ITEM 1: BUSINESS
General Meridian Insurance Group, Inc. ("the Company"), is a holding company principally engaged in the property and casualty insurance business through its wholly-owned subsidiaries, Meridian Security Insurance Company ("Meridian Security"), Meridian Citizens Security Insurance Company ("Meridian Citizens Security"), and Insurance Company of Ohio ("ICO"). The Company also owns a small service support company, Meridian Service Corporation, whose results of operations are insignificant to the total operations of the Company.
Approximately 48.1 percent of the Company's outstanding common shares are owned by Meridian Mutual Insurance Company ("Meridian Mutual"), a mutual property and casualty insurance company headquartered in Indianapolis, Indiana. Meridian Security, Meridian Citizens Security, ICO, Meridian Mutual and Meridian Citizens Mutual Insurance Company ("Meridian Citizens Mutual") are parties to a reinsurance pooling agreement ("pooling agreement") under which business written is shared by the companies on the basis of their percentage participation defined in the pooling agreement. Effective July 1, 1998, the pooling arrangement was amended to include business solicited through direct response marketing as well as the non-standard automobile product introduced during 1998, effectively pooling all business written by the insurance companies.
Collectively, the insurance companies participating in this reinsurance pooling arrangement write a broad line of property and casualty insurance, including personal, non-standard and commercial automobile; homeowners, farmowners and commercial multi-peril; and workers' compensation. Business is written primarily through nearly 1,400 independent insurance agencies in the states of Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Missouri, North Dakota, Ohio, Pennsylvania, South Dakota, Tennessee, Virginia, and Wisconsin.
Relationships with Meridian Mutual and Meridian Citizens Mutual All of the Company's corporate officers are officers of Meridian Mutual and five of the eight members that constitute the Company's Board of Directors are also directors of Meridian Mutual. Each of the six members of the directors and officers of Meridian Citizens Mutual are corporate officers of the Company. Effective January 1, 1997, the Company became the employer for all of the employees of Meridian Mutual and Meridian Citizens Mutual and the related employee benefit plans were merged into the Company's plans. Prior to January 1, 1997, the Company had no employees and was dependent upon Meridian Mutual and Meridian Citizens Mutual for the sale and underwriting of insurance, the servicing of policyholder claims and all other aspects of the Company's operations. Underwriting expenses are shared under the pooling agreement between each entity in accordance with the participation percentages of the parties. Other expenses which can be directly identified with Meridian Mutual, Meridian Citizens Mutual or the Company are paid by the company to which the expense is attributable. All other operating expenses relating to the business of each company (which have not been and are not expected to be significant in amount) are allocated in accordance with policies established in good faith by their Boards of Directors.
Pooling Agreement The pooling agreement currently covers all of the property and casualty insurance written by Meridian Mutual, Meridian Citizens Mutual, Meridian Security, Meridian Citizens Security, and ICO. Under the pooling agreement, premiums, losses, loss adjustment expenses and other underwriting and administrative expenses of each company are shared in accordance with the participation percentages established under the pooling agreement. The participation percentages of the Company's insurance subsidiaries total 74 percent.
The Boards of Directors of the Company, Meridian Mutual and Meridian Citizens Mutual have delegated to their respective Audit Committees the responsibility of monitoring the relationships between each of the participants under the pooling agreement pursuant to such procedures as those Committees may deem necessary and appropriate to allocate the pool participation percentages to each participant of the agreement. The Audit Committees have established guidelines for reviewing the participation percentages at least annually and for referring to the Pooling Committees of each company any decision to change the participation percentages. Future events that could affect the participation percentages among the parties include the receipt by Meridian Mutual of dividends on the common shares it owns of the Company, changes in the capital structure or asset values of Meridian Mutual, Meridian Security, Meridian Citizens Mutual, Meridian Citizens Security, or ICO, different effective rates of income taxation, or other factors which disproportionately affect the surplus of any of the participants.
The Company, Meridian Mutual and Meridian Citizens Mutual have conflicting interests with respect to the establishment of the respective ratios of each company under the pooling agreement, and conflicts may arise between the Company, Meridian Mutual and Meridian Citizens Mutual relating to the allocation of expenses not related to insurance underwriting, business and investment philosophies, profit objectives, cash management, dividend policy and other matters. The business and operations of the Company are integrated with and largely dependent upon the business and operations of Meridian Mutual and Meridian Citizens Mutual. The pooling agreement contains no specific provisions regarding the procedures to be followed in making these decisions.
In arriving at decisions involving matters in which Meridian Mutual and/or Meridian Citizens Mutual has an interest, the directors of the Company will be governed by their fiduciary duties to the Company and its shareholders, but those directors who also are directors of Meridian Mutual and Meridian Citizens Mutual also owe fiduciary duties to the policyholders of Meridian Mutual and Meridian Citizens Mutual and no procedures have been established under which those decisions would be made by disinterested directors. The terms of the pooling agreement preclude conflicts which could arise in deciding which risks are to be insured by each of the participants by making the results of the operations of all participants dependent on the results of the total business covered by the pooling agreement.
The pooling agreement has no fixed term and provides that it is to remain in force until canceled by the mutual consent of Meridian Security, Meridian Citizens Security, ICO or Meridian Citizens Mutual and Meridian Mutual. The pooling agreement may be amended or terminated without the necessity of a vote by the shareholders of the Company or the policyholders of any of the parties. In the event of a termination of the pooling agreement, the terminating party or parties would transfer back to Meridian Mutual the liabilities ceded to it by Meridian Mutual and Meridian Mutual would transfer back to the terminating party the liabilities ceded to it by the terminating party, and each party would receive assets from the other in an amount equal to the amount of the policy liabilities received. If the pooling agreement had been terminated at December 31, 1999, approximately 16% of the assets and liabilities subject to the pooling agreement would have been transferred to the Company's insurance subsidiaries. The Company would continue to own all of the outstanding common shares of Meridian Security, Meridian Citizens Security and ICO. The Company would maintain the employee force but would have reduced sales operations through a smaller independent agency force.
Regulatory approvals of the states of domicile are required to change the participation percentages of the parties to the pooling agreement or to terminate the pooling agreement; however, the requirement for such approvals is for the protection of the policyholders of the participating companies and not for the protection of the Company's shareholders. The Company intends that its insurance subsidiaries will continue their participation in the pooling agreement, absent some unforeseen change in circumstances.
A. M. Best Company, Inc., Ratings Since 1993, Meridian Mutual and Meridian Security have maintained a group rating of "A" (excellent) by A. M. Best Company, Inc. ("Best"). Subsequent to the July 31, 1996 acquisition, the Meridian group rating of "A" was also given to Meridian Citizens Security, ICO and Meridian Citizens Mutual. Best is an independent company which rates insurance companies on the basis of their opinion as to financial position and operating performance. Best's ratings are based upon factors related to the capacity of the insurer to make payment of its obligations to policyholders and do not relate to the protection of investors or indicate expected investment results.
Operations The Company, Meridian Mutual and Meridian Citizens Mutual's operating territory has expanded geographically into several additional states in recent years. During 1999, certain of the Meridian companies were granted licenses in the states of Arizona, Georgia, Kansas, Maryland, Missouri, North Dakota, South Dakota, and Washington. Additional state expansion, including Florida, Oregon, Utah, and Washington D.C. is planned for 2000. This geographic expansion enables the Company to spread its risk across a larger region. The Company has achieved certain economies of scale by consolidating functions within its operations. During 1998, the Meridian Citizens information systems, as well as two Meridian Mutual regional claim offices, were consolidated into the Indianapolis operation. During 1999, the personal and commercial lines processing of the Meridian Citizens' companies was integrated into Indianapolis and the Red Wing, Minnesota office was closed.
Underwriting The underwriting functions are separated into personal, commercial and farm lines of business. The Company's underwriting personnel are responsible for establishing risk-selection guidelines for agents and for the underwriting and monitoring of policy issuance in order to insure adherence to established guidelines. The underwriting departments also determine the product pricing and are responsible for the development of new products and enhancements. The underwriting personnel work closely with sales representatives and consult regularly with agents to assess current market conditions.
In establishing prices, underwriting personnel analyze studies of statistical and actuarial data concerning the impact of price changes in the markets served and consider data compiled by industry organizations. This allows for a more accurate assessment of the anticipated costs of risks underwritten.
Over the last several years, the Company has continued efforts to reduce the loss ratio by implementing underwriting programs related to proper risk selection. The Company also continues to monitor rate adequacy and agency profitability, taking action where appropriate. The Company's 1999 statutory combined ratio of 105.4 percent was a 2.5 percentage point increase from the 102.9 combined ratio reported in 1998. The increase was attributed to an increased loss ratio. Weather-related catastrophe claims added over seven percentage points to the ratios in both 1999 and 1998. The Company continues to focus on reducing per-unit costs and other expenses in order to improve its loss adjustment and underwriting expense ratios through increased automation and expense consolidation. In recent years, the installation of the automated personal lines underwriting system has enabled the majority of applications to be processed by computers via pre-set standards. Human intervention is only necessary when an application falls outside of specified parameters. This allows the Company to process a larger volume of business without proportionally expanding the size of the underwriting staff, thereby reducing per- unit costs. The Company currently issues most personal automobile and homeowners policies via the automated underwriting system.
Products and Marketing Meridian writes a broad line of property and casualty insurance including personal, non-standard, and commercial automobile; homeowners, farmowners and commercial multi-peril; and workers' compensation. Meridian recently began to offer personal automobile products through direct response marketing in the states of Washington and Virginia. Meridian markets most of its insurance through independent insurance agents. Development and maintenance of a strong agency system is essential. Meridian seeks to provide its agents and policyholders a level of service that surpasses industry standards. The Meridian agency network numbers nearly 1,400 independent insurance agencies spread throughout 15 states. Meridian's independent agencies are primarily small to medium-sized firms with no agency producing more than 1 percent of the total written premium. Meridian continuously monitors its agencies, giving special attention to the volume and profitability of business written by each agency. Agencies which consistently write unprofitable business will be rehabilitated or may be terminated by Meridian, subject to compliance with applicable state laws.
Each agency enters into a standard agency agreement, under which the agency is authorized to sell and bind insurance coverage in accordance with procedures specified in the agreement. Agencies also collect/remit premiums and submit business subject to Meridian's underwriting guidelines. The agency receives as a commission a percentage of the premium for each policy written.
Meridian offers a direct billing service to its agents, under which premium statements are provided to the insured and the insured pays the premiums directly to Meridian. Meridian pays the same commission rates on company-billed and agency-billed policies, thereby allowing agencies to reduce administrative costs without a reduction in commission income. Meridian also offers an agency profit-sharing agreement under which agencies attaining designated premium volume and profitability requirements receive a bonus.
Meridian has developed separate growth strategies with respect to the personal, commercial and farm lines of business. With respect to personal lines, Meridian believes that continued improvements in service to agents and policyholders, offering broad coverages and product enhancements, and relying on automation to improve efficiency will increase penetration of existing markets.
Meridian utilizes agency interface automation. Additionally, the company has an automated personal lines underwriting system which processes a majority of personal lines new business. Lower operating costs and strict adherence to underwriting guidelines will allow Meridian to be competitive and grow in the personal lines marketplace. By emphasizing and targeting select lines of business, Meridian believes moderate growth in personal lines business is achievable without significantly increasing risk exposure.
During 1998, Meridian launched a growth initiative by entering into a marketing and sales arrangement with GROUPadvantage. This arrangement makes Meridian's personal lines products available through franchised independent agencies to Sam's Club members in certain states. (GROUPadvantage is a registered service mark of Consumer Insurance Services of America "CISA" and is used under license from CISA.) During late 1998, Meridian began to market personal lines products to members of Sam's Club in Illinois and Michigan, with Missouri, Ohio, and Pennsylvania added in 1999.
Meridian has identified several segments of its commercial lines markets in which management believes Meridian can compete effectively. Meridian has and will continue to focus on mid-sized accounts in the $15,000 to $50,000 range of annual premium volume. Meridian also writes commercial business through association programs. Over 35 associations have endorsed Meridian for their insurance program. Association business is desired in agricultural, contractor, appliance dealer, cosmetologist, veterinary, optometry, and funeral home associations, as well as certain other classes of business.
Meridian's farm strategy emphasizes penetration into existing markets. Meridian targets medium to large farms which meet the Company's underwriting guidelines. Management believes Meridian enjoys a competitive advantage in the farmowners market because of its years of experience, regional focus and the fact that some national insurers have vacated this market.
The following table sets forth for the periods indicated the net premiums written, the net underwriting gain (loss), loss and loss adjustment expense ("LAE") ratios, expense ratios and combined ratios for the Company's insurance operations, prepared in accordance with statutory accounting principles. The combined ratio does not reflect investment income, federal income taxes, or other non-underwriting income or expense, all of which are included in determining net income.
Claims Meridian's claim division is responsible for developing and implementing policies and procedures for the payment and disposition of claims and for establishing claim reserves. In connection therewith, it resolves questions concerning policy coverage and manages reinsurance recoveries and salvage and subrogation matters.
Insurance claims on policies underwritten by Meridian are normally investigated and settled by Meridian claim adjusters. Independent adjusters are employed as needed to handle the occasional overload of claims and in territories in which the volume of claims is not sufficient to justify having company claim adjusters.
The Company's claim adjusters have authority to settle claims within policy limits, subject to direction and control by a claim manager or supervisor. All claims estimated to have a potential value of $100,000 or more are reviewed by additional levels of claims divisions management, and all claims in excess of $200,000 must be approved by the claim division director. A claim review committee provides for the periodic evaluation of certain claims, including those involving special circumstances, to enhance the investigation and decision- making process.
Reserves Loss reserves are estimates at a given time, based on facts then known, of what an insurer predicts its exposure to be in connection with incurred losses. Loss adjustment expense reserves are estimates of the ultimate liability of the expenses in settling all claims, including investigation and litigation costs resulting from such claims. The ultimate liability of the insurer for all losses and loss adjustment expenses reserved at any point in time may be greater or less than these estimates.
