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, 1996
----------------------------------------
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.
------------------------------------------------------
(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, 1996
----- -------------------------------
Common stock, $1.00 par value 10,962,227
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Total pages 14
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PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
- ------- ---------------------
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
ASSETS
Investments:
Fixed maturities:
Securities held-to-maturity, at amortized cost
(market value $195,421,726 and $203,312,748) $190,869,754 $191,440,816
Securities available-for-sale, at market value
(amortized cost $138,338,171 and
$137,099,939) .............................. 140,209,896 142,360,569
Equity securities available-for-sale, at market
value (cost $14,771,422 in 1996 and 1995) .... 17,489,264 16,010,763
Short-term investments, at cost ................ 20,137,201 17,271,798
------------ ------------
Total investments ..................... 368,706,115 367,083,946
Cash ............................................. 1,416,055 1,198,436
Accrued investment income ........................ 5,587,509 5,749,619
Accounts receivable .............................. 586,172 726,181
Deferred policy acquisition costs ................ 8,992,595 8,714,769
Deferred income taxes ............................ 12,793,130 11,921,182
Intangible assets, including goodwill, at cost
less accumulated amortization of $1,876,412
and $1,809,156 ................................. 1,681,408 1,748,664
Reinsurance receivables .......................... 17,654,792 12,916,943
Prepaid reinsurance premiums ..................... 1,743,606 1,805,881
Other assets ..................................... 964,592 1,015,352
------------ ------------
Total assets .......................... $420,125,974 $412,880,973
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
LIABILITIES
Losses and settlement expenses ................... $213,287,789 $205,422,109
Unearned premiums ................................ 47,859,732 48,767,147
Other policyholders' funds ....................... 3,671,984 3,593,328
Indebtedness to related party .................... 346,739 428,463
Income taxes payable ............................. 274,669 2,538,669
Postretirement benefits .......................... 4,718,329 4,489,812
Deferred income .................................. 795,095 940,009
Other liabilities ................................ 9,861,886 9,812,678
------------ ------------
Total liabilities ............................ 280,816,223 275,992,215
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000
shares; issued and outstanding, 10,962,227
shares in 1996 and 10,821,978 shares in 1995 ... 10,962,227 10,821,978
Additional paid-in capital ....................... 61,469,715 59,787,926
Unrealized holding gains on fixed maturity
securities available-for-sale, net of tax ...... 1,235,339 3,472,016
Unrealized holding gains on equity securities
available-for-sale, net of tax ................. 1,793,775 817,965
Retained earnings ................................ 63,848,695 62,089,294
Treasury stock, at cost (0 shares in 1996 and
7,585 shares in 1995, see note 4) ............... - (100,421)
------------ ------------
Total stockholders' equity ................... 139,309,751 136,888,758
------------ ------------
Total liabilities and stockholders' equity ... $420,125,974 $412,880,973
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
REVENUES:
Premiums earned ..........$40,433,259 $37,839,646 $80,913,385 $77,839,816
Investment income, net ... 5,916,176 5,616,938 11,685,151 11,464,079
Realized investment gains 36,545 4,775 50,686 5,473
Other income ............. 70,295 88,014 144,914 181,699
----------- ----------- ----------- -----------
46,456,275 43,549,373 92,794,136 89,491,067
----------- ----------- ----------- -----------
LOSSES AND EXPENSES:
Losses and settlement
expenses ............... 31,693,828 22,903,950 59,554,518 50,640,559
Dividends to policyholders 969,492 1,468,675 1,846,661 2,175,092
Amortization of deferred
policy acquisition costs 8,067,797 7,565,686 15,640,483 15,262,592
Other underwriting
expenses ............... 4,242,259 4,217,902 9,895,701 8,491,355
----------- ----------- ----------- -----------
44,973,376 36,156,213 86,937,363 76,569,598
----------- ----------- ----------- -----------
Income before income
taxes ................. 1,482,899 7,393,160 5,856,773 12,921,469
----------- ----------- ----------- -----------
INCOME TAXES:
Current .................. 147,515 2,106,481 1,275,515 3,713,376
Deferred ................. (135,819) 166,902 (222,410) 88,213
----------- ----------- ----------- -----------
11,696 2,273,383 1,053,105 3,801,589
----------- ----------- ----------- -----------
Net income .........$ 1,471,203 $ 5,119,777 $ 4,803,668 $ 9,119,880
=========== =========== =========== ===========
Earnings per share ......... $.13 $.48 $.44 $.86
=========== =========== =========== ===========
Dividend per share ......... $.14 $.13 $.28 $.26
=========== =========== =========== ===========
