EMCI

EMC Insurance Group Inc. (EMCI)

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EMC Insurance Group Inc. (EMCI)

Q2 2009 Earnings Call Transcript

July 23, 2009 11:00 am ET

Executives

Anita Novak – Assistant Secretary/Director of IR

Bruce Kelley – President & CEO

Mark Reese – SVP Accounting & CFO

Rich Schulz – SVP Claims

Bill Murray – EVP & COO

Ray Davis – SVP Investments & Treasurer

Analysts

Paul Newsome – Sandler O’Neill & Partners

Bob Barnum – KBW

Presentation

Operator

Greetings and welcome to the EMC Insurance Group Incorporated second quarter 2009 earnings conference call. (Operator instructions) As a reminder, this conference is being recorded.

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

Anita Novak

Thank you, Diego. Good morning everyone, and welcome to EMC Insurance Group’s 2009 second 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 July 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 second 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. Bill Murray, Executive Vice President & Chief Operating 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; 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. Good morning. The second quarter operating income was $0.48 per share and net income was $0.53 per share. Catastrophe and storm losses declined to a more normal level of $0.45 per share and the book value of the company's stock increased 8.9% to $23.22 a share. Given current economic conditions, the management is pleased with the second quarter results.

Through the first six months of 2009, both production and underwriting profitability tallied better than our original expectations. We had a good first quarter, but we were a little apprehensive about the second quarter after last year's historic storm losses. Now that we are through the worst of the Midwest storm season we are comfortable in increasing our annual operating income guidance for 2009. We have still many challenges ahead of us as we continue to cope with the weak economy; however with our decentralized branch structure and conservative investment philosophy we are well prepared to handle those challenges.

While current year financial results are much improved over last year, it is important to keep in mind that results for the second quarter and first six months of 2008 were severely impacted by a record level of storm losses. So I would like to begin my discussion today by addressing some of the market trends we are seeing rather than a quarter to quarter comparison.

Some industry reports indicate increased pricing opportunities in both commercial and personal lines of business. While we have not experienced this on a broad basis we have been able to implement moderate price increases in selective lines of business and geographic locations. We also continue to see smaller industry rate reductions which leads us to believe that the stock market is beginning to ease. We still expect to see some rate improvement in the second half of the year with overall price levels declining less than 2007 or 2008. Furthermore, we are seeing increased premium replacement in the form of new business. There was some speculation that reinsurance pricing would begin to harden in 2009. And we did see some hardening with January renewals and again with July renewals, but not to the extent anticipated a year ago after major events such as hurricane Ike. Our expectation is that overall rates for reinsurance lines of business will not reach the industry's expectations of double-digit rate increases for this year. We are currently seeing mid-to-high single digit increases at Best [ph].

The company continues to experience retention levels higher than industry averages. Commercial lines retention is approximately 85% and personal lines retention is approximately 88%. These figures are reasonably consistent with historic levels for the company. Commercial retention is slightly lower than the past four years but reflects the ongoing competitiveness of the commercial lines marketplace and our willingness to walk away from underpriced business. Frequency of loss is down slightly for the first half of 2009 and our expectation for the full year is that frequency will be similar to 2008. Severity of loss is down for the second quarter but is up approximately 1% for the first half of the year.

As reported in our first quarter 10-Q and reiterated in our July 10 press release, the company is no longer reporting on a quarterly basis the amount of development experienced on prior year's reserves. This change in reporting is being implemented because management believes that there is a potential for confusion among investors regarding the perceived impact development has on the company's results of operations. Management is determined that continued reporting of the composition of the company's underwriting results between the current and prior accident years increases the potential for misinterpretation and in an event is not material or relevant to an understanding of the company's results of operations.

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