Edgar Filing: EMC INSURANCE GROUP INC

EMCI 2014.3.31 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________to __________________

Commission File Number: 0-10956

EMC INSURANCE GROUP INC.

(Exact name of registrant as specified in its charter)



Iowa		42-6234555
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



717 Mulberry Street, Des Moines, Iowa		50309
(Address of principal executive offices)		(Zip Code)

(515) 345-2902

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

ý Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

ý Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	o	Accelerated filer	ý
Non-accelerated filer	o	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes ý No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class		Outstanding at April 30, 2014
Common stock, $1.00 par value		13,459,921

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TABLE OF CONTENTS



		PAGE
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42

PART II	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 6.	Exhibits	44

Signatures		45

Index to Exhibits		46

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PART I.	FINANCIAL INFORMATION



ITEM 1.	FINANCIAL STATEMENTS

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	March 31, 2014		December 31, 2013
($ in thousands, except per share amounts)	(Unaudited)		(As Audited)
ASSETS
Investments:
Fixed maturity securities available-for-sale, at fair value (amortized cost $998,651 and $1,009,572)	$	1,030,001	$	1,027,984
Equity securities available-for-sale, at fair value (cost $117,469 and $113,835)	175,674		169,848
Other long-term investments	6,529		2,392
Short-term investments	60,317		56,166
Total investments	1,272,521		1,256,390

Cash	568		239
Reinsurance receivables due from affiliate	31,024		34,760
Prepaid reinsurance premiums due from affiliate	9,066		9,717
Deferred policy acquisition costs (affiliated $38,087 and $37,414)	38,518		37,792
Amounts due from affiliate to settle inter-company transaction balances	7,392		—
Prepaid pension and postretirement benefits due from affiliate	23,106		23,121
Accrued investment income	10,562		9,984
Accounts receivable	1,810		1,080
Goodwill	942		942
Other assets (affiliated $5,677 and $4,780)	5,794		4,908
Total assets	$	1,401,303	$	1,378,933

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	March 31, 2014		December 31, 2013
($ in thousands, except per share amounts)	(Unaudited)		(As Audited)
LIABILITIES
Losses and settlement expenses (affiliated $617,755 and $600,313)	$	627,349	$	610,181
Unearned premiums (affiliated $220,660 and $218,788)	222,613		220,627
Other policyholders' funds (all affiliated)	8,471		8,491
Surplus notes payable to affiliate	25,000		25,000
Amounts due affiliate to settle inter-company transaction balances	—		13,522
Pension and postretirement benefits payable to affiliate	3,268		3,401
Income taxes payable	4,004		1,530
Deferred income taxes	18,067		12,822
Other liabilities (affiliated $15,622 and $25,161)	15,936		28,149
Total liabilities	924,708		923,723

STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 20,000,000 shares; issued and outstanding, 13,456,227 shares in 2014 and 13,306,027 shares in 2013	13,456		13,306
Additional paid-in capital	103,627		99,309
Accumulated other comprehensive income	68,396		59,010
Retained earnings	291,116		283,585
Total stockholders' equity	476,595		455,210
Total liabilities and stockholders' equity	$	1,401,303	$	1,378,933

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Three months ended March 31,
($ in thousands, except per share amounts)	2014			2013
REVENUES
Premiums earned (affiliated $131,932 and $119,117)	$	133,080		$	120,497
Investment income, net	11,855			10,443
Net realized investment gains, excluding impairment losses on securities available-for-sale	1,578			2,689
Total "other-than-temporary" impairment losses on securities available-for-sale	(316		)	(21		)
Portion of "other-than-temporary" impairment losses on fixed maturity securities available-for-sale reclassified from other comprehensive income (before taxes)	—			—
Net impairment losses on securities available-for-sale	(316		)	(21		)
Net realized investment gains	1,262			2,668
Other income (all affiliated)	201			235
Total revenues	146,398			133,843

LOSSES AND EXPENSES
Losses and settlement expenses (affiliated $88,691 and $72,479)	88,969			72,574
Dividends to policyholders (all affiliated)	1,716			2,194
Amortization of deferred policy acquisition costs (affiliated $24,429 and $21,950)	24,615			22,267
Other underwriting expenses (all affiliated)	15,430			16,021
Interest expense (all affiliated)	84			131
Other expense (affiliated $396 and $87)	695			147
Total losses and expenses	131,509			113,334
Income before income tax expense	14,889			20,509

INCOME TAX EXPENSE
Current	4,102			5,496
Deferred	192			740
Total income tax expense	4,294			6,236
Net income	$	10,595		$	14,273

Net income per common share - basic and diluted	$	0.79		$	1.10

Dividend per common share	$	0.23		$	0.21

Average number of common shares outstanding - basic and diluted	13,348,730			12,946,287

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three months ended March 31,
($ in thousands, except per share amounts)	2014			2013
Net income	$	10,595		$	14,273

OTHER COMPREHENSIVE INCOME (LOSS)
Change in unrealized holding gains on investment securities, net of deferred income tax expense of $5,866 and $3,698	10,894			6,867
Reclassification adjustment for realized investment gains included in net income, net of income tax expense of $(571) and $(934)	(1,059		)	(1,734		)
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit cost (income), net of deferred income tax (expense) benefit of $(242) and $189:
Net actuarial loss	88			466
Prior service credit	(537		)	(115		)
Total reclassification adjustment associated with affiliate's pension and postretirement benefit plans	(449		)	351

Other comprehensive income	9,386			5,484

Total comprehensive income	$	19,981		$	19,757

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Three months ended March 31,
($ in thousands, except per share amounts)	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	10,595		$	14,273
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Losses and settlement expenses (affiliated $17,442 and $1,687)	17,168			1,490
Unearned premiums (affiliated $1,872 and $3,004)	1,986			3,091
Other policyholders' funds due to affiliate	(20		)	(43		)
Amounts due to/from affiliate to settle inter-company transaction balances	(20,914		)	(16,151		)
Net pension and postretirement benefits due from affiliate	(809		)	1,278
Reinsurance receivables due from affiliate	3,736			2,735
Prepaid reinsurance premiums due from affiliate	651			(1,601		)
Commissions payable (affiliated $(6,518) and $(5,296))	(6,516		)	(5,297		)
Deferred policy acquisition costs (affiliated $(673) and $186)	(726		)	168
Accrued investment income	(578		)	(179		)
Current income tax	2,532			5,494
Deferred income tax	192			740
Net realized investment gains	(1,262		)	(2,668		)
Other, net (affiliated $(3,930) and $(4,872))	(3,887		)	(5,002		)
Total adjustments to reconcile net income to net cash provided by (used in) operating activities	(8,447		)	(15,945		)
Net cash provided by (used in) operating activities	2,148			(1,672		)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturity securities available-for-sale	(14,494		)	(36,655		)
Disposals of fixed maturity securities available-for-sale	22,216			47,292
Purchases of equity securities available-for-sale	(12,664		)	(14,205		)
Disposals of equity securities available-for-sale	10,283			13,499
Purchases of other long-term investments	(4,367		)	—
Disposals of other long-term investments	—			151
Net purchases of short-term investments	(4,151		)	(7,528		)
Net cash (used in) provided by investing activities	(3,177		)	2,554
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock through affiliate’s stock plans	4,364			1,945
Excess tax benefit associated with affiliate’s stock plans	58			17
Dividends paid to stockholders (affiliated $(1,805) and $(1,648))	(3,064		)	(2,728		)
Net cash provided by (used in) financing activities	1,358			(766		)
NET INCREASE IN CASH	329			116
Cash at the beginning of the year	239			330
Cash at the end of the quarter	$	568		$	446

All affiliated balances presented above are the result of related party transactions with Employers Mutual.

See accompanying Notes to Consolidated Financial Statements.

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

($ in thousands, except per share amounts)


1.	BASIS OF PRESENTATION

EMC Insurance Group Inc., a majority owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is an insurance holding company with operations in property and casualty insurance and reinsurance. The Company writes property and casualty insurance in both commercial and personal lines of insurance, with a focus on medium-sized commercial accounts. The term “Company” is used interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC Insurance Group Inc. and its subsidiaries.

The accompanying unaudited consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The Company has evaluated all subsequent events through the date the financial statements were issued. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the interim financial statements have been included. The results of operations for the interim periods reported are not necessarily indicative of results to be expected for the year. The consolidated balance sheet at December 31, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.

During the first quarter of 2014, the Company invested $4,367 in a limited partnership that is designed to help protect the Company from a sudden and significant decline in the value of its equity portfolio. This investment is included in "other long-term investments" in the Company's financial statements and is carried under the equity method of accounting. Because of the nature of this investment, which was made solely to implement the equity tail-risk hedging strategy, changes in the carrying value of the limited partnership are recorded as realized investment gains (losses), rather than as a component of investment income.

Certain amounts previously reported in the prior years’ consolidated financial statements have been reclassified or adjusted to conform to current year presentation.

In reading these financial statements, reference should be made to the Company’s 2013 Form 10-K or the 2013 Annual Report to Stockholders for more detailed footnote information.


2.	TRANSACTIONS WITH AFFILIATES

The terms of the excess of loss reinsurance agreement between EMC Reinsurance Company and Employers Mutual have been revised beginning January 1, 2014. Effective January 1, 2014, the cost of the excess of loss coverage decreased from 9.0 percent of total assumed reinsurance premiums written to 8.0 percent of total assumed reinsurance premiums written (no changes to the amount of losses retained per event).


3.	REINSURANCE

The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the three months ended March 31, 2014 and 2013 is presented below. The classification of the assumed and ceded reinsurance amounts between affiliates and nonaffiliates is based on the participants in the underlying reinsurance agreements, and is intended to provide an understanding of the actual source of the reinsurance activities. This presentation differs from the classifications used in the consolidated financial statements, where all amounts flowing through the pooling, quota share and excess of loss agreements with Employers Mutual are reported as “affiliated” balances.