Meridian maintains reserves for the eventual payment of losses and loss adjustment expenses with respect to both reported and unreported claims. Two principal methods are followed in establishing reserves. For coverages which involve a large volume of claims for relatively small amounts, such as automobile property damage, comprehensive and collision insurance, reserves are maintained on an average basis by reference to the number and amount of paid claims. Adjustments to average reserves are made periodically, based on claims experience. Reserves for other claims are established on a case-by-case basis pursuant to which a reserve amount is assigned to each claim when reported, based primarily upon an investigation of the circumstances surrounding each claim, consideration of the liability and the damages, and the insurance policy provisions relating to the claim. During the claim settlement process, it is often necessary to adjust estimates of future liability as additional facts regarding individual claims become known.
Meridian also establishes reserves for claims which have been incurred but which have not been reported, utilizing statistical models based on historical experience. Reserves established pursuant to the statistical models also are designed to correct historical deficiencies or redundancies in the reserves established on an average or a case-by-case basis. Meridian consults periodically with independent actuaries concerning the adequacy of reserves.
Management believes that reserves for losses and loss adjustment expenses are adequate to cover the ultimate cost of settling reported and unreported claims, net of reinsurance, anticipated salvage and subrogation receipts, and other recoveries. Loss reserves are not discounted to present value. Inflation is implicitly provided for in calculating reserves through analysis of cost trends and review of historical reserve estimates.
The following table sets forth a three-year reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the Company.
Year Ended December 31, 1999 1998 1997
Balance at beginning of period $ 154,253 169,802 161,309 Less reinsurance recoverables 41,804 48,873 41,819 Net balance at beginning of period 112,449 120,929 119,490
Incurred related to: Current year 157,072 145,328 165,577 Prior years (6,854) (8,708) (16,358) Total incurred 150,218 136,620 149,219
Paid related to: Current year 99,472 93,792 97,448 Prior years 51,291 51,308 50,332 Total paid 150,763 145,100 147,780
Net balance at end of period 111,904 112,449 120,929 Plus reinsurance recoverables 34,058 41,804 48,873 Balance at end of period $ 145,962 $ 154,253 $ 169,802
The reconciliations for 1999, 1998, and 1997 show approximately $6.9 million, $8.7 million, and $16.4 million reductions, respectively in previously established loss reserves. Favorable loss developments resulting from decreases in the frequency and severity of claims in prior accident years for the Company's personal automobile liability, workers' compensation lines and commercial multiple-peril lines of business were the primary factors in the reductions.
The following table shows the calendar-year development of the unpaid losses and loss adjustment expenses of the Company's pooled business for each of the last ten years. The top line of the table shows the estimated reserves for losses and loss adjustment expenses, net of reinsurance recoveries, as recorded by the Company for each of the indicated years. These reserves represent the estimated amount of net unpaid losses and loss adjustment expenses for claims arising on or before December 31 of each year, including claims that had not yet been reported. The data in the upper portion of the table reflect the cumulative payments made as they have developed through time. The payments are expressed as a percentage of the year-end reserves shown in the top line. The data in the lower portion show the change in the reserve estimate over time.
A redundancy in reserves means that reserves established in prior years exceeded actual losses and loss adjustment expenses or were re- evaluated to less than the originally reserved amount. A deficiency in reserves means that the reserves established in prior years were less than actual losses and loss adjustment expenses or were re- evaluated at more than the originally reserved amount.
In evaluating the following information for the Company, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the amount of redundancy related to losses settled in 1999 but incurred in 1992 is included in the cumulative redundancy amount for each of the years from 1992 through 1998. The table does not present accident or policy-year development data. The Company's share of pooled losses increased from 62 percent as of April 1, 1987, to the current level of 74 percent on May 1, 1993. In 1996, the Company acquired approximately $20.7 million in loss and loss adjustment expense reserves from the acquisition of Meridian Citizens Security and ICO. Additionally, payments received on the acquired reserves since the acquisition were spread out over the ten years based on the accident year in which the original acquired reserve was established. Conditions and trends that have affected development of the reserves in the past may not necessarily occur in the future. Accordingly, the data in the table may not be indicative of future redundancies or deficiencies.
Reinsurance Meridian follows the customary industry practice of limiting exposure by ceding to reinsurers a portion of the premiums received and risks assumed under the policies reinsured. Reinsurance is purchased to reduce a net liability on individual risks to predetermined limits and to protect against multiple losses from a single catastrophe or a series of catastrophes. Although reinsurance does not discharge an insurer from its primary liability for claims up to the full limits of the policies, it makes the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded. Employers Reinsurance Corporation, rated "A++" by Best, is Meridian's principal reinsurer providing property and liability excess of loss coverage. Meridian uses a large number of reinsurers for property's catastrophe and facultative coverages to reduce the effect of a default by any one reinsurer. Most of these companies are rated "A-" or better by Best, or an equivalent rating by other recognized independent rating agencies. Reinsurers not rated by Best or another independent agency are analyzed and approved by Meridian's reinsurance broker, E. W. Blanch, and by Company management.
The reinsurance purchased includes contracts under which certain types of policies are automatically reinsured up to the contract limits ("treaty reinsurance") and contracts which provide reinsurance on an individual risk basis which require specific agreement of the reinsurer as to limits of coverage provided ("facultative reinsurance"). Meridian Mutual, Meridian Security, Meridian Citizens Mutual, Meridian Citizens Security, and ICO were each named as insured parties under the treaty reinsurance contracts, and the coverages under those contracts applied to all risks written by each of the companies. Treaty reinsurance coverage was purchased to cover property and liability exposures in excess of $200,000 and $400,000, respectively, up to the limits set forth in the individual treaty. In 1998, the retention was $200,000 for property and $350,000 for liability. Facultative reinsurance was purchased to cover exposures on both property and liability coverages from losses over and above the limits provided by the treaty reinsurance.
Catastrophe reinsurance provided coverage for multiple losses caused by a single catastrophic event such as a windstorm or earthquake. The combined retention under this contract was $6,000,000 plus five percent of losses up to contractual limits for windstorms of $65,000,000 and for earthquakes of $108,000,000. Another catastrophe reinsurance treaty provided coverage for 95 percent of losses sustained from multiple catastrophic events which aggregated beyond specified retentions and per event deductibles, up to the contractual limits.
As of December 31, 1999, the Company had approximately $34.1 million of reinsurance recoverable on unpaid losses. Of this amount, approximately $19.8 million was recoverable from Employers Reinsurance Corporation and approximately $12.4 million was recoverable from the Michigan Catastrophic Claims Association, a mandatory state- administered personal injury protection reinsurance pool in which all insurers writing automobile business in that state must participate.
The cost of the reinsurance contracts are negotiated annually. If the relationships were to be terminated with the current reinsurers, management believes that, under current circumstances, relationships with other reinsurers could be established without a material adverse effect on its business.
Meridian assumes a limited amount of reinsurance from third parties. This business accounted for less than one percent of net premiums written in 1999.
Investments Investments of the Company are principally held by Meridian Security, Meridian Citizens Security and ICO, which are subject to regulation by their respective departments of insurance. The investment decisions are made pursuant to guidelines established by the Company's Finance and Investment Committee. This committee is made up of six directors of the Company, four of whom are also directors of Meridian Mutual. All investment transactions are reviewed by this committee.
The investment guidelines established by the Finance and Investment Committee are intended to reflect a prudent approach to managing invested assets. Investments are required to be diversified by type of issuer, type of security and type of industry. Specific restrictions prohibit investments in real estate mortgages unless the related credit instruments are collateralized by federal or government agencies, and also limit the amount which may be invested in common stocks, based upon the premium-to-surplus ratio of the Company.
The Company's fixed maturity portfolio, which is made up of bonds and sinking fund preferred stocks, consists almost entirely of investment grade securities, the average quality of which is rated Aa/AA. The fixed maturity securities at December 31, 1999 and 1998 were made up entirely of securities classified as available for sale, which are carried on the Company's balance sheet at fair market value. The Company invests in both taxable and tax-exempt securities as part of its investment strategy. This strategy considers, among other factors, the impact of the alternative minimum tax. Tax-exempt bonds, on a carrying value basis, made up approximately 29.0 percent and 17.9 percent of the total fixed maturity portfolio at December 31, 1999 and 1998, respectively. On a carrying value basis, sinking fund preferred stocks made up approximately 10.8 percent and 9.2 percent of the total fixed maturity portfolio of the Company at December 31, 1999 and 1998, respectively.
The Company also holds investments in mortgage-backed pass-through securities and collateralized mortgage obligations ("CMO") which had a carrying value of $39.8 million and $44.9 million at December 31, 1999 and 1998, respectively. The Company has attempted to reduce the prepayment risks associated with mortgage-backed securities by investing a majority of the Company's CMO holdings in planned amortization and very accurately defined tranches. These investments are designed to alleviate the risk of prepayment by providing predictable principal prepayment schedules within a designated range of prepayments. If principal is prepaid earlier than originally anticipated, investment yields may decrease due to reinvestment of these funds at lower current interest rates and capital gains or losses may be realized since the book value of securities purchased at premiums or discounts may be different than the prepayment amount.
As a result of the number of early calls and prepayments, the estimated weighted average duration of the fixed maturity portfolio is approximately 4.9 years.
The Company, as approved by the Finance and Investment Committee, has increased its equity security holdings over the past four years. Equity securities primarily consist of common stocks and had a fair market value of $69.0 million and $64.0 million at December 31, 1999 and 1998, respectively. Equity securities accounted for 23.1 percent and 20.4 percent of the total investment portfolio at December 31, 1999 and 1998, respectively.
Regulation Numerous aspects of the business and operations of the Company's insurance subsidiaries and affiliates are subject to supervision and regulation in each state in which they transact business. The primary purpose of state supervision and regulation is the protection of policyholders. The extent of such regulation varies among states but generally derives from state statutes which delegate regulatory, supervisory, and administrative authority to state insurance departments. The authority of state insurance departments generally extends to the establishment of solvency standards which must be met and maintained by insurers, the licensing of insurers and agents, the nature of and limitations on investments and premium rates, the provisions which insurers must make for current losses and future liabilities, the deposit of securities for the benefit of policyholders, the approval of policy forms, the payment of dividends, the establishment of premium rates and the settlement of claims. State insurance departments also conduct periodic examinations of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies.
The regulatory agencies of each state have statutory authority to enforce their laws and regulations through various administrative orders, civil and criminal enforcement proceedings, and the suspension or revocation of certificates of authority. In extreme cases, including insolvency, impending insolvency and other matters, a regulatory authority may take over the management and operation of an insurer's business and assets.
Meridian Mutual and Meridian Security are admitted as insurers in the states of Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Minnesota, Missouri, North Dakota, Ohio, Pennsylvania, South Dakota, Tennessee, Virginia, Washington, and Wisconsin. Meridian Security is also licensed to write insurance in Arizona. Meridian Citizens Security and Meridian Citizens Mutual hold licenses to write in Arizona, Iowa, Maryland, Minnesota, Missouri, North Dakota, Ohio, South Dakota, and Wisconsin. Meridian Citizens Mutual is also licensed to write insurance in Illinois, Indiana, Kansas, Kentucky, Michigan, Pennsylvania, Tennessee, and Washington. ICO is admitted as an insurer in the state of Ohio. Under insolvency or guaranty laws in the states in which the above companies operate, insurers doing business in those states can be assessed up to prescribed limits for losses incurred by policyholders of insolvent insurance companies. The maximum amounts that can be assessed against an insurer in any one year under the insolvency or guaranty laws of the states named above are limited to a specified percentage of the annual direct premiums written by the company in the state in question with respect to the affected lines of business. Additionally, the companies are required to participate in various mandatory pools or underwriting associations.
The Company is subject to statutes governing insurance holding companies. Typically, such statutes require the Company to file information periodically concerning its capital structure, ownership, financial condition, and material transactions between the Company and its insurance subsidiaries not in the ordinary course of business. The Company's insurance subsidiaries are subject to periodic examination by the insurance departments of the states in which they do business, and the payment of dividends by the insurance subsidiaries to the Company is subject to certain limitations. (See Note 13 of Notes to Consolidated Financial Statements.) Certain transactions between the Company and its insurance subsidiaries including changes in the terms of the pooling agreement and certain loan transactions, if any, may be effected only upon prior approval thereof by state regulatory authorities in the insurance company's state of domicile. Certain transactions deemed to constitute a "change in control" of the Company, including a party's purchase of 10 percent or more of the outstanding common shares, are all subject to approval by state regulatory authorities.
Changes in the laws or regulations to which the Company is subject could adversely affect the operations of the Company. Specific regulatory developments which could materially adversely affect the operations of the Company include, but are not limited to, the potential repeal of the McCarran-Ferguson Act (which exempts insurance companies from a variety of federal regulatory requirements) and rate rollback legislation. The Company will continue to monitor current developments closely.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance, which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas, e.g. deferred income taxes are recorded.
The Indiana, Ohio, and Minnesota Insurance Departments have adopted the Codification guidance, effective January 1, 2001. The Company has not yet estimated the potential effect of the Codification guidance on statutory surplus.
Competition The property and casualty insurance industry is highly competitive. Price competition has been particularly intense during recent years and is expected to continue for the foreseeable future. Meridian Mutual, Meridian Security, Meridian Citizens Mutual, and Meridian Citizens Security all compete with other property and casualty insurers, both in the recruitment and retention of qualified agents and in the sale of insurance products to consumers. The Company believes the principal competitive factors in its markets to be service to agents and policyholders and price. Success in recruiting and retaining agents is dependent upon the administrative support provided to agents, commission rates, and the ability of the insurer to provide products that meet the needs of the agent and the agent's customers.
