<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14094
MEADOWBROOK INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2626206
(State of Incorporation) (IRS Employer Identification No.)
26600 TELEGRAPH ROAD, SOUTHFIELD, MICHIGAN 48034
(Address, zip code of principal executive offices)
(248) 358-1100
(Registrant's telephone number, including area code)
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The aggregate number of shares of the Registrant's Common Stock, $.01 par value,
outstanding on May 11, 1999 was 8,634,934.
Total number of Pages: 17
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I - FINANCIAL INFORMATION
<S> <C>
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Statements of Income 3
Consolidated Statements of Comprehensive Income 4
Condensed Consolidated Balance Sheet 5
Condensed Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements
and Management Representation 7-10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 11-15
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 16
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
MEADOWBROOK INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE QUARTERS ENDED MARCH 31,
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Revenues:
Net premium earned $ 26,159 $ 19,063
Net commissions and fees 9,048 7,758
Net investment income 2,709 2,115
-------- --------
Total Revenues 37,916 28,936
Expenses:
Loss and loss adjustment expenses 42,691 23,800
Reinsurance recoveries (21,900) (13,433)
-------- --------
Net loss and loss adjustment expenses 20,791 10,367
Other operating expenses 8,822 5,775
Salaries and employee benefits 9,911 7,963
Interest on notes payable 840 320
Amortization of intangible assets 345 163
-------- --------
Total Expenses 40,709 24,588
(Loss) income before income taxes (2,793) 4,348
Federal income taxes (1,355) 1,064
Net (loss) income before cumulative
effect of accounting change $ (1,438) $ 3,284
-------- --------
Cumulative effect of accounting for insurance
related assessments, net of deferred taxes of $879 (1,706) --
-------- --------
Net (Loss) Income $ (3,144) $ 3,284
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE> 4
MEADOWBROOK INSURANCE GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE QUARTERS ENDED MARCH 31,
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Net loss $(3,144)
Other comprehensive loss, net of tax:
Unrealized losses on securities:
Unrealized holding losses arising during the period (1,161)
Less: reclassification adjustment for gains included in net loss (19)
-------
Other comprehensive loss (1,180)
-------
Comprehensive loss $(4,324)
=======
<CAPTION>
1998
--------
<S> <C>
Net Income $ 3,284
Other comprehensive loss, net of tax:
Unrealized losses on securities:
Unrealized holding losses arising during the period (376)
Less: reclassification adjustment for gains included in net income --
-------
Other comprehensive loss (376)
-------
Comprehensive income $ 2,908
=======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
4
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MEADOWBROOK INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, DECEMBER 31,
1998 1998
--------------- ---------------
<S> <C> <C>
Investments:
Debt securities available for sale, at fair value
(cost of $170,419 and $167,163) $ 174,437 $ 172,617
Equity securities available for sale, at fair value
(cost of $16,663 and $7,585) 16,692 7,898
Cash and cash equivalents 17,047 20,510
---------- ----------
Total investments and cash and cash equivalents 208,176 201,025
Premiums and agent balances receivable 61,811 63,487
Reinsurance recoverable on:
Paid losses 11,220 10,912
Unpaid losses 79,833 64,590
Deferred policy acquisition costs 11,258 8,900
Prepaid reinsurance premiums 41,023 36,336
Intangible assets 22,108 22,055
Other assets 36,488 32,770
---------- ----------
Total assets $ 471,917 $ 440,075
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
LIABILITIES:
Reserve for losses and loss adjustment expenses $ 174,534 $ 148,844
Unearned premiums 87,532 77,948
Notes payable, bank 38,359 40,953
Other liabilities 56,495 52,763
Contingencies and commitments - -
---------- ----------
Total liabilities 356,920 320,508
---------- ---------
SHAREHOLDERS' EQUITY:
Common stock, $.01 stated value; authorized 20,000,000 shares;
8,663,434 and 8,663,434 shares issued and outstanding 87 87
Additional paid-in capital 71,195 71,190
Retained earnings 41,691 45,105
Note receivable from officer (661) (661)
Accumulated other comprehensive income 2,685 3,846
---------- ----------
Total shareholders' equity 114,997 119,567
---------- ----------
Total liabilities and shareholders' equity $ 471,917 $ 440,075
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
5
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MEADOWBROOK INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 12,584 $ (2,185)
-------- --------
