UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1994
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM to
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Commission File Number: 0-10956
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EMC INSURANCE GROUP INC.
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(Exact name of registrant as specified in its charter)
Iowa 42-6234555
- - ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
717 Mulberry Street, Des Moines, Iowa 50309
- - --------------------------------------- ------------------
(Address of principal executive office) (Zip Code)
(515) 280-2581
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at April 30, 1994
----- -------------------------------
Common stock, $1.00 par value 10,389,361
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Total pages 14
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1
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
- - ------- ---------------------
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
1994 1993
------------ ------------
(Unaudited)
ASSETS
Investments:
Fixed maturities:
Securities held-to-maturity, at amortized cost
(market value $206,025,828 and $206,305,597) $201,205,044 $191,010,623
Securities available-for-sale, at market value
(cost $118,383,097 and $109,947,564) ....... 119,154,774 113,081,580
Equity securities available-for-sale, at market
value (cost $O and $505,000) ................. - 475,000
------------ ------------
Total investments ..................... 320,359,818 304,567,203
Cash ............................................. 1,154,304 675,203
Indebtedness of related party .................... - 12,291,512
Accrued investment income ........................ 4,927,282 4,835,451
Accounts receivable .............................. 890,242 415,215
Deferred policy acquisition costs ................ 7,631,656 7,698,864
Deferred income taxes ............................ 14,198,211 13,040,693
Intangible assets, including goodwill, at cost
less accumulated amortization of $1,573,758
and $1,540,130 ................................. 1,984,062 2,017,690
Reinsurance receivables .......................... 18,168,801 18,477,406
Prepaid reinsurance premiums ..................... 3,215,294 2,832,184
Other assets ..................................... 2,010,525 2,084,102
------------ ------------
Total assets .......................... $374,540,195 $368,935,523
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
2
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
1994 1993
------------ ------------
(Unaudited)
LIABILITIES
Losses and settlement expenses ................... $200,900,107 $197,121,852
Unearned premiums ................................ 45,310,112 45,941,056
Other policyholders' funds ....................... 3,348,592 2,854,793
Indebtedness to related party .................... 2,392,780 -
Income taxes payable ............................. 1,650,000 550,000
Postretirement benefits .......................... 3,677,807 3,537,449
Deferred income .................................. 1,598,960 1,717,641
Other liabilities ................................ 5,936,650 7,578,963
------------ ------------
Total liabilities ............................ 264,815,008 259,301,754
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000
shares; issued and outstanding, 10,397,451
shares in 1994 and 10,325,329 shares in 1993 ... 10,397,451 10,325,329
Additional paid-in capital ....................... 55,621,475 55,021,926
Unrealized holding gains on fixed maturity
securities available-for-sale, net of tax....... 509,307 2,068,451
Unrealized holding losses on equity securities
available-for-sale, net of tax ................. - (19,800)
Retained earnings ................................ 43,278,340 42,319,249
Treasury stock, at cost (8,090 shares in 1994
and 1993) ...................................... (81,386) (81,386)
------------ ------------
Total stockholders' equity ................... 109,725,187 109,633,769
------------ ------------
Total liabilities and
stockholders' equity ....................... $374,540,195 $368,935,523
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
3
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three months ended
March 31,
------------------------
1994 1993
----------- -----------
REVENUES:
Premiums earned .................................. $40,308,915 $36,952,696
Investment income, net ........................... 4,925,577 5,375,769
Realized investment gains ........................ 307,204 40,926
Other income ..................................... 118,681 -
----------- -----------
45,660,377 42,369,391
----------- -----------
LOSSES AND EXPENSES:
Losses and settlement expenses ................... 30,585,898 27,202,684
Dividends to policyholders ....................... 1,030,156 583,729
Amortization of deferred policy
acquisition costs .............................. 7,287,527 7,659,413
Other underwriting expenses ...................... 3,697,025 3,548,421
----------- -----------
42,600,606 38,994,247
----------- -----------
Income before income taxes and cummulative
effect of changes in accounting principles ... 3,059,771 3,375,144
----------- -----------
INCOME TAXES:
Current .......................................... 1,121,750 1,120,632
Deferred ......................................... (364,523) 141,573
----------- -----------
757,227 1,262,205
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Income before cumulative effect of
changes in accounting principles ............. 2,302,544 2,112,939
----------- -----------
CUMMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES FOR:
Income taxes ................................... - 5,595,177
Postretirement benefits ........................ - (2,165,900)
Unearned premiums .............................. - (807,933)
----------- -----------
Net income ................................. $ 2,302,544 $ 4,734,283
=========== ===========
See accompanying Notes to Interim Consolidated Financial Statements.
