EMC Insurance Group Inc. Reports 2008 Second Quarter Results

EMC Insurance Group Inc. (Nasdaq:EMCI) today reported that record storm losses during the second quarter of 2008 resulted in an operating loss of $1,181,000 ($0.09 per share) for the quarter. This compares to record second quarter operating income of $13,849,000 ($1.01 per share) reported in the second quarter of 20071. For the first six months of 2008, operating income was $8,930,000 ($0.65 per share), compared to $27,708,000 ($2.01 per share) in 2007. "Midwest storm losses were the driving force behind our second quarter results,” stated President and CEO Bruce G. Kelley. "The Company’s underlying book of business continued to perform reasonably well and within expectations, given the competitive market conditions; however, catastrophe and storm losses more than doubled to a record $23,518,000 ($1.12 per share after tax) from $9,790,000 ($0.46 per share after tax) in the second quarter of 2007. Storm losses added 24.3 percentage points to the second quarter combined ratio, compared to 9.8 points in the second quarter of 2007,” said Kelley. "The record level of storm losses, combined with an expected decline in the amount of favorable development experienced on prior years’ reserves and a reduction in premium rate levels, generated a combined ratio of 116.0 percent in the second quarter, compared to 91.2 percent in the second quarter of 2007.” The net loss for the second quarter of 2008, including realized investment gains/losses, totaled $940,000 ($0.07 per share) compared to net income of $13,990,000 ($1.02 per share) for the second quarter of 2007. For the first six months of 2008, net income was $7,279,000 ($0.53 per share), compared to $28,692,000 ($2.09 per share) in 2007. For the first six months of 2008, catastrophe and storm losses totaled $29,248,000 ($1.39 per share) compared to $12,261,000 ($0.58 per share) in 2007, and the combined ratio was 106.6 percent compared to 91.2 percent in 2007. Catastrophe and storm losses added 15.3 percentage points to the combined ratio in the first six months of 2008, compared to 6.3 points in 2007. Assuming normal storm activity for the remainder of the year, management is currently projecting that catastrophe and storm losses will approximate 11.5 percent of earned premiums in 2008, compared to an average of 5.4 percent of earned premiums during the period 1998 through 2007. "The past three months have been challenging - not only for us, but for our policyholders,” stated Kelley. "We have witnessed first hand the pain and suffering that has resulted from the devastating Midwest storm activity and we know that our policyholders are counting on us to help them get their lives back in order. We take that responsibility very seriously, and I am proud of our quick response to those policyholders in their time of need.” Premiums earned decreased 2.9 percent to $96,618,000 for the second quarter of 2008 from $99,499,000 for the same period in 2007. For the first six months of 2008, premiums earned declined 1.2 percent to $191,595,000 from $194,005,000 in 2007. Premium income was down 1.7 percent in the property and casualty insurance segment during the second quarter of 2008 as new business premium was not sufficient to offset the premium lost from declining premium rates and business not renewed, while the reinsurance segment was down 7.8 percent due to declining premium rates and the loss of a few accounts. "As expected, premium rates continued to decline moderately during the first half of 2008 and we expect this trend to continue during the remainder of the year,” stated Kelley. "The declining premium rate