 1,389,180
$ 1,465,714
100.0% $ 1,465,714
The Company’s investment strategy is to conservatively manage its investment portfolio by investing primarily in
readily marketable, investment-grade fixed maturity securities and equity securities. The board of directors of each of the
Company’s insurance company subsidiaries has established investment guidelines and regularly reviews the portfolio for
compliance with those guidelines. The Company does not hold foreign denominated investments. The Company does not
purchase non-investment grade securities. Any non-investment grade securities held are the result of rating downgrades that
occurred subsequent to their purchase.
At December 31, 2016, the portfolio of fixed maturity securities consisted of 0.7 percent U.S. Treasury, 21.0 percent
government agency, 14.0 percent asset-backed, 26.9 percent municipal and 37.4 percent corporate securities. As of
December 31, 2016, the effective duration of the Company’s fixed maturity portfolio, excluding interest-only securities, was
5.2, and the effective duration of its liabilities was 3.1. At December 31, 2016, the Company held $3.0 million of non-
investment grade fixed maturity securities in a net unrealized gain position of $50,000.
The Company has two separate common stock equity portfolios that are diversified across a large range of industry
sectors and are managed for fees based on total assets under management (a large-cap blend equity portfolio managed by BMO
Global Asset Management and a high dividend value equity portfolio managed by Schafer Cullen Capital Management). As of
December 31, 2016, the common stock equity portfolios were invested in the following industry sectors:
Financial services
Information technology
Healthcare
Consumer staples
Consumer discretionary
Energy
Industrials
Other
Percent of
equity
portfolio
18.1%
15.8
12.8
9.9
11.5
9.9
12.5
9.5
100.0%
The Company's other long-term investments consist of minority ownership interests in limited partnerships and limited
liability companies. During 2016 and 2015, the Company invested $4.9 million and $4.0 million, respectively, in a limited
partnership that is designed to help protect the Company from a sudden and significant decline in the value of its equity
portfolio (an equity tail-risk hedging strategy). This investment is carried under the equity method of accounting, with changes
in the carrying value (from both expired hedging contracts and changes in the value of contracts that are still in effect) reported
as realized gains or losses in the Company's financial statements. During 2016, the Company's reinsurance subsidiary invested
approximately $6.6 million in a limited liability company designed to provide a return on investment through the receipt of
renewable energy tax credits. After reductions for the utilization of the tax credits and a $209,000 impairment loss, the carrying
value of this investment was approximately $2.0 million at December 31, 2016.
33
Employees
EMC Insurance Group Inc. and its subsidiaries have no employees. The Company’s business activities are conducted by
the approximately 2,250 employees of Employers Mutual. EMC Insurance Group Inc., EMC Reinsurance Company and EMC
Underwriters, LLC are charged their proportionate share of salary and employee benefit costs based on time allocations. Costs
not allocated to these companies, and other subsidiaries of Employers Mutual outside the pooling agreement, are charged to the
pooling agreement. The Company’s property and casualty insurance subsidiaries share the costs charged to the pooling
agreement in accordance with their pool participation percentages.
Regulation
The Company’s insurance subsidiaries are subject to extensive regulation and supervision by their state of domicile, as
well as those states in which they do business. The purpose of such regulation and supervision is primarily to provide
safeguards for policyholders, rather than to protect the interests of stockholders. The insurance laws of the various states
establish regulatory agencies with broad administrative powers, including the power to grant or revoke operating licenses and
regulate trade practices, investments, premium rates, deposits of securities, the form and content of financial statements and
insurance policies, accounting practices and the maintenance of specified reserves and capital for the protection of
policyholders.
Premium rate regulation varies greatly among jurisdictions and lines of insurance. In most states in which the
Company’s subsidiaries and the other pool participants write insurance, premium rates for the various lines of insurance are
subject to either prior approval or limited review upon implementation. States require rates for property and casualty insurance
that are adequate, not excessive, and not unfairly discriminatory.
Like other insurance companies, the pool participants are required to participate in mandatory shared-market
mechanisms or state pooling arrangements as a condition for maintaining their insurance licenses to do business in various
states. The purpose of these state-mandated arrangements is to provide insurance coverage to individuals who, because of poor
driving records or other underwriting reasons, are unable to purchase such coverage voluntarily provided by private insurers.
These risks can be assigned to all insurers licensed in the state and the maximum volume of such risks that any one insurance
company may be assigned typically is proportional to that insurance company’s annual premium volume in that state. The
underwriting results of this mandatory business traditionally have been unprofitable.
The Company’s insurance subsidiaries are required to file detailed annual reports with the appropriate regulatory agency
in each state in which they do business based on applicable statutory regulations, which differ from U.S. generally accepted
accounting principles. Their business and accounts are subject to examination by such agencies at any time. Since three of the
Company’s four insurance subsidiaries and Employers Mutual are domiciled in Iowa, the State of Iowa exercises principal
regulatory supervision, and Iowa law requires periodic examination.
State laws governing insurance holding companies also impose standards on certain transactions with related companies,
which include, among other requirements, that all transactions be fair and reasonable and that an insurer’s surplus as regards
policyholders be reasonable and adequate in relation to its liabilities. Under Iowa law, dividends or distributions made by
registered insurers are restricted in amount and may be subject to approval from the Iowa Commissioner of Insurance.
“Extraordinary” dividends or distributions are subject to prior approval and are defined as dividends or distributions made
within a 12 month period which exceed the greater of 10 percent of statutory surplus as regards policyholders as of the
preceding December 31, or net income of the preceding calendar year on a statutory basis. North Dakota imposes similar
restrictions on the payment of dividends and distributions. At December 31, 2016, $52.7 million was available for distribution
to the Company in 2017 without prior approval. See note 6 of Notes to Consolidated Financial Statements under Part II, Item 8
of this Form 10-K.
Under state insurance guaranty fund laws, insurance companies doing business in a state can be assessed for certain
obligations of insolvent insurance companies to such companies’ policyholders and claimants. Maximum assessments allowed
in any one year generally vary between one percent and two percent of annual premiums written in that state, but it is possible
that caps on such assessments could be raised if there are numerous or large insolvencies. In most states, guaranty fund
assessments are recoverable either through future policy surcharges or offsets to state premium tax liabilities.
34
The National Association of Insurance Commissioners (NAIC) utilizes a risk-based capital model to help state regulators
assess the capital adequacy of insurance companies and identify 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, 2016, the Company’s insurance subsidiaries had total adjusted statutory capital of $526.8
million, which is well in excess of the minimum risk-based capital requirement of $87.3 million.
AVAILABLE INFORMATION
The Company’s internet address is www.emcins.com. The Company’s Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a)
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are available free of charge through the Company’s
website as soon as reasonably practicable after the filing or furnishing of such material with the Securities and Exchange
Commission.
35
EXECUTIVE OFFICERS OF THE COMPANY
The Company’s executive officers, their positions and ages are shown in the table below:
NAME
Melissa J. Appenzeller
AGE
50
Vice President-Chief Actuary of the Company and Employers Mutual effective in 2016.
Assistant Vice President of Employers Mutual from 2009 to 2016. She has been employed
by Employers Mutual since 1993.
POSITION
Ian C. Asplund
36
Senior Vice President-Strategic Analytics of the Company and Employers Mutual effective
in 2016. Vice President-Chief Actuary of the Company and Employers Mutual from 2015
to 2016. Assistant Vice President of Employers Mutual from 2012 to 2014. He has been
employed by Employers Mutual since 2003.
Jason R. Bogart
55
Senior Vice President of the Company and Senior Vice President of Branch Operations of
Employers Mutual since 2013. Vice President of the Company and Vice President of
Branch Operations of Employers Mutual from 2010 to 2013. Resident Vice President-
Lansing Branch of Employers Mutual from 2003 until 2010. He has been employed by
Employers Mutual since 1993.
Bradley J. Fredericks
43
Vice President-Chief Investment Officer of the Company and Employers Mutual since
2014. Assistant Vice President of Employers Mutual from 2013 to 2014. He has been
employed by Employers Mutual since 2010.
Rodney D. Hanson
61
Senior Vice President-Information Technology of the Company and Employers Mutual
since 2013. Vice President-Information Technology of the Company and Employers
Mutual from 2003 to 2013. He has been employed by Employers Mutual since 1978.
Kevin J. Hovick
62
Executive Vice President and Chief Operating Officer of the Company and of Employers
Mutual since 2011. Senior Vice President-Business Development of the Company from
2004 until 2011 and Employers Mutual from 2001 until 2011. Vice President-Marketing of
Employers Mutual from 1997 to 2001. He has been employed by Employers Mutual since
1979.
Scott R. Jean
45
Executive Vice President for Finance & Analytics of the Company and Employers Mutual
since 2015. Senior Vice President-Chief Actuary of the Company and Employers Mutual in
2014. Vice President-Chief Actuary of the Company and of Employers Mutual from 2009
to 2014. He has been employed by Employers Mutual since 1993.
Bruce G. Kelley
62
President and Chief Executive Officer of the Company and Employers Mutual since 1992.
Reappointed Treasurer of the Company and Employers Mutual in 2014 (previously held
that title for Employers Mutual from 1996 until 2000 and the Company from 1996 until
2001). President and Chief Operating Officer of the Company and Employers Mutual from
1991 to 1992 and Executive Vice President of the Company and Employers Mutual from
1989 to 1991. He has been employed by Employers Mutual since 1985.
Robert L. Link
59
Senior Vice President and Assistant Secretary of the Company and Senior Vice President
and Corporate Secretary-Administration of Employers Mutual since 2012. Vice President
of the Company from 2007 to 2012 and Vice President and Corporate Secretary-
Administration of Employers Mutual from 2005 to 2012. He has been employed by
Employers Mutual since 1977.
Mick A. Lovell
54
Executive Vice President for Corporate Development of the Company and Employers
Mutual since 2015. Senior Vice President for Corporate Development of the Company and
Employers Mutual in 2014. Vice President of the Company and Vice President-Business
Development of Employers Mutual from 2011 to 2014. Assistant Vice President of the
Company and Assistant Vice President-Director of Product Management of Employers
Mutual from 2003 to 2011. He has been employed by Employers Mutual since 2003.
36
Elizabeth A. Nigut
47
Senior Vice President of the Company and Senior Vice President-Human Resources of
Employers Mutual since 2014. Vice President of the Company and Vice President-Human
Resources of Employers Mutual from 2010 to 2014. She has been employed by Employers
Mutual since 2010.
Larry W. Phillips
63
Senior Vice President-Business Development of the Company and Employers Mutual since
2015. Vice President-Underwriting of Employers Mutual from 2013 to 2015. He has been
employed by Employers Mutual since 2012. Prior to joining Employers Mutual he was
Executive Director of the Iowa Fair Plan from 2011 to 2012, and Vice President of
Underwriting of Midwest Family Mutual Insurance Company from 2009 to 2011.
Mark E. Reese
59
Senior Vice President and Chief Financial Officer of the Company and of Employers
Mutual since 2004. Vice President of the Company and Employers Mutual from 1996 until
2004 and has been Chief Financial Officer of the Company and Employers Mutual since
1997. He has been employed by Employers Mutual since 1984.
Lisa A. Simonetta
57
Senior Vice President-Claims of the Company and Employers Mutual since 2013. Vice
President Claims-Legal of the Company and Vice President of Employers Mutual from
2002 to 2013. She has been employed by Employers Mutual since 1992.
Todd A. Strother
48
Vice President-General Counsel and Secretary of the Company and Vice President-General
Counsel of Employers Mutual upon his hiring in 2016. Prior to joining Employers Mutual
he was an attorney and shareholder with Bradshaw, Fowler, Proctor & Fairgrave, P.C. from
1999 to 2016.
37
ITEM 1A.
RISK FACTORS
Set forth below is a description of risk factors related to the Company’s business, provided to enable investors to assess,
and be appropriately apprised of, certain risks and uncertainties the Company faces in conducting its business. An investor
should carefully consider the risks described below and elsewhere in this Form 10-K which could materially and adversely
affect the Company’s business, financial condition or results of operations. The risks and uncertainties discussed below are
also applicable to forward-looking statements contained in this Form 10-K and in other reports filed by the Company with the
Securities and Exchange Commission, and in management presentations delivered and press releases issued by the
Company. Given these risks and uncertainties, investors are cautioned not to place undue reliance on forward-looking
statements.
Risks Relating to the Company and Its Business
The Company’s business is highly cyclical and competitive, which may make it difficult for it to market its
products effectively and profitably.
The property and casualty insurance industry is highly cyclical and competitive, and individual lines of business
experience their own cycles within the overall insurance industry cycle. Premium rate levels are subject to many variables,
including the availability of insurance coverage, which can vary according to the level of capital within the industry. Increases
in industry capital have generally been accompanied by increased price competition. If the pool participants find it necessary
to reduce premiums or limit premium increases due to these competitive pressures on pricing, the Company may experience a
reduction in its profit margins and revenues and, therefore, lower profitability.
The pool participants compete with insurers that sell insurance policies through independent agents and/or directly to
their customers. These competitors are not only national companies, but also insurers and independent agents that operate in a
specific region or a single state. Some of these competitors have substantially greater financial and other resources than the
pool participants, and may offer a broader range of products or offer competing products at lower prices. The Company’s
financial condition and results of operations could be materially and adversely affected by a loss of business to its competitors.
The reinsurance business is also highly cyclical and competitive. Employers Mutual, in writing reinsurance business
through its HORAD operation, competes in the global reinsurance market with numerous reinsurance companies, many of
which have substantially greater financial resources. Competition for reinsurance business is based on many factors, including
the perceived financial strength of the reinsurer, industry ratings, stability in products offered and licensing status. There is a
segment of the market that favors large, highly-capitalized reinsurance companies who are able to provide “mega” line capacity
for multiple lines of business. Employers Mutual faces the risk of ceding companies becoming less interested in diversity and
spread of reinsurance risk in favor of having fewer, highly-capitalized reinsurance companies on their program. If Employers
Mutual loses reinsurance business to its competitors, the Company’s financial condition and results of operations could be
materially and adversely affected.
Similar to other industries, the insurance industry is undergoing rapid and significant technological and other change.
Traditional insurance industry participants, technology companies, "InsurTech" start-up companies, the number of which has
increased significantly in recent years, and others are focused on using technology and innovation to alter business models and
cause other potentially disruptive changes in the insurance industry. If management does not anticipate these changes, keep
pace with and adapt to technological and other changes impacting the insurance industry, it could harm the Company's ability
to compete, decrease the value of the Company's products to insureds and agents, and materially and adversely affect the
Company's business. Furthermore, innovation, technological change and changing customer preferences in the markets in
which the Company operates also pose risks to the Company's business.
The frequency and severity of significant catastrophe and storm activity could adversely affect the Company’s
business, financial condition or results of operations.
The Company's insurance operations expose the Company to claims arising out of catastrophic events. Common
catastrophic events include tornadoes, wind and hail storms, hurricanes, earthquakes, fires, explosions and severe winter
storms. If changing climate conditions result in an increase in the frequency and severity of weather-related losses, the
Company could experience additional losses from catastrophic events and destructive weather patterns. High levels of
catastrophe and storm losses could lead to changes in the reinsurance programs protecting the Company (including the
reinsurance coverage provided by Employers Mutual to the Company’s property and casualty insurance subsidiaries and the
reinsurance subsidiary). These changes could include increases in the amount of losses retained, increased pricing and
decreased availability of catastrophe reinsurance protection. Examples of such changes include increases in the pool
participants’ retention amounts on ceded contracts covering the pool business, and increases in the amount of losses retained by
the reinsurance subsidiary. Future increases in the cost of reinsurance protection, and/or the amount of catastrophe and storm
losses retained, could materially adversely affect the Company’s business, financial condition or results of operations.
38
The pool participants currently conduct business in all 50 states and the District of Columbia, with a large
portion of business in the Midwest. The occurrence of catastrophes, or other conditions affecting losses in this
region, could adversely affect the Company’s business, financial condition or results of operations.
In 2016, 69 percent of the pool participant’s direct premiums written were generated through ten Midwest branch offices,
with 13 percent of the direct premiums written generated in Iowa. While the pool participants actively manage their exposure
to catastrophes through their underwriting process and the purchase of third-party reinsurance, a single catastrophic occurrence,
destructive weather pattern, changing climate conditions, general economic trend, terrorist attack, regulatory development or
any other condition affecting the states in which the pool participants conduct substantial business could materially adversely
affect the Company’s business, financial condition or results of operations. Moreover, the Company’s revenues and
profitability are affected by the prevailing regulatory, economic, demographic, competitive and other conditions in these
states. Changes in any of these conditions could make it more costly or more difficult for the pool participants to conduct their
business. Adverse regulatory developments in these states could include reductions in the maximum rates permitted to be
charged, restrictions on rate increases, or fundamental changes to the design or operation of the regulatory framework, and any
of these could have a material adverse effect on the Company’s business, financial condition or results of operations.
The Company cannot predict the impact that changing climate conditions, including legal, regulatory, and social
responses thereto, may have on the Company’s business, financial condition or results of operations.
Some scientists, environmentalists, and other experts believe that changing climate conditions have added to the
unpredictability, frequency, and severity of weather-related losses. If climate conditions are changing and affecting weather
patterns, the Company could experience additional losses from catastrophic events and destructive weather patterns. The
Company cannot predict the impact that changing climate conditions, if any, will have on the Company’s business, financial
condition or results of operations. It is also possible that legal, regulatory and social responses to climate change could have a
material adverse effect on the Company’s business, financial condition or results of operations.
Losses related to a terrorist attack could have a material adverse impact on the Company’s business, financial
condition or results of operations.
Terrorist attacks could cause significant losses from insurance claims related to the property and casualty insurance
operations of the pool participants and the reinsurance operations of the Company’s reinsurance subsidiary, and have a material
adverse impact on the Company’s business, financial condition or results of operations. The TRIA Reauthorization Act
requires that some coverage for terrorism losses be offered by primary property and casualty insurers, and provides federal
assistance for recovery of a portion of claims incurred (effective through December 31, 2020). While the pool participants are
protected by this federally funded terrorism reinsurance with respect to claims under most commercial insurance products, the
pool participants are prohibited from adding terrorism exclusions to the commercial lines policies they write, and a substantial
deductible must be met before the TRIA Reauthorization Act provides coverage to the pool. The pool participants’ personal
lines products do not provide terrorism coverage. The pool participants have underlying reinsurance coverage to partially cover
the TRIA Reauthorization Act deductible, but the Company can offer no assurances that the threats or actual occurrence of
future terrorist-like events in the United States and abroad, or military actions by the United States, will not have a material
adverse effect on its business, financial condition or results of operations.
The Company’s results of operations could suffer if the pool participants were to forecast future losses
inaccurately, experience unusually severe or frequent losses, inadequately price their insurance products, or fail
to control expenses.
The Company’s property and casualty insurance subsidiaries participate in a pooling agreement under which they share
the underwriting results of the property and casualty insurance business written by all the pool participants (excluding certain
assumed reinsurance business). Because of the pooled business the Company is allocated, the insurance operations of the
Company’s pool participants are integrated with the insurance operations of the Employers Mutual pool participants, and the
Company’s results of operations depend upon the forecasts, pricing and underwriting results of the Employers Mutual pool
participants. Although the pool is intended to produce a more uniform and stable underwriting result from year to year for the
participants than they would experience separately by spreading the risk of losses among the participants, if any of the pool
participants experience unusually severe or frequent losses or do not adequately price their insurance products, the Company’s
business, financial condition or results of operations could suffer.
39
One of the distinguishing features of the property and casualty insurance industry is that its products are priced before
the costs are known, as premium rates are generally determined before losses are reported. Accordingly, the pool participants
must establish premium rates from forecasts of the ultimate costs they expect to incur from risks underwritten during the policy
period, and premiums may not be adequate to cover the ultimate losses incurred. Further, the pool participants must establish
reserves for losses and settlement expenses based upon estimates involving actuarial and statistical projections of expected
ultimate liability at a given time, and it is possible that the ultimate liability will exceed these estimates because of the future
development of known losses, the existence of losses that have occurred but are currently unreported, or larger than expected
settlements on pending and unreported claims. Prior to the end of each quarter, Employers Mutual's actuaries review the
adequacy of the pool's previous quarter's reserves for the various lines of business underwritten and these reviews have in the
past, and may in the future, indicate that additional reserves are necessary to adequately cover anticipated losses and settlement
expenses. The process of estimating reserves is inherently judgmental and can be influenced by factors that are subject to
variation. If the premium rates or reserves established are not sufficient, the Company’s business, financial condition and/or
results of operations may be adversely impacted.
The Company's results are also subject to the expenses incurred by its subsidiaries and the other pool participants. One
of the metrics used to evaluate property and casualty insurance companies is the underwriting expense ratio. This ratio weighs
earned premiums against expenses. Underwriting and administrative expenses should be kept within an acceptable range. This
range must be determined and managed with both a short term and long term outlook with regards to premium levels, the
underwriting cycle, industry benchmarks, internal trends, and the annual corporate budgeting process. Pursuant to the terms of
the pooling agreement, underwriting and administrative expenses are prorated between the participants in the pool. Thus, if the
Company's subsidiaries or other pool participants fail to control underwriting or administrative expenses, the Company's
financial condition or results of operation could suffer.
An increase in asbestos and environmental claims could have a material adverse effect on the Company's
financial condition or results of operations.
The Company has exposure to asbestos and environmental claims arising primarily from the other liability line of
business written by the parties to the pooling agreement, as well as the pro rata and excess of loss business assumed by the
reinsurance subsidiary. These exposures are closely monitored by management and reserves have been established to cover
estimated ultimate losses. Estimating loss and settlement expense reserves for asbestos and environmental claims is very
difficult due to the many uncertainties surrounding these types of claims, such as whether coverage exists, the definition of an
occurrence, determination of ultimate damages and the assignment of damages to the responsible parties. These uncertainties
are compounded by the fact that claims typically emerge long after a policy has expired. It is possible that the ultimate liability
for these exposures may increase significantly as a result of the settlement of lawsuits or the receipt of additional claims, which
could have a material adverse effect on the Company's financial condition and/or results of operations.
The Company’s investment portfolio is subject to economic loss, principally from changes in the market value of
financial instruments.
The Company had fixed maturity investments with a fair value of $1.2 billion at December 31, 2016 that are subject to:
• market risk, which is the risk that the Company’s invested assets will decrease in value due to:
•
•
•
an increase in interest rates or a change in the prevailing market yields on its investments,
an unfavorable change in the liquidity of an investment, or
an unfavorable change in the financial prospects, or a downgrade in the credit rating, of the issuer of an
investment;
•
•
reinvestment risk, which is the risk that interest rates will decline and funds reinvested will earn less investment
income than previously earned; and
liquidity risk, which is the risk that the Company may have to sell assets at an undesirable time and/or price to
provide cash for the payment of claims.
The Company maintains a well diversified portfolio of fixed maturity securities in an attempt to manage market,
reinvestment and liquidity risk. The Company primarily pursues a buy and hold strategy for fixed maturity investments. Fixed
maturity securities are purchased as new funds become available to the portfolio. This strategy has a laddering effect on
portfolio maturities that mitigates some of the effects of adverse interest rate movements.
40
The Company’s fixed maturity investment portfolio includes mortgage-backed securities. As of December 31, 2016,
mortgage-backed securities constituted approximately 11.8 percent of the fixed maturity portfolio. As with other fixed maturity
investments, the fair value of these securities fluctuates depending on market and other general economic conditions and the
interest rate environment. Changes in interest rates can expose the Company to prepayment risks on these investments. In
periods of declining interest rates, mortgage prepayments generally increase and mortgage-backed securities are paid more
quickly, requiring the Company to reinvest the proceeds at the then current market rates.
The Company’s common stock equity portfolio, with a fair value of $193.5 million as of December 31, 2016, is subject
to economic loss from a decline in market prices. The Company invests in publicly traded companies listed in the United
States with large market capitalizations. An adverse development in the stock market, or one or more securities that the
Company invests in, could adversely affect its capital position. The Company is currently invested in a limited partnership that
is designed to help protect the Company from significant monthly downside price volatility in the equity markets. However,
this type of protection may be discontinued in the future depending on market conditions and/or the cost of the protection.
The success of any investment activity is affected by general economic conditions, which may adversely affect the
markets for fixed maturity and equity securities. Unexpected volatility or illiquidity in the markets in which the Company
holds securities could reduce its liquidity and stockholders’ equity. To mitigate these risks, the Company’s insurance and
reinsurance subsidiaries are able to borrow funds on a short-term basis from Employers Mutual and its subsidiaries and affiliate
under an Inter-Company Loan Agreement.
The Company relies on Employer Mutual’s information technology and telecommunication systems, and the
disruption or failure of these systems, or the compromise of the security of the systems that results in the misuse
of confidential information, could materially and adversely affect its business.
The Company’s business is highly dependent upon the successful and uninterrupted functioning of Employers Mutual’s
information technology and telecommunications systems. The Company relies on the capacity, reliability and security of these
systems to process new and renewal business, provide customer service, process and pay claims, and facilitate collections and
cancellations. These systems also enable the performance of actuarial and other modeling functions necessary for underwriting
and rate development and establishing and evaluating reserves. Despite security measures in place, the information technology
systems could be vulnerable to computer malware or viruses, unauthorized access, or other cyber attacks that could disrupt the
systems. The failure or disruption of these systems could interrupt the Company’s operations through reduced ability to
underwrite and process new and renewal business, pay claims in a timely manner and provide customer service.
A security breach of information technology systems that results in the misuse or misappropriation of confidential
information could expose Employers Mutual to litigation, or damage Employers Mutual’s reputation. Any legal or other
expenses resulting from the misuse of confidential information would be shared by all users of the systems, including the
Company and its subsidiaries, and such losses could be significant.
Although Employers Mutual maintains insurance on its real property and other physical assets, this insurance will not
compensate Employers Mutual for losses that may occur due to disruptions in service as a result of a computer, data processing
or telecommunication systems failure unrelated to covered property damage. Also, this insurance may not necessarily
compensate Employers Mutual for all losses resulting from covered events. Employers Mutual retains the risks from
disruptions in computer processing and telecommunications services, and has implemented a variety of controls to mitigate
these risks including, but not limited to, off-site back-up and redundant processing capabilities, access restrictions to
confidential customer data, and documented plans for resuming operations upon the occurrence of an event. A portion of any
losses resulting from the failure or disruption of Employers Mutual’s information technology and telecommunication systems
would be shared by all users of the systems, including the Company and its subsidiaries, and such losses could be significant.
The failure of the pool participants to maintain their current financial strength rating could materially and
adversely affect the Company’s business and competitive position.
The pool participants, including the Company’s property and casualty insurance subsidiaries, are currently rated
“A” (Excellent) by A.M. Best, an industry-accepted source of property and casualty insurance company financial strength
ratings. A.M. Best ratings are specifically designed to provide an independent opinion of an insurance company’s financial
health and its ability to meet ongoing obligations to policyholders. These ratings are directed toward the protection of
policyholders, not investors. If the ratings of the pool participants were to be downgraded (particularly below "A-") by A.M.
Best, it would adversely affect the Company’s competitive position and make it more difficult for it to market its products, and
retain its existing agents and policyholders. A downgrade of Employers Mutual's rating below "A-" could make it ineligible to
assume certain reinsurance business, which could lead to a reduction in the amount of business ceded to the Company's
reinsurance subsidiary under the quota share agreement. Thus, a downgrade in the pool participants’ (including Employers
Mutual’s) A.M. Best ratings below "A-" would likely result in a material reduction in the amount of the Company’s business.
41
The profitability of the Company’s reinsurance subsidiary is dependent upon the experience of Employers
Mutual, and changes to this relationship may adversely affect the reinsurance subsidiary’s operations.
The Company’s reinsurance subsidiary operates under a quota share reinsurance agreement with Employers Mutual,
which generated 22 percent of the Company’s net premiums earned in 2016. Under the quota share reinsurance agreement, the
reinsurance subsidiary assumes the voluntary reinsurance business written directly by Employers Mutual (subject to certain
limited exceptions). The reinsurance subsidiary also has in place an inter-company reinsurance program with Employers
Mutual. The reinsurance subsidiary primarily relies on these agreements and on Employers Mutual for its business. If
Employers Mutual terminates or otherwise seeks to modify these agreements, the reinsurance subsidiary may not be able to
enter into similar arrangements with other companies and may be adversely affected.
Through the quota share reinsurance agreement, the reinsurance subsidiary assumes the voluntary reinsurance business
written directly by Employers Mutual with unaffiliated insurance companies, and the reinsurance business assumed by
Employers Mutual from MRB, a voluntary underwriting association of property and casualty insurers in which Employers
Mutual participates. If Employers Mutual or the other participants of MRB discontinue or reduce the assumption of property
and casualty risks, the reinsurance subsidiary could be adversely affected. In connection with the risks assumed from MRB,
officers of the reinsurance subsidiary and Employers Mutual have reviewed the relevant underwriting policies and procedures,
however, no officer of the reinsurance subsidiary directly reviews such risks assumed at the time of underwriting. If Employers
Mutual or MRB are unable to sell reinsurance at adequate premium rates, or were to have poor underwriting experience, the
reinsurance subsidiary could be adversely affected. In addition, since MRB is structured on a joint liability basis, Employers
Mutual, and therefore the Company’s reinsurance subsidiary, would be obligated with respect to the proportionate share of risks
assumed by the other participants in the event they were unable to perform. The failure of the other MRB participants to
perform could have a material adverse effect on the Company’s financial condition or results of operations.
Changes in key assumptions or a deterioration in the debt and equity markets could lead to an increase in
Employers Mutual’s employee benefit plans' costs and a decline in the funded status, which could have a material
adverse effect on the Company’s financial condition and/or results of operations.
Employers Mutual's employee benefit plans' costs and funded status reflect the use of key assumptions regarding the
discount rate, the expected long-term rate of return on plan assets, and the rate of future compensation increases (pension plans
only). Changes in these assumptions could result in a significant decrease in the plans’ funded status and increase the future net
periodic costs associated with these plans. In addition, large declines in the fair value of the assets held in the plans could result
in a significant decrease in the plans’ funded status and increase the future net periodic costs associated with these plans. A
decrease to the plans' funded status could require Employers Mutual to make significant contributions to its employee benefit
plans to maintain adequate funding levels, and the Company would be responsible for its share of these contributions under the
pooling agreement. The occurrence of these events could have a material adverse effect on the Company’s financial condition
and/or results of operations.
The Company may not be successful in reducing its risks and increasing its underwriting capacity through
reinsurance arrangements, which could adversely affect its business, financial condition or results of operations.
In order to reduce underwriting risk and increase underwriting capacity, the pool participants transfer portions of the
pool’s insurance risk to other insurers through reinsurance contracts. The availability, cost and structure of reinsurance
protection is subject to changing market conditions that are outside of the pool participants’ control. In order for these contracts
to qualify for reinsurance accounting and thereby provide the additional underwriting capacity that the pool participants desire,
the reinsurer generally must assume significant risk and have a reasonable possibility of a significant loss.
The reinsurance subsidiary assumes and cedes some selected reinsurance business through the quota share agreement in
connection with “fronting” activities initiated by Employers Mutual. Under these arrangements, an agreed upon percentage of
the selected assumed business is ceded to other reinsurer(s) on a pro rata basis. In addition, in 2016 the reinsurance subsidiary
began purchasing additional reinsurance protection from external parties for the assumed reinsurance business.
Although the reinsurers are liable to the extent they assume risk, the Company’s insurance subsidiaries remain ultimately
liable on all risks reinsured. As a result, ceded reinsurance arrangements do not limit the ultimate obligation to pay claims.
The Company’s insurance subsidiaries are subject to the credit risks of their reinsurers. They are also subject to the risk that
their reinsurers may dispute obligations to pay their claims. As a result, the Company’s insurance subsidiaries may not recover
on claims made against their reinsurers in a timely manner, if at all, which could have a material adverse effect on the
Company’s business, financial condition or results of operations.
42
The Company is subject to comprehensive regulation that may restrict its ability to earn profits.
The Company is subject to comprehensive regulation and supervision by the insurance departments in the states where
its subsidiaries are domiciled and where its subsidiaries and the other pool participants sell insurance products, issue policies
and handle claims. Certain regulatory restrictions and prior approval requirements may affect the pool participants’ ability to
operate, compete, innovate or obtain necessary rate adjustments in a timely manner, and may also increase their costs and
reduce profitability.
Supervision and regulation by insurance departments extend, among other things, to:
Required Licensing. The pool participants operate under licenses issued by various state insurance departments. These
licenses govern, among other things, the types of insurance coverages, agency and claims services, and products that the pool
participants may offer consumers in the states in which they operate. The pool participants must apply for and obtain
appropriate licenses before they can implement any plan to expand into a new state or offer a new line of insurance or other
new products that require separate licensing. If a regulatory authority denies or delays granting a new license, the pool
participants’ ability to enter new markets quickly or offer new products they believe will be profitable can be substantially
impaired.
Regulation of Premium Rates and Approval of Policy Forms. The insurance laws of most states in which the pool
participants operate require insurance companies to file premium rate schedules and insurance policy forms for review and
approval. State insurance departments have broad discretion in judging whether the pool participants’ rates are adequate, not
excessive and not unfairly discriminatory. The speed at which the pool participants can change their rates in response to
competition or increased costs depends, in part, on the method by which the applicable state’s rating laws are administered.
Generally, state insurance departments have the authority to disapprove the pool participants’ requested rates. Thus, if the pool
participants begin using new rates before they are approved, as permitted in some states, they may be required to issue
premium refunds or credits to their policyholders if the new rates are ultimately deemed excessive or unfair, and are
disapproved by the applicable state department. In addition, in some states, there has been pressure in past years to reduce
premium rates for automobile and other personal insurance, or to limit how often an insurer may request increases for such
rates. In states where such pressure is applied, the pool participants’ ability to respond to market developments or increased
costs can be adversely affected.
Restrictions on Cancellation, Non-Renewal or Withdrawal. Many states have laws and regulations that limit an
insurer’s ability to exit a market. Some states prohibit an insurer from withdrawing from one or more lines of business in the
state, except pursuant to a plan approved by the state insurance department. A state insurance department may disapprove a
plan that may lead, under its analyses, to market disruption. These laws and regulations could limit the pool participants’
ability to exit unprofitable markets or discontinue unprofitable products in the future.
Investment Restrictions. The Company’s subsidiaries are subject to state laws and regulations that require
diversification of their investment portfolios, and that limit the amount of investments in certain categories. Failure to comply
with these laws and regulations would cause nonconforming investments to be treated as non-admitted assets for purposes of
measuring statutory surplus and, in some instances, would require divestiture.
Other Regulations. The Company must also comply with laws and regulations involving, among other things:
•
•
•
•
•
disclosure, and in some cases prior approval, of transactions between members of an insurance holding company
system;
acquisition or disposition of an insurance company, or of any company controlling an insurance company;
involuntary assignments of high-risk policies, participation in reinsurance facilities and underwriting associations,
and assessments and other governmental charges;
use of non-public consumer information and related privacy issues; and
use of credit history in underwriting and rating.
These laws and regulations could adversely affect the Company’s profitability.
The Company cannot provide any assurance that states will not make existing insurance laws and regulations more
restrictive in the future, or enact new restrictive laws.
43
From time to time, the United States Congress and certain federal agencies investigate the current condition of the
insurance industry to determine whether federal regulation is necessary. 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 working to monitor and ensure appropriate implementation of the federal terrorism risk insurance program, to
shape the activities of the Federal Insurance Office as it continues to evolve and exercise its authority to monitor the insurance
industry, to pass appropriate tax reform legislation, and to extend the judicial relief from the remand to an exemption for
property and hazard and homeowners insurance from application of the Department of Housing and Urban Development’s
Disparate Impact Rule. In addition, regulatory bodies in Europe are developing a new capital adequacy directive for insurers
and reinsurers. The viability of the recently announced covered agreement between the United States and European Union
remains in doubt, and the future impact of this and other such initiatives, if any, on the results of operations or financial
condition of the Company's reinsurance subsidiary cannot be determined at this time. The Company is unable to predict
whether, or to what extent, new laws and regulations that could affect its business will be adopted in the future, the timing of
any such adoption and what effects, if any, they may have on its business, financial condition or results of operations.
Changes in U.S. federal tax laws could adversely affect the Company's financial condition and results of
operations.
The Company is subject to U.S. federal tax laws, which may be changed in ways that could adversely impact the
Company. Recently, there has been significant debate about reform of the current U.S. Internal Revenue Code. For example,
federal tax legislation could be enacted to reduce the U.S. federal corporate income tax rate from the current 35 percent. If the
tax rate was reduced, the Company would accordingly reduce any deferred tax asset and would likely be required to recognize
a reduction in income in the period enacted. Other potential changes in U.S. tax laws may increase or decrease the Company's
income tax expense recognized in results of operations. The Company is unable to predict whether, and to what extent,
changes to U.S. tax laws would affect the Company's financial condition or results of operations.
The Company’s business may not continue to grow and may be adversely affected if it cannot retain existing, and
attract new, independent agents, or if insurance consumers increase their use of other insurance delivery systems.
The continued growth of the Company’s business will depend upon the pool participants’ ability to retain existing, and
attract new, independent agents. The pool participants’ agency force is one of the most important components of their
competitive position. To the extent that the pool participants’ existing agents cannot maintain current levels of production, the
Company’s business, financial condition and results of operations will suffer. Moreover, if independent agencies find it easier
to do business with the pool participants’ competitors, it could be difficult for them to retain their existing business or attract
new business. While the pool participants believe they maintain good relationships with their independent agents, they cannot
be certain that these independent agents will continue to sell their products to the consumers they represent. Some of the
factors that could adversely affect the ability to retain existing, and attract new, independent agents include:
•
•
•
competition in the insurance industry to attract independent agents;
the pool participants’ requirement that independent agents adhere to disciplined underwriting standards; and
the pool participants’ ability to pay competitive and attractive commissions, profit share bonuses and other
incentives to independent agents as compensation for selling their products.
While the pool participants sell substantially all their insurance through their network of independent agents, many of
their competitors sell insurance through a variety of other delivery methods, including captive agencies, the internet and direct
sales. To the extent that businesses and individuals represented by the pool participants’ independent agents change their
delivery system preferences, the Company’s business, financial condition or results of operations may be adversely affected.
The Company's continued success as an insurance company is substantially dependent on the reputation of EMC
Insurance Companies.
Management believes that one of the reasons independent agents and insureds prefer to purchase insurance from the pool
participants, team members choose Employers Mutual as a place of employment, and vendors choose to do business with
Employers Mutual is the reputation EMC Insurance Companies has built over 105 years. To be successful in the future,
management must continue to preserve, grow, and leverage the value of EMC Insurance Companies reputation. Reputational
value is based in large part on perceptions. While reputations may take decades to build, any negative incidents can quickly
erode trust and confidence, particularly if they result in adverse mainstream and social media publicity, governmental
investigations, or litigation. Those types of incidents could have an adverse impact on perceptions and lead to tangible adverse
effects on the Company's business, including loss of trust, loss of premium, loss of accounts, loss of agency contracts, or team
member retention and recruiting difficulties.
44
The Company’s operations are integrated with those of Employers Mutual, the parent company, and potential
and actual conflicts exist between the best interests of the Company’s stockholders and the best interests of the
policyholders of Employers Mutual.
