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, 1997
---------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ --------------------
Commission File Number: 0-10956
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EMC INSURANCE GROUP INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Iowa 42-6234555
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
717 Mulberry Street, Des Moines, Iowa 50309
- ------------------------------------- ----------
(Address of principal executive office) (Zip Code)
(515) 280-2581
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
requires 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, 1997
----- -------------------------------
Common stock, $1.00 par value 11,291,070
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Total pages 18
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
ASSETS
Investments:
Fixed maturities:
Securities held-to-maturity, at amortized cost
(Fair value $187,681,892 and $194,655,256) $ 180,799,151 $ 188,385,721
Securities available-for-sale, at fair value
(amortized cost $163,370,664 and
$146,794,158) .............................. 168,716,018 150,038,644
Equity securities available-for-sale, at fair
value (cost $24,067,886 and $21,236,281) ..... 31,055,735 24,040,381
Short-term investments, at cost ................ 21,587,634 17,553,606
------------- ------------
Total investments ..................... 402,158,538 380,018,352
Cash ............................................. 1,231,011 3,500,629
Indebtedness of related party .................... 3,664,418 -
Accrued investment income ........................ 5,519,020 6,567,186
Accounts receivable .............................. 1,286,771 740,736
Deferred policy acquisition costs ................ 11,094,655 9,021,863
Deferred income taxes ............................ 9,184,998 10,974,425
Intangible assets, including goodwill, at cost
less accumulated amortization of $2,044,554
and $1,943,669 ................................. 1,513,266 1,614,151
Reinsurance receivables .......................... 14,806,402 14,735,786
Prepaid reinsurance premiums ..................... 1,830,006 1,516,972
Other assets ..................................... 1,170,314 1,637,473
------------- -------------
Total assets .......................... $ 453,459,399 $ 430,327,573
============= =============
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
1997 1996
------------- -------------
(Unaudited)
LIABILITIES
Losses and settlement expenses ................... $ 218,903,636 $ 202,502,986
Unearned premiums ................................ 58,801,610 47,908,954
Other policyholders' funds ....................... 2,425,150 3,467,449
Indebtedness to related party .................... - 7,000,482
Income taxes payable ............................. 609,000 2,942,000
Postretirement benefits .......................... 5,314,825 4,932,834
Deferred income .................................. 496,651 665,550
Other liabilities ................................ 10,515,406 12,178,290
------------- -------------
Total liabilities ............................ 297,066,278 281,598,545
STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000
shares; issued and outstanding, 11,276,877
shares in 1997 and 11,084,461 shares in 1996 ... 11,276,877 11,084,461
Additional paid-in capital ....................... 65,003,302 62,762,613
Unrealized holding gains on fixed maturity
securities available-for-sale, net of tax ...... 3,527,932 2,141,361
Unrealized holding gains on equity securities
available-for-sale, net of tax ................. 4,611,981 1,850,706
Retained earnings ................................ 71,973,029 70,889,887
------------- -------------
Total stockholders' equity ................... 156,393,121 148,729,028
------------- -------------
Total liabilities and stockholders' equity ... $ 453,459,399 $ 430,327,573
============= =============
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,
----------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ------------ ------------
REVENUES:
Premiums earned .......... $44,448,319 $41,359,581 $131,050,041 $122,272,966
Investment income, net ... 5,843,473 5,706,348 17,483,465 17,391,499
Realized investment gains 1,957,060 1,170,356 2,023,782 1,221,042
Other income ............. 52,988 66,451 168,899 211,365
----------- ----------- ------------ ------------
52,301,840 48,302,736 150,726,187 141,096,872
LOSSES AND EXPENSES:
Losses and settlement
expenses ............... 35,026,196 29,564,771 100,223,676 89,119,289
Dividends to policyholders 131,875 304,581 1,512,921 2,151,242
Amortization of deferred
policy acquisition costs 8,750,924 8,108,121 25,847,696 23,748,604
Other underwriting
expenses ............... 5,328,403 4,737,357 16,083,996 14,633,058
----------- ----------- ------------ ------------
49,237,398 42,714,830 143,668,289 129,652,193
----------- ----------- ------------ ------------
Income before income
taxes ................. 3,064,442 5,587,906 7,057,898 11,444,679
----------- ----------- ------------ ------------
INCOME TAXES:
Current .................. 283,241 664,500 1,301,088 2,462,801
Deferred ................. 116,549 745,196 (347,344) -
