EX-99 2 exhibit99earnings8k2016930.htm EXHIBIT 99 Exhibit
EXHIBIT 99

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EMC Insurance Group Inc. Reports 2016
Third Quarter and Nine Month Results

Third Quarter Ended September 30, 2016
Net Income Per Share - $0.20
Operating Income Per Share1 - $0.23
Net Realized Investment Losses Per Share - $0.03
Catastrophe and Storm Losses Per Share - $0.53
GAAP Combined Ratio - 102.9 percent

Nine Months Ended September 30, 2016
Net Income Per Share - $1.19
Operating Income Per Share1 - $1.21
Net Realized Investment Losses Per Share - $0.02
Catastrophe and Storm Losses Per Share - $1.41
GAAP Combined Ratio - 99.8 percent


DES MOINES, Iowa (November 4, 2016) - EMC Insurance Group Inc. (NASDAQ:EMCI) (the “Company”), today reported net income of $4.1 million ($0.20 per share) for the third quarter ended September 30, 2016, compared to net income of $11.2 million ($0.54 per share) for the third quarter of 2015. For the nine months ended September 30, 2016, the Company reported net income of $24.9 million ($1.19 per share), compared to $40.3 million ($1.96 per share) for the same period in 2015.

Operating income1, which excludes realized investment gains and losses from net income, totaled $4.9 million ($0.23 per share) for the third quarter of 2016, compared to $6.3 million ($0.31 per share) for the third quarter of 2015. For the nine months ended September 30, 2016, the Company reported operating income of $25.3 million ($1.21 per share), compared to $32.8 million ($1.59 per share) for the same period in 2015.

The Company’s GAAP combined ratio was 102.9 percent in the third quarter of 2016, compared to 101.8 percent in the third quarter of 2015. For the first nine months of 2016, the Company’s GAAP combined ratio was 99.8 percent, compared to 97.0 percent in 2015.

“Commercial auto and personal lines continue to depress results,” stated President and Chief Executive Officer Bruce G. Kelley. “We expect to see gradual improvement in the performance of these lines during 2017 from our comprehensive Accelerate Commercial Auto Profitability project and our nearly complete personal lines initiative.

“The new intercompany reinsurance program in place for the property and casualty insurance segment is working as planned. Recoveries under the treaty covering the first half of the year reduced the volatility of our quarterly results caused by catastrophe and storm losses. While no recoveries have been made under the treaty covering the second half of the year, we are near its retention amount and therefore are expecting a minimal amount of catastrophe and storm losses in the fourth quarter,” concluded Kelley.



Premiums earned increased 4.4 percent and 2.9 percent for the third quarter and first nine months of 2016. In the property and casualty insurance segment, premiums earned increased 2.3 percent and 1.6 percent for the third quarter and first nine months of 2016. The new semi-annual aggregate catastrophe excess of loss intercompany reinsurance program between the Company’s three property and casualty insurance subsidiaries and Employers Mutual Casualty Company (Employers Mutual), the Company’s parent organization, reduced premiums earned by $765,000 and $7.1 million for the third quarter and first nine months of 2016. Excluding this cost, premiums earned increased 3.0 percent and 3.7 percent. The majority of these increases are attributed to growth in insured exposures, an increase in new business, and small rate level increases on renewal business.

In the reinsurance segment, premiums earned increased 11.8 percent and 7.2 percent for the third quarter and first nine months of 2016. These increases reflect reductions in the total cost of the revised excess of loss reinsurance program with Employers Mutual totaling $246,000 and $2.4 million for the third quarter and first nine months of 2016. In 2016, the total cost of the reinsurance program includes the premiums paid to Employers Mutual, as well as the cost of Industry Loss Warranties (ILWs) that have been purchased from external parties to provide increased protection in peak exposure territories. During 2015, the premium paid to Employers Mutual (8 percent of total assumed reinsurance premiums written) included the cost of ILWs purchased by Employers Mutual for its benefit. Excluding the reduction in the cost of the revised reinsurance program, premiums earned increased approximately 11.0 percent and 4.7 percent for the third quarter and first nine months of 2016. The increase for the third quarter was driven by the addition of some new accounts and growth in the pro rata line of business, partially offset by a decline in the marine business attributed to the offshore energy and liability proportional account.

Catastrophe and storm losses totaled $17.1 million ($0.53 per share after tax) in the third quarter of 2016, compared to $17.8 million ($0.56 per share after tax) in the third quarter of 2015. Catastrophe and storm losses increased $4.9 million in the property and casualty insurance segment, but declined $5.6 million in the reinsurance segment. The property and casualty insurance segment recovered an additional $3.5 million of catastrophe and storm losses from Employers Mutual during the third quarter under the January 1 through June 30 excess of loss reinsurance treaty, bringing the total recovery for first nine months of 2016 to $5.1 million. No recoveries were made under the July 1 through December 31 treaty; however, only $213,000 of retention remains under that treaty, meaning catastrophe and storm losses will be capped at $213,000 in the fourth quarter, unless the $12.0 million limit of protection is exceeded. No recoveries have been made under the reinsurance segment’s intercompany reinsurance program during the first nine months of 2016. Third quarter 2016 catastrophe and storm losses accounted for 11.1 percentage points of the combined ratio, which was lower than expected, and well below the Company’s most recent 10-year average of 14.3 percentage points for this period. Catastrophe and storm losses accounted for 12.2 percentage points of the combined ratio in the third quarter of 2015.

For the first nine months of 2016, catastrophe and storm losses totaled $45.5 million ($1.41 per share after tax), compared to $40.8 million ($1.29 per share after tax) in 2015. On a segment basis, catastrophe and storm losses amounted to $14.8 million ($0.46 per share after tax) and $34.8 million ($1.08 per share after tax) in the property and casualty insurance segment, and $2.3 million ($0.07 per share after tax) and $10.7 million ($0.33 per share after tax) in the reinsurance segment, for the three and nine months ended September 30, 2016, respectively.

