EMC Insurance Group Inc. Reports 2017 Third Quarter and Nine Month Results

Nov 8, 2017

Third Quarter Ended September 30, 2017
Net Income Per Share – $0.03
Non-GAAP Operating Income Per Share* – $0.05
Net Realized Investment Losses Per Share – $0.02
Catastrophe and Storm Losses Per Share – $0.90
GAAP Combined Ratio – 106.7 percent

Nine Months Ended September 30, 2017
Net Income Per Share – $0.61
Non-GAAP Operating Income Per Share* – $0.55
Net Realized Investment Gains Per Share – $0.06
Catastrophe and Storm Losses Per Share – $1.77
GAAP Combined Ratio – 103.8 percent

Lowering 2017 non-GAAP operating income guidance* to $1.15 to $1.35 per share

*Denotes financial measure not calculated in accordance with generally accepted accounting principles (non-GAAP). See “Definition of Non-GAAP Information and Reconciliation to Comparable GAAP Measures” for additional information.

DES MOINES, Iowa, Nov. 08, 2017 (GLOBE NEWSWIRE) -- EMC Insurance Group Inc. (NASDAQ:EMCI) (the “Company”), today reported net income of $746,000 ($0.03 per share) and a loss and settlement expense ratio of 77.1 percent for the third quarter ended September 30, 2017, compared to net income of $4.1 million ($0.20 per share) and a loss and settlement expense ratio of 71.1 percent for the third quarter of 2016. This decline is primarily attributed to a record $19.5 million of catastrophe and storm losses incurred by the reinsurance segment during the third quarter, which is $17.2 million higher than the third quarter of 2016 primarily due to losses from Hurricanes Harvey, Irma and Maria. The decline in the reinsurance segment’s results was partially offset by improvement in the property and casualty insurance segment due to a $4.9 million reduction in catastrophe and storm losses 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) compared to the third quarter of 2016.

The property and casualty insurance segment’s underlying loss and settlement expense ratio has become more consistent during 2017. The underlying loss and settlement expense ratio of 61.9 percent for the nine months ended September 30, 2017, is the result of steadily improving results during 2017, from 65.3 percent for the first quarter, to 62.1 percent for the second quarter, to 58.5 percent for the third quarter. The decline in the third quarter primarily reflects reductions in the current accident year ultimate loss and settlement expense ratio projections in the personal auto liability, workers’ compensation and commercial property lines of business.

For the nine months ended September 30, 2017, the Company reported net income of $13.1 million ($0.61 per share) and a loss and settlement expense ratio of 71.9 percent, compared to net income of $24.9 million ($1.19 per share) and a loss and settlement expense ratio of 67.1 percent for the same period in 2016. This decline is also primarily attributed to the catastrophe and storm losses incurred by the reinsurance segment during the third quarter, as well as a reduction in the amount of favorable development experienced on prior years’ reserves in the reinsurance segment. 

“Losses in the reinsurance segment during the quarter were manageable, especially given the considerable hurricane losses incurred by the industry,” stated President and Chief Executive Officer Bruce G. Kelley. “Having filled the annual aggregate retention under the intercompany reinsurance treaty will help the reinsurance segment mitigate catastrophe and storm losses that might occur during the fourth quarter.”

“Catastrophe and storm losses in the third quarter declined in the property and casualty insurance segment, which experienced minimal impact from Hurricanes Harvey and Irma due to our disciplined underwriting approach along coastal regions and limited loss exposures in Florida,” continued Kelley. “In addition, the underlying loss and settlement expense ratio of this segment improved during the quarter despite the softening market.”

Non-GAAP operating income, which excludes realized investment gains/losses from net income, totaled $1.1 million ($0.05 per share) for the third quarter of 2017, compared to $4.9 million ($0.23 per share) for the third quarter of 2016. For the nine months ended September 30, 2017, the Company reported non-GAAP operating income of $11.6 million ($0.55 per share), compared to $25.3 million ($1.21 per share) for the same period in 2016.

The Company’s GAAP combined ratio was 106.7 percent in the third quarter of 2017, compared to 102.9 percent in the third quarter of 2016. For the first nine months of 2017, the Company’s GAAP combined ratio was 103.8 percent, compared to 99.8 percent in 2016.

