EMC Insurance Group Inc. (EMCI)

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EMC Insurance Group, Inc. (EMCI)

Q1 2009 Earnings Call

April 23, 2009 02:00 pm ET


Anita Novak - Director, IR

Bruce Kelley - President and CEO

Mark Reese - SVP and CFO

Ron Jean - EVP Corporate Development

Steven Peck - SVP Actuarial


Paul Newsome - Sandler O’Neill & Partners

Bob Barnum - KBW



Greetings and welcome to the EMC Insurance Group First Quarter 2009 Earnings Results Call.

At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Ms. Anita Novak, Director of Investor Relations for EMC Insurance Group Incorporated. Thank you. Ms. Novak, you may begin.

Anita Novak

Thank you, Manny. Good morning, everyone and welcome to EMC Insurance Group’s 2009 first quarter earnings call. A supplemental investor packet is available on the Investor Relations page of our web site, which can be found at www.emcins.com/IR. The webcast for replay purposes is also available at this site until February 23, 2010. The transcript of the webcast will be available for one year.

This presentation includes some forward-looking statements about our expectations for our future performance. Actual results could differ materially from those suggested by our comments today. Additional information about factors that could affect future results is addressed in our SEC filings including Forms S-1, 10-K, 10-Q and 8-K. Any information provided today should be read in conjunction with the 2009 first quarter earnings release with accompanying financial table issued earlier today.

With us today are several members of EMC Insurance Group’s executive management team. They are Mr. Bruce Kelley, President and Chief Executive Officer; Mr. Ron Jean, Executive Vice President for Corporate Development; Mr. Steven Peck, Senior Vice President, Actuary; Mr. Ray Davis, Senior Vice President, Investments and Treasurer; Mr. Rich Schulz, Senior Vice President, Claims; Mr. Kevin Hovick, Senior Vice President for Business Development and Mr. Mark Reese, Senior Vice President and Chief Financial Officer.

At this time, it is my pleasure to introduce EMC’s Chief Executive Officer, Bruce Kelley.

Bruce Kelley

Thank you, Anita. From an overall perspective first quarter 2009 ended with a solid result. Net operating income was $0.86 per share and the GAAP combined ratio was 96. Our underlying book of business remains sound despite the fact that overall rate levels on a written basis declined 4.2% year-over-year. Premium rates are showing signs of stabilization and we expect them to be begin firming somewhat during the second-half of 2009 in light of reduced capital levels and continuing uncertainty on the investment side. The lagging effect of previous rate level reductions, however reduced rate levels by approximately 3.5%.

Policy counts were up slightly in commercial lines and a little more significantly in personal lines. Average premium per policy is trending downward reflecting lower rate levels. Frequency is down slightly and severity is up 2.2 percentage points. Retention remains strong at approximately 86% for both commercial and personal lines.

Net written premium declined 2.3% in the first quarter with regard to commercial lines written premium was down for auto and liability but up for property and workers compensation lines as well as surety bonds.

For personal lines, written premiums increased for auto but declined for property and liability. It is important to note that some of the decline in personal lines written premium is a result of strategic decisions to reduce our presence in certain territories. We continue to redirect personal lines marketing initiatives and resources to characterize which we believe offer greater potential for growth and profit.

Personal lines, especially home owners are also being affected by ongoing efforts to mange exposure to catastrophic events. You may recall for example, that we previously decided to reduce our Rhode Island homers exposure by one-third, that process continues as we work to maintain a balance between geographic diversification and focus marketing initiatives in selected territories.

Catastrophe in the storm losses added 4 percentage points to our combined ratio in the first quarter compared to 6 percentage points in the first quarter of 2008. Development on prior years reserves continuous to be favorable. For the first quarter of 2009 favorable development totaled $21.1 million compared to $15.9 million for the same period in 2008, a reflection of consistent and conservative reserving practices.

Reserves are reviewed by our actuaries on a quarterly basis and both reserve adjustments are made as appropriate to maintain a consistent level of reserve adequacy. This methodology creates a transparent view of our actual reserve position and it is our intention to continue this methodology.

Underwriting reserves are very important and we take them very seriously. Our corporate objectives are based on profitable underwriting initiatives. We continue to expand our use of modeling tools, to enhance the value of prediction underwriting approaches and to improve the effectiveness of our selection and pricing decisions. We maintain a brand structure so that our underwriting staff is strategically located throughout our marketing territories and so that underwriters are well versed in the local marketing environment. However, underwriting is only one of the elements of our profit potential. As with most financial services organizations we strategize for profitability and our investment portfolio as well. And like most financial services organizations we continue to feel the effects of the global financial crisis especially in the evaluation of assets.

Investment income in the first quarter increased 2.8% as compared to the same period a year ago. However, as reported in our press release earlier today we recorded other than temporary investment impairment losses totaling $8.4 million or $0.41 per share after-tax on 24 equity securities and one fixed maturity security in the first quarter of 2009. Clearly, asset impairment continues to have a significant effect on net income. Even so we remained financially strong and we believe that our conservative investment philosophy has served us well during the financial crisis.

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