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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:
[X] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[ ] 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 INSURANCE GROUP INC. LETTERHEAD]
April 16, 2004
Dear Stockholder:
I am pleased to extend to you my personal invitation to attend the 2004
Annual Meeting of Stockholders of EMC Insurance Group Inc. on May 21, 2004, at
10:00 a.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 2003 performance and its plans for
2004. 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 auditors, 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
2004 ANNUAL MEETING OF STOCKHOLDERS
MAY 21, 2004
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
Friday, May 21, 2004 at 10:00 a.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 auditors for the current fiscal year;
3. To approve Restated Articles of Incorporation which will consolidate all
prior amendments to the Company's current Articles of Incorporation, and
which will amend the Company's current Articles of Incorporation to
provide for a range in the number of directors which may serve on the
Board of Directors of the Company, eliminate the ability to establish
classes of directors, and amend the provisions limiting the personal
liability of directors and providing indemnification of the directors to
the extent permitted by Iowa law; and
4. 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
April 2, 2004 will be entitled to notice of and to vote at the meeting. The
stock transfer books of the Company will not be closed.
April 16, 2004
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
2004 ANNUAL MEETING OF STOCKHOLDERS
MAY 21, 2004
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 2004 Annual Meeting of Stockholders to be held on May 21,
2004, and at any adjournment thereof (the "Annual Meeting").
The Company's 2003 Annual Report to Stockholders was sent to the Company's
stockholders on or about April 6, 2004. This proxy statement, along with the
accompanying form of proxy, was sent to the Company's stockholders on or about
April 16, 2004.
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.
VOTING SECURITIES
All stockholders of record of the Common Stock at the close of business on
April 2, 2004 are entitled to notice of and to vote at the Annual Meeting. At
the close of business on April 2, 2004, there were 11,548,083 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 auditors, 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 2005 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. Elwin H. Creese, who served on the Board of
Directors during 2003, will be retiring from the Board of Directors as a result
of reaching the age limitation set forth in the Company's By-laws. His
retirement will be effective upon the conclusion of the Annual Meeting.
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...................... 66 -- Director
George C. Carpenter III............... 76 1981 Director
David J. Fisher....................... 67 1985 Director
Bruce G. Kelley....................... 50 1991 President, Chief Executive Officer and
Director
George W. Kochheiser.................. 78 1974 Chairman of the Board
Raymond A. Michel..................... 78 1981 Director
Fredrick A. Schiek.................... 69 1994 Director
Joanne L. Stockdale................... 57 -- 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 has
served as a director of Hamilton Mutual Insurance Company, an affiliate of
Employers Mutual, since 2002. Ms. Ball was employed by Employers Mutual from
1971 to 2001.
George C. Carpenter III was Executive Director 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 President of Onthank
Company, a Des Moines based wholesale distributor of floor, window and wall
covering 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
2
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 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 President/owner of Northern Iowa Die Casting,
Inc. since 1983. Ms. Stockdale, who is a CPA, also serves on the Iowa Strategy
2010 Committee.
INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES
During the year ended December 31, 2003, the Board of Directors of the
Company held four regular meetings. In 2003, 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 2003 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 Messrs. Creese,
Fisher, Carpenter, and Michel are independent directors as defined by the rules
of the National Association of Securities Dealers, Inc. ("NASD").
The Board of Directors of the Company has four standing committees: the
Executive Committee, the Audit Committee, the Inter-Company Committee, and the
Nominating Committee. The Board of Directors of the Company does not have a
compensation committee. As the officers of the Company are employees of
Employers Mutual, the functions of the compensation committee are carried out by
the Employers Mutual Board of Directors or one of its committees.
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, 2003.
The members of the Audit Committee are George C. Carpenter III, David J.
Fisher and E. H. Creese, who replaced Raymond A. Michel at the Company's Annual
Meeting of 2003. Each member of the Audit Committee is "independent" as such
term is defined in the NASD rules, and Rule 10A-3 of the Securities and Exchange
Commission promulgated under the Securities and Exchange Act of 1934, as
amended. The Board
3
of Directors has determined that Messrs. Creese and Fisher qualify and are
designated as an "audit committee financial expert" as defined in Item 401(h) of
Regulation S-K promulgated by the Securities and Exchange Commission. The
functions performed by this Committee are detailed in the Audit Committee
Charter, attached as Appendix A. Their duties are to assist the Board of
Directors in its general oversight of the Company's financial reporting,
internal control and audit functions. The Audit Committee held ten meetings in
2003.
The Inter-Company Committee was established in June 1984 by mutual
agreement of the Boards of Directors of the Company and Employers Mutual. The
members of the Inter-Company Committee are George C. Carpenter III, David J.
Fisher and Raymond A. Michel. Employers Mutual is represented on the
Inter-Company Committee by three members of its Board of Directors. The primary
responsibility of the Inter-Company Committee is to review all major
transactions between the two entities and ensure those transactions are
equitable. The Inter-Company Committee did not meet during the year ended
December 31, 2003.