----------- ----------- ------------ ------------
399,790 1,409,696 953,744 2,462,801
----------- ----------- ------------ ------------
Net income ......... $ 2,664,652 $ 4,178,210 $ 6,104,154 $ 8,981,878
=========== =========== ============ ============
Earnings per share ......... $.24 $.38 $.55 $.82
=========== =========== ============ ============
Dividend per share ......... $.15 $.14 $.45 $.42
=========== =========== ============ ============
Average number of shares
outstanding .............. 11,227,006 10,973,096 11,159,348 10,905,539
=========== =========== ============ ============
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,
--------------------------
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................... $ 6,104,154 $ 8,981,878
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Losses and settlement expenses ............ 10,482,553 5,522,649
Unearned premiums ......................... 8,069,590 3,482,640
Other policyholders' funds ................ (1,042,299) (684,724)
Deferred policy acquisition costs ......... (2,072,792) (1,015,629)
Indebtedness of related party ............. (10,664,900) 730,363
Accrued investment income ................. 1,048,166 2,418
Accrued income taxes:
Current ................................. (2,333,000) (1,611,000)
Deferred ................................ (347,343) 522,785
Provision for amortization ................ 42,081 (35,632)
Realized investment gains ................. (2,023,782) (1,221,042)
Postretirement benefits ................... 381,991 336,325
Reinsurance receivables ................... (70,616) (4,313,169)
Prepaid reinsurance premiums .............. (313,034) (228,983)
Amortization of deferred income ........... (168,899) (211,365)
Other, net ................................ (1,741,760) 1,256,904
------------ ------------
(754,044) 2,532,540
Cash provided by the change in the
property and casualty insurance
subsidiaries' pooling agreement (note 3) 5,674,458 -
Cash provided by the change in the
reinsurance subsidiary's quota share
agreement (note 3) ...................... 3,066,705 -
------------ ------------
Net cash provided by operating activities ..... $ 14,091,273 $ 11,514,418
------------ ------------
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
--------------------------
1997 1996
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity securities
held-to-maturity ............................ $(17,992,820) $(30,412,887)
Maturities of fixed maturity securities
held-to-maturity ............................ 25,638,325 27,081,840
Purchases of fixed maturity securities
available-for-sale .......................... (32,838,731) (17,417,025)
Maturities of fixed maturity securities
available-for-sale .......................... 16,347,711 15,352,023
Purchases of equity securities
available-for-sale .......................... (893,442) (5,363,425)
Net (purchases) sales of short-term investments (4,034,027) 2,131,245
------------ ------------
Net cash used in investing activities ....... (13,772,984) (8,628,229)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ...................... 2,433,105 2,488,326
Dividends paid to stockholders ................ (5,021,012) (4,580,081)
Sale of treasury stock, net (note 2) .......... - 100,421
------------ ------------
Net cash used in financing activities ..... (2,587,907) (1,991,334)
------------ ------------
NET (DECREASE) INCREASE IN CASH ................. (2,269,618) 894,855
Cash at beginning of year ....................... 3,500,629 1,198,436
------------ ------------
Cash at end of quarter .......................... $ 1,231,011 $ 2,093,291
============ ============
Income taxes paid ............................... $ 3,634,088 $ 3,552,500
Interest paid ................................... $ 87,980 $ -
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Unaudited)
September 30, 1997
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 June 30, 1996, the use of treasury stock was discontinued and
all treasury shares held at that time were retired. All shares of the
Company's common stock repurchased after June 30, 1996 have been retired.
Note 3
- ------
Effective January 1, 1997, a new affiliate of Employers Mutual Casualty
Company (Employers Mutual) began participating in the pooling agreement.
In connection with this change in the pooling agreement, the Company's
liabilities increased $6,393,063 and invested assets increased $5,674,458.
The Company reimbursed Employers Mutual $794,074 for commissions incurred
to generate this business and Employers Mutual paid the Company $75,469 in
interest income as the actual cash transfer did not occur until the
affiliation was approved by the policyholders of the new affiliate
(Hamilton Mutual Insurance Company of Cincinnati, Ohio) and the Ohio
Department of Insurance at the end of March.
Effective January 1, 1997, the reinsurance subsidiary's quota share
participation was increased from 95 percent to 100 percent. In connection
with this change in the quota share agreement, the Company's liabilities
increased $3,173,647 and invested assets increased $3,066,705. The Company
reimbursed Employers Mutual $106,942 for commissions incurred to generate
this business.
