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, 2000
---------------------------------------
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 October 31, 2000
----- -------------------------------
Common stock, $1.00 par value 11,293,509
Total pages 20
<PAGE>
PART I. FINANCIAL INFORMATION
------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
------- --------------------
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
------------ ------------
ASSETS
Investments:
Fixed maturities:
Securities held-to-maturity, at amortized cost
(fair value $119,628,799 and $126,679,065) $118,789,773 $127,204,160
Securities available-for-sale, at fair value
(amortized cost $286,967,854 and
$263,720,333) .............................. 283,051,725 256,181,429
Equity securities available-for-sale, at fair
value (cost $28,511,816 and $28,494,631) ..... 35,325,488 32,408,272
Short-term investments, at cost ................ 16,448,135 20,164,210
------------ ------------
Total investments ..................... 453,615,121 435,958,071
Cash ............................................. 2,441,692 1,508,678
Indebtedness of related party .................... 1,415,252 -
Accrued investment income ........................ 6,269,432 6,886,939
Accounts receivable (net of allowance for
uncollectible accounts of $634,000 and $633,000) 766,552 3,293,537
Income taxes recoverable ......................... 841,250 1,537,000
Reinsurance receivables .......................... 12,805,859 11,129,365
Deferred policy acquisition costs ................ 16,582,105 13,619,192
Deferred income taxes ............................ 17,697,458 18,121,317
Intangible assets, including goodwill, at cost
less accumulated amortization of $2,448,093
and $2,347,208 ................................. 1,109,727 1,210,612
Prepaid reinsurance premiums ..................... 2,452,528 1,280,564
Securities lending collateral (note 2) ........... 52,397,543 45,818,533
Other assets ..................................... 1,111,186 2,030,703
------------ ------------
Total assets .......................... $569,505,705 $542,394,511
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
------------ ------------
LIABILITIES
Losses and settlement expenses ................... $275,147,791 $266,514,024
Unearned premiums ................................ 78,442,065 64,991,129
Other policyholders' funds ....................... 759,480 1,093,254
Indebtedness to related party .................... - 3,886,559
Postretirement benefits .......................... 7,458,897 6,768,219
Deferred income .................................. 95,289 158,831
Securities lending obligation (note 2) ........... 52,397,543 45,818,533
Other liabilities ................................ 9,576,272 11,247,685
------------ ------------
Total liabilities ......................... 423,877,337 400,478,234
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000
shares; issued and outstanding, 11,293,509
shares in 2000 and 11,265,232 shares in 1999 ... 11,293,509 11,265,232
Additional paid-in capital ....................... 65,539,981 65,333,686
Accumulated other comprehensive income (loss) .... 1,912,380 (3,625,263)
Retained earnings ................................ 66,882,498 68,942,622
------------ ------------
Total stockholders' equity ................ 145,628,368 141,916,277
------------ ------------
Total liabilities and stockholders' equity $569,505,705 $542,394,511
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended Nine months ended
September 30, September 30,
----------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
REVENUES:
Premiums earned ..........$58,617,746 $52,596,314 $167,177,512 $153,295,867
Investment income, net ... 7,328,475 6,669,304 21,508,117 19,030,740
Realized investment gains 574,984 1,313,608 904,237 1,559,775
Other income ............. 271,702 705,520 1,264,753 1,982,028
----------- ----------- ------------ ------------
66,792,907 61,284,746 190,854,619 175,868,410
----------- ----------- ------------ ------------
LOSSES AND EXPENSES:
Losses and settlement
expenses ............... 46,971,850 44,080,785 135,845,029 126,844,057
Dividends to policyholders 630,354 729,623 1,147,760 1,711,209
Amortization of deferred
policy acquisition costs 12,561,548 11,458,397 36,759,123 34,573,674
Other underwriting
expenses ............... 4,852,337 4,675,398 12,846,085 13,520,600
Other expenses ........... 347,890 254,815 1,117,982 1,198,793
----------- ----------- ------------ ------------
65,363,979 61,199,018 187,715,979 177,848,333
----------- ----------- ------------ ------------
Income (loss) before
income tax expense
(benefit) ............ 1,428,928 85,728 3,138,640 (1,979,923)
----------- ----------- ------------ ------------
INCOME TAX EXPENSE
(BENEFIT):
Current ................ 574,237 157,457 682,711 (860,930)
Deferred ............... (349,525) (864,387) (561,305) (1,961,227)
----------- ----------- ------------ ------------
224,712 (706,930) 121,406 (2,822,157)
----------- ----------- ------------ ------------
