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EMC Insurance Group (EMCI)

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EMC Insurance Group 10-Q 2012

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, 2012

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 30, 2012
Common stock, $1.00 par value		12,891,270

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	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	54

PART II	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 6.	Exhibits	56

Signatures		57

Index to Exhibits		58

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,
	2012		2011
			(As Adjusted)
ASSETS
Investments:
Fixed maturities:
Securities available-for-sale, at fair value (amortized cost $907,629,331 and $899,939,616)	$	988,529,787	$	958,203,576
Equity securities available-for-sale, at fair value (cost $110,461,769 and $90,866,131)		140,912,035		111,300,053
Other long-term investments		9,655		14,527
Short-term investments		50,041,374		42,628,926
Total investments		1,179,492,851		1,112,147,082

Cash		117,460		255,042
Reinsurance receivables due from affiliate		36,224,620		39,517,108
Prepaid reinsurance premiums due from affiliate		6,155,852		9,378,026
Deferred policy acquisition costs (affiliated $36,718,179 and $30,849,717)		36,734,205		30,849,717
Amounts due from affiliate to settle inter-company transaction balances		5,839,995		-
Accrued investment income		10,547,844		10,256,499
Accounts receivable		2,851,540		1,644,782
Income taxes recoverable		4,534,155		9,670,459
Deferred income taxes		-		6,710,919
Goodwill		941,586		941,586
Other assets (affiliated $7,329,757 and $2,584,111)		7,461,239		2,659,942
Total assets	$	1,290,901,347	$	1,224,031,162

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

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,			December 31,
	2012			2011
				(As Adjusted)
LIABILITIES
Losses and settlement expenses (affiliated $590,035,203 and $588,846,586)	$	595,554,438		$	593,300,247
Unearned premiums (affiliated $212,311,792 and $180,689,377)		212,389,653			180,689,377
Other policyholders' funds (all affiliated)		6,603,509			5,061,160
Surplus notes payable to affiliate		25,000,000			25,000,000
Amounts due affiliate to settle inter-company transaction balances		-			21,033,627
Pension and postretirement benefits payable to affiliate		32,963,168			29,671,835
Deferred income taxes		5,048,194			-
Other liabilities (affiliated $18,151,059 and $16,744,447)		20,736,705			16,934,321
Total liabilities		898,295,667			871,690,567

STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding, 12,891,202 shares in 2012 and 12,875,591 shares in 2011		12,891,202			12,875,591
Additional paid-in capital		88,775,732			88,310,632
Accumulated other comprehensive income (loss):
Net unrealized gains on investments		72,377,968			51,153,622
Unrecognized pension and postretirement benefit obligations (all affiliated)		(22,489,919	)		(23,813,112	)
Total accumulated other comprehensive income		49,888,049			27,340,510
Retained earnings		241,050,697			223,813,862
Total stockholders' equity		392,605,680			352,340,595
Total liabilities and stockholders' equity	$	1,290,901,347		$	1,224,031,162

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

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended September 30,
	2012			2011
				(As Adjusted)
REVENUES
Premiums earned (affiliated $119,454,759 and $105,768,033)	$	121,544,787		$	107,416,257
Investment income, net		10,968,913			11,331,251
Net realized investment gains (losses), excluding impairment losses on available-for-sale securities		(153,553	)		1,390,382
Total "other-than-temporary" impairment losses on available-for-sale securities		(22,815	)		(4,912,063	)
Portion of “other-than-temporary” impairment losses on fixed maturity available-for-sale securities reclassified from other comprehensive income (before taxes)		-			-
Net impairment losses on available-for-sale securities		(22,815	)		(4,912,063	)
Net realized investment losses		(176,368	)		(3,521,681	)
Other income (all affiliated)		224,826			198,157
Total revenues		132,562,158			115,423,984

LOSSES AND EXPENSES
Losses and settlement expenses (affiliated $77,470,939and $91,157,122)		79,324,641			91,360,677
Dividends to policyholders (all affiliated)		2,982,748			1,713,336
Amortization of deferred policy acquisition costs (affiliated $21,993,748 and $19,601,094)		22,611,202			19,671,238
Other underwriting expenses (affiliated $15,762,602 and $12,484,300)		15,761,224			12,484,106
Interest expense (all affiliated)		225,000			225,000
Other expense (affiliated $710,527 and $563,369)		906,987			176,050
Total losses and expenses		121,811,802			125,630,407
Income (loss) before income tax expense (benefit)		10,750,356			(10,206,423	)

