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CERTIFICATE OF ADOPTIONNotice of the proposed report for the financial examination ofFARMERS MUTUAL INSURANCE COMPANY OF NEBRASKAdated as of December 31, 2017 verified under oath by the examiner-in-charge onMarch 21, 2019 and received by the company on March 22, 2019, has been adoptedwithout modification as the final report pursuant to Neb. Rev. Stat. § 44-5906(3) (a).Dated this 5th day of April 2019.STATE OF NEBRASKADEPARTMENT OF INSURANCEJustin C. Schrader, CFEChief Financial Examiner
STATE OF NEBRASKADepartment of InsuranceEXAMINATION REPORTOFFARMERS MUTUAL INSURANCE COMPANY OF NEBRASKAas ofDecember 31, 2017
TABLE OF CONTENTSItemPageSalutation .1Introduction .1Scope of Examination .1Description of Company:History.3Management and Control:Policyholders.4Board of Directors.5Officers .6Committees .7Territory and Plan of Operation .8Reinsurance:Ceded .8Assumed.10General .11Body of Report:Growth .11Financial Statements .11Examination Changes In Financial Statements.15Compliance with Previous Recommendations:Custodial Agreement .16Commentary on Current Examination Findings .16Summary of Comments and Recommendations .16Acknowledgment .17
Lincoln, NebraskaFebruary 4, 2019Honorable Bruce R. RamgeDirector of InsuranceNebraska Department of Insurance1135 M Street, Suite 300Lincoln, Nebraska 68501Dear Sir:Pursuant to your instruction and authorizations, and in accordance with statutoryrequirements, an examination has been conducted of the financial condition and business affairs of:FARMERS MUTUAL INSURANCE COMPANY OF NEBRASKA501 South 13th StreetLincoln, Nebraska 68508(hereinafter also referred to as the “Company”) and the report of such examination is respectfullypresented herein.INTRODUCTIONThe Company was last examined as of December 31, 2012, by the State of Nebraska.The current financial condition examination covers the intervening period to, and including, theclose of business on December 31, 2017, and includes such subsequent events and transactionsas were considered pertinent to this report. The State of Nebraska participated in thisexamination and assisted in the preparation of this report.SCOPE OF EXAMINATIONThis examination was conducted pursuant to and in accordance with both the NAICFinancial Condition Examiners Handbook (Handbook) and Section §44-5904(1) of the NebraskaInsurance Statutes. The Handbook requires that examiners plan and perform the examination to
evaluate the financial condition and identify prospective risks of the Company by obtaininginformation about the Company including, but not limited to: corporate governance, identifyingand assessing inherent risks within the Company, and evaluating system controls and proceduresused to mitigate those risks. The examination also includes assessing the principles used andsignificant estimates made by management, as well as evaluating the overall financial statementpresentation and management’s compliance with Statutory Accounting Principles and AnnualStatement Instructions, when applicable to domestic state regulations.A general review was made of the Company’s operations and the manner in which itsbusiness has been conducted in order to determine compliance with statutory and charterprovisions. The Company’s history was traced and has been set out in this report under thecaption “Description of Company”. All items pertaining to management and control werereviewed, including provisions for disclosure of conflicts of interest to the Board of Directorsand the departmental organization of the Company. The Articles of Incorporation and By-Lawswere reviewed, including appropriate filings of any changes or amendments thereto. Theminutes of the meetings of the policyholders, Board of Directors and committees, held during theexamination period, were read and noted. Attendance at meetings, proxy information, electionof Directors and Officers, approval of investment transactions and authorizations of salaries werealso noted.The fidelity bond and other insurance coverages protecting the Company’s property andinterests were reviewed, as were plans for employee welfare and pension. Certificates ofAuthority to conduct the business of insurance in the various states were inspected and a surveywas made of the Company’s general plan of operation.2
