UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
-------------
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) 280-2902
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
----- ----------------------------
Common stock, $1.00 par value 11,486,804
Total pages 20
--------
<PAGE>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
- ------- --------------------
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
1998 1997
ASSETS ------------ ------------
Investments:
Fixed maturities:
Securities held-to-maturity, at amortized cost
(market value $188,417,643 and $193,835,013) $180,523,879 $185,829,063
Securities available-for-sale, at market value
(amortized cost $184,376,648 and
$172,717,206) .............................. 191,343,755 179,652,738
Equity securities available-for-sale, at market
value (cost $24,184,995 and $26,261,157) ..... 32,377,052 30,972,732
Short-term investments, at cost ................ 20,365,387 14,926,994
------------ ------------
Total investments ..................... 424,610,073 411,381,527
Cash ............................................. 2,322,298 1,200,300
Indebtedness of related party .................... - 822,403
Accrued investment income ........................ 6,040,694 5,752,295
Income taxes recoverable ......................... 2,908,000 -
Accounts receivable .............................. 1,597,628 1,457,312
Deferred policy acquisition costs ................ 12,662,709 10,560,657
Deferred income taxes ............................ 9,024,566 9,751,721
Intangible assets, including goodwill, at cost
less accumulated amortization of $2,145,439
and $2,078,182 ................................. 1,412,382 1,479,638
Reinsurance receivables .......................... 15,747,102 13,601,691
Prepaid reinsurance premiums ..................... 1,586,658 1,195,065
Other assets ..................................... 1,954,583 1,907,187
------------ ------------
Total assets .......................... $479,866,693 $459,109,796
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
1998 1997
LIABILITIES ------------ ------------
Losses and settlement expenses ................... $234,839,562 $217,777,942
Unearned premiums ................................ 58,296,571 54,857,463
Other policyholders' funds ....................... 2,713,115 2,781,544
Indebtedness to related party .................... 549,943 -
Income taxes payable ............................. - 3,548,000
Postretirement benefits .......................... 5,986,651 5,428,913
Deferred income .................................. 355,960 446,678
Other liabilities ................................ 12,306,625 11,922,800
----------- -----------
Total liabilities ............................ 315,048,427 296,763,340
STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000
shares; issued and outstanding, 11,481,211
shares in 1998 and 11,351,119 shares in 1997 ... 11,481,211 11,351,119
Additional paid-in capital ....................... 67,645,137 65,916,681
Accumulated other comprehensive income ........... 10,005,048 7,687,092
Retained earnings ................................ 75,686,870 77,391,564
------------ ------------
Total stockholders' equity ................... 164,818,266 162,346,456
------------ ------------
Total liabilities and stockholders' equity ... $479,866,693 $459,109,796
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
------------------ ----------------
REVENUES:
Premiums earned ..........$ 46,573,702 $44,143,379 $92,261,925 $86,601,722
Investment income, net ... 6,419,872 5,895,256 12,697,145 11,639,992
Realized investment
(losses) gains ......... (5,706) 9,417 83,459 66,722
Other income ............. 43,806 56,226 90,718 115,911
---------- ---------- ----------- ----------
53,031,674 50,104,278 105,133,247 98,424,347
LOSSES AND EXPENSES:
Losses and settlement
expenses ............... 42,951,894 33,547,594 73,342,144 65,197,480
Dividends to policyholders 398,819 631,985 1,401,158 1,381,046
Amortization of deferred
policy acquisition costs 9,714,669 8,924,070 18,842,288 17,096,772
Other underwriting
expenses ............... 4,791,092 5,077,725 10,359,130 10,755,593
---------- ---------- ----------- ----------
57,856,474 48,181,374 103,944,720 94,430,891
---------- ---------- ----------- ----------
(Loss) income before
income taxes ......... (4,824,800) 1,922,904 1,188,527 3,993,456
----------- ---------- ----------- ----------
INCOME TAXES:
Current .................. (1,942,000) 354,350 (57,000) 1,017,847
Deferred ................. (116,639) (123,049) (466,946) (463,893)
----------- ----------- ----------- -----------
(2,058,639) 231,301 (523,946) 553,954
----------- ----------- ----------- -----------
Net (loss) income ..$ (2,766,161)$ 1,691,603 $ 1,712,473 $ 3,439,502
=========== =========== =========== ==========
Net (loss) income per common
share - basic and diluted $(.24) $.15 $.15 $.31
=========== =========== =========== ===========
