UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarter ended June 30, 2002 | ||
| or | ||
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Commission File Number 1-14094
Meadowbrook Insurance Group, Inc.
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Michigan
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38-2626206 | |
| (State of Incorporation) | (IRS Employer Identification No.) |
26600 Telegraph Road, Southfield, Michigan 48034
(248) 358-1100
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 þ No o
The aggregate number of shares of the Registrant’s Common Stock, $.01 par value, outstanding on August 13, 2002 was 29,787,194.
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| PART I — FINANCIAL INFORMATION | ||||||
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Item 1 —
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FINANCIAL STATEMENTS | |||||
| Condensed Consolidated Statements of Income (unaudited) | 2-3 | |||||
| Consolidated Statements of Comprehensive Income (unaudited) | 4 | |||||
| Condensed Consolidated Balance Sheets (unaudited) | 5 | |||||
| Condensed Consolidated Statements of Cash Flows (unaudited) | 6 | |||||
| Notes to Consolidated Financial Statements (unaudited) and Management Representation | 7-14 | |||||
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Item 2 —
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 15-22 | ||||
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Item 3 —
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 22 | ||||
| PART II — OTHER INFORMATION | ||||||
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Item 1 —
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LEGAL PROCEEDINGS | 24 | ||||
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Item 2 —
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CHANGES IN SECURITIES AND USE OF PROCEEDS | 24 | ||||
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Item 4 —
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 24 | ||||
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Item 6 —
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EXHIBITS AND REPORTS ON FORM 8-K | 25 | ||||
| SIGNATURES | 26 | |||||
1
MEADOWBROOK INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
| For the Six Months | ||||||||||
| Ended June 30, | ||||||||||
| 2002 | 2001 | |||||||||
| (Unaudited) | ||||||||||
| (in thousands) | ||||||||||
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Revenues:
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Net premium earned
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$ | 82,970 | $ | 80,817 | ||||||
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Net commissions and fees
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18,932 | 22,745 | ||||||||
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Net investment income
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6,629 | 6,980 | ||||||||
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Net realized losses on investments
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(301 | ) | (1,321 | ) | ||||||
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Gain (loss) on sale of subsidiary
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199 | (850 | ) | |||||||
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Total revenues
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108,429 | 108,371 | ||||||||
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Expenses:
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Net loss and loss adjustment expenses
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55,096 | 64,613 | ||||||||
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Salaries and employee benefits
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18,848 | 23,286 | ||||||||
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Other operating expenses
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31,425 | 29,184 | ||||||||
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Interest on notes payable
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2,124 | 2,482 | ||||||||
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Gain on debt reduction
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(359 | ) | — | |||||||
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Total expenses
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107,134 | 119,565 | ||||||||
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Income (loss) before income taxes
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1,295 | (11,194 | ) | |||||||
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Federal income tax expense (benefit)
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263 | (3,865 | ) | |||||||
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Net income (loss)
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$ | 1,032 | $ | (7,329 | ) | |||||
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Earnings per share:
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Basic
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$ | 0.09 | $ | (0.86 | ) | |||||
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Diluted
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$ | 0.09 | $ | (0.86 | ) | |||||
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Weighted average number of common shares
outstanding:
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Basic
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11,220,758 | 8,512,178 | ||||||||
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Diluted
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11,220,758 | 8,512,838 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
2
MEADOWBROOK INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
| For the Quarter | ||||||||||
| Ended June 30, | ||||||||||
| 2002 | 2001 | |||||||||
| (Unaudited) | ||||||||||
| (in thousands) | ||||||||||
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Revenues:
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Net premium earned
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$ | 44,313 | $ | 39,644 | ||||||
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Net commissions and fees
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9,968 | 10,336 | ||||||||
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Net investment income
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3,505 | 3,472 | ||||||||
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Net realized losses on investments
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(310 | ) | (1,467 | ) | ||||||
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Loss on sale of subsidiary
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— | (850 | ) | |||||||
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Total revenues
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57,476 | 51,135 | ||||||||
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Expenses:
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Net loss and loss adjustment expenses
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30,638 | 34,577 | ||||||||
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Salaries and employee benefits
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9,235 | 11,910 | ||||||||
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Other operating expenses
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17,021 | 14,860 | ||||||||
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Interest on notes payable
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874 | 1,163 | ||||||||
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Gain on debt reduction
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(359 | ) | — | |||||||
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Total expenses
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57,409 | 62,510 | ||||||||
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Income (loss) before income taxes
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67 | (11,375 | ) | |||||||
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Federal income tax benefit
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(55 | ) | (3,893 | ) | ||||||
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Net income (loss)
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$ | 122 | $ | (7,482 | ) | |||||
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Earnings per share:
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Basic
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$ | 0.01 | $ | (0.88 | ) | |||||
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Diluted
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$ | 0.01 | $ | (0.88 | ) | |||||
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Weighted average number of common shares
outstanding:
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Basic
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13,899,557 | 8,512,194 | ||||||||
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Diluted
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13,902,073 | 8,512,194 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
3
MEADOWBROOK INSURANCE GROUP, INC.
