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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
EMC INSURANCE GROUP INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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PERSONS WHO POTENTIALLY ARE TO RESPOND TO THE COLLECTION OF INFORMATION
CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE FORM DISPLAYS A
CURRENTLY VALID OMB CONTROL NUMBER.
SEC 1913 (02-02)
(EMC GROUP, INC. LETTERHEAD)
April 12, 2006
Dear Stockholder:
I am pleased to extend to you my personal invitation to attend the 2006
Annual Meeting of Stockholders of EMC Insurance Group Inc. on May 25, 2006, at
1:30 p.m., at the offices of Employers Mutual Casualty Company, 700 Walnut
Street, Des Moines, Iowa 50309.
The accompanying Notice of Annual Meeting and Proxy Statement contains a
description of the formal business to be acted upon by the stockholders. At the
meeting, I intend to discuss the Company's 2005 performance and its plans for
2006. Certain members of the Company's Board of Directors and Officers of the
Company, as well as representatives of Ernst & Young LLP, the Company's
independent registered public accounting firm, will be available to answer
questions you may have.
While I am looking forward to seeing you at the meeting, it is very
important that those of you who cannot personally attend assure that your shares
are represented. I urge you, therefore, to sign and date the enclosed form of
proxy and return it promptly in the accompanying envelope. If you attend the
meeting, you may, if you wish, withdraw any proxy previously given and vote your
shares in person.
Sincerely,
-s- Bruce G. Kelley
Bruce G. Kelley
President and CEO
EMC INSURANCE GROUP INC.
NOTICE OF
2006 ANNUAL MEETING OF STOCKHOLDERS
MAY 25, 2006
TO THE STOCKHOLDERS OF EMC INSURANCE GROUP INC.:
Notice is hereby given that the Annual Meeting of Stockholders of EMC
Insurance Group Inc. (the "Company"), an Iowa corporation, will be held on
Thursday, May 25, 2006 at 1:30 p.m. local time, at Employers Mutual Casualty
Company's office, 700 Walnut Street, Des Moines, Iowa, for the following
purposes:
1. To elect a Board of Directors;
2. To ratify the appointment of Ernst & Young LLP as the Company's
independent registered public accounting firm for the current fiscal
year; and
3. To transact such other business as may properly come before the meeting
or any adjournment thereof.
Each share of the Company's common stock will be entitled to one vote upon
all matters described above. Stockholders of record at the close of business on
March 27, 2006 will be entitled to notice of and to vote at the meeting. The
stock transfer books of the Company will not be closed.
April 12, 2006
BY ORDER OF THE BOARD OF DIRECTORS
DONALD D. KLEMME, Secretary
PLEASE VOTE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY. AN
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES, IS ENCLOSED
FOR YOUR CONVENIENCE.
EMC INSURANCE GROUP INC.
717 MULBERRY STREET
DES MOINES, IOWA 50309
PROXY STATEMENT
2006 ANNUAL MEETING OF STOCKHOLDERS
MAY 25, 2006
GENERAL INFORMATION
This proxy statement is furnished in connection with the solicitation by
the Board of Directors of EMC Insurance Group Inc. (the "Company") of proxies
from the holders of the Company's $1.00 par value common stock (the "Common
Stock") for use at the 2006 Annual Meeting of Stockholders to be held on May 25,
2006, and at any adjournment thereof (the "Annual Meeting").
The Company's 2005 Annual Report to Stockholders was sent to the Company's
stockholders on or about March 29, 2006. This proxy statement, along with the
accompanying form of proxy, was sent to the Company's stockholders on or about
April 12, 2006.
The accompanying proxy may be revoked by the person giving it at any time
before it is voted; such revocation may be accomplished by a letter, or by a
properly signed proxy bearing a later date, filed with the Secretary of the
Company prior to the Annual Meeting. If the person giving the proxy is present
at the meeting and wishes to vote in person, he or she may withdraw his or her
proxy at that time.
The Company has borne all costs of solicitation of proxies. In addition to
solicitation by mail, there may be incidental personal solicitations made by
directors and officers of the Company, its parent, Employers Mutual Casualty
Company ("Employers Mutual"), and their subsidiaries. The cost of solicitation,
including payments to nominees who at the request of the Company mail such
material to their customers, will be borne by the Company.
THE BOARD OF DIRECTORS RECOMMENDS ELECTION OF THE NOMINEES NAMED HEREIN AND A
VOTE "FOR" EACH OF THE OTHER MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING.
VOTING SECURITIES
All stockholders of record of the Common Stock at the close of business on
March 27, 2006, are entitled to notice of and to vote at the Annual Meeting. At
the close of business on March 27, 2006, there were 13,692,554 shares of
outstanding Common Stock, each entitled to one vote per share on all matters to
be voted upon at the Annual Meeting. The Company's stockholders do not have
cumulative voting rights. Shares of Common Stock of the Company present in
person or represented by proxy at the Annual Meeting will be tabulated for
determination of whether or not a quorum is present. A quorum will be present if
a majority of the outstanding shares entitled to vote is represented at the
Annual Meeting. If a quorum exists, directors will be elected by a majority of
the votes cast by the shares entitled to vote in the election and action on
other matters, including appointment of the Company's independent registered
public accounting firm, will be approved if the votes cast favoring the action
exceed the votes cast opposing the action. Votes withheld for any director,
abstentions and broker non-votes will be treated as shares that are present and
entitled to vote for purposes of determining the presence of a quorum, but will
not be counted as votes cast with respect to any matter submitted to the
stockholders for a vote and will not affect the outcome of any matter.
1
ELECTION OF DIRECTORS
NOMINEES
At the Annual Meeting, the stockholders will elect a board of eight
directors to serve for terms extending until the 2007 Annual Meeting and until
their respective successors are duly elected and qualified. Proxies in the
accompanying form which are received by management of the Company in response to
this solicitation will, unless contrary instructions are given therein, be voted
in favor of the eight nominees for director listed in the table below. The Board
of Directors of the Company has no reason to believe that any of such nominees
may not be available to serve or will not serve as a director if elected;
however, if any nominee is not so available at the time of the election, the
proxies may be voted in the discretion of the persons named therein for the
election of a substitute nominee.
The table below contains certain information with respect to the Board of
Directors' nominees for election as directors.
DIRECTOR
NAME AGE SINCE POSITION WITH THE COMPANY
---- --- -------- -------------------------
Margaret A. Ball.......................... 68 2004 Director
George C. Carpenter III................... 78 1981 Director
David J. Fisher........................... 69 1985 Director
Bruce G. Kelley........................... 52 1991 President, Chief Executive Officer and
Director
George W. Kochheiser...................... 80 1974 Chairman of the Board
Raymond A. Michel......................... 80 1981 Director
Fredrick A. Schiek........................ 71 1994 Director
Joanne L. Stockdale....................... 59 2004 Director
Margaret A. Ball was Senior Vice President of Underwriting of the Company
and of Employers Mutual from 1997 until her retirement on January 1, 2001. She
was a Vice President of Employers Mutual from 1983 until 1997. Ms. Ball was
employed by Employers Mutual from 1971 to 2001.
George C. Carpenter III was Executive Director and Chief Executive Officer
of Iowa Public Television from November 1985 until his retirement in 1993. Prior
to that he served as Vice President of Palmer Communications and as Vice
President and General Manager of WHO Broadcasting Company, a division of Palmer
Communications. He was employed by WHO Broadcasting Company for 20 years.
David J. Fisher has been Chairman of the Board and Chief Executive Officer
of Onthank Company, a Des Moines based wholesale distributor of floor, window,
wall covering and countertop products, since 1978 and has been employed by that
firm since 1962.
