Expenses of office facilities owned by Employers Mutual are borne by the parties to the pooling agreement, less the rent received from the space used and paid for by non-insurance subsidiaries and outside tenants. Expenses totaling $1,714,082, $1,784,868 and $1,699,591 for the three years ended December 31, 1994, 1993 and 1992, respectively, were charged to the pool in connection with the rental of 229,770 and 63,450 square feet located in Des Moines and Ames, Iowa.
Insurance premiums earned ...... $164,829 $156,438 $147,410 $113,419 $101,323 Investment income, net ......... 20,930 20,780 21,540 20,202 19,884 Realized investment gains ...... 520 684 384 65 48 Other income ................... 434 259 - - - -------- -------- -------- -------- -------- Total revenues ............ 186,713 178,161 169,334 133,686 121,255
Losses and expenses ............ 168,036 169,142 168,359 123,254 110,415 -------- -------- -------- -------- -------- Income before income taxes ..... 18,677 9,019 975 10,432 10,840
Earnings per common share: Income from continuing operations ................. $ 1.29 $ .70 $ .02 $ .73 $ .80
Income from accounting changes .................... - .26 - - - -------- -------- -------- -------- -------- Total .................... $ 1.29 $ .96 $ .02 $ .91 $ .83 ======== ======== ======== ======== ========
Total assets ................... $387,370 $368,936 $372,807 $311,001 $296,126 ======== ======== ======== ======== ========
Stockholders' equity ........... $116,727 $109,634 $100,911 $105,144 $100,615 ======== ======== ======== ======== ========
Average return on equity ....... 11.9% 9.3% .2% 8.9% 8.4% ======== ======== ======== ======== ========
Book value per share ........... $ 11.03 $ 10.63 $ 9.98 $ 10.47 $ 10.04 ======== ======== ======== ======== ========
Dividends paid per share ....... $ .52 $ .52 $ .52 $ .52 $ .52 ======== ======== ======== ======== ========
EMC Insurance Group Inc. (the "Company"), an approximately 67 percent owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is an insurance holding company with operations in property and casualty insurance, reinsurance, nonstandard risk automobile insurance and excess and surplus lines insurance management. Property and casualty insurance is the most significant segment, representing 70.0 percent of consolidated premium income.
The three property and casualty insurance subsidiaries of the Company and two subsidiaries of Employers Mutual are parties to reinsurance pooling agreements with Employers Mutual (collectively the "pooling agreement"). Under the terms of the pooling agreement, each company cedes to Employers Mutual all of its insurance business and assumes from Employers Mutual an amount equal to its participation in the pool. All losses, settlement expenses and other underwriting and administrative expenses, excluding the voluntary reinsurance business assumed by Employers Mutual from unaffiliated insurance companies, are prorated among the parties on the basis of participation in the pool. The aggregate participation of the Company's property and casualty insurance subsidiaries is 22 percent. Operations of the pool give rise to intercompany balances with Employers Mutual, which are settled on a quarterly basis. The investment programs and income tax liabilities of the pool participants are not subject to the pooling agreement.
The Company's nonstandard risk automobile insurance subsidiary specializes in insuring private passenger automobile risks that are found to be unacceptable in the normal automobile market.
The excess and surplus lines insurance agency provides insurance companies with access to the excess and surplus lines markets and also functions as managing underwriter for such lines for Employers Mutual and several of the pool members.
Operating results before income taxes have improved significantly over the last three years. This improvement reflects a decrease in catastrophe losses and a decline in the loss and settlement expense provision for insured events of prior years. In 1994, all segments showed improved operating results, with the property and casualty insurance subsidiaries and the nonstandard risk automobile insurance subsidiary posting significant increases over 1993. Operating results for 1993 reflect greatly improved underwriting results in the property and casualty insurance subsidiaries and the reinsurance subsidiary. Operating results for 1992 were severely impacted by catastrophe losses associated with Hurricanes Andrew and Iniki.