environment makes it difficult to attain top-line growth. Since we are focused on maintaining our underwriting discipline, we are willing to walk away from underpriced business.” Investment income increased 3.0 percent to $11,999,000 for the second quarter of 2008 from $11,655,000 for the same period in 2007. For the first six months of 2008, investment income increased 1.3 percent to $23,940,000 from $23,643,000 in 2007. The Company experienced $10,053,000 ($0.48 per share after tax) of favorable development on prior years’ reserves in the second quarter of 2008, compared to $13,411,000 ($0.63 per share after tax) in the second quarter of 2007. For the first six months of 2008, favorable development totaled $25,942,000 ($1.23 per share after tax), compared to $31,501,000 ($1.49 per share after tax) for the same period in 2007. It is important to note that, on an aggregate basis, much of this favorable development is attributed to the final settlement of closed claims. At June 30, 2008, consolidated assets totaled $1.2 billion, including $1.0 billion in the investment portfolio; stockholders’ equity was $346.2 million; and the net book value of the Company’s stock was $25.52 per share, a decrease of 2.4 percent from $26.15 per share at December 31, 2007. On July 3, 2008, the Company lowered its annual operating income guidance to a range of $1.20 per share to $1.45 per share. Management affirms that guidance. On March 10, 2008, the Company’s Board of Directors authorized a $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 SEC. Common stock purchased under this program is being retired by the Company. As of June 30, 2008, 254,366 shares of stock had been repurchased at a cost of approximately $7.0 million. Additional repurchases have been made during July, bringing the total, as of July 16, 2008, to 324,942 shares at a cost of approximately $8.7 million. The Company’s parent organization, Employers Mutual Casualty Company, has a stock purchase program in effect as well with about $4.5 million of its $15 million authorization remaining. This program will remain dormant while the Company’s repurchase program is active. The Company will host an earnings call in conjunction with today’s release. The teleconference will begin at 11:00 a.m. eastern daylight time, July 24, 2008, to allow securities analysts, shareholders and other interested parties the opportunity to hear management discuss the Company’s quarterly results, as well as its expectations for the remainder of 2008. Dial-in information for the call is toll-free 1-877-407-8031 (International: 201-689-8031). The event will be archived and available for digital replay through August 7, 2008. The replay access information is toll-free 1-877-660-6853 (International: 201-612-7415); passcodes (both required for playback) are account no. 286; conference ID no. 290299. A webcast of the teleconference will be presented by PrecisionIR and can be accessed at http://www.investorcalendar.com or from the Company’s investor relations page at www.emcinsurance.com. The archived webcast will be available until October 24, 2008. A transcript of the teleconference will also be available on the Company’s website shortly after the completion of the teleconference. EMC Insurance Group Inc., the publicly-held insurance holding company of EMC Insurance Companies, owns subsidiaries with operations in property and casualty insurance and reinsurance. EMC Insurance Companies is one of the largest property and casualty entities in Iowa and among the top 60 insurance entities nationwide based on premium volume. For more information, visit our website www.emcinsurance.com. 