EMC Insurance Group Inc. Reports 2005 First Quarter Results

EMC Insurance Group Inc. Reports 2005 First Quarter Results

    Business Editors

    DES MOINES, Iowa--(BUSINESS WIRE)--April 27, 2005--

First Quarter 2005; Net Income Per Share -- $0.77 Net Operating Income Per Share -- $0.74 GAAP Combined Ratio -- 94.6%
    EMC Insurance Group Inc. (Nasdaq:EMCI) today reported record operating income of $0.74 per share for the first quarter ended March 31, 2005 compared to operating income of $0.70 per share for the first quarter of 2004(1). Net income, including realized investment gains/losses, was $10,503,000 ($0.77 per share) for the first quarter of 2005 compared to $8,349,000 ($0.72 per share) for the first quarter of 2004.
    "We are pleased to report a record-breaking quarter," stated President and CEO Bruce G. Kelley. "We experienced favorable development on our prior years' reserves and our current overall premium rate level continues to be adequate. However, there are indications of increased rate competition and we must adhere to our goal of achieving profitability over production. Achieving an underwriting profit is always stressed, but has become even more critical in this lingering low interest rate environment."
    Premiums earned increased 21.4 percent to $101,294,000 for the three months ended March 31, 2005 from $83,458,000 for the same period in 2004. The majority of this increase is attributed to a 6.5 percentage point increase in the Company's aggregate participation percentage in the EMC Insurance Companies pooling arrangement that became effective January 1, 2005. As a result of this increase, the Company's aggregate participation in the pooling arrangement increased from 23.5 percent to 30.0 percent. The increase in premiums earned also reflects the impact of rate increases that were implemented in the property and casualty insurance business during 2004. On an overall basis, rate competition increased moderately in the property and casualty insurance marketplace during the first quarter of 2005. However, there were indications of more intense rate competition in select territories and lines of business and the Company expects market conditions to remain competitive for the remainder of the year. The Company will continue to implement rate increases in those lines of business and/or territories where such action is warranted, but the overall level of these rate increases is expected to be smaller than those implemented during 2004.
    Investment income increased 22.8 percent to $8,932,000 for the three months ended March 31, 2005 from $7,274,000 for the same period in 2004. This increase is primarily attributed to additional interest income earned on $108,076,000 of cash received from Employers Mutual Casualty Company in the first quarter of 2005 in connection with the change in the pooling arrangement and the $34,890,000 of net proceeds received in October 2004 from the Company's follow-on stock offering.
    Catastrophe and storm losses more than doubled to $2,625,000 ($0.13 per share after tax) in the first quarter of 2005 from $1,015,000 ($0.06 per share after tax) in the first quarter of 2004. Approximately $382,000 of this increase is associated with the increased participation in the pooling arrangement; however, the majority of the increase is attributed to European storm losses experienced in the reinsurance segment.
    The Company's GAAP combined ratio was 94.6 percent in the first quarter of 2005 compared to 93.8 percent in the first quarter of 2004.
    At March 31, 2005, consolidated assets reached $1.0 billion, including $.9 billion in the investment portfolio; stockholders' equity was $232.7 million; and net book value of the Company's stock was $17.11 per share, an increase of 1.6 percent from $16.84 per share at December 31, 2004.
    The Company has elected to delay the expensing of stock options in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment", until the first quarter of 2006 as permitted by the Securities and Exchange Commission's announcement on April 14, 2005.
    While first quarter results were very strong and well above the range of analysts' estimates, management believes it is premature to adjust 2005 core earnings guidance of $2.15 to $2.40 per share.
    The Company will host an earnings call in conjunction with today's release. The teleconference will begin at 11:00 a.m. eastern daylight time, April 28, 2005. Dial-in information for the call is toll-free 1-877-407-8035. The event will be archived and available for digital replay through May 5, 2005. The replay access information is toll-free 1-877-660-6853; account number 286; conference ID number 148746. A webcast of the teleconference will be archived by Vcall and can be accessed from the Company's investor relations page at www.emcinsurance.com or at www.Vcall.com after 1:00 p.m. eastern daylight time on April 28, 2005. The archived webcast will be available for one year. A transcript of the teleconference will also be available on the Company's website shortly after the completion of the teleconference.
    EMC Insurance Group Inc., the publicly-held insurance holding company of EMC Insurance Companies, owns subsidiaries with operations in property and casualty insurance and reinsurance. EMC Insurance Companies is one of the largest property and casualty entities in Iowa and among the top 60 insurance entities nationwide. For more information, visit our website www.emcinsurance.com.
    The Private Securities Litigation Reform Act of 1995 provides issuers the opportunity to make cautionary statements regarding forward-looking statements. Accordingly, any forward-looking statement contained in this report is based on management's current beliefs, assumptions and expectations of the Company's future performance, taking into account all information currently available to management. These beliefs, assumptions and expectations can change as the result of many possible events or factors, not all of which are known to management. If a change occurs, the Company's business, financial condition, liquidity, results of operations, plans and objectives may vary materially from those expressed in the forward-looking statements. The risks and uncertainties that may affect the actual results of the Company include, but are not limited to the following: catastrophic events and the occurrence of significant severe weather conditions; the adequacy of loss and settlement expense reserves; state and federal legislation and regulations; changes in our industry, interest rates or the performance of financial markets and the general economy; rating agency actions and other risks and uncertainties inherent to the Company's business. When we use the words "believe", "expect", "anticipate", "estimate", or similar expressions, we intend to identify forward-looking statements. You should not place undue reliance on these forward-looking statements.
    (1)The Company uses a non-GAAP financial measure called "operating income" that management believes is useful to investors because it illustrates the performance of our normal, ongoing operations, which is important in understanding and evaluating our financial condition and results of operations. While this measure is consistent with measures utilized by investors to evaluate performance, it is not a substitute for the U.S. GAAP financial measure of net income. Therefore, we have provided a reconciliation of this non-GAAP financial measure to the U.S. GAAP financial measure of net income in the Consolidated Statements of Income schedule contained in this release. Management also uses non-GAAP financial measures for goal setting, determining employee and senior management awards and compensation, and evaluating performance.

CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED

Property and Quarter Ended Casualty Parent March 31, 2005 Insurance Reinsurance Company Consolidated ---------------------------------------------------------------------- Revenues: ----------------- Premiums earned $79,718,272 $21,575,798 $- $101,294,070 Investment income, net... 6,341,481 2,495,277 94,952 8,931,710 Other income... 96,096 - - 96,096 ------------ ------------ ------------ ------------- 86,155,849 24,071,075 94,952 110,321,876 ------------ ------------ ------------ ------------- Losses and expenses: ----------------- Losses and settlement expenses...... 47,130,911 15,712,097 - 62,843,008 Dividends to policyholders. 1,550,859 - - 1,550,859 Amortization of deferred policy acquisition costs......... 18,214,990 4,271,721 - 22,486,711 Other underwriting expenses...... 7,617,038 1,283,038 - 8,900,076 Interest expense....... 193,125 84,975 - 278,100 Other expenses. 171,329 - 234,801 406,130 ------------ ------------ ------------ ------------- 74,878,252 21,351,831 234,801 96,464,884 ------------ ------------ ------------ ------------- Operating income (loss) before income taxes 11,277,597 2,719,244 (139,849) 13,856,992 ------------ ------------ ------------ ------------- Realized investment gains (losses)........ 867,114 (138,672) - 728,442 ------------ ------------ ------------ ------------- Income (loss) before income taxes 12,144,711 2,580,572 (139,849) 14,585,434 ------------ ------------ ------------ ------------- Income tax expense (benefit): ----------------- Current........ 5,426,166 121,308 (69,081) 5,478,393 Deferred....... (1,856,022) 441,481 18,986 (1,395,555) ------------ ------------ ------------ ------------- 3,570,144 562,789 (50,095) 4,082,838 ------------ ------------ ------------ ------------- Net income (loss).... $8,574,567 $2,017,783 $(89,754) $10,502,596 ============ ============ ============ ============= Average shares outstanding..... 13,585,110 Per Share Data: ----------------- Net income per share - basic and diluted... $0.63 $0.15 $(0.01) $0.77 (Increase) decrease in provision for insured events of prior years (after tax)... $0.31 $(0.03) $- $0.28 Catastrophe and storm losses (after tax)... $(0.09) $(0.04) $- $(0.13) Dividends per share......... $0.15 Book value per share......... $17.11 Effective tax rate............ 28.0% Net income as a percent of beg. SH equity (annualized).... 18.4% Other Information of Interest: ----------------- Increase (decrease) in provision for insured events of prior years $(6,593,093) $706,770 $- $(5,886,323) Catastrophe and storm losses.. $1,763,717 $861,585 $- $2,625,302 GAAP Combined Ratio: --------------- Loss ratio... 59.1% 72.8% - 62.0% Expense ratio 34.4% 25.8% - 32.6% ------------ ------------ ------------ ------------- 93.5% 98.6% - 94.6% ============ ============ ============ =============

