Meadowbrook Insurance Group Notes Q2 Numbers

Michigan-based Meadowbrook Insurance Group reported net income for the quarter ended June 30, 2003 of $2.7 million, or $0.09 per diluted share, compared to $122,000, or $0.01 per diluted share for the comparable period in 2002. The increase in net income reflects higher fee-for-service revenue, a reduction in interest expense, improvement in underwriting results, and overall expense management.

“We are pleased by the progress we are making in improving profitability,” commented Meadowbrook’s president and CEO, Robert Cubbin. “We remain on track with our plan to leverage fixed costs, maintain underwriting discipline, and to focus on growing our profitable specialty program business.”

During the second quarter of 2003, gross written premium increased $13.4 million, or 31.3 percent, to $56.2 million, from $42.8 million in the comparable period in 2002. This increase reflects the anticipated growth from premium rate increases, the conversion of existing controlled programs to the company’s own insurance company subsidiaries, and new business resulting from the previously announced renewal rights contract.

The gross written premium in 2002 was impacted by planned decreases to reduce leverage ratios. The lower level of gross written premium in 2002 is now reflected in lower net earned premium and revenue in the current quarter.

Revenues:
Revenues decreased $6.0 million, or 10.5%, to $51.5 million in the second quarter of 2003, from $57.5 million for the comparable period in 2002.

Net earned premium decreased $8.1 million, or 18.2 percent, to $36.2 million in the second quarter of 2003, from $44.3 million during the same period of 2002. This decrease reflects the current effect from the prior year reduction in written premium from programs previously discontinued. This decrease was partially offset by controlled growth in new and existing programs.

Net commissions and fees increased $1.3 million, or 13.1 percent, to $11.3 million in the second quarter of 2003, from $10.0 million during the same period of 2002. This increase includes $4.0 million from new fee-for-service contracts and a decrease in consolidated fees as the result of the conversion of an existing fee-based program into an insured program within the company’s underwriting subsidiary. This conversion causes the intercompany fees associated with the program to now be eliminated upon consolidation.

Expenses:
Incurred losses decreased $6.5 million, or 21.3 percent, to $24.1 million in the second quarter of 2003, from $30.6 million in the comparable period of 2002. The second quarter 2003 loss and loss adjustment expense ratio was 71.1 percent compared to 72.6 percent in the comparable period of 2002. This improvement in the loss ratio reflects rate increases, the cancellation of the surplus relief treaty, and the absence earned premium from discontinued programs. The 2003 second quarter net loss and loss adjustment expense ratio was impacted by a loss of $1.0 million (representing 2.8 percentage points) resulting from property damage caused by storms in the Midwest during May 2003.

Commenting on the second quarter loss ratio, Cubbin stated, “Our business fundamentals continue to improve and reserves from discontinued programs have remained stable. Despite the net impact of $1.0 million in losses from the May storms, we believe that we will meet our full year 2003 expectations. The current accident year results are reflective of actual improvement year-over-year and are a sound indication of the positive trends in our continuing business.”

Salaries and employee benefits for the second quarter of 2003 increased $2.6 million, or 28.5 percent, to $11.9 million, from $9.2 million in the second quarter of 2002, due primarily to increases in staff related to new fee-for- service contracts.

Policy acquisition and other underwriting expenses decreased $4.9 million, or 45.3 percent, to $6.0 million in the second quarter of 2003, from $10.9 million in the comparable period in 2002. The GAAP expense ratio was 35.3 percent in the second quarter of 2003, compared to 35.8 percent in the second quarter of 2002. Reductions in overall outside commission expense and the ability to leverage fixed costs had a favorable impact in the second quarter of 2003.

Other administrative expenses decreased $0.8 million, or 12.6 percent, to $5.3 million in the second quarter of 2003, from $6.1 million in the comparable period in 2002. This decrease is primarily the result of a change in accrued policyholder dividends as a result of a reevaluation of the gross loss experience on participating policies. This decrease was partially offset by administrative expenses associated with new fee-for-service contracts.

Interest expense decreased $662,000, or 75.7 percent, to $212,000 in the second quarter of 2003, from the comparable period in 2002. This reflects the decrease in the average outstanding debt from $53.7 million in 2002, to $20.9 million in 2003. A decline in the effective interest rate also had a favorable impact on interest expense during the second quarter of 2003. At June 30, 2003, the company’s debt to equity ratio was 10.8 percent, compared to 18.7 percent at Dec. 31, 2002.

Cash flow from operations was $17.4 million for the second quarter of 2003, compared to cash used in operations of $4.4 million in the same period of 2002. The quarter’s positive cash flow reflects an increase in earnings, growth in written premium, and routine collections on reinsurance recoverables.

Net income for the six months ended June 30, 2003 was $5.4 million, or $0.18 per diluted share, compared to net income of $1.0 million, or $0.09 per diluted share for the comparable period in 2002.

Gross written premium increased $24.7 million, or 24.6 percent, to $125.0 million for the six months ended June 30, 2003, from $100.3 million for the comparable period in 2002.

Revenues:
Revenues decreased $12.7 million, or 11.7 percent, to $95.7 million for the six months ended June 30, 2003, from $108.4 million for the comparable period in 2002.

Net earned premium decreased $19.4 million, or 23.3 percent, to $63.6 million for the six months ended June 30, 2003, from $83.0 million during the same period of 2002.

Net commissions and fees increased $5.7 million, or 30.1 percent, to $24.6 million for the six months ended June 30, 2003, from $18.9 million during the same period of 2002.

Expenses:
Incurred losses decreased $13.8 million, or 25.1%, to $41.3 million for the six months ended June 30, 2003, from $55.1 million in the comparable period of 2002. The loss and loss adjustment expense ratio for the six months ended June 30, 2003 was 70.2 percent, consistent with the comparable period of 2002.

Other expenses decreased $5.7 million, or 10.9 percent, to $46.4 million for the six months ended June 30, 2003, from $52.0 million in the comparable period of 2002. The GAAP expense ratio was 35.8 percent for the six months ended June 30, 2003, compared to 36.8 percent in 2002.