Cincinnati, Ohio-based The Midland Company, a highly focused provider of specialty insurance products and services, reported third quarter 2001 results ahead of its previous announcement.
For the quarter ended Sept. 30, 2001, net operating income (net income exclusive of net capital gains and SFAS 133 adjustments) was $3.2 million, or 35 cents per share (diluted), compared with $7.5 million, or 80 cents per share (diluted), a year ago. Revenue for the quarter was $147.1 million, an 8.3 percent increase from $135.8 million in the comparable prior period. Net income (including net capital losses and SFAS 133 adjustments) for the quarter was $1.8 million, or 20 cents per share (diluted), compared with $7.9 million, or 83 cents per share (diluted), for the same period in 2000.
Midland is a provider of specialty insurance products and services through its wholly owned subsidiary, American Modern Insurance Group, which accounts for approximately 94 percent of Midland’s consolidated revenue. American Modern specializes in writing physical damage insurance and related coverages on manufactured housing and has expanded to other areas of insurance, including homeowners, lower valued homes, dwelling fire, mortgage fire, collateral protection, watercraft, specialty automobile, motorcycle, snowmobile, recreational vehicle, long-haul truck, commercial and excess and surplus lines.
Midland also maintains a profitable investment in a niche transportation business, the M/G Transport Group, which charters barges and brokers freight for the movement of commodities on the inland waterways. “From our perspective, net operating income of 35 cents per share is encouraging. These operating earnings are after absorbing losses on the commercial liability lines and higher than normal levels of fire losses. In line with our announcement last month, the after-tax operating loss for the commercial liability lines that we have decided to cease offering was 53 cents per share in the third quarter compared with 13 cents a year ago and the higher-than-normal level of fire losses in our personal lines accounted for an additional after-tax loss per share of approximately 24 cents vs. 8 cents last year,” said John W. Hayden, Midland president and CEO. “We strongly believe that our decision to eliminate the unprofitable commercial liability lines will even better position us to continue achieving Midland’s double-digit earnings growth and return on equity objectives in the longer term.
“Further, management believes that our deep understanding of the specialty insurance market, our unique suite of products and services and our focused growth strategy give us a competitive advantage that can translate into increased value for shareholders,” Hayden added. “Continued product diversification, along with strategic alliances that leverage our core competencies, gives us even more reason to be confident as we move forward.”
American Modern Insurance Group, Midland’s wholly owned specialty insurance subsidiary, is a leader in the manufactured housing insurance market and offers other specialty products and services, such as motor home, watercraft, motorcycle, snowmobile, specialty auto, dwelling fire, credit life and commercial lines through diverse distribution channels.
On Sept. 18, 2001, Midland announced that American Modern would cease offering commercial liability programs, which amounted to approximately 3.6 percent of American Modern’s total gross premiums in the nine months of 2001. After careful evaluation of the importance of this business area to American Modern’s overall strategy, management decided to cease offering these unprofitable coverages to help enhance Midland’s long-term profitability.
Diversification Supports Record Top-Line
Midland’s top line grew 12.6 percent in the third quarter, largely on the contribution of the motor sports lines of business and on conversion opportunities in manufactured housing and other areas with key general agent business partners. Top-line growth includes property and casualty written premiums, life written premiums and investment income, as well as revenues from the company’s fee-based and transportation businesses.
American Modern’s property and casualty direct and assumed written premiums grew 14.6 percent in the third quarter to $149.1 million, with manufactured housing direct and assumed written premium increasing 5.7 percent to $92.0 million. Direct and assumed written premium in other property and casualty lines — such as motorcycle, recreational vehicle, watercraft, collector auto and site-built dwelling products — grew 32.8 percent to $57.0 million compared with the third quarter of 2000.
Hayden said that manufactured housing premiums now represent about 57 percent of the company’s total writings, compared with approximately 62 percent in 2000.
“Strategic alliances, consolidation of competitor general agent books of business with American Modern, and the diversification of our product line are strategies that we have discussed for a number of quarters,” Hayden said. “The benefits of those strategies clearly are reflected in our top-line performance this quarter, each contributing to the overall results.”
Nine-Month Results
The company reported net operating income (net income exclusive of net capital gains and SFAS 133 adjustments) for the first nine months of the year of $1.85 per share (diluted) compared with $2.25 per share (diluted) in the first nine months of 2000. Year-to-date revenues were $430.9 million, up 8.6 percent from $397.0 million in the same period last year. Net income (including capital gains and SFAS 133 adjustments) for the first nine months was $1.95 per share (diluted) compared with $2.58 per share (diluted) in the comparable prior period.
American Modern’s commercial liability programs produced after-tax losses for the first nine months of 2001 of 63 cents per share (diluted). For the first nine months of 2000, commercial liability losses were 31 cents per share (diluted). Higher-than-normal fire losses reduced net operating income by 85 cents per share in the first nine months of this year compared with 15 cents in the first nine months of last year.