Dividends per common share . $ .15 $.15 $.30 $.30
=========== =========== =========== ===========
Average number of common
shares outstanding - basic
and diluted .............. 11,425,177 11,156,307 11,309,779 11,125,519
========== ========== ========== ==========
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three months ended Six months ended
June 30, June 30,
------------------------ -----------------------
1998 1997 1998 1997
------------ ----------- ----------- -----------
NET (LOSS) INCOME ..........$ (2,766,161)$ 1,691,603 $ 1,712,473 $ 3,439,502
------------ ----------- ----------- -----------
OTHER COMPREHENSIVE INCOME:
Unrealized holding gains
arising during the
period, before deferred
income taxes ........... 624,081 6,937,881 3,582,097 4,331,671
Deferred income taxes .... 212,188 2,358,877 1,217,917 1,472,767
------------ ----------- ----------- -----------
411,893 4,579,004 2,364,182 2,858,904
Reclassification ------------ ----------- ----------- -----------
adjustment for losses
(gains) included in
net income, before
income taxes (benefit).. 14,709 (9,417) (70,040) (66,722)
Income taxes (benefit).... (5,007) 3,201 23,814 22,685
------------ ----------- ----------- -----------
9,708 (6,216) (46,226) (44,037)
Other comprehensive ------------ ----------- ----------- -----------
income ............... 421,601 4,572,788 2,317,956 2,814,867
------------ ----------- ----------- -----------
Total comprehensive
(loss) income ....$ (2,344,560)$ 6,264,391 $ 4,030,429 $ 6,254,369
============ =========== =========== ===========
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended
June 30,
-------------------------
1998 1997
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................... $ 1,712,473 $ 3,439,502
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Losses and settlement expenses ............ 13,753,282 7,043,180
Unearned premiums ......................... 1,177,879 1,625,919
Other policyholders' funds ................ (68,429) (388,600)
Deferred policy acquisition costs ......... (2,102,052) (1,136,810)
Indebtedness of related party ............. 1,372,346 (8,237,259)
Accrued investment income ................. (288,399) 834,431
Income taxes payable ...................... (6,456,000) (2,584,000)
Deferred income taxes ..................... (466,944) (463,893)
Realized investment gains ................. (83,459) (66,722)
Postretirement benefits ................... 557,738 247,479
Reinsurance receivables ................... (2,145,411) (329,489)
Prepaid reinsurance premiums .............. (391,593) (427,973)
Amortization of deferred income ........... (90,718) (115,911)
Other, net ................................ 131,703 (2,029,946)
------------ -----------
4,899,943 (6,029,594)
Cash provided by the change in the
property and casualty insurance
subsidiaries' pooling agreement (note 2) 5,569,567 5,674,458
Cash provided by the change in the
reinsurance subsidiary's quota share
agreement (note 2) ...................... - 3,066,705
------------ ------------
Total adjustment ...................... 10,469,510 2,711,569
------------ ------------
Net cash provided by
operating activities .............. $ 12,181,983 $ 6,151,071
------------ ------------
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Six months ended
June 30,
--------------------------
1998 1997
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity securities
held-to-maturity ............................ $(12,961,406) $ (5,999,070)
Disposals of fixed maturity securities
held-to-maturity ............................ 18,344,757 13,688,421
Purchases of fixed maturity securities
available-for-sale .......................... (21,812,595) (25,962,387)
Disposals of fixed maturity securities
available-for-sale .......................... 10,227,500 11,769,610
Net sales (purchases) of equity securities
available-for-sale .......................... 2,138,771 (792,787)
Net (purchases) sales of short-term investments (5,438,393) 1,184,548
------------ ------------
Net cash used in investing activities ....... (9,501,366) (6,111,665)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ...................... 631,474 239,507
Dividends paid to stockholders ................ (2,190,093) (2,149,442)
------------ ------------
Net cash used in financing activities ..... (1,558,619) (1,909,935)
------------ ------------
NET INCREASE (DECREASE) IN CASH ................. 1,121,998 (1,870,529)
Cash at beginning of year ....................... 1,200,300 3,500,629
------------ ------------
Cash at end of quarter .......................... $ 2,322,298 $ 1,630,100
============ ============
Income taxes paid ............................... $ 6,399,000 $ 3,601,847
Interest paid ................................... $ - $ 84,709
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
June 30, 1998
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.
