UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

o 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 incorporation or organization)	(I.R.S. employer identification no.)

717 Mulberry Street, Des Moines, Iowa	50309
(Address of principal executive offices)	(Zip code)

(515) 345-2902

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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. ý  Yes    o  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý  Yes    o  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

o	Large accelerated filer	ý	Accelerated filer	o	Non-accelerated filer
o	Smaller reporting company	o	Emerging growth company		(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o  Yes    ý  No

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $1.00	EMCI	The Nasdaq Global Select Market
(Title of class)	(Trading symbol)	(Name of each exchange on which registered)

As of April 30, 2019, there were 21,668,287 shares of common stock, $1.00 par value, issued and outstanding.

TABLE OF CONTENTS

		PAGE
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45
PART II	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 6.	Exhibits	47
Signatures		48

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31,   2019		December 31,   2018
($ in thousands, except share and per share amounts)	(Unaudited)
ASSETS
Investments:
Fixed maturity securities available-for-sale, at fair value (amortized cost $1,255,775 and $1,273,132)	$	1,291,860	$	1,282,909
Equity investments, at fair value (cost $167,632 and $160,371)	242,583		215,363
Equity investments, at alternative measurement of cost less impairments	1,200		1,200
Other long-term investments	18,099		19,316
Short-term investments	48,265		28,204
Total investments	1,602,007		1,546,992
Cash	232		337
Reinsurance receivables due from affiliate	35,767		37,361
Prepaid reinsurance premiums due from affiliate	7,530		8,789
Deferred policy acquisition costs (affiliated $47,422 and $44,440)	47,422		44,760
Amounts due from affiliate to settle inter-company transaction balances	11,905		5,154
Prepaid pension and postretirement benefits due from affiliate	17,355		17,691
Accrued investment income	11,713		10,468
Accounts receivable	1,038		1,658
Income taxes recoverable	2,465		6,697
Goodwill	942		942
Other assets (affiliated $3,678 and $4,510)	3,851		4,629
Total assets	$	1,742,227	$	1,685,478

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

3

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31,   2019		December 31,   2018
($ in thousands, except share and per share amounts)	(Unaudited)
LIABILITIES
Losses and settlement expenses (affiliated $774,644 and $771,872)	$	780,393	$	777,190
Unearned premiums (affiliated $271,127 and $267,064)	271,127		268,511
Other policyholders' funds (all affiliated)	8,326		8,807
Surplus notes payable to affiliate	25,000		25,000
Pension benefits payable to affiliate	3,738		4,070
Deferred income taxes	14,844		4,908
Other liabilities (affiliated $20,328 and $31,121)	22,465		31,210
Total liabilities	1,125,893		1,119,696
STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 30,000,000 shares; issued and outstanding, 21,668,287 shares in 2019 and 21,615,105 shares in 2018	21,668		21,615
Additional paid-in capital	129,928		128,451
Accumulated other comprehensive income	22,090		1,620
Retained earnings	442,648		414,096
Total stockholders' equity	616,334		565,782
Total liabilities and stockholders' equity	$	1,742,227	$	1,685,478

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

4

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended March 31,
($ in thousands, except share and per share amounts)	2019		2018
REVENUES
Premiums earned (affiliated $166,747 and $154,246)	$	167,302	$	155,786
Net investment income	12,763		11,371
Net realized investment gains/losses and change in unrealized gains on equity investments	22,643		(5,393		)
Other income (affiliated $1,456 and $1,581)	1,535		1,615
Total revenues	204,243		163,379
LOSSES AND EXPENSES
Losses and settlement expenses (affiliated $102,691 and $110,570)	104,969		110,628
Dividends to policyholders (all affiliated)	2,771		2,120
Amortization of deferred policy acquisition costs (affiliated $29,892 and $26,917)	29,970		27,292
Other underwriting expenses (affiliated $22,715 and $22,920)	22,592		22,855
Interest expense (all affiliated)	171		142
Other expenses (affiliated $645 and $498)	1,485		870
Total losses and expenses	161,958		163,907
Income (loss) before income tax expense (benefit)	42,285		(528		)
INCOME TAX EXPENSE (BENEFIT)
Current	4,259		1,206
Deferred	4,495		(1,658		)
Total income tax expense (benefit)	8,754		(452		)
Net income (loss)	$	33,531	$	(76	)
Net income (loss) per common share - basic and diluted	$	1.55	$	—
Dividend per common share	$	0.23	$	0.22
Average number of common shares outstanding - basic and diluted	21,638,588		21,501,897

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

5

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three months ended   March 31,
($ in thousands)	2019			2018
Net income (loss)	$	33,531		$	(76	)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gains (losses) on investment securities not reflected in net income, net of deferred income tax expense (benefit) of $5,468 and $(5,042)	20,568			(18,969		)
Reclassification adjustment for net realized investment losses included in net income, net of income tax benefit of $57 and $51	215			193
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income, net of deferred income tax expense of $(84) and $(144):
Net actuarial loss	197			81
Prior service credit	(510		)	(622		)
Total reclassification adjustment associated with affiliate's pension and postretirement benefit plans	(313		)	(541		)
Other comprehensive income (loss)	20,470			(19,317		)
Total comprehensive income (loss)	$	54,001		$	(19,393	)

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

6

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

($ in thousands, except per share amounts)	Common stock			Additional paid-in capital			Accumulated other comprehensive income (loss)		Retained earnings			Total stockholders' equity
Balance at December 31, 2018	$	21,615		$	128,451		$	1,620	$	414,096		$	565,782
Issuance of common stock through stock plans	73			2,078								2,151
Repurchase of common stock	(20		)	(623		)						(643		)
Increase resulting from stock-based compensation expense				22								22
Other comprehensive income (loss)							20,470					20,470
Net income (loss)									33,531			33,531
Dividends paid to public stockholders ($0.23 per share)									(2,271		)	(2,271		)
Dividends paid to affiliate ($0.23 per share)									(2,708		)	(2,708		)
Balance at March 31, 2019	$	21,668		$	129,928		$	22,090	$	442,648		$	616,334

($ in thousands, except per share amounts)	Common stock			Additional paid-in capital			Accumulated other comprehensive income (loss)			Retained earnings			Total stockholders' equity
Balance at December 31, 2017	$	21,455		$	124,556		$	83,384		$	374,451		$	603,846
Cumulative adjustment for adoption of financial instruments recognition and measurement changes							(66,234		)	66,234			—
Issuance of common stock through stock plans	94			2,304									2,398
Repurchase of common stock	(30		)	(772		)							(802		)
Increase resulting from stock-based compensation expense				18									18
Other comprehensive income (loss)							(19,317		)				(19,317		)
Net income (loss)										(76		)	(76		)
Dividends paid to public stockholders ($0.22 per share)										(2,128		)	(2,128		)
Dividends paid to affiliate ($0.22 per share)										(2,590		)	(2,590		)
Balance at March 31, 2018	$	21,519		$	126,106		$	(2,167	)	$	435,891		$	581,349

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

7

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended   March 31,
($ in thousands)	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	33,531		$	(76	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Losses and settlement expenses (affiliated $2,772 and $6,427)	3,203			4,443
Unearned premiums (affiliated $4,063 and $1,558)	2,616			1,274
Other policyholders' funds due to affiliate	(481		)	(427		)
Amounts due to/from affiliate to settle inter-company transaction balances	(6,751		)	(153		)
Net pension and postretirement benefits due from affiliate	(392		)	(827		)
Reinsurance receivables due from affiliate	1,594			374
Prepaid reinsurance premiums due from affiliate	1,259			1,188
Commissions payable (affiliated $(9,154) and $(7,893))	(9,153		)	(7,817		)
Deferred policy acquisition costs (affiliated $(2,982) and $(1,819))	(2,662		)	(1,778		)
Accrued investment income	(1,245		)	(330		)
Current income tax	4,232			1,207
Deferred income tax	4,495			(1,658		)
Net realized investment gains/losses and change in unrealized gains on equity investments	(22,643		)	5,393
Other, net (affiliated $(785) and $(727))	3,267			2,644
Total adjustments to reconcile net income (loss) to net cash provided by operating activities	(22,661		)	3,533
Net cash provided by operating activities	10,870			3,457
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturity securities available-for-sale	(10,311		)	(53,019		)
Disposals of fixed maturity securities available-for-sale	25,955			51,447
Purchases of equity investments	(18,333		)	(20,143		)
Disposals of equity investments	15,169			19,168
Purchases of other long-term investments	—			(4,507		)
Disposals of other long-term investments	77			2,305
Net (purchases) disposals of short-term investments	(20,061		)	1,949
Net receipts under reverse repurchase agreements	—			2,500
Net cash used in investing activities	(7,504		)	(300		)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock through affiliate’s stock plans	2,151			2,398
Repurchase of common stock	(643		)	(802		)
Dividends paid to stockholders (affiliated $(2,708) and $(2,590))	(4,979		)	(4,718		)
Net cash used in financing activities	(3,471		)	(3,122		)
NET INCREASE (DECREASE) IN CASH	(105		)	35
Cash at the beginning of the year	337			347
Cash at the end of the quarter	$	232		$	382

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

8

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

EMC Insurance Group Inc., a majority owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is an insurance holding company with operations in property and casualty insurance and reinsurance.  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 writes property and casualty insurance in both commercial and personal lines of insurance, with a focus on medium-sized commercial accounts; however, on October 29, 2018, the Company, Employers Mutual and their subsidiary insurance companies (collectively the "EMC Insurance Companies") announced that they had made a strategic decision to exit personal lines business so that more time and resources can be dedicated to the commercial and reinsurance business. As a result, personal lines premiums written declined significantly during the first quarter of 2019. Personal lines premiums earned also declined, though the decline was much smaller since the premiums are earned over the policies' annual terms. The Company's reinsurance business is primarily written through a quota share reinsurance agreement with Employers Mutual. A small portion of the assumed reinsurance business was previously written on a direct basis, outside the quota share reinsurance agreement.

The accompanying unaudited consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.  The Company has evaluated all subsequent events through the date the financial statements were issued.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the interim financial statements have been included.  The results of operations for the interim periods reported are not necessarily indicative of results to be expected for the year.  The consolidated balance sheet at December 31, 2018 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.

In reading these financial statements, reference should be made to the Company’s 2018 Form 10-K and 10-K/A for more detailed footnote information.

Accounting Pronouncements Adopted

In March 2017, the Financial Accounting Standards Board (FASB) updated guidance related to Receivables-Nonrefundable Fees and Other Costs Subtopic 310-20 of the Accounting Standards Codification^TM (Codification or ASC). The objective of this update is to shorten the amortization period of premiums on certain callable fixed maturity securities to the earliest call date. The Company adopted this guidance on January 1, 2019, and it did not have a material impact on the consolidated financial statements.

In February 2016, the FASB issued updated guidance in Leases Topic 842 of the ASC, which supersedes the guidance in Leases Topic 840 of the ASC. The objective of this update is to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet, and disclosure of key information about leasing arrangements. The Company adopted this guidance during the first quarter of 2019, though management concluded that lease costs allocated to the Company through the pooling and quota share agreements cannot be attributed to a specified asset, and therefore do not meet the definition of a leased asset contained in the guidance. As a result, adoption of this guidance had no impact on the consolidated financial statements.