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	Three months ended March 31, 2014
	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	90,040		$	—		$	90,040
Assumed from nonaffiliates	788			39,514			40,302
Assumed from affiliates	107,048			—			107,048
Ceded to nonaffiliates	(5,322		)	(3,762		)	(9,084		)
Ceded to affiliates	(90,041		)	(2,860		)	(92,901		)
Net premiums written	$	102,513		$	32,892		$	135,405

Premiums earned
Direct	$	91,075		$	—		$	91,075
Assumed from nonaffiliates	844			38,950			39,794
Assumed from affiliates	105,881			—			105,881
Ceded to nonaffiliates	(5,478		)	(4,257		)	(9,735		)
Ceded to affiliates	(91,075		)	(2,860		)	(93,935		)
Net premiums earned	$	101,247		$	31,833		$	133,080

Losses and settlement expenses incurred
Direct	$	48,010		$	—		$	48,010
Assumed from nonaffiliates	602			24,400			25,002
Assumed from affiliates	68,172			291			68,463
Ceded to nonaffiliates	(1,048		)	(3,467		)	(4,515		)
Ceded to affiliates	(48,010		)	19			(47,991		)
Net losses and settlement expenses incurred	$	67,726		$	21,243		$	88,969

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	Three months ended March 31, 2013
	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	88,888		$	—		$	88,888
Assumed from nonaffiliates	613			34,713			35,326
Assumed from affiliates	99,401			—			99,401
Ceded to nonaffiliates	(5,233		)	(4,659		)	(9,892		)
Ceded to affiliates	(88,888		)	(2,705		)	(91,593		)
Net premiums written	$	94,781		$	27,349		$	122,130

Premiums earned
Direct	$	85,142		$	—		$	85,142
Assumed from nonaffiliates	661			33,236			33,897
Assumed from affiliates	97,596			—			97,596
Ceded to nonaffiliates	(5,552		)	(2,739		)	(8,291		)
Ceded to affiliates	(85,142		)	(2,705		)	(87,847		)
Net premiums earned	$	92,705		$	27,792		$	120,497

Losses and settlement expenses incurred
Direct	$	49,604		$	—		$	49,604
Assumed from nonaffiliates	393			19,007			19,400
Assumed from affiliates	56,586			224			56,810
Ceded to nonaffiliates	(1,011		)	(1,448		)	(2,459		)
Ceded to affiliates	(49,604		)	(1,177		)	(50,781		)
Net losses and settlement expenses incurred	$	55,968		$	16,606		$	72,574

Individual lines in the above tables are defined as follows:


•	“Direct” represents business produced by the property and casualty insurance subsidiaries.

•

“Assumed from nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of involuntary business assumed by the pool participants pursuant to state law. For the reinsurance subsidiary, this line represents the reinsurance business assumed through the quota share agreement (including “fronting” activities initiated by Employers Mutual) and the business assumed outside the quota share agreement.

•

“Assumed from affiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of all the pool members’ direct business. The amounts reported under the caption “Losses and settlement expenses incurred” also include claim-related services provided by Employers Mutual that are allocated to the property and casualty insurance subsidiaries and the reinsurance subsidiary.

•

“Ceded to nonaffiliates” for the property and casualty insurance subsidiaries represents their aggregate 30 percent pool participation percentage of 1) the amounts ceded to nonaffiliated reinsurance companies in accordance with the terms of the reinsurance agreements providing protection to the pool and each of its participants, and 2) the amounts ceded on a mandatory basis to state organizations in connection with various programs. For the reinsurance subsidiary, this line includes reinsurance business that is ceded to other insurance companies in connection with “fronting” activities initiated by Employers Mutual.


•	“Ceded to affiliates” for the property and casualty insurance subsidiaries represents the cession of their direct business to Employers Mutual under the terms of the pooling agreement. For the reinsurance subsidiary this line represents amounts ceded to Employers Mutual under the terms of the excess of loss reinsurance agreement.

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4.	SEGMENT INFORMATION

The Company’s operations consist of a property and casualty insurance segment and a reinsurance segment. The property and casualty insurance segment writes both commercial and personal lines of insurance, with a focus on medium-sized commercial accounts. The reinsurance segment provides reinsurance for other insurers and reinsurers. The segments are managed separately due to differences in the insurance products sold and the business environments in which they operate.

Summarized financial information for the Company’s segments is as follows:



Three months ended March 31, 2014	Property and casualty insurance			Reinsurance		Parent company			Consolidated
Premiums earned	$	101,247		$	31,833	$	—		$	133,080

Underwriting profit (loss)	(475		)	2,825		—			2,350
Net investment income (loss)	8,616			3,243		(4		)	11,855
Realized investment gains	1,011			251		—			1,262
Other income	201			—		—			201
Interest expense	84			—		—			84
Other expenses	174			167		354			695
Income (loss) before income tax expense (benefit)	$	9,095		$	6,152	$	(358	)	$	14,889

Assets	$	984,021		$	404,697	$	477,185		$	1,865,903
Eliminations	—			—		(461,970		)	(461,970		)
Reclassifications	(1,563		)	—		(1,067		)	(2,630		)
Net assets	$	982,458		$	404,697	$	14,148		$	1,401,303



Three months ended March 31, 2013	Property and casualty insurance		Reinsurance			Parent company			Consolidated
Premiums earned	$	92,705	$	27,792		$	—		$	120,497

Underwriting profit (loss)	2,616		4,825			—			7,441
Net investment income (loss)	7,649		2,797			(3		)	10,443
Realized investment gains	1,957		711			—			2,668
Other income	235		—			—			235
Interest expense	131		—			—			131
Other expenses	205		(441		)	383			147
Income (loss) before income tax expense (benefit)	$	12,121	$	8,774		$	(386	)	$	20,509

Year ended December 31, 2013
Assets	$	978,746	$	387,284		$	455,368		$	1,821,398
Eliminations	—		—			(441,984		)	(441,984		)
Reclassifications	—		—			(481		)	(481		)
Net assets	$	978,746	$	387,284		$	12,903		$	1,378,933

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The following table displays the net premiums earned of the property and casualty insurance segment and the reinsurance segment for the three months ended March 31, 2014 and 2013, by line of insurance.



	Three months ended March 31,
	2014		2013
Property and casualty insurance segment
Commercial lines:
Automobile	$	22,802	$	20,124
Property	23,317		20,385
Workers' compensation	21,053		19,527
Liability	20,455		18,033
Other	1,779		1,863
Total commercial lines	89,406		79,932

Personal lines:
Automobile	6,411		6,922
Property	5,244		5,687
Liability	186		164
Total personal lines	11,841		12,773
Total property and casualty insurance	$	101,247	$	92,705

Reinsurance segment
Pro rata reinsurance:
Property and liability	$	1,064	$	1,029
Property	5,777		4,627
Crop	438		440
Liability	2,792		393
Marine	3,411		3,411
Total pro rata reinsurance	13,482		9,900

Excess of loss reinsurance:
Property	15,459		15,221
Liability	2,891		2,671
Surety	1		—
Total excess of loss reinsurance	18,351		17,892
Total reinsurance	$	31,833	$	27,792

Consolidated	$	133,080	$	120,497

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5.	INCOME TAXES

The actual income tax expense for the three months ended March 31, 2014 and 2013 differed from the “expected” income tax expense for those periods (computed by applying the United States federal corporate tax rate of 35 percent to income before income tax expense) as follows:



	Three months ended March 31,
	2014			2013
Computed "expected" income tax expense	$	5,211		$	7,178
Increases (decreases) in tax resulting from:
Tax-exempt interest income	(944		)	(943		)
Dividends received deduction	(220		)	(195		)
Proration of tax-exempt interest and dividends received deduction	175			171
Other, net	72			25
Income tax expense	$	4,294		$	6,236

The Company had no provision for uncertain income tax positions at March 31, 2014 or December 31, 2013. The Company did not recognize any interest or other penalties related to U.S. federal or state income taxes during the three months ended March 31, 2014 or 2013. It is the Company’s accounting policy to reflect income tax penalties as other expense, and interest as interest expense.

The Company files a U.S. federal income tax return, along with various state income tax returns. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2010. The Company’s 2011 income tax return has been audited and no changes were proposed.


6.	EMPLOYEE RETIREMENT PLANS

The components of net periodic benefit cost (income) for Employers Mutual’s pension and postretirement benefit plans is as follows:



	Three months ended March 31,
	2014			2013
Pension plans:
Service cost	$	3,191		$	3,426
Interest cost	2,381			1,910
Expected return on plan assets	(5,183		)	(4,288		)
Amortization of net actuarial loss	64			1,466
Amortization of prior service cost	8			13
Net periodic pension benefit cost	$	461		$	2,527

Postretirement benefit plans:
Service cost	$	315		$	1,575
Interest cost	564			1,543
Expected return on plan assets	(1,099		)	(908		)
Amortization of net actuarial loss	413			924
Amortization of prior service credit	(2,867		)	(623		)
Net periodic postretirement benefit cost (income)	$	(2,674	)	$	2,511

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The net periodic postretirement benefit income recognized on Employers Mutual's postretirement benefit plans during the three months ended March 31, 2014 is due to a plan amendment that was announced in the fourth quarter of 2013. This plan amendment generated a large prior service credit that is being amortized into net periodic benefit cost over a number of years. In addition, the service cost and interest cost components of net periodic benefit cost of the revised plan declined significantly.

Net periodic pension benefit cost allocated to the Company amounted to $144 and $782 for the three months ended March 31, 2014 and 2013, respectively. Net periodic postretirement benefit cost (income) allocated to the Company amounted to $(771) and $728 for the three months ended March 31, 2014 and 2013, respectively.

The Company’s share of Employers Mutual’s 2014 planned contributions to the pension plan and the Voluntary Employee Beneficiary Association (VEBA) trust, if made, will be approximately $4,500 and $0, respectively.


7.	STOCK-BASED COMPENSATION

The Company has no stock-based compensation plans of its own; however, Employers Mutual has several stock plans which utilize the common stock of the Company. Employers Mutual can provide the common stock required under its plans by: 1) using shares of common stock that it currently owns; 2) purchasing common stock on the open market; or 3) directly purchasing common stock from the Company at the current fair value. Employers Mutual has historically purchased common stock from the Company for use in its stock plans and its non-employee director stock plans. Employers Mutual generally purchases common stock on the open market to fulfill its obligations under its employee stock purchase plan.

Stock Plans

Employers Mutual currently maintains two separate stock plans for the benefit of officers and key employees of Employers Mutual and its subsidiaries. A total of 1,500,000 shares of the Company’s common stock have been reserved for issuance under the 2003 Employers Mutual Casualty Company Incentive Stock Option Plan (2003 Plan) and a total of 2,000,000 shares have been reserved for issuance under the 2007 Employers Mutual Casualty Company Stock Incentive Plan (2007 Plan).

