EX-99.1 2 k33729exv99w1.htm EX-99.1 EX-99.1
Exhibit 99.1
MEADOWBROOK INSURANCE GROUP, INC.
(NYSE — MIG)
     
CONTACT:
  Karen M. Spaun, SVP & Chief Financial Officer, (248) 204-8178
Holly Moltane, Director of External Financial Reporting, (248) 204-8590
MEADOWBROOK INSURANCE GROUP, INC.
REPORTS RECORD SECOND QUARTER NET INCOME UP 36.4% TO $8.4 MILLION
•    Earnings per diluted share of $0.23
•    Operating earnings, excluding amortization, grew 50.3% to $10.1 million, or $0.27 EPS
•    Combined Ratio Improves to 90.5%
•    Gross Written Premium up 21%
•    Declared Quarterly Dividend of $0.02 per share
•    Increased Share Repurchase Authorization to 3.0 million shares
•    Closing on ProCentury merger set for July 31, 2008.
SOUTHFIELD, MICHIGAN
July 28, 2008
Second Quarter Overview:
Meadowbrook Insurance Group, Inc. (NYSE: MIG) reported that net income grew 36.4% to $8.4 million, or $0.23 per diluted share, for the quarter ended June 30, 2008, compared to net income of $6.2 million, or $0.20 per diluted share, for the comparable period in 2007. Net operating income, excluding amortization, which is a non-GAAP measure of cash earnings, increased 50.3% to $10.1 million, compared to $6.7 million in 2007. Gross written premium in the quarter grew 21% to $94.4 million, up from $78.0 million in 2007. As a result of an equity offering last year, common stock shares outstanding at June 30, 2008 increased to 37,021,032, from 30,529,260 shares outstanding at June 30, 2007.
Year-to-Date Overview:
Net income for the six months ended June 30, 2008, increased 18.2% to $15.5 million, or $0.42 per diluted share, compared to net income of $13.1 million, or $0.44 per diluted share, for the comparable period in 2007. Year-to-date net operating income, excluding amortization, increased 35.8% to $18.7 million, or $0.50 per diluted share, compared to $13.8 million, or $0.46 per diluted share in 2007.
Second Quarter highlights included:
  •   Quarter-to-date net operating income, excluding amortization, increased 50.3% to $10.1 million, or $0.27 per diluted share, compared to $6.7 million, or $0.22 per diluted share in 2007.
 
  •   Gross written premium grew 21% to over $94.0 million.
 
  •   Amortization expense increased to $1.6 million, from $543,000 in 2007.

 

 

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  •   Book value per share grew to $8.43, from $8.16 at December 31, 2007.
 
  •   GAAP combined ratio improved to 90.5%, compared to 97.4% in 2007.
 
  •   Pre-tax underwriting income of $7.3 million, up from $1.8 million in 2007.
 
  •   Affirmation of A.M. Best financial strength rating.
 
  •   Receipt of both shareholder and regulatory approval in connection with ProCentury merger.
 
  •   Establishment of exchange ratio and election deadline in connection with ProCentury merger.
Year-to-Date highlights included:
  •   Year-to-date net operating income, excluding amortization, increased 35.8% to $18.7 million, from $13.8 million in 2007.
 
  •   GAAP combined ratio of 92.1% with pre-tax underwriting income of $11.3 million.
 
  •   Exercised option to acquire the remaining earnings of the USSU acquisition.
 
  •   Total revenue grew approximately 6.9%.
Commenting on the results, Meadowbrook President and Chief Executive Officer Robert S. Cubbin stated:
“We are pleased with the profitable growth we have experienced in our underwriting subsidiaries despite the competitive environment. We are beginning to recognize growth from our 2007 marketing initiatives that followed our A.M. Best upgrade to “A-“in 2007. We remain optimistic that we will meet our pre-merger 2008 gross written premium targets of $385 to $395 million and will soon begin to realize some of the growth synergies from the ProCentury merger. We continue to focus on underwriting profits through our ability to leverage fixed costs and maintain price adequacy. We remain confident that our growth plans for full year 2008 are achievable.”
Second Quarter and Year-to-Date Results:
Net Income:
As noted above, net income for the quarter was up 36.4% to $8.4 million, or $0.23 per diluted share, compared to net income of $6.2 million, or $0.20 per diluted share in 2007. Net income for the first six months was up 18.2% to $15.5 million, or $0.42 per diluted share, compared to net income of $13.1 million, or $0.44 per diluted share in 2007.
Net Operating Income, Excluding Amortization (a non-GAAP measure of cash earnings):
Net operating income, excluding amortization, for the quarter increased 50.3% to $10.1 million, compared to $6.7 million in 2007. For the first six months, net operating income, excluding amortization, increased 35.8% to $18.7 million, compared to $13.8 million in 2007.
Revenues:
Revenues for the quarter ended June 30, 2008, increased 11.0%, to $93.4 million, compared to $84.2 million in 2007. For the first six months, revenues increased 6.9%, to $178.6 million, compared to $167.1 million in 2007.
Net earned premiums increased $9.8 million, or 14.6%, to $77.0 million for the quarter, compared to $67.2 million in 2007. Net earned premiums for the first six months increased 8.1%, to $143.1 million, compared to $132.4 million in 2007. This increase was primarily the result of overall growth within our existing programs and the new business we began writing in 2007 and 2008, as well as additional selective growth consistent with our corporate underwriting guidelines and our controls over price adequacy.