During the third quarter of 2016, management implemented a new reserving methodology for the determination of direct bulk reserves in the property and casualty insurance segment. The new methodology, which is referred to as the accident year ultimate estimate approach, better conforms to industry practices and will provide increased transparency of the drivers of the property and casualty insurance segment's performance. Although the reserves carried at September 30, 2016 were calculated under the new reserving methodology, the explicit drivers of development on prior years' reserves for the three and nine months ended September 30, 2016 cannot be identified because the reserves carried at December 31, 2015 were calculated under the old reserving methodology, and the implicit accident year


ultimate assumptions underlying that methodology are not known. The explicit drivers of development on prior years' reserves will be identifiable beginning in the first quarter of 2017.

The implementation of the new reserving methodology did not have a material impact on total carried reserves for the property and casualty insurance segment at September 30, 2016; however, approximately $5.6 million of incurred but not reported (IBNR) loss reserves and settlement expense reserves were reallocated from prior accident years to the current accident year in multiple lines of business. This reduction in prior accident years' reserves is reported as favorable development; however, this development is "mechanical" in nature, and did not have any impact on earnings because the total amount of carried reserves did not change as a result of this reallocation.

During the third quarter of 2015, approximately $2.4 million of reserves on a two-year contract were reallocated from the current accident year to the prior accident year in the reinsurance segment. The increase in prior accident year reserves is reported as adverse development; however, this development is also “mechanical” in nature and did not have any impact on earnings.

The Company reported $13.2 million ($0.41 per share after tax) of favorable development on prior years’ reserves during the third quarter of 2016, compared to $2.2 million ($0.07 per share after tax) in the third quarter of 2015. For the first nine months of 2016, favorable development totaled $29.1 million ($0.90 per share after tax), compared to $20.0 million ($0.63 per share after tax) in 2015. Excluding the “mechanical” development amounts described above, the implied amounts of favorable development that had an impact on earnings would be approximately $7.6 million and $23.5 million for the third quarter and first nine months of 2016, compared to $4.6 million and $22.3 million for the same periods in 2015.

Under the previous reserving methodology employed through the second quarter of 2016, development amounts could vary significantly from quarter to quarter and year to year depending on a number of factors, including the number of claims settled and the settlement terms. With the conversion to the accident year ultimate estimate methodology as of the end of third quarter 2016, calendar year development on prior accident years is determined solely by changes in the prior accident years’ ultimate loss and settlement expense ratios. In transitioning to the new methodology, changes in the assumptions underlying the ultimate ratios previously established for accident years 2015 and prior are difficult to quantify as the implied ultimate ratios under the previous methodology were based on implicit, rather than explicit, actuarial assumptions. Therefore, comparison of 2016 third quarter and year-to-date development amounts to the 2015 development amounts provides little meaningful information, as the prior accident year reserve allocation method lacked explicit frequency and severity assumptions.

Large losses are defined as reported current accident year losses greater than $500,000 for the EMC Insurance Companies' pool, excluding catastrophe and storm losses. Under the property and casualty insurance segment's prior reserving methodology, large losses had a direct impact on earnings. Under the new reserving methodology, large losses are taken into consideration when establishing the current accident quarter/year ultimate estimates of losses, but there is no longer a direct relationship between large losses and earnings. As a result, it is no longer meaningful to report large losses separately. The amount of large losses previously reported for the first six months of 2016 has not been carried forward and disclosed for the nine months ended September 30, 2016, because it would not be comparable to the amount reported for the first nine months of 2015.

Net investment income increased 1.5 percent and 5.7 percent to $11.5 million and $35.9 million for the third quarter and first nine months of 2016, from $11.3 million and $33.9 million for the same periods in 2015. These increases are primarily attributed to higher amounts of dividend income, and an increase in interest income resulting from a higher average invested balance in fixed maturity securities.

Net realized investment losses totaled $1.2 million ($0.03 per share after tax) and $643,000 ($0.02 per share after tax) for the third quarter and first nine months of 2016, compared to net realized investment


gains of $7.5 million ($0.23 per share after tax) and $11.6 million ($0.37 per share after tax) for the same periods in 2015. Included in net realized investment losses reported for the third quarter and first nine months of 2016 are $1.9 million and $5.3 million, respectively, of net realized investment losses attributed to declines in the carrying value of a limited partnership that helps to protect the Company from a sudden and significant decline in the value of its equity portfolio. Included in the net realized investment gains reported for the third quarter and first nine months of 2015 are net realized investment gains of $7.2 million and $3.8 million, respectively, attributed to an increase in the carrying value of this limited partnership that resulted from the sharp decline in the equity markets that occurred in August of 2015.

At September 30, 2016, consolidated assets totaled $1.6 billion, including $1.5 billion in the investment portfolio, and stockholders’ equity totaled $562.4 million, an increase of 7.1 percent from December 31, 2015. Book value of the Company’s stock increased 5.6 percent to $26.67 per share from $25.26 per share at December 31, 2015, but declined 0.5 percent from June 30, 2016, which reflects a decline in unrealized gains on the investment portfolio. Book value excluding accumulated other comprehensive income increased 2.9 percent to $23.09 per share from $22.45 per share at December 31, 2015, and was relatively flat compared to June 30, 2016.

