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EMC Insurance Group (EMCI)

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EMC Insurance Group 10-Q 2009

Documents found in this filing:

form10-q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SEPTEMBER 30, 2009

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________to __________________

Commission File Number: 0-10956

	EMC INSURANCE GROUP INC.
	(Exact name of registrant as specified in its charter)

	Iowa		42-6234555
	(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

	717 Mulberry Street, Des Moines, Iowa		50309
	(Address of principal executive office)		(Zip Code)

	(515) 345-2902
	(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at October 30, 2009
Common stock, $1.00 par value		13,108,365

Total pages 59

TABLE OF CONTENTS

		PAGE
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	51

PART II	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 6.	Exhibits	53

Signatures		54

Index to Exhibits		55

Table of Contents

PART I.

FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS>

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,
	2009		2008
ASSETS
Investments:
Fixed maturities:
Securities held-to-maturity, at amortized cost (fair value $510,831 and $572,852)	$	456,488	$	534,759
Securities available-for-sale, at fair value (amortized cost $804,643,392 and $821,306,951)		843,823,571		812,868,835
Fixed maturity securities on loan:
Securities available-for-sale, at fair value (amortized cost $38,063,415 and $8,923,745)		39,113,081		8,950,052
Equity securities available-for-sale, at fair value (cost $72,907,988 and $75,025,666)		101,720,813		88,372,207
Other long-term investments, at cost		52,832		66,974
Short-term investments, at cost		50,701,465		54,373,082
Total investments		1,035,868,250		965,165,909

Balances resulting from related party transactions with
Employers Mutual:
Reinsurance receivables		32,515,247		36,355,047
Prepaid reinsurance premiums		5,298,918		4,157,055
Deferred policy acquisition costs		39,760,110		34,629,429
Other assets		10,562,938		2,534,076
Indebtedness of related party		14,627,875		-

Cash		314,910		182,538
Accrued investment income		11,059,408		12,108,129
Deferred policy acquisition costs		1,192		-
Accounts receivable		1,191,585		23,041
Income taxes recoverable		3,613,762		11,859,539
Deferred income taxes		9,745,460		30,819,592
Goodwill		941,586		941,586
Securities lending collateral		40,515,470		9,322,863
Total assets	$	1,206,016,711	$	1,108,098,804

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,
	2009		2008
LIABILITIES
Balances resulting from related party transactions with
Employers Mutual:
Losses and settlement expenses	$	566,343,681	$	573,031,853
Unearned premiums		174,333,965		154,446,205
Other policyholders' funds		7,434,158		6,418,870
Surplus notes payable		25,000,000		25,000,000
Indebtedness to related party		-		20,667,196
Employee retirement plans		21,728,331		19,331,007
Other liabilities		35,283,363		16,964,452

Losses and settlement expenses		1,088,903		-
Unearned premiums		6,165		-
Securities lending obligation		40,515,470		9,322,863
Total liabilities		871,734,036		825,182,446

STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding, 13,154,787shares in 2009 and 13,267,668 shares in 2008		13,154,787		13,267,668
Additional paid-in capital		93,532,583		95,639,349
Accumulated other comprehensive income (loss)		32,337,263		(9,930,112	)
Retained earnings		195,258,042		183,939,453
Total stockholders' equity		334,282,675		282,916,358
Total liabilities and stockholders' equity	$	1,206,016,711	$	1,108,098,804

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

All balances presented below, with the exception of net investment income, realized investment gains (losses), income tax expense (benefit) and other items specifically identified, are the result of related party transactions with Employers Mutual.