Net income .........$ 1,204,216 $ 792,658 $ 3,017,234 $ 842,234
=========== =========== ============ ============
Net income per common
share - basic and diluted $ .11 $ .07 $ .27 $ .07
=========== =========== ============ ============
Dividends per common share $ .15 $ .15 $ .45 $ .45
=========== =========== ============ ============
Average number of common
shares outstanding - basic
and diluted .............. 11,290,979 11,259,339 11,281,968 11,352,828
=========== =========== ============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net income ................. $ 1,204,216 $ 792,658 $ 3,017,234 $ 842,234
----------- ----------- ----------- -----------
OTHER COMPREHENSIVE INCOME:
Unrealized holding
gains (losses) arising
during the period,
before deferred income
tax expense (benefit) .. 4,639,391 (5,582,204) 7,427,043 (12,836,451)
Deferred income tax
expense (benefit) ...... 1,180,658 (1,168,027) 1,292,604 (3,634,473)
----------- ----------- ----------- -----------
3,458,733 (4,414,177) 6,134,439 (9,201,978)
----------- ----------- ----------- -----------
Reclassification
adjustment for gains
included in net
income, before income
tax expense ............ (574,984) (1,305,677) (904,237) (1,551,844)
Income tax expense ....... 195,495 443,930 307,441 527,627
----------- ----------- ----------- -----------
(379,489) (861,747) (596,796) (1,024,217)
----------- ----------- ----------- -----------
Other comprehensive
income (loss) .... 3,079,244 (5,275,924) 5,537,643 (10,226,195)
----------- ----------- ----------- -----------
Total comprehensive
income (loss) .... $ 4,283,460 $(4,483,266)$ 8,554,877 $(9,383,961)
=========== =========== =========== ===========
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 30,
--------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................... $ 3,017,234 $ 842,234
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Losses and settlement expenses ............ 8,633,767 10,764,945
Unearned premiums ......................... 13,450,936 9,436,164
Other policyholders' funds ................ (333,774) 69,081
Deferred policy acquisition costs ......... (2,962,913) (2,259,428)
Indebtedness of related party ............. (5,301,811) 730,765
Accrued investment income ................. 617,507 (36,864)
Accrued income taxes:
Current ................................. 695,750 2,006,000
Deferred ................................ (561,304) (1,961,227)
Realized investment gains ................. (904,237) (1,559,775)
Postretirement benefits ................... 690,678 566,795
Reinsurance receivables ................... (1,676,494) (1,045,812)
Prepaid reinsurance premiums .............. (1,171,964) (681,938)
Amortization of deferred income ........... (63,542) (93,217)
Other, net ................................ 1,778,802 (4,219,194)
------------ ------------
12,891,401 11,716,295
------------ ------------
Net cash provided by
operating activities .................. $ 15,908,635 $ 12,558,529
------------ ------------
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Nine months ended
September 30,
--------------------------
2000 1999
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity securities
held-to-maturity ............................ $ - $(13,459,276)
Maturities of fixed maturity securities
held-to-maturity ............................ 8,442,086 34,723,949
Purchases of fixed maturity securities
available-for-sale .......................... (39,542,271) (100,878,679)
Disposals of fixed maturity securities
available-for-sale .......................... 16,882,174 79,616,230
Purchases of equity securities
available-for-sale .......................... (16,781,588) (17,742,273)
Disposals of equity securities
available-for-sale .......................... 17,150,692 17,852,208
Net sales (purchases) of short-term investments 3,716,072 (5,086,957)
------------ ------------
Net cash used in investing activities ....... (10,132,835) (4,974,798)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ...................... 234,572 248,129
Repurchase of common stock .................... - (2,998,677)
Dividends paid to stockholders ................ (5,077,358) (5,103,276)
------------ ------------
Net cash used in financing activities ..... (4,842,786) (7,853,824)
------------ ------------
NET INCREASE (DECREASE) IN CASH ................. 933,014 (270,093)
Cash at beginning of year ....................... 1,508,678 2,133,056
------------ ------------
Cash at end of quarter .......................... $ 2,441,692 $ 1,862,963
============ ============
Income taxes recovered .......................... $ (13,122) $ (2,877,492)
Interest paid ................................... $ 12,587 $ 107,895
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
Note 1
------
The results of operations for the interim periods reported are not necessarily
indicative of the results to be expected for the year. The information
reflects all adjustments that are, in the opinion of management, necessary for
a fair statement of the results for the interim periods.
