form10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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.) |
26255 American Drive, 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 o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller Reporting Company o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso No x
The aggregate number of shares of the Registrant’s Common Stock, $.01 par value, outstanding on August 2, 2011, was 52,875,204.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEADOWBROOK INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended June 30,
| |
|
2011
|
|
|
2010
|
|
| |
|
(Unaudited)
|
|
| |
|
(In thousands, except share data)
|
|
|
Revenues
|
|
|
|
|
|
|
|
Premiums earned
|
|
|
|
|
|
|
|
Gross
|
|
$ |
209,676 |
|
|
$ |
192,789 |
|
|
Ceded
|
|
|
(28,206 |
) |
|
|
(30,029 |
) |
|
Net earned premiums
|
|
|
181,470 |
|
|
|
162,760 |
|
|
Net commissions and fees
|
|
|
7,897 |
|
|
|
7,135 |
|
|
Net investment income
|
|
|
13,765 |
|
|
|
13,454 |
|
|
Realized gains (losses):
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairments on securities
|
|
|
- |
|
|
|
(106 |
) |
|
Portion of loss recognized in other comprehensive income
|
|
|
- |
|
|
|
- |
|
|
Net other-than-temporary impairments on securities recognized in earnings
|
|
|
- |
|
|
|
(106 |
) |
|
Net realized gains excluding other-than-temporary impairments on securities
|
|
|
1,094 |
|
|
|
398 |
|
|
Net realized gains
|
|
|
1,094 |
|
|
|
292 |
|
|
Total revenues
|
|
|
204,226 |
|
|
|
183,641 |
|
| |
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
141,356 |
|
|
|
119,576 |
|
|
Reinsurance recoveries
|
|
|
(19,953 |
) |
|
|
(20,364 |
) |
|
Net losses and loss adjustment expenses
|
|
|
121,403 |
|
|
|
99,212 |
|
|
Policy acquisition and other underwriting expenses
|
|
|
62,450 |
|
|
|
57,370 |
|
|
General, selling and administrative expenses
|
|
|
5,631 |
|
|
|
5,321 |
|
|
General corporate expenses
|
|
|
(719 |
) |
|
|
1,269 |
|
|
Amortization expense
|
|
|
1,206 |
|
|
|
1,121 |
|
|
Interest expense
|
|
|
2,082 |
|
|
|
2,411 |
|
|
Total expenses
|
|
|
192,053 |
|
|
|
166,704 |
|
|
Income before taxes and equity earnings
|
|
|
12,173 |
|
|
|
16,937 |
|
|
Federal and state income tax expense
|
|
|
2,408 |
|
|
|
4,738 |
|
|
Equity earnings of affiliates, net of tax
|
|
|
173 |
|
|
|
644 |
|
|
Equity earnings of unconsolidated subsidiaries, net of tax
|
|
|
1 |
|
|
|
18 |
|
|
Net income
|
|
$ |
9,939 |
|
|
$ |
12,861 |
|
| |
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.19 |
|
|
$ |
0.24 |
|
|
Diluted
|
|
$ |
0.19 |
|
|
$ |
0.24 |
|
| |
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
53,100,479 |
|
|
|
54,018,868 |
|
|
Diluted
|
|
|
53,248,573 |
|
|
|
54,268,668 |
|
| |
|
|
|
|
|
|
|
|
|
Dividends paid per common share
|
|
$ |
0.04 |
|
|
$ |
0.03 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
MEADOWBROOK INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30,
| |
|
2011
|
|
|
2010
|
|
| |
|
(Unaudited)
|
|
| |
|
(In thousands, except share data)
|
|
|
Revenues
|
|
|
|
|
|
|
|
Premiums earned
|
|
|
|
|
|
|
|
Gross
|
|
$ |
410,362 |
|
|
$ |
372,402 |
|
|
Ceded
|
|
|
(58,234 |
) |
|
|
(58,201 |
) |
|
Net earned premiums
|
|
|
352,128 |
|
|
|
314,201 |
|
|
Net commissions and fees
|
|
|
16,335 |
|
|
|
17,003 |
|
|
Net investment income
|
|
|
27,337 |
|
|
|
26,483 |
|
|
Realized gains (losses):
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairments on securities
|
|
|
(84 |
) |
|
|
(411 |
) |
|
Portion of loss recognized in other comprehensive income
|
|
|
- |
|
|
|
- |
|
|
Net other-than-temporary impairments on securities recognized in earnings
|
|
|
(84 |
) |
|
|
(411 |
) |
|
Net realized gains excluding other-than-temporary impairments on securities
|
|
|
1,990 |
|
|
|
569 |
|
|
Net realized gains
|
|
|
1,906 |
|
|
|
158 |
|
|
Total revenues
|
|
|
397,706 |
|
|
|
357,845 |
|
| |
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
270,079 |
|
|
|
218,897 |
|
|
Reinsurance recoveries
|
|
|
(43,414 |
) |
|
|
(32,205 |
) |
|
Net losses and loss adjustment expenses
|
|
|
226,665 |
|
|
|
186,692 |
|
|
Policy acquisition and other underwriting expenses
|
|
|
119,888 |
|
|
|
109,249 |
|
|
General, selling and administrative expenses
|
|
|
11,875 |
|
|
|
11,227 |
|
|
General corporate expenses
|
|
|
636 |
|
|
|
3,246 |
|
|
Amortization expense
|
|
|
2,438 |
|
|
|
2,522 |
|
|
Interest expense
|
|
|
4,254 |
|
|
|
4,854 |
|
|
Total expenses
|
|
|
365,756 |
|
|
|
317,790 |
|
|
Income before taxes and equity earnings
|
|
|
31,950 |
|
|
|
40,055 |
|
|
Federal and state income tax expense
|
|
|
8,119 |
|
|
|
12,396 |
|
|
Equity earnings of affiliates, net of tax
|
|
|
1,246 |
|
|
|
1,166 |
|
|
Equity earnings of unconsolidated subsidiaries, net of tax
|
|
|
(22 |
) |
|
|
470 |
|
|
Net income
|
|
$ |
25,055 |
|
|
$ |
29,295 |
|
| |
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.47 |
|
|
$ |
0.54 |
|
|
Diluted
|
|
$ |
0.47 |
|
|
$ |
0.53 |
|
| |
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
53,175,824 |
|
|
|
54,642,127 |
|
|
Diluted
|
|
|
53,323,802 |
|
|
|
54,887,561 |
|
| |
|
|
|
|
|
|
|
|
|
Dividends paid per common share
|
|
$ |
0.08 |
|
|
$ |
0.06 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
MEADOWBROOK INSURANCE GROUP, INC.
For the Three Months Ended June 30,
| |
|
|
|
|
|
|
| |
|
2011
|
|
|
2010
|
|
| |
|
(Unaudited)
|
|
| |
|
(In thousands)
|
|
|
Net income
|
|
$ |
9,939 |
|
|
$ |
12,861 |
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
Unrealized gains on securities
|
|
|
13,528 |
|
|
|
13,469 |
|
|
Unrealized gains (losses) in affiliates and unconsolidated subsidiaries
|
|
|
50 |
|
|
|
(7 |
) |
|
(Decrease) increase on non-credit other-than-temporary impairments on securities
|
|
|
(231 |
) |
|
|
1,092 |
|
|
Net deferred derivative losses - hedging activity
|
|
|
(381 |
) |
|
|
(447 |
) |
|
Less reclassification adjustment for investment gains included in net income
|
|
|
(1,070 |
) |
|
|
(216 |
) |
|
Other comprehensive gains, net of tax
|
|
|
11,896 |
|
|
|
13,891 |
|
|
Comprehensive income
|
|
$ |
21,835 |
|
|
$ |
26,752 |
|
MEADOWBROOK INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Six Months Ended June 30,
| |
|
2011
|
|
|
2010
|
|
| |
|
(Unaudited)
|
|
| |
|
(In thousands)
|
|
|
Net income
|
|
$ |
25,055 |
|
|
$ |
29,295 |
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
Unrealized gains on securities
|
|
|
11,148 |
|
|
|
18,267 |
|
|
Unrealized (losses) gains in affiliates and unconsolidated subsidiaries
|
|
|
(1 |
) |
|
|
140 |
|
|
Increase on non-credit other-than-temporary impairments on securities
|
|
|
85 |
|
|
|
485 |
|
|
Net deferred derivative gains (losses) - hedging activity
|
|
|
285 |
|
|
|
(625 |
) |
|
Less reclassification adjustment for investment gains included in net income
|
|
|
(1,880 |
) |
|
|
(60 |
) |
|
Other comprehensive gains, net of tax
|
|
|
9,637 |
|
|
|
18,207 |
|
|
Comprehensive income
|
|
$ |
34,692 |
|
|
$ |
47,502 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
MEADOWBROOK INSURANCE GROUP, INC.