Losses and settlement expenses have decreased over the last three years, reflecting a decline in catastrophe losses and the provision for insured events of prior years. During 1992, the property and casualty insurance subsidiaries and the nonstandard risk automobile insurance subsidiary strengthened prior year reserves on certain lines of business and the reinsurance subsidiary experienced a time lag in the reporting of assumed reinsurance business. During 1993, the property and casualty insurance subsidiaries continued to strengthen reserves on certain lines of business, while the reinsurance subsidiary experienced adverse development on losses associated with Hurricane Andrew. These reserve increases in 1992 and 1993 were partially offset by reserve decreases on other lines of business, resulting in a net increase in the Company's estimate of prior year reserves of $5,472,000 in 1992 and $459,000 in 1993. During 1994, the reinsurance subsidiary experienced adverse development on certain contracts. These reserve increases were offset by significant reserve decreases in the property and casualty insurance subsidiaries and the nonstandard risk automobile insurance subsidiary. As a result, the net decrease in the Company's prior year reserves in 1994 amounted to $6,400,000. In addition to the substantial amount of catastrophe losses incurred in 1992 and 1993, results for these years also reflect losses associated with two reinsurance contracts under the reinsurance subsidiary's quota share agreement that were commuted in 1993.
In 1993, the Company adopted four new accounting standards and implemented an accounting change. The net impact of these items was an increase in net income of $2,621,000 ($.26 per share). Following is a brief explanation of each item:
* Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." The Company adopted SFAS 109 as a cumulative effect adjustment to income. The Company recognized a benefit of $5,595,000 ($.55 per share), net of a valuation allowance of $1,000,000.
* Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 113 (SFAS 113), "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." SFAS 113 requires a gross (rather than net) balance sheet presentation for ceded reinsurance amounts and addresses the recognition of gain or loss resulting from reinsurance transactions and appropriate financial statement disclosure of reinsurance activities. Adoption of this statement had no effect on the income of the Company.
Following is an overview of recent changes that have affected the operations of the property and casualty insurance subsidiaries.
($ in thousands) 1994 1993 1992 -------- -------- -------- Premiums earned .......................... $115,412 $109,585 $109,139 Losses and settlement expenses ........... 77,872 79,777 82,314 Other expenses ........................... 36,606 33,621 33,994 -------- -------- -------- Underwriting gain (loss) ................. 934 (3,813) (7,169) Net investment income .................... 14,080 13,243 13,048 Realized investment gains ................ 334 405 285 -------- -------- -------- Operating income before income taxes ..... $ 15,348 $ 9,835 $ 6,164 ======== ======== ======== Incurred losses and settlement expenses: Insured events of the current year ..... $ 84,204 $ 81,355 $ 80,900 (Decrease) increase in provision for insured events of prior years ........ (6,332) (1,578) 1,414 -------- -------- -------- Total losses and settlement expenses .. $ 77,872 $ 79,777 $ 82,314 ======== ======== ======== Catastrophe losses ....................... $ 4,063 $ 3,372 $ 4,631 ======== ======== ========
Investment income increased in each of the last three years. The large increase in 1994 reflects interest income earned on $13,148,000 received from Employers Mutual in connection with the gross-up of reserve amounts associated with the National Workers' Compensation Reinsurance Pool in 1993.
Following is an overview of recent changes that have affected the operations of the reinsurance subsidiary.
