Lease costs of the Company's office facilities in Oak Brook, Illinois, and Bismarck, North Dakota, which total approximately $256,000 and $125,000 annually, are included as expenses under the pooling agreement. Expenses of office facilities owned and leased by Employers Mutual are borne by the parties to the pooling agreement, less the rent received from the space used and paid for by non-insurance subsidiaries and outside tenants. See "Property and Casualty Insurance - Pooling Agreement" under Item 1 of this Form 10-K.
The three property and casualty insurance subsidiaries of the Company and two subsidiaries of Employers Mutual are parties to reinsurance pooling agreements with Employers Mutual (collectively the "pooling agreement"). Under the terms of the pooling agreement, each company cedes to Employers Mutual all of its insurance business and assumes from Employers Mutual an amount equal to its participation in the pool. All losses, settlement expenses and other underwriting and administrative expenses, excluding the voluntary reinsurance business assumed by Employers Mutual from unaffiliated insurance companies, are prorated among the parties on the basis of participation in the pool. The aggregate participation of the Company's property and casualty insurance subsidiaries is 22 percent. Operations of the pool give rise to intercompany balances with Employers Mutual, which are settled on a quarterly basis. The investment activities and income tax liabilities of the pool participants are not subject to the pooling agreement.
The Company's nonstandard risk automobile insurance subsidiary specializes in insuring private passenger automobile risks that are found to be unacceptable in the standard automobile insurance market.
($ in thousands) 1995 1994 1993 -------- -------- -------- Premiums earned .......................... $162,266 $164,829 $156,438 Losses and settlement expenses ........... 108,152 116,944 120,355 Other expenses ........................... 54,359 51,092 48,787 -------- -------- -------- Underwriting loss ........................ (245) (3,207) (12,704) Net investment income .................... 23,174 20,930 20,780 Realized investment gains ................ 1,043 520 684 Other income ............................. 344 434 259 -------- -------- -------- Operating income before income taxes ..... $ 24,316 $ 18,677 $ 9,019 ======== ======== ======== Incurred losses and settlement expenses: Insured events of the current year ..... $123,877 $123,344 $119,896 (Decrease) increase in provision for insured events of prior years ........ (15,725) (6,400) 459 -------- -------- -------- Total losses and settlement expenses $108,152 $116,944 $120,355 ======== ======== ======== Catastrophe and storm losses ............. $ 6,603 $ 6,343 $ 8,952 ======== ======== ========
Operating income before income taxes has increased significantly over the last three years. This increase has been fueled by improved operating results in both the property and casualty insurance subsidiaries and the reinsurance subsidiary. The results for 1995 reflect a substantial improvement in the operations of the reinsurance subsidiary and continued strong performance by the property and casualty insurance subsidiaries, while the nonstandard risk automobile insurance subsidiary showed a decline. The results for 1994 reflect improved operating results in all segments, with the property and casualty insurance subsidiaries and the nonstandard risk automobile insurance subsidiary posting significant increases over 1993.
Premium income declined slightly in 1995 after posting modest increases in 1994 and 1993. For the year 1995, a small production increase for the property and casualty insurance subsidiaries was more than offset by production decreases for the reinsurance and nonstandard risk automobile insurance subsidiaries. For the year 1994, production increases in the property and casualty insurance subsidiaries and the reinsurance subsidiary were partially offset by a production decrease in the nonstandard risk automobile insurance subsidiary.
Other income amounts represent the amortization of deferred income related to reserve discounting on the 1993 commutation of one of the reinsurance subsidiary's reinsurance contracts under the quota share agreement.
* The property and casualty insurance subsidiaries changed their method of calculating unearned premiums from the monthly pro rata method to the daily method. This change resulted in a cumulative increase in unearned premiums of $1,110,000 and a decrease in income of $808,000 ($.08 per share), net of income tax benefits of $302,000.
