Affirmative Insurance Holdings Inc.’s (AFFM) second quarter results were disappointing. The company reported a loss from continuing operations of $8.0 million or 52 cents per share. This compares with the Zacks Consensus Estimate of a profit of 20 cents per share. The income from continuing operations was $2.9 million in the prior-year quarter.

Results were significantly impacted by increased losses from unfavorable reserve development for prior accident years related to Florida, Michigan and Louisiana businesses.

Affirmative has also sold all of its retail stores and its franchise business in Florida. Including the impact of this discontinued operation, the net loss for the quarter was $9.0 million, compared with net income of $2.3 million in the last year’s second quarter. However, the company expects its pretax income to benefit by $1.0 to $1.5 million annually from the sale.

Gross premiums written were down 9.8% year-over-year to $82.3 million, driven by soft market conditions and stressed economy. However, Affirmative posted a 0.7% increase in premiums earned as the company has reduced its dependence on reinsurance in 2009.

Commission income and fees were up 2.7% year-over-year, primarily stemming from increases in premium finance revenue and commissions and fees generated from third-party products, partially offset by the decline in policyholder fees.

Net investment income for the current quarter decreased 30.4% from the prior-year period. The decrease was primarily due to a reduction in yields and a 13.0% year-over-year decrease in total average invested assets.

Losses and loss adjustment expenses were up 16.6% year-over-year. Affirmative reported a loss ratio (losses and loss adjustment expenses expressed as a percentage of premiums earned) of 86.9% compared with a loss ratio of 75.1% in the second quarter of 2008, reflecting unfavorable reserve development of $11.0 million for prior accident years.

Selling, general and administrative expenses were up 10.4%, stemming from a reduction in ceding commission income, contingent commission expense related to prior-period development and management severance charges. These were partially offset by the cost reduction initiatives.

The disruptions in the overall economy and financial markets have adversely affected consumers’ ability to purchase automobile insurance policies. As a result, the balance sheets of other auto insurance providers such as Progressive Corp. (PGR), Infinity Property and Casualty Corp. (IPCC) and State Auto Financial Corp. (STFC) have also been hurt.

In the beginning of July, the company announced a number of restructuring initiatives and cost-containment measures. We believe that though the top-line growth may be restricted during the ensuing quarters due to economic stress coupled with intensified competition, the expense management initiatives bode well going forward.
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