Affirmative announces restructuring initiatives

Earlier this week, Affirmative Insurance Holdings, Inc. (AFFM) announced a number of restructuring initiatives and cost-containment measures.

Both the company and M. Sean McPadden, Executive Vice President and President – Insurance Companies, have mutually agreed to terminate the latter’s employment. Following this termination, Chief Executive Officer Kevin R. Callahan has assumed the most of Mr. McPadden’s duties.

The actuarial responsibilities of Mr. McPadden have been assumed by Michael J. McClure, Executive Vice President and Chief Financial Officer. As a result, second quarter earnings are expected to include severance charges of approximately $1.0 million, the management said.

Affirmative has also sold all of its retail stores and its franchise business in Florida. The company expects its pretax income to benefit by $1.0 to $1.5 million annually from the sale.

The company has  incurred substantial losses on policies sold in Florida, as a result of its decision to push the full coverage product in Florida in 2007 in response to the Personal Injury Protection sunset in that state in October 2007. Inadequate pricing and product management produced significantly higher losses than anticipated.

Additionally, Affirmative will also suspend its employer matching contributions to its 401(k) plan effective July 25, 2009. Management expects this suspension to benefit pretax income by about $1.0 million annually.

Affirmative also intends to implement a series of organizational changes by the end of 2009. This includes the consolidation of the insurance operations into one location, agency and claims operations evaluation, which will help to recognize consolidation opportunities along with efficiencies.

Management expects all these actions to eliminate approximately 150 jobs and generate expense savings of at least $10 million annually.

We are encouraged by such cost-curtailment measures of Affirmative. Though top-line growth may be restricted during the ensuing quarters due to economic stress coupled with intensified competition, these expense management initiatives will improve the bottom line. Consequently, our Hold recommendation on the shares of Affirmative continues.

Auto insurance providers such as Progressive Corp. (PGR), Infinity Property and Casualty Corp. (IPCC), State Auto Financial Corp. (STFC) and Affirmative Insurance Holdings have been adversely impacted by the disruptions in the overall economy and financial markets. These have reduced consumer confidence in the economy and adversely affected consumers’ ability to purchase automobile insurance policies.

Moreover, unusually high expenses resulting from fraudulent activities have bogged down the US auto insurance industry. There have been cases of over-treating legitimate injuries as well as treating non-existent soft tissue injuries.
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