UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 1999
or
[ ] TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-14094
Meadowbrook Insurance Group, Inc.
(Exact name of registrant as specified in its charter)
Michigan
(State of Incorporation
38-2626206
(IRS Employer Identification No.)
26600 Telegraph Road, Southfield, Michigan 48034
(Address, zip code of principal executive offices)
(248) 358-1100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject
to such filing requirements for the past
90 days. Yes X
No
The aggregate number of shares of the Registrant’s Common
Stock, $.01 par value, outstanding on August 12, 1999 was
8,576,955. Total number of Pages: 22
TABLE OF CONTENTS
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
| |
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Page |
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ITEM 1 — FINANCIAL STATEMENTS |
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Condensed Consolidated Statements of Income |
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3-4 |
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Consolidated Statements of Comprehensive Income |
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5 |
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Condensed Consolidated Balance Sheet |
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6 |
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Condensed Consolidated Statement of Cash Flows |
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7 |
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Notes to Consolidated Financial Statements |
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8-12 |
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Management Representation |
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13 |
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ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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14-20 |
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PART II — OTHER INFORMATION |
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ITEM 1 — LEGAL PROCEEDINGS |
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21 |
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ITEM 6 — EXHIBITS AND REPORTS ON FORM 8-K |
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21 |
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SIGNATURES |
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22 |
2
PART I — FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
MEADOWBROOK INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Six Months Ended June 30,
(Unaudited)
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
1999 |
|
1998 |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
Net premium earned |
|
$ |
55,941 |
|
|
$ |
40,013 |
|
|
Net commissions and fees |
|
|
18,196 |
|
|
|
16,279 |
|
|
Net investment income |
|
|
5,477 |
|
|
|
4,485 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
|
79,614 |
|
|
|
60,777 |
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses |
|
|
88,230 |
|
|
|
45,840 |
|
|
Reinsurance recoveries |
|
|
(46,527 |
) |
|
|
(24,340 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expenses |
|
|
41,703 |
|
|
|
21,500 |
|
|
Other operating expenses |
|
|
16,886 |
|
|
|
11,987 |
|
|
Salaries and employee benefits |
|
|
20,059 |
|
|
|
16,645 |
|
|
Interest on notes payable |
|
|
1,461 |
|
|
|
628 |
|
|
Amortization of intangible assets |
|
|
683 |
|
|
|
366 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses |
|
|
80,792 |
|
|
|
51,126 |
|
|
|
(Loss) income before income taxes |
|
|
(1,178 |
) |
|
|
9,651 |
|
|
Federal income (benefit) expense taxes |
|
|
(1,372 |
) |
|
|
2,505 |
|
|
Net income before cumulative effect of accounting change |
|
$ |
194 |
|
|
$ |
7,146 |
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting for insurance related
assessments, net of deferred taxes of $879 |
|
|
(1,706 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income |
|
$ |
(1,512 |
) |
|
$ |
7,146 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
3
MEADOWBROOK INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Quarter Ended June 30,
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
1999 |
|
1998 |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
Net premium earned |
|
$ |
29,782 |
|
|
$ |
20,950 |
|
|
|
Net commissions and fees |
|
|
9,148 |
|
|
|
8,521 |
|
|
|
Net investment income |
|
|
2,768 |
|
|
|
2,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
|
41,698 |
|
|
|
31,841 |
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses |
|
|
45,539 |
|
|
|
22,040 |
|
|
|
Reinsurance recoveries |
|
|
(24,627 |
) |
|
|
(10,907 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expenses |
|
|
20,912 |
|
|
|
11,133 |
|
|
|
Other operating expenses |
|
|
8,064 |
|
|
|
6,212 |
|
|
|
Salaries and employee benefits |
