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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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 38-2626206
(State of Incorporation) (IRS Employer Identification No.)
26600 TELEGRAPH ROAD, SOUTHFIELD, MICHIGAN 48034
(810) 358-1100
(Address, zip code and telephone of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
<S> <C>
Common Stock, $.01 per share New York Stock Exchange
</TABLE>
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to
this form 10-K. / /
The aggregate market value of the voting stock (common stock, $.01 par value)
held by non-affiliates of the registrant was $112,147,405 on March 21,1997,
based on the closing sales price of the Common Stock on such date.
The aggregate number of shares of the Registrant's Common Stock, $.01 par
value, outstanding on March 21,1997 was 8,658,831.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's proxy statement for the annual meeting
scheduled for May 19, 1997 are incorporated by reference into Part III of this
report and certain portions of the 1996 Annual Report to Shareholders are
incorporated herein by reference into Part II of this report.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Meadowbrook Insurance Group, Inc. (the "Company") is a Michigan
corporation which was originally incorporated in 1985 under the name Star
Holding Company. In November 1995, the Company changed its name and acquired
Meadowbrook, Inc. ("Meadowbrook"). Meadowbrook was founded in 1955 as the
Meadowbrook Insurance Agency and was subsequently incorporated in 1965.
The Company serves as a holding company for not only Meadowbrook but
also for Star Insurance Company ("Star"), Savers Property and Casualty
Insurance Company ("Savers") and American Indemnity Insurance Company LTD
("American Indemnity"). Star was formed in 1985 as a subsidiary of Star
Holding Company. Star then acquired Savers in 1990, and the Company acquired
American Indemnity in 1994.
OVERVIEW
Since 1976, the Company has been developing and managing alternative
market risk management programs for defined client groups and their members.
The alternative market, which developed as a result of historical volatility in
the cost and availability of traditional commercial insurance coverages,
includes a wide range of approaches to financing and managing risk exposures,
such as captives and rent-a-captives, risk retention and risk purchasing
groups, governmental pools and trusts and self-insurance plans. According to
the last industry report made in 1994, the alternative market accounts for an
estimated $61 billion, or 33%, of the estimated $186 billion of United States
property and casualty premium written; and according to industry sources is
expected to reach an estimated $85 billion, or 38%, of the estimated $225
billion of United States property and casualty premium written in the year
2000. The Company believes that the alternative market has continued to expand
even during the current soft market as a result of the desire of many insureds
to exercise greater control over the risk management process and to obtain
customized risk management services.
The Company targets selected industry, trade and professional
associations, affinity groups and governmental entities, whose specialized risk
management goals and objectives are not met by the traditional commercial
insurance market. In cooperation with a client group, the Company designs
customized packages of services and coverages, or programs, which are then
marketed to the group's members. The Company seeks to form long-term risk
management "partnerships" with its clients, which the Company believes enable
it to achieve cost efficiencies and relatively stable and predictable revenue
and to provide clients with enhanced levels of service, cost stability,
insurance capacity and coverage availability. Because clients often share in
the operating results of the program, they are motivated to prevent and control
losses and to participate actively in the overall management of the program.
Historically, the Company has maintained a high client retention rate, which
has permitted the Company to concentrate on increased market penetration.
Based upon the particular risk management goals of its clients and the
Company's assessment of the opportunity for operating profit, the Company
offers its programs on a managed basis, a risk-sharing basis or, in certain
circumstances in response to a specific market opportunity, a fully-insured
basis. In a "managed program," the Company provides program management services
for a fee but usually assumes no insurance risk and does not participate
directly in the operating results of the program. In a "risk-sharing program,"
the Company receives management fees and commissions and participates with its
clients or agents in the operating results of the program through a captive,
retrospectively-rated program, or a contingent commission. In a "fully-insured
program," the Company provides traditional insurance coverage
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without a risk-sharing mechanism and derives revenue exclusively from earned
premiums and investment income. The Company writes programs on a fully-insured
basis generally when the Company believes there is potential to develop a
long-term risk-sharing relationship.
The Company's principal sources of income result from fees and
commissions earned on risk management programs managed by Meadowbrook, and from
the Company's participation in the operating results of many of the programs it
manages through its insurance subsidiaries, Star and Savers. In addition to
its alternative risk management business, the Company also issues surety bonds
and operates a retail insurance agency.
Many of the Company's programs involve the participation of a
risk-bearing entity owned by all or some of the insureds, which serves as a
vehicle for the retention and pooling of risks by the insureds. Through the
client's risk-bearing entity, the insured participates in the program's
underwriting results on the retained risk exposures, earns investment income
and often reduces the costs of risk management. The objective of the client's
risk-bearing entity is generally to retain risks related to loss events that
occur frequently, are low in severity and are relatively predictable, and to
cede excess risk to reinsurers. Consistent with the needs of its clients and
its assessment of the relative opportunities presented by the program, the
Company often chooses to share in the underwriting results related to risk
exposures retained by the client's risk-bearing entity.
The Company's capabilities in the provision of both services and
insurance coverages provide flexibility for the consideration and
implementation of a variety of alternative market solutions. Services provided
and insurance lines of business include:
<TABLE>
<CAPTION>
SERVICES LINES OF BUSINESS
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<S> <C>
- Risk Analysis and Identification - Workers' Compensation
- Feasibility Studies - Commercial Multi-Peril
- Program and Product Design - General Liability
- Sales, Marketing and Public Relations -- Errors and Omissions
- Consultation, Education and Training -- Automobile
- Captive Formation -- Owners, Landlord and Tenant
- Captive Management (Onshore and Offshore) - Professional Liability
- Rent-a-Captive -- Legal
- Underwriting/Risk Selection -- Medical Malpractice
- Policy Issuance -- Real Estate Appraisers
- Reinsurance Brokerage -- Accountants
- Claims Handling and Administration -- Pharmacists
- Litigation Management - Inland Marine
- Accounting and Financial Statement Preparation -- Cargo
- Regulatory Compliance -- Watercraft
- Actuarial and Loss Reserve Analysis - Product Liability
- Loss Prevention and Control - Excess Reinsurance
- Legal and Audit Support - Commercial Property
- Information Technology and Processing
</TABLE>
DESCRIPTION OF SERVICES AND CAPABILITIES
Program Design. Prior to implementing a new program, the Company
reviews a significant amount of data, including: financial projections for the
contemplated program; historical loss experience; actuarial studies of the
underlying risks; the creditworthiness of the potential client; and the
availability of reinsurance. A senior management team and employees
representing each of the risk-management disciplines within the Company work
together to design, market and implement new programs. While the Company does
not generate substantial fees for
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program design services, these services are an integral part of the Company's
program management services.
Formation and Management of Risk-Bearing Entities. The Company
generates fees by forming and managing risk-bearing entities for clients and
agents. The Company currently manages over thirty captives and holds a minority
interest in eight of these captives. The offshore captives are managed by the
Company's subsidiaries in Bermuda and Barbados.
Risk Selection. The Company performs underwriting services for its
clients, its clients' captives and certain individual accounts. Compensation
for underwriting services generally is included in the Company's management
fees. The Company's underwriting personnel help develop the proper criteria for
selecting risks, while actuarial and reinsurance personnel evaluate and
recommend the appropriate levels of risk retention. The program is then
tailored according to the requirements of each client.
Reinsurance Brokerage. The Company earns fees by placing excess
reinsurance for its programs. The Company's two reinsurance brokerage
subsidiaries, Meadowbrook Intermediaries, Inc. and Meadowbrook International,
Ltd., place reinsurance (as well as insurance coverage with high deductibles)
for insurance companies, captives and self-insured programs managed by the
Company. Reinsurance is also placed for clients that do not have other business
relationships with the Company.
Loss Control and Prevention. The Company earns fees for loss control
services which are designed to help clients prevent or limit certain loss
events. Through an evaluation of the client's workplace environment, the
Company's loss control specialists assist the client in planning and
implementing a loss prevention program and, in certain cases, provide
educational and training programs for the client.
Claims Handling and Administration. The Company is experienced in
handling and managing claims for workers' compensation and most other casualty
lines, property and surety bonds. It handles all claims functions for most of
the programs managed by the Company. The Company's involvement in claims
handling and administration provides feedback to program managers in assessing
the client's risk environment and the overall structure of the program.
Sales and Marketing. The Company markets its programs and services to
associations, groups, local, regional and national insurance agents and
insurance consultants. Once a program has been developed for a particular
association or group, the Company generally then markets the program to members
of the association or group. Sales and marketing efforts include personal
contact, direct mail, telemarketing, advertising, and attendance at seminars
and trade and industry conventions.
MANAGED PROGRAMS
In a managed program, the Company, through Meadowbrook, earns
commission and fee revenue by providing management and other services to a
client's risk-bearing entity, but generally does not share in the operating
results of such programs. The Company believes that its managed programs
provide a stable source of revenue as well as opportunities for revenue growth
without a proportionate increase in expenses. Revenue growth may occur through
the sale of an existing managed program to additional members of the sponsoring
client group, the expansion of coverages and services provided to existing
programs and the creation of programs for new client groups (such as additional
municipal associations) with needs that are similar to existing client groups.
Meadowbrook specializes in providing managed programs to public entity
associations, and currently manages public entity pools and other captive
insurance entities, which provide insurance coverage for over 2500
participants, including city, county, township and village
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governments in five states. Over the years, Meadowbrook has been able to expand
the services offered under existing programs as well as to increase the number
of participants in these managed programs.
Managed program services for which Meadowbrook receives commissions
and fees include: program design and development; underwriting; reinsurance
brokerage; policy administration; loss prevention and control services
(including the provision of specialized law enforcement training); claims and
litigation management; information processing and accounting functions; and
general management oversight of the program on behalf of the sponsoring client
group. Fees and commissions received by the Company under its managed programs
are generally either in a fixed amount or based on a percentage of premium
serviced.
In addition to municipal associations, Meadowbrook also manages mutual
insurance companies, offshore captives and other insurance entities including
the Company's insurance subsidiaries Star and Savers.
In total, Meadowbrook employs 464 associates.
RISK-SHARING PROGRAMS
Client Risk-Sharing. In a client risk-sharing program, the Company
participates in the operating results of the program, and the client group also
shares in such results through a captive, a rent-a-captive or a
retrospectively-rated program. In many instances, a captive owned by a client
reinsures a portion of the risk on a quota-share basis. In addition to premium
revenue and investment income from its participation in the operating results
of the program, the Company may also be compensated through the receipt of
ceding commissions and other fees for policy issuance services and acquisition
costs, captive management services, reinsurance brokerage, loss prevention
services and claims handling and administration services. For financial
reporting purposes, ceding commissions are treated as a reduction in
underwriting expenses.
The Company's experience has been that the number of claims and the
cost of losses tend to be lower in risk-sharing programs than with traditional
forms of insurance. The Company believes that client risk-sharing motivates
insureds to focus on loss prevention and control measures and to establish and
adhere to stricter underwriting guidelines. As a result of its experience with
risk-sharing programs, the Company actively seeks out such opportunities in
appropriate circumstances and has significantly increased the capital of Star
since its formation in 1985 to accommodate new and expanded risk-sharing
programs.
The Company assists the sponsoring group in forming a captive, which
is capitalized by contributions from members of the sponsoring group in
exchange for shares of the captive. The captive is generally managed for a fee
by an offshore subsidiary of the Company. The Company works with the client to
determine the amount of risk exposure that will be assumed by the captive,
which varies depending on the captive's capitalization, the line of business,
the amount to be retained by the Company and the amount to be reinsured by
excess reinsurers. The Company then issues an insurance policy and receives
premium from the insured. Pursuant to the quota-share reinsurance agreement
with the captive, the Company generally transfers (cedes) a portion of the
retained risk to the captive and pays to the captive its share of the net
premium (after deducting ceding commissions, policy issuance fees, the cost of
excess reinsurance, taxes and other fees and expenses). The Company generally
seeks to cede approximately 50% of its loss exposures, but in some cases cedes
as little as 30% or as much as 80% of its loss exposures. The Company secures
obligations due from captives through the use of funds withheld trusts and
letters of credit. Through its reinsurance intermediary subsidiaries, the
Company obtains excess-of-loss reinsurance, subject to agreed upon limits and
retention levels. The Company generally administers all claims handling
functions, and the captive
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provides funds to the Company for the payment of the captive's proportionate
share of paid claims and claims expenses. The captive realizes investment
income from its capital, unearned premium and loss reserves, and shares in the
underwriting results.
The Company also offers its clients "rent-a-captive" risk-sharing
programs. These programs allow a client to retain a significant portion of its
own loss exposure without the administrative costs and capital commitment
required to establish and operate its own captive. In order to enhance its
"rent-a-captive" capabilities, the Company acquired American Indemnity, a
Bermuda company, in June 1994.
In another variation on client risk-sharing, the Company establishes
retrospectively rated programs for individual accounts. In such a program, the
Company works with the client to develop the appropriate self-insured retention
and loss fund amount and then helps arrange for excess of loss reinsurance. The
client reimburses the Company for all claims payments within the client's
retention. The Company generally earns a management fee (which includes claims
and loss control fees). In most of these programs, the Company also
participates in the operating results of the reinsurance coverage and earns a
ceding commission.
Agent Risk-Sharing. The Company also writes program business on a
risk-sharing basis with agents or brokers. The Company believes that agent
risk-sharing has grown as a result of market volatility and lack of coverage
availability in the traditional market. Risk-sharing is achieved either through
an agent-owned captive, rent-a-captive or through a contingent commission
structure tied to operating results. The Company believes that certain agents
and brokers view risk-sharing as a means to recapture lost profit margins on
commissions that have been reduced due to premium reductions in the soft market
and to establish a long-term relationship with an insurer.
The agent may own a captive or purchase an interest in a
rent-a-captive which acts as a reinsurer on business produced. In some cases,
the captive's shareholders may include key producers, subproducers and
insureds. In other circumstances, the agent accepts a lower up-front commission
in exchange for a multi-year contingent commission based on operating results.
The Company believes that multi-year commission structures motivate the agent
to produce business with better risk characteristics and higher profit
potential because unfavorable results reduce commissions.
FULLY-INSURED PROGRAMS
In a fully-insured program, the Company earns premium revenue by
providing insurance coverage without a risk-sharing mechanism. The Company may
provide fully-insured programs when it perceives opportunities for the
development of risk-sharing programs in the future. For example, a
fully-insured program marketed to an association comprised of licensed
landscape and irrigation contractors developed into one of the Company's
largest client risk-sharing programs. This program was initially established as
a fully-insured program in 1990 to fill a void in insurance coverage for the
members of the association. Thereafter, the Company assisted the association in
forming a Bermuda-based captive reinsurance company and began ceding business
to the captive in July 1993.
The Company's largest fully-insured program was developed for a
residential care association in Michigan. The Company's relationship with this
association dates from the early 1970's when the Company began placing
insurance and providing program management services for members of the
association. In 1986, the Company began writing property and workers'
compensation insurance for these members and this program now accounts for
approximately 10% of the Company's 1996 revenue.
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AGENCY
The Company earns commissions through the operation of a retail
property and casualty insurance agency. 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 25 insurance carriers. The agency has grown to be one
of the largest agencies in Michigan, generating commissions in excess of $4.6
million, $4.3 million and $3.7 million for the years ended December 31, 1996,
1995 and 1994, respectively. In addition to its independent retail agency
activities, the Company's insurance agency also earns revenue by serving as
agent for several of the Company's programs, including two of its ten largest
programs.
SURETY BONDS
The Company formed a surety bond business unit in late 1993 and began
issuing surety bonds for contractors and licensees in May 1994. The Company
earned premium revenue on surety bonds issued through general agents throughout
the United States, including a wholly-owned subsidiary of the Company. General
agents were paid commissions and, in some cases, profit sharing bonuses based
upon loss ratios. The general agents had limited underwriting authority. In
marketing payment and performance surety bonds to clients, the Company
generally considered the net worth and working capital ratios and the client's
experience, expertise, financial statements and historical track record. In
certain instances, the Company required collateral before issuing a surety
bond. The form of collateral varied depending upon an assessment of the risk
factors associated with the surety bond. Generally, collateral consisted of
escrowed cash, letters of credit or investment securities, all of which was
held through the term of the bond.
In December 1996, the Company entered into a five-year joint
underwriting agreement with Connecticut Surety Corporation. The agreement
provides for the transfer of the underwriting risk on the majority of the
Company's existing surety bond business. In addition, Star will continue to
write new surety business, utilizing its capital and licenses, and Connecticut
Surety will manage the operations and assume the risk. This arrangement
substantially reduces the Company's underwriting risk exposure while creating a
five-year fee arrangement. This enables the Company to refocus its efforts on
its core business, alternative risk management.
INSURANCE OPERATIONS
INSURANCE SUBSIDIARIES
The Company's principal insurance subsidiaries, Star and Savers,
operate primarily as program insurance companies, providing coverage to defined
classes of insureds. These subsidiaries may be used in certain of the Company's
managed programs as a policy issuance vehicle to fulfill a client's legal
requirement or business need for a policy from a licensed insurer, or may be
used to assume a significant portion of the premium and risk exposures under
the Company's risk-sharing and fully-insured programs. The Company's insurance
subsidiaries are involved in most of the Company's programs. Star and Savers
are managed by Meadowbrook and have no employees.
Star is licensed in 45 states and the District of Columbia. Star was
formed in Michigan in 1985 and was originally intended to serve primarily as a
policy-issuing carrier and as a risk-sharing entity for certain of the
Company's clients. In 1990, Star acquired Savers, a surplus lines company, to
supplement its alternative market programs. Savers is domiciled in Missouri,
licensed in five states and authorized as a surplus lines carrier in all other
states except Vermont. Collectively, Star and Savers are authorized to write
business, on either an admitted or surplus lines basis, in all fifty states.
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The following table summarizes the growth in the Company's gross
written premium and net earned premium for the most recent five years:
GROSS WRITTEN PREMIUM
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Workers' compensation . . . . . . .
$39,748 $40,561 $26,042 $20,587 $18,954
Commercial multi-peril . . . . . . 19,368 23,395 24,010 18,848 10,912
Inland marine . . . . . . . . . . . 5,737 8,844 8,418 8,218 9,210
Other liability . . . . . . . . . . 17,366 17,216 16,631 12,523 7,315
Surety bonds . . . . . . . . . . . 25,929 26,041 9,917 379 92
All other lines . . . . . . . . . . 7,432 7,062 5,607 4,261 3,589
-------- -------- ------- ------- -------
Total . . . . . . . . . . . $115,580 $123,119 $90,625 $64,816 $50,072
======== ======== ======= ======= =======
</TABLE>
NET EARNED PREMIUM
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Workers' compensation . . . . .
$30,017 $31,908 $19,184 $14,091 $11,017
Commercial multi-peril . . . . 13,101 15,771 12,093 9,048 5,968
Inland marine . . . . . . . . . 1,673 2,512 2,474 2,223 2,167
Other liability . . . . . . . . 13,614 12,222 11,373 7,220 5,176
Surety bonds . . . . . . . . . 21,156 15,763 1,689 80 100
All other lines . . . . . . . . 4,986 4,522 3,042 1,674 1,197
------- ------- ------- ------- -------
Total . . . . . . . . . . $84,547 $82,698 $49,855 $34,336 $25,625
======= ======= ======= ======= =======
</TABLE>
During 1996, A.M. Best affirmed an "A-" (Excellent) rating for both
Star and Savers. Such ratings are now considered a group rating under the name
Meadowbrook Insurance Group. A.M. Best ratings are based upon factors of
concern to policyholders and are not directed toward the protection of
investors. No assurances can be given that in the future A.M. Best will not
reduce or withdraw the ratings of the Company's insurance subsidiaries.
RESERVES
The Company establishes reserves for the payment of loss and loss
adjustment expenses. Loss reserves are estimates at a given point in time of
what the insurer expects to pay claimants for claims occurring on or prior to
such time, including claims that have not yet been reported to the insurer. The
establishment of appropriate reserves is an uncertain process and, as such, it
can be expected that the ultimate liability on claims will be greater or less
than the estimated amounts. In particular, surety bond losses are not
predictable, by nature; and therefore, by necessity, are based upon
management's best estimates at a given point in time. While management
believes that the amount accrued is adequate, actual results could differ from
those estimates.
When a claim involving a probable loss is reported, the Company
establishes a case reserve for the estimated amount of the Company's ultimate
loss and loss adjustment expense payments on that claim. The estimate reflects
the Company's judgment based on established reserving practices and the
experience and knowledge of the Company's claims examiners regarding the nature
and value of the claim as well as the estimated expense of settling the claim,
including legal and other fees, and the general expenses of administering the
claims adjustment process. These case reserves are reviewed on a regular basis,
and as new data becomes available, appropriate adjustments are made to
reserves.
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Management also establishes reserves on an aggregate basis to provide
for losses "incurred but not reported" ("IBNR"), as well as for future
developments on losses reported to the Company. Thus, IBNR reserves represent
the difference between the estimated value of total loss reserves and the
reported case reserves. A variety of methods have been developed in the
insurance industry for determining estimates of loss reserves. The Company
relies on three methods when setting reserves which consider prior experience,
expected losses, expected payout, reporting patterns and known activity. The
Company uses a combination of Company historical experience and industry data
when projecting IBNR loss reserves.
The following is a summary of the Company's loss and loss adjustment
expense (LAE) reserves as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995
----- -----
(IN THOUSANDS)
<S> <C> <C>
Reported case loss and LAE $44,346 $38,087
reserves . . . . . . . . . . .
IBNR loss and LAE reserves . . 48,044 48,899
------- -------
Total . . . . . . . . . . $92,390 $86,986
======= =======
</TABLE>
Reserves are computed by the Company based on actuarial principles and
procedures applicable to the lines of business written by the Company. These
reserve calculations are reviewed regularly by management and the Company
engages independent actuaries on an annual basis to express an opinion as to
the adequacy of statutory reserves established by management. These opinions
are filed with the various jurisdictions in which the Company is licensed.
Provisions for inflation are implicitly considered in the reserving process.
For GAAP and statutory purposes, the Company's reserves are carried at the
total estimate for ultimate expected loss without any discount to reflect the
time value of money. The following table provides a reconciliation of
beginning and ending liability balances on a GAAP basis for the year indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Reserves for losses and LAE at beginning of year . . $86,986 $64,993 $50,451
Incurred losses and LAE:
Provision for insured events of the current year. . 60,034 60,792 45,389
Increase (decrease) in provision for insured events
of prior years . . . . . . . . . . . . . . . . . 4,295 (576) (1,426)
------- ------- -------
Total incurred losses and LAE . . . . . . . . . $64,329 $60,216 $43,963
------- ------- -------
Loss and LAE payments for claims attributable to:
Current year . . . . . . . . . . . . . . . . . . . $22,552 $15,913 $13,396
Prior years . . . . . . . . . . . . . . . . . . . . 36,373 22,310 16,025
-------- -------- --------
Total payments . . . . . . . . . . . . . . . . . $58,925 $38,223 $29,421
------- ------- -------
Reserves for losses and LAE at end of period . . . . $92,390 $86,986 $64,993
======= ======= =======
</TABLE>
The following table shows the development of reserves for unpaid losses
and loss adjustment expense from 1987 through 1996 for the Company's current
insurance subsidiaries. The top line of the table shows the reserves net of
reinsurance at the balance sheet date for each of the indicated years. This
reflects the estimated amounts of losses and loss adjustment expense for claims
arising in that year and all prior years that are unpaid at the balance sheet
date, including losses incurred but not yet reported to the Company. The upper
portion of the table shows the cumulative amounts subsequently paid as of
successive years with respect to the reserves. The middle portion of the table
shows the re-estimated amount of the previously recorded reserves based on
experience as of the end of each succeeding year. The estimates change as more
information becomes known about the frequency and severity of claims for
individual years. A redundancy (deficiency) exists when the re-estimated
liability at each December 31 year-end is less (greater) than the prior
liability estimate. The "cumulative redundancy (deficiency)" depicted in the
table, for any particular calendar year, represents the aggregate change in the
initial estimates over all subsequent calendar years. It should be emphasized
that the table presents a
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run-off of balance sheet reserves rather than accident or policy year loss
development. Therefore, each amount in the table includes the effects of
changes in reserves for all prior years.
