NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
EMC Insurance Group Inc., a majority owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is an insurance holding company with operations in property and casualty insurance and reinsurance. The term "Company" is used interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC Insurance Group inc. and its subsidiaries. The Company writes property and casualty insurance in both commercial and personal lines of insurance, with a focus on medium-sized commercial accounts; however, on October 29, 2018, the Company, Employers Mutual and their subsidiary insurance companies (collectively the "EMC Insurance Companies") announced that they had made a strategic decision to exit personal lines business so that more time and resources can be dedicated to the commercial and reinsurance business. As a result, personal lines premiums written declined significantly during the first quarter of 2019. Personal lines premiums earned also declined, though the decline was much smaller since the premiums are earned over the policies' annual terms. The Company's reinsurance business is primarily written through a quota share reinsurance agreement with Employers Mutual. A small portion of the assumed reinsurance business was previously written on a direct basis, outside the quota share reinsurance agreement.
The accompanying unaudited consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The Company has evaluated all subsequent events through the date the financial statements were issued. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the interim financial statements have been included. The results of operations for the interim periods reported are not necessarily indicative of results to be expected for the year. The consolidated balance sheet at
December 31, 2018
has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.
In reading these financial statements, reference should be made to the Company’s
2018
Form 10-K and 10-K/A for more detailed footnote information.
Accounting Pronouncements Adopted
In March 2017, the Financial Accounting Standards Board (FASB) updated guidance related to Receivables-Nonrefundable Fees and Other Costs Subtopic 310-20 of the Accounting Standards Codification
TM
(Codification or ASC). The objective of this update is to shorten the amortization period of premiums on certain callable fixed maturity securities to the earliest call date. The Company adopted this guidance on January 1, 2019, and it did not have a material impact on the consolidated financial statements.
In February 2016, the FASB issued updated guidance in Leases Topic 842 of the ASC, which supersedes the guidance in Leases Topic 840 of the ASC. The objective of this update is to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet, and disclosure of key information about leasing arrangements. The Company adopted this guidance during the first quarter of 2019, though management concluded that lease costs allocated to the Company through the pooling and quota share agreements cannot be attributed to a specified asset, and therefore do not meet the definition of a leased asset contained in the guidance. As a result, adoption of this guidance had no impact on the consolidated financial statements.
|
|
|
|
2.
|
TRANSACTIONS WITH AFFILIATES
|
An inter-company reinsurance program is in place between the Company's insurance subsidiaries in the property and casualty insurance segment and Employers Mutual. This reinsurance program is intended to reduce the volatility of the Company's quarterly results caused by excessive catastrophe and storm losses, and provide protection from both the frequency and severity of such losses. The reinsurance program consists of
two
semi-annual aggregate catastrophe excess of loss treaties. The first treaty is effective each year from January 1 through June 30, and has a retention of
$22.0 million
and a limit of
$24.0 million
. The total cost of this treaty is approximately
$6.0 million
. The second treaty is effective each year from July 1 through December 31, and has a retention of
$15.0 million
and a limit of
$12.0 million
. The total cost of this treaty is approximately
$1.4 million
. The terms of these treaties were the same in 2018. Losses and settlement expenses ceded to Employers Mutual under the inter-company reinsurance program totaled
$527,000
for the
three
months ended
March 31,
2019
compared to
$467,000
for the same period in 2018. All catastrophe and storm losses assumed by the property and casualty insurance subsidiaries (net of applicable reinsurance recoveries from external reinsurance protections purchased by the pool participants) are subject to the terms of these treaties, and there is no co-participation provision.
An inter-company reinsurance program is also in place between the Company's reinsurance subsidiary and Employers Mutual. The reinsurance program consists of
two
treaties. The first is a per occurrence catastrophe excess of loss treaty with a retention of
$10.0 million
, a limit of
$10.0 million
,
20 percent
co-participation, and no reinstatement. The total cost of this treaty is approximately
$1.6 million
. The second is an annual aggregate catastrophe excess of loss treaty with a retention of
$20.0 million
, a limit of
$100.0 million
, and
20 percent
co-participation. The total cost of this treaty is approximately
$3.6 million
. Any losses recovered under the per occurrence treaty inure to the benefit of the aggregate treaty, and only catastrophic events with total losses greater than
$500,000
are subject to the terms of the aggregate treaty. The terms of the program were the same in 2018. Losses and settlement expenses ceded to Employers Mutual under the inter-company reinsurance program totaled
$1.7 million
for the
three
months ended
March 31,
2019
, compared to
$(753,000)
for the
three
months ended
March 31,
2018
. For both periods, these amounts represent development on prior accident years' losses, net of any applicable outside reinsurance recoveries.
On November 20, 2018, the Company announced receipt of a non-binding indicative proposal dated November 15, 2018 from Employers Mutual to purchase all the outstanding common stock of the Company not already owned by Employers Mutual, and the formation of a special committee of the Company's board of directors to consider the proposal. The proposal, which is subject to certain conditions, provides that the shares will be purchased at a price of
$30
per share in cash. The special committee, which consists of the Company's four independent directors, has retained its own independent financial and legal advisors to assist it in considering the proposal. Discussions between the special committee and Employers Mutual continued through the first quarter of 2019.
The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the
three
months ended
March 31, 2019
and
2018
is presented below. The classification of the assumed and ceded reinsurance amounts between affiliates and nonaffiliates is based on the participants in the underlying reinsurance agreements, and is intended to provide an understanding of the actual source of the reinsurance activities. This presentation differs from the classifications used in the consolidated financial statements, where all amounts flowing through the pooling and quota share agreements and inter-company reinsurance programs with Employers Mutual are reported as “affiliated” balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
|
($ in thousands)
|
|
Property and
casualty
insurance
|
|
Reinsurance
|
|
Total
|
|
Premiums written
|
|
|
|
|
|
|
|
Direct
|
|
$
|
105,233
|
|
|
$
|
—
|
|
|
$
|
105,233
|
|
|
Assumed from nonaffiliates
|
|
965
|
|
|
48,735
|
|
|
49,700
|
|
|
Assumed from affiliates
|
|
134,343
|
|
|
—
|
|
|
134,343
|
|
|
Ceded to nonaffiliates
|
|
(6,812
|
)
|
|
(1,973
|
)
|
|
(8,785
|
)
|
|
Ceded to affiliates
|
|
(108,213
|
)
|
|
(1,313
|
)
|
|
(109,526
|
)
|
|
Net premiums written
|
|
$
|
125,516
|
|
|
$
|
45,449
|
|
|
$
|
170,965
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
|
|
|
|
|
|
Direct
|
|
$
|
101,267
|
|
|
$
|
—
|
|
|
$
|
101,267
|
|
|
Assumed from nonaffiliates
|
|
1,038
|
|
|
46,248
|
|
|
47,286
|
|
|
Assumed from affiliates
|
|
134,354
|
|
|
—
|
|
|
134,354
|
|
|
