UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
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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 | |
| For the Quarter Ended September 30, 2004 | ||
| 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 | |
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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
The aggregate number of shares of the Registrant’s Common Stock, $.01 par value, outstanding on November 5, 2004 was 29,067,883.
TABLE OF CONTENTS
1
PART 1 — FINANCIAL INFORMATION
ITEM 1. Financial Statements
MEADOWBROOK INSURANCE GROUP, INC.
| For the Nine Months Ended | ||||||||||
| September 30, | ||||||||||
| 2004 | 2003 | |||||||||
| (Unaudited) | ||||||||||
| (In thousands, | ||||||||||
| except share data) | ||||||||||
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Revenues
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||||||||||
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Premiums earned
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||||||||||
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Gross
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$ | 211,125 | $ | 147,895 | ||||||
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Ceded
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(55,366 | ) | (44,094 | ) | ||||||
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Net earned premiums
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155,759 | 103,801 | ||||||||
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Net commissions and fees
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32,794 | 35,430 | ||||||||
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Net investment income
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10,901 | 10,127 | ||||||||
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Net realized (losses) gains on disposition of
investments
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(73 | ) | 878 | |||||||
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Total revenues
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199,381 | 150,236 | ||||||||
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Expenses
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||||||||||
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Losses and loss adjustment expenses
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158,467 | 117,705 | ||||||||
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Reinsurance recoveries
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(61,303 | ) | (50,053 | ) | ||||||
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Net losses and loss adjustment expenses
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97,164 | 67,652 | ||||||||
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Salaries and employee benefits
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39,417 | 36,172 | ||||||||
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Policy acquisition and other underwriting expenses
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24,633 | 15,745 | ||||||||
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Other administrative expenses
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20,202 | 18,206 | ||||||||
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Interest expense
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1,529 | 656 | ||||||||
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Total expenses
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182,945 | 138,431 | ||||||||
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Income before taxes and equity earnings
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16,436 | 11,805 | ||||||||
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Federal income tax expense
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5,160 | 3,870 | ||||||||
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Equity earnings of affiliates
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28 | — | ||||||||
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Net income
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$ | 11,304 | $ | 7,935 | ||||||
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Earnings Per Share
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||||||||||
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Basic
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$ | 0.39 | $ | 0.27 | ||||||
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Diluted
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$ | 0.38 | $ | 0.27 | ||||||
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Weighted average number of common shares
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||||||||||
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Basic
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29,040,503 | 29,245,087 | ||||||||
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Diluted
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29,420,049 | 29,287,573 | ||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
2
MEADOWBROOK INSURANCE GROUP, INC.
| For the Three Months Ended | ||||||||||
| September 30, | ||||||||||
| 2004 | 2003 | |||||||||
| (Unaudited) | ||||||||||
| (In thousands, | ||||||||||
| except share data) | ||||||||||
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Revenues
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||||||||||
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Premiums earned
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||||||||||
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Gross
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$ | 75,025 | $ | 54,305 | ||||||
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Ceded
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(22,062 | ) | (14,118 | ) | ||||||
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Net earned premiums
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52,963 | 40,187 | ||||||||
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Net commissions and fees
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12,669 | 10,803 | ||||||||
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Net investment income
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3,757 | 3,197 | ||||||||
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Net realized gains on disposition of investments
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79 | 299 | ||||||||
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Total revenues
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69,468 | 54,486 | ||||||||
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Expenses
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||||||||||
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Losses and loss adjustment expenses
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57,056 | 41,465 | ||||||||
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Reinsurance recoveries
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(25,227 | ) | (15,108 | ) | ||||||
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Net losses and loss adjustment expenses
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31,829 | 26,357 | ||||||||
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Salaries and employee benefits
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14,284 | 12,372 | ||||||||
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Policy acquisition and other underwriting expenses
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8,175 | 5,996 | ||||||||
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Other administrative expenses
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6,869 | 5,816 | ||||||||
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Interest expense
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686 | 207 | ||||||||
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Total expenses
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61,843 | 50,748 | ||||||||
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Income before taxes and equity earnings
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7,625 | 3,738 | ||||||||
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Federal income tax expense
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2,436 | 1,238 | ||||||||
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Equity earnings of affiliates
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63 | — | ||||||||
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Net income
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$ | 5,252 | $ | 2,500 | ||||||
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Earnings Per Share
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||||||||||
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Basic
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$ | 0.18 | $ | 0.09 | ||||||
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Diluted
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$ | 0.18 | $ | 0.09 | ||||||
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Weighted average number of common shares
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||||||||||
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Basic
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29,059,626 | 29,022,419 | ||||||||
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Diluted
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29,425,674 | 29,169,826 | ||||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
3
MEADOWBROOK INSURANCE GROUP, INC.