The 2003 Plan permits the issuance of incentive stock options only, while the 2007 Plan permits the issuance of performance shares, performance units, and other stock-based awards, in addition to qualified (incentive) and non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units. Both plans provide for a ten-year time limit for granting awards. No additional options can be granted under the 2003 Plan due to the expiration of the term of the plan. Options granted under the plans generally have a vesting period of five years, with options becoming exercisable in equal annual cumulative increments commencing on the first anniversary of the option grant. Option prices cannot be less than the fair value of the common stock on the date of grant. Restricted stock awards granted under the 2007 Plan generally have a vesting period of four years, with shares vesting in equal annual cumulative increments commencing on the first anniversary of the grant. Holders of unvested shares receive compensation income equal to the amount of any dividends declared.

The Senior Executive Compensation and Stock Option Committee (the “Committee”) of Employers Mutual’s Board of Directors (the “Board”) grants the awards and is the administrator of the plans. The Company’s Compensation Committee must consider and approve all awards granted to the Company’s executive officers.

The Company recognized compensation expense from these plans of $51 ($33 net of tax) and $64 ($43 net of tax) for the three months ended March 31, 2014 and 2013, respectively. During the first three months of 2014, 62,764 shares of restricted stock were granted under the 2007 Plan to eligible participants and 14,117 shares of restricted stock vested. In addition, 105,117 options were exercised under the plans at a weighted average exercise price of $21.20.

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8.	DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount and the estimated fair value of the Company’s financial instruments is summarized below.



	Carrying amount		Estimated fair value
March 31, 2014
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	9,524	$	9,524
U.S. government-sponsored agencies	147,688		147,688
Obligations of states and political subdivisions	360,368		360,368
Commercial mortgage-backed	59,357		59,357
Residential mortgage-backed	94,112		94,112
Other asset-backed	11,525		11,525
Corporate	347,427		347,427
Total fixed maturity securities available-for-sale	1,030,001		1,030,001

Equity securities available-for-sale:
Common stocks:
Financial services	28,701		28,701
Information technology	23,860		23,860
Healthcare	23,280		23,280
Consumer staples	13,662		13,662
Consumer discretionary	20,960		20,960
Energy	21,527		21,527
Industrials	14,593		14,593
Other	16,919		16,919
Non-redeemable preferred stocks	12,172		12,172
Total equity securities available-for-sale	175,674		175,674

Short-term investments	60,317		60,317

Liabilities:
Surplus notes	25,000		10,728

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	Carrying amount		Estimated fair value
December 31, 2013
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	9,412	$	9,412
U.S. government-sponsored agencies	146,946		146,946
Obligations of states and political subdivisions	357,052		357,052
Commercial mortgage-backed	68,939		68,939
Residential mortgage-backed	94,179		94,179
Other asset-backed	12,648		12,648
Corporate	338,808		338,808
Total fixed maturity securities available-for-sale	1,027,984		1,027,984

Equity securities available-for-sale:
Common stocks:
Financial services	28,498		28,498
Information technology	18,917		18,917
Healthcare	21,945		21,945
Consumer staples	13,011		13,011
Consumer discretionary	21,031		21,031
Energy	21,117		21,117
Industrials	17,264		17,264
Other	17,811		17,811
Non-redeemable preferred stocks	10,254		10,254
Total equity securities available-for-sale	169,848		169,848

Short-term investments	56,166		56,166

Liabilities:
Surplus notes	25,000		10,040

The estimated fair value of fixed maturity and equity securities is based on quoted market prices, where available. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security.

Short-term investments generally include money market funds, U.S. Treasury bills and commercial paper. Short-term investments are carried at fair value, which approximates cost, due to the highly liquid nature of the securities. Short-term securities are classified as Level 1 fair value measurements when the fair value can be validated by recent trades. When recent trades are not available, fair value is deemed to be the cost basis and the securities are classified as Level 2 fair value measurements.

The estimated fair value of the surplus notes is derived by discounting future expected cash flows at a rate deemed appropriate. The discount rate was set at the average of current yields-to-maturity on several insurance company surplus notes that are traded in observable markets, adjusted upward by 50 basis points to reflect illiquidity and perceived risk premium differences. Other assumptions include a 25-year term (the surplus notes have no stated maturity date) and an interest rate that continues at the current 1.35 percent interest rate. The rate is typically adjusted every five years and is based upon the then-current Federal Home Loan Bank borrowing rate for 5-year funds available to Employers Mutual.

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Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value:



	Level 1 -	Unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

	Level 2 -	Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

	Level 3 -	Prices or valuation techniques that require significant unobservable inputs because observable inputs are not available. The unobservable inputs may reflect the Company’s own judgments about the assumptions that market participants would use.

The Company uses an independent pricing source to obtain the estimated fair values of a majority of its securities, subject to an internal validation. The fair values are based on quoted market prices, where available. This is typically the case for equity securities and money market funds, which are accordingly classified as Level 1 fair value measurements. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security. Fixed maturity securities, non-redeemable preferred stocks and various short-term investments in the Company’s portfolio may not trade on a daily basis; however, observable inputs are utilized in their valuations, and these securities are therefore classified as Level 2 fair value measurements. Following is a brief description of the various pricing techniques used by the independent pricing source for different asset classes.


•	U.S. Treasury securities (including bonds, notes, and bills) are priced according to a number of live data sources, including active market makers and inter-dealer brokers. Prices from these sources are reviewed based on the sources’ historical accuracy for individual issues and maturity ranges.

•

U.S. government-sponsored agencies and corporate securities (including fixed-rate corporate bonds and medium-term notes) are priced by determining a bullet (non-call) spread scale for each issuer for maturities going out to forty years. These spreads represent credit risk and are obtained from the new issue market, secondary trading, and dealer quotes. An option adjusted spread model is incorporated to adjust spreads of issues that have early redemption features. The final spread is then added to the U.S. Treasury curve.

•

Obligations of states and political subdivisions are priced by tracking and analyzing actively quoted issues and reported trades, material event notices and benchmark yields. Municipal bonds with similar characteristics are grouped together into market sectors, and internal yield curves are constructed daily for these sectors. Individual bond evaluations are extrapolated from these sectors, with the ability to make individual spread adjustments for attributes such as discounts, premiums, alternative minimum tax, and/or whether or not the bond is callable.

•

Mortgage-backed and asset-backed securities are first reviewed for the appropriate pricing speed (if prepayable), spread, yield and volatility. The securities are priced with models using spreads and other information solicited from Wall Street buy- and sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. To determine a tranche’s price, first the benchmark yield is determined and adjusted for collateral performance, tranche level attributes and market conditions. Then the cash flow for each tranche is generated (using consensus prepayment speed assumptions including, as appropriate, a prepayment projection based on historical statistics of the underlying collateral). The tranche-level yield is used to discount the cash flows and generate the price. Depending on the characteristics of the tranche, a volatility-driven, multi-dimensional single cash flow stream model or an option-adjusted spread model may be used. When cash flows or other security structure or market information is not available, broker quotes may be used.

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On a quarterly basis, the Company receives from its independent pricing service a list of fixed maturity securities, if any, that were priced solely from broker quotes. For these securities, fair value may be determined using the broker quotes, or by the Company using similar pricing techniques as the Company’s independent pricing service. Depending on the level of observable inputs, these securities would be classified as Level 2 or Level 3 fair value measurements. At March 31, 2014, one security was priced solely from a broker quote (seven at December 31, 2013); however, all of these securities were reported as Level 2 fair value measurements due to the broker quote prices approximating the Company's price estimates obtained by applying pricing techniques with observable inputs.

A small number of the Company’s securities are not priced by the independent pricing service. One is an equity security that is reported as a Level 3 fair value measurement at March 31, 2014 and December 31, 2013, since no reliable observable inputs are used in its valuation. This equity security continues to be reported at the fair value obtained from the Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (NAIC). The SVO establishes a per share price for this security based on an annual review of that company’s financial statements, typically performed during the second quarter. The other securities not priced by the Company’s independent pricing service at March 31, 2014 and December 31, 2013 include six fixed maturity securities. Two of these fixed maturity securities, classified as Level 3 fair value measurements, are corporate securities that convey premium tax benefits and are not publicly traded. The fair values for these securities are based on discounted cash flow analyses. The other fixed maturity securities are classified as Level 2 fair value measurements. The fair values for these fixed maturity securities were obtained from either the SVO or the Company’s investment custodian using similar pricing techniques as the Company’s independent pricing service.

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Presented in the table below are the estimated fair values of the Company’s financial instruments as of March 31, 2014 and December 31, 2013.



			Fair value measurements using
March 31, 2014	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial instruments reported at fair value on recurring basis:
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	9,524	$	—	$	9,524	$	—
U.S. government-sponsored agencies	147,688		—		147,688		—
Obligations of states and political subdivisions	360,368		—		360,368		—
Commercial mortgage-backed	59,357		—		59,357		—
Residential mortgage-backed	94,112		—		94,112		—
Other asset-backed	11,525		—		11,525		—
Corporate	347,427		—		345,452		1,975
Total fixed maturity securities available-for-sale	1,030,001		—		1,028,026		1,975

Equity securities available-for-sale:
Common stocks:
Financial services	28,701		28,698		—		3
Information technology	23,860		23,860		—		—
Healthcare	23,280		23,280		—		—
Consumer staples	13,662		13,662		—		—
Consumer discretionary	20,960		20,960		—		—
Energy	21,527		21,527		—		—
Industrials	14,593		14,593		—		—
Other	16,919		16,919		—		—
Non-redeemable preferred stocks	12,172		7,626		4,546		—
Total equity securities available-for-sale	175,674		171,125		4,546		3

Short-term investments	60,317		60,317		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	10,728		—		—		10,728

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			Fair value measurements using
December 31, 2013	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Financial instruments reported at fair value on recurring basis:
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	9,412	$	—	$	9,412	$	—
U.S. government-sponsored agencies	146,946		—		146,946		—
Obligations of states and political subdivisions	357,052		—		357,052		—
Commercial mortgage-backed	68,939		—		68,939		—
Residential mortgage-backed	94,179		—		94,179		—
Other asset-backed	12,648		—		12,648		—
Corporate	338,808		—		336,832		1,976
Total fixed maturity securities available-for-sale	1,027,984		—		1,026,008		1,976

Equity securities available-for-sale:
Common stocks:
Financial services	28,498		28,495		—		3
Information technology	18,917		18,917		—		—
Healthcare	21,945		21,945		—		—
Consumer staples	13,011		13,011		—		—
Consumer discretionary	21,031		21,031		—		—
Energy	21,117		21,117		—		—
Industrials	17,264		17,264		—		—
Other	17,811		17,811		—		—
Non-redeemable preferred stocks	10,254		5,795		4,459		—
Total equity securities available-for-sale	169,848		165,386		4,459		3

Short-term investments	56,166		56,166		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	10,040		—		—		10,040

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Presented in the table below is a reconciliation of the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2014 and 2013. Any unrealized gains or losses on these securities are recognized in other comprehensive income. Any gains or losses from disposals or impairments of these securities are reported as realized investment gains or losses in net income.



