10-Q 1 a201863010q.htm 10-Q Document

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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 June 30, 2018
OR
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, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
o
Large accelerated filer
ý
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
 
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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
As of July 31, 2018, there were 21,555,202 shares of common stock, $1.00 par value, issued and outstanding.



TABLE OF CONTENTS




PART I.
FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
June 30, 
 2018
 
December 31, 
 2017
($ in thousands, except share and per share amounts)
 
(Unaudited)
 

ASSETS
 
 
 
 
Investments:
 
 
 
 
Fixed maturity securities available-for-sale, at fair value (amortized cost $1,247,717 and $1,253,166)
 
$
1,241,699

 
$
1,275,016

Equity investments, at fair value (cost $148,866 and $144,274)
 
222,397

 
228,115

Equity investments, at alternative measurement of cost less impairments
 
3,200

 

Other long-term investments
 
16,654

 
13,648

Short-term investments
 
23,447

 
23,613

Total investments
 
1,507,397

 
1,540,392

 
 
 
 
 
Cash
 
259

 
347

Reinsurance receivables due from affiliate
 
31,929

 
31,650

Prepaid reinsurance premiums due from affiliate
 
14,376

 
12,789

Deferred policy acquisition costs (affiliated $43,634 and $40,848)
 
43,861

 
41,114

Prepaid pension and postretirement benefits due from affiliate
 
22,274

 
20,683

Accrued investment income
 
10,424

 
11,286

Amounts receivable under reverse repurchase agreements
 
16,500

 
16,500

Accounts receivable
 
1,700

 
1,604

Income taxes recoverable
 
5,116

 

Goodwill
 
942

 
942

Other assets (affiliated $3,943 and $4,423)
 
4,530

 
4,633

Total assets
 
$
1,659,308

 
$
1,681,940

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

See accompanying Notes to Consolidated Financial Statements.

3


EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
 
June 30, 
 2018
 
December 31, 
 2017
($ in thousands, except share and per share amounts)
 
(Unaudited)
 

LIABILITIES
 
 
 
 
Losses and settlement expenses (affiliated $752,852 and $726,413)
 
$
756,869

 
$
732,612

Unearned premiums (affiliated $265,491 and $256,434)
 
266,500

 
257,797

Other policyholders' funds (all affiliated)
 
8,027

 
10,013

Surplus notes payable to affiliate
 
25,000

 
25,000

Amounts due affiliate to settle inter-company transaction balances
 
588

 
367

Pension benefits payable to affiliate
 
4,034

 
4,185

Income taxes payable
 

 
544

Deferred income taxes
 
7,807

 
15,020

Other liabilities (affiliated $21,991 and $27,520)
 
22,416

 
32,556

Total liabilities
 
1,091,241

 
1,078,094

 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
Common stock, $1 par value, authorized 30,000,000 shares; issued and outstanding, 21,526,346 shares in 2018 and 21,455,545 shares in 2017
 
21,526

 
21,455

Additional paid-in capital
 
126,308

 
124,556

Accumulated other comprehensive income (loss)
 
(5,944
)
 
83,384

Retained earnings
 
426,177

 
374,451

Total stockholders' equity
 
568,067

 
603,846

Total liabilities and stockholders' equity
 
$
1,659,308

 
$
1,681,940

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

See accompanying Notes to Consolidated Financial Statements.


4


EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 
 
Three months ended 
 June 30,
($ in thousands, except share and per share amounts)
 
2018
 
2017
REVENUES
 
 
 
 
Premiums earned (affiliated $156,714 and $148,460)
 
$
157,946

 
$
149,837

Net investment income
 
11,778

 
11,171

Net realized investment gains (losses) and, beginning in 2018, change in unrealized investment gains on equity investments
 
(5,860
)
 
3,387

Other income (affiliated $2,582 and $1,227)
 
2,773

 
1,031

Total revenues
 
166,637

 
165,426

 
 
 
 
 
LOSSES AND EXPENSES
 
 
 
 
Losses and settlement expenses (affiliated $119,119 and $107,223)
 
119,091

 
107,228

Dividends to policyholders (all affiliated)
 
2,386

 
2,416

Amortization of deferred policy acquisition costs (affiliated $29,122 and $27,185)
 
29,429

 
27,533

Other underwriting expenses (affiliated $22,458 and $20,146)
 
22,451

 
20,133

Interest expense (all affiliated)
 
171

 
85

Other expenses (affiliated $486 and $514)
 
831

 
802

Total losses and expenses
 
174,359

 
158,197

Income (loss) before income tax expense (benefit)
 
(7,722
)
 
7,229

 
 
 
 
 
INCOME TAX EXPENSE (BENEFIT)
 
 
 
 
Current
 
(3,311
)
 
2,069

Deferred
 
584

 
(344
)
Total income tax expense (benefit)
 
(2,727
)
 
1,725

Net income (loss)
 
$
(4,995
)
 
$
5,504

 
 
 
 
 
Net income (loss) per common share - basic and diluted
 
$
(0.24
)
 
$
0.26

 
 
 
 
 
Dividend per common share
 
$
0.22

 
$
0.21

 
 
 
 
 
Average number of common shares outstanding - basic and diluted
 
21,529,727

 
21,276,627

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

See accompanying Notes to Consolidated Financial Statements.


