EMC Insurance Group Inc. Reports 2007 Results and Announces 2008 Guidance

EMC Insurance Group Inc. (Nasdaq:EMCI): Fourth Quarter 2007 Net Income Per Share -- $0.51 Net Operating Income Per Share -- $0.39 GAAP Combined Ratio - 105.2 percent   Year Ended December 31, 2007 Net Income Per Share -- $3.09 Net Operating Income Per Share -- $2.91 GAAP Combined Ratio - 97.6 percent EMC Insurance Group Inc. (Nasdaq:EMCI) today reported fourth quarter operating income of $0.39 per share for the quarter ended December 31, 2007, compared to $0.78 per share for the fourth quarter of 20061. Operating income for the year ended December 31, 2007 was $2.91 per share, compared to $3.70 per share for the same period in 2006. Net income, including realized investment gains/losses, was $7,058,000 ($0.51 per share) for the fourth quarter of 2007 compared to $11,494,000 ($0.84 per share) for the fourth quarter of 2006. Net income for the year ended December 31, 2007 was $42,478,000 ($3.09 per share), compared to $53,547,000 ($3.91 per share) for the same period in 2006. "2007 was another successful year for EMC Insurance Group Inc.,” stated President and CEO Bruce G. Kelley. "We were prepared for the competitive market conditions that we experienced during the year and we successfully executed our operating plan. Our results were negatively impacted by an increase in both large losses and catastrophe and storm losses, but we saw measurable benefits from the enhancements that we have made to our marketing and underwriting capabilities over the past several years. As a result of those enhancements, we are better prepared to respond to the challenges we face in this competitive environment.” Premiums earned decreased 0.5 percent to $102,240,000 for the three months ended December 31, 2007 from $102,756,000 for the same period in 2006. For the year ended December 31, 2007, premiums earned increased 0.4 percent to $393,059,000 from $391,615,000 for the same period in 2006. On an overall basis, premium rate competition increased moderately in the property and casualty insurance marketplace during 2007, resulting in an approximate 4.9 percent reduction in premium rate levels. Market conditions are expected to remain competitive in 2008, which will likely result in a further reduction in premium rate levels. Investment income increased 5.7 percent to $12,587,000 for the fourth quarter and 3.8 percent to $48,482,000 for the year ended December 31, 2007 from $11,904,000 and $46,692,000 for the same periods in 2006, primarily as a result of higher average investment balances. The Company experienced $266,000 ($0.01 per share after tax) of adverse development on prior years’ reserves during the fourth quarter of 2007 compared to $3,438,000 ($0.16 per share after tax) of favorable development in the fourth quarter of 2006. For the year ended December 31, 2007, the Company had favorable development on prior years’ reserves totaling $38,738,000 ($1.83 per share after tax) compared to $41,916,000 ($1.99 per share after tax) for the same period in 2006. "Carried loss and settlement expense reserves were in the upper quarter of the range of actuarial indications at December 31, 2007, which is similar to our position at year-end 2006,” stated President and CEO Bruce G. Kelley. "Much of the favorable reserve development experienced during the past two years has resulted from the final settlement of closed claims, which is a historical trend for the Company. While we expect favorable reserve development to continue in the future, we anticipate the amounts will be somewhat lower than the unusually high levels experienced during the past two years.” Catastrophe and storm losses were $2,040,000 ($0.10 per share after tax) in the fourth quarter of 2007 compared to $1,700,000 ($0.08 per share after tax) in the fourth quarter of 2006. For the year ended December 31, 2007, catastrophe and storm losses totaled $21,514,000 ($1.02 per share after tax) compared to $14,635,000 ($0.69 per share after tax) for the same period in 2006. Included in the amount for the year ended December 31, 2007 is $6,577,000 ($0.31 per share after tax) of losses associated with the