INCOME TAX EXPENSE (BENEFIT)
Current		2,852,716			(3,108,524	)
Deferred		(423,604	)		(1,523,409	)
Total income tax expense (benefit)		2,429,112			(4,631,933	)
Net income (loss)	$	8,321,244		$	(5,574,490	)

Net income (loss) per common share -basic and diluted	$	0.65		$	(0.43	)

Dividend per common share	$	0.20		$	0.19

Average number of common shares outstanding -basic and diluted		12,889,628			12,886,163

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

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Nine months ended September 30,
	2012			2011
				(As Adjusted)
REVENUES
Premiums earned (affiliated $336,391,841 and $300,689,772)	$	341,575,003		$	304,634,600
Investment income, net		33,274,390			34,882,954
Net realized investment gains, excluding impairment losses on available-for-sale securities		7,752,488			12,265,135
Total "other-than-temporary" impairment losses on available-for-sale securities		(148,863	)		(5,742,360	)
Portion of "other-than-temporary" impairment losses on fixed maturity available-for-sale securities reclassified from other comprehensive income (before taxes)		-			(86,017	)
Net impairment losses on available-for-sale securities		(148,863	)		(5,828,377	)
Net realized investment gains		7,603,625			6,436,758
Other income (all affiliated)		686,575			638,470
Total revenues		383,139,593			346,592,782

LOSSES AND EXPENSES
Losses and settlement expenses (affiliated $228,565,383 and $263,568,983)		232,964,881			266,501,044
Dividends to policyholders (all affiliated)		6,894,504			4,081,374
Amortization of deferred policy acquisition costs (affiliated $61,021,651 and $55,658,488)		62,456,591			56,342,429
Other underwriting expenses (affiliated $45,434,704 and $41,696,412)		45,349,532			41,574,993
Interest expense (all affiliated)		675,000			675,000
Other expense (affiliated $1,712,742 and $2,254,061)		1,662,246			2,131,475
Total losses and expenses		350,002,754			371,306,315
Income (loss) before income tax expense (benefit)		33,136,839			(24,713,533	)

INCOME TAX EXPENSE (BENEFIT)
Current		8,550,202			(10,046,869	)
Deferred		(381,871	)		(1,930,001	)
Total income tax expense (benefit)		8,168,331			(11,976,870	)
Net income (loss)	$	24,968,508		$	(12,736,663	)

Net income (loss) per common share - basic and diluted	$	1.94		$	(0.99	)

Dividend per common share	$	0.60		$	0.57

Average number of common shares outstanding - basic and diluted		12,884,327			12,926,670

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

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three months ended September 30,
	2012			2011
				(As Adjusted)

Net income (loss)	$	8,321,244		$	(5,574,490	)

OTHER COMPREHENSIVE INCOME (LOSS)
Change in unrealized holding gains (losses) on investment securities, net of deferred income tax expense (benefit) of $6,150,961 and ($718,594)		11,423,214			(1,334,523	)

Reclassification adjustment for realized investment losses included in net income (loss), net of income tax benefit of $61,729 and $1,232,589		114,639			2,289,092

Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit cost, net of deferred income tax expense of $244,506 and $104,508:
Net actuarial loss		540,144			274,790
Prior service credit		(86,061	)		(80,702	)
Total adjustment associated with affiliate's pension and postretirement benefit plans		454,083			194,088

Other comprehensive income		11,991,936			1,148,657

Total comprehensive income (loss)	$	20,313,180		$	(4,425,833	)

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

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Nine months ended September 30,
	2012			2011
				(As Adjusted)

Net income (loss)	$	24,968,508		$	(12,736,663	)

OTHER COMPREHENSIVE INCOME (LOSS)
Change in unrealized holding gains on investment securities, net of deferred income tax expense of $14,089,762 and $5,927,516		26,166,703			11,008,247

Reclassification adjustment for realized investment gains included in net income (loss), net of income tax (expense) of ($2,661,268) and ($2,282,971)		(4,942,357	)		(4,239,804	)

Change in unrealized holding gains on fixed maturity securities with "other-than-temporary" impairment, net of deferred income tax expense of $0 and $7,507		-			13,941

Reclassification adjustment for realized investment losses from fixed maturity securities with "other-than-temporary" impairment included in net income (loss), net of income tax benefit of $0 and $30,106		-			55,911

Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit cost, net of deferred income tax expense of $712,490 and $289,960:
Net actuarial loss		1,581,377			775,532
Prior service credit		(258,184	)		(237,036	)
Total adjustment associated with affiliate's pension and postretirement benefit plans		1,323,193			538,496

