PROPERTIES. - ------- ----------- Lease costs of the Company's two office facilities in West Des Moines, Iowa total approximately $71,000 and $31,000 annually. These leases expire March 31, 1998 and November 30, 1995, respectively.
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 $1,784,868, $1,699,591 and $1,457,824 for the three years ended December 31, 1993, 1992 and 1991, respectively, were charged to the pool in connection with the rental of 130,433 and 63,450 square feet located in Des Moines and Ames, Iowa, respectively.
Losses and expenses ............ 169,142 168,359 123,254 110,415 102,517 -------- -------- -------- -------- -------- Income before income taxes ..... 9,019 975 10,432 10,840 8,777
Income from accounting changes 2,621 - - - - -------- -------- -------- -------- -------- Net income ................ $ 9,755 $ 216 $ 9,161 $ 8,265 $ 6,996 ======== ======== ======== ======== ======== Earnings per common share: Income from continuing operations ................. $ .70 $ .02 $ .73 $ .80 $ .71
Income from accounting changes .................... .26 - - - - -------- -------- -------- -------- -------- Net income ................ $ .96 $ .02 $ .91 $ .83 $ .74 ======== ======== ======== ======== ======== Premiums earned by segment: Property and casualty ........ $109,585 $109,139 $ 78,413 $ 70,597 $ 62,517 Reinsurance .................. 33,324 26,615 25,009 20,696 18,621 Nonstandard risk automobile .. 13,529 11,656 9,997 10,030 10,590 -------- -------- -------- -------- -------- Total ..................... $156,438 $147,410 $113,419 $101,323 $ 91,728 ======== ======== ======== ======== ======== Total assets ................... $368,936 $372,807 $311,001 $296,126 $284,396 ======== ======== ======== ======== ======== Stockholders' equity ........... $109,634 $100,911 $105,144 $100,615 $ 95,911 ======== ======== ======== ======== ======== Average return on equity ....... 9.3% .2% 8.9% 8.4% 7.5% ======== ======== ======== ======== ======== Book value per share ........... $ 10.63 $ 9.98 $ 10.47 $ 10.04 $ 9.82 ======== ======== ======== ======== ======== Cash dividends paid per share .. $ .52 $ .52 $ .52 $ .52 $ .52 ======== ======== ======== ======== ========
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 are prorated among the parties on the basis of participation in the pool. The investment programs and income tax liabilities of the pool participants are not subject to the pooling agreement.
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. Amounts not ceded to the reinsurance subsidiary have historically been retained by Employers Mutual and have been subject to cession to the pool members. Under the terms of the pooling agreement, the property and casualty insurance subsidiaries had a 22 percent (17 percent in 1991) participation in the amounts assumed from these nonaffiliated companies.
The parties to the pooling agreement have historically 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. As a result, outstanding losses increased $11,437,000, unearned premiums increased $1,711,000 and indebtedness to related party decreased $13,148,000. There was no income effect from this reclassification. Prior year consolidated financial statements have been restated for comparative purposes.
As noted above, the Company's reinsurance subsidiary assumes a 95 percent quota share portion of Employers Mutual's assumed reinsurance business, exclusive of certain reinsurance contracts. The reinsurance subsidiary receives 95 percent of all premiums and assumes 95 percent of all related losses and settlement expenses of this business. The reinsurance subsidiary does not reinsure any of Employers Mutual's direct insurance business, nor any "involuntary" facility or pool business that Employers Mutual assumes pursuant to state law. In addition, the reinsurance subsidiary is not liable for credit risk in connection with the insolvency of any reinsurers of Employers Mutual. The following changes were made to the quota share agreement during 1993:
(1) 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 $1,809,000 in 1993.
In conjunction with this change in the quota share agreement, the reinsurance subsidiary terminated its catastrophe reinsurance contracts with Employers Mutual and other nonaffiliated reinsurers. Effective January 1, 1993, the reinsurance subsidiary no longer cedes reinsurance to nonaffiliated 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 prior year amounts. Ceded reinsurance on the books at December 31, 1992 is being allowed to run-off.
The Company sold its life insurance subsidiary to Employers Mutual on December 31, 1991. All information presented in this report reflects the life segment as a discontinued operation.
Losses and expenses totaled $169,142,000 in 1993, $168,359,000 in 1992 and $123,254,000 in 1991. The large increase in 1992 reflects the change in the property and casualty insurance subsidiaries' pool participation and a record amount of catastrophe losses.