Ceded to nonaffiliates
|
|
(7,640
|
)
|
|
(2,405
|
)
|
|
(10,045
|
)
|
|
Ceded to affiliates
|
|
(104,247
|
)
|
|
(1,313
|
)
|
|
(105,560
|
)
|
|
Net premiums earned
|
|
$
|
124,772
|
|
|
$
|
42,530
|
|
|
$
|
167,302
|
|
|
|
|
|
|
|
|
|
|
Losses and settlement expenses incurred
|
|
|
|
|
|
|
|
Direct
|
|
$
|
60,935
|
|
|
$
|
—
|
|
|
$
|
60,935
|
|
|
Assumed from nonaffiliates
|
|
987
|
|
|
31,049
|
|
|
32,036
|
|
|
Assumed from affiliates
|
|
77,778
|
|
|
255
|
|
|
78,033
|
|
|
Ceded to nonaffiliates
|
|
(1,258
|
)
|
|
(1,582
|
)
|
|
(2,840
|
)
|
|
Ceded to affiliates
|
|
(61,462
|
)
|
|
(1,733
|
)
|
|
(63,195
|
)
|
|
Net losses and settlement expenses incurred
|
|
$
|
76,980
|
|
|
$
|
27,989
|
|
|
$
|
104,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
|
($ in thousands)
|
|
Property and
casualty
insurance
|
|
Reinsurance
|
|
Total
|
|
Premiums written
|
|
|
|
|
|
|
|
Direct
|
|
$
|
100,044
|
|
|
$
|
—
|
|
|
$
|
100,044
|
|
|
Assumed from nonaffiliates
|
|
1,018
|
|
|
41,121
|
|
|
42,139
|
|
|
Assumed from affiliates
|
|
130,201
|
|
|
—
|
|
|
130,201
|
|
|
Ceded to nonaffiliates
|
|
(7,970
|
)
|
|
(2,005
|
)
|
|
(9,975
|
)
|
|
Ceded to affiliates
|
|
(103,024
|
)
|
|
(1,313
|
)
|
|
(104,337
|
)
|
|
Net premiums written
|
|
$
|
120,269
|
|
|
$
|
37,803
|
|
|
$
|
158,072
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
|
|
|
|
|
|
Direct
|
|
$
|
95,745
|
|
|
$
|
—
|
|
|
$
|
95,745
|
|
|
Assumed from nonaffiliates
|
|
1,002
|
|
|
41,092
|
|
|
42,094
|
|
|
Assumed from affiliates
|
|
129,148
|
|
|
—
|
|
|
129,148
|
|
|
Ceded to nonaffiliates
|
|
(8,538
|
)
|
|
(2,625
|
)
|
|
(11,163
|
)
|
|
Ceded to affiliates
|
|
(98,725
|
)
|
|
(1,313
|
)
|
|
(100,038
|
)
|
|
Net premiums earned
|
|
$
|
118,632
|
|
|
$
|
37,154
|
|
|
$
|
155,786
|
|
|
|
|
|
|
|
|
|
|
Losses and settlement expenses incurred
|
|
|
|
|
|
|
|
Direct
|
|
$
|
52,287
|
|
|
$
|
—
|
|
|
$
|
52,287
|
|
|
Assumed from nonaffiliates
|
|
992
|
|
|
26,415
|
|
|
27,407
|
|
|
Assumed from affiliates
|
|
85,967
|
|
|
358
|
|
|
86,325
|
|
|
Ceded to nonaffiliates
|
|
(2,991
|
)
|
|
(399
|
)
|
|
(3,390
|
)
|
|
Ceded to affiliates
|
|
(52,754
|
)
|
|
753
|
|
|
(52,001
|
)
|
|
Net losses and settlement expenses incurred
|
|
$
|
83,501
|
|
|
$
|
27,127
|
|
|
$
|
110,628
|
|
Individual lines in the above tables are defined as follows:
|
|
|
|
•
|
“Direct” represents business produced by the property and casualty insurance subsidiaries.
|
|
|
|
|
•
|
“Assumed from nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate
30 percent
pool participation percentage of involuntary business assumed by the pool participants pursuant to state law. For the reinsurance subsidiary, this line represents the reinsurance business assumed through the quota share agreement (including “fronting” activities initiated by Employers Mutual) and the business assumed outside the quota share agreement.
|
|
|
|
|
•
|
“Assumed from affiliates” for the property and casualty insurance subsidiaries represents their aggregate
30 percent
pool participation percentage of all the pool members’ direct business. The amounts reported under the caption “Losses and settlement expenses incurred” also include claim-related services provided by Employers Mutual that are allocated to the property and casualty insurance subsidiaries and the reinsurance subsidiary.
|
|
|
|
|
•
|
“Ceded to nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate
30 percent
pool participation percentage of 1) the amounts ceded to nonaffiliated reinsurance companies in accordance with the terms of the reinsurance agreements providing protection to the pool and each of its participants, and 2) the amounts ceded on a mandatory basis to state organizations in connection with various programs. For the reinsurance subsidiary, this line includes 1) reinsurance business that is ceded to other insurance companies in connection with “fronting” activities initiated by Employers Mutual, and 2) amounts ceded in connection with the purchase of additional reinsurance protection in peak exposure territories from external parties.
|
|
|
|
|
•
|
“Ceded to affiliates” for the property and casualty insurance subsidiaries represents the cession of their direct business to Employers Mutual under the terms of the pooling agreement and amounts ceded to Employers Mutual under the terms of the inter-company reinsurance program. For the reinsurance subsidiary this line represents amounts ceded to Employers Mutual under the terms of the inter-company reinsurance program.
|
|
|
|
|
4.
|
LIABILITY FOR LOSSES AND SETTLEMENT EXPENSES
|
The following table sets forth a reconciliation of beginning and ending reserves for losses and settlement expenses of the Company. Amounts presented are on a net basis, with a reconciliation of beginning and ending reserves to the gross amounts presented in the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
Gross reserves at beginning of year
|
|
$
|
777,190
|
|
|
$
|
732,612
|
|
|
Re-valuation due to foreign currency exchange rates
|
|
(593
|
)
|
|
525
|
|
|
Less ceded reserves at beginning of year
|
|
36,595
|
|
|
30,923
|
|
|
Net reserves at beginning of year
|
|
741,188
|
|
|
701,164
|
|
|
|
|
|
|
|
|
Incurred losses and settlement expenses related to:
|
|
|
|
|
|
|
|
Current year
|
|
118,259
|
|
|
116,204
|
|
|
Prior years
|
|
(13,290
|
)
|
|
(5,576
|
)
|
|
Total incurred losses and settlement expenses
|
|
104,969
|
|
|
110,628
|
|
|
|
|
|
|
|
|
Paid losses and settlement expenses related to:
|
|
|
|
|
|
|
|
Current year
|
|
23,608
|
|
|
24,262
|
|
|
Prior years
|
|
76,412
|
|
|
81,877
|
|
|
Total paid losses and settlement expenses
|
|
100,020
|
|
|
106,139
|
|
|
|
|
|
|
|
|
Net reserves at end of period
|
|
746,137
|
|
|
705,653
|
|
|
Plus ceded reserves at end of period
|
|
34,927
|
|
|
30,549
|
|
|
Re-valuation due to foreign currency exchange rates
|
|
(671
|
)
|
|
853
|
|
|
Gross reserves at end of period
|
|
$
|
780,393
|
|
|
$
|
737,055
|
|
There is an inherent amount of uncertainty involved in the establishment of insurance liabilities. This uncertainty is greatest in the current and more recent accident years because a smaller percentage of the expected ultimate claims have been reported, adjusted and settled compared to more mature accident years. As the carried reserves for these accident years run off, the overall expectation is that, more often than not, favorable development will occur. However, there is also the possibility that the ultimate settlement of liabilities associated with these accident years will show adverse development, and such adverse development could be substantial.
Changes in reserve estimates are reflected in net income in the year such changes are recorded. Following is an analysis of the reserve development the Company experienced during the
three
months ended
March 31, 2019
and
2018
. Care should be exercised when attempting to analyze the financial impact of the reported development amounts because, as noted above, the overall expectation is that, more often than not, favorable development will occur as the prior accident years’ reserves run off.
2019
Development
For the property and casualty insurance segment, the
March 31, 2019
estimate of loss and settlement expense reserves for accident years
2018
and prior decreased
$9.6 million
from the estimate at December 31,
2018
. This decrease represents
1.8 percent
of the December 31,
2018
gross carried reserves and is primarily attributed to reductions in prior year ultimate loss ratios for most lines of business except personal auto liability and homeowners. The commercial auto liability and workers' compensation lines of business were the largest contributors to favorable development. Favorable development in the commercial auto liability line of business was a result of decreases in ultimate severity estimates for accident years 2014, 2016, 2017 and 2018. Favorable development in the workers compensation line of business is the result of a decrease in estimated ultimate frequency and severity for accident year 2018, and decreases in estimated ultimate severity for several prior accident years except 2015 and 2016, which experienced adverse development. Personal auto liability and homeowners experienced adverse development as estimated ultimate severity increased for accident year 2018.
For the reinsurance segment, the
March 31, 2019
estimate of loss and settlement expense reserves for accident years
2018
and prior decreased
$3.6 million
from the estimate at December 31,
2018
. This decrease represents
1.5 percent
of the December 31,
2018
gross carried reserves and is primarily attributed to lower ultimate losses impacting accident years 2003-2015 and 2018 for casualty excess contracts and accident years 2016-2018 for property-casualty global excess contracts.
2018
Development
For the property and casualty insurance segment, the
March 31,
2018
estimate of loss and settlement expense reserves for accident years
2017
and prior decreased
$2.1 million
from the estimate at December 31,
2017
. This decrease represented
0.4 percent
of the December 31,
2017
gross carried reserves and was primarily attributed to decreases in the ultimate loss ratios for several accident years, including 2017, due to reductions in expected ultimate frequency and/or severity in the workers' compensation line of business. The commercial auto liability line of business experienced adverse development due to higher than expected severity in the 2017 accident year.
For the reinsurance segment, the
March 31,
2018
estimate of loss and settlement expense reserves for accident years
2017
and prior increased
$3.4 million
from the estimate at December 31,
2017
. This increase represented
1.5 percent
of the December 31,
2017
gross carried reserves and was primarily attributed to lower ultimate loss estimates impacting accident years 2014-2017 for the property pro rata, catastrophe and per risk excess, and property-casualty global excess lines of business. The favorable development was partially offset by adverse development on casualty excess contracts for years 2007, 2012, 2014, and 2017, whose ultimates were increased in response to higher than expected reported losses.
The Company’s operations consist of a property and casualty insurance segment and a reinsurance segment. The property and casualty insurance segment writes both commercial and personal lines of insurance, with a focus on medium-sized commercial accounts. The reinsurance segment provides reinsurance for other insurers and reinsurers. The segments are managed separately due to differences in the insurance products sold and the business environments in which they operate. Management evaluates the performance of its insurance segments using financial measurements based on Statutory Accounting Principles (SAP) instead of GAAP. Such measures include premiums written, premiums earned, statutory underwriting profit (loss), and investment results, as well as loss and loss adjustment expense ratios, trade underwriting expense ratios, and combined ratios.
Summarized financial information for the Company’s segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
|
Property and
casualty
insurance
|
|
Reinsurance
|
|
Parent
company
|
|
Consolidated
|
|
($ in thousands)
|
|
|
|
|
|
Premiums earned
|
|
$
|
124,772
|
|
|
$
|
42,530
|
|
|
$
|
—
|
|
|
$
|
167,302
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss):
|
|
|
|
|
|
|
|
|
|
SAP underwriting profit (loss)
|
|
1,407
|
|
|
3,563
|
|
|
—
|
|
|
4,970
|
|
|
GAAP adjustments
|
|
1,210
|
|
|
820
|
|
|
—
|
|
|
2,030
|
|
|
GAAP underwriting profit (loss)
|
|
2,617
|
|
|
4,383
|
|
|
—
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
9,138
|
|
|
3,608
|
|
|
17
|
|
|
12,763
|
|
|
Net realized investment gains/losses and change in unrealized gains on equity investments
|
|
14,168
|
|
|
8,542
|
|
|
(67
|
)
|
|
22,643
|
|
|
Other income (loss)
|
|
1,533
|
|
|
2
|
|
|
—
|
|
|
1,535
|
|
|
Interest expense
|
|
171
|
|
|
—
|
|
|
—
|
|
|
171
|
|
|
Other expenses
|
|
311
|
|
|
—
|
|
|
1,174
|
|
|
1,485
|
|
|
Income (loss) before income tax expense (benefit)
|
|
$
|
26,974
|
|
|
$
|
16,535
|
|
|
$
|
(1,224
|
)
|
|
$
|
42,285
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
1,220,775
|
|
|
$
|
512,430
|
|
|
$
|
617,254
|
|
|
$
|
2,350,459
|
|
|
Eliminations
|
|
—
|
|
|
—
|
|
|
(606,809
|
)
|
|
(606,809
|
)
|
|
Reclassifications
|
|
(934
|
)
|
|
—
|
|
|
(489
|
)
|
|
(1,423
|
)
|
|
Total assets
|
|
$
|
1,219,841
|
|
|
$
|
512,430
|
|
|
$
|
9,956
|
|
|
$
|
1,742,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
|
Property and
casualty
insurance
|
|
Reinsurance
|
|
Parent
company
|
|
Consolidated
|
|
($ in thousands)
|
|
|
|
|
|
Premiums earned
|
|
$
|
118,632
|
|
|
$
|
37,154
|
|
|
$
|
—
|
|
|
$
|
155,786
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss):
|
|
|
|
|
|
|
|
|
|
SAP underwriting profit (loss)
|
|
(9,036
|
)
|
|
1,563
|
|
|
—
|
|
|
(7,473
|
)
|
|
GAAP adjustments
|
|
262
|
|
|
102
|
|
|
—
|
|
|
364
|
|
|
GAAP underwriting profit (loss)
|
|
(8,774
|
)
|
|
1,665
|
|
|
—
|
|
|
(7,109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
8,148
|
|
|
3,218
|
|
|
5
|
|
|
11,371
|
|
|
Net realized investment gains/losses and change in unrealized gains on equity investments
|
|
(3,293
|
)
|
|
(2,100
|
)
|
|
—
|
|
|
(5,393
|
)
|
|
Other income (loss)
|
|
2,051
|
|
|
(436
|
)
|
|
—
|
|
|
1,615
|
|
|
Interest expense
|
|
142
|
|
|
—
|
|
|
—
|
|
|
142
|
|
|
Other expenses
|
|
233
|
|
|
—
|
|
|
637
|
|
|
870
|
|
|
Income (loss) before income tax expense (benefit)
|
|
$
|
(2,243
|
)
|
|
$
|
2,347
|
|
|
$
|
(632
|
)
|
|
$
|
(528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
1,191,286
|
|
|
$
|
485,270
|
|
|
$
|
565,905
|
|
|
$
|
2,242,461
|
|
|
Eliminations
|
|
—
|
|
|
—
|
|
|
(556,977
|
)
|
|
(556,977
|
)
|
|
Reclassifications
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
|
Total assets
|
|
$
|
1,191,286
|
|
|
$
|
485,270
|
|
|
$
|
8,922
|
|
|
$
|
1,685,478
|
|
The following table displays the premiums earned for the property and casualty insurance segment and the reinsurance segment for the
three
months ended
March 31, 2019
and
2018
, by line of insurance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
Property and casualty insurance
|
|
|
|
|
|
Commercial lines:
|
|
|
|
|
|
Automobile
|
|
$
|
32,907
|
|
|
$
|
30,644
|
|
|
Property
|
|
27,671
|
|
|
26,429
|
|
|
Workers' compensation
|
|
23,543
|
|
|
24,902
|
|
|
Other liability
|
|
28,905
|
|
|
24,962
|
|
|
Other
|
|
2,506
|
|
|
2,186
|
|
|
Total commercial lines
|
|
115,532
|
|
|
109,123
|
|
|
|
|
|
|
|
|
Personal lines
|
|
9,240
|
|
|
9,509
|
|
|
Total property and casualty insurance
|
|
$
|
124,772
|
|
|
$
|
118,632
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
|
|
|
|
Pro rata reinsurance
|
|
$
|
13,006
|
|
|
$
|
13,073
|
|
|
Excess of loss reinsurance
|
|
29,524
|
|
|
24,081
|
|
|
Total reinsurance
|
|
$
|
42,530
|
|
|
$
|
37,154
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
167,302
|
|
|
$
|
155,786
|
|
The actual income tax expense (benefit) for the
three
months ended
March 31, 2019
and
2018
differed from the “expected” income tax expense (benefit) for those periods (computed by applying the United States federal corporate tax rate of
21 percent
to income (loss) before income tax) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
Computed "expected" income tax expense (benefit)
|
|
$
|
8,880
|
|
|
$
|
(111
|
)
|
|
Increases (decreases) in tax resulting from:
|
|
|
|
|
|
Tax-exempt interest income
|
|
(283
|
)
|
|
(310
|
)
|
|
Dividends received deduction
|
|
(132
|
)
|
|
(123
|
)
|
|
Proration of tax-exempt interest and dividends received deduction
|
|
104
|
|
|
108
|
|
|
Internal Revenue Code 50(d)(5) income from investment tax credits
|
|
221
|
|
|
36
|
|
|
Other, net
|
|
(36
|
)
|
|
(52
|
)
|
|
Total income tax expense (benefit)
|
|
$
|
8,754
|
|
|
$
|
(452
|
)
|
Pursuant to Staff Accounting Bulletin No. 118 issued by the Securities and Exchange Commission, the Company made reasonable estimates of the effects the Tax Cuts and Jobs Act (TCJA) had on deferred income tax assets and liabilities at December 31, 2017 and the interim periods in 2018. For items where the Company could not make a reasonable estimate, primarily loss reserve discounting, the Company used existing accounting guidance and the provisions of the tax laws that were in place prior to the enactment. Subsequently, the Company made its final determination of the effects of the TCJA when the Internal Revenue Service (IRS) issued Revenue Procedure 2019-06, which provided applicable discount factors for both the transition obligation (reserves at January 1, 2018), and reserves at December 31, 2018.