Cash flows (used in) provided by investing activities:
Purchase of debt securities available for sale (29,260) (9,743)
Purchase of equity securities available for sale (9,195) (946)
Proceeds from sale of debt securities available for sale 26,077 9,332
Proceeds from sale of equity securities available for sale 107 307
Other investing activities (916) (749)
-------- --------
Net cash (used in) investing activities (13,187) (1,799)
Cash flows (used in) provided by financing activities:
Net (paydown) proceeds of bank loan (2,594) 1,796
Dividends paid on common stock (260) (173)
Other financing activities (6) --
-------- --------
Net cash (used in) provided by financing activities (2,860) 1,623
-------- --------
(Decrease) in cash and cash equivalents (3,463) (2,361)
Cash and cash equivalents, beginning of period 20,510 20,215
-------- --------
Cash and cash equivalents, end of period $ 17,047 $ 17,854
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - EARNINGS PER SHARE (EPS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
(UNAUDITED)
1999 1998
---- ----
<S> <C> <C>
BASIC EPS
Net (loss) income before cumulative effect of
accounting change $ (0.16) $ 0.38
Cumulative effect of accounting change $ (0.20)
Net (loss) income $ (0.36) $ 0.38
DILUTED EPS
Net (loss) income before cumulative effect of
accounting change $ (0.16) $ 0.36
Cumulative effect of accounting change $ (0.20)
Net (loss) income $ (0.36) $ 0.36
WEIGHTED AVERAGE OF NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 8,663,434 8,660,164
Diluted 8,831,696 9,236,741
</TABLE>
NOTE 2 - COMMITMENTS & CONTINGENCIES
On June 26, 1995, two shareholders and an officer of a former agent (the
"Primary Plaintiffs') of Star, and a former spouse of one shareholder and an
employee of the former agent (the "Individual Plaintiffs") initiated legal
proceedings against, among others, Star and Meadowbrook in the District Court
for Washoe County, Reno, Nevada. All of the plaintiffs requested injunctive
relief, compensatory damages, punitive and exemplary damages, and attorney's
fees in an unspecified amount. The Nevada Insurance Department revoked the
license of one of the Primary Plaintiffs and one of the Individual Plaintiffs
and denied further licensing of the other Primary Plaintiffs.
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The Company vigorously defended itself and filed counter-claims against the
Primary Individual Plaintiffs. On April 1, 1998, the Court issued an Order
dismissing all claims of the Primary Plaintiffs with prejudice.
On January 12, 1999, the remaining claims of the Individual Plaintiffs and the
counterclaims of Meadowbrook and Star against the Primary and Individual
Plaintiffs were tried. On February 2, 1999, the jury returned a verdict in favor
of Meadowbrook and Star against the Primary Plaintiffs and Individual
Plaintiffs. In addition, the jury found against the Individual Plaintiffs and in
favor of Meadowbrook and Star on their remaining claims. On April 21, 1999, the
Court found in favor of Meadowbrook and Star and against the Primary and
Individual Plantiffs on all outstanding claims for equitable relief. It is not
expected that the outcome of this litigation will have a material impact on the
financial condition of the Company.
A Final Judgment has been entered with the Court, which is subject to appeal.
NOTE 3 - CUMULATIVE EFFECT OF ACCOUNTING CHANGE
As described in our 1998 Annual report, the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants issued
Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" (SOP 97-3). SOP 97-3 provides guidance for
determining when an entity should recognize a liability for guaranty-fund and
other insurance-related assessments, how to measure that liability, and when an
asset may be recognized for the recovery of such assessments through premium tax
offsets or policy surcharges. As required, the Company adopted SOP 97-3 in the
quarter ended March 31, 1999. The adoption of SOP 97-3 resulted in an after-tax,
non-cash $1.7 million, or $0.20 per share, cumulative effect accounting change.
The current quarter after-tax effect of the adoption of SOP 97-3 was $70,000.
The Company anticipates that it will collect a substantial portion of these
charges from its risk-sharing partners. To the extent that balances are charged
to the captives, the corresponding receivables will be recorded in current
operations.
NOTE 4 - SEGMENT INFORMATION
Effective December 31, 1998, the Company adopted Statement Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information". Upon adoption, the Company defined its operations as agency
operations and program business operations based upon differences in products
and services. The separate financial information of these segments is consistent
with the way results are regularly evaluated by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
Intersegment revenue is eliminated in consolidation.