Bruce G. Kelley has been President and Chief Executive Officer of the
Company and of Employers Mutual since 1992 and was Treasurer of Employers Mutual
from 1996 until 2000, and of the Company from 1996 until 2001. He was President
and Chief Operating Officer of the Company and of Employers Mutual from 1991 to
1992 and was Executive Vice President of both companies from 1989 to 1991. Mr.
Kelley has been employed by Employers Mutual since 1985 and has been a director
of that company since 1984.
George W. Kochheiser has been Chairman of the Board of the Company since
1994, and was President and Chief Operating Officer of the Company and of
Employers Mutual from 1982 until his retirement in
2
1991. Mr. Kochheiser also serves as a director of Employers Mutual and was an
employee of that company from 1949 to 1991.
Raymond A. Michel is a member of the Board of Directors of Koss
Construction Company, a highway and airport construction firm, and was its
Chairman and Chief Executive Officer from 1972 until his retirement in 1989. He
has been affiliated with that company in one capacity or another since 1955.
Fredrick A. Schiek was Executive Vice President and Chief Operating Officer
of the Company and of Employers Mutual from 1992 until his retirement on March
1, 2001. He was Vice President of Employers Mutual from 1983 until 1992 and has
served as a director of Employers Mutual since 1998. Mr. Schiek was employed by
Employers Mutual from 1959 to 2001.
Joanne L. Stockdale has been the President and Chief Executive Officer of
Northern Iowa Die Casting Inc., a manufacturer of aluminum die castings for
original equipment manufacturers, since 1983. Since 1988, she has been an
investment trustee of the Iowa Public Employees Retirement System (IPERS) where
she has served as chair or vice-chair since 1995. She is a Certified Public
Accountant.
INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES
During the year ended December 31, 2005, the Board of Directors of the
Company held four regular meetings. In 2005, each member of the Board of
Directors attended at least 75 percent of the aggregate of (i) the total number
of meetings of the Board of Directors held and (ii) the total number of meetings
held by all committees of the Board of Directors on which they served. All of
the members of the Board of Directors attended the Company's 2005 annual meeting
and the Company expects all of the members of the Board of Directors to attend
this year's Annual Meeting. The Board has determined that Board members Ball,
Carpenter, Fisher, Michel and Stockdale are independent directors as defined by
the rules of the Nasdaq Stock Market.
The Board of Directors of the Company has five standing committees: the
Executive Committee, the Audit Committee, the Compensation Committee, the
Inter-Company Committee and the Nominating Committee. The Executive Committee
members are Bruce G. Kelley, Fredrick A. Schiek and George W. Kochheiser. This
Committee has authority to exercise all of the authority of the Board of
Directors when the Board of Directors is not in session, with the exception of
certain actions which, under Iowa law and the Company's By-laws, require action
by the Board of Directors; these include amending the Company's Articles of
Incorporation, declaring dividends, adopting a plan of merger or consolidation
of the Company, appointing or removing executive officers, filling officer
vacancies, approving or recommending to the Company's stockholders a voluntary
dissolution or revocation of its Articles of Incorporation, or amending the
Company's By-laws. The Executive Committee did not meet during the year ended
December 31, 2005.
The members of the Audit Committee are Margaret A. Ball, David J. Fisher
and Joanne L. Stockdale. Each member of the Audit Committee is "independent"
under the standards established by the corporate governance rules of the Nasdaq
Stock Market and the rules of the Securities and Exchange Commission. The Board
of Directors has determined that Committee member Joanne L. Stockdale qualifies
and is designated as an "audit committee financial expert" as defined by the
rules of the Securities and Exchange Commission. The functions performed by this
Committee are detailed in the Audit Committee Charter, which is available on the
Company's website at www.EMCInsurance.com. Their duties are to assist the Board
of Directors in its general oversight of the Company's financial reporting,
internal control over financial reporting and audit functions. The Audit
Committee met seven times during the year ended December 31, 2005.
3
The process for establishing the compensation of the Company's executive
officers commences with Employers Mutual's Compensation Committee, which makes
an initial determination of compensation arrangements for the executive
officers. The compensation arrangements determined by Employers Mutual's
Compensation Committee are then submitted to the Company's Compensation
Committee for its independent evaluation and approval. Both committees are
authorized to meet jointly in an attempt to resolve any disputes, but the
Company's Compensation Committee is ultimately required by its Charter to take
action independently of any actions taken by Employers Mutual's Compensation
Committee and to approve the compensation arrangements. In 2005, the Company's
Compensation Committee met one time and approved the compensation
recommendations of Employers Mutual's Compensation Committee.
The Company's Compensation Committee members are George C. Carpenter III,
Raymond A. Michel and Joanne L. Stockdale. The report of the Company's
Compensation Committee begins on page 16 of this proxy statement. The charter of
the Compensation Committee is available on the Company's web site at
www.EMCInsurance.com.
The Company and Employers Mutual have each established an Inter-Company
Committee. None of the three members of the Company's Inter-Company Committee
may be members of Employers Mutual's board of directors, and each are required
to be "independent" under the standards established by the rules of the Nasdaq
Stock Market. Similarly, Employers Mutual's Inter-Company Committee consists of
three directors of Employers Mutual who are not members of the Company's board
of directors. The members of the Company's Inter-Company Committee are Margaret
A. Ball, George C. Carpenter, III and Raymond A. Michel. 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 in an existing 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 in an existing agreement, is fair and reasonable
to Employers Mutual and its policyholders. The two Inter-Company Committees may
meet separately or jointly, but separate votes are always required. The
Company's Inter-Company Committee met three times during the year ended December
31, 2005.
The members of the Nominating Committee are George C. Carpenter III, David
J. Fisher and Raymond A. Michel. Each of these members are "independent" under
the standards established by the rules of the Nasdaq Stock Market. The
Nominating Committee ensures that the Board of Directors of the Company is
appropriately constituted to meet its fiduciary obligations to stockholders. To
accomplish this purpose, the Nominating Committee assists the Board of Directors
in assessing its membership needs, identifies individuals qualified to become
members of the Board of Directors and makes recommendations regarding potential
director candidates to the Board of Directors. Criteria for the nomination of a
director and the process of consideration of director candidates recommended by
stockholders are set forth in the Nominating Committee Charter, which is located
on the Company's web site at www.EMCInsurance.com. In considering a nominee for
a position on the Company's Board of Directors, the Nominating Committee will
seek to identify individuals who, in addition to having a reputation for
integrity, honesty and adherence to high ethical standards, also have
demonstrated business knowledge, experience and the ability to exercise sound
judgment in matters related to current and long-term objectives of the Company
and a willingness and ability to contribute positively to the decision-making
process of the Company. The Nominating Committee met one time during the year
ended December 31, 2005.
4
DIRECTORS' COMPENSATION
In 2005, each member of the Company's Board of Directors who was not an
officer or employee of the Company was paid $1,200 for each board meeting or
committee meeting attended, plus expenses, and a $9,000 annual fee payable
irrespective of attendance at meetings. In addition, the chair of the Audit
Committee was paid a $4,000 annual fee. Non-employee directors of the Company
are also eligible to participate in Employers Mutual's Non-Employee Director
Stock Option Plan. Under this Plan, directors are granted an option to purchase
Common Stock in an amount up to 100 percent of their annual retainer at an
option price equal to 75 percent of the fair market value of the Common Stock on
the option exercise date. During 2005, two directors participated in this plan
and exercised options for a total of 1,967 shares.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding those entities
known to the Company to own beneficially more than five (5) percent of the
Company's Common Stock:
AMOUNT AND NATURE
TITLE OF NAME AND ADDRESS OF BENEFICIAL PERCENT
CLASS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
-------- -------------------------------------------------------- ----------------- --------
Common Employers Mutual Casualty Company....................... 7,782,351(1) 56.8%
717 Mulberry Street
Des Moines, Iowa 50309
Common Wells Fargo & Company................................... 912,603(2) 6.7%
525 Market Street, 10th Floor
San Francisco, California 94105
---------------
(1) On March 27, 2006, Employers Mutual owned 57.0% of the outstanding Common
Stock of the Company. Employers Mutual intends to retain ownership of a
majority of the Company's Common Stock in the foreseeable future. This
majority stock ownership will give Employers Mutual the right to determine
whether or not all of the proposals presented at the Annual Meeting are
carried and will enable it to control the election of the Board of Directors
of the Company. The Company's operations are integrated with the operations
of Employers Mutual and are largely dependent upon a continuing relationship
with Employers Mutual. The Company does not anticipate any disruptions in
this relationship.
