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| 8-K - MEADOWBROOK INSURANCE GROUP, INC 8-K 4-30-2012 - MEADOWBROOK INSURANCE GROUP INC | form8k.htm |
EXHIBIT 99.1
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CONTACT:
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Karen M. Spaun
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John P. Shallcross
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SVP & Chief Financial Officer
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Director of Investor Relations & Capital Strategies
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(248) 204-8178
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(248) 204-8066
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FOR IMMEDIATE RELEASE
SOUTHFIELD, MICHIGAN
April 30, 2012
MEADOWBROOK INSURANCE GROUP, INC.
REPORTS FIRST QUARTER 2012 NET OPERATING INCOME OF $7.5 MILLION
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Revenue up 11.8% from prior year first quarter to $216.2 million
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GAAP combined ratio of 101.5% and accident year combined ratio of 96.2%
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Net operating income of $7.5 million, or $0.15 per diluted share
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Book value per share of $11.60, up 1.2% from December 31, 2011
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Quarterly dividend declared of $0.05 per share
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First Quarter Overview:
Meadowbrook Insurance Group, Inc. (NYSE: MIG) reported first quarter 2012 net operating income, a non-GAAP measure the Company defines as net income excluding after-tax realized gains and losses, of $7.5 million, or $0.15 per diluted share, compared to $14.0 million, or $0.26 per diluted share, in the prior year first quarter. First quarter 2012 results include the previously announced increase in net ultimate loss estimates for accident years 2011 and prior of ($6.6 million), or ($0.13) per diluted share; which compares to first quarter 2011 results that include a decrease in the net ultimate loss estimates for accident years 2010 and prior of $2.1 million, or $0.04 per diluted share.
The accident year combined ratio, a non-GAAP measure that excludes changes in net ultimate loss estimates from prior year loss reserves, improved to 96.2% for the first quarter of 2012, compared to 97.7% in the first quarter of 2011. The GAAP combined ratio for the first quarter of 2012 was 101.5%, compared to 95.8% in the first quarter of 2011.
The accident year loss and LAE ratio, a non-GAAP measure that excludes changes in net ultimate loss estimates from prior year loss reserves, was 63.5% for the first quarter of 2012, compared to 63.6% in the first quarter of 2011.
Net income for the first quarter of 2012 was $8.1 million, or $0.16 per diluted share, as compared to $14.6 million, or $0.27 per diluted share, for the first quarter of 2011. The 2012 results include $0.6 million, or $0.01 per diluted share, of after-tax realized gains, which is comparable to 2011 first quarter results.
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PRESS RELEASE
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PAGE 2
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First quarter 2012 gross written premium increased $33.0 million, or 14.7%, to $258.0 million, compared to $224.9 million in the first quarter of 2011. The increase reflects the maturation of existing programs, rate increases that have been achieved and new business initiatives that were implemented during the past twelve months designed to develop specialty niche expertise in a range of areas. These increases were partially offset by reductions in certain programs where pricing and underwriting did not meet the Company’s targets.
Net commissions and fee revenue for the first quarter of 2012 increased $0.6 million, or 6.2%, to $9.0 million from $8.4 million in the prior year quarter. The increase was driven primarily by commission revenues generated from a Michigan agency that was acquired in the fourth quarter of 2011.
The expense ratio for the three-months ended March 31, 2012 decreased 1.4 percentage points to 32.7%, from 34.1% for the same period in 2011. The 2012 expense ratio improvement was primarily impacted by a reduction in variable compensation and a shift in the mix of business resulting in a lower commission expense as compared to the prior year first quarter.
Meadowbrook President and Chief Executive Officer Robert S. Cubbin stated: “During the first quarter, we continued to achieve moderate rate increases across our book of business and significant rate increases in certain lines of business and states where underwriting profitability was not meeting our targets. These rate increases, which are estimated to exceed loss cost trends, will earn out throughout 2012 and 2013. We also continue to see the positive impact of the underwriting actions taken in 2011 and the first part of 2012. We believe these efforts will enhance our profitability.”
