EMC INSURANCE GROUP INC - FORM 10-Q

Attached files

file	filename
EX-10.2.2 - EXHIBIT 10.2.2 - EMC INSURANCE GROUP INC	exhibit1022.htm
EX-10.1.1 - EXHIBIT 10.1.1 - EMC INSURANCE GROUP INC	a20160331ex1011.htm
EX-31.1 - EXHIBIT 31.1 - EMC INSURANCE GROUP INC	a2016331ex311.htm
EX-31.2 - EXHIBIT 31.2 - EMC INSURANCE GROUP INC	a2016331ex312.htm
EX-32.1 - EXHIBIT 32.1 - EMC INSURANCE GROUP INC	a2016331ex321.htm
EX-32.2 - EXHIBIT 32.2 - EMC INSURANCE GROUP INC	a2016331ex322.htm

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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, 2016



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 Section 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 29, 2016
Common stock, $1.00 par value		20,973,185

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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	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	46

PART II	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 6.	Exhibits	48

Signatures		49

Index to Exhibits		50

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PART I.	FINANCIAL INFORMATION



ITEM 1.	FINANCIAL STATEMENTS

EMC INSURANCE GROUP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	March 31, 2016		December 31, 2015
($ in thousands, except share and per share amounts)	(Unaudited)
ASSETS
Investments:
Fixed maturity securities available-for-sale, at fair value (amortized cost $1,116,627 and $1,130,217)	$	1,166,022	$	1,161,025
Equity securities available-for-sale, at fair value (cost $151,046 and $144,176)	212,582		206,243
Other long-term investments	8,440		9,930
Short-term investments	48,447		38,599
Total investments	1,435,491		1,415,797

Cash	697		224
Reinsurance receivables due from affiliate	21,342		24,236
Prepaid reinsurance premiums due from affiliate	7,080		6,563
Deferred policy acquisition costs (affiliated $40,232 and $40,535)	40,462		40,720
Amounts due from affiliate to settle inter-company transaction balances	7,309		—
Prepaid pension and postretirement benefits due from affiliate	11,754		12,133
Accrued investment income	11,939		10,789
Amounts receivable under reverse repurchase agreements	16,850		16,850
Accounts receivable	1,440		804
Income taxes recoverable	—		1,735
Goodwill	942		942
Other assets (affiliated $4,019 and $4,595)	4,938		5,162
Total assets	$	1,560,244	$	1,535,955

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, 2016		December 31, 2015
($ in thousands, except share and per share amounts)	(Unaudited)
LIABILITIES
Losses and settlement expenses (affiliated $674,131 and $671,169)	$	681,579	$	678,774
Unearned premiums (affiliated $238,600 and $238,637)	239,609		239,435
Other policyholders' funds (all affiliated)	11,025		8,721
Surplus notes payable to affiliate	25,000		25,000
Amounts due affiliate to settle inter-company transaction balances	—		6,408
Pension benefits payable to affiliate	3,958		4,299
Income taxes payable	5,882		—
Deferred income taxes	23,818		19,029
Other liabilities (affiliated $16,968 and $28,598)	18,307		29,351
Total liabilities	1,009,178		1,011,017

STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 30,000,000 shares; issued and outstanding, 20,946,158 shares in 2016 and 20,780,439 shares in 2015	20,946		20,781
Additional paid-in capital	112,500		108,747
Accumulated other comprehensive income	69,917		58,433
Retained earnings	347,703		336,977
Total stockholders' equity	551,066		524,938
Total liabilities and stockholders' equity	$	1,560,244	$	1,535,955

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 share and per share amounts)	2016			2015
REVENUES
Premiums earned (affiliated $141,715 and $137,419)	$	142,737		$	138,731
Net investment income	12,230			11,206
Net realized investment gains (losses), excluding impairment losses on securities available-for-sale	(654		)	1,401
Total "other-than-temporary" impairment losses on securities available-for-sale	(431		)	(618		)
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	(431		)	(618		)
Net realized investment gains (losses)	(1,085		)	783
Other income (loss) (affiliated $123 and $657)	(11		)	1,615
Total revenues	153,871			152,335

LOSSES AND EXPENSES
Losses and settlement expenses (affiliated $85,258 and $75,272)	85,109			75,785
Dividends to policyholders (all affiliated)	3,853			2,900
Amortization of deferred policy acquisition costs (affiliated $26,118 and $25,212)	26,328			25,441
Other underwriting expenses (all affiliated)	16,971			17,521
Interest expense (all affiliated)	84			84
Other expenses (affiliated $437 and $441)	649			667
Total losses and expenses	132,994			122,398
Income before income tax expense	20,877			29,937

INCOME TAX EXPENSE (BENEFIT)
Current	7,618			9,205
Deferred	(1,395		)	402
Total income tax expense	6,223			9,607
Net income	$	14,654		$	20,330

Net income per common share - basic and diluted	$	0.70		$	1.00

Dividend per common share	$	0.190		$	0.167

Average number of common shares outstanding - basic and diluted	20,842,199			20,436,302

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)	2016			2015
Net income	$	14,654		$	20,330

OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gains on investment securities, net of deferred income tax expense of $6,610 and $2,689	12,275			4,993
Reclassification adjustment for realized investment gains included in net income, net of income tax expense of $(290) and $(764)	(539		)	(1,418		)
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income, net of deferred income tax expense of $(136) and $(190):
Net actuarial loss	279			184
Prior service credit	(531		)	(537		)
Total reclassification adjustment associated with affiliate's pension and postretirement benefit plans	(252		)	(353		)

Other comprehensive income	11,484			3,222

Total comprehensive income	$	26,138		$	23,552

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)	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	14,654		$	20,330
Adjustments to reconcile net income to net cash provided by operating activities:
Losses and settlement expenses (affiliated $2,962 and $(2,989))	2,805			(4,024		)
Unearned premiums (affiliated $(37) and $2,354)	174			2,378
Other policyholders' funds due to affiliate	2,304			956
Amounts due to/from affiliate to settle inter-company transaction balances	(13,717		)	(16,153		)
Net pension and postretirement benefits due from affiliate	(350		)	(516		)
Reinsurance receivables due from affiliate	2,894			1,299
Prepaid reinsurance premiums due from affiliate	(517		)	1,767
Commissions payable (affiliated $(8,297) and $(6,075))	(8,304		)	(6,072		)
Deferred policy acquisition costs (affiliated $303 and $(1,675))	258			(1,785		)
Accrued investment income	(1,150		)	(1,108		)
Current income tax	7,617			8,702
Deferred income tax	(1,395		)	402
Net realized investment (gains) losses	1,085			(783		)
Other, net (affiliated $(2,733) and $(1,540))	(472		)	291
Total adjustments to reconcile net income to net cash provided by operating activities	(8,768		)	(14,646		)
Net cash provided by operating activities	5,886			5,684
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturity securities available-for-sale	(43,163		)	(66,928		)
Disposals of fixed maturity securities available-for-sale	54,269			61,119
Purchases of equity securities available-for-sale	(21,284		)	(17,269		)
Disposals of equity securities available-for-sale	15,469			15,710
Purchases of other long-term investments	(1,020		)	(5,141		)
Disposals of other long-term investments	198			88
Net (purchases) disposals of short-term investments	(9,848		)	6,029
Net cash used in investing activities	(5,379		)	(6,392		)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock through affiliate’s stock plans	4,277			4,083
Repurchase of common stock	(383		)	—
Excess tax benefit associated with affiliate’s stock plans	—			34
Dividends paid to stockholders (affiliated $(2,237) and $(1,962))	(3,928		)	(3,388		)
Net cash (used in) provided by financing activities	(34		)	729
NET INCREASE IN CASH	473			21
Cash at the beginning of the year	224			383
Cash at the end of the quarter	$	697		$	404

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)


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, 2015 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.

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 2015 Form 10-K or the 2015 Annual Report to Stockholders for more detailed footnote information.

Accounting Pronouncements Adopted

In February 2015, the Financial Accounting Standards Board (FASB) updated its guidance related to the Consolidation Topic 810 of the Accounting Standards Codification^TM (Codification or ASC). The objective of this update is to improve consolidation guidance through changes in the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The guidance modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, while also eliminating the presumption that a general partner should consolidate a limited partnership. This guidance is effective for interim and annual periods beginning after December 15, 2015, and is to be applied either retrospectively or through a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The Company adopted this guidance in the first quarter of 2016. Adoption of this guidance did not have an impact on the consolidated financial condition or operating results of the Company.