| |
|
|
|
|
|
|
| |
|
(Unaudited)
|
|
|
|
|
| |
|
(In thousands, except share data)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
Debt securities available for sale, at fair value (amortized cost of $1,228,767 and $1,170,795)
|
|
$ |
1,297,993 |
|
|
$ |
1,226,360 |
|
|
Equity securities available for sale, at fair value (cost of $26,135 and $25,632)
|
|
|
29,664 |
|
|
|
28,483 |
|
|
Cash and cash equivalents
|
|
|
77,122 |
|
|
|
90,414 |
|
|
Accrued investment income
|
|
|
13,882 |
|
|
|
13,021 |
|
|
Premiums and agent balances receivable, net
|
|
|
195,500 |
|
|
|
169,866 |
|
|
Reinsurance recoverable on:
|
|
|
|
|
|
|
|
|
|
Paid losses
|
|
|
9,854 |
|
|
|
13,342 |
|
|
Unpaid losses
|
|
|
296,113 |
|
|
|
280,854 |
|
|
Prepaid reinsurance premiums
|
|
|
28,500 |
|
|
|
28,208 |
|
|
Deferred policy acquisition costs
|
|
|
84,833 |
|
|
|
78,755 |
|
|
Deferred income taxes, net
|
|
|
616 |
|
|
|
5,569 |
|
|
Goodwill
|
|
|
118,842 |
|
|
|
118,842 |
|
|
Other intangible assets
|
|
|
34,328 |
|
|
|
36,637 |
|
|
Other assets
|
|
|
93,759 |
|
|
|
87,290 |
|
|
Total assets
|
|
$ |
2,281,006 |
|
|
$ |
2,177,641 |
|
| |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
$ |
1,125,216 |
|
|
$ |
1,065,056 |
|
|
Unearned premiums
|
|
|
379,842 |
|
|
|
352,585 |
|
|
Debt
|
|
|
31,250 |
|
|
|
37,750 |
|
|
Debentures
|
|
|
80,930 |
|
|
|
80,930 |
|
|
Accounts payable and accrued expenses
|
|
|
39,860 |
|
|
|
38,645 |
|
|
Funds held and reinsurance balances payable
|
|
|
31,649 |
|
|
|
28,824 |
|
|
Payable to insurance companies
|
|
|
5,127 |
|
|
|
2,754 |
|
|
Other liabilities
|
|
|
14,096 |
|
|
|
23,996 |
|
|
Total liabilities
|
|
|
1,707,970 |
|
|
|
1,630,540 |
|
| |
|
|
|
|
|
|
|
|
|
Shareholders' Equity
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Common stock, $0.01 stated value; authorized 75,000,000 shares; 52,875,204 and 53,236,542 shares issued and outstanding
|
|
|
516 |
|
|
|
520 |
|
|
Additional paid-in capital
|
|
|
289,902 |
|
|
|
292,705 |
|
|
Retained earnings
|
|
|
238,387 |
|
|
|
219,298 |
|
|
Note receivable from officer
|
|
|
(781 |
) |
|
|
(797 |
) |
|
Accumulated other comprehensive income
|
|
|
45,012 |
|
|
|
35,375 |
|
|
Total shareholders' equity
|
|
|
573,036 |
|
|
|
547,101 |
|
|
Total liabilities and shareholders' equity
|
|
$ |
2,281,006 |
|
|
$ |
2,177,641 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
MEADOWBROOK INSURANCE GROUP, INC.
| |
|
Common
Stock
|
|
|
Additional
Paid-In Capital
|
|
|
Retained
Earnings
|
|
|
Note
Receivable
from Officer
|
|
|
Accumulated Other
Comprehensive
Income
|
|
|
Total
Shareholders'
Equity
|
|
| |
|
(Unaudited, In thousands)
|
|
|
Balances December 31, 2010
|
|
$ |
520 |
|
|
$ |
292,705 |
|
|
$ |
219,298 |
|
|
$ |
(797 |
) |
|
$ |
35,375 |
|
|
$ |
547,101 |
|
|
Net income
|
|
|
- |
|
|
|
- |
|
|
|
25,055 |
|
|
|
- |
|
|
|
- |
|
|
|
25,055 |
|
|
Dividends declared and paid
|
|
|
- |
|
|
|
- |
|
|
|
(4,262 |
) |
|
|
- |
|
|
|
- |
|
|
|
(4,262 |
) |
|
Change in unrealized on available for sale securities, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,320 |
|
|
|
9,320 |
|
|
Change in valuation allowance on deferred tax assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
33 |
|
|
|
33 |
|
|
Net deferred derivative gain - hedging activity
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
285 |
|
|
|
285 |
|
|
Stock award
|
|
|
- |
|
|
|
366 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
366 |
|
|
Long term incentive plan; stock award for 2009-2011 plan years
|
|
|
- |
|
|
|
(973 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(973 |
) |
|
Change in investment of affiliates, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
Repurchase of 400,000 shares of common stock
|
|
|
(4 |
) |
|
|
(2,196 |
) |
|
|
(1,704 |
) |
|
|
- |
|
|
|
- |
|
|
|
(3,904 |
) |
|
Note receivable from officer
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
16 |
|
|
|
- |
|
|
|
16 |
|
|
Balances June 30, 2011
|
|
$ |
516 |
|
|
$ |
289,902 |
|
|
$ |
238,387 |
|
|
$ |
(781 |
) |
|
$ |
45,012 |
|
|
$ |
573,036 |
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
MEADOWBROOK INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
| |
|
2011
|
|
|
2010
|
|
| |
|
(Unaudited)
|
|
| |
|
(In thousands)
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
Net income
|
|
$ |
25,055 |
|
|
$ |
29,295 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Amortization of other intangible assets
|
|
|
2,438 |
|
|
|
2,522 |
|
|
Amortization of deferred debenture issuance costs
|
|
|
63 |
|
|
|
132 |
|
|
Depreciation of furniture, equipment, and building
|
|
|
2,697 |
|
|
|
2,793 |
|
|
Net amortization of discount and premiums on bonds
|
|
|
1,829 |
|
|
|
1,759 |
|
|
Gain on sale of investments, net
|
|
|
(1,880 |
) |
|
|
(60 |
) |
|
Gain on sale of fixed assets
|
|
|
(44 |
) |
|
|
(44 |
) |
|
Long-term incentive plan expense
|
|
|
(973 |
) |
|
|
501 |
|
|
Stock award
|
|
|
366 |
|
|
|
385 |
|
|
Equity earnings of affiliates, net of taxes
|
|
|
(1,246 |
) |
|
|
(1,166 |
) |
|
Equity loss (earnings) of unconsolidated subsidiaries, net of tax
|
|
|
22 |
|
|
|
(470 |
) |
|
Deferred income tax expense
|
|
|
(185 |
) |
|
|
(37 |
) |
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in:
|
|
|
|
|
|
|
|
|
|
Premiums and agent balances receivable
|
|
|
(25,634 |
) |
|
|
(25,181 |
) |
|
Reinsurance recoverable on paid and unpaid losses
|
|
|
(11,771 |
) |
|
|
(11,467 |
) |
|
Prepaid reinsurance premiums
|
|
|
(292 |
) |
|
|
1,258 |
|
|
Deferred policy acquisition costs
|
|
|
(6,078 |
) |
|
|
(8,539 |
) |
|
Other assets
|
|
|
(285 |
) |
|
|
(2,953 |
) |
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
60,160 |
|
|
|
63,479 |
|
|
Unearned premiums
|
|
|
27,257 |
|
|
|
24,592 |
|
|
Payable to insurance companies
|
|
|
2,373 |
|
|
|
(438 |
) |
|
Funds held and reinsurance balances payable
|
|
|
2,825 |
|
|
|
218 |
|
|
Other liabilities
|
|
|
(14,826 |
) |
|
|
(3,687 |
) |
|
Total adjustments
|
|
|
36,816 |
|
|
|
43,597 |
|
|
Net cash provided by operating activities
|
|
|
61,871 |
|
|
|
72,892 |
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
Purchase of debt securities available for sale
|
|
|
(133,777 |
) |
|
|
(116,523 |
) |
|
Proceeds from sales and maturities of debt securities available for sale
|
|
|
78,352 |
|
|
|
49,366 |
|
|
Proceeds from sales of equity securities available for sale
|
|
|
200 |
|
|
|
420 |
|
|
Capital expenditures
|
|
|
(3,970 |
) |
|
|
(2,379 |
) |
|
Acquisition of rights renewals
|
|
|
(129 |
) |
|
|
(148 |
) |
|
Other investing activities
|
|
|
592 |
|
|
|
(286 |
) |
|
Net cash used in investing activities
|
|
|
(58,732 |
) |
|
|
(69,550 |
) |
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
Payment of lines of credit
|
|
|
(6,500 |
) |
|
|
(5,625 |
) |
|
Book overdrafts
|
|
|
(1,785 |
) |
|
|
933 |
|
|
Dividends paid on common stock
|
|
|
(4,262 |
) |
|
|
(3,272 |
) |
|
Cash payment for payroll taxes associated with long-term incentive plan net stock issuance
|
|
|
- |
|
|
|
(35 |
) |
|
Share repurchases
|
|
|
(3,904 |
) |
|
|
(17,130 |
) |
|
Other financing activities
|
|
|
