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, 1994
----------------------------------------
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 October 31, 1994
----- -------------------------------
Common stock, $1.00 par value 10,517,849
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Total pages 16
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1
<PAGE>
PART I. FINANCIAL INFORMATION
- - ------- ---------------------
Item 1. Financial Statements
- - ------- ---------------------
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
1994 1993
------------ ------------
(Unaudited)
ASSETS
Investments:
Fixed maturities:
Securities held-to-maturity, at amortized cost
(market value $232,358,489 and $206,305,597) $233,021,915 $191,010,623
Securities available-for-sale, at market value
(amortized cost $95,391,727 and
$109,947,564) ............................. 95,179,680 113,081,580
Equity securities available-for-sale, at market
value (cost $0 and $505,000) ................. - 475,000
------------ ------------
Total investments ..................... 328,201,595 304,567,203
Cash ............................................. 1,411,682 675,203
Indebtedness of related party .................... 4,311,907 12,291,512
Accrued investment income ........................ 5,407,037 4,835,451
Accounts receivable .............................. 895,496 415,215
Deferred policy acquisition costs ................ 9,188,912 7,698,864
Deferred income taxes ............................ 13,918,427 13,040,693
Intangible assets, including goodwill, at cost
less accumulated amortization of $1,641,015
and $1,540,130 ................................. 1,916,805 2,017,690
Reinsurance receivables .......................... 18,707,046 18,477,406
Prepaid reinsurance premiums ..................... 2,592,730 2,832,184
Other assets ..................................... 1,948,441 2,084,102
------------ ------------
Total assets .......................... $388,500,078 $368,935,523
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
2
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
1994 1993
------------- ------------
(Unaudited)
LIABILITIES
Losses and settlement expenses .................. $ 205,022,814 $197,121,852
Unearned premiums ............................... 51,885,824 45,941,056
Other policyholders' funds ...................... 2,905,346 2,854,793
Income taxes payable ............................ 1,004,000 550,000
Postretirement benefits ......................... 3,960,610 3,537,449
Deferred income ................................. 1,382,934 1,717,641
Other liabilities ............................... 7,725,546 7,578,963
------------- ------------
Total liabilities ........................... 273,887,074 259,301,754
------------- ------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000
shares; issued and outstanding, 10,525,939
shares in 1994 and 10,325,329 shares in 1993 .. 10,525,939 10,325,329
Additional paid-in capital ...................... 56,634,371 55,021,926
Unrealized holding (losses) gains on fixed
maturity securities available-for-sale,
net of tax..................................... (139,951) 2,068,451
Unrealized holding losses on equity securities
available-for-sale, net of tax ................ - (19,800)
Retained earnings ............................... 47,674,031 42,319,249
Treasury stock, at cost (8,090 shares in 1994
and 1993) ..................................... (81,386) (81,386)
------------- ------------
Total stockholders' equity .................. 114,613,004 109,633,769
------------- ------------
Total liabilities and
stockholders' equity ...................... $ 388,500,078 $368,935,523
============= ============
See accompanying Notes to Interim Consolidated Financial Statements.