Due to the Company's adoption of SFAS 113, the bottom portion of the
table shows the impact of reinsurance for the years 1992 through 1996,
reconciling the net reserves shown in the upper portion of the table to gross
reserves.
<TABLE>
<CAPTION>
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
YEARS ENDED DECEMBER 31,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------- -------- ------- -------- ------- ------- ------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for losses
and LAE at end
of period............... $ 3,240 $ 6,311 $ 6,262 $ 9,293 $13,964 $23,545 $35,744 $ 47,149 $64,668 $65,746
Cumulative paid as of:
1 year later............ 591 2,512 1,737 2,877 4,326 5,420 11,172 15,792 25,659
2 years later........... 1,185 3,484 3,284 4,796 6,309 10,052 19,298 26,227
3 years later........... 2,259 4,178 4,508 5,117 7,652 13,554 23,571
4 years later........... 2,242 5,103 4,195 5,971 8,954 15,598
5 years later........... 2,223 4,625 4,594 6,568 9,564
6 years later........... 2,353 4,822 4.970 6,786
7 years later........... 2,466 5,126 5,154
8 years later........... 2,489 5,257
9 years later........... 2,528
Reserves re-estimated
as of end of year:
1 year later............ 2,425 5,466 8,204 9,939 14,693 22,609 35,354 46,738 64,329
2 years later........... 2,377 7,228 7,488 9,800 14,361 21,661 33,524 45,578
3 years later........... 3,430 6,010 7,296 9,396 12,853 20,909 33,308
4 years later........... 2,839 6,374 6,683 8,758 12,649 20,623
5 years later........... 2,769 5,961 6,299 8,600 12,525
6 years later........... 2,830 5,825 6,293 8,371
7 years later........... 2,706 5,850 6,128
8 years later........... 2,676 5,798
9 years later........... 2,651
Cumulative
redundancy:
Dollars............... $ 589 $ 513 $ 134 $ 922 $ 1,439 $ 2,922 $ 2,436 $ 1,571 $ 339
Percentage............ 18.18% 8.13% 2.14% 9.92% 10.31% 12.41% 6.82% 3.33% 0.52%
Net reserves.............. $23,545 $35,744 $ 47,149 $64,668 $65,746
Ceded reserves............ 20,399 14,707 17,844 22,318 26,644
Gross reserves............ 43,944 50,451 64,993 86,986 92,390
------- ------- -------- ------- -------
Net re-estimated.......... 20,623 33,308 45,578 64,329 --
Ceded re-estimated........ 21,586 15,847 21,037 26,952 --
Gross re-estimated........ 42,209 49,155 66,615 91,281
------- ------- -------- ------- -------
Gross cumulative
redundancy
(deficiency)........... $ 1,735 $ 1,296 $(1,622) $(4,295) $ --
======= ======= ======== ======= =======
</TABLE>
Loss reserves have historically developed redundancies on a net basis.
In the most recent two years, gross reserves have been inadequate, due to
adverse development from large surety bond claims and increased IBNR estimates
for ceded excess of loss reinsurance. For 1995, the Company had gross adverse
development of $3.7 million on surety bonds, with the balance attributed to
increases in ceded excess IBNR. For 1994, surety bonds had gross favorable
development, therefore the entire deficiency was caused by increased IBNR
estimates for ceded excess of loss reinsurance. Payments, on both a gross and
net basis, are typically about one third of respective prior year-end reserves.
However, in 1996, net payments were 39.7% of 1995 reserves, due to increased
surety bond payments. Surety has a quicker payment pattern than the balance of
the Company's book of business. This, coupled with the recent growth in
surety, caused the increase in the percentage of reserves paid in 1996. In
addition, gross payments in 1993 were 46.1% of 1992 year-end gross reserves,
due to the settlement of the large claim on an agent risk-sharing program
covering a type of risk that is no longer insured by the Company.
9
<PAGE> 11
Net payments in 1993 were only 23.0% of 1992 year-end net reserves, due to the
commutation of a reinsurance treaty with a captive in which the recapture of
$4.5 million in loss and loss adjustment reserves was recorded as a reduction
in net paid losses. Excluding the effects of these two items, 1993 payments
would have represented 33.8% and 37.1% of 1992 year-end reserves on a gross and
net basis, respectively.
INVESTMENTS
The Company's investment portfolio consists primarily of tax-exempt
fixed income securities. As of December 31, 1996, the Company's cash and
invested assets totaled $156.5 million, of which $118.2 million consisted of
obligations of state and local governmental authorities. The Company's
investment strategy emphasizes the preservation of capital and after-tax yield.
The Company seeks to manage its investment portfolio to match the cash flows
and maturities of its fixed-income securities to its anticipated cash flow
requirements. The Company generally holds fixed-income securities until
maturity and currently has 76.8% of its portfolio classified as "held to
maturity" at December 31, 1996. The Company's investment policies and
strategies are subject to change depending upon regulatory, economic and market
conditions and the existing or anticipated financial condition and operating
requirements, including the tax position of the Company.
Based on its investment experience, the Company believes that
investments in municipal bonds currently generate a greater after-tax return
than investments in taxable fixed income securities of comparable risk,
duration and other investment characteristics. All of the income derived from
the tax-exempt municipal bonds is included in the expanded base on which the
alternative minimum tax ("AMT") is calculated. Currently, the Company is not
in an AMT position, but the Company constantly monitors the AMT effect of its
investments in municipal bonds and may adjust its portfolio to include taxable
securities to avoid incurring an AMT liability.
At December 31, 1996, the carrying value of the Company's investment portfolio,
including cash and cash equivalents, was approximately $156.5 million. The
diversification of the Company's portfolio at December 31, 1996 is shown below:
<TABLE>
<CAPTION>
%
MARKET CARRYING OF TOTAL
TYPE OF INVESTMENT COST VALUE VALUE PORTFOLIO
------------------ ---- ----- ----- ---------
<S> <C> <C> <C> <C>
HELD TO MATURITY DEBT SECURITIES
--------------------------------
U.S. government $ 3,287,309 $ 3,352,991 $ 3,287,309 2.1%
Tax-exempt obligations of states and
political subdivisions 110,265,406 112,651,179 110,265,406 70.5%
Mortgage-backed securities 6,169,051 6,067,416 6,169,051 3.9%
Corporate debt securities 299,902 318,780 299,902 0.2%
Certificates of deposit 95,000 95,000 95,000 0.1%
-----------------------------------------------------------
Total held to maturity debt securities $120,116,668 $122,485,366 $120,116,668 76.8%
AVAILABLE FOR SALE SECURITIES
-----------------------------
DEBT SECURITIES:
U.S. government $ 2,995,204 $ 2,997,810 $ 2,997,810 1.9%
Tax-exempt obligations of states and
political subdivisions 7,897,953 7,808,096 7,808,096 5.0%
Mortgage-backed securities 2,931,914 2,927,451 2,927,451 1.9%
Corporate debt securities 2,200,733 2,222,124 2,222,124 1.4%
-----------------------------------------------------------
Total available for sale debt securities $ 16,025,804 $ 15,955,481 $ 15,955,481 10.2%
EQUITY SECURITIES:
Bond mutual funds 1,562,999 1,420,949 1,420,949 0.9%
-----------------------------------------------------------
Total available for sale securities $ 17,588,803 $ 17,376,430 $ 17,376,430 11.1%
CASH AND CASH EQUIVALENTS 19,002,241 19,002,241 19,002,241 12.1%
-----------------------------------------------------------
Grand Total of Investments $156,707,712 $158,864,037 $156,495,339 100.0%
===========================================================
</TABLE>
10
<PAGE> 12
At December 31, 1996, based on carrying value, 88.3% of the Company's
investments were in fixed income securities (including fixed income cash
equivalents), of which over 98.6% were invested in securities with a S&P rating
range from AAA to A-.
The following table sets forth certain information regarding the
maturities of the Company's fixed income securities at December 31, 1996:
<TABLE>
<CAPTION>
%
MARKET CARRYING OF TOTAL
MATURITY COST VALUE VALUE PORTFOLIO
-------- ---- ----- ----- ---------
<S> <C> <C> <C>
HELD TO MATURITY
----------------
1 year $ 11,141,863 $ 11,173,787 $ 11,141,863 8.2%
1-5 years 41,110,058 41,699,032 41,110,058 30.2%
5-10 years 54,744,177 56,488,699 54,744,177 40.2%
Over 10 years 6,951,519 7,056,432 6,951,519 5.1%
Mortgage-backed securities 6,169,051 6,067,416 6,169,051 4.5%
-----------------------------------------------------------
Total Held to Maturity $120,116,668 $122,485,366 $120,116,668 88.2%
AVAILABLE FOR SALE
------------------
1 year $ - $ - $ - - %
1-5 years 3,977,691 3,983,590 3,983,590 2.9%
5-10 years 3,353,553 3,351,425 3,351,425 2.5%
Over 10 years 5,762,646 5,693,015 5,693,015 4.2%
Mortgage-backed securities 2,931,914 2,927,451 2,927,451 2.2%
-----------------------------------------------------------
Total Available for Sale $ 16,025,804 $ 15,955,481 $ 15,955,481 11.8%
-----------------------------------------------------------
Grand Total $136,142,472 $138,440,847 $136,072,149 100.0%
===========================================================
</TABLE>
COMPETITION
The Company competes both with other providers of alternative risk
management programs and services and with traditional providers of commercial
insurance coverages. Both the alternative risk management and the traditional
property and casualty insurance markets are highly competitive. The Company's
alternative risk management programs and services compete with products and
services offered by insurance companies, other providers of alternative risk
management services (including certain domestic and foreign insurers and
reinsurers and insurance brokers) as well as with self-insurance plans,
captives managed by others, and a variety of other risk-financing vehicles and
mechanisms. These competitive products are offered by other companies that may
have greater financial resources than the Company.
The market for alternative risk management products and services is
significantly influenced by market conditions affecting the traditional
property and casualty insurance industry. Insurance market conditions
historically have been subject to significant variability due to premium rate
competition, natural disasters and other catastrophic events, judicial trends,
changes in the investment and interest rate environment, regulation and general
economic conditions. Pricing is a primary means of competition in the
commercial insurance market. Competition is also based on the availability and
quality of products, quality and speed of service (including claims service),
financial strength, ratings, distribution systems and technical expertise. The
primary basis for competition among alternative risk management providers
varies with the financial and insurance needs and resources of each potential
insured. Principal factors that are considered by insureds include: an analysis
of the net present-value (after tax) of the cost of financing the insured's
expected level of losses, the amount of excess coverage provided in the event
losses exceed expected levels, cash flow and tax planning considerations and
the expected quality and consistency of the services to be provided. The
Company believes that it is able to compete based on its experience, the
quality of its products and services and its program-oriented approach.
However, its ability to successfully compete is dependent upon a number of
factors,
11
<PAGE> 13
many of which, including market and competitive conditions, are outside of the
Company's control.
REGULATION
REGULATION IN GENERAL
The Company's insurance subsidiaries are subject to regulation by
government agencies in the states in which they do business. The nature and
extent of such regulation vary from jurisdiction to jurisdiction, but typically
involve prior approval of the acquisition of control of an insurance company or
of any company controlling an insurance company, regulation of certain
transactions entered into by an insurance company with any of its affiliates,
approval of premium rates, forms and policies used for many lines of insurance,
standards of solvency and minimum amounts of capital and surplus which must be
maintained, establishment of reserves required to be maintained for unearned
premium, losses and loss expense or for other purposes, limitations on types
and amounts of investments, restrictions on the size of risks which may be
insured by a single company, licensing of insurers and agents, deposits of
securities for the benefit of policyholders, and the filing of periodic reports
with respect to financial condition and other matters. In addition, state
regulatory examiners perform periodic examinations of insurance companies. Such
regulation is generally intended for the protection of policyholders rather
than security holders.
In addition to the regulatory oversight of the Company's insurance
subsidiaries, the Company is also subject to regulation under the Michigan and
Missouri Insurance Holding Company System Regulatory Acts (the "Holding Company
Acts"). The Holding Company Acts contain certain reporting requirements
including those requiring the Company, as the ultimate parent company, to file
information relating to its capital structure, ownership, and financial
condition and general business operations of its insurance subsidiaries. The
Holding Company Acts contain special reporting and prior approval requirements
with respect to transactions among affiliates.
Insurance companies are also affected by a variety of state and
federal legislative and regulatory measures and judicial decisions that define
and extend the risks and benefits for which insurance is sought and provided.
These include redefinitions of risk exposure in areas such as product
liability, environmental damage and workers' compensation. In addition,
individual state insurance departments may prevent premium rates for some
classes of insureds from reflecting the level of risk assumed by the insurer
for those classes. Such developments may adversely affect the profitability of
various lines of insurance. In some cases, these adverse effects on
profitability can be minimized through re-pricing, if permitted by applicable
regulations, of coverages or limitations or cessation of the affected business.
The Company's insurance intermediaries are subject to regulation as
insurance intermediaries. Under applicable regulations, the intermediary is
responsible as a fiduciary for funds received for the account of the parties to
the reinsurance transaction and is required to hold such funds in appropriate
bank accounts subject to restrictions on withdrawals and prohibitions on
commingling.
INSURANCE REGULATION CONCERNING CHANGE OR ACQUISITION OF CONTROL
Star and Savers are domestic property and casualty insurance companies
organized, respectively, under the insurance laws of Michigan and Missouri (the
"Insurance Codes"). The Insurance Codes provide that the acquisition or change
of "control" of a domestic insurer or of any person that controls a domestic
insurer cannot be consummated without the prior approval of the relevant
insurance regulatory authority. A person seeking to acquire control, directly
or indirectly, of a domestic insurance company or of any person controlling a
domestic insurance company must generally file with the relevant insurance
regulatory authority an application for
12
<PAGE> 14
change of control containing certain information required by statute and
published regulations and provide a copy of such to the domestic insurer. In
both Michigan and Missouri, control is generally presumed to exist if any
person, directly or indirectly, owns, controls, holds with the power to vote or
holds proxies representing 10% or more of the voting securities of any other
person.
In addition, many state insurance regulatory laws contain provisions
that require pre-notification to state agencies of a change in control of a
non-domestic admitted insurance company in that state. While such
pre-notification statutes do not authorize the state agency to disapprove the
change of control, such statutes do authorize issuance of a cease and desist
order with respect to the non-domestic admitted insurer if certain conditions
exist such as undue market concentration.
Any future transactions that would constitute a change in control of
the Company would also generally require prior approval by the Insurance
Departments of Michigan and Missouri and would require pre-acquisition
notification in those states which have adopted pre-acquisition notification
provisions and in which the insurers are admitted. Such requirements may deter,
delay or prevent certain transactions that could be advantageous to the
stockholders of the Company.
RESTRICTIONS ON DIVIDENDS
A significant portion of the Company's consolidated assets represents
assets of the Company's insurance subsidiaries that may not be transferable to
the holding company in the form of dividends, loans or advances. The Company's
insurance subsidiaries are subject to various state statutory and regulatory
restrictions, generally applicable to each insurance company in its state of
incorporation, which limit the amount of dividends or distributions by an
insurance company to its stockholders. The restrictions are generally based on
certain levels of surplus, operating income and investment income, as
determined under statutory accounting practices.
The insurance holding company laws of Michigan and Missouri regulate
the distribution of dividends and other payments to the Company by its
subsidiaries. Under the applicable Michigan statute, the maximum discretionary
dividend that may be declared (or cash/property distribution that may be made)
by Star is the greater of (i) the insurance company's net income (excluding
realized capital gains) for the preceding calendar year plus net income
(excluding realized capital gains) from the second and third preceding calendar
years (that was not paid in dividends or other distributions) or (ii) ten
percent of the insurance company's policyholders' surplus for the preceding
calendar year, excluding unrealized gains. These dividends are further limited
by a clause in the Michigan law which prohibits an insurer from declaring
dividends except out of earned surplus earnings of the company, as allowed
under the Insurance Code. Since Star is the parent insurance company, its
maximum dividend calculation represents that of the combined insurance
companies.
Under the applicable Missouri statute, the maximum discretionary
dividend that may be declared (or cash/property distribution that may be made)
by Savers to Star is the lesser of (i) 10% of the insurer's policyholders
surplus for the preceding calendar year or (ii) the net investment income for
the preceding calendar year. Such restrictions, or any additional subsequently
imposed restrictions, may in the future affect the Company's ability to pay
expenses, cash dividends to its stockholders and principal and interest on any
future debt outstanding.
RISK-BASED CAPITAL
The NAIC has adopted a methodology for assessing the adequacy of
statutory surplus of property and casualty insurers which includes a risk-based
capital requirement that requires insurance companies to calculate and report
information under a risk-based formula which
13
<PAGE> 15
attempts to measure statutory capital and surplus needs based on the risks in a
company's mix of products and investment portfolio. The formula is designed to
allow state insurance regulators to identify potential weakly capitalized
companies. Under the formula, a company determines its "risk-based capital"
("RBC") by taking into account certain risks related to the insurer's assets
(including risks related to its investment portfolio and ceded reinsurance) and
the insurer's liabilities (including underwriting risks related to the nature
and experience of its insurance business). The risk-based capital rules provide
for different levels of regulatory attention depending on the ratio of a
company's total adjusted capital to its "authorized control level" ("ACL") of
RBC. Based on calculations made by the Company, the risk-based capital levels
for each of the Company's insurance subsidiaries exceed levels that would
trigger regulatory attention. At December 31, 1996 the parent insurance
company's (Star) RBC ratio exceeded applicable risk-based capital requirements.
At December 31, 1996, Star's statutory surplus was $64.6 million; the threshold
requiring regulatory involvement was $11.7 million. Therefore, the Company's
capital exceeds all requirements of the Risk-Based Capital Model Act.
EFFECT OF FEDERAL LEGISLATION
Although the federal government does not directly regulate the
business of insurance, federal initiatives often affect the insurance business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include federal government
participation in asbestos and other product liability claims, pension
regulation (ERISA), examination of the taxation of insurers and reinsurers
minimum levels of liability insurance and automobile safety regulations.
NAIC-IRIS RATIOS
The NAIC's Insurance Regulatory Information System ("IRIS") was
developed by a committee of state insurance regulators and is primarily
intended to assist state insurance departments in executing their statutory
mandates to oversee the financial condition of insurance companies operating in
their respective states. IRIS identifies 11 industry ratios and specifies
"usual values" for each ratio. Departure from the usual values on four or more
ratios generally leads to inquiries from individual state insurance
commissioners.
In 1996, Star had one ratio which varied from the "usual value" range
as follows:
For Star:
<TABLE>
<CAPTION>
RATIO USUAL RANGE STAR VALUE
------------- ------------ -----------
<S> <C> <C>
Investment yield....... 10 to 4.5 4.2
</TABLE>
Star's "investment yield" ratio was affected by its commitment of a large
portion of its invested assets to the ownership of Savers, which does not pay
Star a dividend and therefore does not produce an investment yield.
Eliminating the effect of the Savers investment, the investment yield would
have been 5.0%, which puts Star within the usual range.
ITEM 2. PROPERTIES
The Company currently leases its corporate offices in Southfield, Michigan from
26600 Development Associates Limited Partnership. In 1996, the Company paid
rent in the amount of approximately $660,000. The term of the lease for the
offices in Southfield expires on September 30, 2004. The Company, through its
subsidiaries, is also a party to various leases for locations in which such
subsidiaries have offices. The Company does not consider any of these leases to
be material.
14
<PAGE> 16
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to litigation in the ordinary course of business. Among
the legal actions currently pending is a lawsuit filed by two of the former
shareholders of the agent which previously produced substantially all of the
Company's surety bond business against, among others: Star; Meadowbrook;
certain of the Company's officers, including Warren D. Gardner, Robert S.
Cubbin, Joseph C. Henry and Merton J. Segal; as well as certain employees of
the Company. This lawsuit was filed on June 26, 1995 in the Second Judicial
District Court of the State of Nevada in the County of Washoe and alleges,
among other claims, breach of contract, breach of the covenant of good faith
and fair dealing, unjust enrichment, bad faith, negligence, slander and
wrongful termination by the Company. The plaintiffs requested injunctive
relief, compensatory damages, punitive and exemplary damages and attorney fees
in an unspecified amount. The Nevada Insurance Department revoked the license
of the first plaintiff and denied further licensing of the second plaintiff.
The Company continues to vigorously defend itself and has filed counterclaims
against the plaintiffs. While the Company believes that it has meritorious
defenses and counterclaims in this lawsuit, there can be no assurance that the
Company's results of operations and financial condition will not be materially
adversely affected by this lawsuit. The ultimate outcome of the lawsuit cannot
be determined at this time, and the Company is unable to estimate the range of
possible loss, if any.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
15
<PAGE> 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to page 49
of the Company's 1996 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to page 26
of the Company's 1996 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to pages 17
to 25 of the Company's 1996 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to pages 27
to 47 of the Company's 1996 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
16
<PAGE> 18
PART III
Certain information required by Part III is omitted from this Report in that
the Registrant has filed a definitive proxy statement pursuant to Regulation
14A (the "Proxy Statement") not later than 120 days after the end of the
fiscal year covered by this report and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
that specifically address the items set forth herein are incorporated by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included under the caption "Directors
and Executive Officers" of the Company's Proxy Statement relating to the Annual
Meeting of Shareholders to be held on May 19, 1997, which is hereby
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption "Executive
Compensation" of the Company's Proxy Statement relating to the Annual Meeting
of Shareholders to be held on May 19, 1997, which is hereby incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is included under the caption "Security
Ownership of Certain Beneficial Owners and Management" of the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on May 19,
1997, which is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
17
<PAGE> 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(A) The following documents are filed as part of this Report:
1. Financial Statements: The following Consolidated Financial Statements of
Meadowbrook Insurance Group, Inc., the accompanying Notes to Consolidated
Financial Statements and Report of Coopers & Lybrand L.L.P., Independent
Accountants, have been incorporated herein by reference in their entirety, from
pages 27-47 of the 1996 Annual Report to Shareholders:
Report of Coopers & Lybrand L.L.P., Independent Accountants
Consolidated Balance Sheet - December 31, 1996 and 1995
Consolidated Statement of Income - Fiscal Years Ended December 31, 1996,
1995 and 1994
Consolidated Statement of Shareholders' Equity - Fiscal Years Ended December
31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows - Fiscal Years Ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
2. Report of Independent Accountants on Financial Statement
Schedules Listed Under 14(A)3 of this Form 10-K (enclosed on pg. 22)
3. Financial Statement Schedule
Schedule II Condensed Financial Information of Registrant (enclosed
on pg. 23-25)
Schedules not listed above have been omitted because they are not applicable or
are not required or the information required to be set forth therein is
included in the Consolidated Financial Statements and Notes thereto.
4. Exhibits The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedule are filed as part of, or
incorporated by reference into, this Form 10-K.
