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Transcription:

Investor Presentation February 2011 Bob Cubbin, CEO Karen Spaun, CFO

Forward-Looking Statements Certain statements made by Meadowbrook Insurance Group, Inc. in this presentation may constitute forward-looking statements including, but not limited to, those statements that include the words "believes," "expects," "anticipates," "estimates," or similar expressions. Please refer to the Company's most recent 10-K, 10-Q, and other Securities and Exchange Commission filings for more information on risk factors. Actual results could differ materially. These forwardlooking statements involve risks and uncertainties including, but not limited to the following: the frequency and severity of claims; uncertainties inherent in reserve estimates; catastrophic events; a change in the demand for, pricing of, availability or collectability of reinsurance; increased rate pressure on premiums; obtainment of certain rate increases in current market conditions; investment rate of return; changes in and adherence to insurance regulation; actions taken by regulators, rating agencies or lenders; obtainment of certain processing efficiencies; changing rates of inflation; and general economic conditions. Meadowbrook is not under any obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events or otherwise. 2

The Meadowbrook Approach We strive to deliver consistent results with a balanced business model We are a specialty niche focused commercial insurance underwriter and insurance administration services company Our objective is to generate predictable results across the market cycle, with a target return on average equity of 10% - 17% To achieve these results we seek to leverage the unique characteristics of our balanced business model to generate: Consistent, profitable underwriting results Predictable investment income in a low-risk, high-quality, fixed income portfolio Profitable growth both organically and through acquisitions fee- Strong cash flow from our insurance company subsidiaries and non-regulated based services to leverage invested assets to equity and manage debt service Steady fee and commission income 3

Meadowbrook Vitals Current market cap (at 2/18/11): Outstanding shares at 12/31/10: Weighted average shares (At 12/31/10): Book value (12/31/2010): $559.5 million 53.2 million $547.1 million 54.3 million Book value per share: $10.28 (TTM Dec -10 ROAE 11.4%) Excluding unrealized gain / loss, net of deferred taxes: $9.61 (TTM Dec -10 ROAE 12.1%) Tangible book value per share (excluding goodwill and intangibles):$7.36 (TTM Dec -10 ROAE 15.7%) Debt to equity: Debt to total capital: 21.7%; 6.9% excluding debentures 17.8%; 5.7% excluding debentures Current price / book: 1.02 (at $10.51/share market price as of 2/18/11) Dividend yield (at 2/18/11): 1.60% Statutory premium leverage Actual Target GWP to Statutory surplus 2.2 to 1 2.75 to 1 NWP to Statutory surplus 1.9 to 1 2.25 to 1 Insider ownership (at 12/31/10): 7.1% 4

What Makes Us Different: We are Flexible and are Able to Adapt to Changing Market Conditions Our model allows us to deliver more predictable results Diverse Revenue Sources Positioned to Manage Insurance Cycles Conservative Investment Philosophy Ability to Attract and Retain Talented Professionals Strong Capital and Liquidity Position Earned premium from insurance operations Fee revenue from risk management services Flexibility to utilize multiple distribution channels Product, program and geographic diversification Admitted market capabilities contribute to stability and higher renewal retention Non-admitted capabilities enable opportunistic response in volatile pricing environment High-quality fixed income approach to our $1.3 billion portfolio Investment approach reinforces our focus on underwriting profitability Team of talented insurance professionals with a wide range of expertise across all functions and lines of business Regional structure enables associates to deliver strong and responsive local service to clients Insurance subsidiaries rated A- (Excellent) by A.M. Best Insurance subsidiary surplus levels can support meaningful premium growth Generate cash flows from both regulated and non-regulated sources, which provides flexibility Manageable debt levels, with access to $35 million line of credit (no outstanding balance) 5

Our Approach Has Delivered Results Over Time Total Revenue ($M) Net Operating Income ($M) $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 CAGR (2006 to 2010) = 24% $750 $628 $438 $318 $341 2006 2007 2008 2009 2010 $70 $60 $50 $40 $30 $20 $10 $0 CAGR (2006 to 2010) = 28% $53.5 $58.2 $38.8 $27.9 $22.0 2006 2007 2008 2009 2010 Net Operating Income per Share Shareholders Equity ($M) $1.20 $1.00 $0.80 $0.60 $0.40 CAGR (2006 to 2010) = 10% $0.93 $0.84 $0.86 $0.74 $1.07 $600 $500 $400 $300 $200 CAGR (2006 to 2010) = 28% $438 $302 $202 $502 $547 $0.20 $100 $0.00 2006 2007 2008 2009 2010 $0 2006 2007 2008 2009 2010 6