The Board of Directors, by resolution adopted by unanimous written consent
effective February 18, 2004, established the Nominating Committee. The purpose
of the Nominating Committee is to help ensure that the Board of Directors is
appropriately constituted to meet its fiduciary obligations to the stockholders
of the Company. To accomplish this purpose, the Nominating Committee shall (a)
assist the Board of Directors in assessing its membership needs, (b) identify
individuals qualified to become members of the Board of Directors and (c) make
recommendations regarding potential director candidates to the Board of
Directors. An invitation to join the Board of Directors will be extended by the
Chairman of the Board of Directors, on behalf of the Board of Directors, and by
the Chairman of the Nominating Committee, on behalf of such Committee. The
Nominating Committee will have a Chairman and a minimum of two (2) other
directors, all of whom shall be appointed by the Board of Directors. Each member
of the Nominating Committee shall be independent from the Company under
applicable standards for director independence of the Securities and Exchange
Commission and NASD. Committee members shall serve at the pleasure of the Board
of Directors for such term or terms as the Board of Directors may determine, and
may be replaced by the Board of Directors at any time, with or without cause.
The members of the Nominating Committee are George C. Carpenter III, David J.
Fisher, and Raymond A. Michel.
Criteria for the nominations as 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 website at
www.EMCInsurance.com. The recommendation of Ms. Ball and Ms. Stockdale as new
members of the Board of Directors was received from the Company's Chief
Executive Officer and was approved by the Nominating Committee and the Board of
Directors. All of the other director nominees currently serve on the Board of
Directors.
DIRECTORS' COMPENSATION
In 2003, 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, any non-employee director
serving as a Committee chair was paid a $3,000 annual fee. Non-employee
directors of the Company are also eligible to participate in Employers Mutual's
Non-Employee Director Stock Purchase Plan. Under this Plan, directors are
granted an option to purchase Common Stock in an amount up to 100 percent of
their annual fee at an option price equal to 75 percent of the fair market value
of the Common Stock on the option exercise date. During 2003, none of the
Company's directors participated in this Plan.
4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the only
entity known to the Company which owns 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....................... 9,331,582(1) 80.8%
717 Mulberry Street
Des Moines, Iowa 50309
---------------
(1) On April 2, 2004, Employers Mutual owned 80.8% 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 give it the right to elect all of the directors of the
Company. The Company's operations are interrelated 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.
The Company is a "controlled company" as defined by the rules of the NASD.
The basis for this determination is that Employers Mutual has 80.8% ownership of
the Common Stock of the Company and its intentions are to maintain at a minimum
the majority ownership for the foreseeable future.
5
SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS
The following information is furnished as to the Common Stock of the
Company owned beneficially as of April 2, 2004, 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
---- ----------------- --------
George C. Carpenter III..................................... 5,490 *
Margaret A. Ball............................................ 2,005 *
Raymond W. Davis............................................ 16,709(2) *
David J. Fisher............................................. 1,876 *
Ronald W. Jean.............................................. 23,564(3) *
Bruce G. Kelley............................................. 150,454(4) 1.3%
George W. Kochheiser........................................ 55,000 *
Raymond A. Michel........................................... 5,000 *
William A. Murray........................................... 27,920(5) *
David O. Narigon............................................ 16,350(6) *
Fredrick A. Schiek.......................................... 12,765 *
Joanne Stockdale............................................ -- *
All Directors and Executive Officers as a Group (16 persons,
including those listed above)............................. 360,984 3.1%
---------------
* 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 13,109 shares of Common Stock and has
presently exercisable options to purchase 3,600 shares, which shares are
included in the table.
(3) Ronald W. Jean directly owns 11,395 shares of Common Stock and has presently
exercisable options to purchase 12,169 shares, which shares are included in
the table.
(4) Bruce G. Kelley owns 89,656 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 34,600 shares, which shares are
included in the table.
(5) William A. Murray directly owns 9,410 shares of Common Stock and has
presently exercisable options to purchase 18,510 shares, which shares are
included in the table.
(6) David O. Narigon directly owns 15,550 shares of Common Stock and has
presently exercisable options to purchase 800 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,
no employee benefit plans and no compensation committee of its Board of
Directors. 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 2003 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 2003 was 23.5% and this
percentage represents the portion of the compensation expenses described below
which were allocated to the Company during the year.
The compensation of the executive officers of Employers Mutual is initially
determined by a Senior Executive Compensation and Stock Option Committee
composed of six members of its Board of Directors, with subsequent approval by
its full Board of Directors. As previously stated, the Company is a controlled
company of Employers Mutual and all compensation and benefit matters are
mandated by this relationship.
7
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, 2003.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1)
--------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND SALARY BONUS COMPENSATION OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)(2) (#)(3) ($)(4)
------------------ ---- ------- ------- ------------ ---------- ------------
Bruce G. Kelley................ 2003 507,962 302,890 -- 5,000 52,216
President & CEO 2002 452,388 391,004 -- 4,000 30,136
2001 426,782 -- -- -- 5,730
Ronald W. Jean................. 2003 267,658 147,151 -- 5,000 30,425
Executive Vice President 2002 240,634 191,799 -- 10,000 18,647
for Corporate Development 2001 219,813 -- -- -- 6,066
William A. Murray.............. 2003 266,463 146,494 -- 5,000 26,794
Executive Vice 2002 239,475 190,874 66,852 10,000 20,078
President & COO 2001 211,104 -- -- 8,200 6,906
Raymond W. Davis............... 2003 200,704 101,260 -- 1,000 24,257
Sr. Vice President & Treasurer 2002 173,943 127,118 -- 2,000 12,244
2001 164,263 -- -- -- 6,196
David O. Narigon............... 2003 189,347 95,526 -- 1,000 22,938
Sr. Vice President 2002 169,772 123,980 -- -- 5,793
2001 160,175 -- -- -- 5,272
---------------
(1) Compensation deferred at election of executive includable in category and
year earned.
