EMC Insurance Group Inc. Reports 2016 First Quarter Results

Des Moines, Iowa, UNITED STATES


First Quarter Ended March 31, 2016

Operating Income Per Share – $0.74
Net Income Per Share – $0.70
Net Realized Investment Losses Per Share – $0.03
Catastrophe and Storm Losses Per Share – $0.19
Large Losses Per Share – $0.09
GAAP Combined Ratio – 92.7 percent

2016 Operating Income Guidance – $1.70 to $1.90 per share

DES MOINES, Iowa, May 06, 2016 (GLOBE NEWSWIRE) -- EMC Insurance Group Inc. (NASDAQ:EMCI) (the “Company”), today reported operating income of $15.4 million ($0.74 per share) for the first quarter ended March 31, 2016, compared to operating income of $19.8 million ($0.97 per share) for the first quarter of 20151.

Net income, including realized investment gains and losses, totaled $14.7 million ($0.70 per share) for the first quarter of 2016, compared to $20.3 million ($1.00 per share) for the first quarter of 2015.

The Company’s GAAP combined ratio was 92.7 percent in the first quarter of 2016, compared to 87.7 percent in the first quarter of 2015.

“Our year is off to an excellent start,” stated President and Chief Executive Officer Bruce G. Kelley. “We are reporting a terrific first quarter--second only to last year’s first quarter. Contributing to the strong results were catastrophe and storm losses below our 10-year average and a substantial increase in investment income.”

Kelley continued, “We continue to innovate and look for ways to better serve our agents and policyholders. For example, last month we announced a new telematics app that we are piloting with a few agents and accounts. This is one of many enhancements currently being developed to attract and retain the best business and provide more opportunity for profitable growth in the future.”

Premiums earned increased 2.9 percent to $142.7 million for the first quarter of 2016, from $138.7 million in the first quarter of 2015. In the property and casualty insurance segment, premiums earned increased 2.1 percent. The new aggregate catastrophe excess of loss intercompany reinsurance program between the Company’s three property and casualty insurance subsidiaries and Employers Mutual Casualty Company (Employers Mutual), the Company’s parent organization, reduced premiums earned by $3.2 million. Excluding this cost, premiums earned would have increased 5.0 percent. The majority of the increase is attributed to an increase in new business, small rate level increases on commercial lines renewal business and growth in insured exposures. In the reinsurance segment, premiums earned increased 5.8 percent. The revised inter-company reinsurance program between the Company’s reinsurance subsidiary and Employers Mutual resulted in a reduction of $1.7 million in the cost of the coverage. Without this reduction in the cost of the reinsurance program, premiums earned would have increased approximately 0.2 percent.  

Catastrophe and storm losses totaled $6.2 million ($0.19 per share after tax) in the first quarter of 2016, compared to $4.6 million ($0.15 per share after tax) in the first quarter of 2015. First quarter catastrophe and storm losses accounted for 4.3 percentage points of the combined ratio, which is below the Company’s most recent 10-year average of 5.5 percentage points for this period, but above the 3.3 percentage points experienced in the first quarter of 2015. On a segment basis, catastrophe and storm losses for the first quarter of 2016 amounted to $3.4 million ($0.10 per share after tax) in the property and casualty insurance segment, and $2.7 million ($0.09 per share after tax) in the reinsurance segment.

The Company reported $7.8 million ($0.24 per share after tax) of favorable development on prior years’ reserves during the first quarter of 2016, compared to $14.6 million ($0.46 per share after tax) in the first quarter of 2015. Both segments reported a decline in favorable development with the largest decline occurring in the property and casualty insurance segment.

Development amounts can vary significantly from quarter to quarter and year to year depending on a number of factors, including the number of claims settled and the settlement terms, and should therefore not be considered a reliable factor in assessing the adequacy of the Company’s carried reserves. The most recent actuarial analysis of the Company’s carried reserves indicated that the level of reserve adequacy was consistent with other recent evaluations.

Large losses (which the Company defines as losses greater than $500,000 for the EMC Insurance Companies pool, excluding catastrophe and storm losses) decreased to $3.0 million ($0.09 per share after tax) in the first quarter of 2016 from $4.3 million ($0.14 per share after tax) in the first quarter of 2015.

Net investment income increased 9.1 percent to $12.2 million for the first quarter of 2016, from $11.2 million in the first quarter of 2015. This increase reflects a higher average invested balance in fixed maturity securities and an increase in dividend income from the common stock portfolio due to the receipt of approximately $480,000 of special dividends.

Net realized investment losses totaled $1.1 million ($0.03 per share after tax) for the first quarter of 2016 compared to net realized investment gains of $783,000 ($0.02 per share after tax) for the first quarter of 2015. Included in net realized investment gains/losses reported for the first quarters of 2016 and 2015 are $1.9 million and $1.4 million, respectively, of 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).

