Press Release - October 29, 2004
EMC INSURANCE GROUP INC. ANNOUNCES RESTATED 2004 THIRD QUARTER AND NINE MONTH RESULTS
RESTATED FINANCIAL HIGHLIGHTS
Third Quarter 2004
Operating Income1 Per Share -- $0.10
Net Income Per Share -- $0.16
Nine Months Ended September 30, 2004
Operating Income1 Per Share -- $0.92
Net Income Per Share -- $1.18
DES MOINES, Iowa (October 29, 2004) - EMC Insurance Group Inc. (Nasdaq/NM:EMCI) today announced restated earnings for the third quarter and nine months ended September 30, 2004 due to an error in the calculation of investment income for the third quarter of 2004. This error was caused by an overstatement of accrued interest income on one municipal fixed maturity security. The restatement resulted in a reduction of $441,000 in the previously reported third quarter investment income and a reduction of $418,000 ($0.04 per share) in the previously reported third quarter net income. The overstatement of accrued interest income was caused by a manual input error on the yield of this one security. The Company currently out-sources the investment accounting function, but will be bringing this function in-house effective January 1, 2005.
Operating income was $0.10 per share for the third quarter ended September 30, 2004 compared to operating income of $0.49 per share for the third quarter of 20031. Operating income for the nine months ended September 30, 2004 was $0.92 per share compared to $1.25 per share for the same period in 2003.
Net income, including realized investment gains, was $1,858,000 ($0.16 per share) for the third quarter of 2004 compared to $6,382,000 ($0.56 per share) for the third quarter of 2003. Net income for the nine months ended September 30, 2004 was $13,673,000 ($1.18 per share) compared to $14,258,000 ($1.25 per share) for the same period in 2003.
Net book value of the Company’s stock as of September 30, 2004 was $16.43 per share, compared to $15.72 per share at December 31, 2003.
The remaining narrative of this release restates the information contained in the October 28, 2004 release.
As reported on October 8, 2004, third quarter results were adversely affected by four hurricanes that hit the Southern United States in August and September. The Company’s reinsurance segment had exposure to all four hurricanes and reached its $1.5 million cap on losses assumed per occurrence on each of them. Hurricane losses in the property and casualty insurance segment, the majority of which are associated with damage caused by Hurricane Ivan in the Gulf States, totaled $2.4 million. Total losses associated with these four hurricanes amounted to $8.4 million. On an after-tax basis, these hurricane losses reduced third quarter earnings by $5.5 million or $0.47 per share.
Total catastrophe and storm losses for the Company increased significantly to $10,790,000 ($0.61 per share after tax) in the third quarter of 2004 from $8,703,000 ($0.49 per share after tax) in the third quarter of 2003. For the first nine months of 2004, catastrophe and storm losses totaled $19,002,000 ($1.07 per share after tax) compared to $20,131,000 ($1.14 per share after tax) for the same period in 2003.
As reported on September 27, 2004, the Company strengthened its prior years’ reserves during the third quarter of 2004 in response to a recently completed actuarial evaluation of the carried reserves for the property and casualty insurance segment. This increase in reserves amounted to $588,000 and reduced third quarter earnings by $382,000 ($0.03 per share) on an after-tax basis. Actuarial evaluations of the Company’s carried reserves are performed on a regularly-scheduled basis and additional evaluations will be performed during the remainder of the year. The Company’s standard practice is to adjust its carried reserves as necessary in response to these evaluations in an effort to maintain a consistent level of reserve adequacy.
Adverse development on prior years’ reserves totaled $2,512,000 in the third quarter of 2004 compared to favorable development of $1,437,000 in the third quarter of 2003. For the first nine months of 2004, adverse development on prior years’ reserves totaled $4,719,000 compared to adverse development of $2,726,000 for the same period in 2003.
“The property and casualty insurance industry has been severely impacted by the four hurricanes that hit the Southern United States during the third quarter,” stated President and CEO Bruce G. Kelley. “Industry-wide losses are expected to exceed those of Hurricane Andrew, which cost the industry $22 billion in 1992. Although these hurricanes impacted our third quarter results more than we would have liked, we were able to limit our losses in the reinsurance segment to $1.5 million per storm under the terms of the quota share agreement with Employers Mutual Casualty Company. The adverse reserve development experienced in 2004 is primarily the result of steps taken to ensure that our reserves are adequate. Significant reserve strengthening has occurred and we believe that appropriate actions have been taken to address this issue.”
Premiums earned increased 4.0 percent to $87,588,000 for the three months ended September 30, 2004 from $84,210,000 for the same period in 2003. For the nine months ended September 30, 2004, premiums earned increased 3.4 percent to $255,031,000 from $246,570,000 for the same period in 2003. These increases are primarily attributed to rate increases implemented during the last few years in the property and casualty insurance business as well as moderate growth and improved pricing in the assumed reinsurance business. The overall market for property and casualty insurance remained stable during the third quarter of 2004 but moderated slightly in certain lines of business and select territories due to an increase in price competition. No significant changes are anticipated in the commercial lines marketplace for the remainder of the year and the Company will continue to implement rate increases in those lines of business and/or territories where such action is warranted; however, the overall impact of these rate increases is expected to be smaller than those implemented during the recent past.
The Company’s GAAP combined ratio was 107.6 percent in the third quarter of 2004 compared to 98.6 percent in the third quarter of 2003. For the first nine months of 2004, the GAAP combined ratio was 102.8 percent compared to 100.3 percent for the same period in 2003.
EMC Insurance Group Inc., the publicly-held insurance holding company of EMC Insurance Companies, owns subsidiaries with operations in property and casualty insurance and reinsurance. EMC Insurance Companies is one of the largest property and casualty entities in Iowa and among the top 60 insurance entities nationwide. For more information, visit our website www.emcinsurance.com.
The Private Securities Litigation Reform Act of 1995 provides issuers the opportunity to make cautionary statements regarding forward-looking statements. Accordingly, any forward-looking statement contained in this report is based on management’s current expectations and actual results of the Company may differ materially from such expectations. 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; state and federal legislation and regulations; rate competition; changes in interest rates and the performance of financial markets; the adequacy of loss and settlement expense reserves, including asbestos and environmental claims; rate agency actions and other risks and uncertainties inherent to the Company’s business. When we use the words “believe”, “expect”, “anticipate”, “estimate” or similar expressions, we intend to identify forward-looking statements. You should not place undue reliance on these forward-looking statements.
ąThe Company uses a non-GAAP financial measure called “operating income” that management believes is useful to investors because it illustrates the performance of our normal, ongoing operations, which is important in understanding and evaluating our financial condition and results of operations. While this measure is consistent with measures utilized by investors to evaluate performance, it is not a substitute for the U.S. GAAP financial measure of net income. Therefore, we have provided a reconciliation of this non-GAAP financial measure to the U.S. GAAP financial measure of net income in the Summary of Consolidated Financial Data schedule contained in this release. Management also uses non-GAAP financial measures for goal setting, determining employee and senior management awards and compensation, and evaluating performance.
EMC Insurance Group Inc., Des Moines
Anita Novak (Investors)
515-280-2515
Lisa Hamilton (Media)
515-362-7589
717 Mulberry Street
Des Moines, IA 50309