	Fair value measurements using significant unobservable inputs (Level 3)
Three months ended March 31, 2014	Fixed maturity securities available-for-sale, corporate			Equity securities available-for-sale, financial services		Total
Beginning balance	$	1,976		$	3	$	1,979
Unrealized losses included in other comprehensive income	(1		)	—		(1		)
Balance at March 31, 2014	$	1,975		$	3	$	1,978



	Fair value measurements using significant unobservable inputs (Level 3)
Three months ended March 31, 2013	Fixed maturity securities available-for-sale, corporate		Equity securities available-for-sale, financial services		Total
Beginning balance	$	—	$	2	$	2
Unrealized losses included in other comprehensive income	—		—		—
Balance at March 31, 2013	$	—	$	2	$	2

There were no transfers into or out of Levels 1 or 2 during the three months ended March 31, 2014 or 2013. It is the Company’s policy to recognize transfers between levels at the beginning of the reporting period.


9.	INVESTMENTS

Investments of the Company’s insurance subsidiaries are subject to the insurance laws of the state of their incorporation. These laws prescribe the kind, quality and concentration of investments that may be made by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks and real estate mortgages. The Company believes that it is in compliance with these laws.

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The amortized cost and estimated fair value of securities available-for-sale as of March 31, 2014 and December 31, 2013 are as follows. All securities are classified as available-for-sale and are carried at fair value.



March 31, 2014	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	9,548	$	173	$	197	$	9,524
U.S. government-sponsored agencies	154,289		1,442		8,043		147,688
Obligations of states and political subdivisions	342,900		19,344		1,876		360,368
Commercial mortgage-backed	54,168		5,189		—		59,357
Residential mortgage-backed	95,906		826		2,620		94,112
Other asset-backed	10,341		1,184		—		11,525
Corporate	331,499		17,709		1,781		347,427
Total fixed maturity securities	998,651		45,867		14,517		1,030,001

Equity securities:
Common stocks:
Financial services	19,345		9,409		53		28,701
Information technology	17,198		6,765		103		23,860
Healthcare	12,570		10,710		—		23,280
Consumer staples	9,502		4,160		—		13,662
Consumer discretionary	10,690		10,270		—		20,960
Energy	14,882		6,912		267		21,527
Industrials	8,386		6,207		—		14,593
Other	12,814		4,262		157		16,919
Non-redeemable preferred stocks	12,082		463		373		12,172
Total equity securities	117,469		59,158		953		175,674
Total securities available-for-sale	$	1,116,120	$	105,025	$	15,470	$	1,205,675

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December 31, 2013	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	9,540	$	191	$	319	$	9,412
U.S. government-sponsored agencies	156,981		1,356		11,391		146,946
Obligations of states and political subdivisions	346,554		15,040		4,542		357,052
Commercial mortgage-backed	63,185		5,842		88		68,939
Residential mortgage-backed	96,058		1,073		2,952		94,179
Other asset-backed	11,456		1,192		—		12,648
Corporate	325,798		16,542		3,532		338,808
Total fixed maturity securities	1,009,572		41,236		22,824		1,027,984

Equity securities:
Common stocks:
Financial services	19,273		9,374		149		28,498
Information technology	12,645		6,301		29		18,917
Healthcare	12,801		9,144		—		21,945
Consumer staples	9,162		3,849		—		13,011
Consumer discretionary	10,722		10,309		—		21,031
Energy	14,102		7,341		326		21,117
Industrials	11,190		6,075		1		17,264
Other	13,358		4,489		36		17,811
Non-redeemable preferred stocks	10,582		316		644		10,254
Total equity securities	113,835		57,198		1,185		169,848
Total securities available-for-sale	$	1,123,407	$	98,434	$	24,009	$	1,197,832

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The following table sets forth the estimated fair value and gross unrealized losses associated with investment securities that were in an unrealized loss position as of March 31, 2014 and December 31, 2013, listed by length of time the securities were in an unrealized loss position.



March 31, 2014	Less than twelve months				Twelve months or longer				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Fixed maturity securities:
U.S. treasury	$	4,632	$	197	$	—	$	—	$	4,632	$	197
U.S. government-sponsored agencies	71,839		4,902		32,169		3,141		104,008		8,043
Obligations of states and political subdivisions	53,336		1,631		5,481		245		58,817		1,876
Residential mortgage-backed	60,790		1,588		5,551		1,032		66,341		2,620
Corporate	63,149		1,091		10,638		690		73,787		1,781
Total, fixed maturity securities	253,746		9,409		53,839		5,108		307,585		14,517
Equity securities:
Common stocks:
Financial services	1,530		53		—		—		1,530		53
Information technology	4,144		103		—		—		4,144		103
Energy	730		267		—		—		730		267
Industrials	38		—		—		—		38		—
Other	2,431		157		—		—		2,431		157
Non-redeemable preferred stocks	2,241		9		1,636		364		3,877		373
Total, equity securities	11,114		589		1,636		364		12,750		953
Total temporarily impaired securities	$	264,860	$	9,998	$	55,475	$	5,472	$	320,335	$	15,470

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December 31, 2013	Less than twelve months				Twelve months or longer				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Fixed maturity securities:
U.S. treasury	$	4,507	$	319	$	—	$	—	$	4,507	$	319
U.S. government-sponsored agencies	93,856		8,120		24,053		3,271		117,909		11,391
Obligations of states and political subdivisions	74,523		4,335		3,008		207		77,531		4,542
Commercial mortgage-backed	10,551		88		—		—		10,551		88
Residential mortgage-backed	44,243		2,482		4,600		470		48,843		2,952
Corporate	81,292		2,704		10,547		828		91,839		3,532
Total, fixed maturity securities	308,972		18,048		42,208		4,776		351,180		22,824
Equity securities:
Common stocks:
Financial services	2,801		149		—		—		2,801		149
Information technology	610		29		—		—		610		29
Consumer staples	30		—		—		—		30		—
Energy	1,450		326		—		—		1,450		326
Industrials	625		1		—		—		625		1
Other	1,499		36		—		—		1,499		36
Non-redeemable preferred stocks	2,121		128		1,484		516		3,605		644
Total, equity securities	9,136		669		1,484		516		10,620		1,185
Total temporarily impaired securities	$	318,108	$	18,717	$	43,692	$	5,292	$	361,800	$	24,009

Unrealized losses on fixed maturity securities decreased in every asset class at March 31, 2014 due to the decline in interest rates during the first quarter of 2014. Most of these securities are considered investment grade by credit rating agencies. Because management does not intend to sell these securities, does not believe it will be required to sell these securities before recovery, and believes it will collect the amounts due on these securities, it was determined that these securities were not “other-than-temporarily” impaired at March 31, 2014.

No particular sector or individual security accounted for a material amount of unrealized losses on common stocks at March 31, 2014. The Company believes the unrealized losses on common stocks are primarily due to general fluctuations in the equity markets. Because the Company has the ability and intent to hold these securities for a reasonable amount of time to allow for recovery, it was determined that these securities were not “other-than-temporarily” impaired at March 31, 2014.

All of the Company’s preferred stock holdings are perpetual preferred stocks. The Company evaluates perpetual preferred stocks with unrealized losses for “other-than-temporary” impairment similar to fixed maturity securities since they have debt-like characteristics such as periodic cash flows in the form of dividends and call features, are rated by rating agencies and are priced like other long-term callable fixed maturity securities. There was no evidence of any credit deterioration in the issuers of the preferred stocks and the Company does not intend to sell these securities before recovery, nor does it believe it will be required to sell these securities before recovery; therefore, it was determined that these securities were not “other-than-temporarily” impaired at March 31, 2014.

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The amortized cost and estimated fair value of fixed maturity securities at March 31, 2014, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.



	Amortized cost		Estimated fair value
Securities available-for-sale:
Due in one year or less	$	14,861	$	15,163
Due after one year through five years	204,579		217,051
Due after five years through ten years	148,790		153,719
Due after ten years	480,347		490,599
Mortgage-backed securities	150,074		153,469
Totals	$	998,651	$	1,030,001

A summary of realized investment gains and (losses) is as follows:



	Three months ended March 31,
	2014			2013
Fixed maturity securities available-for-sale:
Gross realized investment gains	$	81		$	686
Gross realized investment losses	(92		)	—

Equity securities available-for-sale:
Gross realized investment gains	2,033			2,091
Gross realized investment losses	(76		)	(88		)
"Other-than-temporary" impairments	(316		)	(21		)

Other long-term investments:
Gross realized investment losses	(368		)	—
Totals	$	1,262		$	2,668

Gains and losses realized on the disposition of investments are included in net income. The cost of investments sold is determined on the specific identification method using the highest cost basis first. The realized investment losses recognized on other long-term investments in the first quarter of 2014 represent changes in the carrying value of a limited partnership that was purchased to implement an equity tail-risk hedging strategy. The amount reported as “other-than-temporary” impairments on equity securities does not include any individually significant items. The Company did not have any outstanding cumulative credit losses on fixed maturity securities that have been recognized in earnings from “other-than-temporary” impairments during any of the reported periods.


10.	CONTINGENT LIABILITIES

The Company and Employers Mutual and its other subsidiaries are parties to numerous lawsuits arising in the normal course of the insurance business. The Company believes that the resolution of these lawsuits will not have a material adverse effect on its financial condition or its results of operations. The companies involved have established reserves which are believed adequate to cover any potential liabilities arising out of all such pending or threatened proceedings.

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The participants in the pooling agreement have purchased annuities from life insurance companies, under which the claimant is payee, to fund future payments that are fixed pursuant to specific claim settlement provisions. The Company’s share of case loss reserves eliminated by the purchase of those annuities was $178 at December 31, 2013. The Company had a contingent liability for the aggregate guaranteed amount of the annuities of $245 at December 31, 2013 should the issuers of those annuities fail to perform. Although management is not able to verify the amount, the Company would likely have a similar contingent liability at March 31, 2014. The probability of a material loss due to failure of performance by the issuers of these annuities is considered remote.


11.	STOCK REPURCHASE PROGRAM

On November 3, 2011, the Company’s Board of Directors authorized a $15,000 stock repurchase program. This program became effective immediately and does not have an expiration date. The timing and terms of the purchases are determined by management based on market conditions and are conducted in accordance with the applicable rules of the Securities and Exchange Commission. Common stock repurchased under this program will be retired by the Company. No purchases have been made under this program.


