EMC Insurance Group Inc. Reports 2011 First Quarter Results and Revises 2011 Operating Income Guidance

First Quarter 2011
Operating Loss Per Share – $0.01
Net Income Per Share – $0.40
Realized Investment Gains Per Share – $0.41
Catastrophe and Storm Losses Per Share – $0.47
Large Losses Per Share – $0.20
GAAP Combined Ratio – 113.5 percent

2011 Operating Income Guidance – $0.40 to $0.65 per share

DES MOINES, Iowa--(BUSINESS WIRE)--EMC Insurance Group Inc. (Nasdaq:EMCI) today reported an operating loss of $0.01 per share for the first quarter ended March 31, 2011, compared to operating income of $0.73 per share for the first quarter of 2010¹.

“First quarter 2011 is a stark reminder of our business purpose to insure our policyholders against loss. Our hearts go out to all those affected by the catastrophic events of the first quarter”

Net income, including realized investment gains and losses, totaled $5,221,000 ($0.40 per share) for the first quarter of 2011 compared to $9,878,000 ($0.75 per share) for the first quarter of 2010.

“First quarter 2011 is a stark reminder of our business purpose to insure our policyholders against loss. Our hearts go out to all those affected by the catastrophic events of the first quarter,” stated Bruce G. Kelley, President and Chief Executive Officer. “Both our property and casualty insurance and our reinsurance segments tallied large losses from national and world-wide events of the quarter.”

Kelley went on to say that, “catastrophe and storm losses totaled $9,405,000 ($0.47 per share after taxes) and accounted for 9.8 percentage points of our first quarter loss ratio; this compares to $3,421,000 ($0.17 per share after taxes) in the first quarter of 2010 and is significantly greater than the 10-year (2001 through 2010) first quarter average of 3.0 percentage points. Non-catastrophic large losses accounted for an additional 4.2 percentage points of the loss ratio.”

“Approximately 64 percent of the catastrophe and storm losses are attributable to our reinsurance segment and about half of those losses ($3.0 million) were a result of the Japan earthquake and tsunami, which occurred on March 11, 2011,” continued Kelley. “Within the property and casualty insurance segment, losses came from the weight of excessive snow and ice on roofs, as well as other winter weather-related claims from mid-western and eastern U.S. storms. There has been some media speculation that global storm activity is increasing in both frequency and severity; however, we believe the recent increase in storm-related losses, though somewhat unusual, is not a permanent change. Nonetheless, we remain diligent in the evaluation of our losses and are prepared to take necessary pricing and underwriting actions, if deemed necessary.”

Premiums earned increased 4.3 percent to $96,287,000 for the first quarter of 2011, from $92,345,000 for the first quarter of 2010. “Premium rates in the commercial lines of business continue to be competitive, but we are beginning to see some signs of improvement in both rate levels and insured exposures,” stated Kelley. “Personal lines rates continue to increase moderately and overall, premium rates are up slightly. In the reinsurance segment, premium rate levels declined slightly during the January 1, 2011 renewal season.”

Investment income decreased 3.5 percent to $12,079,000 in the first quarter of 2011 from $12,517,000 in the first quarter of 2010.

The Company experienced $3,907,000 ($0.20 per share after taxes) of favorable development on prior years’ reserves during the first quarter of 2011, compared to $21,420,000 ($1.06 per share after taxes) in the first quarter of 2010. The property and casualty insurance segment continued to experience favorable development on prior years’ reserves, but the amount was substantially less than the amount reported in the first quarter of 2010. Approximately $4.0 million, or 44 percent, of the decline in favorable development is attributed to a change in the methodology used to allocate bulk reserves to the various accident years that was implemented December 31, 2010. Under the revised methodology, a larger portion of the current quarter’s bulk reserves is being allocated to the prior accident years. This had the effect of reducing the amount of favorable development reported in the first quarter of 2011 compared to the same period in 2010. Most of the remaining decline in favorable development is attributed to a higher level of adverse development on open claims during the first quarter of 2011. The amount of favorable development experienced on closed claims was very similar to the amount experienced in the first quarter of 2010. The reinsurance subsidiary experienced adverse development on its prior years’ reserves due to higher than anticipated reported losses.

Net realized investment gains totaled $8,300,000 ($0.41 per share after taxes) for the first quarter of 2011 compared to $525,000 ($0.02 per share after taxes) in 2010. During the first quarter of 2011, the Company’s outside equity manager rebalanced the equity portfolio to improve future performance, which triggered a significant amount of realized gains. “Other-than-temporary” investment impairment losses declined slightly to $246,000 ($0.01 per share after taxes) in the first quarter of 2011 from $352,000 ($0.01 per share after taxes) in the first quarter of 2010.