In March 2016, the FASB updated its guidance related to Stock Compensation Topic 718 of the ASC. The objective of this update was to simplify the accounting for employee share-based payments. The provisions applicable to the Company primarily involve the accounting treatment for excess tax benefits, which is the excess of the actual tax benefit realized by the Company upon the exercise of non-qualified stock options (by Employers Mutual's employees) over the deferred income tax benefit previously recognized in conjunction with the compensation expense (tax deficiency if the actual tax benefit realized is less than the previously recognized deferred income tax benefit). The FASB permitted early prospective adoption of these provisions, and the Company elected to adopt effective January 1, 2016. As a result, effective January 1, 2016 the Company no longer records to additional paid-in capital the excess tax benefits (deficiencies) allocated to it through the pooling agreement, but instead recognizes these amounts through the consolidated statements of income as components of current and deferred income taxes. The requirement that these excess tax benefits (deficiencies) be reflected as financing cash flows in the consolidated statements of cash flows was also removed, and these amounts are now reflected as cash flows from operating activities on a prospective basis.

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2.	TRANSACTIONS WITH AFFILIATES

The Inter-Company Committees of the boards of directors of the Company and Employers Mutual approved a new inter-company reinsurance program between the Company's insurance subsidiaries in the property and casualty insurance segment and Employers Mutual for calendar year 2016. This reinsurance program is intended to reduce the volatility of the Company's quarterly results caused by excessive catastrophe and storm losses, and provide protection from both the frequency and severity of such losses. The reinsurance program consists of two semi-annual aggregate catastrophe excess of loss treaties. The first treaty is effective from January 1, 2016 through June 30, 2016, and has a retention of $20.0 million and a limit of $24.0 million. The total cost of this treaty is approximately $6.3 million. The second treaty is effective from July 1, 2016 through December 31, 2016, and has a retention of $15.0 million and a limit of $12.0 million. The total cost of this treaty is approximately $1.5 million. All catastrophe and storm losses assumed by the property and casualty insurance subsidiaries (net of applicable reinsurance recoveries from external reinsurance protections purchased by the pool participants) is subject to the terms of these treaties, and there is no co-participation provision.

The Inter-Company Committees of the boards of directors of the Company and Employers Mutual also approved a change in the inter-company reinsurance program between the Company's reinsurance subsidiary and Employers Mutual for calendar year 2016. The reinsurance program consists of two treaties. The first is a per occurrence catastrophe excess of loss treaty with a retention of $10.0 million, a limit of $10.0 million, 20 percent co-participation, and no reinstatement. The total cost of this treaty is approximately $2.0 million. The second is an annual aggregate catastrophe excess of loss treaty with a retention of $20.0 million, a limit of $100.0 million, and 20 percent co-participation. The total cost of this treaty is approximately $3.1 million. Any losses recovered under the per occurrence treaty inure to the benefit of the aggregate treaty. Only catastrophic events with total losses greater than $500,000 are subject to the terms of the aggregate treaty. The reinsurance subsidiary is purchasing additional reinsurance protection (Industry Loss Warranties) in peak exposure territories from external parties in which coverage is triggered when losses experienced by the insurance industry from a catastrophic event exceed a specified threshold. Any reinsurance recoveries received from external parties reduce the amount of losses ceded to Employers Mutual under the excess of loss agreement. The net cost of the external reinsurance protection is estimated to be approximately $4.0 million.


3.	REINSURANCE

The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the three months ended March 31, 2016 and 2015 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, 2016
($ in thousands)	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	94,986		$	—		$	94,986
Assumed from nonaffiliates	957			34,259			35,216
Assumed from affiliates	118,846			—			118,846
Ceded to nonaffiliates	(5,381		)	(1,980		)	(7,361		)
Ceded to affiliates	(98,141		)	(1,270		)	(99,411		)
Net premiums written	$	111,267		$	31,009		$	142,276

Premiums earned
Direct	$	92,836		$	—		$	92,836
Assumed from nonaffiliates	1,027			34,716			35,743
Assumed from affiliates	118,262			—			118,262
Ceded to nonaffiliates	(5,688		)	(1,155		)	(6,843		)
Ceded to affiliates	(95,991		)	(1,270		)	(97,261		)
Net premiums earned	$	110,446		$	32,291		$	142,737

Losses and settlement expenses incurred
Direct	$	41,054		$	—		$	41,054
Assumed from nonaffiliates	721			23,202			23,923
Assumed from affiliates	61,454			388			61,842
Ceded to nonaffiliates	(77		)	(907		)	(984		)
Ceded to affiliates	(41,054		)	328			(40,726		)
Net losses and settlement expenses incurred	$	62,098		$	23,011		$	85,109

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	Three months ended March 31, 2015
($ in thousands)	Property and casualty insurance			Reinsurance			Total
Premiums written
Direct	$	88,760		$	—		$	88,760
Assumed from nonaffiliates	971			37,977			38,948
Assumed from affiliates	113,145			—			113,145
Ceded to nonaffiliates	(5,320		)	(881		)	(6,201		)
Ceded to affiliates	(88,760		)	(2,968		)	(91,728		)
Net premiums written	$	108,796		$	34,128		$	142,924

Premiums earned
Direct	$	89,852		$	—		$	89,852
Assumed from nonaffiliates	1,033			35,871			36,904
Assumed from affiliates	112,761			—			112,761
Ceded to nonaffiliates	(5,589		)	(2,377		)	(7,966		)
Ceded to affiliates	(89,852		)	(2,968		)	(92,820		)
Net premiums earned	$	108,205		$	30,526		$	138,731

Losses and settlement expenses incurred
Direct	$	36,427		$	—		$	36,427
Assumed from nonaffiliates	546			20,900			21,446
Assumed from affiliates	55,898			243			56,141
Ceded to nonaffiliates	231			(1,926		)	(1,695		)
Ceded to affiliates	(36,427		)	(107		)	(36,534		)
Net losses and settlement expenses incurred	$	56,675		$	19,110		$	75,785

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 1) reinsurance business that is ceded to other insurance companies in connection with “fronting” activities initiated by Employers Mutual, and 2) starting in 2016, amounts ceded to purchase industry loss warranties (ILWs) from external parties that provide additional reinsurance protection for the assumed reinsurance business.

•

“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 and amounts ceded to Employers Mutual under the terms of the excess of loss reinsurance program. 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, 2016	Property and casualty insurance			Reinsurance			Parent company			Consolidated
($ in thousands)	Property and casualty insurance			Reinsurance			Parent company			Consolidated
Premiums earned	$	110,446		$	32,291		$	—		$	142,737

Underwriting profit	8,605			1,871			—			10,476
Net investment income (loss)	8,771			3,457			2			12,230
Net realized investment gains (losses)	(846		)	(239		)	—			(1,085		)
Other income (loss)	132			(143		)	—			(11		)
Interest expense	84			—			—			84
Other expenses	157			—			492			649
Income (loss) before income tax expense (benefit)	$	16,421		$	4,946		$	(490	)	$	20,877

Assets	$	1,097,040		$	453,484		$	551,419		$	2,101,943
Eliminations	—			—			(540,576		)	(540,576		)
Reclassifications	—			—			(1,123		)	(1,123		)
Total assets	$	1,097,040		$	453,484		$	9,720		$	1,560,244



Three months ended March 31, 2015	Property and casualty insurance		Reinsurance			Parent company			Consolidated
($ in thousands)	Property and casualty insurance		Reinsurance			Parent company			Consolidated
Premiums earned	$	108,205	$	30,526		$	—		$	138,731

Underwriting profit	14,078		3,006			—			17,084
Net investment income (loss)	8,026		3,184			(4		)	11,206
Net realized investment gains (losses)	700		83			—			783
Other income (loss)	182		1,433			—			1,615
Interest expense	84		—			—			84
Other expenses	206		—			461			667
Income (loss) before income tax expense (benefit)	$	22,696	$	7,706		$	(465	)	$	29,937

Year ended December 31, 2015
Assets	$	1,092,820	$	437,575		$	525,042		$	2,055,437
Eliminations	—		—			(514,309		)	(514,309		)
Reclassifications	—		(5,173		)	—			(5,173		)
Total assets	$	1,092,820	$	432,402		$	10,733		$	1,535,955

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The following table displays the net premiums earned for the property and casualty insurance segment and the reinsurance segment for the three months ended March 31, 2016 and 2015, by line of insurance.