In reading these financial statements, reference should be made
to the Company's 1997 Form 10-K or the 1997 Annual Report to
Shareholders for more detailed footnote information.
Note 2
- ------
Effective January 1, 1998, Farm and City Insurance Company (Farm
and City), a subsidiary of the Company that writes nonstandard
risk automobile insurance business, became a participant in the
EMC Insurance Companies pooling agreement. Farm and City assumes
a 1.5 percent participation in the pool, which increased the
Company's aggregate participation in the pool from 22 percent to
23.5 percent. In connection with this change in the pooling
agreement, the Company's liabilities increased $6,224,586 and
invested assets increased $5,569,567. The Company reimbursed
Employers Mutual Casualty Company (Employers Mutual) $726,509 for
commissions incurred to generate this business and Employers
Mutual paid the Company $71,490 in interest income as the actual
cash transfer did not occur until the end of March.
Effective January 1, 1997, a new affiliate of 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 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.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
June 30, 1998
Note 3
- ------
The Company adopted Statement of Financial Accounting Standards
(SFAS) 130, "Reporting Comprehensive Income" in the first quarter
of 1998. SFAS 130 requires certain disclosures of comprehensive
income. Adoption of this statement had no impact on the net
income of the Company.
The Company will adopt the presentation requirements of SFAS 131,
"Disclosures about Segments of an Enterprise and Related
Information", in the fourth quarter of 1998. Management is
currently in the process of evaluating the segment reporting
disclosure requirements. Adoption of this statement will have no
effect on the income of the Company.
The Company will adopt the disclosure requirements of SFAS 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits", in the fourth quarter of 1998. The applicable
disclosures will be included in the footnotes to the financial
statements for the year ended December 31, 1998. Adoption of
this statement will have no effect on the income of the Company.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations
OVERVIEW
EMC Insurance Group Inc., 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 and an excess and surplus lines insurance agency. Property and
casualty insurance is the most significant segment, representing 81.4
percent of consolidated premium income. For purposes of this discussion,
the term "Company" is used interchangeably to describe EMC Insurance Group
Inc. (Parent company only) and EMC Insurance Group Inc. and its
subsidiaries.
The Company's four property and casualty insurance subsidiaries and
two subsidiaries and an affiliate 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, with the
exception of any voluntary reinsurance business assumed from nonaffiliated
insurance companies, 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 nonaffiliated
insurance companies, are prorated among the parties on the basis of
participation in the pool. 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 companies in the pool.
Effective January 1, 1998, Farm and City Insurance Company (Farm and
City), a subsidiary of the Company that writes nonstandard risk automobile
insurance business, became a participant in the pooling agreement. Farm
and City assumes a 1.5 percent participation in the pool, which increased
the Company's aggregate participation in the pool from 22 percent to 23.5
percent. As a result of this change in structure, the Company now has four
subsidiaries that comprise the property and casualty insurance segment and
no longer has a separate segment for the nonstandard risk automobile
insurance business.