<TABLE>
<CAPTION>
Page Number
Exhibit In Sequential
No. Description Numbering System
- -------- ----------- ----------------
<S> <C> <C>
3.1 Articles of Incorporation of the Company, including Certificate
of Amendment to the Articles of Incorporation. *
3.2 Bylaws of the Company. *
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
Page Number
Exhibit In Sequential
No. Description Numbering System
- ------- ----------- ----------------
<S> <C> <C>
10.1 Employment Agreement between the Company and
James R. Parry, Sr. ("Parry") dated January 1, 1993. *
10.2 Management Services Agreement among the Company,
Star, Savers and Meadowbrook dated January 1, 1993. *
10.3 Meadowbrook Insurance Group, Inc. 1995 Stock Option Plan. *
10.4 Lease between Meadowbrook and 26600 Development
Associates Limited Partnership, with fourth amendment to
lease dated March 21, 1995. *
10.5 Fifth and Sixth Amendments to Lease between Meadowbrook
and 26600 Development Associates Limited Partnership dated
August 7, 1995 and May 13, 1996.
10.6 Meadowbrook, Inc. 401(k) Profit Sharing Plan Trust, amended
and restated December 31, 1994. *
10.7 Employment Agreement, Covenant Not to Compete and
Restricted Stock Agreement dated as of August 1, 1995
between Meadowbrook and Robert A. Engle. *
10.8 Employment Agreement, Covenant Not to Compete and
Restricted Stock Agreement dated as of August 1, 1995
between Meadowbrook and Robert A. Engle, Amendment. *
10.9 Stock Purchase Agreement dated August 1, 1995 among the
Company , Robert A. Engle, Trustee of the Robert A. Engle
Revocable Trust dated November 24, 1993, Merton J. Segal
and certain other employees of the Company. *
10.10 Stock Purchase Agreement dated August 1, 1995 among the
Company , Robert A. Engle, Trustee of the Robert A. Engle
Revocable Trust dated November 24, 1993, Merton J. Segal
and certain other employees of the Company, Amendment. *
11 Statement re computation of per share earnings.
13 1996 Annual Report to Shareholders.
21 List of Subsidiaries.
23 Consent of Independent Accountants.
24 Power of attorney.
27 Financial Data Schedule
28.1 Star Insurance Company's 1996 Schedule P. **
28.2 Savers Property & Casualty Insurance Company's 1996 Schedule P. **
</TABLE>
19
<PAGE> 21
(*) Incorporated by reference to Form S-1 Registration Statement (No.
33-2626206) of Meadowbrook Insurance Group, Inc. declared effective
November 20, 1995.
(**) Submitted in paper format under separate cover; see Form S-E filing.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the year ended
December 31, 1996.
20
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Southfield,
Michigan, on March 24, 1997.
MEADOWBROOK INSURANCE GROUP, INC.
By: **
--------------------------------------------
Merton J. Segal
Chairman and Chief Executive Officer
(Principal Executive Officer)
By:/s/ Daniel G. Gibson
--------------------------------------------
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacity and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
** Chairman, Chief Executive Officer and March 24, 1997
- ------------------------------------ Director (Principal Executive Officer)
Merton J. Segal
** Vice Chairman and Director March 24, 1997
- ------------------------------------
Warren D. Gardner
/s/ Robert S. Cubbin Executive Vice President, Secretary March 24, 1997
- ------------------------------------
Robert S. Cubbin and Director
** Executive Vice President, Treasurer March 24, 1997
- ------------------------------------ and Director
Joseph C. Henry
** Executive Vice President, March 24, 1997
- ------------------------------------ Chief Marketing Officer and Director
James R. Parry, Sr.
** Director March 24, 1997
- ------------------------------------
Bruce E. Thal
** Director March 24, 1997
- ------------------------------------
Hugh W. Greenberg
** By: /s/ Robert S. Cubbin
-----------------------------
Robert S. Cubbin, Attorney-in-fact
</TABLE>
21
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- -------- -----------
<S> <C>
3.1 Articles of Incorporation of the Company, including Certificate
of Amendment to the Articles of Incorporation.
3.2 Bylaws of the Company.
10.1 Employment Agreement between the Company and
James R. Parry, Sr. ("Parry") dated January 1, 1993.
10.2 Management Services Agreement among the Company,
Star, Savers and Meadowbrook dated January 1, 1993.
10.3 Meadowbrook Insurance Group, Inc. 1995 Stock Option Plan.
10.4 Lease between Meadowbrook and 26600 Development
Associates Limited Partnership, with fourth amendment to
lease dated March 21, 1995.
10.5 Fifth and Sixth Amendments to Lease between Meadowbrook
and 26600 Development Associates Limited Partnership dated
August 7, 1995 and May 13, 1996.
10.6 Meadowbrook, Inc. 401(k) Profit Sharing Plan Trust, amended
and restated December 31, 1994.
10.7 Employment Agreement, Covenant Not to Compete and
Restricted Stock Agreement dated as of August 1, 1995
between Meadowbrook and Robert A. Engle.
10.8 Employment Agreement, Covenant Not to Compete and
Restricted Stock Agreement dated as of August 1, 1995
between Meadowbrook and Robert A. Engle, Amendment.
10.9 Stock Purchase Agreement dated August 1, 1995 among the
Company , Robert A. Engle, Trustee of the Robert A. Engle
Revocable Trust dated November 24, 1993, Merton J. Segal
and certain other employees of the Company.
10.10 Stock Purchase Agreement dated August 1, 1995 among the
Company , Robert A. Engle, Trustee of the Robert A. Engle
Revocable Trust dated November 24, 1993, Merton J. Segal
and certain other employees of the Company, Amendment.
11 Statement re computation of per share earnings.
13 1996 Annual Report to Shareholders.
21 List of Subsidiaries.
23 Consent of Independent Accountants.
24 Power of attorney.
27 Financial Data Schedule
28.1 Star Insurance Company's 1996 Schedule P.
28.2 Savers Property & Casualty Insurance Company's 1996 Schedule P.
</TABLE>
(*) Incorporated by reference to Form S-1 Registration Statement (No.
33-2626206) of Meadowbrook Insurance Group, Inc. declared effective
November 20, 1995.
(**) Submitted in paper format under separate cover; see Form S-E filing.
<PAGE> 24
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Meadowbrook Insurance Group, Inc.
We have audited the consolidated financial statements of Meadowbrook
Insurance Group, Inc. (formerly "Star Holding Company") and Subsidiaries as
of December 31, 1996 and 1995, and for each of the three years in the
period ended December 31, 1996, which financial statements are included on
pages 27 through 47 of the 1996 Annual Report to Shareholders of
Meadowbrook Insurance Group, Inc. and incorporated by reference herein. We
have also audited the financial statement schedule listed under Item 14(A)3
of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
Meadowbrook Insurance Group, Inc. and Subsidiaries as of December 31, 1996
and 1995, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. In addition, in
our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand LLP
Detroit, Michigan
March 10, 1997
22
<PAGE> 25
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MEADOWBROOK INSURANCE GROUP, INC.
PARENT COMPANY ONLY
INCOME STATEMENT
For the years ended December 31,
_______
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ------------
<S> <C> <C> <C>
Revenue: $ 275,740 $129,376 $ -
Operating expenses:
Interest expense - 316,175 382,553
Other expenses 350,849 109,770 281,271
----------- ----------- ------------
Total Operating Expenses 350,849 425,945 663,824
----------- ----------- ------------
Loss before federal income taxes (75,109) (296,569) (633,824)
Federal income tax benefit (41,940) (100,834) (225,700)
----------- ----------- ------------
Net loss before subsidiary equity (33,169) (195,735) (438,124)
----------- ----------- ------------
earnings
Subsidiary equity earnings 8,739,193 7,415,605 4,140,174
----------- ----------- ------------
Net Income $ 8,706,024 $ 7,219,870 $ 3,702,050
=========== =========== ============
</TABLE>
23
<PAGE> 26
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MEADOWBROOK INSURANCE GROUP, INC.
PARENT COMPANY ONLY
BALANCE SHEET
As of December 31, 1996 and 1995
_______
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,056,424 $ 8,092,719
Investment in subsidiaries 91,772,990 83,066,158
Receivables from subsidiaries 6,975,678 1,552,336
Other assets 639,376 299,652
------------ -----------
Total Assets $100,444,468 $93,010,865
============ ===========
LIABILITIES
Other liabilities $ 243,634 $ 794,699
Long-term debt - -
------------ -----------
Total Liabilities 243,634 794,699
SHAREHOLDERS' EQUITY
Common Stock 86,493 86,200
Additional paid in capital 72,873,396 72,868,651
Retained earnings 27,381,111 19,369,118
Unrealized depreciation on
available for sale securities (140,166) (107,803)
------------ -----------
Total Shareholders' Equity 100,200,834 92,216,166
------------ -----------
Total Liabilities and Shareholders' Equity $100,444,468 $93,010,865
============ ===========
</TABLE>
24
<PAGE> 27
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MEADOWBROOK INSURANCE GROUP, INC.
PARENT COMPANY ONLY
STATEMENT OF CASH FLOWS
For the years ended December 31,
_______
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net cash used in operating activities: $ (6,145,849) $ (718,847) $ (747,004)
------------ ----------- -----------
Cash Flow from Investing Activities:
Investment in subsidiaries - (32,504,672) (10,165,523)
Dividends received from/(returned to)
subsidiaries - - (43,466)
------------ ----------- -----------
Net cash used in
investing activities: - (32,504,672) (10,208,989)
------------ ----------- -----------
Cash Flows from Financing Activities:
Proceeds from bank loan - - 3,500,000
Principal payments on bank loan - (3,500,000) (6,118,202)
Additional expenses from IPO (221,018) - -
Dividends paid on common stock (517,797) - -
Retirement of common stock (470,370) (27,655) (54,540)
Issuance of common stock 318,739 44,242,503 14,230,125
------------ ----------- -----------
Net cash (used in) provided by
financing activities: (890,446) 40,714,848 11,557,383
------------ ----------- -----------
Increase/(decrease) in cash and
cash equivalents (7,036,295) 7,491,329 601,390
Cash and cash equivalents,
beginning of year 8,092,719 601,390 -
------------ ----------- -----------
Cash and cash equivalents
end of year $ 1,056,424 $ 8,092,719 $ 601,390
============ =========== ===========
</TABLE>
25
<PAGE> 1
EXHIBIT 10.5
FIFTH AMENDMENT TO LEASE
This FIFTH AMENDMENT TO LEASE made and entered into this 7th day of
August, 1995, by and between 26600 DEVELOPMENT ASSOCIATES LIMITED PARTNERSHIP,
a Michigan limited partnership, whose address is c/o Kojaian Management
Corporation, 26600 Telegraph Road, Suite 450, Southfield, Michigan
48034-5300 (hereinafter referred to as "Landlord") and MEADOWBROOK, INC. a
Michigan corporation, whose address is 26600 Telegraph Road, Suite 300,
Southfield Michigan 48034 (hereinafter referred to as "Tenant"):
W I T N E S S E T H :
WHEREAS, Landlord as Landlord, and Tenant as Tenant, entered into that
certain lease dated July 25, 1990 covering premises at the Brookview Building,
26600 Telegraph Road, Southfield Michigan (hereinafter referred to as the
"Original Premises"); and,
WHEREAS, the lease was amended by the First Amendment to Lease dated May
26, 1993, Second Amendment to Lease dated October 27, 1993, Third Amendment to
Lease dated April 4, 1994 and Fourth Amendment to Lease dated March 21, 1995
(hereinafter collectively referred to as the "Lease"): and
WHEREAS, Tenant desires to lease an additional premises on the fourth
(4th) floor consisting of four thousand five hundred fifty-four (4,554)
rentable square feet, hereinafter referred to as and designated the "Additional
Premises E" on Exhibit "B" hereto and Landlord is willing to lease the
Additional Premises E to Tenant upon the terms and conditions herein set forth;
and
WHEREAS, the parties wish to further amend the Lease as more particularly
set forth herein,
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree that the
Lease is hereby amended as follows:
1.
(a) Tenant acknowledges that Landlord has earlier constructed the
Additional Premises E and that Tenant is familiar with the physical condition
of the Additional Premises E and hereby agrees to accept the Additional
Premises E in its existing "as-is" condition, except as provided herein,
without representation or warranty of any kind by Landlord as to the present or
future condition of the Additional Premises E. Tenant's taking of possession of
the Additional Premises E shall be deemed conclusive evidence of Tenant's
acceptance of the Additional Premises E in good order and satisfactory
condition. Landlord shall repaint the Additional Premises E as reasonably
needed at Landlord's sole cost and expense. Landlord shall have no further
obligation to improve or to repair the Additional Premises E except as
expressly set forth in the Lease.
(b) Landlord shall deliver the Additional Premises E to Tenant for
Tenant's occupancy on or before August 11, 1995.
(c) Effective August 11, 1995, the Additional Premises E shall be
deemed a part of the Demised Premises for all purposes of the Lease.
1
<PAGE> 2
2.
Effective upon August 11, 1995 and the respective Effective Dates as
provided in the Fourth Amendment to Lease, the Lease shall be amended as
follows:
(a) Section 1(d) of the Lease captioned "Demised Premises", shall be
amended as follows:
"(d) Demised Premises: The entire third floor of the building
(25,064 square feet) and a portion of
the second floor of the building
(9,261 square feet) and a portion of
the fourth floor of the Building
(6,754) as of the date hereof.
The entire third floor of the building
(25,064 square feet) and a portion of
the second floor of the building
(16,570 square feet) as of the
Effective Date I.
The entire third floor of the building
(25,064 square feet), a portion of the
second floor of the building (16,570
square feet) and a portion of the
fourth floor of the Building (4,554
square feet) as of August 11, 1995.
The entire third floor of the building
(25,064 square feet), a portion of the
second floor of the building (19,568
square feet) and a portion of the
fourth floor of the Building (4,554
square feet) as of the Effective Date
II.
The entire third floor of the building
(25,064 square feet), a portion of the
second floor of the building (19,568
square feet) and a portion of the
fourth floor of the Building (4,554
square feet) as of the Effective Date
III.
(b) Rider to Section 1(g) of the Lease shall be amended to read as follows:
"Demised Premises (excluding the Additional Premises C and D)
Term Monthly Rental
---- --------------
From the date hereof through
the date prior to the
Effective Date I $58,742.97
Effective Date I through
September 30, 1995 $59,536.62
(subject to the credit provided in Section 1(d) hereof)
October 1, 1995 through
September 30, 1996 $61,167.29
(subject to the credit provided in Section 1(d) hereof)
October 1, 1996 through
September 30, 1997 $62,797.95
October 1, 1997 through
September 30, 1998 $64,428.62
2
<PAGE> 3
October 1, 1998 through
September 30, 1999 $66,059.28
October 1, 1999 through
September 30, 2000 $67,724.64
October 1, 2000 through
September 30, 2001 $68,210.37
October 1, 2001 through
September 30, 2002 $68,730.80
October 1, 2002 through
September 30, 2003 $70,361.46
October 1, 2003 through
September 30, 2004 $71,992.13
Additional Premises C
---------------------
Term Monthly Rental
---- --------------
Effective Date II through
September 30, 1996 $4,404.56
(subject to the credit provided in Section l(d) hereof)
October 1, 1996 through
September 30, 1997 $4,521.98
October 1, 1997 through
September 30, 1998 $4,639.41
October 1, 1998 through
September 30, 1999 $4,756.83
October 1, 1999 through
September 30, 2000 $4,876.75
October 1, 2000 through
September 30, 2001 $4,911.72
October 1, 2001 through
September 30, 2002 $4,949.20
October 1, 2002 through
September 30, 2003 $5,066.62
October 1, 2003 through
September 30, 2004 $5,184.04
Additional Premises D
---------------------
Term Monthly Rental
---- --------------
Effective Date III through
September 30, 1997 $6,185.68
(subject to the credit provided in Section l(d) hereof)
October 1, 1997 through
September 30, 1998 $6,346.30
3
<PAGE> 4
October 1, 1998 through
September 30, 1999 $6,506.92
October 1, 1999 through
September 30, 2000 $6,670.96
October 1, 2000 through
September 30, 2001 $6,718.81
October 1, 2001 through
September 30, 2002 $6,770.07
October 1, 2002 through
September 30, 2003 $6,930.69
October 1, 2003 through
September 30, 2004 $7,091.31
Additional Premises E
---------------------
August 11, 1995 through
September 30, 1995 $6,512.22
October 1, 1995 through
September 30, 1996 $6,690.59
October 1, 1996 through
September 30, 1997 $6,868.95
October 1, 1997 through
September 30, 1998 $7,047.32
October 1, 1998 through
September 30, 1999 $7,225.68
October 1, 1999 through
September 30, 2000 $7,407.84
October 1, 2000 through
September 30, 2001 $7,460.97
October 1, 2001 through
September 30, 2002 $7,517.90
October 1, 2002 through
September 30, 2003 $7,696.26
October 1, 2003 through
September 30, 2004 $7,874.63"
(c) Section 1(i) of the Lease shall be amended to read as follows:
"(i) Tenant's share: 39.83% as of the date hereof.
40.37% as of the Effective Date I.
44.79% as of August 11, 1995.
43.28% as of the Effective Date II.
47.26% as of the Effective Date III."
4
<PAGE> 5
(d) Section 41(a) of the Rider to Lease shall be amended to read as
follows:
"(a) Provided Tenant shall not be in default at the time of the
execution of such right, Tenant shall have the right to lease an
expansion area on the fourth floor of the Building of approximately
five thousand (5,000) square feet on or about the sixty-sixth (66th)
month of the term after the Effective Date I. Landlord shall
designate such expansion area; provided, that such five thousand
(5,000) square foot area shall constitute a single,
self-contained suite. Tenant shall exercise such right to lease such
expansion area, if at all, at lease nine (9) months prior to the date
such premises is to be made available to Tenant."
3.
Effective upon August 11, 1995, Exhibit "B" to the Lease is hereby deleted
in its entirety and Exhibit "B" attached hereto is hereby substituted.
4.
EXCEPT, as specifically provided to the contrary herein, all of the rest
and remaining terms and conditions of the Lease shall remain in full force and
effect. All defined terms used herein shall have the same meaning as used in
the Lease unless a different meaning is clearly indicated.
The Lease as herein amended is hereby ratified and confirmed by the parties
and shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands the
day and year first above written.
26600 DEVELOPMENT ASSOCIATES LIMITED
PARTNERSHIP,
a Michigan limited partnership
By: 26600 Investment Corporation,
a Michigan corporation
Its: General Partner
By: C. Michael Kojaian
--------------------------
C. MICHAEL KOJAIAN
EXECUTIVE VICE PRESIDENT
"LANDLORD"
MEADOWBROOK INC.,
a Michigan corporation
By: WARREN D. GARDNER
-------------------------
WARREN D. GARDNER
Its: PRESIDENT
"TENANT"
5
<PAGE> 6
"EXHIBIT B"
[FLOOR PLAN]
6
<PAGE> 7
EXHIBIT "B" (cont.)
[FLOOR PLAN]
7
<PAGE> 8
EXHIBIT "B" (cont.)
[FLOOR PLAN]
8
<PAGE> 9
EXHIBIT 10.5
[KOJAIAN LETTERHEAD]
HAND-DELIVERED
June 25, 1996
Ms. Donna J. Economo
Director, Human Resources
MEADOWBROOK INSURANCE GROUP
26600 Telegraph Road, Suite 300
Southfield, Michigan 48037-2054
RE: BROOKVIEW BUILDING
SOUTHFIELD, MICHIGAN
Dear Ms. Economo:
Enclosed herewith please find one (1) original of both the Estoppel Certificate
and the fully executed Sixth Amendment to Lease by and between 26600
Development Associates Limited Partnership, as Landlord, and Meadowbrook, Inc.,
as Tenant. Please retain this document for your files and records.
If you have any questions about the document, please do not hesitate to call me.
Very truly yours,
KOJAIAN MANAGEMENT CORPORATION
D. Renee Markowski
D. Renee Markowski
Lease Administrator
enclosure
9
<PAGE> 10
SIXTH AMENDMENT TO LEASE
This SIXTH AMENDMENT TO LEASE made and entered into this 13th
day of May, 1996, by and between 26600 DEVELOPMENT ASSOCIATES LIMITED
PARTNERSHIP, a Michigan limited partnership, whose address is c/o Kojaian
Management Corporation, 26600 Telegraph Road, Suite 450, Southfield, Michigan
48034-5300 (hereinafter referred to as "Landlord") and MEADOWBROOK, INC., a
Michigan corporation, whose address 26600 Telegraph Road, Suite 300,
Southfield, Michigan 48034 (hereinafter referred to as "Tenant").
WITNESSETH:
WHEREAS, Landlord as Landlord, and Tenant as Tenant, entered into that
certain lease dated July 25, 1990 covering premises at the Brookview Building,
26600 Telegraph Road, Southfield, Michigan (hereinafter referred to as the
"Original Premises"); and
WHEREAS, the lease was amended by the First Amendment to Lease dated May
26, 1993, Second Amendment to Lease dated October 27, 1993, Third Amendment to
Lease dated April 4, 1994, Fourth Amendment to Lease dated March 21, 1995 and
Fifth Amendment to Lease dated August 7, 1995 (hereinafter collectively referred
to as the "Lease"); and
WHEREAS, Tenant desires to lease an additional premises on the first (1st)
floor consisting of seven thousand two hundred thirty-four (7,234) rentable
square feet, hereinafter referred to as and designated the "Additional Premises
F" on Exhibit "B" hereto and Landlord is willing to lease the Additional
Premises F to Tenant upon the terms and conditions herein set forth; and
WHEREAS, the parties wish to further amend the Lease as more particularly
set forth herein,
NOW THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree that the
Lease is hereby amended as follows:
1.
(a) Tenant will furnish to Landlord all information regarding its
partition, electrical and telephone requirements and all other pertinent
information, by not later than sixty (60) days prior to the anticipated
Effective Date, as hereinafter defined. Based upon the information supplied by
Tenant to Landlord, Landlord, at its sole cost and expense, shall prepare plans
and specifications for the renovations to the Additional Premises F, and
Landlord shall submit such plans and specifications to Tenant for Tenant's
approval, which approval shall not be unreasonably withheld. Tenant shall
approve said plans and specifications or supply Landlord with its comments in
writing thereto within five (5) days of receipt of same, and if Tenant shall
fail to supply such approval or comments in writing within such five (5) day
period, such plans and specifications shall be deemed approved. If Tenant
requests any changes to such plans and specifications, Landlord and Tenant shall
cooperate to resolve all such matters.
(b) Landlord shall complete the Additional Premises F in accordance with
the approved plans and specifications and deliver the same to Tenant for
Tenant's occupancy on or about October 1, 1996. The date Landlord so delivers
the Additional Premises F to Tenant is hereinafter referred to as the "Effective
Date".
10
<PAGE> 11
(c) The cost of all improvements to the Additional Premises F shall be
paid by Tenant as follows: (i) One-half of such amount upon the approval of such
costs by Tenant, and (ii) the balance of such amount prior to occupancy of the
Additional Premises F by Tenant.
(d) In consideration of Tenant paying for all the improvement costs, as
provided in (c) above, Landlord shall provide Tenant with a $36,170.00 ($5.00
per rentable square foot) rent credit. Such credit shall be applied against the
Basic Rental for the Additional Premises F until exhausted. For example, Tenant
shall not be required to pay any Basic Rental with respect to the Additional
Premises F for the first three (3) months following the Effective Date and the
Basic Rental for the fourth (4th) month shall be $7,475.12.
2.
Effective upon the Effective Date, the Lease shall be amended as
follows:
(a) Section 1(d) of the Lease captioned "Demised Premises", shall
be amended as follows:
"(d) Demised Premises The entire third floor of the building
(25,064 square feet), a portion of
the second floor of the building
(19,568 square feet) and a portion
of the fourth floor of the building
(4,554 square feet) as of the date
hereof.