	Three months ended March 31,
($ in thousands)	2016		2015
Property and casualty insurance segment
Commercial lines:
Automobile	$	26,927	$	25,396
Property	24,748		25,066
Workers' compensation	23,247		22,367
Liability	23,670		22,416
Other	2,071		1,966
Total commercial lines	100,663		97,211

Personal lines:
Automobile	5,217		5,817
Homeowners	4,566		5,177
Total personal lines	9,783		10,994
Total property and casualty insurance	$	110,446	$	108,205

Reinsurance segment
Pro rata reinsurance:
Multiline (primarily property)	$	690	$	1,238
Property	6,257		3,856
Liability	5,351		3,801
Marine	1,343		3,410
Total pro rata reinsurance	13,641		12,305

Excess of loss reinsurance:
Property	15,280		14,462
Liability	3,370		3,759
Total excess of loss reinsurance	18,650		18,221
Total reinsurance	$	32,291	$	30,526

Consolidated	$	142,737	$	138,731

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5.	INCOME TAXES

The actual income tax expense for the three months ended March 31, 2016 and 2015 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,
($ in thousands)	2016			2015
Computed "expected" income tax expense	$	7,307		$	10,478
Increases (decreases) in tax resulting from:
Tax-exempt interest income	(695		)	(698		)
Dividends received deduction	(425		)	(258		)
Proration of tax-exempt interest and dividends received deduction	168			143
Other, net	(132		)	(58		)
Total income tax expense	$	6,223		$	9,607

The Company had no provision for uncertain income tax positions at March 31, 2016 or December 31, 2015. The Company did not recognize any interest expense or other penalties related to U.S. federal or state income taxes during the three months ended March 31, 2016 or 2015. 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 2012.


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,
($ in thousands)	2016			2015
Pension plans:
Service cost	$	3,640		$	3,644
Interest cost	2,525			2,278
Expected return on plan assets	(4,840		)	(5,075		)
Amortization of net actuarial loss	1,039			517
Amortization of prior service cost	8			8
Net periodic pension benefit cost	$	2,372		$	1,372

Postretirement benefit plans:
Service cost	$	318		$	353
Interest cost	554			537
Expected return on plan assets	(1,056		)	(1,104		)
Amortization of net actuarial loss	374			436
Amortization of prior service credit	(2,835		)	(2,866		)
Net periodic postretirement benefit income	$	(2,645	)	$	(2,644	)

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Net periodic pension benefit cost allocated to the Company amounted to $730,000 and $421,000 for the three months ended March 31, 2016 and 2015, respectively. Net periodic postretirement benefit income allocated to the Company amounted to $761,000 and $762,000 for the three months ended March 31, 2016 and 2015, respectively.

The Company’s share of Employers Mutual’s remaining 2016 planned contribution to the pension plan, if made, will be approximately $2.5 million. No contributions will be made to the Voluntary Employee Beneficiary Association (VEBA) trust in 2016.


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 in the open market; or 3) directly purchasing common stock from the Company at the current fair value. Employers Mutual's current practice is to purchase common stock from the Company for use in all of its stock plans (including its non-employee director stock purchase plan and 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 2,250,000 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 3,000,000 shares have been reserved for issuance under the 2007 Employers Mutual Casualty Company Stock Incentive Plan (2007 Plan).

The 2003 Plan permitted 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 of restricted stock receive compensation income equal to the amount of any dividends declared on the common stock.

The Senior Executive Compensation Committee of Employers Mutual’s Board of Directors 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 $137,000 ($89,000 net of tax) and $73,000 ($48,000 net of tax) for the three months ended March 31, 2016 and 2015, respectively. During the first three months of 2016, 116,588 shares of restricted stock were granted under the 2007 Plan to eligible participants, 69,057 shares of restricted stock vested, and 86,068 options were exercised under the plans at a weighted average exercise price of $16.03.

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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.



March 31, 2016	Carrying amount		Estimated fair value
($ in thousands)	Carrying amount		Estimated fair value
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	8,138	$	8,138
U.S. government-sponsored agencies	189,448		189,448
Obligations of states and political subdivisions	340,780		340,780
Commercial mortgage-backed	41,757		41,757
Residential mortgage-backed	88,122		88,122
Other asset-backed	16,644		16,644
Corporate	481,133		481,133
Total fixed maturity securities available-for-sale	1,166,022		1,166,022

Equity securities available-for-sale:
Common stocks:
Financial services	33,443		33,443
Information technology	28,519		28,519
Healthcare	24,440		24,440
Consumer staples	19,581		19,581
Consumer discretionary	22,037		22,037
Energy	20,590		20,590
Industrials	23,521		23,521
Other	21,492		21,492
Non-redeemable preferred stocks	18,959		18,959
Total equity securities available-for-sale	212,582		212,582

Short-term investments	48,447		48,447

Liabilities:
Surplus notes	25,000		11,071

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December 31, 2015	Carrying amount		Estimated fair value
($ in thousands)	Carrying amount		Estimated fair value
Assets:
Fixed maturity securities available-for-sale:
U.S. treasury	$	12,589	$	12,589
U.S. government-sponsored agencies	202,666		202,666
Obligations of states and political subdivisions	344,359		344,359
Commercial mortgage-backed	46,108		46,108
Residential mortgage-backed	88,543		88,543
Other asset-backed	17,844		17,844
Corporate	448,916		448,916
Total fixed maturity securities available-for-sale	1,161,025		1,161,025

Equity securities available-for-sale:
Common stocks:
Financial services	33,955		33,955
Information technology	28,102		28,102
Healthcare	25,894		25,894
Consumer staples	18,200		18,200
Consumer discretionary	18,923		18,923
Energy	21,068		21,068
Industrials	20,416		20,416
Other	20,683		20,683
Non-redeemable preferred stocks	19,002		19,002
Total equity securities available-for-sale	206,243		206,243

Short-term investments	38,599		38,599

Liabilities:
Surplus notes	25,000		10,823

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 values 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, 2016 and December 31, 2015, the Company had no securities priced solely from broker quotes.

A small number of the Company’s securities are not priced by the independent pricing service. One equity security is reported as a Level 3 fair value measurement at March 31, 2016 and December 31, 2015, 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, 2016 and December 31, 2015 include seven 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, the Company's investment custodian, or the Company's investment department 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, 2016 and December 31, 2015.



March 31, 2016			Fair value measurements using
($ in thousands)	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	$	8,138	$	—	$	8,138	$	—
U.S. government-sponsored agencies	189,448		—		189,448		—
Obligations of states and political subdivisions	340,780		—		340,780		—
Commercial mortgage-backed	41,757		—		41,757		—
Residential mortgage-backed	88,122		—		88,122		—
Other asset-backed	16,644		—		16,644		—
Corporate	481,133		—		479,862		1,271
Total fixed maturity securities available-for-sale	1,166,022		—		1,164,751		1,271

Equity securities available-for-sale:
Common stocks:
Financial services	33,443		33,440		—		3
Information technology	28,519		28,519		—		—
Healthcare	24,440		24,440		—		—
Consumer staples	19,581		19,581		—		—
Consumer discretionary	22,037		22,037		—		—
Energy	20,590		20,590		—		—
Industrials	23,521		23,521		—		—
Other	21,492		21,492		—		—
Non-redeemable preferred stocks	18,959		11,578		7,381		—
Total equity securities available-for-sale	212,582		205,198		7,381		3

Short-term investments	48,447		48,447		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	11,071		—		—		11,071

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December 31, 2015			Fair value measurements using
($ in thousands)	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	$	12,589	$	—	$	12,589	$	—
U.S. government-sponsored agencies	202,666		—		202,666		—
Obligations of states and political subdivisions	344,359		—		344,359		—
Commercial mortgage-backed	46,108		—		46,108		—
Residential mortgage-backed	88,543		—		88,543		—
Other asset-backed	17,844		—		17,844		—
Corporate	448,916		—		447,587		1,329
Total fixed maturity securities available-for-sale	1,161,025		—		1,159,696		1,329

Equity securities available-for-sale:
Common stocks:
Financial services	33,955		33,952		—		3
Information technology	28,102		28,102		—		—
Healthcare	25,894		25,894		—		—
Consumer staples	18,200		18,200		—		—
Consumer discretionary	18,923		18,923		—		—
Energy	21,068		21,068		—		—
Industrials	20,416		20,416		—		—
Other	20,683		20,683		—		—
Non-redeemable preferred stocks	19,002		11,706		7,296		—
Total equity securities available-for-sale	206,243		198,944		7,296		3

Short-term investments	38,599		38,599		—		—

Financial instruments not reported at fair value:
Liabilities:
Surplus notes	10,823		—		—		10,823

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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, 2016 and 2015. Any unrealized gains or losses on these securities are recognized in other comprehensive income. Any gains or losses from settlements, disposals or impairments of these securities are reported as realized investment gains or losses in net income.