Based on results for the first nine months of 2016 and projections for the remainder of the year, management is reaffirming its 2016 operating income1 guidance range of $1.55 to $1.75 per share. The guidance is based on a projected GAAP combined ratio of 99.6 percent for the year and investment income growth in the low- to mid-single digits. The load for catastrophe and storm losses has been reduced to 8.7 points from the previous expectation of 10.2 points; however, the 1.5 point decline in the loss ratio attributable to this reduction was offset by an increase in the core loss ratio.

The Company will hold an earnings teleconference call at noon Eastern time on Friday, November 4, 2016 to allow securities analysts, stockholders and other interested parties the opportunity to hear management discuss the Company’s results for the third quarter and nine months ended September 30, 2016, as well as its expectations for the remainder of 2016. Dial-in information for the call is toll-free 1-866-652-5200 (International: 1-412-317-6060).

Members of the news media, investors and the general public are invited to access a live webcast of the conference call via the Company’s investor relations page at www.emcins.com/ir. The webcast will be archived and available for replay for approximately 90 days following the earnings call. A transcript of the teleconference will be available on the Company’s website shortly after the completion of the teleconference.

About EMCI:
EMC Insurance Group Inc. is a publicly held insurance holding company with operations in property and casualty insurance and reinsurance, which was formed in 1974 and became publicly held in 1982. The Company’s common stock trades on the Global Select Market tier of the NASDAQ Stock Market under the symbol EMCI. Additional information regarding EMC Insurance Group Inc. may be found at www.emcins.com/ir. EMCI’s parent company is Employers Mutual. EMCI and Employers Mutual, together with their subsidiary and affiliated companies, conduct operations under the trade name EMC Insurance Companies.

Cautionary Note 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 beliefs, assumptions and expectations of the Company’s future performance, taking into account all information currently available to management. These beliefs, assumptions and expectations can change as the result of many possible events or factors, not all of which are known to management. If a change occurs, the Company’s business, financial condition, liquidity, results of operations, plans and objectives may vary materially from those


expressed in the forward-looking statements.

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;
•
the adequacy of loss and settlement expense reserves;
•
state and federal legislation and regulations;
•
changes in the property and casualty insurance industry, interest rates or the performance of financial markets and the general economy;
•
rating agency actions;
•
“other-than-temporary” investment impairment losses; and
•
other risks and uncertainties inherent to the Company’s business, including those discussed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K.

Management intends to identify forward-looking statements when using the words “believe,” “expect,” “anticipate,” “estimate,” “project,” or similar expressions. Undue reliance should not be placed on these forward-looking statements. The Company disclaims any obligation to update such statements or to announce publicly the results of any revisions that it may make to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures:
The Company prepares its public financial statements in conformity with accounting principles generally accepted in the Unites States of America (GAAP). Management uses certain non-GAAP financial measures for goal setting, determining employee and senior management awards and compensation, and evaluating performance.

1Operating income: Operating income is calculated by excluding net realized investment gains/losses (defined as realized investment gains and losses after applicable federal and state income taxes) from net income. While realized investment gains (or losses) are integral to the Company’s insurance operations over the long term, the decision to realize investment gains or losses in any particular period is subject to changing market conditions and management’s discretion, and is independent of the Company’s insurance operations. The Company’s calculation of operating income may differ from similar measures used by other companies, so investors should exercise caution when comparing the Company’s measure of operating income to the measure of other companies. Management’s projected operating income guidance is also considered a non-GAAP financial measure.

Management believes operating income is useful to investors because it illustrates the performance of the Company’s normal, ongoing operations, which is important in understanding and evaluating the Company’s financial condition and results of operations. While this measure is consistent with measures utilized by investors and analysts to evaluate performance, it is not intended as a substitute for the GAAP financial measure of net income. Therefore, the Company has provided the following reconciliations of the non-GAAP financial measure of operating income to the GAAP financial measure of net income.



RECONCILIATION OF OPERATING INCOME TO NET INCOME
($ in thousands)
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Operating income
 
$
4,904

 
$
6,315

 
$
25,329

 
$
32,756

Net realized investment gains (losses)(after tax)
 
(775
)
 
4,874

 
(418
)
 
7,511

Net income
 
$
4,129

 
$
11,189

 
$
24,911

 
$
40,267


RECONCILIATION OF OPERATING INCOME PER SHARE TO NET INCOME PER SHARE
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Operating income
 
$
0.23

 
$
0.31

 
$
1.21

 
$
1.59

Net realized investment gains (losses)(after tax)
 
(0.03
)
 
0.23

 
(0.02
)
 
0.37

Net income
 
$
0.20

 
$
0.54

 
$
1.19

 
$
1.96


Statutory data is prepared in accordance with statutory accounting principles as defined by the National Association of Insurance Commissioners’ (NAIC) Accounting Practices and Procedures Manual. Statutory data is publicly available, and various organizations use it to calculate aggregate industry data, study industry trends and compare insurance companies.

2Premiums written: Under statutory accounting principles, property/casualty premiums written is the cost of insurance coverage, and refers to premiums for all policies sold during a specified reporting period. Management analyzes trends in premiums written to assess business efforts. Premiums earned, used in both statutory and GAAP accounting, is the recognition of the portion of premiums written directly related to the expired portion of an insurance policy for a given reporting period. The unexpired portion of premiums written is referred to as unearned premiums, and represents the portion of premiums written that would be returned to a policyholder upon cancellation of a policy.




