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, 1996
- ----------------------------------------
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
-------------
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, 1996
-----
- -------------------------------
Common stock, $1.00 par value
11,022,082
- ----------
Total pages ??
------
<PAGE>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
- ------- ---------------------
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,
December 31,
1996
1995
------------
- ------------
(Unaudited)
ASSETS
Investments:
Fixed maturities:
Securities held-to-maturity, at amortized cost
(market value $199,485,168 and $203,312,748) $194,893,314
$191,440,816
Securities available-for-sale, at market value
(amortized cost $139,299,616 and
$137,099,939) .............................. 141,522,920
142,360,569
Equity securities available-for-sale, at market
value (cost $21,236,281 and $14,771,422) ..... 23,177,933
16,010,763
Short-term investments, at cost ................ 15,140,554
17,271,798
------------
- ------------
Total investments ..................... 374,734,721
367,083,946
Cash ............................................. 2,093,291
1,198,436
Accrued investment income ........................ 5,747,201
5,749,619
Accounts receivable .............................. 705,748
726,181
Deferred policy acquisition costs ................ 9,730,398
8,714,769
Deferred income taxes ............................ 12,192,301
11,921,182
Intangible assets, including goodwill, at cost
less accumulated amortization of $1,910,041
and $1,809,156 ................................. 1,647,779
1,748,664
Reinsurance receivables .......................... 17,230,112
12,916,943
Prepaid reinsurance premiums ..................... 2,034,864
1,805,881
Other assets ..................................... 878,930
1,015,352
------------
- ------------
Total assets .......................... $426,995,345
$412,880,973
============
============
See accompanying Notes to Interim Consolidated Financial
Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,
December 31,
1996
1995
------------
- ------------
(Unaudited)
LIABILITIES
Losses and settlement expenses ................... $210,944,758
$205,422,109
Unearned premiums ................................ 52,249,787
48,767,147
Other policyholders' funds ....................... 2,908,604
3,593,328
Indebtedness to related party .................... 1,158,826
428,463
Income taxes payable ............................. 927,669
2,538,669
Postretirement benefits .......................... 4,826,137
4,489,812
Deferred income .................................. 728,644
940,009
Other liabilities ................................ 10,912,727
9,812,678
------------
- ------------
Total liabilities ............................ 284,657,152
275,992,215
------------
- ------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000
shares; issued and outstanding, 11,022,082
shares in 1996 and 10,821,978 shares in 1995 ... 11,022,082
10,821,978
Additional paid-in capital ....................... 62,076,148
59,787,926
Unrealized holding gains on fixed maturity
securities available-for-sale, net of tax ...... 1,467,380
3,472,016
Unrealized holding gains on equity securities
available-for-sale, net of tax ................. 1,281,492
817,965
Retained earnings ................................ 66,491,091
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 ................... 142,338,193
136,888,758
------------
- ------------
Total liabilities and stockholders' equity ... $426,995,345
$412,880,973
============
============
See accompanying Notes to Interim Consolidated Financial
Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three months ended Nine
months ended
September 30,
September 30,
------------------------
- --------------------------
1996 1995 1996
1995
----------- ----------- ------------
- ------------
REVENUES:
Premiums earned ..........$41,359,581 $41,242,521 $122,272,966
$119,082,337
Investment income, net ... 5,706,348 5,730,206 17,391,499
17,194,285
Realized investment gains 1,170,356 302,398 1,221,042
307,871
Other income ............. 66,451 83,075 211,365
264,774
----------- ----------- ------------
- ------------
48,302,736 47,358,200 141,096,872
136,849,267
----------- ----------- ------------
- ------------
LOSSES AND EXPENSES:
Losses and settlement
expenses ............... 29,564,771 30,522,622 89,119,289
81,163,181