| For the Nine | |||||||||||
| Months Ended | |||||||||||
| September 30, | |||||||||||
| 2004 | 2003 | ||||||||||
| (Unaudited) | |||||||||||
| (In thousands) | |||||||||||
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Net income
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$ | 11,304 | $ | 7,935 | |||||||
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Other comprehensive income, net of tax:
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|||||||||||
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Unrealized (losses) gains on securities
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(1,386 | ) | 297 | ||||||||
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Less: reclassification adjustment for losses
(gains) included in net income
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41 | (236 | ) | ||||||||
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Other comprehensive (loss) income, net of tax
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(1,345 | ) | 61 | ||||||||
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Comprehensive income
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$ | 9,959 | $ | 7,996 | |||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
4
MEADOWBROOK INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| For the Three | |||||||||||
| Months Ended | |||||||||||
| September 30, | |||||||||||
| 2004 | 2003 | ||||||||||
| (Unaudited) | |||||||||||
| (In thousands) | |||||||||||
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Net income
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$ | 5,252 | $ | 2,500 | |||||||
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Other comprehensive income, net of tax:
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|||||||||||
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Unrealized gains (losses) on securities
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3,285 | (2,006 | ) | ||||||||
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Less: reclassification adjustment for
(gains) included in net income
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(19 | ) | (7 | ) | |||||||
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Other comprehensive income (loss), net of tax
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3,266 | (2,013 | ) | ||||||||
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Comprehensive income
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$ | 8,518 | $ | 487 | |||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
5
MEADOWBROOK INSURANCE GROUP, INC.
| September 30, | December 31, | |||||||||
| 2004 | 2003 | |||||||||
| (Unaudited) | ||||||||||
| (In thousands, except share | ||||||||||
| data) | ||||||||||
| ASSETS | ||||||||||
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Investments
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||||||||||
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Debt securities available for sale, at fair value
(amortized cost of $305,670 and $260,330)
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$ | 314,564 | $ | 271,217 | ||||||
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Equity securities available for sale, at fair
value (cost of $1,980 and $1,980)
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2,349 | 2,371 | ||||||||
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Total investments
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316,913 | 273,588 | ||||||||
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Cash and cash equivalents
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62,736 | 50,647 | ||||||||
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Accrued investment income
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3,774 | 3,441 | ||||||||
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Premiums and agent balances receivable, net
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100,389 | 77,554 | ||||||||
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Reinsurance recoverable on:
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||||||||||
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Paid losses
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18,744 | 17,566 | ||||||||
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Unpaid losses
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158,983 | 147,446 | ||||||||
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Prepaid reinsurance premiums
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24,433 | 20,492 | ||||||||
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Deferred policy acquisition costs
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23,312 | 19,564 | ||||||||
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Deferred federal income taxes
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13,677 | 15,201 | ||||||||
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Goodwill
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28,997 | 28,997 | ||||||||
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Other assets
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33,104 | 37,770 | ||||||||
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Total assets
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$ | 785,062 | $ | 692,266 | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||
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Liabilities
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||||||||||
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Losses and loss adjustment expenses
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$ | 372,142 | $ | 339,465 | ||||||
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Unearned premiums
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129,712 | 109,677 | ||||||||
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Debt
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13,750 | 17,506 | ||||||||
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Debentures
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35,310 | 10,310 | ||||||||
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Accounts payable and accrued expenses
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31,994 | 26,283 | ||||||||
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Reinsurance funds held and balances payable
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20,118 | 13,961 | ||||||||
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Payable to insurance companies
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7,747 | 7,853 | ||||||||
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Other liabilities
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8,457 | 12,098 | ||||||||
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Total liabilities
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619,230 | 537,153 | ||||||||
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Commitments and contingencies
(Note 6)
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||||||||||
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Shareholders’ Equity
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||||||||||
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Common stock, $0.01 stated value; authorized
50,000,000 shares; 29,067,883 and 29,022,435 shares
issued and outstanding
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290 | 290 | ||||||||
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Additional paid-in capital
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125,880 | 125,181 | ||||||||
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Retained earnings
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34,420 | 23,069 | ||||||||
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Note receivable from officer
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(872 | ) | (886 | ) | ||||||
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Accumulated other comprehensive income
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6,114 | 7,459 | ||||||||
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Total shareholders’ equity
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165,832 | 155,113 | ||||||||
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Total liabilities and shareholders’ equity
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$ | 785,062 | $ | 692,266 | ||||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
6
MEADOWBROOK INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Nine Months | |||||||||||
| Ended September 30, | |||||||||||
| 2004 | 2003 | ||||||||||
| (Unaudited) | |||||||||||
| (In thousands) | |||||||||||
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Cash Flows From Operating Activities
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|||||||||||
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Net income
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$ | 11,304 | $ | 7,935 | |||||||
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Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
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|||||||||||
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Amortization of goodwill and other intangible
assets
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284 | 256 | |||||||||
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Amortization of deferred debenture issuance costs
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73 | — | |||||||||
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Depreciation of furniture and equipment
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1,087 | 1,096 | |||||||||
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Net accretion of discount and premiums on bonds
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1,318 | 1,394 | |||||||||
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(Gain) loss on sale of investments
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63 | (358 | ) | ||||||||
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Gain on sale of assets
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(22 | ) | — | ||||||||
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Stock-based employee compensation
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61 | 155 | |||||||||
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Long-term incentive plan expense
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488 | — | |||||||||
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Deferred income tax expense
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2,193 | 3,558 | |||||||||
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Changes in operating assets and liabilities:
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|||||||||||
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Decrease (increase) in:
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|||||||||||
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Premiums and agent balances receivable
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(22,572 | ) | (17,191 | ) | |||||||
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Reinsurance recoverable on paid and unpaid losses
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(11,104 | ) | 4,825 | ||||||||
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Prepaid reinsurance premiums
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(3,514 | ) | (4,207 | ) | |||||||
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Deferred policy acquisition costs
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(3,918 | ) | (6,833 | ) | |||||||
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Other assets
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4,244 | (1,635 | ) | ||||||||
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Increase (decrease) in:
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|||||||||||
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Losses and loss adjustment expenses
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|||||||||||