Certain amounts previously reported in prior years' consolidated financial
statements have been reclassified to conform to current year presentation.
In reading these financial statements, reference should be made to the
Company's 1999 Form 10-K or the 1999 Annual Report to Shareholders for more
detailed footnote information.
Note 2
------
The Company participates in a securities lending program whereby certain fixed
maturity securities from the investment portfolio are loaned to other
institutions for short periods of time. The Company receives a fee for each
security loaned out under this program and requires initial collateral,
primarily cash, equal to 102 percent of the market value of the loaned
securities. This collateral is recorded as an asset, along with a
corresponding liability, on the Company's balance sheet.
Note 3
------
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of Effective Date of
FASB Statement No. 133", which defers the effective date of SFAS 133 until
fiscal years beginning after June 15, 2000. In June 2000, the FASB issued
SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133". SFAS 138 addresses a
limited number of Statement 133 implementation issues, and is effective for
fiscal years beginning after June 15, 2000. Currently, the Company's
investment strategy does not include investments in derivative instruments or
hedging activities. Adoption of these statements is not expected to have any
effect on the operating results of the Company.
In September 2000, the FASB issued SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement of FASB Statement No. 125". SFAS 140 is effective for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after March 31, 2001 and for recognition and reclassification of collateral
and disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. Adoption of this statement is
not expected to have any effect on the operating results 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 76 percent-owned subsidiary of
Employers Mutual Casualty Company (Employers Mutual), is an insurance holding
company with operations in property and casualty insurance and reinsurance.
Property and casualty insurance is the most significant segment, representing
81.5 percent of consolidated premiums earned. 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 inter-company balances with Employers Mutual, which are settled
on a quarterly basis. The investment and income tax activities 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.
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
$1,500,000 per event. The reinsurance subsidiary does not reinsure any of
Employers Mutual's direct insurance business, nor any "involuntary" facility
or pool business that Employers Mutual assumes pursuant to state law. In
addition, the reinsurance subsidiary is not liable for credit risk in
connection with the insolvency of any reinsurers of Employers Mutual.
Operations of the quota share agreement give rise to inter-company balances
with Employers Mutual, which are settled on a quarterly basis.
The results of operations for the interim periods reported are not
necessarily indicative of results to be expected for the year. The
information reflects all adjustments that are, in the opinion of management,
necessary for a fair statement of the results for the interim periods.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
----------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS
Operating results for the three months and nine months ended September
30, 2000 and 1999 are as follows:
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
($ in thousands) 2000 1999 2000 1999
-------- -------- -------- --------
Premiums earned ..................... $ 58,618 $ 52,596 $167,178 $153,296
Losses and settlement expenses ...... 46,972 44,081 135,845 126,844
Acquisition and other expenses ...... 18,044 16,863 50,753 49,806
-------- -------- -------- --------
Underwriting loss ................... (6,398) (8,348) (19,420) (23,354)
Net investment income ............... 7,328 6,669 21,508 19,031
Other (loss) income ................. (76) 451 147 783
-------- -------- -------- --------
Operating income (loss) before
income tax expense (benefit) ...... 854 (1,228) 2,235 (3,540)
Realized investment gains ........... 575 1,314 904 1,560
-------- -------- -------- --------
Income (loss) before income tax
expense (benefit) ................. 1,429 86 3,139 (1,980)
Income tax expense (benefit) ........ 225 (707) 122 (2,822)
-------- -------- -------- --------
Net income .......................... $ 1,204 $ 793 $ 3,017 $ 842
======== ======== ======== ========
Incurred losses and
settlement expenses:
Insured events of current year .. $ 48,053 $ 47,235 $140,080 $134,135
Decrease in provision for
insured events of prior years (1,081) (3,154) (4,235) (7,291)
-------- -------- -------- --------
Total losses and
settlement expenses ....... $ 46,972 $ 44,081 $135,845 $126,844
======== ======== ======== ========
Catastrophe and storm losses ........ $ 2,252 $ 2,117 $ 7,683 $ 8,211
======== ======== ======== ========
Operating results before income taxes improved for both the three months
and nine months ended September 30, 2000 as compared to the same periods in
1999, but continue to be constrained by inadequate premium rate levels that
have resulted from several years of intense rate competition within the
insurance industry. The improvement in the 2000 operating results is
attributed to a moderate improvement in overall premium rate adequacy, a
slight decline in loss frequency and a sizable increase in investment income.
