News Column

EMC Insurance Group Inc. Reports 2014 Second Quarter and Six Month Results

August 23, 2014



By a News Reporter-Staff News Editor at Investment Weekly News -- EMC Insurance Group Inc. (NASDAQ:EMCI): Second Quarter Ended June 30, 2014Operating Loss Per Share - $0.04Net Income Per Share - $0.08Net Realized Investment Gains Per Share - $0.11Catastrophe and Storm Losses Per Share - $1.35Large Losses Per Share - $0.48GAAP Combined Ratio - 109.6 percent Six Month Ended June 30, 2014Operating Income Per Share - $0.69Net Income Per Share - $0.87Net Realized Investment Gains Per Share - $0.17Catastrophe and Storm Losses Per Share - $1.71Large Losses Per Share - $0.68GAAP Combined Ratio - 103.9 percent 2014 Operating Income Guidance - $2.00 to $2.25 per share EMC Insurance Group Inc. (NASDAQ OMX/GS:EMCI) reported an operating loss of $509,000 ($0.04 per share) for the second quarter ended June 30, 2014, compared to operating income of $6,098,000 ($0.47 per share) for the second quarter of 20131. For the six months ended June 30, 2014, the Company reported operating income of $9,266,000 ($0.69 per share), compared to $18,637,000 ($1.43 per share) for the same period in 2013.

Net income, including realized investment gains and losses, totaled $1,014,000 ($0.08 per share) for the second quarter of 2014, compared to $6,212,000 ($0.48 per share) for the second quarter of 2013. For the six months ended June 30, 2014, the Company reported net income of $11,609,000 ($0.87 per share), compared to $20,485,000 ($1.58 per share) for the same period in 2013.

The Company's GAAP combined ratio was 109.6 percent in the second quarter of 2014, compared to 102.2 percent in the second quarter of 2013. For the first six months of 2014, the Company's GAAP combined ratio was 103.9 percent, compared to 98.1 percent in 2013.

"Second quarter operating results were impacted by higher than anticipated catastrophe and storm losses," stated President and Chief Executive Officer Bruce G. Kelley. "The frequency of convective storms was down for the first six months of the year compared to recent averages; however, storms during the second quarter happened to strike areas in the Midwest where we have sizable exposures. Improved premium rate adequacy achieved over the past several years reduced the impact that these storms otherwise would have had on our results," continued Kelley.

Kelley went on to say, "The relatively high loss and settlement expense ratio reported by the reinsurance segment in the second quarter, coupled with the exceptionally low ratio reported in the second quarter of 2013, was responsible for much of the increase in the combined ratio for the quarter."

Premiums earned increased 5.3 percent to $133,952,000 for the second quarter of 2014, from $127,189,000 in the second quarter of 2013. In the property and casualty insurance segment, premiums earned increased 5.8 percent, with the majority of the increase attributable to rate level increases on renewal business, growth in insured exposures and an increase in retained policies. In the reinsurance segment, premiums earned increased 3.6 percent, reflecting growth in specialty casualty and marine business. Premium growth was limited by an extension of the renewal date of two large facility contracts from May 1 to July 1, and rate level declines on catastrophe excess of loss business. For the first six months of 2014, premiums earned increased 7.8 percent (7.5 percent in the property and casualty insurance segment and 8.9 percent in the reinsurance segment).

Catastrophe and storm losses totaled $27,945,000 ($1.35 per share after tax) in the second quarter of 2014, compared to $21,349,000 ($1.06 per share after tax) in the second quarter of 2013. Second quarter 2014 catastrophe and storm losses accounted for 20.9 percentage points of the combined ratio, which is above the Company's most recent 10-year average of 18.0 percentage points for this period and the 16.8 percentage points experienced in the second quarter of 2013. For the first six months of 2014, catastrophe and storm losses totaled $35,357,000 ($1.71 per share after tax), compared to $26,746,000 ($1.34 per share after tax) in 2013. On a segment basis, catastrophe and storm losses amounted to $21,465,000 ($1.04 per share after tax) and $28,437,000 ($1.37 per share after tax) in the property and casualty insurance segment, and $6,480,000 ($0.31 per share after tax) and $6,920,000 ($0.34 per share after tax) in the reinsurance segment, for the three months and six months ended June 30, 2014, respectively.

