EMC INSURANCE GROUP INC - FORM 10-Q

Attached files

file	filename
EX-31.1 - EXHIBIT - EMC INSURANCE GROUP INC	a2014930ex311.htm
EXCEL - IDEA: XBRL DOCUMENT - EMC INSURANCE GROUP INC	Financial_Report.xls
EX-32.1 - EXHIBIT - EMC INSURANCE GROUP INC	a2014930ex321.htm
EX-31.2 - EXHIBIT - EMC INSURANCE GROUP INC	a2014930ex312.htm
EX-32.2 - EXHIBIT - EMC INSURANCE GROUP INC	a2014930ex322.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________to __________________

Commission File Number: 0-10956

EMC INSURANCE GROUP INC.

(Exact name of registrant as specified in its charter)



Iowa		42-6234555
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



717 Mulberry Street, Des Moines, Iowa		50309
(Address of principal executive offices)		(Zip Code)

(515) 345-2902

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

ý Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

ý Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	o	Accelerated filer	ý
Non-accelerated filer	o	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes ý No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class		Outstanding at October 31, 2014
Common stock, $1.00 par value		13,546,384

Table of Contents

TABLE OF CONTENTS



		PAGE
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48

PART II	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 6.	Exhibits	50

Signatures		51

Index to Exhibits		52

Table of Contents



PART I.	FINANCIAL INFORMATION



ITEM 1.	FINANCIAL STATEMENTS

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	September 30, 2014		December 31, 2013
($ in thousands, except share and per share amounts)	(Unaudited)
ASSETS
Investments:
Fixed maturity securities available-for-sale, at fair value (amortized cost $1,059,598 and $1,009,572)	$	1,101,240	$	1,027,984
Equity securities available-for-sale, at fair value (cost $122,986 and $113,835)	187,383		169,848
Other long-term investments	6,730		2,392
Short-term investments	69,991		56,166
Total investments	1,365,344		1,256,390

Cash	381		239
Reinsurance receivables due from affiliate	31,691		34,760
Prepaid reinsurance premiums due from affiliate	9,869		9,717
Deferred policy acquisition costs (affiliated $42,008 and $37,414)	42,254		37,792
Amounts due from affiliate to settle inter-company transaction balances	4,182		—
Prepaid pension and postretirement benefits due from affiliate	23,063		23,121
Accrued investment income	10,938		9,984
Accounts receivable	2,134		1,080
Income taxes recoverable	4,424		—
Goodwill	942		942
Other assets (affiliated $5,999 and $4,780)	6,148		4,908
Total assets	$	1,501,370	$	1,378,933

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	September 30, 2014		December 31, 2013
($ in thousands, except share and per share amounts)	(Unaudited)
LIABILITIES
Losses and settlement expenses (affiliated $656,855 and $600,313)	$	665,280	$	610,181
Unearned premiums (affiliated $252,152 and $218,788)	253,108		220,627
Other policyholders' funds (all affiliated)	8,541		8,491
Surplus notes payable to affiliate	25,000		25,000
Amounts due affiliate to settle inter-company transaction balances	—		13,522
Pension and postretirement benefits payable to affiliate	3,391		3,401
Income taxes payable	—		1,530
Deferred income taxes	23,526		12,822
Other liabilities (affiliated $19,943 and $25,161)	36,649		28,149
Total liabilities	1,015,495		923,723

STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding, 13,536,635 shares in 2014 and 13,306,027 shares in 2013	13,537		13,306
Additional paid-in capital	105,914		99,309
Accumulated other comprehensive income	78,229		59,010
Retained earnings	288,195		283,585
Total stockholders' equity	485,875		455,210
Total liabilities and stockholders' equity	$	1,501,370	$	1,378,933

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Three months ended September 30,
($ in thousands, except share and per share amounts)	2014			2013
REVENUES
Premiums earned (affiliated $137,395 and $130,873)	$	138,316		$	132,362
Investment income, net	11,503			10,545
Net realized investment gains, excluding impairment losses on securities available-for-sale	171			1,010
Total "other-than-temporary" impairment losses on securities available-for-sale	(561		)	(3		)
Portion of "other-than-temporary" impairment losses on fixed maturity securities available-for-sale reclassified from other comprehensive income (before taxes)	—			—
Net impairment losses on securities available-for-sale	(561		)	(3		)
Net realized investment gains (losses)	(390		)	1,007
Other income (all affiliated)	202			195
Total revenues	149,631			144,109

LOSSES AND EXPENSES
Losses and settlement expenses (affiliated $106,090 and $86,786)	106,652			88,235
Dividends to policyholders (all affiliated)	2,588			4,220
Amortization of deferred policy acquisition costs (affiliated $24,761 and $23,327)	24,957			23,671
Other underwriting expenses (affiliated $13,907 and $17,332)	13,907			17,332
Interest expense (all affiliated)	84			84
Other expense (affiliated $(152) and $544)	(440		)	1,003
Total losses and expenses	147,748			134,545
Income before income tax expense (benefit)	1,883			9,564

INCOME TAX EXPENSE (BENEFIT)
Current	(1,452		)	3,875
Deferred	1,106			(1,510		)
Total income tax expense (benefit)	(346		)	2,365
Net income	$	2,229		$	7,199

Net income per common share - basic and diluted	$	0.16		$	0.55

Dividend per common share	$	0.23		$	0.21

Average number of common shares outstanding - basic and diluted	13,511,692			13,131,323

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Nine months ended September 30,
($ in thousands, except share and per share amounts)	2014			2013
REVENUES
Premiums earned (affiliated $399,541, and $374,609)	$	405,348		$	380,048
Investment income, net	34,434			32,028
Net realized investment gains, excluding impairment losses on securities available-for-sale	4,092			3,874
Total "other-than-temporary" impairment losses on securities available-for-sale	(877		)	(24		)
Portion of "other-than-temporary" impairment losses on fixed maturity securities available-for-sale reclassified from other comprehensive income (before taxes)	—			—
Net impairment losses on securities available-for-sale	(877		)	(24		)
Net realized investment gains (losses)	3,215			3,850
Other income (all affiliated)	584			593
Total revenues	443,581			416,519

LOSSES AND EXPENSES
Losses and settlement expenses (affiliated $298,444 and $244,756)	301,467			249,777
Dividends to policyholders (all affiliated)	6,517			8,747
Amortization of deferred policy acquisition costs (affiliated $73,365 and $68,177)	74,690			69,503
Other underwriting expenses (affiliated $43,229 and $48,387)	42,941			48,408
Interest expense (all affiliated)	253			300
Other expense (affiliated $578 and $965)	671			1,762
Total losses and expenses	426,539			378,497
Income before income tax expense (benefit)	17,042			38,022

INCOME TAX EXPENSE (BENEFIT)
Current	2,848			11,973
Deferred	356			(1,635		)
Total income tax expense (benefit)	3,204			10,338
Net income	$	13,838		$	27,684

Net income per common share - basic and diluted	$	1.03		$	2.12

Dividend per common share	$	0.69		$	0.63

Average number of common shares outstanding - basic and diluted	13,443,798			13,044,351

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three months ended September 30,
($ in thousands)	2014			2013
Net income	$	2,229		$	7,199

OTHER COMPREHENSIVE INCOME (LOSS)
Change in unrealized holding gains (losses) on investment securities, net of deferred income tax expense (benefit) of $(110) and $(178)	(204		)	(331		)
Reclassification adjustment for realized investment gains included in net income, net of income tax expense of $(184) and $(353)	(343		)	(654		)
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit cost (income), net of deferred income tax (expense) benefit of $(239) and $191:
Net actuarial loss	94			470
Prior service credit	(537		)	(115		)
Total reclassification adjustment associated with affiliate's pension and postretirement benefit plans	(443		)	355

Other comprehensive income (loss)	(990		)	(630		)

Total comprehensive income	$	1,239		$	6,569



	Nine months ended September 30,
($ in thousands)	2014			2013
Net income	$	13,838		$	27,684

OTHER COMPREHENSIVE INCOME (LOSS)
Change in unrealized holding gains (losses) on investment securities, net of deferred income tax expense (benefit) of $12,927 and $(9,390)	24,007			(17,439		)
Reclassification adjustment for realized investment gains included in net income, net of income tax expense of $(1,862) and $(1,348)	(3,458		)	(2,502		)
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit cost (income), net of deferred income tax (expense) benefit of $(717) and $574:
Net actuarial loss	282			1,411
Prior service credit	(1,612		)	(345		)
Total reclassification adjustment associated with affiliate's pension and postretirement benefit plans	(1,330		)	1,066

Other comprehensive income (loss)	19,219			(18,875		)

Total comprehensive income	$	33,057		$	8,809

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine months ended September 30,
($ in thousands)	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	13,838		$	27,684
Adjustments to reconcile net income to net cash provided by operating activities:
Losses and settlement expenses (affiliated $56,542 and $18,213)	55,099			21,551
Unearned premiums (affiliated $33,364 and $40,590)	32,481			40,691
Other policyholders' funds due to affiliate	50			2,289
Amounts due to/from affiliate to settle inter-company transaction balances	(17,704		)	(28,605		)
Net pension and postretirement benefits due from affiliate	(1,999		)	4,163
Reinsurance receivables due from affiliate	3,069			3,680
Prepaid reinsurance premiums due from affiliate	(152		)	(4,340		)
Commissions payable (affiliated $(2,607) and $(852))	(2,787		)	(868		)
Deferred policy acquisition costs (affiliated $(4,594) and $(5,446))	(4,462		)	(5,467		)
Accrued investment income	(954		)	(409		)
Current income tax	(5,855		)	2,035
Deferred income tax	356			(1,635		)
Net realized investment gains	(3,215		)	(3,850		)
Other, net (affiliated $(3,839) and $(1,044))	(546		)	(91		)
Total adjustments to reconcile net income to net cash provided by operating activities	53,381			29,144
Net cash provided by operating activities	67,219			56,828
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturity securities available-for-sale	(137,283		)	(199,004		)
Disposals of fixed maturity securities available-for-sale	97,799			159,214
Purchases of equity securities available-for-sale	(35,659		)	(33,374		)
Disposals of equity securities available-for-sale	31,036			30,491
Purchases of other long-term investments	(7,007		)	(644		)
Disposals of other long-term investments	344			154
Net purchases of short-term investments	(13,825		)	(11,152		)
Net cash used in investing activities	(64,595		)	(54,315		)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock through affiliate’s stock plans	6,647			5,941
Excess tax benefit associated with affiliate’s stock plans	99			52
Dividends paid to stockholders (affiliated $(5,415) and $(4,944))	(9,228		)	(8,235		)
Net cash used in financing activities	(2,482		)	(2,242		)
NET INCREASE IN CASH	142			271
Cash at the beginning of the year	239			330
Cash at the end of the quarter	$	381		$	601

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

($ in thousands, except share and per share amounts)


1.	BASIS OF PRESENTATION

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 Company writes property and casualty insurance in both commercial and personal lines of insurance, with a focus on medium-sized commercial accounts. The term “Company” is used interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC Insurance Group Inc. and its subsidiaries.

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, 2013 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.

During the first quarter of 2014, the Company invested $4,367 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. This investment is included in "other long-term investments" in the Company's financial statements and is carried under the equity method of accounting. 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.

