MEADOWBROOK INSURANCE GROUP, INC.

 

26255 American Drive
Southfield, Michigan 48034
(248) 358-1100

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

Date:  May 10, 2006

Time:  2:00 p.m., EST

 

We invite you to attend the Meadowbrook Insurance Group, Inc. Annual Meeting of Stockholders to:

 

 

The record date for the Annual Meeting is March 16, 2006. Only stockholders of record at the close of business on that date are entitled to vote at the Annual Meeting. This Notice was mailed only to those stockholders.

 

A proxy statement, a proxy card and the Company’s 2005 Annual Report are enclosed. Whether you plan to attend the meeting or not, whether you own a few or many shares of stock, the Board of Directors urges you to vote promptly. You may vote by completing, signing, dating and returning the enclosed proxy card in the enclosed envelope.

 

By Order of the Board of Directors,

 

 

Michael G. Costello
Secretary

 

Southfield, Michigan

Dated: April 14, 2006

 

IF YOU DO NOT EXPECT TO ATTEND THE MEETING
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD
AND RETURN IT PROMPTLY IN THE POSTAGE-PAID ENVELOPE.

 

MEADOWBROOK INSURANCE GROUP, INC.

 

PROXY STATEMENT

 

QUESTIONS AND ANSWERS

 

 

A: A proxy is a procedure which enables you, as a stockholder, to authorize someone else to cast your vote for you. The Board of Directors of Meadowbrook Insurance Group, Inc. (the “Company”) is soliciting your proxy, and asking you to authorize Merton J. Segal, Chairman of the Board, Robert S. Cubbin, the President and Chief Executive Officer or Michael G. Costello, the Senior Vice President, General Counsel and Secretary of the Company, to cast your vote for you at the 2006 Annual Meeting. You may, of course, cast your vote in person or abstain from voting, if you so choose. The term proxy is also used to refer to the person who is authorized by you to vote for you.

 

2.  Q: What are a proxy statement and a proxy card?

 

A: A proxy statement is the document the United States Securities and Exchange Commission requires to explain the matters on which you are asked to vote. A proxy card is the form by which you may authorize someone else, and in this case Mr. Segal, Mr. Cubbin or Mr. Costello, to cast your vote for you. This proxy statement and proxy card with respect to the Company’s 2006 Annual Meeting were mailed on or about April 14, 2006 to all stockholders entitled to vote at the Annual Meeting.

 

3.  Q: Who is entitled to vote?

 

A: Only holders of shares of the Company’s common stock at the close of business on March 16, 2006 (the “Record Date”) are entitled to vote at the Annual Meeting. Each stockholder of record has one vote for each share of common stock for each matter presented for a vote.

 

4.  Q: What will I vote on at the Annual Meeting?

 

A: At the Annual Meeting, stockholders will vote to:

 

 

5.  Q: How does the Board of Directors recommend I vote on the proposals?

 

A: The Board of Directors recommends a vote FOR each proposal.

 

6.  Q: How can I vote?

 

A: You can vote in person or by proxy. To vote by proxy, complete, sign, date and return the enclosed proxy card in the enclosed envelope. If you returned your signed proxy card to the Company before the Annual Meeting, the persons named as proxies on the card will vote your shares as you direct. Shares represented by proxies, which are marked “WITHHELD” to vote for all three nominees for director, or for any individual nominee(s) for election as director(s) and which are not otherwise marked “FOR” the other nominees, will not be counted in determining whether a plurality vote has been received for the election of directors. Similarly, shares represented by proxies which are marked “ABSTAIN” on the proposal to ratify the appointment of Ernst & Young LLP as independent registered public accounting firm for the Company in 2006, will not be counted in determining whether the requisite vote has been received for such proposal. IF YOU WISH TO VOTE IN THE MANNER THE BOARD OF DIRECTORS RECOMMENDS, IT IS NOT NECESSARY TO

SPECIFY YOUR CHOICE ON THE PROXY CARD. SIMPLY SIGN, DATE AND RETURN THE PROXY CARD IN THE ENCLOSED ENVELOPE. You may revoke a proxy at any time before the proxy is voted by:

 

 

7.  Q: Is my vote confidential?

 

A: Yes, your vote is confidential. Only the inspectors of election and certain employees associated with processing proxy cards and counting the votes have access to your proxy card. All comments received will be forwarded to management on an anonymous basis unless, of course, you ask that your name be disclosed.

 

8.  Q: What is a quorum?

 

A: There were 28,773,694 shares of the Company’s common stock outstanding on the Record Date. A majority of the outstanding shares, or 14,386,848 shares, present or represented by proxy, constitutes a quorum. A quorum must exist to conduct business at the Annual Meeting. Abstentions and broker non-votes are counted as votes present. A broker non-vote is a proxy a broker submits that does not indicate a vote for the proposal, because the broker does not have discretionary voting authority and the broker did not receive instructions as to how to vote on the proposal.

 

9.  Q: How does voting work?

 

A: If a quorum exists at the Annual Meeting, a plurality vote, being the greatest number, of the shares voted, although not a majority, is required to elect the three nominees for director. The three nominees receiving the highest number of votes will be elected. If a quorum is present, the affirmative vote by the holders of a majority of the shares present, or represented by proxy, is required to ratify the appointment of Ernst & Young LLP as the independent registered public accounting firm of the Company in 2006. Broker non-votes are excluded for this purpose. Therefore, a broker non-vote will have no effect on the proposal to elect the three nominees for director and ratify the appointment of Ernst & Young LLP as the independent registered pubic accounting firm for the Company in 2006.

 

The Company will vote properly executed proxies it receives prior to the Annual Meeting in the way you direct. If you do not specify instructions, the shares represented by proxies will be voted FOR the nominees for director and FOR the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for 2006.

 

10.  Q: Who pays for the costs of the Annual Meeting?

 

A: The Company pays the cost of preparing and printing the proxy statement, proxy card and soliciting proxies. The Company will solicit proxies primarily by mail, but also may solicit proxies personally and by telephone, facsimile or other means. Officers and regular employees of the Company and its subsidiaries also may solicit proxies, but will receive no additional compensation for doing so, nor will their efforts result in more than a minimal cost to the Company. The Company also will reimburse banks, brokerage houses and other custodians, nominees and fiduciaries for their out-of-pocket expenses for forwarding solicitation material to beneficial owners of the Company’s common stock.

 

11.  Q: When are stockholder proposals for the 2007 Annual Meeting due?

 

A: All stockholder proposals to be considered for inclusion in next year’s proxy statement under Securities and Exchange Commission Rule 14a-8 must be submitted in writing to the Secretary of the Company at the address shown on the Notice of Annual Meeting of Stockholders on the first page of this booklet by December 6, 2006.

 

For any proposal that is not submitted for inclusion in next year’s proxy statement but instead is sought to be presented directly at next year’s annual meeting, Securities and Exchange Commission rules permit management to vote proxies in its discretion if (a) the Company receives notice of the proposal before the close of business on February 19, 2007 and advises stockholders in next year’s proxy statement about the nature of the matter and how management intends to vote on such matter, or (b) does not receive notice of the proposal prior to the close of business on February 19, 2007.

 

The Company reserves the right to reject, rule out of order, or take other appropriate action with respect to any proposal that does not comply with these and other applicable requirements.

 

THE FIRST PROPOSAL ON WHICH YOU ARE VOTING
THE ELECTION OF THREE DIRECTORS

 

The Company’s Board of Directors is divided into three (3) classes with each class of directors elected to a three-year term of office. At each annual meeting of stockholders, the stockholders elect one class of directors for a three-year term to succeed the class of directors whose term of office expires at that meeting.

 

This year you are voting on three (3) candidates for Director. The Company’s Board of Directors, acting upon the recommendation of the Governance and Nominating Committee, has nominated: Robert S. Cubbin, Hugh W. Greenberg and Florine Mark as Directors with terms expiring in 2009. Each nominee currently serves as a Director, has consented to their nomination and has agreed to serve as a Director, if elected.