Three months ended March 31, 2016	Fair value measurements using significant unobservable (Level 3) inputs
($ in thousands)	Fixed maturity securities available-for-sale, corporate			Equity securities available-for-sale, financial services		Total
Beginning balance	$	1,329		$	3	$	1,332
Settlements	(61		)	—		(61		)
Unrealized gains included in other comprehensive income	3			—		3
Balance at March 31, 2016	$	1,271		$	3	$	1,274



Three months ended March 31, 2015	Fair value measurements using significant unobservable (Level 3) inputs
($ in thousands)	Fixed maturity securities available-for-sale, corporate			Equity securities available-for-sale, financial services		Total
Beginning balance	$	1,662		$	3	$	1,665
Settlements	(4		)	—		(4		)
Unrealized gains included in other comprehensive income	5			—		5
Balance at March 31, 2015	$	1,663		$	3	$	1,666

There were no transfers into or out of Levels 1 or 2 during the three months ended March 31, 2016 or 2015. It is the Company’s policy to recognize transfers between levels at the beginning of the reporting period.

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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.

The amortized cost and estimated fair value of securities available-for-sale as of March 31, 2016 and December 31, 2015 are as follows. All securities are classified as available-for-sale and are carried at fair value.



March 31, 2016	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
($ in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	7,824	$	314	$	—	$	8,138
U.S. government-sponsored agencies	187,366		2,145		63		189,448
Obligations of states and political subdivisions	312,476		28,304		—		340,780
Commercial mortgage-backed	40,098		1,661		2		41,757
Residential mortgage-backed	93,625		2,232		7,735		88,122
Other asset-backed	15,901		872		129		16,644
Corporate	459,337		23,206		1,410		481,133
Total fixed maturity securities	1,116,627		58,734		9,339		1,166,022

Equity securities:
Common stocks:
Financial services	26,311		7,820		688		33,443
Information technology	18,821		9,757		59		28,519
Healthcare	15,573		9,039		172		24,440
Consumer staples	12,440		7,148		7		19,581
Consumer discretionary	12,729		9,349		41		22,037
Energy	16,815		5,596		1,821		20,590
Industrials	13,942		9,697		118		23,521
Other	16,384		5,136		28		21,492
Non-redeemable preferred stocks	18,031		1,013		85		18,959
Total equity securities	151,046		64,555		3,019		212,582
Total securities available-for-sale	$	1,267,673	$	123,289	$	12,358	$	1,378,604

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December 31, 2015	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
($ in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	12,566	$	23	$	—	$	12,589
U.S. government-sponsored agencies	202,486		1,817		1,637		202,666
Obligations of states and political subdivisions	319,940		24,419		—		344,359
Commercial mortgage-backed	44,433		1,692		17		46,108
Residential mortgage-backed	94,279		1,059		6,795		88,543
Other asset-backed	17,000		883		39		17,844
Corporate	439,513		12,992		3,589		448,916
Total fixed maturity securities	1,130,217		42,885		12,077		1,161,025

Equity securities:
Common stocks:
Financial services	24,557		9,731		333		33,955
Information technology	19,427		8,807		132		28,102
Healthcare	15,599		10,359		64		25,894
Consumer staples	11,136		7,090		26		18,200
Consumer discretionary	10,270		8,658		5		18,923
Energy	16,384		5,972		1,288		21,068
Industrials	11,525		8,902		11		20,416
Other	17,246		3,672		235		20,683
Non-redeemable preferred stocks	18,032		1,168		198		19,002
Total equity securities	144,176		64,359		2,292		206,243
Total securities available-for-sale	$	1,274,393	$	107,244	$	14,369	$	1,367,268

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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, 2016 and December 31, 2015, listed by length of time the securities were in an unrealized loss position.



March 31, 2016	Less than twelve months				Twelve months or longer				Total
($ in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Fixed maturity securities:
U.S. government-sponsored agencies	$	6,987	$	5	$	11,440	$	58	$	18,427	$	63
Commercial mortgage-backed	5,101		2		—		—		5,101		2
Residential mortgage-backed	11,820		1,443		23,906		6,292		35,726		7,735
Other asset-backed	5,331		129		—		—		5,331		129
Corporate	27,439		740		19,671		670		47,110		1,410
Total, fixed maturity securities	56,678		2,319		55,017		7,020		111,695		9,339
Equity securities:
Common stocks:
Financial services	7,858		688		—		—		7,858		688
Information technology	2,419		59		—		—		2,419		59
Healthcare	2,855		172		—		—		2,855		172
Consumer staples	89		7		—		—		89		7
Consumer discretionary	1,094		41		—		—		1,094		41
Energy	5,979		1,821		—		—		5,979		1,821
Industrials	1,586		118		—		—		1,586		118
Other	1,646		28		—		—		1,646		28
Non-redeemable preferred stocks	—		—		4,419		85		4,419		85
Total equity securities	23,526		2,934		4,419		85		27,945		3,019
Total temporarily impaired securities	$	80,204	$	5,253	$	59,436	$	7,105	$	139,640	$	12,358

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December 31, 2015	Less than twelve months				Twelve months or longer				Total
($ in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Fixed maturity securities:
U.S. government-sponsored agencies	$	78,800	$	1,228	$	34,079	$	409	$	112,879	$	1,637
Commercial mortgage-backed	6,807		17		—		—		6,807		17
Residential mortgage-backed	22,028		1,694		22,781		5,101		44,809		6,795
Other asset-backed	6,013		39		—		—		6,013		39
Corporate	101,088		2,683		14,212		906		115,300		3,589
Total, fixed maturity securities	214,736		5,661		71,072		6,416		285,808		12,077
Equity securities:
Common stocks:
Financial services	6,387		333		—		—		6,387		333
Information technology	1,316		132		—		—		1,316		132
Healthcare	3,199		64		—		—		3,199		64
Consumer staples	1,244		26		—		—		1,244		26
Consumer discretionary	176		5		—		—		176		5
Energy	8,233		1,272		116		16		8,349		1,288
Industrials	1,263		11		—		—		1,263		11
Other	4,064		235		—		—		4,064		235
Non-redeemable preferred stocks	2,450		53		1,855		145		4,305		198
Total equity securities	28,332		2,131		1,971		161		30,303		2,292
Total temporarily impaired securities	$	243,068	$	7,792	$	73,043	$	6,577	$	316,111	$	14,369

Fixed maturity security fair values increased during the first three months of 2016 due to a decrease in interest rates. Most of these securities that are in an unrealized loss position 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, 2016.

The majority of the unrealized losses on common stocks at March 31, 2016 are from the energy sector, though no individual security accounted for a material amount of unrealized losses. 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, 2016.

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, 2016.

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The amortized cost and estimated fair value of fixed maturity securities at March 31, 2016, 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.



($ in thousands)	Amortized cost		Estimated fair value
Securities available-for-sale:
Due in one year or less	$	50,535	$	50,810
Due after one year through five years	148,018		155,947
Due after five years through ten years	344,710		361,569
Due after ten years	435,929		464,071
Securities not due at a single maturity date	137,435		133,625
Totals	$	1,116,627	$	1,166,022

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



	Three months ended March 31,
($ in thousands)	2016			2015
Fixed maturity securities available-for-sale:
Gross realized investment gains	$	669		$	535
Gross realized investment losses	(299		)	—

Equity securities available-for-sale:
Gross realized investment gains	2,082			2,594
Gross realized investment losses	(1,192		)	(329		)
"Other-than-temporary" impairments	(431		)	(618		)

Other long-term investments, net	(1,914		)	(1,399		)
Totals	$	(1,085	)	$	783

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 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. The amounts reported as “other-than-temporary” impairments on equity securities do not include any individually significant items. The net realized investment losses recognized on other long-term investments during the three months ended March 31, 2016 and 2015 represent changes in the carrying value of a limited partnership that is used solely to support an equity tail-risk hedging strategy.