9

2. TRANSACTIONS WITH AFFILIATES

An inter-company reinsurance program is in place between the Company's insurance subsidiaries in the property and casualty insurance segment and Employers Mutual. This reinsurance program is intended to reduce the volatility of the Company's quarterly results caused by excessive catastrophe and storm losses, and provide protection from both the frequency and severity of such losses. The reinsurance program consists of two semi-annual aggregate catastrophe excess of loss treaties. The first treaty is effective each year from January 1 through June 30, and has a retention of $22.0 million and a limit of $24.0 million. The total cost of this treaty is approximately $6.0 million. The second treaty is effective each year from July 1 through December 31, and has a retention of $15.0 million and a limit of $12.0 million. The total cost of this treaty is approximately $1.4 million. The terms of these treaties were the same in 2018. Losses and settlement expenses ceded to Employers Mutual under the inter-company reinsurance program totaled $527,000 for the three months ended March 31,2019 compared to $467,000 for the same period in 2018. All catastrophe and storm losses assumed by the property and casualty insurance subsidiaries (net of applicable reinsurance recoveries from external reinsurance protections purchased by the pool participants) are subject to the terms of these treaties, and there is no co-participation provision.

An inter-company reinsurance program is also in place between the Company's reinsurance subsidiary and Employers Mutual. The reinsurance program consists of two treaties. The first is a per occurrence catastrophe excess of loss treaty with a retention of $10.0 million, a limit of $10.0 million, 20 percent co-participation, and no reinstatement. The total cost of this treaty is approximately $1.6 million. The second is an annual aggregate catastrophe excess of loss treaty with a retention of $20.0 million, a limit of $100.0 million, and 20 percent co-participation. The total cost of this treaty is approximately $3.6 million. Any losses recovered under the per occurrence treaty inure to the benefit of the aggregate treaty, and only catastrophic events with total losses greater than $500,000 are subject to the terms of the aggregate treaty. The terms of the program were the same in 2018. Losses and settlement expenses ceded to Employers Mutual under the inter-company reinsurance program totaled $1.7 million for the three months ended March 31,2019, compared to $(753,000) for the three months ended March 31,2018. For both periods, these amounts represent development on prior accident years' losses, net of any applicable outside reinsurance recoveries.

On November 20, 2018, the Company announced receipt of a non-binding indicative proposal dated November 15, 2018 from Employers Mutual to purchase all the outstanding common stock of the Company not already owned by Employers Mutual, and the formation of a special committee of the Company's board of directors to consider the proposal. The proposal, which is subject to certain conditions, provides that the shares will be purchased at a price of $30 per share in cash. The special committee, which consists of the Company's four independent directors, has retained its own independent financial and legal advisors to assist it in considering the proposal. Discussions between the special committee and Employers Mutual continued through the first quarter of 2019.

3. REINSURANCE

The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the three months ended March 31, 2019 and 2018 is presented below.  The classification of the assumed and ceded reinsurance amounts between affiliates and nonaffiliates is based on the participants in the underlying reinsurance agreements, and is intended to provide an understanding of the actual source of the reinsurance activities.  This presentation differs from the classifications used in the consolidated financial statements, where all amounts flowing through the pooling and quota share agreements and inter-company reinsurance programs with Employers Mutual are reported as “affiliated” balances.

10

	Three months ended March 31, 2019
($ in thousands)	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	105,233		$	—		$	105,233
Assumed from nonaffiliates	965			48,735			49,700
Assumed from affiliates	134,343			—			134,343
Ceded to nonaffiliates	(6,812		)	(1,973		)	(8,785		)
Ceded to affiliates	(108,213		)	(1,313		)	(109,526		)
Net premiums written	$	125,516		$	45,449		$	170,965
Premiums earned
Direct	$	101,267		$	—		$	101,267
Assumed from nonaffiliates	1,038			46,248			47,286
Assumed from affiliates	134,354			—			134,354
Ceded to nonaffiliates	(7,640		)	(2,405		)	(10,045		)
Ceded to affiliates	(104,247		)	(1,313		)	(105,560		)
Net premiums earned	$	124,772		$	42,530		$	167,302
Losses and settlement expenses incurred
Direct	$	60,935		$	—		$	60,935
Assumed from nonaffiliates	987			31,049			32,036
Assumed from affiliates	77,778			255			78,033
Ceded to nonaffiliates	(1,258		)	(1,582		)	(2,840		)
Ceded to affiliates	(61,462		)	(1,733		)	(63,195		)
Net losses and settlement expenses incurred	$	76,980		$	27,989		$	104,969

11

	Three months ended March 31, 2018
($ in thousands)	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	100,044		$	—		$	100,044
Assumed from nonaffiliates	1,018			41,121			42,139
Assumed from affiliates	130,201			—			130,201
Ceded to nonaffiliates	(7,970		)	(2,005		)	(9,975		)
Ceded to affiliates	(103,024		)	(1,313		)	(104,337		)
Net premiums written	$	120,269		$	37,803		$	158,072
Premiums earned
Direct	$	95,745		$	—		$	95,745
Assumed from nonaffiliates	1,002			41,092			42,094
Assumed from affiliates	129,148			—			129,148
Ceded to nonaffiliates	(8,538		)	(2,625		)	(11,163		)
Ceded to affiliates	(98,725		)	(1,313		)	(100,038		)
Net premiums earned	$	118,632		$	37,154		$	155,786
Losses and settlement expenses incurred
Direct	$	52,287		$	—		$	52,287
Assumed from nonaffiliates	992			26,415			27,407
Assumed from affiliates	85,967			358			86,325
Ceded to nonaffiliates	(2,991		)	(399		)	(3,390		)
Ceded to affiliates	(52,754		)	753			(52,001		)
Net losses and settlement expenses incurred	$	83,501		$	27,127		$	110,628

Individual lines in the above tables are defined as follows:

• “Direct” represents business produced by the property and casualty insurance subsidiaries.

• “Assumed from nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of involuntary business assumed by the pool participants pursuant to state law. For the reinsurance subsidiary, this line represents the reinsurance business assumed through the quota share agreement (including “fronting” activities initiated by Employers Mutual) and the business assumed outside the quota share agreement.

• “Assumed from affiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of all the pool members’ direct business.  The amounts reported under the caption “Losses and settlement expenses incurred” also include claim-related services provided by Employers Mutual that are allocated to the property and casualty insurance subsidiaries and the reinsurance subsidiary.

• “Ceded to nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of 1) the amounts ceded to nonaffiliated reinsurance companies in accordance with the terms of the reinsurance agreements providing protection to the pool and each of its participants, and 2) the amounts ceded on a mandatory basis to state organizations in connection with various programs.  For the reinsurance subsidiary, this line includes 1) reinsurance business that is ceded to other insurance companies in connection with “fronting” activities initiated by Employers Mutual, and 2) amounts ceded in connection with the purchase of additional reinsurance protection in peak exposure territories from external parties.

• “Ceded to affiliates” for the property and casualty insurance subsidiaries represents the cession of their direct business to Employers Mutual under the terms of the pooling agreement and amounts ceded to Employers Mutual under the terms of the inter-company reinsurance program.  For the reinsurance subsidiary this line represents amounts ceded to Employers Mutual under the terms of the inter-company reinsurance program.

12

4. LIABILITY FOR LOSSES AND SETTLEMENT EXPENSES

The following table sets forth a reconciliation of beginning and ending reserves for losses and settlement expenses of the Company.  Amounts presented are on a net basis, with a reconciliation of beginning and ending reserves to the gross amounts presented in the consolidated financial statements.

	Three months ended March 31,
($ in thousands)	2019			2018
Gross reserves at beginning of year	$	777,190		$	732,612
Re-valuation due to foreign currency exchange rates	(593		)	525
Less ceded reserves at beginning of year	36,595			30,923
Net reserves at beginning of year	741,188			701,164
Incurred losses and settlement expenses related to:
Current year	118,259			116,204
Prior years	(13,290		)	(5,576		)
Total incurred losses and settlement expenses	104,969			110,628
Paid losses and settlement expenses related to:
Current year	23,608			24,262
Prior years	76,412			81,877
Total paid losses and settlement expenses	100,020			106,139
Net reserves at end of period	746,137			705,653
Plus ceded reserves at end of period	34,927			30,549
Re-valuation due to foreign currency exchange rates	(671		)	853
Gross reserves at end of period	$	780,393		$	737,055

There is an inherent amount of uncertainty involved in the establishment of insurance liabilities.  This uncertainty is greatest in the current and more recent accident years because a smaller percentage of the expected ultimate claims have been reported, adjusted and settled compared to more mature accident years.  As the carried reserves for these accident years run off, the overall expectation is that, more often than not, favorable development will occur.  However, there is also the possibility that the ultimate settlement of liabilities associated with these accident years will show adverse development, and such adverse development could be substantial.

Changes in reserve estimates are reflected in net income in the year such changes are recorded.  Following is an analysis of the reserve development the Company experienced during the three months ended March 31, 2019 and 2018.  Care should be exercised when attempting to analyze the financial impact of the reported development amounts because, as noted above, the overall expectation is that, more often than not, favorable development will occur as the prior accident years’ reserves run off.

13

2019 Development

For the property and casualty insurance segment, the March 31, 2019 estimate of loss and settlement expense reserves for accident years 2018 and prior decreased $9.6 million from the estimate at December 31, 2018.  This decrease represents 1.8 percent of the December 31, 2018 gross carried reserves and is primarily attributed to reductions in prior year ultimate loss ratios for most lines of business except personal auto liability and homeowners. The commercial auto liability and workers' compensation lines of business were the largest contributors to favorable development. Favorable development in the commercial auto liability line of business was a result of decreases in ultimate severity estimates for accident years 2014, 2016, 2017 and 2018. Favorable development in the workers compensation line of business is the result of a decrease in estimated ultimate frequency and severity for accident year 2018, and decreases in estimated ultimate severity for several prior accident years except 2015 and 2016, which experienced adverse development. Personal auto liability and homeowners experienced adverse development as estimated ultimate severity increased for accident year 2018.

For the reinsurance segment, the March 31, 2019 estimate of loss and settlement expense reserves for accident years 2018 and prior decreased $3.6 million from the estimate at December 31, 2018.  This decrease represents 1.5 percent of the December 31, 2018 gross carried reserves and is primarily attributed to lower ultimate losses impacting accident years 2003-2015 and 2018 for casualty excess contracts and accident years 2016-2018 for property-casualty global excess contracts.

2018 Development

For the property and casualty insurance segment, the March 31,2018 estimate of loss and settlement expense reserves for accident years 2017 and prior decreased $2.1 million from the estimate at December 31, 2017.  This decrease represented 0.4 percent of the December 31, 2017 gross carried reserves and was primarily attributed to decreases in the ultimate loss ratios for several accident years, including 2017, due to reductions in expected ultimate frequency and/or severity in the workers' compensation line of business. The commercial auto liability line of business experienced adverse development due to higher than expected severity in the 2017 accident year.

For the reinsurance segment, the March 31,2018 estimate of loss and settlement expense reserves for accident years 2017 and prior increased $3.4 million from the estimate at December 31, 2017.  This increase represented 1.5 percent of the December 31, 2017 gross carried reserves and was primarily attributed to lower ultimate loss estimates impacting accident years 2014-2017 for the property pro rata, catastrophe and per risk excess, and property-casualty global excess lines of business. The favorable development was partially offset by adverse development on casualty excess contracts for years 2007, 2012, 2014, and 2017, whose ultimates were increased in response to higher than expected reported losses.

5. SEGMENT INFORMATION

The Company’s operations consist of a property and casualty insurance segment and a reinsurance segment.  The property and casualty insurance segment writes both commercial and personal lines of insurance, with a focus on medium-sized commercial accounts.  The reinsurance segment provides reinsurance for other insurers and reinsurers.  The segments are managed separately due to differences in the insurance products sold and the business environments in which they operate. Management evaluates the performance of its insurance segments using financial measurements based on Statutory Accounting Principles (SAP) instead of GAAP. Such measures include premiums written, premiums earned, statutory underwriting profit (loss), and investment results, as well as loss and loss adjustment expense ratios, trade underwriting expense ratios, and combined ratios.