20 |
|
|
|
(69 |
) |
|
Net cash used in financing activities
|
|
|
(16,431 |
) |
|
|
(25,198 |
) |
|
Net decrease in cash and cash equivalents
|
|
|
(13,292 |
) |
|
|
(21,856 |
) |
|
Cash and cash equivalents, beginning of period
|
|
|
90,414 |
|
|
|
86,319 |
|
|
Cash and cash equivalents, end of period
|
|
$ |
77,122 |
|
|
$ |
64,463 |
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
4,070 |
|
|
$ |
4,193 |
|
|
Net income taxes paid (1)
|
|
$ |
14,678 |
|
|
$ |
16,601 |
|
|
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
Stock-based employee compensation
|
|
$ |
366 |
|
|
$ |
385 |
|
| |
|
|
|
|
|
|
|
|
|
(1) In first quarter 2011, $731,795 was received for amended tax return refunds.
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 –Summary of Significant Accounting Policies
Basis of Presentation and Management Representation
The consolidated financial statements include accounts, after elimination of intercompany accounts and transactions, of Meadowbrook Insurance Group, Inc. (the “Company” or “Meadowbrook”), its wholly owned subsidiary Star Insurance Company (“Star”), and Star’s wholly owned subsidiaries, Savers Property and Casualty Insurance Company (“Savers”), Williamsburg National Insurance Company (“Williamsburg”), and Ameritrust Insurance Corporation (“Ameritrust”). The consolidated financial statements also include Meadowbrook, Inc., Crest Financial Corporation, and their respective subsidiaries. In addition, the consolidated
financial statements also include ProCentury Corporation (“ProCentury”) and its wholly owned subsidiaries. ProCentury’s wholly owned subsidiaries consist of Century Surety Company (“Century”) and its wholly owned subsidiary ProCentury Insurance Company (“PIC”). In addition, ProCentury Risk Partners Insurance Company, Ltd., is a wholly owned subsidiary of ProCentury. Star, Savers, Williamsburg, Ameritrust, Century, and PIC are collectively referred to as the Insurance Company Subsidiaries.
In the opinion of management, the consolidated financial statements reflect all normal recurring adjustments necessary to present a fair statement of the results for the interim period. Preparation of financial statements under generally accepted accounting principles (“GAAP”) requires management to make estimates. Actual results could differ from those estimates. The results of operations for the three months and six months ended June 30, 2011 are not necessarily indicative of the results expected for the full year.
These financial statements and the notes thereto should be read in conjunction with the Company’s audited financial statements and accompanying notes included in its Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission, for the year ended December 31, 2010.
Revenue Recognition
Premiums written, which include direct, assumed and ceded amounts are recognized as earned on a pro rata basis over the life of the policy term. Unearned premiums represent the portion of premiums written that 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 and actuarial estimates.
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Assumed premium estimates are specifically related to an established book of workers compensation business on which the Company has established an equity ownership relationship and the mandatory assumed pool business from the National Council on Compensation Insurance (“NCCI”), or residual market business. The pool cedes workers’ compensation business to participating companies based upon the individual company’s market share by state. The activity is reported from the NCCI to participating companies on a two quarter lag. To accommodate this lag, the Company estimates premium and loss activity based on historical and market based results. Historically, the
Company has not experienced any material difficulties or disputes in collecting balances from NCCI; therefore, no provision for doubtful accounts is recorded related to the assumed premium estimate.
Fee income, which includes risk management consulting, loss control, and claims services, is recognized during the period the services are provided. Depending on the terms of the contract, claims processing fees are recognized as revenue over the estimated life of the claims, or the estimated life of the contract. For those contracts that provide services beyond the expiration or termination of the contract, fees are deferred in an amount equal to management’s estimate of the Company’s obligation to continue to provide services in the future.
Commission income, which includes reinsurance placement, is recorded on the later of the effective date or the billing date of the policies on which they were earned. Commission income is reported net of any sub-producer commission expense. Any commission adjustments that occur subsequent to the earnings process are recognized upon notification from the insurance companies. Profit sharing commissions from insurance companies are recognized when determinable, which is when such commissions are received.
Income Taxes
As of June 30, 2011 and December 31, 2010, the Company did not have any unrecognized tax benefits.
Interest costs and penalties related to income taxes are classified as interest expense and other administrative expenses, respectively. As of June 30, 2011 and December 31, 2010, the Company had no accrued interest or penalties related to uncertain tax positions.
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recent Accounting Pronouncements
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the Financial Accounting Standards Board (“FASB”) issued guidance to assist in a consistent application of accounting for costs related to acquiring or renewing insurance contracts among industry practice. The new guidance restricts the capitalization of a contract’s acquisition costs to those that are directly related to the successful acquisition of a new or renewing insurance contract. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2011. The Company is still evaluating the impact of adoption on its financial condition and results of operations.
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
In May 2011, the FASB issued guidance to achieve common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (IFRSs). The guidance explains how to measure fair value and does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The guidance is to be applied prospectively for interim and annual periods beginning after December 15, 2011. The Company is still evaluating the impact of adoption on its financial condition and results of operations
Presentation of Comprehensive Income
In June 2011, the FASB issued guidance to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The guidance requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance is to be applied retrospectively and is effective for interim and annual periods beginning after December 15, 2011, with early adoption permitted. The Company has not yet adopted this guidance and will not have a material impact on its financial
condition and results of operations.
