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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14094
MEADOWBROOK INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2626206
(State of Incorporation) (IRS Employer Identification No.)
26600 TELEGRAPH ROAD, SOUTHFIELD, MICHIGAN 48034
(810) 358-1100
(Address, zip code and telephone of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 per share New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to
this form 10-K. / /
The aggregate market value of the voting stock (common stock, $.01 par value)
held by non-affiliates of the registrant was $112,147,405 on March 21,1997,
based on the closing sales price of the Common Stock on such date.
The aggregate number of shares of the Registrant's Common Stock, $.01 par
value, outstanding on March 21,1997 was 8,658,831.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's proxy statement for the annual meeting
scheduled for May 19, 1997 are incorporated by reference into Part III of this
report and certain portions of the 1996 Annual Report to Shareholders are
incorporated herein by reference into Part II of this report.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Meadowbrook Insurance Group, Inc. (the "Company") is a Michigan
corporation which was originally incorporated in 1985 under the name Star
Holding Company. In November 1995, the Company changed its name and acquired
Meadowbrook, Inc. ("Meadowbrook"). Meadowbrook was founded in 1955 as the
Meadowbrook Insurance Agency and was subsequently incorporated in 1965.
The Company serves as a holding company for not only Meadowbrook but
also for Star Insurance Company ("Star"), Savers Property and Casualty
Insurance Company ("Savers") and American Indemnity Insurance Company LTD
("American Indemnity"). Star was formed in 1985 as a subsidiary of Star
Holding Company. Star then acquired Savers in 1990, and the Company acquired
American Indemnity in 1994.
OVERVIEW
Since 1976, the Company has been developing and managing alternative
market risk management programs for defined client groups and their members.
The alternative market, which developed as a result of historical volatility in
the cost and availability of traditional commercial insurance coverages,
includes a wide range of approaches to financing and managing risk exposures,
such as captives and rent-a-captives, risk retention and risk purchasing
groups, governmental pools and trusts and self-insurance plans. According to
the last industry report made in 1994, the alternative market accounts for an
estimated $61 billion, or 33%, of the estimated $186 billion of United States
property and casualty premium written; and according to industry sources is
expected to reach an estimated $85 billion, or 38%, of the estimated $225
billion of United States property and casualty premium written in the year
2000. The Company believes that the alternative market has continued to expand
even during the current soft market as a result of the desire of many insureds
to exercise greater control over the risk management process and to obtain
customized risk management services.
The Company targets selected industry, trade and professional
associations, affinity groups and governmental entities, whose specialized risk
management goals and objectives are not met by the traditional commercial
insurance market. In cooperation with a client group, the Company designs
customized packages of services and coverages, or programs, which are then
marketed to the group's members. The Company seeks to form long-term risk
management "partnerships" with its clients, which the Company believes enable
it to achieve cost efficiencies and relatively stable and predictable revenue
and to provide clients with enhanced levels of service, cost stability,
insurance capacity and coverage availability. Because clients often share in
the operating results of the program, they are motivated to prevent and control
losses and to participate actively in the overall management of the program.
Historically, the Company has maintained a high client retention rate, which
has permitted the Company to concentrate on increased market penetration.
Based upon the particular risk management goals of its clients and the
Company's assessment of the opportunity for operating profit, the Company
offers its programs on a managed basis, a risk-sharing basis or, in certain
circumstances in response to a specific market opportunity, a fully-insured
basis. In a "managed program," the Company provides program management services
for a fee but usually assumes no insurance risk and does not participate
directly in the operating results of the program. In a "risk-sharing program,"
the Company receives management fees and commissions and participates with its
clients or agents in the operating results of the program through a captive,
retrospectively-rated program, or a contingent commission. In a "fully-insured
program," the Company provides traditional insurance coverage
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without a risk-sharing mechanism and derives revenue exclusively from earned
premiums and investment income. The Company writes programs on a fully-insured
basis generally when the Company believes there is potential to develop a
long-term risk-sharing relationship.
The Company's principal sources of income result from fees and
commissions earned on risk management programs managed by Meadowbrook, and from
the Company's participation in the operating results of many of the programs it
manages through its insurance subsidiaries, Star and Savers. In addition to
its alternative risk management business, the Company also issues surety bonds
and operates a retail insurance agency.
Many of the Company's programs involve the participation of a
risk-bearing entity owned by all or some of the insureds, which serves as a
vehicle for the retention and pooling of risks by the insureds. Through the
client's risk-bearing entity, the insured participates in the program's
underwriting results on the retained risk exposures, earns investment income
and often reduces the costs of risk management. The objective of the client's
risk-bearing entity is generally to retain risks related to loss events that
occur frequently, are low in severity and are relatively predictable, and to
cede excess risk to reinsurers. Consistent with the needs of its clients and
its assessment of the relative opportunities presented by the program, the
Company often chooses to share in the underwriting results related to risk
exposures retained by the client's risk-bearing entity.
The Company's capabilities in the provision of both services and
insurance coverages provide flexibility for the consideration and
implementation of a variety of alternative market solutions. Services provided
and insurance lines of business include:
SERVICES LINES OF BUSINESS
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- Risk Analysis and Identification - Workers' Compensation
- Feasibility Studies - Commercial Multi-Peril
- Program and Product Design - General Liability
- Sales, Marketing and Public Relations -- Errors and Omissions
- Consultation, Education and Training -- Automobile
- Captive Formation -- Owners, Landlord and Tenant
- Captive Management (Onshore and Offshore) - Professional Liability
- Rent-a-Captive -- Legal
- Underwriting/Risk Selection -- Medical Malpractice
- Policy Issuance -- Real Estate Appraisers
- Reinsurance Brokerage -- Accountants
- Claims Handling and Administration -- Pharmacists
- Litigation Management - Inland Marine
- Accounting and Financial Statement Preparation -- Cargo
- Regulatory Compliance -- Watercraft
- Actuarial and Loss Reserve Analysis - Product Liability
- Loss Prevention and Control - Excess Reinsurance
- Legal and Audit Support - Commercial Property
- Information Technology and Processing
DESCRIPTION OF SERVICES AND CAPABILITIES
Program Design. Prior to implementing a new program, the Company
reviews a significant amount of data, including: financial projections for the
contemplated program; historical loss experience; actuarial studies of the
underlying risks; the creditworthiness of the potential client; and the
availability of reinsurance. A senior management team and employees
representing each of the risk-management disciplines within the Company work
together to design, market and implement new programs. While the Company does
not generate substantial fees for
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program design services, these services are an integral part of the Company's
program management services.
Formation and Management of Risk-Bearing Entities. The Company
generates fees by forming and managing risk-bearing entities for clients and
agents. The Company currently manages over thirty captives and holds a minority
interest in eight of these captives. The offshore captives are managed by the
Company's subsidiaries in Bermuda and Barbados.
Risk Selection. The Company performs underwriting services for its
clients, its clients' captives and certain individual accounts. Compensation
for underwriting services generally is included in the Company's management
fees. The Company's underwriting personnel help develop the proper criteria for
selecting risks, while actuarial and reinsurance personnel evaluate and
recommend the appropriate levels of risk retention. The program is then
tailored according to the requirements of each client.