Data reflecting the Company's growth during the period under review, as developed fromthe Company's filed annual statements, is reflected in the financial section of this report underthe caption "Body of Report".The Company's reinsurance facilities were ascertained and noted, and have beencommented upon in this report under the caption "Reinsurance". Accounting records andprocedures were tested to the extent deemed necessary through the risk-focused examinationprocess. The Company’s method of claims handling and procedures pertaining to the adjustmentand payment of incurred losses were also noted.All accounts and activities of the Company were considered in accordance with the riskfocused examination process. This included a review of workpapers prepared by KPMG, theCompany’s external auditors, during their audit of the Company’s accounts for the years endedDecember 31, 2016 and 2017. Portions of the auditor’s workpapers have been incorporated intothe workpapers of the examiners and have been utilized in determining the scope and areas ofemphasis in conducting the examination. This utilization was performed pursuant to Title 210(Rules of the Nebraska Department of Insurance), Chapter 56, Section 013.Any failure of items to add to the totals shown in schedules and exhibits appearingthroughout this report is due to rounding.DESCRIPTION OF COMPANYHISTORYThe Company was incorporated under the laws of the State of Nebraska as an assessmentfire association on September 1, 1891, and commenced business on November 1st of that year.During the period of the early 1930’s, several small county mutual assessment companies in3
Nebraska merged into Farmers Mutual Insurance Company, which at the time remained anassessment fire association.On June 1, 1960, the Company's By-Laws were amended to change the plan of operationto a non-assessable mutual insurance company.Under the provisions of its charter and in conformity with Nebraska statutes, theCompany is authorized to write the kinds of insurance prescribed by Section 44-201, Subsections4, 5, 7, 8, 9, 10, 11, 12, 13, 14, 16, 18, and 20 of the Nebraska Insurance Code.MANAGEMENT AND CONTROLPolicyholdersArticle III of the Company’s Articles of Incorporation states, “the Company shall operateupon the mutual plan and charge a fixed premium for insurance written.” Article VI furtherstates, “ each person, corporation, general partnership, limited partnership, limited liabilitypartnership, limited liability company, joint venture, trust, business trust, cooperative, associationor other entity owning a policy or policies of insurance by the Company shall be a memberthereof and entitled to one vote which may be cast in person or by proxy.” Article II, paragraph1 of the Company’s By-Laws states, “the annual meeting of the members shall be held inLincoln, Nebraska on the third Wednesday in February at 10:00 a.m.” Article II, paragraph 4states, “the members present at a duly organized meeting, represented in person or by proxy,shall constitute a quorum for the transaction of business at such meeting.” Article II, paragraph 6states, “each member entitled to vote shall be entitled to one vote upon each matter submitted toa vote at a meeting of members.”4
Board of DirectorsArticle VII of the Articles of Incorporation states, “the Company’s Board of Directorsshall be elected by the Company’s members. The Board of Directors shall consist of nineDirectors and shall be divided into three classes as nearly equal in number as possible. TheDirectors in each class shall be elected for a term of three years and until their successors areelected and qualified. One class shall be elected by ballot annually.” The following personswere serving as Directors at December 31, 2017:Name and ResidencePrincipal OccupationAnn L. ParrLincoln, NebraskaSenior Vice President, Secretary,and General Counsel of the Company2018Dr. James K. StatesNorth Platte, NebraskaDentist - Retired2018Paul R. WaggonerAlma, NebraskaInsurance Agent2018Steve D. ErwinLincoln, NebraskaPresident of US Bank - Nebraska2019Timothy G. PetersenCambridge, NebraskaRancher2019Mark T. WalzLincoln, NebraskaChairman of the Board of DirectorsPresident, and Chief ExecutiveOfficer of the Company2019Ann M. FrohmanLincoln, NebraskaAttorney, Frohman Law Office, LLC2020Robert T. GrimitLincoln, NebraskaAttorney - Retired2020Richard J. LabenzLincoln, NebraskaPartner, Labenz & Associates, LLC20205Term Expires