The Company had
no
provision for uncertain income tax positions at
March 31, 2019
or
December 31, 2018
. The Company recognized no interest expense or other penalties related to U.S. federal or state income taxes during the
three
months ended
March 31, 2019
or
2018
. It is the Company’s accounting policy to reflect income tax penalties as other expense, and interest as interest expense.
The Company files a U.S. federal income tax return, along with various state income tax returns. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2015.
|
|
|
|
7.
|
EMPLOYEE RETIREMENT PLANS
|
The components of net periodic benefit cost (income) for Employers Mutual’s pension and postretirement benefit plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
Pension plans:
|
|
|
|
|
|
Service cost
|
|
$
|
4,071
|
|
|
$
|
4,126
|
|
|
Interest cost
|
|
2,949
|
|
|
2,665
|
|
|
Expected return on plan assets
|
|
(5,440
|
)
|
|
(5,978
|
)
|
|
Amortization of net actuarial loss
|
|
598
|
|
|
125
|
|
|
Net periodic pension benefit cost
|
|
$
|
2,178
|
|
|
$
|
938
|
|
|
|
|
|
|
|
|
Postretirement benefit plans:
|
|
|
|
|
|
Service cost
|
|
$
|
353
|
|
|
$
|
368
|
|
|
Interest cost
|
|
546
|
|
|
521
|
|
|
Expected return on plan assets
|
|
(1,095
|
)
|
|
(1,204
|
)
|
|
Amortization of net actuarial loss
|
|
245
|
|
|
234
|
|
|
Amortization of prior service credit
|
|
(2,285
|
)
|
|
(2,782
|
)
|
|
Net periodic postretirement benefit income
|
|
$
|
(2,236
|
)
|
|
$
|
(2,863
|
)
|
Net periodic pension benefit cost allocated to the Company amounted to
$653,000
and
$282,000
for the
three
months ended
March 31, 2019
and
2018
, respectively. Net periodic postretirement benefit income allocated to the Company amounted to
$636,000
and
$806,000
for the
three
months ended
March 31, 2019
and
2018
, respectively. The service cost component of net periodic pension and postretirement benefit cost/(income) allocated to the Company is included in the income statement line titled "other underwriting expenses". The other components of net periodic pension and postretirement benefit cost/(income) are included in the income statement line titled "other income".
Employers Mutual plans to contribute approximately
$7.0 million
to the pension plan in
2019
.
No
contributions are expected to be made to the Voluntary Employee Beneficiary Association (VEBA) trust in
2019
.
|
|
|
|
8.
|
STOCK-BASED COMPENSATION
|
The Company has a stock-based compensation plan for non-employee directors. Employers Mutual also has several stock plans which utilize the common stock of the Company. Employers Mutual can provide the common stock required under its plans by: 1) using shares of common stock that it currently owns; 2) purchasing common stock in the open market; or 3) directly purchasing common stock from the Company at the current fair value. Employers Mutual's current practice is to purchase common stock from the Company for use in all of its stock plans (including its non-employee director stock purchase plan and its employee stock purchase plan). A portion of the compensation expense recognized by Employers Mutual (as the requisite service period for restricted stock awards/units is rendered) is allocated to the Company’s property and casualty insurance subsidiaries though their participation in the pooling agreement.
An account Employers Mutual established to hold previously granted restricted stock awards until they vest will periodically contain excess shares of the Company's stock stemming from forfeitures and surrenders. During the first
three
months of
2019
, the Company repurchased
20,221
shares of stock from this unvested restricted stock account at an average cost of
$31.83
. These repurchased shares are not deemed to be shares repurchased under the Company's stock repurchase program.
During the first
three
months of
2019
,
122,073
restricted stock units were granted to eligible employees of Employers Mutual. Under the stock plans,
96,374
shares of restricted stock vested, and
32,262
options were exercised at a weighted average exercise price of
$12.58
. The Company recognized compensation expense from these plans of
$283,000
(
$223,000
net of tax) and
$413,000
(
$326,000
net of tax) for the
three
months ended
March 31, 2019
and
2018
, respectively.
|
|
|
|
9.
|
DISCLOSURES ABOUT THE FAIR VALUES OF FINANCIAL INSTRUMENTS
|
The carrying amounts and estimated fair values of the Company’s financial instruments as of
March 31, 2019
and
December 31, 2018
are summarized in the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Carrying
amounts
|
|
Estimated
fair values
|
|
($ in thousands)
|
|
|
|
Assets:
|
|
|
|
|
|
Fixed maturity securities available-for-sale:
|
|
|
|
|
|
U.S. treasury
|
|
$
|
8,113
|
|
|
$
|
8,113
|
|
|
U.S. government-sponsored agencies
|
|
309,120
|
|
|
309,120
|
|
|
Obligations of states and political subdivisions
|
|
276,857
|
|
|
276,857
|
|
|
Commercial mortgage-backed
|
|
86,664
|
|
|
86,664
|
|
|
Residential mortgage-backed
|
|
168,765
|
|
|
168,765
|
|
|
Other asset-backed
|
|
17,719
|
|
|
17,719
|
|
|
Corporate
|
|
424,622
|
|
|
424,622
|
|
|
Total fixed maturity securities available-for-sale
|
|
1,291,860
|
|
|
1,291,860
|
|
|
|
|
|
|
|
|
Equity investments, at fair value
|
|
|
|
|
|
Common stocks:
|
|
|
|
|
|
Financial services
|
|
47,345
|
|
|
47,345
|
|
|
Information technology
|
|
39,346
|
|
|
39,346
|
|
|
Healthcare
|
|
34,006
|
|
|
34,006
|
|
|
Consumer staples
|
|
14,694
|
|
|
14,694
|
|
|
Consumer discretionary
|
|
28,764
|
|
|
28,764
|
|
|
Energy
|
|
15,853
|
|
|
15,853
|
|
|
Industrials
|
|
19,435
|
|
|
19,435
|
|
|
Other
|
|
15,471
|
|
|
15,471
|
|
|
Non-redeemable preferred stocks
|
|
18,180
|
|
|
18,180
|
|
|
Investment funds
|
|
9,489
|
|
|
9,489
|
|
|
Total equity investments
|
|
242,583
|
|
|
242,583
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
48,265
|
|
|
48,265
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Surplus notes
|
|
25,000
|
|
|
16,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Carrying
amounts
|
|
Estimated
fair values
|
|
($ in thousands)
|
|
|
|
Assets:
|
|
|
|
|
|
Fixed maturity securities available-for-sale:
|
|
|
|
|
|
U.S. treasury
|
|
$
|
8,021
|
|
|
$
|
8,021
|
|
|
U.S. government-sponsored agencies
|
|
304,479
|
|
|
304,479
|
|
|
Obligations of states and political subdivisions
|
|
283,651
|
|
|
283,651
|
|
|
Commercial mortgage-backed
|
|
84,379
|
|
|
84,379
|
|
|
Residential mortgage-backed
|
|
162,137
|
|
|
162,137
|
|
|
Other asset-backed
|
|
20,834
|
|
|
20,834
|
|
|
Corporate
|
|
419,408
|
|
|
419,408
|
|
|
Total fixed maturity securities available-for-sale
|
|
1,282,909
|
|
|
1,282,909
|
|
|
|
|
|
|
|
|
Equity investments, at fair value
|
|
|
|
|
|
Common stocks:
|
|
|
|
|
|
Financial services
|
|
41,839
|
|
|
41,839
|
|
|
Information technology
|
|
31,581
|
|
|
31,581
|
|
|
Healthcare
|
|
34,571
|
|
|
34,571
|
|
|
Consumer staples
|
|
13,180
|
|
|
13,180
|
|
|
Consumer discretionary
|
|
22,765
|
|
|
22,765
|
|
|
Energy
|
|
13,372
|
|
|
13,372
|
|
|
Industrials
|
|
19,389
|
|
|
19,389
|
|
|
Other
|
|
14,371
|
|
|
14,371
|
|
|
Non-redeemable preferred stocks
|
|
16,654
|
|
|
16,654
|
|
|
Investment funds
|
|
7,641
|
|
|
7,641
|
|
|
Total equity investments
|
|
215,363
|
|
|
215,363
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
28,204
|
|
|
28,204
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Surplus notes
|
|
25,000
|
|
|
15,259
|
|
The estimated fair values of fixed maturity and equity securities is based on quoted market prices, where available. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security.