The Company adopted four new accounting standards and implemented an accounting change in 1993. 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 December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities". SFAS 115 provides that investments in all debt securities and those equity securities with readily determinable market values are to be classified in one of three categories: held-to-maturity, trading or available-for-sale. Classification of investments is based upon management's current intent. Debt securities which management has a positive intent and ability to hold to maturity are classified as "securities held-to-maturity" and are carried at amortized cost. Unrealized holding gains and losses on securities held-to-maturity are not reflected in the consolidated financial statements. Debt and equity securities that are held for current resale are classified as "trading securities" and are reported at market value, with unrealized holding gains and losses included in earnings. All other debt and equity securities are classified as "securities available-for-sale" and are carried at market value, with unrealized holding gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of tax. The Company has historically held its investment portfolio to maturity and has classified the majority of its portfolio at December 31, 1993 (63.3 percent) as "securities held-to-maturity". The remainder of the portfolio has been classified as "securities available-for-sale". Adoption of this statement had no effect on the income of the Company. Net unrealized holding gains reflected in stockholders' equity at December 31, 1993 totaled $2,049,000, net of deferred income taxes of $1,055,000.
Operating income before income taxes increased 59.6 percent to $9,835,000 in 1993, increased 2.1 percent to $6,164,000 in 1992 and decreased 17.3 percent to $6,037,000 in 1991. Underwriting loss decreased significantly in 1993. Results for 1992 reflect an increase in catastrophe losses, which was compounded by the increase in the pool participation. Results for 1991 reflect a substantial increase in reserves reported by the National Workers' Compensation Reinsurance Pool. Investment income increased 2.9 percent to $13,243,000 in 1993, 17.0 percent to $13,048,000 in 1992 and 9.6 percent to $11,153,000 in 1991. Results for 1993 reflect the transfer of $4,427,000 to Employers Mutual in connection with the change in the pooling agreement and the general decline in interest rates for current investments. The large increase in 1992 reflects investment income earned on $29,402,000 received from Employers Mutual in connection with the change in pool participation and $10,000,000 received from the parent company to support this increased participation.
Premiums earned increased 25.2 percent to $33,324,000 in 1993, 6.4 percent to $26,615,000 in 1992 and 20.8 percent to $25,009,000 in 1991. Amounts earned in 1992 and 1991 reflect $1,220,000 and $1,286,000, respectively, in premiums ceded (excluding reinstatement premiums) to Employers Mutual for catastrophe reinsurance protection. This coverage was terminated in 1993 in conjunction with the change in the quota share agreement noted above. The reinsurance subsidiary pays Employers Mutual an annual override commission for retaining losses in excess of $1,000,000 per event, which totaled $1,809,000 in 1993. The amount earned in 1992 also reflects $3,859,000 of reinstatement premiums paid to reinsurers (including Employers Mutual) to reinstate reinsurance coverage which was exhausted by Hurricanes Andrew and Iniki. Results for 1993 reflect a shift from catastrophe "excess of loss" business to "pro rata" business and a general improvement in rates. Under catastrophe "excess of loss" contracts, the reinsurance subsidiary provided coverage for catastrophe losses which exceeded a specified amount. Premiums associated with this type of business are generally lower as the coverage provided is not often exposed. However, the last few years have demonstrated that the exposure under this type of business can far exceed the premiums received. With "pro rata" business, the reinsurance subsidiary receives a specified portion of all premiums on each contract and then shares in all losses in the same proportion as the premium. Although the reinsurance subsidiary has a share in each loss under this type of business, the premium received is believed to be more adequate.
Underwriting loss decreased 49.3 percent to $6,040,000 in 1993, increased 138.5 percent to $11,904,000 in 1992 and decreased 17.9 percent to $4,991,000 in 1991. The large loss in 1992 is primarily related to catastrophe losses, which totaled $11,609,000. This compares to catastrophe losses of $5,141,000 in 1993 (including development on Hurricane Andrew of $1,283,000) and $2,403,000 in 1991. Operating results for the last three years have been significantly impacted by losses from two voluntary pools in which the subsidiary participates and by losses from a casualty pool that is in a run-off position. The voluntary pools reported combined losses of $2,425,000 in 1993, $2,007,000 in 1992 and $1,571,000 in 1991. Effective October 31, 1993, Employers Mutual commuted the portion of the quota share agreement that pertains to one of these pools. Losses associated with this pool totaled $2,017,000 in 1993 and $1,294,000 in 1992. No reserve discount was calculated as this business involves short-tail property coverage. Losses associated with the casualty pool that is in a run-off position totaled $868,000 in 1993, $952,000 in 1992 and $2,376,000 in 1991. Employers Mutual commuted the portion of the quota share agreement that pertains to this pool effective June 30, 1993. The reserve discount amount of $1,977,000 was recorded as deferred income and is being amortized into operations over the estimated settlement period of the reserves, which is ten years. During 1993, $259,000 was recognized as income. Results for 1993 also reflect $1,000,000 of losses associated with severe east coast winter storms and $398,000 of losses associated with the World Trade Center explosion.
Premiums earned increased 16.1 percent to $13,528,000 in 1993, increased 16.6 percent to $11,656,000 in 1992 and decreased .3 percent to $9,997,000 in 1991. The large increases in 1993 and 1992 reflect the increase in market share discussed above.