|
|
10,148 |
|
|
|
8,682 |
|
|
|
Interest on notes payable |
|
|
621 |
|
|
|
308 |
|
|
|
Amortization of intangible assets |
|
|
338 |
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses |
|
|
40,083 |
|
|
|
26,538 |
|
|
|
|
Income before income taxes |
|
|
1,615 |
|
|
|
5,303 |
|
|
Federal income (benefit) expense taxes |
|
|
(17 |
) |
|
|
1,441 |
|
|
|
Net income |
|
$ |
1,632 |
|
|
$ |
3,862 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
4
MEADOWBROOK INSURANCE GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the Six Months Ended June 30,
(Unaudited)
(in thousands)
| |
|
|
|
|
|
|
|
|
|
1999 |
|
|
|
|
Net Loss |
|
$ |
(1,512 |
) |
|
|
|
|
|
|
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on securities: |
|
|
|
|
|
|
|
Unrealized holding losses arising during the period |
|
|
(3,574 |
) |
|
|
|
Less: reclassification adjustment for gains included in net
income |
|
|
48 |
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
(3,622 |
) |
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(5,134 |
) |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
1998 |
|
|
|
|
Net Income |
|
$ |
7,146 |
|
|
|
|
|
|
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on securities: |
|
|
|
|
|
|
|
Unrealized holding losses arising during the period |
|
|
(261 |
) |
|
|
|
Less: reclassification adjustment for gains included in net
income |
|
|
47 |
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
(308 |
) |
|
|
|
|
|
|
Comprehensive income |
|
$ |
6,838 |
|
|
|
|
|
|
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the Quarter Ended June 30,
(Unaudited)
(in thousands)
| |
|
|
|
|
|
|
|
|
|
1999 |
|
|
|
|
Net Income |
|
$ |
1,632 |
|
|
|
|
|
|
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on securities: |
|
|
|
|
|
|
|
Unrealized holding losses arising during the period |
|
|
(2,413 |
) |
|
|
|
Less: reclassification adjustment for gains included in net
income |
|
|
29 |
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
(2,442 |
) |
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(810 |
) |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
1998 |
|
|
|
|
Net Income |
|
$ |
3,862 |
|
|
|
|
|
|
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on securities: |
|
|
|
|
|
|
|
Unrealized holding gains arising during the period |
|
|
115 |
|
|
|
|
Less: reclassification adjustment for gains included in net
income |
|
|
3 |
|
|
|
|
|
|
|
Other comprehensive income |
|
|
112 |
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
3,974 |
|
|
|
|
|
|
5
MEADOWBROOK INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
June 30, |
|
December 31, |
|
|
1999 |
|
1998 |
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
|
Debt securities available for sale, at fair value
(cost of $167,043 and $167,163) |
|
$ |
166,559 |
|
|
$ |
172,617 |
|
|
Equity securities available for sale, at fair value
(cost of $17,721 and $7,585) |
|
|
18,619 |
|
|
|
7,898 |
|
|
Cash and cash equivalents |
|
|
22,142 |
|
|
|
20,510 |
|
|
|
|
|
|
|
|
|
|
|
|
Total investments and cash and cash equivalents |
|
|
207,320 |
|
|
|
201,025 |
|
|
Premiums and agent balances receivable |
|
|
64,132 |
|
|
|
63,487 |
|
|
|
|
|
|
|
Reinsurance recoverable on: |
|
|
|
|
|
|
|
|
|
Paid losses |
|
|
10,829 |
|
|
|
10,912 |
|
|
Unpaid losses |
|
|
86,756 |
|
|
|
64,590 |
|
|
Deferred policy acquisition costs |
|
|
11,430 |
|
|
|
8,900 |
|
|
Prepaid reinsurance premiums |
|
|
39,105 |
|
|
|
36,336 |
|
|
Intangible assets |
|
|
21,743 |
|
|
|
22,055 |
|
|
Other assets |
|
|
39,050 |
|
|
|
32,770 |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
480,365 |
|
|
$ |
440,075 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
Reserve for losses and loss adjustment expenses |
|
$ |
188,241 |
|
|
$ |
148,844 |
|
|
Unearned premiums |
|
|
83,883 |
|
|
|
77,948 |
|
|
Notes payable, bank |
|
|
39,455 |
|
|
|
40,953 |
|
|
Other liabilities |
|
|
56,105 |
|
|
|
52,763 |
|
|
Contingencies and commitments |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
367,684 |
|
|
|
320,508 |
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity: |
|
|
|
|
|
|
|
|
Common stock, $.01 stated value; authorized 20,000,000 shares;
8,576,955 and 8,663,434 shares issued and outstanding |
|
|
86 |
|
|
|
87 |
|
|
Additional paid-in capital |
|
|
69,280 |
|
|
|
71,190 |
|
|
Retained earnings |
|
|
43,737 |
|
|
|
45,105 |
|
|
Note receivable from officer |
|
|
(694 |
) |
|
|
(661 |
) |
|
Accumulated other comprehensive income |
|
|
272 |
|
|
|
3,846 |
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
112,681 |
|
|
|
119,567 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
480,365 |
|
|
$ |
440,075 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
6
MEADOWBROOK INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30,
(Unaudited)
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
1999 |
|
1998 |