3
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------------- -------------------------
1994 1993 1994 1993
----------- ----------- ------------ ------------
REVENUES:
Premiums earned ........... $41,640,071 $39,863,333 $121,445,455 $116,798,573
Investment income, net .... 5,274,202 5,212,048 15,240,992 15,948,850
Realized investment gains 42,310 310,665 448,959 488,667
Other income .............. 104,776 133,215 334,707 133,215
----------- ----------- ------------ ------------
47,061,359 45,519,261 137,470,113 133,369,305
----------- ----------- ------------ ------------
LOSSES AND EXPENSES:
Losses and settlement
expenses ................ 29,055,207 32,329,163 87,135,088 91,304,969
Dividends to policyholders 922,614 665,463 2,324,969 1,927,458
Amortization of deferred
policy acquisition costs 8,187,140 7,158,199 23,253,841 24,051,559
Other underwriting expenses 4,065,663 4,739,141 11,757,829 11,606,818
----------- ----------- ------------ ------------
42,230,624 44,891,966 124,471,727 128,890,804
----------- ----------- ------------ ------------
Income before income taxes
and cumulative effect of
changes in accounting
principles ............. 4,830,735 627,295 12,998,386 4,478,501
----------- ----------- ------------ ------------
INCOME TAXES:
Current ................... 1,084,371 406,058 3,339,553 624,890
Deferred .................. 459,546 (13,512) 249,728 66,235
----------- ----------- ------------ ------------
1,543,917 392,546 3,589,281 691,125
----------- ----------- ------------ ------------
Income before cumulative
effect of changes in
accounting principles... 3,286,818 234,749 9,409,105 3,787,376
CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING
PRINCIPLES FOR:
Income taxes ............ - - - 5,595,177
Postretirement benefits - - - (2,165,900)
Unearned premiums ....... - - - (807,933)
----------- ----------- ------------ ------------
Net income .......... $ 3,286,818 $ 234,749 $ 9,409,105 $ 6,408,720
=========== =========== ============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
4
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income, Continued
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
EARNINGS PER COMMON SHARE:
Income before cumulative
effect of changes in
accounting principles..... $.31 $.02 $.90 $.37
Cumulative effect of
changes in accounting
principles for:
Income taxes ........... - - - .55
Postretirement benefits - - - (.21)
Unearned premiums ...... - - - (.08)
----------- ----------- ----------- -----------
Net income ........... $.31 $.02 $.90 $.63
=========== =========== =========== ===========
Cash dividend per common share $.13 $.13 $.39 $.39
=========== =========== =========== ===========
Average number of
shares outstanding ......... 10,466,614 10,223,316 10,399,626 10,172,181
=========== =========== =========== ===========
See accompanying Notes to Interim Consolidated Financial Statements.
5
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
--------------------------
1994 1993
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................... $ 9,409,105 $ 6,408,720
------------ ------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Cumulative effect of changes in accounting
principles, net of tax .................. - (2,621,344)
Losses and settlement expenses ............ 7,900,962 9,006,438
Unearned premiums ......................... 5,944,768 4,376,485
Other policyholders' funds ................ 50,553 (791,598)
Deferred policy acquisition costs ......... (1,490,048) (914,630)
Indebtedness of related party ............. 7,979,605 (12,747,327)
Accrued investment income ................. (571,586) (299,084)
Accrued income taxes:
Current ................................. 454,000 (1,423,000)
Deferred ................................ 249,728 66,235
Provision for amortization ................ 594 2,378
Realized investment gains ................. (448,959) (488,667)
Postretirement benefits ................... 423,161 269,811
Reinsurance receivables ................... (229,640) 8,149,037
Prepaid reinsurance premiums .............. 239,454 63,374
Amortization of deferred income ........... (334,707) (133,215) -
Other, net ................................ (198,037) (1,248,685)
------------ ------------
19,969,848 1,266,208
Cash used in the change in the property
and casualty insurance subsidiaries'
pooling agreement ....................... - (4,426,945)
Cash used in the commutation of a portion
of the reinsurance subsidiary's quota
share agreement ......................... - (17,806,179)
------------ ------------
Total adjustment ...................... 19,969,848 (20,966,916)
------------ ------------
Net cash provided by (used in)
operating activities ................ $ 29,378,953 $(14,558,196)
------------ ------------
6
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Unaudited)
Nine months ended
September 30,
--------------------------
1994 1993
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity securities
held-to-maturity ............................ $(71,583,301) $ -
Maturities of fixed maturity securities
held-to-maturity ............................ 30,108,336 -
Purchases of fixed maturity securities
available-for-sale (note 3) ................. (286,162,758) -
Maturities of fixed maturity securities
available-for-sale .......................... 182,048,038 -
Sales of fixed maturity securities
available-for-sale (note 3) ................. 118,688,479 -
Sales of equity securities available-for-sale 500,000 1,043,067
Purchases of fixed maturities ................. - (39,881,912)
Maturities of fixed maturities ................ - 47,732,440
Purchases of short-term investments ........... - (241,374,807)
Sales of short-term investments ............... - 248,896,549
------------ ------------
Net cash (used in) provided by
investing activities .................... (26,401,206) 16,415,337
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ...................... 384,962 169,885
Dividends paid to stockholders ................ (2,626,230) (2,576,934)
------------ ------------
Net cash used in financing activities ..... (2,241,268) (2,407,049)
------------ ------------
NET INCREASE (DECREASE) IN CASH ................. 736,479 (549,908)
Cash at beginning of year ....................... 675,203 2,009,512
------------ ------------
Cash at end of quarter .......................... $ 1,411,682 $ 1,459,604
============ ============
Income taxes paid ............................... $ 2,887,563 $ 1,958,309
Interest paid ................................... 30,372 -
See accompanying Notes to Interim Consolidated Financial Statements.