The GAAP loss and LAE ratio for the first quarter included an increase in net ultimate loss estimates for 2011 and prior accident years of $10.2 million, which increased the GAAP loss and LAE ratio by 5.3 percentage points; whereas the 2011 results included a decrease in net ultimate loss estimates for 2010 and prior accident years of $3.2 million, which reduced the GAAP loss and LAE ratio by 1.9 percentage points. The GAAP loss and LAE ratio was 68.8% for the first quarter of 2012, compared to 61.7% in the prior year first quarter. The following table sets forth a summary of changes to net ultimate loss estimates for accident years 2011 and prior by line of business (NOTE: $ in ‘000s):
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SEC Line of Business
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Development on Prior Accident Years
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Net Reserves at December 31, 2011
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Development as Percent of December 31, 2011 Reserves
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Workers' Compensation
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$ | 3,064 | $ | 358,131 | 0.9 | % | ||||||
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Residual Markets
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(468 | ) | 17,682 | -2.6 | % | |||||||
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Commercial Multiple Peril/General Liability
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2,322 | 353,311 | 0.7 | % | ||||||||
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Commercial Automobile
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3,987 | 117,594 | 3.4 | % | ||||||||
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Other
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1,303 | 32,375 | 4.0 | % | ||||||||
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Total
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$ | 10,208 | $ | 879,093 | 1.2 | % | ||||||
Workers’ Compensation
The net ultimate loss estimates for accident years 2011 and prior in the workers' compensation line of business increased $3.1 million, or 0.9%. As our business grew in 2009-2011, claim counts increased. Additionally, as the case reserves matured, our estimates for the ultimate probable cost on those newer claims increased. During the first quarter of 2012, we also experienced an acceleration of our claims closure rate which should be an indication that this phenomenon has stabilized. The increase in net ultimate loss estimates is spread approximately equally over the 2009, 2010 and 2011 accident years.
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PRESS RELEASE
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PAGE 3
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Commercial Multiple Peril/General Liability
The $2.3 million increase, or 0.7%, in net ultimate loss estimates in the commercial multiple peril/general liability line of business is primarily from accident years 2007 and prior, reflecting higher than expected severity in one excess liability program. All other accident years and programs remained relatively stable.
Cumulative rate increases in commercial multi-peril line of business over the last nine quarters has been
approximately 1.8%.
Commercial Automobile
The $4.0 million increase, or 3.4%, in net ultimate loss estimates in the commercial automobile line of business is primarily in the 2011 accident year reflecting the emergence of higher than expected severity on the policies written prior to June 2011 on a transportation program and slightly higher than expected severity on a smaller west coast program. As we announced in previous quarters, we have aggressively raised rates and reduced premium volume to lower our future loss ratios in this line of business.
Cumulative rate increases in the transportation program mentioned above have been 46.0% since the first quarter of 2011 and we have reduced written premium volume by 41.2%.
Other Lines
The $1.3 million increase, or 4.0%, in net ultimate loss estimates in the other lines of business is primarily from 2011 accident year property exposures where we had a handful of larger claims that occurred in late 2011, but were not reported until the first quarter of 2012. These occurrences were partially offset by better than expected frequency in our medical malpractice line of business.
2012 Guidance Affirmed
Mr. Cubbin stated: “Despite the increase in net ultimate loss projections from older years, our current accident year loss ratios show positive signs of the cumulative pricing increases and underwriting actions we have taken over the last three years to stay ahead of industry loss cost trends. We therefore expect full year 2012 results to still come in at/or near the low end of the previously announced guidance range of $0.90 to $1.00.”
The current run rate for our 2012 accident year combined ratio is approximately 98.1%, which is 1.9 percentage points higher than our first quarter accident year combined ratio of 96.2%. The difference between the 2012 run rate and the first quarter accident year combined ratio is primarily driven by better than expected insurance-related assessments that reduced policy acquisition costs during the first quarter, but are not expected to impact future periods.
Other Matters
Adoption of New Accounting Guidance:
In October 2010, the Financial Accounting Standards Board issued new guidance concerning the accounting for costs associated with acquiring or renewing insurance contracts. Under the new guidance, only direct incremental costs associated with successful insurance contract acquisitions or renewals are deferrable. The Company adopted this guidance effective January 1, 2012 and has retrospectively adjusted its previously issued financial information. Adoption of this guidance reduced the carrying value of its deferred acquisition costs as of December 31, 2011 by $11.2 million and equity by $7.3 million, or $0.14 per common share. Both net operating income and net income for the first quarter of 2011 were reduced by $0.5 million, or $0.01 per diluted share.
