Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
MIG > SEC Filings for MIG > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for MEADOWBROOK INSURANCE GROUP INC

Form 10-Q for MEADOWBROOK INSURANCE GROUP INC


8-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the Periods ended June 30, 2014 and 2013

Forward-Looking Statements

This quarterly report may provide information including certain statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These include statements regarding the intent, belief, or current expectations of management, including, but not limited to, those statements that use the words "believes," "expects," "anticipates," "estimates," or similar expressions. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties, and results could differ materially from those indicated by such forward-looking statements. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: actual loss and loss adjustment expenses exceeding our reserve estimates; competitive pressures in our business; the failure of any of the loss limitation methods we employ; a failure of additional capital to be available or only available on unfavorable terms; our geographic concentration and the business and economic conditions, natural perils, man made perils, and regulatory conditions within our most concentrated region; our ability to appropriately price the risks we underwrite; goodwill impairment risk employed as part of our growth strategy; efforts with regard to the review of strategic alternatives; actions taken by regulators, rating agencies or lenders, including the impact of the downgrade by A.M. Best of the Company's Insurance Company Subsidiaries' financial strength rating, the lowering of the outlook of this ratings from "stable" to "negative", A.M. Best's downgrade of our issuer credit rating and any other future action by A.M. Best with respect to such ratings; increased risks or reduction in the level of our underwriting commitments due to market conditions; a failure of our reinsurers to pay losses in a timely fashion, or at all; interest rate changes; continued difficult conditions in the global capital markets and the economy generally; market and credit risks affecting our investment portfolio; liquidity requirements forcing us to sell our investments; a failure to introduce new products or services to keep pace with advances in technology; the new federal financial regulatory reform; our holding company structure and regulatory constraints restricting dividends or other distributions by our Insurance Company Subsidiaries; minimum capital and surplus requirements imposed on our Insurance Company Subsidiaries; acquisitions and integration of acquired businesses resulting in operating difficulties, which may prevent us from achieving the expected benefits; our reliance upon producers, which subjects us to their credit risk; loss of one of our core selected producers; our dependence on the continued services and performance of our senior management and other key personnel; our reliance on our information technology and telecommunications systems; managing technology initiatives and obtaining the efficiencies anticipated with technology implementation; a failure in our internal controls; the cyclical nature of the property and casualty insurance industry; severe weather conditions and other catastrophes; the effects of litigation, including the previously disclosed arbitration and class action litigation or any similar litigation which may be filed in the future; state regulation; and assessments imposed upon our Insurance Company Subsidiaries to provide funds for failing insurance companies.


Table of Contents
For additional information with respect to certain of these and other factors, refer to the Item 1A of Part I to our Annual Report on Form 10-K for the year ended December 31, 2013 and subsequent filings made with the United States Securities and Exchange Commission. We are not under any obligation to (and expressly disclaim any obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.

Business Overview

We are a specialty niche focused commercial insurance underwriter, which also owns and operates insurance agencies and an insurance administration services company. We recognize revenue related to the services and coverages within the following categories: net earned premiums, management administrative fees, claims fees, commission revenue, net investment income, and net realized gains (losses).

We market and underwrite specialty property and casualty insurance programs and products on both an admitted and non-admitted basis through a broad and diverse network of independent retail agents, wholesalers, program administrators and general agents, who value service, specialized knowledge, and focused expertise. Program business refers to an aggregation of individually underwritten homogeneous risks that have similar characteristics and are distributed through a select group of agents. We seek to combine profitable underwriting, income from our net commissions and fees, investment returns and efficient capital management to deliver consistent long-term growth in shareholder value.

Through our agency operations, we also generate commission revenue, which represents 2.6% of our total consolidated revenues. Our agencies are located in Michigan, California, Massachusetts, and Florida and produce commercial, personal lines, life and accident and health insurance which are placed primarily with unaffiliated insurance carriers. Although our agencies are a minimal source of business for our Insurance Company Subsidiaries, the agency operations remain a core strategy enabling us to balance our sources of revenue and better understand the needs of independent agents within our own insurance carrier operations.