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Summarized financial information for the Company’s segments is as follows:

Three months ended March 31, 2019	Property and casualty insurance			Reinsurance		Parent company			Consolidated
($ in thousands)
Premiums earned	$	124,772		$	42,530	$	—		$	167,302
Underwriting profit (loss):
SAP underwriting profit (loss)	1,407			3,563		—			4,970
GAAP adjustments	1,210			820		—			2,030
GAAP underwriting profit (loss)	2,617			4,383		—			7,000
Net investment income	9,138			3,608		17			12,763
Net realized investment gains/losses and change in unrealized gains on equity investments	14,168			8,542		(67		)	22,643
Other income (loss)	1,533			2		—			1,535
Interest expense	171			—		—			171
Other expenses	311			—		1,174			1,485
Income (loss) before income tax expense (benefit)	$	26,974		$	16,535	$	(1,224	)	$	42,285
Assets	$	1,220,775		$	512,430	$	617,254		$	2,350,459
Eliminations	—			—		(606,809		)	(606,809		)
Reclassifications	(934		)	—		(489		)	(1,423		)
Total assets	$	1,219,841		$	512,430	$	9,956		$	1,742,227

15

Three months ended March 31, 2018	Property and casualty insurance			Reinsurance			Parent company			Consolidated
($ in thousands)
Premiums earned	$	118,632		$	37,154		$	—		$	155,786
Underwriting profit (loss):
SAP underwriting profit (loss)	(9,036		)	1,563			—			(7,473		)
GAAP adjustments	262			102			—			364
GAAP underwriting profit (loss)	(8,774		)	1,665			—			(7,109		)
Net investment income	8,148			3,218			5			11,371
Net realized investment gains/losses and change in unrealized gains on equity investments	(3,293		)	(2,100		)	—			(5,393		)
Other income (loss)	2,051			(436		)	—			1,615
Interest expense	142			—			—			142
Other expenses	233			—			637			870
Income (loss) before income tax expense (benefit)	$	(2,243	)	$	2,347		$	(632	)	$	(528	)
Year ended December 31, 2018
Assets	$	1,191,286		$	485,270		$	565,905		$	2,242,461
Eliminations	—			—			(556,977		)	(556,977		)
Reclassifications	—			—			(6		)	(6		)
Total assets	$	1,191,286		$	485,270		$	8,922		$	1,685,478

16

The following table displays the premiums earned for the property and casualty insurance segment and the reinsurance segment for the three months ended March 31, 2019 and 2018, by line of insurance.

	Three months ended March 31,
($ in thousands)	2019		2018
Property and casualty insurance
Commercial lines:
Automobile	$	32,907	$	30,644
Property	27,671		26,429
Workers' compensation	23,543		24,902
Other liability	28,905		24,962
Other	2,506		2,186
Total commercial lines	115,532		109,123
Personal lines	9,240		9,509
Total property and casualty insurance	$	124,772	$	118,632
Reinsurance
Pro rata reinsurance	$	13,006	$	13,073
Excess of loss reinsurance	29,524		24,081
Total reinsurance	$	42,530	$	37,154
Consolidated	$	167,302	$	155,786

6. INCOME TAXES

The actual income tax expense (benefit) for the three months ended March 31, 2019 and 2018 differed from the “expected” income tax expense (benefit) for those periods (computed by applying the United States federal corporate tax rate of 21 percent to income (loss) before income tax) as follows:

	Three months ended   March 31,
($ in thousands)	2019			2018
Computed "expected" income tax expense (benefit)	$	8,880		$	(111	)
Increases (decreases) in tax resulting from:
Tax-exempt interest income	(283		)	(310		)
Dividends received deduction	(132		)	(123		)
Proration of tax-exempt interest and dividends received deduction	104			108
Internal Revenue Code 50(d)(5) income from investment tax credits	221			36
Other, net	(36		)	(52		)
Total income tax expense (benefit)	$	8,754		$	(452	)

Pursuant to Staff Accounting Bulletin No. 118 issued by the Securities and Exchange Commission, the Company made reasonable estimates of the effects the Tax Cuts and Jobs Act (TCJA) had on deferred income tax assets and liabilities at December 31, 2017 and the interim periods in 2018. For items where the Company could not make a reasonable estimate, primarily loss reserve discounting, the Company used existing accounting guidance and the provisions of the tax laws that were in place prior to the enactment. Subsequently, the Company made its final determination of the effects of the TCJA when the Internal Revenue Service (IRS) issued Revenue Procedure 2019-06, which provided applicable discount factors for both the transition obligation (reserves at January 1, 2018), and reserves at December 31, 2018.

17

The Company had no provision for uncertain income tax positions at March 31, 2019 or December 31, 2018.  The Company recognized no interest expense or other penalties related to U.S. federal or state income taxes during the three months ended March 31, 2019 or 2018.  It is the Company’s accounting policy to reflect income tax penalties as other expense, and interest as interest expense.

The Company files a U.S. federal income tax return, along with various state income tax returns.  The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2015.  

7. EMPLOYEE RETIREMENT PLANS

The components of net periodic benefit cost (income) for Employers Mutual’s pension and postretirement benefit plans is as follows:

	Three months ended   March 31,
($ in thousands)	2019			2018
Pension plans:
Service cost	$	4,071		$	4,126
Interest cost	2,949			2,665
Expected return on plan assets	(5,440		)	(5,978		)
Amortization of net actuarial loss	598			125
Net periodic pension benefit cost	$	2,178		$	938
Postretirement benefit plans:
Service cost	$	353		$	368
Interest cost	546			521
Expected return on plan assets	(1,095		)	(1,204		)
Amortization of net actuarial loss	245			234
Amortization of prior service credit	(2,285		)	(2,782		)
Net periodic postretirement benefit income	$	(2,236	)	$	(2,863	)

Net periodic pension benefit cost allocated to the Company amounted to $653,000 and $282,000 for the three months ended March 31, 2019 and 2018, respectively.  Net periodic postretirement benefit income allocated to the Company amounted to $636,000 and $806,000 for the three months ended March 31, 2019 and 2018, respectively. The service cost component of net periodic pension and postretirement benefit cost/(income) allocated to the Company is included in the income statement line titled "other underwriting expenses". The other components of net periodic pension and postretirement benefit cost/(income) are included in the income statement line titled "other income".

Employers Mutual plans to contribute approximately $7.0 million to the pension plan in 2019. No contributions are expected to be made to the Voluntary Employee Beneficiary Association (VEBA) trust in 2019.

8. STOCK-BASED COMPENSATION

The Company has a stock-based compensation plan for non-employee directors. Employers Mutual also has several stock plans which utilize the common stock of the Company.  Employers Mutual can provide the common stock required under its plans by: 1) using shares of common stock that it currently owns; 2) purchasing common stock in the open market; or 3) directly purchasing common stock from the Company at the current fair value. Employers Mutual's current practice is to purchase common stock from the Company for use in all of its stock plans (including its non-employee director stock purchase plan and its employee stock purchase plan). A portion of the compensation expense recognized by Employers Mutual (as the requisite service period for restricted stock awards/units is rendered) is allocated to the Company’s property and casualty insurance subsidiaries though their participation in the pooling agreement.

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An account Employers Mutual established to hold previously granted restricted stock awards until they vest will periodically contain excess shares of the Company's stock stemming from forfeitures and surrenders. During the first three months of 2019, the Company repurchased 20,221 shares of stock from this unvested restricted stock account at an average cost of $31.83. These repurchased shares are not deemed to be shares repurchased under the Company's stock repurchase program.

During the first three months of 2019, 122,073 restricted stock units were granted to eligible employees of Employers Mutual. Under the stock plans, 96,374 shares of restricted stock vested, and 32,262 options were exercised at a weighted average exercise price of $12.58. The Company recognized compensation expense from these plans of $283,000 ($223,000 net of tax) and $413,000 ($326,000 net of tax) for the three months ended March 31, 2019 and 2018, respectively.  

9. DISCLOSURES ABOUT THE FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of the Company’s financial instruments as of March 31, 2019 and December 31, 2018 are summarized in the tables below.

March 31, 2019	Carrying amounts		Estimated fair values
($ in thousands)
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	8,113	$	8,113
U.S. government-sponsored agencies	309,120		309,120
Obligations of states and political subdivisions	276,857		276,857
Commercial mortgage-backed	86,664		86,664
Residential mortgage-backed	168,765		168,765
Other asset-backed	17,719		17,719
Corporate	424,622		424,622
Total fixed maturity securities available-for-sale	1,291,860		1,291,860
Equity investments, at fair value
Common stocks:
Financial services	47,345		47,345
Information technology	39,346		39,346
Healthcare	34,006		34,006
Consumer staples	14,694		14,694
Consumer discretionary	28,764		28,764
Energy	15,853		15,853
Industrials	19,435		19,435
Other	15,471		15,471
Non-redeemable preferred stocks	18,180		18,180
Investment funds	9,489		9,489
Total equity investments	242,583		242,583
Short-term investments	48,265		48,265
Liabilities:
Surplus notes	25,000		16,056

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December 31, 2018	Carrying amounts		Estimated fair values
($ in thousands)
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	8,021	$	8,021
U.S. government-sponsored agencies	304,479		304,479
Obligations of states and political subdivisions	283,651		283,651
Commercial mortgage-backed	84,379		84,379
Residential mortgage-backed	162,137		162,137
Other asset-backed	20,834		20,834
Corporate	419,408		419,408
Total fixed maturity securities available-for-sale	1,282,909		1,282,909
Equity investments, at fair value
Common stocks:
Financial services	41,839		41,839
Information technology	31,581		31,581
Healthcare	34,571		34,571
Consumer staples	13,180		13,180
Consumer discretionary	22,765		22,765
Energy	13,372		13,372
Industrials	19,389		19,389
Other	14,371		14,371
Non-redeemable preferred stocks	16,654		16,654
Investment funds	7,641		7,641
Total equity investments	215,363		215,363
Short-term investments	28,204		28,204
Liabilities:
Surplus notes	25,000		15,259

The estimated fair values of fixed maturity and equity securities is based on quoted market prices, where available.  In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security.

Short-term investments generally include money market funds, U.S. Treasury bills and commercial paper.  Short-term investments are carried at fair value, which approximates cost, due to the highly liquid nature of the securities.   Short-term securities are classified as Level 1 fair value measurements when the fair values can be validated by recent trades.  When recent trades are not available, fair value is deemed to be the cost basis and the securities are classified as Level 2 fair value measurements.

The estimated fair value of the surplus notes is derived by discounting future expected cash flows at a rate deemed appropriate over a 25-year term (the surplus notes have no stated maturity date, and the interest to be paid is assumed to continue at the current interest rate in place of 2.73 percent).

20

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The following fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value.

Level 1 -	Unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level 2 -	Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
Level 3 -	Prices or valuation techniques that require significant unobservable inputs because observable inputs are not available.  The unobservable inputs may reflect the Company’s own judgments about the assumptions that market participants would use.
NAV -	The fair values of investment company limited partnership investments and similar vehicles (referred to as investment funds) are based on the capital account balances reported by the investment funds subject to their management review and adjustment. These capital account balances reflect the fair value of the investment funds.

The Company uses an independent pricing source to obtain the estimated fair values of a majority of its securities, subject to an internal validation.  The fair values are based on quoted market prices, where available.  This is typically the case for equity securities and money market funds, which are accordingly classified as Level 1 fair value measurements.  In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security.  Fixed maturity securities, non-redeemable preferred stocks and various short-term investments in the Company’s portfolio may not trade on a daily basis; however, observable inputs are utilized in their valuations, and these securities are therefore classified as Level 2 fair value measurements.  Following is a brief description of the various pricing techniques used by the independent pricing source for different asset classes.

• U.S. Treasury securities (including bonds, notes, and bills) are priced according to a number of live data sources, including active market makers and inter-dealer brokers.  Prices from these sources are reviewed based on the sources’ historical accuracy for individual issues and maturity ranges.