PR-0712
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PRESS RELEASE
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PAGE 4
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At March 31, 2012, our debt-to-equity ratio was 22.3%, compared to 18.7% at December 31, 2011. The Company’s debt-to-equity ratio excluding the 30 year interest only senior and junior subordinated debentures was 8.5% at March 31, 2012, compared to 4.9% at December 31, 2011. The increase in the debt to equity ratio during the quarter primarily reflects a drawdown of $20.0 million on our Federal Home Loan Bank (“FHLB”) credit facility. The proceeds were used to fund purchases of high quality bonds with maturities that match the maturity of the FHLB credit facility. Due to the low cost of the FHLB funding, we expect to generate returns in excess of our cost of borrowing under this strategy.
Investment Portfolio:
Net investment income for the first quarter of 2012 increased $0.1 million, or 1.2%, to $13.7 million from $13.6 million in the first quarter of 2011. The 2011 results include accretion on a security that was previously impaired, but deemed to have recovered subsequent to the impairment. This security recovered fully and matured in the second quarter of 2011. Excluding the income amounts related to the recovery of this security, net investment income would have increased $0.5 million, or 3.7%. This reflects an increase in average invested assets due to positive cash flow from operations, as well as the investment of the FHLB loan proceeds in our fixed income portfolio.
At March 31, 2012, pre-tax book yield was 4.0%, which is comparable to the pre-tax book yield at December 31, 2011. The effective duration of the portfolio was 5.0 years at March 31, 2012, compared to 4.9 years at December 31, 2011.
Shareholders’ Equity:
Shareholders’ equity increased to $585.7 million, or $11.60 per common share at March 31, 2012 from $585.2 million, or $11.46 per common share at December 31, 2011.
Statutory Surplus:
At March 31, 2012, the combined statutory surplus was $381.0 million, compared to $385.4 million at December 31, 2011.
Premium Leverage Ratios: As of March 31, 2012, on a trailing twelve month statutory consolidated basis, the gross and net premium leverage ratios were 2.5 to 1.0 and 2.1 to 1.0, respectively. As a reference point, the Company’s guidelines for gross and net written premium to statutory surplus are 2.75 to 1.0 and 2.25 to 1.0, respectively.
Cash Flows from Operations:
For the three months ended March 31, 2012, operating cash flows remain strong at $38.3 million as compared to $34.6 million for the three months ended March 31, 2011. The increase in operating cash flows is driven primarily by variable compensation payments that were made in 2011 (related to 2010 performance), but not in 2012.
Dividend and Share Repurchases:
On April 26, 2012, the Board of Directors declared a quarterly dividend of $0.05 per share payable on May 29, 2012 to shareholders of record as of May 11, 2012.
During the quarter, the Company repurchased 530,000 shares at an average cost of $9.44 per share. Accretive share repurchases during the quarter increased book value per share by $0.03.
PR-0712
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PRESS RELEASE
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PAGE 5
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Conference Call
Meadowbrook’s 2012 first quarter results will be discussed by management in more detail on Tuesday, May 1, 2012 at 9:00 a.m. EDT.
To listen to the call please dial 1-877-407-8035 approximately five minutes prior to the start of the call and ask for the Meadowbrook conference call. Additionally, the conference call will be broadcast live over the internet and can be accessed by all interested parties via the investor relations section of our website at www.meadowbrook.com or www.investorcalendar.com.
For those who cannot listen to the live conference call, a replay of the call will be available through May 15, 2012 by dialing 1-877-660-6853 and referring to account number 286 and conference ID 391077. The webcast will be archived and available for replay through August 1, 2012.