The Company's reinsurance subsidiary assumes a 100 percent quota share
portion of Employers Mutual's assumed reinsurance business, exclusive of
certain reinsurance contracts. This includes all premiums and related
losses and settlement expenses of this business, subject to a maximum loss
of $1,500,000 per event. The reinsurance subsidiary does not reinsure any
of Employers Mutual's direct insurance business, nor any "involuntary"
facility or pool business that Employers Mutual assumes pursuant to state
law. In addition, the reinsurance subsidiary is not liable for credit risk
in connection with the insolvency of any reinsurers of Employers Mutual.
The excess and surplus lines insurance agency provides insurance
agents access to the excess and surplus lines markets and also functions as
managing underwriter for such lines for Employers Mutual and several of the
pool members.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
The results of operations for the interim periods reported are not
necessarily indicative of results to be expected for the year. The
information reflects all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the interim
periods.
CONSOLIDATED RESULTS OF OPERATIONS
Operating results for the three months and six months ended June 30,
1998 and 1997 are as follows:
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
($ in thousands) 1998 1997 1998 1997
------------------ -----------------
Premiums earned ..................... $ 46,574 $ 44,144 $ 92,262 $ 86,602
Losses and settlement expenses ...... 42,952 33,548 73,342 65,197
Acquisition and other expenses ...... 14,905 14,634 30,603 29,234
-------- -------- -------- --------
Underwriting loss ................... (11,283) (4,038) (11,683) (7,829)
Net investment income ............... 6,420 5,895 12,697 11,640
Other income ........................ 44 56 91 116
-------- -------- -------- --------
Operating (loss) income before
income taxes ................... (4,819) 1,913 1,105 3,927
Realized investment (losses) gains .. (6) 10 84 67
-------- -------- -------- --------
(Loss) income before income taxes ... $ (4,825)$ 1,923 $ 1,189 $ 3,994
======== ======== ======== ========
Incurred losses and
settlement expenses:
Insured events of current year .. $ 45,385 $ 32,998 $ 80,153 $ 65,787
(Decrease) increase in provision
for insured events of prior
years ......................... (2,433) 550 (6,811) (590)
-------- -------- -------- --------
Total losses and
settlement expenses ....... $ 42,952 $ 33,548 $ 73,342 $ 65,197
======== ======== ======== ========
Catastrophe and storm losses ........ $ 8,627 $ 2,138 $ 9,146 $ 3,101
======== ======== ======== ========
Operating results before income taxes decreased significantly for the
three months ended June 30, 1998 as compared to the same period in 1997.
This decline is attributable to a substantial increase in catastrophe and
storm losses that resulted from a series of intense storms that battered
the Midwestern, Southern and Northeastern United States. These storms
produced the highest level of second-quarter storm losses that the
insurance industry has experienced since 1949, when these statistics were
first recorded. Operating results for the first six months of 1998 also
declined as a result of the record amount of catastrophe and storm losses
incurred in the second quarter.
Premiums earned increased 5.5 percent for the three months and 6.5
percent for the six months ended June 30, 1998 from the same periods in
1997. Both the property and casualty insurance segment and the reinsurance
segment achieved solid growth in the competitive markets within which they
operate.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
Losses and settlement expenses increased 28.0 percent for the three
months and 12.5 percent for the six months ended June 30, 1998 from the
same periods in 1997. Excluding the effect of catastrophe and storm
losses, which can vary greatly from period to period, the increase was 9.3
percent for the three months and 3.4 percent for the six months ended June
30, 1998. Results for the second-quarter of 1998 reflect an increase in
both the frequency and severity of losses while the results for the first
six months of 1998 reflect a large increase in the amount of favorable
development experienced in the actual settlement of claims and changes in
reserves associated with prior year losses.
Acquisition and other expenses increased 1.9 percent for the three
months and 4.7 percent for the six months ended June 30, 1998 as compared
to the same periods in 1997. During the first six months of 1998 the
property and casualty insurance subsidiaries increased the estimate of
expenses related to acquisition costs. As a result, more acquisition costs
were deferred during the first six months of 1998, which resulted in a
smaller increase in the amount of acquisition and other expenses for the
period.