Reflecting the ongoing challenges within the manufactured housing industry, the company’s manufactured housing direct and assumed written premiums were essentially flat with the prior year at $261.3 million through the first nine months of 2001. Growth in all property and casualty lines was 12.2 percent, resulting in $430.1 million in direct and assumed property and casualty written premium.
Underwriting Results
Including catastrophe losses, the combined ratio (losses and expenses as a percent of earned premium) for the property and casualty companies for the quarter was 104.1 percent compared with 97.4 percent in the third quarter of 2000. Weather-related losses were lower than normal in both periods, contributing 0.9 points to the combined ratio in this year’s third quarter and 0.6 points in last year’s third quarter.
As previously announced, during the third quarter, the company completed a detailed review of open claims related to the commercial liability lines of business and strengthened its reserves where it believed it was appropriate.
Losses from these commercial liability lines contributed 6.2 percentage points to the combined ratio compared with 2.1 points a year ago. The fire loss ratio was approximately 4.0 percentage points higher than normal in this year’s third quarter, while only 1.3 points higher than normal in last year’s quarter.
Hayden added that it is not unusual for the fire loss ratio to rise when economic conditions worsen. “To counter this trend, we are aggressively pursuing rate increases and have conducted a comprehensive review of our underwriting guidelines specific to certain channels of distribution,” he said.
The company also reiterated that it has no underwriting exposure to the Sept. 11 events in New York, Washington, D.C., and Pennsylvania.
Investment Portfolio and Book Value Growth
The market value of Midland’s investment portfolio rose to $665.0 million as of Sept. 30, 2001, compared with $634.3 million at the end of the third quarter of 2000. Net pre-tax investment income (excluding capital gains and the affect of SFAS 133 adjustments) increased 5.1 percent to $8.3 million during the quarter, compared with $7.9 million last year, and increased 14.1 percent for the first nine months.
Midland’s shareholders’ equity, which included $47.8 million of net unrealized gains (net of tax) from the company’s investment portfolio, rose to $286.7 million, or $32.28 per share, at September 30, 2001, from $282.3 million, or $30.25 per share, as of Sept. 30, 2000.
The company noted that SFAS 133 adjustments now are included with realized capital gains or losses rather than investment income. Prior period results have been restated on this basis. For the quarter, realized after-tax capital losses were $0.7 million, or 7 cents per share (diluted), compared with after-tax capital gains of $0.4 million, or 3 cents per share, in the comparable prior period. The SFAS 133 impact on earnings was an after-tax loss of $0.8 million, or 8 cents per share (diluted) for the third quarter and an after-tax loss of $0.2 million, or 2 cents per share (diluted) for the first nine months of 2001. SFAS 133 did not affect 2000 results.
On Jan. 25, 2001, the board authorized the repurchase of an additional 500,000 shares of its common stock. In the third quarter of 2001, the company repurchased 28,700 shares of its stock at an average price of $39.44 per share, bringing the year-to-date total to 156,846 shares at an average of $33.79 per share.
M/G Transport
M/G Transport, Midland’s transportation subsidiary, reported 5 percent growth in revenue for the quarter. M/G’s pre-tax contribution to operating earnings was $345,000 for the third quarter of 2001, compared with $681,000 for the third quarter of 2000. M/G has experienced a change in the shipping patterns for some of its products resulting in lower operating profits in the second and third quarters of 2001.
Long-term Outlook
“Actions taken this quarter will promote the health of our bottom line for the long term,” Hayden said. “For the full-year 2001, management believes the combined ratio will be slightly below 100 percent, assuming normal weather patterns in the fourth quarter. In 2002, again assuming normal weather patterns, we believe the combined ratio will be between 96 and 98 percent, in part dependent upon the pace at which rate increases are approved by various states.”
Continuing, Hayden said that while double-digit top-line growth remains the long-term objective, growth is expected to be below that level for the next several quarters.
“The elimination of the commercial liability business and any potential negative impact of underwriting and rate actions in manufactured housing will impact the top line,” Hayden said. “Further, the manufactured housing market, in general, continues to be soft. We firmly believe the industry will recover, and there are many who see signs that the recovery already is under way. When it does, we will be ready to support and leverage its growth with a full range of specialty products.”
Topics Auto Profit Loss Excess Surplus Property Property Casualty Manufacturing Casualty
Was this article valuable?
Here are more articles you may enjoy.
AT&T Says Data From Around 109M Customer Accounts Illegally Downloaded 
Beryl’s Remnants Spawned 4 Indiana Tornadoes, Including an EF-3: NWS 
Biden Administration Raises FEMA Bar for Flood Resilience 
Hurricane Beryl Triggers Record Payout for Caribbean Insurer 