Capability Building Through Successful Acquisitions Strategic Staging of Acquisitions Retail Agency Only 1955: Founded as a retail insurance agency Core Capability Build Out 1985: Star Insurance Company 1990: Savers Property & Casualty Insurance Company 1994: American Indemnity Insurance Company 1996: Association Self Insurance Services 1997: Williamsburg National Insurance Company Crest Financial Services 1998: Ameritrust Insurance Corporation Florida Preferred Administrators, Inc. 1999: TPA Insurance Agency Continued Synergistic Expansion 2007: USSU 2008: Procentury Continued Synergistic Expansion Meadowbrook actively reviews acquisition prospects on a strategic basis and enters into transactions that will increase long-term shareholder value We consider a range of strategic factors when looking at acquisitions including: Opportunity to leverage our diverse revenue platform, by expanding current distribution, servicing capabilities, and complementary product lines and classes Ability to attract talented insurance professionals that are a good fit with Meadowbrook culture Opportunity to create win-win situation by mitigation our downside risk and providing seller with opportunity to obtain fair value through deal structure 7

Diverse Revenue Sources Our most prominent source of revenue and income comes from our insurance operation; commission revenue and fee-for-service revenue generate unregulated free cash flow Insurance Operations TTM Dec -10 Earned Premium: $659.8 M TTM Dec -10 Net Investment Income: $54.2M Admitted and non-admitted products and programs Risk sharing vehicles Fee Revenue Managed program revenue Municipality and Association clients TTM Dec -10 Fee Revenue: $23.0 M Commission Revenue Agency commission from non-affiliated carriers TTM Dec -10 Commission Revenue: $11.2 M 8

Insurance Operations Diversified Commercial Positions Built to Manage Across Cycles Admitted Programs TTM Dec-10 GWP:$532 M Description Homogeneous specialized programs Heterogeneous geographic centers Product focused Promotes specialty agents Examples Picture framers Music equipment stores Christian booksellers Chemical distributors Main Street Excess and Surplus Lines TTM Dec-10 GWP: $147 M Broad classes of Main Street commercial risks Promotes General Agent distribution Restaurants, bars and taverns Apartments, hotels and motels Mercantile Contractors liability Non-Admitted Programs TTM Dec-10 GWP: $47 M Specialized programs ignored or underserved by the standard market Promotes wholesalers with specialty underwriting authority Pet-sitters Oil and gas contractors Assisted care facilities Package delivery Specialty Markets TTM Dec-10 GWP: $76 M Solutions designed for very specific products and market segments Excess workers comp Transportation Agriculture Marine 9

National Scope with Regional Perspective Balance of effective local touch, with efficient national coordination Talented associates are located throughout the country to serve the needs of regional clients Support from headquarters enables efficient resource deployment and cross-unit coordination Bermuda 1 1 3 6 9 10 3 8 5 7 5 10 8 6 2 2 9 4 Meadowbrook locations Top 10 production states (As of 12/31/2010) 10

Diverse Mix of Business Full Year 2010 Gross Written Premium Business Mix We have built our business to create product diversification as indicated by the mix of business This platform enables us to grow our business opportunistically with a focus on underwriting discipline and pricing adequacy Our wide range of product expertise positions us well to support future growth Our new business is primarily rollover books of business with a proven track record of profitability Year Ended December 31, 2010 11

Loss and Expense Ratios Our GAAP combined ratio has improved over time and our accident year combined ratio has remained profitable 2006 2010 GAAP and Accident Year Combined Ratios Re-estimated AY Combined Ratio 94.7%* 94.7%* 93.2%* 98.3% 99.7% (as of 12/31/2010) 120% Loss ratio 96.8% 97.9% Expense ratio 100% 95.4% 98.0% 93.3% 97.8% 93.2% 98.5% 95.0% 99.7% 80% 60% 40% 62.3% 63.4% 61.2% 63.8% 62.0% 66.5% 60.7% 66.0% 60.6% 65.3% 20% 0% 34.5% 34.5% 34.2% 34.2% 31.3% 31.3% 32.5% 32.5% 34.4% 34.4% GAAP AY GAAP AY GAAP AY GAAP AY GAAP AY 2006 2007 2008 2009 # 2010 The re-estimated AY combined ratio reflects reserve adjustments made following the accident year, for example, the 94.7% re-estimated 2006 AY combined ratio reflects new loss development information gathered over the 4 years from 12/31/2006 to 12/31/2010; the 94.7% re-estimated 2007 AY combined ratio reflects new loss development gathered over the 3 years from 12/31/2007 to 12/31/2010; etc. * The 2006 2007 initial and re-estimated AY combined ratios excludes Century. The 2008 re-estimated AY combined ratio includes a pro-rata portion of the Century AY 2008 development for the 5 post-merger months. # 2009 AY and CY expense ratio reflects expense reclassification as disclosed in our May 3, 2010 8-k filing with the SEC. 12

