EMC Insurance Group Inc. Reports 2012 First Quarter Results

EMC Insurance Group Inc. (Nasdaq:EMCI) today reported operating income of $1.04 per share for the first quarter ended March 31, 2012, compared to $0.03 per share for the first quarter of 2011 1.

Net income, including realized investment gains and losses, totaled $19,224,000 ($1.49 per share) for the first quarter of 2012 compared to $5,740,000 ($0.44 per share) for the first quarter of 2011.

“The Company experienced another strong quarter,” stated Bruce G. Kelley, President and Chief Executive Officer. “Our property and casualty insurance segment and our reinsurance segment both benefited from increases in premium income and favorable reserve development.”

Premiums earned increased 14.0 percent to $109,760,000 for the first quarter of 2012, from $96,287,000 for the first quarter of 2011. The property and casualty insurance segment reported a 10.0 percent increase in premiums earned, while the reinsurance segment reported a 30.3 percent increase.

“The increase in premium income in the property and casualty insurance segment is the result of several factors, including rate level increases in all lines of business, growth in insured exposures, and strong retention of policies,” continued Kelley. “The large increase in the reinsurance segment was primarily driven by Employers Mutual’s participation in a new offshore energy and liability proportional account written through a specialty marine underwriter, but also reflects double-digit rate level increases implemented on January 1, 2012 renewals as well. The new marine account is expected to generate between $17 and $21 million of annual premiums, which will more than offset the loss of a large account in the Mutual Reinsurance Bureau book of business that was cancelled in the first quarter of 2012 due to poor experience.”

Investment income decreased 7.6 percent to $11,157,000 in the first quarter of 2012 from $12,078,000 in the first quarter of 2011. This decrease is attributed to the continued decline in the average coupon rate on the Company’s fixed maturity portfolio, as well as an increase in short-term investments, which carry even lower yields.

“Investment income continues to decline as a result of the low interest rate environment that has persisted for the past several years,” stated Kelley. “At the end of the first quarter, management reinvested approximately $35 million from the current equity portfolio and $10 million of cash into a new equity strategy with an emphasis on dividend income. In addition to a higher dividend return, this new equity strategy is expected to carry less market volatility.”

Catastrophe losses totaled $9,703,000 ($0.49 per share after tax) in the first quarter of 2012 compared to $9,405,000 ($0.47 per share after tax) in the first quarter of 2011. On a segment basis, 2012 catastrophe losses amounted to $5,554,000 ($0.28 per share after taxes) in the property and casualty insurance segment and $4,149,000 ($0.21 per share after tax) in the reinsurance segment.

The Company experienced $16,263,000 ($0.82 per share after tax) of favorable development on prior years’ reserves during the first quarter of 2012, compared to $3,907,000 ($0.20 per share after tax) in the first quarter of 2011. As in recent periods, the majority of the favorable development was associated with the final settlement of prior accident years’ claims. The most recent actuarial analysis of the Company’s carried reserves indicates a level of adequacy consistent with other recent evaluations.

Net realized investment gains totaled $5,797,000 ($0.45 per share) for the first quarter of 2012 compared to $5,368,000 ($0.42 per share) in 2011.

During the first quarter of 2012, the Company recognized no “other-than-temporary” investment impairment losses. This compares to $246,000 ($0.01 per share after tax) of “other-than-temporary” investment impairment losses in the first quarter of 2011.

Large losses (which the Company defines as losses greater than $500,000 for the EMC Insurance Companies’ pool, excluding catastrophe losses) increased to $6,324,000 ($0.32 per share after tax) in the first quarter of 2012 from $4,037,000 ($0.20 per share after tax) in the first quarter of 2011.

The Company’s GAAP combined ratio was 92.4 percent in the first quarter of 2012 compared to 112.7 percent in the first quarter of 2011.

At March 31, 2012, consolidated assets totaled $1.3 billion, including $1.2 billion in the investment portfolio, and stockholders’ equity totaled $375.9 million, an increase of 6.7 percent from December 31, 2011. Net book value of the Company’s stock increased to $29.18 per share from $27.37 per share at December 31, 2011. Book value excluding accumulated other comprehensive income increased to $26.54 per share from $25.24 per share at December 31, 2011.

Management’s 2012 operating income guidance is currently a range of $1.30 to $1.55 per share, and is based on a projected GAAP combined ratio of 104.9 percent for the year. As noted in the Company’s April 23 pre-release of first quarter operating results, management is not revising its 2012 operating earnings guidance at this time because operating results in the second and third quarters can be extremely volatile depending on the frequency and severity of Midwest storms, and the potential for hurricane losses.