• U.S. government-sponsored agencies and corporate securities (including fixed-rate corporate bonds and medium-term notes) are priced by determining a bullet (non-call) spread scale for each issuer for maturities going out to forty years.  These spreads represent credit risk and are obtained from the new issue market, secondary trading, and dealer quotes.  An option adjusted spread model is incorporated to adjust spreads of issues that have early redemption features.  The final spread is then added to the U.S. Treasury curve.

• Obligations of states and political subdivisions are priced by tracking and analyzing actively quoted issues and reported trades, material event notices and benchmark yields.  Municipal bonds with similar characteristics are grouped together into market sectors, and internal yield curves are constructed daily for these sectors.  Individual bond evaluations are extrapolated from these sectors, with the ability to make individual spread adjustments for attributes such as discounts, premiums, alternative minimum tax, and/or whether or not the bond is callable.

• Mortgage-backed and asset-backed securities are first reviewed for the appropriate pricing speed (if prepayable), spread, yield and volatility.  The securities are priced with models using spreads and other information solicited from market buy- and sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts.  To determine a tranche’s price, first the benchmark yield is determined and adjusted for collateral performance, tranche level attributes and market conditions.  Then the cash flow for each tranche is generated (using consensus prepayment speed assumptions including, as appropriate, a prepayment projection based on historical statistics of the underlying collateral).  The tranche-level yield is used to discount the cash flows and generate the price.  Depending on the characteristics of the tranche, a volatility-driven, multi-dimensional single cash flow stream model or an option-adjusted spread model may be used.  When cash flows or other security structure or market information is not available, broker quotes may be used.

On a quarterly basis, the Company receives from its independent pricing service a list of fixed maturity securities, if any, that were priced solely from broker quotes.  For these securities, fair value may be determined using the broker quotes, or by the Company using similar pricing techniques as the Company’s independent pricing service.  Depending on the level of observable inputs, these securities would be classified as Level 2 or Level 3 fair value measurements.   At March 31, 2019 and December 31, 2018, the Company had no securities priced solely from broker quotes.

21

A small number of the Company’s securities are not priced by the independent pricing service.  One of these was an equity security that was reported as a Level 3 fair value measurement since no observable inputs were used in its valuation. This security was sold in the fourth quarter of 2018 and in prior periods was reported at the fair value obtained from the Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (NAIC).  The SVO established a per share price for this security based on an annual review of that company’s financial statements, typically performed during second quarter.  The other securities not priced by the Company’s independent pricing service consist of six fixed maturity securities. One of these fixed maturity securities (two at December 31, 2018), classified as Level 3 fair value measurements, are corporate securities that convey premium tax benefits and are not publicly traded. The fair values for these securities are based on discounted cash flow analyses. The other fixed maturity securities are classified as Level 2 fair value measurements.  The fair values for these fixed maturity securities were obtained from either the SVO, the Company's investment custodian, or the Company's investment department using similar pricing techniques as the Company’s independent pricing service.

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Presented in the tables below are the estimated fair values of the Company’s financial instruments as of March 31, 2019 and December 31, 2018.

March 31, 2019					Fair value measurements using
($ in thousands)	Total		Investments measured at net asset value (NAV)		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial instruments reported at fair value on recurring basis:
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	8,113	$	—	$	—	$	8,113	$	—
U.S. government-sponsored agencies	309,120		—		—		309,120		—
Obligations of states and political subdivisions	276,857		—		—		276,857		—
Commercial mortgage-backed	86,664		—		—		86,664		—
Residential mortgage-backed	168,765		—		—		168,765		—
Other asset-backed	17,719		—		—		17,719		—
Corporate	424,622		—		—		424,421		201
Total fixed maturity securities available-for-sale	1,291,860		—		—		1,291,659		201
Equity investments, at fair value:
Common stocks:
Financial services	47,345		—		47,345		—		—
Information technology	39,346		—		39,346		—		—
Healthcare	34,006		—		34,006		—		—
Consumer staples	14,694		—		14,694		—		—
Consumer discretionary	28,764		—		28,764		—		—
Energy	15,853		—		15,853		—		—
Industrials	19,435		—		19,435		—		—
Other	15,471		—		15,471		—		—
Non-redeemable preferred stocks	18,180		—		8,578		9,602		—
Investment funds	9,489		9,489		—		—		—
Total equity investments	242,583		9,489		223,492		9,602		—
Short-term investments	48,265		—		48,265		—		—
Financial instruments not reported at fair value:
Liabilities:
Surplus notes	16,056		—		—		—		16,056

23

December 31, 2018					Fair value measurements using
($ in thousands)	Total		Investments measured at net asset value (NAV)		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial instruments reported at fair value on recurring basis:
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	8,021	$	—	$	—	$	8,021	$	—
U.S. government-sponsored agencies	304,479		—		—		304,479		—
Obligations of states and political subdivisions	283,651		—		—		283,651		—
Commercial mortgage-backed	84,379		—		—		84,379		—
Residential mortgage-backed	162,137		—		—		162,137		—
Other asset-backed	20,834		—		—		20,834		—
Corporate	419,408		—		—		419,149		259
Total fixed maturity securities available-for-sale	1,282,909		—		—		1,282,650		259
Equity investments, at fair value:
Common stocks:
Financial services	41,839		—		41,839		—		—
Information technology	31,581		—		31,581		—		—
Healthcare	34,571		—		34,571		—		—
Consumer staples	13,180		—		13,180		—		—
Consumer discretionary	22,765		—		22,765		—		—
Energy	13,372		—		13,372		—		—
Industrials	19,389		—		19,389		—		—
Other	14,371		—		14,371		—		—
Non-redeemable preferred stocks	16,654		—		10,325		6,329		—
Investment funds	7,641		7,641		—		—		—
Total equity investments	215,363		7,641		201,393		6,329		—
Short-term investments	28,204		—		28,204		—		—
Financial instruments not reported at fair value:
Liabilities:
Surplus notes	15,259		—		—		—		15,259

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Presented in the table below is a reconciliation of the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2019 and 2018.  Any unrealized gains or losses on fixed maturity securities are recognized in other comprehensive income (loss).  Any gains or losses from settlements, disposals, impairments and unrealized gains or losses on equity securities are reported as realized investment gains or losses in net income.

($ in thousands)	Fair value measurements using significant unobservable (Level 3) inputs
	Fixed maturity securities available-for-sale, corporate			Total
Three months ended March 31, 2019
Beginning balance	$	259		$	259
Settlements	(57		)	(57		)
Unrealized losses included in other comprehensive income (loss) on securities still held at reporting date	(1		)	(1		)
Balance at March 31, 2019	$	201		$	201

($ in thousands)	Fair value measurements using significant unobservable (Level 3) inputs
	Fixed maturity securities available-for-sale, corporate			Equity securities, financial services		Total
Three months ended March 31, 2018
Beginning balance	$	620		$	3	$	623
Settlements	(56		)	—		(56		)
Unrealized losses included in other comprehensive income (loss) on securities still held at reporting date	(2		)	—		(2		)
Balance at March 31, 2018	$	562		$	3	$	565

10. INVESTMENTS

Investments of the Company’s insurance subsidiaries are subject to the insurance laws of the state of their incorporation. These laws prescribe the kind, quality and concentration of investments that may be made by insurance companies.  In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks and real estate mortgages.  The Company believes that it is in compliance with these laws.

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The amortized cost and estimated fair value of securities available-for-sale as of March 31, 2019 and December 31, 2018 are as follows.  All fixed maturity securities are classified as available-for-sale and are carried at fair value.

March 31, 2019	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair values
($ in thousands)
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	8,146	$	—	$	33	$	8,113
U.S. government-sponsored agencies	302,811		6,489		180		309,120
Obligations of states and political subdivisions	263,064		13,852		59		276,857
Commercial mortgage-backed	83,882		2,869		87		86,664
Residential mortgage-backed	163,955		6,233		1,423		168,765
Other asset-backed	17,892		301		474		17,719
Corporate	416,025		9,342		745		424,622
Total fixed maturity securities	$	1,255,775	$	39,086	$	3,001	$	1,291,860

December 31, 2018	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair values
($ in thousands)
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	8,139	$	—	$	118	$	8,021
U.S. government-sponsored agencies	303,198		2,799		1,518		304,479
Obligations of states and political subdivisions	273,727		10,375		451		283,651
Commercial mortgage-backed	83,854		1,287		762		84,379
Residential mortgage-backed	161,055		3,374		2,292		162,137
Other asset-backed	21,596		273		1,035		20,834
Corporate	421,563		2,605		4,760		419,408
Total fixed maturity securities	$	1,273,132	$	20,713	$	10,936	$	1,282,909

26

The following tables set forth the estimated fair values and gross unrealized losses associated with investment securities that were in an unrealized loss position recognized in accumulated other comprehensive income as of March 31, 2019 and December 31, 2018, listed by length of time the securities were consistently in an unrealized loss position.

March 31, 2019	Less than twelve months				Twelve months or longer				Total
($ in thousands)	Fair values		Unrealized losses		Fair values		Unrealized losses		Fair values		Unrealized losses
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	—	$	—	$	8,113	$	33	$	8,113	$	33
U.S. government-sponsored agencies	—		—		47,961		180		47,961		180
Obligations of states and political subdivisions	—		—		12,372		59		12,372		59
Commercial mortgage-backed	—		—		11,140		87		11,140		87
Residential mortgage-backed	4,466		94		40,869		1,329		45,335		1,423
Other asset-backed	—		—		11,167		474		11,167		474
Corporate	7,901		349		36,514		396		44,415		745
Total fixed maturity securities	$	12,367	$	443	$	168,136	$	2,558	$	180,503	$	3,001

December 31, 2018	Less than twelve months				Twelve months or longer				Total
($ in thousands)	Fair values		Unrealized losses		Fair values		Unrealized losses		Fair values		Unrealized losses
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	—	$	—	$	8,021	$	118	$	8,021	$	118
U.S. government-sponsored agencies	14,620		20		92,603		1,498		107,223		1,518
Obligations of states and political subdivisions	—		—		14,498		451		14,498		451
Commercial mortgage-backed	2,021		21		24,222		741		26,243		762
Residential mortgage-backed	16,852		145		45,597		2,147		62,449		2,292
Other asset-backed	4,810		147		11,691		888		16,501		1,035
Corporate	198,030		2,996		45,734		1,764		243,764		4,760
Total fixed maturity securities	$	236,333	$	3,329	$	242,366	$	7,607	$	478,699	$	10,936

Nearly all of the fixed maturity securities that are in an unrealized loss position are considered investment grade by credit rating agencies. Because management does not intend to sell these securities, does not believe it will be required to sell these securities before recovery, and believes it will collect the amounts due on these securities, it was determined that these securities were not “other-than-temporarily” impaired at March 31, 2019.

27

The amortized cost and estimated fair values of fixed maturity securities at March 31, 2019, by contractual maturity, are shown below.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.

($ in thousands)	Amortized cost		Estimated fair values
Securities available-for-sale:
Due in one year or less	$	23,719	$	23,824
Due after one year through five years	265,818		270,454
Due after five years through ten years	314,904		325,430
Due after ten years	402,224		415,475
Securities not due at a single maturity date	249,110		256,677
Totals	$	1,255,775	$	1,291,860

A summary of realized investment gains and (losses) and the change in unrealized gains on equity investments is as follows:

	Three months ended March 31,
($ in thousands)	2019			2018
Fixed maturity securities available-for-sale:
Gross realized investment gains	$	—		$	234
Gross realized investment losses	(272		)	(478		)
Equity securities:
Net realized investment gains	4,097			2,716
Change in unrealized investment gains	19,829			(9,854		)
Other long-term investments, net	(1,011		)	1,989
Totals	$	22,643		$	(5,393	)

Gains and losses realized on the disposition of investments are included in net income.  The cost of investments sold is determined on the specific identification method using the highest cost basis first.  The Company did not have any outstanding cumulative credit losses on fixed maturity securities that have been recognized in earnings from “other-than-temporary” impairments during any of the reported periods. The net realized investment gains (losses) recognized on other long-term investments primarily represent changes in the carrying value of a limited partnership that is used solely to support an equity tail-risk hedging strategy.

