10-K 1 s000751x1_10k.htm 10-K

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

OR

oTRANSITION 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.)
   
26255 American Drive, Southfield, MI 48034-6112
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (248) 358-1100
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Name of Exchange
on Which Registered
Common Stock, $.01 par value per share New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ☒

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No ☒

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 ☒ No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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. o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer o Accelerated filer ☒ Non-accelerated filer o Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ☒

The aggregate market value of the voting and non-voting common stock held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2014 was $360,159,251. As of February 18, 2015, there were 50,090,691 shares of the Company’s common stock ($.01 par value) outstanding.

Documents Incorporated by Reference

Certain portions of the Registrant’s Proxy Statement for the 2015 Annual Shareholders’ Meeting are incorporated by reference into Part III of this report.

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MEADOWBROOK INSURANCE GROUP, INC.

PART I

ITEM 1.   BUSINESS

Legal Organization

Meadowbrook Insurance Group, Inc. (NYSE: MIG) is a holding company organized as a Michigan corporation in 1985. Our principal executive offices are located at 26255 American Drive, Southfield, Michigan 48034-6112 (telephone number: (248) 358-1100). Meadowbrook was initially founded in 1955 as “Meadowbrook Insurance Agency” and was subsequently incorporated in Michigan in 1965.

As used in this Form 10-K, references to the “Company”, “we”, “us”, or “our” refer to Meadowbrook Insurance Group, Inc. (“Meadowbrook”) and its subsidiaries: Star Insurance Company (“Star”), ProCentury Corporation (“ProCentury”), Meadowbrook Inc., and Crest Financial Corporation. References to Meadowbrook also include Star’s wholly-owned subsidiaries Ameritrust Insurance Corporation (“Ameritrust”), Savers Property and Casualty Insurance Company (“Savers”), and Williamsburg National Insurance Company (“Williamsburg”) and ProCentury’s wholly-owned subsidiaries Century Surety Company (“Century”), ProCentury Insurance Company (“PIC”), and ProCentury Risk Partners Insurance Company (“PROPIC”).

Star, Savers, Williamsburg, Ameritrust, Century, and PIC are collectively referred to as the “Insurance Company Subsidiaries.”

Recent Developments

On December 30, 2014, Fosun International Limited (HKEx stock code: 00656, together with its subsidiaries, “Fosun”) and the Company announced each entered into a definitive agreement under which Fosun will acquire all of the issued and outstanding common stock of the Company. The transaction follows a thorough review of strategic alternatives by the Company’s Board of Directors and represents a 24% premium over the Company’s closing price on December 29, 2014 and a premium of 39% to the Company’s three-month average closing price for the period ending December 29, 2014. The transaction also represents a multiple of approximately 1.04x the Company’s tangible book value per share as of September 30, 2014.

The transaction is subject to the approval of the Company’s shareholders as well as regulatory approvals and the satisfaction of other specified closing conditions. The transaction is expected to be completed in the second half of 2015.

See “Risks Related to Our Being Acquired by Fosun.”

Business Overview

We are a specialty niche focused commercial insurance underwriter and insurance administration services company, which also owns/operates insurance agencies and third-party administrators. We recognize revenue within the following categories: net earned premiums, net investment income, management administrative fees, commission revenue, claims fees, and net realized gains (losses). We remain committed to our core business model where we seek to combine our diverse revenue streams and efficient capital management to deliver consistent long-term growth in shareholder value.

Our mission dictates our commitment to serving:

our clients, by providing them with customized insurance products and services, with an emphasis on developing long-term relationships;
our associates, for whom we foster a positive and professional work environment with a strong commitment to diversity and equal opportunities for advancement;
our shareholders, by promoting steady growth, financial stability and superior long-term investment opportunities; and
our communities, by supporting charitable, cultural and educational organizations nationwide, while honoring our responsibility to protect the environment.

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The Company’s objective is to create value by emphasizing a regional focus and diverse source of revenues between underwriting premiums, fee-for-service revenue and commissions:

Within our insurance company operations, we believe our approach balances an effective local touch with efficient national coordination and positions us to opportunistically pursue a wide range of business in response to changing market conditions. We market and underwrite specialty property and casualty insurance programs and products on both an admitted and non-admitted basis through a broad and diverse network of independent retail agents, wholesalers, program administrators and general agents, who value service, specialized knowledge, and focused expertise. Program business refers to an aggregation of individually underwritten homogeneous risks that have similar characteristics and are distributed through a select group of agents.

Within our fee-for-service operations, we generate fee revenue by providing administrative and risk management services to self-insured groups, municipal pools and trusts.

Through our agency operations, we earn commission revenue through securing quality business and personal insurance products for our clients. Our agencies are located in Michigan, California, Massachusetts, Kansas, and Florida and produce commercial, personal lines, life and accident and health insurance which are placed primarily with unaffiliated insurance carriers. Although our agencies are a minimal source of business for our Insurance Company Subsidiaries, the agency operations remain a core strategy enabling us to balance our sources of revenue.

Our strategy is to generate profitable results and to deliver consistent, long-term shareholder value. To achieve these results we seek to leverage the unique characteristics of our balanced business model to generate:

consistent, profitable underwriting results;
predictable investment income in a low-risk, high-quality, primarily fixed income portfolio;
steady fee and commission income;
strong cash flow from our Insurance Company Subsidiaries and non-regulated fee-based services to leverage invested assets to equity and manage debt service;
steady growth through rate increases and select new business with proven track records;

We create a competitive advantage by investing in the talent and technology to efficiently service our clients; through strategically identified industry niches and individual account selectivity; and through adequate pricing and focused claims handling.

We monitor our objectives and strategy within the context of the interest rate environment, insurance market cycle conditions, inflation and general economic conditions. Our enterprise risk management (“ERM”) and capital management strategies are designed to ensure our compliance with regulatory guidelines and that our industry reputation is in good-standing. As we seek to maximize long-term shareholder value, our priorities and corresponding risk appetite may be influenced by these factors.

The Meadowbrook Approach

We have built our business in a manner that is designed to adapt to changing market conditions and deliver more predictable results. The following highlights key aspects of our model that contribute to our balanced approach:

Diverse Revenue Sources:   We generate the vast majority of our revenues from net earned premiums. To help generate our premiums, we have developed specialty niche expertise relative to a wide range of underwriting risks. Consequently, our premium base is broadly diversified by line of business, customer, type of distribution and geography. We also generate fee-for-service revenues from risk management services and commission revenue from our agencies that are not related to our insurance underwriting operations. Our range of capabilities provides flexibility for our long-term business development efforts as we seek to generate profitable growth. We also believe revenue diversification reduces our risk profile and enhances the sustainability of our business model.

Positioned to Manage Insurance Cycles:   We serve markets that operate on different cycles and believe our mix of admitted and non-admitted capabilities enhances our balanced business model. Our admitted market

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capabilities generally provide a consistent source of revenues as this market generally has less pronounced cycles, higher renewal retentions, and more stable pricing than the non-admitted markets. Our non-admitted capabilities enable us to respond opportunistically to otherwise unavailable insurance and volatile pricing environments.

Conservative Investment Philosophy:   We seek to generate consistent investment income through a low-risk, high-quality investment portfolio. We manage overall credit, interest rate, and liquidity risks when making investment decisions. We invest in highly-rated, investment grade securities. Our market risk to the investment portfolio is primarily interest rate risk associated with debt securities. Our exposure to equity price risk is related to our investments in high dividend equities. These investments comprise 7.0% of our investment portfolio. The duration of our high quality investment portfolio is well matched to our loss reserves and our investment approach reinforces our focus on underwriting profitability.

Ability to Attract and Retain Talented Insurance Professionals throughout United States:   We have assembled a team of talented insurance professionals and are committed to providing career development opportunities and building a culture focused on delivering superior customer service. Our associates possess a wide range of expertise across all functions and lines of business. Moreover, our regional structure enables our associates to deliver strong and responsive local service to our clients. We believe this is a unique aspect of our business model that enables us to better serve our agency network.

Culture of Disciplined Underwriting, Claims Handling & Reserving:   We have built a control environment that emphasizes a commitment to disciplined underwriting, claims handling and reserving. New business opportunities undergo a rigorous due diligence process with input provided from key functional areas and existing business is actively managed as discussed below.

Our underwriters are focused on achieving pricing adequacy and appropriate risk selection through adherence to program or insurance product underwriting guidelines. Underwriting trends are closely monitored, which enables us to proactively manage our business as we seek to deliver more predictable results. Our specialty lines products rely on dedicated underwriter leadership whereby the product is managed to meet a defined type of insured and we retain full underwriting and pricing authority. Our main street excess and surplus lines business includes binding authority and brokerage production sources. Our non-admitted program business employs dedicated underwriting specialists in the particular class of business being considered. These professionals review policy files for completeness and compliance with our terms, conduct on-site audits, and, when necessary, send and enforce underwriting notifications on files found to be out of compliance. With regard to property coverages, we limit exposures from catastrophe prone areas and purchase excess of loss and catastrophe reinsurance.

Additionally, our actuarial associates support underwriting with pricing and loss analysis. Corporate loss reserves are determined for each line of business, as Meadowbrook regularly performs a complete and detailed reserve analysis. Meadowbrook’s actuaries utilize both standard and proprietary systems to accurately and efficiently analyze reserves. We also engage an outside actuarial firm to review our reserve estimates.

Finally, we have built a strong claims handling function internally that plays a substantial role in claims management and handling activities. Meadowbrook employs approximately 233 claims personnel who operate from 14 regional offices, located throughout the United States. We also operate a centralized support call center and manage a network of independent adjusters. Claims monitoring is conducted through self and corporate audits, internal controls and executive oversight reports.

Description of Programs, Products, and Services

We market and underwrite specialty property and casualty insurance programs and products on both an admitted and non-admitted basis. We categorize our products into the following four categories:

Admitted Programs and Standard Market Products:   The admitted programs that we write are characterized by risks that are homogeneous or similar within specialty line, class and niche segments of business but have a diverse geographic profile. We also write a range of standard market products that are distributed through specialty agents. Generally, the average account premium for our admitted programs and standard market products is approximately $6,200. Due to the specialized nature of the program and distribution style, our

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admitted programs tend to have higher premium retention levels. This helps create stability in our business amid the cyclicality of the insurance industry. Examples of admitted programs we underwrite include coverages for the food service industry, educators, physicians, agricultural businesses and public entities. The largest line of business for our standard market products is workers’ compensation.

Main Street Excess and Surplus Lines:   The excess and surplus lines business we write include broad classes of “Main Street” commercial risks that are generally ineligible for coverage by the standard market. Generally, the average account premium for our excess and surplus lines risks is approximately $2,500. The excess and surplus lines regulatory environment allows rate and form freedom, which gives us the flexibility to design tailored coverage forms that are often more restrictive than those available in the admitted market. The high degree of flexibility contributes to heightened competition during soft markets and creates the potential for rapid expansion during hard markets. Examples of our excess and surplus lines business we underwrite include coverages for restaurants, bars/taverns, apartments, hotels/motels, and contractors’ liability. These examples and sub-classes can change as underwriting circumstances dictate.

Non-Admitted Programs:   The non-admitted programs we write have characteristics that are similar to our admitted programs; however, the commercial risks we provide coverage for are generally ineligible for coverage by the standard or admitted market. With this focus on non-admitted program underwriting, we are able to provide coverage for start-up organizations and relatively low volume programs that other markets are unable or unwilling to serve. Examples of non-admitted programs we offer include coverages for pet-sitters, oil and gas contractors, and professional liability.

Specialty Market Products:   We also offer specialty market products, where specific and unique underwriting expertise is required. We develop product solutions designed for specific specialty lines and market segments that may leverage either our admitted market or non-admitted market product capabilities, or both, depending on the market need. The specific and unique underwriting expertise that is required to write business in the segments we serve creates barriers to entry for new competitors. Examples of specialty markets we serve are the excess workers’ compensation, environmental, and marine markets.

As part of delivering our insurance programs and products, we are actively involved in a range of activities as described below:

Program and Product Design.   Before implementing a new program on behalf of a client, we generally review: (1) financial projections for the contemplated program, (2) historical loss and actuarial experience, (3) actuarial studies of the underlying risks, (4) the credit worthiness of the potential agent or client, and (5) the availability of reinsurance. Our senior management team and associates representing each of the risk-management disciplines work together to design, market, and implement new programs. Our due diligence process is structured to provide an underwriting risk assessment of the program and how the program fits within our client’s entity wide business plan and our overall risk profile.

Underwriting Risk Selection and Policy Issuance.   Our underwriting personnel help develop the proper criteria for selecting risks, while actuarial and reinsurance personnel evaluate and recommend the appropriate levels of rate and risk retention. The program is then tailored according to the requirements and qualifications of each client. With managed programs, we may also perform underwriting services based upon the profile of the specific program for a fee.

