Edgar Filing: EMC INSURANCE GROUP INC

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K



ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________to __________________

Commission File Number: 0-10956

EMC INSURANCE GROUP INC.

(Exact name of registrant as specified in its charter)



Iowa		42-6234555
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



717 Mulberry Street, Des Moines, Iowa		50309
(Address of principal executive offices)		(Zip Code)



Registrant’s telephone number, including area code:		(515) - 345 - 2902
Securities registered pursuant to Section 12(b) of the Act:



Common Stock, Par Value $1.00		The Nasdaq Global Select Market
(Title of Class)		(Name of each exchange on which registered)

Securities registered pursuant to Section 12 (g) of the Act: None



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act	o	Yes	ý	No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act	o	Yes	ý	No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.	ý	Yes	o	No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).	ý	Yes	o	No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.	ý

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.



o	Large accelerated filer	ý	Accelerated filer	o	Non-accelerated filer
o	Smaller reporting company	o	Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2018 was $270,981,899.

The number of shares outstanding of the registrant's common stock, $1.00 par value, on February 28, 2019, was 21,640,617.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for the Annual Meeting of Stockholders to be held on May 16, 2019, and to be filed pursuant to Regulation 14A within 120 days after the registrant’s fiscal year ended December 31, 2018, are incorporated by reference under Part III.

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TABLE OF CONTENTS



		Page
Part I
Item 1.	Business	2
	Executive Officers of the Company	32
Item 1A.	Risk Factors	34
Item 1B.	Unresolved Staff Comments	46
Item 2.	Properties	46
Item 3.	Legal Proceedings	46
Item 4.	Mine Safety Disclosures	46

Part II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	46
Item 6.	Selected Financial Data	49
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	51
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	92
Item 8.	Financial Statements and Supplementary Data	93
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	168
Item 9A.	Controls and Procedures	168
Item 9B.	Other Information	168

Part III
Item 10.	Directors, Executive Officers and Corporate Governance	168
Item 11.	Executive Compensation	169
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	169
Item 13.	Certain Relationships and Related Transactions, and Director Independence	169
Item 14.	Principal Accountant Fees and Services	169

Part IV
Item 15.	Exhibits, Financial Statement Schedules	170
	Index to Financial Statement Schedules	170
Item 16.	Form 10-K Summary	173
Signatures		174

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PART I



ITEM 1.	BUSINESS

GENERAL

EMC Insurance Group Inc. is an insurance holding company that was incorporated in Iowa in 1974 by Employers Mutual Casualty Company (Employers Mutual) and became a public company in 1982 following the initial public offering of its common stock. EMC Insurance Group Inc. is approximately 55 percent owned by Employers Mutual, a multiple-line property and casualty insurance company organized as an Iowa mutual insurance company in 1911 that is licensed in all 50 states and the District of Columbia. The term “Company” is used interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC Insurance Group Inc. and its subsidiaries. Employers Mutual and all of its subsidiaries (including the Company) are referred to as the “EMC Insurance Companies.”

On November 20, 2018, the Company announced receipt of a non-binding indicative proposal dated November 15, 2018 from Employers Mutual to purchase all the outstanding common stock of the Company not already owned by Employers Mutual, and the formation of a special committee of the Company's board of directors to consider the proposal. The proposal, which is subject to certain conditions, provides that the shares will be purchased at a price of $30 per share in cash. The special committee, which consists of the Company's four independent directors, has retained its own independent financial and legal advisors to assist it in considering the proposal. There can be no assurance that any definitive agreement will be finalized and executed or that the proposal transaction or any other transaction will be approved or consummated.

The Company conducts operations in property and casualty insurance and reinsurance through its subsidiaries. The Company primarily focuses on the sale of commercial lines of property and casualty insurance to small and medium-sized businesses. These products are sold through independent insurance agents who are supported by a decentralized network of branch offices. Although the Company actively markets its insurance products in 41 states, a large portion of its business is marketed and generated in the Midwest.

The Company conducts its insurance business through two business segments as follows:

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Illinois EMCASCO was formed in Illinois in 1976 (and was re-domesticated to Iowa in 2001), Dakota Fire was formed in North Dakota in 1957 and EMCASCO was formed in Iowa in 1958, all for the purpose of writing property and casualty insurance. EMC Reinsurance Company was formed in 1981 to assume reinsurance business from Employers Mutual. The Company’s excess and surplus lines insurance agency, EMC Underwriters, LLC, was formed in Iowa in 1975 and was acquired by the Company in 1985. Effective December 31, 1998, the excess and surplus lines insurance agency was converted to a limited liability company and the ownership was contributed to EMCASCO.

Property and casualty insurance is the most significant segment of the Company’s business, totaling 77 percent of consolidated premiums earned in 2018. The property and casualty insurance operations are conducted through Illinois EMCASCO, Dakota Fire and EMCASCO and are integrated with the property and casualty insurance operations of Employers Mutual through participation in a reinsurance pooling agreement. Because the Company conducts its property and casualty insurance operations together with Employers Mutual through the reinsurance pooling agreement, the Company shares the same business philosophy, management, employees and facilities as Employers Mutual and offers the same types of insurance products. For a discussion of the reinsurance pooling agreement and its benefits, please see “Organizational Structure – Property and Casualty Insurance” below.

Reinsurance operations are conducted through EMC Reinsurance Company and accounted for 23 percent of consolidated premiums earned in 2018. The principal business activity of EMC Reinsurance Company is to assume, through a quota share reinsurance agreement, 100 percent of Employers Mutual's assumed reinsurance business, subject to certain exceptions. EMC Reinsurance Company also writes a relatively small amount of international assumed reinsurance business on a direct basis (outside the quota share reinsurance agreement). For a discussion of the quota share reinsurance agreement and its benefits, please see “Organizational Structure – Reinsurance” below.

The Company’s insurance agency, EMC Underwriters, LLC, specializes in marketing excess and surplus lines of insurance. The excess and surplus lines markets provide insurance coverage at negotiated rates for risks that are not acceptable to licensed insurance companies. EMC Underwriters accesses this market by working through independent agents and functions as managing underwriter for excess and surplus lines insurance for the pool participants. The Company derives income from this business based on the fees and commissions earned through placement of the business, as opposed to the underwriting of the risks associated with that business.

Organizational Structure

Property and Casualty Insurance

The Company’s three property and casualty insurance subsidiaries and two subsidiaries of Employers Mutual (Union Insurance Company of Providence and EMC Property & Casualty Company) are parties to reinsurance pooling agreements with Employers Mutual (collectively the “pooling agreement"). Under the terms of the pooling agreement, each company cedes to Employers Mutual all of its insurance business, and assumes from Employers Mutual an amount equal to its participation in the pool. All premiums, losses, settlement expenses, and other underwriting and administrative expenses, excluding the voluntary reinsurance business assumed by Employers Mutual from nonaffiliated insurance companies, are prorated among the parties on the basis of participation in the pool. Employers Mutual negotiates reinsurance agreements that provide protection to the pool and each of its participants, including protection against losses arising from catastrophic events. The aggregate participation of the Company’s property and casualty insurance subsidiaries in the pool is 30 percent.

All transactions occurring under the pooling agreement and the inter-company reinsurance program are based on statutory accounting principles. Certain adjustments are made to the statutory-basis amounts assumed by the property and casualty insurance subsidiaries to bring the amounts into compliance with U.S. generally accepted accounting principles (GAAP).

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Operations of the pool and the inter-company reinsurance program give rise to inter-company balances with Employers Mutual, which are generally settled during the subsequent month. The investment and income tax activities of the pool participants are not subject to the pooling agreement. The pooling agreement provides that Employers Mutual will make up any shortfall or difference resulting from an error in its systems and/or computation processes that would otherwise result in the required restatement of the pool participants’ financial statements.

The purpose of the pooling agreement is to spread the risk of an exposure insured by any of the pool participants among all the companies participating in the pool. The particular benefits that the Company’s property and casualty insurance subsidiaries realize from participating in the pooling agreement include the following:


•	the ability to produce a more uniform and stable underwriting result from year to year than might be experienced individually, by spreading the risks over a wide range of geographic locations, lines of insurance written, rate filings, commission plans and policy forms;


•	the ability to benefit from the capacity of the entire pool (representing $1.8 billion in direct premiums written¹ in 2018 and $1.5 billion in statutory surplus as of December 31, 2018) rather than being limited to policy exposures of a size commensurate with each participant’s own surplus level;


•	the achievement of an “A” (Excellent) rating from A.M. Best Company on a “group” basis;


•	the ability to take advantage of a significant distribution network of independent agencies that the participants most likely could not access on an individual basis;


•	the ability to negotiate and purchase reinsurance from third-party reinsurers on a combined basis, thereby achieving larger retentions and better pricing; and


•	the ability to achieve and benefit from economies of scale in operations.

¹ Premiums written is an industry metric used to quantify the amount of insurance sold during a specified reporting period. Premiums earned is the recognition of the portion of premiums written directly related to the expired portion of an insurance policy for a given reporting period.

The amount of insurance a property and casualty insurance company writes under industry standards is commonly expressed as a multiple of its surplus calculated in accordance with statutory accounting practices. Generally, a ratio of 3 or less is considered satisfactory by state insurance regulators. The ratios of the pool participants for the past three years are as follows:



	Year ended December 31,
	2018	2017	2016
Employers Mutual¹	0.85	0.79	0.82
EMCASCO²	1.57	1.39	1.44
Illinois EMCASCO²	1.57	1.39	1.44
Dakota Fire²	1.67	1.46	1.51
EMC Property & Casualty Company¹	—	—	(0.27	)
Union Insurance Company of Providence¹	—	—	(0.27	)

¹The ratios for these companies reflect changes in their pool participation percentages in 2016. Effective January 1, 2016, the pool participation rates for EMC Property & Casualty Company and Union Insurance Company of Providence declined to zero, while Employers Mutual's pool participation rate increased to 68 percent. Effective January 1, 2018, Hamilton Mutual Insurance Company was merged into Employers Mutual. The balances for Employers Mutual reflect those of the merged entity as a 70 percent pool participant.

²The ratios for these companies reflect the issuance of an aggregate $25.0 million of surplus notes to Employers Mutual. Surplus notes are considered to be a component of surplus for statutory reporting purposes; however, under GAAP, surplus notes are considered to be debt and are reported as a liability in the Company’s financial statements.

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Reinsurance

The Company’s reinsurance subsidiary is party to a quota share reinsurance retrocessional agreement (the “quota share agreement”) with Employers Mutual. Under the terms of the quota share agreement, the reinsurance subsidiary assumes 100 percent of Employers Mutual’s assumed reinsurance business, subject to certain exceptions. EMC Reinsurance Company also writes a relatively small amount of international assumed reinsurance business on a direct basis (outside the quota share agreement).

The Company's reinsurance subsidiary also has an inter-company reinsurance program in place with Employers Mutual that covers both business assumed from Employers Mutual through the quota share agreement, as well as business obtained outside the quota share agreement, and consists of two treaties. The first is a per occurrence catastrophe excess of loss treaty, and the second is an annual aggregate catastrophe excess of loss treaty. Any losses recovered under the per occurrence treaty inure to the benefit of the aggregate treaty, and only catastrophic events with total losses greater than $500,000 are subject to the terms of the aggregate treaty.

The reinsurance subsidiary, through Employers Mutual, purchases additional reinsurance protection in peak exposure territories from external parties in which coverage is triggered when losses experienced by the insurance industry from a catastrophic event exceed a specified threshold. Any reinsurance recoveries received from external parties reduces the amount of losses ceded to Employers Mutual under the inter-company reinsurance program, net of the reinsurance subsidiary's 20 percent co-participation.

All transactions occurring under the quota share agreement and the inter-company reinsurance program are based on statutory accounting principles. Certain adjustments are made to the statutory-basis amounts assumed by the Company's reinsurance subsidiary to bring the amounts into compliance with GAAP.

Operations of the quota share agreement and the inter-company reinsurance program, as well as the purchase of the reinsurance protection from external parties, give rise to inter-company balances with Employers Mutual, which are generally settled during the month following the end of each quarter. The investment and income tax activities of the reinsurance subsidiary are not subject to the quota share agreement.

Property and Casualty Insurance and Reinsurance

The Company does not have any employees of its own. Employers Mutual performs all operations for all of its subsidiaries. Such services include data processing, claims, financial, actuarial, legal, auditing, marketing and underwriting. Employers Mutual allocates a portion of the cost of these services to its subsidiaries that do not participate in the pooling agreement based upon a number of criteria, including usage of the services and the number of transactions. The remaining costs are charged to the pooling agreement and each pool participant shares in the total cost in accordance with its pool participation percentage.

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NARRATIVE DESCRIPTION OF BUSINESS

Principal Products

Property and Casualty Insurance

The Company’s property and casualty insurance subsidiaries and the other parties to the pooling agreement underwrite both commercial and personal lines of property and casualty insurance; however, on October 29, 2018, it was announced that a strategic decision had been made to exit personal lines business so that more time and resources could be dedicated to the commercial and reinsurance business. The exit from personal lines of business is expected to be completed in early 2020. The coverages provided have consisted of the following types of insurance:

Commercial Lines


•	Automobile - policies purchased by insureds engaged in a commercial activity that provide protection against liability for bodily injury and property damage arising from automobile accidents, and protection against loss from damage to automobiles owned by the insured.


•	Property - policies purchased by insureds engaged in a commercial activity that provide protection against damage or loss to property (other than autos) owned by the insured.


•	Workers’ Compensation - policies purchased by employers to provide benefits to employees for injuries incurred during the course of employment. The extent of coverage is established by the workers’ compensation laws of each state.


•	Liability - policies purchased by insureds engaged in a commercial activity that provide protection against liability for bodily injury or property damage to others resulting from acts or omissions of the insured or its employees.


•	Other - includes a broad range of policies purchased by insureds engaged in a commercial activity that provide protection with respect to burglary and theft loss, aircraft, marine and other types of losses. This category also includes fidelity and surety bonds issued to secure performance.

Personal Lines

•

Includes automobile policies purchased by individuals that provide protection against liability for bodily injury and property damage arising from automobile accidents, and protection against loss from damage to automobiles owned by the insured; homeowners policies purchased by individuals that provide protection against damage or loss to property (other than autos) owned by the individual; and umbrella policies purchased by individuals that provide protection against liability for bodily injury or property damage to others resulting from acts or omissions of the insured.

The following table sets forth the aggregate direct premiums written of all parties to the pooling agreement for the three years ended December 31, 2018, by line of business.



	Year ended December 31,
	2018				2017				2016
($ in thousands) Line of business	Amount		Percent of total		Amount		Percent of total		Amount		Percent of total
Commercial lines:
Automobile	$	449,286	24.8	%	$	420,513	24.2	%	$	383,503	23.4	%
Property	461,425		25.5	%	436,084		25.1	%	421,792		25.8	%
Workers' compensation	353,680		19.6	%	361,574		20.8	%	327,663		20.0	%
Other liability	372,860		20.6	%	350,579		20.2	%	340,337		20.8	%
Other	35,194		1.9	%	32,789		1.9	%	31,725		1.9	%
Total commercial lines	1,672,445		92.4	%	1,601,539		92.2	%	1,505,020		91.9	%

Personal lines	135,821		7.6	%	134,902		7.8	%	132,697		8.1	%
Total	$	1,808,266	100.0	%	$	1,736,441	100.0	%	$	1,637,717	100.0	%

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Reinsurance

As previously noted, the reinsurance subsidiary primarily assumes the voluntary reinsurance business written directly by Employers Mutual with unaffiliated insurance companies (subject to certain limited exceptions). Employers Mutual writes both pro rata and excess of loss reinsurance for unaffiliated insurance companies. Pro rata reinsurance is a form of reinsurance in which the reinsurer assumes a stated percentage of all premiums, losses and related expenses in a given class of business. In contrast, excess of loss reinsurance provides coverage for a portion of losses incurred by an insurer which exceed predetermined retention limits.

The following table sets forth the net premiums written of the reinsurance subsidiary for the three years ended December 31, 2018. During 2018, 2017 and 2016, $5.3 million, $4.9 million and $5.1 million, respectively, of premiums written were ceded to Employers Mutual in accordance with the terms of the inter-company reinsurance program, and $10.0 million, $10.2 million and $10.1 million, respectively, of premiums written were ceded to external parties, through Employers Mutual, in connection with the purchase of reinsurance and through fronting activities. The ceded premiums associated with the inter-company reinsurance program were allocated entirely to the excess of loss line of business.



	Year ended December 31,
	2018				2017				2016
($ in thousands) Line of business	Amount		Percent of total		Amount		Percent of total		Amount		Percent of total
Pro rata reinsurance	$	44,648	29.7	%	$	42,203	31.9	%	$	52,996	40.4	%
Excess of loss reinsurance	105,870		70.3	%	90,071		68.1	%	78,034		59.6	%
Total	$	150,518	100.0	%	$	132,274	100.0	%	$	131,030	100.0	%

Marketing and Distribution

Property and Casualty Insurance

The pool participants market a wide variety of commercial lines insurance products through 16 branch offices, which actively write business through independent agents in 41 states. Since 2016, the oversight of personal lines business has been handled in the home office, with support provided by certain branch offices. The pool participants’ products are marketed exclusively through a network of more than 1,900 local independent agency relationships through more than 4,000 offices. The pool participants primarily focus on the sale of commercial lines of property and casualty insurance to small and medium-sized businesses, which are considered to be policyholders that pay less than $100,000 in annual premiums. The pool participants also seek to provide more than one policy to a given customer, because this “account selling” strategy diversifies risks and generally improves underwriting results.

The pool participants wrote approximately $1.8 billion in direct premiums in 2018, with 92 percent of this business coming from commercial lines products and 8 percent coming from personal lines products. Although a large portion of the pool participants’ business is generated by sales in the Midwest, Employers Mutual’s branch offices are located across the country to take advantage of local market conditions and opportunities, as well as to spread risk geographically. Each branch office performs its own underwriting, claims, marketing and risk management functions according to policies and procedures established and monitored by the home office. This decentralized network of branch offices allows the pool participants to develop marketing strategies, products and pricing that target the needs of individual marketing territories and take advantage of different opportunities for profit in each market. This operating structure also enables the pool participants to develop close relationships with their agents and customers.

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Although each branch office offers a slightly different combination of products, the branches have generally targeted two customer segments:


•	a wide variety of small to medium-sized businesses, through a comprehensive package of property and liability coverages;


•	businesses and institutions eligible for the pool participants’ target market, safety dividend group and EMC Choice programs (described below), which offer specialized products geared to their members’ unique protection needs.

The pool participants write a number of target market, safety dividend group and EMC Choice programs throughout the country, and have developed a strong reputation for these programs within the marketplace. These programs provide enhanced insurance protection to businesses or institutions that have similar hazards and exposures, and are willing to implement loss prevention programs. These groups include public schools, small municipalities, petroleum marketers, and contractors. As an example, the pool participants write coverage for approximately 1,500 school districts throughout the Midwest. These programs have been successful because they offer loss control products and services that are targeted to the needs of the group members through local independent agents.

The following table sets forth the geographic distribution of the aggregate direct premiums written by all parties to the pooling agreement for the three years ended December 31, 2018.



	Year ended December 31,
	2018		2017		2016
Illinois	4.1	%	4.1	%	4.2	%
Iowa	11.3	%	11.8	%	12.5	%
Kansas	6.9	%	7.4	%	8.0	%
Michigan	5.1	%	4.9	%	4.9	%
Minnesota	5.2	%	5.0	%	5.1	%
Nebraska	5.2	%	5.2	%	5.4	%
North Carolina	3.3	%	3.4	%	3.5	%
Texas	4.5	%	4.3	%	4.3	%
Wisconsin	7.4	%	7.5	%	5.9	%
Other *	47.0	%	46.4	%	46.2	%
	100.0	%	100.0	%	100.0	%

* Includes all other jurisdictions, none of which accounted for more than 3 percent.

Reinsurance

The reinsurance subsidiary currently obtains 97 percent of its business from Employers Mutual through the quota share agreement, and writes 3 percent directly in certain foreign jurisdictions to comply with their regulatory requirements. The reinsurance subsidiary relies on the financial strength of Employers Mutual to write reinsurance business, as well as the competitive advantage that Employers Mutual has by virtue of being licensed in all 50 states and the District of Columbia. Reinsurance marketing is undertaken by Employers Mutual in its role as the direct writer of the reinsurance business; however, the reinsurance subsidiary is utilized in the marketing efforts to help differentiate the reinsurance business from the direct insurance business that is written by Employers Mutual and the other pool participants.

The reinsurance business is derived from two sources. Approximately 93 percent of the reinsurance subsidiary’s assumed reinsurance premiums written in 2018 was generated through the activities of Employers Mutual’s Home Office Reinsurance Assumed Department (also known as “HORAD”). The reinsurance business written by HORAD is primarily generated through independent intermediaries. The risks assumed through HORAD are directly underwritten by Employers Mutual. As such, Employers Mutual has discretion with respect to the type and size of risks which it assumes and services through these activities. Since the reinsurance subsidiary utilizes Employers Mutual’s underwriting personnel and systems to process its direct business, HORAD also includes the international business written directly by the reinsurance subsidiary.

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The remaining 7 percent of the reinsurance subsidiary’s assumed reinsurance premiums written in 2018 was generated through Employers Mutual’s participation in Mutual Re, an unincorporated association through which Employers Mutual and four other unaffiliated insurance companies participate in a voluntary reinsurance pool to meet the reinsurance needs of small and medium-sized, unaffiliated mutual insurance companies. Employers Mutual has participated in Mutual Re since 1957. Mutual Re is controlled by a board of directors composed of the five member companies, including one representative designated by Employers Mutual. As a member of this organization, Employers Mutual assumes its proportionate share of the risks assumed by Mutual Re from unaffiliated insurers. Since Mutual Re is structured on a joint liability basis, Employers Mutual, and therefore the Company’s reinsurance subsidiary, would be obligated with respect to the proportionate share of risks assumed by the other participants in the event they were unable to perform. Mutual Re, which is operated by an independent management team, manages assumed risks through typical underwriting practices, including loss exposure controls provided through reinsurance coverage obtained for the benefit of Mutual Re. The reinsurance risks for Mutual Re arise primarily from the Northeast and Midwest markets. Underwriting of risks and pricing of coverage is performed by Mutual Re management under general guidelines established by Employers Mutual and the other participating insurers. Except for this general oversight, Employers Mutual has only limited control over the risks assumed by, and the operating results of, Mutual Re. Because of the joint liability structure, Mutual Re participating companies must generally maintain a rating of “A-” (Excellent) or above from A.M. Best Company, Inc. and meet certain other standards.

Employers Mutual emphasizes writing excess of loss reinsurance business in its HORAD operation and works to increase its participation on existing contracts that have had favorable terms and/or results. Employers Mutual strives to be flexible in the types of reinsurance products it offers, but generally limits its writings to direct reinsurance business, rather than providing retrocessional covers. The reinsurance marketplace tends to favor “across the board” participation on excess of loss reinsurance contracts. As a result, reinsurance companies must be willing to participate on all layers offered under a specific contract in order to be considered viable reinsurers.

It is customary in the reinsurance business for the assuming company to compensate the ceding company for the acquisition expenses incurred in the generation of the business. Commissions incurred by the reinsurance subsidiary under the quota share agreement with Employers Mutual amounted to $30.0 million in 2018. During 2018, the reinsurance subsidiary ceded to Employers Mutual $5.3 million of premiums under the inter-company reinsurance program. The reinsurance subsidiary also assumes all foreign currency exchange gain/loss associated with contracts incepting on January 1, 2006 and thereafter that are subject to the quota share agreement. The net foreign currency exchange gain assumed by the reinsurance subsidiary through the quota share agreement in 2018 was $266,000.

Competition

Property and Casualty Insurance

The property and casualty insurance marketplace is very competitive. The pool participants compete in the United States insurance market with numerous insurers, many of which have substantially greater financial resources. Competition in the types of insurance in which the pool participants are engaged is based on many factors, including the perceived overall financial strength of the insurer, industry ratings, premiums charged, contract terms and conditions, services offered, speed of claim payments, reputation and experience. Because the pool participants’ insurance products are marketed exclusively through independent agencies, they face competition to retain qualified agencies, as well as competition within the agencies. The pool participants also compete with direct writers, who utilize salaried employees and generally offer their products at a lower cost; exclusive agencies, who write insurance business for only one company; and to a lesser extent, internet-based enterprises. Employers Mutual’s decentralized network of 16 branch offices allows the pool participants to enhance business relationships with agents and customers and develop products, marketing strategies and pricing parameters targeted to individual territories. The pool participants also utilize a company-paid trip for qualified agents and a profit-sharing plan as incentives for the independent agencies to place high-quality insurance business with them.

Reinsurance

Employers Mutual, in writing reinsurance business through its HORAD operation, competes in the global reinsurance market with numerous reinsurance companies, many of which have substantially greater financial resources. Competition for reinsurance business is based on many factors, including the perceived financial strength of the reinsurer, industry ratings, stability in products offered and licensing status. There is a segment of the market that favors large, highly-capitalized reinsurance companies who are able to provide “mega” line capacity for multiple lines of business.

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While reinsurer competition for national and regional company business is growing, management believes that Mutual Re has a competitive advantage in the smaller mutual company market that it serves due to its low operating costs. Mutual Re understands the needs of the smaller company market and operates at a very low expense ratio, enabling it to offer reinsurance coverage (on business that generally presents less risk) to an under-served market at lower margins. However, due to growth in the reinsurance intermediary marketplace, the size of this under-served market has declined.

A.M. Best Company, Inc. Ratings

Property and Casualty Insurance

A.M. Best Company, Inc. (A.M. Best) rates insurance companies based on their relative financial strength and ability to meet their contractual obligations. During 2013, the Company’s property and casualty insurance subsidiaries' financial strength rating was raised from “A-” to “A” (Excellent) in their capacity as participants in the pooling agreement. A.M. Best re-evaluates its ratings from time to time (normally on an annual basis) and there can be no assurance that the Company’s property and casualty insurance subsidiaries and the other pool participants will maintain their current rating in the future. Management believes that an A.M. Best rating of “A-” (Excellent) or better is important to the Company’s business since many insureds require that companies with which they insure be so rated. A.M. Best’s publications indicate that the “A” (Excellent) rating is assigned to companies that have achieved excellent overall performance and have a strong ability to meet their obligations over a long period of time. A downgrade of the Company’s property and casualty insurance subsidiaries’ rating (particularly below “A-”) would adversely affect the Company’s competitive position and make it more difficult for it to market its products, and retain its existing agents and policyholders. A.M. Best’s ratings are based upon factors of concern to policyholders and insurance agents, and are not directed toward the protection of investors.

Reinsurance

The most recent A.M. Best Property Casualty Key Rating Guide gives the Company’s reinsurance subsidiary a financial strength rating of “A” (Excellent). However, because the majority of the reinsurance business assumed by the reinsurance subsidiary is produced by Employers Mutual, the rating of the reinsurance subsidiary is not critical to the Company’s reinsurance operations. The rating of Employers Mutual is, however, critical to the Company’s reinsurance operations, as the unaffiliated insurance companies that cede business to Employers Mutual view the rating as an indication of Employers Mutual’s ability to meet its obligations to those insurance companies. Employers Mutual’s rating was increased from “A-” to “A” (Excellent) during 2013. This rating increase aids in marketing efforts because some insurance companies require a rating of “A” (Excellent) or higher. A downgrade of Employers Mutual’s rating (particularly below “A-”) would have a material adverse impact on the Company’s reinsurance subsidiary, as a downgrade would negatively impact Employers Mutual’s ability to write reinsurance business and, consequently, to cede that business to the Company’s reinsurance subsidiary.

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Statutory Combined Trade Ratios

The following table sets forth the statutory combined trade ratios of the Company’s insurance subsidiaries, and the property and casualty insurance industry averages, for the five years ended December 31, 2018. The combined trade ratios below are the sum of the following: the loss and settlement expense ratio, calculated by dividing losses and settlement expenses incurred by net premiums earned, and the expense ratio, calculated by dividing underwriting expenses incurred by net premiums written and policyholder dividends by net premiums earned. Generally, if the combined trade ratio is below 100 percent, a company has an underwriting profit; if it is above 100 percent, a company has an underwriting loss.



	Year ended December 31,
	2018		2017		2016		2015		2014
Property and casualty insurance¹
Loss and settlement expense ratio	67.2	%	64.2	%	64.6	%	65.5	%	70.5	%
Expense ratio	34.9	%	34.5	%	33.9	%	33.4	%	32.0	%
Combined trade ratio	102.1	%	98.7	%	98.5	%	98.9	%	102.5	%

Reinsurance
Loss and settlement expense ratio	83.0	%	88.3	%	68.0	%	64.1	%	73.9	%
Expense ratio	23.2	%	23.6	%	24.4	%	24.9	%	24.5	%
Combined trade ratio	106.2	%	111.9	%	92.4	%	89.0	%	98.4	%

Total insurance operations¹
Loss and settlement expense ratio	70.8	%	69.6	%	65.5	%	65.2	%	71.2	%
Expense ratio	32.2	%	32.1	%	31.8	%	31.6	%	30.4	%
Combined trade ratio	103.0	%	101.7	%	97.3	%	96.8	%	101.6	%

Property and casualty insurance industry averages²
Loss and settlement expense ratio	74.4	%	76.3	%	72.7	%	69.8	%	69.3	%
Expense ratio	27.1	%	27.7	%	28.2	%	28.5	%	28.1	%
Combined trade ratio	101.5	%	104.0	%	100.9	%	98.3	%	97.4	%

¹ The expense ratios for the Company's property and casualty insurance subsidiaries reflect net periodic postretirement benefit income allocated to them as a result of a plan amendment to Employers Mutual's postretirement medical plan, which created a large prior service credit that is being amortized into benefit expense over a period of 10 years starting in 2014.

² As reported by A.M. Best. The ratio for 2018 is an estimate; the actual combined trade ratio is not currently available.

Claims Management

Effective claims management is critical to the success of the pool participants. To this end, the pool participants have adopted a customer-focused claims management process that is cost efficient, and delivers a high level of claims service that produces superior results. The claims management process is focused on handling claims from their inception, utilizing enhanced claims solutions to improve outcomes and lower costs, accelerating communication to insureds and claimants, and compressing the cycle time of claims to control both loss costs and claims-handling costs. This process provides quality service and results in the appropriate handling of claims, allowing the pool participants to cost-effectively pay valid claims and contest fraudulent claims.

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The claims management operation includes adjusters, appraisers, special investigators, attorneys, nurses and claims administrative personnel. The pool participants conduct their claims management operations out of 16 branch offices and four service offices located throughout the United States. The home office claims group provides advice and counsel for branch claims staff in investigating, reserving and settling claims. The home office claims staff also evaluates branch claims operations and makes recommendations for improvements in performance. Additional home office services provided include: complex claim handling, physical damage and property review, medical case management, medical bill review, legal coverage analysis, a special investigative unit, litigation management and subrogation. Management believes these home office services assist the branch claims personnel in producing greater efficiencies than can be achieved at the local level.

Each branch office is responsible for evaluating and settling claims within the authority provided by home office claims. Authority levels within the branch offices are granted based upon an adjuster’s experience and expertise. A branch office must request input from home office claims once a case exceeds its authority level. The Senior Vice President-Chief Claims Officer participates in a claims committee that exists within the home office. This committee meets on a weekly basis to assist the branches in evaluating and settling claims beyond their authority level.

The pool participants manage litigated claims arising from value disputes and questionable liability, and will defend appropriate denials of coverage. The pool participants retain outside defense counsel to defend such matters; however, internal claims professionals manage the litigation process. The pool participants have implemented an internally developed litigation management system that allows the claims staff to evaluate the quality and cost effectiveness of outside legal services. Cases are constantly reviewed to adjust the litigation plan as necessary, and all cases going to trial are carefully reviewed to assess the value of a trial verses a settlement.

Loss and Settlement Expense Reserves

The Company's liabilities for losses and settlement expenses represent management's best estimate at a given point in time of ultimate unpaid losses and settlement expenses for both reported and unreported claims. The estimates of the liabilities for losses and settlement expenses include assumptions of future trends and claims severity, judicial theories of liability, historic loss emergence and other factors. Because of the inherent uncertainties involved in the establishment of reserves for less mature accident years, management’s reserving methodology for the current and more recent accident years utilizes a stochastically derived risk load associated with the Company’s enterprise risk management practices. During the loss settlement period, which may cover many years in some cases, the inherent uncertainty associated with these accident years declines as the Company learns additional facts regarding individual claims and potential future claims, and consequently it often becomes necessary to refine and adjust its estimates of liability. The Company reflects any adjustments to its liabilities for losses and settlement expenses in its operating results in the period in which the changes in estimates are made.

The amount of reserves established for reported claims, known as “case loss reserves”, is primarily based upon a case-by-case evaluation of the specific type of claim, knowledge of the circumstances surrounding each claim and the policy provisions relating to the type of loss. Case loss reserves on assumed reinsurance business are the amounts reported by the ceding companies. Established reserves (for both reported and unreported claims) are closely monitored and are frequently examined using a variety of formulas and statistical techniques for analyzing loss development, as well as other economic and social factors.

Settlement expense reserves are intended to cover the ultimate cost of investigating claims and defending lawsuits arising from claims. Reserves are established separately for expenses specifically associated with a claim (allocated) and expenses not specifically associated with a claim (unallocated). To the extent that adjustments are required to be made in the amount of loss reserves each year, settlement expense reserves are correspondingly revised, if necessary.

The Company does not discount reserves. Inflation is implicitly provided for in the reserving function through analysis of cost trends, reviews of historical reserving results and projections of future economic conditions. Estimates of individual case loss reserves are monitored and reviewed on a regular basis by claims staff members. The home office claims group reviews and maintains a diary on files with reserves over $150,000, and also monitors catastrophic losses (fatalities, paraplegia, serious burns, etc.) regardless of claim size. Based on currently available information, individual case loss reserves are revised to reflect changes in the estimated average verdict value of the case in the applicable venue.

Despite the inherent uncertainties of estimating loss and settlement expense reserves, management believes that the Company’s reserves are being calculated in accordance with sound actuarial practices and, based upon current information, that the reserve for losses and settlement expenses at December 31, 2018 represents management’s best estimate of the Company’s overall liability.

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Reserving Methodology and Determination of Management’s Best Estimate of Overall Liability

Property and casualty insurance

The property and casualty insurance segment establishes case loss, IBNR loss and settlement expense reserves separately for three categories of losses, which are (1) all claims other than those stemming from storms, catastrophic events, asbestos and environmental exposures (general claims), (2) storms and catastrophic events, and (3) asbestos and environmental claims. Case loss reserves are established on a common basis for all three categories based on the specific facts for each reported claim. Individual case loss reserves are based on the probable, or most likely, outcome for each claim, with probable outcome defined as what is most likely to be awarded if the case were to be decided by a civil court in the applicable venue or, in the case of a workers’ compensation case, by that state’s Workers’ Compensation Commission. IBNR loss and settlement expense reserves are established differently for the three categories of losses as discussed below.

Reserves for General Claims

IBNR loss reserves for general claims are calculated by subtracting paid loss amounts and the case loss reserves carried on reported claims from the estimated ultimate loss amounts established by line of business and accident year. Allocated settlement expense reserves are established in a similar manner, except that only paid expenses to date are subtracted from the estimated ultimates, as adjusters do not establish case-basis settlement expense reserves. Unallocated settlement expenses reserves are determined through a study of historical paid expenses compared to paid losses. The unallocated settlement expense reserve established through this process is for all accident years combined, and the total is allocated to the various accident years proportional to the loss reserves.

Lines of Business and Process Overview

Reserves are evaluated for adequacy on a quarterly basis, and are the end-product of a broader process by which management establishes estimated ultimate loss (net of salvage, subrogation and reimbursement recoveries) and allocated settlement expense amounts by line of business and accident year. At quarter-end, carried bulk reserves are established as the difference between management's estimated ultimate amounts, and the reported amounts incurred to date. The actuarial department establishes estimated ultimate loss and allocated settlement expense amounts by accident year. During 2018, the number of line of business aggregations used in the actuarial reserving process was increased from eight to thirty-one in order to better align with pricing operations. For purposes of presentation, the finer line of business breakouts are aggregated into eight reserving lines of business: personal auto liability, commercial auto liability, auto physical damage, workers' compensation, other liability, commercial property, homeowners, and an “all other” category, which consists mostly of fidelity and surety bonds.

For each line of business, the establishment of IBNR loss and allocated settlement expense reserves begins with a review of historical experience as of the end of the first or second month of the quarter. The actuarial department utilizes standard actuarial incurred and paid chain ladder (triangle) development methods, expected loss and settlement expense ratio methods, and various methodologies which blend the development and expected ratio methods, such as the Bornhuetter-Ferguson method. The actuarial department employs these methods using incurred and paid losses and paid allocated settlement expenses aggregated on a calendar/accident year basis. The calendar/accident year development triangles generated in this process contain thirty-five years of historic data. The result of the process is a separate set of estimated ultimate ratios to earned premiums for losses and allocated settlement expenses by reserving line of business and accident year. At the end of each quarter, the selected estimated ultimate ratios are applied to the corresponding calendar year earned premiums to produce the estimated ultimate dollar amounts, from which the amounts reported to date are subtracted to produce the IBNR loss reserves and allocated settlement expense reserves to be recorded.

Several different averaging periods/methods are used in the incurred and paid chain ladder methods to produce development factors to ultimate. Since the pool participants do not establish settlement expense reserves on an individual claim basis, there is no corresponding incurred allocated settlement expense data upon which to apply the chain ladder method.

In addition to the accident year ultimate loss and allocated settlement expense estimates produced from the chain ladder methods, the actuarial department employs the following methodologies on an incurred and paid basis: Bornhuetter-Ferguson, Benktander (iterative Bornhuetter-Ferguson), Ultimate Frequency-Severity and Generalized Cape Cod. The actuarial department will also sometimes apply the Expected Loss Ratio Method for extremely immature accident years. For allocated settlement expenses, the actuarial department also produces ultimate estimates by applying the chain ladder approach to the ratio of paid allocated settlement expenses to paid losses. The ultimate factors from these paid-to-paid ratios are applied to the ultimate losses determined by the paid chain ladder method to produce ultimate allocated settlement expense dollar amounts.

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Range of Reasonable Ultimates and Management's Best Estimate: Each of the above listed methods are employed to determine an unbiased actuarial central estimate of the ultimate loss or settlement expense ratio. The actuarial department examines the indicated ultimate amounts for each category (losses and allocated settlement expenses) and each accident year, and applies judgment and knowledge of each method’s biases (if any) to exclude unreasonable estimates and assign a weight to the remaining estimates. The weighted average of the included estimates becomes the “actuarial central estimate”, to which a risk load is applied to produce management’s best estimate. The maximum and minimum of the remaining estimates define the range of reasonable ultimates.

The selected point estimate for each accident year is divided by its corresponding earned premiums to produce the expected ultimate loss and allocated settlement expense ratios. At quarter end, the ratios are applied to the corresponding calendar year earned premiums to produce the ultimate estimated dollar amounts, from which the amounts incurred to date are subtracted to produce the IBNR loss and allocated settlement expense reserves to be recorded.

Reserves for Storms and Catastrophic Events

IBNR loss reserves for storms and catastrophic events are established by the branch offices in conjunction with the home office claims department. IBNR loss reserves associated with storms and catastrophic events are event-specific. The pool participants define a storm or catastrophic event as any event for which the Property Liability Research Bureau (PLRB) assigns an occurrence number. When a storm or catastrophic event occurs, the location of the event is overlaid with a map of the pool participants’ exposures. Using this information and other factors (such as wind speed and the size of any hail), the affected branch office(s) are contacted and requested to develop a loss estimate based on projections of loss frequency and severity in their location. To develop this loss estimate, large accounts located in the affected areas are contacted. Based on this information and discussions with local agents, both the number and severity of estimated losses are projected by location. Management then compiles and analyzes this information and calculates a total loss estimate. The total loss estimate is generally established within two weeks of an event and is adjusted, if necessary, as the actual claims are inspected. At each reporting date, the total amount of reported losses associated with each storm/catastrophic event is compared to the most recent total loss estimate for that event, and the difference is recorded as the storm/catastrophe IBNR loss reserve. Since the pool participants do not establish separate settlement expense reserves for individual storm and catastrophe claims, the reserving methodology for settlement expenses on these claims is included in the settlement expense reserving process for general claims.

Reserves for Asbestos and Environmental Claims

The IBNR loss and settlement expense reserves are established jointly for asbestos and environmental liabilities as the available estimation methodologies require the consideration of both loss and settlement expense payments together. Management's internal ultimate loss and settlement expense evaluations consist of runoff scenarios based on recent payment activity and various future payout decay assumptions. The assumptions include published research on industry payout curves as well as reasonable alternative assumptions selected by the actuarial department. Internal and industry survival ratios are also monitored to assist in validating assumptions underlying the payout scenarios.

Reinsurance

The IBNR loss reserves for the HORAD book of business are determined and booked each quarter along with the ceding companies’ reported reserves. The methodologies used to establish the IBNR loss reserves produce a range of indicated reserves for each contract type and contract year. Employers Mutual’s actuaries examine the reasonableness of each range, and then select a point estimate within those ranges. For the more recent contract years, the selected IBNR loss reserve estimate tends to be higher in the range, typically in the fourth quartile, due to the considerable uncertainty associated with these immature contract years. The IBNR loss reserve selected for the more mature contract years tends to be at, or slightly above, the midpoint of the range of reasonable reserves. In addition to the actuarially determined reserves, an additional IBNR loss reserve is established when large catastrophic events occur, based on an examination of impacted contracts/exposures and reported industry-wide loss estimates. In aggregate, the IBNR loss reserve selected using these methods and procedures, combined with reserves reported by the ceding companies, becomes management’s best estimate of the reinsurance segment’s overall liability. The next several paragraphs provide addition detail on the HORAD reserving process.

Reserves for the HORAD book of business are reviewed quarterly. Contract years 1988 and subsequent are reviewed every quarter, while accident years 1981-1987, for which detailed contract year information is not available, are reviewed separately during the fourth quarter. Management segregates claims data associated with specified catastrophe occurrences expected to exceed $2.0 million in losses, and establishes a catastrophe specific IBNR loss reserve based upon an evaluation of the exposed reinsurance contracts. Once established, catastrophe specific IBNR reserves are taken down as claims are reported, unless the ultimate expected loss is adjusted by management.

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Premium, loss and settlement expense data is generally reported by ceding companies on a contract year basis; however, some loss and settlement expense data is reported on an accident year basis. Some ceding companies also report IBNR loss reserves. The reinsurance segment books these IBNR loss reserve amounts, and then deducts them from the indicated IBNR loss reserves calculated by Employers Mutual’s actuaries. The reinsurance segment may also book “additional case loss reserves” for ceding companies whose reported case loss reserves related to certain claims are believed to be less than adequate.

Using the reported data, excluding the reported IBNR loss reserves, Employers Mutual's actuaries develop an indicated ultimate loss, and corresponding IBNR loss reserve, by type of contract (property/casualty/excess/pro rata/multi-line) and by contract year. The actuaries employ the standard paid and incurred chain ladder (triangle) development methods and the Bornheutter-Furguson method to produce the indicated ultimate loss, and corresponding IBNR loss reserves. In addition, a loss ratio approach and judgment are applied to a few minor contract types which represent an insignificant portion of the totals.

For the major contract types, the reinsurance subsidiary uses its own paid and incurred development data aggregated on a contract year basis. The reason for aggregating by contract year, rather than accident year, is to ensure an accurate aggregation, as ceding companies have not always provided sufficient detail to determine the proper accident year assignment. In addition, the reinsurance subsidiary uses Reinsurance Association of America (RAA) development triangles to assist in estimating reserves for casualty excess contracts.

The expected loss ratios used in the Bornheutter-Ferguson method for the current contract year are calculated by contract type during the first quarter. Once established, the expected loss ratios for the various contract years are generally not revised. The expected loss ratios are calculated by dividing the projected ultimate losses for contract years having at least five years of maturity by the contract-year earned premiums brought to the current rate-level. The current rate-level loss ratios are then trended to the current contract period. In addition, when large accounts are first written, there is generally some underwriting or reserving data available from which an expected loss ratio may be determined.

After establishing the ultimate loss, and corresponding IBNR loss reserve, by treaty type and contract year, an allocation must be made in order to book the IBNR loss reserves by accident year and line-of-business. This is accomplished by a historical study of the ultimate accident year distribution of reported losses and reported loss types (for those treaty types which may cover multiple lines of business). For the latest contract years, consideration is also given to the distribution of the contract effective dates and the expected earnings patterns of the contract types (occurrence vs. risks attaching contracts).

The reinsurance subsidiary also books earned but not reported (EBNR) premiums on pro rata contracts, and accrued reinstatement premiums on catastrophe excess contracts. EBNR premium is estimated by applying selected earnings patterns to the expected ultimate contract year premium associated with each individual pro rata account, and netting the reported-to-date amount from the estimated earned-to-date amount. The account level earnings patterns are selected from an examination of all available information regarding distribution of risk attachment dates during the contract period and a review of each ceding company's historical reporting patterns. It is important to note that whenever EBNR premium is booked, there is an associated IBNR loss reserve established as well. Accrued reinstatement premiums are estimated by applying a historically selected ratio of ultimate reinstatement premiums to incurred losses to the expected ultimate incurred catastrophe loss by contract year. Netting the reported reinstatement premiums-to-date from this ultimate produces the recorded amount.

Reported case and IBNR loss reserves associated with the Mutual Re book of business are established by that entity’s management, and booked by the reinsurance subsidiary on a monthly basis. Mutual Re claims files are audited annually by the member companies’ reinsurance claim departments, and the member companies' actuarial departments perform an annual reserve adequacy review. The reinsurance subsidiary estimates and books a relatively small IBNR loss reserve and EBNR premium amount to account for a one month lag in reporting. The booking of the lag IBNR loss reserve may be suspended, and a negative bulk IBNR loss reserve may be booked, during periods when the Company's actuarial reviews indicate Mutual Re's carried reserves are more than adequate to cover its liabilities.

Reserve Development

Property and casualty insurance

There is an inherent amount of uncertainty involved in the establishment of insurance liabilities. This uncertainty is greatest in the current and more recent accident years because a smaller percentage of the expected ultimate claims have been reported, adjusted and settled compared to more mature accident years. For this reason, carried reserves for these accident years reflect prudently conservative assumptions. As the carried reserves for these accident years run off, the overall expectation is that, more often than not, favorable development will occur. However, there is also the possibility that the ultimate settlement of liabilities associated with these accident years will show adverse development, and such adverse development could be substantial and have a negative impact on the Company's financial condition and results of operations.

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Reinsurance

There are inherent uncertainties involved in establishing reserves for assumed reinsurance business. Such uncertainties include the fact that a reinsurance company generally has less knowledge than the ceding companies about the underlying book of business and the ceding companies' reserving practices. For this reason, the carried reserves for the reinsurance segment are generally in the upper quartiles of the range of actuarial reserve indications. As the carried reserves run off, the overall expectation is that, more often than not, favorable development will occur. However, there is also the possibility that the ultimate settlement of liabilities will show adverse development, and such adverse development could be substantial and have a negative impact on the Company's financial condition and results of operations.

See note 4 of Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for a reconciliation of beginning and ending reserves for losses and settlement expenses for the three years ended December 31, 2018, as well as ten years of incurred and paid development information for each major line of business. Following is a detailed analysis of the development the Company has experienced on its prior accident years’ reserves during the past three years. Care should be exercised when attempting to analyze the financial impact of the reported development amounts because, as previously noted, the overall expectation is that, more often than not, favorable development will occur as the prior accident years’ reserves run off.

Year ended December 31, 2018

Property and casualty insurance segment



($ in thousands) Line of business	Reported case and IBNR loss reserves			Allocated settlement expense reserves			Unallocated settlement expense reserves			Total
Personal lines	$	(196	)	$	(348	)	$	10		$	(534	)
Commercial auto liability	(413		)	1,318			(2,551		)	(1,646		)
Auto physical damage	(83		)	(97		)	420			240
Workers' compensation	2,951			(2,497		)	360			814
Other liability	(1,614		)	(4,502		)	(3,502		)	(9,618		)
Commercial property	(1,654		)	(1,109		)	(550		)	(3,313		)
Other	(1,061		)	(269		)	68			(1,262		)

Total	$	(2,070	)	$	(7,504	)	$	(5,745	)	$	(15,319	)

The favorable development reported for 2018 is generally attributed to lower loss severity assumptions underlying the loss and allocated settlement expense reserves carried at year-end 2018 than those underlying year-end 2017 reserves. The favorable development associated with the loss and allocated settlement expense reserves totaled $9.6 million, which consisted of $2.1 million of favorable loss reserve development and $7.5 million of favorable development from allocated settlement expense reserves.

The $9.6 million of favorable development on loss and allocated settlement expense reserves accounted for approximately 60 percent of the property and casualty insurance segment’s total reported favorable development of $15.3 million. The following table displays the development experienced in 2018 on reported case and IBNR loss reserves and allocated settlement expense reserves for the five most recent accident years, and all prior accident years, by line of business.

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($ in thousands)
Calendar accident year	Personal lines			Commercial auto liability			Auto physical damage			Workers' compensation			Other liability			Commercial property			Other			Total
Prior	$	(88	)	$	(391	)	$	2		$	(1,266	)	$	(117	)	$	238		$	(54	)	$	(1,676	)
2013	(5		)	170			(55		)	(38		)	(2,120		)	(534		)	(15		)	(2,597		)
2014	(186		)	(442		)	(46		)	(1,114		)	(97		)	(617		)	101			(2,401		)
2015	(115		)	427			(107		)	528			(3,079		)	(632		)	179			(2,799		)
2016	(75		)	864			(31		)	(557		)	1,004			(116		)	(776		)	313
2017	(76		)	278			58			2,903			(1,706		)	(1,103		)	(768		)	(414		)

Total	$	(545	)	$	906		$	(179	)	$	456		$	(6,115	)	$	(2,764	)	$	(1,333	)	$	(9,574	)

In the table above, five of the seven lines of business exhibited favorable development: personal lines, auto physical damage, other liability, commercial property and all other (surety). For these lines of business, favorable development for most accident years was driven by decreases in the severity assumptions underlying the estimated ultimate accident year loss and allocated settlement expense ratios.

Personal lines experienced favorable development in nearly every accident year due to better than expected development on prior reported claims and lower than anticipated emerged IBNR and settlement expenses.

The commercial auto liability line of business experienced adverse development in four of the latest five accident years. Ultimate loss ratios increased for accident years 2013 and 2017, while both ultimate loss and settlement expense ratios increased for accident years 2015 and 2016 due to increases in higher estimated ultimate severity.

Auto physical damage ultimate loss and settlement expense ratios decreased for accident years 2013-2016, as ultimate severity estimates decreased. However, the accident year 2017 ultimate loss ratio increased due to an increase in estimated ultimate frequency.

Reserves in the prior years (years prior to 2013) in workers' compensation experienced favorable development during 2018 after having been significantly strengthened during 2017. Two of the most recent five accident years experienced adverse development. An increase in ultimate estimated severity is the driver for the accident year 2015 development. Accident year 2017 saw a significant increase in ultimate frequency mainly due to a surge in claims associated with winter weather that occurred in late 2017.

The other liability line experienced favorable development from lower ultimate frequency and/or severity estimates on all years except accident year 2016, for which the ultimate severity estimate was increased four percent.

Commercial property’s favorable development in the latest five accident years is the result of reductions in estimated ultimate claim severities. The prior years (years prior to 2013) adverse development was impacted by a large businessowners liability claim from accident year 2012.

The “other” line of business consists mostly of fidelity and surety bonds. Favorable development on three of the latest five accident years was driven by decreases in estimated ultimate claim frequency and severity. The adverse development experienced for accident years 2014 and 2015 is from a reduction in the estimated ultimate reimbursement recoveries on surety bonds.

Reinsurance segment

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The HORAD segment experienced favorable development of $3.2 million. The composition of the prior year development consisted of $2.7 million of favorable development from assumed operations, $5.2 million of favorable development from external reinsurance recoveries on accident year 2017 catastrophes, and $4.6 million of adverse development from the inter-company reinsurance program with Employers Mutual. The $2.7 million of favorable development from assumed operations was associated with lower estimated ultimate losses for casualty excess contracts for accident years 2008-2011 and 2016, nearly all contact types for accident year 2013, and catastrophe and per risk excess contracts for accident year 2017.

Operations attributable to Mutual Re experienced favorable development of $0.2 million. Actuarial reviews of the reserves assumed from Mutual Re have consistently indicated a level of adequacy which challenged the upper boundary of the range of reasonable reserves. To address this issue, the reinsurance segment currently maintains a $3.7 million negative bulk IBNR loss reserve to keep reserves within the reasonable range. The negative IBNR was reduced during 2018 from the $4.0 million carried at the end of 2017.

During 2018, the expected loss ratios utilized in the various reserving methodologies for prior contract years were unchanged except for one contract type. Based on conversations with and observed experience provided by a large cedant, the ocean marine pro rata expected loss ratios for contract years 2012 through 2017, excepting 2015, experienced reductions ranging from 2 points to 22 points. The expected loss ratios utilized in reserving methodologies for the 2018 contract year were based on an extensive actuarial analysis of trended historic ultimate loss ratios based on current-level earned premiums. Where applicable, new contract loss information or loss histories were also incorporated into the reserving process. Compared to the 2017 contract year selection, the 2018 contract year expected loss ratio for the property pro rata contract type increased 2.5 points. Compared to the 2017 contract year selection, the 2018 contract year expected loss ratio for the ocean marine pro rata contract type decreased 5.0 points. All other 2018 expected loss ratios were unchanged from what was used for contract year 2017.

Year ended December 31, 2017

Property and casualty insurance segment



($ in thousands) Line of business	Reported case and IBNR loss reserves			Allocated settlement expense reserves			Unallocated settlement expense reserves			Total
Personal lines	$	(1,691	)	$	(89	)	$	119		$	(1,661	)
Commercial auto liability	2,619			1,251			(1,850		)	2,020
Auto physical damage	(584		)	(78		)	424			(238		)
Workers' compensation	(3,712		)	256			(421		)	(3,877		)
Other liability	(10,167		)	1,432			(1,266		)	(10,001		)
Commercial property	(1,590		)	(693		)	(52		)	(2,335		)
Other	572			7			(221		)	358

Total	$	(14,553	)	$	2,086		$	(3,267	)	$	(15,734	)

The favorable development reported for 2017 was generally attributed to lower loss severity assumptions underlying the loss and allocated settlement expense reserves carried at year-end 2017 than those underlying year-end 2016 reserves. The favorable development associated with the loss and allocated settlement expense reserves totaled $12.5 million, which consisted of $14.6 million of favorable loss reserve development and $2.1 million of adverse development from allocated settlement expense reserves.

The $12.5 million of favorable development on loss and allocated settlement expense reserves accounted for approximately 80 percent of the property and casualty insurance segment’s total reported favorable development of $15.7 million. The following table displays the development experienced in 2017 on reported case and IBNR loss reserves and allocated settlement expense reserves for the five most recent accident years, and all prior accident years, by line of business.