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
14,107 |
|
|
$ |
5,972 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Purchase of debt securities available for sale |
|
|
(30,553 |
) |
|
|
(21,178 |
) |
|
Purchase of equity securities available for sale |
|
|
(10,263 |
) |
|
|
(1,588 |
) |
|
Proceeds from sale of debt securities available for sale |
|
|
30,789 |
|
|
|
14,823 |
|
|
Proceeds from sale of equity securities available for sale |
|
|
117 |
|
|
|
333 |
|
|
Net capital proceeds (expenditures) |
|
|
1,105 |
|
|
|
(2,260 |
) |
|
Purchase of subsidiary |
|
|
(371 |
) |
|
|
(4,480 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(9,176 |
) |
|
|
(14,350 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
(Payment on) proceeds from bank loan |
|
|
(1,498 |
) |
|
|
5,402 |
|
|
Dividends paid on common stock |
|
|
(519 |
) |
|
|
(346 |
) |
|
Retirement of common stock |
|
|
(1,282 |
) |
|
|
(1,023 |
) |
|
Issuance of common stock |
|
|
— |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(3,299 |
) |
|
|
4,035 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
1,632 |
|
|
|
(4,343 |
) |
|
Cash and cash equivalents, beginning of period |
|
|
20,510 |
|
|
|
20,215 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
22,142 |
|
|
$ |
15,872 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — Earnings Per Share (EPS)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
Ended |
|
|
June 30, |
|
|
(Unaudited) |
|
|
|
|
|
1999 |
|
1998 |
|
|
|
|
|
|
Basic EPS |
|
|
|
|
|
|
|
|
|
Net income before cumulative effect of accounting change |
|
$ |
0.02 |
|
|
$ |
0.82 |
|
|
Cumulative effect of accounting change |
|
$ |
(0.19 |
) |
|
|
— |
|
|
Net (loss) income |
|
$ |
(0.17 |
) |
|
$ |
0.82 |
|
|
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
|
Net income before cumulative effect of accounting change |
|
$ |
0.02 |
|
|
$ |
0.77 |
|
|
Cumulative effect of accounting change |
|
$ |
(0.19 |
) |
|
|
— |
|
|
Net (loss) income |
|
$ |
(0.17 |
) |
|
$ |
0.77 |
|
|
|
|
|
|
|
Weighted average of number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
Basic |
|
|
8,644,657 |
|
|
|
8,674,426 |
|
|
Diluted |
|
|
8,790,745 |
|
|
|
9,259,031 |
|
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — Earnings Per Share (EPS)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
|
June 30, |
|
|
(Unaudited) |
|
|
|
|
|
1999 |
|
1998 |
|
|
|
|
|
|
Basic EPS |
|
|
|
|
|
|
|
|
|
Net income before cumulative effect of accounting change |
|
$ |
0.19 |
|
|
$ |
0.44 |
|
|
Cumulative effect of accounting change |
|
|
— |
|
|
|
— |
|
|
Net income |
|
$ |
0.19 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
|
Net income before cumulative effect of |
|
$ |
0.19 |
|
|
$ |
0.42 |
|
|
accounting change |
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting change |
|
|
— |
|
|
|
— |
|
|
Net income |
|
$ |
0.19 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
Weighted average of number of commonshares outstanding: |
|
|
|
|
|
|
|
|
|
Basic |
|
|
8,628,947 |
|
|
|
8,688,531 |
|
|
Diluted |
|
|
8,758,987 |
|
|
|
9,279,576 |
|
NOTE 2 — Commitments & Contingencies
On June 26, 1995, two shareholders and an officer of a
former agent (the “Primary Plaintiffs’) of Star
Insurance Company (“Star”), and a former spouse of one
shareholder and an employee of the former agent (the
“Individual Plaintiffs”) initiated legal proceedings
against, among others, Star and Meadowbrook Inc.
(“Meadowbrook” ) in the District Court for Washoe
County, Reno, Nevada. All of the plaintiffs requested injunctive
relief, compensatory damages, punitive and exemplary damages, and
attorney’s fees in an unspecified amount. The Nevada
Insurance Department revoked the license of one of the Primary
Plaintiffs and one of the Individual Plaintiffs and denied
further licensing of the other Primary Plaintiffs.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Meadowbrook Insurance Group, Inc. (“the Company”)
Meadowbrook and Star vigorously defended itself and filed
counter-claims against the Primary Individual Plaintiffs. On
April 1, 1998, the Court issued an Order dismissing all
claims of the Primary Plaintiffs with prejudice.
On January 12, 1999, the remaining claims of the Individual
Plaintiffs and the counterclaims of Meadowbrook and Star against
the Primary and Individual Plaintiffs were tried. On
February 2, 1999, the jury returned a verdict in favor of
Meadowbrook and Star against the Primary Plaintiffs and
Individual Plaintiffs. In addition, the jury found against the
Individual Plaintiffs and in favor of Meadowbrook and Star on
their remaining claims. On April 21, 1999, the Court found
in favor of Meadowbrook and Star and against the Primary and
Individual Plantiffs on all outstanding claims for equitable
relief. It is not expected that the outcome of this litigation
will have a material impact on the financial condition of the
Company.