11. CONTINGENT LIABILITIES

The Company and Employers Mutual and its other subsidiaries are parties to numerous lawsuits arising in the normal course of the insurance business.  The Company believes that the resolution of these lawsuits will not have a material adverse effect on its financial condition or its results of operations.  The companies involved have established reserves which are believed adequate to cover any potential liabilities arising out of all such pending or threatened proceedings.

On March 22, 2019, a lawsuit was filed in state court in Iowa relating to the November 15, 2018 proposal by Employers Mutual to acquire all outstanding shares of stock in the Company not already owned by Employers Mutual.  The lawsuit was filed as a purported class action, and names as defendants Employers Mutual and the five individual directors of the Company.  The lawsuit alleges that the proposal is unfair to the Company’s minority shareholders, and seeks an unspecified amount of damages.  Employers Mutual and the Company and its directors deny all allegations of wrongdoing set forth in the lawsuit. The Company believes that Directors, Officers and Organization Liability Coverage is in place that should be sufficient to cover any finding of liability.

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The participants in the pooling agreement have purchased annuities from life insurance companies, under which the claimant is payee, to fund future payments that are fixed pursuant to specific claim settlement provisions.  The Company’s share of case loss reserves eliminated by the purchase of those annuities was $110,000 at December 31, 2018.  The Company had a contingent liability for the aggregate guaranteed amount of the annuities of $183,000 at December 31, 2018 should the issuers of those annuities fail to perform.  Although management is not able to verify the amount, the Company would likely have a similar contingent liability at March 31, 2019.  The probability of a material loss due to failure of performance by the issuers of these annuities is considered remote.

12. STOCK REPURCHASE PROGRAM

On November 3, 2011, the Company’s Board of Directors authorized a $15.0 million stock repurchase program.  This program does not have an expiration date.  The timing and terms of the purchases are determined by management based on board approved parameters and market conditions, and are conducted in accordance with the applicable rules of the Securities and Exchange Commission.  Common stock repurchased under this program will be retired by the Company.  The Company did not repurchase any shares during the first three months of either 2019 or 2018.

13. ACCUMULATED OTHER COMPREHENSIVE INCOME

The Company has available-for-sale securities and receives an allocation of the actuarial losses and net prior service credits associated with Employers Mutual’s pension and postretirement benefit plans, both of which generate accumulated other comprehensive income (loss) amounts.  The following table reconciles, by component, the beginning and ending balances of accumulated other comprehensive income (loss), net of tax.

	Accumulated other comprehensive income (loss) by component
	Unrealized gains (losses) on available-for- sale securities		Unrecognized pension and postretirement benefit obligations
($ in thousands)			Net actuarial loss			Prior service credit			Total			Total
Balance at December 31, 2018	$	7,724	$	(17,626	)	$	11,522		$	(6,104	)	$	1,620
Other comprehensive income (loss) before reclassifications	20,568		—			—			—			20,568
Amounts reclassified from accumulated other comprehensive income (loss)	215		197			(510		)	(313		)	(98		)
Other comprehensive income (loss)	20,783		197			(510		)	(313		)	20,470
Balance at March 31, 2019	$	28,507	$	(17,429	)	$	11,012		$	(6,417	)	$	22,090

	Accumulated other comprehensive income (loss) by component
	Unrealized gains (losses) on available-for- sale securities			Unrecognized pension and postretirement benefit obligations
($ in thousands)				Net actuarial loss			Prior service credit			Total			Total
Balance at December 31, 2017	$	83,497		$	(13,074	)	$	12,961		$	(113	)	$	83,384
Cumulative adjustment for adoption of financial instruments recognition and measurement changes	(66,234		)	—			—			—			(66,234		)
Other comprehensive income (loss) before reclassifications	(18,969		)	—			—			—			(18,969		)
Amounts reclassified from accumulated other comprehensive income (loss)	193			81			(622		)	(541		)	(348		)
Other comprehensive income (loss)	(18,776		)	81			(622		)	(541		)	(19,317		)
Balance at March 31, 2018	$	(1,513	)	$	(12,993	)	$	12,339		$	(654	)	$	(2,167	)

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The following tables display amounts reclassified out of accumulated other comprehensive income (loss) and into net income (loss) during the three months ended March 31, 2019 and 2018, respectively.

($ in thousands)	Amounts reclassified from accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss) components	Three months ended   March 31, 2019			Affected line item in the consolidated statements of income
Unrealized gains (losses) on investments:
Reclassification adjustment for net realized investment losses included in net income	$	(272	)	Net realized investment gains/losses and change in unrealized gains on equity investments
Deferred income tax (expense) benefit	57			Total income tax expense (benefit)
Net reclassification adjustment	(215		)	Net income (loss)
Unrecognized pension and postretirement benefit obligations:
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income:
Net actuarial loss	(249		)	(1)
Prior service credit	646			(1)
Total before tax	397
Deferred income tax (expense) benefit	(84		)
Net reclassification adjustment	313
Total reclassification adjustment	$	98

(1) These reclassified components of accumulated other comprehensive income are included in the computation of net periodic pension and postretirement benefit cost (income) (see note 7, Employee Retirement Plans, for additional details).

30

($ in thousands)	Amounts reclassified from accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss) components	Three months ended March 31, 2018			Affected line item in the consolidated statements of income
Unrealized gains (losses) on investments:
Reclassification adjustment for net realized investment losses included in net income	$	(244	)	Net realized investment gains/losses and change in unrealized gains on equity investments
Deferred income tax (expense) benefit	51			Total income tax expense (benefit)
Net reclassification adjustment	(193		)	Net income (loss)
Unrecognized pension and postretirement benefit obligations:
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income:
Net actuarial loss	(103		)	(1)
Prior service credit	788			(1)
Total before tax	685
Deferred income tax (expense) benefit	(144		)
Net reclassification adjustment	541
Total reclassification adjustment	$	348

(1) These reclassified components of accumulated other comprehensive income are included in the computation of net periodic pension and postretirement benefit cost (income) (see note 7, Employee Retirement Plans, for additional details).

14. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

In June 2016, the FASB issued updated guidance in Financial Instruments-Credit Losses Topic 326 of the ASC. The objective of this update is to provide information about expected credit losses on financial instruments and other commitments to extend credit. Specifically, this updated guidance replaces the current incurred loss impairment methodology, which delays recognition of a loss until it is probable a loss has been incurred, with a methodology that reflects expected credit losses considering a broader range of reasonable and supportable information. This guidance covers financial assets that are not accounted for at fair value through net income, thus is not applicable to the Company's equity investments. This guidance is effective for interim and annual periods beginning after December 15, 2019, and is to be applied with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (modified-retrospective approach). Early adoption is permitted, but only to fiscal years beginning after December 15, 2018. The Company will adopt this guidance during the first quarter of 2020. The Company is currently evaluating the impact this guidance will have on the Company's consolidated financial condition and net income.

15. SUBSEQUENT EVENTS

On May 9, 2019, it was announced that the Company and Employers Mutual had entered into a definitive merger agreement pursuant to which Employers Mutual will acquire all of the remaining shares of the Company for $36 per share in cash. The transaction is expected to close in the second half of 2019.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited)

The term “Company” is used below interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC Insurance Group Inc. and its subsidiaries.  The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included under Item 1 of this Form 10-Q, and the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2018 Form 10-K.

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 beliefs, assumptions and expectations of the Company’s future performance, taking all information currently available into account.  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 U.S. federal corporate tax law;

• 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”, “may”, “intend”, “likely” 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.

UPDATE ON 2018 CORPORATE EVENTS

Proposal to purchase all of the Company's outstanding common stock

On November 20, 2018, the Company announced receipt of a non-binding indicative proposal dated November 15, 2018 from Employers Mutual Casualty Company (Employers Mutual) to purchase all the outstanding common stock of the Company not already owned by Employers Mutual, and the formation of a special committee of the Company's board of directors to consider the proposal. The proposal, which is subject to certain conditions, provides that the shares will be purchased at a price of $30 per share in cash. The special committee, which consists of the Company's four independent directors, has retained its own independent financial and legal advisors to assist it in considering the proposal. Discussions between the special committee and Employers Mutual continued through the first quarter of 2019.

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Exit from personal lines of business

As announced on October 29, 2018, the Company and Employers Mutual made a strategic decision to exit personal lines business so that more time and resources could be dedicated to the commercial and reinsurance business. The companies stopped writing personal lines policies in most states (regulatory restrictions apply in some states) during the first quarter of 2019 and non-renewal notices are being sent to policyholders in accordance with state regulations as existing policies expire. Personal lines premiums earned declined less than three percent in the first quarter, but personal lines premiums written declined 36.2 percent. During the remainder of 2019, the loss and settlement expense ratio for personal lines business will deteriorate as the companies will continue to process claims and incur expenses to support this business, while premiums earned will decline significantly. All personal lines business is expected to roll off the companies' books by the end of the first quarter of 2020.

Digital transformation project

During 2018, management began a digital transformation project that will guide the design, build and deployment of a new "EMC Digital Business Platform". This digital platform will consist of new core insurance systems, such as policy, rating, billing, claims, agent portal, customer portal, and an enterprise data warehouse. These new systems, together with some enhanced systems, will replace the majority of Employers Mutual's current legacy systems. Employers Mutual will also adopt cloud technology, and integrate and configure vendor purchased systems. Management, with the assistance of outside consultants, has selected a vendor product and established a five-year project time line. While the total cost of the project has not yet been finalized, management currently estimates that the Company's portion of the pre-tax expense will approximate $28.0 million over the next five years.

COMPANY OVERVIEW

The Company, a majority owned subsidiary of Employers Mutual, is an insurance holding company with operations that consist of a property and casualty insurance segment and a reinsurance segment. Management evaluates the performance of its insurance segments based upon statutory underwriting profit (loss), which is calculated as premiums earned, less loss and settlement expenses and acquisition and other expenses. Additional information is presented in note 5, "Segment Information", of Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

Property and casualty insurance operations are conducted through three subsidiaries and represent the most significant segment of the Company’s business, totaling 75 percent of consolidated premiums earned during the first three months of 2019.  The property and casualty insurance operations are integrated with the property and casualty insurance operations of Employers Mutual through participation in a reinsurance pooling agreement.  Because the Company conducts its property and casualty insurance operations together with Employers Mutual through the reinsurance pooling agreement, the Company shares the same business philosophy, management, employees and facilities as Employers Mutual and offers the same types of insurance products.

Reinsurance operations are conducted through EMC Reinsurance Company and accounted for 25 percent of consolidated premiums earned during the first three months of 2019.  The principal business activity of EMC Reinsurance Company is to assume, through a quota share reinsurance agreement, 100 percent of Employers Mutual’s assumed reinsurance business, subject to certain exceptions.

An inter-company reinsurance program, consisting of two semi-annual aggregate catastrophe excess of loss treaties, is in place between the Company's insurance subsidiaries in the property and casualty insurance segment and Employers Mutual. The program is intended to reduce the volatility of the Company's quarterly results caused by excessive catastrophe and storm losses, and provide protection from both the frequency and severity of such losses. An inter-company reinsurance program is also in place between the Company's reinsurance subsidiary and Employers Mutual. This program also consists of two treaties, one being a per occurrence catastrophe excess of loss treaty and the other an annual aggregate catastrophe excess of loss treaty. The terms of all of these treaties did not change from 2018. For detailed information regarding the inter-company reinsurance programs, see note 2, "Transactions with Affiliates", of Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accounting policies and estimates considered by management to be critically important in the preparation and understanding of the Company’s financial statements and related disclosures are presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2018 Form 10-K.

