| EMC INSURANCE GROUP INC ITEM 1A RISK FACTORS Risks Relating to the Company and Its Business The Company’s operations are integrated with those of Employers Mutual, the parent corporation, and potential conflicts exist between the best interests of its 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 57 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, three of the eight members of the Company’s board of directors are also members of the board of directors of Employers Mutual |
| These directors have a fiduciary duty both to 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 both to 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 reinsurance agreement between Employers Mutual and the Company’s reinsurance subsidiary; • 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 arrangement; 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 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 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, with one exception, 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 |
| 34 ______________________________________________________________________ The Company’s results of operations could suffer if the pool participants were to forecast future losses inaccurately, experience unusually severe or frequent losses or inadequately price their insurance products |
| 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 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 |
| One of the distinguishing features of the property and casualty insurance industry is that its products are priced before its 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 |
| The Company reviews the adequacy of its reserves for the various lines of business underwritten on a quarterly basis 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 or results of operations may be adversely impacted |
| 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 its ability to retain existing, and attract new, independent agents |
| The Company’s agency force is one of the most important components of its competitive position |
| To the extent that the Company’s existing agents cannot maintain current levels of production, its business, financial condition and results of operations will suffer |
| Moreover, if independent agencies find it easier to do business with the Company’s competitors, it could be difficult for it to retain its existing business or attract new business |
| While the Company believes it maintains good relationships with its independent agents, the Company cannot be certain that these independent agents will continue to sell its 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: • the significant competition among the Company’s competitors to attract independent agents; • the Company’s requirement that independent agents adhere to disciplined underwriting standards; and • the Company’s ability to pay competitive and attractive commissions, bonuses and other incentives to independent agents as compensation for selling its products |
| While the Company sells substantially all its insurance through its network of independent agents, many of its competitors sell insurance through a variety of other delivery methods, including captive agencies, the Internet and direct sales |
| To the extent that individuals represented by the Company’s independent agents change their delivery system preference, the Company’s business, financial condition or results of operations may be adversely affected |
| 35 ______________________________________________________________________ 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 AM Best, an industry-accepted source of property and casualty insurance company financial strength ratings |
| AM 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 pool participants were to be downgraded by AM 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 |
| Employers Mutual’s “A-” rating has resulted in a loss of some of its reinsurance business and any downgrade of its rating could make it ineligible to assume certain reinsurance business and, accordingly, result in a material reduction in the amount of reinsurance business assumed by the Company’s reinsurance subsidiary |
| The insolvency of Employers Mutual or one of its subsidiaries or affiliate could result in additional liabilities for the Company’s insurance subsidiaries participating in the pooling agreement |
| Effective January 1, 2006, the pooling agreement was amended to comply with certain requirements of AM Best |
| The most significant amendment 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, subject to compliance with all regulatory requirements applicable to such adjustment |
| Under this provision, the Group pool participants could become financially responsible for their pro rata share of the liabilities of one of the Employers Mutual pool participants in the event of an insolvency or a liquidation or receivership proceeding involving such participant |
| 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 of its subsidiaries |
| The maximum amount of dividends that the Company’s subsidiaries can pay it in 2006 without prior regulatory approval is approximately dlra40dtta1 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 |
| 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 dlra815dtta2 million at December 31, 2005 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 than expected; 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 payment of claims |
| 36 ______________________________________________________________________ The Company’s fixed maturity investment portfolio includes mortgage-backed and other asset-backed securities |
| As of December 31, 2005, mortgage-backed securities and other asset-backed securities constituted approximately 1dtta3 percent of its cash and invested assets |
| 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 and other asset-backed securities are paid more quickly, requiring the Company to reinvest the proceeds at the then current market rates |
| The Company’s equity portfolio of dlra93dtta3 million as of December 31, 2005 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 companies that the Company invests in, could adversely affect its capital position |
| 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, whether due to terrorist events or otherwise, could reduce its liquidity and stockholders’ equity |
| The pool participants currently conduct business in all 50 states, with a concentration 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 2005, approximately 68 percent of the direct premiums written of the pool were generated through the Company’s ten Midwest branch offices, with approximately 15 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, general economic trend, terrorist attack, regulatory development or any other condition affecting the states in which the Company conducts substantial business could materially adversely affect its business, financial condition or results of operations |
| Common catastrophic events include tornadoes, wind-and-hail storms, fires, explosions and severe winter storms |
| 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 continuation of significant hurricane activity could adversely affect the Company’s business, financial condition or results of operations |
| During the last two years there has been a significant increase in both the frequency and severity of hurricane activity in the United States |
| The Company’s reinsurance subsidiary incurred dlra4cmam500cmam000 of losses from three hurricanes in 2005 (all capped at dlra1cmam500cmam000 per event) and dlra4cmam830cmam000 of losses from four hurricanes in 2004 (three capped at dlra1cmam500cmam000 per event) |
| The Company’s property and casualty insurance subsidiaries do not write insurance business in coastal areas, but the size and intensity of Hurricanes Katrina and Rita in 2005 resulted in dlra6cmam396cmam000 of net hurricane losses, with many losses occurring over one hundred miles from the coast |
| For comparative purposes, the property and casualty insurance subsidiaries incurred dlra2cmam888cmam000 of hurricane losses in 2004 |
| A continuation of this frequent and severe hurricane activity could lead to further increases in the amount of losses assumed per event by the reinsurance subsidiary under the quota share agreement with Employers Mutual and/or the cost of this protection, as well as decreased availability, and increased pricing, of catastrophe reinsurance protection for the pool participants |
| Such increases in the cost of reinsurance protection could materially adversely affect the Company’s business, financial condition or results of operations |
| 37 ______________________________________________________________________ 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 have a material adverse impact on the Company’s business, financial condition or results of operations |
| In 2002, the United States Congress enacted the Terrorism Risk Insurance Act of 2002 (“TRIA”), which requires that some coverage for terrorism losses be offered by primary property and casualty insurers and provides federal assistance for recovery of claims through 2007 (after extension) |
| While the pool participants are protected by this federally funded terrorism reinsurance with respect to claims under commercial insurance products, the pool participants are prohibited from adding terrorism exclusions to policies they write, and a substantial deductible must be met before TRIA provides coverage to the pool |
| The scheduled expiration of the Terrorism Act on December 31, 2007 could also adversely affect the pool participants by causing reinsurers to increase prices or withdraw from certain markets for terrorism coverage |
| In addition, TRIA does not cover the personal insurance products the Company offers and it could incur large unexpected losses from these policies in the event of a terrorist attack |
| The Company can, therefore, 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 profitability of the Company’s reinsurance subsidiary is dependent upon the experience of Employers Mutual, and changes to this relationship may adversely affect its reinsurance subsidiary’s operations |
| The Company’s reinsurance subsidiary has entered into a reinsurance agreement with Employers Mutual that generated approximately 23 percent of the Company’s premiums earned in 2005 |
| Under this agreement, the reinsurance subsidiary assumes the voluntary reinsurance business written directly by Employers Mutual (subject to certain limited exceptions) |
| The reinsurance subsidiary relies exclusively on this agreement and on Employers Mutual for its business |
| If Employers Mutual terminates or otherwise seeks to modify this agreement, the reinsurance subsidiary may not be able to enter into a similar arrangement with another company and may be adversely affected |
| Through this reinsurance agreement, the reinsurance subsidiary assumes the voluntary reinsurance business written directly by Employers Mutual with unaffiliated insurance companies and by the MRB pool, a voluntary pool of property and casualty insurers in which Employers Mutual participates |
| If Employers Mutual or the other participants of the MRB pool discontinue or reduce the assumption of property and casualty risks, the reinsurance subsidiary could be adversely affected |
| In connection with the risks assumed from the MRB pool, 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 the MRB pool are unable to sell reinsurance at adequate premium rates, or were to have poor underwriting experience, the reinsurance subsidiary could be adversely affected |
| 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 Company’s control |
| In order for these contracts to qualify for reinsurance accounting and thereby provide the additional underwriting capacity that the Company desires, the reinsurer generally must assume significant risk and have a reasonable possibility of a significant loss |
| Although the reinsurer is liable to the Company to the extent it transfers, or “cedes,” risk to the reinsurer, the Company remains ultimately liable to the policyholders on all risks reinsured |
| As a result, ceded reinsurance arrangements do not limit the Company’s ultimate obligation to policyholders to pay claims |
| The Company is subject to the credit risks of its reinsurers |
| The Company is also subject to the risk that its reinsurers may dispute their obligations to pay its claims |
| As a result, the Company may not recover on claims made against its reinsurers in a timely manner, if at all, which could have a material adverse effect on its business, financial condition or results of operations |
| 38 ______________________________________________________________________ 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 related to the availability of insurance coverage, which varies according to the level of surplus within the industry |
| Increases in industry surplus have generally been accompanied by increased price competition |
| If the Company finds it necessary to reduce premiums or limit premium increases due to these competitive pressures on pricing, it may experience a reduction in its profit margins and revenues and, therefore, lower profitability |
| The Company competes with insurers that sell insurance policies through independent agents or directly to their customers |
| The Company believes that its competitors are not only national companies, but also insurers and independent agents that operate in a specific region or single state in which it operates |
| Some of the Company’s competitors have substantially greater financial and other resources than it has, and they 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 |
| New pricing, claims and coverage issues and class action litigation 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 can have an adverse effect on the Company’s business by changing the way it prices its products, by extending coverage beyond its underwriting intent or by increasing the size of claims |
| Recent examples include continued increases in loss severity (particularly in the workers’ compensation area), principally driven by larger court judgments and increasing medical costs, and claims based on the relationship between contingent compensation of insurance agents and the sale of suitable insurance products |
| The effects of these and other unforeseen emerging issues could negatively affect the Company’s results of operations or its methods of doing business |
| The Company is subject to comprehensive regulation that may restrict its ability to 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 sell insurance products, issue policies and handle claims |
| Certain regulatory restrictions and prior approval requirements may affect the Company’s subsidiaries’ ability to operate, compete, innovate or obtain necessary rate adjustments in a timely manner, and may also increase its costs and reduce profitability |
| Supervision and regulation by insurance departments extend, among other things, to: Required Licensing |
| The Company operates 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 Company may offer consumers in the states in which it operates |
| The Company must apply for and obtain appropriate licenses before it can implement any plan to expand into a new state or offer a new line of insurance or other new product that requires separate licensing |
| If a regulatory authority denies or delays granting a new license, the Company’s ability to enter new markets quickly or offer new products it believes will be profitable can be substantially impaired |
| The insurance laws of most states in which the Company’s subsidiaries 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 Company’s rates are adequate, not excessive and not unfairly discriminatory |
| The speed at which the Company can change its 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 Company’s requested rates |
| Thus, if the Company begins using new rates before they are approved as permitted in some states, it may be required to issue premium refunds or credits to its 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 Company’s 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 Company’s 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 |
| 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; • 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 |
| In addition, 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 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 relies on Employer Mutual’s information technology and telecommunication systems, and the failure of these systems could materially and adversely affect its business |
| The Company’s business is highly dependent upon the successful and uninterrupted functioning of Employers Mutual’s information technology and telecommunications systems |
| The Company relies on 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 Company to perform actuarial and other modeling functions necessary for underwriting and rate development |
| The failure of these systems could interrupt the Company’s operations or adversely impact its ability to evaluate and write new and renewal business, pay claims in a timely manner and provide customer service |
| 40 ______________________________________________________________________ Although Employers Mutual maintains insurance on its real property and other physical assets, this insurance will not compensate the Company for losses that may occur due to disruptions in service as a result of a computer, data processing or telecommunication systems failure unrelated to covered property damage |
| Also, this insurance may not necessarily compensate the Company for all losses resulting from covered events |
| Risks Relating to the Company’s Common Stock 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 ownership of its common stock |
| The Company’s common stock has one vote per share and voting control of the Company is currently vested in Employers Mutual |
| Employers Mutual owns approximately 57 percent of the Company’s outstanding common stock |
| As a result of recent changes to the AM Best rating methodology, Employers Mutual must retain a minimum 50dtta1 percent ownership of the Company’s outstanding common stock at all times in order for the pool participants to have their 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 its common stock |
| 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 |
| 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 ability 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 |