Claims Administration and Handling.   We provide substantially all claims management and handling services for workers’ compensation and most other lines, such as property, automobile liability, professional liability, and general liability. Our claims handling is managed by our field offices. Our corporate claims department monitors the results through self-audits, corporate claim audits, internal controls, and other executive oversight reports. With the exception of Midwest Financial Holdings, LLC (“MFH”), for which we have direct access to their paid and case reserve loss data and perform corporate claims audits, we handle substantially all claims functions for the majority of the programs we underwrite. Our involvement in claims administration and handling provides benchmarks and valuable feedback to program managers in assessing the client’s risk environment and the overall structure of the program.

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Loss Prevention and Control.   We provide loss control services which are designed to help clients prevent or limit the impact of certain loss events. Through an evaluation of the client’s workplace environment, our loss control specialists assist the client in planning and implementing a loss prevention program and, in certain cases, provide educational and training programs. With our managed programs, we provide these same services for a fee based upon the profile of the specific program.

Reinsurance.   Meadowbrook’s Insurance Company Subsidiaries cede insurance to other insurers under pro rata and excess-of-loss contracts. These reinsurance arrangements diversify the Company’s business and mitigate its losses arising from large risks or from hazards of an unusual nature. We maintain reinsurance treaties for our workers’ compensation, liability, aviation, marine, surety and property programs. In addition, facultative reinsurance is obtained as required for individual risks on a policy-by-policy basis. Meadowbrook also has the ability to cede insurance through captives, rent-a-captives, large deductible programs, and indemnification agreements, and assume insurance from other insurers.

The Company’s philosophy around reinsurance buying has not changed fundamentally and remains rooted in long-term relationships with highly rated reinsurers. These reinsurance partners are generally focused on the longer term profitability of their relationship with the Company.

We also provide the following services to our fee-for-service and agency clients:

Administration of Risk-Bearing Entities.   We generate fee revenue by assisting in the formation and administration of risk-bearing entities for clients and agents. We provide administrative services to self-insured groups, municipal pools and trusts. Additionally, through our subsidiary in Washington D.C., we are able to provide administrative services for certain captives and/or rent-a-captives.

Agency.   We earn commission revenue through the operation of our independent retail insurance agencies, located in Michigan, California, Massachusetts, Kansas and Florida. These agencies produce commercial, personal lines, life and accident and health insurance that is placed primarily with unaffiliated insurance carriers.

Distribution

We market our specialty property and casualty insurance products on both an admitted and non-admitted basis through a broad and diverse network of independent retail agents, wholesalers, program administrators and general agents (referred to as, “agents” or “producers”). On a limited basis, some of our producers provide certain policy issuance functions on our behalf.

Unlike traditional standard market companies that sell a full menu of insurance products through their distribution network, we selectively determine distribution and target agents that meet the specific product focus and needs for each of our targeted programs for our admitted business. We seek program agents with a primary focus and established niche expertise and where our relationship is a significant if not a majority source of their revenues.

Our largest producer in 2014 was Midwest General Insurance Agency, LLC (“Midwest General”), which, in combination with its affiliates, accounted for 14.6% of our gross written premium. We have a 28.5% equity interest in Midwest General Agency’s parent, MWFH. Our second largest producer in 2014 was Food Service Management, which in combination with its affiliates, accounted for 10.9% of our gross written premium. No other producer was responsible for more than 10% of our gross written premium.

We seek to offer incentives to our distribution network in a manner that aligns our distributors’ financial interests with our balanced business model. We believe that risk-sharing motivates participants to focus on underwriting selection, loss prevention, risk control measures and adherence to stricter underwriting guidelines. Risk sharing structures are designed based on the particular risk management goals of our clients, market conditions and our assessment of the opportunity for generating operating profit. We categorize risk sharing into two categories: profit sharing and quota sharing.

Profit-Sharing:   In addition to the initial commission allowed to the program agent, we at times offer various program dependent, profit-sharing commission contracts. These are tailored to the specific product and its attributes.

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Quota Sharing:   A second way we offer incentives to our producers is through quota-share reinsurance structures. In these scenarios, producers of the business determine which risks to submit to us for underwriting. For risks submitted, Meadowbrook underwrites individual primary insurance policies for members of a group or association, or a specific industry. We share in the operating results with the producer through a quota share reinsurance agreement with an insurance company (owned, or affiliated with the producer) or a captive or rent-a-captive.

We believe our selective approach to distribution also serves to align the agents’ financial interests with our balanced business model. Our selective approach reduces channel conflict and allows our agencies to generate franchise value. This is a mutually beneficial approach to enhancing the value of our distribution relationships.

Technology

We seek to leverage our business technology platform in order to achieve a high level of customer service and enhance operating efficiencies. We provide a select set of internet-based business processing systems to our producers to automate their capability to rate, quote, bind and service insurance policies in a timely and efficient manner. Advantage is a processing system for quoting and binding workers’ compensation insurance policies. Century On-Line (“COL”) is a processing system for quoting, binding, and issuing policies for general liability, property and garage insurance policies underwritten by our excess and surplus lines company, Century. Further, we provide additional systems on a network-accessible basis for processing select package and commercial automobile programs. In addition to reducing our internal administrative processing costs, these systems enhance underwriting practices by automating risk selection criteria.

Competition and Pricing

We are part of a highly competitive industry that is cyclical and historically characterized by periods of high premium rates and shortages of underwriting capacity followed by periods of intense competition and excess underwriting capacity resulting in lower pricing and relaxed eligibility standards including broadening of coverages. We compete with other providers of specialty insurance programs, products, and risk management services, as well as with traditional providers of commercial insurance. Some of our competitors may have greater financial resources than we do.

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. In addition to the factors noted above, the insurance industry also competes on commission rates.

Principal competitive factors for providing risk management services include the costs of self-insuring relative to the cost of purchasing insurance from an insurance carrier, the availability and pricing of excess reinsurance coverage, cash flow needs, and the expected quality and consistency of the services to be provided.

We believe that we are able to compete based on our experience, the combined quality of our products and services, the high level of our employees’ professional expertise, our processing technology platforms, and our program-oriented approach. However, our ability to successfully compete is dependent upon a number of factors, including market and competitive conditions, many of which are outside of our control.

Geographic Diversity and Mix of Business

Our revenues are diversified geographically by class and line of business, type of insured and agency distribution. Within the workers’ compensation line of business, we have a regional focus in California and New England. Within the other liability, commercial automobile liability, excess worker’s compensation, and commercial multiple peril liability lines of business, we have a regional focus in the Southeast and California. Our fee-for-service business is managed on a regional basis with an emphasis in the Midwest, New England, and Southeast regions of the United States.

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The following table summarizes our gross written premium distribution by state for the years ended December 31, 2014, 2013, and 2012 (in thousands). We include only states that were top ten gross written premium production states in 2014:

Gross Written Premium
2014
%
2013
%
2012
%
California
$
261,305
 
 
35.2
%
$
325,215
 
 
34.5
%
$
351,805
 
 
33.0
%
Florida
 
61,114
 
 
8.2
%
 
70,005
 
 
7.4
%
 
98,127
 
 
9.2
%
Texas
 
42,795
 
 
5.8
%
 
54,643
 
 
5.8
%
 
67,068
 
 
6.3
%
New York
 
41,350
 
 
5.6
%
 
44,460
 
 
4.7
%
 
40,177
 
 
3.8
%
New Jersey
 
27,500
 
 
3.7
%
 
36,754
 
 
3.9
%
 
44,582
 
 
4.2
%
Missouri
 
24,967
 
 
3.4
%
 
23,936
 
 
2.5
%
 
24,526
 
 
2.3
%
Michigan
 
20,700
 
 
2.8
%
 
39,316
 
 
4.2
%
 
40,952
 
 
3.8
%
Pennsylvania
 
15,791
 
 
2.1
%
 
20,576
 
 
2.2
%
 
22,290
 
 
2.1
%
Illinois
 
15,304
 
 
2.1
%
 
21,056
 
 
2.2
%
 
28,969
 
 
2.7
%
Louisiana
 
13,260
 
 
1.7
%
 
19,719
 
 
2.1
%
 
21,168
 
 
2.0
%
All Other States
 
218,378
 
 
29.4
%
 
288,331
 
 
30.5
%
 
326,969
 
 
30.6
%
Total
$
742,464
 
 
100.0
%
$
944,011
 
 
100.0
%
$
1,066,633
 
 
100.0
%

Gross written premium decreased in 2014, which primarily reflects the impact of business that was targeted to be terminated during the fourth quarter of 2012 and planned premium reductions in specific underperforming areas. The terminations were on all new business, and upon renewal of existing business. The decrease was partially offset by achieved rate increases and the maturation of existing programs. Our most significant geographic concentration remains the state of California. Our current book of business in California is largely related to our relationship with a general agent who specializes in non-contractor workers’ compensation, and our relationship with a general agent that primarily focuses on the food service industry.

We manage our business to reduce geographic concentration of risk that could increase our exposure to losses from natural or intentionally caused catastrophic events. We also monitor the regulatory environment within our concentrated regions. We believe we have been able to strategically increase our California exposure, while maintaining a geographically diverse premium base throughout the United States.

The following table summarizes gross written premiums, net earned premiums, and net written premiums by line of business for the years ended December 31, 2014, 2013, and 2012 (in thousands):

Meadowbrook Insurance Group, Inc.
Summary of GWP, NEP, and NWP

Gross Written Premium
2014
%
2013
%
2012
%
Workers' Compensation
$
335,612
 
 
45.2
%
$
420,100
 
 
44.5
%
$
429,259
 
 
40.2
%
Other Liability
 
104,583
 
 
14.1
%
 
147,900
 
 
15.7
%
 
179,487
 
 
16.8
%
Commercial Auto Liability
 
60,706
 
 
8.2
%
 
75,638
 
 
8.0
%
 
109,758
 
 
10.3
%
Commercial Multi-Peril Property
 
48,992
 
 
6.6
%
 
66,886
 
 
7.1
%
 
78,399
 
 
7.4
%
Excess Workers' Compensation
 
55,934
 
 
7.5
%
 
63,290
 
 
6.7
%
 
81,171
 
 
7.6
%
Commercial Multi-Peril Liability
 
38,390
 
 
5.2
%
 
47,931
 
 
5.1
%
 
59,986
 
 
5.6
%
All Other Lines
 
98,247
 
 
13.2
%
 
122,266
 
 
13.0
%
 
128,573
 
 
12.1
%
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
742,464
 
 
100.0
%
$
944,011
 
 
100.0
%
$
1,066,633
 
 
100.0
%
Net Earned Premium
2014
%
2013
%
2012
%
Workers' Compensation
$
307,548
 
 
47.8
%
$
328,978
 
 
47.2
%
$
358,243
 
 
41.9
%
Other Liability
 
87,710
 
 
13.6
%
 
117,208
 
 
16.8
%
 
134,224
 
 
15.7
%
Commercial Auto Liability
 
56,521
 
 
8.8
%
 
47,902
 
 
6.9
%
 
97,723
 
 
11.4
%
Commercial Multi-Peril Property
 
46,023
 
 
7.1
%
 
34,990
 
 
5.0
%
 
62,991
 
 
7.4
%
Excess Workers' Compensation
 
30,696
 
 
4.8
%
 
48,166
 
 
6.9
%
 
50,510
 
 
5.9
%
Commercial Multi-Peril Liability
 
39,609
 
 
6.2
%
 
50,317
 
 
7.2
%
 
54,536
 
 
6.4
%
All Other Lines
 
75,164
 
 
11.7
%
 
69,856
 
 
10.0
%
 
96,032
 
 
11.3
%
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
643,271
 
 
100.0
%
$
697,417
 
 
100.0
%
$
854,259
 
 
100.0
%

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Net Written Premium
2014
%
2013
%
2012
%
Workers' Compensation
$
297,361
 
 
49.5
%
$
331,647
 
 
48.0
%
$
344,992
 
 
43.3
%
Other Liability
 
78,763
 
 
13.1
%
 
104,024
 
 
15.0
%
 
133,520
 
 
16.7
%
Commercial Auto Liability
 
55,906
 
 
9.3
%
 
52,244
 
 
7.6
%
 
78,868
 
 
9.9
%
Commercial Multi-Peril Property
 
40,578
 
 
6.8
%
 
42,792
 
 
6.2
%
 
48,330
 
 
6.1
%
Excess Workers' Compensation
 
27,813
 
 
4.6
%
 
39,127
 
 
5.7
%
 
52,421
 
 
6.6
%
Commercial Multi-Peril Liability
 
35,014
 
 
5.8
%
 
42,853
 
 
6.2
%
 
57,317
 
 
7.2
%
All Other Lines
 
65,802
 
 
10.9
%
 
78,950
 
 
11.4
%
 
82,054
 
 
10.3
%
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
601,237
 
 
100.0
%
$
691,637
 
 
100.0
%
$
797,502
 
 
100.0
%

As noted above, gross written premium decreased in 2014 due primarily to business that was targeted to be terminated during the fourth quarter of 2012 and planned premium reductions in specific underperforming areas. The decrease was partially offset by achieved rate increases and the maturation of existing programs. During 2014, we achieved overall average written rate increases of approximately 6.5%. The average written rate increases for our workers’ compensation line of business in 2014 was approximately 6.3%.