 

 

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Net commissions and fees decreased $1.1 million, or 10.3%, to $9.6 million for the quarter, compared to $10.7 million in 2007. For the first six months, net commissions and fees decreased to $21.7 million, compared to $22.3 million in 2007. In 2008, we converted a portion of the policies produced by USSU to our insurance company subsidiaries. The intercompany management fees associated with that portion of the USSU business that we moved to our insurance company subsidiaries were $1.0 million for the three months ended June 30, 2008. These fees are now eliminated upon consolidation, but do not impact overall consolidated results. Excluding the full year impact of this change, net commission and fees would have been relatively flat in comparison to the second quarter of 2007. Net commission and fees were partially impacted by a decrease in fees within a New England-based program and by lower agency commission revenue, both due to competitive pricing in certain jurisdictions.
Net investment income increased by 11.0%, to $6.9 million for the quarter ended June 30, 2008. Year-to-date net investment income increased to $14.1 million, from $12.4 million in 2007. Average invested assets for the quarter increased $94.4 million to $641.9 million. For the first six months, average invested assets increased $112.9 million to $647.7 million. The increase in average invested assets primarily resulted from the positive cash flows from operations, favorable underwriting results, and the lengthening of the duration of our reserves. In addition, the increase in average invested assets includes cash from our equity offering in July 2007.
The average investment yield was 4.31% for June 30, 2008, down from 4.55% in 2007. The current pre-tax book yield was 4.28%. The current after-tax book yield was 3.24%, compared to 3.40% in 2007. The duration of the investment portfolio is 3.9 years.
During the quarter, we recognized a capital loss of $168,000 related to a single asset-backed security. This asset-backed security had some indirect sub-prime exposure that is wrapped by insurance from monoline insurer, FGIC. The security is collateralized by fixed rate second loans originated in 2005. The security is current on all interest payments, is adequately collateralized and we have the ability and intent to hold the security to maturity. However, the present value of the expected cash flows is below the amortized cost of the security. Therefore, we are required to recognize any unrealized loss as a capital loss in the income statement. Accordingly, the amortized cost was reduced at June 30, 2008 to market value.
Our investment portfolio is 99.7% in investment grade securities and we continue to invest in securities with minimum credit risk. While our investment portfolio includes investments in mortgage-backed and agency-backed securities, we do not have any direct exposure to any sub-prime risks. Mortgage-backed securities, including both commercial and residential mortgage-backed, were 19.0% of our investment portfolio at June 30, 2008, compared to 19.5% at June 30, 2007. Asset-backed securities were 3.2% of our investment portfolio at June 30, 2008, compared to 4.6% at June 30, 2007. Within the asset-backed sector, we have an indirect exposure to subprime loans on four securities totaling $2.6 million. Two securities are AAA rated and have current credit enhancement in excess of the initial credit enhancement. The other two securities are insured by FGIC, which has been downgraded. As a result, these two securities have been downgraded to BBB- and BB. Since these securities no longer bear a rating of high credit quality and are in an unrealized loss position, we are required to evaluate the securities for other than temporary impairment charges, in accordance with accounting guidelines. As a result, an impairment loss of $168,000, as noted above, was recognized on one of the securities. No impairment was required to be recognized on the other security. We do not expect any principal loss will be realized on either security.
Expenses:
The GAAP combined ratio for the quarter improved 6.9 percentage points to 90.5%, compared to 97.4% in 2007. For the first six months, our combined ratio was 92.1%, compared to 96.8% in 2007, an improvement of 4.7 percentage points. Our combined ratio was favorably impacted by the elimination of the fronting fees associated with our prior use of an unaffiliated insurance carrier, as well as our ability to

 

 

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further leverage fixed costs. In addition, our combined ratio was favorably impacted by an increase in favorable development on prior accident years ultimate loss estimates.
Incurred losses were $43.5 million for the quarter ended June 30, 2008, compared to $39.7 million in 2007. Year-to-date incurred losses were $81.2 million, up from $76.4 million in 2007. The loss and loss adjustment expense ratio for the quarter improved 2.9 percentage points to 61.2%, from 64.1% in 2007. For the first six months, the loss and loss adjustment expense ratio improved 1.2 percentage points to 61.5%, from 62.7% in 2007.
For the quarter, our loss and loss adjustment expense ratio included favorable development of $2.7 million, or 3.5 percentage points, compared to adverse development of $83,000 in 2007. For the first six months, we had favorable development on prior accident years of $5.6 million, or 3.9 percentage points, compared to favorable development of $2.1 million, or 1.6 percentage points in 2007.
Policy acquisition and other underwriting expenses decreased 3.4%, to $12.7 million for the second quarter of 2008, compared to $13.2 million in 2007. The GAAP expense ratio for the quarter improved 4.0 percentage points to 29.3%, from 33.3% in 2007. Year-to-date policy acquisition and other underwriting expenses decreased 3.5%, to $25.9 million, from $26.8 million in 2007. The GAAP expense ratio for the year improved 3.5 percentage points to 30.6%, from 34.1% in 2007. The decrease within our expense ratio reflects the anticipated decrease due to the elimination of the fronting fees paid in 2007 and our continued leveraging of fixed costs as we are able to grow without adding to our staffing levels.
Salaries and employee benefits for the quarter ended June 30, 2008 increased $1.2 million, or 9.6%, to $14.1 million, from $12.9 million in 2007. Year-to-date salaries and employee benefits increased to $26.9 million, from $26.4 million in 2007. This change primarily reflects an increase in variable compensation, as a result of our favorable results and its relation to our targeted variable compensation thresholds and an increase in health benefit costs. Slightly offsetting these unfavorable variances was a decrease in profit sharing commissions. The decrease in profit sharing commissions was the result of our purchase of an excess book of business.
Other administrative expenses increased to $8.0 million for the quarter, from $7.6 million in 2007. Year-to-date other administrative expenses increased to $16.8 million, from $15.0 million in comparison to 2007. The year-to-date increase primarily relates to the management fee associated with the USSU acquisition. These fees were discontinued upon termination of the Management Agreement we had with the former owners of USSU in January 2008.
Amortization expense for the quarter ended June 30, 2008, increased $1.0 million, to $1.6 million, from $543,000 in 2007. Year-to-date amortization expense increased $2.4 million, to $3.1 million, from $687,000 in 2007. This increase in amortization expense primarily relates to the customer relationships acquired with the USSU business and the excess book of business.
Interest expense for the quarter decreased 24.8%, to $1.3 million, from $1.7 million in 2007. Year-to-date interest expense decreased 18.7%, to $2.6 million, from $3.2 million in 2007. These decreases primarily reflect a decrease in the average outstanding balance on our line of credit, as well as a decrease in our overall average interest rates on our debentures, in comparison to 2007.
In April 2008, we entered into three interest rate swap transactions to mitigate our interest rate risk on our remaining $30.0 million in debt not previously fixed with our prior interest rate swaps entered into in 2005. This was the result of our overall capital structure, recent interest rate reductions and the fact that the 3-month LIBOR rate was at its lowest point since we entered into our prior interest rate swap transactions. As a result, all of our senior debentures and trust preferred securities now have fixed interest rates associated with them. The average fixed interest rate associated with the interest rate swaps was 8.2%, compared to an annualized rate of 9.6% in 2007.