(2) The total dollar value of perquisites and other personal benefits for the
named executive officer was less than the reporting thresholds established
by the Securities and Exchange Commission. The $66,852 paid to Mr. Murray in
2002 was for reimbursement for relocation costs.
(3) All stock options granted were at option prices 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.
(4) The amounts shown for all other compensation include employer matching
contributions to the Employers Mutual Casualty Company 401(k) Savings Plan
(the "401(k) Plan"), employer matching contributions to the Employers Mutual
Casualty Company Executive Non Qualified Excess Plan, a recognition payment
for professional education designation awards and excess group life
insurance premiums. During 2003, contributions to the 401(k) Plan and the
Executive Non Qualified Excess Plan on behalf of each of Messrs. Kelley,
Jean, Murray, Davis and Narigon were $51,322, $29,115, $24,390, $22,504 and
$22,054, respectively. Excess life insurance premiums paid during 2003 on
behalf of Messrs. Kelley, Jean, Murray, Davis and Narigon were $894, $1,310,
$2,404, $1,753 and $884, respectively.
8
STOCK OPTIONS
The following table sets forth details regarding stock options granted to
the named executive officers during 2003. In addition, the table shows the
hypothetical gain, or "option spread", that would exist for the respective
options based on assumed rates of annual compound stock appreciation of five and
ten percent over the full term of the options. Employers Mutual grants the stock
options which are utilized to purchase the Common Stock of the Company. Upon the
exercise of these options, Employers Mutual pays to the Company the spread
between the fair market value and the exercise price.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUES BASED ON
ASSUMED RATES OF
NUMBER OF % OF STOCK PRICE
OPTIONS TOTAL EXERCISE APPRECIATION(2)
GRANTED OPTIONS PRICE EXPIRATION --------------------
NAME (#)(1) GRANTED ($/SH) DATE 5% ($) 10% ($)
---- --------- ------- -------- ---------- -------- ---------
Bruce G. Kelley...................... 5,000 4.4 16.88 2/7/13 53,078 134,511
Ronald W. Jean....................... 5,000 4.4 16.88 2/7/13 53,078 134,511
William A. Murray.................... 5,000 4.4 16.88 2/7/13 53,078 134,511
Raymond W. Davis..................... 1,000 0.9 16.88 2/7/13 10,615 26,902
David O. Narigon..................... 1,000 0.9 16.88 2/7/13 10,615 26,902
---------------
(1) All stock options granted were at option prices 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.
9
The following table sets forth information with respect to the named
executive officers concerning the exercise of stock options during 2003, the
realized gains from those exercises, the number of unexercised options held as
of December 31, 2003, 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....................... 34,000 321,555 42,800/8,200 444,527/30,413
Ronald W. Jean........................ 2,090 21,067 8,969/20,200 81,311/128,966
William A. Murray..................... 3,004 28,990 19,476/25,220 187,437/177,854
Raymond W. Davis...................... 2,900 26,759 3,000/5,400 26,812/42,101
David O. Narigon...................... -- -- 7,600/4,800 70,716/41,519
---------------
(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 of the stock at year-end. The year-end
fair market value was $21.14 per share.
10
RETIREMENT PLANS
The following table reflects the estimated annual retirement benefit that
will be available to the executives named in the Summary Compensation Table. It
assumes that all retirement plans remain in effect as they are currently
structured and a normal retirement age of 65. The assumed annual earnings is an
average of the five consecutive pay years out of all pay years, which give the
highest average. The assumed annual earnings shown have been computed to reflect
a range adequate to cover the current salaries of the named executives with
provision for reasonable increases in future compensation.
YEARS OF SERVICE AT NORMAL RETIREMENT DATE
-----------------------------------------------------------
ASSUMED ANNUAL EARNINGS 15 20 25 30
----------------------- -- -- -- --
$250,000........................... $ 69,525 $ 93,705 $115,870 $139,050
300,000........................... 84,525 112,706 140,869 169,050
350,000........................... 99,525 132,707 165,868 199,050
400,000........................... 114,525 152,708 190,867 229,050
450,000........................... 129,525 172,709 215,866 259,050
500,000........................... 144,525 192,710 240,865 289,050
550,000........................... 159,525 212,711 265,864 319,050
600,000........................... 174,525 232,712 290,863 349,050
650,000........................... 189,525 252,713 315,862 379,050
700,000........................... 204,525 272,714 340,861 409,050
750,000........................... 219,525 292,715 365,860 439,050
800,000........................... 234,525 312,716 390,859 469,050
850,000........................... 249,525 332,717 415,858 499,050
900,000........................... 264,525 352,718 440,857 529,050
950,000........................... 279,525 372,719 465,856 559,050
1,000,000........................... 294,525 392,720 490,855 589,050
1,050,000........................... 309,525 412,721 515,854 619,050
The Employers Mutual Casualty Company Retirement Plan (the "Pension Plan")
covers all employees of Employers Mutual and its subsidiaries. Within the
pension plan there are two formulas for arriving at an employee's benefit,
depending on their age and date of employment.
Employees employed prior to January 1, 1989 and who were 50 years old, or
older, on January 1, 2000 will continue to have their benefits calculated under
a traditional defined benefit formula. This formula is based on years of
service, the highest average pay for five consecutive years and the employee's
age at the time of retirement. Retirement benefits for all other employees will
be determined under a cash balance formula.
