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 SEPTEMBER 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 October 31, 1995
----- -------------------------------
Common stock, $1.00 par value 10,763,038
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Total pages XX
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1
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
- ------- ---------------------
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
1995 1994
------------- ------------
(Unaudited)
ASSETS
Investments:
Fixed maturities:
Securities held-to-maturity, at amortized cost
(market value $268,210,393 and $238,721,488) $257,653,390 $243,649,720
Securities available-for-sale, at market value
(amortized cost $61,611,569 and $77,808,992) 62,773,243 76,492,396
Equity securities available-for-sale, at market
value (cost $13,908,981 and $0) .............. 15,284,867 -
Short-term investments, at cost ................ 17,322,377 16,029,426
------------- ------------
Total investments ..................... 353,033,877 336,171,542
Cash ............................................. 1,480,383 1,258,221
Indebtedness of related party .................... 4,959,073 -
Accrued investment income ........................ 5,482,733 5,560,633
Accounts receivable .............................. 606,645 1,280,550
Deferred policy acquisition costs ................ 9,696,650 8,393,635
Deferred income taxes ............................ 12,931,919 14,190,499
Intangible assets, including goodwill, at cost
less accumulated amortization of $1,775,528
and $1,674,643 ................................. 1,782,292 1,883,177
Reinsurance receivables .......................... 13,535,204 14,935,048
Prepaid reinsurance premiums ..................... 2,425,841 2,121,033
Other assets ..................................... 1,156,536 1,575,540
------------- ------------
Total assets .......................... $407,091,153 $387,369,878
============= ============
See accompanying Notes to Interim Consolidated Financial Statements.
2
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
1995 1994
------------- ------------
(Unaudited)
LIABILITIES
Losses and settlement expenses ................... $207,714,109 $203,181,615
Unearned premiums ................................ 52,953,291 47,672,570
Other policyholders' funds ....................... 3,072,810 3,102,609
Indebtedness to related party .................... - 937,356
Income taxes payable ............................. 341,000 1,736,000
Postretirement benefits .......................... 4,370,451 4,086,674
Deferred income .................................. 1,018,888 1,283,662
Other liabilities ................................ 7,760,897 8,642,703
------------- ------------
Total liabilities ............................ 277,231,446 270,643,189
------------- ------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000
shares; issued and outstanding, 10,818,100
shares in 1995 and 10,587,629 shares in 1994 ... 10,818,100 10,587,629
Additional paid-in capital ....................... 59,648,606 57,162,911
Unrealized holding gains (losses) on fixed
maturity securities available-for-sale,
net of tax ..................................... 766,705 (1,316,596)
Unrealized holding gains on equity securities
available-for-sale, net of tax ................. 908,085 -
Retained earnings ................................ 58,357,754 50,402,812
Treasury stock, at cost (55,062 shares in 1995
and 10,931 shares in 1994) ..................... (639,543) (110,067)
------------- ------------
Total stockholders' equity ................... 129,859,707 116,726,689
------------- ------------
Total liabilities and stockholders' equity ... $407,091,153 $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 Nine months ended
September 30, September 30,
----------------------- --------------------------
1995 1994 1995 1994
----------- ----------- ------------ ------------
REVENUES:
Premiums earned ..........$41,242,521 $41,640,071 $119,082,337 $121,445,455
Investment income, net ... 5,730,206 5,274,202 17,194,285 15,240,992
Realized investment gains 302,398 42,310 307,871 448,959
Other income ............. 83,075 104,776 264,774 334,707
----------- ----------- ----------- -----------
47,358,200 47,061,359 136,849,267 137,470,113
----------- ----------- ----------- -----------
LOSSES AND EXPENSES:
Losses and settlement
expenses ............... 30,522,622 28,980,000 81,163,181 86,909,464
Dividends to policyholders 478,888 922,614 2,653,980 2,324,969
Amortization of deferred
policy acquisition costs 7,992,608 8,187,140 23,255,200 23,253,841
Other underwriting
expenses ............... 4,657,984 4,140,870 13,149,339 11,983,453
----------- ----------- ----------- -----------
43,652,102 42,230,624 120,221,700 124,471,727
----------- ----------- ----------- -----------
Income before income
taxes ................. 3,706,098 4,830,735 16,627,567 12,998,386
----------- ----------- ----------- -----------
INCOME TAXES:
Current .................. 408,209 1,084,371 4,121,585 3,339,553
Deferred ................. 307,596 459,546 395,809 249,728
----------- ----------- ----------- -----------
715,805 1,543,917 4,517,394 3,589,281
----------- ----------- ----------- -----------
Net income .........$ 2,990,293 $ 3,286,818 $12,110,173 $ 9,409,105
=========== =========== =========== ===========
Earnings per share ......... $.28 $.31 $1.14 $.90
=========== =========== =========== ===========
Dividend per share ......... $.13 $.13 $.39 $.39
=========== =========== =========== ===========
Average number of shares
outstanding .............. 10,724,282 10,466,614 10,656,524 10,399,626
=========== =========== =========== ===========
See accompanying Notes to Interim Consolidated Financial Statements.