The entire third floor of the
building (25,064 square feet), a
portion of the second floor of the
building (19,568 square feet), a
portion of the fourth floor of the
building (4,554 square feet) and a
portion of the first floor of the
building (7,234 square feet) as of
the Effective Date.
The entire third floor of the
building (25,064 square feet), a
portion of the second floor of the
building (23,669 square feet), a
portion of the fourth floor of the
building (4,554 square feet) and a
portion of the first floor of the
building (7,234 square feet) as of
the Effective Date III, as defined
in the Fourth Amendment to Lease."
(b) Rider to Section I (g) of the Lease captioned "Basic Rental"
shall be amended to read as follows:
(g) "Demised Premises (excluding the Additional Premises D and F)
Term Monthly Rental
May 1, 1996 through $72,262.44
September 30, 1996
October 1, 1996 through $74,188.88
September 30, 1997
October 1, 1997 through $76,115.35
September 30, 1998
11
<PAGE> 12
October 1, 1998 through $78,041.79
September 30, 1999
October 1, 1999 through $80,009.23
September 30, 2000
October 1, 2000 through $80,583.06
September 30, 2001
October 1, 2001 through $81,197.90
September 30, 2002
October 1, 2002 through $83,124.34
September 30, 2003
October 1, 2003 through $85,050.80
September 30, 2004
Additional Premises D
Term Monthly Rental
Effective Date III through $6,185.68
September 30, 1997
(subject to the credit provided in Section l(d)
of the Fourth Amendment to Lease)
October 1, 1997 through $6,346.30
September 30, 1998
October 1, 1998 through $6,506.92
September 30, 1999
October 1, 1999 through $6,670.96
September 30, 2000
October 1, 2000 through $6,718.81
September 30, 2001
October 1, 2001 through $6,770.07
September 30, 2002
October 1, 2002 through $6,930.69
September 30, 2003
October 1, 2003 through $7,091.31
September 30, 2004
Additional Premises F
Term Monthly Rental
Effective Date through $10,911.28
September 30, 1997
(subject to the credit provided in Section I (d)
hereof)
12
<PAGE> 13
October 1, 1997 through $11,194.62
September 30, 1998
October 1, 1998 through $11,477.95
September 30, 1999
October 1, 1999 through $11,767.31
September 30, 2000
October 1, 2000 through $11,851.70
September 30, 2001
October 1, 2001 through $11,942.13
September 30, 2002
October 1, 2002 through $12,225.46
September 30, 2003
October 1, 2003 through $12,508.79"
September 30, 2004
(c) Section I (1) of the Lease captioned "Tenant's Share"
shall be amended to read as follows:
"(i) Tenant's share: 50.66% as of the date hereof.
62.33% as of the Effective Date III.
58.15% as of the Effective Date"
(d) Section 2(e) of the Fourth Amendment to Lease shall be
amended to read as follows:
"Notwithstanding anything herein contained to the contrary, if this
Lease shall be terminated and/or Landlord shall re-enter the Demised
Premises as a result of Tenant's default, then upon such termination
or re-entry, and in addition to Section (xiii) Tenant shall pay to
Landlord the amount of Three Hundred Seventy Six Thousand Six Hundred
Seventeen no/00dollars ($376,617) multiplied by a fraction, the
numerator of which is the number of months remaining in the term upon
such termination and/or re-entry and the denominator of which is the
number of months from the respective Effective Dates through the
Expiration Date. Such amount shall be discounted to present value
over the remaining term of this Lease at the discount rate of the
Federal Reserve Bank of Chicago at such time, plus one percent (1%).
(e) Rider to Section 2.1 of the Lease shall be amended as follows:
"Tenant shall have the right to utilize the following reserved parking
spaces in the executive covered parking area without additional cost
of rent during the term of this Lease, as the same may be extended:
Twenty-two (22) spaces as of the date hereof; four (4) additional
spaces [for a total of twenty-six (26)] as of the Effective Date and
four (4) additional spaces [for a total of thirty (30)] as of the
Effective Date III. Landlord shall place signs designating such spaces
[for the exclusive use of Tenant] Landlord shall use reasonable
efforts to police Tenant's right to utilize such reserved spaces, but
Landlord shall have no liability or responsibility to Tenant if such
spaces are not available through acts or omissions of others.
13
<PAGE> 14
If Tenant shall expand the Demised Premises pursuant to Sections (h)
and/or (i) hereof, Tenant shall be entitled to additional reserved
spaces on a pro-rata basis to the extent the same are available.
Landlord shall provide an area in reasonable proximity to the Building
for general designated visitor parking for the Building (including
Tenant's visitors)."
3.
Effective upon the Effective Date, Exhibit "B" to the Lease is hereby
deleted in its entirety and Exhibit"B" attached hereto is hereby substituted.
4.
EXCEPT, as specifically provided to the contrary herein, all of the rest
and remaining terms and conditions of the Lease shall remain in full force and
effect. All defined terms used herein shall have the same meaning as used in
the Lease unless a different meaning is clearly indicated.
The Lease as herein amended is hereby ratified and confirmed by the parties
and shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands the
day and year first above written.
26600 DEVELOPMENT ASSOCIATES
LIMITED PARTNERSHIP,
a Michigan limited partnership
By: 26600 Investment Corporation
a Michigan corporation
Its: General Partner
By: Mike Kojaian
------------------------
Mike Kojaian
President
"LANDLORD"
MEADOWBROOK, INC,
a Michigan corporation
By: [sig]
---------------------
Its: Chairman
---------------------
"TENANT"
14
<PAGE> 15
"EXHIBIT B"
[FLOOR PLAN]
15
<PAGE> 16
"EXHIBIT B"
[FLOOR PLAN]
16
<PAGE> 17
"EXHIBIT B" (cont.)
[FLOOR PLAN]
17
<PAGE> 18
"EXHIBIT B" (cont.)
[FLOOR PLAN]
18
<PAGE> 1
EXHIBIT 11
MEADOWBROOK INSURANCE GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Primary:
Weighted average shares outstanding 8,630,150 4,970,626 3,241,950
Common stock equivalents 554,122 494,310 648,232
---------- ---------- ----------
9,184,272 5,464,936 3,890,182
========== ========== ==========
Fully Diluted:
Weighted average shares outstanding 8,630,150 4,970,626 3,241,950
Common stock equivalents 554,122 590,168 648,232
---------- ---------- ----------
9,184,272 5,560,794 3,890,182
========== ========== ==========
Income before extraordinary item and
preferred dividend requirement $8,706,024 $7,219,870 $3,702,050
Preferred dividend requirement - - -
---------- ---------- ----------
Income applicable to common shareholders
and before extraordinary item $8,706,024 $7,219,870 $3,702,050
Extraordinary item - - -
---------- ---------- ----------
Net income applicable to common
shareholders $8,706,024 $7,219,870 $3,702,050
========== ========== ==========
Earnings per share:
Primary -
Net income before extraordinary item $ .95 $ 1.32 $ .95
Extraordinary item - - -
Net income .95 1.32 .95
Fully Diluted -
Net income before extraordinary item .95 1.30 .95
Extraordinary item - - -
Net income .95 1.30 .95
</TABLE>
Note: Primary and fully diluted weighted average shares outstanding are the same
for 1996 due to the fact that the average market price for the period was
higher than the ending market price.
<PAGE> 1
EXHIBIT 13
1996 ANNUAL REPORT
"WE'VE BUILT A FORMIDABLE AND INNOVATIVE ORGANIZATION OVER THE LAST FORTY-ONE
YEARS...WE'RE COMMITTED TO CONTINUALLY ADDING CREATIVE ALTERNATIVES TO OUR
BLUEPRINT FOR TOMORROW."
[MEADOWBROOK INSURANCE GROUP LOGO]
<PAGE> 2
[MEADOWBROOK INSURANCE GROUP LOGO]
CORPORATE PROFILE
In 1955, no one had ever heard of "Alternative Risk Management."
Now, thanks in part to Meadowbrook Insurance Group, Inc., Alternative Risk
Management has become one of the most important innovations in the insurance
industry in decades.
Now, the marketplace has acknowledged that these nontraditional programs and
products are the future of insurance.
At Meadowbrook, we saw it coming decades ago.
Meadowbrook pioneered it, evolved it, and is one of the nation's recognized
leaders in providing alternative risk management solutions for clients.
The Meadowbrook Agency was formed in 1955, and has grown to be the largest
independent insurance services provider in Michigan. Today, Meadowbrook
provides a wide variety of traditional and alternative risk management
services. Its clients include public entities, professional and trade
associations, businesses and individuals.
The parent, Meadowbrook Insurance Group, Inc. (The Company), is the holding
company for insurance subsidiaries, Star Insurance Company (Star), Savers
Property and Casualty Insurance Company (Savers), and American Indemnity
Insurance Company Ltd. (American Indemnity), and Meadowbrook, Inc.
(Meadowbrook), the risk management services company.
In an initial public offering on November 21, 1995, 27% of the common stock was
sold to the public.
- Star was formed as an admitted carrier in 1985 and, with Savers, today
is licensed to write all lines of property and casualty insurance in 47
states.
- Savers was acquired in 1990 and provides all lines of property and
casualty insurance on a "surplus lines" basis. Collectively, Star and
Savers are authorized to write business, on either an admitted or surplus
lines basis, in all 50 states.
- American Indemnity in Bermuda was acquired in 1994 to enhance the
Company's ability to offer clients rent-a-captive risk-sharing programs.
Building a $100 million net worth company, being recognized as a leader in
alternative risk management, becoming a publicly traded company on the
NYSE...these accomplishments are the result of a history of innovative,
visionary thinking; unparalleled service; and uncompromising integrity. As the
insurance industry evolves into the 21st century, Meadowbrook Insurance Group
will continue to lead the way.
A leading pioneer in Alternative Risk Management programs, Meadowbrook is
uniquely situated for long-term growth as the marketplace evolves to more
non-traditional insurance. In short,...Our future will be built on our
developed strengths.
<PAGE> 3
1996
ANNUAL REPORT
CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------
1996 1995 1994 1993
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
OPERATING RESULTS
Gross Premiums Written $115,580 $ 123,119 $90,625 $64,816
Net Premiums Written 72,758 93,638 57,555 39,452
Net Premiums Earned 84,547 82,698 49,855 34,336
Net Investment Income
Actual 8,002 5,325 3,257 2,639
Pro Forma N/A 5,613 3,499 2,814
Underwriting Income 2,365 4,177 1,949 512
Net Income
Actual 8,706 7,220 3,702 2,105
Pro Forma N/A 9,675 4,221 2,625
Earnings Per Share
Actual 0.95 1.32 .95 .54
Pro Forma N/A 1.37 .69 .48
FINANCIAL POSITION
Cash and Investments 156,495 148,977 88,460 58,418
Total Assets 265,035 241,764 158,637 115,568
Liability for Losses
and Loss
Adjustment Expenses
(LAE) 92,390 86,986 64,993 50,451
Shareholders' Equity 100,201 92,216 44,444 25,493
</TABLE>
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Meadowbrook Corporate Profile Inside Front Cover
Financial Highlights 1
To Our Shareholders 3
Meadowbrook 2000 6
Review of Operations 8
Insurance Company Operations 10
Insurance Management and Brokerage Operations 14
Management's Discussion and Analysis and Results of Operations 17
Selected Consolidated Financial Data 26
Report of Management and Independent Accountants 27
Consolidated Financial Statements 28
Notes to Consolidated Financial Statements 33
Board of Directors 48
Shareholder Information 49
Meadowbrook Insurance Group Offices 50
Meadowbrook Mission Statement Inside Back Cover
</TABLE>
[BAR CHART]
GROWTH OF EARNED PREMIUMS
($MILLIONS)
[BAR CHART]
FEES AND COMMISSIONS
($MILLIONS)
[BAR CHART]
INSURANCE PROGRAMS IN FORCE
(YEAR END)
[1]
<PAGE> 4
[MEADOWBROOK INSURANCE GROUP LOGO]
[Illustration of Management Team]
Top Row: Robert S. Cubbin, Joseph C. Henry, James R. Parry, Sr.
Bottom Row: Warren D. Gardner, Merton J. Segal
[2]
<PAGE> 5
1996
ANNUAL REPORT
"Our corporate goal is to build a world class insurance organization
specializing in the Alternative Risk Market."
Merton J. Segal
Chairman of the Board
BUILDING ON STRENGTH
1996 was an exciting year for Meadowbrook Insurance Group! In our first full
year as a public company we formed new relationships, learned new lessons
and strategically positioned ourselves for continuing our long-term goals of
growth and profitability. Our status as a public company broadened our name
recognition worldwide and has created a wealth of opportunities as new programs
and partnerships have presented themselves.
TO OUR SHAREHOLDERS...
1996 ACCOMPLISHMENTS
Our efforts in 1996 paved the way for stronger performance now and into the
next millennium.
- - We initiated eleven new programs in late 1996. Two were with
multi-national corporations who sought out Meadowbrook as a leading expert
in the Alternative Risk Market field. These types of partnerships are the
foundations upon which Meadowbrook builds long term relationships to reach
our clients' goals.
- - During the year we initiated a regional sales and marketing strategy to
better serve our clients nationwide. Midwest, Southeastern, and Eastern
marketing centers have been established, and we plan to add at least two
more in 1997 in the West and Southwest.
- - A.M. Best Company affirmed our insurance company subsidiaries' ratings at
"A-", (excellent), recognizing our strong capital position and the
profitability of our insurance operations.
- - We established the University of Meadowbrook, a training ground for
Meadowbrook associates. As a financial services company, our associates
are our most important asset. They allow us to successfully deliver
products and services to our clients. We continue to invest substantial
time, money and effort to develop the best possible group of associates.
- - We acquired Association Self Insurance Services, Inc., in Montgomery,
Alabama to geographically expand our client services. This acquisition
brought us a full service risk management operation focused on pools and
funds. Its services include claims, loss control, managed care, policy
issuance and administration. We consolidated our existing Montgomery
office with ASI and placed a ten year Meadowbrook associate in charge of
the combined operation. We have already experienced benefits from this
acquisition through the addition of two major new Alabama client
contracts.
As we enter 1997, we continue to investigate other acquisition opportunities,
focusing on those that provide synergies that enhance profitability for our
shareholders and expand services to our growing client base.
As the challenges have grown in our first full year as a public company, we
were pleased to add highly talented individuals to lead our key divisions. We
added new Vice Presidents of Underwriting, Mergers and Acquisitions and Managed
Care in addition to a new Chief Information Officer.
[3]
<PAGE> 6
[MEADOWBROOK INSURANCE GROUP LOGO]
[GRAPHIC]
TO OUR SHAREHOLDERS...
1996 was also a year to distinguish the past from the future. President Warren
Gardner became Vice Chairman and has taken a leadership role in Regional
Marketing, Mergers & Acquisitions, and Integrated Managed Care.
In conjunction, we established the Office of the President, incorporating a
"team approach" to manage the Company's growth into the next century. The
Company is now guided by a triumvirate of our top executives - Robert Cubbin,
Joseph Henry and James Parry, Sr.
The Office of the President enhanced our program matrix management process by
initiating an Executive Responsible Program to personally oversee each
insurance program Meadowbrook manages, ensuring the highest quality of service
to our clients.
Our Investor Relations Department is pleased to announce a new Dividend
Reinvestment Plan and a Direct Purchase Plan to enhance the liquidity of our
stock and provide a cost effective method to invest in the Company.
[4]
<PAGE> 7
1996
ANNUAL REPORT
"We are prepared for the challenges of today and the new millennium."
Robert S. Cubbin
Executive Vice President
1996 FINANCIAL PERFORMANCE
While there were many positive results, financially, 1996 was not the success
we had planned. We did not achieve our revenue or profitability goals for the
year. The delay in closing several large new programs, combined with
discontinuing unprofitable programs, pushed much new revenue growth into 1997.
We experienced unexpected claims in the surety business during the third
quarter, which reduced our profits. As a result, the reaction of certain
segments of the stock market created a drop in our stock price. Subsequently,
we entered into a partnership with a surety carrier in December that
substantially reduces our exposure in the surety bond business and refocuses
our efforts on our core businesses, where we have been most successful. The
stock's recovery is evidence of the confidence we enjoy from our long term
partners and investors.
1997
Our priorities in 1997 will be to reinforce our image as a growth company, to
continue to build our profitability and to reinforce the trust of our
shareholders. Our ongoing goals are to grow our revenues an average of 20% per
year and consistently return 15% on equity to our shareholders. We are
confident that our goals will be achieved in 1997. We appreciate your support
of Meadowbrook through your investment, and we will continue to keep you
informed of our progress through the coming year.
Merton J. Segal Robert S. Cubbin
Merton J. Segal Robert S. Cubbin
Chairman and Executive Vice President
Chief Executive Officer
Warren D. Gardner Joseph C. Henry
Warren D. Gardner Joseph C. Henry
Vice Chairman Executive Vice President
James R. Parry, Sr.
James R. Parry, Sr.
Executive Vice President
[5]
<PAGE> 8
[MEADOWBROOK INSURANCE GROUP LOGO]
[GRAPHIC]
BREAKING NEW GROUND FOR THE 21ST CENTURY
MEADOWBROOK 2000
Some view the future with caution and fear. Others see it as a limitless set of
opportunities. Meadowbrook believes the only things worth finding are
opportunities.
The insurance industry is changing at an unprecedented pace. Mergers and
acquisitions are taking place at record levels as companies deal with
overcapacity and declining premium levels. Former competitors are now
partners. Affiliations within the industry are developing as clients require
more innovative products. There will be fewer, but larger, companies in the
future, focused where their expertise can create profitable returns.
Partnerships and affiliations will grow across industry lines.
With these tremendous changes, opportunities exist for those willing to adapt.
Meadowbrook seeks these opportunities for itself and its clients.
In 1995, we created our Meadowbrook 2000 strategy, a vision of what we want to
be and a plan for how to get there.
Like most companies, Meadowbrook establishes annual goals for our financial
performance and client growth. We focus on insurance opportunities and the
needs of our clients for five to ten years ahead. This planning process is
integral to our ability to compete in today's market and to ensure our future
success.
[6]
<PAGE> 9
1996
ANNUAL REPORT
The changes that have occurred in our industry require us to broaden our
strategies for growth. The current competition and various pressures on self
insured groups that provide workers' compensation to their members have created
opportunities to develop strong partnerships. These funds need support and
unique tools to protect and grow their business. Meadowbrook supplies the
capital, licenses, expertise, and innovative concepts to complement the
benefits these groups provide.
We are rapidly increasing our risk-sharing partnerships with top local,
regional, and national agents and brokers. Many have experienced loss of
revenues as a result of the prolonged soft market, and seek to create producer
owned/policyholder owned group and association captives. Products and services
are being added to our existing programs. We have also created new partnerships
with other key insurance companies that need our Alternative Risk Management
expertise.
The Alternative Risk Market which Meadowbrook pioneered is expanding rapidly.
More and more, clients want to control their insurance destiny and reap the
rewards of their own risk management efforts. As a leader in this arena, we
are in an excellent position to increase our market share.
We have established strategic directions for growth commensurate with the
values and knowledge we have gained over our forty-one year history. These are
the foundations on which we will enhance shareholder value and provide
consistently superior returns to investors and value to our clients. We are
singularly committed to being the "best" at what we do; nothing less is
acceptable.
[BAR CHART]
<TABLE>
<CAPTION>
PROJECTION OF ALTERNATIVE MARKET GROWTH
PROPERTY-CASUALTY PREMIUM (BILLIONS)
<S> <C>
1991 $166
1994 $186
2000E $225
</TABLE>
[7]
<PAGE> 10
[MEADOWBROOK INSURANCE GROUP LOGO]
[GRAPHIC]
REVIEW OF OPERATIONS
SOLID STRUCTURE,
STRONG MATERIALS
Meadowbrook knows our clients are best served by intelligently engineered
programs that work for them. That is why we've developed and refined a broad
range of Alternative Risk Management capabilities.
This range of capabilities enables Meadowbrook to offer cost effective risk
management programs and services that generate premiums for our insureds that
are more closely related to their own risk exposures and loss experience.
These premiums are also generally less volatile than those in the traditional
insurance market. Our clients benefit because Meadowbrook offers them more
stable and predictable insurance pricing. Long term, costs are usually lower
because the client benefits from participating in the underwriting and
investment income results of their program. We work together to improve
profitability by implementing loss control and better claims handling measures.
Meadowbrook develops programs, which are customized packages of services and
coverages marketed to the policyholder. There are three types of programs,
categorized by the level of risk maintained by Meadowbrook. In managed
programs, Meadowbrook usually assumes no insurance risk and provides services
to the client under long term contracts, as with public entity pool management.
In risk-sharing programs, Meadowbrook participates in the operating results
[8]
<PAGE> 11
1996
ANNUAL REPORT
of the programs, and the client or agent shares in the operating results, as
with agency owned captives. In fully-insured programs, Meadowbrook provides
traditional insurance without a risk-sharing mechanism, usually where specialty
or niche opportunities exist to convert this business to a risk sharing
program.
SERVICES PROVIDED BY MEADOWBROOK:
<TABLE>
<S> <C>
- - Risk Analysis - Claims Handling & Administration
- - Program and Product Design - Information Technology and Processing
- - Sales, Marketing and Public Relations - Accounting and Financial Statement Preparation
- - Consultation, Education and Training - Regulatory Compliance
- - Captive Formation and Management - Actuarial and Loss Reserve Analysis
- - Rent-a-Captive Formation and Management - Loss Prevention and Control
- - Underwriting/Risk Selection - Legal and Audit Support
- - Policy Issuance
</TABLE>
CLAIMS HANDLING AND LOSS CONTROL SERVICES
The foundation upon which Meadowbrook builds its reputation is the management
of clients' risks and the reduction of their losses through the implementation
of far reaching and effective loss control and claims handling programs. By
creating partnerships with our clients through risk-sharing programs, we are
able to reduce losses, which ultimately leads to lower insurance premiums. We
work with the clients to develop proprietary knowledge of their unique
insurance risks and needs. With their guidance, we endeavor to become experts
in their business, working together to reduce losses.
Meadowbrook leads the industry in developing loss control services. Our staff
includes recognized experts in the insurance industry. Most staff members hold
advanced degrees or industry designations in their fields. Our areas of
expertise include: products liability, law enforcement operations, ergonomics
and office safety, managing workplace violence, employment practices liability
and professional liability loss prevention.
Meadowbrook made a major commitment to the future in 1996 by investing in new
claims software that will enhance claims services throughout the United States.
This state-of-the-art software will enable us to stay in the forefront of
claims management. Our acquisition of Association Self Insurance Services,
Inc. in Montgomery, Alabama, exemplifies our commitment to expanding our fee
for service specialities such as claims, loss prevention and insurance
management services geographically.
[9]
<PAGE> 12
[MEADOWBROOK INSURANCE GROUP LOGO]
Meadowbrook's insurance subsidiaries are Star Insurance Company (Star), Savers
Property and Casualty Insurance Company (Savers), and American Indemnity
Insurance Company LTD (American Indemnity). They operate as program insurance
companies, providing coverage to defined classes of insureds. Star and Savers
are rated A- (excellent) by A.M. Best.
INSURANCE COMPANY OPERATIONS
In 1996, our insurance companies' premium writings stabilized due to the
delayed implementation of major new programs, intense price competition in the
property/casualty insurance industry, and the termination of several programs
that were not meeting our profit objectives. Our management is committed to
growth and return on investment. In those situations where business proves to
be unprofitable and all reasonable rehabilitation efforts are unsuccessful,
Meadowbrook will discontinue a program rather than accept losses for our
shareholders.