Employers Mutual currently owns shares of the Company’s common stock entitling it to cast approximately 55 percent
of the aggregate votes eligible to be cast by the Company’s stockholders at any meeting of stockholders. These holdings enable
Employers Mutual to control the election of the Company’s board of directors. In addition, one of the five members of the
Company’s board of directors is also a member of the board of directors of Employers Mutual. This director has a fiduciary
duty to both the Company’s stockholders and to the policyholders of Employers Mutual. The Company’s executive officers
hold the same positions with both Employers Mutual and the Company, and therefore also have a fiduciary duty to both the
stockholders of the Company and to the policyholders of Employers Mutual. Certain potential and actual conflicts of interest
arise from the Company’s relationship with Employers Mutual and these competing fiduciary duties. Among these conflicts of
interest are:
•
•
•
•
•
•
the Company and Employers Mutual must establish the relative participation interests of all the participating insurers
in the pooling arrangement, along with other terms of the pooling agreement;
the Company and Employers Mutual must establish the terms of the quota share agreement and the inter-company
reinsurance programs between Employers Mutual and the Company’s reinsurance subsidiary and property and
casualty insurance subsidiaries;
the Company and Employers Mutual must establish the terms (including the interest rate, which is reviewed every
five years) of the surplus notes issued by the Company’s property and casualty insurance subsidiaries to Employers
Mutual;
the Company and Employers Mutual must establish the terms (including the interest rate) of any inter-company loans
between Employers Mutual and any of the Company’s insurance company subsidiaries;
the Company and Employers Mutual must make judgments about the allocation of expenses to the Company and its
subsidiaries and to Employers Mutual’s subsidiaries that do not participate in the pooling agreement; and
the Company may enter into other transactions and contractual relationships with Employers Mutual and its
subsidiaries or affiliates.
As a consequence, the Company and Employers Mutual have each established an Inter-Company Committee, with the
Company’s Inter-Company Committee consisting of three of the Company’s independent directors who are not directors of
Employers Mutual and Employers Mutual’s Inter-Company Committee consisting of three directors of Employers Mutual who
are not members of the Company’s board of directors. Any new material agreement or transaction between Employers Mutual
and the Company, as well as any proposed material change to an existing material agreement between Employers Mutual and
the Company, must receive the approval of both Inter-Company Committees. This approval is granted only if the members of
the Company’s Inter-Company Committee unanimously conclude that the new agreement or transaction, or proposed material
change to an existing material agreement, is fair and reasonable to the Company and its stockholders, and the members of
Employers Mutual’s Inter-Company Committee unanimously conclude that the new agreement or transaction, or proposed
change to an existing material agreement, is fair and reasonable to Employers Mutual and its policyholders.
The Company relies on Employers Mutual to provide employees, facilities and information technology systems to
conduct its operations.
The Company does not employ any staff to conduct its operations, nor does the Company own or, with one exception,
lease any facilities or information technology systems necessary for its operations. As a result, the Company is totally
dependent on Employers Mutual’s employees, facilities and information technology systems to conduct its business. There are
no agreements in place that obligate Employers Mutual to provide the Company with access to its employees, facilities or
information technology systems. In addition, the Company does not have any employment agreements with its executive
officers, all of whom are employed by Employers Mutual. These arrangements make it unlikely that anyone could acquire
control of the Company or replace its management unless Employers Mutual was in favor of such action. Any of these
arrangements could diminish the value of the Company’s common stock.
The Company depends on Employers Mutual's ability to attract and retain qualified executive officers, experienced
underwriting talent, and other skilled employees who are knowledgeable about insurance. Providing suitable succession
planning for such positions is also important. If Employers Mutual cannot attract or retain top-performing executive officers,
underwriters, and other employees, if the quality of their performance decreases, or if Employers Mutual fails to implement
succession plans for its key staff, Employers Mutual and its subsidiaries and affiliate may be unable to maintain their current
competitive position in the markets in which they operate and be unable to expand operations into new markets.
45
The insolvency of Employers Mutual or its affiliate could result in additional liabilities for the Company’s
insurance subsidiaries participating in the pooling agreement.
The pooling agreement requires each pool participant to assume its pro rata share (based on its participation interest in
the pool) of the liabilities of any pool participant that becomes insolvent or is otherwise subject to liquidation or receivership
proceedings. Under this provision, the Company’s pool participants could become financially responsible for their pro rata
share of the liabilities of one or more of the Employers Mutual pool participants in the event of an insolvency, or a liquidation
or receivership proceeding involving such participant(s).
The Company is dependent on dividends from its subsidiaries for the payment of its operating expenses and
dividends to stockholders; however, its subsidiaries may be unable to pay dividends to the Company.
As a holding company, the Company relies primarily on dividends from its subsidiaries as a source of funds to meet its
corporate obligations and pay dividends to its stockholders. Payment of dividends by the Company’s subsidiaries is subject to
regulatory restrictions, and depends on the surplus position of its subsidiaries. The maximum amount of dividends that the
Company’s subsidiaries can pay it in 2017 without prior regulatory approval is approximately $52.7 million. In addition, state
insurance regulators have broad discretion to limit the payment of dividends by the Company’s subsidiaries in the future. The
ability of its subsidiaries to pay dividends to it may be further constrained by business and regulatory considerations, such as
the impact of dividends on surplus, competitive position and the amount of premiums that can be written.
New pricing, claims, coverage issues, class action litigation, and technology innovations are continually emerging
in the property and casualty insurance industry, and these new issues could adversely impact the Company’s
revenues or its methods of doing business.
As property and casualty insurance industry practices, and regulatory, judicial and consumer conditions change,
unexpected and unintended issues related to claims, coverages and business practices may emerge. These issues could have an
adverse effect on the Company’s business by changing the way the pool participants price their products, by extending
coverages beyond their underwriting intent, or by increasing the size of claims. The effect of unforeseen emerging issues could
negatively affect the Company’s results of operations or its methods of doing business. In addition, the advent of driverless
cars and usage-based insurance could materially alter the way that automobile insurance is marketed, priced, and underwritten.
Changes to existing accounting standards may adversely affect the Company’s consolidated financial statements.
The Company is required to prepare its consolidated financial statements in accordance with GAAP, as promulgated by
the Financial Accounting Standards Board ("FASB"), subject to accounting rules and interpretations of the Securities and
Exchange Commission. Accordingly, the Company is required to adopt new or revised accounting standards issued by these
authoritative bodies from time to time. It is possible that changes to the Company’s accounting policies resulting from the
adoption of future changes in GAAP, including an updated financial instruments standard issued in January 2016 and a new
credit losses accounting standard issued in June 2016, could have a material adverse effect on the Company’s reported financial
condition and/or results of operations. The Company's significant accounting policies are described in note 1 of Notes to
Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.
Risks Relating to the Company’s Common Stock
Employers Mutual has the ability to determine the outcome of all matters submitted to the Company’s
stockholders for approval. The price of the Company’s common stock may be adversely affected because of
Employers Mutual’s majority ownership of the Company’s common stock.
The Company’s common stock has one vote per share and voting control of the Company is currently vested in
Employers Mutual, which owns approximately 55 percent of the Company’s outstanding common stock. Employers Mutual
must retain a minimum 50.1 percent ownership of the Company’s outstanding common stock at all times in order for the pool
participants to have their A.M. Best financial strength ratings determined on a “group” basis. Accordingly, Employers Mutual
will retain the ability to control:
•
•
the election of the Company’s entire board of directors, which in turn determines its management and policies;
the outcome of any corporate transaction or other matter submitted to the Company’s stockholders for approval,
including mergers or other transactions providing for a change of control; and
•
the amendment of the Company’s organizational documents.
The interests of Employers Mutual may conflict with the interests of the Company’s other stockholders and may have a
negative effect on the price of the Company’s common stock.
46
Employers Mutual’s ownership of the Company’s common stock and provisions of certain state laws make it
unlikely anyone could acquire control of the Company or replace or remove its management unless Employers
Mutual were in favor of such action, which could diminish the value of the Company’s common stock.
Employers Mutual’s ownership of the Company’s common stock and the laws and regulations of Iowa and North Dakota
could delay, or prevent, the removal of members of its board of directors, and could make a merger, tender offer or proxy
contest involving the Company more difficult to complete, even if such events were beneficial to the interest of its stockholders
other than Employers Mutual. The insurance laws of the states in which the Company’ subsidiaries are domiciled prohibit any
person from acquiring control of it, and thus indirect control of its subsidiaries, without the prior approval of each such state
insurance department. Generally, these laws presume that control exists where any person, directly or indirectly, owns,
controls, holds the power to vote, or holds proxies representing 10 percent or more of the Company’s outstanding common
stock. Even persons who do not acquire beneficial ownership of 10 percent or more of the outstanding shares of the
Company’s common stock may be deemed to have acquired such control, if the relevant insurance department determines that
such control exists in fact. Therefore, any person seeking to acquire a controlling interest in the Company would face
regulatory obstacles, which could delay, deter or prevent an acquisition that stockholders might consider to be in their best
interests. Moreover, the Iowa Business Corporation Act, which governs the Company’s corporate activities, contains certain
provisions that prohibit certain business combination transactions under certain circumstances. These factors could discourage
a third party from attempting to acquire control of the Company and thus could have a negative impact on the value of the
Company's common stock.
Although the Company has consistently paid cash dividends in the past, it may not be able to pay cash dividends
in the future.
The Company has paid cash dividends to its stockholders on a consistent basis since 1982, following the initial public
offering of its common stock. However, future cash dividends will depend upon various factors, including the ability of the
Company’s subsidiaries to make distributions to it, which may be restricted by financial or regulatory constraints. Also, there
can be no assurance that the Company will continue to pay dividends even if the necessary financial and regulatory conditions
are met and if sufficient cash is available for distribution.
The Company may be adversely affected by foreign currency fluctuations.
The Company's reporting currency is the U.S. dollar. A portion of the Company's assumed reinsurance business is
written in currencies other than the U.S. dollar. The Company may, from time to time, experience losses resulting from
fluctuations in the values of foreign currencies, which could adversely affect the Company's financial condition and results of
operations.
47
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
The Company does not own any real property; however, one of the property and casualty insurance subsidiaries, Dakota
Fire, leases from EMC National Life Company (an affiliate of Employers Mutual) office space in which the Bismarck, North
Dakota branch office is located. The Company’s home office, which also serves as the home office of Employers Mutual, is
located in four office buildings in Des Moines, Iowa, all of which are owned by Employers Mutual. Employers Mutual also
owns office buildings in which the Milwaukee and Lansing branch offices operate, and leases office space in 16 other locations
where other branch offices and service centers are located.
The Company’s subsidiaries that do not participate in the pooling agreement (EMC Reinsurance Company and EMC
Underwriters, LLC), as well as subsidiaries of Employers Mutual that do not participate in the pooling agreement, are allocated
rent expense based on the square footage occupied by the respective operations. The remaining rent expense is charged to the
pool and is allocated among the pool participants based on their respective participation interests.
ITEM 3.
LEGAL PROCEEDINGS
The Company and Employers Mutual and its other subsidiaries are parties to numerous lawsuits arising in the normal
course of the insurance business. The Company believes that the resolution of these lawsuits will not have a material adverse
effect on its financial condition or its results of operations. The companies involved have established reserves which are
believed adequate to cover any potential liabilities arising out of all such pending or threatened proceedings.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock trades on the NASDAQ Global Select Market tier of The NASDAQ Stock Market, Inc.
under the symbol EMCI. The following table shows the high and low sales prices, as reported by NASDAQ, and the dividends
paid for each quarter within the two most recent years.
Quarter:
High
Low
Period-end close
2016
2015
$
1st
25.99
21.62
25.65
$
2nd
28.01
24.02
27.72
$
3rd
29.01
24.71
26.93
$
4th
31.18
23.45
30.01
$
1st
23.93
19.84
22.53
$
2nd
26.00
21.67
25.07
$
3rd
26.52
20.23
23.21
$
4th
26.83
22.20
25.30
Cash dividends declared
$
0.190
$
0.190
$
0.190
$
0.210
$
0.167
$
0.167
$
0.170
$
0.190
48
On February 20, 2017, there were 672 registered holders of the Company’s common stock.
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 under Part II, Item 8 of this 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, is determined
by the Board of Directors at its discretion.
The Company maintains an Amended and Restated Dividend Reinvestment and Common Stock Purchase Plan. 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. Additional information regarding the plan is contained in note 13 of Notes to
Consolidated Financial Statements under Part II, Item 8 of this Form 10-K. Employers Mutual did not participate in the
dividend reinvestment plan during 2016, 2015 or 2014.
The following graph compares the cumulative total stockholder return on the Company’s common stock to the
NASDAQ Composite Index and a peer group consisting of publicly traded companies in SIC Code 6330-6339, Fire, Marine &
Casualty Insurance, as provided by Research Data Group. The total stockholder return assumes $100.00 invested at the
beginning of the period in the Company’s common stock, the NASDAQ Composite Index and the Peer Group Index. It also
assumes reinvestment of all dividends for the periods presented.
2011
2012
2013
2014
2015
2016
EMC Insurance Group Inc
$ 100.00
$ 120.84
$ 159.84
$ 190.78
$ 210.45
$ 257.06
NASDAQ Composite Index
Peer Group Index
100.00
100.00
116.41
123.67
165.47
167.50
188.69
194.91
200.32
196.50
216.54
232.25
49
The following table sets forth information regarding purchases of equity securities by the Company and affiliated
purchasers for the three months ended December 31, 2016:
(a) Total
number of
shares
(or units)
purchased 1
(b) Average
price
paid
per share
(or unit)
100
$
1,291
115
1,506
$
26.84
27.97
30.50
28.09
(c) Total number
of shares (or
units) purchased
as part of publicly
announced plans
or programs 2
(d) Maximum number
(or approximate dollar
value) of shares
(or units) that may yet
be purchased under the
plans or programs
($ in thousands) 2, 3
— $
—
—
—
19,108
19,108
19,108
Period
10/1/16 - 10/31/16
11/1/16 - 11/30/16
12/1/16 - 12/31/16
Total
1 Included in this column are shares purchased in the open market to fulfill the Company's obligations under its dividend
reinvestment and common stock purchase plan.
2 On November 3, 2011, the Company’s Board of Directors authorized a $15.0 million stock repurchase program. This
program does not have an expiration date. A total of $14.6 million remains available in this plan for the purchase of additional
shares.
3 On May 12, 2005, the Company announced that its parent company, Employers Mutual, had initiated a $15.0 million stock
purchase program under which Employers Mutual may purchase shares of the Company’s common stock in the open market.
This purchase program does not have an expiration date; however, this program has been dormant while the Company’s
repurchase programs have been in effect. A total of $4.5 million remains in this program.
The following table sets forth information regarding Employers Mutual's equity compensation plans as of December 31,
2016:
Plan category
Equity compensation plans approved by
security holders 1
Equity compensation plans not approved by
security holders 2
Total
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights
Weighted-average
exercise price
of outstanding
options, warrants and
rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
(a)
(b)
(c)
649,012
$
—
649,012
$
14.65
—
14.65
1,336,791
249,843
1,586,634
1 Consists of Employers Mutual’s 2007 Stock Incentive Plan, 2003 Incentive Stock Option Plan and 2008 Employee Stock
Purchase Plan. Securities available for future issuance includes 987,387 shares that may be issued in the form of restricted
stock, restricted stock units, performance shares, performance units or other stock-based awards under Employers Mutual's
2007 Stock Incentive Plan.
2 Consists of Employers Mutual’s 2013 Non-Employee Director Stock Purchase Plan.
For a description of each plan, see note 13 of Notes to Consolidated Financial Statements under Part II, Item 8 of this
Form 10-K.
50
9
5
0
,
3
9
3
$
8
1
3
,
9
8
3
$
1
1
0
,
4
8
3
$
2
2
1
,
9
8
3
$
2
0
4
,
6
1
4
$
6
4
8
,
8
5
4
$
6
0
5
,
5
1
5
$
2
2
7
,
0
4
5
$
6
6
2
,
0
7
5
$
8
0
4
,
2
9
5
$
d
e
n
r
a
e
s
m
u
i
m
e
r
p
e
c
n
a
r
u
s
n
I
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
r
a
e
Y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
e
r
a
h
s
r
e
p
d
n
a
e
r
a
h
s
t
p
e
c
x
e
,
s
d
n
a
s
u
o
h
t
n
i
$
(
)
s
t
n
u
o
m
a
A
T
A
D
T
N
E
M
E
T
A
T
S
E
M
O
C
N
I
2
8
4
,
8
4
5
4
5
4
2
7
,
3
0
1
8
,
5
4
4
1
7
1
,
7
8
3
9
3
6
,
8
5
3
4
3
,
6
1
3
0
4
,
8
4
)
6
5
4
,
4
2
(
7
2
6
2
9
8
,
3
1
4
2
3
1
,
5
2
4
)
0
4
2
,
1
1
(
)
7
1
9
,
8
(
6
5
7
9
5
7
,
7
4
2
2
9
,
7
1
8
4
4
,
0
5
4
1
2
0
,
9
8
3
7
2
4
,
1
6
0
7
7
,
6
1
9
8
4
,
9
4
3
8
7
9
6
8
,
3
3
6
2
,
3
4
4
4
1
8
,
0
0
4
9
4
4
,
2
4
0
0
1
,
1
1
1
1
1
,
6
4
8
2
8
3
0
3
,
9
4
4
6
,
2
7
4
6
3
6
,
3
8
4
)
2
9
9
,
0
1
(
)
5
5
2
,
8
(
5
4
1
,
4
4
4
3
8
7
1
0
,
8
2
4
8
,
1
1
5
9
0
2
,
0
6
4
3
3
6
,
1
5
7
6
6
,
3
1
2
2
0
,
3
4
0
6
4
7
9
9
,
8
5
8
9
,
7
6
5
2
3
1
,
7
0
5
3
5
8
,
0
6
4
3
3
,
7
1
5
6
4
,
6
4
9
4
3
,
4
1
3
9
,
2
7
6
4
,
4
9
5
0
6
5
,
3
5
5
7
0
9
,
0
4
5
1
9
,
0
1
2
8
5
,
5
4
3
5
1
,
6
5
2
7
,
1
6
2
7
,
3
2
6
0
7
0
,
2
5
5
6
5
6
,
1
7
4
9
4
,
1
2
0
9
4
,
7
4
4
7
0
,
4
1
1
0
,
1
3
8
9
,
4
4
6
6
7
7
,
1
8
5
7
0
2
,
3
6
4
0
0
,
7
1
6
9
2
,
2
4
$
)
3
2
3
,
2
(
$
7
5
6
,
4
4
$
9
4
3
,
1
3
$
)
7
3
7
,
2
(
$
6
6
9
,
7
3
$
9
1
5
,
3
4
$
2
9
9
,
9
2
$
2
6
1
,
0
5
$
3
0
2
,
6
4
5
0
.
2
$
)
1
1
.
0
(
$
5
2
.
2
$
0
6
.
1
$
)
4
1
.
0
(
$
6
9
.
1
$
2
2
.
2
$
8
4
.
1
$
3
4
.
2
$
0
2
.
2
6
3
8
,
0
2
3
$
8
9
5
,
5
1
3
$
9
7
0
,
8
0
3
$
7
4
6
,
5
0
3
$
9
4
6
,
1
2
3
$
9
3
1
,
7
5
3
$
9
1
7
,
2
9
3
$
1
8
3
,
2
2
4
$
7
9
1
,
7
4
4
$
7
6
4
,
6
5
4
3
2
2
,
2
7
0
2
7
,
3
7
2
3
9
,
5
7
5
7
4
,
3
8
3
5
7
,
4
9
7
0
7
,
1
0
1
7
8
7
,
2
2
1
1
4
3
,
8
1
1
9
6
0
,
3
2
1
1
4
9
,
5
3
1
9
5
0
,
3
9
3
$
8
1
3
,
9
8
3
$
1
1
0
,
4
8
3
$
2
2
1
,
9
8
3
$
2
0
4
,
6
1
4
$
6
4
8
,
8
5
4
$
6
0
5
,
5
1
5
$
2
2
7
,
0
4
5
$
6
6
2
,
0
7
5
$
8
0
4
,
2
9
5
3
9
8
,
5
5
3
4
5
2
,
8
9
1
,
1
$
$
0
4
8
,
7
7
2
2
2
0
,
3
0
1
,
1
$
$
7
2
6
,
6
3
3
7
9
9
,
9
5
1
,
1
$
$
3
5
8
,
2
6
3
6
0
0
,
2
8
1
,
1
$
$
1
4
3
,
2
5
3
1
3
0
,
4
2
2
,
1
$
$
9
0
2
,
1
0
4
9
0
7
,
0
9
2
,
1
$
$
0
1
2
,
5
5
4
1
0
5
,
4
7
3
,
1
$
$
6
8
8
,
2
0
5
0
2
8
,
7
9
4
,
1
$
$
8
3
9
,
4
2
5
5
5
9
,
5
3
5
,
1
$
$
2
4
3
,
3
5
5
3
1
8
,
8
8
5
,
1
$
$
$
$
$
$
)
s
e
s
s
o
l
(
s
n
i
a
g
t
n
e
m
t
s
e
v
n
i
d
e
z
i
l
a
e
R
e
m
o
c
n
i
t
n
e
m
t
s
e
v
n
i
t
e
N
s
e
s
n
e
p
x
e
d
n
a
s
e
s
s
o
L
s
e
u
n
e
v
e
r
l
a
t
o
T
e
m
o
c
n
i
r
e
h
t
O
e
s
n
e
p
x
e
x
a
t
e
m
o
c
n
i
e
r
o
f
e
b
)
s
s
o
l
(
e
m
o
c
n
I
)
t
i
f
e
n
e
b
(
)
t
i
f
e
n
e
b
(
e
s
n
e
p
x
e
x
a
t
e
m
o
c
n
I
)
s
s
o
l
(
e
m
o
c
n
i
t
e
N
c
i
s
a
b
-
e
r
a
h
s
n
o
m
m
o
c
r
e
p
)
s
s
o
l
(
e
m
o
c
n
i
t
e
N
:
d
e
t
u
l
i
d
d
n
a
51
e
c
n
a
r
u
s
n
i
y
t
l
a
u
s
a
c
d
n
a
y
t
r
e
p
o
r
P
:
t
n
e
m
g
e
s
y
b
d
e
n
r
a
e
s
m
u
i
m
e
r
P
e
c
n
a
r
u
s
n
i
e
R
l
a
t
o
T
A
T
A
D
T
E
E
H
S
E
C
N
A
L
A
B
y
t
i
u
q
e
'
s
r
e
d
l
o
h
k
c
o
t
S
s
t
e
s
s
a
l
a
t
o
T
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
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
r
a
e
Y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
e
r
a
h
s
r
e
p
d
n
a
e
r
a
h
s
t
p
e
c
x
e
,
s
d
n
a
s
u
o
h
t
n
i
$
(
A
T
A
D
R
E
H
T
O
)
s
t
n
u
o
m
a
%
8
.
2
1
%
)
7
.
0
(
%
5
.
4
1
%
0
.
9
%
)
8
.
0
(
%
1
.
0
1
%
2
.
0
1
%
3
.
6
%
8
.
9
%
6
.
8
y
t
i
u
q
e
n
o
n
r
u
t
e
r
e
g
a
r
e
v
A
2
2
.
7
1
6
4
.
0
$
$
6
9
.
3
1
8
4
.
0
$
$
1
1
.
7
1
8
4
.
0
$
$
1
7
.
8
1
9
4
.
0
$
$
4
2
.
8
1
1
5
.
0
$
$
2
7
.
0
2
4
5
.
0
$
$
1
8
.
2
2
7
5
.
0
$
$
2
7
.
4
2
3
6
.
0
$
$
6
2
.
5
2
9
6
.
0
$
$
7
0
.
6
2
8
7
.
0
$
$
e
r
a
h
s
r
e
p
d
i
a
p
s
d
n
e
d
i
v
i
D
e
r
a
h
s
r
e
p
e
u
l
a
v
k
o
o
B
%
0
.
0
3
%
0
.
0
3
%
0
.
0
3
%
0
.
0
3
%
0
.
0
3
%
0
.
0
3
%
0
.
0
3
%
0
.
0
3
%
0
.
0
3
%
0
.
0
3
%
0
0
1
%
0
0
1
%
0
0
1
%
0
0
1
%
0
0
1
%
0
0
1
%
0
0
1
%
0
0
1
%
0
0
1
%
0
0
1
'
s
e
i
r
a
i
d
i
s
b
u
s
e
c
n
a
r
u
s
n
i
y
t
l
a
u
s
a
c
d
n
a
y
t
r
e
p
o
r
P
e
g
a
t
n
e
c
r
e
p
l
o
o
p
e
t
a
g
e
r
g
g
a
e
r
a
h
s
a
t
o
u
q
'
s
y
r
a
i
d
i
s
b
u
s
e
c
n
a
r
u
s
n
i
e
R
e
g
a
t
n
e
c
r
e
p
8
7
.
5
1
$
0
1
.
7
1
$
4
3
.
4
1
$
0
1
.
5
1
$
1
7
.
3
1
$
2
9
.
5
1
$
1
4
.
0
2
$
4
6
.
3
2
$
0
3
.
5
2
$
1
0
.
0
3
$
e
c
i
r
p
k
c
o
t
s
g
n
i
s
o
l
C
%
2
0
.
5
%
0
0
.
5
%
7
8
.
4
%
9
8
.
4
%
9
4
.
4
%
7
1
.
4
%
0
8
.
3
%
1
8
.
3
%
5
5
.
3
%
3
5
.
3
)
x
a
t
-
e
r
p
(
d
l
e
i
y
t
n
e
m
t
s
e
v
n
i
t
e
N
%
9
.
2
%
8
.
2
%
3
.
3
%
2
.
3
%
7
.
3
%
4
.
3
%
8
.
2
%
7
.
2
%
7
.
2
%
6
.
2
e
c
i
r
p
k
c
o
t
s
g
n
i
s
o
l
c
o
t
s
d
n
e
d
i
v
i
d
h
s
a
C
0
2
8
,
6
6
6
,
0
2
2
0
5
,
1
0
9
,
9
1
2
2
7
,
1
7
6
,
9
1
7
1
5
,
1
9
3
,
9
1
7
8
3
,
3
1
3
,
9
1
7
2
1
,
4
6
3
,
9
1
0
8
9
,
8
5
9
,
9
1
9
0
4
,
4
4
3
,
0
2
9
3
4
,
0
8
7
,
0
2
5
3
5
,
2
2
2
,
1
2
g
n
i
d
n
a
t
s
t
u
o
s
e
r
a
h
s
n
o
m
m
o
C
%
8
.
6
9
%
1
.
9
0
1
%
3
.
0
0
1
%
1
.
2
0
1
%
6
.
5
1
1
%
0
.
9
9
%
5
.
7
9
%
6
.
1
0
1
%
8
.
6
9
%
3
.
7
9
o
i
t
a
r
d
e
n
i
b
m
o
c
e
d
a
r
t
y
r
o
t
u
t
a
t
S
52
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The term “Company” is used below interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and
EMC Insurance Group Inc. and its subsidiaries. The following discussion and analysis of the Company’s financial condition
and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated
Financial Statements included under Part II, Item 8 of this Form 10-K.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides issuers the opportunity to make cautionary statements
regarding forward-looking statements. Accordingly, any forward-looking statement contained in this report is based on
management’s current beliefs, assumptions and expectations of the Company’s future performance, taking all information
currently available into account. These beliefs, assumptions and expectations can change as the result of many possible events
or factors, not all of which are known to management. If a change occurs, the Company’s business, financial condition,
liquidity, results of operations, plans and objectives may vary materially from those expressed in the forward-looking
statements. The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the
following:
•
•
•
•
•
•
•
catastrophic events and the occurrence of significant severe weather conditions;
the adequacy of loss and settlement expense reserves;
state and federal legislation and regulations;
changes in the property and casualty insurance industry, interest rates or the performance of financial markets and
the general economy;
rating agency actions;
“other-than-temporary” investment impairment losses; and
other risks and uncertainties inherent to the Company’s business, including those discussed under the heading “Risk
Factors” in Part I, Item 1A, of this Form 10-K.
Management intends to identify forward-looking statements when using the words “believe”, “expect”, “anticipate”,
“estimate”, “project” or similar expressions. Undue reliance should not be placed on these forward-looking statements. The
Company disclaims any obligation to update such statements or to announce publicly the results of any revisions that it may
make to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after
the date of such 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 quota share retrocessional reinsurance agreement (the "quota share agreement")
and inter-company reinsurance programs with Employers Mutual. All transactions occurring under the pooling agreement,
quota share agreement and the inter-company reinsurance programs with Employers Mutual are based on statutory accounting
principles. Certain adjustments are made to these amounts to bring them into compliance with U.S. generally accepted
accounting principles (GAAP).
53
Property and casualty insurance operations are conducted through three subsidiaries and represent the most significant
segment of the Company’s business, totaling 77 percent of consolidated premiums earned in 2016. 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, 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.
The Inter-Company Committees of the boards of directors of the Company and Employers Mutual approved a new inter-
company reinsurance program between the Company's insurance subsidiaries in the property and casualty insurance segment
and Employers Mutual for calendar year 2016. This reinsurance program is intended to reduce the volatility of the Company's
quarterly results caused by excessive catastrophe and storm losses, and provide protection from both the frequency and severity
of such losses. The reinsurance program consists of two semi-annual aggregate catastrophe excess of loss treaties. The first
treaty was effective from January 1, 2016 through June 30, 2016, and had a retention of $20.0 million and a limit of $24.0
million. The total cost of this treaty was approximately $6.3 million. The second treaty was effective from July 1, 2016
through December 31, 2016, and had a retention of $15.0 million and a limit of $12.0 million. The total cost of this treaty was
approximately $1.5 million. All catastrophe and storm losses assumed by the property and casualty insurance subsidiaries (net
of applicable reinsurance recoveries from external reinsurance protections purchased by the pool participants) were subject to
the terms of these treaties, and there was no co-participation provision.
Operations of the pool and the inter-company reinsurance program give rise to inter-company balances with Employers
Mutual, which are generally settled during the subsequent 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 23 percent of
consolidated premiums earned in 2016. The Company’s reinsurance subsidiary is party to a quota share agreement and an
inter-company reinsurance program 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 inter-
company reinsurance program in place with Employers Mutual covers both business assumed from Employers Mutual through
the quota share agreement, as well as business obtained outside the quota share agreement. The Inter-Company Committees of
the boards of directors of the Company and Employers Mutual approved a change in the inter-company reinsurance program
between the Company's reinsurance subsidiary and Employers Mutual for calendar year 2016. The 2016 reinsurance program
consists of two treaties. The first was a per occurrence catastrophe excess of loss treaty with a retention of $10.0 million, a
limit of $10.0 million, 20 percent co-participation, and no reinstatement. The total cost of this treaty was approximately $2.0
million. The second was an annual aggregate catastrophe excess of loss treaty with a retention of $20.0 million, a limit of
$100.0 million, and 20 percent co-participation. The total cost of this treaty was approximately $3.1 million. Any losses
recovered under the per occurrence treaty inure to the benefit of the aggregate treaty, and only catastrophic events with total
losses greater than $500,000 are subject to the terms of the aggregate treaty. Prior to 2016, the reinsurance program with
Employers Mutual consisted of a single excess of loss reinsurance agreement. Under the terms of that agreement, the
reinsurance subsidiary retained the first $4.0 million of losses per event, and also retained 20.0 percent of any losses between
$4.0 million and $10.0 million and 10.0 percent of any losses between $10.0 million and $50.0 million. The cost of the excess
of loss reinsurance protection, which included reimbursement for the cost of reinsurance protection purchased by Employers
Mutual to protect itself from the assumption of excessive losses in the event of a major catastrophe, was 8.0 percent of the
reinsurance subsidiary’s total assumed reinsurance premiums written in 2015 and 2014.
54
In connection with the change in the inter-company reinsurance program in 2016, the reinsurance subsidiary began
purchasing additional reinsurance protection in peak exposure territories from external parties in which coverage is triggered
when losses experienced by the insurance industry from a catastrophic event exceed a specified threshold. Any reinsurance
recoveries received from external parties reduces the amount of losses ceded to Employers Mutual under the inter-company
reinsurance program. The net cost of this external reinsurance protection was approximately $3.5 million in 2016.
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 the inter-company reinsurance program give rise to inter-company balances with Employers Mutual,
which are generally settled during the month following the end of each quarter. The investment and income tax activities of the
reinsurance subsidiary are not subject to the quota share agreement.
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,
after increasing consistently during the three previous years. This trend of declining premium rate increases continued through
2016, where premium rate increases were slightly positive. It is important to note that the hardening of the market that
occurred during 2011, 2012 and 2013 was somewhat unusual in that it was not driven by a reduction in capital adequacy, but
rather by a persistent decline in investment income and an increase in severe weather events. The outlook for 2017 is that the
Company's overall premium rate level will remain steady or increase slightly.
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 state legislatures, the United States Congress and federal and state
agencies through its membership in various organizations. In particular, our trade organizations are working to achieve a
nationwide data security and breach standard, to promote accident avoidance and accident prevention technology, to oppose
legislative or regulatory changes that weaken the private workers' compensation insurance marketplace, to prevent the Federal
Insurance Office and other federal and international entities expanding their control of the insurance industry from undermining
the consumer-focused state insurance regulatory system, to pass appropriate tax reform legislation, and to continue efforts to
obtain an exemption for homeowners’ insurers from disparate impact liability under the Fair Housing Act.
55
MANAGEMENT ISSUES AND PERSPECTIVES
Low interest rate environment
The persistent low 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 $6.6 million at December 31, 2016, 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 lower yields,
which has had a negative impact on investment income over the past several years. Interest rates increased approximately 17
basis points during 2016, which reduced the amount of unrealized gains on the Company's fixed maturity portfolio. If the
current low interest rate environment continues, future growth in investment income will be limited.
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. The prolonged low interest rate environment has resulted in
limited growth in investment income, which has increased 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.
Equity portfolio market risk
Approximately 14.6 percent of the Company’s investment portfolio is invested in equity securities. Net unrealized
investment gains on the equity portfolio totaled approximately $43.1 million at December 31, 2016, which is reflected as
accumulated other comprehensive income in the Company’s financial statements and represents $2.03 per share of the
Company’s December 31, 2016 book value of $26.07 per share. To help protect the Company from a sudden and significant
decline in the value of its equity portfolio, management began investing in a limited partnership during the first quarter of 2014
to implement and maintain an equity tail-risk hedging strategy. This hedging strategy is designed to help protect the Company
from significant monthly downside price volatility in the equity markets. By implementing this hedging strategy, management
was able to reduce the level of risk contained in the Company’s financial statements without reducing the size of the equity
portfolio. While there is a cost associated with this protection, management views this cost similar to the cost of an insurance
policy. The cost of the hedging strategy is equal to the decline in the carrying value of the limited partnership that the
Company invested in to implement the strategy, and is reported as a realized investment loss in the Company's financial
statements. The decline in the carrying value of the limited partnership primarily reflects the cost of hedging contracts that
expired without value during the year, but also includes changes in the value of contracts that were still in effect at year-end.
Premium rate levels
Premium rate levels have improved steadily during the past four years, and management has worked diligently with the
sixteen branch offices to stress the importance of achieving modest, but consistent, commercial lines rate level increases
whenever possible. These efforts have been successful, as the Company was able to implement high-single-digit rate level
increases during 2012 and 2013, and more modest increases during 2014, 2015 and 2016. Rate levels for commercial lines of
business are projected to decline on an industry-wide basis in 2017, but management currently expects the Company's overall
rate level to remain steady or increase slightly in 2017. Management will continue to work with the branch offices to ensure
that all opportunities for additional rate level increases are pursued.
56
Change in personal lines operation
Effective January 1, 2016, Personal Lines Operations assumed responsibility for the growth and profitability of personal
lines business throughout the country. In connection with this change in oversight, management implemented new personal
auto and homeowners products that are expected to improve profitability. The new products have been rolled-out in all
locations and have been well received by agents and policyholders; however, it will take some time before the anticipated
improvement in personal lines profitability begins to occur. In addition to the potential for improved profitability in the
personal lines of business, this change in oversight has allowed the 16 local branch offices to focus their efforts on commercial
lines of business, which accounts for approximately 92 percent of the property and casualty insurance segment's net written
premiums.
Commercial Auto Line of Business
The Company, like most of the insurance industry, has experienced a significant increase in both claims frequency and
severity in the commercial auto line of business in recent years. The industry is forecasting continued deterioration in the
commercial auto line of business in 2017, and management is forecasting similar deterioration in the property and casualty
insurance segment's results for this line of business if steps are not taken to improve profitability. The commercial auto line of
business represents approximately 25 percent of the property and casualty insurance segment's commercial business, so it is
imperative that profitability is restored to this line of business. Recognizing the importance of this issue, management
implemented an intensive, multi-year Accelerate Commercial Auto Profitability project during 2016, with a goal of returning
this line of business to profitability by mid-2019. While profitability is the end goal of this project, incremental improvements
in performance are expected in each of the next three years as the action plans developed by each of the eight teams charged
with returning this line of business to profitability are implemented.
Investing in innovation
Management is focused on finding innovative solutions and leveraging technology to create insurance-related solutions
that can set our agents apart, while benefiting policyholders. In late 2015, management formed a strategic analytics department
focused on utilizing high-quality data to make better decisions. Key priorities for this department include partnering with the
Company's 16 local branch offices to develop innovative products and services, improving claims fraud detection capabilities,
prioritizing claims resources and integrating a decision science discipline into the decision making process. During 2016, the
strategic analytics department undertook several initiatives, including the creation of an innovation lab, which is comprised of
team members who are empowered to collaborate, make quick decisions and take action to develop new and creative
insurance-related solutions. One of the first projects undertaken by the innovation lab was the development and introduction of
a telematics program, which is currently being piloted with select agencies. Management's approach to telematics has been
much different than other insurance companies, and has been well received by agents. Rather than focusing solely on
improving the Company's underwriting results, the focus has been directed towards agent differentiation and helping
policyholders lower their costs of doing business through improvements in fuel economy, uptime and driver retention. Other
projects being developed include a computer application to assist insureds in identifying and reporting hazards that can lead to
slip and fall accidents, a pilot program with schools that utilizes sensors to monitor and manage property risks using real-time
data, and a partnership with a start-up company that has developed patent pending wearable technology that monitors
environmental exposures to help identify and address safety risks in industrial workplace environments.
Catastrophe and storm losses
The Company's property and casualty insurance subsidiaries write a large portion of their business in the Midwest, and
therefore have exposure to wind, hail, and tornado losses caused by convective storms. 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). Due to the volatility of catastrophe and storm losses, the
Company's net income has historically varied significantly from quarter to quarter and year to year. In an effort to reduce the
volatility of the Company's quarterly net income, management implemented a new inter-company reinsurance program
between the three insurance subsidiaries in the property and casualty insurance segment and Employers Mutual effective
January 1, 2016. In addition, the inter-company reinsurance program between the Company's reinsurance subsidiary and
Employers Mutual was modified for 2016. It is expected that these new reinsurance programs will reduce the volatility of the
Company's quarterly net income caused by excessive catastrophe and storm losses.
57
Reserving methodology
During the third quarter of 2016, management implemented a new reserving methodology for the determination of bulk
reserves in the property and casualty insurance segment. The new methodology, which is referred to as the accident year
ultimate estimate approach, better conforms to industry practices and will provide increased transparency of the drivers of the
property and casualty insurance segment's performance.