Certain amounts previously reported in the prior years’ consolidated financial statements have been reclassified or adjusted to conform to current year presentation.

In reading these financial statements, reference should be made to the Company’s 2013 Form 10-K or the 2013 Annual Report to Stockholders for more detailed footnote information.


2.	TRANSACTIONS WITH AFFILIATES

The terms of the excess of loss reinsurance agreement between EMC Reinsurance Company and Employers Mutual have been revised beginning January 1, 2014. Effective January 1, 2014, the cost of the excess of loss coverage decreased from 9.0 percent of total assumed reinsurance premiums written to 8.0 percent of total assumed reinsurance premiums written (no changes to the amount of losses retained per event).


3.	REINSURANCE

The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the three and nine months ended September 30, 2014 and 2013 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, quota share and excess of loss agreements with Employers Mutual are reported as “affiliated” balances.

Table of Contents



	Three months ended September 30, 2014
	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	117,508		$	—		$	117,508
Assumed from nonaffiliates	1,038			38,326			39,364
Assumed from affiliates	137,591			—			137,591
Ceded to nonaffiliates	(7,624		)	(3,735		)	(11,359		)
Ceded to affiliates	(117,508		)	(2,767		)	(120,275		)
Net premiums written	$	131,005		$	31,824		$	162,829

Premiums earned
Direct	$	93,571		$	—		$	93,571
Assumed from nonaffiliates	963			37,369			38,332
Assumed from affiliates	113,039			—			113,039
Ceded to nonaffiliates	(6,050		)	(4,238		)	(10,288		)
Ceded to affiliates	(93,571		)	(2,767		)	(96,338		)
Net premiums earned	$	107,952		$	30,364		$	138,316

Losses and settlement expenses incurred
Direct	$	55,850		$	—		$	55,850
Assumed from nonaffiliates	540			29,938			30,478
Assumed from affiliates	78,147			291			78,438
Ceded to nonaffiliates	(131		)	(2,621		)	(2,752		)
Ceded to affiliates	(55,850		)	488			(55,362		)
Net losses and settlement expenses incurred	$	78,556		$	28,096		$	106,652

Table of Contents



	Three months ended September 30, 2013
	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	117,721		$	—		$	117,721
Assumed from nonaffiliates	945			43,472			44,417
Assumed from affiliates	128,564			—			128,564
Ceded to nonaffiliates	(7,324		)	(5,163		)	(12,487		)
Ceded to affiliates	(117,721		)	(3,448		)	(121,169		)
Net premiums written	$	122,185		$	34,861		$	157,046

Premiums earned
Direct	$	91,944		$	—		$	91,944
Assumed from nonaffiliates	814			40,219			41,033
Assumed from affiliates	105,134			—			105,134
Ceded to nonaffiliates	(5,863		)	(4,494		)	(10,357		)
Ceded to affiliates	(91,944		)	(3,448		)	(95,392		)
Net premiums earned	$	100,085		$	32,277		$	132,362

Losses and settlement expenses incurred
Direct	$	50,705		$	—		$	50,705
Assumed from nonaffiliates	1,034			24,364			25,398
Assumed from affiliates	64,168			296			64,464
Ceded to nonaffiliates	436			(2,031		)	(1,595		)
Ceded to affiliates	(50,705		)	(32		)	(50,737		)
Net losses and settlement expenses incurred	$	65,638		$	22,597		$	88,235

Table of Contents



	Nine months ended September 30, 2014
	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	298,400		$	—		$	298,400
Assumed from nonaffiliates	2,818			110,346			113,164
Assumed from affiliates	362,925			—			362,925
Ceded to nonaffiliates	(19,761		)	(11,133		)	(30,894		)
Ceded to affiliates	(298,400		)	(7,937		)	(306,337		)
Net premiums written	$	345,982		$	91,276		$	437,258

Premiums earned
Direct	$	277,932		$	—		$	277,932
Assumed from nonaffiliates	2,698			113,014			115,712
Assumed from affiliates	328,317			—			328,317
Ceded to nonaffiliates	(18,299		)	(12,445		)	(30,744		)
Ceded to affiliates	(277,932		)	(7,937		)	(285,869		)
Net premiums earned	$	312,716		$	92,632		$	405,348

Losses and settlement expenses incurred
Direct	$	179,277		$	—		$	179,277
Assumed from nonaffiliates	1,626			81,921			83,547
Assumed from affiliates	233,649			828			234,477
Ceded to nonaffiliates	(8,206		)	(8,880		)	(17,086		)
Ceded to affiliates	(179,277		)	529			(178,748		)
Net losses and settlement expenses incurred	$	227,069		$	74,398		$	301,467

Table of Contents



	Nine months ended September 30, 2013
	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	296,467		$	—		$	296,467
Assumed from nonaffiliates	2,440			117,181			119,621
Assumed from affiliates	338,105			—			338,105
Ceded to nonaffiliates	(18,320		)	(14,912		)	(33,232		)
Ceded to affiliates	(296,467		)	(9,204		)	(305,671		)
Net premiums written	$	322,225		$	93,065		$	415,290

Premiums earned
Direct	$	267,579		$	—		$	267,579
Assumed from nonaffiliates	2,238			110,406			112,644
Assumed from affiliates	305,500			—			305,500
Ceded to nonaffiliates	(17,131		)	(11,761		)	(28,892		)
Ceded to affiliates	(267,579		)	(9,204		)	(276,783		)
Net premiums earned	$	290,607		$	89,441		$	380,048

Losses and settlement expenses incurred
Direct	$	171,775		$	—		$	171,775
Assumed from nonaffiliates	1,461			60,063			61,524
Assumed from affiliates	197,525			731			198,256
Ceded to nonaffiliates	(3,300		)	(5,658		)	(8,958		)
Ceded to affiliates	(171,775		)	(1,045		)	(172,820		)
Net losses and settlement expenses incurred	$	195,686		$	54,091		$	249,777

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 reinsurance business that is ceded to other insurance companies in connection with “fronting” activities initiated by Employers Mutual.


•	“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. For the reinsurance subsidiary this line represents amounts ceded to Employers Mutual under the terms of the excess of loss reinsurance agreement.

Table of Contents


4.	SEGMENT INFORMATION

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.

Summarized financial information for the Company’s segments is as follows:



Three months ended September 30, 2014	Property and casualty insurance			Reinsurance			Parent company			Consolidated
Premiums earned	$	107,952		$	30,364		$	—		$	138,316

Underwriting profit (loss)	(4,414		)	(5,374		)	—			(9,788		)
Net investment income (loss)	8,230			3,275			(2		)	11,503
Realized investment gains (losses)	(286		)	(104		)	—			(390		)
Other income	202			—			—			202
Interest expense	84			—			—			84
Other expenses	132			(1,028		)	456			(440		)
Income (loss) before income tax expense (benefit)	$	3,516		$	(1,175	)	$	(458	)	$	1,883



Three months ended September 30, 2013	Property and casualty insurance			Reinsurance		Parent company			Consolidated
Premiums earned	$	100,085		$	32,277	$	—		$	132,362

Underwriting profit (loss)	(3,945		)	2,849		—			(1,096		)
Net investment income (loss)	7,677			2,870		(2		)	10,545
Realized investment gains (losses)	720			287		—			1,007
Other income	195			—		—			195
Interest expense	84			—		—			84
Other expenses	163			557		283			1,003
Income (loss) before income tax expense (benefit)	$	4,400		$	5,449	$	(285	)	$	9,564

Table of Contents



Nine months ended September 30, 2014	Property and casualty insurance			Reinsurance			Parent company			Consolidated
Premiums earned	$	312,716		$	92,632		$	—		$	405,348

Underwriting profit (loss)	(15,868		)	(4,399		)	—			(20,267		)
Net investment income (loss)	24,818			9,624			(8		)	34,434
Realized investment gains (losses)	2,293			922			—			3,215
Other income	584			—			—			584
Interest expense	253			—			—			253
Other expenses	540			(1,042		)	1,173			671
Income (loss) before income tax expense (benefit)	$	11,034		$	7,189		$	(1,181	)	$	17,042

Assets	$	1,069,564		$	421,292		$	485,970		$	1,976,826
Eliminations	—			—			(475,456		)	(475,456		)
Net assets	$	1,069,564		$	421,292		$	10,514		$	1,501,370



Nine months ended September 30, 2013	Property and casualty insurance			Reinsurance		Parent company			Consolidated
Premiums earned	$	290,607		$	89,441	$	—		$	380,048

Underwriting profit (loss)	(11,752		)	15,365		—			3,613
Net investment income (loss)	23,422			8,613		(7		)	32,028
Realized investment gains (losses)	3,069			781		—			3,850
Other income	593			—		—			593
Interest expense	300			—		—			300
Other expenses	554			217		991			1,762
Income (loss) before income tax expense (benefit)	$	14,478		$	24,542	$	(998	)	$	38,022

Year ended December 31, 2013
Assets	$	978,746		$	387,284	$	455,368		$	1,821,398
Eliminations	—			—		(441,984		)	(441,984		)
Reclassifications	—			—		(481		)	(481		)
Net assets	$	978,746		$	387,284	$	12,903		$	1,378,933

Table of Contents

The following table displays the net premiums earned of the property and casualty insurance segment and the reinsurance segment for the three and nine months ended September 30, 2014 and 2013, by line of insurance.



	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
Property and casualty insurance segment
Commercial lines:
Automobile	$	25,000	$	22,254	$	71,657	$	63,475
Property	25,111		22,337		71,756		64,147
Workers' compensation	22,209		20,784		65,172		61,338
Liability	22,090		20,066		63,600		57,701
Other	1,881		1,898		5,472		5,604
Total commercial lines	96,291		87,339		277,657		252,265

Personal lines:
Automobile	6,284		6,876		18,999		20,715
Property	5,177		5,688		15,483		17,104
Liability	200		182		577		523
Total personal lines	11,661		12,746		35,059		38,342
Total property and casualty insurance	$	107,952	$	100,085	$	312,716	$	290,607

Reinsurance segment
Pro rata reinsurance:
Property and liability	$	700	$	824	$	5,031	$	4,336
Property	1,198		5,862		7,263		14,134
Crop	1,400		612		2,613		1,558
Liability	3,148		1,432		8,661		2,950
Marine	3,526		4,444		11,774		10,401
Total pro rata reinsurance	9,972		13,174		35,342		33,379

Excess of loss reinsurance:
Property	17,248		16,509		48,507		47,958
Liability	3,051		2,594		8,689		8,104
Surety	93		—		94		—
Total excess of loss reinsurance	20,392		19,103		57,290		56,062
Total reinsurance	$	30,364	$	32,277	$	92,632	$	89,441

Consolidated	$	138,316	$	132,362	$	405,348	$	380,048

Table of Contents


5.	INCOME TAXES

The actual income tax expense (benefit) for the three and nine months ended September 30, 2014 and 2013 differed from the “expected” income tax expense (benefit) for those periods (computed by applying the United States federal corporate tax rate of 35 percent to income before income tax expense (benefit)) as follows:



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Computed "expected" income tax expense	$	659		$	3,348		$	5,965		$	13,308
Increases (decreases) in tax resulting from:
Tax-exempt interest income	(757		)	(961		)	(2,559		)	(2,897		)
Dividends received deduction	(247		)	(221		)	(725		)	(638		)
Proration of tax-exempt interest and dividends received deduction	151			188			493			541
Other, net	(152		)	11			30			24
Income tax expense (benefit)	$	(346	)	$	2,365		$	3,204		$	10,338

The Company had no provision for uncertain income tax positions at September 30, 2014 or December 31, 2013. The Company did not recognize any interest or other penalties related to U.S. federal or state income taxes during the three or nine months ended September 30, 2014 or 2013. 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 2011. The Company’s 2011 income tax return has been audited and no adjustments were proposed.