Operating income before income taxes decreased 79.1 percent to $103,000 in 1993, 22.7 percent to $496,000 in 1992 and 12.3 percent to $641,000 in 1991. Operating results continue to be effected by the termination of business with a large agency that had previously represented over 50 percent of this segment's volume. Management continues to search for new business, but a large portion of excess and surplus lines insurance is currently being written by standard carriers due to the soft market conditions.
Operating income before income taxes decreased 194.1 percent to a loss of $161,000 in 1993, increased 39.2 percent to $171,000 in 1992 and decreased 79.1 percent to $123,000 in 1991. The loss in 1993 is primarily due to a decline in investment income. Invested assets decreased in 1993 as a result of a capital contribution made to the reinsurance subsidiary in December of 1992 and the payment of stockholder dividends.
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 112 (SFAS 112), "Employers' Accounting for Postemployment Benefits". SFAS 112 requires that the cost of certain postemployment benefits that vest or accumulate be accrued over the period of an employee's service. SFAS 112 is effective for fiscal years beginning after December 15, 1993. The Company will adopt this standard in the first quarter of 1994. Adoption of this standard is not expected to have a material effect on the income of the Company.
The Company has historically generated positive cash flows from operations. During 1993, the Company had a negative operating cash flow of $8,794,000, which reflects $24,853,000 paid to Employers Mutual in connection with the change in the property and casualty insurance subsidiaries' pooling agreement and the commutation of two reinsurance contracts under the reinsurance subsidiary's quota share agreement. This compares to operating cash flows of $50,826,000 for 1992, which included $29,402,000 received from Employers Mutual in connection with the increase in the property and casualty insurance subsidiaries' pool participation.
In discharging its responsibility both for the integrity and fairness of these statements and the related financial information, and for the examination of the accounting systems from which they are derived, management maintains a system of internal control designed to provide reasonable assurance, weighing the costs with the benefits sought, that transactions are executed in accordance with management's authorization, assets are safeguarded, and proper records are maintained. Management believes that the system of internal control, which is subject to close scrutiny by management and by internal auditors and is revised as considered necessary, supports the integrity and reliability of the consolidated financial statements. Further, in accordance with generally accepted auditing standards, the independent certified public accountants obtained a sufficient understanding of the Company's internal control structure to plan their audit and determine the nature, timing and extent of tests to be performed.
The consolidated financial statements are examined by KPMG Peat Marwick, independent certified public accountants. Their report appears elsewhere in this annual report.
We have audited the accompanying consolidated balance sheets of EMC Insurance Group Inc. and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1993. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
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, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles.
Cash .............................................. 675,203 2,009,512 Indebtedness of related party (note 4) ............ 12,291,512 3,652,076 Accrued investment income ......................... 4,835,451 4,592,856 Accounts receivable ............................... 415,215 576,155 Deferred policy acquisition costs ................. 7,698,864 8,112,831 Deferred income taxes (note 13) ................... 13,040,693 7,065,221 Intangible assets, including goodwill, at cost less accumulated amortization of $1,540,130 and $1,405,617 ................................. 2,017,690 2,152,203 Reinsurance receivables (note 3) .................. 18,477,406 27,866,790 Prepaid reinsurance premiums (note 3) ............. 2,832,184 3,637,917 Other assets ...................................... 2,084,102 1,972,611 ------------ ------------ Total assets ............................... $368,935,523 $372,807,100 ============ ============
Income from discontinued operations (note 5) ............... - - 1,853,234 ------------ ------------ ------------ Income before cumulative effect of changes in accounting principles 7,134,035 215,692 9,161,055
Unearned premiums (note 1) ...... (807,933) - - ------------ ------------ ------------ Net income ................. $ 9,755,379 $ 215,692 $ 9,161,055 ============ ============ ============
Income from discontinued operations .................... - - .18 ------------ ------------ ------------ Income before cumulative effect of changes in accounting principles .70 .02 .91
Average number of shares outstanding 10,197,999 10,071,901 10,054,899 ============ ============ ============
Pro forma amounts, assuming retroactive application of new method of calculating unearned premiums:
Year ended December 31, ------------------------------------- 1993 1992 1991 ----------- ----------- ----------- Common stock, beginning of year ........ $10,161,760 $10,082,675 $10,023,435 Issuance of common stock: Stock option plans ................. 31,252 79,085 59,240 Dividend reinvestment plan ......... 132,317 - - ----------- ----------- ----------- Common stock, end of year .............. 10,325,329 10,161,760 10,082,675 ----------- ----------- -----------
