UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2017~~2019



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________to __________________

Commission File Number: 0-10956

~~EMC INSURANCE GROUP INC.~~

(Exact name of registrant as specified in its charter)



Iowa		42-6234555
(State or other jurisdiction of incorporation or organization)		(I.R.S. ~~Employer Identification No.~~employer identification no.)



717 Mulberry Street, Des Moines, Iowa		50309
(Address of principal executive offices)		(Zip ~~Code)~~code)

(515) 345-2902
(Registrant's telephone number, including area code)



~~(515) 345-2902~~Securities registered pursuant to Section 12(b) of the Act:

Common Stock, Par Value $1.00	EMCI	The Nasdaq Global Select Market
(~~Registrant’s telephone number, including area code)~~Title of class)	(Trading symbol)	(Name of each exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

ý Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

ý Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



o	Large accelerated filer	ý	Accelerated filer	o	Non-accelerated filer
o	Smaller reporting company	o	Emerging growth company		(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes ý No

~~Indicate the number~~As of July 31, 2019, there were 21,674,013 shares ~~outstanding of each of the issuer’s classes~~ of common stock, ~~as of the latest practicable date.~~



~~Class~~		~~Outstanding at October 31, 2017~~
~~Common stock, $1.00 par value~~		~~21,399,578~~

$1.00 par value, issued and outstanding.

TABLE OF CONTENTS



		PAGE
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5352
Item 4.	Controls and Procedures	5352

PART II	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5453
Item 6.	Exhibits	5554

Signatures		5655



PART I.	FINANCIAL INFORMATION



ITEM 1.	FINANCIAL STATEMENTS

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	September 30, 2017		December 31, 2016		June 30, 2019		December 31, 2018
($ in thousands, except share and per share amounts)	(Unaudited)				(Unaudited)
ASSETS
Investments:
Fixed maturity securities available-for-sale, at fair value (amortized cost $1,233,772 and $1,189,525)	$	1,258,340	$	1,199,699
Equity securities available-for-sale, at fair value (cost $150,428 and $147,479)	231,719		213,839
Fixed maturity securities available-for-sale, at fair value (amortized cost $1,280,928 and $1,273,132)					$	1,340,066	$	1,282,909
Equity investments, at fair value (cost $179,359 and $160,371)					249,507		215,363
Equity investments, at alternative measurement of cost less impairments					1,200		1,200
Other long-term investments	14,471		12,506		17,352		19,316
Short-term investments	25,255		39,670		46,857		28,204
Total investments	1,529,785		1,465,714		1,654,982		1,546,992

Cash	402		307		276		337
Reinsurance receivables due from affiliate	26,079		21,326		35,470		37,361
Prepaid reinsurance premiums due from affiliate	15,759		9,309		10,718		8,789
Deferred policy acquisition costs (affiliated $43,836 and $40,660)	44,110		40,939
Deferred policy acquisition costs (affiliated $47,019 and $44,440)					47,019		44,760
Amounts due from affiliate to settle inter-company transaction balances	4,210		—		—		5,154
Prepaid pension and postretirement benefits due from affiliate	11,407		12,314		17,090		17,691
Accrued investment income	11,963		11,050		10,394		10,468
Amounts receivable under reverse repurchase agreements	16,500		20,000
Accounts receivable	813		2,076		63		1,658
Income taxes recoverable	3,850		—		8,077		6,697
Goodwill	942		942		942		942
Other assets (affiliated $4,818 and $4,632)	5,018		4,836
Other assets (affiliated $2,989 and $4,510)					3,120		4,629
Total assets	$	1,670,838	$	1,588,813	$	1,788,151	$	1,685,478

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	September 30, 2017		December 31, 2016		June 30, 2019		December 31, 2018
($ in thousands, except share and per share amounts)	(Unaudited)				(Unaudited)
LIABILITIES
Losses and settlement expenses (affiliated $720,901 and $685,533)	$	726,461	$	690,532
Unearned premiums (affiliated $281,055 and $243,682)	282,443		244,885
Losses and settlement expenses (affiliated $792,205 and $771,872)					$	798,706	$	777,190
Unearned premiums (affiliated $272,373 and $267,064)					272,373		268,511
Other policyholders' funds (all affiliated)	9,847		13,068		8,150		8,807
Surplus notes payable to affiliate	25,000		25,000		25,000		25,000
Amounts due affiliate to settle inter-company transaction balances	—		11,222		5,296		—
Pension benefits payable to affiliate	3,807		4,097		3,788		4,070
Income taxes payable	—		2,359
Deferred income taxes	21,403		11,321		18,415		4,908
Other liabilities (affiliated $24,155 and $27,871)	26,815		32,987
Other liabilities (affiliated $24,623 and $31,121)					25,861		31,210
Total liabilities	1,095,776		1,035,471		1,157,589		1,119,696

STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 30,000,000 shares; issued and outstanding, 21,379,763 shares in 2017 and 21,222,535 shares in 2016	21,380		21,223
Common stock, $1 par value, authorized 30,000,000 shares; issued and outstanding, 21,672,325 shares in 2019 and 21,615,105 shares in 2018					21,672		21,615
Additional paid-in capital	122,640		119,054		129,961		128,451
Accumulated other comprehensive income	64,326		46,081		39,976		1,620
Retained earnings	366,716		366,984		438,953		414,096
Total stockholders' equity	575,062		553,342		630,562		565,782
Total liabilities and stockholders' equity	$	1,670,838	$	1,588,813	$	1,788,151	$	1,685,478

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three months ended September 30,						Three months ended June 30,
($ in thousands, except share and per share amounts)	2017			2016			2019			2018
REVENUES
Premiums earned (affiliated $154,451 and $149,988)	$	155,190		$	152,181
Premiums earned (affiliated $168,101and $156,714)							$	168,133		$	157,946
Net investment income	11,501			11,474			12,951			11,778
Net realized investment gains (losses), excluding impairment losses on securities available-for-sale	(239		)	(917		)
Total "other-than-temporary" impairment losses on securities available-for-sale	(355		)	(275		)
Portion of "other-than-temporary" impairment losses on fixed maturity securities available-for-sale reclassified from other comprehensive income (before taxes)	—			—
Net impairment losses on securities available-for-sale	(355		)	(275		)
Net realized investment gains (losses)	(594		)	(1,192		)
Other income (loss) (affiliated $(30) and $39)	(179		)	(85		)
Net realized investment gains/losses and change in unrealized gains on equity investments							4,258			(5,860		)
Other income (affiliated $1,548 and $2,582)							1,557			2,773
Total revenues	165,918			162,378			186,899			166,637

LOSSES AND EXPENSES
Losses and settlement expenses (affiliated $116,908 and $106,795)	119,576			108,173
Losses and settlement expenses (affiliated $121,764 and $119,119)							122,517			119,091
Dividends to policyholders (all affiliated)	46			3,944			3,384			2,386
Amortization of deferred policy acquisition costs (affiliated $26,177 and $26,256)	26,430			26,845
Other underwriting expenses (affiliated $19,520 and $17,600)	19,521			17,606
Amortization of deferred policy acquisition costs (affiliated $32,681 and $29,122)							32,684			29,429
Other underwriting expenses (affiliated $23,681 and $22,458)							23,715			22,451
Interest expense (all affiliated)	84			84			170			171
Other expenses (affiliated $442 and $481)	701			679
Other expenses (affiliated $490 and $486)							2,788			831
Total losses and expenses	166,358			157,331			185,258			174,359
Income (loss) before income tax expense (benefit)	(440		)	5,047			1,641			(7,722		)

INCOME TAX EXPENSE (BENEFIT)
Current	(2,197		)	1,448			1,540			(3,311		)
Deferred	1,011			(530		)	(1,184		)	584
Total income tax expense (benefit)	(1,186		)	918			356			(2,727		)
Net income	$	746		$	4,129
Net income (loss)							$	1,285		$	(4,995	)

Net income per common share - basic and diluted	$	0.03		$	0.20
Net income (loss) per common share - basic and diluted							$	0.06		$	(0.24	)

Dividend per common share	$	0.21		$	0.19		$	0.23		$	0.22

Average number of common shares outstanding - basic and diluted	21,356,588			21,060,665			21,670,297			21,529,727

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Nine months ended September 30,						Six months ended June 30,
($ in thousands, except share and per share amounts)	2017			2016			2019		2018
REVENUES
Premiums earned (affiliated $446,522, and $436,804)	$	449,514		$	441,364
Premiums earned (affiliated $334,848 and $310,960)							$	335,435	$	313,732
Net investment income	33,679			35,883			25,714		23,149
Net realized investment gains (losses), excluding impairment losses on securities available-for-sale	3,254			333
Total "other-than-temporary" impairment losses on securities available-for-sale	(1,088		)	(976		)
Portion of "other-than-temporary" impairment losses on fixed maturity securities available-for-sale reclassified from other comprehensive income (before taxes)	—			—
Net impairment losses on securities available-for-sale	(1,088		)	(976		)
Net realized investment gains (losses)	2,166			(643		)
Other income (loss) (affiliated $(350) and $307)	(834		)	(19		)
Net realized investment gains/losses and change in unrealized gains on equity investments							26,901		(11,253		)
Other income (affiliated $3,004 and $4,163)							3,092		4,388
Total revenues	484,525			476,585			391,142		330,016

LOSSES AND EXPENSES
Losses and settlement expenses (affiliated $318,902 and $295,061)	323,089			296,102
Losses and settlement expenses (affiliated $224,455 and $229,689)							227,486		229,719
Dividends to policyholders (all affiliated)	5,184			11,292			6,155		4,506
Amortization of deferred policy acquisition costs (affiliated $79,957 and $79,584)	80,774			80,740
Other underwriting expenses (affiliated $57,803 and $52,120)	57,732			52,134
Amortization of deferred policy acquisition costs (affiliated $62,573 and $56,039)							62,654		56,721
Other underwriting expenses (affiliated $46,396 and $45,378)							46,307		45,306
Interest expense (all affiliated)	253			253			341		313
Other expenses (affiliated $1,423 and $1,414)	2,264			2,053
Other expenses (affiliated $1,135 and $984)							4,273		1,701
Total losses and expenses	469,296			442,574			347,216		338,266
Income (loss) before income tax expense (benefit)	15,229			34,011			43,926		(8,250		)

INCOME TAX EXPENSE (BENEFIT)
Current	1,918			11,440			5,799		(2,105		)
Deferred	257			(2,340		)	3,311		(1,074		)
Total income tax expense (benefit)	2,175			9,100			9,110		(3,179		)
Net income	$	13,054		$	24,911
Net income (loss)							$	34,816	$	(5,071	)

Net income per common share - basic and diluted	$	0.61		$	1.19
Net income (loss) per common share - basic and diluted							$	1.61	$	(0.24	)

Dividend per common share	$	0.63		$	0.57		$	0.46	$	0.44

Average number of common shares outstanding - basic and diluted	21,295,882			20,964,236			21,654,443		21,515,812

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three months ended September 30,						Three months ended June 30,
($ in thousands)	2017			2016			2019			2018
Net income	$	746		$	4,129
Net income (loss)							$	1,285		$	(4,995	)

OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gains (losses) on investment securities, net of deferred income tax expense (benefit) of $2,951 and $(1,226)	5,481			(2,275		)
Reclassification adjustment for net realized investment gains included in net income, net of income tax expense of $(141) and $(252)	(264		)	(466		)
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income, net of deferred income tax expense of $(146) and $(62):
Unrealized holding gains (losses) on investment securities not reflected in net income, net of deferred income tax expense (benefit) of $4,851 and $(2,014)							18,252			(7,577		)
Reclassification adjustment for net realized investment (gains) losses included in net income, net of income tax (expense) benefit of $(10) and $1,153							(40		)	4,337
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income, net of deferred income tax expense of $(86) and $(143):
Net actuarial loss	240			722			185			85
Prior service credit	(511		)	(839		)	(511		)	(622		)
Total reclassification adjustment associated with affiliate's pension and postretirement benefit plans	(271		)	(117		)	(326		)	(537		)

Other comprehensive income (loss)	4,946			(2,858		)	17,886			(3,777		)

Total comprehensive income	$	5,692		$	1,271
Total comprehensive income (loss)							$	19,171		$	(8,772	)


	Nine months ended September 30,						Six months ended June 30,
($ in thousands)	2017			2016			2019			2018
Net income	$	13,054		$	24,911
Net income (loss)							$	34,816		$	(5,071	)

OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gains (losses) on investment securities, net of deferred income tax expense of $12,632 and $11,145	23,460			20,698
Reclassification adjustment for net realized investment gains included in net income, net of income tax expense of $(2,368) and $(1,613)	(4,399		)	(2,995		)
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income, net of deferred income tax expense of $(439) and $(327):
Unrealized holding gains (losses) on investment securities not reflected in net income, net of deferred income tax expense (benefit) of $10,319 and $(7,056)							38,820			(26,546		)
Reclassification adjustment for net realized investment (gains) losses included in net income, net of income tax (expense) benefit of $47 and $1,204							175			4,530
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income, net of deferred income tax expense of $(170) and $(287):
Net actuarial loss	719			1,271			382			166
Prior service credit	(1,535		)	(1,878		)	(1,021		)	(1,244		)
Total reclassification adjustment associated with affiliate's pension and postretirement benefit plans	(816		)	(607		)	(639		)	(1,078		)

Other comprehensive income (loss)	18,245			17,096			38,356			(23,094		)

Total comprehensive income	$	31,299		$	42,007
Total comprehensive income (loss)							$	73,172		$	(28,165	)

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

($ in thousands, except per share amounts) Common
stock Additional
paid-in capital Accumulated
other
comprehensive
income Retained
earnings Total
stockholders'
equity
Balance at December 31, 2016 $ 21,223
$ 119,054
$ 46,081
$ 366,984
$ 553,342
Issuance of common stock through stock plans 225
5,328

5,553
Repurchase of common stock (68 ) (1,790 )

(1,858 )
Increase resulting from stock-based compensation expense
48

48
Other comprehensive income

18,245

18,245
Net income

13,054
13,054
Dividends paid to public stockholders ($0.63 per share)

(5,906 ) (5,906 )
Dividends paid to affiliate ($0.63 per share)

(7,416 ) (7,416 )
Balance at September 30, 2017 $ 21,380
$ 122,640
$ 64,326
$ 366,716
$ 575,062



($ in thousands, except per share amounts)	Common stock		Additional paid-in capital			Accumulated other comprehensive income (loss)		Retained earnings			Total stockholders' equity
Balance at March 31, 2019	$	21,668	$	129,928		$	22,090	$	442,648		$	616,334
Issuance of common stock through stock plans	4		36								40
Increase resulting from stock-based compensation expense			(3		)						(3		)
Other comprehensive income (loss)						17,886					17,886
Net income (loss)								1,285			1,285
Dividends paid to public stockholders ($0.23 per share)								(2,273		)	(2,273		)
Dividends paid to affiliate ($0.23 per share)								(2,707		)	(2,707		)
Balance at June 30, 2019	$	21,672	$	129,961		$	39,976	$	438,953		$	630,562

($ in thousands, except per share amounts) Common
stock Additional
paid-in capital Accumulated
other
comprehensive
income Retained
earnings Total
stockholders'
equity
Balance at December 31, 2015 $ 20,781
$ 108,747
$ 58,433
$ 336,977
$ 524,938
Issuance of common stock through stock plans 321
7,294

7,615
Repurchase of common stock (17 ) (366 )

(383 )
Increase resulting from stock-based compensation expense
49

49
Other comprehensive income

17,096

17,096
Net income

24,911
24,911
Dividends paid to public stockholders ($0.57 per share)

(5,107 ) (5,107 )
Dividends paid to affiliate ($0.57 per share)

(6,710 ) (6,710 )
Balance at September 30, 2016 $ 21,085
$ 115,724
$ 75,529
$ 350,071
$ 562,409



($ in thousands, except per share amounts)	Common stock			Additional paid-in capital			Accumulated other comprehensive income (loss)		Retained earnings			Total stockholders' equity
Balance at December 31, 2018	$	21,615		$	128,451		$	1,620	$	414,096		$	565,782
Issuance of common stock through stock plans	77			2,114								2,191
Repurchase of common stock	(20		)	(623		)						(643		)
Increase resulting from stock-based compensation expense				19								19
Other comprehensive income (loss)							38,356					38,356
Net income (loss)									34,816			34,816
Dividends paid to public stockholders ($0.46 per share)									(4,544		)	(4,544		)
Dividends paid to affiliate ($0.46 per share)									(5,415		)	(5,415		)
Balance at June 30, 2019	$	21,672		$	129,961		$	39,976	$	438,953		$	630,562

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED

(Unaudited)



($ in thousands, except per share amounts)	Common stock			Additional paid-in capital			Accumulated other comprehensive income (loss)			Retained earnings			Total stockholders' equity
Balance at March 31, 2018	$	21,519		$	126,106		$	(2,167	)	$	435,891		$	581,349
Issuance of common stock through stock plans	33			808									841
Repurchase of common stock	(26		)	(627		)							(653		)
Increase resulting from stock-based compensation expense				21									21
Other comprehensive income (loss)							(3,777		)				(3,777		)
Net income (loss)										(4,995		)	(4,995		)
Dividends paid to public stockholders ($0.22 per share)										(2,129		)	(2,129		)
Dividends paid to affiliate ($0.22 per share)										(2,590		)	(2,590		)
Balance at June 30, 2018	$	21,526		$	126,308		$	(5,944	)	$	426,177		$	568,067



($ in thousands, except per share amounts)	Common stock			Additional paid-in capital			Accumulated other comprehensive income (loss)			Retained earnings			Total stockholders' equity
Balance at December 31, 2017	$	21,455		$	124,556		$	83,384		$	374,451		$	603,846
Cumulative adjustment for adoption of financial instruments recognition and measurement changes							(66,234		)	66,234			—
Issuance of common stock through stock plans	127			3,112									3,239
Repurchase of common stock	(56		)	(1,399		)							(1,455		)
Increase resulting from stock-based compensation expense				39									39
Other comprehensive income (loss)							(23,094		)				(23,094		)
Net income (loss)										(5,071		)	(5,071		)
Dividends paid to public stockholders ($0.44 per share)										(4,257		)	(4,257		)
Dividends paid to affiliate ($0.44 per share)										(5,180		)	(5,180		)
Balance at June 30, 2018	$	21,526		$	126,308		$	(5,944	)	$	426,177		$	568,067

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine months ended September 30,						Six months ended June 30,
($ in thousands)	2017			2016			2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	13,054		$	24,911
Adjustments to reconcile net income to net cash provided by operating activities:
Losses and settlement expenses (affiliated $35,368 and $24,292)	35,929			21,791
Unearned premiums (affiliated $37,373 and $32,902)	37,558			33,465
Net income (loss)							$	34,816		$	(5,071	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Losses and settlement expenses (affiliated $20,333 and $26,439)							21,516			24,257
Unearned premiums (affiliated $5,309 and $9,057)							3,862			8,703
Other policyholders' funds due to affiliate	(3,221		)	3,088			(657		)	(1,986		)
Amounts due to/from affiliate to settle inter-company transaction balances	(15,432		)	(2,383		)	10,450			221
Net pension and postretirement benefits due from affiliate	(638		)	(317		)	(490		)	(3,107		)
Reinsurance receivables due from affiliate	(4,753		)	1,646			1,891			(279		)
Prepaid reinsurance premiums due from affiliate	(6,450		)	(5,025		)	(1,929		)	(1,587		)
Commissions payable (affiliated $(2,309) and $(3,682))	(2,318		)	(3,743		)
Deferred policy acquisition costs (affiliated $(3,176) and $(3,785))	(3,171		)	(3,900		)
Commissions payable (affiliated $(5,983) and $(5,135))							(5,948		)	(5,066		)
Deferred policy acquisition costs (affiliated $(2,579) and $(2,786))							(2,259		)	(2,747		)
Accrued investment income	(913		)	(1,354		)	74			862
Current income tax	(6,209		)	1,891			(1,380		)	(5,660		)
Deferred income tax	257			(2,340		)	3,311			(1,074		)
Net realized investment gains	(2,166		)	643
Other, net (affiliated $(1,545) and $(451))	8,596			6,769
Total adjustments to reconcile net income to net cash provided by operating activities	37,069			50,231
Net realized investment gains/losses and change in unrealized gains on equity investments							(26,901		)	11,253
Other, net (affiliated $1,025 and $125)							6,008			4,238
Total adjustments to reconcile net income (loss) to net cash provided by operating activities							7,548			28,028
Net cash provided by operating activities	50,123			75,142			42,364			22,957
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturity securities available-for-sale	(174,579		)	(338,659		)	(68,808		)	(176,606		)
Disposals of fixed maturity securities available-for-sale	121,463			282,787			58,503			166,757
Purchases of equity securities available-for-sale	(43,868		)	(45,632		)
Disposals of equity securities available-for-sale	49,595			40,525
Purchases of equity investments							(41,815		)	(37,256		)
Disposals of equity investments							36,576			34,594
Purchases of other long-term investments	(12,231		)	(5,920		)	(469		)	(5,407		)
Disposals of other long-term investments	1,304			480			652			2,360
Net (purchases) disposals of short-term investments	14,415			(4,012		)	(18,653		)	166
Net receipts under reverse repurchase agreements	3,500			—
Net cash used in investing activities	(40,401		)	(70,431		)	(34,014		)	(15,392		)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock through affiliate’s stock plans	5,553			7,615			2,191			3,239
Repurchase of common stock	(1,858		)	(383		)	(643		)	(1,455		)
Dividends paid to stockholders (affiliated $(7,416) and $(6,710))	(13,322		)	(11,817		)
Dividends paid to stockholders (affiliated $(5,415) and $(5,180))							(9,959		)	(9,437		)
Net cash used in financing activities	(9,627		)	(4,585		)	(8,411		)	(7,653		)
NET INCREASE IN CASH	95			126
NET DECREASE IN CASH							(61		)	(88		)
Cash at the beginning of the year	307			224			337			347
Cash at the end of the quarter	$	402		$	350		$	276		$	259

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


1.	BASIS OF PRESENTATION

EMC Insurance Group Inc., a majority owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is an insurance holding company with operations in property and casualty insurance and reinsurance. The term "Company" is used interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC Insurance Group Inc. and its subsidiaries. The Company writes property and casualty insurance in both commercial and personal lines of insurance, with a focus on medium-sized commercial ~~accounts.~~accounts; however, on October 29, 2018, the Company, Employers Mutual and their subsidiary insurance companies (collectively the "EMC Insurance Companies") announced that they had made a strategic decision to exit personal lines business so that more time and resources can be dedicated to the commercial and reinsurance business. As a result, personal lines premiums written declined significantly during 2019. Personal lines premiums earned also declined, though the decline was much smaller since the premiums are earned over the policies' annual terms. The ~~term “Company”~~Company's reinsurance business is ~~used interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC Insurance Group Inc. and its subsidiaries.~~primarily written through a quota share reinsurance agreement with Employers Mutual. A small portion of the assumed reinsurance business was previously written on a direct basis, outside the quota share reinsurance agreement.

The accompanying unaudited consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The Company has evaluated all subsequent events through the date the financial statements were issued. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the interim financial statements have been included. The results of operations for the interim periods reported are not necessarily indicative of results to be expected for the year. The consolidated balance sheet at December 31, ~~2016~~2018 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.

