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EMC Insurance Group (EMCI)

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EMC Insurance Group 10-Q 2011

Documents found in this filing:

form10q.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, 2011

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 offices)		(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).

x 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 28, 2011
Common stock, $1.00 par value		12,870,541

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	37
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
	Item 4.	Controls and Procedures	53

PART II		OTHER INFORMATION
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
	Item 6.	Exhibits	55

Signatures			56
Index to Exhibits			57

Table of Content

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS>

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30, 2011		December 31, 2010
ASSETS
Investments:
Fixed maturities:
Securities held-to-maturity, at amortized cost (fair value $364,994 and $389,679)	$	317,279	$	340,803
Securities available-for-sale, at fair value (amortized cost $894,942,793 and $909,582,782)		952,756,369		941,537,026
Equity securities available-for-sale, at fair value (cost $89,248,731 and $75,721,039)		99,327,795		101,138,982
Other long-term investments, at cost		18,352		29,827
Short-term investments, at cost		66,257,086		36,616,111
Total investments		1,118,676,881		1,079,662,749

Cash		365,574		491,994
Reinsurance receivables due from affiliate		42,556,872		30,256,586
Prepaid reinsurance premiums due from affiliate		10,400,141		9,530,426
Deferred policy acquisition costs (affiliated $44,143,760 and $37,584,448)		44,152,508		37,584,448
Prepaid pension benefits due from affiliate		4,001,151		5,125,701
Accrued investment income		10,802,976		10,925,854
Accounts receivable		1,352,056		1,716,150
Income taxes recoverable		10,618,339		2,350,864
Deferred income taxes		3,930,487		6,690,218
Goodwill		941,586		941,586
Other assets (affiliated $4,353,943 and $2,433,445)		4,530,550		2,517,922
Total assets	$	1,252,329,121	$	1,187,794,498

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

Table of Content

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30, 2011			December 31, 2010
LIABILITIES
Losses and settlement expenses (affiliated $596,866,878 and $553,125,183)	$	601,324,726		$	556,140,956
Unearned premiums (affiliated $196,010,325 and $167,896,119)		196,053,488			167,896,119
Other policyholders' funds due to affiliate		5,859,924			8,315,751
Surplus notes payable to affiliate		25,000,000			25,000,000
Amounts due affiliate to settle inter-company transaction balances		23,350,909			18,380,813
Pension and postretirement benefits payable to affiliate		21,652,677			20,418,716
Other liabilities (affiliated $14,993,243 and $22,861,092)		22,658,051			23,001,141
Total liabilities		895,899,775			819,153,496

STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding, 12,870,541 shares in 2011 and 12,927,678 shares in 2010		12,870,541			12,927,678
Additional paid-in capital		88,177,145			88,937,294
Accumulated other comprehensive income (loss):
Net unrealized losses on fixed maturity securities with "other-than-temporary" impairments		-			(69,852	)
Other net unrealized gains		44,130,217			37,361,774
Unrecognized pension and postretirement benefits (all affiliated)		(12,257,939	)		(12,796,435	)
Total accumulated other comprehensive income		31,872,278			24,495,487
Retained earnings		223,509,382			242,280,543
Total stockholders' equity		356,429,346			368,641,002
Total liabilities and stockholders' equity	$	1,252,329,121		$	1,187,794,498

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

Table of Content

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended September 30,
	2011			2010
REVENUES
Premiums earned (affiliated $105,768,033 and $96,134,999)	$	107,416,257		$	97,284,237
Investment income, net		11,331,251			12,235,007
Net realized investment gains, excluding impairment losses on available-for-sale securities		1,390,382			2,116,249
Total "other-than-temporary" impairment losses on available-for-sale securities		(4,912,063	)		(366,319	)
Net realized investment gains (losses)		(3,521,681	)		1,749,930
Other income (all affiliated)		198,157			229,520
		115,423,984			111,498,694
LOSSES AND EXPENSES
Losses and settlement expenses (affiliated $91,157,122 and $67,706,628)		91,360,677			67,572,519
Dividends to policyholders (all affiliated)		1,713,336			1,905,231
Amortization of deferred policy acquisition costs (affiliated $23,214,123 and $21,306,350)		23,284,182			21,590,581
Other underwriting expenses (affiliated $6,670,729 and $9,422,956)		6,670,535			9,422,956
Interest expense (all affiliated)		225,000			225,000
Other expense (affiliated $563,369 and $810,159)		176,050			965,956
		123,429,780			101,682,243
Income (loss) before income tax expense (benefit)		(8,005,796	)		9,816,451