A Final Judgment has been entered with the Court. All Plaintiffs
have filed an appeal with the Nevada Supreme Court.
NOTE 3 — Cumulative Effect of Accounting Change
As described in our 1998 Annual report, the Accounting Standards
Executive Committee of the American Institute of Certified Public
Accountants issued Statement of Position 97-3, “Accounting
by Insurance and Other Enterprises for Insurance-Related
Assessments” (SOP 97-3). SOP 97-3 provides guidance for
determining when an entity should recognize a liability for
guaranty-fund and other insurance-related assessments, how to
measure that liability, and when an asset may be recognized for
the recovery of such assessments through premium tax offsets or
policy surcharges. As required, the Company adopted SOP 97-3 in
the quarter ended March 31, 1999. The adoption of SOP 97-3
resulted in an after-tax, non-cash $1.7 million, or $0.19
per share, cumulative effect accounting charge. The current
quarter effect of the adoption of SOP 97–3 amounted to
$130,000. The Company anticipates that it will collect a
substantial portion of these charges from its risk-sharing
partners. To the extent that balances are charged to the
captives, the corresponding receivables will be recorded in
current operations. During the second quarter of 1999, the
Company recorded $680,000 relating to balances charged to
captives.
Note 4 — Segment Information
Effective December 31, 1998, the Company adopted Statement
Financial Accounting Standards No. 131, “Disclosures
About Segments of an Enterprise and Related Information”.
Upon adoption, the Company defined its operations as agency
operations and program business operations based upon differences
in products and services. The separate financial information of
these segments is consistent with the way results are regularly
evaluated by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. Intersegment
revenue is eliminated in consolidation.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Agency Operations
The agency segment was formed in 1955 as Meadowbrook’s
original business. The insurance agency places principally
commercial insurance, as well as personal property, casualty,
life and accident and health insurance, with more than 50
insurance carriers from which it earns commission income. The
agency has grown to be one of the largest agencies in Michigan
and, with recent acquisitions has expanded into Florida and
California.
Program Business
The program business segment is engaged primarily in developing
and managing alternative market risk management programs for
defined client groups and their members. This includes providing
services, such as reinsurance brokering, risk management
consulting, claims handling, and administrative services, along
with various types of property and casualty insurance coverage,
including workers’ compensation, general liability and
commercial multiple peril. Insurance coverage is primarily
provided to associations or similar groups of members, commonly
referred to as programs. A program is a set of coverages and
services tailored to meet the specific requirements of a group of
clients.
The following table set forth the segment results (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
Ended June 30, |
|
|
|
|
|
1999 |
|
1998 |
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
$ |
55,941 |
|
|
$ |
40,013 |
|
|
Management fees |
|
|
9,910 |
|
|
|
9,273 |
|
|
Investment income |
|
|
5,477 |
|
|
|
4,482 |
|
|
|
|
|
|
|
|
|
|
|
Program business segment |
|
|
77,328 |
|
|
|
53,768 |
|
|
Agency operations |
|
|
8,688 |
|
|
|
7,280 |
|
|
Intersegment revenue |
|
|
(402 |
) |
|
|
(271 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated revenue |
|
|
79,614 |
|
|
|
60,777 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Income |
|
|
|
|
|
|
|
|
|
Program business |
|
|
(2,512 |
) |
|
|
8,387 |
|
|
Agency operations |
|
|
2,240 |
|
|
|
1,938 |
|
|
Reconciling items |
|
|
(906 |
) |
|
|
(674 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated pre-tax income |
|
$ |
(1,178 |
) |
|
$ |
9,651 |
|
|
|
|
|
|
|
|
|
|
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter |
|
|
Ended June 30, |
|
|
|
|
|
1999 |
|
1998 |
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
$ |
29,782 |
|
|
$ |
20,950 |
|
|
Management fees |
|
|
4,958 |
|
|
|
4,657 |
|
|
Investment income |
|
|
2,768 |
|
|
|
2,370 |
|
|
|
|
|
|
|
|
|
|
|
Program business segment |
|
|
37,508 |
|
|
|
27,977 |
|
|
Agency operations |
|
|
4,331 |
|
|
|
4,024 |
|
|
Intersegment revenue |
|
|
(141 |
) |
|
|
(160 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated revenue |
|
|
41,698 |
|
|
|
31,841 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Income |
|
|
|
|
|
|
|
|
|
Program business |
|
|
881 |
|
|
|
4,454 |
|
|
Agency operations |
|
|
1,108 |
|
|
|
1,201 |
|
|
Reconciling items |
|
|
(374 |
) |
|
|
(352 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated pre-tax income |
|
$ |
1,615 |
|
|
$ |
5,303 |
|
|
|
|
|
|
|
|
|
|
The pre-tax income reconciling items represent other expenses
relating to the holding company which are not allocated among the
segments.