In reading these financial statements, reference should be made to the Company’s ~~2016~~2018 Form 10-K ~~or the 2016 Annual Report to Stockholders~~ for more detailed footnote information.

Accounting Pronouncements Adopted

In March 2017, the Financial Accounting Standards Board (FASB) updated guidance related to Receivables-Nonrefundable Fees and Other Costs Subtopic 310-20 of the Accounting Standards Codification^TM (Codification or ASC). The objective of this update is to shorten the amortization period of premiums on certain callable fixed maturity securities to the earliest call date. The Company adopted this guidance on January 1, 2019, and it did not have a material impact on the consolidated financial statements.

In February 2016, the FASB issued updated guidance in Leases Topic 842 of the ASC, which supersedes the guidance in Leases Topic 840 of the ASC. The objective of this update is to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet, and disclosure of key information about leasing arrangements. The Company adopted this guidance during the first quarter of 2019, though management concluded that lease costs allocated to the Company through the pooling and quota share agreements cannot be attributed to a specified asset, and therefore do not meet the definition of a leased asset contained in the guidance. As a result, adoption of this guidance had no impact on the consolidated financial statements.


2.	TRANSACTIONS WITH AFFILIATES

An inter-company reinsurance program is in place between the Company's insurance subsidiaries in the property and casualty insurance segment and Employers Mutual. This reinsurance program is intended to reduce the volatility of the Company's quarterly results caused by excessive catastrophe and storm losses, and provide protection from both the frequency and severity of such losses. The reinsurance program consists of two semi-annual aggregate catastrophe excess of loss treaties. The first treaty ~~was~~is effective each year from January 1 ~~2017~~ through June 30, ~~2017,~~ and ~~had~~has a retention of ~~$20.0~~$22.0 million and a limit of $24.0 million. The total cost of this treaty ~~was~~is approximately $6.0 million. The second treaty is effective each year from July 1 ~~2017~~ through December 31, ~~2017,~~ and has a retention of $15.0 million and a limit of $12.0 million. The total cost of this treaty is approximately $1.4 million. The terms of these treaties were the same in 2018. Losses and settlement expenses ceded to Employers Mutual under the ~~2017~~inter-company reinsurance program totaled ~~$3.0~~$1.0 million and ~~$19.0~~$1.5 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, respectively, compared to ~~$3.5 million~~$317,000 and $5.1 million ceded during the three and nine months ended September 30, 2016, respectively. In both years the ceded amounts are applicable to the treaties that covered the first half of each year. The terms of these treaties were$784,000 for the same periods in ~~2016 with the exception of the costs, which were $6.3 million during the first half of 2016 and $1.5 million during the second half of 2016.~~2018. All catastrophe and storm losses assumed by the property and casualty insurance subsidiaries (net of applicable reinsurance recoveries from external reinsurance protections purchased by the pool participants) are subject to the terms of these treaties, and there is no co-participation provision.

An inter-company reinsurance program is also in place between the Company's reinsurance subsidiary and Employers Mutual. The reinsurance program consists of two treaties. The first is a per occurrence catastrophe excess of loss treaty with a retention of $10.0 million, a limit of $10.0 million, 20 percent co-participation, and no reinstatement. The total cost of this treaty is approximately ~~$1.7~~$1.6 million. The second is an annual aggregate catastrophe excess of loss treaty with a retention of $20.0 million, a limit of $100.0 million, and 20 percent co-participation. The total cost of this treaty is approximately ~~$3.2~~$3.6 million. Any losses recovered under the per occurrence treaty inure to the benefit of the aggregate treaty, and only catastrophic events with total losses greater than $500,000 are subject to the terms of the aggregate treaty. ~~Recoveries totaled $9.0 million during the three and nine months ended September 30, 2017, all under the annual aggregate treaty.~~ The terms of ~~these treaties~~the program were the same in ~~2016 with the exception of the costs, which were $2.0 million for the per occurrence treaty~~2018. Losses and ~~$3.2 million for the annual aggregate treaty. No recoveries were made under these treaties during the same periods of 2016.~~

The reinsurance subsidiary purchases additional reinsurance protection in peak exposure territories from external parties in which coverage is triggered when losses experienced by the insurance industry from a catastrophic event exceed a specified threshold. Any reinsurance recoveries received from external parties reduces the amount of lossessettlement expenses ceded to Employers Mutual under the inter-company reinsurance ~~program. No recoveries have been made from external parties~~program totaled $(788,000) and $945,000 for the three and six months ended June 30, 2019, respectively, compared to $291,000 and $(462,000) for the same periods in ~~2017~~2018. For all periods, these amounts represent development on prior accident years' losses, net of any applicable outside reinsurance recoveries.

On May 8, 2019, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Employers Mutual and Oak Merger Sub, Inc., an Iowa corporation and wholly owned subsidiary of Employers Mutual ("Merger Sub"). Pursuant to the Merger Agreement, Merger Sub will merge with and into the Company, the separate corporate existence of Merger Sub will cease and the Company will continue its corporate existence under Iowa law as the surviving corporation (the "Merger"). As a result of the Merger, Employers Mutual will own all outstanding shares of the Company. At the effective time of the Merger, each issued and outstanding share of common stock of the Company (other than (i) shares in respect of which appraisal rights are exercised and perfected and (ii) shares held by Employers Mutual, Merger Sub, the Company or ~~2016.~~any wholly-owned subsidiary of the Company) will be canceled and converted into the right to receive $36.00 per share in cash, without interest. The Merger Agreement is subject to shareholder approval. A special meeting of the shareholders of the Company, at which the Merger Agreement will be considered and voted upon, is expected to be held during the third quarter.


3.	REINSURANCE

The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 is presented below. The classification of the assumed and ceded reinsurance amounts between affiliates and nonaffiliates is based on the participants in the underlying reinsurance agreements, and is intended to provide an understanding of the actual source of the reinsurance activities. This presentation differs from the classifications used in the consolidated financial statements, where all amounts flowing through the pooling and quota share agreements and inter-company reinsurance programs with Employers Mutual are reported as “affiliated” balances.


	Three months ended September 30, 2017									Three months ended June 30, 2019
($ in thousands)	Property and casualty insurance			Reinsurance			Total			Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	122,665		$	—		$	122,665		$	106,704		$	—		$	106,704
Assumed from nonaffiliates	1,333			38,955			40,288			1,070			45,823			46,893
Assumed from affiliates	153,900			—			153,900			136,725			—			136,725
Ceded to nonaffiliates	(10,532		)	(1,220		)	(11,752		)	(6,662		)	(6,303		)	(12,965		)
Ceded to affiliates	(123,355		)	(1,212		)	(124,567		)	(109,684		)	(1,312		)	(110,996		)
Net premiums written	$	144,011		$	36,523		$	180,534		$	128,153		$	38,208		$	166,361

Premiums earned
Direct	$	96,547		$	—		$	96,547		$	104,781		$	—		$	104,781
Assumed from nonaffiliates	1,225			38,463			39,688			1,053			45,929			46,982
Assumed from affiliates	128,325			—			128,325			135,219			—			135,219
Ceded to nonaffiliates	(8,388		)	(2,533		)	(10,921		)	(6,995		)	(2,781		)	(9,776		)
Ceded to affiliates	(97,237		)	(1,212		)	(98,449		)	(107,761		)	(1,312		)	(109,073		)
Net premiums earned	$	120,472		$	34,718		$	155,190		$	126,297		$	41,836		$	168,133

Losses and settlement expenses incurred
Direct	$	62,745		$	—		$	62,745		$	62,495		$	—		$	62,495
Assumed from nonaffiliates	961			57,268			58,229			426			31,299			31,725
Assumed from affiliates	81,047			277			81,324			97,860			265			98,125
Ceded to nonaffiliates	(4,435		)	(3,039		)	(7,474		)	(3,690		)	(3,429		)	(7,119		)
Ceded to affiliates	(66,279		)	(8,969		)	(75,248		)	(63,497		)	788			(62,709		)
Net losses and settlement expenses incurred	$	74,039		$	45,537		$	119,576		$	93,594		$	28,923		$	122,517


	Three months ended September 30, 2016									Three months ended June 30, 2018
($ in thousands)	Property and casualty insurance			Reinsurance			Total			Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	119,849		$	—		$	119,849		$	98,579		$	—		$	98,579
Assumed from nonaffiliates	1,221			39,592			40,813			1,284			39,232			40,516
Assumed from affiliates	146,289			—			146,289			140,850			—			140,850
Ceded to nonaffiliates	(7,841		)	(983		)	(8,824		)	(7,953		)	(6,009		)	(13,962		)
Ceded to affiliates	(120,614		)	(1,270		)	(121,884		)	(101,559		)	(1,312		)	(102,871		)
Net premiums written	$	138,904		$	37,339		$	176,243		$	131,201		$	31,911		$	163,112

Premiums earned
Direct	$	96,730		$	—		$	96,730		$	99,011		$	—		$	99,011
Assumed from nonaffiliates	1,170			39,394			40,564			1,300			40,357			41,657
Assumed from affiliates	122,058			—			122,058			131,768			—			131,768
Ceded to nonaffiliates	(6,091		)	(2,315		)	(8,406		)	(8,593		)	(2,594		)	(11,187		)
Ceded to affiliates	(97,495		)	(1,270		)	(98,765		)	(101,991		)	(1,312		)	(103,303		)
Net premiums earned	$	116,372		$	35,809		$	152,181		$	121,495		$	36,451		$	157,946

Losses and settlement expenses incurred
Direct	$	59,831		$	—		$	59,831		$	62,069		$	—		$	62,069
Assumed from nonaffiliates	793			27,206			27,999			770			27,053			27,823
Assumed from affiliates	85,196			280			85,476			95,713			239			95,952
Ceded to nonaffiliates	(895		)	(944		)	(1,839		)	(1,911		)	(2,165		)	(4,076		)
Ceded to affiliates	(63,282		)	(12		)	(63,294		)	(62,386		)	(291		)	(62,677		)
Net losses and settlement expenses incurred	$	81,643		$	26,530		$	108,173		$	94,255		$	24,836		$	119,091


	Nine months ended September 30, 2017									Six months ended June 30, 2019
($ in thousands)	Property and casualty insurance			Reinsurance			Total			Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	312,809		$	—		$	312,809		$	211,937		$	—		$	211,937
Assumed from nonaffiliates	3,542			108,056			111,598			2,035			94,558			96,593
Assumed from affiliates	415,426			—			415,426			271,068			—			271,068
Ceded to nonaffiliates	(27,109		)	(9,074		)	(36,183		)	(13,474		)	(8,276		)	(21,750		)
Ceded to affiliates	(319,459		)	(3,637		)	(323,096		)	(217,897		)	(2,625		)	(220,522		)
Net premiums written	$	385,209		$	95,345		$	480,554		$	253,669		$	83,657		$	337,326

Premiums earned
Direct	$	287,821		$	—		$	287,821		$	206,048		$	—		$	206,048
Assumed from nonaffiliates	3,370			110,563			113,933			2,091			92,177			94,268
Assumed from affiliates	375,601			—			375,601			269,573			—			269,573
Ceded to nonaffiliates	(22,014		)	(7,719		)	(29,733		)	(14,635		)	(5,186		)	(19,821		)
Ceded to affiliates	(294,471		)	(3,637		)	(298,108		)	(212,008		)	(2,625		)	(214,633		)
Net premiums earned	$	350,307		$	99,207		$	449,514		$	251,069		$	84,366		$	335,435

Losses and settlement expenses incurred
Direct	$	198,317		$	—		$	198,317		$	123,430		$	—		$	123,430
Assumed from nonaffiliates	2,406			104,685			107,091			1,413			62,348			63,761
Assumed from affiliates	258,169			942			259,111			175,638			520			176,158
Ceded to nonaffiliates	(9,400		)	(4,626		)	(14,026		)	(4,948		)	(5,011		)	(9,959		)
Ceded to affiliates	(218,425		)	(8,979		)	(227,404		)	(124,959		)	(945		)	(125,904		)
Net losses and settlement expenses incurred	$	231,067		$	92,022		$	323,089		$	170,574		$	56,912		$	227,486


	Nine months ended September 30, 2016									Six months ended June 30, 2018
($ in thousands)	Property and casualty insurance			Reinsurance			Total			Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	311,542		$	—		$	311,542		$	198,623		$	—		$	198,623
Assumed from nonaffiliates	3,430			111,378			114,808			2,302			80,353			82,655
Assumed from affiliates	393,418			—			393,418			271,051			—			271,051
Ceded to nonaffiliates	(19,069		)	(8,814		)	(27,883		)	(15,923		)	(8,014		)	(23,937		)
Ceded to affiliates	(318,617		)	(3,810		)	(322,427		)	(204,583		)	(2,625		)	(207,208		)
Net premiums written	$	370,704		$	98,754		$	469,458		$	251,470		$	69,714		$	321,184

Premiums earned
Direct	$	284,281		$	—		$	284,281		$	194,756		$	—		$	194,756
Assumed from nonaffiliates	3,332			111,790			115,122			2,302			81,449			83,751
Assumed from affiliates	359,985			—			359,985			260,916			—			260,916
Ceded to nonaffiliates	(17,653		)	(5,205		)	(22,858		)	(17,131		)	(5,219		)	(22,350		)
Ceded to affiliates	(291,356		)	(3,810		)	(295,166		)	(200,716		)	(2,625		)	(203,341		)
Net premiums earned	$	338,589		$	102,775		$	441,364		$	240,127		$	73,605		$	313,732

Losses and settlement expenses incurred
Direct	$	167,827		$	—		$	167,827		$	114,356		$	—		$	114,356
Assumed from nonaffiliates	2,298			71,787			74,085			1,762			53,468			55,230
Assumed from affiliates	232,472			1,033			233,505			181,680			597			182,277
Ceded to nonaffiliates	(4,498		)	(2,336		)	(6,834		)	(4,902		)	(2,564		)	(7,466		)
Ceded to affiliates	(172,892		)	411			(172,481		)	(115,140		)	462			(114,678		)
Net losses and settlement expenses incurred	$	225,207		$	70,895		$	296,102		$	177,756		$	51,963		$	229,719

Individual lines in the above tables are defined as follows:

“Direct” represents business produced by the property and casualty insurance subsidiaries.

“Assumed from nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of involuntary business assumed by the pool participants pursuant to state law. For the reinsurance subsidiary, this line represents the reinsurance business assumed through the quota share agreement (including “fronting” activities initiated by Employers Mutual) and the business assumed outside the quota share agreement.

“Assumed from affiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of all the pool members’ direct business. The amounts reported under the caption “Losses and settlement expenses incurred” also include claim-related services provided by Employers Mutual that are allocated to the property and casualty insurance subsidiaries and the reinsurance subsidiary.

“Ceded to nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of 1) the amounts ceded to nonaffiliated reinsurance companies in accordance with the terms of the reinsurance agreements providing protection to the pool and each of its participants, and 2) the amounts ceded on a mandatory basis to state organizations in connection with various programs. For the reinsurance subsidiary, this line includes 1) reinsurance business that is ceded to other insurance companies in connection with “fronting” activities initiated by Employers Mutual, and 2) amounts ceded toin connection with the purchase of additional reinsurance protection in peak exposure territories from external parties.

“Ceded to affiliates” for the property and casualty insurance subsidiaries represents the cession of their direct business to Employers Mutual under the terms of the pooling agreement and amounts ceded to Employers Mutual under the terms of the inter-company reinsurance program. For the reinsurance subsidiary this line represents amounts ceded to Employers Mutual under the terms of the inter-company reinsurance program.


4.	LIABILITY FOR LOSSES AND SETTLEMENT EXPENSES

The following table sets forth a reconciliation of beginning and ending reserves for losses and settlement expenses of the Company. Amounts presented are on a net basis, with a reconciliation of beginning and ending reserves to the gross amounts presented in the consolidated financial statements.


	Nine months ended September 30,						Six months ended June 30,
($ in thousands)	2017			2016			2019			2018
Gross reserves at beginning of year	$	690,532		$	678,774		$	777,190		$	732,612
Re-valuation due to foreign currency exchange rates	(1,913		)	(2,475		)	(593		)	525
Less ceded reserves at beginning of year	20,664			23,477			36,595			30,923
Net reserves at beginning of year	671,781			657,772			741,188			701,164

Incurred losses and settlement expenses related to:
Current year	340,706			325,211			243,103			235,806
Prior years	(17,617		)	(29,109		)	(15,617		)	(6,087		)
Total incurred losses and settlement expenses	323,089			296,102			227,486			229,719

Paid losses and settlement expenses related to:
Current year	120,053			112,283			68,394			65,714
Prior years	173,986			161,888			135,560			139,625
Total paid losses and settlement expenses	294,039			274,171			203,954			205,339

Net reserves at end of period	700,831			679,703			764,720			725,544
Plus ceded reserves at end of period	25,348			21,983			34,642			31,148
Re-valuation due to foreign currency exchange rates	282			(1,121		)	(656		)	177
Gross reserves at end of period	$	726,461		$	700,565		$	798,706		$	756,869

There is an inherent amount of uncertainty involved in the establishment of insurance liabilities. This uncertainty is greatest in the current and more recent accident years because a smaller percentage of the expected ultimate claims have been reported, adjusted and settled compared to more mature accident years. ~~For this reason, carried reserves for these accident years reflect prudently conservative assumptions.~~ As the carried reserves for these accident years run off, the overall expectation is that, more often than not, favorable development will occur. However, there is also the possibility that the ultimate settlement of liabilities associated with these accident years will show adverse development, and such adverse development could be substantial.

Changes in reserve estimates are reflected in net income in the year such changes are recorded. Following is an analysis of the reserve development the Company experienced during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016.~~2018. Care should be exercised when attempting to analyze the financial impact of the reported development amounts because, as noted above, the overall expectation is that, more often than not, favorable development will occur as the prior accident years’ reserves run off.

~~2017~~2019 Development

For the property and casualty insurance segment, the ~~September~~June 30, ~~2017~~2019 estimate of loss and settlement expense reserves for accident years ~~2016~~2018 and prior decreased ~~$15.6~~$14.6 million from the estimate at December 31, ~~2016.~~2018. This decrease represents ~~3.2~~2.7 percent of the December 31, ~~2016~~2018 gross carried reserves and is primarily attributed to reductions in prior year ultimate loss ratios for ~~every~~most lines of business except personal auto liability and homeowners. The workers' compensation and commercial auto liability lines of business were the largest contributors to favorable development. Favorable development in the workers' compensation line of business ~~except~~is the result of a decrease in estimated ultimate average severity for accident years 2002-2018, excluding 2015. Favorable development in the commercial auto ~~liability. The other~~ liability line of business was ~~the largest contributor to favorable development. The~~a result of decreases in ultimate loss ratios for this line were decreased slightly for most accident years from 2003 through 2016 due to declines in expected ultimate claim frequency and/or severity. Due to increases in projected ultimate claim frequency and severity ~~the ultimate loss ratios in the commercial auto line of business were increased~~estimates for accident years ~~2013 through 2016, producing adverse reserve development for that line of business. Included in the development amount is~~2016-2018. Personal auto liability experienced adverse development as estimated ultimate severity increased in accident years 2014-2018, and homeowners experienced adverse development as estimated ultimate severity increased in ~~the other liability line of business stemming from the settlement of claims for past and future legal fees and losses on a multi-year asbestos exposure associated~~accident years 2015-2018, with ~~a former insured, and a slight strengthening of remaining reserves.~~2018 also seeing an increase in estimated ultimate frequency.

For the reinsurance segment, the ~~September~~June 30, ~~2017~~2019 estimate of loss and settlement expense reserves for accident years ~~2016~~2018 and prior decreased ~~$2.1~~$1.0 million from the estimate at December 31, ~~2016.~~2018. This decrease represents ~~1.0~~0.4 percent of the December 31, ~~2016~~2018 gross carried reserves and is primarily attributed to ~~prior year reserve releases in the~~better than expected experience on global excess contracts, partially offset by adverse development on several large losses under a 2018 property per risk excess ~~property/~~contract, adverse development on a 2014 casualty ~~global excess and property/casualty global~~ pro rata contract, ~~types.~~and a small amount of adverse development on Mutual Re business.

~~2016~~2018 Development

During the third quarter of 2016, management implemented a new reserving methodology for the determination of direct bulk reserves in the property and casualty insurance segment. The new methodology, which is referred to as the accident year ultimate estimate approach, better conforms to industry practices and provides increased transparency of the drivers of the property and casualty insurance segment's performance. In connection with this change in reserving methodology, there was a reallocation of incurred but not reported (IBNR) loss and allocated settlement expense reserves from prior accident years to the current accident year in multiple lines of business. This change resulted in the movement of approximately $5.6 million of reserves from prior accident years to the current accident year that is reported as favorable development; however, this development is "mechanical in nature", and did not have an impact on earnings because the total amount of carried reserves did not change.

For the property and casualty insurance segment, the ~~September~~June 30, ~~2016~~2018 estimate of loss and settlement expense reserves for accident years ~~2015~~2017 and prior decreased ~~$22.2~~$5.3 million from the estimate at December 31, 2015. Excluding the $5.6 million of "mechanical" favorable development that resulted from the change in reserving methodology noted above, the implied amount of favorable development that had an impact on earnings was approximately $16.6 million.2017. This decrease represented ~~3.5~~1.1 percent of the December 31, ~~2015~~2017 gross carried reserves and was primarily attributed to ~~better than~~decreases in the ultimate loss and settlement expense ratios for several accident years in the other liability line of business due to reductions in expected ~~outcomes for all~~ultimate frequency and/or severity. The auto physical damage, workers' compensation and homeowners lines of business ~~except commercial~~had relatively small amounts of adverse development. The adverse development in the auto ~~liability, commercial property and homeowners (workers' compensation and other liability lines~~physical damage line of business ~~were~~was the ~~largest contributors to favorable development). As noted above, the change in bulk reserving methodology implemented on September 30, 2016 resulted~~result of an increase in the ~~movement of a significant amount of~~accident year 2017 ultimate loss and settlement expense ~~reserves~~ratio after observing higher than expected reported severity for non-storm claims, while the adverse development in the workers' compensation line of business was driven by an upwards adjustment to the accident year 2017 ultimate loss ~~reserves,~~ and ~~a reallocation of reserves between current and prior accident years. Other liability accounted for most of the favorable development on~~ settlement expense ~~reserves.~~ratio following a second quarter revision in the ultimate frequency and severity assumptions.

For the reinsurance segment, the ~~September~~June 30, ~~2016~~2018 estimate of loss and settlement expense reserves for accident years ~~2015~~2017 and prior decreased ~~$6.9 million~~$801,000 from the estimate at December 31, ~~2015.~~2017. This decrease represented ~~3.5~~0.3 percent of the December 31, ~~2015~~2017 gross carried reserves ~~with slightly less than half~~and was primarily attributed to lower ultimate loss estimates impacting accident years 2013-2017 for the catastrophe and per risk excess, property pro rata and ocean marine pro rata lines of ~~the~~business. The favorable development ~~coming from the Mutual Reinsurance Bureau underwriting association (MRB), which included a decrease~~was partially offset by adverse development on casualty excess, property/casualty global excess and pro rata, and aggregate excess contracts for years 2004, 2007, 2012, 2014 and 2017, whose ultimates were increased in ~~bulk reserves.~~response to higher than expected reported losses.