Reinsurance Brokerage. The Company earns fees by placing excess
reinsurance for its programs. The Company's two reinsurance brokerage
subsidiaries, Meadowbrook Intermediaries, Inc. and Meadowbrook International,
Ltd., place reinsurance (as well as insurance coverage with high deductibles)
for insurance companies, captives and self-insured programs managed by the
Company. Reinsurance is also placed for clients that do not have other business
relationships with the Company.
Loss Control and Prevention. The Company earns fees for loss control
services which are designed to help clients prevent or limit certain loss
events. Through an evaluation of the client's workplace environment, the
Company's loss control specialists assist the client in planning and
implementing a loss prevention program and, in certain cases, provide
educational and training programs for the client.
Claims Handling and Administration. The Company is experienced in
handling and managing claims for workers' compensation and most other casualty
lines, property and surety bonds. It handles all claims functions for most of
the programs managed by the Company. The Company's involvement in claims
handling and administration provides feedback to program managers in assessing
the client's risk environment and the overall structure of the program.
Sales and Marketing. The Company markets its programs and services to
associations, groups, local, regional and national insurance agents and
insurance consultants. Once a program has been developed for a particular
association or group, the Company generally then markets the program to members
of the association or group. Sales and marketing efforts include personal
contact, direct mail, telemarketing, advertising, and attendance at seminars
and trade and industry conventions.
MANAGED PROGRAMS
In a managed program, the Company, through Meadowbrook, earns
commission and fee revenue by providing management and other services to a
client's risk-bearing entity, but generally does not share in the operating
results of such programs. The Company believes that its managed programs
provide a stable source of revenue as well as opportunities for revenue growth
without a proportionate increase in expenses. Revenue growth may occur through
the sale of an existing managed program to additional members of the sponsoring
client group, the expansion of coverages and services provided to existing
programs and the creation of programs for new client groups (such as additional
municipal associations) with needs that are similar to existing client groups.
Meadowbrook specializes in providing managed programs to public entity
associations, and currently manages public entity pools and other captive
insurance entities, which provide insurance coverage for over 2500
participants, including city, county, township and village
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governments in five states. Over the years, Meadowbrook has been able to expand
the services offered under existing programs as well as to increase the number
of participants in these managed programs.
Managed program services for which Meadowbrook receives commissions
and fees include: program design and development; underwriting; reinsurance
brokerage; policy administration; loss prevention and control services
(including the provision of specialized law enforcement training); claims and
litigation management; information processing and accounting functions; and
general management oversight of the program on behalf of the sponsoring client
group. Fees and commissions received by the Company under its managed programs
are generally either in a fixed amount or based on a percentage of premium
serviced.
In addition to municipal associations, Meadowbrook also manages mutual
insurance companies, offshore captives and other insurance entities including
the Company's insurance subsidiaries Star and Savers.
In total, Meadowbrook employs 464 associates.
RISK-SHARING PROGRAMS
Client Risk-Sharing. In a client risk-sharing program, the Company
participates in the operating results of the program, and the client group also
shares in such results through a captive, a rent-a-captive or a
retrospectively-rated program. In many instances, a captive owned by a client
reinsures a portion of the risk on a quota-share basis. In addition to premium
revenue and investment income from its participation in the operating results
of the program, the Company may also be compensated through the receipt of
ceding commissions and other fees for policy issuance services and acquisition
costs, captive management services, reinsurance brokerage, loss prevention
services and claims handling and administration services. For financial
reporting purposes, ceding commissions are treated as a reduction in
underwriting expenses.
The Company's experience has been that the number of claims and the
cost of losses tend to be lower in risk-sharing programs than with traditional
forms of insurance. The Company believes that client risk-sharing motivates
insureds to focus on loss prevention and control measures and to establish and
adhere to stricter underwriting guidelines. As a result of its experience with
risk-sharing programs, the Company actively seeks out such opportunities in
appropriate circumstances and has significantly increased the capital of Star
since its formation in 1985 to accommodate new and expanded risk-sharing
programs.
The Company assists the sponsoring group in forming a captive, which
is capitalized by contributions from members of the sponsoring group in
exchange for shares of the captive. The captive is generally managed for a fee
by an offshore subsidiary of the Company. The Company works with the client to
determine the amount of risk exposure that will be assumed by the captive,
which varies depending on the captive's capitalization, the line of business,
the amount to be retained by the Company and the amount to be reinsured by
excess reinsurers. The Company then issues an insurance policy and receives
premium from the insured. Pursuant to the quota-share reinsurance agreement
with the captive, the Company generally transfers (cedes) a portion of the
retained risk to the captive and pays to the captive its share of the net
premium (after deducting ceding commissions, policy issuance fees, the cost of
excess reinsurance, taxes and other fees and expenses). The Company generally
seeks to cede approximately 50% of its loss exposures, but in some cases cedes
as little as 30% or as much as 80% of its loss exposures. The Company secures
obligations due from captives through the use of funds withheld trusts and
letters of credit. Through its reinsurance intermediary subsidiaries, the
Company obtains excess-of-loss reinsurance, subject to agreed upon limits and
retention levels. The Company generally administers all claims handling
functions, and the captive
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provides funds to the Company for the payment of the captive's proportionate
share of paid claims and claims expenses. The captive realizes investment
income from its capital, unearned premium and loss reserves, and shares in the
underwriting results.
The Company also offers its clients "rent-a-captive" risk-sharing
programs. These programs allow a client to retain a significant portion of its
own loss exposure without the administrative costs and capital commitment
required to establish and operate its own captive. In order to enhance its
"rent-a-captive" capabilities, the Company acquired American Indemnity, a
Bermuda company, in June 1994.
In another variation on client risk-sharing, the Company establishes
retrospectively rated programs for individual accounts. In such a program, the
Company works with the client to develop the appropriate self-insured retention
and loss fund amount and then helps arrange for excess of loss reinsurance. The
client reimburses the Company for all claims payments within the client's
retention. The Company generally earns a management fee (which includes claims
and loss control fees). In most of these programs, the Company also
participates in the operating results of the reinsurance coverage and earns a
ceding commission.
Agent Risk-Sharing. The Company also writes program business on a
risk-sharing basis with agents or brokers. The Company believes that agent
risk-sharing has grown as a result of market volatility and lack of coverage
availability in the traditional market. Risk-sharing is achieved either through
an agent-owned captive, rent-a-captive or through a contingent commission
structure tied to operating results. The Company believes that certain agents
and brokers view risk-sharing as a means to recapture lost profit margins on
commissions that have been reduced due to premium reductions in the soft market
and to establish a long-term relationship with an insurer.
The agent may own a captive or purchase an interest in a
rent-a-captive which acts as a reinsurer on business produced. In some cases,
the captive's shareholders may include key producers, subproducers and
insureds. In other circumstances, the agent accepts a lower up-front commission
in exchange for a multi-year contingent commission based on operating results.
The Company believes that multi-year commission structures motivate the agent
to produce business with better risk characteristics and higher profit
potential because unfavorable results reduce commissions.
FULLY-INSURED PROGRAMS
In a fully-insured program, the Company earns premium revenue by
providing insurance coverage without a risk-sharing mechanism. The Company may
provide fully-insured programs when it perceives opportunities for the
development of risk-sharing programs in the future. For example, a
fully-insured program marketed to an association comprised of licensed
landscape and irrigation contractors developed into one of the Company's
largest client risk-sharing programs. This program was initially established as
a fully-insured program in 1990 to fill a void in insurance coverage for the
members of the association. Thereafter, the Company assisted the association in
forming a Bermuda-based captive reinsurance company and began ceding business
to the captive in July 1993.