Agency Operations
The agency segment was formed in 1955 as Meadowbrook's original business. The
insurance agency places principally commercial insurance, as well as personal
property, casualty, life and accident and health insurance, with more than 50
insurance carriers from which it earns
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<PAGE> 9
commission income. The agency has grown to be one of the largest agencies in
Michigan and, with recent acquisitions, expanded into Florida and California.
Program Business
The program business segment is engaged primarily in developing and managing
alternative market risk management programs for defined client groups and their
members. This includes providing services, such as reinsurance brokering, risk
management consulting, claims handling, and administrative services, along with
various types of property and casualty insurance coverage, including workers'
compensation, general liability and commercial multiple peril. Insurance
coverage is primarily provided to associations or similar groups of members,
commonly referred to as programs. A program is a set of coverages and services
tailored to meet the specific requirements of a group of clients.
The following table set forth the segment results (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues
Net earned premiums $ 26,159 $ 19,063
Management fees 4,952 4,613
Investment income 2,709 2,115
--------- ---------
Program business segment 33,820 25,791
Agency operations 4,357 3,256
Intersegment revenue (261) (111)
--------- ---------
Consolidated revenue 37,916 28,936
========= =========
Pre-tax Income
Program business (3,393) 3,933
Agency operations 1,132 737
Reconciling items (532) (322)
--------- ---------
Consolidated pre-tax income $ (2,793) $ 4,348
========= =========
</TABLE>
The pre-tax income reconciling items represent other expenses relating to the
holding company which are not allocated among the segments.
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MANAGEMENT REPRESENTATION
In the opinion of management, the financial statements reflect all adjustments
of a normal recurring nature necessary for a fair presentation of the interim
periods. Preparation of financial statements under GAAP requires management to
make estimates. Actual results could differ from those estimates. Interim
results are not necessarily indicative of results expected for the entire year.
These financial statements should be read in conjunction with the Company's 1998
Form 10-K, as filed with the Securities and Exchange Commission.
Certain statements made by the Company in this document may constitute
forward-looking statements. Actual results could differ materially from those
projected in forward-looking statements. These forward-looking statements
involve risk and uncertainties including, but not limited to the following: the
frequency and severity of claims; uncertainties inherent in reserve estimates;
catastrophic events; a change in the demand for, pricing of, or supply of
reinsurance or insurance; increased competitive pressure; changing rates of
inflation; general economic conditions; and Year 2000 expense estimates.
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PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE PERIODS ENDED MARCH 31, 1999 AND 1998
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Net loss for the three months ended March 31, 1999 was $3.1 million, a decrease
of $6.4 million, from net income of $3.3 million for the same period in 1998.
Net loss before cumulative effect of accounting change was $1.4 million in 1999
compared to net income of $3.3 million in 1998. Results in the first quarter of
1999 reflect reserve strengthening of $2.7 million, a reduction in anticipated
recoveries on the discontinued surety bond program of $2.0 million, higher
losses and loss adjustment expenses, and higher operating expenses. These items
were somewhat offset by growth in revenues of 31%.
REVENUE
Revenue for the three months ended March 31, 1999 was $37.9 million, an increase
of $9.0 million, or 31.0%, from 1998's revenue of $28.9 million (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Risk management fees & commissions $ 9,048 $ 7,758
Net earned premiums 26,159 19,063
Net investment income 2,709 2,115
--------- --------
$ 37,916 $ 28,936
</TABLE>
Risk Management Fees and Commissions
The Company's risk management fees and commission income generated from its
managed program operations and retail agency operations consists of the
following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Commissions $ 4,096 $ 3,145
Management fees 2,573 2,147
Claims fees 1,642 1,956
Loss control fees 507 319
Reinsurance placement 230 184
Miscellaneous fees & charges - 7
--------- --------
$ 9,048 $ 7,758
</TABLE>
11
<PAGE> 12
Net fees and commission income increased by $1.2 million, or 16.6%, to $9.0
million for the three month period ended March 31, 1999 from $7.8 million for
the same period in 1998. The entire $1.2 million increase is the result of
additional revenue generated from acquisitions made in 1998.