In selling its insurance products, Meridian Mutual, Meridian Security, Meridian Citizens Mutual, and Meridian Citizens Security compete with other insurers writing through independent agents (including insurers represented by the independent agents who represent Meridian), with insurers having their own agency organizations and with direct sellers of insurance products. There are numerous companies competing for business in the geographic areas in which the Company, Meridian Mutual and Meridian Citizens Mutual operate. No single company dominates the marketplace, but many of Meridian's competitors have more established national reputations and substantially greater financial resources and market share.
Employees In 1997, the Company became the employer of all employees that were formerly employed by Meridian Mutual and Meridian Citizens Mutual. This transfer allows for more freedom in compensation planning, such as flexibility in the use of the Company's common stock as compensation, and improves internal efficiencies by combining employee benefit plans. Prior to the change, the Company had no employees and relied upon Meridian Mutual and Meridian Citizens Mutual to provide all management and administrative services required by the Company. The Company employs approximately 600 people and believes that its relationship with its employees is satisfactory.
Audit Practices The Board of Directors has an Audit Committee composed of four directors who are not employees of the Company or its affiliates. Usually meeting in conjunction with the Meridian Mutual Audit Committee, the committee monitors the Company's financial reporting and internal control systems and reviews the work of the Company's internal audit function.
The Company retains the firm of PricewaterhouseCoopers LLP as independent accountants to perform an independent audit of the financial statements of the Company and its affiliates. The audit is conducted in accordance with generally accepted auditing standards. The independent accountants have unlimited access to, and meet regularly with, the Audit Committee.
ITEM 2:
ITEM 2: PROPERTIES
The headquarters building of the Company is owned by Meridian Mutual and is located near downtown Indianapolis, Indiana. The building is a multi-level structure containing approximately 205,000 square feet of office space. Expansion efforts completed in 1995, have allowed the Company and Meridian Mutual to consolidate the two Indianapolis satellite offices, two regional claim offices, and the Meridian Citizens Mutual operation previously in Red Wing, Minnesota into the home office facility.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
The Company's insurance subsidiaries are parties to litigation arising in the ordinary course of their business. The Company believes that the resolution of these lawsuits will not have a material adverse effect on its financial condition.
A civil lawsuit was filed on July 23, 1999, by an insured alleging the failure of the Company to pay the full collision loss as required by the automobile insurance policy. The plaintiff's complaint asked the court to certify a class of plaintiffs comprised of the Company's insureds in Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, North Dakota, Ohio, Pennsylvania, South Dakota, Tennessee, Virginia, and Wisconsin who had submitted a claim for damages to an insured automobile for collision or other than collision coverages from August 15, 1993, forward. Management intends to vigorously defend this claim and filed a Motion to Dismiss the plaintiff's complaint. The Company's Motion to Dismiss was granted on March 6, 2000.
ITEM 4:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5:
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information The Company's common stock has traded on the NASDAQ Stock Market under the symbol "MIGI" since completing an initial public offering of 1,700,000 shares in March 1987 at a price of $12 per share. On May 5, 1993, the Company completed a second public offering of 1,725,000 common shares at $12 per share. As of March 10, 2000, approximately 48.1 percent of the common stock was owned by Meridian Mutual and the balance was spread among approximately 230 common shareholders of record, including many brokers holding shares for their individual clients. The number of individual shareholders on the same date was approximately 1,100. The number of Common Shares outstanding on March 10, 2000, totaled 7,925,666. Information relating to the common stock is available through the NASDAQ Stock Market System and the following table sets forth the high, low and closing sale prices of the common stock for each quarter of 1999 and 1998. The stock prices reflect the ten percent stock dividends declared in December 1999 and 1998.
1999 1998 High Low Close High Low Close Quarter Ended March 31 $ 18.41 $ 13.64 $ 14.32 $ 16.32 $ 13.64 $ 15.50 June 30 $ 15.46 $ 13.30 $ 15.23 $ 16.84 $ 14.77 $ 15.81 September 30 $ 16.19 $ 14.77 $ 15.34 $ 18.18 $ 14.77 $ 15.39 December 31 $ 15.34 $ 12.00 $ 14.00 $ 18.41 $ 13.22 $ 18.41
Dividend Policy Since the first quarter of 1996 and prior to the December 1998 and 1999 ten percent stock dividends, the Company paid a quarterly cash dividend of $0.08 per common share. Subsequent to the stock dividends, the cash dividend rate remained at $0.08 per common share, effectively increasing the cash dividend. The continued payment of dividends is reviewed quarterly by the Board of Directors in relation to changes in the financial condition and results of operations of the Company. The ability of the Company to pay dividends is dependent upon the receipt of dividends from its insurance company subsidiaries, which are subject to state laws and regulations which restrict their ability to pay dividends. (See Note 13 of the Notes to Consolidated Financial Statements.)
ITEM 6:
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data is derived from the consolidated financial statements of the Company. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included elsewhere in this document.
* Retroactively restated to reflect the 10 percent stock dividends declared in December 1999 and 1998.
ITEM 7:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview:
Net income declined in 1999, in spite of an increase in revenues. The primary factor behind the decrease in earnings was an increase in the loss ratios for several lines of business. While net investment income and realized gains on the sales of investments declined somewhat during 1999, total revenues increased by 4.1 percent, driven by a 5.4 percent increase in premiums earned. Earned premiums are expected to continue to increase in 2000, given the trend in net written premiums, which increased over 9.8 percent in 1999, compared with 1998.
One of the Company's growing lines of business is non-standard automobile coverage. The Company began selling this product in 1998. During 1999 the pool of Meridian companies wrote approximately $21 million in non-standard auto premium. Continued growth is expected in 2000. Non-standard automobile insurance covers drivers with no prior insurance or with driving records that do not qualify them for standard or preferred premium rates. Non-standard policies are generally sold at higher premiums to offset increased risk of loss. The non-standard auto policies are marketed through the Company's independent agency force, select non-standard specialty agents, and directly via the internet in certain states in which the Company does not sell personal lines through independent agents.
Another source of premium growth is the Company's relationship with GROUPadvantage. This sales arrangement makes Meridian's personal lines products available through franchised independent agencies to Sam's Club members in certain states. In late 1998, the Company began writing business in Michigan and Illinois through this distribution channel. During 1999, this arrangement was expanded to include Missouri, Ohio, and Pennsylvania, with Kansas and Wisconsin added in early 2000. (GROUPadvantage is a registered serviced mark of Consumer Insurance Services of America (CISA) and is used under license from CISA.)
Late in 1999, the Company entered into a marketing arrangement with InsWeb, a leading Internet insurance marketplace, to quote personal automobile products on the Internet. Meridian is initially quoting policies for consumers in Virginia, with Washington and Missouri expected soon. In addition, during 1999 Meridian added a direct website, www.meridiandirect.com, through which consumers are able to apply for Meridianr insurance products, receive quotations and purchase products in certain states in which the Company does not sell personal lines through independent agents.
The implementation of new distribution methods does not detract from the Company's strong support of the independent agency system. Marketing products through independent agents has been and continues to be the Company's primary source of distribution. The Company continues to build these relationships and has a growing group of nearly 1,400 independent agents.
The Company has been steadily expanding its operations into new states. At the end of 1994, Meridian operated in seven states, entirely in the Midwest. The Company has significantly increased its geographic diversification in recent years and is currently licensed in 19 states. Additional state expansion, including Florida, Oregon, Utah, and Washington D.C., is planned for 2000.
In addition to growth initiatives, the Company is working to increase profitability through consistent exercise of underwriting discipline, proper pricing, sound investment management, enhanced customer service and cost control. During 1999 the Company continued its expense consolidation efforts. The Meridian Citizens personal and commercial lines processing was successfully integrated into the Company's Indianapolis headquarters and the Red Wing, Minnesota office was closed. These actions are expected to save approximately $1.1 million of costs annually, beginning in 2000.
Forward-Looking Statements
Statements in this annual report that are not strictly historical may be "forward looking" statements which involve risks and uncertainties. The Company's future results could differ materially from those discussed. Risk factors include: variation in catastrophe losses due to changes in weather patterns or other natural causes; changes in property and casualty reserves; developments in insurance regulations or legislation that may affect the Company; technological difficulties and advancements; general economic conditions; fluctuations in interest rates or securities markets; or market and competitive changes affecting pricing or demand for insurance products or the ability to generate investment income. Growth and profitability have been and may be affected by these and other factors.
Year 2000 Disclosures
As we approached the end of the century, there was a significant concern that many information technology products would not recognize the year 2000. Businesses were at risk for possible calculation errors or system failures which could cause a disruption in their operations. This became commonly known as the Year 2000 ("Y2K") issue.
In 1995, Meridian began the initial planning phase to ensure that all systems were Y2K compliant. As a result of this planning, it was determined that Meridian would utilize internal resources to complete the necessary remediation. This would allow Meridian to contain costs and maintain control as well as provide consistency in system applications. As a result of this decision, a team of programmers was hired under the direction of experienced internal management to address the issue. It was determined that the Meridian Citizens project team would operate independently utilizing contracted personnel to complete the project. Such personnel, our former contracted outside automation services providers, were under contract to complete and test the Y2K programming efforts as well as provide daily systems support.
The next stage of the process was to identify those systems and programs that contained date sensitive fields throughout the operating systems. The internal approach taken to address the issue was field expansion. This expansion allowed the date fields to be expanded and allowed programs to distinguish dates based upon an eight digit code as opposed to a six digit code. The Meridian Citizens approach implemented by the outside automation services provider, took into account the various operating platforms used to process data. A combination of field expansion and "windowing" was selected to address the Y2K issue. The "windowing" approach utilized a two digit year currently in the date fields and assumed the two digit century field fell within an established "window." For example, any result over 50 signified the 20th century and any under fifty, the 21st century.
Prioritizing the effort was done by reviewing those systems and programs which would require the effective date change prior to January 1, 2000, such as the policy processing systems which required renewal processing as early as November 1, 1998. Extensive reprogramming now allows the internal policy processing systems to recognize the difference between the 20th and the 21st century. Updated policy processing systems have been in production and compliant since November 1997. During the third quarter of 1998, code remediation was also completed for the Meridian management reporting systems and front-end client server applications. The Meridian Citizens companies, which operated under a different platform, largely achieved Y2K compliance as certified by the outside services provider in August 1998 and have been in production since that time. Mainframe, front-end client server, and critical network programming have also been completed. The remediated policy processing systems were tested and are processing policies with Y2K dates.
During the fourth quarter of 1998, the Information Systems operations of the Meridian Citizens companies were moved to the Indianapolis home office location. This change allowed for certain cost savings and a more consistent application of programming discipline throughout the organization. Prior to the move, Y2K remediation efforts were completed by an outside vendor for the Meridian Citizens companies. While reviewing other processing issues, internal personnel discovered instances in which remediation efforts had not correctly been completed. These issues were resolved when discovered. The manner in which these systems were constructed or designed did not provide for a test environment. Therefore, a more detailed analysis was performed by a project team consisting of both internal and external resources. This extensive analysis encompassed applications which were previously understood to be compliant. These applications were reviewed for date sensitive related code to determine that the Y2K remediation was completed correctly. Re-programming efforts, as required, were performed to obtain Y2K compliance.
Costs for the Y2K remediation approximated $1.3 million upon completion. Such incremental costs have been estimated at approximately $200,000 in 1996, $400,000 in 1997 and 1998, with an additional $300,000 for 1999. The Company was able to manage the cost of its Y2K effort because of the early start of the project and the overall approach of hiring additional internal resources as opposed to extensively utilizing outside programmers. Approximately 50 percent of the total costs related to programming personnel. The remainder of these costs related to the replacement of software applications, hardware costs, and outside consulting fees. Due to the complexity and importance of the Y2K project, the Company engaged independent consultants to review the planning and methods utilized within the project for all subsidiaries. The written report received from the independent consultants contained comments and suggestions which were implemented and incorporated into the final Y2K action plans. Y2K costs were funded through operating revenues and represented less than 10 percent of the information systems annual budgets. Costs for the Meridian Citizens remediation were included under the automation programming charges incurred by the Company on a monthly basis and were therefore not distinguishable from normal programming fees.
As part of the readiness program, the Company also recognized the impact that significant outside vendors, agents, and other business associates could have on the ability to transact business. As a result, the Company reviewed vendor associated software and hardware products utilized within the organization to determine the Y2K effort that would be necessary to achieve readiness. Hardware and software vendors were required to provide certification of Y2K compliance for all products or services afforded to the enterprise. All vendor products purchased within the last two years were certified and documented. Testing took place for each product in a pseudo Y2K environment prior to moving to production. Additionally, the Company established contact with agents and certain vendors to highlight the Y2K issue. This contact was established for the purpose of reasonably ascertaining the Y2K impact.
Contingency plans were developed by management of the Information Resources Division. The plans included the necessary steps to verify the functionality and to validate the compliance of each system. The contingency plans included the use of the Company's business resumption/disaster recovery "hot site" in Chicago. This hot site was prepared to run mainframe applications with very little lag time should all other contingencies have failed. While successful testing was performed at this site on two occasions during 1999, the Company did not need to utilize this source as the year 2000 began. The Company required key personnel to work during the holiday weekend beginning December 31, 1999, to insure a smooth transition into the year 2000 and found only a minor issue that was immediately resolved by replacing a personal computer.
No material effect on operations or financial results occurred because of the calendar year change. Any future problems are anticipated to be minimal and further reporting of Y2K issues will not be made, unless the occurrence is material to the Company.
No significant information technology projects having a material effect on the Company's financial position or results of operations were deferred as a direct result of Y2K efforts.
The Company did not issue insurance policies covering risks related to the Year 2000 issue. However, there can be no certainty regarding future judicial or legislative interpretations of coverage.