	Three months ended						Nine months ended
	September 30,						September 30,
	2009			2008			2009			2008
REVENUES
Premiums earned:
Related party transactions	$	95,195,148		$	96,409,215		$	283,705,370		$	288,004,696
Other transactions		1,537,669			-			1,580,001			-
Total premiums earned		96,732,817			96,409,215			285,285,371			288,004,696
Investment income, net		11,804,810			12,251,192			35,254,663			36,190,779
Net realized investment gains, excluding impairment losses on available-for-sale securities		3,531,873			2,978,487			4,961,286			5,034,862
Total other-than-temporary impairment losses on available-for-sale securities		(610,563	)		(17,075,004	)		(9,727,119	)		(21,672,386	)
Portion of impairment losses on fixed maturity available-for-sale securities recognized in other comprehensive income (before taxes)		-			-			-			-
Net impairment losses on available-for-sale securities		(610,563	)		(17,075,004	)		(9,727,119	)		(21,672,386	)
Net realized investment gains (losses)		2,921,310			(14,096,517	)		(4,765,833	)		(16,637,524	)
Other income		224,191			191,161			575,449			499,059
		111,683,128			94,755,051			316,349,650			308,057,010
LOSSES AND EXPENSES
Losses and settlement expenses:
Related party transactions		71,193,945			81,644,261			190,134,810			221,987,946
Other transactions		1,082,300			-			1,082,300			-
Total losses and settlement expenses		72,276,245			81,644,261			191,217,110			221,987,946
Dividends to policyholders		1,517,886			752,432			7,273,968			3,028,440
Amortization of deferred policy acquisition costs:
Related party transactions		20,066,798			20,250,192			63,598,194			64,655,459
Other transactions		379,363			-			380,828			-
Total amortization of deferred policy acquisition costs		20,446,161			20,250,192			63,979,022			64,655,459
Other underwriting expenses		9,497,185			8,043,689			28,934,786			25,173,590
Interest expense		225,000			225,000			675,000			664,375
Other expense:
Related party transactions		1,239,318			228,532			1,970,472			1,456,548
Other transactions		10,404			-			10,404			-
Total other expense		1,249,722			228,532			1,980,876			1,456,548
		105,212,199			111,144,106			294,060,762			316,966,358
Income (loss) before income tax expense (benefit)		6,470,929			(16,389,055	)		22,288,888			(8,909,348	)

INCOME TAX EXPENSE (BENEFIT)
Current		71,457			(2,971,046	)		6,498,841			(1,890,548	)
Deferred.		1,348,697			(3,960,440	)		(2,031,723	)		(4,839,887	)
		1,420,154			(6,931,486	)		4,467,118			(6,730,435	)
Net income (loss)	$	5,050,775		$	(9,457,569	)	$	17,821,770		$	(2,178,913	)

Net income (loss) per common share
-basic and diluted	$	0.38		$	(0.70	)	$	1.35		$	(0.16	)

Dividend per common share	$	0.18		$	0.18		$	0.54		$	0.54

Average number of common shares outstanding
-basic and diluted		13,229,225			13,413,718			13,238,296			13,615,224

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2009			2008			2009			2008

Net income (loss)	$	5,050,775		$	(9,457,569	)	$	17,821,770		$	(2,178,913	)

OTHER COMPREHENSIVE INCOME (LOSS)
Change in unrealized holding gains (losses) on investment securities, before deferred income tax expense (benefit)		42,760,410			(53,897,957	)		60,332,105			(71,924,441	)
Deferred income tax expense (benefit)		14,966,145			(18,864,285	)		21,116,237			(25,173,554	)
		27,794,265			(35,033,672	)		39,215,868			(46,750,887	)

Reclassification adjustment for realized investment (gains) losses included in net income (loss), before income tax (expense) benefit		(2,921,310	)		14,096,517			4,765,833			16,637,524
Income tax (expense) benefit		(1,022,459	)		4,933,781			1,668,042			5,823,133
		(1,898,851	)		9,162,736			3,097,791			10,814,391

