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EMC Insurance Group Inc. Reports 2018 Third Quarter and Nine Month Results

/EIN News/ -- Third Quarter Ended September 30, 2018
Net Income Per Share – $0.89
Non-GAAP Operating Income Per Share* – $0.48
Net Realized Investment Gains and Change in Net Unrealized 
Investment Gains on Equity Investments Per Share – $0.41
Catastrophe and Storm Losses Per Share – $0.77
GAAP Combined Ratio – 100.0 percent

Nine Months Ended September 30, 2018
Net Income Per Share – $0.65
Non-GAAP Operating Income Per Share* – $0.66
Net Realized Investment Gains and Change in Net Unrealized
Investment Gains on Equity Investments Per Share – ($0.01)
Catastrophe and Storm Losses Per Share – $1.55
GAAP Combined Ratio – 104.7 percent

2018 Non-GAAP Operating Income Guidance* of $1.30 to $1.50 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. 07, 2018 (GLOBE NEWSWIRE) -- EMC Insurance Group Inc. (Nasdaq:EMCI) (the “Company”), today reported net income of $19.1 million ($0.89 per share) and a loss and settlement expense ratio of 68.0 percent for the third quarter ended September 30, 2018, compared to net income of $746,000 ($0.03 per share) and a loss and settlement expense ratio of 77.1 percent for the third quarter of 2017. For the nine months ended September 30, 2018, the Company reported net income of $14.1 million ($0.65 per share) and a loss and settlement expense ratio of 71.4 percent, compared to net income of $13.1 million ($0.61 per share) and a loss and settlement expense ratio of 71.9 percent for the same period in 2017.

Included in the net income amounts reported for the third quarter and first nine months of 2018 are a pre-tax increase of $9.5 million and a pre-tax decrease of $799,000, respectively, in unrealized investment gains on the Company’s equity investments as required by updated accounting guidance adopted by the Company on January 1, 2018. Excluding the change in unrealized investment gains, the primary drivers of the increase in net income reported for the third quarter of 2018 are a lower level of catastrophe and storm losses and an increase in the amount of favorable development experienced on prior years’ reserves. Despite a large decline in the amount of catastrophe and storm losses for the first nine months of 2018, net income increased only slightly due to a decline in favorable development on prior years’ reserves and a high level of non-catastrophe losses in the property and casualty insurance segment during the first half of the year.

Also contributing to the net income amounts reported for the third quarter and first nine months of 2018 are $1.6 million and $681,000, respectively, of pre-tax realized investment gains, compared to $594,000 of pre-tax realized investment losses and $2.2 million of pre-tax realized investment gains for the same periods in 2017. The income tax expense/benefit amounts reported for 2018 reflect the new 21 percent federal corporate tax rate, compared to the 35 percent federal corporate tax rate in effect in 2017.

In the property and casualty insurance segment, the underlying loss and settlement expense ratio* (which excludes the impact of catastrophe and storm losses and development on prior years’ reserves) declined 1.8 percentage points to 56.7 percent in the third quarter of 2018, from 58.5 percent in the third quarter of 2017. This decline primarily reflects reductions in the ultimate settlement expense ratios established for several accident years in several lines of business.  For the first nine months of 2018, the underlying loss and settlement expense ratio increased 2.2 percentage points to 64.1 percent from 61.9 percent in 2017.

“While our overall catastrophe and storm losses were down for the third quarter, they increased for the property and casualty insurance segment,” stated President and Chief Executive Officer Bruce G. Kelley. “The retention amounts under both semi-annual aggregate excess of loss reinsurance treaties have been filled. As a result, any additional catastrophe and storm losses incurred by the property and casualty insurance segment during the fourth quarter will be ceded to Employers Mutual Casualty Company (Employers Mutual), unless the limits of protection are exceeded.”

Kelley continued, “Our reinsurance segment continued to perform well given the active hurricane season and the significant catastrophic events that have impacted the industry. Premiums written growth remains strong as we were able to capitalize on opportunities for new business and increased participation on our best accounts during the January 1 renewal season.”