Premiums earned increased 2.0 percent and 1.8 percent for the third quarter and first nine months of 2017, respectively. In the property and casualty insurance segment, premiums earned increased 3.5 percent for both the third quarter and first nine months of 2017, respectively. The majority of these increases are attributed to growth in insured exposures and an increase in retained policies in the commercial lines of business. In the reinsurance segment, premiums earned decreased 3.0 percent and 3.5 percent for the third quarter and first nine months of 2017, respectively. These decreases, which occurred in the pro rata line of business and stem from the Mutual Reinsurance Bureau underwriting association’s withdrawal from non-standard automobile business, were partially offset by increases in the excess of loss line of business. 

Catastrophe and storm losses totaled $29.4 million ($0.90 per share after tax) in the third quarter of 2017, compared to $17.1 million ($0.53 per share after tax) in the third quarter of 2016. For the first nine months of 2017, catastrophe and storm losses totaled $57.9 million ($1.77 per share after tax), compared to $45.5 million ($1.41 per share after tax) for the same period in 2016. On a segment basis, catastrophe and storm losses amounted to $9.9 million ($0.30 per share after tax) and $29.9 million ($0.91 per share after tax) in the property and casualty insurance segment, and $19.5 million ($0.60 per share after tax) and $28.0 million ($0.86 per share after tax) in the reinsurance segment, for the three and nine months ended September 30, 2017, respectively.

In the third quarter of 2017, the reinsurance segment retained approximately $15.8 million of catastrophe and storm losses to fill the $20 million retention amount under the reinsurance subsidiary’s intercompany annual aggregate catastrophe excess of loss treaty with Employers Mutual, which has a limit of $100 million, and 20 percent co-participation above the retention. The reinsurance segment retained an additional $2.2 million of catastrophe and storm losses representing their 20 percent co-participation on $11.2 million of losses above the retention amount, and recovered $9.0 million from Employers Mutual. Having filled the annual aggregate retention, the reinsurance segment will be a 20 percent co-participant on any fourth quarter catastrophic events that are greater than $500,000, up to the $100 million limit of coverage. No recoveries were made under this program during 2016. Taking the loss recoveries received and the premiums paid to Employers Mutual into consideration, the intercompany reinsurance program reduced the catastrophe and storm loss ratios by 20.4 and 5.4 percentage points for the three and nine months ended September 30, 2017, respectively. In addition, the reinsurance segment accrued approximately $1.3 million of reinstatement premiums stemming from the hurricane losses sustained during the quarter.

No recoveries were made under the property and casualty insurance segment’s July 1 through December 31 intercompany excess of loss reinsurance treaty with Employers Mutual. Approximately $5.1 million of retention remains under the 2017 treaty, meaning catastrophe and storm losses will be capped at $5.1 million in the fourth quarter, unless the $12.0 million limit of protection is exceeded. The property and casualty insurance segment was further into the $15.0 million retention amount at September 30, 2016; therefore, fourth quarter of 2016 catastrophe and storm losses in the property and casualty insurance segment were capped at $512,000.

The property and casualty insurance subsidiaries ceded $3.0 million and $19.0 million of catastrophe and storm losses to Employers Mutual under the 2017 inter-company reinsurance program during the three and nine months ended September 30, 2017, compared to $3.5 million and $5.1 million during the same periods in 2016. In both years, the ceded amounts are applicable to the treaties that covered the first half of each year. Taking the loss recoveries received and the premiums paid to Employers Mutual into consideration, the intercompany reinsurance program with Employers Mutual reduced the catastrophe and storm loss ratios by 2.1 and 2.4 percentage points for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, the catastrophe and storm loss ratios were reduced by 4.1 and 0.1 percentage points, respectively.

The Company reported $4.4 million ($0.13 per share after tax) of favorable development on prior years’ reserves during the third quarter of 2017, compared to $7.6 million ($0.24 per share after tax) in the third quarter of 2016. For the first nine months of 2017, favorable development totaled $17.6 million ($0.54 per share after tax), compared to $23.5 million ($0.73 per share after tax) in 2016. Included in the favorable development amount reported for the first nine months of 2017 is $4.5 million of adverse development in the property and casualty insurance segment stemming from the settlement of claims for past and future legal fees and losses on a multi-year asbestos exposure associated with a former insured. Excluded from the favorable development amounts reported for 2016 is $5.6 million of “mechanical” favorable development stemming from the change in the property and casualty insurance segment’s reserving methodology that had no impact on earnings.