Adjustment associated with Employers Mutual's retirement benefit plans, before deferred income tax expense (benefit):
Net actuarial loss		296,733			14,846			1,278,945			44,538
Prior service credit		(120,051	)		(120,456	)		(360,147	)		(361,368	)
		176,682			(105,610	)		918,798			(316,830	)
Deferred income tax expense (benefit)		61,842			(36,964	)		321,582			(110,891	)
		114,840			(68,646	)		597,216			(205,939	)

Other comprehensive income (loss)		26,010,254			(25,939,582	)		42,910,875			(36,142,435	)

Total comprehensive income (loss)	$	31,061,029		$	(35,397,151	)	$	60,732,645		$	(38,321,348	)

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended September 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	17,821,770		$	(2,178,913	)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Balances resulting from related party transactions with Employers Mutual:
Losses and settlement expenses		(6,688,172	)		24,529,892
Unearned premiums.		19,887,760			13,034,356
Other policyholders' funds		1,015,288			(3,779,815	)
Indebtedness to related party		(35,295,071	)		(17,321,926	)
Employee retirement plans		3,316,122			1,356,784
Reinsurance receivables		3,839,800			(4,167,709	)
Prepaid reinsurance premiums		(1,141,863	)		(328,079	)
Commission payable		(2,306,302	)		(3,914,676	)
Interest payable		(214,375	)		(108,125	)
Prepaid assets		(1,043,943	)		(1,556,855	)
Deferred policy acquisition costs		(5,130,681	)		(3,291,626	)
Stock-based compensation plans		259,223			209,382
Other, net		3,016,606			(2,434,945	)

Accrued investment income		1,048,721			5,846
Accrued income tax:
Current		8,245,771			(2,074,349	)
Deferred		(2,031,723	)		(4,839,887	)
Realized investment losses		4,765,833			16,637,524
Deferred policy acquisition costs		(1,192	)		-
Unearned premiums		6,165			-
Losses and settlement expenses		1,088,903			-
Accounts receivable		(1,168,544	)		(64,883	)
Amortization of premium/discount on fixed maturity securities		(430,982	)		435,757
		(8,962,656	)		12,326,666
Net cash provided by operating activities	$	8,859,114		$	10,147,753

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Unaudited)

	Nine months ended September 30,
	2009			2008
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of fixed maturity securities held-to-maturity	$	78,542		$	24,199
Purchases of fixed maturity securities available-for-sale		(297,417,060	)		(255,769,765	)
Disposals of fixed maturity securities available-for-sale		295,233,876			277,015,316
Purchases of equity securities available-for-sale		(45,890,346	)		(35,202,629	)
Disposals of equity securities available-for-sale		44,362,307			32,787,671
Disposals of other long-term investments		14,142			26,261
Net purchases (sales) of short-term investments		3,671,617			(10,305,345	)
Net cash provided by investing activities		53,078			8,575,708

CASH FLOWS FROM FINANCING ACTIVITIES
Balances resulting from related party transactions with Employers Mutual:
Issuance of common stock through Employers
Mutual's stock option plans		181,434			1,054,819
Dividends paid to Employers Mutual		(4,237,840	)		(4,237,840	)

Repurchase of common stock		(1,814,573	)		(12,272,002	)
Dividends paid to public stockholders		(2,908,841	)		(3,102,637	)
Net cash used in financing activities		(8,779,820	)		(18,557,660	)

NET INCREASE IN CASH		132,372			165,801
Cash at the beginning of the year		182,538			262,963

Cash at the end of quarter	$	314,910		$	428,764

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	BASIS OF PRESENTATION

EMC Insurance Group Inc., a 60 percent owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is an insurance holding company with operations in property and casualty insurance and reinsurance. Both commercial and personal lines of insurance are written, with a focus on medium-sized commercial accounts. The term “Company” is used interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC Insurance Group Inc. and its subsidiaries.

The accompanying unaudited consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The Company has evaluated all subsequent events through the date the financial statements were issued (November 9, 2009). In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the interim financial statements have been included. The results of operations for the interim periods reported are not necessarily indicative of results to be expected for the year. The consolidated balance sheet at December 31, 2008 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.

