KBW Insurance Conference

Transcription

1 KBW Insurance Conference Bruce Kelley Chief Executive Officer and President Mark E. Reese Senior Vice President and Chief Financial Officer September 6, 2012

2 Legal Disclaimer 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 into account all information currently available to management. 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.

3 Who We Are Long History 1911 parent company formed (Employers Mutual Casualty Company (EMCC)) 1982 IPO (net proceeds: $2,516,665) NASDAQ OMX: EMCI 1985 follow-on offering (net proceeds: $21,416,014) 2004 follow-on offering (net proceeds: $34,890,058) Property and Casualty Insurance Segment 2,100 independent agency relationships representing EMC through 3,800 offices in 42 states 30% participation in EMCC pool Benefit from capacity of the entire pool Diversified writings (85% commercial / 15% personal) Represents approximately 77% of total earned premiums Reinsurance Segment 1/3 of business comes from participation in the MRB pool 2/3 of business comes from broker market (23 brokers e.g. AON, Guy Carpenter, etc.) 100% Quota Share Agreement with EMCC, but some contracts written directly Losses are capped at $4.0 million per event under an excess of loss agreement with EMCC, at a cost of 10.0% of total assumed written premiums EMCC has been assuming reinsurance business since 1951 Represents approximately 23% of total earned premiums $ in millions Reins, Segment, $94.8 P&C Segment, $321.6 EMCC, Subs. & Affil., $757.4 EMC Insurance Companies consists of EMCI and its subsidiaries and Employers Mutual and its subsidiaries and affiliate. Earned premiums for EMC Insurance Companies totaled approximately $1.2 billion in EMCI consists of the property and casualty insurance segment (30% of the inter-company pool) plus the reinsurance segment (dark blue sections) or approximately 1/3 of EMC Insurance Companies earned premiums.

4 Corporate Structure In May 2005, EMCC s Board Authorized a $15 million stock purchase program, which is 70% complete. Employers Mutual Casualty Company Public Shareholders 61%* 39%* $15 million stock repurchase program approved November EMC Insurance Group Inc. Pooling Mechanism - Cede 100% of direct business to inter-company pool - Receive 30% of the pooled underwriting results Property and Casualty Insurance Segment Reinsurance Segment (100% of Employers Mutual s Assumed Reinsurance Business - Some direct writings beginning in 2009) *As of June 30, 2012

5 Benefits of the Pooling Agreement Spread risk over a wide range of geographic locations, lines of insurance written, rate filings, commission plans and policy forms Benefit from capacity of the entire pool: $1.2 billion in direct premiums written in 2011 and $1.1 billion of statutory surplus as of 06/30/2012 The achievement of an A- (Excellent) rating from A.M. Best with positive outlook Network of 2,100 insurance agencies in 42 state distribution network Merger and acquisition flexibility Economies of scale in operations and purchase of reinsurance

6 Significantly Lower Total Statutory Loss Ratio EMC Insurance Group has outperformed the property and casualty insurance industry annually on a statutory basis by an average of 3.8 percentage points since Average 3.8% 16.0% 12.0% 8.0% 4.0% 0.0% -4.0% -8.0% 4.3% 3.3% -3.0% 3.9% 11.9% 10.1% 8.5% -0.1% -5.6% -4.7% -1.6% 4.5% 11.6% 6.0% 0.2% 12.4% 6.5% 4.7% 1.3% 7.1% 5.9% -3.3% -12.0% Hurricane Andrew Heavy Midwest storms Reserve Strengthening Midwest Storms Record Catastrophes Source: Company statutory filings and A.M. Best. Total Loss Ratio includes Loss Ratio and LAE Ratio

7 2011 Catastrophes Reinsurance Segment Very unusual year five events with losses in excess of $3 million cap Upper left: tornado super cell sequence (April 27, 2011) Center left: Tuscaloosa, AL (April 27, 2011) -- $3 million cap met, similar storms in Joplin, MO -- $3 million cap met; and Springfield, MA. -- $3 million cap met Bottom Left: Japan earthquake (March 11, 2011) -- $3 million cap met Lower Right: Hurricane Irene (August 2011) -- $3 million cap met