Reserves

The following table shows the development of reserves for unpaid losses and loss adjustment expenses (“LAE”) from 2005 through 2014 for our Insurance Company Subsidiaries

Development of the ProCentury acquired reserves is not included for the years prior to 2008, because our merger with ProCentury (the “ProCentury Merger”) was not effective until August 1, 2008. The lower portion of the table reflects the impact of reinsurance for the years 2005 through 2014 reconciling the net reserves shown in the upper portion of the table to gross reserves.

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Additional information relating to our reserves is included within the Losses and Loss Adjustment Expenses and Reinsurance Recoverables section of Note 1 ~ Summary of Significant Accounting Policies and Note 4 ~ Liability for Losses and Loss Adjustment Expenses of the Notes to the Consolidated Financial Statements, as well as to the Critical Accounting Policies section and the Reserves section of Item 7, Management’s Discussion and Analysis.

Analysis of Loss and Loss Adjustment Expense Development

Years Ended December 31,
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
(in thousands)
Reserves for losses and LAE at end of period
$
271,423
 
$
302,655
 
$
341,541
 
$
625,331
 
$
682,376
 
$
784,202
 
$
879,093
 
$
1,074,075
 
$
1,111,090
 
$
1,070,829
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted reserves for losses and LAE at end of period
$
271,423
 
$
302,655
 
$
341,541
 
$
625,331
 
$
682,376
 
$
784,202
 
$
879,093
 
$
1,074,075
 
$
1,111,090
 
$
1,070,829
 
Cumulative paid as of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 year later
 
83,271
 
 
81,779
 
 
95,393
 
 
173,525
 
 
187,818
 
 
269,913
 
 
331,440
 
 
396,480
 
 
366,161
 
 
 
 
2 years later
 
133,809
 
 
140,308
 
 
155,745
 
 
279,221
 
 
338,925
 
 
458,376
 
 
560,826
 
 
653,666
 
 
 
 
 
 
 
3 years later
 
170,226
 
 
180,197
 
 
197,558
 
 
369,313
 
 
441,938
 
 
598,254
 
 
712,692
 
 
 
 
 
 
 
 
 
 
4 years later
 
195,242
 
 
204,802
 
 
233,421
 
 
425,223
 
 
520,024
 
 
684,161
 
 
 
 
 
 
 
 
 
 
 
 
 
5 years later
 
210,993
 
 
228,284
 
 
255,627
 
 
469,293
 
 
568,904
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6 years later
 
226,048
 
 
241,737
 
 
279,743
 
 
500,465
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7 years later
 
235,193
 
 
258,360
 
 
292,460
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8 years later
 
245,528
 
 
267,043
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9 years later
 
252,232
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserves re-estimated as of end of year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 year later
 
268,704
 
 
295,563
 
 
330,416
 
 
596,661
 
 
651,373
 
 
791,514
 
 
964,608
 
 
1,142,475
 
 
1,109,349
 
 
 
 
2 years later
 
263,069
 
 
286,647
 
 
327,862
 
 
566,878
 
 
654,641
 
 
844,001
 
 
1,014,009
 
 
1,177,366
 
 
 
 
 
 
 
3 years later
 
261,319
 
 
292,516
 
 
331,034
 
 
568,751
 
 
684,621
 
 
874,804
 
 
1,035,542
 
 
 
 
 
 
 
 
 
 
4 years later
 
265,448
 
 
293,897
 
 
339,931
 
 
580,023
 
 
704,163
 
 
889,193
 
 
 
 
 
 
 
 
 
 
 
 
 
5 years later
 
268,007
 
 
303,948
 
 
346,790
 
 
598,137
 
 
712,583
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6 years later
 
276,374
 
 
305,504
 
 
360,406
 
 
601,542
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7 years later
 
276,130
 
 
316,316
 
 
356,972
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8 years later
 
285,106
 
 
313,031
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9 years later
 
283,451
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cumulative redundancy (deficiency):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dollars
$
(12,028
)
$
(10,377
)
$
(15,431
)
$
23,788
 
$
(30,207
)
$
(104,991
)
$
(156,449
)
$
(103,292
)
$
1,741
 
 
 
 
Percentage
 
-4.4
%
 
-3.4
%
 
-4.5
%
 
3.8
%
 
-4.4
%
 
-13.4
%
 
-17.8
%
 
-9.6
%
 
0.2
%
 
 
 
Net reserves
 
271,423
 
 
302,655
 
 
341,541
 
 
625,331
 
 
682,376
 
 
784,202
 
 
879,093
 
 
1,074,075
 
 
1,111,090
 
 
1,070,829
 
Ceded reserves
 
187,254
 
 
198,422
 
 
198,461
 
 
260,366
 
 
266,801
 
 
280,854
 
 
315,884
 
 
381,905
 
 
505,431
 
 
519,530
 
Gross reserves
 
458,677
 
 
501,077
 
 
540,002
 
 
885,697
 
 
949,177
 
 
1,065,056
 
 
1,194,977
 
 
1,455,980
 
 
1,616,521
 
 
1,590,359
 
Net re-estimated
 
283,451
 
 
313,031
 
 
356,972
 
 
601,542
 
 
712,583
 
 
889,193
 
 
1,035,542
 
 
1,177,366
 
 
1,109,349
 
 
 
 
Ceded re-estimated
 
215,406
 
 
213,164
 
 
212,002
 
 
260,168
 
 
278,196
 
 
305,646
 
 
337,401
 
 
403,943
 
 
513,465
 
 
 
 
Gross re-estimated
 
498,858
 
 
526,196
 
 
568,974
 
 
861,710
 
 
990,780
 
 
1,194,839
 
 
1,372,943
 
 
1,581,310
 
 
1,622,814
 
 
 
 
Gross cumulative redundancy (deficiency)
$
(40,181
)
$
(25,119
)
$
(28,972
)
$
23,986
 
$
(41,602
)
$
(129,783
)
$
(177,966
)
$
(125,330
)
$
(6,293
)
 
 
 

The following table sets forth the difference between United States Generally Accepted Accounting Principles (“GAAP”) reserves for loss and loss adjustment expenses and statutory reserves for loss and loss adjustment expenses at December 31, (in thousands):

   
2014
2013
GAAP reserves for loss and LAE
 
1,590,359
 
 
1,616,521
 
Reinsurance recoverables for unpaid losses
 
(519,530
)
 
(505,431
)
ASC 944 adjustment*
 
(5,217
)
 
(5,827
)
Statutory reserves for loss and LAE
 
1,065,612
 
 
1,105,263
 

*100% Quota Share Reinsurance Agreement related to a worker’s compensation novation policy, with reinsurance provisions recognized as retroactive reinsurance on a GAAP basis, in accordance with ASC 944- Financial Services- Insurance and recognized as prospective reinsurance on a statutory basis, in accordance with SSAP 62R- Property and Casualty Reinsurance.

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For the year ended December 31, 2014, we reported an increase of $6.3 million in gross ultimate loss estimates for accident years 2013 and prior, or 0.4% of $1,616.5 million of gross loss and LAE reserves at January 1, 2014. We reported a $1.7 million decrease in net ultimate loss and LAE estimates for accident years 2013 and prior, or 0.2% of $1,111.1 million of net loss & LAE reserves at January 1, 2014.

For the year ended December 31, 2013, we reported an increase of $81.1 million in gross ultimate loss estimates for accident years 2012 and prior, or 5.6% of $1,456.0 million of gross loss and LAE reserves at January 1, 2013. We reported a $68.4 million increase in net ultimate loss and LAE estimates for accident years 2012 and prior, or 6.4% of $1,074.1 million of net loss & LAE reserves at January 1, 2013.

Reinsurance

Information relating to our reinsurance structure and treaty information is included within Note 6 ~ Reinsurance of the Notes to the Consolidated Financial Statements.

Investments

Information relating to our investment portfolio is included within Note 3 ~ Investments of the Notes to the Consolidated Financial Statements and the Investments section of Item 7, Management’s Discussion and Analysis, as well as Item 7A Quantitative and Qualitative Disclosures about Market Risk.

Regulation

Insurance Company Regulation

Our Insurance Company Subsidiaries are subject to regulation in the states where they conduct business. State insurance regulations generally are designed to protect the interests of policyholders, state insurance consumers or claimants rather than shareholders or other investors. The nature and extent of such state regulation varies by jurisdiction, but generally involves:

prior approval of the acquisition of control of an insurance company or of any company controlling an insurance company, including the acquisition by Fosun;
regulation of certain transactions entered into by such Insurance Company Subsidiary 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 that must be maintained;
establishment of reserves required to be maintained for unearned premium, loss and loss adjustment expense, or for other purposes;
limitations on types and amounts of investments;
underwriting and claims settlement practices;
restrictions on the size of risks that 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 our Insurance Company Subsidiaries. The results of these examinations can give rise to regulatory orders requiring remedial, injunctive or other corrective action.

Insurance Holding Company Regulation

We operate as an insurance holding company and are subject to regulation in the jurisdictions in which we conduct business. These regulations require that each of our Insurance Company Subsidiaries in the system register with the insurance department of its state of domicile and furnish information concerning the operations

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of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system which are domiciled in that state. The insurance laws similarly provide that all transactions among members of a holding company system must be fair and reasonable. Certain types of transactions between our Insurance Company Subsidiaries and the Company and our other affiliates generally must be disclosed to the state regulators, and prior approval of the applicable state insurance regulator generally is required for any material or extraordinary transaction. In addition, a change of control of a domestic insurer or of any controlling person requires the prior approval of the state insurance regulator.

Various State and Federal Regulation

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. In addition, for some classes of insureds 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, if permitted by applicable regulations, these adverse effects on profitability can be minimized through repricing of coverages or limitations or cessation of the affected business.

Reinsurance Intermediary

Our reinsurance intermediaries are also subject to regulation. Under applicable regulations, an intermediary is responsible, as a fiduciary, for funds received on account of the parties to the reinsurance transaction. The intermediaries are required to hold such funds in appropriate bank accounts subject to restrictions on withdrawals and prohibitions on commingling.

Licensing and Agency Contracts

We, or certain of our designated employees, must be licensed to act as agents by state regulatory authorities in the states in which we conduct business. Regulations and licensing laws vary in individual states and are often complex.

Insurance licenses are issued by state insurance regulators upon application and may be of perpetual duration or may require periodic renewal. We must apply for and obtain appropriate new licenses before we can expand into a new state on an admitted basis or offer new lines of insurance that require separate or additional licensing.

Insurers operating on an admitted basis must file premium rate schedules and policy or coverage forms for review and approval by the insurance regulators. In many states, rates and policy forms must be approved prior to use, and insurance regulators have broad discretion in judging whether an insurer’s rates are adequate, not excessive and not unfairly discriminatory.

The applicable licensing laws and regulations in all states are subject to amendment or reinterpretation by state regulatory authorities, and such authorities are vested in most cases with relatively broad discretion as to the granting, revocation, suspension and renewal of licenses. We, or our employees, could be excluded, or temporarily suspended, from continuing with some or all of our activities in, or otherwise subjected to penalties by, a particular state.

Insurance Regulation Concerning Change or Acquisition of Control

Star, Williamsburg, Ameritrust, and PIC are domestic property and casualty insurance companies organized under the insurance laws (the “Insurance Codes”) of Michigan, while Savers, Century and PROPIC are organized under the Insurance Codes of Missouri, Ohio, and Washington D.C., respectively. The Insurance Codes provide that acquisition or change of control of a domestic insurer or of any person that controls a domestic insurer (including the proposed transaction with Fosun) 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 change of control (commonly known as a “Form A”)

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containing information required by statute and published regulations and provide a copy of such Form A to the domestic insurer. Control is generally presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote or holds proxies representing ten percent or more of the voting securities of the company.

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.

Membership in Insolvency Funds and Associations and Mandatory Pools

Most states require admitted property and casualty insurers to become members of insolvency funds or associations, which generally protect policyholders against the insolvency of insurers. Members of the fund or association must contribute to the payment of certain claims made against insolvent insurers. Maximum contributions required by law in any one year vary between 1% and 2% of the annual premium written by a member in that state. For 2014, 2013, and 2012, assessments from insolvency funds were $5.3 million, $7.0 million, and $6.8 million, respectively. Most of these payments are recoverable through future policy surcharges and premium tax reductions.

Our Insurance Company Subsidiaries are also required to participate in various mandatory insurance facilities or in funding mandatory pools, which are generally designed to provide insurance coverage for consumers who are unable to obtain insurance in the voluntary insurance market. Among the pools participated in are those established in certain states to provide windstorm and other similar types of property coverage. These pools typically require all companies writing applicable lines of insurance in the state for which the pool has been established to fund deficiencies experienced by the pool based upon each company’s relative premium writings in that state, with any excess funding typically distributed to the participating companies on the same basis. To the extent that reinsurance treaties do not cover these assessments, they may have an adverse effect on the Company. For 2014, 2013, and 2012, total assessments paid to all such facilities were $3.9 million, $4.2 million, and $4.9 million, respectively.

Restrictions on Dividends and Risk-Based Capital

For information on Restrictions on Dividends and Risk-based Capital that affect us please refer to Note 8 ~ Regulatory Matters and Rating Issues of the Notes to the Consolidated Financial Statements and the Regulatory and Rating Issues section within Item 7, Management’s Discussion and Analysis.

NAIC-IRIS Ratios

The National Association of Insurance Commissioners’ (“NAIC”) 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 thirteen industry ratios and specifies “usual values” for each ratio. Departure from the usual values on four or more ratios generally leads to inquiries or possible further review from individual state insurance commissioners. Refer to the Regulatory and Rating Issues section within Item 7, Management’s Discussion and Analysis.

Effect of Federal Legislation

The Terrorism Risk Insurance Act, (“TRIA”), was enacted in November 2002. After several extensions, Congress enacted the Terrorism risk Insurance Program Reauthorization of 2015 (“Act”). The 2015 Act extends the Federal Terrorism Insurance Program until December 31, 2020. The Act continues to require insurance companies to offer terrorism coverage and provides compensation for insured losses resulting from acts of certified terrorism, subject to a program event trigger of $100.0 million for 2015, which will increase by 20.0 million each year until it reaches $200.0 million in 2020, after the insurer retains loss equal to 20% of its direct earned premium as permitted by the Act. There was no change to the insurer deductible under the Act. Insurers covered by the Act are also responsible for a 15% coinsurance of loss in excess of their stated retention

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in 2015, such coinsurance will increase by 1 percentage point each year until it reaches 20% in 2020. Over 6 years the Company’s co-participation of the federal insurance quota share will increase from 15% to 20%. The Company currently purchases $140.0 million of terrorism protection under its workers’ compensation treaties to satisfy these obligations. The Company implemented a conservative strategy during 2014 addressing the possible non-renewal of the statute in relation to its exposure, which is specifically connected to employee concentrations in certain large hospitals. The Company imposed aggregate limits on certain workers’ compensation policies where previously statutory limits were extended as permitted; and/or non-renewed certain specific risks where other alternatives were not commercially feasible. The Company is actively engaged in evaluating alternatives and monitoring its aggregation exposures to terrorism on a regular basis, we will implement a strategy that conservatively addresses the increasing retentions under the Act.

Employees

At February 18, 2015, we employed 904 associates to service our clients and provide management services to our Insurance Company Subsidiaries as described below. We believe we have good relationships with our associates.

Available Information

Our Internet address is www.meadowbrook.com, where we make available, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Statements of Beneficial Ownership (Forms 3, 4, and 5), and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish to, the SEC. You may read and copy materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington D.C., 20549. You may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy statements, and other information that we file at www.sec.gov. Our SEC reports can also be accessed through the investor relations section of our website. The information found on our website is not part of this or any other report we file with, or furnish to the SEC. The Charters of the Governance and Nominating Committee, the Compensation Committee, the Audit Committee and the Capital Strategy and Investment Committee, as well as the Board of Directors Governance Guidelines are also available on our website, or available in print to any shareholder who requests this information. In addition, our Compliance Code of Conduct and Business Ethics policy is available on our website, or in print to any shareholder who requests this information.

Glossary of Selected Insurance Terms

GAAP Terms

Book value per share
Total common shareholders' equity divided by the number of common shares outstanding.
Case reserves
Claim department estimates of anticipated future payments to be made on each specific individual reported claim.
Deferred acquisition costs
Primarily commissions and premium-related taxes that vary with, and are primarily related to, the production of new contracts and are deferred and amortized to achieve a matching of revenues and expenses when reported in financial statements prepared in accordance GAAP.
Deficiency
With regard to reserves for a given liability, a deficiency exists when it is estimated or determined that the reserves are insufficient to pay the ultimate settlement value of the related liabilities. Where the deficiency is the result of an estimate, the estimated amount of deficiency (or even the finding of whether or not a deficiency exists) may change as new information becomes available.

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Expense ratio
See “Underwriting expense ratio.”
Incurred but not reported (IBNR) reserves
Reserves for estimated losses and LAE that have been incurred but not yet reported to the insurer. This includes amounts for unreported claims, development on known cases, and re-opened claims.
Loss
An occurrence that is the basis for submission and/or payment of a claim. Losses may be covered, limited or excluded from coverage, depending on the terms of the policy.
Loss adjustment expenses (LAE)
The expenses of settling claims, including legal and other fees and the portion of general expenses allocated to claim settlement costs.
Loss and LAE ratio
For GAAP, it is the ratio of incurred losses and loss adjustment expenses to net earned premiums. For SSAP, it is the ratio of incurred losses and loss adjustment expenses to net earned premiums.
Loss reserves
Liabilities established by insurers and reinsurers to reflect the estimated cost of claims incurred that the insurer or reinsurer will ultimately be required to pay in respect of insurance or reinsurance it has written. Reserves are established for losses and for LAE, and consist of case reserves and IBNR reserves. As the term is used in this document, “loss reserves” is meant to include reserves for both losses and LAE, unless stated otherwise.
Loss reserve development
The increase or decrease in incurred claims and claim adjustment expenses as a result of the re-estimation of claims and claim adjustment expense reserves at successive valuation dates for a given group of claims. Loss reserve development may be related to prior year or current year development.
Losses incurred
The total losses sustained by an insurance company under a policy or policies, whether paid or unpaid. Incurred losses include a provision for IBNR.
Redundancy
With regard to reserves for a given liability, a redundancy exists when it is estimated or determined that the reserves are greater than what will be needed to pay the ultimate settlement value of the related liabilities. Where the redundancy is the result of an estimate, the estimated amount of redundancy (or even the finding of whether or not a redundancy exists) may change as new information becomes available.
Underwriting expense ratio
For GAAP, it is the ratio of GAAP underwriting expenses incurred to net earned premiums. For SSAP, it is the ratio of Statutory underwriting expenses incurred to net written premiums.

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Non-GAAP Terms

Accident year
The annual calendar accounting period in which loss events occurred, regardless of when the losses are actually reported, booked or paid.
Accident year combined ratio
The accident year combined ratio is a non-GAAP measure that excludes changes in net ultimate loss estimates from prior accident year loss reserves. The accident year combined ratio provides management with an assessment of the specific policy year’s profitability (which matches policy pricing with related losses) and assists management in their evaluation of product pricing levels and quality of business written. Management uses accident year combined ratio as one component to assess the Company's current year performance and as a measure to evaluate, and if necessary, adjust current year pricing and underwriting.
A.M. Best’s Capital Adequacy Ratio (BCAR)..
An integrated review of underwriting, financial and asset leverage. BCAR calculates the net required capital to support the financial risks of the company associated with the exposure of assets and underwriting to adverse economic and market conditions, and compares it to economic capital.
Combined Ratio (GAAP)
The statutory combined ratios modified to reflect GAAP accounting, as management evaluates the performance of our underwriting operations using the GAAP combined ratio. Specifically, the GAAP combined ratio is the sum of the loss and LAE ratio, plus the ratio of GAAP underwriting expenses (which include the change in deferred policy acquisition costs) to net premiums earned (expense ratio)
Combined Ratio (Statutory)
The combined loss and expense ratio (or combined ratio), expressed as a percentage, is the key measure of underwriting profitability traditionally used in the property and casualty insurance business. The combined ratio is a statutory (non-GAAP) accounting measurement, which represents the sum of (i) the ratio of losses and loss expenses to net premiums earned (loss ratio), plus (ii) the ratio of underwriting expenses to net premiums written (expense ratio).
Combined Ratio (Overall)
When the combined ratio is under 100%, underwriting results are generally considered profitable; when the combined ratio is over 100%, underwriting results are generally considered unprofitable.
NAIC-IRIS ratios
Financial ratios calculated by the NAIC to assist state insurance departments in monitoring the financial condition of insurance companies.
Operating income (loss)
Net income (loss) excluding the after-tax impact of net realized investment gains (losses) and cumulative effect of changes in accounting principles when applicable.
Operating income (loss) per share
Operating income (loss) on a per share basis.

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Premium leverage ratio (Gross / Net)
The ratio of gross / net written premium to consolidated statutory surplus.
Policyholders' surplus
As determined under SSAP, the amount remaining after all liabilities, including loss reserves, are subtracted from all admitted assets. Admitted assets are assets of an insurer prescribed or permitted by a state to be recognized on the statutory balance sheet. Policyholders' surplus is also referred to as “surplus” or “statutory surplus” for statutory accounting purposes.
Risk-based capital (RBC)
A measure adopted by the NAIC and enacted by states for determining the minimum statutory policyholders' surplus requirements of insurers. Insurers having total adjusted capital less than that required by the RBC calculation will be subject to varying degrees of regulatory action depending on the level of capital inadequacy.
Statutory accounting practices (SSAP)
The practices and procedures prescribed or permitted by domiciliary state insurance regulatory authorities in the United States for recording transactions and preparing financial statements. Statutory accounting practices generally reflect a modified going concern basis of accounting.
Underwriting gain or loss
Net earned premiums claims and claim adjustment expenses and insurance-related expenses.

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 ITEM 1A.    RISK FACTORS

In addition to the other information set forth in this report, including the information regarding forward-looking statements set forth in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, you should carefully consider the following risk factors, categorized by “Risks Related to Our Being Acquired by Fosun”, “Risks Related to Our Business”, “Risks Related to Our Industry” and “Risks Related to Our Common Stock”, which could materially affect our business, financial condition or results of operations in future periods.

Risks Related to Our Being Acquired by Fosun

The announcement and pendency of our agreement to be acquired by Fosun may have an adverse impact on our business.

On December 30, 2014, we entered into a merger agreement pursuant to which we will be acquired by Fosun through the merger of us with a subsidiary of Fosun. Under the terms of the transaction, our shareholders will receive $8.65 per share of our common stock, consisting of all cash. The transaction is expected to close in the second half of 2015. Various events, regulatory factors or other circumstances related to the merger agreement could have an impact on our results of operations, including:

the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement, including a termination under circumstances that could require us to pay a termination fee;
the inability or the failure to satisfy conditions to complete the merger, including insurance regulatory approvals, and negative impacts associated with actions required to be taken by us in order to obtain requisite regulatory approvals;
the failure of the merger to close for any other reason;
risks that the proposed transaction disrupts current plans and operations and the potential difficulties in employee retention as a result of the merger;
adverse outcomes of pending or threatened litigation or government investigations relating to such transaction;
diversion of management’s attention from ongoing business concerns;
the effect of the announcement of the merger on our business relationships, operating results and our business generally, including effects on our relationships with agents, wholesalers, suppliers, customers, policyholders and regulators;
actions taken or conditions imposed by the governmental or regulatory authorities;
the impact of competition in the industries and in the specific markets in which we operate; and
the possibility that the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events.

Risks Related to Our Business

Actual loss and loss adjustment expenses may exceed our reserve estimates, which would negatively impact our profitability and financial position.

In many cases, several years may elapse between the occurrence of an insured loss, the reporting of the loss to us and our payment of the loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the related loss adjustment expenses. Loss reserves are an estimate of what we anticipate the ultimate costs to be and therefore do not represent an exact calculation of liabilities. Estimating loss reserves is a difficult and complex process involving many variables and subjective judgments. As part of the reserving process, we review historical data and consider the impact of various factors such as:

actuarial and statistical projections of the cost of settlement and administration of claims reflecting facts and circumstances then known;

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historical claims information and loss emergence patterns;
assessments of currently available data;
estimates of future trends in claims severity and frequency;
economic factors such as inflation;
judicial theories of liability;
estimates and assumptions regarding social, judicial and legislative trends, and actions such as class action lawsuits and judicial interpretation of coverages or policy exclusions; and
the level of insurance fraud.

This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future results. It also assumes that adequate historical or other data exists upon which to make these judgments. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves and actual results are likely to differ from original estimates.

If the actual amount of insured losses is greater than our reserve estimates, our profitability, capital and financial position could suffer. In addition, if our loss reserves are inadequate to cover the actual amount of insured losses, our financial strength rating or the financial strength ratings of our Insurance Company Subsidiaries could be impacted or downgraded. An increase in reserves may also require us to write off a portion of our deferred acquisition costs asset, which would also negatively impact our operating results and financial position.

In 2013, we experienced material reserve strengthening because of significant adverse loss development, and for the year ended December 31, 2013, we reported an increase in net ultimate loss estimates for accident years 2012 and prior of $68.4 million, or $63.1 million excluding an adverse arbitration award. The adverse development did impact our financial strength ratings of our Insurance Company Subsidiaries as discussed under “A decrease in our A.M. Best rating could negatively affect our business” below.

Additional unforeseen losses, the type and magnitude of which we cannot predict, may emerge in the future. These additional losses could arise from changes in the legal environment, laws and regulations, climate change, catastrophic events, increases in loss severity or frequency, or other causes. Such future losses could be substantial. Inflationary scenarios may cause the cost of claims, especially medical claims, to rise, impacting reserve adequacy and our results of operations. There can be no assurance that we will not in the future experience significant adverse loss developments that could result in reserve strengthening and additional material charges to earnings.

Additional information relating to our reserves is included within the Losses and Loss Adjustment Expenses and Reinsurance Recoverables section of Note 1 ~ Summary of Significant Accounting Policies and Note 4 ~ Liability for Losses and Loss Adjustment Expenses of the Notes to the Consolidated Financial Statements, as well as to the Critical Accounting Policies section and the Reserves section of Item 7, Management’s Discussion and Analysis.

A decrease in our A.M. Best rating could negatively affect our business.

Financial ratings are an important factor influencing the competitive position of insurance companies. Insurance companies are subject to financial strength ratings produced by external rating agencies. Higher ratings generally indicate greater financial stability and a stronger ability to pay claims. Ratings are assigned by rating agencies to insurers based upon factors they believe are important to policyholders. Ratings evaluations are not directed to potential purchasers of our common stock and are not recommendations to buy, hold, or sell our securities and should not be relied upon as such.

Our ability to write business is most influenced by our rating from A.M. Best (“A.M. Best”). A.M. Best ratings are designed to assess an insurer’s financial strength and ability to meet continuing obligations to policyholders. On August 2, 2013, A.M. Best lowered Meadowbrook’s issuer credit rating, as well its financial strength ratings and downgraded the Company’s Insurance Company Subsidiaries’ financial strength rating from “A-” (Excellent) with a “negative” outlook to “B++” (Good) with a “stable” outlook. Subsequently, on

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February 21, 2014, A.M. Best lowered Meadowbrook's issuer credit rating from bbb+ to bbb. A.M. Best affirmed the B++ financial strength rating of our Insurance Company Subsidiaries, but lowered the outlook for this rating from “stable” to “negative.” On January 5, 2015, A.M. Best placed under review with positive implications the issuer credit rating of “bb” of Meadowbrook, and also placed the financial strength rating of B++ (Good) and the ICRs of “bbb” under review with positive implications for our Insurance Company Subsidiaries.

Our results of operations could be materially and adversely impacted by the foregoing ratings. The adverse impact could include loss of current and potential independent agents and insureds who may choose to transact their business with more highly rated competitors. In addition, we may face a significant reduction in the number of insurance contracts we write and the loss of substantial business to our competitors that maintain higher ratings, which would cause premiums and earnings to decrease. The rating changes could negatively impact our ability to raise capital and have a negative impact on our overall liquidity. Because lenders and reinsurers will use our A.M. Best ratings as a factor in deciding whether to transact business with us, the current ratings of our Insurance Company Subsidiaries or their failure to maintain the current ratings may dissuade a financial institution or reinsurance company from conducting any business with us or may increase our interest or reinsurance costs. There can be no assurance that the Company will not be further downgraded.

In response to the downgrade by A.M. Best, on August 4, 2013, the Insurance Company Subsidiaries entered into a 100% quota share reinsurance agreement(s) with State National Insurance Company, National Specialty Insurance Company and United Specialty Insurance Company (collectively, “SNIC”), which provides the Insurance Company Subsidiaries the use of an “A” rated policy of insurance for a portion of its business where an “A” rated policy issuer is required. The costs associated with these agreements could negatively impact our results of operations. A further downgrade of the Company could increase the cost for this agreement, as well as require us to post additional collateral. In addition, a change in the A.M. Best rating of the policy issuance company could have a material adverse impact upon our business. There can be no assurance that the Company will not need to enter into additional policy issuance agreements.

We may require additional capital in the future, which may not be available or may only be available on unfavorable terms.

Our future capital requirements depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. To the extent that our present capital is insufficient to meet future operating requirements and/or cover losses, we may need to raise additional funds through financings. If we had to raise additional capital, equity or debt financing may not be available or may be on terms that are not favorable to us in our current environment. In the case of equity financings, dilution to our shareholders could result, and in any case such securities may have rights, preferences and privileges that are senior to those of the shares currently outstanding. If we cannot obtain adequate capital on favorable terms or at all, our business, operating results and financial condition could be adversely affected.

We face competitive pressures in our business that could cause our revenues to decline and adversely affect our profitability.

We compete with a large number of other companies in our selected lines of business. Many of our competitors are substantially larger and may enjoy better name recognition, substantially greater financial resources, higher financial strength ratings by rating agencies, broader and more diversified product lines and more widespread agency relationships than us. Insurers in our markets generally compete on the basis of price, consumer recognition, coverages offered, claims handling, financial stability, customer service and geographic coverage. Although pricing is influenced to some degree by that of our competitors, it is not in our best interests to compete solely on price, and we may from time-to-time experience a loss of market share during periods of intense price competition. A number of new, proposed or potential legislative or industry developments could further increase competition in our industry including, but not limited to:

the formation of new insurers and an influx of new capital in the marketplace as existing companies attempt to expand their business as a result of better pricing and/or terms or the offering of similar or better products at or below our prices;
programs in which state-sponsored entities provide property insurance in catastrophe-prone areas, other alternative market types of coverage, or other non-property insurance; and

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changing practices created by the Internet, which has increased competition within the insurance business.

New competition resulting from these and other developments could make the property and casualty insurance marketplace more competitive by increasing the supply of insurance capacity. In that event, the current market may soften further, and it may negatively influence our ability to maintain or increase rates. Consequently, our profitability could be adversely impacted by increased competition.

The failure of any of the loss limitation methods we employ could have a material adverse effect on our results of operations and financial condition.

Various provisions of our policies, such as limitations or exclusions from coverage or choice of forum, have been negotiated to limit our exposure to certain types of risks and expanding theories of legal liability. In addition, many of our policies limit the period during which a policyholder may bring a claim under the policy, which period in many cases is shorter than the statutory period under which these claims can be brought by our policyholders. While these exclusions and limitations help us assess and control our loss exposure, it is possible that a court or regulatory authority could nullify or void an exclusion, or legislation could be enacted that modifies or voids the use of such endorsements and limitations in a way that could have a materially adverse impact on our financial condition and operating results. Such actions could result in higher than anticipated losses and LAE by extending coverage beyond our underwriting intent or increasing the number or size of claims, which could have a material adverse effect on our operating results. In some instances, these changes may not become apparent until sometime after we have issued the insurance policies that are affected by the changes and litigation relating to the insurance policy interpretation has been resolved. As a result, the full extent of liability under our insurance contracts may not be known for many years after a policy is issued.

Our geographic concentration ties our performance to the business, economic, natural perils, man-made perils, and regulatory conditions within our most concentrated region.

Our revenues and profitability are subject to the prevailing regulatory, legal, economic, political, demographic, competitive, weather and other conditions in the principal states in which we do business. Changes in any of these conditions could make it less attractive for us to do business in such states and would have a more pronounced effect on us compared to companies that are more geographically diversified. In addition, our exposure to severe losses from localized perils, such as earthquakes, hurricanes, tropical storms, tornadoes, wind, ice storms, hail, fires, terrorism, riots and explosions, is increased in those areas where we have written significant numbers of insurance policies.

One of our predominate lines of business is workers’ compensation (47.8% of net earned premiums in 2014), which has a high concentration in California. Accordingly, unfavorable business, economic or regulatory conditions in this state could negatively impact our business. California is also exposed to climate and environmental changes, natural perils such as earthquakes, water supplies, and the possibility of pandemics or terrorist acts. Because our business is concentrated in this manner, we may be exposed to economic and regulatory risks or risk from natural perils that are greater than the risks associated with greater geographic diversification. Refer to Note 5 ~ Reinsurance for further information regarding our reinsurance structure related to workers’ compensation business.

Our success depends on our ability to appropriately price the risks we underwrite.

Our financial results depend on our ability to underwrite and collect adequate premium rates for a wide variety of risks. Rate adequacy is necessary to generate sufficient premiums to pay losses, loss expenses, and underwriting expenses and to earn a profit. To price our products accurately, we must collect and properly analyze a substantial amount of data, develop, test and apply appropriate rating formulas, monitor and react to changes in trends and project both severity and frequency of losses with reasonable accuracy. These activities are subject to a number of risks and uncertainties that are outside our control, including:

availability of sufficient reliable data and our ability to properly analyze available data;
uncertainties that inherently characterize estimates and assumptions;
selection and application of appropriate rating and pricing techniques;

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changes in legal standards, claim settlement practices, medical care expenses and restoration costs;
changes in mandated rates or benefits set by the state regulators; and
legislative actions.

Consequently, we could underprice risks, which would negatively affect our profit margins, or we could overprice risks, which could reduce our sales volume and competitiveness. In either event, our profitability could be materially and adversely affected.

If market conditions cause our reinsurance to be more costly or unavailable, we may be required to bear increased risks or reduce the level of our underwriting commitments.

As part of our overall risk and capacity management strategy, we purchase reinsurance for significant amounts of risk underwritten by our Insurance Company Subsidiaries, especially for the excess-of-loss and severity risks. We purchase reinsurance by transferring part of the risk we have written (known as ceding) to a reinsurance company in exchange for part of the premium we receive in connection with the risk under pro-rata and excess-of-loss contracts. These reinsurance arrangements are intended to diversify our business and reduce our exposure to large losses or from hazards of an unusual nature.

Market conditions beyond our control determine the availability and cost of the reinsurance we purchase, which may affect the level of our business and profitability. Our reinsurance facilities are generally subject to annual renewal. We may be unable to maintain our current reinsurance facilities or to obtain other reinsurance in adequate amounts and at favorable rates. Increases in the cost of reinsurance would adversely affect our profitability. In addition, if we are unable to renew our expiring facilities or to obtain new reinsurance on favorable terms, either our net exposure to risk would increase or, if we are unwilling to bear an increase in net risk exposures, we would have to reduce the amount of risk we underwrite.

Our reinsurers may not pay on losses in a timely fashion, or at all, which may cause a substantial loss and increase our costs.

Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred, the ceding of insurance does not discharge us of our primary liability to our policyholder. As a result, ceded reinsurance arrangements do not limit our ultimate obligations to policyholders to pay claims. Therefore, we are subject to credit risk with respect to the obligations of our reinsurers. We are also subject to the risk that their reinsurers may dispute their obligations to pay our claims. In addition, our reinsurance agreements are subject to specified limits and we would not have reinsurance coverage to the extent that it exceeds those limits. Should an unlikely event occur that exceeds our reinsurance coverage, then the amounts in excess of our reinsurance coverage could adversely impact our financial condition or results of operations. In order to minimize our exposure to significant losses from reinsurer insolvencies, we evaluate the financial condition of our reinsurers and monitor the economic characteristics of the reinsurers on an ongoing basis and, if appropriate, we may require trust agreements to collateralize reinsurers’ financial obligation to us. Nevertheless, if our reinsurers fail to pay us or fail to pay on a timely basis, our financial results and financial condition could be adversely affected.

We may be adversely affected by interest rate changes.

Our investment portfolio is predominantly comprised of fixed income securities. These securities are sensitive to changes in interest rates. An increase in interest rates typically reduces the fair market value of fixed income securities. In addition, if interest rates decline, investment income earned from future investments in fixed income securities will be lower. We generally hold our fixed income securities to maturity, so our interest rate exposure does not usually result in realized losses. However, as noted above, rising interest rates could result in a significant reduction of our book value. A low investment yield environment could adversely impact our net earnings, as a result of fixed income securities maturing and being replaced with lower yielding securities which impact investing results.

Interest rates are highly sensitive to many factors beyond our control including general economic conditions, governmental monetary policy, and political conditions. As discussed above, fluctuations in interest rates may adversely impact our business. See “Item 7A. Qualitative and Quantitative Disclosures About Market Risk” for further discussion on interest rate risk.

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Difficult conditions in the global capital markets and the economy potentially could materially and adversely affect our business and results of operations.

Our results of operations are materially affected by conditions in the global capital markets and the United States economy generally, both in the United States and elsewhere around the world. Recently, concerns over the slow economic recovery, the level of United States national debt, inflation levels, energy costs and geopolitical issues have contributed to increased volatility and diminished expectations for the economy and global capital markets going forward. These factors, combined with volatile oil prices, reduced business and consumer confidence and continued high unemployment, have negatively impacted the United States economy. Although liquidity has improved, the market for fixed income instruments continues to experience some price volatility, credit downgrade events and elevated probabilities of default.

Factors such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, investor and consumer confidence and inflation levels all affect the business and economic environment and, ultimately, the amount and profitability of our business. In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment, negative investor sentiment and lower consumer spending, the demand for our insurance products could be adversely affected. Our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. In addition, we may experience an elevated incidence of claims and lapses or surrenders of policies. Adverse changes in the economy could negatively affect our net income and could have a material adverse effect on our business, results of operations and financial condition.

In addition, continuing market turmoil has resulted in, and may continue to raise the possibility of, legislative, regulatory and governmental actions. We cannot predict whether or when such actions may occur, or what impact, if any, such actions could have on our business, results of operations and financial condition.

Even in the absence of a market downturn, our insurance products, as well as our investment returns and our access to and cost of financing, are sensitive to equity, fixed income, real estate and other market fluctuations and general economic and political conditions. These fluctuations and conditions could materially and adversely affect our results of operations, financial condition and liquidity.

Our investment portfolio is subject to market and credit risks, which could affect our financial results and ability to conduct business.

Our investment portfolio is subject to overall market risk and credit risk of the individual issuers of securities. The value of investments in marketable securities is subject to impairment as a result of deterioration in the creditworthiness of the issuer. Although we try to manage this risk by diversifying our portfolio and emphasizing credit quality, our investments are subject to losses as a result of a general downturn in the economy. A severe economic downturn could have a material adverse impact on our results from operations and our financial condition.

We could be forced to sell investments to meet our liquidity requirements.

We invest the premiums we receive from customers until they are needed to pay policyholder claims or until they are recognized as profits. Consequently, we seek to match the duration of our investment portfolio with the duration of our loss and loss adjustment expense reserves to ensure strong liquidity and avoid having to liquidate securities to fund claims. As an example, we ladder the maturities of our investment portfolio to ensure we have adequate liquidity to fund anticipated liabilities that are coming due. Risks such as inadequate loss and loss adjustment reserves or unfavorable trends in litigation could potentially result in the need to sell investments to fund these liabilities. Such sales could result in significant realized losses depending on the conditions of the general market, interest rates and credit issues with individual securities.

If we are unable to successfully introduce new products or services or fail to keep pace with advances in technology, our business, financial condition and results of operations will be adversely affected.

The successful implementation of our business model depends on our ability to adapt to evolving technologies and industry standards and introduce new products and services. We cannot assure you that we will be able to introduce new products or services, or that any new products will achieve market acceptance.

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Moreover, competitors may develop competitive products that could adversely affect our results of operations. A failure by us to introduce planned products or other new products could have an adverse effect on our business, financial condition and results of operations.

If we cannot adapt to changing technologies, our products and services may become obsolete, and our business could suffer. Our success will depend, in part, on our ability to continue to enhance our existing products and services, develop new technology that addresses the increasingly sophisticated and varied needs of our prospective customers and respond to technological advances on a timely and cost-effective basis. We may not be successful in using new technologies effectively or adapting our proprietary technology to evolving customer requirements, and, as a result, our business could suffer.

Changes in federal regulation could impose significant burdens on us and otherwise adversely impact our results.

While the U.S. federal government has not historically regulated the insurance business, in 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) established a Federal Insurance Office (the FIO) within the U.S. Department of the Treasury. The FIO has limited regulatory authority and is empowered to gather data and information regarding the insurance industry and insurers. In December 2013, the FIO released a report recommending ways to modernize and improve the system of insurance regulation in the United States. While the report did not recommend full federal regulation of insurance, it did suggest an expanded federal role in some circumstances. In addition, the report suggested that Congress should consider direct federal involvement to fill regulatory gaps identified in the report, should those gaps persist, for example, by considering either establishing a federal coordinating body or a direct regulator of select aspects of the industry, such as large complex institutions or institutions that seek a federal charter, if a law is passed to allow a federal charter. It is not clear as to the extent, if any, the report will lead to regulatory changes or how any such changes would impact the Company.

As a result of the foregoing, the Dodd-Frank Act, or other additional federal regulation that is adopted in the future, could impose significant burdens on us, including impacting the ways in which we conduct our business, increasing compliance costs and duplicating state regulation, and could result in a competitive disadvantage, particularly relative to other insurers that may not be subject to the same level of regulation. Changes in the U.S. regulatory framework could impact the overall competitive environment by imposing additional burdens on us and allowing other competitors not subject to these same burdens to enter or expand their insurance businesses.

Even if we are not subject to additional regulation by the federal government, significant financial sector regulatory reform, including the Dodd-Frank Act, could have a significant impact on us. For example, regulatory reform could have an unexpected impact on our rights as a creditor or on our competitive position.

Other potential changes in U.S. federal legislation, regulation and/or administrative policies, including the potential repeal of the McCarran-Ferguson Act (which exempts insurance from most federal regulation) and potential changes in federal taxation, could also significantly harm the insurance industry, including us.

Our ability to meet ongoing cash requirements and pay dividends may be limited by our holding company structure and regulatory constraints restricting dividends or other distributions by our Insurance Company Subsidiaries.

We are a holding company that transacts the majority of our business through our Insurance Company Subsidiaries. Our ability to meet our obligations on our outstanding debt, and to pay our expenses and shareholder dividends, depends upon the dividend paying capacity of our Insurance Company Subsidiaries. We will be limited by the earnings of our Insurance Company Subsidiaries, and the distribution or other payment of such earnings to it in the form of dividends, loans, advances or the reimbursement of expenses. Payments of dividends to us by our Insurance Company Subsidiaries are subject to various business considerations and restricted by state insurance laws, including laws establishing minimum solvency and liquidity thresholds, and could be subject to revised restrictions in the future. The ability to pay ordinary and extraordinary dividends must be reviewed in relation to the impact on key financial measurement ratios, including RBC ratios and BCAR. The Insurance Company Subsidiaries’ ability to pay future dividends without advance regulatory approval is dependent upon maintaining a positive level of unassigned surplus, which in turn, is dependent upon the

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Insurance Company Subsidiaries generating net income. As a result, at times, we may not be able to receive dividends from our Insurance Company Subsidiaries in amounts necessary to meet our debt obligations, to pay shareholder dividends on our capital stock or to pay corporate expenses. Therefore, the inability of our Insurance Company Subsidiaries to pay dividends or make other distributions could have a material adverse effect on our business and financial condition.

Our Insurance Company Subsidiaries are subject to minimum capital and surplus requirements. Failure to meet these requirements could subject us to regulatory action.

Our Insurance Company Subsidiaries are subject to minimum capital and surplus requirements (which we are in compliance with as of December 31, 2014) imposed under the laws of their respective states of domicile and each state in which they issue policies. Any failure by one of our Insurance Company Subsidiaries to meet minimum capital and surplus requirements imposed by applicable state law will subject it to corrective action. This may include requiring adoption of a comprehensive financial plan, revocation of its license to sell insurance products or placing the subsidiary under state regulatory control. A decline in the risk based capital ratios of our Insurance Company Subsidiaries could limit their ability to make a dividend to us and could be a factor in causing rating agencies to downgrade our ratings. Any new minimum capital and surplus requirements adopted in the future may require us to increase the capital and surplus of our Insurance Company Subsidiaries, which we may not be able to do.

Our reliance upon producers subjects us to their credit risk.

With respect to agency-billed premiums and premiums generated by brokers, producers collect premiums from the policyholders and forward them to us. We rely, and will continue to rely, heavily on these producers to attract new business. Independent producers generally have the ability to bind insurance policies and collect premiums on our behalf, actions over which we have a limited ability to exercise preventative control. In the event that an independent agent exceeds its authority by binding us to a risk that does not comply with our underwriting guidelines, we may be at risk for that policy until we effect a cancellation. Any improper use of such authority may result in losses that could have a material adverse effect on our business, results of operations and financial condition.

In certain jurisdictions, when the insured pays premium for these policies to producers for payment, the premium might be considered to have been paid under applicable insurance laws and the insured will no longer be liable to us for those amounts, whether or not we have actually received the premium from the producer. Consequently, we assume a degree of credit risk associated with producers. Although producers’ failures to remit premiums to us have not caused a material adverse impact on us to date, there may be instances for which producers collect premium but do not remit it to us, and we may nevertheless be required under applicable law to provide the coverage set forth in the policy. Because the possibility of these events is dependent in large part upon the financial condition, cash flows, and internal operations of our producers, we may not be able to quantify any potential exposure presented by the risk. If we are unable to collect premium from our producers in the future, our financial condition and results of operations could be materially and adversely affected.

Two of our core selected producers accounts for a large portion of our premium volume, loss of business provided by this entity could adversely affect us.

Our largest producers in 2014 were Midwest General Insurance Agency, LLC, which in combination with its affiliates, accounted for 14.6% of our gross written premium and our food service industry producer which accounted for 10.9% of gross written premium. All other producers were less than 10% of our gross written premium. We do not have an exclusive relationship with either agency, and there can be no assurance that this relationship will continue in the future. If either agency reduces their marketing of our products or moves some or all of its business to another carrier, then our business, financial condition, results of operations and cash flows may be adversely affected.

Our performance is dependent on the continued services and performance of our senior management and other key personnel.

The success of our business is dependent on our ability to retain and motivate our senior management and key management personnel and their efforts. The loss of the services of any of our executive officers or other key employees could have a material adverse effect on our business, financial condition, results of operations,

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and cash flows. We have existing employment or severance agreements with Robert S. Cubbin, Christopher J. Timm, Karen M. Spaun, Michael G. Costello, James M. Mahoney and other senior executives. We maintain a “key person” life insurance policy on Robert S. Cubbin, our President and CEO. The loss of any of these officers or other key personnel could cause our ability to implement our business strategies to be delayed or hindered.

Our future success also will depend on our ability to attract, train, motivate and retain other highly skilled technical, managerial, marketing, and customer service personnel. Competition for these employees is strong and we may not be able to successfully attract, integrate or retain sufficiently qualified personnel in our current environment. In addition, our future success depends on our ability to attract, retain and motivate our agents and other producers. Our failure to attract and retain the necessary personnel and producers could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Increased information technology security threats and more sophisticated computer crime pose a risk to our systems, networks, products and services.

Our business is dependent upon the uninterrupted functioning of our information technology and telecommunication systems. We rely upon our systems, as well as the systems of our vendors, to underwrite and process our business; make claim payments; provide customer service; provide policy administration services, such as endorsements, cancellations and premium collections; comply with insurance regulatory requirements; and perform actuarial and other analytical functions necessary for pricing and product development. We have established security policies, processes and layers of defense designed to help identify and protect against intentional and unintentional misappropriation or corruption of our systems and information and disruption of our operations. Our security measures are focused on the prevention, detection and remediation of damage from computer viruses, natural disasters, unauthorized access, cyber attack and other similar disruptions.

Despite these efforts, our systems may be damaged, disrupted, or shut down due to attacks by unauthorized access, malicious software, undetected intrusion, hardware failures, or other events, and in these circumstances our disaster recovery planning may be ineffective or inadequate. Information technology security threats from user error to cybersecurity attacks are increasing in frequency and sophistication. Cybersecurity attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced threats. These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. No cybersecurity attack has had a material impact on our financial condition, results of operations or liquidity. However, the potential consequences of a material cybersecurity attack include reputational damage, litigation with third parties, and increased cybersecurity protection and remediation costs. A sustained business interruption or system failure could adversely impact our ability to process our business, provide customer service, pay claims in a timely manner or perform other necessary business functions. We could also be subject to fines and penalties from a security breach. The cost to remedy a severe breach could be substantial.

Managing technology initiatives and obtaining the efficiencies anticipated with technology implementation may present significant challenges.

While technological enhancements and initiatives can streamline several business processes and ultimately reduce the costs of operations, these initiatives can present short-term costs and implementation risks. Projections of associated costs, implementation timelines, and the benefits of those results may be inaccurate and such inaccuracies could increase over time. In addition, there are risks associated with not achieving the anticipated efficiencies from technology implementation that could impact our financial condition, results of operations, and cash flows.

Our internal controls are not fail-safe.

We continually enhance our operating procedures and internal controls to effectively support our business and comply with our regulatory and financial reporting requirements. As a result of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control objectives have been or will be met, and that every instance of error or fraud has been or will be detected. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the

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control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by individual acts or by collusion of two or more persons. The design of any system of controls is based in part upon assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Internal controls may also become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Further, the design of a control system must reflect resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in a cost-effective control system, misstatement due to error or fraud may occur and not be detected. Accordingly, our internal controls and procedures are designed to provide reasonable, not absolute, assurance that the control objectives are met.

Risks Related to Our Industry and Our Regulatory and Litigation Environment

The property and casualty insurance industry is cyclical in nature, which may affect our overall financial performance.

