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EMC Insurance Group Inc. Reports 2011 Fourth Quarter And Year-End Results And 2012 Operating Income Guidance

¹The Company uses a non-GAAP financial measure called “operating income (loss)” that management believes is useful to investors because it illustrates the performance of our normal, ongoing operations, which is important in understanding and evaluating our financial condition and results of operations. While this measure is consistent with measures utilized by investors to evaluate performance, it is not a substitute for the GAAP financial measure of net income (loss). Therefore, the Company has provided the following reconciliation of the non-GAAP financial measure of operating income (loss) to the GAAP financial measure of net income (loss). Management also uses non-GAAP financial measures for goal setting, determining employee and senior management awards and compensation, and evaluating performance.

Reconciliation of operating income (loss) to net income (loss):

    Three Months Ended December 31,   Year Ended December 31,
2011   2010 2011   2010
 
Operating income (loss) $   7,443,091 $   9,125,505 $   (8,144,754 ) $   28,831,601
Net realized investment gains     1,863,247       1,585,678       6,047,140       2,514,722  
Net income (loss) $   9,306,338   $   10,711,183   $   (2,097,614 ) $   31,346,323  
 
     
CONSOLIDATED STATEMENTS OF INCOME
   
Property and
Casualty Parent
Quarter Ended December 31, 2011 Insurance   Reinsurance   Company   Consolidated

Revenues:

Premiums earned $   83,660,958 $   28,106,755 $   - $   111,767,713
Investment income, net 8,212,872 3,017,858 (2,759 ) 11,227,971
Other income     152,332       37,308       -       189,640  
    92,026,162       31,161,921       (2,759 )     123,185,324  

Losses and expenses:

Losses and settlement expenses 57,132,128 19,341,265 - 76,473,393
Dividends to policyholders 1,174,194 - - 1,174,194
Amortization of deferred policy acquisition costs 20,607,873 6,004,831 - 26,612,704
Other underwriting expenses 8,053,650 315,947 - 8,369,597
Interest expense 225,000 - - 225,000
Other expenses     214,875       (6,078 )     332,382       541,179  
    87,407,720       25,655,965       332,382       113,396,067  
Operating income (loss) before income taxes     4,618,442       5,505,956       (335,141 )     9,789,257  
Realized investment gains     2,036,893       829,642       -       2,866,535  
Income (loss) before income taxes     6,655,335       6,335,598       (335,141 )     12,655,792  

Income tax expense (benefit):

Current (1,397,937 ) 1,743,848 (117,301 ) 228,610
Deferred     2,962,903       157,941       -       3,120,844  
    1,564,966       1,901,789       (117,301 )     3,349,454  
Net income (loss) $   5,090,369   $   4,433,809   $   (217,840 ) $   9,306,338  
Average shares outstanding 12,870,862

Per Share Data:

Net income (loss) per share - basic and diluted $ 0.40 $ 0.34 $ (0.02 ) $ 0.72

Decrease in provision for insured events of prior years (after tax)

$ 0.14 $ 0.44 $ - $ 0.58
Catastrophe and storm losses (after tax) $ (0.01 ) $ (0.17 ) $ - $ (0.18 )
Dividends per share $ 0.20

Other Information of Interest:

Net written premiums $ 69,460,236 $ 28,212,718 $ - $ 97,672,954

Decrease in provision for insured events of prior years

$ (2,659,359 ) $ (8,730,979 ) $ - $ (11,390,338 )
Catastrophe and storm losses $ 147,895 $ 3,347,038 $ - $ 3,494,933

GAAP Combined Ratio:

Loss ratio 68.3 % 68.8 % - 68.4 %
Expense ratio     35.7 %     22.5 %     -       32.4 %
    104.0 %     91.3 %     -       100.8 %
 
 
CONSOLIDATED STATEMENTS OF INCOME
         
Property and
Casualty Parent
Quarter Ended December 31, 2010 Insurance   Reinsurance   Company   Consolidated

Revenues:

Premiums earned $   78,048,084 $   25,013,652 $   - $   103,061,736
Investment income, net 8,968,750 3,101,499 4,948 12,075,197
Other income     126,779       -       -       126,779  
    87,143,613       28,115,151       4,948       115,263,712  

Losses and expenses:

Losses and settlement expenses 50,865,926 9,007,382 - 59,873,308
Dividends to policyholders 2,235,526 - - 2,235,526
Amortization of deferred policy acquisition costs 20,618,178 5,383,060 - 26,001,238
Other underwriting expenses 7,995,277 6,506,377 - 14,501,654
Interest expense 225,000 - - 225,000
Other expenses     119,456       (108,862 )     265,810       276,404  
    82,059,363       20,787,957       265,810       103,113,130  
Operating income (loss) before income taxes     5,084,250       7,327,194       (260,862 )     12,150,582  
Realized investment gains     1,943,407       496,098       -       2,439,505  
Income (loss) before income taxes     7,027,657       7,823,292       (260,862 )     14,590,087  

Income tax expense (benefit):

Current (674,740 ) 1,465,422 (91,302 ) 699,380
Deferred     2,277,325       902,199       -       3,179,524  
    1,602,585       2,367,621       (91,302 )     3,878,904  
Net income (loss) $   5,425,072   $   5,455,671   $   (169,560 ) $   10,711,183  
Average shares outstanding 12,920,702

Per Share Data:

Net income (loss) per share - basic and diluted $ 0.42 $ 0.42 $ (0.01 ) $ 0.83

Decrease (increase) in provision for insured events of prior years (after tax)

$ (0.12 ) $ 0.35 $ - $ 0.23
Catastrophe and storm losses (after tax) $ (0.06 ) $ (0.09 ) $ - $ (0.15 )
Dividends per share $ 0.19

Other Information of Interest:

Net written premiums $ 63,201,500 $ 24,914,176 $ - $ 88,115,676

(Decrease) increase in provision for insured events of prior years

$ 2,456,661 $ (7,018,676 ) $ - $ (4,562,015 )
Catastrophe and storm losses $ 1,308,310 $ 1,742,867 $ - $ 3,051,177

GAAP Combined Ratio:

Loss ratio 65.2 % 36.0 % - 58.1 %
Expense ratio     39.5 %     47.5 %     -       41.5 %
    104.7 %     83.5 %     -       99.6 %
 
 
CONSOLIDATED STATEMENTS OF INCOME
         
Property and
Casualty Parent
Year ended December 31, 2011 Insurance   Reinsurance   Company   Consolidated

Revenues:

Premiums earned $   321,649,215 $   94,753,098 $   - $   416,402,313
Investment income, net 33,718,436 12,395,350 (2,861 ) 46,110,925
Other income     790,802       37,308       -       828,110  
    356,158,453       107,185,756       (2,861 )     463,341,348  

Losses and expenses:

Losses and settlement expenses 251,449,247 91,525,190 - 342,974,437
Dividends to policyholders 5,255,568 - - 5,255,568
Amortization of deferred policy acquisition costs 77,810,011 19,742,819 - 97,552,830
Other underwriting expenses 32,678,652 617,916 - 33,296,568
Interest expense 900,000 - - 900,000
Other expenses     750,675       591,850       1,330,129       2,672,654  
    368,844,153       112,477,775       1,330,129       482,652,057  
Operating loss before income taxes     (12,685,700 )     (5,292,019 )     (1,332,990 )     (19,310,709 )
Realized investment gains     6,970,028       2,333,265       -       9,303,293  
Loss before income taxes     (5,715,672 )     (2,958,754 )     (1,332,990 )     (10,007,416 )

Income tax expense (benefit):

Current (7,960,371 ) (1,391,340 ) (466,548 ) (9,818,259 )
Deferred     2,805,843       (897,386 )     -       1,908,457  
    (5,154,528 )     (2,288,726 )     (466,548 )     (7,909,802 )
Net loss $   (561,144 ) $   (670,028 ) $   (866,442 ) $   (2,097,614 )
Average shares outstanding 12,912,718

Per Share Data:

Net loss per share - basic and diluted $ (0.04 ) $ (0.05 ) $ (0.07 ) $ (0.16 )

Decrease in provision for insured events of prior years (after tax)

$ 1.01 $ 0.66 $ - $ 1.67
Catastrophe and storm losses (after tax) $ (2.64 ) $ (1.40 ) $ - $ (4.04 )
Dividends per share $ 0.77
Book value per share $ 27.86
Effective tax rate 79.0 %
Annualized net loss as a percent of beg. SH equity (0.6 )%

Other Information of Interest:

Net written premiums $ 333,294,142 $ 96,493,350 $ - $ 429,787,492

Decrease in provision for insured events of prior years

$ (20,162,952 ) $ (12,936,231 ) $ - $ (33,099,183 )
Catastrophe and storm losses $ 52,447,963 $ 27,882,541 $ - $ 80,330,504

GAAP Combined Ratio:

Loss ratio 78.2 % 96.6 % - 82.4 %
Expense ratio     36.0 %     21.5 %     -       32.7 %
    114.2 %     118.1 %     -       115.1 %
 
     
CONSOLIDATED STATEMENTS OF INCOME
   
Property and
Casualty Parent
Year Ended December 31, 2010 Insurance   Reinsurance   Company   Consolidated

Revenues:

Premiums earned $   305,646,658 $   83,475,492 $   - $   389,122,150
Investment income, net 36,966,159 12,523,505 (449 ) 49,489,215
Other income     783,346       -       -       783,346  
    343,396,163       95,998,997       (449 )     439,394,711  

Losses and expenses:

Losses and settlement expenses 208,114,161 46,526,358 - 254,640,519
Dividends to policyholders 8,013,843 - - 8,013,843
Amortization of deferred policy acquisition costs 74,298,312 17,799,907 - 92,098,219
Other underwriting expenses 34,184,263 9,240,176 - 43,424,439
Interest expense 900,000 - - 900,000
Other expenses     753,014       (345,978 )     1,334,234       1,741,270  
    326,263,593       73,220,463       1,334,234       400,818,290  
Operating income (loss) before income taxes     17,132,570       22,778,534       (1,334,683 )     38,576,421  
Realized investment gains     3,078,289       790,514       -       3,868,803  
Income (loss) before income taxes     20,210,859       23,569,048       (1,334,683 )     42,445,224  

Income tax expense (benefit):

Current 1,449,805 6,308,402 (467,139 ) 7,291,068
Deferred     3,212,310       595,523       -       3,807,833  
    4,662,115       6,903,925       (467,139 )     11,098,901  
Net income (loss) $   15,548,744   $   16,665,123   $   (867,544 ) $   31,346,323  
Average shares outstanding 13,038,263

Per Share Data:

Net income (loss) per share - basic and diluted $ 1.19 $ 1.28 $ (0.07 ) $ 2.40

Decrease in provision for insured events of prior years (after tax)

$ 1.43 $ 1.10 $ - $ 2.53
Catastrophe and storm losses (after tax) $ (1.65 ) $ (0.45 ) $ - $ (2.10 )
Dividends per share $ 0.73
Book value per share $ 28.52
Effective tax rate 26.1 %
Annualized net income as a percent of beg. SH equity

 

9.2 %

Other Information of Interest:

Net written premiums $ 310,794,289 $ 84,054,820 $ - $ 394,849,109

Decrease in provision for insured events of prior years

$ (28,726,238 ) $ (22,022,632 ) $ - $ (50,748,870 )
Catastrophe and storm losses $ 33,062,100 $ 9,081,615 $ - $ 42,143,715

GAAP Combined Ratio:

Loss ratio 68.1 % 55.7 % - 65.4 %
Expense ratio     38.1 %     32.4 %     -       36.9 %
    106.2 %     88.1 %     -       102.3 %
 
       
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2011 2010
ASSETS
Investments:
Fixed maturities:
Securities held-to-maturity, at amortized cost
(fair value $0 and $389,679) $   - $   340,803
Securities available-for-sale, at fair value
(amortized cost $899,939,616 and $909,582,782) 958,203,576 941,537,026
Equity securities available-for-sale, at fair value
(cost $90,866,131 and $75,721,039) 111,300,053 101,138,982
Other long-term investments, at cost 14,527 29,827
Short-term investments, at cost     42,628,926       36,616,111  
Total investments 1,112,147,082 1,079,662,749
 
Cash 255,042 491,994
Reinsurance receivables due from affiliate 39,517,108 30,256,586
Prepaid reinsurance premiums due from affiliate 9,378,026 9,530,426
Deferred policy acquisition costs (all affiliated) 40,738,565 37,584,448
Prepaid pension benefits due from affiliate - 5,125,701
Accrued investment income 10,256,499 10,925,854
Accounts receivable 1,644,782 1,716,150
Income taxes recoverable 9,670,459 2,350,864
Deferred income taxes 3,249,821 6,690,218
Goodwill 941,586 941,586
Other assets (affiliated $2,584,111 and $2,433,445)     2,659,942       2,517,922  
Total assets $   1,230,458,912   $   1,187,794,498  
 