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($ in thousands)
Calendar accident year	Personal lines			Commercial auto liability			Auto physical damage			Workers' compensation			Other liability			Commercial property			Other			Total
Prior	$	(44	)	$	(13	)	$	(41	)	$	7,394		$	2,585		$	(65	)	$	(24	)	$	9,792
2012	75			59			22			187			88			185			(18		)	598
2013	(48		)	823			37			(153		)	(3,012		)	(104		)	(25		)	(2,482		)
2014	(147		)	478			42			365			(1,554		)	205			74			(537		)
2015	(372		)	803			(280		)	(1,693		)	(4,174		)	(1,139		)	1,139			(5,716		)
2016	(1,244		)	1,720			(442		)	(9,556		)	(2,668		)	(1,365		)	(567		)	(14,122		)

Total	$	(1,780	)	$	3,870		$	(662	)	$	(3,456	)	$	(8,735	)	$	(2,283	)	$	579		$	(12,467	)

In the table above, five of the seven lines of business exhibited favorable development; personal lines, auto physical damage, workers’ compensation, other liability and commercial property. For these lines of business, favorable development for most accident years was driven by decreases in the severity assumptions underlying the estimated ultimate accident year loss and allocated settlement expense ratios.

Personal lines experienced favorable development in nearly every accident year due to better than expected development on prior reported claims and lower than anticipated emerged IBNR.

The commercial auto liability line of business experienced adverse development in each of the latest five accident years. The severity assumption for accident year 2016 increased three percent over the assumption underlying the ultimate established at year-end 2016. For accident years 2012 through 2015, the severity assumption was increased between one and two percent.

Auto physical damage ultimate ratios were reduced for accident years 2016 and 2015, as claim severity estimates were lowered. Accident years 2014 and prior experienced little additional claim activity during 2017.

The workers’ compensation line of business experienced adverse development on accident years prior to 2012, as management strengthened those reserves in response to increases in the severity assumptions. During 2017, it became apparent that the severity assumption underlying the initial workers’ compensation ultimate ratio established for accident year 2016 was too conservative. The favorable development reported above was the result of using an updated assumption.

The other liability line of business experienced favorable development on all recent accident years due to lower severity estimates. The adverse development observed on accident years prior to 2012 was due to a settlement reached with a former insured, resulting in the Company recognizing $4.5 million (its share) of losses and settlement expenses to remove all past and future asbestos liability exposure related to that policyholder. Loss and settlement expense reserves for asbestos claims were also strengthened approximately $900,000. If not for this unanticipated asbestos settlement, development on prior accident years would have been favorable.

Commercial property’s favorable development was concentrated in accident years 2015 and 2016, as severity on reported and emerged claims was less than anticipated. Accident years 2014 and prior experienced minor fluctuations in claims activity with mostly offsetting changes in the ultimate severity assumptions.

The “other” line of business category consists almost exclusively of fidelity and surety bonds. Uncharacteristically, this line experienced adverse development stemming from unanticipated outcomes associated with two accident year 2015 claims.

Reinsurance segment

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In the HORAD book of business, $2.6 million of favorable development occurred in the pro rata line of business and $1.3 million of favorable development occurred in the excess of loss line of business. The favorable development in the pro rata line of business was driven by a change in loss development assumptions for property/casualty global pro rata contracts. Previously, ultimate losses for this contract type were determined by using a weighting of the reinsurance segment’s historical loss development experience with loss development factors from the Reinsurance Association of America (RAA). As the reinsurance segment’s exposure volume has increased over time, and as actual emerged losses have generally been significantly better than the weighted loss development history projections, the use of RAA factors was discontinued in favor of actual emerged loss development in the fourth quarter. In the excess of loss line of business, accident year 2015 was the greatest contributor to the favorable development, but was partially offset by reserve strengthening in accident year 2016 and several prior accident years.

As previously stated, Mutual Re experienced approximately zero development on prior accident years in aggregate. Actuarial reviews of the reserves assumed from Mutual Re have consistently indicated a level of adequacy which challenged the upper boundary of the range of reasonable reserves. To address this issue, the reinsurance segment maintained a $4.0 million negative bulk IBNR loss reserve to keep reserves within the reasonable range.

During 2017, the expected loss ratios utilized in the various reserving methodologies for prior contract years were unchanged. The expected loss ratios utilized in reserving methodologies for the 2017 contract year were based on an extensive actuarial analysis of trended historic ultimate loss ratios based on current-level earned premiums. Where applicable, new contract loss information or loss histories were also incorporated into the reserving process. Compared to the 2016 contract year selections, the 2017 contract year expected loss ratios for property pro rata and aggregate excess contract types decreased 2.5 points and 5.0 points, respectively, from the ratios established for contract year 2016. Additionally, the contract year 2017 expected loss ratio for casualty excess contracts was 2.5 points higher than what was used for contact year 2016. All other 2017 expected loss ratios were unchanged from what was used for contract year 2016.

Year ended December 31, 2016

Property and casualty insurance segment

For the property and casualty insurance segment, the December 31, 2016 estimate of loss and settlement expense reserves for accident years 2015 and prior decreased $30.0 million from the estimate at December 31, 2015. During the third quarter of 2016, management implemented a new reserving methodology for the determination of direct bulk reserves in the property and casualty insurance segment. The new methodology produces specific line of business and accident year estimated ultimate loss and allocated settlement expense amounts based on explicit loss frequency and severity assumptions. The previous methodology used one process to determine the aggregate amount of IBNR loss and settlement expense reserves, and a separate process to allocate those reserves to the various accident years. The implementation of the new reserving methodology did not have a material impact on total carried reserves for the property and casualty insurance segment; however, there was some movement of allocated settlement expense reserves to IBNR loss reserves, and a reallocation of loss and allocated settlement expense reserves by accident year to align those reserves with the estimated ultimate loss and allocated settlement expense ratios. In connection with this reallocation of reserves by accident year, approximately $5.6 million of IBNR loss and allocated settlement expense reserves were moved from prior accident years to the current accident year in multiple lines of business. This reduction in prior accident years' reserves was reported as favorable development; however, this development was "mechanical in nature", and did not have any impact on earnings because the total amount of carried reserves did not change. Excluding this adjustment, the implied amount of favorable development that had an impact on earnings was approximately 5.1 percent of the December 31, 2015 gross carried reserves. The following table displays development on prior years' reserves by line of business and type of reserve.

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($ in thousands) Line of business	Reported case and IBNR loss reserves			Allocated settlement expense reserves			Unallocated settlement expense reserves			Total
Personal lines	$	(1,242	)	$	(302	)	$	(33	)	$	(1,577	)
Commercial auto liability	6,807			(3,236		)	(1,222		)	2,349
Auto physical damage	(1,850		)	(34		)	205			(1,679		)
Workers' compensation	(11,271		)	(4,205		)	(844		)	(16,320		)
Other liability	(2,709		)	(9,936		)	(523		)	(13,168		)
Commercial property	1,296			982			174			2,452
Other	(1,426		)	(163		)	(481		)	(2,070		)

Total	$	(10,395	)	$	(16,894	)	$	(2,724	)	$	(30,013	)

The favorable development reported for 2016 was generally attributed to lower explicit loss frequency and severity assumptions underlying the loss and allocated settlement expense reserves carried at year-end 2016 than the implicit assumptions underlying the reserves carried at year-end 2015. The favorable development associated with the loss and allocated settlement expense reserves total $27.3 million, with $10.4 million coming from favorable loss reserve development and $16.9 million coming from favorable allocated settlement expense reserve development.

Favorable development on loss and allocated settlement expense reserves represented 91 percent of the property and casualty insurance segment’s total reported favorable development of $30.0 million. The following table displays the development experienced in 2016 on reported case and IBNR loss reserves and allocated settlement expense reserves for the five most recent accident years, and all prior accident years, by line of business.



($ in thousands)
Calendar accident year	Personal lines			Commercial auto liability			Auto physical damage			Workers' compensation			Other liability			Commercial property			Other			Total
Prior	$	(96	)	$	(490	)	$	(145	)	$	218		$	2,681		$	(158	)	$	(361	)	$	1,649
2011	(182		)	(277		)	(37		)	(770		)	(1,654		)	672			(83		)	(2,331		)
2012	(243		)	(67		)	(72		)	(1,910		)	(3,435		)	296			(200		)	(5,631		)
2013	(199		)	126			(116		)	(2,940		)	(495		)	557			(142		)	(3,209		)
2014	(211		)	1,129			(204		)	(3,643		)	(2,231		)	(332		)	(163		)	(5,655		)
2015	(613		)	3,150			(1,310		)	(6,431		)	(7,511		)	1,243			(640		)	(12,112		)

Total	$	(1,544	)	$	3,571		$	(1,884	)	$	(15,476	)	$	(12,645	)	$	2,278		$	(1,589	)	$	(27,289	)

The property and casualty insurance segment's new bulk reserving methodology is based on explicit assumptions concerning the ultimate number (frequency) and average size (severity) of claims expected to be incurred. The prior methodology separated the calculation of the aggregate reserves from the allocation of those reserves to the various accident years, and thus did not utilize explicit claim frequency and severity assumptions. Under the new reserving methodology, management seeks to better align expected and actual development by line of business and accident year. As this was a transitional year, there were some discontinuities in the development amounts reported for 2016. The following comments are based on a comparison of the explicit assumptions underlying the December 31, 2016 carried reserves to the implicit assumptions underlying the December 31, 2015 carried reserves.

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In the table above, five of the seven lines of business exhibited favorable development on a fairly consistent basis over the prior five accident years, those being personal lines, auto physical damage, workers’ compensation, other liability and other. For these lines of business, favorable development for most accident years was driven by decreases in the frequency and/or severity assumptions underlying the estimated ultimate accident year loss and allocated settlement expense ratios. The workers’ compensation line of business experienced adverse development on accident years prior to 2011, as management strengthened those reserves in response to increases in the severity assumptions for those years due to the expansion of the experience review period to thirty-five accident years.

The commercial auto liability line of business experienced adverse development in each of the latest three accident years. Comparing the explicit assumptions utilized at December 31, 2016 to the implicit assumptions underlying the December 31, 2015 reserves, the ultimate claim frequency and severity assumptions for accident year 2015 were underestimated by 1.8 percent and 9.7 percent, respectively. Using the same comparison, claims severity for accident year 2014 was underestimated by 3.4 percent, and for accident year 2013, claim frequency was slightly underestimated.

The commercial property line of business experienced the greatest number of development discontinuities by accident year in connection with the change in reserving methodology. Under the previous methodology, negative bulk case loss reserves were often carried in the commercial property line of business due to the perceived strength of the case loss reserves relative to the other lines of business. With the elimination of the bulk case loss reserves under the new methodology, the reserves for the commercial property line of business were reallocated in total and by accident year in accordance with the explicit claim frequency and severity assumptions developed during 2016. The implicit assumptions utilized at year-end 2015 underestimated claim frequency for each of the five most recent accident years, and underestimated loss severity for all of those years except 2014.

The Company increased asbestos and environmental IBNR loss and settlement expense reserves by $3.5 million during 2016, which was primarily reflected in the other liability line of business. The increase was in response to an indicated increase in the ultimate asbestos liability produced by internal payout decay models. Management also noted that A.M. Best increased the industry’s estimated ultimate liability by $15 billion during 2016. Newly reported asbestos claims had decreased slightly for the last two calendar years. Asbestos and environmental reserves constituted less than 3 percent of the property and casualty insurance segment’s total direct reserves.

Reinsurance segment

For the reinsurance segment, the December 31, 2016 estimate of loss and settlement expense reserves for accident years 2015 and prior decreased $10.9 million from the estimate at December 31, 2015. This decrease represented 5.5 percent of the December 31, 2015 carried reserves. Approximately $7.1 million of favorable development was attributable to the HORAD book of business, with the remaining $3.8 million of favorable development associated with Mutual Re.

In the HORAD book of business, $7.4 million of favorable development occurred in the pro rata line of business and $0.3 million of adverse development occurred in the excess of loss line of business. The favorable development in the pro rata line of business primarily occurred in the 2015 accident year, with accident years 2012 - 2014 generating $1.4 million of adverse development and the remaining prior accident years experiencing little development in the aggregate. In the excess of loss line of business, the 2015 accident year experienced over $3.0 million of favorable development; however, this favorable development was more than offset by adverse development in many of the prior 21 accident years, with the greatest amount of adverse development concentrated in accident years 2005 - 2014.

The favorable development experienced on the Mutual Re business was mostly attributed to an increase in the amount of negative bulk IBNR loss reserve carried on prior years' reserves. Recent actuarial reviews of Mutual Re's reported reserves had consistently indicated that those reserves challenged the upper level of the range of reasonable reserves. To address this issue, a $2.0 million negative bulk IBNR loss reserve was established in 2015 for this business. During 2016, the negative bulk IBNR loss reserve was increased to $4.0 million, with $5.3 million of negative IBNR loss reserve carried on prior accident years and $1.3 million of positive lag IBNR loss reserve carried on the 2016 accident year. The recognition of the additional negative IBNR loss reserve accounted for $3.3 million of the $3.8 million of favorable development experienced during 2016.

During 2016, the expected loss ratios utilized for prior contract years remained unchanged, except for ocean marine pro rata business. The expected loss ratios associated with this contract type were decreased by approximately 2.5, 4.0 and 5.0 percentage points for contract years 2012, 2014 and 2015, respectively, from the ratios utilized during 2015. Additionally, the expected loss ratio for contract year 2013 was increased by approximately 2.0 percentage points relative to the 2015 value. These changes were made in response to reserving information supplied by the ceding company, a large writer of ocean marine pro rata business.

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The expected loss ratios utilized for the 2016 contract year were based on an extensive actuarial analysis of trended historic ultimate loss ratios based on current-level earned premiums. Where applicable, new contract loss information or loss histories were also incorporated into the reserving process. Compared to the 2015 contract year selections, the 2016 contract year expected loss ratios for per risk excess and casualty excess business increased by 2.5 percentage points, while the expected loss ratio for aggregate excess business decreased by 5.0 percentage points. The 2016 contract year expected loss ratio for ocean marine pro rata business increased approximately 2.5 percentage points above the initial 2015 contract year selection, but was approximately 7.5 percentage points above the revised ratio.

Asbestos and Environmental Claims

The Company has exposure to asbestos and environmental related claims associated with the insurance business written by the parties to the pooling agreement and the reinsurance business assumed from Employers Mutual by the reinsurance subsidiary. With regard to the assumed reinsurance business, however, all asbestos and environmental exposures related to 1980 and prior accident years are retained by Employers Mutual.

Estimating loss and settlement expense reserves for asbestos and environmental claims is very difficult due to the many uncertainties surrounding these types of claims. These uncertainties exist because the assignment of responsibility varies widely by state and claims often emerge long after a policy has expired, which makes assignment of damages to the appropriate party and to the time period covered by a particular policy difficult. In establishing reserves for these types of claims, management monitors the relevant facts concerning each claim, the current status of the legal environment, social and political conditions, and the claim history and trends within the Company and the industry.

The following table presents asbestos and environmental-related losses and settlement expenses incurred and reserves outstanding, net of reinsurance, for the Company:



	Year ended December 31,
($ in thousands)	2018		2017			2016
Losses and settlement expenses incurred:
Asbestos:
Property and casualty insurance	$	1,274	$	5,177		$	3,475
Reinsurance	—		—			—
	1,274		5,177			3,475
Environmental:
Property and casualty insurance	—		(97		)	652
Reinsurance	—		—			—
	—		(97		)	652
Total losses and settlement expenses incurred	$	1,274	$	5,080		$	4,127



	Year ended December 31,
($ in thousands)	2018		2017		2016
Loss and settlement expense reserves:
Asbestos:
Property and casualty insurance	$	9,521	$	9,652	$	11,134
Reinsurance	318		332		359
	9,839		9,984		11,493
Environmental:
Property and casualty insurance	635		730		846
Reinsurance	655		664		666
	1,290		1,394		1,512
Total loss and settlement expense reserves	$	11,129	$	11,378	$	13,005

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The property and casualty insurance subsidiaries have exposure to asbestos and environmental claims arising primarily from the other liability line of business. These exposures are closely monitored by management, and IBNR loss reserves have been established to cover estimated ultimate losses. The loss and settlement expense reserves associated with asbestos claims have been increased each year for the last several years due to continued reporting of new claims at a rate not previously anticipated, as well as updated internal ultimate loss and settlement expense evaluations. In 2018, the settlement expense reserves for asbestos claims were strengthened by $1.5 million. During 2017, a settlement was reached with a former insured, resulting in the Company recognizing $4.5 million (its share) of losses and settlement expenses to remove all past and future asbestos liability exposure related to that policyholder.

Reserves for environmental claims are established in consideration of the implied three-year survival ratio. Estimation of ultimate liabilities for these exposures is unusually difficult due to unresolved issues such as whether coverage exists, the definition of an occurrence, the determination of ultimate damages and the allocation of such damages to financially responsible parties. Therefore, any estimation of these liabilities is subject to greater than normal variation and uncertainty, and ultimate payments for losses and settlement expenses for these exposures may differ significantly from the carried reserves.

Based upon current facts, management believes the reserves carried for asbestos and environmental-related claims at December 31, 2018 are adequate. Although future changes in the legal and political environment may result in adjustment to these reserves, management believes any adjustment will not have a material impact on the Company's financial condition or results of operations.

Reinsurance Ceded

Property and Casualty Insurance

The pool participants cede insurance in the ordinary course of business for the primary purpose of limiting their maximum loss exposure. The pool participants also purchase catastrophe reinsurance to cover multiple losses arising from a single event.

All major reinsurance treaties, with the exception of the pooling agreement, the personal boiler contract, the employment practices liability contract, and the data compromise, cyber liability and identity recovery contracts, are on an “excess of loss” basis whereby the reinsurer agrees to reimburse the pool participants for covered losses in excess of a predetermined amount, up to a stated limit. The personal boiler contract, data compromise, cyber liability and identity recovery contracts, and the employment practices liability contract provide for 100 percent reinsurance of the pool’s applicable direct exposures. Facultative reinsurance from approved markets, which provides reinsurance on an individual risk basis and requires specific agreement of the reinsurer as to the limits provided, is purchased when an insured requires coverage in excess of treaty capacity, where a high-risk type policy could expose the treaty reinsurance programs, or other reasons where the pool participants wish to reduce their net loss exposure from a particular risk.

Excess of loss reinsurance coverage is purchased in layers subject to retentions determined by reinsurance market conditions and the surplus position of the EMC Insurance Companies. The pooling agreement aids efficient buying of reinsurance since it allows for higher retention levels and correspondingly decreased dependence on the reinsurance marketplace.

Summaries of the reinsurance treaties benefiting the pool participants during 2018 are presented below.

Property Catastrophe Program

5th Layer Property Catastrophe $35 million excess $195 million

4th Layer Property Catastrophe $95 million excess $100 million

3rd Layer Property Catastrophe $60 million excess $40 million

2nd Layer Property Catastrophe $20 million excess $20 million (91.15% placed)

1st Layer Property Catastrophe $10 million excess $10 million (60.30% placed)

$10 million Retention plus $10 million Annual Aggregate Deductible

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Property Per Risk, Casualty and Workers' Compensation Excess Program
Property per Risk $60 million excess $20 million	Workers' Compensation Catastrophe $50 million excess $40 million
	Casualty $20 million excess $20 million (Casualty, Umbrella, Workers' Compensation)
2nd Layer Multiline $10 million excess $10 million (Combined Property per Risk, Casualty, Umbrella, Workers' Compensation)
1st Layer Multiline $6 million excess $4 million (Combined Property per Risk, Casualty, Umbrella, Workers' Compensation)
$4 million Retention

Fidelity and Surety Program

3rd Layer Surety $30 million excess $15 million

2nd Layer Surety $8 million excess $7 million (90% placed)

1st Layer Fidelity and Surety $5 million excess $2 million (95% placed)

$2 million Retention



($ in thousands)
Type of reinsurance treaty	Retention		Limits
Boiler - commercial lines (1/1/18 through 5/31/18)	$	—	100 percent of $100,000
Boiler - commercial lines (6/1/18 through 12/31/18)	$	25	$100,000 excess $25
Boiler - personal lines	$	—	100 percent of $100
Employment practices liability	$	—	100 percent of $1,000
Data compromise	$	—	100 percent of $1,000
Identity recovery	$	—	100 percent of $25
Cyber liability	$	—	100 percent of $1,000

Although reinsurance does not discharge the original insurer from its primary liability to its policyholders, it is the practice of insurers for accounting purposes to treat reinsured risks as risks of the reinsurer since the primary insurer would only re-assume liability in those situations where the reinsurer is unable to meet the obligations it assumes under the reinsurance agreements. The ability to collect reinsurance is subject to the solvency of the reinsurers.

The major reinsurers in the pool participants’ reinsurance programs during 2018 are presented below. The percentages represent the reinsurers’ share of the total reinsurance protection under all coverages. Each type of coverage is purchased in layers, and an individual reinsurer may participate in more than one type of coverage and in various layers. All programs (except the boiler, data compromise, cyber liability, identity recovery, and employment practice liability programs, and the top layer of the property catastrophe program) are handled by reinsurance brokers who cede coverage to 55 domestic and foreign reinsurers.

In formulating reinsurance programs, Employers Mutual is selective in its choice of reinsurers. Employers Mutual selects reinsurers on the basis of financial stability and long-term relationships, as well as price and coverage terms. Reinsurers are generally required to have an A.M. Best rating of “A” (Excellent) or higher and a minimum policyholders’ surplus of $500 million.

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	Percent of total reinsurance protection		A.M. Best rating
Property catastrophe, property per risk and casualty coverages	Percent of total reinsurance protection		A.M. Best rating
Underwriters at Lloyd's of London	22.4	%		A
Mutual Re	12.4	%		(1)
Hannover Ruckversicherung AG	9.1	%		A+
R + V Versicherung AG	7.6	%		(2)
MAPFRE Re Compania De Reaseguros, SA	4.5	%		A
QBE Reinsurance Corporation	3.8	%		A
Swiss Reinsurance America Corporation	3.7	%		A+
Tokio Milennium Re AG	3.4	%		A+

Fidelity and surety coverages
Transatlantic Reinsurance Company	31.6	%		A+
Hannover Ruckversicherung AG	21.4	%		A+
Axis Reinsurance Company	14.7	%		A+
Odyssey America Reinsurance Corp.	12.1	%		A
Everest Reinsurance Company	12.1	%		A+
Endurance Assurance Corporation	8.1	%		A+

Boiler - commercial lines coverage
Hartford Steam Boiler Inspection and Insurance Company	100.0	%		A++

Boiler - personal lines coverage
Factory Mutual Insurance Company	100.0	%		A+

Employment practices liability coverage
Hartford Steam Boiler Inspection and Insurance Company	100.0	%		A++

Data compromise, cyber liability and identity recovery
Hartford Steam Boiler Inspection and Insurance Company	100.0	%		A++


(1)	Mutual Re is composed of Employers Mutual and four other unaffiliated mutual insurance companies. Mutual Re is backed by the financial strength of the five member companies. Two of the other member companies have an “A” (Excellent) rating from A.M. Best, while the other two have “A-” (Excellent) ratings.


(2)	R + V Versicherung AG is not rated by A.M. Best, but maintains an AA- rating from Standard & Poor’s.

The Terrorism Risk Insurance Program Reauthorization Act of 2015 (effective through December 31, 2020, referred to herein as the "TRIA") continues the Federal backstop on losses from certified terrorism events. TRIA covers most direct commercial lines of business, including coverage for losses from nuclear, biological and chemical exposures if coverage was afforded by an insurer, but with exclusions for commercial automobile insurance, burglary and theft insurance, surety insurance, professional liability insurance, and farmowners multiple peril insurance.

The program trigger threshold for federal participation in losses was $160.0 million in 2018, and increases $20.0 million per year until reaching $200.0 million on January 1, 2020. A loss must be $5.0 million or more to count towards the program trigger threshold. Each insurer has a deductible amount (20 percent of the prior year’s direct commercial lines premiums earned for the applicable lines of business) and a retention above the deductible (18 percent in 2018, increasing by one percentage point each year until reaching 20 percent on January 1, 2020). TRIA caps losses at $100.0 billion annually, so no insurer that has met its deductible will be liable for payment of any portion of losses above that amount. For the Company, the TRIA deductible is approximately $66.0 million.

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Coverage for terrorism losses is included in the pool participants’ reinsurance programs for property and casualty risks (including coverage for the aggregation of property claims from catastrophic losses). In summary, coverage under the property contracts includes both domestic and foreign terrorism, though it is restricted to exclude from coverage nuclear, biological, chemical and radiation (NBCR) losses. Coverage under the casualty contracts also includes both domestic and foreign terrorism, though NBCR terrorism is covered for one limit per layer.

Reinsurance

The reinsurance subsidiary purchases additional reinsurance protection in peak exposure territories from external parties in which coverage is triggered when losses experienced by the insurance industry from a catastrophic event exceed a specified threshold. Any reinsurance recoveries received from external parties reduces the amount of losses ceded to Employers Mutual under the inter-company reinsurance program, net of the reinsurance subsidiary's 20 percent co-participation. The net cost of this external reinsurance protection was approximately $6.0 million, $5.6 million and $3.5 million in 2018, 2017 and 2016, respectively. During 2018, the reinsurance subsidiary recovered $5.2 million under the treaty purchased in 2017, 80 percent of which was ceded to Employers Mutual in accordance with the co-participation provision of the inter-company reinsurance program. No recoveries were made from external parties in 2017 or 2016.

The reinsurance subsidiary also assumes and cedes some selected reinsurance business through the quota share agreement in connection with “fronting” activities initiated by Employers Mutual whereby an agreed upon percentage of the selected assumed business is ceded to other reinsurer(s) on a pro rata basis. Ceded earned premiums associated with this fronting activity amounted to $3.8 million, $4.2 million and $3.7 million during 2018, 2017 and 2016, respectively. The ceding of this reinsurance business through these fronting activities does not discharge the reinsurance subsidiary from its assumed liability to the original cedants, and the ability to collect reinsurance is subject to the solvency of the reinsurers.

Property and Casualty Insurance and Reinsurance

The Company’s portion of premiums written ceded (unaffiliated and excluding premiums ceded to mandatory pools) by the property and casualty insurance segment and the reinsurance segment for the year ended December 31, 2018 is presented below. Reinsurance coverage for the property and casualty insurance segment is often purchased in layers, and an individual reinsurer may participate in more than one type of coverage and at various layers within the coverages. Since each layer of coverage is priced separately, with the lower layers being more expensive than the upper layers, a reinsurer’s overall participation in a reinsurance program does not necessarily correspond to the amount of premiums it receives. The premium amounts ceded by the reinsurance subsidiary reflect the purchase of additional reinsurance protection from external parties and fronting transactions handled through the quota share agreement, and excludes premiums written ceded to Employers Mutual under the inter-company reinsurance program.



	Premiums written ceded
($ in thousands) Reinsurer	Property and casualty insurance segment		Reinsurance segment		Total
Hartford Steam Boiler Inspection and Insurance Company	$	7,278	$	—	$	7,278
Underwriters at Lloyd's of London	1,078		2,949		4,027
Transatlantic Reinsurance Company	1,854		1,750		3,604
Country Mutual Insurance Company	—		2,568		2,568
Hannover Ruckversicherung AG	2,524		—		2,524
Tokio Millenium Re AG	66		1,150		1,216
QBE Reinsurance Corporation	1,140		—		1,140
Swiss Reinsurance America Corporation	856		—		856
TOA Reinsurance Company of America	844		—		844
R + V Versicherung AG	673		—		673
Other Reinsurers	4,389		1,562		5,951
Total	$	20,702	$	9,979	$	30,681

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The property and casualty insurance segment also cedes reinsurance on a mandatory basis to state organizations in connection with various workers’ compensation and assigned risk programs. The Company’s portion of premiums written ceded to these organizations for the year ended December 31, 2018 is presented below.



($ in thousands) Reinsurer	Property and casualty insurance segment
Wisconsin Compensation Rating Bureau	$	7,246
Michigan Catastrophic Claims Association	929
Other Reinsurers	288
Total	$	8,463

The following table presents amounts due to the Company from reinsurers for losses and settlement expenses, contingent commissions, and prepaid reinsurance premiums as of December 31, 2018. This presentation differs from the presentation utilized in the consolidated financial statements, where all amounts flowing through the pooling and quota share agreements and inter-company reinsurance programs with Employers Mutual are reported as “affiliated” balances.



	Amount recoverable
($ in thousands)	Property and casualty insurance segment		Reinsurance segment		Total			Percent of total		A.M. Best rating
Wisconsin Compensation Rating Bureau	$	10,314	$	—	$	10,314		22.3	%	(1)
Country Mutual Insurance Company	—		6,250		6,250			13.5	%	A+
Hartford Steam Boiler Inspection and Insurance Company	3,869		—		3,869			8.4	%	A++
Hannover Ruckversicherung AG	3,485		—		3,485			7.5	%	A+
Transatlantic Reinsurance Company	2,448		729		3,177			6.9	%	A+
Michigan Catastrophic Claims Association	2,099		—		2,099			4.6	%	(1)
Mutual Re	915		1,155		2,070			4.5	%	(2)
Underwriters at Lloyd's of London	710		996		1,706			3.7	%	A
TOA Reinsurance Company of America	1,429		—		1,429			3.1	%	A
QBE Reinsurance Corporation	1,373		—		1,373			3.0	%	A
Other Reinsurers	9,769		609		10,378			22.5	%
	$	36,411	$	9,739	$	46,150	(3)	100.0	%

(1)

Amounts recoverable reflect the property and casualty insurance subsidiaries’ aggregate pool participation percentage of amounts ceded to these organizations by Employers Mutual in connection with its role as “service carrier.” Under these arrangements, Employers Mutual writes business for these organizations on a direct basis and then cedes the business (typically at 100 percent) to these organizations. Credit risk associated with these amounts is minimal as all companies participating in these organizations are responsible for the liabilities of such organizations on a pro rata basis.


(2)	Mutual Re is composed of Employers Mutual and four other unaffiliated mutual insurance companies. Mutual Re is backed by the financial strength of the five member companies. Two of the other member companies have an “A” (Excellent) rating from A.M. Best, while the other two have “A-” (Excellent) ratings.

(3)

The total amount recoverable at December 31, 2018 represents $36.6 million in unpaid losses and settlement expenses, $766,000 in unpaid contingent commissions, and $8.8 million in prepaid reinsurance premiums. Employers Mutual settles with the pool participants (monthly) and the reinsurance subsidiary (quarterly) ceded paid losses and settlement expenses under the reinsurance contracts and provides full credit for the ceded paid losses and settlement expenses generated during the period (not just the collected portion). As a result, Employers Mutual's recoverable for paid losses and settlement expenses represents, to the Company, an off-balance sheet arrangement with an unconsolidated entity that results in credit-risk exposure that is not reflected in the Company’s financial statements. See note 1 of Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for further discussion of off-balance sheet credit exposures.

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Investments

The Company’s total invested assets at December 31, 2018 are summarized in the following table:



	December 31, 2018
($ in thousands)	Amortized cost		Fair value		Carrying value		Percent of total carrying value
Fixed maturity securities available-for-sale	$	1,273,132	$	1,282,909	$	1,282,909	83.0	%
Equity investments, at fair value	160,371		215,363		215,363		13.9	%
Short-term investments	28,204		28,204		28,204		1.8	%
Equity investments, at alternative measurement of cost less impairments	1,200		XXXX		1,200		0.1	%
Other long-term investments	19,316		XXXX		19,316		1.2	%
	$	1,482,223	XXXX		$	1,546,992	100.0	%

The Company’s investment strategy is to conservatively manage its investment portfolio by investing primarily in readily marketable, investment-grade fixed maturity securities and equity investments. The board of directors of each of the Company’s insurance company subsidiaries have established investment guidelines and regularly review the investment portfolio for compliance with those guidelines. The Company does not hold foreign denominated investments. The Company does not purchase non-investment grade securities. Any non-investment grade securities held are the result of rating downgrades that occurred subsequent to their purchase.

At December 31, 2018, the portfolio of fixed maturity securities consisted of 0.7 percent U.S. Treasury, 23.8 percent government agency, 20.9 percent asset-backed, 21.5 percent municipal and 33.1 percent corporate securities. As of December 31, 2018, the effective duration of the Company’s fixed maturity portfolio, excluding interest-only securities, was 4.9, and the effective duration of its liabilities was 2.7. At December 31, 2018, the Company held $4.2 million of non-investment grade fixed maturity securities in a net unrealized loss position of $421,000.

The Company has two separate common stock equity portfolios that are diversified across a large range of industry sectors and are managed for fees based on total assets under management (a large-cap blend equity portfolio managed by BMO Global Asset Management and a high dividend value equity portfolio managed by Schafer Cullen Capital Management). As of December 31, 2018, the common stock equity portfolios were invested in the following industry sectors:



	Percent of equity portfolio
Financial services	21.9	%
Information technology	16.5	%
Healthcare	18.1	%
Consumer staples	6.9	%
Consumer discretionary	11.9	%
Energy	7.0	%
Industrials	10.2	%
Other	7.5	%
	100.0	%

The Company's other long-term investments primarily consist of holdings in limited partnerships, and privately placed common and non-redeemable convertible preferred stock in start-up technology companies with ties to the insurance industry. The equity method of accounting is used for these investments, with changes in the carrying value recorded as realized investment gains (losses). Also included in other long-term investments are holdings in limited liability companies that convey renewable energy tax credits that are carried at amortized cost.

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Employees

EMC Insurance Group Inc. and its subsidiaries have no employees. The Company’s business activities are conducted by the approximately 2,500 employees of Employers Mutual. EMC Insurance Group Inc., EMC Reinsurance Company and EMC Underwriters, LLC are charged their proportionate share of salary and employee benefit costs based on time allocations. Costs not allocated to these companies, and other subsidiaries of Employers Mutual outside the pooling agreement, are charged to the pooling agreement. The Company’s property and casualty insurance subsidiaries share the costs charged to the pooling agreement in accordance with their pool participation percentages.

Regulation

The Company’s insurance subsidiaries are subject to extensive regulation and supervision by their states of domicile, as well as those states in which they do business. The purpose of such regulation and supervision is primarily to provide safeguards for policyholders, rather than to protect the interests of stockholders. The insurance laws of the various states establish regulatory agencies with broad administrative powers, including the power to grant or revoke operating licenses and regulate trade practices, investments, premium rates, deposits of securities, the form and content of financial statements and insurance policies, accounting practices and the maintenance of specified reserves and capital for the protection of policyholders.

Premium rate regulation varies greatly among jurisdictions and lines of insurance. In most states in which the Company’s subsidiaries and the other pool participants write insurance, premium rates for the various lines of insurance are subject to either prior approval or limited review upon implementation. States require rates for property and casualty insurance that are adequate, not excessive, and not unfairly discriminatory.

Like other insurance companies, the pool participants are required to participate in mandatory shared-market mechanisms or state pooling arrangements as a condition for maintaining their insurance licenses to do business in various states. The purpose of these state-mandated arrangements is to provide insurance coverage to individuals who, because of poor driving records or other underwriting reasons, are unable to purchase such coverage voluntarily provided by private insurers. These risks can be assigned to all insurers licensed in the state and the maximum volume of such risks that any one insurance company may be assigned typically is proportional to that insurance company’s annual premium volume in that state. The underwriting results of this mandatory business traditionally have been unprofitable.

The Company’s insurance subsidiaries are required to file detailed annual reports with the appropriate regulatory agency in each state in which they do business based on applicable statutory regulations, which differ from U.S. generally accepted accounting principles. Their business and accounts are subject to examination by such agencies at any time. Since three of the Company’s four insurance subsidiaries and Employers Mutual are domiciled in Iowa, the State of Iowa exercises principal regulatory supervision, and Iowa law requires periodic examination.

State laws governing insurance holding companies also impose standards on certain transactions with related companies, which include, among other requirements, that all transactions be fair and reasonable and that an insurer’s surplus as regards policyholders be reasonable and adequate in relation to its liabilities. Under Iowa law, dividends or distributions made by registered insurers are restricted in amount and may be subject to approval from the Iowa Commissioner of Insurance. “Extraordinary” dividends or distributions are subject to prior approval and are defined as dividends or distributions made within a 12-month period which exceed the greater of 10 percent of statutory surplus as regards policyholders as of the preceding December 31, or net income of the preceding calendar year on a statutory basis. North Dakota imposes similar restrictions on the payment of dividends and distributions, though its restriction is set at the lower 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 excluding capital gains. At December 31, 2018, $48.0 million was available for distribution to the Company in 2019 without prior approval. See note 6 of Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.

Under state insurance guaranty fund laws, insurance companies doing business in a state can be assessed for certain obligations of insolvent insurance companies to such companies’ policyholders and claimants. Maximum assessments allowed in any one year generally vary between one percent and two percent of annual premiums written in that state, but it is possible that caps on such assessments could be raised if there are numerous or large insolvencies. In most states, guaranty fund assessments are recoverable either through future policy surcharges or offsets to state premium tax liabilities.

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The National Association of Insurance Commissioners (NAIC) utilizes a risk-based capital model to help state regulators assess the capital adequacy of insurance companies and identify insurers that are in, or are perceived as approaching, financial difficulty. This model establishes minimum capital needs based on the risks applicable to the operations of the individual insurer. The risk-based capital requirements for property and casualty insurance companies measure three major areas of risk: asset risk, credit risk and underwriting risk. Companies having less statutory surplus than required by the risk-based capital requirements are subject to varying degrees of regulatory scrutiny and intervention, depending on the severity of the inadequacy. At December 31, 2018, the Company’s insurance subsidiaries had total adjusted statutory capital of $527.1 million, which exceeds the minimum risk-based capital requirement of $101.9 million.

AVAILABLE INFORMATION

The Company’s internet address is investors.emcins.com. The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are available free of charge through the Company’s website as soon as reasonably practicable after the filing or furnishing of such material with the Securities and Exchange Commission.

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EXECUTIVE OFFICERS OF THE COMPANY

The Company’s executive officers, their positions and ages are shown in the table below:



NAME	AGE	POSITION
Dan D. Aksamit	54	Senior Vice President-Chief Risk Officer of the Company and Employers Mutual since 2018. Assistant Vice President of Employers Mutual from 2015 through 2017. He has been employed by Employers Mutual since 2004.

Ian C. Asplund	38	Senior Vice President-Chief Analytics Officer of the Company and Employers Mutual since 2018. Senior Vice President-Strategic Analytics of the Company and Employers Mutual from 2016 through 2017. Vice President-Chief Actuary of the Company and Employers Mutual from 2015 to 2016. Assistant Vice President of Employers Mutual from 2012 to 2014. He has been employed by Employers Mutual since 2003.

Dan C. Crew	50	Senior Vice President-Chief Underwriting Officer of the Company and Employers Mutual since 2018. Vice President-Underwriting of Employers Mutual from 2014-2017. Assistant Vice President of Employers Mutual from 2007-2013. He has been employed by Employers Mutual since 1995.

Bradley J. Fredericks	45	Senior Vice President-Chief Investment Officer of the Company and Employers Mutual since 2017. Vice President-Chief Investment Officer of the Company and Employers Mutual from 2014 to 2017. Assistant Vice President of Employers Mutual from 2013 to 2014. He has been employed by Employers Mutual since 2010.

Lisa L. Hamilton	64	Senior Vice President-Chief Brand Officer of the Company and Employers Mutual since 2018. Vice President of Employers Mutual from 2012 through 2017. Assistant Vice President of Employers Mutual from 2009 to 2012. She has been employed by Employers Mutual since 2002.

Scott R. Jean	47	Executive Vice President-Finance & Strategy of the Company and Employers Mutual since 2018. Executive Vice President for Finance & Analytics of the Company and Employers Mutual from 2015 through 2017. Senior Vice President-Chief Actuary of the Company and Employers Mutual from 2014 to 2015. Vice President-Chief Actuary of the Company and of Employers Mutual from 2009 to 2014. He has been employed by Employers Mutual since 1993.

Bruce G. Kelley	64	President and Chief Executive Officer of the Company and Employers Mutual since 1992. Reappointed Treasurer of the Company and Employers Mutual in 2014 (previously held that title for Employers Mutual from 1996 to 2000 and the Company from 1996 to 2001). President and Chief Operating Officer of the Company and Employers Mutual from 1991 to 1992 and Executive Vice President of the Company and Employers Mutual from 1989 to 1991. He has been employed by Employers Mutual since 1985.

Meyer T. Lehman	43	Senior Vice President-Chief Actuarial Officer of the Company and Employers Mutual upon his hiring in 2017. Prior to joining Employers Mutual he was Product Management Vice President & Chief Actuarial Officer of Continental Western Group & Berkley Agribusiness Risk Specialists from 2012 to 2017.

Robert L. Link	61	Senior Vice President-Chief Administrative Officer and Assistant Secretary of the Company and Senior Vice President-Chief Administrative Officer and Corporate Secretary of Employers Mutual since 2018. Senior Vice President and Assistant Secretary of the Company and Senior Vice President and Corporate Secretary-Administration of Employers Mutual from 2012 through 2017. Vice President of the Company from 2007 to 2012 and Vice President and Corporate Secretary-Administration of Employers Mutual from 2005 to 2012. He has been employed by Employers Mutual since 1977.

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Mick A. Lovell	56	Executive Vice President-Operations of the Company and Employers Mutual since 2018. Executive Vice President for Corporate Development of the Company and Employers Mutual from 2015 through 2017. Senior Vice President for Corporate Development of the Company and Employers Mutual from 2014 to 2015. Vice President of the Company and Vice President-Business Development of Employers Mutual from 2011 to 2014. Assistant Vice President of the Company and Assistant Vice President-Director of Product Management of Employers Mutual from 2003 to 2011. He has been employed by Employers Mutual since 2003.

Elizabeth A. Nigut	49	Senior Vice President-Chief Human Resources Officer of the Company and Employers Mutual since 2018. Senior Vice President of the Company and Senior Vice President-Human Resources of Employers Mutual from 2014 through 2017. Vice President of the Company and Vice President-Human Resources of Employers Mutual from 2010 to 2014. She has been employed by Employers Mutual since 2010.

Larry W. Phillips	65	Senior Vice President-Chief Field Officer of the Company and Employers Mutual since 2018. Senior Vice President-Business Development of the Company and Employers Mutual from 2015 through 2017. Vice President-Underwriting of Employers Mutual from 2013 to 2015. He has been employed by Employers Mutual since 2012.

Mark E. Reese	61	Senior Vice President and Chief Financial Officer of the Company and of Employers Mutual since 2004. Vice President of the Company and Employers Mutual from 1996 to 2004 and has been Chief Financial Officer of the Company and Employers Mutual since 1997. He has been employed by Employers Mutual since 1984.

Lisa A. Simonetta	59	Senior Vice President-Chief Claims Officer of the Company and Employers Mutual since 2018. Senior Vice President-Claims of the Company and Employers Mutual from 2013 through 2017. Vice President Claims-Legal of the Company and Vice President of Employers Mutual from 2002 to 2013. She has been employed by Employers Mutual since 1992.

Sanjeev K. Singh	49	Senior Vice President-Chief Information Officer of the Company and Employers Mutual upon his hiring in 2018. Prior to joining Employers Mutual he was Chief Information Officer of Fidelity & Guaranty Life from 2013 to 2018.

Todd A. Strother	50	Senior Vice President-Chief Legal Officer and Secretary of the Company and Senior Vice President-Chief Legal Officer of Employers Mutual since 2018. Vice President-General Counsel and Secretary of the Company and Vice President-General Counsel of Employers Mutual from 2016 through 2017. Prior to joining Employers Mutual he was an attorney and shareholder with Bradshaw, Fowler, Proctor & Fairgrave, P.C. from 1999 to 2016.

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ITEM 1A. RISK FACTORS

Set forth below is a description of risk factors related to the Company’s business, provided to enable investors to assess, and be appropriately apprised of, certain risks and uncertainties the Company faces in conducting its business. An investor should carefully consider the risks described below and elsewhere in this Form 10-K which could materially and adversely affect the Company’s business, financial condition or results of operations. The risks and uncertainties discussed below are also applicable to forward-looking statements contained in this Form 10-K and in other reports filed by the Company with the Securities and Exchange Commission, and in management presentations delivered and press releases issued by the Company. Given these risks and uncertainties, investors are cautioned not to place undue reliance on forward-looking statements.

Risks Relating to the Company and Its Business

The Company’s business is highly cyclical and competitive, which may make it difficult for it to market its products effectively and profitably.

The property and casualty insurance industry is highly cyclical and competitive, and individual lines of business experience their own cycles within the overall insurance industry cycle. Premium rate levels are subject to many variables, including the availability of insurance coverage, which can vary according to the level of capital within the industry. Increases in industry capital have generally been accompanied by increased price competition. If the pool participants find it necessary to reduce premiums or limit premium increases due to these competitive pressures on pricing, the Company may experience a reduction in its profit margins and revenues and, therefore, lower profitability.

The pool participants compete with insurers that sell insurance policies through independent agents and/or directly to their customers. These competitors are not only national companies, but also insurers and independent agents that operate in a specific region or a single state. Some of these competitors have substantially greater financial and other resources than the pool participants, and may offer a broader range of products or offer competing products at lower prices. The Company’s financial condition and results of operations could be materially and adversely affected by a loss of business to its competitors.

The reinsurance business is also highly cyclical and competitive. Employers Mutual, in writing reinsurance business through its HORAD operation, competes in the global reinsurance market with numerous reinsurance companies, many of which have substantially greater financial resources. Competition for reinsurance business is based on many factors, including the perceived financial strength of the reinsurer, industry ratings, stability in products offered and licensing status. There is a segment of the market that favors large, highly-capitalized reinsurance companies who are able to provide “mega” line capacity for multiple lines of business. Employers Mutual faces the risk of ceding companies becoming less interested in diversity and spread of reinsurance risk in favor of having fewer, highly-capitalized reinsurance companies on their program. If Employers Mutual loses reinsurance business to its competitors, the amount of business ceded to the Company's reinsurance subsidiary under the quota share agreement could decline and the Company’s financial condition and results of operations could be materially and adversely affected.

Similar to other industries, the insurance industry is undergoing rapid and significant technological and other change. Traditional insurance industry participants, technology companies, "InsurTech" start-up companies, the number of which has increased significantly in recent years, and others are focused on using technology and innovation to alter business models and cause other potentially disruptive changes in the insurance industry. If management does not anticipate these changes, keep pace with and adapt to technological and other changes impacting the insurance industry, it could harm the Company's ability to compete, decrease the value of the Company's products to insureds and agents, and materially and adversely affect the Company's business. Furthermore, innovation, technological change and changing customer preferences in the markets in which the Company operates also pose risks to the Company's business.

The frequency and severity of significant catastrophe and storm activity could adversely affect the Company’s business, financial condition or results of operations.

The Company's insurance operations expose the Company to claims arising out of catastrophic events. Common catastrophic events include tornadoes, wind and hail storms, hurricanes, earthquakes, fires (including wildfires), explosions and severe winter storms. If changing climate conditions result in an increase in the frequency or severity of weather-related losses, the Company could experience additional losses from catastrophic events and destructive weather patterns. High levels of catastrophe and storm losses could lead to changes in the reinsurance programs protecting the Company (including the reinsurance coverage provided by Employers Mutual to the Company’s property and casualty insurance subsidiaries and the reinsurance subsidiary). These changes could include increases in the amount of losses retained, increased pricing and decreased availability of catastrophe reinsurance protection. Examples of such changes include increases in the pool participants’ retention amounts on ceded contracts covering the pool business, and increases in the amount of losses retained by the property and casualty insurance subsidiaries and the reinsurance subsidiary under the inter-company reinsurance programs. Future increases in the cost of reinsurance protection, and/or the amount of catastrophe and storm losses retained, could materially adversely affect the Company’s business, financial condition or results of operations.

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The pool participants currently conduct business in all 50 states and the District of Columbia, with a large portion of business in the Midwest. The occurrence of catastrophes, or other conditions affecting losses in this region, could adversely affect the Company’s business, financial condition or results of operations.

In 2018, 68 percent of the pool participant’s direct premiums written were generated through ten Midwest branch offices, with 11 percent of the direct premiums written generated in Iowa. While the pool participants actively manage their exposure to catastrophes through their underwriting process and the purchase of third-party reinsurance, a single catastrophic occurrence, destructive weather pattern, changing climate conditions, general economic trend, terrorist attack, regulatory development or any other condition affecting the states in which the pool participants conduct substantial business could materially adversely affect the Company’s business, financial condition or results of operations. Moreover, the Company’s revenues and profitability are affected by the prevailing regulatory, economic, demographic, competitive and other conditions in these states. Changes in any of these conditions could make it more costly or more difficult for the pool participants to conduct their business. Adverse regulatory developments in these states could include reductions in the maximum rates permitted to be charged, restrictions on rate increases, or fundamental changes to the design or operation of the regulatory framework, and any of these could have a material adverse effect on the Company’s business, financial condition or results of operations.

The Company cannot predict the impact that changing climate conditions, including legal, regulatory, and social responses thereto, may have on the Company’s business, financial condition or results of operations.

Some scientists, environmentalists, and other experts believe that changing climate conditions have added to the unpredictability, frequency, and severity of weather-related losses. If climate conditions are changing and affecting weather patterns, the Company could experience additional losses from catastrophic events and destructive weather patterns. The Company cannot predict the impact that changing climate conditions, if any, will have on the Company’s business, financial condition or results of operations. It is also possible that legal, regulatory and social responses to climate change could have a material adverse effect on the Company’s business, financial condition or results of operations.

Losses related to a terrorist attack could have a material adverse impact on the Company’s business, financial condition or results of operations.

Terrorist attacks could cause significant losses from insurance claims related to the property and casualty insurance operations of the pool participants and the reinsurance operations of the Company’s reinsurance subsidiary, and have a material adverse impact on the Company’s business, financial condition or results of operations. TRIA requires that some coverage for terrorism losses be offered by primary property and casualty insurers, and provides federal assistance for recovery of a portion of claims incurred (effective through December 31, 2020). While the pool participants are protected by this federally funded terrorism reinsurance with respect to claims under most commercial insurance products, the pool participants are prohibited from adding terrorism exclusions to the commercial lines policies they write, and a substantial deductible must be met before TRIA provides coverage to the pool. The pool participants’ personal lines products do not provide terrorism coverage. The pool participants have underlying reinsurance coverage to partially cover the TRIA deductible, but the Company can offer no assurances that the threats or actual occurrence of future terrorist-like events in the United States and abroad, or military actions by the United States, will not have a material adverse effect on its business, financial condition or results of operations.

The Company’s results of operations could suffer if the pool participants were to forecast future losses inaccurately, experience unusually severe or frequent losses, inadequately price their insurance products, or fail to control expenses.

The Company’s property and casualty insurance subsidiaries participate in a pooling agreement under which they share the underwriting results of the property and casualty insurance business written by all the pool participants (excluding certain assumed reinsurance business). Because of the pooled business the Company is allocated, the insurance operations of the Company’s pool participants are integrated with the insurance operations of the Employers Mutual pool participants, and the Company’s results of operations depend upon the forecasts, pricing and underwriting results of the Employers Mutual pool participants. Although the pool is intended to produce a more uniform and stable underwriting result from year to year for the participants than they would experience separately by spreading the risk of losses among the participants, if any of the pool participants experience unusually severe or frequent losses or do not adequately price their insurance products, the Company’s business, financial condition or results of operations could suffer.

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One of the distinguishing features of the property and casualty insurance industry is that its products are priced before the costs are known, as premium rates are generally determined before losses are reported. Accordingly, the pool participants must establish premium rates from forecasts of the ultimate costs they expect to incur from risks underwritten during the policy period, and premiums may not be adequate to cover the ultimate losses incurred. Further, the pool participants must establish reserves for losses and settlement expenses based upon estimates involving actuarial and statistical projections of expected ultimate liability at a given time, and it is possible that the ultimate liability will exceed these estimates because of the future development of known losses, the existence of losses that have occurred but are currently unreported, or larger than expected settlements on pending and unreported claims. Prior to the end of each quarter, Employers Mutual's actuaries review the adequacy of the pool's previous quarter's reserves for the various lines of business underwritten and these reviews have in the past, and may in the future, indicate that additional reserves are necessary to adequately cover anticipated losses and settlement expenses. The process of estimating reserves is inherently judgmental and can be influenced by factors that are subject to variation. If the premium rates or reserves established are not sufficient, the Company’s business, financial condition and/or results of operations may be adversely impacted.

The Company's results are also subject to the expenses incurred by its subsidiaries and the other pool participants. One of the metrics used to evaluate property and casualty insurance companies is the underwriting expense ratio. This ratio weighs earned premiums against expenses. Underwriting and administrative expenses should be kept within an acceptable range. This range must be determined and managed with both a short term and long term outlook with regards to premium levels, the underwriting cycle, industry benchmarks, internal trends, and the annual corporate budgeting process. Pursuant to the terms of the pooling agreement, underwriting and administrative expenses are prorated between the participants in the pool. Thus, if the Company's subsidiaries or other pool participants fail to control underwriting or administrative expenses, the Company's financial condition or results of operation could suffer.

An increase in asbestos and environmental claims could have a material adverse effect on the Company's financial condition or results of operations.

The Company has exposure to asbestos and environmental claims arising primarily from the other liability line of business written by the parties to the pooling agreement, as well as the pro rata and excess of loss business assumed by the reinsurance subsidiary. These exposures are closely monitored by management and reserves have been established to cover estimated ultimate losses. Estimating loss and settlement expense reserves for asbestos and environmental claims is very difficult due to the many uncertainties surrounding these types of claims, such as whether coverage exists, the definition of an occurrence, determination of ultimate damages and the assignment of damages to the responsible parties. These uncertainties are compounded by the fact that claims typically emerge long after a policy has expired. It is possible that the ultimate liability for these exposures may increase significantly as a result of the settlement of lawsuits or the receipt of additional claims, which could have a material adverse effect on the Company's financial condition and/or results of operations.

The Company’s investment portfolio is subject to economic loss, principally from changes in the market value of financial instruments.

The Company had fixed maturity investments with a fair value of $1.3 billion at December 31, 2018 that are subject to:


•	market risk, which is the risk that the Company’s invested assets will decrease in value due to:


•	an increase in interest rates or a change in the prevailing market yields on its investments,


•	an unfavorable change in the liquidity of an investment, or


•	an unfavorable change in the financial prospects, or a downgrade in the credit rating, of the issuer of an investment;


•	reinvestment risk, which is the risk that interest rates will decline and funds reinvested will earn less investment income than previously earned; and


•	liquidity risk, which is the risk that the Company may have to sell assets at an undesirable time and/or price to provide cash for the payment of claims.

The Company maintains a well diversified portfolio of fixed maturity securities in an attempt to manage market, reinvestment and liquidity risk. The Company primarily pursues a buy and hold strategy for fixed maturity investments. Fixed maturity securities are purchased as new funds become available to the portfolio. This strategy has a laddering effect on portfolio maturities that mitigates some of the effects of adverse interest rate movements.

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The Company’s fixed maturity investment portfolio includes mortgage-backed securities. As of December 31, 2018, mortgage-backed securities constituted approximately 19.2 percent of the fixed maturity portfolio. As with other fixed maturity investments, the fair value of these securities fluctuates depending on market and other general economic conditions and the interest rate environment. Changes in interest rates can expose the Company to prepayment risks on these investments. In periods of declining interest rates, mortgage prepayments generally increase and mortgage-backed securities are paid more quickly, requiring the Company to reinvest the proceeds at the then current market rates.

The Company’s common stock equity portfolio, with a fair value of $191.1 million as of December 31, 2018, is subject to economic loss from a decline in market prices. The Company invests in publicly traded companies listed in the United States with large market capitalizations. An adverse development in the stock market, or one or more securities that the Company invests in, could adversely affect its capital position. The Company is currently invested in a limited partnership that is designed to help protect the Company from significant monthly downside price volatility in the equity markets. However, this type of protection may be discontinued in the future depending on market conditions and/or the cost of the protection.