Workers' compensation production for 1995 was hindered by rate reductions, including a 10.6% rate reduction in the State of Iowa, the pool's largest producer of workers' compensation business. During 1994, 11 states implemented rate reductions and 14 states implemented rate increases for workers' compensation insurance; however, the impact on production was not material as they were enacted at various times throughout the year and they generally offset each other.
Underwriting results have improved significantly over the last three years, reflecting favorable development in the provision for insured events of prior years. This favorable development includes savings associated with reform measures implemented by several states to control administrative costs for workers' compensation insurance as well as various cost control functions that have been implemented by Employers Mutual to control losses. The property and casualty insurance subsidiaries have historically experienced favorable development in their reserves and current reserving practices have not been relaxed; however, the level of favorable development experienced in 1995 is not expected to continue. Underwriting results for 1993 were negatively impacted by reserve strengthening in the workers' compensation line of business related to greater than expected increases in the price and usage of drugs, medical durables and medical services. Other expenses have increased over the last three years due to higher commission rates associated with property business and additional expenses associated with the various cost control functions that have been implemented to control losses.
Investment income increased in 1995 after declining in 1994 and 1993 due to the transfer of $20,426,000 to Employers Mutual in 1993 in connection with the commutation of two reinsurance contracts. The increase for 1995 is primarily due to an increase in the invested asset balance.
Under the terms of the amended quota share agreement with Employers Mutual, 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 $1,913,000, $2,095,000 and $1,809,000 in 1995, 1994 and 1993, respectively. The reinsurance subsidiary also pays for 95 percent of the outside 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 $1,984,000, $2,836,000 and $2,439,000 in 1995, 1994 and 1993, respectively. Losses retained by Employers Mutual for the three years ended 1995, 1994 and 1993 amounted to $1,103,000, $7,020,000 and $615,000, respectively.
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 year. The coverage provided is $2,000,000, excess of $3,000,000 ($2,500,000 in 1994 and 1993) aggregate loss retained, excess of $200,000 per event. Maximum recovery is limited to $2,000,000 ($4,000,000 in 1994 and 1993) per accident year. The reinsurance subsidiary recovered $0, $0 and $144,000 under this treaty and paid reinstatement premiums of $0, $0 and $208,000 in 1995, 1994 and 1993, respectively. Total premiums paid to Employers Mutual amounted to $500,000, $558,000 and $708,000 in 1995, 1994 and 1993, respectively.
Effective October 31, 1993, Employers Mutual commuted the portion of the quota share agreement that pertained to a voluntary pool that handled large "highly protected" risks. In connection with this change in the quota share agreement, the Company's liabilities decreased $3,827,000 and invested assets decreased $2,620,000. Employers Mutual reimbursed the Company $1,207,000 for commissions incurred to generate this business. No reserve discount was calculated as this business involved short-tail property coverage.
($ in thousands) 1995 1994 1993 -------- -------- -------- Premiums earned ............................ $ 10,001 $ 12,161 $ 13,529 Losses and settlement expenses ............. 9,482 8,507 12,706 Other expenses ............................. 2,775 3,160 3,366 -------- -------- -------- Underwriting (loss) gain ................... (2,256) 494 (2,543) Net investment income ...................... 1,175 1,152 1,166 Realized investment gains .................. 3 75 109 -------- -------- -------- Operating (loss) income before income taxes $ (1,078) $ 1,721 $ (1,268) ======== ======== ======== Incurred losses and settlement expenses: Insured events of the current year ....... $ 9,798 $ 9,870 $ 13,182 Decrease in provision for insured events of prior years .................. (316) (1,363) (476) -------- -------- -------- Total losses and settlement expenses $ 9,482 $ 8,507 $ 12,706 ======== ======== ========
Underwriting results have fluctuated dramatically over the last three years. Results for 1995 were negatively impacted by an increase in both the frequency and severity of losses. Companies within the standard market have been retaining more of the marginal risks that previously had been passed on to the nonstandard market. As a result, the pool of potential insureds seeking nonstandard coverage is smaller and contains a larger percentage of high risk drivers. This has led to increased rate competition within the nonstandard market and an overall decline in the quality of the company's book of business. Underwriting results for 1994 reflect improved loss experience, favorable development in the provision for insured events of prior years and rate increases that were implemented in all states during the later part of 1993 and the first part of 1994. Results for 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.
