-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IL8YDikz9AL/G0+BBnF+VxCv1R9E1Fswh9FO/eAKOOAGdkk0Pb6QKe32WcA2Bhm+ EuBUYP3wQmW/Ap03HudS8Q== 0000356130-97-000009.txt : 19970815 0000356130-97-000009.hdr.sgml : 19970815 ACCESSION NUMBER: 0000356130-97-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMC INSURANCE GROUP INC CENTRAL INDEX KEY: 0000356130 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 426234555 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10956 FILM NUMBER: 97662522 BUSINESS ADDRESS: STREET 1: 717 MULBERRY ST CITY: DES MOINES STATE: IA ZIP: 50309 BUSINESS PHONE: 5152802902 10-Q 1 SECOND QUARTER 10-Q EMC INSURANCE GROUP INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1997 ---------------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ --------------------- Commission File Number: 0-10956 EMC INSURANCE GROUP INC. -------------------------------------------------------- (Exact name of registrant as specified in its charter) Iowa 42-6234555 - ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 717 Mulberry Street, Des Moines, Iowa 50309 - --------------------------------------- ------------------ (Address of principal executive office) (Zip Code) (515) 280-2581 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at July 31, 1997 ----- ------------------------------- Common stock, $1.00 par value 11,204,287 ---------- Total pages 17 ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements EMC INSURANCE GROUP INC. AND SUBSIDIARIES Consolidated Balance Sheets June 30, December 31, 1997 1996 ------------- ------------ (Unaudited) ASSETS Investments: Fixed maturities: Securities held-to-maturity, at amortized cost (Fair value $185,830,167 and $194,655,256) $180,737,547 $188,385,721 Securities available-for-sale, at fair value (amortized cost $161,052,960 and $146,794,158) .............................. 164,577,471 150,038,644 Equity securities available-for-sale, at fair value (cost $22,029,068 and $21,236,281) ..... 28,818,092 24,040,381 Short-term investments, at cost ................ 16,369,057 17,553,606 ------------ ------------ Total investments ..................... 390,502,167 380,018,352 Cash ............................................. 1,630,100 3,500,629 Indebtedness of related party .................... 1,236,777 - Accrued investment income ........................ 5,732,755 6,567,186 Accounts receivable .............................. 938,875 740,736 Deferred policy acquisition costs ................ 10,158,673 9,021,863 Deferred income taxes ............................ 9,988,235 10,974,425 Intangible assets, including goodwill, at cost less accumulated amortization of $2,010,926 and $1,943,669 ................................. 1,546,895 1,614,151 Reinsurance receivables .......................... 15,065,275 14,735,786 Prepaid reinsurance premiums ..................... 1,944,945 1,516,972 Other assets ..................................... 1,560,007 1,637,473 ------------ ------------ Total assets .......................... $440,304,704 $430,327,573 ============ ============ See accompanying Notes to Interim Consolidated Financial Statements. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Consolidated Balance Sheets June 30, December 31, 1997 1996 ------------ ------------- (Unaudited) LIABILITIES Losses and settlement expenses ................... $215,464,263 $202,502,986 Unearned premiums ................................ 52,357,939 47,908,954 Other policyholders' funds ....................... 3,078,849 3,467,449 Indebtedness to related party .................... - 7,000,482 Income taxes payable ............................. 358,000 2,942,000 Postretirement benefits .......................... 5,180,313 4,932,834 Deferred income .................................. 549,639 665,550 Other liabilities ................................ 10,242,239 12,178,290 ------------ ------------ Total liabilities ............................ 287,231,242 281,598,545 STOCKHOLDERS' EQUITY Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding, 11,201,783 shares in 1997 and 11,084,461 shares in 1996 ... 11,201,783 11,084,461 Additional paid-in capital ....................... 64,072,090 62,762,613 Unrealized holding gains on fixed maturity securities available-for-sale, net of tax ...... 2,326,178 2,141,361 Unrealized holding gains on equity securities available-for-sale, net of tax ................. 4,480,756 1,850,706 Retained earnings ................................ 70,992,655 70,889,887 ------------ ------------ Total stockholders' equity ................... 153,073,462 148,729,028 ------------ ------------ Total liabilities and stockholders' equity ... $440,304,704 $430,327,573 ============ ============ See accompanying Notes to Interim Consolidated Financial Statements. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) Three months ended Six months ended June 30, June 30, ------------------------ ----------------------- 1997 1996 1997 1996 ------------ ----------- ----------- ----------- REVENUES: Premiums earned ..........