Certain amounts previously reported in prior years’ consolidated financial statements have been reclassified to conform to current year presentation.

In reading these financial statements, reference should be made to the Company’s 2008 Form 10-K or the 2008 Annual Report to Stockholders for more detailed footnote information.

2.	NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) recognized the complexity of its standard-setting process and embarked on a revised process in 2004 that culminated in the release on July 1, 2009, of the FASB Accounting Standards Codification,TM sometimes referred to as the Codification or ASC. The Codification does not change how the Company accounts for its transactions or the nature of related disclosures made. However, when referring to guidance issued by the FASB, the Company now refers to topics in the ASC rather than the previous FASB Statement numbers, Interpretations, Staff Positions, etc. This change was made effective by the FASB for periods ending on or after September 15, 2009. References to GAAP in this quarterly report on Form 10-Q have been updated to reflect guidance in the Codification.

In May 2009, the FASB updated its guidance related to the Subsequent Events Topic of the FASB ASC (issued as Statement of Financial Accounting Standards (SFAS) No. 165, “Subsequent Events”), which sets forth the period after the balance sheet date during which management shall evaluate events or transactions for potential recognition or disclosure, the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date, and disclosures to make about events or transactions that occur after the balance sheet date. This pronouncement was effective for interim and annual reporting periods ending after June 15, 2009. Adoption of this pronouncement had no effect on the consolidated financial position or operating results of the Company. The Company evaluates subsequent events through the date its financial statements are issued (filed with the Securities and Exchange Commission).

Table of Contents

The Fair Value Measurements and Disclosures Topic of the FASB ASC has undergone substantial changes in recent years, including the issuance of several pronouncements predating the Codification. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defined fair value, established a framework for measuring fair value, and expanded disclosures about fair value measurements. These requirements were effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted this pronouncement effective January 1, 2008, which resulted in additional disclosures, but no impact on the Company’s consolidated financial position or operating results. In October 2008, the FASB issued Staff Position (FSP) FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market For That Asset Is Not Active,” which was followed in April 2009 by FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” Both of these pronouncements were intended to clarify the determination of fair value in markets that are not, at the measurement date, providing fair values representative of orderly transactions. Adoption of these pronouncements had no effect on the consolidated financial position or operating results of the Company.

In April 2009, the FASB updated its guidance related to the Investments-Debt and Equity Securities Topic of the FASB ASC (issued as FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”). This pronouncement established guidance for evaluating “other-than-temporary” impairments for fixed maturity securities, and required changes to the financial statement presentation and disclosure of fixed maturity and equity security “other-than-temporary” impairments. Included is a requirement that the evaluation of an impaired fixed maturity security include an assessment of whether the entity has the intent to sell the security and if it is more likely than not to be required to sell the security before recovery of its amortized cost basis. In addition, if the present value of cash flows expected to be collected is less than the amortized cost of the security, a credit loss is deemed to exist and the security is considered “other-than-temporarily” impaired. The portion of the impairment related to a credit loss is recognized through earnings and the impairment related to other factors is recognized through “other comprehensive income”. This pronouncement was effective for interim and annual reporting periods ending after June 15, 2009. A cumulative effect adjustment from retained earnings to “accumulated other comprehensive income” was required for previously “other-than-temporarily” impaired fixed maturity securities still owned that had a non-credit component of the loss as of the date of adoption. Adoption resulted in a cumulative effect adjustment to increase retained earnings and decrease “accumulated other comprehensive income” by $643,500, net of tax. Adoption also resulted in additional disclosures for fixed maturity and equity securities.

In April 2009, the FASB updated its guidance related to the Financial Instruments Topic of the FASB ASC (issued as FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”). This pronouncement established quarterly disclosure requirements in interim financial statements of the fair value disclosures that were previously only required annually. This pronouncement was effective for interim and annual reporting periods ending after June 15, 2009. Adoption resulted in the addition of fair value disclosures, but had no effect on the consolidated financial position or operating results of the Company.