During the year, the Company experienced losses in its surety bond business.
We evaluated the strategic risks/rewards of this business and elected to
substantially reduce our surety risk by entering into a long term
agreement with a company focused solely on this business. The agreement
results in the transfer of the underwriting risk to that company, creating
instead a stream of fee income that meets the Company's profitability goals.
"Meadowbrook is committed to growth and return on investment."
Joseph C. Henry
Executive Vice President
Over a six year period, Meadowbrook's combined ratio has averaged 11.7 points
better than the property casualty industry.
[CHART]
[10]
<PAGE> 13
1996
ANNUAL REPORT
[GRAPHIC]
[11]
<PAGE> 14
[MEADOWBROOK INSURANCE GROUP LOGO]
RISK SHARING PARTNERSHIPS
The Company's insurance operations focus on developing risk-sharing programs
for agents, brokers, third party administrators, groups and associations, and
individual insureds.
INSURANCE COMPANY OPERATIONS
In an agent risk-sharing program, the agent participates in the operating
results of the program. Substantial opportunities exist as agents face profit
challenges and pressure to provide access to Alternative Risk Mechanisms.
Risk-sharing is achieved either through an agent-owned captive, a
rent-a-captive or through a superior contingent commission structure tied to
operating results. Meadowbrook seeks to align itself with these agents to
benefit all parties involved.
In a client risk-sharing program, individual companies, groups or associations
participate in the operating results through a captive, rent-a-captive, or a
retrospectively rated program. Typically, a client-owned captive reinsures a
portion of the risk.
The Company also offers its clients a rent-a-captive risk-sharing vehicle. A
rent-a-captive allows a client to retain a significant portion of its own loss
exposure without the administrative costs and capital commitment required to
establish and operate its own captive. The clients share in the underwriting
results and the investment income.
Meadowbrook also encourages client risk-sharing by establishing retrospectively
rated programs for individual accounts. The goal of these programs is to lower
the frequency and severity of claims. For risk-sharing programs of this kind,
we work with the client to establish an appropriate self-insured retention and
loss fund level in addition to securing reinsurance protection. The Company
earns premium revenue and investment income from its participation in the
operating results of the program.
[12]
<PAGE> 15
1996
ANNUAL REPORT
[GRAPHIC]
[13]
<PAGE> 16
[MEADOWBROOK INSURANCE GROUP LOGO]
[GRAPHIC]
RISK MANAGEMENT & MARKETING OPERATIONS
A DETAILED BLUEPRINT
Meadowbrook's Risk Management and Marketing Operations comprise nine major
areas: Public Entity Division, Claims Management, Loss Control Services,
Insurance Agency Operations, Reinsurance Intermediaries, Captive Management,
Management of Insurance Companies, Marketing Management and Employee Benefits
Consulting.
[14]
<PAGE> 17
1996
ANNUAL REPORT
"From the promptness of their contact to the efficient and
expeditious handling of claims, Meadowbrook's Public Entity Division has
received universal accolades. "
George D. Goodman
Executive Director
Michigan Municipal League
MARKETING OPERATIONS AND CLIENT SATISFACTION
PUBLIC ENTITY DIVISION
Since its inception in 1982, Meadowbrook's Public Entity Division has grown to
serve over 2,500 municipalities throughout the United States. During its
fifteen year history, this division has remained in the forefront of
Meadowbrook's risk management operations by consistently refining its
procedures and services. In 1996, Meadowbrook recorded the following
achievements:
- - Renewed our largest public entity program with property/casualty and
workers compensation services on a long-term contract. This program
provides a complete range of services including marketing, policyholder
services, claims administration, loss control, risk management services
and general program management. Meadowbrook has handled this program
since 1982, reflecting the satisfaction of our clients;
- - Renewed one of the most successful midwestern property/casualty and
workers' compensation public entity pools in the country. This is the
third long-term renewal with this client. This program has been
recognized around the country as a model for other property/casualty
programs for municipalities;
- - Completed the initiation of a public entity construction liability and
workers' compensation program for one of the largest public entities in
the Midwest. This multi-year program involves providing insurance and
risk management services for multiple site construction activities.
NEW AND EMERGING PROGRAMS
In 1996 we strengthened our program management services by adding several high
quality program managers to our staff. We initiated 11 new programs, an
outstanding year for Meadowbrook, and over 50 additional programs are currently
under review. The revenues from these programs will flow into the Company's
income statement for many years to come. Specific examples include:
- - A partnership with a global auto manufacturer to provide a complete
insurance package for its United States dealership base;
- - A three tier workers' compensation and liability program partnership with
a leading multi-national insurance broker, providing insurance for medium
to large clients throughout the United States.
"Meadowbrook is more than a service provider. They're partners in
our long-term success."
Kevin C. Murphy
Director of Risk Management
Michigan Municipal League
[15]
<PAGE> 18
[MEADOWBROOK INSURANCE GROUP LOGO]
[GRAPHIC]
ROAD TO COMPLETE CLIENT SATISFACTION
AGENCY
Meadowbrook originally opened its doors in 1955 as a retail property casualty
insurance agency. In 41 years our agency has grown to become the largest in
Michigan. The core business consists of commercial property, casualty, life,
accident and health insurance. We also provide personal property and liability
insurance. Our clients range from large manufacturers to small businesses,
from associations to individuals.
The agency is committed to finding the most cost effective methods of handling
client risk management needs. Our associates are highly skilled and bring a
wide range of experience and expertise to their work. As a result, they are
able to create customized solutions for our clients by combining traditional
insurance products with progressive risk management alternatives.
CAPTIVE MANAGEMENT AND
MARKETING THROUGH MEADOWBROOK RISK MANAGEMENT LTD. (MRM)
In 1996, Meadowbrook's Bermuda and Barbados offices continued to grow as the
alternative market arena expanded. These offshore operations provide captive
insurance company management services including accounting, consulting,
reinsurance placement, policy issuance and regulatory compliance. MRM
currently manages over thirty captives and continues to receive recognition
for superior leadership in managing member-owned insurance companies.
REINSURANCE PLACEMENT THROUGH MEADOWBROOK INTERMEDIARIES (MINT) AND MEADOWBROOK
INTERNATIONAL LTD.
MINT has operated as a reinsurance intermediary since 1983. MINT, based in New
York, and Meadowbrook International in Bermuda offer reinsurance intermediary
services on behalf of Meadowbrook companies and outside clients. Our
professional associates manage the process of both reinsurance placement and
ongoing service by utilizing a network of the finest reinsurance markets in the
world.
[16]
<PAGE> 19
1996
ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS
Meadowbrook Insurance Group, Inc. (the Company) provides alternative risk
management programs and services primarily to industry, public entities, and
trade/professional groups. Revenues are generated from four principal sources:
fees from program management services, commissions earned on insurance placed
by a subsidiary with other carriers, earned insurance premiums, and investment
income. The subsidiaries of the Company that provide these services are Star
Insurance Company (Star), Savers Property and Casualty Insurance Company
(Savers), American Indemnity Insurance Company Ltd. (American Indemnity) and
Meadowbrook, Inc. (Meadowbrook), the risk management company.
Through these subsidiaries the Company develops programs, which are customized
packages of services or coverages marketed to the group's members. The
programs are categorized by the level of risk assumed by the Company. In
managed programs, the Company usually assumes no insurance risk and generates
fee revenue through program management services. In risk-sharing programs, the
Company participates with the client or producing agent in the operating
results of the programs through a captive, retrospectively-rated program, or a
contingent commission. In fully-insured programs, the Company provides
traditional insurance without a risk-sharing mechanism and derives revenue
exclusively from earned premiums and investment income. Fully-insured programs
are developed only in response to a specific market opportunity and generally
when the Company believes there is potential to create a long-term risk-sharing
partnership in the future.
The Company's major insurance subsidiaries, Star and Savers, issue insurance
policies for both the risk-sharing and the fully-insured programs. These
companies are complemented by American Indemnity, which offers clients a
rent-a-captive vehicle for risk-sharing programs.
Managed programs and agency activities are provided through Meadowbrook, the
Company's risk management subsidiary. Meadowbrook was acquired by the Company
in November of 1995. Prior to its acquisition, it was an affiliated company.
Fee and commission revenues are generated through Meadowbrook primarily from
the following sources: retail insurance agency commissions, program management
fees, claims handling and administration fees, loss prevention and control
fees, and reinsurance brokerage commissions. Management fee revenue is also
generated from the following services: program design and implementation, sales
and marketing to members of a client group, captive formation and management,
underwriting/risk selection, accounting and financial statement preparation,
regulatory compliance, actuarial and loss reserve analysis. In addition to
providing services to outside clients, Meadowbrook also provides services to
the Company's insurance subsidiaries which include the management of their
insurance operations.
The Company acquired Association Self Insurance Services, Inc. (ASI) of
Montgomery, Alabama in November of 1996. The purchase price is subject to
reduction, contingent on a specific contract renewal. The acquisition was not
material to the Company's results of operations. ASI is a full service
risk-management operation focused on pools and funds whose services include
claims, loss control, managed care, and policy issuance. ASI's operations were
consolidated with the Company's existing operations in Montgomery, Alabama.
In December 1996, the Company entered into a five-year joint underwriting
agreement with Connecticut Surety Corporation. The agreement provides for the
transfer of the underwriting risk on the majority of the Company's existing
surety bond business. In addition, Star will continue to write new surety
business, utilizing its capital and licenses, and Connecticut Surety will
manage the operations and assume the risk. This arrangement substantially
reduces the Company's underwriting risk exposure while creating a five year fee
arrangement. This enables the Company to refocus its efforts on its core
business, alternative risk management.
Management's discussion and analysis is presented both on an actual and pro
forma basis for the years ended December 31, 1995 and 1994. The data presented
on an actual basis, for 1995 and 1994, reflects consolidated operations with
Meadowbrook only for the brief period from the date of acquisition (November
20, 1995) to year-end. The pro forma financial information in 1995 and 1994 is
based on a consolidation of operations, assuming that Meadowbrook had been a
wholly-owned subsidiary during the entire 1995 and 1994 period.
[17]
<PAGE> 20
[MEADOWBROOK INSURANCE GROUP LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
ACTUAL PRO FORMA CHANGE 96 VS. 95 CHANGE 95 VS. 94
- -------------------------- ----------- ----------------- ------------------ ------------------
(IN THOUSANDS, EXCEPT %'S) 1996 1995 1994 $ % $ %
- -------------------------- ----------- -------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues $109,189 $103,349 $65,573 $ 5,840 5.7% $37,776 57.6%
Total expenses 98,321 90,179 59,919 8,142 9.0% 30,260 50.5%
----------- -------- ------- ------- -------- -------- --------
Income before taxes 10,868 13,170 5,654 (2,302) (17.5%) 7,516 132.9%
Income taxes 2,162 3,495 1,433 (1,333) (38.1%) 2,062 143.9%
----------- -------- ------- ------- -------- -------- --------
Net Income $ 8,706 $ 9,675 $ 4,221 $ (969) (10.0%) $ 5,454 129.2%
----------- -------- ------- ------- -------- -------- --------
<CAPTION>
ACTUAL CHANGE 96 VS. 95 CHANGE 95 VS. 94
- -------------------------- ----------- -------- ------- ------------------ ------------------
(IN THOUSANDS, EXCEPT %'S) 1996 1995 1994 $ % $ %
- -------------------------- ----------- -------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues $109,189 $ 89,974 $53,155 $19,215 21.4% $36,819 69.3%
Total expenses 98,321 80,486 48,288 17,835 22.2% 32,198 66.7%
----------- -------- ------- ------- -------- -------- --------
Income before taxes 10,868 9,488 4,867 1,380 14.5% 4,621 94.9%
Income taxes 2,162 2,268 1,165 (106) (4.7%) 1,103 94.7%
----------- -------- ------- ------- -------- -------- --------
Net Income $ 8,706 $ 7,220 $ 3,702 $ 1,486 20.6% $ 3,518 95.0%
</TABLE>
Net income in 1996 decreased $1.0 million, or 10.0%, from the pro forma net
income of $9.7 million in 1995. Net earned premiums increased $1.8 million, or
2.2%, over the prior year. Net investment income increased by $2.4 million, or
41.8%, in 1996 due to a full year's earnings on invested proceeds from the
Company's initial public offering. Salaries and employee benefits increased by
$5.0 million in 1996 as a result of additional new full-time employees. Other
operating expenses increased $4.2 million due to investments in new programs.
The increase in 1995 net income from 1994 was the result of higher investment
income, improved underwriting results, and an increased operating margin in
risk management operations. Investment income increased $2.2 million on a pro
forma basis and $2.1 million on an actual basis. This increase was attributed
to growth in invested assets, resulting from strong underwriting cash flows as
well as additional capital raised in 1994 and 1995. Increased underwriting
profits accounted for an additional $2.2 million of pre-tax income in 1995.
The increase in underwriting profits was generated through premium growth and
an improved combined ratio. The remainder of the increase in operating income
was the result of overall growth in fee based revenue, coupled with
proportionally smaller increases in salary and employee benefit expenses.
REVENUE
<TABLE>
<CAPTION>
ACTUAL PRO FORMA CHANGE 96 VS. 95 CHANGE 95 VS. 94
-------- ----------------- ------------------ ------------------
(IN THOUSANDS, EXCEPT %'S) 1996 1995 1994 $ % $ %
- -------------------------- -------- -------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earned premium $ 84,547 $ 82,698 $49,855 $1,849 2.2% $32,843 65.9%
Net commissions & fees 16,566 14,955 12,176 1,611 10.8% 2,779 22.8%
Investment & misc. income 8,076 5,696 3,542 2,380 41.8% 2,154 60.8%
-------- -------- ------- -------- -------- -------- --------
Total Revenue $109,189 $103,349 $65,573 $5,840 5.7% $37,776 57.6%
</TABLE>
[18]
<PAGE> 21
1996
ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS
<TABLE>
<CAPTION>
ACTUAL CHANGE 96 VS. 95 CHANGE 95 VS. 94
- ----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT %'S) 1996 1995 1994 $ % $ %
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earned premium $ 84,547 $ 82,698 $49,855 $ 1,849 2.2% $32,843 65.9%
Net commissions & fees 16,566 1,886 - 14,680 778% 1,886 -
Investment & misc. income 8,076 5,390 3,300 2,686 49.8% 2,090 63.3%
------------------------------------------------------------------------------------
Total Revenue $109,189 $ 89,974 $53,155 $ 19,215 21.4% $36,819 69.3%
</TABLE>
The Company's written and earned premium were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER CHANGE 96 VS. 95 CHANGE 95 VS. 94
- ----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT %'S) 1996 1995 1994 $ % $ %
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross written premium $115,580 $123,119 $90,625 $ (7,539) (6.1%) $32,494 35.9%
Net written premium 72,758 93,638 57,555 (20,880) (22.3%) 36,083 62.7%
Net earned premium 84,547 82,698 49,855 1,849 2.2% 32,843 65.9%
</TABLE>
Gross written premium decreased by $7.5 million, or 6.1%, to $115.6 million in
1996 from $123.1 million in 1995 due to the effects of retrospectively rated
(retro) programs, changes in residual market program assessments, and Company
discontinued and downsized programs. Approximately $1.5 million of the decline
related to favorable claims experience on three retro programs which resulted
in reduced premiums and the conversion of one retro program to a self-insured
program. A self-insured program converts premium revenue into fee revenue.
The reduction in the dollar amount assessed for workers' compensation
involuntary pools in which the Company's insurance subsidiaries participate
accounted for $2.3 million of the decrease. This resulted from the shrinking
size of the workers' compensation involuntary pools. In addition, the Company
decided to decrease its writings in historically unprofitable programs which
accounted for a $7.4 million decline in written premiums. Finally, there was a
$2.3 million decrease from other downsized programs. Partially offsetting the
above items was a $6.0 million increase in premiums in core programs; $3.7
million from one new program and a $2.3 million increase related to growth in a
workers' compensation program.
Net written premium decreased by $20.9 million, or 22.3%, to $72.8 million in
1996 from $93.6 million in 1995. $10.1 million of this decrease was the result
of the decreases in the retrospectively-rated programs, residual markets, and
discontinued programs mentioned above. The transfer of the unearned premium on
the surety bond business to Connecticut Surety decreased net written premiums
by $11.9 million. The formation of an agent-owned captive from an existing
fully insured program increased ceded premiums by $4.2 million, thereby
reducing net written premiums by the same amount. Partially offsetting the
above items was a $6.0 million increase in premiums in core programs.
Net earned premium increased by $1.8 million, or 2.2%, to $84.5 million in 1996
from $82.7 in 1995, due principally to growth of $1.3 million in a workers'
compensation program and $816,000 in revenue from a similar new program.
Premiums from the surety bond book of business increased $5.4 million, net of
the $1.8 million decrease due to the Connecticut Surety transfer, and other
core programs grew by $3.6 million. Offsetting these increases were the
decreases in earned premium corresponding to the retrospectively-rated
programs, residual markets, and discontinued programs amounting to $9.3
million.
Gross written premium increased by $32.5 million, or 35.9%, in 1995 from $90.6
million in 1994. The largest increase in premium was in the surety business
which grew by $16.1 million to $26.0 million in 1995. The other significant
increase was $10.3 million from a large workers' compensation risk management
program. The remainder of the increase was from the growth of twelve other
programs added in 1994 and six new programs added in 1995.
Net written premium in 1995 increased by $36.1 million, or 62.7%, from $57.6
million in 1994, mirroring the increase in gross written premium. The
percentage increase in net written premium was greater than the increase in
gross written premium in 1995 due to lower reinsurance
[19]
<PAGE> 22
[MEADOWBROOK INSURANCE GROUP LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS
cessions on both the surety business and a new workers' compensation program;
both programs utilized only excess reinsurance. The growth of residual pool
assessments associated with workers' compensation programs involves no
reinsurance whatsoever, thus, gross premium equals net premium. In addition,
the higher growth in net written premium was due to audit premiums on one of
the Company's retrospectively rated programs and to the commutation of a
reinsurance agreement on an existing program effective at the end of 1994.
Net earned premium increased by $32.8 million, or 65.9%, to $82.7 million in
1995 from $49.9 million in 1994, generally reflecting the growth rate in net
written premium.
NET COMMISSIONS AND FEES. Net commissions and fees for Meadowbrook, on a pro
forma basis, increased by $1.6 million, or 10.8%, to $16.6 million in 1996.
Net commission and fees, on a pro forma basis, increased by $2.8 million, or
22.8%, to $15.0 million in 1995 from $12.2 million in 1994. Commissions and
fees are derived from managed programs and the retail insurance agency
operations and consist of the following:
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
-------------------------
(IN THOUSANDS) 1996 1995 1994
-------------------------
<S> <C> <C> <C>
Management fees $5,822 $5,490 $4,340
Claims fees 3,720 2,332 1,673
Loss control fees 1,390 1,413 1,113
Reinsurance brokerage 797 906 1,026
Miscellaneous fees and charges 23 7 101
-------------------------
Total Risk Management Fees 11,752 10,148 8,253
Agency and sales commissions 4,814 4,807 3,923
-------------------------
Net Commissions and Fees $16,566 $14,955 $12,176
</TABLE>
Net commissions and fees increased $1.6 million during 1996. Management fees
increased 6.0%, or $332,000, due to fee increases for existing programs and
fees from newly formed captives. Claims fees increased 59.5%, or $1.4 million,
due to the two months of revenue generated from ASI, additional claim handling
services provided to an existing client, and fee increases to existing
programs. Agency and sales commissions were unchanged from the prior year.
The overall growth in net commissions and fees during 1995 resulted from the
addition of new clients, high client retention, and the expansion of services
to existing clients. In 1995, management fees increased 26.5% as a result of
an expansion of services provided to, and fee increases on, managed programs.
Approximately 37% of the increase in management fees from 1994 to 1995 related
to a modification of a management services agreement which reduced 1994
management fee revenue by $425,000. Claims fees increased 39.4% for the
following reasons: an expansion of services provided to an existing program in
mid-year which generated over $300,000 in additional claims fees; the addition
of several new self-insured clients in mid-1994 (for which the Company is
providing stand-alone claims handling and administration); and increases in
fees related to growth in premium serviced and claims activity on existing
business. Loss control fees increased 26.9% for 1995 primarily due to an
expansion of services provided to certain existing public entity programs and
increases in fee charges. Agency and sales commissions increased 22.5%.
Approximately $700,000 of the increase related to new commercial lines and life
and health business produced by the agency which has been placed with other
carriers. The remainder of the difference was the result of additional sales
to existing programs along with a change in commission payments to producing
agents on certain insurance company programs that were processed by Meadowbrook
in 1994 and prior, but have since been processed directly by the insurance
companies. This change had no impact on net income. On an actual basis for
1995, fees and commissions were $1.9 million, representing fees earned since
the acquisition of Meadowbrook on November 20, 1995.
[20]
<PAGE> 23
1996
ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS
NET INVESTMENT INCOME. Net investment income increased $2.4 million in 1996,
or 41.8%, to $8.1 million from $5.7 million in 1995 and $2.2 million in 1995,
or 60.8%, from 1994, on a pro forma basis. The increase in investment income
in 1996 and 1995 was primarily the result of growth in cash and invested
assets. This growth was from the $43.8 million in new capital raised through
the initial public offering at the end of November 1995, higher premium volume
in 1995, and the $14.2 million in new capital from private investors received
in December of 1994. The pre-tax weighted average yield on invested assets was
5.3% for both 1996 and 1995, and 5.2% for 1994. The Company's investment
philosophy is one of maximizing after-tax earnings through significant
investments in tax-exempt bonds. Accordingly, the weighted average yield on
invested assets on an after-tax basis was 4.7%, 4.5%, and 4.3% for 1996, 1995,
and 1994, respectively.
EXPENSES
Total expenses increased by $8.1 million, or 9.0%, to $98.3 million in 1996
compared to 1995 on a pro forma basis and increased, also on a pro forma basis,
by $30.3 million, or 50.5%, to $90.2 million in 1995 from $59.9 million in
1994. Total expenses on an actual basis increased by $17.8 million, or 22.2%,
to $98.3 million in 1996 and increased $32.2 million, or 66.7%, to $80.5
million in 1995 from $48.3 million in 1994. The expenses are as follows:
<TABLE>
<CAPTION>
ACTUAL PRO FORMA ACTUAL
- ---------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994 1996 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Losses & LAE:
Other than surety $32,971 $36,089 $28,730 $32,971 $38,231 $30,588
Surety business 8,294 5,584 352 8,294 5,564 368
Salaries and benefits 24,977 20,001 16,025 24,977 2,629 -
Interest - 576 568 - 341 382
Other operating expenses:
Expenses other than surety 21,962 18,095 11,941 21,962 23,921 15,657
Surety bond expenses 10,117 9,834 2,303 10,117 9,800 1,293
- ---------------------------------------------------------------------------------
Total expenses $98,321 $90,179 $59,919 $98,321 $80,486 $48,288
</TABLE>
NET LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE). Net losses and LAE incurred
decreased by $408,000, or 1.0%, to $41.3 million in 1996, compared to 1995 on a
pro forma basis, and increased on a pro forma basis by $12.6 million, or 43.3%,
to $41.7 million for 1995 from $29.1 million for 1994. Analysis of losses and
LAE utilizing insurance ratios, on an overall and non-surety basis, are
reflected below.