The implementation of the new reserving methodology did not have a material impact on total carried reserves for the
property and casualty insurance segment; however, approximately $5.6 million of incurred but not reported (IBNR) loss
reserves and allocated settlement expense reserves were reallocated from prior accident years to the current accident year in
multiple lines of business. This reduction in prior accident year reserves is reported as favorable development; however, this
development is "mechanical" in nature, and did not have any impact on earnings because the total amount of carried reserves
did not change as a result of this reallocation.
The property and casualty insurance segment's prior reserving methodology was focused on maintaining a consistent
level of overall reserve adequacy. Case and IBNR loss reserves, as well as settlement expense reserves, were established
independently of each other and added together to get the total loss and settlement expense reserve. The prior reserving
methodology also separated the calculation of the aggregate reserves from the allocation of those reserves to the various
accident years, and thus did not utilize explicit claim frequency and severity assumptions.
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.
Management believes the explicit assumptions utilized in the new reserving methodology provide more meaningful
accident year information than the implicit assumptions underlying the prior methodology.
European Union/United States Covered Agreement
Solvency II came into effect in the European Union (EU) on January 1, 2016. Solvency II requires that in order for
insurers and reinsurers outside of the EU to conduct business in the European market, their country of domicile regulatory
system must be deemed equivalent. The US regulatory system has not been deemed equivalent at this time.
Due to this requirement, some European countries (primarily Germany and Belgium) have begun to enforce Solvency
II, requiring that nonequivalent reinsurers establish a branch office in their country in order to conduct business. Both countries
granted exceptions to this rule for 2017 renewals, which allowed the reinsurance segment to renew most of its EU business;
however, these exceptions are not likely to be extended beyond 2017.
On January 13, 2017, the United States and the European Union announced they had completed negotiation of a
"Bilateral Agreement between the European Union and the United States of America on Prudential Measures Regarding
Insurance and Reinsurance" (the "Covered Agreement"). This agreement was submitted to the US Congress and the Office of
the US Trade Representative on the same day so they could begin a required 90-day review of this document. The Covered
Agreement eliminates collateral and local presence requirements for US and EU reinsurers operating on a cross-border basis;
however, to qualify for the elimination of these requirements, reinsurers must meet several requirements, including a minimum
of $250 million of capital and surplus. At December 31, 2016, the reinsurance subsidiary had $209 million of capital and
surplus.
Management is closely monitoring this situation. If the agreement is ultimately approved, management will have to
consider its alternatives. Such alternatives could include injecting additional capital into the reinsurance subsidiary, ceasing
operations in the EU, fronting the business through other reinsurers, or utilizing other arrangements deemed acceptable by
regulators. In 2017, the Company expects to write approximately $9 million of assumed reinsurance business in the EU.
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.
58
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.
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 subsidiaries to Employers Mutual under the terms of the inter-company reinsurance programs 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.
59
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 the
Property & Liability Resource 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 $25.0 million or more in direct insured losses to property, and affect a significant number of policyholders and
insurers.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Company's financial statements in conformity with GAAP requires management to adopt
accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements
and related disclosures. The Company's significant accounting policies are described in note 1, Summary of Significant
Accounting Policies, of Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K. The following
estimates and assumptions are considered by management to be critically important in the preparation and understanding of the
Company's financial statements and related disclosures. The estimates and assumptions utilized are complex and require
subjective judgment.
Loss and settlement expense reserves
Processes and assumptions for establishing loss and settlement expense reserves
In the property and casualty insurance segment, the methodology used to establish direct loss and allocated settlement
expense reserves changed in 2016. Beginning in September, estimated ultimate loss and allocated settlement expense amounts
for most claims are established by accident year and line of business using standard actuarial techniques. At each reporting
date, the amounts to be carried for IBNR loss reserves and allocated settlement expense reserves are determined by subtracting
the amounts incurred to date (paid amounts plus case loss reserves carried for reported claims) from the estimated ultimate
amounts. Under this methodology, changes in the incurred amounts will result in corresponding adjustments to the reserve
amounts. Prior to September 2016, case loss reserves (including bulk case loss reserves), IBNR loss reserves and settlement
expense reserves were all established independently of each other, and the amounts were added together to determine the total
liability for losses and settlement expenses. Under that methodology, adjustments to any of the reserve components did not
result in corresponding adjustments to the other reserve components. The implementation of the new reserving methodology
did not have a material impact on total carried reserves for the property and casualty insurance segment; however, there was
some movement of allocated settlement expense reserves to IBNR loss reserves, and a reallocation of loss and allocated
settlement expense reserves by accident year. In connection with this reallocation of reserves by accident year, approximately
$5.6 million of IBNR loss and allocated settlement expense reserves were moved from prior accident years to the current
accident year in multiple lines of business. This reduction in prior accident years' reserves is reported as favorable
development; however, this development is "mechanical in nature", and did not have any impact on earnings because the total
amount of carried reserves did not change.
In the reinsurance segment, Employers Mutual records the case and IBNR loss reserves reported by the ceding
companies for the Home Office Reinsurance Assumed Department (“HORAD”) book of business. Since many ceding
companies in the HORAD book of business do not report IBNR loss reserves, Employers Mutual establishes a bulk IBNR loss
reserve, which is based on an actuarial reserve analysis, to cover a lag in reporting. For MRB, Employers Mutual records the
case and IBNR loss reserves reported to it by the management of the association, along with a relatively small IBNR loss
reserve to cover a one-month reporting lag. The booking of the lag IBNR loss reserve may be suspended, and negative bulk
IBNR loss reserves may be established, during periods when the actuarial reviews indicate MRB's carried reserves are more
than adequate to cover its liabilities. To verify the adequacy of the reported reserves, an actuarial evaluation of MRB’s reserves
is performed at each year-end.
60
Property and Casualty Insurance Segment
Following is a summary of the carried loss and settlement expense reserves for the property and casualty insurance
segment at December 31, 2016 and 2015.
($ in thousands)
Line of business
Commercial lines:
Automobile
Property
Workers' compensation
Liability
Other
Total commercial lines
Personal lines
December 31,
2016
2015
$
107,328
$
36,303
154,435
170,580
2,193
470,839
15,548
95,564
34,072
160,645
168,062
2,170
460,513
19,900
480,413
Total property and casualty insurance segment
$
486,387
$
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.
As previously noted, a new reserving methodology was implemented in 2016. Under this new methodology, ultimate
loss and allocated settlement expense amounts expected to be incurred are established by accident year and line of business.
The amount of IBNR loss and allocated settlement expense reserves carried at each reporting dated is determined by
subtracting the amounts incurred to date from the ultimate estimated incurred amounts.
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.
61
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 and allocated settlement expense development patterns,
which results in some uncertainty regarding the estimated ultimate projections, particularly for longer-tail lines such as
workers’ compensation, other liability and commercial auto liability. Therefore, the reasonableness of the actuarial projections
is regularly monitored through an examination of the assumptions underlying those projections.
As previously noted, one assumption underlying the reserve estimation process is that the inflation trends implicitly built
into the historical loss and allocated settlement expense development patterns will continue into the future. To estimate the
sensitivity of the estimated ultimate loss and allocated 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, 2016 loss and allocated settlement expense reserves to generate estimated annual incremental
loss and allocated 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 patterns, and revised incremental loss and settlement expense payments were calculated. This unexpected
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.
($ in thousands)
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
$(83)
(1,096)
—
(4,133)
(4,401)
(290)
(23)
to
to
to
to
to
to
to
$84
1,117
—
4,699
4,891
298
24
The Company uses standard actuarial methods to produce estimates of ultimate loss ratios by accident year and line of
business. Underlying each selection are explicit assumptions regarding the ultimate claim frequency and severity associated
with the selected ultimate ratio. As the assumptions are based on estimates made at a specific point in time, it is likely that the
ultimate claim frequency and severity experience, and, therefore, the ultimate loss ratio, will vary upwards or downwards from
prior estimates. The expected variation will be greater for less mature accident years, and decreases as each accident year ages.
This uncertainty is reflected in the unpaid loss estimates underlying the selected estimated ultimate loss ratios, which produce
the carried loss reserves. Assuming the unpaid loss estimates are unbiased, the cumulative impact on the Company's results of
operations of a one percent variance in the associated carried loss reserves over the lifetime of the underlying claims is shown
below. A variance in carried loss reserves would also affect the Company’s financial position in that the Company’s equity
would be impacted by an amount equivalent to the change in net income. A one percent variance in the unpaid loss estimates
underlying the selected ultimate loss ratio estimates is considered reasonably likely based on the range of actuarial indications
developed during the analysis of the property and casualty insurance segment’s carried loss reserves.
62
($ in thousands)
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 loss reserves
to
to
to
to
to
to
to
$(63)
(584)
(10)
(795)
(796)
(228)
(25)
$64
596
10
811
812
232
25
Similar to the loss reserving process, the Company uses standard actuarial methods to produce estimates of ultimate
ratios by accident year and line of business for allocated settlement expenses. Underlying each selection are explicit
assumptions regarding the ultimate claim frequency and settlement expense severity associated with the selected estimated
ultimate ratio. As the assumptions are based on estimates made at a specific point in time, it is likely that the ultimate allocated
settlement expense ratios will vary upwards or downwards from prior estimates. The expected variation will be greater for less
mature accident years, and decreases as each accident year ages. This uncertainty is reflected in the unpaid allocated settlement
expense estimates underlying the selected estimated ultimate ratios, which produce the carried allocated settlement expense
reserves. Assuming the unpaid allocated settlement expense estimates are unbiased, the cumulative impact on the Company's
results of operations of a one percent variance in the associated allocated settlement expense reserves over the lifetime of the
underlying claims is shown below. A variance in carried allocated settlement expense reserves would also affect the
Company’s financial position in that the Company’s equity would be impacted by an amount equivalent to the change in net
income. A one percent variance in the unpaid allocated settlement expense estimates underlying the selected estimated ultimate
allocated settlement expense ratios is considered reasonably likely based on the range of actuarial indications developed during
the analysis of the property and casualty insurance segment’s carried allocated settlement expense reserves.
($ in thousands)
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 allocated settlement
expense reserves
to
to
to
to
to
to
to
$(6)
(66)
(2)
(71)
(309)
(32)
(3)
$6
67
2
73
315
33
3
One of the variables impacting the estimation of 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 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 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 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
losses may differ substantially from the carried loss reserves.
63
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 allocated 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 loss and settlement expense reserves associated with asbestos claims
have been increased each year for the last several years due to continued reporting of new claims at a rate not previously
anticipated, as well as updated internal ultimate loss and settlement expense evaluations. In 2016, the loss and settlement
expense reserves for asbestos claims were strengthened approximately $3.5 million.
Environmental IBNR loss reserves are established in consideration of the implied three-year survival ratio (ratio of loss
and settlement expense reserves to the three-year average of loss and settlement expense payments). Estimation of ultimate
liabilities for these exposures is unusually difficult due to unresolved issues such as whether coverage exists, the definition of
an occurrence, the determination of ultimate damages and the allocation of such damages to financially responsible parties.
Therefore, any estimation of these liabilities is subject to greater than normal variation and uncertainty, and ultimate payments
for losses and settlement expenses for these exposures may differ significantly from the carried reserves.
Reinsurance Segment
Following is a summary of the carried loss and settlement expense reserves for the reinsurance segment at December 31,
2016 and 2015.
($ in thousands)
Line of business
Pro rata reinsurance
Excess of loss reinsurance
Total reinsurance segment
December 31,
2016
2015
$
$
60,412
143,733
204,145
$
$
60,098
138,263
198,361
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, 2016, 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, 2016, there was no backlog in the processing of assumed reinsurance information. Approximately
$133.4 million, or 65 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.
64
Carried reserves established in addition to those reported by the ceding companies totaled approximately $70.7 million
at December 31, 2016. 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 a negative bulk IBNR loss reserve established by Employers Mutual's actuaries in 2016 and 2015, and a small IBNR
loss reserve generally established to cover a one-month lag in reporting, the MRB IBNR loss reserve is established by the
management of MRB. Employers Mutual rarely records additional case loss reserves.
Assumed reinsurance losses tend to be reported later than direct losses. This lag is reflected in loss projection factors for
assumed reinsurance that tend to be higher than for direct business. The result is that assumed reinsurance IBNR loss reserves
as a percentage of total reserves tend to be higher than for direct loss reserves. IBNR loss reserves totaled $98.4 million and
$101.8 million at December 31, 2016 and 2015, respectively, and accounted for approximately 48 percent and 51 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, 2016 would equate to $3.2
million, net of tax, which represents 6.9 percent of the net income reported for 2016 and 0.6 percent of stockholders’ equity.
As previously noted, the assumptions implicit in the methodologies utilized to establish reserves for the reinsurance
segment are stability in the mix of business, consistent claims processing procedures, immaterial impact of loss cost trends on
development patterns, consistent case loss reserving practices and appropriate Bornhuetter-Ferguson expected loss ratio
selections. The tables below display the impact on the Company’s results of operations from (1) a one percent variance in case
loss reserve adequacy from the level anticipated in the incurred loss projection factors, (2) a one percent variance in the implicit
annual claims inflation rate, (3) a one percent variance in IBNR losses as a percentage of reported incurred losses (due, for
example, to changes in mix of business or claims processing procedures) and (4) a one percent variance in the expected loss
ratios used with the Bornhuetter-Ferguson method. In other words, under each scenario, future loss and settlement expense
payments would be expected to vary from actuarial reserve estimates by the amounts shown below. These variances in future
loss and settlement expense payments could occur in one year or over multiple years. Variances in future loss and settlement
payments would also affect the Company’s financial position in that the Company’s equity would be impacted by an amount
equivalent to the change in net income. Variances of this type would typically be recognized in loss and settlement expense
reserves and, accordingly, would not have a material effect on liquidity because the claims have not been paid. Such variances
are considered reasonably likely based on the range of actuarial indications developed during the analysis of the reinsurance
segment’s carried reserves.
The after-tax impact on the Company’s earnings under each scenario is as follows:
($ in thousands)
(1) One percent variance in case loss reserve adequacy from the
level anticipated in the incurred loss projection factors
$(116)
(2) One percent variance in the implicit annual claims inflation rate
(516)
Reinsurance segment
MRB
HORAD
to
to
$118
$(1,104)
to
$1,126
565
(4,588)
to
5,192
(3) One percent variance in IBNR losses from the level anticipated
in the loss projection factors
(91)
to
91
(633)
to
633
(4) One percent variance in the expected loss ratios used with the
Bornhuetter-Ferguson method
(72)
to
72
(875)
to
875
To ensure the accuracy and completeness of the information received from the ceding companies, Employers Mutual’s
actuarial department reviews contract years 1988 and subsequent every quarter, 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.
65
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.
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, 2016.
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 1,856 asbestos bodily injury
lawsuits, some of which involve multiple plaintiffs. Claims activity associated with eight policyholders dominates the pool
participants’ asbestos claims, representing an aggregate 1,812 lawsuits with 2,074 claimants. 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 often dismissed
from asbestos litigation with nominal or no payment (i.e., small contractors, supply companies, and a furnace manufacturer).
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 one
former policyholder. During the period 2009 through 2016, the Company's share of paid losses and settlement expenses
attributed to this former policyholder, a furnace manufacturer, was $11.2 million (mostly settlement expenses). 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 a 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 728 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.
The pool participants are defending approximately 70 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.
66
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, 2016, all Methyl Tertiary Butyl Ether (“MTBE”) claims related to the pool participants’ policyholders had been
dismissed.
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, 2016, the Company carried asbestos and environmental reserves for direct insurance and assumed
reinsurance business totaling $13.3 million, which represents 1.9 percent of total loss and settlement expense reserves. The
asbestos and environmental reserves include $5.4 million of case loss reserves, $4.8 million of IBNR loss reserves and $3.1
million of bulk settlement expense reserves. Ceded reinsurance on these reserves totaled $335,000. Loss and settlement
expense reserves were increased in 2016 because of deterioration in the implied survival ratio.
The pool participants’ non-asbestos direct product liability claims are considered to be highly uncertain exposures due to
the many uncertainties inherent in determining the loss, and the significant periods of time that can elapse between the
occurrence of the loss and the ultimate settlement of the claim. The majority of the pool participants’ product liability claims
arise from small to medium-sized manufacturers, contractors, petroleum distributors, and mobile home and auto dealerships.
No specific claim trends are evident from the pool participants’ 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 2016, 35 of these claims were reported to the pool participants.
67
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 374, 338 and 385 in
2016, 2015 and 2014, respectively, and produced incurred losses and paid settlement expenses of approximately $3.6 million,
$3.2 million and $2.9 million in each respective period. Incurred losses and paid settlement expenses on all construction defect
claims totaled approximately $4.2 million in 2016. At December 31, 2016, the Company carried case loss reserves of
approximately $5.6 million on 372 open construction defect claims.
The Company’s assumed casualty excess reinsurance business is also considered a highly uncertain exposure due to the
significant periods of time that can elapse during the settlement of the underlying claims, and the fact that a reinsurance
company generally has less knowledge than the ceding company about the underlying book of business and the ceding
company’s reserving practices. Employers Mutual attempts to account for this uncertainty by establishing bulk IBNR loss
reserves, using conservative assumed treaty limits and, to a much lesser extent, booking of individual treaty IBNR loss reserves
(if reported by the ceding company) or establishing additional case loss reserves if the reported case loss reserves appear
inadequate on an individual claim. While Employers Mutual is predominantly a property reinsurer, it does write casualty
excess business oriented mainly towards shorter-tail casualty lines of coverage. Employers Mutual avoids reinsuring large
company working layer casualty risks, and does not write risks with heavy product liability exposures, risks with obvious latent
injury manifestation and medical malpractice. Casualty excess business on large companies is written, but generally on a
“clash” basis only (layers above the limits written for any individual policyholder) or specialty casualty written with claims-
made forms.
68
Following is a summary of loss and settlement expense reserves and payments associated with asbestos, environmental,
products liability and casualty excess reinsurance exposures for 2016, 2015 and 2014:
Property and casualty insurance segment
Reinsurance segment
Case
IBNR
Settlement
expense
Case
IBNR
Settlement
expense
($ in thousands)
Reserves at:
December 31, 2016
Asbestos
$
5,075
$
3,566
$
2,828
$
125
$
Environmental
Products1
Casualty excess2
December 31, 2015
178
8,585
—
377
5,673
—
292
7,912
—
Asbestos
$
4,360
$
3,015
$
2,193
$
136
$
Environmental
Products1
Casualty excess2
December 31, 2014
Asbestos
Environmental
Products1
Casualty excess2
Paid during:
2016
Asbestos
Environmental
Products1
Casualty excess2
2015
Asbestos
Environmental
Products1
Casualty excess2
2014
Asbestos
Environmental
Products1
Casualty excess2
91
7,409
—
446
6,680
—
320
9,119
—
$
4,725
$
1,363
$
1,624
$
92
7,416
—
605
(8)
1,434
—
1,477
—
2,481
—
624
197
1,465
—
$
$
$
297
5,643
—
$
$
$
169
6,902
—
986
28
2,268
—
887
30
1,918
—
960
36
1,876
—
60
—
46
—
234
607
—
250
640
—
$
$
$
—
—
—
3,697
—
—
—
3,029
—
—
—
35,482
44,701
30,142
48,350
$
131
123
—
281
615
—
27,992
52,935
2,971
$
$
$
24
20
—
13,479
19
52
—
8,681
16
(11)
—
8,091
$
$
$
3
—
—
1,913
8
—
—
2,077
—
(1)
—
1,589
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.
69
Following is a summary of the claim activity associated with asbestos, environmental and products liability exposures
for 2016, 2015 and 2014:
2016
Open claims at year-end
Reported
Disposed
2015
Open claims at year-end
Reported
Disposed
2014
Open claims at year-end
Reported
Disposed
Asbestos
Environmental
Products
2,143
475
474
2,142
480
2,605
4,267
516
521
6
6
4
4
1
—
3
—
2
140
254
223
109
192
195
112
141
123
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, 2016 along with the statutory-basis carried reserves, which are displayed net of ceded reinsurance. The GAAP-
basis loss and settlement expense reserves contained in the Company’s financial statements are reported gross of ceded
reinsurance, and contain a small number of adjustments from the statutory-basis amounts presented here. The last two columns
display the estimated after-tax impact on earnings if the reserves were moved to the high end-point or low end-point of the
ranges.
($ in thousands)
Property and casualty
insurance segment
Reinsurance segment
Range of reserve estimates
After-tax impact on earnings
High
Low
Carried
Reserves at high
Reserves at low
$
$
509,675
209,279
718,954
$
$
411,782
170,125
581,907
$
$
473,409
201,936
675,345
$
$
(23,573) $
(4,773)
(28,346) $
40,058
20,677
60,735
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 net income in the year such changes
are recorded.
70
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 this Form 10-K.
Investments
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The following fair value hierarchy prioritizes inputs to
valuation techniques used to measure fair value:
Level 1 - Unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability
to access.
Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets
or liabilities in inactive markets; or valuations based on models where the significant inputs are observable
(e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be
corroborated by observable market data.
Level 3 - Prices or valuation techniques that require significant unobservable inputs 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, non-redeemable preferred stocks 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.
71
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, 2016
and 2015, the Company had no securities priced solely from broker quotes.
Essentially all securities in the Company’s investment portfolios have transparent pricing. All equity securities (with
two exceptions) 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, 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.
72
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, 2016. 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 17.8 percentage points in the property and
casualty insurance segment and 8.5 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 initiatives that have been implemented recently to
improve performance in the commercial auto and personal lines of business. 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, and the rate of future compensation increases (pension plans 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, 2016, 2015 and 2014 were 4.07 percent, 3.90 percent and 3.57 percent, respectively. The discount rates used in
the postretirement benefit obligation valuations at December 31, 2016, 2015 and 2014 were 4.21 percent, 4.42 percent and 4.04
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 2016 valuations would increase the Company’s net periodic pension and postretirement benefit costs for 2017 by
approximately $293,000. Conversely, a 0.25 percentage point increase in the 2016 discount rates would decrease the
Company’s net periodic pension and postretirement benefit costs for 2017 by approximately $278,000.
73
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, 2016 and 2015 was 7.00 percent and 7.00 percent, respectively. 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, 2016 and 2015
was 6.50 percent and 6.50 percent, respectively. The expected rate of return on plan assets to be used in the calculation of the
2017 net periodic benefit costs for the pension and postretirement benefit plans will be 7.00 percent and 6.50 percent,
respectively. The actual rate of return earned on plan assets during 2016 was approximately 9 percent for the pension plan and
6 percent for the postretirement benefit plans. The expected long-term rate of return assumption is subject to the general
movement of the economy, but is generally less volatile than the discount rate assumption. A decrease in the expected long-
term rate of return assumption increases future expenses, whereas an increase in the assumption reduces future expenses. A
0.25 percentage point change in the expected long-term rate of return assumption for 2017 would change the Company’s net
periodic pension and postretirement benefit costs by approximately $272,000. For detailed information regarding the current
allocation of assets within the pension and postretirement benefit plans, see note 12 of Notes to Consolidated Financial
Statements under Part II, Item 8 of this Form 10-K.
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, 2016, all of the benefit plans had accumulated actuarial losses in
excess of the corridor that will be partially amortized into expense in 2017. The Company’s share of the accumulated actuarial
losses that will be amortized into expense during 2017 amounts to $1.5 million. 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, 2016, 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 2017 is $3.2 million.
In accordance with GAAP, the funded status of defined benefit pension and other postretirement plans is recognized as
an asset or liability on the balance sheet. Changes in the funded status of the plans are recognized through other comprehensive
income.
74
RESULTS OF OPERATIONS
Results of operations by segment and on a consolidated basis for the three years ended December 31, 2016 are as
follows:
($ in thousands)
Property and casualty insurance
Premiums earned
Losses and settlement expenses
Acquisition and other expenses
Underwriting profit (loss)
GAAP ratios:
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
Large losses1
Year ended December 31,
2016
2015
2014
$
456,467
$
447,197
$
422,381
294,369
158,756
291,883
147,360
$
3,342
$
7,954
$
298,033
136,657
(12,309)
64.5%
34.8%
99.3%
65.3%
32.9%
98.2%
70.6%
32.3%
102.9%
$
$
$
324,382
(30,013)
294,369
35,299
N/A
$
$
$
$
305,722
(13,839)
291,883
29,609
34,239
$
$
$
$
306,143
(8,110)
298,033
40,226
35,673
1 Large losses are defined as reported current accident year losses greater than $500 for the EMC Insurance Companies' pool,
excluding catastrophe and storm losses. Under the property and casualty insurance segment's prior reserving methodology,
large losses had a direct impact on earnings. Under the new reserving methodology, large losses are taken into consideration
when establishing the current accident year ultimate estimates of losses, but there is no longer a direct relationship between
large losses and earnings. As a result, it is no longer meaningful to report large losses separately.
The following table presents the reported amounts of favorable development experienced on prior years’ reserves and the
portion of the reported development amounts that resulted from the reallocation of direct bulk reserves from prior accident
years to the current accident year in the property and casualty insurance segment (no impact on earnings). In 2016, the
reallocation of reserves resulted from the implementation of a new reserving methodology for the determination of bulk
reserves. In 2015 and 2014, the reallocation of reserves resulted from revisions to the accident year allocation factors used in
the prior reserving methodology. The result is an approximation of the implied amount of favorable development that had an
impact on earnings.
($ in thousands)
Year ended December 31,
2016
2015
2014
Reported amount of favorable development experienced on prior years'
reserves
Adjustment for 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
$
$
(30,013) $
(13,839) $
(8,110)
5,592
423
2,151
(24,421) $
(13,416) $
(5,959)
75
($ in thousands)
Reinsurance
Premiums earned
Losses and settlement expenses
Acquisition and other expenses
Underwriting profit
GAAP ratios:
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,
2016
2015
2014
$
135,941
$
123,069
$
118,341
92,528
33,059
10,354
68.1%
24.3%
92.4%
103,456
(10,928)
92,528
12,608
$
$
$
$
78,853
30,947
13,269
64.1%
25.1%
89.2%
100,128
(21,275)
78,853
14,765
$
$
$
$
87,441
28,715
2,185
73.9%
24.3%
98.2%
100,123
(12,682)
87,441
17,025
$
$
$
$
The following table presents the reported amounts of favorable development experienced on prior years’ reserves and the
portion of the reported development amount that resulted from the reallocation of reserves on a two-year contract from the
current accident year to prior accident years in the reinsurance segment during 2015 (no impact on earnings). The result is an
approximation of the implied amount of favorable development that had an impact on earnings.
($ in thousands)
Year ended December 31,
2016
2015
2014
Reported amount of favorable development experienced on prior years'
reserves
Adjustment for adverse 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
$
$
(10,928) $
(21,275) $
(12,682)
—
(1,041)
—
(10,928) $
(22,316) $
(12,682)
76
($ in thousands, except per share amounts)
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 before income tax expense
Income tax expense
Net income
Net income per share
GAAP ratios:
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
Large losses1
Year ended December 31,
2016
2015
2014
$
592,408
$
570,266
$
540,722
47,490
4,074
1,011
644,983
386,897
191,815
337
2,727
45,582
6,153
1,725
623,726
370,736
178,307
337
2,690
46,465
4,349
2,931
594,467
385,474
165,372
337
2,377
581,776
552,070
553,560
63,207
17,004
46,203
2.20
65.3%
32.4%
97.7%
427,838
(40,941)
386,897
47,907
$
$
$
$
$
71,656
21,494
50,162
2.43
65.0%
31.3%
96.3%
405,850
(35,114)
370,736
44,374
N/A $
34,239
$
$
$
$
$
$
40,907
10,915
29,992
1.48
71.3%
30.6%
101.9%
406,266
(20,792)
385,474
57,251
35,673
$
$
$
$
$
1 Large losses are defined as reported current accident year losses greater than $500 for the EMC Insurance Companies' pool,
excluding catastrophe and storm losses. Under the property and casualty insurance segment's prior reserving methodology,
large losses had a direct impact on earnings. Under the new reserving methodology, large losses are taken into consideration
when establishing the current accident year ultimate estimates of losses, but there is no longer a direct relationship between
large losses and earnings. As a result, it is no longer meaningful to report large losses separately.
77
The following table presents the reported amounts of favorable development experienced on prior years’ reserves and the
portion of the reported development amounts that resulted solely from changes in the allocation of bulk reserves between the
current and prior accident years (no impact on earnings). The result is an approximation of the implied amounts of favorable
development that had an impact on earnings.
($ in thousands)
Year ended December 31,
2016
2015
2014
Reported amount of favorable development experienced on prior years'
reserves
Adjustment for favorable (adverse) 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
$
$
(40,941) $
(35,114) $
(20,792)
5,592
(618)
2,151
(35,349) $
(35,732) $
(18,641)
Year ended December 31, 2016 compared to year ended December 31, 2015
The Company reported net income of $46.2 million ($2.20 per share) in 2016 compared to $50.2 million ($2.43 per
share) in 2015. The decrease in net income is primarily due to declines in underwriting profitability and realized investment
gains.
Premiums earned, losses and settlement expenses incurred, and the corresponding loss and settlement expense ratios, by
line of business for each segment and on a consolidated basis, for the two years ended December 31, 2016 are as follows:
($ in thousands)
Property and casualty insurance
Commercial lines:
Automobile
Property
Workers' compensation
Liability
Other
Total commercial lines
Personal lines
Year ended December 31,
2016
Losses
and
settlement
expenses
Loss and
settlement
expense
ratio
2015
Losses
and
settlement
expenses
Loss and
settlement
expense
ratio
Premiums
earned
Premiums
earned
$ 110,941
$
93,364
84.2 % $ 105,904
$
86,134
105,012
96,517
96,630
8,374
417,474
38,993
64,509
51,371
56,738
(12)
265,970
28,399
61.4 %
53.2 %
58.7 %
(0.1)%
63.7 %
72.8 %
104,303
92,828
92,665
8,079
403,779
43,418
65,806
57,803
48,399
854
258,996
32,887
Total property and casualty insurance
$ 456,467
$ 294,369
64.5 % $ 447,197
$ 291,883
Reinsurance
Pro rata reinsurance
Excess of loss reinsurance
Total reinsurance
$
56,317
79,624
$ 135,941
$
$
31,498
61,030
92,528
55.9 % $
47,421
76.6 %
75,648
68.1 % $ 123,069
$
$
29,433
49,420
78,853
81.3%
63.1%
62.3%
52.2%
10.6%
64.1%
75.7%
65.3%
62.1%
65.3%
64.1%
Consolidated
$ 592,408
$ 386,897
65.3 % $ 570,266
$ 370,736
65.0%
78
Premium income
Premiums earned increased 3.9 percent to $592.4 million in 2016 from $570.3 million in 2015. Despite increasingly
competitive market conditions, both segments reported an increase in premium income. Rate levels for both segments continue
to be constrained by a high level of competition, especially for quality accounts with good loss experience. Average rate level
increases were just slightly positive in the property and casualty insurance segment in 2016, while the reinsurance segment
continued to experience pricing pressure during the January 1, 2016 renewal season, when approximately 70 percent of its
business renews; however, the deterioration in pricing did slow considerably from that experienced in 2015. On an overall
basis, the new and revised inter-company reinsurance programs between the Company's insurance segments and Employers
Mutual reduced premiums earned by $5.6 million in 2016. For 2017, the cost the inter-company reinsurance programs will
decline by $730,000.
Premiums earned for the property and casualty insurance segment increased 2.1 percent to $456.5 million in 2016 from
$447.2 million in 2015. The premium amount for 2016 reflects $7.8 million ceded to Employers Mutual for the cost of the new
inter-company reinsurance program. Excluding this amount, premiums earned increased 3.8 percent, primarily due to growth
in insured exposures, new business, and small rate level increases on renewal business. New business premium (representing
14 percent of the pool participants’ direct written premiums) was approximately ten percent higher than in 2015. Commercial
lines accounted for most of the increase in new business premium; however, personal lines also reported an increase in new
business premium after several years of declining premium. Commercial lines new business continues to be in the desired
range of growth, and management is encouraged by the reversal in personal lines, which experienced an approximate 36
percent increase in new business premium. This large increase is based on a relatively small amount of new business premium
in 2015; however, it does reflect agents' and policyholders' satisfaction with the new products that were rolled out during 2016.
While management continues to seek growth in most territories, it is particularly focused on achieving the strongest growth
outside of the core Midwest market, which will help diversify the pool participants' book of business geographically, while
staying consistent with the industry and line of business mix of the existing book of business. Renewal business premium
increased approximately three percent during 2016. After factoring in the continued implementation of some mandatory rate
reductions on workers' compensation business in a few states, the overall rate change on renewal business remained positive,
but was less than one percent. Rates are expected to be mixed in 2017, with the largest rate increases expected in the troubled
commercial auto line of business. Rate decreases are expected in the workers' compensation and general liability lines of
business, and rates on most other lines of business are expected to be flat or increase slightly. During 2016, the overall policy
retention rate remained strong at 86.8 percent (commercial lines at 87.0 percent and personal lines at 84.6 percent). These
retention rates approximate those reported at the end of 2015.
Premiums earned for the reinsurance segment increased 10.5 percent to $135.9 million in 2016 from $123.1 million in
2015. This increase reflects a $2.3 million reduction in the total cost of the revised inter-company reinsurance program with
Employers Mutual. For purposes of this comparison, the total cost of the 2016 reinsurance program includes the premium paid
to Employers Mutual ($5.1 million), as well as the cost of additional reinsurance protection purchased from external parties to
provide increased protection in peak exposure territories. During 2015, the premium paid to Employers Mutual ($10.8 million,
or 8 percent of total assumed reinsurance premiums written) included the cost of reinsurance protection purchased from
external parties by Employers Mutual for its benefit. The reinsurance subsidiary purchased $5.1 million of additional
reinsurance protection from external parties during 2016, with $3.5 million of ceded earned premium recognized in 2016.
Excluding the reduction in the cost of the revised inter-company reinsurance program with Employers Mutual, premiums
earned increased 8.6 percent, or $10.5 million; however, a $7.2 million negative premium adjustment recorded in the fourth
quarter of 2015 is distorting this percentage increase. This premium adjustment was reported by the ceding company for the
offshore energy and liability proportional account, and reduced the ultimate amount of premiums expected to be earned for
underwriting years 2012 through 2014. Without this adjustment, and excluding the reduction in the cost of the revised inter-
company reinsurance program with Employers Mutual, premiums earned increased approximately 2.6 percent in 2016. This
increase was largely from growth in the property pro rata line of business, as well as the addition of some new domestic excess
of loss contracts. During 2015, the ceded premium associated with the inter-company reinsurance program was allocated to all
lines of business (both pro rata and excess of loss) because the premium was based on total assumed reinsurance premiums
written. Beginning in 2016, the ceded premium for the inter-company reinsurance program is a fixed amount that is allocated
to only the excess of loss line of business. The assumed reinsurance market continues to experience pricing pressure due to the
influx of nontraditional capital and the lack of major catastrophic events. Pricing declines moderated somewhat during the
January 1, 2017 renewal season, as rate level declines were much lower than those experienced on January 1, 2016 renewals.
Rate decreases are currently estimated to be in the low-to-mid single digits across the excess of loss book of business.
79
Losses and settlement expenses
Losses and settlement expenses increased 4.4 percent to $386.9 million in 2016 from $370.7 million in 2015, and the
loss and settlement expense ratio increased slightly to 65.3 percent in 2016 from 65.0 percent in 2015. An increase in the
reinsurance segment's loss and settlement expense ratio was largely offset by a decline in the property and casualty insurance
segment's ratio. During the third quarter of 2016, management implemented a new reserving methodology for the
determination of direct bulk reserves in the property and casualty insurance segment, which impacted the process for
determining how reserve adequacy is measured, and how reserves are allocated by accident year. Due to the expansion of the
number of historical accident years included in the review process, the size of the range of reasonable reserves increased. The
actuarial analysis of the Company’s carried reserves at December 31, 2016 indicates that they are in the upper half of the range
of reasonable reserves. This placement in the range is lower than in previous years due to the range expansion associated with
the process change; however, exclusive of the process change, the adequacy of the carried reserves appears to be consistent
with prior evaluations.
The loss and settlement expense ratio for the property and casualty insurance segment decreased to 64.5 percent in 2016
from 65.3 percent in 2015. This decrease is primarily attributed to a significant amount of favorable reserve development
experienced on loss reserves and allocated settlement expense reserves in the workers' compensation and other liability lines of
business. The favorable development in the workers' compensation line of business was generated by decreases in the claim
frequency assumption for accident year 2015 and decreases in the claim severity assumptions for the five most recent accident
years. The favorable development in the other liability line of business was generated by decreases in the claim severity
assumptions for the last ten accident years. As previously noted, approximately $5.6 million of "mechanical" favorable
development was generated during the implementation of the new reserving methodology in 2016. This development did not
have any impact on earnings because it resulted from the movement of direct bulk reserves from prior accident years into the
current accident year, with no change in total reserves.
Other factors impacting the property and casualty insurance segment's 2016 loss and settlement expense ratio include an
increase in claim severity in the commercial auto line of business, and an increase in catastrophe and storm losses. Both the
commercial auto and personal lines of business continued to generate unfavorable results in 2016, posting loss and settlement
expense ratios of 84.2 percent and 72.8 percent, respectively. The industry is forecasting continued deterioration in the
commercial auto line of business in 2017, and management is forecasting similar deterioration in the property and casualty
insurance segment's results for this line of business if no additional steps are taken to improve profitability. Recognizing the
importance of this issue, management implemented an intensive, multi-year Accelerate Commercial Auto Profitability project
during 2016, with a goal of returning this line of business to profitability by mid-2019. Management continues to focus on the
implementation of its new personal lines strategy, and has completed the roll-out of the new personal auto and homeowners
policies in all states where personal lines business is written. Early indications are that the new policies have been well
received by agents and policyholders; however, it will take some time before profitability improves.
Catastrophe and storm losses accounted for 7.7 percentage points of the property and casualty insurance segment's loss
and settlement expense ratio in 2016, compared to 6.6 percentage points in 2015. The most recent 10-year average for this
period is 9.8 percentage points. The property and casualty insurance segment recovered $7.5 million of catastrophe and storm
losses under the new inter-company reinsurance program with Employers Mutual in 2016 ($5.0 million under the treaty
covering the period from January 1 through June 30, and $2.5 million under the treaty covering the period from July 1 through
December 31). Taking the loss recoveries received and the premiums paid to Employers Mutual into consideration, the new
inter-company reinsurance program with Employers Mutual reduced the catastrophe and storm loss ratio for 2016 by 0.5
percentage points.
The loss and settlement expense ratio for the reinsurance segment increased to 68.1 percent in 2016 from 64.1 percent in
2015. The loss and settlement expense ratio for 2015 reflects an unusually low amount of reported large losses (losses greater
than $100,000) and two large reductions in reported reserves for prior accident year events. A decline in catastrophe and storm
losses helped limit the increase in the reinsurance segment's loss and settlement expense ratio. The largest catastrophe and
storm loss incurred in 2016 was a $3.5 million loss stemming from the Alberta, Canada wildfire, while the largest loss incurred
in 2015 was $4.5 million ($4.1 million net of reinsurance recovery under the inter-company reinsurance program with
Employers Mutual) from the Tianjin, China explosion. No recoveries were made under the revised inter-company reinsurance
program with Employers Mutual during 2016. The decline in the total cost of the revised inter-company reinsurance program
with Employers Mutual produced a 1.4 percentage point decline in the loss and settlement expense ratio for 2016. This
reduction is reflected in the catastrophe and storm loss ratio, which declined to 9.3 percentage points in 2016 from 12.0
percentage points in 2015. The most recent 10-year average for catastrophe and storm losses is 13.0 percentage points.
