Des Moines, IA -(BusinessWire)- EMC Insurance Group Inc. (Nasdaq:EMCI) (the “Company”) today reported an operating loss of $0.14 per share for the second quarter ended June 30, 2012, compared to an operating loss of $1.08 per share for the second quarter of 20111. For the six months ended June 30, 2012, the Company reported operating income of $0.90 per share, compared to an operating loss of $1.05 per share for the same period in 2011.
Second Quarter Ended June 30, 2012
- Operating Loss Per Share – $0.14
- Net Loss Per Share – $0.20
- Net Realized Investment Losses Per Share – $0.06
- Catastrophe Losses Per Share – $1.25
- Large Losses Per Share – $0.31
- GAAP Combined Ratio – 113.9 percent
Six Months Ended June 30, 2012
- Operating Income Per Share – $0.90
- Net Income Per Share – $1.29
- Net Realized Investment Gains Per Share – $0.39
- Catastrophe Losses Per Share – $1.74
- Large Losses Per Share – $0.63
- GAAP Combined Ratio – 103.2 percent
Net loss, including realized investment gains and losses, totaled $2,576,000 ($0.20 per share) for the second quarter of 2012, compared to a net loss of $12,902,000 ($1.00 per share) for the second quarter of 2011. For the six months ended June 30, 2012, the Company reported net income of $16,647,000 ($1.29 per share), compared to a net loss of $7,162,000 ($0.55 per share) for the same period in 2011.
“We have expended a great deal of time and resources into implementing much needed rate level increases in the commercial lines of business during the first six months of the year, and those efforts have been successful. Unfortunately, the positive impact those rate increases had on second quarter operating results was overshadowed by a high level of catastrophe losses and a decline in the amount of favorable development experienced on prior years’ reserves,” stated Bruce G. Kelley, President and Chief Executive Officer. “We continue to believe that the persistent level of above-average catastrophe losses is an aberration attributed to an active weather cycle, and does not reflect a permanent change in weather patterns. Future operating results should benefit from the rate level increases we are implementing now.”
Premiums earned increased 9.3 percent to $110,270,000 for the second quarter of 2012, from $100,932,000 for the second quarter of 2011. The property and casualty insurance segment reported a 12.0 percent increase in premiums earned during the quarter, while the reinsurance segment reported a 0.5 percent decline. For the first six months of 2012, premiums earned increased 11.6 percent.
The increase in premium income in the property and casualty insurance segment is the result of several factors, including rate level increases in all lines of business, growth in insured exposures, and strong retention of policies. The decline in the reinsurance segment is attributed to a negative “earned but not reported” (EBNR) premium adjustment recorded during the second quarter on a new offshore energy and liability proportional account that Employers Mutual began participating in effective January 1. During the first quarter, the reinsurance segment recognized $3,975,000 of EBNR premiums on this account. However, based on more refined actuarial projections, and the fact that the 2012 earnings stream on this account is somewhat back-loaded because it is a new account and the majority of the underlying policies are expected to have effective dates in the months of June and July, a total of $990,000 of EBNR premiums was recognized on this account for the six months ended June 30. Accordingly, premium income for the second quarter reflects $2,985,000 of negative EBNR premiums associated with this account. Corresponding decreases in “incurred but not reported” reserves, commission expense reserves and the cost of the excess of loss reinsurance protection were also recorded, resulting in an after-tax impact on second quarter results of less than $100,000. Premium income on this account is currently projected to approximate $8,000,000 for calendar year 2012.
Catastrophe losses totaled $24,847,000 ($1.25 per share after tax) in the second quarter of 2012, compared to $41,065,000 ($2.06 per share after tax) in the second quarter of 2011. For the first six months of 2012, catastrophe losses totaled $34,550,000 ($1.74 per share after taxes), compared to $50,469,000 ($2.53 per share after tax) in 2011. On a segment basis, catastrophe losses amounted to $25,327,000 in the property and casualty insurance segment and $9,223,000 in the reinsurance segment during the first six months of 2012.