In December 2008, the FASB updated its guidance related to the Compensation-Retirement Benefits Topic of the FASB ASC (issued as FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets”). This pronouncement established guidance on employers’ disclosures about plan assets of defined benefit pension or other postretirement plans, and was intended to address a lack of transparency surrounding the types of assets and associated risks in an employer’s defined benefit pension or other postretirement plans. The plan asset disclosures required are effective for fiscal years ending after December 15, 2009. Adoption will result in additional disclosures, but will have no effect on the consolidated financial position or operating results of the Company.

In December 2007, the FASB updated its guidance related to the Business Combinations Topic of the FASB ASC (issued as SFAS No. 141 (revised 2007), “Business Combinations,” a replacement of SFAS No. 141, “Business Combinations”). This pronouncement retained the fundamental requirements of the acquisition method of accounting (previously referred to as “purchase method”) to be used for all business combinations, and was to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Adoption of this statement had no effect on the consolidated financial position or operating results of the Company.

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3.	REINSURANCE

The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the three months and nine months ended September 30, 2009 and 2008 is presented below.

	Three months ended September 30, 2009
	Property and
	casualty
	insurance			Reinsurance			Total
Premiums written
Direct	$	80,465,984		$	-		$	80,465,984
Assumed from nonaffiliates		610,620			19,984,276			20,594,896
Assumed from affiliates		103,137,225			-			103,137,225
Ceded to nonaffiliates		(6,713,237	)		(541,425	)		(7,254,662	)
Ceded to affiliates		(80,465,984	)		-			(80,465,984	)
Net premiums written	$	97,034,608		$	19,442,851		$	116,477,459

Premiums earned
Direct	$	58,721,350		$	-		$	58,721,350
Assumed from nonaffiliates		584,469			19,378,229			19,962,698
Assumed from affiliates		83,084,587			-			83,084,587
Ceded to nonaffiliates		(5,739,229	)		(575,239	)		(6,314,468	)
Ceded to affiliates		(58,721,350	)		-			(58,721,350	)
Net premiums earned	$	77,929,827		$	18,802,990		$	96,732,817

Losses and settlement expenses incurred
Direct	$	44,016,784		$	-		$	44,016,784
Assumed from nonaffiliates		173,206			14,473,800			14,647,006
Assumed from affiliates		58,233,986			204,663			58,438,649
Ceded to nonaffiliates		(401,189	)		(408,221	)		(809,410	)
Ceded to affiliates		(44,016,784	)		-			(44,016,784	)
Net losses and settlement expenses incurred	$	58,006,003		$	14,270,242		$	72,276,245

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	Three months ended September 30, 2008
	Property and
	casualty
	insurance			Reinsurance			Total
Premiums written
Direct	$	72,381,302		$	-		$	72,381,302
Assumed from nonaffiliates		614,112			18,286,577			18,900,689
Assumed from affiliates		101,605,339			-			101,605,339
Ceded to nonaffiliates		(6,841,679	)		(344,149	)		(7,185,828	)
Ceded to affiliates		(72,381,302	)		-			(72,381,302	)
Net premiums written	$	95,377,772		$	17,942,428		$	113,320,200

Premiums earned
Direct	$	54,866,579		$	-		$	54,866,579
Assumed from nonaffiliates		596,856			17,835,825			18,432,681
Assumed from affiliates		84,310,240			-			84,310,240
Ceded to nonaffiliates		(5,947,908	)		(385,798	)		(6,333,706	)
Ceded to affiliates		(54,866,579	)		-			(54,866,579	)
Net premiums earned	$	78,959,188		$	17,450,027		$	96,409,215