 

 

PRESS RELEASE   PAGE 5
 
Other Matters:
Shareholders’ Equity:
Shareholders’ equity increased to $312.0 million, or $8.43 per common share, at June 30, 2008, compared to $301.9 million, or $8.16 per common share, at December 31, 2007. This per share increase in book value primarily reflects our year-to-date earnings and an increase in unrealized losses, net of deferred income tax, of $4.4 million.
At June 30, 2008, our debt-to-equity ratio was 17.9%, compared to 18.5% at December 31, 2007, which is comprised solely of our interest only 30-year debentures. Excluding these debentures our debt-to-equity ratio would have been 0% at June 30, 2008.
Dividend and Share Repurchases:
On July 25, 2008, our Board of Directors declared a quarterly dividend of $0.02 per share payable on September 2, 2008, to shareholders of record as of August 15, 2008.
At our regularly scheduled Board of Directors meeting of July 25, 2008, our Board of Directors increased our authorized share repurchases from 1,000,000 to 3,000,000 in market transactions for a period not to exceed twenty-four months. As of June 30, 2008, we did not repurchase any shares under our prior share repurchase plan.
Statutory Surplus:
Statutory surplus increased to $205.5 million at June 30, 2008, from $188.4 million at December 31, 2007. The increase in statutory surplus was primarily due to statutory net income. As of June 30, 2008, our earned surplus is $56.0 million, which represents our available dividend potential from our insurance company subsidiaries to our holding company for capital strategies, such as acquisitions, dividends, debt repayments, and share repurchases.
Income Taxes:
The effective federal tax rate for the six months ended June 30, 2008 was 28.9%, compared to 28.3% in 2007. The increase in the effective tax rate from 2007 to 2008 reflects a lower contribution of investment income to pre-tax income. Investment income represented 63.4% of pre-tax income for the six months ended June 30, 2008, compared to 66.4% in 2007. This decrease reflects the improved underwriting results in 2008, compared to 2007, slightly offset by growth in invested assets from operations and the cash proceeds from the equity raise in July 2007.
A.M. Best Affirmation:
As previously announced on June 4, 2008, A.M. Best Company affirmed the financial strength rating of “A-” (Excellent) for our insurance company subsidiaries.
ProCentury Merger Update:
As announced on July 14, 2008, the shareholders of both Meadowbrook and ProCentury have now approved the merger of the companies. In addition, and as recently announced, all regulatory approvals were obtained and we established the exchange ratio and the election form deadline. The exchange ratio

 

 

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for ProCentury Corporation common shares exchanged for Meadowbrook common stock in the merger will be 2.5000. The election form deadline for ProCentury Corporation shareholders to submit their election forms for selecting the form of merger consideration to be received upon consummation of the merger has been set at 5:00 p.m., Eastern Time, on July 30, 2008. The closing on the transaction is scheduled for July 31, 2008.
Commenting on the finalization of the merger, Robert S. Cubbin stated, “We are extremely excited that we will be closing on the merger transaction very soon. We were pleased with the strong support for the merger we received from the shareholders of both companies and we appreciate the cooperation we received for the regulators in order to meet our deadlines. Both management teams have been working together diligently to insure a smooth transition into one organization. We are excited about the numerous growth opportunities created by this merger and look forward to finally being able to bring these two very disciplined operations together.”
We expect to provide a more detailed merger update in mid-August 2008.
About Meadowbrook Insurance Group
A leader in the specialty program management market, Meadowbrook is a risk management organization, specializing in alternative risk management solutions for agents, professional/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 collectibility 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.