INCOME TAX EXPENSE (BENEFIT)
Current		(3,108,524	)		2,055,285
Deferred		(753,189	)		302,591
		(3,861,713	)		2,357,876
Net income (loss)	$	(4,144,083	)	$	7,458,575

Net income (loss) per common share -basic and diluted	$	(0.32	)	$	0.57
Dividend per common share	$	0.19		$	0.18

Average number of common shares outstanding -basic and diluted		12,886,163			12,979,372

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

Table of Content

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Nine months ended September 30,
	2011			2010
REVENUES
Premiums earned (affiliated $300,689,772 and $282,671,314)	$	304,634,600		$	286,060,414
Investment income, net		34,882,954			37,414,018
Net realized investment gains, excluding impairment losses on available-for-sale securities		12,265,135			3,724,710
Total "other-than-temporary" impairment losses on available-for-sale securities		(5,742,360	)		(2,174,873	)
Portion of "other-than-temporary" impairment losses on fixed maturity available-for-sale securities reclassified from other comprehensive income (before taxes)		(86,017	)		(120,539	)
Net impairment losses on available-for-sale securities		(5,828,377	)		(2,295,412	)
Net realized investment gains		6,436,758			1,429,298
Other income (all affiliated)		638,470			656,567
		346,592,782			325,560,297
LOSSES AND EXPENSES
Losses and settlement expenses (affiliated $263,568,983 and $193,367,014)		266,501,044			194,767,211
Dividends to policyholders (all affiliated)		4,081,374			5,778,317
Amortization of deferred policy acquisition costs (affiliated $70,256,228 and $65,181,923)		70,940,126			66,096,981
Other underwriting expenses (affiliated $25,048,390 and $28,973,059)		24,926,971			28,922,785
Interest expense (all affiliated)		675,000			675,000
Other expense (affiliated $2,254,061 and $1,498,705)		2,131,475			1,464,866
		369,255,990			297,705,160
Income (loss) before income tax expense (benefit)		(22,663,208	)		27,855,137

INCOME TAX EXPENSE (BENEFIT)
Current		(10,046,869	)		6,591,688
Deferred		(1,212,387	)		628,309
		(11,259,256	)		7,219,997
Net income (loss)	$	(11,403,952	)	$	20,635,140

Net income (loss) per common share -basic and diluted	$	(0.88	)	$	1.58

Dividend per common share	$	0.57		$	0.54

Average number of common shares outstanding -basic and diluted		12,926,670			13,077,450

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

Table of Content

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three months ended September 30,
	2011			2010

Net income (loss)	$	(4,144,083	)	$	7,458,575

OTHER COMPREHENSIVE INCOME (LOSS)
Change in unrealized holding gains (losses) on investment securities, net of deferred income tax expense (benefit) of ($718,594) and $8,763,683		(1,334,523	)		16,275,411
Reclassification adjustment for realized investment (gains) losses included in net income (loss), net of income tax (expense) benefit of $1,232,589 and ($612,476)		2,289,092			(1,137,454	)
Change in unrealized holding gains on fixed maturity securities with "other-than-temporary" impairment, net of deferred income tax expense of $0 and $19,030		-			35,338
Adjustment associated with affiliate's pension and postretirement benefit plans, net of deferred income tax expense of $104,508 and $98,477:
Net actuarial loss		274,790			260,933
Prior service credit		(80,702	)		(78,040	)
		194,088			182,893

Other comprehensive income		1,148,657			15,356,188

Total comprehensive income (loss)	$	(2,995,426	)	$	22,814,763

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

Table of Content

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Nine months ended September 30,
	2011			2010