Overall premium rate adequacy continued to show moderate improvement during
the third quarter of 2000 and this trend is expected to continue; however, it
will take time for premium rates to return to adequate levels due to the
competitive rate environment that persists in the insurance industry. The
improvement in premium rate adequacy will have a positive impact on future
operating results, but the unpredictable nature of catastrophe and storm
losses will remain. In the meantime, management continues to work toward
improving profitability through re-underwriting programs for both the existing
book of business and the agency force.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
----------------------------------------------
Premiums earned increased 11.4 percent for the three months and 9.1
percent for the nine months ended September 30, 2000 from the same periods in
1999. This growth in premium income, which is well above the industry average
of approximately 2.0 percent, is primarily associated with the property and
casualty insurance segment. Applications for insurance coverage have
increased significantly in the first nine months of 2000 as some of the
Company's competitors have withdrawn from certain markets or implemented
large, mandatory across-the-board rate increases regardless of loss
experience. The Company has been selective in the insurance risks it has
accepted and has been able to price both new and renewal business at more
adequate levels. The combination of these factors has contributed to the
strong growth rate.
Losses and settlement expenses increased 6.6 percent for the three months
and 7.1 percent for the nine months ended September 30, 2000 from the same
periods in 1999. Overall loss frequency has declined in the property and
casualty insurance segment during the first nine months of 2000, but this
improvement has been partially offset by increased loss experience in the
reinsurance segment. Active storm patterns have kept catastrophe and storm
losses at an elevated level, compounding the impact of inadequate premium
rates. The benefit provided by the development of prior years' reserves
declined for both the three months and nine months ended September 30, 2000,
but remained positive. The Company has historically experienced favorable
development in its reserves and reserving practices have not been changed;
however, the amount of development experienced will fluctuate from quarter to
quarter and from year to year as individual claims are settled.
Acquisition and other expenses increased 7.0 percent for the three months
and 1.9 percent for the nine months ended September 30, 2000 from the same
periods in 1999. These increases, which are less than the increases in
premium income noted above, reflect a decline in profit sharing expenses due
to the recent deterioration in the profitability of the underlying insurance
policies. The increase for the first nine months of 2000 was further limited
by $839,000 of commission income recorded by the reinsurance subsidiary during
the second quarter of 2000 and a modest increase in the estimate of deferrable
acquisition expenses recorded by the property and casualty insurance segment
during the first half of 2000.
Net investment income increased 9.9 percent for the three months and 13.0
percent for the nine months ended September 30, 2000 from the same periods in
1999. These increases reflect the combination of a higher average invested
balance in fixed-maturity securities and an increase in the average rate of
return earned on the fixed-maturity portfolio. During 2000 and 1999 the
Company sold approximately $14,000,000 and $55,000,000, respectively, of tax-
exempt securities and reinvested the proceeds into taxable securities in order
to achieve a better rate of return after taxes.