LIABILITIES

Losses and settlement expenses (affiliated $588,846,586 and $553,125,183)

$ 593,300,247 $ 556,140,956
Unearned premiums due to affiliate 180,689,377 167,896,119
Other policyholders' funds due to affiliate 5,061,160 8,315,751
Surplus notes payable to affiliate 25,000,000 25,000,000
Amounts due affiliate to settle inter-company transaction balances 21,033,627 18,380,813
Pension and postretirement benefits payable to affiliate 29,671,835 20,418,716
Other liabilities (affiliated $16,744,447 and $22,861,092)     16,934,321       23,001,141  
Total liabilities     871,690,567       819,153,496  
 
STOCKHOLDERS' EQUITY

Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding, 12,875,591 shares in 2011 and 12,927,678 shares in 2010

12,875,591 12,927,678
Additional paid-in capital 88,310,632 88,937,294
Accumulated other comprehensive income (loss):

Net unrealized losses on fixed maturity securities with "other-than-temporary" impairments

- (69,852 )
Other net unrealized gains 51,153,622 37,361,774
Unrecognized pension and postretirement benefits
(all affiliated)     (23,813,112 )     (12,796,435 )
Total accumulated other comprehensive income     27,340,510       24,495,487  
Retained earnings     230,241,612       242,280,543  
Total stockholders' equity     358,768,345       368,641,002  
Total liabilities and stockholders' equity $   1,230,458,912   $   1,187,794,498  
 
         
INVESTMENTS
 

The Company had total cash and invested assets with a carrying value of $1.1 billion as of December 31, 2011 and 2010. The following table summarizes the Company's cash and invested assets as of the dates indicated:

 
December 31, 2011
Percent of
Amortized Fair Total Carrying
($ in thousands) Cost Value Fair Value Value
Fixed maturity securities available-for-sale $   899,940 $   958,204 86.1 % $   958,204
Equity securities available-for-sale 90,866 111,300 10.0 % 111,300
Cash 255 255 - 255
Short-term investments 42,629 42,629 3.9 % 42,629
Other long-term investments     14       14   -       14  
$   1,033,704   $   1,112,402   100.0 % $   1,112,402  
 
December 31, 2010
Percent of
Amortized Fair Total Carrying
($ in thousands) Cost Value Fair Value Value
Fixed maturity securities held-to-maturity $ 341 $ 390 - $ 341
Fixed maturity securities available-for-sale 909,583 941,537 87.2 % 941,537
Equity securities available-for-sale 75,721 101,139 9.4 % 101,139
Cash 492 492 - 492
Short-term investments 36,616 36,616 3.4 % 36,616
Other long-term investments     30       30   -       30  
$   1,022,783   $   1,080,204   100.0 % $   1,080,155  
 
 
NET WRITTEN PREMIUMS
    Three Months Ended     Year Ended
December 31, 2011 December 31, 2011
  Percent of   Percent of
Increase/ Increase/
Percent of (Decrease) in Percent of (Decrease) in
Net Written Net Written Net Written Net Written
Premiums Premiums Premiums Premiums
Property and Casualty Insurance
Commercial Lines:
Automobile 15.3 % 10.7 % 16.2 % 5.8 %
Liability 13.5 % 15.1 % 14.6 % 8.4 %
Property 15.3 % 10.8 % 16.8 % 7.9 %
Workers' Compensation 12.9 % 9.6 % 16.5 % 9.5 %
Other 1.6   % (2.9 ) % 1.8   % (5.5 ) %
Total Commercial Lines 58.6   % 11.0 % 65.9   % 7.5 %
 
Personal Lines:
Automobile 7.1 % 4.2 % 6.6 % (1.4 ) %
Property 5.3 % 5.8 % 5.1 % 17.4 %
Liability 0.1   % 14.7 % 0.1   % 7.4 %
Total Personal Lines 12.5   % 5.0 % 11.8   % 6.0 %
Total Property and Casualty Insurance 71.1   % 9.9 % 77.7   % 7.2 %
 
Reinsurance (1) 28.9   % 13.2 % 22.3   % 13.7 %
Total 100.0   % 10.8 % 100.0   % 8.6 %
 
(1) Excludes $920,597 positive portfolio adjustment related to the January 1, 2011 increased participation in the MRB pool.
 




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