Large losses (which the Company defines as losses greater than $500,000 for the pool), excluding catastrophe and storm losses, increased to $4,037,000 ($0.20 per share after taxes) in the first quarter of 2011 from $3,409,000 ($0.17 per share after taxes) in the first quarter of 2010.

The Company’s GAAP combined ratio was 113.5 percent in the first quarter of 2011 compared to 98.1 percent in the first quarter of 2010.

At March 31, 2011, consolidated assets totaled $1.2 billion, including $1.1 billion in the investment portfolio and stockholders’ equity totaled $370.0 million, an increase of 0.4 percent from December 31, 2010. Net book value of the Company’s stock increased slightly to $28.56 per share from $28.52 per share at December 31, 2010. Book value excluding accumulated other comprehensive income increased to $26.83 per share from $26.63 per share at December 31, 2010.

The Company currently expects losses associated with storms that occurred during the month of April, including a tornado in Mapleton, Iowa and a record number of tornados in Alabama and several other southern states, to total approximately $15,000,000, or $0.75 per share after tax. These losses will be included in the Company’s second quarter results. As a result of the unusually large amount of April storm losses, management is lowering its 2011 operating income guidance from the previous range of $1.00 to $1.25 per share to a range of $0.40 to $0.65 per share. This guidance is based on a projected GAAP combined ratio of 110.6 percent for the year.

The Company will hold an earnings teleconference call at 11:00 a.m. eastern standard time on May 10, 2011 to allow securities analysts, stockholders and other interested parties the opportunity to hear management discuss the Company’s results for the quarter ended March 31, 2011, as well as its expectations for the remainder of 2011. Dial-in information for the call is toll-free 1-877-407-9205 (International: 1-201-689-8054). The event will be archived and available for digital replay through August 1, 2011. The replay access information is toll-free 1-877-660-6853 (International: 1-201-612-7415); passcodes required for playback: account number 286, conference ID number 370904.

Members of the news media, investors and the general public are invited to access a live webcast of the conference call via the Company’s investor relations page at www.emcins.com/ir. The webcast will be archived and available for replay until August 1, 2011. A transcript of the teleconference will also be available on the Company’s website shortly after the completion of the teleconference.

EMC Insurance Group Inc. is a publicly held insurance holding company with operations in property and casualty insurance and reinsurance, which was formed in 1974 and became publicly held in 1982. The Company’s common stock trades on the Global Select Market tier of the NASDAQ OMX Stock Market under the symbol EMCI. EMCI’s parent company is Employers Mutual Casualty Company (EMCC). EMCI and EMCC, together with their subsidiary and affiliated companies, conduct operations under the trade name EMC Insurance Companies. Additional information regarding EMC Insurance Companies may be found at www.emcins.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 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.

¹The Company uses a non-GAAP financial measure called “operating income (loss) ” 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 (loss). Therefore, the Company has provided the following reconciliation of the non-GAAP financial measure of operating income (loss) to the U.S. GAAP financial measure of net income. Management also uses non-GAAP financial measures for goal setting, determining employee and senior management awards and compensation, and evaluating performance.

Reconciliation of operating income (loss) to net income:

	Three Months Ended March 31,
	2011			2010
Operating income (loss)	$	(146,477	)	$	9,536,899
Net realized investment gains		5,367,827			341,193
Net income	$	5,221,350		$	9,878,092

CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
	Property and
	Casualty						Parent
Quarter Ended March 31, 2011	Insurance			Reinsurance			Company			Consolidated
Revenues:
Premiums earned	$	77,311,292		$	18,975,522		$	-		$	96,286,814
Investment income, net		8,897,650			3,180,547			398			12,078,595
Other income		203,830			-			-			203,830
		86,412,772			22,156,069			398			108,569,239
Losses and expenses:
Losses and settlement expenses		51,167,688			22,201,913			-			73,369,601
Dividends to policyholders		2,512,969			-			-			2,512,969
Amortization of deferred policy acquisition costs		19,732,697			4,078,085			-			23,810,782
Other underwriting expenses		9,090,607			530,717			-			9,621,324
Interest expense		225,000			-			-			225,000
Other expenses		162,716			421,286			348,376			932,378
		82,891,677			27,232,001			348,376			110,472,054
Operating income (loss) before income taxes		3,521,095			(5,075,932	)		(347,978	)		(1,902,815	)
Realized investment gains		6,353,354			1,904,842			-			8,258,196
Income (loss) before income taxes		9,874,449			(3,171,090	)		(347,978	)		6,355,381
Income tax expense (benefit):
Current		2,831,702			(1,092,835	)		(121,792	)		1,617,075
Deferred		(134,522	)		(348,522	)		-			(483,044	)
		2,697,180			(1,441,357	)		(121,792	)		1,134,031
Net income (loss)	$	7,177,269		$	(1,729,733	)	$	(226,186	)	$	5,221,350
Average shares outstanding											12,935,554
Per Share Data:
Net income (loss) per share - basic and diluted	$	0.55		$	(0.13	)	$	(0.02	)	$	0.40
Decrease (increase) in provision for insured
events of prior years (after tax)	$	0.24		$	(0.04	)	$	-		$	0.20
Catastrophe and storm losses (after tax)	$	(0.17	)	$	(0.30	)	$	-		$	(0.47	)
Dividends per share										$	0.19
Book value per share										$	28.56
Effective tax rate											17.8	%
Annualized net income as a percent of beg. SH equity											5.7	%
Other Information of Interest:
Net written premiums	$	76,628,300		$	20,156,866		$	-		$	96,785,166
Increase (decrease) in provision for
insured events of prior years	$	(4,682,025	)	$	774,736		$	-		$	(3,907,289	)
Catastrophe and storm losses	$	3,423,338		$	5,981,344		$	-		$	9,404,682
GAAP Combined Ratio:
Loss ratio		66.2	%		117.0	%		-			76.2	%
Expense ratio		40.5	%		24.3	%		-			37.3	%
		106.7	%		141.3	%		-			113.5	%
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED - CONTINUED
	Property and
	Casualty						Parent
Quarter Ended March 31, 2010	Insurance			Reinsurance			Company			Consolidated
Revenues:
Premiums earned	$	74,787,363		$	17,557,703		$	-		$	92,345,066
Investment income, net		9,416,496			3,104,100			(3,609	)		12,516,987
Other income		206,686			-			-			206,686
		84,410,545			20,661,803			(3,609	)		105,068,739
Losses and expenses:
Losses and settlement expenses		44,014,288			12,028,336			-			56,042,624
Dividends to policyholders		2,354,462			-			-			2,354,462
Amortization of deferred policy acquisition costs		18,251,004			3,614,111			-			21,865,115
Other underwriting expenses		9,051,013			1,314,181			-			10,365,194
Interest expense		225,000			-			-			225,000
Other expenses		227,724			(310,195	)		280,674			198,203
		74,123,491			16,646,433			280,674			91,050,598
Operating income (loss) before income taxes		10,287,054			4,015,370			(284,283	)		14,018,141
Realized investment gains		405,511			119,402			-			524,913
Income (loss) before income taxes		10,692,565			4,134,772			(284,283	)		14,543,054
Income tax expense (benefit):
Current		3,069,962			1,182,987			(99,499	)		4,153,450
Deferred		587,145			(75,633	)		-			511,512
		3,657,107			1,107,354			(99,499	)		4,664,962
Net income (loss)	$	7,035,458		$	3,027,418		$	(184,784	)	$	9,878,092
Average shares outstanding											13,123,810
Per Share Data:
Net income (loss) per share - basic and diluted	$	0.54		$	0.23		$	(0.02	)	$	0.75
Decrease in provision for
insured events of prior years (after tax)	$	0.67		$	0.39		$	-		$	1.06
Catastrophe and storm losses (after tax)	$	(0.12	)	$	(0.05	)	$	-		$	(0.17	)
Dividends per share										$	0.18
Book value per share										$	27.32
Effective tax rate											31.1	%
Annualized net income as a percent of beg. SH equity											11.5	%
Other Information of Interest:
Net written premiums	$	72,555,642		$	17,996,129		$	-		$	90,551,771
Decrease in provision for
insured events of prior years	$	(13,611,773	)	$	(7,808,189	)	$	-		$	(21,419,962	)
Catastrophe and storm losses	$	2,363,529		$	1,057,087		$	-		$	3,420,616
GAAP Combined Ratio:
Loss ratio		58.9	%		68.5	%		-			60.7	%
Expense ratio		39.6	%		28.1	%		-			37.4	%
		98.5	%		96.6	%		-			98.1	%