Average number of shares
outstanding .............. 10,905,112 10,650,777 10,871,760 10,622,645
=========== =========== =========== ===========
See accompanying Notes to Interim Consolidated Financial Statements.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
--------------------------
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................... $ 4,803,668 $ 9,119,880
------------ ------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Losses and settlement expenses ............ 7,865,680 956,867
Unearned premiums ......................... (907,415) 860,806
Other policyholders' funds ................ 78,656 714,811
Deferred policy acquisition costs ......... (277,826) (577,529)
Indebtedness of related party ............. (81,724) (3,333,376)
Accrued investment income ................. 162,110 (61,934)
Accrued income taxes:
Current ................................. (2,264,000) (178,000)
Deferred ................................ (222,411) 88,213
Provision for amortization ................ (21,946) (15,091)
Realized investment gains ................. (50,686) (5,473)
Postretirement benefits ................... 228,517 155,353
Reinsurance receivables ................... (4,737,849) 917,737
Prepaid reinsurance premiums .............. 62,275 (156,527)
Amortization of deferred income ........... (144,914) (181,699)
Other, net ................................ 239,977 (871,493)
------------ ------------
(71,556) (1,687,335)
------------ ------------
Net cash provided by
operating activities ................ 4,732,112 7,432,545
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity securities
held-to-maturity ............................ (11,959,263) (22,904,536)
Maturities of fixed maturity securities
held-to-maturity ............................ 12,596,869 11,269,764
Purchases of fixed maturity securities
available-for-sale .......................... (12,427,911) (14,869,869)
Maturities of fixed maturity securities
available-for-sale .......................... 11,263,023 32,479,887
Purchases of equity securities
available-for-sale .......................... - (13,550,000)
Net (purchases) sales of short-term investments (2,865,403) 1,471,091
------------ ------------
Net cash used in investing activities ....... (3,392,685) (6,103,663)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ...................... 1,822,038 1,837,397
Dividends paid to stockholders ................ (3,044,267) (2,761,423)
Net decrease (increase) of treasury stock ..... 100,421 (358,885)
------------ ------------
Net cash used in financing activities ..... (1,121,808) (1,282,911)
------------ ------------
NET INCREASE IN CASH ............................ 217,619 45,971
Cash at beginning of year ....................... 1,198,436 1,258,221
------------ ------------
Cash at end of quarter .......................... $ 1,416,055 $ 1,304,192
============ ============
Income taxes paid ............................... $ 3,541,000 $ 4,012,400
Interest paid ................................... - 167,881
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Unaudited)
June 30, 1996
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
- ------
Effective January 1, 1996, the Company adopted Statement of financial
Accounting Standards (SFAS) 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". The adoption of this
statement will have no effect on the income of the Company.
Effective January 1, 1996, the Company adopted the disclosure requirement of
SFAS 123, "Accounting for Stock-Based Compensation". Adoption of this
statement will have no effect on the income of the Company.
Note 4
- ------
Effective June 30, 1996, the use of treasury stock was eliminated. Amounts
associated with treasury stock were reclassed to the Common Stock account.
All future transactions will also be made to the Common Stock account. The
overall equity position of the Company was not affected by this change.
Note 5
- ------
In reviewing these financial statements, reference should be made to the 1995
Form 10K-405 or the 1995 Annual Report to Shareholders for more detailed
footnote information.
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 72.9 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 activities 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, lines of insurance written, 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 $1,000,000 per
event are retained by Employers Mutual. The reinsurance subsidiary does not
reinsure any of Employers Mutual's direct insurance business, nor any
"involuntary" facility or pool business that Employers Mutual assumes pursuant
to state law. In addition, the reinsurance subsidiary is not liable for
credit risk in connection with the insolvency of any reinsurers of Employers
Mutual.
The Company's nonstandard risk automobile insurance subsidiary
specializes in insuring private passenger automobile risks that are found to
be unacceptable in the standard automobile insurance market.
The excess and surplus lines insurance agency provides access to the
excess and surplus lines markets through independent agents and managing
general agents and represents several major excess and surplus lines
companies, including Lloyd's of London.