Losses and settlement expenses incurred
Direct	$	43,709,891		$	-		$	43,709,891
Assumed from nonaffiliates		417,371			16,453,674			16,871,045
Assumed from affiliates		68,187,194			138,176			68,325,370
Ceded to nonaffiliates		(3,101,960	)		(450,194	)		(3,552,154	)
Ceded to affiliates		(43,709,891	)		-			(43,709,891	)
Net losses and settlement expenses incurred	$	65,502,605		$	16,141,656		$	81,644,261

Table of Contents

	Nine months ended September 30, 2009
	Property and
	casualty
	insurance			Reinsurance			Total
Premiums written
Direct	$	193,427,053		$	-		$	193,427,053
Assumed from nonaffiliates		1,816,110			56,450,182			58,266,292
Assumed from affiliates		265,719,799			-			265,719,799
Ceded to nonaffiliates		(17,914,843	)		(1,486,457	)		(19,401,300	)
Ceded to affiliates		(193,427,053	)		-			(193,427,053	)
Net premiums written	$	249,621,066		$	54,963,725		$	304,584,791

Premiums earned
Direct	$	170,734,207		$	-		$	170,734,207
Assumed from nonaffiliates		1,891,320			56,272,431			58,163,751
Assumed from affiliates		245,867,355			-			245,867,355
Ceded to nonaffiliates		(17,200,516	)		(1,545,219	)		(18,745,735	)
Ceded to affiliates		(170,734,207	)		-			(170,734,207	)
Net premiums earned	$	230,558,159		$	54,727,212		$	285,285,371

Losses and settlement expenses incurred
Direct	$	117,678,427		$	-		$	117,678,427
Assumed from nonaffiliates		1,069,640			42,491,675			43,561,315
Assumed from affiliates		152,570,235			528,834			153,099,069
Ceded to nonaffiliates		(3,806,679	)		(1,636,595	)		(5,443,274	)
Ceded to affiliates		(117,678,427	)		-			(117,678,427	)
Net losses and settlement expenses incurred	$	149,833,196		$	41,383,914		$	191,217,110

Table of Contents

	Nine months ended September 30, 2008
	Property and
	casualty
	insurance			Reinsurance			Total
Premiums written
Direct	$	176,998,691		$	-		$	176,998,691
Assumed from nonaffiliates		1,857,333			52,360,115			54,217,448
Assumed from affiliates		265,984,013			-			265,984,013
Ceded to nonaffiliates		(18,166,361	)		(869,959	)		(19,036,320	)
Ceded to affiliates		(176,998,691	)		-			(176,998,691	)
Net premiums written	$	249,674,985		$	51,490,156		$	301,165,141

Premiums earned
Direct	$	160,139,290		$	-		$	160,139,290
Assumed from nonaffiliates		1,992,141			52,296,560			54,288,701
Assumed from affiliates		252,359,688			-			252,359,688
Ceded to nonaffiliates		(17,838,287	)		(805,406	)		(18,643,693	)
Ceded to affiliates		(160,139,290	)		-			(160,139,290	)
Net premiums earned	$	236,513,542		$	51,491,154		$	288,004,696

Losses and settlement expenses incurred
Direct	$	123,215,049		$	-		$	123,215,049
Assumed from nonaffiliates		1,726,833			42,574,144			44,300,977
Assumed from affiliates		187,234,937			415,594			187,650,531
Ceded to nonaffiliates		(9,281,225	)		(682,337	)		(9,963,562	)
Ceded to affiliates		(123,215,049	)		-			(123,215,049	)
Net losses and settlement expenses incurred	$	179,680,545		$	42,307,401		$	221,987,946

Individual lines in the above tables are defined as follows:

“Direct” represents policies issued by the Company’s property and casualty insurance subsidiaries.

“Assumed from nonaffiliates” represents the Company’s property and casualty insurance subsidiaries’ pool participation percentage of involuntary business assumed by the pool participants pursuant to state law. This line also includes business assumed by the reinsurance subsidiary through the quota share agreement, and, starting January 1, 2009, German-based business assumed by the reinsurance subsidiary outside the quota share agreement.