At March 31, 2016, consolidated assets totaled $1.6 billion, including $1.4 billion in the investment portfolio, and stockholders’ equity totaled $551.1 million, an increase of 5.0 percent from December 31, 2015. Book value of the Company’s stock increased 4.2 percent to $26.31 per share from $25.26 per share at December 31, 2015. Book value excluding accumulated other comprehensive income increased 2.3 percent to $22.97 per share from $22.45 per share at December 31, 2015.

Based on results for the first quarter of 2016 and management’s expectations for the remainder of the year, management is reaffirming its 2016 operating income guidance in the range of $1.70 to $1.90 per share. This guidance is based on a projected GAAP combined ratio of 98.7 percent for the year with nominal changes to the other assumptions utilized in the projection.

The Company will hold an earnings teleconference call at noon Eastern time on Friday, May 6, 2016 to allow securities analysts, stockholders and other interested parties the opportunity to hear management discuss the Company’s results for the first quarter, as well as its expectations for the rest of 2016. Dial-in information for the call is toll-free 1-877-407-9205 (International: 1-201-689-8054).

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 6, 2016. 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 Stock Market under the symbol EMCI. Additional information regarding EMC Insurance Group Inc. may be found at www.emcins.com/ir. 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 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. 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.

¹The Company prepares its public financial statements in conformity with accounting principles generally accepted in the Unites States of America (GAAP). Operating income is a non-GAAP financial measure, calculated by excluding net realized investment gains/losses from net income. The Company’s calculation of operating income may differ from similar measures used by other companies, so investors should exercise caution when comparing the Company’s measure of operating income to the measure of other companies. Management’s projected operating income guidance is also considered a non-GAAP financial measure. 

Management believes operating income is useful to investors because it illustrates the performance of the Company’s normal, ongoing 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 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.

The reconciliation of operating income to net income is as follows:

     
   
 Three Months Ended March 31, 
  2016   2015  
($ in thousands)    
Operating income$  15,359  $  19,821  
Net realized investment gains (losses) (after tax)     (705)    509  
Net income $  14,654  $  20,330  
     

 

       
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
($ in thousands, except share and per share amounts) 
  Property and       
  Casualty   Parent   
Quarter Ended March 31, 2016 Insurance Reinsurance Company Consolidated
Revenues:        
Premiums earned $  110,446  $  32,291  $  -  $  142,737 
Investment income, net    8,771     3,457     2     12,230 
Other income (loss)    132     (143)    -     (11)
     119,349     35,605     2     154,956 
Losses and expenses:       
Losses and settlement expenses    62,098     23,011     -     85,109 
Dividends to policyholders    3,853     -     -     3,853 
Amortization of deferred policy acquisition costs    19,422     6,906     -     26,328 
Other underwriting expenses    16,468     503     -     16,971 
Interest expense     84     -     -     84 
Other expenses    157     -     492     649 
     102,082     30,420     492     132,994 
Operating income (loss) before income taxes    17,267     5,185     (490)    21,962 
Realized investment losses    (846)    (239)    -     (1,085)
Income (loss) before income taxes    16,421     4,946     (490)    20,877 
Income tax expense (benefit):       
Current    6,117     1,672     (171)    7,618 
Deferred    (1,187)    (208)    -     (1,395)
     4,930     1,464     (171)    6,223 
Net income (loss) $  11,491  $  3,482  $  (319) $  14,654 
Average shares outstanding         20,842,199 
Per Share Data:       
Net income (loss) per share - basic and diluted    $  0.55  $  0.17  $  (0.02) $  0.70 
Catastrophe and storm losses (after tax)    $  0.10  $  0.09  $  -  $  0.19 
Large losses* (after tax) $  0.09  $  -  $  -  $  0.09 
Reported favorable development          
  experienced on prior years' reserves (after tax)    $  0.12  $  0.12  $  -  $  0.24 
Dividends per share            $  0.190 
Book value per share          $  26.31 
Effective tax rate           29.8%
Annualized net income as a percent of beg. SH equity        11.2%
Other Information of Interest:       
Net written premiums    $  111,267  $  31,009  $  -  $  142,276 
Catastrophe and storm losses    $  3,424  $  2,740  $  -  $  6,164 
Large losses* $  3,035  $  -  $  -  $  3,035 
Reported favorable development        
  experienced on prior years' reserves    $  (3,798) $  (3,954) $  -  $  (7,752)
GAAP Ratios:       
Loss and settlement expense ratio  56.2%  71.3%    -   59.6%
Acquisition expense ratio  36.0%  22.9%    -   33.1%
Combined ratio  92.2%  94.2%    -   92.7%
         
*Large losses are defined as losses greater than $500 for the EMC Insurance Companies pool, excluding catastrophe and storm losses.
 