Operating income before income taxes increased to $50,000 in 1995 from losses of $84,000 in 1994 and $161,000 in 1993. The improvement in 1995 and 1994 is primarily due to additional investment income that resulted from an increase in the invested asset balance.
Loss and settlement expense reserves are the Company's largest liability. Management continually reviews these reserves using a variety of statistical and actuarial techniques to analyze claim costs, frequency and severity data, and social and economic factors. Significant periods of time may elapse between the occurrence of an insured loss, the reporting of the loss and the settlement of the loss. During the loss settlement period, additional facts regarding individual claims become known, and accordingly, it often becomes necessary to refine and adjust the estimates of liability on a claim. Changes in reserve estimates are reflected in operating results in the year such changes are recorded.
The Company's financial results have not been materially affected by losses associated with asbestos and environmental exposures. The Company's environmental claims activity is predominately from hazardous waste and pollution-related claims. The parties to the pooling agreement have not written primary coverage for the major oil or chemical companies; the greatest exposure arises out of commercial general liability and umbrella policies issued to municipalities during the 1970s which allegedly cover contamination emanating from closed landfills. The remaining exposure is for claims from small regional operations or local businesses involved with disposing wastes at dump sites or having pollution on their own property due to hazardous material use or leaking underground storage tanks. These insureds include small manufacturing operations, tool makers, automobile dealerships, contractors, gasoline stations and real estate developers.
The 1995 Private Securities Litigation Reform Act provides issuers the opportunity to make cautionary statements regarding forward-looking statements. Accordingly, any forward-looking statement contained herein or in any other oral or written statement by the Company or any of its officers, directors or employees is qualified by the fact that actual results of the Company may differ materially from such statement due to the following important factors, among other risks and uncertainties inherent in the Company's business: catastrophic events, state insurance regulations, rate competition, adverse changes in interest rates and unforeseen losses with respect to loss and settlement expense reserves for unreported and reported claims, including asbestos and environmental claims.
The accompanying financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. Their report appears elsewhere in this annual report.
------------ ------------ ASSETS Investments (note 10): Fixed maturities: Securities held-to-maturity, at amortized cost (market value $203,312,748 and $238,721,488) $191,440,816 $243,649,720 Securities available-for-sale, at market value (amortized cost $137,099,939 and $77,808,992) 142,360,569 76,492,396 Equity securities available-for-sale, at market value (cost $14,771,422 and $0) ............... 16,010,763 - Short-term investments, at cost ................. 17,271,798 16,029,426 ------------ ------------ Total investments .......................... 367,083,946 336,171,542
STOCKHOLDERS' EQUITY (notes 7,8,10,14 and 15) Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding, 10,821,978 shares in 1995 and 10,587,629 shares in 1994 ........... 10,821,978 10,587,629 Additional paid-in capital ........................ 59,787,926 57,162,911 Unrealized holding gains (losses) on fixed maturity securities available-for-sale, net of tax ...................................... 3,472,016 (1,316,596) Unrealized holding gains on equity securities available-for-sale, net of tax .................. 817,965 -
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES FOR: Income taxes (note 11) .......... - - 5,595,177 Postretirement benefits (note 13) - - (2,165,900) Unearned premiums (note 1) ...... - - (807,933) ------------ ------------ ------------ NET INCOME .................... $ 17,348,828 $ 13,505,727 $ 9,755,379 ============ ============ ============
Cumulative effect of changes in accounting principles for: Income taxes ................. - - .55
Postretirement benefits ...... - - (.21) Unearned premiums ............ - - (.08) ------------ ------------ ------------ Total ...................... $ 1.62 $ 1.29 $ .96 ============ ============ ============