 

If any of the nominees are unable to stand for election, the Company may vote the shares to elect a substitute nominee, who is nominated by the Board of Directors, or the number of Directors to be elected at the Annual Meeting may be reduced.

 

The Company’s Board of Directors recommends a vote FOR each of the nominees.

 

INFORMATION ABOUT THE NOMINEES, THE INCUMBENT DIRECTORS AND
OTHER EXECUTIVE OFFICERS

 

Independence Determination

 

Our Board of Directors has determined that Messrs. Dresner, Greenberg, Naftaly, Page, Sturgis, Thal, Tyner, and Ms. Mark are independent as such term is defined in the New York Stock Exchange’s independence standards, as modified or supplemented, and these Directors have no other relationship that would impair such independence.

 

The following is information about the nominees for election as a Director, each of the Directors whose term of office will continue after the meeting, and other persons who are executive officers of the Company. The information is as of the date of record, March 16, 2006.

 

Nominee Directors — Terms Expiring in 2009

 

Robert S. Cubbin, age 48 and a Director since 1995, was appointed as President and Chief Executive Officer of the Company in May 2002. Prior to being named President and Chief Executive Officer, Mr. Cubbin served as President and Chief Operating Officer since February 1999. In 1999, Mr. Cubbin was also appointed Chairman of the Board of Directors of the following subsidiaries of the Company: Star Insurance Company (“Star”), a property and casualty insurance company; Savers Property and Casualty Insurance Company (“Savers”), a property and casualty insurance company; Williamsburg National Insurance Company (“Williamsburg”), a property and casualty insurance company, Ameritrust Insurance Corporation (“Ameritrust”), a property and casualty insurance company and Meadowbrook, Inc.(“Meadowbrook”) an insurance agency and risk management subsidiary of the Company. Mr. Cubbin is the President of Meadowbrook. From 1996 until his appointment as President and Chief Operating Officer in February 1999, Mr. Cubbin was an Executive Vice President of the Company. Mr. Cubbin joined the Company in 1987, as Vice President and General Counsel. Prior to joining the Company, Mr. Cubbin, an attorney, was with Plunkett & Cooney, P.C., a Michigan law firm specializing in insurance law. Mr. Cubbin is a member of the Finance Committee and the Investment Committee of the Board of Directors of the Company.

Hugh W. Greenberg, age 75 and a Director since 1985, is President of DataNet Quality Systems, formerly Detroit Gauge & Tool Company. DataNet Quality Systems develops manufacturing quality control software and systems. Mr. Greenberg is the Chairman of the Governance and Nominating Committee and a member of the Audit Committee, the Finance Committee and the Compensation Committee of the Board of Directors of the Company.

 

Florine Mark, age 73, and a Director since 1996, is President and Chief Executive Officer of The WW Group, Inc., the largest franchisee of Weight Watchers International. Ms. Mark is a member of the Governance and Nominating Committee and the Investment Committee of the Board of Directors of the Company.

 

Incumbent Directors — Terms Expiring in 2008

 

Robert H. Naftaly, age 68 and a Director since 2002, is retired as President and Chief Executive Officer of PPOM, an independent operating subsidiary of Blue Cross Blue Shield of Michigan (“BCBSM”) and as Executive Vice President and Chief Operating Officer of BCBSM. Previously, Mr. Naftaly served as Vice President and General Auditor of Detroit Edison Company and was the Director of the Department of Management and Budget for the State of Michigan. He was a managing partner and founder of Geller, Naftaly, Herbach & Shapiro, a certified public accounting firm. He is the Chairman of the Compensation Committee and a member of the Audit Committee, the Finance Committee and the Governance and Nominating Committee of the Board of Directors of the Company.

 

Robert W. Sturgis, age 64 and a Director since 2000, is a retired Director and Principal of Tillinghast-Towers Perrin, a global management and actuarial consulting firm. He is a member of the Audit Committee and the Finance Committee of the Board of Directors of the Company.

 

Bruce E. Thal, age 74 and a Director since 1995, is a retired partner of Deloitte & Touche L.L.P., a public accounting firm. Mr. Thal is the Chairman of the Audit Committee and a member of the Investment Committee and the Finance Committee of the Board of Directors of the Company.

 

Incumbent Directors — Terms Expiring in 2007

 

Merton J. Segal, age 77, is the Founder of the Company. Mr. Segal has been a Director since 1985 and is Chairman of the Board of Directors of the Company. Further, Mr. Segal is a Director of Star, Savers, Williamsburg, Ameritrust and Meadowbrook, which are subsidiaries of the Company. Mr. Segal holds the designation of Chartered Property & Casualty Underwriter (“CPCU”) and is a Licensed Insurance Counselor (“LIC”). Mr. Segal is a member of the Finance Committee and the Investment Committee of the Board of Directors of the Company.

 

Joseph S. Dresner, age 80 and a Director since 1985, is Chairman of the Highland Companies, a Detroit-area-based developer and manager of commercial, industrial and residential properties. Mr. Dresner is the Chairman of the Investment Committee and a member of the Finance Committee of the Board of Directors of the Company

 

David K. Page, age 72 and a Director since 2000, is a Partner in the Detroit, Michigan law firm of Honigman Miller Schwartz & Cohn. Mr. Page is the Chairman of the Finance Committee and a member of the Compensation Committee, the Investment Committee and the Governance and Nominating Committee of the Board of Directors of the Company.

 

Herbert Tyner, age 75 and a Director since 1985, is Chief Executive Officer of Hartman & Tyner, Inc., a Detroit-based real estate developer with land, apartment developments and other real estate holdings in Michigan and Florida. Mr. Tyner is a member of the Compensation Committee of the Board of Directors of the Company.

 

Effective April 29, 2005, Messrs. Swider and Milo resigned as Directors of the Company.

 

Other Executive Officers

 

The following is information about the Company’s other Executive Officers.

 

Gregory L. Wilde, age 58, is Executive Vice President of the Company and is President and a Director of Star, Savers, Ameritrust and Williamsburg. Also, he serves as a Director of Meadowbrook. Mr. Wilde joined the Company in 1999. He previously served as Regional Vice President for Crum & Forester, a national provider of insurance services, in their Detroit, Michigan office. From 1971 to 1996, he served in a variety of positions

including Regional Vice President, with Aetna Casualty & Surety Company at their offices in Milwaukee, WI and Philadelphia, PA.

 

Karen M. Spaun, age 41, was appointed Chief Financial Officer in 2003. She has served as Senior Vice President and Chief Accounting Officer of the Company since 2002. That same year, she was elected Director, Vice President and Treasurer of Star, Savers, Ameritrust and Meadowbrook. In 2003, she was elected Director, Vice President and Treasurer of Williamsburg. Ms. Spaun joined the Company in 1998 as Director of Investor Relations. In 1997, Ms. Spaun served as Controller of CoverX, an excess and surplus lines broker. From 1993 to 1997 she served as Director of Financial Accounting at Citizens Insurance Company, a member of Allmerica Financial Corporation, in Howell, Michigan. Ms. Spaun previously held financial and accounting positions in public companies and the Coopers & Lybrand public accounting firm.

 

Michael G. Costello, age 45, was appointed Senior Vice President, General Counsel and Secretary of the Company, Star, Savers, Ameritrust, Williamsburg and Meadowbrook in 1999. Previously, Mr. Costello served as Vice President and General Counsel of the Company, Star, Savers and Meadowbrook. Mr. Costello joined the Company in 1993 as Vice President and Assistant General Counsel. Mr. Costello was formerly a Shareholder with Plunkett & Cooney, P.C., a Michigan law firm specializing in insurance law.

 

Stephen A. Belden, age 50, is Senior Vice President and Chief Actuary for Meadowbrook, Star, Savers, Williamsburg and Amertirust. Mr. Belden joined the Company in 2003. He previously served as Chief Actuary for Zurich North American Construction from 1995 to 2003. From 1990 to 1995, Mr. Belden worked with Orion Capital Companies as AVP and Actuary. Previous to this, Mr. Belden’s experience includes serving as a Consultant with Tillinghast and with Touche, Ross and Company as an Actuarial Officer for St. Paul Companies. He started his career in 1977 with Aetna Life and Casualty at their offices in Hartford, CT, where he served in various positions in the Actuarial Department. Mr. Belden’s credentials include both FCAS and CPCU designations.