Results of Operations:
1999 Compared to 1998
Net income for 1999 declined to $7.3 million, or $0.90 diluted earnings per share, down from $12.2 million, or $1.50 per diluted share for 1998. Realized investment gains for 1999 decreased to $6.7 million, or $0.54 per share after tax, from $7.3 million, or $0.59 per share after tax, for 1998. Earnings per share included a $0.04 first quarter charge for the cumulative effect of an accounting change for certain insurance-related assessments. Also included was a fourth quarter non-recurring charge of approximately $625,000, or $0.05 per share after tax, for severance and other costs associated with closing the former Minnesota home office of the Meridian Citizens Insurance Companies.
The Company's total revenues for 1999 increased 4.1 percent to $222.4 million from $213.7 million in 1998. Premiums earned increased 5.4 percent to $199.4 million for 1999 in comparison to $189.2 million for 1998, while net written premiums were up 9.8 percent over the prior year. Most of the 1999 growth in written premiums was generated from the non-standard auto product and from the Sam's Club sales arrangement through GROUPadvantage, along with approximately 6.0 percent commercial lines growth. Farmowners production was generally flat, while core personal lines of business generated through independent agents declined by approximately 1.5 percent.
Net investment income of approximately $16.3 million for 1999 decreased by 5.3 percent in comparison to $17.2 million for 1998. This decline is attributable to a number of factors, including slight reductions in yield and in the average balance of fixed maturity investments held during the year. For the years ended December 31, 1999 and 1998, the Company realized net investment gains of approximately $6.7 and $7.3 million, respectively. The current year's realized gains resulted largely from the sale of certain equity securities, which had been trading at relatively high price/earnings multiples and had reached the Company's price targets.
Loss and loss adjustment expenses increased from the $136.6 million reported for 1998 to $150.2 million in 1999. Relative to earned premiums, the loss and loss adjustment expense ratio increased to 75.3 percent in 1999, compared with 72.2 percent in 1998. Weather -related catastrophe losses accounted for over seven percentage points of the ratios in both years, with approximately $14.4 million of such losses in 1999 compared to $14.7 million in 1998. Due in large part to such weather-related losses, property lines of business remained unprofitable, while the casualty lines of business were profitable in both 1999 and 1998. The personal lines loss ratio of 78.6 percent increased from 75.8 percent in 1998. The 1999 commercial lines loss ratio increased to 68.5 percent from 66.3 percent in 1998. The increases in the 1999 ratios were generally due to loss costs and severity and, to an extent in certain lines, to prior years' premium rate actions. Loss frequency was not a major factor, as overall frequency comparisons changed only a small fraction of one percent between 1998 and 1999.
General operating and amortization expenses of $62.2 million in 1999 increased from the $59.6 million recorded during 1998. Relative to the earned premium volume, the Company's 1999 expense ratio decreased slightly to 31.2 percent compared to 31.5 percent for 1998. The increase in premium volume over which to spread fixed costs was a factor behind this decrease, as was cost savings resulting from the prior year consolidation of the Meridian Citizens information systems into the Company's Indianapolis location.
For the year ended December 31, 1999, the Company recorded income tax expense of $1.9 million compared to $4.7 million for the same period last year. The decrease in the effective tax rate resulted primarily from the amounts of tax exempt interest and the dividends received deduction, relative to the reduced level of pre-tax income.
1998 Compared to 1997
Net income for 1998 grew 76 percent to $12.2 million, or $1.50 diluted earnings per share, up from $6.9 million, or $0.85 per diluted share for 1997. This improvement was achieved in spite of more than double the amount of weather-related catastrophe losses in 1998, compared with 1997. Net catastrophe losses were approximately $14.7 million in 1998 versus approximately $7.3 million for 1997. The Company's combined ratio improved to 102.9 percent for 1998 from 107.1 percent in 1997. Realized investment gains for 1998 increased to $7.3 million, or $0.59 per share after tax, from $4.5 million, or $0.36 per share after tax, for 1997.
The Company's total revenues for 1998 decreased 1.3 percent to $213.7 million from $216.5 million in 1997. Premiums earned decreased 2.8 percent to $189.2 million for 1998 in comparison to $194.6 million for the previous year. Net written premiums for the Company's personal lines of business decreased by approximately 1.0 percent. This was the combination of a 3.8 percent increase in personal automobile premiums and a 13.5 decrease in written premium for the homeowners line of business. The personal automobile growth was favorably affected by the introduction of the new non-standard automobile product. Net written premiums for the farmowners line of business increased approximately 1.0 percent. Commercial lines net written premium decreased approximately 7.0 percent. Underwriting actions were taken in 1997 and early 1998 to improve profitability, negatively affecting premium revenue growth in the short-term. Additionally, intense competition and a soft pricing environment continued to affect market conditions in the Company's operating territory, particularly for commercial lines of business.
Net investment income of approximately $17.2 million for 1998 increased 5.3 percent in comparison to $16.4 million for 1997. This increase was due in part to a larger invested asset base for much of the year. The Company's pre-tax net investment yield was enhanced by a reduction in the tax-advantaged portfolio allocation and a reduced allocation to investment expenses. For the years ended December 31, 1998 and 1997, the Company realized net investment gains of approximately $7.3 and $4.5 million, respectively. The 1998 realized gains resulted largely from the sale of certain equity securities, as well as from certain municipal bond sales motivated by tax planning strategies.
Loss and loss adjustment expenses decreased from the $149.2 million reported at year-end 1997 to $136.6 million in 1998. The improvement was achieved despite the high level of weather-related catastrophe losses which hit the midwest. Many of the Company's operating states reported significant weather-related damage. Most significantly, industry statistics indicated Minnesota, the largest state of operation for the Meridian Citizens companies, incurred more such losses in 1998 than in the last 49 years combined. This caused the Meridian Citizens companies to incur approximately half of the Company's consolidated catastrophe losses, while generating less than 20 percent of the Company's premium volume. The Company estimated weather-related losses to approximate $14.7 million in 1998 compared to $7.3 million in 1997. Despite the record level of catastrophe weather-related claims, the statutory loss and loss adjustment expense ratio improved for nearly all lines of business when compared to 1997. The personal lines loss ratio of 75.8 percent improved 7.6 percentage points from 1997. Personal automobile, the Company's largest line of business, had a 1998 loss ratio of 69.2 percent, compared to 78.7 percent for 1997. The 1998 commercial lines loss ratio of 66.3 percent was also an improvement over the 1997 result of 68.8 percent. Worker's compensation continued to be very profitable for the Company reporting a 49.5 percent loss ratio in 1998 versus 52.5 percent for 1997. Much of the improvement in the Company's core book of business was attributed to underwriting actions implemented in late 1997 and early 1998. The Company generally experienced favorable trends during 1998 in both the frequency and severity of claims incurred.
General operating and amortization expenses of $59.6 million in 1998 slightly increased from the $59.4 million recorded during 1997. Relative to earned premium volume, the Company's 1998 expense ratio increased to 31.5 percent compared to 30.5 percent for 1997. The reduction in premium volume over which to spread fixed costs was a factor behind this increase, as were costs to initiate new growth strategies. During the fourth quarter of 1998, the Company consolidated two regional claims centers and the Meridian Citizens information systems into the Company's Indianapolis location. While expected to produce cost savings beginning in 1999, incremental costs to implement these changes were estimated at approximately $0.04 per share after tax in 1998.
For the year ended December 31, 1998, the Company recorded income tax expense of $4.7 million compared to $0.2 million for the same 1997 period. The higher level of pre-tax income and a reduction in the tax- advantaged portfolio allocation to municipal bonds and sinking fund preferred stocks were the primary factors in the increase.
Liquidity and Capital Resources:
The Company's primary need for liquidity is to pay shareholder dividends and service debt. Its main source of liquidity is the receipt of dividends from its subsidiaries. The Company's subsidiaries are subject to state laws and regulations which restrict their ability to pay dividends. During each of the years 1999, 1998 and 1997, Meridian Security declared and paid annual dividends to the Company of $5.0 million. The principal need of the Company's insurance subsidiaries for liquid funds is the payment of claims and general operating expenses in the ordinary course of business. The funds of the Company's insurance subsidiaries are generally invested in securities with maturities intended to provide adequate cash to pay such claims and expenses without forced sales of investments. The average duration of the fixed maturity portfolio is approximately 4.9 years. Over the next year, a relatively small portion of the Company's bond portfolio is scheduled to mature.
Approximately 76 percent of the Company's investment assets are held in fixed maturities, substantially all of which are believed to be readily marketable. Within the fixed maturity portfolio, the Company holds approximately 18 percent in mortgage-backed pass-through securities and collateralized mortgage obligations. The Company has attempted to reduce the prepayment risks associated with mortgage- backed securities by investing a majority of the collateralized mortgage obligations in planned amortization and very accurately defined tranches. These investments are designed to alleviate the risk of prepayment by providing predictable principal prepayment schedules within a designated range of prepayments.
The Company's fixed income investment portfolio consists almost entirely of investment grade securities, the average quality of which is rated Aa / AA. The Company currently holds all of its fixed maturity investments in the "available-for-sale" category carried at market value. The Company at December 31, 1999 recorded unrealized losses in the fixed maturity portfolio of approximately $3.7 million, net of deferred income taxes. At year-end 1998, the Company recorded unrealized gains on the fixed maturity portfolio of approximately $4.8 million, net of deferred income taxes. The Company's equity security portfolio, which accounted for approximately 23 percent of invested assets at year-end 1999, had unrealized gains, net of deferred income taxes, of approximately $9.6 million at December 31, 1999, compared to approximately $10.2 million at December 31, 1998. Net unrealized appreciation of investments added $0.76 to the Company's $17.26 book value per share at December 31, 1999. Net unrealized appreciation added $1.91 per share to the $17.82 book value at December 31, 1998.
The Company does have exposure to market rates and prices. The Company's primary market risk exposures are changes in price for equity securities and changes in interest rates and credit ratings for fixed maturity securities. The Company, with the Board of Directors, administers and oversees investment risk through the Investment Committee, which provides executive oversight of investment activities. The Company has specific investment guidelines and policies that define the overall framework used daily by investment portfolio managers to limit the Company's exposure to market risk.
The Company does not own or currently utilize derivative financial instruments for the purpose of hedging, enhancing the overall return of its investment portfolio, or reducing the cost of its bank debt. Meridian, through its outside professional portfolio managers, employs traditional investment management tools and techniques to address the yield and valuation exposures of its invested assets. The long term fixed maturity investment portfolio is managed so as to limit various risks inherent in the bond market. Credit risk is addressed through adequate diversification and the purchase of investment grade securities. Reinvestment rate risk is controlled through asset- liability matching practices and by addressing call characteristics in security selection. Market value risk is addressed through maturity selection. The market value of the Company's long term fixed maturity investment portfolio is sensitive to fluctuations in the level of interest rates. The impact of interest rate movements on the long term fixed maturity investment portfolio generally affects net realized gains or losses when securities are sold. The Company estimates that a 100 basis point increase in interest rates from current levels would result in a possible decline in the $226.4 million market value of the long term fixed maturity investment portfolio of approximately 4.1 percent, or $9.3 million. With regard to its $69.0 million equity security portfolio, the Company does not own nor engage in any type of option writing. A 10% decrease in the U.S. equity market prices could result in a decrease of $6.9 million in the market value of the Company's common equities. These possible declines in values for the bond and stock portfolios would, net of deferred income taxes, negatively affect the common shareholders' equity at any point in time, but would not necessarily result in the recognition of realized investment losses as long as operating cash flow and the ongoing emergence of bond maturities continued to provide sufficient funds to meet obligations to policyholders and claimants, as well as debt service and cash dividend requirements at the holding company level.
On May 6, 1997, the Company announced that its Board of Directors had authorized the repurchase of up to 350,000 common shares, or approximately five percent of the Company's outstanding common stock. As of December 31, 1999, the Company had repurchased 291,557 shares, or approximately 83 percent of the authorized total, at a cost of approximately $4.6 million. On February 23, 2000, the Company announced that its Board of Directors had authorized the additional repurchase of up to 400,000 common shares.
In July 1996, the Company completed the acquisition of Citizens Security Group Inc. of Red Wing, Minnesota. The Company purchased all of the outstanding shares of Citizens Security Group Inc. and its wholly-owned property and casualty insurance subsidiaries, Meridian Citizens Security Insurance Company and Insurance Company of Ohio, for approximately $30.3 million in cash, including capitalized acquisition costs, and became affiliated with Meridian Citizens Mutual Insurance Company. Approximately 60 percent of the purchase price was generated from the sale of a portion of the Company's investment portfolio. The remaining $12 million was financed through bank debt and is being amortized over seven years with a variable interest rate of LIBOR plus 50 basis points. The acquisition was accounted for as a purchase with the assets acquired and liabilities assumed being recorded at their estimated fair value at the date of acquisition. The excess cost over the fair value of the net assets of approximately $14.5 million was recorded as goodwill, which is being amortized on a straight-line basis over a 25 year period.
Beginning in 1994, state insurance regulators required companies to calculate Risk Based Capital ("RBC"). RBC is the capital required to cover the varying degrees of risk inherent in a company's assets, loss reserves, underwriting, and reinsurance. The "company action level" RBC is the minimum amount of capital required in order to avoid regulatory action. The adjusted capital of the Company's insurance subsidiaries is well above the required minimum.
Impact of Inflation:
Inflation can have a significant impact on property and casualty insurers because premium rates are established before the amount of losses and loss adjustment expenses is known. The Company attempts to anticipate increases from inflation in establishing rates, subject to limitations imposed for competitive pricing.
The Company considers inflation when estimating liabilities for losses and loss adjustment expenses, particularly for claims having a long period between occurrence and settlement. The liabilities for losses and loss adjustment expenses are management's estimates of the ultimate net cost of underlying claims and expenses and are not discounted for the time value of money. In times of inflation, the normally higher investment yields available may partially offset potentially higher claims and expenses.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS Page
Report of Independent Accountants 26
Financial Statements: Consolidated Statement of Income 27 Consolidated Balance Sheet 28 Consolidated Statement of Shareholders' Equity 29 Consolidated Statement of Cash Flows 30 Notes to Consolidated Financial Statements 31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Meridian Insurance Group, Inc.
