Meadowbrook Group Notes Q3 Net Income of $2.5 Million

Michigan-based Meadowbrook Insurance Group reported net income for the quarter ended Sept. 30, 2003 of $2.5 million, or $0.09 per diluted share, compared to a net loss of ($1.9 million), or ($0.06) per diluted share for the comparable period in 2002. The increase in net income reflects premium growth in profitable programs, higher fee-for-service revenue, stable reserves, 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 and fee-for-service businesses.”

During the third quarter of 2003, gross written premium increased $25.2 million, or 62.2%, to $65.8 million, from $40.6 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, the addition of select new business, and the renewal rights contract announced in November 2002.

Revenues:
Revenues increased $10.1 million, or 22.8%, to $54.5 million in the third quarter of 2003, from $44.4 million for the comparable period in 2002.

Net earned premium increased $8.9 million, or 28.2%, to $40.2 million in the third quarter of 2003, from $31.3 million during the same period of 2002. This increase reflects controlled growth in new and existing programs.

Net commissions and fees increased $2.1 million, or 24.8%, to $10.8 million in the third quarter of 2003, from $8.7 million during the same period of 2002. This increase includes $3.3 million from new fee-for-service contracts. Partially offsetting this increase is the elimination of $1.4 million in net fees relating to a managed program that has been converted to an insured program in one of the company’s insurance subsidiaries, those fees are now considered intercompany fees as opposed to managed fees and are eliminated upon financial consolidation.

Net investment income decreased $554,000, or 14.8%, to $3.2 million in the third quarter of 2003, from $3.8 million during the same period of 2002. Average invested assets increased $16.7 million, or 5.8%, to $306.5 million in 2003, from $289.8 million in 2002. The average investment yield for the third quarter of 2003 was 4.2% compared to 5.2% in 2002. The current pre-tax book yield is 4.37% and the current pre-tax reinvestment yield is 3.04%. The decrease in investment yield reflects the decline in the macro level of interest rates and the tightening of yield spreads relative to U.S. Treasuries.

Expenses:
Incurred losses increased $1.8 million, or 7.0%, to $26.4 million in the third quarter of 2003, from $24.6 million in the comparable period of 2002. The third quarter 2003 loss and loss adjustment expense ratio was 70.6%, compared to 83.3% in the third quarter of 2002. This improvement in the calendar quarter loss ratio reflects continued rate increases, the elimination of the surplus relief treaty in 2002, and the stabilization of reserves.

Commenting on the second quarter loss ratio, Cubbin stated, “Our business fundamentals continue to improve and prior year reserves have remained stable. The current accident year results are reflective of year- over-year improvement and a sound indication of the positive trends in our continuing business.”

Salaries and employee benefits for the third quarter of 2003 increased $3.3 million, or 35.5%, to $12.4 million, from $9.1 million in the third quarter of 2002, due primarily to increases in staff related to new fee-for- service contracts. This increase was also impacted by merit increases and performance-based variable compensation.

Policy acquisition and other underwriting expenses decreased $949,000, or 13.7%, to $6.0 million in the third quarter of 2003, from $6.9 million in the comparable period in 2002. The GAAP expense ratio was 32.9% in the third quarter of 2003, compared to 36.2% in the third quarter of 2002. Reductions in overall outside commission expense and the ability to leverage fixed costs had a favorable impact on the third quarter 2003 results. This favorable impact was partially offset by an increase in loss-based and other insurance related assessments.

Other administrative expenses decreased $161,000, or 2.7%, to $5.8 million in the third quarter of 2003, from $6.0 million in the comparable period in 2002.

Interest expense decreased $375,000, or 64.4%, to $207,000 in the third quarter of 2003, from $582,000 in the comparable period in 2002. This reflects the decrease in the average outstanding debt from $34.6 million in 2002, to $20.0 million in 2003. In addition, a decline in the effective interest rate from 6.7% in the third quarter of 2002, to 4.1% in the third quarter of 2003 had a favorable impact on interest expense during the third quarter of 2003. At September 30, 2003, the company’s debt-to-equity ratio was 16.6%, compared to 18.7% at December 31, 2002.

Year to Date Results:

Net Income:

Net income for the nine months ended Sept. 30, 2003 was $7.9 million, or $0.27 per diluted share, compared to a net loss of ($859,000), or ($0.05) per diluted share, for the comparable period in 2002.

Gross written premium increased $49.9 million, or 35.4%, to $190.8 million for the nine months ended Sept. 30, 2003, from $140.9 million for the comparable period in 2002.

Revenues:

Revenues decreased $2.6 million, or 1.7%, to $150.2 million for the nine months ended Sept. 30, 2003, from $152.8 million for the comparable period in 2002.

Net earned premium decreased $10.5 million, or 9.2%, to $103.8 million for the nine months ended Sept. 30, 2003, from $114.3 million during the same period of 2002.

Net commissions and fees increased $7.8 million, or 28.4%, to $35.4 million for the nine months ended Sept. 30, 2003, from $27.6 million during the same period of 2002.

Expenses:

Incurred losses decreased $12.0 million, or 15.2%, to $67.7 million for the nine months ended Sept. 30, 2003, from $79.7 million in the comparable period of 2002. The loss and loss adjustment expense ratio for the nine months ended Sept. 30, 2003 was 70.4%, compared to 73.8% in 2002.

Other expenses decreased $3.9 million, or 5.2%, to $70.8 million for the nine months ended Sept. 30, 2003, from $74.7 million in the comparable period of 2002. The GAAP expense ratio was 34.7% for the nine months ended Sept. 30, 2003, compared to 36.6% in 2002.