UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172019
OR
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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
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EMC INSURANCE GROUP INC. |
(Exact name of registrant as specified in its charter) |
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| | |
Iowa | | 42-6234555 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.employer identification no.) |
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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) |
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| | |
(515) 345-2902Securities 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.
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| | | | | |
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 numberAs 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.
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| | |
Class | | Outstanding at October 31, 2017 |
Common stock, $1.00 par value | | 21,399,578 |
$1.00 par value, issued and outstanding.
TABLE OF CONTENTS
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| | PAGE |
PART I | FINANCIAL INFORMATION | |
Item 1. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| | |
PART II | OTHER INFORMATION | |
Item 2. | | |
Item 6. | | |
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| |
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PART I. | FINANCIAL INFORMATION |
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| |
ITEM 1. | FINANCIAL STATEMENTS |
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2019 | | December 31, 2018 |
($ 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)
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, 20162018 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 20162018 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 CodificationTM (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 wasis effective each year from January 1 2017 through June 30, 2017, and hadhas a retention of $20.0$22.0 million and a limit of $24.0 million. The total cost of this treaty wasis 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 2017inter-company reinsurance program totaled $3.0$1.0 million and $19.0$1.5 million for the three and ninesix months ended SeptemberJune 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 treatiesthe program were the same in 2016 with the exception of the costs, which were $2.0 million for the per occurrence treaty2018. 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 partiesprogram 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 20172018. 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 $36.00 per share in cash, without interest. The Merger Agreement is subject to shareholder approval. A special meeting of the shareholders of the Company, at which the Merger Agreement will be considered and voted upon, is expected to be held during the third quarter.
The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 is presented below. The classification of the assumed and ceded reinsurance amounts between affiliates and nonaffiliates is based on the participants in the underlying reinsurance agreements, and is intended to provide an understanding of the actual source of the reinsurance activities. This presentation differs from the classifications used in the consolidated financial statements, where all amounts flowing through the pooling and quota share agreements and inter-company reinsurance programs with Employers Mutual are reported as “affiliated” balances.
| | | | Three months ended September 30, 2017 | | Three months ended June 30, 2019 |
($ 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 ninesix months ended SeptemberJune 30, 20172019 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.
20172019 Development
For the property and casualty insurance segment, the SeptemberJune 30, 20172019 estimate of loss and settlement expense reserves for accident years 20162018 and prior decreased $15.6$14.6 million from the estimate at December 31, 2016.2018. This decrease represents 3.22.7 percent of the December 31, 20162018 gross carried reserves and is primarily attributed to reductions in prior year ultimate loss ratios for everymost 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 exceptis 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. Thea 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 increasedestimates for accident years 2013 through 2016, producing adverse reserve development for that line of business. Included in the development amount is2016-2018. 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 associatedaccident 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 SeptemberJune 30, 20172019 estimate of loss and settlement expense reserves for accident years 20162018 and prior decreased $2.1$1.0 million from the estimate at December 31, 2016.2018. This decrease represents 1.00.4 percent of the December 31, 20162018 gross carried reserves and is primarily attributed to prior year reserve releases in thebetter 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.
20162018 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 SeptemberJune 30, 20162018 estimate of loss and settlement expense reserves for accident years 20152017 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 3.51.1 percent of the December 31, 20152017 gross carried reserves and was primarily attributed to better thandecreases 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 allultimate frequency and/or severity. The auto physical damage, workers' compensation and homeowners lines of business except commercialhad relatively small amounts of adverse development. The adverse development in the auto liability, commercial property and homeowners (workers' compensation and other liability linesphysical damage line of business werewas the largest contributors to favorable development). As noted above, the change in bulk reserving methodology implemented on September 30, 2016 resultedresult of an increase in the movement of a significant amount ofaccident year 2017 ultimate loss and settlement expense reservesratio 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 SeptemberJune 30, 20162018 estimate of loss and settlement expense reserves for accident years 20152017 and prior decreased $6.9 million$801,000 from the estimate at December 31, 2015.2017. This decrease represented 3.50.3 percent of the December 31, 20152017 gross carried reserves with slightly less than halfand was primarily attributed to lower ultimate loss estimates impacting accident years 2013-2017 for the catastrophe and per risk excess, property pro rata and ocean marine pro rata lines of thebusiness. The favorable development coming from the Mutual Reinsurance Bureau underwriting association (MRB), which included a decreasewas partially offset by adverse development on casualty excess, property/casualty global excess and pro rata, and aggregate excess contracts for years 2004, 2007, 2012, 2014 and 2017, whose ultimates were increased in bulk reserves.response to higher than expected reported losses.