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 50 present fairly, in all material respects, the financial position of Meridian Insurance Group, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 14(a)(2) on page 50 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the financial statements, the Company changed its method of accounting for insurance-related assessments.
PricewaterhouseCoopers LLP Indianapolis, Indiana February 22, 2000
The accompanying notes are an integral part of the consolidated financial statements.
MERIDIAN INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET as of December 31, 1999 and 1998
December 31, 1999 1998 ASSETS Investments: Fixed maturities, available for sale at market (cost $232,090,000 and $234,632,000) $ 226,431,532 $ 241,993,962 Equity securities, at market (cost $54,282,000 and $48,338,000) 69,002,099 64,020,661 Short-term investments, at cost, which approximates market 2,822,215 6,431,482 Other invested assets 1,322,209 1,375,463 Total investments 299,578,055 313,821,568
Cash 1,381,888 854,522 Premium receivable, net of allowance for bad debts 13,113,315 5,625,470 Accrued investment income 3,314,756 2,950,290 Deferred policy acquisition costs 19,974,450 17,671,856 Goodwill 14,070,480 14,775,426 Reinsurance receivables 34,057,786 41,803,624 Prepaid reinsurance premiums 3,592,121 3,362,441 Due from Meridian Mutual Insurance Company 4,620,574 7,528,333 Other assets 4,519,700 463,990 Total assets $ 398,223,125 $ 408,857,520
LIABILITIES AND SHAREHOLDERS' EQUITY Losses and loss adjustment expenses $ 145,962,418 $ 154,252,671 Unearned premiums 88,698,507 81,223,095 Other post-employment benefits 2,204,739 1,935,616 Bank loan payable 8,500,000 10,125,000 Payable for securities --- 3,061,898 Reinsurance payables 9,142,015 9,811,976 Other liabilities 6,906,277 6,478,431 Total liabilities 261,413,956 266,888,687
Shareholders' equity: Common shares, no par value, Authorized 20,000,000 shares; issued 8,218,167 and 8,180,883; outstanding 7,926,610 and 7,968,083 at December 31, 1999 and 1998, respectively (including 10% stock dividend issued on January 6, 1999, for 658,493 shares, and January 11, 2000, for 721,872 shares) 44,793,300 44,336,679 Treasury Shares, at cost; 291,557 and 212,800 shares at December 31, 1999 and 1998, respectively (4,566,809) (3,277,781) Contributed capital 36,481,864 25,923,462 Retained earnings 54,112,519 59,796,235 Accumulated other comprehensive income 5,988,295 15,190,238 Total shareholders' equity 136,809,169 141,968,833 Total liabilities and shareholders' equity $ 398,223,125 $ 408,857,520
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
MERIDIAN INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Summary of Significant Accounting Policies
Nature of Operations: Meridian Insurance Group, Inc. ("the Company"), was organized in 1986 as a subsidiary of Meridian Mutual Insurance Company ("Meridian Mutual"), an Indiana mutual insurance company that currently owns 48.1 percent of the outstanding common shares of the Company. The Company is a holding company principally engaged in the business of underwriting property and casualty insurance through its wholly-owned subsidiaries, Meridian Security Insurance Company ("Meridian Security") and Meridian Citizens Security Insurance Company ("Meridian Citizens Security").
Meridian Security, Meridian Citizens Security, and Insurance Company of Ohio ("ICO," a wholly-owned subsidiary of the Company) are participants in a reinsurance pooling arrangement with Meridian Mutual and Meridian Citizens Mutual Insurance Company ("Meridian Citizens Mutual"), in which the underwriting income and expenses of each entity are shared. The participation percentages of the Company's insurance subsidiaries total 74 percent. See Note 6 - Related Party Transactions.
Collectively, the insurance companies participating in this reinsurance pooling arrangement write a broad line of property and casualty insurance, including personal, non-standard and commercial automobile; homeowners, farmowners and commercial multi- peril; and workers' compensation. Business is written primarily through nearly 1,400 independent insurance agencies in the states of Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Missouri, North Dakota, Ohio, Pennsylvania, South Dakota, Tennessee, Virginia, and Wisconsin.
Basis of Presentation: The consolidated financial statements have been prepared on the basis of generally accepted accounting principles which differ in some respects from those followed in reports to insurance regulatory authorities. Certain prior year amounts have been reclassified to conform to the current-year presentation.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosure of certain assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation: The consolidated financial statements include the accounts of Meridian Insurance Group, Inc., and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Investments: Fixed maturity investments include bonds, notes, mortgage backed pass-through securities, collateralized mortgage obligations, other asset backed securities and sinking fund preferred stocks. The fixed maturity portfolio is invested entirely in securities classified as available for sale and is carried at quoted market values. Equity securities, consisting of unaffiliated common and perpetual preferred stocks, are reported at quoted market values. Short-term investments are recorded at cost, approximating market value. Other investments include limited partnerships recorded on the equity method.
Realized gains or losses on disposition of investments are determined on a specific identification basis. Unrealized gains and losses resulting from changes in the valuation of both equity securities and fixed maturities available for sale are recorded as a component of other comprehensive income, net of applicable deferred income taxes.
The Company regularly evaluates its investments based on current economic conditions, past credit loss experience and other circumstances. A decline in a security's net market value that is not a temporary fluctuation is recognized as a realized loss, and the cost basis of that security is reduced.
Premium Revenue: Premiums are recognized as revenue on a monthly pro rata basis over the coverage terms of the respective policies. Any premiums applicable to the future terms of the policies are included in liabilities as unearned premiums.
Deferred Policy Acquisition Costs: Policy acquisition costs, principally commissions, premium taxes, and variable underwriting and policy issue expenses, have been deferred. Such costs are amortized as premium revenue is earned. The method used in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. It also considers the effects of anticipated investment income, losses and loss adjustment expenses, and certain other costs anticipated to be incurred as the premium is earned.
Goodwill: The Company's goodwill represents the excess of cost over the fair value of identifiable net assets acquired from business acquisitions and is being amortized on a straight-line basis over a 25-year period. The Company continually monitors the value of its goodwill based on estimates of future earnings of the subsidiaries that were acquired. If it is determined that changes in such projected earnings no longer support the recoverability of goodwill over the remaining amortization period, the carrying value would be reduced with a corresponding charge to expense or the amortization period would be shortened. As of December 31, 1999 no material changes have occurred.
Losses and Loss Adjustment Expenses: Reserves for unpaid losses and loss adjustment expenses are based on both estimates of the ultimate costs of individual claims and on other non-discounted estimates, such as claims incurred but not reported and salvage and subrogation. The methods of making such estimates are continually reviewed and updated, and any reserve adjustments are reflected in current operating results.
Income Taxes: Deferred income taxes are provided to reflect the estimated future tax effects of temporary differences between the tax basis of an asset or liability and the basis recorded in financial statements. The deferred tax asset or liability is measured by using enacted tax rates expected to apply to future taxable income in the periods in which the temporary differences are expected to be recovered or settled. Accordingly, changes in future tax rates cause immediate adjustments to deferred taxes.
Earnings Per Share: The Company presents basic and diluted earnings per share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential that could occur if securities or other contracts to issued common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Stock Dividend: On both December 9, 1998, and December 15, 1999, a ten percent stock dividend was declared that was effective for shareholders of record as of December 21, 1998, and December 27, 1999, respectively. The financial statements, notes, and other references to share and per share data have been retroactively restated to reflect the stock dividend for all periods presented.
Impact of New Accounting Pronouncements: Effective January 1, 1999, the Company adopted SOP 97-3 "Accounting by Insurance and Other Enterprises for Insurance- Related Assessments." This statement requires that a liability for insurance-related assessments be recognized when the assessments have been imposed or it is probable that an assessment will be imposed, the event obligating the Company has occurred, and the amount can be reasonably estimated. SOP 97-3 requires that a liability for the current calendar year experience be recognized and that the initial application be treated as a cumulative effect type accounting change. The Company recorded an additional liability and a charge to the statement of income of $293,700 net of income tax, to reflect the cumulative effect of the accounting change.
In June 1998 the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In July 1999, the FASB released SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, An Amendment of FASB Statement No. 133." SFAS No. 137 defers the effective date of this pronouncement to fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments (including derivative instruments that are embedded in other contracts) and hedging activities. All items that are required to be recognized must be displayed according to accounting standards in the statement of financial position at fair value. The Company does not hold any derivative instruments and does not currently participate in hedging activities. The Company does not anticipate a material impact upon adoption of this statement.
2. Investments The Company's net investment income for the periods ended December 31, 1999, 1998, and 1997 are summarized as follows:
Net realized and unrealized gains on investments are summarized as follows:
The amortized cost and estimated market values of investments in fixed maturity securities at December 31, 1999 and 1998, are as follows:
The amortized cost and estimated market value of fixed maturity securities available for sale at December 31, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Amortized Market Cost Value Available for sale: Due in one year or less $ 1,834,471 $ 1,840,032 Due after one year through five years 19,143,159 19,199,604 Due after five years through ten years 60,607,713 58,943,343 Due after ten years through fifteen years 53,241,844 51,038,374 Due after fifteen years through twenty years 27,381,699 27,586,263 Due after twenty years 29,039,843 28,072,720 Subtotal 191,248,729 186,680,336 Mortgage-backed securities 40,841,608 39,751,196 Total fixed maturity securities $ 232,090,337 $ 226,431,532
Proceeds from sales of investments in fixed maturity securities during 1999, 1998 and 1997, respectively, were $42,415,984, $78,138,240, and $26,135,592. During 1999, 1998 and 1997, respectively, gross gains of $110,779, $2,672,721, and $338,920 and gross losses of $404,864, $44,464, and $324,812 were realized on those sales.
Unrealized appreciation of equity securities at December 31, 1999 totaled $14,720,302 representing $18,850,995 of gains on certain securities and $4,130,693 of losses on other securities.
3. Other Comprehensive Income The Company's other comprehensive income consists solely of net unrealized gains (losses) on securities. The total net unrealized gain (losses) on securities for the years ended December 31, 1999, 1998 and 1997 consist of the following:
4. Segment Reporting The following tables display the Company's reportable segments, a reconciliation of segment data to total consolidated financial data, and related disclosure information concerning revenues as required by SFAS No. 131. Segments were defined based upon the Company's structure and decision making processes. Personal, commercial and farm lines are segmented within all internal reporting mechanisms to aid chief decision makers in achieving profitable results within each business segment. Amortization was allocated by segment based upon a ratio of premium. Investment income was determined consistent with statutory modeling requirements for the Insurance Expense Exhibit. These guidelines rely on historical reserve patterns by line of business. Asset information by reportable segment is not reported, since the Company does not internally produce such information.
As required by SFAS No. 131, the following table delineates the Company's products and revenues in a manner which is consistent with segment reporting: 1999 1998 1997 Personal lines: Automobile $ 91,123,405 $ 79,438,864 $ 78,609,066 Homeowners 24,271,745 25,649,226 26,262,790 Other 2,580,806 2,718,432 2,929,743 Total personal lines $ 117,975,956 $ 107,806,522 $ 107,801,599
Commercial lines: Automobile $ 18,532,450 $ 17,666,781 $ 17,826,255 Worker's compensation 22,874,065 22,442,522 25,586,297 Commercial multi-peril 24,539,325 25,983,425 28,041,002 Other 4,563,192 4,410,290 4,766,669 Total commercial lines $ 70,509,032 $ 70,503,018 $ 76,220,223
Farm lines: Farmowners 10,935,071 10,878,882 10,564,810 Total farm lines $ 10,935,071 $ 10,878,882 $ 10,564,810
Total all lines combined $ 199,420,059 $ 189,188,422 $ 194,586,632
5.Bank Loan Payable The 1996 acquisition of Citizens Security Group acquisition was funded in part through a $12,000,000 bank loan. The debt has a variable interest rate of LIBOR plus 50 basis points, which was 6.6613 percent and 5.7388 percent at December 31, 1999 and 1998, respectively. The bank loan will mature on August 1, 2003. The Company is required to make principal payments in accordance with the following schedule:
2000 $ 2,000,000 2001 2,125,000 2002 2,500,000 2003 1,875,000 Total payments outstanding $ 8,500,000
The principal balance of the bank loan as of December 31, 1999, approximates its market value. Interest paid on the loan during 1999 and 1998 amounted to $532,000 and $672,000, respectively. The bank debt includes certain financial covenants, the most significant of which concern the amounts of risk based capital, statutory policyholders' surplus, total debt, debt to capitalization and debt service coverage (the relationship of dividends available from the Company's insurance subsidiaries to required principal and interest payments).
6.Related Party Transactions Meridian Security, Meridian Citizens Security, ICO, Meridian Mutual, and Meridian Citizens Mutual are parties to a reinsurance pooling agreement ("pooling agreement") under which essentially all premiums, loss and loss adjustment expenses, as well as other underwriting expenses are shared by the companies on the basis of their percentage participation defined in the pooling agreement. The reinsurance pool participation percentages of the Company's insurance subsidiaries total 74 percent. Other expenses are allocated on the basis of specific identification or estimated costs. Amounts either due to or due from Meridian Mutual and Meridian Citizens Mutual result from these transactions, and are normally reimbursed on a monthly basis. Management believes that such expenses would not be materially different if incurred directly by each company.
For the year ended December 31, 1999, approximately 78 percent of the Company's total premium volume was derived from its participation in the pooling agreement. In 1998 and 1997, approximately 86 percent and 88 percent, respectively, were derived from the pooling arrangement.
Effective January 1, 1997, the Company became the employer of all of the former Meridian Mutual and Meridian Citizens Mutual employees. This transfer of employees allowed for the integration of benefit plans, thus increasing management efficiencies and allowing for enhanced benefit options, such as the use of the Company's common stock as compensation.