($ in thousands) 1994 1993 1992 -------- -------- -------- Premiums earned ............................ $ 37,256 $ 33,324 $ 26,615 Losses and settlement expenses ............. 30,565 27,872 29,047 Other expenses ............................. 11,408 11,492 9,472 -------- -------- -------- Underwriting loss .......................... (4,717) (6,040) (11,904) Net investment income ...................... 5,354 6,090 6,763 Realized investment gains .................. 116 201 52 Other income ............................... 434 259 - -------- -------- -------- Operating income (loss) before income taxes $ 1,187 $ 510 $ (5,089) ======== ======== ======== Incurred losses and settlement expenses: Insured events of the current year ....... $ 29,270 $ 25,359 $ 25,608 Increase in provision for insured events of prior years .................. 1,295 2,513 3,439 -------- -------- -------- Total losses and settlement expenses .... $ 30,565 $ 27,872 $ 29,047 ======== ======== ======== Catastrophe losses ......................... $ 1,424 $ 5,141 $ 11,609 ======== ======== ========
Underwriting results have improved significantly over the last three years, primarily due to a decline in catastrophe losses. The large decrease in catastrophe losses in 1994 was partially offset by an increase in crop hail losses and a deterioration of results in the pro rata business. Incurred losses for the last three years reflect adverse development on prior year losses. The large amount in 1992 is primarily due to a time lag in the reporting of assumed reinsurance business. This time lag did not have a material effect on the underwriting results of the reinsurance subsidiary since the premium income associated with this business was recorded at the same time as the losses. The adverse development experienced in 1993 primarily relates to losses associated with Hurricane Andrew. Results for 1993 and 1992 reflect $1,678,000 and $2,246,000, respectively, of underwriting losses associated with two reinsurance contracts that were commuted in 1993.
Expenses for 1994 and 1993 include $2,095,000 and $1,809,000, respectively, of commissions paid to Employers Mutual in connection with the $1,000,000 cap on catastrophe losses under the amended quota share agreement.
The large decline in investment income in 1994 and 1993 is primarily attributable to the transfer of $20,426,000 to Employers Mutual during 1993 in connection with the commutation of two reinsurance contracts. This decline in investment income was partially offset by the recognition of deferred income totaling $434,000 in 1994 and $259,000 in 1993 related to reserve discounting on one of the commuted contracts.
Premiums earned declined in 1994 as the company elected to emphasize profitability over premium volume and did not reduce rates in order to retain business. Recently, the larger standard companies have begun to develop rate tiers that are geared toward retaining nonstandard risk customers, rather than passing them into the nonstandard market. This additional availability in the standard market has resulted in increased competition in the nonstandard market. Production for 1995 is expected to remain relatively flat as the company will continue to emphasize profitability over market share. The company expects to begin writing business in the state of Missouri in late 1995 which should help to offset any production decreases experienced in existing markets.
Underwriting results for 1994 reflect improved loss experience, favorable development on prior year loss reserves and rate increases that were implemented in all states during the later part of 1993 and the first part of 1994. Results for 1992 and 1993 were negatively impacted by increased loss frequency and severity associated with a new book of business and a strengthening of loss and settlement expense reserves. During 1992, this reserve strengthening was primarily directed toward prior year claims. During 1993, the reserve strengthening was primarily directed toward current year claims in response to increased loss frequency and severity on the new book of business. Profitable underwriting results in the future are likely to be more dependent upon successful niche marketing, rather than full coverage programs. The company is prepared to meet the needs of its consumers by offering selected coverages at prices deemed adequate for the risks insured.
Estimating asbestos and environmental related reserves is very difficult due to the following uncertainties surrounding these types of claims: the legal definition of asbestos and environmental damage is still evolving, the assignment of responsibility varies widely by state, defense costs are often much greater than the claim costs and claims often emerge long after the policy has expired, making assignment of damages to the appropriate party and to the time period covered by a particular policy difficult. In establishing reserves for these types of claims, management monitors the relevant facts concerning each claim, the current status of the legal environment, the social and political conditions and the claim history and trends within the Company and the industry.
The Company's asbestos claims activity is predominately from insureds that have been named as one of multiple defendants covering exposure over many years. The Company has not found any evidence of injury as a result of exposure to the Company's insured's products during the policy periods.