7
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Unaudited)
September 30, 1994
Note 1
- - ------
The results of operations for the interim periods reported are not
necessarily indicative of results to be expected for the year. The
information reflects all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the interim
periods.
Note 2
- - ------
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits". Adoption of this statement did not have a material effect on
the operations of the Company.
Note 3
- - ------
The "fixed maturity securities available-for-sale" classification includes
short-term investments. Purchases and sales of fixed maturity securities
available-for-sale for the nine months ended September 30, 1994 reflects
the rollover of money market funds.
Note 4
- - ------
Certain amounts previously reported in prior year consolidated financial
statements have been reclassified to conform to current year presentation.
8
<PAGE>
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 71.2 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. Since 1992, the property and casualty insurance
subsidiaries' participation in the pool has been 22 percent. The investment
programs and income tax liabilities of the pool participants are not subject
to the pooling agreement.
The purpose of the pooling agreement is to reduce the risk of an exposure
insured by any of the pool participants by spreading it among all the
companies. The pooling agreement produces a more uniform and stable
underwriting result from year to year for all companies in the pool than might
be experienced individually. In addition, each company benefits from the
capacity of the entire pool, rather than being limited to policy exposures of
a size commensurate with its own assets, and from the wide range of policy
forms and lines of insurance written and the variety of rate filings and
commission plans offered by each of the companies. A single set of
reinsurance treaties is maintained for the protection of all six companies in
the pool.
Employers Mutual cedes 95 percent of the voluntary reinsurance business
it assumes from nonaffiliated insurance companies to the Company's reinsurance
subsidiary, exclusive of certain reinsurance contracts. The reinsurance
subsidiary receives 95 percent of all premiums and assumes 95 percent of all
related losses and settlement expenses of this business. The reinsurance
subsidiary does not reinsure any of Employers Mutual's direct insurance
business, nor any "involuntary" facility or pool business that Employers
Mutual assumes pursuant to state law. In addition, the reinsurance subsidiary
is not liable for credit risk in connection with the insolvency of any
reinsurers of Employers Mutual.
The results of operations for the interim periods reported are not
necessarily indicative of results to be expected for the year. The
information reflects all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods.
9
<PAGE>
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 income before income taxes increased to $12,998,000 for the
nine months ended September 30, 1994 from $4,479,000 for the same period in
1993. Operating results improved in all segments of the Company's operations,
with substantial improvement occurring in the property and casualty insurance
segment and the nonstandard risk automobile insurance segment.
Net income for the nine months ended September 30, 1994 was $9,409,000
($.90 per share) compared to $6,409,000 ($.63 per share) for the same period
in 1993. Results for 1993 include $2,621,000 ($.26 per share) of income from
the implementation of two new accounting standards and a change in accounting
principle.
Premiums earned increased $4,646,000 (4.0 percent) to $121,445,000 for
the nine months ended September 30, 1994 from $116,799,000 for the same period
in 1993. Increased premium volume in the property and casualty insurance
subsidiaries and the reinsurance subsidiary was partially offset by a decline in
the nonstandard risk automobile insurance subsidiary.
Net investment income decreased $708,000 (4.4 percent) to $15,241,000 for
the nine months ended September 30, 1994 from $15,949,000 for the same period
in 1993. This decrease is due to a decline in invested assets resulting from
the transfer of $24,853,000 to Employers Mutual during 1993 in connection with
the change in the property and casualty insurance subsidiaries' pooling
agreement relating to the voluntary assumed reinsurance business and the
commutation of two reinsurance contracts under the reinsurance subsidiary's
quota share agreement.