$ 44,143,379 $40,433,259 $86,601,722 $80,913,385 Investment income, net ... 5,895,256 5,916,176 11,639,992 11,685,151 Realized investment gains 9,417 36,545 66,722 50,686 Other income ............. 56,226 70,295 115,911 144,914 ------------ ----------- ----------- ----------- 50,104,278 46,456,275 98,424,347 92,794,136 ------------ ----------- ----------- ----------- LOSSES AND EXPENSES: Losses and settlement expenses ............... 33,547,594 31,693,828 65,197,480 59,554,518 Dividends to policyholders 631,985 969,492 1,381,046 1,846,661 Amortization of deferred policy acquisition costs 8,924,070 8,067,797 17,096,772 15,640,483 Other underwriting expenses ............... 5,077,725 4,242,259 10,755,593 9,895,701 ------------ ----------- ----------- ----------- 48,181,374 44,973,379 94,430,891 86,937,363 ------------ ----------- ----------- ----------- Income before income taxes ................. 1,922,904 1,482,899 3,993,456 5,856,773 ------------ ----------- ----------- ----------- INCOME TAXES: Current .................. 354,350 147,515 1,017,847 1,275,515 Deferred ................. (123,049) (135,819) (463,893) (222,410) ------------ ----------- ----------- ----------- 231,301 11,696 553,954 1,053,105 ------------ ----------- ----------- ----------- Net income .........$ 1,691,603 $ 1,471,203 $ 3,439,502 $ 4,803,668 ============ =========== =========== =========== Earnings per share ......... $.15 $.13 $.31 $.44 ============ =========== =========== =========== Dividend per share ......... $.15 $.14 $.30 $.28 ============ =========== =========== =========== Average number of shares outstanding .............. 11,156,307 10,905,112 11,125,519 10,871,760 ============ =========== =========== =========== See accompanying Notes to Interim Consolidated Financial Statements. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, -------------------------- 1997 1996 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income .................................... $ 3,439,502 $ 4,803,668 ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities: Losses and settlement expenses ............ 7,043,180 7,865,680 Unearned premiums ......................... 1,625,919 (907,415) Other policyholders' funds ................ (388,600) 78,656 Deferred policy acquisition costs ......... (1,136,810) (277,826) Indebtedness of related party ............. (8,237,259) (81,724) Accrued investment income ................. 834,431 162,110 Accrued income taxes: Current ................................. (2,584,000) (2,264,000) Deferred ................................ (463,893) (222,411) Provision for amortization ................ 26,784 (21,946) Realized investment gains ................. (66,722) (50,686) Postretirement benefits ................... 247,479 228,517 Reinsurance receivables ................... (329,489) (4,737,849) Prepaid reinsurance premiums .............. (427,973) 62,275 Amortization of deferred income ........... (115,911) (144,914) Other, net ................................ (2,056,730) 239,977 ------------ ----------- (6,029,594) (71,556) Cash provided by the change in the property and casualty insurance subsidiaries' pooling agreement (note 3) 5,674,458 - Cash provided by the change in the reinsurance subsidiary's quota share agreement (note 3) ...................... 3,066,705 - ------------ ------------ Net cash provided by operating activities ..... $ 6,151,071 $ 4,732,112 ------------ ------------ EMC INSURANCE GROUP INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, -------------------------- 1997 1996 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixed maturity securities held-to-maturity ............................ $ (5,999,070) $(11,959,263) Maturities of fixed maturity securities held-to-maturity ............................ 13,688,421 12,596,869 Purchases of fixed maturity securities available-for-sale .......................... (25,962,387) (12,427,911) Maturities of fixed maturity securities available-for-sale .......................... 11,769,610 11,263,023 Purchases of equity securities available-for-sale .......................... (792,787) - Net sales (purchases) of short-term investments 1,184,548 (2,865,403) ------------ ------------ Net cash used in investing activities ....... (6,111,665) (3,392,685) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock ...................... 1,426,799 1,822,038 Dividends paid to stockholders ................ (3,336,734) (3,044,267) Purchase of treasury stock, net (note 2) ...... - 100,421 ------------ ------------ Net cash used in financing activities ..... (1,909,935) (1,121,808) ------------ ------------ NET (DECREASE) INCREASE IN CASH ................. (1,870,529) 217,619 Cash at beginning of year ....................... 3,500,629 1,198,436 ------------ ------------ Cash at end of quarter .......................... $ 1,630,100 $ 1,416,055 ============ ============ Income taxes paid ............................... $ 3,601,847 $ 3,541,000 Interest paid ................................... $ 84,709 $ - See accompanying Notes to Interim Consolidated Financial Statements. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (Unaudited) June 30, 1997 Note 1 - ------ The results of operations for the interim periods reported are not necessarily indicative of results to be expected for the year. The information reflects all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods. Note 2 - ------ Effective June 30, 1996, the use of treasury stock was discontinued and all treasury shares held at that time were retired. All shares of the Company's common stock repurchased after June 30, 1996 have been retired. Note 3 - ------ Effective January 1, 1997, a new affiliate of Employers Mutual Casualty Company (Employers Mutual) began participating in the pooling agreement. In connection with this change in the pooling agreement, the Company's liabilities increased $6,393,063 and invested assets increased $5,674,458. The Company reimbursed Employers Mutual $794,074 for commissions incurred to generate this business and Employers Mutual paid the Company $75,469 in interest income as the actual cash transfer did not occur until the affiliation was approved by Hamilton Mutual's policyholders and the Ohio Department of Insurance at the end of March. Effective January 1, 1997, the reinsurance subsidiary's quota share participation was increased from 95 percent to 100 percent. In connection with this change in the quota share agreement, the Company's liabilities increased $3,173,647 and invested assets increased $3,066,705. The Company reimbursed Employers Mutual $106,942 for commissions incurred to generate this business. Note 4 - ------ The Company will adopt Statement of Financial Accounting Standard 128, "Earnings Per Share" in the fourth quarter of 1997. Adoption of this statement is not expected to have any impact on the financial statements of the Company. Note 5 - ------ In reviewing these financial statements, reference should be made to the Company's 1996 Form 10-K or the 1996 Annual Report to Shareholders for more detailed footnote information. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) OVERVIEW EMC Insurance Group Inc. (the "Company"), an approximately 67 percent owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is an insurance holding company with operations in property and casualty insurance, reinsurance, nonstandard risk automobile insurance and an excess and surplus lines insurance agency. Property and casualty insurance is the most significant segment, representing 75.5 percent of consolidated premium income. The three property and casualty insurance subsidiaries of the Company are parties to reinsurance pooling agreements with Employers Mutual and several of its subsidiaries (collectively the "pooling agreement"). Effective January 1, 1997, a new affiliate of Employers Mutual, The Hamilton Mutual Insurance Company of Cincinnati, Ohio (Hamilton Mutual), began participating in the pooling agreement. In connection with this change in the pooling agreement, the Company's liabilities increased $6,393,063 and invested assets increased $5,674,458. The Company reimbursed Employers Mutual $794,074 for commissions incurred to generate this business and Employers Mutual paid the Company $75,469 in interest income as the actual cash transfer did not occur until the affiliation was approved by Hamilton Mutual's policyholders and the Ohio Department of Insurance at the end of March. Under the terms of the pooling agreement, each company cedes to Employers Mutual all of its insurance business and assumes from Employers Mutual an amount equal to its participation in the pool. All losses, settlement expenses and other underwriting and administrative expenses, excluding the voluntary reinsurance business assumed by Employers Mutual and Hamilton Mutual from unaffiliated insurance companies, are prorated among the parties on the basis of participation in the pool. The aggregate participation of the Company's property and casualty insurance subsidiaries in the pool is 22 percent. Operations of the pool give rise to intercompany balances with Employers Mutual, which are settled on a quarterly basis. The investment activities and income tax liabilities of the pool participants are not subject to the pooling agreement. The purpose of the pooling agreement is to spread the risk of an exposure insured by any of the pool participants among all the companies. The pooling agreement produces a more uniform and stable underwriting result from year to year for all companies in the pool than might be experienced individually. In addition, each company benefits from the capacity of the entire pool, rather than being limited to policy exposures of a size commensurate with its own assets, and from the wide range of policy forms, lines of insurance written, rate filings and commission plans offered by each of the companies. A single set of reinsurance treaties is maintained for the protection of all seven companies in the pool. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued (Unaudited) The Company's reinsurance subsidiary assumes a quota share portion of Employers Mutual's assumed reinsurance business, exclusive of certain reinsurance contracts. In order to take advantage of the reinsurance subsidiary's current surplus level, the following changes were made to the quota share agreement effective January 1, 1997: an increase in the quota share percentage from 95 percent to 100 percent and an increase in the maximum amount of losses retained per event from $1,000,000 to $1,500,000. In connection with this change in the quota share agreement, the Company's liabilities increased $3,173,647 and invested assets increased $3,066,705. The Company reimbursed Employers Mutual $106,942 for commissions incurred to generate this business. The reinsurance subsidiary receives all premiums and assumes all related losses and settlement expenses of this business, subject to the maximum loss per event noted above. The reinsurance subsidiary does not reinsure any of Employers Mutual's direct insurance business, nor any "involuntary" facility or pool business that Employers Mutual assumes pursuant to state law. In addition, the reinsurance subsidiary is not liable for credit risk in connection with the insolvency of any reinsurers of Employers Mutual. The Company's nonstandard risk automobile insurance subsidiary specializes in insuring private passenger automobile risks that are found to be unacceptable in the standard automobile insurance market. The excess and surplus lines insurance agency provides insurance agents access to the excess and surplus lines markets and also functions as managing underwriter for such lines for Employers Mutual and several of the pool members. The results of operations for the interim periods reported are not necessarily indicative of results to be expected for the year. The information reflects all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued (Unaudited) CONSOLIDATED RESULTS OF OPERATIONS Operating results for the six months and three months ended June 30, 1997 and 1996 are as follows: Six months ended Three months ended June 30, June 30, ----------------- ----------------- ($ in thousands) 1997 1996 1997 1996 -------- -------- -------- -------- Premiums earned ..................... $ 86,602 $ 80,913 $ 44,144 $ 40,433 Losses and settlement expenses ...... 65,197 59,554 33,548 31,693 Other underwriting expenses ......... 29,234 27,383 14,634 13,280 -------- -------- -------- -------- Underwriting loss ................... (7,829) (6,024) (4,038) (4,540) Net investment income ............... 11,640 11,685 5,895 5,916 Realized investment gains ........... 67 51 10 37 Other income ........................ 116 145 56 70 -------- -------- -------- -------- Operating income before income taxes ................... $ 3,994 $ 5,857 $ 1,923 $ 1,483 ======== ======== ======== ======== Losses and settlement expenses: Insured events of current year .... $ 65,787 $ 69,590 $ 32,998 $ 36,301 (Decrease) increase in provision for insured events of prior years (590) (10,036) 550 (4,608) -------- -------- -------- -------- Total losses and settlement expenses ............ $ 65,197 $ 59,554 $ 33,548 $ 31,693 ======== ======== ======== ======== Catastrophe and storm losses ........ $ 3,101 $ 4,771 $ 2,138 $ 3,625 ======== ======== ======== ======== Operating income before income taxes decreased 31.9 percent for the six months and increased 29.7 percent for the three months ended June 30, 1997 from the same periods in 1996. The decrease for the six months is primarily due to a decline in the operating results of the nonstandard risk automobile and property and casualty insurance subsidiaries. The increase for the three months reflects an improvement in the operating results of the property and casualty insurance subsidiaries, which reported very poor loss experience in the second quarter of 1996. Premiums earned increased 7.0 percent for the six months and 9.2 percent for the three months ended June 30, 1997 from the same periods in 1996. Production increases in the property and casualty insurance and nonstandard risk automobile insurance subsidiaries were partially offset by a production decrease in the reinsurance subsidiary. Losses and settlement expenses increased 9.5 percent for the six months and 5.9 percent for the three months ended June 30, 1997 from the same periods in 1996. Loss experience associated with current year losses improved from the amounts reported for the six months and three months ended June 30, 1996, but remained at elevated levels. This improvement, however, was more than offset by a substantial decrease in the amount of benefit realized from the actual settlement of claims and changes in reserves associated with prior year losses. Other underwriting expenses increased 6.8 percent for the six months and 10.2 percent for the three months ended June 30, 1997 from the same periods in 1996. These increases are primarily a result of the production increases experienced in the first six months of 1997. Net investment income decreased 0.4 percent for both the six months and three months ended June 30, 1997 from the same periods in 1996. These decreases primarily reflect a lower average rate of return on bonds and short-term investments. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued (Unaudited) SEGMENT RESULTS Property and Casualty Insurance Operating results for the six months and three months ended June 30, 1997 and 1996 are as follows: Six months ended Three months ended June 30, June 30, ----------------- ----------------- ($ in thousands) 1997 1996 1997 1996 -------- -------- -------- -------- Premiums earned ..................... $ 65,380 $ 58,985 $ 33,406 $ 29,462 Losses and settlement expenses ...... 49,356 44,108 26,234 23,642 Other underwriting expenses ......... 22,514 20,635 11,284 10,393 -------- -------- -------- -------- Underwriting loss ................... (6,490) (5,758) (4,112) (4,573) Net investment income ............... 7,678 7,725 3,915 3,892 Realized investment gains ........... 48 28 3 19 -------- -------- -------- -------- Operating income (loss) before income taxes ................... $ 1,236 $ 1,995 $ (194)$ (662) ======== ======== ======== ======== Losses and settlement expenses: Insured events of current year .... $ 49,779 $ 51,991 $ 25,202 $ 26,806 (Decrease) increase in provision for insured events of prior years (423) (7,883) 1,032 (3,164) -------- -------- -------- -------- Total losses and settlement expenses ............ $ 49,356 $ 44,108 $ 26,234 $ 23,642 ======== ======== ======== ======== Catastrophe and storm losses ........ $ 2,384 $ 3,030 $ 1,924 $ 2,509 ======== ======== ======== ======== Premiums earned increased substantially for the six months and three months ended June 30, 1997 from the same periods in 1996. These increases reflect growth in both personal and commercial lines of business from the existing branch office structure as well as the increase in the size of the pool with the addition of Hamilton Mutual on January 1, 1997. Growth in the commercial lines of business continues to be concentrated in the property products offered under the Medallion series. The workers' compensation line of business continues to be hampered by rate reductions in several states. Underwriting results for the six months ended June 30, 1997 declined from the same period in 1996, while underwriting results for the second quarter of 1997 improved from the substandard results reported for the second quarter of 1996. Loss experience associated with current year losses improved from the amounts reported for the six months and three months ended June 30, 1996, but remained at elevated levels. This improvement, however, was more than offset by a substantial decrease in the amount of benefit realized from the actual settlement of claims and changes in reserves associated with prior year losses. The property and casualty insurance subsidiaries have historically experienced favorable development in their reserves and current reserving practices have not been relaxed; however, as previously reported, the level of favorable development experienced in prior years was not expected to continue. The growth in other underwriting expenses reflects the increase in the size of the pool with the addition of Hamilton Mutual and a slight increase in commission rates. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued (Unaudited) Reinsurance Operating results for the six months and three months ended June 30, 1997 and 1996 are as follows: Six months ended Three months ended June 30, June 30, ----------------- ----------------- ($ in thousands) 1997 1996 1997 1996 -------- -------- -------- -------- Premiums earned ..................... $ 16,377 $ 17,308 $ 8,236 $ 8,629 Losses and settlement expenses ...... 11,062 11,738 5,229 6,029 Other underwriting expenses ......... 5,221 5,425 2,540 2,149 -------- -------- -------- -------- Underwriting gain ................... 94 145 467 451 Net investment income ............... 3,202 3,150 1,621 1,613 Realized investment gains ........... 13 17 5 12 Other income ........................ 116 145 56 70 -------- -------- -------- -------- Operating income before income taxes ................... $ 3,425 $ 3,457 $ 2,149 $ 2,146 ======== ======== ======== ======== Losses and settlement expenses: Insured events of current year .... $ 11,509 $ 13,372 $ 5,949 $ 7,495 Decrease in provision for insured events of prior years ... (447) (1,634) (720) (1,466) -------- -------- -------- -------- Total losses and settlement expenses ............ $ 11,062 $ 11,738 $ 5,229 $ 6,029 ======== ======== ======== ======== Catastrophe losses .................. $ 717 $ 1,741 $ 214 $ 1,116 ======== ======== ======== ======== Premiums earned decreased for the six months and three months ended June 30, 1997 from the same periods in 1996. These decreases are primarily attributable to competitive market conditions and a general decline in rate levels for catastrophe coverage. The company is addressing these market conditions by accepting larger lines on desirable programs and strengthening its relationships with reinsurance intermediaries. Underwriting results remained profitable, but deteriorated slightly, for the six months ended June 30, 1997, while results for the three months ended June 30, 1997 remained fairly constant compared to the same period in 1996. Losses associated with the current accident year declined due to a decrease in catastrophe losses as well as the decrease in premium volume. This decrease in current accident year losses was partially offset by a decline in the amount of benefit realized from the downward development of the provision for insured events of prior years. During 1997, other underwriting expenses fluctuated by quarter while decreasing for the first six months of 1997 compared to 1996 levels, which were inflated due to the recognition of additional contingent commissions. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued (Unaudited) Nonstandard Risk Automobile Insurance Operating results for the six months and three months ended June 30, 1997 and 1996 are as follows: Six months ended Three months ended June 30, June 30, ----------------- ----------------- ($ in thousands) 1997 1996 1997 1996 -------- -------- -------- -------- Premiums earned ..................... $ 4,845 $ 4,620 $ 2,502 $ 2,342 Losses and settlement expenses ...... 4,779 3,708 2,085 2,022 Other underwriting expenses ......... 1,467 1,329 797 679 -------- -------- -------- -------- Underwriting loss ................... (1,401) (417) (380) (359) Net investment income ............... 518 559 249 282 Realized investment gains ........... 5 6 1 6 -------- -------- -------- -------- Operating (loss) income before income taxes ................... $ (878)$ 148 $ (130)$ (71) ======== ======== ======== ======== Losses and settlement expenses: Insured events of current year .... $ 4,499 $ 4,227 $ 1,847 $ 2,000 Increase (decrease) in provision for insured events of prior years 280 (519) 238 22 -------- -------- -------- -------- Total losses and settlement expenses ............ $ 4,779 $ 3,708 $ 2,085 $ 2,022 ======== ======== ======== ======== Premiums earned increased for the six months and three months ended June 30, 1997 from the same periods in 1996. This is the second consecutive quarter the company has experienced an increase in earned premiums after experiencing premium declines during the last several years. These increases reflect rate increases that were implemented in the states of Iowa and South Dakota in late 1996. Additionally, the company continues to appoint new agents and improve its marketing and business relationships with its existing agency force. Underwriting results deteriorated substantially for the six months and more moderately for the three months ended June 30, 1997 from the same periods in 1996. Results for the first six months of 1997 reflect an increase in both the frequency and severity of losses due to severe winter driving conditions in the Midwest. In addition, underwriting results for both periods were negatively impacted by adverse development in the provision for insured events of prior years. Excess and Surplus Lines Insurance Agency Operating income before income taxes remained constant at $231,000 for the first six months of 1997, compared to $233,000 for the same period in 1996. For the three months ended June 30, 1997, operating income before income taxes increased to $148,000 compared to $75,000 for the same period in 1996. The excess and surplus market continues to be very competitive. Despite this intense competition, the company has been able to increase its production levels because of new marketing programs implemented in the second quarter of 1997. Additionally, investment income has increased primarily due to a larger invested asset balance. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued (Unaudited) Parent Company Operating loss before income taxes was $21,000 for the six months ended June 30, 1997 compared to operating income of $24,000 for the same period in 1996. For the three months ended June 30, 1997, operating loss before income taxes was $52,000 compared to an operating loss of $5,000 for the same period in 1996. These decreases are primarily due to a decline in investment income caused by a lower invested asset balance. OTHER INFORMATION The majority of the Company's assets are invested in fixed maturities. These investments provide a substantial amount of income which supplements underwriting results and contributes to net earnings. As these investments mature the proceeds will be reinvested at current rates, which may be higher or lower than those now being earned; therefore, more or less investment income may be available to contribute to net earnings depending on the interest rate level. LIQUIDITY AND CAPITAL RESOURCES The Company maintains a portion of the investment portfolio in