The loss and LAE ratio was 52.1% and 53.2% in 1996 and 1995, respectively, a
one point improvement. The major reason for the decline in 1996 was the
reduction in residual market participation, due to the shrinking size of the
involuntary pools. The loss and LAE ratio for non-surety business also improved
one point to 56.4% in 1996 from 57.4% in 1995. The decrease in the loss and
LAE ratio in the non-surety business in 1996 is also a result of the reduction
in the residual market assessments.
The significant decline in the loss and LAE ratio for 1995 to 53.2%, from 62.1%
in 1994, was due to the higher volume of surety bond business. Due to the
nature of the bond business, losses tend to be lower and expenses tend to be
higher than other types of insurance business, and therefore the surety line
caused a decrease in the overall loss and LAE ratio of the Company. In
addition, during 1995 favorable development occurred in other lines of
business. The 1995 non-surety improvement, from 63.5% to 57.4%, was due to
the Company adding programs in 1994, which grew significantly in 1995. These
programs had lower loss and LAE ratios than established programs and accounted
for over two points of the improvement. The remainder of the decline in losses
and LAE was the result of three established programs improving their loss
control.
[21]
<PAGE> 24
[MEADOWBROOK INSURANCE GROUP LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS
SALARIES AND EMPLOYEE BENEFITS. Salaries and employee benefits increased by
$5.0 million, or 24.9%, to $25.0 million in 1996 compared to $20 million in
1995, on a pro forma basis, as a result of additional new full-time employees.
A major reason for this was the expansion of the bond operation that began in
mid-1995. Bond salary expense includes an entire twelve months of expense in
1996 versus only six months in 1995. Bonds represent 15.5% of the total
average employee count in 1996. Salaries and employee benefits for 1996 also
include two months of expense for the 55 employees of the recently acquired
ASI. In addition, marketing and other departmental infrastructures grew to
accommodate pending growth from several large new programs that were under
development during the year. The average salaries and wages per associate in
1996 remained relatively consistent with 1995.
Salaries and benefits increased by $4.0 million, or 24.8%, to $20.0 million in
1995 compared to $16.0 million in 1994, on a pro forma basis, as a result of
the addition of new full-time employees and, to a lesser extent, salary and
benefit increases for existing employees. As a result of improved operating
efficiencies associated with the revenue growth, the proportional increase in
salaries and benefit expenses was significantly less than the 58.9% growth in
revenues. Revenue per employee increased by 31.2%. Salaries and benefits on
an actual basis were $2.6 million. These expenses are the result of the
acquisition of Meadowbrook on November 20, 1995. Prior to this, all employee
costs were charged to the insurance companies through a management services
agreement with Meadowbrook and were included in other expenses in the form of
management fees.
INTEREST EXPENSE. There was no interest expense recorded during 1996, as all
debt was retired with the proceeds of the initial public offering. In 1995,
interest expense on an actual basis decreased by less than 15%. The decline in
1995 from 1994 was due to a reduction in debt outstanding during the year.
Interest expense on a pro forma basis remained relatively consistent due to an
increase in borrowings by Meadowbrook that offset the decline in borrowings by
the insurance company operations.
OTHER OPERATING EXPENSES. Other operating expenses from the non-surety
business increased $3.9 million, or 21.4%, to $22.0 million in 1996 from $18.1
million in 1995, on a pro forma basis. Analyzing non-surety expenses
utilizing GAAP insurance ratios, the expense ratio increased just under three
points to 36.3% in 1996 from 33.5% in 1995. In 1996, $800,000 of consulting
fees were incurred in connection with systems technology studies to assess the
capabilities of and set the future direction for upgrades to major operating
systems. In addition, boards, bureaus and associations grew $360,000 due to
state assessments related to higher premium volume. The change in deferred
acquisition costs (DAC) increased expenses $380,000 in 1996 over 1995 due to
the decline in premiums written in 1996 from 1995. Depreciation expense
increased by $508,000 as a result of fixed asset purchases made to provide for
the Company's future growth. The remaining $1.9 million of the increase in
1996 was due to the expansion of marketing and other departmental
infrastructures to accommodate pending growth from several large new programs
that were under development during the year.
The 1995 increase of $6.2 million, on a pro forma basis, from 1994 expenses of
$11.9 million was primarily the result of increases in agents' commissions
related to premium growth. The other significant increase in expenses resulted
from costs related to the addition of staff (i.e. equipment and related office
space).
Other operating expenses from the surety business increased $283,000 to $10.1
million in 1996 from $9.8 million in 1995, on a pro forma basis. The change in
DAC increased expenses $8.8 million in 1996 over 1995, primarily due to the
Connecticut Surety transfer and partially due to decreased writings. This
increase was substantially offset by a $7.9 million decrease in commission
expense, $6.9 million of which was directly due to the surety transfer, and the
remainder was due to other increases in ceded commission. Finally, the
uncollectable premiums receivable write-off decreased $815,000 due to an
unusual item in 1995, discussed below. The combination of all these items
resulted in a negligible increase in 1996 expenses.
Expenses related to surety bond business increased $7.5 million to $9.8 million
in 1995, on a pro forma basis, from $2.3 million in 1994. This was due
primarily to increases in agency commissions reflecting the growth in this
business, higher acquisition costs associated with this type of business and a
charge of over $844,000 for uncollectable premiums receivable, reflecting the
portion of a premium shortfall due from a former agent that was deemed
uncollectable.
[22]
<PAGE> 25
1996
ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS
Other operating expenses, on an actual basis, decreased by $1.6 million in
1996, or 4.9%, from $33.7 million in 1995, which was an increase of $16.8
million in 1995, or 98.9%, from $17.0 million in 1994. The decrease in 1996 is
due to the one-time $844,000 charge-off mentioned above, and the non-eliminated
Meadowbrook amounts included in the actual basis from the date of the
Meadowbrook acquisition through year-end 1995. The increases in 1995 were the
result of items mentioned above along with higher management fees and profit
sharing expense paid to Meadowbrook, which increased $5.7 million in 1995 from
$6.6 million in 1994. The increase in management fees and profit sharing is
primarily due to higher premium volume and improved underwriting results.
TAXES
The provision for income taxes on an actual basis was $2.2 million in 1996,
$2.3 million in 1995, and $1.2 million in 1994, representing effective tax
rates of 19.9% in 1996 and 23.9% in both 1995 and 1994. The tax rates were
significantly lower than the 34% corporate rate due to the Company's heavily
tax-exempt investment portfolio.
On a pro forma basis, the tax provision was $3.5 million in 1995, and $1.4
million in 1994, representing effective tax rates of 26.5% and 25.3%,
respectively. The higher effective tax rates over the actual rates was due to
increased taxable income generated from Meadowbrook's risk-management
operations.
The decline in the effective tax rate in 1996, from both the actual and pro
forma rates in 1995, was primarily due to significantly higher tax-free
investment income in 1996, resulting in a larger portion of total gross income
which was tax-exempt. The Initial Public Offering proceeds received at the end
of 1995 were invested predominately in tax-exempt securities during 1996.
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 insurance operations paying management
fees to the risk management operations. Such fees are subject to regulatory
approval by state insurance departments.
Cash flow from operations for 1996 was $11.6 million as compared to $25.0
million for 1995, and $17.6 million for 1994. The Company held $19.0 million
in cash and cash equivalents at December 31, 1996.
The agreement with Connecticut Surety substantially reduces the Company's
surety bond underwriting risk exposure while creating a five year fee
arrangement. This will produce a minimum of $6.0 million in ceding commissions
over the next five years, which is in addition to the $4.0 million prepayment
received at the close of 1996. This fee income has been and will be reflected
in insurance operations as a reduction in net expenses. Although the effect of
this arrangement will result in lower premiums, this will be more than offset
by lower incurred losses and net expenses.
The Company has one unsecured line of credit totaling $10.0 million, all of
which was available at December 31, 1996. The line expires on January 1, 2000.
As of December 31, 1995, the Company had repaid all term loans and lines of
credit outstanding with the proceeds of the initial public offering.
The Company has raised additional capital twice in the last three years,
primarily to support the growth of the insurance operations. Through a private
placement, the Company sold shares of capital stock totaling $14.2 million in
December of 1994. In an initial public offering in November 1995, the Company
generated proceeds of $43.6 million, net of offering expenses.
[23]
<PAGE> 26
[MEADOWBROOK INSURANCE GROUP LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS
As of December 31, 1996, the recorded carrying and market values of the
Company's investment portfolio, including cash and cash equivalents, were
$156.5 million and $158.9 million, respectively. The Company's investment
portfolio consists primarily of tax-exempt fixed income securities of varying
maturities. The Company's investments are held almost entirely by the
Company's insurance subsidiaries. The insurance subsidiaries are required to
maintain certain deposits with regulatory authorities which totaled $16.0
million at December 31, 1996, and $14.0 million at December 31, 1995.
The Company adopted FASB 115 "Accounting for Investments in Debt and Equity
Securities" in 1994. Because the Company believes that it has both the ability
and intent to hold its investments to maturity, $120.1 million or 76.8% of its
investment portfolio at December 31, 1996, is classified as held to maturity
and recorded at amortized cost. The remaining $36.4 million of investments are
classified as available for sale securities (reported at fair market value with
unrealized gains and losses included as a separate component of shareholders'
equity) or cash and equivalents. The implementation of FASB 115 had no effect
on the Company's income in 1994.
REGULATORY ISSUES
Insurance operations are subject to various leverage tests (e.g. premium to
statutory surplus ratios) which are evaluated by regulators and rating
agencies. The Company seeks to maintain a ratio of consolidated gross written
premium to statutory surplus at or below 3 to 1 and a ratio at or below 2 to 1
on a net written premium basis. For 1996, premium leverage ratios were 1.8 to
1 and 1.1 to 1 on a gross and net premium written basis, respectively.
The National Association of Insurance Commissioners ("NAIC") has adopted a
risk-based capital ("RBC") formula to be applied to all property and casualty
insurance companies. The formula measures required capital and surplus based
on an insurance company's products and investment portfolio and is to be used
as a tool to identify weakly capitalized companies. At December 31, 1996, the
parent insurance company's (Star) RBC ratio exceeded applicable risk-based
capital requirements. At December 31, 1996, Star's statutory surplus was $64.6
million; the threshold requiring regulatory involvement was $11.7 million.
REINSURANCE CONSIDERATIONS
The Company seeks to manage the risk exposure of its insurance subsidiaries and
its clients through the purchase of excess-of-loss and quota share reinsurance.
The Company's reinsurance requirements are analyzed on a specific program
basis to determine the appropriate retention levels and reinsurance coverage
limits. The Company secures this reinsurance based on the availability, cost,
and benefits of various reinsurance alternatives.
Reinsurance does not legally discharge an insurer from its primary liability
for the full amount of risks assumed under insurance policies it issues, but it
does make the assuming reinsurer liable to the insurer to the extent of the
reinsurance ceded. Therefore, the Company is subject to credit risk with
respect to the obligations of its reinsurers. In its selection of reinsurers,
the Company evaluates the financial stability of its prospective reinsurers.
To date, the Company has not experienced any material difficulties in
collecting reinsurance recoverables. No assurance can be given, however,
regarding the future ability of any of the Company's reinsurers to meet their
obligations. The following table sets forth certain information relating to
the Company's five largest reinsurers (other than client captive quota-share
reinsurers) as of December 31, 1996:
[24]
<PAGE> 27
1996
ANNUAL REPORT
MANAGEMENT'S DISCUSSION & ANALYSIS
REINSURER
<TABLE>
<CAPTION>
REINSURANCE PREMIUM CEDED A.M. BEST
DECEMBER 31, 1996 RATING
-------------------------------------
<S> <C> <C>
(IN THOUSANDS)
Connecticut Surety Company / NAC Reinsurance Corporation** $11,909 * / A+
Employers Reinsurance Corporation 3,315 A++
Swiss Reinsurance Corporation 1,199 A
Underwriters Reinsurance Company 644 A+
CNA International Insurance Company Ltd. 556 *
</TABLE>
* Not rated
** NAC Reinsurance Corporation provides a cut-through reinsurance endorsement
for the benefit of Star on the premium ceded to Connecticut Surety Company.
In its risk-sharing programs, the Company is also subject to credit risk with
respect to the payment of claims by its clients' captive insurers on the
portion of risk exposure ceded to such captives. The capitalization and credit
worthiness of prospective captive insurers is one of the factors considered by
the Company in entering into and renewing risk-sharing programs. The Company
seeks to secure reinsurance balances due from its non-admitted reinsurers
through funds withheld trusts and letters of credit.
DEPENDENCE ON KEY PROGRAMS
The Company provides alternative risk management programs and services to
certain large client groups and associations and then markets them to their
individual members. In 1996 and in 1995, the Company's top four programs,
excluding the surety bond business, accounted for 37% and 34%, respectively, of
the Company's total revenue on an actual basis. The loss or cancellation of
any of the Company's significant programs by the relevant client groups, or the
general availability of commercial market coverage to members of such groups on
more favorable terms than provided under the Company's programs, could have an
adverse effect on the Company's results of operations.
[25]
<PAGE> 28
[MEADOWBROOK INSURANCE GROUP LOGO]
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994 1993 1992
--------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Gross written premium $115,580 $123,119 $ 90,625 $ 64,816 $ 50,072
Net written premium 72,758 93,638 57,555 39,452 26,693
Net earned premium 84,547 82,698 49,855 34,336 25,625
Net investment income 8,002 5,325 3,257 2,639 2,016
Net realized gain (loss) on investments 25 45 (35) (24) 13
Total revenue 109,189 89,974 53,155 36,911 27,769
Net losses and LAE 41,265 43,795 30,956 23,297 18,589
Policy acquisition and other expenses 32,079 33,721 16,950 10,527 6,973
Income before income taxes 10,868 9,488 4,867 2,642 1,988
Net income 8,706 7,220 3,702 2,105 1,254
Earnings per share $ 0.95 $ 1.32 $ .95 $ .54 $ .42
Dividends declared per share $ 0.08 - - - -
BALANCE SHEET DATA:
Total investments and cash and cash equivalents $156,495 $148,977 $ 88,460 $ 58,418 $ 49,268
Total assets 265,035 241,764 158,637 115,568 102,027
Loss and LAE reserves 92,390 86,986 64,993 50,451 43,944
Shareholders' equity 100,201 92,216 44,444 25,493 23,385
OTHER DATA:
GAAP combined ratios (insurance companies only)
Net loss and LAE ratio 52.1% 53.2% 62.1% 67.9% 72.5%
Expense ratio 45.0% 41.7% 34.0% 30.7% 27.2%
-------------------------------------------------------
Combined ratio 97.1% 94.9% 96.1% 98.6% 99.7%
Statutory combined ratio 98.1% 94.2% 96.4% 97.5% 97.6%
=======================================================
Industry statutory combined ratio 106.8% (est.) 106.4% 108.5% 106.9% 115.6%
</TABLE>
[26]
<PAGE> 29
1996
ANNUAL REPORT
REPORT OF MANAGEMENT & INDEPENDENT ACCOUNTANTS
Management is responsible for the accompanying consolidated financial
statements and all other financial information contained in the Annual Report.
The financial statements have been prepared in conformity with generally
accepted accounting principles and include amounts which of necessity are based
on management's best estimates and informed judgments under existing
circumstances.
The Company maintains a system of internal controls designed to provide
reasonable assurance, at appropriate costs, that assets are safeguarded,
transactions are properly authorized and recorded, and that the financial
records provide a reliable basis for the preparation of financial statements
that are free of material misstatement.
The financial statements have been audited by the independent auditors Coopers
& Lybrand L.L.P.. Their role is to render an independent professional opinion
on management's financial statements based upon performance of procedures they
deem appropriate under generally accepted auditing standards. As part of their
audit, they evaluate the Company's internal control structure to the extent
they consider necessary to express their opinion on the consolidated financial
statements.
The Audit Committee of the Board of Directors, composed of directors who are
not officers or employees of the Company, meets periodically with management,
the Company's chief internal auditor, and with its independent auditors to
discuss their evaluation of internal accounting controls and the quality of
financial reporting. Both the independent auditors and the internal auditors
have free access to the Audit Committee to discuss the results of audits.
/s/ Merton J. Segal /s/ Daniel G. Gibson
Merton J. Segal Daniel G. Gibson
Chairman and Chief Executive Office Vice President and Chief Financial Officer
- -------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS [COOPERS & LYBRAND
OF MEADOWBROOK INSURANCE GROUP, INC.: LOGO]
We have audited the accompanying consolidated balance sheet of Meadowbrook
Insurance Group, Inc. (formerly "Star Holding Company") and Subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of income,
shareholders' equity, and cash flows for the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Meadowbrook
Insurance Group, Inc. and Subsidiaries as of December 31, 1996 and 1995 and the
consolidated results of their operations and cash flows for the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principals.
/s/ Coopers & Lybrand LLP
Detroit, Michigan
March 10, 1997
[27]
<PAGE> 30
[MEADOWBROOK INSURANCE GROUP LOGO]
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
---------------------------
<S> <C> <C>
Investments:
Debt securities held to maturity, at amortized cost
(fair value of $122,485,366 and $107,555,077) $120,116,668 $105,014,287
Debt securities available for sale, at fair value
(cost of $16,025,804 and $0) 15,955,481 -
Equity securities available for sale, at fair value
(cost of $1,562,999 and $2,219,606) 1,420,949 2,056,268
Cash and cash equivalents 19,002,241 41,906,577
---------------------------
Total investments and cash and cash equivalents 156,495,339 148,977,132
Accrued investment income 1,811,195 1,382,947
Premiums and agent balances receivable 25,907,407 29,935,087
Reinsurance recoverable on:
Paid losses 6,672,133 3,264,911
Unpaid losses 26,615,052 22,317,717
Prepaid reinsurance premiums 20,271,068 9,826,733
Funds held by or deposited with reinsured companies 1,042,116 660,914
Deferred policy acquisition costs 4,264,795 9,063,989
Deferred federal income taxes 6,623,758 4,664,127
Furniture and equipment (less accumulated depreciation
of $2,891,725 and $2,337,580) 3,587,364 2,501,062
Intangible assets (less accumulated amortization of $312,768 and $769,594) 5,414,073 372,866
Other assets 6,331,041 8,796,726
---------------------------
Total Assets $265,035,341 $241,764,211
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for losses and loss adjustment expenses $92,390,227 $ 86,985,614
Unearned premiums 44,090,675 44,392,973
Payable to insurance companies 4,457,315 5,383,130
Federal income taxes payable 1,666,772 649,761
Accounts payable and accrued expenses 7,823,567 7,475,508
Reinsurance funds held and balances payable 2,909,353 4,220,533
Other liabilities 11,496,598 440,526
Commitments and contingencies - -
---------------------------
Total liabilities 164,834,507 149,548,045
---------------------------
SHAREHOLDERS' EQUITY
Common stock, $0.01 stated value; authorized 20,000,000 shares;
8,649,346 and 8,619,916 shares issued and outstanding in
1996 and 1995, respectively 86,493 86,200
Additional paid-in capital 72,873,396 72,868,651
Retained earnings 27,381,111 19,369,118
Unrealized (depreciation) appreciation on available for sale securities,
(net of deferred tax benefit of $72,207 and $55,535 in 1996
and 1995, respectively) (140,166) (107,803)
---------------------------
Total shareholders' equity 100,200,834 92,216,166
---------------------------
Total Liabilities and Shareholders' Equity $265,035,341 $241,764,211
===========================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
[28]
<PAGE> 31
1996
ANNUAL REPORT
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums earned
Gross $116,924,848 $ 115,248,000 $ 78,351,516
Ceded (32,378,004) (32,549,722) (28,496,403)
-----------------------------------------------
Net earned 84,546,844 82,698,278 49,855,113
Net commissions and fees 16,566,327 1,885,708 -
Net investment income 8,002,072 5,324,921 3,257,092
Net realized gains (losses) on disposition of investments 25,354 45,082 (35,042)
Miscellaneous income 48,040 20,158 78,424
-----------------------------------------------
Total Revenues 109,188,637 89,974,147 53,155,587
-----------------------------------------------
EXPENSES
Losses and loss adjustment expenses 64,328,606 60,216,035 43,962,922
Reinsurance recoveries (23,063,948) (16,421,185) (13,007,263)
-----------------------------------------------
Net losses and loss adjustment expenses 41,264,658 43,794,850 30,955,659
Salaries and employee benefits 24,976,666 2,629,486 -
Other operating expenses 32,015,980 33,721,329 16,928,714
Interest on notes payable - 340,952 382,553
Policyholder dividends 63,378 - 21,409
-----------------------------------------------
Total Expenses 98,320,682 80,486,617 48,288,335
-----------------------------------------------
Income before taxes 10,867,955 9,487,530 4,867,252
-----------------------------------------------
Federal income taxes
Current 3,522,801 1,984,677 1,623,219
Deferred (1,360,870) 282,983 (458,017)
-----------------------------------------------
Total income taxes 2,161,931 2,267,660 1,165,202
-----------------------------------------------
Net income $8,706,024 $ 7,219,870 $ 3,702,050
===============================================
Primary and fully diluted earnings per share $0.95 $1.32 $ .95
Weighted average number of common shares and common share equivalents
outstanding 9,184,272 5,464,936 3,890,182
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
[29]
<PAGE> 32
[MEADOWBROOK INSURANCE GROUP LOGO]
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
UNREALIZED
(DEPRECIATION)
APPRECIATION
CLASS A ADDITIONAL ON AVAILABLE TOTAL
COMMON COMMON PAID-IN FOR SALE RETAINED SHAREHOLDERS'
STOCK STOCK CAPITAL SECURITIES EARNINGS EQUITY
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994 $28,320 $3,676 $17,010,727 $3,098 $8,447,198 $25,493,019
Purchase and retirement of 5,951 shares of common stock (60) - (54,480) - - (54,540)
Issuance of 3,571 shares of Class A common stock - 36 19,584 - - 19,620
Issuance of 1,173,440 shares of common stock 11,734 - 14,198,771 - - 14,210,505
Issuance of 114,019 shares of common stock to
purchase subsidiary 1,141 - 1,256,437 - - 1,257,578
Unrealized depreciation on available for sale securities - - - (184,351) - (184,351)
Net income - - - - 3,702,050 3,702,050
-------------------------------------------------------------------------
Balances, December 31, 1994 41,135 3,712 32,431,039 (181,253) 12,149,248 44,443,881
Share exchange 3,712 (3,712) - - - -
Purchase and retirement of 2,425 shares of common stock (24) - (27,631) - - (27,655)
Issuance of 2,419,118 shares of common stock to
purchase subsidiary 24,191 - 3,313,120 - - 3,337,311
Issuance of 2,331,811 shares of common stock 23,318 - 44,219,185 - - 44,242,503
Unrealized appreciation on available for sale securities - - - 73,450 - 73,450
Retirement of 613,171 shares of common stock (6,132) - (7,067,062) - - (7,073,194)
Net income - - - - 7,219,870 7,219,870
-------------------------------------------------------------------------
Balances, December 31, 1995 86,200 - 72,868,651 (107,803) 19,369,118 92,216,166
Unrealized depreciation on available for sale securities - - - (32,363) - (32,363)
Dividends declared at $0.08 per share - - - - (690,784) (690,784)
Issuance of 45,608 shares of common stock from
stock option exercises 455 - 318,284 - - 318,739
Retirement of 16,178 shares of common stock (162) - (466,961) - (3,247) (470,370)
Tax benefit of stock option exercises - - 374,440 - - 374,440
Initial public offering - additional expenses - - (221,018) - - (221,018)
Net income - - - - 8,706,024 8,706,024
-------------------------------------------------------------------------
Balances, December 31, 1996 $86,493 $ - $72,873,396 $(140,166) $27,381,111 $100,200,834
=========================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
[30]
<PAGE> 33
1996
ANNUAL REPORT
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $8,706,024 $7,219,870 $3,702,050
----------------------------------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of intangible assets 152,968 108,887 57,977
Depreciation of furniture and equipment 1,359,752 140,817 30,449
Net accretion of discount on bonds (232,278) (178,093) (68,944)
Loss on sale of investments (25,354) (45,082) 35,042
Deferred income tax (benefit) expense (1,360,870) 282,983 (458,017)
Changes in operating assets and liabilities:
Decrease (increase) in:
Accrued investment income (428,248) (555,370) (244,873)
Premiums and agent balances receivable 4,027,680 (250,351) (7,214,304)
Reinsurance recoverable on paid and unpaid losses (7,704,557) (5,143,566) (1,161,015)
Prepaid reinsurance premiums (10,444,335) 3,068,355 (4,574,201)
Funds held by or deposited with reinsured companies (381,202) (1,264) 344,660
Deferred policy acquisition costs 4,799,194 (4,373,099) (2,748,556)
Amounts receivable from reinsurer under commutation - - 5,474,659
Other assets 3,154,437 (1,119,594) (1,890,266)
Increase (decrease) in:
Losses and loss adjustment expenses 5,404,613 21,992,912 14,542,025
Unearned premiums (302,298) 7,875,927 12,952,198
Federal income taxes payable 1,345,900 612,955 (338,768)
Accounts payable and accrued expenses 348,059 350,668 150,037
Insurance company payable (925,815) (1,924,372) -
Reinsurance funds held and balances payable (1,311,180) (1,612,779) (1,601,177)
Due to affiliates - (1,116,388) 359,615
Other liabilities 5,403,118 (286,374) 259,823
----------------------------------------
Total adjustments 2,879,584 17,827,172 13,906,364
----------------------------------------
Net cash provided by operating activities 11,585,608 25,047,042 17,608,414
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equity securities available for sale (63,953) (40,447) (72,862)
Purchase of debt securities available for sale (17,276,583) - -
Purchase of debt securities held to maturity (26,419,086) (45,299,301) (22,202,854)
Proceeds from sale of equity securities available for sale 723,058 98,225 107,711
Proceeds from sale of debt securities available for sale 1,185,731 - -
Proceeds from maturity of securities held to maturity 11,661,884 7,901,310 6,695,979
Capital expenditures (2,523,979) (445,183) -
Proceeds from sale of furniture and equipment - 65,945 -
Purchase of subsidiary (886,570) - -
Net cash of acquired subsidiary - - 1,083,823
----------------------------------------
Net cash used in investing activities (33,599,498) (37,719,451) (14,388,203)
----------------------------------------
</TABLE>
[31]
<PAGE> 34
[MEADOWBROOK INSURANCE GROUP LOGO]
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank loan $ - $ - $ 3,500,000
Principal payments on bank loan - (8,654,672) (6,118,202)
Additional expenses from initial public offering (221,018) - -
Dividends paid on common stock (517,797) - -
Retirement of common stock (470,370) (27,655) (54,540)
Issuance of common stock 318,739 44,242,503 14,230,125
-------------------------------------------
Net cash (used in) provided by financing activities (890,446) 35,560,176 11,557,383
-------------------------------------------
(Decrease) increase in cash and cash equivalents (22,904,336) 22,887,767 14,777,594
Cash and cash equivalents, beginning of year 41,906,577 19,018,810 4,241,216
-------------------------------------------
Cash and cash equivalents, end of year $19,002,241 $41,906,577 $ 19,018,810
===========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 21,638 $262,916 $ 382,553
Income taxes paid, net of refund 2,089,225 1,377,251 1,957,397
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for net non-cash assets of acquired subsidiary $ - $3,337,311 $ 173,755
Dividend and retirement of common stock in connection
with the acquisition of subsidiary - 7,073,194 -
Tax benefit from stock option exercises 374,440 - -
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
[32]
<PAGE> 35
1996
ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP"), which differ
from statutory accounting practices prescribed or permitted for insurance
companies by regulatory authorities. Prescribed statutory accounting practices
include a variety of publications of the National Association of Insurance
Commissioners ("NAIC"), as well as state laws, regulations and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
PRINCIPLES OF CONSOLIDATION
The financial statements present the accounts of Meadowbrook Insurance Group,
Inc., formerly known as Star Holding Company. The consolidated financial
statements include the accounts, after intercompany eliminations, of
Meadowbrook Insurance Group, Inc. (the "Company"), its wholly owned subsidiary,
Star Insurance Company ("Star"), Star's wholly owned subsidiary, Savers
Property and Casualty Insurance Company ("Savers"), American Indemnity
Insurance Company, Ltd. ("American Indemnity"), which was acquired in June of
1994 and is owned 50% by Star and 50% by the Company, and Meadowbrook, Inc. and
its consolidated subsidiaries ("Meadowbrook"), a wholly owned subsidiary which
was acquired in November of 1995 (see Note 9).