The Company maintains a portion of the investment portfolio in relatively short-term and highly liquid investments to ensure the availability of funds to meet claims and expenses. The remainder of the investment portfolio is invested in securities with maturities that approximate the anticipated liabilities of the insurance issued. Net unrealized holding losses on fixed maturity securities available-for-sale totaled $1,317,000 at December 31, 1994. This compares to net unrealized holding gains of $3,134,000 at December 31, 1993. The decrease in the market value of these investments is primarily due to higher interest rates imposed by the Federal Reserve Board during 1994, which caused bond values to decline. Further declines in the market value of these investments may occur if the Federal Reserve Board again raises interest rates. Since the Company does not actively trade in the bond market, such fluctuations in the market 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 investment policy as changing conditions warrant. A valuation allowance related to the tax benefits associated with these unrealized holding losses was established in 1994 due to the uncertainty concerning the future realization of these tax benefits.
The majority of the Company's assets are invested in fixed maturities. These investments provide a substantial amount of income which offsets underwriting losses and contributes to net earnings. As these investments mature the proceeds will be reinvested at current 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 depending on the interest rate level.
The Company intends to increase its investment in equity securities during 1995. Approximately $13,500,000 of short-term funds will be reinvested in equity securities classified as available-for-sale during the first six months of 1995. The overall liquidity position of the Company will not be affected by this change.
The Company contributed $10,000,000 of the proceeds received from the sale of the life subsidiary to increase the surplus of the property and casualty insurance subsidiaries in 1992 in connection with the increase in pool participation. The Company contributed $3,000,000 to the surplus of the reinsurance subsidiary in 1992 in order to retain its status as an authorized reinsurance company in several states.
Insurance company operations require capital to support premium writings. The Company believes that its insurance company subsidiaries have sufficient capital to support their expected near-term writings. The Company's insurance agency operations do not require a large amount of capital.
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 which reflects an increasingly litigious society and increasing jury awards, when setting reserve amounts. Premiums are also affected by inflation, although they are often restricted or delayed by competition and the regulatory rate-setting environment.
The NAIC is in the process of developing model legislation to govern insurance company investments. An exposure draft was released in August of 1994 and a model law may be adopted by the NAIC in 1995. This model law is not expected to have a material impact on the operations of the Company's insurance subsidiaries.
The consolidated financial statements contained in this annual report were prepared by management in conformity with generally accepted accounting principles. In preparing these financial statements, reasonable estimates and judgments have been made when necessary.
Management is responsible for establishing and maintaining a system of internal control, designed to provide reasonable assurance as to the integrity and reliability of the financial records. The concept of reasonable assurance recognizes that there are inherent limitations in any control system and that the cost of maintaining a control system should not exceed the expected benefits to be derived therefrom. Management believes its system of internal control effectively meets its objective of reliable financial reporting.
The Audit Committee of the Board of Directors, composed solely of outside directors, met during the year with management and the independent accountants to review and discuss audit findings and other financial and accounting matters. The independent accountants have free access to the Audit Committee, with and without management present, to discuss the results of their audit work.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EMC Insurance Group Inc. and Subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles.