 

Robert Christopher Spring, age 52, is Senior Vice President of Business Operations of Meadowbrook and President of the Company’s TPA Associates Division, which was acquired by the Company in 1999. Mr. Spring co-founded TPA Associates in 1993. He served as Executive Vice President of TPA from 1993 through 2000. He previously served as Assistant Vice President with American Mutual Insurance Companies from 1987 through 1989. From 1989 through 1993, Mr. Spring worked with Towers Perrin as a risk management consultant. He began his career with Signature Group, an Illinois insurance company, in 1977.

 

Archie S. McIntyre, age 41, is Senior Vice President of Business Development for Meadowbrook and also serves as a Director for Star, Savers, Williamsburg and Ameritrust. Mr. McIntyre joined the Company in 1986. From 1986 to 1988, Mr. McIntyre held various positions in the agency, marketing and finance divisions of the Company. From 1988 to 1996, Mr. McIntyre was a manager in the Company’s public entity division. In 1996, Mr. McIntyre was named Vice President of the Company’s Alabama Branch. In 1999, Mr. McIntyre was appointed to manage the Company’s Business Development Department, which includes marketing, due diligence, acquisitions and corporate strategy. Mr. McIntyre graduated from the University of Michigan-Dearborn and holds an ARM (Associate in Risk Management) designation.

 

Kenn R. Allen, age 56, is Senior Vice President of the Company and President of the Meadowbrook Insurance Agency and also serves as a Director for Star, Savers, Williamsburg and Ameritrust. Mr. Allen has served as President of the Meadowbrook Insurance Agency since 1986. Prior to joining the Company, Mr. Allen held many positions at Republic Hogg Robinson, where he was a Regional Senior Vice President for its self-funded groups, self-insured’s/associations and property/casualty business. Mr. Allen is a graduate of the University of Cincinnati and Henry Ford College. His credentials include CIC (Certified Insurance Counselor) and CHCM (Certified Hazard Control Manager).

 

COMMITTEES AND MEETINGS OF DIRECTORS

 

The Board of Directors has established an Audit Committee, Compensation Committee, Finance Committee, Investment Committee and Governance and Nominating Committee.

Each of the Committees of the Board of Directors has adopted a written Charter. A current copy of each Committee’s Charter is available on the Company’s website which is: www.meadowbrook.com.

 

Audit Committee.  The Audit Committee is responsible for reviewing the services of the Company’s independent registered public accounting firm and actuaries, consults with the accountants and actuaries, reviews the financial statements of the Company and internal controls of the Company and monitors the Internal Audit Department of the Company. The Audit Committee members are Bruce E. Thal, Chairman, Hugh W. Greenberg, Robert H. Naftaly and Robert W. Sturgis. The members of the Audit Committee satisfy the independence and experience requirements of the NYSE. The Audit Committee met seven (7) times in 2005. Please refer to the Audit Committee Report below for details of the Committee’s proceedings during 2005.

 

Compensation Committee.  The Compensation Committee establishes the performance goals and objectives and evaluates the performance of the Chief Executive Officer and the Chairman of the Board. The Compensation Committee recommends to the Board of Directors the base salary levels, bonuses and equity compensation for the Chief Executive Officer and Chairman of the Board. In addition, the Compensation Committee approves the guidelines to determine salary levels, bonuses and equity compensation for other executive officers and managers of the Company. The Compensation Committee also reviews and makes recommendations with respect to the Company’s compensation plans and is responsible for administering the Company’s 1995 and 2002 Amended and Restated Stock Option Plans, as well as the Long-Term Incentive Plan. The Compensation Committee members are Robert H. Naftaly, Chairman, Hugh W. Greenberg, David K. Page, and Herbert Tyner. The Compensation Committee met four (4) times in 2005. Please refer to the Compensation Committee Report below for details of the Committee’s proceedings during 2005.

 

Finance Committee.  The Finance Committee reviews the Company’s banking relationships, business operations, potential acquisitions, capital strategy and litigation relating to the Company. Members of the Finance Committee are David K. Page, Chairman, Joseph S. Dresner, Hugh W. Greenberg, Robert H. Naftaly, Bruce E. Thal, Robert W. Sturgis, Merton J. Segal and Robert S. Cubbin. The Finance Committee met eight (8) times in 2005.

 

Investment Committee.  The Investment Committee reviews and approves the Company’s Investment Policy Guidelines, investment transactions of the Company and its insurance company subsidiaries, investment performance and monitors adherence to the Company’s Investment Policy Guidelines. The Investment Committee members are Joseph S. Dresner, Chairman, Robert S. Cubbin, Florine Mark, David K. Page, Merton J. Segal and Bruce E. Thal. The Investment Committee met four (4) times in 2005.

 

Governance and Nominating Committee.  The Governance and Nominating Committee reviews the criteria for the selection of senior executives and Directors of the Company. The Governance and Nominating Committee reviews the performance of the Directors and recommends Directors for election to the Board of Directors. The Governance and Nominating Committee monitors compliance with the Company’s Code of Conduct, Business Conduct Policy and other corporate governance policies. The Governance and Nominating Committee also reviews and approves any related-party transactions involving the Company. The Governance and Nominating Committee members are Hugh W. Greenberg, Chairman, Florine Mark, David K. Page, and Robert H. Naftaly. The Governance and Nominating Committee met three (3) times in 2005.

 

ATTENDANCE AT MEETINGS

 

The Board of Directors met four (4) times in 2005. Committees of the Board held twenty-six (26) additional meetings in 2005. During 2005, each of the Directors, with the exception of Mr. Dresner, attended (in the aggregate) at least 75% of the total number of meetings of the Board of Directors and the total number of meetings held by all Committees of the Board upon which he/she served.

 

Seven (7) members of the Board of Directors attended the 2005 Annual Meeting.

 

It is the Policy of the Board of Directors of the Company to encourage attendance by its members at all meetings of the Board and Committees of the Board.

 

EXECUTIVE SESSIONS

 

Executive sessions of non-management directors were held at each meeting of the Board of Directors. The Audit Committee held executive sessions at each meeting; the Compensation Committee held executive sessions at three (3) of its four (4) meetings, the Governance and Nominating Committee held executive sessions at two (2) of its three (3) meetings; the Finance Committee held executive sessions at five (5) of its eight (8) meetings; the Investment Committee held an executive session at three (3) of its four (4) meetings.

 

COMMUNICATIONS TO THE BOARD OF DIRECTORS
AND TO INDIVIDUAL MEMBERS OF THE BOARD

 

Any security holder may communicate directly with the Board of Directors, or with any one or more individual members of the Board. A security holder wishing to do so, should address the communication to “Board of Directors” or to one or more individual members of the Board and submit the communication to the Company at the address of the Company noted on the first page of this Notice of Meeting and Proxy Statement. All such communications received by the Company and addressed to the Board of Directors will be forwarded to the Chairman of the Board of Directors, or to the individual member or members of the Board, if addressed to them.

 

All of these communications will be reviewed by our Secretary to filter out communications that are not appropriate, specifically, spam or communications offering to buy or sell products or services. The Secretary will forward all remaining communications to the appropriate Directors.

 

Any interested party may communicate with our non-management Directors by writing to:

 

Meadowbrook Insurance Group, Inc.

26255 American Drive

Southfield, Michigan 48034

Attention: Non-Management Directors

 

GOVERNANCE AND NOMINATING COMMITTEE

 

Our Board of Directors has adopted Corporate Governance Guidelines and a written Charter for the Governance and Nominating Committee, copies of which are available to shareholders on our website, at www.meadowbrook.com. Each member of our Governance and Nominating Committee is independent as defined in the New York Stock Exchange’s independence standards, as those standards have been modified or supplemented, and these Directors have no other relationship that would impair their independence.