6.	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 September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Pension plans:
Service cost	$	3,216		$	3,302		$	9,647		$	9,909
Interest cost	2,416			1,914			7,248			5,742
Expected return on plan assets	(5,183		)	(4,288		)	(15,549		)	(12,863		)
Amortization of net actuarial loss	91			1,491			274			4,472
Amortization of prior service cost	8			13			24			38
Net periodic pension benefit cost	$	548		$	2,432		$	1,644		$	7,298

Postretirement benefit plans:
Service cost	$	315		$	1,575		$	945		$	4,725
Interest cost	564			1,543			1,691			4,629
Expected return on plan assets	(1,099		)	(908		)	(3,297		)	(2,723		)
Amortization of net actuarial loss	413			923			1,238			2,770
Amortization of prior service credit	(2,867		)	(622		)	(8,600		)	(1,868		)
Net periodic postretirement benefit cost (income)	$	(2,674	)	$	2,511		$	(8,023	)	$	7,533

Table of Contents

The net periodic postretirement benefit income recognized on Employers Mutual's postretirement benefit plans during the three and nine months ended September 30, 2014 is due to a plan amendment that was announced in the fourth quarter of 2013. This plan amendment generated a large prior service credit that is being amortized into net periodic benefit cost over 10 years. In addition, the service cost and interest cost components of net periodic benefit cost of the revised plan declined significantly.

Net periodic pension benefit cost allocated to the Company amounted to $170 and $753 for the three months and $510 and $2,260 for the nine months ended September 30, 2014 and 2013, respectively. Net periodic postretirement benefit cost (income) allocated to the Company amounted to $(770) and $728 for the three months and $(2,312) and $2,184 for the nine months ended September 30, 2014 and 2013, respectively.

The Company’s share of Employers Mutual’s 2014 planned contributions to the pension plan and the Voluntary Employee Beneficiary Association (VEBA) trust, if made, will be approximately $4,500 and $0, respectively.


7.	STOCK-BASED COMPENSATION

The Company has no stock-based compensation plans of its own; however, Employers Mutual 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 on the open market; or 3) directly purchasing common stock from the Company at the current fair value. Employers Mutual has historically purchased common stock from the Company for use in its stock plans and its non-employee director stock plans. Beginning with the second quarter 2014 purchase, Employers Mutual is also purchasing common stock from the Company to fulfill its obligations under its employee stock purchase plan (previously the shares needed for this were purchased on the open market).

Stock Plans

Employers Mutual currently maintains two separate stock plans for the benefit of officers and key employees of Employers Mutual and its subsidiaries. A total of 1,500,000 shares of the Company’s common stock have been reserved for issuance under the 2003 Employers Mutual Casualty Company Incentive Stock Option Plan (2003 Plan) and a total of 2,000,000 shares have been reserved for issuance under the 2007 Employers Mutual Casualty Company Stock Incentive Plan (2007 Plan).

The 2003 Plan permits the issuance of incentive stock options only, while the 2007 Plan permits the issuance of performance shares, performance units, and other stock-based awards, in addition to qualified (incentive) and non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units. Both plans provide for a ten-year time limit for granting awards. No additional options can be granted under the 2003 Plan due to the expiration of the term of the plan. Options granted under the plans generally have a vesting period of five years, with options becoming exercisable in equal annual cumulative increments commencing on the first anniversary of the option grant. Option prices cannot be less than the fair value of the common stock on the date of grant. Restricted stock awards granted under the 2007 Plan generally have a vesting period of four years, with shares vesting in equal annual cumulative increments commencing on the first anniversary of the grant. Holders of unvested shares receive compensation income equal to the amount of any dividends declared.

The Senior Executive Compensation and Stock Option Committee (the “Committee”) of Employers Mutual’s Board of Directors (the “Board”) grants the awards and is the administrator of the plans. The Company’s Compensation Committee must consider and approve all awards granted to the Company’s executive officers.

The Company recognized compensation expense from these plans of $65 ($43 net of tax) and $78 ($50 net of tax) for the three months and $204 ($133 net of tax) and $220 ($144 net of tax) for the nine months ended September 30, 2014 and 2013, respectively. During the first nine months of 2014, 62,764 shares of restricted stock were granted under the 2007 Plan to eligible participants and 14,117 shares of restricted stock vested. In addition, 178,452 options were exercised under the plans at a weighted average exercise price of $21.30.

Table of Contents


8.	DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount and the estimated fair value of the Company’s financial instruments is summarized below.



	Carrying amount		Estimated fair value
September 30, 2014
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	9,598	$	9,598
U.S. government-sponsored agencies	204,363		204,363
Obligations of states and political subdivisions	332,093		332,093
Commercial mortgage-backed	51,693		51,693
Residential mortgage-backed	98,406		98,406
Other asset-backed	15,937		15,937
Corporate	389,150		389,150
Total fixed maturity securities available-for-sale	1,101,240		1,101,240

Equity securities available-for-sale:
Common stocks:
Financial services	29,958		29,958
Information technology	26,412		26,412
Healthcare	25,003		25,003
Consumer staples	14,724		14,724
Consumer discretionary	19,239		19,239
Energy	24,621		24,621
Industrials	15,828		15,828
Other	19,276		19,276
Non-redeemable preferred stocks	12,322		12,322
Total equity securities available-for-sale	187,383		187,383

Short-term investments	69,991		69,991

Liabilities:
Surplus notes	25,000		11,557

Table of Contents



	Carrying amount		Estimated fair value
December 31, 2013
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	9,412	$	9,412
U.S. government-sponsored agencies	146,946		146,946
Obligations of states and political subdivisions	357,052		357,052
Commercial mortgage-backed	68,939		68,939
Residential mortgage-backed	94,179		94,179
Other asset-backed	12,648		12,648
Corporate	338,808		338,808
Total fixed maturity securities available-for-sale	1,027,984		1,027,984

Equity securities available-for-sale:
Common stocks:
Financial services	28,498		28,498
Information technology	18,917		18,917
Healthcare	21,945		21,945
Consumer staples	13,011		13,011
Consumer discretionary	21,031		21,031
Energy	21,117		21,117
Industrials	17,264		17,264
Other	17,811		17,811
Non-redeemable preferred stocks	10,254		10,254
Total equity securities available-for-sale	169,848		169,848

Short-term investments	56,166		56,166

Liabilities:
Surplus notes	25,000		10,040

The estimated fair value 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. The discount rate was set at the average of current yields-to-maturity on several insurance company surplus notes that are traded in observable markets, adjusted upward by 50 basis points to reflect illiquidity and perceived risk premium differences. Other assumptions include a 25-year term (the surplus notes have no stated maturity date) and an interest rate that continues at the current 1.35 percent interest rate. The rate is typically adjusted every five years and is based upon the then-current Federal Home Loan Bank borrowing rate for 5-year funds available to Employers Mutual.

Table of Contents

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.

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 Wall Street 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.

Table of Contents

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 September 30, 2014, the Company had no securities priced solely from broker quotes (seven at December 31, 2013). At December 31, 2013 all of these securities were reported as Level 2 fair value measurements due to the broker quote prices approximating the Company's price estimates obtained by applying pricing techniques with observable inputs.

A small number of the Company’s securities are not priced by the independent pricing service. One is an equity security that is reported as a Level 3 fair value measurement at September 30, 2014 and December 31, 2013, since no reliable observable inputs are used in its valuation. This equity security continues to be reported at the fair value obtained from the Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (NAIC). The SVO establishes a per share price for this security based on an annual review of that company’s financial statements, typically performed during the second quarter. The other securities not priced by the Company’s independent pricing service at September 30, 2014 include ten fixed maturity securities (six at December 31, 2013). Two of these fixed maturity securities, 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 or the Company's investment custodian using similar pricing techniques as the Company’s independent pricing service.

Table of Contents

Presented in the table below are the estimated fair values of the Company’s financial instruments as of September 30, 2014 and December 31, 2013.



			Fair value measurements using
September 30, 2014	Total		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	$	9,598	$	—	$	9,598	$	—
U.S. government-sponsored agencies	204,363		—		204,363		—
Obligations of states and political subdivisions	332,093		—		332,093		—
Commercial mortgage-backed	51,693		—		51,693		—
Residential mortgage-backed	98,406		—		98,406		—
Other asset-backed	15,937		—		15,937		—
Corporate	389,150		—		387,274		1,876
Total fixed maturity securities available-for-sale	1,101,240		—		1,099,364		1,876

Equity securities available-for-sale:
Common stocks:
Financial services	29,958		29,955		—		3
Information technology	26,412		26,412		—		—
Healthcare	25,003		25,003		—		—
Consumer staples	14,724		14,724		—		—
Consumer discretionary	19,239		19,239		—		—
Energy	24,621		24,621		—		—
Industrials	15,828		15,828		—		—
Other	19,276		19,276		—		—
Non-redeemable preferred stocks	12,322		7,736		4,586		—
Total equity securities available-for-sale	187,383		182,794		4,586		3

Short-term investments	69,991		69,991		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	11,557		—		—		11,557

Table of Contents



			Fair value measurements using
December 31, 2013	Total		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	$	9,412	$	—	$	9,412	$	—
U.S. government-sponsored agencies	146,946		—		146,946		—
Obligations of states and political subdivisions	357,052		—		357,052		—
Commercial mortgage-backed	68,939		—		68,939		—
Residential mortgage-backed	94,179		—		94,179		—
Other asset-backed	12,648		—		12,648		—
Corporate	338,808		—		336,832		1,976
Total fixed maturity securities available-for-sale	1,027,984		—		1,026,008		1,976

Equity securities available-for-sale:
Common stocks:
Financial services	28,498		28,495		—		3
Information technology	18,917		18,917		—		—
Healthcare	21,945		21,945		—		—
Consumer staples	13,011		13,011		—		—
Consumer discretionary	21,031		21,031		—		—
Energy	21,117		21,117		—		—
Industrials	17,264		17,264		—		—
Other	17,811		17,811		—		—
Non-redeemable preferred stocks	10,254		5,795		4,459		—
Total equity securities available-for-sale	169,848		165,386		4,459		3

Short-term investments	56,166		56,166		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	10,040		—		—		10,040

Table of Contents

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 and nine months ended September 30, 2014 and 2013. Any unrealized gains or losses on these securities are recognized in other comprehensive income. Any gains or losses from disposals or impairments of these securities are reported as realized investment gains or losses in net income.