5.	SEGMENT INFORMATION

The Company’s operations consist of a property and casualty insurance segment and a reinsurance segment. The property and casualty insurance segment writes both commercial and personal lines of insurance, with a focus on medium-sized commercial accounts. The reinsurance segment provides reinsurance for other insurers and reinsurers. The segments are managed separately due to differences in the insurance products sold and the business environments in which they operate. Management evaluates the performance of its insurance segments using financial measurements based on Statutory Accounting Principles (SAP) instead of GAAP. Such measures include premiums written, premiums earned, statutory underwriting profit (loss), and investment results, as well as loss and loss adjustment expense ratios, trade underwriting expense ratios, and trade combined ratios.

Summarized financial information for the Company’s segments is as follows:


Three months ended September 30, 2017	Property and casualty insurance				Reinsurance				Parent company			Consolidated
Three months ended June 30, 2019								Property and casualty insurance							Reinsurance				Parent company				Consolidated
($ in thousands)				Property and casualty insurance							Reinsurance			Parent company								Consolidated
Premiums earned								$	126,297								$	41,836			$				—		$	168,133

Underwriting profit (loss):
SAP underwriting profit (loss)	1,927				(18,364		)		—			(16,437		)		(16,127		)		3,008				—			(13,119		)
GAAP adjustments	5,860				194				—			6,054				(353		)		(695		)		—			(1,048		)
GAAP underwriting profit (loss)	7,787				(18,170		)		—			(10,383		)		(16,480		)		2,313				—			(14,167		)

Net investment income	8,252				3,237				12			11,501				9,129				3,808				14			12,951
Net realized investment gains (losses)	(108		)		(486		)		—			(594		)
Other income (loss)	179				(358		)		—			(179		)
Net realized investment gains/losses and change in unrealized gains on equity investments																2,930				1,545				(217		)	4,258
Other income																1,551				6				—			1,557
Interest expense	84				—				—			84				170				—				—			170
Other expenses	170				—				531			701				201				—				2,587			2,788
Income (loss) before income tax expense (benefit)	$	15,856			$	(15,777	)		$	(519	)	$	(440	)		$	(3,241	)		$	7,672			$	(2,790	)	$	1,641



Three months ended June 30, 2018	Property and casualty insurance			Reinsurance			Parent company			Consolidated
($ in thousands)	Property and casualty insurance			Reinsurance			Parent company			Consolidated
Premiums earned	$	121,495		$	36,451		$	—		$	157,946

Underwriting profit (loss):
SAP underwriting profit (loss)	(20,184		)	3,707			—			(16,477		)
GAAP adjustments	1,921			(855		)	—			1,066
GAAP underwriting profit (loss)	(18,263		)	2,852			—			(15,411		)

Net investment income	8,410			3,360			8			11,778
Net realized investment gains/losses and change in unrealized gains on equity investments	(4,692		)	(1,168		)	—			(5,860		)
Other income	2,095			678			—			2,773
Interest expense	171			—			—			171
Other expenses	244			—			587			831
Income (loss) before income tax expense (benefit)	$	(12,865	)	$	5,722		$	(579	)	$	(7,722	)


Three months ended September 30, 2016	Property and casualty insurance				Reinsurance				Parent company			Consolidated
Six months ended June 30, 2019								Property and casualty insurance							Reinsurance				Parent company				Consolidated
($ in thousands)				Property and casualty insurance							Reinsurance			Parent company								Consolidated
Premiums earned								$	251,069								$	84,366			$				—		$	335,435

Underwriting profit (loss):
SAP underwriting profit (loss)	(8,081		)		689				—			(7,392		)		(14,720		)		6,571				—			(8,149		)
GAAP adjustments	2,970				35				—			3,005				857				125				—			982
GAAP underwriting profit (loss)	(5,111		)		724				—			(4,387		)		(13,863		)		6,696				—			(7,167		)

Net investment income	8,185				3,285				4			11,474				18,267				7,416				31			25,714
Net realized investment gains (losses)	(799		)		(393		)		—			(1,192		)
Other income (loss)	172				(257		)		—			(85		)
Net realized investment gains/losses and change in unrealized gains on equity investments																17,098				10,087				(284		)	26,901
Other income																3,084				8				—			3,092
Interest expense	84				—				—			84				341				—				—			341
Other expenses	190				—				489			679				512				—				3,761			4,273
Income (loss) before income tax expense (benefit)	$	2,173			$	3,359			$	(485	)	$	5,047			$	23,733			$	24,207			$	(4,014	)	$	43,926

Assets																$	1,254,989			$	525,750			$	631,092		$	2,411,831
Eliminations																—				—				(623,505		)	(623,505		)
Reclassifications																—				(101		)		(74		)	(175		)
Total assets																$	1,254,989			$	525,649			$	7,513		$	1,788,151

Nine months ended September 30, 2017 Property and
casualty
insurance Reinsurance Parent
company Consolidated
($ in thousands)
Premiums earned $ 350,307
$ 99,207
$ —
$ 449,514

Underwriting profit (loss):
SAP underwriting profit (loss) (9,559 ) (14,899 ) —
(24,458 )
GAAP adjustments 8,135
(942 ) —
7,193
GAAP underwriting profit (loss) (1,424 ) (15,841 ) —
(17,265 )

Net investment income 24,225
9,421
33
33,679
Net realized investment gains (losses) 3,033
(867 ) —
2,166
Other income (loss) 623
(1,457 ) —
(834 )
Interest expense 253
—
—
253
Other expenses 580
—
1,684
2,264
Income (loss) before income tax expense (benefit) $ 25,624
$ (8,744 ) $ (1,651 ) $ 15,229

Assets $ 1,185,269
$ 481,951
$ 575,365
$ 2,242,585
Eliminations —
—
(568,814 ) (568,814 )
Reclassifications (2,772 ) —
(161 ) (2,933 )
Total assets $ 1,182,497
$ 481,951
$ 6,390
$ 1,670,838


Nine months ended September 30, 2016	Property and casualty insurance				Reinsurance				Parent company			Consolidated
Six months ended June 30, 2018					Reinsurance			Property and casualty insurance				Consolidated			Reinsurance				Parent company				Consolidated
($ in thousands)	Property and casualty insurance			Property and casualty insurance				Property and casualty insurance			Reinsurance			Parent company					Parent company			Consolidated
Premiums earned				Property and casualty insurance				$	240,127		Reinsurance			Parent company			$	73,605			$	Consolidated			—		$	313,732

Underwriting profit (loss):																											��
SAP underwriting profit (loss)	(8,904		)		7,777				—			(1,127		)		(29,220		)		5,270				—			(23,950		)
GAAP adjustments	3,026				(803		)		—			2,223				2,183				(753		)		—			1,430
GAAP underwriting profit (loss)	(5,878		)		6,974				—			1,096				(27,037		)		4,517				—			(22,520		)

Net investment income	25,524				10,350				9			35,883				16,558				6,578				13			23,149
Net realized investment gains (losses)	(627		)		(16		)		—			(643		)
Other income (loss)	466				(485		)		—			(19		)
Net realized investment gains/losses and change in unrealized gains on equity investments																(7,985		)		(3,268		)		—			(11,253		)
Other income																4,146				242				—			4,388
Interest expense	253				—				—			253				313				—				—			313
Other expenses	558				—				1,495			2,053				477				—				1,224			1,701
Income (loss) before income tax expense (benefit)	$	18,674			$	16,823			$	(1,486	)	$	34,011			$	(15,108	)		$	8,069			$	(1,211	)	$	(8,250	)

Year ended December 31, 2016
Year ended December 31, 2018
Assets	$	1,122,037			$	455,493			$	554,164		$	2,131,694			$	1,191,286			$	485,270			$	565,905		$	2,242,461
Eliminations	—				—				(540,249		)	(540,249		)		—				—				(556,977		)	(556,977		)
Reclassifications	—				(1,932		)		(700		)	(2,632		)		—				—				(6		)	(6		)
Total assets	$	1,122,037			$	453,561			$	13,215		$	1,588,813			$	1,191,286			$	485,270			$	8,922		$	1,685,478

The following table displays the premiums earned for the property and casualty insurance segment and the reinsurance segment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018, by line of insurance.


	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
($ in thousands)	2017		2016		2017		2016		2019		2018		2019		2018
Property and casualty insurance segment
Property and casualty insurance
Commercial lines:
Automobile	$	30,229	$	28,113	$	87,275	$	82,449	$	34,260	$	31,660	$	67,167	$	62,304
Property	27,980		27,471		79,551		77,292		28,853		27,196		56,524		53,788
Workers' compensation	25,373		24,536		75,419		71,272		24,032		25,229		47,575		50,131
Other liability	24,996		24,277		73,378		72,086		29,170		25,591		58,075		50,553
Other	2,203		2,102		6,509		6,246		2,501		2,228		5,007		4,414
Total commercial lines	110,781		106,499		322,132		309,345		118,816		111,904		234,348		221,190

Personal lines	9,691		9,873		28,175		29,244		7,481		9,591		16,721		18,937
Total property and casualty insurance	$	120,472	$	116,372	$	350,307	$	338,589	$	126,297	$	121,495	$	251,069	$	240,127

Reinsurance segment
Reinsurance
Pro rata reinsurance	$	10,730	$	15,066	$	33,181	$	44,175	$	11,147	$	10,070	$	24,153	$	23,143
Excess of loss reinsurance	23,988		20,743		66,026		58,600		30,689		26,381		60,213		50,462
Total reinsurance	$	34,718	$	35,809	$	99,207	$	102,775	$	41,836	$	36,451	$	84,366	$	73,605

Consolidated	$	155,190	$	152,181	$	449,514	$	441,364	$	168,133	$	157,946	$	335,435	$	313,732


6.	INCOME TAXES

The actual income tax expense (benefit) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 differed from the “expected” income tax expense (benefit) for those periods (computed by applying the United States federal corporate tax rate of 3521 percent to income (loss) before income ~~tax)~~tax expense (benefit)) as follows:


	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
($ in thousands)	2017			2016			2017			2016			2019			2018			2019			2018
Computed "expected" income tax expense (benefit)	$	(154	)	$	1,767		$	5,330		$	11,904		$	345		$	(1,622	)	$	9,225		$	(1,733	)
Increases (decreases) in tax resulting from:
Incremental benefit of net operating loss carry back													—			(839		)	—			(839		)
Tax-exempt interest income	(656		)	(709		)	(2,122		)	(2,101		)	(269		)	(297		)	(552		)	(607		)
Dividends received deduction	(294		)	(336		)	(948		)	(1,110		)	(166		)	(151		)	(298		)	(274		)
Proration of tax-exempt interest and dividends received deduction	142			157			460			482			108			112			212			220
Nondeductible expenses													374			30			419			55
Internal Revenue Code 50(d)(5) income from investment tax credits													(111		)	(36		)	110			—
Other, net	(224		)	39			(545		)	(75		)	75			76			(6		)	(1		)
Total income tax expense (benefit)	$	(1,186	)	$	918		$	2,175		$	9,100		$	356		$	(2,727	)	$	9,110		$	(3,179	)

Pursuant to Staff Accounting Bulletin No. 118 issued by the Securities and Exchange Commission, the Company made reasonable estimates of the effects the Tax Cuts and Jobs Act (TCJA) had on deferred income tax assets and liabilities at December 31, 2017 and the interim periods in 2018. For items where the Company could not make a reasonable estimate, primarily loss reserve discounting, the Company used existing accounting guidance and the provisions of the tax laws that were in place prior to the enactment. Subsequently, the Company made its determination of the effects of the TCJA when the Internal Revenue Service (IRS) issued Revenue Procedure 2019-06, which provided applicable discount factors for both the transition obligation (reserves at January 1, 2018), and reserves at December 31, 2018. On July 22, 2019, the IRS issued Revenue Procedures 2019-30 and 2019-31, which provide additional guidance with regards to loss reserve discounting and the transition obligation pursuant to the TCJA. The Company is analyzing the effects of this most recent guidance. The Company does not expect any potential changes to have a material impact on the consolidated financial statements.

The Company had no provision for uncertain income tax positions at ~~September~~June 30, ~~2017~~2019 or December 31, ~~2016~~.2018. The Company recognized no interest expense or other penalties related to U.S. federal or state income taxes during the ~~three or~~ ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 or ~~2016~~.2018. It is the Company’s accounting policy to reflect income tax penalties as other expense, and interest as interest expense.

The Company files a U.S. federal income tax return, along with various state income tax returns. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before ~~2014.~~2015.


7.	EMPLOYEE RETIREMENT PLANS

The components of net periodic benefit cost (income) for Employers Mutual’s pension and postretirement benefit plans is as follows:


	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
($ in thousands)	2017			2016			2017			2016			2019			2018			2019			2018
Pension plans:
Service cost	$	3,783		$	3,639		$	11,351		$	10,824		$	3,806		$	4,300		$	7,877		$	8,426
Interest cost	2,798			2,551			8,393			7,620			2,930			2,698			5,879			5,363
Expected return on plan assets	(5,192		)	(4,841		)	(15,574		)	(14,521		)	(5,423		)	(6,048		)	(10,863		)	(12,026		)
Amortization of net actuarial loss	911			1,111			2,732			3,233			548			143			1,146			268
Amortization of prior service cost	5			9			15			24
Net periodic pension benefit cost	$	2,305		$	2,469		$	6,917		$	7,180		$	1,861		$	1,093		$	4,039		$	2,031

Postretirement benefit plans:
Service cost	$	341		$	319		$	1,022		$	955		$	352		$	368		$	705		$	736
Interest cost	570			553			1,710			1,661			545			521			1,091			1,042
Expected return on plan assets	(1,077		)	(1,056		)	(3,233		)	(3,168		)	(1,094		)	(1,203		)	(2,189		)	(2,407		)
Amortization of net actuarial loss	342			374			1,028			1,121			246			233			491			467
Amortization of prior service credit	(2,788		)	(2,835		)	(8,365		)	(8,504		)	(2,285		)	(2,782		)	(4,570		)	(5,564		)
Net periodic postretirement benefit income	$	(2,612	)	$	(2,645	)	$	(7,838	)	$	(7,935	)	$	(2,236	)	$	(2,863	)	$	(4,472	)	$	(5,726	)

Net periodic pension benefit cost allocated to the Company amounted to ~~$692,000~~$559,000 and ~~$1.1 million~~$327,000 for the three months and ~~$2.1~~$1.2 million and ~~$2.5 million~~$609,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018, respectively. Net periodic postretirement benefit income allocated to the Company amounted to ~~$736,000~~$635,000 and ~~$937,000~~$806,000 for the three months and ~~$2.2~~$1.3 million and ~~$2.4~~$1.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018, respectively. The service cost component of net periodic pension and postretirement benefit income allocated to the Company is included in the income statement line titled "other underwriting expenses". The other components of net periodic pension and postretirement benefit income are included in the income statement line titled "other income".

~~The Company’s share of~~ Employers ~~Mutual’s remaining~~ ~~2017~~ ~~planned contribution~~Mutual plans to contribute approximately $7.0 million to the pension plan ~~if made, will be approximately~~ ~~$2.7 million~~. in 2019. No contributions ~~will~~are expected to be made to the Voluntary Employee Beneficiary Association (VEBA) trust in ~~2017~~.2019.


8.	STOCK-BASED COMPENSATION

~~On May 26, 2017, the~~The Company ~~registered 150,000 shares of the Company's common stock~~has a stock-based compensation plan for use in the EMC Insurance Group Inc. 2017 Non-Employee Director Stock Plan (the "2017 Director Plan"). The 2017 Director Plan provides for the awarding of non-qualified stock options, restricted stock, restricted stock units and other stock-based awards to non-employee ~~directors of the Company. During the first nine months of 2017, 2,000 shares of restricted stock were granted to non-employee directors of the Company.~~directors. Employers Mutual also has several stock plans which utilize the common stock of the Company. Employers Mutual can provide the common stock required under its plans by: 1) using shares of common stock that it currently owns; 2) purchasing common stock in the open market; or 3) directly purchasing common stock from the Company at the current fair value. Employers Mutual's current practice is to purchase common stock from the Company for use in all of its stock plans (including its non-employee director stock purchase plan and its employee stock purchase plan). A portion of the compensation expense recognized by Employers Mutual (as the requisite service period for ~~granted options and~~ restricted stock awards/units is rendered) is allocated to the Company’s property and casualty insurance subsidiaries though their participation in the pooling agreement.

During the first quarter of 2017, Employers Mutual began issuing restricted stock units rather than restricted stock awards. In connection with this change, Employers Mutual will now acquire stock to fulfill its obligations to the recipients of the restricted stock units on the date they vest, rather than on the grant date of the awards.

~~Because of this change, an~~An account Employers Mutual established to hold previously granted restricted stock awards until they vest will periodically contain excess shares of the Company's stock stemming from forfeitures and surrenders. During the first ~~nine~~six months of ~~2017,~~2019, the Company repurchased ~~67,974~~20,221 shares of stock from this unvested restricted stock account at an average cost of ~~$27.34.~~$31.83. These repurchased shares are not deemed to be shares repurchased under the Company's stock repurchase program.

During the first ~~nine~~six months of ~~2017, 116,288~~2019, 122,073 restricted stock units were granted to eligible employees of Employers Mutual. Under the stock plans, ~~85,192~~99,842 shares of restricted stock vested, and ~~163,658~~33,500 options were exercised at a weighted average exercise price of ~~$14.76~~.$12.66. The Company recognized compensation expense from these plans of ~~$296,000~~$417,000 ($~~192,000~~330,000 net of tax) and ~~$218,000~~$193,000 ($~~142,000~~153,000 net of tax) for the three months and ~~$508,000~~$700,000 ($~~330,000~~553,000 net of tax) and ~~$542,000~~$606,000 ($~~353,000~~479,000 net of tax) for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively.


9.	DISCLOSURES ABOUT THE FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of the Company’s financial instruments as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 are summarized in the tables below.


September 30, 2017	Carrying amounts		Estimated fair values
June 30, 2019					Carrying amounts			Estimated fair values
($ in thousands)		Carrying amounts		Estimated fair values
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	8,164	$	8,164		$	8,270		$	8,270
U.S. government-sponsored agencies	255,619		255,619			320,827			320,827
Obligations of states and political subdivisions	336,638		336,638			269,702			269,702
Commercial mortgage-backed	65,810		65,810			94,304			94,304
Residential mortgage-backed	103,666		103,666			194,444			194,444
Other asset-backed	24,967		24,967			17,644			17,644
Corporate	463,476		463,476			434,875			434,875
Total fixed maturity securities available-for-sale	1,258,340		1,258,340			1,340,066			1,340,066

Equity securities available-for-sale:
Equity investments, at fair value
Common stocks:
Financial services	40,738		40,738			51,313			51,313
Information technology	36,684		36,684			41,911			41,911
Healthcare	30,730		30,730			29,513			29,513
Consumer staples	15,044		15,044			17,547			17,547
Consumer discretionary	21,605		21,605			29,178			29,178
Energy	17,196		17,196			14,613			14,613
Industrials	28,315		28,315			21,636			21,636
Other	16,787		16,787			15,186			15,186
Non-redeemable preferred stocks	24,620		24,620			18,840			18,840
Total equity securities available-for-sale	231,719		231,719
Investment funds						9,770			9,770
Total equity investments						249,507			249,507

Short-term investments	25,255		25,255			46,857			46,857

Liabilities:
Surplus notes	25,000		11,512			25,000			16,626


December 31, 2016	Carrying amounts		Estimated fair values
December 31, 2018					Carrying amounts			Estimated fair values
($ in thousands)		Carrying amounts		Estimated fair values
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	7,830	$	7,830		$	8,021		$	8,021
U.S. government-sponsored agencies	239,197		239,197			304,479			304,479
Obligations of states and political subdivisions	335,757		335,757			283,651			283,651
Commercial mortgage-backed	37,572		37,572			84,379			84,379
Residential mortgage-backed	96,434		96,434			162,137			162,137
Other asset-backed	26,393		26,393			20,834			20,834
Corporate	456,516		456,516			419,408			419,408
Total fixed maturity securities available-for-sale	1,199,699		1,199,699			1,282,909			1,282,909

Equity securities available-for-sale:
Equity investments, at fair value
Common stocks:
Financial services	35,122		35,122			41,839			41,839
Information technology	30,542		30,542			31,581			31,581
Healthcare	24,707		24,707			34,571			34,571
Consumer staples	19,100		19,100			13,180			13,180
Consumer discretionary	22,321		22,321			22,765			22,765
Energy	19,071		19,071			13,372			13,372
Industrials	24,245		24,245			19,389			19,389
Other	18,384		18,384			14,371			14,371
Non-redeemable preferred stocks	20,347		20,347			16,654			16,654
Total equity securities available-for-sale	213,839		213,839
Investment funds						7,641			7,641
Total equity investments						215,363			215,363

Short-term investments	39,670		39,670			28,204			28,204

Liabilities:
Surplus notes	25,000		11,228			25,000			15,259

The estimated fair values of fixed maturity and equity securities isare based on quoted market prices, where available. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security.

Short-term investments generally include money market funds, U.S. Treasury bills and commercial paper. Short-term investments are carried at fair value, which approximates cost, due to the highly liquid nature of the securities. Short-term securities are classified as Level 1 fair value measurements when the fair values can be validated by recent trades. When recent trades are not available, fair value is deemed to be the cost basis and the securities are classified as Level 2 fair value measurements.

The estimated fair value of the surplus notes is derived by discounting future expected cash flows at a rate deemed appropriate. The discount rate was set at the average of current yields-to-maturity on several insurance company surplus notes that are traded in observable markets, adjusted upward by 50 basis points to reflect illiquidity and perceived risk premium differences. Other assumptions includeappropriate over a 25-year term (the surplus notes have no stated maturity ~~date)~~date, and anthe interest ~~rate that continues~~to be paid is assumed to continue at the current interest rate in place of ~~1.35~~2.73 percent ~~interest rate. The rate is typically adjusted every~~ ~~five~~ ~~years (next review due in 2018) and is based upon the then-current Federal Home Loan Bank borrowing rate for 5-year funds available to Employers Mutual.~~).

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value.



	Level 1 -	Unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

	Level 2 -	Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

	Level 3 -	Prices or valuation techniques that require significant unobservable inputs because observable inputs are not available. The unobservable inputs may reflect the Company’s own judgments about the assumptions that market participants would use.

	NAV -	The fair values of investment company limited partnership investments and similar vehicles (referred to as investment funds) are based on the capital account balances reported by the investment funds subject to their management review and adjustment. These capital account balances reflect the fair value of the investment funds.

The Company uses an independent pricing source to obtain the estimated fair values of a majority of its securities, subject to an internal validation. The fair values are based on quoted market prices, where available. This is typically the case for equity securities and money market funds, which are accordingly classified as Level 1 fair value measurements. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security. Fixed maturity securities, non-redeemable preferred stocks and various short-term investments in the Company’s portfolio may not trade on a daily basis; however, observable inputs are utilized in their valuations, and these securities are therefore classified as Level 2 fair value measurements. Following is a brief description of the various pricing techniques used by the independent pricing source for different asset classes.

U.S. Treasury securities (including bonds, notes, and bills) are priced according to a number of live data sources, including active market makers and inter-dealer brokers. Prices from these sources are reviewed based on the sources’ historical accuracy for individual issues and maturity ranges.