8 Experienced Management Team EMC has the highest percentage of CPCU s in the industry Average Years w/ EMC: 23 years Average Years in Industry: 29 years

9 Diversified Book of Business Twelve Months Ended 12/31/2011 Net Premiums Earned Total EMC Re 23% Net Premiums Earned P&C Segment Personal Auto 8.6% Bonds 2.4% Homeowners 6.6% Commercial Auto 20.9% $416.4 million Property and Casualty 77% Net Premiums Earned Growth in 2011: 7% 5.2% P&C Segment 13.5% Reinsurance Segment 5.8% CAGR ( ) Net Premiums Earned Growth in 1 st Half 2012: 11.6% 11.0% P&C Segment 13.6% Reinsurance Segment Workers' Comp 21.2% Commercial Property 21.5% Casualty and Other 14.9% Crop 6.0% Marine* 0.9% International 13.6% Property Pro Rata 14.9% Commercial Liability 18.8% $321.6 million Net Premiums Earned Reinsurance Segment Property XS 49.7% $94.8 million

10 2012 Premium Growth - Reinsurance Primarily due to double-digit rate increases on January 1 renewals Currently do business with 23 reinsurance brokers in 153 offices worldwide. Continue to seek relationships with additional offices of existing brokers, as well as relationships with additional brokers.

11 How We Conduct Direct Business Local Market Presence 16 branch offices and 5 service offices Decentralized: each branch office performs its own marketing, underwriting, risk management and claims handling This local presence allows us to enhance relationships with agents and customers, which generally results in a superior loss ratio Structure allows us to develop products, marketing strategies, and pricing targeted to individual territories Retention ratios that consistently stay in the mid to upper 80 percentile

12 Commercial Lines Business COUNTRY-WIDE COMMERCIAL LINES WRITTEN PREMIUM (Program business constitutes 40.0% of commercial lines written premium) EMC Choice 10.4% Target Markets 14.6% As of June 30, 2012 Other 60.0% Safety Groups 15.0% Program Change in Written Premiums Ratio of Incurred Losses to Earned Premiums Program Details EMC Choice 18.3% 56.9% (13 select business coverages, including auto services, boat dealers, artisan contractors, equipment dealers, financial institutions, metal manufacturers, motels, hospitals, dry cleaners, wholesalers, printers, auto repair, and religious institutions - local agents take the lead) Target Markets 12.5% 50.5% (schools, municipalities, auto/rv dealers, telecommunications, local towing, milk haulers, petroleum dealers, water/sanitation distribution, and manufactured housing - branch specific) Safety Groups 4.7% 51.6% (Target Markets offering dividends for good experience of the group)

13 EMC Agency Force 19.7% of EMC s 2,100 member agency force consists of Premier and Leading Partner agencies These Premier and Leading Partner agencies produced over 52% of the pool s business volume in 2011 Premier and Leading Partner agencies are those agencies that meet rigorous production, retention and profitability standards EMC continues to seek out and appoint top-quality agents 106 new agencies were added in new agencies were added in the first half of 2012

14 Local Service Focus Minneapolis Providence Bismarck Milwaukee Lansing Omaha Des Moines Denver Chicago Cincinnati Charlotte Phoenix Kansas City Wichita Jackson Birmingham Each dot is an agency

15 2012 Premium Growth - Direct Rate levels Underlying Exposures Renewal Retention New Business To a lesser extent: Audits and Endorsements

16 Countrywide Cumulative Rate Changes 50% 40% 30% 20% 14.2% Seven Major Lines of Direct Business Manual Rates and Underwriting Mods 31.5% 40.3% 42.8% 39.4% 33.1% 26.4% 19.6% 18.9% 18.8% 20.9% 25.5% 10% 4.7% 0% June

17 Commercial Lines Renewal Premium Changes 25.0% 20.0% 15.0% Policy Renewal Premiums Compared to Prior Policy Period (Same Policies) 19.5% Exposure Change Rate Change Premium Change 16.9% 14.9% 10.0% 5.0% 0.0% 8.8% 5.7% 1.3% 3.3% 7.7% -5.0% -10.0% -0.4% -0.9% -1.4% -0.4% June

