Meadowbrook Insurance declares 4Q net income

Meadowbrook Insurance Group reported fourth quarter 2012 net income of $38.0 million, or $0.76 per diluted share, as compared to $9.0 million, or $0.18 per diluted share, for the fourth quarter of 2011. Net operating income, a non-GAAP measure the Company defines as net income excluding after-tax realized gains and losses, was $47,000, or $0.00 per diluted share, compared to net operating income of $8.5 million, or $0.17 per diluted share, in the prior year fourth quarter. The fourth quarter 2012 results include $38.0 million, or $0.76 per diluted share, of after-tax realized gains, compared to $0.4 million, or less than $0.01 per diluted share, during the same period in 2011.

Statutory surplus, a non-GAAP measure, increased to $426.3 million at December 31, 2012 from $347.3 million at September 30, 2012 and from $385.4 million at December 31, 2011.

Commenting on the quarterly results, Robert S. Cubbin, President and Chief Executive officers, said we are committed to our shareholders, partners, agents, customers, and employees to solidify our A.M. Best rating. We have made progress in enhancing our statutory surplus and reducing our required capital by harvesting $52.1 million of gains embedded in our investment portfolio, entering into a quota share reinsurance agreement and terminating underperforming business. With these actions, our statutory surplus has increased by $79.0 million in the last quarter and our net premium leverage ratio decreased from 2.5 to 1.0 to 1.9 to 1.0. We are also pleased that our loss reserves are stabilizing and that rate increases continue to outpace loss trends. Fourth quarter 2012 results include a pre-tax increase in net ultimate loss estimates for accident years 2011 and prior of $4.2 million, or 1.8 combined ratio percentage points; fourth quarter 2012 results also reflect the impact from Super Storm Sandy of $7.0 million, or 3.1 combined ratio percentage points.

The accident year loss and LAE ratio, a non-GAAP measure that excludes changes in net ultimate loss estimates from prior year loss reserves, was 71.6% for the fourth quarter of 2012, compared to 65.4% in the fourth quarter of 2011. As discussed above, the increase was partially driven by the impact of Super Storm Sandy, which added 3.1 percentage points in 2012 as compared to 2011. In addition, the 2012 accident year loss and LAE ratio reflects the cumulative effect of an increase in our accident year forecasted 2012 loss and LAE ratio based upon the year-todate increase in net ultimate loss estimates for the 2009, 2010 and 2011 accident years previously recognized in prior quarters.

The expense ratio was 31.1% in the fourth quarter of 2012, compared to 32.1% in the prior year quarter. The improvement in the expense ratio reflects a lower level of technology expenses and leveraging of fixed costs over a larger premium base.

Fourth quarter 2012 gross written premium increased to $246.7 million, compared to $223.1 million in the fourth quarter of 2011. This growth primarily reflects the accelerating pace of rate increases that have been achieved in combination with the maturation of existing programs where we are achieving adequate pricing levels. This growth was partially offset by the termination of, or reductions in certain programs where pricing and underwriting did not meet the Company's targets.

Pre-tax profit from net commissions and fee revenue for the fourth quarter of 2012 was $3.1 million, compared to $1.5 million for the fourth quarter of 2011. The increased profitability was driven primarily by commission revenues generated by our Michigan agency that we acquired in the fourth quarter of 2011 in combination with a reduction in our general, selling and administrative costs in the current year.

General corporate expenses increased to $0.7 million in the fourth quarter of 2012, compared to a benefit of $0.5 million in 2011. The increase is due to a reduction in the performance based variable compensation accrual in 2011.

Amortization expense increased to $3.2 million in the fourth quarter of 2012, compared to $1.3 million in 2011. The increase is due to the $1.8 million write off of an intangible asset related to the Public Entity Excess Liability program that we terminated in the fourth quarter of 2012.