The Company's largest fully-insured program was developed for a
residential care association in Michigan. The Company's relationship with this
association dates from the early 1970's when the Company began placing
insurance and providing program management services for members of the
association. In 1986, the Company began writing property and workers'
compensation insurance for these members and this program now accounts for
approximately 10% of the Company's 1996 revenue.
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AGENCY
The Company earns commissions through the operation of a retail
property and casualty insurance agency. Formed in 1955 as Meadowbrook's
original business, the insurance agency places principally commercial
insurance, as well as personal property, casualty, life and accident and health
insurance, with more than 25 insurance carriers. The agency has grown to be one
of the largest agencies in Michigan, generating commissions in excess of $4.6
million, $4.3 million and $3.7 million for the years ended December 31, 1996,
1995 and 1994, respectively. In addition to its independent retail agency
activities, the Company's insurance agency also earns revenue by serving as
agent for several of the Company's programs, including two of its ten largest
programs.
SURETY BONDS
The Company formed a surety bond business unit in late 1993 and began
issuing surety bonds for contractors and licensees in May 1994. The Company
earned premium revenue on surety bonds issued through general agents throughout
the United States, including a wholly-owned subsidiary of the Company. General
agents were paid commissions and, in some cases, profit sharing bonuses based
upon loss ratios. The general agents had limited underwriting authority. In
marketing payment and performance surety bonds to clients, the Company
generally considered the net worth and working capital ratios and the client's
experience, expertise, financial statements and historical track record. In
certain instances, the Company required collateral before issuing a surety
bond. The form of collateral varied depending upon an assessment of the risk
factors associated with the surety bond. Generally, collateral consisted of
escrowed cash, letters of credit or investment securities, all of which was
held through the term of the bond.
In December 1996, the Company entered into a five-year joint
underwriting agreement with Connecticut Surety Corporation. The agreement
provides for the transfer of the underwriting risk on the majority of the
Company's existing surety bond business. In addition, Star will continue to
write new surety business, utilizing its capital and licenses, and Connecticut
Surety will manage the operations and assume the risk. This arrangement
substantially reduces the Company's underwriting risk exposure while creating a
five-year fee arrangement. This enables the Company to refocus its efforts on
its core business, alternative risk management.
INSURANCE OPERATIONS
INSURANCE SUBSIDIARIES
The Company's principal insurance subsidiaries, Star and Savers,
operate primarily as program insurance companies, providing coverage to defined
classes of insureds. These subsidiaries may be used in certain of the Company's
managed programs as a policy issuance vehicle to fulfill a client's legal
requirement or business need for a policy from a licensed insurer, or may be
used to assume a significant portion of the premium and risk exposures under
the Company's risk-sharing and fully-insured programs. The Company's insurance
subsidiaries are involved in most of the Company's programs. Star and Savers
are managed by Meadowbrook and have no employees.
Star is licensed in 45 states and the District of Columbia. Star was
formed in Michigan in 1985 and was originally intended to serve primarily as a
policy-issuing carrier and as a risk-sharing entity for certain of the
Company's clients. In 1990, Star acquired Savers, a surplus lines company, to
supplement its alternative market programs. Savers is domiciled in Missouri,
licensed in five states and authorized as a surplus lines carrier in all other
states except Vermont. Collectively, Star and Savers are authorized to write
business, on either an admitted or surplus lines basis, in all fifty states.
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The following table summarizes the growth in the Company's gross
written premium and net earned premium for the most recent five years:
GROSS WRITTEN PREMIUM
YEARS ENDED DECEMBER 31,
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1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Workers' compensation . . . . . . .
$39,748 $40,561 $26,042 $20,587 $18,954
Commercial multi-peril . . . . . . 19,368 23,395 24,010 18,848 10,912
Inland marine . . . . . . . . . . . 5,737 8,844 8,418 8,218 9,210
Other liability . . . . . . . . . . 17,366 17,216 16,631 12,523 7,315
Surety bonds . . . . . . . . . . . 25,929 26,041 9,917 379 92
All other lines . . . . . . . . . . 7,432 7,062 5,607 4,261 3,589
-------- -------- ------- ------- -------
Total . . . . . . . . . . . $115,580 $123,119 $90,625 $64,816 $50,072
======== ======== ======= ======= =======
NET EARNED PREMIUM
YEARS ENDED DECEMBER 31,
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1996 1995 1994 1993 1992
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(IN THOUSANDS)
Workers' compensation . . . . .
$30,017 $31,908 $19,184 $14,091 $11,017
Commercial multi-peril . . . . 13,101 15,771 12,093 9,048 5,968
Inland marine . . . . . . . . . 1,673 2,512 2,474 2,223 2,167
Other liability . . . . . . . . 13,614 12,222 11,373 7,220 5,176
Surety bonds . . . . . . . . . 21,156 15,763 1,689 80 100
All other lines . . . . . . . . 4,986 4,522 3,042 1,674 1,197
------- ------- ------- ------- -------
Total . . . . . . . . . . $84,547 $82,698 $49,855 $34,336 $25,625
======= ======= ======= ======= =======
During 1996, A.M. Best affirmed an "A-" (Excellent) rating for both
Star and Savers. Such ratings are now considered a group rating under the name
Meadowbrook Insurance Group. A.M. Best ratings are based upon factors of
concern to policyholders and are not directed toward the protection of
investors. No assurances can be given that in the future A.M. Best will not
reduce or withdraw the ratings of the Company's insurance subsidiaries.
RESERVES
The Company establishes reserves for the payment of loss and loss
adjustment expenses. Loss reserves are estimates at a given point in time of
what the insurer expects to pay claimants for claims occurring on or prior to
such time, including claims that have not yet been reported to the insurer. The
establishment of appropriate reserves is an uncertain process and, as such, it
can be expected that the ultimate liability on claims will be greater or less
than the estimated amounts. In particular, surety bond losses are not
predictable, by nature; and therefore, by necessity, are based upon
management's best estimates at a given point in time. While management
believes that the amount accrued is adequate, actual results could differ from
those estimates.
When a claim involving a probable loss is reported, the Company
establishes a case reserve for the estimated amount of the Company's ultimate
loss and loss adjustment expense payments on that claim. The estimate reflects
the Company's judgment based on established reserving practices and the
experience and knowledge of the Company's claims examiners regarding the nature
and value of the claim as well as the estimated expense of settling the claim,
including legal and other fees, and the general expenses of administering the
claims adjustment process. These case reserves are reviewed on a regular basis,
and as new data becomes available, appropriate adjustments are made to
reserves.
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Management also establishes reserves on an aggregate basis to provide
for losses "incurred but not reported" ("IBNR"), as well as for future
developments on losses reported to the Company. Thus, IBNR reserves represent
the difference between the estimated value of total loss reserves and the
reported case reserves. A variety of methods have been developed in the
insurance industry for determining estimates of loss reserves. The Company
relies on three methods when setting reserves which consider prior experience,
expected losses, expected payout, reporting patterns and known activity. The
Company uses a combination of Company historical experience and industry data
when projecting IBNR loss reserves.
The following is a summary of the Company's loss and loss adjustment
expense (LAE) reserves as of December 31, 1996 and 1995:
YEARS ENDED DECEMBER 31,
1996 1995
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(IN THOUSANDS)
Reported case loss and LAE $44,346 $38,087
reserves . . . . . . . . . . .
IBNR loss and LAE reserves . . 48,044 48,899
------- -------
Total . . . . . . . . . . $92,390 $86,986
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Reserves are computed by the Company based on actuarial principles and
procedures applicable to the lines of business written by the Company. These
reserve calculations are reviewed regularly by management and the Company
engages independent actuaries on an annual basis to express an opinion as to
the adequacy of statutory reserves established by management. These opinions
are filed with the various jurisdictions in which the Company is licensed.
Provisions for inflation are implicitly considered in the reserving process.
For GAAP and statutory purposes, the Company's reserves are carried at the
total estimate for ultimate expected loss without any discount to reflect the
time value of money. The following table provides a reconciliation of
beginning and ending liability balances on a GAAP basis for the year indicated:
YEARS ENDED DECEMBER 31,
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1996 1995 1994
------- ------- ------
(IN THOUSANDS)
Reserves for losses and LAE at beginning of year . . $86,986 $64,993 $50,451
Incurred losses and LAE:
Provision for insured events of the current year. . 60,034 60,792 45,389
Increase (decrease) in provision for insured events
of prior years . . . . . . . . . . . . . . . . . 4,295 (576) (1,426)
------- ------- -------
Total incurred losses and LAE . . . . . . . . . $64,329 $60,216 $43,963
------- ------- -------
Loss and LAE payments for claims attributable to:
Current year . . . . . . . . . . . . . . . . . . . $22,552 $15,913 $13,396
Prior years . . . . . . . . . . . . . . . . . . . . 36,373 22,310 16,025
-------- -------- --------
Total payments . . . . . . . . . . . . . . . . . $58,925 $38,223 $29,421
------- ------- -------
Reserves for losses and LAE at end of period . . . . $92,390 $86,986 $64,993
======= ======= =======
The following table shows the development of reserves for unpaid losses
and loss adjustment expense from 1987 through 1996 for the Company's current
insurance subsidiaries. The top line of the table shows the reserves net of
reinsurance at the balance sheet date for each of the indicated years. This
reflects the estimated amounts of losses and loss adjustment expense for claims
arising in that year and all prior years that are unpaid at the balance sheet
date, including losses incurred but not yet reported to the Company. The upper
portion of the table shows the cumulative amounts subsequently paid as of
successive years with respect to the reserves. The middle portion of the table
shows the re-estimated amount of the previously recorded reserves based on
experience as of the end of each succeeding year. The estimates change as more
information becomes known about the frequency and severity of claims for
individual years. A redundancy (deficiency) exists when the re-estimated
liability at each December 31 year-end is less (greater) than the prior
liability estimate. The "cumulative redundancy (deficiency)" depicted in the
table, for any particular calendar year, represents the aggregate change in the
initial estimates over all subsequent calendar years. It should be emphasized
that the table presents a
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run-off of balance sheet reserves rather than accident or policy year loss
development. Therefore, each amount in the table includes the effects of
changes in reserves for all prior years.
Due to the Company's adoption of SFAS 113, the bottom portion of the
table shows the impact of reinsurance for the years 1992 through 1996,
reconciling the net reserves shown in the upper portion of the table to gross
reserves.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
YEARS ENDED DECEMBER 31,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------- -------- ------- -------- ------- ------- ------- -------- ------- -------
(Dollars in thousands)
Reserves for losses
and LAE at end
of period............... $ 3,240 $ 6,311 $ 6,262 $ 9,293 $13,964 $23,545 $35,744 $ 47,149 $64,668 $65,746
Cumulative paid as of:
1 year later............ 591 2,512 1,737 2,877 4,326 5,420 11,172 15,792 25,659
2 years later........... 1,185 3,484 3,284 4,796 6,309 10,052 19,298 26,227
3 years later........... 2,259 4,178 4,508 5,117 7,652 13,554 23,571
4 years later........... 2,242 5,103 4,195 5,971 8,954 15,598
5 years later........... 2,223 4,625 4,594 6,568 9,564
6 years later........... 2,353 4,822 4.970 6,786
7 years later........... 2,466 5,126 5,154
8 years later........... 2,489 5,257
9 years later........... 2,528
Reserves re-estimated
as of end of year:
1 year later............ 2,425 5,466 8,204 9,939 14,693 22,609 35,354 46,738 64,329
2 years later........... 2,377 7,228 7,488 9,800 14,361 21,661 33,524 45,578
3 years later........... 3,430 6,010 7,296 9,396 12,853 20,909 33,308
4 years later........... 2,839 6,374 6,683 8,758 12,649 20,623
5 years later........... 2,769 5,961 6,299 8,600 12,525
6 years later........... 2,830 5,825 6,293 8,371
7 years later........... 2,706 5,850 6,128
8 years later........... 2,676 5,798
9 years later........... 2,651
Cumulative
redundancy:
Dollars............... $ 589 $ 513 $ 134 $ 922 $ 1,439 $ 2,922 $ 2,436 $ 1,571 $ 339
Percentage............ 18.18% 8.13% 2.14% 9.92% 10.31% 12.41% 6.82% 3.33% 0.52%
Net reserves.............. $23,545 $35,744 $ 47,149 $64,668 $65,746
Ceded reserves............ 20,399 14,707 17,844 22,318 26,644
Gross reserves............ 43,944 50,451 64,993 86,986 92,390
------- ------- -------- ------- -------
Net re-estimated.......... 20,623 33,308 45,578 64,329 --
Ceded re-estimated........ 21,586 15,847 21,037 26,952 --
Gross re-estimated........ 42,209 49,155 66,615 91,281
------- ------- -------- ------- -------
Gross cumulative
redundancy
(deficiency)........... $ 1,735 $ 1,296 $(1,622) $(4,295) $ --
======= ======= ======== ======= =======
Loss reserves have historically developed redundancies on a net basis.
In the most recent two years, gross reserves have been inadequate, due to
adverse development from large surety bond claims and increased IBNR estimates
for ceded excess of loss reinsurance. For 1995, the Company had gross adverse
development of $3.7 million on surety bonds, with the balance attributed to
increases in ceded excess IBNR. For 1994, surety bonds had gross favorable
development, therefore the entire deficiency was caused by increased IBNR
estimates for ceded excess of loss reinsurance. Payments, on both a gross and
net basis, are typically about one third of respective prior year-end reserves.
However, in 1996, net payments were 39.7% of 1995 reserves, due to increased
surety bond payments. Surety has a quicker payment pattern than the balance of
the Company's book of business. This, coupled with the recent growth in
surety, caused the increase in the percentage of reserves paid in 1996. In
addition, gross payments in 1993 were 46.1% of 1992 year-end gross reserves,
due to the settlement of the large claim on an agent risk-sharing program
covering a type of risk that is no longer insured by the Company.
9
11
Net payments in 1993 were only 23.0% of 1992 year-end net reserves, due to the
commutation of a reinsurance treaty with a captive in which the recapture of
$4.5 million in loss and loss adjustment reserves was recorded as a reduction
in net paid losses. Excluding the effects of these two items, 1993 payments
would have represented 33.8% and 37.1% of 1992 year-end reserves on a gross and
net basis, respectively.