Historically, the financial performance of the property and casualty insurance industry has tended to fluctuate in cyclical periods of price competition, excess capacity and lower levels of profitability (known as a soft market) followed by periods of high premium rates, shortages of underwriting capacity, and higher levels of profitability (known as a hard market). Although an individual insurance company’s financial performance is dependent on its own specific business characteristics, the profitability of most property and casualty insurance companies tends to follow this cyclical market pattern. Specific factors that can drive the industry’s profitability include:

rising levels of actual costs that are not known by companies at the time they price their products;
volatile and unpredictable developments, including man-made, weather-related and other natural catastrophes or terrorist attacks;
changes in loss reserves resulting from the general claims and legal environments as different types of claims arise and judicial interpretations relating to the scope of insurer’s liability develop;
fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested assets and may impact the ultimate payout of losses; and
increases in medical costs beyond historic or expected annual inflationary levels.

Because the cyclicality of our industry is due in large part to the actions of competitors and general economic conditions, we cannot predict with certainty the timing or duration of changes in the market cycle.

Severe weather conditions and other catastrophes are inherently unpredictable and could cause us to suffer material financial losses.

The majority of our property business is exposed to the risk of severe weather conditions and other catastrophes. Catastrophes can be caused by various events, including natural events, such as hurricanes, winter weather, tornadoes, windstorms, earthquakes, hailstorms, severe thunderstorms and fires, and other events, such as explosions, terrorist attacks and riots. The incidence and severity of catastrophes and severe weather conditions are inherently unpredictable. Generally, these losses result in an increase in the number of claims incurred as well as the amount of compensation sought by claimants.

One or more catastrophic or other events could result in claims that substantially exceed our expectations, which could have an adverse effect on our results of operations or financial condition. Along with other insurers in the industry, we use models in assessing our exposure to catastrophe losses that assume various conditions and probability scenarios. However, these models do not necessarily accurately predict future losses or accurately measure losses currently incurred. Catastrophe models use historical information about various catastrophes and detailed information about our in-force business. While we use this information in connection with our pricing and risk management activities, there are limitations with respect to their usefulness in predicting losses in any reporting period. Such limitations lead to questionable predictive capability and post-event measurements that

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have not been well understood or proven to be sufficiently reliable. In addition, the models are not necessarily reflective of our or state-specific policy language, demand surge for labor and materials or loss settlement expenses, all of which are subject to wide variation by catastrophe.

Litigation may have an adverse effect on our business

We are subject at times to various claims, lawsuits and proceedings relating principally to alleged errors or omissions in the placement of insurance, claims administration, consulting services and other business transactions arising in the ordinary course of business as further disclosed in Note 15 ~ Commitments and Contingencies. Where appropriate, we vigorously defend such claims, lawsuits and proceedings. Some of these claims, lawsuits and proceedings seek damages, including consequential, exemplary or punitive damages, in amounts that could, if awarded, be significant. Most of the claims, lawsuits and proceedings arising in the ordinary course of business are covered by the policy of insurance at issue. We account for such activity through the establishment of unpaid loss and loss expense reserves. We also maintain errors and omissions insurance and extra-contractual coverage under reinsurance treaties related to the policy of insurance at issue or other appropriate insurance. In terms of any retentions or deductibles associated with such insurance, we have established accruals for such retentions or deductibles, when necessary, based upon current available information. In accordance with accounting guidance, if it is probable that an asset has been impaired or a liability has been incurred as of the date of the financial statements and the amount of loss is reasonably estimable; then an accrual for the costs to resolve these claims is recorded in the accompanying consolidated balance sheets. Period expenses related to the defense of such claims are included in the accompanying consolidated statements of income. With the assistance of outside counsel, we adjust such provisions according to new developments or changes in the strategy in dealing with such matters. On the basis of current information, we do not believe that there is a reasonable possibility that, other than with regard to the arbitration disclosed in Note 15 ~ Commitments and Contingencies, any material loss exceeding amounts already accrued, if any, will result from any of the claims, lawsuits and proceedings to which the Company is subject to, either individually, or in the aggregate. However, it is possible that future results of operations or cash flows for any particular quarter or annual period could be materially affected by an unfavorable resolution of any such matters.

Because we are heavily regulated by the states in which we operate, we may be limited in the way we operate.

We are subject to extensive supervision and regulation in the states in which we operate. The supervision and regulation relate to numerous aspects of our business and financial condition. The primary purpose of the supervision and regulation is to maintain compliance with insurance regulations and to protect policyholders. The extent of regulation varies, but generally is governed by state statutes. These statutes delegate regulatory, supervisory and administrative authority to state insurance departments. This system of regulation covers, among other things:

standards of solvency, including risk-based capital measurements;
restrictions on the nature, quality and concentration of investments;
restrictions on the types of terms that we can include in the insurance policies we offer;
restrictions on our ability to withdraw from unprofitable lines of insurance or unprofitable market areas;
required methods of accounting;
required reserves for unearned premiums, losses and other purposes;
permissible underwriting and claims settlement practices;
assessments for the provision of funds necessary for the settlement of covered claims under certain insurance policies provided by impaired, insolvent or failed insurance companies;
approval of policy forms and rates; and
restrictions on transactions between our Insurance Company Subsidiaries and their affiliates.

The regulations of the state insurance departments may affect the cost or demand for our products and may impede us from obtaining rate increases or taking other actions we might wish to take to increase our

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profitability. Furthermore, we may be unable to maintain all required licenses and approvals and our business may not fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations. Also, regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If we do not have the requisite licenses and approvals, or do not comply with applicable regulatory requirements, the insurance regulatory authorities could stop or temporarily suspend us from conducting some or all of our activities or monetarily penalize us. In addition, state regulators and the NAIC regularly examine existing laws and regulations applicable to insurance companies. Changes in these laws and regulations or the interpretations thereof could adversely impact our business.

Although the United States federal government does not directly regulate the insurance business, changes in federal legislation, regulation, and/or administrative policies in several areas, including changes in financial services regulation and federal taxation, can significantly harm the insurance industry.

Most states assess our Insurance Company Subsidiaries to provide funds for failing insurance companies and those assessments could be material.

Our Insurance Company Subsidiaries are subject to assessments in most states where we are licensed for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies. These assessments, which are levied by guaranty associations within the state up to prescribed limits, are imposed on all member insurers in the applicable state on the basis of the proportionate share of the premiums written by member insures in the lines of business in which the impaired, insolvent or failed insurer was engaged. Accordingly, the assessments levied on us by the states in which we are licensed to write insurance may increase as we increase our premiums written. Maximum contributions required by law in any one year vary by state, and have historically been less than one percent of annual premiums written. In addition, as a condition to the ability to conduct business in certain states, insurance companies are required to participate in mandatory reinsurance funds. We cannot predict with certainty the amount of future assessments or level of participation in mandatory reinsurance funds. Significant assessments and the effect of mandatory reinsurance arrangements, or changes therein, could have a material adverse effect on our financial condition and results of operations.

Risks Related to Our Common Stock

The price of our common stock may be volatile.

The trading price of our common stock may fluctuate substantially due to a variety of factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could be significant and could cause a loss in the amount invested in our shares of common stock. Factors that could cause fluctuations include, but are not limited to, the following:

Variations in our actual or anticipated operating results or changes in the expectations of financial market analysts with respect to our results;
Investor perceptions of the insurance industry in general and the Company in particular;
Market conditions in the insurance industry and any significant volatility in the market;
Major catastrophic events; and
Departure of key personnel.
Perceptions regarding the timing and likelihood of consummating the proposed transaction with Fosun.

Provisions of the Michigan Business Corporation Act, our articles of incorporation and other corporate governing documents and the insurance laws may discourage takeover attempts.

The Michigan Business Corporation Act contains “anti-takeover” provisions. Chapter 7A (the “Fair Price Act”) of the Business Corporation Act applies to us and may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider in their best interest, including those attempts that might result in shareholders receiving a premium over market price for their shares.

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In general, subject to certain exceptions, the Fair Price Act prohibits a Michigan corporation from engaging in a “business combination” with an “interested shareholder” for a period of five years following the date that such shareholder became an interested shareholder, unless (i) prior to such date, the board of directors approved the business combination or (ii) on or subsequent to such date, the business combination is approved by at least 90% of the votes of each class of the corporation’s stock entitled to vote and by at least two-thirds of such voting stock not held by the interested shareholder or such shareholder’s affiliates. The Fair Price Act defines a “business combination” to include certain mergers, consolidations, dispositions of assets or shares and recapitalizations. An “interested shareholder” is defined by the Fair Price Act to include a beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting shares of the corporation.

We are also subject to the laws of Michigan, Ohio, California, Washington D.C., Missouri, and other states, which govern insurance holding companies. Under these laws, a person generally must obtain the applicable Insurance Department’s approval to acquire, directly or indirectly, five to ten percent or more of the outstanding voting securities of our Insurance Company Subsidiaries. An Insurance Department’s determination of whether to approve an acquisition would be based on a variety of factors, including an evaluation of the acquirer’s financial stability, the competence of its management, and whether competition in that state would be reduced. These laws may prevent, delay or defer a change of control of us or our Insurance Company Subsidiaries. The proposed transaction with Fosun is subject to regulatory approval by insurance departments for the states of Michigan, Ohio, Missouri, California and Washington D. C., which could either delay or prevent the execution of the transaction.

Although we have paid cash dividends in the past, we may not pay cash dividends in the future.

The declaration and payment of dividends is subject to the discretion of our Board of Directors and will depend on our financial condition, results of operations, cash flows, cash requirements, future prospects, regulatory and contractual restrictions on the payment of dividends by our Insurance Company Subsidiaries and other factors deemed relevant by our Board of Directors. There is no requirement that we must, and we cannot assure you that we will, declare and pay any dividends in the future. Our Board of Directors may determine to retain such capital for general corporate or other purposes.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

Not Applicable

ITEM 2.   PROPERTIES

We own the land and an approximately 72,000 square foot corporate headquarters building in Southfield, Michigan. We expect that our corporate headquarters building will be adequate for our current and expected future operations.

We lease 60,000 square feet of office space in Westerville, Ohio that expires in 2024.

We are also a party to various leases for other locations in which we have offices. We do not consider any of these leases to be material.

ITEM 3.    LEGAL PROCEEDINGS

The Company, and its subsidiaries, are subject at times to various claims, lawsuits and proceedings relating principally to alleged errors or omissions in the placement of insurance, claims administration, consulting services and other business transactions arising in the ordinary course of business as further disclosed in Note 15 ~ Commitments and Contingencies. Where appropriate, the Company vigorously defends such claims, lawsuits and proceedings. Some of these claims, lawsuits and proceedings seek damages, including consequential, exemplary or punitive damages, in amounts that could, if awarded, be significant. Most of the claims, lawsuits and proceedings arising in the ordinary course of business are covered by the policy of insurance at issue. We account for such activity through the establishment of unpaid loss and loss expense reserves. We also maintain errors and omissions insurance and extra-contractual coverage under reinsurance treaties related to the policy of insurance at issue or other appropriate insurance. In terms of any retentions or deductibles associated with such insurance, the Company has established accruals for such retentions or deductibles, when necessary, based upon

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current available information. In accordance with accounting guidance, if it is probable that an asset has been impaired or a liability has been incurred as of the date of the financial statements and the amount of loss is reasonably estimable; then an accrual for the costs to resolve these claims is recorded by the Company in the accompanying consolidated balance sheets. Period expenses related to the defense of such claims are included in the accompanying consolidated statements of income. Management, with the assistance of outside counsel, adjusts such provisions according to new developments or changes in the strategy in dealing with such matters. On the basis of current information, the Company does not believe that there is a reasonable possibility that, other than with regard to the arbitration disclosed in Note 15 ~ Commitments and Contingencies, any material loss exceeding amounts already accrued, if any, will result from any of the claims, lawsuits and proceedings to which the Company is subject to, either individually, or in the aggregate.