The Company reported $6,643,000 ($0.32 per share after tax) of favorable development on prior years' reserves during the second quarter of 2014, compared to $2,063,000 ($0.10 per share after tax) in the second quarter of 2013. For the first six months of 2014, favorable development totaled $9,231,000 ($0.45 per share after tax), compared to $6,319,000 ($0.32 per share after tax) in 2013. Development amounts can vary significantly from quarter to quarter and year to year depending on a number of factors, including the number of claims settled and the settlement terms, and should therefore not be considered a reliable factor in assessing the adequacy of the Company's carried reserves. The most recent actuarial analysis of the Company's carried reserves indicates that carried reserves remain within the top quartile of the range of reasonable reserves.

Large losses (which the Company defines as losses greater than $500,000 for the EMC Insurance Companies pool, excluding catastrophe and storm losses) increased to $9,913,000 ($0.48 per share after tax) in the second quarter of 2014 from $6,548,000 ($0.33 per share after tax) in the second quarter of 2013. For the first six months of 2014, large losses increased to $14,109,000 ($0.68 per share after tax) from $9,483,000 ($0.47 per share after tax) in 2013.

Results for the second quarter and first six months of 2014 reflect a significant reduction in the amount of net periodic pension and postretirement benefit costs allocated to the Company. Net periodic pension benefit cost declined to $196,000 and $340,000 for the three and six months ended June 30, 2014, compared to $725,000 and $1,507,000 for the same periods in 2013. This decline reflects an increase in the expected return on plan assets due to growth of the plan assets and a decline in the amount of net actuarial loss amortized into expense. Net periodic postretirement benefit cost changed significantly as a result of the plan amendment that was announced in the fourth quarter of 2013. The Company recognized net periodic postretirement benefit income of $771,000 and $1,542,000 for the three and six months ended June 30, 2014, compared to net periodic postretirement benefit expense of $728,000 and $1,456,000 in the same periods in 2013. The plan amendment created a large prior service credit that is being amortized into expense over 10 years. In addition, the service cost and interest cost components of the revised plan's net periodic benefit cost are significantly lower than those of the prior plan.

Net investment income increased 0.3 percent and 6.7 percent to $11,076,000 and $22,931,000 for the second quarter and first six months of 2014, from $11,040,000 and $21,483,000 for the same periods in 2013. These increases reflect a higher average invested balance in fixed maturity securities and an increase in dividend income; however, approximately $442,000 (2.1 percentage points) of the increase for the first six months of 2014 resulted from the early payoff of a commercial mortgage-backed security during the first quarter of 2014 that was purchased at a significant discount to par value, which accelerated the accretion of the discount to par value and therefore increased investment income. The investment income amounts reported for the second quarter and first six months of 2013 included $201,000 of funds received from a litigation settlement on one security. Excluding this amount from the calculations, the increases in investment income would have been 2.2 percent and 7.7 percent, respectively.

Net realized investment gains totaled $1,523,000 ($0.11 per share) and $2,343,000 ($0.17 per share) for the second quarter and first six months of 2014, compared to $114,000 ($0.01 per share) and $1,848,000 ($0.14 per share) for the same periods in 2013. During the first quarter of 2014, the Company invested in a limited partnership that is designed to help protect the Company from a sudden and significant decline in the value of its equity portfolio. Included in the net realized investment gains reported for the second quarter and first six months of 2014, are $533,000 and $772,000 of net realized investment losses attributed to the decline in the carrying value of this limited partnership.

At June 30, 2014, consolidated assets totaled $1.4 billion, including $1.3 billion in the investment portfolio, and stockholders' equity totaled $486.6 million, an increase of 6.9 percent from December 31, 2013. Book value of the Company's stock increased 5.4 percent to $36.05 per share, from $34.21 per share at December 31, 2013. Book value excluding accumulated other comprehensive income increased to $30.18 per share from $29.78 per share at December 31, 2013.

On July 21, 2014, management announced that, based on actual results for the first six months of the year and projections for the remainder of the year, it was revising its 2014 operating income guidance to a range of $2.00 to $2.25 per share. This guidance is based on a projected GAAP combined ratio of 101.0 percent and a mid-single digit increase in investment income. The projected GAAP combined ratio has a load of 11.2 percentage points for catastrophe and storm losses.

Keywords for this news article include: Industry, Financial Companies, Investment and Finance, EMC Insurance Group Inc., Property and Casualty Insurance Companies.

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Source: Investment Weekly News


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