“Assumed from affiliates” represents the property and casualty insurance subsidiaries’ pool participation percentage of all the pool members’ direct business. Losses and settlement expenses incurred also includes claim-related services provided by Employers Mutual that is allocated to the property and casualty insurance subsidiaries and the reinsurance subsidiary.

“Ceded to nonaffiliates” represents the Company’s property and casualty insurance subsidiaries’ pool participation percentage of ceded reinsurance agreements that provide protection to the pool and each of its participants. This line also includes a limited amount of ceded reinsurance that is subject to the quota share agreement.

“Ceded to affiliates” represents the cession of the property and casualty insurance subsidiaries’ direct business to Employers Mutual under the terms of the pooling agreement.

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4.	SEGMENT INFORMATION

The Company’s operations consist of a property and casualty insurance segment and a reinsurance segment. The property and casualty insurance segment writes both commercial and personal lines of insurance, with a focus on medium-sized commercial accounts. The reinsurance segment provides reinsurance for other insurers and reinsurers. The segments are managed separately due to differences in the insurance products sold and the business environments in which they operate.

Summarized financial information for the Company’s segments is as follows:

	Property and
Three months ended	casualty					Parent
September 30, 2009	insurance			Reinsurance		company			Consolidated
Premiums earned	$	77,929,827		$	18,802,990	$	-		$	96,732,817

Underwriting profit (loss)		(7,232,037	)		227,377		-			(7,004,660	)
Net investment income		8,781,681			3,022,390		739			11,804,810
Realized investment gains		2,030,639			890,671		-			2,921,310
Other income		224,191			-		-			224,191
Interest expense		225,000			-		-			225,000
Other expenses		208,518			728,520		312,684			1,249,722
Income (loss) before income tax expense (benefit)	$	3,370,956		$	3,411,918	$	(311,945	)	$	6,470,929

	Property and
Three months ended	casualty						Parent
September 30, 2008	insurance			Reinsurance			company			Consolidated
Premiums earned	$	78,959,188		$	17,450,027		$	-		$	96,409,215

Underwriting loss		(11,458,365	)		(2,822,994	)		-			(14,281,359	)
Net investment income		9,174,650			3,017,725			58,817			12,251,192
Realized investment losses		(9,516,502	)		(4,580,015	)		-			(14,096,517	)
Other income		191,161			-			-			191,161
Interest expense		225,000			-			-			225,000
Other expenses		113,730			(247,243	)		362,045			228,532
Loss before income tax benefit	$	(11,947,786	)	$	(4,138,041	)	$	(303,228	)	$	(16,389,055	)

Table of Contents

	Property and
Nine months ended	casualty						Parent
September 30, 2009	insurance			Reinsurance			company			Consolidated
Premiums earned	$	230,558,159		$	54,727,212		$	-		$	285,285,371

Underwriting profit (loss)		(7,722,721	)		1,603,206			-			(6,119,515	)
Net investment income		26,334,016			8,905,851			14,796			35,254,663
Realized investment losses		(3,060,164	)		(1,705,669	)		-			(4,765,833	)
Other income		575,449			-			-			575,449
Interest expense		675,000			-			-			675,000
Other expenses		614,847			335,396			1,030,633			1,980,876
Income (loss) before income tax expense (benefit)	$	14,836,733		$	8,467,992		$	(1,015,837	)	$	22,288,888

Assets	$	919,015,422		$	286,265,132		$	335,612,475		$	1,540,893,029
Eliminations		-			-			(332,798,030	)		(332,798,030	)
Reclassifications		(10,532	)		(1,646,327	)		(421,429	)		(2,078,288	)
Net assets	$	919,004,890		$	284,618,805

EMC Insurance Group (EMCI)

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