CONSOLIDATED BALANCE SHEETS - UNAUDITED
	March 31,			December 31,
	2011			2010
ASSETS
Investments:
Fixed maturities:
Securities held-to-maturity, at amortized cost
(fair value $382,905 and $389,679)	$	335,320		$	340,803
Securities available-for-sale, at fair value
(amortized cost $883,749,482 and $909,582,782)		912,992,330			941,537,026
Equity securities available-for-sale, at fair value
(cost $84,461,376 and $75,721,039)		109,114,446			101,138,982
Other long-term investments, at cost		26,002			29,827
Short-term investments, at cost		54,445,536			36,616,111
Total investments		1,076,913,634			1,079,662,749
Cash		728,827			491,994
Reinsurance receivables due from affiliate		32,868,653			30,256,586
Prepaid reinsurance premiums due from affiliate		8,793,643			9,530,426
Deferred policy acquisition costs (affiliated $37,670,566
and $37,584,448)		37,683,733			37,584,448
Prepaid pension benefits due from affiliate		4,692,991			5,125,701
Accrued investment income		11,587,420			10,925,854
Accounts receivable		1,027,521			1,716,150
Income taxes recoverable		741,523			2,350,864
Deferred income taxes		8,297,229			6,690,218
Goodwill		941,586			941,586
Other assets (affiliated $2,398,198 and $2,433,445)		2,563,031			2,517,922
Total assets	$	1,186,839,791		$	1,187,794,498
LIABILITIES
Losses and settlement expenses (affiliated $564,103,373
and $553,125,183)	$	567,422,231		$	556,140,956
Unearned premiums (affiliated $167,746,796 and $167,896,119)		167,817,489			167,896,119
Other policyholders' funds due to affiliate		8,573,012			8,315,751
Surplus notes payable to affiliate		25,000,000			25,000,000
Amounts due affiliate to settle quarterly transaction balances		10,493,402			18,380,813
Pension and postretirement benefits payable to affiliate		20,987,377			20,418,716
Other liabilities (affiliated $16,464,544 and $22,861,092)		16,586,572			23,001,141
Total liabilities		816,880,083			819,153,496
STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000
shares; issued and outstanding, 12,953,116
shares in 2011 and 12,927,678 shares in 2010		12,953,116			12,927,678
Additional paid-in capital		89,556,825			88,937,294
Accumulated other comprehensive income (loss):
Net unrealized losses on fixed maturity securities
with "other-than-temporary" impairments		(5,210	)		(69,852	)
Other net unrealized gains		35,037,556			37,361,774
Pension and postretirement benefits payable to affiliate		(12,624,231	)		(12,796,435	)
Total accumulated other comprehensive income		22,408,115			24,495,487
Retained earnings		245,041,652			242,280,543
Total stockholders' equity		369,959,708			368,641,002
Total liabilities and stockholders' equity	$	1,186,839,791		$	1,187,794,498

INVESTMENTS
The Company had total cash and invested assets with a carrying value of $1.1 billion as of
March 31, 2011 and December 31, 2010. The following table summarizes the Company's cash and
invested assets as of the dates indicated:
	March 31, 2011
						Percent of
	Amortized		Fair			Total			Carrying
($ in thousands)	Cost		Value			Fair Value			Value
Fixed maturity securities held-to-maturity	$	335	$	383		-			$	335
Fixed maturity securities available-for-sale		883,749		912,992		84.7%				912,992
Equity securities available-for-sale		84,461		109,114		10.1%				109,114
Cash		729		729		0.1%				729
Short-term investments		54,446		54,446		5.1%				54,446
Other long-term investments		26		26		-				26
	$	1,023,746	$	1,077,690		100.0%			$	1,077,642
	December 31, 2010
						Percent of
	Amortized		Fair			Total			Carrying
($ in thousands)	Cost		Value			Fair Value			Value
Fixed maturity securities held-to-maturity	$	341	$	390		-			$	341
Fixed maturity securities available-for-sale		909,583		941,537		87.2%				941,537
Equity securities available-for-sale		75,721		101,139		9.4%				101,139
Cash		492		492		-				492
Short-term investments		36,616		36,616		3.4%				36,616
Other long-term investments		30		30		-				30
	$	1,022,783	$	1,080,204		100.0%			$	1,080,155
NET WRITTEN PREMIUMS
			Three Months Ended
			March 31, 2011
						Percent of
						Increase/
			Percent of			(Decrease) in
			Net Written			Net Written
			Premiums			Premiums
Property and Casualty Insurance
Commercial Lines:
Automobile				17.2	%	5.0		%
Liability				15.6	%	5.5		%
Property				17.4	%	9.8		%
Workers' Compensation				16.0	%	11.8		%
Other				1.7	%	(18.2	)	%
Total Commercial Lines				67.9	%	7.1		%
Personal Lines:
Automobile				7.1	%	(12.1	)	%
Property				4.8	%	18.2		%
Liability				0.1	%	5.6		%
Total Personal Lines				12.0	%	(2.0	)	%
Total Property and Casualty Insurance				79.9	%	5.6		%
Reinsurance (1)				20.1	%	6.9		%
Total				100.0	%	5.9		%

(1) Excludes $920,597 positive portfolio adjustment related to the January 1, 2011 increased participation in the MRB pool.