Net income (loss)	$	(11,403,952	)	$	20,635,140

OTHER COMPREHENSIVE INCOME (LOSS)
Change in unrealized holding gains on investment securities, net of deferred income tax expense of $5,927,516 and $14,420,647		11,008,247			26,781,201
Reclassification adjustment for realized investment gains included in net income (loss), net of income tax expense of $2,282,971 and $542,443		(4,239,804	)		(1,007,394	)
Change in unrealized holding gains on fixed maturity securities with "other-than-temporary" impairment, net of deferred income tax expense of $7,507 and $53,872		13,941			100,045
Reclassification adjustment for realized investment losses from fixed maturity securities with "other-than-temporary" impairment included in net income, net of income tax benefit of $30,106 and $42,188		55,911			78,351
Adjustment associated with affiliate's pension and postretirement benefit plans, net of deferred income tax expense of $289,960 and $296,931:
Net actuarial loss		775,532			785,569
Prior service credit		(237,036	)		(234,124	)
		538,496			551,445

Other comprehensive income		7,376,791			26,503,648

Total comprehensive income (loss)	$	(4,027,161	)	$	47,138,788

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

Table of Content

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(11,403,952	)	$	20,635,140

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Losses and settlement expenses (affiliated $43,741,695 and $10,570,393)		45,183,770			11,097,500
Unearned premiums (affiliated $28,114,206 and $23,699,789)		28,157,369			23,699,789
Other policyholders' funds due to affilitate		(2,455,827	)		(415,198	)
Amounts due affiliate to settle inter-company transaction balances		4,970,096			(22,898,319	)
Pension and postretirement benefits payable to affiliate		3,186,967			3,778,948
Reinsurance receivables due from affiliate		(12,300,286	)		(1,842,101	)
Prepaid reinsurance premiums due from affiliate		(869,715	)		(4,586,938	)
Commission payable (affiliated ($6,472,164) and ($1,635,680))		(6,465,019	)		(1,594,362	)
Interest payable to affiliate		(225,000	)		(225,000	)
Deferred policy acquisition costs (affiliated ($6,559,312) and ($4,563,771))		(6,568,060	)		(4,563,771	)
Stock-based compensation payable to affiliate		150,802			112,054
Accrued investment income		122,878			(648,342	)
Accrued income tax:
Current		(8,260,853	)		(8,018,462	)
Deferred		(1,212,387	)		628,309
Realized investment gains		(6,436,758	)		(1,429,298	)
Accounts receivable		364,094			(729,552	)
Amortization of premium/discount on fixed maturity securities		(581,134	)		(802,570	)
Other, net (affiliated ($3,095,097) and ($4,222,703))		(3,254,620	)		(4,292,828	)
		33,506,317			(12,730,141	)
Net cash provided by operating activities	$	22,102,365		$	7,904,999

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

Table of Content

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

	Nine months ended September 30,
	2011			2010
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of fixed maturity securities held-to-maturity	$	23,627		$	57,734
Purchases of fixed maturity securities available-for-sale		(161,203,068	)		(149,067,364	)
Disposals of fixed maturity securities available-for-sale		183,498,684			143,105,230
Purchases of equity securities available-for-sale		(60,685,974	)		(28,260,083	)
Disposals of equity securities available-for-sale		54,102,743			28,550,120
Disposals of other long-term investments		11,475			12,166
Net (purchases) disposals of short-term investments		(29,640,975	)		9,372,377
Net cash provided by (used in) investing activities		(13,893,488	)		3,770,180

CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock through affilate's stock option plans		875,186			755,705
Excess tax benefit associated with affilate's stock option plans		6,622			342
Repurchase of common stock		(1,849,896	)		(5,294,432	)
Dividends paid to stockholders (affiliated ($4,473,276) and ($4,237,840))		(7,367,209	)		(7,058,028	)
Net cash used in financing activities		(8,335,297	)		(11,596,413	)

NET INCREASE (DECREASE) IN CASH		(126,420	)		78,766
Cash at the beginning of the year		491,994			278,534

Cash at the end of the quarter	$	365,574		$	357,300

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

Table of Content

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

EMC Insurance Group Inc., a 61 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. 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, 2010 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 2010 Form 10-K or the 2010 Annual Report to Stockholders for more detailed footnote information.