RECONCILIATION OF PREMIUMS WRITTEN TO PREMIUMS EARNED
($ in thousands)
 
 
 
 
 
Three months ended September 30, 2016
Property and Casualty Insurance
 
Reinsurance
 
Consolidated
Premiums written
$
138,904

 
$
37,339

 
$
176,243

Change in unearned premiums
(22,532
)
 
(1,530
)
 
(24,062
)
Premiums earned
$
116,372

 
$
35,809

 
$
152,181

 
 
 
 
 
 
Three months ended September 30, 2015
Property and Casualty Insurance
 
Reinsurance
 
Consolidated
Premiums written
$
134,722

 
$
31,446

 
$
166,168

Change in unearned premiums
(20,969
)
 
589

 
(20,380
)
Premiums earned
$
113,753

 
$
32,035

 
$
145,788

 
 
 
 
 
 
Nine months ended September 30, 2016
Property and Casualty Insurance
 
Reinsurance
 
Consolidated
Premiums written
$
370,704

 
$
98,754

 
$
469,458

Change in unearned premiums
(32,115
)
 
4,021

 
(28,094
)
Premiums earned
$
338,589

 
$
102,775

 
$
441,364

 
 
 
 
 
 
Nine months ended September 30, 2015
Property and Casualty Insurance
 
Reinsurance
 
Consolidated
Premiums written
$
364,329

 
$
96,914

 
$
461,243

Change in unearned premiums
(31,117
)
 
(1,002
)
 
(32,119
)
Premiums earned
$
333,212

 
$
95,912

 
$
429,124

 
 
 
 
 
 

CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
 
 
 
 
 
 
($ in thousands, except share and per share amounts)
 
 
 
 
 
 
 
 
Quarter ended September 30, 2016
 
Property and Casualty Insurance
 
Reinsurance
 
Parent Company
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
Premiums earned
 
$
116,372

 
$
35,809

 
$
—

 
$
152,181

Investment income, net
 
8,185

 
3,285

 
4

 
11,474

Other income (loss)
 
172

 
(257
)
 
—

 
(85
)
 
 
124,729

 
38,837

 
4

 
163,570

Losses and expenses:
 
 
 
 
 
 
 
 
Losses and settlement expenses
 
81,643

 
26,530

 
—

 
108,173

Dividends to policyholders
 
3,944

 
—

 
—

 
3,944

Amortization of deferred policy acquisition costs
 
19,206

 
7,639

 
—

 
26,845

Other underwriting expenses
 
16,690

 
916

 
—

 
17,606

Interest expense
 
84

 
—

 
—

 
84

Other expenses
 
190

 
—

 
489

 
679

 
 
121,757

 
35,085

 
489

 
157,331

Operating income (loss) before income taxes
 
2,972

 
3,752

 
(485
)
 
6,239

Realized investment losses
 
(799
)
 
(393
)
 
—

 
(1,192
)
Income (loss) before income taxes
 
2,173

 
3,359

 
(485
)
 
5,047

Income tax expense (benefit):
 
 
 
 
 
 
 
 


Current
 
569

 
1,024

 
(145
)
 
1,448

Deferred
 
(264
)
 
(108
)
 
(158
)
 
(530
)
 
 
305

 
916

 
(303
)
 
918

Net income (loss)
 
$
1,868

 
$
2,443

 
$
(182
)
 
$
4,129

Average shares outstanding
 
 
 
 
 
 
 
21,060,665

Per Share Data:
 
 
 
 
 
 
 
 
Net income (loss) per share - basic and diluted
 
$
0.09

 
$
0.12

 
$
(0.01
)
 
$
0.20

Catastrophe and storm losses (after tax)
 
$
0.46

 
$
0.07

 
$
—

 
$
0.53

Large losses* (after tax)
 
N/A

 
N/A

 
N/A

 
N/A

Reported favorable development experienced on prior years' reserves (after tax)
 
$
0.39

 
$
0.02

 
$
—

 
$
0.41

Favorable development that had no impact on earnings (after tax)
 
(0.17
)
 
—

 
—

 
(0.17
)
Implied favorable development that had an impact on earnings (after tax)
 
$
0.22

 
$
0.02

 
$
—

 
$
0.24

Dividends per share
 
 
 
 
 
 
 
$
0.190

Other Information of Interest:
 
 
 
 
 
 
 
 
Premiums written2
 
$
138,904

 
$
37,339

 
$
—

 
$
176,243

Catastrophe and storm losses
 
$
14,787

 
$
2,266

 
$
—

 
$
17,053

Large losses*
 
N/A

 
N/A

 
N/A

 
N/A

Reported favorable development experienced on prior years' reserves
 
$
(12,442
)
 
$
(796
)
 
$
—

 
$
(13,238
)
Favorable development that had no impact on earnings
 
5,592

 
—

 
—

 
5,592

Implied favorable development that had an impact on earnings
 
$
(6,850
)
 
$
(796
)
 
$
—

 
$
(7,646
)
GAAP Ratios:
 
 
 
 
 
 
 
 
Loss and settlement expense ratio
 
70.2
%
 
74.1
%
 
—

 
71.1
%
Acquisition expense ratio
 
34.2
%
 
23.9
%
 
—

 
31.8
%
Combined ratio
 
104.4
%
 
98.0
%
 
—

 
102.9
%
 
 
 
 
 
 
 
 
 
*Large losses are defined as reported current accident year losses greater than $500 for the EMC Insurance Companies' pool, excluding catastrophe and storm losses. Under the property and casualty insurance segment's prior reserving methodology, large losses had a direct impact on earnings. Under the new reserving methodology, large losses are taken into consideration when establishing the current accident quarter/year ultimate estimates of losses, but there is no longer a direct relationship between large losses and earnings. As a result, it is no longer meaningful to report large losses separately.