OfficersArticle IV, paragraph 1 of the By-Laws state, “the required Officers of the Company shallbe a President, a Secretary and a Treasurer. In addition, the Company may have, at thediscretion of the Board of Directors, a Chief Executive Officer, a Chief Operating Officer, aChief Financial Officer, one or more Executive Vice President(s) (as the Board of Directors maydetermine), one or more Senior Vice President(s) (as the Board of Directors may determine) andsuch other Officers as may be deemed necessary by the Board of Directors, the Chief ExecutiveOfficer or the President.” Article IV, Paragraph 2 states, “the President, Secretary and Treasurerof the Company, as well as any Chief Executive Officer, Chief Operating Officer, ChiefFinancial Officer, Executive Vice President(s) and Senior Vice President(s) of the Company,shall be elected by the Board of Directors at its annual meeting or at a special meeting called forthat purpose.”Executive Officers elected and serving the Company at December 31, 2017, were asfollows:NameOfficeMark T. WalzLisa M. FinknerTravis E. LeboChairman, President, and Chief Executive OfficerVice President, Treasurer, and Chief Financial OfficerSenior Vice President of Underwriting and ActuarialServicesSenior Vice President, Secretary, and General CounselAnn L. ParrAdministrative Officers appointed by the Executive Committee and serving atDecember 31, 2017, were as follows:NameChad M. DlouhyJames A FredricksonAaron K. GlauseMark T. GokieTitleVice President, UnderwritingVice President, Policy DevelopmentVice President, ClaimsVice President, Assistant General Counsel6
NameAndrew J. KrausTimothy R. SchlegelmilchDale K. TheisenTitleVice President, AgenciesVice President, Investments and Real EstateVice President, Information SystemsCommitteesArticle III, Paragraph 14, of the Company’s By-Laws states, “the Board of Directorsmay, by resolution or resolutions passed by a majority of the whole Board, appoint an ExecutiveCommittee and one or more other committees, each committee to consist of two or moreDirectors or the Company, which committees shall, to the extent permitted by law, have and mayexercise such powers of the Board of Directors in the management of the business and affairs ofthe Company as shall be delegated to them. The powers of any such committee shall be set forthin the resolution or resolutions appointing such committee.”The following persons were serving on the Executive Committee and other standingcommittees at December 31, 2017:Executive CommitteeAudit CommitteeMark T. Walz, ChairmanAnn L. Parr, SecretaryRobert T. GrimitRichard J. Labenz, ChairmanSteven D. ErwinRobert T. GrimitMark T. WalzEmployee Benefits CommitteeInvestment CommitteeMark T. Walz, ChairmanAnn L. ParrMark T. Walz, ChairmanAnn L. Parr, SecretarySteven D. ErwinCompensation CommitteeRobert T. Grimit, ChairmanJames K. StatesMark T. WalzProxy CommitteeMark T. Walz, ChairmanJames K. States7
TERRITORY AND PLAN OF OPERATIONAs evidenced by current or continuous Certificates of Authority, the Company waslicensed to transact the business of insurance in the following states at December 31, 2017:IllinoisKansasSouth DakotaIndianaNebraskaIowaNorth DakotaBusiness is produced under the general agency system in the States of Nebraska andSouth Dakota. The Company has contracts with 279 agencies and 1,139 agents in Nebraska and133 agencies and 477 agents in South Dakota.Nebraska is divided into eight claims districts. South Dakota is divided into five claimsdistricts. A Director of Field Operations, three Regional Managers, ten District Managers, andfour Claim Supervisors have under their direct supervision, special agents who are assigned tovarious territories. There are also two Telephone Claims Supervisors located in the Lincolnhome office. All are salaried personnel responsible for adjusting losses and promoting goodagency relations.REINSURANCECededUnder a property excess of loss reinsurance agreement with Swiss Reinsurance AmericaCorporation (Swiss Re), business classified as fire, allied lines, earthquake, inland marine, glass,and the property portion of homeowners and farmowners multiple peril are ceded under thisexcess per risk treaty whereby the Company’s first, second, third, fourth, and fifth layers providecoverage in excess of the Company's 500,000 retention as follows:8
LayerLimits1st2nd3rd4th5th 625,000 xs 500,000 per occurrence 1,000,000 xs 1,125,000 per occurrence 1,000,000 xs 2,125,000 per occurrence 2,000,000 xs 3,125,000 per occurrence 2,000,000 xs 5,125,000 per occurrenceThe reinsurer's liability shall not exceed 1,875,000 under the first layer, 2,000,000under the second and third layers, and 4,000,000 under the fourth and fifth layer on all risksinvolved in one loss occurrence, and 8,000,000 per calendar year.Under a property catastrophe excess of loss agreement with subscribing reinsurers,accumulated excess property losses and property losses caused by a single loss event, includingthe comprehensive portion of auto losses, are covered for the lines of business