“The personal lines of business continue to weigh on underwriting profitability; however, the impact of this business will begin to diminish as we transition out of personal lines over the next 18 months and focus our efforts on strengthening and expanding our commercial lines business,” concluded Kelley.

Non-GAAP operating income, which excludes net realized investment gains/losses and, beginning in 2018, the change in net unrealized investment gains on equity investments from net income/loss, totaled $10.4 million ($0.48 per share) for the third quarter of 2018, compared to $1.1 million ($0.05 per share) for the third quarter of 2017. For the nine months ended September 30, 2018, the Company reported non-GAAP operating income of $14.2 million ($0.66 per share), compared to $11.6 million ($0.55 per share) for the same period in 2017.

The Company’s GAAP combined ratio was 100.0 percent in the third quarter of 2018, compared to 107.5 percent in the third quarter of 2017. For the first nine months of both 2018 and 2017, the GAAP combined ratio was 104.7 percent.

On January 1, 2018, the Company adopted updated accounting guidance issued by the FASB which prohibits including components of net periodic pension and postretirement benefit costs/income, other than the service cost component, in any capitalized asset. In conjunction with the adoption of this updated guidance, management elected to report all components of net periodic pension and postretirement benefit income, other than the service cost component, as other income in the consolidated statements of income. The service cost component continues to be reported in other underwriting expenses. This change in reporting was applied retrospectively for comparison purposes and did not impact the net income or non-GAAP operating income amounts reported for the third quarter and first nine months of 2018 and 2017, as other income and other underwriting expenses increased by the same amounts; however, it did increase the acquisition expense ratios, and therefore the combined ratios, by 1.1 percentage points and 1.2 percentage points for the three and nine months ended September 30, 2018, respectively and 0.8 percentage points and 0.9 percentage points for the three and nine months ended September 30, 2017, respectively.

Premiums earned increased 5.5 percent and 6.2 percent for the third quarter and first nine months of 2018, respectively. In the property and casualty insurance segment, premiums earned increased 4.8 percent and 4.6 percent for the third quarter and first nine months of 2018, respectively. These increases reflect small rate level increases on renewal business, an increase in retained policies in the commercial lines of business, and new business in both commercial and personal lines of business. In the reinsurance segment, premiums earned increased 8.0 percent and 12.0 percent for the third quarter and first nine months of 2018, respectively. These increases are attributed to increases in participation and higher estimated premiums achieved on existing multi-line contracts and a specialty casualty contract, higher estimated premiums on a large offshore energy contract within the pro rata line of business, and the addition of new business. The increases were partially offset by a continued decline in premiums reported by Mutual Re (formerly known as Mutual Reinsurance Bureau underwriting association) due to its withdrawal from non-standard automobile business.

Catastrophe and storm losses totaled $21.0 million ($0.77 per share after tax) in the third quarter of 2018, compared to $29.4 million ($0.90 per share after tax) in the third quarter of 2017. The property and casualty insurance segment experienced an elevated level of catastrophe and storm losses during the third quarter, primarily from Midwest storms and Hurricane Florence. As a result, the property and casualty insurance segment filled the $15 million retention amount under the July 1 through December 31 intercompany excess of loss reinsurance treaty with Employers Mutual, and ceded $1.4 million of catastrophe and storm losses to Employers Mutual. In addition, the property and casualty insurance segment incurred an additional $2.9 million of gross catastrophe and storm losses resulting from increases in the estimates of catastrophe and storm losses that occurred during the first six months of 2018. As a result, the $22 million retention amount under the intercompany reinsurance treaty covering the first half of the year was filled, and an additional $864,000 of catastrophe and storm losses were ceded to Employers Mutual. Having filled the retention amounts under both semi-annual aggregate excess of loss treaties, any additional catastrophe and storm losses incurred in the fourth quarter will be ceded to Employers Mutual, unless the limits of protection are exceeded.  For the three and nine months ended September 30, 2017, the property and casualty subsidiaries ceded $3.0 million and $19.0 million of catastrophe and storm losses to Employers Mutual under the 2017 intercompany reinsurance program covering the first half of the year. No recoveries were made under the intercompany reinsurance treaty covering the second half of 2017.