 
 
 
 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
 
 
 
 
 
 
($ in thousands, except share and per share amounts)
 
 
 
 
 
 
 
 
Quarter ended September 30, 2015
 
Property and Casualty Insurance
 
Reinsurance
 
Parent Company
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
Premiums earned
 
$
113,753

 
$
32,035

 
$
—

 
$
145,788

Investment income, net
 
8,125

 
3,176

 
(2
)
 
11,299

Other income
 
210

 
309

 
—

 
519

 
 
122,088

 
35,520

 
(2
)
 
157,606

Losses and expenses:
 
 
 
 
 
 
 
 
Losses and settlement expenses
 
75,976

 
26,709

 
—

 
102,685

Dividends to policyholders
 
3,555

 
—

 
—

 
3,555

Amortization of deferred policy acquisition costs
 
18,736

 
7,403

 
—

 
26,139



Other underwriting expenses
 
15,587

 
458

 
—

 
16,045

Interest expense
 
84

 
—

 
—

 
84

Other expenses
 
196

 
—

 
479

 
675

 
 
114,134

 
34,570

 
479

 
149,183

Operating income (loss) before income taxes
 
7,954

 
950

 
(481
)
 
8,423

Realized investment gains
 
4,889

 
2,609

 
—

 
7,498

Income (loss) before income taxes
 
12,843

 
3,559

 
(481
)
 
15,921

Income tax expense (benefit):
 
 
 
 
 
 
 
 
Current
 
2,743

 
507

 
(169
)
 
3,081

Deferred
 
1,235

 
416

 
—

 
1,651

 
 
3,978

 
923

 
(169
)
 
4,732

Net income (loss)
 
$
8,865

 
$
2,636

 
$
(312
)
 
$
11,189

Average shares outstanding
 
 
 
 
 
 
 
20,684,890

Per Share Data:
 
 
 
 
 
 
 
 
Net income (loss) per share - basic and diluted
 
$
0.43

 
$
0.12

 
$
(0.01
)
 
$
0.54

Catastrophe and storm losses (after tax)
 
$
0.31

 
$
0.25

 
$
—

 
$
0.56

Large losses* (after tax)
 
$
0.32

 
$
—

 
$
—

 
$
0.32

Reported favorable (adverse) development experienced on prior years' reserves (after tax)
 
$
0.15

 
$
(0.08
)
 
$
—

 
$
0.07

Adverse development that had no impact on earnings (after tax)
 
—

 
0.07

 
—

 
0.07

Implied favorable (adverse) development that had an impact on earning (after tax)
 
$
0.15

 
$
(0.01
)
 
$
—

 
$
0.14

Dividends per share
 
 
 
 
 
 
 
$
0.170

Other Information of Interest:
 
 
 
 
 
 
 
 
Premiums written2
 
$
134,722

 
$
31,446

 
$
—

 
$
166,168

Catastrophe and storm losses
 
$
9,920

 
$
7,844

 
$
—

 
$
17,764

Large losses*
 
$
10,304

 
$
—

 
$
—

 
$
10,304

Reported (favorable) adverse development experienced on prior years' reserves
 
$
(4,722
)
 
$
2,495

 
$
—

 
$
(2,227
)
Adverse development that had no impact on earnings
 
—

 
(2,361
)
 
—

 
(2,361
)
Implied (favorable) adverse development that had an impact on earnings
 
$
(4,722
)
 
$
134

 
$
—

 
$
(4,588
)
GAAP Ratios:
 
 
 
 
 
 
 
 
Loss and settlement expense ratio
 
66.8
%
 
83.4
%
 
—

 
70.4
%
Acquisition expense ratio
 
33.3
%
 
24.5
%
 
—

 
31.4
%
Combined ratio
 
100.1
%
 
107.9
%
 
—

 
101.8
%
 
 
 
 
 
 
 
 
 
*Large losses are defined as reported current accident year losses greater than $500 for the EMC Insurance Companies' pool, excluding catastrophe and storm losses.

CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
 
 
 
 
 
 
($ in thousands, except share and per share amounts)
 
 
 
 
 
 
 
 
Nine months ended September 30, 2016
 
Property and Casualty Insurance
 
Reinsurance
 
Parent Company
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
Premiums earned
 
$
338,589

 
$
102,775

 
$
—

 
$
441,364

Investment income, net
 
25,524

 
10,350

 
9

 
35,883

Other income (loss)
 
466

 
(485
)
 
—

 
(19
)
 
 
364,579

 
112,640

 
9

 
477,228



Losses and expenses:
 
 
 
 
 
 
 
 
Losses and settlement expenses
 
225,207

 
70,895

 
—

 
296,102

Dividends to policyholders
 
11,292

 
—

 
—

 
11,292

Amortization of deferred policy acquisition costs
 
58,129

 
22,611

 
—

 
80,740

Other underwriting expenses
 
49,839

 
2,295

 
—

 
52,134

Interest expense
 
253

 
—

 
—

 
253

Other expenses
 
558

 
—

 
1,495

 
2,053

 
 
345,278

 
95,801

 
1,495

 
442,574

Operating income (loss) before income taxes
 
19,301

 
16,839

 
(1,486
)
 
34,654

Realized investment losses
 
(627
)
 
(16
)
 
—

 
(643
)
Income (loss) before income taxes
 
18,674

 
16,823

 
(1,486
)
 
34,011

Income tax expense (benefit):
 
 
 
 
 
 
 
 
Current
 
6,425

 
5,601

 
(586
)
 
11,440

Deferred
 
(1,778
)
 
(494
)
 
(68
)
 
(2,340
)
 
 
4,647

 
5,107

 
(654
)
 
9,100

Net income (loss)
 
$
14,027

 
$
11,716

 
$
(832
)
 
$
24,911

Average shares outstanding
 
 
 
 
 
 
 
20,964,236

Per Share Data:
 
 
 
 
 
 
 
 
Net income (loss) per share - basic and diluted
 
$
0.67

 
$
0.56

 
$
(0.04
)
 
$
1.19

Catastrophe and storm losses (after tax)
 