18 Estimated Changes in Rate Levels on P&C Insurance Policies Business Owners Commercial Property Workers Compensation EMC Industry Average +3.4% -+2.8% General Liability Commercial Auto Home Owners Personal Auto +7.3% +2.9% +3.9% +2.9% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% June 2012 vs. June 2011 Sources for Industry Data: Market Scout and Conning

19 Loss Trends 5.0% Seven Major Lines of Direct Business Compound Ultimate Accident YearTrends: * 4.0% 3.0% 2.0% 2.0% 1.7% Frequency Severity Loss Trend 1.0% 0.0% -0.3% -1.0% *Excluding Storms and Excess Losses

20 Invested Assets ($ in thousands) As of June 30, 2012 RMBS/ABS/Other $37,885 3% Commercial Mortgage-Backed Bonds $86,658 8% Corporate Bonds $315,722 27% Common & Preferred Stock $133,133 12% S-T Investments $66,295 6% Municipal bonds $386,445 34% Treasuries/Agencies $119,947 10%

21 Net Investment Income ($ in thousands) $60,000 $50,000 $40,000 $48,403 $49,489 $30,000 $20,000 $40,696 $46,692 $48,482 $47,759 $46,111 $45,175* (Projected ) $10,000 $ *Projected Net Investment Income is an estimate and could vary materially based on reinvestment rate, bond calls and growth in portfolio. Projection as of 6/30/2012.

22 Recent Trends In Net Investment Income Dividend Stocks MLPs Corporate Bond Allocation Portfolio Growth Interest Rates Duration Shift Less Callability No change in quality guidelines

23 Recent Trends In Net Investment Income 1. Dividend Stocks ü Added $45 million to Schafer-Cullen dividend stocks in March $10 million was new money and $35 million was transferred from core equities ü Schafer-Cullen dividend yield of 3.8% versus 2.1% for core equity strategy ü Contributed materially to surplus as well as provided competitive-to-bond income 2. Master Limited Partnerships ü Added $6.9 million of master-limited partnerships in Sept/Oct 2011 ü Current Yield 5.9% ü Gains in price as well as above-bond income 3. Corporate Bonds ü Have increased corporate bonds from 17.6% of bonds at 12/31/08 to 31.6% of bonds 6/30/2012. ü A- or better quality 4. Invested Assets ü Invested assets are expected to grow with 2012 premium increases. More assets = more income

24 Recent Trends In Net Investment Income 1. Interest rates keep coming down 2. EMCI bond portfolio is shortening in duration 3. Less callability in EMCI bond portfolio ü Agencies (mostly callable) as a percentage of bond portfolio have declined ü If rates increase, portfolio has less extension risk June Yr Treasury 2.21% 3.84% 3.30% 1.88% 1.65% Eff Duration Agencies 31.5% 16.7% 17.2% 13.9% 12.5%

25 Recent Trends In Net Investment Income No change in quality guidelines or conservative investment philosophy.

26 Selected Financial Results * ($ in thousands, except per share amounts) (Unaudited) Year Ended December 31, Six Months Ended June 30, Revenues (As Adjusted) (As Adjusted) Premiums Earned $ 416,402 $ 389,122 $ 384,011 $ 389,318 $ 220,030 $ 197,218 Investment Income, excl. Realized Gains 46,111 49,489 47,759 48,403 22,305 23,552 Other Income Expenses Losses and Settlement Expenses (342,974) (254,641) (248,749) (294,265) (153,640) (175,140) Acquisition and Other Expenses (140,662) (146,174) (140,272) (130,867) (74,551) (70,536) Operating Income (Loss) Before Taxes $ (20,295) $ 38,579 $ 43,504 $ 13,215 $ 14,606 $ (24,466) Net Income (Loss) $ (2,737) $ 31,349 $ 44,657 $ (2,323) $ 16,647 $ (7,162) Net Income (Loss) Per Share $ (0.21) $ 2.40 $ 3.38 $ (0.17) $ 1.29 $ (0.55) Loss and Settlement Expense Ratio 82.4% 65.4% 64.8% 75.6% 69.8% 88.8% Expense Ratio 32.9% 36.9% 35.7% 33.0% 33.4% 34.6% Combined Ratio 115.3% 102.3% 100.5% 108.6% 103.2% 123.4% After-Tax Impact Per Share: Catastrophe and Storm Losses $ (4.04) $ (2.10) $ (1.55) $ (2.44) $ (1.74) $ (2.53) Development - Favorable Impairment Losses (0.30) (0.12) (0.50) (1.48) (0.01) (0.05) Total $ (2.67) $ 0.31 $ 0.34 $ (2.22) $ (0.86) $ (1.92) * Certain amounts previously reported have been adjusted in conjunction with the Company's retrospective adoption of new accounting guidance related to deferred policy acquisition costs on January 1, 2012.