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 $110,000 at December 31, 2015. The Company had a contingent liability for the aggregate guaranteed amount of the annuities of $183,000 at December 31, 2015 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, 2016. 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 $15.0 million stock repurchase program. This program does not have an expiration date. The timing and terms of the purchases are determined by management based on board approved parameters and 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. The Company repurchased 17,300 shares of its common stock at an average cost of $22.14 during the first three months of 2016. No other 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 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, net of tax.



	Accumulated other comprehensive income by component
($ in thousands)	Unrealized gains (losses) on available-for- sale securities			Unrecognized pension and postretirement benefit obligations			Total
Balance at December 31, 2015	$	60,369		$	(1,936	)	$	58,433
Other comprehensive income before reclassifications	12,275			—			12,275
Amounts reclassified from accumulated other comprehensive income	(539		)	(252		)	(791		)
Other comprehensive income (loss)	11,736			(252		)	11,484
Balance at March 31, 2016	$	72,105		$	(2,188	)	$	69,917

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The following tables display amounts reclassified out of accumulated other comprehensive income and into net income during the three months ended March 31, 2016 and 2015, respectively.



($ in thousands)	Amounts reclassified from accumulated other comprehensive income
Accumulated other comprehensive income components	Three months ended March 31, 2016			Affected line item in the consolidated statements of income
Unrealized gains on investments:
Reclassification adjustment for realized investment gains included in net income	$	829		Net realized investment gains
Deferred income tax expense	(290		)	Income tax expense, current
Net reclassification adjustment	539

Unrecognized pension and postretirement benefit obligations:
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income:
Net actuarial loss	(429		)	(1)
Prior service credit	817			(1)
Total before tax	388
Deferred income tax expense	(136		)	Income tax expense, current
Net reclassification adjustment	252

Total reclassification adjustment	$	791


(1)	These reclassified components of accumulated other comprehensive income are included in the computation of net periodic pension and postretirement benefit income (see Note 5, Employee Retirement Plans, for additional details).

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($ in thousands)	Amounts reclassified from accumulated other comprehensive income
Accumulated other comprehensive income components	Three months ended March 31, 2015			Affected line item in the consolidated statements of income
Unrealized gains on investments:
Reclassification adjustment for realized investment gains included in net income	$	2,182		Net realized investment gains
Deferred income tax expense	(764		)	Income tax expense, current
Net reclassification adjustment	1,418

Unrecognized pension and postretirement benefit obligations:
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income:
Net actuarial loss	(284		)	(1)
Prior service credit	827			(1)
Total before tax	543
Deferred income tax expense	(190		)	Income tax expense, current
Net reclassification adjustment	353

Total reclassification adjustment	$	1,771


(1)	These reclassified components of accumulated other comprehensive income are included in the computation of net periodic pension and postretirement benefit income (see Note 5, Employee Retirement Plans, for additional details).


13.	NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

In May 2014, the FASB updated its guidance related to the Revenue from Contracts with Customers Topic 606 of the ASC. The objective of this update (and other related following updates) is to improve the reporting of revenue by providing a more robust framework for addressing revenue issues, and improved disclosure requirements. Current revenue recognition guidance in U.S. GAAP is comprised of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes result in different accounting for economically similar transactions. This guidance is to be applied retrospectively to annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted as of the original effective date (annual and interim reporting periods beginning after December 15, 2016). The Company will adopt this guidance during the first quarter of 2018. Since premium revenue from insurance contracts is excluded from the scope of this updated guidance, adoption is expected to have little or no impact on the consolidated financial condition or operating results of the Company. The Company's largest non-premium revenue items are service charges related to the billing of the pool participants' direct written premiums to policyholders, and commission income on excess and surplus lines business marketed by EMC Underwriters, LLC, both of which are included in "Other income" in the consolidated statements of income.

In May 2015, the FASB updated its guidance related to the Financial Services-Insurance Topic 944 of the ASC. The objective of this update is to add disclosures which provide transparency of significant estimates made in measuring the liability for losses and settlement expenses, thus providing more insight into an insurance entity's ability to underwrite and anticipate costs associated with claims. The new disclosures primarily include incurred and paid claims development tables prepared net of reinsurance (not to exceed ten years), and a reconciliation of the carrying amount of the liability for losses and settlement expenses. Also included (for each accident year of incurred claims development disclosed), is disclosure of incurred but not reported (IBNR) loss reserves, claim frequency information, and the average annual percentage payout of incurred claims by age. This guidance is to be applied retrospectively to annual reporting periods beginning after December 15, 2015, and certain disclosures to interim reporting periods beginning after December 15, 2016. The Company will adopt this guidance during the fourth quarter of 2016. Since the guidance only affects disclosure, adoption will have no impact on the consolidated financial condition or operating results of the Company.

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In January 2016, the FASB updated its guidance related to the Financial Instruments-Overall Subtopic 825-10 of the ASC. The objective of this update is to enhance the reporting model for financial instruments to provide financial statement users with more decision-useful information. The major change in reporting from this update that will impact the Company is a requirement that equity investments (excluding those accounted for under the equity method of accounting or those that are consolidated) be measured at fair value with changes in fair value recognized in net income. While all of the Company's equity investments are already measured at fair value (with the exception of those that are consolidated and those that are accounted for under the equity method of accounting), the Company currently classifies all of its investments in equity securities as available-for-sale, and as such, the changes in fair value are currently recognized in other comprehensive income rather than net income. This guidance is to be applied to annual and interim reporting periods beginning after December 15, 2017, with recognition of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Early adoption is not permitted. The Company will adopt this guidance during the first quarter of 2018. Adoption is not expected to impact consolidated stockholders' equity, but is expected to introduce a material amount of volatility to the Company's consolidated net income.

In February 2016, the FASB issued updated guidance in Leases Topic 842 of the ASC, which supersedes the guidance in Leases Topic 840 of the ASC. The objective of this update is to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet, and disclosure of key information about leasing arrangements. This guidance is effective for interim and annual periods beginning after December 15, 2018, and is to be applied using a modified retrospective approach. Early adoption is permitted. The Company will adopt this guidance during the first quarter of 2019. The Company is currently evaluating the impact this guidance will have on the Company's consolidated financial condition and operating results.

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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)

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 2015 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 77 percent of consolidated premiums earned during the first three months of 2016. 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 23 percent of consolidated premiums earned during the first three months of 2016. 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.

The Inter-Company Committees of the boards of directors of the Company and Employers Mutual approved a change in the inter-company reinsurance program between the Company's reinsurance subsidiary and Employers Mutual for calendar year 2016, and also approved a new inter-company reinsurance program between the Company's three insurance subsidiaries in the property and casualty insurance segment and Employers Mutual for calendar year 2016. These reinsurance programs are intended to reduce the volatility of the Company's quarterly results caused by excessive catastrophe and storms losses, and will provide protection from both the frequency and severity of such losses. For detailed information regarding the inter-company reinsurance programs, see note 2 of Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accounting policies and estimates 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 2015 Form 10-K.

RESULTS OF OPERATIONS

Results of operations by segment and on a consolidated basis for the three months ended March 31, 2016 and 2015 are as follows:



	Three months ended March 31,
($ in thousands)	2016			2015
Property and casualty insurance
Premiums earned	$	110,446		$	108,205
Losses and settlement expenses	62,098			56,675
Acquisition and other expenses	39,743			37,452
Underwriting profit	$	8,605		$	14,078

GAAP ratios:
Loss and settlement expense ratio	56.2		%	52.4		%
Acquisition expense ratio	36.0		%	34.6		%
Combined ratio	92.2		%	87.0		%

Losses and settlement expenses:
Insured events of current year	$	65,896		$	65,940
Decrease in provision for insured events of prior years	(3,798		)	(9,265		)

Total losses and settlement expenses	$	62,098		$	56,675

Catastrophe and storm losses	$	3,424		$	1,761

Large losses	$	3,035		$	4,258

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	Three months ended March 31,
	2016							2015
($ in thousands)	Premiums earned		Losses and settlement expenses			Loss and settlement expense ratio		Premiums earned		Losses and settlement expenses		Loss and settlement expense ratio
Property and casualty insurance
Commercial lines:
Automobile	$	26,927	$	18,805		69.8	%	$	25,396	$	16,851	66.4	%
Property	24,748		12,382			50.0	%	25,066		12,333		49.2	%
Workers' compensation	23,247		13,406			57.7	%	22,367		11,511		51.5	%
Liability	23,670		12,553			53.0	%	22,416		10,936		48.8	%
Other	2,071		(66		)	(3.2	)%	1,966		97		4.9	%
Total commercial lines	100,663		57,080			56.7	%	97,211		51,728		53.2	%