The formula for determining the benefits earned under the cash balance
formula is similar to that of a defined contribution plan. The formula is based
on a combination of covered compensation and interest paid on a participant's
accumulated account balance. Each year a participant's account is credited with
(1) a defined percentage of their covered compensation for the year and (2)
interest on the prior year-end account balance at the 30 year treasury rate,
until Congress enacts a new interest rate. The participant's account balance is
defined annually based on these factors without regard to the actual investment
performance of the pension plan's assets.
11
Employers Mutual also sponsors a 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 percent of the
first six percent of covered compensation that an employee defers. With the
exception of the highly compensated group, the employee participants can make
tax qualified deferrals of up to 50 percent of their covered compensation to
this plan. Beginning in 2001 a new plan, the Executive Non Qualified Excess Plan
(ENQEP), was created for the highly compensated group who were limited in their
401(k) deferral percentage. This plan allows the highly compensated to defer up
to 25% of their salary between the 401(k) Plan and the ENQEP. Employers Mutual
matches 100 percent of the first five percent of covered compensation under the
ENQEP.
In addition to the ENQEP, Employers Mutual has two other non-qualified
supplemental retirement plans, the Excess Retirement Benefit Agreement and the
Supplemental Executive Retirement Plan. These plans restore retirement benefits
to those employees who are prevented from receiving full benefits from the
Pension Plan because of their deferral of bonus income and the restrictions
imposed on the amount of covered compensation that can be credited to, and the
maximum benefits that can be received from, qualified pension plans. These three
plans are unfunded and any payments made to participants will be from the
general accounts of Employers Mutual.
All of the individuals named in the Summary Compensation Table are
participants in each of these plans. For retirement benefit purposes, during
2003 the number of full years of service accrued and the compensation for
Messrs. Kelley, Jean, Murray, Davis, and Narigon were 18 and $902,443, 24 and
$462,471, 18 and $365,970, 24 and $329,575, and 21 and $321,235, respectively.
For 2003, pursuant to the requirements of the Internal Revenue Code, as amended,
compensation credited under the qualified Pension Plan and the 401(k) Plan was
limited to $200,000.
EXECUTIVE COMPENSATION REPORT
The compensation of the executive officers of Employers Mutual is initially
determined by the Senior Executive Compensation and Stock Option Committee (the
"Compensation Committee") of the Board of Directors of Employers Mutual, with
subsequent approval by its full Board of Directors.
COMPENSATION PHILOSOPHY
The general intent of Employers Mutual is to provide an executive
compensation 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, some of which are included in the industry index used in the
performance graph appearing later in this report, is comprised of companies
which are similar in size, have comparable insurance products and which have
been identified as the competition with respect to such things as the quality of
the products and services provided, and which tend to compete in the same
targeted markets as does Employers Mutual. It is also the intention of Employers
Mutual to provide a level of compensation that will allow it to attract and
retain highly qualified, motivated executives who will enhance the ability of
Employers Mutual to continue its long history of steady growth and financial
strength.
12
EXECUTIVE COMPENSATION COMPONENTS
The compensation of Employers Mutual executives is determined primarily
through the use of three major components in its compensation structure. Each of
those components is designed to achieve a particular result and to allow for
measurement of individual and collective executive performance.
The basic component of executive compensation is base salary. On an annual
basis, the Compensation Committee reviews the salary of each individual
executive officer, using as a guideline the average base pay of other industry
and peer company executives with like positions, and with strong reliance upon
the Chief Executive Officer's report on the overall performance and progress of
each executive during the past year.
The executives also have an incentive bonus program based upon the overall
performance of Employers Mutual and its subsidiaries. The bonus program measures
performance based on production increases compared to goal, the amount of
increase in statutory surplus and the statutory combined loss and expense ratio
of Employers Mutual and its insurance subsidiaries compared to goal and to the
industry. The Compensation Committee reviews the bonus program on an annual
basis and makes changes to it if and when such changes are deemed to be
appropriate.
Employers Mutual has also made available a long-term incentive compensation
opportunity for its senior executives through the use of incentive stock option
grants. The Common Stock of the Company is utilized for those grants. Because of
the Pooling Agreement that Employers Mutual has with two of its subsidiaries, an
affiliate and four subsidiaries of the Company, the Compensation Committee
believes that superior performance by the senior executives of Employers Mutual
will have 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 the executives. The Compensation Committee has formal guidelines for
granting stock options to eligible executives. Those guidelines provide for base
option award ranges for executives based upon their level of authority and
responsibility and also provide for the granting of discretionary option awards
to executives based upon such factors as individual performance, attainment of
agreed goals and objectives and other contributions to overall results.
13
COMPENSATION OF CHIEF EXECUTIVE OFFICER
For 2003, the Compensation Committee recommended that the base salary of
Bruce G. Kelley, Chief Executive Officer, be increased to $509,916, an increase
of 12.3 percent over the base salary paid him during 2002. The Compensation
Committee arrived at that figure as an appropriate salary for the position based
upon a salary range imputed from surveys of base salaries being paid to Chief
Executive Officers of peer group companies. The full Board of Directors of
Employers Mutual approved the salary recommendation.
Awards under the incentive bonus program are based upon a number of factors
for Employers Mutual and its property and casualty insurance subsidiaries, as
described above. The Compensation Committee recommended that Mr. Kelley be paid
a bonus of $302,941 for the 2003 performance of Employers Mutual and the
Company. The full Board of Directors of Employers Mutual approved this
recommendation. Mr. Kelley's bonus will be paid in two installments during 2004.