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 our industry, interest rates or the performance of financial markets and the general economy; rating agency actions 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 U.S. GAAP financial measure of net income. Therefore, we have provided a reconciliation of this non-GAAP financial measure to the U.S. GAAP financial measure of net income in the Consolidated Statements of Income schedule contained in this release. Management also uses non-GAAP financial measures for goal setting, determining employee and senior management awards and compensation, and evaluating performance. CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED       Property and   Casualty Parent Quarter Ended June 30, 2008   Insurance   Reinsurance   Company   Consolidated Revenues: Premiums earned $ 78,463,944 $ 18,153,752 $ - $ 96,617,696 Investment income, net 8,947,910 3,010,099 41,345 11,999,354 Other income   160,571     -     -     160,571     87,572,425     21,163,851     41,345     108,777,621   Losses and expenses: Losses and settlement expenses 66,543,098 13,793,879 - 80,336,977 Dividends to policyholders 1,851,840 - - 1,851,840 Amortization of deferred policy acquisition costs 18,367,821 3,526,349 - 21,894,170 Other underwriting expenses 7,680,153 330,283 - 8,010,436 Interest expense 225,000 - - 225,000 Other expenses   154,370     (77,770 )   333,419     410,019     94,822,282     17,572,741     333,419     112,728,442   Operating income (loss) before income taxes   (7,249,857 )   3,591,110     (292,074 )   (3,950,821 ) Realized investment gains   291,436     79,534     -     370,970   Income (loss) before income taxes   (6,958,421 )   3,670,644     (292,074 )   (3,579,851 ) Income tax expense (benefit): Current (3,066,352 ) 1,541,311 (102,226 ) (1,627,267 ) Deferred   (362,376 )   (649,878 )   -     (1,012,254 )   (3,428,728 )   891,433     (102,226 )   (2,639,521 ) Net income (loss) $ (3,529,693 ) $ 2,779,211   $ (189,848 ) $ (940,330 ) Average shares outstanding 13,653,462 Per Share Data: Net income (loss) per share - basic and diluted $ (0.26 ) $ 0.20 $ (0.01 ) $ (0.07 ) Decrease in provision for insured events of prior years (after tax) $ 0.29 $ 0.19 $ - $ 0.48 Catastrophe and storm losses (after tax) $ (1.05 ) $ (0.07 ) $ - $ (1.12 ) Dividends per share $ 0.18 Other Information of Interest: Net Written Premiums $ 79,918,030 $ 16,835,091 $ - $ 96,753,121 Decrease in provision for insured events of prior years $ (5,983,669 ) $ (4,069,662 ) $ - $ (10,053,331 ) Catastrophe and storm losses $ 21,966,957 $ 1,550,556 $ - $ 23,517,513 GAAP Combined Ratio: Loss ratio 84.8 % 76.0 % - 83.1 % Expense ratio   35.6 %   21.2 %   -     32.9 %   120.4 %   97.2 %   -     116.0 %   Property and       Casualty Parent Quarter Ended June 30, 2007 Insurance   Reinsurance   Company   Consolidated Revenues: Premiums earned $ 79,803,159 $ 19,695,525 $ - $ 99,498,684 Investment income, net 8,667,075 2,926,302 61,196 11,654,573 Other income 151,024 - - 151,024 88,621,258 22,621,827 61,196 111,304,281 Losses and expenses: Losses and settlement expenses 45,735,919 10,678,193 - 56,414,112 Dividends to policyholders 2,794,606 - - 2,794,606 Amortization of deferred policy acquisition costs 18,650,398 3,843,089 - 22,493,487 Other underwriting expenses 8,900,095 114,823 - 9,014,918 Interest expense 193,125 84,975 - 278,100 Other expenses 176,329 171,008 202,355 549,692 76,450,472 14,892,088 202,355 91,544,915 Operating income (loss) before income taxes 12,170,786 7,729,739 (141,159) 19,759,366 Realized investment gains 184,283 32,568 - 216,851 Income (loss) before income taxes 12,355,069 7,762,307 (141,159) 19,976,217 