Personal lines:
Automobile	5,217		2,636			50.5	%	5,817		2,453		42.2	%
Homeowners	4,566		2,382			52.2	%	5,177		2,494		48.2	%
Total personal lines	9,783		5,018			51.3	%	10,994		4,947		45.0	%
Total property and casualty insurance	$	110,446	$	62,098		56.2	%	$	108,205	$	56,675	52.4	%



	Three months ended March 31,
($ in thousands)	2016			2015
Reinsurance
Premiums earned	$	32,291		$	30,526
Losses and settlement expenses	23,011			19,110
Acquisition and other expenses	7,409			8,410
Underwriting profit	$	1,871		$	3,006

GAAP ratios:
Loss and settlement expense ratio	71.3		%	62.6		%
Acquisition expense ratio	22.9		%	27.6		%
Combined ratio	94.2		%	90.2		%

Losses and settlement expenses:
Insured events of current year	$	26,965		$	24,438
Decrease in provision for insured events of prior years	(3,954		)	(5,328		)

Total losses and settlement expenses	$	23,011		$	19,110

Catastrophe and storm losses	$	2,740		$	2,809

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	Three months ended March 31,
	2016						2015
($ in thousands)	Premiums earned		Losses and settlement expenses		Loss and settlement expense ratio		Premiums earned		Losses and settlement expenses		Loss and settlement expense ratio
Reinsurance
Pro rata reinsurance:
Multiline (primarily property)	$	690	$	159	23.0	%	$	1,238	$	455	36.8	%
Property	6,257		4,602		73.5	%	3,856		6,028		156.3	%
Liability	5,351		4,238		79.2	%	3,801		2,140		56.3	%
Marine	1,343		877		65.3	%	3,410		1,105		32.4	%
Total pro rata reinsurance	13,641		9,876		72.4	%	12,305		9,728		79.1	%

Excess of loss reinsurance:
Property	15,280		12,937		84.7	%	14,462		7,940		54.9	%
Liability	3,370		198		5.9	%	3,759		1,442		38.4	%
Total excess of loss reinsurance	18,650		13,135		70.4	%	18,221		9,382		51.5	%
Total reinsurance	$	32,291	$	23,011	71.3	%	$	30,526	$	19,110	62.6	%

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	Three months ended March 31,
($ in thousands, except per share amounts)	2016			2015
Consolidated
REVENUES
Premiums earned	$	142,737		$	138,731
Net investment income	12,230			11,206
Realized investment gains (losses)	(1,085		)	783
Other income (loss)	(11		)	1,615
	153,871			152,335
LOSSES AND EXPENSES
Losses and settlement expenses	85,109			75,785
Acquisition and other expenses	47,152			45,862
Interest expense	84			84
Other expense	649			667
	132,994			122,398

Income before income tax expense	20,877			29,937
Income tax expense	6,223			9,607
Net income	$	14,654		$	20,330

Net income per share	$	0.70		$	1.00

GAAP ratios:
Loss and settlement expense ratio	59.6		%	54.6		%
Acquisition expense ratio	33.1		%	33.1		%
Combined ratio	92.7		%	87.7		%

Losses and settlement expenses:
Insured events of current year	$	92,861		$	90,378
Decrease in provision for insured events of prior years	(7,752		)	(14,593		)

Total losses and settlement expenses	$	85,109		$	75,785

Catastrophe and storm losses	$	6,164		$	4,570

Large losses	$	3,035		$	4,258

The Company reported net income of $14.7 million ($0.70 per share) during the three months ended March 31, 2016, compared to $20.3 million ($1.00 per share) during the same period in 2015. First quarter net income declined from the record amount reported in 2015, primarily from a decrease in underwriting profits in both segments. Underwriting results remained profitable and within management's expectations for the first quarter. Realized investment losses and a foreign currency exchange loss on the reinsurance segment's foreign currency denominated reinsurance business also contributed to the decline in net income.

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Premium income

Premiums earned increased 2.9 percent to $142.7 million for the three months ended March 31, 2016 from $138.7 million for the same period in 2015. Both segments were able to achieve small increases in premium income despite increasingly competitive market conditions. The increase in the property and casualty insurance segment is attributed to an increase in new business, small rate level increases on renewal business and growth in insured exposures, and reflects the cost of the new aggregate catastrophe excess of loss reinsurance program with Employers Mutual. The majority of the increase in the reinsurance segment is due to a reduction in the cost of the revised excess of loss reinsurance program with Employers Mutual. Rate levels for both segments continue to be constrained by increased competition, especially for quality accounts with good loss experience. Average rate level increases were in the low single-digits in the property and casualty insurance segment during the first three months of 2016, and are expected to remain at that level during the remainder of the year. The January 1, 2016 renewal season, when approximately 70 percent of the reinsurance segment's business renews, saw continued pricing pressure, though the deterioration in pricing has slowed considerably from that experienced in 2015.

Premiums earned for the property and casualty insurance segment increased 2.1 percent to $110.4 million for the three months ended March 31, 2016 from $108.2 million for the same period in 2015. This increase is primarily attributed to an increase in new business, small rate level increases on renewal business and growth in insured exposures, and reflects $3.2 million of premiums ceded to Employers Mutual for the cost of the new aggregate catastrophe excess of loss reinsurance program. Renewal business increased three percent during the first three months of 2016. Excluding the workers' compensation line of business, renewal rates across both commercial and personal lines of business increased approximately two percent during the first three months of 2016. The continued implementation of some mandatory rate reductions on workers' compensation business in a few states reduced the overall renewal rate increase to approximately one percent. Renewal rates are expected to continue to increase at low single-digit levels through the remainder of the year due to competition constraints. New business premium (representing 15 percent of the pool participants’ direct written premiums) is approximately ten percent higher than the same period in 2015. Commercial lines accounted for most of the increase in new business premium; however, personal lines also had an increase in new business premiums (approximately four percent) after several years of declining premiums. Commercial lines new business continues to be in the desired range of growth, and was strongest outside of the core Midwest market. This growth helps diversify the pool participants' book of business geographically, while staying consistent with the industry and line of business mix of the existing book of business. Management continues to focus on the development and implementation of its new personal lines strategy, and is encouraged by the increase in personal lines new business premium. During the first three months of 2016, the overall policy retention rate remained strong at 86.8 percent (commercial lines at 87.0 percent and personal lines at 84.6 percent). These retention rates approximate those at the end of 2015.

Premiums earned for the reinsurance segment increased 5.8 percent to $32.3 million for the three months ended March 31, 2016 from $30.5 million for the same period in 2015. This increase is largely attributed to a $1.7 million reduction in the cost of the revised excess of loss reinsurance program with Employers Mutual. As previously reported, the reinsurance subsidiary will be purchasing additional reinsurance protection (in the form of Industry Loss Warranties (ILWs)) from external parties in 2016 to provide increased protection in peak exposure territories. In 2015, the ILWs were purchased by Employers Mutual, but the cost of the ILWs was included in the premium Employers Mutual charged for the excess of loss reinsurance protection. The reinsurance subsidiary purchased its first ILW late in the first quarter for $1.1 million, and $92,000 of ceded earned premium was recognized on this ILW during the first quarter. Excluding the reduction in the cost of the revised excess of loss reinsurance program with Employers Mutual, premiums earned were relatively flat, with increases in the pro rata property and liability lines of business being mostly offset by a decrease in the marine business. The decline in the marine business is attributed to the offshore energy and liability proportional account, and was driven by reduced participation in the account and a decrease in the number of oil rigs in service due to the significant decline in oil prices. Rates-on-line for excess of loss reinsurance renewal business declined less than two percent during the January 1, 2016 renewal season, and the decline was partially offset by a slight increase in limits purchased. During 2015, the ceded premium associated with the excess of loss reinsurance program was allocated to all lines of business because it was a quota share arrangement whereby the premium was based on total assumed reinsurance premiums written. Beginning in 2016, the ceded premium for the revised excess of loss reinsurance program is being allocated to only the excess of loss property line of business.