	Fair value measurements using significant unobservable inputs (Level 3)
Three months ended September 30, 2014	Fixed maturity securities available-for-sale, corporate			Equity securities available-for-sale, financial services		Total
Beginning balance	$	1,949		$	3	$	1,952
Settlements	(70		)	—		(70		)
Unrealized gains (losses) included in other comprehensive income (loss)	(3		)	—		(3		)
Balance at September 30, 2014	$	1,876		$	3	$	1,879

Nine months ended September 30, 2014
Beginning balance	$	1,976		$	3	$	1,979
Settlements	(112		)	—		(112		)
Unrealized gains (losses) included in other comprehensive income (loss)	12			—		12
Balance at September 30, 2014	$	1,876		$	3	$	1,879



	Fair value measurements using significant unobservable inputs (Level 3)
Three months ended September 30, 2013	Fixed maturity securities available-for-sale, corporate		Equity securities available-for-sale, financial services		Total
Beginning balance	$	948	$	3	$	951
Unrealized gains (losses) included in other comprehensive income (loss)	4		—		4
Balance at September 30, 2013	$	952	$	3	$	955

Nine months ended September 30, 2013
Beginning balance	$	—	$	2	$	2
Purchases	948		—		948
Unrealized gains (losses) included in other comprehensive income (loss)	4		1		5
Balance at September 30, 2013	$	952	$	3	$	955

There were no transfers into or out of Levels 1 or 2 during the three or nine months ended September 30, 2014 or 2013. It is the Company’s policy to recognize transfers between levels at the beginning of the reporting period.

Table of Contents


9.	INVESTMENTS

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 September 30, 2014 and December 31, 2013 are as follows. All securities are classified as available-for-sale and are carried at fair value.



September 30, 2014	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	9,565	$	132	$	99	$	9,598
U.S. government-sponsored agencies	206,743		1,781		4,161		204,363
Obligations of states and political subdivisions	307,807		24,373		87		332,093
Commercial mortgage-backed	47,513		4,180		—		51,693
Residential mortgage-backed	100,371		992		2,957		98,406
Other asset-backed	14,811		1,176		50		15,937
Corporate	372,788		17,352		990		389,150
Total fixed maturity securities	1,059,598		49,986		8,344		1,101,240

Equity securities:
Common stocks:
Financial services	20,136		9,888		66		29,958
Information technology	16,898		9,514		—		26,412
Healthcare	14,008		11,003		8		25,003
Consumer staples	9,985		4,739		—		14,724
Consumer discretionary	9,886		9,353		—		19,239
Energy	16,638		8,094		111		24,621
Industrials	8,386		7,462		20		15,828
Other	14,967		4,377		68		19,276
Non-redeemable preferred stocks	12,082		509		269		12,322
Total equity securities	122,986		64,939		542		187,383
Total securities available-for-sale	$	1,182,584	$	114,925	$	8,886	$	1,288,623

Table of Contents



December 31, 2013	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	9,540	$	191	$	319	$	9,412
U.S. government-sponsored agencies	156,981		1,356		11,391		146,946
Obligations of states and political subdivisions	346,554		15,040		4,542		357,052
Commercial mortgage-backed	63,185		5,842		88		68,939
Residential mortgage-backed	96,058		1,073		2,952		94,179
Other asset-backed	11,456		1,192		—		12,648
Corporate	325,798		16,542		3,532		338,808
Total fixed maturity securities	1,009,572		41,236		22,824		1,027,984

Equity securities:
Common stocks:
Financial services	19,273		9,374		149		28,498
Information technology	12,645		6,301		29		18,917
Healthcare	12,801		9,144		—		21,945
Consumer staples	9,162		3,849		—		13,011
Consumer discretionary	10,722		10,309		—		21,031
Energy	14,102		7,341		326		21,117
Industrials	11,190		6,075		1		17,264
Other	13,358		4,489		36		17,811
Non-redeemable preferred stocks	10,582		316		644		10,254
Total equity securities	113,835		57,198		1,185		169,848
Total securities available-for-sale	$	1,123,407	$	98,434	$	24,009	$	1,197,832

Table of Contents

The following table sets forth the estimated fair value and gross unrealized losses associated with investment securities that were in an unrealized loss position as of September 30, 2014 and December 31, 2013, listed by length of time the securities were in an unrealized loss position.



September 30, 2014	Less than twelve months				Twelve months or longer				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Fixed maturity securities:
U.S. treasury	$	—	$	—	$	4,739	$	99	$	4,739	$	99
U.S. government-sponsored agencies	32,507		112		95,617		4,049		128,124		4,161
Obligations of states and political subdivisions	—		—		3,715		87		3,715		87
Residential mortgage-backed	42,877		1,027		23,215		1,930		66,092		2,957
Other asset-backed	4,987		50		—		—		4,987		50
Corporate	44,368		372		24,511		618		68,879		990
Total, fixed maturity securities	124,739		1,561		151,797		6,783		276,536		8,344
Equity securities:
Common stocks:
Financial services	2,184		66		—		—		2,184		66
Healthcare	840		8		—		—		840		8
Energy	3,078		111		—		—		3,078		111
Industrials	351		20		—		—		351		20
Other	1,756		68		—		—		1,756		68
Non-redeemable preferred stocks	—		—		1,731		269		1,731		269
Total, equity securities	8,209		273		1,731		269		9,940		542
Total temporarily impaired securities	$	132,948	$	1,834	$	153,528	$	7,052	$	286,476	$	8,886

Table of Contents



December 31, 2013	Less than twelve months				Twelve months or longer				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Fixed maturity securities:
U.S. treasury	$	4,507	$	319	$	—	$	—	$	4,507	$	319
U.S. government-sponsored agencies	93,856		8,120		24,053		3,271		117,909		11,391
Obligations of states and political subdivisions	74,523		4,335		3,008		207		77,531		4,542
Commercial mortgage-backed	10,551		88		—		—		10,551		88
Residential mortgage-backed	44,243		2,482		4,600		470		48,843		2,952
Corporate	81,292		2,704		10,547		828		91,839		3,532
Total, fixed maturity securities	308,972		18,048		42,208		4,776		351,180		22,824
Equity securities:
Common stocks:
Financial services	2,801		149		—		—		2,801		149
Information technology	610		29		—		—		610		29
Consumer staples	30		—		—		—		30		—
Energy	1,450		326		—		—		1,450		326
Industrials	625		1		—		—		625		1
Other	1,499		36		—		—		1,499		36
Non-redeemable preferred stocks	2,121		128		1,484		516		3,605		644
Total, equity securities	9,136		669		1,484		516		10,620		1,185
Total temporarily impaired securities	$	318,108	$	18,717	$	43,692	$	5,292	$	361,800	$	24,009

Unrealized losses on fixed maturity securities decreased in nearly every asset class at September 30, 2014 due to the decline in interest rates during the first nine months of 2014. Most of these securities 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 September 30, 2014.

No particular sector or individual security accounted for a material amount of unrealized losses on common stocks at September 30, 2014. The Company believes the unrealized losses on common stocks are primarily due to general fluctuations in the equity markets. Because the Company has the ability and intent to hold these securities for a reasonable amount of time to allow for recovery, it was determined that these securities were not “other-than-temporarily” impaired at September 30, 2014.

All of the Company’s preferred stock holdings are perpetual preferred stocks. The Company evaluates perpetual preferred stocks with unrealized losses for “other-than-temporary” impairment similar to fixed maturity securities since they have debt-like characteristics such as periodic cash flows in the form of dividends and call features, are rated by rating agencies and are priced like other long-term callable fixed maturity securities. There was no evidence of any credit deterioration in the issuers of the preferred stocks and the Company does not intend to sell these securities before recovery, nor does it believe it will be required to sell these securities before recovery; therefore, it was determined that these securities were not “other-than-temporarily” impaired at September 30, 2014.

Table of Contents

The amortized cost and estimated fair value of fixed maturity securities at September 30, 2014, 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.



	Amortized cost		Estimated fair value
Securities available-for-sale:
Due in one year or less	$	23,233	$	23,647
Due after one year through five years	200,474		212,084
Due after five years through ten years	187,845		193,274
Due after ten years	500,162		522,136
Mortgage-backed securities	147,884		150,099
Totals	$	1,059,598	$	1,101,240

A summary of realized investment gains and (losses) is as follows:



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Fixed maturity securities available-for-sale:
Gross realized investment gains	$	129		$	44		$	495		$	862
Gross realized investment losses	—			—			(92		)	(725		)

Equity securities available-for-sale:
Gross realized investment gains	1,140			968			6,456			4,292
Gross realized investment losses	(181		)	(2		)	(662		)	(555		)
"Other-than-temporary" impairments	(561		)	(3		)	(877		)	(24		)

Other long-term investments:
Gross realized investment losses	(917		)	—			(2,105		)	—
Totals	$	(390	)	$	1,007		$	3,215		$	3,850

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 realized investment losses recognized on other long-term investments for the three and nine months ended September 30, 2014 represent changes in the carrying value of a limited partnership that was purchased to implement an equity tail-risk hedging strategy. The amount reported as “other-than-temporary” impairments on equity securities does not include any individually significant items. 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.


10.	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.

Table of Contents

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 $178 at December 31, 2013. The Company had a contingent liability for the aggregate guaranteed amount of the annuities of $245 at December 31, 2013 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 September 30, 2014. The probability of a material loss due to failure of performance by the issuers of these annuities is considered remote.


11.	STOCK REPURCHASE PROGRAM

On November 3, 2011, the Company’s Board of Directors authorized a $15,000 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 program will be retired by the Company. No purchases have been made under this program.


12.	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.



	Accumulated other comprehensive income by component (1)
	Unrealized gains (losses) on available-for- sale securities			Unrecognized pension and postretirement benefit obligations			Total
Balance at December 31, 2013	$	48,376		$	10,634		$	59,010
Other comprehensive income (loss) before reclassifications	24,007			—			24,007
Amounts reclassified from accumulated other comprehensive income	(3,458		)	(1,330		)	(4,788		)
Other comprehensive income (loss)	20,549			(1,330		)	19,219
Balance at September 30, 2014	$	68,925		$	9,304		$	78,229


(1)	All amounts are net of tax. Amounts in parentheses indicate debits.

Table of Contents

The following table displays amounts reclassified out of accumulated other comprehensive income during the three and nine months ended September 30, 2014.



	Amounts reclassified from accumulated other comprehensive income (1)
Accumulated other comprehensive income components	Three months ended September 30, 2014			Nine months ended September 30, 2014			Affected line item in the consolidated statements of income
Unrealized gains on investments:
Reclassification adjustment for realized investment gains included in net income	$	527		$	5,320		Net realized investment gains
Deferred income tax expense	(184		)	(1,862		)	Income tax (expense) benefit, current
Net reclassification adjustment	343			3,458

Unrecognized pension and postretirement benefit obligations:
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit cost (income):
Net actuarial loss	(144		)	(433		)	(2)
Prior service credit	826			2,480			(2)
Total before tax	682			2,047
Deferred income tax expense	(239		)	(717		)	Income tax (expense) benefit, current
Net reclassification adjustment	443			1,330

Total reclassification adjustment	$	786		$	4,788


(1)	Amounts in parentheses indicate debits to net income


(2)	These accumulated other comprehensive income components are included in the computation of net periodic pension and postretirement benefit cost (income) (see Note 6, Employee Retirement Plans, for additional details).