The results of operations for the interim periods reported are not
necessarily indicative of results to be expected for the year. The
information reflects all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
(Unaudited)
CONSOLIDATED RESULTS OF OPERATIONS
Operating results for the six months and three months ended June 30, 1996 and
1995 are as follows:
Six months ended Three months ended
June 30, June 30,
------------------ ------------------
($ in thousands) 1996 1995 1996 1995
-------- -------- -------- --------
Premiums earned ..................... $ 80,913 $ 77,840 $ 40,433 $ 37,840
Losses and settlement expenses ...... 59,554 50,641 31,693 22,904
Other underwriting expenses ......... 27,383 25,929 13,280 13,252
-------- -------- -------- --------
Underwriting (loss) gain ............ (6,024) 1,270 (4,540) 1,684
Net investment income ............... 11,685 11,464 5,916 5,617
Realized investment gains ........... 51 5 37 4
Other income ........................ 145 182 70 88
-------- -------- -------- --------
Operating income before income taxes $ 5,857 $ 12,921 $ 1,483 $ 7,393
======== ======== ======== ========
Losses and settlement expenses:
Insured events of the current year $ 69,590 $ 60,608 $ 36,301 $ 31,080
Decrease in provision for
insured events of prior years ... (10,036) (9,967) (4,608) (8,176)
-------- -------- -------- --------
Total losses and
settlement expenses ......... $ 59,554 $ 50,641 $ 31,693 $ 22,904
======== ======== ======== ========
Catastrophe and storm losses ........ $ 4,771 $ 2,923 $ 3,625 $ 2,506
======== ======== ======== ========
Operating income before income taxes decreased 54.7 percent for the six
months and 79.9 percent for the three months ended June 30, 1996 from the same
periods in 1995. These decreases are due to a decline in the operating
results of the property and casualty insurance subsidiaries. Operating
results of the reinsurance subsidiary remained steady for the first six months
of 1996 and increased for the second quarter of 1996, while results for the
nonstandard risk automobile insurance subsidiary improved for both periods.
Premiums earned increased 3.9 percent for the six months and 6.9 percent
for the three months ended June 30, 1996 from the same periods in 1995.
Production increases in the property and casualty insurance and reinsurance
subsidiaries were partially offset by a production decrease in the nonstandard
risk automobile insurance subsidiary.
Losses and settlement expenses increased 17.6 percent for the six months
and 38.4 percent for the three months ended June 30, 1996 from the same
periods in 1995. Losses and settlement expenses related to the current
accident year increased in both periods as a result of increased catastrophe
and storm losses and an unusually large number of commercial property losses.
Development on prior year losses improved slightly for the first six months of
1996, but declined significantly for the second quarter of 1996. During 1996,
the Company revised its method of allocating the property and casualty
insurance subsidiaries' Incurred But Not Reported (IBNR) loss reserves between
current and prior accident years. Management believes that the new method of
allocating IBNR reserves provides a more accurate measurement of loss
development on a quarterly basis. Prior year amounts have been restated using
the new allocation method for comparative purposes.
Other underwriting expenses increased 5.6 percent for the six months and
0.2 percent for the three months ended June 30, 1996 from the same periods in
1995. The increases in 1996 reflect higher commission rates on the growing
book of property business written by the property and casualty insurance
subsidiaries and the recognition of additional contingent commissions by the
reinsurance subsidiary related to favorable loss experience during 1995.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
(Unaudited)
Net investment income increased 1.9 percent for the six months and 5.3
percent for the three months ended June 30, 1996 from the same periods in
1995. These increases reflect an increase in the average invested asset
balance partially offset by a slight decrease in the average rate of return on
investments.
Realized investment gains increased for the six months and three months
ended June 30, 1996 from the same periods in 1995. These increases are
primarily due to calls and prepayments on fixed maturity securities.
The other income amount represents 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 results for the six months and three months ended June 30, 1996 and
1995 are as follows:
Six months ended Three months ended
June 30, June 30,
------------------ ------------------
($ in thousands) 1996 1995 1996 1995
-------- -------- -------- --------
Premiums earned ..................... $ 58,985 $ 57,149 $ 29,462 $ 28,722
Losses and settlement expenses ...... 44,108 35,702 23,642 16,055
Other underwriting expenses ......... 20,635 19,473 10,393 10,271
-------- -------- -------- --------
Underwriting (loss) gain ............ (5,758) 1,974 (4,573) 2,396
Net investment income ............... 7,725 7,620 3,892 3,681
Realized investment gains ........... 28 3 19 3
-------- -------- -------- --------
Operating income (loss)
before income taxes ............... $ 1,995 $ 9,597 $ (662) $ 6,080
======== ======== ======== ========
Losses and settlement expenses:
Insured events of the current year $ 51,991 $ 44,237 $ 26,806 $ 21,327
Decrease in provision for
insured events of prior years ... (7,883) (8,535) (3,164) (5,272)
-------- -------- -------- --------
Total losses and
settlement expenses ......... $ 44,108 $ 35,702 $ 23,642 $ 16,055
======== ======== ======== ========
Catastrophe and storm losses ........ $ 3,030 $ 2,677 $ 2,509 $ 2,359
======== ======== ======== ========
Premiums earned increased moderately for the six months and three months
ended June 30, 1996 from the same periods in 1995. The market for property
and casualty insurance continues to be very competitive, making it
increasingly difficult to write new business and retain renewal business. The
property and casualty insurance subsidiaries continue to emphasize property
insurance through marketing programs targeted at commercial insureds.