The Company’s operations consist of a property and casualty insurance segment and a reinsurance segment. The property and casualty insurance segment writes both commercial and personal lines of insurance, with a focus on medium-sized commercial accounts. The reinsurance segment provides reinsurance for other insurers and reinsurers. The segments are managed separately due to differences in the insurance products sold and the business environments in which they operate. Management evaluates the performance of its insurance segments using financial measurements based on Statutory Accounting Principles (SAP) instead of GAAP. Such measures include premiums written, premiums earned, statutory underwriting profit (loss), and investment results, as well as loss and loss adjustment expense ratios, trade underwriting expense ratios, and trade combined ratios.
Summarized financial information for the Company’s segments is as follows:
| | Three months ended September 30, 2017 | | Property and casualty insurance | | Reinsurance | | Parent company | | Consolidated | |
Three months ended June 30, 2019 | | | Property and casualty insurance | | Reinsurance | | Parent company | | Consolidated |
($ 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) | | | | |
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 | | | Property and casualty insurance | | Reinsurance | | Parent company | | Consolidated |
($ in thousands) | | Property and casualty insurance | | Reinsurance | | Parent company | | Consolidated | |
Premiums earned | | | $ | 240,127 |
| | $ | 73,605 |
| | $ | — |
| | $ | 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 ninesix months ended SeptemberJune 30, 20172019 and 20162018, 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 |
|
The actual income tax expense (benefit) for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 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 SeptemberJune 30, 20172019 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 ninesix months ended SeptemberJune 30, 20172019 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 ninesix months ended SeptemberJune 30, 20172019 and 20162018, 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 ninesix months ended SeptemberJune 30, 20172019 and 20162018, 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 contributionMutual plans to contribute approximately $7.0 million to the pension plan if made, will be approximately $2.7 million. in 2019. No contributions willare expected to be made to the Voluntary Employee Beneficiary Association (VEBA) trust in 2017.2019.
| |
8. | STOCK-BASED COMPENSATION |
On May 26, 2017, theThe Company registered 150,000 shares of the Company's common stockhas 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, anAn 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 ninesix months of 2017,2019, the Company repurchased 67,97420,221 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 ninesix months of 2017, 116,2882019, 122,073 restricted stock units were granted to eligible employees of Employers Mutual. Under the stock plans, 85,19299,842 shares of restricted stock vested, and 163,65833,500 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 ($192,000330,000 net of tax) and $218,000$193,000 ($142,000153,000 net of tax) for the three months and $508,000$700,000 ($330,000553,000 net of tax) and $542,000$606,000 ($353,000479,000 net of tax) for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.
| |
9. | DISCLOSURES ABOUT THE FAIR VALUES OF FINANCIAL INSTRUMENTS |
The carrying amounts and estimated fair values of the Company’s financial instruments as of SeptemberJune 30, 20172019 and December 31, 20162018 are summarized in the tables below.
| | September 30, 2017 | | Carrying amounts | | Estimated fair values | |
June 30, 2019 | | | Carrying amounts | | Estimated fair values |
($ 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 continuesto be paid is assumed to continue at the current interest rate in place of 1.352.73 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 SeptemberJune 30, 20172019 and December 31, 20162018, 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. TwoOne of these arewas an equity securitiessecurity that arewas reported as a Level 3 fair value measurementsmeasurement since no observable inputs arewere 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 bewas 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 establishesestablished 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 eightsix fixed maturity securities (nine at December 31, 2016).securities. TwoOne 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 SeptemberJune 30, 20172019 and December 31, 20162018.
| | 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 ninesix months ended SeptemberJune 30, 20172019 and 20162018. Any unrealized gains or losses on thesefixed maturity securities are recognized in other comprehensive income (loss). Any gains or losses stemming from settlements, disposals or impairments, of theseas 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.
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 SeptemberJune 30, 20172019 and December 31, 20162018 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) | | | | |
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) | | | | |
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 SeptemberJune 30, 20172019 and December 31, 20162018, 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 |
|
MostNearly 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 SeptemberJune 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, 20172019.