5


EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 
 
Six months ended June 30,
($ in thousands, except share and per share amounts)
 
2018
 
2017
REVENUES
 
 
 
 
Premiums earned (affiliated $310,960, and $292,071)
 
$
313,732

 
$
294,324

Net investment income
 
23,149

 
22,178

Net realized investment gains (losses) and, beginning in 2018, change in unrealized investment gains on equity investments
 
(11,253
)
 
2,760

Other income (affiliated $4,163 and $2,236)
 
4,388

 
1,901

Total revenues
 
330,016

 
321,163

 
 
 
 
 
LOSSES AND EXPENSES
 
 
 
 
Losses and settlement expenses (affiliated $229,689 and $201,994)
 
229,719

 
203,513

Dividends to policyholders (all affiliated)
 
4,506

 
5,138

Amortization of deferred policy acquisition costs (affiliated $56,039 and $53,780)
 
56,721

 
54,344

Other underwriting expenses (affiliated $45,378 and $40,839)
 
45,306

 
40,767

Interest expense (all affiliated)
 
313

 
169

Other expenses (affiliated $984 and $981)
 
1,701

 
1,563

Total losses and expenses
 
338,266

 
305,494

Income (loss) before income tax expense (benefit)
 
(8,250
)
 
15,669

 
 
 
 
 
INCOME TAX EXPENSE (BENEFIT)
 
 
 
 
Current
 
(2,105
)
 
4,115

Deferred
 
(1,074
)
 
(754
)
Total income tax expense (benefit)
 
(3,179
)
 
3,361

Net income (loss)
 
$
(5,071
)
 
$
12,308

 
 
 
 
 
Net income (loss) per common share - basic and diluted
 
$
(0.24
)
 
$
0.58

 
 
 
 
 
Dividend per common share
 
$
0.44

 
$
0.42

 
 
 
 
 
Average number of common shares outstanding - basic and diluted
 
21,515,812

 
21,265,529

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

See accompanying Notes to Consolidated Financial Statements.



6


EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three months ended 
 June 30,
($ in thousands)
 
2018
 
2017
Net income (loss)
 
$
(4,995
)
 
$
5,504

 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
Unrealized holding gains (losses) on investment securities not reflected in net income (loss), net of deferred income tax expense (benefit) of $(2,014) and $4,455
 
(7,577
)
 
8,274

Reclassification adjustment for net realized investment (gains) losses included in net income (loss), net of income tax (expense) benefit of $1,153 and $(1,646)
 
4,337

 
(3,056
)
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income, net of deferred income tax expense of $(143) and $(146):
 
 
 
 
Net actuarial loss
 
85

 
240

Prior service credit
 
(622
)
 
(513
)
Total reclassification adjustment associated with affiliate's pension and postretirement benefit plans
 
(537
)
 
(273
)
 
 
 
 
 
Other comprehensive income (loss)
 
(3,777
)
 
4,945

 
 
 
 
 
Total comprehensive income (loss)
 
$
(8,772
)
 
$
10,449

 
 
Six months ended 
 June 30,
($ in thousands)
 
2018
 
2017
Net income (loss)
 
$
(5,071
)
 
$
12,308

 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
Unrealized holding gains (losses) on investment securities not reflected in net income (loss), net of deferred income tax expense (benefit) of $(7,056) and $9,681
 
(26,546
)
 
17,979

Reclassification adjustment for net realized investment (gains) losses included in net income (loss), net of income tax (expense) benefit of $1,204 and $(2,227)
 
4,530

 
(4,135
)
Reclassification adjustment for amounts amortized into net periodic pension and postretirement benefit income, net of deferred income tax expense of $(287) and $(293):
 
 
 
 
Net actuarial loss
 
166

 
479

Prior service credit
 
(1,244
)
 
(1,024
)
Total reclassification adjustment associated with affiliate's pension and postretirement benefit plans
 
(1,078
)
 
(545
)
 
 
 
 
 
Other comprehensive income (loss)
 
(23,094
)
 
13,299

 
 
 
 
 
Total comprehensive income (loss)
 
$
(28,165
)
 
$
25,607

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

See accompanying Notes to Consolidated Financial Statements.


7


EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)

($ in thousands, except per share amounts)
 
Common
stock
 
Additional
paid-in capital
 
Accumulated
other
comprehensive
income (loss)
 
Retained
earnings
 
Total
stockholders'
equity
Balance at December 31, 2017
 
$
21,455

 
$
124,556

 
$
83,384

 
$
374,451

 
$
603,846

Cumulative adjustment for adoption of financial instruments recognition and measurement changes
 


 


 
(66,234
)
 
66,234

 

Issuance of common stock through stock plans
 
127

 
3,112

 
 

 
 

 
3,239

Repurchase of common stock
 
(56
)
 
(1,399
)
 
 

 
 

 
(1,455
)
Increase resulting from stock-based compensation expense
 
 

 
39

 
 

 
 

 
39

Other comprehensive income (loss)
 
 

 
 

 
(23,094
)
 
 

 
(23,094
)
Net income (loss)
 
 

 
 

 
 

 
(5,071
)
 
(5,071
)
Dividends paid to public stockholders ($0.44 per share)
 
 

 
 

 
 

 
(4,257
)
 
(4,257
)
Dividends paid to affiliate ($0.44 per share)
 
 

 
 

 
 

 
(5,180
)
 
(5,180
)
Balance at June 30, 2018
 
$
21,526

 
$
126,308

 
$
(5,944
)
 
$
426,177

 
$
568,067


($ in thousands, except per share amounts)
 