We compete in the specialty insurance market. Our wide range of specialty niche insurance expertise allows us to accommodate a diverse distribution network ranging from specialized program agents to insurance brokers. In the specialty market, competition tends to place considerable focus on availability, service and other tailored coverages in addition to price. Moreover, our broad geographical footprint enables us to function with a local presence on both a regional and national basis. We also have the capacity to write specialty insurance in both the admitted and non-admitted markets. These unique aspects of our business model enable us to compete on factors other than price.


Table of Contents
Critical Accounting Policies

In certain circumstances, we are required to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related footnotes. We evaluate these estimates and assumptions periodically on an on-going basis based on a variety of factors. There can be no assurance, however, that actual results will not be materially different than our estimates and assumptions, and that reported results of operation will not be affected by accounting adjustments needed to reflect changes in these estimates and assumptions. The accounting estimates and related risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the United States Securities and Exchange Commission on March 5, 2014, are those that we consider to be our critical accounting estimates. For the three and six months ended June 30, 2014, there have been no material changes in regard to any of our critical accounting estimates.

Non-GAAP Financial Measures

Statutory Surplus

Statutory surplus is a non-GAAP measure with the most directly comparable financial GAAP measure being shareholders' equity. The following is a reconciliation of statutory surplus to shareholders' equity:

                       Meadowbrook Insurance Group, Inc.
          Consolidated Statutory Surplus to GAAP Shareholders' Equity
                        For Period Ending: June 30, 2014
                                 (in thousands)

Statutory Consolidated Surplus                        $  507,700

Statutory to GAAP differences:
Deferred policy acquisition costs          64,629
Other                                       8,145

Total Statutory to GAAP differences                       72,774

Total Non-Regulated Entities (1)                        (133,947 )

GAAP Consolidated Shareholders' Equity                $  446,527

(1) Total includes $80,930 of debentures and $158,481 of debt

Net Operating Income and Net Operating Income Per Share

Net operating income and net operating income per share are non-GAAP measures that represent net income excluding net realized gains or loss, net of tax. The most directly comparable financial GAAP measures to net operating income and net operating income per share are net income and net income per share, respectively. Net operating income and net operating income per share are intended as supplemental information and are not meant to replace net income or net income per share. Net operating income and net operating income per share should be read in conjunction with the GAAP financial results. The following is a reconciliation of net operating income (loss) to net income (loss), as well as net operating income (loss) per share to net income (loss) per share:


Table of Contents
                                            For the Three Months Ended June 30,        For the Six Months Ended June 30,
                                                2014                   2013               2014                   2013
                                            (In thousands, except share and per       (In thousands, except share and per
                                                        share data)                               share data)
Net operating income (loss)                $        3,649         $     (115,090 )   $       12,039         $     (108,213 )
Net realized gains, net of tax                      2,115                  2,032              4,081                  2,237
Net income (loss)                          $        5,764         $     (113,058 )   $       16,120         $     (105,976 )

Diluted earnings (losses) per common share:
Net operating income (loss)                $         0.07         $        (2.31 )   $         0.24         $        (2.17 )
Net income (loss)                          $         0.12         $        (2.27 )   $         0.32         $        (2.13 )
Diluted weighted average common shares
outstanding                                    50,091,984             49,887,200         50,034,349             49,855,716

We use net operating income and net operating income per share as components to assess our performance and as measures to evaluate the results of our business. We believe these measures provide investors with valuable information relating to our ongoing performance that may be obscured by the net effect of realized gains and losses as a result of our market risk sensitive instruments, which primarily relate to fixed income securities that are available for sale and not held for trading purposes. Realized gains and losses may vary significantly between periods and are generally driven by external economic developments, such as capital market conditions. Accordingly, net operating income excludes the effect of items that tend to be highly variable from period to period and highlights the results from our ongoing business operations and the underlying loss or profitability of our business. We believe that it is useful for investors to evaluate net operating income and net operating income per share, along with net income and net income per share, when reviewing and evaluating our performance.