80
Acquisition and other expenses
Acquisition and other expenses increased 7.6 percent to $191.8 million in 2016 from $178.3 million in 2015. The
acquisition expense ratio increased to 32.4 percent in 2016 from 31.3 percent in 2015. Acquisition and other expenses reported
for both years include net periodic postretirement benefit income resulting from the amortization of a large prior service credit
that resulted from an amendment of Employers Mutual's postretirement medical plan in the fourth quarter of 2013. This prior
service credit was recognized in accumulated other comprehensive income in the fourth quarter of 2013, and is being amortized
out of accumulated other comprehensive income and into net income over a period of 10 years. The increase in the 2016 ratio
is primarily attributed to higher policyholder dividend expense in the property and casualty insurance segment.
The acquisition expense ratio for the property and casualty insurance segment increased to 34.8 percent in 2016 from
32.9 percent in 2015. The increase is primarily attributed to higher policyholder dividend expense resulting from favorable loss
experience on some safety dividend groups. The 2016 ratio also reflects the premiums ceded to Employers Mutual under the
new inter-company reinsurance program, which added 0.6 percentage points to the ratio.
The acquisition expense ratio for the reinsurance segment decreased to 24.3 percent in 2016 from 25.1 percent in
2015. The 2015 ratio reflects a $1.1 million commission adjustment for prior periods reported by a ceding company. A
decrease in contingent commission expense on the offshore energy and liability proportional account contributed to the decline
in the acquisition expense ratio in 2016. The 2016 ratio also reflects the reduction in the total cost of the revised inter-company
reinsurance program with Employers Mutual, which reduced the acquisition expense ratio by 0.2 percentage points.
Investment results
Net investment income increased 4.2 percent to $47.5 million in 2016 from $45.6 million in 2015. The increase is
primarily attributed to a higher amount of dividend income in 2016, but also reflects an increase in investment income from
other long-term investments. The Company’s equity portfolio produced dividend income of $6.9 million and $5.6 million in
2016 and 2015, respectively. Current interest rate levels remain below the average book yield of the fixed maturity portfolio,
and will therefore likely continue to limit future growth in net investment income. The average coupon rate on the fixed
maturity portfolio, excluding interest-only securities, has declined slightly over the past year, coming in at 3.8 percent at
December 31, 2016 compared to 3.9 percent at both December 31, 2015 and 2014. The effective duration of the fixed maturity
portfolio, excluding interest-only securities, increased to 5.2 at December 31, 2016 from 4.6 at December 31, 2015.
The Company reported net realized investment gains of $4.1 million in 2016, compared to $6.2 million in
2015. Included in these amounts are losses of $6.3 million and $1.5 million in 2016 and 2015, respectively, from declines in
the carrying value of a limited partnership that the Company has invested in since 2014 to help protect the equity portfolio from
a sudden and significant decline in value (an equity tail-risk hedging strategy). Due to the sharp decline in the equity markets
in August of 2015, the losses from this investment were much lower in 2015. The large amount of losses experienced in 2016
were more than offset by gains recognized during the fourth quarter from the sale of some equity securities in connection with a
small re-balance of the investment portfolio. The Company recognized "other-than-temporary" impairment losses of $1.3
million and $1.5 million during 2016 and 2015, respectively. With the exception of a $209,000 impairment loss recorded in
2016 on a new investment that conveys investment tax credits (included in other long-term investments), these impairment
losses were recognized on securities held in the Company's equity portfolio.
Other income
Included in other income are foreign currency exchange gains and losses recognized on the reinsurance segment’s
foreign currency denominated reinsurance business. The reinsurance segment had foreign currency exchange gains of
$356,000 and $898,000 in 2016 and 2015, respectively.
Income tax
Income tax expense decreased 20.9 percent to $17.0 million in 2016 from $21.5 million in 2015. The effective tax rate
for 2016 was 26.9 percent, compared to 30.0 percent in 2015. The primary contributors to the differences between these
effective tax rates and the United States federal corporate tax rate of 35 percent are tax-exempt interest income earned, the
dividends received deduction, and, in 2016, $1.5 million of investment tax credits recognized from a renewable energy tax
credit investment.
81
Year ended December 31, 2015 compared to year ended December 31, 2014
The Company reported net income of $50.2 million ($2.43 per share) in 2015 compared to $30.0 million ($1.48 per
share) in 2014. Improved premium rate adequacy, an increase in favorable development on prior years' reserves and below
average catastrophe and storm losses together produced an excellent combined ratio, the lowest since 2006.
Premiums earned, losses and settlement expenses incurred, and the corresponding loss and settlement expense ratios, by
line of business for each segment and on a consolidated basis, for the two years ended December 31, 2015 are as follows:
82.4%
69.4%
59.5%
67.2%
23.1%
69.0%
83.2%
70.6%
87.0%
66.7%
73.9%
($ in thousands)
Property and casualty insurance
Commercial lines:
Automobile
Property
Workers' compensation
Liability
Other
Total commercial lines
Personal lines
Year ended December 31,
2015
Losses
and
settlement
expenses
Loss and
settlement
expense
ratio
2014
Losses
and
settlement
expenses
Loss and
settlement
expense
ratio
Premiums
earned
Premiums
earned
$ 105,904
$
86,134
81.3% $
96,908
$
79,838
104,303
92,828
92,665
8,079
403,779
43,418
65,806
57,803
48,399
854
258,996
32,887
63.1%
62.3%
52.2%
10.6%
64.1%
75.7%
97,155
88,356
86,108
7,416
375,943
46,438
67,444
52,537
57,869
1,713
259,401
38,632
Total property and casualty insurance
$ 447,197
$ 291,883
65.3% $ 422,381
$ 298,033
Reinsurance
Pro rata reinsurance
Excess of loss reinsurance
Total reinsurance
$
47,421
75,648
$ 123,069
$
$
29,433
49,420
78,853
62.1% $
41,883
65.3%
76,458
64.1% $ 118,341
$
$
36,421
51,020
87,441
Consolidated
$ 570,266
$ 370,736
65.0% $ 540,722
$ 385,474
71.3%
Premium income
Premiums earned increased 5.5 percent to $570.3 million in 2015 from $540.7 million in 2014. The property and
casualty insurance segment continued to report an increase in premiums earned due to rate level increases on renewal business,
growth in insured exposures and an increase in retained policies. Premiums earned also increased in the reinsurance segment,
primarily due to growth in MRB business. Rate levels for both segments continued to be restrained by increased competition,
especially for quality accounts with good loss experience. Average rate level increases were in the low single-digits in the
property and casualty insurance segment during 2015, and were expected to remain at that level throughout 2016. Rates-on-
line for excess of loss reinsurance renewal business declined approximately 3.0 percent during the January 1, 2015 renewal
season, but those declines were partially offset by a slight increase in retentions and an increase in limits purchased.
82
Premiums earned for the property and casualty insurance segment increased 5.9 percent to $447.2 million in 2015 from
$422.4 million in 2014. The increase was primarily associated with renewal business, which increased four percent during
2015 due to a combination of rate level increases and growth in insured exposures. Renewal rates across both commercial and
personal lines of business increased approximately two percent during 2015, and were expected to continue to increase at low
single-digit levels throughout 2016 due to competition restraints. New business premium (representing 13 percent of the pool
participants’ direct written premiums) was approximately three percent higher than 2014, with an increase in commercial lines
new business premium being partially offset by a decline in personal lines new business premium. Commercial lines new
business continued to be in the desired range of growth, and was strongest outside of the core Midwest market. This growth
helped diversify the pool participants' book of business geographically, while staying consistent with the industry and line of
business mix of the existing book of business. While retention levels for personal lines of business remained stable, new
business written premiums were down as management continued to focus on the development and implementation of its new
personal lines strategy. During 2015, the overall policy retention rate remained strong at 86.5 percent (commercial lines at 86.7
percent and personal lines at 84.8 percent). These retention rates approximated those experienced in 2014.
Premiums earned for the reinsurance segment increased 4.0 percent to $123.1 million in 2015 from $118.3 million in
2014; however, premium adjustments made in 2015 and 2014 were impacting this percentage increase. In 2015, a negative
premium adjustment of $7.2 million reported by the ceding company for the offshore energy and liability proportional account
was recorded to reduce the ultimate amount of premiums expected to be earned for underwriting years 2012 through 2014. In
2014, a $7.7 million reduction in earned but not reported premiums was recognized on pro rata accounts. Without these
adjustments, premiums earned would have increased approximately 3.3 percent. This growth was driven by new accounts,
changes in current contract structures, a decline in terminated accounts in the HORAD book of business, and an increase in pro
rata business in the MRB book of business. The premium adjustments made in 2015 and 2014 did not have a material impact
on net income because corresponding adjustments were made to IBNR loss reserves, commission expense reserves and the cost
of the excess of loss reinsurance protection. The negative premium adjustment recorded for the offshore energy and liability
proportional account, coupled with reduced participation in this account for the 2015 contract year, resulted in a $10.3 million
decline in premiums earned from this program in 2015. Competition in the reinsurance market began to increase during 2014
due to the entrance of non-traditional capital into the marketplace. This trend continued into 2015, but at a more moderate
level. As a result, total premiums earned for excess of loss business was down slightly in 2015 compared to 2014. The January
1, 2016 renewal season, when approximately 70 percent of the reinsurance segment's business renewed, saw continued pricing
pressure similar to that experienced in 2015.
Losses and settlement expenses
Losses and settlement expenses decreased 3.8 percent to $370.7 million in 2015 from $385.5 million in 2014, and the
loss and settlement expense ratio decreased to 65.0 percent in 2016 from 71.3 percent in 2014. Both segments experienced
significant improvements in their loss and settlement expense ratios during 2015, due in large part to below normal catastrophe
and storm losses and an increase in favorable reserve development. The actuarial analysis of the Company’s carried reserves at
December 31, 2015 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 65.3 percent in 2015
from 70.6 percent in 2014. This decrease was attributed to lower catastrophe and storm losses, a decline in overall claim
frequency and continued improvement in premium rate adequacy. The decline in overall claim frequency was across many of
the major lines of business, and was partially driven by the unusually high level of losses experienced during the first quarter of
2014 due to severe winter weather. Catastrophe and storm losses accounted for 6.6 percentage points of the loss and settlement
expense ratio in 2015, down from 9.5 percentage points in 2014, and lower than the then most recent 10-year average of 9.6
percentage points. Large losses (which the Company defined as losses greater than $500,000 for the EMC Insurance
Companies' pool, excluding catastrophe losses) accounted for 7.7 percentage points of the loss and settlement expense ratio in
2015, compared to 8.4 percentage points in 2014. Included in the large loss amount reported for 2014 was $1.5 million
stemming from a fire at an adjacent building being renovated that damaged two office buildings owned by the Company's
parent, Employers Mutual. At the time of the loss, Employers Mutual was self-insured for the first $5.0 million of loss to its
campus, and the loss was subject to the EMC Insurance Companies' inter-company pooling agreement. Overall claims severity
increased during 2015, after remaining fairly steady throughout 2014. Increased claims frequency and severity was the primary
driver of the high loss and settlement expense ratios reported for the commercial auto line of business in both 2015 and 2014,
which was consistent with industry results.
83
The property and casualty insurance segment's loss and settlement expense ratios for 2015 and 2014 reflected $13.8
million (3.1 percent of earned premiums) and $8.1 million (1.9 percent of earned premiums), respectively, of reported favorable
development on prior years' reserves; however, these amounts included $423,000 and $2.2 million, respectively, of favorable
development that resulted solely from changes in the allocation of bulk reserves between the current and prior accident years,
and therefore had no impact on net income. Net income was only impacted by changes in the total amount of carried reserves.
The loss and settlement expense ratio for the reinsurance segment decreased to 64.1 percent in 2015 from 73.9 percent in
2014. This decrease reflected a decline in both reported large losses (losses greater than $100,000) and catastrophe and storm
losses, as well as a significant increase in the amount of favorable reserve development experienced on prior years' reserves.
Results for 2015 included $4.1 million of catastrophe and storm losses from the Tianjin, China explosion, which was net of
$400,000 of reinsurance recovery under the excess of loss reinsurance protection provided by Employers Mutual.
Approximately $500,000 of this loss was from the MRB book of business and was reflected in the pro rata property line of
business, while the remaining $3.6 million of this loss was reflected in the excess of loss property line of business (accounted
for approximately 3.5 and 5.6 percentage points of the loss and settlement expense ratios reported for the pro rata property and
excess of loss property lines of business, respectively). The elevated loss and settlement expense ratio reported for the excess
of loss liability line of business was attributed to an increase in reported losses for contract years 2010 through 2014, and a
corresponding increase in the amount of bulk IBNR loss reserves allocated to these relatively immature years of this long-tailed
coverage. Two large reductions in carried reserves implemented during 2015 had an impact on the loss and settlement expense
ratios reported for two lines of business. First, revised ultimate loss ratio information was received for several contract years
from the ceding company for the offshore energy and liability proportional account, which reduced the carried amount of IBNR
loss reserves. This reduction in IBNR loss reserves, coupled with the decrease in IBNR loss reserves resulting from the
downward adjustment in expected ultimate premiums on this account (see discussion above), produced a small negative
amount of incurred losses and settlement expenses in the pro rata marine line of business, and a corresponding negative loss
and settlement expense ratio. Second, a large estimated loss reserve that was established on a German account in the fourth
quarter of 2014 was taken down because of favorable development contained in an account statement received in 2015. This
resulted in a lower than normal loss and settlement expense ratio in the multiline line of business. In addition to the two large
reductions in carried reserves noted above, the favorable development experienced on prior years’ reserves reflected a reduction
in IBNR loss reserves established for the 2014 contract year that could no longer be justified. Catastrophe and storm losses
accounted for 12.0 percentage points of the loss and settlement expense ratio in 2015, which was lower than both the 14.4
percentage points reported in 2014 and the most recent 10-year average of 13.0 percentage points.
The reinsurance segment's loss and settlement expense ratio for 2015 reflected $21.3 million (17.3 percent of earned
premiums) of reported favorable development on prior years' reserves; however, this amount included $1.0 million of adverse
development that resulted solely from changes in the allocation of bulk reserves between the current and prior accident years,
and therefore had no impact on net income. Net income was only impacted by changes in the total amount of carried reserves.
Acquisition and other expenses
Acquisition and other expenses increased 7.8 percent to $178.3 million in 2015 from $165.4 million in 2014. The
acquisition expense ratio increased to 31.3 percent in 2015 from 30.6 percent in 2014. Acquisition and other expenses reported
for both years included net periodic postretirement benefit income resulting from the amortization of a large prior service credit
that resulted from an amendment of Employers Mutual's postretirement medical plan in the fourth quarter of 2013. This prior
service credit was recognized in accumulated other comprehensive income in the fourth quarter of 2013, and was being
amortized out of accumulated other comprehensive income and into net income over a period of 10 years. The increase in the
2015 ratio was attributed to a combination of higher technology costs, increased pension expense, and an increase in variable
expenses such as contingent commissions and bonus accruals that are based on the improved underwriting results reported in
2015.
For the property and casualty insurance segment, the acquisition expense ratio increased to 32.9 percent in 2015 from
32.3 percent in 2015. The higher acquisition expense ratio in 2015 was primarily attributed to higher technology costs,
increased pension expense, and an increase in the variable expense categories of contingent commissions and bonus accruals.
Policyholders' dividend expense, another variable expense based on the underwriting results of some individual policies and the
safety dividend groups, declined significantly and thus limited the increase in the acquisition expense ratio.
For the reinsurance segment, the acquisition expense ratio increased to 25.1 percent in 2015 from 24.3 percent in
2014. This increase was primarily attributed to higher contingent commission expense on the offshore energy and liability
proportional account. Growth in pro rata business, which carried higher commission rates than excess of loss business, also
contributed to the increase in the ratio.
84
Investment results
Net investment income decreased 1.9 percent to $45.6 million in 2015 from $46.5 million in 2014. Net investment
income for 2014 included approximately $442,000 that resulted from the early payoff of a commercial mortgage-backed
security that was purchased at a significant discount to par value, which accelerated the accretion of the discount to par value
and therefore increased investment income. Excluding this amount, net investment income declined approximately 1.0 percent.
Current interest rate levels remained below the average book yield of the fixed maturity portfolio, and were therefore likely to
continue to limit future growth in net investment income. The average coupon rate on the fixed maturity portfolio, excluding
interest-only securities, remained relatively steady at 3.9 percent since December 31, 2014, but was down slightly from 4.0
percent at December 31, 2013. The effective duration of the fixed maturity portfolio, excluding interest-only securities, also
remained steady at 4.6 at December 31, 2015 and 2014. The Company’s equity portfolio produced dividend income of $5.6
million and $6.0 million in 2015 and 2014, respectively.
The Company reported net realized investment gains of $6.2 million in 2015 compared to $4.3 million in 2014.
Included in these amounts were $1.5 million and $2.8 million in 2015 and 2014, respectively, of realized losses attributed to
declines in the carrying value of a limited partnership that the Company first invested in during 2014 to help protect it from a
sudden and significant decline in the value of its equity portfolio (an equity tail-risk hedging strategy). The Company
recognized "other-than-temporary" impairment losses of $1.5 million and $878,000 during 2015 and 2014, respectively. The
vast majority of these impairment losses were recognized on securities held in the Company's equity portfolio.
Other income and interest expense
Included in other income was foreign currency exchange gains and losses recognized on the reinsurance segment’s
foreign currency denominated reinsurance business. The reinsurance segment had foreign currency exchange gains of
$898,000 and $2.2 million in 2015 and 2014, respectively.
Income tax
Income tax expense increased 96.9 percent to $21.5 million in 2015 from $10.9 million in 2014. The effective tax rate
for 2015 was 30.0 percent, compared to 26.7 percent in 2014. The primary contributor to the differences between these
effective tax rates and the United States federal corporate tax rate of 35 percent was tax-exempt interest income earned.
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 $83.4 million in 2016, $85.6 million in 2015 and $91.8 million in 2014. 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 driver 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 program. 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 2017 without prior regulatory approval is approximately $52.7 million. The Company
received $9.7 million, $9.2 million and $378,000 of dividends from its insurance subsidiaries and paid cash dividends to its
stockholders totaling $16.2 million, $14.2 million and $12.6 million in 2016, 2015 and 2014, respectively.
85
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. 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. In addition, Employers Mutual maintains access to a line of credit with the Federal Home
Loan Bank that could be used to provide the insurance subsidiaries additional liquidity if needed.
The Company maintains a portion of its investment portfolio in relatively short-term and highly liquid investments to
ensure the availability of funds to pay claims and expenses. A variety of maturities are maintained in the Company’s
investment portfolio to assure adequate liquidity. The maturity structure of the fixed maturity portfolio is also established by
the relative attractiveness of yields on short, intermediate and long-term securities. The Company does not invest in 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, 2016 and 2015, the Company had net unrealized
holding gains, net of deferred taxes, on its fixed maturity securities available-for-sale of $6.6 million and $20.0 million,
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 intends
to hold fixed maturity securities to maturity, such fluctuations in the fair value of these investments are not expected to have a
material impact on the operations of the Company, as forced liquidations of investments are not anticipated. The Company
closely monitors the bond market and makes appropriate adjustments in its portfolio as conditions warrant.
The majority of the Company’s assets are invested in fixed maturity securities. These investments provide a substantial
amount of investment income that supplements underwriting results and contributes to net earnings. As these investments
mature, or are called, the proceeds are reinvested at current interest rates, which may be higher or lower than those now being
earned; therefore, more or less investment income may be available to contribute to net earnings. Due to the 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 $12.5 million and $9.9 million in minority ownership interests in limited partnerships and limited
liability companies at December 31, 2016 and 2015, respectively. During the 2016 and 2015, the Company invested $4.9
million and $4.0 million, respectively, in a limited partnership that is designed to help protect the Company from a sudden and
significant decline in the value of its equity portfolio. During 2016, the Company's reinsurance subsidiary invested
approximately $6.6 million in a limited liability company as an investment that conveys renewable energy tax credits. After
reductions for the utilization of tax credits and a $209,000 impairment loss, the carrying value of this investment was
approximately $2.0 million at December 31, 2016. These investments are included in "other long-term investments" in the
Company's financial statements, with the limited partnership carried under the equity method of accounting.
The Company participates in reverse repurchase arrangements, involving the purchase of investment securities from
third-party sellers with the agreement that the purchased securities be sold back to the third-party sellers for agreed-upon prices
at specified future dates. The third-party sellers are required to pledge collateral with a value greater than the amount of cash
received in the transactions. In accordance with GAAP, the investment securities purchased under the reverse repurchase
agreements are not reflected in the Company's consolidated balance sheets, but instead a receivable is recorded for the principal
amount lent. The Company's receivable under reverse repurchase agreements was $20.0 million and $16.9 million at
December 31, 2016 and 2015, respectively.
The Company’s cash balance was $307,000 and $224,000 at December 31, 2016 and 2015, respectively.
86
Employers Mutual contributed $9.0 million, $4.0 million and $7.0 million to its qualified pension plan in 2016, 2015 and
2014, respectively, and plans to contribute approximately $9.0 million to the qualified pension plan in 2017. The Company
reimbursed Employers Mutual $2.7 million, $1.2 million and $2.2 million for its share of the pension contributions in 2016,
2015 and 2014, respectively. Employers Mutual did not make any contributions to its postretirement benefit plans during 2016,
2015, or 2014, and does not expect to make any contributions in 2017 due to the plan amendment that was announced during
2013.
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, 2016.
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, 2016, the Company’s insurance subsidiaries had total adjusted statutory capital of $526.8 million, which is well
in excess of the minimum risk-based capital requirement of $87.3 million.
The Company’s total cash and invested assets at December 31, 2016 and 2015 are summarized as follows:
($ in thousands)
December 31, 2016
Amortized
cost
Fair
value
Percent of
total
fair value
Carrying
value
Fixed maturity securities available-for-sale
$
1,189,525
$
1,199,699
81.8% $
1,199,699
Equity securities available-for-sale
Cash
Short-term investments
Other long-term investments
147,479
307
39,670
12,506
213,839
307
39,670
12,506
14.6
—
2.7
0.9
213,839
307
39,670
12,506
$
1,389,487
$
1,466,021
100.0% $
1,466,021
($ in thousands)
Fixed maturity securities available-for-sale
Equity securities available-for-sale
Cash
Short-term investments
Other long-term investments
December 31, 2015
Amortized
cost
1,130,217
144,176
224
38,599
9,930
1,323,146
$
$
$
$
Fair
value
1,161,025
206,243
224
38,599
9,930
1,416,021
Percent of
total
fair value
82.0% $
14.6
—
2.7
0.7
100.0% $
Carrying
value
1,161,025
206,243
224
38,599
9,930
1,416,021
87
The amortized cost and estimated fair value of fixed maturity and equity securities at December 31, 2016 were as
follows:
($ in thousands)
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 values
$
7,841
$
— $
11
$
249,495
319,663
37,964
102,307
26,592
445,663
1,189,525
22,922
19,832
16,092
13,438
14,812
14,276
13,005
13,071
20,031
147,479
311
17,034
741
1,435
732
12,232
32,485
12,410
10,739
8,700
5,787
7,672
4,873
11,258
5,345
483
67,267
10,609
940
1,133
7,308
931
1,379
22,311
210
29
85
125
163
78
18
32
167
907
7,830
239,197
335,757
37,572
96,434
26,393
456,516
1,199,699
35,122
30,542
24,707
19,100
22,321
19,071
24,245
18,384
20,347
213,839
Total securities available-for-sale
$
1,337,004
$
99,752
$
23,218
$
1,413,538
The Company’s property and casualty insurance subsidiaries have $25.0 million of surplus notes issued to Employers
Mutual. The interest rate on the surplus notes is 1.35 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 are 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 $337,000 in each year 2016, 2015 and 2014. At December 31, 2016, the
Company’s property and casualty insurance subsidiaries had received approval for the payment of interest accrued on the
surplus notes during 2016.
As of December 31, 2016, the Company had no material commitments for capital expenditures.
88
Off-Balance Sheet Arrangements
Employers Mutual collects from agents, policyholders and ceding companies all written 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 losses and settlement expenses recoverable under the reinsurance
contracts protecting the pool participants and, starting in 2016, the reinsurance subsidiary, as well as the fronting business
ceded to the reinsurance subsidiary. Employers Mutual settles with the pool participants (monthly) and the reinsurance
subsidiary (quarterly) the premiums written from these insurance policies and the paid losses and settlement expenses
recoverable under the external reinsurance contracts, providing full credit for the premiums written and the paid losses and
settlement expenses recoverable under the external reinsurance contracts 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
underlying coverage periods, Employers Mutual carries a substantial receivable balance for insurance and reinsurance
premiums in process of collection and, to a lesser extent, paid losses and settlement expenses recoverable from the external
reinsurance companies. 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 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 $362,000. 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 $1.3 million of “other-than-temporary” investment impairment losses during 2016, compared to
$1.5 million during 2015. With the exception of a $209,000 impairment loss recorded in 2016 on a new investment that
conveys renewable energy tax credits (included in other long-term investments), these impairment losses were recognized on
securities held in the Company's equity portfolio.
At December 31, 2016, the Company had unrealized losses on available-for-sale securities as presented in the following
table. The estimated fair value is based on quoted market prices, where available. In cases where quoted market prices are not
available, fair values are based on a variety of valuation techniques depending on the type of security. None of these securities
are considered to be in concentrations by either security type or industry. The Company uses several factors to determine
whether the carrying value of an individual security has been “other-than-temporarily” impaired. Such factors include, but are
not limited to, the security’s value and performance in the context of the overall markets, length of time and extent the
security’s fair value has been below carrying value, key corporate events and, for fixed maturity securities, the amount of
collateral available. Based on these factors, the absence of management’s intent to sell these securities prior to recovery or
maturity, and the fact that management does not anticipate that it will be forced to sell these securities prior to recovery or
maturity, it was determined that the carrying value of these securities were not “other-than-temporarily” impaired at
December 31, 2016. 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 $15.1 million, net of tax; however,
the Company’s financial position would not be affected because unrealized losses on available-for-sale securities are reflected
in the Company’s financial statements as a component of stockholders’ equity, net of deferred taxes.
89
Following is a schedule of the length of time securities have continuously been in an unrealized loss position as of
December 31, 2016.
($ in thousands)
Fixed maturity securities:
U.S. treasury
Less than twelve months
Twelve months or longer
Total
Fair
values
Unrealized
losses
Fair
values
Unrealized
losses
Fair
values
Unrealized
losses
$
7,830
$
11
$
— $
— $
7,830
$
11
202,900
10,609
U.S. government-sponsored agencies
202,900
10,609
Obligations of states and political
subdivisions
Commercial mortgage-backed
Residential mortgage-backed
Other asset-backed
Corporate
43,777
21,695
26,217
19,091
82,657
940
1,133
1,232
931
1,273
Total fixed maturity securities
404,167
16,129
Equity securities:
Common stocks:
Financial services
Information technology
Healthcare
Consumer staples
Consumer discretionary
Energy
Industrials
Other
Non-redeemable preferred stocks
1,462
1,947
3,585
2,427
1,637
1,621
779
1,472
3,356
Total equity securities
18,286
12
29
85
125
163
33
18
32
44
541
—
—
—
23,625
—
8,625
32,250
908
—
—
—
—
1,188
—
—
1,877
3,973
—
—
—
6,076
—
106
43,777
21,695
49,842
19,091
91,282
6,182
436,417
198
—
—
—
—
45
—
—
123
366
2,370
1,947
3,585
2,427
1,637
2,809
779
1,472
5,233
22,259
940
1,133
7,308
931
1,379
22,311
210
29
85
125
163
78
18
32
167
907
Total temporarily impaired
securities
$
422,453
$
16,670
$
36,223
$
6,548
$
458,676
$
23,218
Following is a schedule of the maturity dates of the fixed maturity securities presented in the above table.
($ in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Securities not due at a single maturity date
Book value
Fair value
Gross
unrealized
loss
$
5,493
$
5,459
$
24,444
101,023
245,100
82,668
24,390
99,306
233,045
74,217
34
54
1,717
12,055
8,451
$
458,728
$
436,417
$
22,311
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, 2016,
the Company held $3.0 million of non-investment grade fixed maturity securities in a net unrealized gain position of $50,000.
90
Following is a schedule of gross realized losses recognized in 2016. The schedule is aged according to the length of
time the underlying securities were in an unrealized loss position.
($ in thousands)
Fixed maturity securities:
Three months or less
Over three months to six months
Over six months to nine months
Over nine months to twelve months
Over twelve months
Subtotal, fixed maturity securities
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
Realized losses from sales
Book
value
Sales
price
Gross
realized
losses
"Other-
than-
temporary"
impairment
losses
Total
gross
realized
losses
$
5,736
$
5,429
$
307
$
— $
17,377
15,798
1,579
—
—
7,534
30,647
15,373
6,775
515
900
348
—
—
6,591
27,818
13,618
6,012
479
828
299
—
—
943
2,829
1,755
763
36
72
49
—
—
—
—
—
237
104
450
—
264
307
1,579
—
—
943
2,829
1,992
867
486
72
313
23,911
21,236
2,675
1,055
3,730
Total realized losses
$
54,558
$
49,054
$
5,504
$
1,055
$
6,559
LEASES, COMMITMENTS AND CONTINGENT LIABILITIES
The following table reflects the Company's contractual obligations as of December 31, 2016. 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 2024. Employers Mutual has entered into various leases for branch and
service office facilities with lease terms expiring through 2026. 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.
($ in thousands)
Contractual obligations
Loss and settlement expense reserves1
Long-term debt2
Interest expense on long-term debt3
Real estate operating leases
Payments due by period
Total
Less than 1
year
1 - 3 years
4 - 5 years
More than 5
years
$
690,532
$
278,733
$
260,697
$
80,007
$
25,000
3,375
2,572
—
337
391
—
675
844
—
675
665
71,095
25,000
1,688
672
Total
$
721,479
$
279,461
$
262,216
$
81,347
$
98,455
1 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.
2 Long-term debt reflects the surplus notes issued by the Company’s property and casualty insurance subsidiaries to Employer
Mutual, which have no maturity date. Excluded from long-term debt are pension and other postretirement benefit obligations.
91
3 Interest expense on long-term debt reflects the interest expense on the surplus notes issued by the Company’s property and
casualty insurance subsidiaries to Employers Mutual. The interest rate on the surplus notes is subject to change every five
years (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 $851,000 and $912,000 as of December 31, 2016 and 2015, respectively. Premium tax offsets of
$1.0 million and $1.1 million, which are related to prior guarantee fund payments and current assessments, have been accrued
as of December 31, 2016 and 2015, 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 had accrued estimated second-injury fund assessments of $1.9 million and $1.9
million as of December 31, 2016 and 2015, 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 $110,000 at December 31, 2016. The Company
had a contingent liability for the aggregate guaranteed amount of the annuities of $183,000 at December 31, 2016 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.
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 the economic environment, business cycle, regulatory requirements, fluctuations in interest
rates, underwriting results 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 owned by 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 effect 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.
92
December 31, 2016
($ in thousands)
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
$
$
$
$
$
$
$
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
7,830
200 bp decrease
$
100 bp decrease
100 bp increase
200 bp increase
239,197
200 bp decrease
$
100 bp decrease
100 bp increase
200 bp increase
335,757
200 bp decrease
$
100 bp decrease
100 bp increase
200 bp increase
37,572
200 bp decrease
$
100 bp decrease
100 bp increase
200 bp increase
8,814
8,306
7,385
6,967
255,895
252,190
219,640
200,613
370,140
352,654
318,116
298,642
42,024
39,702
35,615
33,817
96,434
200 bp decrease
$
101,734
100 bp decrease
100 bp increase
200 bp increase
26,393
200 bp decrease
100 bp decrease
$
100 bp increase
200 bp increase
456,516
200 bp decrease
$
100 bp decrease
100 bp increase
200 bp increase
99,440
92,585
89,072
29,604
27,924
24,994
23,714
504,220
479,709
434,530
413,953
1,312,431
1,259,925
1,132,865
1,066,778
0.12%
0.06
(0.05)
(0.10)
1.96%
1.53
(2.30)
(4.53)
4.04%
1.98
(2.07)
(4.36)
0.52%
0.25
(0.23)
(0.44)
0.62%
0.35
(0.45)
(0.86)
0.38%
0.18
(0.16)
(0.31)
5.60%
2.72
(2.58)
(5.00)
13.24%
7.07
(7.85)
(15.61)
Total fixed maturity securities
$
1,199,699
200 bp decrease
$
100 bp decrease
100 bp increase
200 bp increase
93
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, excluding
interest-only securities, at December 31, 2016 was 5.2. Duration extended slightly during the year as interest rates increased.
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, 2016 would result in a corresponding pre-tax decrease in the fair
value of the Company’s equity portfolio of approximately $17.9 million. Management implemented an equity tail-risk hedging
strategy during 2014 to protect the Company from significant monthly downside price volatility in the equity markets. The cost
of this protection (recorded as a realized investment loss) totaled $6.3 million during 2016. This hedging strategy may be
discontinued in the future depending on market conditions and/or the cost of the protection.
Fixed maturity securities held by the Company generally have an investment quality rating of “A” or better by
independent rating agencies. The following table shows the composition of the Company’s fixed maturity securities, by rating,
as of December 31, 2016.
($ in thousands)
December 31, 2016
Rating:
AAA
AA
A
BAA
BA
B
CAA
Total fixed maturities
Securities available-for-sale
(at fair value)
Amount
Percent
$
$
461,898
346,075
313,401
75,314
2,799
1
211
1,199,699
38.5%
28.9
26.1
6.3
0.2
—
—
100.0%
Ratings for preferred stocks and fixed maturity securities are assigned by nationally recognized statistical rating
organizations ("NRSRO"). NRSRO rating processes seek to evaluate the quality of a security by examining the factors that
affect returns to investors. NRSRO 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, 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 $335.8 million as
of December 31, 2016. 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 $49.8 million 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 within the portfolio of mortgage-
backed securities. Prepayment risk is monitored regularly through the analysis of interest rate simulations. At December 31,
2016, the effective duration of the mortgage-backed securities, excluding interest-only securities, is 4.9 with an average life of
5.9 years and a yield to worst of 2.8 percent. At December 31, 2015, the effective duration of the mortgage-backed securities,
excluding interest-only securities, was 3.6, with an average life of 4.4 years and a yield to worst of 2.9 percent.
94
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
See note 1 of Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for a description of
new accounting pronouncements not yet adopted by 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 this Form 10-K, is incorporated herein by reference.
95
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Report on Internal Control Over Financial Reporting
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 (2013 Framework) (the COSO criteria). Based on this assessment, management believes that, as of December 31,
2016, 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, Chief Executive Officer and Treasurer
(Principal Executive Officer)
/s/ Mark E. Reese
Mark E. Reese
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
96
Report of Independent Registered Public Accounting Firm
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, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). EMC Insurance Group Inc.
and Subsidiaries’ 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, 2016, 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, 2016 and 2015, 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, 2016 of EMC Insurance Group Inc. and Subsidiaries and our report dated March 6,
2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Des Moines, Iowa
March 6, 2017
97
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2016 and 2015, 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, 2016. Our audits also
included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and
schedules 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, 2016 and 2015, and the consolidated results
of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth
therein.
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, 2016, based on
criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) and our report dated March 6, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Des Moines, Iowa
March 6, 2017
98
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share and per share amounts)
ASSETS
Investments:
Fixed maturity securities available-for-sale, at fair value (amortized cost $1,189,525
and $1,130,217)
Equity securities available-for-sale, at fair value (cost $147,479 and $144,176)
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 $40,660 and $40,535)
Prepaid pension and postretirement benefits due from affiliate
Accrued investment income
Amounts receivable under reverse repurchase agreements
Accounts receivable
Income taxes recoverable
Goodwill
Other assets (affiliated $4,632 and $4,595)
Total assets
December 31,
2016
2015
$
1,199,699
$
1,161,025
213,839
12,506
39,670
206,243
9,930
38,599
1,465,714
1,415,797
307
21,326
9,309
40,939
12,314
11,050
20,000
2,076
—
942
4,836
224
24,236
6,563
40,720
12,133
10,789
16,850
804
1,735
942
5,162
$
1,588,813
$
1,535,955
All affiliated balances presented above are the result of related party transactions with Employers Mutual.
See accompanying Notes to Consolidated Financial Statements.
99
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share and per share amounts)
LIABILITIES
December 31,
2016
2015
Losses and settlement expenses (affiliated $685,533 and $671,169)
$
690,532
$
Unearned premiums (affiliated $243,682 and $238,637)
Other policyholders' funds (all affiliated)
Surplus notes payable to affiliate
Amounts due affiliate to settle inter-company transaction balances
Pension benefits payable to affiliate
Income taxes payable
Deferred income taxes
Other liabilities (affiliated $27,871 and $28,598)
Total liabilities
STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 30,000,000 shares; issued and outstanding,
21,222,535 shares in 2016 and 20,780,439 shares in 2015
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total stockholders' equity
244,885
13,068
25,000
11,222
4,097
2,359
11,321
32,987
678,774
239,435
8,721
25,000
6,408
4,299
—
19,029
29,351
1,035,471
1,011,017
21,223
119,054
46,081
366,984
553,342
20,781
108,747
58,433
336,977
524,938
Total liabilities and stockholders' equity
$
1,588,813
$
1,535,955
All affiliated balances presented above are the result of related party transactions with Employers Mutual.
See accompanying Notes to Consolidated Financial Statements.
100
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except share and per share amounts)
REVENUES
Year ended December 31,
2016
2015
2014
Premiums earned (affiliated $586,609, $566,103 and $534,105)
$
592,408
$
570,266
$
540,722
Net investment income
47,490
45,582
46,465
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 (affiliated $1,021, $1,214 and $1,784)
5,338
7,634
(1,264)
(1,481)
—
(1,264)
4,074
1,011
—
(1,481)
6,153
1,725
5,227
(878)
—
(878)
4,349
2,931
Total revenues
644,983
623,726
594,467
LOSSES AND EXPENSES
Losses and settlement expenses (affiliated $385,708, $368,722 and
$378,263)
Dividends to policyholders (all affiliated)
Amortization of deferred policy acquisition costs (affiliated $106,931,
$101,090 and $97,551)
Other underwriting expenses (affiliated $69,560, $68,305 and $57,148)
Interest expense (all affiliated)
Other expenses (affiliated $1,860, $1,822 and $1,570)
Total losses and expenses
Income before income tax expense
386,897
13,800
108,403
69,612
337
2,727
581,776
63,207
370,736
7,705
102,184
68,418
337
2,690
552,070
71,656
INCOME TAX EXPENSE (BENEFIT)
Current
Deferred
Total income tax expense
Net income
Net income per common share - basic and diluted
18,061
(1,057)
17,004
46,203
2.20
$
$
18,611
2,883
21,494
50,162
2.43
$
$
$
$
385,474
9,504
99,042
56,826
337
2,377
553,560
40,907
7,280
3,635
10,915
29,992
1.48
Average number of common shares outstanding - basic and diluted
21,006,302
20,621,919
20,205,935
All affiliated balances presented above are the result of related party transactions with Employers Mutual.
