Production increases for the last three years have been hindered by rate competition and the continued shift of large commercial insureds to alternative risk mechanisms. In response to these difficult market conditions, the property and casualty insurance subsidiaries have implemented new marketing programs that emphasize property insurance. In addition to increasing the amount of property insurance written, these programs have also helped to highlight the subsidiaries' other products. Premium rate adequacy varied greatly by line of business in 1994, but overall rate adequacy improved. This improvement reflects many factors, including careful underwriting, significant reform measures implemented by several states to control the administrative costs of workers' compensation claims and internal cost management programs. During 1994, 11 states implemented rate reductions for the workers' compensation line of business ranging from .3 percent to 16.0 percent while 14 states implemented rate increases ranging from .1 percent to 12.6 percent. These rate changes did not have a material impact on 1994 production as they were implemented at various times throughout the year and they largely offset each other.
As of December 31, 1994, the Company had no material commitments for capital expenditures.
As discussed in notes 1, 10, 11 and 13 to the consolidated financial statements, the Company changed its method of computing unearned premiums in 1993 and implemented the provisions of the Financial Accounting Standards Board's Statements No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions", No. 109, "Accounting for Income Taxes" and No. 115, "Accounting for Certain Investments in Debt and Equity Securities".
Losses and settlement expenses (notes 2,3,5 and 6) $203,181,615 $197,121,852 Unearned premiums (notes 2 and 3) ................. 47,672,570 45,941,056 Other policyholders' funds ........................ 3,102,609 2,854,793 Indebtedness to related party (note 4) ............ 937,356 - Income taxes payable .............................. 1,736,000 550,000 Postretirement benefits (note 13).................. 4,086,674 3,537,449 Deferred income (note 2) .......................... 1,283,662 1,717,641 Other liabilities ................................. 8,642,703 7,578,963 ------------ ------------ Total liabilities .......................... 270,643,189 259,301,754 ------------ ------------
Income taxes paid ................... $ 3,795,381 $ 2,021,128 $ 4,650,795 Interest paid ....................... 33,672 - 387,351
Effective January 1, 1993, the quota share agreement was amended so that losses in excess of $1,000,000 per event are retained by Employers Mutual. The reinsurance subsidiary pays an annual override commission to Employers Mutual for this additional protection, which totaled $2,094,715 in 1994 and $1,808,527 in 1993. The reinsurance subsidiary also pays for 95 percent of the outside reinsurance protection Employers Mutual purchases to protect itself from catastrophic losses on the assumed reinsurance business. This cost is recorded as a reduction to the premiums received by the reinsurance subsidiary and amounted to $2,563,041 in 1994 and $2,866,825 in 1993. Employers Mutual retained losses and settlement expenses totaling $7,019,772 in 1994 and $615,000 in 1993 under this agreement.
The reinsurance subsidiary has an aggregate excess of loss treaty with Employers Mutual which provides protection from a large accumulation of retentions resulting from multiple catastrophes in any one calendar year. The coverage provided is $2,000,000 excess of $2,500,000 aggregate losses retained, excess of $200,000 per event. Maximum recovery is limited to $4,000,000 per accident year. The reinsurance subsidiary recovered $0, $143,501, and $4,221,444 under this treaty and paid reinstatement premiums of $0, $208,470 and $744,561 in 1994, 1993 and 1992, respectively. Total premiums paid to Employers Mutual amounted to $557,842, $708,445 and $1,124,561 in 1994, 1993 and 1992, respectively.
Prior to 1993, the reinsurance subsidiary ceded reinsurance business to Employers Mutual and other nonaffiliated reinsurers in the ordinary course of business for the purpose of limiting its maximum loss exposure. Effective January 1, 1993, the quota share agreement with Employers Mutual was amended so that losses in excess of $1,000,000 per event are retained by Employers Mutual. In conjunction with this amendment to the quota share agreement, the reinsurance subsidiary terminated its catastrophe reinsurance contracts with Employers Mutual and the nonaffiliated reinsurers. Effective January 1, 1993, the reinsurance subsidiary no longer cedes reinsurance to unaffiliated reinsurers and only cedes reinsurance to Employers Mutual under an aggregate "excess of loss" treaty. As a result, reinsurance receivables and prepaid reinsurance premiums for the Company have decreased from 1992 amounts.