12.	ACCUMULATED OTHER COMPREHENSIVE INCOME

The Company has available-for-sale securities and receives an allocation of the net actuarial losses and net prior service credits associated with Employers Mutual’s pension and postretirement benefit plans, both of which generate accumulated other comprehensive income (loss) amounts. The following table reconciles, by component, the beginning and ending balances of accumulated other comprehensive income.



	Accumulated other comprehensive income by component (1)
	Unrealized gains (losses) on available-for- sale securities			Unrecognized pension and postretirement benefit obligations			Total
Balance at December 31, 2013	$	48,376		$	10,634		$	59,010
Other comprehensive income before reclassifications	10,894			—			10,894
Amounts reclassified from accumulated other comprehensive income	(1,059		)	(449		)	(1,508		)
Other comprehensive income	9,835			(449		)	9,386
Balance at March 31, 2014	$	58,211		$	10,185		$	68,396


(1)	All amounts are net of tax. Amounts in parentheses indicate debits.

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The following table displays amounts reclassified out of accumulated other comprehensive income during the three months ended March 31, 2014.



	Amounts reclassified from accumulated other comprehensive income (1)
Accumulated other comprehensive income components	Three months ended March 31, 2014			Affected line item in the consolidated statements of income
Unrealized gains on investments:
Reclassification adjustment for realized investment gains included in net income	$	1,630		Net realized investment gains
Deferred income tax expense	(571		)	Income tax expense, current
Net reclassification adjustment	1,059

Unrecognized pension and postretirement benefit obligations:
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit cost (income):
Net actuarial loss	(136		)	(2)
Prior service credit	827			(2)
Total before tax	691
Deferred income tax expense	(242		)	Income tax expense, current
Net reclassification adjustment	449

Total reclassification adjustment	$	1,508


(1)	Amounts in parentheses indicate debits to net income


(2)	These accumulated other comprehensive income components are included in the computation of net periodic pension and postretirement benefit cost (income) (see Note 6, Employee Retirement Plans, for additional details).

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES



ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited)

($ in thousands, except per share amounts)

The term “Company” is used below interchangeably to describe EMC Insurance Group Inc. (Parent Company only) and EMC Insurance Group Inc. and its subsidiaries. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included under Item 1 of this Form 10-Q, and the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2013 Form 10-K.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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 all information currently available into account. 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. The Company disclaims any obligation to update such statements or to announce publicly the results of any revisions that it may make to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

COMPANY OVERVIEW

The Company, a majority owned subsidiary of Employers Mutual Casualty Company (Employers Mutual), is an insurance holding company with operations in property and casualty insurance and reinsurance.

Property and casualty insurance operations are conducted through three subsidiaries and represent the most significant segment of the Company’s business, totaling 76 percent of consolidated premiums earned during the first three months of 2014. The property and casualty insurance operations are integrated with the property and casualty insurance operations of Employers Mutual through participation in a reinsurance pooling agreement. Because the Company conducts its property and casualty insurance operations together with Employers Mutual through the reinsurance pooling agreement, the Company shares the same business philosophy, management, employees and facilities as Employers Mutual and offers the same types of insurance products.

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Reinsurance operations are conducted through EMC Reinsurance Company and accounted for 24 percent of consolidated premiums earned during the first three months of 2014. The principal business activity of EMC Reinsurance Company is to assume, through a quota share reinsurance agreement, 100 percent of Employers Mutual’s assumed reinsurance business, subject to certain exceptions.

CRITICAL ACCOUNTING POLICIES

The accounting policies considered by management to be critically important in the preparation and understanding of the Company’s financial statements and related disclosures are presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s 2013 Form 10-K.

RESULTS OF OPERATIONS

Results of operations by segment and on a consolidated basis for the three months ended March 31, 2014 and 2013 are as follows:



	Three months ended March 31,
	2014			2013
Property and casualty insurance
Premiums earned	$	101,247		$	92,705
Losses and settlement expenses	67,726			55,968
Acquisition and other expenses	33,996			34,121
Underwriting profit (loss)	$	(475	)	$	2,616

Loss and settlement expense ratio	66.9		%	60.4		%
Acquisition expense ratio	33.6		%	36.8		%
Combined ratio	100.5		%	97.2		%

Losses and settlement expenses:
Insured events of current year	$	68,665		$	58,506
Decrease in provision for insured events of prior years	(939		)	(2,538		)

Total losses and settlement expenses	$	67,726		$	55,968

Catastrophe and storm losses	$	6,972		$	4,865

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	Three months ended March 31,
	2014			2013
Reinsurance
Premiums earned	$	31,833		$	27,792
Losses and settlement expenses	21,243			16,606
Acquisition and other expenses	7,765			6,361
Underwriting profit	$	2,825		$	4,825

Loss and settlement expense ratio	66.7		%	59.7		%
Acquisition expense ratio	24.4		%	22.9		%
Combined ratio	91.1		%	82.6		%

Losses and settlement expenses:
Insured events of current year	$	22,892		$	18,324
Decrease in provision for insured events of prior years	(1,649		)	(1,718		)

Total losses and settlement expenses	$	21,243		$	16,606

Catastrophe and storm losses	$	440		$	532

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	Three months ended March 31,
	2014			2013
Consolidated
REVENUES
Premiums earned	$	133,080		$	120,497
Net investment income	11,855			10,443
Realized investment gains	1,262			2,668
Other income	201			235
	146,398			133,843
LOSSES AND EXPENSES
Losses and settlement expenses	88,969			72,574
Acquisition and other expenses	41,761			40,482
Interest expense	84			131
Other expense	695			147
	131,509			113,334

Income before income tax expense	14,889			20,509
Income tax expense	4,294			6,236
Net income	$	10,595		$	14,273

Net income per share	$	0.79		$	1.10

Loss and settlement expense ratio	66.9		%	60.2		%
Acquisition expense ratio	31.3		%	33.6		%
Combined ratio	98.2		%	93.8		%

Losses and settlement expenses:
Insured events of current year	$	91,557		$	76,830
Decrease in provision for insured events of prior years	(2,588		)	(4,256		)

Total losses and settlement expenses	$	88,969		$	72,574

Catastrophe and storm losses	$	7,412		$	5,397

The Company reported net income of $10,595 ($0.79 per share) for the three months ended March 31, 2014, compared to $14,273 ($1.10 per share) for the same period in 2013. The severe winter weather and unusually cold temperatures that persisted across much of the country during January and February caused an increase in losses in the property and casualty insurance segment stemming from frozen pipes, roof collapses, auto accidents, fires, and slip and fall incidents. The improved premium rate adequacy achieved in the property and casualty insurance segment over the past several years helped soften the impact that the severe winter weather losses had on first quarter results. The increase in severe winter weather losses was offset somewhat by a 13.5 percent increase in investment income. The increase in investment income is primarily attributed to a higher average invested balance in fixed maturity securities and an increase in dividend income; however, approximately 4.2 percentage points of the increase resulted from the early payoff of a commercial mortgage-backed security that was purchased at at significant discount to par value, which accelerated the accretion of the discount to par value and therefore increased investment income. Results for the three months ended March 31, 2014 also benefited from a significant reduction in the amount of net periodic pension and postretirement benefit costs allocated to the Company.

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Premium income

Premiums earned increased 10.4 percent to $133,080 for the three months ended March 31, 2014 from $120,497 for the same period in 2013. In the property and casualty insurance segment, the majority of the increase is attributable to rate level increases on renewal business, growth in insured exposures and an increase in retained policies. In the reinsurance segment, the increase is attributable to growth in existing pro rata contracts, as well as the addition of some new business. Management anticipates that rate increases will continue to be implemented in the property and casualty insurance segment during the remainder of the year, though the increases are expected to be somewhat smaller than those implemented during 2013. Rates-on-line for excess of loss reinsurance business declined approximately seven to eight percent during the January 1 renewal season, but those declines were partially offset (as far as rate adequacy is concerned) by a slight increase in retentions and an increase in limits purchased.

Premiums earned for the property and casualty insurance segment increased 9.2 percent to $101,247 for the three months ended March 31, 2014 from $92,705 for the same period in 2013. This increase is primarily associated with renewal business, which increased eight percent, and reflects a combination of rate level increases, growth in insured exposures and an increase in retained policies. Renewal rates across both commercial and personal lines of business increased approximately 5.0 percent during the first quarter of 2014. Management anticipates that rate level increases will continue to be implemented through the remainder of the year, though at a somewhat lower level than those implemented during 2013. The pool participants have not implemented broad-based rate level increases across the entire book of business, but have instead implemented rate level increases based on the loss history and risk exposures associated with each renewing policy, in order to achieve a more adequate overall rate level. This approach has allowed the property and casualty insurance segment to retain its core book of business, while improving underwriting margins. While renewal rates for personal lines of business increased, written premiums were down due to an intentional reduction in policy count to lessen exposure concentrations. Due to the decrease in personal lines policy count and the continued emphasis on rate increases, overall policy retention declined slightly during 2013. During the first quarter of 2014, the overall policy retention rate continued to be strong at 85.4 percent (commercial lines at 86.9 percent and personal lines at 83.5 percent), which approximates the retention rate at the end of 2013. New business continues to account for a relatively small portion (just 14 percent) of the pool participants’ direct written premiums. New business premium increased three percent in the commercial lines of business, while policy count decreased two percent. Personal lines new business premium declined, but had little impact as total new business premium increased approximately three percent.

Premiums earned for the reinsurance segment increased 14.5 percent to $31,833 for the three months ended March 31, 2014 from $27,792 for the same period in 2013. Premiums increased despite a decline in reinsurance rate levels. This increase is primarily attributed to growth on several contracts written in 2013, as well as the addition of some new business. The majority of the growth in premiums earned occurred on the pro rata casualty account that was first written in 2013. Significant premium growth also occurred in the pro rata property line of business due to an upward revision of the total expected ultimate premiums on all accounts. The growth in premiums earned was higher than anticipated during the first quarter, but is expected to moderate as the year progresses. Rates-on-line for excess of loss business declined approximately seven to eight percent during the January 1 renewal season, but those declines were partially offset (as far as rate adequacy is concerned) by a slight increase in retentions and an increase in limits purchased. Other trends noted during the January 1 renewal season included the liberalization of contract terms generally favorable to the buyer, including, but not limited to, an expansion of the hours clause (which provides a longer time period for losses to be attributed to a named catastrophic event); expansion of terrorism coverage to include, in many contracts, all acts other than nuclear, biological, chemical and radiation; and multi-year commitments on pricing. Premiums earned for the first quarter of 2014 reflect a reduction in the cost of the excess of loss reinsurance protection provided by Employers Mutual, from 9.0 percent of total assumed reinsurance premiums written in 2013 to 8.0 percent in 2014; however, the total amount of premiums ceded to Employers Mutual for this coverage increased due to the increase in total assumed reinsurance premiums written.