The success of any investment activity is affected by general economic conditions, which may adversely affect the markets for fixed maturity and equity securities. Unexpected volatility or illiquidity in the markets in which the Company holds securities could reduce its liquidity and stockholders’ equity. To mitigate these risks, the Company’s insurance and reinsurance subsidiaries are able to borrow funds on a short-term basis from Employers Mutual under an Inter-Company Loan Agreement.

The Company relies on Employer Mutual’s information technology and telecommunication systems, and the disruption or failure of these systems, or the compromise of the security of the systems that results in the misuse of confidential information, could materially and adversely affect its business.

The Company’s business is highly dependent upon the successful and uninterrupted functioning of the information technology and telecommunications systems of Employers Mutual and its third-party vendors. The Company relies on the capacity, reliability and security of these systems to process new and renewal business, provide customer service, process and pay claims, and facilitate collections and cancellations. These systems also enable the performance of actuarial and other modeling functions necessary for underwriting and rate development and establishing and evaluating reserves. Despite security measures in place, the information technology systems could be vulnerable to computer malware or viruses, unauthorized access, or other cyber attacks that could disrupt the systems. The failure or disruption of these systems could interrupt the Company’s operations and result in financial loss through remediation costs, reduced ability to underwrite and process new and renewal business, pay claims in a timely manner and provide customer service.

A security incident of information technology systems that results in the misuse or misappropriation of confidential information could expose Employers Mutual to litigation or regulatory actions, or damage Employers Mutual’s reputation. Any legal or other expenses resulting from the misuse of confidential information would be shared by all users of the systems, including the Company and its subsidiaries, and such losses could be significant.

Employers Mutual maintains insurance on its real property and other physical assets, including cyber insurance that may compensate Employers Mutual for losses that occur due to disruptions in service as a result of a computer, data processing or telecommunication systems failure, though this insurance may not necessarily compensate Employers Mutual for all losses resulting from covered events. Employers Mutual would retain the risks from disruptions in computer processing and telecommunications services above the limits of such coverage. Employers Mutual has implemented a variety of controls to mitigate these risks including, but not limited to, off-site back-up and redundant processing capabilities, access restrictions to confidential customer data, and documented plans for resuming operations upon the occurrence of an event. A portion of any losses resulting from the failure or disruption of Employers Mutual’s information technology and telecommunication systems, not covered by insurance, would be shared by all users of the systems, including the Company and its subsidiaries, and such losses could be significant.

The failure or material delay of Employers Mutual's digital transformation project could materially and adversely affect the Company’s business and competitive position.

Employers Mutual has recently undertaken a digital transformation project, which involves the integration of digital technology into all areas of the business, not just Information Technology. The goals of this project are to 1) establish a digital-ready workforce, 2) increase investment in digital technologies and 3) position EMC to accelerate the design, build and adoption of digital business platforms. When completed, digital transformation will help strengthen EMC's ability to deliver quicker solutions, while simultaneously reducing enterprise risks related to data and systems. This project will take several years to complete. Failure or material delay of this project could impact the Company's ability to interact with agents and policyholders, which could affect the Company's business and competitive position, and could have a material adverse impact on the Company's results of operation.

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The failure of the pool participants to maintain their current financial strength rating could materially and adversely affect the Company’s business and competitive position.

The pool participants, including the Company’s property and casualty insurance subsidiaries, are currently rated “A” (Excellent) by A.M. Best, an industry-accepted source of property and casualty insurance company financial strength ratings. A.M. Best ratings are specifically designed to provide an independent opinion of an insurance company’s financial health and its ability to meet ongoing obligations to policyholders. These ratings are directed toward the protection of policyholders, not investors. If the ratings of the pool participants were to be downgraded (particularly below "A-") by A.M. Best, it would adversely affect the Company’s competitive position and make it more difficult for it to market its products, and retain its existing agents and policyholders. A downgrade of Employers Mutual's rating below "A-" could make it ineligible to assume certain reinsurance business, which could lead to a reduction in the amount of business ceded to the Company's reinsurance subsidiary under the quota share agreement. Thus, a downgrade in the pool participants’ (including Employers Mutual’s) A.M. Best ratings below "A-" would likely result in a material reduction in the amount of the Company’s business.

The profitability of the Company’s reinsurance subsidiary is dependent upon the experience of Employers Mutual, and changes to this relationship may adversely affect the reinsurance subsidiary’s operations.

The Company’s reinsurance subsidiary, which operates under a quota share reinsurance agreement with Employers Mutual, generated 22 percent of the Company’s net premiums earned in 2018. Under the quota share reinsurance agreement, the reinsurance subsidiary assumes the voluntary reinsurance business written directly by Employers Mutual (subject to certain limited exceptions). The reinsurance subsidiary also has in place an inter-company reinsurance program with Employers Mutual. The reinsurance subsidiary primarily relies on these agreements and on Employers Mutual for its business. If Employers Mutual terminates or otherwise seeks to modify these agreements, the reinsurance subsidiary may not be able to enter into similar arrangements with other companies and may be adversely affected.

Through the quota share reinsurance agreement, the reinsurance subsidiary assumes the voluntary reinsurance business written directly by Employers Mutual with unaffiliated insurance companies, and the reinsurance business assumed by Employers Mutual from Mutual Re, a voluntary underwriting association of property and casualty insurers in which Employers Mutual participates. If Employers Mutual or the other participants of Mutual Re discontinue or reduce the assumption of property and casualty risks, the reinsurance subsidiary could be adversely affected. In connection with the risks assumed from Mutual Re, officers of the reinsurance subsidiary and Employers Mutual have reviewed the relevant underwriting policies and procedures, however, no officer of the reinsurance subsidiary directly reviews such risks assumed at the time of underwriting. If Employers Mutual or Mutual Re are unable to sell reinsurance at adequate premium rates, or were to have poor underwriting experience, the reinsurance subsidiary could be adversely affected. In addition, since Mutual Re is structured on a joint liability basis, Employers Mutual, and therefore the Company’s reinsurance subsidiary, would be obligated with respect to the proportionate share of risks assumed by the other participants in the event they were unable to perform. The failure of the other Mutual Re participants to perform could have a material adverse effect on the Company’s financial condition or results of operations.

Changes in key assumptions or a deterioration in the debt and equity markets could lead to an increase in Employers Mutual’s employee benefit plans' costs and a decline in the funded status, which could have a material adverse effect on the Company’s financial condition and/or results of operations.

Employers Mutual's employee benefit plans' costs and funded status reflect the use of key assumptions regarding the discount rate, the expected long-term rate of return on plan assets, and (for pension plans only) the interest credit rate and the rate of future compensation increases. Changes in these assumptions could result in a significant decrease in the plans’ funded status and increase the future net periodic costs associated with these plans. In addition, large declines in the fair value of the assets held in the plans could result in a significant decrease in the plans’ funded status and increase the future net periodic costs associated with these plans. A decrease to the plans' funded status could require Employers Mutual to make significant contributions to its employee benefit plans to maintain adequate funding levels, and the Company would be responsible for its share of these contributions under the pooling agreement. The occurrence of these events could have a material adverse effect on the Company’s financial condition and/or results of operations.

The Company may not be successful in reducing its risks and increasing its underwriting capacity through reinsurance arrangements, which could adversely affect its business, financial condition or results of operations.

In order to reduce underwriting risk and increase underwriting capacity, the pool participants transfer portions of the pool’s insurance risk to other insurers through reinsurance contracts. The availability, cost and structure of reinsurance protection is subject to changing market conditions that are outside of the pool participants’ control. In order for these contracts to qualify for reinsurance accounting and thereby provide the additional underwriting capacity that the pool participants desire, the reinsurer generally must assume significant risk and have a reasonable possibility of a significant loss.

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The reinsurance subsidiary assumes and cedes some selected reinsurance business through the quota share agreement in connection with “fronting” activities initiated by Employers Mutual. Under these arrangements, an agreed upon percentage of the selected assumed business is ceded to other reinsurer(s) on a pro rata basis. In addition, the reinsurance subsidiary purchases additional reinsurance protection from external parties.

Although the reinsurers are liable to the extent they assume risk, the Company’s insurance subsidiaries remain ultimately liable on all risks reinsured. As a result, ceded reinsurance arrangements do not limit the ultimate obligation to pay claims. The Company’s insurance subsidiaries are subject to the credit risks of their reinsurers. They are also subject to the risk that their reinsurers may dispute obligations to pay their claims. As a result, the Company’s insurance subsidiaries may not recover on claims made against their reinsurers in a timely manner, if at all, which could have a material adverse effect on the Company’s business, financial condition or results of operations.

The Company is subject to comprehensive regulation that may restrict its ability to react to market or industry changes and earn profits.

The Company is subject to comprehensive regulation and supervision by the insurance departments in the states where its subsidiaries are domiciled and where its subsidiaries and the other pool participants sell insurance products, issue policies and handle claims. Certain regulatory restrictions and prior approval requirements may affect the pool participants’ ability to operate, compete, innovate or obtain necessary rate adjustments in a timely manner, and may also increase their costs and reduce profitability.

Supervision and regulation by insurance departments extend, among other things, to:

Required Licensing. The pool participants operate under licenses issued by various state insurance departments. These licenses govern, among other things, the types of insurance coverages, agency and claims services, and products that the pool participants may offer consumers in the states in which they operate. The pool participants must apply for and obtain appropriate licenses before they can implement any plan to expand into a new state or offer a new line of insurance or other new products that require separate licensing. If a regulatory authority denies or delays granting a new license, the pool participants’ ability to enter new markets quickly or offer new products they believe will be profitable can be substantially impaired.

Regulation of Premium Rates and Approval of Policy Forms. The insurance laws of most states in which the pool participants operate require insurance companies to file premium rate schedules and insurance policy forms for review and approval. State insurance departments have broad discretion in judging whether the pool participants’ rates are adequate, not excessive and not unfairly discriminatory. The speed at which the pool participants can change their rates in response to competition or increased costs depends, in part, on the method by which the applicable state’s rating laws are administered. Generally, state insurance departments have the authority to disapprove the pool participants’ requested rates. Thus, if the pool participants begin using new rates before they are approved, as permitted in some states, they may be required to issue premium refunds or credits to their policyholders if the new rates are ultimately deemed excessive or unfair, and are disapproved by the applicable state department. In addition, in some states, there has been pressure in past years to reduce premium rates for automobile and other personal insurance, or to limit how often an insurer may request increases for such rates. In states where such pressure is applied, the pool participants’ ability to respond to market developments or increased costs can be adversely affected.

Restrictions on Cancellation, Non-Renewal or Withdrawal. Many states have laws and regulations that limit an insurer’s ability to exit a market. Some states prohibit an insurer from withdrawing from one or more lines of business in the state, except pursuant to a plan approved by the state insurance department. A state insurance department may disapprove a plan that may lead, under its analyses, to market disruption. These laws and regulations could limit the pool participants’ ability to exit unprofitable markets or discontinue unprofitable products in the future.

Investment Restrictions. The Company’s subsidiaries are subject to state laws and regulations that require diversification of their investment portfolios, and that limit the amount of investments in certain categories. Failure to comply with these laws and regulations would cause nonconforming investments to be treated as non-admitted assets for purposes of measuring statutory surplus and, in some instances, would require divestiture.

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Other Regulations. The Company must also comply with laws and regulations involving, among other things:


•	disclosure, and in some cases prior approval, of transactions between members of an insurance holding company system;


•	acquisition or disposition of an insurance company, or of any company controlling an insurance company;


•	involuntary assignments of high-risk policies, participation in reinsurance facilities and underwriting associations, and assessments and other governmental charges;


•	producer appointment, licensing and background investigations;


•	use of non-public consumer information and related privacy issues; and


•	use of credit history in underwriting and rating.

These laws and regulations could adversely affect the Company’s profitability.

The Company cannot provide any assurance that states will not make existing insurance laws and regulations more restrictive in the future, or enact new restrictive laws.

From time to time, the United States Congress and certain federal agencies investigate the current condition of the insurance industry to determine whether federal regulation is necessary. The Company closely monitors these activities through its membership in various organizations. In particular, our trade organizations are working to monitor and shape the activities of the Federal Insurance Office as it continues to evolve and exercise its authority, and to promote accident avoidance and accident prevention technology. The Company is unable to predict whether, or to what extent, new laws and regulations that could affect its business will be adopted in the future, the timing of any such adoption and what effects, if any, they may have on its business, financial condition or results of operations.

The Company's assumed reinsurance business from international sources could decline from the European Union's Solvency II, Brexit or other international regulatory changes.

Solvency II came into effect in the European Union (EU) on January 1, 2016. Solvency II requires that in order for insurers and reinsurers outside of the EU to conduct business in the European market, their country of domicile regulatory system must be deemed equivalent. The U.S. regulatory system was not deemed equivalent, so trade negotiations began.

On January 13, 2017, the U.S. and the EU announced they had completed negotiation of a "Bilateral Agreement between the European Union and the United States of America on Prudential Measures Regarding Insurance and Reinsurance" (the "Covered Agreement"). The U.S. signed the Covered Agreement on September 22, 2017, and the agreement was approved by the EU in March 2018.

Employers Mutual was approved to conduct reinsurance business by the regulatory regimes in Germany and Belgium in November 2018 based on the terms of the Covered Agreement.

The U.S. Department of the Treasury and the Office of the U.S. Trade Representative signed a Covered Agreement between the U.S. and the United Kingdom (UK) on December 18, 2018. This is an important step in maintaining regulatory certainty and market continuity as the UK prepares to leave the EU. The parties plan to bring this Covered Agreement into force once the UK is no longer subject to the U.S.’s Covered Agreement with the EU, and domestic processes are complete.

Management of the reinsurance subsidiary continues to monitor all regulatory developments which could affect the Company's financial condition or results of operations.

Changes in U.S. federal tax laws could adversely affect the Company's financial condition and results of operations.

The Company is subject to U.S. federal tax laws, which may be changed in ways that could adversely impact the Company. Potential changes in U.S. tax laws may increase or decrease the Company's income tax expense recognized in results of operations. The Company is unable to predict whether, and to what extent, changes to U.S. tax laws would affect the Company's financial condition or results of operations.

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The Company’s business may not continue to grow and may be adversely affected if it cannot retain existing, and attract new, independent agents, or if insurance consumers increase their use of other insurance delivery systems.

The continued growth of the Company’s business will depend upon the pool participants’ ability to retain existing, and attract new, independent agents. The pool participants’ agency force is one of the most important components of their competitive position. To the extent that the pool participants’ existing agents cannot maintain current levels of production, the Company’s business, financial condition and results of operations will suffer. Moreover, if independent agencies find it easier to do business with the pool participants’ competitors, it could be difficult for them to retain their existing business or attract new business. While the pool participants believe they maintain good relationships with their independent agents, they cannot be certain that these independent agents will continue to sell their products to the consumers they represent. Some of the factors that could adversely affect the ability to retain existing, and attract new, independent agents include:


•	competition in the insurance industry to attract independent agents;


•	the pool participants’ requirement that independent agents adhere to disciplined underwriting standards; and


•	the pool participants’ ability to pay competitive and attractive commissions, profit share bonuses and other incentives to independent agents as compensation for selling their products.

While the pool participants sell substantially all their insurance through their network of independent agents, many of their competitors sell insurance through a variety of other delivery methods, including captive agencies, the internet and direct sales. To the extent that businesses and individuals represented by the pool participants’ independent agents change their delivery system preferences, the Company’s business, financial condition or results of operations may be adversely affected.

The Company's continued success as an insurance company is substantially dependent on the reputation of EMC Insurance Companies.

Management believes that one of the reasons independent agents and insureds prefer to purchase insurance from the pool participants, team members choose Employers Mutual as a place of employment, and vendors choose to do business with Employers Mutual is the reputation EMC Insurance Companies has built over 107 years. To be successful in the future, management must continue to preserve, grow, and leverage the value of EMC Insurance Companies reputation. Reputational value is based in large part on perceptions. While reputations may take decades to build, any negative incidents can quickly erode trust and confidence, particularly if they result in adverse mainstream and social media publicity, governmental investigations, or litigation. Those types of incidents could have an adverse impact on perceptions and lead to tangible adverse effects on the Company's business, including loss of trust, loss of premium, loss of accounts, loss of agency contracts, or team member retention and recruiting difficulties.

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The Company’s operations are integrated with those of Employers Mutual, the parent company, and potential and actual conflicts exist between the best interests of the Company’s stockholders and the best interests of the policyholders of Employers Mutual.

Employers Mutual currently owns shares of the Company’s common stock entitling it to cast approximately 55 percent of the aggregate votes eligible to be cast by the Company’s stockholders at any meeting of stockholders. These holdings enable Employers Mutual to control the election of the Company’s board of directors. In addition, one of the five members of the Company’s board of directors is also a member of the board of directors of Employers Mutual. This director has a fiduciary duty to both the Company’s stockholders and to the policyholders of Employers Mutual. The Company’s executive officers hold the same positions with both Employers Mutual and the Company, and therefore also have a fiduciary duty to both the stockholders of the Company and to the policyholders of Employers Mutual. Certain potential and actual conflicts of interest arise from the Company’s relationship with Employers Mutual and these competing fiduciary duties. Among these conflicts of interest are:


•	the Company and Employers Mutual must establish the relative participation interests of all the participating insurers in the pooling arrangement, along with other terms of the pooling agreement;


•	the Company and Employers Mutual must establish the terms of the quota share agreement and the inter-company reinsurance programs between Employers Mutual and the Company’s reinsurance subsidiary and property and casualty insurance subsidiaries;


•	the Company and Employers Mutual must establish the terms (including the interest rate, which is reviewed every five years) of the surplus notes issued by the Company’s property and casualty insurance subsidiaries to Employers Mutual;


•	the Company and Employers Mutual must establish the terms (including the interest rate) of any inter-company loans between Employers Mutual and any of the Company’s insurance company subsidiaries;


•	the Company and Employers Mutual must make judgments about the allocation of expenses to the Company and its subsidiaries and to Employers Mutual’s subsidiaries that do not participate in the pooling agreement; and


•	the Company may enter into other transactions and contractual relationships with Employers Mutual and its subsidiaries or affiliates.

As a consequence, the Company and Employers Mutual have each established an Inter-Company Committee, with the Company’s Inter-Company Committee consisting of three of the Company’s independent directors who are not directors of Employers Mutual and Employers Mutual’s Inter-Company Committee consisting of three directors of Employers Mutual who are not members of the Company’s board of directors. Any new material agreement or transaction between Employers Mutual and the Company, as well as any proposed material change to an existing material agreement between Employers Mutual and the Company, must receive the approval of both Inter-Company Committees. This approval is granted only if the members of the Company’s Inter-Company Committee unanimously conclude that the new agreement or transaction, or proposed material change to an existing material agreement, is fair and reasonable to the Company and its stockholders, and the members of Employers Mutual’s Inter-Company Committee unanimously conclude that the new agreement or transaction, or proposed change to an existing material agreement, is fair and reasonable to Employers Mutual and its policyholders.

The Company relies on Employers Mutual to provide employees, facilities and information technology systems to conduct its operations.

The Company does not employ any staff to conduct its operations, nor does the Company own or lease any facilities or information technology systems necessary for its operations. As a result, the Company is totally dependent on Employers Mutual’s employees, facilities and information technology systems to conduct its business. There are no agreements in place that obligate Employers Mutual to provide the Company with access to its employees, facilities or information technology systems. In addition, the Company does not have any employment agreements with its executive officers, all of whom are employed by Employers Mutual. These arrangements make it unlikely that anyone could acquire control of the Company or replace its management unless Employers Mutual was in favor of such action. Any of these arrangements could diminish the value of the Company’s common stock.

The Company depends on Employers Mutual's ability to attract and retain qualified executive officers, experienced underwriting talent, and other skilled employees who are knowledgeable about insurance. Providing suitable succession planning for such positions is also important. If Employers Mutual cannot attract or retain top-performing executive officers, underwriters, and other employees, if the quality of their performance decreases, or if Employers Mutual fails to implement succession plans for its key staff, Employers Mutual and its subsidiaries and affiliate may be unable to maintain their current competitive position in the markets in which they operate and be unable to expand operations into new markets.

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The insolvency of Employers Mutual could result in additional liabilities for the Company’s insurance subsidiaries participating in the pooling agreement.

The pooling agreement requires each pool participant to assume its pro rata share (based on its participation interest in the pool) of the liabilities of any pool participant that becomes insolvent or is otherwise subject to liquidation or receivership proceedings. Under this provision, the Company’s pool participants could become financially responsible for their pro rata share of the liabilities of Employers Mutual in the event of an insolvency, liquidation or receivership proceeding.

The Company is dependent on dividends from its subsidiaries for the payment of its operating expenses and dividends to stockholders; however, its subsidiaries may be unable to pay dividends to the Company.

As a holding company, the Company relies primarily on dividends from its subsidiaries as a source of funds to meet its corporate obligations and pay dividends to its stockholders. Payment of dividends by the Company’s subsidiaries is subject to regulatory restrictions, and depends on the surplus position and/or operating performance of its subsidiaries. The maximum amount of dividends that the Company’s subsidiaries can pay it in 2019 without prior regulatory approval is approximately $48.0 million. In addition, state insurance regulators have broad discretion to limit the payment of dividends by the Company’s subsidiaries in the future. The ability of its subsidiaries to pay dividends to it may be further constrained by business and regulatory considerations, such as the impact of dividends on surplus, competitive position and the amount of premiums that can be written.

New pricing, claims, coverage issues, class action litigation, and technology innovations are continually emerging in the property and casualty insurance industry, and these new issues could adversely impact the Company’s revenues or its methods of doing business.

As property and casualty insurance industry practices, and regulatory, judicial and consumer conditions change, unexpected and unintended issues related to claims, coverages and business practices may emerge. These issues could have an adverse effect on the Company’s business by changing the way the pool participants price their products, by extending coverages beyond their underwriting intent, or by increasing the size of claims. The effect of unforeseen emerging issues could negatively affect the Company’s results of operations or its methods of doing business. In addition, the advent of autonomous vehicles and usage-based insurance could materially alter the way that automobile insurance is marketed, priced, and underwritten.

The Company's results of operations or financial condition could be adversely impacted if risks are not properly underwritten and priced.

The Company's financial condition, cash flows, and results of operations depend on the pool participants' ability to properly underwrite risks and accurately set rates for risks across several lines of business. This requires adherence to disciplined underwriting standards and pricing methodologies for the pool participants' products. To do this, the pool participants must collect, analyze, and use data to make decisions and take appropriate action based upon available information. This data must be sufficient, accurate, and accessible. If not, loss cost trends may be overestimated or underestimated, or these trends may unexpectedly change, leading to lost business from pricing risks above competitors or from charging rates too low to maintain profitability. Inflation trends, especially outside of historical norms, may make it more difficult to determine adequate pricing. If rates are not accurate, the Company may not generate enough premiums to offset losses and expenses, or may not be competitive in the marketplace.

Changes to existing accounting standards may adversely affect the Company’s consolidated financial statements.

The Company is required to prepare its consolidated financial statements in accordance with GAAP, as promulgated by the Financial Accounting Standards Board ("FASB"), subject to accounting rules and interpretations of the Securities and Exchange Commission. Accordingly, the Company is required to adopt new or revised accounting standards issued by these authoritative bodies from time to time. It is possible that changes to the Company’s accounting policies resulting from the adoption of future changes in GAAP could have a material adverse effect on the Company’s reported financial condition and/or results of operations. The Company's significant accounting policies are described in note 1 of Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.

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Risks Relating to the Company’s Common Stock

The Company's financial results could be negatively affected as a result of the proposal received from Employers Mutual to purchase all of the Company's outstanding common stock that it does not currently own, and the price of the Company's common stock could decline significantly if a transaction is not completed.

On November 15, 2018, Employers Mutual submitted a non-binding indicative proposal to the Company to purchase all of the Company's outstanding common stock that it does not currently own for $30 per share. The proposal is subject to a non-waivable condition requiring approval of the transaction by a majority of the shares not owned by Employers Mutual or Employers Mutual's directors or executive officers. The board has formed a special committee composed of independent directors to consider the proposal, and the special committee has hired independent legal and financial advisors to assist in its evaluation of the proposal. To date, no decision has been made with respect to the Company's response to the proposal. The Company cannot guarantee that the proposal will result in a definitive proposal to purchase the Company's common stock, or that any definitive agreement reached between the Company and Employers Mutual will be approved by a majority of the minority shareholders. The Company has incurred, and will continue to incur, expenses associated with the proposal, and those expenses could be significant. Actions that the Company (including any of its officers or directors) has taken, or may take, in response to the proposal, or the existence of potential or actual conflicts of interest, may result in litigation against the Company. If such litigation materializes, it may be a significant distraction for the Company's management and board, and may result in significant costs. If a transaction is not completed, the price of the Company's common stock could decline, and that decline could be significant.

Employers Mutual has the ability to determine the outcome of all matters submitted to the Company’s stockholders for approval. The price of the Company’s common stock may be adversely affected because of Employers Mutual’s majority ownership of the Company’s common stock.

The Company’s common stock has one vote per share and voting control of the Company is currently vested in Employers Mutual, which owns approximately 55 percent of the Company’s outstanding common stock. Employers Mutual must retain a minimum 50.1 percent ownership of the Company’s outstanding common stock at all times in order for the pool participants to have their A.M. Best financial strength ratings determined on a “group” basis. Accordingly, Employers Mutual will retain the ability to control:


•	the election of the Company’s entire board of directors, which in turn determines its management and policies;


•	the outcome of any corporate transaction or other matter submitted to the Company’s stockholders for approval, including mergers or other transactions providing for a change of control; and


•	the amendment of the Company’s organizational documents.

The interests of Employers Mutual may conflict with the interests of the Company’s other stockholders and may have a negative effect on the price of the Company’s common stock.

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Employers Mutual’s ownership of the Company’s common stock and provisions of certain state laws make it unlikely anyone could acquire control of the Company or replace or remove its management unless Employers Mutual were in favor of such action, which could diminish the value of the Company’s common stock.

Employers Mutual’s ownership of the Company’s common stock and the laws and regulations of Iowa and North Dakota could delay, or prevent, the removal of members of its board of directors, and could make a merger, tender offer or proxy contest involving the Company more difficult to complete, even if such events were beneficial to the interest of its stockholders other than Employers Mutual. The insurance laws of the states in which the Company’ subsidiaries are domiciled prohibit any person from acquiring control of it, and thus indirect control of its subsidiaries, without the prior approval of each such state insurance department. Generally, these laws presume that control exists where any person, directly or indirectly, owns, controls, holds the power to vote, or holds proxies representing 10 percent or more of the Company’s outstanding common stock. Even persons who do not acquire beneficial ownership of 10 percent or more of the outstanding shares of the Company’s common stock may be deemed to have acquired such control, if the relevant insurance department determines that such control exists in fact. Therefore, any person seeking to acquire a controlling interest in the Company would face regulatory obstacles, which could delay, deter or prevent an acquisition that stockholders might consider to be in their best interests. Moreover, the Iowa Business Corporation Act, which governs the Company’s corporate activities, contains certain provisions that prohibit certain business combination transactions under certain circumstances. These factors could discourage a third party from attempting to acquire control of the Company and thus could have a negative impact on the value of the Company's common stock.

Although the Company has consistently paid cash dividends in the past, it may not be able to pay cash dividends in the future.

The Company has paid cash dividends to its stockholders on a consistent basis since 1982, following the initial public offering of its common stock. However, future cash dividends will depend upon various factors, including the ability of the Company’s subsidiaries to make distributions to it, which may be restricted by financial or regulatory constraints. Also, there can be no assurance that the Company will continue to pay dividends even if the necessary financial and regulatory conditions are met and if sufficient cash is available for distribution.

The Company may be adversely affected by foreign currency fluctuations.

The Company's reporting currency is the U.S. dollar. A portion of the Company's assumed reinsurance business is written in currencies other than the U.S. dollar. The Company may, from time to time, experience losses resulting from fluctuations in the values of foreign currencies, which could adversely affect the Company's financial condition and results of operations.

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ITEM 1B.	UNRESOLVED STAFF COMMENTS

None.



ITEM 2.	PROPERTIES

The Company does not have any lease agreements, but Employers Mutual has entered into leases for 16 branch and service office facilities. The Company’s home office, which also serves as the home office of Employers Mutual, is located in four office buildings in Des Moines, Iowa, all of which are owned by Employers Mutual. Employers Mutual also owns office buildings in which the Milwaukee and Lansing branch offices operate.

Rent expense is allocated to the Company's property and casualty insurance segment through the pooling agreement and to the Company's reinsurance segment through the quota share agreement. A small amount of rent expense is allocated to the Company's insurance agency based on the space utilized by that operation.



ITEM 3.	LEGAL PROCEEDINGS

The Company and Employers Mutual and its other subsidiaries are parties to numerous lawsuits arising in the normal course of the insurance business. The Company believes that the resolution of these lawsuits will not have a material adverse effect on its financial condition or its results of operations. The companies involved have established reserves which are believed adequate to cover any potential liabilities arising out of all such pending or threatened proceedings.



ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.

PART II



ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock trades on the Global Select Market tier of The Nasdaq Stock Market under the symbol EMCI. On February 20, 2019, there were 600 registered holders of the Company’s common stock.

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The following graph compares the cumulative total stockholder return on the Company’s common stock to the Nasdaq Composite Index and a peer group consisting of publicly traded companies in SIC Code 6330-6339, Fire, Marine & Casualty Insurance, as provided by Research Data Group. The total stockholder return assumes $100.00 invested at the beginning of the period in the Company’s common stock, the Nasdaq Composite Index and the Peer Group Index. It also assumes reinvestment of all dividends for the periods presented.



	2013		2014		2015		2016		2017		2018
EMC Insurance Group Inc	$	100.00	$	119.36	$	131.66	$	160.82	$	158.44	$	182.09
Nasdaq Composite Index	100.00		114.62		122.81		133.19		172.11		165.84
Peer Group Index	100.00		102.72		120.19		153.10		159.64		164.57

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The following table sets forth information regarding purchases of equity securities by the Company and affiliated purchasers for the three months ended December 31, 2018:



Period	(a) Total number of shares (or units) purchased¹	(b) Average price paid per share (or unit)		(c) Total number of shares (or units) purchased as part of publicly announced plans or programs²	(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs ($ in thousands)^2,3
10/1/18 - 10/31/18	33	$	24.15	—	$	18,456
11/1/18 - 11/30/18	955	31.28		—	18,456
12/1/18 - 12/31/18	37	32.38		—	18,456
Total	1,025	$	31.09	—

¹ Consists of shares purchased in the open market to fulfill the Company's obligations under its dividend reinvestment and common stock purchase plan.

² On November 3, 2011, the Company’s Board of Directors authorized a $15.0 million stock repurchase program. This program does not have an expiration date. A total of $14.0 million remains available in this plan for the purchase of additional shares.

³ On May 12, 2005, the Company announced that its parent company, Employers Mutual, had initiated a $15.0 million stock purchase program under which Employers Mutual may purchase shares of the Company’s common stock in the open market. This purchase program does not have an expiration date; however, this program has been dormant while the Company’s repurchase programs have been in effect. A total of $4.5 million remains in this program.

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ITEM 6.	SELECTED FINANCIAL DATA



	Year ended December 31,
($ in thousands, except share and per share amounts)	2018			2017		2016		2015		2014		2013		2012			2011			2010			2009
INCOME STATEMENT DATA
Premiums earned	$	645,183		$	607,158	$	592,408	$	570,266	$	540,722	$	515,506	$	458,846		$	416,402		$	389,122		$	384,011
Net investment income	47,637			45,479		47,490		45,582		46,465		43,022		44,145			46,111			49,489			47,759
Net realized investment gains (losses) and, beginning in 2018, change in unrealized gains on equity investments	(41,252		)	6,556		4,074		6,153		4,349		8,997		8,017			9,303			3,869			17,922
Other income (loss)	9,159			4,764		5,820		7,715		9,673		469		(952		)	633			(248		)	(1,037		)
Total revenues	660,727			663,957		649,792		629,716		601,209		567,994		510,056			472,449			442,232			448,655
Losses and expenses	675,403			624,141		586,585		558,060		560,302		507,141		458,423			483,441			399,783			387,228
Income (loss) before income tax expense (benefit)	(14,676		)	39,816		63,207		71,656		40,907		60,853		51,633			(10,992		)	42,449			61,427
Income tax expense (benefit)	(7,208		)	578		17,004		21,494		10,915		17,334		13,667			(8,255		)	11,100			16,770
Net income (loss)	$	(7,468	)	$	39,238	$	46,203	$	50,162	$	29,992	$	43,519	$	37,966		$	(2,737	)	$	31,349		$	44,657

Net income (loss) per common share - basic and diluted:	$	(0.35	)	$	1.84	$	2.20	$	2.43	$	1.48	$	2.22	$	1.96		$	(0.14	)	$	1.60		$	2.25

Premiums earned by segment:
Property and casualty insurance	$	495,447		$	472,369	$	456,467	$	447,197	$	422,381	$	392,719	$	357,139		$	321,649		$	305,647		$	308,079
Reinsurance	149,736			134,789		135,941		123,069		118,341		122,787		101,707			94,753			83,475			75,932
Total	$	645,183		$	607,158	$	592,408	$	570,266	$	540,722	$	515,506	$	458,846		$	416,402		$	389,122		$	384,011

BALANCE SHEET DATA
Total assets	$	1,685,478		$	1,681,940	$	1,588,813	$	1,535,955	$	1,497,820	$	1,374,501	$	1,290,709		$	1,224,031		$	1,182,006		$	1,159,997
Stockholders' equity	$	565,782		$	603,846	$	553,342	$	524,938	$	502,886	$	455,210	$	401,209		$	352,341		$	362,853		$	336,627

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	Year ended December 31,
($ in thousands, except share and per share amounts)	2018			2017			2016			2015			2014			2013			2012			2011			2010			2009
OTHER DATA
Average return on equity	(1.3		)%	6.8		%	8.6		%	9.8		%	6.3		%	10.2		%	10.1		%	(0.8		)%	9.0		%	14.5		%
Book value per share	$	26.18		$	28.14		$	26.07		$	25.26		$	24.72		$	22.81		$	20.72		$	18.24		$	18.71		$	17.11
Dividends paid per share	$	0.89		$	0.85		$	0.78		$	0.69		$	0.63		$	0.57		$	0.54		$	0.51		$	0.49		$	0.48
Property and casualty insurance subsidiaries' aggregate pool percentage	30.0		%	30.0		%	30.0		%	30.0		%	30.0		%	30.0		%	30.0		%	30.0		%	30.0		%	30.0		%
Reinsurance subsidiary's quota share percentage	100		%	100		%	100		%	100		%	100		%	100		%	100		%	100		%	100		%	100		%
Closing stock price	$	31.85		$	28.69		$	30.01		$	25.30		$	23.64		$	20.41		$	15.92		$	13.71		$	15.10		$	14.34
Net investment yield (pre-tax)	3.31		%	3.25		%	3.53		%	3.55		%	3.81		%	3.80		%	4.17		%	4.49		%	4.89		%	4.87		%
Cash dividends to closing stock price	2.8		%	3.0		%	2.6		%	2.7		%	2.7		%	2.8		%	3.4		%	3.7		%	3.2		%	3.3		%
Common shares outstanding	21,615,105			21,455,545			21,222,535			20,780,439			20,344,409			19,958,980			19,364,127			19,313,387			19,391,517			19,671,722
Statutory trade combined ratio	103.0		%	101.7		%	97.3		%	96.8		%	101.6		%	97.5		%	99.0		%	115.6		%	102.1		%	100.3		%

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES



ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The term “Company” is used below interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC Insurance Group Inc. and its subsidiaries. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included under Part II, Item 8 of this Form 10-K.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides issuers the opportunity to make cautionary statements regarding forward-looking statements. Accordingly, any forward-looking statement contained in this report is based on management’s current beliefs, assumptions and expectations of the Company’s future performance, taking all information currently available into account. These beliefs, assumptions and expectations can change as the result of many possible events or factors, not all of which are known to management. If a change occurs, the Company’s business, financial condition, liquidity, results of operations, plans and objectives may vary materially from those expressed in the forward-looking statements. The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the following:


•	catastrophic events and the occurrence of significant severe weather conditions;


•	the adequacy of loss and settlement expense reserves;


•	state and federal legislation and regulations;


•	changes in the U.S. federal corporate tax law;


•	changes in the property and casualty insurance industry, interest rates or the performance of financial markets and the general economy;


•	rating agency actions;


•	“other-than-temporary” investment impairment losses; and


•	other risks and uncertainties inherent to the Company’s business, including those discussed under the heading “Risk Factors” in Part I, Item 1A, of this Form 10-K.

Management intends to identify forward-looking statements when using the words “believe”, “expect”, “anticipate”, “estimate”, “project”, "may", "intend", "likely" or similar expressions. Undue reliance should not be placed on these forward-looking statements. The Company disclaims any obligation to update such statements or to announce publicly the results of any revisions that it may make to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

COMPANY OVERVIEW

The Company, a majority owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is an insurance holding company with operations that consist of a property and casualty insurance segment and a reinsurance segment. The operations of the Company are highly integrated with those of Employers Mutual through participation in a property and casualty reinsurance pooling agreement (the "pooling agreement"), a quota share retrocessional reinsurance agreement (the "quota share agreement") and inter-company reinsurance programs with Employers Mutual. All transactions occurring under the pooling agreement, quota share agreement and the inter-company reinsurance programs with Employers Mutual are based on statutory accounting principles. Certain adjustments are made to these amounts to bring them into compliance with U.S. generally accepted accounting principles (GAAP).

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Property and casualty insurance operations are conducted through three subsidiaries and represent the most significant segment of the Company’s business, totaling 77 percent of consolidated premiums earned in 2018. The Company’s three property and casualty insurance subsidiaries and two subsidiaries of Employers Mutual (Union Insurance Company of Providence and EMC Property & Casualty Company) are parties to a pooling agreement with Employers Mutual. Under the terms of the pooling agreement, each company cedes to Employers Mutual all of its insurance business, and assumes from Employers Mutual an amount equal to its participation in the pool. All premiums, losses, settlement expenses, and other underwriting and administrative expenses, excluding the voluntary reinsurance business assumed by Employers Mutual from nonaffiliated insurance companies, are prorated among the parties on the basis of participation in the pool. Employers Mutual negotiates reinsurance agreements that provide protection to the pool and each of its participants, including protection against losses arising from catastrophic events. The aggregate participation of the Company’s property and casualty insurance subsidiaries in the pool is 30 percent.

An inter-company reinsurance program is in place between the Company's insurance subsidiaries in the property and casualty insurance segment and Employers Mutual. This reinsurance program is intended to reduce the volatility of the Company's quarterly results caused by excessive catastrophe and storm losses, and provide protection from both the frequency and severity of such losses. The reinsurance program consists of two semi-annual aggregate catastrophe excess of loss treaties. The first treaty is effective each year from January 1 through June 30, and has a retention of $22.0 million and a limit of $24.0 million. The total cost of this treaty was approximately $6.0 million in 2018. The second treaty is effective each year from July 1 through December 31, and has a retention of $15.0 million and a limit of $12.0 million. The total cost of this treaty was approximately $1.4 million in 2018. The terms of these treaties were the same in 2017 and 2016, with the exceptions of the retention amount contained in the treaty covering the first half of the year, which was $20.0 million in each of those years, and the costs, which totaled approximately $6.3 million during the first half of 2016 and $1.5 million during the second half of 2016. Losses and settlement expenses ceded to Employers Mutual under the inter-company reinsurance program totaled $5.2 million, $19.2 million and $7.5 million in 2018, 2017 and 2016, respectively. All catastrophe and storm losses assumed by the property and casualty insurance subsidiaries (net of applicable reinsurance recoveries from external reinsurance protections purchased by the pool participants) are subject to the terms of these treaties, and there is no co-participation provision.

The purpose of the pooling agreement is to spread the risk of an exposure insured by any of the pool participants among all the companies participating in the pool. The pooling agreement produces a more uniform and stable underwriting result from year to year for the companies participating in the pool than might be experienced individually. In addition, each company benefits from the capacity of the entire pool, rather than being limited to policy exposures of a size commensurate with its own statutory surplus, and from the wide range of policy forms, lines of insurance written, rate filings and commission plans offered by each of the companies.

Reinsurance operations are conducted through EMC Reinsurance Company and accounted for 23 percent of consolidated premiums earned in 2018. The Company’s reinsurance subsidiary is party to a quota share agreement and an inter-company reinsurance program with Employers Mutual. Under the terms of the quota share agreement, the reinsurance subsidiary assumes 100 percent of Employers Mutual’s assumed reinsurance business, subject to certain exceptions. The inter-company reinsurance program in place with Employers Mutual covers both business assumed from Employers Mutual through the quota share agreement, as well as business obtained outside the quota share agreement, and consists of two treaties. The first is a per occurrence catastrophe excess of loss treaty with a retention of $10.0 million, a limit of $10.0 million, 20 percent co-participation, and no reinstatement. The total cost of this treaty was approximately $1.6 million, $1.7 million and $2.0 million in 2018, 2017 and 2016, respectively. The second is an annual aggregate catastrophe excess of loss treaty with a retention of $20.0 million, a limit of $100.0 million, and 20 percent co-participation. The total cost of this treaty was approximately $3.6 million, $3.2 million and $3.2 million in 2018, 2017 and 2016, respectively. Any losses recovered under the per occurrence treaty inure to the benefit of the aggregate treaty, and only catastrophic events with total losses greater than $500,000 are subject to the terms of the aggregate treaty. With the exception of the costs, the terms of the program were the same in all three years presented. Losses and settlement expenses ceded to Employers Mutual under the inter-company reinsurance program totaled $(4.6) million in 2018, $16.8 million in 2017 and $(467,000) in 2016. Much of the negative amount for 2018 is attributed to the reinsurance subsidiary recovering losses under external reinsurance purchased in 2017 to provide additional protection in peak exposure territories (see following paragraph). In accordance with the co-participation provision of the inter-company reinsurance program, the reinsurance subsidiary retained 20 percent of this recovery, with the balance ceded to Employers Mutual.

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The reinsurance subsidiary purchases additional reinsurance protection in peak exposure territories from external parties in which coverage is triggered when losses experienced by the insurance industry from a catastrophic event exceed a specified threshold. Any reinsurance recoveries received from external parties reduces the amount of losses ceded to Employers Mutual under the inter-company reinsurance program. The net cost of this external reinsurance protection was approximately $6.0 million, $5.6 million and $3.5 million in 2018, 2017 and 2016, respectively. During 2018, the reinsurance subsidiary recovered $5.2 million from external parties. No recoveries were made from external parties in 2017 or 2016.

The reinsurance subsidiary does not directly reinsure any of the insurance business written by Employers Mutual or the other pool participants; however, Employers Mutual assumes reinsurance business from Mutual Re, which provides a small amount of reinsurance protection to the members of the EMC Insurance Companies pooling agreement. As a result, the reinsurance subsidiary’s assumed exposures include a small portion of the EMC Insurance Companies’ direct business, after ceded reinsurance protections purchased by Mutual Re are applied. In addition, the reinsurance subsidiary does not reinsure any “involuntary” facility or pool business that Employers Mutual assumes pursuant to state law. The reinsurance subsidiary assumes all foreign currency exchange gain/loss associated with contracts incepting on January 1, 2006 and thereafter that are subject to the quota share agreement. Operations of the quota share agreement and the inter-company reinsurance program, as well as the purchase of the reinsurance protection from external parties, give rise to inter-company balances with Employers Mutual, which are generally settled during the month following the end of each quarter. The investment and income tax activities of the reinsurance subsidiary are not subject to the quota share agreement.

INDUSTRY OVERVIEW

An insurance company’s underwriting results reflect the profitability of its insurance operations, excluding investment income. Underwriting profit or loss is calculated by subtracting losses and expenses incurred from premiums earned.

Insurance companies collect cash in the form of insurance premiums and pay out cash in the form of loss and settlement expense payments. Additional cash outflows occur through the payment of acquisition and underwriting costs such as commissions, premium taxes, salaries and general overhead. During the loss settlement period, which varies by line of business and by the circumstances surrounding each claim and may cover several years, insurance companies invest the cash premiums; thereby earning interest and dividend income. This investment income supplements underwriting results and contributes to net earnings. Funds from called and matured fixed maturity securities are reinvested at current interest rates. The low interest rate environment that has existed during the past several years has had a negative impact on the insurance industry’s investment income.

Insurance pricing has historically been cyclical in nature. Periods of excess capital and increased competition encourage price reductions and liberal underwriting practices (referred to as a soft market) as insurance companies compete for market share, while attempting to cover the inevitable underwriting losses from these actions with investment income. A prolonged soft market generally leads to a reduction in the adequacy of capital in the insurance industry. To cure this condition, underwriting practices are tightened, premium rate levels increase and competition subsides as companies strive to strengthen their balance sheets (referred to as a hard market). At the end of 2013, premium rate level increases were beginning to decline, after increasing consistently during the three previous years. This trend of declining premium rate increases continued through 2017, with 2017 premium rates overall being essentially flat. Rates increased modestly during 2018, and the outlook for 2019 is that the Company's overall premium rate level will continue to increase slightly.

A substantial determinant of an insurance company’s underwriting results is its loss and settlement expense reserving practices. Insurance companies must estimate the amount of losses and settlement expenses that will ultimately be paid to settle claims that have occurred to date (loss and settlement expense reserves). This estimation process is inherently subjective with the possibility of widely varying results, particularly for certain highly volatile types of claims (i.e., asbestos, environmental and various casualty exposures, such as products liability, where the loss amount and the parties responsible are difficult to determine). During a soft market, inadequate premium rates put pressure on insurance companies to under-estimate their loss and settlement expense reserves in order to report better results. Correspondingly, inadequate reserves can play an integral part in bringing about a hard market, because increased profitability from higher premium rate levels can be used to strengthen inadequate reserves.

The Company closely monitors the activities of state legislatures, the United States Congress and federal and state agencies through its membership in various organizations. In particular, our trade organizations are working to monitor and shape the activities of the Federal Insurance Office as it continues to evolve and exercise its authority, and to promote accident avoidance and accident prevention technology.

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MANAGEMENT ISSUES AND PERSPECTIVES

Exit from personal lines business

On October 29, 2018, the Company and Employers Mutual, its parent company, announced that they had made a strategic decision to exit personal lines business so that more time and resources could be dedicated to the commercial and reinsurance business. At the time of the announcement, personal lines premiums written comprised approximately six percent of the Company's total premiums written. The companies stopped writing personal lines policies in the first quarter of 2019, and all personal lines business is expected to roll off the companies' books by the end of the first quarter of 2020. During 2019, premiums earned for personal lines business will decline significantly, but the companies will continue to process claims and incur expenses to support this business. In addition, approximately 80 employees who spent a portion of their time supporting the personal lines operation (equivalent to approximately 40 full time employees) will be retained after the exit from personal lines is completed. This will place additional pressure on the acquisition expense ratio during the next few years until growth in commercial lines business replaces the discontinued personal lines business. During the fourth quarter of 2018, the Company incurred approximately $967,000 of expense associated with severance costs and the write-off of personal lines software currently in development. During 2019, the Company expects to incur approximately $914,000 in additional severance costs. In addition, the amortization of personal lines software currently in use will be accelerated over the transition period, which is expected to be approximately 18 months.

Proposal to purchase all of the Company's outstanding common stock

On November 20, 2018, the Company announced receipt of a non-binding indicative proposal dated November 15, 2018 from Employers Mutual to purchase all the outstanding common stock of the Company not already owned by Employers Mutual, and the formation of a special committee of the Company's board of directors to consider the proposal. The proposal, which is subject to certain conditions, provides that the shares will be purchased at a price of $30 per share in cash. The special committee, which consists of the Company's four independent directors, has retained its own independent financial and legal advisors to assist it in considering the proposal. Management has worked diligently to provide the financial advisors of both Employers Mutual and the Company with the information requested to perform their duties. There can be no assurance that any definitive agreement will be finalized and executed or that the proposal transaction or any other transaction will be approved or consummated.

Digital Transformation

EMC currently has core legacy insurance systems that are built around the traditional insurance model in a pre-digital aged architecture. The systems operate within several functional silos, which makes it difficult to share data and create a unified customer experience. During 2018, management undertook a digital transformation project that will guide the design, build and deployment of a new "EMC Digital Business Platform". This digital platform will consist of new core insurance systems, such as policy, rating, billing, claims, agent portal, customer portal, and an agency distribution management system. These new systems, together with some enhanced systems, will replace the company's current legacy systems. EMC will also adopt cloud technology, and integrate and configure vendor purchased systems. Previously, all core systems were built in-house. This project will take several years to complete, and will require a significant amount of resources.

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Equity portfolio market risk

Approximately 13.9 percent of the Company’s investment portfolio is invested in equity securities. At December 31, 2018, net unrealized investment gains on the equity portfolio totaled $43.4 million, representing $2.01 per share of the Company's December 31, 2018 book value of $26.18 per share. At December 31, 2017, net unrealized investment gains on the equity portfolio totaled $66.2 million, and represented $3.09 per share of the Company's December 31, 2017 book value of $28.14 per share. To help protect the Company from a sudden and significant decline in the value of its equity portfolio, management began investing in a limited partnership during the first quarter of 2014 to implement and maintain an equity tail-risk hedging strategy. This hedging strategy is designed to help protect the Company from significant monthly downside price volatility in the equity markets. Although the equity markets were volatile in December, the volatility was spread over an extended time period and the equity markets were down by less than 10 percent, which is the level at which the hedge generally begins to perform. As a result, the hedge provided very little protection in 2018. By maintaining this hedging strategy, management is able to reduce the level of risk contained in the Company’s financial statements without reducing the size of the equity portfolio. While there is a cost associated with this protection, management views this cost similar to the cost of an insurance policy. The cost of the hedging strategy is equal to the decline in the carrying value of the limited partnership that the Company invests in to maintain the strategy, and is reported as a realized investment loss in the Company's financial statements. The decline in the carrying value of the limited partnership primarily reflects the cost of hedging contracts that expired without value during the year, but also includes changes in the value of contracts that were still in effect at year-end.

Realized investment losses

During the fourth quarter of 2018, management elected to recognize $11.9 million of losses on the Company's fixed maturity portfolio to take advantage of a 14 percent tax differential that could be realized by carrying these losses back to a previous tax year subject to the prior 35 percent tax rate. This resulted in a $1.7 million tax benefit for the Company. In addition, management was able to reinvest the proceeds from the sales into fixed maturity securities with similar characteristics at a higher book yield.

Premium rate levels

Premium rate level increases have slowed over the past several years due to increased competition resulting from excess capital in the insurance industry. During this time, management has worked diligently with the sixteen branch offices to stress the importance of achieving modest, but consistent, commercial lines rate level increases whenever possible. These efforts have been successful, as the Company has been able to achieve modest rate level increases during the past five years. Premium rate levels for most commercial lines of business are projected to increase moderately on an industry-wide basis in 2019, and management currently expects the Company's overall rate level to remain steady or increase slightly in 2019. Management will continue to work with the branch offices to ensure that all opportunities for additional rate level increases are pursued.

Commercial auto line of business

The Company, like most of the insurance industry, continues to experience high levels of claims frequency and severity in the commercial auto line of business. The commercial auto line of business represents approximately 28 percent of the property and casualty insurance segment's commercial business; therefore, improving profitability is a top priority for management. Management continues to devote a significant amount of resources to the intensive, multi-year Accelerate Commercial Auto Profitability project that was implemented in 2016, which has a goal of returning this line of business to profitability. There are indications that the action plans developed by each of the eight teams charged with returning this line of business to profitability are beginning to take effect.

Investing in innovation

Innovation continues to be an important part of the Company's overall strategy and has become entrenched in its operations. The Company simply cannot maintain the status quo and expect to be successful as the pace of change in the insurance industry continues to accelerate. To remain competitive in this quickly changing market and achieve our goal of being a leader in innovation, systems are being upgraded and additional team members with the skills necessary to meet these objectives are being hired. This will result in an increase in the Company's acquisition expense ratio. While a higher acquisition expense ratio is not desirable, management views these expenses as an investment in the Company's future, and expects future results to benefit from these expenditures.

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MEASUREMENT OF RESULTS

The Company’s consolidated financial statements are prepared on the basis of GAAP. The Company also prepares financial statements for each of its insurance subsidiaries based on statutory accounting principles that are filed with insurance regulatory authorities in the states where they do business. Statutory accounting principles are designed to address the concerns of state regulators and stress the measurement of the insurer’s ability to satisfy its obligations to its policyholders and creditors.

Management evaluates the Company’s operations by monitoring key measures of growth and profitability. Management measures the Company’s growth by examining direct premiums written and, perhaps more importantly, premiums written assumed from affiliates. Management generally measures the Company’s operating results by examining the Company’s net income and return on equity, as well as the loss and settlement expense, acquisition expense and combined ratios. The following provides further explanation of the key measures management uses to evaluate the Company’s results:

Direct Premiums Written. Direct premiums written is the sum of the total policy premiums, net of cancellations, associated with policies underwritten and issued by the Company’s property and casualty insurance subsidiaries. These direct premiums written are transferred to Employers Mutual under the terms of the pooling agreement and are reflected in the Company’s consolidated financial statements as premiums written ceded to affiliates. See note 3 of Notes to Consolidated Financial Statements.

Premiums Written Assumed From Affiliates and Premiums Written Assumed From Nonaffiliates. For the property and casualty insurance segment, premiums written assumed from affiliates and nonaffiliates reflects the property and casualty insurance subsidiaries’ aggregate 30 percent participation interest in 1) the total direct premiums written by all the participants in the pooling arrangement, and 2) the involuntary business assumed by the pool participants pursuant to state law, respectively. For the reinsurance segment, premiums written assumed from nonaffiliates reflects the reinsurance business assumed through the quota share agreement (including “fronting” activities initiated by Employers Mutual) and reinsurance business assumed outside the quota share agreement. See note 3 of Notes to Consolidated Financial Statements. Management uses premiums written assumed from affiliates and nonaffiliates, which excludes the impact of premiums written ceded to reinsurers, as a measure of the underlying growth of the Company’s insurance business from period to period.

Net Premiums Written. Net premiums written is calculated by summing direct premiums written, premiums written assumed from affiliates and nonaffiliates, and then subtracting from that result premiums written ceded to affiliates and nonaffiliates. For the property and casualty insurance segment, premiums written ceded to nonaffiliates is the portion of the direct and assumed premiums written that is transferred to 1) reinsurers in accordance with the terms of the underlying reinsurance contracts, based upon the risks they accept, and 2) state organizations on a mandatory basis in connection with various workers' compensation and assigned risk programs. For the reinsurance segment, premiums written ceded to nonaffiliates reflects reinsurance business that is ceded to other insurance companies in connection with 1) “fronting” activities initiated by Employers Mutual, and 2) amounts ceded to purchase additional reinsurance protection in peak exposure territories. Premiums written ceded to affiliates includes both the cession of the Company’s property and casualty insurance subsidiaries’ direct business to Employers Mutual under the terms of the pooling agreement, and premiums ceded by the Company’s subsidiaries to Employers Mutual under the terms of the inter-company reinsurance programs with Employers Mutual. See note 3 of Notes to Consolidated Financial Statements. Management uses net premiums written to measure the amount of business retained after cessions to reinsurers.

