EMC Insurance Group Inc. Reports 2012 First Quarter Results

Published on Tuesday, 08 May 2012 06:33 Written by TradersHuddle Staff

DES MOINES, Iowa-( Business Wire )-

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 2011¹.

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.

EMC Insurance Group Inc.Anita Novak (Investors), 515-345-2515orLisa Hamilton (Media), 515-345-7589