See accompanying Notes to Consolidated Financial Statements.
101
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
Net income
Year ended December 31,
2016
2015
2014
$
46,203
$
50,162
$
29,992
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gains (losses) on investment securities, net of
deferred income tax expense (benefit) of $(2,092), $(7,021) and
$18,664
Reclassification adjustment for realized investment gains included in
net income, net of income tax expense of $(3,628), $(2,668) and
$(2,518)
Reclassification adjustment for amounts amortized into net periodic
pension and postretirement benefit income, net of deferred income
tax expense of $(457), $(693) and $(955):
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 benefit of $(474), $(2,126) and
$(2,994):
Net actuarial loss
Prior service cost
Total change in funded status of affiliate's pension and
postretirement benefit plans
(3,885)
(13,037)
34,663
(6,736)
(4,956)
(4,677)
1,549
(2,399)
863
(2,150)
375
(2,149)
(850)
(1,287)
(1,774)
(542)
(339)
(881)
(3,637)
(312)
(5,525)
(35)
(3,949)
(5,560)
Other comprehensive income (loss)
(12,352)
(23,229)
22,652
Total comprehensive income
$
33,851
$
26,933
$
52,644
All affiliated balances presented above are the result of related party transactions with Employers Mutual.
See accompanying Notes to Consolidated Financial Statements.
102
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
($ in thousands, except per share
amounts)
Common
stock
Additional
paid-in capital
Accumulated
other
comprehensive
income
Retained
earnings
Total
stockholders'
equity
Balance at December 31, 2013
$
19,959
$
92,656
$
59,010
$
283,585
$
455,210
385
7,007
228
22,652
29,992
7,392
228
22,652
29,992
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 (loss)
Net income
Dividends paid to public
stockholders ($.627 per share)
Dividends paid to affiliate ($.627
per share)
(5,211)
(5,211)
(7,377)
300,989
50,162
(7,377)
502,886
9,078
215
(23,229)
50,162
(6,012)
(6,012)
(8,162)
336,977
(8,162)
524,938
11,070
(383)
62
(12,352)
46,203
(7,014)
(7,014)
(9,182)
366,984
$
(9,182)
553,342
Balance at December 31, 2014
20,344
99,891
81,662
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 (loss)
Net income
Dividends paid to public
stockholders ($.693 per share)
Dividends paid to affiliate ($.693
per share)
437
8,641
215
(23,229)
Balance at December 31, 2015
20,781
108,747
58,433
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 (loss)
Net income
Dividends paid to public
stockholders ($.780 per share)
Dividends paid to affiliate ($.780
per share)
459
(17)
10,611
(366)
62
(12,352)
46,203
Balance at December 31, 2016
$
21,223
$
119,054
$
46,081
$
All affiliated balances presented above are the result of related party transactions with Employers Mutual.
See accompanying Notes to Consolidated Financial Statements.
103
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Year ended December 31,
2016
2015
2014
Net income
$
46,203
$
50,162
$
29,992
Adjustments to reconcile net income to net cash provided by
operating activities:
Losses and settlement expenses (affiliated $14,364, $20,517 and
$50,339)
Unearned premiums (affiliated $5,045, $8,177 and $11,672)
Other policyholders' funds due to affiliate
Amounts due to/from affiliate to settle inter-company transaction
balances
Net pension and postretirement benefits due from affiliate
Reinsurance receivables due from affiliate
Prepaid reinsurance premiums due from affiliate
Commissions payable (affiliated $(1,662), $3,191 and $(196))
Deferred policy acquisition costs (affiliated $(125), $(1,605) and
$(1,516))
Accrued investment income
Current income tax
Deferred income tax
Net realized investment gains
Other, net (affiliated $960, $1,796 and $(1,122))
Total adjustments to reconcile net income to net cash provided
by operating activities
11,758
5,450
4,347
4,814
(3,045)
2,910
(2,746)
(1,697)
(219)
(261)
8,512
(1,057)
(4,074)
12,539
17,465
7,342
(1,432)
(2,151)
(2,691)
4,367
2,302
3,265
(1,377)
(494)
(1,643)
2,883
(6,153)
13,767
37,231
35,450
Net cash provided by operating activities
$
83,434
$
85,612
$
All affiliated balances presented above are the result of related party transactions with Employers Mutual.
See accompanying Notes to Consolidated Financial Statements.
51,128
11,466
1,662
(531)
(4,761)
1,725
852
(408)
(1,551)
(311)
(1,424)
3,635
(4,349)
4,690
61,823
91,815
104
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
($ in thousands)
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
Net (purchases) disposals of short-term investments
Net disbursements under reverse repurchase agreements
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 $(9,182), $(8,162) and
$(7,377))
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
Interest paid to affiliate
$
$
$
Year ended December 31,
2016
2015
2014
(403,134) $
330,239
(63,683)
71,106
(8,720)
571
(1,071)
(3,150)
(77,842)
11,070
—
(383)
(16,196)
(5,509)
83
224
307
13,967
337
$
$
$
(235,242) $
174,971
(83,098)
70,905
(8,416)
2,297
14,663
(16,850)
(80,770)
9,078
95
—
(14,174)
(5,001)
(159)
383
224
20,254
337
$
$
$
(209,885)
131,942
(50,154)
45,698
(7,613)
530
2,904
—
(86,578)
7,392
103
—
(12,588)
(5,093)
144
239
383
8,703
384
All affiliated balances presented above are the result of related party transactions with Employers Mutual.
See accompanying Notes to Consolidated Financial Statements.
105
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
Premiums written is the amount charged for policies issued during a reporting period. 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 related contracts and underlying policies. 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 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 catastrophic event, and/or the accumulation of catastrophe losses 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, 2016, 2015 or 2014.
106
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 22 percent of the property and casualty
insurance subsidiaries’ total net commercial line premiums written in 2016. 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 the estimated ultimate loss
ratios established by line of business and accident year, and estimates of losses expected 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 reserves estimates are reflected in net income in the year such changes are recorded (see
note 4).
Ceded reinsurance amounts with nonaffiliated reinsurers relating to reinsurance receivables for unpaid losses and
settlement expenses and prepaid reinsurance premiums are reported on the balance sheet on a gross basis. Amounts ceded to
Employers Mutual under the affiliated reinsurance pooling agreement and the inter-company reinsurance programs (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 liabilities 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 in stockholders’ equity, net of deferred income
taxes. Other long-term investments consist of holdings in limited partnerships that are carried under the equity method of
accounting, and holdings in limited partnerships and limited liability companies that are carried at amortized cost. The
Company has an investment in a limited partnership that is designed to help protect the Company from a sudden and significant
decline in the value of its equity portfolio. This limited partnership is carried under the equity method of accounting. Because
of the nature of this investment, which is used solely to support the equity tail-risk hedging strategy, changes in the carrying
value of the limited partnership are recorded as realized investment gains (losses), rather than as a component of investment
income. 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 participates in a reverse repurchase arrangement involving the purchase of investment securities from
third-party sellers, with the agreement that the purchased securities be sold back to the third-party sellers for agreed-upon prices
at specified future dates. The third-party sellers are required to pledge collateral with a value greater than the amount of cash
received in the transactions. In accordance with GAAP, the investment securities purchased under the reverse repurchase
agreements are not reflected in the Company's consolidated balance sheets, but instead a receivable is recorded for the principal
amount lent. Net proceeds/disbursements related to the reverse repurchase transactions are reported as a component of
investing activities in the consolidated statements of cash flows, and the income as a component of operating activities.
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, fair values are 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). The Company
uses a practical expedient to measure the pooled separate account investments in Employers Mutual's qualified pension plan at
the net asset value per share (see note 12).
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, 2016 and 2015 are securities on deposit with various regulatory authorities as required
by law amounting to $11.0 million and $11.2 million, respectively.
107
The Company regularly monitors its investment portfolio for securities whose fair value 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, (4) for fixed maturity securities, the amount of collateral available, and (5) 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 determines 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.
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. A portion of the compensation expense recognized by Employers Mutual (as the requisite service period for granted
options and restricted stock awards is rendered) is allocated to the Company’s property and casualty insurance subsidiaries
though their participation in the pooling agreement (see note 2). Because a portion of Employers Mutual’s stock compensation
expense is reflected in the Company’s financial statements and issuances of the Company’s stock under Employers Mutual’s
stock 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 CodificationTM
(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 benefits. Although the Company has no
employees of its own, it is responsible for its share of the plans' expenses and related prepaid assets and liabilities (the "funded
status") as determined under the terms of the pooling agreement. 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.” In addition,the Company is responsible for its share of costs of
these plans allocated by Employers Mutual to subsidiaries that do not participate in the pooling agreement (see note 2). During
2016, Employers Mutual's management determined that an allocation of the plans' funded status to the Company's reinsurance
subsidiary would no longer be made because the amounts were immaterial and significant time and cost was needed to
determine the allocation. As a result, the assets and liabilities allocated to the reinsurance subsidiary as of December 31, 2015
were settled with Employers Mutual during 2016.
108
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.
Off-Balance-Sheet Credit Exposure
Employers Mutual collects from agents, policyholders and ceding companies all written 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 losses and settlement expenses recoverable under the reinsurance
contracts protecting the pool participants and, starting in 2016, the additional reinsurance protection (see note 2) protecting the
reinsurance subsidiary, as well as the fronting business ceded to the reinsurance subsidiary. Employers Mutual settles with the
pool participants (monthly) and the reinsurance subsidiary (quarterly) the premiums written from these insurance policies and
the paid losses and settlement expenses recoverable under the external reinsurance contracts, providing full credit for the
premiums written and the paid losses and settlement expenses recoverable under the external reinsurance contracts 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 underlying coverage periods, Employers Mutual carries a substantial receivable
balance for insurance and reinsurance premiums in process of collection and, to a lesser extent, paid losses and settlement
expenses recoverable from the external reinsurance companies. 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 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
$362,000. 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
income in the consolidated statements of income.
Net Income Per Share - Basic and Diluted
The Company’s basic and diluted net income per share is computed by dividing net income by the weighted average
number of common shares outstanding during each period. As previously noted, the Company receives the current fair value
for all shares issued under Employers Mutual’s stock plans. As a result, the Company had no potential common shares
outstanding during 2016, 2015 or 2014 that would have been dilutive to the calculation of net income per share.
109
Goodwill
Goodwill represents the excess of cost over the fair value of net assets of acquired subsidiaries. Goodwill is not
amortized, but is instead subject to impairment if the carrying value of the goodwill exceeds the estimated fair value of net
assets. If the carrying amount of the reporting unit (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 2016, 2015 or 2014.
Accounting Pronouncements Adopted
In February 2015, the FASB updated its guidance related to the Consolidation Topic 810 of the (ASC). The objective of
this update is to improve consolidation guidance through changes in the analysis that a reporting entity must perform to
determine whether it should consolidate certain types of legal entities. The guidance modifies the evaluation of whether limited
partnerships and similar legal entities are variable interest entities or voting interest entities, while also eliminating the
presumption that a general partner should consolidate a limited partnership. This guidance was effective for interim and annual
periods beginning after December 15, 2015, and was to be applied either retrospectively or through a modified retrospective
approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The
Company adopted this guidance in the first quarter of 2016. Adoption of this guidance did not have an impact on the
consolidated financial condition or operating results of the Company.
In May 2015, the FASB updated its guidance related to the Financial Services-Insurance Topic 944 of the ASC. The
objective of this update is to add disclosures which provide transparency of significant estimates made in measuring the
liability for losses and settlement expenses, thus providing more insight into an insurance entity's ability to underwrite and
anticipate costs associated with claims. The new disclosures primarily include incurred and paid claims development tables
prepared net of reinsurance (not to exceed ten years), and a reconciliation of the carrying amount of the liability for losses and
settlement expenses. Also included (for each accident year of incurred claims development disclosed), is disclosure of incurred
but not reported (IBNR) loss reserves, claim frequency information, and the average annual percentage payout of incurred
claims by age. This guidance is applied to annual reporting periods beginning after December 15, 2015, and certain disclosures
to interim reporting periods beginning after December 15, 2016. The Company adopted this guidance during the fourth quarter
of 2016 (see note 4). Since the guidance only affects disclosure, adoption had no impact on the consolidated financial
condition or operating results of the Company.
In August 2014, the FASB updated its guidance related to the Presentation of Financial Statements - Going Concern
Subtopic 205-40 of the ASC. The objective of this update is to provide guidance regarding management’s responsibility to
evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern, and to provide related
footnote disclosures if indeed substantial doubts do exist. This guidance is effective for annual periods ending after December
15, 2016, and for interim and annual reporting periods thereafter. The Company adopted this guidance in the fourth quarter of
2016. Management completed an evaluation and determined no disclosures were necessary.
In March 2016, the FASB updated its guidance related to Stock Compensation Topic 718 of the ASC. The objective of
this update is to simplify the accounting for employee share-based payments. The provisions applicable to the Company
primarily involve the accounting treatment for excess tax benefits, which is the excess of the actual tax benefit realized by the
Company upon the exercise of non-qualified stock options (by Employers Mutual's employees) over the deferred income tax
benefit previously recognized in conjunction with the compensation expense (tax deficiency if the actual tax benefit realized is
less than the previously recognized deferred income tax benefit). The FASB permitted early prospective adoption of these
provisions, and the Company elected to adopt effective January 1, 2016. As a result, effective January 1, 2016, the Company
no longer records to additional paid-in capital the excess tax benefits (deficiencies) allocated to it through the pooling
agreement, but instead recognizes these amounts through the consolidated statements of income as components of current and
deferred income taxes. The requirement that these excess tax benefits (deficiencies) be reflected as financing cash flows in the
consolidated statements of cash flows was also removed, and these amounts are now reflected as cash flows from operating
activities on a prospective basis.
110
New Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB updated its guidance related to the Revenue from Contracts with Customers Topic 606 of the
ASC. The objective of this update (and other related following updates) is to improve the reporting of revenue by providing a
more robust framework for addressing revenue issues, and improved disclosure requirements. Current revenue recognition
guidance in U.S. GAAP is comprised of broad revenue recognition concepts together with numerous revenue requirements for
particular industries or transactions, which sometimes result in different accounting for economically similar transactions. This
guidance is to be applied retrospectively to annual and interim reporting periods beginning after December 15, 2017, with early
adoption permitted as of the original effective date (annual and interim reporting periods beginning after December 15,
2016). The Company will adopt this guidance during the first quarter of 2018. Since premium revenue from insurance
contracts is excluded from the scope of this updated guidance, adoption is expected to have little or no impact on the
consolidated financial condition or operating results of the Company. The Company's largest non-premium revenue items are
service charges related to the billing of the pool participants' direct written premiums to policyholders, and commission income
on excess and surplus lines business marketed by EMC Underwriters, LLC, both of which are included in "Other income" in
the consolidated statements of income.
In January 2016, the FASB updated its guidance related to the Financial Instruments-Overall Subtopic 825-10 of the
ASC. The objective of this update is to enhance the reporting model for financial instruments to provide financial statement
users with more decision-useful information. The major change in reporting from this update that will impact the Company is a
requirement that equity investments (excluding those accounted for under the equity method of accounting or those that are
consolidated) be measured at fair value, with changes in fair value recognized in net income. While all of the Company's
equity investments are already measured at fair value (with the exception of those that are consolidated and those that are
accounted for under the equity method of accounting), the Company currently classifies all of its investments in equity
securities as available-for-sale, and as such, the changes in fair value are currently recognized in other comprehensive income
rather than net income. This guidance is to be applied to annual and interim reporting periods beginning after December 15,
2017, with recognition of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of
adoption. Early adoption is not permitted. The Company will adopt this guidance during the first quarter of 2018. Adoption is
not expected to impact consolidated stockholders' equity, but is expected to introduce a material amount of volatility to the
Company's operating results.
In February 2016, the FASB issued updated guidance in Leases Topic 842 of the ASC, which supersedes the guidance in
Leases Topic 840 of the ASC. The objective of this update is to increase transparency and comparability among organizations
by requiring recognition of lease assets and lease liabilities on the balance sheet, and disclosure of key information about
leasing arrangements. This guidance is effective for interim and annual periods beginning after December 15, 2018, and is to
be applied using a modified retrospective approach. Early adoption is permitted. The Company will adopt this guidance
during the first quarter of 2019. Management continues to research this guidance, which thus far has lead management to a
preliminary determination that this update will not have a material impact to the Company's consolidated financial condition or
operating results.
In June 2016, the FASB issued updated guidance in Financial Instruments-Credit Losses Topic 326 of the ASC. The
objective of this update is to provide information about expected credit losses on financial instruments and other commitments
to extend credit. Specifically, this updated guidance replaces the current incurred loss impairment methodology, which delays
recognition of a loss until it is probable a loss has been incurred, with a methodology that reflects expected credit losses
considering a broader range of reasonable and supportable information. This guidance covers financial assets that are not
accounted for at fair value through net income, thus will not be applicable to the Company's equity investments upon
implementation of the updated guidance described above for the Financial Instruments-Overall Subtopic 825-10. This
guidance is effective for interim and annual periods beginning after December 15, 2019, and is to be applied with a cumulative-
effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective
(modified-retrospective approach). Early adoption is permitted, but only to fiscal years beginning after December 15, 2018.
The Company will adopt this guidance during the first quarter of 2020. The Company is currently evaluating the impact this
guidance will have on the Company's consolidated financial condition and operating results.
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 quota share retrocessional reinsurance agreement (the
"quota share agreement") and inter-company reinsurance programs. All transactions occurring under the pooling agreement,
quota share agreement and the inter-company reinsurance programs 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.
111
Property and Casualty Insurance Subsidiaries
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, 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.
The Inter-Company Committees of the boards of directors of the Company and Employers Mutual approved a new inter-
company reinsurance program between the Company's insurance subsidiaries in the property and casualty insurance segment
and Employers Mutual for calendar year 2016. This reinsurance program is intended to reduce the volatility of the Company's
quarterly results caused by excessive catastrophe and storm losses, and provide protection from both the frequency and severity
of such losses. The reinsurance program consists of two semi-annual aggregate catastrophe excess of loss treaties. The first
treaty was effective from January 1, 2016 through June 30, 2016, and had a retention of $20.0 million and a limit of $24.0
million. The total cost of this treaty was approximately $6.3 million. The second treaty was effective from July 1, 2016
through December 31, 2016, and had a retention of $15.0 million and a limit of $12.0 million. The total cost of this treaty was
approximately $1.5 million. All catastrophe and storm losses assumed by the property and casualty insurance subsidiaries (net
of applicable reinsurance recoveries from external reinsurance protections purchased by the pool participants) were subject to
the terms of these treaties, and there was no co-participation provision. Losses and settlement expenses ceded to Employers
Mutual under these treaties totaled $7.5 million.
Operations of the pool and the inter-company reinsurance program give rise to inter-company balances with Employers
Mutual, which are generally settled during the subsequent 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 Subsidiary
The Company’s reinsurance subsidiary is party to a quota share agreement and an inter-company reinsurance program
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 inter-company reinsurance program in
place with Employers Mutual covers both business assumed from Employers Mutual through the quota share agreement, as
well as business obtained outside the quota share agreement. The Inter-Company Committees of the boards of directors of the
Company and Employers Mutual approved a change in the inter-company reinsurance program between the Company's
reinsurance subsidiary and Employers Mutual for calendar year 2016. The 2016 reinsurance program consists of two treaties.
The first was a per occurrence catastrophe excess of loss treaty with a retention of $10.0 million, a limit of $10.0 million, 20
percent co-participation, and no reinstatement. The total cost of this treaty was approximately $2.0 million. The second was an
annual aggregate catastrophe excess of loss treaty with a retention of $20.0 million, a limit of $100.0 million, and 20 percent
co-participation. The total cost of this treaty was approximately $3.1 million. Any losses recovered under the per occurrence
treaty inure to the benefit of the aggregate treaty, and only catastrophic events with total losses greater than $500,000 are
subject to the terms of the aggregate treaty. Prior to 2016, the reinsurance program with Employers Mutual consisted of a
single excess of loss reinsurance agreement. Under the terms of that agreement, the reinsurance subsidiary retained the first
$4.0 million of losses per event, and also retained 20.0 percent of any losses between $4.0 million and $10.0 million and 10.0
percent of any losses between $10.0 million and $50.0 million. The cost of the excess of loss reinsurance protection, which
included reimbursement for the cost of reinsurance protection purchased by Employers Mutual to protect itself from the
assumption of excessive losses in the event of a major catastrophe, was 8.0 percent of the reinsurance subsidiary’s total
assumed reinsurance premiums written in 2015 and 2014.
112
In connection with the change in the inter-company reinsurance program in 2016, the reinsurance subsidiary began
purchasing additional reinsurance protection in peak exposure territories from external parties in which coverage is triggered
when losses experienced by the insurance industry from a catastrophic event exceed a specified threshold. Any reinsurance
recoveries received from external parties reduces the amount of losses ceded to Employers Mutual under the inter-company
reinsurance program. The net cost of the external reinsurance protection was approximately $3.5 million in 2016.
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 the inter-company reinsurance program, as well as the purchase of the reinsurance protection from
external parties, give rise to inter-company balances with Employers Mutual, which are generally settled during the month
following the end of each quarter. The investment and income tax activities of the reinsurance subsidiary are not subject to the
quota share agreement.
Premiums earned assumed by the reinsurance subsidiary from Employers Mutual amounted to $135.2 million, $129.6
million and $122.1 million in 2016, 2015 and 2014, respectively. The reinsurance subsidiary ceded premiums of $5.1 million,
$10.8 million and $10.3 million in 2016, 2015 and 2014, respectively, to Employers Mutual as payment for the inter-company
reinsurance program. Losses and settlement expenses assumed by the reinsurance subsidiary from Employers Mutual
amounted to $90.9 million, $77.5 million and $79.5 million in 2016, 2015 and 2014, respectively. Losses and settlement
expenses ceded to Employers Mutual under the inter-company reinsurance program totaled ($467,000), $622,000 and
($720,000) in 2016, 2015 and 2014, 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 $27.4 million, $27.3 million and $25.6 million in 2016, 2015 and
2014, respectively.
The net foreign currency exchange gains assumed by the reinsurance subsidiary from Employers Mutual were $367,000
in 2016, $386,000 in 2015 and $1.0 million in 2014. The total amount of net foreign currency exchange gains assumed by the
reinsurance subsidiary, including the business written on a direct basis outside the quota share agreement, were $356,000 in
2016, $898,000 in 2015 and $2.2 million in 2014.
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 $4.7 million, $3.4 million and $3.5
million in 2016, 2015 and 2014, respectively. Costs allocated to the Company through the operation of the pooling agreement
amounted to $92.3 million, $87.4 million and $76.0 million in 2016, 2015 and 2014, respectively.
Investment expenses are based on actual expenses incurred by the Company and its subsidiaries, 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 $1.4
million, $1.4 million and $1.3 million in 2016, 2015 and 2014, respectively.
113
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.
However, 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, 2016 and 2015, amounts recoverable from nonaffiliated reinsurers (two in 2016 and three in 2015)
totaled $10.4 million and $12.7 million respectively, which represents a significant portion of the total prepaid reinsurance
premiums and reinsurance receivables for losses and settlement expenses. Included in these balances are amounts due from the
MRB underwriting association, of which the Company (through Employers Mutual) is a member with other unaffiliated
reinsurers. All members of MRB have joint and several liability for MRB's obligations. Also included in these balances is the
property and casualty insurance subsidiaries’ aggregate pool participation percentage of amounts ceded by Employers Mutual
to organizations on a mandatory basis. Credit risk associated with these amounts are minimal, as all companies participating in
the organizations are responsible for the liabilities of the organizations on a pro rata basis.
The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the three
years ended December 31, 2016 is presented below. The classification of the assumed and ceded reinsurance amounts between
affiliates and nonaffiliates is based on the participants in the underlying reinsurance agreements, and is intended to provide an
understanding of the actual source of the reinsurance activities. This presentation differs from the classifications used in the
consolidated financial statements, where all amounts flowing through the pooling and quota share agreements and inter-
company reinsurance programs with Employers Mutual are reported as “affiliated” balances.
($ in thousands)
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
114
Year ended December 31, 2016
Property and
casualty
insurance
Reinsurance
Total
$
383,811
$
— $
4,544
491,315
(24,346)
(391,651)
463,673
382,300
4,444
483,759
(23,896)
(390,140)
456,467
$
$
$
146,236
—
(10,126)
(5,080)
131,030
$
— $
148,851
—
(7,830)
(5,080)
135,941
$
229,859
$
— $
2,712
304,007
(4,891)
(237,318)
294,369
93,306
1,811
(3,056)
467
$
92,528
$
$
$
$
$
$
383,811
150,780
491,315
(34,472)
(396,731)
594,703
382,300
153,295
483,759
(31,726)
(395,220)
592,408
229,859
96,018
305,818
(7,947)
(236,851)
386,897
($ in thousands)
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, 2015
Property and
casualty
insurance
Reinsurance
Total
$
$
$
$
$
$
370,955
4,392
474,323
(24,281)
(370,955)
454,434
366,752
4,240
466,966
(24,009)
(366,752)
447,197
198,504
2,407
294,324
(4,848)
(198,504)
291,883
$
$
$
$
$
$
— $
138,700
—
(3,369)
(10,827)
124,504
$
— $
139,839
—
(5,943)
(10,827)
123,069
$
— $
83,515
857
(4,897)
(622)
78,853
$
370,955
143,092
474,323
(27,650)
(381,782)
578,938
366,752
144,079
466,966
(29,952)
(377,579)
570,266
198,504
85,922
295,181
(9,745)
(199,126)
370,736
115
($ in thousands)
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, 2014
Property and
casualty
insurance
Reinsurance
Total
$
367,732
$
— $
3,955
455,183
(25,431)
(367,732)
433,707
$
143,564
—
(14,322)
(10,339)
118,903
$
372,658
$
— $
3,787
443,440
(24,846)
(372,658)
422,381
$
144,439
—
(15,759)
(10,339)
118,341
$
227,382
$
— $
2,201
304,579
(8,747)
(227,382)
298,033
96,281
1,278
(10,838)
720
$
87,441
$
$
$
$
$
$
367,732
147,519
455,183
(39,753)
(378,071)
552,610
372,658
148,226
443,440
(40,605)
(382,997)
540,722
227,382
98,482
305,857
(19,585)
(226,662)
385,474
•
•
•
•
•
“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.
“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 1) reinsurance business that is ceded to other insurance companies in connection with
“fronting” activities initiated by Employers Mutual, and 2) starting in 2016, amounts ceded to purchase additional
reinsurance protection from external parties for the assumed reinsurance business.
“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 and amounts ceded to Employers Mutual under the
terms of the inter-company reinsurance program. For the reinsurance subsidiary this line represents amounts ceded to
Employers Mutual under the terms of the inter-company reinsurance program.
116
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.
($ in thousands)
Gross reserves at beginning of year
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
Net reserves at end of year
Plus ceded reserves at end of year
Re-valuation due to foreign currency exchange rates
Gross reserves at end of year
$
$
Year ended December 31,
2016
2015
2014
$
610,181
$
678,774
(2,475)
23,477
657,772
427,838
(40,941)
386,897
172,652
200,236
372,888
661,309
(2,061)
28,253
635,117
405,850
(35,114)
370,736
154,958
193,123
348,081
671,781
20,664
(1,913)
690,532
$
657,772
23,477
(2,475)
678,774
$
333
30,118
579,730
406,266
(20,792)
385,474
162,905
167,182
330,087
635,117
28,253
(2,061)
661,309
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. 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 (no impact on earnings). The result is an approximation of the implied amounts of favorable
development that had an impact on earnings.
($ in thousands)
Year ended December 31,
2016
2015
2014
Reported amount of favorable development experienced on prior
years' reserves
Adjustment for favorable (adverse) 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
$
$
(40,941) $
(35,114) $
(20,792)
5,592
(618)
2,151
(35,349) $
(35,732) $
(18,641)
117
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.
During the third quarter of 2016, management implemented a new reserving methodology for the determination of direct
bulk reserves in the property and casualty insurance segment. The new methodology, which is referred to as the accident year
ultimate estimate approach, better conforms to industry practices and will provide increased transparency of the drivers of the
property and casualty insurance segment's performance. In connection with this change in reserving methodology, there was a
reallocation of IBNR loss and allocated settlement expense reserves from prior accident years to the current accident year in
multiple lines of business. This change resulted in the movement of approximately $5.6 million of reserves from prior accident
years to the current accident year that is reported as favorable development; however, this development is "mechanical in
nature", and did not have an impact on earnings because the total amount of carried reserves did not change.
Changes in reserve estimates are reflected in net income 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, 1) the overall
expectation is that, more often than not, favorable development will occur as the prior accident years’ reserves run off, and 2)
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 any impact on earnings.
2016 Development
For the property and casualty insurance segment, the December 31, 2016 estimate of loss and settlement expense
reserves for accident years 2015 and prior decreased $30.0 million from the estimate at December 31, 2015. This decrease
represents 6.2 percent of the December 31, 2015 gross carried reserves and is primarily attributed to a significant amount of
favorable reserve development experienced in the workers' compensation and other liability lines of business. The favorable
development in the workers' compensation line of business was generated from a change in assumptions due to better than
expected loss frequency for accident year 2015 and loss severity for the most recent accident years. The favorable development
in the other liability line of business was generated from a change in assumptions due to better than expected loss severity.
For the reinsurance segment, the December 31, 2016 estimate of loss and settlement expense reserves for accident years
2015 and prior decreased $10.9 million from the estimate at December 31, 2015. This decrease represents 5.5 percent of the
December 31, 2015 gross carried reserves and is primarily attributed to favorable development in the 2015 accident year in the
HORAD pro rata line of business, and an increase in the amount of negative bulk IBNR loss reserve carried on prior years'
reserves in the MRB book of business.
During 2016, the expected loss ratios utilized for prior contract years remained unchanged, except for ocean marine pro
rata business. The expected loss ratios associated with this contract type were decreased in contract years 2012, 2014 and 2015
from the ratios utilized during 2015. Additionally, the expected loss ratio for contract year 2013 was increased slightly relative
to the 2015 value. These changes were made in response to reserving information supplied by the ceding company, a large
writer of ocean marine pro rata business.
2015 Development
For the property and casualty insurance segment, the December 31, 2015 estimate of loss and settlement expense
reserves for accident years 2014 and prior decreased $13.8 million from the estimate at December 31, 2014. This decrease
represented 3.0 percent of the December 31, 2014 gross carried reserves and was primarily attributed to better than expected
outcomes on claims reported in prior years and favorable development on prior years' settlement expenses. No changes were
made in the key actuarial assumptions utilized to estimate loss and settlement expense reserves during 2015; however, the
accident year allocation factors applied to IBNR loss reserves, bulk case loss reserves and the defense and cost containment
portion of settlement expense reserves were revised at December 31, 2015 as part of the annual review. This change resulted in
the movement of $423,000 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.
118
For the reinsurance segment, the December 31, 2015 estimate of loss and settlement expense reserves for accident years
2014 and prior decreased $21.3 million from the estimate at December 31, 2014. This decrease represented 10.8 percent of the
December 31, 2014 gross carried reserves and was attributed to several factors, including adjustments made in the offshore
energy and liability proportional account, a reduction in carried IBNR loss reserves that could no longer be justified and a
negative bulk IBNR loss reserve established for the MRB book of business. No changes were made in the key actuarial
assumptions utilized to estimate loss and settlement expense reserves during 2015; however, the accident year allocation factors
applied to IBNR loss reserves were revised during 2015. This change resulted in the movement of $1.0 million 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.
2014 Development
For the property and casualty insurance segment, the December 31, 2014 estimate of loss and settlement expense
reserves for accident years 2013 and prior decreased $8.1 million from the estimate at December 31, 2013. This decrease
represented 1.9 percent of the December 31, 2013 gross carried reserves and was primarily attributed to better than expected
outcomes on claims reported in prior years and favorable development on prior years' settlement expense reserves. No changes
were made in the key actuarial assumptions utilized to estimate loss and settlement expense reserves during 2014; however, the
accident year allocation factors applied to IBNR loss reserves, bulk case loss reserves and the defense and cost containment
portion of settlement expense reserves were revised at December 31, 2014 as part of the annual review. This change resulted in
the movement of $2.2 million of reserves from the 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, 2014 estimate of loss and settlement expense reserves for accident years
2013 and prior decreased $12.7 million from the estimate at December 31, 2013. This decrease represented 6.9 percent of the
December 31, 2013 gross carried reserves and was largely attributed to reported losses being lower than what was expected as
of December 31, 2014 for accident years 2012 and prior, and a reduction of IBNR loss reserves on older accident years because
the amount previously carried was no longer indicated in the actuarial analysis.
Following is information about reported incurred and paid claims development as of December 31, 2016, net of
reinsurance, as well as cumulative claim frequency and the amount of IBNR loss reserves carried. The information displayed
for assumed reinsurance is restated to reflect all foreign currency denominated transactions on the basis of current (December
31, 2016) exchange rates. The number of reported claims (cumulative claim frequency) for the Company’s direct insurance
business represents the total number of claims reported by the participants in the pooling agreement, and is determined on the
basis of each unique combination of claimant, specific policy coverage, and type of loss. This is in contrast to all other
reported amounts that are stated at the aggregate 30 percent pool participation percentage of the Company's property and
casualty insurance subsidiaries. The cumulative claim frequency for the Company’s assumed reinsurance business is not
readily available. Consistent with industry practices, bordereauxs on pro rata accounts often exclude claim frequency
information, and if it is included, the level of detail provided by the ceding companies can vary significantly. Excess of loss
contracts customarily report total losses subject to the treaty without detailed loss listings.