Short-term investments generally include money market funds, U.S. Treasury bills and commercial paper. Short-term investments are carried at fair value, which approximates cost, due to the highly liquid nature of the securities. Short-term securities are classified as Level 1 fair value measurements when the fair values can be validated by recent trades. When recent trades are not available, fair value is deemed to be the cost basis and the securities are classified as Level 2 fair value measurements.
The estimated fair value of the surplus notes is derived by discounting future expected cash flows at a rate deemed appropriate over a
25
-year term (the surplus notes have no stated maturity date, and the interest to be paid is assumed to continue at the current interest rate in place of
2.73 percent
).
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value.
|
|
|
|
|
|
|
|
Level 1 -
|
Unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
|
|
|
|
|
|
|
Level 2 -
|
Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
|
|
|
|
|
|
|
Level 3 -
|
Prices or valuation techniques that require significant unobservable inputs because observable inputs are not available. The unobservable inputs may reflect the Company’s own judgments about the assumptions that market participants would use.
|
|
|
|
|
|
|
NAV -
|
The fair values of investment company limited partnership investments and similar vehicles (referred to as investment funds) are based on the capital account balances reported by the investment funds subject to their management review and adjustment. These capital account balances reflect the fair value of the investment funds.
|
The Company uses an independent pricing source to obtain the estimated fair values of a majority of its securities, subject to an internal validation. The fair values are based on quoted market prices, where available. This is typically the case for equity securities and money market funds, which are accordingly classified as Level 1 fair value measurements. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security. Fixed maturity securities, non-redeemable preferred stocks and various short-term investments in the Company’s portfolio may not trade on a daily basis; however, observable inputs are utilized in their valuations, and these securities are therefore classified as Level 2 fair value measurements. Following is a brief description of the various pricing techniques used by the independent pricing source for different asset classes.
|
|
|
|
•
|
U.S. Treasury securities (including bonds, notes, and bills) are priced according to a number of live data sources, including active market makers and inter-dealer brokers. Prices from these sources are reviewed based on the sources’ historical accuracy for individual issues and maturity ranges.
|
|
|
|
|
•
|
U.S. government-sponsored agencies and corporate securities (including fixed-rate corporate bonds and medium-term notes) are priced by determining a bullet (non-call) spread scale for each issuer for maturities going out to forty years. These spreads represent credit risk and are obtained from the new issue market, secondary trading, and dealer quotes. An option adjusted spread model is incorporated to adjust spreads of issues that have early redemption features. The final spread is then added to the U.S. Treasury curve.
|
|
|
|
|
•
|
Obligations of states and political subdivisions are priced by tracking and analyzing actively quoted issues and reported trades, material event notices and benchmark yields. Municipal bonds with similar characteristics are grouped together into market sectors, and internal yield curves are constructed daily for these sectors. Individual bond evaluations are extrapolated from these sectors, with the ability to make individual spread adjustments for attributes such as discounts, premiums, alternative minimum tax, and/or whether or not the bond is callable.
|
|
|
|
|
•
|
Mortgage-backed and asset-backed securities are first reviewed for the appropriate pricing speed (if prepayable), spread, yield and volatility. The securities are priced with models using spreads and other information solicited from market buy- and sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. To determine a tranche’s price, first the benchmark yield is determined and adjusted for collateral performance, tranche level attributes and market conditions. Then the cash flow for each tranche is generated (using consensus prepayment speed assumptions including, as appropriate, a prepayment projection based on historical statistics of the underlying collateral). The tranche-level yield is used to discount the cash flows and generate the price. Depending on the characteristics of the tranche, a volatility-driven, multi-dimensional single cash flow stream model or an option-adjusted spread model may be used. When cash flows or other security structure or market information is not available, broker quotes may be used.
|
On a quarterly basis, the Company receives from its independent pricing service a list of fixed maturity securities, if any, that were priced solely from broker quotes. For these securities, fair value may be determined using the broker quotes, or by the Company using similar pricing techniques as the Company’s independent pricing service. Depending on the level of observable inputs, these securities would be classified as Level 2 or Level 3 fair value measurements. At
March 31, 2019
and
December 31, 2018
, the Company had
no
securities priced solely from broker quotes.
A small number of the Company’s securities are not priced by the independent pricing service.
One
of these was an equity security that was reported as a Level 3 fair value measurement since no observable inputs were used in its valuation. This security was sold in the fourth quarter of 2018 and in prior periods was reported at the fair value obtained from the Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (NAIC). The SVO established a per share price for this security based on an annual review of that company’s financial statements, typically performed during second quarter. The other securities not priced by the Company’s independent pricing service consist of
six
fixed maturity securities.
One
of these fixed maturity securities (
two
at December 31, 2018), classified as Level 3 fair value measurements, are corporate securities that convey premium tax benefits and are not publicly traded. The fair values for these securities are based on discounted cash flow analyses. The other fixed maturity securities are classified as Level 2 fair value measurements. The fair values for these fixed maturity securities were obtained from either the SVO, the Company's investment custodian, or the Company's investment department using similar pricing techniques as the Company’s independent pricing service.