13.	NEW ACCOUNTING PRONOUNCEMENTS

In January 2014, the Financial Accounting Standards Board (FASB) updated its guidance related to the Investments-Equity Method and Joint Ventures Topic 323 of the Accounting Standards Codification^TM (Codification or ASC). The objective of this update is to improve the reporting of investments in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. This updated guidance allows an entity to elect to account for its investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Current accounting guidance contains similar, but more restrictive, conditions to elect to use the effective yield method to account for these investments. This guidance is to be applied retrospectively to annual and interim reporting periods beginning after December 15, 2014. Early adoption is permitted. The Company will adopt this guidance during the first quarter of 2015. Adoption of this guidance is not expected to have an impact on the consolidated financial condition or operating results of the Company.

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES



ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited)

($ in thousands, except per share amounts)

The term “Company” is used below interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC Insurance Group Inc. and its subsidiaries. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included under Item 1 of this Form 10-Q, and the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2013 Form 10-K.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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 all information currently available into account. 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 the property and casualty insurance industry, interest rates or the performance of financial markets and the general economy;


•	rating agency actions;


•	“other-than-temporary” investment impairment losses; and


•	other risks and uncertainties inherent to the Company’s business, including those discussed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K.

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.

COMPANY OVERVIEW

The Company, 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.

Property and casualty insurance operations are conducted through three subsidiaries and represent the most significant segment of the Company’s business, totaling approximately 77 percent of consolidated premiums earned during the first nine months of 2014. The property and casualty insurance operations are integrated with the property and casualty insurance operations of Employers Mutual through participation in a reinsurance pooling agreement. Because the Company conducts its property and casualty insurance operations together with Employers Mutual through the reinsurance pooling agreement, the Company shares the same business philosophy, management, employees and facilities as Employers Mutual and offers the same types of insurance products.

Table of Contents

Reinsurance operations are conducted through EMC Reinsurance Company and accounted for approximately 23 percent of consolidated premiums earned during the first nine months of 2014. The principal business activity of EMC Reinsurance Company is to assume, through a quota share reinsurance agreement, 100 percent of Employers Mutual’s assumed reinsurance business, subject to certain exceptions.

CRITICAL ACCOUNTING POLICIES

The accounting policies considered by management to be critically important in the preparation and understanding of the Company’s financial statements and related disclosures are presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2013 Form 10-K.

RESULTS OF OPERATIONS

Results of operations by segment and on a consolidated basis for the three and nine months ended September 30, 2014 and 2013 are as follows:



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Property and casualty insurance
Premiums earned	$	107,952		$	100,085		$	312,716		$	290,607
Losses and settlement expenses	78,556			65,638			227,069			195,686
Acquisition and other expenses	33,810			38,392			101,515			106,673
Underwriting loss	$	(4,414	)	$	(3,945	)	$	(15,868	)	$	(11,752	)

Loss and settlement expense ratio	72.8		%	65.6		%	72.6		%	67.3		%
Acquisition expense ratio	31.3		%	38.3		%	32.5		%	36.7		%
GAAP combined ratio	104.1		%	103.9		%	105.1		%	104.0		%

Losses and settlement expenses:
Insured events of current year	$	78,983		$	67,792		$	233,175		$	199,623
Increase (decrease) in provision for insured events of prior years	(427		)	(2,154		)	(6,106		)	(3,937		)

Total losses and settlement expenses	$	78,556		$	65,638		$	227,069		$	195,686

Catastrophe and storm losses	$	10,064		$	11,247		$	38,501		$	34,601

Large losses	$	9,673		$	5,802		$	23,782		$	15,286

Table of Contents



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Reinsurance
Premiums earned	$	30,364		$	32,277		$	92,632		$	89,441
Losses and settlement expenses	28,096			22,597			74,398			54,091
Acquisition and other expenses	7,642			6,831			22,633			19,985
Underwriting profit (loss)	$	(5,374	)	$	2,849		$	(4,399	)	$	15,365

Loss and settlement expense ratio	92.5		%	70.0		%	80.3		%	60.5		%
Acquisition expense ratio	25.2		%	21.2		%	24.4		%	22.3		%
GAAP combined ratio	117.7		%	91.2		%	104.7		%	82.8		%

Losses and settlement expenses:
Insured events of current year	$	29,360		$	21,752		$	79,214		$	57,782
Decrease in provision for insured events of prior years	(1,264		)	845			(4,816		)	(3,691		)

Total losses and settlement expenses	$	28,096		$	22,597		$	74,398		$	54,091

Catastrophe and storm losses	$	7,415		$	3,819		$	14,335		$	7,211

Table of Contents



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Consolidated
REVENUES
Premiums earned	$	138,316		$	132,362		$	405,348		$	380,048
Net investment income	11,503			10,545			34,434			32,028
Realized investment gains	(390		)	1,007			3,215			3,850
Other income	202			195			584			593
	149,631			144,109			443,581			416,519
LOSSES AND EXPENSES
Losses and settlement expenses	106,652			88,235			301,467			249,777
Acquisition and other expenses	41,452			45,223			124,148			126,658
Interest expense	84			84			253			300
Other expense	(440		)	1,003			671			1,762
	147,748			134,545			426,539			378,497

Income before income tax expense (benefit)	1,883			9,564			17,042			38,022
Income tax expense (benefit)	(346		)	2,365			3,204			10,338
Net income	$	2,229		$	7,199		$	13,838		$	27,684

Net income per share	$	0.16		$	0.55		$	1.03		$	2.12

Loss and settlement expense ratio	77.1		%	66.7		%	74.4		%	65.7		%
Acquisition expense ratio	30.0		%	34.1		%	30.6		%	33.3		%
GAAP combined ratio	107.1		%	100.8		%	105.0		%	99.0		%

Losses and settlement expenses:
Insured events of current year	$	108,343		$	89,544		$	312,389		$	257,405
Decrease in provision for insured events of prior years	(1,691		)	(1,309		)	(10,922		)	(7,628		)

Total losses and settlement expenses	$	106,652		$	88,235		$	301,467		$	249,777

Catastrophe and storm losses	$	17,479		$	15,066		$	52,836		$	41,812

Large losses	$	9,673		$	5,802		$	23,782		$	15,286

The Company reported net income of $2,229 ($0.16 per share) during the three months ended September 30, 2014, compared to $7,199 ($0.55 per share) during the same period in 2013. For the nine months ended September 30, 2014, net income totaled $13,838 ($1.03 per share) compared to $27,684 ($2.12 per share) during the same period in 2013. These large declines in net income are primarily attributed to the reinsurance segment, which reported an unusually high GAAP combined ratio of 117.7 percent in the third quarter, and a corresponding elevated GAAP combined ratio of 104.7 for the first nine months of 2014. The property and casualty insurance segment's GAAP combined ratios also increased during both periods, but at a much more moderate level. Although net income is down in 2014, the Company continues to benefit from improved premium rate adequacy in the property and casualty insurance segment, an increase in investment income stemming from a larger invested asset base, and a significant reduction in the amount of net periodic pension and postretirement benefit expenses allocated to the Company.

Table of Contents

Premium income

Premiums earned increased 4.5 percent and 6.7 percent to $138,316 and $405,348 for the three and nine months ended September 30, 2014 from $132,362 and $380,048 for the same periods in 2013. The property and casualty insurance segment reported an increase in premiums earned for both periods, while the reinsurance segment reported an increase for the first nine months of 2014, but a decline for the third quarter. The decline in third quarter premiums earned is attributed to a change in the premium recognition period on two large facility contracts. Management continues to implement premium rate increases in the property and casualty insurance segment, but the level of rate increases has declined steadily during the first nine months of 2014. Premium rate levels in the reinsurance market have declined during 2014, but those declines have not had a significant impact on the reinsurance segment's operations since the majority of its reinsurance contracts renewed in the beginning of the year.

Premiums earned for the property and casualty insurance segment increased 7.9 percent and 7.6 percent to $107,952 and $312,716 for the three and nine months ended September 30, 2014 from $100,085 and $290,607 for the same periods in 2013. These increases are primarily associated with renewal business, which increased seven percent during the first nine months of 2014 due to a combination of rate level increases, growth in insured exposures and an increase in retained policies in the commercial lines of business. Renewal rates across both commercial and personal lines of business increased approximately 4.5 percent during the first nine months of 2014, though the level of rate increases has slowed as the year has progressed. The pool participants have not implemented broad-based rate level increases across the entire book of business, but have instead implemented rate level increases based on the loss history and risk exposures associated with each renewing policy, in order to achieve a more adequate overall rate level. This approach has allowed the property and casualty insurance segment to retain its core book of business, while working to improve underwriting margins. While renewal rates for personal lines of business increased, written premiums were down due to an intentional reduction in policy count to lessen exposure concentrations. During the first nine months of 2014, the overall policy retention rate continued to be strong at 85.7 percent (commercial lines at 86.7 percent and personal lines at 84.4 percent), which approximates the retention rate at the end of 2013. While new business continues to account for a relatively small portion (just 13 percent) of the pool participants’ direct written premiums, the pool participants were able to capitalize on some new business opportunities outside of the core Midwest market. New business in the Northwest, Southwest and Southeast parts of the United States grew, and is generally expected to continue to grow, at a slightly faster pace than other regions. This growth helps diversify the pool participants' book of business geographically, while staying consistent with the industry and line of business mix of the existing book of business. New business premium increased nine percent in the commercial lines of business (corresponding policy count was nearly unchanged), and personal lines new business premium was down slightly.

Table of Contents

Premiums earned for the reinsurance segment decreased 5.9 percent to $30,364 for the three months ended September 30, 2014 from $32,277 for the same period in 2013. However, for the nine months ended September 30, 2014, premiums earned increased 3.6 percent to $92,632 from $89,441 for the same period in 2013. The decline in premiums earned for the third quarter is primarily due to a change in the premium recognition period of two large facility contracts in the pro rata property line of business. Upon completion of the 2014 renewal of these facility contracts, a detailed analysis of the underlying contracts in these facilities was completed, and it was determined that the vast majority of them do not attach until January 1, 2015, or later. Therefore, most of premium associated with the 2014 facility contracts will not be recognized until calendar year 2015. In 2013, twelve months of premiums were appropriately earned on these facility contracts, with four months of premium income stemming from the 2012 facility contracts and eight months of premium income stemming from the 2013 facility contracts. This change in premium recognition did not have a material impact on third quarter results because corresponding adjustments were made to incurred but not reported (IBNR) loss reserves, commission expense reserves and the cost of the excess of loss reinsurance protection. A detailed review of the premium recognition period of all remaining pro rata contracts will be completed before year-end. Any adjustments to earned premiums that become necessary as a result of this review will be recorded in the fourth quarter, along with corresponding adjustments to IBNR loss reserves, commission expense reserves and the cost of the excess of loss reinsurance protection. As a result, the after-tax impact of any fourth quarter adjustments is not expected to be material. The increase in premiums earned for the nine months ended September 30, 2014 is primarily attributed to growth in a pro rata casualty account first written in 2013 and the offshore energy and liability proportional account, as well as the addition of some new business. Premium growth was limited by a decline in rate levels for catastrophe excess of loss business (which comprises approximately 20 percent of the reinsurance segment's book of business) and the change in the premium recognition period of the two large facility contracts noted above. Rates-on-line for catastrophe excess of loss business declined approximately seven to eight percent during the January 1 renewal season, but those declines were partially offset by a slight increase in retentions and an increase in limits purchased by ceding companies. Other trends noted during the January 1 renewal season included the liberalization of contract terms generally favorable to the buyer, including, but not limited to, an expansion of the hours clause (which provides a longer time period for losses to be attributed to a named catastrophic event); expansion of terrorism coverage to include, in many contracts, all acts other than nuclear, biological, chemical and radiation; and multi-year commitments on pricing. Premiums earned for 2014 reflect a reduction in the cost of the excess of loss reinsurance protection provided by Employers Mutual, from 9.0 percent of total assumed reinsurance premiums written in 2013 to 8.0 percent in 2014.