Realized investment gains decreased to $449,000 for the nine months ended
September 30, 1994 from $489,000 for the same period in 1993. These realized
gains are primarily the result of calls and prepayments on fixed maturity
securities.
Other income increased to $335,000 for the nine months ended September
30, 1994 from $133,000 for the same period in 1993. These 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.
Losses and expenses decreased $4,419,000 (3.4 percent) to $124,472,000
for the nine months ended September 30, 1994 from $128,891,000 for the same
period in 1993. This decrease reflects improved loss experience in the
property and casualty insurance subsidiaries and the nonstandard risk
automobile insurance subsidiary and reduced commission expense in the
reinsurance subsidiary.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits". Adoption of this statement did not have a material effect on the
operations of the Company.
10
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- - ------- Condition and Results of Operations, Continued
(Unaudited)
For the third quarter of 1994, operating income before income taxes was
$4,831,000 compared to $627,000 for the same period in 1993 and $5,108,000 for
the second quarter of 1994. Operating results for the third quarter of 1994
improved over the second quarter of 1994 for the reinsurance subsidiary and
the nonstandard risk automobile insurance subsidiary, while the property and
casualty insurance subsidiaries' operating results were not as good.
SEGMENT RESULTS
Property and Casualty Insurance
Operating income before income taxes increased to $11,044,000 for the
nine months ended September 30, 1994 from $6,116,000 for the same period in
1993. This increase reflects improved underwriting results in both the
personal and the commercial lines of business. For the third quarter of 1994,
operating income before income taxes was $3,202,000 compared to $1,325,000 for
the same period in 1993 and $4,932,000 for the second quarter of 1994.
Operating results were not as good in the third quarter of 1994 as the second
quarter of 1994 due to storm losses in both the personal and the commercial
lines of business.
Premiums earned increased 5.1 percent to $86,434,000 for the nine months
ended September 30, 1994 from $82,207,000 for the same period in 1993. New
marketing programs that emphasize property insurance have not only contributed
to this increase but have helped to highlight the subsidiaries' other products.
During the first nine months of 1994, 10 states implemented rate reductions for
the workers' compensation line of business ranging from .3 percent to 16.0
percent while 13 states implemented rate increases ranging from .1 percent to
12.6 percent. These rate changes have not had a material impact on 1994
production as they have been implemented at various times throughout the year
and they have largely offset each other. However, production for 1995 could be
negatively impacted by up to $700,000 if a 10.6 percent rate reduction currently
pending with the State of Iowa is approved.
Underwriting gain for the nine months ended September 30, 1994 was
$448,000 compared to an underwriting loss of $4,250,000 for the same period in
1993. Underwriting results improved for both the personal and commercial
lines of business despite an increase in catastrophe losses, which totaled
$3,909,000 for the nine months ended September 30, 1994 and $2,933,000 for the
same period in 1993. Reform measures implemented by several states to control
costs have helped to improve the workers' compensation line of business. By
monitoring this reform on a state by state basis and writing business only in
states that show a potential for profit, management has been able to achieve
improved results. It is currently unknown whether these improved results will
continue in light of the rate reductions noted above. The commercial property
and liability lines showed improved results for the first nine months of 1994
while the commercial auto line deteriorated. Although the overall results for
the personal lines of business improved from 1993, the homeowners line
continues to be a problem for this segment and the industry. Management
continues to review the marketing and underwriting of the personal lines of
business in order to improve future performance.
11
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- - ------- Condition and Results of Operations, Continued
(Unaudited)
Reinsurance
Operating income before income taxes increased to $524,000 for the nine
months ended September 30, 1994 from an operating loss of $469,000 for the
same period in 1993. Underwriting results improved significantly for the
first nine months of 1994 while investment income declined 17.4 percent due to
the transfer of $20,426,000 to Employers Mutual during 1993 in connection with
the commutation of two reinsurance contracts under the quota share agreement.