Net investment income increased 8.9 percent for the three months and
9.1 percent for the six months ended June 30, 1998 from the same periods in
1997. These increases are due to higher average invested balances in fixed
maturity securities, coupled with a decrease in investment expenses.
SEGMENT RESULTS
Property and Casualty Insurance
Operating results for the three months and six months ended June 30,
1998 and 1997 are as follows:
Three months ended Six months ended
June 30, June 30
----------------- -----------------
($ in thousands) 1998 1997 1998 1997
-------- -------- -------- --------
Premiums earned ..................... $ 38,236 $ 33,406 $ 75,146 $ 65,380
Losses and settlement expenses ...... 37,336 26,234 62,240 49,356
Acquisition and other expenses ...... 11,961 11,284 24,665 22,514
-------- -------- -------- --------
Underwriting loss ................... (11,061) (4,112) (11,759) (6,490)
Net investment income ............... 4,470 3,915 8,879 7,678
-------- -------- -------- --------
Operating (loss) income before
income taxes ................... (6,591) (197) (2,880) 1,188
Realized investment (losses) gains .. (8) 3 77 48
-------- -------- -------- --------
(Loss) income before income taxes ... $ (6,599)$ (194) $ (2,803)$ 1,236
======== ======== ======== ========
Incurred losses and
settlement expenses:
Insured events of current year .. $ 38,649 $ 25,202 $ 67,718 $ 49,779
(Decrease) increase in provision
for insured events of prior
years ......................... (1,312) 1,032 (5,477) (423)
-------- -------- -------- --------
Total losses and
settlement expenses ....... $ 37,337 $ 26,234 $ 62,241 $ 49,356
======== ======== ======== ========
Catastrophe and storm losses ........ $ 7,533 $ 1,924 $ 7,889 $ 2,384
======== ======== ======== ========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
As previously noted, the property and casualty insurance subsidiaries'
aggregate participation in the pooling agreement increased from 22 percent
to 23.5 percent on January 1, 1998, when Farm and City became a participant
in the pooling agreement. Beginning in 1998, the underwriting results of
the nonstandard risk automobile insurance business written by Farm and City
are included in the pool, with 23.5 percent of this business assumed by the
property and casualty insurance subsidiaries. In addition, the investment
results of Farm and City are now included in the property and casualty
insurance segment. Prior year amounts have not been restated for this
change in structure.
Premiums earned increased 14.5 percent for the three months and 14.9
percent for the six months ended June 30, 1998 from the same periods in
1997. Excluding the addition of Farm and City to the property and casualty
insurance segment, the increases would have been 5.0 percent for the three
months and 5.7 percent for the six months ended June 30, 1998. These
production increases are primarily the result of growth within the existing
branch structure and are attributed to competitive rates, value added
services and an emphasis on building and maintaining strong working
relationships with local agents. Rate competition continues to be intense,
especially in the commercial lines marketplace; however, there has been
some indication of rate stabilization in the workers compensation line of
business and in the personal lines market.
Losses and settlement expenses increased 42.3 percent for the three
months and 26.1 percent for the six months ended June 30, 1998 as compared
to the same periods in 1997. Excluding the addition of Farm and City to
the property and casualty insurance segment, the increases would have been
30.9 percent for the three months and 15.9 percent for the six months ended
June 30, 1998. These large increases are primarily the result of an
unusually large amount of catastrophe and storm losses experienced during
the second-quarter of 1998, as well as an overall increase in both the
frequency and severity of other types of losses. Favorable development
from the actual settlement of claims and changes in reserves associated
with prior year losses helped to reduce the impact of the losses
experienced during the second-quarter of 1998, but not to the level
realized in the first quarter of the year.
Acquisition and other expenses increased 6.0 percent and 9.5 percent
for the three months and six months ended June 30, 1998 as compared to the
same periods in 1997. Excluding the addition of Farm and City to the
property and casualty insurance segment, acquisition and other expenses
would have decreased 0.2 percent and increased 3.4 percent for the three
months and six months ended June 30, 1998 as compared to the same periods
in 1997. During the first six months of 1998 the property and casualty
insurance subsidiaries increased the estimate of expenses related to
acquisition costs. As a result, more acquisition costs were deferred
during the first six months of 1998, which resulted in a smaller increase
in the amount of acquisition and other expenses for the period. The
decrease for the three months ended June 30, 1998 also reflects a decline
in the amount of dividends paid to policyholders.