The members of the Senior Executive Compensation and Stock Option Committee
of Employers Mutual are as follows:
Blaine A. Briggs -- Chairman
Thomas W. Booth
John C. Burgeson
Gale L. Griffin
Lanning Macfarland, Jr.
Philip T. Van Ekeren
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
and do not have a relationship with the Company which would interfere with the
exercise of their judgment in carrying out their responsibilities. The Audit
Committee's responsibilities are described in a written charter initially
adopted by the Board of Directors on May 25, 2000, with modifications to such
charter being approved by the Board by unanimous written consent resolution
effective April 5, 2004. A copy of the Audit Committee's written charter may be
obtained on the Company's website at www.EMCInsurance.com and is also reflected
as Appendix A.
Management is responsible for the internal controls and financial reporting
processes of the Company. The independent auditors are 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.
The Committee's responsibility is to monitor and oversee these processes.
At each of its ten meetings during calendar year 2003, the Committee met
and held discussions with management and Ernst & Young, independent auditors 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, its evaluation of the
Company's financial reporting controls, and its assessment of the overall
quality of the Company's financial reporting controls. Management represented to
the Committee that the consolidated financial statements were prepared in
accordance with generally accepted accounting principles. The Committee reviewed
and discussed the consolidated financial statements with management and Ernst &
Young. The Committee also discussed with Ernst & Young matters
14
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 2003 calendar year are compatible
with maintaining their independence.
Based on the Committee's discussions with management and Ernst & Young, the
Committee's review of the representations of management, and the report 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, 2003. The Committee also has recommended for
stockholder approval the retention of Ernst & Young as independent auditors for
calendar year 2004.
AUDIT COMMITTEE
David J. Fisher, Chairman
George C. Carpenter III
E. H. Creese
AUDIT FEES
The aggregate fees paid to Ernst & Young by the Company for the performance
of the audit and the review of the Company's financial statements during 2003
and 2002 were $142,127 and $123,849, respectively.
AUDIT RELATED FEES
During 2003, the Company paid to Ernst & Young $27,979 for consultation
services relating to the Sarbanes-Oxley Act of 2002 and had no audit related
fees for 2002.
TAX FEES
The Company paid to Ernst & Young during 2003 and 2002 $18,426 and $19,463,
respectively, for tax compliance services.
ALL OTHER FEES
The Company paid to Ernst & Young during 2003 and 2002 $6,057 and $20,614,
respectively, for other related services.
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, 1998 and ending December 31, 2003. 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]
1998 1999 2000 2001 2002 2003
------- ------ ------ ------ ------ ------
EMC INSURANCE GROUP INC. ................ $100.00 75.73 104.08 159.25 171.65 209.58
INDUSTRY INDEX........................... $100.00 111.19 152.65 130.55 103.59 126.96
NASDAQ MARKET INDEX...................... $100.00 176.37 110.86 88.37 61.64 92.68
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The operations of the Company are directly interrelated with the operations
of Employers Mutual. Because of this operational relationship, there are a
number of transactions between the two companies and their subsidiary companies
that occur on an ongoing basis. For a discussion of those transactions, see the
"Notes to Consolidated Financial Statements" in the Company's 2003 Annual Report
to Stockholders.
16
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Ernst & Young LLP (E&Y) audited the financial statements of the Company for
the year ended December 31, 2003. The Board of Directors has selected E&Y as
auditors for the fiscal year ending December 31, 2004 and the stockholders are
asked to ratify that selection. During 2003, 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 consultation regarding various financial and accounting matters.
A representative of E&Y will be present at the Annual Meeting, and will be
available to respond to appropriate questions.
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.
APPROVAL OF RESTATED ARTICLES OF INCORPORATION
The Company is presently governed by Articles of Incorporation which have
been the subject of numerous amendments (collectively, the "Current Articles").
The Company proposes to restate the Current Articles and to include additional
amendments. The Restated Articles of Incorporation attached as Appendix B to the
Proxy Statement (the "Restated Articles") were adopted by the Board of Directors
by a unanimous written consent resolution effective April 5, 2004 and will
become effective if approved by the stockholders of the Company at the Annual
Meeting and upon filing with the Iowa Secretary of State. In addition to the
consolidation of all prior amendments, the following is a description of the
amendments proposed to be effected by the Restated Articles.
CHANGE IN NUMBER OF DIRECTORS AUTHORIZED BY THE CURRENT ARTICLES TO
ESTABLISH A RANGE FOR THE NUMBER OF AUTHORIZED DIRECTORS. Article IV of the
Current Articles provides that the Board of Directors shall consist of five
members. The proposed amendment provided in Article VII of the Restated Articles
would increase this number and allow the number of directors serving on the
Board of Directors of the Company to be within a range of not less than five nor
more than twelve members, with the actual number of members to be set forth in,
or determined in accordance with the procedures prescribed in, the Bylaws of the
Company.
ELIMINATION OF CLASSIFICATION OF DIRECTORS TO SERVE FOR STAGGERED TERMS.
Article IX of the Current Articles provides that the directors may be divided
into two or three classes with the term of the office of the directors of each
class expiring after a term of years equal to the number of classes. The Company
has never implemented this classification of the Board of Directors and has
submitted the names of all directors for election each year. The Company
proposes to eliminate this classification provision in the Restated Articles.
PERSONAL LIABILITY OF DIRECTORS. Article VIII of the Current Articles
provides that a director of the Company is not personally liable for monetary
damages for breach of fiduciary duty, except for liability: (i) for breach of
the director's duty of loyalty to the Company or the stockholders, (ii) for acts
or omissions not in good faith which involve intentional misconduct or a knowing
violation of law, or (iii) for any transaction for which the director derived an
improper benefit. Article VIII of the Restated Articles proposes to amend the
exceptions to the liability protection to make them consistent with applicable
Iowa law.
17
INDEMNIFICATION OF DIRECTORS. Article X of the Current Articles provides
that the Company is empowered to indemnify directors as permitted by the then
applicable law. Article IX of the Restated Articles proposes to amend the
indemnification provisions within the Current Articles to make them consistent
with applicable Iowa law and also with the standard of personal liability of
directors as is proposed by Article VIII of the Restated Articles, as discussed
in the preceding section.
The Board of Directors does not contemplate that the adoption or
recommendation of adoption of any amendments to the Current Articles will have
any "anti-takeover" effect.
The Board of Directors has unanimously adopted a resolution recommending
the Restated Articles of Incorporation and directed that they should be
submitted to the stockholders for their consideration. All shares of Common
Stock are entitled to vote on the Restated Articles of Incorporation and a
majority of Shares at the Meeting must be voted in favor of the Restated
Articles of Incorporation for them to be approved.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE RESTATED
ARTICLES OF INCORPORATION. A PROXY SOLICITED BY THE BOARD OF DIRECTORS WILL 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 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 2005 ANNUAL MEETING
AND STOCKHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS
Stockholder proposals for inclusion in the Company's Proxy Statement for
the 2005 Annual Meeting of Stockholders must be received by the Company no later
than December 17, 2004. 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 2005 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.
18
The Board has implemented a process whereby stockholders may send
communications directly to the Board's attention. Any stockholder deciding to
communicate with the Board, or one or more specific members thereof, should send
their 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 communication for
validation and then promptly forward all such communication to the specified
addressee thereof.
April 16, 2004
BY ORDER OF THE BOARD OF DIRECTORS
DONALD D. KLEMME, Secretary
19
APPENDIX A
EMC INSURANCE GROUP INC.
AUDIT COMMITTEE CHARTER
PURPOSE
The purpose of the Audit Committee (the "Committee") of EMC Insurance Group
Inc. (the "Company") is to assist the Company's Board of Directors (the "Board")
in fulfilling its oversight responsibilities for (1) the integrity of the
Company's financial statements, (2) the Company's compliance with legal and
regulatory requirements, (3) the independent auditor's qualifications and
independence, and (4) the performance of the Company's internal audit function
and independent auditors. The Committee will also prepare the report required by
the rules of the Securities and Exchange Commission to be included in the
Company's annual proxy statement.
AUTHORITY
The Committee shall have the authority granted to it in Article V, Section
3 of the Company's By-Laws. The primary responsibility of the Committee is to
oversee the Company's financial controls and reporting processes on behalf of
the Board, and to report the results of its activities to the Board. The
Committee's responsibilities are set forth more fully below. Management of the
Company is responsible for preparing the Company's financial statements, and the
external auditors are responsible for auditing those financial statements. The
Committee may perform such other duties or activities and may assume such other
responsibilities as are consistent with its purpose and as the Board or the
Committee deems appropriate. The following shall be the principal recurring
processes of the Committee in carrying out its oversight responsibilities:
- Appoint, determine funding for, and oversee the work of the external
auditors employed by the Company to conduct the annual audit. The
external auditors will report directly to the Committee.
- Resolve any disagreements between management and the external auditors
regarding financial reporting.
- Pre-approve all audit and permitted non-audit services to be performed by
the Company's external auditors.
- Retain and determine funding for independent counsel, accountants, or
others to advise the Committee or assist in the conduct of an
investigation.
- Seek any information it requires from employees -- all of whom are
directed to cooperate with the Committee's requests.
- Meet with Company officers, external auditors, or outside counsel, as
necessary.
COMPOSITION
The Audit Committee will consist of three or more members of the Board of
Directors. The full Board will appoint the Committee members and the Committee
chair.
A-1
Each Committee member will be both independent and financially literate. At
least one member shall be designated as the "Audit Committee financial expert,"
as defined by applicable rules and regulations.
No Committee member shall simultaneously serve on the audit committees of
more than two other public companies.
MEETINGS
The Committee will meet at least four times a year, with authority to
convene additional meetings as circumstances require. All Committee members are
expected to attend each meeting, in person or via tele-conference. The Committee
will invite members of management, the external auditors or others to attend
meetings and provide pertinent information, as necessary. It will meet
separately with management, with internal auditors and with external auditors.
It will also meet periodically in executive session.
Meetings may occur jointly with meetings of the audit committees of one or
more affiliated companies, in which case a chairman of the joint meeting shall
be elected by the members of the audit committees in attendance.
Special meetings may be called by any member of the Committee or by the
Chief Executive Officer of the Company at any time circumstances dictate the
need, pursuant to the notice provisions set forth in the By-Laws of the Company.
Meeting agendas will be prepared and provided in advance to members, along with
appropriate briefing materials. Minutes will be prepared.