 

 

EARNINGS RELEASE   PAGE 7
 
MEADOWBROOK INSURANCE GROUP, INC.
FINANCIAL INFORMATION
SUPPLEMENT TO THE EARNINGS RELEASE
UNAUDITED BALANCE SHEET INFORMATION
                 
    JUNE 30,     DECEMBER 31,  
(In Thousands, Except Per Share Data)   2008     2007  
 
                
BALANCE SHEET DATA
                
 
                
ASSETS
                
Cash and invested assets
   $ 643,779     $ 651,601  
Premium & agents balances
     94,242       87,341  
Reinsurance recoverable
     200,904       199,514  
Deferred policy acquisition costs
     28,997       26,926  
Prepaid reinsurance premiums
     18,669       17,763  
Goodwill
     60,371       43,497  
Other assets
     91,244       87,324  
 
            
 
                
Total Assets
   $ 1,138,206     $ 1,113,966  
 
            
 
                
LIABILITIES
                
Loss and loss adjustment expense reserves
   $ 558,864     $ 540,002  
Unearned premium reserves
     159,250       153,927  
Debentures
     55,930       55,930  
Other liabilities
     52,142       62,213  
 
            
Total Liabilities
     826,186       812,072  
 
                
STOCKHOLDERS’ EQUITY
                
Common stockholders’ equity
     312,020       301,894  
 
            
 
                
Total Liabilities & Stockholders’ Equity
   $ 1,138,206     $ 1,113,966  
 
            
 
                
Book value per common share
   $ 8.43     $ 8.16  
 
                
Book value per common share excluding unrealized gain/loss on available for sale securities, net of deferred taxes
   $ 8.45     $ 8.07  

 

 

     
EARNINGS RELEASE
  PAGE 8
 
MEADOWBROOK INSURANCE GROUP, INC.
FINANCIAL INFORMATION
SUPPLEMENT TO THE EARNINGS RELEASE
UNAUDITED INCOME STATEMENT INFORMATION
                                 
    FOR THE QUARTER     FOR THE SIX MONTHS  
(In Thousands, Except   ENDED JUNE 30,     ENDED JUNE 30,  
Share & Per Share Data)   2008     2007     2008     2007  
SUMMARY DATA                        
Gross written premiums
   $ 94,370     $ 78,000     $ 184,838     $ 167,504  
Net written premiums
     76,071       65,670       147,470       137,642  
 
                                
REVENUES
                                
Net earned premiums
   $ 77,031     $ 67,191     $ 143,053     $ 132,395  
Net commissions and fees
     9,632       10,743       21,663       22,294  
Net investment income
     6,917       6,229       14,065       12,385  
Net realized (losses) gains
     (146 )     20       (177 )     14  
 
                        
Total Revenues
     93,434       84,183       178,604       167,088  
 
                                
EXPENSES
                                
Net losses & loss adjustment expenses (1)
     43,542       39,707       81,203       76,353  
Salaries & employee benefits
     14,143       12,900       26,898       26,432  
Interest expense
     1,254       1,667       2,565       3,154  
Policy acquisition and other underwriting expenses (1)
     12,716       13,169       25,863       26,812  
Amortization expense
     1,563       543       3,114       687  
Other administrative expenses
     7,961       7,598       16,793       14,992  
 
                        
Total Expenses
     81,179       75,584       156,436       148,430  
 
                                
INCOME BEFORE INCOME TAXES AND EQUITY EARNINGS
     12,255       8,599       22,168       18,658  
Income tax expense
     3,879       2,461       6,790       5,610  
Equity earnings of affiliates
     61       48       117       61  
 
                        
NET INCOME
   $ 8,437     $ 6,186     $ 15,495     $ 13,109  
 
                        
NET OPERATING INCOME (2)
   $ 8,532     $ 6,173     $ 15,610     $ 13,100  
 
                        
 
                                
Amortization expense
     1,563       543       3,114       687  
 
                                
NET OPERATING INCOME, excluding amortization expense (3)
   $ 10,095     $ 6,716     $ 18,724     $ 13,787  
 
                        
 
                                
Diluted earnings per common share
                                
Net income
   $ 0.23     $ 0.20     $ 0.42     $ 0.44  
Net operating income
   $ 0.23     $ 0.20     $ 0.42     $ 0.44  
Net operating income, excluding amortization expense
   $ 0.27     $ 0.22     $ 0.50     $ 0.46  
Diluted weighted average common shares outstanding
     37,126,911       30,350,553       37,126,782       29,876,480  
 
                                
GAAP ratios:
                                
 
                                
Loss & LAE ratio
     61.2 %     64.1 %     61.5 %     62.7 %
Other underwriting expense ratio
     29.3 %     33.3 %     30.6 %     34.1 %
 
                        
GAAP combined ratio
     90.5 %     97.4 %     92.1 %     96.8 %
 
                        
 
(1)   Both the loss and loss adjustment and expense ratios are calculated based upon the unconsolidated insurance company operations. The following supplemental information sets forth the intercompany fees, which are eliminated upon consolidation.
 
(2)   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 (losses) net of taxes associated with such gains (losses).
 
(3)   While net operating income, excluding amortization expense, is a non-GAAP disclosure, management believes this information is beneficial to reviewing the financial statements. Management believes this information is beneficial as amortization expense reflects an interim non-cash charge and in the long-term cash earnings will reflect GAAP earnings as we complete the amortization periods associated with current acquisitions. Net operating income, excluding amortization expense, is net income less realized gains (losses) net of taxes associated with such gains (losses) and less amortization expense.