BUSINESS
The Company, through its subsidiaries, 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, administrative
services, along with various types of property and liability insurance
coverage, including workers' compensation, surety and commercial multiple
peril. The Company does not have significant exposures to
environmental/asbestos and catastrophic coverages. Insurance coverage is
primarily provided to associations or similar groups of members, commonly
referred to as programs. Four programs accounted for 37.1%, 33.6%, and 46.9%
of the Company's premium revenue in 1996, 1995 and 1994, respectively. The net
earned premium of the largest program in each respective year represented
11.7%, 10.0% and 15.4% of the Company's premium revenues in 1996, 1995 and
1994, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
[33]
<PAGE> 36
[MEADOWBROOK INSURANCE GROUP LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which requires that investments in debt securities
and marketable equity securities be designated in one of three categories:
trading, available for sale, or held to maturity. The effect of adopting this
new standard was not material to the financial statements. Trading securities
are investments which are purchased with the intent of selling them in the near
future. Trading securities are reported at fair value, with changes in the
fair value included in earnings. The Company does not hold any trading
securities. Held to maturity securities are those securities that the Company
has both the intent and ability to hold to maturity, and are reported at
amortized cost. Available for sale securities are those securities that do not
meet the requirements of the trading or held to maturity categories.
Investments are classified as available for sale securities in order to be
available to be sold in the future in response to the Company's liquidity
needs, changes in market interest rates, and asset-liability management
strategies, among other reasons. Available for sale securities are reported at
fair value, with unrealized gains and losses reported as a separate component
of shareholders' equity, net of deferred taxes. The Company's investment
securities include both available for sale and held to maturity securities.
Realized gains or losses on sale or maturity of investments are determined on
the basis of specific costs of the investments. Discount or premium on debt
securities purchased at other than par value is amortized using the constant
yield method. Investments with other than temporary declines in fair value are
written down to estimated fair value and the related realized losses recognized
in income.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand and highly liquid short-term
investments. The Company considers all short-term investments purchased with a
maturity of three months or less at the time of acquisition to be cash
equivalents.
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring insurance business that vary with and
are primarily related to the production of new and renewal business are
deferred and amortized over the terms of the policies or reinsurance treaties
to which they relate. Investment earnings are anticipated in determining the
recoverability of such deferred amounts.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and are depreciated using both
accelerated and straight-line methods over the estimated useful lives of the
assets, generally five to ten years. Upon sale or retirement, the cost of the
asset and related accumulated depreciation are eliminated from their respective
accounts, and the resulting gain or loss is included in income. Repairs and
maintenance are charged to operations when incurred.
[34]
<PAGE> 37
1996
ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLE ASSETS
Goodwill resulting from the acquisition of Association Self Insurance Services,
Inc. (ASI) in 1996 is amortized on a straight-line basis over 20 years. Other
intangibles are amortized on a straight-line basis over 3 to 5 years.
Annually, the Company evaluates the net carrying value of goodwill to determine
if there has been any impairment in value. The methodology used for this
evaluation entails review of annual operating performance along with
anticipated results for the ensuing year based on operating budgets. At
December 31, 1996 the Company concluded that there had been no impairment in
the net carrying value of goodwill.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for losses and loss adjustment expenses (LAE) represents (1) case
basis estimates of reported losses on direct business, (2) estimates received
from ceding reinsurers on assumed business and (3) actuarial estimates of
incurred but not reported losses and LAE. Such liabilities, by necessity, are
based upon estimates and, while management believes that the amount accrued is
adequate, the ultimate liability may be greater or less than the amount
provided. The methods for making such estimates and for establishing the
resulting reserves are continually reviewed and updated. The effects of
changes in the estimated reserves are included in the results of operations in
the period in which the estimates are revised.
REVENUE RECOGNITION
Premiums written are recognized as earned on a pro rata basis over the life of
the policy term. Unearned premiums represent the portion of premiums written
which are applicable to the unexpired terms of policies in force. Provisions
for unearned premiums on reinsurance assumed from others are made on the basis
of ceding reports when received. Certain premiums are subject to retrospective
premium adjustments. The estimated ultimate premium is recognized over the
term of the insurance contract.
Commission and fee income is recorded on the later of the effective date or the
billing date of the policies on which it was earned.
Meadowbrook occasionally guarantees the financing of policies it writes. No
material premium financing guarantees were in effect at December 31, 1996.
The majority of claims processing fees are recognized as revenue over the
estimated life of the claims. For those contracts that provide services beyond
the contractually defined termination date of the related contracts, fees are
defined in an amount equal to management's estimate of the Company's obligation
to continue to provide services.
[35]
<PAGE> 38
[MEADOWBROOK INSURANCE GROUP LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
The Company accounts for its income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires the asset and liability method of recording income taxes. Under the
asset and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities.
STOCK OPTIONS
Compensation expense, if any, resulting from stock options granted by the
Company is determined based on the difference between the exercise price and
the market value of the underlying common stock at the date of grant.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common shares
and common share equivalents outstanding during the year. Earnings per share
for 1995 and 1994 have been retroactively adjusted for the effect of the
2.975532 stock split that occurred on November 20, 1995, and to reflect the
shares issued in December 1994 and options granted in 1995 and 1994, as
outstanding for all periods presented, as applicable. The treasury stock
method was applied to options granted and to the shares issued in December 1994
using the initial public offering price of $21.00 per share.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform with the 1996 presentation.
[36]
<PAGE> 39
1996
ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS AND OTHER FINANCIAL INSTRUMENTS
The estimated fair value of investments in securities is determined based on
published market quotations. Due to the short-term nature of other financial
instruments such as cash equivalents, carrying value approximates fair value.
The cost or amortized cost and estimated fair values of investments in
securities at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
DEBT SECURITIES:
Debt securities issued by the
U.S. government and agencies $ 3,287,309 $ 67,895 $ (2,213) $ 3,352,991
Obligations of states and political
subdivisions 110,265,406 2,456,081 (70,308) 112,651,179
Corporate securities 299,902 18,878 - 318,780
Certificates of deposit 95,000 - - 95,000
Mortgage-backed securities 6,169,051 34,293 (135,928) 6,067,416
------------------------------------------------------
Total Debt Securities Held to Maturity $120,116,668 $2,577,147 ($ 208,449) $122,485,366
======================================================
SECURITIES AVAILABLE FOR SALE
DEBT SECURITIES:
Debt securities issued by the
U.S. government and agencies $ 2,995,204 $ 3,856 $ (1,250) $ 2,997,810
Obligations of states and
political subdivisions 7,897,953 15,279 (105,136) 7,808,096
Corporate securities 2,200,733 22,818 (1,427) 2,222,124
Mortgage-backed securities 2,931,914 2,874 (7,337) 2,927,451
----------------------------------------------------
Total Debt Securities Available
for Sale 16,025,804 44,827 (115,150) 15,955,481
EQUITY SECURITIES:
Mutual funds 1,562,999 - (142,050) 1,420,949
------------------------------------------------------
Total Securities Available for Sale $ 17,588,803 $ 44,827 ($ 257,200) $ 17,376,430
======================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------------
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C> <C>
HELD TO MATURITY
DEBT SECURITIES
Debt securities issued by the
U.S. government and agencies $ 3,438,181 $ 71,655 $ - $ 3,509,837
Obligations of states and
political subdivisions 93,991,295 2,419,855 (75,779) 96,335,370
Corporate securities 299,864 11,629 - 311,493
Certificates of deposit 95,000 - - 95,000
Mortgage-backed securities 7,189,947 148,423 (34,993) 7,303,377
------------ ---------- ----------- ------------
$105,014,287 $2,651,562 ($ 110,772) $107,555,077
============ ========== =========== ============
AVAILABLE FOR SALE
EQUITY SECURITIES
Mutual funds $ 2,219,606 $ 15,052 ($ 178,389) $ 2,056,268
============ ========== ========== ============
</TABLE>
[37]
<PAGE> 40
[MEADOWBROOK INSURANCE GROUP LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The gross change, before tax (expense)/benefit, in unrealized
appreciation/(depreciation), on available for sale debt securities was
($70,323) for 1996 and zero for 1995 and 1994, as no available for sale debt
securities were owned during 1995 and 1994. The gross change in unrealized
appreciation/(depreciation) on available for sale equity securities was
$21,288, $111,287 and ($279,320) in 1996, 1995 and 1994, respectively. The
unrecorded change in market value over book value on held to maturity debt
securities was ($172,092), $4,705,510, and ($3,362,720) for 1996, 1995, and
1994, respectively.
The amortized cost and estimated fair value of available for sale and held to
maturity securities at December 31, 1996, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because
certain borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
---------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $11,141,863 $11,173,787
Due after one year through five years 3,977,691 3,983,590 41,110,058 41,699,032
Due after five years through ten years 3,353,553 3,351,425 54,744,177 56,488,699
Due after ten years 5,762,646 5,693,015 6,951,519 7,056,432
Mortgage-backed securities 2,931,914 2,927,451 6,169,051 6,067,416
---------------------------------------------------
$16,025,804 $15,955,481 $120,116,668 $122,485,366
===================================================
</TABLE>
There were no sales of held to maturity investments prior to maturity during
1996, 1995, and 1994.
Net investment income for the last three years ended December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------
<S> <C> <C> <C>
Investment income on:
Debt securities $6,474,620 $4,534,225 $2,979,561
Equity securities 120,617 120,704 128,644
Cash and cash equivalents 1,706,296 925,736 381,089
----------------------------------
Total gross investment income 8,301,533 5,580,665 3,489,294
Less investment expenses 299,461 255,744 232,202
----------------------------------
Net investment income $8,002,072 $5,324,921 $3,257,092
==================================
</TABLE>
United States government obligations, municipal bonds, and bank certificates of
deposit aggregating $16,027,911 and $14,039,288 were on deposit with state
regulatory authorities as required by law at December 31, 1996 and 1995,
respectively.
[38]
<PAGE> 41
1996
ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LIABILITY FOR LOSSES AND
LOSS ADJUSTMENT EXPENSES
The Company regularly updates its reserve estimates as new information becomes
available and further events occur which may impact the resolution of unsettled
claims. Changes in prior reserve estimates are reflected in results of
operations in the year such changes are determined to be needed and recorded.
Activity in the liability for losses and loss adjustment expenses is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------
<S> <C> <C>
Balance, beginning of year $86,986 $ 64,993
Less reinsurance recoverables 22,318 17,844
-----------------
Net balance, beginning of year 64,668 47,149
-----------------
Incurred related to:
Current year 40,875 44,118
Prior years 390 (323)
-----------------
Total incurred 41,265 43,795
-----------------
Paid related to:
Current year 16,754 11,233
Prior years 23,404 15,043
-----------------
Total Paid 40,158 26,276
-----------------
Net balance, end of year 65,775 64,668
Plus reinsurance recoverables 26,615 22,318
-----------------
Balance, end of year $92,390 $86,986
=================
</TABLE>
As a result of unfavorable development in estimates of prior accident years'
reserves, the provision for losses and loss adjustment expenses increased by
$390,000 in 1996. This was due to adverse development on the runoff of
discontinued Surety Bond business. The provision for losses and loss
adjustment expenses decreased by $323,000 in 1995, as a result of favorable
development in estimates of prior accident years' reserves.
4. REINSURANCE
The insurance subsidiaries cede insurance to other insurers under pro rata and
excess-of-loss contracts. These reinsurance arrangements diversify the
Company's business and reduce the exposure arising from large risks or from
hazards of an unusual nature. The ceding of insurance does not discharge the
original insurer from its primary liability to its policyholder, and in the
event that all or any of the reinsuring companies are unable to meet their
obligations under existing reinsurance agreements, the subsidiaries would be
liable for such defaulted amounts. In order to minimize its exposure to
significant losses from reinsurer insolvencies, the Company evaluates the
financial condition of its reinsurers and monitors the economic characteristics
of the reinsurers on an ongoing basis. The Company also assumes insurance from
other insurers and reinsurers, both domestic and foreign, under pro rata and
excess-of-loss contracts.
[39]
<PAGE> 42
[MEADOWBROOK INSURANCE GROUP LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company receives ceding commissions in conjunction with reinsurance
activities. These ceding commissions are offset against the related
underwriting expenses and were $14,843,140, $7,931,632, and $10,022,159 for
1996, 1995, and 1994, respectively.
In December 1996, Star ceded $11.9 million of surety premium to Connecticut
Surety Company. Liabilities due to Star at December 31, 1996 were secured by a
cut-through reinsurance endorsement provided by NAC Reinsurance Corporation.
Future liabilities will be further secured by letters of credit and funds
withheld trusts. This transaction had no material impact on net income, since
ceding commissions received offset the release of deferred acquisition costs.
Reconciliations of direct to net premiums, on both written and earned bases,
for 1996, 1995, and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------------------------------------------
Written Earned Written Earned Written Earned
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $112,279,247 $113,874,603 $117,633,933 $108,332,771 $86,587,591 $74,181,717
Assumed 3,300,609 3,050,245 5,485,181 6,915,229 4,037,704 4,169,799
Ceded (42,822,340) (32,378,004) (29,481,367) (32,549,722) (33,070,607) (28,496,403)
----------------------------------------------------------------------------------
Net $72,757,516 $84,546,844 $93,637,747 $82,698,278 $57,554,688 $49,855,113
==================================================================================
</TABLE>
5. DEFERRED POLICY ACQUISITION COSTS
The following reflects the amounts of policy acquisition costs deferred and
amortized (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period $ 9,064 $ 4,691 $ 1,942
Acquisition costs deferred 7,036 19,119 7,394
Amortized to expense during the period (11,835) (14,746) (4,645)
-------------------------------------------
Balance, end of period $ 4,265 $ 9,064 $ 4,691
===========================================
</TABLE>
6. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
For The Years Ended
December 31
-----------------------
1996 1995 1994
-----------------------
<S> <C> <C> <C>
Current tax expense $3,523 $1,985 $1,623
Deferred tax expense/(benefit) (1,361) 283 (458)
-----------------------
Total provision for income taxes $2,162 $2,268 $1,165
=======================
</TABLE>
[40]
<PAGE> 43
1996
ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the Company's tax provision on income from operations to
the U.S. federal income tax rate of 34% in 1996, 1995, and 1994 is as follows
(in thousands):
<TABLE>
<CAPTION>
For the Years Ended
December 31
------------------------------
1996 1995 1994
------------------------------
<S> <C> <C> <C>
Tax provision at statutory rate $ 3,695 $ 3,226 $1,655
Tax effect of:
Tax exempt interest (1,566) (1,016) (562)
Other, net 33 58 72
------------------------------
Federal income tax expense $ 2,162 $ 2,268 $1,165
==============================
Effective tax rate 19.9% 23.9% 23.9%
</TABLE>
Deferred income taxes, under SFAS No. 109, reflects the estimated future tax
effect of temporary differences between the bases of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws and
regulations.
The components of deferred tax assets and liabilities as of December 31, 1996
and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
-----------------------------------------
<S> <C> <C> <C> <C>
Unpaid losses and loss adjustment expenses $4,613 $ - $4,932 $ -
Unearned premium reserves 1,325 - 2,127 -
Deferred policy acquisition expense - 1,442 - 3,082
Deferred compensation 500 - 515 -
Deferred fee recognition 1,564 - - -
Other 128 64 177 5
-----------------------------------------
Total deferred taxes $8,130 $1,506 $7,751 $3,087
-----------------------------------------
Net deferred tax assets $6,624 $4,664
=========================================
</TABLE>
7. LINES OF CREDIT AND LETTERS OF CREDIT
At December 31, 1996, the Company and its subsidiaries had one unsecured line
of credit with a bank which permits borrowings up to $10,000,000 and expires
January 1, 2000. This line bears interest at one percent under the prime rate
(prime was 8.25% at December 31, 1996). The Company also has the option to
elect a eurodollar based rate in place of prime. At December 31, 1996, no
borrowing was outstanding under this line.
As of December 31, 1996, a standby letter of credit of $6,855,000 had been
issued by a bank to an insurance subsidiary of the Company, under an agreement
expiring June 30, 1997, with extensions granted on a yearly basis. This letter
of credit is being utilized as security for a surety bond filed with one state.
This
[41]
<PAGE> 44
[MEADOWBROOK INSURANCE GROUP LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
bond was filed as a requirement for writing workers' compensation business in
that state. The letter of credit is collateralized by specifically identified
marketable securities of the subsidiary, with a total fair market value of 110%
of the $6,855,000 letter of credit.
8. NOTES PAYABLE
On December 29, 1994, the Company borrowed $3,500,000 from a bank under a
five-year variable rate term note; this debt was retired in December of 1995.
This represented a pre-payment of $3,500,000 which originally was due under a
schedule of payments during calendar years 1997 through 1999. No gain or loss
was recognized on the debt retirement.
Upon acquisition of Meadowbrook, the Company retired Meadowbrook's outstanding
debt. This included early payoffs on a term loan and capital leases of
$1,025,000 and $860,708, respectively, which were originally due under a
schedule of payments during 1996 and 1997. In addition, the Company also
repaid $1,000,000 on Meadowbrook's lines of credit. No gain or loss was
recognized on the debt retirements.
9. SHAREHOLDERS' EQUITY
The Company issued 2,300,000 shares of common stock at a price of $21 a share
through an initial public offering in November 1995. Simultaneously, the
Company changed its name from Star Holding Company to Meadowbrook Insurance
Group, Inc. and acquired the common stock of Meadowbrook in exchange for
2,419,118 shares of common stock of the Company. Upon acquisition, Meadowbrook
declared and paid a dividend to the Company in the form of 613,171 shares of
common stock of the Company which it held; such shares have been retired.
A significant portion of the Company's consolidated assets represents assets of
the Company's insurance subsidiaries that may not be transferable to the
holding company in the form of dividends, loans or advances. The restriction on
the transferability to the holding company from its insurance subsidiaries is
limited by Michigan regulatory guidelines which are as follows: The maximum
discretionary dividend that may be declared, based on data from the preceding
calendar year, is the greater of the insurance company's net income (excluding
realized capital gains) OR ten percent of the insurance company's
policyholders' surplus (excluding unrealized gains). These dividends are
further limited by a clause in the Michigan law which prohibits an insurer from
declaring dividends except out of earned surplus earnings of the company.
Since Star is the parent insurance company, its maximum dividend calculation
represents the combined insurance companies. Based upon the 1996 statutory
financial statements of Star Insurance Company, the maximum dividend that may
be paid by Star as of January 1, 1997, without prior approval of the Michigan
Commissioner of Insurance, is $2.3 million, which is the amount of earned
surplus. No dividends were paid or returned in 1995 and 1996. In 1994, the
Company returned dividends of $368,466 to Star.