$
1.08

 
$
0.33

 
$
—

 
$
1.41

Large losses* (after tax)
 
N/A

 
N/A

 
N/A

 
N/A

Reported favorable development experienced on prior years' reserves (after tax)
 
$
0.69

 
$
0.21

 
$
—

 
$
0.90

Favorable development that had no impact on earnings (after tax)
 
(0.17
)
 
—

 
—

 
(0.17
)
Implied favorable development that had an impact on earnings (after tax)
 
$
0.52

 
$
0.21

 
$
—

 
$
0.73

Dividends per share
 
 
 
 
 
 
 
$
0.570

Book value per share
 
 
 
 
 
 
 
$
26.67

Effective tax rate
 
 
 
 
 
 
 
26.8
%
Annualized net income as a percent of beg. SH equity
 
 
 
 
 
 
 
6.3
%
Other Information of Interest:
 
 
 
 
 
 
 
 
Premiums written2
 
$
370,704

 
$
98,754

 
$
—

 
$
469,458

Catastrophe and storm losses
 
$
34,787

 
$
10,747

 
$
—

 
$
45,534

Large losses*
 
N/A

 
N/A

 
N/A

 
N/A

Reported favorable development experienced on prior years' reserves
 
$
(22,229
)
 
$
(6,880
)
 
$
—

 
$
(29,109
)
Favorable development that had no impact on earnings
 
5,592

 
—

 
—

 
5,592

Implied favorable development that had an impact on earnings
 
$
(16,637
)
 
$
(6,880
)
 
$
—

 
$
(23,517
)
GAAP Ratios:
 
 
 
 
 
 
 
 
Loss and settlement expense ratio
 
66.5
%
 
69.0
%
 
—

 
67.1
%
Acquisition expense ratio
 
35.2
%
 
24.2
%
 
—

 
32.7
%
Combined ratio
 
101.7
%
 
93.2
%
 
—

 
99.8
%
 
 
 
 
 
 
 
 
 
*Large losses are defined as reported current accident year losses greater than $500 for the EMC Insurance Companies' pool, excluding catastrophe and storm losses. Under the property and casualty insurance segment's prior reserving methodology, large losses had a direct impact on earnings. Under the new reserving methodology, large losses are taken into consideration when establishing the current accident quarter/year ultimate estimates of losses, but there is no longer a direct relationship between large losses and earnings. As a result, it is no longer meaningful to report large losses separately. The amount of large losses previously reported for the first six months of 2016 has not been carried forward and disclosed for the nine months ended September 30, 2016, because it would not be comparable to the amount reported for the first nine months of 2015.


CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
 
 
 
 
 
 
($ in thousands, except share and per share amounts)
 
 
 
 
 
 
 
 
Nine months ended September 30, 2015
 
Property and Casualty Insurance
 
Reinsurance
 
Parent Company
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
Premiums earned
 
$
333,212

 
$
95,912

 
$
—

 
$
429,124

Investment income, net
 
24,301

 
9,654

 
(9
)
 
33,946

Other income
 
582

 
1,040

 
—

 
1,622

 
 
358,095

 
106,606

 
(9
)
 
464,692

Losses and expenses:
 
 
 
 
 
 
 
 
Losses and settlement expenses
 
215,468

 
65,135

 
—

 
280,603

Dividends to policyholders
 
6,492

 
—

 
—

 
6,492

Amortization of deferred policy acquisition costs
 
56,003

 
22,820

 
—

 
78,823

Other underwriting expenses
 
47,784

 
2,567

 
—

 
50,351

Interest expense
 
253

 
—

 
—

 
253

Other expenses
 
568

 
—

 
1,424

 
1,992

 
 
326,568

 
90,522

 
1,424

 
418,514

Operating income (loss) before income taxes
 
31,527

 
16,084

 
(1,433
)
 
46,178

Realized investment gains
 
7,866

 
3,689

 
—

 
11,555

Income (loss) before income taxes
 
39,393

 
19,773

 
(1,433
)
 
57,733

Income tax expense (benefit):
 
 
 
 
 
 
 
 
Current
 
10,513

 
5,583

 
(502
)
 
15,594

Deferred
 
1,312

 
560

 
—

 
1,872

 
 
11,825

 
6,143

 
(502
)
 
17,466

Net income (loss)
 
$
27,568

 
$
13,630

 
$
(931
)
 
$
40,267

Average shares outstanding
 
 
 
 
 
 
 
20,577,493

Per Share Data:
 
 
 
 
 
 
 
 
Net income (loss) per share - basic and diluted
 
$
1.34

 
$
0.66

 
$
(0.04
)
 
$
1.96

Catastrophe and storm losses (after tax)
 
$
0.91

 
$
0.38

 
$
—

 
$
1.29

Large losses* (after tax)
 
$
0.68

 
$
—

 
$
—

 
$
0.68

Reported favorable development experienced on prior years' reserves (after tax)
 
$
0.45

 
$
0.18

 
$
—

 
$
0.63

Adverse development that had no impact on earnings (after tax)
 
—

 
0.07

 
—

 
0.07

Implied favorable development that had an impact on earnings (after tax)
 
$
0.45

 
$
0.25

 
$
—

 
$
0.70

Dividends per share
 
 
 
 
 
 
 
$
0.503

Book value per share
 
 
 
 
 
 
 
$
25.09

Effective tax rate
 
 
 
 
 
 
 
30.3
%
Annualized net income as a percent of beg. SH equity
 
 
 
 
 
 
 
10.7
%
Other Information of Interest:
 
 
 
 
 
 
 
 
Premiums written2
 
$
364,329

 
$
96,914

 
$
—

 
$
461,243

Catastrophe and storm losses
 
$
28,651

 
$
12,104

 
$
—

 
$
40,755

Large losses*
 
$
21,453

 
$
—

 
$
—

 
$
21,453

Reported favorable development experienced on prior years' reserves
 
$
(14,177
)
 