Loss and Settlement Expense Ratio. The loss and settlement expense ratio is the ratio (expressed as a percentage) of losses and settlement expenses incurred to premiums earned, and measures the underwriting profitability of a company’s insurance business. The loss and settlement expense ratio is generally measured on both a gross (direct and assumed) and net (gross less ceded) basis. Management uses the gross loss and settlement expense ratio as a measure of the Company’s overall underwriting profitability of the insurance business it writes and to assess the adequacy of the Company’s pricing. The net loss and settlement expense ratio is meaningful in evaluating the Company’s financial results, which are net of ceded reinsurance, as reflected in the consolidated financial statements. The loss and settlement expense ratios are generally calculated in the same way for GAAP and statutory accounting purposes.

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Underlying Loss and Settlement Expense Ratio. Management uses certain non-GAAP financial measures for evaluating the Company’s performance. These measures are considered non-GAAP financial measures under applicable Securities and Exchange Commission (SEC) rules because they are not displayed as separate line items in the consolidated financial statements or are not required to be disclosed in the notes to financial statements or, in some cases, include or exclude certain items not ordinarily included or excluded in the most comparable GAAP financial measure. The Company’s calculation of non-GAAP financial measures may differ from similar measures used by other companies, so investors should exercise caution when comparing the Company’s non-GAAP financial measures to the measures used by other companies. In this report, a non-GAAP financial measure known as the "underlying loss and settlement expense ratio" is utilized in describing the Company's results of operations with respect to the property and casualty insurance segment. The most directly comparable GAAP financial measure is reconciled to this non-GAAP financial measure under "Results of Operations" section later in this discussion.

The underlying loss and settlement expense ratio represents the loss and settlement expense ratio, excluding the impact of catastrophe and storm losses and development on prior years’ reserves. Management uses this ratio as an indicator of the property and casualty insurance segment’s underwriting discipline and performance for the current accident year. Management believes this ratio is useful for investors to understand the property and casualty insurance segment’s periodic earnings and variability of earnings caused by the unpredictable nature (i.e., the timing and amount) of catastrophe and storm losses and development on prior years’ reserves. While this measure is consistent with measures utilized by investors and analysts to evaluate performance, it is not intended as a substitute for the GAAP financial measure of loss and settlement expense ratio.

Acquisition Expense Ratio. The acquisition expense ratio is the ratio (expressed as a percentage) of net acquisition and other expenses incurred to premiums earned, and measures a company’s operational efficiency in producing, underwriting and administering its insurance business. For statutory accounting purposes, acquisition and other expenses of an insurance company exclude investment expenses. There is no such industry definition for determining an acquisition expense ratio for GAAP purposes. As a result, management applies the statutory definition to calculate the Company’s acquisition expense ratio on a GAAP basis. The net acquisition expense ratio is meaningful in evaluating the Company’s financial results, which are net of ceded reinsurance, as reflected in the consolidated financial statements.

GAAP Combined Ratio. The combined ratio (expressed as a percentage) is the sum of the loss and settlement expense ratio and the acquisition expense ratio, and measures a company’s overall underwriting profit/loss. If the combined ratio is at or above 100, an insurance company cannot be profitable without investment income (and may not be profitable if investment income is insufficient). Management uses the GAAP combined ratio in evaluating the Company’s overall underwriting profitability and as a measure for comparison of the Company’s profitability relative to the profitability of its competitors who prepare GAAP-basis financial statements.

Statutory Combined Ratio. The statutory combined ratio (expressed as a percentage) is calculated in the same manner as the GAAP combined ratio, but is based on results determined pursuant to statutory accounting rules and regulations. The statutory “trade combined ratio” differs from the statutory combined ratio in that the acquisition expense ratio is based on net premiums written rather than net premiums earned. Management uses the statutory trade combined ratio as a measure for comparison of the Company’s profitability relative to the profitability of its competitors, all of whom must file statutory-basis financial statements with insurance regulatory authorities.

Catastrophe and storm losses. For the property and casualty insurance segment, catastrophe and storm losses include losses attributed to events that have occurred in the United States which have been assigned an occurrence number by the Property & Liability Resource Bureau (PLRB) Catastrophe Services. According to PLRB, an occurrence number is assigned when an event has produced conditions severe enough to have caused, or to be likely to have caused, property damage. For the reinsurance segment, catastrophe and storm losses include losses that have occurred in the United States, Puerto Rico and the U.S. Virgin Islands which have been designated as catastrophes by Property Claims Services (PCS), as well as non-U.S. catastrophe and storm losses reported by the ceding companies. According to PCS, catastrophe serial numbers are assigned to events that cause $25.0 million or more in direct insured losses to property, and affect a significant number of policyholders and insurers.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the Company's financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements and related disclosures. The Company's significant accounting policies are described in note 1, Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K. The following estimates and assumptions are considered by management to be critically important in the preparation and understanding of the Company's financial statements and related disclosures. The estimates and assumptions utilized are complex and require subjective judgment.

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Loss and settlement expense reserves

Processes and assumptions for establishing loss and settlement expense reserves

Estimated ultimate loss and allocated settlement expense amounts for most claims are established by accident year and line of business using standard actuarial techniques. At each reporting date, the amounts to be carried for incurred but not reported (IBNR) loss reserves and allocated settlement expense reserves are determined by subtracting the amounts incurred to date (paid amounts plus case loss reserves carried for reported claims) from the estimated ultimate amounts. Under this methodology, changes in the incurred amounts result in corresponding adjustments to the reserve amounts.

In the reinsurance segment, Employers Mutual records the case and IBNR loss reserves reported by the ceding companies for the Home Office Reinsurance Assumed Department ("HORAD") book of business. Since many ceding companies in the HORAD book of business do not report IBNR loss reserves, Employers Mutual establishes a bulk IBNR loss reserve, which is based on an actuarial reserve analysis, to cover a lag in reporting. For Mutual Re, Employers Mutual records the case and IBNR loss reserves reported to it by the management of the association, along with a relatively small IBNR loss reserve to cover a one-month reporting lag. The booking of the lag IBNR loss reserve may be suspended, and negative bulk IBNR loss reserves may be established, during periods when the actuarial reviews indicate Mutual Re's carried reserves are more than adequate to cover its liabilities. To verify the adequacy of the reported reserves, an actuarial evaluation of Mutual Re’s reserves is performed at each year-end.

Property and Casualty Insurance Segment

Following is a summary of the carried loss and settlement expense reserves for the property and casualty insurance segment at December 31, 2018 and 2017.



	December 31,
($ in thousands) Line of business	2018		2017
Commercial lines:
Automobile	$	128,130	$	118,666
Property	41,886		37,477
Workers' compensation	166,890		156,632
Liability	180,992		173,394
Other	2,791		3,410
Total commercial lines	520,689		489,579

Personal lines	11,223		13,285
Total property and casualty insurance segment	$	531,912	$	502,864

Branch claims personnel establish case loss reserves for individual claims, with mandatory home office claims department review of reserves that exceed a specified threshold. The philosophy utilized to establish case loss reserves is exposure based, and implicitly assumes a consistent inflationary and legal environment. When claims department personnel establish case loss reserves, they take into account various factors that influence the potential exposure.

The claims department has implemented specific line-of-business guidelines that are used to establish the individual case loss reserve estimates. These guidelines, which are used for both short-tail and long-tail claims, require the claims department personnel to reserve for the probable (most likely) exposure for each claim. Probable exposure is defined as what is likely to be awarded if the case were to be decided by a civil court in the applicable venue or, in the case of a workers’ compensation case, by that state’s Workers’ Compensation Commission. This evaluation process is repeated throughout the life of the claim at regular intervals, and as additional information becomes available. While performing these regular reviews, the branch claims personnel are able to make adjustments to the case loss reserves for location and time specific factors, such as legal venue, inflation, and changes in applicable laws.

To provide consistency in the reserving process, the claims department utilizes established claims management processes and an automated claims system. Claims personnel conduct periodic random case loss reserve reviews to verify the accuracy of the reserve estimates and adherence to the reserving guidelines. In addition, the claims department has specific line-of-business management controls for case loss reserves. For example, all workers’ compensation claim files are reviewed by management before benefits are declined, and all casualty case loss reserves are reviewed every 60 days for reserve adequacy.

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The automated claims system utilizes an automatic diary process that helps ensure that case loss reserve estimates are reviewed on a regular basis. The claims system requires written documentation each time a case loss reserve is established or modified, and provides management with the information necessary to perform individual reserve reviews and monitor reserve development. In addition, the claims system produces monthly reports that allow management to analyze case loss reserve development in the aggregate, by branch, by line of business, or by claims adjuster.

As previously noted, ultimate loss and allocated settlement expense amounts expected to be incurred are established by accident year and line of business. The amount of IBNR loss and allocated settlement expense reserves carried at each reporting date is determined by subtracting the amounts incurred to date from the ultimate estimated incurred amounts.

Ceded loss reserves are derived by applying the ceded contract terms to the direct loss reserves. For excess of loss contracts (excluding the catastrophe contract), this is accomplished by applying the ceded contract terms to the case loss reserves of the ceded claims. For the catastrophe excess of loss contract, ceded loss reserves are calculated by applying the contract terms to (1) the aggregate case loss reserves on claims stemming from catastrophes and (2) the estimate of IBNR loss reserves developed for each individual catastrophe. For quota share contracts, ceded loss reserves are calculated as the quota share percentage multiplied by both case and IBNR loss reserves on the direct business.

Internal actuarial evaluations of the prior quarter’s overall loss reserve levels are performed each quarter for all direct lines of business. There is a certain amount of random variation in loss and allocated settlement expense development patterns, which results in some uncertainty regarding the estimated ultimate projections, particularly for longer-tail lines such as workers’ compensation, other liability and commercial auto liability. Therefore, the reasonableness of the actuarial projections is regularly monitored through an examination of the assumptions underlying those projections.

As previously noted, one assumption underlying the reserve estimation process is that the inflation trends implicitly built into the historical loss and allocated settlement expense development patterns will continue into the future. To estimate the sensitivity of the estimated ultimate loss and allocated settlement expense payments to an unexpected change in inflationary trends, the actuarial department derived expected payment patterns separately for each major line of business. These patterns were applied to the December 31, 2018 loss and allocated settlement expense reserves to generate estimated annual incremental loss and allocated settlement expense payments for each subsequent calendar year. Then, for the purpose of sensitivity testing, an explicit annual inflationary variance of one percent was added to the inflationary trend that is implicitly embedded in the estimated payment patterns, and revised incremental loss and settlement expense payments were calculated. This unexpected inflation trend could arise from a variety of sources including a change in economic inflation, social inflation and, especially for the workers’ compensation line of business, the introduction of new medical technologies and procedures, changes in the utilization of procedures and changes in life expectancy. The estimated cumulative impact that this unexpected one percent variance in the inflationary trend would have on the Company’s results of operations over the lifetime of the underlying claims is shown below. A variance in the inflationary trend would also affect the Company’s financial position in that the Company’s equity would be impacted by an amount equivalent to the change in net income. A variance of this type would typically be recognized in loss and settlement expense reserves and, accordingly, would not have a material effect on liquidity because the claims have not been paid. A one percent variance in the projected inflationary trend is considered reasonably likely based on the range of actuarial indications developed during the analysis of the property and casualty insurance segment’s carried reserves. The after-tax impact on earnings is calculated using the federal corporate tax rate of 21 percent.



($ in thousands) Line of business	After-tax impact on earnings from a one percent variance in the projected inflationary trend
Personal auto liability	$(69)	to	$70
Commercial auto liability	(1,586)	to	1,616
Auto physical damage	(30)	to	26
Workers' compensation	(4,930)	to	5,560
Other liability	(4,954)	to	5,437
Property	(350)	to	360
Homeowners	(16)	to	16

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The Company uses standard actuarial methods to produce estimates of ultimate loss ratios by accident year and line of business. Underlying each selection are explicit assumptions regarding the ultimate claim frequency and severity associated with the selected ultimate ratio. As the assumptions are based on estimates made at a specific point in time, it is likely that the ultimate claim frequency and severity experience, and, therefore, the ultimate loss ratio, will vary upwards or downwards from prior estimates. The expected variation will be greater for less mature accident years, and decreases as each accident year ages. This uncertainty is reflected in the unpaid loss estimates underlying the selected estimated ultimate loss ratios, which produce the carried loss reserves. Assuming the unpaid loss estimates are unbiased, the cumulative impact on the Company's results of operations of a one percent variance in the associated carried loss reserves over the lifetime of the underlying claims is shown below. A variance in carried loss reserves would also affect the Company’s financial position in that the Company’s equity would be impacted by an amount equivalent to the change in net income. A one percent variance in the unpaid loss estimates underlying the selected ultimate loss ratio estimates is considered reasonably likely based on the range of actuarial indications developed during the analysis of the property and casualty insurance segment’s carried loss reserves. The after-tax impact on earnings is calculated using the federal corporate tax rate of 21 percent.



($ in thousands) Line of business	After-tax impact on earnings from a one percent variance in loss reserves
Personal auto liability	$(52)	to	$53
Commercial auto liability	(836)	to	853
Auto physical damage	(14)	to	15
Workers' compensation	(1,064)	to	1,086
Other liability	(1,069)	to	1,090
Property	(330)	to	337
Homeowners	(21)	to	21

Similar to the loss reserving process, the Company uses standard actuarial methods to produce estimates of ultimate ratios by accident year and line of business for allocated settlement expenses. Underlying each selection are explicit assumptions regarding the ultimate claim frequency and settlement expense severity associated with the selected estimated ultimate ratio. As the assumptions are based on estimates made at a specific point in time, it is likely that the ultimate allocated settlement expense ratios will vary upwards or downwards from prior estimates. The expected variation will be greater for less mature accident years, and decreases as each accident year ages. This uncertainty is reflected in the unpaid allocated settlement expense estimates underlying the selected estimated ultimate ratios, which produce the carried allocated settlement expense reserves. Assuming the unpaid allocated settlement expense estimates are unbiased, the cumulative impact on the Company's results of operations of a one percent variance in the associated allocated settlement expense reserves over the lifetime of the underlying claims is shown below. A variance in carried allocated settlement expense reserves would also affect the Company’s financial position in that the Company’s equity would be impacted by an amount equivalent to the change in net income. A one percent variance in the unpaid allocated settlement expense estimates underlying the selected estimated ultimate allocated settlement expense ratios is considered reasonably likely based on the range of actuarial indications developed during the analysis of the property and casualty insurance segment’s carried allocated settlement expense reserves. The after-tax impact on earnings is calculated using the federal corporate tax rate of 21 percent.



($ in thousands) Line of business	After-tax impact on earnings from a one percent variance in allocated settlement expense reserves
Personal auto liability	$(3)	to	$4
Commercial auto liability	(100)	to	102
Auto physical damage	(1)	to	1
Workers' compensation	(94)	to	96
Other liability	(337)	to	343
Property	(28)	to	29
Homeowners	(2)	to	2

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One of the variables impacting the estimation of loss reserves is the assumption that the vast majority of future construction defect losses will continue to occur in those states in which most construction defect claims have historically arisen. Since the vast majority of these losses have been confined to a relatively small number of states, which is consistent with industry experience, there is no provision in the loss reserve for a significant spread of construction defect claims to other states. It is also assumed that various underwriting initiatives implemented in recent years will gradually mitigate the amount of construction defect losses experienced. These initiatives include exclusionary endorsements, increased care regarding additional insured endorsements, a general reduction in the amount of contractor business written relative to the total commercial lines book of business, and underwriting restrictions on the writing of residential contractors. The estimation of the Company’s loss reserves also does not contemplate substantial losses from potential mass torts such as Methyl Tertiary Butyl Ether (a gasoline additive that reduces emissions, but causes pollution), tobacco, silicosis, cell phones and lead. Further, consistent with general industry practice, the loss reserve for all liability lines does not provide for any significant retroactive expansion of coverage through judicial interpretation. If these assumptions prove to be incorrect, ultimate paid amounts on losses may differ substantially from the carried loss reserves.

The estimation of settlement expense reserves assumes a consistent claims department philosophy regarding the defense of lawsuits. If the pool participants should in the future take a more aggressive defense posture, defense costs would increase and it is likely that the Company’s carried allocated settlement expense reserves would be deficient. However, such a change in philosophy would likely reduce losses, generating some offsetting redundancy in the loss reserves.

The property and casualty insurance subsidiaries have exposure to asbestos and environmental claims arising primarily from the other liability line of business. These exposures are closely monitored by management, and IBNR loss reserves have been established to cover estimated ultimate losses. The loss and settlement expense reserves associated with asbestos claims have increased each year for the last several years due to continued reporting of new claims at a rate not previously anticipated, as well as updated internal ultimate loss and settlement expense evaluations. In 2018, the settlement expense reserves for asbestos claims were strengthened by $1.5 million. During 2017, a settlement was reached with a former insured, resulting in the Company recognizing $4.5 million (its share) of losses and settlement expenses to remove all past and future asbestos liability exposure related to that policyholder.

Environmental IBNR loss reserves are established in consideration of the implied three-year survival ratio (ratio of loss and settlement expense reserves to the three-year average of loss and settlement expense payments). Estimation of ultimate liabilities for these exposures is unusually difficult due to unresolved issues such as whether coverage exists, the definition of an occurrence, the determination of ultimate damages and the allocation of such damages to financially responsible parties. Therefore, any estimation of these liabilities is subject to greater than normal variation and uncertainty, and ultimate payments for losses and settlement expenses for these exposures may differ significantly from the carried reserves.

Reinsurance Segment

Following is a summary of the carried loss and settlement expense reserves for the reinsurance segment at December 31, 2018 and 2017.



	December 31,
($ in thousands) Line of business	2018		2017
Pro rata reinsurance	$	53,937	$	58,087
Excess of loss reinsurance	191,341		171,661
Total reinsurance segment	$	245,278	$	229,748

The reinsurance book of business is comprised of two major components. The first is HORAD, which includes the reinsurance business assumed by the reinsurance subsidiary through the quota share agreement and the business written directly by the reinsurance subsidiary outside of the quota share agreement. The second is Mutual Re, which is a voluntary reinsurance pool in which Employers Mutual participates with four other unaffiliated insurers.

The primary actuarial methods used to project ultimate policy year losses on the assumed reinsurance business are paid development, incurred development and Bornhuetter-Ferguson. The assumptions underlying the various projection methods include stability in the mix of business, consistent claims processing procedures, immaterial impact of loss cost trends on development patterns, consistent case loss reserving practices and appropriate Bornhuetter-Ferguson expected loss ratio selections.

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At December 31, 2018, the carried reserves for HORAD and Mutual Re combined were in the upper third of the range of actuarial reserve indications. This selection reflects the fact that there are inherent uncertainties involved in establishing reserves for assumed reinsurance business. Such uncertainties include the fact that a reinsurance company generally has less knowledge than the ceding company about the underlying book of business and the ceding company’s reserving practices. Because of these uncertainties, there is a risk that the reinsurance segment’s reserves for losses and settlement expenses could prove to be inadequate, with a consequential adverse impact on the Company’s future earnings and stockholders’ equity.

At December 31, 2018, there was no backlog in the processing of assumed reinsurance information. Approximately $150.6 million, or 61 percent, of the reinsurance segment’s carried reserves were reported by the ceding companies. Employers Mutual receives loss reserve and paid loss data from its ceding companies on individual excess of loss contracts. If a claim involves a single or small group of claimants, a summary of the loss and claim outlook is normally provided. Summarized data is provided for catastrophe claims and pro rata business, which is subject to closer review if inconsistencies are suspected.

Carried reserves established in addition to those reported by the ceding companies totaled approximately $94.6 million at December 31, 2018. Since many ceding companies in the HORAD book of business do not report IBNR loss reserves, Employers Mutual establishes a bulk IBNR loss reserve to cover the lag in reporting. For the few ceding companies that do report IBNR loss reserves, Employers Mutual carries them as reported. These reported IBNR loss reserves are subtracted from the total IBNR loss reserve calculated by Employers Mutual’s actuaries, with the difference carried as bulk IBNR loss reserves. Except for a negative bulk IBNR loss reserve established by Employers Mutual's actuaries, and a small IBNR loss reserve generally established to cover a one-month lag in reporting, the Mutual Re IBNR loss reserve is established by the management of Mutual Re. Employers Mutual rarely records additional case loss reserves.

Assumed reinsurance losses tend to be reported later than direct losses. This lag is reflected in loss projection factors for assumed reinsurance that tend to be higher than for direct business. The result is that assumed reinsurance IBNR loss reserves as a percentage of total reserves tend to be higher than for direct loss reserves. IBNR loss reserves totaled $108.9 million and $103.1 million at December 31, 2018 and 2017, respectively, and accounted for approximately 44 percent and 45 percent, respectively, of the reinsurance segment’s total loss and settlement expense reserves. IBNR loss reserves are, by nature, less precise than case loss reserves. A five percent change in IBNR loss reserves at December 31, 2018 would equate to $4.3 million, net of tax, which represents 56.9 percent of the net loss reported for 2018 and 0.8 percent of stockholders’ equity.

As previously noted, the assumptions implicit in the methodologies utilized to establish reserves for the reinsurance segment are stability in the mix of business, consistent claims processing procedures, immaterial impact of loss cost trends on development patterns, consistent case loss reserving practices and appropriate Bornhuetter-Ferguson expected loss ratio selections. The tables below display the impact on the Company’s results of operations from (1) a one percent variance in case loss reserve adequacy from the level anticipated in the incurred loss projection factors, (2) a one percent variance in the implicit annual claims inflation rate, (3) a one percent variance in IBNR losses as a percentage of reported incurred losses (due, for example, to changes in mix of business or claims processing procedures) and (4) a one percent variance in the expected loss ratios used with the Bornhuetter-Ferguson method. In other words, under each scenario, future loss and settlement expense payments would be expected to vary from actuarial reserve estimates by the amounts shown below. These variances in future loss and settlement expense payments could occur in one year or over multiple years. Variances in future loss and settlement payments would also affect the Company’s financial position in that the Company’s equity would be impacted by an amount equivalent to the change in net income. Variances of this type would typically be recognized in loss and settlement expense reserves and, accordingly, would not have a material effect on liquidity because the claims have not been paid. Such variances are considered reasonably likely based on the range of actuarial indications developed during the analysis of the reinsurance segment’s carried reserves.

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The after-tax impact on the Company’s earnings, calculated using the federal corporate tax rate of 21 percent, under each scenario is as follows:



	Reinsurance segment
($ in thousands)	Mutual Re			HORAD
(1) One percent variance in case loss reserve adequacy from the level anticipated in the incurred loss projection factors	$(126)	to	$129	$(1,579)	to	$1,611

(2) One percent variance in the implicit annual claims inflation rate	(618)	to	683	(5,589)	to	6,193

(3) One percent variance in IBNR losses from the level anticipated in the loss projection factors	(54)	to	54	(833)	to	833

(4) One percent variance in the expected loss ratios used with the Bornhuetter-Ferguson method	(48)	to	48	(1,110)	to	1,110

To ensure the accuracy and completeness of the information received from the ceding companies, Employers Mutual’s actuarial department reviews contract years 1988 and subsequent every quarter, and all policy years on an annual basis. Any significant unexplained departures from historical reporting patterns are brought to the attention of the reinsurance department’s staff, who contacts the ceding company or broker for clarification.

Employers Mutual’s actuarial department annually reviews the Mutual Re reserves for reasonableness. These analyses use a variety of actuarial techniques, which are applied at a line-of-business level. Mutual Re staff supplies the reserve analysis data, which is verified for accuracy by Employers Mutual’s actuaries. This review process is replicated by certain other Mutual Re member companies, using actuarial techniques they deem appropriate. Based on these reviews, Employers Mutual and the other Mutual Re member companies have consistently found the Mutual Re reserves to be adequate.

For the HORAD book of business, paid and incurred loss development patterns for relatively short-tail lines of business (property and marine) are based on data reported by the ceding companies. Employers Mutual has determined that there is sufficient volume and stability in the reported losses to base projections of ultimate losses on these patterns. For longer tail lines of business (casualty), industry incurred development patterns supplement the data reported by ceding companies due to the instability of the development patterns based on reported historical losses.

For long-tail lines of business, unreliable estimates of unreported losses can result from the application of loss projection factors to reported losses. To some extent, this is also true for short-tail lines of business in the early stages of a policy year’s development. Therefore, in addition to loss-based projections, Employers Mutual generates estimates of unreported losses based on premiums earned. The latter estimates are sometimes more stable and reliable than projections based on losses.

Disputes with ceding companies do not occur often. Employers Mutual performs claims audits and encourages prompt reporting of reinsurance claims. Employers Mutual also reviews claim reports for accuracy, completeness and adequate reserving. Most reinsurance contracts contain arbitration clauses to resolve disputes, but such disputes are generally resolved without arbitration due to the long-term and ongoing relationships that exist with those companies. There were no matters in dispute at December 31, 2018.

Toxic tort (primarily asbestos), environmental and other uncertain exposures (property and casualty insurance segment and reinsurance segment)

Toxic tort claims include those where the claimant seeks compensation for harm allegedly caused by exposure to a toxic substance or a substance that increases the risk of contracting a serious disease, such as cancer. Typically, the injury is caused by latent effects of direct or indirect exposure to a substance or combination of substances through absorption, contact, ingestion, inhalation, implantation or injection. Examples of toxic tort claims include injuries arising out of exposure to asbestos, silica, mold, drugs, carbon monoxide, chemicals and lead.

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Since 1989, the pool participants have included an asbestos exclusion in liability policies issued for most lines of business. The exclusion prohibits liability coverage for “bodily injury”, “personal injury” or “property damage” (including any associated clean-up obligations) arising out of the installation, existence, removal or disposal of asbestos or any substance containing asbestos fibers. Therefore, the pool participants’ current asbestos exposures are primarily limited to commercial policies issued prior to 1989. At present, the pool participants are defending approximately 1,737 asbestos bodily injury lawsuits, some of which involve multiple plaintiffs. Claims activity associated with seven policyholders dominates the pool participants’ asbestos claims, representing an aggregate 1,727 lawsuits. Most of the lawsuits are subject to express reservation of rights based upon the lack of an injury within the applicable policy periods, because many asbestos lawsuits do not specifically allege dates of asbestos exposure or dates of injury. The pool participants’ policyholders named as defendants in these asbestos lawsuits are typically peripheral defendants who have little or no exposure and are often dismissed from asbestos litigation with nominal or no payment (i.e., small contractors, supply companies, and a furnace manufacturer).

Prior to 2008, actual losses paid for asbestos-related claims had been minimal due to the plaintiffs’ failure to identify an exposure to any asbestos-containing products associated with the pool participants’ current and former policyholders. However, paid losses and settlement expenses have increased significantly since 2008 as a result of claims attributed to one former policyholder. During the period 2009 through 2018, the Company's share of paid losses and settlement expenses attributed to this former policyholder, a furnace manufacturer, was $14.2 million (mostly settlement expenses). A coverage-in-place agreement was executed with this former policyholder in 2009 and a national coordinating counsel was retained to address the multi-state litigation issues. The national coordinating counsel has provided, and continues to provide, significant services in the areas of document review, discovery, deposition and trial preparation. The asbestos exposure associated with this former policyholder has increased in recent years, and this trend may possibly continue into the future with increased per plaintiff settlements. Approximately 702 asbestos exposure claims associated with this former policyholder remain open. During 2017, a settlement was reached with another former insured, resulting in the Company recognizing $4.5 million (its share) of losses and settlement expenses to remove all past and future asbestos liability exposure related to that policyholder.

The pool participants are defending approximately 40 lawsuits alleging “silica” exposure in Mississippi and Louisiana, some of which involve multiple plaintiffs. The plaintiffs allege employment exposure to “airborne respirable silica dust,” causing “serious and permanent lung injuries” (i.e., silicosis). Silicosis injuries are identified in the upper lobes of the lungs, while asbestos injuries are localized in the lower lobes.

The plaintiffs in the silicosis lawsuits are sandblasters, gravel and concrete workers, ceramic workers and road construction workers. All of these lawsuits are subject to express reservation of rights based upon the lack of an injury within the applicable policy periods because many silica lawsuits, like asbestos lawsuits, do not specifically allege dates of exposure or dates of injury. The pool participants’ policyholder (a sand and gravel hauler) that has been named as defendant in these silica lawsuits has had little or no exposure, and is routinely dismissed from silica litigation with nominal or no payment.

Since 2004, the pool participants have included a “pneumoconiosis dust” exclusion to their commercial lines liability policies in most jurisdictions where such action was warranted. This exclusion precludes liability coverage due to “mixed dust” pneumoconiosis, pleural plaques, pleural effusion, mesothelioma, lung cancer, emphysema, bronchitis, tuberculosis or pleural thickening, or other pneumoconiosis-related ailments such as arthritis, cancer (other than lung), lupus, heart, kidney or gallbladder disease. “Mixed dust” includes dusts composed of asbestos, silica, fiberglass, coal, cement, or various other elements. It is anticipated that this mixed dust exclusion will further limit the pool participants’ exposure in silica claims, and may be broad enough to limit exposure in other dust claims.

The Company’s environmental claims are defined as 1) claims for bodily injury, personal injury, property damage, loss of use of property, diminution of property value, etc., allegedly due to contamination of air, and/or contamination of surface soil or surface water, and/or contamination of ground water, aquifers, wells, etc.; or 2) any/all claims for remediation or clean-up of hazardous waste sites by the United States Environmental Protection Agency, or similar state and local environmental or government agencies, usually presented in conjunction with Federal or local clean up statutes (i.e., CERCLA, RCRA, etc.).

Examples include, but are not limited to: chemical waste; hazardous waste treatment, storage and/or disposal facilities; industrial waste disposal facilities; landfills; superfund sites; toxic waste spills; and underground storage tanks. Widespread use of pollution exclusions since 1970 in virtually all lines of business, except personal lines, has resulted in limited exposure to environmental claims. Absolute pollution exclusions have been used since the 1980’s; however, the courts in the State of Indiana have ruled that the absolute pollution exclusion is ambiguous.

The Company’s current exposures to environmental claims include losses involving petroleum haulers, lead contamination, and soil and groundwater contamination in the State of Indiana. Claims from petroleum haulers are generally caused by overturned commercial vehicles and overfills at commercial and residential properties. Exposures for accident year losses preceding the 1980s include municipality exposures for closed landfills, small commercial businesses involved with disposing waste at landfills, leaking underground storage tanks and contamination from dry cleaning operations.

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The Company’s exposure to asbestos and environmental claims through assumed reinsurance is limited due to the fact that the Company’s reinsurance subsidiary entered into the reinsurance marketplace in the early 1980’s, after much attention had already been brought to these issues.

At December 31, 2018, the Company carried asbestos and environmental reserves for direct insurance and assumed reinsurance business totaling $11.6 million, which represents 1.5 percent of total loss and settlement expense reserves. The asbestos and environmental reserves include $5.0 million of case loss reserves, $3.3 million of IBNR loss reserves and $3.4 million of bulk settlement expense reserves. Ceded reinsurance on these reserves totaled $513,000. Asbestos settlement expense reserves were strengthened by $1.5 million in 2018.

The pool participants’ non-asbestos direct product liability claims are considered to be highly uncertain exposures due to the many uncertainties inherent in determining the loss, and the significant periods of time that can elapse between the occurrence of the loss and the ultimate settlement of the claim. The majority of the pool participants’ product liability claims arise from small to medium-sized manufacturers, contractors, petroleum distributors, and mobile home and auto dealerships. No specific claim trends are evident from the pool participants’ manufacturing clients, as the claims activity on these policies is generally isolated and can be severe. Specific product liability coverage is provided to the pool participants’ mobile home and auto dealership policyholders, and the claims from these policies tend to be relatively small. Certain construction defect claims are also reported under product liability coverage. During 2018, 29 of these claims were reported to the pool participants.

The Company has exposure to construction defect claims arising from general liability policies issued by the pool participants to contractors. Most of the pool participants’ construction defect claims are concentrated in a limited number of states, and the pool participants have taken steps to mitigate this exposure. Construction defect is a highly uncertain exposure due to such issues as whether coverage exists, definition of an occurrence, determination of ultimate damages, and allocation of such damages to financially responsible parties. Newly reported construction defect claims numbered 392, 463 and 374 in 2018, 2017 and 2016, respectively, and produced incurred losses and paid settlement expenses of approximately $4.1 million, $4.8 million and $3.6 million in each respective period. Incurred losses and paid settlement expenses on all construction defect claims totaled approximately $6.4 million in 2018. At December 31, 2018, the Company carried case loss reserves of approximately $8.0 million on 398 open construction defect claims.

The Company’s assumed casualty excess reinsurance business is also considered a highly uncertain exposure due to the significant periods of time that can elapse during the settlement of the underlying claims, and the fact that a reinsurance company generally has less knowledge than the ceding company about the underlying book of business and the ceding company’s reserving practices. Employers Mutual attempts to account for this uncertainty by establishing bulk IBNR loss reserves, using conservative assumed treaty limits and, to a much lesser extent, booking of individual treaty IBNR loss reserves (if reported by the ceding company) or establishing additional case loss reserves if the reported case loss reserves appear inadequate on an individual claim. While Employers Mutual is predominantly a property reinsurer, it does write casualty excess business oriented mainly towards shorter-tail casualty lines of coverage. Employers Mutual avoids reinsuring large company working layer casualty risks, and does not write risks with heavy product liability exposures, risks with obvious latent injury manifestation and medical malpractice. Casualty excess business on large companies is written, but generally on a “clash” basis only (layers above the limits written for any individual policyholder) or specialty casualty written with claims-made forms.

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Following is a summary of loss and settlement expense reserves and payments associated with asbestos, environmental, products liability and casualty excess reinsurance exposures for 2018, 2017 and 2016:



	Property and casualty insurance segment							Reinsurance segment
($ in thousands)	Case			IBNR		Settlement expense		Case		IBNR		Settlement expense
Reserves at:
December 31, 2018
Asbestos	$	4,679		$	2,237	$	3,117	$	111	$	207	$	—
Environmental	170			210		255		54		601		—
Products¹	9,395			4,719		14,268		—		—		—
Casualty excess²	—			—		—		43,676		50,020		3,153
December 31, 2017
Asbestos	$	4,161		$	3,203	$	2,577	$	118	$	214	$	—
Environmental	182			268		280		58		606		—
Products¹	9,133			5,337		14,666		—		—		—
Casualty excess²	—			—		—		38,950		47,178		3,953
December 31, 2016
Asbestos	$	5,075		$	3,566	$	2,828	$	125	$	234	$	—
Environmental	178			377		292		60		607		—
Products¹	9,209			5,673		7,912		—		—		—
Casualty excess²	—			—		—		35,482		44,701		3,697

Paid during:
2018
Asbestos	$	448				$	960	$	14			$	—
Environmental	70					25		9				—
Products¹	3,426					2,446		—				—
Casualty excess²	—					—		18,007				2,499
2017
Asbestos	$	1,252				$	5,412	$	25			$	1
Environmental	9					10		2				—
Products¹	2,840					6,856		—				—
Casualty excess²	—					—		14,136				1,890
2016
Asbestos	$	605				$	986	$	24			$	3
Environmental	(8		)			28		20				—
Products¹	1,651					2,509		—				—
Casualty excess²	—					—		13,479				1,913

¹ Products includes the portion of asbestos and environmental claims reported that are non-premises/operations claims.

² Casualty excess includes the asbestos and environmental claims reported above.

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Following is a summary of the claim activity associated with asbestos, environmental and products liability exposures for 2018, 2017 and 2016:



	Asbestos	Environmental	Products
2018
Open claims at year-end	1,709	11	1,593
Reported	431	5	660
Disposed	413	4	541

2017
Open claims at year-end	1,691	10	1,474
Reported	537	7	589
Disposed	989	3	556

2016
Open claims at year-end	2,143	6	1,441
Reported	475	6	635
Disposed	474	4	674

Variability of loss and settlement expense reserves

During each quarter, an actuarially determined range of estimates is developed for the major components of the loss and settlement expense reserves as of the preceding quarter-end. All reserves are reviewed with the exception of reserves for involuntary workers’ compensation pools, which are set by the National Council on Compensation Insurance (NCCI) and are assumed to be adequate (the impact of potential variability of this segment on overall reserve adequacy is considered immaterial). Shown below are the actuarially determined ranges of reserve estimates as of December 31, 2018 along with the statutory-basis carried reserves, which are displayed net of ceded reinsurance. The GAAP-basis loss and settlement expense reserves contained in the Company’s financial statements are reported gross of ceded reinsurance, and contain a small number of adjustments from the statutory-basis amounts presented here. The last two columns display the estimated after-tax impact on earnings, calculated using the federal corporate tax rate of 21 percent, if the reserves were moved to the high end-point or low end-point of the ranges.



	Range of reserve estimates						After-tax impact on earnings
($ in thousands)	High		Low		Carried		Reserves at high			Reserves at low
Property and casualty insurance segment	$	525,109	$	446,406	$	503,771	$	(16,857	)	$	45,318
Reinsurance segment	249,388		209,858		239,309		(7,962		)	23,266
	$	774,497	$	656,264	$	743,080	$	(24,819	)	$	68,584

The precise location of total carried reserves within the actuarial range is unknown at the time the reserves are established because the actuarial evaluation of reserve adequacy is conducted after the establishment of the reserves.

Changes in loss and settlement expense reserve estimates of prior periods

Loss and settlement expense reserves are estimates at a given time of what an insurer expects to pay on incurred losses, based on facts and circumstances then known. During the loss settlement period, which may be many years, additional facts regarding individual claims become known, and accordingly, it often becomes necessary to refine and adjust the estimates of liability. Such changes in the reserves for losses and settlement expenses are reflected in net income in the year such changes are recorded.

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For a detailed discussion of the development experienced on prior accident years’ reserves during the past three years, see the discussion entitled “Loss and Settlement Expense Reserves” under the “Narrative Description of Business” heading in the Business Section under Part I, Item 1 of this Form 10-K.

Investments

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value.



	Level 1 -	Unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

	Level 2 -	Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

	Level 3 -	Prices or valuation techniques that require significant unobservable inputs because observable inputs are not available. The unobservable inputs may reflect the Company’s own judgments about the assumptions that market participants would use.

	NAV -	The fair values of investment company limited partnership investments and similar vehicles (referred to as investment funds) are based on the capital account balances reported by the investment funds subject to their management review and adjustment. These capital account balances reflect the fair value of the investment funds.

The Company uses an independent pricing source to obtain the estimated fair values of a majority of its securities, subject to an internal validation. The fair values are based on quoted market prices, where available. This is typically the case for equity securities and money market funds, which are accordingly classified as Level 1 fair value measurements. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security. Fixed maturity securities, non-redeemable preferred stocks and various short-term investments in the Company’s portfolio may not trade on a daily basis; however, observable inputs are utilized in their valuations, and these securities are therefore classified as Level 2 fair value measurements. Following is a brief description of the various pricing techniques used by the independent pricing source for different asset classes.


•	U.S. Treasury securities (including bonds, notes, and bills) are priced according to a number of live data sources, including active market makers and inter-dealer brokers. Prices from these sources are reviewed based on the sources’ historical accuracy for individual issues and maturity ranges.

•

U.S. government-sponsored agencies and corporate securities (including fixed-rate corporate bonds and medium-term notes) are priced by determining a bullet (non-call) spread scale for each issuer for maturities going out to forty years. These spreads represent credit risk and are obtained from the new issue market, secondary trading, and dealer quotes. An option adjusted spread model is incorporated to adjust spreads of issues that have early redemption features. The final spread is then added to the U.S. Treasury curve.

•

Obligations of states and political subdivisions are priced by tracking and analyzing actively quoted issues and reported trades, material event notices and benchmark yields. Municipal bonds with similar characteristics are grouped together into market sectors, and internal yield curves are constructed daily for these sectors. Individual bond evaluations are extrapolated from these sectors, with the ability to make individual spread adjustments for attributes such as discounts, premiums, alternative minimum tax, and/or whether or not the bond is callable.

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•

Mortgage-backed and asset-backed securities are first reviewed for the appropriate pricing speed (if prepayable), spread, yield and volatility. The securities are priced with models using spreads and other information solicited from market buy- and sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. To determine a tranche’s price, first the benchmark yield is determined and adjusted for collateral performance, tranche level attributes and market conditions. Then the cash flow for each tranche is generated (using consensus prepayment speed assumptions including, as appropriate, a prepayment projection based on historical statistics of the underlying collateral). The tranche-level yield is used to discount the cash flows and generate the price. Depending on the characteristics of the tranche, a volatility-driven, multi-dimensional single cash flow stream model or an option-adjusted spread model may be used. When cash flows or other security structure or market information is not available, broker quotes may be used.

On a quarterly basis, the Company receives from its independent pricing service a list of fixed maturity securities, if any, that were priced solely from broker quotes. For these securities, fair value may be determined using the broker quotes, or by the Company using similar pricing techniques as the Company’s independent pricing service. Depending on the level of observable inputs, these securities would be classified as Level 2 or Level 3 fair value measurements. At December 31, 2018 and 2017, the Company had no securities priced solely from broker quotes.

Essentially all securities in the Company’s investment portfolios have transparent pricing. All equity securities (with three exceptions) are traded on national exchanges with observable prices. Fixed maturity securities are typically high quality, liquid issues with daily pricing from the Company’s independent pricing source. Prices are validated through a variety of techniques. When performing these validations, the Company uses graduated tolerance levels for determining exceptions. Equity securities and U.S. treasury and government-sponsored agency fixed maturity securities have the highest transparency in pricing, and therefore have the smallest tolerance levels for variance. These are followed by (in order of decreasing transparency/increasing tolerance levels) municipal, corporate, high-yield and finally mortgage-backed fixed maturity securities. The validations performed include:


1.	Comparisons of the prices reported by the independent pricing source to daily runs of offerings and bids from several brokers for a sample of securities.


2.	Comparison of the prices reported by the independent pricing source to prices realized from the Company’s own purchase and sale transactions.


3.	Comparison of the prices reported by the independent pricing source to prices from the Company’s investment custodian. It should be noted that the independent pricing source used by the Company is often the same source used by the Company’s investment custodian, thus limiting the confidence gained from this validation technique.

Rarely are the independent pricing source’s prices outside of tolerance levels. This is most likely to occur in less frequently traded municipal fixed maturity securities, where the price reported by the independent pricing source may have become stale due to a lack of recent trading activity. If it is believed that the price reported by the independent pricing source does not reflect the quality, maturity, optionality and liquidity characteristics of the fixed maturity security, alternative pricing sources are examined, including Bloomberg matrix pricing, regression pricing, and broker runs for offering prices of similar securities. A judgment is then made as to what price best reflects the characteristics of the security, and if the result is materially different than the fair value reported by the independent pricing source for that security, then management’s judgment of the fair value is used in the financial statements.

Investment Impairments

The Company regularly monitors its investment portfolio for investments whose fair value is less than the carrying value for indications of “other-than-temporary” impairment (except for, beginning in 2018, equity securities carried at fair value, with changes in fair value recognized in net income). Several factors are used to determine whether the carrying value of an individual investment has been “other-than-temporarily” impaired. Such factors include, but are not limited to (1) the investment’s value and performance in the context of the overall markets, (2) length of time and extent the investment’s fair value has been below carrying value, (3) key corporate events, and (4) the amount of collateral available. For fixed maturity securities, if the present value of cash flows expected to be collected is less than the amortized cost of the security, a credit loss is deemed to exist and the security is considered “other-than-temporarily” impaired. The portion of the impairment related to a credit loss is recognized through earnings, and the portion of the impairment related to other factors, if any, is recognized through “other comprehensive income”. Alternatively, if the Company has the intent to sell a fixed maturity security that is in an unrealized loss position, or determines that it will "more likely than not" be required to sell a fixed maturity security that is in an unrealized loss position before recovery of its amortized cost basis, then the carrying value is reduced to fair value and the entire amount of the impairment is recognized through earnings.

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Deferred policy acquisition costs and related amortization

Acquisition costs, consisting of commissions, premium taxes, and salary and benefit expenses (beginning in 2018, only the service cost component of the net periodic pension and postretirement benefit income/expense is included) of employees directly involved in the underwriting of insurance policies that are successfully issued, are deferred and amortized to expense as premium revenue is recognized. Deferred policy acquisition costs and related amortization are calculated separately for the property and casualty insurance segment and the reinsurance segment. The methodology followed in computing deferred policy acquisition costs limits the amount of such deferred costs to the estimated realizable value. In determining estimated realizable value, the computation gives effect to the premium to be earned, related investment income, anticipated losses and settlement expenses, anticipated policyholder dividends, and certain other costs expected to be incurred to administer the insurance policies as the premium is earned. The anticipated losses and settlement expenses are based on the segment’s projected loss and settlement expense ratios for the next twelve months, which include provisions for anticipated catastrophe and storm losses based on historical results adjusted for recent trends. Utilizing these projections, deferred policy acquisition costs for the property and casualty insurance segment and the reinsurance segment were not subject to limitation at December 31, 2018. Based on an analysis performed by management, the actuarial projections of the expected loss and settlement expense ratios for the next twelve months would have needed to increase 19.2 percentage points in the property and casualty insurance segment and 6.3 percentage points in the reinsurance segment before deferred policy acquisition costs would have been subject to limitation. Such increases in the expected loss and settlement expense ratios would likely be driven by many factors, including higher provisions for anticipated catastrophe and storm losses.

Deferred income taxes

The realization of the deferred income tax asset is based upon projections indicating that a sufficient amount of future taxable income will be earned to utilize the tax deductions that will reverse in the future. These projections are based on the Company’s history of producing significant amounts of taxable income, the current premium rate environment for both the property and casualty insurance segment and the reinsurance segment, and initiatives that have been implemented recently to improve performance in the commercial auto and personal lines of business. In addition, management has formulated tax-planning strategies that could be implemented to generate taxable income if needed. Should the projected taxable income and tax planning strategies not provide sufficient taxable income to recover the deferred tax asset, a valuation allowance would be required.

Benefit Plans

Employers Mutual sponsors two defined benefit pension plans (a qualified plan and a non-qualified supplemental plan) and two postretirement benefit plans that provide certain health reimbursement arrangement (HRA) and life insurance benefits for eligible retired employees. Although the Company has no employees of its own, it is responsible for its share of the expenses and related prepaid assets and liabilities of these plans, as determined under the terms of the pooling agreement and the cost allocation methodologies applicable to its subsidiaries that do not participate in the pooling agreement.

The net periodic pension and postretirement benefit costs, as well as the prepaid assets and liabilities of these plans, are determined by actuarial valuations. Inherent in these valuations are key assumptions regarding the discount rate and the expected long-term rate of return on plan assets. The assumptions used in the actuarial valuations are updated annually. Material changes in the net periodic pension and postretirement benefit costs may occur in the future due to changes in these assumptions or changes in other factors, such as the number of plan participants, the level of benefits provided, asset values and applicable legislation or regulations.

The discount rate utilized in the valuations is based on an analysis of the total rate of return that could be generated by a hypothetical portfolio of high-quality bonds created to generate cash flows that match the plans’ expected benefit payments. No callable bonds are used in this analysis and the discount rate produced by this analysis is compared to interest rates of applicable published indices for reasonableness. The discount rates used in the pension benefit obligation valuations at December 31, 2018, 2017 and 2016 were 4.24 percent, 3.60 percent and 4.07 percent, respectively. The discount rates used in the postretirement benefit obligation valuations at December 31, 2018, 2017 and 2016 were 4.27 percent, 3.63 percent and 4.21 percent, respectively. The discount rates used in the pension and postretirement benefit obligation valuations are also used in the calculation of the net periodic benefit costs for the subsequent year. A 0.25 percentage point decrease in the discount rates used in the 2018 valuations would increase the Company’s net periodic pension and postretirement benefit costs for 2019 by approximately $255,000. Conversely, a 0.25 percentage point increase in the 2018 discount rates would decrease the Company’s net periodic pension and postretirement benefit costs for 2019 by approximately $243,000.

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The expected long-term rate of return on plan assets is developed considering actual historical results, current and expected market conditions, the mix of plan assets and investment strategy. The expected long-term rate of return on plan assets produced by this analysis and used in the calculation of the net periodic pension benefit costs for the years ended December 31, 2018 and 2017 was 7.00 percent and 7.00 percent, respectively. The expected long-term rate of return on plan assets used in the calculation of the net periodic postretirement benefit costs for the years ended December 31, 2018 and 2017 was 6.50 percent and 6.50 percent, respectively. The expected rate of return on plan assets to be used in the calculation of the 2019 net periodic benefit costs for the pension and postretirement benefit plans will be 7.00 percent and 6.50 percent, respectively. The actual rate of return earned on plan assets during 2018 was approximately negative 7 percent for the pension plan and negative 6 percent for the postretirement benefit plans. The expected long-term rate of return assumption is subject to the general movement of the economy, but is generally less volatile than the discount rate assumption. A decrease in the expected long-term rate of return assumption increases future expenses, whereas an increase in the assumption reduces future expenses. A 0.25 percentage point change in the expected long-term rate of return assumption for 2019 would change the Company’s net periodic pension and postretirement benefit costs by approximately $284,000. For detailed information regarding the current allocation of assets within the pension and postretirement benefit plans, see note 12 of Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.

In accordance with GAAP, actuarial gains/losses contained in the valuations that result from (1) actual experience that differs from that assumed, or (2) a change in actuarial assumptions, is accumulated and, if in excess of a specified corridor, amortized to expense over future periods. As of December 31, 2018, all of the benefit plans had accumulated actuarial losses in excess of the corridor that will be partially amortized into expense in 2019. The Company’s share of the accumulated actuarial losses that will be amortized into expense during 2019 amounts to $998,000. Prior service credits for plan amendments are also contained in the valuations, and are amortized into income over the future service periods of the participants. As of December 31, 2018, the postretirement benefit plans have prior service credits that are being amortized into income in future periods. The Company's share of the prior service credit being amortized into income during 2019 is $2.6 million.

In accordance with GAAP, the funded status of defined benefit pension and other postretirement plans is recognized as an asset or liability on the balance sheet.

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RESULTS OF OPERATIONS

Results of operations by segment and on a consolidated basis for the three years ended December 31, 2018 are as follows:



	Year ended December 31,
($ in thousands)	2018			2017			2016
Property and casualty insurance
Premiums earned	$	495,447		$	472,369		$	456,467
Losses and settlement expenses	332,921			302,973			294,369
Acquisition and other expenses	179,045			166,589			163,565
Underwriting profit (loss)	$	(16,519	)	$	2,807		$	(1,467	)

GAAP ratios:
Loss and settlement expense ratio	67.2		%	64.1		%	64.5		%
Acquisition expense ratio	36.1		%	35.3		%	35.8		%
Combined ratio	103.3		%	99.4		%	100.3		%

Reconciliation of loss and settlement expense ratio to underlying loss and settlement expense ratio¹:
Loss and settlement expense ratio	67.2		%	64.1		%	64.5		%
Catastrophe and storm losses	(7.5		)%	(6.3		)%	(7.7		)%
Favorable development on prior years' reserves	3.1		%	3.3		%	5.4		%
Underlying loss and settlement expense ratio	62.8		%	61.1		%	62.2		%

Favorable development on prior years' reserves²	$	(15,318	)	$	(15,735	)	$	(24,421	)

Catastrophe and storm losses	$	37,000		$	29,587		$	35,299

¹ Underlying loss and settlement expense ratio: The loss and settlement expense ratio is the ratio (expressed as a percentage) of losses and settlement expenses incurred to premiums earned, which management uses as a measure of underwriting profitability of the Company’s property and casualty insurance business. The underlying loss and settlement expense ratio is a non-GAAP financial measure which represents the loss and settlement expense ratio, excluding the impact of catastrophe and storm losses and development on prior years’ reserves. Management uses this ratio as an indicator of the property and casualty insurance segment’s underwriting discipline and performance for the current accident year. Management believes this ratio is useful for investors to understand the property and casualty insurance segment’s periodic earnings and variability of earnings caused by the unpredictable nature (i.e., the timing and amount) of catastrophe and storm losses and development on prior years’ reserves. While this measure is consistent with measures utilized by investors and analysts to evaluate performance, it is not intended as a substitute for the GAAP financial measure of loss and settlement expense ratio.

² During the third quarter of 2016, management implemented a new reserving methodology for the determination of direct bulk reserves in the property and casualty insurance segment. The new methodology, which is referred to as the accident year ultimate estimate approach, better conforms to industry practices and provides increased transparency of the drivers of the property and casualty insurance segment's performance. In connection with this change in reserving methodology, there was a reallocation of IBNR loss reserves and allocated settlement expense reserves from prior accident years to the current accident year in multiple lines of business. This resulted in the movement of approximately $5.6 million of reserves from prior accident years to the current accident year that was technically reportable as favorable development; however, this development was "mechanical in nature" and did not have an impact on earnings because the total amount of carried reserves did not change. This "mechanical" development amount was excluded from the favorable development amount presented for 2016 to improve comparability.

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	Year ended December 31,
($ in thousands)	2018			2017			2016
Reinsurance
Premiums earned	$	149,736		$	134,789		$	135,941
Losses and settlement expenses	124,238			118,996			92,528
Acquisition and other expenses	34,791			31,849			33,059
Underwriting profit (loss)	$	(9,293	)	$	(16,056	)	$	10,354

GAAP ratios:
Loss and settlement expense ratio	83.0		%	88.3		%	68.1		%
Acquisition expense ratio	23.2		%	23.6		%	24.3		%
Combined ratio	106.2		%	111.9		%	92.4		%

Favorable development on prior years' reserves	$	(3,366	)	$	(3,884	)	$	(10,928	)

Catastrophe and storm losses	$	23,870		$	30,230		$	12,608

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	Year ended December 31,
($ in thousands, except per share amounts)	2018			2017			2016
Consolidated
REVENUES
Premiums earned	$	645,183		$	607,158		$	592,408
Net investment income	47,637			45,479			47,490
Net realized investment gains (losses) and, beginning in 2018, change in unrealized gains on equity investments	(41,252		)	6,556			4,074
Other income	9,159			4,764			5,820
	660,727			663,957			649,792
LOSSES AND EXPENSES
Losses and settlement expenses	457,159			421,969			386,897
Acquisition and other expenses	213,836			198,438			196,624
Interest expense	654			337			337
Other expense	3,754			3,397			2,727
	675,403			624,141			586,585

Income (loss) before income tax expense (benefit)	(14,676		)	39,816			63,207
Income tax expense (benefit)	(7,208		)	578			17,004
Net income (loss)	$	(7,468	)	$	39,238		$	46,203

Net income (loss) per share	$	(0.35	)	$	1.84		$	2.20

GAAP ratios:
Loss and settlement expense ratio	70.9		%	69.5		%	65.3		%
Acquisition expense ratio	33.1		%	32.7		%	33.2		%
Combined ratio	104.0		%	102.2		%	98.5		%

Favorable development on prior years' reserves²	$	(18,684	)	$	(19,619	)	$	(35,349	)

Catastrophe and storm losses	$	60,870		$	59,817		$	47,907

² See note above regarding adjustments made to the development amount presented for the property and casualty insurance segment in 2016.

2018 Corporate Events

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Year ended December 31, 2018 compared to year ended December 31, 2017

The Company reported a net loss of $7.5 million ($(0.35) per share) in 2018 compared to net income of $39.2 million ($1.84 per share) in 2017. Included in the net loss reported for 2018 is a pre-tax decrease of $28.8 million in unrealized gains on the Company's equity investments stemming from the decline in equity markets that occurred in the fourth quarter. Updated accounting guidance adopted by the Company on January 1, 2018 requires that changes in unrealized gains and losses on equity investments be recognized in net income, whereas in 2017 and prior years these amounts were recognized through other comprehensive income. Also included in the net loss reported for 2018 is a $12.4 million pre-tax realized investment loss, primarily resulting from $11.9 million of losses recorded in the fixed maturity portfolio during the fourth quarter, that was recognized to capture a $1.7 million tax benefit stemming from a 14 percent tax differential that could be achieved by carrying these losses back to a prior tax year subject to the previous 35 percent federal corporate tax rate. Net income in 2017 included a one-time $9.1 million deferred income tax benefit resulting from the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA). The enactment of the TCJA lowered the federal corporate tax rate from 35 percent to 21 percent beginning in 2018. From an underwriting perspective, the reinsurance segment's GAAP combined ratio decreased to 106.2 percent in 2018 from 111.9 percent in 2017, while the property and casualty insurance segment's GAAP combined ratio increased to 103.3 percent in 2018 from 99.4 percent in 2017.