Property and Quarter Ended Casualty Parent March 31, 2004 Insurance Reinsurance Company Consolidated ---------------------------------------------------------------------- Revenues: ----------------- Premiums earned $61,360,228 $22,098,054 $- $83,458,282 Investment income, net... 4,966,371 2,295,483 12,123 7,273,977 Other income... 76,479 - - 76,479 ------------ ------------ ------------ ------------- 66,403,078 24,393,537 12,123 90,808,738 ------------ ------------ ------------ ------------- Losses and expenses: ----------------- Losses and settlement expenses...... 36,395,142 14,566,035 - 50,961,177 Dividends to policyholders. 768,042 - - 768,042 Amortization of deferred policy acquisition costs......... 13,839,758 4,579,769 - 18,419,527 Other underwriting expenses...... 6,316,937 1,778,384 - 8,095,321 Interest expense....... 193,125 84,975 - 278,100 Other expenses. 180,397 - 143,341 323,738 ------------ ------------ ------------ ------------- 57,693,401 21,009,163 143,341 78,845,905 ------------ ------------ ------------ ------------- Operating income (loss) before income taxes 8,709,677 3,384,374 (131,218) 11,962,833 ------------ ------------ ------------ ------------- Realized investment gains 289,967 110,560 - 400,527 ------------ ------------ ------------ ------------- Income (loss) before income taxes 8,999,644 3,494,934 (131,218) 12,363,360 ------------ ------------ ------------ ------------- Income tax expense (benefit): ----------------- Current........ 3,275,482 787,151 (252,149) 3,810,484 Deferred....... (268,873) 266,430 206,224 203,781 ------------ ------------ ------------ ------------- 3,006,609 1,053,581 (45,925) 4,014,265 ------------ ------------ ------------ ------------- Net income (loss)... $5,993,035 $2,441,353 $(85,293) $8,349,095 ============ ============ ============ ============= Average shares outstanding..... 11,522,643 Per Share Data: ----------------- Net income per share - basic and diluted... $0.52 $0.21 $(0.01) $0.72 Increase in provision for insured events of prior years (after tax)... $(0.19) $(0.02) $- $(0.21) Catastrophe and storm losses (after tax)... $(0.05) $(0.01) $- $(0.06) Dividends per share......... $0.15 Book value per share......... $16.58 Effective tax rate............ 32.5% Net income as a percent of beg. SH equity (annualized).... 18.5% Other Information of Interest: ----------------- Increase in provision for insured events of prior years $(3,424,903) $(364,748) $- $(3,789,651) Catastrophe and storm losses.. $870,174 $144,543 $- $1,014,717 GAAP Combined Ratio: --------------- Loss ratio... 59.3% 65.9% - 61.1% Expense ratio 34.1% 28.8% - 32.7% ------------ ------------ ------------ ------------- 93.4% 94.7% - 93.8% ============ ============ ============ =============