Year ended December 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- COMMON STOCK: Beginning of year .................... $10,587,629 $10,325,329 $10,161,760 Issuance of common stock: Stock option plans ................. 102,797 41,694 31,252
From issuance of common stock: Stock option plans ................. 1,092,041 349,390 279,234
Dividend reinvestment plan ......... 1,417,808 1,791,595 1,211,972 Gain on sale of treasury stock ....... 115,166 - 23,261
----------- ----------- ----------- End of year .......................... 59,787,926 57,162,911 55,021,926 ----------- ----------- -----------
Gains (losses) on revaluation of fixed maturity securities available-for-sale, net of tax (notes 1 and 10) ............. 4,788,612 (3,385,047) 2,068,451
----------- ----------- ----------- End of year ........................ 3,472,016 (1,316,596) 2,068,451 ----------- ----------- -----------
Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ RETAINED EARNINGS: Beginning of year ................. $ 50,402,812 $ 42,319,249 $ 37,866,902 Net income ........................ 17,348,828 13,505,727 9,755,379 Dividends on common stock ($.53 per share in 1995, $.52 in 1994 and 1993): Cash dividends ................ (3,653,299) (3,510,555) (3,443,465) Dividends reinvested in shares of common stock ............. (2,009,047) (1,911,609) (1,859,567) ------------ ------------ ------------ End of year ....................... 62,089,294 50,402,812 42,319,249 ------------ ------------ ------------
Cash used in the change in the property and casualty insurance subsidiaries' pooling agreement (note 2) ............. - - (4,426,945)
Cash used in the commutation of two reinsurance contracts under the reinsurance subsidiary's quota share agreement (note 2) - - (20,425,955) ----------- ----------- ----------- Total adjustment ............. 7,302,235 25,499,823 (18,548,921) ----------- ----------- ----------- Net cash provided by (used in) operating activities $24,651,063 $39,005,550 $(8,793,542) ----------- ----------- -----------
Net (purchases) sales of short-term investments ..................... (1,242,372) 699,964 1,420,288 ------------ ------------ ------------ Net cash (used in) provided by investing activities .. (21,917,512) (35,374,972) 10,689,771 ------------ ------------ ------------
Income taxes paid ................... $ 6,242,085 $ 3,795,381 $ 2,021,128 Interest paid ....................... 177,156 33,672 -
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 an excess and surplus lines insurance agency. Both commercial and personal lines of insurance are written, with the focus on medium-sized commercial accounts. About two-thirds of the premiums written are in Iowa and the contiguous states. EMC Insurance Group Inc. and its subsidiaries are referred to herein as the "Company".
The Company's subsidiaries include EMCASCO Insurance Company, Illinois EMCASCO Insurance Company, Dakota Fire Insurance Company, EMC Reinsurance Company, Farm and City Insurance Company and EMC Underwriters, Ltd.
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. The Company reviews the recoverability of the unamortized balance of goodwill on a periodic basis using projected cash flows.
During 1995, the Financial Accounting Standards Board (FASB) issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which is effective for fiscal years beginning after December 15, 1995. This statement establishes accounting standards which address the recognition and measurement of losses due to the impairment of long-lived assets. The Company will adopt SFAS 121 in the first quarter of 1996. Adoption of this statement will have no effect on the income of the Company.
During 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation", which is effective for fiscal years beginning after December 15, 1995. This statement establishes a fair value-based method of accounting for stock-based compensation plans; however, it also permits continued application of the provisions of Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees", with separate disclosure of information prepared under the guidelines of SFAS 123. The Company will adopt the new disclosure requirements of SFAS 123 in the first quarter of 1996. Adoption of this statement will have no effect on the income of the Company.
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. 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.
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 $343,653 in 1995, $433,979 in 1994 and $259,217 in 1993.
