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 JUNE 30, 1995
----------------------------------------
OR
( ) 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)
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 July 31, 1995
----- -------------------------------
Common stock, $1.00 par value 10,715,145
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Total pages 15
------
1
PART I. FINANCIAL INFORMATION
------- ---------------------
Item 1. Financial Statements
------- ---------------------
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1995 1994
------------ ------------
(Unaudited)
ASSETS
Investments:
Fixed maturities:
Securities held-to-maturity, at amortized cost
(market value $265,922,353 and $238,721,488) $255,360,210 $243,649,720
Securities available-for-sale, at market value
(amortized cost $60,211,077 and $77,808,992) 60,950,613 76,492,396
Equity securities available-for-sale, at market
value (cost $13,550,000 and $0) .............. 14,326,594 -
Short-term investments, at cost ................ 14,558,333 16,029,426
------------ ------------
Total investments ..................... 345,195,750 336,171,542
Cash ............................................. 1,304,192 1,258,221
Indebtedness of related party .................... 2,396,020 -
Accrued investment income ........................ 5,622,567 5,560,633
Accounts receivable .............................. 874,135 1,280,550
Deferred policy acquisition costs ................ 8,971,164 8,393,635
Deferred income taxes ............................ 13,586,802 14,190,499
Intangible assets, including goodwill, at cost
less accumulated amortization of $1,741,899
and $1,674,643 ................................. 1,815,921 1,883,177
Reinsurance receivables .......................... 14,017,311 14,935,048
Prepaid reinsurance premiums ..................... 2,277,560 2,121,033
Other assets ..................................... 1,321,072 1,575,540
------------ ------------
Total assets .......................... $397,382,494 $387,369,878
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
2
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1995 1994
------------ ------------
(Unaudited)
LIABILITIES
Losses and settlement expenses ................... $204,138,482 $203,181,615
Unearned premiums ................................ 48,533,376 47,672,570
Other policyholders' funds ....................... 3,817,420 3,102,609
Indebtedness to related party .................... - 937,356
Income taxes payable ............................. 1,558,000 1,736,000
Postretirement benefits .......................... 4,242,027 4,086,674
Deferred income .................................. 1,101,963 1,283,662
Other liabilities ................................ 7,110,327 8,642,703
------------ ------------
Total liabilities ............................ 270,501,595 270,643,189
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000
shares; issued and outstanding, 10,755,540
shares in 1995 and 10,587,629 shares in 1994 ... 10,755,540 10,587,629
Additional paid-in capital ....................... 58,832,397 57,162,911
Unrealized holding gains (losses) on fixed
maturity securities available-for-sale,
net of tax ..................................... 488,094 (1,316,596)
Unrealized holding gains on equity securities
available-for-sale, net of tax ................. 512,551 -
Retained earnings ................................ 56,761,269 50,402,812
Treasury stock, at cost (41,754 shares in 1995
and 10,931 shares in 1994) ..................... (468,952) (110,067)
------------ ------------
Total stockholders' equity ................... 126,880,899 116,726,689
------------ ------------
Total liabilities and stockholders' equity ... $397,382,494 $387,369,878
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
3
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
REVENUES:
Premiums earned ..........$37,839,646 $39,496,469 $77,839,816 $79,805,384
Investment income, net ... 5,616,938 5,041,213 11,464,079 9,966,790
Realized investment gains 4,775 99,445 5,473 406,649
Other income ............. 88,014 111,250 181,699 229,931
----------- ----------- ----------- -----------
43,549,373 44,748,377 89,491,067 90,408,754
----------- ----------- ----------- -----------
LOSSES AND EXPENSES:
Losses and settlement
expenses ............... 22,903,950 27,418,776 50,640,559 57,929,464
Dividends to policyholders 1,468,675 372,199 2,175,092 1,402,355
Amortization of deferred
policy acquisition costs 7,565,686 7,779,174 15,262,592 15,066,701
Other underwriting
expenses ............... 4,217,902 4,070,348 8,491,355 7,842,583
----------- ----------- ----------- -----------
36,156,213 39,640,497 76,569,598 82,241,103
----------- ----------- ----------- -----------
Income before income
taxes ................. 7,393,160 5,107,880 12,921,469 8,167,651
----------- ----------- ----------- -----------
INCOME TAXES:
Current .................. 2,106,481 1,133,432 3,713,376 2,255,182
Deferred ................. 166,902 154,705 88,213 (209,818)
----------- ----------- ----------- -----------
2,273,383 1,288,137 3,801,589 2,045,364
----------- ----------- ----------- -----------
Net income .........$ 5,119,777 $ 3,819,743 $ 9,119,880 $ 6,122,287
=========== =========== =========== ===========
Earnings per share ......... $.48 $.37 $.86 $.59
=========== =========== =========== ===========
Dividend per share ......... $.13 $.13 $.26 $.26
=========== =========== =========== ===========
Average number of shares
outstanding .............. 10,650,777 10,396,080 10,622,645 10,366,131
=========== =========== =========== ===========
See accompanying Notes to Interim Consolidated Financial Statements.
