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Penn Millers Reports Third Quarter and Nine Months Results Ended September 30, 2010

^{Published on 2010-11-12 06:25:52 - Market Wire}
 

WILKES-BARRE, Pa.--([ BUSINESS WIRE ])--Penn Millers Holding Corporation (NASDAQ: PMIC) (the aCompanya) reported today its financial results for the third quarter and nine months ended September 30, 2010.

"We expect premiums written in the small business segment to continue to decline as we seek to improve profitability in the face of a competitive insurance market. We continue to focus on growing our PennEdge target market book of business where our product is more differentiated."

For the three months ended September 30, 2010, Penn Millers reported a net loss of $3.2 million compared to net income of $1.4 million for the three months ended September 30, 2009. The $4.6 million increase in net loss was primarily due to:

• The Company had a pre-tax loss from continuing operations of $488,000 for the three months ended September 30, 2010, compared to pre-tax income of $849,000 for the three months ended September 30, 2009. The decline in pre-tax income is primarily attributable to our commercial multi-peril line of business, which experienced two large losses and an increase in the frequency of smaller claims during the quarter. Additionally, our Agribusiness segment saw increases in non-weather related property losses and liability losses.
• Offsetting this adverse claims experience was an improvement in loss development on prior year claims of $0.7 million, after-tax. We had net favorable after-tax prior year development of $0.6 million for the third quarter of 2010. This compares to net unfavorable after-tax development, excluding the effects of our stop loss reinsurance contract, of $0.1 million in the same period of 2009.
• The 2010 loss was partially offset by an after-tax increase in realized investment gains of $0.4 million. We sold investments and recognized $0.6 million of pre-tax capital gains in order to recapture some of the tax benefits on capital losses taken in 2008.
• The Companya™s financial results were also impacted by a $3.5 million year over year change in valuation allowances on deferred tax assets. In the third quarter of 2010, we recorded a tax valuation allowance against our net deferred tax assets, resulting in net expense of $2.5 million for the quarter. In the third quarter of 2009, we recognized a $1.0 million reversal of a tax valuation allowance on deferred tax assets for capital losses recognized in 2008.

Book value per share decreased by $0.33 per share compared to June 30, 2010, and was $21.11 per share at September 30, 2010. Our shareholdersa™ equity decreased from $95.1 million at June 30, 2010 to $93.9 million at September 30, 2010, primarily as a result of the tax valuation allowance recorded during the quarter. Our basic and diluted earnings per share were each a loss of $0.71 per share for the quarter.

For the nine months ended September 30, 2010, Penn Millers reported a net loss of $4.7 million compared to net income of $1.3 million for the nine months ended September 30, 2009. The $6.0 million increase in net loss was primarily due to:

• The Company had an operating loss after taxes from continuing operations, which excludes after-tax realized investment gains or losses, of $6.2 million in the first nine months of 2010. This compares to income of $2.1 million for the same period last year.
  
  
  • The $8.3 million decline in operating income was primarily driven by the $3.5 million year over year change in tax valuation allowances.
  • A $2.3 million increase in after-tax losses from catastrophes, mostly in the second quarter of 2010, has also contributed to the decline in operating income. Year to date pre-tax catastrophe losses of $5.7 million have exceeded our highest full year total for at least the previous ten years.
  • We have also been adversely affected by losses from storms that were not declared catastrophes, particularly winter storms in the first quarter. For the first nine months of 2010, we have experienced $0.5 million more in after-tax, non-catastrophe related weather losses compared to the same period in 2009.
  • The remainder of the decline in operating income arose primarily from our Commercial Business segment, which had a higher level of large, non-weather related, property losses as well as increased frequency of smaller property claims. That segment has also experienced some adverse development on 2009 workersa™ compensation claims, which resulted in an increase in the actuarya™s estimate of 2010 ultimate losses for that line of business. This increased loss activity has occurred even though we have seen a decline in earned premiums as we had intentionally cancelled agency relationships and non-renewed certain unprofitable classes of business between the fourth quarter of 2008 and the second quarter of 2010.
  • Our results were adversely impacted to a lesser extent by a $0.2 million after-tax decline in net favorable prior year development for the first nine months of 2010 compared to the same period of 2009. For the first nine months of 2010, favorable prior year development was $1.2 million, after-tax, compared to net after-tax favorable development, excluding the effects of our stop loss reinsurance contract, of $1.4 million in 2009.
  • The declines in operating income were partially offset by an improvement arising from a $1.5 million adverse after-tax impact from the reversal of our stop loss reinsurance contract, which we recognized in the third quarter of 2009.
  • We also recognized a one-time, after-tax benefit of $0.4 million from the termination of our SERP in the second quarter of 2010, which has helped offset increased costs related to being a public company.
• In addition, the decrease in operating income was partially offset by an after-tax increase in realized investment gains of $1.6 million, most of which occurred in the second quarter.
• Net income for the same period in 2009 was adversely impacted by a net after-tax loss from discontinued operations of $0.8 million resulting from the tax impact of the sale of Eastern Insurance Group.