cited under theexcess per risk agreement. An outline of this coverage by layer is shown below, subject to theCompany’s 10,000,000 retention with a 20,000,000 annual aggregate deductible. The limit forall loss events commencing during the agreement period is also shown by layer.Layer1st2nd2 (3 Event)ndrd2nd (5th Event)3rd4th5thLimits95% of 10,000,00 xs 10,000,000 xs 20,000,000 or 95% of 20,000,000 allloss events95% of 10,000,000 xs 20,000,000 or 95% of 20,000,000 all loss events100% of 10,000,000 xs 20,000,000 or 100% of 20,000,000 all loss events100% of 10,000,000 xs 20,000,000 or 100% of 20,000,000 all loss events100% of 35,000,000 xs 30,000,000 or 100% of 70,000,000 all loss events100% of 45,000,000 xs 65,000,000 or 100% of 90,000,000 all loss events100% of 90,000,000 xs 110,000,000 or 100% of 180,000,000 all loss eventsOne automatic reinstatement per layer is allowed under this treaty.The Company retains net for its own account, with respect to each loss event, theremaining 5% of such ultimate net loss under the 1st and 2nd layers. During 2017 the Company’sloss experience prompted the purchase of a third event excess and fifth event excess of losscontract in the 2nd layer as outlined above which also provided for one automatic reinstatement.9
Under a casualty excess of loss reinsurance agreement with Swiss Re, per occurrencereinsurance coverage is provided in two layers, and applies to those policies written andclassified by the Company as auto liability, farmowners liability, homeowners liability, ownerslandlords and tenants liability, comprehensive personal liability, and dwelling owners liability.The Company shall retain the first 500,000 of ultimate net loss as respects any one lossoccurrence, not to exceed 2,500,000 (1st layer 1,000,000 xs 500,000; 2nd layer 1,000,000 xs 1,500,000).Personal umbrella liability policies are reinsured net of the Company's retention of 2.5%of the first 1,000,000 per occurrence under a continuous reinsurance contract with Swiss Re.The reinsurer indemnifies the Company for the remaining 97.5% of the first 1,000,000, and100% of the next 4,000,000 any one loss occurrence.Under a property and casualty aggregate excess of loss agreement, the subscribingreinsurers agree to indemnify the Company in respect to the liability which may accrue to theCompany under all policies in force as of the effective date of the agreement, or issued orrenewed by the Company in respect to all property and casualty business written by theCompany at or after the effective date. The reinsurers shall indemnify the Company for theamount by which the aggregate of the Company’s ultimate net loss during the term of theagreement exceeds 75% of the Company’s net earned premium for the term of this agreementwhich is renewed on a calendar year basis. The reinsurers limit of liability in the aggregate forultimate net loss under the agreement shall not exceed 100% of 17,500,000.AssumedReinsurance assumed business, as shown in Schedule F of the Company's 2017 AnnualStatement, is in a run-off position.10
GeneralAll contracts reviewed contained standard insolvency, arbitration, errors and omissions, andtermination clauses where applicable. All contracts contained the clauses necessary to assurereinsurance credits could be taken.BODY OF REPORTGROWTHThe following comparative data reflects the growth of the Company for the periodcovered by this examination:2013BondsAdmitted assetsLoss reservesUnearnedpremiumsTotal liabilitiesUnassigned funds(surplus)Premiums earnedLosses incurredUnderwritinggain (loss)Net investmentgainNet income2014201520162017 299,916,008 268,985,480 333,319,471 383,776,551 413,204,753512,378,598 536,174,950 590,963,362 653,498,620 1,107,82226,380,26612,757,01721,967,692FINANCIAL STATEMENTSThe following financial statements are based on the statutory financial statements filed bythe Company with the State of Nebraska Department of Insurance and present the financialcondition of the Company for the period ending December 31, 2017. The accompanyingcomments on financial statements reflect any examination adjustments to the amounts reported11