Greensburg, Kansas tornado. The Company’s GAAP combined ratio was 105.2 percent in the fourth quarter of 2007 compared to 96.3 percent in the fourth quarter of 2006. For the year ended December 31, 2007, the GAAP combined ratio was 97.6 percent compared to 92.9 percent for the same period in 2006. At December 31, 2007, consolidated assets totaled $1.2 billion, including $1.0 billion in the investment portfolio; stockholders’ equity increased 16.9 percent to $360.4 million; and net book value of the Company’s stock was $26.15 per share, an increase of 16.5 percent from $22.44 per share at December 31, 2006. Management is projecting that 2008 operating income will be within a range of $2.10 per share to $2.35 per share. This estimate is based on a projected GAAP combined ratio of 101.8 percent and management’s expectations of continued rate competition in both the property and casualty insurance marketplace and the reinsurance marketplace. The Company will hold an earnings teleconference call at 11:00 a.m. eastern standard time on February 28, 2008 to allow securities analysts, shareholders and other interested parties the opportunity to hear management discuss the Company’s quarterly and year-end 2007 results, as well as its expectations for 2008. Dial-in information for the call is toll-free 1-877-407-0782 (International: 1-201-689-8567). The event will be archived and available for digital replay through March 13, 2008. The replay access information is toll-free 1-877-660-6853 (International: 1-201-612-7415); passcodes required for playback: account number is 286, conference ID number is 271465. Members of the news media, investors and the general public are invited to access a live webcast of the conference call via http://www.InvestorCalendar.com or the Company’s investor relations page at www.emcinsurance.com. The webcast will be archived and available for replay until May 28, 2008. 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 based on premium volume. 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. Management intends to identify forward-looking statements when using the words "believe”, "expect”, "anticipate”, "estimate”, or similar expressions. Undue reliance should not be placed on these forward-looking statements. ¹The 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, the Company has 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   Property and       Casualty Parent Quarter Ended December 31, 2007   Insurance   Reinsurance   Company   Consolidated Revenues: Premiums earned $ 81,377,154 $ 20,862,508 $ - $ 102,239,662 Investment income, net 9,382,499 3,176,583 27,931 12,587,013 Other income   161,875     -     -     161,875     90,921,528     24,039,091     27,931     114,988,550   Losses and expenses: Losses and settlement expenses 59,561,978 13,851,659 - 73,413,637 Dividends to policyholders 1,452,427 - - 1,452,427 Amortization of deferred policy acquisition costs 19,268,359 4,241,430 - 23,509,789 Other underwriting expenses 8,859,438 306,398 - 9,165,836 Interest expense 193,125 84,044 - 277,169 Other expenses   134,147     38,572     221,172     393,891     89,469,474     18,522,103     221,172     108,212,749   Operating income (loss) before income taxes   1,452,054     5,516,988     (193,241 )   6,775,801   Realized investment losses   2,271,240     220,450     -     2,491,690   Income (loss) before income taxes   3,723,294     5,737,438     (193,241 )   9,267,491   Income tax expense (benefit): Current (968,671 ) 1,234,100 (67,634 ) 197,795 Deferred   1,585,150     426,376     -     2,011,526     616,479     1,660,476     (67,634 )   2,209,321   Net income (loss) $ 3,106,815   $ 4,076,962   $ (125,607 ) $ 7,058,170   Average shares outstanding 13,772,257 Per Share Data: Net income (loss) per share - basic and diluted $ 0.22 $ 0.30 $ (0.01 ) $ 0.51 (Increase) decrease in provision for insured events of prior years (after tax) $ (0.18 ) $ 0.17 $ - $ (0.01 ) Catastrophe and storm losses (after tax) $ (0.11 ) $ 0.01 $ - $ (0.10 ) Dividends per share $ 0.18 Other Information of Interest: Net Written Premiums $ 70,991,975 $ 19,692,097 $ - $ 90,684,072 Increase (decrease) in provision