4
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
--------------------------
1995 1994
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................... $ 12,110,173 $ 9,409,105
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Losses and settlement expenses ............ 4,532,494 7,900,962
Unearned premiums ......................... 5,280,721 5,944,768
Other policyholders' funds ................ (29,799) 50,553
Deferred policy acquisition costs ......... (1,303,015) (1,490,048)
Indebtedness of related party ............. (5,896,429) 7,979,605
Accrued investment income ................. 77,900 (571,586)
Accrued income taxes:
Current ................................. (1,395,000) 454,000
Deferred ................................ 395,809 249,728
Provision for amortization ................ (1,132) 594
Realized investment gains ................. (307,871) (448,959)
Postretirement benefits ................... 283,777 423,161
Reinsurance receivables ................... 1,399,844 (229,640)
Prepaid reinsurance premiums .............. (304,808) 239,454
Amortization of deferred income ........... (264,774) (334,707)
Other, net ................................ 211,103 (198,037)
------------ ------------
2,678,820 19,969,848
------------ ------------
Net cash provided by
operating activities ................ 14,788,993 29,378,953
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity securities
held-to-maturity ............................ (28,901,718) (71,583,301)
Maturities of fixed maturity securities
held-to-maturity ............................ 14,989,238 30,108,336
Purchases of fixed maturity securities
available-for-sale .......................... (24,366,619) (169,090,594)
Maturities of fixed maturity securities
available-for-sale .......................... 40,609,206 182,048,038
Net (purchases) sales of mutual funds invested
in equity securities available-for-sale ..... (13,635,446) -
Sale of equity securities available-for-sale .. - 500,000
Net (purchases) sales of short-term investments (1,292,951) 1,616,315
------------ ------------
Net cash used in investing activities ....... (12,598,290) (26,401,206)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ...................... 1,242,067 384,962
Dividends paid to stockholders ................ (2,681,132) (2,626,230)
Purchase of treasury stock, net ............... (529,476) -
------------ ------------
Net cash used in financing activities ..... (1,968,541) (2,241,268)
------------ ------------
NET INCREASE IN CASH ............................ 222,162 736,479
Cash at beginning of year ....................... 1,258,221 675,203
------------ ------------
Cash at end of quarter .......................... $ 1,480,383 $ 1,411,682
============ ============
Income taxes paid ............................... $ 5,637,609 $ 2,887,563
Interest paid ................................... 170,553 30,372
5
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Unaudited)
September 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 an excess and surplus
lines insurance agency. Property and casualty insurance is the most
significant segment, representing 73.2 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 $1,000,000 per
event are retained by Employers Mutual. The reinsurance subsidiary does not
reinsure any of Employers Mutual's direct insurance business, nor any
"involuntary" facility or pool business that Employers Mutual assumes pursuant
to state law. In addition, the reinsurance subsidiary is not liable for credit
risk in connection with the insolvency of any reinsurers of Employers Mutual.