In the third quarter of 2018, no recoveries were made under the reinsurance subsidiary’s intercompany annual aggregate catastrophe excess of loss treaty with Employers Mutual, which has a retention of $20 million, a limit of $100 million, and a 20 percent co-participation above the retention. Approximately $18.0 million of retention remains under this treaty. The reinsurance subsidiary did, however, recover $3.2 million under Industry Loss Warranties purchased in 2017 to provide additional protection in peak exposure territories. The reinsurance subsidiary retained 20 percent of this recovery under the co-participation provision of the intercompany reinsurance program, with the remaining 80 percent ceded to Employers Mutual. In the third quarter of 2017, the reinsurance segment incurred a record amount of catastrophe and storm losses, primarily stemming from Hurricanes Harvey, Irma and Maria. The reinsurance segment retained approximately $18.0 million of catastrophe and storm losses subject to the treaty, and ceded $9.0 million to Employers Mutual. Taking 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.

Catastrophe and storm losses totaled $42.4 million ($1.55 per share after tax) for the first nine months of 2018, compared to $57.9 million ($1.77 per share after tax) for the same period in 2017. On a segment basis, catastrophe and storm losses totaled $17.0 million ($0.62 per share after tax) and $37.0 million ($1.35 per share after tax) in the property and casualty insurance segment, and $4.0 million ($0.15 per share after tax) and $5.4 million ($0.20 per share after tax) in the reinsurance segment for the three and nine months ended September 30, 2018, respectively.

The Company reported $5.9 million ($0.22 per share after tax) and $12.0 million ($0.44 per share after tax) of favorable development on prior years’ reserves during the third quarter and first nine months of 2018, respectively, compared to $4.4 million ($0.13 per share after tax) and $17.6 million ($0.54 per share after tax) for the same periods in 2017. In the property and casualty insurance segment, favorable development totaled $7.2 million in the third quarter of 2018, compared to $6.2 million in 2017. The majority of the favorable development experienced in the third quarter of 2018 was driven by reductions in the ultimate settlement expense ratios established for several accident years in several lines of business.  In addition, the ultimate loss ratios were reduced for several accidents years in several lines of business, but to a lesser extent than the reduction in the settlement expense ratios. Included in the 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. In the reinsurance segment, adverse development totaled $1.3 million in the third quarter of 2018, compared to $1.8 million in 2017.

Net investment income increased 3.9 percent and 4.2 percent to $12.0 million and $35.1 million for the third quarter and first nine months of 2018, from $11.5 million and $33.7 million for the same periods in 2017, respectively. These increases are primarily attributed to growth in the fixed maturity portfolio and an increase in interest rates.

The pre-tax realized investment gains of $1.6 million and $681,000 reported for the third quarter and first nine months of 2018 include a pre-tax realized investment loss of $1.7 million for both periods generated from changes 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). Pre-tax realized investment losses of $594,000 and pre-tax realized investment gains of $2.2 million for the third quarter and first nine months of 2017 include $1.0 million and $4.6 million, respectively, of pre-tax realized investment losses attributed to a decline in the carrying value of this limited partnership.

Other income totaled $2.3 million and $6.7 million in the third quarter and first nine months of 2018, respectively, and includes $1.9 million and $5.6 million of net periodic pension and postretirement benefit income, and $147,000 and $389,000 of foreign currency exchange gains. In the third quarter and first nine months of 2017, other income totaled $1.1 million and $3.0 million, respectively, and includes $1.3 million and $3.8 million of net periodic pension and postretirement benefit income, and $357,000 and $1.5 million of foreign currency exchange losses.