 

Our Board of Directors has a Governance and Nominating Committee, which consists of four (4) Directors. Hugh W. Greenberg (Chairman), Florine Mark, David K. Page, and Robert H. Naftaly are the current members of the Governance and Nominating Committee. The Governance and Nominating Committee recommends individuals for election to the Board of Directors. During the fiscal year ended December 31, 2005, the Governance and Nominating Committee held three (3) meetings.

 

The Governance and Nominating Committee’s policy is to consider director candidates recommended by shareholders. Such recommendations must be made pursuant to timely notice in writing to:

 

Meadowbrook Insurance Group, Inc.

26255 American Drive

Southfield, Michigan 48034-2438

Attention: Governance and Nominating Committee

 

The Governance and Nominating Committee has not established specific minimum qualifications and skills for directors to possess. The Governance and Nominating Committee uses a subjective process for identifying and evaluating nominees for director, based upon the information available to members of the Governance and Nominating Committee and the Company’s then current needs. The Governance and Nominating Committee does not believe there would be any difference in the manner in which it evaluates nominees based on whether the

nominee is recommended by a shareholder or director. Historically, nominees have been the existing directors or persons with significant business, insurance accounting, actuarial or legal experience.

 

CODE OF CONDUCT

 

The Company has adopted a Code of Conduct that applies to all of our employees, officers and Directors, including our principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions. Annually, we review the Code of Conduct for any amendments, which are thereafter reviewed and approved by the Governance and Nominating Committee and the Board of Directors.

 

Our Code of Conduct contains written standards that are intended to deter wrongdoing and promote:

 

 

In addition, the Company has a Whistleblower Policy, which allows employees to anonymously report ethical or illegal conduct on the part of employees. All reports are investigated by the Compliance Officer and then reported to the Audit Committee of the Board of Directors for further action.

 

This Code of Conduct is attached to our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 as Exhibit 14. We have also posted it on our website at www.meadowbrook.com. We will provide a copy of the Code of Conduct to any person, without charge and upon request. Requests for a copy of our Code of Conduct, Corporate Governance Guidelines or Committee Charters should be made to the Secretary at 26255 American Drive, Southfield, Michigan 48034. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of our Code of Conduct that applies to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions and that relates to any element of the code definition enumerated in Securities and Exchange Commission, Regulation S-K, Item 406(b) by posting such information on our website at www.meadowbrook.com within five (5) business days following the date of the amendment or waiver. To date, no such waivers have been made.

 

REPORT OF THE AUDIT COMMITTEE

 

The Audit Committee (the “Committee”) has adopted a Charter outlining its duties and responsibilities on matters relating to financial reporting, internal audit, accounting practices, internal controls, loss reserving and selection of the Company’s independent auditors.

 

The Committee consists of all independent directors. The members are: Bruce E. Thal, Chairman, Robert H. Naftaly, Robert Sturgis and Hugh Greenberg. The Committee recommended and the Board of Directors appointed Bruce E. Thal as the Committee’s financial expert, in accordance with the Sarbanes-Oxley Act of 2002.

 

In 2005, the Committee met with members of the Company’s financial management team at each of its meetings. The Company’s independent auditors attended six (6) of eight (8) Committee meetings. The Committee also met with the Company’s independent actuarial consultants. During these meetings, the Committee held discussions with the independent auditors and the actuarial consultants relating to financial management, accounting practices, loss reserves, internal audit and other internal control related issues. The Committee met in executive session with the Company’s independent auditors and actuarial consultants. Also, the Committee met in executive session with the Company’s Chief Financial Officer, Chief Actuary, Director of Internal Audit and General Counsel.

In 2005, the Committee replaced PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm with Ernst & Young LLP effective August 8, 2005. In addition, the Committee retained Ernst & Young LLP to provide tax compliance services to the Company for 2006. Each of these actions were approved by the Board of Directors of the Company.

 

During 2005, the Committee reviewed the Company’s financial management with its independent auditors. The Committee reviewed the results of the Ernst  & Young LLP audit for 2005. The Committee reviewed the audited financial statements, which are included in the Company’s Annual Report on Form 10-K. The Committee received a report from the Company’s independent actuarial firm relating to the Company’s loss reserves. Also, the Committee received reports from Ernst & Young LLP and the Company’s Internal Audit Department relating to the Company’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002. The Committee is responsible for overseeing the Company’s project plan and compliance with Section 404.

 

The Committee also discussed with the independent auditors other matters required to be discussed by the auditors with the Committee under Statement on Auditing Standards No. 61, as amended, (communication with audit committees). The Committee received and discussed with the auditors their annual written report on their independence from the Company and its management, which is made under Independence Standards Board Standard No. 1 (independence discussions with audit committees).

 

In reliance upon these reviews and discussions, and the report of the independent auditors, the Committee has recommended to the Board of Directors, and the Board of Directors has approved, that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

 

The Audit Committee

 

Bruce E. Thal, Chairman
Hugh W. Greenberg
Robert H. Naftaly
Robert W. Sturgis

 

COMPENSATION OF DIRECTORS

 

During 2005, each outside director received an annual retainer fee of $20,000 and $1,000 meeting fee for each Board or Committee meeting attended. Each outside Director, who served as Chairman of a Board Committee, received an additional $3,000 annual retainer for such services.

 

In 2006, the Compensation Committee of the Board of Directors reviewed the compensation paid by the Company to Directors. The Compensation Committee reviewed compensation paid to Directors of peer companies and considered the additional work and responsibilities assumed by Directors in recent years. Also, the Compensation Committee wanted to assure the compensation paid by the Company to its Directors was competitive, which would assist the recruitment of new Directors. Effective January 1, 2006, the Compensation Committee recommended to the Board of Directors the annual retainer fee for outside Directors remain the same; the annual retainer for outside Directors who serve as a Chairman of a Board Committee be increased from $3,000 to $5,000; and the fee for attending a Board or Committee meeting be increased from $1,000 to $1,500. On February 10, 2006, the Board of Directors approved these changes to Board compensation.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth as of the Record Date the beneficial ownership of the Company’s common stock by: (i) each person known by the Company to beneficially own five percent or more of such shares, (ii) each nominee and incumbent director, (iii) each person named in the Summary Compensation Table under the EXECUTIVE COMPENSATION Section of this proxy statement, and (iv) all nominees and incumbent directors and Executive Officers as a group, together with their respective percentage ownership of the outstanding shares. Unless otherwise indicated, each individual has sole investment and voting power with respect to such shares.

 

 

 

 

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that the Company’s Directors, executive officers and persons who own more than 10% of a registered class of the Company’s equity securities file reports of stock ownership and any subsequent changes in stock ownership with the Securities and Exchange Commission within prescribed time limits. During 2005, all of the required reports were filed on a timely basis, except as noted herein. Mr. Archie McIntyre submitted one (1) late report involving three (3) transactions. Mr. Merton J. Segal submitted one (1) late report involving one (1) transaction. Mr. Robert Naftaly submitted one (1) late report involving one (1) transaction. The Company is unaware of any other failure to file a required report. In making this disclosure, the Company relies on the Directors’ and Executive Officers’ written representations and a review of copies of the reports filed with the SEC.

 

CERTAIN TRANSACTIONS WITH MANAGEMENT AND
RELATED PARTY TRANSACTIONS

 

a. Demand Note:

 

At December 31, 2005, the Company held an $858,923 Demand Note receivable, including $198,134 of accrued interest, from Robert S. Cubbin and Kathleen D. Cubbin. In 2005, Mr. Cubbin paid $42,000 to the Company in interest relating to the Demand Note. This Demand Note arose from a transaction in late 1998 whereby the Company loaned Robert S. Cubbin and Kathleen D. Cubbin funds to exercise 64,718 common stock options to cover the exercise price and associated tax withholdings. The Demand Note bears a rate of interest equal to the rate charged the Company pursuant to its current revolving credit agreement. On December 31, 2005, the rate was 6.36%. The Demand Note is due on demand. The loan is partially collateralized by 64,718 shares of the Company’s common stock, pursuant to a Stock Pledge Agreement. The Demand Note between the Company and Mr. and Mrs. Cubbin is a non-recourse loan with the Company’s sole remedy in the event of a default being the reclamation of the shares of the Company that were pledged as collateral. (See the “EMPLOYMENT CONTRACTS — Robert S. Cubbin Employment Agreement” Section of this proxy statement).