| For the Six Months | |||||||||||
| Ended June 30, | |||||||||||
| 2002 | 2001 | ||||||||||
| (Unaudited) | |||||||||||
| (in thousands) | |||||||||||
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Net income (loss)
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$ | 1,032 | $ | (7,329 | ) | ||||||
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Other comprehensive income, net of tax:
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Unrealized gains on securities
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373 | 633 | |||||||||
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Less: reclassification adjustment for losses
included in net income
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199 | 27 | |||||||||
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Other comprehensive income, net of tax
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572 | 660 | |||||||||
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Comprehensive income (loss)
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$ | 1,604 | $ | (6,669 | ) | ||||||
MEADOWBROOK INSURANCE GROUP, INC.
| For the Quarter | |||||||||||
| Ended June 30, | |||||||||||
| 2002 | 2001 | ||||||||||
| (Unaudited) | |||||||||||
| (in thousands) | |||||||||||
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Net income (loss)
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$ | 122 | $ | (7,482 | ) | ||||||
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Other comprehensive income (loss), net of tax:
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Unrealized gains (losses) on securities
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1,976 | (913 | ) | ||||||||
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Less: reclassification adjustment for losses
included in net income
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205 | 123 | |||||||||
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Other comprehensive income (loss), net of tax
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2,181 | (790 | ) | ||||||||
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Comprehensive income (loss)
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$ | 2,303 | $ | (8,272 | ) | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
4
MEADOWBROOK INSURANCE GROUP, INC.
| June 30, | December 31, | |||||||||
| 2002 | 2001 | |||||||||
| (Unaudited) | ||||||||||
| (in thousands, | ||||||||||
| except share data) | ||||||||||
| ASSETS | ||||||||||
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Invested assets:
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Debt securities available for sale, at fair value
(cost of $206,987 and $193,020)
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$ | 212,559 | $ | 197,634 | ||||||
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Equity securities available for sale, at fair
value (cost of $1,980 and $2,757)
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1,914 | 2,787 | ||||||||
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Total invested assets
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214,473 | 200,421 | ||||||||
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Cash and cash equivalents
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58,439 | 33,302 | ||||||||
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Premiums and agent balances receivable
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77,617 | 78,171 | ||||||||
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Reinsurance recoverable on paid and unpaid losses
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219,156 | 222,458 | ||||||||
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Prepaid reinsurance premiums
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23,120 | 37,852 | ||||||||
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Deferred policy acquisition costs
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13,308 | 13,953 | ||||||||
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Intangible assets
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28,997 | 28,997 | ||||||||
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Other assets
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62,455 | 72,734 | ||||||||
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Total assets
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$ | 697,565 | $ | 687,888 | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||
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Liabilities:
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Reserve for losses and loss adjustment expenses
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$ | 385,914 | $ | 394,596 | ||||||
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Unearned premiums
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74,926 | 94,002 | ||||||||
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Debt
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43,723 | 54,741 | ||||||||
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Reinsurance funds held and balances payable
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15,000 | 26,887 | ||||||||
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Other liabilities
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35,571 | 37,346 | ||||||||
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Total liabilities
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555,134 | 607,572 | ||||||||
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Commitments and contingencies (Note 6)
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Shareholders’ Equity:
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Common stock, $.01 par value; authorized
50,000,000 shares: 29,787,194 and 8,512,194 shares
issued and outstanding
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298 | 85 | ||||||||
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Additional paid-in capital
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128,271 | 67,948 | ||||||||
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Retained earnings
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11,067 | 10,034 | ||||||||
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Note receivable from officer
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(850 | ) | (824 | ) | ||||||
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Accumulated other comprehensive income
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3,645 | 3,073 | ||||||||
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Total shareholders’ equity
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142,431 | 80,316 | ||||||||
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Total liabilities and shareholders’ equity
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$ | 697,565 | $ | 687,888 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
5
MEADOWBROOK INSURANCE GROUP, INC.