ITEM 4.    MINE SAFETY DISCLOSURES

Not Applicable


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PART II

ITEM 5.   MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Shareholder Information
Corporate Headquarters
Transfer Agent & Registrar
26255 American Drive Computershare Shareowner Services LLC
Southfield, MI 48034-6112 P.O. Box 43006
Phone: (248) 358-1100 Providence, RI 02940-3006
Independent Registered
Public Accounting Firm
Ernst & Young LLP Stock Listing Corporate Headquarters
One Kennedy Square, Suite 1000 New York Stock Exchange 26255 American Drive
777 Woodward Avenue Symbol: MIG Southfield, MI 48304-6112
Detroit, MI 48226-5495
Corporate Counsel
Sidley Austin LLP
One South Dearborn Street
Chicago, IL 60603-2302

Shareholder Relations and Form 10-K

A copy of our 2014 Annual Report and Form 10-K, as filed with the Securities and Exchange Commission, may be obtained upon written request to our Financial Reporting Department at our corporate headquarters, or contact:

Karen M. Spaun, Senior Vice President and Chief Financial Officer
(248) 204-8178; karen.spaun@meadowbrook.com

Shareholder Investment Plan

Our Shareholder Investment Plan (“Plan”) offers a simple and systematic way to purchase our common stock without paying brokerage fees or commissions. With the Plan’s many flexible features, an account may be customized to reflect individual financial and investment objectives. If you would like additional information including a prospectus and an application, please contact:

Computershare Shareowner Services LLC
1-800-442-8134

Or visit their website at www.cpushareownerservices.com

Share Price and Dividend Information

Our common stock is traded on the New York Stock Exchange under the symbol “MIG.” The following table sets forth the high and low sale prices of our common shares as reported by the NYSE and our quarterly dividends declared for each period shown:

December 31, 2014
High
Low
Dividends
First Quarter
$
7.00
 
$
5.24
 
$
0.02
 
Second Quarter
 
7.20
 
 
5.27
 
 
0.02
 
Third Quarter
 
7.28
 
 
5.66
 
 
0.02
 
Fourth Quarter
 
8.63
 
 
5.76
 
 
0.02
 

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December 31, 2013
High
Low
Dividends
First Quarter
$
7.44
 
$
5.79
 
$
0.02
 
Second Quarter
 
8.26
 
 
6.84
 
 
0.02
 
Third Quarter
 
8.90
 
 
5.87
 
 
0.02
 
Fourth Quarter
 
7.46
 
 
6.17
 
 
0.02
 

When evaluating the declaration of a dividend, our Board of Directors considers a variety of factors, including but not limited to, our cash flow, liquidity needs, results of operations strategic plans, industry conditions, our overall financial condition and other relevant factors. As a holding company, the ability to pay cash dividends is partially dependent on dividends and other permitted payments from our subsidiaries which may be subject to limitations under applicable insurance regulations. In 2014 and 2013, the Insurance Company Subsidiaries paid dividends to our holding company of $20.0 million and $14.0 million, respectively.

For additional information regarding dividend restrictions, refer to the Liquidity and Capital Resources section of Management’s Discussion and Analysis.

Shareholders of Record

As of February 18, 2015, there were 221 shareholders of record of our common stock. For purposes of this determination, Cede & Co., the nominee for the Depositary Trust Company is treated as one holder.

Purchase of Equity Securities by the Issuer

There have been no repurchases of shares of our common stock in 2014 or 2013.

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Performance Graph

The following graph sets forth, for the five year period ended December 31, 2014, the cumulative total shareholder return for the Company’s common stock, the Russell 2000 Index, and a published industry index. The graph assumes the investment of $100 on December 31, 2009 in Common Stock of the Company, the Russell 2000 Index, and such published index. The stock price performance represented on the following graph is not necessarily indicative of future stock price performance.

The performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be deemed to be incorporated by reference into any future filing of the Company under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent the Company specifically incorporates it by reference into such filing.


Period Ending
Index
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
Meadowbrook Insurance Group, Inc.
 
100.00
 
 
140.61
 
 
149.00
 
 
82.41
 
 
100.34
 
 
123.58
 
Russell 2000
 
100.00
 
 
126.86
 
 
121.56
 
 
141.43
 
 
196.34
 
 
205.95
 
SNL Insurance $2.5B-$10B
 
100.00
 
 
115.12
 
 
118.14
 
 
142.48
 
 
187.40
 
 
225.53
 

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ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA

MEADOWBROOK INSURANCE GROUP, INC.
SELECTED CONSOLIDATED FINANCIAL DATA

For the Years Ended December 31,
2014
2013
2012
2011
2010
(In thousands, except per share and ratio data)
Income Statement Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross written premiums
$
742,464
 
$
944,011
 
$
1,066,633
 
$
904,026
 
$
801,901
 
Net written premiums
 
601,237
 
 
691,637
 
 
797,502
 
 
776,253
 
 
693,599
 
Net earned premiums
 
643,271
 
 
697,417
 
 
854,259
 
 
747,635
 
 
659,840
 
Net commissions and fees
 
43,173
 
 
39,512
 
 
34,049
 
 
32,115
 
 
34,239
 
Net investment income
 
45,142
 
 
46,473
 
 
53,143
 
 
54,522
 
 
54,173
 
Net realized gains
 
10,939
 
 
7,769
 
 
55,312
 
 
2,949
 
 
1,817
 
Total revenue
 
742,525
 
 
791,171
 
 
996,763
 
 
837,221
 
 
750,069
 
Net losses and LAE
 
420,808
 
 
549,037
 
 
677,684
 
 
495,351
 
 
399,650
 
Policy acquisition and other underwriting expenses
 
236,271
 
 
225,510
 
 
274,066
 
 
250,535
 
 
228,182
 
General selling & administrative expenses
 
31,972
 
 
25,789
 
 
24,463
 
 
24,775
 
 
22,494
 
General corporate expense
 
6,454
 
 
3,997
 
 
3,572
 
 
400
 
 
5,668
 
Amortization expense
 
3,988
 
 
4,237
 
 
7,296
 
 
4,973
 
 
4,966
 
Goodwill impairment expense
 
 
 
115,397
 
 
 
 
 
 
 
Interest expense
 
13,899
 
 
12,950
 
 
8,429
 
 
8,347
 
 
9,458
 
Income (loss) before income taxes and equity earnings
 
29,133
 
 
(145,746
)
 
1,253
 
 
52,840
 
 
79,651
 
Equity earnings of affiliates, net of tax
 
3,609
 
 
3,441
 
 
2,652
 
 
2,418
 
 
2,263
 
Equity earnings (losses) of unconsolidated subsidiaries, net of tax
 
21
 
 
(965
)
 
2
 
 
(57
)
 
473
 
Net income (loss)
 
28,657
 
 
(112,310
)
 
11,749
 
 
43,032
 
 
58,973
 
Earnings (loss) per share - Diluted
$
0.57
 
$
(2.25
)
$
0.23
 
$
0.82
 
$
1.09
 
Dividends paid per common share
$
0.08
 
$
0.08
 
$
0.17
 
$
0.17
 
$
0.13
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments and cash and cash equivalents
$
1,662,521
 
$
1,667,804
 
$
1,651,592
 
$
1,487,680
 
$
1,345,257
 
Total assets
 
2,679,774
 
 
2,761,842
 
 
2,713,274
 
 
2,370,098
 
 
2,170,943
 
Loss and LAE reserves
 
1,590,359
 
 
1,616,521
 
 
1,455,980
 
 
1,194,977
 
 
1,065,056
 
Debt
 
151,282
 
 
160,723
 
 
78,500
 
 
28,375
 
 
37,750
 
Debentures
 
80,930
 
 
80,930
 
 
80,930
 
 
80,930
 
 
80,930
 
Shareholders' equity
 
457,633
 
 
413,413
 
 
558,279
 
 
585,151
 
 
540,403
 
Book value per share
$
9.14
 
$
8.29
 
$
11.22
 
$
11.46
 
$
19.15
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP ratios (insurance companies only):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss and LAE ratio
 
65.4
%
 
78.7
%
 
79.3
%
 
66.3
%
 
60.6
%
Expense ratio
 
36.7
%
 
32.3
%
 
32.1
%
 
33.5
%
 
34.6
%
Combined ratio (1)
 
102.1
%
 
111.0
%
 
111.4
%
 
99.9
%
 
95.2
%
Accident year combined ratio (2)
 
102.4
%
 
101.2
%
 
101.4
%
 
98.8
%
 
99.9
%
Total (favorable) adverse development on prior years
$
(1,741
)
$
68,400
 
$
85,515
 
$
7,311
 
$
(31,003
)

(1)The combined loss and expense ratio (or combined ratio), expressed as a percentage, is the key measure of underwriting profitability traditionally used in the property and casualty insurance business. The combined ratio is a statutory (non-GAAP) accounting measurement, which represents the sum of (i) the ratio of losses and loss expenses to net premiums earned (loss ratio), plus (ii) the ratio of underwriting expenses to net premiums written (expense ratio). The combined ratios above have been modified to reflect GAAP accounting, as management evaluates the performance of our underwriting operations using the GAAP combined ratio. Specifically, the GAAP combined ratio is the sum of the loss ratio, plus the ratio of GAAP underwriting expenses (which include the change in deferred policy acquisition costs) to net premiums earned (expense ratio). When the combined ratio is under 100% underwriting results are generally considered profitable; when the combined ratio is over 100% underwriting results are generally considered unprofitable.
(2)The accident year combined ratio is a non-GAAP measure that excludes changes in net ultimate loss estimates from prior accident year loss reserves. The accident year combined ratio provides management with an assessment of the specific policy year’s profitability (which matches policy pricing with related losses) and assists management in their evaluation of product pricing levels and quality of business written. Management uses accident year combined ratio as one component to assess the Company's current year performance and as a measure to evaluate, and if necessary, adjust current year pricing and underwriting.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This annual report may provide information including certain statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These include statements regarding the intent, belief, or current expectations of management, including, but not limited to, those statements that use the words “believes,” “expects,” “anticipates,” “estimates,” or similar expressions. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties, and results could differ materially from those indicated by such forward-looking statements. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: actual loss and loss adjustment expenses exceeding our reserve estimates; competitive pressures in our business; the failure of any of the loss limitation methods we employ; a failure of additional capital to be available or only available on unfavorable terms; our geographic concentration and the business and economic conditions, natural perils, man made perils, and regulatory conditions within our most concentrated region; our ability to appropriately price the risks we underwrite; goodwill impairment risk employed as part of our growth strategy; actions taken by regulators, rating agencies or lenders, including the impact of the downgrade by A.M. Best of the Company’s Insurance Company Subsidiaries’ financial strength rating, A.M. Best’s downgrade of our issuer credit rating and any other future action by A.M. Best with respect to such ratings; increased risks or reduction in the level of our underwriting commitments due to market conditions; a failure of our reinsurers to pay losses in a timely fashion, or at all; interest rate changes; continued difficult conditions in the global capital markets and the economy generally; market and credit risks affecting our investment portfolio; liquidity requirements forcing us to sell our investments; a failure to introduce new products or services to keep pace with advances in technology; the new federal financial regulatory reform; our holding company structure and regulatory constraints restricting dividends or other distributions by our Insurance Company Subsidiaries; minimum capital and surplus requirements imposed on our Insurance Company Subsidiaries; our reliance upon producers, which subjects us to their credit risk; loss of one of our core selected producers; our dependence on the continued services and performance of our senior management and other key personnel; our reliance on our information technology and telecommunications systems; managing technology initiatives and obtaining the efficiencies anticipated with technology implementation; a failure in our internal controls; the cyclical nature of the property and casualty insurance industry; severe weather conditions and other catastrophes; the effects of litigation, including the previously disclosed arbitration and class action litigation or any similar litigation which may be filed in the future; state regulation; assessments imposed upon our Insurance Company Subsidiaries to provide funds for failing insurance companies, and risks and uncertainties relating to the proposed transaction with Fosun, including the risk that the Company’s shareholders do not approve the transaction; uncertainties as to the timing of the transaction; the risk that regulatory or other approvals required for the transaction are not obtained or are obtained subject to conditions that are not anticipated; competitive responses to the transaction; litigation relating to the transaction; disruptions of current plans and operations caused by the announcement and pendency of the proposed transaction; potential difficulties in employee retention as a result of the announcement and pendency of the proposed transaction; and disruption from the proposed transaction making it more difficult to maintain relationships with agents, wholesalers, suppliers, customers, policyholders and regulators.

For additional information with respect to certain of these and other factors, refer to “Risk Factors” above and subsequent filings made with the United States Securities and Exchange Commission. We are not under any obligation to (and expressly disclaim any obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.

Critical Accounting Policies

General

In certain circumstances, we are required to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related footnotes. We evaluate these estimates and assumptions on an

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MANAGEMENT’S DISCUSSION AND ANALYSIS - continued

on-going basis based on a variety of factors. There can be no assurance, however, the actual results will not be materially different than our estimates and assumptions, and that reported results of operation will not be affected by accounting adjustments needed to reflect changes in these estimates and assumptions. We believe the following policies, along with those disclosed in Note 1 ~ Summary of Significant Accounting Policies, are the most sensitive to estimates and judgments.

Losses and Loss Adjustment Expenses

Significant periods of time can elapse between the occurrence of a loss, the reporting of the loss to the insurer, and the insurer’s payment of that loss. To recognize liabilities for unpaid losses and LAE, insurers establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported net losses and LAE.

We establish a liability for losses and LAE, which represents case based estimates of reported unpaid losses and LAE and actuarial estimates of IBNR and LAE. Such liabilities, by necessity, are based upon estimates and, while we believe the amount of our reserves is adequate, the ultimate liability may be greater or less than the estimate. As of December 31, 2014 and 2013, we have accrued $1,590.4 million and $1,616.5 million of gross loss and LAE reserves, respectively.

Components of Losses and Loss Adjustment Expense

The following table sets forth our gross and net reserves for losses and LAE based upon an underlying source of data, at December 31, 2014 (in thousands):

Case
IBNR