Production in workers' compensation insurance has been hampered by state
imposed rate decreases and a decline in mandatory assigned risk business. The
decrease in the mandatory assigned risk business is looked at favorably as
losses associated with this type of business are generally higher than losses
associated with direct business. Production for the remainder of 1996 is not
expected to increase significantly as the market conditions that have limited
production over the last several years are not expected to change.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
(Unaudited)
Underwriting results deteriorated significantly for the six months and
three months ended June 30, 1996. Losses and settlement expenses related to
the current accident year increased in both periods as a result of increased
catastrophe and storm losses and an unusually large number of commercial
property losses. In addition, losses and settlement expenses associated with
the new business were higher than those experienced with the renewal business.
The benefit realized from the downward development of prior year losses
declined for both the six months and the three months ended June 30, 1996 from
the same periods of 1995. As previously noted, the property and casualty
insurance subsidiaries have historically experienced favorable development in
their reserves and current reserving practices have not been relaxed; however,
the level of favorable development experienced in 1995 is not expected to
continue. Other underwriting expenses increased primarily as a result of
higher commission rates on the growing book of property business.
Reinsurance
Operating results for the six months and three months ended June 30, 1996 and
1995 are as follows:
Six months ended Three months ended
June 30, June 30,
------------------ ------------------
($ in thousands) 1996 1995 1996 1995
-------- -------- -------- --------
Premiums earned ..................... $ 17,308 $ 15,571 $ 8,629 $ 6,596
Losses and settlement expenses ...... 11,738 10,182 6,029 4,187
Other underwriting expenses ......... 5,425 5,106 2,149 2,230
-------- -------- -------- --------
Underwriting gain ................... 145 283 451 179
Net investment income ............... 3,150 2,985 1,613 1,505
Realized investment gains ........... 17 2 12 1
Other income ........................ 145 182 70 88
-------- -------- -------- --------
Operating income before income taxes $ 3,457 $ 3,452 $ 2,146 $ 1,773
======== ======== ======== ========
Losses and settlement expenses:
Insured events of the current year $ 13,372 $ 11,851 $ 7,495 $ 7,296
Decrease in provision for
insured events of prior years ... (1,634) (1,669) (1,466) (3,109)
-------- -------- -------- --------
Total losses and
settlement expenses ......... $ 11,738 $ 10,182 $ 6,029 $ 4,187
======== ======== ======== ========
Catastrophe losses .................. $ 1,741 $ 246 $ 1,116 $ 147
======== ======== ======== ========
Premiums earned increased for the six months and three months ended June
30, 1996 from the same periods in 1995. The increase in both periods is
primarily due to a slight change in the mix of business from pro rata
reinsurance to excess of loss reinsurance. Excess of loss reinsurance earns
premiums more rapidly than pro rata reinsurance since excess of loss
reinsurance is typically written on a losses occurring basis while pro rata
reinsurance is typically written on a policies attaching basis. Under the
losses occurring basis, reinsurance is both written and earned in the same
time period. Under a policies attaching basis, reinsurance is writen on a
policy year basis and premiums are earned in each calendar year in proportion
to the time period that each policy was in effect. Premiums earned for the
second quarter of 1995 were impacted by the cancellation of several large pro
rata accounts at the end of 1994.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
(Unaudited)
Underwriting results deteriorated slightly for the six months ended June
30, 1996 while improving for the three months ended June 30, 1996 compared to
the same periods in 1995. Current year accident losses increased reflecting
an increase in premiums earned as well as an increase in catastrophe losses.
For the six months ended June 30, 1996 the decrease in the provision for
insured events of prior years has been steady, while fluctuating by quarter
with a much smaller decrease for the three months ended June 30, 1996. Other
underwriting expenses have increased for the six months ended June 30, 1996
primarily due to the recognition of additional contingent commissions related
to the favorable loss experience in 1995.