Net investment income totaled $11.5 million for the third quarter ended September 30, 2017, which is consistent with the third quarter of 2016. Net investment income decreased 6.1 percent to $33.7 million for the first nine months of 2017, from $35.9 million for the same period in 2016. This decrease primarily reflects a lower book yield in the fixed maturity portfolio as well as a decline in dividend income.

Net realized investment losses totaled $594,000 ($0.02 per share after tax) for the third quarter of 2017, compared to $1.2 million ($0.03 per share after tax) in the third quarter of 2016. Net realized investment gains totaled $2.2 million ($0.06 per share after tax) for the first nine months of 2017, compared to net realized investment losses of $643,000 ($0.02 per share after tax) for the same period in 2016. Included in net realized investment gains/losses reported for the third quarter and first nine months of 2017 are $1.0 million and $4.6 million, respectively, of net realized investment losses attributed to a decline in the carrying value of a limited partnership that helps protect the Company from a sudden and significant decline in the value of its equity portfolio (the equity tail-risk hedging strategy). Included in net realized investment losses reported for the third quarter and first nine months of 2016 are $1.9 million and $5.3 million, respectively, attributed to declines in the carrying value of this limited partnership.

At September 30, 2017, consolidated assets totaled $1.7 billion, including $1.5 billion in the investment portfolio, and stockholders’ equity totaled $575.1 million, an increase of 3.9 percent from December 31, 2016. Book value of the Company’s common stock increased 3.2 percent to $26.90 per share from $26.07 per share at December 31, 2016. Book value excluding accumulated other comprehensive income was relatively flat at $23.89 per share at September 30, 2017, compared to $23.90 per share at December 31, 2016.

Based on results for the first nine months of 2017 and projections for the remainder of the year, management is lowering its 2017 non-GAAP operating income guidance to a range of $1.15 to $1.35 per share from the previous range of $1.35 to $1.55 per share. The revised guidance is based on a projected GAAP combined ratio of 101.2 percent for the year and investment income that is flat to down slightly. The projected GAAP combined ratio has a load of 9.9 points for catastrophe and storm losses.

The Company will hold an earnings conference call at noon Eastern time on Wednesday, November 8, 2017 to allow securities analysts, stockholders and other interested parties the opportunity to hear management discuss the Company’s results for the third quarter, as well as its expectations for the remainder of 2017. Dial-in information for the call is toll-free 1-844-850-0550 (International: 1-412-317-5180).

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

About EMCI
EMC Insurance Group Inc. is a publicly held insurance holding company with operations in property and casualty insurance and reinsurance, which was formed in 1974 and became publicly held in 1982. The Company’s common stock trades on the Global Select Market tier of the NASDAQ Stock Market under the symbol EMCI. Additional information regarding the Company may be found at investors.emcins.com. 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.

Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides issuers the opportunity to make cautionary statements regarding forward-looking statements. Accordingly, any forward-looking statement contained in this report is based on management’s current beliefs, assumptions and expectations of the Company’s future performance, taking 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 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.

Definition of Non-GAAP Information and Reconciliation to Comparable GAAP Measures
The Company prepares its public financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP). Management uses certain non-GAAP financial measures for evaluating the Company’s performance. These measures are considered non-GAAP financial measures under applicable Securities and Exchange Commission (SEC) rules because they are not displayed as separate line items in the consolidated financial statements or are not required to be disclosed in the notes to financial statements or, in some cases, include or exclude certain items not ordinarily included or excluded in the most comparable GAAP financial measure. The Company’s calculation of non-GAAP financial measures may differ from similar measures used by other companies, so investors should exercise caution when comparing the Company’s non-GAAP financial measures to the measures used by other companies. The following discussion includes reconciliations of the most directly comparable GAAP financial measures to the non-GAAP financial measures referenced in this report.

Non-GAAP operating income: One of the primary non-GAAP financial measures utilized by management for evaluating the Company’s performance is operating income. Non-GAAP operating income is calculated by excluding net realized investment gains/losses (defined as realized investment gains and losses after applicable federal and state income taxes) from net income. While realized investment gains/losses are integral to the Company’s insurance operations over the long term, the decision to realize investment gains or losses in any particular period is subject to changing market conditions and management’s discretion, and is independent of the Company’s insurance operations.

Management’s operating income guidance is also considered a non-GAAP financial measure. Net realized investment gains/losses resulting from the sale of assets are not predictable due to changing market conditions and the discretionary nature of such events. As a result, management is unable to accurately project the Company’s annual net income and therefore utilizes non-GAAP operating income in the Company’s projected annual guidance.