Net investment income increased 14.2 percent for the three months and
15.6 percent for the six months ended June 30, 1998 as compared to the same
periods in 1997. Excluding the addition of Farm and City to the property
and casualty insurance segment, the increases would have been 6.2 percent
for the three months and 7.7 percent for the six months ended June 30,
1998. A higher average invested balance in fixed maturity securities,
coupled with a decrease in investment expenses, contributed to this
increase.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
Reinsurance
Operating results for the three months and six months ended June 30,
1998 and 1997 are as follows:
Three months ended Six months ended
June 30, June 30,
----------------- -----------------
($ in thousands) 1998 1997 1998 1997
-------- -------- -------- --------
Premiums earned ..................... $ 8,338 $ 8,236 $ 17,116 $ 16,377
Losses and settlement expenses ...... 5,616 5,229 11,102 11,062
Acquisition and other expenses ...... 2,935 2,540 5,947 5,221
-------- -------- -------- --------
Underwriting (loss) gain ............ (213) 467 67 94
Net investment income ............... 1,787 1,621 3,490 3,202
Other income ........................ 44 56 91 116
-------- -------- -------- --------
Operating income before
income taxes ................... 1,618 2,144 3,648 3,412
Realized investment gains ........... 2 5 7 13
-------- -------- -------- --------
Income before income taxes .......... $ 1,620 $ 2,149 $ 3,655 $ 3,425
======== ======== ======== ========
Incurred losses and
settlement expenses:
Insured events of current year .. $ 6,737 $ 5,949 $ 12,436 $ 11,509
Decrease in provision for
insured events of prior years . (1,121) (720) (1,334) (447)
-------- -------- -------- --------
Total losses and
settlement expenses ....... $ 5,616 $ 5,229 $ 11,102 $ 11,062
======== ======== ======== ========
Catastrophe and storm losses ........ $ 1,094 $ 214 $ 1,257 $ 717
======== ======== ======== ========
Premiums earned increased 1.2 percent for the three months and 4.5
percent for the six months ended June 30, 1998 from the same periods in
1997. Rate competition within the reinsurance marketplace continues to be
very competitive. The premium increases experienced in 1998 are the result
of the addition of several new accounts during the first quarter of 1998.
Losses and settlement expenses increased 7.4 percent for the three
months and 0.4 percent for the six months ended June 30, 1998 from the same
periods in 1997. Results for the second-quarter of 1998 reflect an
increase in catastrophe and storm losses; however, this increase was
partially offset by an increase in the amount of favorable development
realized in the actual settlement of claims and changes in reserves
associated with prior year losses.
Acquisition and other expenses increased 15.6 percent for the three
months and 13.9 percent for the six months ended June 30, 1998 from the
same periods in 1997. These increases are primarily due to an increase in
contingent commissions resulting from the favorable loss experience on the
assumed book of business.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
Nonstandard Risk Automobile Insurance
As previously noted, effective January 1, 1998 the underwriting results
of the nonstandard risk automobile insurance business are included in the
pooling agreement and the operating results of Farm and City are included
in the property and casualty insurance segment. Separate operating results
for the nonstandard risk automobile insurance business are no longer
presented.
The loss ratio of the nonstandard risk automobile insurance business
improved in 1998 from the substandard results reported in 1997. This
improvement is attributable to better winter driving conditions in the
Midwest and improved working relationships with the agency force.