 

 

EARNINGS RELEASE   PAGE 9
 
MEADOWBROOK INSURANCE GROUP, INC.
FINANCIAL INFORMATION
SUPPLEMENT TO THE EARNINGS RELEASE
UNAUDITED UNCONSOLIDATED GAAP DATA
                                   
    FOR THE QUARTER       FOR THE SIX MONTHS  
    ENDED JUNE 30,       ENDED JUNE 30,  
(In Thousands)   2008     2007       2008     2007  
Unconsolidated GAAP data — Ratio Calculation Table:
                                  
Net earned premiums
   $ 77,031     $ 67,191       $ 143,053     $ 132,395  
 
                                  
Consolidated net loss and LAE (1)
   $ 43,542     $ 39,707       $ 81,203     $ 76,353  
Intercompany claim fees
     3,629       3,353         6,735       6,648  
 
                          
Unconsolidated net loss and LAE
   $ 47,171     $ 43,060       $ 87,938     $ 83,001  
 
                          
 
                                  
GAAP loss and LAE ratio
     61.2 %     64.1 %       61.5 %     62.7 %
 
                                  
Consolidated policy acquisition and other underwriting expenses (1)
   $ 12,716     $ 13,169       $ 25,863     $ 26,812  
Intercompany administrative and other underwriting fees
     9,832       9,178         17,920       18,330  
 
                          
Unconsolidated policy acquisition and other underwriting expenses
   $ 22,548     $ 22,347       $ 43,783     $ 45,142  
 
                          
 
                                  
GAAP other underwriting expense ratio
     29.3 %     33.3 %       30.6 %     34.1 %
 
                                  
GAAP combined ratio
     90.5 %     97.4 %       92.1 %     96.8 %
 
                                  
 
     2008       2007         2008       2007  
 
                          
Unconsolidated GAAP data — Gross Commissions and Fees:
                                  
Managed programs:
                                  
Management fees
   $ 4,174     $ 5,412       $ 10,206     $ 10,287  
Claims fees
     2,305       2,247         4,485       4,451  
Loss control fees
     625       544         1,135       1,143  
Reinsurance brokerage
     98       85         394       418  
 
                          
Total managed programs
     7,202       8,288         16,220       16,299  
Agency commissions
     2,681       2,860         6,009       6,745  
Intersegment revenue
     (251 )     (405 )       (566 )     (750 )
 
                          
Net commissions and fees
     9,632       10,743         21,663       22,294  
Intercompany commissions and fees
     13,461       12,531         24,655       24,978  
 
                          
Gross commissions and fees
   $ 23,093     $ 23,274       $ 46,318     $ 47,272  
 
                          
 
                                  
Fee-for-service pre-tax income, excluding amortization
   $ 1,708     $ 3,309       $ 4,246     $ 7,237  
 
                          
 
                                  
Pre-tax margin on fee-for-service income
     7.4 %     14.2 %       9.2 %     15.3 %
 
(1)   Both the loss and loss adjustment and expense ratios are calculated based upon the unconsolidated insurance company operations. The above table sets forth the intercompany fees, which are eliminated in consolidation. The GAAP combined ratio is the sum of the GAAP loss and loss adjustment expense ratio and the GAAP expense ratio. The GAAP loss and loss adjustment expense ratio is the unconsolidated net loss and loss adjustment expense in relation to net earned premium. The GAAP expense ratio is the unconsolidated policy acquisition and other underwriting expenses in relation to net earned premium.

 

 

     
EARNINGS RELEASE   PAGE 10
MEADOWBROOK INSURANCE GROUP, INC.
FINANCIAL INFORMATION
SUPPLEMENT TO THE EARNINGS RELEASE
UNAUDITED ADJUSTED GAAP EXPENSE RATIO SUMMARY
                                     
    FOR THE QUARTER       FOR THE SIX MONTHS    
    ENDED JUNE 30,       ENDED JUNE 30,    
(In Thousands)   2008     2007       2008     2007    
 
                                    
Net earned premiums
   $ 77,031     $ 67,191       $ 143,053     $ 132,395    
Less: Unconsolidated net loss and LAE
     47,171       43,060         87,938       83,001    
Unconsolidated policy acquisition and other underwriting expenses
     22,548       22,347         43,783       45,142    
 
                            
Underwriting income
   $ 7,312     $ 1,784       $ 11,332     $ 4,252    
 
                            
 
                                    
GAAP combined ratio as reported
     90.5 %     97.4 %       92.1 %     96.8 %  
 
                                    
Specialty risk management operations pre-tax income
   $ 15,617     $ 10,848       $ 28,529     $ 22,167    
Less: Underwriting income
     7,312       1,784         11,332       4,252    
Net investment income and capital gains
     6,771       6,249         13,888       12,399    
 
                            
Fee-based operations pre-tax income
     1,534       2,815         3,309       5,516    
Agency operations pre-tax income
     174       494         937       1,721    
 
                            
Total fee-for-service pre-tax income
   $ 1,708     $ 3,309       $ 4,246     $ 7,237    
 
                            
 
                                    
GAAP expense ratio as reported
     29.3 %     33.3 %       30.6 %     34.1 %  
Adjustment to include pre-tax income from total fee-for-service income (1)
     2.2 %     4.9 %       3.0 %     5.5 %  
 
                            
GAAP expense ratio as adjusted (2)
     27.1 %     28.3 %       27.6 %     28.6 %  
GAAP loss and LAE ratio as reported
     61.2 %     64.1 %       61.5 %     62.7 %  
 
                            
 
                                    
GAAP combined ratio as adjusted
     88.3 %     92.4 %       89.1 %     91.3 %  
 
                            
 
                                    
Reconciliation of consolidated pre-tax income:
                                    
Specialty risk management operations pre-tax income:
                                    
Fee-based operations pre-tax income
   $ 1,534     $ 2,815       $ 3,309     $ 5,516    
Underwriting income
     7,312       1,784         11,332       4,252    
Net investment income and capital gains
     6,771       6,249         13,888       12,399    
 
                            
Total specialty risk management operations pre-tax income
     15,617       10,848         28,529       22,167    
 
                                    
Agency operations pre-tax income
     174       494         937       1,721    
Less: Holding company expenses
     719       533         1,619       1,389    
Interest expense
     1,254       1,667         2,565       3,154    
Amortization expense
     1,563       543         3,114       687    
 
                            
Consolidated pre-tax income
   $ 12,255     $ 8,599       $ 22,168     $ 18,658    
 
                            
 
(1)   Adjustment to include pre-tax income from total fee-for-service income is calculated by dividing total fee-for-service income by net earned premiums.
 