Expense Ratio Analysis Twelve Month Ended GAAP Expense Ratio Comparison Net earned premium $539.6M $659.8M Policy acquisition $175.1M $227.0M and other u/w expenses Expense ratio 32.5% 34.4% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 8.8% 23.7% 7.6% 1.0% 25.8% 0.0% December 31, 2009 December 31, 2010 External Expense Ratio Internal Claims Administration Ratio* Internal Expense Ratio *As a result of our internal cost allocation study,1.0% of internal claims administration is included in the 2010 expense ratio instead of ULAE 13

Focus on Generating Consistent Investment Income Robust top line growth has led to a larger investment base and a meaningful increase in full year NII Pre-tax book yield was 4.2% at 12/31/2010 vs. 4.5% at 12/31/2006 Pre-tax Net Investment Income ($ in M) and Average Investment Yield The duration of our portfolio increased to 5.0 years at 12/31/2010 from 3.9 years at 12/31/2006 At 12/31/2010 our loss and LAE reserve duration was approximately 3.3 years Net investment income for YTD 12/31/2010 increased by 7.6% compared to YTD 12/31/2009 2010 year to date impairments of $491,000 on a $1.3 billion portfolio *3.9 *4.4 *4.8 *5.1 *5.0 *Effective Duration 14

We Maintain a High Quality, Low Risk Investment Portfolio We maintain a conservative investment portfolio Low equity risk exposure 98% fixed income and cash 2% equity High credit quality 98% of bonds are investment grade Average S&P rating of AA / Moody s of Aa2 The effective duration of our $1.3 billion portfolio is 5.0 years Portfolio Allocation and Quality Quality Summary: MV for allocation purposes % Allocation Fixed Income MV Avg. Moody's Avg. S&P US Government and Agencies 2% $ 26,713,527 Aaa AAA Corporate 32% $ 400,556,697 A2 A Mortgage and Asset Backed 20% $ 247,931,692 Aaa AAA Municipal 44% $ 546,746,076 Aa1 AA+ Preferred Stock Debt 0% $ 4,411,980 Ba2 BB+ Equities Preferred Stock 1% $ 12,868,573 Mutual Funds 1% $ 15,614,541 The duration on net reserves of $784 million is approximately 3.3 years NOTE: Data above as of December 31, 2010 Allocation based on market value 15

Fee-Based and Agency Operations Give Us Flexibility with Unregulated Cash Flow Our fee-based and commission businesses are relatively small but continue to provide a valuable source of unregulated cash flow Managed Programs We serve the self-insurance market for municipalities and associations Sample clients include the Michigan Municipal League, the Minnesota County Insurance Trust and the Alabama Forest Fund We provides clients administrative and back office services In many cases, programs have been built on long-standing relationships A source of non-regulated liquidity that has low capital requirements Agency Operations Original foundation of the company in 1955 We operate five retail / wholesale agencies and generate commission income from more than 50 unaffiliated carriers 16

Capital Management Our goal is to be efficient managers of capital; we initiated a dividend during 2008 and since this time we have returned $54.4M to shareholders through dividends and share repurchases $ in millions $54.4 $27.7 $18.0 $8.7 17

Capital Management Since 2008 our share repurchase activity has been accretive, increasing BVPS by $0.20 12/31/2010 BVPS: $10.28 $10.00 $0.20 $9.50 $9.00 $10.08 $8.50 $8.00 BVPS at 12/31/2010 BVPS excluding share repurchases Accretion from share repurchase activity 18

Recent Financial Highlights: Highlights ($ in M) Twelve Months Ended 2009 Twelve Months Ended 2010 Change Gross Written Premium $ 688.7 $ 801.9 16.4% Net Operating Income $ 53.5 $ 58.2 8.8% Operating Income per Share $ 0.93 $ 1.07 15.1% 19

Full Year 2011 Guidance and Long Term Value Creation Looking ahead to 2011, we expect a market similar to that which we have experienced during 2010 Gross Written Premium $802M Combined Ratio 95.0% Net income from operations $58.2M Net operating income per share $1.07 2010 Results 2011 Guidance* Gross Written Premium Range of $830M $850M Combined Ratio Range of 96.0% - 97.0% Net income from operations $53.0M - $58.5M Net operating income per share $1.00 to $1.10 per share *Our guidance range does not include any favorable or unfavorable development on prior year reserves Driving Long-term Enterprise Value Leverage multiple revenue sources and diverse insurance offering to maximize opportunities across market cycles Increase underwriting leverage through selective growth opportunities, while sustaining appropriate diversification Increase investment leverage through cash from operations Leverage fixed costs over a larger revenue base Increase fee-for service income through new opportunities and margin expansion 20