2. NEW ACCOUNTING PRONOUNCEMENTS

In September 2011, the Financial Accounting Standards Board (FASB) updated its guidance related to the Intangibles-Goodwill and Other Topic 350 of the FASB Accounting Standards Codification TM (ASC). The objective of this updated guidance is to simplify the process of testing goodwill for impairment. The guidance allows an initial qualitative assessment to determine whether it is more likely than not that the fair value of a reporting entity is less than its carrying amount. If an entity concludes that it is more likely than not that the fair value is greater than its carrying amount, then performing the two-step goodwill impairment test is unnecessary. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. Adoption of this guidance will not have an impact on the consolidated financial position or operating results of the Company.

In June 2011, the FASB updated its guidance related to the Comprehensive Income Topic 220 of the ASC. The objective of this updated guidance is to increase the prominence of items reported in other comprehensive income by eliminating the option of presenting components of other comprehensive income as part of the statement of changes in stockholders’ equity. The guidance requires total comprehensive income (including both the net income components and other comprehensive income components) be reported in either a single continuous statement of comprehensive income, or two separate but consecutive statements (the approach currently used in the Company’s consolidated financial statements). This guidance is to be applied retrospectively to fiscal years (and interim periods within those years) beginning after December 15, 2011. Early adoption is permitted. Since the Company already uses the two-statement approach for reporting comprehensive income, this guidance will not have any impact on its consolidated financial position or operating results.

Table of Content

In May 2011, the FASB updated its guidance related to the Fair Value Measurement Topic 820 of the ASC to achieve common fair value measurement and disclosure requirements with International Financial Reporting Standards. The changes in this guidance both clarify the intent of application of existing fair value measurement and disclosure requirements, and change particular principles or requirements for measuring and disclosing fair value measurements. Specifically included in this guidance is expanded disclosure of the valuation processes used for Level 3 fair value measurements, including quantitative information about unobservable inputs used. This guidance is to be applied prospectively to interim and annual reporting periods beginning after December 15, 2011. Adoption of this guidance is not expected to have any impact on the consolidated financial position or operating results of the Company.

In October 2010, the FASB updated its guidance related to Insurance Topic 944 of the ASC to clarify which costs associated with the acquisition of insurance contracts should be capitalized and deferred for recognition during the coverage period. This guidance specifies that only incremental costs or costs directly related to the successful acquisition of new or renewal insurance contracts are to be capitalized as a deferred acquisition cost. Currently, industry practice is such that deferred costs typically also include costs related to unsuccessful acquisitions of insurance contracts. This guidance is effective for annual reporting periods (and interim reporting periods of those annual reporting periods) beginning on or after December 15, 2011, and may be adopted prospectively or retrospectively. Adoption of this guidance will have an impact on the consolidated financial position and operating results of the Company since certain costs associated with contract acquisition that are currently deferred will not likely meet the criteria for deferral under the new guidance. The Company has not yet established an estimate of the impact this new guidance will have on its financial statements.

In July 2010, the FASB updated its guidance related to Receivables Topic 310 of the ASC to require additional disclosures regarding credit risk exposures and the allowance for credit losses, as well as a description of the accounting policies and methodology used to estimate the liability for off-balance-sheet credit risk exposures and related charges. The additional disclosures required at the end of a reporting period were effective for interim and annual reporting periods ending on or after December 15, 2010, and the additional disclosures required about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Adoption of this guidance resulted in some additional disclosures at year-end 2010, but had no effect on the consolidated financial position or operating results of the Company.

In January 2010, the FASB updated its guidance related to the Fair Value Measurements and Disclosures Topic 820 of the ASC to require additional disclosures regarding transfers in and out of fair value measurement Levels 1 and 2, the display of Level 3 activity on a gross basis (rather than net), fair value measurement disclosures for each class of assets and liabilities (rather than by line item within the statement of financial position), and additional disclosures about inputs and valuation techniques. This guidance was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective for fiscal years (and interim periods of those fiscal years) beginning after December 15, 2010. Adoption of this guidance had no effect on the consolidated financial position or operating results of the Company.

Table of Content

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, 2011 and 2010 is presented below.

