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EMC Insurance Group Inc. Reports 2014 First Quarter Results and Revises 2014 Operating Income GuidanceDES MOINES, Iowa --(Business Wire)-- EMC Insurance Group Inc. (Nasdaq:EMCI) today reported operating income of $9,775,000 ($0.73 per share) for the first quarter ended March 31, 2014, compared to $12,538,000 ($0.97 per share) for the first quarter of 20131. Net income, including realized investment gains and losses, totaled $10,595,000 ($0.79 per share) for the first quarter of 2014, compared to $14,273,000 ($1.10 per share) for the first quarter of 2013. "The severe winter weather and unusually cold temperatures that persisted across much of the country during January and February caused an increase in losses in the property and casualty insurance segment stemming from frozen pipes, roof collapses, auto accidents, fires, and slip and fall incidents," stated President and Chief Executive Officer Bruce G. Kelley. "However, the improved premium rate adequacy achieved over the past several years helped soften the impact of severe winter weather losses on first quarter results," continued Kelley. Kelley went on to say, "We are pleased with the growth in our net written premiums, which has been driven by above-industry-average rate level increases in our property and casualty insurance segment, and growth in pro rata business in our reinsurance segment. While first quarter operating results are less than our initial projections, we are encouraged by our outlook for the remainder of the year," continued Kelley. The Company's GAAP combined ratio was 98.2 percent in the first quarter of 2014, compared to 93.8 percent in the first quarter of 2013. Premiums earned increased 10.4 percent to $133,080,000 for the first quarter of 2014, from $120,497,000 in the first quarter of 2013. In the property and casualty insurance segment, premiums earned increased 9.2 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 14.5 percent in the first quarter, reflecting a large increase in a pro rata casualty account that was first written in 2013 and an increase in pro rata property business due to an upward revision of total expected ultimate premiums from all accounts, as well as the addition of some new business. Catastrophe and storm losses totaled $7,412,000 ($0.36 per share after tax) in the first quarter of 2014, compared to $5,397,000 ($0.27 per share after tax) in the first quarter of 2013. First quarter 2014 catastrophe and storm losses accounted for 5.6 percentage points of the combined ratio, which is consistent with the Company's most recent 10-year average of 5.5 percentage points for this period, but above the 4.5 percentage points experienced in the first quarter of 2013. On a segment basis, catastrophe and storm losses amounted to $6,972,000 ($0.34 per share after tax) in the property and casualty insurance segment, which includes $3,985,000 ($0.19 per share after tax) of losses attributed to the polar vortex that impacted the eastern United States in early January. Catastrophe and storm losses amounted to $440,000 ($0.02 per share after tax) in the reinsurance segment. The Company reported $2,588,000 ($0.13 per share after tax) of favorable development on prior years' reserves during the first quarter of 2014, compared to $4,256,000 ($0.21 per share after tax) of favorable development in the first quarter of 2013. The majority of the decline in favorable development occurred in the property and casualty insurance segment, and is attributed to an increase in adverse development on open claims that exceeded the increase in favorable development on claims that closed. 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 $4,196,000 ($0.20 per share after tax) in the first quarter of 2014 from $2,935,000 ($0.15 per share after tax) in the first quarter of 2013. Results for the first quarter 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 $144,000 in the first quarter of 2014 from $782,000 in the same period in 2013. This decline reflects an increase in the expected return on 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 in the first quarter of 2014, compared to net periodic postretirement benefit expense of $728,000 in the same period 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 13.5 percent to $11,855,000 for the first quarter of 2014 from $10,443,000 in the first quarter of 2013. This increase is primarily attributed to a higher average invested balance in fixed maturity securities and an increase in dividend income; however, approximately $442,000 (4.2 percentage points) of the increase resulted from the early payoff of a commercial mortgage-backed security 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. Net realized investment gains totaled $820,000 ($0.06 per share) in the first quarter of 2014, compared to $1,735,000 ($0.13 per share) in the first quarter of 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. Because of the nature of this investment, which was made solely to implement the equity tail-risk hedging strategy, changes in the carrying value of the limited partnership are recorded as realized investment gains/losses, rather than as a component of investment income. Included in the net realized investment gains reported for the first quarter of 2014 is $239,000 of net realized investment losses attributed to the decline in the carrying value of this limited partnership. At March 31, 2014, consolidated assets totaled $1.4 billion, including $1.3 billion in the investment portfolio, and stockholders' equity totaled $476.6 million, an increase of 4.7 percent from December 31, 2013. Book value of the Company's stock increased 3.5 percent to $35.42 per share, from $34.21 per share at December 31, 2013. Book value excluding accumulated other comprehensive income increased to $30.34 per share from $29.78 per share at December 31, 2013. Based on results for the first quarter of 2014 and management's expectations for the remainder of the year, management has revised its 2014 operating income guidance from the previous range of $3.00 to $3.25 per share to a range of $2.65 to $2.90 per share. The revised guidance is based on a projected GAAP combined ratio of 98.3 percent for the year, with nominal changes to the other assumptions utilized in the projection. The Company will hold an earnings teleconference call at noon Eastern Time on May 8, 2014 to allow securities analysts, stockholders and other interested parties the opportunity to hear management discuss the Company's results for the first quarter, as well as its expectations for the rest of 2014. Dial-in information for the call is toll-free 1-877-407-9205 (International: 1-201-689-8054). The event will be archived and available for digital replay through August 8, 2014. The replay access information is toll-free 1-877-660-6853 (International: 1-201-612-7415); conference ID number 13580184. Members of the news media, investors and the general public are invited to access a live webcast of the conference call via the Company's investor relations page at www.emcins.com/ir. The webcast will be archived and available for replay until August 8, 2014. A transcript of the teleconference will also be available on the Company's website shortly after the completion of the teleconference.
About EMCI:
Cautionary Note Regarding Forward-Looking Statements: The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the following:
Management intends to identify forward-looking statements when using the words "believe," "expect," "anticipate," "estimate," "project," or similar expressions. Undue reliance should not be placed on these forward-looking statements. The Company disclaims any obligation to update such statements or to announce publicly the results of any revisions that it may make to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. ¹The Company prepares its public financial statements in conformity with accounting principles generally accepted in the Unites States of America (GAAP). Operating income is a non-GAAP financial measure, calculated by excluding net realized investment gains from net income. The Company's calculation of operating income may differ from similar measures used by other companies, so investors should exercise caution when comparing the Company's measure of operating income to the measure of other companies. Management's projected operating income guidance is also considered a non-GAAP financial measure. Management believes operating income 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 GAAP financial measure of net income. Therefore, the Company has provided the following reconciliation of the non-GAAP financial measure of operating income to the GAAP financial measure of net income. Management also uses non-GAAP financial measures for goal setting, determining employee and senior management awards and compensation, and evaluating performance. The reconciliation of operating income to net income is as follows:
The Company had total cash and invested assets with a carrying value of $1.3 billion as of March 31, 2014, and December 31, 2013, respectively. The following table summarizes the Company's cash and invested assets as of the dates indicated:
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