Effective January 1, 2013, Church Mutual Insurance Company (Church Mutual) became a member of the Mutual Reinsurance Bureau (MRB) underwriting association. As a result, Employers Mutual became a one-fifth participant in MRB, down from its previous one-fourth participation. In connection with Employers Mutual’s decreased participation in MRB, the reinsurance segment recorded a $585 portfolio adjustment decrease in premiums written in the first quarter of 2013. This portfolio adjustment did not affect earned premium since there was a corresponding decrease in unearned premiums. Nine percent of this amount ($53) was recorded as a reduction in the cost of the excess of loss coverage provided by Employers Mutual, and the reinsurance segment recognized $223 of negative commission allowance (commission income) to compensate for the acquisition costs incurred to generate the business ceded to Church Mutual.

Losses and settlement expenses

Losses and settlement expenses increased 20.9 percent and 20.7 percent to $106,652 and $301,467 for the three and nine months ended September 30, 2014 from $88,235 and $249,777 for the same periods in 2013. The loss and settlement expense ratios increased to 77.1 percent and 74.4 percent for the three and nine months ended September 30, 2014 from 66.7 percent and 65.7 percent for the same periods in 2013. Both segments experienced significant increases in their loss and settlement expense ratios for the three and nine months ended September 30, 2014, but the increases were especially large in the reinsurance segment due to an increase in both loss severity and catastrophe and storm losses in the third quarter, and the unusually low loss and settlement expense ratio reported for the first nine months of 2013. The improved premium rate adequacy achieved over the past several years helped reduce the impact that the elevated level of losses would have otherwise had on the loss and settlement expense ratios. The actuarial analysis of the Company’s carried reserves as of June 30, 2014 indicates that the level of reserve adequacy is consistent with other recent evaluations. From management’s perspective, this measure is more relevant to an understanding of the Company’s results of operations than the composition of the underwriting results between the current and prior accident years.

Table of Contents

The loss and settlement expense ratios for the property and casualty insurance segment increased to 72.8 percent and 72.6 percent for the three and nine months ended September 30, 2014 from 65.6 percent and 67.3 percent for the same periods in 2013. The primary drivers of these increases are an increase in large losses, which the Company defines as losses greater than $500 for the EMC Insurance Companies’ pool, excluding catastrophe and storm losses, and an under-performance of the underlying book of business (excluding catastrophe and storm losses, large losses and development on prior years' reserves). The increase in large losses is primarily attributed to liability losses in the commercial auto line of business and fire-related losses in the commercial property line of business. There are several factors contributing to the decline in the performance of the underlying book of business, including the severe winter weather losses experienced in the first quarter, and an increase in loss severity in the homeowners' and commercial auto lines of business. Many of the first quarter severe winter weather losses were not classified as catastrophe and storm losses because cold weather events are generally not assigned an occurrence code by the Property & Liability Resource Bureau (PLRB); however, losses attributed to the polar vortex that impacted the eastern United States in early January were classified as catastrophe and storm losses because the PLRB assigned an occurrence code to that event. Catastrophe and storm losses accounted for 9.3 and 12.3 percentage points of the loss and settlement expense ratios for the three and nine months ended September 30, 2014, respectively, compared to 11.2 and 11.9 percentage points during the same periods in 2013. The most recent 10-year averages for these periods are 13.9 and 12.5 percentage points. Large losses accounted for 9.0 and 7.6 percentage points of the loss and settlement expense ratios for the three and nine months ended September 30, 2014, compared to 5.8 and 5.3 percentage points for the same periods in 2013. Included in the large loss amount reported for the nine months ended September 30, 2014 is $1,500 stemming from a fire at an adjacent building being renovated that damaged two home office buildings owned by the Company's parent, Employers Mutual. At the time of the loss, Employers Mutual was self-insured for the first $5,000 of loss to its campus, and the loss was subject to the EMC Insurance Companies' inter-company pooling agreement. Favorable development on prior years’ reserves declined during the three months ended September 30, 2014 compared to the same period in 2013, but increased for the nine months ended September 30, 2014 compared to the same period in 2013. 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.

The loss and settlement expense ratios for the reinsurance segment increased to 92.5 percent and 80.3 percent for the three and nine months ended September 30, 2014 from 70.0 percent and 60.5 percent for the same periods in 2013. While these increases are significant, it is important to note that the 2013 ratios, particularly for the nine months ended September 30, 2013, were unusually low. These increases are primarily attributed to an increase in catastrophe and storm losses, as well as loss severity. The increase in catastrophe and storm losses was caused by a significant amount of additional losses being reported on three events that occurred in the second quarter. One was a severe wind and hail storm in Europe that had no reported losses until the third quarter. The other two were severe Midwest storms that had higher levels of losses than estimated at the end of the second quarter. The increase in loss severity is attributed to a number of fire losses and some crop hail losses. The decline in premiums earned for the three months ended September 30, 2014 also contributed to the increase in the loss and settlement expense ratio for that period. Favorable development on prior years’ reserves increased for both the three and nine months ended September 30, 2014.

Acquisition and other expenses

Acquisition and other expenses declined 8.3 percent and 2.0 percent to $41,452 and $124,148 for the three and nine months ended September 30, 2014 from $45,223 and $126,658 for the same periods in 2013. The acquisition expense ratios declined to 30.0 percent and 30.6 percent for the three and nine months ended September 30, 2014 from 34.1 percent and 33.3 percent for the same periods in 2013. The decreases in the acquisition expense ratios are primarily attributed to large declines in the amount of net periodic pension and postretirement benefit costs allocated to the Company, as well as declines in policyholder dividend and contingent commission expenses, and an overall improvement in premium rate adequacy. Net periodic pension benefit cost declined to $170 and $510 for the three and nine months ended September 30, 2014, from $753 and $2,260 in the same periods of 2013. These decreases reflect an increase in the expected return on plan assets, due to an increase in 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 $770 and $2,312 for the three and nine months ended September 30, 2014, compared to net periodic postretirement benefit expense of $728 and $2,184 in the same periods of 2013. The plan amendment created a large prior service credit that is being amortized into the benefit 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. These declines were partially offset by higher commission expense in the reinsurance segment, reflecting growth in pro rata reinsurance business.

Table of Contents

The acquisition expense ratios for the property and casualty insurance segment declined to 31.3 percent and 32.5 percent for the three and nine months ended September 30, 2014 from 38.3 percent and 36.7 percent for the same periods in 2013. As mentioned above, this decrease is primarily attributed to the large decline in retirement benefit expenses and, to a lesser extent, declines in policyholder dividend and contingent commission expenses and an increase in premium income. For the three and nine months ended September 30, 2014, the property and casualty insurance segment was allocated $585 and $1,756 of net periodic benefit income for the pension and postretirement benefit plans, compared to $1,425 and $4,276 of net periodic benefit expense during the same periods in 2013.

The acquisition expense ratios for the reinsurance segment increased to 25.2 percent and 24.4 percent for the three and nine months ended September 30, 2014 from 21.2 percent and 22.3 percent for the same periods in 2013. These increases are primarily attributed to growth in pro rata reinsurance business, which typically carries higher commission rates than excess of loss reinsurance business and, to a lesser extent, an increase in contingent commission expense. During the first quarter of 2013, the reinsurance segment recognized a $223 negative commission allowance in conjunction with the addition of Church Mutual to the MRB underwriting association. A portion of this negative commission allowance was offset by the amortization of the related deferred policy acquisition cost asset, resulting in an immediate expense reduction of approximately $105 during the first quarter of 2013.

Investment results

Net investment income increased 9.1 percent and 7.5 percent to $11,503 and $34,434 for the three and nine months ended September 30, 2014 from $10,545 and $32,028 for the same periods in 2013. These increases reflect a higher average invested balance in fixed maturity securities and an increase in dividend income; however, approximately 1.4 percentage points of the increase for the nine months ended September 30, 2014 is attributed to an early payoff of a commercial mortgage-backed security during the first quarter of 2014 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. Current interest rate levels remain below the average coupon rate of the fixed maturity portfolio, and will therefore likely continue to limit future growth in net investment income. The average coupon rate on the fixed maturity portfolio, excluding interest-only securities, declined slightly to 3.8 percent at September 30, 2014, from 4.0 percent at December 31, 2013 and 4.1 percent at September 30, 2013. The effective duration of the fixed maturity portfolio, excluding interest-only securities, decreased to 4.9 at September 30, 2014 from 5.7 at December 31, 2013, reflecting the decline in interest rates that occurred during 2014. The Company’s equity security holdings produced dividend income of $1,325 and $4,096 for the three and nine months ended September 30, 2014, compared to $1,164 and $3,413 for the same periods in 2013.

The Company had a net realized investment loss of $390 during the three months ended September 30, 2014 compared to a net realized investment gain of $1,007 during the same period in 2013. For the nine months ended September 30, 2014, the Company had a net realized investment gain of $3,215 compared to $3,850 during the same period in 2013. The amounts reported for the three and nine months ended September 30, 2014 include $917 and $2,105, respectively, of realized losses attributed to the decline in the carrying value of a limited partnership that the Company invested in during the first quarter of 2014 to help protect it from a sudden and significant decline in the value of its equity portfolio (an equity tail-risk hedging strategy). The Company recognized "other-than-temporary" impairment losses of $561 and $877 during the three and nine months ended September 30, 2014, compared to $3 and $24 during the same periods in 2013. Impairment losses were recognized on two equity securities in both 2014 and 2013 (one each during the third quarters of 2014 and 2013).

Interest and other expense

The decline in interest expense for the nine months ended September 30, 2014 is due to a reduction in the interest rate on the property and casualty insurance segment’s outstanding surplus notes from 3.60 percent to 1.35 percent that became effective February 1, 2013. Included in other expense are foreign currency exchange gains and losses recognized on the reinsurance segment’s foreign currency denominated reinsurance business. For the three and nine months ended September 30, 2014, the reinsurance segment had foreign currency exchange gains of $1,028 and $1,042, respectively, compared to foreign currency exchange losses of $558 and $218 during the same periods in 2013.