Investments (note 10): Fixed maturities: Securities held-to-maturity, at amortized cost (market value $238,721,488 and $206,305,597) $243,649,720 $191,010,623 Securities available-for-sale, at market value (amortized cost $77,808,992 and $93,218,174) 76,492,396 96,352,190 Equity securities available-for-sale, at market value (cost $0 and $505,000) .................. - 475,000 Short-term investments, at cost ................. 16,029,426 16,729,390 ------------ ------------ Total investments .......................... 336,171,542 304,567,203
Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding, 10,587,629 shares in 1994 and 10,325,329 shares in 1993 ........... 10,587,629 10,325,329 Additional paid-in capital ........................ 57,162,911 55,021,926 Unrealized holding (losses) gains on fixed maturity securities available-for-sale, net of tax ...................................... (1,316,596) 2,068,451 Unrealized holding losses on equity securities available-for-sale, net of tax .................. - (19,800) Retained earnings ................................. 50,402,812 42,319,249 Treasury stock, at cost (10,931 shares in 1994 and 8,090 shares in 1993) ....................... (110,067) (81,386) ------------ ------------ Total stockholders' equity ................. 116,726,689 109,633,769 ------------ ------------ Contingent liabilities (notes 3,11 and 17)
Cumulative effect of changes in accounting principles for: Income taxes ................. - .55 - Postretirement benefits ...... - (.21) - Unearned premiums ............ - (.08) - ------------ ------------ ------------ Total ...................... $ 1.29 $ .96 $ .02 ============ ============ ============ Average number of shares outstanding 10,431,925 10,197,999 10,071,901 ============ ============ ============
Net income ............................... $ 10,563,312 $ 344,420 ============ ============ Earnings per common share ................ $ 1.04 $ .03 ============ ============
Additional paid-in capital, beginning of year .................... 55,021,926 53,507,459 52,838,624 Additional paid-in capital from issuance of common stock: Stock option plans ................. 349,390 279,234 669,320 Dividend reinvestment plan ......... 1,791,595 1,211,972 - Gain (loss) on sale of treasury stock .. - 23,261 (485) ----------- ----------- ----------- Additional paid-in capital, end of year 57,162,911 55,021,926 53,507,459 ----------- ----------- -----------
Unrealized holding gains on fixed maturity securities available-for- sale, net of tax, beginning of year .. 2,068,451 - - Unrealized holding (losses) gains on revaluation of fixed maturity securities available-for-sale, net of tax (notes 1 and 10) .......... (3,385,047) 2,068,451 - ----------- ----------- ----------- Unrealized holding (losses) gains on fixed maturity securities available- for-sale, net of tax, end of year .... (1,316,596) 2,068,451 - ----------- ----------- -----------
Unrealized holding losses on equity securities available-for-sale, net of tax, beginning of year ........ (19,800) (142,000) (326,375) Unrealized holding gains on revaluation of equity securities available-for-sale, net of tax ....... 19,800 122,200 184,375 ----------- ----------- ----------- Unrealized holding losses on equity securities available-for-sale, net of tax, end of year .............. $ - $ (19,800) $ (142,000) ----------- ----------- -----------
Year ended December 31, ---------------------------------------- 1994 1993 1992 ------------ ------------ ------------ Retained earnings, beginning of year $ 42,319,249 $ 37,866,902 $ 42,891,128 Net income .......................... 13,505,727 9,755,379 215,692 Dividends on common stock ($.52 per share in 1994, 1993 and 1992): Cash dividends .................. (3,510,555) (3,443,465) (5,103,890) Dividends reinvested in shares of common stock .............. (1,911,609) (1,859,567) (136,028) ------------ ------------ ------------ Retained earnings, end of year ...... 50,402,812 42,319,249 37,866,902 ------------ ------------ ------------
Year ended December 31, ------------------------------------- 1994 1993 1992 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ........................... $13,505,727 $ 9,755,379 $ 215,692 ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Cumulative effect of changes in accounting principles, net of tax ............................ - (2,621,344) - Losses and settlement expenses ... 5,372,801 8,010,617 33,143,232 Unearned premiums ................ 1,731,514 650,196 4,122,176 Other policyholders' funds ....... 247,816 (840,604) 880,866 Deferred policy acquisition costs (694,771) 413,967 (2,189,375) Indebtedness of related party (note 4) ................. 13,228,868 (8,639,436) 2,261,884 Accrued investment income ........ (725,182) (242,595) (168,511) Accrued income taxes: Current ........................ 1,186,000 (118,000) (2,390,000) Deferred ....................... (94,441) (18,027) (1,501,430) Provision for amortization ....... 4,101 (23,072) 23,660 Realized investment gains ........ (519,567) (684,445) (384,283) Postretirement benefits .......... 549,225 255,782 - Reinsurance receivables .......... 3,542,358 9,389,384 (12,828,945) Prepaid reinsurance premiums ..... 711,151 805,733 (945,813) Amortization of deferred income .. (433,979) (259,217) - Other, net ....................... 706,967 225,040 1,184,844 ----------- ----------- ----------- 24,812,861 6,303,979 21,208,305 Cash (used in) provided by the change in the property and casualty insurance subsidiaries' pooling agreement (note 2) ..... - (4,426,945) 29,402,411
Property and Casualty Insurance, Reinsurance and Nonstandard Risk Automobile Insurance Operations
Ceded reinsurance activities are reported on the basis of Statement of Financial Accounting Standards No. 113 (SFAS 113), "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." SFAS 113 requires a gross (rather than net) balance sheet presentation for ceded reinsurance amounts and addresses the recognition of gain or loss resulting from reinsurance transactions and appropriate financial statement disclosure of reinsurance activities.