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – Investments
The estimated fair value of investments in securities is determined primarily based upon published market quotations and broker/dealer quotations. The cost or amortized cost, gross unrealized gains, losses, non-credit other-than-temporary impairments (“OTTI”) and estimated fair value of investments in securities classified as available for sale at June 30, 2011 and December 31, 2010 were as follows (in thousands):
| |
|
June 30, 2011
|
|
| |
|
Cost or Amortized Cost
|
|
|
Gross Unrealized
|
|
|
Estimated Fair Value
|
|
| |
|
Gains
|
|
|
Losses
|
|
|
Non-Credit OTTI
|
|
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agencies
|
|
$ |
23,323 |
|
|
$ |
1,379 |
|
|
$ |
(6 |
) |
|
$ |
- |
|
|
$ |
24,696 |
|
|
Obligations of states and political subs
|
|
|
541,941 |
|
|
|
30,152 |
|
|
|
(510 |
) |
|
|
- |
|
|
|
571,583 |
|
|
Corporate securities
|
|
|
432,085 |
|
|
|
24,741 |
|
|
|
(749 |
) |
|
|
- |
|
|
|
456,077 |
|
|
Redeemable preferred stocks
|
|
|
1,924 |
|
|
|
492 |
|
|
|
- |
|
|
|
- |
|
|
|
2,416 |
|
|
Residential mortgage-backed securities
|
|
|
173,964 |
|
|
|
11,922 |
|
|
|
(515 |
) |
|
|
(102 |
) |
|
|
185,269 |
|
|
Commercial mortgage-backed securities
|
|
|
39,829 |
|
|
|
1,461 |
|
|
|
(155 |
) |
|
|
- |
|
|
|
41,135 |
|
|
Other asset-backed securities
|
|
|
15,701 |
|
|
|
1,717 |
|
|
|
(31 |
) |
|
|
(570 |
) |
|
|
16,817 |
|
|
Total debt securities available for sale
|
|
|
1,228,767 |
|
|
|
71,864 |
|
|
|
(1,966 |
) |
|
|
(672 |
) |
|
|
1,297,993 |
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual preferred stock
|
|
|
10,824 |
|
|
|
2,509 |
|
|
|
- |
|
|
|
- |
|
|
|
13,333 |
|
|
Common stock
|
|
|
15,311 |
|
|
|
1,373 |
|
|
|
(353 |
) |
|
|
- |
|
|
|
16,331 |
|
|
Total equity securities available for sale
|
|
|
26,135 |
|
|
|
3,882 |
|
|
|
(353 |
) |
|
|
- |
|
|
|
29,664 |
|
|
Total securities available for sale
|
|
$ |
1,254,902 |
|
|
$ |
75,746 |
|
|
$ |
(2,319 |
) |
|
$ |
(672 |
) |
|
$ |
1,327,657 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2010
|
|
| |
|
Cost or Amortized Cost
|
|
|
Gross Unrealized
|
|
|
Estimated Fair Value
|
|
| |
|
Gains
|
|
|
Losses
|
|
|
Non-Credit OTTI
|
|
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agencies
|
|
$ |
25,375 |
|
|
$ |
1,363 |
|
|
$ |
(24 |
) |
|
$ |
- |
|
|
$ |
26,714 |
|
|
Obligations of states and political subs
|
|
|
527,080 |
|
|
|
22,176 |
|
|
|
(2,125 |
) |
|
|
- |
|
|
|
547,131 |
|
|
Corporate securities
|
|
|
379,974 |
|
|
|
21,555 |
|
|
|
(1,355 |
) |
|
|
(3 |
) |
|
|
400,171 |
|
|
Redeemable preferred stocks
|
|
|
3,368 |
|
|
|
1,044 |
|
|
|
- |
|
|
|
- |
|
|
|
4,412 |
|
|
Residential mortgage-backed securities
|
|
|
181,966 |
|
|
|
12,182 |
|
|
|
(694 |
) |
|
|
(151 |
) |
|
|
193,303 |
|
|
Commercial mortgage-backed securities
|
|
|
34,942 |
|
|
|
1,236 |
|
|
|
(478 |
) |
|
|
- |
|
|
|
35,700 |
|
|
Other asset-backed securities
|
|
|
18,090 |
|
|
|
1,476 |
|
|
|
(33 |
) |
|
|
(604 |
) |
|
|
18,929 |
|
|
Total debt securities available for sale
|
|
|
1,170,795 |
|
|
|
61,032 |
|
|
|
(4,709 |
) |
|
|
(758 |
) |
|
|
1,226,360 |
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual preferred stock
|
|
|
10,869 |
|
|
|
2,006 |
|
|
|
(6 |
) |
|
|
- |
|
|
|
12,869 |
|
|
Common stock
|
|
|
14,763 |
|
|
|
1,255 |
|
|
|
(404 |
) |
|
|
- |
|
|
|
15,614 |
|
|
Total equity securities available for sale
|
|
|
25,632 |
|
|
|
3,261 |
|
|
|
(410 |
) |
|
|
- |
|
|
|
28,483 |
|
|
Total securities available for sale
|
|
$ |
1,196,427 |
|
|
$ |
64,293 |
|
|
$ |
(5,119 |
) |
|
$ |
(758 |
) |
|
$ |
1,254,843 |
|
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Gross unrealized gains, losses, and non-credit OTTI on available for sale securities as of June 30, 2011 and December 31, 2010 were as follows (in thousands):
| |
|
June 30,
2011
|
|
|
December 31, 2010
|
|
|
Unrealized gains
|
|
$ |
75,746 |
|
|
$ |
64,293 |
|
|
Unrealized losses
|
|
|
(2,319 |
) |
|
|
(5,119 |
) |
|
Non-credit OTTI
|
|
|
(672 |
) |
|
|
(758 |
) |
|
Net unrealized gains
|
|
|
72,755 |
|
|
|
58,416 |
|
|
Deferred federal income tax expense
|
|
|
(25,464 |
) |
|
|
(20,445 |
) |
|
Net unrealized gains on investments, net of deferred federal income taxes
|
|
$ |
47,291 |
|
|
$ |
37,971 |
|
Net realized gains (losses including OTTI) on securities, for the three months and six months ended June 30, 2011 and 2010 were as follows (in thousands):
| |
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Realized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$ |
942 |
|
|
$ |
225 |
|
|
$ |
1,866 |
|
|
$ |
373 |
|
|
Gross realized losses
|
|
|
(27 |
) |
|
|
(54 |
) |
|
|
(141 |
) |
|
|
(368 |
) |
|
Total debt securities
|
|
|
915 |
|
|
|
171 |
|
|
|
1,725 |
|
|
|
5 |
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
|
154 |
|
|
|
106 |
|
|
|
154 |
|
|
|
116 |
|
|
Gross realized losses
|
|
|
- |
|
|
|
(61 |
) |
|
|
- |
|
|
|
(61 |
) |
|
Total equity securities
|
|
|
154 |
|
|
|
45 |
|
|
|
154 |
|
|
|
55 |
|
|
Net realized gains
|
|
$ |
1,069 |
|
|
$ |
216 |
|
|
$ |
1,879 |
|
|
$ |
60 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTTI included in realized losses on securities above
|
|
$ |
- |
|
|
$ |
106 |
|
|
$ |
(84 |
) |
|
$ |
411 |
|
Proceeds from the sales of fixed maturity securities available for sale were $11.1 million and $0.7 million for the three months ended June 30, 2011 and 2010, respectively. Proceeds from the sales of fixed maturity securities available for sale were $27.4 million and $1.1 million for the six months ended June 30, 2011 and 2010, respectively.
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At June 30, 2011, the amortized cost and estimated fair value of available for sale debt securities 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 (in thousands):
| |
|
Available for Sale
|
|
|
|
|
Amortized
Cost
|
|
|
Estimated Fair
Value
|
|
|
Due in one year or less
|
|
$ |
33,863 |
|
|
$ |
34,393 |
|
|
Due after one year through five years
|
|
|
257,075 |
|
|
|
268,758 |
|
|
Due after five years through ten years
|
|
|
584,531 |
|
|
|
623,341 |
|
|
Due after ten years
|
|
|
123,804 |
|
|
|
128,280 |
|
|
Mortgage-backed securities, collateralized obligations and asset-backed securities
|
|
|
229,494 |
|
|
|
243,221 |
|
| |
|
$ |
1,228,767 |
|
|
$ |
1,297,993 |
|
Net investment income for the three months and six months ended June 30, 2011 and 2010 was as follows (in thousands):
| |
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Net Investment Income Earned From:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
$ |
13,436 |
|
|
$ |
12,970 |
|
|
$ |
26,628 |
|
|
$ |
25,550 |
|
|
Equity Securities
|
|
|
473 |
|
|
|
525 |
|
|
|
979 |
|
|
|
1,061 |
|
|
Cash and cash equivalents
|
|
|
174 |
|
|
|
226 |
|
|
|
390 |
|
|
|
409 |
|
|
Total gross investment income
|
|
|
14,083 |
|
|
|
13,721 |
|
|
|
27,997 |
|
|
|
27,020 |
|
|
Less investment expenses
|
|
|
318 |
|
|
|
267 |
|
|
|
660 |
|
|
|
537 |
|
|
Net investment income
|
|
$ |
13,765 |
|
|
$ |
13,454 |
|
|
$ |
27,337 |
|
|
$ |
26,483 |
|
Other-Than-Temporary Impairments of Securities and Unrealized Losses on Investments
Available for sale securities are reviewed for declines in fair value that are determined to be other-than-temporary. For a debt security, if the Company intends to sell a security and it is more likely than not the Company will be required to sell a debt security before recovery of its amortized cost basis and the fair value of the debt security is below amortized cost, the Company concludes that an OTTI has occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized loss in the Consolidated Statements of Income. If the Company does not intend to sell a debt security and it is not more likely than not the Company will be required to sell a
debt security before recovery of its amortized cost basis but the present value of the cash flows expected to be collected is less than the amortized cost of the debt security (referred to as the credit loss), the Company concludes that an OTTI has occurred. In this instance, accounting guidance requires the bifurcation of the total OTTI into the amount related to the credit loss, which is recognized in earnings and the non-credit OTTI, which is recorded in Other Comprehensive Income as an unrealized non-credit OTTI in the Consolidated Statements of Comprehensive Income.