INVESTMENTS
The Company's investment portfolio consists primarily of tax-exempt
fixed income securities. As of December 31, 1996, the Company's cash and
invested assets totaled $156.5 million, of which $118.2 million consisted of
obligations of state and local governmental authorities. The Company's
investment strategy emphasizes the preservation of capital and after-tax yield.
The Company seeks to manage its investment portfolio to match the cash flows
and maturities of its fixed-income securities to its anticipated cash flow
requirements. The Company generally holds fixed-income securities until
maturity and currently has 76.8% of its portfolio classified as "held to
maturity" at December 31, 1996. The Company's investment policies and
strategies are subject to change depending upon regulatory, economic and market
conditions and the existing or anticipated financial condition and operating
requirements, including the tax position of the Company.
Based on its investment experience, the Company believes that
investments in municipal bonds currently generate a greater after-tax return
than investments in taxable fixed income securities of comparable risk,
duration and other investment characteristics. All of the income derived from
the tax-exempt municipal bonds is included in the expanded base on which the
alternative minimum tax ("AMT") is calculated. Currently, the Company is not
in an AMT position, but the Company constantly monitors the AMT effect of its
investments in municipal bonds and may adjust its portfolio to include taxable
securities to avoid incurring an AMT liability.
At December 31, 1996, the carrying value of the Company's investment portfolio,
including cash and cash equivalents, was approximately $156.5 million. The
diversification of the Company's portfolio at December 31, 1996 is shown below:
%
MARKET CARRYING OF TOTAL
TYPE OF INVESTMENT COST VALUE VALUE PORTFOLIO
------------------ ---- ----- ----- ---------
HELD TO MATURITY DEBT SECURITIES
--------------------------------
U.S. government $ 3,287,309 $ 3,352,991 $ 3,287,309 2.1%
Tax-exempt obligations of states and
political subdivisions 110,265,406 112,651,179 110,265,406 70.5%
Mortgage-backed securities 6,169,051 6,067,416 6,169,051 3.9%
Corporate debt securities 299,902 318,780 299,902 0.2%
Certificates of deposit 95,000 95,000 95,000 0.1%
-----------------------------------------------------------
Total held to maturity debt securities $120,116,668 $122,485,366 $120,116,668 76.8%
AVAILABLE FOR SALE SECURITIES
-----------------------------
DEBT SECURITIES:
U.S. government $ 2,995,204 $ 2,997,810 $ 2,997,810 1.9%
Tax-exempt obligations of states and
political subdivisions 7,897,953 7,808,096 7,808,096 5.0%
Mortgage-backed securities 2,931,914 2,927,451 2,927,451 1.9%
Corporate debt securities 2,200,733 2,222,124 2,222,124 1.4%
-----------------------------------------------------------
Total available for sale debt securities $ 16,025,804 $ 15,955,481 $ 15,955,481 10.2%
EQUITY SECURITIES:
Bond mutual funds 1,562,999 1,420,949 1,420,949 0.9%
-----------------------------------------------------------
Total available for sale securities $ 17,588,803 $ 17,376,430 $ 17,376,430 11.1%
CASH AND CASH EQUIVALENTS 19,002,241 19,002,241 19,002,241 12.1%
-----------------------------------------------------------
Grand Total of Investments $156,707,712 $158,864,037 $156,495,339 100.0%
===========================================================
10
12
At December 31, 1996, based on carrying value, 88.3% of the Company's
investments were in fixed income securities (including fixed income cash
equivalents), of which over 98.6% were invested in securities with a S&P rating
range from AAA to A-.
The following table sets forth certain information regarding the
maturities of the Company's fixed income securities at December 31, 1996:
%
MARKET CARRYING OF TOTAL
MATURITY COST VALUE VALUE PORTFOLIO
-------- ---- ----- ----- ---------
HELD TO MATURITY
----------------
1 year $ 11,141,863 $ 11,173,787 $ 11,141,863 8.2%
1-5 years 41,110,058 41,699,032 41,110,058 30.2%
5-10 years 54,744,177 56,488,699 54,744,177 40.2%
Over 10 years 6,951,519 7,056,432 6,951,519 5.1%
Mortgage-backed securities 6,169,051 6,067,416 6,169,051 4.5%
-----------------------------------------------------------
Total Held to Maturity $120,116,668 $122,485,366 $120,116,668 88.2%
AVAILABLE FOR SALE
------------------
1 year $ - $ - $ - - %
1-5 years 3,977,691 3,983,590 3,983,590 2.9%
5-10 years 3,353,553 3,351,425 3,351,425 2.5%
Over 10 years 5,762,646 5,693,015 5,693,015 4.2%
Mortgage-backed securities 2,931,914 2,927,451 2,927,451 2.2%
-----------------------------------------------------------
Total Available for Sale $ 16,025,804 $ 15,955,481 $ 15,955,481 11.8%
-----------------------------------------------------------
Grand Total $136,142,472 $138,440,847 $136,072,149 100.0%
===========================================================
COMPETITION
The Company competes both with other providers of alternative risk
management programs and services and with traditional providers of commercial
insurance coverages. Both the alternative risk management and the traditional
property and casualty insurance markets are highly competitive. The Company's
alternative risk management programs and services compete with products and
services offered by insurance companies, other providers of alternative risk
management services (including certain domestic and foreign insurers and
reinsurers and insurance brokers) as well as with self-insurance plans,
captives managed by others, and a variety of other risk-financing vehicles and
mechanisms. These competitive products are offered by other companies that may
have greater financial resources than the Company.
The market for alternative risk management products and services is
significantly influenced by market conditions affecting the traditional
property and casualty insurance industry. Insurance market conditions
historically have been subject to significant variability due to premium rate
competition, natural disasters and other catastrophic events, judicial trends,
changes in the investment and interest rate environment, regulation and general
economic conditions. Pricing is a primary means of competition in the
commercial insurance market. Competition is also based on the availability and
quality of products, quality and speed of service (including claims service),
financial strength, ratings, distribution systems and technical expertise. The
primary basis for competition among alternative risk management providers
varies with the financial and insurance needs and resources of each potential
insured. Principal factors that are considered by insureds include: an analysis
of the net present-value (after tax) of the cost of financing the insured's
expected level of losses, the amount of excess coverage provided in the event
losses exceed expected levels, cash flow and tax planning considerations and
the expected quality and consistency of the services to be provided. The
Company believes that it is able to compete based on its experience, the
quality of its products and services and its program-oriented approach.
However, its ability to successfully compete is dependent upon a number of
factors,
11
13
many of which, including market and competitive conditions, are outside of the
Company's control.
REGULATION
REGULATION IN GENERAL
The Company's insurance subsidiaries are subject to regulation by
government agencies in the states in which they do business. The nature and
extent of such regulation vary from jurisdiction to jurisdiction, but typically
involve prior approval of the acquisition of control of an insurance company or
of any company controlling an insurance company, regulation of certain
transactions entered into by an insurance company with any of its affiliates,
approval of premium rates, forms and policies used for many lines of insurance,
standards of solvency and minimum amounts of capital and surplus which must be
maintained, establishment of reserves required to be maintained for unearned
premium, losses and loss expense or for other purposes, limitations on types
and amounts of investments, restrictions on the size of risks which may be
insured by a single company, licensing of insurers and agents, deposits of
securities for the benefit of policyholders, and the filing of periodic reports
with respect to financial condition and other matters. In addition, state
regulatory examiners perform periodic examinations of insurance companies. Such
regulation is generally intended for the protection of policyholders rather
than security holders.