The Company adopted updated accounting guidance on January 1, 2018 that requires the components of net periodic pension and postretirement benefit costs/income, other than the service cost component, to be presented in the income statement outside a subtotal of income from operations, if one is presented. The Company does not report a subtotal of income from operations in its consolidated statements of income; however, in conjunction with the adoption of this updated guidance, management elected to report all components of net periodic pension and postretirement benefit income, other than the service cost component, as other income in the consolidated statements of income. The service cost component continues to be reported in other underwriting expenses. This change in reporting was applied retrospectively for comparison purposes and did not impact any of the net income amounts reported, as other income and other underwriting expenses increased by the same amounts; however, it did increase the acquisition expense ratios, and therefore the combined ratios, by 1.2 percentage points in 2018, 0.9 percentage points in 2017 and 0.8 percentage points in 2016.

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Premiums earned, losses and settlement expenses incurred, and the corresponding loss and settlement expense ratios, by line of business for each segment and on a consolidated basis, for the two years ended December 31, 2018 are as follows:



	Year ended December 31,
	2018						2017
($ in thousands)	Premiums earned		Losses and settlement expenses		Loss and settlement expense ratio		Premiums earned		Losses and settlement expenses		Loss and settlement expense ratio
Property and casualty insurance
Commercial lines:
Automobile	$	128,496	$	106,266	82.7	%	$	118,224	$	100,915	85.4	%
Property	108,525		59,634		54.9	%	108,162		59,638		55.1	%
Workers' compensation	99,699		70,410		70.6	%	100,552		57,332		57.0	%
Other liability	110,400		67,061		60.7	%	98,674		56,021		56.8	%
Other	9,256		412		4.4	%	8,719		1,655		19.0	%
Total commercial lines	456,376		303,783		66.6	%	434,331		275,561		63.4	%
Personal lines	39,071		29,138		74.6	%	38,038		27,412		72.1	%
Total property and casualty insurance	$	495,447	$	332,921	67.2	%	$	472,369	$	302,973	64.1	%

Reinsurance
Pro rata reinsurance	$	44,610	$	27,281	61.2	%	$	44,636	$	29,862	66.9	%
Excess of loss reinsurance	105,126		96,957		92.2	%	90,153		89,134		98.9	%
Total reinsurance	$	149,736	$	124,238	83.0	%	$	134,789	$	118,996	88.3	%

Consolidated	$	645,183	$	457,159	70.9	%	$	607,158	$	421,969	69.5	%

Premium income

Premiums earned increased 6.3 percent to $645.2 million in 2018 from $607.2 million in 2017. Rate levels for both segments continue to be constrained by a high level of competition, especially for quality accounts with good loss experience; however, there were some indications of moderate rate level improvement during the year. Average rate level increases were slightly positive in the property and casualty insurance segment, with variances by line of business. The lines of business experiencing the greatest profitability challenges in the property and casualty insurance segment, namely commercial auto and personal lines, received larger (mid-single digit) rate increases. During the January 1, 2018 reinsurance renewal season, moderate price increases were achieved on most of the reinsurance segment's property per risk and catastrophe programs. The reinsurance industry is placing greater emphasis on wildfire exposures following a second consecutive year of significant losses from this peril. As a result, programs with wildfire losses received the largest rate level increases during the January 1, 2019 reinsurance renewal season, while other programs renewed flat, or down slightly.

Premiums earned for the property and casualty insurance segment increased 4.9 percent to $495.4 million in 2018 from $472.4 million in 2017. The majority of this increase is attributed to small rate level increases on renewal business, an increase in retained commercial lines policies and new commercial lines business. Commercial lines new business premium (representing 14 percent of the pool participants’ direct premiums written) was approximately 8 percent higher than in 2017. Management continues to seek growth in most territories for its commercial lines of business, particularly outside of the core Midwest market, which will help diversify the pool participants' book of business geographically while staying consistent with the industry and the commercial lines mix of business. Renewal business premium increased approximately 5 percent during 2018. After factoring in the continued implementation of some mandatory rate reductions on workers' compensation business, the overall rate change on renewal business was approximately 1.7 percent. Rate levels are expected to be mixed during 2019, with the largest rate increases expected in the commercial auto line of business. Rate decreases are expected to slow or stop in the workers' compensation and general liability lines of business, and rates on most other lines of business are expected to increase slightly. Policy retention remained strong during 2018 at 87 percent.

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Premiums earned for the reinsurance segment increased 11.1 percent to $149.7 million in 2018 from $134.8 million in 2017. This increase is primarily attributed to increases in participation and higher estimated premiums achieved on existing multi-line contracts and a specialty casualty contract, and the addition of some new excess of loss business. These increases were partially offset by a continued decline in premiums reported by Mutual Re due to its withdrawal from non-standard automobile business. Underwriting capacity tightened somewhat during the January 1,2019 renewal season. As a result, reinsurance rate levels were mixed, with increases on programs that sustained losses from wildfires and other catastrophe losses, while rate levels remained stable on programs not affected by 2017 and 2018 catastrophic events.

Losses and settlement expenses

Losses and settlement expenses increased 8.3 percent to $457.2 million in 2018 from $422.0 million in 2017, and the loss and settlement expense ratio increased to 70.9 percent in 2018 from 69.5 percent in 2017. The increase in the loss and settlement expense ratio is primarily attributed to a high level of non-catastrophe losses experienced in the property and casualty insurance segment during the first half of the year. Catastrophe and storm losses were unusually high in both years due to active weather patterns in the Midwest, increased hurricane activity and the California wildfires. The inter-company reinsurance programs continue to perform as expected, and have helped to reduce the volatility of the Company's quarterly earnings. The actuarial analysis of the Company’s carried reserves at December 31, 2018 indicates that they are in the upper third of the range of reasonable reserves.

The loss and settlement expense ratio for the property and casualty insurance segment increased to 67.2 percent in 2018 from 64.1 percent in 2017. The underlying loss and settlement expense ratio, which excludes the impact of catastrophe and storm losses and development on prior years' reserves, increased 1.7 percentage points to 62.8 percent in 2018 from 61.1 percent in 2017. This increase is primarily attributed to the workers' compensation line of business, and reflects an adjustment made to the first quarter ultimate loss and settlement expense ratio during the second quarter. This was deemed necessary after it became apparent that the ultimate loss and settlement expense ratio established for the first quarter needed to be revised due to unanticipated increases in both the frequency and severity of first quarter reported losses as claims emerged during the second quarter. Although loss frequency and severity assumptions returned to more normal levels during the second half of the year, there is less premium to cover projected losses due to the mandatory rate level decreases that have been implemented during the past several years. Management is beginning to see improvement in some of the metrics used to evaluate the performance of the commercial auto line of business; however, it continued to under-perform expectations due to adverse development experienced on prior years' reserves, posting a loss and settlement expense ratio of 82.7 percent in 2018 compared to 85.4 percent in 2017.

Favorable development on the property and casualty insurance segment's prior years' reserves totaled $15.3 million and $15.7 million in 2018 and 2017, respectively. Included in the development amount reported for 2018 is $1.5 million of adverse development due to strengthening of asbestos settlement expense reserves. Included in the development amount reported for 2017 is $4.5 million of adverse development experienced in the other liability line of business stemming from the settlement of claims for past and future legal fees and losses on a multi-year asbestos exposure associated with a former insured. Management's experience with selecting ultimate loss and settlement expense ratios under the accident year ultimate methodology implemented in 2016 has led to more refined ultimate selections closer to the actuarial central estimate. As a result, the magnitude of favorable development reported in future periods is expected to be somewhat less than what has been observed in recent periods. For a detailed discussion of the development experienced on prior accident years’ reserves during 2018 and 2017, see the discussion entitled “Loss and Settlement Expense Reserves” under the “Narrative Description of Business” heading in the Business Section under Part I, Item 1 of this Form 10-K.

Catastrophe and storm losses totaled $37.0 million in 2018, compared to $29.6 million in 2017. The 2018 amount was capped at $37.0 million because the retention amounts under both of the semi-annual aggregate excess of loss treaties with Employers Mutual were filled ($22.0 million in the first half of the year and $15.0 million in the second half of the year). There were seven events in 2018 that generated losses of $2.0 million or more. Six of those events stemmed from Midwest convective storms that produced wind, hail and/or tornado damage. The seventh event involved losses associated with Hurricane Florence. Current accident year catastrophe and storm losses, net of the amounts ceded to Employers Mutual, accounted for 7.5 percentage points of the loss and settlement expense ratio in 2018, compared to 6.3 percentage points in 2017. Catastrophe and storm losses ceded to Employers Mutual totaled $5.2 million in 2018, compared to $19.2 million in 2017. The inter-company reinsurance program had no impact on the loss and settlement expense ratio reported for 2018, but reduced the ratio by 3.1 percentage points in 2017. The inter-company reinsurance program has been renewed for 2019, with no change in terms.

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The loss and settlement expense ratio for the reinsurance segment decreased to 83.0 percent in 2018 from 88.3 percent in 2017. This decrease is primarily attributed to a reduction in catastrophe and storm losses, despite a record $18.5 million incurred in the fourth quarter of 2018. Current accident year catastrophe and storm losses totaled $23.9 million in 2018 and accounted for 15.9 percentage points of the loss and settlement expense ratio, compared to $30.2 million and 22.4 percentage points in 2017. Nearly half of the record fourth quarter catastrophe and storm losses resulted from the California wildfires, with the majority of the remaining losses stemming from Hurricane Michael and Typhoon Jebi. Only catastrophic events with total losses greater than $500,000 are subject to the terms of the inter-company annual aggregate excess of loss treaty. In 2018, such losses did not exceed the $20 million retention amount. As a result, no recoveries were made under the treaty and all catastrophe and storm losses were retained. However, the reinsurance subsidiary did recover $5.2 million under external reinsurance protections purchased in 2017 to provide additional protection in peak exposure territories. The reinsurance subsidiary retained 20 percent of this recovery in accordance with the co-participation provision of the inter-company reinsurance program, with the remaining 80 percent ceded to Employers Mutual. In 2017, the reinsurance subsidiary incurred a significant amount of catastrophe and storm losses, primarily from Hurricanes Harvey, Irma and Maria, California wildfires and two Mexico earthquakes. The reinsurance subsidiary retained the first $20 million of qualifying losses and 20 percent of all qualifying losses above that amount, and ceded $16.8 million of catastrophe and storm losses to Employers Mutual under the inter-company reinsurance program. Taking the loss recoveries and the premiums paid to Employers Mutual into consideration, the inter-company reinsurance program increased the reinsurance segment's loss and settlement expense ratio by 5.8 percentage points in 2018, and reduced it by 9.0 percentage points in 2017. The inter-company reinsurance program has been renewed for 2019, with no change in terms. The reinsurance subsidiary reported favorable development on prior years' reserves totaling $3.4 million in 2018, compared to $3.9 million in 2017. For a detailed discussion of the development experienced on prior accident years’ reserves during 2018 and 2017, see the discussion entitled “Loss and Settlement Expense Reserves” under the “Narrative Description of Business” heading in the Business Section under Part I, Item 1 of this Form 10-K.

Acquisition and other expenses

Acquisition and other expenses increased 7.8 percent to $213.8 million in 2018 from $198.4 million in 2017. The acquisition expense ratio increased to 33.1 percent in 2018 from 32.7 percent in 2017. The increase in the acquisition expense ratio is attributed to the property and casualty insurance segment.

The acquisition expense ratio for the property and casualty insurance segment increased to 36.1 percent in 2018 from 35.3 percent in 2017. This increase reflects an increase in policyholder dividends, as well as higher salary expense and bonus accruals.

The acquisition expense ratio for the reinsurance segment decreased to 23.2 percent in 2018 from 23.6 percent in 2017. The decline is primarily due to a decrease in contingent commissions.

Investment results

Net investment income increased 4.7 percent to $47.6 million in 2018 from $45.5 million in 2017. This increase is primarily due to an increase in the fixed maturity portfolio book yield, and to a lesser extent, growth in the fixed maturity portfolio. The pre-tax yield on the fixed maturity portfolio increased to approximately 3.68 percent at December 31, 2018, from 3.45 percent at December 31, 2017 and 3.50 percent at December 31, 2016. The effective duration of the fixed maturity portfolio, excluding interest-only securities, declined slightly to 4.9 at December 31, 2018 from 5.0 at December 31, 2017. The Company’s equity portfolio produced dividend income of $6.1 million in 2018, compared to $6.0 million in 2017.

Net realized investment gains (losses) and, beginning in 2018, the change in unrealized gains on equity investments, declined to a loss of $41.3 million in 2018, from a gain of $6.6 million in 2017. Included in the net loss reported for 2018 is a decrease of $28.8 million in unrealized gains on the Company's equity investments stemming from the decline in equity markets that occurred in the fourth quarter. Net realized investment gains on equity investments totaled $8.0 million in 2018, compared to $18.2 million in 2017. Management elected to re-balance a portion of the common stock portfolios in 2017, which generated the larger amount of gains. Due to the recent increase in interest rates, management chose to recognize $11.9 million of losses on the fixed maturity portfolio during the fourth quarter of 2018 in order to increase book yield without sacrificing quality or duration, while also taking advantage of a 14 percent tax differential that could be achieved by carrying these losses back to a previous tax year subject to the prior 35 percent federal corporate tax rate. Total realized losses recognized on the fixed maturity portfolio during 2018 amounted to $18.5 million, compared to $4.3 million in 2017. The amounts reported include losses of $2.7 million and $6.3 million in 2018 and 2017, respectively, from declines in the carrying value of a limited partnership that the Company invests in to help protect the equity portfolio from a sudden and significant decline in value (an equity tail-risk hedging strategy).

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Other income

Other income totaled $9.2 million in 2018, compared to $4.8 million in 2017. The 2018 amount includes $7.5 million of net periodic pension and postretirement benefit income and $637,000 of foreign currency exchange gains recognized on the reinsurance segment’s foreign currency denominated reinsurance business. The 2017 amount includes $5.1 million of net periodic pension and postretirement benefit income and $1.6 million of foreign currency exchange losses.

Income tax

The Company reported an income tax benefit of $7.2 million in 2018 compared to income tax expense of $578,000 in 2017. The effective tax rate for 2018 was 49.1 percent, compared to 1.5 percent in 2017. The 2018 effective tax rate is calculated using an income tax benefit relative to a pretax loss, thus the larger number is actually indicative of a low effective tax rate. The 2017 effective tax rate is impacted by a $9.1 million reduction in the deferred tax liability related to the enactment of the TCJA. Excluding this deferred income tax benefit, the effective tax rate for 2017 was 24.2 percent. The primary contributors to the differences between the effective tax rates and the United States federal corporate tax rate of 21 percent for 2018 and 35 percent for 2017 are tax-exempt interest income earned and the dividends received deduction and, for 2018, a $1.7 million tax benefit stemming from the 14 percent tax differential realized from the carry-back of realized investment losses to a tax year subject to the 35 percent tax rate.

Year ended December 31, 2017 compared to year ended December 31, 2016

The Company reported net income of $39.2 million ($1.84 per share) in 2017 compared to $46.2 million ($2.20 per share) in 2016. Net income declined in 2017 despite a one-time $9.1 million deferred income tax benefit resulting from the enactment of the TCJA. This decline was primarily attributed to a large amount of catastrophe and storm losses incurred by the reinsurance segment during the third quarter, as well as a reduction in the amount of favorable development experienced on prior years' reserves. Considering the extraordinary amount of catastrophe and storm losses incurred by the insurance industry during 2017, management was satisfied with the Company's results. The property and casualty insurance segment continued to perform well, as the underlying loss and settlement expense ratio improved during the second half of the year. Also encouraging was the recent improvement in the pricing environment in the property and casualty insurance segment and the reinsurance segment during the January 1, 2018renewals.

The TCJA was signed into law on December 22, 2017. Among other provisions, the TCJA lowered the federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018. Companies were required to calculate deferred income taxes using tax rates expected to be in effect when tax timing differences reverse, which, as of December 22, was 21 percent rather than the previous 35 percent. The Company was in a net deferred tax liability position on the date of enactment, which meant that the reduction in the tax rate resulted in a lower deferred tax liability. In accordance with GAAP, this reduction in the deferred tax liability, which was reflected as a deferred income tax benefit, was recognized in net income in the fourth quarter.

Because the change in the deferred tax liability was recognized in net income, the amounts contained in the accumulated other comprehensive income line in stockholders' equity continued to reflect deferred income taxes at the previous 35 percent tax rate (commonly referred to as "stranded tax effects"). In February 2018, the Financial Accounting Standards Board issued updated guidance to allow a reclassification to be made from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from the enactment of the TCJA. The Company adopted this guidance in 2017, and transferred the stranded tax effects in accumulated other comprehensive income to retained earnings.

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	Year ended December 31,
	2017						2016
($ in thousands)	Premiums earned		Losses and settlement expenses		Loss and settlement expense ratio		Premiums earned		Losses and settlement expenses			Loss and settlement expense ratio
Property and casualty insurance
Commercial lines:
Automobile	$	118,224	$	100,915	85.4	%	$	110,941	$	93,364		84.2	%
Property	108,162		59,638		55.1	%	105,012		64,509			61.4	%
Workers' compensation	100,552		57,332		57.0	%	96,517		51,371			53.2	%
Other liability	98,674		56,021		56.8	%	96,630		56,738			58.7	%
Other	8,719		1,655		19.0	%	8,374		(12		)	(0.1	)%
Total commercial lines	434,331		275,561		63.4	%	417,474		265,970			63.7	%
Personal lines	38,038		27,412		72.1	%	38,993		28,399			72.8	%
Total property and casualty insurance	$	472,369	$	302,973	64.1	%	$	456,467	$	294,369		64.5	%

Reinsurance
Pro rata reinsurance	$	44,636	$	29,862	66.9	%	$	56,317	$	31,498		55.9	%
Excess of loss reinsurance	90,153		89,134		98.9	%	79,624		61,030			76.6	%
Total reinsurance	$	134,789	$	118,996	88.3	%	$	135,941	$	92,528		68.1	%

Consolidated	$	607,158	$	421,969	69.5	%	$	592,408	$	386,897		65.3	%

Premium income

Premiums earned increased 2.5 percent to $607.2 million in 2017 from $592.4 million in 2016. Rate levels for both segments continued to be constrained by a high level of competition, especially for quality accounts with good loss experience; however, there were some indications of moderate rate level improvement during the fourth quarter. Average rate level increases were slightly positive for the year in the property and casualty insurance segment, with variances by line of business. In the reinsurance segment, rate levels stabilized somewhat during the January 1, 2017 renewal season, when approximately 70 percent of the business renewed, after several years of continuous declines. The lines of business experiencing the greatest profitability challenges in the property and casualty insurance segment, namely commercial auto and personal lines, received larger (mid-single digit) rate increases. During the January 1, 2018 renewal season, moderate price increases were achieved on most of the reinsurance segment's property per risk and catastrophe programs.

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Premiums earned for the property and casualty insurance segment increased 3.5 percent to $472.4 million in 2017 from $456.5 million in 2016. This increase was primarily attributed to new business in both commercial and personal lines of business, growth in insured exposures and an increase in retained policies in the commercial lines of business. New business premium (representing 15 percent of the pool participants’ direct premiums written) was approximately 15 percent higher than in 2016. Commercial lines new business continued to be in the desired range of growth, and accounted for most of the increase in total new business premium. Personal lines new business premium was up significantly, but was measured against a relatively small amount of new business premium in 2016. While management continued to seek growth in most territories, it was particularly focused on achieving growth outside of the core Midwest market, which would help diversify the pool participants' book of business geographically, while staying consistent with the industry and line of business mix of the existing book of business. Renewal business premium increased approximately five percent during 2017. After factoring in the continued implementation of some mandatory rate reductions on workers' compensation business in a few states, the overall rate change on renewal business was positive, but less than one percent. Rates were expected to continue to be mixed in 2018, with the largest rate increases expected in the commercial auto line of business. Rate decreases were expected in the workers' compensation and general liability lines of business, and rates on most other lines of business were expected to be flat or increase slightly. The overall policy retention rate remained strong during 2017 at 85.8 percent (commercial lines at 86.9 percent and personal lines at 83.7 percent). These retention rates approximated those reported at the end of 2016.

Premiums earned for the reinsurance segment decreased 0.8 percent to $134.8 million in 2017 from $135.9 million in 2016. This decrease was primarily attributed to Mutual Re's withdrawal from non-standard automobile business, but also reflected a decline in some casualty business that converted from a pro rata structure in 2016 to an excess of loss structure in 2017. However, the addition of some new business and growth on some existing accounts largely offset those declines. Underwriting capacity remained strong during the January 1,2018 renewal season, despite the unusually large amount of catastrophe and storm losses incurred by the reinsurance industry in 2017. As a result, reinsurance rate levels only increased moderately for those lines and territories most affected by the 2017 events (property per risk and catastrophe programs), and remained stable in most segments of the market not affected by the 2017 events. Rate levels for international business were also stable, with renewal rates largely flat or up slightly.

Losses and settlement expenses

Losses and settlement expenses increased 9.1 percent to $422.0 million in 2017 from $386.9 million in 2016, and the loss and settlement expense ratio increased to 69.5 percent in 2017 from 65.3 percent in 2016. Higher catastrophe and storm losses in the reinsurance segment (including a record amount during the third quarter of 2017), along with a decline in favorable development on prior years' reserves, were the primary drivers of the increase in the ratio. These increases were partially offset by an improvement in the property and casualty insurance segment's underlying loss and settlement expense ratio. Fourth quarter catastrophe and storm losses in the reinsurance segment, which primarily resulted from the California wildfires, were mitigated by the inter-company reinsurance program with Employers Mutual. Since the retention amount under the annual aggregate treaty was filled during the third quarter, the reinsurance segment only retained 20 percent of the fourth quarter wildfire losses. The inter-company reinsurance programs implemented in 2016 performed as expected, and reduced the volatility of the Company's quarterly earnings. The actuarial analysis of the Company’s carried reserves at December 31, 2017 indicated that they were in the upper third of the range of reasonable reserves.

The loss and settlement expense ratio for the property and casualty insurance segment decreased to 64.1 percent in 2017 from 64.5 percent in 2016. Lower catastrophe and storm losses and an improvement in the underlying loss and settlement expense ratio were the primary drivers of the decline in the loss and settlement expense ratio. Catastrophe and storm losses, net of the amounts ceded to Employers Mutual under the inter-company reinsurance program, accounted for 6.3 percentage points of the loss and settlement expense ratio in 2017, compared to 7.7 percentage points in 2016. The property and casualty insurance subsidiaries ceded $19.2 million of catastrophe and storm losses to Employers Mutual under the inter-company reinsurance program in 2017, compared to $7.5 million in 2016. Taking the loss recoveries and the premiums paid to Employers Mutual into consideration, the inter-company reinsurance program reduced the property and casualty insurance segment's loss and settlement expense ratios by 3.1 and 0.5 percentage points for the years ended December 31, 2017 and 2016, respectively. The inter-company reinsurance program was renewed for 2018. The only change was a $2 million increase in the retention amount under the treaty covering the first half of the year (from $20.0 million to $22.0 million). The cost of the program remained at $7.4 million. The underlying loss and settlement expense ratio improved during the second half of 2017, primarily reflecting reductions in the current accident year ultimate loss and settlement expense ratio projections in the commercial property and other liability lines of business. The commercial auto and personal lines of business, which posted loss and settlement expense ratios of 85.4 percent and 72.1 percent, respectively, in 2017, continued to underperform. Management continued to devote a significant amount of time and effort to the initiatives that had been undertaken to improve the performance of these lines of business, including rate increases and more selective risk selection.

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Favorable development on the property and casualty insurance segment's prior years' reserves totaled $15.7 million and $24.4 million in 2017 and 2016, respectively. Included in the development amount reported for 2017 was $4.5 million of adverse development experienced in the other liability line of business stemming from the settlement of claims for past and future legal fees and losses on a multi-year asbestos exposure associated with a former insured. Under the new reserving methodology implemented in the third quarter of 2016, development on prior accident years' reserves was determined primarily by changes in the prior accident years' ultimate loss and settlement expense ratio projections established by management. As a result, the explicit drivers of development on prior years' reserves were identifiable beginning in 2017. Due to additional insights gained and the adjustments made under the new reserving methodology during 2017, the magnitude of favorable development reported in future periods was expected to be somewhat less than what had been observed in recent periods. For a detailed discussion of the development experienced on prior accident years’ reserves during 2017 and 2016, see the discussion entitled “Loss and Settlement Expense Reserves” under the “Narrative Description of Business” heading in the Business Section under Part I, Item 1 of this Form 10-K.

The loss and settlement expense ratio for the reinsurance segment increased to 88.3 percent in 2017 from 68.1 percent in 2016. The large increase was primarily due to a significant increase in catastrophe and storm losses, which accounted for 22.4 percentage points of the loss and settlement expense ratio in 2017 compared to just 9.3 percentage points in 2016. Gross losses from Hurricanes Harvey, Irma and Maria were estimated to be approximately $9.0 million, $7.0 million and $3.5 million, respectively, and the aggregate losses from the California wildfires were estimated at approximately $9.5 million. The reinsurance subsidiary ceded $16.8 million and ($467,000) of catastrophe and storm losses to Employers Mutual under the inter-company reinsurance program in 2017 and 2016, respectively. Taking the loss recoveries and the premiums paid to Employers Mutual into consideration, the inter-company reinsurance program reduced the reinsurance segment's loss and settlement expense ratio by 9.0 percentage points for the year ended December 31, 2017, but increased it by 2.8 percentage points in 2016. The inter-company reinsurance program was renewed for 2018. The only change was a $400,000 increase in the cost of the program.

Aside from catastrophe and storm losses, the remaining increase in the reinsurance segment's loss and settlement expense ratio was due to a decline in favorable development on prior years' reserves. It was expected that future development would still be favorable, but less so than what had been observed in the recent past, and closer to neutral. For a detailed discussion of the development experienced on prior accident years’ reserves during 2017 and 2016, see the discussion entitled “Loss and Settlement Expense Reserves” under the “Narrative Description of Business” heading in the Business Section under Part I, Item 1 of this Form 10-K.

Acquisition and other expenses

Acquisition and other expenses increased 0.9 percent to $198.4 million in 2017 from $196.6 million in 2016. The acquisition expense ratio decreased to 32.7 percent in 2017 from 33.2 percent in 2016. Both segments contributed to the decrease in this ratio. To remain competitive in the quickly changing insurance market and achieve management's goal of being a leader in innovation, upgrades were being made to the Company's systems and additional team members with the skills necessary to meet these objectives were being hired. As a result, the Company's acquisition expense ratio was projected to increase in 2018.

The acquisition expense ratio for the property and casualty insurance segment decreased to 35.3 percent in 2017 from 35.8 percent in 2016. This decrease was primarily attributed to a decline in policyholder dividend expense, largely from a couple of the pool participants' safety dividend groups. Partially offsetting the decrease were higher expenses for agents' contingent commissions, data analytics initiatives, and salaries.

The acquisition expense ratio for the reinsurance segment decreased to 23.6 percent in 2017 from 24.3 percent in 2016. This decrease reflected a shift in the mix of business towards excess of loss contracts from pro rata contracts, as pro rata contracts typically have higher commission rates. The decrease also reflected declines in salary and benefit expenses (inclusive of bonuses) and contingent commissions.

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Investment results

Net investment income decreased 4.2 percent to $45.5 million in 2017 from $47.5 million in 2016. The decrease primarily reflected a lower book yield in the fixed maturity portfolio and a decline in dividend income. Current interest rate levels remained below the average book yield of the fixed maturity portfolio, and would therefore likely continue to limit future growth in net investment income. The average coupon rate on the fixed maturity portfolio, excluding interest-only securities, declined slightly over the past year, coming in at 3.7 percent at December 31, 2017 compared to 3.8 percent at December 31, 2016 and 3.9 percent at December 31, 2015. The effective duration of the fixed maturity portfolio, excluding interest-only securities, also declined slightly to 5.0 at December 31, 2017 from 5.2 at December 31, 2016. The Company’s equity portfolio produced dividend income of $6.0 million in 2017, compared to $6.9 million in 2016.

The Company reported net realized investment gains of $6.6 million in 2017, compared to $4.1 million in 2016. Included in these amounts were losses of $6.3 million in both 2017 and 2016 from declines in the carrying value of a limited partnership that the Company invested in to help protect the equity portfolio from a sudden and significant decline in value (an equity tail-risk hedging strategy). The Company recognized "other-than-temporary" impairment losses of $1.1 million and $1.3 million during 2017 and 2016, respectively. With the exception of a $209,000 impairment loss recorded in 2016 on a new investment that conveys investment tax credits (included in other long-term investments), these impairment losses were recognized on securities held in the Company's equity portfolio.

Other income

Other income totaled $4.8 million in 2017 compared to $5.8 million in 2016. Other income reported for both years included net periodic postretirement benefit income resulting from the amortization of a large prior service credit that resulted from an amendment of Employers Mutual's postretirement medical plan in the fourth quarter of 2013. This prior service credit was recognized in accumulated other comprehensive income in the fourth quarter of 2013, and was being amortized out of accumulated other comprehensive income and into net income over a period of 10 years. The 2017 amount included $5.1 million of net periodic pension and postretirement benefit income and $1.6 million of foreign currency exchange losses recognized on the reinsurance segment’s foreign currency denominated reinsurance business. The 2016 amount included $4.8 million of net periodic pension and postretirement benefit income and $356,000 of foreign currency exchange gains, respectively.

Income tax

Income tax expense decreased 96.6 percent to $578,000 in 2017 from $17.0 million in 2016. As noted above, the TCJA was signed into law on December 22, 2017, lowering the federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018. Companies were required to calculate deferred taxes using tax rates expected to be in effect when tax timing differences reversed, which, as of December 22, 2017, was now 21 percent rather than the previous 35 percent. The Company was in a net deferred tax liability position on the date of enactment, which meant that the reduction in the tax rate resulted in a lower deferred tax liability. This reduction in the deferred tax liability ($9.1 million) was reflected as a deferred income tax benefit in the fourth quarter. Including this deferred income tax benefit, the effective tax rate for 2017 was 1.5 percent, and was expected to be in the mid-teens in future years compared to the upper twenties historically. Excluding this deferred income tax benefit, the effective tax rate for 2017 was 24.2 percent, compared to 26.9 percent in 2016. The primary contributors to the differences between these effective tax rates and the United States federal corporate tax rate of 35 percent were tax-exempt interest income earned, the dividends received deduction, and, especially in 2016, investment tax credits recognized from renewable energy tax credit investments ($672,000 in 2017 and $1.4 million in 2016).

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet cash obligations. The Company had positive cash flows from operations of $71.8 million in 2018, $58.9 million in 2017 and $83.4 million in 2016. The Company typically generates substantial positive cash flows from operations because cash from premium payments is generally received in advance of cash payments made to settle claims. These positive cash flows provide the foundation of the Company’s asset/liability management program and are the primary driver of the Company’s liquidity. The Company invests in high quality, liquid securities to match the anticipated payments of losses and settlement expenses of the underlying insurance policies. Because the timing of the losses is uncertain, the majority of the portfolio is maintained in short to intermediate maturity securities that can be easily liquidated or that generate adequate cash flow to meet liabilities.

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The Company is a holding company whose principal asset is its investment in its property and casualty insurance subsidiaries and its reinsurance subsidiary (“insurance subsidiaries”). As a holding company, the Company is dependent upon cash dividends from its insurance subsidiaries to meet all its obligations, including cash dividends to stockholders, the funding of the Company’s stock repurchase program and, in 2019, expenses associated with evaluating and responding to Employers Mutual's non-binding indicative proposal to purchase all of the common stock of the Company not already owned by Employers Mutual. State insurance regulations restrict the maximum amount of dividends insurance companies can pay without prior regulatory approval. The maximum amount of dividends that the insurance subsidiaries can pay to the Company in 2019 without prior regulatory approval is approximately $48.0 million. The Company received $21.1 million, $5.7 million and $9.7 million of dividends from its insurance subsidiaries and paid cash dividends to its stockholders totaling $19.1 million, $18.0 million and $16.2 million in 2018, 2017 and 2016, respectively.

The Company’s insurance subsidiaries must maintain adequate liquidity to ensure that their cash obligations are met; however, because of the property and casualty insurance subsidiaries’ participation in the pooling agreement and the reinsurance subsidiary’s participation in the quota share agreement, they do not have the daily liquidity concerns normally associated with an insurance company. This is because under the terms of the pooling and quota share agreements, Employers Mutual receives all premiums and pays all losses and expenses associated with the insurance business produced by the pool participants and the assumed reinsurance business ceded to the Company’s reinsurance subsidiary, and then settles inter-company balances generated by these transactions with the participating companies on a monthly (pool participants) or quarterly (reinsurance subsidiary) basis.

At the insurance subsidiary level, the primary sources of cash are premium income, investment income and proceeds from called or matured investments. The principal outflows of cash are payments of claims, commissions, premium taxes, operating expenses, income taxes, dividends, interest and principal payments on debt, and investment purchases. Cash outflows vary because of uncertainties regarding settlement dates for unpaid losses and the potential for large losses, either individually or in the aggregate. Accordingly, the insurance subsidiaries maintain investment and reinsurance programs intended to provide adequate funds to pay claims without forced sales of investments. The insurance subsidiaries also have the ability to borrow funds on a short-term basis (180 days) from Employers Mutual under an Inter-Company Loan Agreement. In addition, Employers Mutual maintains access to a line of credit with the Federal Home Loan Bank that could be used to provide the insurance subsidiaries additional liquidity if needed.

The Company maintains a portion of its investment portfolio in relatively short-term and highly liquid investments to ensure the availability of funds to pay claims and expenses. A variety of maturities are maintained in the Company’s investment portfolio to assure adequate liquidity. The maturity structure of the fixed maturity portfolio is also established by the relative attractiveness of yields on short, intermediate and long-term securities. The Company does not invest in non-investment grade debt securities. Any non-investment grade securities held by the Company are the result of rating downgrades subsequent to their purchase.

The Company invests for the long term and generally purchases fixed maturity securities with the intent to hold them to maturity. Despite this intent, the Company currently classifies fixed maturity securities as available-for-sale to provide flexibility in the management of its investment portfolio. At December 31, 2018 and 2017, the Company had net unrealized holding gains, net of deferred taxes, on its fixed maturity securities available-for-sale of $7.7 million and $17.3 million, respectively. The fluctuation in the fair value of these investments is primarily due to changes in the interest rate environment during this time period, but also reflects fluctuations in risk premium spreads over U.S. Treasuries. Since the Company intends to hold fixed maturity securities to maturity, such fluctuations in the fair value of these investments are not expected to have a material impact on the operations of the Company, as forced liquidations of investments are not anticipated. The Company closely monitors the bond market and makes appropriate adjustments in its portfolio as conditions warrant.

The majority of the Company’s assets are invested in fixed maturity securities. These investments provide a substantial amount of investment income that supplements underwriting results and contributes to net earnings. As these investments mature, or are called, the proceeds are reinvested at current interest rates, which may be higher or lower than those now being earned; therefore, more or less investment income may be available to contribute to net earnings.

The Company held $19.3 million and $13.6 million in other long-term investments at December 31, 2018 and 2017, respectively, which primarily consist of holdings in limited partnerships, and privately placed common and non-redeemable convertible preferred stock in start-up technology companies with ties to the insurance industry. The equity method of accounting is used for these investments, with changes in the carrying value recorded as realized investment gains (losses). During 2018 and 2017, the Company invested additional funds of $7.5 million and $5.8 million, respectively, into a limited partnership that is designed to help protect the Company from a sudden and significant decline in the value of its equity portfolio (the 2018 contribution amount includes $2.3 million of gains realized from the program that were reinvested). Also included in other long-term investments are holdings in limited liability companies that convey renewable energy tax credits that are carried at amortized cost. After reductions for the utilization of the tax credits and impairment losses, the carrying values of these investments totaled $2.2 million and $1.5 million at December 31, 2018 and 2017, respectively.

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The Company participates in reverse repurchase arrangements, involving the purchase of investment securities from third-party sellers with the agreement that the purchased securities be sold back to the third-party sellers for agreed-upon prices at specified future dates. The third-party sellers are required to pledge collateral with a value greater than the amount of cash received in the transactions. In accordance with GAAP, the investment securities purchased under the reverse repurchase agreements are not reflected in the Company's consolidated balance sheets, but instead a receivable is recorded for the principal amount lent. The Company's receivable under reverse repurchase agreements was $0 and $16.5 million at December 31, 2018 and 2017, respectively.

The Company’s cash balance was $337,000 and $347,000 at December 31, 2018 and 2017, respectively.

Employers Mutual contributed $8.0 million, $7.0 million and $9.0 million to its qualified pension plan in 2018, 2017 and 2016, respectively, and plans to contribute approximately $7.0 million to the qualified pension plan in 2019. The Company reimbursed Employers Mutual $2.4 million, $2.1 million and $2.7 million for its share of the pension contributions in 2018, 2017 and 2016, respectively. Employers Mutual did not make any contributions to its postretirement benefit plans during 2018, 2017, or 2016, and does not expect to make any contributions in 2019 due to the plan amendment that was announced during 2013.

Capital Resources

Capital resources consist of stockholders’ equity and debt, representing funds deployed or available to be deployed to support business operations. For the Company’s insurance subsidiaries, capital resources are required to support premium writings. Regulatory guidelines suggest that the ratio of a property and casualty insurer’s annual net premiums written to its statutory surplus should not exceed three to one. All of the Company’s property and casualty insurance subsidiaries were well under this guideline at December 31, 2018.

The Company’s insurance subsidiaries are required to maintain a certain minimum level of surplus on a statutory basis, and are subject to regulations under which the payment of dividends from statutory surplus is restricted and may require prior approval of their domiciliary insurance regulatory authorities. The Company’s insurance subsidiaries are also subject to annual Risk Based Capital (RBC) requirements that may further impact their ability to pay dividends. RBC requirements attempt to measure minimum statutory capital needs based upon the risks in a company’s mix of products and investment portfolio. At December 31, 2018, the Company’s insurance subsidiaries had total adjusted statutory capital of $527.1 million, which is well in excess of the minimum risk-based capital requirement of $101.9 million.

The Company’s total cash and invested assets at December 31, 2018 and 2017 are summarized as follows:



	December 31, 2018
($ in thousands)	Amortized cost		Fair value		Carrying value		Percent of total carrying value
Fixed maturity securities available-for-sale	$	1,273,132	$	1,282,909	$	1,282,909	83.0	%
Equity investments, at fair value	160,371		215,363		215,363		13.9	%
Cash	337		337		337		—	%
Short-term investments	28,204		28,204		28,204		1.8	%
Equity investments, at alternative measurement of cost less impairments	1,200		XXXX		1,200		0.1	%
Other long-term investments	19,316		XXXX		19,316		1.2	%
	$	1,482,560	XXXX		$	1,547,329	100.0	%

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	December 31, 2017
($ in thousands)	Amortized cost		Fair value		Carrying value		Percent of total carrying value
Fixed maturity securities available-for-sale	$	1,253,166	$	1,275,016	$	1,275,016	82.8	%
Equity securities available-for-sale	144,274		228,115		228,115		14.8	%
Cash	347		347		347		—	%
Short-term investments	23,613		23,613		23,613		1.5	%
Other long-term investments	13,648		XXXX		13,648		0.9	%
	$	1,435,048	XXXX		$	1,540,739	100.0	%

The Company’s property and casualty insurance subsidiaries have $25.0 million of surplus notes issued to Employers Mutual. The interest rate on the surplus notes was increased to 2.73 percent from 1.35 percent effective February 1, 2018. Reviews of the interest rate are conducted by the Inter-Company Committees of the boards of directors of the Company and Employers Mutual every five years, with the next review due in 2023. Payments of interest and repayments of principal can only be made out of the applicable subsidiary’s earned surplus and are subject to prior approval by the insurance commissioners of the respective states of domicile. The surplus notes are subordinate and junior in right of payment to all obligations or liabilities of the applicable insurance subsidiaries. Total interest expense incurred on these surplus notes was $654,000 in 2018 and $337,000 in 2017 and 2016. The Company’s property and casualty insurance subsidiaries received approval for the payment of the interest expense incurred for calendar year 2018, which was paid at the end of 2018.

As of December 31, 2018, the Company had no material commitments for capital expenditures.

Off-Balance Sheet Arrangements

Employers Mutual collects from agents, policyholders and ceding companies all premiums written associated with the insurance business produced by the pool participants and the assumed reinsurance business ceded to the reinsurance subsidiary. Employers Mutual also collects from its reinsurers all losses and settlement expenses recoverable under the reinsurance contracts protecting the pool participants and the reinsurance subsidiary, as well as the fronting business ceded to the reinsurance subsidiary. Employers Mutual settles with the pool participants (monthly) and the reinsurance subsidiary (quarterly) the premiums written from these insurance policies and the paid losses and settlement expenses recoverable under the external reinsurance contracts, providing full credit for the premiums written and the paid losses and settlement expenses recoverable under the external reinsurance contracts generated during the period (not just the collected portion). Due to this arrangement, and since a significant portion of the premium balances are collected over the course of the underlying coverage periods, Employers Mutual carries a substantial receivable balance for insurance and reinsurance premiums in process of collection and, to a lesser extent, paid losses and settlement expenses recoverable from the external reinsurance companies. Any of these receivable amounts that are ultimately deemed to be uncollectible are charged-off by Employers Mutual and the expense is charged to the reinsurance subsidiary or allocated to the pool members on the basis of pool participation. As a result, the Company has off-balance sheet arrangements with an unconsolidated entity that results in credit-risk exposures (Employers Mutual’s insurance and reinsurance premium receivable balances, and paid loss and settlement expense recoverable amounts) that are not reflected in the Company’s financial statements. The average annual expense for such charge-offs allocated to the Company over the past ten years is $414,000. Based on this historical data, this credit-risk exposure is not considered to be material to the Company’s results of operations or financial position and, accordingly, no loss contingency liability has been recorded.

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Investment Impairments and Considerations

At December 31, 2018, the Company had unrealized losses on fixed maturity securities available-for-sale as presented in the following table. The estimated fair value is based on quoted market prices, where available. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security. None of these securities are considered to be in concentrations by either security type or industry. The Company uses several factors to determine whether the carrying value of an individual security has been “other-than-temporarily” impaired. Such factors include, but are not limited to, the security’s value and performance in the context of the overall markets, length of time and extent the security’s fair value has been below carrying value, key corporate events and the amount of collateral available. Based on these factors, the absence of management’s intent to sell these securities prior to recovery or maturity, and the fact that management does not anticipate that it will be forced to sell these securities prior to recovery or maturity, it was determined that the carrying value of these securities were not “other-than-temporarily” impaired at December 31, 2018. Risks and uncertainties inherent in the methodology utilized in this evaluation process include interest rate risk and the overall performance of the economy, all of which have the potential to adversely affect the value of the Company’s investments. Should a determination be made at some point in the future that these unrealized losses are “other-than-temporary”, the Company’s earnings would be reduced by approximately $8.6 million, net of tax; however, the Company’s financial position would not be affected because unrealized losses on fixed maturity securities available-for-sale are reflected in the Company’s financial statements as a component of stockholders’ equity, net of deferred taxes.

Following is a schedule of the length of time fixed maturity securities available-for-sale have continuously been in an unrealized loss position as of December 31, 2018.



	Less than twelve months				Twelve months or longer				Total
($ in thousands)	Fair values		Unrealized losses		Fair values		Unrealized losses		Fair values		Unrealized losses
Fixed maturity securities:
U.S. treasury	$	—	$	—	$	8,021	$	118	$	8,021	$	118
U.S. government-sponsored agencies	14,620		20		92,603		1,498		107,223		1,518
Obligations of states and political subdivisions	—		—		14,498		451		14,498		451
Commercial mortgage-backed	2,021		21		24,222		741		26,243		762
Residential mortgage-backed	16,852		145		45,597		2,147		62,449		2,292
Other asset-backed	4,810		147		11,691		888		16,501		1,035
Corporate	198,030		2,996		45,734		1,764		243,764		4,760
Total fixed maturity securities	$	236,333	$	3,329	$	242,366	$	7,607	$	478,699	$	10,936

Following is a schedule of the maturity dates of the fixed maturity securities presented in the above table.



($ in thousands)	Book value		Fair value		Gross unrealized loss
Due in one year or less	$	14,749	$	14,714	$	35
Due after one year through five years	102,846		101,473		1,373
Due after five years through ten years	153,139		150,109		3,030
Due after ten years	125,874		122,458		3,416
Securities not due at a single maturity date	93,027		89,945		3,082
	$	489,635	$	478,699	$	10,936

The Company does not purchase non-investment grade fixed maturity securities. Any non-investment grade fixed maturity securities held are the result of rating downgrades that occurred subsequent to their purchase. At December 31, 2018, the Company held $4.2 million of non-investment grade fixed maturity securities in a net unrealized loss position of $421,000.

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Following is a schedule of gross realized losses recognized in 2018 on fixed maturity securities available-for-sale. The schedule is aged according to the length of time the underlying securities were in an unrealized loss position.



	Realized losses from sales						"Other-than- temporary" impairment losses		Total gross realized losses
($ in thousands)	Book value		Sales price		Gross realized losses		"Other-than- temporary" impairment losses		Total gross realized losses
Fixed maturity securities:
Three months or less	$	11,978	$	11,791	$	187	$	—	$	187
Over three months to six months	6,769		6,513		256		—		256
Over six months to nine months	21,014		20,368		646		—		646
Over nine months to twelve months	49,171		47,362		1,809		—		1,809
Over twelve months	298,216		282,242		15,974		—		15,974
Subtotal, fixed maturity securities	$	387,148	$	368,276	$	18,872	$	—	$	18,872

LEASES, COMMITMENTS AND CONTINGENT LIABILITIES

The following table reflects the Company's contractual obligations as of December 31, 2018. Included in the table are the estimated payments that the Company expects to make in the settlement of its 30.0 percent aggregate participation percentage of the pool participants' loss and settlement expense reserves, and with respect to its long-term debt. The Company does not have any lease agreements, but Employers Mutual has entered into leases for 16 branch and service office facilities, the costs of which are charged to the pool and allocated among the pool participants based on their respective participation interests.



	Payments due by period
($ in thousands)	Total		Less than 1 year		1 - 3 years		4 - 5 years		More than 5 years
Contractual obligations
Loss and settlement expense reserves¹	$	777,190	$	313,541	$	298,556	$	90,996	$	74,097
Long-term debt²	25,000		—		—		—		25,000
Interest expense on long-term debt³	6,826		683		1,365		1,365		3,413
Total	$	809,016	$	314,224	$	299,921	$	92,361	$	102,510

¹ The amounts presented are estimates of the dollar amounts and time periods in which the Company expects to pay out its gross loss and settlement expense reserves. These amounts are based on historical payment patterns and do not represent actual contractual obligations. The actual payment amounts and the related timing of those payments could differ significantly from these estimates.

² Long-term debt reflects the surplus notes issued by the Company’s property and casualty insurance subsidiaries to Employers Mutual, which have no maturity date. Excluded from long-term debt are pension and other postretirement benefit obligations.

³ Interest expense on long-term debt reflects the interest expense on the surplus notes issued by the Company’s property and casualty insurance subsidiaries to Employers Mutual. The interest rate on the surplus notes is subject to change every five years (rate was increased to 2.73 percent effective February 1, 2018, with the next review scheduled for 2023). Interest payments on the surplus notes are subject to prior approval of the regulatory authorities of the issuing company’s state of domicile. The balance shown under the heading “More than 5 years” represents estimated interest expense for years six through ten. Since the surplus notes have no maturity date and the interest rate is subject to change every five years, interest expense could be greater than the amounts shown.

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The participants in the pooling agreement are subject to guaranty fund assessments by states in which they write business. Guaranty fund assessments are used by states to pay policyholder liabilities of insolvent insurers domiciled in those states. Many states allow assessments to be recovered through premium tax offsets. The Company has accrued estimated guaranty fund assessments of $615,000 and $706,000 as of December 31, 2018 and 2017, respectively. Premium tax offsets of $809,000 and $897,000, which are related to prior guarantee fund payments and current assessments, have been accrued as of December 31, 2018 and 2017, respectively. The guaranty fund assessments are expected to be paid over the next two years and the premium tax offsets are expected to be realized within ten years of the payments. The participants in the pooling agreement are also subject to second-injury fund assessments, which are designed to encourage employers to employ workers with pre-existing disabilities. The Company had accrued estimated second-injury fund assessments of $2.4 million and $2.0 million as of December 31, 2018 and 2017, respectively. The second-injury fund assessment accruals are based on projected loss payments. The periods over which the assessments will be paid is not known.

The participants in the pooling agreement have purchased annuities from life insurance companies, under which the claimant is payee, to fund future payments that are fixed pursuant to specific claim settlement provisions. The Company’s share of case loss reserves eliminated by the purchase of those annuities was $110,000 at December 31, 2018. The Company had a contingent liability for the aggregate guaranteed amount of the annuities of $183,000 at December 31, 2018 should the issuers of those annuities fail to perform. The probability of a material loss due to failure of performance by the issuers of these annuities is considered remote.

MARKET RISK

The main objectives in managing the Company’s investment portfolios are to maximize after-tax investment return while minimizing risk, in order to provide maximum support for the underwriting operations. Investment strategies are developed based upon many factors including the economic environment, business cycle, regulatory requirements, fluctuations in interest rates, underwriting results and consideration of other market risks. Investment decisions are centrally managed by investment professionals and are supervised by the investment committees of the respective boards of directors for each of the Company’s subsidiaries.

Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments, and is directly influenced by the volatility and liquidity in the markets in which the related underlying assets are traded. The market risks of the financial instruments owned by the Company relate to the investment portfolio, which exposes the Company to interest rate (inclusive of credit spreads) and equity price risk and, to a lesser extent, credit quality and prepayment risk. Monitoring systems and analytical tools are in place to assess each of these elements of market risk; however, there can be no assurance that future changes in interest rates, creditworthiness of issuers, prepayment activity, liquidity available in the market and other general market conditions will not have a material adverse impact on the Company’s results of operations, liquidity or financial position.

Interest rate risk (inclusive of credit spreads) includes the price sensitivity of a fixed maturity security to changes in interest rates, and the effect on the Company’s future earnings from short-term investments and maturing long-term investments given a change in interest rates. The following table illustrates the sensitivity of the Company’s portfolio of fixed maturity securities available-for-sale to hypothetical changes in market rates and prices.

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December 31, 2018	Estimated fair value		Hypothetical change in interest rate (bp=basis points)	Estimated fair value after hypothetical change in interest rate		Hypothetical percentage increase (decrease) in stockholders' equity
($ in thousands)
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	8,021	200 bp decrease	$	8,696	0.09	%
			100 bp decrease	8,351		0.05	%
			100 bp increase	7,706		(0.04	)%
			200 bp increase	7,405		(0.09	)%

U.S. government-sponsored agencies	$	304,479	200 bp decrease	$	317,031	1.75	%
			100 bp decrease	314,247		1.36	%
			100 bp increase	282,965		(3.00	)%
			200 bp increase	259,332		(6.30	)%

Obligations of states and political subdivisions	$	283,651	200 bp decrease	$	309,231	3.57	%
			100 bp decrease	296,077		1.74	%
			100 bp increase	271,067		(1.76	)%
			200 bp increase	257,681		(3.63	)%

Commercial mortgage-backed	$	84,379	200 bp decrease	$	96,524	1.70	%
			100 bp decrease	90,201		0.81	%
			100 bp increase	79,010		(0.75	)%
			200 bp increase	74,056		(1.44	)%

Residential mortgage-backed	$	162,137	200 bp decrease	$	186,112	3.35	%
			100 bp decrease	173,476		1.58	%
			100 bp increase	152,109		(1.40	)%
			200 bp increase	143,156		(2.65	)%

Other asset-backed	$	20,834	200 bp decrease	$	23,095	0.32	%
			100 bp decrease	21,918		0.15	%
			100 bp increase	19,834		(0.14	)%
			200 bp increase	18,911		(0.27	)%

Corporate	$	419,408	200 bp decrease	$	454,166	4.85	%
			100 bp decrease	436,602		2.40	%
			100 bp increase	402,691		(2.33	)%
			200 bp increase	386,861		(4.54	)%

Total fixed maturity securities	$	1,282,909	200 bp decrease	$	1,394,855	15.63	%
			100 bp decrease	1,340,872		8.09	%
			100 bp increase	1,215,382		(9.43	)%
			200 bp increase	1,147,402		(18.92	)%

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The Company monitors interest rate risk through an analysis of interest rate simulations, and adjusts the average duration of its fixed maturity portfolio by investing in either longer or shorter-term instruments given the results of interest rate simulations and judgments of cash flow needs. The effective duration of the Company’s fixed maturity portfolio, excluding interest-only securities, was 4.9 at December 31, 2018.

The valuation of the Company’s marketable equity portfolio is subject to equity price risk. In general, equities have more year-to-year price variability than bonds. However, returns from equity securities have consistently been higher over longer time frames. The Company invests in a diversified portfolio of readily marketable equity securities. A hypothetical 10 percent decrease in the S&P 500 index as of December 31, 2018 would result in a corresponding pre-tax decrease in the fair value of the Company’s equity portfolio of approximately $18.5 million. The Company has an equity tail-risk hedging strategy in place to protect it from significant monthly downside price volatility in the equity markets. The cost of this protection (recorded as a realized investment loss) totaled $2.7 million during 2018. This hedging strategy may be discontinued in the future depending on market conditions and/or the cost of the protection.

Fixed maturity securities held by the Company generally have an investment quality rating of “A” or better by independent rating agencies. The following table shows the composition of the Company’s fixed maturity securities, by rating, as of December 31, 2018.



($ in thousands)	Securities available-for-sale (at fair value)
December 31, 2018	Amount		Percent
Rating:
AAA	$	626,892	48.9	%
AA	281,931		22.0	%
A	289,755		22.6	%
BAA	80,118		6.2	%
BA	4,140		0.3	%
B	—		—	%
CAA	73		—	%
Total fixed maturities	$	1,282,909	100.0	%

Ratings for preferred stocks and fixed maturity securities are assigned by nationally recognized statistical rating organizations ("NRSRO"). NRSRO rating processes seek to evaluate the quality of a security by examining the factors that affect returns to investors. NRSRO ratings are based on quantitative and qualitative factors, as well as the economic, social and political environment in which the issuing entity operates. For further discussion of credit risk and related topics (i.e., unrealized losses, assessing "other-than-temporary" impairment losses, and non-investment grade securities held by the Company in its fixed maturity securities available-for-sale portfolio) see the section entitled "Investment Impairments and Considerations” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Municipal fixed maturity securities, including taxable, tax-exempt and pre-refunded securities, totaled $283.7 million as of December 31, 2018. Municipal securities are well diversified between general obligation and revenue bonds, as well as geographically. The Company’s credit analysis of municipal securities is predominantly based on the underlying credit quality of the obligor. Therefore, although a portion of the Company’s municipal securities are guaranteed by financial guaranty insurers, reliance is placed on the underlying obligor to pay all contractual cash flows. The ratings of insured municipal securities generally reflect the rating of the underlying primary obligor. The average quality of the municipal fixed maturity securities portfolio is Aa1/AA+ with over 98 percent of securities rated A3/A- or higher. Approximately $25.0 million of the Company’s municipal securities have been pre-refunded, which means that funds have been set aside in escrow to satisfy the future interest and principal obligations of the securities.