At September 30, 2018, consolidated assets totaled $1.7 billion, including $1.5 billion in the investment portfolio, and stockholders’ equity totaled $574.6 million, a decrease of 4.8 percent from December 31, 2017. Book value of the Company’s common stock decreased 5.4 percent to $26.63 per share from $28.14 per share at December 31, 2017, primarily due to a decline in unrealized investment gains on the fixed maturity portfolio attributable to an increase in interest rates during the year.

During the third quarter of 2018, no shares of the Company’s common stock were repurchased under its stock repurchase program. Approximately $14.0 million remains under this program. The amount and timing of stock repurchases depends on several factors, including, but not limited to, general market conditions, the economic environment and the rate of return that can be achieved through the repurchase of stock compared to other alternatives.

On October 30, 2018, management announced that, based on actual results for the first nine months of 2018 and projections for the remainder of the year, it was revising its 2018 non-GAAP operating income guidance from the previous range of $0.95 to $1.15 per share to a range of $1.30 to $1.50 per share. This guidance is based on a projected GAAP combined ratio of 102.6 percent for the year and investment income growth in the mid-single digits, with nominal changes to the other assumptions utilized in the projection.

The Company will hold an earnings conference call at noon Eastern time on Wednesday, November 7, 2018, 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 2018. 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. EMCI and Employers Mutual, 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 federal corporate tax rate;
  • 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 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 and, beginning in 2018, the change in net unrealized investment gains/losses on equity investments from net income/loss. 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. Prior to 2018, investments in equity investments were classified as available-for-sale and changes in unrealized investment gains/losses on equity investments were recognized in other comprehensive income. Effective January 1, 2018, the Company adopted the updated financial instruments guidance issued by the FASB, which requires changes in the unrealized investment gains/losses on equity investments to be recognized in net income/loss rather than other comprehensive income. Changes in unrealized investment gains/losses on equity investments are not predictable due to changing market conditions and are therefore also excluded from the calculation of non-GAAP operating income.

Management’s operating income guidance is also considered a non-GAAP financial measure. For the reasons noted above, management is unable to accurately project the amount of net income/loss that will result from realized investment gains/losses and changes in the unrealized investment gains/losses on equity investments, 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/loss.

RECONCILIATION OF NET INCOME TO NON-GAAP OPERATING INCOME
($ in thousands)                
    Three months ended September 30,   Nine months ended September 30,
    2018   2017   2018   2017
Net income   $ 19,148     $ 746     $ 14,077     $ 13,054  
Realized investment (gains) losses   (1,633 )   594     (681 )   (2,166 )
Change in unrealized investment gains on equity investments   (9,502 )   XXXX     799     XXXX  
Income tax expense (benefit)   2,338     (208 )   (25 )   758  
Net realized investment (gains) losses and, beginning in 2018, change in net unrealized investment gains on equity investments   (8,797 )   386     93     (1,408 )
Non-GAAP operating income   $ 10,351     $ 1,132     $ 14,170     $ 11,646  
                                 


RECONCILIATION OF NET INCOME PER SHARE TO NON-GAAP OPERATING INCOME PER SHARE
    Three months ended September 30,   Nine months ended September 30,
    2018   2017   2018   2017
Net income   $ 0.89     $ 0.03     $ 0.65     $ 0.61  
Realized investment (gains) losses   (0.07 )   0.03     (0.03 )   (0.10 )
Change in unrealized investment gains on equity investments   (0.44 )   XXXX     0.04     XXXX  
Income tax expense (benefit)   0.10     (0.01 )   (0.00 )   0.04  
Net realized investment (gains) losses and, beginning in 2018, change in net unrealized investment gains on equity investments   (0.41 )   0.02     0.01     (0.06 )
Non-GAAP operating income   $ 0.48     $ 0.05     $ 0.66     $ 0.55  
                                 