Also as a result of the employee transfer, the Company assumed the operations of the previously established benefit plans of Meridian Mutual. Included in these benefit plans were a non-contributory pension plan that covers substantially all employees, a non-tax qualified supplemental retirement plan for certain key employees, and a multi-employer plan for other post-retirement benefits. See Note 10-Pension Plan and Other Post-Retirement Benefits. The Company also assumed a 401(k) plan whereby employees can contribute up to 16 percent of their compensation, with the Company contributing 50 percent of the employee contribution on the first 6 percent. Costs related to these benefit plans are allocated to each company in accordance with their percentage participation under the pooling agreement.
7. Liability for Losses and Loss Adjustment Expenses Activity in the liability for losses and loss adjustment expenses is summarized as follows:
The reconciliations for 1999, 1998, and 1997 show approximately $6.9 million, $8.7 million, and $16.4 million reductions, respectively, in previously established loss reserves. Favorable loss developments resulting from decreases in the frequency and severity of claims in prior accident years for the Company's personal automobile liability, workers' compensation and commercial multi-peril lines of business were the primary factors in the reductions.
8.Reinsurance The companies that participate in the reinsurance pooling agreement reduce the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring their insurance business with unrelated third party insurers. In accordance with industry practice, the Company in its consolidated financial statements treats risks, to the extent reinsured, as though they were risks for which the Company is not liable. Reinsurance recoverables are estimated in a manner consistent with the claim liability associated with the reinsured policy. Insurance ceded by the Company's insurance subsidiaries does not relieve the subsidiaries' primary liability as the originating insurers.
The reinsurance purchased includes contracts under which certain types of policies are automatically reinsured up to the contract limits ("treaty reinsurance") and contracts which provide reinsurance on an individual risk basis which require a specific agreement of the reinsurer as to limits of coverage provided ("facultative reinsurance"). Meridian Mutual, Meridian Security, Meridian Citizens Mutual, Meridian Citizens Security, and ICO were each named as insured parties under the treaty reinsurance contracts, and the coverage under those contracts applied to all risks written by each of the companies. Treaty coverage was purchased to cover property and liability exposures in excess of $200,000 and $400,000, respectively, up to the limits set forth in the individual treaty. (In 1998 and 1997, the exposures were $350,000 and $200,000, respectively.) Facultative reinsurance was purchased to cover exposures on both property and liability coverages from losses over and above the limits provided by the treaty reinsurance.
Catastrophe reinsurance provided coverage for multiple losses caused by a single catastrophic event such as a windstorm or earthquake. The combined retention under this contract was $6,000,000 plus five percent of losses up to contractual limits for windstorms of $65,000,000 and for earthquakes of $108,000,000. Another catastrophe reinsurance treaty provided coverage for 95% of losses sustained from multiple catastrophic events which aggregated beyond specified retentions and per event deductibles up to the contractual limits.
Approximately 97 percent of the Company's ceded reserves for losses and loss adjustment expenses were with Employers Reinsurance Corporation, Michigan Catastrophic Claims Association and Swiss Reinsurance America Corporation. The effect of reinsurance on premiums written, premiums earned and losses and loss adjustment expenses for the years ended December 31, 1999, 1998 and 1997 were as follows:
1999 1998 1997
Premiums written: Direct $ 223,584,026 $ 204,046,222 $ 210,393,552 Assumed 366,751 486,305 718,004 Ceded (17,285,000) (16,461,276) (16,592,247) Net $ 206,665,777 $ 188,071,251 $ 194,519,309
Premiums earned: Direct $ 216,078,155 $ 205,534,750 $ 211,105,812 Assumed 397,210 614,042 1,232,165 Ceded (17,055,306) (16,960,370) (17,751,345) Net $ 199,420,059 $ 189,188,422 $ 194,586,632
Losses and loss adjustment expenses incurred: Direct $ 160,929,807 $ 151,184,461 $ 168,173,120 Assumed 57,832 624,892 1,355,214 Ceded (10,770,031) (15,189,362) (20,309,603) Net $ 150,217,608 $ 136,619,991 $ 149,218,731
9. Deferred Policy Acquisition Costs Changes in deferred policy acquisition costs are summarized as follows:
1999 1998 1997
Deferred, beginning of period $ 17,671,856 $ 17,651,544 $ 16,690,275 Additions: Commissions 34,870,279 31,845,030 32,391,959 Premium taxes 3,074,928 2,416,582 2,375,996 Other 9,208,481 7,972,312 8,357,111 Total additions 47,153,688 42,233,924 43,125,066 Amortization expense 44,851,094 42,213,612 42,163,797 Deferred, end of period $ 19,974,450 $ 17,671,856 $ 17,651,544
10. Pension Plan and Other Post-Retirement Benefits The Company maintains a defined benefit pension plan for the benefit of eligible employees. Under the plan, all employees of the Company completing more than 1,000 hours of employment in a 12- month period become eligible to participate. The plan provides for a pension annuity beginning at age 65 based on the employee's average monthly base pay during the five highest consecutive salary years out of the last ten. Provisions for delayed retirement benefits, early retirements benefits after age 55, disability and death benefits, optional methods for benefit payment, payments to an employee who leaves after a certain number of years of service, and payments to an employee's surviving spouse are also covered under the plan.
The Company also maintains a non-tax qualified supplemental retirement income plan for certain key employees who participate in the defined benefit pension plan. The plan provides additional benefits in excess of the limitations imposed by Section 401(a)(17) and Section 415 of the Internal Revenue Code on plans to which those sections apply. The benefit is in the form of a straight life annuity over the lifetime of the participant and commences on the participant's normal retirement date.
The following table presents a reconciliation of the funded status for the Company's defined benefit pension plan and the amounts recognized in the Company's consolidated balance sheet as of December 31, 1999 and 1998 per FASB 132 requirements:
1999 1998
Reconciliation of benefit obligation: Obligation at January 1 $ 27,117,622 $ 23,432,716 Service cost 1,345,750 1,067,292 Interest cost 1,748,264 1,608,088 Plan amendments --- 1,131,954 Actuarial (gain) loss (4,679,250) 1,165,040 Benefit payments (1,273,206) (1,287,468) Obligation at December 31 $ 24,259,180 $ 27,117,622
Reconciliation of fair value of plan assets: Fair value of plan assets at January 1 $ 34,401,026 $ 31,582,957 Actual return on plan assets 6,004,071 4,105,537 Benefit payments (1,273,206) (1,287,468) Fair value of plan assets at December 31 $ 39,131,891 $ 34,401,026
Funded Status Funded status at December 31 $ 14,872,711 $ 7,283,404 Unrecognized asset (6,483,880) (7,015,956) Unrecognized prior service cost 984,688 1,058,321 Unrecognized gain (8,440,374) (603,345) Accrued asset at December 31 $ 933,145 $ 722,424
The following table presents a reconciliation of the funded status for the Company's supplemental retirement income plan and the amounts recognized in the Company's consolidated balance sheet as of December 31, 1999 and 1998:
1999 1998 Reconciliation of benefit obligation: Obligation at January 1 $ 1,050,623 $ 760,102 Service cost 46,533 37,193 Interest cost 69,839 59,987 Actuarial (gain) loss (217,298) 193,341 Obligation at December 31 $ 949,697 $ 1,050,623
Funded Status Funded status at December 31 $ (949,697) $ (1,050,623) Unrecognized prior service cost 193,522 216,599 Unrecognized loss 29,612 260,908 Accrued liability at December 31 $ (726,563) $ (573,116)
A 7.75 and 6.50 percent weighted average discount rate was assumed for 1999 and 1998, respectively, in determining the accumulated benefit obligation and a 5.0 percent average salary increase was used to project the additional pay increase on all plans. The expected return on assets for the defined pension plan was assumed to be 8.25 percent. Net periodic pension costs for the defined benefit pension plan for the years ended December 31, 1999, 1998, and 1997 included the following components:
Net periodic pension costs for the supplemental retirement income plan for the years ended December 31, 1999, 1998, and 1997 were approximately $114,000, $94,000, and $72,000 respectively.
In addition to pension benefits, the Company provides certain health care and life insurance benefits ("post-retirement benefits") for retired employees. Substantially all employees may become eligible for these benefits if they reach retirement age while working for the Company. The Company also provides medical benefits for early retirees (eligible upon attainment of age 55 and five years service up to age 65) and group term life insurance that phases out over a five year period from the retirement date.
The following table presents a reconciliation of the funded status for the Company's post-retirement benefit obligation and the amounts recognized in the Company's consolidated balance sheet as of December 31, 1999 and 1998:
1999 1998
Reconciliation of benefit obligation: Obligation at January 1 $ 1,909,278 $ 1,952,474 Service cost 210,680 211,586 Interest cost 121,129 133,691 Actuarial (gain) loss (223,453) (324,893) Benefit payments (78,476) (63,580) Obligation at December 31 $ 1,939,158 $ 1,909,278
Reconciliation of fair value of plan assets: Fair value of plan assets at January 1 $ --- $ --- Employer contributions 78,476 63,580 Benefit payments (78,476) (63,580) Fair value of plan assets at December 31 $ --- $ ---
Funded Status Funded status at December 31 $ (1,939,158) $ (1,909,278) Unrecognized (gain) loss (265,580) (26,338) Accrued liability at December 31 $ (2,204,739) $ (1,935,616)
A 7.75 and 6.50 percent weighted average discount rate was used for 1999 and 1998, respectively, to determine the accumulated post- retirement benefit obligation at December 31, 1999. Net periodic pension costs for the post-retirement plan for the years ended December 31, 1999, 1998, and 1997 included the following components:
1999 1998 1997 Service costs $ 155,903 $ 156,574 $ 107,313 Interest costs 89,636 98,931 75,838 Amortization of net loss (26,898) (11,864) (29,704) Net periodic benefit cost $ 218,641 $ 243,641 $ 153,447
The assumed rate of future increases in per capita cost of health care benefits was 9.0 percent for the first year and 5.0 percent for all years thereafter in 1999, and 7.0 percent for the first year and 4.0 percent for all years thereafter in 1998. The health care cost trend rate assumption affects the amounts reported. For example, increasing the assumed health care cost trend rate by one percentage point would increase the accumulated post-retirement benefit obligation by approximately $176,000 and the aggregate of the service and interest cost components of net periodic post- retirement benefit cost by approximately $41,000. A decrease in the assumed health care cost trend rate by one percentage point would decrease the accumulated post-retirement benefit obligation by approximately $154,000 and the aggregate of the service and interest cost components of net periodic post-retirement benefit cost by approximately $35,000.
11.Income Taxes Current tax expense for the following periods differed from the tax expected solely on pre-tax income by applying the applicable statutory corporate tax rate to the various differences identified as follows:
The Tax Reform Act of 1986 allowed for a fresh start deduction for reserve discounting requirements, which was to be amortized over the life of the reserve. This produced an aggregate tax benefit of approximately $900,000. The remainder of the unamortized fresh start was fully recognized in 1997, resulting in a tax reduction of approximately $137,000.
Under SFAS No. 109, "Accounting For Income Taxes", the Company recorded a net deferred tax asset in 1999 and deferred tax liabilities in 1998 and 1997. The net deferred tax asset/liability at December 31, 1999, 1998 and 1997, is comprised of the following:
The Company has paid income taxes during the past three years of $725,000 in 1999, $3,215,000 in 1998, and $1,110,000 in 1997.
12.Earnings Per Share The following table reflects the reconciliation of the numerators and denominators of the Company's basic earnings per share and diluted earnings per share computations reported on the Consolidated Statement of Income for the years ended December 31, 1999, 1998 and 1997.
13.Statutory Information Subsidiary retained earnings available for distribution as dividends to the Company are limited by law to the statutory unassigned surplus of the subsidiaries on the previous December 31, as determined in accordance with the accounting practices prescribed or permitted by insurance regulatory authorities of the state of Indiana. Subject to this limitation, the maximum dividend that may be paid during a 12-month period, without prior approval of the insurance regulatory authorities is the greater of ten percent of statutory capital and surplus as of the preceding December 31 or net income for the preceding calendar year determined on a statutory basis. Meridian Security declared and paid dividends to the Company of $5,000,000 in 1999, 1998 and 1997. As of December 31, 1999, approximately $11,600,000 was available for distribution to the Company without prior approval of insurance regulatory authorities.
Meridian Security's subsidiaries, Meridian Citizens Security and ICO, also pay dividends to their parent. Each company's retained earnings available for distribution as dividends are limited by laws in their states of domicile, Minnesota and Ohio, respectively. Meridian Citizens Security declared and paid dividends to Meridian Security of $400,000 in 1999, $600,000 in 1998, and $300,000 in 1997. ICO declared and paid dividends to Meridian Security of $150,000 in 1999 and $300,000 in 1998. Dividends were not paid by ICO in 1997.
The following is selected information for the Company's insurance subsidiaries, as determined in accordance with accounting practices prescribed or permitted by the Department of Insurance of their state of domicile:
1999 1998 1997
Statutory capital and surplus $ 135,534,000 $ 133,322,000 $115,280,000 Statutory net investment income $ 14,973,000 $ 16,156,000 $ 15,212,000 Statutory net income $ 6,573,000 $ 15,716,000 $ 6,140,000
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance, which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas, e.g. deferred income taxes are recorded.
The Indiana, Ohio, and Minnesota Insurance Departments have adopted the Codification guidance, effective January 1, 2001. The Company has not yet estimated the potential effect of the Codification guidance on statutory surplus.