 

b. Employees:

 

Sue Cubbin, Vice President of Human Resources, is the sister of Robert S. Cubbin, President and Chief Executive Officer of the Company. In her capacity as Vice President of Human Resources, Ms. Cubbin is responsible for all human resource matters relating to compensation, fringe benefits, payroll, education and training, hiring and performance reviews of the Company’s employees. In addition, she is responsible for facilities management of the Company’s Southfield, Michigan headquarters.

 

Laura Segal, a Vice President in the Southfield branch, is the daughter of the Chairman of the Board, Merton J. Segal. Ms. Segal is responsible for management of the Company’s largest public entity program, which is located in the State of Michigan.

 

Carol Ziecik, Vice President of Corporate Communications, is the daughter of the Chairman of the Board, Merton J. Segal. Ms. Ziecik is responsible for the corporate communications of the Company, which include press releases, marketing materials, the Annual Report and other similar matters.

In 2005, the total compensation for Ms. Cubbin, Ms. Segal and Ms. Ziecik was $389,495. In 2004, the Compensation Committee granted a three (3) year long-term incentive target for Ms. Cubbin and Ms. Segal of $39,000 and $23,398, respectively.

 

In 2004, the Governance & Nominating Committee retained an outside compensation consultant to independently review the compensation paid Ms. Cubbin, Ms. Segal and Ms. Ziecik in relation to their duties and responsibilities. The consultant concluded the compensation paid these employees was within a competitive range of market medium levels. On February 9, 2006, the Governance & Nominating Committee reviewed the compensation of Ms. Cubbin, Ms. Segal and Ms. Ziecik. The Governance & Nominating Committee determined there had been no material change in either the compensation or duties of these employees and concluded the compensation paid these employees was fair and reasonable in relation to their experience, duties and responsibilities. On February 10, 2006, the Board of Directors approved the continued employment of Ms. Cubbin, Ms. Segal and Ms. Ziecik.

 

EXECUTIVE COMPENSATION

 

The following table sets forth information for the fiscal years ended December 31, 2005, 2004 and 2003 concerning the compensation of the Company’s Chief Executive Officer and the Company’s four most highly compensated Executive Officers, other than the Chief Executive Officer, whose total annual salary and bonus exceeded $100,000 and includes all compensation paid to such officers:

 

Summary Compensation Table for Years Ended December 31, 2005, 2004 and 2003

 

 

 

 

The Company did not grant any stock options during 2005 under either the 1995 Amended and Restated Stock Option Plan or the 2002 Amended and Restated Stock Option Plan.

Options Value Table

 

The following table sets forth information concerning exercises and fiscal year end values of Company stock options during the fiscal year ended December 31, 2005 by the following Executive Officers:

 

Aggregated Option Exercises and Fiscal Year End Option Values
for Year Ended December 31, 2005

 

 

 

 

Meadowbrook Insurance Group, Inc. Stock Option Plans

 

The Meadowbrook Insurance Group, Inc. 1995 Amended and Restated Stock Option Plan (the “1995 Plan”) and the 2002 Amended and Restated Stock Option Plan (the “2002 Plan”) (the “Plans”) are intended to further the interests of the Company and its stockholders by attracting, retaining and motivating associates. The Plans provide for the grant of stock options (which may be nonqualified options or incentive stock options for tax purposes) and restricted stock awards.

 

The number of shares of Common Stock which may be issued under the Plans is 2,000,000 for each of the two Plans. Options issued under both the 1995 Plan and the 2002 Plan which expire unexercised will again become available for grant under the Plans. Cash exercises of stock appreciation rights and cash supplemental payments will not count against these limits. Lapsed, forfeited or canceled awards will also not count against these limits. The maximum number of shares of Common Stock which may be issued under each Plan to any single individual is 800,000. As of the Record Date, 447,380 of the options provided for in the 1995 Plan are outstanding or have been exercised. As of the Record Date, 1,194,325 of the options provided for in the 2002 Plan are outstanding or have been exercised.

 

Stock Options

 

The Compensation Committee is authorized to determine the terms and conditions of all option grants, subject to the limitations that the option price per share may not be less than the fair market value of a share of Common Stock on the date of grant and the term of an option may not be longer than ten years. Payment of the option price may be made in any manner specified by the Compensation Committee (which may include payment in cash or Common Stock or by “cashless exercise”).

 

MEADOWBROOK, INC. 401(k) AND PROFIT SHARING PLAN

 

The Company offers a 401(k) and Profit Sharing Plan (“Plan”). Employees who have reached the age of 21, and who have completed six (6) months of service, are eligible to participate. Employees are 100% vested upon becoming eligible to participate in the Plan. In the 401(k), the Company matches a portion of the employee’s pre-tax contribution. Likewise, the Company may also make a discretionary profit-sharing contribution.

 

LONG-TERM INCENTIVE PLAN

 

In 2004, the Compensation Committee authorized the adoption of the Company’s Long Term Incentive Plan (the “LTIP”). The LTIP provides participants with the opportunity to earn cash and stock awards based upon the achievement of specified financial goals over a three-year performance period with the first performance period commencing January 1, 2004. At the end of the three-year performance period, and if the performance target is achieved, the Compensation Committee of the Board of Directors shall determine the amount of LTIP awards that are payable to participants in the LTIP. One-half of any LTIP award will be payable in cash and one-half of the award will be payable in the form of a restricted stock award. If the Company achieves the three-year performance target, payment of the cash portion of the award would be made in three annual installments, with the first payment being paid as of the end of the performance period and the remaining two payments to be paid in the fourth and fifth year. Any unpaid portion of a cash award is subject to forfeiture if the participant voluntarily leaves the Company or is discharged for cause. The portion of the award to be paid in the form of stock will be issued as of the end of the performance period. The number of shares of Company’s common stock subject to the restricted stock award shall equal the dollar amount of one-half of the LTIP award divided by the fair market value of Company’s common stock on the first date of the performance period. The restricted stock awards shall be made subject to the terms and conditions of the LTIP and Plans. No LTIP awards were paid by the Company in 2005.

 

EMPLOYMENT CONTRACTS

 

Merton J. Segal Employment Agreement

 

The Company entered into an employment agreement with Mr. Segal effective January 1, 2006 through December 31, 2008.

 

Mr. Segal’s employment agreement provides for (a) a base salary of not less than $31,250 per month, (b) a discretionary bonus targeted at 50 percent of his base salary (at the sole discretion of the Company) upon the attainment of certain growth and profitability goals, profit center goals and personal goals and objectives, (c) participation in Company Option Plans, (d) participation in the Company’s Long Term Incentive Plan, (e) life insurance benefits, and (f) severance benefits upon termination of Mr. Segal’s employment under the circumstances described below.

 

In the event Mr. Segal’s employment is terminated prior to a change in control of the Company and without cause, or by Mr. Segal for good reason, the Company shall pay to Mr. Segal (a) his base salary for 24 months or the remaining months of his employment term, whichever is less, in accordance with the Company’s regularly scheduled payroll., (b) a pro rata share of the portion of Mr. Segal’s discretionary bonus that is based on Company performance criteria, and (c) Mr. Segal’s COBRA premiums for health care coverage for 18 months, or, if earlier, the cessation of Mr. Segal’s and his family members’ eligibility for COBRA continuation coverage.

 

In the event Mr. Segal’s employment is terminated following a change in control of the Company and without cause, or by Mr. Segal for good reason, the Company shall pay to Mr. Segal (a) an amount equal to two times the sum of (i) Mr. Segal’s annual base salary, plus (ii) Mr. Segal’s target discretionary bonus, to be paid in a lump sum payment within 10 days following the date Mr. Segal’s employment terminates, (b) a pro rata share of the portion of Mr. Segal’s discretionary bonus that is based on Company performance criteria no later than the February 28th following the year Mr. Segal’s employment terminates, and (c) Mr. Segal’s COBRA premiums for health care coverage for 18 months, or, if earlier, the cessation of Mr. Segal’s and his family members’ eligibility for COBRA continuation coverage. In the event his employment terminates following a change in control and Mr. Segal becomes entitled to the aforementioned payments, Mr. Segal has agreed to be subject to restrictive covenants against competing with the Company for a period of 2 years following such termination of employment. These restrictions are in addition to those already in effect for all Company employees. In the event Mr. Segal’s employment is terminated for cause, he is not entitled to any severance payment under the employment agreement.