(2) The information shown is based upon a Schedule 13G, filed March 3, 2006 with
the Securities and Exchange Commission by Wells Fargo & Company on its own
behalf and on behalf of its identified subsidiaries. This reports sole
voting power for 861,498 shares, sole dispositive power for 891,603 shares,
and shared dispositive power for 1,000 shares held by Wells Fargo & Company,
and sole voting power for 587,679 shares and sole dispositive power for
857,608 shares held by Wells Capital Management Incorporated.
5
SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS
The following information is furnished as to the Common Stock of the
Company owned beneficially as of March 27, 2006, by each of the Company's
directors, director nominees and named executive officers individually, and the
directors and executive officers of the Company as a group. The information
concerning beneficial ownership has been furnished by the persons listed below
or was determined by the Company from reports filed by such persons with the
Securities and Exchange Commission regarding such ownership.
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME OWNERSHIP(1) OF CLASS
---- ----------------- --------
Margaret A. Ball............................................ 2,005 *
George C. Carpenter III..................................... 5,490 *
Raymond W. Davis............................................ 20,576(2) *
David J. Fisher............................................. 1,967 *
Ronald W. Jean.............................................. 38,099(3) *
Bruce G. Kelley............................................. 150,724(4) 1.1%
George W. Kochheiser........................................ 55,000 *
Raymond A. Michel........................................... 5,000 *
William A. Murray........................................... 39,497(5) *
Steven C. Peck.............................................. 16,500(6) *
Fredrick A. Schiek.......................................... 16,561 *
Joanne L. Stockdale......................................... 646 *
All Directors and Executive Officers as a Group (21 persons,
including those listed above)............................. 452,403 3.3%
---------------
* Less than one percent
(1) All named holders of the Common Stock listed in this table have sole voting
and investment power with respect to the shares held, except as stated
otherwise below.
(2) Raymond W. Davis directly owns 15,976 shares of Common Stock and has
presently exercisable options to purchase 4,600 shares, which shares are
included in the table.
(3) Ronald W. Jean directly owns 13,632 shares of Common Stock and has presently
exercisable options to purchase 24,467 shares, which shares are included in
the table.
(4) Bruce G. Kelley owns 95,768 shares of Common Stock directly and 26,198
shares indirectly. Of the 26,198 shares indirectly owned, 1,500 are owned by
his spouse and 24,698 are owned by his children. In addition, he owns
presently exercisable options to purchase 28,758 shares, which shares are
included in the table.
(5) William A. Murray directly owns 13,587 shares of Common Stock and has
presently exercisable options to purchase 25,910 shares, which shares are
included in the table.
(6) Steven C. Peck directly owns 3,000 shares of Common Stock and has presently
exercisable options to purchase 13,500 shares, which shares are included in
the table.
6
COMPENSATION OF MANAGEMENT
The Company has no employees of its own and, consequently, has no payroll
and no employee benefit plans. Approximately 15 employees of Employers Mutual
devote a portion of their time performing administrative duties for the Company.
The Company's four property and casualty insurance subsidiaries (Dakota Fire
Insurance Company, EMCASCO Insurance Company, Farm and City Insurance Company
and Illinois EMCASCO Insurance Company) and two subsidiaries and an affiliate of
Employers Mutual are parties to reinsurance pooling agreements with Employers
Mutual (collectively, the "Pooling Agreement"). The compensation of Employers
Mutual's employees during 2005 was shared by the Company's property and casualty
insurance subsidiaries in accordance with the terms of the Pooling Agreement.
The compensation paid to the employees of Employers Mutual who perform duties
for EMC Reinsurance Company and EMC Underwriters, LLC, the other two
subsidiaries of the Company, is not allocated to the Pooling Agreement and is
charged directly to those subsidiaries. The aggregate participation of the
Company's property and casualty insurance subsidiaries in the Pooling Agreement
during 2005 was 30% and this percentage represents the approximate portion of
the compensation expenses described below which were allocated to the Company
during the year.
The following table sets forth information with respect to compensation
paid by Employers Mutual to its Chief Executive Officer and the other four most
highly compensated executive officers serving as such on December 31, 2005.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1)
----------------------------------------
SECURITIES
UNDERLYING ALL OTHER
OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) (#)(2) ($)(3)
--------------------------- ---- --------- -------- ---------- ------------
Bruce G. Kelley............................ 2005 585,795 382,231 18,000 74,915
President & CEO 2004 584,690 -- 6,000 45,858
2003 507,962 302,890 5,000 61,482
William A. Murray.......................... 2005 338,155 203,674 15,000 53,138
Executive Vice President & COO 2004 315,670 -- 5,000 31,797
2003 266,463 146,494 5,000 33,605
Ronald W. Jean............................. 2005 338,155 203,674 15,000 48,572
Executive Vice President 2004 315,670 -- 5,000 26,973
for Corporate Development 2003 267,658 147,151 5,000 31,734
Raymond W. Davis........................... 2005 240,192 132,614 5,000 34,868
Sr. Vice President & Treasurer 2004 229,854 -- 1,000 20,272
2003 200,704 101,260 1,000 24,932
Steven C. Peck............................. 2005 207,366 114,490 6,000 29,323
Sr. Vice President -- Actuary 2004 198,732 -- 2,000 21,885
2003 165,539 81,094 2,000 17,106
---------------
(1) Compensation deferred at election of executive includable in category and
year earned.
(2) All stock options granted were at an option price equal to the fair market
value of the Common Stock on the date of grant, have a term of ten years and
vest at a rate of 20 percent per year, commencing in the second year of the
term.
7
(3) Amounts shown for all other compensation in the above table and detailed in
the following table include employer matching contributions to Employers
Mutual's 401(k) Savings Plan (the "401(k) Plan"), employer matching
contributions to Employers Mutual's Board and Executive Non-qualified Excess
Plan, ("BENEP") recognition payments for professional education designation
awards, excess group life insurance and supplemental disability insurance
premiums and professional tax preparation fees.