Note 4
- ------
The Company will adopt Statement of Financial Accounting Standard 128,
"Earnings Per Share" in the fourth quarter of 1997. Adoption of this
statement is not expected to have any impact on the financial statements of
the Company.
Note 5
- ------
In reviewing these financial statements, reference should be made to the
Company's 1996 Form 10-K or the 1996 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 75.7 percent of consolidated premium
income.
The three property and casualty insurance subsidiaries of the Company
are parties to reinsurance pooling agreements with Employers Mutual and
several of its subsidiaries (collectively the "pooling agreement").
Effective January 1, 1997, a new affiliate of Employers Mutual, The
Hamilton Mutual Insurance Company of Cincinnati, Ohio (Hamilton Mutual),
began participating in the pooling agreement. In connection with this
change in the pooling agreement, the Company's liabilities increased
$6,393,063 and invested assets increased $5,674,458. The Company
reimbursed Employers Mutual $794,074 for commissions incurred to generate
this business and Employers Mutual paid the Company $75,469 in
interest income as the actual cash transfer did not occur until the
affiliation was approved by Hamilton Mutual's policyholders and the Ohio
Department of Insurance at the end of March. 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 and Hamilton 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 in the pool 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 spread the risk of an
exposure insured by any of the pool participants 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 seven companies in the pool.
<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's reinsurance subsidiary assumes a quota share portion of
Employers Mutual's assumed reinsurance business, exclusive of certain
reinsurance contracts. In order to take advantage of the reinsurance
subsidiary's current surplus level, the following changes were made to the
quota share agreement effective January 1, 1997: an increase in the quota
share percentage from 95 percent to 100 percent and an increase in the
maximum amount of losses retained per event from $1,000,000 to $1,500,000.
In connection with this change in the quota share agreement, the Company's
liabilities increased $3,173,647 and invested assets increased $3,066,705.
The Company reimbursed Employers Mutual $106,942 for commissions incurred
to generate this business. The reinsurance subsidiary receives all
premiums and assumes all related losses and settlement expenses of this
business, subject to the maximum loss per event noted above. The
reinsurance subsidiary does not reinsure any of Employers Mutual's direct
insurance business, nor any "involuntary" facility or pool business that
Employers Mutual assumes pursuant to state law. In addition, the
reinsurance subsidiary is not liable for credit risk in connection with the
insolvency of any reinsurers of Employers Mutual.
The Company's nonstandard risk automobile insurance subsidiary
specializes in insuring private passenger automobile risks that are found
to be unacceptable in the standard automobile insurance market.
The excess and surplus lines insurance agency provides insurance
agents access to the excess and surplus lines markets and also functions as
managing underwriter for such lines for Employers Mutual and several of the
pool members.
The results of operations for the interim periods reported are not
necessarily indicative of results to be expected for the year. The
information reflects all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the interim
periods.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
(Unaudited)
CONSOLIDATED RESULTS OF OPERATIONS
Operating results for the three months and nine months ended
September 30, 1997 and 1996 are as follows:
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
($ in thousands) 1997 1996 1997 1996
-------- -------- -------- --------
Premiums earned ..................... $ 44,448 $ 41,360 $131,050 $122,273
Losses and settlement expenses ...... 35,026 29,565 100,224 89,119
Other underwriting expenses ......... 14,211 13,150 43,445 40,533
-------- -------- -------- --------
Underwriting loss ................... (4,789) (1,355) (12,619) (7,379)
Net investment income ............... 5,843 5,707 17,484 17,392
Realized investment gains ........... 1,957 1,170 2,024 1,221
Other income ........................ 53 66 169 211
-------- -------- -------- --------
Operating income before
income taxes ................... $ 3,064 $ 5,588 $ 7,058 $ 11,445
======== ======== ======== ========
Losses and settlement expenses:
Insured events of current year .... $ 35,970 $ 30,766 $101,758 $100,356
Decrease in provision for
insured events of prior years ... (944) (1,201) (1,534) (11,237)
-------- -------- -------- --------
Total losses and
settlement expenses ............ $ 35,026 $ 29,565 $100,224 $ 89,119
======== ======== ======== ========
Catastrophe and storm losses ........ $ 1,833 $ 2,663 $ 4,934 $ 7,434
======== ======== ======== ========
Operating income before income taxes decreased 45.2 percent for the
three months and 38.3 percent for the nine months ended September 30, 1997
from the same periods in 1996. These decreases are primarily due to a
decline in the operating results of the property and casualty and
nonstandard risk automobile insurance subsidiaries.