Common
stock
 
Additional
paid-in capital
 
Accumulated
other
comprehensive
income (loss)
 
Retained
earnings
 
Total
stockholders'
equity
Balance at December 31, 2016
 
$
21,223

 
$
119,054

 
$
46,081

 
$
366,984

 
$
553,342

Issuance of common stock through stock plans
 
168

 
3,961

 
 

 
 

 
4,129

Repurchase of common stock
 
(64
)
 
(1,694
)
 
 

 
 

 
(1,758
)
Increase resulting from stock-based compensation expense
 
 

 
30

 
 

 
 

 
30

Other comprehensive income (loss)
 
 

 
 

 
13,299

 
 

 
13,299

Net income (loss)
 
 

 
 

 
 

 
12,308

 
12,308

Dividends paid to public stockholders ($0.42 per share)
 
 

 
 

 
 

 
(3,924
)
 
(3,924
)
Dividends paid to affiliate ($0.42 per share)
 
 

 
 

 
 

 
(4,944
)
 
(4,944
)
Balance at June 30, 2017
 
$
21,327

 
$
121,351

 
$
59,380

 
$
370,424

 
$
572,482

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

See accompanying Notes to Consolidated Financial Statements.



8


EMC INSURANCE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six months ended 
 June 30,
($ in thousands)
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net income (loss)
 
$
(5,071
)
 
$
12,308

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Losses and settlement expenses (affiliated $26,439 and $19,257)
 
24,257

 
18,959

Unearned premiums (affiliated $9,057 and $11,906)
 
8,703

 
11,477

Other policyholders' funds due to affiliate
 
(1,986
)
 
(603
)
Amounts due to/from affiliate to settle inter-company transaction balances
 
221

 
(6,396
)
Net pension and postretirement benefits due from affiliate
 
(3,107
)
 
(579
)
Reinsurance receivables due from affiliate
 
(279
)
 
163

Prepaid reinsurance premiums due from affiliate
 
(1,587
)
 
(5,618
)
Commissions payable (affiliated $(5,135) and $(4,895))
 
(5,066
)
 
(4,904
)
Deferred policy acquisition costs (affiliated $(2,786) and $(215))
 
(2,747
)
 
(105
)
Accrued investment income
 
862

 
149

Current income tax
 
(5,660
)
 
(2,902
)
Deferred income tax
 
(1,074
)
 
(754
)
Net realized investment gains (losses) and, beginning in 2018, change in unrealized investment gains on equity investments
 
11,253

 
(2,760
)
Other, net (affiliated $125 and $(2,247))
 
4,238

 
3,961

Total adjustments to reconcile net income (loss) to net cash provided by operating activities
 
28,028

 
10,088

Net cash provided by operating activities
 
22,957

 
22,396

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Purchases of fixed maturity securities available-for-sale
 
(176,606
)
 
(101,700
)
Disposals of fixed maturity securities available-for-sale
 
166,757

 
81,762

Purchases of equity investments
 
(37,256
)
 
(28,859
)
Disposals of equity investments
 
34,594

 
36,098

Purchases of other long-term investments
 
(5,407
)
 
(11,084
)
Disposals of other long-term investments
 
2,360

 
857

Net (purchases) disposals of short-term investments
 
166

 
3,535

Net receipts under reverse repurchase agreements
 

 
3,500

Net cash used in investing activities
 
(15,392
)
 
(15,891
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Issuance of common stock through affiliate’s stock plans
 
3,239

 
4,129

Repurchase of common stock
 
(1,455
)
 
(1,758
)
Dividends paid to stockholders (affiliated $(5,180) and $(4,944))
 
(9,437
)
 
(8,868
)
Net cash used in financing activities
 
(7,653
)
 
(6,497
)
NET INCREASE (DECREASE) IN CASH
 
(88
)
 
8

Cash at the beginning of the year
 
347

 
307

Cash at the end of the quarter
 
$
259

 
$
315

All affiliated balances presented above are the result of related party transactions with Employers Mutual.
See accompanying Notes to Consolidated Financial Statements.

9


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, 2017 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.
In reading these financial statements, reference should be made to the Company’s 2017 Form 10-K or the 2017 Annual Report to Stockholders for more detailed footnote information.

Accounting Pronouncements Adopted
In January 2016, the Financial Accounting Standards Board (FASB) updated its guidance related to the Financial Instruments-Overall Subtopic 825-10 of the Accounting Standards CodificationTM (Codification or 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 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. Equity investments that do not have a readily determinable fair value may be measured at estimated fair value or cost less impairment. All of the Company's common and preferred stock equity investments were already measured at fair value, as they were classified as available-for-sale with changes in fair value recognized in other comprehensive income (excludes those investments that were consolidated and those that were accounted for under the equity method of accounting). The Company adopted this guidance on January 1, 2018, recording a cumulative-effect adjustment that moved $66.2 million from accumulated other comprehensive income to retained earnings, which is the amount of net unrealized investment gains on available-for-sale equity securities as of December 31, 2017, net of deferred income taxes. A privately placed non-redeemable convertible preferred stock investment in a start-up technology company was determined to not have a readily determinable fair value. As such, the cost less impairment alternative measurement is being used for this investment in lieu of fair value. Management uses the equity method of accounting for certain investment company limited partnerships classified as other long-term investments in which the Company has minor ownership interests. In connection with the adoption of this new guidance, beginning January 1, 2018, the equity adjustments for these investments are being reported as realized investment gains and losses from other long-term investments, rather than net investment income.