SUMMARY COMPENSATION TABLE FOOTNOTE(3)
COMPANY
MATCHING
CONTRIBUTIONS PERSONAL
TO 401(K) EXECUTIVE USE OF
AND BENEP INSURANCE PROFESSIONAL COMPANY ALL OTHER
NAME YEAR PLANS PREMIUMS SERVICES AUTO COMPENSATION
---- ---- ------------- --------- ------------ -------- ------------
Bruce G. Kelley.............. 2005 $55,181 $8,456 $2,800 $2,537 $5,941
2004 34,827 1,518 4,650 2,229 2,634
2003 51,322 894 4,000 2,582 2,684
William A. Murray............ 2005 31,249 11,903 645 2,418 6,923
2004 22,282 2,639 1,350 2,984 2,542
2003 24,390 2,404 2,000 2,404 2,407
Ronald W. Jean............... 2005 33,630 11,218 -- 1,931 1,793
2004 22,173 2,758 -- 2,042 --
2003 29,115 1,310 -- 1,309 --
Raymond W. Davis............. 2005 24,653 8,888 -- -- 1,327
2004 17,768 1,984 520 -- --
2003 22,504 1,753 675 -- --
Steven C. Peck............... 2005 22,088 6,105 -- -- 1,130
2004 20,224 1,661 -- -- --
2003 15,699 1,407 -- -- --
8
STOCK OPTIONS
The following table sets forth details regarding stock options granted to
the named executive officers during 2005. In addition, the table shows the
hypothetical gain, or "option spread", that would exist for the respective
options based on assumed rates of annual compound stock appreciation of five and
ten percent over the full term of the options. Employers Mutual grants the stock
options which are utilized to purchase the Common Stock of the Company. Upon the
exercise of these options, Employers Mutual pays to the Company the spread
between the fair market value and the exercise price.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUES BASED ON
ASSUMED RATES OF
NUMBER OF % OF STOCK PRICE
OPTIONS TOTAL EXERCISE APPRECIATION(2)
GRANTED OPTIONS PRICE EXPIRATION ---------------------
NAME (#)(1) GRANTED ($/SH) DATE 5%($) 10%($)
---- --------- ------- ----------- ---------- --------- ---------
Bruce G. Kelley.................. 18,000 7.1 19.35 3/1/15 219,044 555,100
William A. Murray................ 15,000 5.9 19.35 3/1/15 182,537 462,584
Ronald W. Jean................... 15,000 5.9 19.35 3/1/15 182,537 462,584
Raymond W. Davis................. 5,000 2.0 19.35 3/1/15 60,846 154,195
Steven C. Peck................... 6,000 2.3 19.35 3/1/15 73,015 183,034
---------------
(1) All stock options granted were at an option price equal to the fair market
value of the Common Stock on the date of grant, have a term of ten years and
vest at a rate of 20 percent per year, commencing in the second year of the
term.
(2) The potential realizable values indicated are based on the assumption that
the stock price appreciates at the annual rate shown from the date of grant
until the expiration date. These numbers do not reflect the historical
increase in the price of the stock and do not represent the Company's
estimate of future appreciation in the stock price.
The following table sets forth information with respect to the named
executive officers concerning the exercise of stock options during 2005, the
value realized from those exercises, the number of unexercised options held as
of December 31, 2005, and the amount of unrealized gains attributed to them on
that date.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES VALUE YEAR-END(#) YEAR END($)
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($)(1) UNEXERCISABLE UNEXERCISABLE(2)
---- ----------- -------- ------------- ----------------
Bruce G. Kelley.................. 10,000 97,990 29,600/23,830 210,390/14,814
William A. Murray................ 5,894 55,912 23,496/23,182 160,507/30,459
Ronald W. Jean................... -- -- 22,748/22,506 152,550/17,177
Raymond W. Davis................. 500 3,604 7,000/7,200 52,372/4,245
Steven C. Peck................... 1,500 14,970 12,800/9,200 93,399/5,670
9
---------------
(1) Value realized is the fair market value on the date(s) of exercise less the
exercise price(s).
(2) The value of unexercised options is calculated by subtracting the exercise
price(s) from the fair market value, which is determined by calculating the
average of the highest and lowest trade of the stock at year-end, which was
$19.65 per share.
RETIREMENT PLANS
DEFINED BENEFIT PLANS
Employers Mutual sponsors a tax-qualified defined benefit plan, the
Employers Mutual Casualty Company Retirement Plan (the "Pension Plan"), covering
all employees of Employers Mutual and its subsidiaries. Employers Mutual also
sponsors a non-qualified defined benefit supplemental retirement plan, the
Employers Mutual Casualty Company Supplemental Retirement Plan (the "SRP"),
covering certain of its (and its subsidiaries') management and highly
compensated employees. Both plans contain a traditional defined benefit formula
pension benefit (based on a combination of average pay and years of service) for
certain eligible employees and a cash balance account benefit for all other
eligible employees.
TRADITIONAL FORMULA
The table below sets forth the annual retirement benefits at age 65 payable
to those executives named in the Summary Compensation Table who are eligible
under the traditional defined benefit formula portion of the Pension Plan and
the SRP. These plans are described in more detail below. The Assumed Annual
Earnings is an average of the five consecutive pay years, out of all pay years,
which gives the highest average. The assumed annual earnings shown in the table
have been computed to reflect a range adequate to cover the current and future
salaries of eligible named executives. Generally, compensation utilized for
pension formula purposes (and in the table below) includes salary and annual
bonus reported in the Summary Compensation Table. Company contributions received
under the 401(k) and the Board and Executive Non-qualified Excess plans and
amounts related to stock options are not included in the calculation of
compensation for purposes of the pension benefit. The benefits in the table do
take into account any reduction for applicable Social Security retirement
benefits.
10
ESTIMATED ANNUAL RETIREMENT BENEFITS
YEARS OF SERVICE CREDITED AT NORMAL RETIREMENT DATE
---------------------------------------------------------------
ASSUMED ANNUAL EARNINGS 15 20 25 30 35 40
----------------------- -------- -------- -------- -------- -------- --------
$ 250,000................. $ 83,482 $105,357 $127,232 $149,107 $170,982 $192,857
300,000................ 100,179 126,429 152,679 178,929 205,179 231,429
350,000................ 116,875 147,500 178,125 208,750 239,375 270,000
400,000................ 133,571 168,571 203,571 238,571 273,571 308,571
450,000................ 150,268 189,643 229,018 268,393 307,768 347,143
500,000................ 166,964 210,714 254,464 298,214 341,964 385,714
550,000................ 183,661 231,786 279,911 328,036 376,161 424,286
600,000................ 200,357 252,857 305,357 357,857 410,357 462,857
650,000................ 217,054 273,929 330,804 387,679 444,554 501,429
700,000................ 233,750 295,000 356,250 417,500 478,750 540,000
PENSION PLAN
Employees employed prior to January 1, 1989 and who were 50 years old, or
older, on January 1, 2000, have their benefits determined under the Pension Plan
(a tax-qualified noncontributory plan), using a traditional defined benefit
formula where benefits are based on a percentage of (a) the employee's average
compensation (five consecutive pay years that results in the highest average),
or (b) $210,000 for 2005 (the limit set by the Internal Revenue Code of 1986, as
amended, (the "Code")), whichever is lower, multiplied by the employee's
credited service (maximum of 40 years). The normal form of benefit is a single
life annuity with payments guaranteed for 10 years. This is the form of benefit
that would be paid under the table shown on page 12. Various joint and survivor
annuities, a single life annuity with no term certain, and a single life annuity
with various term certain options are also available under the Pension Plan (in
addition to a lump sum option). All alternative payment options are the
actuarial equivalent of the normal form of benefit. Early retirement can be
elected by a participant who has reached age 55. The benefit paid on early
retirement is a percentage of the benefit that would be payable upon normal
retirement and ranges from 52% at age 55 to 92% at age 64.