As previously disclosed, on November 3, 2011 the Company’s board of directors authorized a new $15 million stock repurchase program. This program became effective immediately and does not have an expiration date. The timing and terms of the purchases are determined by management based on market conditions and are conducted in accordance with the applicable rules of the Securities and Exchange Commission. Common stock repurchased under this new program will be retired by the Company. No shares were repurchased under this new program during the first quarter of 2012.

The Company’s parent organization, Employers Mutual Casualty Company, currently has a stock purchase program in place, with about $4.5 million of its $15 million authorization remaining. This program has been dormant and will remain so while the Company’s new repurchase program is active.

The Company will hold an earnings teleconference call at 11:00 a.m. Eastern Standard Time on May 8, 2012 to allow securities analysts, stockholders and other interested parties the opportunity to hear management discuss the Company’s results for the quarter, as well as its expectations for the rest of 2012. Dial-in information for the call is toll-free 1-877-407-9205 (International: 1-201-689-8054). The event will be archived and available for digital replay through August 7, 2012. The replay access information is toll-free 1-877-660-6853 (International: 1-201-612-7415); passcodes required for playback: account number 286 and conference ID number 391452.

Members of the news media, investors and the general public are invited to access a live webcast of the conference call via the Company’s investor relations page at www.emcins.com/ir. The webcast will be archived and available for replay until August 8, 2012. A transcript of the teleconference will also be available on the Company’s website shortly after the completion of the teleconference.

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

FORWARD-LOOKING STATEMENTS: The Private Securities Litigation Reform Act of 1995 provides issuers the opportunity to make cautionary statements regarding forward-looking statements. Accordingly, any forward-looking statement contained in this report is based on management’s current beliefs, assumptions and expectations of the Company’s future performance, taking into account all information currently available to management. These beliefs, assumptions and expectations can change as the result of many possible events or factors, not all of which are known to management. If a change occurs, the Company’s business, financial condition, liquidity, results of operations, plans and objectives may vary materially from those expressed in the forward-looking statements. The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the following:
  • catastrophic events and the occurrence of significant severe weather conditions;
  • the adequacy of loss and settlement expense reserves;
  • state and federal legislation and regulations;
  • changes in the property and casualty insurance industry, interest rates or the performance of financial markets and the general economy;
  • rating agency actions;
  • “other-than-temporary” investment impairment losses; and
  • other risks and uncertainties inherent to the Company’s business, including those discussed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K.

Management intends to identify forward-looking statements when using the words “believe,” “expect,” “anticipate,” “estimate,” “project,” or similar expressions. Undue reliance should not be placed on these forward-looking statements.

¹The Company uses a non-GAAP financial measure called “operating income” 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. Therefore, the Company has provided the following reconciliation of the non-GAAP financial measure of operating income to the GAAP financial measure of net income. 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 to net income:
  Three Months Ended March 31,
2012   2011
 
Operating income $ 13,426,821 $ 372,011
Net realized investment gains   5,796,914   5,367,827
Net income $ 19,223,735 $ 5,739,838
 
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED    
 
Property and
Casualty Parent
Quarter ended March 31, 2012 Insurance   Reinsurance   Company   Consolidated

Revenues:
Premiums earned $ 85,031,390 $ 24,728,366 $ - $ 109,759,756
Investment income, net 8,175,127 2,983,925 (2,270 ) 11,156,782
Other income   238,998     -     -     238,998  
  93,445,515     27,712,291     (2,270 )   121,155,536  

Losses and expenses:
Losses and settlement expenses 52,018,253 13,222,036 - 65,240,289
Dividends to policyholders 1,651,525 - - 1,651,525
Amortization of deferred policy acquisition costs 14,619,935 4,594,443 - 19,214,378
Other underwriting expenses 14,841,655 416,214 - 15,257,869
Interest expense 225,000 - - 225,000
Other expenses   219,164     19,765     347,588     586,517  
  83,575,532     18,252,458     347,588     102,175,578  
Operating income (loss) before income taxes   9,869,983     9,459,833     (349,858 )   18,979,958  
Realized investment gains   7,904,789     1,013,540     -     8,918,329  
Income (loss) before income taxes   17,774,772     10,473,373     (349,858 )   27,898,287  