In addition to the regulatory oversight of the Company's insurance
subsidiaries, the Company is also subject to regulation under the Michigan and
Missouri Insurance Holding Company System Regulatory Acts (the "Holding Company
Acts"). The Holding Company Acts contain certain reporting requirements
including those requiring the Company, as the ultimate parent company, to file
information relating to its capital structure, ownership, and financial
condition and general business operations of its insurance subsidiaries. The
Holding Company Acts contain special reporting and prior approval requirements
with respect to transactions among affiliates.
Insurance companies are also affected by a variety of state and
federal legislative and regulatory measures and judicial decisions that define
and extend the risks and benefits for which insurance is sought and provided.
These include redefinitions of risk exposure in areas such as product
liability, environmental damage and workers' compensation. In addition,
individual state insurance departments may prevent premium rates for some
classes of insureds from reflecting the level of risk assumed by the insurer
for those classes. Such developments may adversely affect the profitability of
various lines of insurance. In some cases, these adverse effects on
profitability can be minimized through re-pricing, if permitted by applicable
regulations, of coverages or limitations or cessation of the affected business.
The Company's insurance intermediaries are subject to regulation as
insurance intermediaries. Under applicable regulations, the intermediary is
responsible as a fiduciary for funds received for the account of the parties to
the reinsurance transaction and is required to hold such funds in appropriate
bank accounts subject to restrictions on withdrawals and prohibitions on
commingling.
INSURANCE REGULATION CONCERNING CHANGE OR ACQUISITION OF CONTROL
Star and Savers are domestic property and casualty insurance companies
organized, respectively, under the insurance laws of Michigan and Missouri (the
"Insurance Codes"). The Insurance Codes provide that the acquisition or change
of "control" of a domestic insurer or of any person that controls a domestic
insurer cannot be consummated without the prior approval of the relevant
insurance regulatory authority. A person seeking to acquire control, directly
or indirectly, of a domestic insurance company or of any person controlling a
domestic insurance company must generally file with the relevant insurance
regulatory authority an application for
12
14
change of control containing certain information required by statute and
published regulations and provide a copy of such to the domestic insurer. In
both Michigan and Missouri, control is generally presumed to exist if any
person, directly or indirectly, owns, controls, holds with the power to vote or
holds proxies representing 10% or more of the voting securities of any other
person.
In addition, many state insurance regulatory laws contain provisions
that require pre-notification to state agencies of a change in control of a
non-domestic admitted insurance company in that state. While such
pre-notification statutes do not authorize the state agency to disapprove the
change of control, such statutes do authorize issuance of a cease and desist
order with respect to the non-domestic admitted insurer if certain conditions
exist such as undue market concentration.
Any future transactions that would constitute a change in control of
the Company would also generally require prior approval by the Insurance
Departments of Michigan and Missouri and would require pre-acquisition
notification in those states which have adopted pre-acquisition notification
provisions and in which the insurers are admitted. Such requirements may deter,
delay or prevent certain transactions that could be advantageous to the
stockholders of the Company.
RESTRICTIONS ON DIVIDENDS
A significant portion of the Company's consolidated assets represents
assets of the Company's insurance subsidiaries that may not be transferable to
the holding company in the form of dividends, loans or advances. The Company's
insurance subsidiaries are subject to various state statutory and regulatory
restrictions, generally applicable to each insurance company in its state of
incorporation, which limit the amount of dividends or distributions by an
insurance company to its stockholders. The restrictions are generally based on
certain levels of surplus, operating income and investment income, as
determined under statutory accounting practices.
The insurance holding company laws of Michigan and Missouri regulate
the distribution of dividends and other payments to the Company by its
subsidiaries. Under the applicable Michigan statute, the maximum discretionary
dividend that may be declared (or cash/property distribution that may be made)
by Star is the greater of (i) the insurance company's net income (excluding
realized capital gains) for the preceding calendar year plus net income
(excluding realized capital gains) from the second and third preceding calendar
years (that was not paid in dividends or other distributions) or (ii) ten
percent of the insurance company's policyholders' surplus for the preceding
calendar year, excluding unrealized gains. These dividends are further limited
by a clause in the Michigan law which prohibits an insurer from declaring
dividends except out of earned surplus earnings of the company, as allowed
under the Insurance Code. Since Star is the parent insurance company, its
maximum dividend calculation represents that of the combined insurance
companies.
Under the applicable Missouri statute, the maximum discretionary
dividend that may be declared (or cash/property distribution that may be made)
by Savers to Star is the lesser of (i) 10% of the insurer's policyholders
surplus for the preceding calendar year or (ii) the net investment income for
the preceding calendar year. Such restrictions, or any additional subsequently
imposed restrictions, may in the future affect the Company's ability to pay
expenses, cash dividends to its stockholders and principal and interest on any
future debt outstanding.
RISK-BASED CAPITAL
The NAIC has adopted a methodology for assessing the adequacy of
statutory surplus of property and casualty insurers which includes a risk-based
capital requirement that requires insurance companies to calculate and report
information under a risk-based formula which
13
15
attempts to measure statutory capital and surplus needs based on the risks in a
company's mix of products and investment portfolio. The formula is designed to
allow state insurance regulators to identify potential weakly capitalized
companies. Under the formula, a company determines its "risk-based capital"
("RBC") by taking into account certain risks related to the insurer's assets
(including risks related to its investment portfolio and ceded reinsurance) and
the insurer's liabilities (including underwriting risks related to the nature
and experience of its insurance business). The risk-based capital rules provide
for different levels of regulatory attention depending on the ratio of a
company's total adjusted capital to its "authorized control level" ("ACL") of
RBC. Based on calculations made by the Company, the risk-based capital levels
for each of the Company's insurance subsidiaries exceed levels that would
trigger regulatory attention. At December 31, 1996 the parent insurance
company's (Star) RBC ratio exceeded applicable risk-based capital requirements.
At December 31, 1996, Star's statutory surplus was $64.6 million; the threshold
requiring regulatory involvement was $11.7 million. Therefore, the Company's
capital exceeds all requirements of the Risk-Based Capital Model Act.
EFFECT OF FEDERAL LEGISLATION
Although the federal government does not directly regulate the
business of insurance, federal initiatives often affect the insurance business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include federal government
participation in asbestos and other product liability claims, pension
regulation (ERISA), examination of the taxation of insurers and reinsurers
minimum levels of liability insurance and automobile safety regulations.
NAIC-IRIS RATIOS
The NAIC's Insurance Regulatory Information System ("IRIS") was
developed by a committee of state insurance regulators and is primarily
intended to assist state insurance departments in executing their statutory
mandates to oversee the financial condition of insurance companies operating in
their respective states. IRIS identifies 11 industry ratios and specifies
"usual values" for each ratio. Departure from the usual values on four or more
ratios generally leads to inquiries from individual state insurance
commissioners.