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 $2,140, $71,567 and $0 in 1995, 1994 and 1993, respectively. Premiums paid to Employers Mutual amounted to $45,232, $49,659 and $42,065 in 1995, 1994 and 1993, respectively.
Employers Mutual provides various services to all of its subsidiaries. Such services include data processing, claims, financial, actuarial, auditing, marketing and underwriting. Costs of these services are allocated to the subsidiaries outside the pooling agreement based upon a number of criteria, including usage and number of transactions. Costs not allocated to these subsidiaries are charged to the pool and each pool participant shares in the total cost in proportion to its participation percentage.
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.
Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ PREMIUMS WRITTEN Direct ......................... $152,579,014 $143,444,388 $135,277,129 Assumed from nonaffiliates ..... 3,282,699 5,843,091 6,636,942 Assumed from affiliates ........ 159,253,136 158,646,332 147,620,705 Ceded to nonaffiliates ......... (8,365,648) (8,890,119) (10,701,482) Ceded to affiliates ............ (143,259,942) (132,100,537) (120,898,914) ------------ ------------ ------------ Net premiums written ......... $163,489,259 $166,943,155 $157,934,380 ============ ============ ============ PREMIUMS EARNED Direct ......................... $151,450,871 $140,012,247 $137,141,457 Assumed from nonaffiliates ..... 3,548,647 5,988,228 6,758,364 Assumed from affiliates ........ 157,897,322 156,839,482 148,366,487 Ceded to nonaffiliates ......... (8,680,800) (9,601,270) (11,507,217) Ceded to affiliates ............ (141,949,790) (128,409,308) (124,321,553) ------------ ------------ ------------ Net premiums earned .......... $162,266,250 $164,829,379 $156,437,538 ============ ============ ============ LOSSES AND SETTLEMENT EXPENSES INCURRED Direct ......................... $ 98,651,399 $113,680,306 $ 97,842,980 Assumed from nonaffiliates ..... 608,796 2,774,689 6,575,099 Assumed from affiliates ........ 100,098,436 108,594,530 107,369,274 Ceded to nonaffiliates ......... (2,036,962) (3,077,305) (5,845,414) Ceded to affiliates ............ (89,169,391) (105,028,166) (85,586,640) ------------ ------------ ------------ Net losses and settlement expenses incurred .......... $108,152,278 $116,944,054 $120,355,299 ============ ============ ============
Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Gross reserves for losses and settlement expenses, beginning of year .......................... $203,181,615 $197,121,852 $215,388,865
(Decrease) increase in provision for insured events of prior years ........................ (15,724,323) (6,399,775) 458,773 ------------ ------------ ------------ Total incurred losses and settlement expenses ...... 108,152,278 116,944,054 120,355,299 ------------ ------------ ------------ Payments: - --------- Losses and settlement expenses attributable to insured events of the current year ............ 48,237,715 48,771,573 47,600,851
Losses and settlement expenses attributable to insured events of prior years ................. 55,753,875 59,491,875 45,508,460
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
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 ............. $103,991,590 $107,576,486 $130,823,484 ------------ ------------ ------------
Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Net reserves for losses and settlement expenses, end of year $193,195,429 $189,034,741 $179,667,173
Ceded reserves for losses and settlement expenses, end of year 12,226,680 14,146,874 17,454,679 ------------ ------------ ------------ Gross reserves for losses and settlement expenses, end of year $205,422,109 $203,181,615 $197,121,852 ============ ============ ============
The Company has exposure to asbestos and environmental related claims associated with the insurance business issued by the property and casualty insurance subsidiaries and the reinsurance business assumed from Employers Mutual. Reserves for asbestos and environmental related claims totaled $2,068,635 and $749,807 at December 31, 1995 and 1994, respectively. When comparing these amounts it is important to note that the reserves reported at December 31, 1995 are not presented on the same basis as the reserves reported at December 31, 1994. As noted in the following discussion, the reserves at December 31, 1995 reflect an increased allocation of Incurred But Not Reported (IBNR) reserves, and related settlement expense reserves, due to a change in reserving methodology and the receipt of additonal information regarding the assumed reinsurance business.