About Meadowbrook Insurance Group
Meadowbrook Insurance Group, Inc., based in Southfield, Michigan, is a leader in the specialty program management market. Meadowbrook includes several agencies, claims and loss prevention facilities, self-insured management organizations and seven property and casualty insurance underwriting companies, including one in Bermuda. Meadowbrook has thirty-four locations in the United States. Meadowbrook is a risk management organization, specializing in specialty risk management solutions for agents, professional and trade associations, and small to medium-sized insureds. Meadowbrook Insurance Group, Inc. common shares are listed on the New York Stock Exchange under the symbol "MIG". For further information, please visit Meadowbrook’s corporate web site at www.meadowbrook.com.
Certain statements made by Meadowbrook Insurance Group, Inc. in this release may constitute forward-looking statements including, but not limited to, those statements that include the words “believes,” “expects,” “anticipates,” “estimates,” or similar expressions. Please refer to the Company's most recent 10-K, 10-Q, and other Securities and Exchange Commission filings for more information on risk factors. Actual results could differ materially. These forward-looking statements involve risks and uncertainties including, but not limited to the following: the frequency and severity of claims; uncertainties inherent in reserve estimates; catastrophic events; a change in the demand for, pricing of, availability or collectability of reinsurance; increased rate pressure on premiums; obtainment of certain rate increases in current market conditions; investment rate of return; changes in and adherence to insurance regulation; actions taken by regulators, rating agencies or lenders; obtainment of certain processing efficiencies; changing rates of inflation; and general economic conditions. Meadowbrook is not under any obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events or otherwise.
PR-0712
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EARNINGS RELEASE
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PAGE 6 |
MEADOWBROOK INSURANCE GROUP, INC.
FINANCIAL INFORMATION
SUPPLEMENT TO THE EARNINGS RELEASE
UNAUDITED BALANCE SHEET INFORMATION
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As Adjusted
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MARCH 31,
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DECEMBER 31,
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(In Thousands, Except Per Share Data)
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2012
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2011
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BALANCE SHEET DATA
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ASSETS
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Cash and invested assets
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1,542,210 | $ | 1,487,680 | |||||
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Premium and agents balances
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198,605 | 183,160 | ||||||
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Reinsurance recoverable
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343,469 | 325,754 | ||||||
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Deferred policy acquisition costs
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79,703 | 74,467 | ||||||
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Prepaid reinsurance premiums
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38,103 | 33,754 | ||||||
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Goodwill
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120,792 | 120,792 | ||||||
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Other assets
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143,367 | 144,491 | ||||||
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Total Assets
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2,466,249 | $ | 2,370,098 | |||||
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LIABILITIES
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Loss and loss adjustment expense reserves
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1,235,211 | $ | 1,194,977 | |||||
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Unearned premium reserves
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417,258 | 386,750 | ||||||
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Debt
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49,688 | 28,375 | ||||||
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Debentures
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80,930 | 80,930 | ||||||
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Other liabilities
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97,443 | 93,915 | ||||||
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Total Liabilities
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1,880,530 | 1,784,947 | ||||||
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STOCKHOLDERS' EQUITY
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Common stockholders' equity
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585,719 | 585,151 | ||||||
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Total Liabilities & Stockholders' Equity
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2,466,249 | $ | 2,370,098 | |||||
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Book value per common share
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$ | 11.60 | $ | 11.46 | ||||
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Book value per common share excluding unrealized gain/loss, net of deferred taxes
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$ | 10.26 | $ | 10.13 | ||||
PR-0712
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EARNINGS RELEASE
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PAGE 7
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MEADOWBROOK INSURANCE GROUP, INC.