“For the Company, the second quarter of any given year has the potential for significant catastrophe losses due to the changing of the seasons. This is especially true in the Midwest, where we conduct the majority of our business, because the change in seasons is often the catalyst for wind and hail storms, and tornados,” continued Kelley. “Although catastrophe losses in the second quarter of 2012 were significantly less than the unprecedented amount experienced in the second quarter of 2011, they were substantially higher than the long-term average. During the second quarter of 2012, catastrophe losses accounted for 22.5 percentage points of the combined ratio. Our most recent 10-year average for the second quarter, which includes the record catastrophe losses experienced during the second quarter of 2011, is 16.6 percentage points of the combined ratio.”
The Company experienced $1,399,000 ($0.07 per share after tax) of favorable development on prior years’ reserves during the second quarter of 2012, compared to $9,190,000 ($0.46 per share after tax) in the second quarter of 2011. For the first six months of 2012, favorable development totaled $17,662,000 ($0.89 per share after tax), compared to $13,097,000 ($0.66 per share after tax) in 2011. 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 a level of adequacy consistent with other recent evaluations.
Large losses (which the Company defines as losses greater than $500,000 for the EMC Insurance Companies’ pool, excluding catastrophe losses) increased to $6,114,000 ($0.31 per share after tax) in the second quarter of 2012 from $4,144,000 ($0.21 per share after tax) in the second quarter of 2011. For the first six months of 2012, large losses increased to $12,439,000 ($0.63 per share after tax) from $8,181,000 ($0.41 per share after tax) in 2011.
Investment income decreased 2.8 percent to $11,149,000 in the second quarter of 2012 from $11,473,000 in the second quarter of 2011. For the first six months of 2012, investment income decreased 5.3 percent to $22,305,000 from $23,552,000 in 2011.
“Investment income continues to decline as a result of the low interest rate environment that has persisted for the past several years,” stated Kelley. “We are actively pursuing ways to minimize the decline in investment income without increasing overall risk, such as the implementation of our new equity strategy, which emphasizes dividend income. Those efforts have been successful, and we are currently projecting that the year-to-year decline in investment income will be less than two percent by the end of the year.”
Net realized investment losses totaled $740,000 ($0.06 per share) for the second quarter of 2012, compared to net realized investment gains of $1,105,000 ($0.09 per share) in 2011. For the first six months of 2012, net realized investment gains totaled $5,057,000 ($0.39 per share), compared to $6,473,000 ($0.50 per share) in 2011.
During the second quarter of 2012, the Company recognized $126,000 ($0.01 per share after tax) of “other-than-temporary” investment impairment losses, compared to $670,000 ($0.03 per share after tax) in the second quarter of 2011. For the first six months of 2012, “other-than-temporary” investment impairment losses totaled $126,000 ($0.01 per share after tax) compared to $916,000 ($0.05 per share after tax) in 2011. These amounts are included in the net realized investment gains/losses disclosed above. The “other-than-temporary” investment impairment losses recognized during the second quarter of 2012 were associated with two equity securities.
The Company’s GAAP combined ratio was 113.9 percent in the second quarter of 2012, compared to 133.5 percent in the second quarter of 2011. For the first six months of 2012, the Company’s GAAP combined ratio was 103.2 percent compared to 123.4 percent in 2011.
At June 30, 2012, consolidated assets totaled $1.2 billion, including $1.1 billion in the investment portfolio, and stockholders’ equity totaled $374.7 million, an increase of 6.4 percent from December 31, 2011. Net book value of the Company’s stock increased to $29.08 per share from $27.37 per share at December 31, 2011. Book value excluding accumulated other comprehensive income increased to $26.14 per share from $25.25 per share at December 31, 2011.
Based on actual results for the first six months of 2012 and management’s expectations for the remainder of the year, management is reaffirming its 2012 operating income guidance in the range of $1.30 to $1.55 per share. This range is based on a projected GAAP combined ratio of 104.9 percent for the year.
As previously disclosed, on November 3, 2011 the Company’s board of directors authorized a new $15 million stock repurchase program. This program became effective immediately and does not have an expiration date. The timing and terms of the purchases are determined by management based on market conditions and are conducted in accordance with the applicable rules of the Securities and Exchange Commission. Common stock repurchased under this new program will be retired by the Company. No shares were repurchased under this new program during the first six months of 2012.
The Company’s parent organization, Employers Mutual Casualty Company, currently has a stock purchase program in place, with about $4.5 million of its $15 million authorization remaining. This program has been dormant and will remain so while the Company’s new repurchase program is active.
The complete earnings release is available here: EMC Insurance Group 2012 Second Quarter Results (PDF)