During 1995, Employers Mutual attempted to improve its disclosure of asbestos and environmental exposures related to its assumed reinsurance business, some of which is ceded to the Company's reinsurance subsidiary, by mailing supplemental questionnaires to its ceding reinsurers. Many of these reinsurers responded with more detailed information than they had previously provided. Using this additional information, Employers Mutual allocated a portion of the current bulk IBNR reserve to asbestos and environmental exposures. No additional bulk IBNR reserves were established on the business ceded to the Company's reinsurance subsidiary.
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 dividends and distributions. At December 31, 1995, $18,326,542 was available for distribution in 1996 to EMC Insurance Group Inc. without prior approval.
Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Statutory net income ................ $ 17,706,843 $ 13,697,482 $ 8,761,472 Change in deferred policy acquisition costs ................. 321,134 694,771 (413,967) Change in salvage and subrogation accrual ........................... 568,919 5,851 (232,760) Change in other policyholders' funds (490,719) (247,816) 840,604 Change in pension accrual ........... (572,062) (298,021) (103,846) GAAP postretirement benefit cost in excess of statutory cost ....... (235,592) (314,583) (216,091) Deferred income tax (expense) benefit (59,327) 94,441 18,027 Prior year income taxes and related interest .................. (231,001) (180,770) 817 GAAP basis amortization of reserve discount on commutation of reinsurance contract .............. 343,653 433,979 259,217 Statutory reserve discount on commutation of reinsurance contract - - (1,976,858) Other, net .......................... (3,020) (379,607) 197,420 ------------ ------------ ------------ Income before cumulative effect of changes in accounting principles, GAAP basis ........................ 17,348,828 13,505,727 7,134,035
During 1995, the Company invested $13,550,000 of short-term funds and maturing U.S. Treasury Bills into mutual funds invested in equity securities.
In November of 1995 the FASB issued a special report titled "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." This report contained a provision that allowed entities a one-time option to reassess the appropriateness of the classifications of all securities held and to reclassify securities from the held-to-maturity category without calling into question the intent of that enterprise to hold other debt securities to maturity in the future. The Company elected to take advantage of this option and reclassified $80,534,719 of municipal and corporate bonds from the held-to-maturity category to the available-for-sale category in the fourth quarter of 1995 in order to achieve more flexibility in its investment portfolio.
Securities available-for sale: Fixed maturity securities: Obligations of states and political subdivisions ......... $108,241,811 $ 4,301,309 $ (114,206)$112,428,914 Debt securities issued by foreign governments 1,996,716 16,104 - 2,012,820 Public utilities ....... 9,458,349 288,560 (690) 9,746,219 Corporate securities ... 17,233,563 760,019 - 17,993,582 Other debt securities .. 169,500 9,534 - 179,034 ------------ ----------- ----------- ------------ Total fixed maturity securities ....... 137,099,939 5,375,526 (114,896) 142,360,569
The amortized cost and estimated market value of fixed maturity securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Amortized market cost value ------------ ------------ Securities held-to-maturity: Due in one year or less ................... $ 19,002,127 $ 19,143,485 Due after one year through five years ..... 67,912,517 71,776,690 Due after five years through ten years .... 62,095,274 67,615,966 Due after ten years ....................... 4,475,329 4,890,645 Mortgage-backed securities ................ 37,955,569 39,885,962 ------------ ------------ Totals .................................. $191,440,816 $203,312,748 ============ ============
Fixed maturity securities available-for-sale: Proceeds from calls and prepayments 786,616 842,000 - Gross realized investment gains ... 27,414 23,966 -
Total available-for-sale securities $ 5,606,577 $(3,365,247) $ 2,190,651 =========== =========== ===========
The Company adopted SFAS 109 as of January 1, 1993. The cumulative effect of this change in accounting for income taxes as of January 1, 1993 increased income by $5,595,177 ($.55 per share), net of a valuation allowance of $1,000,000, and is reported separately in the consolidated statement of income for the year ended December 31, 1993. Excluding the amount recognized as the cumulative effect of the change, the effect of applying SFAS 109 on net income for the year ended December 31, 1993 was a decrease of $174,483 ($.02 per share).