$
(5,780
)
 
$
—

 
$
(19,957
)
Adverse development that had an impact on earnings
 
—

 
(2,361
)
 
—

 
(2,361
)
Implied favorable development that had an impact on earnings
 
$
(14,177
)
 
$
(8,141
)
 
$
—

 
$
(22,318
)
GAAP Ratios:
 
 
 
 
 
 
 
 


Loss and settlement expense ratio
 
64.7
%
 
67.9
%
 
—

 
65.4
%
Acquisition expense ratio
 
33.1
%
 
26.5
%
 
—

 
31.6
%
Combined ratio
 
97.8
%
 
94.4
%
 
—

 
97.0
%
 
 
 
 
 
 
 
 
 
*Large losses are defined as reported current accident year losses greater than $500 for the EMC Insurance Companies' pool, excluding catastrophe and storm losses.



CONSOLIDATED BALANCE SHEETS
 
 
 
 
 
 
September 30, 
 2016
 
December 31, 
 2015
($ in thousands, except share and per share amounts)
 
(Unaudited)
 

ASSETS
 
 
 
 
Investments:
 
 
 
 
Fixed maturity securities available-for-sale, at fair value (amortized cost $1,184,470 and $1,130,217)
 
$
1,237,150

 
$
1,161,025

Equity securities available-for-sale, at fair value (cost $151,852 and $144,176)
 
219,282

 
206,243

Other long-term investments
 
9,941

 
9,930

Short-term investments
 
42,611

 
38,599

Total investments
 
1,508,984

 
1,415,797

 
 
 
 
 
Cash
 
350

 
224

Reinsurance receivables due from affiliate
 
22,590

 
24,236

Prepaid reinsurance premiums due from affiliate
 
11,588

 
6,563

Deferred policy acquisition costs (affiliated $44,320 and $40,535)
 
44,620

 
40,720

Prepaid pension and postretirement benefits due from affiliate
 
11,043

 
12,133

Accrued investment income
 
12,143

 
10,789

Amounts receivable under reverse repurchase agreements
 
16,850

 
16,850

Accounts receivable
 
2,958

 
804

Income taxes recoverable
 
—

 
1,735

Goodwill
 
942

 
942

Other assets (affiliated $4,838 and $4,595)
 
5,437

 
5,162

Total assets
 
$
1,637,505

 
$
1,535,955

 
 
 
 
 
LIABILITIES
 
 
 
 
Losses and settlement expenses (affiliated $695,461 and $671,169)
 
$
700,565

 
$
678,774

Unearned premiums (affiliated $271,539 and $238,637)
 
272,900

 
239,435

Other policyholders' funds (all affiliated)
 
11,809

 
8,721

Surplus notes payable to affiliate
 
25,000

 
25,000

Amounts due affiliate to settle inter-company transaction balances
 
4,025

 
6,408

Pension benefits payable to affiliate
 
3,826

 
4,299

Income taxes payable
 
156

 
—

Deferred income taxes
 
25,894

 
19,029

Other liabilities (affiliated $24,659 and $28,598)
 
30,921

 
29,351

Total liabilities
 
1,075,096

 
1,011,017

 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
Common stock, $1 par value, authorized 30,000,000 shares; issued and outstanding, 21,084,948 shares in 2016 and 20,780,439 shares in 2015
 
21,085

 
20,781

Additional paid-in capital
 
115,724

 
108,747

Accumulated other comprehensive income
 
75,529

 
58,433

Retained earnings
 
350,071

 
336,977

Total stockholders' equity
 
562,409

 
524,938

Total liabilities and stockholders' equity
 
$
1,637,505

 
$
1,535,955






LOSS AND SETTLEMENT EXPENSE BY LINE OF BUSINESS
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
 
2016
 
2015
($ in thousands)
 
Premiums earned
 
Losses and settlement expenses
 
Loss and settlement expense ratio
 
Premiums earned
 
Losses and settlement expenses
 
Loss and settlement expense ratio
Property and casualty insurance
 
 
 
 
 
 
 
 
 
 
 
 
Commercial lines:
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
 
$
28,113

 
$
26,274

 
93.5
%
 
$
27,080

 
$
24,555

 
90.7
%
Property
 
27,471

 
17,227

 
62.7
%
 
26,526

 
19,290

 
72.7
%
Workers' compensation
 
24,536

 
13,510

 
55.1
%
 
23,777

 
12,098

 
50.9
%
Liability
 
24,277

 
14,179

 
58.4
%
 
23,449

 
10,726

 
45.7
%
Other
 
2,102

 
705

 
33.6
%
 
2,032

 
348

 
17.1
%
Total commercial lines
 
106,499

 
71,895

 
67.5
%
 
102,864

 
67,017

 
65.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal lines
 
9,873

 
9,748

 
98.7
%
 
10,889

 
8,959

 
82.3
%
Total property and casualty insurance
 
$
116,372

 
$
81,643

 
70.2
%
 
$
113,753

 
$
75,976

 
66.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance
 
 
 
 
 
 
 
 
 
 
 
 
Pro rata reinsurance
 
$
15,066

 
$
10,235

 
67.9
%
 
$
13,037

 
$
9,667

 
74.2
%
Excess of loss reinsurance
 
20,743

 
16,295

 
78.6
%
 
18,998

 
17,042

 
89.7
%
Total reinsurance
 
$
35,809

 
$
26,530

 
74.1
%
 
$
32,035

 
$
26,709

 
83.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
$
152,181

 
$
108,173

 
71.1
%
 
$
145,788

 
$
102,685

 
70.4
%



 
 