Other comprehensive income		22,547,539			7,376,791

Total comprehensive income (loss)	$	47,516,047		$	(5,359,872	)

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

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended September 30,
	2012			2011
				(As Adjusted)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	24,968,508		$	(12,736,663	)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Losses and settlement expenses (affiliated $1,188,617 and $43,741,695)		2,254,191			45,183,770
Unearned premiums (affiliated $31,622,415 and $28,114,206)		31,700,276			28,157,369
Other policyholders' funds due to affilitate		1,542,349			(2,455,827	)
Amounts due affiliate to settle inter-company transaction balances		(26,873,622	)		4,970,096
Pension and postretirement benefits payable to affiliate		5,327,016			3,186,967
Reinsurance receivables due from affiliate		3,292,488			(12,300,286	)
Prepaid reinsurance premiums due from affiliate		3,222,174			(869,715	)
Commission payable (affiliated $693,173 and ($6,472,164))		655,488			(6,465,019	)
Interest payable to affiliate		(225,000	)		(225,000	)
Deferred policy acquisition costs (affiliated ($5,868,462) and ($4,509,030))		(5,884,488	)		(4,517,735	)
Stock-based compensation payable to affiliate		176,470			150,802
Accrued investment income		(291,345	)		122,878
Accrued income tax:
Current		5,134,114			(8,260,853	)
Deferred		(381,871	)		(1,930,001	)
Realized investment gains		(7,603,625	)		(6,436,758	)
Accounts receivable		(1,206,758	)		364,094
Amortization of premium/discount on fixed maturity securities		(386,038	)		(581,134	)
Other, net (affiliated ($3,805,017) and ($3,095,097))		(2,424,711	)		(3,254,620	)
Total adjustments to reconcile net income (loss) to cash provided by operating activities		8,027,108			34,839,028
Net cash provided by operating activities	$	32,995,616		$	22,102,365

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

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Unaudited)

	Nine months ended September 30,
	2012			2011
				(As Adjusted)
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of fixed maturity securities held-to-maturity	$	-		$	23,627
Purchases of fixed maturity securities available-for-sale		(184,246,071	)		(161,203,068	)
Disposals of fixed maturity securities available-for-sale		178,582,941			183,498,684
Purchases of equity securities available-for-sale		(75,820,766	)		(60,685,974	)
Disposals of equity securities available-for-sale		63,185,706			54,102,743
Disposals of other long-term investments		4,872			11,475
Net purchases of short-term investments		(7,412,448	)		(29,640,975	)
Net cash used in investing activities		(25,705,766	)		(13,893,488	)

CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock through affilate's stock option plans		306,431			875,186
Excess tax benefit associated with affilate's stock option plans		(2,190	)		6,622
Repurchase of common stock		-			(1,849,896	)
Dividends paid to stockholders (affiliated ($4,708,710) and ($4,473,276))		(7,731,673	)		(7,367,209	)
Net cash used in financing activities		(7,427,432	)		(8,335,297	)

NET DECREASE IN CASH		(137,582	)		(126,420	)
Cash at the beginning of the year		255,042			491,994

Cash at the end of the quarter	$	117,460		$	365,574

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

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 majority 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, 2011 has been derived from the audited financial statements at that date; however, certain amounts have been adjusted as discussed below. The December 31, 2011 consolidated balance sheet does not include all of the information and notes required by GAAP for complete financial statements.

Table of Contents

Certain amounts previously reported in the prior year’s consolidated financial statements have been reclassified or adjusted to conform to current year presentation. Most notable is a retrospective adjustment resulting from adoption of new accounting guidance related to deferred policy acquisition costs (see note 12 to these interim consolidated financial statements). The following tables provide a summary of the adjusted financial information.

	December 31, 2011
	As						Effect
	previously			As			of
	reported			adjusted			change
Balance Sheet
Deferred policy acquisition costs	$	40,738,565		$	30,849,717		$	(9,888,848	)
Deferred income taxes		3,249,821			6,710,919			3,461,098
Total assets		1,230,458,912			1,224,031,162			(6,427,750	)
Retained earnings		230,241,612			223,813,862			(6,427,750	)
Total stockholders' equity		358,768,345			352,340,595			(6,427,750	)
Total liabilities and stockholders' equity		1,230,458,912			1,224,031,162			(6,427,750	)