4
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income, Continued
(Unaudited)
Three months ended
March 31,
------------------------
1994 1993
----------- -----------
EARNINGS PER COMMON SHARE:
Income before cumulative effect of changes
in accounting principles ....................... $ .22 $ .21
Cumulative effect of changes in accounting
principles for:
Income taxes ................................. - .55
Postretirement benefits ...................... - (.21)
Unearned premiums ............................ - (.08)
----------- -----------
Net income ................................. $ .22 $ .47
=========== ===========
Cash dividend per common share ..................... $ .13 $ .13
=========== ===========
Average number of shares outstanding ............... 10,336,183 10,117,185
=========== ===========
See accompanying Notes to Interim Consolidated Financial Statements.
5
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
--------------------------
1994 1993
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................... $ 2,302,544 $ 4,734,283
------------ ------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Cumulative effect of changes in accounting
principles, net of tax .................. - (2,621,344)
Losses and settlement expenses ............ 3,778,255 (1,902,419)
Unearned premiums ......................... (630,944) (1,832,082)
Other policyholders' funds ................ 493,799 (464,940)
Deferred policy acquistion costs .......... 67,208 246,640
Indebtedness to related party ............. 14,684,292 (5,968,027)
Accrued investment income ................. (91,831) (399,138)
Accrued income taxes:
Current ................................. 1,100,000 1,194,000
Deferred ................................ (364,523) 141,573
Provision for amortization ................ 2,872 (4,653)
Realized investments gains ................ (307,204) (40,926)
Postretirement benefits ................... 140,358 89,937
Reinsurance receivables ................... 308,605 6,953,572
Prepaid reinsurance premiums .............. (383,110) 55,226
Amortization of deferred income ........... (118,681) -
Other, net ................................ (2,043,763) (1,613,312)
------------ ------------
16,635,333 (6,165,893)
Cash used in the change in the property
and casualty insurance subsidiaries'
pooling agreement ....................... - (3,848,247)
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Total adjustment ...................... 16,635,333 (10,014,140)
------------ ------------
Net cash provided by (used in)
operating activities ................ $ 18,937,877 $ (5,279,857)
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6
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Unaudited)
Three months ended
March 31,
--------------------------
1994 1993
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity securities
held-to-maturity ............................ $(19,534,553) $ -
Maturities of fixed maturity securities
held-to-maturity ............................ 13,923,082 -
Purchases of fixed maturity securities
available-for-sale .......................... (108,420,467) -
Maturities of fixed maturity securities
available-for-sale .......................... 80,159,506 -
Sales of fixed maturity securities
available-for-sale (note 3) ................. 15,585,438 -
Sale of equity securities available-for-sale .. 500,000 -
Purchases of fixed maturities ................. - (14,968,490)
Maturities of fixed maturities ................ - 11,120,124
Purchases of short-term investments ........... - (66,558,486)
Sales of short-term investments ............... - 76,425,030
------------ ------------
Net cash (used in) provided by
investing activities ................ (17,786,994) 6,018,178
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ...................... 199,174 99,125
Dividends paid to stockholders ................ (870,956) (854,454)
Purchase of treasury stock, net ............... - (23,306)
------------ ------------
Net cash used in financing activities ..... (671,782) (778,635)
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NET INCREASE (DECREASE) IN CASH ................. 479,101 (40,314)
Cash at beginning of year ....................... 675,203 2,009,512
------------ ------------
Cash at end of quarter .......................... $ 1,154,304 $ 1,969,198
============ ============
Income taxes paid ............................... $ 18,873 $ 1,948,632
See accompanying Notes to Interim Consolidated Financial Statements.