The decline in investment income was partially offset by the recognition of
$335,000 of deferred income in 1994 related to reserve discounting on one of
the commuted contracts. For the third quarter of 1994, operating income
before income taxes was $986,000 compared to $581,000 for the same period in
1993 and an operating loss of $98,000 for the second quarter of 1994. The
substantial increase in operating results in the third quarter of 1994 over
the second quarter of 1994 is primarily due to an improvement in the actuarial
estimate of the ultimate losses associated with the 1988 - 1993 accident
years.
Premiums earned increased 4.6 percent to $25,636,000 for the nine months
ended September 30, 1994 from $24,505,000 for the same period in 1993. This
increase reflects additional premium volume on both new and existing pro rata
contracts and as well as increased participation in a voluntary pool effective
January 1, 1994. The increase in premium volume was partially offset by the
loss of premium income associated with a voluntary pool that was commuted by
Employers Mutual in the fourth quarter of 1993 and therefore is no longer
ceded to the reinsurance subsidiary. Rates for some pro rata business have
gradually deteriorated as a result of the soft market, but these reductions are
not expected to have a material effect on operations.
Underwriting loss decreased 31.0 percent to $3,805,000 for the nine
months ended September 30, 1994 from $5,516,000 for the same period in 1993.
This decrease reflects a substantial decline in commission expense associated
with a voluntary pool that was commuted by Employers Mutual in the fourth
quarter of 1993. Overall, loss experience remained fairly constant despite a
significant decline in catastrophe losses, which totaled $1,779,000 for the
nine months ended September 30, 1994 and $4,568,000 for the same period in
1993. Underwriting results for the first nine months of 1994 reflect one
large catastrophe loss of $1,000,000 on the Los Angles earthquake while
results for the same period in 1993 reflect catastrophe losses of $1,000,000
on east coast storms, $546,000 on the Midwest floods and $1,348,000 of
development on Hurricane Andrew and New England storms. The decline in
catastrophe losses during the first nine months of 1994 was offset by
approximately $900,000 of crop hail losses, $550,000 of loss associated with
the settlement of a large claim and additional losses associated with
increased premium volume.
Underwriting results for the fourth quarter of 1994 will be adversely
impacted by severe hail storms that occurred in several Midwest states. These
losses are expected to range between $750,000 and $1,000,000.
12
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- - ------- Condition and Results of Operations, Continued
(Unaudited)
Nonstandard Risk Automobile Insurance
Operating income before income taxes increased to $1,213,000 for the nine
months ended September 30, 1994 from an operating loss of $1,088,000 for the
same period in 1993. This increase reflects favorable development on prior
year reserves, improved loss experience and rate increases that were
implemented in all states during the later part of 1993 and the first part of
1994. For the third quarter of 1994, operating income before income taxes was
$558,000 compared to a loss of $1,272,000 for the same period in 1993 and a
profit of $238,000 in the second quarter of 1994. Second quarter results for
1994 were impacted by an increase in the frequency and severity of losses.
Premiums earned decreased 7.1 percent to $9,375,000 for the nine months
ended September 30, 1994 from $10,087,000 for the same period in 1993. This
decrease reflects a softening of underwriting standards in the standard
market, a decline in renewal business caused by the rate increases implemented
and rate competition in the nonstandard market.
Underwriting gain for the first nine months of 1994 was $310,000 compared
to an underwriting loss of $2,019,000 for the same period in 1993. This
significant improvement is primarily the result of a decline in storm related
losses and favorable development on prior year reserves. In addition, current
operations have benefited from the rate increases implemented and a more
seasoned book of business. Profitable underwriting results in the future are
likely to be more dependent upon successful niche marketing rather than full
coverage programs. Management is currently analyzing each type of coverage
offered in order to determine the appropriate rate level. As a result, the
company will be prepared to meet the individual needs of the consumer at a
rate deemed adequate for the risks insured.
Excess and Surplus Lines Insurance Management
Operating income before income taxes increased to $344,000 for the nine
months ended September 30, 1994 from $48,000 for the same period in 1993. For
the third quarter of 1994, operating income before income taxes was $114,000
compared to $8,000 for the same period in 1993 and $106,000 in the second
quarter of 1994. The improvement in 1994 operations is the result of a new
management plan put into effect which places more emphasis on writing excess
and surplus lines business through Employers Mutual's agency force.
