Meadowbrook Insurance Group CEO Discusses Q3 2010 Results – Earnings Call Transcript

Meadowbrook Insurance Group, Inc. (

MIG

)

Q3 2010 Earnings Conference Call

November 2, 2010 9:00 AM ET

Executives

Karen Spaun – CFO

Bob Cubbin – President and CEO

Analysts

Beth Malone – Wunderlich Securities

Ken Billingsley – BGB Securities

Scott Heleniak – RBC Capital

Tom Spiro – Spiro Capital Management

Bijan Moazami – FBR Capital Markets

Presentation

Operator

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Greetings and welcome to the Meadowbrook Insurance Group Incorporated Q3 2010 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Karen Spaun, CFO for Meadowbrook Insurance Group Incorporated. Thank you.

Ms. Spaun, you may now begin.

Karen Spaun

Thank you, and welcome to Meadowbrook Insurance Group’s third quarter 2010 earnings conference call. I will lead off today’s call with a review of our financial results. Bob Cubbin, our President and CEO will then follow with a review of our financial outlook and current market conditions. The call will conclude with a question-and-answer session.

During this call, we may make certain statements relating to the future results and expectations. These statements constitute forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. We, therefore, must state that actual results may differ materially from those projected and may involve risk and uncertainties that are outlined in our Forms 10-K and 10-Q that are filed with the SEC. Please note Meadowbrook undertakes no obligation to update or revise any forward-looking statement.

If you have not received a copy of our earnings release, it is currently available on our website meadowbrook.com, or you may give me a call and I will be happy to email a copy to you.

Before reviewing our results, I will take a moment to discuss some changes we made to the presentation of the expense line items on our income statement. In 2010, we completed an in-depth cost allocation study and made refinements to our process to track these costs on a functional basis. The purpose of the study was to align our internal expenses with those activities they support such as underwriting and related policy administration, claims administration or otherwise referred to us ULAE, general, selling and administration costs associated with the production and management of net commission and fee revenue, and general corporate expenses.

Upon completion of the study, we have the information to better define our intercompany fees and treat these fees as intercompany cost reimbursements for financial reporting purposes. This enabled us to align the consolidated results with the underlying nature or function of the internal expenses. Previously, we used estimations based upon an overall cost study that focused on intercompany fees in total and the reasonableness of the split between claims administration and policy administration costs.

These reclasses

were made to enable the user of the financial statements to calculate the GAAP combined ratio directly from the consolidated statement of income. As a result, the consolidated statement of income for the three months ended September 30

th

, 2009 has been reclassified to conform to this presentation. These reclassifications do not change total expenses or consolidated net income as originally reported for the three months ended September 30

th

, 2009. Please refer to our Forms 8-K filed on May 3

rd

, 2010 for further details.

For the three months ended September 30

th

, 2010 this refinement resulted a in 2.3 percentage point increase in the expense ratio, a 1 percentage point decrease in the loss and LAE ratio, and a decrease of $2 million in general, selling and administrative costs.

Now, with the results. We are pleased with the third quarter results as we continue to achieve profitable growth in a competitive environment.

Net operating income increased 25% to $14.6 million from $11.7 million in the third quarter 2009. This equates to an increase in operating income per share of 35% to $0.27 per share, compared to $0.20 per share in 2009.

Net income increased 36.5% to $15 million compared to $11 million for the third quarter of 2009. This equates to an increase in net income per share of 47.4% to $0.28 per share compared to $0.19 per share in 2009.

Revenues increased $35.6 million or 22.2% from a $160.2 million in the third quarter of 2009 to a $195.7 million in 2010. This increase reflects growth in net earned premiums from the business that we implemented in the second half of 2009.

Our 2010 third quarter GAAP combined ratio was 95.9%, which is comparable to the third quarter of 2009. Our expense ratio increased 2.9 percentage points to 34.3% for the three months ended September 30

th

, 2010 from 31.4% for the same period in 2009. After adjusting for the previously mentioned reclassification the expense ratio would have just increased 0.6 percentage points. This reflects an increase in external costs primarily relating to net commission expense relating to new business added in the second half of 2009 where the agent performed and is paid for certain policy issuance functions.

The third quarter of 2010 loss and loss adjustment expense ratio was 61.6% compared to 64.5% for 2009. The 2010 results include 4.2 percentage points, a favorable development as compared to the 2009 results which include 4.5 percentage points of favorable development. The accident year loss and LAE ratio was 65.9% compared to 69% in 2009. The improvement in the current accident year loss and LAE ratio reflects a decline in storm related losses and a single fire loss totaling $5.7 million that occurred in 2009.

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