Premiums earned increased 7.5 percent for the three months and 7.2
percent for the nine months ended September 30, 1997 from the same periods
in 1996. Production increases in the property and casualty and nonstandard
risk automobile insurance subsidiaries were partially offset by a
production decrease in the reinsurance subsidiary.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
(Unaudited)
Losses and settlement expenses increased 18.5 percent for the three
months and 12.5 percent for the nine months ended September 30, 1997 from
the same periods in 1996. The large increase for the three months ended
September 30, 1997 is attributable to the growth in the premium volume
noted above, as well as an increase in average claim costs. The increase
for the nine months ended September 30, 1997 reflects these same factors;
however, losses and settlement expenses associated with insured events of
the current year increased only 1.4 percent due to a large amount of
catastrophe and storm losses and commercial property losses experienced in
the first nine months of 1996. The benefit realized from the actual
settlement of claims and changes in reserves associated with prior year
losses remained fairly constant for the three months ended September 30,
1997, but decreased substantially for the nine months ended September 30,
1997.
Other underwriting expenses increased 8.1 percent for the three months
and 7.2 percent for the nine months ended September 30, 1997 from the same
periods in 1996. These increases are primarily a result of the production
increases experienced in 1997.
Net investment income increased 2.4 percent for the three months and
0.5 percent for the nine months ended September 30, 1997 from the same
periods in 1996. During 1997, 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 67.3
percent for the three months and 65.8 percent for the nine months ended
September 30, 1997 from the same periods in 1996. These increases reflect
a substantial increase in the amount of common stock mutual fund
distributions received in 1997.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
(Unaudited)
SEGMENT RESULTS
Property and Casualty Insurance
Operating results for the three months and nine months ended
September 30, 1997 and 1996 are as follows:
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
($ in thousands) 1997 1996 1997 1996
-------- -------- -------- --------
Premiums earned ..................... $ 33,780 $ 30,587 $ 99,160 $ 89,572
Losses and settlement expenses ...... 26,408 21,552 75,764 65,660
Other underwriting expenses ......... 11,122 9,931 33,636 30,566
-------- -------- -------- --------
Underwriting loss ................... (3,750) (896) (10,240) (6,654)
Net investment income ............... 3,783 3,712 11,461 11,437
Realized investment gains ........... 1,947 1,146 1,995 1,174
-------- -------- -------- --------
Operating income before
income taxes ................... $ 1,980 $ 3,962 $ 3,216 $ 5,957
======== ======== ======== ========
Losses and settlement expenses:
Insured events of current year .... $ 27,658 $ 22,009 $ 77,437 $ 74,000
Decrease in provision for
insured events of prior years ... (1,250) (457) (1,673) (8,340)
-------- -------- -------- --------
Total losses and
settlement expenses ............ $ 26,408 $ 21,552 $ 75,764 $ 65,660
======== ======== ======== ========
Catastrophe and storm losses ........ $ 1,386 $ 1,311 $ 3,770 $ 4,341
======== ======== ======== ========
Premiums earned increased for the three months and nine months ended
September 30, 1997 from the same periods in 1996. These increases reflect
growth in both personal and commercial lines of business from the existing
branch office structure, as well as the increase in the size of the pool
with the addition of Hamilton Mutual on January 1, 1997. Growth in the
commercial lines of business continues to be concentrated in the property
products offered under the Medallion series.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
(Unaudited)
Underwriting results declined substantially for both the three months
and nine months ended September 30, 1997 when compared to the same periods
in 1996. Loss experience associated with insured events of the current
year deteriorated for the three months ended September 30, 1997, but
improved slightly from the elevated level reported for the first nine
months of 1996. Underwriting results for 1997 have been negatively
impacted by an increase in average claim costs. While claim costs continue
to increase, profit margins have narrowed due to intense rate competition,
especially in the commercial market. Underwriting results for the first
nine months of 1997 also reflect a substantial decline in the amount of
benefit realized from the actual settlement of claims and changes in
reserves associated with prior year losses. The property and casualty
insurance subsidiaries have historically experienced favorable development
in their reserves and current reserving practices have not been relaxed;
however, as previously reported, the level of favorable development
experienced in prior years was not expected to continue. The growth in
other underwriting expenses is due to the increase in the size of the pool
with the addition of Hamilton Mutual and the increase in production.