Insurance Premiums
The Company's gross premiums written increased by $16.9 million, or 40.3%, to
$58.8 million for the three months ended March 31, 1998 from $41.9 million for
the same period in 1998. Excluding the impact of the Ameritrust acquisition in
1998, gross written premium would have increased 26.7%. The remaining variance
primarily reflects growth in existing programs and new programs started in 1998.
Existing business grew by $8.9 million, or 25.3%, to $35.5 million. New business
generated $4.7 million in additional premium in 1998. This growth was partially
offset by a $1.7 million decrease in premium on discontinued programs from prior
years, which includes the surety bond program. The growth in existing business
principally reflects new programs added in 1998 and 1997.
Net premiums written increased by $10.2 million, or 48.1%, to $31.3 million for
the three months ended March 31, 1999 from $21.1 million for the same period in
1998. Excluding the impact of the Ameritrust acquisition, net written premiums
would have grown 25.4%. Existing business grew by $6.1 million and new business
generated $2.0 million in additional premium. These increases were partially
offset by $0.8 million in decreased premium as the result of discontinued
programs. Excluding the impact of the Ameritrust acquisition, gross written
premium continues to grow at a faster pace than net written premium as a result
of an emphasis on fronted programs or programs in which the Company retains
limited risk. Gross written premium associated with fronted programs represented
18% of gross written premium. This compares to 11% in 1998.
Net premiums earned increased by $7.1 million, or 37.2%, to $26.2 million for
the three months ended March 31, 1999 from $19.1 million for the same period in
1998. Existing business grew by $4.8 million, reflecting expansion of core
programs, the acquisition of Ameritrust, in 1998, and new programs added in the
prior year. New business in 1999 generated $500,000 in additional premium. These
increases were partially offset by $1.0 million in decreased premium as the
result of the addition of reinsurance costs.
Net Investment Income
Net investment income increased by $594,000, or 28.1%, to $2.7 million for the
three months ended March 31, 1999 from $2.1 million for the same period in the
prior year. This increase represents an increase in invested assets of 23% that
is primarily related to the acquisition of Ameritrust. The pre-tax weighted
average yield on invested assets was 5.3% and 5.1%for the first three months of
1999 and 1998. 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% in both 1999 and 1998.
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EXPENSES
Total expenses increased $16.1 million, or 65.6%, to $40.7 million at March 31,
1999 from $24.6 million for the same period in 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Losses and LAE incurred $ 20,791 $ 10,367
Salaries and employee benefits 9,911 7,963
Other operating expenses 8,822 5,775
Interest on notes payable 840 320
Amortization of intangible assets 345 163
-------- --------
$ 40,709 $ 24,588
</TABLE>
Losses and Loss Adjustment Expenses (LAE) Incurred
Losses and LAE incurred increased by $10.4 million to $20.8 million for the
three months ended March 31, 1999 from $10.4 million for the same period in
1998. The GAAP loss and loss adjustment expense ratio increased 24.4 points to
82.5% from 58.1%. This increase reflects $2.7 million of reserve strengthening,
a $2.0 million reduction in anticipated recoveries of the discontinued surety
bond program, and $1.2 million relating to loss and LAE ratios that are higher
than our historical ratios. As a result of the program action plans initiated in
the fourth quarter of 1998, the Company expects that these higher ratios will
decrease by end of 1999. The remaining variance reflects unanticipated good
experience reported in the first quarter of 1998.
Salaries and Employee Benefits
Salaries and benefits increased $1.9 million or 24.5%, to $9.9 million in 1999
from $8.0 million in 1998. Excluding the impact of the 1998 acquisitions,
salaries and benefits would have increased $1.1 million from first quarter 1998.
This increase reflects the additions to staff in 1998 to execute technology
initiatives and handle growth. Salaries and benefits, however, decreased from
the level reported in the third and fourth quarters of 1998. These expense
decreases reflect minor staff reductions and stricter hiring controls
implemented as part of the 1999 budgeting process.
Other Operating Expenses
Other operating expenses increased by $3.0 million, or 52.8%, to $8.8 million
for the three months ended March 31, 1999 from $5.8 million for the same period
in 1998. Excluding the impact of the 1998 acquisitions, the increase would have
been $1.5 million, or 26.9%. This increase resulted from growth in premium,
which is reflected with the GAAP expense ratio remaining unchanged from 33.6% in
1998.