in the annual statements and should be considered an integral part of the financial statements. Areconciliation of the capital and surplus account for the period under review is also included.FINANCIAL STATEMENTDecember 31, 2017AssetsAssetsAssets NotAdmittedNetAdmittedAssetsBonds 413,204,753Common stocks112,152,261Real estate occupied by the company19,363,380Real estate held for the production of income7,835,768Cash, cash equivalents,and short-term investments30,718,129Receivable for securities5,000 , cash and invested assetsInvestment income due and accruedUncollected premiums and agents'balances in course of collectionAmounts recoverable from reinsurersFunds held by reinsured companiesFederal income tax recoverableNet deferred tax assetGuaranty funds on depositEDP equipmentFurniture and equipmentCorporate owned life insuranceCompany owned automobilesPrepaid pension assetPrepaid expensesBalance receivable reinsuranceassumedOther assets 583,279,2914,266,458 583,279,2914,266,45854197,685170,0005427,685Totals 686,398,969 6,078,209 1192,3291230,718,1295,000 ,329
Liabilities, Surplus, and Other FundsLossesReinsurance payable on paid lossesLoss adjustment expensesCommissions payable, contingent commissions and other similar chargesOther expensesTaxes, licenses and feesUnearned premiumsAdvance premiumCeded reinsurance premiums payableFunds held by the company under reinsurance treatiesAmounts withheld or retained by companyProvision for reinsuranceLiability for pension benefitsLiability for postretirement benefitsOther liabilities 3523,532,0796,244,32254,659Total liabilities 326,889,286Special surplus funds:Guaranty fundUnassigned funds (surplus) Surplus as regards policyholders 353,431,474Total 680,320,7601,000,000352,431,47413
STATEMENT OF INCOME - 2017Underwriting IncomePremiums earned 336,526,658Deductions:Losses incurredLoss expenses incurredOther underwriting expenses incurred 207,659,19625,114,39889,628,623Total underwriting deductions 322,402,217Net underwriting gain 14,124,441Investment IncomeNet investment income earnedNet realized capital gain 11,498,7571,258,260Net investment gain 12,757,017Other IncomeFinance and service charges not included in premiumsMiscellaneous income 360,135(4,060)Total other income 356,075Net income before federal income taxesFederal income taxes incurred 27,237,5335,269,841Net income 21,967,69214
CAPITAL AND SURPLUS ACCOUNT2013Surplus, beginning201420162017 269,722,510 293,190,770 282,359,360 304,298,006 333,630,444Net income 20,038,698 (7,705,093) Change in netunrealized capitalgains (losses)6,879,2493,844,959Change in netdeferred income tax274,1195,312,997Change innon-admittedassets(1,396,688) (1,973,682)Change in provisionfor reinsuranceChange in liabilityfor pension benefitsnet of deferred taxes(2,591,082) (9,231,737)Change in liabilityfor postretirementbenefits net ofdeferred taxes263,964(1,078,854)Net change forthe year23,468,260 (10,831,410)Surplus, ending201527,306,252 26,380,266 04,835)40,594(996,705)21,938,646(1,988,557) 030 293,190,770 282,359,360 304,298,006 333,630,444 353,431,474EXAMINATION CHANGES IN FINANCIAL STATEMENTSUnassigned funds (surplus) in the amount of 352,431,474 as reported in the Company's2017 Annual Statement, has been accepted for examination purposes. Examination findings, inthe aggregate, were considered to have no material effect on the Company’s financial condition.COMPLIANCE WITH PREVIOUS RECOMMENDATIONSThe recommendations appearing in the previous report of examination are reflectedbelow together with the remedial actions taken by the Company to comply therewith:Custodial Agreement –It is recommended that the Company amend its current custodialagreements with U.S. Bank to comply with the required provisions of Title 210 (Rules ofthe Nebraska Department of Insurance), Chapter 81.15
Action: The Company has complied with this recommendation.COMMENTARY ON CURRENT EXAMINATION FINDINGSThere are no comments or recommendations that have been made as a result of thisexamination.SUMMARY OF COMMENTS AND RECOMMENDATIONSThere are no comments or recommendations that have been made as a result of thisexamination.16
ACKNOWLEDGMENTThe courteous cooperation extended by the Officers and employees of the Companyduring this examination is hereby acknowledged.In addition to the undersigned, Kim Hurst, CFE, Derek Petersen, CFE, John Wiatr, andOlivia Satterfield, Financial Examiners; Gary Evans, CFE, CISA, AES, Information SystemsSpecialist; and Gordan Hay, FCAS, MAAA, CPCU, Actuarial Examiner; all with the NebraskaDepartment of Insurance, participated in this examination and assisted in the preparation of thisreport.Respectfully submitted,Tadd K. Wegner, CFESupervisory ExaminerDepartment of InsuranceState of Nebraska17
FARMERS MUTUAL INSURANCE COMPANY OF NEBRASKA dated as of December 31, 2017 verified under oath by the examiner-in-charge on March 21, 2019 and received by the company on March 22, 2019, has been adopted . Lincoln, Nebraska on the third Wednesday in February at 10:00 a.m." Article II, paragraph 4 states, "the members present at a duly .