relatively short-term and highly liquid investments to ensure the availability of funds to meet claims and expenses. The remainder of the investment portfolio is invested in securities with maturities that approximate the anticipated liabilities of the insurance issued. Net unrealized holding gains on fixed maturity securities available-for-sale totaled $2,326,000 at June 30, 1997 and $2,141,000 at December 31, 1996. Since the Company does not actively trade in the bond market, such fluctuations in the fair value of these investments are not expected to have a material impact on the operations of the Company, as forced liquidations of investments are not anticipated. The Company closely monitors the bond market and makes appropriate adjustments in investment policy as changing conditions warrant. Net unrealized holding gains on equity securities totaled $4,481,000 at June 30, 1997 and $1,851,000 at December 31, 1996. The overall liquidity position of the Company is not affected by the equity investments. The major ongoing sources of the Company's liquidity are insurance premium income, investment income and cash provided from maturing or liquidated investments. The principal outflows of cash are payments of claims, commissions, premium taxes, operating expenses, income taxes, dividends and investment purchases. As of June 30, 1997, the Company had no material commitments for capital expenditures. NEW ACCOUNTING PRONOUNCEMENT The Company will adopt Statement of Financial Accounting Standards 128, "Earnings Per Share", in the fourth quarter of 1997. The adoption of this statement is not expected to have any impact on the financial statements of the Company. EMC INSURANCE GROUP INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued (Unaudited) CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS The 1995 Private Securities Litigation Reform Act provides issuers the opportunity to make cautionary statements regarding forward-looking statements. Accordingly, any forward-looking statement contained herein or in any other oral or written statement by the Company or any of its officers, directors or employees is qualified by the fact that actual results of the Company may differ materially from such statement due to the following important factors, among other risks and uncertainties inherent in the Company's business: catastrophic events, state insurance regulations, rate competition, adverse changes in interest rates, unforeseen losses with respect to loss and settlement expense reserves for unreported and reported claims, including asbestos and environmental claims. PART II. OTHER INFORMATION Item 4. Submissions of Matters to a Vote of Security Holders ---------------------------------------------------- (a) Annual Meeting of Stockholders EMC Insurance Group Inc. May 20, 1997 (b) The following seven persons were elected to serve as directors of the Company for the ensuing year: George C. Carpenter III Elwin H. Creese David J. Fisher Bruce G. Kelley George W. Kochheiser Raymond A. Michel Fredrick A. Schiek (c) Items voted upon and number of votes cast: 1. Election of directors Votes Votes Nominee Cast for Withheld ----------------------- ---------- --------- George C. Carpenter III 10,238,407 23,782 Elwin H. Creese 10,238,332 23,857 David J. Fisher 10,238,173 24,016 Bruce G. Kelley 10,238,430 23,759 George W. Kochheiser 10,236,911 25,278 Raymond A. Michel 10,237,358 24,831 Fredrick A. Schiek 10,238,430 23,759 2. Proposal to amend Employers Mutual Casualty Company's 1993 Incentive Stock Option Plan to increase the number of shares subject thereto: For 10,161,014 Against 88,235 Withheld 12,940 ------------ -------- -------- 3. Proposal to ratify the appointment of KPMG Peat Marwick LLP as the independent auditors of the Company: For 10,249,779 Against 6,390 Withheld 6,020 ------------ ------- ------- The total number of qualified shares voted by proxy is: 10,262,190 (d) None. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) None. (b) No Form 8-K was filed by the registrant during the quarter ended June 30, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EMC INSURANCE GROUP INC. Registrant /s/ Bruce G. Kelley --------------------------- Bruce G. Kelley President & Chief Executive Officer /s/ Mark Reese ---------------------------- Mark Reese Chief Accounting Officer Date: August 14, 1997 EX-27 2
7 This schedule contains summary financial information extracted from 6/30/97 balance sheet and income statement and is qualified in its entirety by reference. 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 164,577,471 180,737,547 185,830,167 28,818,092 0 0 390,502,167 1,630,100 15,065,275 10,158,673 440,304,704 215,464,263 52,357,939 0 3,078,849 0 0 0 11,201,783 141,871,679 440,304,704 86,601,722 11,639,992 66,722 115,911 65,197,480 17,096,772 10,755,593 3,993,456 553,954 3,439,502 0 0 0 3,439,502 .31 .31 202,502,986 65,776,163 (578,683) 19,463,269 32,837,744 215,464,247 (578,683)
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