	Three months ended September 30, 2011
	Property and
	casualty
	insurance			Reinsurance			Total
Premiums written
Direct	$	96,286,937		$	-		$	96,286,937
Assumed from nonaffiliates		578,928			32,363,185			32,942,113
Assumed from affiliates		109,194,449			-			109,194,449
Ceded to nonaffiliates		(7,473,697	)		(3,669,773	)		(11,143,470	)
Ceded to affiliates		(96,286,937	)		(2,869,341	)		(99,156,278	)
Net premiums written	$	102,299,680		$	25,824,071		$	128,123,751

Premiums earned
Direct	$	74,330,476		$	-		$	74,330,476
Assumed from nonaffiliates		474,357			31,692,494			32,166,851
Assumed from affiliates		88,073,825			-			88,073,825
Ceded to nonaffiliates		(6,252,425	)		(3,702,653	)		(9,955,078	)
Ceded to affiliates		(74,330,476	)		(2,869,341	)		(77,199,817	)
Net premiums earned	$	82,295,757		$	25,120,500		$	107,416,257

Losses and settlement expenses incurred
Direct	$	59,667,253		$	-		$	59,667,253
Assumed from nonaffiliates		427,383			26,609,406			27,036,789
Assumed from affiliates		76,633,840			218,689			76,852,529
Ceded to nonaffiliates		(6,531,312	)		(4,595,308	)		(11,126,620	)
Ceded to affiliates		(59,667,253	)		(1,402,021	)		(61,069,274	)

Net losses and settlement expenses incurred	$	70,529,911		$	20,830,766		$	91,360,677

Table of Content

	Three months ended September 30, 2010
	Property and
	casualty
	insurance			Reinsurance			Total
Premiums written
Direct	$	81,394,172		$	-		$	81,394,172
Assumed from nonaffiliates		479,401			28,820,228			29,299,629
Assumed from affiliates		99,302,343			-			99,302,343
Ceded to nonaffiliates		(6,764,258	)		(7,479,832	)		(14,244,090	)
Ceded to affiliates		(81,394,172	)		-			(81,394,172	)
Net premiums written	$	93,017,486		$	21,340,396		$	114,357,882

Premiums earned
Direct	$	63,131,881		$	-		$	63,131,881
Assumed from nonaffiliates		468,565			26,962,298			27,430,863
Assumed from affiliates		82,236,907			-			82,236,907
Ceded to nonaffiliates		(5,731,160	)		(6,652,373	)		(12,383,533	)
Ceded to affiliates		(63,131,881	)		-			(63,131,881	)
Net premiums earned	$	76,974,312		$	20,309,925		$	97,284,237

Losses and settlement expenses incurred
Direct	$	49,032,278		$	-		$	49,032,278
Assumed from nonaffiliates		415,104			14,627,067			15,042,171
Assumed from affiliates		56,912,799			226,058			57,138,857
Ceded to nonaffiliates		(890,982	)		(3,717,527	)		(4,608,509	)
Ceded to affiliates		(49,032,278	)		-			(49,032,278	)

Net losses and settlement expenses incurred	$	56,436,921		$	11,135,598		$	67,572,519

Table of Content

	Nine months ended September 30, 2011
	Property and
	casualty
	insurance			Reinsurance			Total
Premiums written
Direct	$	236,464,970		$	-		$	236,464,970
Assumed from nonaffiliates (1)		1,149,037			88,108,827			89,257,864
Assumed from affiliates		282,462,185			-			282,462,185
Ceded to nonaffiliates		(19,777,316	)		(12,241,458	)		(32,018,774	)
Ceded to affiliates (1)		(236,464,970	)		(7,586,737	)		(244,051,707	)
Net premiums written	$	263,833,906		$	68,280,632		$	332,114,538

Premiums earned
Direct	$	208,935,272		$	-		$	208,935,272
Assumed from nonaffiliates		1,101,953			86,765,065			87,867,018
Assumed from affiliates		255,503,378			-			255,503,378
Ceded to nonaffiliates		(18,617,074	)		(12,531,985	)		(31,149,059	)
Ceded to affiliates		(208,935,272	)		(7,586,737	)		(216,522,009	)
Net premiums earned	$	237,988,257		$	66,646,343		$	304,634,600

Losses and settlement expenses incurred
Direct	$	194,629,900		$	-		$	194,629,900
Assumed from nonaffiliates		1,212,075			98,483,897			99,695,972
Assumed from affiliates		206,238,698			559,036			206,797,734
Ceded to nonaffiliates		(13,133,654	)		(13,421,015	)		(26,554,669	)
Ceded to affiliates		(194,629,900	)		(13,437,993	)		(208,067,893	)

Net losses and settlement expenses incurred	$	194,317,119		$	72,183,925		$	266,501,044

(1)

The “Reinsurance” and “Total” amounts include $1,022,885 associated with a portfolio adjustment related to the January 1, 2011 increase in participation in the MRB pool. Ten percent of this amount ($102,288) is included in the ceded to affiliates amounts in accordance with the terms of the excess of loss reinsurance protection provided by Employers Mutual.