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,
    2018   2017   2018   2017
Loss and settlement expense ratio   64.5 %   61.5 %   70.8 %   66.0 %
Catastrophe and storm losses   (13.5 )%   (8.2 )%   (10.1 )%   (8.5 )%
Favorable development on prior years' reserves   5.7 %   5.2 %   3.4 %   4.4 %
Underlying loss and settlement expense ratio   56.7 %   58.5 %   64.1 %   61.9 %
                         

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)                
Quarter ended September 30, 2018   Property and
Casualty
Insurance
  Reinsurance   Parent
Company
  Consolidated
Revenues:                
Premiums earned   $ 126,213     $ 37,495     $     $ 163,708  
Investment income, net   8,514     3,423     14     11,951  
Other income   2,184     147         2,331  
    136,911     41,065     14     177,990  
Losses and expenses:                
Losses and settlement expenses   81,435     29,842         111,277  
Dividends to policyholders   2,654             2,654  
Amortization of deferred policy acquisition costs   21,182     7,601         28,783  
Other underwriting expenses   20,426     498         20,924  
Interest expense   170             170  
Other expenses   282         591     873  
    126,149     37,941     591     164,681  
Operating income (loss) before income taxes   10,762     3,124     (577 )   13,309  
Net realized investment gains (losses)
and change in unrealized investment gains
on equity investments
  6,760     4,476     (101 )   11,135  
Income (loss) before income taxes   17,522     7,600     (678 )   24,444  
Income tax expense (benefit):                
Current   2,961     722     (99 )   3,584  
Deferred   859     897     (44 )   1,712  
    3,820     1,619     (143 )   5,296  
Net income (loss)   $ 13,702     $ 5,981     $ (535 )   $ 19,148  
Average shares outstanding               21,556,557  
Per Share Data:                
Net income (loss) per share - basic and diluted   $ 0.64     $ 0.28     $ (0.03 )   $ 0.89  
Catastrophe and storm losses (after tax)   $ 0.62     $ 0.15     $     $ 0.77  
Favorable (adverse) development on prior years'
reserves (after tax)
  $ 0.27     $ (0.05 )   $     $ 0.22  
Dividends per share               $ 0.22  
Other Information of Interest:                
Premiums written   $ 152,787     $ 39,898     $     $ 192,685  
Catastrophe and storm losses   $ 17,033     $ 3,975     $     $ 21,008  
(Favorable) adverse development on
 prior years' reserves
  $ (7,203 )   $ 1,294     $     $ (5,909 )
GAAP Ratios:                
Loss and settlement expense ratio   64.5 %   79.6 %   %   68.0 %
Acquisition expense ratio   35.1 %   21.6 %   %   32.0 %
Combined ratio   99.6 %   101.2 %   %   100.0 %
                         


CONSOLIDATED STATEMENTS OF INCOME  - UNAUDITED    
($ in thousands, except share and per share amounts)                
Quarter ended September 30, 2017   Property and
Casualty
Insurance
  Reinsurance   Parent
Company
  Consolidated
Revenues:                
Premiums earned   $ 120,472     $ 34,718     $     $ 155,190  
Investment income, net   8,252     3,237     12     11,501  
Other income (loss)1   1,457     (358 )       1,099  
    130,181     37,597     12     167,790  
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 expenses1   20,387     412         20,799  
Interest expense   84             84  
Other expenses   170         531     701  
    114,217     52,888     531     167,636  
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 (adverse) 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) adverse 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 ratio1   33.1 %   21.1 %   %   30.4 %
Combined ratio1   94.6 %   152.3 %   %   107.5 %
                                 
1Amounts for other income (loss), other underwriting expenses and the acquisition expense and combined ratios are restated for new accounting guidance for the reporting of retirement benefit expenses that became effective January 1, 2018.