Effective January 1, 2013, Church Mutual Insurance Company (Church Mutual) became a member of the Mutual Reinsurance Bureau (MRB) underwriting association. As a result, Employers Mutual became a one-fifth participant in MRB, down from its previous one-fourth participation. In connection with Employers Mutual’s decreased participation in MRB, the reinsurance segment recorded a $585 portfolio adjustment decrease in premiums written in the first quarter of 2013. This portfolio adjustment did not affect earned premium since there was a corresponding decrease in unearned premiums. Nine percent of this amount ($53) was recorded as a reduction in the cost of the excess of loss coverage provided by Employers Mutual, and the reinsurance segment recognized $223 of negative commission allowance (commission income) to compensate for the acquisition costs incurred to generate the business ceded to Church Mutual.

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Losses and settlement expenses

Losses and settlement expenses increased 22.6 percent to $88,969 for the three months ended March 31, 2014 from $72,574 for the same period in 2013. The loss and settlement expense ratio increased to 66.9 percent for the three months ended March 31, 2014 from 60.2 percent for the same period in 2013. The increase in the loss and settlement expense ratio is primarily attributed to the severe winter weather experienced in 2014. The improved premium rate adequacy achieved over the past several years reduced the impact that the severe winter weather losses otherwise would have had on the loss and settlement expense ratio. The actuarial analysis of the Company’s carried reserves as of December 31, 2013 indicated that the level of reserve adequacy was consistent with other recent evaluations. From management’s perspective, this measure is more relevant to an understanding of the Company’s results of operations than the composition of the underwriting results between the current and prior accident years.

The loss and settlement expense ratio for the property and casualty insurance segment increased to 66.9 percent for the three months ended March 31, 2014 from 60.4 percent for the same period in 2013. The increase in the loss and settlement expense ratio is primarily attributed to the severe winter weather experienced in 2014. The majority of the severe weather losses were not classified as catastrophe and storm losses because cold weather events are generally not assigned an occurrence code; however, losses attributed to the polar vortex that impacted the eastern United States in early January were classified as catastrophe and storm losses because the Property & Liability Resource Bureau assigned an occurrence code to this event. Catastrophe and storm losses accounted for 6.9 percentage points of the loss and settlement expense ratio for the first quarter of 2014, up from 5.2 percentage points during the same period of 2013, and higher than the most recent 10-year average of 4.8 percentage points. Included in the catastrophe and storm losses reported for the first quarter of 2014 is $3,985 (3.9 percentage points of the loss and settlement expense ratio) of losses attributed to the polar vortex. Large losses, which the Company defines as losses greater than $500 for the EMC Insurance Companies’ pool, excluding catastrophe and storm losses, accounted for 4.1 percentage points of the loss and settlement expense ratio for the three months ended March 31, 2014, compared to 3.2 percentage points for the same period in 2013. Development on prior years’ reserves declined during the first quarter of 2014 compared to the same period in 2013. This decline is attributed to adverse development on open claims that exceeded favorable development on claims that closed. Favorable development amounts can vary significantly from quarter to quarter and year to year depending on a number of factors, including the number of claims settled and the settlement terms.

The loss and settlement expense ratio for the reinsurance segment increased to 66.7 percent for the three months ended March 31, 2014 from 59.7 percent for the same period in 2013. This increase is primarily attributed to the establishment of a greater amount of bulk incurred but not reported (IBNR) loss reserves in the first quarter of 2014 than the first quarter of 2013, as well as an increase in reported large losses. The increase in IBNR loss reserves was implemented to maintain a consistent level of overall reserve adequacy, and does not reflect any major change in assumptions, or concerns about the current or prior contract years. The reinsurance subsidiary also experienced a small decline in the amount of favorable development experienced on prior years’ reserves.

Acquisition and other expenses

Acquisition and other expenses increased 3.2 percent to $41,761 for the three months ended March 31, 2014 from $40,482 for the same period in 2013. However, the acquisition expense ratio decreased to 31.3 percent for the three months ended March 31, 2014 from 33.6 percent for the same period in 2013. The decrease in the acquisition expense ratio is attributed to an overall improvement in rate adequacy and large declines in the amount of net periodic pension and postretirement benefit costs allocated to the Company. Net periodic pension benefit cost declined to $144 for the three months ended March 31, 2014, from $782 in the same period in 2013. This decrease reflects an increase in the expected return on plan assets and a decline in the amount of net actuarial loss amortized into expense. Net periodic postretirement benefit cost changed significantly as a result of the plan amendment that was announced in the fourth quarter of 2013. The Company recognized net periodic postretirement benefit income of $771 for the three months ended March 31, 2014, compared to net periodic postretirement benefit expense of $728 in the same period in 2013. The plan amendment created a large prior service credit that is being amortized into the benefit expense over 10 years. In addition, the service cost and interest cost components of the revised plan's net periodic benefit cost are significantly lower than those of the prior plan. A decline in policyholder dividend expense also contributed to the decrease in the acquisition expense ratio.

For the property and casualty insurance segment, the acquisition expense ratio decreased to 33.6 percent for the three months ended March 31, 2014 from 36.8 percent for the same period in 2013. As mentioned above, this decrease is primarily attributed to the large decline in retirement benefit expenses, and to a lesser extent, a decline in policyholder dividend expense and an increase in premium income. For the three months ended March 31, 2014, the property and casualty insurance segment was allocated $612 of net periodic benefit income for the pension and postretirement benefit plans, compared to $1,454 of net periodic benefit cost during the same period in 2013.

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For the reinsurance segment, the acquisition expense ratio increased to 24.4 percent for the three months ended March 31, 2014 from 22.9 percent for the same period in 2013. This increase is primarily attributed to growth in pro rata reinsurance business, which typically carries higher commission rates than excess of loss reinsurance business. During the first quarter of 2013, the reinsurance segment recognized a $223 negative commission allowance in conjunction with the addition of Church Mutual to the MRB underwriting association. A portion of this negative commission allowance was offset by the amortization of the related deferred policy acquisition cost asset, resulting in an immediate expense reduction of approximately $105 during the first quarter of 2013. The increase in premium income helped mitigate the impact the increased expenses had on the acquisition expense ratio.

Investment results

Net investment income increased 13.5 percent to $11,855 for the three months ended March 31, 2014 from $10,443 for the same period in 2013. This increase is primarily attributed to a higher average invested balance in fixed maturity securities and an increase in dividend income; however, approximately 4.2 percentage points of the increase resulted from the early payoff of a commercial mortgage-backed security that was purchased at a significant discount to par value, which accelerated the accretion of the discount to par value and therefore increased investment income. The low interest rate environment that has persisted for the past several years continued during the first quarter of 2014. Current interest rate levels remain below the average coupon rate of the fixed maturity portfolio, and will therefore likely continue to limit future growth in net investment income. The average coupon rate on the fixed maturity portfolio, excluding interest-only securities, declined slightly to 3.99 percent at March 31, 2014 from 4.03 percent at December 31, 2013 and 4.14 percent at March 31, 2013. The effective duration of the fixed maturity portfolio, excluding interest-only securities, was 5.18 at March 31, 2014, compared to 5.65 at December 31, 2013. The Company’s equity security holdings produced dividend income of $1,491 for the three months ended March 31, 2014, compared to $1,096 for the same period in 2013.

The Company reported net realized investment gains of $1,262 during the three months ended March 31, 2014, compared to $2,668 during the same period in 2013. The amount reported for the three months ended March 31, 2014 reflects $368 of realized losses attributed to the decline in the carrying value of a limited partnership that the Company invested in during the first quarter to help protect it from a sudden and significant decline in the value of its equity portfolio (an equity tail-risk hedging strategy). During the first three months of 2014, "other-than-temporary" impairment losses totaled $316, compared to $21 in the same period of 2013. The impairment losses in 2014 were recognized on two equity securities, while the impairment loss in 2013 was recognized on one equity security.

Interest and other expense

The decline in interest expense for the three months ended March 31, 2014 is due to a reduction in the interest rate on the property and casualty insurance segment’s outstanding surplus notes from 3.60 percent to 1.35 percent that became effective February 1, 2013. Included in other expenses is foreign currency exchange gains and losses recognized on the reinsurance segment’s foreign currency denominated reinsurance business. The reinsurance segment had a foreign currency exchange loss of $166 for the three months ended March 31, 2014, compared to a gain of $441 during the same period in 2013.

Income tax

Income tax expense decreased 31.1 percent to $4,294 for the three months ended March 31, 2014 from $6,236 for the same period in 2013. The effective tax rate for the three months ended March 31, 2014 was 28.8 percent, compared to 30.4 percent for the same period in 2013. The primary contributor to the differences between these effective tax rates and the United States federal corporate tax rate of 35 percent is tax-exempt interest income earned.

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet cash obligations. The Company had positive (negative) cash flows from operations of $2,148 and $(1,672) during the first three months of 2014 and 2013, respectively. The Company typically generates substantial positive cash flows from operations because cash from premium payments is generally received in advance of cash payments made to settle claims. These positive cash flows provide the foundation of the Company’s asset/liability management program and are the primary driver of the Company’s liquidity. The Company invests in high quality, liquid securities to match the anticipated payments of losses and settlement expenses of the underlying insurance policies. Because the timing of the losses is uncertain, the majority of the portfolio is maintained in short to intermediate maturity securities that can be easily liquidated or that generate adequate cash flow to meet liabilities.

The Company is a holding company whose principal asset is its investment in its property and casualty insurance subsidiaries and its reinsurance subsidiary (“insurance subsidiaries”). As a holding company, the Company is dependent upon cash dividends from its insurance subsidiaries to meet all its obligations, including cash dividends to stockholders and the funding of the Company’s stock repurchase programs. State insurance regulations restrict the maximum amount of dividends insurance companies can pay without prior regulatory approval. The maximum amount of dividends that the insurance subsidiaries can pay to the Company in 2014 without prior regulatory approval is approximately $47,976. The Company received $226 and $4,500 of dividends from its insurance subsidiaries and paid cash dividends to its stockholders totaling $3,064 and $2,728 during the first three months of 2014 and 2013, respectively.