Year ended December 31, ------------------------ 1995 1994 ----------- ----------- Loss reserve discounting .......................... $12,486,760 $12,690,876 Unearned premium reserve limitation ............... 3,158,304 3,075,140 Postretirement benefits ........................... 1,482,631 1,389,469 Policyholder dividends payable .................... 1,221,732 1,054,887 Prepayment of tax on commutation of loss reserves 319,603 436,445 Net unrealized holding losses ..................... - 447,643 Other, net ........................................ 547,799 574,569 ----------- ----------- Total gross deferred income tax asset ......... 19,216,829 19,669,029
Year ended December 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Income tax expense (benefit) on: Operations .......................... $ 6,967,081 $ 5,171,041 $ 1,885,101 Unrealized holding gains (losses) on revaluation of securities available-for-sale ................ 2,209,990 (1,055,365) 1,055,365 Accounting changes: Income taxes ...................... - - (5,595,177) Postretirement benefits (note 13) - - (1,115,767) Unearned premiums (note 1) ........ - - (301,866) ----------- ----------- ----------- Comprehensive income tax expense (benefit) ............. $ 9,177,071 $ 4,115,676 $(4,072,344) =========== =========== ===========
The Company has established reserves totaling $251,988 for the payment of taxes and interest related to the examination of the Company's 1991 and 1990 tax returns by the Internal Revenue Service. The Company is currently protesting certain issues arising out of these examinations.
Year ended December 31, ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $51,185,830, $52,520,753 and $27,245,933 ................... $ 52,190,610 $ 53,244,188 $ 29,713,282 ============ ============ ============
Effective April 1, 1994, Employers Mutual entered into a new group annuity contract with its pension administrator. Under the old contract, the pension administrator assumed the mortality risk associated with retirees. Accordingly, assets and liabilities of retirees were transferred to the pension administrator and were excluded from the plan. Effective April 1, 1994, Employers Mutual assumed the mortality risk associated with retirees and the related assets and liabilities were transferred back into the plan. As a result, the plan's assets and liabilities increased approximately $19,100,000. This change in contracts had no effect on the funded status of the plan or the benefits payable to participants.
The Company participates in Employers Mutual's postretirement benefit plans which provide certain health care and life insurance benefits for retired employees. Substantially all employees may become eligible for those benefits if they reach normal retirement age and have attained the required length of service while working for Employers Mutual or its subsidiaries.
The health care postretirement plan requires contributions from participants and contains certain cost sharing provisions such as coinsurance and deductibles. The life insurance plan is noncontributory. Both plans are unfunded and benefits provided are subject to change.
The following tables set forth the status and the components of the net periodic postretirement benefit cost of the Employers Mutual postretirement benefit plans based upon a measurement date of November 1, 1995, 1994 and 1993, respectively.
The Company's net periodic postretirement benefit cost for the years ended December 31, 1995, 1994 and 1993 was $608,832, $684,899 and $359,747, respectively.
Year ended December 31, ------------------------------- 1995 1994 1993 --------- --------- --------- Options outstanding, beginning of year 556,277 518,023 392,853 Granted .............................. 119,550 64,600 163,650 Exercised ............................ (88,645) (13,546) (25,780) Expired .............................. (21,300) (12,800) (12,700) --------- --------- --------- Options outstanding, end of year ..... 565,882 556,277 518,023 ========= ========= ========= Options exercisable, end of year ..... 284,112 299,207 219,480 ========= ========= =========
A total of 500,000 shares of the Company's common stock were reserved for issuance under the Employers Mutual 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 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, a stock certificate is issued evidencing the ownership of the participant in the shares of stock so purchased. The certificate, however, is 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 has 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 plan. However, the participant is not 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 will, 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 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.