Dividends to policyholders 304,581 478,888 2,151,242
2,653,980
Amortization of deferred
policy acquisition costs 8,108,121 7,992,608 23,748,604
23,255,200
Other underwriting
expenses ............... 4,737,357 4,657,984 14,633,058
13,149,339
----------- ----------- ------------
- ------------
42,714,830 43,652,102 129,652,193
120,221,700
----------- ----------- ------------
- ------------
Income before income
taxes ................. 5,587,906 3,706,098 11,444,679
16,627,567
----------- ----------- ------------
- ------------
INCOME TAXES:
Current .................. 664,500 408,209 1,940,015
4,121,585
Deferred ................. 745,196 307,596 522,786
395,809
----------- ----------- ------------
- ------------
1,409,696 715,805 2,462,801
4,517,394
----------- ----------- ------------
- ------------
Net income .........$ 4,178,210 $ 2,990,293 $ 8,981,878
$ 12,110,173
=========== =========== ============
============
Earnings per share ......... $.38 $.28 $.82
$1.14
=========== =========== ============
============
Dividend per share ......... $.14 $.13 $.42
$.39
=========== =========== ============
============
Average number of shares
outstanding .............. 10,973,096 10,724,282 10,905,539
10,656,524
=========== =========== ============
============
See accompanying Notes to Interim Consolidated Financial
Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine
months ended
September 30,
- --------------------------
1996
1995
------------
- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................... $ 8,981,878 $
12,110,173
------------
- ------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Losses and settlement expenses ............ 5,522,649
4,532,494
Unearned premiums ......................... 3,482,640
5,280,721
Other policyholders' funds ................ (684,724)
(29,799)
Deferred policy acquisition costs ......... (1,015,629)
(1,303,015)
Indebtedness of related party ............. 730,363
(5,896,429)
Accrued investment income ................. 2,418
77,900
Accrued income taxes:
Current ................................. (1,611,000)
(1,395,000)
Deferred ................................ 522,785
395,809
Provision for amortization ................ (35,632)
(1,132)
Realized investment gains ................. (1,221,042)
(307,871)
Postretirement benefits ................... 336,325
283,777
Reinsurance receivables ................... (4,313,169)
1,399,844
Prepaid reinsurance premiums .............. (228,983)
(304,808)
Amortization of deferred income ........... (211,365)
(264,774)
Other, net ................................ 1,256,904
211,103
------------
- ------------
2,532,540
2,678,820
------------
- ------------
Net cash provided by
operating activities ................ 11,514,418
14,788,993
------------
- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity securities
held-to-maturity ............................ (30,412,887)
(28,901,718)
Maturities of fixed maturity securities
held-to-maturity ............................ 27,081,840
14,989,238
Purchases of fixed maturity securities
available-for-sale .......................... (17,417,025)
(24,366,619)
Maturities of fixed maturity securities
available-for-sale .......................... 15,352,023
40,609,206
Purchases of equity securities
available-for-sale .......................... (5,363,425)
(13,635,446)
Net sales (purchases) of short-term investments 2,131,245
(1,292,951)
------------
- ------------
Net cash used in investing activities ....... (8,628,229)
(12,598,290)
------------
- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ...................... 2,488,326
2,716,166
Dividends paid to stockholders ................ (4,580,081)
(4,155,231)
Net decrease (increase) of treasury stock ..... 100,421
(529,476)
------------
- ------------
Net cash used in financing activities ..... (1,991,334)
(1,968,541)
------------
- ------------
NET INCREASE IN CASH ............................ 894,855
222,162
Cash at beginning of year ....................... 1,198,436
1,258,221
------------
- ------------
Cash at end of quarter .......................... $ 2,093,291 $
1,480,383
============
============
Income taxes paid ............................... $ 3,552,500 $
5,637,609
Interest paid ................................... -
170,553
See accompanying Notes to Interim Consolidated Financial
Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial
Statements
(Unaudited)
September 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.