Combined Ratio

The combined loss and expense ratio (or combined ratio), expressed as a percentage, is the key measure of underwriting profitability traditionally used in the property and casualty insurance business. The combined ratio is a statutory (non-GAAP) accounting measurement, which represents the sum of (i) the ratio of losses and loss expenses to premiums earned (loss ratio), plus (ii) the ratio of underwriting expenses to premiums written (expense ratio). The combined ratios above have been modified to reflect GAAP accounting, as we evaluate the performance of our underwriting operations using the GAAP combined ratio. Specifically, the GAAP combined ratio is the sum of the loss ratio, plus the ratio of GAAP underwriting expenses (which include the change in deferred policy acquisition costs) to premiums earned (expense ratio). When the combined ratio is under 100%, underwriting results are generally considered profitable; when the combined ratio is over 100%, underwriting results are generally considered unprofitable.


Table of Contents
The accident year combined ratio is a non-GAAP measure that excludes changes in net ultimate loss estimates from prior accident year loss reserves. The accident year combined ratio provides us with an assessment of the specific policy year's profitability (which matches policy pricing with related losses) and assists us in our evaluation of product pricing levels and quality of business written. We use accident year combined ratio as one component to assess the Company's current year performance and as a measure to evaluate, and if necessary, adjust current year pricing and underwriting. The following is a reconciliation of the accident year combined ratio to the GAAP combined ratio:

                                       For the Three Months             For the Six Months
                                          Ended June 30,                  Ended June 30,
                                       2014             2013           2014            2013
Accident year combined ratio              103.0 %         100.9 %        101.7 %          99.9 %
Increase (decrease) in net
ultimate loss estimates on prior
year loss reserves                          0.0 %          15.1 %         (0.2 %)          8.7 %
GAAP combined ratio                       103.0 %         116.0 %        101.5 %         108.6 %

We believe the accident year combined ratio provides investors with valuable information for comparison to historical trends and current industry estimates. We also believe that it is useful for investors to evaluate the accident year combined ratio and GAAP combined ratio separately when reviewing and evaluating our performance.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE, 2014 AND 2013

Executive Overview

Our GAAP combined ratio improved by 13.0 percentage points to 103.0% in the second quarter 2014 from 116.0% for the comparable quarter in 2013. This improvement reflects the continued stabilization of reserves, improved current accident year loss experience and earned rate increases in excess of loss ratio trends. These improvements were partially offset by the costs of using an unaffiliated "A" rated insurance company for policy issuance and the deleveraging impact of the anticipated reduction in earned premium associated with the Company's efforts to terminate unprofitable business.

Net operating income, a non-GAAP measure the Company defines as net income excluding after-tax realized gains and losses, was $3.6 million or $0.07 per diluted share, for the second quarter 2014 compared to net operating loss of $115.1 million, or $2.31 per diluted share, for the second quarter 2013.

The second quarter 2014 results include pre-tax favorable prior year loss reserve development of $0.1 million, or less than 0.1 percentage points of the loss and LAE ratio. The second quarter 2013 results included pre-tax unfavorable prior year loss reserve development of $26.5 million, or 15.1 percentage points of the loss and LAE ratio. Our accident year loss and LAE ratio, a non-GAAP measure that excludes changes in net ultimate loss estimates from prior year loss reserves, was 66.8% for the second quarter of 2014 compared to 67.6% for the comparable quarter in 2013, an improvement of 0.8 percentage points.


Table of Contents
Excluding the impact of the previously terminated multi-line quota share reinsurance treaty with Swiss Re America Corporation ("Swiss Re Treaty"), the accident year loss and LAE ratio was 66.4% for the three months ended June 30, 2014 and 2013. Second quarter 2014 results benefited from lower earned premium on terminated business (i.e., in run-off) in conjunction with the 2012 capital enhancement initiatives, which added 2.2 points to the 2013 accident year loss and LAE ratio and had only a 0.4 percentage point impact on 2014. Rate increases earned in excess of loss ratio trends during the second quarter 2014 also improved the accident year loss and LAE ratio by 4.5 points. These improvements to 2014 accident year results were offset by a slightly higher level of short tail lines claim activity in the second quarter 2014 and a higher and more conservative loss and LAE ratio selection for the 2014 accident year. This selection reflects a more conservative expected loss ratio within the standard actuarial methods and consideration of the inherent risks associated with a less mature accident year.