Note 5 — Subsequent Event
On August 4, 1999, the Company entered a Purchase Agreement
to purchase for cash the assets of TPA Associates, Inc. and all
the outstanding stock of TPA Insurance Agency, Inc. and Preferred
Holdings, Inc., which also included all of the outstanding stock
of Preferred Insurance Company, Ltd., and Preferred Holdings,
Inc.’s ownership of approximately 94% of the outstanding
stock of Preferred Insurance Company, Ltd., (collectively,
“TPA”). On August 4, 1999 the Bermuda Monetary
Authority approved the Company’s purchase of Preferred
Insurance Company, Ltd., and the transaction closed on
August 6, 1999. This transaction will be accounted for as a
purchase. This acquisition is not expected to have a material
impact on the Company’s financial position or results of
operations.
12
MANAGEMENT REPRESENTATION
In the opinion of management, the financial statements reflect
all adjustments of a normal recurring nature necessary for a fair
presentation of the interim periods. Preparation of financial
statements under GAAP requires management to make estimates.
Actual results could differ from those estimates. Interim results
are not necessarily indicative of results expected for the
entire year. These financial statements should be read in
conjunction with the Company’s 1998 Form 10-K, as filed
with the Securities and Exchange Commission.
Certain statements made by the Company in this document may
constitute forward-looking statements. Actual results could
differ materially from those projected in forward-looking
statements. These forward-looking statements involve risk 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, or supply of reinsurance or insurance; increased
competitive pressure; changing rates of inflation; general
economic conditions; and Year 2000 expense estimates.
13
PART I — FINANCIAL INFORMATION
ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Periods ended June 30, 1999 and 1998
(Tables are in Thousands)
RESULTS OF OPERATIONS
For the Six Months Ended June 30, 1999 and 1998
The Company reported a net loss for the six months ended
June 30, 1999 of $1.5 million, a decrease of
$8.6 million from the $7.1 million in income for the
same period in 1998. Net income before cumulative effect of
accounting change was $194,000 in 1999 compared to net income of
$7.1 million in 1998. Results in 1999 reflect reserve
strengthening of $2.7 million, a reduction in anticipated
recoveries on the discontinued surety bond program of
$2.0 million, higher losses and loss adjustment expenses,
and higher operating expenses. These items were somewhat offset
by growth in revenues of 31%.
Revenue
Revenue for the six months ended June 30, 1999 was
$79.6 million, an increase of $18.8 million, or 31.0%,
from 1998’s revenue of $60.8 million.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
|
|
|
1999 |
|
1998 |
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Risk management fees & commissions |
|
$ |
18,196 |
|
|
$ |
16,279 |
|
|
Net earned premiums |
|
|
55,941 |
|
|
|
40,013 |
|
|
Net investment income |
|
|
5,477 |
|
|
|
4,485 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
79,614 |
|
|
$ |
60,777 |
|
|
|
|
|
|
|
|
|
|
14
Risk Management Fees and Commissions
Net fees and commission income increased by $1.9 million, or
11.8%, to $18.2 million for the six months ended June 30,
1999 from $16.3 million for the same period in 1998. The
$1.9 million increase is primarily the result of additional
revenue generated from acquisitions, primarily the Villari &
Associates, Inc. (“Villari”) and Florida Preferred
Administrators, Inc. (“Florida Preferred”) acquisitions
made in 1998.
Insurance Premiums
The Company’s gross premiums written increased
$20.4 million, or 21.9%, to $113.3 million for the six
months ended June 30, 1999 from $93.0 million for the
same period in 1998. Existing business contributed
$27.5 million, which includes $10.2 million related to
the Ameritrust Insurance Corporation (“Ameritrust”)
acquisition. New business contributed $7.5 million. This
growth was somewhat offset by anticipated reductions of
$4.0 million in gross written premium on the fronted,
non-risk surety bond program, $3.7 million of gross written
premium in the terminated workers’ compensation program in
the Southeast, and $6.4 million from the cancellation of a
non risk-bearing program. The remaining variance reflects changes
in residual market premium and retrospective premium.
Net premiums written increased by $18.2 million, or 43.4%,
to $60.1 million for the six months ended June 30, 1999
from $41.9 million for the same period in 1998. Existing
business grew by $15.7 million, which included
$9.1 million from the Ameritrust acquisition. New business
contributed $3.6 million of the increase. This growth was
somewhat offset the selective reduction in unprofitable programs.
The greater increase of net over gross written premium reflects
the effect of the Ameritrust acquisition and partially offset by
an increased focus on fronted programs or programs in which the
Company retains limited risk. Excluding the impact of the
Ameritrust acquisition and discontinued fronted programs, gross
written premium associated with fronted programs represented 21%
of gross written premium. This compares to 10% in 1998.