CONSOLIDATED STATEMENTS OF INCOME  - UNAUDITED    
($ in thousands, except share and per share amounts)                
Nine months ended September 30, 2018   Property and
Casualty
Insurance
  Reinsurance   Parent
Company
  Consolidated
Revenues:                
Premiums earned   $ 366,340     $ 111,100     $     $ 477,440  
Investment income, net   25,072     10,001     27     35,100  
Other income   6,330     389         6,719  
    397,742     121,490     27     519,259  
Losses and expenses:                
Losses and settlement expenses   259,191     81,805         340,996  
Dividends to policyholders   7,160             7,160  
Amortization of deferred policy acquisition costs   61,654     23,850         85,504  
Other underwriting expenses   64,856     1,374         66,230  
Interest expense   483             483  
Other expenses   759         1,815     2,574  
    394,103     107,029     1,815     502,947  
Operating income (loss) before income taxes   3,639     14,461     (1,788 )   16,312  
Net realized investment gains (losses)
and change in unrealized investment gains
on equity investments
  (1,225 )   1,208     (101 )   (118 )
Income (loss) before income taxes   2,414     15,669     (1,889 )   16,194  
Income tax expense (benefit):                
Current   (1,160 )   3,032     (393 )   1,479  
Deferred   523     119     (4 )   638  
    (637 )   3,151     (397 )   2,117  
Net income (loss)   $ 3,051     $ 12,518     $ (1,492 )   $ 14,077  
Average shares outstanding               21,529,394  
Per Share Data:                
Net income (loss) per share - basic and diluted   $ 0.14     $ 0.58     $ (0.07 )   $ 0.65  
Catastrophe and storm losses (after tax)   $ 1.35     $ 0.20     $     $ 1.55  
Favorable (adverse) development on prior years'
reserves (after tax)
  $ 0.46     $ (0.02 )   $     $ 0.44  
Dividends per share               $ 0.66  
Book value per share               $ 26.63  
Effective tax rate               13.1 %
Annualized net income as a percent of beg. SH equity               3.1 %
Other Information of Interest:                
Premiums written   $ 404,257     $ 109,612     $     $ 513,869  
Catastrophe and storm losses   $ 37,000     $ 5,374     $     $ 42,374  
(Favorable) adverse development on
 prior years' reserves
  $ (12,489 )   $ 493     $     $ (11,996 )
GAAP Ratios:                
Loss and settlement expense ratio   70.8 %   73.6 %   %   71.4 %
Acquisition expense ratio   36.5 %   22.7 %   %   33.3 %
Combined ratio   107.3 %   96.3 %   %   104.7 %
                         


CONSOLIDATED STATEMENTS OF INCOME  - UNAUDITED    
($ in thousands, except share and per share amounts)                
Nine months ended September 30, 2017   Property and
Casualty
Insurance
  Reinsurance   Parent
Company
  Consolidated
Revenues:                
Premiums earned   $ 350,307     $ 99,207     $     $ 449,514  
Investment income, net   24,225     9,421     33     33,679  
Other income (loss)1   4,457     (1,457 )       3,000  
    378,989     107,171     33     486,193  
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 expenses1   60,128     1,438         61,566  
Interest expense   253             253  
Other expenses   580         1,684     2,264  
    356,398     115,048     1,684     473,130  
Operating income (loss) before income taxes   22,591     (7,877 )   (1,651 )   13,063  
Realized investment 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 ratio1   35.5 %   23.2 %   %   32.8 %
Combined ratio1   101.5 %   116.0 %   %   104.7 %
                                 
1Amounts for other income (loss), other underwriting expenses and the acquisition expense and combined ratios are restated for new accounting guidance for the reporting of retirement benefit expenses that became effective January 1, 2018.