Operating results for the three months and six months ended June 30,
1997 are as follows:
Three Six
months months
ended ended
June 30, June 30,
($ in thousands) 1997 1997
-------- --------
Premiums earned ..................... $ 2,502 $ 4,845
Losses and settlement expenses ...... 2,085 4,779
Acquisition and other expenses ...... 797 1,467
-------- --------
Underwriting loss ................... (380) (1,401)
Net investment income ............... 249 518
-------- --------
Operating loss before income taxes .. (131) (883)
Realized investment gains ........... 1 5
-------- --------
Loss before income taxes ............ $ (130) $ (878)
======== ========
Incurred losses and
settlement expenses:
Insured events of current year .. $ 1,847 $ 4,499
Increase in provision for insured
events of prior years ......... 238 280
-------- --------
Total losses and
settlement expenses .......... $ 2,085 $ 4,779
======== ========
Excess and Surplus Lines Insurance Agency
Operating income before income taxes increased to $172,000 for the
three months and $327,000 for the six months ended June 30, 1998 compared
to $148,000 and $231,000 for the same periods in 1997. The increases for
1998 reflect increased commission income resulting from a long-haul
trucking program introduced during 1997.
Parent Company
Operating results before income taxes totaled ($19,000) and $9,000 for
the three months and six months ended June 30, 1998 compared to ($52,000)
and ($21,000) for the same periods in 1997. The improvement in the results
for 1998 is due to an increase in investment income, which is attributable
to a higher invested asset balance.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
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, excluding investments in equity securities, is
invested in securities with maturities that approximate the anticipated
liabilities of the insurance issued. Unrealized holding gains on fixed
maturity securities available-for-sale, net of tax, totaled $4,598,000 at
June 30, 1998 and $4,577,000 at December 31, 1997. 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.
The Company currently has equity investments in common stock mutual
funds and non-redeemable preferred stocks. During the third quarter of
1998, the Company plans to liquidate its investment in common stock mutual
funds and reinvest the proceeds in individual stock issues that will be
managed on a tax-aware basis. This change in investment philosophy is not
expected to have a material impact on the operations of the Company since
the proceeds from the sale of the mutual funds are generally reinvested and
are not utilized in the daily operations of the Company.
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.
The major ongoing sources of the Company's liquidity are insurance
premium income, investment income and cash provided from maturing or
liquidated investments. The principal outflows of cash are payments of
claims, commissions, premium taxes, operating expenses, income taxes,
dividends and investment purchases.
During the first six months of 1998, the Company generated positive
cash flows from operations of $12,181,983 compared to $6,151,071 for the
same period in 1997. The amount for 1998 includes $5,569,567 received from
Employers Mutual in connection with the addition of Farm and City to the
pooling agreement. The amount for 1997 includes $8,741,163 received from
Employers Mutual in connection with the addition of a new member to the
pooling agreement and an increase in the reinsurance subsidiary's quota
share percentage.
As of June 30, 1998, the Company had no material commitments for
capital expenditures.
IMPACT OF YEAR 2000 REMEDIATION ON OPERATIONS
The Year 2000 issue presents both operational and underwriting risks
to the Company. Operational risks include the failure of computer systems
owned and operated by Employers Mutual, as well as those owned and operated
by vendors and other parties with which the Company conducts business.
Underwriting risks of Year 2000 relate to potential claims of the Company's
insureds to recover losses due to interruption of business or liability to
third parties that result from the failure of computer systems.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
Employers Mutual owns and maintains the computer systems utilized in
the operation of the Company's businesses. Employers Mutual is currently
in the process of finalizing changes to these systems in order to be Year
2000 compliant. Most systems have been updated at this time, and all
remaining work is scheduled for completion and testing in 1998. Employers
Mutual is also in the final stages of contract negotiations with an outside
consulting firm to provide an independent assessment of Year 2000
compliance efforts. This work is scheduled to be performed during the
second half of 1998. In addition, Employers Mutual is aware of and is
monitoring Year 2000 compliance on systems purchased from and used by
vendors and other parties with which it interacts. By verifying Year 2000
compliance with these parties, management is further minimizing the risks
of Year 2000 noncompliance.