Prior to December 31, 1993, investments in fixed maturities were carried at amortized cost and equity securities were carried at market value. Changes in unrealized holding gains and losses resulting from the revaluation of equity securities were reported as direct increases and decreases in stockholders' equity. Unrealized holding gains and losses on fixed maturities were not recognized in the consolidated financial statements.
Short-term investments represent money market funds and are carried at cost.
Effective December 31, 1994, the Company adopted Statement of Financial Accounting Standards No. 119 (SFAS 119), "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." Adoption of this statement had no effect on current disclosures as the Company did not hold or issue any derivative financial instruments at December 31, 1994.
Net periodic pension cost relating to the Company's employee participation in Employers Mutual's Retirement Plan is computed on the basis of Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions." It is the Company's policy to fund pension costs according to regulations provided under the Internal Revenue Code. Assets held in the plan are a mix of equity, debt and guaranteed interest securities and real estate funds.
The Company files a consolidated Federal income tax return with its subsidiaries. Consolidated income tax/benefit is allocated among the entities based upon separate tax liabilities.
Employers Mutual voluntarily assumes reinsurance business from nonaffiliated insurance companies and cedes 95 percent of this business to the Company's reinsurance subsidiary, exclusive of certain reinsurance contracts. Prior to 1993, amounts not ceded to the reinsurance subsidiary were retained by Employers Mutual and were subject to cession to the pool members. Effective January 1, 1993, the pooling agreement was amended so that the voluntary assumed reinsurance business written by Employers Mutual is no longer subject to cession to the pool members. As a result, amounts assumed from nonaffiliates have declined from the amount's assumed in 1992. In connection with this change in the pooling agreement, the Company's liabilities decreased $4,470,204 and invested assets decreased $4,426,945. Employers Mutual reimbursed the Company $43,259 for commissions incurred to generate this business.
In conjunction with this amendment to the quota share agreement, the reinsurance subsidiary terminated its catastrophe reinsurance treaty with Employers Mutual effective January 1, 1993. This treaty paid losses in excess of $1,000,000 resulting from any one catastrophe, subject to a maximum loss of $3,000,000. Maximum recovery was limited to $6,000,000. The reinsurance subsidiary recovered $306,250 and $4,125,000 under this treaty and paid reinstatement premiums of $0 and $1,033,030 in 1993 and 1992, respectively. Total premiums paid to Employers Mutual amounted to $0 and $2,253,579 in 1993 and 1992, respectively.
Effective June 30, 1993, Employers Mutual commuted the portion of the quota share agreement that pertained to a casualty pool that is in a run-off position. In connection with this change in the quota share agreement, the Company's liabilities decreased $19,783,037 and invested assets decreased $17,806,179. The reserve discount amount of $1,976,858 was recorded as deferred income and is being amortized into operations over the estimated settlement period of the reserves, which is ten years. The amount recognized as income totaled $433,979 in 1994 and $259,217 in 1993.
During 1994, the reinsurance subsidiary commuted all outstanding reinsurance balances ceded to Employers Mutual under catastrophe and aggregate excess of loss reinsurance treaties related to accident years 1991 through 1993. In connection with these commutations, the Company's assets and liabilities increased $686,962. There was no income effect from these commutations.