7
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Unaudited)
March 31, 1994
Note 1
- - ------
The results of operations for the interim periods reported are not
necessarily indicative of results to be expected for the year. The
information reflects all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the interim
periods.
Note 2
- - ------
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112 (SFAS 112), "Employers' Accounting for
Postemployment Benefits". The adoption of this statement did not have a
material effect on the operations of the Company.
Note 3
- - ------
The fixed maturity securities available-for-sale classification includes short-
term investments. Sales of fixed maturity securities available-for-sale for
the three months ended March 31, 1994 reflects the sale of money market funds.
8
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial
- - ------- Condition and Results of Operations
OVERVIEW
EMC Insurance Group Inc. (the "Company"), an approximately 67 percent
owned subsidiary of Employers Mutual Casualty Company ("Employers Mutual"),
is an insurance holding company with operations in property and casualty
insurance, reinsurance, nonstandard risk automobile insurance and excess
and surplus lines insurance management. Property and casualty insurance is
the most significant segment, representing 70.8 percent of consolidated
premium income.
The three property and casualty insurance subsidiaries of the Company
and two subsidiaries of Employers Mutual are parties to reinsurance pooling
agreements with Employers Mutual (collectively the "pooling agreement").
Under the terms of the pooling agreement, each company cedes to Employers
Mutual all of its insurance business and assumes from Employers Mutual an
amount equal to its participation in the pool. All losses, settlement
expenses and other underwriting and administrative expenses, excluding the
voluntary reinsurance business assumed by Employers Mutual from
unaffiliated insurance companies, are prorated among the parties on the
basis of participation in the pool. Since 1992, the property and casualty
insurance subsidiaries' participation in the pool has been 22 percent. The
investment programs and income tax liabilities of the pool participants are
not subject to the pooling agreement.
The purpose of the pooling agreement is to reduce the risk of an
exposure insured by any of the pool participants by spreading it among all
the companies. The pooling agreement produces a more uniform and stable
underwriting result from year to year for all companies in the pool than
might be experienced individually. In addition, each company benefits from
the capacity of the entire pool, rather than being limited to policy
exposures of a size commensurate with its own assets, and from the wide
range of policy forms and lines of insurance written and the variety of
rate filings and commission plans offered by each of the companies. A
single set of reinsurance treaties is maintained for the protection of all
six companies in the pool.
Employers Mutual cedes 95 percent of the voluntary reinsurance
business it assumes from nonaffiliated insurance companies to the Company's
reinsurance subsidiary, exclusive of certain reinsurance contracts. The
reinsurance subsidiary receives 95 percent of all premiums and assumes 95
percent of all related losses and settlement expenses of this business.
The reinsurance subsidiary does not reinsure any of Employers Mutual's
direct insurance business, nor any "involuntary" facility or pool business
that Employers Mutual assumes pursuant to state law. In addition, the
reinsurance subsidiary is not liable for credit risk in connection with the
insolvency of any reinsurers of Employers Mutual.
The results of operations for the interim periods reported are not
necessarily indicative of results to be expected for the year. The
information reflects all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the interim
periods.
9
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial
- - ------- Condition and Results of Operations, Continued
RESULTS OF OPERATIONS
Operating income before income taxes decreased 9.3 percent to
$3,060,000 for the three months ended March 31, 1994 from $3,375,000 for
the same period in 1993. Operating results improved in the nonstandard
risk automobile insurance subsidiary and the excess and surplus lines
insurance management agency while the property and casualty insurance
subsidiaries and the reinsurance subsidiary showed small declines.