U.S. government-sponsored agencies and corporate securities (including fixed-rate corporate bonds and medium-term notes) are priced by determining a bullet (non-call) spread scale for each issuer for maturities going out to forty years. These spreads represent credit risk and are obtained from the new issue market, secondary trading, and dealer quotes. An option adjusted spread model is incorporated to adjust spreads of issues that have early redemption features. The final spread is then added to the U.S. Treasury curve.

Obligations of states and political subdivisions are priced by tracking and analyzing actively quoted issues and reported trades, material event notices and benchmark yields. Municipal bonds with similar characteristics are grouped together into market sectors, and internal yield curves are constructed daily for these sectors. Individual bond evaluations are extrapolated from these sectors, with the ability to make individual spread adjustments for attributes such as discounts, premiums, alternative minimum tax, and/or whether or not the bond is callable.

Mortgage-backed and asset-backed securities are first reviewed for the appropriate pricing speed (if prepayable), spread, yield and volatility. The securities are priced with models using spreads and other information solicited from market buy- and sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. To determine a tranche’s price, first the benchmark yield is determined and adjusted for collateral performance, tranche level attributes and market conditions. Then the cash flow for each tranche is generated (using consensus prepayment speed assumptions including, as appropriate, a prepayment projection based on historical statistics of the underlying collateral). The tranche-level yield is used to discount the cash flows and generate the price. Depending on the characteristics of the tranche, a volatility-driven, multi-dimensional single cash flow stream model or an option-adjusted spread model may be used. When cash flows or other security structure or market information is not available, broker quotes may be used.

On a quarterly basis, the Company receives from its independent pricing service a list of fixed maturity securities, if any, that were priced solely from broker quotes. For these securities, fair value may be determined using the broker quotes, or by the Company using similar pricing techniques as the Company’s independent pricing service. Depending on the level of observable inputs, these securities would be classified as Level 2 or Level 3 fair value measurements. At ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018, the Company had no securities priced solely from broker quotes.

A small number of the Company’s securities are not priced by the independent pricing service. ~~Two~~One of these ~~are~~was an equity ~~securities~~security that ~~are~~was reported as a Level 3 fair value ~~measurements~~measurement since no observable inputs ~~are~~were used in their valuations. The largest of these equity security holdings is in a privately placed non-redeemable convertible preferred stock investment in a start-up technology company that Employers Mutual is working closely with in its ~~data analytics activities.~~valuation. This security ~~is carried at its acquisition cost, which is presumed to approximate fair value. The other equity security, a much smaller holding, continues to be~~was sold in the fourth quarter of 2018 and in prior periods was reported at the fair value obtained from the Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (NAIC). The SVO ~~establishes~~established a per share price for this security based on an annual review of that company’s financial statements, typically performed during the second quarter. The other securities not priced by the Company’s independent pricing service consist of ~~eight~~six fixed maturity ~~securities (nine at December 31, 2016).~~securities. ~~Two~~One of these fixed maturity securities (two at December 31, 2018), classified as Level 3 fair value measurements, are corporate securities that convey premium tax benefits and are not publicly traded. The fair values for these securities are based on discounted cash flow analyses. The other fixed maturity securities are classified as Level 2 fair value measurements. The fair values for these fixed maturity securities were obtained from either the SVO, the Company's investment custodian, or the Company's investment department using similar pricing techniques as the Company’s independent pricing service.

Presented in the tables below are the estimated fair values of the Company’s financial instruments by fair value hierarchy, as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018.


September 30, 2017			Fair value measurements using
June 30, 2019													Fair value measurements using
($ in thousands)	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total		Investments measured at net asset value (NAV)		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial instruments reported at fair value on recurring basis:
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	8,164	$	—	$	8,164	$	—	$	8,270	$	—	$	—	$	8,270	$	—
U.S. government-sponsored agencies	255,619		—		255,619		—		320,827		—		—		320,827		—
Obligations of states and political subdivisions	336,638		—		336,638		—		269,702		—		—		269,702		—
Commercial mortgage-backed	65,810		—		65,810		—		94,304		—		—		94,304		—
Residential mortgage-backed	103,666		—		103,666		—		194,444		—		—		194,444		—
Other asset-backed	24,967		—		24,967		—		17,644		—		—		17,644		—
Corporate	463,476		—		462,762		714		434,875		—		—		434,723		152
Total fixed maturity securities available-for-sale	1,258,340		—		1,257,626		714		1,340,066		—		—		1,339,914		152

Equity securities available-for-sale:
Equity investments, at fair value:
Common stocks:
Financial services	40,738		40,735		—		3		51,313		—		51,313		—		—
Information technology	36,684		36,684		—		—		41,911		—		41,911		—		—
Healthcare	30,730		30,730		—		—		29,513		—		29,513		—		—
Consumer staples	15,044		15,044		—		—		17,547		—		17,547		—		—
Consumer discretionary	21,605		21,605		—		—		29,178		—		29,178		—		—
Energy	17,196		17,196		—		—		14,613		—		14,613		—		—
Industrials	28,315		28,315		—		—		21,636		—		21,636		—		—
Other	16,787		16,787		—		—		15,186		—		15,186		—		—
Non-redeemable preferred stocks	24,620		9,822		12,798		2,000		18,840		—		9,059		9,781		—
Total equity securities available-for-sale	231,719		216,918		12,798		2,003
Investment funds									9,770		9,770		—		—		—
Total equity investments									249,507		9,770		229,956		9,781		—

Short-term investments	25,255		25,255		—		—		46,857		—		46,857		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	11,512		—		—		11,512		16,626		—		—		—		16,626


December 31, 2016			Fair value measurements using
December 31, 2018													Fair value measurements using
($ in thousands)	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total		Investments measured at net asset value (NAV)		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial instruments reported at fair value on recurring basis:
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	7,830	$	—	$	7,830	$	—	$	8,021	$	—	$	—	$	8,021	$	—
U.S. government-sponsored agencies	239,197		—		239,197		—		304,479		—		—		304,479		—
Obligations of states and political subdivisions	335,757		—		335,757		—		283,651		—		—		283,651		—
Commercial mortgage-backed	37,572		—		37,572		—		84,379		—		—		84,379		—
Residential mortgage-backed	96,434		—		96,434		—		162,137		—		—		162,137		—
Other asset-backed	26,393		—		26,393		—		20,834		—		—		20,834		—
Corporate	456,516		—		455,534		982		419,408		—		—		419,149		259
Total fixed maturity securities available-for-sale	1,199,699		—		1,198,717		982		1,282,909		—		—		1,282,650		259

Equity securities available-for-sale:
Equity investments, at fair value:
Common stocks:
Financial services	35,122		35,119		—		3		41,839		—		41,839		—		—
Information technology	30,542		30,542		—		—		31,581		—		31,581		—		—
Healthcare	24,707		24,707		—		—		34,571		—		34,571		—		—
Consumer staples	19,100		19,100		—		—		13,180		—		13,180		—		—
Consumer discretionary	22,321		22,321		—		—		22,765		—		22,765		—		—
Energy	19,071		19,071		—		—		13,372		—		13,372		—		—
Industrials	24,245		24,245		—		—		19,389		—		19,389		—		—
Other	18,384		18,384		—		—		14,371		—		14,371		—		—
Non-redeemable preferred stocks	20,347		11,074		7,273		2,000		16,654		—		10,325		6,329		—
Total equity securities available-for-sale	213,839		204,563		7,273		2,003
Investment funds									7,641		7,641		—		—		—
Total equity investments									215,363		7,641		201,393		6,329		—

Short-term investments	39,670		39,670		—		—		28,204		—		28,204		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	11,228		—		—		11,228		15,259		—		—		—		15,259

Presented in the table below is a reconciliation of the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018. Any unrealized gains or losses on ~~these~~fixed maturity securities are recognized in other comprehensive income (loss). Any gains or losses stemming from settlements, disposals or impairments, ~~of these~~as well as unrealized gains or losses on equity securities, are reported as realized investment gains or losses in net income.

($ in thousands) Fair value measurements using significant unobservable (Level 3) inputs
Three months ended September 30, 2017 Fixed maturity securities available-for-sale, corporate Equity securities
available-for-sale,
financial services Equity securities available-for-sale, non-redeemable preferred stocks Total
Beginning balance $ 840
$ 3
$ 2,000
$ 2,843
Settlements (125 ) —
—
(125 )
Unrealized gains (losses) included in other comprehensive income (loss) (1 ) —
—
(1 )
Balance at September 30, 2017 $ 714
$ 3
$ 2,000
$ 2,717

Nine months ended September 30, 2017
Beginning balance $ 982
$ 3
$ 2,000
$ 2,985
Settlements (265 ) —
—
(265 )
Unrealized gains (losses) included in other comprehensive income (loss) (3 ) —
—
(3 )
Balance at September 30, 2017 $ 714
$ 3
$ 2,000
$ 2,717



($ in thousands)	Fair value measurements using significant unobservable (Level 3) inputs
Three months ended June 30, 2019	Fixed maturity securities available-for-sale, corporate			Total
Beginning balance	$	201		$	201
Settlements	(50		)	(50		)
Unrealized gains (losses) included in other comprehensive income (loss) on securities still held at reporting date	1			1
Balance at June 30, 2019	$	152		$	152

Six months ended June 30, 2019
Beginning balance	$	259		$	259
Settlements	(107		)	(107		)
Balance at June 30, 2019	$	152		$	152

($ in thousands) Fair value measurements using significant unobservable (Level 3) inputs
Three months ended September 30, 2016 Fixed maturity securities available-for-sale, corporate Equity securities
available-for-sale,
financial services Equity securities available-for-sale, non-redeemable preferred stocks Total
Beginning balance $ 1,191
$ 3
$ —
$ 1,194
Settlements (117 ) —
—
(117 )
Unrealized gains (losses) included in other comprehensive income (loss) (4 ) —
—
(4 )
Balance at September 30, 2016 $ 1,070
$ 3
$ —
$ 1,073

Nine months ended September 30, 2016
Beginning balance $ 1,329
$ 3
$ —
$ 1,332
Settlements (262 ) —
—
(262 )
Unrealized gains (losses) included in other comprehensive income (loss) 3
—
—
3
Balance at September 30, 2016 $ 1,070
$ 3
$ —
$ 1,073



($ in thousands)	Fair value measurements using significant unobservable (Level 3) inputs
Three months ended June 30, 2018	Fixed maturity securities available-for-sale, corporate			Equity securities, financial services			Total
Beginning balance	$	562		$	3		$	565
Settlements	(89		)	—			(89		)
Unrealized gains (losses) included in other comprehensive income (loss) on securities still held at reporting date	1			(3		)	(2		)
Balance at June 30, 2018	$	474		$	—		$	474

Six months ended June 30, 2018
Beginning balance	$	620		$	3		$	623
Settlements	(145		)	—			(145		)
Unrealized gains (losses) included in other comprehensive income (loss) on securities still held at reporting date	(1		)	(3		)	(4		)
Balance at June 30, 2018	$	474		$	—		$	474

~~There were no transfers into or out of Levels 1 or 2 during the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2017~~ or ~~2016. It is the Company’s policy to recognize transfers between levels at the beginning of the reporting period.~~


10.	INVESTMENTS

Investments of the Company’s insurance subsidiaries are subject to the insurance laws of the state of their incorporation. These laws prescribe the kind, quality and concentration of investments that may be made by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks and real estate mortgages. The Company believes that it is in compliance with these laws.

The amortized cost and estimated fair value of securities available-for-sale as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 are as follows. All fixed maturity securities are classified as available-for-sale and are carried at fair value.

September 30, 2017 Amortized
cost Gross
unrealized
gains Gross
unrealized
losses Estimated
fair values
($ in thousands)
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury $ 8,109
$ 57
$ 2
$ 8,164
U.S. government-sponsored agencies 262,050
237
6,668
255,619
Obligations of states and political subdivisions 318,016
18,954
332
336,638
Commercial mortgage-backed 66,138
583
911
65,810
Residential mortgage-backed 104,620
2,593
3,547
103,666
Other asset-backed 24,501
756
290
24,967
Corporate 450,338
14,001
863
463,476
Total fixed maturity securities 1,233,772
37,181
12,613
1,258,340

Equity securities:
Common stocks:
Financial services 28,130
12,679
71
40,738
Information technology 19,772
16,912
—
36,684
Healthcare 18,417
12,457
144
30,730
Consumer staples 10,258
4,794
8
15,044
Consumer discretionary 12,224
9,464
83
21,605
Energy 13,273
4,692
769
17,196
Industrials 13,209
15,138
32
28,315
Other 12,114
4,704
31
16,787
Non-redeemable preferred stocks 23,031
1,591
2
24,620
Total equity securities 150,428
82,431
1,140
231,719
Total securities available-for-sale $ 1,384,200
$ 119,612
$ 13,753
$ 1,490,059



June 30, 2019	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair values
($ in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair values
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	8,152	$	118	$	—	$	8,270
U.S. government-sponsored agencies	311,194		9,659		26		320,827
Obligations of states and political subdivisions	252,931		16,771		—		269,702
Commercial mortgage-backed	88,573		5,731		—		94,304
Residential mortgage-backed	184,680		10,895		1,131		194,444
Other asset-backed	17,315		492		163		17,644
Corporate	418,083		17,239		447		434,875
Total fixed maturity securities	$	1,280,928	$	60,905	$	1,767	$	1,340,066

December 31, 2016 Amortized
cost Gross
unrealized
gains Gross
unrealized
losses Estimated
fair values
($ in thousands)
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury $ 7,841
$ —
$ 11
$ 7,830
U.S. government-sponsored agencies 249,495
311
10,609
239,197
Obligations of states and political subdivisions 319,663
17,034
940
335,757
Commercial mortgage-backed 37,964
741
1,133
37,572
Residential mortgage-backed 102,307
1,435
7,308
96,434
Other asset-backed 26,592
732
931
26,393
Corporate 445,663
12,232
1,379
456,516
Total fixed maturity securities 1,189,525
32,485
22,311
1,199,699

Equity securities:
Common stocks:
Financial services 22,922
12,410
210
35,122
Information technology 19,832
10,739
29
30,542
Healthcare 16,092
8,700
85
24,707
Consumer staples 13,438
5,787
125
19,100
Consumer discretionary 14,812
7,672
163
22,321
Energy 14,276
4,873
78
19,071
Industrials 13,005
11,258
18
24,245
Other 13,071
5,345
32
18,384
Non-redeemable preferred stocks 20,031
483
167
20,347
Total equity securities 147,479
67,267
907
213,839
Total securities available-for-sale $ 1,337,004
$ 99,752
$ 23,218
$ 1,413,538



December 31, 2018	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair values
($ in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair values
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	8,139	$	—	$	118	$	8,021
U.S. government-sponsored agencies	303,198		2,799		1,518		304,479
Obligations of states and political subdivisions	273,727		10,375		451		283,651
Commercial mortgage-backed	83,854		1,287		762		84,379
Residential mortgage-backed	161,055		3,374		2,292		162,137
Other asset-backed	21,596		273		1,035		20,834
Corporate	421,563		2,605		4,760		419,408
Total fixed maturity securities	$	1,273,132	$	20,713	$	10,936	$	1,282,909

The following tables set forth the estimated fair values and gross unrealized losses associated with investment securities that were in an unrealized loss position recognized in accumulated other comprehensive income as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018, listed by length of time the securities were consistently in an unrealized loss position.

September 30, 2017 Less than twelve months Twelve months or longer Total
($ in thousands) Fair
values Unrealized
losses Fair
values Unrealized
losses Fair
values Unrealized
losses
Fixed maturity securities:
U.S. treasury $ 248
$ 2
$ —
$ —
$ 248
$ 2
U.S. government-sponsored agencies 104,235
1,695
125,982
4,973
230,217
6,668
Obligations of states and political subdivisions —
—
14,372
332
14,372
332
Commercial mortgage-backed 26,070
133
15,653
778
41,723
911
Residential mortgage-backed 19,872
431
21,155
3,116
41,027
3,547
Other asset-backed 5,211
39
8,809
251
14,020
290
Corporate 9,056
67
15,956
796
25,012
863
Total fixed maturity securities 164,692
2,367
201,927
10,246
366,619
12,613
Equity securities:
Common stocks:
Financial services 2,964
71
—
—
2,964
71
Healthcare 1,594
144
—
—
1,594
144
Consumer staples 159
8
—
—
159
8
Consumer discretionary 1,023
79
99
4
1,122
83
Energy 4,323
769
—
—
4,323
769
Industrials 309
32
—
—
309
32
Other 894
31
—
—
894
31
Non-redeemable preferred stocks —
—
1,998
2
1,998
2
Total equity securities 11,266
1,134
2,097
6
13,363
1,140
Total temporarily impaired securities $ 175,958
$ 3,501
$ 204,024
$ 10,252
$ 379,982
$ 13,753



June 30, 2019	Less than twelve months				Twelve months or longer				Total
($ in thousands)	Fair values		Unrealized losses		Fair values		Unrealized losses		Fair values		Unrealized losses
Securities available-for-sale:
Fixed maturity securities:
U.S. government-sponsored agencies	$	4,987	$	14	$	4,404	$	12	$	9,391	$	26
Residential mortgage-backed	3,638		375		14,201		756		17,839		1,131
Other asset-backed	—		—		7,154		163		7,154		163
Corporate	—		—		16,538		447		16,538		447
Total fixed maturity securities	$	8,625	$	389	$	42,297	$	1,378	$	50,922	$	1,767

December 31, 2016 Less than twelve months Twelve months or longer Total
($ in thousands) Fair
values Unrealized
losses Fair
values Unrealized
losses Fair
values Unrealized
losses
Fixed maturity securities:
U.S. treasury $ 7,830
$ 11
$ —
$ —
$ 7,830
$ 11
U.S. government-sponsored agencies 202,900
10,609
—
—
202,900
10,609
Obligations of states and political subdivisions 43,777
940
—
—
43,777
940
Commercial mortgage-backed 21,695
1,133
—
—
21,695
1,133
Residential mortgage-backed 26,217
1,232
23,625
6,076
49,842
7,308
Other asset-backed 19,091
931
—
—
19,091
931
Corporate 82,657
1,273
8,625
106
91,282
1,379
Total fixed maturity securities 404,167
16,129
32,250
6,182
436,417
22,311
Equity securities:
Common stocks:
Financial services 1,462
12
908
198
2,370
210
Information technology 1,947
29
—
—
1,947
29
Healthcare 3,585
85
—
—
3,585
85
Consumer staples 2,427
125
—
—
2,427
125
Consumer discretionary 1,637
163
—
—
1,637
163
Energy 1,621
33
1,188
45
2,809
78
Industrials 779
18
—
—
779
18
Other 1,472
32
—
—
1,472
32
Non-redeemable preferred stocks 3,356
44
1,877
123
5,233
167
Total equity securities 18,286
541
3,973
366
22,259
907
Total temporarily impaired securities $ 422,453
$ 16,670
$ 36,223
$ 6,548
$ 458,676
$ 23,218



December 31, 2018	Less than twelve months				Twelve months or longer				Total
($ in thousands)	Fair values		Unrealized losses		Fair values		Unrealized losses		Fair values		Unrealized losses
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	—	$	—	$	8,021	$	118	$	8,021	$	118
U.S. government-sponsored agencies	14,620		20		92,603		1,498		107,223		1,518
Obligations of states and political subdivisions	—		—		14,498		451		14,498		451
Commercial mortgage-backed	2,021		21		24,222		741		26,243		762
Residential mortgage-backed	16,852		145		45,597		2,147		62,449		2,292
Other asset-backed	4,810		147		11,691		888		16,501		1,035
Corporate	198,030		2,996		45,734		1,764		243,764		4,760
Total fixed maturity securities	$	236,333	$	3,329	$	242,366	$	7,607	$	478,699	$	10,936

~~Most~~Nearly all of the fixed maturity securities that are in an unrealized loss position are considered investment grade by credit rating agencies. Because management does not intend to sell these securities, does not believe it will be required to sell these securities before recovery, and believes it will collect the amounts due on these securities, it was determined that these securities were not “other-than-temporarily” impaired at ~~September~~June 30, ~~2017~~.

No individual equity security accounted for a material amount of unrealized losses. Because the Company has the ability and intent to hold these securities for a reasonable amount of time to allow for recovery, it was determined that these securities were not “other-than-temporarily” impaired at September 30, 2017.

All of the Company’s preferred stock holdings that are in an unrealized loss position are perpetual preferred stocks. The Company evaluates these perpetual preferred stocks with unrealized losses for “other-than-temporary” impairment similar to fixed maturity securities since they have debt-like characteristics such as periodic cash flows in the form of dividends and call features, are rated by rating agencies and are priced like other long-term callable fixed maturity securities. There was no evidence of any credit deterioration in the issuers of the preferred stocks and the Company does not intend to sell these securities before recovery, nor does it believe it will be required to sell these securities before recovery; therefore, it was determined that these securities were not “other-than-temporarily” impaired at ~~September 30, 2017~~2019.

The amortized cost and estimated fair values of fixed maturity securities available-for-sale at ~~September~~June 30, ~~2017~~2019, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.


($ in thousands)	Amortized cost		Estimated fair values		Amortized cost		Estimated fair values
Securities available-for-sale:
Fixed maturity securities available-for-sale:
Due in one year or less	$	51,964	$	52,464	$	15,670	$	15,732
Due after one year through five years	167,769		173,934		304,720		314,153
Due after five years through ten years	378,169		387,220		312,299		328,334
Due after ten years	462,916		473,065		373,887		392,008
Securities not due at a single maturity date	172,954		171,657		274,352		289,839
Totals	$	1,233,772	$	1,258,340	$	1,280,928	$	1,340,066

A summary of realized investment gains and (losses) and the change in unrealized gains on equity investments is as follows:


	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
($ in thousands)	2017			2016			2017			2016			2019			2018			2019			2018
Fixed maturity securities available-for-sale:
Gross realized investment gains	$	29		$	261		$	408		$	1,935		$	51		$	—		$	51		$	234
Gross realized investment losses	(230		)	(218		)	(2,316		)	(517		)	(1		)	(5,490		)	(273		)	(5,968		)

Equity securities available-for-sale:
Gross realized investment gains	1,396			1,001			10,669			5,849
Gross realized investment losses	(435		)	(50		)	(906		)	(1,683		)
"Other-than-temporary" impairments	(355		)	(275		)	(1,088		)	(976		)
Equity securities:
Net realized investment gains													9,652			1,479			13,749			4,195
Change in unrealized investment gains													(4,674		)	(447		)	15,155			(10,301		)

Other long-term investments, net	(999		)	(1,911		)	(4,601		)	(5,251		)	(770		)	(1,402		)	(1,781		)	587
Totals	$	(594	)	$	(1,192	)	$	2,166		$	(643	)	$	4,258		$	(5,860	)	$	26,901		$	(11,253	)

Gains and losses realized on the disposition of investments are included in net income. The cost of investments sold is determined on the specific identification method using the highest cost basis first. The Company did not have any outstanding cumulative credit losses on fixed maturity securities that have been recognized in earnings from “other-than-temporary” impairments during any of the reported periods. The ~~amounts reported as “other-than-temporary” impairments on equity securities do not include any individually significant items. The~~ net realized investment ~~losses~~gains (losses) recognized on other long-term investments primarily represent changes in the carrying value of a limited partnership that is used solely to support an equity tail-risk hedging strategy.