Premiums assumed by the reinsurance subsidiary from Employers Mutual amounted to $39,899,335, $34,445,978 and $34,777,710 in 1994, 1993 and 1992, respectively. It is customary in the reinsurance business for the assuming company to compensate the ceding company for the acquisition expenses it incurred in the generation of the business. Commissions paid by the reinsurance subsidiary to Employers Mutual amounted to $11,482,086, $8,979,309 and $10,242,650 in 1994, 1993 and 1992, respectively.
The nonstandard risk automobile insurance subsidiary has a reinsurance treaty on an excess of loss basis with Employers Mutual which provides reinsurance for 100 percent of each loss in excess of $100,000, up to $1,000,000. Recoveries under this treaty totaled $71,567, $0 and $0 in 1994, 1993 and 1992, respectively. Premiums paid to Employers Mutual amounted to $49,659, $42,065 and $35,377 in 1994, 1993 and 1992, respectively.
Employers Mutual provides various services to all of it's subsidiaries. Such services include data processing, claims, financial, actuarial, auditing, marketing and underwriting. Costs of these services are charged to the subsidiaries outside the pooling agreement based upon a number of criteria, including usage and number of transactions. Costs not charged to these subsidiaries are charged to the pool and each pool participant shares in the total cost in proportion to its participation percentage.
Year ended December 31, ---------------------------------------- 1994 1993 1992 ------------ ------------ ------------ Premiums Written Direct ......................... $143,444,388 $135,277,129 $138,829,576 Assumed from nonaffiliates ..... 5,843,091 6,636,942 16,467,613 Assumed from affiliates ........ 158,646,332 147,620,705 150,070,741 Ceded to nonaffiliates ......... (8,890,119) (10,701,482) (17,721,207) Ceded to affiliates ............ (132,100,537) (120,898,914) (129,826,840) ------------ ------------ ------------ Net premiums written ......... $166,943,155 $157,934,380 $157,819,883 ============ ============ ============ Premiums Earned Direct ......................... $140,012,247 $137,141,457 $142,391,771 Assumed from nonaffiliates ..... 5,988,228 6,758,364 14,980,642 Assumed from affiliates ........ 156,839,482 148,366,487 140,442,245 Ceded to nonaffiliates ......... (9,601,270) (11,507,217) (16,775,394) Ceded to affiliates ............ (128,409,308) (124,321,553) (133,628,977) ------------ ------------ ------------ Net premiums earned .......... $164,829,379 $156,437,538 $147,410,287 ============ ============ ============ Losses and Settlement Expenses Incurred Direct ......................... $113,680,306 $ 97,842,980 $112,579,261 Assumed from nonaffiliates ..... 2,774,689 6,575,099 17,415,319 Assumed from affiliates ........ 108,594,530 107,369,274 114,359,445 Ceded to nonaffiliates ......... (3,077,305) (5,845,414) (16,862,082) Ceded to affiliates ............ (105,028,166) (85,586,640) (105,404,110) ------------ ------------ ------------ Net losses and settlement expenses incurred .......... $116,944,054 $120,355,299 $122,087,833 ============ ============ ============
Prior to December 31, 1993, the parties to the pooling agreement recorded amounts assumed from the National Workers' Compensation Reinsurance Pool on a net basis. Under this approach, reserves for outstanding losses and unearned premiums were reported as liabilities under "Indebtedness to Related Party" in the Company's consolidated financial statements. Effective December 31, 1993, the parties to the pooling agreement began recording these amounts as outstanding losses and unearned premiums and restated all prior year consolidated financial statements for comparative purposes. There was no income effect from this reclassification. In connection with this gross-up of balances, amounts due from Employers Mutual increased $13,147,831 at December 31, 1993. Under the terms of the pooling agreement, these balances were settled in the first quarter of 1994.