The Company has distributed a letter to all of its commercial insureds
notifying them that their current policies do not cover Year 2000 losses,
but that coverage will be offered through an endorsement to the policy. A
questionnaire has been developed and provided to them to aide in assessing
potential risks from Year 2000 noncompliance. Employers Mutual is also
working with its reinsurance carriers to ensure that reinsurance protection
will be in place starting January 1, 1999 for potential claims arising from
Year 2000 issues.
The Company, under terms of the pooling agreement, will be a 23.5
percent participant in the remaining costs associated with the Year 2000
remediation projects. These costs are not expected to be material to the
Company's financial position or its results of operations.
The risks of Year 2000 noncompliance have been identified and analyzed
by management. If an unforeseen Year 2000 failure occurs, a formalized and
documented business continuation plan is in place to support the Company's
operations until corrective actions are taken.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards (SFAS)
130, "Reporting Comprehensive Income", in the first quarter of 1998. SFAS
130 requires certain disclosures of comprehensive income. Adoption of this
statement had no impact on the net income of the Company.
The Company will adopt the presentation requirements of SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information", in
the fourth quarter of 1998. Management is currently in the process of
evaluating the segment reporting disclosure requirements. Adoption of this
statement will have no effect on the net income of the Company.
The Company will adopt the disclosure requirements of SFAS 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits",
in the fourth quarter of 1998. The applicable disclosures will be included
in the footnotes to the financial statements for the year ended December
31, 1998. Adoption of this statement will have no effect on the net income
of the Company.
In June of 1998, the Financial Accounting Standards Board issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities",
effective for fiscal years beginning after June 15, 1999. Adoption of this
statement will have no effect on the net income of the Company.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations, Continued
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>
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 21, 1998
(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 11,031,289 25,196
Elwin H. Creese 11,034,919 21,566
David J. Fisher 11,033,838 22,647
Bruce G. Kelley 11,035,836 20,650
George W. Kochheiser 11,033,824 22,662
Raymond A. Michel 11,030,444 26,041
Fredrick A. Schiek 11,035,724 20,761
2. Proposal to ratify the appointment of KPMG Peat
Marwick LLP as the independent auditors of the Company:
For 11,043,161 Against 12,921 Withheld 12,415
---------- ------ ------
The total number of qualified shares voted by proxy
is: 11,068,497
(d) None.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) None.
(b) No Form 8-K was filed by the registrant during the
quarter ended June 30, 1998.
<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
Date: August 14, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
6/30/98 balance sheet and income statement and is qualified in its entirety by
reference.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 191,343,755
<DEBT-CARRYING-VALUE> 180,523,879
<DEBT-MARKET-VALUE> 188,417,643
<EQUITIES> 32,377,052
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 424,610,073
<CASH> 2,322,298
<RECOVER-REINSURE> 15,747,102
<DEFERRED-ACQUISITION> 12,662,709
<TOTAL-ASSETS> 479,866,693
<POLICY-LOSSES> 234,839,562
<UNEARNED-PREMIUMS> 58,296,571
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 2,713,115
<NOTES-PAYABLE> 0
0
0
<COMMON> 11,481,211
<OTHER-SE> 153,337,055
<TOTAL-LIABILITY-AND-EQUITY> 479,866,693
92,261,925
<INVESTMENT-INCOME> 12,697,145
<INVESTMENT-GAINS> 83,459
<OTHER-INCOME> 90,718
<BENEFITS> 73,342,144
<UNDERWRITING-AMORTIZATION> 18,842,288
<UNDERWRITING-OTHER> 10,359,130
<INCOME-PRETAX> 1,188,527
<INCOME-TAX> (523,946)
<INCOME-CONTINUING> 1,712,473
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,712,473
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
<RESERVE-OPEN> 217,777,942
<PROVISION-CURRENT> 80,133,972
<PROVISION-PRIOR> (6,791,828)
<PAYMENTS-CURRENT> 21,767,214
<PAYMENTS-PRIOR> 36,620,570
<RESERVE-CLOSE> 234,095,020
<CUMULATIVE-DEFICIENCY> (6,791,828)
</TABLE>