Net premiums earned increased by $15.9 million, or 39.8%, to
$55.9 million for the six months ended June 30, 1999
from $40.0 million for the same period in 1998. Existing
business grew by $16.8 million, which included
$9.6 million associated with the Ameritrust acquisition. New
business accounted for $1.2 million of the increase. This growth
was somewhat offset the selective reduction in unprofitable
programs, as well as increased reinsurance costs.
Net Investment Income
Net investment income increased by $1.0 million or 22.1%, to
$5.5 million for the six months ended June 30, 1999
from $4.5 million for the same period in the prior year.
This increase represents an increase in invested assets of 21.7%
that is primarily related to the acquisition of Ameritrust. The
pre-tax weighted average yield on invested assets was 4.8% and
5.3% for the first six months of 1999 and 1998, respectively. The
Company’s investment philosophy is one of maximizing
after-tax earnings through significant investments in tax-exempt
bonds. Accordingly, the
15
weighted average yield on invested assets on an after-tax basis
was 4.6% in 1999, which is consistent with the prior year of
4.7%.
Expenses
Total expenses increased $29.7 million, or 58.0%, to
$80.8 million at June 30, 1999 from $51.1 million
for the same period in 1998.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
|
|
|
1999 |
|
1998 |
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Losses and LAE incurred |
|
$ |
41,703 |
|
|
$ |
21,500 |
|
|
Salaries and employee benefits |
|
|
20,059 |
|
|
|
16,645 |
|
|
Other operating expenses |
|
|
16,886 |
|
|
|
11,987 |
|
|
Amortization |
|
|
683 |
|
|
|
366 |
|
|
Interest on notes payable |
|
|
1,461 |
|
|
|
628 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
80,792 |
|
|
$ |
51,126 |
|
|
|
|
|
|
|
|
|
|
Losses and Loss Adjustment Expenses (LAE) Incurred
Losses and LAE incurred increased by $20.2 million, or
94.0%, to $41.7 million for the six months ended
June 30, 1999 from $21.5 million for the same period in
1998. The GAAP loss and loss adjustment expense ratio increased
21 points to 78.4% from 57.4%. This increase reflects
$2.7 million of reserve strengthening, a $2.0 million
reduction in anticipated recoveries of the discontinued surety
bond program, and $2.2 million relating to claims activity
on previously discontinued programs. Adjusting for these items,
the loss and LAE ratio would have been 66.1%. As a result of the
program action plans initiated in the fourth quarter of 1998, the
Company expects that these higher ratios will decrease by end of
1999. The remaining variance reflects an unusually good loss and
LAE ratio reported in the prior year.
16
Salaries and Employee Benefits
Salaries and employee benefits increased by $3.4 million, or
20.5%, to $20.0 million for the six months ended June 30,
1999 compared to $16.6 million for the same period in 1998.
The entire $3.4 million increase is the result of additional
staff from acquisitions, primarily the acquisitions of Villari
and Ameritrust made in 1998.
Other Operating Expenses
Other operating expenses increased by $4.9 million, or
40.9%, to $16.9 million for the six months ended
June 30, 1999 from $12.0 million for the same period in
1998. Analyzing expenses utilizing GAAP insurance ratios, the
expense ratio decreased to 33.7% in 1999, from 34.3% in 1998. The
decrease in the expense ratio reflects the impact of adjusting
deferred acquisition costs for an increase an increase in the
fees received for programs in which the Company retains limited
risk and an increase in insurance related assessments rates used
to determine deferred acquisition costs.
Interest Expense
Interest expense of $1.4 million and $628,000 was recorded
for the six months ended June 30, 1999 and 1998,
respectively. This interest related to utilization of the
Company’s line of credit. The increase in interest expense
is a result of a higher average daily loan balance during the
first two quarters of 1999 as compared to 1998. The Company drew
on this line of credit during 1998 and 1999 primarily to meet
acquisition cash flow needs, as well as to fund stock
repurchases.
Amortization Expense
Amortization expense of $683,000 and $366,000 was recorded for
the six months ended June 30, 1999 and 1998, respectively.
This increase in amortization is related to the goodwill recorded
on the various acquisitions made since July 1997.
Federal Income Taxes
The provision for income taxes was a $1.4 million benefit
for the six months ended June 30, 1999. This compares to an
income tax provision of $2.5 million for the same period in
1998, representing an effective tax rate of 26.0%. Historically,
the Company’s tax rates are significantly lower than the 34%
corporate rate due to its heavily tax-exempt investment
portfolio. The decrease in income taxes and the effective rate in
1999 is the result of the higher level of tax-exempt interest in
proportion to total underwriting results experienced this year.