119
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
f
o
s
A
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
e
r
r
u
c
n
I
e
c
n
a
r
u
s
n
i
y
t
i
l
i
b
a
i
l
o
t
u
a
l
a
i
c
r
e
m
m
o
C
)
s
d
n
a
s
u
o
h
t
n
i
$
(
9
8
2
,
2
1
1
1
5
,
1
1
1
8
4
,
0
1
1
9
3
,
1
1
3
6
7
,
1
1
0
4
9
,
1
1
8
2
6
,
3
1
9
2
0
,
5
1
8
7
3
,
6
1
8
9
5
,
5
1
d
e
t
i
d
u
A
e
v
i
t
a
l
u
m
u
C
f
o
r
e
b
m
u
n
d
e
t
r
o
p
e
r
s
m
i
a
l
c
d
e
t
i
d
u
A
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
6
4
2
4
1
)
1
(
0
3
)
8
0
3
(
)
4
5
4
(
8
0
0
,
2
8
0
6
,
4
7
8
4
,
1
1
R
N
B
I
s
e
v
r
e
s
e
r
d
e
i
r
r
a
c
9
5
0
,
8
8
3
$
l
a
t
o
T
8
6
7
,
6
2
5
5
6
,
4
2
6
6
1
,
6
2
5
3
6
,
1
3
3
9
6
,
7
3
6
3
3
,
2
4
5
5
4
,
1
5
4
2
8
,
7
5
8
6
4
,
9
5
1
4
7
,
6
2
0
3
7
,
4
2
9
7
4
,
6
2
4
1
9
,
1
3
1
8
6
,
7
3
6
8
0
,
2
4
8
9
9
,
9
4
3
8
8
,
3
5
8
7
8
,
6
2
4
7
8
,
4
2
2
5
2
,
6
2
1
6
9
,
1
3
8
9
0
,
7
3
2
8
3
,
0
4
2
4
3
,
0
5
3
2
9
,
6
2
6
8
9
,
4
2
1
0
4
,
6
2
8
9
0
,
1
3
5
3
2
,
4
3
5
6
2
,
7
3
6
8
8
,
6
2
0
7
3
,
5
2
8
7
4
,
6
2
0
9
7
,
9
2
8
6
7
,
2
3
8
6
9
,
7
2
7
6
6
,
6
2
0
8
4
,
7
2
5
7
7
,
2
3
3
3
4
,
9
2
3
2
9
,
7
2
7
7
3
,
0
3
2
8
0
,
0
3
3
7
9
,
8
2
8
9
8
,
9
2
$
9
5
0
,
0
3
$
4
5
0
,
0
3
$
0
2
1
,
0
3
$
3
6
2
,
0
3
$
3
1
5
,
0
3
$
0
5
8
,
0
3
$
4
6
2
,
2
3
$
5
8
0
,
3
3
$
0
7
2
,
2
3
$
1
9
3
,
9
2
$
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
3
7
7
,
7
8
2
$
l
a
t
o
T
)
4
3
(
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
7
0
0
2
e
r
o
f
e
b
s
e
i
t
i
l
i
b
a
i
l
g
n
i
d
n
a
t
s
t
u
o
l
l
A
2
5
2
,
0
0
1
$
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
n
a
s
e
s
s
o
l
r
o
f
y
t
i
l
i
b
a
i
L
0
5
7
,
6
2
8
0
6
,
4
2
9
3
0
,
6
2
3
9
2
,
0
3
6
0
4
,
5
3
2
3
2
,
6
3
3
3
4
,
7
3
4
2
4
,
7
2
3
8
5
,
3
1
8
4
6
,
6
2
3
9
5
,
4
2
8
5
5
,
5
2
1
2
1
,
9
2
6
3
6
,
2
3
7
9
9
,
9
2
6
4
7
,
5
2
6
3
3
,
3
1
7
2
5
,
6
2
5
9
4
,
4
2
4
7
6
,
4
2
8
9
5
,
6
2
3
2
0
,
6
2
5
7
9
,
9
1
9
6
0
,
2
1
6
0
3
,
6
2
1
0
0
,
4
2
7
4
5
,
3
2
6
0
2
,
2
2
8
9
3
,
9
1
9
2
7
,
8
5
1
2
,
5
2
2
3
5
,
1
2
4
7
2
,
9
1
5
7
8
,
4
1
0
3
8
,
8
4
4
1
,
3
2
9
5
3
,
7
1
8
7
2
,
3
1
1
0
8
,
6
4
0
2
,
9
1
7
5
9
,
2
1
5
2
0
,
7
2
5
9
,
6
7
3
4
,
3
1
1
5
5
,
6
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
i
a
p
e
v
i
t
a
l
u
m
u
C
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
5
0
0
,
0
3
$
8
9
9
,
9
2
$
9
8
9
,
9
2
$
3
9
9
,
9
2
$
9
3
2
,
9
2
$
1
4
2
,
8
2
$
8
2
9
,
5
2
$
0
0
6
,
1
2
$
1
3
2
,
4
1
$
0
8
1
,
6
$
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
120
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
f
o
s
A
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
e
r
r
u
c
n
I
e
c
n
a
r
u
s
n
i
y
t
r
e
p
o
r
p
l
a
i
c
r
e
m
m
o
C
)
s
d
n
a
s
u
o
h
t
n
i
$
(
3
3
9
,
1
1
5
9
7
,
5
1
5
3
6
,
4
1
7
6
2
,
6
1
3
9
4
,
9
1
9
3
0
,
6
1
2
8
9
,
5
1
2
0
7
,
6
1
3
5
2
,
4
1
6
3
6
,
3
1
d
e
t
i
d
u
A
e
v
i
t
a
l
u
m
u
C
f
o
r
e
b
m
u
n
d
e
t
r
o
p
e
r
s
m
i
a
l
c
d
e
t
i
d
u
A
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
1
)
0
5
(
)
6
4
4
(
)
3
(
5
9
)
7
2
(
)
5
3
(
)
6
1
1
(
)
9
8
2
(
9
3
3
R
N
B
I
s
e
v
r
e
s
e
r
d
e
i
r
r
a
c
9
4
1
,
7
8
4
$
l
a
t
o
T
7
0
7
,
2
4
0
2
0
,
6
3
8
2
4
,
9
3
5
7
3
,
8
5
6
6
5
,
6
4
0
7
0
,
3
5
2
6
6
,
0
6
8
9
7
,
6
5
8
0
7
,
9
5
5
6
7
,
2
4
6
5
0
,
6
3
9
7
3
,
9
3
3
0
7
,
7
5
3
7
2
,
6
4
1
1
5
,
2
5
0
9
9
,
0
6
8
0
5
,
5
5
4
8
7
,
2
4
6
2
9
,
5
3
4
5
1
,
9
3
9
2
6
,
7
5
3
1
3
,
5
4
6
7
9
,
0
5
8
1
0
,
0
6
9
4
6
,
2
4
2
2
6
,
5
3
1
7
0
,
9
3
1
7
2
,
7
5
7
5
1
,
4
4
6
6
2
,
0
5
2
6
5
,
2
4
1
8
8
,
5
3
0
7
7
,
8
3
4
1
6
,
7
5
5
3
5
,
1
4
2
2
4
,
2
4
5
8
9
,
5
3
0
5
6
,
8
3
0
3
9
,
8
5
5
4
6
,
2
4
3
0
0
,
6
3
2
2
4
,
0
4
0
7
8
,
2
4
1
1
5
,
9
3
9
5
5
,
8
4
$
5
1
8
,
3
3
$
1
1
8
,
3
3
$
8
2
9
,
3
3
$
2
9
8
,
3
3
$
6
9
8
,
3
3
$
8
5
8
,
3
3
$
7
7
8
,
3
3
$
0
7
0
,
4
3
$
6
6
1
,
5
3
$
3
9
2
,
8
3
$
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
8
7
8
,
6
5
4
$
l
a
t
o
T
0
0
1
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
7
0
0
2
e
r
o
f
e
b
s
e
i
t
i
l
i
b
a
i
l
g
n
i
d
n
a
t
s
t
u
o
l
l
A
1
7
3
,
0
3
$
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
n
a
s
e
s
s
o
l
r
o
f
y
t
i
l
i
b
a
i
L
5
5
7
,
2
4
3
9
8
,
5
3
8
1
3
,
9
3
7
0
6
,
7
5
0
7
2
,
6
4
7
5
4
,
1
5
5
4
0
,
8
5
8
6
0
,
0
5
2
5
6
,
1
4
5
5
7
,
2
4
9
4
8
,
5
3
4
1
3
,
9
3
5
6
0
,
7
5
3
4
5
,
4
4
0
6
4
,
0
5
9
7
6
,
5
5
8
0
2
,
7
3
1
9
6
,
2
4
3
0
8
,
5
3
1
0
9
,
8
3
9
4
2
,
6
5
8
2
6
,
3
4
3
8
6
,
7
4
2
2
0
,
3
4
7
0
6
,
2
4
3
0
8
,
5
3
6
2
9
,
7
3
3
0
8
,
4
5
2
6
8
,
1
4
5
5
5
,
6
3
1
7
0
,
2
4
2
2
4
,
5
3
1
3
9
,
6
3
6
2
2
,
3
5
9
7
8
,
2
3
1
9
9
,
1
4
4
2
6
,
4
3
0
3
7
,
5
3
4
2
5
,
1
4
8
6
8
,
1
4
2
0
6
,
2
3
2
3
0
,
8
2
3
0
6
,
0
4
1
2
3
,
5
2
4
1
5
,
1
3
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
i
a
p
e
v
i
t
a
l
u
m
u
C
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
3
1
8
,
3
3
$
0
0
8
,
3
3
$
4
1
9
,
3
3
$
8
7
8
,
3
3
$
7
5
8
,
3
3
$
9
0
8
,
3
3
$
6
5
6
,
3
3
$
4
0
4
,
3
3
$
7
9
7
,
2
3
$
3
7
8
,
4
2
$
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
121
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
f
o
s
A
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
e
r
r
u
c
n
I
e
c
n
a
r
u
s
n
i
n
o
i
t
a
s
n
e
p
m
o
c
'
s
r
e
k
r
o
W
)
s
d
n
a
s
u
o
h
t
n
i
$
(
2
1
3
,
2
2
4
1
6
,
1
2
3
3
2
,
9
1
1
1
6
,
9
1
2
6
5
,
9
1
7
5
3
,
9
1
4
1
8
,
9
1
0
9
3
,
9
1
3
8
9
,
8
1
4
6
7
,
7
1
d
e
t
i
d
u
A
e
v
i
t
a
l
u
m
u
C
f
o
r
e
b
m
u
n
d
e
t
r
o
p
e
r
s
m
i
a
l
c
d
e
t
i
d
u
A
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
5
4
8
9
7
1
,
1
8
9
9
3
8
3
,
1
9
4
6
,
1
6
5
1
,
2
9
3
6
,
2
0
8
6
,
2
5
8
4
,
3
8
2
2
,
7
1
R
N
B
I
s
e
v
r
e
s
e
r
d
e
i
r
r
a
c
9
6
5
,
7
6
4
$
l
a
t
o
T
3
4
9
,
2
4
4
7
7
,
2
4
5
4
1
,
9
4
5
9
6
,
3
4
8
8
0
,
5
4
2
0
1
,
6
4
2
7
4
,
7
4
9
1
9
,
8
4
2
3
8
,
7
5
7
3
7
,
3
4
4
2
7
,
3
4
9
6
0
,
0
5
7
2
4
,
4
4
8
2
9
,
6
4
6
4
9
,
8
4
3
7
9
,
0
5
0
6
9
,
4
5
1
0
3
,
3
4
0
9
5
,
3
4
1
5
8
,
9
4
6
0
5
,
4
4
6
5
7
,
7
4
7
3
6
,
1
5
5
1
5
,
1
5
8
3
3
,
3
4
3
9
0
,
4
4
6
0
9
,
9
4
9
0
7
,
4
4
4
9
0
,
0
5
1
4
1
,
2
5
6
6
7
,
3
4
1
4
0
,
4
4
7
5
0
,
0
5
4
2
7
,
6
4
9
9
0
,
1
5
6
5
1
,
3
4
8
9
0
,
4
4
6
3
3
,
9
4
6
3
8
,
7
4
3
1
1
,
4
4
5
3
3
,
3
4
8
2
3
,
6
4
0
4
2
,
6
4
0
3
1
,
6
4
7
7
5
,
9
4
$
9
9
5
,
3
4
$
3
5
3
,
4
4
$
5
2
3
,
4
4
$
2
7
3
,
4
4
$
3
7
3
,
4
4
$
1
8
9
,
4
4
$
8
8
8
,
4
4
$
7
4
7
,
4
4
$
2
3
8
,
5
4
$
5
8
2
,
3
4
$
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
8
1
1
,
9
5
3
$
l
a
t
o
T
1
3
3
,
8
2
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
7
0
0
2
e
r
o
f
e
b
s
e
i
t
i
l
i
b
a
i
l
g
n
i
d
n
a
t
s
t
u
o
l
l
A
2
8
7
,
6
3
1
$
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
n
a
s
e
s
s
o
l
r
o
f
y
t
i
l
i
b
a
i
L
9
9
0
,
9
3
3
8
5
,
9
3
4
1
6
,
3
4
7
3
4
,
8
3
6
5
4
,
9
3
7
0
9
,
7
3
3
8
8
,
5
3
3
2
0
,
9
2
3
7
4
,
5
1
4
5
6
,
8
3
7
6
1
,
9
3
1
5
6
,
2
4
7
2
0
,
7
3
7
0
3
,
7
3
1
6
0
,
5
3
4
9
8
,
8
2
6
5
9
,
4
1
8
3
9
,
7
3
9
2
3
,
8
3
7
3
4
,
1
4
5
9
2
,
5
3
3
4
9
,
3
3
9
1
2
,
9
2
2
9
6
,
4
1
0
7
2
,
7
3
9
0
4
,
7
3
1
0
0
,
9
3
7
3
2
,
2
3
9
0
1
,
8
2
7
1
9
,
4
1
4
2
0
,
6
3
3
6
3
,
5
3
9
2
0
,
5
3
1
9
2
,
6
2
5
1
0
,
4
1
2
0
3
,
4
3
2
0
8
,
1
3
4
7
0
,
8
2
1
9
2
,
3
1
0
1
1
,
1
3
7
5
1
,
5
2
7
3
2
,
4
1
4
1
2
,
5
2
9
7
8
,
1
1
2
3
4
,
2
1
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
i
a
p
e
v
i
t
a
l
u
m
u
C
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
3
4
6
,
0
4
$
1
5
2
,
0
4
$
8
2
6
,
9
3
$
6
1
9
,
8
3
$
8
1
8
,
7
3
$
8
3
3
,
6
3
$
1
6
0
,
4
3
$
0
0
6
,
0
3
$
4
6
1
,
4
2
$
2
9
5
,
1
1
$
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
122
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
f
o
s
A
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
e
r
r
u
c
n
I
e
c
n
a
r
u
s
n
i
y
t
i
l
i
b
a
i
l
r
e
h
t
O
)
s
d
n
a
s
u
o
h
t
n
i
$
(
2
4
4
,
0
1
1
4
9
,
0
1
6
2
8
,
9
9
2
1
,
0
1
9
6
9
,
9
0
1
0
,
0
1
4
0
5
,
0
1
1
9
6
,
0
1
4
7
0
,
0
1
2
1
6
,
8
d
e
t
i
d
u
A
e
v
i
t
a
l
u
m
u
C
f
o
r
e
b
m
u
n
d
e
t
r
o
p
e
r
s
m
i
a
l
c
d
e
t
i
d
u
A
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
2
3
6
6
5
0
,
1
7
7
2
,
1
3
7
2
,
1
0
0
7
,
1
0
5
4
,
1
7
5
9
,
6
4
1
6
,
6
3
3
5
,
5
1
5
4
3
,
4
2
R
N
B
I
s
e
v
r
e
s
e
r
d
e
i
r
r
a
c
7
1
5
,
9
0
4
$
l
a
t
o
T
1
9
4
,
5
3
1
2
5
,
2
3
6
5
5
,
4
3
2
5
4
,
2
3
3
9
0
,
7
3
7
8
1
,
2
4
1
0
6
,
2
5
3
5
5
,
7
4
2
5
0
,
9
5
8
2
5
,
5
3
4
8
3
,
2
3
5
5
6
,
4
3
9
4
6
,
3
3
5
7
2
,
0
4
4
4
5
,
2
4
3
0
4
,
4
5
1
2
2
,
4
5
5
0
3
,
6
3
7
2
8
,
2
3
7
3
1
,
6
3
7
7
1
,
5
3
9
3
1
,
1
4
7
3
8
,
3
4
2
8
3
,
1
6
5
0
0
,
7
3
4
1
6
,
5
3
9
2
8
,
8
3
5
2
1
,
5
3
1
8
0
,
2
4
4
7
9
,
7
4
5
5
7
,
8
3
3
6
2
,
4
3
5
5
6
,
4
3
2
8
9
,
2
4
1
6
6
,
2
4
9
8
6
,
4
3
0
5
6
,
7
3
3
1
2
,
6
3
0
9
4
,
4
4
7
7
8
,
8
3
8
0
9
,
9
3
4
2
6
,
1
4
5
0
0
,
0
4
7
9
4
,
4
4
7
2
3
,
6
4
$
1
1
0
,
6
3
$
4
9
1
,
6
3
$
9
9
3
,
6
3
$
5
2
7
,
6
3
$
5
8
1
,
6
3
$
8
4
1
,
6
3
$
5
3
5
,
6
3
$
4
4
9
,
5
3
$
1
4
4
,
0
4
$
6
2
4
,
7
4
$
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
2
9
7
,
9
5
2
$
l
a
t
o
T
6
5
0
,
4
1
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
7
0
0
2
e
r
o
f
e
b
s
e
i
t
i
l
i
b
a
i
l
g
n
i
d
n
a
t
s
t
u
o
l
l
A
1
8
7
,
3
6
1
$
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
n
a
s
e
s
s
o
l
r
o
f
y
t
i
l
i
b
a
i
L
2
6
1
,
3
3
6
7
1
,
0
3
1
1
7
,
0
3
8
2
2
,
8
2
1
5
6
,
9
2
2
4
6
,
7
2
6
0
5
,
7
2
8
8
5
,
1
1
3
0
4
,
6
3
6
8
,
2
3
2
2
7
,
9
2
8
8
6
,
9
2
7
4
6
,
5
2
5
9
0
,
5
2
2
2
1
,
1
2
7
6
2
,
7
1
1
3
3
,
4
4
1
5
,
2
3
2
7
1
,
8
2
2
1
6
,
7
2
4
5
1
,
2
2
1
6
6
,
9
1
4
9
8
,
1
1
0
3
6
,
5
0
7
2
,
1
3
5
5
2
,
6
2
2
3
7
,
1
2
8
0
3
,
7
1
1
5
8
,
2
1
4
1
4
,
4
6
7
4
,
8
2
6
7
2
,
2
2
1
4
0
,
5
1
2
7
5
,
0
1
0
2
7
,
4
9
3
1
,
4
2
8
1
7
,
6
1
5
1
3
,
8
0
3
7
,
4
5
2
5
,
6
1
7
0
7
,
0
1
3
0
4
,
3
4
9
2
,
3
3
4
4
,
0
1
9
9
2
,
4
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
i
a
p
e
v
i
t
a
l
u
m
u
C
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
5
2
7
,
4
3
$
6
9
0
,
4
3
$
2
8
1
,
3
3
$
5
0
6
,
1
3
$
4
3
2
,
0
3
$
3
8
3
,
8
2
$
3
9
8
,
3
2
$
1
7
9
,
7
1
$
6
6
9
,
9
$
5
0
5
,
3
$
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
123
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
f
o
s
A
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
e
r
r
u
c
n
I
e
c
n
a
r
u
s
n
i
y
t
i
l
i
b
a
i
l
o
t
u
a
l
a
n
o
s
r
e
P
)
s
d
n
a
s
u
o
h
t
n
i
$
(
7
3
7
,
6
1
8
7
,
6
3
2
5
,
7
9
2
4
,
7
0
5
0
,
8
1
7
8
,
7
2
3
2
,
7
4
0
3
,
6
2
4
6
,
5
3
4
4
,
4
d
e
t
i
d
u
A
e
v
i
t
a
l
u
m
u
C
f
o
r
e
b
m
u
n
d
e
t
r
o
p
e
r
s
m
i
a
l
c
d
e
t
i
d
u
A
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
1
2
1
5
4
2
1
3
)
7
9
(
)
0
3
(
3
1
2
1
1
3
1
2
7
9
9
R
N
B
I
s
e
v
r
e
s
e
r
d
e
i
r
r
a
c
2
6
9
,
9
8
$
l
a
t
o
T
2
6
8
,
7
5
2
3
,
9
6
7
6
,
9
1
1
3
,
9
7
3
5
,
0
1
5
8
0
,
0
1
1
3
3
,
9
8
3
6
,
8
4
0
4
,
7
3
3
8
,
7
9
3
3
,
9
6
5
6
,
9
0
6
4
,
9
1
3
7
,
0
1
6
7
3
,
0
1
1
3
6
,
9
9
1
1
,
9
6
7
8
,
7
2
8
3
,
9
0
0
7
,
9
2
3
4
,
9
3
2
0
,
1
1
4
8
3
,
0
1
3
7
5
,
0
1
9
0
9
,
7
3
5
3
,
9
8
9
6
,
9
1
3
3
,
9
6
5
7
,
0
1
2
9
4
,
0
1
4
9
0
,
8
6
8
3
,
9
6
3
7
,
9
8
8
3
,
9
7
1
9
,
0
1
8
9
0
,
8
2
5
4
,
9
1
5
8
,
9
1
4
7
,
9
1
2
1
,
8
3
5
6
,
9
5
1
8
,
9
1
2
2
,
8
8
6
1
,
0
1
4
2
0
,
9
$
3
9
7
,
7
$
2
8
7
,
7
$
4
9
7
,
7
$
4
1
8
,
7
$
9
3
8
,
7
$
6
6
8
,
7
$
3
2
9
,
7
$
7
0
1
,
8
$
7
3
3
,
8
$
6
1
6
,
8
$
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
9
5
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
7
0
0
2
e
r
o
f
e
b
s
e
i
t
i
l
i
b
a
i
l
g
n
i
d
n
a
t
s
t
u
o
l
l
A
0
0
0
,
9
$
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
n
a
s
e
s
s
o
l
r
o
f
y
t
i
l
i
b
a
i
L
5
0
8
,
7
8
7
2
,
9
2
3
6
,
9
3
5
1
,
9
8
4
6
,
9
5
5
7
,
7
9
2
2
,
6
5
0
5
,
3
4
4
2
,
0
1
9
0
8
,
7
4
0
2
,
9
2
6
5
,
9
8
3
0
,
9
1
7
8
,
9
5
8
9
,
8
2
9
3
,
6
0
0
8
,
3
1
2
0
,
1
8
$
l
a
t
o
T
0
1
8
,
7
4
9
1
,
9
1
0
4
,
9
3
8
8
,
8
1
9
0
,
9
1
2
5
,
7
0
7
9
,
3
4
9
7
,
7
9
4
0
,
9
8
0
1
,
9
9
2
1
,
8
9
3
4
,
7
7
7
3
,
4
8
5
5
,
7
5
0
9
,
8
0
5
2
,
8
2
4
8
,
6
9
7
7
,
4
1
9
2
,
7
6
6
9
,
7
6
6
6
,
6
0
5
9
,
3
3
4
7
,
6
3
9
3
,
6
8
8
9
,
3
8
9
7
,
5
4
6
5
,
3
6
9
0
,
3
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
i
a
p
e
v
i
t
a
l
u
m
u
C
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
2
7
7
,
7
$
2
7
7
,
7
$
2
7
7
,
7
$
6
5
7
,
7
$
7
9
6
,
7
$
7
9
4
,
7
$
4
3
1
,
7
$
6
9
6
,
6
$
5
5
3
,
5
$
3
4
2
,
3
$
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
124
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
f
o
s
A
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
e
r
r
u
c
n
I
e
c
n
a
r
u
s
n
i
s
r
e
n
w
o
e
m
o
H
)
s
d
n
a
s
u
o
h
t
n
i
$
(
8
0
2
,
9
4
6
9
,
2
1
5
7
4
,
1
1
2
3
1
,
2
1
7
5
2
,
4
1
8
0
1
,
0
1
3
8
6
,
8
6
1
4
,
7
7
0
9
,
5
3
5
8
,
6
d
e
t
i
d
u
A
e
v
i
t
a
l
u
m
u
C
f
o
r
e
b
m
u
n
d
e
t
r
o
p
e
r
s
m
i
a
l
c
)
6
(
—
—
)
6
1
(
5
4
)
9
(
0
6
9
3
7
3
)
8
3
(
d
e
t
i
d
u
A
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
R
N
B
I
s
e
v
r
e
s
e
r
d
e
i
r
r
a
c
$
2
1
3
,
2
1
$
2
2
3
,
2
1
$
4
1
3
,
2
1
$
2
2
3
,
2
1
$
5
9
2
,
2
1
$
7
1
3
,
2
1
$
3
3
3
,
2
1
$
2
3
3
,
2
1
$
5
2
5
,
2
1
$
3
8
2
,
4
1
$
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
2
2
3
,
7
5
1
$
l
a
t
o
T
8
0
9
,
9
1
4
6
4
,
6
1
6
4
1
,
7
1
5
1
4
,
3
2
2
9
8
,
6
1
4
8
7
,
4
1
7
4
4
,
3
1
3
5
1
,
1
1
1
0
8
,
1
1
1
0
9
,
9
1
5
6
4
,
6
1
9
2
1
,
7
1
8
4
4
,
3
2
9
2
9
,
6
1
5
8
6
,
4
1
8
2
3
,
3
1
3
3
2
,
1
1
6
8
8
,
9
1
4
9
3
,
6
1
3
9
0
,
7
1
9
0
3
,
3
2
6
3
8
,
6
1
3
3
8
,
4
1
8
2
2
,
3
1
6
8
8
,
9
1
2
5
3
,
6
1
3
5
0
,
7
1
5
7
9
,
2
2
6
9
4
,
6
1
4
4
8
,
4
1
5
0
9
,
9
1
9
7
3
,
6
1
4
7
0
,
7
1
9
8
3
,
3
2
7
5
0
,
6
1
4
2
9
,
9
1
7
6
4
,
6
1
3
2
5
,
7
1
0
3
5
,
4
2
4
9
8
,
9
1
6
0
6
,
6
1
5
7
8
,
7
1
2
2
2
,
0
2
9
0
1
,
8
1
6
3
7
,
2
2
7
7
8
,
4
5
1
$
l
a
t
o
T
—
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
7
0
0
2
e
r
o
f
e
b
s
e
i
t
i
l
i
b
a
i
l
g
n
i
d
n
a
t
s
t
u
o
l
l
A
5
4
4
,
2
$
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
n
a
s
e
s
s
o
l
r
o
f
y
t
i
l
i
b
a
i
L
8
0
9
,
9
1
4
6
4
,
6
1
0
3
1
,
7
1
0
7
3
,
3
2
9
5
8
,
6
1
1
8
6
,
4
1
5
1
2
,
3
1
6
5
4
,
0
1
3
7
5
,
0
1
2
0
9
,
9
1
1
2
4
,
6
1
8
2
1
,
7
1
3
0
4
,
3
2
3
9
7
,
6
1
1
2
6
,
4
1
5
2
0
,
3
1
0
5
6
,
8
3
0
9
,
9
1
5
1
3
,
6
1
8
2
1
,
7
1
6
3
1
,
3
2
2
8
5
,
6
1
5
8
2
,
4
1
5
6
0
,
1
1
2
0
9
,
9
1
8
8
2
,
6
1
1
1
0
,
7
1
7
3
7
,
2
2
3
8
2
,
6
1
5
3
7
,
1
1
1
9
8
,
9
1
6
4
2
,
6
1
9
0
9
,
6
1
1
2
4
,
2
2
9
5
7
,
3
1
7
8
7
,
9
1
5
3
1
,
6
1
3
3
6
,
6
1
8
2
8
,
9
1
0
5
5
,
9
1
5
8
8
,
5
1
7
5
4
,
3
1
5
8
3
,
9
1
5
4
6
,
2
1
2
4
6
,
5
1
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
i
a
p
e
v
i
t
a
l
u
m
u
C
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
1
2
2
,
2
1
$
1
2
2
,
2
1
$
0
2
2
,
2
1
$
9
1
2
,
2
1
$
8
5
1
,
2
1
$
3
3
1
,
2
1
$
6
2
1
,
2
1
$
7
6
0
,
2
1
$
5
0
6
,
1
1
$
4
6
1
,
9
$
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
125
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
f
o
s
A
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
e
r
r
u
c
n
I
e
c
n
a
r
u
s
n
i
e
g
a
m
a
d
l
a
c
i
s
y
h
p
o
t
u
A
)
s
d
n
a
s
u
o
h
t
n
i
$
(
3
7
9
,
5
2
5
3
6
,
8
2
9
1
4
,
9
2
3
1
5
,
1
3
3
9
3
,
4
3
8
9
0
,
1
3
0
4
0
,
1
3
1
7
5
,
1
3
3
3
6
,
0
3
0
6
0
,
9
2
d
e
t
i
d
u
A
e
v
i
t
a
l
u
m
u
C
f
o
r
e
b
m
u
n
d
e
t
r
o
p
e
r
s
m
i
a
l
c
d
e
t
i
d
u
A
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
)
9
(
)
5
1
(
)
5
1
(
)
5
3
(
)
5
2
(
)
4
5
(
)
2
5
(
)
8
9
(
)
7
4
(
)
4
9
2
,
1
(
R
N
B
I
s
e
v
r
e
s
e
r
d
e
i
r
r
a
c
3
0
6
,
0
1
2
$
l
a
t
o
T
0
4
5
,
7
1
7
8
5
,
6
1
8
8
4
,
8
1
7
7
8
,
0
2
1
6
1
,
1
2
1
7
3
,
2
2
4
0
9
,
3
2
2
1
6
,
6
2
0
7
0
,
8
2
8
5
5
,
7
1
2
0
6
,
6
1
2
3
5
,
8
1
5
1
9
,
0
2
3
3
2
,
1
2
6
8
4
,
2
2
5
1
1
,
4
2
0
5
9
,
7
2
2
6
5
,
7
1
5
0
6
,
6
1
7
2
5
,
8
1
7
1
9
,
0
2
3
6
2
,
1
2
3
5
5
,
2
2
7
9
8
,
4
2
7
6
5
,
7
1
3
9
5
,
6
1
9
4
5
,
8
1
9
1
9
,
0
2
2
4
3
,
1
2
7
4
8
,
2
2
8
7
5
,
7
1
9
3
6
,
6
1
8
3
5
,
8
1
3
0
0
,
1
2
9
8
3
,
1
2
4
8
5
,
7
1
0
2
7
,
6
1
7
5
6
,
8
1
5
6
9
,
1
2
8
9
5
,
7
1
4
4
7
,
6
1
9
4
2
,
9
1
3
4
7
,
7
1
7
7
0
,
8
1
9
8
5
,
9
1
$
3
9
9
,
4
1
$
4
0
0
,
5
1
$
0
1
0
,
5
1
$
4
1
0
,
5
1
$
2
2
0
,
5
1
$
3
3
0
,
5
1
$
1
5
0
,
5
1
$
4
3
0
,
5
1
$
8
9
1
,
5
1
$
7
7
1
,
7
1
$
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
8
0
6
,
9
0
2
$
l
a
t
o
T
3
8
9
9
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
7
0
0
2
e
r
o
f
e
b
s
e
i
t
i
l
i
b
a
i
l
g
n
i
d
n
a
t
s
t
u
o
l
l
A
$
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
n
a
s
e
s
s
o
l
r
o
f
y
t
i
l
i
b
a
i
L
5
5
5
,
7
1
1
0
6
,
6
1
1
2
5
,
8
1
0
0
9
,
0
2
6
1
2
,
1
2
7
1
4
,
2
2
7
8
9
,
3
2
8
3
5
,
6
2
1
7
8
,
6
2
7
5
5
,
7
1
2
0
6
,
6
1
8
2
5
,
8
1
2
1
9
,
0
2
7
2
2
,
1
2
3
6
4
,
2
2
0
1
1
,
4
2
3
8
4
,
4
2
0
6
5
,
7
1
3
0
6
,
6
1
3
2
5
,
8
1
4
0
9
,
0
2
6
5
2
,
1
2
2
1
5
,
2
2
3
4
7
,
2
2
4
6
5
,
7
1
2
9
5
,
6
1
0
4
5
,
8
1
2
1
9
,
0
2
8
2
3
,
1
2
4
7
7
,
0
2
7
7
5
,
7
1
6
3
6
,
6
1
9
2
5
,
8
1
4
8
9
,
0
2
9
1
7
,
9
1
0
7
5
,
7
1
7
8
6
,
6
1
7
5
5
,
8
1
9
4
8
,
9
1
7
7
5
,
7
1
1
6
6
,
6
1
3
1
1
,
7
1
2
6
6
,
7
1
6
6
5
,
5
1
1
9
4
,
6
1
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
i
a
p
e
v
i
t
a
l
u
m
u
C
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
2
0
0
,
5
1
$
4
0
0
,
5
1
$
8
0
0
,
5
1
$
2
1
0
,
5
1
$
9
1
0
,
5
1
$
9
2
0
,
5
1
$
3
4
0
,
5
1
$
9
1
0
,
5
1
$
1
1
1
,
5
1
$
2
0
2
,
4
1
$
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
126
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
f
o
s
A
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
e
r
r
u
c
n
I
e
c
n
a
r
u
s
n
i
e
r
a
t
a
r
o
r
p
d
e
m
u
s
s
A
)
s
d
n
a
s
u
o
h
t
n
i
$
(
d
e
t
i
d
u
A
e
v
i
t
a
l
u
m
u
C
f
o
r
e
b
m
u
n
d
e
t
r
o
p
e
r
s
m
i
a
l
c
e
l
b
a
l
i
a
v
a
n
U
d
e
t
i
d
u
A
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
8
6
2
1
2
3
5
9
2
0
5
1
0
3
2
5
0
5
4
6
7
,
2
9
8
0
,
2
2
9
2
,
5
7
3
6
,
7
1
R
N
B
I
s
e
v
r
e
s
e
r
d
e
i
r
r
a
c
9
6
7
,
2
4
2
$
l
a
t
o
T
2
1
7
,
3
2
9
9
8
,
6
1
5
6
0
,
5
1
2
9
7
,
7
2
1
3
2
,
7
1
5
2
3
,
6
2
0
0
5
,
7
2
3
5
9
,
4
3
9
1
5
,
5
3
4
5
6
,
3
2
7
0
9
,
6
1
4
1
1
,
5
1
8
0
8
,
7
2
5
8
7
,
7
1
2
0
9
,
6
2
5
1
2
,
7
2
2
4
1
,
8
3
0
0
5
,
3
2
0
7
9
,
6
1
2
2
3
,
5
1
9
9
3
,
8
2
2
2
4
,
0
2
4
5
5
,
9
2
1
3
9
,
0
3
0
9
6
,
3
2
3
4
1
,
7
1
1
0
5
,
5
1
6
5
1
,
9
2
5
6
8
,
0
2
2
2
0
,
3
2
0
6
5
,
3
2
6
0
3
,
7
1
1
5
1
,
6
1
7
6
5
,
9
2
5
3
7
,
1
2
3
5
0
,
4
2
0
0
1
,
8
1
3
7
7
,
6
1
0
9
8
,
9
2
4
8
6
,
3
2
9
0
0
,
9
1
7
5
3
,
9
1
4
0
0
,
5
2
5
2
6
,
3
2
8
9
6
,
9
2
$
3
7
7
,
7
1
$
8
5
7
,
7
1
$
9
4
8
,
7
1
$
7
6
8
,
7
1
$
9
5
9
,
7
1
$
2
5
1
,
8
1
$
3
2
3
,
8
1
$
5
4
2
,
8
1
$
8
5
7
,
9
1
$
7
0
4
,
6
2
$
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
6
3
2
,
7
8
1
$
l
a
t
o
T
6
2
9
,
2
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
7
0
0
2
e
r
o
f
e
b
s
e
i
t
i
l
i
b
a
i
l
g
n
i
d
n
a
t
s
t
u
o
l
l
A
9
5
4
,
8
5
$
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
n
a
s
e
s
s
o
l
r
o
f
y
t
i
l
i
b
a
i
L
4
8
9
,
2
2
6
4
3
,
6
1
3
8
7
,
4
1
9
3
3
,
7
2
8
7
1
,
6
1
4
6
5
,
0
2
7
9
2
,
0
2
4
9
7
,
1
2
3
1
6
,
9
2
4
8
,
2
2
8
5
1
,
6
1
2
4
7
,
4
1
8
6
2
,
7
2
4
3
8
,
5
1
5
5
4
,
7
1
7
0
9
,
5
1
6
2
5
,
9
9
3
5
,
2
2
0
8
9
,
5
1
3
9
6
,
4
1
3
9
8
,
6
2
9
3
6
,
4
1
1
9
2
,
2
1
0
8
9
,
5
8
8
2
,
2
2
0
2
7
,
5
1
3
8
0
,
4
1
0
9
1
,
6
2
3
3
4
,
2
1
4
3
8
,
3
2
7
8
,
1
2
5
9
1
,
5
1
2
9
6
,
3
1
5
7
5
,
2
2
8
7
3
,
4
7
6
3
,
1
2
7
8
3
,
4
1
4
7
7
,
1
1
9
3
1
,
0
1
8
6
1
,
0
2
1
2
8
,
2
1
5
9
9
,
4
1
7
0
,
6
3
7
9
,
7
1
4
5
1
,
9
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
i
a
p
e
v
i
t
a
l
u
m
u
C
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
8
3
3
,
7
1
$
3
7
2
,
7
1
$
2
2
2
,
7
1
$
7
0
0
,
7
1
$
9
9
8
,
6
1
$
9
8
7
,
6
1
$
4
0
0
,
6
1
$
6
7
9
,
4
1
$
7
4
2
,
3
1
$
7
9
3
,
6
$
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
127
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
f
o
s
A
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
e
r
r
u
c
n
I
e
c
n
a
r
u
s
n
i
e
r
s
s
o
l
f
o
s
s
e
c
x
e
d
e
m
u
s
s
A
)
s
d
n
a
s
u
o
h
t
n
i
$
(
d
e
t
i
d
u
A
e
v
i
t
a
l
u
m
u
C
f
o
r
e
b
m
u
n
d
e
t
r
o
p
e
r
s
m
i
a
l
c
e
l
b
a
l
i
a
v
a
n
U
d
e
t
i
d
u
A
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
5
3
1
,
1
0
9
4
,
1
2
7
8
,
1
1
6
7
,
2
4
5
2
,
3
8
9
5
,
4
9
1
2
,
4
1
1
6
,
6
7
6
1
,
0
1
7
5
4
,
3
2
R
N
B
I
s
e
v
r
e
s
e
r
d
e
i
r
r
a
c
5
6
8
,
1
6
4
$
l
a
t
o
T
1
2
8
,
6
3
6
9
0
,
7
2
4
4
5
,
9
3
4
4
4
,
8
5
0
0
8
,
2
5
1
9
3
,
4
4
7
2
8
,
9
5
2
2
5
,
4
5
6
3
3
,
6
6
6
5
9
,
6
3
7
6
8
,
7
2
8
4
3
,
0
4
5
2
8
,
8
5
2
5
1
,
3
5
6
3
5
,
4
4
6
7
4
,
8
5
6
8
6
,
9
5
3
1
4
,
7
3
7
8
1
,
8
2
2
9
5
,
9
3
8
8
0
,
9
5
7
9
3
,
4
5
8
8
0
,
7
4
9
0
0
,
5
6
9
9
4
,
9
3
1
2
1
,
0
3
3
2
2
,
0
4
2
7
6
,
0
6
1
7
9
,
5
5
3
4
1
,
2
5
1
1
9
,
8
3
0
7
4
,
0
3
5
3
7
,
0
4
4
0
5
,
1
6
4
3
7
,
8
5
4
5
0
,
0
4
1
4
9
,
9
2
3
2
9
,
0
4
7
9
8
,
1
7
9
1
3
,
1
4
5
0
5
,
0
3
7
6
3
,
7
4
3
2
8
,
9
3
9
4
8
,
8
3
6
4
8
,
3
4
$
4
8
0
,
2
2
$
6
3
0
,
2
2
$
2
1
1
,
2
2
$
8
8
5
,
2
2
$
5
3
7
,
2
2
$
5
2
8
,
2
2
$
4
6
0
,
3
2
$
7
6
5
,
6
2
$
9
9
8
,
5
2
$
6
4
2
,
1
3
$
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
4
1
6
,
1
4
3
$
l
a
t
o
T
2
4
1
,
9
1
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
7
0
0
2
e
r
o
f
e
b
s
e
i
t
i
l
i
b
a
i
l
g
n
i
d
n
a
t
s
t
u
o
l
l
A
3
9
3
,
9
3
1
$
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
n
a
s
e
s
s
o
l
r
o
f
y
t
i
l
i
b
a
i
L
4
5
5
,
3
3
7
8
9
,
2
2
6
0
3
,
5
3
7
5
6
,
3
5
5
1
1
,
5
4
2
3
2
,
7
3
4
0
6
,
5
4
1
7
1
,
0
3
0
8
2
,
8
1
0
1
1
,
3
3
9
0
8
,
2
2
9
2
6
,
3
3
2
6
3
,
2
5
0
8
5
,
3
4
3
7
9
,
2
3
1
2
9
,
8
3
6
7
3
,
3
1
9
7
6
,
2
3
6
8
1
,
2
2
0
2
6
,
2
3
7
6
3
,
0
5
2
9
5
,
0
4
7
2
3
,
7
2
4
1
1
,
2
2
9
2
5
,
2
3
7
3
8
,
1
2
8
7
7
,
0
3
2
2
7
,
7
4
4
2
2
,
6
3
6
7
6
,
1
1
4
1
2
,
1
3
8
6
9
,
0
2
5
8
9
,
7
2
7
0
0
,
2
4
8
1
3
,
1
2
5
8
5
,
0
3
5
6
7
,
8
1
3
1
7
,
4
2
8
8
1
,
5
2
2
5
6
,
8
2
7
6
8
,
5
1
1
8
2
,
9
4
5
5
,
8
4
6
4
,
5
2
0
5
2
,
4
1
d
e
t
i
d
u
A
n
o
i
t
a
m
r
o
f
n
i
d
e
t
i
d
u
a
n
u
y
r
a
t
n
e
m
e
l
p
p
u
S
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
,
e
c
n
a
r
u
s
n
i
e
r
f
o
t
e
n
,
s
e
s
n
e
p
x
e
t
n
e
m
e
l
t
t
e
s
d
e
t
a
c
o
l
l
a
d
n
a
s
e
s
s
o
l
d
i
a
p
e
v
i
t
a
l
u
m
u
C
6
1
0
2
5
1
0
2
4
1
0
2
3
1
0
2
2
1
0
2
1
1
0
2
0
1
0
2
9
0
0
2
8
0
0
2
7
0
0
2
8
0
7
,
9
1
$
8
2
3
,
9
1
$
5
2
7
,
8
1
$
4
6
4
,
8
1
$
7
5
1
,
8
1
$
9
9
5
,
7
1
$
3
1
5
,
6
1
$
0
5
7
,
5
1
$
7
5
2
,
3
1
$
3
5
8
,
5
$
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
t
n
e
d
i
c
c
A
r
a
e
y
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
128
The following table sets forth a reconciliation of the incurred and paid claims development tables to the liability for
losses and settlement expenses:
($ in thousands)
Net outstanding liabilities for losses and allocated settlement expenses:
December 31, 2016
Commercial auto liability insurance
Commercial property insurance
Workers' compensation insurance
Other liability insurance
Personal auto liability insurance
Homeowners insurance
Auto physical damage insurance
Assumed pro rata reinsurance
Assumed excess of loss reinsurance
Other lines of insurance
Liability for losses and allocated settlement expenses, net of reinsurance
Ceded reserves for losses and allocated settlement expenses:
Commercial auto liability insurance
Commercial property insurance
Workers' compensation insurance
Other liability insurance
Personal auto liability insurance
Homeowners insurance
Auto physical damage insurance
Assumed pro rata reinsurance
Assumed excess of loss reinsurance
Other lines of insurance
Total ceded reserves for losses and allocated settlement expenses
$
100,252
30,371
136,782
163,781
9,000
2,445
998
58,459
139,393
1,967
643,448
526
3,608
8,265
2,547
1,511
41
21
2,242
1,880
23
20,664
Unallocated settlement expenses
Gross reserve for losses and settlement expenses
$
26,420
690,532
129
Average annual percentage payout of incurred claims by age, net of reinsurance
Supplementary unaudited information
Years
1
2
3
4
5
6
7
8
9
10
23.5% 25.8% 21.8 % 15.5% 7.5 %
3.3%
1.4%
0.2% 0.2 %
0.0%
70.6% 20.9% 3.6 %
1.7% 1.6 %
0.7%
0.1%
0.1% (0.2)%
0.0%
Commercial auto liability
insurance
Commercial property
insurance
Workers' compensation
insurance
29.5% 29.8% 14.0 %
7.5% 4.6 %
Other liability insurance
11.0% 18.6% 19.7 % 17.1% 12.8 %
Personal auto liability
insurance
42.5% 29.0% 15.1 %
7.7% 3.0 %
Homeowners insurance
80.3% 16.8% 1.8 %
0.9% 0.5 %
Auto physical damage
insurance
93.9%
6.8% (0.3)%
0.0% (0.1)%
Assumed pro rata reinsurance
29.6% 39.5% 12.8 %
5.6% 2.8 %
2.8%
6.6%
2.0%
0.1%
0.0%
0.9%
2.0%
3.8%
0.5%
0.3%
0.0%
0.8%
1.4% 1.2 %
2.3% 1.7 %
0.3% (0.1)%
0.1% 0.0 %
0.0% 0.0 %
1.2% 0.5 %
0.9%
1.7%
0.0%
0.0%
0.0%
0.4%
Assumed excess of loss
reinsurance
31.9% 31.2% 10.1 %
6.2% 3.5 %
2.4%
2.1%
1.0% 2.0 %
1.7%
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. Asbestos and environmental losses paid by the Company have averaged $2.0 million per year over the past five
years. Reserves for asbestos and environmental related claims for direct insurance and assumed reinsurance business totaled
$13.3 million and $11.5 million ($13.0 million and $11.2 million net of reinsurance) at December 31, 2016 and 2015,
respectively.