The Company’s insurance subsidiaries must maintain adequate liquidity to ensure that their cash obligations are met; however, because of the property and casualty insurance subsidiaries’ participation in the pooling agreement and the reinsurance subsidiary’s participation in the quota share agreement, they do not have the daily liquidity concerns normally associated with an insurance company. This is because under the terms of the pooling and quota share agreements, Employers Mutual receives all premiums and pays all losses and expenses associated with the insurance business produced by the pool participants and the assumed reinsurance business ceded to the Company’s reinsurance subsidiary, and then settles inter-company balances generated by these transactions with the participating companies on a monthly (pool participants) or quarterly (reinsurance subsidiary) basis.

At the insurance subsidiary level, the primary sources of cash are premium income, investment income and proceeds from called or matured investments. The principal outflows of cash are payments of claims, commissions, premium taxes, operating expenses, income taxes, dividends, interest and principal payments on debt, and investment purchases. Cash outflows vary because of uncertainties regarding settlement dates for unpaid losses and the potential for large losses, either individually or in the aggregate. Accordingly, the insurance subsidiaries maintain investment and reinsurance programs intended to provide adequate funds to pay claims without forced sales of investments. The insurance subsidiaries also have the ability to borrow funds on a short-term basis (180 days) from Employers Mutual and its subsidiaries and affiliate under an Inter-Company Loan agreement. In addition, Employers Mutual maintains access to a line of credit with the Federal Home Loan Bank that could be used to provide the insurance subsidiaries additional liquidity if needed.

The Company maintains a portion of its investment portfolio in relatively short-term and highly liquid investments to ensure the availability of funds to pay claims and expenses. A variety of maturities are maintained in the Company’s investment portfolio to assure adequate liquidity. The maturity structure of the fixed maturity portfolio is also established by the relative attractiveness of yields on short, intermediate and long-term securities. The Company does not invest in high-yield, non-investment grade debt securities. Any non-investment grade securities held by the Company are the result of rating downgrades subsequent to their purchase.

The Company invests for the long term and generally purchases fixed maturity securities with the intent to hold them to maturity. Despite this intent, the Company currently classifies fixed maturity securities as available-for-sale to provide flexibility in the management of its investment portfolio. At March 31, 2014 and December 31, 2013, the Company had net unrealized holding gains, net of deferred taxes, on its fixed maturity securities available-for-sale of $20,378 and $11,968, respectively. The fluctuation in the fair value of these investments is primarily due to changes in the interest rate environment during this time period, but also reflects fluctuations in risk premium spreads over U.S. Treasuries. Since the Company does not actively trade in the bond market, such fluctuations in the fair value of these investments are not expected to have a material impact on the operations of the Company, as forced liquidations of investments are not anticipated. The Company closely monitors the bond market and makes appropriate adjustments in its portfolio as conditions warrant.

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The majority of the Company’s assets are invested in fixed maturity securities. These investments provide a substantial amount of investment income that supplements underwriting results and contributes to net earnings. As these investments mature, or are called, the proceeds are reinvested at current interest rates, which may be higher or lower than those now being earned; therefore, more or less investment income may be available to contribute to net earnings. Due to the prolonged low interest rate environment, proceeds from calls and maturities in recent years have been reinvested at lower yields, which has had a negative impact on investment income.

The Company held $6,529 and $2,392 in minority ownership interests in limited partnerships and limited liability companies at March 31, 2014 and December 31, 2013, respectively. During the first quarter of 2014, the Company invested $4,367 in a limited partnership that is designed to help protect the Company from a sudden and significant decline in the value of its equity portfolio. This investment is included in "other long-term investments" in the Company's financial statements and is carried under the equity method of accounting. The Company does not hold any other unregistered securities.

The Company’s cash balance was $568 and $239 at March 31, 2014 and December 31, 2013, respectively.

During the first three months of 2014, Employers Mutual made no contributions to its qualified pension plan or postretirement benefit plans. The Company’s share of Employers Mutual’s 2014 planned contributions to its pension plan and the Voluntary Employee Beneficiary Association (VEBA) trust, if made, will be approximately $4,500 and $0, respectively.

During the first three months of 2013, Employers Mutual made no contributions to its qualified pension plan or postretirement benefit plans. The Company reimbursed Employers Mutual $4,321 for its share of the total 2013 qualified pension plan contribution and $144 for its share of the total 2013 postretirement benefit plan contributions (no reimbursements were paid in the first three months of 2013).

Capital Resources

Capital resources consist of stockholders’ equity and debt, representing funds deployed or available to be deployed to support business operations. For the Company’s insurance subsidiaries, capital resources are required to support premium writings. Regulatory guidelines suggest that the ratio of a property and casualty insurer’s annual net premiums written to its statutory surplus should not exceed three to one. On an annualized basis, all of the Company’s property and casualty insurance subsidiaries were well under this guideline at March 31, 2014.

The Company’s insurance subsidiaries are required to maintain a certain minimum level of surplus on a statutory basis, and are subject to regulations under which the payment of dividends from statutory surplus is restricted and may require prior approval of their domiciliary insurance regulatory authorities. The Company’s insurance subsidiaries are also subject to annual Risk Based Capital (RBC) requirements that may further impact their ability to pay dividends. RBC requirements attempt to measure minimum statutory capital needs based upon the risks in a company’s mix of products and investment portfolio. At December 31, 2013, the Company’s insurance subsidiaries had total adjusted statutory capital well in excess of the minimum RBC requirement.

The Company’s total cash and invested assets at March 31, 2014 and December 31, 2013 are summarized as follows:



	March 31, 2014
	Amortized cost		Fair value		Percent of total fair value		Carrying value
Fixed maturity securities available-for-sale	$	998,651	$	1,030,001	81.0	%	$	1,030,001
Equity securities available-for-sale	117,469		175,674		13.8		175,674
Cash	568		568		—		568
Short-term investments	60,317		60,317		4.7		60,317
Other long-term investments	6,529		6,529		0.5		6,529
	$	1,183,534	$	1,273,089	100.0	%	$	1,273,089

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	December 31, 2013
	Amortized cost		Fair value		Percent of total fair value		Carrying value
Fixed maturity securities available-for-sale	$	1,009,572	$	1,027,984	81.8	%	$	1,027,984
Equity securities available-for-sale	113,835		169,848		13.5		169,848
Cash	239		239		—		239
Short-term investments	56,166		56,166		4.5		56,166
Other long-term investments	2,392		2,392		0.2		2,392
	$	1,182,204	$	1,256,629	100.0	%	$	1,256,629

The amortized cost and estimated fair value of fixed maturity and equity securities at March 31, 2014 were as follows:



	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	9,548	$	173	$	197	$	9,524
U.S. government-sponsored agencies	154,289		1,442		8,043		147,688
Obligations of states and political subdivisions	342,900		19,344		1,876		360,368
Commercial mortgage-backed	54,168		5,189		—		59,357
Residential mortgage-backed	95,906		826		2,620		94,112
Other asset-backed	10,341		1,184		—		11,525
Corporate	331,499		17,709		1,781		347,427
Total fixed maturity securities	998,651		45,867		14,517		1,030,001

Equity securities:
Common stocks:
Financial services	19,345		9,409		53		28,701
Information technology	17,198		6,765		103		23,860
Healthcare	12,570		10,710		—		23,280
Consumer staples	9,502		4,160		—		13,662
Consumer discretionary	10,690		10,270		—		20,960
Energy	14,882		6,912		267		21,527
Industrials	8,386		6,207		—		14,593
Other	12,814		4,262		157		16,919
Non-redeemable preferred stocks	12,082		463		373		12,172
Total equity securities	117,469		59,158		953		175,674
Total securities available-for-sale	$	1,116,120	$	105,025	$	15,470	$	1,205,675

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The Company’s property and casualty insurance subsidiaries have $25,000 of surplus notes issued to Employers Mutual. Effective February 1, 2013, the interest rate on the surplus notes was reduced to 1.35 percent from the previous rate of 3.60 percent. Reviews of the interest rate are conducted by the Inter-Company Committees of the boards of directors of the Company and Employers Mutual every five years, with the next review due in 2018. Payments of interest and repayments of principal can only be made out of the applicable subsidiary’s statutory surplus and is subject to prior approval by the insurance commissioner of the respective states of domicile. The surplus notes are subordinate and junior in right of payment to all obligations or liabilities of the applicable insurance subsidiaries. Total interest expense incurred on these surplus notes was $84 and $131 during the first three months of 2014 and 2013, respectively. During the first quarter of 2014, the Company’s property and casualty insurance subsidiaries paid Employers Mutual for the interest that had been accrued on the surplus notes during 2013.

As of March 31, 2014, the Company had no material commitments for capital expenditures.

Off-Balance Sheet Arrangements

Employers Mutual collects from agents, policyholders and ceding companies all premiums associated with the insurance business produced by the pool participants and the assumed reinsurance business ceded to the reinsurance subsidiary. Employers Mutual also collects from its reinsurers all ceded paid losses and settlement expenses associated with reinsurance contracts covering the pool participants' business and the fronting business ceded to the reinsurance subsidiary. Employers Mutual settles with the pool participants (monthly) and the reinsurance subsidiary (quarterly) the premiums written and ceded paid losses and settlement expenses from these insurance policies and reinsurance contracts, providing full credit for the premiums written and ceded paid losses and settlement expenses generated during the period (not just the collected portion). Due to this arrangement, and since a significant portion of the premium balances are collected over the course of the coverage period, Employers Mutual carries a substantial receivable balance for insurance and reinsurance premiums in process of collection, and to a lesser extent, ceded paid losses and settlement expenses recoverable. Any of these receivable amounts that are ultimately deemed to be uncollectible are charged-off by Employers Mutual and the expense is charged to the reinsurance subsidiary or allocated to the pool members on the basis of pool participation. As a result, the Company has off-balance sheet arrangements with an unconsolidated entity that results in credit-risk exposures (Employers Mutual’s insurance and reinsurance premium receivable balances, and ceded paid loss and settlement expense recoverable amounts) that are not reflected in the Company’s financial statements. The average annual expense for such charge-offs allocated to the Company over the past ten years is $332. Based on this historical data, this credit-risk exposure is not considered to be material to the Company’s results of operations or financial position, and accordingly, no loss contingency liability has been recorded.

Investment Impairments and Considerations

For the three months ended March 31, 2014, the Company recognized "other-than-temporary" investment impairment losses totaling $316 on two equity securities, compared to $21 on one equity security during the same period in 2013.