Nine months ended September 30,
 
 
2016
 
2015
($ in thousands)
 
Premiums earned
 
Losses and settlement expenses
 
Loss and settlement expense ratio
 
Premiums earned
 
Losses and settlement expenses
 
Loss and settlement expense ratio
Property and casualty insurance
 
 
 
 
 
 
 
 
 
 
 
 
Commercial lines:
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
 
$
82,449

 
$
69,763

 
84.6
%
 
$
78,698

 
$
61,843

 
78.6
%
Property
 
77,292

 
52,687

 
68.2
%
 
77,518

 
53,652

 
69.2
%
Workers' compensation
 
71,272

 
39,680

 
55.7
%
 
69,150

 
39,591

 
57.3
%
Liability
 
72,086

 
38,045

 
52.8
%
 
68,952

 
34,668

 
50.3
%
Other
 
6,246

 
648

 
10.4
%
 
6,044

 
794

 
13.1
%
Total commercial lines
 
309,345

 
200,823

 
64.9
%
 
300,362

 
190,548

 
63.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal lines
 
29,244

 
24,384

 
83.4
%
 
32,850

 
24,920

 
75.9
%
Total property and casualty insurance
 
$
338,589

 
$
225,207

 
66.5
%
 
$
333,212

 
$
215,468

 
64.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance
 
 
 
 
 
 
 
 
 
 
 
 
Pro rata reinsurance
 
$
44,175

 
$
26,367

 
59.7
%
 
$
40,154

 
$
23,468

 
58.4
%
Excess of loss reinsurance
 
58,600

 
44,528

 
76.0
%
 
55,758

 
41,667

 
74.7
%
Total reinsurance
 
$
102,775

 
$
70,895

 
69.0
%
 
$
95,912

 
$
65,135

 
67.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
$
441,364

 
$
296,102

 
67.1
%
 
$
429,124

 
$
280,603

 
65.4
%



PREMIUMS WRITTEN2
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended 
 September 30, 2016
 
Three months ended 
 September 30, 2015
 
 
($ in thousands)
 
Premiums written
 
Percent of premiums written
 
Premiums written
 
Percent of premiums written
 
Change in premiums written
Property and casualty insurance
 
 
 
 
 
 
 
 
 
 
Commercial lines:
 
 
 
 
 
 
 
 
 
 
Automobile
 
$
29,649

 
16.8
%
 
$
28,904

 
17.4
%
 
2.6%
Property
 
34,062

 
19.3
%
 
32,891

 
19.8
%
 
3.6%
Workers' compensation
 
35,623

 
20.2
%
 
33,385

 
20.1
%
 
6.7%
Liability
 
27,060

 
15.4
%
 
26,556

 
16.0
%
 
1.9%
Other
 
2,329

 
1.3
%
 
2,213

 
1.3
%
 
5.2%
Total commercial lines
 
128,723

 
73.0
%
 
123,949

 
74.6
%
 
3.9%
 
 
 
 
 
 
 
 
 
 
 
Personal lines
 
10,181

 
5.8
%
 
10,773

 
6.5
%
 
(5.5)%
Total property and casualty insurance
 
$
138,904

 
78.8
%
 
$
134,722

 
81.1
%
 
3.1%
 
 
 
 
 
 
 
 
 
 
 
Reinsurance
 
 
 
 
 
 
 
 
 
 
Pro rata reinsurance
 
$
15,115

 
8.6
%
 
$
12,103

 
7.3
%
 
24.9%
Excess of loss reinsurance
 
22,224

 
12.6
%
 
19,343

 
11.6
%
 
14.9%
Total reinsurance
 
$
37,339

 
21.2
%
 
$
31,446

 
18.9
%
 
18.7%
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
$
176,243

 
100.0
%
 
$
166,168

 
100.0
%
 
6.1%

 
 
Nine months ended 
 September 30, 2016
 
Nine months ended 
 September 30, 2015
 
 
($ in thousands)
 
Premiums written
 
Percent of premiums written
 
Premiums written
 
Percent of premiums written
 
Change in premiums written
Property and casualty insurance
 
 
 
 
 
 
 
 
 
 
Commercial lines:
 
 
 
 
 
 
 
 
 
 
Automobile
 
$
89,974

 
19.2
%
 
$
86,947

 
18.9
%
 
3.5%
Property
 
85,534

 
18.2
%
 
85,853

 
18.6
%
 
(0.4)%
Workers' compensation
 
80,896

 
17.2
%
 
76,912

 
16.7
%
 
5.2%
Liability
 
78,456

 
16.7
%
 
75,765

 
16.4
%
 
3.6%
Other
 
6,863

 
1.5
%
 
6,413

 
1.4
%
 
7.0%
Total commercial lines
 
341,723

 
72.8
%
 
331,890

 
72.0
%
 
3.0%
 
 
 
 
 
 
 
 
 
 
 
Personal lines
 
28,981

 
6.2
%
 
32,439

 
7.0
%
 
(10.7)%
Total property and casualty insurance
 
$
370,704

 
79.0
%
 
$
364,329

 
79.0
%
 
1.7%
 
 
 
 
 
 
 
 
 
 
 
Reinsurance
 
 
 
 
 
 
 
 
 
 
Pro rata reinsurance
 
$
42,078

 
9.0
%
 
$
40,232

 
8.7
%
 
4.6%
Excess of loss reinsurance
 
56,676

 
12.0
%
 
56,682

 
12.3
%
 
—%
Total reinsurance
 
$
98,754

 
21.0
%
 
$
96,914

 
21.0
%
 
1.9%
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
$
469,458

 
100.0
%
 
$
461,243

 
100.0
%
 
1.8%