Presented in the tables below are the estimated fair values of the Company’s financial instruments as of
March 31, 2019
and
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
|
|
Fair value measurements using
|
|
($ in thousands)
|
|
Total
|
|
Investments measured at net asset value (NAV)
|
|
Quoted
prices in
active markets
for identical
assets
(Level 1)
|
|
Significant
other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Financial instruments reported at fair value on recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury
|
|
$
|
8,113
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,113
|
|
|
$
|
—
|
|
|
U.S. government-sponsored agencies
|
|
309,120
|
|
|
—
|
|
|
—
|
|
|
309,120
|
|
|
—
|
|
|
Obligations of states and political subdivisions
|
|
276,857
|
|
|
—
|
|
|
—
|
|
|
276,857
|
|
|
—
|
|
|
Commercial mortgage-backed
|
|
86,664
|
|
|
—
|
|
|
—
|
|
|
86,664
|
|
|
—
|
|
|
Residential mortgage-backed
|
|
168,765
|
|
|
—
|
|
|
—
|
|
|
168,765
|
|
|
—
|
|
|
Other asset-backed
|
|
17,719
|
|
|
—
|
|
|
—
|
|
|
17,719
|
|
|
—
|
|
|
Corporate
|
|
424,622
|
|
|
—
|
|
|
—
|
|
|
424,421
|
|
|
201
|
|
|
Total fixed maturity securities available-for-sale
|
|
1,291,860
|
|
|
—
|
|
|
—
|
|
|
1,291,659
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks:
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
47,345
|
|
|
—
|
|
|
47,345
|
|
|
—
|
|
|
—
|
|
|
Information technology
|
|
39,346
|
|
|
—
|
|
|
39,346
|
|
|
—
|
|
|
—
|
|
|
Healthcare
|
|
34,006
|
|
|
—
|
|
|
34,006
|
|
|
—
|
|
|
—
|
|
|
Consumer staples
|
|
14,694
|
|
|
—
|
|
|
14,694
|
|
|
—
|
|
|
—
|
|
|
Consumer discretionary
|
|
28,764
|
|
|
—
|
|
|
28,764
|
|
|
—
|
|
|
—
|
|
|
Energy
|
|
15,853
|
|
|
—
|
|
|
15,853
|
|
|
—
|
|
|
—
|
|
|
Industrials
|
|
19,435
|
|
|
—
|
|
|
19,435
|
|
|
—
|
|
|
—
|
|
|
Other
|
|
15,471
|
|
|
—
|
|
|
15,471
|
|
|
—
|
|
|
—
|
|
|
Non-redeemable preferred stocks
|
|
18,180
|
|
|
—
|
|
|
8,578
|
|
|
9,602
|
|
|
—
|
|
|
Investment funds
|
|
9,489
|
|
|
9,489
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total equity investments
|
|
242,583
|
|
|
9,489
|
|
|
223,492
|
|
|
9,602
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
48,265
|
|
|
—
|
|
|
48,265
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments not reported at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Surplus notes
|
|
16,056
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
Fair value measurements using
|
|
($ in thousands)
|
|
Total
|
|
Investments measured at net asset value (NAV)
|
|
Quoted
prices in
active markets
for identical
assets
(Level 1)
|
|
Significant
other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Financial instruments reported at fair value on recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury
|
|
$
|
8,021
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,021
|
|
|
$
|
—
|
|
|
U.S. government-sponsored agencies
|
|
304,479
|
|
|
—
|
|
|
—
|
|
|
304,479
|
|
|
—
|
|
|
Obligations of states and political subdivisions
|
|
283,651
|
|
|
—
|
|
|
—
|
|
|
283,651
|
|
|
—
|
|
|
Commercial mortgage-backed
|
|
84,379
|
|
|
—
|
|
|
—
|
|
|
84,379
|
|
|
—
|
|
|
Residential mortgage-backed
|
|
162,137
|
|
|
—
|
|
|
—
|
|
|
162,137
|
|
|
—
|
|
|
Other asset-backed
|
|
20,834
|
|
|
—
|
|
|
—
|
|
|
20,834
|
|
|
—
|
|
|
Corporate
|
|
419,408
|
|
|
—
|
|
|
—
|
|
|
419,149
|
|
|
259
|
|
|
Total fixed maturity securities available-for-sale
|
|
1,282,909
|
|
|
—
|
|
|
—
|
|
|
1,282,650
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks:
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
41,839
|
|
|
—
|
|
|
41,839
|
|
|
—
|
|
|
—
|
|
|
Information technology
|
|
31,581
|
|
|
—
|
|
|
31,581
|
|
|
—
|
|
|
—
|
|
|
Healthcare
|
|
34,571
|
|
|
—
|
|
|
34,571
|
|
|
—
|
|
|
—
|
|
|
Consumer staples
|
|
13,180
|
|
|
—
|
|
|
13,180
|
|
|
—
|
|
|
—
|
|
|
Consumer discretionary
|
|
22,765
|
|
|
—
|
|
|
22,765
|
|
|
—
|
|
|
—
|
|
|
Energy
|
|
13,372
|
|
|
—
|
|
|
13,372
|
|
|
—
|
|
|
—
|
|
|
Industrials
|
|
19,389
|
|
|
—
|
|
|
19,389
|
|
|
—
|
|
|
—
|
|
|
Other
|
|
14,371
|
|
|
—
|
|
|
14,371
|
|
|
—
|
|
|
—
|
|
|
Non-redeemable preferred stocks
|
|
16,654
|
|
|
—
|
|
|
10,325
|
|
|
6,329
|
|
|
—
|
|
|
Investment funds
|
|
7,641
|
|
|
7,641
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total equity investments
|
|
215,363
|
|
|
7,641
|
|
|
201,393
|
|
|
6,329
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
28,204
|
|
|
—
|
|
|
28,204
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments not reported at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Surplus notes
|
|
15,259
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,259
|
|
Presented in the table below is a reconciliation of the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the
three
months ended
March 31, 2019
and
2018
. Any unrealized gains or losses on fixed maturity securities are recognized in other comprehensive income (loss). Any gains or losses from settlements, disposals, impairments and unrealized gains or losses on equity securities are reported as realized investment gains or losses in net income.
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Fair value measurements using significant unobservable (Level 3) inputs
|
|
|
|
Fixed maturity securities available-for-sale, corporate
|
|
Total
|
|
Three months ended March 31, 2019
|
|
|
|
|
|
Beginning balance
|
|
$
|
259
|
|
|
$
|
259
|
|
|
Settlements
|
|
(57
|
)
|
|
(57
|
)
|
|
Unrealized losses included in other comprehensive income (loss) on securities still held at reporting date
|
|
(1
|
)
|
|
(1
|
)
|
|
Balance at March 31, 2019
|
|
$
|
201
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Fair value measurements using significant
unobservable (Level 3) inputs
|
|
|
|
Fixed maturity securities available-for-sale, corporate
|
|
Equity securities,
financial services
|
|
Total
|
|
Three months ended March 31, 2018
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
620
|
|
|
$
|
3
|
|
|
$
|
623
|
|
|
Settlements
|
|
(56
|
)
|
|
—
|
|
|
(56
|
)
|
|
Unrealized losses included in other comprehensive income (loss) on securities still held at reporting date
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
Balance at March 31, 2018
|
|
$
|
562
|
|
|
$
|
3
|
|
|
$
|
565
|
|
Investments of the Company’s insurance subsidiaries are subject to the insurance laws of the state of their incorporation. These laws prescribe the kind, quality and concentration of investments that may be made by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks and real estate mortgages. The Company believes that it is in compliance with these laws.