11.	CONTINGENT LIABILITIES

The Company and Employers Mutual and its other subsidiaries are parties to numerous lawsuits arising in the normal course of the insurance business. The Company believes that the resolution of these lawsuits will not have a material adverse effect on its financial condition or its results of operations. The companies involved have established reserves which are believed adequate to cover any potential liabilities arising out of all such pending or threatened proceedings.

On March 22, 2019, a lawsuit was filed in state court in Iowa relating to the November 15, 2018 proposal by Employers Mutual to acquire all outstanding shares of stock in the Company not already owned by Employers Mutual. The lawsuit was filed as a purported class action, and names as defendants Employers Mutual and the five individual directors of the Company. The lawsuit alleges that the proposal is unfair to the Company’s minority shareholders, and seeks an unspecified amount of damages. Employers Mutual and the Company and its directors deny all allegations of wrongdoing set forth in the lawsuit. On July 26, 2019, the plaintiffs filed an Unopposed Motion to Voluntarily Dismiss the lawsuit. On July 31, 2019, the court granted that motion and dismissed the lawsuit without prejudice.

The participants in the pooling agreement have purchased annuities from life insurance companies, under which the claimant is payee, to fund future payments that are fixed pursuant to specific claim settlement provisions. The Company’s share of case loss reserves eliminated by the purchase of those annuities was ~~$110,000~~$110,000 at December 31, ~~2016.~~2018. The Company had a contingent liability for the aggregate guaranteed amount of the annuities of ~~$183,000~~$183,000 at December 31, ~~2016~~2018 should the issuers of those annuities fail to perform. Although management is not able to verify the amount, the Company would likely have a similar contingent liability at ~~September~~June 30, ~~2017~~2019. The probability of a material loss due to failure of performance by the issuers of these annuities is considered remote.


12.	STOCK REPURCHASE PROGRAM

On November 3, 2011, the Company’s Board of Directors authorized a $15.0 million stock repurchase program. This program does not have an expiration date. The timing and terms of the purchases are determined by management based on board approved parameters and market conditions, and are conducted in accordance with the applicable rules of the Securities and Exchange Commission. Common stock repurchased under this program will be retired by the Company. ~~During~~The Company did not repurchase any shares during the first ~~nine~~six months of ~~2016, the~~2019. The Company repurchased ~~17,300~~25,300 shares ~~under this program~~of its common stock at an average cost of ~~$22.14.~~$25.76 during the first six months of 2018.


13.	ACCUMULATED OTHER COMPREHENSIVE INCOME

The Company has available-for-sale securities and receives an allocation of the actuarial losses and net prior service credits associated with Employers Mutual’s pension and postretirement benefit plans, both of which generate accumulated other comprehensive income (loss) amounts. The following table reconciles, by component, the beginning and ending balances of accumulated other comprehensive income (loss), net of tax.

Accumulated other comprehensive income by component
Unrealized
gains (losses) on
available-for-
sale securities Unrecognized pension and postretirement benefit obligations
($ in thousands) Net actuarial loss Prior service credit Total Total
Balance at December 31, 2016 $ 49,748
$ (16,299 ) $ 12,632
$ (3,667 ) $ 46,081
Other comprehensive income before reclassifications 23,460
—
—
—
23,460
Amounts reclassified from accumulated other comprehensive income (4,399 ) 719
(1,535 ) (816 ) (5,215 )
Other comprehensive income (loss) 19,061
719
(1,535 ) (816 ) 18,245
Balance at September 30, 2017 $ 68,809
$ (15,580 ) $ 11,097
$ (4,483 ) $ 64,326



	Accumulated other comprehensive income (loss) by component
	Unrealized gains (losses) on available-for- sale securities		Unrecognized pension and postretirement benefit obligations
($ in thousands)	Unrealized gains (losses) on available-for- sale securities		Net actuarial loss			Prior service credit			Total			Total
Balance at December 31, 2018	$	7,724	$	(17,626	)	$	11,522		$	(6,104	)	$	1,620
Other comprehensive income (loss) before reclassifications	38,820		—			—			—			38,820
Amounts reclassified from accumulated other comprehensive income (loss)	175		382			(1,021		)	(639		)	(464		)
Other comprehensive income (loss)	38,995		382			(1,021		)	(639		)	38,356
Balance at June 30, 2019	$	46,719	$	(17,244	)	$	10,501		$	(6,743	)	$	39,976

Accumulated other comprehensive income by component
Unrealized
gains (losses) on
available-for-
sale securities Unrecognized pension and postretirement benefit obligations
($ in thousands) Net actuarial loss Prior service credit Total Total
Balance at December 31, 2015 $ 60,369
$ (17,306 ) $ 15,370
$ (1,936 ) $ 58,433
Other comprehensive income before reclassifications 20,698
—
—
—
20,698
Amounts reclassified from accumulated other comprehensive income (2,995 ) 1,271
(1,878 ) (607 ) (3,602 )
Other comprehensive income (loss) 17,703
1,271
(1,878 ) (607 ) 17,096
Balance at September 30, 2016 $ 78,072
$ (16,035 ) $ 13,492
$ (2,543 ) $ 75,529



	Accumulated other comprehensive income (loss) by component
	Unrealized gains (losses) on available-for- sale securities			Unrecognized pension and postretirement benefit obligations
($ in thousands)	Unrealized gains (losses) on available-for- sale securities			Net actuarial loss			Prior service credit			Total			Total
Balance at December 31, 2017	$	83,497		$	(13,074	)	$	12,961		$	(113	)	$	83,384
Cumulative adjustment for adoption of financial instruments recognition and measurement changes	(66,234		)	—			—			—			(66,234		)
Other comprehensive income (loss) before reclassifications	(26,546		)	—			—			—			(26,546		)
Amounts reclassified from accumulated other comprehensive income (loss)	4,530			166			(1,244		)	(1,078		)	3,452
Other comprehensive income (loss)	(22,016		)	166			(1,244		)	(1,078		)	(23,094		)
Balance at June 30, 2018	$	(4,753	)	$	(12,908	)	$	11,717		$	(1,191	)	$	(5,944	)

The following tables display amounts reclassified out of accumulated other comprehensive income (loss) and into net income (loss) during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively.


($ in thousands)	Amounts reclassified from accumulated other comprehensive income							Amounts reclassified from accumulated other comprehensive income (loss)
Accumulated other comprehensive income components	Three months ended September 30, 2017			Nine months ended September 30, 2017			Affected line item in the consolidated statements of income
Unrealized gains on investments:
Reclassification adjustment for net realized investment gains included in net income	$	405		$	6,767		Net realized investment gains (losses), excluding impairment losses on securities available-for-sale
Deferred income tax expense	(141		)	(2,368		)	Total income tax expense (benefit)
Accumulated other comprehensive income (loss) components								Three months ended June 30, 2019			Six months ended June 30, 2019			Affected line item in the consolidated statements of income
Unrealized gains (losses) on investments:
Reclassification adjustment for net realized investment gains (losses) included in net income								$	50		$	(222	)	Net realized investment gains/losses and change in unrealized gains on equity investments
Deferred income tax (expense) benefit								(10		)	47			Total income tax expense (benefit)
Net reclassification adjustment	264			4,399			Net income	40			(175		)	Net income (loss)

Unrecognized pension and postretirement benefit obligations:
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income:
Net actuarial loss	(370		)	(1,107		)	(1)	(234		)	(483		)	(1)
Prior service credit	787			2,362			(1)	646			1,292			(1)
Total before tax	417			1,255				412			809
Deferred income tax expense	(146		)	(439		)
Deferred income tax (expense) benefit								(86		)	(170		)
Net reclassification adjustment	271			816				326			639

Total reclassification adjustment	$	535		$	5,215			$	366		$	464


(1)	These reclassified components of accumulated other comprehensive income are included in the computation of net periodic pension and postretirement benefit income (see note 7, Employee Retirement Plans, for additional details).


($ in thousands)	Amounts reclassified from accumulated other comprehensive income							Amounts reclassified from accumulated other comprehensive income (loss)
Accumulated other comprehensive income components	Three months ended September 30, 2016			Nine months ended September 30, 2016			Affected line item in the consolidated statements of income
Unrealized gains on investments:
Reclassification adjustment for net realized investment gains included in net income	$	718		$	4,608		Net realized investment gains (losses), excluding impairment losses on securities available-for-sale
Deferred income tax expense	(252		)	(1,613		)	Total income tax expense (benefit)
Accumulated other comprehensive income (loss) components								Three months ended June 30, 2018			Six months ended June 30, 2018			Affected line item in the consolidated statements of income
Unrealized gains (losses) on investments:
Reclassification adjustment for net realized investment gains (losses) included in net income								$	(5,490	)	$	(5,734	)	Net realized investment gains/losses and change in unrealized gains on equity investments
Deferred income tax (expense) benefit								1,153			1,204			Total income tax expense (benefit)
Net reclassification adjustment	466			2,995			Net income	(4,337		)	(4,530		)	Net income (loss)

Unrecognized pension and postretirement benefit obligations:
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income:
Net actuarial loss	(1,112		)	(1,956		)	(1)	(107		)	(210		)	(1)
Prior service credit	1,291			2,890			(1)	787			1,575			(1)
Total before tax	179			934				680			1,365
Deferred income tax expense	(62		)	(327		)
Deferred income tax (expense) benefit								(143		)	(287		)
Net reclassification adjustment	117			607				537			1,078

Total reclassification adjustment	$	583		$	3,602			$	(3,800	)	$	(3,452	)


(1)	These reclassified components of accumulated other comprehensive income are included in the computation of net periodic pension and postretirement benefit income (see note 7, Employee Retirement Plans, for additional details).


14.	NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

~~In May 2014, the Financial Accounting Standards Board (FASB) updated its guidance related to the Revenue from Contracts with Customers Topic 606 of the Accounting Standards Codification~~^TM (Codification or ASC). The objective of this update (and other related following updates) is to improve the reporting of revenue by providing a more robust framework for addressing revenue issues, and improved disclosure requirements. Current revenue recognition guidance in U.S. GAAP is comprised of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes result in different accounting for economically similar transactions. This guidance is to be applied retrospectively to annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted as of the original effective date (annual and interim reporting periods beginning after December 15, 2016). The Company will adopt this guidance during the first quarter of 2018. Since premium revenue from insurance contracts is excluded, the Company has only minimal revenue items that are covered by this guidance. The largest revenue item, outside of premium income, is commission income on excess and surplus lines business marketed by EMC Underwriters, LLC, which is included in "Other income" in the consolidated statements of income. Applying this new revenue recognition guidance to commission income produces no material difference compared to that recognized under current practices, as the commission income is typically recognized in full at the time the policy is issued, which is when substantially all of the performance obligation is performed. This guidance will have no impact on the consolidated financial condition or operating results of the Company.

In January 2016, the FASB updated its guidance related to the Financial Instruments-Overall Subtopic 825-10 of the ASC. The objective of this update is to enhance the reporting model for financial instruments to provide financial statement users with more decision-useful information. The major change in reporting from this update that will impact the Company is a requirement that equity investments (excluding those accounted for under the equity method of accounting or those that are consolidated) be measured at fair value, with changes in fair value recognized in net income. While all of the Company's equity investments are already measured at fair value (with the exception of those that are consolidated and those that are accounted for under the equity method of accounting), the Company currently classifies all of its investments in equity securities as available-for-sale, and as such, the changes in fair value are currently recognized in other comprehensive income rather than net income. This guidance is to be applied to annual and interim reporting periods beginning after December 15, 2017, with recognition of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Early adoption is not permitted. The Company will adopt this guidance during the first quarter of 2018. Adoption is not expected to impact consolidated stockholders' equity, but is expected to introduce a material amount of volatility to the Company's consolidated net income.

In February 2016, the FASB issued updated guidance in Leases Topic 842 of the ASC, which supersedes the guidance in Leases Topic 840 of the ASC. The objective of this update is to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet, and disclosure of key information about leasing arrangements. This guidance is effective for interim and annual periods beginning after December 15, 2018, and is to be applied using a modified retrospective approach. Early adoption is permitted. The Company will adopt this guidance during the first quarter of 2019. Management continues to research this guidance, which thus far has lead management to a preliminary determination that lease costs allocated to the Company through the pooling and quota share agreements can not be attributed to a specified asset, and therefore do not meet the definition of a leased asset contained in the guidance. As a result, adoption of this guidance is not expected to have a material impact on the Company's consolidated financial condition or net income.

In June 2016, the FASB issued updated guidance in Financial Instruments-Credit Losses Topic 326 of the ASC. The objective of this update is to provide information about expected credit losses on financial instruments and other commitments to extend credit. Specifically, this updated guidance replaces the current incurred loss impairment methodology, which delays recognition of a loss until it is probable a loss has been incurred, with a methodology that reflects expected credit losses considering a broader range of reasonable and supportable information. This guidance covers financial assets that are not accounted for at fair value through net income, thus ~~will~~is not be applicable to the Company's equity ~~investments upon implementation of the updated guidance described above for the Financial Instruments-Overall Subtopic 825-10.~~investments. This guidance is effective for interim and annual periods beginning after December 15, 2019, and is to be applied with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (modified-retrospective approach). Early adoption is permitted, but only to fiscal years beginning after December 15, 2018. The Company will adopt this guidance during the first quarter of 2020. The Company is currently evaluating the impact this guidance will have on the Company's consolidated financial condition and net income.

In March 2017, the FASB issued updated guidance in Compensation-Retirement Benefits Topic 715 of the ASC. The objective of this update is to improve the presentation of net periodic pension and postretirement benefit costs by disaggregating the components of these expenses (disclosing the service cost component separately from the other components) for income statement reporting. Also included in this update is a prohibition against including components of the net periodic pension and postretirement benefit costs, other than the service cost component, in any capitalized assets. This guidance is effective for interim and annual periods beginning after December 15, 2017. The portion of the guidance related to the income statement display of net periodic pension and postretirement benefit costs is to be applied retrospectively, while the prohibition against including these costs, other than the service cost component, in capitalized assets is to be applied prospectively. Early adoption is permitted. The Company will adopt this guidance during the first quarter of 2018. Adoption will not impact consolidated stockholders' equity initially; however, the prohibition against including components of the net periodic pension and postretirement benefit costs, other than the service cost component, in capitalized assets is expected to result in a relatively small change in the deferred policy acquisition cost asset starting March 31, 2018, which is expected to have an immaterial impact, net of tax, on consolidated stockholders' equity and net income from that which would otherwise have been reported.

EMC INSURANCE GROUP INC. AND SUBSIDIARIES



ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited)

The term “Company” is used below interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC Insurance Group Inc. and its subsidiaries. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included under Item 1 of this Form 10-Q, and the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s ~~2016~~2018 Form 10-K.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides issuers the opportunity to make cautionary statements regarding forward-looking statements. Accordingly, any forward-looking statement contained in this report is based on management’s current beliefs, assumptions and expectations of the Company’s future performance, taking all information currently available into account. These beliefs, assumptions and expectations can change as the result of many possible events or factors, not all of which are known to management. If a change occurs, the Company’s business, financial condition, liquidity, results of operations, plans and objectives may vary materially from those expressed in the forward-looking statements. The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the following:

catastrophic events and the occurrence of significant severe weather conditions;

the adequacy of loss and settlement expense reserves;

state and federal legislation and regulations;

changes in the U.S. federal corporate tax law;

changes in the property and casualty insurance industry, interest rates or the performance of financial markets and the general economy;

rating agency actions;

“other-than-temporary” investment impairment losses; and

other risks and uncertainties inherent to the Company’s business, including those discussed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K.

Management intends to identify forward-looking statements when using the words “believe”, “expect”, “anticipate”, “estimate”, “project”, “may”, “intend”, “likely” or similar expressions. Undue reliance should not be placed on these forward-looking statements. The Company disclaims any obligation to update such statements or to announce publicly the results of any revisions that it may make to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

UPDATE ON 2018 CORPORATE EVENTS

Proposal to purchase all of the Company's outstanding common stock

On May 8, 2019, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Employers Mutual and Oak Merger Sub, Inc., an Iowa corporation and wholly owned subsidiary of Employers Mutual ("Merger Sub"). Pursuant to the Merger Agreement, Merger Sub will merge with and into the Company, the separate corporate existence of Merger Sub will cease, and the Company will continue its corporate existence under Iowa law as the surviving corporation (the "Merger"). As a result of the Merger, Employers Mutual will own all outstanding shares of the Company. At the effective time of the Merger, each issued and outstanding share of common stock of the Company (other than (i) shares in respect of which appraisal rights are exercised and perfected and (ii) shares held by Employers Mutual, Merger Sub, the Company or any wholly-owned subsidiary of the Company) will be canceled and converted into the right to receive $36.00 per share in cash, without interest. The Merger Agreement is subject to shareholder approval. A special meeting of the shareholders of the Company, at which the Merger Agreement will be considered and voted upon, is expected to be held during the third quarter.

Exit from personal lines of business

As announced on October 29, 2018, the Company and Employers Mutual made a strategic decision to exit personal lines business so that more time and resources could be dedicated to the commercial and reinsurance business. The companies stopped writing personal lines policies in most states (regulatory restrictions apply in some states) during the first quarter of 2019 and non-renewal notices are being sent to policyholders in accordance with state regulations as existing policies expire. Personal lines premiums earned declined 22.0 percent and 11.7 percent during the second quarter and first six months of 2019, respectively, while the loss and settlement ratios increased significantly. During the remainder of 2019, the loss and settlement expense ratio for personal lines business will remain at an elevated level as the companies will continue to process claims and incur expenses to support this business, while premiums earned will continue to decline. All personal lines business is expected to roll off the companies' books by the end of the first quarter of 2020.

Digital transformation project

During 2018, management began a digital transformation project that will guide the design, build and deployment of a new "EMC Digital Business Platform". This digital platform will consist of new core insurance systems, such as policy, rating, billing, claims, agent portal, customer portal, and an enterprise data warehouse. These new systems, together with some enhanced systems, will replace the majority of Employers Mutual's current legacy systems. Employers Mutual will also adopt cloud technology and integrate and configure vendor purchased systems. Management, with the assistance of outside consultants, has selected a vendor product and established a five-year project time line. While the total cost of the project has not yet been finalized, management currently estimates that the Company's portion of the pre-tax expense will approximate $37.0 million over the next five years.

COMPANY OVERVIEW

The Company, a majority owned subsidiary of Employers Mutual, ~~Casualty Company (Employers Mutual),~~ is an insurance holding company with operations that consist of a property and casualty insurance segment and a reinsurance segment. Management evaluates the performance of its insurance segments based upon statutory underwriting profit (loss), which is calculated as premiums earned, less loss and settlement expenses and acquisition and other expenses. Additional information is presented in note 5, "Segment Information", of Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

Property and casualty insurance operations are conducted through three subsidiaries and represent the most significant segment of the Company’s business, totaling 7875 percent of consolidated premiums earned during the first ~~nine~~six months of ~~2017~~.2019. The property and casualty insurance operations are integrated with the property and casualty insurance operations of Employers Mutual through participation in a reinsurance pooling agreement. Because the Company conducts its property and casualty insurance operations together with Employers Mutual through the reinsurance pooling agreement, the Company shares the same business philosophy, management, employees and facilities as Employers Mutual and offers the same types of insurance products.

Reinsurance operations are conducted through EMC Reinsurance Company and accounted for 2225 percent of consolidated premiums earned during the first ~~nine~~six months of ~~2017~~2019. The principal business activity of EMC Reinsurance Company is to assume, through a quota share reinsurance agreement, 100 percent of Employers Mutual’s assumed reinsurance business, subject to certain exceptions.

An inter-company reinsurance program, consisting of two semi-annual aggregate catastrophe excess of loss treaties, is in place between the Company's insurance subsidiaries in the property and casualty insurance segment and Employers Mutual. The program is intended to reduce the volatility of the Company's quarterly results caused by excessive catastrophe and storm losses, and provide protection from both the frequency and severity of such losses. An inter-company reinsurance program is also in place between the Company's reinsurance subsidiary and Employers Mutual. This program also consists of two treaties, one being a per occurrence catastrophe excess of loss treaty and the other an annual aggregate catastrophe excess of loss treaty. The terms of all of these treaties ~~are the same as 2016, with the exception of the costs.~~did not change from 2018. For detailed information regarding the inter-company reinsurance programs, see note 2, "Transactions with Affiliates", of Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accounting policies and estimates considered by management to be critically important in the preparation and understanding of the Company’s financial statements and related disclosures are presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s ~~2016~~2018 Form 10-K.

During the third quarter of 2016, management implemented a new reserving methodology for the determination of direct bulk reserves in the property and casualty insurance segment. The new methodology, which is referred to as the accident year ultimate estimate approach, better conforms to industry practices and provides increased transparency of the drivers of the property and casualty insurance segment's performance. Although the reserves carried at September 30, 2016 were calculated under the new reserving methodology, the explicit drivers of development on prior years' reserves for the three and nine months ended September 30, 2016 could not be identified because the reserves carried at December 31, 2015 were calculated under the prior reserving methodology, and the implicit accident year ultimate assumptions underlying that methodology were not known.

The implementation of the new reserving methodology did not have a material impact on total carried reserves for the property and casualty insurance segment at September 30, 2016; however, approximately $5.6 million of incurred but not reported (IBNR) loss reserves and settlement expense reserves were reallocated from prior accident years to the current accident year in multiple lines of business. This reduction in prior accident years' reserves was reported as favorable development; however, this development was "mechanical" in nature, and did not have any impact on earnings because the total amount of carried reserves did not change as a result of this reallocation.

~~NON-GAAP INFORMATION~~

The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP). Management uses certain non-GAAP financial measures for evaluating the Company’s performance. These measures are considered non-GAAP financial measures under applicable Securities and Exchange Commission (SEC) rules because they are not displayed as separate line items in the consolidated financial statements or are not required to be disclosed in the notes to financial statements or, in some cases, include or exclude certain items not ordinarily included or excluded in the most comparable GAAP financial measure. The Company’s calculation of non-GAAP financial measures may differ from similar measures used by other companies, so investors should exercise caution when comparing the Company’s non-GAAP financial measures to the measures used by other companies. In this report, a non-GAAP financial measure known as the "underlying loss and settlement expense ratio" is utilized in describing the Company's results of operations with respect to the property and casualty insurance segment. The most directly comparable GAAP financial measure is reconciled to this non-GAAP financial measure under "Results of Operations" below.