Unrealized holding gains on fixed maturity securities available-for- sale, beginning of year .............. - - - Unrealized holding gains on revaluation of fixed maturity securities available -for-sale, net of tax (note 10) ...... 2,068,451 - - ----------- ----------- ----------- Unrealized holding gains on fixed maturity securities available-for- sale, net of tax, end of year ........ 2,068,451 - - ----------- ----------- -----------
Unrealized holding losses on equity securities available-for-sale, net of tax, beginning of year ........ (142,000) (326,375) (625,000) Unrealized holding gains on revaluation of equity securities available-for- sale, net of tax ..................... 122,200 184,375 298,625 ----------- ----------- ----------- Unrealized holding losses on equity securities available-for-sale, net of tax, end of year .............. $ (19,800) $ (142,000) $ (326,375) ----------- ----------- -----------
Year ended December 31, ---------------------------------------- 1993 1992 1991 ------------ ------------ ------------
Treasury stock at cost, beginning of year ................. (483,344) (341,616) (63,207) Purchase of shares for the treasury (126,948) (315,749) (420,799) Sale of shares from the treasury .... 528,906 174,021 142,390 ------------ ------------ ------------ Treasury stock at cost, end of year (81,386) (483,344) (341,616) ------------ ------------ ------------ Total stockholders' equity ..... $109,633,769 $100,910,777 $105,144,436 ============ ============ ============
Cash used in the commutation of two reinsurance contracts under the reinsurance subsidiary's quota share agreement (note 2) .. (20,425,955) - - ----------- ----------- ----------- Total adjustment .............. (18,548,921) 50,610,716 6,214,079 ----------- ----------- ----------- Net cash (used in) provided by operating activities ... $(8,793,542) $50,826,408 $13,521,900 ----------- ----------- -----------
Year ended December 31, ---------------------------------------- 1993 1992 1991 ------------ ------------ ------------ Cash flows from investing activities: Purchases of fixed maturities ..... $(55,851,708) $(62,701,348) $(35,475,949) Maturities of fixed maturities .... 57,329,956 37,285,914 31,844,948 Sale of equity securities ......... 1,043,068 - - Purchases of short-term investments (308,953,569) (357,300,319) (163,308,142) Sales of short-term investments ... 317,122,024 337,456,332 141,779,010 Sale of life subsidiary ........... - 474,356 15,500,000 ------------ ------------ ------------ Net cash provided by (used in) investing activities 10,689,771 (44,785,065) (9,660,133) ------------ ------------ ------------
Cash at beginning of year ........... 2,009,512 601,895 1,670,819 ------------ ------------ ------------ Cash at end of year ................. $ 675,203 $ 2,009,512 $ 601,895 ============ ============ ============
Income taxes paid ................... $ 4,656,213 $ 4,650,795 $ 2,954,736 Interest paid ....................... 1,696 387,351 15,874
EMC Insurance Group Inc., 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. EMC Insurance Group Inc. and its subsidiaries are referred to herein as the "Company".
PROPERTY AND CASUALTY INSURANCE, REINSURANCE AND NONSTANDARD RISK AUTOMOBILE INSURANCE OPERATIONS
Certain costs of acquiring new business, principally commissions, premium taxes and variable underwriting expenses, have been deferred. Such costs are being amortized as premium revenue is recognized. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss settlement expenses and certain other costs expected to be incurred as the premium is earned.
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. Ceded reinsurance amounts previously reported on a net basis in the December 31, 1992 consolidated financial statements have been reclassified for comparative purposes. Assets and liabilities increased $20,074,607 and $28,891,424 at December 31, 1993 and 1992, respectively, as a result of the gross-up of ceded balances related to reinsurance receivables on losses and settlement expenses and prepaid reinsurance premiums. Adoption of this statement had no effect on the income of the Company.
Deferred income taxes are provided for temporary differences between financial statement carrying values of assets and liabilities and their respective tax bases. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes". Under SFAS 109, deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and then a valuation allowance is established to reduce that deferred tax asset if it is "more likely than not" that the related tax benefits will not be realized. 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. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. Prior to 1993, the Company computed deferred income taxes in accordance with Statement of Financial Accounting Standards No. 96.
Goodwill, which represents the excess of cost over the fair value of net assets of acquired subsidiaries, is being amortized on a straight-line basis over 25 years.
Effective January 1, 1992, the aggregate participation of the property and casualty insurance subsidiaries was increased to 22 percent from 17 percent. In connection with this change in pool participation, the Company's liabilities increased $31,427,861 and invested assets increased $29,402,411. The Company reimbursed Employers Mutual $2,025,450 for commissions incurred to generate this business.
Effective June 30, 1993, Employers Mutual commuted the portion of the quota share agreement that pertains 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. During 1993, $259,217 was recognized as income.
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. No recoveries have been made under this treaty. Premiums paid to Employers Mutual amounted to $42,065, $35,377 and $34,827 in 1993, 1992 and 1991, respectively.