Table of Content

	Nine months ended September 30, 2010
	Property and
	casualty
	insurance			Reinsurance			Total
Premiums written
Direct	$	204,537,723		$	-		$	204,537,723
Assumed from nonaffiliates		1,538,687			79,832,753			81,371,440
Assumed from affiliates		263,962,168			-			263,962,168
Ceded to nonaffiliates		(17,908,066	)		(20,692,109	)		(38,600,175	)
Ceded to affiliates		(204,537,723	)		-			(204,537,723	)
Net premiums written	$	247,592,789		$	59,140,644		$	306,733,433

Premiums earned
Direct	$	183,888,408		$	-		$	183,888,408
Assumed from nonaffiliates		1,587,343			75,391,944			76,979,287
Assumed from affiliates		243,094,381			-			243,094,381
Ceded to nonaffiliates		(17,083,150	)		(16,930,104	)		(34,013,254	)
Ceded to affiliates		(183,888,408	)		-			(183,888,408	)
Net premiums earned	$	227,598,574		$	58,461,840		$	286,060,414

Losses and settlement expenses incurred
Direct	$	128,610,391		$	-		$	128,610,391
Assumed from nonaffiliates		1,456,825			44,733,410			46,190,235
Assumed from affiliates		160,005,878			585,975			160,591,853
Ceded to nonaffiliates		(4,214,468	)		(7,800,409	)		(12,014,877	)
Ceded to affiliates		(128,610,391	)		-			(128,610,391	)

Net losses and settlement expenses incurred	$	157,248,235		$	37,518,976		$	194,767,211

Individual lines in the above tables are defined as follows:

●

“Direct” represents business produced by the property and casualty insurance subsidiaries.

●

“Assumed from nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of involuntary business assumed by the pool participants pursuant to state law. For the reinsurance subsidiary, this line represents the reinsurance business assumed through the quota share agreement (including “fronting” activities performed by Employers Mutual, which were expanded significantly during 2010, most notably with MRB) and the business assumed outside the quota share agreement.

●

“Assumed from affiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent 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 are allocated to the property and casualty insurance subsidiaries and the reinsurance subsidiary.

●

“Ceded to nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of the ceded reinsurance agreements that provide protection to the pool and each of its participants. For the reinsurance subsidiary, this line includes reinsurance business that is ceded to other insurance companies in connection with the above referenced “fronting” activities performed by Employers Mutual.

●

“Ceded to affiliates” for the property and casualty insurance subsidiaries represents the cession of their direct business to Employers Mutual under the terms of the pooling agreement. For the reinsurance subsidiary, starting in 2011 this line includes amounts ceded to Employers Mutual in connection with the stand-alone excess of loss reinsurance agreement.

Table of Content

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 environment in which they operate.

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

	Property and
	casualty						Parent
Three months ended September 30, 2011	insurance			Reinsurance			company			Consolidated
Premiums earned	$	82,295,757		$	25,120,500		$	-		$	107,416,257

Underwriting loss		(15,088,315	)		(524,158	)		-			(15,612,473	)
Net investment income		8,222,036			3,109,923			(708	)		11,331,251
Realized investment losses		(2,723,889	)		(797,792	)		-			(3,521,681	)
Other income		198,157			-			-			198,157
Interest expense		225,000			-			-			225,000
Other expenses		209,359			(343,920	)		310,611			176,050

Income (loss) before income tax expense (benefit)	$	(9,826,370	)	$	2,131,893		$	(311,319	)	$	(8,005,796	)

	Property and
	casualty					Parent
Three months ended September 30, 2010	insurance			Reinsurance		company			Consolidated
Premiums earned	$	76,974,312		$	20,309,925	$	-		$	97,284,237