Income tax expense (benefit): Current 4,125,132 2,342,205 (49,406) 6,417,931 Deferred (437,158) 5,017 - (432,141) 3,687,974 2,347,222 (49,406) 5,985,790 Net income (loss) $ 8,667,095 $ 5,415,085 $ (91,753) $ 13,990,427 Average shares outstanding 13,761,285 Per Share Data: Net income (loss) per share - basic and diluted $ 0.63 $ 0.39 $ - $ 1.02 Decrease in provision for insured events of prior years (after tax) $ 0.46 $ 0.17 $ - $ 0.63 Catastrophe and storm losses (after tax) $ (0.44) $ (0.02) $ - $ (0.46) Dividends per share $ 0.17 Other Information of Interest: Net Written Premiums $ 83,788,100 $ 19,566,392 $ - $ 103,354,492 Decrease in provision for insured events of prior years $ (9,724,759) $ (3,686,198) $ - $ (13,410,957) Catastrophe and storm losses $ 9,417,254 $ 372,662 $ - $ 9,789,916 GAAP Combined Ratio: Loss ratio 57.3% 54.2% - 56.7% Expense ratio 38.0% 20.1% - 34.5% 95.3% 74.3% - 91.2%   Property and       Casualty Parent Six Months Ended June 30, 2008 Insurance   Reinsurance   Company   Consolidated Revenues: Premiums earned $ 157,554,354 $ 34,041,127 $ - $ 191,595,481 Investment income, net 17,937,726 5,922,765 79,096 23,939,587 Other income   307,898     -     -     307,898       175,799,978     39,963,892     79,096     215,842,966   Losses and expenses: Losses and settlement expenses 114,177,940 26,165,745 - 140,343,685 Dividends to policyholders 2,276,008 - - 2,276,008 Amortization of deferred policy acquisition costs 37,277,761 7,127,506 - 44,405,267 Other underwriting expenses 16,000,163 1,129,738 - 17,129,901 Interest expense 439,375 - - 439,375 Other expenses   298,876     294,203     634,937     1,228,016     170,470,123     34,717,192     634,937     205,822,252   Operating income (loss) before income taxes   5,329,855     5,246,700     (555,841 )   10,020,714   Realized investment losses   (1,767,491 )   (773,516 )   -     (2,541,007 ) Income (loss) before income taxes   3,562,364     4,473,184     (555,841 )   7,479,707   Income tax expense (benefit): Current (684,273 ) 1,959,315 (194,544 ) 1,080,498 Deferred   265,517     (1,144,964 )   -     (879,447 )   (418,756 )   814,351     (194,544 )   201,051   Net income (loss) $ 3,981,120   $ 3,658,833   $ (361,297 ) $ 7,278,656   Average shares outstanding 13,715,977 Per Share Data: Net income (loss) per share - basic and diluted $ 0.29 $ 0.27 $ (0.03 ) $ 0.53 Decrease in provision for insured events of prior years (after tax) $ 0.93 $ 0.30 $ - $ 1.23 Catastrophe and storm losses (after tax) $ (1.31 ) $ (0.08 ) $ - $ (1.39 ) Dividends per share $ 0.36 Book value per share $ 25.52 Effective tax rate 2.7 % Annualized net income as a percent of beg. SH equity 4.0 % Other Information of Interest: Net Written Premiums $ 154,297,213 $ 33,547,728 $ - $ 187,844,941 Decrease in provision for insured events of prior years $ (19,709,342 ) $ (6,232,493 ) $ - $ (25,941,835 ) Catastrophe and storm losses $ 27,615,451 $ 1,632,310 $ - $ 29,247,761 GAAP Combined Ratio: Loss ratio 72.5 % 76.9 % - 73.3 % Expense ratio   35.2 %   24.2 %   -     33.3 %   107.7 %   101.1 %   -     106.6 %   Property and       Casualty Parent Six Months Ended June 30, 2007 Insurance   Reinsurance   Company   Consolidated Revenues: Premiums earned $ 159,007,479 $ 34,997,590 $ - $ 194,005,069 Investment income, net 17,561,611 5,947,671 133,258 23,642,540 Other income   270,901     -     -     270,901     176,839,991     40,945,261     133,258     217,918,510   Losses and expenses: Losses and settlement expenses 87,733,362 22,156,710 - 109,890,072 Dividends to policyholders 3,736,715 - - 3,736,715 Amortization of deferred policy acquisition costs 37,630,571 6,641,057 - 44,271,628 