(2)   While the adjusted GAAP expense ratio is a non-GAAP disclosure, management believes this information is beneficial to reviewing the financial statements. The adjusted GAAP expense ratio is the GAAP expense ratio, as reported, less the adjustment to include pre-tax income from total fee-for-service income. Management believes this information is beneficial as our GAAP expense ratio includes the impact of the margin associated with our fee-based operations. If the profit margin from our fee-for-service business is recognized as an offset to our underwriting expense, a more realistic picture of our operating efficiency emerges.

 

 

EARNINGS RELEASE   PAGE 11
MEADOWBROOK INSURANCE GROUP, INC.
FINANCIAL INFORMATION
SUPPLEMENT TO THE EARNINGS RELEASE
UNAUDITED CASH OPERATING ACTIVITIES SUMMARY FOR
INSURANCE COMPANY AND FEE-BASED SUBSIDIARIES
                                 
    FOR THE QUARTER     FOR THE SIX MONTHS  
    ENDED JUNE 30,     ENDED JUNE 30,  
(In Thousands)   2008     2007     2008     2007  
SUMMARY DATA
                                
Net Income
   $ 8,437     $ 6,186     $ 15,495     $ 13,109  
 
                        
 
Insurance Company Subsidiaries
                                
Net Income
   $ 9,643     $ 5,455     $ 16,931     $ 11,071  
 
                        
Adjustments to reconcile net income to net cash provided by operating activities
     2,480       (283 )     2,877       158  
Changes in operating assets and liabilities
     5,848       (1,551 )     7,121       9,732  
 
                        
Total adjustments
     8,328       (1,834 )     9,998       9,890  
 
                        
 
Net cash provided by operating activities
   $ 17,971     $ 3,621     $ 26,929     $ 20,961  
 
                        
 
Fee-based Subsidiaries
                                
Net (loss) income
   $ (1,206 )   $ 731     $ (1,436 )   $ 2,038  
Depreciation
     760       788       1,505       1,525  
Amortization
     1,563       543       3,114       687  
Interest
     1,254       1,667       2,565       3,154  
 
                        
Net income, excluding interest, depreciation, and amortization (1) (“EBIDA”)
   $ 2,371     $ 3,729     $ 5,748     $ 7,404  
 
                        
 
Adjustments to reconcile net income to net cash provided by (used in ) operating activities
     2,371       879       4,202       2,452  
Changes in operating assets and liabilities
     (1,832 )     (146 )     (3,548 )     (3,214 )
 
                        
Total adjustments
     539       733       654       (762 )
Depreciation
     (760 )     (788 )     (1,505 )     (1,525 )
Amortization
     (1,563 )     (543 )     (3,114 )     (687 )
Interest
     (1,254 )     (1,667 )     (2,565 )     (3,154 )
 
                        
Net cash (used in) provided by operating activities
   $ (667 )   $ 1,464     $ (782 )   $ 1,276  
 
                        
 
Consolidated total adjustments
     8,867       (1,101 )     10,652       9,128  
 
                        
Consolidated net cash provided by operating activities
   $ 17,304     $ 5,085     $ 26,147     $ 22,237  
 
                        
 
(1)   While net income, excluding interest, depreciation, and amortization, is a non-GAAP disclosure, management believes this information is beneficial to reviewing the financial statements.

 

 

EARNINGS RELEASE   PAGE 12
 
MEADOWBROOK INSURANCE GROUP, INC.
FINANCIAL INFORMATION
SUPPLEMENT TO THE EARNINGS RELEASE
UNAUDITED HISTORICAL INCOME STATEMENT INFORMATION
                                                                                             
(In Thousands, Except                                                        
Share & Per Share Data)     2005A     2006A     Q107A   Q207A   Q307A   Q407A     2007A     Q108A   Q208A          
                                 
SUMMARY DATA
                                                                                            
Gross written premiums
     $ 332,209       $ 330,872       $ 89,504     $ 78,000     $ 90,729     $ 88,218       $ 346,451       $ 90,468     $ 94,370            
Net written premiums
       258,134         262,668         71,972       65,670       73,203       69,366         280,211         71,399       76,071            
 
                                                                                            
INCOME STATEMENT
                                                                                            
 
                                                                                            
REVENUES
                                                                                            
Net earned premiums
     $ 249,959       $ 254,920       $ 65,204     $ 67,191     $ 67,337     $ 68,465       $ 268,197       $ 66,022     $ 77,031            
Commissions and fees (net)
       35,916         41,172         11,551       10,743       13,319       10,375         45,988         12,031       9,632            
Net investment income
       17,975         22,075         6,156       6,229       6,788       7,227         26,400         7,148       6,917            
Net realized gains (losses)
       167         69         (6 )     20       100       36         150         (31 )     (146 )          
                                 
Total Revenues
       304,017         318,236         82,905       84,183       87,544       86,103         340,735         85,170       93,434            
 