SUPPLEMENTAL RETIREMENT PLAN
Effective October 1, 2004, Employers Mutual established the SRP, which
replaced individual Excess Retirement Benefit Agreements with certain executives
and replaced the Employers Mutual Supplemental Executive Retirement Plan for
certain executives. Accrued benefits under the replaced plans were assumed under
the SRP. The SRP is an unfunded, non-qualified retirement plan maintained to
provide additional deferred compensation for a select group of management and
highly compensated employees. The SRP provides a benefit to eligible persons
whenever 100% of their pension benefits under the Pension Plan are not permitted
to be funded or paid through that plan because of limits impose by the Code
(limit on compensation that can be taken into account and limit on benefits that
can be paid) and/or because of elective deferrals of covered compensation under
any non-qualified deferred compensation plan. For those executives eligible
11
under the traditional defined benefit formula in the Pension Plan, the SRP
benefit is the benefit as calculated under the formula in the Pension Plan
(without regard to compensation or benefit limits), offset by the benefit under
the Pension Plan. The accrued benefit under the SRP is calculated as a single
life annuity (with 10 years certain) and is converted to an actuarially
equivalent lump sum, which is then paid to the executive over a period of years,
ranging from one year if the present value of the benefit is less than $50,000
to ten years if the present value of the benefit is $450,000 or greater.
However, for purposes of the table shown on page 11, it is assumed that the SRP
benefit is paid as a single life annuity (with ten years certain), the same as
under the Pension Plan, so that a total equivalent pension at normal retirement
can be determined.
ESTIMATED BENEFITS OF NAMED EXECUTIVE OFFICERS
The individuals named in the Summary Compensation Table who are
participants in the traditional defined benefit portion of the Pension Plan and
SRP are Messrs. Murray, Jean, Davis and Peck. If each of these individuals had
retired on December 31, 2005, the years of credited service and the five-year
average compensation used to calculate retirement benefits at age 65 in the
table would have been 20 and $341,930 for Mr. Murray, 26 and $332,856 for Mr.
Jean, 26 and $238,740 for Mr. Davis and 19 and $197,253 for Mr. Peck. If each of
these individuals retire at age 65, assuming the benefit formula in the Pension
Plan does not change, and assuming a 6% annual increase in covered compensation
between 2005 and the year each one reaches age 65, the years of credited service
at age 65 and the five-year average compensation used to calculate retirement
benefits at age 65 would be 25 and $413,380 for Mr. Murray, 35 and $491,763 for
Mr. Jean, 31 and $276,696 for Mr. Davis, and 28 and $237,767 for Mr. Peck.
CASH BALANCE FORMULA
PENSION PLAN
Those employees who were not employed prior to January 1, 1989 or who were
not at least age 50 on January 1, 2000, have their pension benefit determined
under the cash balance formula in the Pension Plan. The benefit earned is
expressed in the form of a hypothetical account balance. Benefit credits accrue
monthly at a rate between 3.25% and 13.50% of eligible monthly compensation; the
rate increases with age. Interest credits are applied annually at the end of
each year to the prior year's balance; these credits are based on the yield on
30-year Treasury bonds (as published by the Internal Revenue Service). Although
the normal form of benefit is an annuity, the hypothetical account balance is
also payable as a lump sum.
SUPPLEMENTAL RETIREMENT PLAN
As with those executives eligible for the traditional defined benefit
formula in the Pension Plan who accrue additional benefits under the SRP, the
executives eligible in the cash balance formula under the Pension Plan accrue
benefits under the SRP (using a similar hypothetical account balance as under
the Pension Plan) to the extent that either compensation or benefits are limited
in the Pension Plan by the Code and/or because of elective deferral of covered
compensation under any non-qualified deferred compensation plans.
ESTIMATED BENEFITS OF NAMED EXECUTIVE OFFICERS
Mr. Kelley is the only individual named in the Summary Compensation Table
who is a participant in the cash balance formula portion of the Pension Plan and
SRP. If Mr. Kelley had retired on December 31, 2005,
12
his hypothetical account balance of $1,060,175 (combining both the Pension Plan
and SRP accounts), based on annuity conversion factors being used for current
retirees, would provide a single life annuity with 10 years certain of
approximately $172,450 per year beginning at age 65. If Mr. Kelley remains
employed and retires at age 65, assuming (1) an interest crediting rate of 5.5%
per year, (2) annual compensation credit percentages under the current formula,
and (3) annual salary growth of 6% per year to age 65, Mr. Kelley's hypothetical
account balance would be approximately $5,389,144 at the end of the year in
which he reaches age 65 (2019) and, based on annuity conversion factors being
used for current retirees, would provide a single life annuity with 10 years
certain of approximately $427,568 per year.
DEFINED CONTRIBUTION PLANS
401(K) PLAN
Employers Mutual also sponsors a tax-qualified defined contribution plan,
the 401(k) Plan. This plan is available to all employees of Employers Mutual and
its subsidiaries. Under the 401(k) Plan, Employers Mutual matches 50% of the
first 6% of covered compensation that an employee defers. With the exception of
the highly compensated group, the employee participants can make pre-tax
deferrals of up to 50% of their covered compensation to this plan (and up to an
annual limit under the Code -- for 2005, $14,000 for those under age 50 and
$18,000 for those age 50 and above).
BENEP
In 2005, the former Executive Nonqualified Excess Plan was restated to
comply with new Section 409A of the Internal Revenue Code, and is now called the
Board and Executive Non-qualified Excess Plan (the "BENEP"). This plan,
initially created for highly compensated employees who were limited in their
401(k) deferral percentage, allows highly compensated employees to defer up to
25% of their base salary between the 401(k) plan and the BENEP, with Employers
Mutual matching 100% of the first 5% of covered compensation deferred for
certain officers. In addition, up to 100% of any annual bonus awarded to such
highly compensated employees may be deferred (with a minimum deferral of
$5,000), and members of the boards of directors of Employers Mutual and the
Company may now defer all or a portion of their director fees into the BENEP.
BENEFITS FOR NAMED EXECUTIVE OFFICERS
The contributions made by Employers Mutual under the 401(k) Plan and BENEP
in 2005 for all the individuals named in the Summary Compensation Table are set
forth in footnote (3) to that table.
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During 2005, there were two occasions when a Form 4 was not filed on a
timely basis by Employers Mutual. Employers Mutual acquired 5,600 shares of the
Company's common stock in August and 6,000 shares in September. These
transactions were made pursuant to SEC Rule 10b-18 (safe harbor) as disclosed in
a prior appropriate filing, which set forth Employers Mutual's plan for a stock
purchase program to acquire additional shares of the Company's common stock on
the open market. The Form 4's associated with these two transactions were filed
five days and six days late, respectively.
13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The property and casualty insurance operations of the Company are
integrated with those of Employers Mutual through participation in a pooling
agreement. As a result of this operational relationship, there are numerous
transactions between the Company and the Employers Mutual pool participants that
occur on an ongoing basis in the ordinary course of business. Under the terms of
the pooling agreement, each company cedes to Employers Mutual all of its
insurance business, with the exception of any voluntary reinsurance business
assumed from nonaffiliated insurance companies, 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 net proceeds from the follow-on stock offering completed in October,
2004, were distributed among three of the Company's property and casualty
insurance subsidiaries in December, 2004 to support a 6.5 percentage point
increase in the Company's aggregate participation in the pooling agreement
effective January 1, 2005. As a result of this change in the Company's aggregate
participation in the pooling agreement increased from 23.5 percent to 30 percent
and Employers Mutual's participation decreased from 65.5 percent to 59.0
percent. In connection with this change in the pooling agreement, the Company's
liabilities increased $115,042,355 and invested assets increased $108,798,583.
The Company reimbursed Employers Mutual $6,518,735 for expenses that were
incurred to generate the additional business assumed by the Company, but this
expense was offset by an increase in deferred policy acquisition costs. The
Company also received $274,963 in interest income from Employers Mutual as the
actual cash transfer did not occur until February 15, 2005.
Premiums assumed by the reinsurance subsidiary from Employers Mutual
amounted to $92,588,093 in 2005. 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 paid by the
reinsurance subsidiary to Employers Mutual amounted to $21,508,620 in 2005.