Other underwriting expenses 17,982,447 998,364 - 18,980,811 Interest expense 386,250 169,950 - 556,200 Other expenses   473,226     175,800     484,026     1,133,052     147,942,571     30,141,881     484,026     178,568,478   Operating income (loss) before income taxes   28,897,420     10,803,380     (350,768 )   39,350,032   Realized investment gains   1,326,276     187,015     -     1,513,291   Income (loss) before income taxes   30,223,696     10,990,395     (350,768 )   40,863,323   Income tax expense (benefit): Current 9,911,901 3,448,199 (122,769 ) 13,237,331 Deferred   (739,551 )   (326,285 )   -     (1,065,836 )   9,172,350     3,121,914     (122,769 )   12,171,495   Net income (loss) $ 21,051,346   $ 7,868,481   $ (227,999 ) $ 28,691,828   Average shares outstanding 13,756,816 Per Share Data: Net income (loss) per share - basic and diluted $ 1.53 $ 0.57 $ (0.01 ) $ 2.09 Decrease in provision for insured events of prior years (after tax) $ 1.21 $ 0.28 $ - $ 1.49 Catastrophe and storm losses (after tax) $ (0.56 ) $ (0.02 ) $ - $ (0.58 ) Dividends per share $ 0.34 Book value per share $ 24.18 Effective tax rate 29.8 % Annualized net income as a percent of beg. SH equity 18.6 % Other Information of Interest: Net Written Premiums $ 158,941,580 $ 34,373,121 $ - $ 193,314,701 Decrease in provision for insured events of prior years $ (25,509,757 ) $ (5,991,590 ) $ - $ (31,501,347 ) Catastrophe and storm losses $ 11,851,896 $ 409,134 $ - $ 12,261,030 GAAP Combined Ratio: Loss ratio 55.2 % 63.3 % - 56.6 % Expense ratio   37.3 %   21.8 %   -     34.6 %   92.5 %   85.1 %   -     91.2 % CONSOLIDATED BALANCE SHEETS - UNAUDITED   June 30,   December 31, 2008 2007 ASSETS Investments: Fixed maturities: Securities held-to-maturity, at amortized cost (fair value $673,268 and $688,728) $ 619,366 $ 636,969 Securities available-for-sale, at fair value (amortized cost $766,998,980 and $766,462,351) 777,601,051 785,253,286 Fixed maturity securities on loan: Securities available-for-sale, at fair value (amortized cost $25,431,883 and $58,865,232) 25,471,094 58,994,666 Equity securities available-for-sale, at fair value (cost $96,791,488 and $97,847,545) 131,165,279 139,427,726 Other long-term investments, at cost 84,481 101,988 Short-term investments, at cost   94,566,911     53,295,310 Total investments 1,029,508,182 1,037,709,945   Balances resulting from related party transactions with Employers Mutual: Reinsurance receivables 36,213,312 33,272,405 Prepaid reinsurance premiums 3,900,139 4,465,836 Deferred policy acquisition costs 34,198,513 34,687,804 Defined benefit retirement plan, prepaid asset 10,778,698 11,451,758 Other assets 3,692,486 2,488,309   Cash (55,305 ) 262,963 Accrued investment income 11,230,748 11,288,005 Accounts receivable 296,872 81,141 Income taxes recoverable 4,447,824 3,595,645 Deferred income taxes 8,201,093 1,682,597 Goodwill 941,586 941,586 Securities lending collateral   26,273,030     60,785,148 Total assets $ 1,169,627,178   $ 1,202,713,142   LIABILITIES Balances resulting from related party transactions with Employers Mutual: Losses and settlement expenses $ 563,712,646 $ 551,602,006 Unearned premiums 153,812,154 158,156,683 Other policyholders' funds 6,738,124 8,273,187 Surplus notes payable 25,000,000 25,000,000 Indebtedness to related party 7,797,261 5,918,396 Employee retirement plans 11,405,534 10,518,351 Other liabilities 28,735,279 22,107,379   Securities lending obligation   26,273,030     60,785,148 Total liabilities   823,474,028     842,361,150   STOCKHOLDERS' EQUITY Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding, 13,562,099 shares in 2008 and 13,777,880 shares in 2007 13,562,099 13,777,880 Additional paid-in capital 102,158,604 108,030,228 Accumulated other comprehensive income 32,712,994 42,961,904 Retained earnings   197,719,453     195,581,980 Total stockholders' equity   346,153,150     360,351,992 Total liabilities and stockholders' equity $ 1,169,627,178   $ 1,202,713,142 The Company had total cash and invested assets with a carrying value of $1.0 billion as of  June 30, 2008 and December 31, 2007.  