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

 

        
RECONCILIATION OF NET INCOME TO NON-GAAP OPERATING INCOME  
($ in thousands)       
 Three months ended September 30, Nine months ended September 30,
  2017   2016   2017  2016 
Net income$  746  $  4,129  $  13,054 $  24,911 
Realized investment gains (losses)   (594)    (1,192)    2,166    (643)
Income tax expense (benefit)   (208)    (417)    758    (225)
Net realized investment gains (losses)   (386)    (775)    1,408    (418)
Non-GAAP operating income$  1,132  $  4,904  $  11,646 $  25,329 
        
RECONCILIATION OF NET INCOME PER SHARE TO NON-GAAP OPERATING INCOME PER SHARE   
 Three months ended September 30, Nine months ended September 30,
  2017   2016   2017  2016 
Net income$  0.03  $  0.20  $  0.61 $  1.19 
Realized investment gains (losses)   (0.03)    (0.05)    0.10    (0.03)
Income tax expense (benefit)   (0.01)    (0.02)    0.04    (0.01)
Net realized investment gains (losses)   (0.02)    (0.03)    0.06    (0.02)
Non-GAAP operating income$  0.05  $  0.23  $  0.55 $  1.21 
        

Property and casualty insurance segment’s 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. 

        
RECONCILIATION OF THE PROPERTY AND CASUALTY INSURANCE SEGMENT'S LOSS AND SETTLEMENT   
EXPENSE RATIO TO THE UNDERLYING LOSS AND SETTLEMENT EXPENSE RATIO    
 Three months ended September 30, Nine months ended September 30,
 2017  2016  2017  2016 
Loss and settlement expense ratio61.5% 70.2% 66.0% 66.5%
Catastrophe and storm losses  (8.2 )%   (12.7 )%   (8.5 )%   (10.3 )%
Favorable development on prior        
years' reserves**5.2% 5.9% 4.4% 4.9%
Underlying loss and settlement expense ratio58.5% 63.4% 61.9% 61.1%
        

**During the third quarter of 2016, management implemented a new reserving methodology for the determination of direct bulk reserves in the property and casualty insurance segment. The new methodology, which is referred to as the accident year ultimate estimate approach, better conforms to industry practices and provides increased transparency of the drivers of the property and casualty insurance segment’s performance. In connection with this change in reserving methodology, there was a reallocation of incurred but not reported (IBNR) loss reserves and allocated settlement expense reserves from prior accident years to the current accident year in multiple lines of business. This change resulted in the movement of approximately $5.6 million of reserves from prior accident years to the current accident year that was reported as favorable development; however, this development is “mechanical in nature”, and did not have an impact on earnings because the total amount of carried reserves did not change. This “mechanical” favorable development has been excluded from the amounts presented for 2016.

Industry Metric
Premiums written: Premiums written is an industry metric used in statutory accounting to quantify the amount of insurance sold during a specified reporting period. Management analyzes trends in premiums written to assess business efforts, and uses it as a financial measure for goal setting and determining a portion of employee and senior management awards and compensation. Premiums earned, used in both statutory and GAAP accounting, is the recognition of the portion of premiums written directly related to the expired portion of an insurance policy for a given reporting period. The unexpired portion of premiums written is referred to as unearned premiums, and represents the portion of premiums written that would be returned to a policyholder upon cancellation of a policy.