10


In March 2017, the FASB issued updated guidance in Compensation-Retirement Benefits Topic 715 of the ASC. The objective of this update is to improve the presentation of net periodic pension and postretirement benefit costs by disaggregating the components of these expenses (disclosing the service cost component separately from the other components) for income statement reporting, if a subtotal of income from operations is presented. The Company does not report a subtotal of income from operations in its financial statements. Also included in this update is a prohibition against including components of the net periodic pension and postretirement benefit costs, other than the service cost component, in any capitalized assets. In conjunction with the adoption of this updated guidance, management elected to report all components of net periodic pension and postretirement benefit income, other than the service cost component, as other income in the consolidated statements of income. The service cost component continues to be reported in other underwriting expenses. This change in reporting was applied retrospectively for comparison purposes and did not impact the net income/loss amounts reported, as other income and other underwriting expenses increased by the same amount ($1.9 million and $1.3 million for the three months and $3.7 million and $2.6 million for the six months ended June 30, 2018 and 2017, respectively). The prohibition against including net periodic pension and postretirement benefit costs, other than the service cost component, in capitalized assets was adopted prospectively on January 1, 2018. The impact of the exclusion of these costs from capitalized assets resulted in a negligible impact on the deferred policy acquisition cost asset calculation at June 30, 2018 compared to that which would have been calculated under previous guidance.

2.
TRANSACTIONS WITH AFFILIATES
An inter-company reinsurance program is in place between the Company's insurance subsidiaries in the property and casualty insurance segment and Employers Mutual. 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, 2018 through June 30, 2018, and has a retention of $22.0 million and a limit of $24.0 million. The total cost of this treaty is approximately $6.0 million. The second treaty is effective from July 1, 2018 through December 31, 2018, and has a retention of $15.0 million and a limit of $12.0 million. The total cost of this treaty is approximately $1.4 million. The terms of these treaties were the same in 2017, with the exception of the retention amount contained in the treaty covering the first half of the year, which was $20.0 million. Losses and settlement expenses ceded to Employers Mutual under the inter-company reinsurance program totaled $317,000 and $784,000 for the three and six months ended June 30, 2018, respectively, compared to $16.0 million and $16.6 million for the same periods in 2017. 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) are subject to the terms of these treaties, and there is no co-participation provision.
An inter-company reinsurance program is also in place between the Company's reinsurance subsidiary and Employers Mutual. 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 $1.6 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 $3.6 million. Any losses recovered under the per occurrence treaty inure to the benefit of the aggregate treaty, and only catastrophic events with total losses greater than $500,000 are subject to the terms of the aggregate treaty. The terms of the program were the same in 2017 with the exception of the costs, which were $1.7 million for the per occurrence treaty and $3.2 million for the annual aggregate treaty. Losses and settlement expenses ceded to Employers Mutual under the inter-company reinsurance program totaled $291,000 and a negative $462,000 for the three and six months ended June 30, 2018, respectively, compared to $1,000 and $10,000 for the three and six months ended June 30, 2017 respectively.

3.
REINSURANCE
The effect of reinsurance on premiums written and earned, and losses and settlement expenses incurred, for the three and six months ended June 30, 2018 and 2017 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 and quota share agreements and inter-company reinsurance programs with Employers Mutual are reported as “affiliated” balances.

11


 
 
Three months ended June 30, 2018
($ in thousands)
 
Property and
casualty
insurance
 
Reinsurance
 
Total
Premiums written
 
 
 
 
 
 
Direct
 
$
98,579

 
$

 
$
98,579

Assumed from nonaffiliates
 
1,284

 
39,232

 
40,516

Assumed from affiliates
 
140,850

 

 
140,850

Ceded to nonaffiliates
 
(7,953
)
 
(6,009
)
 
(13,962
)
Ceded to affiliates
 
(101,559
)
 
(1,312
)
 
(102,871
)
Net premiums written
 
$
131,201

 
$
31,911

 
$
163,112

 
 
 
 
 
 
 
Premiums earned
 
 
 
 
 
 
Direct
 
$
99,011

 
$

 
$
99,011

Assumed from nonaffiliates
 
1,300

 
40,357

 
41,657

Assumed from affiliates
 
131,768

 

 
131,768

Ceded to nonaffiliates
 
(8,593
)
 
(2,594
)
 
(11,187
)
Ceded to affiliates
 
(101,991
)
 
(1,312
)
 
(103,303
)
Net premiums earned
 
$
121,495

 
$
36,451

 
$
157,946

 
 
 
 
 
 
 
Losses and settlement expenses incurred
 
 
 
 
 
 
Direct
 
$
62,069

 
$

 
$
62,069

Assumed from nonaffiliates
 
770

 
27,053

 
27,823

Assumed from affiliates
 
95,713

 
239

 
95,952

Ceded to nonaffiliates
 
(1,911
)
 
(2,165
)
 
(4,076
)
Ceded to affiliates
 
(62,386
)
 
(291
)
 
(62,677
)
Net losses and settlement expenses incurred
 
$
94,255

 
$
24,836

 
$
119,091


12


 
 
Three months ended June 30, 2017
($ in thousands)
 
Property and
casualty
insurance
 
Reinsurance
 
Total
Premiums written
 
 
 
 
 