The following table summarizes the Company's cash and invested assets as of the dates indicated:    June 30, 2008     Percent of   Amortized Fair Total Carrying ($ in thousands) Cost Value Fair Value Value Fixed maturity securities held-to-maturity $ 619 $ 673 0.1 % $ 619 Fixed maturity securities available-for-sale 792,431 803,072 78.0 % 803,072 Equity securities available-for-sale 96,791 131,165 12.7 % 131,165 Cash (55 ) (55 ) - (55 ) Short-term investments 94,567 94,567 9.2 % 94,567 Other long-term investments   85     85     -     85   $ 984,438   $ 1,029,507     100.0 % $ 1,029,453     December 31, 2007 Percent of Amortized Fair Total Carrying ($ in thousands) Cost Value Fair Value Value Fixed maturity securities held-to-maturity $ 637 $ 689 0.1 % $ 637 Fixed maturity securities available-for-sale 825,328 844,248 81.4 % 844,248 Equity securities available-for-sale 97,847 139,428 13.4 % 139,428 Cash 263 263 - 263 Short-term investments 53,295 53,295 5.1 % 53,295 Other long-term investments   102     102     -     102   $ 977,472   $ 1,038,025     100.0 % $ 1,037,973     The amortized cost and estimated fair value of securities held-to-maturity and available-for-sale as of June 30, 2008 are as follows: Held-to-Maturity Gross Gross Amortized Unrealized Unrealized Estimated ($ in thousands) Cost Gains Losses Fair Value Mortgage-backed securities $ 619   $ 54   $ -   $ 673   Total securities held-to-maturity $ 619   $ 54   $ -   $ 673     Available-for-Sale Gross Gross Amortized Unrealized Unrealized Estimated ($ in thousands) Cost Gains Losses Fair Value U.S. treasury securities $ 4,727 $ 258 $ - $ 4,985 U.S. government-sponsored agencies 296,330 2,890 612 298,608 Obligations of states and political subdivisions 306,234 7,383 1,075 312,542 Mortgage-backed securities 38,690 378 25 39,043 Public utility securities 6,002 271 - 6,273 Debt securities issued by foreign governments 6,680 36 - 6,716 Corporate securities   133,768     2,778     1,641     134,905   Total fixed maturity securities   792,431     13,994     3,353     803,072     Common stocks 71,291 40,238 1,896 109,633 Non-redeemable preferred stocks   25,500     -     3,968     21,532   Total equity securities   96,791     40,238     5,864     131,165   Total securities available-for-sale $ 889,222   $ 54,232   $ 9,217   $ 934,237   NET WRITTEN PREMIUMS   Three Months Ended   Six Months Ended June 30, 2008 June 30, 2008   Percent of   Percent of Increase/ Increase/ Percent of (Decrease) in Percent of (Decrease) in Net Written Net Written Net Written Net Written Premiums Premiums Premiums Premiums Property and Casualty Insurance Commercial Lines: Automobile 18.4 % (8.5) % 18.5 % (6.3) % Liability 18.4 % (7.8) % 18.5 % (6.1) % Property 15.9 % (1.8) % 15.7 % (0.4) % Workers' Compensation 15.7 % (0.2) % 15.9 % 2.1 % Other 2.6 % 3.4 % 2.3 % 1.9 % Total Commercial Lines 71.0 % (4.7) % 70.9 % (2.9) %   Personal Lines: Automobile 6.0 % (3.2) % 6.1 % (2.6) % Property 5.4 % (4.7) % 4.9 % (3.0) % Liability 0.2 % (8.2) % 0.2 % (6.5) % Total Personal Lines 11.6 % (4.0) % 11.2 % (2.8) % Total Property and Casualty Insurance 82.6 % (4.6) % 82.1 % (2.9) %   Reinsurance 17.4 % (14.0) % 17.9 % (2.4) % Total 100.0 % (6.4) % 100.0 % (2.8) %