In 1996, Star had one ratio which varied from the "usual value" range
as follows:
For Star:
RATIO USUAL RANGE STAR VALUE
------------- ------------ -----------
Investment yield....... 10 to 4.5 4.2
Star's "investment yield" ratio was affected by its commitment of a large
portion of its invested assets to the ownership of Savers, which does not pay
Star a dividend and therefore does not produce an investment yield.
Eliminating the effect of the Savers investment, the investment yield would
have been 5.0%, which puts Star within the usual range.
ITEM 2. PROPERTIES
The Company currently leases its corporate offices in Southfield, Michigan from
26600 Development Associates Limited Partnership. In 1996, the Company paid
rent in the amount of approximately $660,000. The term of the lease for the
offices in Southfield expires on September 30, 2004. The Company, through its
subsidiaries, is also a party to various leases for locations in which such
subsidiaries have offices. The Company does not consider any of these leases to
be material.
14
16
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to litigation in the ordinary course of business. Among
the legal actions currently pending is a lawsuit filed by two of the former
shareholders of the agent which previously produced substantially all of the
Company's surety bond business against, among others: Star; Meadowbrook;
certain of the Company's officers, including Warren D. Gardner, Robert S.
Cubbin, Joseph C. Henry and Merton J. Segal; as well as certain employees of
the Company. This lawsuit was filed on June 26, 1995 in the Second Judicial
District Court of the State of Nevada in the County of Washoe and alleges,
among other claims, breach of contract, breach of the covenant of good faith
and fair dealing, unjust enrichment, bad faith, negligence, slander and
wrongful termination by the Company. The plaintiffs requested injunctive
relief, compensatory damages, punitive and exemplary damages and attorney fees
in an unspecified amount. The Nevada Insurance Department revoked the license
of the first plaintiff and denied further licensing of the second plaintiff.
The Company continues to vigorously defend itself and has filed counterclaims
against the plaintiffs. While the Company believes that it has meritorious
defenses and counterclaims in this lawsuit, there can be no assurance that the
Company's results of operations and financial condition will not be materially
adversely affected by this lawsuit. The ultimate outcome of the lawsuit cannot
be determined at this time, and the Company is unable to estimate the range of
possible loss, if any.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
15
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to page 49
of the Company's 1996 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to page 26
of the Company's 1996 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to pages 17
to 25 of the Company's 1996 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to pages 27
to 47 of the Company's 1996 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
16
18
PART III
Certain information required by Part III is omitted from this Report in that
the Registrant has filed a definitive proxy statement pursuant to Regulation
14A (the "Proxy Statement") not later than 120 days after the end of the
fiscal year covered by this report and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
that specifically address the items set forth herein are incorporated by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included under the caption "Directors
and Executive Officers" of the Company's Proxy Statement relating to the Annual
Meeting of Shareholders to be held on May 19, 1997, which is hereby
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption "Executive
Compensation" of the Company's Proxy Statement relating to the Annual Meeting
of Shareholders to be held on May 19, 1997, which is hereby incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is included under the caption "Security
Ownership of Certain Beneficial Owners and Management" of the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on May 19,
1997, which is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
17
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(A) The following documents are filed as part of this Report:
1. Financial Statements: The following Consolidated Financial Statements of
Meadowbrook Insurance Group, Inc., the accompanying Notes to Consolidated
Financial Statements and Report of Coopers & Lybrand L.L.P., Independent
Accountants, have been incorporated herein by reference in their entirety, from
pages 27-47 of the 1996 Annual Report to Shareholders:
Report of Coopers & Lybrand L.L.P., Independent Accountants
Consolidated Balance Sheet - December 31, 1996 and 1995
Consolidated Statement of Income - Fiscal Years Ended December 31, 1996,
1995 and 1994
Consolidated Statement of Shareholders' Equity - Fiscal Years Ended December
31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows - Fiscal Years Ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
2. Report of Independent Accountants on Financial Statement
Schedules Listed Under 14(A)3 of this Form 10-K (enclosed on pg. 22)
3. Financial Statement Schedule
Schedule II Condensed Financial Information of Registrant (enclosed
on pg. 23-25)
Schedules not listed above have been omitted because they are not applicable or
are not required or the information required to be set forth therein is
included in the Consolidated Financial Statements and Notes thereto.
4. Exhibits The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedule are filed as part of, or
incorporated by reference into, this Form 10-K.
Page Number
Exhibit In Sequential
No. Description Numbering System
- -------- ----------- ----------------
3.1 Articles of Incorporation of the Company, including Certificate
of Amendment to the Articles of Incorporation. *
3.2 Bylaws of the Company. *
18
20
Page Number
Exhibit In Sequential
No. Description Numbering System
- ------- ----------- ----------------
10.1 Employment Agreement between the Company and
James R. Parry, Sr. ("Parry") dated January 1, 1993. *
10.2 Management Services Agreement among the Company,
Star, Savers and Meadowbrook dated January 1, 1993. *
10.3 Meadowbrook Insurance Group, Inc. 1995 Stock Option Plan. *
10.4 Lease between Meadowbrook and 26600 Development
Associates Limited Partnership, with fourth amendment to
lease dated March 21, 1995. *
10.5 Fifth and Sixth Amendments to Lease between Meadowbrook
and 26600 Development Associates Limited Partnership dated
August 7, 1995 and May 13, 1996.
10.6 Meadowbrook, Inc. 401(k) Profit Sharing Plan Trust, amended
and restated December 31, 1994. *
10.7 Employment Agreement, Covenant Not to Compete and
Restricted Stock Agreement dated as of August 1, 1995
between Meadowbrook and Robert A. Engle. *
10.8 Employment Agreement, Covenant Not to Compete and
Restricted Stock Agreement dated as of August 1, 1995
between Meadowbrook and Robert A. Engle, Amendment. *
10.9 Stock Purchase Agreement dated August 1, 1995 among the
Company , Robert A. Engle, Trustee of the Robert A. Engle
Revocable Trust dated November 24, 1993, Merton J. Segal
and certain other employees of the Company. *
10.10 Stock Purchase Agreement dated August 1, 1995 among the
Company , Robert A. Engle, Trustee of the Robert A. Engle
Revocable Trust dated November 24, 1993, Merton J. Segal
and certain other employees of the Company, Amendment. *
11 Statement re computation of per share earnings.
13 1996 Annual Report to Shareholders.
21 List of Subsidiaries.
23 Consent of Independent Accountants.
24 Power of attorney.
27 Financial Data Schedule
28.1 Star Insurance Company's 1996 Schedule P. **
28.2 Savers Property & Casualty Insurance Company's 1996 Schedule P. **
19
21
(*) Incorporated by reference to Form S-1 Registration Statement (No.
33-2626206) of Meadowbrook Insurance Group, Inc. declared effective
November 20, 1995.
(**) Submitted in paper format under separate cover; see Form S-E filing.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the year ended
December 31, 1996.
20
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, in Southfield,
Michigan, on March 24, 1997.
MEADOWBROOK INSURANCE GROUP, INC.
By: **
--------------------------------------------
Merton J. Segal
Chairman and Chief Executive Officer
(Principal Executive Officer)
By:/s/ Daniel G. Gibson
--------------------------------------------
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacity and on the dates indicated.