[42]
<PAGE> 45
1996
ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized 1996 and 1995 statutory basis information for the primary insurance
subsidiaries, which differs from generally accepted accounting principles,
follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------
Star Savers Star Savers
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Statutory capital and surplus $64,642,412 $20,711,906 $61,188,631 $20,011,071
Minimum statutory capital and surplus 5,000,000 20,000,000 5,000,000 20,000,000
Statutory net income 7,503,071 3,920,748 196,706 2,587,872
Net investment income 4,810,325 2,380,230 3,048,077 2,053,687
</TABLE>
The net investment income and statutory net income in 1994 for Star were
$1,706,058 and $1,497,525, respectively, and for Savers were $146,574 and
$720,795.
10. STOCK OPTIONS
The Company, through its 1995 Stock Option Plan ("the Plan"), may grant options
to key executives of the Company and its subsidiaries of up to 2,000,000 shares
of the Company's common stock. The Plan is administered by a committee (the
"Committee") appointed by the Board of Directors. Option shares may be
exercised subject to the terms of the Plan and the terms prescribed by the
Committee at the time of grant. Currently, the Plan's options have either five
or ten year terms and are exercisable/vest in equal increments over the option
term.
Effective for December 31, 1996 year-end financial statements, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation." This
standard permits the Company to adopt the SFAS No. 123 fair value based method
of accounting for stock based compensation plans or to continue to apply the
valuation provisions of existing accounting standards (APB No. 25). The
Company has elected to continue measuring compensation expense under APB No. 25
and has adopted the disclosure requirements of SFAS No. 123. If compensation
cost for stock option grants had been determined based on the fair value method
prescribed by SFAS No. 123, net income and earnings per share on a pro forma
basis for 1996 and 1995 would be as follows:
<TABLE>
<CAPTION>
1996 1995
-----------------------
<S> <C> <C>
Reported net income $8,706,024 $7,219,870
Pro forma net income, using SFAS No. 123 $8,635,170 *$7,219,870
Earnings per share, primary and fully diluted:
Reported $0.95 $1.32
Pro forma, using SFAS No. 123 $0.94 *$1.32
</TABLE>
*Options granted during 1995 did not become exercisable until 1996, and
therefore no pro forma compensation expense until 1996.
The Black-Scholes valuation model utilized the following annualized assumptions
for all applicable years: Risk-free interest rate of 6.5%, dividend yield of
$.08 per share, and volatility factor for the expected market price of the
Company's common stock of .237. The weighted-average expected life of options
for the 1996 grants is 7.61 years and for the 1995 grants is 7.74 years.
[43]
<PAGE> 46
[MEADOWBROOK INSURANCE GROUP LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the Company's stock option activity and related
information for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PRICE
Outstanding - beginning of year 949,434 $10.28 209,775 $8.34 141,338 $6.86
Exchange of existing options - - 572,285 $11.34 - -
Granted 63,280 $30.45 167,374 $9.11 89,266 $10.25
Exercised (45,524) $ 7.00 - - (20,829) $6.52
Forfeited (13,391) $10.25 - - - -
---------------------------------------------------------
Outstanding - end of year 953,799 $11.78 949,434 $10.28 209,775 $8.34
=========================================================
Exercisable at end of year 326,017 $9.03 227,952 $6.64 26,780 $6.69
Weighted-average fair value of options
granted during the year $7.65 - $1.82* - - -
</TABLE>
Note: SFAS 123 requires disclosure for 1995 and 1996 only.
*Options granted during 1995 did not become exercisable until 1996, and
therefore no pro forma compensation expense until 1996.
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Range Of Remaining Exercise Exercise
Exercise Prices Options Life Price Options Price
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.10 to $8.11 551,070 5.3 years $ 6.35 238,777 $5.77
$10.25 to $12.17 133,900 6.3 $ 11.10 26,776 $11.10
$21.00 to $30.45 268,829 6.3 $ 23.22 60,464 $21.00
--------------------------------------------------------------
953,799 5.8 $ 11.78 326,017 $9.03
==============================================================
</TABLE>
No compensation cost has been recorded for stock option grants issued during
1995 and 1996, as the market value equaled the exercise price at the date of
grant.
All pre-IPO outstanding options of Meadowbrook and the Company were exchanged
for 743,885 options to purchase the Company's stock under the Meadowbrook
Insurance Group, Inc. 1995 Stock Option Plan. The exercise prices of the new
options are equivalent to the exercise prices of the exchanged options after
reflecting the effects of the stock split and share exchange related to the
acquisition of Meadowbrook (refer to Note 11). Additionally, all non-vested
Meadowbrook stock awards were exchanged for 205,549 options to purchase the
Company's common stock at $21 a share.
[44]
<PAGE> 47
1996
ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. ACQUISITION OF SUBSIDIARY
In November of 1996, the Company acquired Association Self Insurance Services,
Inc. (ASI) of Alabama at a purchase price of $5.2 million, resulting in $5.2
million of goodwill. The purchase price is subject to reduction, contingent on
a specific contract renewal. The acquisition was accounted for as a purchase.
The effect of the acquisition was not material to the Company's results of
operations.
On November 20, 1995, the Company acquired Meadowbrook, Inc., an affiliated
company formed in 1955. The acquisition of Meadowbrook represents an exchange
of non-monetary assets by a promoter/shareholder for common stock of the
Company and is recorded at the transferor's historical basis (see Note 9).
The following pro forma financial information reflects this transaction as if
it had been completed as of January 1, 1995 (unaudited):
<TABLE>
<CAPTION>
1995
---------
<S> <C>
REVENUES
Risk management fees and commissions $ 15,766
Net earned premium 82,698
Net investment income 5,613
Other income 83
--------
Total revenues 104,160
EXPENSES
Net losses and LAE 41,673
Underwriting and other expenses 28,740
Salaries and employees benefits 20,001
Interest expense 576
--------
Total expenses 90,990
PRETAX INCOME 13,170
Taxes (3,495)
--------
NET INCOME $ 9,675
========
Earnings per share $1.37
</TABLE>
In June of 1994, the Company purchased American Indemnity Insurance Company
Ltd. ("American Indemnity"), a Bermuda company formed in 1982 to facilitate
rent-a-captive business. The acquisition was accounted for as a purchase. In
exchange for the shares of American Indemnity, the Company issued 114,019
shares of common stock to the former owners for a purchase price of $1,257,578.
Subsequent to the acquisition, Meadowbrook Insurance Group, Inc. contributed a
50% interest of American Indemnity to Star. The effect of the acquisition was
not material to the Company's results of operations.
[45]
<PAGE> 48
[MEADOWBROOK INSURANCE GROUP LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. EMPLOYEE BENEFIT PLANS
Company employees over the age of 21 who have completed 12 months of service
and worked at least 1,000 hours during those 12 months are eligible for
participation in Meadowbrook's 401(K) Profit Sharing Plan. The plan provides
for discretionary matching contributions and/or profit sharing contributions at
the discretion of the Board of Directors. In 1996 and 1995, the matching
contributions were $295,671 and $23,721 and profit sharing contributions were
$424,459 and $53,916, respectively. The increases in 1996 over 1995 reflects
that there was only forty days of activity during 1995, from the date of the
Meadowbrook acquisition on November 20, 1995 through December 31, 1995.
13. COMMITMENTS AND CONTINGENCIES
The Company has certain operating lease agreements for its offices and
equipment. At December 31, 1996, future minimum rental payments required under
non-cancelable long-term operating leases are as follows:
<TABLE>
<S> <C>
1997 $2,134,996
1998 1,928,962
1999 1,661,469
2000 1,636,709
2001 1,472,112
Thereafter 3,382,367
-----------
Total minimum lease commitments $12,216,615
===========
</TABLE>
Rent expense for the year ended December 31, 1996 amounted to $1,480,000. Rent
expense during 1995 was immaterial and there was no rent expense during 1994,
due to the fact Meadowbrook Inc. is the only company with rent expense and it
was acquired in November of 1995 (see Note 9).
On June 26, 1995, two shareholders of a former agent of Star initiated legal
proceedings against, among others, Star and Meadowbrook. The plaintiffs have
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 the first plaintiff and denied further
licensing of the second plaintiff. The Company is vigorously defending itself
and has filed counterclaims against the plaintiffs. While the Company believes
that it has meritorious defenses and counterclaims in this lawsuit, there can
be no assurance that the Company's results of operations and financial
condition will not be materially adversely affected by this lawsuit. The
ultimate outcome of the lawsuit cannot be determined at this time, and the
Company is unable to estimate the range of possible loss, if any.
14. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries have a management services agreement with
Meadowbrook, under which Meadowbrook furnishes their accounting, financial
reporting, underwriting, reinsurance, sales, claims, loss prevention and
general management services. The terms of the agreement continue through 1997
and automatically renew for successive five-year periods unless terminated by
either party 90 days prior to expiration.
[46]
<PAGE> 49
1996
ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fees under the agreement are a combination of fixed charges and profit sharing
based on the results of operations. The fees expensed were $10,571,636 for
1995 prior to acquisition, and $6,635,798 for 1994. Subsequent to the
acquisition in November 1995, such fees are eliminated in consolidation.
Prior to the acquisition of Meadowbrook, it acted as an agent and produced a
significant portion of the business written by the Company's insurance
subsidiaries. Subsequent to the acquisition, effects of the transactions are
eliminated in consolidation. Commissions paid to Meadowbrook in 1995 and 1994
approximated eight percent of written premiums. The following amounts are
included in the accompanying financial statements as of and for the years ended
December 31, 1995 and 1994, related to these affiliations. There are no
amounts as of and for the year ended December 31, 1996, as the effects of
related party transactions are now eliminated in consolidation:
<TABLE>
<CAPTION>
1995 1994
--------- ----------
<S> <C> <C>
Commissions $775,179 $2,126,761
Claims fees and loss control 2,927,998 2,522,887
</TABLE>
Certain of the subsidiaries assume from, or cede to, other insurers, some of
which are managed by affiliates (see Note 4).
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
1996:
Gross written premium $31,231 $27,995 $25,791 $30,563
Net written premium 22,675 20,400 18,664 11,019
Net earned premium 21,266 20,103 22,429 20,749
Net commissions and fees 4,598 4,043 3,291 4,634
Net investment income and
realized gains/losses 2,002 1,993 1,945 2,087
Net losses and LAE incurred 11,709 7,746 11,738 10,072
Policy acquisition and
other expenses 6,701 8,455 9,392 7,531
Net income 2,773 3,114 492* 2,327
Earnings per share $0.30 $0.34 $0.05 $0.26
Dividends declared per share $0.02 $0.02 $0.02 $0.02
GAAP combined ratio 97.4% 93.5% 101.4% 95.8%
</TABLE>
*Due to the adverse development in the surety bond business related to
discontinued agents.
[47]
<PAGE> 50
[MEADOWBROOK INSURANCE GROUP LOGO]
BOARD OF DIRECTORS
DAVID J. CAMPBELL
President and Chief Executive
Officer of the Detroit Medical Center
JOSEPH S. DRESNER 1,3,4
Chairman of the Highland Companies
WILLIAM K. GOOD 2
Director, retired President of Koppy Corporation
HUGH W. GREENBERG 1,2
President of Detroit Gauge &
Tool Company
MERTON J. SEGAL 3,4
Chairman and Chief Executive Officer
WARREN D. GARDNER
Vice Chairman and Director
JAMES R. PARRY, SR.
Executive Vice President and
Chief Marketing Officer
FLORINE MARK
President and Chief Executive Officer of
The WW Group, Inc.
IRVIN F. SWIDER 2
President and Chief Executive Officer
of Future Products Tool Corporation and
Metal Punch, Inc.
BRUCE E. THAL 4
Retired Partner of Deloitte & Touche LLP
HERBERT TYNER
Chief Executive Officer of Hartman and Tyner, Inc.
JOSEPH C. HENRY 3
Executive Vice President and Treasurer
ROBERT S. CUBBIN
Executive Vice President and Secretary
1 AUDIT COMMITTEE MEMBER
2 COMPENSATION COMMITTEE MEMBER
3 INVESTMENT COMMITTEE MEMBER
4 ACQUISITION COMMITTEE MEMBER
[48]
<PAGE> 51
1996
ANNUAL REPORT
SHAREHOLDER INFORMATION
CORPORATE OFFICES
26600 Telegraph Road
Southfield, MI 48075
Phone: 810-358-1100
AUDITORS
Coopers & Lybrand L.L.P
Detroit, MI
CORPORATE COUNSEL
Bodman, Longley & Dahling L.L.P.
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 2:00 p.m.
May 19, 1997 at:
Temple Beth-El
7400 Telegraph Road
Bloomfield Hills, MI
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company
P.O. Box 2536
Jersey City, NJ 07303-2536
SHAREHOLDER RELATIONS AND FORM 10-K
A copy of Meadowbrook Insurance Group, Inc.'s 1996 Annual Report on Form 10-K
as filed with the Securities and Exchange Commission may be obtained, when
available, upon written request to the Investor Relations Department at the
Company's Corporate Offices.
STOCK LISTING
New York Stock Exchange
Symbol "MIG"
SHARE PRICE AND DIVIDEND INFORMATION
The following table sets forth for the periods indicated, the high and low
closing sale prices of the Company's Common Shares as reported on the NYSE
Composite Tape:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1995 AND 1996
High Low
<S> <C> <C>
Fourth Quarter 1995 $33.875 $24.00
First Quarter 1996 33.375 27.00
Second Quarter 1996 34.125 27.50
Third Quarter 1996 30.75 25.125
Fourth Quarter 1996 28.00 15.25
</TABLE>
Prior to the Offering in November of 1995, there was no public market for the
Company's common stock.
As of March 6, 1997, there were approximately 209 holders of record of the
Company's common stock. Dividends of $.08 per share were declared in 1996.
There were no dividends declared in 1995.
This report is submitted for general information of stockholders of Meadowbrook
Insurance Group, Inc. and is not intended to be used in connection with any
sale or purchase of securities.
[49]
<PAGE> 52
[MEADOWBROOK INSURANCE GROUP LOGO]
MEADOWBROOK INSURANCE GROUP OFFICES
MEADOWBROOK INSURANCE GROUP
26600 Telegraph Road
Southfield, MI 48034-2347
Phone: (810) 358-1100
Fax: (810) 358-1614
MEADOWBROOK INSURANCE GROUP/A.S.I.
27 Madison Avenue
Montgomery, AL 36111
Contact: Archie McIntyre
Phone: (334) 265-7700 or (800) 536-7701
Fax: (334) 261-6339
MEADOWBROOK RISK MANAGEMENT LTD.
P.O. Box 724
I.C.B. Building, Roebuck Street
Bridgetown, Barbados
Contact: Omar Cordial
Phone: (246) 426-4684
Fax: (246) 426-4878
MEADOWBROOK RISK MANAGEMENT LTD.
The Belvedere Building
69 Pitt's Bay Road
Pembroke, Bermuda HM08
Mailing Address: P.O. Box HM2340
Hamilton, Bermuda HMJX
Contact: Brian Stephenson
Phone: (441) 292-7569
Fax: (441) 292-3299
MEADOWBROOK INSURANCE GROUP
3501 Lake Eastbrook, S.E., Suite 150
Grand Rapids, MI 49546-5939
Contact: Michael Feehan
Phone: (616) 942-0311
Fax: (616) 942-0390
MEADOWBROOK RISK MANAGEMENT
407 Lincoln Road, Suite 12L
Miami, FL 33239-8171
Mailing Address:
P.O. Box 398171
Miami, FL 33239-8171
Contact: Omar Cordial
Phone: (305) 279-0553
Fax: (305) 279-0568
MEADOWBROOK INSURANCE GROUP
Dupont Center, Suite 120
9801 Dupont Avenue, South
Bloomington, MN 55431-3175
Contact: James LeRoy
Phone: (612) 884-9833
Fax: (612) 884-9839
MEADOWBROOK INTERMEDIARIES, INC.
144 East 44th Street, 3rd Floor
New York, NY 10017-4008
Contact: John Dobbs
Phone: (212) 297-1800
Fax: (212) 297-1802
MEADOWBROOK INSURANCE GROUP
Eastern Region Marketing
18 Windsor Road
Summit, NJ 07901
Contact: Gary Bakalar
Phone: (908) 273-8288
Fax: (908) 273-8289
SAVERS PROPERTY & CASUALTY INSURANCE COMPANY
10985 Cody, Suite 135
Overland Park, KS 66210-1224
Contact: Karl Koch, President
Phone: (913) 451-0002
Fax: (913) 451-6033
MEADOWBROOK INSURANCE SERVICES
2820 West Charleston Blvd., Suite 28
Las Vegas, NV 89102-1933
Contact: Camille Hilmo
Phone: (702) 877-8823
Fax: (702) 877-3157
MEADOWBROOK INSURANCE SERVICES
100 Century Center Court, Suite 302
San Jose, CA 95112-4512
Contact: Karen Ramey
Phone: (408) 453-6006 or (800) 870-0037
Fax: (408) 453-6077
MEADOWBROOK INSURANCE GROUP
3335 N. Timberwood
Traverse City, MI 49686-3839
Contact: Peter E. Kurak
Phone: (616) 938-2859
Fax: (616) 938-9546
[50]
<PAGE> 53
1996
ANNUAL REPORT
MISSION STATEMENT
Meadowbrook Insurance Group offers a full array of traditional and
nontraditional insurance and risk management services for business and personal
needs. We are the pioneers of Alternative Risk Management,
and it is our mission to continue to lead the industry by providing clients
with the most complete selection of quality services and innovative products
available anywhere.
TO OUR CLIENTS
We work with our clients to create customized programs to better manage
their risks. We encourage risk-sharing partnerships designed to generate
profits for our clients. We develop long-term relationships with our clients
by providing services and products that exceed their expectations.
TO OUR ASSOCIATES
We value our associates' ideas and encourage their involvement as integral
members of our team.
We foster a positive and professional work environment with a strong
commitment to diversity and equal opportunities for advancement.
TO OUR SHAREHOLDERS
We manage our business to promote steady growth, financial stability and
superior long-term investment opportunities. We will maintain our leadership
in the expanding Alternative Risk Market by continuing to redefine insurance
industry standards.
TO OUR COMMUNITIES
We support many charitable, cultural and educational organizations nationwide.
We will continue to recognize and honor our responsibility to protect the
environment.
<PAGE> 54
[BACK COVER]
[MEADOWBROOK INSURANCE GROUP LOGO]
26600 Telegraph Road
Southfield, MI 48034-2347
Phone: Toll Free (800) 482-2726 - Fax (810) 358-1614
[NYSE LOGO]
<PAGE> 1
EXHIBIT 21
----------
<TABLE>
<S><C>
Meadowbrook Insurance Group, Inc. (50%)
f/k/a Star Holding Company _______________________________________
| |
| |
\ / \ /
____________________________________________________________ American
| | Indemnity
| | Insurance
\ / | Co., Ltd.
\ / / \
Meadowbrook, Star |
Inc. Insurance Co._________|
| | (50%)
| |
\ / \ /
_______________________________________________________________________________________________ Savers Property
| | | | | | | and Casualty
| | | | | | | Insurance Co.
\ / \ / \ / \ / \ / \ / \ /
Association Meadowbrook Meadowbrook Meadowbrook Of Medowbrook Meadowbrook Meadowbrook
Self Insurance Intermediaries, Risk Nevada, Inc. Insurance Risk Risk Management
Services, Inc. Inc. Management, Agency, Inc. Management, Limited
Inc. Ltd. (Barbados) (Bermuda)
| (80%)
|
\ /
Meadowbrook
International, Ltd.
</TABLE>
<PAGE> 1
EXHIBIT 23
[COOPERS & LYBRAND LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Meadowbrook Insurance Group, Inc. on Form S-3 (File No. 333-24083) of our
report dated March 10, 1997, on our audits of the consolidated financial
statements and financial statement schedule of Meadowbrook Insurance Group,
Inc. as of December 31, 1996 and 1995, and for the years ended December 31,
1996, 1995, and 1994, which report is incorporated by reference in this Annual
Report on Form 10-K
Coopers & Lybrand LLP
Detroit, Michigan
March 27, 1997
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS: That the undersigned officers and
directors of Meadowbrook Insurance Group, Inc., a Michigan corporation, do
hereby constitute and appoint Joseph C. Henry and Robert S. Cubbin, and each of
them, the lawful attorneys and agents or attorney and agent, with power and
authority to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, and any of them, determine may be
necessary or advisable or required to enable said corporation to comply with
the Securities Act of 1933 as amended, and any rules or regulations or
requirements of the Securities and Exchange Commission in connection with this
Registration Statement. Without limiting the generality of the foregoing power
and authority, the powers granted include the power and authority to sign the
names of the undersigned officers and directors in the capacities indicated
below to this Registration Statement, to any and all amendments, both
pre-effective and post-effective, and supplements to this Registration
Statement, and to any and all instruments or documents filed as part of or in
conjunction with this Registration Statement, and to any and all instruments
or documents filed as part of or in conjunction with this Registration
Statement or amendments or supplements thereto, and each of the undersigned
hereby ratifies and confirms all that said attorneys and agents or any of them
shall do or cause to be done by virtue hereof. This Power of Attorney may be
signed in several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his name.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Merton J. Segal
- --------------------------- Chairman, Chief Executive March 5, 1997
Merton J. Segal Officer and Director
(Principal Executive Officer)
/s/ Warren D. Gardner
- --------------------------- Vice Chairman and Director March 5, 1997
Warren D. Gardner
/s/ James R. Parry
- --------------------------- Executive Vice President, March 5, 1997
James R. Parry Chief Marketing Officer and
Director
- --------------------------- Executive Vice President, March , 1997
Robert S. Cubbin Secretary and Director
/s/ Joseph C. Henry
- --------------------------- Executive Vice President, March 5, 1997
Joseph C. Henry Treasurer and Director
- --------------------------- Director March , 1997
David J. Campbell
<PAGE> 2
SIGNATURE TITLE DATE
--------- ------ ----
- --------------------------- Director March , 1997
Joseph S. Dresner
- --------------------------- Director March , 1997
William K. Good
/s/ Hugh W. Greenberg
- --------------------------- Director March 7, 1997
Hugh W. Greenberg
- --------------------------- Director March , 1997
Florine Mark
- --------------------------- Director March , 1997
Irvin F. Swider
/s/ Bruce E. Thal
- --------------------------- Director March 5, 1997
Bruce E. Thal
- --------------------------- Director March , 1997
Herbert Tyner
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 15,955
<DEBT-CARRYING-VALUE> 120,117
<DEBT-MARKET-VALUE> 122,485
<EQUITIES> 1,421
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 137,493
<CASH> 19,002
<RECOVER-REINSURE> 6,672
<DEFERRED-ACQUISITION> 4,265
<TOTAL-ASSETS> 265,035
<POLICY-LOSSES> 92,390
<UNEARNED-PREMIUMS> 44,091
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 86
<OTHER-SE> 100,114
<TOTAL-LIABILITY-AND-EQUITY> 265,035
84,547
<INVESTMENT-INCOME> 8,002
<INVESTMENT-GAINS> 25
<OTHER-INCOME> 16,614
<BENEFITS> 41,265
<UNDERWRITING-AMORTIZATION> 11,835
<UNDERWRITING-OTHER> 45,221
<INCOME-PRETAX> 10,868
<INCOME-TAX> 2,162
<INCOME-CONTINUING> 8,706
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,706
<EPS-PRIMARY> .95
<EPS-DILUTED> .95
<RESERVE-OPEN> 64,668
<PROVISION-CURRENT> 40,875
<PROVISION-PRIOR> 390
<PAYMENTS-CURRENT> 16,754
<PAYMENTS-PRIOR> 23,404
<RESERVE-CLOSE> 65,775
<CUMULATIVE-DEFICIENCY> 390
</TABLE>