Net income for the three months ended March 31, 1994 was $2,303,000
($.22 per share) compared to $4,734,000 ($.47 per share) for the same
period in 1993. Results for 1993 include $2,621,000 ($.26 per share) of
income from the implementation of two new accounting standards and a change
in accounting principle.
Premiums earned increased $3,357,000 (9.1 percent) to $40,309,000 for
the three months ended March 31, 1994 from $36,953,000 for the same period
in 1993. This increase is primarily due to increased volume in the
property and casualty insurance subsidiaries.
Net investment income decreased $450,000 (8.2 percent) to $4,926,000
for the three months ended March 31, 1994 from $5,376,000 for the same
period in 1993. This decrease is due to a decline in invested assets
resulting from the transfer of $24,853,000 to Employers Mutual during 1993
in connection with the change in the property and casualty insurance
subsidiaries' pooling agreement relating to the voluntary assumed
reinsurance business and the commutation of two reinsurance contracts under
the reinsurance subsidiary's quota share agreement.
Realized investment gains totaled $307,000 for the three months ended
March 31, 1994 compared to $40,000 for the same period in 1993. The
increase is the result of calls and prepayments on fixed maturity
securities.
Other income totaled $119,000 for the three months ended March 31,
1994 compared to none for the same period in 1993. This amount represents
the amortization of deferred income related to reserve discounting in
connection with the commutation of a reinsurance contract under the
reinsurance subsidiary's quota share agreement in 1993.
Losses and expenses increased $3,608,000 (9.3 percent) to $42,601,000
for the three months ended March 31, 1994 from $38,994,000 for the same
period in 1993. This increase is primarily due to losses associated with
increased premium volume in the property and casualty insurance
subsidiaries. Improved loss experience in the nonstandard risk automobile
insurance subsidiary was offset by poor experience in the reinsurance
subsidiary.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112 (SFAS 112), "Employers' Accounting for
Postemployment Benefits". The adoption of this statement did not have a
material effect on the operations of the Company.
10
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial
- - ------- Condition and Results of Operations, Continued
SEGMENT RESULTS
Property and Casualty Insurance
Operating income before income taxes decreased 11.7 percent to
$2,910,000 for the three months ended March 31, 1994 from $3,297,000 for
the same period in 1993. Underwriting loss increased $487,000 to $594,000
in the first three months of 1994 and was compounded by a $95,000 (2.8
percent) decline in investment income.
Premiums earned increased 11.4 percent to $28,559,000 for the three
months ended March 31, 1994 from $25,625,000 for the same period in 1993.
Marketing programs started during 1992 and 1993 have resulted in increases
in commercial property business.
Underwriting results for the first three months of 1994 were impacted
by unfavorable personal lines experience. Winter storms in the south and
east coast had an adverse affect on homeowners results. Management is
currently reviewing the marketing and underwriting of this business in
order to improve future performance. Commercial auto results for the first
three months of 1994 were unprofitable; however, the commercial property,
commercial liability and workers' compensation lines all showed
improvement. Management continues to monitor workers' compensation reform
on a state by state basis and will only write this line of business in
those states which show a potential for profit.
Reinsurance
Operating loss before income taxes increased to $364,000 for the three
months ended March 31, 1994 from $6,000 for the same period in 1993.
Underwriting loss increased 12.6 percent to $1,856,000 in the first three
months of 1994 and was compounded by a 20.8 percent decline in investment
income resulting from the transfer of $20,426,000 to Employers Mutual
during 1993 in connection with the commutation of two reinsurance contracts
under the quota share agreement. This decline in investment income was
partially offset by the recognition of $119,000 of deferred income related
to reserve discounting on one of the commuted contracts.
Premiums earned increased 4.7 percent to $8,461,000 for the three
months ended March 31, 1994 from $8,080,000 for the same period in 1993.