33

RESULTS OF OPERATIONS

Results of operations by segment and on a consolidated basis for the three months ended March 31, 2019 and 2018 are as follows:

	Three months ended March 31,
($ in thousands)	2019			2018
Property and casualty insurance
Premiums earned	$	124,772		$	118,632
Losses and settlement expenses	76,980			83,501
Acquisition and other expenses	45,175			43,905
Underwriting profit (loss)	$	2,617		$	(8,774	)
GAAP ratios:
Loss and settlement expense ratio	61.7		%	70.4		%
Acquisition expense ratio	36.2		%	37.0		%
Combined ratio	97.9		%	107.4		%
Reconciliation of loss and settlement expense ratio to underlying loss and settlement expense ratio1:
Loss and settlement expense ratio	61.7		%	70.4		%
Catastrophe and storm losses	(4.7		)%	(3.6		)%
Favorable development on prior years' reserves	7.7		%	1.8		%
Underlying loss and settlement expense ratio	64.7		%	68.6		%
Favorable development on prior years' reserves	$	(9,643	)	$	(2,135	)
Catastrophe and storm losses	$	5,888		$	4,260

¹ Underlying loss and settlement expense ratio: The loss and settlement expense ratio is the ratio (expressed as a percentage) of losses and settlement expenses incurred to premiums earned, which management uses as a measure of underwriting profitability of the Company’s property and casualty insurance business. The underlying loss and settlement expense ratio is a non-GAAP financial measure which represents the loss and settlement expense ratio, excluding the impact of catastrophe and storm losses and development on prior years’ reserves. Management uses this ratio as an indicator of the property and casualty insurance segment’s underwriting discipline and performance for the current accident year. Management believes this ratio is useful for investors to understand the property and casualty insurance segment’s periodic earnings and variability of earnings caused by the unpredictable nature (i.e., the timing and amount) of catastrophe and storm losses and development on prior years’ reserves. 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 loss and settlement expense ratio.

34

	Three months ended March 31,
	2019							2018
($ 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	$	32,907	$	21,415		65.1	%	$	30,644	$	26,456	86.3	%
Property	27,671		17,428			63.0	%	26,429		18,723		70.8	%
Workers' compensation	23,543		13,735			58.3	%	24,902		12,531		50.3	%
Other liability	28,905		17,341			60.0	%	24,962		17,701		70.9	%
Other	2,506		(384		)	(15.3	)%	2,186		494		22.6	%
Total commercial lines	115,532		69,535			60.2	%	109,123		75,905		69.6	%
Personal lines	9,240		7,445			80.6	%	9,509		7,596		79.9	%
Total property and casualty insurance	$	124,772	$	76,980		61.7	%	$	118,632	$	83,501	70.4	%

	Three months ended March 31,
($ in thousands)	2019			2018
Reinsurance
Premiums earned	$	42,530		$	37,154
Losses and settlement expenses	27,989			27,127
Acquisition and other expenses	10,158			8,362
Underwriting profit	$	4,383		$	1,665
GAAP ratios:
Loss and settlement expense ratio	65.8		%	73.0		%
Acquisition expense ratio	23.9		%	22.5		%
Combined ratio	89.7		%	95.5		%
Favorable development on prior years' reserves	$	(3,648	)	$	(3,441	)
Catastrophe and storm losses	$	19		$	396

	Three months ended March 31,
	2019						2018
($ in thousands)	Premiums earned		Losses and settlement expenses		Loss and settlement expense ratio		Premiums earned		Losses and settlement expenses		Loss and settlement expense ratio
Reinsurance
Pro rata reinsurance	$	13,006	$	5,914	45.5	%	$	13,073	$	4,665	35.7	%
Excess of loss reinsurance	29,524		22,075		74.8	%	24,081		22,462		93.3	%
Total reinsurance	$	42,530	$	27,989	65.8	%	$	37,154	$	27,127	73.0	%

35

	Three months ended March 31,
($ in thousands, except per share amounts)	2019			2018
Consolidated
REVENUES
Premiums earned	$	167,302		$	155,786
Net investment income	12,763			11,371
Net realized investment gains (losses) and change in unrealized gains on equity investments	22,643			(5,393		)
Other income	1,535			1,615
	204,243			163,379
LOSSES AND EXPENSES
Losses and settlement expenses	104,969			110,628
Acquisition and other expenses	55,333			52,267
Interest expense	171			142
Other expense	1,485			870
	161,958			163,907
Income (loss) before income tax expense (benefit)	42,285			(528		)
Income tax expense (benefit)	8,754			(452		)
Net income (loss)	$	33,531		$	(76	)
Net income (loss) per share	$	1.55		$	—
GAAP ratios:
Loss and settlement expense ratio	62.7		%	71.0		%
Acquisition expense ratio	33.1		%	33.6		%
Combined ratio	95.8		%	104.6		%
Favorable development on prior years' reserves	$	(13,291	)	$	(5,576	)
Catastrophe and storm losses	$	5,907		$	4,656

The Company reported net income of $33.5 million ($1.55 per share) for the three months ended March 31, 2019, compared to a net loss of $76,000 ($0.00 per share) during the same period in 2018.  Included in the net income amount reported in 2019 is a $19.8 million pre-tax increase in unrealized gains on the Company's equity investments, and $2.8 million of pre-tax realized investment gains. Included in the net loss reported in 2018 is a $9.9 million pre-tax decline in unrealized gains on the Company's equity investments, which was partially offset by $4.5 million of pre-tax realized investment gains. Both segments reported improved underwriting results in the first quarter of 2019. The property casualty insurance segment benefited from an increase in favorable development on prior years' reserves and improvement in the underlying loss and settlement expense ratio (which excludes the impact of catastrophe and storm losses and development on prior years' reserves) from the disappointing results reported in the first quarter of 2018, which was impacted by a high level of non-catastrophe losses. The improvement in the reinsurance segment is primarily attributed to an increase in premiums earned.

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Premium income

Premiums earned increased7.4 percent to $167.3 million for the three months ended March 31, 2019 from $155.8 million for the same period in 2018.  Rate levels for both segments continue to be constrained by a high level of competition, especially for quality accounts with good loss experience; however, the moderate rate level improvements that began last year have continued through the first quarter. Average rate level increases were slightly positive in the property and casualty insurance segment, with variances by line of business. Commercial auto continues to receive larger (mid-to-upper single digit) rate increases, while rates for the workers' compensation line of business continue to decline due to mandatory rate decreases. During the January 1, 2019 renewal season, the reinsurance industry placed greater emphasis on wildfire exposures following a second consecutive year of significant losses from this peril. As a result, programs with wildfire losses received the largest rate level increases during the January 1, 2019 reinsurance renewal season, while other programs generally renewed flat or slightly down.

Premiums earned in the property and casualty insurance segment increased5.2 percent to $124.8 million for the three months ended March 31, 2019 from $118.6 million for the same period in 2018.  The majority of this increase is attributed to small rate level increases on renewal business and an increase in retained policies in the commercial lines of business. Personal lines premiums earned declined less than three percent during the first quarter as new business was not accepted due to management's decision in late 2018 to exit this line of business; however, this decline will increase significantly during the remainder of 2019 as existing policies are not renewed upon expiration. Commercial lines new business premium (representing 15 percent of the pool participants’ direct premiums written) was approximately 6 percent higher in the three months ended March 31, 2019 than the same period in 2018. Management continues to seek growth in most territories for its commercial lines of business, particularly outside of the core Midwest market, which will help diversify the pool participants' book of business geographically while staying consistent with the industry and the commercial lines mix of business. Renewal business premium increased approximately 4 percent during the first three months of 2019. After factoring in the continued implementation of some mandatory rate reductions on workers' compensation business, the overall rate change on renewal business was approximately 2.1 percent. Rate levels are expected to be mixed during the remainder of 2019, with the largest rate increases expected in the commercial auto line of business. Rate decreases are expected to slow or stop in the workers' compensation and general liability lines of business, and rates on most other lines of business are expected to increase slightly. The commercial lines policy retention rate remained strong during the first three months of 2019 at 86 percent, which approximates that reported at the end of 2018.

Premiums earned in the reinsurance segment increased 14.5 percent to $42.5 million for the three months ended March 31, 2019 from $37.2 million for the same period in 2018. This increase is attributed to increases in participation and higher estimated premiums achieved on existing multi-line contracts, and new business written in the property and liability excess lines, including from Mutual Re. Underwriting capacity tightened somewhat during the January 1,2019 renewal season. As a result, reinsurance rate levels were mixed, with increases implemented on programs that sustained losses from wildfires and other catastrophic events, while rate levels remained stable on programs not affected by 2017 and 2018 catastrophic events.

Losses and settlement expenses

Losses and settlement expenses decreased5.1 percent to $105.0 million for the three months ended March 31, 2019 from $110.6 million for the same period in 2018.  The loss and settlement expense ratio decreased to 62.7 percent for the three months ended March 31, 2019 from 71.0 percent for the same period in 2018. This decrease is primarily attributed to the property and casualty insurance segment and reflects a significant increase in the amount of favorable development experienced on prior years' reserves and improvement in the underlying loss and settlement expense ratio. The reinsurance segment also reported a decrease in its loss and settlement expense ratio, which is primarily attributed to an increase in premiums earned and improved loss experience. The actuarial analysis of the Company’s carried reserves at March 31, 2019 indicates that they are in the upper third of the range of reasonable reserves.

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The loss and settlement expense ratio for the property and casualty insurance segment decreased to 61.7 percent for the three months ended March 31, 2019 from 70.4 percent for the same period in 2018. The underlying loss and settlement expense ratio, which excludes the impact of catastrophe and storm losses and development on prior years' reserves, decreased to 64.7 percent in the first quarter of 2019 from 68.6 percent for the same period in 2018. All commercial lines of business experienced declines in their respective underlying loss and settlement expense ratios, except for workers' compensation, where mandatory rate decreases are having a negative impact. These decreases stem from declines in both loss frequency and, with the exception of the commercial auto liability line of business, loss severity. A significant increase in favorable development on prior years' reserves across all commercial lines of business also contributed to the decrease in the loss and settlement expense ratio. See note 4, "Liability for Losses and Settlement Expenses", of Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for information regarding the sources of development on prior years' reserves. Catastrophe and storm losses totaled $5.9 million in the first quarter of 2019 compared to $4.3 million for the same period in 2018, and accounted for 4.7 percentage points of the loss and settlement expense ratio in the first quarter of 2019 compared to 3.6 percentage points for the same period in 2018.

The loss and settlement expense ratio for the reinsurance segment decreased to 65.8 percent for the three months ended March 31, 2019 from 73.0 percent for the same period in 2018. This decrease is primarily attributed to the increase in premiums earned and improved loss experience. Catastrophe and storm losses declined to $19,000 in the first quarter of 2019 compared to $396,000 for the same period in 2018, and accounted for 0.0 percentage points of the loss and settlement expense ratio for the first quarter of 2019, compared to 1.1 percentage points during the same period in 2018. The reinsurance subsidiary reported favorable development on prior years' reserves totaling $3.6 million in the first quarter of 2019, compared to $3.4 million in the first quarter of 2018. See note 4, "Liability for Losses and Settlement Expenses", of Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q for information regarding the sources of development on prior years' reserves.

Acquisition and other expenses

Acquisition and other expenses increased5.9 percent to $55.3 million for the three months ended March 31, 2019 from $52.3 million for the same period in 2018.  The acquisition expense ratio decreased to 33.1 percent for the three months ended March 31, 2019 from 33.6 percent for the same period in 2018. This decrease is attributed to the property and casualty insurance segment.  

The acquisition expense ratio for the property and casualty insurance segment decreased to 36.2 percent for the three months ended March 31, 2019 from 37.0 percent for the same period in 2018. This decrease primarily reflects a decline in salary expense, partially offset by an increase in commission expense.