CONSOLIDATED BALANCE SHEETS        
    September 30,
 2018
  December 31,
 2017
($ in thousands, except share and per share amounts)   (Unaudited)    
ASSETS        
Investments:        
Fixed maturity securities available-for-sale, at fair value (amortized cost $1,264,975 and $1,253,166)   $ 1,248,072     $ 1,275,016  
Equity investments, at fair value (cost $155,734 and $144,274)   238,768     228,115  
Equity investments, at alternative measurement of cost less impairments   1,200      
Other long-term investments   17,818     13,648  
Short-term investments   33,717     23,613  
Total investments   1,539,575     1,540,392  
         
Cash   302     347  
Reinsurance receivables due from affiliate   33,448     31,650  
Prepaid reinsurance premiums due from affiliate   12,470     12,789  
Deferred policy acquisition costs (affiliated $47,323 and $40,848)   47,653     41,114  
Amounts due from affiliate to settle inter-company transaction balances   8,067      
Prepaid pension and postretirement benefits due from affiliate   22,769     20,683  
Accrued investment income   11,714     11,286  
Amounts receivable under reverse repurchase agreements   16,500     16,500  
Accounts receivable   1,103     1,604  
Income taxes recoverable   1,531      
Goodwill   942     942  
Other assets (affiliated $4,706 and $4,423)   5,028     4,633  
Total assets   $ 1,701,102     $ 1,681,940  
         
LIABILITIES        
Losses and settlement expenses (affiliated $756,751 and $726,413)   $ 761,581     $ 732,612  
Unearned premiums (affiliated $291,464 and $256,434)   292,983     257,797  
Other policyholders' funds (all affiliated)   9,145     10,013  
Surplus notes payable to affiliate   25,000     25,000  
Amounts due affiliate to settle inter-company transaction balances       367  
Pension benefits payable to affiliate   4,111     4,185  
Income taxes payable       544  
Deferred income taxes   7,090     15,020  
Other liabilities (affiliated $26,440 and $27,520)   26,584     32,556  
Total liabilities   1,126,494     1,078,094  
         
STOCKHOLDERS' EQUITY        
Common stock, $1 par value, authorized 30,000,000 shares; issued and outstanding, 21,575,286 shares in 2018 and 21,455,545 shares in 2017   21,575     21,455  
Additional paid-in capital   127,520     124,556  
Accumulated other comprehensive income (loss)   (15,082 )   83,384  
Retained earnings   440,595     374,451  
Total stockholders' equity   574,608     603,846  
Total liabilities and stockholders' equity   $ 1,701,102     $ 1,681,940  
                 


LOSS AND SETTLEMENT EXPENSE BY LINE OF BUSINESS        
    Three months ended September 30,
    2018   2017
($ 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   $ 32,851     $ 22,776     69.3 %   $ 30,229     $ 24,293     80.4 %
Property   25,271     15,223     60.2 %   27,980     15,803     56.5 %
Workers' compensation   24,249     16,931     69.8 %   25,373     11,386     44.9 %
Other liability   31,399     19,825     63.1 %   24,996     15,802     63.2 %
Other   2,368     (1,014 )   (42.8 )%   2,203     447     20.3 %
Total commercial lines   116,138     73,741     63.5 %   110,781     67,731     61.1 %
                         
Personal lines   10,075     7,694     76.4 %   9,691     6,308     65.1 %
Total property and casualty insurance   $ 126,213     $ 81,435     64.5 %   $ 120,472     $ 74,039     61.5 %
                         
Reinsurance                        
Pro rata reinsurance   $ 10,484     $ 8,394     80.1 %   $ 10,730     $ 10,159     94.7 %
Excess of loss reinsurance   27,011     21,448     79.4 %   23,988     35,378     147.5 %
Total reinsurance   $ 37,495     $ 29,842     79.6 %   $ 34,718     $ 45,537     131.2 %
                         
   Consolidated   $ 163,708     $ 111,277     68.0 %   $ 155,190     $ 119,576     77.1 %
                         