Table of Contents

Income tax

The Company had an income tax benefit of $346 for the three months ended September 30, 2014, compared to income tax expense of $2,365 during the same period in 2013. For the nine months ended September 30, 2014, income tax expense decreased 69.0 percent to $3,204 from $10,338 during the same period of 2013. The effective tax rates for the three and nine months ended September 30, 2014 were a negative 18.4 percent and a positive 18.8 percent compared to positive rates of 24.7 percent and 27.2 percent for the same periods in 2013. The primary contributor to the differences between these effective tax rates and the United States federal corporate tax rate of 35 percent is tax-exempt interest income earned.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet cash obligations. The Company had positive cash flows from operations of $67,219 and $56,828 during the first nine months of 2014 and 2013, respectively. The Company typically generates substantial positive cash flows from operations because cash from premium payments is generally received in advance of cash payments made to settle claims. These positive cash flows provide the foundation of the Company’s asset/liability management program and are the primary driver of the Company’s liquidity. The Company invests in high quality, liquid securities to match the anticipated payments of losses and settlement expenses of the underlying insurance policies. Because the timing of the losses is uncertain, the majority of the portfolio is maintained in short to intermediate maturity securities that can be easily liquidated or that generate adequate cash flow to meet liabilities.

The Company is a holding company whose principal asset is its investment in its property and casualty insurance subsidiaries and its reinsurance subsidiary (“insurance subsidiaries”). As a holding company, the Company is dependent upon cash dividends from its insurance subsidiaries to meet all its obligations, including cash dividends to stockholders and the funding of the Company’s stock repurchase programs. State insurance regulations restrict the maximum amount of dividends insurance companies can pay without prior regulatory approval. The maximum amount of dividends that the insurance subsidiaries can pay to the Company in 2014 without prior regulatory approval is approximately $47,976. The Company received $351 and $9,450 of dividends from its insurance subsidiaries and paid cash dividends to its stockholders totaling $9,228 and $8,235 during the first nine months of 2014 and 2013, respectively.

The Company’s insurance subsidiaries must maintain adequate liquidity to ensure that their cash obligations are met; however, because of the property and casualty insurance subsidiaries’ participation in the pooling agreement and the reinsurance subsidiary’s participation in the quota share agreement, they do not have the daily liquidity concerns normally associated with an insurance company. This is because under the terms of the pooling and quota share agreements, Employers Mutual receives all premiums and pays all losses and expenses associated with the insurance business produced by the pool participants and the assumed reinsurance business ceded to the Company’s reinsurance subsidiary, and then settles inter-company balances generated by these transactions with the participating companies on a monthly (pool participants) or quarterly (reinsurance subsidiary) basis.

At the insurance subsidiary level, the primary sources of cash are premium income, investment income and proceeds from called or matured investments. The principal outflows of cash are payments of claims, commissions, premium taxes, operating expenses, income taxes, dividends, interest and principal payments on debt, and investment purchases. Cash outflows vary because of uncertainties regarding settlement dates for unpaid losses and the potential for large losses, either individually or in the aggregate. Accordingly, the insurance subsidiaries maintain investment and reinsurance programs intended to provide adequate funds to pay claims without forced sales of investments. The insurance subsidiaries also have the ability to borrow funds on a short-term basis (180 days) from Employers Mutual and its subsidiaries and affiliate under an Inter-Company Loan agreement. In addition, Employers Mutual maintains access to a line of credit with the Federal Home Loan Bank that could be used to provide the insurance subsidiaries additional liquidity if needed.

The Company maintains a portion of its investment portfolio in relatively short-term and highly liquid investments to ensure the availability of funds to pay claims and expenses. A variety of maturities are maintained in the Company’s investment portfolio to assure adequate liquidity. The maturity structure of the fixed maturity portfolio is also established by the relative attractiveness of yields on short, intermediate and long-term securities. The Company does not invest in high-yield, non-investment grade debt securities. Any non-investment grade securities held by the Company are the result of rating downgrades subsequent to their purchase.

Table of Contents

The Company invests for the long term and generally purchases fixed maturity securities with the intent to hold them to maturity. Despite this intent, the Company currently classifies fixed maturity securities as available-for-sale to provide flexibility in the management of its investment portfolio. At September 30, 2014 and December 31, 2013, the Company had net unrealized holding gains, net of deferred taxes, on its fixed maturity securities available-for-sale of $27,067 and $11,968, respectively. The fluctuation in the fair value of these investments is primarily due to changes in the interest rate environment during this time period, but also reflects fluctuations in risk premium spreads over U.S. Treasuries. Since the Company intends to hold fixed maturity securities to maturity, such fluctuations in the fair value of these investments are not expected to have a material impact on the operations of the Company, as forced liquidations of investments are not anticipated. The Company closely monitors the bond market and makes appropriate adjustments in its portfolio as conditions warrant.

The majority of the Company’s assets are invested in fixed maturity securities. These investments provide a substantial amount of investment income that supplements underwriting results and contributes to net earnings. As these investments mature, or are called, the proceeds are reinvested at current interest rates, which may be higher or lower than those now being earned; therefore, more or less investment income may be available to contribute to net earnings. Due to the prolonged low interest rate environment, proceeds from calls and maturities in recent years have been reinvested at lower yields, which has had a negative impact on investment income.

The Company held $6,730 and $2,392 in minority ownership interests in limited partnerships and limited liability companies at September 30, 2014 and December 31, 2013, respectively. During the first quarter of 2014, the Company invested $4,367 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. This investment is included in "other long-term investments" in the Company's financial statements and is carried under the equity method of accounting. The Company does not hold any other unregistered securities.

The Company’s cash balance was $381 and $239 at September 30, 2014 and December 31, 2013, respectively.

During the first nine months of 2014, Employers Mutual made no contributions to its qualified pension plan or postretirement benefit plans. The Company’s share of Employers Mutual’s 2014 planned contributions to its pension plan and the Voluntary Employee Beneficiary Association (VEBA) trust, if made, will be approximately $4,500 and $0, respectively.

During the first nine months of 2013, Employers Mutual made no contributions to its qualified pension plan or postretirement benefit plans. The Company reimbursed Employers Mutual $4,321 for its share of the total 2013 qualified pension plan contribution and $144 for its share of the total 2013 postretirement benefit plan contribution (no reimbursements were paid in the first nine months of 2013).

Capital Resources

Capital resources consist of stockholders’ equity and debt, representing funds deployed or available to be deployed to support business operations. For the Company’s insurance subsidiaries, capital resources are required to support premium writings. Regulatory guidelines suggest that the ratio of a property and casualty insurer’s annual net premiums written to its statutory surplus should not exceed three to one. On an annualized basis, all of the Company’s property and casualty insurance subsidiaries were well under this guideline at September 30, 2014.

The Company’s insurance subsidiaries are required to maintain a certain minimum level of surplus on a statutory basis, and are subject to regulations under which the payment of dividends from statutory surplus is restricted and may require prior approval of their domiciliary insurance regulatory authorities. The Company’s insurance subsidiaries are also subject to annual Risk Based Capital (RBC) requirements that may further impact their ability to pay dividends. RBC requirements attempt to measure minimum statutory capital needs based upon the risks in a company’s mix of products and investment portfolio. At December 31, 2013, the Company’s insurance subsidiaries had total adjusted statutory capital well in excess of the minimum RBC requirement.

Table of Contents

The Company’s total cash and invested assets at September 30, 2014 and December 31, 2013 are summarized as follows:



	September 30, 2014
	Amortized cost		Fair value		Percent of total fair value		Carrying value
Fixed maturity securities available-for-sale	$	1,059,598	$	1,101,240	80.7	%	$	1,101,240
Equity securities available-for-sale	122,986		187,383		13.7		187,383
Cash	381		381		—		381
Short-term investments	69,991		69,991		5.1		69,991
Other long-term investments	6,730		6,730		0.5		6,730
	$	1,259,686	$	1,365,725	100.0	%	$	1,365,725



	December 31, 2013
	Amortized cost		Fair value		Percent of total fair value		Carrying value
Fixed maturity securities available-for-sale	$	1,009,572	$	1,027,984	81.8	%	$	1,027,984
Equity securities available-for-sale	113,835		169,848		13.5		169,848
Cash	239		239		—		239
Short-term investments	56,166		56,166		4.5		56,166
Other long-term investments	2,392		2,392		0.2		2,392
	$	1,182,204	$	1,256,629	100.0	%	$	1,256,629

Table of Contents

The amortized cost and estimated fair value of fixed maturity and equity securities at September 30, 2014 were as follows:



	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	9,565	$	132	$	99	$	9,598
U.S. government-sponsored agencies	206,743		1,781		4,161		204,363
Obligations of states and political subdivisions	307,807		24,373		87		332,093
Commercial mortgage-backed	47,513		4,180		—		51,693
Residential mortgage-backed	100,371		992		2,957		98,406
Other asset-backed	14,811		1,176		50		15,937
Corporate	372,788		17,352		990		389,150
Total fixed maturity securities	1,059,598		49,986		8,344		1,101,240

Equity securities:
Common stocks:
Financial services	20,136		9,888		66		29,958
Information technology	16,898		9,514		—		26,412
Healthcare	14,008		11,003		8		25,003
Consumer staples	9,985		4,739		—		14,724
Consumer discretionary	9,886		9,353		—		19,239
Energy	16,638		8,094		111		24,621
Industrials	8,386		7,462		20		15,828
Other	14,967		4,377		68		19,276
Non-redeemable preferred stocks	12,082		509		269		12,322
Total equity securities	122,986		64,939		542		187,383
Total securities available-for-sale	$	1,182,584	$	114,925	$	8,886	$	1,288,623

The Company’s property and casualty insurance subsidiaries have $25,000 of surplus notes issued to Employers Mutual. Effective February 1, 2013, the interest rate on the surplus notes was reduced to 1.35 percent from the previous rate of 3.60 percent. Reviews of the interest rate are conducted by the Inter-Company Committees of the boards of directors of the Company and Employers Mutual every five years, with the next review due in 2018. Payments of interest and repayments of principal can only be made out of the applicable subsidiary’s statutory surplus and are subject to prior approval by the insurance commissioner of the respective states of domicile. The surplus notes are subordinate and junior in right of payment to all obligations or liabilities of the applicable insurance subsidiaries. Total interest expense incurred on these surplus notes was $253 and $300 during the first nine months of 2014 and 2013, respectively. During the first quarter of 2014, the Company’s property and casualty insurance subsidiaries paid Employers Mutual for the interest that had been accrued on the surplus notes during 2013.

As of September 30, 2014, the Company had no material commitments for capital expenditures.

Table of Contents

Off-Balance Sheet Arrangements

Employers Mutual collects from agents, policyholders and ceding companies all premiums associated with the insurance business produced by the pool participants and the assumed reinsurance business ceded to the reinsurance subsidiary. Employers Mutual also collects from its reinsurers all ceded paid losses and settlement expenses associated with reinsurance contracts covering the pool participants' business and the fronting business ceded to the reinsurance subsidiary. Employers Mutual settles with the pool participants (monthly) and the reinsurance subsidiary (quarterly) the premiums written and ceded paid losses and settlement expenses from these insurance policies and reinsurance contracts, providing full credit for the premiums written and ceded paid losses and settlement expenses generated during the period (not just the collected portion). Due to this arrangement, and since a significant portion of the premium balances are collected over the course of the coverage period, Employers Mutual carries a substantial receivable balance for insurance and reinsurance premiums in process of collection, and to a lesser extent, ceded paid losses and settlement expenses recoverable. Any of these receivable amounts that are ultimately deemed to be uncollectible are charged-off by Employers Mutual and the expense is charged to the reinsurance subsidiary or allocated to the pool members on the basis of pool participation. As a result, the Company has off-balance sheet arrangements with an unconsolidated entity that results in credit-risk exposures (Employers Mutual’s insurance and reinsurance premium receivable balances, and ceded paid loss and settlement expense recoverable amounts) that are not reflected in the Company’s financial statements. The average annual expense for such charge-offs allocated to the Company over the past ten years is $332. Based on this historical data, this credit-risk exposure is not considered to be material to the Company’s results of operations or financial position and, accordingly, no loss contingency liability has been recorded.