for insured events of prior years $ 3,840,226 $ (3,574,577 ) $ - $ 265,649 Catastrophe and storm losses $ 2,244,945 $ (204,787 ) $ - $ 2,040,158 GAAP Combined Ratio: Loss ratio 73.2 % 66.4 % - 71.8 % Expense ratio   36.3 %   21.8 %   -     33.4 %   109.5 %   88.2 %   -     105.2 %       Property and Casualty Parent Quarter Ended December 31, 2006   Insurance   Reinsurance   Company   Consolidated Revenues: Premiums earned $ 80,985,652 $ 21,770,274 $ - $ 102,755,926 Investment income, net 8,719,294 3,113,867 70,555 11,903,716 Other income   94,412     -     -     94,412     89,799,358     24,884,141     70,555     114,754,054   Losses and expenses: Losses and settlement expenses 49,798,628 14,284,701 - 64,083,329 Dividends to policyholders 2,046,699 - - 2,046,699 Amortization of deferred policy acquisition costs 18,108,742 4,678,254 - 22,786,996 Other underwriting expenses 9,039,959 1,012,619 - 10,052,578 Interest expense 193,125 84,975 - 278,100 Other expenses   181,448     (34,852 )   227,788     374,384     79,368,601     20,025,697     227,788     99,622,086   Operating income (loss) before income taxes   10,430,757     4,858,444     (157,233 )   15,131,968   Realized investment losses   1,093,321     147,576     -     1,240,897   Income (loss) before income taxes   11,524,078     5,006,020     (157,233 )   16,372,865   Income tax expense (benefit): Current 905,373 1,175,422 (55,032 ) 2,025,763 Deferred   2,636,940     215,907     -     2,852,847     3,542,313     1,391,329     (55,032 )   4,878,610   Net income (loss) $ 7,981,765   $ 3,614,691   $ (102,201 ) $ 11,494,255   Average shares outstanding 13,732,573 Per Share Data: Net income (loss) per share - basic and diluted $ 0.58 $ 0.26 $ - $ 0.84 Decrease in provision for insured events of prior years (after tax) $ 0.02 $ 0.14 $ - $ 0.16 Catastrophe and storm losses (after tax) $ (0.08 ) $ - $ - $ (0.08 ) Dividends per share $ 0.17 Other Information of Interest: Net Written Premiums $ 66,302,971 $ 21,326,227 $ - $ 87,629,198 Decrease in provision for insured events of prior years $ (416,821 ) $ (3,020,816 ) $ - $ (3,437,637 ) Catastrophe and storm losses $ 1,633,936 $ 65,754 $ - $ 1,699,690 GAAP Combined Ratio: Loss ratio 61.5 % 65.6 % - 62.4 % Expense ratio   36.0 %   26.2 %   -     33.9 %   97.5 %   91.8 %   -     96.3 %       Property and Casualty Parent Year ended December 31, 2007   Insurance   Reinsurance   Company   Consolidated Revenues: Premiums earned $ 320,836,066 $ 72,223,331 $ - $ 393,059,397 Investment income, net 36,000,281 12,267,193 214,513 48,481,987 Other income   544,422     -     -     544,422     357,380,769     84,490,524     214,513     442,085,806   Losses and expenses: Losses and settlement expenses 199,494,325 48,344,856 - 247,839,181 Dividends to policyholders 7,632,714 - - 7,632,714 Amortization of deferred policy acquisition costs 74,393,683 14,336,552 - 88,730,235 Other underwriting expenses 37,125,716 2,204,290 - 39,330,006 Interest expense 772,500 338,969 - 1,111,469 Other expenses   776,020     519,771     951,510     2,247,301     320,194,958     65,744,438     951,510     386,890,906   Operating income (loss) before income taxes   37,185,811     18,746,086     (736,997 )   55,194,900   Realized investment gains   3,460,933     262,856     -     3,723,789   Income (loss) before income taxes   40,646,744     19,008,942     (736,997 )   58,918,689   Income tax expense (benefit): Current 10,428,903 5,256,005 (257,949 ) 15,426,959 Deferred   1,018,095     (4,400 )   -     1,013,695     11,446,998     5,251,605     (257,949 )   16,440,654   Net income (loss) $ 29,199,746   $ 13,757,337   $ (479,048 ) $ 42,478,035   Average shares outstanding 13,762,663 Per Share Data: Net income (loss) per share - basic and diluted $ 2.12 $ 1.00 $ (0.03 ) $ 3.09 Decrease in provision for insured events of prior years (after tax) $ 1.32 $ 0.51 $ - $ 1.83 Catastrophe and storm losses (after tax) $ (0.98 ) $ (0.04 ) $ - $ (1.02 ) Dividends per share $ 0.69 Book value per share $ 26.15 Effective tax rate 27.9 % Annualized net income as a percent of beg. SH equity 13.8 % Other Information of Interest: Net Written Premiums $ 324,252,764 $ 71,002,733 $ - $ 395,255,497 Decrease in provision for insured events of prior years $ (27,976,811 ) $ (10,761,217 ) $ - $ (38,738,028 ) Catastrophe and storm losses $ 20,731,825 $ 782,375 $ - $ 21,514,200 GAAP Combined Ratio: Loss ratio 62.2 % 66.9 % - 63.1 % Expense ratio   37.1 %   22.9 %   -     34.5 %   99.3 %   89.8 %   -     97.6 %       Property and Casualty Parent Year ended December 31, 2006   Insurance   Reinsurance   Company   Consolidated Revenues: Premiums earned $ 318,416,718 $ 73,198,723 $ - $ 391,615,441 Investment income, net 34,310,739 12,116,726 264,464 46,691,929 Other income   526,617     -     -     526,617     353,254,074     85,315,449     264,464     438,833,987   Losses and expenses: Losses and settlement expenses 178,305,327 50,147,165 - 228,452,492 Dividends to policyholders 8,663,715 - - 8,663,715 Amortization of deferred policy acquisition costs 71,708,560 14,856,471 - 86,565,031 Other underwriting expenses 37,337,648 2,681,846 - 40,019,494 Interest expense 772,500 339,900 - 1,112,400 Other expenses   1,065,324     61,055     781,383     1,907,762     297,853,074     68,086,437     781,383     366,720,894   Operating income (loss) before income taxes   55,401,000     17,229,012     (516,919 )   72,113,093   Realized investment gains   4,026,538     225,751     -     4,252,289   Income (loss) before income taxes   59,427,538     17,454,763     (516,919 )   76,365,382   Income tax expense (benefit): Current 16,907,367 4,696,561 (180,027 ) 21,423,901 Deferred   1,446,249     (51,872 )   -     1,394,377     18,353,616     4,644,689     (180,027 )   22,818,278   Net income (loss) $ 41,073,922   $ 12,810,074   $ (336,892 ) $ 53,547,104   Average shares outstanding 13,710,953 Per Share Data: Net income (loss) per share - basic and diluted $ 3.00 $ 0.93 $ (0.02 ) $ 3.91 Decrease in provision for insured events of prior years (after tax) $ 1.53 $ 0.46 $ - $ 1.99 Catastrophe and storm losses (after tax) $ (0.67 ) $ (0.02 ) $ - $ (0.69 ) Dividends per share $ 0.65 Book value per share $ 22.44 Effective tax rate 29.9 % Annualized net income as a percent of beg. SH equity 20.5 % Other Information of Interest: Net Written Premiums $ 319,984,030 $ 66,268,178 $ - $ 386,252,208 Decrease in provision for insured events of prior years $ (32,255,312 ) $ (9,660,943 ) $ - $ (41,916,255 ) Catastrophe and storm losses $ 14,312,793 $ 322,080 $ - $ 14,634,873 GAAP Combined Ratio: Loss ratio 56.0 % 68.5 % - 58.3 % Expense ratio   37.0 %   24.0 %   -     34.6 %   93.0 %   92.5 %   -     92.9 % CONSOLIDATED BALANCE SHEETS   December 31,   December 31, 2007 2006 ASSETS Investments: Fixed maturities: Securities held-to-maturity, at amortized cost (fair value $688,728 and $5,768,918) $ 636,969 $ 5,679,960 Securities available-for-sale, at fair value (amortized cost $766,462,351 and $706,273,867) 785,253,286 716,927,579 Fixed maturity securities on loan: Securities available-for-sale, at fair value (amortized cost $58,865,232 and $89,841,454) 58,994,666 88,909,477 Equity securities available-for-sale, at fair value (cost $97,847,545 and $77,089,044) 139,427,726 112,527,480 Other long-term investments, at cost 101,988 552,202 Short-term investments, at cost   53,295,310   76,722,652 Total investments 1,037,709,945 1,001,319,350   Balances resulting from related party transactions with Employers Mutual: Reinsurance receivables 33,272,405 37,805,569 Prepaid reinsurance premiums 4,465,836 4,807,822 Deferred policy acquisition costs 34,687,804 33,662,408 Defined benefit retirement plan, prepaid asset 11,451,758 7,836,958 Other assets 2,488,309 2,410,120   Cash 262,963 196,274 Accrued investment income 11,288,005 11,363,814 Accounts receivable (net of allowance for uncollectible accounts of $0 and $0) 81,141 205,046 Income taxes recoverable 3,595,645 1,888,935 Deferred income taxes 1,682,597 12,403,141 Goodwill 941,586 941,586 Securities lending collateral   60,785,148   91,317,719 Total assets $ 1,202,713,142 $ 1,206,158,742   LIABILITIES Balances resulting from related party transactions with Employers Mutual: Losses and settlement expenses $ 551,602,006 $ 548,547,982 Unearned premiums 158,156,683 155,653,799 Other