NET WRITTEN PREMIUMS Percent of Increase/ Percent of (Decrease) Net in Net Written Written Premiums(a) Premiums(a) ------------ ------------ Property and Casualty Insurance Commercial Lines: --------------- Automobile... 18.5% 2.7% Liability.... 16.9% 7.1% Property..... 14.0% -1.7% Workers' Compensation 14.2% -3.1% Other........ 1.6% 30.4% ------------ Total..... 65.2% 0.4%

Personal Lines: --------------- Automobile... 7.8% -13.3% Property..... 4.9% -5.5% Liability.... 0.2% 7.0% ------------ Total...... 12.9% -10.3%

Reinsurance...... 21.9% -13.3% ------------ Total....... 100.0% ============

(a) Excludes portfolio adjustment of $29,630,612 related to the change in the Company's aggregate participation in the pooling arrangement.

CONSOLIDATED BALANCE SHEETS - UNAUDITED March 31, December 31, 2005 2004 ----------------------------------------------------- -------------- ASSETS Investments: Fixed maturities: Securities held -to-maturity, at amortized cost (fair value $17,720,250 and $16,908,726)... $16,893,257 $15,895,607 Securities available-for-sale, at fair value (amortized cost $693,107,458 and $541,401,950). 709,388,705 565,000,931 Fixed maturity securities on loan: Securities held-to-maturity, at amortized cost (fair value $3,299,513 and $13,684,880).... 3,164,466 13,310,264 Securities available-for-sale, at fair value (amortized cost $1,366,976 and $54,389,046).... 1,524,960 54,653,472 Equity securities available-for- sale, at fair value (cost $60,570,541 and $59,589,434)..... 79,854,556 78,692,893 Other long-term investments, at cost............................. 5,541,923 5,550,093 Short-term investments, at cost... 85,339,244 46,238,853 ---------------- -------------- Total investments......... 901,707,111 779,342,113 Balances resulting from related party transactions with Employers Mutual:............................ Reinsurance receivables......... 33,196,375 26,316,358 Prepaid reinsurance premiums.... 4,768,035 3,682,676 Deferred policy acquisition costs.......................... 33,668,539 27,940,583 Defined benefit retirement plan, prepaid asset.................. 2,819,822 2,684,463 Other assets.................... 9,572,170 1,877,564 Cash................................ 118,753 61,088 Accrued investment income........... 8,341,383 8,726,292 Accounts receivable (net of allowance for uncollectible accounts of $0 and $0)............. 201,605 216,836 Income taxes recoverable............ - 3,399,485 Deferred income taxes............... 13,435,017 9,504,193 Goodwill, at cost less accumulated amortization of $2,616,234 and $2,616,234......................... 941,586 941,586 Securities lending collateral....... 5,012,693 70,122,695 ---------------- -------------- Total assets................... $1,013,783,089 $934,815,932 ---------------- --------------

LIABILITIES Balances resulting from related party transactions with Employers Mutual: Losses and settlement expenses.. $520,249,140 $429,677,302 Unearned premiums............... 158,695,371 131,589,365 Other policyholders' funds...... 3,977,424 2,825,809 Surplus notes payable........... 36,000,000 36,000,000 Indebtedness to related party... 1,889,490 6,058,848 Employee retirement plans....... 12,716,691 9,764,406 Other liabilities............... 38,326,255 20,304,475 Income taxes payable................ 4,265,930 - Securities lending obligation....... 5,012,693 70,122,695 ---------------- -------------- Total liabilities.............. 781,132,994 706,342,900 ---------------- -------------- STOCKHOLDERS' EQUITY Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding 13,595,398 shares in 2005 and 13,568,945 shares in 2004..................... 13,595,398 13,568,945 Additional paid-in capital.......... 103,969,027 103,467,293 Accumulated other comprehensive income............................. 23,220,109 27,928,463 Retained earnings................... 91,865,561 83,508,331 ---------------- -------------- Total stockholders' equity..... 232,650,095 228,473,032 ---------------- -------------- Total liabilities and stockholders' equity............................. $1,013,783,089 $934,815,932 ---------------- --------------