Year ended December 31, ---------------------------------------- 1994 1993 1992 ------------ ------------ ------------ Gross reserves for losses and settlement expenses, beginning of year .......................... $197,121,852 $215,388,865 $158,814,130
Losses and settlement expenses attributable to insured events of prior years ................. 59,491,875 45,508,460 53,810,715
Payment related to the commutation of the reinsurance subsidiary's catastrophe and aggregate excess of loss reinsurance treaties ... (686,962) - -
Payment related to the change in the property and casualty insurance subsidiaries' pooling agreement ...................... $ - $ 4,373,629 $(23,431,503)
Year ended December 31, ---------------------------------------- 1994 1993 1992 ------------ ------------ ------------ Payment related to the commutation of two reinsurance contracts under the reinsurance subsidiary's quota share agreement ...................... $ - $ 21,904,001 $ -
Adjustment related to the gross-up of reserve amounts associated with the National Workers' Compensation Reinsurance Pool .. - 11,436,543 - ------------ ------------ ------------ Total payments .............. 107,576,486 130,823,484 76,815,572 ------------ ------------ ------------ Net reserves for losses and settlement expenses, end of year 189,034,741 179,667,173 190,135,358
Estimating loss and settlement reserves for asbestos and environmental related claims is very difficult due to the following uncertainties surrounding these types of claims: the legal definition of asbestos and environmental damage is still evolving, the assignment of responsibility varies widely by state, defense costs are often much greater than the claim costs and claims often emerge long after the policy has expired, making assignment of damages to the appropriate party and to the time period covered by a particular policy difficult. In establishing reserves for these types of claims, management monitors the relevant facts concerning each claim, the current status of the legal environment, the social and political conditions and the claim history and trends within the Company and the industry. Reserves for asbestos and environmental related claims at December 31, 1994 and 1993 were $749,807 and $550,773, respectively.
Statutory surplus of the Company's insurance subsidiaries was $86,820,039 and $78,681,248 at December 31, 1994 and 1993, respectively. Statutory net income (loss) of the Company's insurance subsidiaries was $13,430,353, $8,788,458 and ($3,960,393) for the three years ended December 31, 1994.
Income taxes ...................... - 5,595,177 - Postretirement benefits ........... - (2,165,900) - Unearned premiums ................. - (807,933) - ----------- ----------- ----------- Net income, GAAP basis ................ $13,505,727 $ 9,755,379 $ 215,692 =========== =========== ===========
Year ended December 31, ---------------------------------------- 1994 1993 1992 ------------ ------------ ------------ Statutory surplus .................. $ 94,317,215 $ 85,830,140 $ 83,331,013 Deferred policy acquisition costs .. 8,393,635 7,698,864 8,112,831 Accrued salvage and subrogation .... 1,799,443 1,793,592 2,026,352 Other policyholders' funds payable (3,102,609) (2,854,793) (3,695,397) Pension asset ...................... 1,407,714 1,705,735 1,809,581 GAAP postretirement benefit liability in excess of statutory liability ........................ (1,672,780) (1,358,197) - Deferred income tax asset .......... 14,190,499 13,040,693 7,065,221 Goodwill ........................... 1,883,177 2,017,690 2,152,203 Excess statutory reserves over statement reserves .......... 2,044,268 - 8,007 GAAP basis reserve discount on commutation of reinsurance contract in excess of statutory recognition ...................... (1,283,662) (1,717,641) - Unrealized holding (losses) gains on fixed maturity securities available-for-sale ............... (1,316,596) 3,134,016 - Other .............................. 66,385 343,670 100,966 ------------ ------------ ------------ Stockholders' equity, GAAP basis ... $116,726,689 $109,633,769 $100,910,777 ============ ============ ============
1) The index to exhibits in the electronic format indicates if the exhibits are included in the direct transmission or are filed under Form SE. The circulated document contains the page numbers of the exhibits.
2) Exhibit 28 was filed in hard copy under Form SE and is not included in the filed under EDGAR.