 

In the event of Mr. Segal’s death, fifty percent (50%) of his remaining base salary would be paid to his designee.

The Compensation Committee and the Board of Directors approved the termination of Mr. Segal’s former Employment Agreement and replaced it with the Employment Agreement designated above.

 

Robert S. Cubbin Employment Agreement

 

The Company entered into an employment agreement with Mr. Cubbin effective January 1, 2004 through December 31, 2006. Unless either the Company or Mr. Cubbin gives notice to the other party of an election not to renew the employment agreement on or before December 31, 2004, and annually thereafter, the employment agreement will automatically be extended one additional year.

 

Mr. Cubbin’s employment agreement provides for (a) a base salary of not less than $37,500 per month, (b) a discretionary bonus targeted at 50 percent of his base salary (at the sole discretion of the Company) upon the attainment of certain growth and profitability goals, profit center goals and personal goals and objectives, (c) participation in Company Option Plans, (d) participation in the Company’s Long Term Incentive Plan, and (e) severance benefits upon termination of Mr. Cubbin’s employment under the circumstances described below.

 

In the event Mr. Cubbin’s employment is terminated prior to a change in control of the Company and without cause, or by Mr. Cubbin for good reason, the Company shall pay to Mr. Cubbin (a) his base salary for 24 months over the Company’s regularly scheduled payroll, (b) a pro rata share of the portion of Mr. Cubbin’s discretionary bonus that is based on Company performance criteria, and (c) Mr. Cubbin’s COBRA premiums for health care coverage for 18 months, or, if earlier, the cessation of Mr. Cubbin’s and his family members’ eligibility for COBRA continuation coverage.

 

In the event Mr. Cubbin’s employment is terminated following a change in control of the Company and without cause, or by Mr. Cubbin for good reason, the Company shall pay to Mr. Cubbin (a) an amount equal to two times the sum of (i) Mr. Cubbin’s annual base salary, plus (ii) Mr. Cubbin’s target discretionary bonus, to be paid in a lump sum payment within 10 days following the date Mr. Cubbin’s employment terminates, (b) a pro rata share of the portion of Mr. Cubbin’s discretionary bonus that is based on Company performance criteria no later than the February 28th following the year Mr. Cubbin’s employment terminates, and (c) Mr. Cubbin’s COBRA premiums for health care coverage for 18 months, or, if earlier, the cessation of Mr. Cubbin’s and his family members’ eligibility for COBRA continuation coverage. In the event his employment terminates following a change in control and Mr. Cubbin becomes entitled to the aforementioned payments, Mr. Cubbin has agreed to be subject to restrictive covenants against competing with the Company for a period of 2 years following such termination of employment. These restrictions are in addition to those already in effect for all Company employees.

 

In the event Mr. Cubbin’s employment is terminated for cause, he is not entitled to any severance payment under the employment agreement, he forfeits all of the shares of Company stock subject to a pledge agreement with the Company, but the Demand Note he has with the Company is cancelled and deemed paid in full. (See “CERTAIN TRANSACTIONS WITH MANAGEMENT”). The Demand Note was amended effective June 1, 2001 and deemed a non-recourse loan with the Company’s sole remedy in the event of a default being the reclamation of the shares of the Company that were pledged as collateral. The employment agreement also provides that in the event Mr. Cubbin’s employment is terminated by the Company without Cause or as a result of any purchaser acquiring 50% or more of the outstanding shares of the Company, then (a) the Demand Note shall be cancelled and deemed paid in full, and (b) Mr. Cubbin shall be entitled to retain his shares of Company stock subject to the pledge agreement or, in his discretion, sell the shares back to the Company at the then current market price or book value, whichever is greater. This provision continues in effect the identical provision contained in the amendment to Mr. Cubbin’s prior employment agreement with the Company that was adopted on June 15, 2002.

 

Michael G. Costello Employment Agreement

 

The Company entered into an employment agreement with Mr. Costello effective January 1, 2004 through December 31, 2006. Unless either the Company or Mr. Costello gives notice to the other party of an election not to renew the employment agreement on or before December 31, 2004, and annually thereafter, the employment agreement will automatically be extended one additional year.

Mr. Costello’s employment agreement provides for (a) a base salary of not less than $18,417 per month, (b) a discretionary bonus targeted at 40 percent of his base salary (at the sole discretion of the Company) upon the attainment of certain growth and profitability goals, profit center goals and personal goals and objectives, (c) participation in Company Option Plans, (d) participation in the Company’s Long Term Incentive Plan, and (e) severance benefits upon termination of Mr. Costello’s employment under the circumstances described below.

 

In the event Mr. Costello’s employment is terminated prior to a change in control of the Company and without cause, or by Mr. Costello for good reason, the Company shall pay to Mr. Costello (a) his base salary for 24 months over the Company’s regularly scheduled payroll, (b) a pro rata share of the portion of Mr. Costello’s discretionary bonus that is based on Company performance criteria, and (c) Mr. Costello’s COBRA premiums for health care coverage for 18 months, or, if earlier, the cessation of Mr. Costello’s and his family members’ eligibility for COBRA continuation coverage.

 

In the event Mr. Costello’s employment is terminated following a change in control of the Company and without cause, or by Mr. Costello for good reason, the Company shall pay to Mr. Costello (a) an amount equal to two times the sum of (i) Mr. Costello’s annual base salary, plus (ii) Mr. Costello’s target discretionary bonus, to be paid in a lump sum payment within 10 days following the date Mr. Costello’s employment terminates, (b) a pro rata share of the portion of Mr. Costello’s discretionary bonus that is based on Company performance criteria no later than the February 28th following the year Mr. Costello’s employment terminates, and (c) Mr. Costello’s COBRA premiums for health care coverage for 18 months, or, if earlier, the cessation of Mr. Costello’s and his family members’ eligibility for COBRA continuation coverage. In the event his employment terminates following a change in control and Mr. Costello becomes entitled to the aforementioned payments, Mr. Costello has agreed to be subject to restrictive covenants against competing with the Company for a period of 2 years following such termination of employment. These restrictions are in addition to those already in effect for all Company employees.

 

In the event Mr. Costello’s employment is terminated for cause, he is not entitled to any severance payment under the employment agreement.

 

The following terms are applicable to each of the three employment agreements described above:

 

“Cause” is generally defined to include (i) a failure by the executive to obey the reasonable and lawful orders of the Board of Directors; (ii) misconduct by the executive that is materially injurious to the Company; or (iii) dishonest activities injurious to the Company. If the executive’s employment is terminated for Cause, he is not entitled to any severance payment.

 

“Change in Control” is generally defined as

 

 

 

 

 

“Good Reason” is generally defined as the executive tendering his resignation within 6 months following the date on which (a) the executive is not reelected to or is removed from the title and office he currently holds with the Company, (b) the Company fails to vest in the executive the responsibilities, authority or resources he reasonably needs to competently perform his duties in his current title and office for the Company, (c) the Company changes the executive’s primary location of employment to a place more than 50 miles from Southfield, Michigan, (d) the Company commits a material breach of its obligations under the employment agreement and fails to cure the breach within 30 days following the executive giving notice of the breach, or (e) the Company gives notice that it will not renew the employment agreement. (Not applicable to Employment Agreement of Mr. Segal, dated January 1, 2006.)