4
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
--------------------------
1995 1994
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................... $ 9,119,880 $ 6,122,287
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Losses and settlement expenses ............ 956,867 5,851,281
Unearned premiums ......................... 860,806 1,458,340
Other policyholders' funds ................ 714,811 406,051
Deferred policy acquisition costs ......... (577,529) (585,775)
Indebtedness of related party ............. (3,333,376) 9,233,225
Accrued investment income ................. (61,934) 82,454
Accrued income taxes:
Current ................................. (178,000) 463,025
Deferred ................................ 88,213 (209,818)
Provision for amortization ................ (15,091) (1,652)
Realized investment gains ................. (5,473) (406,649)
Postretirement benefits ................... 155,353 287,337
Reinsurance receivables ................... 917,737 254,726
Prepaid reinsurance premiums .............. (156,527) 45,958
Amortization of deferred income ........... (181,699) (229,931)
Other, net ................................ (871,493) (2,279,531)
------------ ------------
(1,687,335) 14,369,041
------------ ------------
Net cash provided by
operating activities ................ 7,432,545 20,491,328
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity securities
held-to-maturity ............................ (22,904,536) (41,261,502)
Maturities of fixed maturity securities
held-to-maturity ............................ 11,269,764 25,695,244
Purchases of fixed maturity securities
available-for-sale .......................... (14,869,869) (135,833,689)
Maturities of fixed maturity securities
available-for-sale .......................... 32,479,887 132,826,050
Purchases of equity securities
available-for-sale .......................... (13,550,000) -
Sale of equity securities available-for-sale .. - 500,000
Net sales (purchases) of short-term investments 1,471,091 (854,996)
------------ ------------
Net cash used in investing activities ....... (6,103,663) (18,928,893)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ...................... 857,983 240,467
Dividends paid to stockholders ................ (1,782,009) (1,746,047)
Purchase of treasury stock, net ............... (358,885) -
------------ ------------
Net cash used in financing activities ..... (1,282,911) (1,505,580)
------------ ------------
NET INCREASE IN CASH ............................ 45,971 56,855
Cash at beginning of year ....................... 1,258,221 675,203
------------ ------------
Cash at end of quarter .......................... $ 1,304,192 $ 732,058
============ ============
Income taxes paid ............................... $ 4,012,400 $ 1,792,157
Interest paid ................................... 167,881 -
5
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1995
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
------
Certain amounts previously reported in prior year consolidated financial
statements have been reclassified to conform to current year presentation.
NOTE 3
------
In reviewing these financial statements, reference should be made to the 1994
Annual Report to Shareholders for more detailed footnote information.
6
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
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 73.4 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. The aggregate participation of the Company's
property and casualty insurance subsidiaries is 22 percent. Operations of the
pool give rise to intercompany balances with Employers Mutual, which are
settled on a quarterly basis. 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.
The Company's reinsurance subsidiary assumes a 95 percent quota share
portion of Employers Mutual's assumed reinsurance business, 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. Since 1993, losses in excess of $1,000,000 per
event are retained by Employers Mutual. The reinsurance subsidiary does not
reinsure any of Employers Mutual's direct insurance business, nor any
"involuntary" facility or pool business that Employers Mutual assumes pursuant
to state law. In addition, the reinsurance subsidiary is not liable for
credit risk in connection with the insolvency of any reinsurers of Employers
Mutual.