The Company's reinsurance subsidiary pays an annual override commission to
Employers Mutual in connection with the $1,500,000 cap on losses assumed per
event. The override commission rate is charged at 4.50 percent of written
premiums. Total override commission paid to Employers Mutual in 2005 amounted to
$4,166,464. Employers Mutual retained losses and settlement expenses under this
agreement totaling $28,682,084 in 2005. The reinsurance subsidiary also pays for
100 percent of the outside reinsurance protection Employers Mutual purchases to
protect itself from catastrophic losses on the assumed reinsurance business it
retains in excess of the $1,500,000 cap per event, excluding reinstatement
premiums. This cost is recorded as a reduction to the premiums received by the
reinsurance subsidiary and amounted to $3,695,833 in 2005.
Employers Mutual provides various services to all of its subsidiaries and
affiliates, including the Company and its subsidiaries. Such services include
data processing, claims, financial, legal, actuarial, auditing, marketing and
underwriting. Employers Mutual allocates a portion of the cost of these services
to the subsidiaries that do not participate in the pooling agreement based upon
a number of criteria, including usage and 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
14
participate in the pooling agreement amounted to $2,055,394 in 2005. Costs
allocated to the Company through the operation of the pooling agreement amounted
to $82,782,802 in 2005.
Investment expenses are based on actual expenses incurred by the Company
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 $1,011,370 in 2005. In addition, a subsidiary of
the Company leased office space from an affiliate of Employers Mutual, which is
used as a branch office. These lease payments amounted to $375,000 in 2005.
15
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on the
Company's Common Stock to the NASDAQ Total Return Index for U.S. companies and a
published Industry Index, which is the Media General Industry Group 432, over a
five-year period beginning December 31, 2000 and ending December 31, 2005. The
total stockholder return assumes $100.00 invested at the beginning of the period
in the Company's Common Stock, the NASDAQ Market Index and the Industry Index.
It also assumes reinvestment of all dividends for the period.
COMPARATIVE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG EMC INSURANCE GROUP INC., NASDAQ MARKET INDEX
AND INDUSTRY INDEX
(PERFORMANCE GRAPH)
2000 2001 2002 2003 2004 2005
------- ------ ------ ------ ------ ------
EMC INSURANCE GROUP INC. ................ $100.00 153.02 164.93 201.37 212.16 201.84
NASDAQ MARKET INDEX...................... $100.00 79.71 55.60 83.60 90.63 92.62
INDUSTRY INDEX........................... $100.00 85.52 67.86 83.17 89.27 98.37
COMPENSATION COMMITTEE REPORT
Historically, this Report has been provided by the Senior Executive
Compensation and Stock Option Committee of the Board of Directors of Employers
Mutual (the "EMCC Compensation Committee"), as the executive officers of the
Company are employed by Employers Mutual. For example, in 2004, the compensation
of the executive officers of the Company was initially determined by the EMCC
Compensation
16
Committee, with subsequent approval of the base salary component (described
below) by the full Board of Directors of Employers Mutual. However, the
Company's Board of Directors established its own compensation committee (the
"Company Compensation Committee") in 2004 and, commencing in 2005, the Company
Compensation Committee began to consider and independently approve the
compensation arrangements for the Company's Chief Executive Officer and other
executive officers. This constitutes the first report of the Company
Compensation Committee.
The process for establishing the compensation of the Company's executive
officers commences with the EMCC Compensation Committee, which makes an initial
determination of compensation arrangements for the executive officers. The
compensation arrangements as determined by the EMCC Compensation Committee are
then submitted to the Company Compensation Committee for its independent
evaluation and approval. The base salary component of such compensation
arrangements for each executive officer is also submitted to the full Board of
Directors of Employers Mutual for its approval. If the Company Compensation
Committee does not concur with such compensation arrangements, its concerns are
referred back to the EMCC Compensation Committee for additional study and
reconsideration. Both committees are authorized to meet jointly in an attempt to
resolve any continuing disputes, but the Company Compensation Committee is
ultimately required by its Charter to take action independently of the actions
taken by the EMCC Compensation Committee and to approve the compensation
arrangements. In 2005, the recommendations of EMCC's Compensation Committee were
approved by the Company Compensation Committee.
COMPENSATION PHILOSOPHY
The philosophy followed in establishing executive officer compensation is
to provide a structure that will allow for a level of compensation that is
competitive within the insurance industry and, more particularly, with a peer
group of companies within the property and casualty insurance industry. That
peer group is comprised of companies that are similar in size, have comparable
insurance products and that have been identified by management as the
competition with respect to such matters as the quality of the products and
services provided, and which tend to compete in the same targeted markets as do
Employers Mutual and its subsidiaries, including the Company's four property and
casualty insurance subsidiaries. The philosophy also seeks to provide a level of
compensation that will attract and retain highly qualified, motivated executive
officers who will enhance the ability of Employers Mutual and the Company to
continue their long history of steady growth and financial strength.
EXECUTIVE OFFICER COMPENSATION COMPONENTS
The compensation of executive officers is provided primarily through the
use of three major components, consisting of a base salary, a cash bonus program
and stock option awards. Each of these elements is designed to achieve
particular results and to award compensation based on measurement of individual
and collective executive officer performance.
BASE SALARIES. In establishing the base salaries of executive officers,
Employers Mutual's management and Human Resources Department personnel obtain
salary surveys from three industry-recognized sources. From these surveys,
suggested salary ranges are established for each executive officer position. An
executive officer's proposed salary is then set within that range. Such
recommendation, including placement within the suggested salary range, is then
reviewed by the EMCC Compensation Committee, which also obtains information on
the overall performance and progress of each executive officer during the
previous year, and his or her contributions to the management team, as reported
by the Chief Executive Officer. Additional factors considered in placement
within the range include the executive officer's contribution to the achievement
of
17
identified business objectives, demonstrated leadership skills, overall
management effectiveness and length of service. In 2005, it was also an
objective to move executive officers toward the midpoint of the range for their
respective positions within four years following the individual's assumption of
his or her position, assuming satisfactory performance.
Similar information, including the recommended base salary for each
executive officer, is then shared with, and independently reviewed and evaluated
by, the Company Compensation Committee, which makes the final determination on
whether to accept the base salary recommendations of the EMCC Compensation
Committee.
BONUS PROGRAM. The Employers Mutual Senior Executive Compensation Bonus
Program, in which the Company's eligible executive officers participate, is
designed to provide short-term incentives based on annual performance. The
program provides that eligible executive officers may receive a cash bonus based
on the financial performance of Employers Mutual Casualty Company and its
subsidiaries and affiliates (collectively doing business as EMC Insurance
Companies). Those performance results are measured against targets recommended
by the EMCC Compensation Committee, and independently reviewed and adopted by
the Company Compensation Committee, on an annual basis. This program is based on
the statutory financial statements of EMC Insurance Companies and (i) compares
consolidated written premium growth to an established goal, (ii) considers
growth of consolidated statutory surplus and (iii) compares the consolidated
statutory combined ratio to both a target ratio and the combined ratio of the
insurance industry. Each performance standard is weighted in its importance in
the bonus formula. The maximum bonus that may be earned by an executive officer
begins at 50% of base salary for an eligible Vice President (with not all vice
presidents being eligible for this program), and increases to 55% for the
Company's Senior Vice Presidents, 60% for its Executive Vice Presidents, and 65%
for its President and Chief Executive Officer. In 2005, application of the bonus
formula to the reported financial results of EMC Insurance Companies resulted in
$1,036,683 in bonuses being earned by the named executive officers collectively.
Any bonus earned is paid in two installments during the following year.