RESPONSIBILITIES
The Committee will have the following responsibilities:
FINANCIAL STATEMENTS
- Review significant accounting and reporting issues and understand their
impact on the financial statements of the Company. These issues include:
- Complex or unusual transactions
- Major issues regarding accounting principles and financial statement
presentations, including any significant changes in the Company's
selection or application of accounting principles
- Review and approval of all related party transactions, as defined by the
National Association of Securities Dealers, Inc. to which the Company is
a party
- The effect of regulatory and accounting initiatives, as well as
off-balance sheet structures, on the financial statements of the Company
- Review analyses prepared by management and/or the external auditor
setting forth significant financial reporting issues and judgments made
in connection with the preparation of the financial statements, including
analyses of the effects of alternative GAAP methods on the financial
statements.
- Review with management and the external auditors the results of each
audit, including any difficulties encountered. This review will include
any restrictions on the scope of the external auditor's activities or on
access to requested information, and any significant disagreements with
management.
A-2
- Discuss the annual audited financial statements and quarterly financial
statements with management and the external auditors, including the
Company's disclosures under "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
- Review disclosures and certifications made by the Chief Executive Officer
and the Chief Financial Officer in the Company's Forms 10-K and 10-Q
concerning controls and procedures for financial reporting.
- Discuss earnings press releases (particularly use of "pro forma," or
"adjusted" non-GAAP, information), as well as financial information and
earnings guidance provided to analysts and rating agencies. This review
may be general (i.e., the types of information to be disclosed and the
type of presentations to be made).
INTERNAL CONTROL
- Review any reports prepared by the internal or external auditors
regarding the effectiveness of the Company's internal control system,
including information technology security and controls.
- Understand the scope of internal and external auditor reviews of internal
controls over financial reporting, and obtain reports on significant
findings and recommendations, together with management's responses.
INTERNAL AUDIT
- Review with management and the Chief Audit Officer the charter, plans,
activities, staffing and organizational structure of the internal audit
function.
- Ensure there are no unjustified restrictions or limitations placed upon,
and review and concur in the appointment, replacement, or dismissal of,
the Chief Audit Officer.
- Review the effectiveness of the internal audit function, including
compliance with The Institute of Internal Auditors' Standards for the
Professional Practice of Internal Auditing.
- Meet separately with the Chief Audit Officer on a regular basis, to
discuss any matters that the Committee or the internal audit department
believes should be discussed privately.
EXTERNAL AUDIT
- Review the external auditor's proposed audit scope and approach,
including coordination of audit effort with internal audit.
- Review the performance of the external auditors. In performing this
review, the Committee will:
- Obtain and review, at least annually, a report by the external auditors
describing the firm's internal quality-control procedures
- Assess the external auditor's independence and review any relationships
between the external auditor(s) and the Company
- Take into account the opinions of management and internal audit
- Review and evaluate the lead partner of the external auditor
A-3
- Present to the Board its conclusions with respect to the external
auditor
- Ensure the rotation of the lead and concurring audit partners every five
years and other audit partners every seven years, and consider whether
there should be regular rotation of the audit firm itself.
- Set clear hiring policies for employees or former employees of the
external auditors.
- Meet separately with the external auditors on a regular basis, to discuss
any matters that the Committee or the external auditors believe should be
discussed privately.
COMPLIANCE
- Review any reports prepared by internal audit, General Counsel or the
external auditors regarding (i) the effectiveness of the Company's system
for monitoring compliance with laws and regulations, and/or (ii) the
results of management's investigation and follow-up (including
disciplinary action) of any instances of noncompliance.
- Establish procedures for: (i) the receipt, retention, and treatment of
complaints received by the Company regarding accounting, internal
controls, or auditing matters; and (ii) the confidential, anonymous
submission by employees of the Company or its affiliates of concerns
regarding questionable accounting or auditing matters.
- Review the findings of any examinations by regulatory agencies, as well
as any auditor observations.
- Review and discuss with management, the internal auditors, and the
external auditors the adequacy and effectiveness of the Company's legal,
regulatory and ethical compliance programs, including the Company's Code
of Corporate Conduct and Code of Ethics.
- Obtain regular updates from management and the Company's legal counsel
regarding compliance matters.
REPORTING RESPONSIBILITIES
- Report regularly to the Board of Directors about Committee activities and
issues that arise with respect to the quality or integrity of the
Company's financial statements, the Company's compliance with legal or
regulatory requirements, the performance and independence of the
Company's external auditors, and the performance of the internal audit
function.
- Provide an open avenue of communication between internal audit, the
external auditors, and the Board of Directors.
- Report annually to the stockholders, describing the Committee's
composition, its responsibilities and how they were discharged, and any
other information required by regulation or rule, including approval of
non-audit services.
- Review any other reports the Company issues that relate to Committee
responsibilities.
OTHER RESPONSIBILITIES
- Discuss with management the Company's major policies with respect to risk
assessment and risk management.
- Perform other activities related to this Charter as requested by the
Board of Directors.
A-4
- Institute and oversee special investigations as needed.
- Maintain financial literacy through formal seminars, self-study programs
or professional experience.
- Review and assess the adequacy of this Committee Charter annually (to the
extent such function is not delegated to and performed by Employers
Mutual Casualty Company's Corporate Governance and Nominating Committee),
request Board approval for proposed changes, and ensure that appropriate
disclosures have been made, as may be required by law or regulation.
- Confirm annually that all responsibilities outlined in this Charter have
been carried out.
A-5
APPENDIX B
RESTATED
ARTICLES OF INCORPORATION
OF
EMC INSURANCE GROUP INC.