 

        
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED  
($ in thousands, except share and per share amounts)  
  Property and        
  Casualty   Parent    
Quarter Ended March 31, 2015 Insurance Reinsurance Company Consolidated 
Revenues:         
Premiums earned $  108,205  $  30,526  $  -  $  138,731  
Investment income, net    8,026     3,184     (4)    11,206  
Other income    182     1,433     -     1,615  
     116,413     35,143     (4)    151,552  
Losses and expenses:        
Losses and settlement expenses    56,675     19,110     -     75,785  
Dividends to policyholders    2,900     -     -     2,900  
Amortization of deferred policy acquisition costs    18,379     7,062     -     25,441  
Other underwriting expenses    16,173     1,348     -     17,521  
Interest expense     84     -     -     84  
Other expenses    206     -     461     667  
     94,417     27,520     461     122,398  
Operating income (loss) before income taxes    21,996     7,623     (465)    29,154  
Realized investment gains    700     83     -     783  
Income (loss) before income taxes    22,696     7,706     (465)    29,937  
Income tax expense (benefit):        
Current    7,585     1,783     (163)    9,205  
Deferred    (290)    692     -     402  
     7,295     2,475     (163)    9,607  
Net income (loss) $  15,401  $  5,231  $  (302) $  20,330  
Average shares outstanding         20,436,302  
Per Share Data:        
Net income (loss) per share - basic and diluted    $  0.75  $  0.26  $  (0.01) $  1.00  
Catastrophe and storm losses (after tax)    $  0.06  $  0.09  $  -  $  0.15  
Large losses* (after tax) $  0.14  $  -  $  -  $  0.14  
Reported favorable development        
  experienced on prior years' reserves (after tax)    $  0.29  $  0.17  $  -  $  0.46  
Dividends per share         $  0.167  
Book value per share          $  25.65  
Effective tax rate           32.1% 
Annualized net income as a percent of beg. SH equity        16.2% 
Other Information of Interest:        
Net written premiums    $  108,796  $  34,128  $  -  $  142,924  
Catastrophe and storm losses    $  1,761  $  2,809  $  -  $  4,570  
Large losses* $  4,258  $  -  $  -  $  4,258  
Reported favorable development         
  experienced on prior years' reserves    $  (9,265) $  (5,328) $  -  $  (14,593) 
GAAP Ratios:        
Loss and settlement expense ratio  52.4%  62.6%    -   54.6% 
Acquisition expense ratio  34.6%  27.6%    -   33.1% 
Combined ratio  87.0%  90.2%    -   87.7% 
          
*Large losses are defined as losses greater than $500 for the EMC Insurance Companies pool, excluding catastrophe and storm losses. 

 

CONSOLIDATED BALANCE SHEETS    
 March 31, December 31, 
  2016   2015  
($ in thousands, except share and per share amounts)(Unaudited)   
ASSETS    
Investments:    
Fixed maturity securities available-for-sale, at fair value     
  (amortized cost $1,116,627 and $1,130,217)$  1,166,022  $  1,161,025  
Equity securities available-for-sale, at fair value     
  (cost $151,046 and $144,176)   212,582     206,243  
Other long-term investments   8,440     9,930  
Short-term investments   48,447     38,599  
Total investments   1,435,491     1,415,797  
     
Cash   697     224  
Reinsurance receivables due from affiliate   21,342     24,236  
Prepaid reinsurance premiums due from affiliate   7,080     6,563  
Deferred policy acquisition costs (affiliated $40,232 and $40,535)   40,462     40,720  
Amounts due from affiliate to settle inter-company    
  transaction balances   7,309     -   
Prepaid pension and postretirement benefits due from affiliate   11,754     12,133  
Accrued investment income   11,939     10,789  
Amounts receivable under reverse repurchase agreements   16,850     16,850  
Accounts receivable   1,440     804  
Income taxes recoverable   -     1,735  
Goodwill   942     942  
Other assets (affiliated $4,019 and $4,595)   4,938     5,162  
Total assets$  1,560,244  $  1,535,955  
     
LIABILITIES    
Losses and settlement expenses (affiliated $674,131 and $671,169)  $  681,579  $  678,774  
Unearned premiums (affiliated $238,600 and $238,637)   239,609     239,435  
Other policyholders' funds (all affiliated)   11,025     8,721  
Surplus notes payable to affiliate   25,000     25,000  
Amounts due affiliate to settle inter-company transaction balances   -     6,408  
Pension benefits payable to affiliate   3,958     4,299  
Income taxes payable   5,882     -  
Deferred income taxes   23,818     19,029  
Other liabilities (affiliated $16,968 and $28,598)   18,307     29,351  
Total liabilities   1,009,178     1,011,017  
     