STOCK OPTIONS. Long-term incentive compensation opportunities are provided
for executive officers through the use of incentive stock option grants. Because
of the Pooling Agreement that Employers Mutual has with two of its subsidiaries,
an affiliate and four subsidiaries of the Company, both the Company Compensation
Committee and the EMCC Compensation Committee believe that superior performance
by the executive officers of Employers Mutual and the Company has a significant
impact on the performance of the Common Stock of the Company, thereby providing
long-term appreciation in the value of the options held by executive officers.
The incentive stock option plan provides that all stock options be granted at
option prices equal to the fair market value of the Common Stock on the date of
grant. Stock options generally have a term of ten years and vest at a rate of 20
percent per year, commencing in the second year of the term.
During 2005, the Company Compensation Committee approved revisions to
previously established formal guidelines for granting stock options to eligible
executive officers. The revised guidelines establish base option award ranges
for each executive officer based upon his or her level of authority and
responsibility, and provide for the granting of both standard awards, made in
conjunction with each executive officer's annual salary review, and
discretionary awards, based upon such factors as individual performance,
attainment of agreed goals and objectives, and other contributions to overall
results. Effective March 1, 2005, an aggregate of 59,000 stock options were
awarded to the named executive officers of the Company, at an option price of
$19.35 per share.
18
OTHER COMPENSATION. The executive officers also receive other forms of
compensation pursuant to certain plans adopted by Employers Mutual (and in some
cases formally adopted by the Company's Board of Directors as well), some of
which are generally available to all employees of Employers Mutual (subject to
standard eligibility requirements) and some of which are limited to executive
officers. During 2005, Employers Mutual maintained a Board and Executive
Non-qualified Excess Plan (BENEP), which allowed those executive officers whose
compensation level limited their deferral percentage under Employers Mutual's
defined contribution 401(k) Plan to defer up to 25% of their base salary between
the 401(k) Plan and the BENEP. Employers Mutual matches 100% of the first five
percent of covered compensation deferred under the BENEP for certain officers.
The Executive Non-qualified Excess Plan was replaced during 2005 with the BENEP,
in part to bring that non-qualified benefit program into compliance with the
requirements of the American Jobs Creation Act of 2004 and new Section 409A of
the Internal Revenue Code.
Effective October 1, 2004, Employers Mutual established a new Supplemental
Retirement Plan (the "SRP"). This plan is an unfunded, non-qualified retirement
plan maintained primarily for providing additional deferred compensation for a
select group of executive officers as designated under the provisions of the
Employee Retirement Income Security Act of 1974. The SRP replaced certain
previously existing individual Excess Retirement Benefit Agreements and the
Supplemental Executive Retirement Plan. Those plans had been designed to restore
benefits to eligible executive officers who were prevented from receiving full
benefits from Employers Mutual's qualified pension plan because of their
deferral of bonus income and the restrictions imposed by the Internal Revenue
Service on the amount of covered compensation that can be credited to, and the
maximum benefits that can be received from, qualified pension plans. Benefits
accrued under the previous plans were transferred to the SRP, and plan benefits
began to accrue for the participating executive officers as of the plan's
effective date. A total of $120,965 was paid out under the SRP in 2005,
including $42,433 to a former executive officer of the Company who retired
during 2005.
Certain executive officers of the Company may receive other compensation in
the form of professional designation awards, excess group life insurance
supplemental disability insurance and life insurance premiums paid on their
behalf, and automobile and country club membership allowances. The Company
Compensation Company considers all of these forms of compensation in its process
of setting compensation pursuant to the three components noted above.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
In establishing the total compensation package for 2005 for Mr. Kelley, the
Company Compensation Committee considered the Company's overall operating
performance based on a broad range of factors relative to financial strength and
performance, such as premium and surplus growth and combined ratio, as well as
financial performance compared to other companies engaged in the insurance
industry and an assessment of Mr. Kelley's satisfactory attainment of individual
performance goals established in prior years.
For 2005, the Company Compensation Committee established Mr. Kelley's base
salary at $588,048. Under the terms of the Senior Executive Compensation Bonus
Program, a bonus of $382,231 was earned by Mr. Kelley for 2005. Mr. Kelley was
granted a stock option award for 18,000 shares at an option price of $19.35 per
share. During 2005, Mr. Kelley received a matching payment under the BENEP of
$48,881 and has accrued a retirement benefit of $1,060,175 from all qualified
and non-qualified plans. Mr. Kelley also benefited from premium payments
totaling $1,518 made on his behalf for excess group life insurance, and premium
payments totaling $6,938 made on his behalf for life insurance and supplemental
disability insurance. Employers Mutual provided Mr. Kelley with an automobile, a
country club membership, and access to financial and tax planning services at a
total cost of $8,072.
19
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to publicly held companies for compensation of more than $1.0 million
paid to a company's chief executive officer or any executive officer named in
its Summary Compensation table. Qualifying performance-based compensation is not
subject to the deduction limit if certain requirements are met. The policy of
the Company Compensation Committee is to structure the compensation of our
executive officers, including Mr. Kelley, to avoid the loss of the deductibility
of any compensation, although Section 162(m) will not preclude the Company
Compensation Committee from awarding compensation in excess of $1.0 million, if
it should be warranted in the future. We believe that Section 162(m) will not
have any effect on the deductibility of the compensation of Mr. Kelley and the
other executive officers named in the Summary Compensation Table for 2005.
The members of the Compensation Committee of EMC Insurance Group Inc. are
as follows and hereby submit this Executive Compensation Report.
Joanne L. Stockdale -- Chair
George C. Carpenter III
Raymond A. Michel
AUDIT COMMITTEE REPORT
As reported earlier, the Audit Committee of the Board of Directors is
composed of three members. All members of the Audit Committee are independent
under "Nasdaq" Corporate Governance Rules and Securities and Exchange Commission
Rules. The Audit Committee's responsibilities are described in a written
charter. A copy of the Audit Committee's written charter may be obtained on the
Company's website at www.EMCInsurance.com.
Management is responsible for the internal controls and financial reporting
processes of the Company. The independent registered public accounting firm is
responsible for performing an independent audit of the consolidated financial
statements in accordance with generally accepted auditing standards and issuing
a report to the Company's stockholders and Board of Directors on the results of
this audit. Beginning in 2005, the independent registered public accounting firm
is also responsible for performing an independent audit of the effectiveness of
the Company's internal control over financial reporting in accordance with
standards established by the Public Company Accounting Oversight Board and
issuing a report to the Company's stockholders and Board of Directors on the
results of this audit. The Committee's responsibility is to monitor and oversee
these processes.
At each of its seven meetings during calendar year 2005, the Committee met
and held discussions with management and Ernst & Young LLP, independent
registered public accounting firm for the Company. Two of these meetings
included sessions at which management was not present. The Committee discussed
with Ernst & Young the results of its examination of the consolidated financial
statements and its assessment of the effectiveness of the Company's internal
control over financial reporting.
During 2005, management documented, tested and evaluated the Company's
internal control over financial reporting pursuant to the requirements of the
Sarbanes-Oxley Act of 2002. The Committee was kept apprised of the Company's
progress by management and Ernst & Young at each regularly scheduled Committee
meeting. Management has provided the Committee with a report of the
effectiveness of the Company's internal control over financial reporting. The
Committee reviewed management's and Ernst & Young's evaluation of the Company's
internal control over financial reporting to be included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2005. The Committee also
reviewed and
20
discussed the consolidated financial statements with management and Ernst &
Young. In addition, the Committee discussed with Ernst & Young matters related
to the financial reporting process required to be discussed by Statement on
Auditing Standards No. 61 (Communication with Audit Committees) issued by and as
amended by the Auditing Standards Board of the American Institute of Certified
Public Accountants.