It is expected that the effective tax rate will return to
historical levels as the Company’s underwriting results
become profitable. Tax exempt securities at June 30, 1999
represented 66.7% of the portfolio, down from 77.9% at year-end.
The Company is shifting its portfolio to taxable securities, by
reinvesting cash from operations and maturing securities and is
completing an analysis of additional sales and purchases to
re-balance the fixed income portfolio aimed to maximize after-tax
investment yields and minimize current outflow related to taxes.
17
For the Three Months Ended June 30, 1999 and 1998
Net income for the quarter ended June 30, 1999 was
$1.6 million, a decrease of $2.3 million or 57.7%, from
$3.9 million for the same period in 1998. This decrease
reflects the increase in claims activity in selected programs,
somewhat offset by an increase in revenues of 31%.
Revenue
Revenue increased by $9.9 million, or 31.0%, to
$41.7 million for the quarter ended June 30, 1999
compared to $31.8 million for the same period in 1998.
Earned premium increased by $8.8 million, or 42.2%, to
$29.8 million in the second quarter of 1999 from
$21.0 million in the same period of 1998. Earned premium
from existing business grew by $8.4 million, reflecting the
acquisition of Ameritrust ($5.6 million) and growth in
programs added in 1998 and prior
Net fees and commissions increased by $627,000, or 7.4%, to
$9.1 million in the second quarter of 1999 from
$8.5 million in the same period of 1998. The increase in net
fee and commissions for the quarter is mainly the result of
additional fee revenue generated from the Villari and Florida
Preferred acquisitions.
Net investment income increased by $398,000, or 16.8%, to
$2.8 million in the second quarter of 1999 from
$2.4 million in the same period of 1998. Investment income
has grown as a result of increases in cash and invested assets.
Expenses
Expenses increased by $13.5 million, or 51.0%, to
$40.1 million for the quarter ended June 30, 1999
compared to $26.5 million for the same period in 1998.
Net losses and LAE incurred increased by $9.8 million, or
87.8%, from $11.1 million to $20.9 million in the second
quarter of 1999. The second quarter GAAP loss and loss adjustment
expense ratio increased to 73.2% from 56.7% in 1998. Excluding
the impact of discontinued and terminated programs, the second
quarter 1999 loss & LAE ratio would have been 66.7%. The
remaining variance reflects an unusually good loss ratio reported
in the second quarter of 1998.
Other operating expenses increased $1.9 million, or 29.8%,
to $8.1 million in 1999. Excluding the impact of the 1998
acquisitions, operating expenses would have decreased by
$600,000, or 9%. This decrease reflects the impact of increased
fees associated with fronted and risks sharing programs.
Additionally, the second quarter of 1999 was favorably impacted
by an increase in deferred acquisition costs associated with the
revised rates developed with the adoption of SOP 97 – 03
“Accounting for Insurance Related Assessments” and an
increase in ceding commissions relating to additional billings to
clients for insurance related assessments. Excluding the unusual
items relating to Insurance Related Assessments, other operating
expenses increased $3.0 million and the GAAP expense ratio
would have been 31.0% compared to 33.3% in second quarter of
1998.
18
Salaries and benefits increased $1.5 million or 16.8 %, to
$10.1 million in 1999 from $8.6 million in 1998.
Excluding the impact of the 1998 acquisitions, salaries and
benefits would have increased 7.3% from second quarter 1998.
Salaries and benefits have decreased from $10.2 million in
the fourth quarter of 1998 to $10.1 million in the second
quarter of 1999. These expense improvements reflect minor staff
reductions and stricter hiring controls implemented as part of
the 1999 budgeting process and more efficient approaches to
processing business.
Federal Income Taxes
The provision for income taxes was a $17,000 benefit for the
quarter ended June 30, 1999. This compares to an income tax
provision of $1.4 million for the same period in 1998,
representing an effective tax rate of 27.2%. As stated within the
year-to-date results, the decrease in income taxes and the
effective rate in 1999 resulted from the higher level of
tax-exempt interest in proportion to total underwriting results
experienced this quarter.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of funds for the Company are insurance
premiums, investment income, proceeds from the maturity and sale
of invested assets, risk management fees and agency commissions.
Funds are primarily used for the payment of claims, commissions,
salaries and employee benefits, and other operating expenses. In
addition, the Company has a high volume of intercompany
transactions due to the payment of management fees by the
insurance subsidiaries to the risk management subsidiaries, which
are subject to regulatory approval by state insurance
departments.
Cash flow provided by operations for the six months ended
June 30, 1999 was $14.1 million as compared to
$6.0 million for the same period in 1998. Cash flow has
significantly improved from the prior year since 1998 reflected
unusually high cash out flow relating to payment of 1997
contingent commissions, premium taxes and assessments made in the
first half of 1998. At June 30, 1999, the Company held
$22.1 million in cash and cash equivalents.
