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National Interstate Corporation Reports 2013 Second Quarter And First Six Months Results

Stocks in this article: NATL

RICHFIELD, Ohio, July 29, 2013 (GLOBE NEWSWIRE) -- National Interstate Corporation (Nasdaq:NATL) today reported results for the 2013 second quarter and first six months. The Company experienced a net loss of $0.32 per share, diluted for the 2013 second quarter compared to net income per share, diluted of $0.37 per share for the 2012 second quarter. The net loss for the 2013 second quarter was the result of underwriting results which were adversely impacted by a higher than normal number of large claims that occurred during the quarter coupled with significant unfavorable development from prior years' claims.

Gross premiums written increased 6% for the 2013 second quarter and 11% for the 2013 first six months compared to the same 2012 periods primarily attributable to growth in the transportation component.

Earnings

The table below shows the Company's net (loss) income per share determined in accordance with U.S. generally accepted accounting principles (GAAP), reconciled between after-tax (loss) earnings from operations and realized gains from investments, both of which are non-GAAP financial measures. Net after-tax (loss) earnings from operations include underwriting income and net investment income.

  Three Months Ended June 30, Six Months Ended June 30,
  2013 2012 2013 2012
  (In thousands, except per share data) (In thousands, except per share data)
Net after-tax (loss) earnings from operations $ (7,927) $ 6,991 $ (915) $ 15,605
After-tax net realized gains from investments 1,647 274 2,652 1,406
  Net (loss) income  $ (6,280) $ 7,265 $ 1,737 $ 17,011
         
Net after-tax (loss) earnings from operations per share, diluted $ (0.40) $ 0.36 $ (0.05) $ 0.79
         
After-tax net realized gains from investments per share, diluted  0.08  0.01  0.14  0.08
 Net (loss) income per share, diluted $ (0.32) $ 0.37 $ 0.09 $ 0.87

Underwriting Results:

Dave Michelson, President and Chief Executive Officer said, "We are obviously disappointed with our underwriting results. During the quarter we experienced an unusual number and magnitude of large claims. We also addressed emerging deficiencies in a portion of our claims reserves which is a unique situation for our Company."

  Three Months Ended June 30, Six Months Ended June 30,
  2013 2012 2013 2012
Losses and loss adjustment expense ratio 92.3% 74.7% 84.3% 73.9%
Underwriting expense ratio 21.6% 23.8% 21.6% 23.6%
Combined ratio 113.9% 98.5% 105.9% 97.5%

Claims: The loss and loss adjustment expense (LAE) ratio for the 2013 second quarter of 92.3% was elevated by approximately 9 percentage points due to a high number of severe claims that occurred in the quarter and 6.5 percentage points due to unfavorable development from prior year claims. These items accounted for the variance of the 2013 second quarter and first six month combined ratios when compared to recent periods. 

Three claims, two in passenger transportation products and one in moving and storage represented a significant portion of the severe claims activity that occurred during the 2013 second quarter. These three claims were related to established customers with historically favorable loss histories. While the Company expects large claims to occur in any given quarter, the number and severity experienced in the 2013 second quarter was higher than normal.

In the 2013 second quarter, the Company had $8.4 million of unfavorable development from prior year claims, of which $6.0 million was attributable to reserve strengthening of accident year 2011. This compares to $0.2 million of favorable development in the 2012 second quarter. The Company has experienced increased claims severity in recent periods, and because of prolonged competitive conditions in the commercial insurance markets which began to subside in 2012, its pricing has not adequately kept pace. The accident year 2011 reserve strengthening is predominately related to products now in runoff within the program portion of the alternative risk transfer (ART) component, as well as from the commercial vehicle product, which is part of the specialty personal lines component. The Company experienced higher than initially anticipated frequency and severity levels in accident year 2011, and although in 2011 adjustments to our pricing and reserving practices were made and underwriting actions were implemented to stem such adverse results and improve the claim frequency, the severity experience was not improving as rapidly as anticipated.  As such, the Company revised its estimate to address the increased claims severity that was emerging in the 2011 accident year, particularly related to the aforementioned products that are in runoff.

Underwriting Expenses: The underwriting expense ratio of 21.6% for the 2013 second quarter and first six months was slightly better than the same periods of 2012 and the expected range. The Company continues to effectively manage underwriting expenses.

Investments:

Net investment income of $7.9 million for the 2013 second quarter was 12% below the 2012 second quarter.  Lower reinvestment yields on fixed maturity securities and a decrease in our average fixed income holdings primarily due to the one-time special shareholder dividend paid in December 2012 contributed to the year over year decline. However, net investment income has remained flat for the past three quarters.

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