The Midland Company to Cease Offering Commercial Liability Coverage

The Midland Company, a provider of specialty insurance products and services, announced that American Modern Insurance Group, its insurance subsidiary, will cease offering the commercial liability coverages associated with its manufactured housing park and dealership programs. The commercial liability programs represented approximately 3.4 percent of American Modern’s total gross premiums in the first half of 2001.

The Midland Company derives approximately 94 percent of its consolidated revenues from its American Modern Insurance Group subsidiary. American Modern, a leader in the manufactured housing insurance market, offers a variety of specialty insurance products and fee-generating services through diverse distribution channels.

John W. Hayden, Midland president and chief executive officer, said, “American Modern has offered commercial liability and physical damage coverages to manufactured housing parks and dealerships for 10 years. Despite our best efforts, the liability portion of this business, which accounted for approximately $20.0 million in gross written premiums in 2000 and $10.2 million in the first six months of 2001, has continued to produce bottom-line losses. More recently, we have observed an escalating deterioration in these results. After careful evaluation of its importance to American Modern’s overall strategy, management has decided to cease offering the commercial liability portion of these programs. American Modern will continue to offer property coverages to these markets.

“We will continue to serve the overall needs of the manufactured housing industry,” Hayden said, “but will do so with products and services that add value — both to our business partners and to our shareholders. This particular product line did not enhance our core growth and profitability strategies.”

Impact of Commercial Liability
“Now that we will no longer be offering commercial liability coverages for the manufactured housing park and dealership programs, Midland’s long-term profitability picture should be enhanced,” said Hayden.

American Modern’s commercial liability from the manufactured housing park and dealership programs produced after-tax losses of 45 cents per share (diluted) in the 12 months ended December 31, 2000 and 10 cents per share (diluted) in the first six months of 2001.

Hayden noted, “The company has just completed a detailed review of open claims related to this line of business and has strengthened its reserves where we believed it was appropriate. As a result of this reserve strengthening, management currently believes that commercial liability losses will lower after-tax net income by 45 to 55 cents per share (diluted) in this year’s third quarter from published consensus analysts’ estimates for the period.”

Continued Impact of Fire Losses

Hayden commented, “As we had discussed in our second quarter conference call, American Modern continues to experience an increase in the fire loss ratio in its manufactured housing programs. As we had indicated, the fire loss ratio through the first six months of 2001 was approximately 4.5 percentage points higher than the first half of 2000. This trend has continued in the third quarter. Management believes that the higher incidence of fire losses will lower after-tax net income by 20 to 30 cents per share (diluted) in the third quarter of 2001 from the published consensus analysts’ estimates for the period.

“It is not unusual for American Modern to experience an increase in the fire loss ratio when economic conditions worsen,” Hayden said. “As we previously have discussed, we are aggressively pursuing rate increases to help counter this trend. In addition, we have conducted a comprehensive review of our underwriting guidelines specific to certain channels of distribution. This review precipitated some changes in our risk selection criteria that should result in the elimination of certain unacceptable risks. While these are longer-term actions and will take time to benefit the operating results, we believe that they will result in a return to a more normalized fire loss ratio.

Outlook
“By eliminating the unprofitable commercial liability line and aggressively pursuing the necessary actions to improve American Modern’s fire loss ratio, management believes that Midland will be even better positioned to continue achieving its double-digit earnings growth and return on equity objectives,” Hayden said.

“Management believes the combined ratio for the full year 2001 will be slightly below 100 percent. In 2002, assuming normal weather patterns, we believe the combined ratio will be between 96 and 98 percent, in part dependent on the rate at which rate increases are approved by various states.

“Our mission is to be an indispensable partner to customers within our chosen markets,” he continued. Even though indispensability sets a high bar, 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 unique competitive advantage that can translate into increased value for shareholders.”

National Tragedies — No Underwriting Exposure for American Modern
“The tragic events in the United States have deeply saddened everyone at The Midland Company. On behalf of everyone in our organization, I would like to express our deepest sympathies to all of the victims and their families.” Hayden added, “While we have no underwriting exposure to the events in New York, Washington, D.C. and Pennsylvania, we remain concerned for everyone involved and we pray for the speedy recovery of our nation.”

Topics Profit Loss Commercial Lines Business Insurance Manufacturing