The acquisition expense ratio for the reinsurance segment increased to 23.9 percent for the three months ended March 31, 2019 from 22.5 percent for the same period in 2018. This increase primarily reflects an increase in contingent commission expense.

Investment results

Net investment income increased12.2 percent to $12.8 million for the three months ended March 31, 2019 from $11.4 million for the same period in 2018. This increase is primarily the result of actions taken during 2018 to sell fixed maturity securities with lower book yields and reinvest the proceeds in fixed maturity securities with similar characteristics but higher yields. This allowed the Company to increase the portfolio's book yield without altering quality or duration, while also taking advantage of a 14 percent tax differential that could be achieved by carrying the losses from the sales back to a previous tax year subject to the prior 35 percent federal corporate tax rate. Growth in the fixed maturity portfolio also contributed to the increase in net investment income, but to a lesser extent. The pre-tax yield on the fixed maturity portfolio increased to 3.63 percent at March 31, 2019 from 3.45 percent at March 31, 2018, but declined slightly from 3.68 percent at December 31, 2018.  The effective duration of the fixed maturity portfolio, excluding interest-only securities, declined to 4.4 at March 31, 2019 from 4.9 at December 31, 2018.

Net realized investment gains/losses and the change in unrealized gains on equity investments increased to a gain of $22.6 million for the three months ended March 31, 2019 from a loss of $5.4 million for the same period in 2018. This increase is primarily due to a $19.8 million pre-tax increase in unrealized gains on the Company's equity investments compared to a $9.9 million pre-tax decline in unrealized gains in 2018. The amounts reported also include a loss of $938,000 and a gain of $1.8 million in 2019 and 2018, respectively, from changes in the carrying value of a limited partnership that the Company invests in to help protect the equity portfolio from a sudden and significant decline in value (an equity tail-risk hedging strategy).

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Other income

Other income totaled $1.5 million during the three months ended March 31, 2019, compared to $1.6 million during the same period in 2018. The 2019 amount includes $1.3 million of net periodic pension and postretirement benefit income.  The 2018 amount includes $1.9 million of net periodic pension and postretirement benefit income and $436,000 of foreign currency exchange losses on the reinsurance segment’s foreign currency denominated reinsurance business.

Income tax

The Company reported income tax expense of $8.8 million for the three months ended March 31, 2019, compared to an income tax benefit of $452,000 for the same period in 2018. The effective tax rate for the three months ended March 31, 2019 was 20.7 percent, compared to 85.5 percent for the same period in 2018. The first quarter 2018 effective tax rate is calculated using an income tax benefit relative to pretax losses, thus the larger number is actually indicative of a low effective tax rate. The primary contributors to the differences between these effective tax rates and the United States federal corporate tax rate of 21 percent are tax-exempt interest income earned and the dividends received deduction.

SUBSEQUENT EVENT

On May 9, 2019, it was announced that the Company and Employers Mutual had entered into a definitive merger agreement pursuant to which Employers Mutual will acquire all of the remaining shares of the Company for $36.00 per share in cash. The transaction is expected to close in the second half of 2019.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet cash obligations.  The Company had positive cash flows from operations of $10.9 million and $3.5 million during the first three months of 2019 and 2018, respectively. The Company typically generates substantial positive cash flows from operations because cash from premium payments is generally received in advance of cash payments made to settle claims.  These positive cash flows provide the foundation of the Company’s asset/liability management program and are the primary driver of the Company’s liquidity.  The Company invests in high quality, liquid securities to match the anticipated payments of losses and settlement expenses of the underlying insurance policies.  Because the timing of the losses is uncertain, the majority of the portfolio is maintained in short to intermediate maturity securities that can be easily liquidated or that generate adequate cash flow to meet liabilities.

The Company is a holding company whose principal asset is its investment in its property and casualty insurance subsidiaries and its reinsurance subsidiary (“insurance subsidiaries”).  As a holding company, the Company is dependent upon cash dividends from its insurance subsidiaries to meet all its obligations, including cash dividends to stockholders, the funding of the Company’s stock repurchase program and, more recently, expenses associated with evaluating and responding to Employers Mutual's non-binding indicative proposal to purchase all of the common stock of the Company not already owned by Employers Mutual.  State insurance regulations restrict the maximum amount of dividends insurance companies can pay without prior regulatory approval.  The maximum amount of dividends that the insurance subsidiaries can pay to the Company in 2019 without prior regulatory approval is approximately $48.0 million.  The Company received $5.1 million and $3.5 million of dividends from its insurance subsidiaries and paid cash dividends to its stockholders totaling $5.0 million and $4.7 million during the first three months of 2019 and 2018, respectively.

The Company’s insurance subsidiaries must maintain adequate liquidity to ensure that their cash obligations are met; however, because of the property and casualty insurance subsidiaries’ participation in the pooling agreement and the reinsurance subsidiary’s participation in the quota share agreement, they do not have the daily liquidity concerns normally associated with an insurance company.  This is because under the terms of the pooling and quota share agreements, Employers Mutual receives all premiums and pays all losses and expenses associated with the insurance business produced by the pool participants and the assumed reinsurance business ceded to the Company’s reinsurance subsidiary, and then settles inter-company balances generated by these transactions with the participating companies on a monthly (pool participants) or quarterly (reinsurance subsidiary) basis.

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At the insurance subsidiary level, the primary sources of cash are premium income, investment income and proceeds from called or matured investments.  The principal outflows of cash are payments of claims, commissions, premium taxes, operating expenses, income taxes, dividends, interest and principal payments on debt, and investment purchases.  Cash outflows vary because of uncertainties regarding settlement dates for unpaid losses and the potential for large losses, either individually or in the aggregate.  Accordingly, the insurance subsidiaries maintain investment and reinsurance programs intended to provide adequate funds to pay claims without forced sales of investments.  The insurance subsidiaries also have the ability to borrow funds on a short-term basis (180 days) from Employers Mutual and/or its subsidiaries under an Inter-Company Loan Agreement. In addition, Employers Mutual maintains access to a line of credit with the Federal Home Loan Bank that could be used to provide the insurance subsidiaries additional liquidity if needed.

The Company maintains a portion of its investment portfolio in relatively short-term and highly liquid investments to ensure the availability of funds to pay claims and expenses.  A variety of maturities are maintained in the Company’s investment portfolio to assure adequate liquidity.  The maturity structure of the fixed maturity portfolio is also established by the relative attractiveness of yields on short, intermediate and long-term securities.  The Company does not invest in non-investment grade debt securities.  Any non-investment grade securities held by the Company are the result of rating downgrades subsequent to their purchase.

The Company invests for the long term and generally purchases fixed maturity securities with the intent to hold them to maturity.  Despite this intent, the Company currently classifies fixed maturity securities as available-for-sale to provide flexibility in the management of its investment portfolio.  At March 31, 2019 and December 31, 2018, the Company had net unrealized holding gains, net of deferred taxes, on its fixed maturity securities available-for-sale of $28.5 million and $7.7 million, respectively.  The fluctuation in the fair value of these investments is primarily due to changes in the interest rate environment during this time period, but also reflects fluctuations in risk premium spreads over U.S. Treasuries.  Since the Company intends to hold fixed maturity securities to maturity, 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 its portfolio as conditions warrant.

The majority of the Company’s assets are invested in fixed maturity securities.  These investments provide a substantial amount of investment income that supplements underwriting results and contributes to net earnings.  As these investments mature, or are called, the proceeds are reinvested at current interest 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.  

The Company held $18.1 million and $19.3 million in other long-term investments at March 31, 2019 and December 31, 2018, respectively, which primarily consist of holdings in limited partnerships, and privately placed common and non-redeemable convertible preferred stock in start-up technology companies with ties to the insurance industry. The equity method of accounting is used for these investments, with changes in the carrying value recorded as realized investment gains (losses). During 2018, the Company invested additional funds of $7.5 million into a limited partnership that is designed to help protect the Company from a sudden and significant decline in the value of its equity portfolio (included $2.3 million of gains realized from the program that were reinvested). No additional funds were invested into this program during the first quarter of 2019. Also included in other long-term investments are holdings in limited liability companies that convey renewable energy tax credits that are carried at amortized cost. After reductions for the utilization of the tax credits and impairment losses, the carrying values of these investments totaled $2.1 million at March 31, 2019 and $2.2 million at December 31, 2018.

The Company participates in reverse repurchase arrangements, involving the purchase of investment securities from third-party sellers with the agreement that the purchased securities be sold back to the third-party sellers for agreed-upon prices at specified future dates. The third-party sellers are required to pledge collateral with a value greater than the amount of cash received in the transactions. In accordance with GAAP, the investment securities purchased under the reverse repurchase agreements are not reflected in the Company's consolidated balance sheets, but instead a receivable is recorded for the principal amount lent. The Company did not have a receivable under reverse repurchase agreements as of March 31, 2019 or December 31, 2018.

The Company’s cash balance was $232,000 and $337,000 at March 31, 2019 and December 31, 2018, respectively.

During the first three months of 2019, Employers Mutual made no contributions to its qualified pension plan or postretirement benefit plans. The Company's share of Employers Mutual's 2019 planned contribution to its pension plan, if made, will be approximately $2.1 million. No contributions will be made to the postretirement benefit plans in 2019.

During the first three months of 2018, Employers Mutual made no contributions to its qualified pension plan or postretirement benefit plans.  The Company reimbursed Employers Mutual $2.4 million for its share of the total 2018 pension contribution (no contributions were made to the postretirement benefit plans during 2018).

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Capital Resources

Capital resources consist of stockholders’ equity and debt, representing funds deployed or available to be deployed to support business operations.  For the Company’s insurance subsidiaries, capital resources are required to support premium writings.  Regulatory guidelines suggest that the ratio of a property and casualty insurer’s annual net premiums written to its statutory surplus should not exceed three to one.  On an annualized basis, all of the Company’s property and casualty insurance subsidiaries were well under this guideline at March 31, 2019.

The Company’s insurance subsidiaries are required to maintain a certain minimum level of surplus on a statutory basis, and are subject to regulations under which the payment of dividends from statutory surplus is restricted and may require prior approval of their domiciliary insurance regulatory authorities.  The Company’s insurance subsidiaries are also subject to annual Risk Based Capital (RBC) requirements that may further impact their ability to pay dividends.  RBC requirements attempt to measure minimum statutory capital needs based upon the risks in a company’s mix of products and investment portfolio.  At December 31, 2018, the Company’s insurance subsidiaries had total adjusted statutory capital of $527.1 million, which is well in excess of the minimum risk-based capital requirement of $101.9 million.

The Company’s total cash and invested assets at March 31, 2019 and December 31, 2018 are summarized as follows:

	March 31, 2019
($ in thousands)	Amortized cost		Fair value		Carrying value		Percent of total carrying value
Fixed maturity securities available-for-sale	$	1,255,775	$	1,291,860	$	1,291,860	80.7	%
Equity investments, at fair value	167,632		242,583		242,583		15.1	%
Cash	232		232		232		—	%
Short-term investments	48,265		48,265		48,265		3.0	%
Equity investments, at alternative measurement of cost less impairments	1,200		XXXX		1,200		0.1	%
Other long-term investments	18,099		XXXX		18,099		1.1	%
	$	1,491,203	XXXX		$	1,602,239	100.0	%

	December 31, 2018
($ in thousands)	Amortized cost		Fair value		Carrying value		Percent of total carrying value
Fixed maturity securities available-for-sale	$	1,273,132	$	1,282,909	$	1,282,909	83.0	%
Equity investments, at fair value	160,371		215,363		215,363		13.9	%
Cash	337		337		337		—	%
Short-term investments	28,204		28,204		28,204		1.8	%
Equity investments, at alternative measurement of cost less impairments	1,200		XXXX		1,200		0.1	%
Other long-term investments	19,316		XXXX		19,316		1.2	%
	$	1,482,560	XXXX		$	1,547,329	100.0	%

The Company’s property and casualty insurance subsidiaries have $25.0 million of surplus notes issued to Employers Mutual.  The interest rate on the surplus notes was increased to 2.73 percent from 1.35 percent effective February 1, 2018. Reviews of the interest rate are conducted by the Inter-Company Committees of the boards of directors of the Company and Employers Mutual every five years, with the next review due in 2023.  Payments of interest and repayments of principal can only be made out of the applicable subsidiary’s earned surplus and are subject to prior approval by the insurance commissioners of the respective states of domicile.  The surplus notes are subordinate and junior in right of payment to all obligations or liabilities of the applicable insurance subsidiaries.  Total interest expense incurred on these surplus notes was $171,000 during the first three months of 2019 and $142,000 during the first three months of 2018.  

