The Midland Co. Notes Q2 Results

The Midland Company, an Ohio provider of specialty insurance products and services, reported results for its second quarter ended June 30.

The company reported a net loss of $1.0 million, or 6 cents per share, including 10 cents in realized capital gains. That compares with net income of $5.9 million, or 33 cents per share, in last year’s second quarter, which included 4 cents in realized capital losses. Revenue was $178.6 million compared with $157.5 million in the second quarter of last year. All per- share amounts are on a diluted basis.

Net operating results (net income before realized capital gains and losses and the effects of any changes in accounting principles) for the second quarter reflected a loss of $2.8 million or 16 cents per share, compared with last year’s record profit of $6.6 million, or 37 cents per share. The company believes that this non-GAAP financial measure provides a clearer picture of core insurance operations than the GAAP measure of net income, as it removes potential issues of timing regarding investment gains and losses and any fluctuations due solely to changes in accounting rules.

“While catastrophes traditionally impact our results in the second quarter, this year’s catastrophe losses were particularly severe,” said John Hayden, president and CEO. “Catastrophes alone had a 71 cent per share after-tax impact on earnings, compared with a normalized average of approximately 36 cents per share for the second quarter. It has been reported that the 2003 spring tornado activity resulted in the largest number of individual tornadoes within a given month and one of the highest insured losses from a series of windstorms in history. Our second quarter was also negatively impacted by approximately 15 cents per share in after-tax losses emanating from American Modern’s previously exited commercial liability lines of business.

“On a more positive note, we are encouraged that, excluding catastrophes, our core manufactured housing business is very healthy, fueled by the continued improvement in the fire loss ratio. Fire losses are now back to the sub-20 percent level that we consider acceptable. This improvement reflects both rate actions and our attention to underwriting detail over the past year and a half. Our non-catastrophe results in the second quarter were also better than expected in our site-built dwelling line of business.”

Midland’s wholly owned insurance subsidiary, American Modern Insurance Group, specializes in providing insurance products and services for niche markets such as manufactured housing, site-built dwelling, motorcycle, watercraft, snowmobile, recreational vehicle and credit life and related products. American Modern’s products and services are offered through diverse distribution channels.

Steady Premium Growth Across Multiple Products and Channels
For the second quarter, American Modern’s property and casualty gross written premiums grew 12.8 percent to $180.9 million, including manufactured housing gross written premium growth of 8.9 percent to $85.2 million. While the company’s manufactured housing premium volume continues to be impacted by the difficult market conditions that exist in the point-of-sale channel, a deliberate focus on the agency channel has helped reinforce American Modern’s commitment to this core market.

“Our specialty focus runs across multiple product lines and multiple distribution channels,” Hayden said. “This structure adds stability and diversification to our product and distribution offering, and it also helps solidify our reputation as one of the nation’s leading niche specialty insurance companies.

“Gross written premium in American Modern’s property and casualty specialty lines other than manufactured housing – including motorcycle, site- built dwelling, watercraft, mortgage fire, recreational vehicle and collector automobile products – collectively grew 16.4 percent to $95.7 million during the second quarter. Rate actions continue to factor positively into the overall growth and the company continues to aggressively pursue rate increases across all product lines.

“The motorcycle premium growth that we have been accustomed to seeing each quarter has been tempered somewhat as a result of the aggressive rate increases and underwriting actions implemented by the company in recent months,” Hayden said. “For the quarter, motorcycle premium increased less than 1 percent.”

Higher-Than-Average Storm Activity and Other Product Lines Impact Underwriting Results
For the second quarter, American Modern’s property and casualty combined ratio (losses and expenses as a percent of earned premium) was 111.2 percent, compared with 100.8 percent a year ago. Catastrophe losses during the second quarter of 2003 had a 12.7 point impact on the combined ratio, compared with a 5.9 point catastrophe impact a year ago.

Hayden noted, “Our second quarter results were lower due to three primary reasons: weather related catastrophes, an up-tick in commercial liability losses and higher-than-budgeted losses in our motorcycle line.

“As we announced previously, catastrophes certainly took their toll on our results during the second quarter,” Hayden commented. “Storms and tornadoes in April and May pushed weather-related catastrophe losses to $19.5 million (pre- tax) compared to a second quarter historical average of approximately $10 million (pre-tax). These claims, though costly for our company, were even more painful for our policyholders, and we moved quickly to assess the damage and help them get their living conditions back to normal. American Modern consistently settles more than 85 percent of all property claims within 30 days of being reported, most of which are settled in the first seven days.”

Hayden also commented on the commercial liability losses, noting, “American Modern experienced a higher level of losses related to its previously exited commercial liability programs during the second quarter. These losses impacted our second quarter results by approximately 15 cents per share (after tax) and added approximately 2.9 percentage points to the quarterly property and casualty combined ratio. This is the first quarter since we made the decision to exit these product lines that we have experienced unfavorable results of any magnitude. We hope this sudden up-tick proves to be an aberration. But as a precaution, we did strengthen the reserves associated with this line during the second quarter. We will obviously be monitoring the loss activity associated with these lines very closely over the next several months.

“Results from the motorcycle book also impacted profitability as the company continues to work diligently to attain rate adequacy in that line. The loss ratio for this line of business was 10 to 12 percentage points above our full year targeted loss ratio through the first six months, a target we hope to achieve after the effect of rate increases and product modifications take hold. This variance from target had the effect of adding approximately 2.0 percentage points to the quarterly property and casualty combined ratio. American Modern’s motorcycle rate increases are averaging 20 to 25 percent nationwide, and the company is also modifying products to enhance profitability in that relatively new line. The rate increases are just now beginning to take effect and are the first meaningful increases the company has been able to attain in two years due to the timing of our entry into the market and certain system constraints that have since been remedied. We believe that the beneficial impact on earnings from our rate actions will be fully realized over the next 12 to 24 months. We are confident that these rate increases, coupled with the product, coverage modifications and underwriting actions, will ultimately result in a significant improvement in the profitability of this line of business,” Hayden said.

Six-Month Results
For the six months ended June 30, 2003, net income (including capital gains/losses and the effects of any changes in accounting principles) was $9.0 million, or 51 cents per share, compared with $13.8 million, or 77 cents per share last year. Net operating income (net income excluding capital gains/losses and the effects of any changes in accounting principles) was $8.3 million, or 47 cents per share in the first six months of 2003, compared with a record $16.1 million, or 90 cents per share in the first half of 2002. Revenue was $347.9 million compared with $311.5 million in the same period last year.

As mentioned earlier, the company believes that this non-GAAP financial measure provides a clearer picture of core insurance operations than the GAAP measure of net income, as it removes potential issues of timing regarding investment gains and losses and any fluctuations due solely to changes in accounting rules.

American Modern’s property and casualty gross written premiums grew 12.2 percent to $326.2 million for the first half of the year. This includes growth in manufactured housing premium of 6.5 percent over prior year levels. Gross written premium in all other specialty lines collectively grew 18.1 percent to $168.0 million.