Income tax expense (benefit):
Current 5,313,503 2,423,749 (122,450 ) 7,614,802
Deferred   138,017     921,733     -     1,059,750  
  5,451,520     3,345,482     (122,450 )   8,674,552  
Net income (loss) $ 12,323,252   $ 7,127,891   $ (227,408 ) $ 19,223,735  
Average shares outstanding 12,879,020

Per Share Data:
Net income (loss) per share - basic and diluted $ 0.96 $ 0.55 $ (0.02 ) $ 1.49
Decrease in provision for insured events
of prior years (after tax) $ 0.53 $ 0.29 $ - $ 0.82
Catastrophe and storm losses (after tax) $ (0.28 ) $ (0.21 ) $ - $ (0.49 )
Dividends per share $ 0.20
Book value per share $ 29.18
Effective tax rate 31.1 %
Annualized net income as a percent of beg. SH equity 21.8 %

Other Information of Interest:
Net written premiums $ 85,895,096 $ 22,076,663 $ - $ 107,971,759
Decrease in provision for insured events
of prior years $ (10,504,577 ) $ (5,758,196 ) $ - $ (16,262,773 )
Catastrophe and storm losses $ 5,554,285 $ 4,148,904 $ - $ 9,703,189

GAAP Combined Ratio:
Loss ratio 61.2 % 53.5 % - 59.4 %
Expense ratio   36.6 %   20.2 %   -     33.0 %
  97.8 %   73.7 %   -     92.4 %
 
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
 
Property and
Casualty Parent
Quarter Ended March 31, 2011 (restated)* Insurance   Reinsurance   Company   Consolidated

Revenues:
Premiums earned $ 77,311,292 $ 18,975,522 $ - $ 96,286,814
Investment income, net 8,897,650 3,180,547 398 12,078,595
Other income   203,830     -     -     203,830  
  86,412,772     22,156,069     398     108,569,239  

Losses and expenses:
Losses and settlement expenses 51,167,688 22,201,913 - 73,369,601
Dividends to policyholders 2,512,969 - - 2,512,969
Amortization of deferred policy acquisition costs 13,426,533 4,022,549 - 17,449,082
Other underwriting expenses 14,624,767 560,584 - 15,185,351
Interest expense 225,000 - - 225,000
Other expenses   162,716     421,286     348,376     932,378  
  82,119,673     27,206,332     348,376     109,674,381  

Operating income (loss) before income taxes
  4,293,099     (5,050,263 )   (347,978 )   (1,105,142 )
Realized investment gains   6,353,354     1,904,842     -     8,258,196  
Income (loss) before income taxes   10,646,453     (3,145,421 )   (347,978 )   7,153,054  

Income tax expense (benefit):
Current 2,831,702 (1,092,835 ) (121,792 ) 1,617,075
Deferred   135,679     (339,538 )   -     (203,859 )
  2,967,381     (1,432,373 )   (121,792 )   1,413,216  
Net income (loss) $ 7,679,072   $ (1,713,048 ) $ (226,186 ) $ 5,739,838  
Average shares outstanding 12,935,554

Per Share Data:
Net income (loss) per share - basic and diluted $ 0.59 $ (0.13 ) $ (0.02 ) $ 0.44
Decrease (increase) in provision for insured
events of prior years (after tax) $ 0.24 $ (0.04 ) $ - $ 0.20
Catastrophe and storm losses (after tax) $ (0.17 ) $ (0.30 ) $ - $ (0.47 )
Dividends per share $ 0.19
Book value per share $ 28.15
Effective tax rate 19.8 %
Annualized net income as a percent of beg. SH equity 6.3 %

Other Information of Interest:
Net written premiums $ 76,628,300 $ 20,156,866 $ - $ 96,785,166
Increase (decrease) in provision for
insured events of prior years $ (4,682,025 ) $ 774,736 $ - $ (3,907,289 )
Catastrophe and storm losses $ 3,423,338 $ 5,981,344 $ - $ 9,404,682

GAAP Combined Ratio:
Loss ratio 66.2 % 117.0 % - 76.2 %
Expense ratio   39.5 %   24.2 %   -     36.5 %
  105.7 %   141.2 %   -     112.7 %
 
*Amounts restated, where applicable, for new accounting guidance regarding deferrable acquisition costs (effective January 1, 2012).
 