The amortized cost and estimated fair values of fixed maturity securities available-for-sale at SeptemberJune 30, 20172019, 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 lossesgains (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, 20162018 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 SeptemberJune 30, 20172019. 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. DuringThe Company did not repurchase any shares during the first ninesix months of 2016, the2019. The Company repurchased 17,30025,300 shares under this programof 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) | | | 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) | | | 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 ninesix months ended SeptemberJune 30, 20172019 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 CodificationTM (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 willis 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 20162018 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 ninesix 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 ninesix months of 20172019. 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 20162018 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 ninesix months ended SeptemberJune 30, 20172019 and 20162018 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 underlyingUnderlying 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 |
|
NetThe Company reported net income declined to $746,000of $1.3 million ($0.030.06 per share) and $13.1$34.8 million ($0.611.61 per share) for the three and ninesix months ended SeptemberJune 30, 2017 from $4.12019, compared to net losses of $5.0 million ($0.200.24 per share) and $24.9$5.1 million ($1.190.24 per share) during the same periods in 2016. These declines2018. Included in the net income amounts reported for the three and six months ended June 30, 2019 are primarily due to a record amountpre-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 $3.0a 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 factoringreported 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 Harveyreported improved underwriting results for both the second quarter and Irma producing combined lossesfirst six months of less than $1.0 million. A2019, 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 tounderlying loss and settlement expense ratios (which exclude the decline in underwriting results for both the three and nine month periodsimpact 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 millionand 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, unlesssegments' reported results were partially offset by expenses incurred by the $12.0 million limitholding 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 2.06.4 percent and 1.86.9 percent to $155.2$168.1 million and $449.5$335.4 million for the three and ninesix months ended SeptemberJune 30, 20172019 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 bewere 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 levelsdecreases. Rate level changes were mixed in the reinsurance segment stabilized somewhat during the January 1, 20172019 renewal season, when approximately 70 percentas 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 3.54.0 percent and 3.54.6 percent to $120.5$126.3 million and $350.3$251.1 million for the three and ninesix months ended SeptemberJune 30, 20172019 from $116.4$121.5 million and $338.6$240.1 million for the same periods in 2016. These2018. 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. NewPersonal 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 ninesix months of 2016. Commercial lines new business continues to beended 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 isfor 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 businessthe commercial lines mix of the existing book of business. RenewalCommercial lines renewal business premium increased approximately four5 percent during the first ninesix 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 oneapproximately 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 overallcommercial lines policy retention rate remained strong during the first ninethree months of 20172019 at 85.887 percent, (commercial lines at 87.0 percent and personal lines at 83.5 percent). Thesewhich approximates the retention rates approximate thoserate reported at the end of 2016.2018.
Premiums earned in the reinsurance segment decreased 3.0increased 14.8 percent and 3.514.6 percent to $34.7$41.8 million and $99.2$84.4 million for the three and ninesix months ended SeptemberJune 30, 20172019 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 somehigher 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, 20172019 renewal season, asseason. As a result, reinsurance rate levels were mixed, with increases implemented on excess of loss reinsurance business were largely unchanged, which was an improvementprograms that sustained losses from the declines experiencedwildfires 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 10.52.9 percent and 9.1decreased 1.0 percent to $119.6$122.5 million and $323.1$227.5 million for the three and ninesix months ended SeptemberJune 30, 20172019 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 increasedratios decreased to 77.172.9 percent and 71.967.8 percent for the three and ninesix months ended SeptemberJune 30, 20172019 from 71.175.4 percent and 67.173.2 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 increasedecreases 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'ssegment, 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 SeptemberJune 30, 20172019 indicates that they are in the upper halfthird of the range of reasonable reserves.
The loss and settlement expense ratioratios for the property and casualty insurance segment decreased to 61.574.1 percent and 66.067.9 percent for the three and ninesix months ended SeptemberJune 30, 20172019 from 70.277.6 percent and 66.574.0 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 lower2018. The underlying loss and settlement expense ratio contributedratios, which exclude the remainderimpact of the decline in the ratio for the third quarter. Catastrophecatastrophe and storm losses netand 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 cededother 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 8.2actions taken to exit from this line of business; however, both loss frequency and 8.5 percentage pointsseverity 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 ofinformation 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 ninesix months ended SeptemberJune 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 tosecond quarter of 2019, the treaties that covered the first halfproperty 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 forreinsurance treaty with Employers Mutual. Having filled the threeretention 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 and2019 will be ceded to Employers Mutual.