 
Direct
 
$
93,392

 
$

 
$
93,392

Assumed from nonaffiliates
 
1,290

 
35,596

 
36,886

Assumed from affiliates
 
136,726

 

 
136,726

Ceded to nonaffiliates
 
(8,444
)
 
(5,830
)
 
(14,274
)
Ceded to affiliates
 
(96,373
)
 
(1,212
)
 
(97,585
)
Net premiums written
 
$
126,591

 
$
28,554

 
$
155,145

 
 
 
 
 
 
 
Premiums earned
 
 
 
 
 
 
Direct
 
$
95,376

 
$

 
$
95,376

Assumed from nonaffiliates
 
1,130

 
37,411

 
38,541

Assumed from affiliates
 
125,179

 

 
125,179

Ceded to nonaffiliates
 
(7,142
)
 
(2,549
)
 
(9,691
)
Ceded to affiliates
 
(98,356
)
 
(1,212
)
 
(99,568
)
Net premiums earned
 
$
116,187

 
$
33,650

 
$
149,837

 
 
 
 
 
 
 
Losses and settlement expenses incurred
 
 
 
 
 
 
Direct
 
$
72,811

 
$

 
$
72,811

Assumed from nonaffiliates
 
693

 
26,177

 
26,870

Assumed from affiliates
 
100,380

 
301

 
100,681

Ceded to nonaffiliates
 
(3,564
)
 
(757
)
 
(4,321
)
Ceded to affiliates
 
(88,812
)
 
(1
)
 
(88,813
)
Net losses and settlement expenses incurred
 
$
81,508

 
$
25,720

 
$
107,228


13


 
 
Six months ended June 30, 2018
($ in thousands)
 
Property and
casualty
insurance
 
Reinsurance
 
Total
Premiums written
 
 
 
 
 
 
Direct
 
$
198,623

 
$

 
$
198,623

Assumed from nonaffiliates
 
2,302

 
80,353

 
82,655

Assumed from affiliates
 
271,051

 

 
271,051

Ceded to nonaffiliates
 
(15,923
)
 
(8,014
)
 
(23,937
)
Ceded to affiliates
 
(204,583
)
 
(2,625
)
 
(207,208
)
Net premiums written
 
$
251,470

 
$
69,714

 
$
321,184

 
 
 
 
 
 
 
Premiums earned
 
 
 
 
 
 
Direct
 
$
194,756

 
$

 
$
194,756

Assumed from nonaffiliates
 
2,302

 
81,449

 
83,751

Assumed from affiliates
 
260,916

 

 
260,916

Ceded to nonaffiliates
 
(17,131
)
 
(5,219
)
 
(22,350
)
Ceded to affiliates
 
(200,716
)
 
(2,625
)
 
(203,341
)
Net premiums earned
 
$
240,127

 
$
73,605

 
$
313,732

 
 
 
 
 
 
 
Losses and settlement expenses incurred
 
 
 
 
 
 
Direct
 
$
114,356

 
$

 
$
114,356

Assumed from nonaffiliates
 
1,762

 
53,468

 
55,230

Assumed from affiliates
 
181,680

 
597

 
182,277

Ceded to nonaffiliates
 
(4,902
)
 
(2,564
)
 
(7,466
)
Ceded to affiliates
 
(115,140
)
 
462

 
(114,678
)
Net losses and settlement expenses incurred
 
$
177,756

 
$
51,963

 
$
229,719


14


 
 
Six months ended June 30, 2017
($ in thousands)
 
Property and
casualty
insurance
 
Reinsurance
 
Total
Premiums written
 
 
 
 
 
 
Direct
 
$
190,144

 
$

 
$
190,144

Assumed from nonaffiliates
 
2,209

 
69,101

 
71,310

Assumed from affiliates
 
261,526

 

 
261,526

Ceded to nonaffiliates
 
(16,577
)
 
(7,854
)
 
(24,431
)
Ceded to affiliates
 
(196,104
)
 
(2,425
)
 
(198,529
)
Net premiums written
 
$
241,198

 
$
58,822

 
$
300,020

 
 
 
 
 
 
 
Premiums earned
 
 
 
 
 
 
Direct
 
$
191,274

 
$

 
$
191,274

Assumed from nonaffiliates
 
2,145

 
72,100

 
74,245

Assumed from affiliates
 
247,276

 

 
247,276

Ceded to nonaffiliates
 
(13,626
)
 
(5,186
)
 
(18,812
)
Ceded to affiliates
 
(197,234
)
 
(2,425
)
 
(199,659
)
Net premiums earned
 
$
229,835

 
$
64,489

 
$
294,324

 
 
 
 
 
 
 
Losses and settlement expenses incurred
 
 
 
 
 
 
Direct
 
$
135,572

 
$

 
$
135,572

Assumed from nonaffiliates
 
1,445

 
47,417

 
48,862

Assumed from affiliates
 
177,122

 
665

 
177,787

Ceded to nonaffiliates
 
(4,965
)
 
(1,587
)
 
(6,552
)
Ceded to affiliates
 
(152,146
)
 
(10
)
 
(152,156
)
Net losses and settlement expenses incurred
 
$
157,028

 
$
46,485

 
$
203,513


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) amounts ceded to purchase additional reinsurance protection in peak exposure territories from external parties.
“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 inter-company reinsurance program.  For the reinsurance subsidiary this line represents amounts ceded to Employers Mutual under the terms of the inter-company reinsurance program.