<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 an excess
and surplus
lines insurance agency. Property and casualty insurance is the
most
significant segment, representing 73.3 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
$1,000,000 per
event are retained by Employers Mutual. The reinsurance
subsidiary does not
reinsure any of Employers Mutual's direct insurance business, nor
any
"involuntary" facility or pool business that Employers Mutual
assumes pursuant
to state law. In addition, the reinsurance subsidiary is not
liable for credit
risk in connection with the insolvency of any reinsurers of
Employers Mutual.
The Company's nonstandard risk automobile insurance
subsidiary specializes
in insuring private passenger automobile risks that are found to
be
unacceptable in the standard automobile insurance market.
The excess and surplus lines insurance agency provides
access to the
excess and surplus lines markets through independent agents and
managing
general agents and represents several major excess and surplus
lines companies,
including Lloyd's of London.
The results of operations for the interim periods reported
are not
necessarily indicative of results to be expected for the year.
The information
reflects all adjustments which are, in the opinion of management,
necessary to
a fair statement of the results for the interim periods.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
(Unaudited)
CONSOLIDATED RESULTS OF OPERATIONS
Operating results for the nine months and three months ended
September 30, 1996
and 1995 are as follows:
Nine months ended Three
months ended
September 30,
September 30,
------------------
- ------------------
($ in thousands) 1996 1995 1996
1995
-------- --------
- -------- --------
Premiums earned ..................... $122,273 $119,082 $
41,360 $ 41,242
Losses and settlement expenses ...... 89,119 81,163
29,565 30,522
Other underwriting expenses ......... 40,533 39,058
13,150 13,129
-------- --------
- -------- --------
Underwriting loss ................... (7,379) (1,139)
(1,355) (2,409)
Net investment income ............... 17,392 17,194
5,707 5,730
Realized investment gains ........... 1,221 308
1,170 303
Other income ........................ 211 265
66 83
-------- --------
- -------- --------
Operating income before income taxes $ 11,445 $ 16,628 $
5,588 $ 3,707
======== ========
======== ========
Losses and settlement expenses:
Insured events of the current year $100,356 $ 94,477 $
30,766 $ 33,869
Decrease in provision for
insured events of prior years ... (11,237) (13,314)
(1,201) (3,347)
-------- --------
- -------- --------
Total losses and
settlement expenses ......... $ 89,119 $ 81,163 $
29,565 $ 30,522
======== ========
======== ========
Catastrophe and storm losses ........ $ 7,434 $ 5,307 $
2,663 $ 2,199
======== ========
======== ========
Operating income before income taxes increased 50.7 percent
for the three
months ended September 30, 1996, but the results for the nine
month ended
September 30, 1996 continued to trail the results for the same
period in 1995
by 31.2 percent. Results for the three months ended September
30, 1996
benefited from improved operations in all segments. Results for
the nine
months ended September 30, 1996 have been negatively impacted by
a decline in
the operating results of the property and casualty insurance
subsidiaries.
Premiums earned increased 2.7 percent for the nine months
and 0.3 percent
for the three months ended September 30, 1996 from the same
periods in 1995.
Production increases in the property and casualty insurance
subsidiaries were
partially offset by a production decrease in the nonstandard risk
automobile
insurance subsidiary.
Losses and settlement expenses increased 9.8 percent for the
nine months
and decreased 3.1 percent for the three months ended September
30, 1996 from
the same periods in 1995. For the nine months ended September
30, 1996 losses
and settlement expenses related to the current accident year
increased as a
result of catastrophe and storm losses and an unusually large
number of
commercial property losses in the second quarter of 1996. For
the three months
ended September 30, 1996 losses and settlement expenses related
to the current
accident year decreased due to improved loss experience in all
segments. The
benefit realized from the downward development of prior accident
year loss
estimates declined for both the nine months and three months
ended September
30, 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.
Catastrophe and storm losses for the nine and three months ended
September 30,
1996 include $908,000 related to Hurricane Fran which hit the
Carolinas in
September, 1996. Both the property and casualty insurance
subsidiaries and the
reinsurance subsidiary sustained losses from this hurricane.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
(Unaudited)
Other underwriting expenses increased 3.8 percent for the
nine months and
0.2 percent for the three months ended September 30, 1996 from
the same periods
in 1995. The increase in 1996 is primarily due to higher
commission rates on
the growing book of property business written by the property and
casualty
insurance subsidiaries.