During 1995, 130 employees participated in the plan and exercised a total of 17,895 options at prices of $10.20 and $11.69. Activity under the plan was as follows:
A total of 200,000 shares of the Company's common stock were reserved for issuance under Employers Mutual's Non-Employee Director Stock Purchase Plan. All non-employee directors of Employers Mutual and its subsidiaries who are not serving on the "Disinterested Director Committee" of 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 1995, four directors participated in the plan and exercised a total of 2,531 options at prices ranging from $7.13 to $8.35. Activity under the plan was as follows:
Fixed maturity securities: Held-to-maturity ......................... $243,649,720 $238,721,488 Available-for-sale ....................... 76,492,396 76,492,396 Short-term investments ..................... 16,029,426 16,029,426
The Company and Employers Mutual and its other subsidiaries are parties to numerous lawsuits arising in the normal course of the insurance business. The Company believes that the resolution of these lawsuits will not have a material adverse effect on its financial condition or its results of operations. The companies involved have reserves which are believed adequate to cover any potential liabilities arising out of all such pending or threatened proceedings.
Employers Mutual has entered into unsecured financing arrangements with several large commercial policyholders. The Company, under terms of the pooling agreement, is a 22 percent participant in these policies (note 2). At December 31, 1995, the Company is contingently liable for $1,166,000 of unsecured receivables held by Employers Mutual.
Employers Mutual has purchased annuities to fund future payments that are fixed pursuant to specific claim settlement provisions. The Company, under terms of the pooling agreement, is a 22 percent participant in these annuities (note 2). The Company is contingently liable to various claimants in the amount of $1,134,026 in the event that the issuing company would be unable to fulfill its obligations.
Three months ended, ------------------------------------------------------ March 31 June 30 September 30 December 31 ------------ ------------ ------------ ------------ - ---- Total revenues ........ $ 45,941,694 $ 43,549,373 $ 47,358,200 $ 49,978,160 ============ ============ ============ ============ Income before income taxes ............... $ 5,528,309 $ 7,393,160 $ 3,706,098 $ 7,688,342 Income taxes .......... 1,528,206 2,273,383 715,805 2,449,687 ------------ ------------ ------------ ------------ Net income ....... $ 4,000,103 $ 5,119,777 $ 2,990,293 $ 5,238,655 ============ ============ ============ ============
Earnings per share*.... $ .38 $ .48 $ .28 $ .48 ============ ============ ============ ============
- ---- Total revenues ........ $ 45,660,377 $ 44,748,377 $ 47,061,359 $ 49,242,492 ============ ============ ============ ============ Income before income taxes ............... $ 3,059,771 $ 5,107,880 $ 4,830,735 $ 5,678,382 Income taxes .......... 757,227 1,288,137 1,543,917 1,581,760 ------------ ------------ ------------ ------------ Net income ....... $ 2,302,544 $ 3,819,743 $ 3,286,818 $ 4,096,622 ============ ============ ============ ============
- ---- Total revenues ........ $ 42,369,391 $ 45,480,653 $ 45,519,261 $ 44,791,846 ============ ============ ============ ============ Income before income taxes (benefit)...... $ 3,375,144 $ 476,062 $ 627,295 $ 4,540,635 Income taxes (benefit) 1,262,205 (963,626) 392,546 1,193,976 ------------ ------------ ------------ ------------ Income from operations 2,112,939 1,439,688 234,749 3,346,659 Income from accounting changes ............. 2,621,344 - - - ------------ ------------ ------------ ------------ Net income ....... $ 4,734,283 $ 1,439,688 $ 234,749 $ 3,346,659 ============ ============ ============ ============