        
CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED       
($ in thousands, except share and per share amounts)         
  Property and        
  Casualty   Parent    
Quarter ended September 30, 2017 Insurance Reinsurance Company Consolidated 
Revenues:         
Premiums earned $  120,472  $  34,718  $  -  $  155,190  
Investment income, net    8,252     3,237     12     11,501  
Other income (loss)    179     (358)    -     (179) 
     128,903     37,597     12     166,512  
Losses and expenses:        
Losses and settlement expenses    74,039     45,537     -     119,576  
Dividends to policyholders    46     -     -     46  
Amortization of deferred policy acquisition costs    19,491     6,939     -     26,430  
Other underwriting expenses    19,109     412     -     19,521  
Interest expense     84     -     -     84  
Other expenses    170     -     531     701  
     112,939     52,888     531     166,358  
Operating income (loss) before income taxes    15,964     (15,291)    (519)    154  
Realized investment losses    (108)    (486)    -     (594) 
Income (loss) before income taxes    15,856     (15,777)    (519)    (440) 
Income tax expense (benefit):        
Current    3,428     (5,473)    (152)    (2,197) 
Deferred    1,466     (425)    (30)    1,011  
     4,894     (5,898)    (182)    (1,186) 
Net income (loss) $  10,962  $  (9,879) $  (337) $  746  
Average shares outstanding         21,356,588  
Per Share Data:        
Net income (loss) per share - basic and diluted    $  0.52  $  (0.46) $  (0.03) $  0.03  
Catastrophe and storm losses (after tax)    $  0.30  $  0.60  $  -  $  0.90  
Favorable (unfavorable) development on prior        
years' reserves (after tax) $  0.19  $  (0.06) $  -  $  0.13  
Dividends per share         $  0.21  
Other Information of Interest:        
Premiums written $  144,011  $  36,523  $  -  $  180,534  
Catastrophe and storm losses    $  9,922  $  19,499  $  -  $  29,421  
(Favorable) unfavorable development on prior        
years' reserves $  (6,242) $  1,822  $  -  $  (4,420) 
GAAP Ratios:        
Loss and settlement expense ratio  61.5%  131.2%    -   77.1% 
Acquisition expense ratio  32.0%  21.1%    -   29.6% 
Combined ratio  93.5%  152.3%    -   106.7% 
          

 

CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED      
($ in thousands, except share and per share amounts)        
  Property and       
  Casualty   Parent   
Quarter ended September 30, 2016 Insurance Reinsurance Company Consolidated
Revenues:        
Premiums earned $  116,372  $  35,809  $  -  $  152,181 
Investment income, net    8,185     3,285     4     11,474 
Other income (loss)    172     (257)    -     (85)
     124,729     38,837     4     163,570 
Losses and expenses:       
Losses and settlement expenses    81,643     26,530     -     108,173 
Dividends to policyholders    3,944     -     -     3,944 
Amortization of deferred policy acquisition costs    19,206     7,639     -     26,845 
Other underwriting expenses    16,690     916     -     17,606 
Interest expense     84     -     -     84 
Other expenses    190     -     489     679 
     121,757     35,085     489     157,331 
Operating income (loss) before income taxes    2,972     3,752     (485)    6,239 
Realized investment losses    (799)    (393)    -     (1,192)
Income (loss) before income taxes    2,173     3,359     (485)    5,047 
Income tax expense (benefit):       
Current    569     1,024     (145)    1,448 
Deferred    (264)    (108)    (158)    (530)
     305     916     (303)    918 
Net income (loss) $  1,868  $  2,443  $  (182) $  4,129 
Average shares outstanding         21,060,665 
Per Share Data:       
Net income (loss) per share - basic and diluted    $  0.09  $  0.12  $  (0.01) $  0.20 
Catastrophe and storm losses (after tax)    $  0.46  $  0.07  $  -  $  0.53 
Favorable development on prior years'        
reserves1 (after tax) $  0.22  $  0.02  $  -  $  0.24 
Dividends per share         $  0.19 
Other Information of Interest:       
Premiums written $  138,904  $  37,339  $  -  $  176,243 
Catastrophe and storm losses    $  14,787  $  2,266  $  -  $  17,053 
Favorable development on prior years' reserves1 $  (6,850) $  (796) $  -  $  (7,646)
GAAP Ratios:       
Loss and settlement expense ratio  70.2%  74.1%    -   71.1%
Acquisition expense ratio  34.2%  23.9%    -   31.8%
Combined ratio  104.4%  98.0%    -   102.9%
         
1 During the third quarter of 2016, management implemented a new reserving methodology for the determination of direct bulk reserves in the property and casualty insurance segment.  The new methodology, which is referred to as the accident year ultimate estimate approach, better conforms to industry practices and provides increased transparency of the drivers of the property and casualty insurance segment's performance.  In connection with this change in reserving methodology, there was a reallocation of IBNR loss reserves and allocated settlement expense reserves from prior accident years to the current accident year in multiple lines of business.  This change resulted in the movement of approximately $5.6 million of reserves from prior accident years to the current accident year that was reported as favorable development; however, this development is "mechanical in nature", and did not have an impact on earnings because the total amount of carried reserves did not change.  This "mechanical" favorable development has been excluded from the amounts presented for 2016. 
         