The Company's nonstandard risk automobile insurance subsidiary
specializes in insuring private passenger automobile risks that are found to
be unacceptable in the normal automobile market.
The excess and surplus lines insurance management company provides
insurance agents with access to the excess and surplus lines markets and also
functions as managing underwriter for such lines for Employers Mutual and
several of the pool members.
The results of operations for the interim periods reported are not
necessarily indicative of results to be expected for the year. The
information reflects all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods.
7
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
CONSOLIDATED RESULTS OF OPERATIONS
Operating results for the six months ended June 30, 1995 and 1994, and
the three months ended June 30, 1995 and 1994 and March 31, 1995 are as
follows:
Six months ended Three months ended
----------------- --------------------------
June 30, June 30, June 30, March 31,
($ in thousands) 1995 1994 1995 1994 1995
-------- -------- -------- -------- --------
Premiums earned ............... $ 77,840 $ 79,805 $ 37,840 $ 39,496 $ 40,000
Losses and settlement expenses 50,641 57,929 22,904 27,418 27,737
Other expenses ................ 25,929 24,312 13,252 12,222 12,677
-------- -------- -------- -------- --------
Underwriting gain (loss) ...... 1,270 (2,436) 1,684 (144) (414)
Net investment income ......... 11,464 9,967 5,617 5,041 5,847
Realized investment gains ..... 5 407 4 100 1
Other income .................. 182 230 88 111 94
-------- -------- -------- -------- --------
Operating income before
income taxes ................ $ 12,921 $ 8,168 $ 7,393 $ 5,108 $ 5,528
======== ======== ======== ======== ========
Losses and settlement expenses:
Insured events of the
current year .............. $ 54,906 $ 56,263 $ 30,027 $ 28,023 $ 24,879
(Decrease) increase in
provision for insured
events of prior years ..... (4,265) 1,666 (7,123) (605) 2,858
-------- -------- -------- -------- --------
Total losses and
settlement expenses ... $ 50,641 $ 57,929 $ 22,904 $ 27,418 $ 27,737
======== ======== ======== ======== ========
Catastrophe losses ............ $ 2,923 $ 3,356 $ 2,506 $ 1,673 $ 417
======== ======== ======== ======== ========
Operating income before income taxes increased 58.2 percent for the six
months ended June 30, 1995 from the same period in 1994. This increase is
primarily due to a significant improvement in the operating results of the
reinsurance subsidiary. Operating results for the property and casualty
insurance subsidiaries and the excess and surplus lines insurance management
subsidiary also improved, while results for the nonstandard risk automobile
insurance subsidiary declined. Second quarter operating results improved
significantly for the reinsurance subsidiary and the property and casualty
insurance subsidiaries while the nonstandard risk automobile insurance
subsidiary showed a decline.
Premiums earned decreased 2.5 percent for the six months ended June 30,
1995 from the same period in 1994. Premium volume decreased slightly in the
property and casualty insurance subsidiaries while the reinsurance and
nonstandard risk automobile insurance subsidiaries experienced more
significant
declines.
Losses and expenses decreased 6.9 percent for the six months ended June
30, 1995 from the same period in 1994. Results for the first six months of
1995 benefited from a decrease in the provision for insured events of prior
years of $4,265,000 compared to an increase in the provision for insured
events of prior years of $1,666,000 for the first six months of 1994.
Net investment income increased 15.0 percent for the six months ended
June 30, 1995 from the same period in 1994 due to a larger invested asset
balance as well as higher interest rates.
Realized investment gains decreased for the six months ended June 30,
1995 from the same period in 1994 reflecting fewer calls and prepayments on
fixed maturity securities due to the rise in interest rates.
8
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Other income amounts represent the amortization of deferred income
related to reserve discounting on the commutation of one of the reinsurance
subsidiary's reinsurance contracts under the quota share agreement in 1993.
SEGMENT RESULTS
PROPERTY AND CASUALTY INSURANCE
Operating income before income taxes increased 22.4 percent for the first
six months of 1995 from the same period in 1994. This improvement is
primarily due to favorable development on prior year claims. Operating
results improved in the second quarter of 1995 despite increased catastrophe
losses from wind and hail damage in the Midwest.