The Company reported income tax expense for both the three months and
nine months ended September 30, 2000 compared to an income tax benefit for the
same periods in 1999. This change in tax status is primarily due to the
Company's improved operating results, but also reflects the change in asset
allocation from tax-exempt securities to taxable securities noted above. Also
contributing to the increase in income tax expense for the nine months ended
September 30, 2000 is $176,000 of income tax expense generated by a required
change in the tax method used to recognize installment premiums.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
----------------------------------------------
SEGMENT RESULTS
Property and Casualty Insurance
Operating results for the three months and nine months ended September
30, 2000 and 1999 are as follows:
Three months ended Nine months ended
September 30, September 30,
------------------------------------
($ in thousands) 2000 1999 2000 1999
-------- -------- -------- --------
Premiums earned ..................... $ 47,112 $ 42,628 $136,179 $124,044
Losses and settlement expenses ...... 37,124 35,625 108,935 104,214
Acquisition and other expenses ...... 14,050 13,775 41,601 40,413
-------- -------- -------- --------
Underwriting loss ................... (4,062) (6,772) (14,357) (20,583)
Net investment income ............... 5,290 4,711 15,354 13,425
Other (loss) income ................. (24) 491 389 1,013
-------- -------- -------- --------
Operating income (loss)
before income taxes ............... $ 1,204 $ (1,570) $ 1,386 $ (6,145)
======== ======== ======== ========
Incurred losses and
settlement expenses:
Insured events of current year .. $ 37,203 $ 38,883 $114,671 $112,308
Decrease in provision for
insured events of prior years.. (79) (3,258) (5,736) (8,094)
-------- -------- -------- --------
Total losses and
settlement expenses ....... $ 37,124 $ 35,625 $108,935 $104,214
======== ======== ======== ========
Catastrophe and storm losses ........ $ 2,233 $ 1,969 $ 7,062 $ 7,060
======== ======== ======== ========
Premiums earned increased 10.5 percent for the three months and 9.8
percent for the nine months ended September 30, 2000 from the same periods in
1999. These increases reflect an increase in policy count and exposure base
in the commercial lines of business, as well as rate increases in both the
commercial and personal lines of business. Overall premium rate adequacy
continued to improve during the third quarter of 2000 as the Company
implemented rate increases in both the personal and commercial lines of
business. Management expects premium rate adequacy to improve further during
the remainder of 2000 as the rate increases implemented in 1999 and 2000
become more fully recognized.
Losses and settlement expenses increased 4.2 percent for the three months
and 4.5 percent for the nine months ended September 30, 2000 from the same
periods in 1999. These increases, which are less than the increases in
premium income noted above, reflect a decline in overall loss frequency from
the elevated levels experienced during 1999. Catastrophe and storm losses
continue to have a significant impact on operating results due to the
persistence of active storm patterns.
Acquisition and other expenses increased 2.0 percent for the three months
and 2.9 percent for the nine months ended September 30, 2000 from the same
periods in 1999. Profit sharing expenses, which take the form of policyholder
dividends and contingent commissions, have declined as a result of the recent
deterioration in the profitability of the underlying insurance policies. As a
result, acquisition and other expenses have not increased at the same pace as
premium income. Results for the first nine months of 2000 also reflect a
moderate increase in the estimate of deferrable acquisition expenses.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
----------------------------------------------
Underwriting results for the three months and nine months ended September
30, 2000 improved from the same periods in 1999, but continue to be
constrained by the competitive rate environment of the insurance industry.
Premium rate levels are showing improvement, but this improvement has been
moderate and it will take time for rates to return to adequate levels.
Underwriting results are expected to improve gradually, but steadily, as the
Company realizes the positive impact of various initiatives implemented during
the past couple of years and as additional rate increases are implemented.
The Company continues to work toward improving profitability through re-
underwriting programs for both the existing book of business and the agency
force.
Reinsurance
Operating results for the three months and nine months ended September
30, 2000 and 1999 are as follows:
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
($ in thousands) 2000 1999 2000 1999
-------- -------- -------- --------
Premiums earned ..................... $ 11,506 $ 9,968 $ 30,999 $ 29,252
Losses and settlement expenses ...... 9,848 8,456 26,910 22,630
Acquisition and other expenses ...... 3,994 3,088 9,152 9,393
-------- -------- -------- --------
Underwriting loss ................... (2,336) (1,576) (5,063) (2,771)
Net investment income ............... 1,949 1,847 5,895 5,302
Other income ........................ 19 28 64 93
-------- -------- -------- --------
Operating (loss) income before
income taxes ...................... $ (368)$ 299 $ 896 $ 2,624
======== ======== ======== ========
Incurred losses and
settlement expenses:
Insured events of current year .. $ 10,850 $ 8,352 $ 25,409 $ 21,827
(Decrease) increase in
provision for insured events
of prior years ................ (1,002) 104 1,501 803
-------- -------- -------- --------
Total losses and
settlement expenses ....... $ 9,848 $ 8,456 $ 26,910 $ 22,630
======== ======== ======== ========
Catastrophe losses .................. $ 19 $ 148 $ 621 $ 1,151
======== ======== ======== ========
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
----------------------------------------------
Premiums earned increased 15.4 percent for the three months and 6.0
percent for the nine months ended September 30, 2000 from the same periods in
1999. The increase for the three months ended September 30, 2000 includes
approximately $750,000 associated with a change in the estimate of "earned but
not reported" premium income from foreign reinsurance contracts. Due to the
time lag in reporting of foreign reinsurance contracts, estimated amounts of
premium income and related losses and expenses are booked on quarterly basis.