This increase reflects additional participation in a voluntary pool and
premium adjustments related to pro rata business.
Underwriting loss increased 12.6 percent to $1,856,000 for the three
months ended March 31, 1994. Results for the first three months of 1994
were adversely impacted by $1,000,000 of losses from the Los Angles
earthquake, $700,000 of crop hail losses and lower investment income.
Results for the first three months of 1993 were impacted by severe east
coast storms, the world trade center explosion and development on a
reinsurance contract involving a casualty pool that was commuted under the
quota share agreement on June 30, 1993.
11
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial
- - ------- Condition and Results of Operations, Continued
Nonstandard Risk Automobile Insurance
Operating income before income taxes increased 315.3 percent to
$417,000 for the three months ended March 31, 1994 from $100,000 for the
same period in 1993. Underwriting gain improved 163.7 percent to $121,000
for the three months ended March 31, 1994 while net investment income
increased 3.9 percent to $291,000.
Premiums earned increased 1.3 percent to $3,289,000 for the three
months ended March 31, 1994 from $3,247,000 for the same period in 1993.
Rate increases were implemented in all states during the later part of 1993
and the first part of 1994, which resulted in a slight decrease in the
number of policies issued. These rate increases are not expected to have a
significant effect on market share during 1994.
The improvement in underwriting results for the first three months of
1994 reflects the rate increases implemented, a more seasoned book of
business and more normal winter driving conditions.
Excess and Surplus Lines Insurance Management
Operating income before income taxes increased to $124,000 for the
three months ended March 31, 1994 from $6,000 for the same period in 1993.
This increase is the result of a new management plan put into effect which
places more emphasis on writing excess and surplus lines business through
Employers Mutual's agency force.
Parent Company
Operating loss before income taxes increased to $27,000 for the three
months ended March 31, 1994 from $22,000 for the same period in 1993. This
increase reflects a $5,000 realized loss on the call of preferred stock.
OTHER INFORMATION
The majority of the Company's assets are invested in fixed maturities.
These investments provide a substantial amount of income which offsets
underwriting losses and contributes to net earnings. As these investments
mature the proceeds will be reinvested at current rates, which are
significantly lower than those now being earned; therefore, less investment
income will be available to contribute to net earnings.
12
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial
- - ------- Condition and Results of Operations, Continued
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a portion of the investment portfolio in
relatively short-term and highly liquid investments to ensure the
availability of funds to meet claims and expenses. The remainder of the
investment portfolio is invested in securities with maturities that
approximate the anticipated liabilities of the insurance issued.
Unrealized holding gains on fixed maturity securities available-for-sale
decreased $1,559,000 to $509,000 at March 31, 1994 from $2,068,000 at
December 31, 1993. This decrease is primarily due to higher interest rates
imposed by the Federal Reserve Board during the first three months of 1994,
which caused bond values to decline. Since the Company does not actively
trade in the bond market, such fluctuations in the market value of
available-for-sale securities are not expected to have a material impact on
the operations of the Company as forced liquidation of investments are not
anticipated. The Company closely monitors the bond market and makes
appropriate adjustments in investment policy as changing conditions
warrant.
The major ongoing sources of the Company's liquidity are insurance
premium income, investment income and cash provided from maturing or
liquidated investments. The principal outflows of cash are payments of
claims, commissions, premium taxes, operating expenses, income taxes,
dividends and investment purchases.
As of March 31, 1994, the Company had no material commitments for
capital expenditures.
PART II. OTHER INFORMATION
- - -------- -----------------
Item 6. Exhibits and Reports on Form 8-K
- - ------- --------------------------------
(a) None.
(b) No Form 8-K was filed by the registrant during the quarter ended
March 31, 1994.
13
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.
EMC INSURANCE GROUP INC.
Registrant
/s/ E. H. Creese
--------------------------
E. H. Creese
Senior Vice President & Treasurer
(Chief Financial Officer)
Date: May 13, 1994
14