Related Party Transactions and Outside Related Director Information

EMC Insurance Group Inc. (EMCI)

4/12/2006 Proxy Information

Mr. Kochheiser was President and Chief Operating Officer of EMC Insurance Group Inc. and of Employers Mutual from 1982 until his retirement in 1991.

The property and casualty insurance operations of the Company are integrated with those of Employers Mutual through participation in a pooling agreement. As a result of this operational relationship, there are numerous transactions between the Company and the Employers Mutual pool participants that occur on an ongoing basis in the ordinary course of business. Under the terms of the pooling agreement, each company cedes to Employers Mutual all of its insurance business, with the exception of any voluntary reinsurance business assumed from nonaffiliated insurance companies, and assumes from Employers Mutual an amount equal to its participation in the pool. All premiums, losses, settlement expenses and other underwriting and administrative expenses, excluding the voluntary reinsurance business assumed by Employers Mutual from nonaffiliated insurance companies, are prorated among the parties on the basis of participation in the pool. Employers Mutual negotiates reinsurance agreements that provide protection to the pool and each of its participants, including protection against losses arising from catastrophic events.

The net proceeds from the follow-on stock offering completed in October, 2004, were distributed among three of the Company's property and casualty insurance subsidiaries in December, 2004 to support a 6.5 percentage point increase in the Company's aggregate participation in the pooling agreement effective January 1, 2005. As a result of this change in the Company's aggregate participation in the pooling agreement increased from 23.5 percent to 30 percent and Employers Mutual's participation decreased from 65.5 percent to 59.0 percent. In connection with this change in the pooling agreement, the Company's liabilities increased $115,042,355 and invested assets increased $108,798,583. The Company reimbursed Employers Mutual $6,518,735 for expenses that were incurred to generate the additional business assumed by the Company, but this expense was offset by an increase in deferred policy acquisition costs. The Company also received $274,963 in interest income from Employers Mutual as the actual cash transfer did not occur until February 15, 2005.

Premiums assumed by the reinsurance subsidiary from Employers Mutual amounted to $92,588,093 in 2005. It is customary in the reinsurance business for the assuming company to compensate the ceding company for the acquisition expenses incurred in the generation of the business. Commissions paid by the reinsurance subsidiary to Employers Mutual amounted to $21,508,620 in 2005.

The Company's reinsurance subsidiary pays an annual override commission to Employers Mutual in connection with the $1,500,000 cap on losses assumed per event. The override commission rate is charged at 4.50 percent of written premiums. Total override commission paid to Employers Mutual in 2005 amounted to $4,166,464. Employers Mutual retained losses and settlement expenses under this agreement totaling $28,682,084 in 2005. The reinsurance subsidiary also pays for 100 percent of the outside reinsurance protection Employers Mutual purchases to protect itself from catastrophic losses on the assumed reinsurance business it retains in excess of the $1,500,000 cap per event, excluding reinstatement premiums. This cost is recorded as a reduction to the premiums received by the reinsurance subsidiary and amounted to $3,695,833 in 2005.

Employers Mutual provides various services to all of its subsidiaries and affiliates, including the Company and its subsidiaries. Such services include data processing, claims, financial, legal, actuarial, auditing, marketing and underwriting. Employers Mutual allocates a portion of the cost of these services to the subsidiaries that do not participate in the pooling agreement based upon a number of criteria, including usage and number of transactions. The remaining costs are charged to the pooling agreement and each pool participant shares in the total cost in accordance with its pool participation percentage. Costs allocated to the Company by Employers Mutual for services provided to the holding company and its subsidiaries that do not participate in the pooling agreement amounted to $2,055,394 in 2005. Costs allocated to the Company through the operation of the pooling agreement amounted to $82,782,802 in 2005.

Investment expenses are based on actual expenses incurred by the Company plus an allocation of other investment expenses incurred by Employers Mutual, which is based on a weighted average of total invested assets and number of investment transactions. Investment expenses allocated to the Company by Employers Mutual amounted to $1,011,370 in 2005. In addition, a subsidiary of the Company leased office space from an affiliate of Employers Mutual, which is used as a branch office. These lease payments amounted to $375,000 in 2005.