Net investment income increased 1.2 percent for the nine
months and
decreased 0.2 percent for the three months ended September 30,
1996 from the
same periods in 1995. During 1996, the Company has experienced
an increase in
the average invested asset balance and a slight decrease in the
average rate of
return on investments.
Realized investment gains increased for the nine months and
three months
ended September 30, 1996 from the same periods in 1995. These
increases are
primarily due to gains from mutual funds invested in equity
securities. The
Company began investing in equity based mutual funds in 1995 and,
therefore,
expects to have a higher level of realized investment gains than
historically
experienced.
The other income amount represents the amortization of
deferred income
related to reserve discounting on the commutation of one of the
reinsurance
subsidiary's reinsurance contracts under the quota share
agreement in 1993.
SEGMENT RESULTS
Property and Casualty Insurance
Operating results for the nine months and three months ended
September 30, 1996
and 1995 are as follows:
Nine months ended Three
months ended
September 30,
September 30,
------------------
- ------------------
($ in thousands) 1996 1995 1996
1995
-------- --------
- -------- --------
Premiums earned ..................... $ 89,572 $ 87,157 $
30,587 $ 30,008
Losses and settlement expenses ...... 65,660 57,321
21,552 21,619
Other underwriting expenses ......... 30,566 29,116
9,931 9,643
-------- --------
- -------- --------
Underwriting (loss) gain ............ (6,654) 720
(896) (1,254)
Net investment income ............... 11,437 11,419
3,712 3,799
Realized investment gains ........... 1,174 296
1,146 293
-------- --------
- -------- --------
Operating income before income taxes $ 5,957 $ 12,435 $
3,962 $ 2,838
======== ========
======== ========
Losses and settlement expenses:
Insured events of the current year $ 74,000 $ 68,392 $
22,009 $ 24,155
Decrease in provision for
insured events of prior years ... (8,340) (11,071)
(457) (2,536)
-------- --------
- -------- --------
Total losses and
settlement expenses ......... $ 65,660 $ 57,321 $
21,552 $ 21,619
======== ========
======== ========
Catastrophe and storm losses ........ $ 4,341 $ 4,672 $
1,311 $ 1,810
======== ========
======== ========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
(Unaudited)
Premiums earned increased moderately for the nine months and
three months
ended September 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 rate
decreases including large decreases in the states of Iowa,
Illinois, Kansas and
Nebraska. There has also been a decline in mandatory assigned
risk business,
which is looked at favorably as losses associated with this type
of business
are generally higher than losses associated with controlled
business. For
1996, most of the property and casualty insurance subsidiaries'
growth has come
from outside of the Midwest. This is due to the intense
competition in the
Midwest for properly priced business and the workers'
compensation rate
decreases mentioned above. Rate adequacy continues to be
pressured in this
competitive environment. The property and casualty insurance
subsidiaries
remain committed to selective underwriting procedures and are
only writing
business in those areas where there is expected to be a potential
for profit.
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.
Underwriting results improved for the three months ended
September 30,
1996, but continued to lag behind 1995 results for the nine
months ended
September 30, 1996 as a result of an unusually large number of
commercial
property losses in the second quarter of 1996. In addition to
large losses,
losses and settlement expenses associated with new business were
higher than
those experienced with renewal business. The benefit realized
from the
downward development of prior accident year loss estimates
declined for both
the nine months and the three months ended September 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 was 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 nine months and three months ended
September 30, 1996
and 1995 are as follows:
Nine months ended Three
months ended
September 30,
September 30,
------------------
- ------------------
($ in thousands) 1996 1995 1996
1995
-------- --------
- -------- --------
Premiums earned ..................... $ 25,782 $ 24,335 $
8,474 $ 8,764
Losses and settlement expenses ...... 17,765 16,511
6,027 6,329
Other underwriting expenses ......... 8,009 7,860
2,584 2,754
-------- --------
- -------- --------
Underwriting gain (loss) ............ 8 (36)
(137) (319)
Net investment income ............... 4,762 4,507
1,612 1,522
Realized investment gains ........... 36 12
19 10
Other income ........................ 211 265
66 83
-------- --------
- -------- --------
Operating income before income taxes $ 5,017 $ 4,748 $
1,560 $ 1,296
======== ========
======== ========
Losses and settlement expenses:
Insured events of the current year $ 20,437 $ 19,048 $
7,065 $ 7,197
Decrease in provision for
insured events of prior years ... (2,672) (2,537)
(1,038) (868)
-------- --------
- -------- --------
Total losses and
settlement expenses ......... $ 17,765 $ 16,511 $
6,027 $ 6,329
======== ========
======== ========
Catastrophe losses .................. $ 3,093 $ 635 $
1,352 $ 389
======== ========
======== ========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
(Unaudited)
Premiums earned for the three months ended September 30,
1996 decreased
slightly, but the amount for the nine months ended September 30,
1996 remained
ahead of premium levels for the same period in 1995. During
1996, the company
has experienced a slight change in the mix of business from pro
rata
reinsurance to excess of loss reinsurance. Excess of loss
reinsurance
generally 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 written
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. The reinsurance
market continues
to have excess capacity, which has caused increased rate
competition. For the
remainder of 1996 premiums are expected to remain relatively flat
and
significant increases for 1997 are not expected.
Underwriting results improved slightly for the nine months
and three
months ended September 30, 1996 compared to the same periods in
1995. For the
nine months ended September 30, 1996, current accident year
losses increased as
a result of severe weather. Catastrophe losses for the three and
nine months
ended September 30, 1996 include $446,000 in reported losses
related to
Hurricane Fran. For the nine months ended September 30, 1996 the
decrease in
the provision for insured events of prior years has been steady,
while
fluctuating by quarter with a greater decrease for the three
months ended
September 30, 1996. Other underwriting expenses have increased
for the nine
months ended September 30, 1996 primarily due to the recognition
of additional
contingent commissions related to the favorable loss experience
in 1995.
Nonstandard Risk Automobile Insurance
Operating results for the nine months and three months ended
September 30, 1996
and 1995 are as follows:
Nine months ended Three
months ended
September 30,
September 30,
------------------
- ------------------
($ in thousands) 1996 1995 1996
1995
-------- --------
- -------- --------
Premiums earned ..................... $ 6,919 $ 7,590 $
2,299 $ 2,470
Losses and settlement expenses ...... 5,694 7,331
1,986 2,574
Other underwriting expenses ......... 1,973 2,100
644 689
-------- --------
- -------- --------
Underwriting loss ................... (748) (1,841)
(331) (793)
Net investment income ............... 820 897
261 279
Realized investment gains ........... 11 -
5 -
-------- --------
- -------- --------
Operating income (loss)
before income taxes ............... $ 83 $ (944) $
(65) $ (514)
======== ========
======== ========
Losses and settlement expenses:
Insured events of the current year $ 5,919 $ 7,037 $
1,692 $ 2,517
(Decrease) increase in provision
for insured events of prior years (225) 294
294 57
-------- --------
- -------- --------
Total losses and
settlement expenses ......... $ 5,694 $ 7,331 $
1,986 $ 2,574
======== ========
======== ========
Premiums earned decreased for the nine months and three
months ended
September 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. During the third quarter of
1996 the
company began writing business in the state of Missouri. Premium
volume in the
state of Missouri is expected to grow gradually, but will help to
offset
production decreases experienced in existing markets.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
(Unaudited)
The company experienced improved underwriting results for
the nine months
and three months ended September 30, 1996 compared to the same
periods in 1995.
Current accident year losses decreased in 1996 as a result of the
decline in
premium volume as well as improved loss experience. Results for
the third
quarter of 1995 were negatively impacted by the occurrence of
several severe
accidents.