27 Reserving Methodology We don t use accident year loss picks to establish reserves. Case and IBNR reserves are established independently of each other. Case Reserves Based on the probable outcome for each claim, with probable outcome defined as what is most likely to be awarded if the case were to be decided by a civil court in the applicable venue, or in the case of a workers compensation case, by that state s Workers Compensation Commission. On an individual claim basis, case reserves represent the Company s best estimate of exposure. However, when accumulated, the total is somewhat conservative because all claims will not be settled at the probable outcome amount. IBNR Reserves Calculated by line of business and allocated to the various accident years using historical claim emergence patterns. Accident Year Results The current and more recent accident years have a higher proportion of case, IBNR and settlement expense reserves than earlier accident years. Since the Company s reserves are established somewhat conservatively, the relatively high proportion of reserves in the more recent accident years generates relatively high loss and settlement expense ratios in the early stages of an accident year s development. As those accident years mature, claims are gradually settled, the reserves for those years become smaller, and the loss and settlement expense ratios generally decline.

28 New Offshore Energy and Liability Account $17 to $21 million of annual premiums on an underwriting year basis Approximately 1/2 earned in 2012, with balance earned in 2013 First quarter 2012 Earned But Not Reported (EBNR) premium estimate was $3,975,000 More refined actuarial projection completed during second quarter June 30, 2012 EBNR premium estimate was $990,000 Result was $2,985,000 negative EBNR premium adjustment in second quarter 2012 earnings stream somewhat back-loaded due to: New account status Majority of underlying policies are expected to have effective dates in June and July Earned premium is currently projected to approximate $8,000,000 for calendar year 2012

29 EMCI Reserve Adequacy Indicated vs. Carried Statutory - Basis Reserves (Net Basis) Thousands /31/ /31/2011 High Estimate Selected High Estimate Selected Low Estimate Low Estimate Carried Reserve

30 GAAP Combined Ratios * 140.0% Catastrophe Losses Combined Ratio Excluding Catastrophe Losses 120.0% 100.0% 7.4% 13.5% 8.2% 10.8% 19.3% 15.7% 80.0% 60.0% 40.0% 90.3% 95.1% 92.3% 91.5% 96.0% 87.5% 20.0% 0.0% Total Combined Ratio 97.7% 108.6% 100.5% 102.3% 115.3% 103.2% June NOTE: Record catastrophe losses in 2008 and 2011 * The combined ratio excluding catastrophe losses for the years 2007 through 2011 have been adjusted to reflect the Company s retrospective adoption of new accounting guidance for the calculation of deferred policy acquisition costs that became effective January 1, 2012.

31 Net Operating Income (Loss) Per Share * $6.00 $5.00 $4.00 $4.27 Net Operating Income (Loss) $3.52 Net Operating Income Excl. Catastrophe Losses $4.31 $4.05 $3.36 $3.00 $2.64 $2.00 $2.90 $2.50 $2.21 $1.00 $0.00 $1.00 $0.90 -$1.00 -$2.00 ($0.68) June * The amounts reported for 2007 through 2011 have been adjusted to reflect the Company s retrospective adoption of new accounting guidance for the calculation of deferred policy acquisition costs that became effective January 1, 2012.