The loss and settlement expense ratioratios for the reinsurance segment increased slightly to 131.2 percent and 92.869.1 percent for the three and nine months ended SeptemberJune 30, 20172019 from 74.1 percent and 69.068.1 percent for the same periodsperiod in 2016. These increases reflect $19.52018, 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 duringtotaled $1.0 million, compared to $1.4 million for the third quarter of 2017.same period in 2018. Catastrophe and storm losses accounted for 56.22.4 and 28.21.2 percentage points of the loss and settlement expense ratios for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2019, compared to 6.32.7 and 10.51.9 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 catastropheceded losses and storm lossessettlement 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. Takinginter-company reinsurance program totaling $(788,000) and $945,000 for the loss recoveries receivedthree and six months ended June 30, 2019, respectively, compared to $291,000 and $(462,000) for the premiums paidsame periods in 2018. The amounts ceded to Employers Mutual into consideration, the inter-companyin 2019 were impacted by external reinsurance program with Employers Mutual reduced the catastropherecoveries 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 ninesix months ended September 30, 2017, respectively. TheJune 30. In accordance with the terms of the inter-company reinsurance program, includingthese 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 dueprogram. As a result, 80 percent of these recoveries were ceded to a decline in favorableEmployers Mutual. Adverse development on prior years' reserves including adverseamounted 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 ofinformation regarding the sources of development on prior years' reserves.
Acquisition and other expenses
Acquisition and other expenses decreased 5.0increased 10.2 percent and 0.38.1 percent to $46.0$59.8 million and $143.7$115.1 million for the three and ninesix months ended SeptemberJune 30, 20172019 from $48.4$54.3 million and $144.2$106.5 million for the same periods in 2016.2018. The acquisition expense ratio decreasedratios increased to 29.635.6 percent and 31.934.3 percent for the three and ninesix months ended SeptemberJune 30, 20172019 from 31.834.4 percent and 32.734.0 percent for the same periods in 2016. Both segments contributed2018. These increases are attributed to both the decreases in these ratios.property and casualty insurance segment and the reinsurance segment.
The acquisition expense ratioratios for the property and casualty insurance segment decreasedincreased to 32.038.9 percent and 34.437.6 percent for the three and ninesix months ended SeptemberJune 30, 20172019 from 34.237.4 percent and 35.237.3 percent for the same periods in 2016.2018. These decreases areincreases 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 ratioratios for the reinsurance segment decreasedincreased to 21.125.3 percent and 23.224.6 percent for the three and ninesix months ended SeptemberJune 30, 20172019 from 23.924.1 percent and 24.223.3 percent for the same periods in 2016.2018. These decreasesincreases primarily reflect increases in contingent commission expense and salary expense.
Other expenses
During the accumulationthree 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 $11.5increased 10.0 percent and 11.1 percent to $13.0 million and $25.7 million for the three and six months ended SeptemberJune 30, 20172019 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 periodperiods in 2016. The decrease for2018. These increases are primarily the nine months ended primarily reflects aresult 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 belowalso contributed to the average book yield of the fixed maturity portfolio, and will therefore likely continue to limit future growthincrease in net investment income.income, but to a lesser extent. The average coupon ratepre-tax yield on the fixed maturity portfolio excluding interest-only securities, has remained relatively steady over the past year, coming in at 3.8increased to 3.66 percent at SeptemberJune 30, 2017 and2019 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, decreaseddeclined to 4.94.2 at SeptemberJune 30, 20172019 from 5.24.9 at December 31, 2016. The Company’s2018.
Net realized investment gains/losses and the change in unrealized gains on equity portfolio produced dividend incomeinvestments 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 ninesix months ended SeptemberJune 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 $1.6net 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 generatedlarge gains during the three and ninesix months ended SeptemberJune 30, 20172019 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 declineschanges 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 $1.9This 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 $355,0002018.