The Company has an unsecured line of credit totaling
$60.0 million, of which $39.5 million was outstanding
at June 30, 1999, $38.1 million was outstanding at
December 31, 1998 and $16.9 million at June 30,
1998. The line expires on August 1, 2002. The Company drew
on this line of credit during 1998 primarily to meet acquisition
cash flow needs.
Shareholders’ equity was $112.7 million, or $13.14 per
share, at June 30, 1999, compared to $119.6 million, or
$13.80 per share, at December 31, 1998. This decrease
primarily represents unrealized depreciation on our debt security
portfolio, as well as the cumulative accounting change for SOP
97-03, and stock repurchases. Excluding the impact of unrealized
gains on available-for-sale securities, book value per share at
June 30, 1999 was $13.11 compared to $13.36 at
December 31, 1998.
19
IMPACT OF YEAR 2000
The total estimated cost of the required actions necessary to
become Year 2000 compliant is currently estimated at
$6.3 million.
Amounts expected to be spent in 1999 total about
$2.5 million, including about $1.3 million in outside
vendor costs and another $1.2 in internal reprogramming and
assessment costs. The amount spent through June 30, 1999 was
about $1,400,000.
The Company feels that 90% of its critical operational systems
have been brought into compliance, with 100% compliance expected
by the 3rd Quarter of 1999.
SUBSEQUENT EVENTS
On August 4, 1999, the Company entered a Purchase Agreement
to purchase for cash the assets of TPA Associates, Inc. and all
the outstanding stock of TPA Insurance Agency, Inc. and Preferred
Holdings, Inc., which also included all of the outstanding stock
of Preferred Insurance Company, Ltd., and Preferred Holdings,
Inc.’s ownership of approximately 94% of the outstanding
stock of Preferred Insurance Company, Ltd., (collectively,
“TPA”). On August 4, 1999 the Bermuda Monetary
Authority approved the Company’s purchase of Preferred
Insurance Company, Ltd., and the transaction closed on
August 6, 1999. This transaction will be accounted for as a
purchase. This acquisition is not expected to have a material
impact on the Company’s financial position or results of
operations.
20
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 26, 1995, two shareholders and an officer of a
former agent (the “Primary Plaintiffs”) of Star, and a
former spouse of one shareholder and an employee of the former
agent (the “Individual Plaintiffs”) initiated legal
proceedings against, among others, Star and Meadowbrook in the
District Court for Washoe County, Reno, Nevada. All of the
plaintiffs requested injunctive relief, compensatory damages,
punitive and exemplary damages, and attorney’s fees in an
unspecified amount. The Nevada Insurance Department revoked the
license of one of the Primary Plaintiffs and one of the
Individual Plaintiffs and denied further licensing of the other
Primary Plaintiffs.
Meadowbrook and Star vigorously defended itself and filed
counter-claims against the Primary Individual Plaintiffs. On
April 1, 1998, the Court issued an Order dismissing all
claims of the Primary Plaintiffs with prejudice.
On January 12, 1999, the remaining claims of the Individual
Plaintiffs and the counterclaims of Meadowbrook and Star against
the Primary and Individual Plaintiffs were tried. On
February 2, 1999, the jury returned a verdict in favor of
Meadowbrook and Star against the Primary Plaintiffs and
Individual Plaintiffs. In addition, the jury found against the
Individual Plaintiffs and in favor of Meadowbrook and Star on
their remaining claims. On April 21, 1999, the Court found
in favor of Meadowbrook and Star and against the Primary and
Individual Plantiffs on all outstanding claims for equitable
relief. It is not expected that the outcome of this litigation
will have a material impact on the financial condition of the
Company.
A Final Judgment has been entered with the Court. All Plaintiffs
have filed an appeal with the Nevada Supreme Court.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) The following documents are filed as part of this
Report:
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| Exhibit |
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| No. |
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Description |
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10.11 |
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Revolving Credit Agreement dated as of August 03, 1999,
Comerica Bank as agent |
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11 |
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Statement re computation of per share earnings |
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27 |
|
|
Financial Data Schedule |
(b) Reports on Form 8-K – None
21
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
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MEADOWBROOK INSURANCE GROUP, INC. |
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By: |
/s/ William J. Lohmeyer |
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Sr. Vice President and
Chief Financial Officer |
Dated: August 13, 1999
22
EXHIBIT INDEX
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| Exhibit |
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| No. |
|
Description |
|
|
|
|
10.1 |
|
|
Revolving Credit Agreement dated as of August 03, 1999,
Comerica Bank as Agent |
|
11 |
|
|
Statement re computation of per share earnings |
|
27 |
|
|
Financial Data Schedule |
