EMC Insurance Group Notes Change to Quota Share Reinsurance Deal

December 6, 2005

Iowa-based EMC Insurance Group Inc. announced that the terms of the Quota Share Reinsurance Agreement between the company’s reinsurance subsidiary, EMC Reinsurance Company, and Employers Mutual Casualty Company (Employers Mutual), the company’s parent organization, have been revised effective Jan. 1, 2006.

The revisions to the Agreement were approved at a joint meeting of the Inter-Company Committees of the boards of directors of the company and Employers Mutual on Dec. 2. The Agreement, as well as other inter-company transactions, will continue to be reviewed on an annual basis by the Inter-Company Committees in an effort to ensure that the terms are fair and reasonable to both parties.

The majority of the changes being implemented in 2006 are a direct result of the significant amount of hurricane losses retained by Employers Mutual during the severe 2005 hurricane season; however, other changes are being made to simplify and clarify the terms and conditions of the Agreement. The revised terms of the Agreement for 2006 are as follows: (1) the reinsurance subsidiary’s retention, or cap, on losses assumed per event will increase from $1.5 million to $2.0 million; (2) the cost of the $2.0 million cap on losses assumed per event will be treated as a reduction to written premiums rather than commission expense; (3) the reinsurance subsidiary will no longer directly pay for the outside reinsurance protection that Employers Mutual purchases to protect itself from catastrophic losses on the assumed reinsurance business it retains in excess of the cap and will instead pay a higher premium rate (previously accounted for as commission); and (4) the reinsurance subsidiary will assume all foreign exchange risk/benefit associated with contracts incepting on Jan. 1, 2006 and thereafter that are subject to the Agreement.

For 2006, the premium rate paid by the reinsurance subsidiary to Employers Mutual will be 10.5% of written premiums, which represents an approximate 24.0% increase in the cost of reinsurance protection over 2005 (excluding the increase in retention from $1.5 million per event in 2005 to $2.0 million per event in 2006). During 2005, the reinsurance subsidiary will pay approximately $3.7 million for Employers Mutual’s outside reinsurance protection (approximately 4.0% of written premiums) and a 4.5% commission rate. In total, the cost of the reinsurance subsidiary’s reinsurance protection during 2005 will be approximately 8.5% of written premiums.

If the increased retention and the higher premium rate had been in place during 2005, the company’s net income for the first nine months of 2005 would have been reduced by approximately $1.5 million or $0.11 per share. If the foreign exchange risk on contracts subject to the Agreement had been borne by the reinsurance subsidiary in 2005, the company’s net income would have increased by approximately $215,000 or $0.02 per share for the first nine months of 2005.

“We believe that the increase in reinsurance costs for 2006 is fair and reasonable and in line with the exposures we reinsure,” stated Bruce Kelley, president and chief executive officer. “Reinsurance costs are definitely on the rise for 2006 due to the severe 2005 hurricane season and most companies will be looking at higher retentions to keep the cost increase at an acceptable level. The bottom line is that EMC Insurance Group Inc. was well protected from catastrophe losses in 2005 and that protection will still be in place in 2006.”

Topics Reinsurance

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