The parties to the pooling agreement cede insurance business to other insurers in the ordinary course of business for the purpose of limiting their maximum loss exposure through diversification of their risks. In its consolidated financial statements, the Company treats risks to the extent they are reinsured as though they were risks for which the Company is not liable. Insurance ceded by the pool participants does not relieve their primary liability as the originating insurers. Employers Mutual evaluates the financial condition of the reinsurers of the parties to the pooling agreement and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize exposure to significant losses from reinsurer insolvencies. The parties to the pooling agreement also assume insurance from involuntary pools and associations in conjunction with direct business written in various states.
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 change in 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 prior year amounts. Ceded reinsurance on the books at December 31, 1992 is being allowed to run-off.
Year ended December 31, ---------------------------------------- 1993 1992 1991 ------------ ------------ ------------ Premiums written Direct ......................... $135,277,129 $138,829,576 $139,292,883 Assumed from nonaffiliates ..... 6,636,942 16,467,613 9,477,850 Assumed from affiliates ........ 147,620,705 150,070,741 108,847,230 Ceded to nonaffiliates ......... (10,701,482) (17,721,207) (11,113,238) Ceded to affiliates ............ (120,898,914) (129,826,840) (130,675,014) ------------ ------------ ------------ Net premiums written ......... $157,934,380 $157,819,883 $115,829,711 ============ ============ ============ Premiums earned Direct ......................... $137,141,457 $142,391,771 $134,675,865 Assumed from nonaffiliates ..... 6,758,364 14,980,642 9,056,890 Assumed from affiliates ........ 148,366,487 140,442,245 106,783,050 Ceded to nonaffiliates ......... (11,507,217) (16,775,394) (11,051,459) Ceded to affiliates ............ (124,321,553) (133,628,977) (126,045,108) ------------ ------------ ------------ Net premiums earned .......... $156,437,538 $147,410,287 $113,419,238 ============ ============ ============ Losses and settlement expenses incurred Direct ......................... $ 97,842,980 $112,579,261 $101,910,680 Assumed from nonaffiliates ..... 6,575,099 17,415,319 8,671,495 Assumed from affiliates ........ 107,369,274 114,359,445 77,845,953 Ceded to nonaffiliates ......... (5,845,414) (16,862,082) (4,735,272) Ceded to affiliates ............ (85,586,640) (105,404,110) (95,587,937) ------------ ------------ ------------ Net losses and settlement expenses incurred .......... $120,355,299 $122,087,833 $ 88,104,919 ============ ============ ============
The parties to the pooling agreement have historically 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. As a result, outstanding losses increased $11,436,543, unearned premiums increased $1,711,288 and indebtedness to related party decreased $13,147,831. There was no income effect from this reclassification. Prior year consolidated financial statements have been restated for comparative purposes.
On December 31, 1991 the Company's life insurance subsidiary was sold to Employers Mutual pursuant to a stock acquisition agreement dated December 9, 1991. The Company received $15,500,000 in cash on December 31, 1991 with final settlement of $474,356 on March 2, 1992 based on the GAAP book value on December 31, 1991, which totaled $15,974,356. No income statement gain was recognized on the sale.
Year ended December 31, --------------------------- 1993 1992 1991 ------- ------- ------- Shares available for purchase, beginning of year 55,720 85,765 110,564 Shares purchased under plan ................... (10,706) (30,045) (24,799) Shares deregistered ........................... (45,014) - - ------- ------- ------- Shares available for purchase, end of year ...... - 55,720 85,765 ======= ======= =======
On February 12, 1993, the Company filed a registration statement with the Securities and Exchange Commission authorizing the issuance of up to 500,000 shares of the Company's common stock for use in the Employers Mutual Casualty Company 1993 Employee Stock Purchase Plan. The plan provides for two option periods each calendar year; from January 1 until the last business day of June, and from July 1 until the last business day of December, with the last business day in each option period being the option exercise date. Any employee who is employed by Employers Mutual, its affiliates, or its subsidiaries on the first day of the month immediately preceding any option period is eligible to participate in the plan. Eligible employees may elect to participate in the plan either through payroll deduction or by lump sum contributions, but in no case can the participation level exceed 10 percent of the employee's base annual compensation amount. The option price is 85 percent of the fair market value of the stock on the exercise date. Upon exercise of an option, the Company shall issue a stock certificate evidencing the ownership of the participant in the shares of stock so purchased. The certificate, however, will be held in custody by the stock transfer agent for a period of one year from the exercise date. During such one year period, the participant shall have the rights and privileges of a shareholder, including the right to vote, to receive dividends, and to have such shares participate in the dividend reinvestment and common stock purchase plan. However, the participant shall not be able to sell, transfer, assign, pledge or otherwise encumber or dispose of such shares during such one year period. Upon expiration of the one year period or upon any earlier termination of employment of the participant for any reason, including death, such participant shall, within thirty days of such expiration or termination, receive the stock certificate(s) evidencing his or her shares of stock. The plan is administered by the Board of Directors of Employers Mutual and the Board has the right to amend or terminate the plan at any time; however, no such amendment or termination shall adversely affect the rights and privileges of participants with unexercised options. For the second option period of 1993, 104 employees participated in the plan and exercised a total of 13,454 options at a price of $8.19. Activity under the plan was as follows:
On February 12, 1993, the Company filed a registration statement with the Securities and Exchange Commission authorizing the issuance of up to 200,000 shares of the Company's common stock for use in the 1993 Employers Mutual Casualty Company Non-Employee Director Stock Purchase Plan. All non-employee directors of Employers Mutual and its subsidiaries and affiliates who are not serving on the "Disinterested Director Committee" of Employers Mutual's Board of Directors (the "Board") as of the beginning of the option period are eligible for participation in the plan. The option period is from the date of each eligible director's respective Annual Meeting to the day immediately prior to the next and subsequent Annual Meeting. Each eligible director is granted an option at the beginning of the option period to purchase stock at an option price equal to 75 percent of the fair market value of the stock on the option exercise date. The option may be exercised anytime during the option period. An eligible director can purchase shares of common stock in an amount equal to a minimum of 25 percent to a maximum of 100 percent of their annual cash retainer. Eligible directors may not have sold any of the Company's common stock in the six month period preceding the exercise date and may not sell any shares of the Company's common stock in the six month period following the exercise of an option. The plan is administered by the Disinterested Director Committee of the Board. The Board may amend or terminate the plan at any time; however, no such amendment or termination shall adversely affect the rights and privileges of participants with unexercised options. The plan will continue through the option period for options granted at the 2002 Annual Meeting. During 1993, five directors participated in the plan and exercised a total of 5,952 options at prices ranging from $6.56 to $7.69. Activity under the plan was as follows:
The Company maintains a Dividend Reinvestment and Common Stock Purchase Plan which provides stockholders with the option of reinvesting cash dividends in additional shares of the Company's common stock. Participants may also purchase additional shares of common stock without incurring broker commissions by making optional cash contributions to the plan. Any holder of shares of common stock is eligible to participate in the plan. During 1993, Employers Mutual elected to participate in the Dividend Reinvestment Plan by reinvesting 50 percent of its dividends in additional shares of the Company's common stock. Activity under the plan was as follows:
The Company from time to time repurchases shares of its outstanding common stock in the open market or through negotiated purchases for the purpose of providing shares for use in the Company's Dividend Reinvestment and Common Stock Purchase Plan. The Company repurchased 7,000 shares and 10,000 shares for this purpose during 1992 and 1991 at an average cost of $10.47 and $9.00, respectively. The Company also repurchases shares of its outstanding common stock in connection with the issuance of new shares under Employers Mutual's stock option plans.
Treasury stock activity was as follows: Year ended December 31, ------------------------- 1993 1992 1991 ------- ------- ------- Treasury shares, beginning of year ............... 49,392 36,685 8,863 Repurchased shares ............................ 12,568 31,539 45,496 Reissued shares ............................... (53,870) (18,832) (17,674) ------- ------- ------- Treasury shares, end of year ..................... 8,090 49,392 36,685 ======= ======= ======= Average cost ..................................... $ 10.06 $ 9.79 $ 9.31 ======= ======= ======= Gain (loss) on sale .............................. $23,261 $ (485) $14,887 ======= ======= =======
Under Employers Mutual's 1979 Stock Option Plan, 480,000 shares of the Company's common stock were reserved for issuance to certain officers and key management employees of Employers Mutual and its subsidiaries as determined by its Board of Directors. Options were granted to 37 individuals. For the one remaining eligible participant at February 21, 1994 the option price is the greater of statutory book value or fair market value at the date of grant, which was $6.38 per share and which must be exercised by no later than March 14, 1994. The period for granting options under the plan expired on March 31, 1984. Options granted vest at an annual rate of 10 percent on a cumulative basis. Upon death, retirement, or permanent disability, all options granted become exercisable. During 1993, 960 options were exercised at a price of $6.38. Stock options under the plan were as follows: Year ended December 31, ------------------------ 1993 1992 1991 ------ ------ ------ Outstanding, beginning of year ............ 5,760 44,440 74,290 Exercised .............................. (960) (38,200) (29,850) Expired ................................ - (480) - ------ ------- ------- Outstanding, end of year .................. 4,800 5,760 44,440 ====== ======= ======= Shares exercisable, end of year ........... 4,800 3,840 40,600 ====== ======= =======
Under the terms of Employers Mutual's 1982 Incentive Stock Option Plan, 600,000 shares of the Company's common stock were reserved for issuance to officers and key employees of Employers Mutual and its subsidiaries. The Board of Directors of Employers Mutual is the administrator of the plan. Options have been granted to 57 individuals. For the 35 remaining eligible participants at February 21, 1994, the option price is the fair market value at dates of grant ranging from $7.81 to $10.25 per share. Options granted under the plan are for a term of two to ten years. Each option shall have a vesting period of two, three, four or five years, with such vesting to commence one year from the date of grant, except in the event of termination of employment when all such granted options are exercisable within three, six or twelve months depending upon the circumstances of such termination. The period for granting options under the plan expired on August 30, 1992. Once granted, the period for exercising the options can not exceed ten years from date of grant. The option price was determined by the Board of Directors but could not be less than the fair market value of the stock on the date of grant. During 1993, 24,820 options were exercised at prices ranging from $6.88 to $8.75. Stock options under the plan were as follows:
On February 12, 1993 the Company filed a registration statement with the Securities and Exchange Commission authorizing the issuance of up to 500,000 shares of the Company's common stock for use in the 1993 Employers Mutual Casualty Company Incentive Stock Option Plan. Options granted under the plan will be for a term of two to ten years. Each option shall have a vesting period of two, three, four or five years, with such vesting to commence one year from the date of grant, with the exception of an option with a two year vesting period for which the vesting period shall commence on the date of grant. The time limit for granting options under the plan is December 31, 2002. The Senior Executive Compensation and Stock Option Committee of Employers Mutual's Board of Directors is the administrator of the plan. Options have been granted to 52 individuals under the plan. For the 51 eligible participants at February 21, 1994, the option price is the fair market value at dates of grant ranging from $9.38 to $9.56 per share. Option prices are determined by the Committee but can not be less than the fair market value of the stock on the date of grant. During 1993, 163,650 options were granted to eligible participants and no options were exercised. Stock options under the plan were as follows: Year ended December 31, ------------ Outstanding, beginning of year ............................ - Granted ................................................. 163,650 Exercised ............................................... - Expired ................................................. (2,500) ------------ Outstanding, end of year .................................. 161,150 ============ Shares exercisable, end of year ........................... - ============
Retained earnings of the Company's insurance subsidiaries available for distribution as dividends to EMC Insurance Group Inc. are limited by law to 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 by Iowa corporations without prior approval of the insurance regulatory authorities is 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. Both Illinois and North Dakota impose restrictions which are similar to those of Iowa on the payment of extraordinary dividends and distributions. At December 31, 1993, $10,113,818 was available for distribution in 1994 to EMC Insurance Group Inc. without prior approval.
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 the 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.
As discussed in note 1, Summary of Significant Accounting Policies, the Company adopted SFAS 115 as of December 31, 1993. In conjunction with the adoption of SFAS 115, the Company changed its intent with respect to holding certain debt securities to maturity and reclassified $61,885,165 of securities held-to-maturity and $51,196,415 of short-term investments to securities available-for-sale. Unrealized holding gains related to this reclassification increased stockholders' equity by $2,068,451, net of deferred income taxes of $1,065,565. Unrealized holding losses associated with equity securities available-for-sale totaled $19,800, net of defered tax benefits of $10,200.
Year ended December 31, ------------------------------------- 1993 1992 1991 ----------- ----------- ----------- Proceeds from calls and prepayments ... $37,579,956 $18,640,915 $ 6,504,948 Gross realized investment gains ....... 706,059 388,692 64,514 Gross realized investment losses ...... 9,682 4,409 96
Year ended December 31, ------------------------------------- 1993 1992 1991 ----------- ----------- ----------- Interest on fixed maturities .......... $19,701,641 $19,754,718 $19,297,727 Dividends on equity securities ........ 65,065 119,989 124,777 Interest on short-term investments .... 1,602,740 2,172,983 1,110,513 ----------- ----------- ----------- Total investment income ........... 21,369,446 22,047,690 20,533,017 Investment expense .................... 589,495 508,093 331,024 ----------- ----------- ----------- Net investment income ............. $20,779,951 $21,539,597 $20,201,993 =========== =========== ===========
Year ended December 31, ---------------------------------------- 1993 1992 1991 ------------ ------------ ------------ Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $27,245,933, $23,739,308 and $16,922,064 .................. $ 29,713,282 $ 24,695,567 $ 18,600,097 ============ ============ ============ Projected benefit obligation for service rendered to date ......... $(44,579,398) $(36,103,055) $(27,610,564) Plan assets at fair value .......... 51,625,386 48,365,122 46,915,274 ------------ ------------ ------------ Plan assets in excess of projected benefit obligation ............... 7,045,988 12,262,067 19,304,710 Unrecognized net loss (gain) from past experience different from that assumed and effects of changes in assumptions ........... 4,440,487 (754,346) (3,715,134) Prior service cost not yet recog- nized in net periodic pension cost 4,374,510 4,941,220 653,767 Unrecognized portion of initial net asset ........................ (7,182,692) (8,072,193) (9,123,946) ------------ ------------ ------------ Prepaid pension cost ........ $ 8,678,293 $ 8,376,748 $ 7,119,397 ============ ============ ============
Year ended December 31, ------------------------------------- 1993 1992 1991 ----------- ----------- ----------- Service cost - benefits earned during the period ................... $ 2,347,984 $ 1,691,648 $ 1,368,932 Interest cost on projected benefit obligation .................. 2,533,587 2,053,584 1,818,023 Actual gain on plan assets ............ (5,229,721) (4,386,821) (9,440,576) Net amortization and deferral ......... 647,291 (615,762) 4,791,814 ----------- ----------- ----------- Net periodic pension cost (benefit) $ 299,141 $(1,257,351) $(1,461,807) =========== =========== ===========
The unrecognized net asset is being recognized over 12.5 to 15.2 years beginning January 1, 1987. The weighted average discount rate used to measure the projected benefit obligation was 6.75 percent, 7.00 percent and 7.75 percent and the assumed long-term rate of return on plan assets was 8.00 percent, 8.00 percent and 8.75 percent for 1993, 1992 and 1991, respectively. The rate of increase in future compensation levels used in measuring the projected benefit obligation was 5.30 percent in 1993, 5.50 percent in 1992 and 6.00 percent in 1991. Pension expense (benefit) for the Company amounted to $103,846, ($622,177) and ($275,628) in 1993, 1992 and 1991, respectively.