These estimates are adjusted when the reported amounts deviate from the
estimates. The remainder of the increase for 2000 is attributed to the
addition of several new contracts and growth on existing contracts. The
increase for the first nine months of 2000 is distorted by the delayed
reporting of several foreign reinsurance contracts written in 1998 that were
included in the results of the first quarter of 1999. The majority of the
reinsurance subsidiary's reinsurance contracts renew on January 1 and premium
rates for those renewals were relatively flat. However, industry premium rates
have improved during the first nine months of 2000 and premium rate increases
have been implemented on the reinsurance contracts that renewed during the
second and third quarters. Despite these rate increases, which have varied
from very modest to significant depending on prior loss experience, overall
premium rate adequacy is not expected to improve significantly during 2000.
This is due to the fact that a large portion of the assumed book of business
will not receive rate increases in 2000 and those implemented during 2000 will
not be fully recognized.
Losses and settlement expenses increased 16.5 percent for the three
months and 18.9 percent for the nine months ended September 30, 2000 from the
same periods in 1999. These increases reflect the increase in production
noted above. Results for 2000 have been negatively impacted by an unusually
large increase in loss severity, particularly on aggregate treaties and
property contracts. Additional losses from 1999 storms and increased loss
activity in the workers' compensation line of business also contributed to the
large increases. Results for the first nine months of 2000 have also been
negatively impacted by adverse development on prior years' reserves, including
$800,000 related to December 1999 storms in Europe and $1,600,000 related to
other 1999 property losses.
Acquisition and other expenses increased 29.3 percent for the three
months and decreased 2.6 percent for the nine months ended September 30, 2000
from the same periods in 1999. The increase for the three months ended
September 30, 2000 reflects the large increase in premium income and an
increase in the reserve for contingent commissions. The decrease for the
first nine months of 2000 is attributed to $839,000 of commission income
recorded during the second quarter of 2000. This commission income includes
$420,000 of profit share commission associated with an outside reinsurance
contract that the reinsurance subsidiary pays for to protect Employers Mutual
from catastrophic losses on the assumed book of business and $419,000 of
contingent commission that was returned to a reinsurance pool by a ceding
company client because of loss experience on a treaty.
The underwriting results of the reinsurance subsidiary continue to be
negatively impacted by reduced premium rate levels and increased loss
severity. Industry premium rate levels have improved during the first nine
months of 2000; however, the excess capacity that led to the reduction in
premium rate levels continues to exist. Underwriting results of the
reinsurance subsidiary are not expected to improve significantly during the
last three months of 2000 since the majority of the contracts were renewed in
January at flat rates, but underwriting results for 2001 should benefit from
the improving rate environment. Employers Mutual will continue to work toward
improving profitability on the assumed book of business by accepting a larger
share of coverage on desirable programs, strengthening its relationships with
reinsurance intermediaries and monitoring premium growth.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
----------------------------------------------
Parent Company
Operating results before income taxes totaled $18,000 and ($47,000) for
the three months and nine months ended September 30, 2000 compared to $43,000
and ($19,000) for the same periods in 1999. The decline in operating results
is primarily due to a reduction in investment income that has resulted from a
decline in the invested asset balance.
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
maturity dates that approximate the anticipated liabilities of the insurance
issued.
The Company considers itself to be a long-term investor and generally
purchases fixed maturity investments with the intent to hold them to maturity.