32 Book Value Per Share * $45.00 $30.00 $25.83 $25.67 $28.07 $27.37 $29.08 $22.72 $20.94 $21.69 $24.45 $26.18 $25.25 $26.14 $15.00 Book Value Book Value excluding Accum. Other Comp. Income $ Annual Growth 15.1% -18.9% 22.6% 9.3% -2.5% 6.1% June * The amounts reported for 2007 through 2011 have been adjusted to reflect the Company s retrospective adoption of new accounting guidance for the calculation of deferred policy acquisition costs that became effective on January 1, 2012.

33 Balance Sheet June 30, 2012 Investments $1.1 billion invested assets 88.4% fixed maturity securities (based on fair value) 99.0% investment grade Effective duration: 4.54 years Annualized yield on fixed maturity securities portfolio: 4.43% 10-yr average total rate of return on equity portfolio: 6.51% 10-yr average S&P 500 total rate of return: 5.33% Loss and Settlement Expense Reserves Quarterly internal actuarial reviews Any necessary adjustments are made on a timely basis Debt Only debt is $25 million of surplus notes issued by the property and casualty insurance subsidiaries to Employers Mutual annual interest rate of 3.60%

34 Capital Management EMCI Stock Repurchase Program In November 2011, EMCI s Board authorized a new $15 million stock repurchase program upon the completion of the previous $25 million repurchase program. No stock has been repurchased during EMCC Stock Purchase Program In May 2005, EMCC s Board authorized a $15 million stock purchase program, which is 70% complete (dormant while EMCI s program is active). Quarterly Dividend The Company has paid 122 consecutive quarterly dividends since it s inception in The 122 nd consecutive quarterly dividend was declared on May 24, 2012 and was $0.20 per share. It was payable on June 11, 2012 to shareholders of record on June 4, 2012.

35 2012 Guidance Operating Income of $1.30 to $1.55 per share Projected Underwriting Loss $ (1.69) Projeted Investment Income $ 3.51 Projected Other Income (Loss) $ (0.11) Projected Interest Expense $ (0.07) Projected Operating Income $ 1.64 Taxes (13.30% effective tax rate) $ 0.22 Projected Net Operating Income $ 1.42 Calculation is based on achieving a GAAP combined ratio of 104.9%; Cat load is 8.3% for the pool and 10.1% overall. In addition, the case reserve load (expected development of known IAR case reserves) is -3.5%. Development on IBNR and settlement expense reserves is not projected.

36 Investment Highlights Access to a large capital base and a diversified and seasoned book of business through participation in the EMCC pool Regional, decentralized operating structure (Midwest focus) Proven ability to deliver attractive returns to shareholders: Compound annual total shareholder return of 6.2% over the past 10 years and 8.3% over the past 20 years* Dividend yield of over 4.0 percent as of 06/30/2012 Attractive stock price currently trading at approximately 70% of book value Conservative balance sheet Experienced senior management team and staff * Source: Bloomberg

37 Notes

38 Notes

39 Thank You!

40 Six Months Ended June 30, At a Glance Catastrophe Losses $34.6 million ($50.5 million in 2011) $1.74 per share after tax ($2.53 per share after tax in 2011) Large Losses $12.4 million ($8.2 million in 2011) $0.63 per share after tax ($0.41 per share after tax in 2011) Net Realized Investment Gains $5.1 million ($6.5 million in 2011) $0.39 per share ($0.50 per share in 2011) Investment Impairment Losses $126 thousand ($916 thousand in 2011) $0.01 per share after tax ($0.05 per share after tax in 2011) Premiums Earned $220.0 million ($197.2 million in 2011) GAAP Combined Ratio percent (123.4 percent in 2011) Net Operating Income $0.90 per share (net operating loss of $1.05 per share in 2011) Net Income $1.29 per share (net loss of $0.55 per share in 2011) Book Value $29.08 per share ($27.37 at December 31, 2011) Note: Certain amounts reported for 2011 have been adjusted in conjunction with the Company s retrospective adoption of new accounting guidance for the calculation of deferred policy acquisition costs that became effective January 1, 2012.