14. Shareholders' Equity In May 1997, the Shareholders of Meridian Insurance Group, Inc. approved an amendment to the Company's Articles of Incorporation to increase the number of authorized shares from 20,000,000 to 20,500,000, with the additional shares being preferred stock. The amendment provides that the preferred shares may be issued from time to time in one or more series. The Board of Directors, without further approval of the holders of common shares, would be authorized to fix the dividend rights and terms, liquidation preferences, sinking funds and any other rights, preferences, privileges, and restrictions applicable to each such series of preferred shares. On September 8, 1998, the Board of Directors of Meridian Insurance Group Inc., adopted a Shareholders Rights Plan. Under the Plan, a dividend of one preferred share purchase right was paid to shareholders of record on September 28, 1998 for each outstanding common share. Each Right entitles the holder to purchase one-thousandth of a share Series A Junior Participating Preferred Stock of the Company at a price of $75.00 per one- thousandth of a Preferred Share. If a person or group acquires 20% or more of the outstanding Common Shares (thereby becoming an Acquiring Person), each holder of a Right (except those held by the Acquiring Person and its affiliates and associates) will generally have the right to purchase Common Shares having equal to two times the purchase price of the Right. In other words, the Right's holders, other than the Acquiring Person, may purchase common shares or their equivalent at a 50 percent discount. The Rights will expire on September 18, 2008, unless the expiration date is extended by amendment or unless the Rights are earlier redeemed or exchanged by the Company.
On December 15, 1999, the Board of Directors of Meridian Insurance Group, Inc. declared a ten percent stock dividend. Each shareholder of record as of December 27, 1999, received one additional share of the company's common stock for every ten shares held on that date. The ten percent stock dividend was distributed on January 11, 2000, with the Company issuing 721,872 shares. A similar ten percent stock dividend was also declared on December 9, 1998, for shareholders of record as of December 21, 1998. The dividend was distributed on January 6, 1999, with the Company issuing 658,493 shares. In both years, fractional shares were paid by the Company in cash. All share and prior per share amounts have been retroactively restated to give effect for the stock dividend.
In 1987, the Company's Board of Directors and Shareholders approved an Incentive Stock Plan ("Plan") for the purpose of attracting and retaining key employees. The maximum number of common shares to be authorized for issuance was limited to 750,000 shares over a 10 year term. Awards under the Plan may include non- qualified and incentive stock options, stock appreciation rights, and restricted stock. Options to purchase common shares granted under the Plan are to have an exercise price of not less than the fair market value of the Company's common shares on the date of grant. Options are to be exercisable beginning one year from the date of grant and are to expire over various periods not to exceed ten years from the date of grant. Restricted stock awards may be granted subject to terms and conditions as prescribed by the committee which administers the Plan. Under the 1987 Plan, which expired on January 21, 1997, total options with respect to 477,144 shares were granted and 272,856 options had expired. In early 1996, the Board of Directors and Shareholders approved the 1996 Employee Incentive Stock Plan, which would eventually replace the 1987 Plan. Under the 1996 Plan, which became effective on May 8, 1996, the maximum number of shares authorized for issuance is 750,000 shares over the next ten years. As of December 31, 1999, options with respect to 299,195 shares have been granted under the 1996 Plan.
The Company also has a Director's Stock Plan that provides for an aggregate maximum of up to 150,000 common shares to be issued upon the exercise of stock options granted to outside directors, who are defined as non-employee directors of the Company or Meridian Mutual. Each outside director will automatically be granted an option to purchase 1,210 common shares on the date of each annual meeting of shareholders up until termination of the plan. The exercise price per share for each option will be equal to the fair market value of a common share on the date of grant. Each option will be exercisable commencing one year after the date of the grant and will expire no later than 10 years after the date of the grant. As of December 31, 1999, total options with respect to 79,860 shares have been granted.
In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". This statement encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on the fair value method of accounting. The Company continues to account for stock options in accordance with Accounting Principles Board Opinion No. 25. Had compensation cost been determined using the fair value of the options at the grant dates in accordance with SFAS No. 123, the Company's net income and earnings per share for the periods ended December 31, 1999, 1998 and 1997 would have been reduced by the following pro-forma amounts: $49,000, $186,000, and $640,000 and $0.01, $0.02 and $0.08, respectively. The weighted average grant date fair value of options granted during the year was estimated to be $17.45, $17.07 and $17.26 using the Black-Scholes model with the following assumptions for 1999, 1998 and 1997, respectively: risk free interest rates of 5.94 percent, 5.31 percent and 6.29 percent; dividend yield of 2.04 percent, 1.80 percent and 2.29 percent; and volatility of 30.95 percent, 38.10 percent and 26.36 percent. As of December 31, 1999, options outstanding under these plans had an exercise price that ranged from $8.26 to $15.50 and a remaining weighted average contractual life of 8.89 years. Stock options granted by the Company for the periods ended December 31, 1999, 1998 and 1997, are summarized in the following table:
15. Unaudited Selected Quarterly Financial Data (Amounts in thousands except per-share data)
Quarter Ended March 31 June 30 September 30 December 31
Revenues $ 52,841 $ 55,761 $ 56,716 $ 57,112 Net income $ 630 $ 2,280 $ 2,602 $ 1,738 Basic earnings per share $ 0.08 $ 0.28 $ 0.33 $ 0.22 Diluted earnings per share $ 0.08 $ 0.28 $ 0.32 $ 0.22
Revenues $ 52,633 $ 54,345 $ 53,833 $ 52,906 Net income $ 2,517 $ 2,494 $ 2,940 $ 4,199 Basic earnings per share $ 0.32 $ 0.31 $ 0.36 $ 0.53 Diluted earnings per share $ 0.31 $ 0.31 $ 0.36 $ 0.52
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10:
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to the information contained under the captions "Election of Directors" and "Executive Compensation" in the Company's definitive proxy statement to be sent to shareholders in connection with the annual meeting of shareholders to be held May 10, 2000.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the information contained under the caption "Executive Compensation" in the Company's definitive proxy statement to be sent to shareholders in connection with the annual meeting of shareholders to be held on May 10, 2000.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to the information contained under the caption "Beneficial Ownership of Common Shares" in the Company's definitive proxy statement to be sent to shareholders in connection with the annual meeting of shareholders to be held on May 10, 2000.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the information contained under the caption "Certain Relationships and Transactions" in the Company's definitive proxy statement to be sent to shareholders in connection with the annual meeting of shareholders to be held on May 10, 2000.
PART IV
ITEM 14:
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report.
(1) Financial Statements:
Report of Independent Accountants Financial Statements: Consolidated Statement of Income for the years ended December 31, 1999, 1998 and 1997 Consolidated Balance Sheet as of December 31, 1999 and 1998 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 Consolidated Statement of Cash Flows for the years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Report of Independent Accountants on Financial Statement Schedules Financial Statement Schedules: Schedule I -- Summary of Investments Other Than Investments in Related Parties Schedule II -- Condensed Financial Information of Registrant Schedule IV -- Reinsurance Schedule VI -- Supplemental Information Concerning Property-Casualty Insurance Operations
Schedules other than those listed above have been omitted because the required information is contained in the financial statements and notes thereto or because such schedules are not required or applicable.
(3) Exhibits: See Index to Exhibits
(b) Reports on Form 8-K No reports on Form 8-K were filed during the period covered by this statement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Meridian Insurance Group, Inc.
By: /s/ Steven R. Hazelbaker Steven R. Hazelbaker Vice President, Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on February 23, 2000, on behalf of the registrant in the capacities indicated:
/s/ Ramon L. Humke /s/ John T. Hackett Ramon L. Humke John T. Hackett Chairman of the Board Director
/s/ Norma J. Oman /s/ David M. Kirr Norma J. Oman David M. Kirr President, Chief Executive Director Officer and Director
/s/ Timothy J. Hanrahan /s/ James D. Price Timothy J. Hanrahan James D. Price Senior Vice President Director
/s/ Carl W. Buedel /s/ Sarah W. Rowland Carl W. Buedel Sarah W. Rowland Senior Vice President Director
/s/ Joseph D. Barnette, Jr. /s/ Thomas H. Sams Joseph D. Barnette, Jr. Thomas H. Sams Director Director
MERIDIAN INSURANCE GROUP, INC. FORM 10-K for the fiscal year ended December 31, 1999 Index to Exhibits
Exhibit Number Assigned in Regulation S-K Item 601 Description of Exhibit
(2) 2.01 Acquisition and Affiliation Agreement by and among Citizens Security Group, Inc., Citizens Security Mutual Insurance Company and Meridian Insurance Group, Inc. (Incorporated by reference to Exhibit 2.01 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0- 11413.)
(3) 3.01 Restated Articles of Incorporation of Meridian Insurance Group, Inc. (Incorporated by reference to Exhibit 3.01 to the registrant's Form S-1 Registration Statement No. 33-11413.)
3.02 Amendment to Restated Articles of Incorporation of Meridian Insurance Group, Inc. effective May 14, 1997 (Incorporated by reference to Exhibit 3.02 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)
3.03 Articles of Amendment to Meridian Insurance Group, Inc. Articles of Incorporation regarding Series A Junior Participating Preferred Stock. (Incorporated by reference to Exhibit 3.01 to the registrant's Form 10-Q for quarter ended September 30, 1998; Commission File No. 0-11413.)
3.04 Bylaws of Meridian Insurance Group, Inc. as amended through December 4, 1996. (Incorporated by reference to Exhibit 3.02 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.)
3.05 Amendment to Bylaws of Meridian Insurance Group, Inc. effective December 9, 1998. (Incorporated by reference to Exhibit 3.05 to the registrant's Form 10- K for the fiscal year ended December 31, 1998; Commission File No. 0-11413.)
(4) 4.01 Text of Certificate for Common Shares of Meridian Insurance Group, Inc. (Incorporated by reference to Exhibit 4.01 to the registrant's Form S-1 Registration Statement No. 33-11413.)
4.02 Additional text of newly issued Certificates for Common Shares of Meridian Insurance Group, Inc. (Incorporated by reference to Exhibit 4.02 to the registrant's Form 10-K for the fiscal year ended December 31, 1998; Commission File No. 0-11413.)
4.03 Rights Agreement, dated as of September 18, 1998, between Meridian Insurance Group, Inc. and Harris Trust and Savings Bank, as Rights Agent. The Rights Agreement includes the form of Articles of Amendment setting forth terms of Series A Junior Participating Preferred Stock as Exhibit A, the form Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (Incorporated herein by reference to Exhibit 1 to the Company's report on Form 8-K dated September 18, 1998.)
(9) No exhibit.
(10) 10.01 Form of Supplemental Pension Agreement between Meridian Mutual Insurance Company and Harold C. McCarthy. (Incorporated by reference to Exhibit 10.06 to the registrant's Form S-1 Registration Statement No. 33-11413.)** 10.02 Form of Addendum to Supplemental Pension Agreement between Meridian Mutual Insurance Company and Harold C. McCarthy. (Incorporated by reference to Exhibit 19.07 to the registrant's Form 10-K for the fiscal year ended December 31, 1991; Commission File No. 0-11413.)**
10.03 Form of Supplemental Retirement Income Plan for Employees of Meridian Mutual Insurance Company. (Incorporated by reference to Exhibit 19.02 of the registrant's Form 10-K for the fiscal year ended December 31, 1994; Commission File No. 0-11413.)**
10.04 Meridian Insurance Group, Inc., Incentive Stock Plan. (Incorporated by reference to Exhibit 10.07 to Amendment No. 1 to the registrant's Form S-1 Registration Statement No. 33-11413.)**
10.05 First and Second Amendments to Meridian Insurance Group, Inc., 1987 Employee Incentive Stock Plan.** *Page 66
10.06 Form of 1994 Incentive Stock Option Agreement under 1987 Meridian Insurance Group, Inc., Incentive Stock Plan. (Incorporated by reference to Exhibit 19.03 to the registrant's Form 10-K for the fiscal year ended December 31, 1994; Commission File No. 0-11413.)**
10.07 Form of 1994 Non-qualified Stock Option Agreement under 1987 Meridian Insurance Group, Inc., Incentive Stock Plan. (Incorporated by reference to Exhibit 19.04 to the registrant's Form 10-K for the fiscal year ended December 31, 1994; Commission File No. 0-11413.)**
10.08 Form of 1995 Non-qualified Stock Option Agreement under 1987 Meridian Insurance Group, Inc., Employee Incentive Stock Plan. (Incorporated by reference to Exhibit 10.38 to the registrant's Form 10-K for the fiscal year ended December 31, 1995; Commission File No. 0-11413.)**
10.09 Meridian Insurance Group, Inc., 1996 Employee Incentive Stock Plan. (Incorporated by reference to Exhibit 10.39 to the registrant's Form 10-K for the fiscal year ended December 31, 1995; Commission File No. 0-11413.)**
10.10 First and Second Amendments to Meridian Insurance Group, Inc. 1996 Employee Incentive Stock Plan. (Incorporated by reference to Exhibit 10.09 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)**
10.11 Form of March 3, 1997 Non-Qualified Stock Option Agreement under Meridian Insurance Group, Inc., 1996 Employee Incentive Stock Plan. (Incorporated by reference to Exhibit 10.50 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.)**
10.12 Form of Amendment No. 1 to the March 3, 1997 Non- Qualified Stock Option Agreement under Meridian Insurance Group, Inc., 1996 Employee Incentive Stock Plan. (Incorporated by reference to Exhibit 10.11 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)**
10.13 Form of March 3, 1997 Incentive Stock Option Agreement under Meridian Insurance Group, Inc., 1996 Employee Incentive Stock Plan. (Incorporated by reference to Exhibit 10.51 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.)**
10.14 Form of Amendment No. 1 to the March 3, 1997 Incentive Stock Option Agreement under Meridian Insurance Group, Inc., 1996 Employee Incentive Stock Plan. (Incorporated by reference to Exhibit 10.13 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)**
10.15 Form of December 1, 1997 Non-Qualified Stock Option Agreement under Meridian Insurance Group, Inc., 1996 Employee Incentive Stock Plan. (Incorporated by reference to Exhibit 10.14 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)**
10.16 Written Description of 1999 Meridian Insurance Group, Inc., Executive Incentive Plan. (Incorporated by reference to Exhibit 10.15 to the registrant's Form 10-K for the fiscal year ended December 31, 1998; Commission File No. 0-11413.)