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
When assessing the Company’s intent to sell a debt security, if it is more likely than not the Company will be required to sell a debt security before recovery of its cost basis, facts and circumstances such as, but not limited to, decisions to reposition the security portfolio, sale of securities to meet cash flow needs and sales of securities to capitalize on favorable pricing, are evaluated. In order to determine the amount of the credit loss for a debt security, the Company calculates the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows expected to be recovered. The discount rate is the effective interest rate implicit
in the underlying debt security upon issuance. The effective interest rate is the original yield or the coupon if the debt security was previously impaired. If an OTTI exists and there is not sufficient cash flows or other information to determine a recovery value of the security, the Company concludes that the entire OTTI is credit-related and the amortized cost for the security is written down to current fair value with a corresponding charge to realized loss in the Consolidated Statements of Income.
To determine the recovery period of a debt security, the Company considers the facts and circumstances surrounding the underlying issuer including, but not limited to the following:
|
|
●
|
Historical and implied volatility of the security;
|
|
|
●
|
Length of time and extent to which the fair value has been less than amortized cost;
|
|
|
●
|
Conditions specifically related to the security such as default rates, loss severities, loan to value ratios, current levels of subordination, third party guarantees, and vintage;
|
|
|
●
|
Specific conditions in an industry or geographic area;
|
|
|
●
|
Any changes to the rating of the security by a rating agency;
|
|
|
●
|
Failure, if any, of the issuer of the security to make scheduled payments; and
|
|
|
●
|
Recoveries or additional declines in fair value subsequent to the balance sheet date.
|
In periods subsequent to the recognition of an OTTI, the security is accounted for as if it had been purchased on the measurement date of the OTTI. Therefore, for a fixed maturity security, the discount or reduced premium is reflected in net investment income over the contractual term of the investment in a manner that produces a constant effective yield.
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For an equity security, if the Company does not have the ability and intent to hold the security for a sufficient period of time to allow for a recovery in value, the Company concludes that an OTTI has occurred, and the cost of the equity security is written down to the current fair value, with a corresponding charge to realized loss within the Consolidated Statements of Income. When assessing the Company’s ability and intent to hold the equity security to recovery, the Company considers, among other things, the severity and duration of the decline in fair value of the equity security, as well as the cause of decline, a fundamental analysis of the liquidity, business prospects and overall financial condtion of
the issuer.
After reviewing the Company’s investment portfolio in relation to this policy, the Company did not record any credit OTTI for the three months ended June 30, 2011. The Company recorded $84,000 of credit OTTI for the six months ended June 30, 2011. No non-credit related OTTI were recognized for the three months and six months ended June 30, 2011 in other comprehensive income. For the three months and six months ended June 30, 2010, the Company recorded an OTTI loss of $106,000 and $411,000, respectively, of which no non-credit related OTTI losses were recognized in other comprehensive income.
The fair value and amount of unrealized losses segregated by the time period the investment has been in an unrealized loss position were as follows (in thousands):
| |
|
June 30, 2011
|
|
| |
|
Less than 12 months
|
|
|
Greater than 12 months
|
|
|
Total
|
|
| |
|
Fair Value of
Investments with
Unrealized
Losses
(69 Securities)
|
|
|
Gross
Unrealized
Losses and
Non-Credit
OTTI
|
|
|
Fair Value of
Investments with
Unrealized
Losses
(15 Securities)
|
|
|
Gross
Unrealized
Losses and
Non-Credit
OTTI
|
|
|
Fair Value of
Investments with
Unrealized
Losses
(84 Securities)
|
|
|
Gross
Unrealized
Losses and
Non-Credit
OTTI
|
|
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agencies
|
|
$ |
169 |
|
|
$ |
(6 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
169 |
|
|
$ |
(6 |
) |
|
Obligations of states and political subs
|
|
|
31,820 |
|
|
|
(509 |
) |
|
|
185 |
|
|
|
(1 |
) |
|
|
32,005 |
|
|
|
(510 |
) |
|
Corporate securities
|
|
|
55,411 |
|
|
|
(749 |
) |
|
|
- |
|
|
|
- |
|
|
|
55,411 |
|
|
|
(749 |
) |
|
Redeemable preferred stocks
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Residential mortgage-backed securities
|
|
|
18,880 |
|
|
|
(515 |
) |
|
|
3,673 |
|
|
|
(102 |
) |
|
|
22,553 |
|
|
|
(617 |
) |
|
Commercial mortgage-backed securities
|
|
|
8,734 |
|
|
|
(77 |
) |
|
|
535 |
|
|
|
(78 |
) |
|
|
9,269 |
|
|
|
(155 |
) |
|
Other asset-backed securities
|
|
|
1,113 |
|
|
|
(20 |
) |
|
|
2,379 |
|
|
|
(581 |
) |
|
|
3,492 |
|
|
|
(601 |
) |
|
Total debt securities
|
|
|
116,127 |
|
|
|
(1,876 |
) |
|
|
6,772 |
|
|
|
(762 |
) |
|
|
122,899 |
|
|
|
(2,638 |
) |
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual preferred stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Common stock
|
|
|
48 |
|
|
|
- |
|
|
|
5,098 |
|
|
|
(353 |
) |
|
|
5,146 |
|
|
|
(353 |
) |
|
Total equity securities
|
|
|
48 |
|
|
|
- |
|
|
|
5,098 |
|
|
|
(353 |
) |
|
|
5,146 |
|
|
|
(353 |
) |
|
Total securities
|
|
$ |
116,175 |
|
|
$ |
(1,876 |
) |
|
$ |
11,870 |
|
|
$ |
(1,115 |
) |
|
$ |
128,045 |
|
|
$ |
(2,991 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| |
|
December 31, 2010
|
|
| |
|
Less than 12 months
|
|
|
Greater than 12 months
|
|
|
Total
|
|
| |
|
Fair Value of
Investments
with Unrealized
Losses
(89 Securities)
|
|
|
Gross
Unrealized
Losses and
Non-Credit
OTTI
|
|
|
Fair Value of
Investments
with Unrealized
Losses
(19 Securities)
|
|
|
Gross
Unrealized
Losses and
Non-Credit
OTTI
|
|
|
Fair Value of
Investments with Unrealized Losses (108 Securities)
|
|
|
Gross Unrealized Losses and Non-Credit OTTI
|
|
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agencies
|
|
$ |
3,381 |
|
|
$ |
(24 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,381 |
|
|
$ |
(24 |
) |
|
Obligations of states and political subs
|
|
|
71,422 |
|
|
|
(2,119 |
) |
|
|
679 |
|
|
|
(6 |
) |
|
|
72,101 |
|
|
|
(2,125 |
) |
|
Corporate securities
|
|
|
70,411 |
|
|
|
(1,358 |
) |
|
|
- |
|
|
|
- |
|
|
|
70,411 |
|
|
|
(1,358 |
) |
|
Redeemable preferred stocks
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Residential mortgage-backed securities
|
|
|
22,161 |
|
|
|
(694 |
) |
|
|
3,631 |
|
|
|
(151 |
) |
|
|
25,792 |
|
|
|
(845 |
) |
|
Commercial mortgage-backed securities
|
|
|
7,052 |
|
|
|
(183 |
) |
|
|
311 |
|
|
|
(295 |
) |
|
|
7,363 |
|
|
|
(478 |
) |
|
Other asset-backed securities
|
|
|
1,569 |
|
|
|
(16 |
) |
|
|
2,617 |
|
|
|
(621 |
) |
|
|
4,186 |
|
|
|
(637 |
) |
|
Total debt securities
|
|
|
175,996 |
|
|
|
(4,394 |
) |
|
|
7,238 |
|
|
|
(1,073 |
) |
|
|
183,234 |
|
|
|
(5,467 |
) |
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual preferred stock
|
|
|
995 |
|
|
|
(6 |
) |
|
|
- |
|
|
|
- |
|
|
|
995 |
|
|
|
(6 |
) |
|
Common stock
|
|
|
- |
|
|
|
- |
|
|
|
5,063 |
|
|
|
(404 |
) |
|
|
5,063 |
|
|
|
(404 |
) |
|
Total equity securities
|
|
|
995 |
|
|
|
(6 |
) |
|
|
5,063 |
|
|
|
(404 |
) |
|
|
6,058 |
|
|
|
(410 |
) |
|
Total securities
|
|
$ |
176,991 |
|
|
$ |
(4,400 |
) |
|
$ |
12,301 |
|
|
$ |
(1,477 |
) |
|
$ |
189,292 |
|
|
$ |
(5,877 |
) |
Changes in the amount of credit loss on fixed maturities for which a portion of an OTTI related to other factors was recognized in other comprehensive income were as follows (in thousands):
|
Balance as of January 1, 2010
|
|
$ |
(547 |
) |
|
Additional credit impairments on:
|
|
|
|
|
|
Previously impaired securities
|
|
|
(264 |
) |
|
Securities for which an impairment was not previously recognized
|
|
|
- |
|
|
Reductions
|
|
|
89 |
|
|
Balance as of December 31, 2010
|
|
|
(722 |
) |
|
Additional credit impairments on:
|
|
|
|
|
|
Previously impaired securities
|
|
|
(67 |
) |
|
Securities for which an impairment was not previously recognized
|
|
|
- |
|
|
Reductions
|
|
|
- |
|
|
Balance as of June 30, 2011
|
|
$ |
(789 |
) |
| |
NOTE 3 – Fair Value Measurements
According to accounting guidance for fair value measurements and disclosures, fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The guidance establishes a three-level hierarchy for fair value measurements that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances
(“unobservable inputs”).