Prepayment risk refers to changes in prepayment patterns that can shorten or lengthen the expected timing of principal repayments and thus the average life and the effective yield of a security. Such risk exists within the portfolio of mortgage-backed securities. Prepayment risk is monitored regularly through the analysis of interest rate simulations. At December 31, 2018, the effective duration of the mortgage-backed securities, excluding interest-only securities, is 7.7 with an average life of 10.0 years and a yield to worst of 3.5 percent. At December 31, 2017, the effective duration of the mortgage-backed securities, excluding interest-only securities, was 6.9, with an average life of 8.6 years and a yield to worst of 3.1 percent.

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IMPACT OF INFLATION

Inflation has a widespread effect on the Company’s results of operations, primarily through increased losses and settlement expenses. The Company considers inflation, including social inflation that reflects an increasingly litigious society and increasing jury awards, when setting loss and settlement expense reserve amounts. Premiums are also affected by inflation, although they are often restricted or delayed by competition and the regulatory rate-setting environment.

NEW ACCOUNTING PRONOUNCEMENTS

See note 1 of Notes to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for a description of new accounting pronouncements not yet adopted by the Company.



ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information under the caption “Market Risk” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, which is included in Part II, Item 7 of this Form 10-K, is incorporated herein by reference.

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ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management’s Report on Internal Control Over Financial Reporting

Management of EMC Insurance Group Inc. and Subsidiaries is responsible for the preparation, integrity and objectivity of the accompanying Consolidated Financial Statements, as well as all other financial information in this report. The Consolidated Financial Statements and the accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles and include amounts that are based on management’s estimates and judgments where necessary.

Management is responsible for establishing and maintaining adequate internal control over financial reporting, including safeguarding of assets and reliability of financial records. The Company’s internal control over financial reporting, designed by or under the supervision of management, includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. This control structure is further reinforced by a program of internal audits, including audits of the Company’s decentralized branch locations, which requires responsive management action.

There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, adequate internal controls can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

Management assessed the effectiveness of the Company’s internal control over financial reporting based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). Based on this assessment, management believes that, as of December 31, 2018, the Company maintained effective internal control over financial reporting.

The Audit Committee of the Board of Directors is comprised of three directors who are independent of the Company’s management. The Audit Committee is responsible for the selection of the independent registered public accounting firm. It meets periodically with management, the independent registered public accounting firm, and the internal auditors to ensure that they are carrying out their responsibilities. In addition to reviewing the Company’s financial reports, the Audit Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of the Company. The independent registered public accounting firm and the internal auditors have full and free access to the Audit Committee, with or without the presence of management, to discuss the adequacy of internal control over financial reporting and any other matters which they believe should be brought to the attention of the Audit Committee.

The Company’s financial statements and internal control over financial reporting have been audited by Ernst & Young LLP, an independent registered public accounting firm. Management has made available to Ernst & Young LLP all of the Company’s financial records and related data, as well as the minutes of the stockholders’ and directors’ meetings. Furthermore, management believes that all representations made to Ernst & Young LLP during its audit were valid and appropriate. Their reports with respect to the fairness of presentation of the Company’s financial statements and the effectiveness of the Company’s internal control over financial reporting appear elsewhere in this annual report.



/s/ Bruce G. Kelley		/s/ Mark E. Reese
Bruce G. Kelley		Mark E. Reese
President, Chief Executive Officer and Treasurer		Senior Vice President and Chief Financial Officer
(Principal Executive Officer)		(Principal Financial and Accounting Officer)

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of EMC Insurance Group Inc.

Opinion on Internal Control over Financial Reporting

We have audited EMC Insurance Group Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, EMC Insurance Group Inc. and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2018 consolidated financial statements of the Company and our report dated March 6, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Des Moines, Iowa

March 6, 2019

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of EMC Insurance Group Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of EMC Insurance Group Inc. and Subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations and the Treadway Commission (2013 framework), and our report dated March 6, 2019 expressed an unqualified opinion thereon.

Adoption of ASU No. 2016-01

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for the recognition and measurement of certain financial instruments in 2018 due to the adoption of ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatements of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and the significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company's auditor since 2000.

Des Moines, Iowa

March 6, 2019

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	December 31,
($ in thousands, except share and per share amounts)	2018		2017
ASSETS
Investments:
Fixed maturity securities available-for-sale, at fair value (amortized cost $1,273,132 and $1,253,166)	$	1,282,909	$	1,275,016
Equity investments, at fair value (cost $160,371 and $144,274)	215,363		228,115
Equity investments, at alternative measurement of cost less impairments	1,200		—
Other long-term investments	19,316		13,648
Short-term investments	28,204		23,613
Total investments	1,546,992		1,540,392

Cash	337		347
Reinsurance receivables due from affiliate	37,361		31,650
Prepaid reinsurance premiums due from affiliate	8,789		12,789
Deferred policy acquisition costs (affiliated $44,440 and $40,848)	44,760		41,114
Amounts due from affiliate to settle inter-company transaction balances	5,154		—
Prepaid pension and postretirement benefits due from affiliate	17,691		20,683
Accrued investment income	10,468		11,286
Amounts receivable under reverse repurchase agreements	—		16,500
Accounts receivable	1,658		1,604
Income taxes recoverable	6,697		—
Goodwill	942		942
Other assets (affiliated $4,510 and $4,423)	4,629		4,633
Total assets	$	1,685,478	$	1,681,940

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	December 31,
($ in thousands, except share and per share amounts)	2018		2017
LIABILITIES
Losses and settlement expenses (affiliated $771,872 and $726,413)	$	777,190	$	732,612
Unearned premiums (affiliated $267,064 and $256,434)	268,511		257,797
Other policyholders' funds (all affiliated)	8,807		10,013
Surplus notes payable to affiliate	25,000		25,000
Amounts due affiliate to settle inter-company transaction balances	—		367
Pension benefits payable to affiliate	4,070		4,185
Income taxes payable	—		544
Deferred income taxes	4,908		15,020
Other liabilities (affiliated $31,121 and $27,520)	31,210		32,556
Total liabilities	1,119,696		1,078,094

STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 30,000,000 shares; issued and outstanding, 21,615,105 shares in 2018 and 21,455,545 shares in 2017	21,615		21,455
Additional paid-in capital	128,451		124,556
Accumulated other comprehensive income	1,620		83,384
Retained earnings	414,096		374,451
Total stockholders' equity	565,782		603,846
Total liabilities and stockholders' equity	$	1,685,478	$	1,681,940

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME



	Year ended December 31,
($ in thousands, except share and per share amounts)	2018			2017			2016
REVENUES
Premiums earned (affiliated $640,119, $603,233 and $586,609)	$	645,183		$	607,158		$	592,408
Net investment income	47,637			45,479			47,490
Net realized investment gains (losses) and, beginning in 2018, change in unrealized gains on equity investments	(41,252		)	6,556			4,074
Other income (affiliated $8,667, $5,255 and $5,830)	9,159			4,764			5,820
Total revenues	660,727			663,957			649,792

LOSSES AND EXPENSES
Losses and settlement expenses (affiliated $454,293, $417,259 and $385,708)	457,159			421,969			386,897
Dividends to policyholders (all affiliated)	9,209			7,610			13,800
Amortization of deferred policy acquisition costs (affiliated $114,468, $107,854 and $106,931)	115,803			108,910			108,403
Other underwriting expenses (affiliated $88,930, $82,044 and $74,370)	88,824			81,918			74,421
Interest expense (all affiliated)	654			337			337
Other expenses (affiliated $2,129, $1,825 and $1,860)	3,754			3,397			2,727
Total losses and expenses	675,403			624,141			586,585
Income (loss) before income tax expense (benefit)	(14,676		)	39,816			63,207

INCOME TAX EXPENSE (BENEFIT)
Current	(1,225		)	8,004			18,061
Deferred	(5,983		)	(7,426		)	(1,057		)
Total income tax expense (benefit)	(7,208		)	578			17,004
Net income (loss)	$	(7,468	)	$	39,238		$	46,203

Net income (loss) per common share - basic and diluted	$	(0.35	)	$	1.84		$	2.20

Average number of common shares outstanding - basic and diluted	21,549,436			21,326,358			21,006,302

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Year ended December 31,
($ in thousands)	2018			2017			2016
Net income (loss)	$	(7,468	)	$	39,238		$	46,203

OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gains (losses) on investment securities not reflected in net income, net of deferred income tax expense (benefit) of $(6,429), $14,688 and $(2,092)	(24,192		)	27,278			(3,885		)
Reclassification adjustment for net realized investment (gains) losses included in net income, net of income tax (expense) benefit of $3,895, $(4,483) and $(3,628)	14,653			(8,326		)	(6,736		)
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income, net of deferred income tax expense of $(573), $(587) and $(457):
Net actuarial loss	333			958			1,549
Prior service credit	(2,489		)	(2,047		)	(2,399		)
Total reclassification adjustment associated with affiliate's pension and postretirement benefit plans	(2,156		)	(1,089		)	(850		)
Change in funded status of affiliate's pension and postretirement benefit plans, net of deferred income tax expense (benefit) of $(1,022), $1,507 and $(474):
Net actuarial gain (loss)	(4,885		)	5,571			(542		)
Prior service credit (cost)	1,050			96			(339		)
Total change in funded status of affiliate's pension and postretirement benefit plans	(3,835		)	5,667			(881		)

Other comprehensive income (loss)	(15,530		)	23,530			(12,352		)

Total comprehensive income (loss)	$	(22,998	)	$	62,768		$	33,851

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY



($ in thousands, except per share amounts)	Common stock			Additional paid-in capital			Accumulated other comprehensive income			Retained earnings			Total stockholders' equity
Balance at December 31, 2015	$	20,781		$	108,747		$	58,433		$	336,977		$	524,938
Issuance of common stock through stock plans	459			10,611									11,070
Repurchase of common stock	(17		)	(366		)							(383		)
Increase resulting from stock-based compensation expense				62									62
Other comprehensive income (loss)							(12,352		)				(12,352		)
Net income (loss)										46,203			46,203
Dividends paid to public stockholders ($.78 per share)										(7,014		)	(7,014		)
Dividends paid to affiliate ($.78 per share)										(9,182		)	(9,182		)
Balance at December 31, 2016	21,223			119,054			46,081			366,984			553,342
Issuance of common stock through stock plans	300			7,227									7,527
Repurchase of common stock	(68		)	(1,790		)							(1,858		)
Increase resulting from stock-based compensation expense				65									65
Other comprehensive income (loss)							23,530						23,530
Net income (loss)										39,238			39,238
Dividends paid to public stockholders ($.85 per share)										(7,992		)	(7,992		)
Dividends paid to affiliate ($.85 per share)										(10,006		)	(10,006		)
Reclassification of tax effects from accumulated other comprehensive income resulting from TCJA							13,773			(13,773		)	—
Balance at December 31, 2017	21,455			124,556			83,384			374,451			603,846
Cumulative adjustment for adoption of financial instruments recognition and measurement changes							(66,234		)	66,234			—
Issuance of common stock through stock plans	216			5,210									5,426
Repurchase of common stock	(56		)	(1,399		)							(1,455		)
Increase resulting from stock-based compensation expense				84									84
Other comprehensive income (loss)							(15,530		)				(15,530		)
Net income (loss)										(7,468		)	(7,468		)
Dividends paid to public stockholders ($.89 per share)										(8,644		)	(8,644		)
Dividends paid to affiliate ($.89 per share)										(10,477		)	(10,477		)
Balance at December 31, 2018	$	21,615		$	128,451		$	1,620		$	414,096		$	565,782

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Year ended December 31,
($ in thousands)	2018			2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(7,468	)	$	39,238		$	46,203
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Losses and settlement expenses (affiliated $45,459, $40,880 and $14,364)	44,578			42,080			11,758
Unearned premiums (affiliated $9,057, $12,752 and $5,045)	10,714			12,912			5,450
Other policyholders' funds due to affiliate	(1,206		)	(3,055		)	4,347
Amounts due to/from affiliate to settle inter-company transaction balances	(5,521		)	(10,855		)	4,814
Net pension and postretirement benefits due from affiliate	(4,709		)	(2,783		)	(3,045		)
Reinsurance receivables due from affiliate	(5,711		)	(10,324		)	2,910
Prepaid reinsurance premiums due from affiliate	4,000			(3,480		)	(2,746		)
Commissions payable (affiliated $1,887, $981 and $(1,662))	1,921			903			(1,697		)
Deferred policy acquisition costs (affiliated $(3,592), $(188) and $(125))	(3,646		)	(175		)	(219		)
Accrued investment income	818			(236		)	(261		)
Current income tax	(7,241		)	(1,815		)	8,512
Deferred income tax	(5,983		)	(7,426		)	(1,057		)
Net realized investment gains (losses) and, beginning in 2018, change in unrealized investment gains on equity investments	41,252			(6,556		)	(4,074		)
Other, net (affiliated $1,711, $(1,058) and $960)	9,972			10,474			12,539
Total adjustments to reconcile net income (loss) to net cash provided by operating activities	79,238			19,664			37,231
Net cash provided by operating activities	$	71,770		$	58,902		$	83,434

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED



	Year ended December 31,
($ in thousands)	2018			2017			2016
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturity securities available-for-sale	$	(496,987	)	$	(310,684	)	$	(403,134	)
Disposals of fixed maturity securities available-for-sale	445,268			235,626			330,239
Purchases of equity investments	(90,137		)	(62,939		)	(63,683		)
Disposals of equity investments	79,492			83,256			71,106
Purchases of other long-term investments	(13,934		)	(14,782		)	(8,720		)
Disposals of other long-term investments	7,759			3,433			571
Net (purchases) disposals of short-term investments	(4,591		)	16,057			(1,071		)
Net receipts (disbursements) under reverse repurchase agreements	16,500			3,500			(3,150		)
Net cash used in investing activities	(56,630		)	(46,533		)	(77,842		)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock through affiliate’s stock plans	5,426			7,527			11,070
Repurchase of common stock	(1,455		)	(1,858		)	(383		)
Dividends paid to stockholders (affiliated $(10,477), $(10,006) and $(9,182))	(19,121		)	(17,998		)	(16,196		)
Net cash used in financing activities	(15,150		)	(12,329		)	(5,509		)
NET INCREASE (DECREASE) IN CASH	(10		)	40			83
Cash at the beginning of the year	347			307			224
Cash at the end of the year	$	337		$	347		$	307

Income taxes paid	$	2,393		$	9,820		$	13,967
Interest paid to affiliate	$	654		$	337		$	337

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

EMC Insurance Group Inc., a majority owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is an insurance holding company with operations in property and casualty insurance and reinsurance. The Company conducts its property and casualty insurance operations through the following subsidiaries: EMCASCO Insurance Company, Illinois EMCASCO Insurance Company and Dakota Fire Insurance Company, and its reinsurance operations through its subsidiary, EMC Reinsurance Company. The Company also has an excess and surplus lines insurance agency subsidiary, EMC Underwriters, LLC. The term “Company” is used interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC Insurance Group Inc. and its subsidiaries.

The Company writes property and casualty insurance in both commercial and personal lines of insurance, with a focus on medium-sized commercial accounts; however, on October 29, 2018, the Company, Employers Mutual and their subsidiary insurance companies (collectively the "EMC Insurance Companies") announced that they had made a strategic decision to exit personal lines business so that more time and resources can be dedicated to the commercial, reinsurance and life business. Approximately 36 percent of the premiums written are in Iowa and contiguous states. The Company’s reinsurance business is primarily written through a quota share reinsurance agreement with Employers Mutual. A small portion of the assumed reinsurance business is written on a direct basis, outside the quota share reinsurance agreement.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting principles (GAAP), which differ in some respects from those followed in reports to insurance regulatory authorities. All significant inter-company balances and transactions have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company has evaluated all subsequent events through the date the financial statements were issued.

Accounting Pronouncements Adopted

In January 2016, the Financial Accounting Standards Board (FASB) updated its guidance related to Financial Instruments-Overall Subtopic 825-10 of the Accounting Standards Codification^TM (Codification or ASC). The objective of this update is to enhance the reporting model for financial instruments to provide financial statement users with more decision-useful information. The major change in reporting from this update is a requirement that equity investments (excluding those accounted for under the equity method of accounting or those that are consolidated) be measured at fair value, with changes in fair value recognized in net income. Equity investments that do not have a readily determinable fair value may be measured at estimated fair value or cost less impairment. All of the Company's common and preferred stock equity investments were already measured at fair value, as they were classified as available-for-sale with changes in fair value recognized in other comprehensive income (excludes those investments that were consolidated and those that were accounted for under the equity method of accounting). The Company adopted this guidance on January 1, 2018, recording a cumulative-effect adjustment that moved $66.2 million from accumulated other comprehensive income to retained earnings, which is the amount of net unrealized investment gains on available-for-sale equity securities as of December 31, 2017, net of deferred income taxes. Management uses the equity method of accounting for a few holdings in privately placed common and non-redeemable convertible preferred stock investments in start-up technology companies with ties to the insurance industry, as well as for an investment company limited partnership in which the Company has a minor ownership interest (these investments are classified as other long-term investments). In connection with the adoption of this new guidance, beginning January 1, 2018, the equity adjustments for these investments are being reported as realized investment gains and losses on other long-term investments, rather than net investment income.

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In March 2017, the FASB issued updated guidance in Compensation-Retirement Benefits Topic 715 of the ASC. The objective of this update is to improve the presentation of net periodic pension and postretirement benefit costs by disaggregating the components of these expenses (disclosing the service cost component separately from the other components) for income statement reporting, if a subtotal of income from operations is presented. The Company does not report a subtotal of income from operations in its financial statements. Also included in this update is a prohibition against including components of the net periodic pension and postretirement benefit costs, other than the service cost component, in any capitalized assets. In conjunction with the adoption of this updated guidance, management elected to begin reporting all components of net periodic pension and postretirement benefit income, other than the service cost component, as other income in the consolidated statements of income. The service cost component continues to be reported in other underwriting expenses. This change in reporting was applied retrospectively for comparison purposes and did not impact the net income (loss) amounts reported, as other income and other underwriting expenses increased by the same amount ($7.5 million, $5.1 million and $4.8 million for the years ended December 31, 2018, 2017 and 2016, respectively). The prohibition against including net periodic pension and postretirement benefit costs, other than the service cost component, in capitalized assets was adopted prospectively on January 1, 2018. The impact of the exclusion of these costs from capitalized assets resulted in a negligible impact on the deferred policy acquisition cost asset calculation at December 31, 2018 compared to that which would have been calculated previously.

In August 2018, the FASB issued updated guidance related to Fair Value Measurement Topic 820 of the ASC. The objective of this update is to improve the effectiveness of disclosures in the notes to financial statements as part of the FASB's disclosure framework project. As it relates to the Company's footnote disclosures, this update removes disclosure of the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy, as well as the policy for timing of transfers between levels, but adds disclosure of the amount of unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements still held at the end of the reporting period. The Company adopted these disclosure modifications in 2018.

In August 2018, the FASB issued updated guidance in Compensation-Retirement Benefits Topic 715 of the ASC. The objective of this update is to improve the effectiveness of disclosures in the notes to financial statements as part of the FASB's disclosure framework project. As it relates to the Company's footnote disclosures, this update adds to the annual disclosures the weighted-average crediting rate used in Employers Mutual's pension plans, and requires explanations for significant gains and losses in the benefit obligations of Employers Mutual's pension and postretirement benefit plans. This update removes from the Company's annual disclosures the amounts in accumulated other comprehensive income for pension and postretirement benefit plans expected to be recognized as components of net periodic benefit cost in the next fiscal year. The Company adopted these disclosure modifications in 2018.

Property and Casualty Insurance and Reinsurance Operations

Premiums written is the amount charged for policies issued during a reporting period. Property and casualty insurance premiums are recognized as revenue ratably over the terms of the respective policies. Unearned premiums are calculated on the daily pro rata method. Both domestic and foreign assumed reinsurance premiums are recognized as revenues ratably over the terms of the related contracts and underlying policies. Amounts paid as ceded reinsurance premiums are reported as prepaid reinsurance premiums and are amortized over the remaining contract period in proportion to the amount of reinsurance protection provided. Reinsurance reinstatement premiums are recognized in the same period as the loss event that gave rise to the reinstatement premiums.

Costs related to the acquisition of insurance contracts are deferred and amortized to expense as the associated premium revenue is recognized. Only incremental costs and costs directly related to the successful acquisition of new or renewal insurance contracts are capitalized. Accordingly, acquisition costs consist of commissions, premium taxes, and salary and benefit expenses (beginning in 2018, only the service cost component is included from the pension and postretirement benefit plans) of employees directly involved in the underwriting of insurance policies that are successfully issued.

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The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to the estimated realizable value. In determining estimated realizable value, the computation gives effect to the premium to be earned, related investment income, anticipated losses and settlement expenses, anticipated policyholder dividends, and certain other costs expected to be incurred to administer the insurance policies as the premium is earned. The anticipated losses and settlement expenses are not discounted and are based on the Company’s projected loss and settlement expense ratios for the next twelve months, which include catastrophe loads based on historical results adjusted for recent trends. The occurrence of a significant catastrophic event, and/or the accumulation of catastrophe losses would not have a direct impact on the determination of premium deficiencies; however, such occurrences would be included in the historical results that are used to establish the catastrophe loads. A premium deficiency is first recognized by expensing the amount of unamortized deferred policy acquisition costs necessary to eliminate the deficiency. If the premium deficiency is greater than the unamortized deferred policy acquisition costs, a liability is accrued for the excess deficiency. The Company did not record a premium deficiency for the years ended December 31, 2018, 2017 or 2016.

Certain commercial lines of business written by the property and casualty insurance subsidiaries, including workers’ compensation, are eligible for policyholder dividends in accordance with provisions of the underlying insurance policies. Net premiums written subject to policyholder dividends represented approximately 32 percent and 26 percent of the property and casualty insurance subsidiaries’ total net commercial line premiums written in 2018 and 2017, respectively. Policyholder dividends are accrued over the terms of the underlying policy periods.

Liabilities for losses reflect losses incurred through the balance sheet date and are based upon the estimated ultimate loss ratios established by line of business and accident year, and estimates of losses expected under assumed reinsurance contracts. Liabilities for settlement expenses are provided by estimating expenses expected to be incurred in settling the claims provided for in the loss reserves. Changes in reserve estimates are reflected in net income in the year such changes are recorded (see note 4).

Ceded reinsurance amounts with nonaffiliated reinsurers relating to reinsurance receivables for unpaid losses and settlement expenses and prepaid reinsurance premiums are reported on the balance sheet on a gross basis. Amounts ceded to Employers Mutual under the affiliated reinsurance pooling agreement and the inter-company reinsurance programs (see note 2) have not been grossed up because the contracts provide that receivables and payables may be offset upon settlement.

Based on current information, the liabilities for losses and settlement expenses are considered to be adequate. Since the provisions are necessarily based on estimates, the ultimate liabilities may be more or less than such provisions.

Investments

Currently, all fixed maturity securities are classified as available-for-sale and are carried at fair value, with unrealized holding gains and losses reported as a component of accumulated other comprehensive income in stockholders’ equity, net of deferred income taxes. Beginning January 1, 2018, equity securities (excluding those accounted for under the equity method of accounting or those that are consolidated) are measured at fair value, with changes in fair value recognized in net income. However, equity investments that do not have a readily determinable fair value are measured at cost less impairment. Prior to 2018, equity securities were classified as available-for-sale and were carried at fair value, with unrealized holding gains and losses reported as a component of accumulated other comprehensive income in stockholders’ equity, net of deferred income taxes.

Other long-term investments primarily consist of holdings in limited partnerships, and privately placed common and non-redeemable convertible preferred stock in start-up technology companies with ties to the insurance industry. The equity method of accounting is used for these investments, with changes in the carrying value recorded as realized investment gains (losses). Also included in other long-term investments are holdings in limited liability companies that convey renewable energy tax credits that are carried at amortized cost.

Short-term investments generally include money market funds, U.S. Treasury bills and commercial paper that are carried at fair value, which approximates cost.

The Company participates in a reverse repurchase arrangement involving the purchase of investment securities from third-party sellers, with the agreement that the purchased securities be sold back to the third-party sellers for agreed-upon prices at specified future dates. The third-party sellers are required to pledge collateral with a value greater than the amount of cash received in the transactions. In accordance with GAAP, the investment securities purchased under the reverse repurchase agreements are not reflected in the Company's consolidated balance sheets, but instead a receivable is recorded for the principal amount lent. Net proceeds/disbursements related to the reverse repurchase transactions are reported as a component of investing activities in the consolidated statements of cash flows, and the income as a component of operating activities.

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The Company uses independent pricing sources to obtain the estimated fair value of securities. Fair values are based on quoted market prices, where available. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of investment. The fair values obtained from independent pricing sources are reviewed for reasonableness and any discrepancies are investigated for final valuation (see note 8). The Company uses the practical expedient of net asset value per share to measure fair value of its private equity arrangements (referred to as investment funds) and the pooled separate account investments in Employers Mutual's qualified pension plan (see notes 8 & 12).

Premiums and discounts on fixed maturity securities are amortized over the expected life of the security as an adjustment to yield using the effective interest method. Amortization of premiums and discounts on mortgage-backed securities incorporate prepayment assumptions to estimate expected lives. Prepayment assumptions are reviewed quarterly and adjusted as necessary. Gains and losses realized on the disposition of investments are included in net income. The cost of investments sold is determined on the specific identification method using the highest cost basis first. Included in investments at December 31, 2018 and 2017 are securities on deposit with various regulatory authorities as required by law amounting to $11.6 million and $11.3 million, respectively.

The Company regularly monitors its investment portfolio for investments whose fair value is less than the carrying value for indications of “other-than-temporary” impairment (except for, beginning in 2018, equity securities carried at fair value, with changes in fair value recognized in net income). Several factors are used to determine whether the carrying value of an individual investment has been “other-than-temporarily” impaired. Such factors include, but are not limited to (1) the investment’s value and performance in the context of the overall markets, (2) length of time and extent the investment’s fair value has been below carrying value, (3) key corporate events, and (4) for fixed maturity securities, the amount of collateral available. For fixed maturity securities, if the present value of cash flows expected to be collected is less than the amortized cost of the security, a credit loss is deemed to exist and the security is considered “other-than-temporarily” impaired. The portion of the impairment related to a credit loss is recognized through earnings, and the portion of the impairment related to other factors, if any, is recognized through “other comprehensive income”. Alternatively, if the Company has the intent to sell a fixed maturity security that is in an unrealized loss position, or determines that it will "more likely than not" be required to sell a fixed maturity security that is in an unrealized loss position before recovery of its amortized cost basis, then the carrying value is reduced to fair value and the entire amount of the impairment is recognized through earnings.

Income Taxes

The Company files a consolidated Federal income tax return with its subsidiaries. Consolidated income taxes/benefits are allocated among the entities based upon separate tax liabilities.

Deferred income taxes are provided for temporary differences between the tax basis of assets and liabilities and the reported amounts of those assets and liabilities for financial reporting purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Income tax expense provisions increase or decrease in the same period in which a change in tax rates is enacted. A valuation allowance is established to reduce deferred tax assets to their net realizable value if it is “more likely than not” that a tax benefit will not be realized.

In February 2018, the FASB issued updated guidance in Income Statement-Comprehensive Income Topic 220 of the ASC. The objective of this update was to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (TCJA), and requires certain disclosures about the stranded tax effects. The Company adopted this guidance for the 2017 reporting period, and elected to transfer the stranded tax effects in accumulated other comprehensive income to retained earnings as reflected in the consolidated statements of stockholders' equity. The Company releases the tax effects in accumulated other comprehensive income on an individual unit of account basis.

An assessment of the Company’s current tax positions indicated no uncertainties that would warrant different recognition and valuation from that applied in the Company’s tax returns.

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Stock-Based Compensation

The Company has a stock-based compensation plan for non-employee directors. Compensation expense under this plan is based upon the grant date fair value, and is recognized as the requisite service period is rendered. The Company has no other stock-based compensation plans of its own; however, Employers Mutual has several stock plans which utilize the common stock of the Company. The Company receives the current fair value for all shares issued under Employers Mutual's plans, and a portion of the compensation expense recognized by Employers Mutual is allocated to the Company’s property and casualty insurance subsidiaries though their participation in the pooling agreement (see note 2). For granted options and restricted stock awards, compensation expense is based upon the grant date fair value, and is recognized as the requisite service period is rendered. For granted restricted stock units, the expense is determined in accordance with the liability-based model, whereby Employers Mutual records a liability representing the current value of the Company's stock granted for the portion of the service period that has been rendered (both the liability and the resulting expense are allocated to the Company's property and casualty insurance subsidiaries through the pooling agreement). Excess tax benefits (deficiencies) related to non-qualified stock option activities allocated to the Company's property and casualty insurance subsidiaries through the pooling agreement are recognized through the consolidated statements of income as components of current and deferred income taxes, with the associated cash flows reflected as cash flows from operating activities. Because a portion of Employers Mutual’s stock compensation expense is reflected in the Company’s financial statements and issuances of the Company’s stock under Employers Mutual’s stock plans have an impact on the Company’s capital accounts, the disclosures required by the Compensation – Stock Compensation Topic 718 of the FASB ASC are included in the Company’s consolidated financial statements (see note 13).

Employee Retirement Plans

Employers Mutual has various employee benefit plans, including two defined benefit pension plans, and two postretirement benefit plans that provide retiree healthcare and life insurance benefits. Although the Company has no employees of its own, it is responsible for its share of the plans' expenses and related prepaid assets and liabilities (the "funded status") as determined under the terms of the pooling agreement. Accordingly, the Company recognizes its share of the funded status of Employers Mutual’s pension and postretirement benefit plans on its balance sheet. In addition, the Company is responsible for its share of costs of these plans allocated by Employers Mutual to subsidiaries that do not participate in the pooling agreement (see note 2).

Accounts Receivable

The accounts receivable balance consists of assumed reinsurance premiums receivable (net of any commissions) on business written directly by the reinsurance subsidiary, and commission income receivable on excess and surplus lines business marketed by EMC Underwriters, LLC. These receivables are carried at their initial recognition amounts. It is the Company’s policy to reflect the impairment of receivables through a valuation allowance until ultimately collected or charged-off. No valuation allowance is currently carried, as no amounts are deemed impaired. No interest income, other fees, or deferred costs related to these receivables are assessed or recognized.

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Off-Balance-Sheet Credit Exposure

Employers Mutual collects from agents, policyholders and ceding companies all premiums written associated with the insurance business produced by the pool participants and the assumed reinsurance business ceded to the reinsurance subsidiary. Employers Mutual also collects from its reinsurers all losses and settlement expenses recoverable under the reinsurance contracts protecting the pool participants and the reinsurance subsidiary (see note 2), as well as the fronting business ceded to the reinsurance subsidiary. Employers Mutual settles with the pool participants (monthly) and the reinsurance subsidiary (quarterly) the premiums written from these insurance policies and the paid losses and settlement expenses recoverable under the external reinsurance contracts, providing full credit for the premiums written and the paid losses and settlement expenses recoverable under the external reinsurance contracts generated during the period (not just the collected portion). Due to this arrangement, and since a significant portion of the premium balances are collected over the course of the underlying coverage periods, Employers Mutual carries a substantial receivable balance for insurance and reinsurance premiums in process of collection and, to a lesser extent, paid losses and settlement expenses recoverable from the external reinsurance companies. Any of these receivable amounts that are ultimately deemed to be uncollectible are charged-off by Employers Mutual and the expense is charged to the reinsurance subsidiary or allocated to the pool members on the basis of pool participation. As a result, the Company has off-balance sheet arrangements with an unconsolidated entity that results in credit-risk exposures (Employers Mutual’s insurance and reinsurance premium receivable balances, and paid loss and settlement expense recoverable amounts) that are not reflected in the Company’s financial statements. The average annual expense for such charge-offs allocated to the Company over the past ten years is $414,000. Based on this historical data, this credit-risk exposure is not considered to be material to the Company’s results of operations or financial position and, accordingly, no loss contingency liability has been recorded.

Foreign Currency Transactions

Included in the underlying reinsurance business assumed by the reinsurance subsidiary are reinsurance transactions conducted with foreign cedants denominated in their local functional currencies. In accordance with the terms of the quota share agreement (see note 2), the reinsurance subsidiary assumes all foreign currency exchange gains/losses associated with contracts that are subject to the quota share agreement. The reinsurance subsidiary also has foreign currency exchange gains/losses associated with the business assumed outside the quota share agreement. The assets and liabilities resulting from these foreign reinsurance transactions are reported in U.S. dollars based on the foreign currency exchange rates that existed at the balance sheet dates. The foreign currency exchange rate gains/losses reported in the consolidated statements of income that resulted from these foreign reinsurance transactions are reported in U.S. dollars re-measured from the foreign currency exchange rates that existed at the inception of each reinsurance contract. The foreign currency exchange rate gains/losses resulting from these re-measurements to U.S. dollars are reported as a component of other income in the consolidated statements of income.

Net Income Per Share - Basic and Diluted

The Company’s basic and diluted net income per share is computed by dividing net income by the weighted average number of common shares outstanding during each period. As previously noted, the Company receives the current fair value for all shares issued under Employers Mutual’s stock plans. As a result, with the exception of the immaterial number of shares of outstanding non-vested restricted stock issued to the Company's non-employee directors, the Company had no potential common shares outstanding during 2018, 2017 or 2016 that would have been dilutive to the calculation of net income per share. The outstanding non-vested restricted stock issued to the Company's non-employee directors is not material enough to produce a diluted net income per share different from the basic net income per share; therefore, the Company does not disclose an amount for the diluted weighted average number of common shares outstanding.

Goodwill

Goodwill represents the excess of cost over the fair value of net assets of acquired subsidiaries. Goodwill is not amortized, but is instead subject to impairment if the carrying value of the goodwill exceeds the estimated fair value of net assets. If the carrying amount of the reporting unit (including goodwill) exceeds the computed fair value, an impairment loss is recognized through the income statement equal to the excess amount, but not greater than the balance of the goodwill. Goodwill was not deemed to be impaired in 2018, 2017 or 2016.

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Exit Cost Obligations

As noted earlier, on October 29, 2018, the EMC Insurance Companies announced that they had made a strategic decision to exit personal lines business. Personal lines premiums written represent approximately six percent of the Company's total premiums written. This exit process is expected to conclude during the first quarter of 2020, and is contained entirely within the property and casualty insurance segment. Over the course of this exit, the Company expects to incur, as its share through the pooling agreement, approximately $1.2 million of expense associated with severance costs, and $729,000 from the write-off of personal lines software that was in development. Total exit cost expenses recorded in 2018 were $967,000. Other related costs, including job search assistance, are deemed immaterial.

New Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued updated guidance in Leases Topic 842 of the ASC, which supersedes the guidance in Leases Topic 840 of the ASC. The objective of this update is to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet, and disclosure of key information about leasing arrangements. This guidance is effective for interim and annual periods beginning after December 15, 2018, and is to be applied using a modified retrospective approach. Early adoption is permitted. The Company will adopt this guidance during the first quarter of 2019. Management's research of this guidance led to the conclusion that lease costs allocated to the Company through the pooling and quota share agreements can not be attributed to a specified asset, and therefore do not meet the definition of a leased asset contained in the guidance. As a result, adoption of this guidance will not have an impact on the Company's consolidated financial condition or net income.

In June 2016, the FASB issued updated guidance in Financial Instruments-Credit Losses Topic 326 of the ASC. The objective of this update is to provide information about expected credit losses on financial instruments and other commitments to extend credit. Specifically, this updated guidance replaces the current incurred loss impairment methodology, which delays recognition of a loss until it is probable a loss has been incurred, with a methodology that reflects expected credit losses considering a broader range of reasonable and supportable information. This guidance covers financial assets that are not accounted for at fair value through net income, thus is not applicable to the Company's equity investments. This guidance is effective for interim and annual periods beginning after December 15, 2019, and is to be applied with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (modified-retrospective approach). Early adoption is permitted, but only to fiscal years beginning after December 15, 2018. The Company will adopt this guidance during the first quarter of 2020. The Company is currently evaluating the impact this guidance will have on the Company's consolidated financial condition and net income.


2.	AFFILIATION AND TRANSACTIONS WITH AFFILIATES

The operations of the Company are highly integrated with those of Employers Mutual through participation in a property and casualty reinsurance pooling agreement (the "pooling agreement"), a quota share retrocessional reinsurance agreement (the "quota share agreement") and inter-company reinsurance programs. All transactions occurring under the pooling agreement, quota share agreement and the inter-company reinsurance programs are based on statutory accounting principles. Certain adjustments are made to the statutory-basis amounts assumed by the property and casualty insurance subsidiaries and the reinsurance subsidiary to bring the amounts into compliance with GAAP.

On November 20, 2018, the Company announced receipt of a non-binding indicative proposal dated November 15, 2018 from Employers Mutual to purchase all the outstanding common stock of the Company not already owned by Employers Mutual, and the formation of a special committee of the Company's board of directors to consider the proposal. The proposal, which is subject to certain conditions, provides that the shares will be purchased at a price of $30 per share in cash. The special committee has retained its own independent financial and legal advisors to assist it in considering the proposal. There can be no assurance that any definitive agreement will be finalized and executed or that the proposal transaction or any other transaction will be approved or consummated.

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Property and Casualty Insurance Subsidiaries

The Company’s three property and casualty insurance subsidiaries and two subsidiaries of Employers Mutual (Union Insurance Company of Providence and EMC Property & Casualty Company) are parties to a pooling agreement with Employers Mutual. Under the terms of the pooling agreement, each company cedes to Employers Mutual all of its insurance business, and assumes from Employers Mutual an amount equal to its participation in the pool. All premiums, losses, settlement expenses, and other underwriting and administrative expenses, excluding the voluntary reinsurance business assumed by Employers Mutual from nonaffiliated insurance companies, are prorated among the parties on the basis of participation in the pool. Employers Mutual negotiates reinsurance agreements that provide protection to the pool and each of its participants, including protection against losses arising from catastrophic events. The aggregate participation of the Company’s property and casualty insurance subsidiaries in the pool is 30 percent.

Reinsurance Subsidiary

The Company’s reinsurance subsidiary is party to a quota share agreement and an inter-company reinsurance program with Employers Mutual. Under the terms of the quota share agreement, the reinsurance subsidiary assumes 100 percent of Employers Mutual’s assumed reinsurance business, subject to certain exceptions. The inter-company reinsurance program in place with Employers Mutual covers both business assumed from Employers Mutual through the quota share agreement, as well as business obtained outside the quota share agreement, and consists of two treaties. The first is a per occurrence catastrophe excess of loss treaty with a retention of $10.0 million, a limit of $10.0 million, 20 percent co-participation, and no reinstatement. The total cost of this treaty was approximately $1.6 million, $1.7 million and $2.0 million in 2018, 2017 and 2016, respectively. The second is an annual aggregate catastrophe excess of loss treaty with a retention of $20.0 million, a limit of $100.0 million, and 20 percent co-participation. The total cost of this treaty was approximately $3.6 million, $3.2 million and $3.2 million in 2018, 2017 and 2016, respectively. Any losses recovered under the per occurrence treaty inure to the benefit of the aggregate treaty, and only catastrophic events with total losses greater than $500,000 are subject to the terms of the aggregate treaty. With the exception of the costs, the terms of the program were the same in all three years presented. Losses and settlement expenses ceded to Employers Mutual under the inter-company reinsurance program totaled $(4.6) million in 2018, $16.8 million in 2017 and $(467,000) in 2016. Much of the negative amount for 2018 is attributed to the reinsurance subsidiary recovering losses under external reinsurance purchased in 2017 to provide additional protection in peak exposure territories (see following paragraph). In accordance with the co-participation provision of the inter-company reinsurance program, the reinsurance subsidiary retained 20 percent of this recovery, with the balance ceded to Employers Mutual.

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Premiums earned assumed by the reinsurance subsidiary from Employers Mutual amounted to $149.9 million, $135.7 million and $135.2 million in 2018, 2017 and 2016, respectively. Losses and settlement expenses assumed by the reinsurance subsidiary from Employers Mutual amounted to $116.7 million, $131.1 million and $90.9 million in 2018, 2017 and 2016, respectively. It is customary in the reinsurance business for the assuming company to compensate the ceding company for the acquisition expenses incurred in the generation of the business. Commissions incurred by the reinsurance subsidiary under the quota share agreement with Employers Mutual amounted to $30.0 million, $27.5 million and $27.4 million in 2018, 2017 and 2016, respectively.

The net foreign currency exchange gains (losses) assumed by the reinsurance subsidiary from Employers Mutual were $266,000 in 2018, $(978,000) in 2017 and $367,000 in 2016. The total amount of net foreign currency exchange gains (losses) assumed by the reinsurance subsidiary, including the business written on a direct basis outside the quota share agreement, were $637,000 in 2018, $(1.6) million in 2017 and $356,000 in 2016.

Services Provided by Employers Mutual

The Company does not have any employees of its own. Employers Mutual performs all operations for all of its subsidiaries and affiliate. Such services include data processing, claims, financial, actuarial, legal, auditing, marketing and underwriting. Employers Mutual allocates a portion of the cost of these services to its subsidiaries that do not participate in the pooling agreement based upon a number of criteria, including usage of the services and the number of transactions. The remaining costs are charged to the pooling agreement and each pool participant shares in the total cost in accordance with its pool participation percentage. Costs allocated to the Company by Employers Mutual for services provided to the holding company and its subsidiaries that do not participate in the pooling agreement amounted to $5.9 million, $4.4 million and $4.7 million in 2018, 2017 and 2016, respectively. Costs allocated to the Company through the operation of the pooling agreement amounted to $104.8 million, $97.7 million and $92.3 million in 2018, 2017 and 2016, respectively.

Investment expenses are based on actual expenses incurred by the Company and its subsidiaries, plus an allocation of other investment expenses incurred by Employers Mutual, which is based on a weighted-average of total invested assets and number of investment transactions. Investment expenses allocated to the Company by Employers Mutual amounted to $1.8 million, $1.6 million and $1.4 million in 2018, 2017 and 2016, respectively.


3.	REINSURANCE

The parties to the pooling agreement cede insurance business to other insurers in the ordinary course of business for the purpose of limiting their maximum loss exposure through diversification of their risks. In its consolidated financial statements, the Company treats risks to the extent they are reinsured as though they were risks for which the Company is not liable. However, insurance ceded by the pool participants does not relieve their primary liability as the originating insurers. Employers Mutual evaluates the financial condition of the reinsurers of the parties to the pooling agreement and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize exposure to significant losses from reinsurer insolvencies.

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As of December 31, 2018 and 2017, amounts recoverable from nonaffiliated reinsurers (two in 2018 and three in 2017) totaled $16.6 million and $22.7 million respectively, which represents a significant portion of the total prepaid reinsurance premiums and reinsurance receivables for losses and settlement expenses. Included in these balances is the property and casualty insurance subsidiaries’ aggregate pool participation percentage of amounts ceded by Employers Mutual to an organization on a mandatory basis. Credit risk associated with these amounts are minimal, as all companies participating in the organization are responsible for the liabilities of the organization on a pro rata basis.

The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the three years ended December 31, 2018 is presented below. The classification of the assumed and ceded reinsurance amounts between affiliates and nonaffiliates is based on the participants in the underlying reinsurance agreements, and is intended to provide an understanding of the actual source of the reinsurance activities. This presentation differs from the classifications used in the consolidated financial statements, where all amounts flowing through the pooling and quota share agreements and inter-company reinsurance programs with Employers Mutual are reported as “affiliated” balances.



	Year ended December 31, 2018
($ in thousands)	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	408,821		$	—		$	408,821
Assumed from nonaffiliates	4,550			165,747			170,297
Assumed from affiliates	542,480			—			542,480
Ceded to nonaffiliates	(29,165		)	(9,979		)	(39,144		)
Ceded to affiliates	(416,161		)	(5,250		)	(421,411		)
Net premiums written	$	510,525		$	150,518		$	661,043

Premiums earned
Direct	$	399,660		$	—		$	399,660
Assumed from nonaffiliates	4,482			165,052			169,534
Assumed from affiliates	531,384			—			531,384
Ceded to nonaffiliates	(33,079		)	(10,066		)	(43,145		)
Ceded to affiliates	(407,000		)	(5,250		)	(412,250		)
Net premiums earned	$	495,447		$	149,736		$	645,183

Losses and settlement expenses incurred
Direct	$	225,676		$	—		$	225,676
Assumed from nonaffiliates	3,470			128,354			131,824
Assumed from affiliates	352,423			1,306			353,729
Ceded to nonaffiliates	(17,800		)	(10,049		)	(27,849		)
Ceded to affiliates	(230,848		)	4,627			(226,221		)
Net losses and settlement expenses incurred	$	332,921		$	124,238		$	457,159

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	Year ended December 31, 2017
($ in thousands)	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	391,029		$	—		$	391,029
Assumed from nonaffiliates	4,454			147,284			151,738
Assumed from affiliates	520,932			—			520,932
Ceded to nonaffiliates	(34,019		)	(10,160		)	(44,179		)
Ceded to affiliates	(398,369		)	(4,850		)	(403,219		)
Net premiums written	$	484,027		$	132,274		$	616,301

Premiums earned
Direct	$	384,993		$	—		$	384,993
Assumed from nonaffiliates	4,299			149,952			154,251
Assumed from affiliates	505,795			—			505,795
Ceded to nonaffiliates	(30,385		)	(10,313		)	(40,698		)
Ceded to affiliates	(392,333		)	(4,850		)	(397,183		)
Net premiums earned	$	472,369		$	134,789		$	607,158

Losses and settlement expenses incurred
Direct	$	252,007		$	—		$	252,007
Assumed from nonaffiliates	2,879			142,687			145,566
Assumed from affiliates	334,240			1,330			335,570
Ceded to nonaffiliates	(14,968		)	(8,183		)	(23,151		)
Ceded to affiliates	(271,185		)	(16,838		)	(288,023		)
Net losses and settlement expenses incurred	$	302,973		$	118,996		$	421,969

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	Year ended December 31, 2016
($ in thousands)	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	383,811		$	—		$	383,811
Assumed from nonaffiliates	4,544			146,236			150,780
Assumed from affiliates	491,315			—			491,315
Ceded to nonaffiliates	(24,346		)	(10,126		)	(34,472		)
Ceded to affiliates	(391,651		)	(5,080		)	(396,731		)
Net premiums written	$	463,673		$	131,030		$	594,703

Premiums earned
Direct	$	382,300		$	—		$	382,300
Assumed from nonaffiliates	4,444			148,851			153,295
Assumed from affiliates	483,759			—			483,759
Ceded to nonaffiliates	(23,896		)	(7,830		)	(31,726		)
Ceded to affiliates	(390,140		)	(5,080		)	(395,220		)
Net premiums earned	$	456,467		$	135,941		$	592,408

Losses and settlement expenses incurred
Direct	$	229,859		$	—		$	229,859
Assumed from nonaffiliates	2,712			93,306			96,018
Assumed from affiliates	304,007			1,811			305,818
Ceded to nonaffiliates	(4,891		)	(3,056		)	(7,947		)
Ceded to affiliates	(237,318		)	467			(236,851		)
Net losses and settlement expenses incurred	$	294,369		$	92,528		$	386,897

Individual lines in the above tables are defined as follows:


•	“Direct” represents business produced by the property and casualty insurance subsidiaries.

•

“Assumed from nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of involuntary business assumed by the pool participants pursuant to state law. For the reinsurance subsidiary, this line represents the reinsurance business assumed through the quota share agreement (including “fronting” activities initiated by Employers Mutual) and the business assumed outside the quota share agreement.

•

“Assumed from affiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of all the pool members’ direct business. The amounts reported under the caption “Losses and settlement expenses incurred” also include claim-related services provided by Employers Mutual that are allocated to the property and casualty insurance subsidiaries and the reinsurance subsidiary.

•

“Ceded to nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of 1) the amounts ceded to nonaffiliated reinsurance companies in accordance with the terms of the reinsurance agreements providing protection to the pool and each of its participants, and 2) the amounts ceded on a mandatory basis to state organizations in connection with various programs. For the reinsurance subsidiary, this line includes 1) reinsurance business that is ceded to other insurance companies in connection with “fronting” activities initiated by Employers Mutual, and 2) amounts ceded in connection with the purchase of additional reinsurance protection in peak exposure territories from external parties.

•

“Ceded to affiliates” for the property and casualty insurance subsidiaries represents the cession of their direct business to Employers Mutual under the terms of the pooling agreement and amounts ceded to Employers Mutual under the terms of the inter-company reinsurance program. For the reinsurance subsidiary this line represents amounts ceded to Employers Mutual under the terms of the inter-company reinsurance program.

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4.	LIABILITY FOR LOSSES AND SETTLEMENT EXPENSES

The following table sets forth a reconciliation of beginning and ending reserves for losses and settlement expenses of the Company. Amounts presented are on a net basis, with a reconciliation of beginning and ending reserves to the gross amounts presented in the consolidated financial statements.



	Year ended December 31,
($ in thousands)	2018			2017			2016
Gross reserves at beginning of year	$	732,612		$	690,532		$	678,774
Re-valuation due to foreign currency exchange rates	525			(1,913		)	(2,475		)
Less ceded reserves at beginning of year	30,923			20,664			23,477
Net reserves at beginning of year	701,164			671,781			657,772

Incurred losses and settlement expenses related to:
Current year	475,843			441,588			427,838
Prior years	(18,684		)	(19,619		)	(40,941		)
Total incurred losses and settlement expenses	457,159			421,969			386,897

Paid losses and settlement expenses related to:
Current year	180,230			179,354			172,652
Prior years	236,905			213,232			200,236
Total paid losses and settlement expenses	417,135			392,586			372,888

Net reserves at end of year	741,188			701,164			671,781
Plus ceded reserves at end of year	36,595			30,923			20,664
Re-valuation due to foreign currency exchange rates	(593		)	525			(1,913		)
Gross reserves at end of year	$	777,190		$	732,612		$	690,532

There is an inherent amount of uncertainty involved in the establishment of insurance liabilities. This uncertainty is greatest in the current and more recent accident years because a smaller percentage of the expected ultimate claims have been reported, adjusted and settled compared to more mature accident years. As the carried reserves for these accident years run off, the overall expectation is that, more often than not, favorable development will occur. However, there is also the possibility that the ultimate settlement of liabilities associated with these accident years will show adverse development, and such adverse development could be substantial.

Changes in reserve estimates are reflected in net income in the year such changes are recorded. Following is an analysis of the reserve development the Company experienced during the past three years. Care should be exercised when attempting to analyze the financial impact of the reported development amounts because, as noted above, the overall expectation is that, more often than not, favorable development will occur as the prior accident years’ reserves run off.

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2018 Development

For the property and casualty insurance segment, the December 31, 2018 estimate of loss and settlement expense reserves for accident years 2017 and prior decreased $15.3 million from the estimate at December 31, 2017. This decrease represents 3.0 percent of the December 31, 2017 gross carried reserves and is primarily attributed to reductions in prior year ultimate loss and settlement ratios for every line of business except workers' compensation and auto physical damage. Other liability experienced favorable development, driven by a reduction in the expected ultimate loss and settlement ratios for accident years 2013, 2015 and 2017, although the ultimate settlement expense ratios for several prior years were reduced slightly as well. Favorable development in the commercial property line was produced by reductions in the ultimate loss and settlement ratios for accident years 2013-2017, as both reported and expected ultimate claim severity decreased. Commercial auto liability had favorable development from decreases in the ultimate loss and settlement ratios for accident years 2011, 2014 and 2017, since ultimate claim severities are now projected to be better than initially expected. Ultimate loss and settlement ratios for surety bonds have been lowered for accident years 2016 and 2017 due to lower than expected reported losses to date, and homeowners ultimate loss and settlement ratios were reduced for accident years 2014 and 2017. Workers' compensation and auto physical damage experienced adverse development on direct loss and settlement expenses. Adverse development in workers' compensation is the result of an increase in the 2017 accident year ultimate loss and settlement ratio due to an initial underestimate of both the ultimate frequency and severity, especially winter related slip and fall claims. The 2017 accident year ultimate loss and settlement ratio for auto physical damage was increased due to an increase in frequency associated with fourth quarter 2017 claims. Prior year development was flat in the personal auto liability line of business.

For the reinsurance segment, the December 31, 2018 estimate of loss and settlement expense reserves for accident years 2017 and prior decreased $3.4 million from the estimate at December 31, 2017. This decrease represents 1.5 percent of the December 31, 2017 gross carried reserves and primarily reflects favorable development associated with lower estimated ultimate losses for casualty excess contracts for accident years 2008-2011 and 2016, nearly all contract types for accident year 2013, and catastrophe and per risk excess contracts for accident year 2017. The favorable development from external reinsurance recoveries in 2018 for the 2017 accident year was largely offset by the cession of the majority of those balances to Employers Mutual under the provisions of the inter-company reinsurance program.

2017 Development

For the property and casualty insurance segment, the December 31, 2017 estimate of loss and settlement expense reserves for accident years 2016 and prior decreased $15.7 million from the estimate at December 31, 2016. This decrease represented 3.2 percent of the December 31, 2016 gross carried reserves and was primarily attributed to reductions in prior year ultimate loss ratios for every line of business except commercial auto liability and surety bonds (included in "other" lines of business). Commercial auto liability experienced adverse development as ultimate loss and settlement expense ratios were increased for accident years 2013-2016 due to increases in projected severity and/or frequency. The adverse development from surety bonds was due to two large accident year 2015 losses. The two lines of business contributing the majority of favorable development were other liability and workers' compensation. Other liability’s ultimate loss ratios were decreased for most accident years from 2001 through 2016 mainly in response to decreases in expected ultimate severity. Workers' compensation’s favorable development reflected a reduction in the accident year 2016 ultimate ratio as reported losses to date were materially more favorable than anticipated in frequency and severity assumptions underlying the December 31, 2016 selection. Included in the development amount was adverse development experienced in the other liability line of business stemming from the settlement of claims for past and future legal fees and losses on a multi-year asbestos exposure associated with a former insured, and a slight strengthening of remaining reserves.

For the reinsurance segment, the December 31, 2017 estimate of loss and settlement expense reserves for accident years 2016 and prior decreased $3.9 million from the estimate at December 31, 2016. This decrease represented 1.9 percent of the December 31, 2016 gross carried reserves and primarily reflected favorable development in the property/casualty global pro rata and excess contracts, and the per risk excess contracts. For the property/casualty global pro rata contracts, the favorable development was related to a change in ultimate loss assumptions for several prior years due to the use of company experience in place of Reinsurance Association of America data for calculating development factors to ultimate.

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2016 Development

During the third quarter of 2016, management implemented a new reserving methodology for the determination of direct bulk reserves in the property and casualty insurance segment. The new methodology, which is referred to as the accident year ultimate estimate approach, better conforms to industry practices and provides increased transparency of the drivers of the property and casualty insurance segment's performance. In connection with this change in reserving methodology, there was a reallocation of incurred but not reported ("IBNR") loss reserves and allocated settlement expense reserves from prior accident years to the current accident year in multiple lines of business. This change resulted in the movement of approximately $5.6 million of reserves from prior accident years to the current accident year that was reported as favorable development; however, this development was "mechanical in nature", and did not have an impact on earnings because the total amount of carried reserves did not change.