Nonstandard Risk Automobile Insurance
Operating results for the six months and three months ended June 30, 1996 and
1995 are as follows:
Six months ended Three months ended
June 30, June 30,
------------------ ------------------
($ in thousands) 1996 1995 1996 1995
-------- -------- -------- --------
Premiums earned ..................... $ 4,620 $ 5,120 $ 2,342 $ 2,522
Losses and settlement expenses ...... 3,708 4,757 2,022 2,662
Other underwriting expenses ......... 1,329 1,411 679 711
-------- -------- -------- --------
Underwriting loss ................... (417) (1,048) (359) (851)
Net investment income ............... 559 618 282 310
Realized investment gains ........... 6 - 6 -
-------- -------- -------- --------
Operating income (loss)
before income taxes ............... $ 148 $ (430) $ (71) $ (541)
======== ======== ======== ========
Losses and settlement expenses:
Insured events of the current year $ 4,227 $ 4,520 $ 2,000 $ 2,457
(Decrease) increase in provision
for insured events of prior years (519) 237 22 205
-------- -------- -------- --------
Total losses and
settlement expenses ......... $ 3,708 $ 4,757 $ 2,022 $ 2,662
======== ======== ======== ========
Premiums earned decreased for the six months and three months ended June
30, 1996 from the same periods in 1995. The company continues to experience
intense competition for nonstandard auto business from both the standard and
the nonstandard markets. The company is addressing this decline in production
by appointing new agents and improving marketing and business relationships
with its agency force.
The company experienced improved underwriting results for the six months
and three months ended June 30, 1996 compared to the same periods in 1995.
The improvement for the six months ended June 30, 1996 is primarily due to
favorable development on prior year losses. The improvement for the second
quarter of 1996 reflects improvement in both the current and prior accident
years.
Excess and Surplus Lines Insurance Management
Operating income before income taxes decreased to $233,000 and $75,000
for the six months and three months ended June 30, 1996 from $331,000 and
$109,000 for the same periods in 1995. These decreases reflect a decline in
production as well as a decrease in investment income caused by a smaller
invested asset balance.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
(Unaudited)
Parent Company
Operating income before income taxes increased to $24,000 for the six
months ended June 30, 1996 from an operating loss of $29,000 for the same
period in 1995. For the three months ended June 30, 1996, operating loss
before income taxes was $5,000 compared to an operating loss of $29,000 for
the same period in 1995. 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 supplements
underwriting results 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 $1,235,000 at June 30, 1996 and
$3,472,000 at December 31, 1995. 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,
as forced liquidations of investments are not anticipated. 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 of
short-term funds and maturing U.S. Treasury Bills into mutual funds invested
in equity securities. The overall liquidity position of the Company was not
affected by these investments. Net unrealized holding gains on equity
securities totaled $1,794,000 at June 30, 1996 and $818,000 at December 31,
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.
As of June 30, 1996, the Company had no material commitments for capital
expenditures.
The use of treasury stock was eliminated effective June 30, 1996. All
future transactions will be made directly to the Common Stock account. The
overall equity position of the Company was not affected by this change.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The 1995 Private Securities Litigation Reform Act provides issuers the
opportunity to make cautionary statements regarding forward-looking
statements. Accordingly, any forward-looking statement contained herein or in
any other oral or written statement by the Company or any of its officers,
directors or employees is qualified by the fact that actual results of the
Company may differ materially from such statement due to the following
important factors, among other risks and uncertainties inherent in the
Company's business: catastrophic events, state insurance regulations, rate
competition, adverse changes in interest rates, unforeseen losses with respect
to loss and settlement expense reserves for unreported and reported claims,
including asbestos and environmental claims.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
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 22, 1996
(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 10,243,541 5,594 92,778
Elwin H. Creese 10,244,487 4,648 92,778
David J. Fisher 10,242,454 6,681 92,778
Bruce G. Kelley 10,244,461 4,674 92,778
George W. Kochheiser 10,243,937 5,198 92,778
Raymond A. Michel 10,244,287 4,848 92,778
Fredrick A. Schiek 10,244,337 4,798 92,778
2. Proposal to ratify the appointment of KPMG Peat Marwick as the
independent auditors of the Company:
For 10,240,796 Against 5,459 Abstain 2,880
----------- ------ ------
Broker Non-Votes 92,778 Withheld 0
------- -----
The total number of qualified shares voted by proxy is:10,187,500
(d) None.
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, 1996.
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/ Bruce G. Kelley
--------------------------
Bruce G. Kelley
President & Chief Executive Officer
/s/ Mark Reese
--------------------------
Mark Reese
Chief Accounting Officer
Date: August 13, 1996