 

AT-WILL EMPLOYMENT AND SEVERANCE AGREEMENTS

 

It is the Company’s philosophy to attract and retain high-quality people, which is crucial to the short-term and long-term success of the Company. In order to further this goal, the Company determined that it was in the best interests of the Company to enter into At-Will Employment and Severance Agreements (the “Agreements”) with twelve (12) senior executives of the Company, including Karen M. Spaun, Gregory L. Wilde and Stephen A. Belden. These Agreements provide for a lump-sum severance payment (of up to twelve (12) months of the executive’s annual base salary, plus one times the executive’s targeted annual bonus) to the executive in the event the executive’s employment is terminated without “Good Cause” or “Good Reason” within two (2) years following a “Change of Control” of the Company. If the executive is terminated within the two (2) year period following a “Change of Control” and the termination is for “Good Cause,” then, no severance payment would be due the executive. Further, if the executive voluntarily resigns or his or her employment is not terminated within the two (2) year period following a “Change of Control” and the executive’s employment is terminated thereafter, no severance payment would be due the executive.

 

Under the Agreements, the following terms are applicable to each of the Agreements described above:

 

(a) A “Change in Control” shall be deemed to have taken place upon:

 

 

 

 

 

(b) “Good Cause” shall mean (i) the failure by the Executive to obey the reasonable and lawful orders of the Board of Directors of the Company or Executive’s direct supervisor; (ii) misconduct by the Executive that is materially injurious to the Company; or (iii) the Executive engaging in dishonest activities injurious to the Company.

 

(c) “Good Reason” shall exist if Executive resigns from employment with the Company following the occurrence of any one or more of the following, without Executive’s prior written consent: (i) Executive is not reelected to or is removed as an Executive of the Company; (ii) the Company fails to vest Executive with or removes from Executive the duties, responsibilities, authority or resources that Executive reasonably needs to competently perform Executive’s duties as an officer of the Company; (iii) the Company changes the primary location of Executive’s employment to a place that is more than 50 miles from the Executive’s principal location of employment with the Company immediately prior to a Change in Control of the Company; or (iv) the Company otherwise commits a material breach of its obligations under the Agreements and fails to cure the breach within 30 days after Executive gives the Company written notice of the breach.

 

The Compensation Committee reviewed and approved the Agreements and those executives eligible for such Agreements. The actions of the Compensation Committee were also ratified by the Board of Directors of the Company.

 

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD
ON EXECUTIVE COMPENSATION

 

In 2003, the Compensation Committee (the “Committee”) of the Board of Directors adopted a Committee Charter (the “Charter”) to assure that the Company’s executives were appropriately compensated in relation to their duties, responsibilities and performance. The Charter authorizes the Committee to review and approve the goals and objectives for the Chairman and Chief Executive Officer, evaluate the performance of the Chairman and Chief Executive Officer and approve the compensation (base salary, annualized bonus and equity compensation) of the Chairman and Chief Executive Officer. The Committee is responsible for reviewing recommendations made by the Chief Executive Officer relating to the compensation of the Company’s principal executives who report to the Chief Executive Officer. In addition, the Committee is responsible for reviewing and approving stock option awards and/or long-term incentive awards granted to applicable employees. Finally, the Committee is authorized to periodically review the Company’s compensation philosophy relating to the salaries, bonuses and other long-term incentive awards paid to employees of the Company.

 

It is the Company’s policy to offer a compensation package including a competitive salary, an incentive bonus based upon individual and Company performance, as well as, competitive benefits. The Company’s compensation policy for its executive officers is similar to that of other employers and intended to promote the attraction and retention of talented management, continued performance and attainment of corporate and personal goals, as well as to further promote the Company’s financial success by aligning executive officers’ financial interest with long-term shareholder value.

 

Compensation consists of three (3) elements for executive officers: base salary, annual incentive bonus and equity compensation. The criteria for determining the Chairman, Chief Executive Officer and other executive officers’ base salary includes level of responsibility, corporate performance, personal contribution to the Company’s success, experience, expertise and market data for the Company’s competitors in the insurance industry. Criteria for determining the Chairman, Chief Executive Officer and other executive officers’ annual incentive bonus includes corporate performance, personal contribution to the Company, achievement of individually established goals, market data for the Company’s competitors in the insurance industry and the attainment of other corporate objectives. Criteria for awarding stock options or long-term incentive awards to the Chairman, Chief Executive Officer and other executive officers includes level of responsibility, expected future contributions, market data for the Company’s competitors in the insurance industry, corporate performance and actual achievement of individually established goals.

 

a. Compensation of the President and Chief Executive Officer:

 

For 2005, the Committee established fifteen (15) performance objectives for Mr. Cubbin. The performance goals included financial, operational and entity-wide control objectives. The financial objectives included goals for written premium, fee and commission revenue, return on equity, earnings per share and growth of after-tax profit. The operational goals included a targeted combined ratio, implementation of new programs, growth of the Company’s fee based business and strategic acquisitions. Further, the entity-wide control objectives included implementation of a risk assessment policy, and maintenance of the internal controls over financial reporting. The Committee determined that Mr. Cubbin achieved substantially all of these performance objectives for 2005. Based upon Mr. Cubbin’s performance, the Committee awarded a salary increase of $35,000. In addition, the Committee awarded an annual bonus of $285,000. Further, the Committee approved an annual bonus target for 2006 of 50% of his base salary.

 

b. Compensation of the Chairman of the Board and Other Senior Executives

 

The Committee reviewed the performance of Mr. Segal as it related to the Company’s 2005 results. Based upon this review, the Committee awarded a salary increase of $10,000. In addition, the Committee awarded an annual bonus of $215,000. Further, the Committee approved an annual bonus target for 2006 of 50% of his base salary.

 

Also, the Committee approved the 2005 annual bonus awards, 2006 merit pool and 2006 annual bonus targets for the Company’s other senior executives who report to Mr. Cubbin, as well as the 2005 annual bonus awards, 2006 merit pool and 2006 annual bonus targets for all other applicable employees.

c. Mr. Segal’s Employment Agreement:

 

The Company entered into an Employment Agreement with Mr. Segal effective January 1, 2006. The Employment Agreement expires on December 31, 2008. This Employment Agreement replaces Mr. Segal’s former Employment Agreement dated January 1, 2004. There are three (3) major changes to Mr. Segal’s Employment Agreement. First, Mr. Segal’s former Employment Agreement would automatically extend for one (1) additional year, unless notice of non-renewal is provided by the Company. Mr. Segal’s new Employment Agreement now expires on December 31, 2008 and does not automatically extend. Second, if terminated without “cause” and prior to “change of control” of the Company, Mr. Segal would be entitled to a severance equal to twenty-four (24) months of his base salary under his former Employment Agreement. Under his new Employment Agreement, the severance is equal to twenty-four (24) months of his base salary, or the remaining months of his employment term, whichever is less. In addition, under his new Employment Agreement, in the event of Mr. Segal’s death, 50% of Mr. Segal’s remaining base salary would be paid to his designee. There were no other material changes to Mr. Segal’s Employment Agreement.

 

The Committee approved these changes to Mr. Segal’s Employment Agreement on February 10, 2006.

 

d. At-Will Employment and Severance Agreements:

 

The Committee retained an outside compensation consultant to advise the Committee as to the employment agreements for other executives of the Company. The Company advised the outside compensation consultant of its philosophy to attract and retain high-quality people, which is critical to the short-term and long-term success of the Company. The outside compensation consultant reviewed other employment agreements between peer companies and its executives. The outside compensation consultant made recommendations to the Committee regarding the length and type of employment agreements, which would be appropriate for such executives.

 

After receiving the report from the outside compensation consultant, the Committee approved At-Will Employment and Severance Agreements for twelve (12) executives of the Company, including Karen M. Spaun, Gregory L. Wilde and Stephen A. Belden. The At-Will Employment and Severance Agreements provide for a lump-sum severance payment (of up to twelve (12) months of the executive’s annual base salary, plus one times the executive’s targeted annual bonus) to the executive in the event the executive’s employment is terminated without “Good Cause” or “Good Reason” within two (2) years following a “Change of Control” of the Company. If the executive is terminated within the two (2) year period following such ’Change of Control” and the termination is for “Good Cause,” then, no severance payment would be due the executive. Further, if the executive voluntarily resigns, or his or her employment is not terminated within the two (2) year period following a “Change of Control” and the executive’s employment is terminated thereafter, no severance payment would be due the executive.