CONSOLIDATED BALANCE SHEETS - UNAUDITED    
March 31, December 31,
2012 2011*
ASSETS
Investments:
Fixed maturities:
Securities available-for-sale, at fair value
(amortized cost $857,820,238 and $899,939,616) $ 922,004,894 $ 958,203,576
Equity securities available-for-sale, at fair value
(cost $106,958,665 and $90,866,131) 131,049,385 111,300,053
Other long-term investments, at cost 12,903 14,527
Short-term investments, at cost   101,770,552     42,628,926  
Total investments 1,154,837,734 1,112,147,082
 
Cash 424,315 255,042
Reinsurance receivables due from affiliate 39,646,296 39,517,108
Prepaid reinsurance premiums due from affiliate 7,131,407 9,378,026
Deferred policy acquisition costs (affiliated $30,789,364
and $30,849,717) 31,044,881 30,849,717
Accrued investment income 10,457,901 10,256,499
Accounts receivable 2,156,360 1,644,782
Income taxes recoverable 2,054,688 9,670,459
Deferred income taxes 2,065,055 6,710,919
Goodwill 941,586 941,586
Other assets (affiliated $6,240,825 and $2,584,111)   6,406,549     2,659,942  
Total assets $ 1,257,166,772   $ 1,224,031,162  
 
LIABILITIES
Losses and settlement expenses (affiliated $582,158,934
and $588,846,586) $ 586,913,370 $ 593,300,247
Unearned premiums (affiliated $176,759,939 and $180,689,377) 176,852,210 180,689,377
Other policyholders' funds (all affiliated) 4,884,098 5,061,160
Surplus notes payable to affiliate 25,000,000 25,000,000
Amounts due affiliate to settle inter-company transaction balances 5,997,017 21,033,627
Pension and postretirement benefits payable to affiliate 31,005,479 29,671,835
Other liabilities (affiliated $11,604,219 and $16,744,447)   50,657,596     16,934,321  
Total liabilities   881,309,770     871,690,567  
 
STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000
shares; issued and outstanding, 12,882,331
shares in 2012 and 12,875,591 shares in 2011 12,882,331 12,875,591
Additional paid-in capital 88,513,103 88,310,632
Accumulated other comprehensive income (loss):
Net unrealized gains from investments 57,378,993 51,153,622
Unrecognized pension and postretirement benefit obligations
(all affiliated)   (23,378,556 )   (23,813,112 )
Total accumulated other comprehensive income   34,000,437     27,340,510  
Retained earnings   240,461,131     223,813,862  
Total stockholders' equity   375,857,002     352,340,595  
Total liabilities and stockholders' equity $ 1,257,166,772   $ 1,224,031,162  
 
*   Prior year amounts restated, where applicable, for new accounting guidance regarding deferrable acquisition costs (effective January 1, 2012).
 

INVESTMENTS

The Company had total cash and invested assets with a carrying value of $1.2 billion and $1.1 billion as of March 31, 2012 and December 31, 2011. The following table summarizes the Company's cash and invested assets as of the dates indicated:
  March 31, 2012
    Percent of  
Amortized Fair Total Carrying
($ in thousands) Cost Value Fair Value Value
Fixed maturity securities available-for-sale $ 857,820 $ 922,005 79.9% $ 922,005
Equity securities available-for-sale 106,959 131,049 11.3% 131,049
Cash 424 424 - 424
Short-term investments 101,771 101,771 8.8% 101,771
Other long-term investments   13   13 -   13
$ 1,066,987 $ 1,155,262 100.0% $ 1,155,262
 
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
 
NET WRITTEN PREMIUMS
Three Months Ended
March 31, 2012
Percent of
Increase/
Percent of (Decrease) in
Net Written Net Written
Premiums Premiums
Property and Casualty Insurance
Commercial Lines:
Automobile 17.9 % 17.2 %
Liability 15.9 % 14.7 %
Property 17.0 % 9.9 %
Workers' Compensation 16.2 % 14.2 %
Other   1.6 % 5.4 %
Total Commercial Lines   68.6 % 13.7 %
 
Personal Lines:
Automobile 6.5 % 1.9 %
Property 4.4 % 3.8 %
Liability   0.1 % 14.2 %
Total Personal Lines   11.0 % 2.8 %
Total Property and Casualty Insurance   79.6 % 12.1 %
 
Reinsurance (1) (2)   20.4 % 14.8 %
Total   100.0 % 12.6 %
 

(1)
 

Includes $3,065,279 negative portfolio adjustment related to the January 1, 2012 cancellation of a large pro rata account.

(2)

Percent increase excludes $920,597 positive portfolio adjustment related to the January 1, 2011 increased participation in the MRB pool.

 

Copyright Business Wire 2010

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