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The estimated fair values of the Company’s fixed investment portfolio are based on prices provided by a third party pricing service and a third party investment manager. The prices provided by these services are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing. The third party pricing service and the third party investment manager provide a single price or quote per security and the Company has not historically adjusted security prices. The Company obtains an understanding of the methods, models and inputs used by the third party pricing service and the third party investment manager, and has controls in place to validate that amounts
provided represent fair values. The Company’s control process includes, but is not limited to, initial and ongoing evaluation of the methodologies used, a review of specific securities and an assessment for proper classification within the fair value hierarchy. The hierarchy level assigned to each security in the Company’s available for sale portfolio is based upon its assessment of the transparency and reliability of the inputs used in the valuation as of the measurement date. The three hierarchy levels are defined as follows:
Level 1 – Valuations that are based on unadjusted quoted prices in active markets for identical securities. The fair value of exchange-traded preferred and common equities, and mutual funds included in the Level 1 category were based on quoted prices that are readily and regularly available in an active market. The fair value measurements that were based on Level 1 inputs comprise 2.3% of the fair value of the total investment portfolio.
Level 2 – Valuations that are based on observable inputs (other than Level 1 prices) such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. The fair value of securities included in the Level 2 category were based on the market values obtained from a third party pricing service that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other observable market information. The third party pricing service monitors market indicators, as well as industry and economic events. The Level 2 category includes
corporate bonds, government and agency bonds, asset-backed, residential mortgage-backed and commercial mortgage-backed securities and municipal bonds. The fair value measurements that were based on Level 2 inputs comprise 97.3% of the fair value of the total investment portfolio.
Level 3 – Valuations that are derived from techniques in which one or more of the significant inputs are unobservable and/or involve management judgment and/or are based on non-binding broker quotes. The fair value measurements that were based on Level 3 inputs comprise 0.4% of the fair value of the total investment portfolio.
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For corporate, government and municipal bonds, the third party pricing service utilizes a pricing model with standard inputs that include benchmark yields, reported trades, issuer spreads, two-sided markets, benchmark securities, market bids/offers, and other reference data observable in the marketplace. The model uses the option adjusted spread methodology and is a multi-dimensional relational model. All bonds valued under these techniques are classified as Level 2.
For asset-backed, residential mortgage-backed and commercial mortgage-backed securities, the third party pricing service valuation methodology includes consideration of interest rate movements, new issue data, monthly remittance reports and other pertinent data that is observable in the marketplace. This information is used to determine the cash flows for each tranche and identifies the inputs to be used such as benchmark yields, prepayment assumptions and collateral performance. All asset-backed, residential mortgage-backed and commercial mortgage-backed securities valued under these methods are classified as Level 2.
Also included in Level 2 valuation are interest rate swap agreements the Company utilizes to hedge the floating interest rate on its debt, thereby changing the variable rate exposure to a fixed rate exposure for interest on these obligations. The estimated fair value of the interest rate swaps is obtained from the third party financial institution counterparties and measured using discounted cash flow analysis that incorporates significant observable inputs, including the LIBOR forward curve, derivative counterparty spreads, and measurements of volatility.
The Level 3 securities consist of 13 securities totaling $4.6 million or 0.4% of the total investment portfolio. These primarily represent asset-backed securities and corporate debt securities that have a principal protection feature supported by a U.S. Treasury strip. To fair value these securities, the third party investment manager uses a combination of methods. Non-binding broker/dealer quotes are used on 4 holdings. Benchmarking techniques based upon industry sector, rating and other factors are used on 8 holdings. The Company holds 1 restricted equity security that is not readily marketable; and therefore, is subject to nonrecurring fair value adjustments.
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis, classified by the valuation hierarchy as of June 30, 2011 (in thousands):
| |
|
|
|
|
Fair Value Measurements Using
|
|
| |
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
|
|
|
Significant Other
Observable
|
|
|
Significant
Unobservable
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agencies
|
|
$ |
24,696 |
|
|
$ |
- |
|
|
$ |
24,696 |
|
|
$ |
- |
|
|
Obligations of states and political subs
|
|
|
571,583 |
|
|
|
- |
|
|
|
571,583 |
|
|
|
- |
|
|
Corporate securities
|
|
|
456,077 |
|
|
|
- |
|
|
|
455,261 |
|
|
|
816 |
|
|
Redeemable preferred stocks
|
|
|
2,416 |
|
|
|
2,416 |
|
|
|
- |
|
|
|
- |
|
|
Residential mortgage-backed securities
|
|
|
185,269 |
|
|
|
- |
|
|
|
185,269 |
|
|
|
- |
|
|
Commercial mortgage-backed securities
|
|
|
41,135 |
|
|
|
- |
|
|
|
41,135 |
|
|
|
- |
|
|
Other asset-backed securities
|
|
|
16,817 |
|
|
|
- |
|
|
|
13,546 |
|
|
|
3,271 |
|
|
Total debt securities available for sale
|
|
|
1,297,993 |
|
|
|
2,416 |
|
|
|
1,291,490 |
|
|
|
4,087 |
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual preferred stock
|
|
|
13,333 |
|
|
|
12,593 |
|
|
|
740 |
|
|
|
- |
|
|
Common stock
|
|
|
16,331 |
|
|
|
15,783 |
|
|
|
- |
|
|
|
548 |
|
|
Total equity securities available for sale
|
|
|
29,664 |
|
|
|
28,376 |
|
|
|
740 |
|
|
|
548 |
|
|
Total securities available for sale
|
|
$ |
1,327,657 |
|
|
$ |
30,792 |
|
|
$ |
1,292,230 |
|
|
$ |
4,635 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives - interest rate swaps
|
|
$ |
(5,494 |
) |
|
$ |
- |
|
|
$ |
(5,494 |
) |
|
$ |
- |
|
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents changes in Level 3 available for sale investments measured at fair value on a recurring basis as of June 30, 2011 (in thousands):
| |
|
Fair Value
Measurement
Using
Significant
Unobservable
Inputs - Level 3
|
|
|
Balance as of January 1, 2010
|
|
$ |
4,161 |
|
| |
|
|
|
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
Included in earnings
|
|
|
(3 |
) |
|
Included in other comprehensive income
|
|
|
463 |
|
| |
|
|
|
|
|
Purchases
|
|
|
- |
|
|
Issuances
|
|
|
- |
|
|
Settlements
|
|
|
(97 |
) |
| |
|
|
|
|
|
Transfers in and out of Level 3
|
|
|
(442 |
) |
|
Balance as of December 31, 2010
|
|
|
4,082 |
|
| |
|
|
|
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
Included in earnings
|
|
|
10 |
|
|
Included in other comprehensive income
|
|
|
37 |
|
| |
|
|
|
|
|
Purchases
|
|
|
- |
|
|
Issuances
|
|
|
- |
|
|
Settlements
|
|
|
(10 |
) |
| |
|
|
|
|
|
Transfers in and out of Level 3
|
|
|
516 |
|
|
Balance as of June 30, 2011
|
|
$ |
4,635 |
|
There were no credit losses for the period included in earnings attributable to the change in unrealized losses on Level 3 assets still held at the reporting date.