15


4.
LIABILITY FOR LOSSES AND SETTLEMENT EXPENSES
The following table sets forth a reconciliation of beginning and ending reserves for losses and settlement expenses of the Company.  Amounts presented are on a net basis, with a reconciliation of beginning and ending reserves to the gross amounts presented in the consolidated financial statements.
 
 
Six months ended June 30,
($ in thousands)
 
2018
 
2017
Gross reserves at beginning of year
 
$
732,612

 
$
690,532

Re-valuation due to foreign currency exchange rates
 
525

 
(1,913
)
Less ceded reserves at beginning of year
 
30,923

 
20,664

Net reserves at beginning of year
 
701,164

 
671,781

 
 
 
 
 
Incurred losses and settlement expenses related to:
 
 

 
 

Current year
 
235,806

 
216,710

Prior years
 
(6,087
)
 
(13,197
)
Total incurred losses and settlement expenses
 
229,719

 
203,513

 
 
 
 
 
Paid losses and settlement expenses related to:
 
 

 
 

Current year
 
65,714

 
66,662

Prior years
 
139,625

 
119,270

Total paid losses and settlement expenses
 
205,339

 
185,932

 
 
 
 
 
Net reserves at end of period
 
725,544

 
689,362

Plus ceded reserves at end of period
 
31,148

 
20,430

Re-valuation due to foreign currency exchange rates
 
177

 
(301
)
Gross reserves at end of period
 
$
756,869

 
$
709,491


There is an inherent amount of uncertainty involved in the establishment of insurance liabilities.  This uncertainty is greatest in the current and more recent accident years because a smaller percentage of the expected ultimate claims have been reported, adjusted and settled compared to more mature accident years.  As the carried reserves for these accident years run off, the overall expectation is that, more often than not, favorable development will occur.  However, there is also the possibility that the ultimate settlement of liabilities associated with these accident years will show adverse development, and such adverse development could be substantial.
Changes in reserve estimates are reflected in net income in the year such changes are recorded.  Following is an analysis of the reserve development the Company experienced during the six months ended June 30, 2018 and 2017.  Care should be exercised when attempting to analyze the financial impact of the reported development amounts because, as noted above, the overall expectation is that, more often than not, favorable development will occur as the prior accident years’ reserves run off.

2018 Development
For the property and casualty insurance segment, the June 30, 2018 estimate of loss and settlement expense reserves for accident years 2017 and prior decreased $5.3 million from the estimate at December 31, 2017.  This decrease represents 1.1 percent of the December 31, 2017 gross carried reserves and is primarily attributed to decreases in the ultimate loss and settlement expense ratios for several accident years in the other liability line of business due to reductions in expected ultimate frequency and/or severity. The auto physical damage, workers' compensation and homeowners lines of business had relatively small amounts of adverse development. The adverse development in the auto physical damage line of business is the result of an increase in the accident year 2017 ultimate loss and settlement expense ratio after observing higher than expected reported severity for non-storm claims, while the adverse development in the workers' compensation line of business was driven by an upwards adjustment to the accident year 2017 ultimate loss and settlement expense ratio following a second quarter revision in the ultimate frequency and severity assumptions.

16


For the reinsurance segment, the June 30, 2018 estimate of loss and settlement expense reserves for accident years 2017 and prior decreased $801,000 from the estimate at December 31, 2017.  This decrease represents 0.3 percent of the December 31, 2017 gross carried reserves and is primarily attributed to lower ultimate loss estimates impacting accident years 2013-2017 for the catastrophe and per risk excess, property pro rata and ocean marine pro rata lines of business. The favorable development was partially offset by adverse development on casualty excess, property/casualty global excess and pro rata, and aggregate excess contracts for years 2004, 2007, 2012, 2014 and 2017, whose ultimates were increased in response to higher than expected reported losses.

2017 Development
For the property and casualty insurance segment, the June 30, 2017 estimate of loss and settlement expense reserves for accident years 2016 and prior decreased $9.3 million from the estimate at December 31, 2016.  This decrease represented 1.9 percent of the December 31, 2016 gross carried reserves and was primarily attributed to reductions in prior year ultimate loss and settlement ratios for most lines of business except commercial auto liability. The other liability line of business was the largest contributor to favorable development. The ultimate loss and settlement ratios for accident years 2004 through 2016 were decreased slightly due to declines in expected ultimate claim frequency and/or severity. Due to increases in projected ultimate claim frequency and severity, the ultimate loss and settlement ratios in the commercial auto line of business were increased for accident years 2012 through 2016, producing adverse reserve development for that line of business. Prior years' asbestos settlement expense reserves in the other liability line of business increased during the first six months of 2017 in connection with the settlement of claims for past and future legal fees and losses on a multi-year asbestos exposure associated with a former insured.
For the reinsurance segment, the June 30, 2017 estimate of loss and settlement expense reserves for accident years 2016 and prior decreased $3.9 million from the estimate at December 31, 2016.  This decrease represented 1.9 percent of the December 31, 2016 gross carried reserves and was primarily attributed to prior year reserve releases in the casualty excess and property/casualty global excess contract types.

5.
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. Management evaluates the performance of its insurance segments using financial measurements based on Statutory Accounting Principles (SAP) instead of GAAP. Such measures include premiums written, premiums earned, statutory underwriting profit (loss), and investment results, as well as loss and loss adjustment expense ratios, trade underwriting expense ratios, and combined ratios.

