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EMCI > SEC Filings for EMCI > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for EMC INSURANCE GROUP INC


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited)

The term "Company" is used below interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC Insurance Group Inc. and its subsidiaries. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included under Item 1 of this Form 10-Q, and the Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Company's 2011 Form 10-K.

As discussed in Note 1 of Notes to the Consolidated Financial Statements, effective January 1, 2012 the Company adopted new accounting guidance related to deferred policy acquisition costs that resulted in a retrospective adjustment of certain amounts reported in the prior year's consolidated financial statements. Certain financial information presented in Management's Discussion and Analysis of Financial Condition and Results of Operations has also been adjusted.

CAUTIONARY STATEMENT 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" or similar expressions. Undue reliance should not be placed on these forward-looking statements.

COMPANY OVERVIEW

The Company, a majority owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is an insurance holding company with operations in property and casualty insurance and reinsurance.


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Property and casualty insurance operations are conducted through three subsidiaries and represent the most significant segment of the Company's business, totaling 77 percent of consolidated premiums earned during the first nine months of 2012. The property and casualty insurance operations are integrated with the property and casualty insurance operations of Employers Mutual through participation in a reinsurance pooling agreement. Because the Company conducts its property and casualty insurance operations together with Employers Mutual through the reinsurance pooling agreement, the Company shares the same business philosophy, management, employees and facilities as Employers Mutual and offers the same types of insurance products.

Reinsurance operations are conducted through EMC Reinsurance Company, totaling 23 percent of consolidated premiums earned during the first nine months of 2012. The principal business activity of EMC Reinsurance Company is to assume, through a quota share reinsurance agreement, 100 percent of Employers Mutual's assumed reinsurance business (with certain exceptions).

Due to the large number of catastrophic events that exceeded the $3,000,000 retention amount contained in the excess of loss reinsurance agreement between EMC Reinsurance Company and Employers Mutual in 2011, the terms of the agreement were changed for fiscal year 2012. Effective January 1, 2012, the retention amount increased to $4,000,000 per event, while the cost of the protection remained at 10.0 percent of total assumed reinsurance premiums written.

CRITICAL ACCOUNTING POLICIES

The accounting policies considered by management to be critically important in the preparation and understanding of the Company's financial statements and related disclosures are presented in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Company's 2011 Form 10-K.

RESULTS OF OPERATIONS

Results of operations by segment and on a consolidated basis for the three and
nine months ended September 30, 2012 and 2011 are as follows.

                                              Three months ended           Nine months ended
                                                September 30,                September 30,
($ in thousands)                              2012          2011          2012          2011
Property and casualty insurance
Premiums earned                            $   91,059     $  82,296     $ 263,916     $ 237,988
Losses and settlement expenses                 56,160        70,530       178,799       194,317
Acquisition and other expenses                 33,743        29,023        97,453        87,820
Underwriting profit (loss)                 $    1,156     $ (17,257 )   $ (12,336 )   $ (44,149 )

Loss and settlement expense ratio                61.7 %        85.7 %        67.7 %        81.6 %
Acquisition expense ratio                        37.0 %        35.3 %        37.0 %        37.0 %
Combined ratio                                   98.7 %       121.0 %       104.7 %       118.6 %

Losses and settlement expenses:
Insured events of current year             $   57,424     $  74,627     $ 195,027     $ 211,821
Decrease in provision for insured events
of prior years                                 (1,264 )      (4,097 )     (16,228 )     (17,504 )

Total losses and settlement expenses       $   56,160     $  70,530     $ 178,799     $ 194,317

Catastrophe losses                         $    6,167     $  19,342     $  31,494     $  52,300


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                                              Three months ended           Nine months ended
                                                September 30,                September 30,
($ in thousands)                              2012          2011          2012          2011
Reinsurance
Premiums earned                            $   30,486     $  25,121     $  77,659     $  66,647
Losses and settlement expenses                 23,165        20,831        54,166        72,184
Acquisition and other expenses                  7,612         4,846        17,248        14,179
Underwriting profit (loss)                 $     (291 )   $    (556 )   $   6,245     $ (19,716 )

Loss and settlement expense ratio                76.0 %        82.9 %        69.7 %       108.3 %
Acquisition expense ratio                        25.0 %        19.3 %        22.3 %        21.3 %
Combined ratio                                  101.0 %       102.2 %        92.0 %       129.6 %

Losses and settlement expenses:
Insured events of current year             $   30,230     $  25,346     $  63,929     $  76,389
Decrease in provision for insured events
of prior years                                 (7,065 )      (4,515 )      (9,763 )      (4,205 )

Total losses and settlement expenses       $   23,165     $  20,831     $  54,166     $  72,184

Catastrophe losses                         $    4,657     $   7,025     $  13,880     $  24,536


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