Ernst & Young provided to the Committee the written disclosures and the
letter required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees), and the Committee reviewed with Ernst &
Young that firm's independence. The Committee determined that the non-audit
services provided by Ernst & Young during the 2005 calendar year are compatible
with maintaining its independence.
Based on the Committee's discussions with management and Ernst & Young, the
Committee's review of the representations of management, and the reports of
Ernst & Young to the Committee, the Committee recommended that the Board of
Directors include the audited consolidated financial statements in the Company's
Annual Report on Form 10-K to be filed with the Securities and Exchange
Commission for the year ended December 31, 2005. The Committee also has
recommended that the stockholders ratify the Committee's selection of Ernst &
Young as the Company's independent registered public accounting firm for
calendar year 2006.
AUDIT COMMITTEE
David J. Fisher, Chairman
Margaret A. Ball
Joanne L. Stockdale
The following table sets forth the fees for professional audit services
rendered by Ernst & Young for the audit of the Company's annual financial
statements for the years ended December 31, 2005 and 2004, the audit of the
Company's internal control over financial reporting as of December 31, 2005, and
fees billed for other services rendered by Ernst & Young during 2005 and 2004.
2005 2004
-------- --------
Audit Fees(1)........................... $463,719 $319,167
Audit Related Fees(2)................... 13,650 10,422
Tax Fees(3)............................. 18,792 36,001
All Other Fees(4)....................... -- 862
-------- --------
Total Fees.............................. $496,161 $366,452
======== ========
---------------
Notes:
(1) Audit fees consist of fees for the audit of the Company's annual financial
statements, review of financial statements included in the Company's
quarterly reports on Form 10-Q, the audit of the Company's internal control
over financial reporting (beginning in 2005) and services normally provided
by the independent registered public accounting firm in connection with
statutory and regulatory filings or engagements. The audit fees reported for
2004 include $156,420 paid to Ernst & Young in connection with the Company's
public offering of stock and the preparation of the related S-1 Registration
Statement.
(2) Audit-related fees consist primarily of services related to the audit of
Employers Mutual's employee benefit plans.
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(3) Tax fees consist of fees for tax advisory and compliance services for the
Company and Employers Mutual's employee benefit plans.
(4) All other fees consist of fees for all other services other than those
reported above.
---------------
The Audit Committee pre-approves all audit and permissible non-audit
services provided by the independent registered public accounting firm. These
services may include audit services, audit-related services, tax services and
other services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed with regard to each particular service and its related
fees. In addition, the Audit Committee may pre-approve any services not
anticipated or services whose costs exceed the previously pre-approved amounts.
In addition, the Audit Committee has delegated its pre-approval authority to the
Chairman of the Audit Committee, who has the authority to pre-approve any
services not anticipated or services whose costs exceed previously pre-approved
amounts, provided all pre-approval decisions made by the Chairman are reported
to the Audit Committee at its next meeting.
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Ernst & Young LLP audited the financial statements of the Company for the
year ended December 31, 2005, and audited the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005. The Audit
Committee of the Board of Directors has selected Ernst & Young LLP as the
Company's independent registered public accounting firm for the fiscal year
ending December 31, 2006 and the stockholders are asked to ratify that
selection. During 2005, in connection with its audit function, E&Y provided
services to the Company which included the examination of the annual
consolidated financial statements, assistance with requirements of the
Securities and Exchange Commission under the Securities Exchange Act of 1934 and
advisory services regarding various financial and accounting matters.
A representative of Ernst & Young LLP will be present at the Annual Meeting
and will have the opportunity to make a statement if he or she desires to do so,
and will be available to respond to appropriate questions.
We are asking our stockholders to ratify the selection of Ernst & Young LLP
as our independent registered public accounting firm. Although this ratification
is not required by current laws, rules and regulations, or the Company's
By-Laws, Audit Committee Charter or otherwise, the Board of Directors is
submitting the selection of Ernst & Young LLP to our stockholders for
ratification as a matter of good corporate practice. Even if the selection is
ratified, the Audit Committee, in its discretion, may select a different
independent registered public accounting firm at any time during the year if it
determines that such a change would be in the best interests of the Company and
its stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THIS
APPOINTMENT. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED IN THE
ABSENCE OF DIRECTION TO THE COMPANY.
OTHER MATTERS
The Board, in addition to the Company's Code of Corporate Conduct, has
adopted a Code of Ethics applicable to the Company's senior financial officers,
including the Company's Chief Executive Officer, Chief Financial Officer,
Treasurer, and principal accounting officer or controller, or persons performing
similar
22
functions. The Company's Code of Ethics for senior financial officers is
available on the Company's website at www.EMCInsurance.com.
The Board of Directors knows of no matters other than those described above
that may come before the Annual Meeting. As to other matters, if any, that
properly may come before the Annual Meeting, the Board of Directors intends that
proxies in the accompanying form will be voted in respect thereof in accordance
with the judgment of the person or persons voting the proxies.
STOCKHOLDER PROPOSALS FOR 2007 ANNUAL MEETING
AND STOCKHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS
Stockholder proposals for inclusion in the Company's Proxy Statement for
the 2007 Annual Meeting of Stockholders must be received by the Company no later
than December 17, 2006. The person submitting the proposal must have been a
record or beneficial owner of the Company's Common Stock for at least one year,
the securities so held must have a market value of at least $2,000 and the
securities must be held on the date of the meeting. Any such proposal will be
included in the Proxy Statement for the 2007 Annual Meeting if the rules of the
Securities and Exchange Commission are satisfied with respect to the timing and
form of such proposal, and if the content of such stockholder proposal is
determined by the Company to be appropriate under the rules promulgated by the
Securities and Exchange Commission.
The Board has implemented a process whereby stockholders may send
communications directly to the Board's attention. Any stockholder wanting to
communicate with the Board, or one or more specific members thereof, should send
his or her written communication to the Office of the General Counsel, EMC
Insurance Group Inc., P.O. Box 712, Des Moines, Iowa 50303. The General Counsel
of the Company has been instructed by the Board to screen such communications
for validation and then promptly forward all such communications to the
specified addressee thereof.
April 12, 2006
BY ORDER OF THE BOARD OF DIRECTORS
DONALD D. KLEMME, Secretary
23
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1, 2 AND 3.
Please sign exactly as your name appears.
When shares are held by joint tenants, both
should sign. When signing as attorney,
executor, administrator, trustee or
guardian, please give full title as such. If
a corporation, please sign in full corporate
name by President or other authorized
officer. If a partnership, please sign in
partnership name by authorized person.
DATE: , 2006.
------------------------------
-------------------------------------------
Signature
-------------------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY
CARD PROMPTLY, USING THE ENCLOSED ENVELOPE.
EMC INSURANCE GROUP INC.
PROXY FOR COMMON STOCK
ANNUAL MEETING OF STOCKHOLDERS-MAY 25, 2006
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Bruce G. Kelley and George W. Kochheiser, or
either of them, as Proxies, each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote, as designated below, all the
shares of stock of EMC Insurance Group Inc. held of record by the undersigned on
March 27, 2006 at the Annual Meeting of Stockholders to be held on May 25, 2006
or any adjournment thereof.
1. ELECTION OF DIRECTORS [ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY
(except as marked to the contrary below) to vote for all nominees listed below
Margaret A. Ball, George C. Carpenter III, David J. Fisher, Bruce G.
Kelley, George W. Kochheiser, Raymond A. Michel, Fredrick A. Schiek,
Joanne L. Stockdale
(INSTRUCTION: To withhold authority to vote for any individual nominee,
write that name on the space provided below.)
----------------------------------------------------------------------
2. PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP AS THE
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM OF THE COMPANY.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. OTHER BUSINESS In their discretion, the proxies are authorized to vote
upon such other business as may properly come before the meeting.