TO THE SECRETARY OF STATE OF THE STATE OF IOWA:
Pursuant to Section 1007 of the Iowa Business Corporation Act, the
undersigned corporation adopts the following Restated Articles of Incorporation.
1. The name of the corporation is: EMC Insurance Group Inc.
2. The following is the text of the Restated Articles of Incorporation:
ARTICLE I.
The name of the corporation is EMC Insurance Group Inc.
ARTICLE II.
The period of its duration is perpetual.
ARTICLE III.
The location of the corporation's principal place of business is in Polk
County, Iowa. As of the filing date of these Restated Articles of Incorporation,
the location of the corporation's principal place of business is 717 Mulberry
Street, Des Moines, Iowa 50309. The principal place of business may be changed
hereafter to any other location in Polk County, Iowa, without further amendment
of these Restated Articles of Incorporation.
ARTICLE IV.
The purposes and objectives for which the corporation is organized are the
transaction of any and all lawful business for which corporations may be
organized under the Iowa Business Corporation Act (Chapter 490, Code of Iowa
2003, and successor statutory provisions).
ARTICLE V.
The aggregate number of shares that the corporation is authorized to issue
is twenty million (20,000,000) shares of common stock at a par value of one
dollar ($l.00) per share.
At all meetings of the shareholders, each holder of common stock shall be
entitled to one vote for each share of stock held by such holder. The holders of
the shares of common stock shall be entitled to receive the net assets of the
corporation upon dissolution.
The shareholders shall have no preemptive right to acquire unissued or
treasury shares of the corporation, or securities of the corporation convertible
into or carrying a right to subscribe to or acquire shares.
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ARTICLE VI.
Private property of the shareholders of this corporation shall be exempt
from corporate liability.
ARTICLE VII.
The business and affairs of this corporation shall be managed by a Board of
Directors consisting of not less than five (5) nor more than twelve (12)
members, with the actual number of members set forth in, or determined in
accordance with the procedures prescribed in, the Bylaws of the corporation.
ARTICLE VIII.
A director of the corporation shall not be liable to the corporation or its
shareholders for money damages for any action taken, or any failure to take any
action, as a director, except liability for any of the following: (1) the amount
of a financial benefit received by a director to which the director is not
entitled; (2) an intentional infliction of harm on the corporation or its
shareholders; (3) a violation of section 490.833 of the Iowa Business
Corporation Act; or (4) an intentional violation of criminal law. If the Iowa
Business Corporation Act is hereafter amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the corporation, in addition to the limitation on personal liability
provided herein, shall be eliminated or limited to the extent of such amendment,
automatically and without any further action, to the fullest extent permitted by
law. Any repeal or modification of this Article by the shareholders of the
corporation shall be prospective only and shall not adversely affect any
limitation on the personal liability or any other right or protection of a
director of the corporation with respect to any statement of facts existing at
or prior to the time of such repeal or modification.
ARTICLE IX.
The corporation shall indemnify a director for liability (as such term is
defined in section 490.850(5) of the Iowa Business Corporation Act) to any
person for any action taken, or any failure to take any action, as a director,
except liability for any of the following: (1) receipt of a financial benefit by
a director to which the director is not entitled: (2) an intentional infliction
of harm on the corporation or its shareholders; (3) a violation of section
490.833 of the Iowa Business Corporation Act; or (4) an intentional violation of
criminal law. Without limiting the foregoing, the corporation shall exercise all
of its permissive powers as often as necessary to indemnify and advance expenses
to its directors and officers to the fullest extent permitted by law. If the
Iowa Business Corporation Act is hereafter amended to authorize broader
indemnification, then the indemnification obligations of the corporation shall
be deemed amended automatically and without any further action to require
indemnification and advancement of funds to pay for or reimburse expenses of its
directors and officers to the fullest extent permitted by law. Any repeal or
modification of this Article by the shareholders of the corporation shall be
prospective only and shall not adversely affect any indemnification obligations
of the corporation with respect to any statement of facts existing at or prior
to the time of such repeal or modification.
ARTICLE X.
A director of this corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the
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director's duty of loyalty to the corporation or its shareholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, or (iii) for any transaction from which the director
derived an improper personal benefit.
3. The duly adopted Restated Articles of Incorporation supersede the
original Articles of Incorporation and all amendments to them.
4. The Restated Articles of Incorporation amend the Articles of
Incorporation in a manner requiring shareholder approval. The Restated Articles
of Incorporation were approved by the shareholders in the manner required by the
Iowa Business Corporation Act and by the Articles of Incorporation.
The effective date and time of this document is the time of filing on the
date it is filed.
EMC INSURANCE GROUP INC.
By:
--------------------------------------
Bruce G. Kelley
President and Chief Executive
Officer
By:
------------------------------------
Donald D. Klemme
Senior Vice President and Secretary
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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 name by authorized person.
DATE:___________________________,2004.
______________________________________
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 21, 2004
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 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
April 2, 2004 at the Annual Meeting of Stockholders to be held on May 21, 2004
or any adjournment thereof.
1. ELECTION OF DIRECTORS [] FOR all nominees listed below [] WITHHOLD AUTHORITY
(except as marked to the to vote for all
contrary below) 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 RESTATED ARTICLES OF INCORPORATION
[]FOR []AGAINST []ABSTAIN
3. PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP AS THE INDEPENDENT
AUDITORS OF THE COMPANY.
[]FOR []AGAINST []ABSTAIN
4. OTHER BUSINESS in their discretion, the proxies are authorized to vote upon
such other business as may properly come before the meeting.