 

CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED       
($ in thousands, except share and per share amounts)         
  Property and        
  Casualty   Parent    
Nine months ended September 30, 2017 Insurance Reinsurance Company Consolidated 
Revenues:         
Premiums earned    $  350,307  $  99,207  $  -  $  449,514  
Investment income, net       24,225     9,421     33     33,679  
Other income (loss)    623     (1,457)    -     (834) 
     375,155     107,171     33     482,359  
Losses and expenses:        
Losses and settlement expenses       231,067     92,022     -     323,089  
Dividends to policyholders       5,184     -     -     5,184  
Amortization of deferred policy acquisition costs       59,186     21,588     -     80,774  
Other underwriting expenses       56,294     1,438     -     57,732  
Interest expense       253     -     -     253  
Other expenses       580     -     1,684     2,264  
     352,564     115,048     1,684     469,296  
Operating income (loss) before income taxes       22,591     (7,877)    (1,651)    13,063  
Realized investment gains (losses)       3,033     (867)    -     2,166  
Income (loss) before income taxes       25,624     (8,744)    (1,651)    15,229  
Income tax expense (benefit):        
Current       5,565     (3,044)    (603)    1,918  
Deferred       1,208     (976)    25     257  
     6,773     (4,020)    (578)    2,175  
Net income (loss)    $  18,851  $  (4,724) $  (1,073) $  13,054  
Average shares outstanding            21,295,882  
Per Share Data:        
Net income (loss) per share - basic and diluted    $  0.89  $  (0.22) $  (0.06) $  0.61  
Catastrophe and storm losses (after tax)    $  0.91  $  0.86  $  -  $  1.77  
Favorable development on prior years'         
reserves (after tax) $  0.48  $  0.06  $  -  $  0.54  
Dividends per share         $  0.63  
Book value per share         $  26.90  
Effective tax rate          14.3% 
Annualized net income as a percent of beg. SH equity        3.2% 
Other Information of Interest:        
Premiums written $  385,209  $  95,345  $  -  $  480,554  
Catastrophe and storm losses    $  29,922  $  27,996  $  -  $  57,918  
Favorable development on prior years' reserves $  (15,555) $  (2,062) $  -  $  (17,617) 
GAAP Ratios:        
Loss and settlement expense ratio  66.0%  92.8%    -   71.9% 
Acquisition expense ratio  34.4%  23.2%    -   31.9% 
Combined ratio  100.4%  116.0%    -   103.8% 
          

 

CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED       
($ in thousands, except share and per share amounts)         
  Property and        
  Casualty   Parent    
Nine months ended September 30, 2016 Insurance Reinsurance Company Consolidated 
Revenues:         
Premiums earned $  338,589  $  102,775  $  -  $  441,364  
Investment income, net    25,524     10,350     9     35,883  
Other income (loss)    466     (485)    -     (19) 
     364,579     112,640     9     477,228  
Losses and expenses:        
Losses and settlement expenses    225,207     70,895     -     296,102  
Dividends to policyholders    11,292     -     -     11,292  
Amortization of deferred policy acquisition costs    58,129     22,611     -     80,740  
Other underwriting expenses    49,839     2,295     -     52,134  
Interest expense     253     -     -     253  
Other expenses    558     -     1,495     2,053  
     345,278     95,801     1,495     442,574  
Operating income (loss) before income taxes    19,301     16,839     (1,486)    34,654  
Realized investment losses    (627)    (16)    -     (643) 
Income (loss) before income taxes    18,674     16,823     (1,486)    34,011  
Income tax expense (benefit):        
Current    6,425     5,601     (586)    11,440  
Deferred    (1,778)    (494)    (68)    (2,340) 
     4,647     5,107     (654)    9,100  
Net Income (loss) $  14,027  $  11,716  $  (832) $  24,911  
Average shares outstanding         20,964,236  
Per Share Data:        
Net income (loss) per share - basic and diluted    $  0.67  $  0.56  $  (0.04) $  1.19  
Catastrophe and storm losses (after tax)    $  1.08  $  0.33  $  -  $  1.41  
Favorable development on prior years'         
reserves1 (after tax) $  0.52  $  0.21  $  -  $  0.73  
Dividends per share         $  0.57  
Book value per share         $  26.67  
Effective tax rate          26.8% 
Annualized net income as a percent of beg. SH equity       6.3% 
Other Information of Interest:        
Premiums written $  370,704  $  98,754  $  -  $  469,458  
Catastrophe and storm losses    $  34,787  $  10,747  $  -  $  45,534  
Favorable development on prior years' reserves1 $  (16,637) $  (6,880) $  -  $  (23,517) 
GAAP Ratios:        
Loss and settlement expense ratio  66.5%  69.0%    -   67.1% 
Acquisition expense ratio  35.2%  24.2%    -   32.7% 
Combined ratio  101.7%  93.2%    -   99.8% 
          