Other income
Other income totaled $1.6 million and $1.1$3.1 million during the three and ninesix months ended SeptemberJune 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 are2018. 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 lossesgains 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
IncomeThe Company reported income tax expense (benefit) decreased 229.2 percentof $356,000 and 76.1 percent to a $1.2$9.1 million benefit and $2.2 million expense for the three and ninesix months ended SeptemberJune 30, 2017 from expenses2019, 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 ninesix months ended SeptemberJune 30, 20172019 were 269.521.7 percent and 14.320.7 percent, compared to 18.235.3 percent and 26.838.5 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 thesethe 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 $50.142.4 million and $75.1$23.0 million during the first ninesix months of 20172019 and 20162018, 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 20172019 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 ninesix months of 20172019 and 20162018, 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 andand/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 SeptemberJune 30, 20172019 and December 31, 20162018, the Company had net unrealized holding gains, net of deferred taxes, on its fixed maturity securities available-for-sale of $16.046.7 million and $6.67.7 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 $14.517.4 million and $12.5$19.3 million in minority ownership interestsother long-term investments at June 30, 2019 and December 31, 2018, respectively, which primarily consist of holdings in limited partnerships, and limited liabilityprivately 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 $5.8additional funds of $7.5 million and $4.9 million, respectively, ininto a limited partnership that is designed to help protect the Company from a sudden and significant decline in the value of its equity portfolio. Duringportfolio (included $2.3 million of gains realized from the fourth quarterprogram 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 million2019. Also included in aother long-term investments are holdings in limited liability company as an investmentcompanies that conveys renewable energyconvey 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 valuevalues of this investment was approximately $1.1 million and $2.0these investments totaled $2.5 million at SeptemberJune 30, 20172019 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'sCompany did not have a receivable under reverse repurchase agreements was $16.5 million and $20.0 million at Septemberas of June 30, 2017 and2019 or December 31, 2016, respectively.2018.
The Company’s cash balance was $402,000$276,000 and $307,000$337,000 at SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively.
During the first ninesix months of 2017,2019, Employers Mutual made no contributions to its qualified pension plan or postretirement benefit plans. The Company’sCompany's share of Employers Mutual’s 2017Mutual'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 ninesix months of 20162018, Employers Mutual made no contributionscontributed $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 20162018 pension contribution (no contributions were made to the postretirement benefit plans during 20162018).
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 SeptemberJune 30, 20172019.
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$101.9 million.
The Company’s total cash and invested assets at SeptemberJune 30, 20172019 and December 31, 20162018 are summarized as follows:
| | | | September 30, 2017 | | June 30, 2019 |
($ 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 statutoryearned surplus and are subject to prior approval by the insurance commissionercommissioners 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 ninesix months of 20172019 and $313,000 during the first six months of 20162018. 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 SeptemberJune 30, 20172019, 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 SeptemberJune 30, 20172019, 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 SeptemberJune 30, 20172019. 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$1.4 million,, net of tax; however, the Company’s financial position would not be affected because unrealized losses on fixed maturity securities available-for-sale securities are reflected in the Company’s financial statements as a component of stockholders’ equity, net of deferred taxes.
Following is a schedule of the length of time fixed maturity securities available-for-sale have continuously been in an unrealized loss position as of SeptemberJune 30, 20172019.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than twelve months | | Twelve months or longer | | Total |
($ 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 SeptemberJune 30, 20172019, the Company held $2.9$4.3 million of non-investment grade fixed maturity securities in a net unrealized gainloss position of $44,000.$316,000.
Following is a schedule of gross realized losses recognized in the first ninesix months of 20172019. on fixed maturity securities available-for-sale. The schedule is aged according to the length of time the underlying securities were in an unrealized loss position.
| | | | Realized losses from sales | | "Other-than- temporary" impairment losses | | Total gross realized losses | | Realized losses from sales | | "Other-than- temporary" impairment losses | | Total gross realized losses |
($ 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 withThe 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. Allthe costs of these lease costswhich are included as expenses undercharged to the pooling agreement.pool and allocated among the pool participants based on their respective participation interests. The Company’sCompany's contractual obligations as of SeptemberJune 30, 20172019 did not change materially from those presented in the Company’s 2016Company'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 SeptemberJune 30, 20172019 and December 31, 20162018, respectively. Premium tax offsets of $990,000672,000 and $1.0 million,$809,000, which are related to prior guarantee fund payments and current assessments, have been accrued as of SeptemberJune 30, 20172019 and December 31, 20162018, 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 SeptemberJune 30, 20172019 and December 31, 20162018, 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, 20162018. The Company had a contingent liability for the aggregate guaranteed amount of the annuities of $183,000 at December 31, 20162018 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 SeptemberJune 30, 20172019. The probability of a material loss due to failure of performance by the issuers of these annuities is considered remote.
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.
|
| |
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 20162018 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 thirdsecond quarter ended SeptemberJune 30, 20172019 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 SeptemberJune 30, 20172019:
|
| | | | | | | | | | | | | | |
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 1,345Consists 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.
2 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. A total of $14.6$14.0 million remains available in this plan for the purchase of additional shares.
3 On 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.
|
| | |
Exhibit number | | Item |
10.2.1 | | |
| | |
31.1* | | |
| | |
31.2* | | |
| | |
32.1* | | |
| | |
32.2* | | |
| | |
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 NovemberAugust 8, 20172019.
|
|
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) |