                                                                                            
EXPENSES
                                                                                            
Net losses & loss adjustment expenses
       151,542         146,293         36,646       39,707       37,015       37,601         150,969         37,661       43,542            
Policy acquisition and other underwriting expenses
       44,439         50,479         13,643       13,169       12,927       13,978         53,717         13,147       12,716            
Other administrative expenses
       26,810         28,824         7,394       7,598       9,190       8,087         32,269         8,832       7,961            
Salaries & employee benefits
       51,331         54,569         13,532       12,900       15,750       14,251         56,433         12,755       14,143            
Amortization expense
       373         590         144       543       622       621         1,930         1,551       1,563            
Interest expense
       3,856         5,976         1,487       1,667       1,476       1,400         6,030         1,311       1,254            
                                 
Total Expenses
       278,351         286,731         72,846       75,584       76,980       75,938         301,348         75,257       81,179            
 
                                                                                            
INCOME BEFORE TAXES AND EQUITY EARNINGS
       25,666         31,505         10,059       8,599       10,564       10,165         39,387         9,913       12,255            
Income tax expense
       7,757         9,599         3,149       2,461       3,219       2,897         11,726         2,911       3,879            
Equity earnings of affiliates
       1         128         13       48       210       60         331         56       61            
                                 
NET INCOME
     $ 17,910       $ 22,034       $ 6,923     $ 6,186     $ 7,555     $ 7,328       $ 27,992       $ 7,058     $ 8,437            
 
                                                                                            
Net realized capital gain (loss), net of tax
       109         45         (4 )     13       65       23         97         (20 )     (95 )          
                                 
OPERATING INCOME
     $ 17,801       $ 21,989       $ 6,927     $ 6,173     $ 7,490     $ 7,305       $ 27,895       $ 7,078     $ 8,532            
                                 
 
                                                                                            
Amortization expense
       373         590         144       543       622       621         1,930         1,551       1,563            
 
                                                                                            
OPERATING INCOME, excluding amortization expense
     $ 18,174       $ 22,579       $ 7,071     $ 6,716     $ 8,112     $ 7,926       $ 29,825       $ 8,629     $ 10,095            
                                 
Weighted average common shares outstanding
       29,653,067         29,566,141         29,465,807       30,350,553       35,378,119       37,074,978         33,101,965         37,103,270       37,126,911            
Shares O/S at end of the period
       28,672,009         29,107,818         29,539,236       30,529,260       36,980,070       36,996,287         36,996,287         37,021,032       37,021,032            
 
                                                                                            
PER SHARE DATA (Diluted)
                                                                                            
Net income
     $ 0.60       $ 0.75       $ 0.23     $ 0.20     $ 0.21     $ 0.20       $ 0.85       $ 0.19     $ 0.23            
Net realized gain (loss), net of tax
     $ —       $ 0.01       $ —     $ —     $ —     $ —       $ 0.01       $ —     $ —            
Operating income
     $ 0.60       $ 0.74       $ 0.23     $ 0.20     $ 0.21     $ 0.20       $ 0.84       $ 0.19     $ 0.23            
Operating income, excluding amortization expense
     $ 0.61       $ 0.76       $ 0.24     $ 0.22     $ 0.23     $ 0.21       $ 0.90       $ 0.23     $ 0.27            
                                 
 
                                                                                            
OPERATING RATIO ANALYSIS
                                                                                            
GAAP Loss & LAE ratio
       65.2 %       62.3 %       61.3 %     64.1 %     59.9 %     59.5 %       61.2 %       61.7 %     61.2 %          
GAAP Expense ratio
       33.5 %       34.5 %       35.0 %     33.3 %     33.9 %     34.5 %       34.2 %       32.2 %     29.3 %          
                                 
GAAP Combined ratio
       98.7 %       96.8 %       96.3 %     97.4 %     93.8 %     94.0 %       95.4 %       93.9 %     90.5 %          
                                 
 
                                                                                            
Unconsolidated GAAP data — Ratio Calculation Table:
                                                                                            
Net earned premiums
     $ 249,959       $ 254,920       $ 65,204     $ 67,191     $ 67,337     $ 68,465       $ 268,197       $ 66,022     $ 77,031            
 
                                                                                            
Consolidated net loss and LAE
     $ 151,542       $ 146,293       $ 36,646     $ 39,707     $ 37,015     $ 37,601       $ 150,969       $ 37,661     $ 43,542            
Intercompany claim fees
       11,523         12,553         3,295       3,353       3,297       3,113         13,058         3,106       3,629            
                                 
Unconsolidated net loss and LAE
     $ 163,065       $ 158,846       $ 39,941     $ 43,060     $ 40,312     $ 40,714       $ 164,027       $ 40,767     $ 47,171            
                                 
 
                                                                                            
GAAP Net loss and LAE ratio
       65.2 %       62.3 %       61.3 %     64.1 %     59.9 %     59.5 %       61.2 %       61.7 %     61.2 %          
 
                                                                                            
Consolidated Policy acquisition and other underwriting expenses
     $ 44,439       $ 50,479       $ 13,643     $ 13,169     $ 12,927     $ 13,978       $ 53,717       $ 13,147     $ 12,716            
Intercompany administrative and other underwriting fees
       39,231         37,442         9,152       9,178       9,916       9,644         37,890         8,088       9,832            
                                 
Unconsolidated policy acquisition and other underwriting expenses
     $ 83,670       $ 87,921       $ 22,795     $ 22,347     $ 22,843     $ 23,622       $ 91,607       $ 21,235     $ 22,548            
                                 
GAAP Expense ratio
       33.5 %       34.5 %       35.0 %     33.3 %     33.9 %     34.5 %       34.2 %       32.2 %     29.3 %          
 