1 During the third quarter of 2016, management implemented a new reserving methodology for the determination of direct bulk reserves in the property and casualty insurance segment.  The new methodology, which is referred to as the accident year ultimate estimate approach, better conforms to industry practices and provides increased transparency of the drivers of the property and casualty insurance segment's performance.  In connection with this change in reserving methodology, there was a reallocation of IBNR loss reserves and allocated settlement expense reserves from prior accident years to the current accident year in multiple lines of business.  This change resulted in the movement of approximately $5.6 million of reserves from prior accident years to the current accident year that was reported as favorable development; however, this development is "mechanical in nature", and did not have an impact on earnings because the total amount of carried reserves did not change.  This "mechanical" favorable development has been excluded from the amounts presented for 2016.  
          

 

     
CONSOLIDATED BALANCE SHEETS    
 September 30, December 31, 
  2017  2016 
($ in thousands, except share and per share amounts)(Unaudited)   
ASSETS    
Investments:    
  Fixed maturity securities available-for-sale, at fair value     
  (amortized cost $1,233,772 and $1,189,525)$  1,258,340 $  1,199,699 
  Equity securities available-for-sale, at fair value     
  (cost $150,428 and $147,479)   231,719    213,839 
  Other long-term investments   14,471    12,506 
  Short-term investments   25,255    39,670 
  Total investments   1,529,785    1,465,714 
     
Cash   402    307 
Reinsurance receivables due from affiliate   26,079    21,326 
Prepaid reinsurance premiums due from affiliate   15,759    9,309 
Deferred policy acquisition costs (affiliated $43,836 and $40,660)   44,110    40,939 
Amounts due from affiliate to settle inter-company    
transaction balances   4,210    -  
Prepaid pension and postretirement benefits due from affiliate   11,407    12,314 
Accrued investment income   11,963    11,050 
Amounts receivable under reverse repurchase agreements   16,500    20,000 
Accounts receivable   813    2,076 
Income taxes recoverable   3,850    - 
Goodwill   942    942 
Other assets (affiliated $4,818 and $4,632)   5,018    4,836 
  Total assets$  1,670,838 $  1,588,813 
     
LIABILITIES    
Losses and settlement expenses (affiliated $720,901 and $685,533)$  726,461 $  690,532 
Unearned premiums (affiliated $281,055 and $243,682)   282,443    244,885 
Other policyholders' funds (all affiliated)   9,847    13,068 
Surplus notes payable to affiliate   25,000    25,000 
Amounts due affiliate to settle inter-company transaction balances   -    11,222 
Pension benefits payable to affiliate   3,807    4,097 
Income taxes payable   -    2,359 
Deferred income taxes   21,403    11,321 
Other liabilities (affiliated $24,155 and $27,871)   26,815    32,987 
  Total liabilities   1,095,776    1,035,471 
     
STOCKHOLDERS' EQUITY     
Common stock, $1 par value, authorized 30,000,000     
  shares; issued and outstanding, 21,379,763    
  shares in 2017 and 21,222,535 shares in 2016   21,380    21,223 
Additional paid-in capital   122,640    119,054 
Accumulated other comprehensive income   64,326    46,081 
Retained earnings   366,716    366,984 
  Total stockholders' equity   575,062    553,342 
  Total liabilities and stockholders' equity$  1,670,838 $  1,588,813 
  

 

 

LOSS AND SETTLEMENT EXPENSE BY LINE OF BUSINESS
 
  Three months ended September 30,
   2017   2016 
($ 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$  30,229 $  24,293    80.4% $  28,113 $  26,274    93.5%
Property   27,980    15,803    56.5%    27,471    17,227    62.7%
Workers' compensation   25,373    11,386    44.9%    24,536    13,510    55.1%
Other liability   24,996    15,802    63.2%    24,277    14,179    58.4%
Other    2,203    447    20.3%    2,102    705    33.6%
Total commercial lines   110,781    67,731    61.1%    106,499    71,895    67.5%
             
Personal lines   9,691    6,308    65.1%    9,873    9,748    98.7%
Total property and casualty            
insurance$ 120,472 $  74,039    61.5% $ 116,372 $  81,643    70.2%
             