RESULTS OF OPERATIONS

Results of operations by segment and on a consolidated basis for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 are as follows:


	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
($ in thousands)	2017			2016			2017			2016			2019			2018			2019			2018
Property and casualty insurance
Premiums earned	$	120,472		$	116,372		$	350,307		$	338,589		$	126,297		$	121,495		$	251,069		$	240,127
Losses and settlement expenses	74,039			81,643			231,067			225,207			93,594			94,255			170,574			177,756
Acquisition and other expenses	38,646			39,840			120,664			119,260			49,183			45,503			94,358			89,408
Underwriting profit (loss)	$	7,787		$	(5,111	)	$	(1,424	)	$	(5,878	)
Underwriting loss													$	(16,480	)	$	(18,263	)	$	(13,863	)	$	(27,037	)

GAAP ratios:
Loss and settlement expense ratio	61.5		%	70.2		%	66.0		%	66.5		%	74.1		%	77.6		%	67.9		%	74.0		%
Acquisition expense ratio	32.0		%	34.2		%	34.4		%	35.2		%	38.9		%	37.4		%	37.6		%	37.3		%
Combined ratio	93.5		%	104.4		%	100.4		%	101.7		%	113.0		%	115.0		%	105.5		%	111.3		%

Reconciliation of loss and settlement expense ratio to underlying loss and settlement expense ratio¹:
Loss and settlement expense ratio	61.5		%	70.2		%	66.0		%	66.5		%	74.1		%	77.6		%	67.9		%	74.0		%
Catastrophe and storm losses	(8.2		)%	(12.7		)%	(8.5		)%	(10.3		)%	(12.8		)%	(12.9		)%	(8.8		)%	(8.3		)%
Favorable development on prior years' reserves	5.2		%	5.9		%	4.4		%	4.9		%	3.9		%	2.6		%	5.8		%	2.2		%
Underlying loss and settlement expense ratio	58.5		%	63.4		%	61.9		%	61.1		%	65.2		%	67.3		%	64.9		%	67.9		%

Favorable development on prior years' reserves²	$	(6,242	)	$	(6,850	)	$	(15,555	)	$	(16,637	)
Favorable development on prior years' reserves													$	(4,932	)	$	(3,151	)	$	(14,575	)	$	(5,286	)

Catastrophe and storm losses	$	9,922		$	14,787		$	29,922		$	34,787		$	16,112		$	15,707		$	22,000		$	19,967

¹ ~~Property and casualty insurance segment's underlying~~Underlying loss and settlement expense ratio: The loss and settlement expense ratio is the ratio (expressed as a percentage) of losses and settlement expenses incurred to premiums earned, which management uses as a measure of underwriting profitability of the Company’s property and casualty insurance business. The underlying loss and settlement expense ratio is a non-GAAP financial measure which represents the loss and settlement expense ratio, excluding the impact of catastrophe and storm losses and development on prior years’ reserves. Management uses this ratio as an indicator of the property and casualty insurance segment’s underwriting discipline and performance for the current accident year. Management believes this ratio is useful for investors to understand the property and casualty insurance segment’s periodic earnings and variability of earnings caused by the unpredictable nature (i.e., the timing and amount) of catastrophe and storm losses and development on prior years’ reserves. While this measure is consistent with measures utilized by investors and analysts to evaluate performance, it is not intended as a substitute for the GAAP financial measure of loss and settlement expense ratio.

² During the third quarter of 2016, management implemented a new reserving methodology for the determination of direct bulk reserves in the property and casualty insurance segment. The new methodology, which is referred to as the accident year ultimate estimate approach, better conforms to industry practices and provides increased transparency of the drivers of the property and casualty insurance segment's performance. In connection with this change in reserving methodology, there was a reallocation of IBNR loss reserves and allocated settlement expense reserves from prior accident years to the current accident year in multiple lines of business. This change resulted in the movement of approximately $5.6 million of reserves from prior accident years to the current accident year that was reported as favorable development; however, this development is "mechanical in nature", and did not have an impact on earnings because the total amount of carried reserves did not change. This "mechanical" favorable development has been excluded from the amounts presented for 2016.





	Three months ended June 30,
	2019						2018
($ in thousands)	Premiums earned		Losses and settlement expenses		Loss and settlement expense ratio		Premiums earned		Losses and settlement expenses		Loss and settlement expense ratio
Property and casualty insurance
Commercial lines:
Automobile	$	34,260	$	25,606	74.7	%	$	31,660	$	26,717	84.4	%
Property	28,853		23,594		81.8	%	27,196		23,529		86.5	%
Workers' compensation	24,032		15,009		62.5	%	25,229		22,513		89.2	%
Other liability	29,170		18,504		63.4	%	25,591		11,971		46.8	%
Other	2,501		220		8.8	%	2,228		125		5.6	%
Total commercial lines	118,816		82,933		69.8	%	111,904		84,855		75.8	%
Personal lines	7,481		10,661		142.5	%	9,591		9,400		98.0	%
Total property and casualty insurance	$	126,297	$	93,594	74.1	%	$	121,495	$	94,255	77.6	%




	Six months ended June 30,
	2019							2018
($ in thousands)	Premiums earned		Losses and settlement expenses			Loss and settlement expense ratio		Premiums earned		Losses and settlement expenses		Loss and settlement expense ratio
Property and casualty insurance
Commercial lines:
Automobile	$	67,167	$	47,021		70.0	%	$	62,304	$	53,173	85.3	%
Property	56,524		41,022			72.6	%	53,788		42,252		78.6	%
Workers' compensation	47,575		28,744			60.4	%	50,131		35,044		69.9	%
Other liability	58,075		35,845			61.7	%	50,553		29,672		58.7	%
Other	5,007		(164		)	(3.3	)%	4,414		619		14.0	%
Total commercial lines	234,348		152,468			65.1	%	221,190		160,760		72.7	%
Personal lines	16,721		18,106			108.3	%	18,937		16,996		89.7	%
Total property and casualty insurance	$	251,069	$	170,574		67.9	%	$	240,127	$	177,756	74.0	%

Three months ended September 30,
2017 2016
($ in thousands) Premiums earned Losses and settlement expenses Loss and settlement expense ratio Premiums earned Losses and settlement expenses Loss and settlement expense ratio
Property and casualty insurance
Commercial lines:
Automobile $ 30,229
$ 24,293
80.4 % $ 28,113
$ 26,274
93.5 %
Property 27,980
15,803
56.5 % 27,471
17,227
62.7 %
Workers' compensation 25,373
11,386
44.9 % 24,536
13,510
55.1 %
Other liability 24,996
15,802
63.2 % 24,277
14,179
58.4 %
Other 2,203
447
20.3 % 2,102
705
33.6 %
Total commercial lines 110,781
67,731
61.1 % 106,499
71,895
67.5 %
Personal lines 9,691
6,308
65.1 % 9,873
9,748
98.7 %
Total property and casualty insurance $ 120,472
$ 74,039
61.5 % $ 116,372
$ 81,643
70.2 %



	Three months ended June 30,						Six months ended June 30,
($ in thousands)	2019			2018			2019			2018
Reinsurance
Premiums earned	$	41,836		$	36,451		$	84,366		$	73,605
Losses and settlement expenses	28,923			24,836			56,912			51,963
Acquisition and other expenses	10,600			8,763			20,758			17,125
Underwriting profit	$	2,313		$	2,852		$	6,696		$	4,517

GAAP ratios:
Loss and settlement expense ratio	69.1		%	68.1		%	67.5		%	70.6		%
Acquisition expense ratio	25.3		%	24.1		%	24.6		%	23.3		%
Combined ratio	94.4		%	92.2		%	92.1		%	93.9		%

(Favorable) unfavorable development on prior years' reserves	$	2,606		$	2,640		$	(1,042	)	$	(801	)

Catastrophe and storm losses	$	1,006		$	1,003		$	1,025		$	1,399




	Three months ended June 30,
	2019						2018
($ in thousands)	Premiums earned		Losses and settlement expenses		Loss and settlement expense ratio		Premiums earned		Losses and settlement expenses		Loss and settlement expense ratio
Reinsurance
Pro rata reinsurance	$	11,147	$	10,175	91.3	%	$	10,070	$	5,116	50.8	%
Excess of loss reinsurance	30,689		18,748		61.1	%	26,381		19,720		74.8	%
Total reinsurance	$	41,836	$	28,923	69.1	%	$	36,451	$	24,836	68.1	%




	Six months ended June 30,
	2019						2018
($ in thousands)	Premiums earned		Losses and settlement expenses		Loss and settlement expense ratio		Premiums earned		Losses and settlement expenses		Loss and settlement expense ratio
Reinsurance
Pro rata reinsurance	$	24,153	$	16,089	66.6	%	$	23,143	$	9,781	42.3	%
Excess of loss reinsurance	60,213		40,823		67.8	%	50,462		42,182		83.6	%
Total reinsurance	$	84,366	$	56,912	67.5	%	$	73,605	$	51,963	70.6	%

Nine months ended September 30,
2017 2016
($ in thousands) Premiums earned Losses and settlement expenses Loss and settlement expense ratio Premiums earned Losses and settlement expenses Loss and settlement expense ratio
Property and casualty insurance
Commercial lines:
Automobile $ 87,275
$ 74,926
85.8 % $ 82,449
$ 69,763
84.6 %
Property 79,551
51,291
64.5 % 77,292
52,687
68.2 %
Workers' compensation 75,419
41,451
55.0 % 71,272
39,680
55.7 %
Other liability 73,378
40,833
55.6 % 72,086
38,045
52.8 %
Other 6,509
777
11.9 % 6,246
648
10.4 %
Total commercial lines 322,132
209,278
65.0 % 309,345
200,823
64.9 %
Personal lines 28,175
21,789
77.3 % 29,244
24,384
83.4 %
Total property and casualty insurance $ 350,307
$ 231,067
66.0 % $ 338,589
$ 225,207
66.5 %



	Three months ended June 30,						Six months ended June 30,
($ in thousands, except per share amounts)	2019			2018			2019			2018
Consolidated
REVENUES
Premiums earned	$	168,133		$	157,946		$	335,435		$	313,732
Net investment income	12,951			11,778			25,714			23,149
Net realized investment gains (losses) and change in unrealized gains on equity investments	4,258			(5,860		)	26,901			(11,253		)
Other income	1,557			2,773			3,092			4,388
	186,899			166,637			391,142			330,016
LOSSES AND EXPENSES
Losses and settlement expenses	122,517			119,091			227,486			229,719
Acquisition and other expenses	59,783			54,266			115,116			106,533
Interest expense	170			171			341			313
Other expense	2,788			831			4,273			1,701
	185,258			174,359			347,216			338,266

Income (loss) before income tax expense (benefit)	1,641			(7,722		)	43,926			(8,250		)
Income tax expense (benefit)	356			(2,727		)	9,110			(3,179		)
Net income (loss)	$	1,285		$	(4,995	)	$	34,816		$	(5,071	)

Net income (loss) per share	$	0.06		$	(0.24	)	$	1.61		$	(0.24	)

GAAP ratios:
Loss and settlement expense ratio	72.9		%	75.4		%	67.8		%	73.2		%
Acquisition expense ratio	35.6		%	34.4		%	34.3		%	34.0		%
Combined ratio	108.5		%	109.8		%	102.1		%	107.2		%

Favorable development on prior years' reserves	$	(2,326	)	$	(511	)	$	(15,617	)	$	(6,087	)

Catastrophe and storm losses	$	17,118		$	16,710		$	23,025		$	21,366

Three months ended September 30, Nine months ended September 30,
($ in thousands) 2017 2016 2017 2016
Reinsurance
Premiums earned $ 34,718
$ 35,809
$ 99,207
$ 102,775
Losses and settlement expenses 45,537
26,530
92,022
70,895
Acquisition and other expenses 7,351
8,555
23,026
24,906
Underwriting profit (loss) $ (18,170 ) $ 724
$ (15,841 ) $ 6,974

GAAP ratios:
Loss and settlement expense ratio 131.2 % 74.1 % 92.8 % 69.0 %
Acquisition expense ratio 21.1 % 23.9 % 23.2 % 24.2 %
Combined ratio 152.3 % 98.0 % 116.0 % 93.2 %

(Favorable) unfavorable development on prior years' reserves $ 1,822
$ (796 ) $ (2,062 ) $ (6,880 )

Catastrophe and storm losses $ 19,499
$ 2,266
$ 27,996
$ 10,747

Three months ended September 30,
2017 2016
($ in thousands) Premiums earned Losses and settlement expenses Loss and settlement expense ratio Premiums earned Losses and settlement expenses Loss and settlement expense ratio
Reinsurance
Pro rata reinsurance $ 10,730
$ 10,159
94.7 % $ 15,066
$ 10,235
67.9 %
Excess of loss reinsurance 23,988
35,378
147.5 % 20,743
16,295
78.6 %
Total reinsurance $ 34,718
$ 45,537
131.2 % $ 35,809
$ 26,530
74.1 %

Nine months ended September 30,
2017 2016
($ in thousands) Premiums earned Losses and settlement expenses Loss and settlement expense ratio Premiums earned Losses and settlement expenses Loss and settlement expense ratio
Reinsurance
Pro rata reinsurance $ 33,181
$ 23,979
72.3 % $ 44,175
$ 26,367
59.7 %
Excess of loss reinsurance 66,026
68,043
103.1 % 58,600
44,528
76.0 %
Total reinsurance $ 99,207
$ 92,022
92.8 % $ 102,775
$ 70,895
69.0 %

Three months ended September 30, Nine months ended September 30,
($ in thousands, except per share amounts) 2017 2016 2017 2016
Consolidated
REVENUES
Premiums earned $ 155,190
$ 152,181
$ 449,514
$ 441,364
Net investment income 11,501
11,474
33,679
35,883
Realized investment gains (losses) (594 ) (1,192 ) 2,166
(643 )
Other losses (179 ) (85 ) (834 ) (19 )
165,918
162,378
484,525
476,585
LOSSES AND EXPENSES
Losses and settlement expenses 119,576
108,173
323,089
296,102
Acquisition and other expenses 45,997
48,395
143,690
144,166
Interest expense 84
84
253
253
Other expense 701
679
2,264
2,053
166,358
157,331
469,296
442,574

Income (loss) before income tax expense (benefit) (440 ) 5,047
15,229
34,011
Income tax expense (benefit) (1,186 ) 918
2,175
9,100
Net income $ 746
$ 4,129
$ 13,054
$ 24,911

Net income per share $ 0.03
$ 0.20
$ 0.61
$ 1.19

GAAP ratios:
Loss and settlement expense ratio 77.1 % 71.1 % 71.9 % 67.1 %
Acquisition expense ratio 29.6 % 31.8 % 31.9 % 32.7 %
Combined ratio 106.7 % 102.9 % 103.8 % 99.8 %

Favorable development on prior years' reserves²
$ (4,420 ) $ (7,646 ) $ (17,617 ) $ (23,517 )

Catastrophe and storm losses $ 29,421
$ 17,053
$ 57,918
$ 45,534

~~Net~~The Company reported net income ~~declined to $746,000~~of $1.3 million ($~~0.03~~0.06 per share) and ~~$13.1~~$34.8 million ($~~0.61~~1.61 per share) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 from $4.1~~2019, compared to net losses of $5.0 million ($~~0.20~~0.24 per share) and ~~$24.9~~$5.1 million ($~~1.19~~0.24 per share) during the same periods in ~~2016. These declines~~2018. Included in the net income amounts reported for the three and six months ended June 30, 2019 are ~~primarily due to~~ a ~~record amount~~pre-tax decline of third quarter catastrophe and storm losses incurred by the reinsurance segment. Management currently estimates that the reinsurance segment's ultimate gross losses from Hurricanes Harvey, Irma and Maria will be approximately $9.0 million, $7.5$4.7 million and ~~$3.0~~a pre-tax increase of $15.2 million, respectively, in unrealized gains on the Company's equity investments, compared to pre-tax declines of $447,000 and ~~that~~$10.3 million in the same periods in 2018. Also included in the net income amounts reported for the three and six months ended June 30, 2019 are $8.9 million and $11.7 million, respectively, of pre-tax realized investment gains, compared to $5.4 million and $952,000 of realized investment losses ~~from two Mexico earthquakes will be approximately $1.5 million. These estimates are before factoring~~reported during the same periods in ~~recoveries under the annual aggregate catastrophe excess of loss treaty with Employers Mutual.~~2018. The property and casualty insurance segment ~~was much less impacted by these events, with Hurricanes Harvey~~reported improved underwriting results for both the second quarter and ~~Irma producing combined losses~~first six months of ~~less than $1.0 million. A~~2019, while the reinsurance segment reported a slight decline in underwriting results for the second quarter, but improved underwriting results for the first six months of 2019. The property casualty insurance segment benefited from both an increase in favorable development on prior years' reserves and improvement in the ~~reinsurance segment also contributed to~~underlying loss and settlement expense ratios (which exclude the ~~decline in underwriting results for both the three and nine month periods~~impact of ~~2017.~~

Because the $20.0 million retention amount in the annual aggregate treaty has been filled, the reinsurance subsidiary will only retain 20 percent of any fourth quarter catastrophe or storm events with losses greater than $500,000, up to the $100.0 million limit of coverage. The property and casualty insurance segment has $5.1 million of retention remaining in its July 1 through December 31 aggregate catastrophe excess of loss treaty with Employers Mutual, meaning that catastrophe and storm losses ~~will be capped at $5.1 million~~and development on prior years' reserves) in comparison to the corresponding 2018 periods, which were impacted by a high level of non-catastrophe losses. The improvements in the ~~fourth quarter, unless~~segments' reported results were partially offset by expenses incurred by the ~~$12.0 million limit~~holding company in connection with Employers Mutual's proposal to purchase all of ~~protection is exceeded. The property and casualty insurance segment was further into~~ the ~~$15.0 million retention amount at September 30, 2016; therefore, fourth quarter 2016 catastrophe and storm losses were capped at $512,000.~~Company's outstanding common stock.

Premium income

Premiums earned increased ~~2.0~~6.4 percent and ~~1.8~~6.9 percent to ~~$155.2~~$168.1 million and ~~$449.5~~$335.4 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 from ~~$152.2~~$157.9 million and ~~$441.4~~$313.7 million for the same periods in ~~2016~~.2018. Rate levels for both segments continue to be constrained by a high level of competition, especially for quality accounts with good loss ~~experience.~~ experience; however, the moderate rate level improvements that began last year have continued through the first six months of 2019. Average rate level increases ~~continue to be~~were slightly positive in the property and casualty insurance segment, with variances by line of business. Commercial auto continues to receive larger (mid-to-upper single digit) rate increases, while rates for the workers' compensation line of business continue to decline due to mandatory rate ~~levels~~decreases. Rate level changes were mixed in the reinsurance segment ~~stabilized somewhat~~ during the January 1, ~~2017~~2019 renewal season, ~~when approximately 70 percent~~as the reinsurance industry placed greater emphasis on wildfire exposures following a second consecutive year of significant losses from this peril. As a result, programs with wildfire losses received the ~~business renews, after several years of declines.~~largest rate level increases, while other programs generally renewed flat or slightly down.

Premiums earned in the property and casualty insurance segment increased ~~3.5~~4.0 percent and ~~3.5~~4.6 percent to ~~$120.5~~$126.3 million and ~~$350.3~~$251.1 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 from ~~$116.4~~$121.5 million and ~~$338.6~~$240.1 million for the same periods in ~~2016. These~~2018. The majority of these increases are ~~primarily~~ attributed to ~~growth in insured exposures, and to a lesser extent higher policy counts and~~ small rate level increases on renewal business and an increase in retained policies in the commercial lines of business. ~~New~~Personal lines premiums earned declined 22.0 percent and 11.7 percent during the second quarter and first six months of 2019 as new business was not accepted after the first quarter due to management's decision in late 2018 to exit this line of business. The decline in personal lines premiums earned will continue during the remainder of 2019 as existing policies will not be renewed upon expiration. Commercial lines new business premium (representing 1516 percent of the pool participants’ direct premiums written) was approximately 1218 percent higher ~~than~~ in the ~~first nine~~six months ~~of 2016. Commercial lines new business continues to be~~ended June 30, 2019 than the same period in the desired range of growth, and accounted for most of the increase in total new business premium. Personal lines new business premium was up significantly, but is measured against a relatively small amount of new business premium in the first nine months of 2016. While management2018. Management continues to seek growth in most territories ~~it is~~for its commercial lines of business, particularly ~~focused on achieving growth~~ outside of the core Midwest market, which will help diversify the pool participants' book of business geographically while staying consistent with the industry and ~~line of business~~the commercial lines mix of ~~the existing book of~~ business. ~~Renewal~~Commercial lines renewal business premium increased approximately ~~four~~5 percent during the first ~~nine~~six months of ~~2017.~~2019. After factoring in the continued implementation of some mandatory rate reductions on workers' compensation business, ~~in a few states,~~ the overall rate change on renewal business was ~~positive, but less than one~~approximately 2.2 percent. Rate levels are expected to be mixed during the remainder of ~~2017,~~2019, with the largest rate increases expected in the commercial auto line of business. Rate decreases are expected to slow or stop in the workers' compensation and general liability lines of business, and rates on most other lines of business are expected to ~~be flat or~~ increase slightly. The ~~overall~~commercial lines policy retention rate remained strong during the first ~~nine~~three months of ~~2017~~2019 at ~~85.8~~87 percent, ~~(commercial lines at 87.0 percent and personal lines at 83.5 percent). These~~which approximates the retention ~~rates approximate those~~rate reported at the end of ~~2016.~~2018.

Premiums earned in the reinsurance segment ~~decreased 3.0~~increased 14.8 percent and ~~3.5~~14.6 percent to ~~$34.7~~$41.8 million and ~~$99.2~~$84.4 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 from ~~$35.8~~$36.5 million and ~~$102.8~~$73.6 million for the same periods in ~~2016~~.2018. These ~~decreases reflect MRB's withdrawal from non-standard automobile business,~~increases are attributed to increases in participation and ~~declines in some casualty business that converted from a pro rata structure in 2016 to an excess of loss structure in 2017. The addition of some~~higher estimated premiums achieved on existing multi-line contracts, as well as new business written in the property and growth on some existing accounts partially offset these declines in premium. The assumed reinsurance market continues to experience pricing pressure due to the influx of nontraditional capital and, prior to the third quarter of 2017, the lack of major catastrophic events. Pricing declines did moderateliability excess lines, including from Mutual Re. Underwriting capacity tightened somewhat during the January 1, ~~2017~~2019 renewal ~~season, as~~season. As a result, reinsurance rate levels were mixed, with increases implemented on ~~excess of loss reinsurance business were largely unchanged, which was an improvement~~programs that sustained losses from ~~the declines experienced~~wildfires and other catastrophic events, while rate levels remained stable on the January 1, 2016 renewals. There was a moderate deterioration in the pricing of catastrophe reinsurance for the industry at the mid-year renewal cycle; however, the majority of the reinsurance segment's business (approximately 70 percent) renewed at January 1,programs not affected by 2017 and ~~as a result this reduction in pricing is expected to have a limited impact on 2017 premiums. Management expects rate levels to increase slightly on certain lines of business during the January 1,~~ 2018 ~~renewal season due to the high level of catastrophe losses experienced by the industry in the third quarter of 2017.~~catastrophic events.