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Losses and settlement expenses

Losses and settlement expenses increased 12.3 percent to $85.1 million for the three months ended March 31, 2016 from $75.8 million for the same period in 2015. The loss and settlement expense ratio increased to 59.6 percent for the three months ended March 31, 2016 from 54.6 percent for the same period in 2015. The loss and settlement expense ratios for both segments increased from the very low ratios reported in the first quarter of 2015, particularly the reinsurance segment which benefited from an unusually low amount of reported large losses in 2015. The actuarial analysis of the Company’s carried reserves as of December 31, 2015 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 56.2 percent for the three months ended March 31, 2016 from 52.4 percent for the same period in 2015. Approximately 1.5 percentage points of the increase is attributed to the cost of the new aggregate catastrophe excess of loss reinsurance program with Employers Mutual. Catastrophe and storm losses accounted for 3.1 percentage points of the loss and settlement expense ratio for the three months ended March 31, 2016, up from 1.6 percentage points during the same period in 2015, but lower than the most recent 10-year average for this period of 4.7 percentage points. Large losses (which the Company defines as losses greater than $500,000 for the EMC Insurance Companies' pool, excluding catastrophe losses) accounted for 2.7 percentage points of the loss and settlement expense ratio for the three months ended March 31, 2016, compared to 3.9 percentage points for the same period in 2015. Favorable development on prior years' reserves decreased substantially for the three months ended March 31, 2016 compared to the same period in 2015. 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 71.3 percent for the three months ended March 31, 2016 from 62.6 percent for the same period in 2015. This increase is primarily attributed to a higher level of reported large losses (losses greater than $100,000) compared to the unusually low amount reported during the first quarter of 2015, and a lower amount of favorable development on prior years' reserves. The decrease in the cost of the revised excess of loss reinsurance program with Employers Mutual produced an approximate 3.0 percentage point decrease in the loss and settlement expense ratio for the first quarter of 2016 compared to what the ratio would have been under the previous program. Catastrophe and storm losses accounted for 8.5 percentage points of the loss and settlement expense ratio for the three months ended March 31, 2016, down slightly from the 9.2 percentage points reported during the same period in 2015 and below the most recent 10-year average for this period of 9.0 percentage points.

Acquisition and other expenses

Acquisition and other expenses increased 2.8 percent to $47.2 million for the three months ended March 31, 2016 from $45.9 million for the same period in 2015. The acquisition expense ratio was unchanged at 33.1 percent for both three month periods ended March 31, 2016 and 2015. A decrease in commission expense in the reinsurance segment was offset by an increase in policyholder dividend expense in the property and casualty insurance segment.

The acquisition expense ratio for the property and casualty insurance segment increased to 36.0 percent for the three months ended March 31, 2016 from 34.6 percent for the same period in 2015. Approximately 1.0 percentage point of the increase is attributed to the cost of the new aggregate catastrophe excess of loss reinsurance program with Employers Mutual. The remaining increase is largely attributed to higher policyholder dividend expense resulting from favorable loss experience on several safety dividend groups.

The acquisition expense ratio for the reinsurance segment decreased to 22.9 percent for the three months ended March 31, 2016 from 27.6 percent for the same period in 2015. The higher ratio in 2015 was primarily attributed to a $1.1 million commission adjustment reported by a ceding company during the first quarter of 2015 that related to prior periods.

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Investment results

Net investment income increased 9.1 percent to $12.2 million for the three months ended March 31, 2016 from $11.2 million for the same period in 2015. Most of this increase is attributed to an increase in dividend income, which includes the receipt of approximately $480,000 of special dividends, but interest income also increased due to a higher average invested balance in fixed maturity securities. Current interest rate levels remain below the average book yield 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, has remained relatively steady at 3.9 percent since March 31, 2015. The effective duration of the fixed maturity portfolio, excluding interest-only securities, declined slightly to 4.4 at March 31, 2016 from 4.6 at December 31, 2015. The Company’s equity portfolio produced dividend income of $2.0 million during the three months ended March 31, 2016 compared to $1.3 million during the same period in 2015.

The Company had net realized investment losses of $1.1 million during the three months ended March 31, 2016 compared to net realized investment gains of $783,000 during the same period in 2015. The reported amounts include losses of $1.9 million and $1.4 million, respectively, attributed to declines in the carrying value of a limited partnership that the Company invests in to help protect it from a sudden and significant decline in the value of its equity portfolio (an equity tail-risk hedging strategy). The Company recognized "other-than-temporary" impairment losses of $431,000 during the three months ended March 31, 2016, compared to $618,000 during the same period in 2015. These impairment losses were recognized on securities held in the Company's equity portfolio.

Other income

Included in other income are 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 $143,000 during the first three months of 2016 compared to a gain of $1.4 million during the same period in 2015.

Income tax

Income tax expense decreased to $6.2 million for the three months ended March 31, 2016 from $9.6 million for the same period in 2015. The effective tax rate for the three months ended March 31, 2016 was 29.8 percent, compared to 32.1 percent for the same period in 2015. The primary contributors to the differences between these effective tax rates and the United States federal corporate tax rate of 35 percent are tax-exempt interest income earned and the dividends received deduction.

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 cash flows from operations of $5.9 million and $5.7 million during the first three months of 2016 and 2015, 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 2016 without prior regulatory approval is approximately $49.8 million. The Company received $190,000 and $227,000 of dividends from its insurance subsidiaries and paid cash dividends to its stockholders totaling $3.9 million and $3.4 million during the first three months of 2016 and 2015, respectively.

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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 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, 2016 and December 31, 2015, the Company had net unrealized holding gains, net of deferred taxes, on its fixed maturity securities available-for-sale of $32.1 million and $20.0 million, 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 intends to hold fixed maturity securities to maturity, 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.

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 $8.4 million and $9.9 million in minority ownership interests in limited partnerships and limited liability companies at March 31, 2016 and December 31, 2015, respectively. During the first quarters of 2015 and 2014, the Company invested $4.0 million and $4.4 million, respectively, 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.

During 2015, the Company began participating in a reverse repurchase arrangement, involving the purchase of investment securities from third-party sellers with the agreement that the purchased securities be sold back to the third-party sellers for agreed-upon prices at specified future dates. The third-party sellers are required to pledge collateral with a value greater than the amount of cash received in the transactions. In accordance with GAAP, the investment securities purchased under the reverse repurchase agreements are not reflected in the Company's consolidated balance sheets, but instead a receivable is recorded for the principal amount lent. The Company's receivable under reverse repurchase agreements was $16.9 million at both March 31, 2016 and December 31, 2015.

The Company’s cash balance was $697,000 and $224,000 at March 31, 2016 and December 31, 2015, respectively.

During the first three months of 2016, Employers Mutual made no contributions to its qualified pension plan or postretirement benefit plans. The Company’s share of Employers Mutual’s 2016 planned contribution to its pension plan, if made, will be approximately $2.5 million. No contributions will be made to the VEBA trust in 2016.

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During the first three months of 2015, Employers Mutual made no contributions to its qualified pension plan or postretirement benefit plans. The Company reimbursed Employers Mutual $1.2 million for its share of the total 2015 pension contribution (no contributions were made to the postretirement benefit plans during 2015).

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, 2016.

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, 2015, the Company’s insurance subsidiaries had total adjusted statutory capital of $485.2 million, which is well in excess of the minimum risk-based capital requirement of $77.4 million.