Gross written premium decreased $55.4 million, or 23.7%, to $178.7 million for the three months ended June 30, 2014, compared to $234.1 million in the same period in 2013. The decline in premium, as expected, is attributable to the termination of, or the reduction of premium in certain programs for which pricing and/or underwriting risk did not meet the Company's targets. This decline was offset by an overall 6.2% written rate increase.

Results of Operations

Net income for the three months ended June 30, 2014, was $5.8 million, or $0.12 per dilutive share, compared to a net loss of $113.1 million, or $2.27 per dilutive share, for the comparable period of 2013. Net operating income, a non-GAAP measure, was $3.6 million or $0.07 per diluted share, for the second quarter 2014 compared to net operating loss of $115.1 million, or $2.31 per diluted share, for the second quarter 2013. Total diluted weighted average shares outstanding for the three months ended June 30, 2014 was 50,091,984 compared to 49,887,200 for the comparable period in 2013. This increase reflects the impact of shares issued under our Long Term Incentive Plan. Refer to Note 8 ~ Earnings Per Share of the Notes to the Consolidated Financial Statements, for additional information specific to the impact of our Long Term Incentive Plan.

Revenues

Revenues for the three months ended June 30, 2014 decreased $11.1 million, or 5.6%, to $187.9 million, from $199.0 million for the comparable period in 2013. This decrease primarily reflects the planned reduction within our net earned premiums, partially offset by an increase in net commissions and fees and net realized gains.


Table of Contents
The following table sets forth the components of revenues (in thousands):

                                          For the Three Months Ended June 30,
                                             2014                    2013
      Revenue:
      Net earned premiums              $         164,124       $         175,781
      Management administrative fees               3,301                   2,791
      Claims fees                                  1,631                   1,674
      Commission revenue                           4,410                   4,074
      Net investment income                       11,209                  11,768
      Net realized gains                           3,253                   2,869
      Total revenue                    $         187,928       $         198,957

Net earned premiums decreased $11.7 million, or 6.7%, to $164.1 million for the three months ended June 30, 2014, from $175.8 million in the comparable period in 2013. This expected decrease was primarily the result of the termination of, or reduction in certain programs in which pricing and underwriting did not meet our underwriting standards and was offset by an overall 10.3% earned rate increase, which exceeded our estimated loss trend of 1.8%.

Net commission and fee revenue increased $0.8 million, or 9.4%, to $9.3 million for the three months ended June 30, 2014, from $8.5 million for the comparable period in 2013. This increase was driven primarily by commission revenue generated from our subsidiary US Specialty Underwriters ("USSU") that is no longer considered intercompany revenue as the applicable polices are now written by SNIC and reinsured by our Insurance Company Subsidiaries; and therefore, the related commission revenue is no longer eliminated in consolidation. This increase did not impact our consolidated financial results as there is a corresponding increase in the expenses from net commission and fee operations.

Net realized gains increased $0.4 million, or 13.8%, to $3.3 million for the three months ended June 30, 2014, from $2.9 million for the comparable period in 2013.

Expenses

Expenses decreased $149.0 million from $330.6 million for the three months ended June 30, 2013 to $181.6 million for the three months ended June 30, 2014. The decrease primarily is attributed to the $115.4 million goodwill impairment and $26.5 million unfavorable development on prior years which was recorded during the second quarter of 2013.