Operating results for the six months ended June 30, 1995 and 1994, and
the three months ended June 30, 1995 and 1994 and March 31, 1995 are as
follows:
Six months ended Three months ended
----------------- --------------------------
June 30, June 30, June 30, March 31,
($ in thousands) 1995 1994 1995 1994 1995
-------- -------- -------- -------- --------
Premiums earned ............... $ 57,149 $ 57,627 $ 28,722 $ 29,068 $ 28,427
Losses and settlement expenses 35,702 38,958 16,055 18,711 19,647
Other expenses ................ 19,473 17,875 10,271 8,969 9,202
-------- -------- -------- -------- --------
Underwriting gain (loss) ...... 1,974 794 2,396 1,388 (422)
Net investment income ......... 7,620 6,752 3,681 3,469 3,939
Realized investment gains ..... 3 296 3 75 -
-------- -------- -------- -------- --------
Operating income before
income taxes ................ $ 9,597 $ 7,842 $ 6,080 $ 4,932 $ 3,517
======== ======== ======== ======== ========
Losses and settlement expenses:
Insured events of the
current year .............. $ 38,535 $ 39,055 $ 20,274 $ 19,772 $ 18,261
(Decrease) increase in
provision for insured
events of prior years ..... (2,833) (97) (4,219) (1,061) 1,386
-------- -------- -------- -------- --------
Total losses and
settlement expenses ... $ 35,702 $ 38,958 $ 16,055 $ 18,711 $ 19,647
======== ======== ======== ======== ========
Catastrophe losses ............ $ 2,677 $ 2,033 $ 2,359 $ 1,414 $ 318
======== ======== ======== ======== ========
Premiums earned decreased 0.8 percent for the six months ended June 30,
1995 from the same period in 1994. Premiums from direct (controlled) business
increased during the first six months of 1995 while premiums from mandatory
assigned risk (non-controlled) business decreased, causing a net decrease in
the total premiums earned. The decrease in mandatory assigned risk premiums
is favorable as losses from this business are generally higher than losses
from direct business. Direct business production for 1995 continues to be
hampered by intense rate competition, and management does not expect market
conditions to change during the remainder of 1995. Overall, a small increase
in premium volume in the direct business for the year is expected.
9
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Underwriting results for the six months ended June 30, 1995 benefited
from a decrease in the provision for insured events of prior years of
$2,833,000. Over the last several years, reserves associated with workers'
compensation claims have been strengthened. These reserves have proven to be
more than adequate when the claims were actually settled. As a result,
current period operations have benefited. The property and casualty insurance
subsidiaries have historically experienced redundancies in their reserves and
current reserving practices have not been relaxed. However, the level of
redundancies experienced in the first six months of 1995 is not expected to
continue. Management continues to improve the marketing and underwriting of
the personal lines of business by increasing the automation of the branches in
order to obtain the best selection of business and to provide better service.
Other expenses increased due to higher commission rates associated with
property business and additional expenses associated with the various cost
control units that have been implemented to control losses.
REINSURANCE
Operating results for the reinsurance subsidiary benefited from an
exceptionally calm period in the first six months of 1995 with no major
catastrophes and no significant large losses. In addition, operating results
have benefited from favorable development on prior year claims.
Operating results for the six months ended June 30, 1995 and 1994, and
the three months ended June 30, 1995 and 1994 and March 31, 1995 are as
follows:
Six months ended Three months ended
----------------- --------------------------
June 30, June 30, June 30, March 31,
($ in thousands) 1995 1994 1995 1994 1995
-------- -------- -------- -------- --------
Premiums earned ............... $ 15,571 $ 15,746 $ 6,596 $ 7,285 $ 8,975
Losses and settlement expenses 10,182 14,236 4,187 6,320 5,995
Other expenses ................ 5,106 4,807 2,230 2,406 2,876
-------- -------- -------- -------- --------
Underwriting gain (loss) ...... 283 (3,297) 179 (1,441) 104
Net investment income ......... 2,985 2,525 1,505 1,229 1,480
Realized investment gains ..... 2 80 1 3 1
Other income .................. 182 230 88 111 94
-------- -------- -------- -------- --------
Operating income (loss)
before income taxes ......... $ 3,452 $ (462) $ 1,773 $ (98)$ 1,679
======== ======== ======== ======== ========
Losses and settlement expenses:
Insured events of the
current year .............. $ 11,851 $ 11,929 $ 7,296 $ 5,686 $ 4,555
(Decrease) increase in
provision for insured
events of prior years ..... (1,669) 2,307 (3,109) 634 1,440
-------- -------- -------- -------- --------
Total losses and
settlement expenses ... $ 10,182 $ 14,236 $ 4,187 $ 6,320 $ 5,995
======== ======== ======== ======== ========
Catastrophe losses ............ $ 246 $ 1,323 $ 147 $ 259 $ 99
======== ======== ======== ======== ========
Premiums earned decreased slightly for the six months ended June 30, 1995
from the same period in 1994. Overall, premiums for 1995 are expected to
remain steady or decrease slightly from 1994. During 1995, more emphasis has
been placed upon writing excess of loss business and increasing participation
on existing contracts that have favorable terms. Pro rata business will
continue to be written, but the emphasis will be on local and regional
accounts. Some national account pro rata business will remain, but with terms
that provide appropriate limitations and protections for catastrophe exposure.