    Nine months ended September 30,
    2018   2017
($ 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   $ 95,155     $ 75,949     79.8 %   $ 87,275     $ 74,926     85.8 %
Property   79,059     57,475     72.7 %   79,551     51,291     64.5 %
Workers' compensation   74,380     51,975     69.9 %   75,419     41,451     55.0 %
Other liability   81,952     49,497     60.4 %   73,378     40,833     55.6 %
Other   6,782     (395 )   (5.8 )%   6,509     777     11.9 %
Total commercial lines   337,328     234,501     69.5 %   322,132     209,278     65.0 %
                         
Personal lines   29,012     24,690     85.1 %   28,175     21,789     77.3 %
Total property and casualty insurance   $ 366,340     $ 259,191     70.8 %   $ 350,307     $ 231,067     66.0 %
                         
Reinsurance                        
Pro rata reinsurance   $ 33,627     $ 18,175     54.0 %   $ 33,181     $ 23,979     72.3 %
Excess of loss reinsurance   77,473     63,630     82.1 %   66,026     68,043     103.1 %
Total reinsurance   $ 111,100     $ 81,805     73.6 %   $ 99,207     $ 92,022     92.8 %
                         
   Consolidated   $ 477,440     $ 340,996     71.4 %   $ 449,514     $ 323,089     71.9 %
                                             


PREMIUMS WRITTEN                    
    Three months ended
 September 30, 2018
  Three months ended
 September 30, 2017
   
($ in thousands)   Premiums
written
  Percent of
premiums
written
  Premiums
written
  Percent of
premiums
written
  Change in
premiums
written
Property and casualty insurance                    
Commercial lines:                    
Automobile   $ 34,688     18.0 %   $ 32,678     18.1 %   6.2%
Property   39,799     20.7 %   33,958     18.8 %   17.2%
Workers' compensation   34,880     18.1 %   36,266     20.1 %   (3.8)%
Other liability   30,093     15.6 %   28,212     15.6 %   6.7%
Other   2,667     1.4 %   2,529     1.4 %   5.5%
Total commercial lines   142,127     73.8 %   133,643     74.0 %   6.3%
                     
Personal lines   10,660     5.5 %   10,368     5.8 %   2.8%
Total property and casualty insurance   $ 152,787     79.3 %   $ 144,011     79.8 %   6.1%
                     
Reinsurance                    
Pro rata reinsurance   $ 10,817     5.6 %   $ 10,591     5.9 %   2.1%
Excess of loss reinsurance   29,081     15.1 %   25,932     14.3 %   12.1%
Total reinsurance   $ 39,898     20.7 %   $ 36,523     20.2 %   9.2%
                     
Consolidated   $ 192,685     100.0 %   $ 180,534     100.0 %   6.7%
                     
    Nine months ended
 September 30, 2018
  Nine months ended
 September 30, 2017
   
($ in thousands)   Premiums
written
  Percent of
premiums
written
  Premiums
written
  Percent of
premiums
written
  Change in
premiums
written
Property and casualty insurance                    
Commercial lines:                    
Automobile   $ 104,621     20.4 %   $ 97,759     20.3 %   7.0%
Property   96,852     18.8 %   87,825     18.3 %   10.3%
Workers' compensation   80,246     15.6 %   83,025     17.3 %   (3.3)%
Other liability   84,699     16.5 %   80,217     16.7 %   5.6%
Other   7,574     1.5 %   7,226     1.5 %   4.8%
Total commercial lines   373,992     72.8 %   356,052     74.1 %   5.0%
                     
Personal lines   30,265     5.9 %   29,157     6.1 %   3.8%
Total property and casualty insurance   $ 404,257     78.7 %   $ 385,209     80.2 %   4.9%
                     
Reinsurance                    
Pro rata reinsurance   $ 32,644     6.3 %   $ 30,096     6.3 %   8.5%
Excess of loss reinsurance   76,968     15.0 %   65,249     13.5 %   18.0%
Total reinsurance   $ 109,612     21.3 %   $ 95,345     19.8 %   15.0%
                     
Consolidated   $ 513,869     100.0 %   $ 480,554     100.0 %   6.9%
                                 

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

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

EMC Insurance Group Inc.

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