	Three months ended September 30, 2011
	As						Effect
	previously			As			of
	reported			adjusted			change
Income Statement
Amortization of deferred policy acquisition costs	$	23,284,182		$	19,671,238		$	(3,612,944	)
Other underwriting expenses		6,670,535			12,484,106			5,813,571
Loss before income tax benefit		(8,005,796	)		(10,206,423	)		(2,200,627	)
Income tax benefit		(3,861,713	)		(4,631,933	)		(770,220	)
Net loss		(4,144,083	)		(5,574,490	)		(1,430,407	)
Net loss per common share, basic and diluted		(0.32	)		(0.43	)		(0.11	)

	Nine months ended September 30, 2011
	As						Effect
	previously			As			of
	reported			adjusted			change
Income Statement
Amortization of deferred policy acquisition costs	$	70,940,126		$	56,342,429		$	(14,597,697	)
Other underwriting expenses		24,926,971			41,574,993			16,648,022
Loss before income tax benefit		(22,663,208	)		(24,713,533	)		(2,050,325	)
Income tax benefit		(11,259,256	)		(11,976,870	)		(717,614	)
Net loss		(11,403,952	)		(12,736,663	)		(1,332,711	)
Net loss per common share, basic and diluted		(0.88	)		(0.99	)		(0.11	)

In reading these financial statements, reference should be made to the Company’s 2011 Form 10-K or the 2011 Annual Report to Stockholders for more detailed footnote information.

2.	TRANSACTIONS WITH AFFILIATES

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

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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, 2012 and 2011 is presented below. The classification of the assumed and ceded reinsurance amounts between affiliates and nonaffiliates is based on the participants in the underlying reinsurance agreements, and is intended to provide a better understanding of the actual source of the reinsurance activities. This presentation differs from the classification used in the consolidated financial statements, where “affiliated balances” represent the net amount of all transactions flowing through the pooling and quota share agreements with Employers Mutual.

	Three months ended September 30, 2012
	Property and
	casualty
	insurance			Reinsurance			Total
Premiums written
Direct	$	107,128,385		$	-		$	107,128,385
Assumed from nonaffiliates		667,712			42,867,793			43,535,505
Assumed from affiliates		118,248,220			-			118,248,220
Ceded to nonaffiliates		(7,055,681	)		(508,871	)		(7,564,552	)
Ceded to affiliates		(107,128,385	)		(4,235,892	)		(111,364,277	)
Net premiums written	$	111,860,251		$	38,123,030		$	149,983,281

Premiums earned
Direct	$	84,547,817		$	-		$	84,547,817
Assumed from nonaffiliates		578,239			36,033,984			36,612,223
Assumed from affiliates		96,432,201			-			96,432,201
Ceded to nonaffiliates		(5,950,717	)		(1,313,028	)		(7,263,745	)
Ceded to affiliates		(84,547,817	)		(4,235,892	)		(88,783,709	)
Net premiums earned	$	91,059,723		$	30,485,064		$	121,544,787

Losses and settlement expenses incurred
Direct	$	43,128,073		$	-		$	43,128,073
Assumed from nonaffiliates		518,821			24,086,891			24,605,712
Assumed from affiliates		56,806,810			231,755			57,038,565
Ceded to nonaffiliates		(1,165,115	)		(1,338,008	)		(2,503,123	)
Ceded to affiliates		(43,128,073	)		183,487			(42,944,586	)
Net losses and settlement expenses incurred	$	56,160,516		$	23,164,125		$	79,324,641

Table of Contents

	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 Contents

	Nine months ended September 30, 2012
	Property and
	casualty
	insurance			Reinsurance			Total
Premiums written
Direct	$	272,372,079		$	-		$	272,372,079
Assumed from nonaffiliates (1)		1,655,504			92,513,300			94,168,804
Assumed from affiliates		309,781,430			-			309,781,430
Ceded to nonaffiliates		(17,170,688	)		(1,394,989	)		(18,565,677	)
Ceded to affiliates (1)		(272,372,079	)		(9,111,831	)		(281,483,910	)
Net premiums written	$	294,266,246		$	82,006,480		$	376,272,726

Premiums earned
Direct	$	242,803,733		$	-		$	242,803,733
Assumed from nonaffiliates		1,537,248			91,395,310			92,932,558
Assumed from affiliates		279,542,128			-			279,542,128
Ceded to nonaffiliates		(17,162,978	)		(4,624,874	)		(21,787,852	)
Ceded to affiliates		(242,803,733	)		(9,111,831	)		(251,915,564	)
Net premiums earned	$	263,916,398		$	77,658,605		$	341,575,003