The Company has previously classified a portion of its investments in fixed
maturity securities, primarily bonds issued by municipalities and
corporations, as available-for-sale securities to provide flexibility in the
management of the portfolio. Beginning in the third quarter of 1999, all
newly acquired securities are being classified as available-for-sale to
provide increased management flexibility. Unrealized holding losses on fixed
maturity securities available-for-sale totaled $3,916,000 at September 30,
2000 compared to $7,539,000 at December 31, 1999. The decline in the market
value of these investments is primarily due to an increase in interest rates.
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. At December 31, 1999 the Company established a valuation allowance
of $1,233,000 for the deferred tax asset associated with the unrealized
holding losses on the Company's available-for-sale securities. This valuation
allowance was established due to uncertainties concerning the future
realization of the tax benefit. At September 30, 2000 the Company had a net
unrealized holding gain on its available-for-sale securities, a related
deferred tax liability, and no valuation allowance.
The majority of the Company's assets are invested in fixed maturity
securities. 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.
During the third quarter of 1999, the Company began participating in a
securities lending program whereby certain fixed maturity securities from the
investment portfolio are loaned to other institutions for short periods of
time. The Company receives a fee for each security loaned out under this
program and requires initial collateral, primarily cash, equal to 102 percent
of the market value of the loaned securities. This collateral is recorded as
an asset, along with a corresponding liability, on the Company's balance sheet.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
----------------------------------------------
During 1999 and 2000 the Company disposed of approximately $55,000,000
and $14,000,000, respectively, of investments in tax-exempt fixed maturity
securities and reinvested the proceeds in taxable fixed maturity securities.
This change in asset allocation is not expected to have a material impact on
the operations of the Company, as forced liquidations of investments are not
anticipated.
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 nine months of 2000, the Company generated positive cash
flows from operations of $15,908,635 compared to $12,558,529 for the same
period of 1999.
During the second quarter of 1999 the Company completed a $3,000,000
stock repurchase plan that was approved by its Board of Directors on November
20, 1998. A total of 254,950 shares of common stock were repurchased under
this plan at an average cost of $11.76 per share.
IMPACT OF YEAR 2000 REMEDIATION ON OPERATIONS
The Year 2000 issue presented both operational and underwriting risks to
the Company. Operational risks included the failure of computer systems and
equipment 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 included, but were not limited to, potential
claims by the Company's policyholders to recover losses due to interruption of
business or liability to third parties that resulted from the failure of
computer systems.
To date, the Company has not encountered any problems as a result of the
Year 2000 date rollover. All of the Company's systems are functioning
normally. In addition, the Company has not encountered any problems with any
vendor-supplied hardware or software. The Company continues to monitor the
situation closely for any potential Year 2000 issues.
The Company distributed a letter during 1999 to all of its commercial
policyholders notifying them that their policies did not cover Year 2000
losses, but that coverage was available through an endorsement to the policy.
A questionnaire was developed and provided to them to aid in the assessment of
potential risks associated with Year 2000 noncompliance. Very few
policyholders elected to purchase the additional coverage provided by this
endorsement. The parties to the pooling agreement purchased reinsurance
protection for potential third party liability claims against policyholders
arising from Year 2000 issues. To date, no claims have been reported relating
to Year 2000 losses.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
----------------------------------------------
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities", effective
for fiscal years beginning after June 15, 1999. In June 1999, the FASB issued
SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of Effective Date of FASB Statement No. 133", which defers the
effective date of SFAS 133 until fiscal years beginning after June 15, 2000.
In June 2000, the FASB issued SFAS 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of FASB statement
No. 133". SFAS 138 addresses a limited number of Statement 133 implementation
issues, and is effective for fiscal years beginning after June 15, 2000.
Currently, the Company's investment strategy does not include investments in
derivative instruments or hedging activities. Accordingly, adoption of these
statements is not expected to have any effect on the operating results of the
Company.