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.
At present, the pool participants are defending approximately 1,856 asbestos bodily injury lawsuits, some of which
involve multiple plaintiffs. 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 often dismissed from asbestos litigation with nominal or no payment (i.e.,
small contractors, supply companies, and a furnace manufacturer).
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 one
former policyholder. During the period 2009 through 2016, the Company's share of paid losses and settlement expenses
attributed to this former policyholder, a furnace manufacturer, was $11.2 million (mostly settlement expenses). A coverage-in-
place agreement was executed with this former policyholder in 2009 and a national coordinating counsel was retained to
address the multi-state litigation issues. 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 728 asbestos
exposure claims associated with this former policyholder remain open.
While the Company does not have a significant amount of exposure to asbestos claims, management has been
strengthening the reserves carried for these exposures each year to the amount believed to be management's best estimate. In
2016, the loss and settlement expense reserves for asbestos claims were strengthened approximately $3.5 million.
130
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 2016, 2015 or 2014.
Statutory surplus of the Company’s insurance subsidiaries was $526.8 million and $485.2 million at December 31, 2016
and 2015, respectively. Statutory net income of the Company’s insurance subsidiaries was $48.3 million, $48.8 million and
$32.2 million for 2016, 2015 and 2014, 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, 2016, the Company’s insurance
subsidiaries had total adjusted statutory capital of $526.8 million, which exceeds the minimum risk-based capital requirement
of $87.3 million.
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, 2016, $52.7 million was available for distribution to the Company in 2017 without prior
approval.
7.
SEGMENT INFORMATION
The Company’s operations consist of a property and casualty insurance segment and a reinsurance segment. The
property and casualty insurance segment writes both commercial and personal lines of insurance, with a focus on medium-sized
commercial accounts. The reinsurance segment provides reinsurance for other insurers and reinsurers. The segments are
managed separately due to differences in the insurance products sold and the business environments in which they operate.
Management evaluates the performance of its insurance segments using financial measurements based on Statutory Accounting
Principles (SAP) instead of GAAP. Such measures include premiums written, premiums earned, statutory underwriting profit
(loss), and investment results, as well as loss and loss adjustment expense ratios, trade underwriting expense ratios, and
combined ratios. The GAAP accounting policies of the segments are described in note 1, Summary of Significant Accounting
Policies.
131
Summarized financial information for the Company’s segments is as follows:
Year ended December 31, 2016
($ in thousands)
Premiums earned
Property and
casualty
insurance
Reinsurance
Parent
company
Consolidated
$
456,467
$
135,941
$
— $
592,408
Underwriting profit (loss):
SAP underwriting profit (loss)
GAAP adjustments
GAAP underwriting profit (loss)
Net investment income (loss)
Net realized investment gains (losses)
Other income
Interest expense
Other expenses
Income (loss) before income tax expense
(benefit)
Assets
Eliminations
Reclassifications
Total assets
4,276
(934)
3,342
33,886
4,082
594
337
721
40,846
1,122,037
—
—
$
$
1,122,037
$
$
$
$
11,377
(1,023)
10,354
13,591
(8)
417
—
—
24,354
455,493
—
(1,932)
453,561
$
$
$
—
—
—
13
—
—
—
2,006
15,653
(1,957)
13,696
47,490
4,074
1,011
337
2,727
(1,993) $
63,207
554,164
(540,249)
(700)
13,215
$
$
2,131,694
(540,249)
(2,632)
1,588,813
Year ended December 31, 2015
($ in thousands)
Premiums earned
Property and
casualty
insurance
Reinsurance
Parent
company
Consolidated
$
447,197
$
123,069
$
— $
570,266
Underwriting profit (loss):
SAP underwriting profit (loss)
GAAP adjustments
GAAP underwriting profit (loss)
Net investment income (loss)
Net realized investment gains (losses)
Other income
Interest expense
Other expenses
Income (loss) before income tax expense
(benefit)
Assets
Eliminations
Reclassifications
Total assets
2,494
5,460
7,954
32,668
4,163
771
337
748
44,471
1,092,820
—
—
$
$
1,092,820
$
132
$
$
$
13,228
41
13,269
12,923
1,990
954
—
—
29,136
437,575
—
(5,173)
432,402
$
$
$
—
—
—
(9)
—
—
—
1,942
15,722
5,501
21,223
45,582
6,153
1,725
337
2,690
(1,951) $
71,656
$
525,042
(514,309)
—
10,733
$
2,055,437
(514,309)
(5,173)
1,535,955
Year ended December 31, 2014
($ in thousands)
Premiums earned
Property and
casualty
insurance
Reinsurance
Parent
company
Consolidated
$
422,381
$
118,341
$
— $
540,722
Underwriting profit (loss):
SAP underwriting profit (loss)
GAAP adjustments
GAAP underwriting profit (loss)
Net investment income (loss)
Net realized investment gains (losses)
Other income
Interest expense
Other expenses
(13,955)
1,646
(12,309)
33,509
2,938
695
337
793
1,718
467
2,185
12,968
1,411
2,236
—
—
—
—
—
(12)
—
—
—
1,584
(12,237)
2,113
(10,124)
46,465
4,349
2,931
337
2,377
Income (loss) before income tax expense
(benefit)
$
23,703
$
18,800
$
(1,596) $
40,907
The following table displays the net premiums earned for the property and casualty insurance segment and the
reinsurance segment for the three years ended December 31, 2016, by line of insurance.
($ in thousands)
Property and casualty insurance segment
Commercial lines:
Automobile
Property
Workers' compensation
Liability
Other
Total commercial lines
Personal lines
Total property and casualty insurance
Reinsurance segment
Pro rata reinsurance
Excess of loss reinsurance
Total reinsurance
Consolidated
Year ended December 31,
2016
2015
2014
$
110,941
$
105,904
$
105,012
96,517
96,630
8,374
417,474
104,303
92,828
92,665
8,079
403,779
38,993
43,418
456,467
$
447,197
$
56,317
79,624
135,941
592,408
$
$
$
47,421
75,648
123,069
570,266
$
$
$
$
$
$
$
96,908
97,155
88,356
86,108
7,416
375,943
46,438
422,381
41,883
76,458
118,341
540,722
133
8.
DISCLOSURES ABOUT THE FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and the estimated fair values of the Company’s financial instruments as of December 31, 2016 and
2015 are summarized in the tables below.
December 31, 2016
($ in thousands)
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
amounts
Estimated
fair values
$
7,830
$
239,197
335,757
37,572
96,434
26,393
456,516
1,199,699
35,122
30,542
24,707
19,100
22,321
19,071
24,245
18,384
20,347
7,830
239,197
335,757
37,572
96,434
26,393
456,516
1,199,699
35,122
30,542
24,707
19,100
22,321
19,071
24,245
18,384
20,347
213,839
213,839
39,670
39,670
25,000
11,228
134
December 31, 2015
($ in thousands)
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
amounts
Estimated
fair values
$
12,589
$
202,666
344,359
46,108
88,543
17,844
448,916
1,161,025
33,955
28,102
25,894
18,200
18,923
21,068
20,416
20,683
19,002
12,589
202,666
344,359
46,108
88,543
17,844
448,916
1,161,025
33,955
28,102
25,894
18,200
18,923
21,068
20,416
20,683
19,002
206,243
206,243
38,599
38,599
25,000
10,823
The estimated fair values 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 values 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. 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.
135
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, non-redeemable preferred stocks 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 market 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, 2016
and 2015, the Company had no securities priced solely from broker quotes.
136
A small number of the Company’s securities are not priced by the independent pricing service. Two of these are equity
securities (one at December 31, 2015) that are reported as Level 3 fair value measurements since no reliable observable inputs
are used in their valuations. The largest of these equity security holdings is in a privately placed non-redeemable convertible
preferred stock investment in a technology company that Employers Mutual intends to work closely with in its data analytics
activities. Due to the recent purchase of this security in November, 2016, this security is currently carried at its acquisition
cost, which is presumed to be equivalent to fair value. The other equity security, a much smaller holding, continues to be
reported at the fair value obtained from the Securities Valuation Office (SVO) of the 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, 2016 include nine fixed
maturity securities (seven at December 31, 2015). 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, the Company’s
investment custodian, or the Company's investment department using similar pricing techniques as the Company's independent
pricing service.
137
Presented in the tables below are the estimated fair values of the Company’s financial instruments as of December 31,
2016 and 2015.
December 31, 2016
($ in thousands)
Total
Financial instruments reported at fair value on
recurring basis:
Assets:
Fixed maturity securities available-for-sale:
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)
U.S. treasury
$
7,830
$
— $
7,830
$
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
239,197
335,757
37,572
96,434
26,393
456,516
1,199,699
35,122
30,542
24,707
19,100
22,321
19,071
24,245
18,384
20,347
—
—
—
—
—
—
—
239,197
335,757
37,572
96,434
26,393
455,534
1,198,717
35,119
30,542
24,707
19,100
22,321
19,071
24,245
18,384
11,074
—
—
—
—
—
—
—
—
7,273
7,273
—
—
—
—
—
—
—
982
982
3
—
—
—
—
—
—
—
2,000
2,003
—
Total equity securities available-for-sale
213,839
204,563
Short-term investments
39,670
39,670
Financial instruments not reported at fair value:
Liabilities:
Surplus notes
11,228
—
—
11,228
138
December 31, 2015
($ in thousands)
Total
Financial instruments reported at fair value on
recurring basis:
Assets:
Fixed maturity securities available-for-sale:
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)
U.S. treasury
$
12,589
$
— $
12,589
$
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
202,666
344,359
46,108
88,543
17,844
448,916
1,161,025
33,955
28,102
25,894
18,200
18,923
21,068
20,416
20,683
19,002
—
—
—
—
—
—
—
33,952
28,102
25,894
18,200
18,923
21,068
20,416
20,683
11,706
Total equity securities available-for-sale
206,243
198,944
Short-term investments
38,599
38,599
202,666
344,359
46,108
88,543
17,844
447,587
1,159,696
—
—
—
—
—
—
—
—
7,296
7,296
—
—
—
—
—
—
—
1,329
1,329
3
—
—
—
—
—
—
—
—
3
—
Financial instruments not reported at fair value:
Liabilities:
Surplus notes
10,823
—
—
10,823
139
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, 2016 and 2015. Any unrealized gains or losses on these
securities are recognized in other comprehensive income. Any gains or losses from settlements, disposals or impairments of
these securities are reported as realized investment gains or losses in net income.
Fair value measurements using significant unobservable (Level 3)
inputs
Equity
securities
available-for-
sale,
financial
services
Equity
securities
available-for-
sale, non-
redeemable
preferred
stocks
Fixed maturity
securities
available-for-
sale, corporate
$
$
$
1,662
(327)
(6)
1,329
—
(345)
(2)
982
$
3
—
—
3
—
—
—
3
$
— $
—
—
—
2,000
—
—
$
2,000
$
Total
1,665
(327)
(6)
1,332
2,000
(345)
(2)
2,985
($ in thousands)
Balance at December 31, 2014
Settlements
Unrealized losses included in other
comprehensive income (loss)
Balance at December 31, 2015
Purchases
Settlements
Unrealized losses included in other
comprehensive income (loss)
Balance at December 31, 2016
There were no transfers into or out of Levels 1 or 2 during 2016 or 2015. 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.
140
The amortized cost and estimated fair value of securities available-for-sale as of December 31, 2016 and 2015 are as
follows. All securities are classified as available-for-sale and are carried at fair value.
December 31, 2016
($ in thousands)
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 values
$
7,841
$
— $
11
$
249,495
319,663
37,964
102,307
26,592
445,663
1,189,525
22,922
19,832
16,092
13,438
14,812
14,276
13,005
13,071
20,031
147,479
311
17,034
741
1,435
732
12,232
32,485
12,410
10,739
8,700
5,787
7,672
4,873
11,258
5,345
483
67,267
10,609
940
1,133
7,308
931
1,379
22,311
210
29
85
125
163
78
18
32
167
907
7,830
239,197
335,757
37,572
96,434
26,393
456,516
1,199,699
35,122
30,542
24,707
19,100
22,321
19,071
24,245
18,384
20,347
213,839
Total securities available-for-sale
$
1,337,004
$
99,752
$
23,218
$
1,413,538
141
December 31, 2015
($ in thousands)
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 values
$
12,566
$
23
$
— $
202,486
319,940
44,433
94,279
17,000
439,513
1,130,217
24,557
19,427
15,599
11,136
10,270
16,384
11,525
17,246
18,032
1,817
24,419
1,692
1,059
883
12,992
42,885
9,731
8,807
10,359
7,090
8,658
5,972
8,902
3,672
1,168
144,176
64,359
1,637
—
17
6,795
39
3,589
12,077
333
132
64
26
5
1,288
11
235
198
2,292
12,589
202,666
344,359
46,108
88,543
17,844
448,916
1,161,025
33,955
28,102
25,894
18,200
18,923
21,068
20,416
20,683
19,002
206,243
Total securities available-for-sale
$
1,274,393
$
107,244
$
14,369
$
1,367,268
142
The following tables set forth the estimated fair values and gross unrealized losses associated with investment securities
that were in an unrealized loss position as of December 31, 2016 and 2015, listed by length of time the securities were in an
unrealized loss position.
December 31, 2016
Less than twelve months
Twelve months or longer
Total
($ in thousands)
Fixed maturity securities:
U.S. treasury
Fair
values
Unrealized
losses
Fair
values
Unrealized
losses
Fair
values
Unrealized
losses
$
7,830
$
11
$
— $
— $
7,830
$
11
202,900
10,609
U.S. government-sponsored agencies
202,900
10,609
Obligations of states and political
subdivisions
Commercial mortgage-backed
Residential mortgage-backed
Other asset-backed
Corporate
43,777
21,695
26,217
19,091
82,657
940
1,133
1,232
931
1,273
Total fixed maturity securities
404,167
16,129
Equity securities:
Common stocks:
Financial services
Information technology
Healthcare
Consumer staples
Consumer discretionary
Energy
Industrials
Other
Non-redeemable preferred stocks
1,462
1,947
3,585
2,427
1,637
1,621
779
1,472
3,356
Total equity securities
18,286
12
29
85
125
163
33
18
32
44
541
—
—
—
23,625
—
8,625
32,250
908
—
—
—
—
1,188
—
—
1,877
3,973
—
—
—
6,076
—
106
43,777
21,695
49,842
19,091
91,282
6,182
436,417
198
—
—
—
—
45
—
—
123
366
2,370
1,947
3,585
2,427
1,637
2,809
779
1,472
5,233
22,259
940
1,133
7,308
931
1,379
22,311
210
29
85
125
163
78
18
32
167
907
Total temporarily impaired
securities
$
422,453
$
16,670
$
36,223
$
6,548
$
458,676
$
23,218
143
December 31, 2015
Less than twelve months
Twelve months or longer
Total
($ in thousands)
Fixed maturity securities:
Fair
values
Unrealized
losses
Fair
values
Unrealized
losses
Fair
values
Unrealized
losses
U.S. government-sponsored agencies
$
78,800
$
1,228
$
34,079
$
409
$
112,879
$
1,637
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
6,807
22,028
6,013
101,088
214,736
6,387
1,316
3,199
1,244
176
8,233
1,263
4,064
2,450
17
1,694
39
2,683
5,661
333
132
64
26
5
1,272
11
235
53
Total equity securities
28,332
2,131
—
22,781
—
14,212
71,072
—
—
—
—
—
116
—
—
1,855
1,971
—
5,101
—
906
6,416
6,807
44,809
6,013
115,300
285,808
—
—
—
—
—
16
—
—
145
161
6,387
1,316
3,199
1,244
176
8,349
1,263
4,064
4,305
17
6,795
39
3,589
12,077
333
132
64
26
5
1,288
11
235
198
30,303
2,292
Total temporarily impaired
securities
$
243,068
$
7,792
$
73,043
$
6,577
$
316,111
$
14,369
The fair values of fixed maturity securities declined during 2016 primarily due to an increase in interest rates. Most of
the securities that are in an unrealized loss position 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, 2016.
No individual equity security accounted for a material amount of unrealized losses. 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, 2016.
All of the Company’s preferred stock holdings that are in an unrealized loss position are perpetual preferred stocks. The
Company evaluates these 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, 2016.
144
The amortized cost and estimated fair values of fixed maturity securities at December 31, 2016, 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.
($ in thousands)
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
Securities not due at a single maturity date
Totals
A summary of realized investment gains and (losses) is as follows:
($ in thousands)
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
Other long-term investments, net
Totals
Amortized
cost
Estimated
fair value
$
45,253
$
153,990
339,635
507,687
142,960
45,945
160,471
344,243
512,355
136,685
$
1,189,525
$
1,199,699
Year ended December 31,
2015
2014
2016
$
$
$
2,054
(2,829)
—
$
725
(251)
—
15,078
(2,675)
(1,055)
12,741
(4,110)
(1,481)
(6,499)
4,074
$
(1,471)
6,153
$
979
(92)
(1)
8,913
(1,727)
(877)
(2,846)
4,349
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. The Company did not have any outstanding
cumulative credit losses on fixed maturity securities that have been recognized in earnings from “other-than-temporary”
impairments during any of the reported periods. The amounts reported as “other-than-temporary” impairments on equity
securities do not include any individually significant items. The net realized investment losses recognized on other long-term
investments primarily represent changes in the carrying value of a limited partnership that is used solely to support an equity
tail-risk hedging strategy, but for 2016 also includes an "other-than-temporary" impairment loss of $209,000 on a new
investment that conveys investment tax credits.
145
A summary of net investment income is as follows:
($ in thousands)
Interest on fixed maturity securities
Dividends on equity securities
Income on reverse repurchase agreements
Interest on short-term investments
Return on long-term investments
Total investment income
Securities litigation income
Investment expenses
Net investment income
Year ended December 31,
2015
2014
2016
$
$
41,499
6,922
236
121
514
49,292
111
(1,913)
47,490
$
$
42,261
5,617
117
2
(461)
47,536
32
(1,986)
45,582
$
$
41,932
6,007
—
—
297
48,236
107
(1,878)
46,465
A summary of net changes in unrealized holding gains (losses) on securities available-for-sale is as follows:
($ in thousands)
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
10.
INCOME TAXES
Year ended December 31,
2015
2014
2016
$
$
(20,634) $
(7,222)
(13,412)
(16,685) $
(5,840)
(10,845)
4,293
1,502
2,791
(10,621) $
(10,997)
(3,849)
(7,148)
(17,993) $
29,081
10,179
18,902
17,051
5,967
11,084
29,986
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, 2016 and 2015 are as
follows:
($ in thousands)
Loss reserve discounting
Unearned premium reserve limitation
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
146
December 31,
2016
2015
$
$
$
13,442
16,497
4,574
2,561
37,074
(26,786)
(14,328)
(3,510)
(3,771)
(48,395)
(11,321) $
13,929
16,310
3,052
1,730
35,021
(32,506)
(14,252)
(3,606)
(3,686)
(54,050)
(19,029)
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 for the years ended December 31, 2016, 2015 and 2014 differed from the “expected”
income tax expense for those years (computed by applying the United States federal corporate tax rate of 35 percent to income
before income tax expense) as follows:
($ in thousands)
Computed "expected" income tax expense
Increases (decreases) in tax resulting from:
Tax-exempt interest income
Dividends received deduction
Proration of tax-exempt interest and dividends received
deduction
Investment tax credits
Other, net
Total income tax expense
Year ended December 31,
2015
2014
2016
$
22,123
$
25,079
$
14,318
(2,803)
(1,429)
635
(1,546)
24
17,004
$
(2,805)
(1,136)
591
—
(235)
21,494
$
(3,285)
(828)
617
—
93
10,915
$
Comprehensive income tax expense included in the consolidated financial statements for the years ended December 31,
2016, 2015 and 2014 is as follows:
($ in thousands)
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
Year ended December 31,
2015
2014
2016
$
$
$
17,004
(5,720)
414
(1,345)
10,353
$
$
21,494
(9,689)
(1,748)
(1,071)
8,986
$
10,915
16,146
(2,619)
(1,330)
23,112
The Company had no provision for uncertain income tax positions at December 31, 2016 or 2015. The Company
recognized $1,000 of interest income related to U.S. federal income taxes during 2014. The Company recognized no interest
expense or other penalties related to U.S. federal or state income taxes during 2016, 2015 or 2014. 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 state income tax returns. The Company is no
longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2013.
11.
SURPLUS NOTES
The Company’s property and casualty insurance subsidiaries have $25.0 million of surplus notes issued to Employers
Mutual. Effective February 1, 2013, the interest rate on the surplus notes was reduced to 1.35 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 are 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 on these surplus notes was $337,000 in 2016, 2015 and 2014. At
December 31, 2016, the Company’s property and casualty insurance subsidiaries had received approval for the payment of the
2016 interest expense on the surplus notes.
147
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 benefits.
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. Employers Mutual has a Health
Reimbursement Arrangement (HRA) that is available to participants. Under the HRA, Employers Mutual reimburses
participants, up to a pre-determined maximum, for amounts expended to enroll in publicly available health care plans and/or
pay for qualifying out-of-pocket health care costs. The obligations of the HRA are based on the total amount of
reimbursements expected to be made by Employers Mutual over the lives of the participants, rather than the total amount of
medical benefits expected to be paid over the participants’ lives. Therefore, the obligations of the HRA are not impacted by
changes in the cost of health care. 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 that has historically been
used to accumulate funds for the payment of postretirement health care and life insurance benefits. Contributions to the VEBA
trust have been used to fund the projected postretirement benefit obligation, as well as pay benefits. Given the overfunded
position of the postretirement benefit plans, contributions to the VEBA trust are not anticipated for the foreseeable future.
148
The following table sets forth the funded status of Employers Mutual’s pension and postretirement benefit plans as of
December 31, 2016 and 2015, based upon measurement dates of December 31, 2016 and 2015, respectively.
($ in thousands)
Change in projected benefit obligation:
Pension plans
Postretirement benefit plans
2016
2015
2016
2015
Benefit obligation at beginning of year
$
269,904
$
267,129
$
51,449
$
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Medicare subsidy reimbursements
Plan amendments
Projected benefit obligation at end of year
Change in plan assets:
Fair value 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
14,432
10,161
5,361
(15,664)
—
—
284,194
283,231
23,081
10,267
(15,664)
300,915
13,962
9,311
(1,661)
(18,837)
—
—
269,904
297,848
(591)
4,811
(18,837)
283,231
1,273
2,215
357
(2,377)
553
2,181
55,651
66,320
3,866
—
(2,377)
67,809
Funded status
$
16,721
$
13,327
$
12,158
$
54,503
1,411
2,148
(5,895)
(2,185)
—
1,467
51,449
69,290
(785)
—
(2,185)
66,320
14,871
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, prior to 2016, amounts
allocated to the reinsurance subsidiary.
Amounts recognized in the Company’s consolidated balance sheets:
($ in thousands)
Assets:
Prepaid pension and postretirement benefits
Liability:
Pension and postretirement benefits
Net amount recognized
$
$
Pension plans
Postretirement benefit plans
2016
2015
2016
2015
9,065
$
8,132
$
3,249
$
4,001
(4,097)
4,968
$
(4,299)
3,833
$
—
3,249
$
—
4,001
Amounts recognized in the Company’s consolidated balance sheets under the caption “accumulated other comprehensive
income”, before deferred income taxes:
($ in thousands)
Net actuarial loss
Prior service (cost) credit
Net amount recognized
Pension plans
Postretirement benefit plans
2016
2015
2016
2015
$
$
(18,927) $
(6)
(18,933) $
(20,101)
(15)
(20,116)
$
$
(6,147) $
19,441
13,294
$
(6,523)
23,662
17,139
149
During 2017, the Company will amortize $1.1 million of net actuarial loss and $6,000 of prior service cost associated
with the pension plans into net periodic benefit cost. In addition, the Company will amortize $381,000 of net actuarial loss and
$3.2 million of prior service credit associated with the postretirement benefit plans into net periodic postretirement benefit
income in 2017.
Amounts recognized in the Company’s consolidated statements of comprehensive income, before deferred income taxes:
($ in thousands)
Net actuarial gain (loss)
Prior service (cost) credit
Net amount recognized
Pension plans
Postretirement benefit plans
2016
2015
2016
2015
$
$
1,174
9
1,183
$
$
(5,004)
10
(4,994)
$
$
$
376
(4,221)
(3,845) $
735
(3,796)
(3,061)
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.
($ in thousands)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Year ended December 31,
2016
2015
$
13,656
$
12,182
—
13,505
12,405
—
The components of net periodic benefit cost (income) for Employers Mutual’s pension and postretirement benefit plans
is as follows:
($ in thousands)
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 income
Year ended December 31,
2016
2015
2014
$
$
$
$
14,432
$
13,962
$
10,161
(19,361)
4,311
31
9,311
(20,298)
2,710
31
9,574
$
5,716
$
1,273
$
2,215
(4,224)
1,494
(11,338)
(10,580) $
1,411
$
2,148
(4,416)
1,745
(11,466)
(10,578) $
12,863
9,664
(20,733)
366
31
2,191
1,260
2,254
(4,396)
1,651
(11,466)
(10,697)
The net periodic postretirement benefit income recognized on Employers Mutual's postretirement benefit plans is due to
a plan amendment that was announced in the fourth quarter of 2013. This plan amendment generated a large prior service
credit that is being amortized into net periodic benefit cost over a period of 10 years.
150
Net periodic pension benefit cost allocated to the Company amounted to $2.9 million, $1.8 million and $680,000 for the
years ended December 31, 2016, 2015 and 2014, respectively. Net periodic postretirement benefit income allocated to the
Company for the years ended December 31, 2016, 2015 and 2014 amounted to $3.0 million, $3.0 million, and $3.1 million,
respectively.
The weighted-average assumptions used to measure the benefit obligations are as follows:
Pension plans:
Discount rate
Rate of compensation increase:
Qualified pension plan
Non-qualified pension plan
Postretirement benefit plans:
Discount rate
Year ended December 31,
2016
2015
4.07%
5.07%
4.53%
3.90%
5.07%
4.56%
4.21%
4.42%
The weighted-average assumptions used to measure the net periodic benefit costs are as follows:
Pension plans:
Discount rate
Expected long-term rate of return on plan assets
Rate of compensation increase:
Qualified pension plan
Non-qualified pension plan
Postretirement benefit plans:
Discount rate
Expected long-term rate of return on plan assets
Year ended December 31,
2016
2015
2014
3.90%
7.00%
5.07%
4.56%
4.42%
6.50%
3.57%
7.00%
4.73%
4.68%
4.04%
6.50%
4.17%
7.25%
4.73%
4.68%
4.71%
6.75%
The expected long-term rates of return on plan assets were developed considering actual historical results, current and
expected market conditions, plan asset mix and management’s investment strategy.
The following benefit payments, which reflect expected future service, are expected to be paid from the plans over the
next ten years:
($ in thousands)
2017
2018
2019
2020
2021
2022 - 2026
Pension benefits
Postretirement
benefits
$
$
19,120
20,282
21,615
22,434
20,233
116,612
2,959
3,197
3,352
3,441
3,497
17,909
151
The Company manages its VEBA trust assets internally. 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. Following is a brief description of the various 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 $1.00.
• Mutual Funds: Valued at the net asset value of shares held by the trust at year-end. For purposes of calculating the
net asset value, portfolio securities and other assets for which market quotes are readily available are valued at fair
value. Fair value is generally determined on the basis of last reported sales prices, or if no sales are reported, based
on quotes obtained from a quotation reporting system, established market makers, or independent pricing services.
• ETF: Valued at the closing price from the applicable exchange.
• Life Insurance Contract: Valued at the cash surrender value, which approximates fair value.
The fair values of the assets held in Employers Mutual’s VEBA trust are as follows:
December 31, 2016
Fair value measurements using
($ in thousands)
Money market fund
Emerging markets ETF
Mutual funds
Life insurance contracts
Cash
Total benefit plan assets
December 31, 2015
($ in thousands)
Money market fund
Emerging markets ETF
Mutual funds
Life insurance contracts
Total benefit plan assets
Quoted
prices in
active markets
for identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
1,485
$
1,485
$
— $
3,743
47,916
14,159
506
3,743
47,916
—
506
—
—
—
—
67,809
$
53,650
$
— $
—
—
—
14,159
—
14,159
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
2,709
$
2,709
$
— $
3,422
46,397
13,792
3,422
46,397
—
—
—
—
66,320
$
52,528
$
— $
—
—
—
13,792
13,792
$
$
$
$
152
Presented below is a reconciliation of the assets measured at fair value using significant unobservable inputs (Level 3)
for the years ended December 31, 2016 and 2015.
($ in thousands)
Balance at beginning of year
Actual return on plan assets:
Increase in cash surrender value of life insurance contracts
Balance at end of year
Fair value measurements
using significant unobservable
(Level 3) inputs
Life insurance contracts
2016
2015
13,792
$
13,408
367
14,159
$
384
13,792
$
$
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.
Following is a brief description of the 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, whose value is the accumulated value of the underlying investments less liabilities. The
sponsor of the fund specifies the source(s) used for the underlying investment asset prices and the protocol used to
value each fund.
In accordance with ASU 2015-07, a fair value hierarchy table is not included here since all of the Plan's investments are
measured at fair value using the net asset value per share (or its equivalent) practical expedient, which are not classified in the
fair value hierarchy. Presented below are the fair values of assets held in Employers Mutual's defined benefit retirement plan:
($ in thousands)
Pooled separate accounts
Total benefit plan assets
December 31,
2016
2015
$
$
300,915
300,915
$
$
283,231
283,231
Employers Mutual plans to contribute approximately $9.0 million to the pension plan in 2017. No contributions are
expected to be made to the VEBA trust in 2017.
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 $2.7 million, $2.5 million and $1.7 million in 2016, 2015 and 2014, respectively.
Note that the amount for 2016 includes an allocation of retirement benefit expenses to the Company's reinsurance subsidiary
(portion of the service cost components of the qualified and non-qualified pension plans and the postretirement benefits plans).
In prior years the Company's reinsurance subsidiary was allocated a portion of all activities of these plans (including the
balance sheet amounts) which are included in the relevant tables and disclosures contained in this footnote.
153
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 in the open market; or 3) directly
purchasing common stock from the Company at the current fair value. Employers Mutual's current practice is to purchase
common stock from the Company for use in all of its stock plans (including its non-employee director stock purchase plan and
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 2,250,000 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
3,000,000 shares have been reserved for issuance under the 2007 Employers Mutual Casualty Company Stock Incentive Plan
(2007 Plan). During 2016, the compensation committee of Employers Mutual and the Corporate Governance and Nominating
Committee of the Company approved the issuance of restricted stock awards to the non-employee directors of the Company
under the 2007 Plan.
The 2003 Plan permitted 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. With the exception of death or permanent disability, any unvested shares of restricted stock are forfeited on
termination of employment, including retirement. Holders of unvested shares of restricted stock receive compensation income
equal to the amount of any dividends declared on the common stock. During 2016, 2,000 shares of restricted stock were
granted to non-employee directors of the Company. These shares of restricted stock vest over a period of three years, or upon a
director reaching 75 years of age while an active director.
The Senior Executive Compensation Committee of Employers Mutual’s Board of Directors 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. Awards granted to directors are approved by the Company's Corporate Governance and
Nominating Committee.
The Company recognized compensation expense from these plans of $788,000 ($512,000 net of tax), $500,000
($325,000 net of tax) and $357,000 ($233,000 net of tax) in 2016, 2015 and 2014, respectively. Due to the historically small
number of forfeitures, the Company has elected to recognize the reduction to compensation expense from forfeitures as they
occur.
A summary of the stock option activity under Employers Mutual’s stock plans for 2016, 2015 and 2014 is as follows:
2016
Year ended December 31,
2015
2014
Outstanding, beginning of year
Exercised
Expired
Forfeited
Outstanding, end of year
Number
of
options
1,006,171
(321,312)
(34,947)
(900)
649,012
Exercisable, end of year
593,224
$
$
$
Weighted-
average
exercise
price
14.92
15.31
16.32
13.99
14.65
Number
of
options
1,351,802
(323,486)
(20,850)
(1,295)
1,006,171
Weighted-
average
exercise
price
14.89
14.86
14.11
14.68
14.92
$
$
$
Number
of
options
1,702,938
(300,479)
(34,421)
(16,236)
1,351,802
Weighted-
average
exercise
price
$
$
$
14.78
14.24
15.01
15.29
14.89
14.94
14.95
963,831
14.72
824,365
154
At December 31, 2016, 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 $7,000, with a 0.17 year weighted-average
period over which the compensation expense is expected to be recognized.
The average of the high and low trading prices of the Company's stock on the date of grant is used to determine the fair
value of the restricted stock awards. At December 31, 2016, the Company’s portion of the unrecognized compensation cost
associated with restricted stock awards issued under the 2007 Plan that are not currently vested was $1.1 million with a 2.33
year weighted-average period over which the compensation expense is expected to be recognized. A summary of restricted
stock activity under 2007 Plan for 2016, 2015 and 2014 is as follows:
2016
Number
of
awards
216,944
118,588
(69,057)
(32,194)
234,281
Weighted-
average
grant-date
fair value
20.40
$
24.56
19.98
22.73
22.31
$
Year ended December 31,
2015
Number
of
awards
155,864
117,146
(40,941)
(15,125)
216,944
Weighted-
average
grant-date
fair value
19.21
$
21.36
18.99
19.35
20.40
$
2014
Number
of
awards
85,002
94,146
(21,223)
(2,061)
155,864
Weighted-
average
grant-date
fair value
17.27
$
20.49
17.27
17.74
19.21
$
Non-vested, beginning of year
Granted
Vested
Forfeited
Non-vested, end of year
The Company’s portion of the total intrinsic value of options exercised under Employers Mutual’s stock plans was $1.1
million, $770,000 and $606,000 in 2016, 2015 and 2014, 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 also 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
restricted stock awards that vested was $414,000, $233,000 and $110,000 in 2016, 2015 and 2014, respectively. Additional
information relating to options outstanding and options vested (exercisable) at December 31, 2016 is as follows:
($ in thousands, except share and per share amounts)
Options outstanding
Options exercisable
December 31, 2016
Number of
options
649,012
593,224
Weighted-
average
exercise price
14.65
$
14.72
$
Aggregate
intrinsic value
9,691
$
8,821
$
Weighted-
average
remaining
term
3.33
3.16
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 $284,000, $121,000 and $152,000 in 2016, 2015 and 2014, 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), which reduce income tax expense (prior to 2016 were recorded to additional paid in
capital). The income tax benefit that results from disqualifying dispositions of stock purchased through the exercise of
incentive stock options is deemed immaterial.
155
Employee Stock Purchase Plan
On May 30, 2008, the Company registered 750,000 shares of the Company’s common stock for use in the Employers
Mutual Casualty Company 2008 Employee Stock Purchase Plan. All employees are eligible 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 Directors of
Employers Mutual, which 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. Expenses allocated to the Company in connection with this plan
totaled $78,000, $59,000 and $35,000 in 2016, 2015 and 2014, respectively.
During 2016, shares were purchased under the plan at prices ranging from $21.78 to $23.42. 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,
2015
2014
2016
414,883
(65,479)
349,404
471,459
(56,576)
414,883
508,749
(37,290)
471,459
On March 14, 2013, the Company registered 300,000 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, as well as non-employee directors of the Company, 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 of the 2023 annual meetings. The plan is administered by the Corporate
Governance and Nominating Committee of the Board of Directors 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. Expenses allocated to the Company in connection with this plan totaled $84,000, $62,000 and $49,000 in 2016,
2015 and 2014, respectively.
During 2016, shares were purchased under the plan at prices ranging from $18.26 to $20.99. 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
Dividend Reinvestment Plan
Year ended December 31,
2015
2014
2016
264,446
(14,603)
249,843
279,809
(15,363)
264,446
294,248
(14,439)
279,809
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.
156
Employers Mutual did not participate in this plan in 2016, 2015 or 2014. 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
Lowest purchase price
Highest purchase price
Year ended December 31,
2015
2014
2016
976,697
(5,475)
971,222
22.09
30.50
$
$
982,227
(5,530)
976,697
21.02
26.43
$
$
988,436
(6,209)
982,227
18.69
23.59
$
$
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, net of tax.
($ in thousands)
Balance at December 31, 2014
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive income
Other comprehensive loss
Balance at December 31, 2015
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive income
Other comprehensive loss
Balance at December 31, 2016
Accumulated other comprehensive income by
component
Unrealized
gains (losses)
on
available-for-
sale securities
Unrecognized
pension and
postretirement
benefit
obligations
$
$
78,362
(13,037)
(4,956)
(17,993)
60,369
(3,885)
(6,736)
(10,621)
49,748
$
$
$
3,300
(3,949)
(1,287)
(5,236)
(1,936)
(881)
(850)
(1,731)
(3,667) $
Total
81,662
(16,986)
(6,243)
(23,229)
58,433
(4,766)
(7,586)
(12,352)
46,081
157
The following tables display amounts reclassified out of accumulated other comprehensive income and into net income
during the three years ended December 31, 2016.
($ in thousands)
Accumulated other comprehensive income components
Unrealized gains on investments:
Reclassification adjustment for realized investment gains
included in net income
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
income:
Net actuarial loss
Prior service credit
Total before tax
Deferred income tax expense
Net reclassification adjustment
Total reclassification adjustment
Amounts reclassified
from accumulated
other comprehensive
income
Year ended
December 31, 2016
Affected line item in the
consolidated statements of income
$
$
10,364 Net realized investment gains
(3,628)
6,736
Income tax expense, current
(1)
(1)
Income tax expense, current
(2,383)
3,690
1,307
(457)
850
7,586
(1) These reclassified components of accumulated other comprehensive income are included in the computation of net
periodic pension and postretirement benefit income (see note 12, Employee Retirement Plans, for additional details).