Underwriting profit (loss)		(6,811,922	)		3,604,872		-			(3,207,050	)
Net investment income		9,111,308			3,123,829		(130	)		12,235,007
Realized investment gains		1,340,740			409,190		-			1,749,930
Other income		229,520			-		-			229,520
Interest expense		225,000			-		-			225,000
Other expenses		206,750			416,176		343,030			965,956

Income (loss) before income tax expense (benefit)	$	3,437,896		$	6,721,715	$	(343,160	)	$	9,816,451

Table of Content

	Property and
	casualty						Parent
Nine months ended September 30, 2011	insurance			Reinsurance			company			Consolidated
Premiums earned	$	237,988,257		$	66,646,343		$	-		$	304,634,600

Underwriting loss		(42,237,376	)		(19,577,539	)		-			(61,814,915	)
Net investment income		25,505,564			9,377,492			(102	)		34,882,954
Realized investment gains		4,933,135			1,503,623			-			6,436,758
Other income		638,470			-			-			638,470
Interest expense		675,000			-			-			675,000
Other expenses		535,800			597,928			997,747			2,131,475

Loss before income tax benefit	$	(12,371,007	)	$	(9,294,352	)	$	(997,849	)	$	(22,663,208	)

Assets	$	911,272,993		$	335,335,976		$	356,543,602		$	1,603,152,571
Eliminations		-			-			(350,548,284	)		(350,548,284	)
Reclassifications		-			-			(275,166	)		(275,166	)
Net assets	$	911,272,993		$	335,335,976		$	5,720,152		$	1,252,329,121

	Property and
	casualty						Parent
Nine months ended September 30, 2010	insurance			Reinsurance			company			Consolidated
Premiums earned	$	227,598,574		$	58,461,840		$	-		$	286,060,414

Underwriting profit (loss)		(15,297,098	)		5,792,218			-			(9,504,880	)
Net investment income		27,997,409			9,422,006			(5,397	)		37,414,018
Realized investment gains		1,134,882			294,416			-			1,429,298
Other income		656,567			-			-			656,567
Interest expense		675,000			-			-			675,000
Other expenses		633,558			(237,116	)		1,068,424			1,464,866

Income (loss) before income tax expense (benefit)	$	13,183,202		$	15,745,756		$	(1,073,821	)	$	27,855,137

Year ended December 31, 2010
Assets	$	876,034,367		$	310,104,843		$	369,116,425		$	1,555,255,635
Eliminations		-			-			(363,926,907	)		(363,926,907	)
Reclassifications		-			(3,534,230	)		-			(3,534,230	)
Net assets	$	876,034,367		$	306,570,613		$	5,189,518		$	1,187,794,498

Table of Content

The following table displays the net premiums earned of the property and casualty insurance segment and the reinsurance segment for the three months and nine months ended September 30, 2011 and 2010, by line of insurance.

	Three months ended September 30,				Nine months ended September 30,
	2011		2010		2011		2010
Property and casualty insurance segment
Commercial lines:
Automobile	$	17,191,989	$	16,499,022	$	49,847,697	$	49,231,303
Property		17,703,212		16,508,912		50,957,255		48,756,488
Workers' compensation		17,596,662		15,786,454		50,698,264		47,197,686
Liability		15,373,023		14,691,512		44,758,242		43,520,587
Other		1,900,875		2,069,367		5,717,603		6,297,880
Total commercial lines		69,765,761		65,555,267		201,979,061		195,003,944

Personal lines:
Automobile		7,032,915		6,472,251		20,284,153		18,961,331
Property		5,355,492		4,811,642		15,313,489		13,228,322
Liability		141,589		135,152		411,554		404,977
Total personal lines		12,529,996		11,419,045		36,009,196		32,594,630
Total property and casualty insurance	$	82,295,757	$	76,974,312	$	237,988,257	$	227,598,574

Reinsurance segment
Pro rata reinsurance:
Property and casualty	$	2,084,458	$	1,728,524	$	6,634,110	$	5,380,181
Property		4,580,264		3,287,102		11,175,433		10,012,201
Marine/Aviation		217,535		292,139		650,580		593,626
Casualty		368,818		336,666		891,208		847,567
Crop		341,454		333,555		1,010,606		911,126
Total pro rata reinsurance		7,592,529		5,977,986		20,361,937		17,744,701

Excess of loss reinsurance:

EMC Insurance Group (EMCI)

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