In September 2000, the FASB issued SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement of FASB Statement No. 125". SFAS 140 is effective for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after March 31, 2001 and for recognition and reclassification of collateral
and disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. Adoption of this statement is
not expected to have any effect on the operating results of the Company.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides issuers the
opportunity to make cautionary statements regarding forward-looking
statements. Accordingly, any forward-looking statement contained in this
report is based on management's current expectations and actual results of the
Company may differ materially from such expectations. The risks and
uncertainties that may affect the actual results of the Company include but
are not limited to the following: catastrophic events and the occurrence of
significant severe weather conditions; state and federal legislation and
regulations; changes in the demand for, pricing of, or supply of insurance or
reinsurance; changes in interest rates and the performance of financial
markets; the adequacy of loss and settlement expense reserves, including
asbestos and environmental claims; and other risks and uncertainties inherent
in the Company's business.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------- ----------------------------------------------------------
The main objectives in managing the investment portfolios of the Company
are to maximize after-tax investment income and total investment return while
minimizing credit risks, in order to provide maximum support for the
underwriting operations. Investment strategies are developed based upon many
factors including underwriting results and the Company's resulting tax
position, regulatory requirements, fluctuations in interest rates and
consideration of other market risks. Investment decisions are centrally
managed by investment professionals and are supervised by an investment
committee composed of representatives from each of the Company's subsidiary's
board of directors.
Market risk represents the potential for loss due to adverse changes in
the fair value of financial instruments. The market risks of the financial
instruments of the Company relate to the investment portfolio, which exposes
the Company to interest rate and equity price risk, and to a lesser extent
credit quality and prepayment risk. Monitoring systems and analytical tools
are in place to assess each of these elements of market risk.
Interest rate risk includes the price sensitivity of a fixed maturity
security to changes in interest rates and the affect on future earnings from
short-term investments and maturing long-term investments, given a change in
interest rates. The following analysis illustrates the sensitivity of the
Company's financial instruments to selected changes in market rates and
prices. A hypothetical one percent increase in interest rates as of September
30, 2000 would result in a corresponding pre-tax decrease in the fair value of
the fixed maturity portfolios of approximately $23,407,000 or 5.5 percent. In
addition, a hypothetical one percent decrease in interest rates at September
30, 2000 would result in a corresponding decrease in pre-tax income over the
next twelve months of approximately $339,000, assuming the current maturity
and prepayment patterns. The Company monitors interest rate risk through the
analysis of interest rate simulations, and adjusts the average duration of its
fixed maturity portfolio by investing in either longer or shorter term
instruments given the results of interest rate simulations and judgments of
cash flow needs. The effective duration of the fixed maturity portfolio at
September 30, 2000 was 5.31 years.
The valuation of the Company's marketable equity portfolios is subject to
equity price risk. In general, equities have more year-to-year price
variability than bonds. However, returns from equity securities over longer
time frames have been consistently higher. The Company invests in a
diversified portfolio of readily marketable equity securities. A hypothetical
10 percent decrease in the S&P 500 as of September 30, 2000 would result in a
corresponding pre-tax decrease in the fair value of the Company's equity
portfolio of approximately $3,116,000.
The Company invests in high quality fixed maturity securities, thus
minimizing credit quality risk. At September 30, 2000 the portfolio of long-
term fixed maturity securities consists of 12.8 percent U.S. Treasury, 12.9
percent government agency, 13.0 percent mortgage-backed, 19.5 percent
municipal, and 41.8 percent corporate securities. At December 31, 1999 the
portfolio of long-term fixed maturity securities consisted of 15.0 percent
U.S. Treasury, 13.9 percent government agency, 15.2 percent mortgage-backed,
24.6 percent municipal, and 31.3 percent corporate securities. No securities
are below investment grade.
<PAGE>
EMC INSURANCE GROUP INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, CONTINUED
------- ---------------------------------------------------------------------
Prepayment risk refers to the changes in prepayment patterns that can
either shorten or lengthen the expected timing of the principal repayments and
thus the average life and the effective yield of a security. Such risk exists
primarily within the portfolio of mortgage-backed securities. The prepayment
risk analysis is monitored regularly through the analysis of interest rate
simulations. At September 30, 2000 the effective duration of the mortgage-
backed securities is 3.9 years with an average life and current yield of 7.0
years and 7.6 percent, respectively. At December 31, 1999 the effective
duration of the mortgage-backed securities was 4.4 years with an average life
and current yield of 7.5 years and 7.7 percent, respectively.
PART II. OTHER INFORMATION
-------- -----------------
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, 2000.
<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
Vice President and
Chief Financial Officer
Date: November 14, 2000