The amortized cost and estimated fair value of securities available-for-sale as of
March 31, 2019
and
December 31, 2018
are as follows. All fixed maturity securities are classified as available-for-sale and are carried at fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Estimated
fair values
|
|
($ in thousands)
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
U.S. treasury
|
|
$
|
8,146
|
|
|
$
|
—
|
|
|
$
|
33
|
|
|
$
|
8,113
|
|
|
U.S. government-sponsored agencies
|
|
302,811
|
|
|
6,489
|
|
|
180
|
|
|
309,120
|
|
|
Obligations of states and political subdivisions
|
|
263,064
|
|
|
13,852
|
|
|
59
|
|
|
276,857
|
|
|
Commercial mortgage-backed
|
|
83,882
|
|
|
2,869
|
|
|
87
|
|
|
86,664
|
|
|
Residential mortgage-backed
|
|
163,955
|
|
|
6,233
|
|
|
1,423
|
|
|
168,765
|
|
|
Other asset-backed
|
|
17,892
|
|
|
301
|
|
|
474
|
|
|
17,719
|
|
|
Corporate
|
|
416,025
|
|
|
9,342
|
|
|
745
|
|
|
424,622
|
|
|
Total fixed maturity securities
|
|
$
|
1,255,775
|
|
|
$
|
39,086
|
|
|
$
|
3,001
|
|
|
$
|
1,291,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Estimated
fair values
|
|
($ in thousands)
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
U.S. treasury
|
|
$
|
8,139
|
|
|
$
|
—
|
|
|
$
|
118
|
|
|
$
|
8,021
|
|
|
U.S. government-sponsored agencies
|
|
303,198
|
|
|
2,799
|
|
|
1,518
|
|
|
304,479
|
|
|
Obligations of states and political subdivisions
|
|
273,727
|
|
|
10,375
|
|
|
451
|
|
|
283,651
|
|
|
Commercial mortgage-backed
|
|
83,854
|
|
|
1,287
|
|
|
762
|
|
|
84,379
|
|
|
Residential mortgage-backed
|
|
161,055
|
|
|
3,374
|
|
|
2,292
|
|
|
162,137
|
|
|
Other asset-backed
|
|
21,596
|
|
|
273
|
|
|
1,035
|
|
|
20,834
|
|
|
Corporate
|
|
421,563
|
|
|
2,605
|
|
|
4,760
|
|
|
419,408
|
|
|
Total fixed maturity securities
|
|
$
|
1,273,132
|
|
|
$
|
20,713
|
|
|
$
|
10,936
|
|
|
$
|
1,282,909
|
|
The following tables set forth the estimated fair values and gross unrealized losses associated with investment securities that were in an unrealized loss position recognized in accumulated other comprehensive income as of
March 31, 2019
and
December 31, 2018
, listed by length of time the securities were consistently in an unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Less than twelve months
|
|
Twelve months or longer
|
|
Total
|
|
($ in thousands)
|
|
Fair
values
|
|
Unrealized
losses
|
|
Fair
values
|
|
Unrealized
losses
|
|
Fair
values
|
|
Unrealized
losses
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,113
|
|
|
$
|
33
|
|
|
$
|
8,113
|
|
|
$
|
33
|
|
|
U.S. government-sponsored agencies
|
|
—
|
|
|
—
|
|
|
47,961
|
|
|
180
|
|
|
47,961
|
|
|
180
|
|
|
Obligations of states and political subdivisions
|
|
—
|
|
|
—
|
|
|
12,372
|
|
|
59
|
|
|
12,372
|
|
|
59
|
|
|
Commercial mortgage-backed
|
|
—
|
|
|
—
|
|
|
11,140
|
|
|
87
|
|
|
11,140
|
|
|
87
|
|
|
Residential mortgage-backed
|
|
4,466
|
|
|
94
|
|
|
40,869
|
|
|
1,329
|
|
|
45,335
|
|
|
1,423
|
|
|
Other asset-backed
|
|
—
|
|
|
—
|
|
|
11,167
|
|
|
474
|
|
|
11,167
|
|
|
474
|
|
|
Corporate
|
|
7,901
|
|
|
349
|
|
|
36,514
|
|
|
396
|
|
|
44,415
|
|
|
745
|
|
|
Total fixed maturity securities
|
|
$
|
12,367
|
|
|
$
|
443
|
|
|
$
|
168,136
|
|
|
$
|
2,558
|
|
|
$
|
180,503
|
|
|
$
|
3,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Less than twelve months
|
|
Twelve months or longer
|
|
Total
|
|
($ in thousands)
|
|
Fair
values
|
|
Unrealized
losses
|
|
Fair
values
|
|
Unrealized
losses
|
|
Fair
values
|
|
Unrealized
losses
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,021
|
|
|
$
|
118
|
|
|
$
|
8,021
|
|
|
$
|
118
|
|
|
U.S. government-sponsored agencies
|
|
14,620
|
|
|
20
|
|
|
92,603
|
|
|
1,498
|
|
|
107,223
|
|
|
1,518
|
|
|
Obligations of states and political subdivisions
|
|
—
|
|
|
—
|
|
|
14,498
|
|
|
451
|
|
|
14,498
|
|
|
451
|
|
|
Commercial mortgage-backed
|
|
2,021
|
|
|
21
|
|
|
24,222
|
|
|
741
|
|
|
26,243
|
|
|
762
|
|
|
Residential mortgage-backed
|
|
16,852
|
|
|
145
|
|
|
45,597
|
|
|
2,147
|
|
|
62,449
|
|
|
2,292
|
|
|
Other asset-backed
|
|
4,810
|
|
|
147
|
|
|
11,691
|
|
|
888
|
|
|
16,501
|
|
|
1,035
|
|
|
Corporate
|
|
198,030
|
|
|
2,996
|
|
|
45,734
|
|
|
1,764
|
|
|
243,764
|
|
|
4,760
|
|
|
Total fixed maturity securities
|
|
$
|
236,333
|
|
|
$
|
3,329
|
|
|
$
|
242,366
|
|
|
$
|
7,607
|
|
|
$
|
478,699
|
|
|
$
|
10,936
|
|
Nearly all of the fixed maturity securities that are in an unrealized loss position are considered investment grade by credit rating agencies. Because management does not intend to sell these securities, does not believe it will be required to sell these securities before recovery, and believes it will collect the amounts due on these securities, it was determined that these securities were not “other-than-temporarily” impaired at
March 31, 2019
.
The amortized cost and estimated fair values of fixed maturity securities at
March 31, 2019
, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Amortized
cost
|
|
Estimated
fair values
|
|
Securities available-for-sale:
|
|
|
|
|
|
Due in one year or less
|
|
$
|
23,719
|
|
|
$
|
23,824
|
|
|
Due after one year through five years
|
|
265,818
|
|
|
270,454
|
|
|
Due after five years through ten years
|
|
314,904
|
|
|
325,430
|
|
|
Due after ten years
|
|
402,224
|
|
|
415,475
|
|
|
Securities not due at a single maturity date
|
|
249,110
|
|
|
256,677
|
|
|
Totals
|
|
$
|
1,255,775
|
|
|
$
|
1,291,860
|
|
A summary of realized investment gains and (losses) and the change in unrealized gains on equity investments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
($ in thousands)
|
|
2019
|
|
2018
|
|
Fixed maturity securities available-for-sale:
|
|
|
|
|
|
Gross realized investment gains
|
|
$
|
—
|
|
|
$
|
234
|
|
|
Gross realized investment losses
|
|
(272
|
)
|
|
(478
|
)
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
Net realized investment gains
|
|
4,097
|
|
|
2,716
|
|
|
Change in unrealized investment gains
|
|
19,829
|
|
|
(9,854
|
)
|
|
|
|
|
|
|
|
Other long-term investments, net
|
|
(1,011
|
)
|
|
1,989
|
|
|
Totals
|
|
$
|
22,643
|
|
|
$
|
(5,393
|
)
|
Gains and losses realized on the disposition of investments are included in net income. The cost of investments sold is determined on the specific identification method using the highest cost basis first. The Company did not have any outstanding cumulative credit losses on fixed maturity securities that have been recognized in earnings from “other-than-temporary” impairments during any of the reported periods. The net realized investment gains (losses) recognized on other long-term investments primarily represent changes in the carrying value of a limited partnership that is used solely to support an equity tail-risk hedging strategy.
|
|
|
|
11.
|
CONTINGENT LIABILITIES
|
The Company and Employers Mutual and its other subsidiaries are parties to numerous lawsuits arising in the normal course of the insurance business. The Company believes that the resolution of these lawsuits will not have a material adverse effect on its financial condition or its results of operations. The companies involved have established reserves which are believed adequate to cover any potential liabilities arising out of all such pending or threatened proceedings.
On March 22, 2019, a lawsuit was filed in state court in Iowa relating to the November 15, 2018 proposal by Employers Mutual to acquire all outstanding shares of stock in the Company not already owned by Employers Mutual. The lawsuit was filed as a purported class action, and names as defendants Employers Mutual and the five individual directors of the Company. The lawsuit alleges that the proposal is unfair to the Company’s minority shareholders, and seeks an unspecified amount of damages. Employers Mutual and the Company and its directors deny all allegations of wrongdoing set forth in the lawsuit. The Company believes that Directors, Officers and Organization Liability Coverage is in place that should be sufficient to cover any finding of liability.