158
($ in thousands)
Accumulated other comprehensive income components
Unrealized gains on investments:
Amounts reclassified
from accumulated
other comprehensive
income
Year ended
December 31, 2015
Affected line item in the
consolidated statements of income
Reclassification adjustment for realized investment gains
included in net income
$
Deferred income tax expense
Net reclassification adjustment
7,624 Net realized investment gains
(2,668)
4,956
Income tax expense, current
Unrecognized pension and postretirement benefit
obligations:
Reclassification adjustment for amounts amortized into
net periodic pension and postretirement benefit
income:
Net actuarial loss
Prior service credit
Total before tax
Deferred income tax expense
Net reclassification adjustment
(1)
(1)
Income tax expense, current
(1,327)
3,307
1,980
(693)
1,287
Total reclassification adjustment
$
6,243
(1) These reclassified components of accumulated other comprehensive income are included in the computation of net
periodic pension and postretirement benefit income (see note 12, Employee Retirement Plans, for additional details).
159
($ in thousands)
Accumulated other comprehensive income components
Unrealized gains on investments:
Reclassification adjustment for realized investment gains
included in net income
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
income:
Net actuarial loss
Prior service credit
Total before tax
Deferred income tax expense
Net reclassification adjustment
Total reclassification adjustment
Amounts reclassified
from accumulated
other comprehensive
income
Year ended
December 31, 2014
Affected line item in the
consolidated statements of income
$
$
7,195 Net realized investment gains
(2,518)
4,677
Income tax expense, current
(1)
(1)
Income tax expense, current
(578)
3,307
2,729
(955)
1,774
6,451
(1) These reclassified components of accumulated other comprehensive income are included in the computation of net
periodic pension and postretirement benefit income (see note 12, Employee Retirement Plans, for additional details).
15.
STOCK REPURCHASE PROGRAMS
Stock Repurchase Plans
On November 3, 2011, the Company’s Board of Directors authorized a $15.0 million stock repurchase program. This
program does not have an expiration date. The timing and terms of the purchases are determined by management based on
board approved parameters and 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. The Company
repurchased 17,300 shares of its common stock at an average cost of $22.14 during 2016. No other purchases have been made
under this program.
Stock Purchase Plan
During the second quarter of 2005, Employers Mutual initiated a $15.0 million stock purchase program under which
Employers Mutual may 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 2016, 2015 and 2014. As of December 31, 2016, $4.5 million remained available under this plan for additional
purchases.
160
16.
LEASES, COMMITMENTS AND CONTINGENT LIABILITIES
One of the Company’s property and casualty insurance subsidiaries leases office facilities in Bismarck, North Dakota
with lease terms expiring in 2024. Employers Mutual has entered into various leases for branch and service office facilities
with lease terms expiring through 2026. All of these lease costs are included as expenses under the pooling agreement. The
following table reflects the Company's share of lease commitments as of December 31, 2016.
($ in thousands)
Lease commitments
Payments due by period
Total
Less than
1 year
1 - 3
years
4 - 5
years
More than
5 years
Real estate operating leases
$
2,572
$
391
$
844
$
665
$
672
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 $851,000 and $912,000 as of December 31, 2016 and 2015, respectively. Premium tax offsets of
$1.0 million and $1.1 million, which are related to prior guarantee fund payments and current assessments, have been accrued
as of December 31, 2016 and 2015, 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 $1.9 million and $1.9
million as of December 31, 2016 and 2015, 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 $110,000 at December 31, 2016. The Company
had a contingent liability for the aggregate guaranteed amount of the annuities of $183,000 at December 31, 2016 should the
issuers of those annuities fail to perform. The probability of a material loss due to failure of performance by the issuers of these
annuities is considered remote.
The Company and Employers Mutual and its other subsidiaries are parties to numerous lawsuits arising in the normal
course of the insurance business. The Company believes that the resolution of these lawsuits will not have a material adverse
effect on its financial condition or its results of operations. The companies involved have established reserves which are
believed adequate to cover any potential liabilities arising out of all such pending or threatened proceedings.
17. UNAUDITED INTERIM FINANCIAL INFORMATION
($ in thousands, except per share amounts)
March 31
June 30
September 30
December 31
Three months ended,
2016
Total revenues
Income before income tax expense
Income tax expense
Net income
Net income per common share - basic and diluted1
$
$
$
$
153,871
20,877
6,223
14,654
0.70
$
$
$
$
160,336
8,087
1,959
6,128
0.29
$
$
$
$
162,378
5,047
918
4,129
0.20
$
$
$
$
168,398
29,196
7,904
21,292
1.01
161
($ in thousands, except per share amounts)
March 31
June 30
September 30
December 31
Three months ended,
2015
Total revenues
Income before income tax expense
Income tax expense
Net income
Net income per common share - basic and diluted1
$
$
$
$
152,335
29,937
9,607
20,330
1.00
$
$
$
$
158,808
11,875
3,127
8,748
0.42
$
$
$
$
165,104
15,921
4,732
11,189
0.54
$
$
$
$
147,479
13,923
4,028
9,895
0.48
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 per share may not total to annual net income per share.
162
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule I – Summary of Investments-
Other than Investment in Related Parties
December 31, 2016
($ in thousands)
Type of investment
Cost
Fair value
Amount at
which shown in
the balance sheet
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
$
7,841
$
7,830
$
249,495
319,663
37,964
102,307
26,592
445,663
1,189,525
22,922
19,832
16,092
13,438
14,812
14,276
13,005
13,071
20,031
239,197
335,757
37,572
96,434
26,393
456,516
1,199,699
35,122
30,542
24,707
19,100
22,321
19,071
24,245
18,384
20,347
7,830
239,197
335,757
37,572
96,434
26,393
456,516
1,199,699
35,122
30,542
24,707
19,100
22,321
19,071
24,245
18,384
20,347
147,479
213,839
213,839
Other long-term investments
12,506
12,506
12,506
Short-term investments
Total investments
39,670
39,670
39,670
$
1,389,180
$
1,465,714
$
1,465,714
163
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II – Condensed Financial Information of Registrant
Condensed Balance Sheets
($ in thousands, except share and per share amounts)
ASSETS
Investments:
Common stock of subsidiaries (equity method)
Equity securities available-for-sale, at fair value (cost $2,000 and $0)
Short-term investments
Total investments
Cash
Accrued investment income
Prepaid assets
Accounts receivable
Income taxes recoverable
Total assets
LIABILITIES
Accounts payable
Amounts due affiliate to settle inter-company transaction balances
Deferred income taxes
Total liabilities
STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 30,000,000 shares; issued and outstanding,
21,222,535 shares in 2016 and 20,780,439 shares in 2015
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
December 31,
2016
2015
$
$
$
$
$
$
540,249
2,000
10,874
553,123
184
3
154
—
700
554,164
46
740
36
822
21,223
119,054
46,081
366,984
553,342
$
554,164
$
514,309
—
9,761
524,070
136
—
95
58
683
525,042
87
17
—
104
20,781
108,747
58,433
336,977
524,938
525,042
All affiliated balances presented above are the result of related party transactions with Employers Mutual.
164
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II – Condensed Financial Information of Registrant, Continued
Condensed Statements of Income
($ in thousands)
REVENUES
Dividends received from subsidiaries
Investment income (loss)
Total revenues
Operating expenses (affiliated $1,139, $1,074 and $777)
Income (loss) before income tax benefit and equity in undistributed net
income of subsidiaries
Income tax benefit
Income (loss) before equity in undistributed net income of subsidiaries
Equity in undistributed net income of subsidiaries
Year ended December 31,
2015
2014
2016
$
$
9,707
13
9,720
2,006
7,714
(698)
8,412
37,791
$
9,180
(9)
9,171
1,942
7,229
(682)
7,911
42,251
378
(12)
366
1,584
(1,218)
(558)
(660)
30,652
29,992
Net income
$
46,203
$
50,162
$
All affiliated balances presented above are the result of related party transactions with Employers Mutual.
165
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II – Condensed Financial Information of Registrant, Continued
Condensed Statements of Comprehensive Income
($ in thousands)
Net income
Year ended December 31,
2015
2014
2016
$
46,203
$
50,162
$
29,992
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gains (losses) on investment securities, net of
deferred income taxes
Reclassification adjustment for realized investment gains included in
net income, net of income taxes
Reclassification adjustment for amounts amortized into net periodic
pension and postretirement benefit income, net of deferred income
taxes:
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 taxes:
Net actuarial loss
Prior service cost
Total change in funded status of affiliate's pension and
postretirement benefit plans
(3,885)
(13,037)
34,663
(6,736)
(4,956)
(4,677)
1,549
(2,399)
863
(2,150)
375
(2,149)
(850)
(1,287)
(1,774)
(542)
(339)
(881)
(3,637)
(312)
(5,525)
(35)
(3,949)
(5,560)
Other comprehensive income (loss)
(12,352)
(23,229)
22,652
Total comprehensive income
$
33,851
$
26,933
$
52,644
All balances labeled with "affiliate" above are the result of related party transactions with Employers Mutual. All other
comprehensive income (loss) balances presented above are from the Registrant's subsidiaries.
166
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule II – Condensed Financial Information of Registrant, Continued
Condensed Statements of Cash Flows
($ in thousands)
Net cash provided by (used in) operating activities
Cash flows from investing activities
Capital contributions to subsidiaries
Purchases of equity securities available-for-sale
Net (purchases) disposals of short-term investments
Net cash (used in) provided by 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 $(9,182), $(8,162) and
$(7,377))
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 recovered
Interest paid
Year ended December 31,
2015
2014
2016
$
9,170
$
7,893
$
(738)
(500)
(2,000)
(1,113)
(3,613)
11,070
—
(383)
(16,196)
(5,509)
—
—
(3,030)
(3,030)
9,078
95
—
(14,174)
(5,001)
48
136
184
$
$
716
— $
(138)
274
136
$
$
559
— $
$
$
$
—
—
5,956
5,956
7,392
103
—
(12,588)
(5,093)
125
149
274
481
—
All affiliated balances presented above are the result of related party transactions with Employers Mutual.
167
S
E
I
R
A
I
D
I
S
B
U
S
D
N
A
.
C
N
I
P
U
O
R
G
E
C
N
A
R
U
S
N
I
C
M
E
n
o
i
t
a
m
r
o
f
n
I
e
c
n
a
r
u
s
n
I
y
r
a
t
n
e
m
e
l
p
p
u
S
–
I
I
I
e
l
u
d
e
h
c
S
4
1
0
2
d
n
a
5
1
0
2
,
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
E
s
r
a
e
Y
r
o
F
s
m
u
i
m
e
r
P
n
e
t
t
i
r
w
r
e
h
t
O
g
n
i
t
i
r
w
r
e
d
n
u
s
e
s
n
e
p
x
e
n
o
i
t
a
z
i
t
r
o
m
A
d
e
r
r
e
f
e
d
f
o
y
c
i
l
o
p
n
o
i
t
i
s
i
u
q
c
a
s
t
s
o
c
d
n
a
s
e
s
s
o
L
t
n
e
m
e
l
t
t
e
s
s
e
s
n
e
p
x
e
d
e
r
r
u
c
n
i
t
e
N
t
n
e
m
t
s
e
v
n
i
e
m
o
c
n
i
m
u
i
m
e
r
P
e
u
n
e
v
e
r
d
e
n
r
a
e
n
U
s
m
u
i
m
e
r
p
d
n
a
s
s
o
L
t
n
e
m
e
l
t
t
e
s
e
s
n
e
p
x
e
s
e
v
r
e
s
e
r
d
e
r
r
e
f
e
D
y
c
i
l
o
p
n
o
i
t
i
s
i
u
q
c
a
s
t
s
o
c
t
n
e
m
g
e
S
)
s
d
n
a
s
u
o
h
t
n
i
$
(
—
3
7
6
,
3
6
4
0
3
0
,
1
3
1
$
3
6
4
,
6
6
$
3
9
4
,
8
7
$
9
6
3
,
4
9
2
$
6
8
8
,
3
3
$
7
6
4
,
6
5
4
$
7
9
6
,
0
2
2
$
7
8
3
,
6
8
4
$
5
9
2
,
6
3
—
9
4
1
,
3
—
0
1
9
,
9
2
—
8
2
5
,
2
9
3
1
1
9
5
,
3
1
—
1
4
9
,
5
3
1
—
8
8
1
,
4
2
—
5
4
1
,
4
0
2
—
4
4
6
,
4
3
0
7
,
4
9
5
$
2
1
6
,
9
6
$
3
0
4
,
8
0
1
$
7
9
8
,
6
8
3
$
0
9
4
,
7
4
$
8
0
4
,
2
9
5
$
5
8
8
,
4
4
2
$
2
3
5
,
0
9
6
$
9
3
9
,
0
4
—
4
3
4
,
4
5
4
4
0
5
,
4
2
1
$
4
5
9
,
3
6
$
1
0
7
,
5
7
$
3
8
8
,
1
9
2
$
8
6
6
,
2
3
$
7
9
1
,
7
4
4
$
2
5
6
,
2
1
2
$
3
1
4
,
0
8
4
$
9
1
2
,
5
3
—
4
6
4
,
4
—
3
8
4
,
6
2
—
3
5
8
,
8
7
)
9
(
3
2
9
,
2
1
—
9
6
0
,
3
2
1
—
3
8
7
,
6
2
—
1
6
3
,
8
9
1
—
1
0
5
,
5
8
3
9
,
8
7
5
$
8
1
4
,
8
6
$
4
8
1
,
2
0
1
$
6
3
7
,
0
7
3
$
2
8
5
,
5
4
$
6
6
2
,
0
7
5
$
5
3
4
,
9
3
2
$
4
7
7
,
8
7
6
$
0
2
7
,
0
4
—
7
0
7
,
3
3
4
3
0
9
,
8
1
1
$
5
8
3
,
4
5
$
8
6
7
,
2
7
$
3
3
0
,
8
9
2
$
9
0
5
,
3
3
$
1
8
3
,
2
2
4
$
7
5
3
,
4
0
2
$
8
5
4
,
3
6
4
$
5
5
8
,
3
3
—
1
4
4
,
2
—
4
7
2
,
6
2
—
1
4
4
,
7
8
)
2
1
(
8
6
9
,
2
1
—
1
4
3
,
8
1
1
—
6
3
7
,
7
2
—
1
5
8
,
7
9
1
—
8
8
4
,
5
0
1
6
,
2
5
5
$
6
2
8
,
6
5
$
2
4
0
,
9
9
$
4
7
4
,
5
8
3
$
5
6
4
,
6
4
$
2
2
7
,
0
4
5
$
3
9
0
,
2
3
2
$
9
0
3
,
1
6
6
$
3
4
3
,
9
3
$
$
$
$
$
$
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
r
a
e
Y
y
t
l
a
u
s
a
c
d
n
a
y
t
r
e
p
o
r
P
d
e
t
a
d
i
l
o
s
n
o
C
y
n
a
p
m
o
c
t
n
e
r
a
P
e
c
n
a
r
u
s
n
i
e
c
n
a
r
u
s
n
i
e
R
5
1
0
2
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
r
a
e
Y
y
t
l
a
u
s
a
c
d
n
a
y
t
r
e
p
o
r
P
168
d
e
t
a
d
i
l
o
s
n
o
C
y
n
a
p
m
o
c
t
n
e
r
a
P
e
c
n
a
r
u
s
n
i
e
c
n
a
r
u
s
n
i
e
R
4
1
0
2
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
r
a
e
Y
y
t
l
a
u
s
a
c
d
n
a
y
t
r
e
p
o
r
P
d
e
t
a
d
i
l
o
s
n
o
C
y
n
a
p
m
o
c
t
n
e
r
a
P
e
c
n
a
r
u
s
n
i
e
c
n
a
r
u
s
n
i
e
R
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Schedule IV – Reinsurance
For Years Ended December 31, 2016, 2015 and 2014
($ in thousands)
Gross amount
Year ended December 31, 2016
Ceded to other
companies
Assumed from
other
companies
Net amount
Percentage of
amount
assumed to net
Consolidated earned premiums
$
382,300
$
426,946
$
637,054
$
592,408
107.5%
Year ended December 31, 2015
Consolidated earned premiums
$
366,752
$
407,531
$
611,045
$
570,266
107.2%
Year ended December 31, 2014
Consolidated earned premiums
$
372,658
$
423,602
$
591,666
$
540,722
109.4%
169
S
E
I
R
A
I
D
I
S
B
U
S
D
N
A
.
C
N
I
P
U
O
R
G
E
C
N
A
R
U
S
N
I
C
M
E
i
g
n
n
r
e
c
n
o
C
n
o
i
t
a
m
r
o
f
n
I
l
a
t
n
e
m
e
l
p
p
u
S
–
I
V
e
l
u
d
e
h
c
S
s
n
o
i
t
a
r
e
p
O
e
c
n
a
r
u
s
n
I
y
t
l
a
u
s
a
C
-
y
t
r
e
p
o
r
P
4
1
0
2
d
n
a
5
1
0
2
,
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
E
s
r
a
e
Y
r
o
F
t
e
N
t
n
e
m
t
s
e
v
n
i
e
m
o
c
n
i
d
e
n
r
a
E
s
m
u
i
m
e
r
p
d
e
n
r
a
e
n
U
s
m
u
i
m
e
r
p
f
i
,
t
n
u
o
c
s
i
D
d
e
t
c
u
d
e
d
,
y
n
a
m
o
r
f
s
e
v
r
e
s
e
r
r
o
f
s
e
v
r
e
s
e
R
d
n
a
s
e
s
s
o
l
t
n
e
m
e
l
t
t
e
s
s
e
s
n
e
p
x
e
d
e
r
r
e
f
e
D
y
c
i
l
o
p
n
o
i
t
i
s
i
u
q
c
a
s
t
s
o
c
7
7
4
,
7
4
1
9
5
,
5
4
7
7
4
,
6
4
$
$
$
8
0
4
,
2
9
5
6
6
2
,
0
7
5
2
2
7
,
0
4
5
3
0
7
,
4
9
5
8
3
9
,
8
7
5
0
1
6
,
2
5
5
s
m
u
i
m
e
r
P
n
e
t
t
i
r
w
$
$
$
$
$
$
5
8
8
,
4
4
2
5
3
4
,
9
3
2
3
9
0
,
2
3
2
$
$
$
—
—
—
$
$
$
2
3
5
,
0
9
6
4
7
7
,
8
7
6
9
0
3
,
1
6
6
$
$
$
9
3
9
,
0
4
0
2
7
,
0
4
3
4
3
,
9
3
8
8
8
,
2
7
3
1
8
0
,
8
4
3
7
8
0
,
0
3
3
$
$
$
3
0
4
,
8
0
1
4
8
1
,
2
0
1
2
4
0
,
9
9
$
$
$
)
1
4
9
,
0
4
(
)
4
1
1
,
5
3
(
)
2
9
7
,
0
2
(
$
$
$
8
3
8
,
7
2
4
0
5
8
,
5
0
4
6
6
2
,
6
0
4
d
n
a
s
e
s
s
o
l
d
i
a
P
t
n
e
m
e
l
t
t
e
s
s
e
s
n
e
p
x
e
f
o
n
o
i
t
a
z
i
t
r
o
m
A
y
c
i
l
o
p
d
e
r
r
e
f
e
d
s
t
s
o
c
n
o
i
t
i
s
i
u
q
c
a
t
n
e
m
e
l
t
t
e
s
d
n
a
s
e
s
s
o
L
o
t
d
e
t
a
l
e
r
d
e
r
r
u
c
n
i
s
e
s
n
e
p
x
e
s
r
a
e
y
r
o
i
r
P
r
a
e
y
t
n
e
r
r
u
C
$
$
$
$
$
$
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
r
a
e
Y
5
1
0
2
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
r
a
e
Y
4
1
0
2
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
r
a
e
Y
)
s
d
n
a
s
u
o
h
t
n
i
$
(
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
r
a
e
Y
5
1
0
2
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
r
a
e
Y
4
1
0
2
,
1
3
r
e
b
m
e
c
e
D
d
e
d
n
e
r
a
e
Y
170
)
s
d
n
a
s
u
o
h
t
n
i
$
(
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of its management, including the Chief Executive Officer
and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls
and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the
Company’s disclosure controls and procedures are effective in timely making known to them material information relating to
the Company and the Company’s consolidated subsidiaries required to be disclosed in the Company’s reports filed or submitted
under the Exchange Act.
The report called for by Item 308(a) of Regulation S-K is included in “Management’s Report on Internal Control Over
Financial Reporting,” under Part II, Item 8 of this report.
The attestation report called for by Item 308(b) of Regulation S-K is included in “Report of Independent Registered
Public Accounting Firm on Internal Control Over Financial Reporting,” under Part II, Item 8 of this report.
There were no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter
ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 regarding the Company’s executive officers is included in “Executive Officers of
the Company” under Part I, Item 1 of this report.
The information required by Item 10 regarding the audit committee financial expert and the members of the Company’s
Audit Committee of the Board of Directors is incorporated by reference from the information under the caption “Corporate
Governance - Information about the Board of Directors and its Committees” in the Company’s Proxy Statement for the Annual
Meeting of Stockholders to be held on May 25, 2017.
The information required by Item 10 regarding the Company’s directors is incorporated by reference from the
information under the captions “Election of Directors” and “Corporate Governance - Information about the Board of Directors
and its Committees” in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 25, 2017.
The information required by Item 10 regarding compliance with Section 16(a) of the Exchange Act is incorporated by
reference from the information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the
Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 25, 2017.
The Company has adopted a code of ethics that applies to the Company’s principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing similar functions. The code of ethics is posted on the
Investors section of the Company’s internet website found at www.emcins.com. In the event that the Company makes any
amendments to, or grants any waivers from, a provision of the ethics policy that requires disclosure under applicable Securities
and Exchange Commission rules, the Company intends to disclose such amendments or waivers and the reasons therefore on its
website.
171
ITEM 11. EXECUTIVE COMPENSATION
See the information under the captions “Executive Compensation,” “Compensation Committee Report” and
“Compensation Committee Interlocks and Insider Participation” in the Company’s Proxy Statement in connection with its
Annual Meeting of Stockholders to be held on May 25, 2017, which information is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
See the information under the captions “Security Ownership of Certain Beneficial Owners” and “Security Ownership of
Management and Directors” in the Company’s Proxy Statement in connection with its Annual Meeting of Stockholders to be
held on May 25, 2017, which information is incorporated herein by reference.
Information regarding securities authorized for issuance under equity compensation plans appears in Part II, Item 5 of
this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
See the information under the captions “Certain Relationships and Related Persons Transactions” and “Corporate
Governance - Independence of Directors” in the Company’s Proxy Statement in connection with its Annual Meeting of
Stockholders to be held on May 25, 2017, which information is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
See the information under the caption “Independent Registered Public Accounting Firm’s Fees” in the Company’s Proxy
Statement in connection with its Annual Meeting of Stockholders to be held on May 25, 2017, which information is
incorporated herein by reference.
172
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
List of Financial Statements and Schedules
1.
Financial Statements
Management's Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, December 31, 2016 and 2015
Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and
2014
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2016, 2015 and
2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
2.
Schedules
Schedule I - Summary of Investments - Other Than Investments in Related Parties
Schedule II - Condensed Financial Information of Registrant
Schedule III - Supplementary Insurance Information
Schedule IV - Reinsurance
Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations
All other schedules have been omitted for the reason that the items required by such schedules are not
present in the consolidated financial statements, are covered in the notes to the consolidated financial
statements or are not significant in amount.
Page
96
97
98
99
101
102
103
104
106
163
164
168
169
170
3.
Exhibits required by Item 601
3.
Articles of incorporation and by-laws:
3.1
3.2
Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 filed
with the Company's Form 8-K filed on May 7, 2015 under Item 5.03)
By-Laws of the Company, as amended (incorporated by reference to Exhibit 3.2 filed with the
Company’s Form 8-K filed on May 30, 2013 under Item 5.03)
10. Material contracts
10.1.1
10.1.2
10.1.3
EMC Insurance Companies reinsurance pooling agreements between Employers Mutual Casualty
Company and certain of its affiliated companies, as amended (incorporated by reference to Exhibit
10.1.1 filed with the Company's Form 10-Q for the quarterly period ended March 31, 2016)
100% Quota Share Reinsurance Retrocessional Agreement between Employers Mutual Casualty
Company and EMC Reinsurance Company (incorporated by reference to Exhibit 10.1.2 filed with
the Company's Form 10-K for the year ended December 31, 2015)
Excess of Loss Reinsurance Agreement between EMC Reinsurance Company and Employers
Mutual Casualty Company, as amended (incorporated by reference to Exhibit 10.1.3 filed with the
Company’s Form 8-K filed on January 22, 2014 under Item 1.01)
173
10.1.4 Aggregate Catastrophe Excess of Loss and Per Occurrence Catastrophe Excess of Loss Reinsurance
Contract between Employers Mutual Casualty Company and EMC Reinsurance Company
(incorporated by reference to Exhibit 10.1.4 filed with the Company's Form 8-K filed on February
19, 2016 under Item 1.01)
10.1.5
10.2.1
10.2.2
10.2.3
10.2.4
10.2.5
10.2.6
10.2.7
Semi-Annual Aggregate Catastrophe Excess of Loss Reinsurance Contract between Employers
Mutual Casualty Company and Dakota Fire Insurance Company, EMCASCO Insurance Company
and Illinois EMCASCO Insurance Company (incorporated by reference to Exhibit 10.1.5 filed with
the Company's Form 8-K filed on February 19, 2016 under Item 1.01)
Summary of compensation for the Company’s non-employee directors (incorporated by reference to
Exhibit 10.2.2 filed with the Company's Form 10-Q for the quarterly period ended March 31, 2016)*
Employers Mutual Casualty Company Executive Annual Bonus Plan (incorporated by reference to
Exhibit 10.2.3 filed with the Company's Form 8-K filed on May 20, 2016 under Item 5.07)*
Executive Contingent Salary Plan – EMC Reinsurance Company (incorporated by reference to
Exhibit 10.2.4 filed with the Company’s Form 8-K filed on December 29, 2014 under Item 5.02)*
Employers Mutual Casualty Company Senior Executive Long Term Incentive Plan (incorporated by
reference to Exhibit 10.2.5 filed with the Company's Form 8-K filed on December 29, 2014 under
Item 5.02)*
EMC Reinsurance Company Executive Long Term Incentive Plan (incorporated by reference to
Exhibit 10.2.6 filed with the Company's Form 8-K filed on December 29, 2014 under Item 5.02)*
Employers Mutual Casualty Company Executive Long term Incentive Plan (incorporated by
reference to Exhibit 10.2.7 filed with the Company's Form 8-K filed on May 20, 2016 under item
5.07)*
Senior Executive Compensation Bonus Program (incorporated by reference to Exhibit 10.2.3 filed
with the Company's Form 8-K filed on December 29, 2014 under item 5.02)*
10.3.1 Deferred Bonus Compensation Plan (incorporated by reference to Exhibit 10.3.1 filed with the
Company's Form 10-K for the year ended December 31, 2015)*
10.3.2
10.3.3
10.3.4
10.3.5
10.3.6
10.4.1
10.4.2
10.4.3
10.4.4
10.4.5
Employers Mutual Casualty Company Board and Executive Non-Qualified Excess Plan, as amended
and restated (incorporated by reference to Exhibit 10.3.2 filed with the Company's Form 10-K for
the calendar year ended December 31, 2013)*
Employers Mutual Casualty Company Board and Executive Non-Qualified Excess Plan II
(incorporated by reference to Exhibit 10.3.3 filed with the Company’s Form 10-K for the calendar
year ended December 31, 2012)*
Employers Mutual Casualty Company Non-Employee Directors’ Post-Service Benefits Plan, as
amended and restated (incorporated by reference to Exhibit 10.3.4 filed with the Company's Form 8-
K filed on November 18, 2013 under Item 1.01)*
Employers Mutual Casualty Company Supplemental Retirement Plan (incorporated by reference to
Exhibit 10.3.5 filed with the Company's Form 10-K for the calendar year ended December 31,
2013)*
Employers Mutual Casualty Company Defined Contribution Supplemental Executive Retirement
Plan (incorporated by reference to Exhibit 10.3.7 filed with the Company's Form 10-K for the
calendar year December 31, 2014)*
Employers Mutual Casualty Company Amended and Restated 2008 Employee Stock Purchase Plan,
as amended (incorporated by reference to Exhibit 10.4.1 filed with the Company's Form 8-K filed on
May 27, 2016 under Item 8.01)*
2013 Employers Mutual Casualty Company Non-Employee Director Stock Purchase Plan
(incorporated by reference to Registration No. 333-187250)*
2003 Employers Mutual Casualty Company Incentive Stock Option Plan (incorporated by reference
to Registration No. 333-103722 and 333-128315)*
2007 Employers Mutual Casualty Company Stock Incentive Plan (incorporated by reference to
Registration No. 333-143457)*
EMC Insurance Group Inc. Amended and Restated Dividend Reinvestment and Common Stock
Purchase Plan (incorporated by reference to Registration No. 333-187622)
174
10.5.1
10.5.2
10.5.3
10.5.4
10.6.1
10.6.2
10.6.3
Surplus Note – EMCASCO Insurance Company (incorporated by reference to Exhibit 10.5.1 filed
with the Company’s Form 10-Q for the quarterly period ended March 31, 2013)
Surplus Note – Illinois EMCASCO Insurance Company (incorporated by reference to Exhibit 10.5.2
filed with the Company’s Form 10-Q for the quarterly period ended March 31, 2013)
Surplus Note – Dakota Fire Insurance Company (incorporated by reference to Exhibit 10.5.3 filed
with the Company’s Form 10-Q for the quarterly period ended March 31, 2013)
Inter-Company Loan Agreement
Investment Management Agreement (incorporated by reference to Exhibit 10.6.1 filed with the
Company’s Form 10-K for the calendar year ended December 31, 2012)
Services Agreement between Employers Mutual Casualty Company and EMC Insurance Group Inc.
(incorporated by reference to Exhibit 10.6.2 filed with the Company’s Form 10-K for the calendar
year ended December 31, 2012)
Services Agreement between Employers Mutual Casualty Company and EMC Underwriters, LLC
(incorporated by reference to Exhibit 10.6.3 filed with the Company’s Form 10-K for the calendar
year ended December 31, 2012)
10.6.4 Agreement for Payment of Taxes between Employers Mutual Casualty Company and EMC
Insurance Group Inc. and its subsidiaries individually
21.
Subsidiaries of the Registrant
23. Consent of Independent Registered Public Accounting Firm, with respect to Forms S-8 (Registration Nos.
333-187250, 333-103722, 333-128315, 333-143457 and 333-151299) and Form S-3 (Registration No.
333-187622)
24.
Power of Attorney
31.1 Certification of President, Chief Executive Officer and Treasurer as required by Section 302 of the Sarbanes-
Oxley Act of 2002
31.2 Certification of Senior Vice President and Chief Financial Officer as required by Section 302 of the Sarbanes-
Oxley Act of 2002
32.1 Certification of President, Chief Executive Officer and Treasurer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
*
Indicates management contract or compensatory plan or arrangement.
ITEM 16.
FORM 10-K SUMMARY
None.
175
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 6, 2017.
SIGNATURES
EMC INSURANCE GROUP INC.
/s/ Bruce G. Kelley
Bruce G. Kelley
President, Chief Executive Officer and Treasurer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities indicated on March 6, 2017.
/s/ Bruce G. Kelley
Bruce G. Kelley
President, Chief Executive Officer, Treasurer
and Director
(Principal Executive Officer)
/s/ Mark E. Reese
Mark E. Reese
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Mark E. Reese
Stephen A. Crane*
Chairman of the Board
/s/ Mark E. Reese
Jonathan R. Fletcher*
Director
/s/ Mark E. Reese
Robert L. Howe*
Director
/s/ Mark E. Reese
Gretchen H. Tegeler*
Director
* by power of attorney
176
GLOSSARY
Assumed Reinsurance - When one or more insurers, in exchange for a share of the premium, accepts responsibility
to indemnify risk underwritten by another as reinsurance. See “Reinsurance.”
Catastrophe and Storm Losses - Losses from the occurrence of an earthquake, hurricane, explosion, flood, hail
storm or other similar event which results in substantial loss.
Ceded Reinsurance - The transfer of all or part of the risk of insurance loss from an insurer to another as
reinsurance. See “Reinsurance.”
Combined Ratio - A measure of property/casualty underwriting results. It is the ratio of claims, settlement and
underwriting expenses to insurance premiums. When the combined ratio is under 100%, underwriting results are
generally profitable; when the ratio is over 100%, underwriting results are generally unprofitable. Underwriting
results do not include net investment income, which may make a significant contribution to overall profitability.
Deferred Policy Acquisition Costs - The capitalization of commissions, premium taxes and other expenses related
to the production of insurance business. These costs are deferred and amortized in proportion to related premium
revenue.
Excess of Loss Reinsurance - Coverage for the portion of losses which exceed predetermined retention limits.
Generally Accepted Accounting Principles (GAAP) - The set of practices and procedures that provides the
framework for financial statement measurement and presentation. Financial statements in this report were prepared
in accordance with U.S. GAAP.
Incurred But Not Reported (IBNR) – An estimate of liability for losses that have occurred but not yet been
reported to the insurer. For reinsurance business IBNR may also include anticipated increases in reserves for claims
that have previously been reported.
Incurred Losses and Settlement Expenses - Claims and settlement expenses paid or unpaid for which the
Company has become liable for during a given reporting period.
Loss Reserve Development - A measure of how the latest estimate of an insurance company’s claim obligations
compares to an earlier projection. This is also referred to as the increase or decrease in the provision for insured
events of prior years.
Net Investment Income - Dividends and interest earned during a specified period from cash and invested assets,
reduced by related investment expenses.
Net Investment Yield - Net investment income divided by average invested assets.
Other-Than-Temporary Investment Impairment Loss – A realized investment loss that is recognized when an
investment’s fair value declines below its carrying value and the decline is deemed to be other-than-temporary.
Pooling Agreement - A joint underwriting operation in which the participants assume a predetermined and fixed
interest in the premiums, losses, expenses and profits of insurance business.
Premiums - Amounts paid by policyholders to purchase insurance coverages.
Premiums Earned - The recognition of the portion of premiums written directly related to the expired
portion of an insurance policy for a given reporting period.
Net Premiums Written - Premiums written during a given reporting period, net of assumed and ceded
reinsurance, which correlate directly to the insurance coverage provided.
Unearned Premium - The portion of premiums written which would be returned to a policyholder upon
cancellation.
Premiums Written - The cost of insurance coverage. Premiums written refer to premiums for all policies
sold during a specified accounting period.
Quota Share Reinsurance Agreement – A form of reinsurance in which the reinsurer assumes a stated percentage
of all premiums, losses and related expenses in a given class of business.
Realized Investment Gains/Losses - The amount of net gains/losses realized when an investment is sold at a
price higher or lower than its original cost or carrying amount. Also the amount of loss recognized when an
investment’s carrying value is reduced to fair value due to an other-than-temporary impairment in the fair value
of that investment.
Reinsurance - The contractual arrangement by which one or more insurers, called reinsurers, in exchange for
premium payments, agree to assume all or part of a risk originally undertaken by another insurer. Reinsurance
“spreads risk” among insurance enterprises, allowing individual companies to reduce exposure to losses and provide
additional capacity to write insurance.
Reserves - The provision for the estimated future cost of all unpaid claims. The total includes known claims as well
as amounts for claims that have occurred but have not been reported to the insurer (IBNR).
Return on Equity (ROE) - Net income divided by average stockholders’ equity.
Risk-Based Capital - A model developed by the National Association of Insurance Commissioners which attempts
to measure the minimum statutory capital needs of property and casualty insurance companies based upon the risks
in a company’s mix of products and investment portfolio.
Settlement Expenses - Expenses incurred in the process of investigating and settling claims.
Statutory Accounting - Accounting practices used by insurance companies to prepare financial statements
submitted to state regulatory authorities. Statutory accounting differs from GAAP in that it stresses insurance
company solvency rather than the matching of revenues and expenses.
Underwriting Gain/Loss - Represents insurance premium income less insurance claims, settlement and
underwriting expenses.
Unrealized Holding Gains/Losses on Investments - Represents the difference between the current market
value of investments and the basis at the end of a reporting period.
EMCI BOARD
OF DIRECTORS
EMCI
OFFICERS
Executive Management
Vice Presidents
President, Chief Executive
Officer & Treasurer
Bruce G. Kelley, J.D., CPCU, CLU
Chief Actuary
Melissa J. Appenzeller, FCAS,
MAAA
Executive Vice President &
Chief Operating Officer
Kevin J. Hovick, CPCU
Executive Vice President for
Finance and Analytics
Scott R. Jean, FCAS, MAAA
Executive Vice President for
Corporate Development
Mick A. Lovell, CPCU
Senior Vice Presidents
Strategic Analytics
Ian C. Asplund, M.S., FCAS,
MAAA, CERA
Chief Investment Officer
Bradley J. Fredericks,
M.B.A., FLMI
Reinsurance
Vicki L. Freese, CPCU, ARe
General Counsel & Secretary
Todd A. Strother, J.D.
Appointed Actuary
Kelvin B. Sederburg, ACAS, MAAA
Assistant Vice Presidents
Investments
Karey S. Anderson, CFA
Branch Operations
Jason R. Bogart, CPCU, ARM
Controller
Carla A. Prather
Assistant Secretaries
Investments
John S. Osier, M.B.A., CPCU, CFA
Director of Investor Relations
Steven T. Walsh, CPA
Information Technology
Rodney D. Hanson, CPCU
Assistant Secretary
Robert L. Link, CAM, CM
Human Resources
Elizabeth A. Nigut, J.D.
Internal Audit
Ronald A. Paine, CPA, CIA
Business Development
Larry W. Phillips, CPCU
Chief Financial Officer
Mark E. Reese, CPA
Claims
Lisa A. Simonetta, J.D.
Chairman of the Board
Stephen A. Crane*
71, A, C, E, N (Chair)
Independent Consultant
Retired Chief Executive Officer,
AlphaStar Insurance Group Ltd.
Other Directorship:
First Security Benefit Life Insurance
and Annuity Company of New York
Directors
Jonathan R. Fletcher
43, C (Chair), I, N
Independent Consultant
Other Directorships:
BTC Financial Corporation
Ruan, Inc.
Ruan Transportation Management Systems, Inc.
Robert L. Howe*, CFE, CIE, CGFM, AIR
74, A, C, I (Chair), N
Consultant, Insurance Strategies Consulting, LLC
Retired Deputy Commissioner and Chief Examiner,
Iowa Insurance Division
Other Directorships:
American Equity Investment Life Holding Company
American Equity Investment Life Insurance
Company of New York
Bruce G. Kelley, J.D., CPCU, CLU
63, E (Chair)
President, Chief Executive Officer & Treasurer,
EMC Insurance Group Inc.
Gretchen H. Tegeler*
61, E, A (Chair), I
President, 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 Inter-Company Committee
N Corporate Governance and Nominating
Committee
*EMCI’s Board-designated Audit Committee financial expert
EMC Insurance Group Inc.
Dakota Fire Insurance Company
EMC Reinsurance Company
EMCASCO Insurance Company
EMC Underwriters, LLC
Illinois EMCASCO Insurance Company
717 Mulberry Street, Des Moines, IA 50309
515-280-2511 | 800-447-2295 | emcins.group@emcins.com | www.emcins.com/ir
© Copyright Employers Mutual Casualty Company 2017. All rights reserved.