Investment Impairments and Considerations

"Other-than-temporary" investment impairment losses of $561 were recorded during the three months ended September 30, 2014 on one equity security, compared to $3 on one equity security during the same period in 2013. For the nine months ended September 30, 2014, the Company recognized "other-than-temporary" investment impairment losses totaling $877 on two equity securities, compared to $24 on two equity securities during the same period in 2013.

At September 30, 2014, the Company had unrealized losses on available-for-sale securities as presented in the following table. The estimated fair value 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. None of these securities are considered to be in concentrations by either security type or industry. The Company uses several factors to determine whether the carrying value of an individual security has been “other-than-temporarily” impaired. Such factors include, but are not limited to, the security’s value and performance in the context of the overall markets, length of time and extent the security’s fair value has been below carrying value, key corporate events and collateralization of fixed maturity securities. Based on these factors, the absence of management’s intent to sell these securities prior to recovery or maturity, and the fact that management does not anticipate that it will be forced to sell these securities prior to recovery or maturity, it was determined that the carrying value of these securities were not “other-than-temporarily” impaired at September 30, 2014. Risks and uncertainties inherent in the methodology utilized in this evaluation process include interest rate risk, equity price risk, and the overall performance of the economy, all of which have the potential to adversely affect the value of the Company’s investments. Should a determination be made at some point in the future that these unrealized losses are “other-than-temporary”, the Company’s earnings would be reduced by approximately $5,776, net of tax; however, the Company’s financial position would not be affected because unrealized losses on available-for-sale securities are reflected in the Company’s financial statements as a component of stockholders’ equity, net of deferred taxes.

Table of Contents

Following is a schedule of the length of time securities have continuously been in an unrealized loss position as of September 30, 2014.



	Less than twelve months				Twelve months or longer				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Fixed maturity securities:
U.S. treasury	$	—	$	—	$	4,739	$	99	$	4,739	$	99
U.S. government-sponsored agencies	32,507		112		95,617		4,049		128,124		4,161
Obligations of states and political subdivisions	—		—		3,715		87		3,715		87
Residential mortgage-backed	42,877		1,027		23,215		1,930		66,092		2,957
Other asset-backed	4,987		50		—		—		4,987		50
Corporate	44,368		372		24,511		618		68,879		990
Total, fixed maturity securities	124,739		1,561		151,797		6,783		276,536		8,344
Equity securities:
Common stocks:
Financial services	2,184		66		—		—		2,184		66
Healthcare	840		8		—		—		840		8
Energy	3,078		111		—		—		3,078		111
Industrials	351		20		—		—		351		20
Other	1,756		68		—		—		1,756		68
Non-redeemable preferred stocks	—		—		1,731		269		1,731		269
Total, equity securities	8,209		273		1,731		269		9,940		542
Total temporarily impaired securities	$	132,948	$	1,834	$	153,528	$	7,052	$	286,476	$	8,886

The Company does not purchase non-investment grade fixed maturity securities. Any non-investment grade fixed maturity securities held are the result of rating downgrades that occurred subsequent to their purchase. At September 30, 2014, non-investment grade fixed maturity securities held by the Company included ten securities, nine of which were residential mortgage-backed securities. All of these securities were in an unrealized gain position at September 30, 2014.

Table of Contents

Following is a schedule of gross realized losses recognized in the first nine months of 2014. The schedule is aged according to the length of time the underlying securities were in an unrealized loss position.



	Realized losses from sales						"Other-than- temporary" impairment losses		Other realized losses (1)		Total gross realized losses
	Book value		Sales price		Gross realized losses		"Other-than- temporary" impairment losses		Other realized losses (1)		Total gross realized losses
Fixed maturity securities:
Three months or less	$	—	$	—	$	—	$	—	$	—	$	—
Over three months to six months	—		—		—		—		—		—
Over six months to nine months	—		—		—		—		—		—
Over nine months to twelve months	—		—		—		—		—		—
Over twelve months	1,990		1,898		92		—		—		92
Subtotal, fixed maturity securities	1,990		1,898		92		—		—		92

Equity securities:
Three months or less	7,720		7,318		402		216		—		618
Over three months to six months	350		341		9		394		—		403
Over six months to nine months	355		281		74		—		—		74
Over nine months to twelve months	642		465		177		—		—		177
Over twelve months	—		—		—		267		—		267
Subtotal, equity securities	9,067		8,405		662		877		—		1,539

Other long-term investments:
Three months or less	—		—		—		—		2,105		2,105
Over three months to six months	—		—		—		—		—		—
Over six months to nine months	—		—		—		—		—		—
Over nine months to twelve months	—		—		—		—		—		—
Over twelve months	—		—		—		—		—		—
Subtotal, other long-term investments	—		—		—		—		2,105		2,105

Total realized losses in earnings	$	11,057	$	10,303	$	754	$	877	$	2,105	$	3,736

(1) The amount reported for other long-term investments represents changes in the carrying value of a limited partnership that are recorded as realized investment losses.

LEASES, COMMITMENTS AND CONTINGENT LIABILITIES

One of the Company’s property and casualty insurance subsidiaries leases office facilities in Bismarck, North Dakota with lease terms expiring in 2014. Employers Mutual has entered into various leases for branch and service office facilities with lease terms expiring through 2023. All of these lease costs are included as expenses under the pooling agreement. The Company’s contractual obligations as of September 30, 2014 did not change materially from those presented in the Company’s 2013 Form 10-K.

Table of Contents

The participants in the pooling agreement are subject to guaranty fund assessments by states in which they write business. Guaranty fund assessments are used by states to pay policyholder liabilities of insolvent insurers domiciled in those states. Many states allow assessments to be recovered through premium tax offsets. The Company has accrued estimated guaranty fund assessments of $824 and $894 as of September 30, 2014 and December 31, 2013, respectively. Premium tax offsets of $858 and $894, which are related to prior guarantee fund payments and current assessments, have been accrued as of September 30, 2014 and December 31, 2013, respectively. The guaranty fund assessments are expected to be paid over the next two years and the premium tax offsets are expected to be realized within ten years of the payments. The participants in the pooling agreement are also subject to second-injury fund assessments, which are designed to encourage employers to employ workers with pre-existing disabilities. The Company has accrued estimated second-injury fund assessments of $1,819 and $1,747 as of September 30, 2014 and December 31, 2013, respectively. The second-injury fund assessment accruals are based on projected loss payments. The periods over which the assessments will be paid is not known.

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. Based on information provided by the life insurance companies on an annual basis, the Company’s share of case loss reserves eliminated by the purchase of those annuities was $178 at December 31, 2013. The Company had a contingent liability for the aggregate guaranteed amount of the annuities of $245 at December 31, 2013 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 September 30, 2014. The probability of a material loss due to failure of performance by the issuers of these annuities is considered remote.



ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The main objectives in managing the Company’s investment portfolios are to maximize after-tax investment return while minimizing risk, in order to provide maximum support for the underwriting operations. Investment strategies are developed based upon many factors including underwriting results, regulatory requirements, fluctuations in interest rates and consideration of other market risks. Investment decisions are centrally managed by investment professionals and are supervised by the investment committees of the respective boards of directors for each of the Company’s subsidiaries.

Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments, and is directly influenced by the volatility and liquidity in the markets in which the related underlying assets are traded. The market risks of the financial instruments owned by the Company relate to the investment portfolio, which exposes the Company to interest rate (inclusive of credit spreads) and equity price risk and, to a lesser extent, credit quality and prepayment risk. Monitoring systems and analytical tools are in place to assess each of these elements of market risk; however, there can be no assurance that future changes in interest rates, creditworthiness of issuers, prepayment activity, liquidity available in the market and other general market conditions will not have a material adverse impact on the Company’s results of operations, liquidity or financial position.

Two categories of influences on market risk exist as it relates to financial instruments. First are systematic aspects, which relate to the investing environment and are out of the control of the investment manager. Second are non-systematic aspects, which relate to the construction of the investment portfolio through investment policies and decisions, and are under the direct control of the investment manager. The Company is committed to controlling non-systematic risk through sound investment policies and diversification.

Further analysis of the components of the Company’s market risk (including interest rate risk, equity price risk, credit quality risk, and prepayment risk) can be found in the Company’s 2013 Form 10-K.



ITEM 4.	CONTROLS AND PROCEDURES

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely making known to them material information relating to the Company and the Company’s consolidated subsidiaries required to be disclosed in the Company’s reports filed or submitted under the Exchange Act.

Table of Contents

There were no changes in the Company’s internal control over financial reporting that occurred during the third quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.



PART II.	OTHER INFORMATION



ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

($ in thousands, except share and per share amounts)

The following table sets forth information regarding purchases of equity securities by the Company and affiliated purchasers for the three months ended September 30, 2014:



Period	(a) Total number of shares (or units) purchased (1)	(b) Average price paid per share (or unit)		(c) Total number of shares (or units) purchased as part of publicly announced plans or programs (2)	(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs (2 & 3)
7/1/2014 - 7/31/2014	34	$	31.13	—	$	19,491
8/1/2014 - 8/31/2014	37	30.55		—	19,491
9/1/2014 - 9/30/2014	1,010	28.93		—	19,491
Total	1,081	$	29.05	—


(1)	Included in this column are shares purchased in the open market to fulfill the Company's obligations under its dividend reinvestment and common stock purchase plan.


(2)	On November 3, 2011, the Company’s Board of Directors authorized a $15,000 stock repurchase program. This program became effective immediately and does not have an expiration date. No purchases have been made under this program.

(3)

On May 12, 2005, the Company announced that its parent company, Employers Mutual, had initiated a $15,000 stock purchase program under which Employers Mutual would purchase shares of the Company’s common stock in the open market. This purchase program became effective immediately and does not have an expiration date; however, this program has been dormant while the Company’s repurchase programs have been in effect. A total of $4,491 remains in this program.

Table of Contents



ITEM 6.	EXHIBITS



31.1		Certification of President and Chief Executive Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Senior Vice President and Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 7, 2014.

EMC INSURANCE GROUP INC.

Registrant

/s/ Bruce G. Kelley

Bruce G. Kelley

President, Chief Executive Officer and Treasurer

(Principal Executive Officer)

/s/ Mark E. Reese

Mark E. Reese

Senior Vice President and

Chief Financial Officer

(Principal Accounting Officer)

Table of Contents

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

INDEX TO EXHIBITS



Exhibit number	Item

31.1*	Certification of President and Chief Executive Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002

31.2*	Certification of Senior Vice President and Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002

32.1*	Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*	Certification of the Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS**	XBRL Instance Document

101.SCH**	XBRL Taxonomy Extension Schema Document

101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB**	XBRL Taxonomy Extension Label Linkbase Document

101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document



*	Filed herewith
**	Furnished, not filed

Attached files

Stock widget

Investing forum

EMC INSURANCE GROUP INC Reports