The participants in the pooling agreement have purchased annuities from life insurance companies, under which the claimant is payee, to fund future payments that are fixed pursuant to specific claim settlement provisions. The Company’s share of case loss reserves eliminated by the purchase of those annuities was
$110,000
at
December 31, 2018
. The Company had a contingent liability for the aggregate guaranteed amount of the annuities of
$183,000
at
December 31, 2018
should the issuers of those annuities fail to perform. Although management is not able to verify the amount, the Company would likely have a similar contingent liability at
March 31, 2019
. The probability of a material loss due to failure of performance by the issuers of these annuities is considered remote.
|
|
|
|
12.
|
STOCK REPURCHASE PROGRAM
|
On November 3, 2011, the Company’s Board of Directors authorized a
$15.0 million
stock repurchase program. This program does not have an expiration date. The timing and terms of the purchases are determined by management based on board approved parameters and market conditions, and are conducted in accordance with the applicable rules of the Securities and Exchange Commission. Common stock repurchased under this program will be retired by the Company. The Company did not repurchase any shares during the first
three
months of either 2019 or 2018.
|
|
|
|
13.
|
ACCUMULATED OTHER COMPREHENSIVE INCOME
|
The Company has available-for-sale securities and receives an allocation of the actuarial losses and net prior service credits associated with Employers Mutual’s pension and postretirement benefit plans, both of which generate accumulated other comprehensive income (loss) amounts. The following table reconciles, by component, the beginning and ending balances of accumulated other comprehensive income (loss), net of tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) by component
|
|
|
|
Unrealized
gains (losses) on
available-for-
sale securities
|
|
Unrecognized pension and postretirement benefit obligations
|
|
|
|
($ in thousands)
|
|
|
Net actuarial loss
|
|
Prior service credit
|
|
Total
|
|
Total
|
|
Balance at December 31, 2018
|
|
$
|
7,724
|
|
|
$
|
(17,626
|
)
|
|
$
|
11,522
|
|
|
$
|
(6,104
|
)
|
|
$
|
1,620
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
20,568
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20,568
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
215
|
|
|
197
|
|
|
(510
|
)
|
|
(313
|
)
|
|
(98
|
)
|
|
Other comprehensive income (loss)
|
|
20,783
|
|
|
197
|
|
|
(510
|
)
|
|
(313
|
)
|
|
20,470
|
|
|
Balance at March 31, 2019
|
|
$
|
28,507
|
|
|
$
|
(17,429
|
)
|
|
$
|
11,012
|
|
|
$
|
(6,417
|
)
|
|
$
|
22,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) by component
|
|
|
|
Unrealized
gains (losses) on
available-for-
sale securities
|
|
Unrecognized pension and postretirement benefit obligations
|
|
|
|
($ in thousands)
|
|
|
Net actuarial loss
|
|
Prior service credit
|
|
Total
|
|
Total
|
|
Balance at December 31, 2017
|
|
$
|
83,497
|
|
|
$
|
(13,074
|
)
|
|
$
|
12,961
|
|
|
$
|
(113
|
)
|
|
$
|
83,384
|
|
|
Cumulative adjustment for adoption of financial instruments recognition and measurement changes
|
|
(66,234
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(66,234
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
|
(18,969
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(18,969
|
)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
193
|
|
|
81
|
|
|
(622
|
)
|
|
(541
|
)
|
|
(348
|
)
|
|
Other comprehensive income (loss)
|
|
(18,776
|
)
|
|
81
|
|
|
(622
|
)
|
|
(541
|
)
|
|
(19,317
|
)
|
|
Balance at March 31, 2018
|
|
$
|
(1,513
|
)
|
|
$
|
(12,993
|
)
|
|
$
|
12,339
|
|
|
$
|
(654
|
)
|
|
$
|
(2,167
|
)
|
The following tables display amounts reclassified out of accumulated other comprehensive income (loss) and into net income (loss) during the
three
months ended
March 31, 2019
and
2018
, respectively.
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
|
Accumulated other comprehensive
income (loss) components
|
|
Three months ended
March 31, 2019
|
|
Affected line item in the consolidated statements of income
|
|
Unrealized gains (losses) on investments:
|
|
|
|
|
|
Reclassification adjustment for net realized investment losses included in net income
|
|
$
|
(272
|
)
|
|
Net realized investment gains/losses and change in unrealized gains on equity investments
|
|
Deferred income tax (expense) benefit
|
|
57
|
|
|
Total income tax expense (benefit)
|
|
Net reclassification adjustment
|
|
(215
|
)
|
|
Net income (loss)
|
|
|
|
|
|
|
|
Unrecognized pension and postretirement benefit obligations:
|
|
|
|
|
|
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income:
|
|
|
|
|
|
Net actuarial loss
|
|
(249
|
)
|
|
(1)
|
|
Prior service credit
|
|
646
|
|
|
(1)
|
|
Total before tax
|
|
397
|
|
|
|
|
Deferred income tax (expense) benefit
|
|
(84
|
)
|
|
|
|
Net reclassification adjustment
|
|
313
|
|
|
|
|
|
|
|
|
|
|
Total reclassification adjustment
|
|
$
|
98
|
|
|
|
|
|
|
|
(1)
|
These reclassified components of accumulated other comprehensive income are included in the computation of net periodic pension and postretirement benefit cost (income) (see note 7, Employee Retirement Plans, for additional details).
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
|
Accumulated other comprehensive
income (loss) components
|
|
Three months ended March 31, 2018
|
|
Affected line item in the consolidated statements of income
|
|
Unrealized gains (losses) on investments:
|
|
|
|
|
|
Reclassification adjustment for net realized investment losses included in net income
|
|
$
|
(244
|
)
|
|
Net realized investment gains/losses and change in unrealized gains on equity investments
|
|
Deferred income tax (expense) benefit
|
|
51
|
|
|
Total income tax expense (benefit)
|
|
Net reclassification adjustment
|
|
(193
|
)
|
|
Net income (loss)
|
|
|
|
|
|
|
|
Unrecognized pension and postretirement benefit obligations:
|
|
|
|
|
|
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income:
|
|
|
|
|
|
Net actuarial loss
|
|
(103
|
)
|
|
(1)
|
|
Prior service credit
|
|
788
|
|
|
(1)
|
|
Total before tax
|
|
685
|
|
|
|
|
Deferred income tax (expense) benefit
|
|
(144
|
)
|
|
|
|
Net reclassification adjustment
|
|
541
|
|
|
|
|
|
|
|
|
|
|
Total reclassification adjustment
|
|
$
|
348
|
|
|
|
|
|
|
|
(1)
|
These reclassified components of accumulated other comprehensive income are included in the computation of net periodic pension and postretirement benefit cost (income) (see note 7, Employee Retirement Plans, for additional details).
|
|
|
|
|
14.
|
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
|
In June 2016, the FASB issued updated guidance in Financial Instruments-Credit Losses Topic 326 of the ASC. The objective of this update is to provide information about expected credit losses on financial instruments and other commitments to extend credit. Specifically, this updated guidance replaces the current incurred loss impairment methodology, which delays recognition of a loss until it is probable a loss has been incurred, with a methodology that reflects expected credit losses considering a broader range of reasonable and supportable information. This guidance covers financial assets that are not accounted for at fair value through net income, thus is not applicable to the Company's equity investments. This guidance is effective for interim and annual periods beginning after December 15, 2019, and is to be applied with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (modified-retrospective approach). Early adoption is permitted, but only to fiscal years beginning after December 15, 2018. The Company will adopt this guidance during the first quarter of 2020. The Company is currently evaluating the impact this guidance will have on the Company's consolidated financial condition and net income.
On May 9, 2019, it was announced that the Company and Employers Mutual had entered into a definitive merger agreement pursuant to which Employers Mutual will acquire all of the remaining shares of the Company for
$36
per share in cash. The transaction is expected to close in the second half of 2019.
EMC INSURANCE GROUP INC. AND SUBSIDIARIES