Losses and settlement expenses

Losses and settlement expenses increased ~~10.5~~2.9 percent and ~~9.1~~decreased 1.0 percent to ~~$119.6~~$122.5 million and ~~$323.1~~$227.5 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 from ~~$108.2~~$119.1 million and ~~$296.1~~$229.7 million for the same periods in ~~2016~~.2018. The loss and settlement expense ~~ratio increased~~ratios decreased to ~~77.1~~72.9 percent and ~~71.9~~67.8 percent for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 from ~~71.1~~75.4 percent and ~~67.1~~73.2 percent for the same periods in ~~2016~~.2018. The ~~record amount of catastrophe and storm losses experienced by the reinsurance segment during the third quarter of 2017 is largely responsible for the increase~~decreases in the ~~ratio for the three months ended September 30, 2017,~~loss and accounts for approximately half of the increase in the ratio for the nine months ended September 30, 2017. A decline in favorable development on prior years' reserves accounts for most of the remaining increase in the ratio for the nine months ended; whereas its impact on the ratio for the three months ended was offset by an improvement insettlement ratios are primarily attributed to the property and casualty insurance ~~segment's~~segment, and reflect increases in the amount of favorable development experienced on prior years' reserves and improvement in the underlying loss and settlement expense ~~ratio.~~ratios. Although the reinsurance segment reported a small increase in the loss and settlement expense ratio for the second quarter, the ratio declined for the first six months of 2019 due to an increase in premiums earned and improved loss experience. The actuarial analysis of the Company’s carried reserves at ~~September~~June 30, ~~2017~~2019 indicates that they are in the upper ~~half~~third of the range of reasonable reserves.

The loss and settlement expense ~~ratio~~ratios for the property and casualty insurance segment decreased to ~~61.5~~74.1 percent and ~~66.0~~67.9 percent for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 from ~~70.2~~77.6 percent and ~~66.5~~74.0 percent for the same periods in ~~2016. Lower catastrophe and storm losses produced the decline in the ratio for the nine months ended, and accounted for approximately half of the decline in the ratio for the third quarter. A lower~~2018. The underlying loss and settlement expense ~~ratio contributed~~ratios, which exclude the ~~remainder~~impact of ~~the decline in the ratio for the third quarter. Catastrophe~~catastrophe and storm losses ~~net~~and development on prior years' reserves, decreased to 65.2 percent and 64.9 percent in the three and six months ended June 30, 2019 from 67.3 percent and 67.9 percent for the same periods in 2018. Most commercial lines of business experienced declines in their respective underlying loss and settlement expense ratios, with the exception of the ~~amounts ceded~~other liability line of business. These decreases primarily stem from declines in estimated loss severity. As expected, the loss and settlement expense ratios for the personal lines of business have deteriorated in 2019 due to ~~Employers Mutual under~~ the ~~inter-company reinsurance program, accounted for 8.2~~actions taken to exit from this line of business; however, both loss frequency and ~~8.5 percentage points~~severity have been higher than expected. A significant increase in the amount of favorable development experienced on prior years' reserves across all commercial lines of business during the first six months of 2019 also contributed to the relatively large decline in the loss and settlement expense ratio for the three and nine months ended September 30, 2017, respectively, compared to 12.7 and 10.3 percentage points during the same periods in 2016. The underlying loss and settlement expense ratio has become more consistent during 2017. The underlying loss and settlement expense ratio of 61.9 percent for the nine months ended September 30, 2017, is the result of steadily improving results during 2017, from 65.3 percent for the first quarter, to 62.1 percent for the second quarter, and to 58.5 percent for the third quarter. The decline in the third quarter primarily reflects reductions in the current accident year ultimate loss and settlement expense ratio projections in the personal auto liability, workers' compensation and commercial property lines of business. The commercial auto and personal lines of business, which posted loss and settlement expense ratios of 85.8 percent and 77.3 percent, respectively, for the nine months ended September 30, 2017, continue to underperform; though the ratios for both lines improved somewhat from the previous year. Management continues to devote a significant amount of time and effort to the initiatives that have been undertaken to improve the performance of these lines of business.

Favorable development on the property and casualty insurance segment's prior years' reserves totaled $6.2 million and $6.8 million for the three months and $15.6 million and $16.6 million for the nine months ended September 30, 2017 and 2016, respectively. Included in the development amount reported for the first nine months of 2017 is $4.5 million of adverse development experienced in the other liability line of business stemming from the settlement of claims for past and future legal fees and losses on a multi-year asbestos exposure associated with a former insured. Under the new reserving methodology implemented in the third quarter of 2016, development on prior accident years' reserves is determined primarily by changes in the prior accident years' ultimate loss and settlement expense ratios implemented by management. Changes in the assumptions underlying the ultimate ratios previously established for accident years 2015 and prior are difficult to quantify as the implied ultimate ratios under the previous methodology were based on implicit, rather than explicit, actuarial assumptions. Therefore, comparison of 2017 third quarter and year-to-date development amounts to the 2016 development amounts provides little meaningful information, as the prior accident year reserve allocation method lacked explicit frequency and severity assumptions. The explicit drivers of development on prior years' reserves are identifiable beginning in 2017.that period. See note 4, "Liability for Losses and Settlement Expenses", of Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for ~~further discussion of~~information regarding the sources of development on prior years' reserves.

Catastrophe and storm losses totaled $16.1 million and $22.0 million in the three and six months ended June 30, 2019 compared to $15.7 million and $20.0 million for the same periods in 2018, and accounted for 12.8 and 8.8 percentage points of the loss and settlement expense ratio in the three and six months ended June 30, 2019 compared to 12.9 and 8.3 percentage points for the same periods in 2018. The property and casualty insurance subsidiaries ceded ~~$3.0~~$1.0 million and ~~$19.0~~$1.5 million of catastrophe and storm losses to Employers Mutual under the ~~2017~~ inter-company reinsurance program during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, respectively, compared to ~~$3.5 million~~$317,000 and ~~$5.1 million during~~$784,000 for the same periods in ~~2016.~~2018. In ~~both years,~~ the ~~ceded amounts are applicable to~~second quarter of 2019, the ~~treaties that covered the first half~~property and casualty insurance subsidiaries experienced an elevated level of ~~each year. Taking the loss recoveries received and the premiums paid to Employers Mutual into consideration, the inter-company reinsurance program with Employers Mutual reduced the~~ catastrophe and storm losses, primarily from Midwest storms. As a result, the property and casualty segment filled the $22 million retention amount under the 2019 January 1 to June 30 inter-company excess of loss ~~ratios by 2.1 and 2.4 percentage points for~~reinsurance treaty with Employers Mutual. Having filled the ~~three~~retention amount under the 2019 January 1 to June 30 treaty, any further development on events that occurred during the first six months ~~and 4.1 and 0.1 percentage points for the nine months ended September 30, 2017 and 2016, respectively. The terms~~ of ~~the inter-company reinsurance program, including the pricing of the coverage, are reviewed annually by the Inter-Company Committees of the boards of directors of the Company and~~2019 will be ceded to Employers Mutual.

The loss and settlement expense ~~ratio~~ratios for the reinsurance segment increased slightly to ~~131.2 percent and 92.8~~69.1 percent for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017~~2019 from ~~74.1 percent and 69.0~~68.1 percent for the same ~~periods~~period in ~~2016. These increases reflect $19.5~~2018, but decreased to 67.5 percent for the six months ended June 30, 2019 from 70.6 percent for the same period in 2018. The decrease in the ratio for the six months is primarily attributed to an increase in premiums earned and improved loss experience. Catastrophe and storm losses totaled $1.0 million in the second quarters of both 2019 and 2018. For the six months ended June 30, 2019, catastrophe and storm losses ~~incurred during~~totaled $1.0 million, compared to $1.4 million for the ~~third quarter of 2017.~~same period in 2018. Catastrophe and storm losses accounted for ~~56.2~~2.4 and ~~28.2~~1.2 percentage points of the loss and settlement expense ratios for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, respectively,~~2019, compared to ~~6.3~~2.7 and ~~10.5~~1.9 percentage points during the same periods in 2016. Gross losses from Hurricanes Harvey, Irma and Maria are currently estimated to be approximately $9.0 million, $7.5 million and $3.0 million, respectively, and losses from two Mexico earthquakes are estimated at approximately $1.5 million. During the third quarter of 2017, the2018. The reinsurance subsidiary ~~retained $15.8 million of catastrophe~~ceded losses and ~~storm losses~~settlement expenses to fill the $20.0 million retention amount in the annual aggregate catastrophe excess of loss treaty with Employers Mutual, and an additional $2.2 million of catastrophe and storm losses representing its 20 percent co-participation on $11.2 million of losses above the retention amount. A total of $9.0 million was recovered from Employers Mutual under the ~~aggregate treaty. Taking~~inter-company reinsurance program totaling $(788,000) and $945,000 for the ~~loss recoveries received~~three and six months ended June 30, 2019, respectively, compared to $291,000 and $(462,000) for the ~~premiums paid~~same periods in 2018. The amounts ceded to Employers Mutual ~~into consideration, the inter-company~~in 2019 were impacted by external reinsurance ~~program with Employers Mutual reduced the catastrophe~~recoveries received on a 2017 accident year event totaling $3.1 million and ~~storm loss ratios by 20.4 and 5.4 percentage points~~$3.5 million for the three ~~months~~ and ~~nine~~six months ended ~~September 30, 2017, respectively. The~~June 30. In accordance with the terms of the inter-company reinsurance program, ~~including~~these recoveries reduce the ~~pricing of the coverage, are reviewed annually by the Inter-Company Committees of the boards of directors of the Company and Employers Mutual.~~

The reinsurance subsidiary accrued $1.3 million of estimated reinstatement premiums expected to be received as a result of the hurricane losses. None of the catastrophic events occurring during the third quarter of 2017 have resulted in recoveries under the reinsurance subsidiary's per occurrence catastrophe excess of loss treaty, as losses stemming from these events are all currently below the $10.0 million retention amount. In addition, no recoveries have occurred under the additional reinsurance protection purchased by the reinsurance subsidiary because total estimated losses experienced by the insurance industry for these events currently do not exceed the specified thresholds to trigger coverage. Aside fromnet catastrophe and storm losses subject to the ~~remaining increases in the reinsurance segment's loss and settlement expense ratios for the three and nine months ended is due~~program. As a result, 80 percent of these recoveries were ceded to ~~a decline in favorable~~Employers Mutual. Adverse development on prior years' reserves ~~including adverse~~amounted to $2.6 million in the second quarters of both 2019 and 2018. For the first six months of 2019, the reinsurance subsidiary reported favorable development of $1.0 million, compared to $801,000 during the ~~third quarter of 2017.~~same period in 2018. See note 4, "Liability for Losses and Settlement Expenses", of Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for ~~further discussion of~~information regarding the sources of development on prior years' reserves.

Acquisition and other expenses

Acquisition and other expenses ~~decreased 5.0~~increased 10.2 percent and ~~0.3~~8.1 percent to ~~$46.0~~$59.8 million and ~~$143.7~~$115.1 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 from ~~$48.4~~$54.3 million and ~~$144.2~~$106.5 million for the same periods in ~~2016~~.2018. The acquisition expense ~~ratio decreased~~ratios increased to ~~29.6~~35.6 percent and ~~31.9~~34.3 percent for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 from ~~31.8~~34.4 percent and ~~32.7~~34.0 percent for the same periods in ~~2016. Both segments contributed~~2018. These increases are attributed to both the ~~decreases in these ratios.~~property and casualty insurance segment and the reinsurance segment.

The acquisition expense ~~ratio~~ratios for the property and casualty insurance segment ~~decreased~~increased to ~~32.0~~38.9 percent and ~~34.4~~37.6 percent for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 from ~~34.2~~37.4 percent and ~~35.2~~37.3 percent for the same periods in ~~2016.~~2018. These ~~decreases are~~increases primarily ~~due to lower policyholder dividend expense, largely from a couple of the pool participants' safety dividend groups. Partially offsetting these decreases are higher salary expenses,~~reflect an increase in ~~costs associated with data analytics initiatives, and an increase in agents' contingent commissions.~~policyholders' dividends.

The acquisition expense ~~ratio~~ratios for the reinsurance segment ~~decreased~~increased to ~~21.1~~25.3 percent and ~~23.2~~24.6 percent for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 from ~~23.9~~24.1 percent and ~~24.2~~23.3 percent for the same periods in ~~2016.~~2018. These ~~decreases~~increases primarily reflect increases in contingent commission expense and salary expense.

Other expenses

During the ~~accumulation~~three and six months ended June 30, 2019, the holding company incurred expenses totaling $2.0 million and $2.6 million, respectively, in connection with Employers Mutual's proposal to purchase all of ~~several expense declines, including salaries (inclusive of bonuses), legal, and contingent commissions.~~the Company's outstanding common stock that it does not currently own.

Investment results

Net investment income ~~remained flat at $11.5~~increased 10.0 percent and 11.1 percent to $13.0 million and $25.7 million for the three and six months ended ~~September~~June 30, ~~2017~~2019 from $11.8 million and ~~2016, but decreased 6.1 percent to $33.7 million for the nine months ended~~ ~~September 30, 2017~~ ~~from $35.9~~$23.1 million for the same ~~period~~periods in ~~2016. The decrease for~~2018. These increases are primarily the ~~nine months ended primarily reflects a~~result of actions taken during 2018 to sell fixed maturity securities with lower book yields and reinvest the proceeds in fixed maturity securities with similar characteristics but higher yields. This allowed the Company to increase the portfolio's book yield without altering quality or duration, while also taking advantage of a 14 percent tax differential that was achieved by carrying the losses from the sales back to a previous tax year subject to the prior 35 percent federal corporate tax rate. Growth in the fixed maturity portfolio ~~and a decline in dividend income. Current interest rate levels remain below~~also contributed to the ~~average book yield of the fixed maturity portfolio, and will therefore likely continue to limit future growth~~increase in net investment ~~income.~~income, but to a lesser extent. The ~~average coupon rate~~pre-tax yield on the fixed maturity portfolio ~~excluding interest-only securities, has remained relatively steady over the past year, coming in at 3.8~~increased to 3.66 percent at ~~September~~June 30, ~~2017 and~~2019 from 3.50 percent at June 30, 2018, but declined slightly from 3.68 percent at December 31, ~~2016, up slightly from 3.7 percent at September 30, 2016.~~2018. The effective duration of the fixed maturity portfolio, excluding interest-only securities, ~~decreased~~declined to ~~4.9~~4.2 at ~~September~~June 30, ~~2017~~2019 from ~~5.2~~4.9 at December 31, ~~2016. The Company’s~~2018.

Net realized investment gains/losses and the change in unrealized gains on equity ~~portfolio produced dividend income~~investments increased to gains of ~~$1.4~~$4.3 million and ~~$4.5~~$26.9 million for the three and six months ended June 30, 2019 from losses of $5.9 million and $11.3 million for the same periods in 2018. The amounts reported include a $4.7 million pre-tax decline and a $15.2 million pre-tax increase in unrealized gains on the Company's equity investments during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, compared to pre-tax declines of $447,000 and $10.3 million in the same periods of 2018. Net realized investment gains for the three and six months ended June 30, 2019 totaled $8.9 million and $11.7 million, respectively, compared to ~~$1.6~~net realized losses of $5.4 million and ~~$5.4 million during the same periods~~$952,000 in ~~2016.~~

The Company had net realized investment losses of $594,000 and $1.2 million during the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017, the Company had net realized investment gains of $2.2 million compared to losses of $643,000 during the same period ~~in 2016.~~of 2018. The ~~reported amounts include losses of $999,000 and $4.6 million generated~~large gains during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 are due to normal trading activity in the equity portfolios. In 2018, the Company chose to dispose of certain fixed maturity securities in order to increase book yield without sacrificing quality or duration, which generated net losses of $5.5 million and $5.7 million in the three months and the six months ended June 30, 2018, respectively. The amounts reported for the three and six months ended June 30, 2019 also include losses of $617,000 and $1.6 million, respectively, generated from ~~declines~~changes in the carrying value of a limited partnership that the Company invests in to help protect the equity portfolio from a sudden and significant decline in value (an equity tail-risk hedging strategy). ~~Losses on this limited partnership amounted to $1.9~~This investment had a realized investment loss of $1.7 million and ~~$5.3 million, respectively,~~a realized investment gain of $78,000 during the same periods in ~~2016. The Company recognized "other-than-temporary" impairment losses of $355,000~~2018.

Other income

Other income totaled $1.6 million and ~~$1.1~~$3.1 million during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~,2019, compared to ~~$275,000~~$2.8 million and ~~$976,000~~$4.4 million during the same periods in ~~2016. These impairment losses were recognized on securities held in the Company's equity portfolio.~~

~~Other losses~~

~~Included in other losses are~~2018. The three and six months amounts of 2019 include $1.3 million and $2.6 million, respectively, of net periodic pension and postretirement benefit income. The 2018 amounts include $1.9 million and $3.7 million of net periodic pension and postretirement benefit income and $678,000 and $242,000 of foreign currency exchange ~~losses~~gains recognized on the reinsurance segment’s foreign currency denominated reinsurance business. The reinsurance segment had foreign currency exchange losses of $357,000 and $1.5 million during the three and nine months ended September 30, 2017, compared to losses of $317,000 and $545,000 during the same periods in 2016.business, respectively.

Income tax

~~Income~~The Company reported income tax expense ~~(benefit) decreased 229.2 percent~~of $356,000 and ~~76.1 percent to a $1.2~~$9.1 million ~~benefit and $2.2 million expense~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~ ~~from expenses~~2019, compared to an income tax benefit of ~~$918,000~~$2.7 million and ~~$9.1~~$3.2 million for the same periods in ~~2016.~~2018. The effective tax rates for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 were ~~269.5~~21.7 percent and ~~14.3~~20.7 percent, compared to ~~18.2~~35.3 percent and ~~26.8~~38.5 percent for the same periods in ~~2016~~.2018. The 2018 effective tax rates are calculated using income tax benefits relative to pre-tax losses, thus the larger numbers are actually indicative of lower effective tax rates. Typically, the primary contributors to the differences between ~~these~~the effective tax rates and the United States federal corporate tax rate of 3521 percent are tax-exempt interest income earned and the dividends received deduction. However, during 2019 these differences were largely offset by non-deductible expenses associated with Employers Mutual's proposal to purchase all of the Company's outstanding common stock. During 2018, an incremental tax benefit associated with the carry-back of net realized investment losses to prior tax periods at the previous 35 percent tax rate also contributed to the relatively low effective tax rates.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet cash obligations. The Company had positive cash flows from operations of $~~50.1~~42.4 million and ~~$75.1~~$23.0 million during the first ~~nine~~six months of ~~2017~~2019 and ~~2016~~2018, respectively. The Company typically generates substantial positive cash flows from operations because cash from premium payments is generally received in advance of cash payments made to settle claims. These positive cash flows provide the foundation of the Company’s asset/liability management program and are the primary driver of the Company’s liquidity. The Company invests in high quality, liquid securities to match the anticipated payments of losses and settlement expenses of the underlying insurance policies. Because the timing of the losses is uncertain, the majority of the portfolio is maintained in short to intermediate maturity securities that can be easily liquidated or that generate adequate cash flow to meet liabilities.

The Company is a holding company whose principal asset is its investment in its property and casualty insurance subsidiaries and its reinsurance subsidiary (“insurance subsidiaries”). As a holding company, the Company is dependent upon cash dividends from its insurance subsidiaries to meet all its obligations, including cash dividends to stockholders, ~~and~~ the funding of the Company’s stock repurchase ~~program.~~program and, more recently, expenses associated with evaluating and responding to Employers Mutual's non-binding indicative proposal to purchase all of the common stock of the Company not already owned by Employers Mutual. State insurance regulations restrict the maximum amount of dividends insurance companies can pay without prior regulatory approval. The maximum amount of dividends that the insurance subsidiaries can pay to the Company in ~~2017~~2019 without prior regulatory approval is approximately ~~$52.7~~$48.0 million. The Company received ~~$3.8~~$10.1 million and ~~$3.6~~$9.8 million of dividends from its insurance subsidiaries and paid cash dividends to its stockholders totaling ~~$13.3~~$10.0 million and ~~$11.8~~$9.4 million during the first ~~nine~~six months of ~~2017~~2019 and ~~2016~~2018, respectively.

The Company’s insurance subsidiaries must maintain adequate liquidity to ensure that their cash obligations are met; however, because of the property and casualty insurance subsidiaries’ participation in the pooling agreement and the reinsurance subsidiary’s participation in the quota share agreement, they do not have the daily liquidity concerns normally associated with an insurance company. This is because under the terms of the pooling and quota share agreements, Employers Mutual receives all premiums and pays all losses and expenses associated with the insurance business produced by the pool participants and the assumed reinsurance business ceded to the Company’s reinsurance subsidiary, and then settles inter-company balances generated by these transactions with the participating companies on a monthly (pool participants) or quarterly (reinsurance subsidiary) basis.

At the insurance subsidiary level, the primary sources of cash are premium income, investment income and proceeds from called or matured investments. The principal outflows of cash are payments of claims, commissions, premium taxes, operating expenses, income taxes, dividends, interest and principal payments on debt, and investment purchases. Cash outflows vary because of uncertainties regarding settlement dates for unpaid losses and the potential for large losses, either individually or in the aggregate. Accordingly, the insurance subsidiaries maintain investment and reinsurance programs intended to provide adequate funds to pay claims without forced sales of investments. The insurance subsidiaries also have the ability to borrow funds on a short-term basis (180 days) from Employers Mutual ~~and~~and/or its subsidiaries ~~and affiliate~~ under an Inter-Company Loan Agreement. In addition, Employers Mutual maintains access to a line of credit with the Federal Home Loan Bank that could be used to provide the insurance subsidiaries additional liquidity if needed.

The Company maintains a portion of its investment portfolio in relatively short-term and highly liquid investments to ensure the availability of funds to pay claims and expenses. A variety of maturities are maintained in the Company’s investment portfolio to assure adequate liquidity. The maturity structure of the fixed maturity portfolio is also established by the relative attractiveness of yields on short, intermediate and long-term securities. The Company does not invest in non-investment grade debt securities. Any non-investment grade securities held by the Company are the result of rating downgrades subsequent to their purchase.

The Company invests for the long term and generally purchases fixed maturity securities with the intent to hold them to maturity. Despite this intent, the Company currently classifies fixed maturity securities as available-for-sale to provide flexibility in the management of its investment portfolio. At ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018, the Company had net unrealized holding gains, net of deferred taxes, on its fixed maturity securities available-for-sale of $~~16.0~~46.7 million and $~~6.6~~7.7 million, respectively. The fluctuation in the fair value of these investments is primarily due to changes in the interest rate environment during this time period, but also reflects fluctuations in risk premium spreads over U.S. Treasuries. Since the Company intends to hold fixed maturity securities to maturity, such fluctuations in the fair value of these investments are not expected to have a material impact on the operations of the Company, as forced liquidations of investments are not anticipated. The Company closely monitors the bond market and makes appropriate adjustments in its portfolio as conditions warrant.