For the property and casualty insurance segment, the December 31, 2016 estimate of loss and settlement expense reserves for accident years 2015 and prior decreased $30.0 million from the estimate at December 31, 2015. Excluding the $5.6 million of "mechanical" favorable development that resulted from the change in reserving methodology noted above, the implied amount of favorable development that had an impact on earnings was approximately $24.4 million. This decrease represented 5.1 percent of the December 31, 2015 gross carried reserves and was primarily attributed to a significant amount of favorable reserve development experienced in the workers' compensation and other liability lines of business. The favorable development in the workers' compensation line of business was generated from a change in assumptions due to better than expected loss frequency for accident year 2015 and loss severity for the most recent accident years. The favorable development in the other liability line of business was generated from a change in assumptions due to better than expected loss severity.

For the reinsurance segment, the December 31, 2016 estimate of loss and settlement expense reserves for accident years 2015 and prior decreased $10.9 million from the estimate at December 31, 2015. This decrease represented 5.5 percent of the December 31, 2015 gross carried reserves and was attributed to favorable development in the 2015 accident year in the HORAD pro rata line of business, and an increase in the amount of negative bulk IBNR loss reserve carried on prior years' reserves in the Mutual Re book of business.

During 2016, the expected loss ratios utilized for prior contract years remained unchanged, except for ocean marine pro rata business. The expected loss ratios associated with this contract type were decreased in contract years 2012, 2014 and 2015 from the ratios utilized during 2015. Additionally, the expected loss ratio for contract year 2013 was increased slightly relative to the 2015 value. These changes were made in response to reserving information supplied by the ceding company, a large writer of ocean marine pro rata business.

Following is information about reported incurred and paid claims development as of December 31, 2018, net of reinsurance, as well as cumulative claim frequency and the amount of IBNR loss reserves carried (representing both IBNR liabilities and expected loss reserve development on reported claims). The information displayed for assumed reinsurance is restated to reflect all foreign currency denominated transactions on the basis of current (December 31, 2018) exchange rates. The number of reported claims (cumulative claim frequency) for the Company’s direct insurance business represents the total number of claims reported by the participants in the pooling agreement, and is determined on the basis of each unique combination of claimant, specific policy coverage, and type of loss. This is in contrast to all other reported amounts that are stated at the aggregate 30 percent pool participation percentage of the Company's property and casualty insurance subsidiaries. The cumulative claim frequency for the Company’s assumed reinsurance business is not readily available. Consistent with industry practices, bordereauxs on pro rata accounts often exclude claim frequency information, and if it is included, the level of detail provided by the ceding companies can vary significantly. Excess of loss contracts customarily report total losses subject to the treaty without detailed loss listings.

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($ in thousands)
Commercial auto liability insurance
	Incurred losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,																					As of December 31, 2018
	Supplementary unaudited information																		Audited			Audited		Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018			IBNR reserves carried		Cumulative number of reported claims
2009	$	28,973	$	27,923	$	26,667	$	25,370	$	24,986	$	24,874	$	24,730	$	24,655	$	24,697	$	24,677		$	—	10,482
2010			30,377		27,480		26,478		26,401		26,252		26,479		26,166		26,166		26,159			2		11,393
2011					32,775		29,790		31,098		31,961		31,914		31,635		31,638		31,286			—		11,768
2012							32,768		34,235		37,098		37,681		37,693		37,753		37,739			7		11,943
2013									37,265		40,382		42,086		42,336		43,159		43,328			20		13,640
2014											50,342		49,998		51,455		51,933		51,491			390		15,071
2015													53,883		57,824		58,627		59,054			919		16,541
2016															59,468		61,188		62,051			3,451		16,978
2017																	63,909		64,187			9,011		16,468
2018																			70,269			22,856		15,759
																	Total		$	470,241

	Cumulative paid losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,
	Supplementary unaudited information																		Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	6,952	$	12,957	$	17,359	$	21,532	$	24,001	$	24,495	$	24,593	$	24,608	$	24,628	$	24,634
2010			7,025		13,278		19,274		23,547		24,674		25,558		26,039		26,088		26,105
2011					6,801		14,875		22,206		26,598		29,121		30,293		30,878		31,146
2012							8,830		19,398		26,023		32,636		35,406		36,541		37,125
2013									8,729		19,975		29,997		36,232		40,807		42,364
2014											12,069		25,746		37,433		44,783		48,467
2015													13,336		27,424		39,478		50,675
2016															13,583		30,233		43,169
2017																	14,474		31,056
2018																			15,064
																	Total		$	349,805
									All outstanding liabilities before 2009, net of reinsurance										(38		)
							Liability for losses and settlement expenses, net of reinsurance												$	120,398

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($ in thousands)
Commercial property insurance
	Incurred losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,																				As of December 31, 2018
	Supplementary unaudited information																		Audited		Audited			Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		IBNR reserves carried			Cumulative number of reported claims
2009	$	39,511	$	36,003	$	35,985	$	35,881	$	35,622	$	35,926	$	36,056	$	36,020	$	36,292	$	36,351	$	—		14,657
2010			40,422		38,650		38,770		39,071		39,154		39,379		39,428		39,347		39,423		1			16,278
2011					58,930		57,614		57,271		57,629		57,703		58,375		58,148		58,122		—			19,511
2012							41,535		44,157		45,313		46,273		46,566		46,750		46,880		(8		)	16,072
2013									50,266		50,976		52,511		53,070		52,966		52,432		(15		)	16,012
2014											60,018		60,990		60,662		60,867		60,250		38			16,755
2015													55,508		56,798		55,659		55,027		(110		)	14,403
2016															59,708		58,343		58,227		(91		)	14,978
2017																	55,459		54,357		(122		)	15,006
2018																			63,623		2,353			12,946
																	Total		$	524,692

	Cumulative paid losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,
	Supplementary unaudited information																		Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	25,321	$	32,602	$	34,624	$	35,422	$	35,803	$	35,803	$	35,849	$	35,893	$	36,224	$	36,246
2010			28,032		35,730		36,931		37,926		38,901		39,314		39,318		39,323		39,368
2011					41,524		53,226		54,803		56,249		57,065		57,607		58,106		58,116
2012							32,879		41,862		43,628		44,543		46,270		46,562		46,708
2013									36,555		47,683		50,460		51,457		52,182		52,266
2014											43,022		55,679		58,045		59,255		59,815
2015													37,208		50,068		52,444		53,405
2016															41,652		51,103		54,681
2017																	38,114		50,280
2018																			43,619
																	Total		$	494,504
									All outstanding liabilities before 2009, net of reinsurance										25
							Liability for losses and settlement expenses, net of reinsurance												$	30,213

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($ in thousands)
Workers' compensation insurance
	Incurred losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,																				As of December 31, 2018
	Supplementary unaudited information																		Audited		Audited		Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		IBNR reserves carried		Cumulative number of reported claims
2009	$	46,130	$	43,335	$	44,098	$	44,041	$	44,093	$	43,590	$	43,724	$	42,774	$	43,417	$	43,217	$	1,443	19,242
2010			46,328		49,336		50,057		49,906		49,851		50,069		49,145		49,435		48,884		1,822		19,631
2011					47,836		46,724		44,709		44,506		44,427		43,695		44,056		44,070		1,948		19,574
2012							51,099		50,094		47,756		46,928		45,088		45,276		45,402		1,836		19,395
2013									52,141		51,637		48,946		46,102		45,949		45,910		2,290		19,866
2014											51,515		50,973		47,472		47,836		46,722		2,190		19,473
2015													54,960		48,919		47,227		47,755		2,335		19,227
2016															57,832		48,276		47,719		2,418		20,325
2017																	52,409		55,312		3,938		22,061
2018																			59,480		6,828		21,734
																	Total		$	484,471

	Cumulative paid losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,
	Supplementary unaudited information																		Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	11,879	$	25,157	$	31,802	$	35,363	$	37,409	$	38,329	$	39,167	$	39,583	$	39,908	$	40,223
2010			14,237		28,074		35,029		39,001		41,437		42,651		43,614		44,175		44,669
2011					13,291		26,291		32,237		35,295		37,027		38,437		39,167		39,652
2012							14,015		28,109		33,943		37,307		39,456		40,292		41,092
2013									14,917		29,219		35,061		37,907		39,254		40,061
2014											14,692		28,894		35,883		39,046		40,941
2015													14,956		29,023		35,458		39,310
2016															15,473		29,592		35,778
2017																	16,863		33,234
2018																			19,075
																	Total		$	374,035
									All outstanding liabilities before 2009, net of reinsurance										34,313
							Liability for losses and settlement expenses, net of reinsurance												$	144,749

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($ in thousands)
Other liability insurance
	Incurred losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,																				As of December 31, 2018
	Supplementary unaudited information																		Audited		Audited		Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		IBNR reserves carried		Cumulative number of reported claims
2009	$	44,497	$	39,908	$	37,650	$	34,263	$	35,614	$	32,827	$	32,384	$	32,521	$	32,063	$	31,739	$	115	9,855
2010			41,624		36,213		34,655		38,829		36,137		34,655		34,556		33,736		33,359		449		10,155
2011					44,490		42,982		35,125		35,177		33,649		32,452		31,711		31,346		400		10,011
2012							42,661		42,081		41,139		40,275		37,093		37,180		38,050		668		10,073
2013									47,974		43,837		42,544		42,187		39,175		37,055		1,219		10,616
2014											61,382		54,403		52,601		51,047		50,950		2,214		10,966
2015													54,221		47,553		43,379		40,300		3,048		10,709
2016															59,052		56,384		57,388		9,177		10,708
2017																	59,420		57,714		13,844		10,032
2018																			63,505		27,373		9,852
																	Total		$	441,406

	Cumulative paid losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,
	Supplementary unaudited information																		Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	3,294	$	10,707	$	16,718	$	22,276	$	26,255	$	28,172	$	29,722	$	30,176	$	30,488	$	30,993
2010			3,403		8,315		15,041		21,732		27,612		29,688		30,711		31,776		32,083
2011					4,730		10,572		17,308		22,154		25,647		28,228		29,060		29,608
2012							4,720		12,851		19,661		25,095		29,651		32,753		35,903
2013									4,414		11,894		21,122		27,642		31,752		33,350
2014											5,630		17,267		27,506		35,318		40,036
2015													4,331		11,588		19,022		26,309
2016															6,403		18,784		28,638
2017																	6,322		16,555
2018																			5,955
																	Total		$	279,430
									All outstanding liabilities before 2009, net of reinsurance										12,100
							Liability for losses and settlement expenses, net of reinsurance												$	174,076

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($ in thousands)
Personal auto liability insurance
	Incurred losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,																				As of December 31, 2018
	Supplementary unaudited information																		Audited		Audited			Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		IBNR reserves carried			Cumulative number of reported claims
2009	$	10,168	$	9,653	$	9,452	$	9,386	$	9,353	$	9,382	$	9,339	$	9,325	$	9,312	$	9,311	$	(1	)	7,524
2010			9,815		9,851		9,736		9,698		9,700		9,656		9,676		9,649		9,638		(1		)	7,438
2011					9,741		9,388		9,331		9,432		9,460		9,311		9,413		9,365		(2		)	8,052
2012							10,917		10,756		11,023		10,731		10,537		10,626		10,610		(3		)	7,875
2013									10,492		10,384		10,376		10,085		10,085		10,060		(1		)	7,237
2014											10,573		9,631		9,331		9,204		9,113		(42		)	6,316
2015													9,119		8,638		8,378		8,225		(18		)	5,670
2016															7,404		6,584		6,490		(1		)	4,720
2017																	7,043		7,213		(13		)	4,728
2018																			7,002		487			4,687
																	Total		$	87,027

	Cumulative paid losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,
	Supplementary unaudited information																		Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	3,564	$	6,393	$	7,966	$	8,905	$	9,049	$	9,194	$	9,204	$	9,278	$	9,314	$	9,313
2010			3,988		6,666		8,250		9,108		9,401		9,562		9,632		9,631		9,636
2011					3,950		6,842		8,129		8,883		9,038		9,153		9,335		9,367
2012							4,779		7,439		9,091		9,871		10,244		10,415		10,565
2013									4,377		7,521		8,985		9,648		9,932		10,021
2014											3,970		6,392		7,755		8,598		8,992
2015													3,800		6,229		7,535		7,975
2016															3,505		5,427		6,046
2017																	3,467		5,735
2018																			3,753
																	Total		$	81,403
									All outstanding liabilities before 2009, net of reinsurance										8
							Liability for losses and settlement expenses, net of reinsurance												$	5,632

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($ in thousands)
Homeowners insurance
	Incurred losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,																				As of December 31, 2018
	Supplementary unaudited information																		Audited		Audited			Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		IBNR reserves carried			Cumulative number of reported claims
2009	$	18,109	$	16,606	$	16,467	$	16,379	$	16,352	$	16,394	$	16,465	$	16,464	$	16,467	$	16,467	$	—		11,486
2010			17,875		17,523		17,074		17,053		17,093		17,129		17,146		17,139		17,132		—			12,147
2011					24,530		23,389		22,975		23,309		23,448		23,415		23,350		23,369		—			14,288
2012							16,057		16,496		16,836		16,929		16,892		16,879		16,925		—			10,141
2013									14,844		14,833		14,685		14,784		14,737		14,757		(5		)	8,688
2014											13,228		13,328		13,447		13,427		13,332		(1		)	7,427
2015													11,233		11,153		11,041		11,079		(45		)	5,951
2016															11,801		11,377		11,397		(15		)	7,318
2017																	9,926		9,679		(84		)	7,803
2018																			9,496		(302		)	4,900
																	Total		$	143,633

	Cumulative paid losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,
	Supplementary unaudited information																		Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	12,645	$	15,885	$	16,135	$	16,246	$	16,288	$	16,315	$	16,421	$	16,464	$	16,467	$	16,467
2010			13,457		16,633		16,909		17,011		17,128		17,128		17,130		17,132		17,132
2011					19,828		22,421		22,737		23,136		23,403		23,370		23,368		23,370
2012							13,759		16,283		16,582		16,793		16,859		16,905		16,926
2013									11,735		14,285		14,621		14,681		14,703		14,741
2014											11,065		13,025		13,215		13,269		13,295
2015													8,650		10,456		10,730		10,866
2016															10,573		10,869		11,243
2017																	8,760		9,696
2018																			8,175
																	Total		$	141,911
									All outstanding liabilities before 2009, net of reinsurance										—
							Liability for losses and settlement expenses, net of reinsurance												$	1,722

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($ in thousands)
Auto physical damage insurance
	Incurred losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,																					As of December 31, 2018
	Supplementary unaudited information																		Audited			Audited			Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018			IBNR reserves carried			Cumulative number of reported claims
2009	$	18,077	$	16,744	$	16,720	$	16,639	$	16,593	$	16,605	$	16,602	$	16,587	$	16,590	$	16,582		$	(17	)	29,427
2010			19,249		18,657		18,538		18,549		18,527		18,532		18,488		18,494		18,497			(22		)	31,523
2011					21,965		21,003		20,919		20,917		20,915		20,877		20,867		20,859			(32		)	34,397
2012							21,389		21,342		21,263		21,233		21,161		21,184		21,172			(40		)	31,111
2013									22,847		22,553		22,486		22,371		22,408		22,353			(52		)	31,042
2014											24,897		24,115		23,904		23,946		23,899			(75		)	31,585
2015													27,950		26,612		26,331		26,224			(96		)	30,672
2016															28,070		27,629		27,595			(158		)	30,752
2017																	28,523		28,589			(393		)	31,486
2018																			32,183			(567		)	30,307
																	Total		$	237,953

	Cumulative paid losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,
	Supplementary unaudited information																		Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	15,566	$	16,661	$	16,687	$	16,636	$	16,592	$	16,603	$	16,602	$	16,601	$	16,599	$	16,599
2010			17,113		18,557		18,529		18,540		18,523		18,528		18,521		18,521		18,518
2011					19,849		20,984		20,912		20,904		20,912		20,900		20,892		20,889
2012							19,719		21,328		21,256		21,227		21,216		21,216		21,210
2013									20,774		22,512		22,463		22,417		22,408		22,403
2014											22,743		24,110		23,987		23,978		23,972
2015													24,483		26,538		26,327		26,308
2016															26,871		27,883		27,742
2017																	27,452		29,050
2018																			29,669
																	Total		$	236,360
									All outstanding liabilities before 2009, net of reinsurance										(3		)
							Liability for losses and settlement expenses, net of reinsurance												$	1,590

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($ in thousands)
Assumed pro rata reinsurance
	Incurred losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,																				As of December 31, 2018
	Supplementary unaudited information																		Audited		Audited		Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		IBNR reserves carried		Cumulative number of reported claims
2009	$	23,731	$	19,222	$	18,302	$	17,496	$	17,323	$	17,150	$	17,088	$	17,080	$	17,059	$	16,993	$	173	Unavailable
2010			19,514		17,078		16,456		15,794		15,610		15,396		15,347		15,340		15,313		95
2011					30,093		30,057		29,604		28,838		28,228		28,209		28,110		27,800		117
2012							21,935		21,282		20,823		18,158		17,592		17,380		17,560		296
2013									23,183		29,921		27,260		26,664		25,173		24,428		1,215
2014											31,262		27,525		27,771		26,160		26,300		571
2015													38,311		35,180		34,962		35,748		1,049
2016															35,696		39,143		38,526		4,568
2017																	29,852		33,856		7,545
2018																			23,689		11,484
																	Total		$	260,213

	Cumulative paid losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,
	Supplementary unaudited information																		Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	6,073	$	12,927	$	14,538	$	15,364	$	15,900	$	16,159	$	16,338	$	16,526	$	16,623	$	16,654
2010			5,016		11,940		13,924		14,328		14,978		15,021		15,062		15,107		15,138
2011					10,178		22,859		26,541		27,270		27,677		27,748		27,810		27,911
2012							4,403		12,650		14,935		16,161		16,520		16,598		16,699
2013									3,845		12,491		17,744		20,871		21,601		22,483
2014											5,988		16,046		20,534		23,326		25,141
2015													9,531		21,932		30,205		31,552
2016															9,626		22,131		29,786
2017																	7,645		20,289
2018																			5,103
																	Total		$	210,756
									All outstanding liabilities before 2009, net of reinsurance										2,648
							Liability for losses and settlement expenses, net of reinsurance												$	52,105

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($ in thousands)
Assumed excess of loss reinsurance
	Incurred losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,																				As of December 31, 2018
	Supplementary unaudited information																		Audited		Audited		Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		IBNR reserves carried		Cumulative number of reported claims
2009	$	38,883	$	30,534	$	29,969	$	30,499	$	30,150	$	28,215	$	27,895	$	27,125	$	26,905	$	26,654	$	989	Unavailable
2010			47,396		40,962		40,773		40,260		39,629		40,385		39,581		39,119		38,275		912
2011					72,077		61,702		60,873		59,276		59,018		58,632		58,213		57,851		1,143
2012							58,767		56,024		54,421		53,186		52,834		51,940		52,637		1,863
2013									52,392		47,375		44,812		44,658		44,541		43,766		2,283
2014											65,289		58,792		60,144		61,717		64,109		4,345
2015													59,837		54,788		51,570		53,235		4,858
2016															66,569		66,645		65,979		6,469
2017																	91,769		85,061		7,724
2018																			102,174		39,651
																	Total		$	589,741

	Cumulative paid losses and allocated settlement expenses, net of reinsurance, for the years ended December 31,
	Supplementary unaudited information																		Audited
Accident year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	8,554	$	15,885	$	18,789	$	20,995	$	21,865	$	22,214	$	22,837	$	23,015	$	23,247	$	23,748
2010			9,282		24,736		28,011		30,813		32,654		33,664		35,341		35,600		35,993
2011					25,313		42,175		47,902		50,549		52,546		53,840		54,562		55,137
2012							21,318		36,232		40,601		43,591		45,127		46,688		47,620
2013									11,695		27,477		33,188		37,467		39,246		40,368
2014											22,160		39,153		45,903		49,974		54,898
2015													13,381		30,273		36,617		41,608
2016															18,303		38,565		48,359
2017																	27,837		56,197
2018																			20,371
																	Total		$	424,299
									All outstanding liabilities before 2009, net of reinsurance										18,857
							Liability for losses and settlement expenses, net of reinsurance												$	184,299

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The following table sets forth a reconciliation of the incurred and paid claims development tables to the liability for losses and settlement expenses:



($ in thousands)	December 31, 2018
Net outstanding liabilities for losses and allocated settlement expenses:
Commercial auto liability insurance	$	120,398
Commercial property insurance	30,213
Workers' compensation insurance	144,749
Other liability insurance	174,076
Personal auto liability insurance	5,632
Homeowners insurance	1,722
Auto physical damage insurance	1,590
Assumed pro rata reinsurance	52,105
Assumed excess of loss reinsurance	184,299
Other lines of insurance	1,711
Liability for losses and allocated settlement expenses, net of reinsurance	716,495

Ceded reserves for losses and allocated settlement expenses:
Commercial auto liability insurance	841
Commercial property insurance	9,962
Workers' compensation insurance	12,956
Other liability insurance	3,830
Personal auto liability insurance	1,274
Homeowners insurance	275
Auto physical damage insurance	103
Assumed pro rata reinsurance	5,453
Assumed excess of loss reinsurance	1,109
Other lines of insurance	792
Total ceded reserves for losses and allocated settlement expenses	36,595

Unallocated settlement expenses	24,100
Gross reserve for losses and settlement expenses	$	777,190

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Average annual percentage payout of incurred claims by age, net of reinsurance
	Supplementary unaudited information
Years	1		2		3		4		5		6		7		8		9		10
Commercial auto liability insurance	23.2	%	25.7	%	21.1	%	16.1	%	7.9	%	3.1	%	1.4	%	0.4	%	0.1	%	0.0	%
Commercial property insurance	70.1	%	20.3	%	4.3	%	2.1	%	1.8	%	0.5	%	0.3	%	0.0	%	0.5	%	0.1	%
Workers' compensation insurance	30.8	%	30.0	%	13.8	%	7.4	%	4.2	%	2.3	%	1.9	%	1.1	%	0.9	%	0.7	%
Other liability insurance	11.3	%	19.8	%	19.9	%	16.9	%	12.3	%	6.6	%	4.8	%	2.1	%	1.0	%	1.6	%
Personal auto liability insurance	45.6	%	29.2	%	14.7	%	8.0	%	2.8	%	1.4	%	1.0	%	0.4	%	0.3	%	0.0	%
Homeowners insurance	83.1	%	13.9	%	2.0	%	0.9	%	0.5	%	0.1	%	0.2	%	0.1	%	0.0	%	0.0	%
Auto physical damage insurance	94.2	%	6.4	%	(0.3	)%	(0.1	)%	(0.1	)%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%
Assumed pro rata reinsurance	26.5	%	39.6	%	16.3	%	6.3	%	3.5	%	1.2	%	0.6	%	0.6	%	0.4	%	0.2	%
Assumed excess of loss reinsurance	30.7	%	31.5	%	11.0	%	7.4	%	4.4	%	2.3	%	2.4	%	0.8	%	1.0	%	1.9	%


5.	ASBESTOS AND ENVIRONMENTAL CLAIMS

The Company has exposure to asbestos and environmental related claims associated with the insurance business written by the parties to the pooling agreement and the reinsurance business assumed from Employers Mutual by the reinsurance subsidiary. Asbestos and environmental losses paid by the Company have averaged $2.8 million per year over the past five years. Reserves for asbestos and environmental related claims for direct insurance and assumed reinsurance business totaled $11.6 million and $11.7 million ($11.1 million and $11.4 million net of reinsurance) at December 31, 2018 and 2017, respectively.

Estimating loss and settlement expense reserves for asbestos and environmental claims is very difficult due to the many uncertainties surrounding these types of claims. These uncertainties exist because the assignment of responsibility varies widely by state and claims often emerge long after a policy has expired, which makes assignment of damages to the appropriate party and to the time period covered by a particular policy difficult. In establishing reserves for these types of claims, management monitors the relevant facts concerning each claim, the current status of the legal environment, social and political conditions, and claim history and trends within the Company and the industry.

At present, the pool participants are defending approximately 1,737 asbestos bodily injury lawsuits, some of which involve multiple plaintiffs. Most of the lawsuits are subject to express reservation of rights based upon the lack of an injury within the applicable policy periods, because many asbestos lawsuits do not specifically allege dates of asbestos exposure or dates of injury. The pool participants’ policyholders named as defendants in these asbestos lawsuits are typically peripheral defendants who have little or no exposure and are often dismissed from asbestos litigation with nominal or no payment (i.e., small contractors, supply companies, and a furnace manufacturer).

While the Company does not have a significant amount of exposure to asbestos claims, management has been strengthening the reserves carried for these exposures when deemed appropriate. In 2018, the settlement expense reserves for asbestos claims were strengthened by $1.5 million.

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6.	STATUTORY INFORMATION AND DIVIDEND RESTRICTIONS

The Company’s insurance subsidiaries are required to file financial statements with state regulatory authorities. The accounting principles used to prepare these statutory financial statements follow prescribed or permitted accounting practices that differ from GAAP. Prescribed statutory accounting principles include state laws, regulations and general administrative rules issued by the state of domicile, as well as a variety of publications and manuals of the National Association of Insurance Commissioners (NAIC). Permitted accounting practices encompass all accounting practices not prescribed, but allowed by the state of domicile. The Company’s insurance subsidiaries had no permitted accounting practices during 2018, 2017 or 2016.

Statutory surplus of the Company’s insurance subsidiaries was $527.1 million and $560.1 million at December 31, 2018 and 2017, respectively. Statutory net income of the Company’s insurance subsidiaries was $10.8 million, $30.1 million and $48.3 million in 2018, 2017 and 2016, respectively.

The NAIC utilizes a risk-based capital model to help state regulators assess the capital adequacy of insurance companies and identify insurers that are in, or are perceived as approaching, financial difficulty. This model establishes minimum capital needs based on the risks applicable to the operations of the individual insurer. The risk-based capital requirements for property and casualty insurance companies measure three major areas of risk: asset risk, credit risk and underwriting risk. Companies having less statutory surplus than required by the risk-based capital requirements are subject to varying degrees of regulatory scrutiny and intervention, depending on the severity of the inadequacy. At December 31, 2018, the Company’s insurance subsidiaries had total adjusted statutory capital of $527.1 million, which exceeds the minimum risk-based capital requirement of $101.9 million.

The amount of dividends available for distribution to the Company by its insurance subsidiaries is limited by law to a percentage of the statutory unassigned surplus of each of the subsidiaries as of the previous December 31, as determined in accordance with accounting practices prescribed by insurance regulatory authorities of the state of domicile of each subsidiary. Under Iowa law, the maximum dividend that may be paid within a 12 month period without prior regulatory approval 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, not greater than earned statutory surplus. North Dakota, the state of domicile of Dakota Fire Insurance Company, imposes similar restrictions, except that the maximum dividend is limited to the lesser of 10 percent of statutory surplus as regards policyholders as of the preceding December 31, or net income excluding capital gains of the preceding calendar year on a statutory basis, not greater than earned statutory surplus. At December 31, 2018, $48.0 million was available for distribution to the Company in 2019 without prior approval.

7. SEGMENT INFORMATION

The Company’s operations consist of a property and casualty insurance segment and a reinsurance segment. The property and casualty insurance segment writes both commercial and personal lines of insurance, with a focus on medium-sized commercial accounts. The reinsurance segment provides reinsurance for other insurers and reinsurers. The segments are managed separately due to differences in the insurance products sold and the business environments in which they operate. Management evaluates the performance of its insurance segments using financial measurements based on Statutory Accounting Principles (SAP) instead of GAAP. Such measures include premiums written, premiums earned, statutory underwriting profit (loss), and investment results, as well as loss and loss adjustment expense ratios, trade underwriting expense ratios, and combined ratios. The GAAP accounting policies of the segments are described in note 1, Summary of Significant Accounting Policies.

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Summarized financial information for the Company’s segments is as follows:



Year ended December 31, 2018	Property and casualty insurance			Reinsurance			Parent company			Consolidated
($ in thousands)	Property and casualty insurance			Reinsurance			Parent company			Consolidated
Premiums earned	$	495,447		$	149,736		$	—		$	645,183

Underwriting profit (loss):
SAP underwriting profit (loss)	(15,177		)	(9,404		)	—			(24,581		)
GAAP adjustments	(1,342		)	111			—			(1,231		)
GAAP underwriting profit (loss)	(16,519		)	(9,293		)	—			(25,812		)

Net investment income	34,070			13,523			44			47,637
Net realized investment gains (losses) and, beginning in 2018, change in unrealized gains on equity investments	(28,227		)	(12,935		)	(90		)	(41,252		)
Other income (loss)	8,444			715			—			9,159
Interest expense	654			—			—			654
Other expenses	1,202			—			2,552			3,754
Income (loss) before income tax expense (benefit)	$	(4,088	)	$	(7,990	)	$	(2,598	)	$	(14,676	)

Assets	$	1,191,286		$	485,270		$	565,905		$	2,242,461
Eliminations	—			—			(556,977		)	(556,977		)
Reclassifications	—			—			(6		)	(6		)
Total assets	$	1,191,286		$	485,270		$	8,922		$	1,685,478

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Year ended December 31, 2017	Property and casualty insurance			Reinsurance			Parent company			Consolidated
($ in thousands)	Property and casualty insurance			Reinsurance			Parent company			Consolidated
Premiums earned	$	472,369		$	134,789		$	—		$	607,158

Underwriting profit (loss):
SAP underwriting profit (loss)	2,702			(15,386		)	—			(12,684		)
GAAP adjustments	105			(670		)	—			(565		)
GAAP underwriting profit (loss)	2,807			(16,056		)	—			(13,249		)

Net investment income	32,670			12,771			38			45,479
Net realized investment gains (losses) and, beginning in 2018, change in unrealized gains on equity investments	4,896			1,660			—			6,556
Other income (loss)	6,283			(1,519		)	—			4,764
Interest expense	337			—			—			337
Other expenses	1,128			—			2,269			3,397
Income (loss) before income tax expense (benefit)	$	45,191		$	(3,144	)	$	(2,231	)	$	39,816

Assets	$	1,200,636		$	484,678		$	604,105		$	2,289,419
Eliminations	—			—			(599,036		)	(599,036		)
Reclassifications	(1,393		)	(6,273		)	(777		)	(8,443		)
Total assets	$	1,199,243		$	478,405		$	4,292		$	1,681,940



Year ended December 31, 2016	Property and casualty insurance			Reinsurance			Parent company			Consolidated
($ in thousands)	Property and casualty insurance			Reinsurance			Parent company			Consolidated
Premiums earned	$	456,467		$	135,941		$	—		$	592,408

Underwriting profit (loss):
SAP underwriting profit (loss)	4,276			11,377			—			15,653
GAAP adjustments	(5,743		)	(1,023		)	—			(6,766		)
GAAP underwriting profit (loss)	(1,467		)	10,354			—			8,887

Net investment income	33,886			13,591			13			47,490
Net realized investment gains (losses) and, beginning in 2018, change in unrealized gains on equity investments	4,082			(8		)	—			4,074
Other income (loss)	5,403			417			—			5,820
Interest expense	337			—			—			337
Other expenses	721			—			2,006			2,727
Income (loss) before income tax expense (benefit)	$	40,846		$	24,354		$	(1,993	)	$	63,207

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The following table displays the premiums earned for the property and casualty insurance segment and the reinsurance segment for the three years ended December 31, 2018, by line of insurance.



	Year ended December 31,
($ in thousands)	2018		2017		2016
Property and casualty insurance
Commercial lines:
Automobile	$	128,496	$	118,224	$	110,941
Property	108,525		108,162		105,012
Workers' compensation	99,699		100,552		96,517
Other liability	110,400		98,674		96,630
Other	9,256		8,719		8,374
Total commercial lines	456,376		434,331		417,474

Personal lines	39,071		38,038		38,993
Total property and casualty insurance	$	495,447	$	472,369	$	456,467

Reinsurance
Pro rata reinsurance	$	44,610	$	44,636	$	56,317
Excess of loss reinsurance	105,126		90,153		79,624
Total reinsurance	$	149,736	$	134,789	$	135,941

Consolidated	$	645,183	$	607,158	$	592,408

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8.	DISCLOSURES ABOUT THE FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying amounts and the estimated fair values of the Company’s financial instruments as of December 31, 2018 and 2017 are summarized in the tables below.



December 31, 2018	Carrying amounts		Estimated fair values
($ in thousands)	Carrying amounts		Estimated fair values
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	8,021	$	8,021
U.S. government-sponsored agencies	304,479		304,479
Obligations of states and political subdivisions	283,651		283,651
Commercial mortgage-backed	84,379		84,379
Residential mortgage-backed	162,137		162,137
Other asset-backed	20,834		20,834
Corporate	419,408		419,408
Total fixed maturity securities available-for-sale	1,282,909		1,282,909

Equity investments, at fair value:
Common stocks:
Financial services	41,839		41,839
Information technology	31,581		31,581
Healthcare	34,571		34,571
Consumer staples	13,180		13,180
Consumer discretionary	22,765		22,765
Energy	13,372		13,372
Industrials	19,389		19,389
Other	14,371		14,371
Non-redeemable preferred stocks	16,654		16,654
Investment funds	7,641		7,641
Total equity investments	215,363		215,363

Short-term investments	28,204		28,204

Liabilities:
Surplus notes	25,000		15,259

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December 31, 2017	Carrying amounts		Estimated fair values
($ in thousands)	Carrying amounts		Estimated fair values
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	8,078	$	8,078
U.S. government-sponsored agencies	297,949		297,949
Obligations of states and political subdivisions	307,536		307,536
Commercial mortgage-backed	83,980		83,980
Residential mortgage-backed	119,799		119,799
Other asset-backed	24,114		24,114
Corporate	433,560		433,560
Total fixed maturity securities available-for-sale	1,275,016		1,275,016

Equity securities available-for-sale:
Common stocks:
Financial services	43,522		43,522
Information technology	35,810		35,810
Healthcare	30,595		30,595
Consumer staples	14,127		14,127
Consumer discretionary	20,538		20,538
Energy	16,905		16,905
Industrials	28,489		28,489
Other	16,421		16,421
Non-redeemable preferred stocks	21,708		21,708
Total equity securities available-for-sale	228,115		228,115

Short-term investments	23,613		23,613

Liabilities:
Surplus notes	25,000		16,689

The estimated fair values of fixed maturity and equity securities is based on quoted market prices, where available. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security. During 2018, the Company invested in a few privately placed equity investments. One of these was in the form of preferred units in a limited liability corporation offering weather-related predictive analytics and risk mitigation tools. In accordance with the new guidance related to financial instruments that was adopted January 1, 2018, this investment does not have a readily determinable fair value. Therefore, the Company has elected to measure this investment at the alternative measurement of cost, adjusted for impairments and observable price changes. No impairment losses have been made to this investment. Due to the alternative measurement classification, this investment is excluded from the disclosures in this footnote. The other privately placed equity investment, also in the field of insurance technology, is accounted for under the equity method of accounting, and as such is also excluded from these fair value disclosures. Since 2016, the Company has held another privately placed equity investment in the form of non-redeembable convertible preferred stock issued by a start-up technology company that Employers Mutual works with in its data analytics activities. During 2018, the Company purchased common stock in this entity. The Company accounts for its investment in this entity under the equity method of accounting, and as such it is also excluded from these fair value disclosures.

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Short-term investments generally include money market funds, U.S. Treasury bills and commercial paper. Short-term investments are carried at fair value, which approximates cost, due to the highly liquid nature of the securities. Short-term securities are classified as Level 1 fair value measurements when the fair values can be validated by recent trades. When recent trades are not available, fair value is deemed to be the cost basis and the securities are classified as Level 2 fair value measurements.

The estimated fair value of the surplus notes is derived by discounting future expected cash flows at a rate deemed appropriate over a 25-year term (the surplus notes have no stated maturity date, and the interest to be paid is assumed to continue at the current interest rate in place of 2.73 percent).



	Level 1 -	Unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

	Level 2 -	Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

	Level 3 -	Prices or valuation techniques that require significant unobservable inputs because observable inputs are not available. The unobservable inputs may reflect the Company’s own judgments about the assumptions that market participants would use.

	NAV -	The fair values of investment company limited partnership investments and similar vehicles (referred to as investment funds) are based on the capital account balances reported by the investment funds subject to their management review and adjustment. These capital account balances reflect the fair value of the investment funds.


•	U.S. Treasury securities (including bonds, notes, and bills) are priced according to a number of live data sources, including active market makers and inter-dealer brokers. Prices from these sources are reviewed based on the sources’ historical accuracy for individual issues and maturity ranges.

•

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•

A small number of the Company’s securities are not priced by the independent pricing service. One of these was an equity security that was reported as a Level 3 fair value measurement since no observable inputs were used in its valuation. This security was sold in 2018 and in prior periods was reported at the fair value obtained from the Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (NAIC). The SVO established a per share price for this security based on an annual review of that company's financial statements, typically performed during second quarter. The other securities not priced by the Company's independent pricing service consist of six fixed maturity securities (eight at December 31, 2017). Two of these fixed maturity securities, classified as Level 3 fair value measurements, are corporate securities that convey premium tax benefits and are not publicly traded. The fair values for these securities are based on discounted cash flow analyses. The other fixed maturity securities are classified as Level 2 fair value measurements. The fair values for these fixed maturity securities were obtained from either the SVO, the Company’s investment custodian, or the Company's investment department using similar pricing techniques as the Company's independent pricing service.

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Presented in the tables below are the estimated fair values of the Company’s financial instruments as of December 31, 2018 and 2017.



December 31, 2018					Fair value measurements using
($ in thousands)	Total		Investments measured at net asset value (NAV)		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial instruments reported at fair value on recurring basis:
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	8,021	$	—	$	—	$	8,021	$	—
U.S. government-sponsored agencies	304,479		—		—		304,479		—
Obligations of states and political subdivisions	283,651		—		—		283,651		—
Commercial mortgage-backed	84,379		—		—		84,379		—
Residential mortgage-backed	162,137		—		—		162,137		—
Other asset-backed	20,834		—		—		20,834		—
Corporate	419,408		—		—		419,149		259
Total fixed maturity securities available-for-sale	1,282,909		—		—		1,282,650		259

Equity investments, at fair value:
Common stocks:
Financial services	41,839		—		41,839		—		—
Information technology	31,581		—		31,581		—		—
Healthcare	34,571		—		34,571		—		—
Consumer staples	13,180		—		13,180		—		—
Consumer discretionary	22,765		—		22,765		—		—
Energy	13,372		—		13,372		—		—
Industrials	19,389		—		19,389		—		—
Other	14,371		—		14,371		—		—
Non-redeemable preferred stocks	16,654		—		10,325		6,329		—
Investment funds	7,641		7,641		—		—		—
Total equity investments	215,363		7,641		201,393		6,329		—

Short-term investments	28,204		—		28,204		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	15,259		—		—		—		15,259

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December 31, 2017					Fair value measurements using
($ in thousands)	Total		Investments measured at net asset value (NAV)		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial instruments reported at fair value on recurring basis:
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	8,078	$	—	$	—	$	8,078	$	—
U.S. government-sponsored agencies	297,949		—		—		297,949		—
Obligations of states and political subdivisions	307,536		—		—		307,536		—
Commercial mortgage-backed	83,980		—		—		83,980		—
Residential mortgage-backed	119,799		—		—		119,799		—
Other asset-backed	24,114		—		—		24,114		—
Corporate	433,560		—		—		432,940		620
Total fixed maturity securities available-for-sale	1,275,016		—		—		1,274,396		620

Equity securities available-for-sale:
Common stocks:
Financial services	43,522		—		43,519		—		3
Information technology	35,810		—		35,810		—		—
Healthcare	30,595		—		30,595		—		—
Consumer staples	14,127		—		14,127		—		—
Consumer discretionary	20,538		—		20,538		—		—
Energy	16,905		—		16,905		—		—
Industrials	28,489		—		28,489		—		—
Other	16,421		—		16,421		—		—
Non-redeemable preferred stocks	21,708		—		9,512		10,196		2,000
Total equity securities available-for-sale	228,115		—		215,916		10,196		2,003

Short-term investments	23,613		—		23,613		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	16,689		—		—		—		16,689

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Presented in the table below is a reconciliation of the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2018 and 2017. Any unrealized gains or losses on fixed maturiy securities are recognized in other comprehensive income (loss). Any gains or losses from settlements, disposals impairments and, starting in 2018, unrealized gains or losses on equity securities, are reported as realized investment gains or losses in net income.



	Fair value measurements using significant unobservable (Level 3) inputs
($ in thousands)	Fixed maturity securities available-for-sale, corporate			Equity securities, financial services			Equity securities, non-redeemable preferred stocks		Total
Balance at December 31, 2016	$	982		$	3		$	2,000	$	2,985
Settlements	(356		)	—			—		(356		)
Unrealized losses included in other comprehensive income (loss) on securities still held at reporting date	(6		)	—			—		(6		)
Balance at December 31, 2017	620			3			2,000		2,623
Settlements	(361		)	—			XXXX		(361		)
Unrealized losses included in net income (loss)	—			(3		)	XXXX		(3		)
Balance at December 31, 2018	$	259		$	—		XXXX		$	259


9.	INVESTMENTS

Investments of the Company’s insurance subsidiaries are subject to the insurance laws of the state of their incorporation. These laws prescribe the kind, quality and concentration of investments that may be made by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks and real estate mortgages. The Company believes that it is in compliance with these laws.

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The amortized cost and estimated fair value of securities available-for-sale as of December 31, 2018 and 2017 are as follows. All fixed maturity securities are classified as available-for-sale and are carried at fair value.



December 31, 2018	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair values
($ in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair values
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	8,139	$	—	$	118	$	8,021
U.S. government-sponsored agencies	303,198		2,799		1,518		304,479
Obligations of states and political subdivisions	273,727		10,375		451		283,651
Commercial mortgage-backed	83,854		1,287		762		84,379
Residential mortgage-backed	161,055		3,374		2,292		162,137
Other asset-backed	21,596		273		1,035		20,834
Corporate	421,563		2,605		4,760		419,408
Total fixed maturity securities	$	1,273,132	$	20,713	$	10,936	$	1,282,909



December 31, 2017	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair values
($ in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair values
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	8,115	$	—	$	37	$	8,078
U.S. government-sponsored agencies	303,932		122		6,105		297,949
Obligations of states and political subdivisions	290,038		17,729		231		307,536
Commercial mortgage-backed	84,058		591		669		83,980
Residential mortgage-backed	120,554		2,479		3,234		119,799
Other asset-backed	23,934		625		445		24,114
Corporate	422,535		11,490		465		433,560
Total fixed maturity securities	1,253,166		33,036		11,186		1,275,016

Equity securities:
Common stocks:
Financial services	30,103		13,594		175		43,522
Information technology	18,308		17,504		2		35,810
Healthcare	18,877		11,876		158		30,595
Consumer staples	9,275		4,917		65		14,127
Consumer discretionary	10,935		9,640		37		20,538
Energy	12,441		5,381		917		16,905
Industrials	12,746		15,757		14		28,489
Other	11,058		5,363		—		16,421
Non-redeemable preferred stocks	20,531		1,216		39		21,708
Total equity securities	144,274		85,248		1,407		228,115
Total securities available-for-sale	$	1,397,440	$	118,284	$	12,593	$	1,503,131

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The following tables set forth the estimated fair values and gross unrealized losses associated with investment securities that were in an unrealized loss position recognized in accumulated other comprehensive income as of December 31, 2018 and 2017, listed by length of time the securities were consistently in an unrealized loss position.



December 31, 2018	Less than twelve months				Twelve months or longer				Total
($ in thousands)	Fair values		Unrealized losses		Fair values		Unrealized losses		Fair values		Unrealized losses
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	—	$	—	$	8,021	$	118	$	8,021	$	118
U.S. government-sponsored agencies	14,620		20		92,603		1,498		107,223		1,518
Obligations of states and political subdivisions	—		—		14,498		451		14,498		451
Commercial mortgage-backed	2,021		21		24,222		741		26,243		762
Residential mortgage-backed	16,852		145		45,597		2,147		62,449		2,292
Other asset-backed	4,810		147		11,691		888		16,501		1,035
Corporate	198,030		2,996		45,734		1,764		243,764		4,760
Total fixed maturity securities	$	236,333	$	3,329	$	242,366	$	7,607	$	478,699	$	10,936



December 31, 2017	Less than twelve months				Twelve months or longer				Total
($ in thousands)	Fair values		Unrealized losses		Fair values		Unrealized losses		Fair values		Unrealized losses
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	8,078	$	37	$	—	$	—	$	8,078	$	37
U.S. government-sponsored agencies	134,284		1,491		127,604		4,614		261,888		6,105
Obligations of states and political subdivisions	—		—		14,416		231		14,416		231
Commercial mortgage-backed	32,155		221		8,530		448		40,685		669
Residential mortgage-backed	30,003		394		22,948		2,840		52,951		3,234
Other asset-backed	—		—		13,440		445		13,440		445
Corporate	28,314		329		4,047		136		32,361		465
Total fixed maturity securities	232,834		2,472		190,985		8,714		423,819		11,186
Equity securities:
Common stocks:
Financial services	4,391		175		—		—		4,391		175
Information technology	344		2		—		—		344		2
Healthcare	2,532		158		—		—		2,532		158
Consumer staples	575		65		—		—		575		65
Consumer discretionary	992		37		—		—		992		37
Energy	3,181		917		—		—		3,181		917
Industrials	3,016		14		—		—		3,016		14
Non-redeemable preferred stocks	—		—		1,961		39		1,961		39
Total equity securities	15,031		1,368		1,961		39		16,992		1,407
Total temporarily impaired securities	$	247,865	$	3,840	$	192,946	$	8,753	$	440,811	$	12,593

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Nearly all of the fixed maturity securities that are in an unrealized loss position are considered investment grade by credit rating agencies. Because management does not intend to sell these securities, does not believe it will be required to sell these securities before recovery, and believes it will collect the amounts due on these securities, it was determined that these securities were not “other-than-temporarily” impaired at December 31, 2018.

The amortized cost and estimated fair values of fixed maturity securities at December 31, 2018, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.



($ in thousands)	Amortized cost		Estimated fair values
Securities available-for-sale:
Due in one year or less	$	32,551	$	32,703
Due after one year through five years	240,690		241,229
Due after five years through ten years	320,118		320,931
Due after ten years	433,584		440,277
Securities not due at a single maturity date	246,189		247,769
Totals	$	1,273,132	$	1,282,909

A summary of realized investment gains and (losses) and the change in unrealized investment gains on equity investments is as follows:



	Year ended December 31,
($ in thousands)	2018			2017			2016
Fixed maturity securities available-for-sale:
Gross realized investment gains	$	324		$	545		$	2,054
Gross realized investment losses	(18,872		)	(4,849		)	(2,829		)

Equity securities:
Net realized investment gains, excluding "other-than-temporary" impairments	8,017			18,200			12,403
Change in unrealized investment gains	(28,838		)	XXXX			XXXX
"Other-than-temporary" impairments	XXXX			(1,088		)	(1,055		)

Other long-term investments, net	(1,883		)	(6,252		)	(6,499		)
Totals	$	(41,252	)	$	6,556		$	4,074

Gains and losses realized on the disposition of investments are included in net income. The cost of investments sold is determined on the specific identification method using the highest cost basis first. The Company did not have any outstanding cumulative credit losses on fixed maturity securities that have been recognized in earnings from “other-than-temporary” impairments during any of the reported periods. The net realized investment losses recognized on other long-term investments primarily represent changes in the carrying value of a limited partnership that is used solely to support an equity tail-risk hedging strategy, but for 2016 also included an "other-than-temporary" impairment loss of $209,000 on an investment that conveyed investment tax credits.

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A summary of net investment income is as follows:



	Year ended December 31,
($ in thousands)	2018			2017			2016
Interest on fixed maturity securities	$	42,961		$	39,992		$	41,499
Dividends on equity securities	6,078			6,032			6,922
Income on reverse repurchase agreements	339			306			236
Interest on short-term investments	608			273			121
Return on long-term investments	134			1,126			514
Total investment income	50,120			47,729			49,292
Securities litigation income	14			12			111
Investment expenses	(2,497		)	(2,262		)	(1,913		)
Net investment income	$	47,637		$	45,479		$	47,490

A summary of net changes in unrealized holding gains (losses) on securities available-for-sale is included in the table below.



	Year ended December 31,
($ in thousands)	2018			2017		2016
Fixed maturity securities	$	(12,073	)	$	11,676	$	(20,634	)
Deferred income tax expense (benefit)	(2,534		)	4,086		(7,222		)
Total fixed maturity securities	(9,539		)	7,590		(13,412		)

Equity securities	XXXX			17,481		4,293
Deferred income tax expense (benefit)	XXXX			6,119		1,502
Total equity securities	XXXX			11,362		2,791
Total available-for-sale securities	$	(9,539	)	$	18,952	$	(10,621	)


10.	INCOME TAXES

Temporary differences between the consolidated financial statement carrying amount and tax basis of assets and liabilities that give rise to significant portions of the deferred income tax asset (liability) at December 31, 2018 and 2017 are as follows:



	December 31,
($ in thousands)	2018			2017
Loss reserve discounting	$	8,520		$	7,507
Unearned premium reserve limitation	10,915			10,284
Other policyholders' funds payable	1,849			2,103
Other, net	1,753			2,202
Total deferred income tax asset	23,037			22,096
Net unrealized holding gains on investment securities	(13,614		)	(22,195		)
Deferred policy acquisition costs	(9,400		)	(8,634		)
Retirement benefits	(2,968		)	(3,714		)
Other, net	(1,963		)	(2,573		)
Total deferred income tax liability	(27,945		)	(37,116		)
Net deferred income tax liability	$	(4,908	)	$	(15,020	)

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Based upon anticipated future taxable income and consideration of all other available evidence, management believes that it is “more likely than not” that the Company’s deferred income tax assets will be realized.

The actual income tax expense benefit for the years ended December 31, 2018, 2017 and 2016 differed from the “expected” income tax expense (benefit) for those years (computed by applying the United States federal corporate tax rate of 21 percent during 2018 and 35 percent during 2017 and 2016 to income (loss) before income tax) as follows:



	Year ended December 31,
($ in thousands)	2018			2017			2016
Computed "expected" income tax expense (benefit)	$	(3,082	)	$	13,936		$	22,123
Increases (decreases) in tax resulting from:
Deferred income tax benefit from enactment of the TCJA	—			(9,056		)	—
Incremental benefit of net operating loss carry back	(1,690		)	—			—
Tax-exempt interest income	(1,183		)	(2,715		)	(2,803		)
Dividends received deduction	(549		)	(1,291		)	(1,429		)
Proration of tax-exempt interest and dividends received deduction	433			601			635
Investment tax credits	(540		)	(672		)	(1,392		)
Other, net	(597		)	(225		)	(130		)
Total income tax expense (benefit)	$	(7,208	)	$	578		$	17,004

The TCJA was signed into law on December 22, 2017. Among other provisions, the TCJA lowered the federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. Since the change in tax rate was not effective until 2018, current tax expense in 2017 was unaffected; however, the temporary tax differences that comprised the net deferred income tax liability at the enactment date were projected to reverse at the lower 21 percent tax rate. The re-measurement of deferred income tax assets and liabilities resulted in the recognition of a $9.1 million deferred income tax benefit.

Pursuant to Staff Accounting Bulletin No. 118 issued by the Securities Exchange Commission, the Company made reasonable estimates of the effects the TCJA had on deferred income tax assets and liabilities at December 31, 2017. For items where the Company could not make a reasonable estimate, primarily loss reserve discounting, the Company used existing accounting guidance and the provisions of the tax laws that were in place prior to the enactment. Subsequently, the Company made its final determination of the effects of the TCJA when the Internal Revenue Service (IRS) issued Revenue Procedure 2019-06, which provides applicable discount factors for both the transition obligation (reserves at January 1, 2018), and reserves at December 31, 2018.

Comprehensive income tax expense (benefit) included in the consolidated financial statements for the years ended December 31, 2018, 2017 and 2016 is as follows. The deferred income tax benefit that resulted from the enactment of the TCJA in 2017 is included in the "operations" line.



	Year ended December 31,
($ in thousands)	2018			2017			2016
Income tax expense (benefit) on:
Operations	$	(7,208	)	$	578		$	17,004
Change in unrealized holding gains on investment securities available-for-sale	(2,534		)	10,205			(5,720		)
Change in funded status of retirement benefit plans:
Pension plans	(1,071		)	1,694			414
Postretirement benefit plans	(524		)	(774		)	(1,345		)
Comprehensive income tax expense (benefit)	$	(11,337	)	$	11,703		$	10,353

The Company had no provision for uncertain income tax positions at December 31, 2018 or 2017. The Company recognized no interest expense or other penalties related to U.S. federal or state income taxes during 2018, 2017 or 2016. It is the Company’s accounting policy to reflect income tax penalties as other expense, and interest as interest expense.

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The Company files a U.S. federal income tax return, along with various state income tax returns. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2015.


11.	SURPLUS NOTES

The Company’s property and casualty insurance subsidiaries have $25.0 million of surplus notes issued to Employers Mutual. The interest rate on the surplus notes was increased to 2.73 percent from 1.35 percent effective February 1, 2018. Reviews of the interest rate are conducted by the Inter-Company Committees of the boards of directors of the Company and Employers Mutual every five years, with the next review due in 2023. Payments of interest and repayments of principal can only be made out of the applicable subsidiary’s statutory surplus and are subject to prior approval by the insurance commissioner of the respective states of domicile. The surplus notes are subordinate and junior in right of payment to all obligations or liabilities of the applicable insurance subsidiaries. Total interest expense incurred on these surplus notes was $654,000 in 2018 and $337,000 in both 2017 and 2016. At December 31, 2018, the Company’s property and casualty insurance subsidiaries had received approval and paid the 2018 interest expense on the surplus notes.


12.	EMPLOYEE RETIREMENT PLANS

Employers Mutual has various employee benefit plans, including a qualified defined benefit pension plan, a non-qualified defined benefit supplemental pension plan, a retiree life insurance benefit and a retiree health reimbursement arrangement (HRA) benefit.

The qualified defined benefit plan covers substantially all of its employees. This plan is funded by employer contributions and provides a benefit under a cash balance formula for most employees; however, benefits are provided to a few long-term employees based on a traditional benefit formula. The cash balance method accumulates funds so that the employee can receive a specified benefit amount at retirement. Benefits accrue with an interest and salary credit each year. On December 18, 2017, Employers Mutual notified its employees that effective January 1, 2019, the salary credit will be based on a combination of age and years of service, rather than just age. This change did not have a material impact on the pension benefit obligation. Benefits generally vest after three years of service or the attainment of 55 years of age and one year of service. It is Employers Mutual’s funding policy to make contributions sufficient to be in compliance with minimum regulatory funding requirements, plus additional amounts as determined by management.

Employers Mutual’s non-qualified defined benefit supplemental retirement plan provides additional retirement benefits for a select group of management. This plan enables select employees to receive retirement benefits without the limit on compensation imposed on qualified defined benefit pension plans by the IRS and to recognize compensation that has been deferred in the non-qualified deferred compensation plan. The plan is unfunded and benefits generally vest after three years of service.