Losses and settlement expenses incurred
Direct	$	144,326,923		$	-		$	144,326,923
Assumed from nonaffiliates		1,225,178			57,923,059			59,148,237
Assumed from affiliates		182,457,292			651,939			183,109,231
Ceded to nonaffiliates		(4,883,317	)		(4,943,552	)		(9,826,869	)
Ceded to affiliates		(144,326,923	)		534,282			(143,792,641	)
Net losses and settlement expenses incurred	$	178,799,153		$	54,165,728		$	232,964,881

Table of Contents

	Nine months ended September 30, 2011
	Property and
	casualty
	insurance			Reinsurance			Total
Premiums written
Direct	$	236,464,970		$	-		$	236,464,970
Assumed from nonaffiliates (2)		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 (2)		(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 a $3,405,866 negative portfolio adjustment related to the January 1, 2012 cancellation of a large pro rata account. Ten percent of this amount ($340,587) is included in the corresponding “ceded to affiliates” amounts in accordance with the terms of the excess of loss reinsurance agreement with Employers Mutual.

(2)

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 Mutual Reinsurance Bureau underwriting association (MRB). Ten percent of this amount ($102,288) is included in the corresponding “ceded to affiliates” amounts in accordance with the terms of the excess of loss reinsurance agreement with Employers Mutual.

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 initiated by Employers Mutual, 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.

Table of Contents

“Ceded to nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of the amounts ceded to nonaffiliated reinsurance companies in accordance with the terms of the reinsurance agreements providing 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 “fronting” activities initiated 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 this line represents amounts ceded to Employers Mutual under the terms of the excess of loss reinsurance agreement.

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
Three months ended	casualty						Parent
September 30, 2012	insurance			Reinsurance			company			Consolidated
Premiums earned	$	91,059,723		$	30,485,064		$	-		$	121,544,787

Underwriting gain (loss)		1,155,505			(290,533	)		-			864,972
Net investment income		8,000,165			2,970,731			(1,983	)		10,968,913
Realized investment losses		(82,254	)		(94,114	)		-			(176,368	)
Other income		224,485			341			-			224,826
Interest expense		225,000			-			-			225,000
Other expenses		211,601			469,379			226,007			906,987
Income (loss) before income tax expense (benefit)	$	8,861,300		$	2,117,046		$	(227,990	)	$	10,750,356

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

Underwriting loss		(17,257,081	)		(556,019	)		-			(17,813,100	)
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)	$	(11,995,136	)	$	2,100,032		$	(311,319	)	$	(10,206,423	)

Table of Contents

	Property and
Nine months ended	casualty					Parent
September 30, 2012	insurance			Reinsurance		company			Consolidated
Premiums earned	$	263,916,398		$	77,658,605	$	-		$	341,575,003

Underwriting profit (loss)		(12,335,954	)		6,245,449		-			(6,090,505	)
Net investment income		24,314,494			8,965,935		(6,039	)		33,274,390
Realized investment gains		7,069,647			533,978		-			7,603,625
Other income		686,234			341		-			686,575
Interest expense		675,000			-		-			675,000
Other expenses		609,041			96,829		956,376			1,662,246
Income (loss) before income tax expense (benefit)	$	18,450,380		$	15,648,874	$	(962,415	)	$	33,136,839

Assets	$	942,781,682		$	346,846,279	$	392,673,846		$	1,682,301,807
Eliminations		-			-		(385,200,484	)		(385,200,484	)
Reclassifications		(6,194,327	)		-		(5,649	)		(6,199,976	)
Net assets	$	936,587,355		$	346,846,279	$	7,467,713		$	1,290,901,347

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

Underwriting loss		(44,148,955	)		(19,716,285	)		-			(63,865,240	)
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	$	(14,282,586	)	$	(9,433,098	)	$	(997,849	)	$	(24,713,533	)

Year ended December 31, 2011
Assets	$	894,566,764		$	325,952,038		$	352,625,304		$	1,573,144,106
Eliminations		-			-			(349,112,944	)		(349,112,944	)
Net assets	$	894,566,764		$	325,952,038		$	3,512,360		$	1,224,031,162

Table of Contents

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, 2012 and 2011, by line of business.

	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Property and casualty insurance segment
Commercial lines:
Automobile	$	19,376,448	$	17,191,989	$	56,285,845	$	49,847,697
Property		19,759,640		17,703,212		56,847,261		50,957,255
Workers' compensation		19,145,924		17,596,662

EMC Insurance Group (EMCI)

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