                                                                                            
GAAP Combined Ratio
       98.7 %       96.8 %       96.3 %     97.4 %     93.8 %     94.0 %       95.4 %       93.9 %     90.5 %          
 
                                                                                            
Unconsolidated Commissions & Fees
                                                                                            
Managed programs:
                                                                                            
Management fees
     $ 16,741       $ 18,714       $ 4,875     $ 5,412       8,376       5,300       $ 23,963       $ 6,032     $ 4,174            
Claims fees
       7,113         8,776         2,204       2,247       2,337       2,237         9,025         2,180       2,305            
Loss control fees
       2,260         2,216         599       544       489       519         2,151         510       625            
Reinsurance brokerage
       660         735         333       85       185       326         929         296       98            
                                 
Total managed programs
       26,774         30,441         8,011       8,288       11,387       8,382       $ 36,068         9,018       7,202            
Agency commissions
       11,304         12,285         3,885       2,860       2,329       2,242         11,316         3,328       2,681            
Intersegment commissions and fees
       (2,162 )       (1,554 )       (345 )     (405 )     (397 )     (249 )       (1,396 )       (315 )     (251 )          
                                 
Net Commissions and fees
       35,916         41,172         11,551       10,743       13,319       10,375         45,988         12,031       9,632            
Intercompany commissions and fees
       50,754         49,995         12,447       12,531       13,213       12,757         50,948         11,194       13,461            
                                 
Gross commissions and fees
     $ 86,670       $ 91,167       $ 23,998     $ 23,274     $ 26,532     $ 23,132       $ 96,936       $ 23,225     $ 23,093            
                                 

 

EARNINGS RELEASE   PAGE 13
 
MEADOWBROOK INSURANCE GROUP, INC.
FINANCIAL INFORMATION
SUPPLEMENT TO THE EARNINGS RELEASE
UNAUDITED HISTORICAL CASH OPERATING ACTIVITIES SUMMARY FOR
INSURANCE COMPANY AND FEE-BASED SUBSIDIARIES
(In Thousands)
                                                                                     
      2005A       2006A       Q107A     Q207A     Q307A     Q407A       2007A       Q108A     Q208A    
                                 
SUMMARY DATA
                                                                                    
Net Income
     $ 17,910       $ 22,034       $ 6,923     $ 6,186     $ 7,555     $ 7,328       $ 27,992       $ 7,058     $ 8,437    
                                 
 
                                                                                    
Insurance Company Subsidiaries
                                                                                    
Net Income
     $ 13,508       $ 19,712       $ 5,616     $ 5,455     $ 7,195     $ 7,329       $ 25,595       $ 7,288     $ 9,643    
                                 
Adjustments to reconcile net income to net cash provided by operating activities
       3,003         3,033         441       (283 )     668       (130 )       696         397       2,480    
Changes in operating assets and liabilities
       59,784         46,915         11,283       (1,551 )     16,602       29,199         55,533         1,273       5,848    
                                 
Total adjustments
       62,787         49,948         11,724       (1,834 )     17,270       29,069         56,229         1,670       8,328    
                                 
 
                                                                                    
Net cash provided by operating activities
     $ 76,295       $ 69,660       $ 17,340     $ 3,621     $ 24,465     $ 36,398       $ 81,824       $ 8,958     $ 17,971    
                                 
Fee-based Subsidiaries
                                                                                    
Net income
     $ 4,402       $ 2,322       $ 1,307     $ 731     $ 360     $ (1 )     $ 2,397       $ (230 )   $ (1,206 )  
Depreciation
       2,277         2,553         737       788       755       867         3,147         745       760    
Amortization
       373         590         144       543       622       621         1,930         1,551       1,563    
Interest
       3,856         5,976         1,488       1,667       1,475       1,400         6,030         1,311       1,254    
                                 
Net income, excluding interest, depreciation, and amortization (“EBIDA”)
     $ 10,908       $ 11,441       $ 3,676     $ 3,729     $ 3,212     $ 2,887       $ 13,504       $ 3,377     $ 2,371    
                                 
 
                                                                                    
Adjustments to reconcile net income to net cash provided by operating activities
       4,444         3,161         1,573       879       1,427       1,998         5,877         1,831       2,371    
Changes in operating assets and liabilities
       (3,194 )       (852 )       (3,068 )     (146 )     3,734       (2,011 )       (1,491 )       (1,716 )     (1,832 )  
                                 
Total adjustments
       1,250         2,309         (1,495 )     733       5,161       (13 )       4,386         115       539    
Depreciation
       (2,277 )       (2,553 )       (737 )     (788 )     (755 )     (867 )       (3,147 )       (745 )     (760 )  
Amortization
       (373 )       (590 )       (144 )     (543 )     (622 )     (621 )       (1,930 )       (1,551 )     (1,563 )  
Interest
       (3,856 )       (5,976 )       (1,488 )     (1,667 )     (1,475 )     (1,400 )       (6,030 )       (1,311 )     (1,254 )  
                                 
Net cash provided by (used in) operating activities
     $ 5,652       $ 4,631       $ (188 )   $ 1,464     $ 5,521     $ (14 )     $ 6,783       $ (115 )   $ (667 )  
                                 
 
                                                                                    
Consolidated total adjustments
       64,037         52,257         10,229       (1,101 )     22,431       29,056         60,615         1,785       8,867    
                                 
Consolidated net cash provided by operating activities
     $ 81,947       $ 74,291       $ 17,152     $ 5,085     $ 29,986     $ 36,384       $ 88,607       $ 8,843     $ 17,304