The majority of the Company’s assets are invested in fixed maturity securities. These investments provide a substantial amount of investment income that supplements underwriting results and contributes to net earnings. As these investments mature, or are called, the proceeds are reinvested at current interest rates, which may be higher or lower than those now being earned; therefore, more or less investment income may be available to contribute to net earnings. ~~Due to the prolonged low interest rate environment, proceeds from calls and maturities in recent years have been reinvested at lower yields, which has had a negative impact on investment income.~~

The Company held $~~14.5~~17.4 million and ~~$12.5~~$19.3 million in ~~minority ownership interests~~other long-term investments at June 30, 2019 and December 31, 2018, respectively, which primarily consist of holdings in limited partnerships, and ~~limited liability~~privately placed common and non-redeemable convertible preferred stock in start-up technology companies at ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016, respectively.~~with ties to the insurance industry. The equity method of accounting is used for these investments, with changes in the carrying value recorded as realized investment gains (losses). During ~~the first nine months of 2017 and 2016,~~2018, the Company invested ~~$5.8~~additional funds of $7.5 million ~~and $4.9 million, respectively, in~~into a limited partnership that is designed to help protect the Company from a sudden and significant decline in the value of its equity ~~portfolio. During~~portfolio (included $2.3 million of gains realized from the ~~fourth quarter~~program that were reinvested). No additional funds were invested into this program during the first six months of ~~2016, the Company's reinsurance subsidiary invested approximately $6.6 million~~2019. Also included in aother long-term investments are holdings in limited liability ~~company as an investment~~companies that ~~conveys renewable energy~~convey tax ~~credits.~~credits that are carried at amortized cost. After reductions for the utilization of the tax credits and ~~a $209,000~~ impairment ~~loss during the fourth quarter of 2016,~~losses, the carrying ~~value~~values of ~~this investment was approximately $1.1 million and $2.0~~these investments totaled $2.5 million at ~~September~~June 30, ~~2017~~2019 and $2.2 million at December 31, ~~2016, respectively. These investments are included in "other long-term investments" in the Company's financial statements, with the limited partnership carried under the equity method of accounting.~~2018.

The Company participates in reverse repurchase arrangements, involving the purchase of investment securities from third-party sellers with the agreement that the purchased securities be sold back to the third-party sellers for agreed-upon prices at specified future dates. The third-party sellers are required to pledge collateral with a value greater than the amount of cash received in the transactions. In accordance with GAAP, the investment securities purchased under the reverse repurchase agreements are not reflected in the Company's consolidated balance sheets, but instead a receivable is recorded for the principal amount lent. The ~~Company's~~Company did not have a receivable under reverse repurchase agreements ~~was $16.5 million and $20.0 million at September~~as of June 30, ~~2017 and~~2019 or December 31, ~~2016, respectively.~~2018.

The Company’s cash balance was ~~$402,000~~$276,000 and ~~$307,000~~$337,000 at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~,2018, respectively.

During the first ~~nine~~six months of ~~2017~~,2019, Employers Mutual made no contributions to its qualified pension plan or postretirement benefit plans. The ~~Company’s~~Company's share of Employers ~~Mutual’s~~ ~~2017~~Mutual's 2019 planned contribution to its pension plan, if made, will be approximately ~~$2.7 million~~. $2.1 million. No contributions will be made to the postretirement benefit plans in ~~2017~~.2019.

During the first ~~nine~~six months of ~~2016~~2018, Employers Mutual ~~made no contributions~~contributed $6.0 million to its qualified pension plan orbut made no contributions to its postretirement benefit plans. The Company reimbursed Employers Mutual ~~$2.7~~$2.4 million for its share of the total ~~2016~~2018 pension contribution (no contributions were made to the postretirement benefit plans during ~~2016~~2018).

Capital Resources

Capital resources consist of stockholders’ equity and debt, representing funds deployed or available to be deployed to support business operations. For the Company’s insurance subsidiaries, capital resources are required to support premium writings. Regulatory guidelines suggest that the ratio of a property and casualty insurer’s annual net premiums written to its statutory surplus should not exceed three to one. On an annualized basis, all of the Company’s property and casualty insurance subsidiaries were well under this guideline at ~~September~~June 30, ~~2017~~2019.

The Company’s insurance subsidiaries are required to maintain a certain minimum level of surplus on a statutory basis, and are subject to regulations under which the payment of dividends from statutory surplus is restricted and may require prior approval of their domiciliary insurance regulatory authorities. The Company’s insurance subsidiaries are also subject to annual Risk Based Capital (RBC) requirements that may further impact their ability to pay dividends. RBC requirements attempt to measure minimum statutory capital needs based upon the risks in a company’s mix of products and investment portfolio. At December 31, ~~2016~~,2018, the Company’s insurance subsidiaries had total adjusted statutory capital of ~~$526.8~~$527.1 million, which is well in excess of the minimum risk-based capital requirement of ~~$87.3~~$101.9 million.

The Company’s total cash and invested assets at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 are summarized as follows:


	September 30, 2017								June 30, 2019
($ in thousands)	Amortized cost		Fair value		Percent of total fair value		Carrying value		Amortized cost		Fair value		Carrying value		Percent of total carrying value
Fixed maturity securities available-for-sale	$	1,233,772	$	1,258,340	82.3	%	$	1,258,340	$	1,280,928	$	1,340,066	$	1,340,066	81.0	%
Equity securities available-for-sale	150,428		231,719		15.1	%	231,719
Equity investments, at fair value									179,359		249,507		249,507		15.1	%
Cash	402		402		—	%	402		276		276		276		—	%
Short-term investments	25,255		25,255		1.7	%	25,255		46,857		46,857		46,857		2.8	%
Equity investments, at alternative measurement of cost less impairments									1,200		XXXX		1,200		0.1	%
Other long-term investments	14,471		14,471		0.9	%	14,471		17,352		XXXX		17,352		1.0	%
	$	1,424,328	$	1,530,187	100.0	%	$	1,530,187	$	1,525,972	XXXX		$	1,655,258	100.0	%

December 31, 2016
($ in thousands) Amortized
cost Fair
value Percent of total
fair value Carrying
value
Fixed maturity securities available-for-sale $ 1,189,525
$ 1,199,699
81.8 % $ 1,199,699
Equity securities available-for-sale 147,479
213,839
14.6 % 213,839
Cash 307
307
— % 307
Short-term investments 39,670
39,670
2.7 % 39,670
Other long-term investments 12,506
12,506
0.9 % 12,506
$ 1,389,487
$ 1,466,021
100.0 % $ 1,466,021

~~The amortized cost and estimated fair value of fixed maturity and equity securities at~~ ~~September 30, 2017~~ ~~were as follows:~~

($ in thousands) Amortized
cost Gross
unrealized
gains Gross
unrealized
losses Estimated
fair values
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury $ 8,109
$ 57
$ 2
$ 8,164
U.S. government-sponsored agencies 262,050
237
6,668
255,619
Obligations of states and political subdivisions 318,016
18,954
332
336,638
Commercial mortgage-backed 66,138
583
911
65,810
Residential mortgage-backed 104,620
2,593
3,547
103,666
Other asset-backed 24,501
756
290
24,967
Corporate 450,338
14,001
863
463,476
Total fixed maturity securities 1,233,772
37,181
12,613
1,258,340

Equity securities:
Common stocks:
Financial services 28,130
12,679
71
40,738
Information technology 19,772
16,912
—
36,684
Healthcare 18,417
12,457
144
30,730
Consumer staples 10,258
4,794
8
15,044
Consumer discretionary 12,224
9,464
83
21,605
Energy 13,273
4,692
769
17,196
Industrials 13,209
15,138
32
28,315
Other 12,114
4,704
31
16,787
Non-redeemable preferred stocks 23,031
1,591
2
24,620
Total equity securities 150,428
82,431
1,140
231,719
Total securities available-for-sale $ 1,384,200
$ 119,612
$ 13,753
$ 1,490,059



	December 31, 2018
($ in thousands)	Amortized cost		Fair value		Carrying value		Percent of total carrying value
Fixed maturity securities available-for-sale	$	1,273,132	$	1,282,909	$	1,282,909	83.0	%
Equity investments, at fair value	160,371		215,363		215,363		13.9	%
Cash	337		337		337		—	%
Short-term investments	28,204		28,204		28,204		1.8	%
Equity investments, at alternative measurement of cost less impairments	1,200		XXXX		1,200		0.1	%
Other long-term investments	19,316		XXXX		19,316		1.2	%
	$	1,482,560	XXXX		$	1,547,329	100.0	%

The Company’s property and casualty insurance subsidiaries have $25.0 million of surplus notes issued to Employers Mutual. The interest rate on the surplus notes iswas increased to 2.73 percent from 1.35 ~~percent.~~percent effective February 1, 2018. Reviews of the interest rate are conducted by the Inter-Company Committees of the boards of directors of the Company and Employers Mutual every five years, with the next review due in ~~2018.~~2023. Payments of interest and repayments of principal can only be made out of the applicable subsidiary’s ~~statutory~~earned surplus and are subject to prior approval by the insurance ~~commissioner~~commissioners of the respective states of domicile. The surplus notes are subordinate and junior in right of payment to all obligations or liabilities of the applicable insurance subsidiaries. Total interest expense incurred on these surplus notes was ~~$253,000~~$341,000 during the first ~~nine~~six months of ~~2017~~2019 and $313,000 during the first six months of ~~2016~~2018. ~~During the first quarter of~~ ~~2017, the Company’s property and casualty insurance subsidiaries paid Employers Mutual for the interest that had been accrued on the surplus notes during~~ ~~2016~~.

As of ~~September~~June 30, ~~2017~~2019, the Company had no material commitments for capital expenditures.

Off-Balance Sheet Arrangements

Employers Mutual collects from agents, policyholders and ceding companies all premiums written ~~premiums~~ associated with the insurance business produced by the pool participants and the assumed reinsurance business ceded to the reinsurance subsidiary. Employers Mutual also collects from its reinsurers all losses and settlement expenses recoverable under the reinsurance contracts protecting the pool participants and ~~starting in 2016,~~ the reinsurance subsidiary, as well as the fronting business ceded to the reinsurance subsidiary. Employers Mutual settles with the pool participants (monthly) and the reinsurance subsidiary (quarterly) the premiums written from these insurance policies and the paid losses and settlement expenses recoverable under the external reinsurance contracts, providing full credit for the premiums written and the paid losses and settlement expenses recoverable under the external reinsurance contracts generated during the period (not just the collected portion). Due to this arrangement, and since a significant portion of the premium balances are collected over the course of the underlying coverage periods, Employers Mutual carries a substantial receivable balance for insurance and reinsurance premiums in process of collection and, to a lesser extent, paid losses and settlement expenses recoverable from the external reinsurance companies. Any of these receivable amounts that are ultimately deemed to be uncollectible are charged-off by Employers Mutual and the expense is charged to the reinsurance subsidiary or allocated to the pool members on the basis of pool participation. As a result, the Company has off-balance sheet arrangements with an unconsolidated entity that results in credit-risk exposures (Employers Mutual’s insurance and reinsurance premium receivable balances, and paid loss and settlement expense recoverable amounts) that are not reflected in the Company’s financial statements. The average annual expense for such charge-offs allocated to the Company over the past ten years is ~~$362,000.~~$414,000. Based on this historical data, this credit-risk exposure is not considered to be material to the Company’s results of operations or financial position and, accordingly, no loss contingency liability has been recorded.

Investment Impairments and Considerations

~~The Company recorded $355,000 and $1.1 million of "other-than-temporary" investment impairment losses during the three and nine months ended~~ ~~September 30, 2017, respectively, compared to $275,000 and $976,000 during the same periods in~~ ~~2016. The impairment losses were recognized on securities held in the Company's equity portfolio.~~

At ~~September~~June 30, ~~2017~~2019, the Company had unrealized losses on fixed maturity securities available-for-sale ~~securities~~ as presented in the following table. The estimated fair value is based on quoted market prices, where available. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security. None of these securities are considered to be in concentrations by either security type or industry. The Company uses several factors to determine whether the carrying value of an individual security has been “other-than-temporarily” impaired. Such factors include, but are not limited to, the security’s value and performance in the context of the overall markets, length of time and extent the security’s fair value has been below carrying value, key corporate events and ~~for fixed maturity securities,~~ the amount of collateral available. Based on these factors, the absence of management’s intent to sell these securities prior to recovery or maturity, and the fact that management does not anticipate that it will be forced to sell these securities prior to recovery or maturity, it was determined that the carrying value of these securities were not “other-than-temporarily” impaired at ~~September~~June 30, ~~2017~~2019. Risks and uncertainties inherent in the methodology utilized in this evaluation process include interest rate ~~risk, equity price~~ risk and the overall performance of the economy, all of which have the potential to adversely affect the value of the Company’s investments. Should a determination be made at some point in the future that these unrealized losses are “other-than-temporary”, the Company’s earnings would be reduced by approximately ~~$8.9~~$1.4 million,, net of tax; however, the Company’s financial position would not be affected because unrealized losses on fixed maturity securities available-for-sale ~~securities~~ are reflected in the Company’s financial statements as a component of stockholders’ equity, net of deferred taxes.

Following is a schedule of the length of time fixed maturity securities available-for-sale have continuously been in an unrealized loss position as of ~~September~~June 30, ~~2017~~2019.

Less than twelve months Twelve months or longer Total
($ in thousands) Fair
values Unrealized
losses Fair
values Unrealized
losses Fair
values Unrealized
losses
Fixed maturity securities:
U.S. treasury $ 248
$ 2
$ —
$ —
$ 248
$ 2
U.S. government-sponsored agencies 104,235
1,695
125,982
4,973
230,217
6,668
Obligations of states and political subdivisions —
—
14,372
332
14,372
332
Commercial mortgage-backed 26,070
133
15,653
778
41,723
911
Residential mortgage-backed 19,872
431
21,155
3,116
41,027
3,547
Other asset-backed 5,211
39
8,809
251
14,020
290
Corporate 9,056
67
15,956
796
25,012
863
Total fixed maturity securities 164,692
2,367
201,927
10,246
366,619
12,613
Equity securities:
Common stocks:
Financial services 2,964
71
—
—
2,964
71
Healthcare 1,594
144
—
—
1,594
144
Consumer staples 159
8
—
—
159
8
Consumer discretionary 1,023
79
99
4
1,122
83
Energy 4,323
769
—
—
4,323
769
Industrials 309
32
—
—
309
32
Other 894
31
—
—
894
31
Non-redeemable preferred stocks —
—
1,998
2
1,998
2
Total equity securities 11,266
1,134
2,097
6
13,363
1,140
Total temporarily impaired securities $ 175,958
$ 3,501
$ 204,024
$ 10,252
$ 379,982
$ 13,753



	Less than twelve months				Twelve months or longer				Total
($ in thousands)	Fair values		Unrealized losses		Fair values		Unrealized losses		Fair values		Unrealized losses
Fixed maturity securities:
U.S. government-sponsored agencies	$	4,987	$	14	$	4,404	$	12	$	9,391	$	26
Residential mortgage-backed	3,638		375		14,201		756		17,839		1,131
Other asset-backed	—		—		7,154		163		7,154		163
Corporate	—		—		16,538		447		16,538		447
Total fixed maturity securities	$	8,625	$	389	$	42,297	$	1,378	$	50,922	$	1,767

The Company does not purchase non-investment grade fixed maturity securities. Any non-investment grade fixed maturity securities held are the result of rating downgrades that occurred subsequent to their purchase. At ~~September~~June 30, ~~2017~~2019, the Company held ~~$2.9~~$4.3 million of non-investment grade fixed maturity securities in a net unrealized ~~gain~~loss position of ~~$44,000.~~$316,000.

Following is a schedule of gross realized losses recognized in the first ~~nine~~six months of ~~2017~~2019. on fixed maturity securities available-for-sale. The schedule is aged according to the length of time the underlying securities were in an unrealized loss position.


	Realized losses from sales						"Other-than- temporary" impairment losses		Total gross realized losses			Realized losses from sales								"Other-than- temporary" impairment losses		Total gross realized losses
($ in thousands)	Book value		Sales price		Gross realized losses						Book value			Sales price			Gross realized losses
Fixed maturity securities:
Three months or less	$	—	$	—	$	—	$	—	$	—		$	—		$	—		$	—	$	—	$	—
Over three months to six months	2,330		2,086		244		—		244			—			—			—		—		—
Over six months to nine months	2,993		2,938		55		—		55			—			—			—		—		—
Over nine months to twelve months	5,044		4,684		360		—		360			—			—			—		—		—
Over twelve months	24,880		23,223		1,657		—		1,657			4,871			4,598			273		—		273
Subtotal, fixed maturity securities	35,247		32,931		2,316		—		2,316			$	4,871		$	4,598		$	273	$	—	$	273

Equity securities:
Three months or less	8,540		7,884		656		—		656
Over three months to six months	2,233		2,000		233		733		966
Over six months to nine months	129		112		17		—		17
Over nine months to twelve months	—		—		—		—		—
Over twelve months	—		—		—		355		355
Subtotal, equity securities	10,902		9,996		906		1,088		1,994

Total realized losses	$	46,149	$	42,927	$	3,222	$	1,088	$	4,310

LEASES, COMMITMENTS AND CONTINGENT LIABILITIES

~~One of the Company’s property and casualty insurance subsidiaries leases office facilities in Bismarck, North Dakota with~~The Company does not have any lease ~~terms expiring in 2024.~~agreements, but Employers Mutual has entered into ~~various~~ leases for 17 branch and service office facilities, ~~with lease terms expiring through 2026. All~~the costs of ~~these lease costs~~which are ~~included as expenses under~~charged to the ~~pooling agreement.~~pool and allocated among the pool participants based on their respective participation interests. The ~~Company’s~~Company's contractual obligations as of ~~September~~June 30, ~~2017~~2019 did not change materially from those presented in the ~~Company’s~~ ~~2016~~Company's 2018 Form 10-K.

The participants in the pooling agreement are subject to guaranty fund assessments by states in which they write business. Guaranty fund assessments are used by states to pay policyholder liabilities of insolvent insurers domiciled in those states. Many states allow assessments to be recovered through premium tax offsets. The Company has accrued estimated guaranty fund assessments of ~~$827,000~~$560,000 and ~~$851,000~~$615,000 as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018, respectively. Premium tax offsets of $~~990,000~~672,000 and ~~$1.0 million,~~$809,000, which are related to prior guarantee fund payments and current assessments, have been accrued as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018, respectively. The guaranty fund assessments are expected to be paid over the next two years and the premium tax offsets are expected to be realized within ten years of the payments. The participants in the pooling agreement are also subject to second-injury fund assessments, which are designed to encourage employers to employ workers with pre-existing disabilities. The Company had accrued estimated second-injury fund assessments of $2.4 million at both ~~$2.0 million~~ ~~and $1.9 million as of~~ ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018~~, respectively.~~. The second-injury fund assessment accruals are based on projected loss payments. The periods over which the assessments will be paid is not known.

The participants in the pooling agreement have purchased annuities from life insurance companies, under which the claimant is payee, to fund future payments that are fixed pursuant to specific claim settlement provisions. Based on information provided by the life insurance companies on an annual basis, the Company’s share of case loss reserves eliminated by the purchase of those annuities was $110,000 at December 31, ~~2016~~2018. The Company had a contingent liability for the aggregate guaranteed amount of the annuities of $183,000 at December 31, ~~2016~~2018 should the issuers of those annuities fail to perform. Although management is not able to verify the amount, the Company would likely have a similar contingent liability at ~~September~~June 30, ~~2017~~2019. The probability of a material loss due to failure of performance by the issuers of these annuities is considered remote.



ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The main objectives in managing the Company’s investment portfolios are to maximize after-tax investment return while minimizing risk, in order to provide maximum support for the underwriting operations. Investment strategies are developed based upon many factors including the economic environment, business cycle, regulatory requirements, fluctuations in interest rates, underwriting results and consideration of other market risks. Investment decisions are centrally managed by investment professionals and are supervised by the investment committees of the respective boards of directors for each of the Company’s subsidiaries.

Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments, and is directly influenced by the volatility and liquidity in the markets in which the related underlying assets are traded. The market risks of the financial instruments owned by the Company relate to the investment portfolio, which exposes the Company to interest rate (inclusive of credit spreads) and equity price risk and, to a lesser extent, credit quality and prepayment risk. Monitoring systems and analytical tools are in place to assess each of these elements of market risk; however, there can be no assurance that future changes in interest rates, creditworthiness of issuers, prepayment activity, liquidity available in the market and other general market conditions will not have a material adverse impact on the Company’s results of operations, liquidity or financial position.

Two categories of influences on market risk exist as it relates to financial instruments. First are systematic aspects, which relate to the investing environment and are out of the control of the investment manager. Second are non-systematic aspects, which relate to the construction of the investment portfolio through investment policies and decisions, and are under the direct control of the investment manager. The Company is committed to controlling non-systematic risk through sound investment policies and diversification.

Further analysis of the components of the Company’s market risk (including interest rate risk, equity price risk, credit quality risk, and prepayment risk) can be found in the Company’s ~~2016~~2018 Form 10-K.



ITEM 4.	CONTROLS AND PROCEDURES

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely making known to them material information relating to the Company and the Company’s consolidated subsidiaries required to be disclosed in the Company’s reports filed or submitted under the Exchange Act.

There were no changes in the Company’s internal control over financial reporting that occurred during the ~~third~~second quarter ended ~~September~~June 30, ~~2017~~2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.



PART II.	OTHER INFORMATION



ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information regarding purchases of equity securities by the Company and affiliated purchasers for the three months ended ~~September~~June 30, ~~2017~~2019:

Period
(a) Total
number of
shares
(or units)
purchased¹
(b) Average
price
paid
per share
(or unit)
(c) Total number
of shares (or
units) purchased
as part of publicly
announced plans
or programs²

(d) Maximum number
(or approximate dollar
value) of shares
(or units) that may yet
be purchased under the
plans or programs
($ in thousands)^2,3
7/1/2017 - 7/31/2017 97
$ 27.97
—
$ 19,108
8/1/2017 - 8/31/2017 31
27.66
—
19,108
9/1/2017 - 9/30/2017 4,833
27.74
—
19,108
Total 4,961
$ 27.74
—



Period	(a) Total number of shares (or units) purchased¹	(b) Average price paid per share (or unit)		(c) Total number of shares (or units) purchased as part of publicly announced plans or programs²	(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs ($ in thousands)^2,3
4/1/2019 - 4/30/2019	20	$	31.90	—	$	18,456
5/1/2019 - 5/31/2019	10	36.12		—	18,456
6/1/2019 - 6/30/2019	709	36.02		—	18,456
Total	739	$	35.91	—

¹~~Included in this column are 1,345~~Consists of shares purchased in the open market to fulfill the Company's obligations under its dividend reinvestment and common stock purchase plan, and 3,616 shares purchased from the account established by Employers Mutual to hold previously granted restricted stock awards until they vest, as these shares were excess shares stemming from forfeitures and surrenders.plan.

²On November 3, 2011, the Company’s Board of Directors authorized a $15.0 million stock repurchase program. This program does not have an expiration date. A total of ~~$14.6~~$14.0 million remains available in this plan for the purchase of additional shares.

³On May 12, 2005, the Company announced that its parent company, Employers Mutual, had initiated a $15.0 million stock purchase program under which Employers Mutual may purchase shares of the Company’s common stock in the open market. This purchase program does not have an expiration date; however, this program has been dormant while the Company’s repurchase programs have been in effect. A total of $4.5 million remains in this program.



ITEM 6.	EXHIBITS



Exhibit number		Item
10.2.1		Summary of compensation for the Company's non-employee directors

31.1*		Certification of President, Chief Executive Officer and Treasurer as required by Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Senior Vice President and Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of President, Chief Executive Officer and Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*		Certification of Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema Document

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB**		XBRL Taxonomy Extension Label Linkbase Document

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document



*	Filed herewith
**	Furnished, not filed

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on ~~November~~August 8, ~~2017~~2019.

EMC INSURANCE GROUP INC.

Registrant

/s/ Bruce G. Kelley

Bruce G. Kelley

President, Chief Executive Officer, Treasurer and Director

(Principal Executive Officer)

/s/ Mark E. Reese

Mark E. Reese

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

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