Effective November 1, 1992, the Plan was amended to comply with the requirements of the Tax Reform Act of 1986, which placed limits on the benefits for highly compensated employees. This change in the benefit formula represents a prior service cost of $4,354,553, which is being amortized over 12 to 14 years beginning January 1, 1993. The Company's share of this prior service cost amounted to $1,003,257.
The Company participates in Employers Mutual's postretirement benefit plans which provide certain health care and life insurance benefits for retired employees. Substantially all of the Company's employees may become eligible for those benefits if they reach normal retirement age while working for the Company.
The following table sets forth the status and the net periodic postretirement benefit cost of the Employers Mutual postretirement benefit plans at December 31, 1993, based upon a measurement date of November 1, 1993:
Service cost - benefits earned during the period ............ $ 596,498 Interest cost on accumulated postretirement benefit obligation ........................................ 999,526 ---------- Net periodic postretirement benefit cost ............ $1,596,024 ==========
The Company's net periodic postretirement benefit cost for the year ended December 31, 1993 was $359,747. The postretirement benefit cost of $78,807 and $53,180 for the years ended December 31, 1992 and 1991, respectively, which were recorded on a cash basis, have not been restated.
Year ended December 31, ---------------------------------- 1993 1992 1991 ---------- ---------- ---------- Computed "expected" tax expense ......... $3,066,506 $ 331,519 $3,546,825 Increases (decreases) in taxes resulting from: Tax-exempt interest income .......... (1,171,612) (1,312,568) (1,464,296) Unrecognized future temporary differences ....................... - 1,745,003 480,042 (Under) over accrual ................ (252,839) - 620,500 Settlement of IRS examination ....... 117,497 - - Other, net .......................... 125,549 (4,589) (59,054) ---------- ---------- ---------- Income taxes ...................... $1,885,101 $ 759,365 $3,124,017 ========== ========== ==========
A reconciliation of net income and stockholders' equity from that reported on a statutory basis to that reported in the accompanying consolidated financial statements on a GAAP basis is as follows:
Year ended December 31, ---------------------------------------- 1993 1992 1991 ------------ ------------ ------------ Statutory stockholders' equity ..... $ 85,830,140 $ 83,331,013 $ 91,670,358 Deferred policy acquisition costs .. 7,698,864 8,112,831 5,923,456 Accrued salvage and subrogation .... 1,793,592 2,026,352 1,284,119 Other policyholders' funds payable (2,854,793) (3,695,397) (2,814,531) Pension asset ...................... 1,705,735 1,809,581 1,187,404 GAAP postretirement benefit liability in excess of statutory liability ........................ (1,358,197) - - Deferred income tax asset .......... 13,040,693 7,065,221 5,563,791 Goodwill ........................... 2,017,690 2,152,203 2,286,716 Statutory reserve discount on commutation of reinsurance contract in excess of GAAP amortization ..................... (1,717,641) - - Unrealized holding gains on fixed maturity securities available-for-sale ............... 3,134,016 - - Other .............................. 343,670 108,973 43,123 ------------ ------------ ------------ Stockholders' equity, GAAP basis ... $109,633,769 $100,910,777 $105,144,436 ============ ============ ============
Three months ended, -------------------------------------------------- March 31 June 30 September 30 December 31 ----------- ----------- ----------- ----------- - ---- Total revenues ........... $42,369,391 $45,480,653 $45,386,046 $44,665,844 =========== =========== =========== ===========
Earnings per share:* Income from operations $ .21 $ .14 $ .02 $ .33 Income from accounting changes .............. .26 - - - ----------- ----------- ----------- ----------- Net income .......... $ .47 $ .14 $ .02 $ .33 =========== =========== =========== ===========