The Company's nonstandard risk automobile insurance subsidiary specializes
in insuring private passenger automobile risks that are found to be
unacceptable in the normal automobile market.
The excess and surplus lines insurance agency provides insurance agents
access to the excess and surplus lines markets and also functions as managing
underwriter for such lines for Employers Mutual and several of the pool
members.
The results of operations for the interim periods reported are not
necessarily indicative of results to be expected for the year. The information
reflects all adjustments which are, in the opinion of management, necessary for
a fair statement of the results for the interim periods.
7
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
(Unaudited)
CONSOLIDATED RESULTS OF OPERATIONS
Operating results for the nine months and the three months ended September
30, 1995 and 1994 are as follows:
Nine months ended Three months ended
------------------ ------------------
September 30, September 30,
($ in thousands) 1995 1994 1995 1994
-------- -------- -------- --------
Premiums earned ................ $119,082 $121,445 $ 41,243 $ 41,640
Losses and settlement expenses 81,163 86,909 30,523 28,980
Other expenses ................. 39,058 37,563 13,129 13,251
-------- -------- -------- --------
Underwriting loss .............. (1,139) (3,027) (2,409) (591)
Net investment income .......... 17,194 15,241 5,730 5,274
Realized investment gains ...... 308 449 302 42
Other income ................... 265 335 83 105
-------- -------- -------- --------
Operating income before
income taxes ................. $ 16,628 $ 12,998 $ 3,706 $ 4,830
======== ======== ======== ========
Losses and settlement expenses:
Insured events of the
current year ............... $ 89,871 $ 88,445 $ 34,965 $ 32,182
Decrease in provision
for insured events of
prior years ................ (8,708) (1,536) (4,442) (3,202)
-------- -------- -------- --------
Total losses and
settlement expenses .... $ 81,163 $ 86,909 $ 30,523 $ 28,980
======== ======== ======== ========
Catastrophe losses ............. $ 4,364 $ 5,688 $ 1,441 $ 2,332
======== ======== ======== ========
Operating income before income taxes increased 27.9 percent for the nine
months ended September 30, 1995 from the same period in 1994. This increase is
primarily due to 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 agency also
improved, while results for the nonstandard risk automobile insurance
subsidiary declined. Third quarter operating results improved for the
reinsurance subsidiary while the property and casualty insurance subsidiaries
and the nonstandard risk automobile insurance subsidiary showed declines
compared to the same period last year.
Premiums earned decreased slightly for the nine months and the three
months ended September 30, 1995 from the same periods in 1994. Premium volume
increased slightly in the property and casualty insurance subsidiaries while
the reinsurance and nonstandard risk automobile insurance subsidiaries
experienced declines.
Losses and expenses decreased for the nine months ended September 30,
1995, but increased for the three months ended September 30, 1995 from the same
periods in 1994. Results for the nine months and three months ended September
30, 1995 have benefited from both a decline in catastrophe losses and a greater
decrease in the provision for insured events of prior years than experienced in
1994. However, results for the third quarter of 1995 were negatively impacted
by summer storms and several large losses.
Net investment income increased for the nine months and three months ended
September 30, 1995 from the same periods in 1994 due primarily to a larger
invested asset balance.
Realized investment gains decreased for the nine months ended September
30, 1995 from the same period in 1994 reflecting fewer calls and prepayments on
fixed maturity securities.
8
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
(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 12.6 percent for the first
nine months of 1995 from the same period in 1994. This improvement is
primarily due to favorable development on prior year claims. Over the last
several years, reserves associated with workers' compensation claims were
strengthened. These reserves have proven to be more than adequate when the
claims were actually settled. As a result, current period operations have
benefited.