FINANCIAL INFORMATION
SUPPLEMENT TO THE EARNINGS RELEASE
UNAUDITED INCOME STATEMENT INFORMATION
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(In Thousands, Except
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FOR THE THREE MONTHS
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Share & Per Share Data)
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ENDED MARCH 31,
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As Adjusted
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SUMMARY DATA
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2012
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2011
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Gross written premiums
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$ | 257,955 | 224,946 | |||||
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Net written premiums
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218,975 | 193,316 | ||||||
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REVENUES
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Net earned premiums
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$ | 192,815 | 170,658 | |||||
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Net commissions and fees
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8,965 | 8,438 | ||||||
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Net investment income
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13,732 | 13,572 | ||||||
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Net realized gains
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732 | 812 | ||||||
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Total Revenues
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216,244 | 193,480 | ||||||
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EXPENSES
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Net losses and loss adjustment expenses
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132,747 | 105,262 | ||||||
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Policy acquisition and other underwriting expenses
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63,113 | 58,158 | ||||||
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General selling and administrative expenses
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6,339 | 6,244 | ||||||
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General corporate expenses
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1,373 | 1,355 | ||||||
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Amortization expense
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1,416 | 1,232 | ||||||
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Interest expense
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1,977 | 2,172 | ||||||
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Total Expenses
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206,965 | 174,423 | ||||||
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INCOME BEFORE INCOME TAXES AND EQUITY EARNINGS OF AFFILIATES AND UNCONSOLIDATED SUBSIDIARIES
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9,279 | 19,057 | ||||||
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Income tax expense
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1,855 | 5,459 | ||||||
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Equity earnings of affiliates, net of tax
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688 | 1,073 | ||||||
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Equity earnings of unconsolidated subsidiaries, net of tax
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(8 | ) | (23 | ) | ||||
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NET INCOME
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$ | 8,104 | 14,648 | |||||
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Less: Net realized gains, net of tax
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577 | 632 | ||||||
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NET OPERATING INCOME (1)
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$ | 7,527 | 14,016 | |||||
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Diluted earnings per common share
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Net income
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$ | 0.16 | 0.27 | |||||
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Net operating income
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$ | 0.15 | 0.26 | |||||
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Diluted weighted average common shares outstanding
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50,921,465 | 53,527,022 | ||||||
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GAAP ratios:
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Loss & LAE ratio
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68.8 | % | 61.7 | % | ||||
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Other underwriting expense ratio
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32.7 | % | 34.1 | % | ||||
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GAAP combined ratio
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101.5 | % | 95.8 | % | ||||
1) While net operating income is a non-GAAP disclosure, management believes this information is beneficial to reviewing the financial statements. Net operating income is net income less realized gains net of taxes associated with such gains.
PR-0712
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EARNINGS RELEASE
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PAGE 8
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MEADOWBROOK INSURANCE GROUP, INC.
FINANCIAL INFORMATION
SUPPLEMENT TO THE EARNINGS RELEASE
UNAUDITED INCOME STATEMENT INFORMATION
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(In Thousands)
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FOR THE THREE MONTHS
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ENDED MARCH 31,
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As Adjusted
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2012
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2011
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Net earned premium
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$ | 192,815 | 170,658 | |||||
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Net losses & loss adjustment expenses (1)
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132,747 | 105,262 | ||||||
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Policy acquisition and other underwriting expenses
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63,113 | 58,158 | ||||||
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Profit (loss) from net earned premium
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(3,045 | ) | 7,238 | |||||
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Net investment income
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13,732 | 13,572 | ||||||
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Profit from insurance operations
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10,687 | 20,810 | ||||||
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Net commissions and fees
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$ | 8,965 | 8,438 | |||||
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General selling & administrative expenses
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6,339 | 6,244 | ||||||
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Profit from net commissions & fees
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2,626 | 2,194 | ||||||
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General corporate expense
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$ | 1,373 | 1,355 | |||||
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Amortization expense
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1,416 | 1,232 | ||||||
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Interest expense
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1,977 | 2,172 | ||||||
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Other expenses
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4,766 | 4,759 | ||||||
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Profit from insurance operations
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$ | 10,687 | 20,810 | |||||
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Profit from net commissions & fees
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2,626 | 2,194 | ||||||
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Other expenses
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(4,766 | ) | (4,759 | ) | ||||
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Net capital gains
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732 | 812 | ||||||
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Pretax income
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$ | 9,279 | 19,057 | |||||
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Key ratios:
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GAAP combined ratio
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101.5 | % | 95.8 | % | ||||
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Accident year combined ratio (2)
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96.2 | % | 97.7 | % | ||||
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(1)
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The three months ended March 31, 2012 and 2011 include unfavorable development of $10,208 and favorable development of $3,231, respectively.
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(2)
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The accident year combined ratio is the sum of the expense ratio and accident year loss ratio. The accident year loss ratio measures loss and LAE occurring in a particular year, regardless of when they are reported and does not take into consideration changes in estimates in loss reserves from prior accident years.
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