17


Summarized financial information for the Company’s segments is as follows:
Three months ended June 30, 2018
 
Property and
casualty
insurance
 
Reinsurance
 
Parent
company
 
Consolidated
($ in thousands)
 
 
 
 
Premiums earned
 
$
121,495

 
$
36,451

 
$

 
$
157,946

 
 
 
 
 
 
 
 
 
Underwriting profit (loss):
 
 
 
 
 
 
 
 
SAP underwriting profit (loss)
 
(20,184
)
 
3,707

 

 
(16,477
)
GAAP adjustments
 
1,921

 
(855
)
 

 
1,066

GAAP underwriting profit (loss)
 
(18,263
)
 
2,852

 

 
(15,411
)
 
 
 
 
 
 
 
 
 
Net investment income
 
8,410

 
3,360

 
8

 
11,778

Net realized investment gains (losses) and, beginning in 2018, change in unrealized investment gains on equity investments
 
(4,692
)
 
(1,168
)
 

 
(5,860
)
Other income (loss)
 
2,095

 
678

 

 
2,773

Interest expense
 
171

 

 

 
171

Other expenses
 
244

 

 
587

 
831

Income (loss) before income tax expense (benefit)
 
$
(12,865
)
 
$
5,722

 
$
(579
)
 
$
(7,722
)

Three months ended June 30, 2017
 
Property and
casualty
insurance
 
Reinsurance
 
Parent
company
 
Consolidated
($ in thousands)
 
 
 
 
Premiums earned
 
$
116,187

 
$
33,650

 
$

 
$
149,837

 
 
 
 
 
 
 
 
 
Underwriting profit (loss):
 
 
 
 
 
 
 
 
SAP underwriting profit (loss)
 
(8,892
)
 
218

 

 
(8,674
)
GAAP adjustments
 
2,006

 
(805
)
 

 
1,201

GAAP underwriting profit (loss)
 
(6,886
)
 
(587
)
 

 
(7,473
)
 
 
 
 
 
 
 
 
 
Net investment income
 
7,958

 
3,201

 
12

 
11,171

Net realized investment gains (losses) and, beginning in 2018, change in unrealized investment gains on equity investments
 
3,738

 
(351
)
 

 
3,387

Other income (loss)
 
1,559

 
(528
)
 

 
1,031

Interest expense
 
85

 

 

 
85

Other expenses
 
231

 

 
571

 
802

Income (loss) before income tax expense (benefit)
 
$
6,053

 
$
1,735

 
$
(559
)
 
$
7,229


18


Six months ended June 30, 2018
 
Property and
casualty
insurance
 
Reinsurance
 
Parent
company
 
Consolidated
($ in thousands)
 
 
 
 
Premiums earned
 
$
240,127

 
$
73,605

 
$

 
$
313,732

 
 
 
 
 
 
 
 
 
Underwriting profit (loss):
 
 
 
 
 
 
 
 
SAP underwriting profit (loss)
 
(29,220
)
 
5,270

 

 
(23,950
)
GAAP adjustments
 
2,183

 
(753
)
 

 
1,430

GAAP underwriting profit (loss)
 
(27,037
)
 
4,517

 

 
(22,520
)
 
 
 
 
 
 
 
 
 
Net investment income
 
16,558

 
6,578

 
13

 
23,149

Net realized investment gains (losses) and, beginning in 2018, change in unrealized investment gains on equity investments
 
(7,985
)
 
(3,268
)
 

 
(11,253
)
Other income (loss)
 
4,146

 
242

 

 
4,388

Interest expense
 
313

 

 

 
313

Other expenses
 
477

 

 
1,224

 
1,701

Income (loss) before income tax expense (benefit)
 
$
(15,108
)
 
$
8,069

 
$
(1,211
)
 
$
(8,250
)
 
 
 
 
 
 
 
 
 
Assets
 
$
1,176,071

 
$
477,701

 
$
568,324

 
$
2,222,096

Eliminations
 

 

 
(562,043
)
 
(562,043
)
Reclassifications
 

 
(745
)
 

 
(745
)
Total assets
 
$
1,176,071

 
$
476,956

 
$
6,281

 
$
1,659,308

Six months ended June 30, 2017
 
Property and
casualty
insurance
 
Reinsurance
 
Parent
company
 
Consolidated
($ in thousands)
 
 
 
 
Premiums earned
 
$
229,835

 
$
64,489

 
$

 
$
294,324

 
 
 
 
 
 
 
 
 
Underwriting profit (loss):
 
 
 
 
 
 
 
 
SAP underwriting profit (loss)
 
(11,486
)
 
3,465

 

 
(8,021
)
GAAP adjustments
 
(281
)
 
(1,136
)
 

 
(1,417
)
GAAP underwriting profit (loss)
 
(11,767
)
 
2,329

 

 
(9,438
)
 
 
 
 
 
 
 
 
 
Net investment income
 
15,973

 
6,184

 
21

 
22,178

Net realized investment gains (losses) and, beginning in 2018, change in unrealized investment gains on equity investments
 
3,141

 
(381
)
 

 
2,760

Other income (loss)
 
3,000

 
(1,099
)
 

 
1,901

Interest expense
 
169

 

 

 
169

Other expenses
 
410

 

 
1,153

 
1,563

Income (loss) before income tax expense (benefit)
 
$
9,768

 
$
7,033

 
$
(1,132
)
 
$
15,669

 
 
 
 
 
 
 
 
 
Year ended December 31, 2017
 
 
 
 
 
 
 
 
Assets
 
$
1,200,636

 
$
484,678

 
$
604,105

 
$
2,289,419

Eliminations
 

 

 
(599,036
)
 
(599,036
)
Reclassifications
 
(1,393
)
 
(6,273
)
 
(777
)
 
(8,443
)
Total assets
 
$
1,199,243

 
$
478,405

 
$
4,292

 
$
1,681,940


19


The following table displays the premiums earned for the property and casualty insurance segment and the reinsurance segment for the three and six months ended June 30, 2018 and 2017, by line of insurance.
 