 

The Committee has reviewed and approved the Agreements and the executives eligible for such Agreements.

 

e. Director Compensation:

 

The Committee reviewed the annual compensation for the Board of Directors. This review was prompted by the additional responsibilities and duties, which have been assumed by the directors, as well as, the committees of the Board of Directors. The Committee retained an outside consultant, which specializes in compensation related matters. The consultant reviewed the compensation of the Board of Directors compared to the compensation paid to directors of other similar publicly-held companies and peers within the insurance industry. The Compensation Committee requested that management update the information of the outside consultant.

 

After reviewing the updated report from management, the Committee recommended the following: the Company’s Board of Directors retainer remain the same at $20,000 per year; the retainer for those Directors who

serve as a Committee Chairperson be increased from $3,000 to $5,000 per year; and the Board and Committee meeting fee be increased from $1,000 to $1,500.

 

The Board of Directors of the Company unanimously ratified and approved all of the above recommendations made by the Committee.

 

The Compensation Committee

 

Robert H. Naftaly, Chairman
Hugh W. Greenberg
David K. Page
Herbert Tyner

 

Compensation Committee Interlocks and Insider Participation

 

No member of the Compensation Committee is a current or former employee of the Company or any of its subsidiaries. No member of the Compensation Committee had any relationship with the Company, which would have required disclosure in this Proxy Statement under the caption “Certain Transactions with Management and Related Party Transaction.” No executive officer of the Company served on the Compensation Committee or as a director of any other entity whose executive officer(s) served on the Company’s Compensation Committee or Board.

 

PERFORMANCE GRAPH

 

Set forth below is a graph showing changes in the value of $100 invested in the Company’s common stock, the Russell 2000 Index, and a Peer Group Index for the period December 31, 2000 through December 31, 2005. The stock price performance on the following graph is not necessarily indicative of future stock price performance.

 

COMPARISON OF CUMULATIVE TOTAL RETURN* AMONG
MEADOWBROOK INSURANCE GROUP, INC., THE RUSSELL 2000 INDEX,
AND THE SNL $500M-$1B INSURANCE ASSET-SIZE INDEX

 

 

 

 

 

 

THE SECOND PROPOSAL ON WHICH YOU ARE VOTING
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS

 

Subject to ratification by the stockholders, the Board of Directors has appointed Ernst & Young LLP as the independent registered public accounting firm of the Company for the current year. The affirmative vote of a majority of shares of the Company’s common stock present in person or represented by proxy at the Annual Meeting is required to ratify the appointment of Ernst & Young LLP. Unless you otherwise indicate on your proxy card, your returned proxy will be voted FOR ratification of the reappointment of Ernst & Young LLP.

 

A representative from Ernst & Young LLP will be available at the Annual Meeting to respond to any appropriate questions from stockholders.

 

AUDIT FEES

 

On August 8, 2005, the Company replaced PriceWaterhouseCoopers LLP as the independent auditor of the Company with Ernst & Young LLP effective August 8, 2005. The decision to change independent auditors and the appointment of the new independent auditors was approved by the Audit Committee and the Board of Directors of the Company.

 

The Audit Reports of PriceWaterhouseCoopers LLP on the Company’s financial statements for the fiscal years ended on December 31, 2003 and December 31, 2004 did not contain any adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principals.

 

During the fiscal years ended December 31, 2003, December 31, 2004 and through August 8, 2005 there were no disagreements with PriceWaterhouseCoopers LLP and any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to PriceWaterhouseCoopers LLP’s satisfaction, would have caused them to make reference to the subject matter of the disagreements in its report on the Company’s financial statements for such years. Set forth below is the information concerning fees billed to the Company by Ernst & Young LLP in respect to the services provided for fiscal year 2005 from August 8, 2005 through March 16, 2006 and concerning fees billed to the Company by PriceWaterhouseCoopers LLP with respect to the services provided for fiscal year 2004 and fiscal year 2005, until August 8, 2005. The Audit Committee of the Board of Directors reviewed and approved such fees and determined the services provided were compatible with maintaining the independence of both PriceWaterhouseCoopers LLP and Ernst & Young LLP.

 

 

Audit Fees.  Annual audit fees relate to service rendered in connection with the audit of the annual financial statements included in the Company’s Form 10-K filing and the quarterly reviews of financial statements included in the Company’s Form 10-Q filings.

 

Audit Related Fees.  Audit related fees are for professional services rendered by the independent auditors in connection with services related to the performance of the audit.

 

Tax Fees.  These fees relate to tax services including fees for tax compliance, tax advice and tax planning.

 

All Other Fees.  No professional services were rendered by either PriceWaterhouseCoopers LLP or Ernst & Young LLP for other services.

 

In accordance with the Securities and Exchange Commission rules issued pursuant to the Sarbanes Oxley Act of 2002, which require, among other things, the Audit Committee pre-approve all audit and non-audit services provided by the Company’s independent registered public accounting firm. The Audit Committee has adopted a

formal policy on auditor independence. This policy requires the approval by the Audit Committee of all professional services rendered by the Company’s independent registered public accounting firm prior to the commencement of the specified services. The Audit Committee of the Board of Directors pre-approved all professional services rendered by the Company’s independent registered public accounting firm. Likewise, the Board of Directors pre-approved all professional services rendered by the Company’s independent registered public accounting firm prior to the commencement of the services.

 

AUDIT COMMITTEE FINANCIAL EXPERT

 

The Board of Directors of the Company has determined that we have an Audit Committee financial expert, as defined by the Securities and Exchange Commission, serving on our Audit Committee. Mr. Bruce E. Thal is our Audit Committee financial expert. He is independent as such term for audit committee members is defined in the New York Stock Exchange’s independence standards, as those standards have been modified or supplemented, and he has no other relationship that would impair his independence.

 

AUDITOR INDEPENDENCE

 

The Audit Committee of the Board of Directors has considered whether the providing of services described under the subheading “Tax Fees” above are compatible with maintaining PriceWaterhouseCoopers LLP’s independence. After such consideration, the Audit Committee believes the services provided under “Tax Fees” provided by PriceWaterhouseCoopers LLP are compatible with maintaining the auditor’s independence.

 

The Company’s Board of Directors recommends that you vote FOR the ratification of the appointment of the independent registered public accounting firm.

 

OTHER MATTERS

 

The Company is not aware of any matter that may be brought before the Annual Meeting other than as described above. In the event any other matter properly comes before the Annual Meeting, the persons named in the accompanying form of proxy have discretionary authority to vote on such matters.

 

Dated: April 14, 2006

PROXY		PROXY

MEADOWBROOK INSURANCE GROUP, INC.

     The undersigned stockholder of MEADOWBROOK INSURANCE GROUP, INC. (the “Company”) hereby appoints MERTON J. SEGAL, ROBERT S. CUBBIN or MICHAEL G. COSTELLO, jointly and severally, the attorney and proxies of the undersigned stockholder, with the full power of substitution, to vote all of the shares of common stock of the Company standing in the name of the undersigned stockholder at the close of business on March 16, 2006, at the 2006 Annual Meeting (the “Annual Meeting”) of the stockholders of the Company to be held on Wednesday, May 10, 2006 and at any adjournments thereof, with all the powers the undersigned stockholder would possess if then, and there present.

     The undersigned stockholder acknowledges receipt of the Notice of the 2006 Annual Meeting and Proxy Statement, both dated April 14, 2006.

     PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY IN THE ENCLOSED ENVELOPE PROMPTLY.

(Continued and to be signed on reverse)

7156—Meadowbrook Insurance Group, Inc.

MEADOWBROOK INSURANCE GROUP, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.

[		]

		If no choice is specified, this Proxy will be voted FOR the election of the nominees listed and FOR the ratification of the appointment of Ernst & Young LLP, as the Company’s independent accountants for the year ending 2006.
		Date:
		Signature(s)
		Please sign exactly as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such.

p       FOLD AND DETACH HERE       p

YOUR VOTE IS IMPORTANT!

PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY
IN THE ENCLOSED ENVELOPE PROMPTLY.

7156—Meadowbrook Insurance Group, Inc.