STOCKHOLDERS' EQUITY     
Common stock, $1 par value, authorized 30,000,000     
  shares; issued and outstanding, 20,946,158    
  shares in 2016 and 20,780,439 shares in 2015   20,946     20,781  
Additional paid-in capital   112,500     108,747  
Accumulated other comprehensive income   69,917     58,433  
Retained earnings   347,703     336,977  
Total stockholders' equity   551,066     524,938  
Total liabilities and stockholders' equity$  1,560,244  $  1,535,955  
  

 

LOSS AND SETTLEMENT EXPENSE BY LINE OF BUSINESS
  Three months ended March 31,
   2016   2015 
($ 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 $  26,927  $  18,805     69.8% $  25,396  $  16,851     66.4%
Property    24,748     12,382     50.0%    25,066     12,333     49.2%
Workers' compensation    23,247     13,406     57.7%    22,367     11,511     51.5%
Liability    23,670     12,553     53.0%    22,416     10,936     48.8%
Other    2,071     (66)    (3.2)%    1,966     97     4.9%
Total commercial lines    100,663     57,080     56.7%    97,211     51,728     53.2%
             
Personal lines:            
Automobile    5,217     2,636     50.5%    5,817     2,453     42.2%
Homeowners    4,566     2,382     52.2%    5,177     2,494     48.2%
Total personal lines    9,783     5,018     51.3%    10,994     4,947     45.0%
     Total property and casualty            
       insurance $  110,446  $  62,098     56.2% $  108,205  $  56,675     52.4%
             
Reinsurance            
Pro rata reinsurance:            
Multiline (primarily property) $  690  $  159     23.0% $  1,238  $  455     36.8%
Property    6,257     4,602     73.5%    3,856     6,028     156.3%
Liability    5,351     4,238     79.2%    3,801     2,140     56.3%
Marine    1,343     877     65.3%    3,410     1,105     32.4%
Total pro rata reinsurance    13,641     9,876     72.4%    12,305     9,728     79.1%
             
Excess of loss reinsurance:            
Property    15,280     12,937     84.7%    14,462     7,940     54.9%
Liability    3,370     198     5.9%    3,759     1,442     38.4%
Total excess of loss reinsurance        18,650     13,135     70.4%    18,221     9,382     51.5%
     Total reinsurance $  32,291  $  23,011     71.3% $  30,526  $  19,110     62.6%
             
          Consolidated $  142,737  $  85,109     59.6% $  138,731  $  75,785     54.6%
             

 

   
NET WRITTEN PREMIUMS 
  
 Three months ended  Three months ended     
 March 31, 2016 March 31, 2015    
   Percent of   Percent of Change  
 Written net written Written net written in net written  
($ in thousands)premiums premiums premiums premiums premiums  
Property and casualty insurance             
Commercial lines:           
Automobile$  28,741     20.1% $  27,353     19.1%    5.1%  
Property   24,426     17.2%    24,555     17.2%    (0.5)%  
Workers' compensation   22,410     15.8%    21,238     14.9%    5.5%  
Liability   24,943     17.5%    23,790     16.6%    4.8%  
Other   2,206     1.6%    1,962     1.4%    12.4%  
Total commercial lines   102,726     72.2%    98,898     69.2%    3.9%  
            
Personal lines:           
Automobile   4,909     3.4%    5,568     3.9%    (11.8)%  
Homeowners   3,632     2.6%    4,330     3.0%    (16.1)%  
Total personal lines   8,541     6.0%    9,898     6.9%    (13.7)%  
     Total property and casualty             2.3%  
       insurance$  111,267     78.2% $  108,796     76.1%    
            
Reinsurance           
Pro rata reinsurance:           
Multiline (primarily property)$  660     0.5% $  1,185     0.8%    (44.3)%  
Property   4,908     3.5%    3,882     2.7%    26.4%  
Liability   5,277     3.7%    5,967     4.2%    (11.6)%  
Marine   1,339     0.9%    3,759     2.7%    (64.4)%  
Total pro rata reinsurance   12,184     8.6%    14,793     10.4%    (17.6)%  
            
Excess of loss reinsurance:           
Property   15,373     10.8%    15,535     10.9%    (1.0)%  
Liability   3,452     2.4%    3,800     2.6%    (9.2)%  
Total excess of loss reinsurance     18,825     13.2%    19,335     13.5%    (2.6)%  
     Total reinsurance$  31,009     21.8% $  34,128     23.9%    (9.1)%  
            
          Consolidated$  142,276   100.0% $  142,924   100.0%    (0.5)%  
            


                    

        

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