Operating results for the nine months and the three months ended September
30, 1995 and 1994 are as follows:
Nine months ended Three months ended
------------------ ------------------
September 30, September 30,
($ in thousands) 1995 1994 1995 1994
-------- -------- -------- --------
Premiums earned ................ $ 87,157 $ 86,434 $ 30,009 $ 28,808
Losses and settlement expenses 57,321 58,775 21,619 19,816
Other expenses ................. 29,116 27,212 9,644 9,338
-------- -------- -------- --------
Underwriting gain (loss) ....... 720 447 (1,254) (346)
Net investment income .......... 11,419 10,289 3,799 3,536
Realized investment gains ...... 296 308 293 12
-------- -------- -------- --------
Operating income before
income taxes ................. $ 12,435 $ 11,044 $ 2,838 $ 3,202
======== ======== ======== ========
Losses and settlement expenses:
Insured events of the
current year ............... $ 63,786 $ 61,628 $ 25,251 $ 22,573
Decrease in provision
for insured events of
prior years ................ (6,465) (2,853) (3,632) (2,757)
-------- -------- -------- --------
Total losses and
settlement expenses .... $ 57,321 $ 58,775 $ 21,619 $ 19,816
======== ======== ======== ========
Catastrophe losses ............. $ 3,729 $ 3,909 $ 1,053 $ 1,876
======== ======== ======== ========
Premiums earned increased 0.8 percent for the nine months ended September
30, 1995 from the same period in 1994. Premium increases in direct
(controlled) business were partially offset by decreases in mandatory assigned
risk programs, resulting in a small increase in 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 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, Continued
(Unaudited)
Underwriting results for the nine months and the three months ended
September 30, 1995 benefited from a substantial decrease in the provision for
insured events of prior years. 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 nine months of 1995 may or may not
continue in the future. Underwriting results for the third quarter of 1995
benefited from a decline in catastrophe losses, but these savings were more
than offset by losses associated with summer storms and several large claims.
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 various cost control units
that have been implemented to control losses.
Reinsurance
Operating results for the reinsurance subsidiary benefited from no major
catastrophes and no significant large losses in the first nine months of 1995.
Even though it was an unusually active hurricane season, the company
experienced a small number of catastrophe losses in the third quarter of 1995.
This reflects the company's emphasis on writing business in non-hurricane prone
areas. In addition, operating results have benefited from favorable
development on prior year claims.
Operating results for the nine months and the three months ended September
30, 1995 and 1994 are as follows:
Nine months ended Three months ended
------------------ ------------------
September 30, September 30,
($ in thousands) 1995 1994 1995 1994
-------- -------- -------- --------
Premiums earned ................ $ 24,335 $ 25,636 $ 8,764 $ 9,889
Losses and settlement expenses 16,511 21,473 6,329 7,238
Other expenses ................. 7,860 7,968 2,754 3,159
-------- -------- -------- --------
Underwriting loss .............. (36) (3,805) (319) (508)
Net investment income .......... 4,507 3,909 1,522 1,384
Realized investment gains ...... 12 85 10 5
Other income ................... 265 335 83 105
-------- -------- -------- --------
Operating income before
income taxes ................. $ 4,748 $ 524 $ 1,296 $ 986
======== ======== ======== ========
Losses and settlement expenses:
Insured events of the
current year ............... $ 19,048 $ 19,499 $ 7,197 $ 7,570
(Decrease) increase in
provision for insured
events of prior years ...... (2,537) 1,974 (868) (332)
-------- -------- -------- --------
Total losses and
settlement expenses .... $ 16,511 $ 21,473 $ 6,329 $ 7,238
======== ======== ======== ========
Catastrophe losses ............. $ 635 $ 1,779 $ 388 $ 456
======== ======== ======== ========
10
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
(Unaudited)
Premiums earned decreased for the nine months and the three months ended
September 30, 1995 from the same period in 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 has continued to be written, but the emphasis has been on local and
regional accounts. Some national account pro rata business has remained, but
with terms that provide appropriate limitations and protections for catastrophe
exposure. Overall, premiums for 1995 are expected to be flat or slightly below
1994 levels.