Employers Mutual also offers postretirement benefit plans which provide an HRA and life insurance benefits for eligible retired employees. Substantially all of its employees may become eligible for those benefits if they reach age 55 and have attained the required length of service while working for Employers Mutual. Under the HRA, Employers Mutual reimburses eligible participants, up to a pre-determined maximum, for amounts expended to enroll in publicly available individual health care plans and/or pay for qualifying out-of-pocket health care costs. The obligations of the HRA are based on the total amount of reimbursements expected to be made by Employers Mutual over the lives of the participants, rather than the total amount of medical benefits expected to be paid over the participants’ lives. Therefore, the obligations of the HRA are not directly impacted by changes in the cost of health care. However, the maximum amount Employers Mutual will reimburse eligible participants may be adjusted periodically based on an analysis of the change in health care costs. Such adjustments are reflected as plan amendments and increased the postretirement benefit plans' benefit obligation $2.7 million in 2017. During December 2017, Employers Mutual notified its employees that the life insurance benefit will be eliminated for employees retiring after 2018. As a result, the postretirement benefit plans' benefit obligation as of December 31, 2017 decreased $3.8 million. This change is also reflected as a plan amendment. The life insurance plan is noncontributory. The benefits provided under both plans are subject to change.

Employers Mutual maintains a Voluntary Employee Beneficiary Association (VEBA) trust that has historically been used to accumulate funds for the payment of postretirement benefits. Given the overfunded position of the postretirement benefit plans, contributions to the VEBA trust are not anticipated for the foreseeable future.

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The following table sets forth the funded status of Employers Mutual’s pension and postretirement benefit plans as of December 31, 2018 and 2017, based upon measurement dates of December 31, 2018 and 2017, respectively.



	Pension plans						Postretirement benefit plans
($ in thousands)	2018			2017			2018			2017
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	308,244		$	284,194		$	59,004		$	55,651
Service cost	16,852			15,135			1,473			1,362
Interest cost	10,726			11,190			2,084			2,281
Actuarial (gain) loss	(30,787		)	12,577			(7,484		)	3,278
Benefits paid	(16,933		)	(14,852		)	(2,579		)	(2,455		)
Plan amendments	—			—			—			(1,113		)
Projected benefit obligation at end of year	288,102			308,244			52,498			59,004

Change in plan assets:
Fair value of plan assets at beginning of year	349,004			300,915			75,658			67,809
Actual return on plan assets	(24,325		)	54,255			(4,311		)	10,304
Employer contributions	9,009			8,686			—			—
Benefits paid	(16,933		)	(14,852		)	(2,579		)	(2,455		)
Fair value of plan assets at end of year	316,755			349,004			68,768			75,658
Funded status	$	28,653		$	40,760		$	16,270		$	16,654

The actuarial gains in the projected benefit obligations of the pension and postretirement benefit plans during 2018 are largely due to the increases in the discount rate assumptions, partially offset by losses from an extension in the retirement rate assumption. For the pension plans, a decline in the interest credit rate assumption also contributed to the actuarial gain.

The following tables set forth the amounts recognized in the Company’s financial statements as a result of the property and casualty insurance subsidiaries’ aggregate 30 percent participation in the pooling agreement.

Amounts recognized in the Company’s consolidated balance sheets:



	Pension plans						Postretirement benefit plans
($ in thousands)	2018			2017			2018		2017
Assets:
Prepaid pension and postretirement benefits	$	12,603		$	16,327		$	5,088	$	4,356
Liability:
Pension and postretirement benefits	(4,070		)	(4,185		)	—		—
Net amount recognized	$	8,533		$	12,142		$	5,088	$	4,356

Amounts recognized in the Company’s consolidated balance sheets under the caption “accumulated other comprehensive income”, before deferred income taxes:



	Pension plans						Postretirement benefit plans
($ in thousands)	2018			2017			2018			2017
Net actuarial loss	$	(16,691	)	$	(11,598	)	$	(5,622	)	$	(4,950	)
Prior service credit	—			—			14,586			16,407
Net amount recognized	$	(16,691	)	$	(11,598	)	$	8,964		$	11,457

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Amounts recognized in the Company’s consolidated statements of comprehensive income, before deferred income taxes:



	Pension plans					Postretirement benefit plans
($ in thousands)	2018			2017		2018			2017
Net actuarial gain (loss)	$	(5,093	)	$	7,329	$	(672	)	$	1,197
Prior service (cost) credit	—			6		(1,821		)	(3,034		)
Net amount recognized	$	(5,093	)	$	7,335	$	(2,493	)	$	(1,837	)

The following table sets forth the projected benefit obligation, accumulated benefit obligation and fair value of plan assets of Employers Mutual’s non-qualified pension plan. The amounts related to the qualified pension plan are not included since the plan assets exceeded the accumulated benefit obligation.



	Year ended December 31,
($ in thousands)	2018		2017
Projected benefit obligation	$	13,566	$	13,950
Accumulated benefit obligation	11,882		12,272
Fair value of plan assets	—		—

The components of net periodic benefit cost (income) for Employers Mutual’s pension and postretirement benefit plans is as follows:



	Year ended December 31,
($ in thousands)	2018			2017			2016
Pension plans:
Service cost	$	16,852		$	15,135		$	14,432
Interest cost	10,726			11,190			10,161
Expected return on plan assets	(24,052		)	(20,765		)	(19,361		)
Amortization of net actuarial loss	537			3,643			4,311
Amortization of prior service cost	—			20			31
Net periodic pension benefit cost	$	4,063		$	9,223		$	9,574

Postretirement benefit plans:
Service cost	$	1,473		$	1,362		$	1,273
Interest cost	2,084			2,281			2,215
Expected return on plan assets	(4,815		)	(4,311		)	(4,224		)
Amortization of net actuarial loss	935			1,371			1,494
Amortization of prior service credit	(11,129		)	(11,154		)	(11,338		)
Net periodic postretirement benefit income	$	(11,452	)	$	(10,451	)	$	(10,580	)

The net periodic postretirement benefit income recognized on Employers Mutual's postretirement benefit plans is due to a plan amendment that was announced in the fourth quarter of 2013. This plan amendment generated a prior service credit that is being amortized into net periodic benefit cost over a period of 10 years.

Net periodic pension benefit cost allocated to the Company amounted to $1.2 million, $2.8 million and $2.9 million for the years ended December 31, 2018, 2017 and 2016, respectively. Net periodic postretirement benefit income allocated to the Company for the years ended December 31, 2018, 2017 and 2016 amounted to $3.2 million, $2.9 million, and $3.0 million, respectively.

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The weighted-average assumptions used to measure the benefit obligations are as follows:



	Year ended December 31,
	2018		2017
Pension plans:
Discount rate	4.24	%	3.60	%
Interest credit rate	4.50	%	5.50	%
Rate of compensation increase:
Qualified pension plan	5.07	%	5.09	%
Non-qualified pension plan	4.37	%	4.45	%

Postretirement benefit plans:
Discount rate	4.27	%	3.63	%

The weighted-average assumptions used to measure the net periodic benefit costs are as follows:



	Year ended December 31,
	2018		2017		2016
Pension plans:
Discount rate	3.60	%	4.07	%	3.90	%
Interest credit rate	5.50	%	5.50	%	5.50	%
Expected long-term rate of return on plan assets	7.00	%	7.00	%	7.00	%
Rate of compensation increase:
Qualified pension plan	5.07	%	5.08	%	5.07	%
Non-qualified pension plan	4.37	%	4.47	%	4.56	%

Postretirement benefit plans:
Discount rate	3.63	%	4.21	%	4.42	%
Expected long-term rate of return on plan assets	6.50	%	6.50	%	6.50	%

The expected long-term rates of return on plan assets were developed considering actual historical results, current and expected market conditions, plan asset mix and management’s investment strategy.

The following benefit payments, which reflect expected future service, are expected to be paid from the plans over the next ten years:



($ in thousands)	Pension benefits		Postretirement benefits
2019	$	19,932	$	2,805
2020	22,180		2,998
2021	21,996		3,169
2022	22,620		3,286
2023	23,408		3,358
2024 - 2028	124,035		17,922

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Employers Mutual manages its VEBA trust assets internally. The VEBA trust assets are reviewed relative to liabilities to determine the optimum allocation focusing on both asset accumulation and income generation. Assets contained in the VEBA trust are invested in fixed income, international equity and domestic equity mutual funds, an emerging markets exchange traded fund (ETF) and universal life insurance policies issued by EMC National Life Company, an affiliate of Employers Mutual, that carry a guaranteed interest rate of 4.5 percent.

See note 8 for a discussion on fair value measurement. Following is a description of the valuation techniques and inputs used for each major class of assets measured at fair value in Employers Mutual’s VEBA trust.


•	Money Market Fund: Valued at amortized cost, which approximates fair value. Under this method, investments purchased at a discount or premium are valued by accreting or amortizing the difference between the original purchase price and maturity value of the issue over the period to maturity. The net asset value of each share held by the trust at year-end was $1.00.

•

Mutual Funds: Valued at the net asset value of shares held by the trust at year-end. For purposes of calculating the net asset value, portfolio securities and other assets for which market quotes are readily available are valued at fair value. Fair value is generally determined on the basis of last reported sales prices, or if no sales are reported, based on quotes obtained from a quotation reporting system, established market makers, or independent pricing services.


•	ETF: Valued at the closing price from the applicable exchange.


•	Life Insurance Contract: Valued at the cash surrender value, which approximates fair value.

The fair values of the assets held in Employers Mutual’s VEBA trust are as follows:



December 31, 2018			Fair value measurements using
($ in thousands)	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Money market fund	$	1,506	$	1,506	$	—	$	—
Emerging markets ETF	3,986		3,986		—		—
Mutual funds	47,632		47,632		—		—
Life insurance contracts	14,885		—		—		14,885
Cash	759		759		—		—
Total benefit plan assets	$	68,768	$	53,883	$	—	$	14,885



December 31, 2017			Fair value measurements using
($ in thousands)	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Money market fund	$	1,254	$	1,254	$	—	$	—
Emerging markets ETF	4,803		4,803		—		—
Mutual funds	54,180		54,180		—		—
Life insurance contracts	14,524		—		—		14,524
Cash	897		897		—		—
Total benefit plan assets	$	75,658	$	61,134	$	—	$	14,524

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Presented below is a reconciliation of the assets measured at fair value using significant unobservable inputs (Level 3) for the years ended December 31, 2018 and 2017.



	Fair value measurements using significant unobservable (Level 3) inputs
	Life insurance contracts
($ in thousands)	2018		2017
Balance at beginning of year	$	14,524	$	14,159
Actual return on plan assets:
Increase in cash surrender value of life insurance contracts	361		365
Balance at end of year	$	14,885	$	14,524

Employers Mutual uses Global Portfolio Strategies, Inc. to advise on the asset allocation strategy for its qualified pension plan. The asset allocation strategy and process of Global Portfolio Strategies, Inc. uses a diversified allocation of equity, debt and real estate exposures that is customized to the plan’s payment risk and return targets.

Global Portfolio Strategies, Inc. reviews the plan’s assets and liabilities in relation to expectations of long-term market performance and liability development to recommend the appropriate asset allocation. The data for the contributions and emerging liabilities is provided from the plan’s actuarial valuation, while the current asset and monthly benefit payment data is provided by the plan record keeper.

Following is a description of the valuation techniques and inputs used for pooled separate accounts, the only major class of assets measured at fair value in Employers Mutual’s qualified pension plan.

•

Pooled Separate Accounts: Each of the funds held by the Plan is in a pooled or commingled investment vehicle that is maintained by the fund sponsor, each with many investors. The Plan asset is represented by a “unit of account” and a per unit value, whose value is the accumulated value of the underlying investments less liabilities. The net asset value is determined by the issuer of the fund by taking the fair value of the underlying investments less any liabilities divided by the number of units outstanding. Sponsors of the funds specify the source(s) used for the underlying investment asset prices and the protocol used to value each fund.

In accordance with ASU 2015-07, a fair value hierarchy table is not included here since all of the Plan's investments are measured at fair value using the net asset value per share (or its equivalent) practical expedient, which are not classified in the fair value hierarchy. Presented below are the fair values of assets held in Employers Mutual's defined benefit retirement plan:



	December 31,
($ in thousands)	2018		2017
Pooled separate accounts	$	316,755	$	349,004
Total benefit plan assets	$	316,755	$	349,004

Employers Mutual plans to contribute approximately $7.0 million to the pension plan in 2019. No contributions are expected to be made to the VEBA trust in 2019.

The Company participates in other benefit plans sponsored by Employers Mutual, including its 401(k) Plan, Board and Executive Non-Qualified Excess Plans and Defined Contribution Supplemental Executive Retirement Plan. The Company’s share of expenses for these plans amounted to $3.3 million, $2.9 million and $2.7 million in 2018, 2017 and 2016, respectively.

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13.	STOCK-BASED COMPENSATION

The Company has a stock-based compensation plan for non-employee directors. Employers Mutual also has several stock plans which utilize the common stock of the Company. Employers Mutual can provide the common stock required under its plans by: 1) using shares of common stock that it currently owns; 2) purchasing common stock in the open market; or 3) directly purchasing common stock from the Company at the current fair value. Employers Mutual's current practice is to purchase common stock from the Company for use in all of its stock plans (including its non-employee director stock purchase plan and its employee stock purchase plan). A portion of the compensation expense recognized by Employers Mutual (as the requisite service period for restricted stock awards/units is rendered) is allocated to the Company’s property and casualty insurance subsidiaries though their participation in the pooling agreement.

Stock Plans

On May 26, 2017, the Company registered 150,000 shares of its common stock for use in the EMC Insurance Group Inc. 2017 Non-Employee Director Stock Plan (the "2017 Director Plan"). The 2017 Director Plan provides for the awarding of non-qualified stock options, restricted stock, restricted stock units and other stock-based awards to the Company's non-employee directors. During 2018 and 2017, 2,800 and 2,000 shares of restricted stock were granted to non-employee directors of the Company under this plan. These shares of restricted stock vest over a one year period. Dividends on the unvested restricted stock are accrued and paid to the directors at the time of vesting.

Employers Mutual currently maintains two separate stock plans for the benefit of officers and key employees of Employers Mutual and its subsidiaries. A total of 3,000,000 shares of the Company’s common stock have been reserved for issuance under the 2007 Employers Mutual Casualty Company Stock Incentive Plan (2007 Plan), and a total of 1,000,000 shares have been reserved for issuance under the Employers Mutual Casualty Company 2017 Stock Incentive Plan (2017 Plan).

Both of Employers Mutual's plans permit the issuance of performance shares, performance units, and other stock-based awards, in addition to qualified (incentive) and non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units. Both plans provide for a ten-year time limit for granting awards. No additional grants can be made under the 2007 Plan due to the expiration of the term of the plan. The Senior Executive Compensation Committee of Employers Mutual’s Board of Directors grants the awards and is the administrator of the plans. The Company’s Compensation Committee must consider and approve all awards granted to the Company’s executive officers. Awards granted to directors are approved by the Company's Corporate Governance and Nominating Committee.

Options granted under the 2007 Plan generally had a vesting period of five years, with options becoming exercisable in equal annual cumulative increments commencing on the first anniversary of the option grant. Option prices could not be less than the fair value of the common stock on the date of grant. Restricted stock awards granted under the 2007 Plan generally have a vesting period of four years, with shares vesting in equal annual cumulative increments commencing on the first anniversary of the grant. With the exception of death, permanent disability or a change in control, any unvested shares of restricted stock are forfeited on termination of employment, including retirement. Holders of unvested shares of restricted stock receive compensation income equal to the amount of any dividends declared on the common stock.

During 2017, Employers Mutual began issuing restricted stock unit awards rather than restricted stock awards. In connection with this change, Employers Mutual now acquires stock to fulfill its obligations to the recipients of the restricted stock unit awards on the date they vest, rather than on the grant date of the awards. Because of this change, an account Employers Mutual established to hold previously granted restricted stock awards until they vest will periodically contain excess shares of the Company's stock stemming from forfeitures and surrenders. During 2018, the Company repurchased 30,523 shares of stock from this unvested restricted stock account at an average cost of $26.30. These repurchased shares are not deemed to be shares repurchased under the Company's stock repurchase program. Like restricted stock awards, restricted stock unit awards generally have a vesting period of four years, with shares vesting in equal annual cumulative increments commencing on the first anniversary of the grant. Upon death, disability or change in control, any granted but unvested restricted stock units become fully vested and settled. Upon qualifying for "Approved Retirement" [attaining 70 points (combined age plus whole years of continuous service) with a minimum age of 55 years, or reaching age 65], restricted stock units will generally become non-forfeitable on a pro-rated basis over the 12 months following the grant date. Settlement of non-forfeitable restricted stock units is deferred until the date on which the restricted stock units would otherwise vest and settle pursuant to the normal four-year vesting schedule. Holders of unvested restricted stock units do not receive compensation income equal to the amount of dividends declared on the common stock.

During 2016, 2,000 shares of restricted stock were granted to non-employee directors of the Company under the 2007 Plan. These shares of restricted stock vest over a period of three years, or upon a director reaching 75 years of age while an active director. The directors are entitled to receive compensation income (equal to the amount of dividends paid on the Company's common stock) earned on unvested shares of restricted stock.

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The Company recognized compensation expense from these plans totaling $1.2 million ($949,000 net of tax), $801,000 ($521,000 net of tax) and $788,000 ($512,000 net of tax) in 2018, 2017 and 2016, respectively. Due to the historically small number of forfeitures, the Company has elected to recognize the reduction to compensation expense from forfeitures as they occur.

A summary of the stock option activity under Employers Mutual’s stock plans for 2018, 2017 and 2016 is as follows:



	Year ended December 31,
	2018				2017				2016
	Number of options		Weighted- average exercise price		Number of options		Weighted- average exercise price		Number of options		Weighted- average exercise price
Outstanding, beginning of year	406,311		$	14.51	649,012		$	14.65	1,006,171		$	14.92
Exercised	(93,802	)	14.51		(222,921	)	14.88		(321,312	)	15.31
Expired	(30,577	)	14.42		(18,805	)	15.16		(34,947	)	16.32
Forfeited	—		—		(975	)	13.99		(900	)	13.99
Outstanding, end of year	281,932		$	14.52	406,311		$	14.51	649,012		$	14.65

Exercisable, end of year	281,932		$	14.52	406,311		$	14.51	593,224		$	14.72

As discussed above, during 2017 Employers Mutual began issuing restricted stock unit awards to eligible employees. These awards are accounted for as liability-based awards, whereby the liability is remeasured at each reporting date as the average of the high and low trading prices of the Company's common stock on that date. Upon settlement, the Company will receive the full fair value for all shares issued. The Company's share of this liability at December 31, 2018 was $1.2 million. A summary of restricted stock unit awards activity for 2018 and 2017 is as follows:



	Year ended December 31,
	2018	2017
	Number of awards	Number of awards
Non-vested, beginning of year	114,055	—
Granted	120,439	116,288
Vested	28,365	—
Forfeited	3,236	2,233
Non-vested, end of year	202,893	114,055

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For restricted stock awards, the average of the high and low trading prices of the Company's common stock on the dates of grant were used to determine their fair values. In 2016, the Company received the full fair value, as of the grant date, for all shares issued in connection with Employers Mutual's grant of restricted stock awards. At December 31, 2018, the Company’s portion of the unrecognized compensation cost associated with restricted stock awards that are not currently vested was $314,000 with a 0.84 year weighted-average period over which the compensation expense is expected to be recognized. The Company's portion of the total fair value of restricted stock awards that vested was $429,000, $545,000 and $414,000 in 2018, 2017 and 2016, respectively. A summary of restricted stock awards activity for 2018, 2017 and 2016 is as follows:



	Year ended December 31,
	2018				2017				2016
	Number of awards		Weighted- average grant-date fair value		Number of awards		Weighted- average grant-date fair value		Number of awards		Weighted- average grant-date fair value
Non-vested, beginning of year	144,050		$	22.96	234,281		$	22.31	216,944		$	20.40
Granted	2,800		25.27		2,000		26.95		118,588		24.56
Vested	(63,849	)	22.42		(85,192	)	21.31		(69,057	)	19.98
Forfeited	(15,844	)	22.91		(7,039	)	22.57		(32,194	)	22.73
Non-vested, end of year	67,157		$	23.57	144,050		$	22.96	234,281		$	22.31

The Company’s portion of the total intrinsic value of options exercised under Employers Mutual’s stock plans was $339,000, $901,000 and $1.1 million in 2018, 2017 and 2016, respectively. Under the terms of the pooling and quota share agreements, these amounts were paid to Employers Mutual. The Company receives the full fair value, as of the exercise date, for all shares issued in connection with option exercises. Additional information relating to options outstanding and options vested (exercisable) at December 31, 2018 is as follows:



	December 31, 2018
($ in thousands, except share and per share amounts)	Number of options	Weighted-average exercise price		Aggregate intrinsic value		Weighted-average remaining term
Options outstanding	281,932	$	14.52	$	4,918	2.18
Options exercisable	281,932	$	14.52	$	4,918	2.18

Incentive stock options generally do not generate income tax deductions for the Company. The Company has recorded a deferred income tax benefit for non-qualified stock options and restricted stock awards that have been issued. The Company’s portion of the current income tax deduction realized from exercises of non-qualified stock options was $56,000, $239,000 and $284,000 in 2018, 2017 and 2016, respectively. These actual deductions are generally in excess of the deferred tax benefits recorded in conjunction with the compensation expense (referred to as excess tax benefits), which reduce income tax expense. The income tax benefit that results from disqualifying dispositions of stock purchased through the exercise of incentive stock options is immaterial.

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Employee Stock Purchase Plan

On May 30, 2008, the Company registered 750,000 shares of its common stock for use in the Employers Mutual Casualty Company 2008 Employee Stock Purchase Plan. All employees are eligible to participate in the plan, though this plan is currently suspended pending the outcome of Employers Mutual's non-binding indicative proposal to purchase all outstanding shares of the Company. An employee may participate in the plan, when not suspended, by delivering, during the first twenty days of the calendar month preceding the first day of an election period, a payroll deduction authorization to the plan administrator; or making a cash contribution (employees designated as “Insiders” are required to give six months advance notice prior to participating in the plan). Participants pay 85 percent of the fair market value of the stock on the date of purchase. The plan is administered by the Board of Directors of Employers Mutual, which has the right to amend or terminate the plan at any time; however, no such amendment or termination shall adversely affect the rights and privileges of participants. Expenses allocated to the Company in connection with this plan totaled $116,000, $100,000 and $78,000 in 2018, 2017 and 2016, respectively.

During 2018, shares were purchased under the plan at prices ranging from $20.90 to $24.70. Activity under the plan was as follows:



	Year ended December 31,
	2018		2017		2016
Shares available for purchase, beginning of year	271,585		349,404		414,883
Shares purchased under the plan	(95,055	)	(77,819	)	(65,479	)
Shares available for purchase, end of year	176,530		271,585		349,404

Non-Employee Director Stock Purchase Plan

On March 14, 2013, the Company registered 300,000 shares of its common stock for issuance under the 2013 Employers Mutual Casualty Company Non-Employee Director Stock Purchase Plan. All non-employee directors of Employers Mutual and its subsidiaries, as well as non-employee directors of the Company, are eligible to participate in the plan, though this plan is currently suspended pending the outcome of Employers Mutual's non-binding indicative proposal to purchase all outstanding shares of the Company. When this plan is not suspended, each eligible director could purchase shares of common stock at 75 percent of the fair value of the stock on the exercise date in an amount equal to a minimum of 25 percent and a maximum of 100 percent of their annual cash retainer. The plan was authorized through the period of the 2023 annual meetings. The plan is administered by the Corporate Governance and Nominating Committee of the Board of Directors of Employers Mutual. The Board may amend or terminate the plan at any time; however, no such amendment or termination shall adversely affect the rights and privileges of the participants. Expenses allocated to the Company in connection with this plan totaled $53,000, $65,000 and $84,000 in 2018, 2017 and 2016, respectively.

During 2018, shares were purchased under the plan at prices ranging from $18.95 to $19.99. Activity under the plan was as follows:



	Year ended December 31,
	2018		2017		2016
Shares available for purchase, beginning of year	235,373		249,843		264,446
Shares purchased under the plan	(10,151	)	(14,470	)	(14,603	)
Shares available for purchase, end of year	225,222		235,373		249,843

Dividend Reinvestment Plan

The Company maintains a dividend reinvestment and common stock purchase plan (the “Plan”) which provides stockholders with the option of reinvesting cash dividends in additional shares of the Company’s common stock. Participants can also purchase additional shares of common stock without incurring broker commissions by making optional cash contributions to the plan, and sell shares of common stock through the plan.

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Employers Mutual did not participate in this plan in 2018, 2017 or 2016. Activity under the plan was as follows:



	Year ended December 31,
	2018			2017			2016
Shares available for purchase, beginning of year	965,801			971,222			976,697
Shares purchased under the plan	(5,301		)	(5,421		)	(5,475		)
Shares available for purchase, end of year	960,500			965,801			971,222
Lowest purchase price	$	23.87		$	26.94		$	22.09
Highest purchase price	$	32.38		$	31.09		$	30.50


14.	ACCUMULATED OTHER COMPREHENSIVE INCOME

The Company has available-for-sale securities and receives an allocation of the actuarial losses and net prior service credits associated with Employers Mutual’s pension and postretirement benefit plans, both of which generate accumulated other comprehensive income (loss) amounts. The following table reconciles, by component, the beginning and ending balances of accumulated other comprehensive income, net of tax.



	Accumulated other comprehensive income by component
	Unrealized gains (losses) on available-for- sale securities			Unrecognized pension and postretirement benefit obligations
($ in thousands)	Unrealized gains (losses) on available-for- sale securities			Net actuarial loss			Prior service credit			Total			Total
Balance at December 31, 2016	$	49,748		$	(16,299	)	$	12,632		$	(3,667	)	$	46,081
Other comprehensive income (loss) before reclassifications	27,278			5,571			96			5,667			32,945
Amounts reclassified from accumulated other comprehensive income	(8,326		)	958			(2,047		)	(1,089		)	(9,415		)
Other comprehensive income (loss)	18,952			6,529			(1,951		)	4,578			23,530
Reclassification of tax effects from accumulated other comprehensive income resulting from TCJA	14,797			(3,304		)	2,280			(1,024		)	13,773
Balance at December 31, 2017	83,497			(13,074		)	12,961			(113		)	83,384
Cumulative adjustment for adoption of financial instruments recognition and measurement changes	(66,234		)	—			—			—			(66,234		)
Other comprehensive income (loss) before reclassifications	(24,192		)	(4,885		)	1,050			(3,835		)	(28,027		)
Amounts reclassified from accumulated other comprehensive income	14,653			333			(2,489		)	(2,156		)	12,497
Other comprehensive income (loss)	(9,539		)	(4,552		)	(1,439		)	(5,991		)	(15,530		)
Balance at December 31, 2018	$	7,724		$	(17,626	)	$	11,522		$	(6,104	)	$	1,620

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The following tables display amounts reclassified out of accumulated other comprehensive income and into net income during the three years ended December 31, 2018.



($ in thousands)	Amounts reclassified from accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss) components	Year ended December 31, 2018			Affected line item in the consolidated statements of income
Unrealized gains (losses) on investments:
Reclassification adjustment for net realized investment gains (losses) included in net income	$	(18,548	)	Net realized investment gains (losses) and, beginning in 2018, change in unrealized gains on equity investments
Deferred income tax (expense) benefit	3,895			Total income tax expense (benefit)
Net reclassification adjustment	(14,653		)	Net income

Unrecognized pension and postretirement benefit obligations:
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income:
Net actuarial loss	(421		)	(1)
Prior service credit	3,150			(1)
Total before tax	2,729
Deferred income tax (expense) benefit	(573		)
Net reclassification adjustment	2,156

Total reclassification adjustment	$	(12,497	)


(1)	These reclassified components of accumulated other comprehensive income are included in the computation of net periodic pension and postretirement benefit income (see note 12, Employee Retirement Plans, for additional details).

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($ in thousands)	Amounts reclassified from accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss) components	Year ended December 31, 2017			Affected line item in the consolidated statements of income
Unrealized gains (losses) on investments:
Reclassification adjustment for net realized investment gains (losses) included in net income	$	12,809		Net realized investment gains (losses) and, beginning in 2018, change in unrealized gains on equity investments
Deferred income tax (expense) benefit	(4,483		)	Total income tax expense (benefit)
Net reclassification adjustment	8,326			Net income

Unrecognized pension and postretirement benefit obligations:
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income:
Net actuarial loss	(1,474		)	(1)
Prior service credit	3,150			(1)
Total before tax	1,676
Deferred income tax (expense) benefit	(587		)
Net reclassification adjustment	1,089

Total reclassification adjustment	$	9,415


(1)	These reclassified components of accumulated other comprehensive income are included in the computation of net periodic pension and postretirement benefit income (see note 12, Employee Retirement Plans, for additional details).

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($ in thousands)	Amounts reclassified from accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss) components	Year ended December 31, 2016			Affected line item in the consolidated statements of income
Unrealized gains (losses) on investments:
Reclassification adjustment for net realized investment gains (losses) included in net income	$	10,364		Net realized investment gains (losses) and, beginning in 2018, change in unrealized gains on equity investments
Deferred income tax (expense) benefit	(3,628		)	Total income tax expense (benefit)
Net reclassification adjustment	6,736			Net income

Unrecognized pension and postretirement benefit obligations:
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income:
Net actuarial loss	(2,383		)	(1)
Prior service credit	3,690			(1)
Total before tax	1,307
Deferred income tax (expense) benefit	(457		)
Net reclassification adjustment	850

Total reclassification adjustment	$	7,586


(1)	These reclassified components of accumulated other comprehensive income are included in the computation of net periodic pension and postretirement benefit income (see note 12, Employee Retirement Plans, for additional details).


15.	STOCK REPURCHASE PROGRAMS

Stock Repurchase Plans

On November 3, 2011, the Company’s Board of Directors authorized a $15.0 million stock repurchase program. This program does not have an expiration date. The timing and terms of the purchases are determined by management based on board approved parameters and market conditions, and are conducted in accordance with the applicable rules of the Securities and Exchange Commission. Common stock repurchased under this program will be retired by the Company. During 2018, the Company repurchased 25,300 shares of its common stock at an average cost of $25.76. No repurchases were made in 2017, but 17,300 shares were repurchased during 2016 at an average cost of $22.14.

Stock Purchase Plan

During the second quarter of 2005, Employers Mutual initiated a $15.0 million stock purchase program under which Employers Mutual may purchase shares of the Company’s common stock in the open market. This purchase program does not have an expiration date; however, this program is currently dormant and will remain so while the Company’s repurchase program is in effect. The timing and terms of the purchases are determined by management based on market conditions and are conducted in accordance with the applicable rules of the Securities and Exchange Commission. No purchases were made during 2018, 2017 and 2016. As of December 31, 2018, $4.5 million remained available under this plan for additional purchases.


16.	LEASES, COMMITMENTS AND CONTINGENT LIABILITIES

The Company does not have any lease agreements, but Employers Mutual has entered into leases for 16 branch and service office facilities, the costs of which are charged to the pool and allocated among the pool participants based on their respective participation interests.

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The participants in the pooling agreement are subject to guaranty fund assessments by states in which they write business. Guaranty fund assessments are used by states to pay policyholder liabilities of insolvent insurers domiciled in those states. Many states allow assessments to be recovered through premium tax offsets. The Company has accrued estimated guaranty fund assessments of $615,000 and $706,000 as of December 31, 2018 and 2017, respectively. Premium tax offsets of $809,000 and $897,000, which are related to prior guarantee fund payments and current assessments, have been accrued as of December 31, 2018 and 2017, respectively. The guaranty fund assessments are expected to be paid over the next two years and the premium tax offsets are expected to be realized within ten years of the payments. The participants in the pooling agreement are also subject to second-injury fund assessments, which are designed to encourage employers to employ workers with pre-existing disabilities. The Company has accrued estimated second-injury fund assessments of $2.4 million and $2.0 million as of December 31, 2018 and 2017, respectively. The second-injury fund assessment accruals are based on projected loss payments. The periods over which the assessments will be paid is not known.

17. UNAUDITED INTERIM FINANCIAL INFORMATION



	Three months ended,
($ in thousands, except per share amounts)	March 31			June 30			September 30		December 31
2018
Total revenues	$	163,379		$	166,637		$	189,125	$	141,586

Income (loss) before income tax expense (benefit)	$	(528	)	$	(7,722	)	$	24,444	$	(30,870	)
Income tax expense (benefit)	(452		)	(2,727		)	5,296		(9,325		)
Net income (loss)	$	(76	)	$	(4,995	)	$	19,148	$	(21,545	)

Net income (loss) per common share - basic and diluted¹	$	—		$	(0.24	)	$	0.89	$	(1.00	)



	Three months ended,
($ in thousands, except per share amounts)	March 31		June 30		September 30			December 31
2017
Total revenues	$	155,737	$	165,426	$	167,196		$	175,598

Income (loss) before income tax expense (benefit)	$	8,440	$	7,229	$	(440	)	$	24,587
Income tax expense (benefit)	1,636		1,725		(1,186		)	(1,597		)
Net income (loss)	$	6,804	$	5,504	$	746		$	26,184

Net income (loss) per common share - basic and diluted¹	$	0.32	$	0.26	$	0.03		$	1.23

¹ Since the weighted-average number of shares outstanding for the quarters are calculated independently of the weighted-average number of shares outstanding for the year, quarterly net income per share may not total to annual net income per share.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

Schedule I – Summary of Investments-

Other than Investment in Related Parties

December 31, 2018



($ in thousands)
Type of investment	Cost		Fair value		Amount at which shown in the balance sheet

Fixed maturity securities available-for-sale:
U.S. treasury	$	8,139	$	8,021	$	8,021
U.S. government-sponsored agencies	303,198		304,479		304,479
Obligations of states and political subdivisions	273,727		283,651		283,651
Commercial mortgage-backed	83,854		84,379		84,379
Residential mortgage-backed	161,055		162,137		162,137
Other asset-backed	21,596		20,834		20,834
Corporate	421,563		419,408		419,408
Total fixed maturity securities available-for-sale	1,273,132		1,282,909		1,282,909

Equity investments, at fair value:
Common stocks:
Financial services	35,410		41,839		41,839
Information technology	17,678		31,581		31,581
Healthcare	21,602		34,571		34,571
Consumer staples	10,926		13,180		13,180
Consumer discretionary	15,921		22,765		22,765
Energy	10,124		13,372		13,372
Industrials	10,989		19,389		19,389
Other	11,512		14,371		14,371
Non-redeemable preferred stocks	18,531		16,654		16,654
Investment funds	7,678		7,641		7,641
Total equity investments	160,371		215,363		215,363

Equity investments, at alternative measurement of cost less impairments	1,200		XXXX		1,200

Other long-term investments	19,316		XXXX		19,316

Short-term investments	28,204		28,204		28,204
Total investments	$	1,482,223	XXXX		$	1,546,992

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Schedule II – Condensed Financial Information of Registrant

Condensed Balance Sheets



	December 31,
($ in thousands, except share and per share amounts)	2018		2017
ASSETS
Investments:
Common stock of subsidiaries (equity method)	$	556,977	$	599,036
Equity investments, at fair value (cost $0 and $2,000)	—		2,000
Equity investments, at alternative measurement of cost less impairments	1,200		—
Other long-term investments	3,811		—
Short-term investments	2,368		1,900
Total investments	564,356		602,936

Cash	206		255
Accrued investment income	3		1
Prepaid assets	119		136
Income taxes recoverable	510		777
Deferred income taxes	6		—
Amounts due from affiliate to settle inter-company transaction balances	705		—
Total assets	$	565,905	$	604,105

LIABILITIES
Accounts payable	$	123	$	80
Amounts due affiliate to settle inter-company transaction balances	—		160
Deferred income taxes	—		19
Total liabilities	123		259

STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 30,000,000 shares; issued and outstanding, 21,615,105 shares in 2018 and 21,455,545 shares in 2017	21,615		21,455
Additional paid-in capital	128,451		124,556
Accumulated other comprehensive income	1,620		83,384
Retained earnings	414,096		374,451
Total stockholders' equity	565,782		603,846
Total liabilities and stockholders' equity	$	565,905	$	604,105

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

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Schedule II – Condensed Financial Information of Registrant, Continued

Condensed Statements of Income



	Year ended December 31,
($ in thousands)	2018			2017			2016
REVENUES
Dividends received from subsidiaries	$	21,124		$	5,719		$	9,707
Investment income	44			38			13
Net realized investment gains (losses) and, beginning in 2018, change in unrealized gains on equity investments	(90		)	—			—
Total revenues	21,078			5,757			9,720
Operating expenses (affiliated $1,243, $1,124 and $1,139)	2,552			2,269			2,006
Income before income tax benefit and equity in undistributed net income (loss) of subsidiaries	18,526			3,488			7,714
Income tax benefit	(535		)	(794		)	(698		)
Income before equity in undistributed net income (loss) of subsidiaries	19,061			4,282			8,412
Equity in undistributed net income (loss) of subsidiaries	(26,529		)	34,956			37,791
Net income (loss)	$	(7,468	)	$	39,238		$	46,203

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

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Schedule II – Condensed Financial Information of Registrant, Continued

Condensed Statements of Comprehensive Income



	Year ended December 31,
($ in thousands)	2018			2017			2016
Net income (loss)	$	(7,468	)	$	39,238		$	46,203

OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gains (losses) on investment securities not reflected in net income, net of deferred income taxes	(24,192		)	27,278			(3,885		)
Reclassification adjustment for net realized investment gains (losses) included in net income, net of income taxes	14,653			(8,326		)	(6,736		)
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income, net of deferred income taxes:
Net actuarial loss	333			958			1,549
Prior service credit	(2,489		)	(2,047		)	(2,399		)
Total reclassification adjustment associated with affiliate's pension and postretirement benefit plans	(2,156		)	(1,089		)	(850		)
Change in funded status of affiliate's pension and postretirement benefit plans, net of deferred income taxes:
Net actuarial gain (loss)	(4,885		)	5,571			(542		)
Prior service credit (cost)	1,050			96			(339		)
Total change in funded status of affiliate's pension and postretirement benefit plans	(3,835		)	5,667			(881		)

Other comprehensive income (loss)	(15,530		)	23,530			(12,352		)

Total comprehensive income (loss)	$	(22,998	)	$	62,768		$	33,851

All balances labeled with "affiliate" above are the result of related party transactions with Employers Mutual. All other comprehensive income (loss) balances presented above are from the Registrant's subsidiaries.

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Schedule II – Condensed Financial Information of Registrant, Continued

Condensed Statements of Cash Flows



	Year ended December 31,
($ in thousands)	2018			2017			2016
Net cash provided by operating activities	$	18,669		$	3,726		$	9,170

Cash flows from investing activities
Capital contributions to subsidiaries	—			(300		)	(500		)
Purchases of equity investments	(1,200		)	—			(2,000		)
Purchases of other long-term investments	(1,900		)	—			—
Net (purchases) disposals of short-term investments	(468		)	8,974			(1,113		)
Net cash (used in) provided by investing activities	(3,568		)	8,674			(3,613		)

Cash flows from financing activities
Issuance of common stock through affiliate’s stock plans	5,426			7,527			11,070
Repurchase of common stock	(1,455		)	(1,858		)	(383		)
Dividends paid to stockholders (affiliated $(10,477), $(10,006) and $(9,182))	(19,121		)	(17,998		)	(16,196		)
Net cash used in financing activities	(15,150		)	(12,329		)	(5,509		)

Net increase (decrease) in cash	(49		)	71			48
Cash at the beginning of the year	255			184			136
Cash at the end of the year	$	206		$	255		$	184

Income taxes recovered	$	777		$	700		$	716
Interest paid	$	—		$	—		$	—

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

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Schedule III – Supplementary Insurance Information

For Years Ended December 31, 2018, 2017 and 2016



($ in thousands)
Segment	Deferred policy acquisition costs		Loss and settlement expense reserves		Unearned premiums		Premium revenue		Net investment income		Losses and settlement expenses incurred		Amortization of deferred policy acquisition costs		Other underwriting expenses		Premiums written

Year ended December 31, 2018
Property and casualty insurance	$	40,674	$	531,912	$	246,330	$	495,447	$	34,070	$	332,921	$	83,869	$	85,967	$	510,525
Reinsurance	4,086		245,278		22,181		149,736		13,523		124,238		31,934		2,857		150,518
Parent company	—		—		—		—		44		—		—		—		—
Consolidated	$	44,760	$	777,190	$	268,511	$	645,183	$	47,637	$	457,159	$	115,803	$	88,824	$	661,043

Year ended December 31, 2017
Property and casualty insurance	$	37,140	$	502,864	$	236,030	$	472,369	$	32,670	$	302,973	$	79,734	$	79,245	$	484,027
Reinsurance	3,974		229,748		21,767		134,789		12,771		118,996		29,176		2,673		132,274
Parent company	—		—		—		—		38		—		—		—		—
Consolidated	$	41,114	$	732,612	$	257,797	$	607,158	$	45,479	$	421,969	$	108,910	$	81,918	$	616,301

Year ended December 31, 2016
Property and casualty insurance	$	36,295	$	486,387	$	220,697	$	456,467	$	33,886	$	294,369	$	78,493	$	71,272	$	463,673
Reinsurance	4,644		204,145		24,188		135,941		13,591		92,528		29,910		3,149		131,030
Parent company	—		—		—		—		13		—		—		—		—
Consolidated	$	40,939	$	690,532	$	244,885	$	592,408	$	47,490	$	386,897	$	108,403	$	74,421	$	594,703

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Schedule IV – Reinsurance

For Years Ended December 31, 2018, 2017 and 2016



($ in thousands)	Gross amount		Ceded to other companies		Assumed from other companies		Net amount		Percentage of amount assumed to net
Year ended December 31, 2018
Consolidated earned premiums	$	399,660	$	455,395	$	700,918	$	645,183	108.6	%

Year ended December 31, 2017
Consolidated earned premiums	$	384,993	$	437,881	$	660,046	$	607,158	108.7	%

Year ended December 31, 2016
Consolidated earned premiums	$	382,300	$	426,946	$	637,054	$	592,408	107.5	%

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Schedule VI – Supplemental Information Concerning

Property-Casualty Insurance Operations

For Years Ended December 31, 2018, 2017 and 2016



($ in thousands)	Deferred policy acquisition costs		Reserves for losses and settlement expenses		Discount, if any, deducted from reserves		Unearned premiums		Earned premiums		Net investment income
Year ended December 31, 2018	$	44,760	$	777,190	$	—	$	268,511	$	645,183	$	47,593
Year ended December 31, 2017	$	41,114	$	732,612	$	—	$	257,797	$	607,158	$	45,441
Year ended December 31, 2016	$	40,939	$	690,532	$	—	$	244,885	$	592,408	$	47,477



	Losses and settlement expenses incurred related to					Amortization of deferred policy acquisition costs		Paid losses and settlement expenses		Premiums written
($ in thousands)	Current year		Prior years			Amortization of deferred policy acquisition costs		Paid losses and settlement expenses		Premiums written
Year ended December 31, 2018	$	475,843	$	(18,684	)	$	115,803	$	417,135	$	661,043
Year ended December 31, 2017	$	441,588	$	(19,619	)	$	108,910	$	392,586	$	616,301
Year ended December 31, 2016	$	427,838	$	(40,941	)	$	108,403	$	372,888	$	594,703

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ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.



ITEM 9A.	CONTROLS AND PROCEDURES

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely making known to them material information relating to the Company and the Company’s consolidated subsidiaries required to be disclosed in the Company’s reports filed or submitted under the Exchange Act.

The report called for by Item 308(a) of Regulation S-K is included in “Management’s Report on Internal Control Over Financial Reporting,” under Part II, Item 8 of this report.

The attestation report called for by Item 308(b) of Regulation S-K is included in “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting,” under Part II, Item 8 of this report.

There were no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.



ITEM 9B.	OTHER INFORMATION

None.

PART III



ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Item 10 regarding the Company’s executive officers is included in “Executive Officers of the Company” under Part I, Item 1 of this report.

The information required by Item 10 regarding the audit committee financial expert and the members of the Company's Audit Committee of the Board of Directors is incorporated by reference from the information under the caption “Corporate Governance of the Company - Board Meetings and Committees” in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2019.

The information required by Item 10 regarding the Company's directors is incorporated by reference from the information under the captions “Election of Directors" and "Corporate Governance of the Company - Board Meetings and Committees” in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2019.

The information required by Item 10 regarding compliance with Section 16(a) of the Exchange Act is incorporated by reference from the information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance" in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2019.

The Company has adopted a code of ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer, controller, and/or persons performing similar functions. The code of ethics is posted on the Corporate Governance page of the Company’s website found at investors.emcins.com. In the event that the Company makes any amendments to, or grants any waivers from, a provision of the ethics policy that requires disclosure under applicable Securities and Exchange Commission rules, the Company intends to disclose such amendments or waivers and the reasons therefor on its website.

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ITEM 11.	EXECUTIVE COMPENSATION

See the information under the captions “Executive Compensation,” “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation” in the Company’s Proxy Statement in connection with its Annual Meeting of Stockholders to be held on May 16, 2019, which information is incorporated herein by reference.



ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

See the information under the captions “Security Ownership of Certain Beneficial Owners”, “Security Ownership of Management and Directors” and “Securities Authorized For Issuance Under Equity Compensation Plans” in the Company’s Proxy Statement in connection with its Annual Meeting of Stockholders to be held on May 16, 2019, which information is incorporated herein by reference.



ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

See the information under the captions “Certain Relatationships and Related Persons Transactions” and “Corporate Governance of the Company- Independence of Directors" in the Company’s Proxy Statement in connection with its Annual Meeting of Stockholders to be held on May 16, 2019, which information is incorporated herein by reference.



ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES

See the information under the caption “Independent Registered Public Accounting Firm's Fees" in the Company’s Proxy Statement in connection with its Annual Meeting of Stockholders to be held on May 16, 2019, which information is incorporated herein by reference.

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PART IV



ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) List of Financial Statements and Schedules



1.	Financial Statements
		Page
	Management's Report on Internal Control Over Financial Reporting	93
	Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting	94
	Report of Independent Registered Public Accounting Firm	95
	Consolidated Balance Sheets, December 31, 2018 and 2017	96
	Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016	98
	Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016	99
	Consolidated Statements of Stockholders' Equity for the years ended December 31, 2018, 2017 and 2016	100
	Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016	101
	Notes to Consolidated Financial Statements	103

2.	Schedules

	Schedule I - Summary of Investments - Other Than Investments in Related Parties	160
	Schedule II - Condensed Financial Information of Registrant	161
	Schedule III - Supplementary Insurance Information	165
	Schedule IV - Reinsurance	166
	Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations	167

	All other schedules have been omitted for the reason that the items required by such schedules are not present in the consolidated financial statements, are covered in the notes to the consolidated financial statements or are not significant in amount.



3.	Exhibits required by Item 601

3.	Articles of incorporation and by-laws:

	3.1	Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 filed with the Company's Form 8-K filed on May 7, 2015 under Item 5.03)

	3.2	By-Laws of the Company, as amended (incorporated by reference to Exhibit 3.2 filed with the Company’s Form 8-K filed on May 21, 2018 under Item 5.03)

10.	Material contracts

	10.1.1	EMC Insurance Companies Amended and Restated Reinsurance Pooling Agreements Between Employers Mutual Casualty Company and Certain of its Affiliated Companies (incorporated by reference to Exhibit 10.1.1 filed with the Company's Form 10-Q for the quarterly period ended June 30, 2018)

	10.1.2	100% Quota Share Reinsurance Retrocessional Agreement between Employers Mutual Casualty Company and EMC Reinsurance Company (incorporated by reference to Exhibit 10.1.2 filed with the Company's Form 10-K for the year ended December 31, 2015)

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		10.1.3	Aggregate Catastrophe Excess of Loss and Per Occurrence Catastrophe Excess of Loss Reinsurance Contract between Employers Mutual Casualty Company and EMC Reinsurance Company (incorporated by reference to Exhibit 10.1.4 filed with the Company's Form 10-Q for the quarterly period ended June 30, 2018)

		10.1.4	Semi-Annual Aggregate Catastrophe Excess of Loss Reinsurance Contract between Employers Mutual Casualty Company and Dakota Fire Insurance Company, EMCASCO Insurance Company and Illinois EMCASCO Insurance Company (incorporated by reference to Exhibit 10.1.5 filed with the Company's Form 10-Q for the quarterly period ended June 30, 2018)

		10.2.1	Summary of compensation for the Company’s non-employee directors (incorporated by reference to the Company's Form 8-K filed on March 6, 2018 under Item 1.01)*

		10.2.2	Employers Mutual Casualty Company Executive Annual Bonus Plan (incorporated by reference to Exhibit 10.2.3 filed with the Company's Form 8-K filed on May 20, 2016 under Item 5.07)*

		10.2.3	Executive Contingent Salary Plan – EMC Reinsurance Company (incorporated by reference to Exhibit 10.2.3 filed with the Company's Form 10-K for the year ended December 31, 2017)*

		10.2.4	Employers Mutual Casualty Company Senior Executive Long Term Incentive Plan (incorporated by reference to Exhibit 10.2.5 filed with the Company's Form 8-K filed on December 29, 2014 under Item 5.02)*

		10.2.5	EMC Reinsurance Company Executive Long Term Incentive Plan (incorporated by reference to Exhibit 10.2.6 filed with the Company's Form 8-K filed on December 29, 2014 under Item 5.02)*

		10.2.6	Employers Mutual Casualty Company Executive Long Term Incentive Plan (incorporated by reference to Exhibit 10.2.7 filed with the Company's Form 8-K filed on May 20, 2016 under Item 5.07)*

		10.2.7	Senior Executive Compensation Bonus Program (incorporated by reference to Exhibit 10.2.3 filed with the Company's Form 8-K filed on December 29, 2014 under Item 5.02)*

		10.2.9	Summary of Compensation for the Company's Special Committee

		10.2.8	Retirement and Transition Agreement between Kevin Hovick and Employers Mutual Casualty Company and any and all of its affiliates (incorporated by reference to Exhibit 10.2.8 filed with the Company's Form 8-K filed on August 30, 2017 under item 5.02)*

		10.3.1	Deferred Bonus Compensation Plan (incorporated by reference to Exhibit 10.3.1 filed with the Company's Form 10-K for the year ended December 31, 2015)*

		10.3.2	Employers Mutual Casualty Company Board and Executive Non-Qualified Excess Plan, as amended and restated (incorporated by reference to Exhibit 10.3.2 filed with the Company's Form 10-K for the year ended December 31, 2017)*

		10.3.3	Employers Mutual Casualty Company Board and Executive Non-Qualified Excess Plan II (incorporated by reference to Exhibit 10.3.3 filed with the Company's Form 10-K for the year ended December 31, 2017)*

		10.3.4	Employers Mutual Casualty Company Non-Employee Directors’ Post-Service Benefits Plan, as amended and restated*

		10.3.5	Employers Mutual Casualty Company Supplemental Retirement Plan*

		10.3.6	Employers Mutual Casualty Company Defined Contribution Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.3.6 filed with the Company's Form 10-K for the year ended December 31, 2017)*

		10.4.1	Employers Mutual Casualty Company Amended and Restated 2008 Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibit 10.4.1 filed with the Company's Form 8-K filed on May 27, 2016 under Item 8.01)*

		10.4.2	2013 Employers Mutual Casualty Company Non-Employee Director Stock Purchase Plan (incorporated by reference to Registration Statement No. 333-187250)*

		10.4.3	EMC Insurance Group Inc. 2017 Non-Employee Director Stock Plan (incorporated by reference to Registration Statement No. 333-218264)*

		10.4.4	2007 Employers Mutual Casualty Company Stock Incentive Plan (incorporated by reference to Registration Statement No. 333-143457)*

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		10.4.5	Employers Mutual Casualty Company 2017 Stock Incentive Plan (incorporated by reference to Registration Statement No. 333-222326)*

		10.4.6	EMC Insurance Group Inc. Amended and Restated Dividend Reinvestment and Common Stock Purchase Plan (incorporated by reference to Registration Statement No. 333-187622)

		10.5.1	Surplus Note – EMCASCO Insurance Company (incorporated by reference to Exhibit 10.5.1 filed with the Company’s Form 10-Q for the quarterly period ended March 31, 2018)

		10.5.2	Surplus Note – Illinois EMCASCO Insurance Company (incorporated by reference to Exhibit 10.5.2 filed with the Company’s Form 10-Q for the quarterly period ended March 31, 2018)

		10.5.3	Surplus Note – Dakota Fire Insurance Company (incorporated by reference to Exhibit 10.5.3 filed with the Company’s Form 10-Q for the quarterly period ended March 31, 2018)

		10.5.4	First Amended Inter-Company Loan Agreement (incorporated by reference to Exhibit 10.5.4 filed with the Company’s Form 10-Q for the quarterly period ended June 30, 2018)

		10.6.1	First Amended Investment Management Agreement (incorporated by reference to Exhibit 10.6.1 filed with the Company’s Form 10-Q for the quarterly period ended June 30, 2018)

		10.6.2	Services Agreement between Employers Mutual Casualty Company and EMC Insurance Group Inc. (incorporated by reference to Exhibit 10.6.2 filed with the Company’s Form 10-K for the calendar year ended December 31, 2017)

		10.6.3	Services Agreement between Employers Mutual Casualty Company and EMC Underwriters, LLC (incorporated by reference to Exhibit 10.6.3 filed with the Company’s Form 10-K for the calendar year ended December 31, 2017)

		10.6.4	Agreement for Payment of Taxes between Employers Mutual Casualty Company and EMC Insurance Group Inc. and its subsidiaries individually (incorporated by reference to Exhibit 10.6.4 filed with the Company’s Form 10-K for the calendar year ended December 31, 2016)

		10.6.5	First Amended Services Agreement between Employers Mutual Casualty Company and EMCASCO Insurance Company, Illinois EMCASCO Insurance Company, Dakota Fire Insurance Company, Union Insurance Company of Providence and EMC Property & Casualty Company (incorporated by reference to Exhibit 10.6.5 filed with the Company’s Form 10-Q for the quarterly period ended June 30, 2018)

	21.	Subsidiaries of the Registrant

	23.	Consent of Independent Registered Public Accounting Firm, with respect to Forms S-8 (Registration Nos. 333-187250, 333-218264, 333-143457, 333-222326 and 333-151299) and Form S-3 (Registration No. 333-187622)

	24.	Power of Attorney

	31.1	Certification of President, Chief Executive Officer and Treasurer as required by Section 302 of the Sarbanes-Oxley Act of 2002

	31.2	Certification of Senior Vice President and Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002

	32.1	Certification of President, Chief Executive Officer and Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	32.2	Certification of Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	101.INS		XBRL Instance Document

	101.SCH		XBRL Taxonomy Extension Schema Document

	101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

	101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

	101.LAB		XBRL Taxonomy Extension Label Linkbase Document

	101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

*	Indicates management contract or compensatory plan or arrangement.

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ITEM 16.	FORM 10-K SUMMARY

None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 6, 2019.

EMC INSURANCE GROUP INC.

/s/ Bruce G. Kelley

Bruce G. Kelley

President, Chief Executive Officer and Treasurer

(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 6, 2019.

/s/ Bruce G. Kelley

Bruce G. Kelley

President, Chief Executive Officer, Treasurer

and Director

(Principal Executive Officer)

/s/ Mark E. Reese

Mark E. Reese

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

/s/ Mark E. Reese

Stephen A. Crane*

Chairman of the Board

/s/ Mark E. Reese

Peter S. Christie*

Director

/s/ Mark E. Reese

Jonathan R. Fletcher*

Director

/s/ Mark E. Reese

Gretchen H. Tegeler*

Director

* by power of attorney

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