Excess and Surplus Lines Insurance Management
Operating income before income taxes decreased to $351,000
for the nine
months ended September 30, 1996 from $383,000 in the same period
last year.
For the third quarter of 1996, operating income before income
taxes increased
to $118,000 from $52,000 for the same period in 1995. While
results have
fluctuated by quarter, the company has experienced a decline in
production due
to a reunderwriting process that was begun in the third quarter
of 1996.
Additionally, investment income has decreased due to a smaller
invested asset
balance.
Parent Company
Operating income before income taxes increased to $37,000
for the nine
months ended September 30, 1996 from $6,000 for the same period
in 1995. For
the three months ended September 30, 1996, operating income
before income taxes
decreased to $13,000 compared to $35,000 for the same period in
1995. For the
year the company has experienced 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 $1,467,000 at
September 30, 1996
and $3,472,000 at December 31, 1995. Since the Company does not
actively trade
in the bond market and forced liquidations of investments are not
anticipated,
fluctuations in the market value of these investments are not
expected to have
a material impact on the operations of the Company. The Company
closely
monitors the bond market and makes appropriate adjustments in
investment policy
as changing conditions warrant.
During the first six months of 1995, the Company invested
$13,550,000 of
short-term funds and maturing U.S. Treasury Bills into mutual
funds invested in
equity securities. During the third quarter of 1996 the Company
increased its
equity investments by investing $5,802,000 into preferred stocks.
The overall
liquidity position of the Company was not affected by these
investments. Net
unrealized holding gains on equity securities totaled $1,281,000
at September
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.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
(Unaudited)
As of September 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. This
change in accounting method had no impact on the equity position
of the
Company.
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, and unforeseen losses with respect to
loss and
settlement expense reserves for unreported and reported claims,
including
asbestos and environmental claims.
<PAGE>
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
September 30, 1996.
<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/ Bruce G. Kelley
- --------------------------
Bruce G. Kelley
President & Chief
Executive Officer
/s/ Mark Reese
- --------------------------
Mark Reese
Chief Accounting Officer
Date: November 8, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM 9/30/96
BALANCE SHEET AND INCOME STATEMENT AND IS QUALIFIED IN INTS
ENTIRETY BY
REFERENCE.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 141,522,920
<DEBT-CARRYING-VALUE> 194,893,314
<DEBT-MARKET-VALUE> 199,485,168
<EQUITIES> 23,177,933
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 374,734,721
<CASH> 2,093,291
<RECOVER-REINSURE> 17,230,112
<DEFERRED-ACQUISITION> 9,730,398
<TOTAL-ASSETS> 426,995,345
<POLICY-LOSSES> 210,944,758
<UNEARNED-PREMIUMS> 52,249,787
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 2,908,604
<NOTES-PAYABLE> 0
0
0
<COMMON> 11,022,082
<OTHER-SE> 131,316,111
<TOTAL-LIABILITY-AND-EQUITY> 426,995,345
122,272,966
<INVESTMENT-INCOME> 17,391,499
<INVESTMENT-GAINS> 1,221,042
<OTHER-INCOME> 211,365
<BENEFITS> 89,119,289
<UNDERWRITING-AMORTIZATION> 23,748,604
<UNDERWRITING-OTHER> 14,633,058
<INCOME-PRETAX> 11,444,679
<INCOME-TAX> 2,462,801
<INCOME-CONTINUING> 8,981,878
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,981,878
<EPS-PRIMARY> .82
<EPS-DILUTED> .82
<RESERVE-OPEN> 205,422,109
<PROVISION-CURRENT> 100,356,174
<PROVISION-PRIOR> (11,236,885)
<PAYMENTS-CURRENT> 37,422,912
<PAYMENTS-PRIOR> 49,825,516
<RESERVE-CLOSE> 210,944,758
<CUMULATIVE-DEFICIENCY> (11,236,885)