Reinsurance
Operating results for the three months and nine months ended
September 30, 1997 and 1996 are as follows:
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
($ in thousands) 1997 1996 1997 1996
-------- -------- -------- --------
Premiums earned ..................... $ 8,042 $ 8,474 $ 24,419 $ 25,782
Losses and settlement expenses ...... 6,072 6,027 17,134 17,765
Other underwriting expenses ......... 2,451 2,584 7,672 8,009
-------- -------- -------- --------
Underwriting (loss) gain ............ (481) (137) (387) 8
Net investment income ............... 1,696 1,612 4,898 4,762
Realized investment gains ........... 9 19 22 36
Other income ........................ 53 66 169 211
-------- -------- -------- --------
Operating income before
income taxes ................... $ 1,277 $ 1,560 $ 4,702 $ 5,017
======== ======== ======== ========
Losses and settlement expenses:
Insured events of current year .... $ 5,811 $ 7,065 $ 17,320 $ 20,437
Increase (decrease) in provision
for insured events of prior years 261 (1,038) (186) (2,672)
-------- -------- -------- --------
Total losses and
settlement expenses ............ $ 6,072 $ 6,027 $ 17,134 $ 17,765
======== ======== ======== ========
Catastrophe losses .................. $ 447 $ 1,352 $ 1,164 $ 3,093
======== ======== ======== ========
<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 decreased for the three months and nine months ended
September 30, 1997 from the same periods in 1996. These decreases are
primarily attributable to competitive market conditions and a general
decline in rate levels for catastrophe coverage. The company is addressing
these market conditions by accepting larger lines on desirable programs and
strengthening its relationships with reinsurance intermediaries.
Underwriting results deteriorated for both the three months and nine
months ended September 30, 1997. Losses associated with insured events of
the current year declined as a result of decreases in both the amount of
catastrophe losses and premium volume. This decline in current year losses
was offset by a large decline in the amount of benefit realized from the
actual settlement of claims and changes in reserves associated with prior
year losses. Other underwriting expenses decreased for the three months
and nine months ended September 30, 1997 from the same periods in 1996,
reflecting the decline in premium volume. The decrease for the nine months
ended September 30, 1997 is greater due to the recognition of additional
contingent commissions in the first quarter of 1996.
Nonstandard Risk Automobile Insurance
Operating results for the three months and nine months ended
September 30, 1997 and 1996 are as follows:
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
($ in thousands) 1997 1996 1997 1996
-------- -------- -------- --------
Premiums earned ..................... $ 2,626 $ 2,299 $ 7,471 $ 6,919
Losses and settlement expenses ...... 2,546 1,986 7,325 5,694
Other underwriting expenses ......... 736 644 2,203 1,973
-------- -------- -------- --------
Underwriting loss ................... (656) (331) (2,057) (748)
Net investment income ............... 244 261 762 820
Realized investment gains ........... 1 5 6 11
-------- -------- -------- --------
Operating (loss) income before
income taxes ................... $ (411)$ (65) $ (1,289)$ 83
======== ======== ======== ========
Losses and settlement expenses:
Insured events of current year .... $ 2,501 $ 1,692 $ 7,000 $ 5,919
Increase (decrease) in provision
for insured events of prior years 45 294 325 (225)
-------- -------- -------- --------
Total losses and
settlement expenses ............ $ 2,546 $ 1,986 $ 7,325 $ 5,694
======== ======== ======== ========
<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 for the three months and nine months ended
September 30, 1997 from the same periods in 1996. This is the third
consecutive quarter the company has experienced an increase in earned
premiums after experiencing premium declines during the last several years.
These increases reflect rate increases that were implemented in the states
of Iowa and South Dakota in late 1996. Additionally, the company continues
to appoint new agents and improve its marketing and business relationships
with its existing agency force.
Underwriting results deteriorated substantially for the three months
and nine months ended September 30, 1997 from the same periods in 1996.
Results for 1997 reflect an increase in loss frequency and severity as well
as a change to a more conservative reserving methodology early in the year.
In addition, underwriting results for both periods were negatively impacted
by adverse development in the provision for insured events of prior years.