10
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Underwriting results for the first six months of 1995 reflect a decrease
in the provision for insured events of prior years of $1,669,000 compared to
an increase of $2,307,000 in 1994. The decrease in the provision for insured
events of prior years in 1995 primarily reflects savings on several property
pro rata losses and crop hail losses. The increase in the provision for
insured events of prior years in the first six months of 1994 reflects
significant development on crop hail losses. The improved loss experience for
the first six months of 1995 also reflects a decline in catastrophe losses,
which totaled $246,000 for the six months ended June 30, 1995 compared to
$1,323,000 for the same period in 1994.
NONSTANDARD RISK AUTOMOBILE INSURANCE
The nonstandard risk automobile marketplace has remained very competitive
in 1995. The continued relaxing of underwriting standards in the standard
market has resulted in a smaller pool of insureds seeking nonstandard
automobile coverage. Companies within the standard market are retaining more
of their marginal risks in order to retain the business and rehabilitate these
risks to profitability. Therefore, more of the very high risks are being
funneled to the nonstandard market. The smaller pool of potential insureds in
the nonstandard market has resulted in increased rate competition.
Operating results for the six months ended June 30, 1995 and 1994, and
the three months ended June 30, 1995 and 1994 and March 31, 1995 are as
follows:
Six months ended Three months ended
----------------- --------------------------
June 30, June 30, June 30, March 31,
($ in thousands) 1995 1994 1995 1994 1995
-------- -------- -------- -------- --------
Premiums earned ............... $ 5,120 $ 6,432 $ 2,522 $ 3,143 $ 2,598
Losses and settlement expenses 4,757 4,735 2,662 2,387 2,095
Other expenses ................ 1,411 1,632 711 812 700
-------- -------- -------- -------- --------
Underwriting (loss) gain ...... (1,048) 65 (851) (56) (197)
Net investment income ......... 618 555 310 264 308
Realized investment gains ..... - 35 - 30 -
-------- -------- -------- -------- --------
Operating (loss) income
before income taxes ......... $ (430)$ 655 $ (541)$ 238 $ 111
======== ======== ======== ======== ========
Losses and settlement expenses:
Insured events of the
current year .............. $ 4,520 $ 5,279 $ 2,457 $ 2,565 $ 2,063
Increase (decrease) in
provision for insured
events of prior years ..... 237 (544) 205 (178) 32
-------- -------- -------- -------- --------
Total losses and
settlement expenses ... $ 4,757 $ 4,735 $ 2,662 $ 2,387 $ 2,095
======== ======== ======== ======== ========
Premium volume continued to decrease in the second quarter of 1995 due to
competition with the standard market and within the nonstandard market. The
company has not reduced rates in order to retain business. As a result, there
has been both a reduction in premium volume and a decline in the overall
quality of the book of business. The company is attempting to increase
production by improving its marketing and business relationships with agents.
The number of new applications is increasing and management expects premium
volume to improve in the last six months of 1995; however, total production
for 1995 is expected to remain below 1994 levels. The company is also
reviewing rate increases, but the timing of any increases is uncertain.