As of March 31, 2019, the Company had no material commitments for capital expenditures.

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Off-Balance Sheet Arrangements

Employers Mutual collects from agents, policyholders and ceding companies all premiums written associated with the insurance business produced by the pool participants and the assumed reinsurance business ceded to the reinsurance subsidiary. Employers Mutual also collects from its reinsurers all losses and settlement expenses recoverable under the reinsurance contracts protecting the pool participants and the reinsurance subsidiary, as well as the fronting business ceded to the reinsurance subsidiary. Employers Mutual settles with the pool participants (monthly) and the reinsurance subsidiary (quarterly) the premiums written from these insurance policies and the paid losses and settlement expenses recoverable under the external reinsurance contracts, providing full credit for the premiums written and the paid losses and settlement expenses recoverable under the external reinsurance contracts generated during the period (not just the collected portion). Due to this arrangement, and since a significant portion of the premium balances are collected over the course of the underlying coverage periods, Employers Mutual carries a substantial receivable balance for insurance and reinsurance premiums in process of collection and, to a lesser extent, paid losses and settlement expenses recoverable from the external reinsurance companies. Any of these receivable amounts that are ultimately deemed to be uncollectible are charged-off by Employers Mutual and the expense is charged to the reinsurance subsidiary or allocated to the pool members on the basis of pool participation.  As a result, the Company has off-balance sheet arrangements with an unconsolidated entity that results in credit-risk exposures (Employers Mutual’s insurance and reinsurance premium receivable balances, and paid loss and settlement expense recoverable amounts) that are not reflected in the Company’s financial statements.  The average annual expense for such charge-offs allocated to the Company over the past ten years is $414,000. Based on this historical data, this credit-risk exposure is not considered to be material to the Company’s results of operations or financial position and, accordingly, no loss contingency liability has been recorded.

Investment Impairments and Considerations

At March 31, 2019, the Company had unrealized losses on fixed maturity securities available-for-sale as presented in the following table. The estimated fair value is based on quoted market prices, where available.  In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security. None of these securities are considered to be in concentrations by either security type or industry.  The Company uses several factors to determine whether the carrying value of an individual security has been “other-than-temporarily” impaired.  Such factors include, but are not limited to, the security’s value and performance in the context of the overall markets, length of time and extent the security’s fair value has been below carrying value, key corporate events and the amount of collateral available. Based on these factors, the absence of management’s intent to sell these securities prior to recovery or maturity, and the fact that management does not anticipate that it will be forced to sell these securities prior to recovery or maturity, it was determined that the carrying value of these securities were not “other-than-temporarily” impaired at March 31, 2019.  Risks and uncertainties inherent in the methodology utilized in this evaluation process include interest rate risk and the overall performance of the economy, all of which have the potential to adversely affect the value of the Company’s investments. Should a determination be made at some point in the future that these unrealized losses are “other-than-temporary”, the Company’s earnings would be reduced by approximately $2.4 million, net of tax; however, the Company’s financial position would not be affected because unrealized losses on fixed maturity securities available-for-sale are reflected in the Company’s financial statements as a component of stockholders’ equity, net of deferred taxes.

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Following is a schedule of the length of time fixed maturity securities available-for-sale have continuously been in an unrealized loss position as of March 31, 2019.

	Less than twelve months				Twelve months or longer				Total
($ in thousands)	Fair values		Unrealized losses		Fair values		Unrealized losses		Fair values		Unrealized losses
Fixed maturity securities:
U.S. treasury	$	—	$	—	$	8,113	$	33	$	8,113	$	33
U.S. government-sponsored agencies	—		—		47,961		180		47,961		180
Obligations of states and political subdivisions	—		—		12,372		59		12,372		59
Commercial mortgage-backed	—		—		11,140		87		11,140		87
Residential mortgage-backed	4,466		94		40,869		1,329		45,335		1,423
Other asset-backed	—		—		11,167		474		11,167		474
Corporate	7,901		349		36,514		396		44,415		745
Total fixed maturity securities	$	12,367	$	443	$	168,136	$	2,558	$	180,503	$	3,001

The Company does not purchase non-investment grade fixed maturity securities.  Any non-investment grade fixed maturity securities held are the result of rating downgrades that occurred subsequent to their purchase.  At March 31, 2019, the Company held $4.4 million of non-investment grade fixed maturity securities in a net unrealized loss position of $204,000.

Following is a schedule of gross realized losses recognized in the first three months of 2019 on fixed maturity securities available-for-sale.  The schedule is aged according to the length of time the underlying securities were in an unrealized loss position.  

	Realized losses from sales						"Other-than- temporary" impairment losses		Total gross realized losses
($ in thousands)	Book value		Sales price		Gross realized losses
Fixed maturity securities:
Three months or less	$	—	$	—	$	—	$	—	$	—
Over three months to six months	—		—		—		—		—
Over six months to nine months	—		—		—		—		—
Over nine months to twelve months	—		—		—		—		—
Over twelve months	4,841		4,569		272		—		272
Subtotal, fixed maturity securities	$	4,841	$	4,569	$	272	$	—	$	272

LEASES, COMMITMENTS AND CONTINGENT LIABILITIES

The Company does not have any lease agreements, but Employers Mutual has entered into leases for 16 branch and service office facilities, the costs of which are charged to the pool and allocated among the pool participants based on their respective participation interests. The Company's contractual obligations as of March 31, 2019 did not change materially from those presented in the Company's 2018 Form 10-K.

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The participants in the pooling agreement are subject to guaranty fund assessments by states in which they write business.  Guaranty fund assessments are used by states to pay policyholder liabilities of insolvent insurers domiciled in those states.  Many states allow assessments to be recovered through premium tax offsets.  The Company has accrued estimated guaranty fund assessments of $531,000 and $615,000 as of March 31, 2019 and December 31, 2018, respectively. Premium tax offsets of $662,000 and $809,000, which are related to prior guarantee fund payments and current assessments, have been accrued as of March 31, 2019 and December 31, 2018, respectively.  The guaranty fund assessments are expected to be paid over the next two years and the premium tax offsets are expected to be realized within ten years of the payments.  The participants in the pooling agreement are also subject to second-injury fund assessments, which are designed to encourage employers to employ workers with pre-existing disabilities.  The Company had accrued estimated second-injury fund assessments of $2.3 million at March 31, 2019 and $2.4 million at December 31, 2018.  The second-injury fund assessment accruals are based on projected loss payments.  The periods over which the assessments will be paid is not known.

The participants in the pooling agreement have purchased annuities from life insurance companies, under which the claimant is payee, to fund future payments that are fixed pursuant to specific claim settlement provisions.  Based on information provided by the life insurance companies on an annual basis, the Company’s share of case loss reserves eliminated by the purchase of those annuities was $110,000 at December 31, 2018.  The Company had a contingent liability for the aggregate guaranteed amount of the annuities of $183,000 at December 31, 2018 should the issuers of those annuities fail to perform. Although management is not able to verify the amount, the Company would likely have a similar contingent liability at March 31, 2019.  The probability of a material loss due to failure of performance by the issuers of these annuities is considered remote.

On March 22, 2019, a lawsuit was filed in state court in Iowa relating to the November 15, 2018 proposal by Employers Mutual to acquire all outstanding shares of stock in the Company not already owned by Employers Mutual.  The lawsuit was filed as a purported class action, and names as defendants Employers Mutual and the five individual directors of the Company.  The lawsuit alleges that the proposal is unfair to the Company’s minority shareholders, and seeks an unspecified amount of damages.  Employers Mutual and the Company and its directors deny all allegations of wrongdoing set forth in the lawsuit. The Company believes that Directors, Officers and Organization Liability Coverage is in place that should be sufficient to cover any finding of liability.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The main objectives in managing the Company’s investment portfolios are to maximize after-tax investment return while minimizing risk, in order to provide maximum support for the underwriting operations.  Investment strategies are developed based upon many factors including the economic environment, business cycle, regulatory requirements, fluctuations in interest rates, underwriting results and consideration of other market risks.  Investment decisions are centrally managed by investment professionals and are supervised by the investment committees of the respective boards of directors for each of the Company’s subsidiaries.

Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments, and is directly influenced by the volatility and liquidity in the markets in which the related underlying assets are traded.  The market risks of the financial instruments owned by the Company relate to the investment portfolio, which exposes the Company to interest rate (inclusive of credit spreads) 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; however, there can be no assurance that future changes in interest rates, creditworthiness of issuers, prepayment activity, liquidity available in the market and other general market conditions will not have a material adverse impact on the Company’s results of operations, liquidity or financial position.

Two categories of influences on market risk exist as it relates to financial instruments.  First are systematic aspects, which relate to the investing environment and are out of the control of the investment manager.  Second are non-systematic aspects, which relate to the construction of the investment portfolio through investment policies and decisions, and are under the direct control of the investment manager.  The Company is committed to controlling non-systematic risk through sound investment policies and diversification.

Further analysis of the components of the Company’s market risk (including interest rate risk, equity price risk, credit quality risk, and prepayment risk) can be found in the Company’s 2018 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely making known to them material information relating to the Company and the Company’s consolidated subsidiaries required to be disclosed in the Company’s reports filed or submitted under the Exchange Act.

There were no changes in the Company’s internal control over financial reporting that occurred during the first quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information regarding purchases of equity securities by the Company and affiliated purchasers for the three months ended March 31, 2019:

Period	(a) Total number of shares (or units) purchased1	(b) Average price paid per share (or unit)		(c) Total number of shares (or units) purchased as part of publicly announced plans or programs2	(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs ($ in thousands)2,3
1/1/2019 - 1/31/2019	36	$	31.74	—	$	18,456
2/1/2019 - 2/28/2019	48	32.34		—	18,456
3/1/2019 - 3/31/2019	894	32.70		—	18,456
Total	978	$	32.64	—

¹ Consists of shares purchased in the open market to fulfill the Company's obligations under its dividend reinvestment and common stock purchase plan.

² On November 3, 2011, the Company’s Board of Directors authorized a $15.0 million stock repurchase program.  This program does not have an expiration date.  A total of $14.0 million remains available in this plan for the purchase of additional shares.

³ On May 12, 2005, the Company announced that its parent company, Employers Mutual, had initiated a $15.0 million stock purchase program under which Employers Mutual may purchase shares of the Company’s common stock in the open market. This purchase program does not have an expiration date; however, this program has been dormant while the Company’s repurchase programs have been in effect.  A total of $4.5 million remains in this program.

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ITEM 6. EXHIBITS

Exhibit number	Item
31.1*	Certification of President, Chief Executive Officer and Treasurer as required by Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Senior Vice President and Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of President, Chief Executive Officer and Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document

*	Filed herewith
**	Furnished, not filed

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

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, on May 9, 2019.

EMC INSURANCE GROUP INC.

Registrant

/s/ Bruce G. Kelley

Bruce G. Kelley

President, Chief Executive Officer, Treasurer and Director

(Principal Executive Officer)

/s/ Mark E. Reese

Mark E. Reese

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

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