| For the Six Months | ||||||||||
| Ended June 30, | ||||||||||
| 2002 | 2001 | |||||||||
| (Unaudited) | ||||||||||
| (in thousands) | ||||||||||
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Net cash (used in) provided by operating
activities
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$ | (14,016 | ) | $ | 6,484 | |||||
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Cash flows (used in) provided by investing
activities:
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Purchase of debt securities available for sale
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(85,318 | ) | (76,312 | ) | ||||||
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Purchase of equity securities available for sale
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— | (453 | ) | |||||||
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Proceeds from sale of debt securities available
for sale
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70,751 | 44,016 | ||||||||
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Proceeds from sale of equity securities available
for sale
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900 | 13,718 | ||||||||
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Other investing activities
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2,880 | (7,920 | ) | |||||||
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Net cash used in investing activities
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(10,787 | ) | (26,951 | ) | ||||||
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Cash flows (used in) provided by financing
activities:
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Net (payments of) proceeds from bank loan
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(10,659 | ) | 450 | |||||||
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Net proceeds from public offering
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60,526 | — | ||||||||
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Dividends paid on common stock
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— | (511 | ) | |||||||
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Other financing activities
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73 | 2,311 | ||||||||
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Net cash provided by financing activities
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49,940 | 2,250 | ||||||||
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Increase (decrease) in cash and cash equivalents
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25,137 | (18,217 | ) | |||||||
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Cash and cash equivalents, beginning of period
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33,302 | 56,838 | ||||||||
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Cash and cash equivalents, end of period
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$ | 58,439 | $ | 38,621 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
6
NOTE 1 — Basis of Presentation
These financial statements and the notes thereto should be read in conjunction with Meadowbrook Insurance Group, Inc.’s (the “Company”) audited financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2001.
The consolidated financial statements reflect all normal recurring adjustments, which were, in the opinion of management, necessary to present a fair statement of the results for the interim quarters. The results of operations for the six months ended June 30, 2002, are not necessarily indicative of the results expected for the full year.
NOTE 2 — New Accounting Pronouncements
FASB has issued SFAS No. 142 “Goodwill and Other Intangible Assets”. SFAS No. 142, for periods starting December 15, 2001 or thereafter, eliminates the amortization of goodwill. In addition, the Company is required to test, at least annually, all existing goodwill for impairment using a fair value approach, on a reporting unit basis.
Upon implementation in 2002, the Company is no longer amortizing goodwill. Goodwill amortization for the six months and quarter ended June 30, 2001, was approximately $1.4 million and $896,000, respectively. In accordance with the transition provisions, the Company completed the first step of the transitional goodwill impairment test. The Company evaluated goodwill for impairment during the second quarter of 2002. This evaluation involved the use of a fair value approach to each reporting unit. Based on this evaluation, management determined there is no impairment to goodwill.
The following table provides income before the cumulative effect of a change in accounting principle, net income, and related per share amounts as of June 30, 2002 and 2001, as reported and adjusted as if the Company had eliminated the amortization of goodwill effective January 1, 2001 (in thousands):
| For the Six Months | |||||||||
| Ended June 30, | |||||||||
| 2002 | 2001 | ||||||||
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Net income (loss), as reported
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$ | 1,032 | $ | (7,329 | ) | ||||
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Amortization expense
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— | 1,445 | |||||||
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Tax effect of amortization expense
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— | (607 | ) | ||||||
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Net income (loss), as adjusted
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$ | 1,032 | $ | (6,491 | ) | ||||
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Earnings per share, as adjusted
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Basic
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$ | 0.09 | $ | (0.76 | ) | ||||
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Diluted
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$ | 0.09 | $ | (0.76 | ) | ||||
| For the Quarter | |||||||||
| Ended June 30, | |||||||||
| 2002 | 2001 | ||||||||
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Net income (loss), as reported
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$ | 122 | $ | (7,482 | ) | ||||
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Amortization expense
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— | 896 | |||||||
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Tax effect of amortization expense
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— | (511 | ) | ||||||
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Net income (loss), as adjusted
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$ | 122 | $ | (7,097 | ) | ||||
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Earnings per share, as adjusted
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