The Company’s total cash and invested assets at March 31, 2016 and December 31, 2015 are summarized as follows:



	March 31, 2016
($ in thousands)	Amortized cost		Fair value		Percent of total fair value		Carrying value
Fixed maturity securities available-for-sale	$	1,116,627	$	1,166,022	81.2	%	$	1,166,022
Equity securities available-for-sale	151,046		212,582		14.8		212,582
Cash	697		697		—		697
Short-term investments	48,447		48,447		3.4		48,447
Other long-term investments	8,440		8,440		0.6		8,440
	$	1,325,257	$	1,436,188	100.0	%	$	1,436,188



	December 31, 2015
($ in thousands)	Amortized cost		Fair value		Percent of total fair value		Carrying value
Fixed maturity securities available-for-sale	$	1,130,217	$	1,161,025	82.0	%	$	1,161,025
Equity securities available-for-sale	144,176		206,243		14.6		206,243
Cash	224		224		—		224
Short-term investments	38,599		38,599		2.7		38,599
Other long-term investments	9,930		9,930		0.7		9,930
	$	1,323,146	$	1,416,021	100.0	%	$	1,416,021

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The amortized cost and estimated fair value of fixed maturity and equity securities at March 31, 2016 were as follows:



($ in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Securities available-for-sale:
Fixed maturity securities:
U.S. treasury	$	7,824	$	314	$	—	$	8,138
U.S. government-sponsored agencies	187,366		2,145		63		189,448
Obligations of states and political subdivisions	312,476		28,304		—		340,780
Commercial mortgage-backed	40,098		1,661		2		41,757
Residential mortgage-backed	93,625		2,232		7,735		88,122
Other asset-backed	15,901		872		129		16,644
Corporate	459,337		23,206		1,410		481,133
Total fixed maturity securities	1,116,627		58,734		9,339		1,166,022

Equity securities:
Common stocks:
Financial services	26,311		7,820		688		33,443
Information technology	18,821		9,757		59		28,519
Healthcare	15,573		9,039		172		24,440
Consumer staples	12,440		7,148		7		19,581
Consumer discretionary	12,729		9,349		41		22,037
Energy	16,815		5,596		1,821		20,590
Industrials	13,942		9,697		118		23,521
Other	16,384		5,136		28		21,492
Non-redeemable preferred stocks	18,031		1,013		85		18,959
Total equity securities	151,046		64,555		3,019		212,582
Total securities available-for-sale	$	1,267,673	$	123,289	$	12,358	$	1,378,604

The Company’s property and casualty insurance subsidiaries have $25.0 million of surplus notes issued to Employers Mutual. The interest rate on the surplus notes is 1.35 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 are 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 $84,000 during the first three months of 2016 and 2015. During the first quarter of 2016, the Company’s property and casualty insurance subsidiaries paid Employers Mutual for the interest that had been accrued on the surplus notes during 2015.

As of March 31, 2016, the Company had no material commitments for capital expenditures.

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Off-Balance Sheet Arrangements

Employers Mutual collects from agents, policyholders and ceding companies all written 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 losses and settlement expenses recoverable under the reinsurance contracts protecting the pool participants and, starting in 2016, the reinsurance subsidiary, as well as the fronting business ceded to the reinsurance subsidiary. Employers Mutual settles with the pool participants (monthly) and the reinsurance subsidiary (quarterly) the premiums written from these insurance policies and the paid losses and settlement expenses recoverable under the external reinsurance contracts, providing full credit for the premiums written and the paid losses and settlement expenses recoverable under the external reinsurance contracts 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 underlying coverage periods, Employers Mutual carries a substantial receivable balance for insurance and reinsurance premiums in process of collection and, to a lesser extent, paid losses and settlement expenses recoverable from the external reinsurance companies. 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 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 $366,000. 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

The Company recorded $431,000 of "other-than-temporary" investment impairment losses during the three months ended March 31, 2016, compared to $618,000 during the same period in 2015. The impairment losses were recognized on securities held in the Company's equity portfolio.

At March 31, 2016, the Company had unrealized losses on available-for-sale securities as presented in the following table. 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, for fixed maturity securities, the amount of collateral available. 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 carrying value of these securities were not “other-than-temporarily” impaired at March 31, 2016. 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 $8.0 million, 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, 2016.



	Less than twelve months				Twelve months or longer				Total
($ in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Fixed maturity securities:
U.S. government-sponsored agencies	$	6,987	$	5	$	11,440	$	58	$	18,427	$	63
Commercial mortgage-backed	5,101		2		—		—		5,101		2
Residential mortgage-backed	11,820		1,443		23,906		6,292		35,726		7,735
Other asset-backed	5,331		129		—		—		5,331		129
Corporate	27,439		740		19,671		670		47,110		1,410
Total, fixed maturity securities	56,678		2,319		55,017		7,020		111,695		9,339
Equity securities:
Common stocks:
Financial services	7,858		688		—		—		7,858		688
Information technology	2,419		59		—		—		2,419		59
Healthcare	2,855		172		—		—		2,855		172
Consumer staples	89		7		—		—		89		7
Consumer discretionary	1,094		41		—		—		1,094		41
Energy	5,979		1,821		—		—		5,979		1,821
Industrials	1,586		118		—		—		1,586		118
Other	1,646		28		—		—		1,646		28
Non-redeemable preferred stocks	—		—		4,419		85		4,419		85
Total equity securities	23,526		2,934		4,419		85		27,945		3,019
Total temporarily impaired securities	$	80,204	$	5,253	$	59,436	$	7,105	$	139,640	$	12,358

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, 2016, the Company held $3.2 million of non-investment grade fixed maturity securities in a net unrealized gain position of $67,000.

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Following is a schedule of gross realized losses recognized in the first three months of 2016. 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		Total gross realized losses
($ in thousands)	Book value		Sales price		Gross realized losses		"Other-than- temporary" impairment losses		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	2,995		2,696		299		—		299
Subtotal, fixed maturity securities	2,995		2,696		299		—		299

Equity securities:
Three months or less	7,202		6,123		1,079		—		1,079
Over three months to six months	455		420		35		13		48
Over six months to nine months	360		354		6		418		424
Over nine months to twelve months	900		828		72		—		72
Over twelve months	—		—		—		—		—
Subtotal, equity securities	8,917		7,725		1,192		431		1,623

Total realized losses	$	11,912	$	10,421	$	1,491	$	431	$	1,922

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 2024. Employers Mutual has entered into various leases for branch and service office facilities with lease terms expiring through 2025. All of these lease costs are included as expenses under the pooling agreement. The Company’s contractual obligations as of March 31, 2016 did not change materially from those presented in the Company’s 2015 Form 10-K.

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 $883,000 and $912,000 as of March 31, 2016 and December 31, 2015, respectively. Premium tax offsets of $989,000 and $1.1 million, which are related to prior guarantee fund payments and current assessments, have been accrued as of March 31, 2016 and December 31, 2015, 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 had accrued estimated second-injury fund assessments of $1.8 million and $1.9 million as of March 31, 2016 and December 31, 2015, 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 $110,000 at December 31, 2015. The Company had a contingent liability for the aggregate guaranteed amount of the annuities of $183,000 at December 31, 2015 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, 2016. The probability of a material loss due to failure of performance by the issuers of these annuities is considered remote.

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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 owned by 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 2015 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 Securities Exchange Act of 1934) 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.

There were no changes in the Company’s internal control over financial reporting that occurred during the first quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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, 2016:



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 ($ in thousands) (2) (3)
1/1/2016 - 1/31/2016	17,380	$	22.14	17,300	$	19,108
2/1/2016 - 2/29/2016	108	24.06		—	19,108
3/1/2016 - 3/31/2016	1,271	25.31		—	19,108
Total	18,759	$	22.37	17,300


(1)	Included in this column are shares purchased in the open market to fulfill the Company's obligations under its dividend reinvestment and common stock purchase plan.


(2)	On November 3, 2011, the Company’s Board of Directors authorized a $15.0 million stock repurchase program. This program does not have an expiration date. A total of $14.6 million remains available in this plan for the purchase of additional shares.

(3)

On May 12, 2005, the Company announced that its parent company, Employers Mutual, had initiated a $15.0 million stock purchase program under which Employers Mutual may purchase shares of the Company’s common stock in the open market. This purchase program 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 $4.5 million remains in this program.

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ITEM 6.	EXHIBITS



10.1.1		EMC Insurance Companies reinsurance pooling agreements between Employers Mutual Casualty Company and certain of its affiliated companies, as amended

10.2.2		Summary of compensation for the Company's non-employee directors*

31.1		Certification of President, Chief Executive Officer and Treasurer 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, Chief Executive Officer and Treasurer 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

* Indicates management contract or compensatory plan or arrangement.

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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 6, 2016.

EMC INSURANCE GROUP INC.

Registrant

/s/ Bruce G. Kelley

Bruce G. Kelley

President, Chief Executive Officer, Treasurer and Director

(Principal Executive Officer)

/s/ Mark E. Reese

Mark E. Reese

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

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EMC INSURANCE GROUP INC. AND SUBSIDIARIES

INDEX TO EXHIBITS



Exhibit number	Item
10.1.1*	EMC Insurance Companies reinsurance pooling agreements between Employers Mutual Casualty Company and certain of its affiliated companies, as amended

10.2.2*	Summary of compensation for the Company's non-employee directors

31.1*	Certification of President, Chief Executive Officer and Treasurer 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, Chief Executive Officer and Treasurer 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

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