The Company had total cash and invested assets with a carrying value of $901.8 million and $779.4 million as of March 31, 2005 and December 31,2004, respectively. The following table summarizes the Company's cash and invested assets as of the dates indicated:

($ in thousands) Percent of Amortized Fair Total at Carrying March 31, 2005 Cost Value Fair Value Value -------------------------- ---------- ---------- ---------- ---------- Fixed maturities held-to- maturity................. $20,058 $21,020 2.3% $20,058 Fixed maturities available-for-sale....... 694,474 710,914 78.8% 710,914 Equity securities available-for-sale....... 60,571 79,855 8.8% 79,855 Cash...................... 119 119 - 119 Short-term investments.... 85,339 85,339 9.5% 85,339 Other long-term investments.............. 5,542 5,542 0.6% 5,542 ---------- ---------- ---------- ---------- $866,103 $902,789 100.0% $901,827 ========== ========== ========== ==========

Percent of Amortized Fair Total at Carrying December 31, 2004 Cost Value Fair Value Value -------------------------- ---------- ---------- ---------- ---------- Fixed maturities held-to- maturity................. $29,206 $30,594 3.9% $29,206 Fixed maturities available-for-sale....... 595,791 619,654 79.4% 619,654 Equity securities available-for-sale....... 59,589 78,693 10.1% 78,693 Cash...................... 61 61 - 61 Short-term investments.... 46,239 46,239 5.9% 46,239 Other long-term investments.............. 5,550 5,550 0.7% 5,550 ---------- ---------- ---------- ---------- $736,436 $780,791 100.0% $779,403 ========== ========== ========== ==========

The amortized cost and estimated fair values of fixed maturity and equity securities at March 31, 2005 were as follows:

Held-to-Maturity ------------------------------------------- Gross Gross ($ in thousands) Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ---------- ---------- ---------- ---------- U.S. treasury securities and obligations of U.S. government corporations and agencies............. $19,031 $877 $- $19,908 Mortgage-backed securities 1,027 85 - 1,112 ---------- ---------- ---------- ---------- Total securities held- to-maturity............ $20,058 $962 $- $21,020 ========== ========== ========== ==========

Available-for-Sale ------------------------------------------- Gross Gross ($ in thousands) Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ---------- ---------- ---------- ---------- U.S. treasury securities and obligations of....... U.S. government corporations and agencies $273,088 $138 $1,037 $272,189 Obligations of states and political subdivisions... 255,293 8,660 452 263,501 Mortgage-backed securities 10,893 588 - 11,481 Public utilities.......... 9,196 1,054 - 10,250 Debt securities issued by foreign governments...... 7,145 149 - 7,294 Corporate securities...... 138,859 8,094 754 146,199 ---------- ---------- ---------- ---------- Total fixed maturity securities............. 694,474 18,683 2,243 710,914 ---------- ---------- ---------- ----------

Equity securities Common stocks........... 60,071 19,887 619 79,339 Non-redeemable preferred stocks................. 500 16 - 516 ---------- ---------- ---------- ---------- Total equity securities. 60,571 19,903 619 79,855 ---------- ---------- ---------- ---------- Total securities available-for-sale..... $755,045 $38,586 $2,862 $790,769 ========== ========== ========== ==========

--30--CP/ms*

CONTACT: EMC Insurance Group Inc., Des Moines Investors: Anita Novak, 515-280-2515 or Media: Lisa Hamilton, 515-362-7589

KEYWORD: IOWA INDUSTRY KEYWORD: INSURANCE EARNINGS CONFERENCE CALLS SOURCE: EMC Insurance Group Inc.

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