Reinsurance           
Pro rata reinsurance$  10,730 $  10,159    94.7% $  15,066 $  10,235    67.9%
Excess of loss reinsurance   23,988    35,378    147.5%    20,743    16,295    78.6%
Total reinsurance$  34,718 $  45,537    131.2% $  35,809 $  26,530    74.1%
             
Consolidated$ 155,190 $ 119,576    77.1% $ 152,181 $ 108,173    71.1%
 
             
  Nine months ended September 30,
   2017   2016 
($ 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$  87,275 $  74,926    85.8% $  82,449 $  69,763    84.6%
Property   79,551    51,291    64.5%    77,292    52,687    68.2%
Workers' compensation   75,419    41,451    55.0%    71,272    39,680    55.7%
Other liability   73,378    40,833    55.6%    72,086    38,045    52.8%
Other    6,509    777    11.9%    6,246    648    10.4%
Total commercial lines   322,132    209,278    65.0%    309,345    200,823    64.9%
             
Personal lines   28,175    21,789    77.3%    29,244    24,384    83.4%
Total property and casualty            
insurance$ 350,307 $ 231,067    66.0% $ 338,589 $ 225,207    66.5%
             
Reinsurance           
Pro rata reinsurance  $ 33,181  $23,979   72.3%  $44,175  $26,367   59.7%
Excess of loss reinsurance   66,026    68,043    103.1%    58,600    44,528    76.0%
Total reinsurance$  99,207 $  92,022    92.8% $ 102,775 $  70,895    69.0%
             
Consolidated$ 449,514 $ 323,089    71.9% $ 441,364 $ 296,102    67.1%
 

  

          
PREMIUMS WRITTEN         
 Three months ended  Three months ended   
 September 30, 2017 September 30, 2016  
   Percent of   Percent of Change in
 Premiums premiums Premiums premiums premiums
($ in thousands)written written written written written
Property and casualty insurance         
Commercial lines:         
Automobile$  32,678   18.1% $  29,649   16.8%   10.2%
Property   33,958   18.8%    34,062   19.3%   (0.3)%
Workers' compensation   36,266   20.1%    35,623   20.2%   1.8%
Other liability   28,212   15.6%    27,060   15.4%   4.3%
Other   2,529   1.4%    2,329   1.3%   8.6%
Total commercial lines   133,643   74.0%    128,723   73.0%   3.8%
          
Personal lines   10,368   5.8%    10,181   5.8%   1.8%
Total property and casualty insurance$  144,011   79.8% $  138,904   78.8%   3.7%
          
Reinsurance         
Pro rata reinsurance$  10,591   5.9% $  15,115   8.6%   (29.9)%
Excess of loss reinsurance   25,932   14.3%    22,224   12.6%   16.7%
Total reinsurance$  36,523   20.2% $  37,339   21.2%   (2.2)%
          
Consolidated$  180,534 100.0% $  176,243 100.0%   2.4%
          
 Nine months ended Nine months ended  
 September 30, 2017 September 30, 2016  
   Percent of   Percent of Change in
 Premiums premiums Premiums premiums premiums
($ in thousands)written written written written written
Property and casualty insurance         
Commercial lines:         
Automobile$  97,759   20.3% $  89,974   19.2%   8.7%
Property   87,825   18.3%    85,534   18.2%   2.7%
Workers' compensation   83,025   17.3%    80,896   17.2%   2.6%
Other liability   80,217   16.7%    78,456   16.7%   2.2%
Other   7,226   1.5%    6,863   1.5%   5.3%
Total commercial lines   356,052   74.1%    341,723   72.8%   4.2%
          
Personal lines   29,157   6.1%    28,981   6.2%   0.6%
Total property and casualty insurance$  385,209   80.2% $  370,704   79.0%   3.9%
          
Reinsurance         
Pro rata reinsurance$  30,096   6.3% $  42,078   9.0%   (28.5)%
Excess of loss reinsurance   65,249   13.5%    56,676   12.0%   15.1%
Total reinsurance$  95,345   19.8% $  98,754   21.0%   (3.5)%
          
Consolidated$  480,554 100.0% $  469,458 100.0%   2.4%
          

 

 

Contacts
Investors:
Steve Walsh, 515-345-2515
steve.t.walsh@emcins.com

Media:
Lisa Hamilton, 515-345-7589
lisa.l.hamilton@emcins.com

 

Source: EMC Insurance Group Inc.
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EMC Insurance Companies
717 Mulberry Street | P.O. Box 712 |
Des Moines, Iowa 50306-0712

800-447-2295