At March 31, 2014, the Company had unrealized losses on available-for-sale securities as presented in the table below. The estimated fair value is based on quoted market prices, where available. In cases where quoted market prices are not available, fair values are based on a variety of valuation techniques depending on the type of security. None of these securities are considered to be in concentrations by either security type or industry. The Company uses several factors to determine whether the carrying value of an individual security has been “other-than-temporarily” impaired. Such factors include, but are not limited to, the security’s value and performance in the context of the overall markets, length of time and extent the security’s fair value has been below carrying value, key corporate events and collateralization of fixed maturity securities. Based on these factors, the absence of management’s intent to sell these securities prior to recovery or maturity, and the fact that management does not anticipate that it will be forced to sell these securities prior to recovery or maturity, it was determined that the amortized cost of these securities were not “other-than-temporarily” impaired at March 31, 2014. Risks and uncertainties inherent in the methodology utilized in this evaluation process include interest rate risk, equity price risk, and the overall performance of the economy, all of which have the potential to adversely affect the value of the Company’s investments. Should a determination be made at some point in the future that these unrealized losses are “other-than-temporary”, the Company’s earnings would be reduced by approximately $10,056, net of tax; however, the Company’s financial position would not be affected because unrealized losses on available-for-sale securities are reflected in the Company’s financial statements as a component of stockholders’ equity, net of deferred taxes.

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Following is a schedule of the length of time securities have continuously been in an unrealized loss position as of March 31, 2014.



	Less than twelve months				Twelve months or longer				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Fixed maturity securities:
U.S. treasury	$	4,632	$	197	$	—	$	—	$	4,632	$	197
U.S. government-sponsored agencies	71,839		4,902		32,169		3,141		104,008		8,043
Obligations of states and political subdivisions	53,336		1,631		5,481		245		58,817		1,876
Residential mortgage-backed	60,790		1,588		5,551		1,032		66,341		2,620
Corporate	63,149		1,091		10,638		690		73,787		1,781
Total, fixed maturity securities	253,746		9,409		53,839		5,108		307,585		14,517
Equity securities:
Common stocks:
Financial services	1,530		53		—		—		1,530		53
Information technology	4,144		103		—		—		4,144		103
Energy	730		267		—		—		730		267
Industrials	38		—		—		—		38		—
Other	2,431		157		—		—		2,431		157
Non-redeemable preferred stocks	2,241		9		1,636		364		3,877		373
Total, equity securities	11,114		589		1,636		364		12,750		953
Total temporarily impaired securities	$	264,860	$	9,998	$	55,475	$	5,472	$	320,335	$	15,470

The Company does not purchase non-investment grade fixed maturity securities. Any non-investment grade fixed maturity securities held are the result of rating downgrades that occurred subsequent to their purchase. At March 31, 2014, non-investment grade fixed maturity securities held by the Company included nine securities, all of which were residential mortgage-backed securities. All of these securities were in an unrealized gain position at March 31, 2014.

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Following is a schedule of gross realized losses recognized in the first three months of 2014. The schedule is aged according to the length of time the underlying securities were in an unrealized loss position.



	Realized losses from sales						"Other-than- temporary" impairment losses		Other realized losses (1)		Total gross realized losses
	Book value		Sales price		Gross realized losses		"Other-than- temporary" impairment losses		Other realized losses (1)		Total gross realized losses
Fixed maturity securities:
Three months or less	$	—	$	—	$	—	$	—	$	—	$	—
Over three months to six months	—		—		—		—		—		—
Over six months to nine months	—		—		—		—		—		—
Over nine months to twelve months	—		—		—		—		—		—
Over twelve months	1,990		1,898		92		—		—		92
Subtotal, fixed maturity securities	1,990		1,898		92		—		—		92

Equity securities:
Three months or less	1,877		1,810		67		49		—		116
Over three months to six months	350		341		9		—		—		9
Over six months to nine months	—		—		—		—		—		—
Over nine months to twelve months	—		—		—		—		—		—
Over twelve months	—		—		—		267		—		267
Subtotal, equity securities	2,227		2,151		76		316		—		392

Other long-term investments:
Three months or less	—		—		—		—		368		368
Over three months to six months	—		—		—		—		—		—
Over six months to nine months	—		—		—		—		—		—
Over nine months to twelve months	—		—		—		—		—		—
Over twelve months	—		—		—		—		—		—
Subtotal, other long-term investments	—		—		—		—		368		368

Total realized losses in earnings	$	4,217	$	4,049	$	168	$	316	$	368	$	852

(1) The amount reported for other long-term investments represents changes in the carrying value of a limited partnership that are recorded as realized investment losses.

LEASES, COMMITMENTS AND CONTINGENT LIABILITIES

One of the Company’s property and casualty insurance subsidiaries leases office facilities in Bismarck, North Dakota with lease terms expiring in 2014. Employers Mutual has entered into various leases for branch and service office facilities with lease terms expiring through 2023. All of these lease costs are included as expenses under the pooling agreement. The Company’s contractual obligations as of March 31, 2014 did not change materially from those presented in the Company’s 2013 Form 10-K.

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The participants in the pooling agreement are subject to guaranty fund assessments by states in which they write business. Guaranty fund assessments are used by states to pay policyholder liabilities of insolvent insurers domiciled in those states. Many states allow assessments to be recovered through premium tax offsets. The Company has accrued estimated guaranty fund assessments of $778 and $894 as of March 31, 2014 and December 31, 2013, respectively. Premium tax offsets of $779 and $894, which are related to prior guarantee fund payments and current assessments, have been accrued as of March 31, 2014 and December 31, 2013, respectively. The guaranty fund assessments are expected to be paid over the next two years and the premium tax offsets are expected to be realized within ten years of the payments. The participants in the pooling agreement are also subject to second-injury fund assessments, which are designed to encourage employers to employ workers with pre-existing disabilities. The Company has accrued estimated second-injury fund assessments of $1,669 and $1,747 as of March 31, 2014 and December 31, 2013, respectively. The second-injury fund assessment accruals are based on projected loss payments. The periods over which the assessments will be paid is not known.

The participants in the pooling agreement have purchased annuities from life insurance companies, under which the claimant is payee, to fund future payments that are fixed pursuant to specific claim settlement provisions. Based on information provided by the life insurance companies on an annual basis, the Company’s share of case loss reserves eliminated by the purchase of those annuities was $178 at December 31, 2013. The Company had a contingent liability for the aggregate guaranteed amount of the annuities of $245 at December 31, 2013 should the issuers of those annuities fail to perform. Although management is not able to verify the amount, the Company would likely have a similar contingent liability at March 31, 2014. The probability of a material loss due to failure of performance by the issuers of these annuities is considered remote.



ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The main objectives in managing the Company’s investment portfolios are to maximize after-tax investment return while minimizing risk, in order to provide maximum support for the underwriting operations. Investment strategies are developed based upon many factors including underwriting results, regulatory requirements, fluctuations in interest rates and consideration of other market risks. Investment decisions are centrally managed by investment professionals and are supervised by the investment committees of the respective boards of directors for each of the Company’s subsidiaries.

Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments, and is directly influenced by the volatility and liquidity in the markets in which the related underlying assets are traded. The market risks of the financial instruments of the Company relate to the investment portfolio, which exposes the Company to interest rate (inclusive of credit spreads) and equity price risk and, to a lesser extent, credit quality and prepayment risk. Monitoring systems and analytical tools are in place to assess each of these elements of market risk; however, there can be no assurance that future changes in interest rates, creditworthiness of issuers, prepayment activity, liquidity available in the market and other general market conditions will not have a material adverse impact on the Company’s results of operations, liquidity or financial position.

Two categories of influences on market risk exist as it relates to financial instruments. First are systematic aspects, which relate to the investing environment and are out of the control of the investment manager. Second are non-systematic aspects, which relate to the construction of the investment portfolio through investment policies and decisions, and are under the direct control of the investment manager. The Company is committed to controlling non-systematic risk through sound investment policies and diversification.

Further analysis of the components of the Company’s market risk (including interest rate risk, equity price risk, credit quality risk, and prepayment risk) can be found in the Company’s 2013 Form 10-K.



ITEM 4.	CONTROLS AND PROCEDURES

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely making known to them material information relating to the Company and the Company’s consolidated subsidiaries required to be disclosed in the Company’s reports filed or submitted under the Exchange Act.

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There were no changes in the Company’s internal control over financial reporting that occurred during the first quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.



PART II.	OTHER INFORMATION



ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information regarding purchases of equity securities by the Company and affiliated purchasers for the three months ended March 31, 2014:



Period	(a) Total number of shares (or units) purchased (1)	(b) Average price paid per share (or unit)		(c) Total number of shares (or units) purchased as part of publicly announced plans or programs (2)	(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs (2 & 3)
1/1/2014 - 1/31/2014	60	$	30.20	—	$	19,491
2/1/2014 - 2/28/2014	28	28.03		—	19,491
3/1/2014 - 3/31/2014	8,323	35.23		—	19,491
Total	8,411	$	35.17	—


(1)	Included in this column are 60, 28 and 894 shares purchased in the open market in January, February and March, respectively, to fulfill the Company's obligations under its dividend reinvestment and common stock purchase plan. 7,429 shares were purchased in the open market during March to fulfill obligations under Employers Mutual’s employee stock purchase plan.


(2)	On November 3, 2011, the Company’s Board of Directors authorized a $15,000 stock repurchase program. This program became effective immediately and does not have an expiration date. No purchases have been made under this program.

(3)

On May 12, 2005, the Company announced that its parent company, Employers Mutual, had initiated a $15,000 stock purchase program under which Employers Mutual would purchase shares of the Company’s common stock in the open market. This purchase program became effective immediately and does not have an expiration date; however, this program has been dormant while the Company’s repurchase programs have been in effect. A total of $4,491 remains in this program.

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ITEM 6.	EXHIBITS



31.1		Certification of President and Chief Executive Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Senior Vice President and Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 8, 2014.

EMC INSURANCE GROUP INC.

Registrant

/s/ Bruce G. Kelley

Bruce G. Kelley

President, Chief Executive Officer and Treasurer

(Principal Executive Officer)

/s/ Mark E. Reese

Mark E. Reese

Senior Vice President and

Chief Financial Officer

(Principal Accounting Officer)

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

INDEX TO EXHIBITS



Exhibit number	Item

31.1*	Certification of President and Chief Executive Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002

31.2*	Certification of Senior Vice President and Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002

32.1*	Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*	Certification of the Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS**	XBRL Instance Document

101.SCH**	XBRL Taxonomy Extension Schema Document

101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB**	XBRL Taxonomy Extension Label Linkbase Document

101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document



*	Filed herewith
**	Furnished, not filed