 
Three months ended June 30,
 
Six months ended June 30,
($ in thousands)
 
2018
 
2017
 
2018
 
2017
Property and casualty insurance segment
 
 
 
 
 
 
 
 
Commercial lines:
 
 
 
 
 
 
 
 
Automobile
 
$
31,660

 
$
29,014

 
$
62,304

 
$
57,046

Property
 
27,196

 
26,069

 
53,788

 
51,571

Workers' compensation
 
25,229

 
25,343

 
50,131

 
50,046

Other liability
 
25,591

 
24,254

 
50,553

 
48,382

Other
 
2,228

 
2,197

 
4,414

 
4,306

Total commercial lines
 
111,904

 
106,877

 
221,190

 
211,351

 
 
 
 
 
 
 
 
 
Personal lines
 
9,591

 
9,310

 
18,937

 
18,484

Total property and casualty insurance
 
$
121,495

 
$
116,187

 
$
240,127

 
$
229,835

 
 
 
 
 
 
 
 
 
Reinsurance segment
 
 
 
 
 
 
 
 
Pro rata reinsurance
 
$
10,070

 
$
12,016

 
$
23,143

 
$
22,451

Excess of loss reinsurance
 
26,381

 
21,634

 
50,462

 
42,038

Total reinsurance
 
$
36,451

 
$
33,650

 
$
73,605

 
$
64,489

 
 
 
 
 
 
 
 
 
Consolidated
 
$
157,946

 
$
149,837

 
$
313,732

 
$
294,324


6.
INCOME TAXES
The actual income tax expense (benefit) for the three and six months ended June 30, 2018 and 2017 differed from the “expected” income tax expense (benefit) for those periods (computed by applying the United States federal corporate tax rates of 21 percent during 2018 and 35 percent during 2017 to income (loss) before income tax) as follows:
 
 
Three months ended 
 June 30,
 
Six months ended 
 June 30,
($ in thousands)
 
2018
 
2017
 
2018
 
2017
Computed "expected" income tax expense (benefit)
 
$
(1,622
)
 
$
2,530

 
$
(1,733
)
 
$
5,484

Increases (decreases) in tax resulting from:
 
 
 
 
 
 
 
 
Incremental benefit of net operating loss carry back
 
(839
)
 

 
(839
)
 

Tax-exempt interest income
 
(297
)
 
(761
)
 
(607
)
 
(1,466
)
Dividends received deduction
 
(151
)
 
(348
)
 
(274
)
 
(654
)
Proration of tax-exempt interest and dividends received deduction
 
112

 
166

 
220

 
318

Other, net
 
70

 
138

 
54

 
(321
)
Total income tax expense (benefit)
 
$
(2,727
)
 
$
1,725

 
$
(3,179
)
 
$
3,361


20



Pursuant to Staff Accounting Bulletin No. 118 issued by the Securities Exchange Commission, the Company made reasonable estimates of the effects the Tax Cuts and Jobs Act of 2017 (TCJA) had on deferred income tax assets and liabilities at December 31, 2017. For items where the Company could not make a reasonable estimate, primarily loss reserve discounting, the Company used existing accounting guidance and the provisions of the tax laws that were in place prior to the enactment. Beginning in the first quarter of 2018, the Company is using estimated industry discount factors until further guidance and updated discount factors are released by the Internal Revenue Service (IRS). The Company continues to wait on guidance from the IRS to complete its analysis of the effects of the TCJA.
The Company had no provision for uncertain income tax positions at June 30, 2018 or December 31, 2017.  The Company recognized no interest expense or other penalties related to U.S. federal or state income taxes during the three or six months ended June 30, 2018 or 2017.  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 2014.  

7.
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 
 June 30,
 
Six months ended 
 June 30,
($ in thousands)
 
2018
 
2017
 
2018
 
2017
Pension plans:
 
 
 
 
 
 
 
 
Service cost
 
$
4,300

 
$
3,708

 
$
8,426

 
$
7,568

Interest cost
 
2,698

 
2,800

 
5,363

 
5,595

Expected return on plan assets
 
(6,048
)
 
(5,191
)
 
(12,026
)
 
(10,382
)
Amortization of net actuarial loss
 
143

 
913

 
268

 
1,821

Amortization of prior service cost
 

 
5

 

 
10

Net periodic pension benefit cost
 
$
1,093

 
$
2,235

 
$
2,031

 
$
4,612

 
 
 
 
 
 
 
 
 
Postretirement benefit plans:
 
 
 
 
 
 
 
 
Service cost
 
$
368

 
$
340

 
$
736

 
$
681

Interest cost
 
521

 
570

 
1,042

 
1,140

Expected return on plan assets
 
(1,203
)
 
(1,078
)
 
(2,407
)
 
(2,156
)
Amortization of net actuarial loss