policyholders' funds 8,273,187 7,320,536 Surplus notes payable 25,000,000 36,000,000 Indebtedness to related party 5,918,396 18,621,351 Employee retirement plans 10,518,351 17,700,372 Other liabilities 22,107,379 22,702,661   Securities lending obligation   60,785,148   91,317,719 Total liabilities   842,361,150   897,864,420   STOCKHOLDERS' EQUITY Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding, 13,777,880 shares in 2007 and 13,741,663 shares in 2006 13,777,880 13,741,663 Additional paid-in capital 108,030,228 107,016,563 Accumulated other comprehensive income 42,961,904 24,934,903 Retained earnings   195,581,980   162,601,193 Total stockholders' equity   360,351,992   308,294,322 Total liabilities and stockholders' equity $ 1,202,713,142 $ 1,206,158,742 The Company had total cash and invested assets with a carrying value of $1.0 billion as of December 31, 2007 and December 31, 2006. The following table summarizes the Company's cash and invested assets as of the dates indicated:   December 31, 2007     Percent of   Amortized Fair Total Carrying ($ in thousands) Cost Value Fair Value Value Fixed maturity securities held-to-maturity $ 637 $ 689 0.1 % $ 637 Fixed maturity securities available-for-sale 825,328 844,248 81.4 % 844,248 Equity securities available-for-sale 97,847 139,428 13.4 % 139,428 Cash 263 263 - 263 Short-term investments 53,295 53,295 5.1 % 53,295 Other long-term investments   102   102   -     102 $ 977,472 $ 1,038,025   100.0 % $ 1,037,973   December 31, 2006 Percent of Amortized Fair Total Carrying ($ in thousands) Cost Value Fair Value Value Fixed maturity securities held-to-maturity $ 5,680 $ 5,769 0.6 % $ 5,680 Fixed maturity securities available-for-sale 796,115 805,837 80.4 % 805,837 Equity securities available-for-sale 77,089 112,527 11.2 % 112,527 Cash 196 196 - 196 Short-term investments 76,723 76,723 7.7 % 76,723 Other long-term investments   552   552   0.1 %   552 $ 956,355 $ 1,001,604   100.0 % $ 1,001,515   The amortized cost and estimated fair value of securities held-to-maturity and available-for-sale as of December 31, 2007 are as follows:   Held-to-Maturity Gross Gross Amortized Unrealized Unrealized Estimated ($ in thousands) Cost Gains Losses Fair Value Mortgage-backed securities $ 637 $ 52 $ -   $ 689 Total securities held-to-maturity $ 637 $ 52 $ -   $ 689   Available-for-Sale Gross Gross Amortized Unrealized Unrealized Estimated ($ in thousands) Cost Gains Losses Fair Value U.S. treasury securities $ 4,723 $ 260 $ - 4,983 U.S. government-sponsored agencies 448,849 4,516 13 453,352 Obligations of states and political subdivisions 250,022 9,639 32 259,629 Mortgage-backed securities 10,241 203 13 10,431 Public utility securities 6,003 350 - 6,353 Debt securities issued by foreign governments 6,756 138 - 6,894 Corporate securities   98,734   3,948   76     102,606 Total fixed maturity securities   825,328   19,054   134     844,248   Common stocks 73,847 44,407 686 117,568 Non-redeemable preferred stocks   24,000   240   2,380     21,860 Total equity securities   97,847   44,647   3,066     139,428 Total securities available-for-sale $ 923,175 $ 63,701 $ 3,200   $ 983,676 NET WRITTEN PREMIUMS   Three Months Ended   Twelve Months Ended December 31, 2007 December 31, 2007   Percent of   Percent of Increase/ Increase/ Percent of (Decrease) in Percent of (Decrease) in Net Written Net Written Net Written Net Written Premiums Premiums Premiums Premiums Property and Casualty Insurance Commercial Lines: Automobile 17.9 % 6.8 % 18.3 % 0.6 % Liability 17.4 % 8.7 % 18.3 % 2.6 % Property 14.2 % 2.1 % 15.7 % 0.3 % Workers' Compensation 14.5 % 13.8 % 16.3 % 5.6 % Other 2.2 % 3.6 % 2.1 % (1.0 ) % Total Commercial Lines 66.2 % 7.6 % 70.7 % 2.1 %   Personal Lines: Automobile 6.5 % 1.1 % 6.0 % (3.6 ) % Property 5.5 % 8.8 % 5.1 % (3.1 ) % Liability 0.1 % 9.0 % 0.2 % 3.1 % Total Personal Lines 12.1 % 4.5 % 11.3 % (3.3 ) % Total Property and Casualty Insurance 78.3 % 7.1 % 82.0 % 1.3 %   Reinsurance 21.7 % (7.7 ) % 18.0 % 1.9 % (1 ) Total 100.0 % 3.5 % 100.0 % 1.4 % (1 ) (1) Excludes $3,440,024 negative portfolio adjustment related to the January 1, 2006 reduced participation in the MRB pool.