Underwriting results for the nine months and the three months ended
September 30, 1995 reflect a substantial decrease in the provision for insured
events of prior years. The decrease in 1995 primarily reflects savings on
several property pro rata and crop hail losses. The increase in the first nine
months of 1994 reflects significant development on crop hail losses. The
improved loss experience for the first nine months of 1995 also reflects a
decline in catastrophe losses, which totaled $635,000 for the nine months ended
September 30, 1995 compared to $1,779,000 for the same period in 1994. Other
expenses decreased in both the nine months and three months ended September 30,
1995 from the same periods in 1994 due to lower commission expenses resulting
from the reduction in premium volume.
Nonstandard Risk Automobile Insurance
The nonstandard risk automobile marketplace continues to be very
competitive. Companies within the standard market are retaining more of their
marginal risks in order to retain the business and rehabilitate these risks to
profitability. This relaxing of underwriting standards in the standard market
has resulted in a smaller pool of insureds seeking nonstandard automobile
coverage. Therefore, more of the very high risks are being funneled to the
nonstandard market. The smaller pool of potential insureds in the nonstandard
market has resulted in increased rate competition and an overall decline in the
company's book of business.
Operating results for the nine months and the three months ended September
30, 1995 and 1994 are as follows:
Nine months ended Three months ended
------------------ ------------------
September 30, September 30,
($ in thousands) 1995 1994 1995 1994
-------- -------- -------- --------
Premiums earned ................ $ 7,590 $ 9,375 $ 2,470 $ 2,943
Losses and settlement expenses 7,331 6,661 2,575 1,926
Other expenses ................. 2,100 2,404 688 772
-------- -------- -------- --------
Underwriting (loss) gain ....... (1,841) 310 (793) 245
Net investment income .......... 897 842 279 288
Realized investment gains ...... - 61 - 25
-------- -------- -------- --------
Operating (loss) income
before income taxes .......... $ (944) $ 1,213 $ (514) $ 558
======== ======== ======== ========
Losses and settlement expenses:
Insured events of the
current year ............... $ 7,037 $ 7,318 $ 2,517 $ 2,039
Increase (decrease) in
provision for insured
events of prior years ...... 294 (657) 58 (113)
-------- -------- -------- --------
Total losses and
settlement expenses .... $ 7,331 $ 6,661 $ 2,575 $ 1,926
======== ======== ======== ========
11
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
(Unaudited)
Premium volume decreased for the nine months and the three months ended
September 30, 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 a substantial reduction in premium
volume. 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 three months of 1995; however, total production for 1995 is expected
to remain significantly below 1994 levels. The company expects to begin
writing business in the state of Missouri in early 1996 which should help
offset the production decreases experienced in existing markets.
Due to the decline in the overall quality of its book of business, the
company has experienced an increase in both the frequency and severity of
losses in 1995. Results for the third quarter of 1995 were negatively impacted
by the occurrence of several severe accidents. In addition, underwriting
results for the nine months and the three months ended September 30, 1995
reflect an increase in the provision for insured events of prior years.
Excess and Surplus Lines Insurance Management
Operating income before income taxes increased to $383,000 for the nine
months ended September 30, 1995 from $344,000 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 primarily due to a larger invested
asset balance.
Parent Company
Operating income before income taxes was $6,000 for the nine months ended
September 30, 1995 compared to an operating loss of $127,000 for the same
period in 1994. This improvement is primarily due to an increase in investment
income caused by a larger invested asset balance.
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 $767,000 at September 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 1995, the Company invested $13,550,000 of short-term funds and
maturing U.S. Treasury Bills into mutual funds invested in equity securities.
The overall liquidity position of the Company has not been affected by these
investments. Net unrealized holding gains on equity securities totaled
$908,000 at September 30, 1995.
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EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
(Unaudited)
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.
During the first nine months of 1995, the Company generated positive cash
flows from operations of $14,789,000. This reflects $269,000 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 $29,379,000 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 $3,400,000
for the first nine months of 1995 and $1,938,000 in the same period of 1994.
The Company paid cash dividends to stockholders totaling $2,681,000 and
$2,626,000 for the nine months ended September 30, 1995 and 1994, respectively.
As of September 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
September 30, 1995.
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: November 9, 1995
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