10.17 Written Description of 2000 Meridian Insurance Group, Inc., Executive Incentive Plan.** *Page 68
10.18 The Meridian Mutual Insurance Company Non-employee Director's Pension Plan. (Incorporated by reference to Exhibit 10.11 to the registrant's Form 10-K for the fiscal year ended December 31, 1988; Commission File No. 0-11413.)**
10.19 Meridian Insurance Group, Inc., 1994 Outside Director Stock Option Plan. (Incorporated by reference to Exhibit 19.05 to the registrant's Form 10-K for the fiscal year ended December 31, 1993; Commission File No. 0-11413.) **
10.20 Form of Directors' Non-qualified Stock Option Agreement. (Incorporated by reference to Exhibit 10.53 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.)**
10.21 Meridian Insurance Group, Inc. 401(k) Plan effective January 1, 1997. (Incorporated by reference to Exhibit 10.21 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)**
10.22 Form of Termination Benefits Agreement executed between Meridian Insurance Group, Inc. and Norma J. Oman, Steven R. Hazelbaker, J. Mark McKinzie, Timothy J. Hanrahan, and Carl W. Buedel. (Incorporated by reference to Exhibit 10.23 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)**
10.23 Form of Termination Benefits Agreement executed between Meridian Insurance Group, Inc. and all other Executive Officers of Meridian Mutual Insurance Company not mentioned in Exhibit 10.20 above. (Incorporated by reference to Exhibit 10.24 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)**
10.24 Meridian Insurance Statement of Policy on Inter-Company Expense Allocation. (Incorporated by reference to Exhibit 19.06 to the registrant's Form 10-K for the fiscal year ended December 31, 1992; Commission File No. 0-11413.)
10.25 Reinsurance Pooling Agreement Amended and Restated as of July 1, 1998, by and among Meridian Mutual Insurance Company, Meridian Security Insurance Company, Meridian Citizens Mutual Insurance Company, Meridian Citizens Security Insurance Company, and Insurance Company of Ohio. (Incorporated by reference to Exhibit 10.25 to the registrant's Form 10-K for the fiscal year ended December 31, 1998; Commission File No. 0-11413.)
10.26 Management Services Agreement among Meridian Insurance Group, Inc., Meridian Mutual Insurance Company and their Affiliates effective January 1, 1997. (Incorporated by reference to Exhibit 10.32 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.)
10.27 Term Loan Agreement and Business Credit Note between NBD Bank, N.A., and Meridian Insurance Group, Inc., dated July 29, 1996. (Incorporated by reference to Exhibit 10.49 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.)
10.25 Form of Modification of Term Loan Agreement between NBD Bank, N.A., and Meridian Insurance Group, Inc., effective December 31, 1997. (Incorporated by reference to Exhibit 10.31 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)
10.29 Form of Meridian Insurance Agency Profit-Sharing Agreement. (Incorporated by reference to Exhibit 10.37 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.)
10.30 Form of Meridian Insurance Agency Profit-Sharing Agreement. (Incorporated by reference to Exhibit 10.33 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)
10.31 Form of Meridian Insurance Agency Agreement (Incorporated by reference to Exhibit 10.31 to the registrant's Form 10-K for the fiscal year ended December 31, 1998; Commission File No. 0-11413.)
10.32 Form of Meridian Insurance New Agent's Incentive Compensation Agreement. (Incorporated by reference to Exhibit 10.32 to the registrant's Form 10-K for the fiscal year ended December 31, 1998; Commission File No. 0- 11413.)
10.33 Form of Meridian Insurance Non-Standard Automobile Contingent Commission Agreement. (Incorporated by reference to Exhibit 10.33 to the registrant's Form 10-K for the fiscal year ended December 31, 1998; Commission File No. 0-11413.)
10.34 Form of Meridian Insurance Farm Lines Contingent Commission Agreement. (Incorporated by reference to Exhibit 10.34 to the registrant's Form 10-K for the fiscal year ended December 31, 1998; Commission File No. 0-11413.)
10.35 Property Per Risk Excess of Loss Reinsurance Agreement between Employers Reinsurance Corporation, Meridian Mutual Insurance Company and Meridian Security Insurance Company effective January 1, 1992. (Incorporated by reference to Exhibit 10.26 to the registrant's Form S- 2 Registration Statement, File No. 33-58406.)
10.36 Form of Amendment No. 2 to Property Per Risk Excess of Loss Reinsurance Agreement between Employers Reinsurance Corporation, Meridian Mutual Insurance Company, Meridian Security Insurance Company and Vernon Fire & Casualty Insurance Company effective January 1, 1997. (Incorporated by reference to Exhibit 10.37 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)
10.37 Form Amendment No. 3 to Property Per Risk Excess of Loss Reinsurance Agreement between Employers Reinsurance Corporation, Meridian Mutual Insurance Company, Meridian Security Insurance Company, Vernon Fire & Casualty Insurance Company, and the Citizens Security Group effective January 1, 1998. (Incorporated by reference to Exhibit 10.38 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)
10.38 Commercial and Personal Umbrella Reinsurance Agreement between Employers Reinsurance Corporation and Meridian Mutual Insurance Company. (Incorporated by reference to Exhibit 19.09 to the registrant's Form 10-K for the fiscal year ended December 31, 1993; Commission File No. 0- 11413.) Amendment No. 9 to the Commercial and Personal Umbrella Reinsurance Agreement effective January 1, 1997. (Incorporated by reference to Exhibit 10.41 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.)
10.39 Personal Excess Liability Reinsurance Agreement between Employers Reinsurance Corporation and Meridian Mutual Insurance Company. (Incorporated by reference to Exhibit 19.10 to the registrant's Form 10-K for the fiscal year ended December 31, 1993; Commission File No. 0-11413.) Amendment No. 7 to the Personal Excess Liability Reinsurance Agreement effective January 1, 1997. (Incorporated by reference to Exhibit 10.39 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.)
10.40 Basket Reinsurance Agreement effective January 1, 1997, among Employers Reinsurance Corporation, Meridian Mutual Insurance Company, Meridian Security Insurance Company and Citizens Security Group. (Incorporated by reference to Exhibit 10.42 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.)
10.41 Sixth Excess Catastrophe Reinsurance Program effective January 1, 1997, issued to Meridian Mutual Group by the Subscribing Reinsurers Executing the Interests and Liabilities Agreements identified therein. (Incorporated by reference to Exhibit 10.47 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0- 11413.)
10.42 Form of Addendum No. 1 to the Sixth Excess Catastrophe Reinsurance Contract effective January 1, 1997, issued to the Meridian Mutual Group. (Incorporated by reference to Exhibit 10.47 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)
10.43 Property Excess of Loss Reinsurance Binding Agreement between Meridian Mutual Group and NAC Reinsurance Corporation effective June 15, 1995 and Endorsement No.1 effective January 1, 1996. (Incorporated by reference to Exhibit 10.44 to the registrant's Form 10-K for the fiscal year ended December 31, 1995; Commission File No. 0-11413.)
10.44 Form of Endorsement No. 2, which became effective January 1, 1997, and Form of Endorsement No. 3, which became effective June 15, 1996, to the Property Excess of Loss Reinsurance Binding Agreement. (Incorporated by reference to Exhibit 10.55 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)
10.45 Endorsement No. 4, Property Excess of Loss Reinsurance Binding Agreement, effective June 1, 1998. (Incorporated by reference to Exhibit 10.51 to the registrant's Form 10-K for the fiscal year ended December 31, 1998; Commission File No. 0-11413.)
10.46 Seventh Excess Catastrophe Reinsurance Contract effective January 1, 1999, issued to Meridian Mutual Insurance Company by the Subscribing Reinsurers Executing the Interest and Liabilities Agreements identified therein. (Incorporated by reference to Exhibit 10.52 to the registrant's Form 10-K for the fiscal year ended December 31, 1998; Commission File No. 0-11413.)
10.47 Underlying Aggregate Excess Catastrophe Reinsurance Contract, effective January 1, 1999, issued to Meridian Mutual Insurance Company by the Subscribing Reinsurers Executing the Interest and Liabilities Agreements identified therein. (Incorporated by reference to Exhibit 10.53 to the registrant's Form 10-K for the fiscal year ended December 31, 1998; Commission File No. 0-11413.)
10.48 Form of Addendum No. 2 to the Sixth Excess Catastrophe Reinsurance Contract effective January 1, 1999, issued to Meridian Mutual Group. (Incorporated by reference to Exhibit 10.54 to the registrant's Form 10-K for the fiscal year ended December 31, 1998; Commission File No. 0-11413.)
10.49 Excess Catastrophe Reinsurance Contract effective January 1, 1999, issued to Meridian Mutual Insurance Company by the Subscribing Reinsurers Executing the Interest and Liabilities Agreements identified therein. (Incorporated by reference to Exhibit 10.55 to the registrant's Form 10-K for the fiscal year ended December 31, 1998; Commission File No. 0- 11413.)
10.50 Amendment No. 1 To Property Per Risk Excess of Loss Reinsurance Agreement between Employers Reinsurance Corporation, Meridian Mutual Insurance Company, Meridian Security Insurance Company, and Vernon Fire and Casualty Insurance Company, effective January 1, 1995 *Page 69
10.51 Amendment No. 4 To Property Per Risk Excess of Loss Reinsurance Agreement between Employers Reinsurance Corporation, Meridian Mutual Insurance Company, Meridian Security Insurance Company, Vernon Fire and Casualty Insurance Company, Citizens Security Mutual Insurance Company, Citizens Fund Insurance Company, and Insurance Company of Ohio, effective December 30, 1996 *Page 74
10.52 Liability Excess Reinsurance Agreement between Employers Reinsurance Corporation, Meridian Mutual Insurance Company, Meridian Security Insurance Company, Meridian Citizens Mutual Insurance Company, Meridian Citizens Security Insurance Company, and Insurance Company of Ohio, effective January 1, 1999 *Page 76
10.53 Amendment No. 1 To Basket Reinsurance Agreement between Employers Reinsurance Corporation, Meridian Mutual Insurance Company, Meridian Security Insurance Company, Vernon Fire and Casualty Insurance Company, Citizens Security Mutual Insurance Company, Citizens Fund Insurance Company, and Insurance Company of Ohio *Page 95
10.54 Endorsement No. 5 To The Property Excess Of Loss Reinsurance Binding Agreement between Meridian Insurance, Meridian Citizens Mutual Insurance Company, Meridian Citizens Security Insurance Company, and NAC Reinsurance Corporation, effective April 1, 1999 *Page 97
10.55 Underlying Aggregate Excess Catastrophe Reinsurance Contract, effective January 1, 2000, issued to Meridian Mutual Insurance Group by the Subscribing Reinsurers Executing the Interest and Liabilities Agreements identified therein *Page 99
10.56 Excess Catastrophe Reinsurance Contract effective January 1, 2000, issued to Meridian Mutual Insurance Group by the Subscribing Reinsurers Executing the Interest and Liabilities Agreements identified therein *Page 125
10.57 Form of Addendum No. 1 to the Seventh Excess Catastrophe Reinsurance Contract effective January 1, 2000, issued to the Meridian Mutual Group *Page 154
10.58 Form of Citizens Security Group Agency Agreement. (Incorporated by reference to Exhibit 10.55 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.)
10.59 Form of Citizens Security Mutual Insurance Company Agency Agreement. (Incorporated by reference to Exhibit 10.56 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0- 11413.)
10.60 Form of Citizens Security Group Limited Agency Agreement. (Incorporated by reference to Exhibit 10.58 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.)
10.61 Form of Citizens Security Mutual Insurance Company Personal Partner Agency Agreement. (Incorporated by reference to Exhibit 10.59 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.)
10.62 Form of Citizens Security Group Personal Partner Contingency Plan. (Incorporated by reference to Exhibit 10.60 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.)
10.63 Form of Citizens Security Group Network Agencies Profit Sharing Plan. (Incorporated by reference to Exhibit 10.61 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0- 11413.)
10.64 Form of Citizens Security Group Individual Agency Profit Sharing Plan. (Incorporated by reference to Exhibit 10.62 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0- 11413.)
10.65 Form of Meridian Citizens Agency Profit-Sharing Agreement. (Incorporated by reference to Exhibit 10.65 to the registrant's Form 10-K for the fiscal year ended December 31, 1998; Commission File No. 0-11413.)
(11) No exhibit.
(12) No exhibit.
(13) No exhibit.
(16) No exhibit.
(18) No exhibit.
(21) 21.01 Revised list of Subsidiaries of Meridian Insurance Group, Inc. (Incorporated by reference to Exhibit 21.01 to the registrant's Form 10-K for the fiscal year ended December 31, 1998; Commission File No. 0-11413.)
(22) No exhibit.
(23) 23.01 Consent of Independent Accountants dated March 28, 2000 *Page 158 (24) No exhibit.
(27) 27.01 Financial Data Schedule for Meridian Insurance Group, Inc., for the year ended December 31, 1999 *Page 159
27.02 Restated Financial Data Schedule for Meridian Insurance Group, Inc., for the year ended December 31, 1998 *Page 160
27.03 Restated Financial Data Schedule for Meridian Insurance Group, Inc., for the year ended December 31, 1997. *Page 161
(28) 28.01 Combined Statutory Schedule P Loss and Loss Adjustment Expense Reserves for the Consolidated Insurance Subsidiaries of Meridian Insurance Group, Inc., as of December 31, 1998 *Page 162
* Exhibits filed as a part of this document.
** These exhibits represent management contracts, compensatory plans or arrangements that are required to be filed by Item 601 of Regulation S-K.
MERIDIAN INSURANCE GROUP, INC. AND SUBSIDIARIES FORM 10-K INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE
Schedule I Summary of Investments Other than Investments in Related Parties 61
Schedule II Condensed Financial Information of Registrant 62
Schedule IV Reinsurance 64
Schedule VI Supplemental Information Concerning Property-Casualty Insurance Operations 65
(1) The amounts for the years ended December 31, 1999, 1998 and 1997 represents the Company's insurance subsidiaries share of third party reinsurance transactions pursuant to the pooling agreement.