The Company’s policy on recognizing transfers between hierarchy levels is applied at the end of a reporting period. During the quarter ended June 30, 2011, there was one asset-backed security transferred into Level 2 from Level 3 as the third party pricing source calculated the fair value using observable market data inputs.
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – Debt
Credit Facilities
On July 31, 2008, the Company executed $100 million in senior credit facilities (the “Credit Facilities”). The Credit Facilities included a $65.0 million term loan facility, which was fully funded upon the closing of its Merger with ProCentury and a $35.0 million revolving credit facility, which was partially funded upon closing of the Merger.The revolving credit facility includes a letter of credit facility with a sublimit. The total amount of credit available under the revolving credit facility is $35.0 million, which may include up to $15 million in letters of credit. As of June 30,
2011, the outstanding balance on its term loan facility was $31.3 million. The Company had a zero outstanding balance on its revolving credit facility as of June 30, 2011, and $0.5 million in letters of credit had been issued as of June 30, 2011. The undrawn portion of the revolving credit facility is available to finance working capital and for general corporate purposes, including but not limited to, surplus contributions to its Insurance Company Subsidiaries to support premium growth or strategic acquisitions. At December 31, 2010, the Company had an outstanding balance of $37.8 million on its term loan and had a zero outstanding balance on its revolving credit facility.
The principal amount outstanding under the Credit Facilities provides for interest at LIBOR, plus the applicable margin, or at the Company’s option, the base rate. The base rate is defined as the higher of the lending bank’s prime rate or the Federal Funds rate, plus 0.50%, plus the applicable margin. The applicable margin is determined by the consolidated indebtedness to consolidated total capital ratio. In addition, the Credit Facilities provide for an unused facility fee ranging between twenty basis points and forty basis points, based on our consolidated leverage ratio as defined by the Credit Facilities. At June 30, 2011, the interest rate on the
Company’s term loan was 5.70%, which consisted of a fixed rate of 3.95%, as described in Note 5 ~ Derivative Instruments, plus an applicable margin of 1.75%.
The debt financial covenants applicable to the Credit Facilities consist of: (1) minimum consolidated net worth starting at eighty percent of pro forma consolidated net worth after giving effect to the acquisition of ProCentury, with quarterly increases thereafter, (2) minimum Risk Based Capital Ratio for Star and Century Surety of 1.75 to 1.00, (3) maximum permitted consolidated leverage ratio of 0.35 to 1.00, (4) minimum consolidated debt service coverage ratio of 1.25 to 1.00, and (5) minimum A.M. Best Company rating of “B++.” As of June 30, 2011, the Company was in compliance with these debt covenants.
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the second quarter of 2011, several of the Company's insurance subsidiaries(Star, Williamsburg, and Ameritrust) became members of the Federal Home Loan Bank of Indianapolis ("FHLBI"). As a member of the FHLBI, these subsidiaries have the ability to borrow on a collateralized basis, providing a source of liquidity. The aggregate investment of approximately $0.5 million by these subsidiaries provides the ability to borrow up to 20 times the total amount of the FHLBI common stock purchased. As of June 30, 2011, based on the subsidiaries’ common stock investment, the Company had the borrowing capacity of up to approximately
$10 million from FHLBI. As of June 30, 2011, the Company did not have any borrowings outstanding from FHLBI.
Debentures
The following table summarizes the principal amounts and variables associated with the Company’s debentures (in thousands):
|
Year of
Issuance
|
Description
|
Year
Callable
|
Year Due
|
Interest Rate Terms
|
|
Interest Rate at June 30, 2011 (1)
|
|
|
Principal Amount
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
2003
|
Junior subordinated debentures
|
2008
|
2033
|
Three-month LIBOR, plus 4.05%
|
|
|
4.30 |
% |
|
$ |
10,310 |
|
|
2004
|
Senior debentures
|
2009
|
2034
|
Three-month LIBOR, plus 4.00%
|
|
|
4.26 |
% |
|
|
13,000 |
|
|
2004
|
Senior debentures
|
2009
|
2034
|
Three-month LIBOR, plus 4.20%
|
|
|
4.46 |
% |
|
|
12,000 |
|
|
2005
|
Junior subordinated debentures
|
2010
|
2035
|
Three-month LIBOR, plus 3.58%
|
|
|
3.83 |
% |
|
|
20,620 |
|
| |
Junior subordinated debentures (2)
|
2007
|
2032
|
Three-month LIBOR, plus 4.00%
|
|
|
4.25 |
% |
|
|
15,000 |
|
| |
Junior subordinated debentures (2)
|
2008
|
2033
|
Three-month LIBOR, plus 4.10%
|
|
|
4.36 |
% |
|
|
10,000 |
|
| |
|
|
|
|
|
|
Total
|
|
|
$ |
80,930 |
|
(1) The underlying three-month LIBOR rate varies as a result of the interest rate reset dates used in determining the three-month LIBOR rate, which varies for each long-term debt item each quarter.
(2) Represents the junior subordinated debentures acquired in conjunction with the ProCentury Merger on July 31, 2008.
Excluding the junior subordinated debentures acquired in conjunction with the ProCentury Merger, the Company received a total of $53.3 million in net proceeds from the issuance of the above long-term debt, of which $26.2 million was contributed to the surplus of its Insurance Company Subsidiaries and the remaining balance was used for general corporate purposes. Associated with the issuance of the above long-term debt, the Company incurred approximately $1.7 million in issuance costs for commissions paid to the placement agents in the transactions.
The issuance costs associated with these debentures have been capitalized and are included in other assets on the balance sheet. As of June 30, 2007, these issuance costs were being amortized over a seven year period as a component of interest expense. The seven year amortization period represented management’s best estimate of the estimated useful life of the bonds related to both the senior debentures and junior subordinated debentures. Beginning July 1, 2007, the Company re-evaluated its best estimate and determined a five year amortization period to be a more accurate representation of the estimated useful life. Therefore, this change in amortization period from
seven years to five years has been applied prospectively beginning July 1, 2007.
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The junior subordinated debentures issued in 2003 and 2005 were issued in conjunction with the issuance of $10.0 million and $20.0 million in mandatory redeemable trust preferred securities to a trust formed by an institutional investor from the Company’s unconsolidated subsidiary trusts, Meadowbrook Capital Trust I and Meadowbrook Capital Trust II, respectively.
The junior subordinated debentures acquired in the ProCentury Merger were issued in conjunction with the issuance of $15.0 million and $10.0 million in floating rate trust preferred securities to a trust formed from the Company’s unconsolidated trust, ProFinance Statutory Trust I and ProFinance Statutory Trust II. The Company also acquired the remaining unamortized portion of the capitalized issuance costs associated with these debentures. The remaining unamortized portion of the issuance costs acquired was $625,000. These issuance costs are included in other assets on the balance sheet. The remaining balance is being amortized over a five year period beginning
August 1, 2008, as a component of interest expense.
The junior subordinated debentures are unsecured obligations of the Company and are junior to the right of payment to all senior indebtedness of the Company. The Company has guaranteed that the payments made to the four trusts mentioned above will be distributed to the holders of the respective trust preferred securities.
The Company estimates that the fair value of the above mentioned junior subordinated debentures and senior debentures issued approximate the gross proceeds of cash received at the time of issuance.