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Interest Expense
Interest expense of $840,000 and $320,000 was recorded for the three months
ended March 31, 1999 and 1998, respectively. This interest is related to
utilization of the Company's Line of Credit. The increase in interest expense is
a result of a higher average daily loan balance during 1999 as compared to 1998.
The outstanding balance on this line was $37.3 million at March 31, 1999, as
compared to $38.1 million at December 31, 1998. The Company drew on this Line of
Credit during 1998 primarily to meet acquisition and cash flow needs.
Amortization Expense
Amortization expense of $345,000 and $163,000 was recorded for the three months
ended March 31, 1999 and 1998, respectively. This increase in amortization is
related to the goodwill recorded on the various acquisitions made since July
1997.
Federal Income Taxes
The provision for income taxes was a $1.4 million benefit for the three months
ended March 31, 1999, and a $1.1 million provision for the same period in 1998,
representing effective tax rates of 49% and 24.5%, respectively. Historically,
the Company's tax rates are significantly lower than the 34% corporate rate due
to its heavily tax-exempt investment portfolio. The decrease in the effective
tax rate in 1999 is the result of the higher level of tax-exempt interest in
proportion to total underwriting results experienced this year. It is expected
that the effective tax rate will return to historical levels as the Company's
underwriting results become profitable. Tax exempt securities at March 31, 1999
represented 70.2% of the portfolio, down from 77.9% at year-end. This reduction
was due to a sale of municipal securities near the end of the quarter. The
proceeds from the sale were held in US agency bonds and not yet re-invested in
tax-exempt. If this transaction did not occur, the level of tax-exempts at March
31, 1999 would have been 75.7%. The Company is shifting its portfolio to taxable
securities, by reinvesting cash from operations and maturing securities and is
completing an analysis of additional sales and purchases to re-balance the fixed
income portfolio aimed to maximize after-tax investment yields and minimize
current outflow related to taxes.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of funds for the Company are insurance premiums,
investment income, proceeds from the maturity and sale of invested assets, risk
management fees and agency commissions. Funds are primarily used for the payment
of claims, commissions, salaries and employee benefits, and other operating
expenses. In addition, the Company has a high volume of intercompany
transactions due to the payment of management fees by the insurance subsidiaries
to the risk management subsidiaries, which are subject to regulatory approval by
state insurance departments.
14
<PAGE> 15
Cash flow provided by operations for the three months ended March 31, 1999 was
$12.6 million as compared to cash used in operations of $2.2 million for the
same period in 1998. Cash flow has significantly improved from the prior year
since 1998 reflected unusually high cash out flow relating to payment of 1997
contingent commissions, premium taxes and assessments made in the first quarter
of 1998. At March 31, 1999, the Company held $17.0 million in cash and cash
equivalents.
The Company has an unsecured Line of Credit totaling $50.0 million, of which
$37.3 million was outstanding at March 31, 1999, $38.1 million was outstanding
at December 31, 1998 and $13.3 million at March 31, 1998. The Line of Credit
expires on July 1, 2001. The Company drew on this Line of Credit during 1998
primarily to meet acquisition and cash flow needs.
The Company is currently in negotiations with its bank and other parities to
facilitate our existing acquisition strategy.
IMPACT OF YEAR 2000
The total estimated cost of the required actions necessary to become Year 2000
compliant is currently estimated at $6.3 million.
Amounts expected to be spent in 1999 total about $2.5 million, including about
$1.3 million in outside vendor costs and another $1.2 in internal reprogramming
and assessment costs. The amount spent through March 31, 1999 was about
$500,000.
The Company feels that 85% of its critical operational systems have been brought
into compliance, with 100% compliance expected by the 3rd Quarter of 1999.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 26, 1995, two shareholders and an officer of a former agent (the
"Primary Plaintiffs') of Star, and a former spouse of one shareholder and an
employee of the former agent (the "Individual Plaintiffs") initiated legal
proceedings against, among others, Star and Meadowbrook in the District Court
for Washoe County, Reno, Nevada. All of the plaintiffs requested injunctive
relief, compensatory damages, punitive and exemplary damages, and attorney's
fees in an unspecified amount. The Nevada Insurance Department revoked the
license of one of the Primary Plaintiffs and one of the Individual Plaintiffs
and denied further licensing of the other Primary Plaintiffs.