Table of Contents
The following table sets forth the components of expenses (in thousands):

                                                         For the Three Months Ended
                                                                  June 30,
                                                            2014             2013
  Expense:
  Net losses and loss adjustment expenses                $  109,660       $  145,371
  Policy acquisition and other underwriting expenses         59,358           58,450
  General selling & administrative expenses                   6,752            5,901
  General corporate expenses                                  1,415              760
  Amortization expense                                          961            1,038
  Goodwill impairment expense                                     -          115,397
  Interest expense                                            3,472            3,653
  Total expenses                                         $  181,618       $  330,570

Net loss and loss adjustment expenses ("LAE") decreased $35.7 million, to $109.7 million for the three months ended June 30, 2014, from $145.4 million for the same period in 2013. Our loss and LAE ratio was 66.8% for the three months ended June 30, 2014 and 82.7% for the three months ended June 30, 2013; an improvement of 15.9 percentage points. The loss and LAE ratio for the second quarter of 2014 includes pre-tax favorable prior year loss reserve development of $0.1 million, or less than 0.1 percentage points of the loss and LAE ratio. The second quarter 2013 results included pre-tax unfavorable prior year loss reserve development of $26.5 million, or 15.1 percentage points of the loss and LAE ratio. The accident year loss and LAE ratio was 66.8% for the three months ended June 30, 2014 down from 67.6% in the comparable period in 2013; an improvement of 0.8 percentage points. Additional discussion of our quarterly reserve activity is described below within the Other Items ~ Reserves section.

Policy acquisition and other underwriting expenses increased $0.9 million, to $59.4 million for the three months ended June 30, 2014 from $58.5 million for the same period in 2013. Our expense ratio increased 2.9% to 36.2% for the second quarter 2014 from 33.3% for the second quarter 2013. This increase primarily reflects the cost associated with the use of an unaffiliated "A" rated insurance company for policy issuance and the deleveraging fixed costs in relation to the decrease in earned premium noted above. The increase also reflects a shift in the mix of business in 2014.

The federal effective rate on operating income was 1.4% for the second quarter of 2014 compared to 16.4% in 2013. These rates include adjustments to an annual operating effective tax rate. The expected annual operating tax rate primarily excludes discrete charges related to the arbitration allowance and the goodwill impairment charge taken during the second quarter of 2013. The second quarter 2014 results included pre-tax net operating income of $3.1 million compared to a pre-tax net operating loss of $134.5 million for the second quarter 2013. The lower tax rate in 2014 reflects net investment income pre-tax profit (which is taxed at a lower rate due to tax exempt municipal bonds income) being partially offset by a pre-tax loss from corporate expenses and underwriting results. The 2013 rate primarily reflects a tax benefit due to the pre-tax net operating loss.


Table of Contents
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE, 2014 AND 2013

Executive Overview

Our GAAP combined ratio improved by 7.1 percentage points to 101.5% for the six months ended June 30, 2014 from 108.6% for the comparable period in 2013. This improvement reflects the continued stabilization of reserves, improved current accident year loss experience and earned rate increases in excess of loss ratio trends. These improvements were partially offset by the costs of using an unaffiliated "A" rated insurance company for policy issuance, the deleveraging impact of the anticipated reduction in earned premium associated with the Company's efforts to terminate unprofitable business and the one-time expenses associated with the first quarter 2014 restructuring.

Net operating income, a non-GAAP measure the Company defines as net income excluding after-tax realized gains and losses, was $12.0 million or $0.24 per diluted share, for the six months ended June 30, 2014 compared to net operating loss of $108.2 million, or $2.17 per diluted share, for six months ended June 30, 2013.

The results for the six months ended June 30, 2014 include favorable prior year loss reserve development of $0.8 million, or less than 0.2 percentage points of the loss and LAE ratio. The results for the six months ended June 30, 2013 included pre-tax unfavorable prior year loss reserve development of $30.1 million, or 8.7 percentage points of the loss and LAE ratio. Our accident year loss and LAE ratio, a non-GAAP measure that excludes changes in net ultimate loss estimates from prior year loss reserves, was 65.4% for the six months ended June 30, 2014 compared to 68.4% for the comparable period in 2013, an improvement of 3.0 percentage points.

Excluding the impact of the previously terminated multi-line quota share reinsurance treaty with Swiss Re America Corporation ("Swiss Re Treaty"), the accident year loss and LAE ratio was 64.5% for the six months ended June 30, 2014 and 66.2% for the six months ended June 30, 2013. The 2014 results benefited from the decrease in premium from business terminated in conjunction . . .

  Add MIG to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for MIG - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.