NOTE 5 – Derivative Instruments
The Company has entered into interest rate swap transactions to mitigate its interest rate risk on its existing debt obligations. These interest rate swap transactions have been designated as cash flow hedges and are deemed highly effective hedges. These interest rate swap transactions are recorded at fair value on the balance sheet and the effective portion of the changes in fair value are accounted for within other comprehensive income. The interest differential to be paid or received is accrued and recognized as an adjustment to interest expense.
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the rates and amounts associated with the Company’s interest rate swaps (in thousands):
|
Effective Date
|
Expiration
Date
|
Debt Instrument
|
Counterparty Interest Rate Terms
|
|
Fixed Rate
|
|
|
Fixed
Amount at
June 30, 2011
|
|
| |
|
|
|
|
|
|
|
|
|
|
4/23/2008
|
6/30/2013
|
Junior subordinated debentures
|
Three-month LIBOR, plus 4.05%
|
|
|
8.020 |
% |
|
$ |
10,000 |
|
|
4/29/2008
|
4/29/2013
|
Senior debentures
|
Three-month LIBOR, plus 4.00%
|
|
|
7.940 |
% |
|
|
13,000 |
|
|
7/31/2008
|
7/31/2013
|
Term loan (1)
|
Three-month LIBOR
|
|
|
3.950 |
% |
|
|
31,250 |
|
|
8/15/2008
|
8/15/2013
|
Junior subordinated debentures (2)
|
Three-month LIBOR
|
|
|
3.780 |
% |
|
|
10,000 |
|
|
9/4/2008
|
9/4/2013
|
Junior subordinated debentures (2)
|
Three-month LIBOR
|
|
|
3.790 |
% |
|
|
15,000 |
|
|
9/8/2010
|
5/24/2016
|
Senior debentures
|
Three-month LIBOR, plus 4.20%
|
|
|
6.248 |
% |
|
|
5,000 |
|
|
9/16/2010
|
9/15/2015
|
Junior subordinated debentures
|
Three-month LIBOR, plus 3.58%
|
|
|
6.160 |
% |
|
|
10,000 |
|
|
9/16/2010
|
9/15/2015
|
Junior subordinated debentures
|
Three-month LIBOR, plus 3.58%
|
|
|
6.190 |
% |
|
|
10,000 |
|
|
5/24/2011
|
5/24/2016
|
Senior debentures
|
Three-month LIBOR, plus 4.20%
|
|
|
6.472 |
% |
|
|
7,000 |
|
(1) The Company is required to make fixed rate interest payments on the current balance of the term loan, amortizing in accordance with the term loan amortization schedule. The Company fixed only the variable interest portion of the loan. The actual interest payments associated with the term loan also include an additional rate of 1.75% in accordance with the credit agreement.
(2) The Company fixed only the variable interest portion of the debt. The actual interest payments associated with the debentures also include an additional rate of 4.10% and 4.00% on the $10.0 million and $15.0 million debentures, respectively.
In relation to the above interest rate swaps, the net interest expense incurred for the three months ended June 30, 2011 and 2010, was approximately $0.9 million and $1.2 million, respectively. The net interest expense incurred for the six months ended June 30, 2011 and 2010, was approximately $1.9 million and $2.3 million, respectively.
As of June 30, 2011 and December 31, 2010, the total fair value of the interest rate swaps was approximately ($5.5 million) and ($5.9 million), respectively. Accumulated other comprehensive income at June 30, 2011 and December 31, 2010, included accumulated loss on the cash flow hedge, net of taxes, of approximately $3.6 million and $3.9 million, respectively.
In May 2010, the Company amended its existing $6.0 million convertible note receivable with an unaffiliated insurance agency. The effective interest rate of the convertible note is equal to the three-month LIBOR, plus 5.2% and is due June 30, 2014. The insurance agency has been a producer for the Company for several years. As security for the loan, the borrower granted the Company a security interest in its accounts, cash, general intangibles, and other intangible property. Also, pledged as collateral are 100% of the common shares of the holding company and its subsidiary insurance agencies, the common shares owned by the shareholder in another agency, and the shareholder also executed a personal
guaranty. This note is convertible at the option of the Company based upon a pre-determined formula.
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – Restricted and Non-Restricted Stock Awards
On February 23, 2011 and 2010, the Company issued 28,500 and 202,500 restricted stock awards, respectively, to executives of the Company, out of its 2002 Amended and Restated Stock Option Plan (the “Plan”). The restricted stock awards vest over a four year period, with the first twenty percent vesting immediately on the date issued (i.e., February 23) and the remaining eighty percent vesting annually on a straight line basis over the requisite four year service period. The unvested restricted stock awards are subject to forfeiture in the event the employee is terminated for “Good Cause” or voluntarily resigns their employment without “Good Reason” as provided for in the
employee’s respective employment agreements. The Company recorded approximately $86,000 and $71,000 of restricted stock awards compensation expense for the three months ended June 30, 2011 and 2010, respectively. The Company recorded approximately $218,000 and $381,000 of restricted stock awards compensation expense for the six months ended June 30, 2011 and 2010, respectively.
On February 23, 2011, the Company issued 1,500 non-restricted stock awards to each outside member of the Board of Directors, which vested immediately. The Company recorded zero and $150,000 of non-restricted stock awards compensation expense for the three months and six months ended June 30, 2011, respectively. No non-restricted stock awards were issued to the directors in 2010.
NOTE 7 – Shareholders’ Equity
At June 30, 2011, shareholders’ equity was $573.0 million, or a book value of $10.84 per common share, compared to $547.1 million, or a book value of $10.28 per common share, at December 31, 2010.
On February 12, 2010, the Company’s Board of Directors approved a Share Repurchase Plan authorizing management to purchase up to 5.0 million shares of the Company’s common stock in market transactions for a period not to exceed twenty-four months. For the three months and six months ended June 30, 2011, the Company purchased and retired 0.4 million shares of common stock for a total cost of approximately $3.9 million. For the year ended December 31, 2010, the Company purchased and retired approximately 2.5 million shares of common stock for a total cost of approximately $19.6 million. As of June 30, 2011, the Company has available approximately 2.1 million shares remaining to be
purchased.
For the period ended June 30, 2011, the Company paid dividends to its common shareholders of $4.3 million. For the year ended December 31, 2010, the Company paid dividends to its common shareholders of $7.0 million. On July 28, 2011, the Company’s Board of Directors declared a quarterly dividend of $0.04 per common share. The dividend is payable on August 29, 2011, to shareholders of record as of August 12, 2011.
MEADOWBROOK INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
When evaluating the declaration of a dividend, the Company’s Board of Directors considers a variety of factors, including but not limited to, cash flow, liquidity needs, results of operations, industry conditions, and our overall financial condition. As a holding company, the ability to pay cash dividends is partially dependent on dividends and other permitted payments from its Insurance Company Subsidiaries.
NOTE 8– Earnings Per Share
Basic earnings per share are based on the weighted average number of common shares outstanding during the year, while diluted earnings per share includes the weighted average number of common shares and potential dilution from shares issuable pursuant to stock awards using the treasury stock method.
The following table is a reconciliation of the income and share data used in the basic and diluted earnings per share computations for the three months and six months ended June 30 (in thousands, except per share amounts):
| |
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
| |
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Net income, as reported
|
|
$ |
9,939 |
|
|
$ |
12,861 |
|
|
$ |
25,055 |
|
|
$ |
29,295 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
53,100,479 |
|
|
|
54,018,868 |
|
|
|
53,175,824 |
|
|
|
54,642,127 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
53,100,479 |
|
|
|
54,018,868 |
|
|
|
53,175,824 |
|
|
|
54,642,127 |
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share awards under long term incentive plan
|
|
|
148,094 |
|
|
|
249,800 |
|
|
|
147,978 |
|
|
|
245,434 |
|
|
Total
|
|
|
53,248,573 |
|
|
|
54,268,668 |
|
|
|
53,323,802 |
|
|
|
54,887,561 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.19 |
|
|
$ |
0.24 |
|
|
$ |
0.47 |
|
|
$ |
0.54 |
|
|
Diluted
|
|
$ |
0.19 |
|
|
$ |
0.24 |
|
|
$ |
0.47 |
|
|
$ |
0.53 |
|
| |
|
|
|
|
|
|
|
|
|
|