Signature Title Date
- --------- ----- ----
** Chairman, Chief Executive Officer and March 24, 1997
- ------------------------------------ Director (Principal Executive Officer)
Merton J. Segal
** Vice Chairman and Director March 24, 1997
- ------------------------------------
Warren D. Gardner
/s/ Robert S. Cubbin Executive Vice President, Secretary March 24, 1997
- ------------------------------------
Robert S. Cubbin and Director
** Executive Vice President, Treasurer March 24, 1997
- ------------------------------------ and Director
Joseph C. Henry
** Executive Vice President, March 24, 1997
- ------------------------------------ Chief Marketing Officer and Director
James R. Parry, Sr.
** Director March 24, 1997
- ------------------------------------
Bruce E. Thal
** Director March 24, 1997
- ------------------------------------
Hugh W. Greenberg
** By: /s/ Robert S. Cubbin
-----------------------------
Robert S. Cubbin, Attorney-in-fact
21
23
EXHIBIT INDEX
Exhibit
No. Description
- -------- -----------
3.1 Articles of Incorporation of the Company, including Certificate
of Amendment to the Articles of Incorporation.
3.2 Bylaws of the Company.
10.1 Employment Agreement between the Company and
James R. Parry, Sr. ("Parry") dated January 1, 1993.
10.2 Management Services Agreement among the Company,
Star, Savers and Meadowbrook dated January 1, 1993.
10.3 Meadowbrook Insurance Group, Inc. 1995 Stock Option Plan.
10.4 Lease between Meadowbrook and 26600 Development
Associates Limited Partnership, with fourth amendment to
lease dated March 21, 1995.
10.5 Fifth and Sixth Amendments to Lease between Meadowbrook
and 26600 Development Associates Limited Partnership dated
August 7, 1995 and May 13, 1996.
10.6 Meadowbrook, Inc. 401(k) Profit Sharing Plan Trust, amended
and restated December 31, 1994.
10.7 Employment Agreement, Covenant Not to Compete and
Restricted Stock Agreement dated as of August 1, 1995
between Meadowbrook and Robert A. Engle.
10.8 Employment Agreement, Covenant Not to Compete and
Restricted Stock Agreement dated as of August 1, 1995
between Meadowbrook and Robert A. Engle, Amendment.
10.9 Stock Purchase Agreement dated August 1, 1995 among the
Company , Robert A. Engle, Trustee of the Robert A. Engle
Revocable Trust dated November 24, 1993, Merton J. Segal
and certain other employees of the Company.
10.10 Stock Purchase Agreement dated August 1, 1995 among the
Company , Robert A. Engle, Trustee of the Robert A. Engle
Revocable Trust dated November 24, 1993, Merton J. Segal
and certain other employees of the Company, Amendment.
11 Statement re computation of per share earnings.
13 1996 Annual Report to Shareholders.
21 List of Subsidiaries.
23 Consent of Independent Accountants.
24 Power of attorney.
27 Financial Data Schedule
28.1 Star Insurance Company's 1996 Schedule P.
28.2 Savers Property & Casualty Insurance Company's 1996 Schedule P.
(*) Incorporated by reference to Form S-1 Registration Statement (No.
33-2626206) of Meadowbrook Insurance Group, Inc. declared effective
November 20, 1995.
(**) Submitted in paper format under separate cover; see Form S-E filing.
24
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Meadowbrook Insurance Group, Inc.
We have audited the consolidated financial statements of Meadowbrook
Insurance Group, Inc. (formerly "Star Holding Company") and Subsidiaries as
of December 31, 1996 and 1995, and for each of the three years in the
period ended December 31, 1996, which financial statements are included on
pages 27 through 47 of the 1996 Annual Report to Shareholders of
Meadowbrook Insurance Group, Inc. and incorporated by reference herein. We
have also audited the financial statement schedule listed under Item 14(A)3
of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
Meadowbrook Insurance Group, Inc. and Subsidiaries as of December 31, 1996
and 1995, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. In addition, in
our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand LLP
Detroit, Michigan
March 10, 1997
22
25
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MEADOWBROOK INSURANCE GROUP, INC.
PARENT COMPANY ONLY
INCOME STATEMENT
For the years ended December 31,
_______
1996 1995 1994
--------- --------- ------------
Revenue: $ 275,740 $129,376 $ -
Operating expenses:
Interest expense - 316,175 382,553
Other expenses 350,849 109,770 281,271
----------- ----------- ------------
Total Operating Expenses 350,849 425,945 663,824
----------- ----------- ------------
Loss before federal income taxes (75,109) (296,569) (633,824)
Federal income tax benefit (41,940) (100,834) (225,700)
----------- ----------- ------------
Net loss before subsidiary equity (33,169) (195,735) (438,124)
----------- ----------- ------------
earnings
Subsidiary equity earnings 8,739,193 7,415,605 4,140,174
----------- ----------- ------------
Net Income $ 8,706,024 $ 7,219,870 $ 3,702,050
=========== =========== ============
23
26
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MEADOWBROOK INSURANCE GROUP, INC.
PARENT COMPANY ONLY
BALANCE SHEET
As of December 31, 1996 and 1995
_______
1996 1995
------------ -----------
ASSETS
Cash and cash equivalents $ 1,056,424 $ 8,092,719
Investment in subsidiaries 91,772,990 83,066,158
Receivables from subsidiaries 6,975,678 1,552,336
Other assets 639,376 299,652
------------ -----------
Total Assets $100,444,468 $93,010,865
============ ===========
LIABILITIES
Other liabilities $ 243,634 $ 794,699
Long-term debt - -
------------ -----------
Total Liabilities 243,634 794,699
SHAREHOLDERS' EQUITY
Common Stock 86,493 86,200
Additional paid in capital 72,873,396 72,868,651
Retained earnings 27,381,111 19,369,118
Unrealized depreciation on
available for sale securities (140,166) (107,803)
------------ -----------
Total Shareholders' Equity 100,200,834 92,216,166
------------ -----------
Total Liabilities and Shareholders' Equity $100,444,468 $93,010,865
============ ===========
24
27
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MEADOWBROOK INSURANCE GROUP, INC.
PARENT COMPANY ONLY
STATEMENT OF CASH FLOWS
For the years ended December 31,
_______
1996 1995 1994
------------ ------------ ------------
Net cash used in operating activities: $ (6,145,849) $ (718,847) $ (747,004)
------------ ----------- -----------
Cash Flow from Investing Activities:
Investment in subsidiaries - (32,504,672) (10,165,523)
Dividends received from/(returned to)
subsidiaries - - (43,466)
------------ ----------- -----------
Net cash used in
investing activities: - (32,504,672) (10,208,989)
------------ ----------- -----------
Cash Flows from Financing Activities:
Proceeds from bank loan - - 3,500,000
Principal payments on bank loan - (3,500,000) (6,118,202)
Additional expenses from IPO (221,018) - -
Dividends paid on common stock (517,797) - -
Retirement of common stock (470,370) (27,655) (54,540)
Issuance of common stock 318,739 44,242,503 14,230,125
------------ ----------- -----------
Net cash (used in) provided by
financing activities: (890,446) 40,714,848 11,557,383
------------ ----------- -----------
Increase/(decrease) in cash and
cash equivalents (7,036,295) 7,491,329 601,390
Cash and cash equivalents,
beginning of year 8,092,719 601,390 -
------------ ----------- -----------
Cash and cash equivalents
end of year $ 1,056,424 $ 8,092,719 $ 601,390
============ =========== ===========
25