11
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Due to the decline in the overall quality of the book of business the
company has experienced an increase in both the frequency and severity of
losses, resulting in poor underwriting results. In addition, underwriting
results for 1995 were negatively impacted by an increase in the provision for
insured events of prior years of $237,000. Underwriting results for the first
six months of 1994 benefited from a decrease in the provision for insured
events of prior years of $544,000.
EXCESS AND SURPLUS LINES INSURANCE MANAGEMENT
Operating income before income taxes increased to $331,000 for the six
months ended June 30, 1995 from $230,000 for the same period in 1994. The
improvement in 1995 operations is the result of expanded marketing efforts and
the continued emphasis on writing more excess and surplus lines business
through Employers Mutual's agency force. The improved operating results also
reflect an increase in investment income caused by higher interest rates.
PARENT COMPANY
Operating loss before income taxes decreased to $29,000 for the six
months ended June 30, 1995 from $97,000 for the same period in 1994. This
improvement is primarily due to an increase in investment income caused by
higher interest rates.
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 may be higher
or lower than those now being earned; therefore, more or less investment
income may be available to contribute to net earnings depending on the
interest rate level.
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. Net unrealized holding gains on fixed
maturity securities available-for-sale totaled $488,000 at June 30, 1995.
This compares to net unrealized holding losses of $1,317,000 at December 31,
1994. Since the Company does not actively trade in the bond market, such
fluctuations in the market value of these investments are not expected to have
a material impact on the operations of the Company. The Company closely
monitors the bond market and makes appropriate adjustments in investment
policy as changing conditions warrant.
During the first six months of 1995, the Company invested $13,550,000
into equity securities from short-term funds and maturing U.S. Treasury Bills.
The overall liquidity position of the Company has not been affected by these
investments. Net unrealized holding gains on equity securities totaled
$513,000 at June 30, 1995.
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.
12
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
During the first six months of 1995, the Company generated positive cash
flows from operations of $7,433,000. This reflects $275,000 of return premium
and $167,000 of interest expense related to the settlement of California
Proposition 103 liabilities. This compares to a positive operating cash flow
of $20,491,000 in 1994, which included $13,148,000 related to the gross-up of
reserve amounts associated with the National Workers' Compensation Reinsurance
Pool, as previously discussed in the 1994 Form 10-K Management's Discussion
and
Analysis.
A major source of cash flows for the holding company is dividend payments
from its subsidiaries. State insurance regulations restrict the maximum
amount of dividends insurance companies can pay without prior regulatory
approval. The Company collected dividends from its insurance subsidiaries of
$2,800,000 for the first six months of 1995 and $1,008,000 in the same period
of 1994. The Company paid cash dividends to stockholders totaling $1,782,000
and $1,746,000 for the six months ended June 30, 1995 and 1994, respectively.
As of June 30, 1995, the Company had no material commitments for capital
expenditures.
PART II. OTHER INFORMATION
-------- -----------------
Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
------- -----------------------------------------------------
(a) Annual Meeting of Stockholders
EMC Insurance Group Inc.
May 25, 1995
(b) The following seven persons were elected to serve as directors of the
Company for the ensuing year:
George C. Carpenter III Elwin H. Creese
David J. Fisher Bruce G. Kelley
George W. Kochheiser Raymond A. Michel
Fredrick A. Schiek
(c) Items voted upon and number of votes cast:
1. Election of directors
Broker
Votes Votes Non
Nominee Cast for Withheld Votes
----------------------- ---------- -------- ------
George C. Carpenter III 10,035,644 8,438 70,512
Elwin H. Creese 10,036,816 7,266 70,512
David J. Fisher 10,034,266 9,816 70,512
Bruce G. Kelley 10,037,504 7,266 70,512
George W. Kochheiser 10,036,530 7,552 70,512
Raymond A. Michel 10,035,361 8,904 70,512
Fredrick A. Schiek 10,036,816 7,266 70,512
2. Proposal to ratify the appointment of KPMG Peat Marwick as the
independent auditors of the Company:
For 10,060,616 Against 6,122 Abstain 9,205
----------- ------------ --------
Broker Non-Votes 70,512 Withheld 0
----------- ---------
The total number of qualified shares voted by proxy is: 10,020,857
-------------
(d) None.
13
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
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
June 30, 1995.
14
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: August 14, 1995
15