Parent Company
Operating loss before income taxes decreased to $126,000 for the nine
months ended September 30, 1994 from $129,000 for the same period in 1993. A
decrease in operating expenses was partially offset by a decrease in
investment income. For the third quarter 1994, operating loss before income
taxes was $29,000 compared to $15,000 for the same period in 1993 and $70,000
for the second quarter of 1994.
13
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- - ------- Condition and Results of Operations, Continued
(Unaudited)
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. Unrealized holding losses on fixed
maturity securities available-for-sale totaled $140,000 at September 30, 1994.
This compares to unrealized holding gains of $279,000 at June 30, 1994 and
$2,068,000 at December 31, 1993. The decrease in the market value of these
investments is primarily due to higher interest rates imposed by the Federal
Reserve Board during the first nine months of 1994, which caused bond values
to decline. Further declines in the market value of these investments may
occur if the Federal Reserve Board again raises interest rates. 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.
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 September 30, 1994, the Company had no material commitments for
capital expenditures.
14
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
- - -------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders
- - ------- ---------------------------------------------------
(a) Annual Meeting of Stockholders
EMC Insurance Group Inc.
May 25, 1994
(b) The following seven persons were elected to serve as directors of the
Company for the ensuing year:
George C. Carpenter III George W. Kochheiser
David J. Fisher Raymond A. Michel
Robb B. Kelley Therese M. Vaughan*
Bruce G. Kelley
* Effective July 15, 1994, Therese M. Vaughan resigned as a director
of the Company. Her resignation is due to her appointment as the
Insurance Commissioner of the State of Iowa. As of November 11,
1994, a replacement has not been named.
(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 9,516,225 9,169 390,400
David J. Fisher 9,515,225 10,169 390,400
Robb B. Kelley 9,514,881 10,513 390,400
Bruce G. Kelley 9,515,602 9,792 390,400
George W. Kochheiser 9,515,224 10,170 390,400
Raymond A. Michel 9,515,240 10,154 390,400
Therese M. Vaughan 9,514,753 10,641 390,400
2. Proposal to ratify the appointment of KPMG Peat Marwick as the
independent auditors of the Company:
For 9,507,387 Against 961 Abstain 7,672
--------- --- -----
Broker Non-Votes 390,400 Withheld 0
------- -----
THE TOTAL NUMBER OF QUALIFIED SHARES VOTED BY PROXY IS: 9,471,686
---------
(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
September 30, 1994.
15
<PAGE>
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 11, 1994
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
9/30/94 BALANCE SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000356130
<NAME> EMC INSURANCE GROUP INC.
<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<DEBT-HELD-FOR-SALE> 95,179,680
<DEBT-CARRYING-VALUE> 233,021,915
<DEBT-MARKET-VALUE> 232,358,489
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 328,201,595
<CASH> 1,411,682
<RECOVER-REINSURE> 18,707,046
<DEFERRED-ACQUISITION> 9,188,912
<TOTAL-ASSETS> 388,500,078
<POLICY-LOSSES> 205,022,814
<UNEARNED-PREMIUMS> 51,885,824
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 2,905,346
<NOTES-PAYABLE> 0
<COMMON> 10,525,939
0
0
<OTHER-SE> 104,087,065
<TOTAL-LIABILITY-AND-EQUITY> 388,500,078
121,445,455
<INVESTMENT-INCOME> 15,240,992
<INVESTMENT-GAINS> 448,959
<OTHER-INCOME> 334,707
<BENEFITS> 87,135,088
<UNDERWRITING-AMORTIZATION> 23,253,841
<UNDERWRITING-OTHER> 14,082,798
<INCOME-PRETAX> 12,998,386
<INCOME-TAX> 3,589,281
<INCOME-CONTINUING> 9,409,105
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,409,105
<EPS-PRIMARY> .90
<EPS-DILUTED> .90
<RESERVE-OPEN> 197,121,852
<PROVISION-CURRENT> 88,670,958
<PROVISION-PRIOR> (1,535,870)
<PAYMENTS-CURRENT> 30,039,655
<PAYMENTS-PRIOR> 49,756,142
<RESERVE-CLOSE> 205,022,814
<CUMULATIVE-DEFICIENCY> (1,535,870)