The Company vigorously defended itself and filed counter-claims against the
Primary Individual Plaintiffs. On April 1, 1998, the Court issued an Order
dismissing all claims of the Primary Plaintiffs with prejudice.
On January 12, 1999, the remaining claims of the Individual Plaintiffs and the
counterclaims of Meadowbrook and Star against the Primary and Individual
Plaintiffs were tried. On February 2, 1999, the jury returned a verdict in favor
of Meadowbrook and Star against the Primary Plaintiffs and Individual
Plaintiffs. In addition, the jury found against the Individual Plaintiffs and in
favor of Meadowbrook and Star on their remaining claims. On April 21, 1999, the
Court found in favor of Meadowbrook and Star and against the Primary and
Individual Plantiffs on all outstanding claims for equitable relief. It is not
expected that the outcome of this litigation will have a material impact on the
financial condition of the Company.
A Final Judgment has been entered with the Court, which is subject to appeal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(A) The following documents are filed as part of this Report:
Exhibit
No. Description
- ------- -----------
11 Statement re computation of per share earnings
27 Financial Data Schedule
(B) Reports on Form 8-K
Form 8-K, dated April 5, 1999, Item 5 - Other Events.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEADOWBROOK INSURANCE GROUP, INC.
By: /s/ William J. Lohmeyer
------------------------
Sr. Vice President and
Chief Financial Officer
Dated: May 12, 1999
17
<PAGE> 18
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
11 Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
18
<PAGE> 1
EXHIBIT 11
MEADOWBROOK INSURANCE GROUP, INC. AND
SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
FOR THE THREE MONTHS ENDED MARCH 31, 1999
-----------------------------------------
<S> <C> <C> <C>
Net (loss) before cumulative effect of
accounting change applicable to common
Shareholders $ (1,437,766)
============
BASIC EPS
(Loss) before cumulative effect of
accounting change applicable to common
shareholders 8,663,434 $ (0.16)
=======
EFFECT OF DILUTIVE SECURITIES
Options 168,262
DILUTED EPS
(Loss) before cumulative effect of
accounting change applicable to common
shareholders 8,831,696 $ (0.16)
========= =======
Cumulative effect of accounting change $ (1,706,416)
============
BASIC EPS
Cumulative effect of accounting change 8,663,434 $ (0.20)
=======
EFFECT OF DILUTIVE SECURITIES
Options 168,262
DILUTED EPS
Cumulative effect of accounting change 8,831,696 $ (0.20)
========= =======
Net (loss) applicable to common
shareholders $ (3,144,182)
============
BASIC EPS
(Loss) applicable to common shareholders 8,663,434 $ (0.36)
=======
EFFECT OF DILUTIVE SECURITIES
Options 168,262
DILUTED EPS
(Loss) applicable to common shareholders 8,831,696 $ (0.36)
========= =======
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
FOR THE THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------------
<S> <C> <C> <C>
Net income applicable to common
shareholders $ 3,283,796
===========
BASIC EPS
Income applicable to common shareholders 8,660,164 $ 0.38
======
EFFECT OF DILUTIVE SECURITIES
Options 576,577
---------
DILUTED EPS
Income applicable to common shareholders 9,236,741 $ 0.36
========= ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 174,437
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 16,692
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 191,129
<CASH> 17,047
<RECOVER-REINSURE> 11,840
<DEFERRED-ACQUISITION> 11,258
<TOTAL-ASSETS> 471,917
<POLICY-LOSSES> 174,534
<UNEARNED-PREMIUMS> 87,532
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 38,359
0
0
<COMMON> 87
<OTHER-SE> 114,910
<TOTAL-LIABILITY-AND-EQUITY> 471,917
26,159
<INVESTMENT-INCOME> 2,709
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 9,048
<BENEFITS> 20,791
<UNDERWRITING-AMORTIZATION> 1,670
<UNDERWRITING-OTHER> 18,248
<INCOME-PRETAX> (2,793)
<INCOME-TAX> (1,355)
<INCOME-CONTINUING> (1,438)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,706)
<NET-INCOME> (3,144)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
<RESERVE-OPEN> 84,254<F1>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 94,701<F1>
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>(Before reinsurance recoverable.)
</FN>
</TABLE>