Excess and Surplus Lines Insurance Agency
Operating income before income taxes for the three months ended
September 30, 1997 was $192,000 compared to $118,000 for the same period in
1996. For the nine months ended September 30, 1997 operating income before
income taxes increased to $423,000 from $351,000 for the same period in
1996. The excess and surplus market continues to be very competitive.
Despite this intense competition, the company has been able to increase its
production levels because of new marketing programs implemented in the
second quarter of 1997. Additionally, investment income has increased
primarily due to a larger invested asset balance.
Parent Company
Operating income before income taxes was $27,000 for the three months
ended September 30, 1997 compared to operating income of $13,000 for the
same period in 1996. For the nine months ended September 30, 1997,
operating income before income taxes was $5,000 compared to an operating
income of $37,000 for the same period in 1996. The increase for the three
months ended September 30, 1997 is due to lower operating expenses as
compared to the same period in 1996. The decrease for the nine months ended
September 30, 1997 as compared to the same period in 1996 is primarily due
to a decline in investment income caused by a lower 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.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
(Unaudited)
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 $3,528,000 at September 30, 1997 and $2,141,000 at December 31,
1996. Since the Company does not actively trade in the bond market, such
fluctuations in the fair 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.
Net unrealized holding gains on equity securities totaled $4,612,000
at September 30, 1997 and $1,851,000 at December 31, 1996. The overall
liquidity position of the Company is not affected by the equity
investments.
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, 1997, the Company had no material commitments for
capital expenditures.
NEW ACCOUNTING PRONOUNCEMENT
The Company will adopt Statement of Financial Accounting Standards
128, "Earnings Per Share", in the fourth quarter of 1997. The adoption of
this statement is not expected to have any impact on the financial
statements 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,
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 20, 1997
(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
Votes Votes
Nominee Cast for Withheld
----------------------- ---------- --------
George C. Carpenter III 10,238,407 23,782
Elwin H. Creese 10,238,332 23,857
David J. Fisher 10,238,173 24,016
Bruce G. Kelley 10,238,430 23,759
George W. Kochheiser 10,236,911 25,278
Raymond A. Michel 10,237,358 24,831
Fredrick A. Schiek 10,238,430 23,759
2. Proposal to amend Employers Mutual Casualty Company's
1993 Incentive Stock Option Plan to increase the number
of shares subject thereto:
For 10,161,014 Against 88,235 Withheld 12,940
------------ -------- --------
3. Proposal to ratify the appointment of KPMG Peat
Marwick LLP as the independent auditors of the Company:
For 10,249,779 Against 6,390 Withheld 6,020
------------ ------- -------
The total number of qualified shares voted by proxy
is: 10,262,190
(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, 1997.
<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 Financial Officer
Date: November 14, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
9/30/97 balance sheet and income statement and is qualified in it's
entirety by reference.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 168,716,018
<DEBT-CARRYING-VALUE> 180,799,151
<DEBT-MARKET-VALUE> 187,681,892
<EQUITIES> 31,055,735
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 402,158,538
<CASH> 1,231,011
<RECOVER-REINSURE> 14,806,402
<DEFERRED-ACQUISITION> 11,094,655
<TOTAL-ASSETS> 453,459,399
<POLICY-LOSSES> 218,903,636
<UNEARNED-PREMIUMS> 58,801,610
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 2,425,150
<NOTES-PAYABLE> 0
0
0
<COMMON> 11,276,877
<OTHER-SE> 145,116,244
<TOTAL-LIABILITY-AND-EQUITY> 453,459,399
131,050,041
<INVESTMENT-INCOME> 17,483,465
<INVESTMENT-GAINS> 2,023,782
<OTHER-INCOME> 168,899
<BENEFITS> 100,223,676
<UNDERWRITING-AMORTIZATION> 25,847,696
<UNDERWRITING-OTHER> 16,083,996
<INCOME-PRETAX> 7,057,898
<INCOME-TAX> 953,744
<INCOME-CONTINUING> 6,104,154
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,104,154
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
<RESERVE-OPEN> 202,502,986
<PROVISION-CURRENT> 101,757,466
<PROVISION-PRIOR> (1,533,790)
<PAYMENTS-CURRENT> 37,500,675
<PAYMENTS-PRIOR> 45,968,712
<RESERVE-CLOSE> 218,903,620
<CUMULATIVE-DEFICIENCY> (1,533,790)
</TABLE>