Share repurchases in the first two quarters have helped mitigate the impact the net loss had on book value per share, which at September 30, 2010 decreased by $0.20 per share compared to December 31, 2009. Our shareholdersa™ equity decreased from $100.0 million at December 31, 2009 to $93.9 million at September 30, 2010 as a result of the share repurchases and the net loss for the current year. Our basic and diluted earnings per share were each a loss of $1.02 per share for the year to date period.

Douglas A. Gaudet, President and Chief Executive Officer, commented on the Companya™s results. aOur Agribusiness segment performed well in the third quarter with an 89.7% combined ratio. Direct premiums written were up in this segment by 4.7% over the third quarter of 2009. We continue to believe there are opportunities to profitably grow this segment of our business, and economic conditions and commodity prices are trending positively for our agribusiness customers.a

aOur Commercial Business segment experienced a large number of property losses in the quarter and we believe the economy remains difficult for small businesses. Our workersa™ compensation experience in this segment has also been trending negatively with decreasing loss frequency but increasing severity, as it remains difficult to get injured workers back to work after an injury. The combination of these factors has resulted in a 158.4% combined ratio for the third quarter of 2010. The insurance market remains competitive but upward price movement is necessary to reverse these negative trends.a

The actions we are taking to improve the profitability of the Commercial Business segment are:

• Commercial Multi-Peril / Solutions Business Ownera™s Policy (BOP) - we have increased our use of credit scoring by non-renewing policyholders with very weak scores and increasing pricing on policyholders with below average scores.
• Workersa™ Compensation - we will utilize credit scores and take more aggressive pricing action on policyholders with declining payrolls and staffing levels.

Mr. Gaudet further commented, aWe expect premiums written in the small business segment to continue to decline as we seek to improve profitability in the face of a competitive insurance market. We continue to focus on growing our PennEdge target market book of business where our product is more differentiated.a

The Company provides property and casualty insurance through its wholly owned subsidiary, Penn Millers Insurance Company. Penn Millers Insurance Company provides agribusiness insurance and commercial lines insurance in 33 states. Penn Millers Insurance Company is rated aA-a (Excellent) by A.M. Best Company, Inc. The Company is located at 72 North Franklin Street in Wilkes-Barre, PA. The Companya™s web address is [ http://www.pennmillers.com ].

Some of the statements contained in this press release are aforward-looking statementsa within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terminology such as amay,a awill,a ashould,a aexpect,a aplan,a aintend,a aanticipate,a abelieve,a aestimate,a apredict,a apotentiala or acontinue,a or the negative of these terms or other terminology. Forward-looking statements are based on the opinions and estimates of management at the time the statements are made and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that could affect the Companya™s actual results include, among others, the fact that our loss reserves are based on estimates and may be inadequate to cover our actual losses; the uncertain effects of emerging claim and coverage issues on our business, including the effects of climate change; the geographic concentration of our business; an inability to obtain or collect on our reinsurance protection; a downgrade in the A.M. Best rating of our insurance subsidiaries; the impact of extensive regulation of the insurance industry and legislative and regulatory changes; a failure to realize our investment objectives; the effects of intense competition; the loss of one or more principal employees; the inability to acquire additional capital on favorable terms; a failure of independent insurance brokers to adequately market our products; and the effects of acts of terrorism or war. More information about these and other factors that potentially could affect our financial results is included in our Annual Report on Form 10-K, filed with the SEC and in our other public filings with the SEC. Readers are cautioned not to place undue reliance upon these forward-looking statements, which speak only as of the date of this release. The Company undertakes no obligation to update any forward-looking statements.

Reconciliation of non-GAAP Measures

The Company uses a non-GAAP financial measure called aoperating income (loss) from continuing operationsa which excludes realized investment gains or losses and the results of discontinued operations. Management believes this is useful to investors because investment gains and losses and the results of discontinued operations could distort the analysis of insurance operating trends. While these measures are utilized by investors to evaluate performance, they are not a substitute for the U.S. GAAP financial measure of aincome (loss) from continuing operations.a Therefore, a reconciliation of these non-GAAP financial measures to the U.S. GAAP financial measure of aincome (loss) from continuing operationsa is provided below: