SCHEDULE 14A
Rule 14a-101
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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Check the appropriate box:
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(as permitted by Rule 14a-6(e) (2))
< Definitive Proxy Statement
< Definitive Additional Materials
< Soliciting Material Pursuant to Rule 14a-11 (c) or Rule
14a-12
Meridian Insurance Group, Inc.
(Name of Registrant as Specified in its Charter)
____________________________________________________________
__________________________________
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Registrant)
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(i) (1) and 0-11.
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transaction applies:
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April 2, 1997
Dear Shareholder:
The directors and officers of Meridian Insurance Group,
Inc., join me in extending to you a cordial invitation to
attend the Annual Meeting of our shareholders. This meeting
will be held at 2:00 p.m., Wednesday, May 14, 1997, in our
home office at 2955 North Meridian Street, Indianapolis,
Indiana, in the Pennsylvania Room.
At our Annual Meeting, we will review our performance in
1996 and report on other developments at Meridian Insurance
Group, Inc. We intend to make our Annual Meeting as
informative and interesting as we can, and we hope you will
plan to attend.
The formal notice of this Annual Meeting and the Proxy
Statement appear on the following pages. After reading the
Proxy Statement, please mark, sign, and return the enclosed
Proxy Card to ensure that your votes on the business
matters of the meeting will be recorded.
We encourage you to attend this meeting. Whether or not
you attend, we urge you to return your proxy promptly in the
postpaid envelope provided. You may cancel the proxy
anytime before voting at the meeting, or you may vote in
person on all matters brought before the meeting. All of us
look forward to seeing you on May 14.
Sincerely,
Norma J. Oman
President and
Chief Executive
Officer
MERIDIAN INSURANCE GROUP, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be Held May 14, 1997
To the Shareholders of
MERIDIAN INSURANCE GROUP, INC.
The Annual Meeting of Shareholders of MERIDIAN INSURANCE
GROUP, INC., will be held
at 2:00 p.m., Eastern Standard Time, on May 14, 1997, in the
Company's home office at 2955 North Meridian
Street, Indianapolis, Indiana, in the Pennsylvania Room for
the following purposes:
1. To elect four persons as directors;
2. To consider and vote upon a proposal to amend the
Company's Restated Articles of Incorporation to
create a new class of preferred shares; and
3. To transact such other business as may properly come
before the meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on
March 14, 1997, as the record date for determining the
shareholders entitled to notice of and to vote at the Annual
Meeting.
Whether or not you plan to attend the meeting in person,
please complete and return the enclosed proxy card in the
envelope provided so that your shares can be voted at the
meeting in accordance with your instructions.
A copy of the Annual Report for fiscal year ended December
31, 1996, is being mailed to shareholders together with this
notice.
By Order of the Board of
Directors,
J. Mark McKinzie
Vice President, Secretary
and General Counsel
April 2, 1997
Indianapolis, Indiana
MERIDIAN INSURANCE GROUP, INC.
2955 North Meridian Street
P.O. Box 1980
Indianapolis, Indiana 46206
PROXY STATEMENT
This Proxy Statement and the form of proxy enclosed
herewith, which are first being mailed to shareholders on or
about April 2, 1997, are being furnished in connection with
the solicitation by the Board of Directors of Meridian
Insurance Group, Inc. ("MIGI" or the "Company") of proxies
to be voted at the Annual Meeting of Shareholders (the
"Annual Meeting") to be held at 2:00 p.m., Eastern Standard
Time, on May 14, 1997, in the Company's home office at 2955
North Meridian Street, Indianapolis, Indiana, in the
Pennsylvania Room, or at any adjournment thereof.
Shares represented by proxies in the accompanying form, if
properly signed and returned, will be voted in accordance
with the specifications made thereon by the shareholders.
The proxy card provides space for a shareholder to withhold
voting for any or all nominees for the Board of Directors or
to abstain from voting for any proposal if the shareholder
chooses to do so. Any proxy not specifying to the contrary
will be voted for the election of the nominees for director
named below and in favor of the proposal to amend the
Company's Restated Articles of Incorporation to create a new
class of preferred shares. A shareholder who signs and
returns a proxy in the accompanying form may revoke it at
any time before it is voted by giving written notice thereof
to the Secretary of MIGI.
Election of directors will be determined by the vote of
the holders of a plurality of the shares voting on such
election. Proposal 2 will be approved at the Annual Meeting
if a quorum is present and votes cast in favor of the
proposal exceed votes cast against the proposal. A proxy
may indicate that all or a portion of the shares represented
by such proxy are not being voted with respect to a specific
proposal. This could occur, for example, when a broker is
not permitted to vote shares held in street name on certain
proposals in the absence of instructions from the beneficial
owner. Shares that are not voted with respect to a specific
proposal will be considered as not present and entitled to
vote on such proposal, even though such shares will be
considered present for purposes of determining a quorum and
voting on other proposals. Abstentions on a specific
proposal will be considered as present, but not as voting in
favor of such proposal. As a result, neither broker non-
votes nor abstentions will affect the determination of
whether a nominee is elected as a director or whether
Proposal 2 is approved.
The cost of solicitation of proxies in the accompanying
form will be borne by MIGI, including expenses in connection
with preparing and mailing this Proxy Statement. Such
solicitation will be made by mail and may also be made on
behalf of MIGI by MIGI's officers and employees in person or
by telephone. MIGI, upon request therefor, will also
reimburse brokers or persons holding shares in their names
or in the names of nominees for their reasonable expenses in
sending proxies and proxy material to beneficial owners.
MIGI has only one class of shares outstanding, its Common
Shares. The holders of MIGI Common Shares of record at the
close of business on March 14, 1997, will be entitled to
notice of and to vote at the Annual Meeting, with each
holder being entitled to one vote for each share so held.
There are no cumulative voting rights.
As of the close of business on March 14, 1997, MIGI had
outstanding 6,779,375 Common Shares. A majority of the
outstanding shares, present in person or by proxy, will
constitute a quorum at the Annual Meeting. As of March 14,
1997, Meridian Mutual Insurance Company ("Meridian Mutual")
owned 3,150,000 Common Shares, or approximately 46.5 percent
of MIGI's outstanding Common Shares. Meridian Mutual has
advised MIGI that Meridian Mutual will vote its shares in
favor of the election of Messrs. Barnette, Broughton, Humke,
and Sams and in favor of the proposal to amend the Company's
Restated Articles of Incorporation.
1
BENEFICIAL OWNERSHIP OF COMMON SHARES
The following table sets forth, as of March 14, 1997, the
number and percentage of MIGI's outstanding Common Shares
beneficially owned by each director of MIGI, each executive
officer listed in the Summary Compensation Table, all
directors and executive officers of MIGI as a group, and
each person who is known by MIGI to own beneficially more
than five percent of its Common Shares. The persons named
in this table have sole voting and dispositive power with
respect to all Common Shares owned by them, unless otherwise
noted.
Shares Percent of
Name of Individual Beneficially Outstanding
or Identity of Group Owned Common Shares
Principal Shareholder:
Meridian Mutual Insurance Co. 3,150,000 46.5%
2955 N. Meridian Street
P.O. Box 1980
Indianapolis, Indiana 46206
Union Automobile Insurance Company 677,000(1) 9.9%
303 E. Washington Street
Bloomington, Illinois 61701
Franklin Resources, Inc. 400,000 (2) 5.9%
Charles B. Johnson
Rupert H. Johnson, Jr.
777 Mariners Island Blvd.
San Mateo, California 94404
Franklin Advisory Services, Inc.
One Parker Plaza, 16th Floor
Ft. Lee, New Jersey 07024
Directors and Officers:
Ramon L. Humke 7,000(3) *
Norma J. Oman 96,142(4) 1.4%
Harold C. McCarthy 27,475(3) *
Sarah W. Rowland 2,200(3) *
Joseph D. Barnette, Jr. 7,000(3)(5) *
Scott S. Broughton 21,000(6) *
David M. Kirr 7,000(3) *
John T. Hackett 4,500(3) *
Van P. Smith 3,000(3)(7) *
Thomas H. Sams 2,000(8)(9) *
Steven R. Hazelbaker 19,189(10) *
J. Mark McKinzie 24,174(11) *
Brent Hartman 30,407(12) *
Timothy J. Hanrahan 24,387(13) *
All directors and executive 301,966(14) 4.3%
officers as a group (15 persons)
*Beneficially owns less than one percent of MIGI's
outstanding Common Shares.
(1)
According to information contained in a Schedule 13G filing
with the Securities and Exchange Commission made by Union
Automobile Insurance Company ("Union") dated December 27,
1996, Union has sole voting and sole dispositive power with
respect to 677,000 Common Shares beneficially owned by Union
through its wholly-owned subsidiaries, American Union Life
Insurance Company and Prairie State Farmers Insurance
Company. Union is owned by American Union
Financial Corporation, whose common stock is owned 50
percent by Gregory M. Shepard and 50 percent by Tracy M.
Shepard.
(2)
Franklin Advisory Services, Inc., Franklin Resources, Inc.,
Charles B. Johnson, and Rupert H.
Johnson, Jr., filed a Schedule 13G with the Securities and
Exchange Commission in February 1997
with regard to 400,000 Common Shares of MIGI. The Schedule
13G states that those 400,000
Common Shares are beneficially owned by one or more open or
closed-end investment companies
or other managed accounts which are advised by direct and
indirect investment advisory
subsidiaries ("Adviser Subsidiaries") of Franklin Resources,
Inc. ("FRI"). Such advisory contracts
grant to such Adviser Subsidiaries all voting and investment
power over the securities owned by
such advisory clients. Therefore, such Adviser Subsidiaries
may be deemed to be beneficial owner
of the Common Shares covered by the Schedule 13G filing.
Charles B. Johnson and Rupert H.
Johnson, Jr. ("Principal Shareholders") each own in excess
of 10 percent of the outstanding common
stock of FRI and are the principal shareholders of FRI. FRI
and the Principal Shareholders may be
deemed to be the beneficial owner of securities held by
persons and entities advised by FRI or its subsidiaries.
FRI, the Principal Shareholders, and each of the Adviser
Subsidiaries disclaim any
economic interest or beneficial ownership in any of the
Common Shares covered by the Schedule 13G
filing.
(3)
Includes options to purchase 2,000 Common Shares granted
under MIGI's 1994 Outside Director
Stock Option Plan.
(4)
Includes 75,032 Common Shares which Ms. Oman has the option
to purchase under MIGI's
Incentive Stock Plan.
(5)
Includes 2,000 Common Shares held by Mr. Barnette's wife, as
to which stock he shares voting and
dispositive power.
(6) In
connection with the Company's acquisition of Citizens
Security Group Inc. ("CSGI"), of
which Mr. Broughton was President and Chief Operating
Officer, Mr. Broughton entered into
a Consulting Services Agreement with the Company which,
among other matters, provided for
the grant to Mr. Broughton of an option to purchase 20,000
Common Shares of the Company.
(7)
Includes 1,000 Common Shares held by the Van P. Smith
Revocable Trust, as to which shares
Mr. Smith has sole voting and dispositive power.
(8)
Includes 1,000 Common Shares owned by Waldemar Industries,
Inc., which is solely owned by
Mr. Sams.
(9)
Includes options to purchase 1,000 Common Shares granted
under MIGI's 1994 Outside Director
Stock Option Plan.
(10)
Includes 18,189 Common Shares which Mr. Hazelbaker has the
option to purchase under MIGI's
Incentive Stock Plan.
(11)
Includes 16,674 Common Shares which Mr. McKinzie has the
option to purchase under MIGI's
Incentive Stock Plan.
(12)
Includes 22,737 Common Shares which Mr. Hartman has the
option to purchase under MIGI's
Incentive Stock Plan.
(13)
Includes 14,173 Common Shares which Mr. Hanrahan has the
option to purchase under MIGI's
Incentive Stock Plan.
(14)
Includes 196,205 Common Shares subject to options to
purchase under MIGI's Incentive Stock Plan
or MIGI's 1994 Outside Director Stock Option Plan. Does not
include Common Shares directly
owned by Meridian Mutual of which such persons are officers
or directors.
ELECTION OF DIRECTORS
The Board of Directors consists of ten directors divided
into three classes of at least three directors each, with
the terms of one class of directors expiring at each Annual
Meeting of Shareholders. Directors serve for terms of three
years. It is the policy of MIGI that at least two members
of the Board of Directors will be persons not otherwise
affiliated with MIGI or Meridian Mutual.
The terms of Messrs. Joseph D. Barnette, Jr., Scott S.
Broughton, Ramon L. Humke, and Thomas H. Sams will expire at
the Annual Meeting, and Messrs. Barnette, Broughton, Humke,
and Sams have been nominated for an additional term of three
years. The other directors listed in the table below have
terms of office which expire in 1998 or 1999.
Unless otherwise instructed, proxy holders will vote the
proxies received by them for the election of the nominees
named below. If any nominee becomes unavailable for any
reason, it is intended that the proxies will be voted for a
substitute nominee designated by the Board of Directors.
The Board of Directors has no reason to believe the nominees
named will be unable to serve if elected. Any vacancy
occurring on the Board of Directors for any reason may be
filled by a majority of the directors then in office until
the expiration of the term of the class of directors in
which the vacancy exists.
Name Age Capacity
Nominees for election as directors
with terms expiring in 2000:
Joseph D. Barnette, Jr. 57 Director
Scott S. Broughton 42 Director
Ramon L. Humke 64 Director
Thomas H. Sams 55 Director
Directors continuing in office
with terms expiring in 1999:
Harold C. McCarthy 70 Director
Sarah W. Rowland 64 Director
Van P. Smith 68 Director
Directors continuing in office
with terms expiring in 1998:
Norma J. Oman 49 President, Chief Executive
Officer and Director
David M. Kirr 59 Director
John T. Hackett 64 Director
Mr. Barnette has served as a director of the Company since
1988. Mr. Barnette is the Chief Executive Officer and
Chairman of the Board of Bank One, Indianapolis, NA, Bank
One, Indiana, NA, and Banc One Indiana Corporation. Mr.
Barnette also serves as a director of IPALCO Enterprises,
Inc.
Mr. Broughton has served as a director of MIGI since July
31, 1996. Mr. Broughton was President and Chief Operating
Officer of CSGI and its insurance subsidiaries from 1992
through July 1996 when those companies were acquired by
MIGI. Since August 1996, he has been Chairman and Chief
Executive Officer of VIS'N, Inc., of Red Wing, Minnesota,
which provides claims and information technology services to
property and casualty insurance companies.
Mr. Humke has served as a director of MIGI since 1987 and
as Chairman since 1992. He is also Chairman of the Board of
Directors of Meridian Mutual. Mr. Humke has been the
President, Chief Operating Officer, and a director of
Indianapolis Power and Light Company since 1990. Mr. Humke
is also a director of IPALCO Enterprises, Inc., LDI
Management, Inc., and NBD Bank, N.A.
Mr. Sams has served as a director of the Company since
1994. Mr. Sams has been President, Chief Executive Officer,
and a director of Waldemar Industries, Inc., an investment
holding company in Indianapolis, Indiana, since 1967. He is
also a director of NBD Bank, N.A., IPALCO Enterprises, Inc.,
and Mid-America Capital Resource, Inc.
Ms. Oman was elected President and Chief Executive Officer
of MIGI in 1991, having served as an Executive Vice
President since 1990. She became President and Chief
Executive Officer of Meridian Mutual and Meridian
Security Insurance Company ("Security") in 1990 after
functioning as an executive officer of both companies since
1983. Ms. Oman has served as a director of MIGI since 1991
and is also a director of Meridian Mutual and Bank One,
Indianapolis, NA.
Mr. Kirr has served as a director of MIGI since 1992. Mr.
Kirr has been the President of Kirr, Marbach & Company, a
Columbus, Indiana, investment advisory firm, since 1975.
Mr. Hackett has served as a director of the Company since
1992 and is also a director of Meridian Mutual.
Since 1991, Mr. Hackett has been a Managing General Partner
of CID Equity Partners, L.P., a venture capital firm. Mr.
Hackett also serves as a director of Ball Corporation, Irwin
Financial Corporation, and Wabash National Corporation.
Mr. McCarthy has served as a director of MIGI since 1986
and is also a director of Meridian Mutual. Mr.
McCarthy is now retired but previously served as President
and Chief Executive Officer of the Company, Meridian
Mutual, and Security.
Ms. Rowland has served as a director of the Company since
1994 and is also a director of Meridian Mutual. Ms.
Rowland was elected Chief Executive Officer and Chairman of
the Board of Rowland Design, Inc., an
Indianapolis, Indiana, interior design and space planning
firm in 1993. From 1968 to 1993, Ms. Rowland served as
President and Chief Executive Officer of The Rowland
Associates, Inc. She also is a director of NBD Bank, N.A.,
and IPALCO Enterprises, Inc.
Mr. Smith has served as a director of MIGI since 1993 and
is also a director of Meridian Mutual. Since 1963, Mr.
Smith has been the Chairman of the Board of Ontario
Corporation, a holding company headquartered in Muncie,
Indiana, whose subsidiaries provide metallurgically based
services, computer software, and computer hardware component
manufacturing. Mr. Smith also serves as a director of Lilly
Industries, Inc., CINergy Corp., and P.S.I. Energy, Inc.
BOARD OF DIRECTORS' MEETINGS
During 1996, the MIGI Board of Directors held six
meetings. During 1996, each director attended at least 75
percent of the aggregate of (1) the total number of
meetings of the Board of Directors and (2) the total number
of meetings held by all committees on which he or she
served, with the exception of Mr. Smith. The Board
of Directors has an Audit Committee, a Finance and
Investment Committee, a Compensation Committee, a Pooling
Agreement Committee, and a Nominating Committee, each of
which normally holds joint meetings with similar committees
of the Meridian Mutual Board of Directors.
The Audit Committee held four meetings during 1996. It
presently consists of Messrs. Barnette, Hackett, and Humke.
The Audit Committee reviews and acts on reports to the Board
with respect to various auditing and accounting matters, the
scope of the audit procedures and the results thereof, the
internal accounting and control systems of MIGI, the nature
of services performed for MIGI by and the fees to be paid to
the independent auditor, the performance of MIGI's
independent and internal auditors and the accounting
practices of MIGI. The Audit Committee also recommends to
the Board of Directors the independent auditor to be
appointed by the Board. As discussed under "Description of
Pooling Agreement," the Audit Committee monitors the
parties' relationships under the pooling agreement.
The Compensation Committee, currently comprised of Messrs.
Smith, Humke, and Sams, met twice during 1996. The main
functions of this committee are to establish and administer
the executive compensation program and any incentive
compensation plans and also to review salary and employee
benefit programs. A committee composed of Messrs. Smith,
Humke, and Sams also administers the 1996 Employee Incentive
Stock Plan.
The Finance and Investment Committee presently consists of
Directors Barnette, Hackett, Humke, Kirr, and Oman. The
committee held four meetings during 1996. The main
functions of the Finance and Investment Committee are to
establish investment policy and guidelines and to review and
approve any investment transactions of MIGI.
The Nominating Committee presently is composed of
Directors Humke, McCarthy, and Oman and met once during
1996. The Nominating Committee recommends to the Board
candidates for nomination as directors. The committee will
consider nominees recommended by shareholders for election
to the Board of Directors. The names of such
nominees, accompanied by relevant biographical information,
should be submitted to the Secretary of MIGI.
The Pooling Agreement Committee presently consists of
Messrs. Barnette, Hackett, Humke, and Kirr but did not meet
during 1996. At the request of the Audit Committee, the
Pooling Agreement Committee, together with Meridian Mutual's
Pooling Agreement Committee, will review the relationships
among the parties under the pooling agreement and determine
whether the percentage participation of the parties
continues to bear an appropriate relationship.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
MIGI was formed by Meridian Mutual in 1986 and was a
wholly-owned subsidiary of Meridian Mutual until March 1987.
At that time MIGI sold 1,700,000 Common Shares in a public
offering, which reduced Meridian Mutual's ownership of
MIGI's outstanding Common Shares from 100 percent to
approximately 65 percent. On May 5, 1993, MIGI completed a
public offering of an additional 1,725,000 Common Shares,
thereby reducing Meridian Mutual's ownership of MIGI's
outstanding Common Shares to approximately 46.8 percent. On
July 31, 1996, the Company acquired CSGI and its property
and casualty insurance subsidiaries, Citizens Fund Insurance
Company ("Fund") and Insurance Company of Ohio ("ICO"), and
became affiliated with Citizens Security Mutual Insurance
Company ("CSM"). References in this Proxy Statement to
"Citizens Security Group" include Fund, ICO, and CSM.
MIGI's operations through its wholly-owned subsidiaries,
Security, Fund, and ICO, are interrelated with the
operations of CSM and Meridian Mutual, an Indiana mutual
property and casualty company. MIGI believes that its
various transactions with Meridian Mutual and CSM, which are
summarized herein, have been on terms no less favorable to
MIGI than the terms that could have been negotiated with an
independent third party.
MIGI obtains the majority of its insurance business
pursuant to a pooling agreement with Meridian Mutual and
CSM. In addition, through 1996, Meridian Mutual provided
the facilities, employees and most services required to
conduct the business of MIGI. During 1996, MIGI paid
$293,633 to Meridian Mutual for administrative and other
services provided to MIGI.
In connection with the Company's acquisition of CSGI, the
Company entered into a Consulting Services Agreement with
Mr. Scott Broughton. The Consulting Services Agreement is
effective for a five-year period ending July 31, 2001, and
provides that MIGI shall pay Mr. Broughton a consulting fee
of $175,000 per year in exchange for his consulting services
and advice regarding the Citizens Security Group, as
requested by the Company. In the event of Mr. Broughton's
disability or death prior to July 31, 2001, the Company will
continue to make the payments to Mr. Broughton or his
estate.
VIS'N, Inc., of which Mr. Broughton is Chairman and CEO,
has agreements with the Citizens Security Group to provide
claims handling and information technology services to those
companies. From the date of their acquisition by MIGI
through the end of 1996, the Citizens Security Group paid
VIS'N, Inc. $389,008 under the information technology
services agreement, which could be terminated immediately
for the reasons specified therein or will expire July 31,
1999. For the same period during 1996, the Citizens
Security Group paid VIS'N, Inc. $1,242,713 for claims
handling and administration. The claims administration
agreement is terminable by Citizens Security Group
immediately for the reasons specified in the agreement or
after July 31, 1999, at the election of Citizens Security
Group. The fees paid to VIS'N under these agreements are
lower that what Citizens Security Group has spent
historically for these services.
Description of Pooling Agreement
Since January 1, 1981, MIGI's wholly-owned subsidiary,
Security, has been a party to a reinsurance pooling
agreement with Meridian Mutual covering all of the property
and casualty insurance written by the parties. With the
acquisition of Citizens Security Group Inc., and affiliation
with CSM, the reinsurance pooling agreement was amended
effective August 1, 1996, to also include all the property
and casualty insurance written by CSM, Fund, and ICO.
Consequently, all premiums, losses, loss adjustment expenses
and the underwriting and administrative expenses of Meridian
Mutual, Security, CSM, Fund, and ICO are shared among the
parties in accordance with the participation percentages
established under the pooling agreement: 74 percent for the
Company's insurance subsidiaries, 22 percent for Meridian
Mutual, and four percent for CSM. The participation
percentages were fixed with reference to the relative
historical net written premiums of the companies.
Therefore, each company's relative share of underwriting
revenues (and losses and expenses) was not significantly
altered as an immediate result of the acquisition. The
previous participation percentages of 74% for Security and
26% for Meridian Mutual were established effective May 1,
1993, following the receipt by Security of $18 million in
proceeds from the second public offering of Common Shares by
the Company.
The Boards of Directors of the Company and Meridian Mutual
have delegated to their respective Audit Committees the
responsibility of monitoring the parties' relationships
under the pooling agreement pursuant to such procedures as
those committees may deem necessary and appropriate. The
Audit Committee of the Company is comprised of Messrs.
Barnette, Hackett, and Humke; the Audit Committee
of Meridian Mutual is comprised of Messrs. Hackett, Humke,
and James D. Price, a member of the Board of Directors of
Meridian Mutual who is not otherwise affiliated with the
Company. The Audit Committees have established guidelines
for reviewing the participation percentages at least
annually and for referring to the Pooling Agreement
Committees of MIGI and Meridian Mutual any decision to
change the participation percentages. MIGI's Pooling
Agreement Committee consists of Messrs. Barnette, Hackett,
Humke, and Kirr while Meridian Mutual's Pooling Agreement
Committee is composed of Mr. Hackett, Mr. Humke, and Ms.
Oman. Future events that could affect the participation
percentages among the parties include, among others, the
receipt by Meridian Mutual of dividends on the Common Shares
of the Company held by it, changes in the capital structure
or asset values of Meridian Mutual, Security, CSM, Fund, or
ICO, different effective rates of income taxation, or other
factors which disproportionately affect the surplus of the
companies.
The Company and Meridian Mutual have conflicting interests
with respect to the establishment of the respective ratios
of the parties under the pooling agreement, the allocation
of expenses not related to insurance underwriting, business
and investment philosophies, profit objectives, cash
management, dividend policy and possibly other matters. The
business and operations of the Company are integrated with
and dependent upon the business and operations of Meridian
Mutual. Management of Meridian Mutual determines which
expenses are associated with underwriting operations (and
therefore shared by the parties under the pooling
agreement), and also selects and values the assets and
liabilities transferred among Meridian Mutual, Security,
CSM, Fund, and ICO pursuant to the pooling agreement. 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 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 also owe fiduciary
duties to the policyholders of Meridian 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
the participants dependent on the results of the total
business covered by the pooling agreement. Because the
pooling agreement covers all of the property and casualty
business of the parties, all the companies will have
identical underwriting ratios from the pooled business as
long as the pooling agreement remains in effect.
The pooling agreement has no fixed term and provides that
it is to remain in force with respect to any party to the
agreement until canceled by the mutual consent of Meridian
Mutual and the party wishing to terminate the agreement.
The pooling agreement may be amended or terminated without
the necessity of a vote by the shareholders of the Company.
In the event of termination of the pooling agreement, the
terminating party 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 said terminating party, and each
party would receive from the other assets in an amount equal
to the amount of the policy liabilities received by it. If
the pooling agreement had been terminated at the end of
February 1997, approximately 12 percent 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 Security, ICO, and Fund.
The approval of the Indiana, Minnesota, and Ohio Insurance
Commissioners is 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 Security, Fund, ICO, CSM, and Meridian
Mutual and not for the protection of shareholders of the
Company. The Company intends that its insurance
subsidiaries will continue their participation in the
pooling agreement, absent some unforeseen change in
circumstances.
EXECUTIVE COMPENSATION
All of the Company's officers also serve as officers of
Meridian Mutual. The following table sets forth information
with respect to the aggregate compensation paid during each
of the last three years by the Company and Meridian Mutual
to the Company's Chief Executive Officer and each of the
four other most highly compensated executive officers of the
Company whose salary and bonus, for their services to both
the Company and Meridian Mutual, exceeded $100,000 during
1996. Annual compensation includes amounts deferred at the
officer's election.
Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards Payouts
Securities
Other Under- All
Name and Annual lying LTIP Other
Principal Salary Bonus Compen- Options/ Pay- Compen-
Position Yr $ ($)(1) sation SARS outs sation
($)(2) (#)(3) ($)(4) ($)(5)
Norma J. Oman 96 268,846 _0_ $ 97,566 _0_ _0_ $110,319
President/Chief 95 258,558 $260,000 135,656 _0_ _0_ 122,377
Executive Officer 94 244,904 247,500 73,095 75,032 71,250 2,700
Steven R. Hazelbaker 96 129,423 _0_ _0_ _0_ _0_ 3,883
Vice President 95 124,423 87,50 _0_ _0_ _0_ 1,499
Chief Financial 94 108,077 25,00 _0_ _0_ _0_ _0_
Officer and Treasurer
Brent Hartman 96 128,846 _0_ 1,900 _0_ _0_ 16,913
Senior V. President 95 118,846 96,000 2,813 _0_ _0_ 9,718
94 100,346 88,000 38,333 22,737 47,500 1,806
J. Mark McKinzie 96 119,423 _0_ 64,871 _0_ -0- 3,583
Vice President 95 114,423 80,500 8,292 _0_ _0_ 2,746
Secretary and 94 109,423 66,000 42,889 16,674 47,500 1,970
General Counsel
Timothy J. Hanrahan 96 103,538 _0_ 66,723 _0_ _0_ 14,124
Vice President 95 112,251 60,000 29,945 _0_ _0_ 4,141
94 93,156 56,100 38,828 14,173 47,500 1,676
(1) The bonuses reflect cash earned during the
fiscal year and paid during the next fiscal year.
(2) The 1996 Other Annual Compensation includes
a) the pay-out for termination of executive car
allowance program: Ms. Oman, $45,000; Mr. McKinzie,
$35,000; and Mr. Hanrahan, $35,000; and b) tax
reimbursement payments of $44,434, $1,900, $29,419, and
$28,478 for Ms. Oman, Mr. Hartman, Mr. McKinzie,
and Mr. Hanrahan, respectively. The 1995 Other Annual
Compensation reports a) tax
reimbursement payments of $14, 389, $1,638, $7,117, and
$8,993 for Ms. Oman, Mr. Hartman, Mr. McKinzie,
and Mr. Hanrahan, respectively, and b) the taxable portion
of exercised stock options, that being the
difference between the fair market value of the stock on the
date of exercise and the option price amounting
to $121,267, $1,175, $1,175, and $20,952 for Ms. Oman, Mr.
Hartman, Mr. McKinzie, and Mr.
Hanrahan, respectively. The 1994 Other Annual Compensation
reports tax reimbursement payments.
(3) Options to acquire Common Shares granted pursuant to
the Employee Incentive Stock Plan.
(4) In 1994 under a December 1992 restricted stock grant,
Ms. Oman and Messrs. McKinzie, Hartman, and
Hanrahan became vested in 6,000, 4,000, 4,000, and 4,000
Common Shares, respectively, valued at $11.875 per
share on the vesting date.
(5) For 1996, consists of Meridian Mutual's matching
contributions of $4,500, $3,883, $3,865, $3,583, and
$3,106 to the Section 401(k) deferred compensation accounts
of Ms. Oman, Mr. Hazelbaker, Mr. Hartman, Mr.
McKinzie, and Mr. Hanrahan, respectively; and accruals under
the Supplemental Retirement Income Plan of $105,819,
$13,048, and $11,018 for the accounts of Ms. Oman,
Mr. Hartman, and Mr. Hanrahan, respectively. For 1995,
consists of Meridian Mutual's matching contributions
of $3,600, $2,852, $1,499, $2,746, and $2,334 to the Section
401(k) deferred compensation accounts of Ms. Oman,
Mr. Hartman, Mr. Hazelbaker, Mr. McKinzie, and
Mr. Hanrahan, respectively; and accruals under the
Supplemental Retirement Income Plan of $118,777,
$6,866, and $1,807 for the accounts of Ms. Oman, Mr.
Hartman, and Mr. Hanrahan, respectively. For 1994,
consists of Meridian Mutual's matching contributions of
$2,700, $1,970, $1,806, and $1,676 to the Section
401(k) deferred compensation accounts of Ms. Oman, Mr.
McKinzie, Mr. Hartman, and Mr. Hanrahan, respectively.
The officers of MIGI serve at the discretion of the Board
of Directors which elects the officers for a term of one
year. There is no family relationship between any of the
officers of the Company.
Mr. McKinzie, age 43, has been an attorney for MIGI,
Meridian Mutual, and Security since 1989, serving as General
Counsel and Secretary of all three companies since 1992. He
was elected a Vice President of the Company, Meridian
Mutual, and Security in 1993.
Mr. Hartman, age 49, was elected a Senior Vice President
of MIGI, Mutual, and Security in 1995. He was
elected a Vice President of MIGI in 1994 and a Vice
President of Meridian Mutual and Security in 1993.
Mr. Hartman has been employed by Meridian since 1976.
Mr. Carl W. Buedel, age 50, was elected a Vice President
of MIGI in 1994 and a Vice President of Meridian Mutual and
Security in 1990. Currently serving as Director of the
Commercial Lines Division, Mr. Buedel has been a Meridian
employee since 1981.
Mr. Hanrahan, age 51, was elected a Vice President of MIGI
in 1994 and has been a Vice President of Meridian Mutual and
Security for more than the past five years. A Meridian
employee since 1981, Mr. Hanrahan is Director
of Strategic Business Development.
Mr. Hazelbaker, age 41, was elected Chief Financial
Officer and Treasurer of MIGI, Meridian Mutual, and
Security in 1994 and a Vice President of all three companies
in 1995. From 1987 until joining the Company in 1994, he
was a partner with Coopers & Lybrand L.L.P.
AGGREGATED OPTION/SAR EXERCISES IN 1996 AND
1996 YEAR-END OPTION/SAR VALUES
The following table sets forth information with respect to
the executive officers named in the
Summary Compensation Table for unexercised options held at
December 31, 1996. The named executive officers did not
exercise any options during 1996. The Company does not have
any outstanding stock appreciation rights.
Shares Value Number of Value of Unexercised
Acquired On Real- Securities In-the-Money
Exercise(#) ized($) Underlying Options/SARs
(1) Unexercised at Fiscal Year
Options/SARs at End ($)(2)
Fiscal Year End (#) Exercisable (E)/
Exercisable (E)/ Unexercisable (U)
Unexercisable (U)
Norma J.
Oman _0_ _0_ 50,021 E $ 143,810 E
25,011 U 71,907 U
Steven R.
Hazelbaker _0_ _0_ 12,126 E 34,862 E
6,063 U 17,431 U
J. Mark
McKinzie _0_ _0_ 11,116 E 31,959 E
5,558 U 15,979 U
Brent
Hartman _0_ _0_ 15,158 E 43,579 E
7,579 U 21,790 U
Timothy J.
Hanrahan _0_ _0_ 9,448 E 27,163 E
4,725 U 13,584 U
(1) Aggregate market value of the Common
Shares covered by the option less the aggregate price
paid by the executive.
(2) Amounts reflecting gains on outstanding
options are based on the December 31, 1996, closing stock
price which was $14.75.
Pension Plan
Through 1996, Meridian Mutual maintained for the benefit
of eligible employees a defined benefit pension plan,
designated as The Meridian Mutual Insurance Company Pension
Plan. (Effective January 1, 1997, the Company became the
employer of all Meridian employees and adopted all Meridian
Mutual employee benefit plans, including this pension plan.)
Under the plan, all Meridian employees completing more than
1,000 hours of employment in a 12-month period become
eligible to participate in the plan. The following table
sets forth the range of estimated annual benefits payable
upon retirement for graduated levels of average annual
earnings and years of service for employees under the
pension plan, based on retirement at age 65 in 1997. The
annual earnings can not exceed the $160,000 maximum
compensation limit for purposes of pension calculations.
PENSION PLAN TABLE
Years of Service
Remuneration 15 20 25 30 35
$120,000 $28,753 $38,337 $47,921 $57,506 $67,090
200,000 39,253 52,337 65,421 78,505 91,590
250,000 39,253 52,337 65,421 78,505 91,590
350,000 39,253 52,337 65,421 78,505 91,590
450,000 39,253 52,337 65,421 78,505 91,590
550,000 39,253 52,337 65,421 78,505 91,590
650,000 39,253 52,337 65,421 78,505 91,590
The plan provides a pension annuity beginning at age 65 of
1.125 percent of the employee's final monthly earnings (the
employee's average monthly base pay during his or her five
highest consecutive salary years out of the last ten) for
each year of credited service, plus .625 percent of the
employee's final monthly earnings in excess of the monthly
Social Security covered compensation, if any, for each year
of credited service (calendar years during which the
employee completes at least 1,000 hours of employment) to a
maximum of 35 years. There are also provisions for delayed
retirement benefits, early retirement benefits, disability
and death benefits, optional methods of benefit payment,
payments to an employee who leaves after a certain number of
years of service, and payments to the employee's surviving
spouse. Early retirement benefits are available after age
55. Benefits listed in the table are computed based on a
straight life annuity and are not subject to any deduction
for Social Security or other offset amounts. The individual
maximum annual benefit allowed under Section 415 of the
Internal Revenue Code is $125,000 for 1997. The
compensation covered by the plan consists of salary and cash
bonus, which for 1996 for the executives named in the
Summary Compensation Table amounted to: Ms. Oman, $617,055;
Mr. Hazelbaker, $216,923; Mr. Hartman, $224,846; Mr.
McKinzie, $263,967; Mr. Hanrahan, $224,674.
The estimated credited years of service for each of the
individuals named in the Summary Compensation Table as of
January 1997 are as follows:
Estimated Years of
Credited Service
Norma J. Oman 23
Steven R. Hazelbaker 3
J. Mark McKinzie 8
Brent Hartman 21
Timothy J. Hanrahan 16
Supplemental Retirement Income Plan
The Supplemental Retirement Income Plan (the "Plan") was
established for certain Meridian employees who participate
in the Meridian Mutual Insurance Company Pension Plan (now
the Meridian Insurance Group, Inc. Pension Plan), solely for
the purpose of providing 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 Supplemental Retirement Benefit payable to an
eligible Participant in the form of a straight life annuity
over the lifetime of the Participant only, commencing on his
or her Normal Retirement Date, shall be a monthly amount
equal to the difference between (a) the monthly amount of
the Qualified Plan Retirement Benefit to which the
Participant would have been entitled under the Qualified
Plan, if such Benefit were computed without giving effect to
the limitations on benefits imposed by Section 401(a)(17)
and Section 415 of the Code, and (b) the monthly amount of
the Qualified Plan Retirement Benefit actually payable to
the Participant under the Qualified Plan.
The following table sets forth the Supplemental Retirement
Benefit payable upon retirement for graduated levels of
average annual earnings and years of service for
Participants under the Plan, based on retirement at age 65
in 1997. The benefits in the table are not subject to any
deduction for Social Security or other offset amounts. The
1996 compensation covered by the Plan for the executives
named in the Summary Compensation Table is listed above
under the caption "Pension Plan," as are the estimated years
of credited service for the same individuals.
Supplemental Retirement Income Plan Table
Years of Service
Remuneration 15 20 25 30 35
$170,000 $ 2,625 $ 3,500 $ 4,375 $ 5,250 $ 6,125
200,000 10,500 14,000 17,500 21,000 24,500
250,000 23,625 31,500 39,375 47,250 55,125
350,000 49,875 66,500 83,125 99,750 116,375
450,000 76,125 101,500 126,875 152,250 177,625
550,000 102,375 136,500 170,625 204,750 238,875
650,000 128,625 171,500 214,375 257,250 300,125
Executive Bonus Compensation Plan
Meridian maintains a bonus compensation plan for key
executive employees. Plan participants are chosen each year
by the President, subject to approval of the Compensation
Committees of the Meridian Mutual and MIGI Boards of
Directors. The purpose of the plan is to establish
compensation commensurate with corporate performance
compared to goal. Criteria for determining bonus payments
generally are established prior to the commencement of each
year. The performance measure for 1996 was the combined pre-
tax net income of Meridian Mutual and Security, with
graduated amounts of cash bonuses payable if Meridian
Mutual's and Security's financial performance met the
threshold level of 80 percent of goal or exceeded it up to a
maximum of 120 percent of goal. The performance measure for
1997 is the combined pre-tax net income of Meridian Mutual,
Security, and Citizens Security Group (composed of CSM,
Fund, and ICO), with graduated amounts of cash bonuses
payable if these companies' combined financial performance
meets the threshold level of 80 percent of goal or exceeds
it up to a maximum of 120 percent of goal. Performance
relative to the predetermined goals is evaluated as soon as
practicable after the close of the year. Actual bonus
awards are determined on the basis of this evaluation and
paid in cash.
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Compensation Committee of MIGI's Board of Directors,
together with the Compensation Committee
of Meridian Mutual, is responsible for establishing and
administering the executive compensation program
for MIGI executives, all of whom were Meridian Mutual
employees during 1996. (Effective January 1, 1997, the
Company became the employer of all Meridian employees.)
Both of these Compensation Committees are composed entirely
of directors who are not employees of the Company.
Compensation Policy
The goal of MIGI's executive compensation policy is to
attract, motivate and retain competent personnel, while at
the same time ensuring an appropriate relationship exists
between executive pay and the performance of the Company.
In establishing the base salary portion of executive
compensation, the Committee gives significant consideration
to factors such as maintaining the Company's
competitiveness, establishing efficient and effective use of
Company resources, preserving the Company's good standing
with regulatory and rating agencies, overseeing development
of adequate loss reserves, managing daily operations, and
developing and achieving long-term and strategic objectives,
but the Committee has assigned no relative weights to these
factors. Through bonus compensation plans, the Committee
seeks to reward the attainment of targeted income goals.
The Compensation Committee's philosophy is to slow the
growth in base salary while putting a greater portion of
total compensation at risk through the bonus plan.
Additionally, the Committee seeks to provide equity-based
incentives to further motivate executives over the long term
to respond to MIGI's business challenges and opportunities
as owners rather than just as employees. It is the
intention of the Compensation Committee that executive
annual compensation shall continue to be tax deductible to
the Company.
In determining appropriate levels of executive
compensation, the Compensation Committee annually evaluates
salary surveys produced by independent compensation
consulting firms. For the positions of Chief Executive
Officer and Chief Financial Officer, the surveys provide
data to compare the Company with other insurance companies,
as well as across all industries, based upon a number of
parameters, including comparable asset levels, direct
written premiums, and net written premiums. For other
executive positions, salary surveys comparing the Company
with other insurance companies of similar asset and premium
levels are utilized. Some of the insurance companies
participating in the salary surveys are included in the
Total Return Industry Index for Nasdaq Insurance Stocks, as
shown in the Stock Performance Chart of this Proxy
Statement.
The cash bonus compensation plan is the vehicle by which
executives can earn additional compensation, depending on
the attainment by Meridian Mutual and Security of certain
levels of annual pre-tax income. See "Executive Bonus
Compensation Plan." The size of the cash bonus awarded as a
percentage of base salary is benchmarked annually against
the salary surveys and other information provided by
independent compensation consulting firms.
The Company's long-term incentive program consists of
grants made under the Employee Incentive Stock Plan. This
plan provides for the grant of incentive stock options, non-
qualified stock options, appreciation rights and restricted
stock awards to key Meridian employees. In early 1994 the
Compensation Committee adopted a long-term incentive plan
designed by an outside consultant. Under this plan each
member of the executive group received options which have a
ten-year term and became exercisable in one-third increments
in March of 1995, 1996, and 1997. The size of the option
grant was a percentage of the individual's base salary, with
separate percentages applicable to the Chief Executive
Officer, Senior Vice President, and all other executive
officers, again commensurate with the amount of
responsibility for their positions. In establishing the
size of the grants, the Committee considered outstanding
options granted in 1991 and observed market practices for
similar positions in stock insurance companies, some of
which are included in the Total Return Industry Index for
Nasdaq Insurance Stocks.
Bases for CEO Compensation
The Company's total revenues in 1996 were a record high of
$186.6 million, a 16.7 percent increase over 1995's $159.8
million. The 1996 total includes five months of premiums
and investment income from the Citizens Security Group
companies which were acquired on July 31, 1996. Aside from
the increase in premium volume attributable to the Citizens
Security Group, premiums earned by the Meridian operation
increased approximately 6.1 percent, or $8.8 million, over
the 1995 total. The Company's net income for 1996 was $5.8
million, or $0.86 per common share, as compared to a record-
high $11.6 million, or $1.72 per common share, in 1995. The
1996 results were negatively impacted by a series of severe
storms that produced an unusually large volume of property
damage claims throughout the Company's operating territory.
The after-tax impact of catastrophe and other weather-
related non-catastrophic claims is estimated to be
approximately $1.17 per share in 1996, compared to
approximately $0.42 per share in 1995. The 1996 catastrophe
losses represent the largest catastrophe loss total in the
Company's history.
The Chief Executive Officer's base salary was increased
during 1996 to reward individual accomplishments during 1995
in, among other things, further streamlining operations,
improving service to customers, expanding markets and
achieving other long-range business and operating
objectives, without assigning relative weights to these
factors. The new base salary was below the average for
chief executive officers of insurance companies with direct
and net written premiums over $200 million and below the
average for chief executive officers of similarly-sized
companies across all industries.
As described above, bonus compensation is tied to the
attainment of corporate performance goals. Because the 1996
combined pre-tax net income of Meridian Mutual and Security
did not meet the level established under the executive bonus
compensation plan, Ms. Oman did not receive a bonus under
that plan for 1996 results. Ms. Oman's below-average base
salary, combined with the absence of a cash bonus, produced
a total compensation package lower than the average paid to
chief executive officers of the comparison companies. This
illustrates the Compensation Committee's philosophy to place
a greater portion of total compensation at risk through the
bonus plan.
Compensation of Other Executive Officers
With respect to compensation of other executives of the
Company, the Compensation Committee utilizes salary surveys
by independent consultants to establish base salaries.
During 1996, the executives' base salaries were adjusted
relative to the assignment of internal responsibility, to
their individual contributions to the Company's performance,
and to the results of the latest salary surveys, without
applying relative weights to these factors. These salaries
are below the competitive range of those persons holding
comparably responsible positions at similarly-sized
insurance companies, both regionally and nationally;
however, the bonus opportunities for the Company's
executives are greater than those offered by the
competition. The Compensation Committee's philosophy is to
put the bonus award at risk and to compensate for that risk
with a slightly-higher-than-average total compensation
package when the bonus is earned.
Because the 1996 combined pre-tax net income of Meridian
Mutual and Security was below the level established under
the executive bonus compensation plan, the Compensation
Committee did not award cash bonuses under that plan for
1996 results. In the absence of a bonus, the total
compensation paid to the executives listed in the Summary
Compensation Table was lower than the comparison companies
surveyed, demonstrating the Compensation Committee's
commitment to the philosophy of putting a significant
portion of executive compensation at risk.
MIGI Compensation Committee Meridian Mutual
Compensation Committee
Van P. Smith, Ramon L. Humke, & Van P. Smith, Ramon L. Huke &
Thomas H. Sams Martha D. Lamkin
Stock Performance Chart
The following chart compares the yearly percentage change
in the cumulative total stockholder return on the Company's
Common Shares during the five fiscal years ended December
31, 1996, with the cumulative total return of the Center for
Research in Securities Prices (CRSP) Total Return Index for
The Nasdaq Stock Market (U.S. Companies) and the CRSP Total
Return Industry Index for Nasdaq Insurance Stocks. The
comparison assumes $100 was invested on December 31, 1991,
in the Company's Common Shares and in each of the foregoing
indices and assumes reinvestment of dividends. The CRSP
Total Return Industry Index for Nasdaq Insurance Stocks
includes all insurance companies quoted on the Nasdaq stock
market within the SIC codes 631 and 633. Upon written
request to MIGI's Secretary, the Company will undertake to
make accessible the identity of those companies listed on
the Nasdaq insurance stock index.
In the Proxy Statement mailed to Company Shareholders, this
space will contain a graph depicting the following
information.
NASD Total NASD
Year MIGI Market (US) Insurance Stocks
1991 100.00% 100.00% 100.00%
1992 146.48 116.38 135.34
1993 157.64 133.60 142.15
1994 150.33 130.59 136.26
1995 222.28 184.67 193.56
1996 225.19 227.16 220.57
Compensation Committee Interlocks and Insider
Participation
The Company's Compensation Committee consists of Van P.
Smith, Thomas H. Sams, and Ramon L. Humke, Chairman of the
MIGI Board of Directors. The bylaws of the Company provide
that the Chairman of the Board is an officer of the Company,
but Mr. Humke is not an employee of the Company.
Change in Control Agreement
The Board of Directors of Meridian Mutual approved the
execution of a Change in Control Agreement ("Agreement")
between Meridian Mutual and Ms. Oman and Mr. McKinzie on
March 18, 1992, and between Meridian Mutual and Messrs.
Hartman and Hazelbaker on June 29, 1994. Under the
Agreement, a "change in control" shall have occurred if
there is a merger or consolidation to be reported to the
Indiana Department of Insurance or if "(a) any person or
entity, other than a trustee or fiduciary holding securities
under an employee benefit plan of the Company, is or becomes
the beneficial owner, directly or indirectly, of the Company
representing fifty percent (50%) or more of the combined
voting power of the Company's then outstanding voting
securities (in the event of a demutualization); (b) there is
a merger or consolidation of the Company in which the
Company does not survive as an independent Company; (c) the
business or businesses of the Company for which your
services are principally performed are disposed of by the
Company pursuant to a partial or complete liquidation of the
Company, a sale of assets of the Company or otherwise; or
(d) there is a voluntary election to the majority of the
Board of Directors of persons selected by a person or entity
in exchange for any material consideration to the Company by
said person or entity." For purposes of this paragraph
only, the word "Company" refers to Meridian Mutual.
Upon termination of employment of any of these executive
officers within two years after a "change in control," the
affected officer shall continue to receive his or her base
salary, at the rate of compensation existing prior to the
"change in control," plus certain other benefits provided
for full-time employees, for two years from the date of
separation of employment, unless dismissed for "cause."
Securing other gainful employment will reduce or eliminate
payments under this Agreement during the second year after
separation of employment. The Meridian Mutual Board of
Directors may not waive or modify any provisions or
conditions of the Agreement without the written consent of
the other party to the Agreement, although Meridian Mutual
may elect not to extend the Agreement, by notice to the
executive officer given prior to December 31 of the
preceding year.
Compensation of Directors
Directors of MIGI who are also salaried employees of the
Company receive no fees for services as directors. MIGI
Board members who are not salaried Company employees and who
do not serve on the Board of any affiliates are paid an
annual retainer of $10,000. Nonemployee MIGI Board members
serving on the Board of an affiliate receive a $1,000 annual
retainer from MIGI. All directors, other than salaried
employees, receive per diem meeting fees of $600 for each
Board or Committee meeting attended, not to exceed a total
of $850 per day for attendance at two or more Board or
Committee meetings on a single day. The Meridian Mutual
Chairman of the Board receives an additional $10,000 per
year while the chairmen of one or more affiliated Boards or
one or more Board committees receive an additional $1,600
per year for services in such capacities.
Meridian Mutual has a defined benefit pension plan,
designated as The Meridian Mutual Insurance Company
Nonemployee Directors' Pension Plan, for the benefit of
eligible nonemployee directors of Meridian Mutual or any of
its subsidiaries. Nonemployee directors become eligible to
participate in the plan following the completion of five
years of "credited service," defined as all calendar years
in which the director has attended, as a nonemployee
director, at least 50 percent of the regularly scheduled
quarterly meetings for that calendar year. The plan
provides a monthly retirement allowance equal to 1.75
percent of the final earnings for each year of credited
service. Final earnings mean the five consecutive years
with the highest average annual total fees paid during the
period of directorship. The monthly retirement allowance
commences on the director's retirement date and continues
each month thereafter during his or her lifetime. There are
also provisions for delayed retirement benefits, early
retirement benefits, limited death benefits, and an optional
method of benefit payment. Early retirement benefits are
available after age 55.
MIGI's shareholders approved the 1994 Outside Director
Stock Option Plan (the "Director Plan"). An "Outside
Director" is a director of either the Company or Meridian
Mutual who is not on the date of grant an employee of the
Company or Meridian Mutual or any of their subsidiaries.
Each Outside Director was granted an Option to purchase
1,000 Common Shares in May of 1994, 1995, and 1996, and each
Outside Director automatically will be granted an Option to
purchase 1,000 Common Shares on the date of each annual
meeting of shareholders in the years 1997 through 2003,
unless the Director Plan is terminated earlier. 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
of the Option. No consideration will be paid by the grantee
to the Company for the granting of an Option. Each Option
will be exercisable commencing one year after the date of
grant, and each Option will expire no later than ten years
after the date of grant.
PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION OF THE
COMPANY
The Board of Directors has unanimously approved amending
Article IV (the "Amendment") of the Company's Restated
Articles of Incorporation to create a new class of Preferred
Shares. The following summary of the Amendment is qualified
in its entirety to the text of the Amendment, which is
attached as Exhibit A to this Proxy Statement and
incorporated herein by reference. If the proposal is
approved, the Amendment will become effective at the time
the Company files Articles of Amendment with the Indiana
Secretary of State.
The authorized capital stock of the Company presently
consists of 20,000,000 Common Shares. As of March 14, 1997,
there were 6,779,375 Common Shares issued and outstanding.
An additional 750,000 Common Shares of the Company are
reserved for issuance under the Company's 1996 Employee
Incentive Stock Plan, and 150,000 Common Shares are reserved
for issuance under the 1994 Outside Director Stock Option
Plan.
The Amendment would increase the number of authorized
shares from 20,000,000 to 20,500,000, 20,000,000 being
Common Shares and 500,000 being Preferred Shares. The
Amendment provides that the Preferred Shares could 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, conversion rights, voting rights, redemption rights
and terms, liquidation preferences, sinking funds and any
other rights, preferences, privileges, and restrictions
applicable to each such series of Preferred Shares.
The Board of Directors recommends approving the Amendment
in order to increase the Company's financial flexibility.
The Board believes that the complexity of modern business
financing and acquisition transactions requires greater
flexibility in the Company's capital structure than exists
now. The
Preferred Shares would be available for issuance from time
to time as determined by the Board of Directors for any
proper corporate purpose. Such purposes might include,
without limitation, issuance in public or private sales for
cash as a means of obtaining additional capital for use in
the Company's business and operations, and issuance as part
or all of the consideration required to be paid by the
Company for acquisitions of other businesses or properties.
No further action or authorization by the Company's
shareholders would be necessary prior to the issuance of the
Preferred Shares unless required by applicable law or
regulatory agencies or by the rules of any stock exchange on
which the Company's securities may then be listed. Common
shareholders would not have preemptive rights to subscribe
for Preferred Shares. The Company does not have any
immediate plans, agreements, understandings or arrangements
which would result in the issuance of any Preferred Shares.
It is not possible to state the precise effect of the
Amendment upon the rights of the Common Shareholders until
the Board of Directors determines the respective
preferences, limitations, and relative rights of the holders
of any future series of Preferred Shares. However, such
effects might include (i) restrictions on dividends; (ii)
dilution of the voting power to the extent that the
Preferred Shares were given voting rights; (iii) dilution of
the equity interest and voting power if the Preferred Shares
were convertible into Common Shares; and (iv) restrictions
upon any distribution of assets to the holders of the
Company's Common Shares upon liquidation or dissolution
until the satisfaction of any liquidation preference granted
to holders of the Preferred Shares.
The issuance of Preferred Shares could, under certain
circumstances, make it more difficult for a third party to
gain control of the Company, discourage bids for the
Company's Common Shares at a premium or otherwise adversely
affect the market price of Common Shares. Although the
Board of Directors has no present intention of doing so, it
could issue Preferred Shares with voting or conversion
privileges intended to make acquisition of the Company more
difficult or more costly. Such an issuance could be used to
discourage or limit the shareholders' participation in
certain types of transactions that might be proposed (such
as a tender offer), whether or not such transactions were
favored by the majority of the shareholders. In opposing
such transaction, the Preferred Shares could be privately
placed with purchasers favorable to the Board of Directors.
In addition, the Board of Directors could authorize holders
of a series of Preferred Shares to vote either separately as
a class or with the holders of the Company's Common Shares
on any merger, sale, or exchange of assets by the Company or
any other extraordinary corporate transaction. The issuance
of new shares also could be used to dilute the share
ownership of a person or entity seeking to obtain control of
the Company, should the Board of Directors consider the
action of such entity or person not to be in the best
interest of the shareholders and the Company. Such issuance
of Preferred Shares could also have the effect of diluting
the earnings per share, book value per share, and voting
power of Company Common Shares held by shareholders.
As stated above, the Company does not have any immediate
plans, agreements, understandings or arrangements which
would result in the issuance of any Preferred Shares.
Likewise, the Board is unaware of any effort to obtain
control of the Company by means of a merger, tender offer,
solicitation in opposition to management, or otherwise.
Therefore, the terms of any Preferred Shares subject to this
proposal cannot be stated or estimated with respect to any
or all of the securities authorized.
The Board of Directors recommends that the shareholders
vote FOR approval of the Amendment to the Company's Articles
of Incorporation.
APPOINTMENT OF AUDITOR
The firm of Coopers & Lybrand L.L.P. served as the
independent auditor for MIGI for the fiscal year ended
December 31, 1996. The Board of Directors has not selected
an independent auditor for the current fiscal year ending
December 31, 1997. It is anticipated that the Audit
Committee, at its meeting scheduled for April 24, 1997, will
recommend to the Board that Coopers & Lybrand L.L.P. be
selected as the independent auditor for 1997.
Representatives of Coopers & Lybrand L.L.P. will be present
at the Annual Meeting to respond to appropriate questions
and to make a statement if they so desire.
SHAREHOLDER PROPOSALS
Shareholder proposals intended to be considered at the
1998 Annual Meeting of Shareholders must be in writing and
received by MIGI's Secretary at MIGI's principal executive
offices at 2955 N. Meridian Street, P.O. Box 1980,
Indianapolis, IN 46206, not later than December 3, 1997.
Such proposals may be included in next year's proxy
statement if they comply with certain rules and regulations
promulgated by the Securities and Exchange Commission and
represent a proper subject for shareholder action under
Indiana law.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934
requires MIGI's directors and executive officers, and
persons who own more than ten percent of a registered class
of MIGI's equity securities, to file with the Securities and
Exchange Commission and provide to MIGI initial reports of
ownership and reports of changes in ownership of Common
Shares and other equity securities of MIGI. To MIGI's
knowledge, based solely on a review of the copies of such
reports furnished to MIGI and written representations that
no other reports were required, during the fiscal year ended
December 31, 1996, its officers, directors and greater than
ten-percent beneficial owners have complied with all Section
16(a) filing requirements applicable to them.
OTHER MATTERS
Management is not aware of any matters to come before the
meeting which will require the vote of shareholders other
than those matters indicated in the Notice of Meeting and
this Proxy Statement. However, if any other matters calling
for shareholder action should properly come before the
meeting or any adjournment thereof, those persons named as
proxies in the enclosed Proxy will vote thereon according to
their best judgment.
INFORMATION INCORPORATED BY REFERENCE
The following information has been incorporated by
reference into this Proxy Statement: the audited financial
statements of the Company and Management's Discussion and
Analysis of Financial Condition and Results of Operations
contained in the Company's Annual Report to Shareholders,
which was mailed concurrently with this Proxy Statement.
You are encouraged to review the financial information
contained in the Annual Report before voting on the proposal
to amend the Company's Restated Articles of Incorporation.
By Order of the Board of
Directors,
Norma J. Oman
President and
Chief Executive Officer
April 2, 1997
EXHIBIT A
MERIDIAN INSURANCE GROUP, INC.
Current Wording of Article IV, Sections 4.01 through 4.04,
of the Company's Restated Articles of Incorporation
Section 4.01. Number. The total number of shares which the
Corporation shall have authority to issue is twenty million
(20,000,000) shares.
Section 4.02. Classes. There shall be one class of shares
of the Corporation, which shall be designated as "Common
Shares."
Section 4.03. Preferences, Limitations and Relative Rights
of Common Shares. All Common Shares shall have the same
rights, preferences, limitations and restrictions.
Section 4.04. Voting Rights of Shares. Each holder of
Common Shares shall be entitled to one (1) vote for each
share owned of record on the books of the Corporation on
each matter submitted to a vote of the holders of Common
Shares.
Proposed Wording of Article IV, Sections 4.01 through 4.04,
of the Company's Restated Articles of Incorporation
Section 4.01. Number. The total number of shares which the
Corporation has authority to issue shall be twenty
million five hundred thousand (20,500,000) shares.
Section 4.02. Classes. There shall be two (2) classes of
shares of the Corporation, consisting of twenty million
(20,000,000) shares of common stock (the "Common Shares"),
and five hundred thousand (500,000) shares of preferred
stock (the "Preferred Shares").
Section 4.03. Voting Rights, Preferences, Limitations and
Other Rights of Common Shares. Each holder of Common Shares
shall be entitled one (1) vote for each share owned of
record on the books of the Corporation on each matter
submitted to a vote of the holders of Common Shares. All
Common Shares shall have the same rights, preferences,
limitations and other rights.
Section 4.04. Voting Rights, Preferences, Limitations and
Other Relative Rights of Preferred Shares. (a) The
Preferred Shares may be issued from time to time in one or
more series. The Board of Directors shall have the
authority to determine and state the designation and the
relative preferences, limitations, voting rights, if any,
and other rights of each series of Preferred Shares by
specifying such matters in an amendment to these Articles of
Incorporation, which amendment may be adopted and become
effective without further shareholder approval as provided
by the Act. All Preferred Shares of the same series shall
have the same relative preferences, limitations, voting
rights, if any, and other rights.
(b) Without limiting the generality of the foregoing, the
Board of Directors shall have the authority to determine the
following for each series of Preferred Shares:
(i) The designation of such series, the number of shares
which shall initially constitute such series and the stated
value thereof;
(ii) Whether the shares of such series shall have voting
rights, in addition to any voting rights provided by law,
and, if so, the terms of such voting rights, which may be
special, conditional or limited or no voting rights except
as required by law;
(iii) The rate or rates and the time or times at which
dividends and other distributions on the shares of such
series shall be paid, the relationship or priority of such
dividends or other distribution to those payable on Common
Shares or to other series of Preferred Shares, and whether
or not any such dividends shall be cumulative;
(iv) The amount payable on the shares of such series in the
event of the voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation,
and the relative priorities, if any, to be accorded such
payments in liquidation;
(v) The terms and conditions upon which either the
Corporation may exercise a right to redeem shares of such
series or upon which the holder of such shares may exercise
a right to require redemption of such shareholder's
Preferred Shares, including any premiums or penalties
applicable to exercise of such rights;
(vi) Whether or not a sinking fund shall be created for the
redemption of the shares of such series, and the terms and
conditions of any such fund;
(vii) Rights, if any, to convert any shares of such
series, either into Common Shares or into other series of
Preferred Shares and the prices, premiums or penalties,
ratios and other terms applicable to any such conversion;
(viii) Restrictions on acquisition, rights of first
refusal or other limitations on transfer as may be
applicable to such series, including any series intended to
be offered to a special class or group; and
(ix) Any other relative rights, preferences, limitations,
qualifications or restrictions on such series of Preferred
Shares, including rights and remedies in the event of
default in connection with dividends, other distributions or
redemptions.
PROXY CARD
Meridian Insurance Group, Inc.
This proxy is solicited on behalf of the Board of Directors
for the Annual Meeting of Shareholders to be held on May 14,
1997
The undersigned appoints Harold C. McCarthy, Sarah W.
Rowland, and Van P. Smith, or any of them, proxies for the
undersigned, each with full power of substitution, to attend
the Annual Meeting of Shareholders of Meridian Insurance
Group, Inc., to be held on May 14, 1997, at 2:00 p.m., EST,
and at any adjournments or postponements of the Annual
Meeting, and to vote as specified in this Proxy all the
Common Shares of the Company which the undersigned would be
entitled to vote if personally present. This Proxy when
properly executed will be voted in accordance with your
indicated directions. If no direction is made, this Proxy
will be voted FOR the election of Directors and FOR proposal
2. In their discretion the proxies are authorized to vote
upon such other business as may properly come before the
meeting.
The Board of Directors recommends a vote FOR the election
of Directors and FOR proposal 2.
YOUR VOTE IS IMPORTANT! PLEASE MARK, SIGN AND DATE THIS
PROXY ON THE REVERSE SIDE AND RETURN IT PROMPTLY IN THE
ACCOMPANYING ENVELOPE.
Meridian Insurance Group, Inc.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK
INK ONLY.
1. Election of Directors- 2. Approval of amendment to Articles of
J. Barnette, S. Broughton, Incorporation to create class of
R. Humke, T. Sams Preferred Shares
For Withheld For All For Against Abstain
All All Except
_________________________________
(Except nominee(s) written above.)
The undersigned acknowledges receipt of the Notice of Annual
Meeting of Shareholders and of the Proxy Statement.
Dated: , 1997
Signature(s)
Please sign exactly as your name appears. Joint owners
should each sign personally. When applicable, indicate your
official position or representation capacity.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview:
The high level of catastrophe and other weather-related losses in 1996
is principally to blame for breaking the Company's several year trend
of improved operating results. Extensive property damage claims
arising primarily from hailstorms, tornadoes and high winds resulted
in the worst year for catastrophic claims in our Company's history.
Gross catastrophe losses were approximately six times those of an
average year. In spite of the significant increase in the magnitude
of such claims, our claims service quality remained high.
The catastrophe activity of 1996 should not overshadow certain
positive strides made during the year. A major development was the
acquisition of Citizens Security Group Inc. and its subsidiaries,
Citizens Fund Insruance Company and Insurance Company of Ohio on July
31, 1996. This acquisition fit well into the Company's plan for
geographic expansion into additional Midwestern and North Central
states. The acquisition expanded the Company's operating territory
into four additional states: Minnesota, Missouri, North Dakota, and
South Dakota; and increased its revenue base in Iowa, Ohio and
Wisconsin. The Company also gained control of Citizens Security
Mutual Insurance Company as a result of the acquisition. Direct
written premiums for the Citizens Security Group were nearly $55
million for the full year. Underwriting results for Citizens Security
were incorporated into the Company's pooling arrangement effective
August 1, 1996. The Company continues to look for other acquisitions
that meet its criteria.
The acquisition of Citizens Security Group, combined with growth in
the existing book of Meridian business, caused an increase in 1996
annualized direct written premiums of approximately 34 percent.
Future synergies are expected as the Company begins to take further
advantage of Citizens Security's strength in working with certain
business associations and as Meridian provides a farm product and
certain commercial lines products to Citizens Security. The Company
strives for a balanced book of property and casualty business
including personal, commercial and farm lines.
During 1996, the Company continued the favorable trend of decreasing
its operating expenses relative to premiums. Achieving continued
reductions in per-unit costs and improvement in productivity remain
key strategic goals. Meridian has developed an automated personal
lines underwriting system that will enable policies meeting certain
criteria to be issued without manual review, thus reducing costs
without increasing risk. Meridian began testing this system in late
1996. By mid-1997, we expect to have most new Meridian homeowners and
automobile business processed by automated underwriting. Additional
efficiencies are expected to result from progress with commercial
lines client-server processing and agency interface.
Results of Operations:
1996 Compared to 1995
In 1996, the Company reported net income of $5.8 million, or $0.86 per
common share . This compares to 1995 net income of $11.6 million, or
$1.72 per share. The 1996 results were negatively impacted by a
series of severe storms that produced an unusually large volume of
property damage claims throughout the Company's operating territory.
The after-tax impact of catastrophe and other weather-related non-
catastrophic claims is estimated to be approximately $1.17 per share
in 1996, compared to approximately $0.42 per share in 1995. The 1996
catastrophe losses represent the largest catastrophe loss total in the
Company's history. The Company's statutory combined ratio for 1996
was 108.0 percent versus 100.2 percent for the comparable 1995 period.
The Company's total revenues in 1996 were a record high of $186.6
million, a 16.7 percent increase over 1995's $159.8 million. The 1996
total includes five months of premiums and investment income from the
Citizens Security Group companies which were acquired on July 31,
1996. The effect of the Citizens Security Group acquisition on total
revenues was approximately $15.8 million, including approximately
$14.7 million of net earned premiums and $1.1 million of net
investment income. Incremental net income from the Citizens Security
Group operation for the five month period ended December 31, 1996 was
approximately $0.25 million, or $0.04 per share, net of goodwill
amortization and interest expense.
The Company's largest source of revenue, net earned premiums,
increased 16.3 percent in 1996 to $167.3 million compared to $143.9
million for the 1995 period. Aside from the 10.2 percent increase in
premium volume that resulted from the Citizens Security Group
acquisition, premiums earned by the Meridian operation increased
approximately 6.1 percent, or $8.8 million, over the 1995 total. The
Meridian growth was attributed to nearly all lines of business, with
personal lines production increasing 6.8 percent, commercial lines 5.6
percent and farmowners achieving growth of 2.8 percent in earned
premium volume. Commercial and personal automobile and homeowners
were the primary lines of business contributing to the increased
premium volume. Depressing the commercial lines growth was a
reduction of approximately $1.2 million in assumed earned premiums
from the National Workers' Compensation Pool. Total policy count for
the Meridian products, on a pooled basis, increased by approximately
12,650 policies, or 5.3 percent over the 1995 in-force total.
Net investment income of $14.9 million in 1996 increased 2.4 percent
over 1995's total of $14.6 million. The pre-tax net investment yield
declined slightly to 5.9 percent from 6.1 percent in 1995. The
reduced portfolio yield resulted primarily from a greater proportion
of assets being invested in equity securities and tax-exempt bonds.
The average yield of the fixed maturity portfolio is 6.8 percent. The
investment income generated from the acquired Citizens Security Group
investment portfolio was partially offset by a reduction in the
Meridian portfolio to help fund the purchase. In 1996, the Company
realized net gains on the disposition of invested assets of $3.8
million, or $0.37 per share net of tax, compared to $1.5 million, or
$0.15 per share after tax, for the 1995 period. Nearly all of the
realized gains recognized in 1996 were generated from the sale of
equity securities which are expected to have little impact on future
investment yields.
Heavily impacted by catastrophe losses in 1996, the Company's incurred
losses and loss adjustment expenses of $130.1 million were 31.3
percent higher than the $99.1 million reported for the comparable 1995
period. Approximately $12.2 million of the current year losses
resulted from catastrophe and other weather-related non-catastrophic
claims. This compares to approximately $4.4 million for the 1995
period. The acquisition of the Citizens Security Group business
contributed approximately $9.1 million to the current year loss and
loss adjustment expense total, accounting for over 9 percent of the
increase. Also contributing to the high volume of losses was an
increase in claim severity for Meridian's private passenger automobile
and commercial multiple-peril lines of business. Partially offsetting
these losses were improved results in the Company's workers'
compensation and personal and commercial automobile liability lines of
business. The Company's statutory loss ratio for 1996 deteriorated to
68.9 percent from 1995's 60.2 percent. The statutory loss adjustment
expense ratio of 9.1 percent remained virtually unchanged from 1995
ratio.
The Company's general operating and amortization expenses of $50.2
million for the year ended December 31, 1996 were 11.6 percent higher
than the $45.0 million reported for the same 1995 period. Relative to
earned premium volume, the Company's expense ratio for 1996 improved
to 30.0 percent from 31.3 percent for the prior year. Factors leading
to the reduced expense ratio include certain economies of scale and
decreases in employee incentive compensation, agent profit-sharing and
assessments from certain boards and bureaus. As a result of the
Citizens Security Group acquisition, the Company incurred
approximately $252,000 of additional expense in 1996 for goodwill
amortization and incurred interest expense of approximately $308,000
on the related bank loan.
For the most recent year, the Company recorded income tax expense of
$150,000. The low effective tax rate results primarily from the
amount of tax-exempt investment income in relation to pre-tax income.
1995 Compared to 1994
In 1995, the Company reported record highs in net income of $11.6
million and earnings per common share of $1.72. This compared to 1994
net income of $9.1 million and $1.35 per share. The improved results
were primarily attributed to increased revenues and a reduction in all
three components of the combined underwriting and expense ratio.
Total revenues increased 7.0 percent to $159.8 million from $149.3
million while the 1995 statutory combined ratio improved to 100.2
percent from 101.8 percent for 1994.
Net premiums earned for 1995 reflected 6.6 percent growth to $143.9
million from 1994's $135.0 million. This growth was attributed to
nearly all major lines of business. Meridian's personal lines
production for 1995 experienced growth of 8.7 percent. This was
primarily attributed to the homeowners and private passenger
automobile lines of business, which reflected earned premium growth of
9.7 percent and 7.6 percent, respectively. Farmowners achieved
earnings growth of 10.2 percent while Meridian's commercial lines of
business grew 3.1 percent over the 1994 level. The increase in
commercial lines was attributed primarily to 8.9 percent growth in the
commercial automobile line and 6.7 percent increase in voluntary
workers' compensation business. Depressing the commercial lines
growth was a reduction of nearly $600,000 in assumed earned premiums
from the National Workers' Compensation Pool ("NWCP"). This partially
resulted from actions taken by Meridian to control the type of
workers' compensation business it would accept in states where the
NWCP was unprofitable. The commercial lines growth was also hampered
by soft market conditions, primarily in the state of Michigan where
premium volume declined from the 1994 level. Meridian has addressed
its products, rates and personnel in the state of Michigan and will
continue to monitor these actions for improved results. Total policy
count, on a pooled basis, for 1995 increased by approximately 7,000
policies, or 3.0 percent, over the 1994 total.
Net investment income for 1995 increased 4.1 percent to $14.6 million
from $14.0 million in 1994 resulting primarily from a larger invested
asset base. A reduction in the Company's pre-tax net investment yield
to 6.1 percent in 1995 from 6.4 percent in 1994 primarily was a result
of a greater proportion of common stocks and tax-exempt bonds in the
investment portfolio and increased investment expenses. During 1995
the Company realized gains on the disposition of invested assets of
$1.5 million compared to $0.3 million of realized gains for the prior
year. Such gains were realized primarily on the sale of common stocks
and have an insignificant effect on future investment yields.
The Company's incurred losses and loss adjustment expenses of $99.1
million for 1995 increased 5.5 percent over 1994's $94.0 million,
primarily as a result of the increased volume of business. The
statutory loss and loss adjustment expense ratio improved to 69.2
percent in comparison to 69.8 percent for the previous year. The
Company reflected improved results in its commercial multiple-peril,
homeowner and workers' compensation lines of business. The loss ratio
for commercial multiple-peril improved significantly from 1994's ratio
of 55.5 percent to a 37.6 percent ratio in 1995. Homeowners also
recorded a reduction from 72.9 percent in 1994 to 71.0 percent in
1995. A reduction in liability claims for the current period was the
primary reason for the improvement in these lines of business. The
Company also experienced improved underwriting results in both the
voluntary and involuntary workers' compensation lines. Partially
offsetting these improvements was deterioration in the personal and
commercial automobile and farmowners lines of business. The loss
ratio for personal and commercial auto increased to 67.4 percent from
61.4 percent in 1994 primarily as a result of increased severity. The
deterioration in the farmowners loss ratio to 60.7 percent for 1995
from 56.5 percent in 1994 was caused by a rise in liability claims.
General operating expenses incurred during 1995 of $14.2 million
decreased 2.6 percent from $14.5 million reported for 1994. Lower
state income taxes, reduced assessments from the NWCP and certain
economies of scale were the primary contributors to the expense
reduction. The reduced expenses, combined with a slight reduction in
the Company's average commission rate, produced a statutory expense
ratio of 31.0 percent for the current period compared to 32.0 percent
for the prior year. Amortization expenses of $30.8 million for the
1995 period increased 5.2 percent from $29.3 million, corresponding
with the Company's growth in premium volume.
The Company's effective tax rate in 1995 increased to 26.1 percent
compared to the prior year's 20.9 percent. This increase was
attributed to an overall growth in taxable income causing the Company
to be subject to less relative impact of tax-exempt income and the
dividends received deduction.
Liquidity and Capital Resources:
The Company's primary need for liquidity is to pay shareholder
dividends, and 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. (See Note 10 of the Notes to Consolidated Financial
Statements.) 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 4.6 years. Over
the next year, a relatively small portion of the Company's bond
portfolio is scheduled to mature.
Approximately 85 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 23 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 has
no exposure to high risk derivatives in its portfolio.
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 which are
carried at market value. The Company at December 31, 1996 recorded
unrealized gains in the bond portfolio of approximately $2.7 million,
net of deferred income taxes. At year-end 1995, the Company recorded
unrealized gains on the bond portfolio of approximately $4.1 million,
net of deferred income taxes. Net unrealized appreciation of
investments added $1.05 to the Company's $18.02 book value per share
at December 31, 1996, similar to unrealized appreciation adding $1.01
per share to the $17.45 book value at December 31, 1995.
On July 31, 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 and its wholly-
owned property and casualty insurance subsidiaries, Citizens Fund
Insurance Company and Insurance Company of Ohio, for approximately
$30.3 million in cash, including capitalized acquisition costs, and
became affiliated with Citizens Security 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 $15.1 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. In 1996, 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 may partially offset potentially
higher claims and expenses.
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
for the Years Ended December 31, 1996, 1995 and 1994
December 31,
1996 1995 1994
Premiums earned $167,304,414 $143,865,821 $135,001,881
Net investment income 14,908,285 14,563,820 13,995,984
Net realized investment gains 3,793,778 1,538,281 285,701
Other income (expense) 562,198 (146,345) 54,623
Total revenues 186,568,675 159,821,577 149,338,189
Losses and loss adjustment expenses 130,101,192 99,123,849 93,970,529
General operating expenses 13,766,868 14,155,631 14,527,021
Interest Expense 307,887 --- ---
Amortization expenses 36,442,635 30,820,058 29,304,576
Total expenses 180,618,582 144,099,538 137,802,126
Income before taxes 5,950,093 15,722,039 11,536,063
Income taxes (benefit)
Current 702,141 3,554,000 2,574,000
Deferred (552,000) 551,000 (159,000)
Total income taxes 150,141 4,105,000 2,415,000
Net income $ 5,799,952 $ 11,617,039 $ 9,121,063
Weighted average shares outstanding 6,779,284 6,770,081 6,739,712
Per share data:
Net income $ 0.86 $ 1.72 $ 1.35
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, 1996 and 1995
December 31,
1996 1995
ASSETS
Investments:
Fixed maturities--available for sale, at market
value (cost $234,356,000 and $213,816,000) $238,343,040 $220,036,772
Equity securities, at market
(cost $33,779,000 and $26,961,000) 40,629,633 31,119,875
Short-term investments, at cost, which
approximates market 1,326,634 2,483,338
Other invested assets 1,390,176 1,053,905
Total investments 281,689,483 254,693,890
Cash 3,128,154 935,098
Premium receivable, net of allowance for bad debts 4,674,984 2,642,425
Accrued investment income 3,241,125 2,942,194
Deferred policy acquisition costs 16,690,275 13,354,600
Goodwill 16,848,829 2,152,339
Reinsurance receivables 45,850,830 32,469,285
Prepaid reinsurance premiums 5,020,605 2,617,138
Due from Meridian Mutual Insurance Company 8,973,672 9,358,803
Other assets 11,679,744 1,422,444
Total assets $397,797,701 $322,588,216
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses $161,309,239 $123,577,240
Unearned premiums 84,065,751 64,558,695
Other post-employment benefits 1,417,814 1,298,378
Bank loan payable 11,875,000 ---
Reinsurance payables 8,664,358 6,863,626
Other liabilities 8,291,558 8,047,610
Total liabilities 275,623,720 204,345,549
Shareholders' equity:
Common shares, no par value,
Authorized-20,000,000, Issued-6,805,955 and
6,803,185, Outstanding-6,779,375 and
6,776,805 at December 31, 1996 and 1995,
respectively 44,077,846 44,076,685
Contributed capital 15,058,327 15,058,327
Unrealized appreciation of investments, net
of deferred income taxes 7,141,846 6,842,245
Retained earnings 55,895,962 52,265,410
Total shareholders' equity 122,173,981 118,242,667
Total liabilities and shareholders' equity $397,797,701 $322,588,216
The accompanying notes are an integral part of the consolidated
financial statements.
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
for the Years Ended December 31, 1996, 1995 and 1994
Unrealized
Appreciation
Common Contributed (Depreciation) Retained
Shares Capital of Investments Earnings
Balance at January 1,
1994 $ 43,855,319 $ 15,058,327 $ 491,027 $ 35,041,862
Cumulative effect of
accounting change for
certain investments,
net of deferred
income taxes --- --- 4,417,201 ---
Net income --- --- --- 9,121,063
Unrealized depreciation
of investment securities,
net of deferred income
taxes --- --- (12,189,952) ---
Dividends ($0.24 per
share) --- --- --- (1,617,811)
Vested restricted
common shares 35,584 --- --- ---
Exercise of stock
options for 6,925
common shares 39,819 --- --- ---
Balance at December 31,
1994 43,930,722 15,058,327 (7,281,724) 42,545,114
Net income --- --- --- 11,617,039
Unrealized appreciation
of investment securities,
net of deferred income
taxes --- --- 14,123,969 ---
Dividends ($0.28 per
share) --- --- --- (1,896,743)
Repurchase and retirement
of 6,479 common shares (77,033) --- --- ---
Exercise of stock
options for 40,521
common shares 222,996 --- --- ---
Balance at December 31,
1995 44,076,685 15,058,327 6,842,245 52,265,410
Net income --- --- --- 5,799,952
Unrealized appreciation
of investment securities,
net of deferred income
taxes --- --- 299,601 ---
Dividends ($0.32 per
share) --- --- --- (2,169,400)
Exercise of stock
options for 4,042
common shares 23,241 --- --- ---
Repurchase and retirement
of 1,472 common shares (22,080) --- --- ---
Balance at December 31,
1996 $ 44,077,846 $ 15,058,327 $ 7,141,846 $ 55,895,962
The accompanying notes are an integral part of the consolidated
financial statements.
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the Years Ended December 31, 1996, 1995 and 1994
December 31,
1996 1995 1994
Cash flows from operating activities:
Net income $ 5,799,952 $ 11,617,039 $ 9,121,063
Reconciliation of net income to net
cash provided by operating
activities:
Realized investment gains (3,793,778) (1,538,281) (285,701)
Amortization 36,442,635 31,257,989 30,202,060
Deferred policy acquisition costs (39,321,446) (32,068,780) (29,181,486)
Increase in unearned premiums 2,034,199 4,895,409 982,535
Increase (decrease) in loss and
loss adjustment expense 11,054,147 (177,410) 3,990,725
Decrease (increase) in amount due
from Meridian Mutual 385,131 (2,548,320) (1,337,003)
Decrease (increase) in reinsurance
receivables (7,352,448) 234,172 (2,303,137)
Decrease (increase) in prepaid
reinsurance premiums (349,547) 2,654 205,510
Decrease (increase) in other assets 2,064,651 66,763 (638,901)
Increase in other post-employment
benefits 119,436 197,223 102,060
Increase (decrease) in reinsurance
payables 1,800,732 972,951 (248,655)
Increase (decrease) in other
liabilities (1,866,664) 116,619 831,814
Other, net (61,732) 755,919 (247,430)
Net cash provided by operating
activities 6,955,268 13,783,947 11,193,454
Cash flows from investing activities:
Purchase of fixed maturities (47,518,736) (39,897,557) (37,157,445)
Proceeds from sale of fixed
maturities 38,131,207 17,111,272 18,528,560
Proceeds from calls, prepayments and
maturity of fixed maturities 24,843,739 14,404,070 16,403,055
Purchase of equity securities (19,794,358) (15,735,622) (16,369,601)
Proceeds from sale of equity
securities 18,633,656 9,556,180 10,267,616
Net (increase) decrease in short-
term investments 3,300,088 1,641,491 (2,075,005)
Decrease (increase) in other
invested assets (336,271) 31,366 (347,414)
Acquisition of subsidiary (30,262,442) --- ---
Increase (decrease) in securities
payable (1,533,830) 1,117,355 430,569
Net cash used in investing
activities (14,536,947) (11,771,445) (10,319,665)
Cash flows from financing activities:
Repurchase and retirement of common
stock (22,080) (77,033) ---
Exercise of stock options 23,241 222,996 39,819
Proceeds from bank loan 12,000,000 --- ---
Repayment of bank loan (125,000) --- ---
Dividends paid (2,101,426) (1,826,933) (1,617,696)
Net cash provided by (used in)
financing activities 9,774,735 (1,680,970) (1,577,877)
Increase (decrease) in cash 2,193,056 331,532 (704,088)
Cash at beginning of year 935,098 603,566 1,307,654
Cash at end of year $ 3,128,154 $ 935,098 $ 603,566
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 46.5 percent of the outstanding common shares of
the Company. The Company is a regional holding company
principally engaged in the business of underwriting property and
casualty insurance through its wholly-owned subsidiaries, Meridian
Security Insurance Company ("Meridian Security"), Citizens Fund
Insurance Company ("Citizens Fund") and Insurance Company of Ohio
("ICO"). Both Citizens Fund and ICO, along with their holding
company, Citizens Security Group Inc. ("CSGI"), were acquired by
the Company on July 31, 1996. (See Note 3.)
Effective August 1, 1996, Citizens Fund , ICO and Citizens
Security Mutual Insurance Company ("Citizens Security Mutual"),
the former majority shareholder of CSGI, became participants in a
reinsurance pooling arrangement with Meridian Mutual and Meridian
Security, in which the underwriting income and expenses of each
entity are shared. The participation percentages of the Company's
insurance subsidiaries total 74 percent. Prior to August 1,
Meridian Security and Meridian Mutual were the only participants
in the reinsurance pooling arrangement, of which Meridian Security
assumed 74 percent of the combined underwriting income and
expenses of the two companies. (See Note 5.)
Meridian Mutual writes a broad line of property and casualty
insurance, including personal and commercial automobile;
homeowners, farmowners and commercial multi-peril; and workers'
compensation. Business is written through approximately 1,075
independent insurance agencies in the states of Illinois,
Indiana, Iowa, Kentucky, Michigan, Ohio, Pennsylvania, Tennessee,
and Wisconsin. Meridian Security is licensed in all states in
which Meridian Mutual is licensed and writes personal and farm
lines in Indiana, Iowa, Kentucky, Ohio, Tennessee, and Wisconsin
through approximately 400 independent insurance agencies, many of
which are cross-licensed with Meridian Mutual. Citizens Fund and
Citizens Security Mutual offer a variety of personal and
commercial insurance products in the states of Iowa, Minnesota,
Missouri, North Dakota, Ohio, South Dakota, and Wisconsin through
a network of 425 independent insurance agencies. ICO writes
personal and commercial products in the state of Ohio through
approximately 92 independent agencies.
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 intercompany 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 a limited partnership recorded
on the equity method and a mortgage loan stated at the aggregate
unpaid balance.
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
directly in shareholders' equity, net of applicable deferred
income taxes.
The Company regularly evaluates its investments based on current
economic conditions, past credit loss experience and other
circumstances of the Company. 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, and 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. In connection with the acquisition of Citizens Fund and
ICO, the Company allocated a portion of its cost to an asset
representing the estimated equity in the unearned premium reserve
of the acquired book of business. The asset is being amortized as
the related premium revenue 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.
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.
Net Income per Share:
Net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the
year.
2.Investments:
Investment income is summarized as follows:
1996 1995 1994
Interest on fixed maturities:
Tax-exempt securities $ 3,875,822 $ 3,578,156 $ 3,050,947
Taxable securities 8,686,144 8,727,315 8,251,261
Dividends on redeemable preferred
stock 2,489,104 2,402,974 2,673,605
Dividends on equity securities 773,238 560,390 339,559
Interest on short-term investments 243,837 247,272 162,067
Other investment income 93,861 84,873 146,698
Total investment income 16,162,006 15,600,980 14,624,137
Investment expenses 1,253,721 1,037,160 628,153
Net investment income $ 14,908,285 $ 14,563,820 $ 13,995,984
Realized and unrealized gains on investments are summarized as follows:
1996 1995 1994
Realized gains (losses):
Fixed maturities $ (456,602) $ 87,370 $ (118,358)
Equity securities 4,559,380 1,458,589 404,059
Other invested assets --- (7,678) ---
Total realized investment gains 4,102,778 1,538,281 285,701
Investment expenses 309,000 --- ---
Net realized investment gains $ 3,793,778 $ 1,538,281 $ 285,701
Net change in unrealized appreciation (depreciation):
Fixed maturities, available for
sale $ (2,150,596) $ 16,373,654 $(16,819,514)
Equity securities 2,692,197 5,104,315 (1,696,054)
Cumulative effect of accounting
change for certain investments --- --- 6,743,818
Deferred income tax from
cumulative effect of accounting
change for certain investments --- --- (2,326,617)
Deferred income tax benefit
(expense) (242,000) (7,354,000) 6,325,616
Net change in unrealized
appreciation (depreciation) $ 299,601 $ 14,123,969 $ (7,772,751)
Net change in unrealized
depreciation of fixed maturities,
held to maturity $ --- $ (367,533) $ (713,522)
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Under this
statement the Company classified all investment securities into
three categories: held-to-maturity securities carried at
amortized cost; available-for-sale securities carried at fair
value, with the unrealized gains and losses recorded, net of
deferred tax, to shareholders' equity; and trading securities
carried at fair value, with the unrealized gains and losses
reflected in the consolidated statement of income. Initially, the
Company classified approximately 98 percent of its fixed
maturities as "available for sale" and 2 percent as "held to
maturity", with no fixed maturities being assigned to the
"trading" category. The cumulative effect of adopting SFAS No.
115 resulted in a $4,417,201 increase, net of deferred taxes, to
the Company's shareholders' equity. On November 30, 1995, the
Company, as permitted in Q61 of the Financial Accounting Standards
Board ("FASB") Special Report on SFAS No. 115, transferred all holdings
classified as "held to maturity" to the "available for sale"
category. This transaction did not have a material effect on the
Company's financial statements.
The amortized cost and estimated market values of investments in
fixed maturity securities at December 31, 1996 and 1995, are as
follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
December 31, 1996
Available for sale:
Government and agency
domestic bonds $ 11,441,004 $ 317,830 $ 50,708 $ 11,708,126
Municipal bonds 73,550,278 1,954,019 302,450 75,201,847
Corporate bonds 61,810,087 1,141,551 152,224 62,799,414
Mortgage-backed
securities 54,090,640 714,993 155,481 54,650,152
Sinking fund preferred
stocks 33,464,362 1,080,656 561,517 33,983,501
Total fixed maturity
securities $234,356,371 $5,209,049 $1,222,380 $238,343,040
December 31, 1995
Available for sale:
Government and agency
domestic bonds $ 8,127,012 $ 600,241 $ 3,790 $ 8,723,463
Municipal bonds 72,356,941 2,649,867 371,703 74,635,105
Corporate bonds 40,484,745 1,633,386 5,580 42,112,551
Mortgage-backed
securities 57,037,770 1,425,970 158,915 58,304,825
Sinking fund preferred
stocks 35,809,142 803,950 352,264 36,260,828
Total fixed maturity
securities $213,815,610 $7,113,414 $ 892,252 $220,036,772
The amortized cost and estimated market value of fixed maturity
securities available for sale at December 31, 1996, 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 $ 2,220,935 $ 2,231,573
Due after one year through five years 42,239,968 42,740,774
Due after five years through ten years 48,664,611 49,914,445
Due after ten years through fifteen years 32,881,299 33,865,382
Due after fifteen years through twenty years 5,693,977 5,655,926
Due after twenty years 48,564,941 49,284,788
Subtotal 180,265,731 183,692,888
Mortgage-backed securities 54,090,640 54,650,152
Total fixed maturity securities $234,356,371 $238,343,040
Proceeds from sales of investments in fixed maturity securities
during 1996, 1995 and 1994, respectively, were $38,131,207,
$17,111,272 and $18,528,560. During 1996, 1995 and 1994,
respectively, gross gains of $197,320, $445,260 and $444,784 and
gross losses of $653,922, $357,890 and $563,142 were realized on
those sales.
Unrealized appreciation resulting from changes in the valuation of
equity securities at December 31, 1996 totaled approximately
$6,851,000 representing $7,614,000 of gains on certain securities
and $763,000 of losses on other securities.
3.Acquisition:
On July 31, 1996, the Company acquired Citizens Security Group
Inc. and its property and casualty insurance subsidiaries,
Citizens Fund Insurance Company and Insurance Company of Ohio, for
a cash purchase price of approximately $30,262,000, including
capitalized acquisition costs. Approximately 60 percent of the
purchase price was generated from the sale of a portion of the
Company's investment portfolio and the remainder was financed
through bank debt. (See Note 4). 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 resulted in goodwill of approximately $15,140,000, which is
being amortized over 25 years on the straight-line basis.
The consolidated financial statements include the results of
operations of the acquired entities from the date of acquisition.
Unaudited pro-forma condensed consolidated results of operations
presented below assume the acquisition and financing of the
transaction had occurred at the beginning of each period
presented:
1996 1995
Premiums earned $ 185,808,000 $174,501,000
Total revenues $ 206,201,000 $192,416,000
Net income $ 4,138,000 $ 11,310,000
Net income per share $ 0.61 $ 1.67
These unaudited pro-forma results are not necessarily indicative
of the results of operations that would have occurred had the
acquisition taken place at the beginning of each period, or of
future operations of the combined companies.
Supplemental cash flow information for the acquisition is as
follows:
1996
Fair value of assets acquired $ 77,440,427
Cash paid 30,262,442
Liabilities assumed $ 47,177,985
4.Bank Loan Payable:
The 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 and will mature on August 1, 2003. The
Company is required to make principal payments in accordance with
the following schedule:
1997 $ 625,000
1998 1,125,000
1999 1,625,000
2000 2,000,000
2001 2,125,000
Thereafter 4,375,000
Total payments outstanding $11,875,000
The principal balance of the bank loan as of December 31, 1996
approximates its market value. Interest paid on the loan during
1996 amounted to $187,887. 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).
5.Related Party Transactions:
Meridian Security, Citizens Fund, ICO, Meridian Mutual and
Citizens Security Mutual are parties to a reinsurance pooling
agreement ("pooling agreement") under which all premiums, losses
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. Other
expenses are allocated on the basis of specific identification or
estimated costs. Amounts either due to or due from Meridian
Mutual and Citizens Security 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.
Beginning August 1, 1996, the reinsurance pool participation
percentages of the Company's insurance subsidiaries total 74
percent. Prior to August 1, Meridian Security and Meridian Mutual
were the only participants in the aforementioned pooling
arrangement, of which Meridian Security assumed 74 percent of the
combined underwriting income and expenses of the two companies.
For the year ended December 31, 1996, approximately 88 percent of
the Company's total premium volume was derived from its
participation in the pooling agreement. In 1995 and 1994,
approximately 90 percent and 84 percent, respectively, was derived
from the pooling arrangement.
Prior to January 1, 1997, Meridian Security, Citizens Fund and ICO
had no employees and were dependent on the business and operations
of Meridian Mutual and Citizens Security Mutual. Meridian Mutual
had a defined pension plan covering substantially all employees
and a non-tax qualified retirement plan for certain key employees.
Related pension costs allocated to the Company were immaterial to
the results of operations for the periods ended December 31, 1996,
1995 and 1994. The Company also participated in the multi-
employer plan for other post-retirement benefits offered by
Meridian Mutual to employees, including medical benefits for
early retirees (eligible upon attainment of age 55 and five years
of service up to age 65) and group term life insurance that phases
out over a five year period from the retirement date. Related
costs allocated to the Company were approximately $53,000, $98,000
and $102,000 for 1996, 1995 and 1994, respectively.
Effective January 1, 1997, the Company became the employer of all
employees that were formerly employed by Meridian Mutual and
Citizens Security Mutual. This transfer allows for more freedom
in compensation planning, such as more flexibility in the use of
the Company's common stock as compensation, and to improve
internal efficiencies by combining employee benefit plans. As a
result of this transfer, all employee benefit plans that were
previously under Meridian Mutual and Citizens Security Mutual were
merged into Company plans.
The Company's non-insurance subsidiaries are provided office space
and various services by Meridian Mutual and Meridian Security.
Expenses are allocated to such subsidiaries on the basis of
specifically identified or estimated costs.
6.Liability for Losses and Loss Adjustment Expenses:
Activity in the liability for losses and loss adjustment expenses
is summarized as follows:
1996 1995 1994
Balance at beginning of period $123,577,240 $123,754,650 $119,763,925
Less reinsurance recoverables 31,204,462 31,815,440 30,133,606
Net balance at beginning of period 92,372,778 91,939,210 89,630,319
Net reserves acquired (See Note 3) 20,685,369 --- ---
Incurred related to:
Current year 137,817,367 104,584,909 99,444,243
Prior years (7,716,175) (5,461,060) (5,473,714)
Total incurred 130,101,192 99,123,849 93,970,529
Paid related to:
Current year 93,199,000 61,791,602 55,216,000
Prior years 30,470,408 36,898,679 36,445,638
Total paid 123,669,408 98,690,281 91,661,638
Net balance at end of period 119,489,931 92,372,778 91,939,210
Plus reinsurance recoverables 41,819,308 31,204,462 31,815,440
Balance at end of period $161,309,239 $123,577,240 $123,754,650
7.Reinsurance:
The companies participating in the reinsurance pooling agreement
(see Note 5) limit the maximum net loss which 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. For the years ended December 31, 1996, 1995 and 1994,
the amounts of unearned premiums that related to thrid party
reinsurers were approximately $5,021,000, $2,617,000 and
$2,620,000, respectively.
Three types of reinsurance were purchased jointly by Meridian
Mutual and Meridian Security. Treaty reinsurance automatically
covers certain types of policies up to contracted limits.
Facultative reinsurance is purchased on an individual risk basis
and sets specific limits of coverage. Such coverage was purchased
to cover liability and property exposures in excess of $200,000,
up to the limits set forth in the individual treaty. Catastrophe
reinsurance provides 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 the $65,000,000 contract limit ($3,250,000
and $50,000,000, respectively, for years prior to 1996).
Two other catastrophe reinsurance treaties provide coverage for
aggregate losses caused by multiple catastrophic events. The
combined retention under the first of these aggregate excess
contracts was based on 2.5 percent of subject earned premiums,
plus five percent of losses up to the $8,000,000 contract limits,
with a $175,000 deductible per catastrophic event. Retention
under the second aggregate excess contact, effective May 10, 1996,
was $500,000 per quarter, plus five percent of losses up to
$4,500,000 per quarter, with a total contract limit of $12,000,000
and a $250,000 per event deductible.
The reinsurance agreements maintained by Citizens Security Mutual,
Citizens Fund and ICO in 1996 were of two general types,
consisting of excess of loss reinsurance and pro rata reinsurance.
Effective January 1, 1996, the companies entered into a pro rata
reinsurance contract covering 40 percent of each homeowner
policy. Under other reinsurance contracts, the companies retained the
first $300,000 of loss on any one risk on property coverage. The
companies have pro rata reinsurance contracts for property risks
covering losses between $300,000 and $4,600,000 per risk. For
property risks in excess of $4,600,000, the companies negotiate
reinsurance arrangements for each risk on an individual basis.
The casualty reinsurance written by the companies is reinsured for
losses in excess of $250,000 up to a maximum of $5,000,000 per
occurrence. Effective January 1, 1996, the companies entered into
an aggregate excess of loss contract which reinsures losses and
allocated loss adjustment expenses in excess of 62 percent in any
accident year. The reinsurer's obligation is limited to 5 percent
of accident year subject net earned premium. Losses and allocated
adjustment expenses in excess of 67 percent are retained.
Approximately 89 percent of the Company's ceded reserves for
losses and loss adjustment expenses are with Michigan Catastrophic
Claims Association, Employers Reinsurance Corporation and Swiss
Reinsurance America Corporation. Reinsurance recoveries
recognized for the years ended December 31, 1996, 1995 and 1994
were $24,136,000, $1,547,000 and $2,758,000, respectively. The
effect of reinsurance on premiums written and earned for the years
ended December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994
Premiums written:
Direct $181,680,624 $152,596,128 $144,084,372
Assumed 3,730,504 7,269,782 6,132,096
Ceded (16,216,479) (11,102,025) (14,026,543)
Net $169,194,649 $148,763,885 $136,189,925
Premiums earned:
Direct $176,718,644 $149,748,331 $141,275,894
Assumed 6,425,316 5,222,170 5,744,277
Ceded (15,839,546) (11,104,680) (12,018,290)
Net $167,304,414 $143,865,821 $135,001,881
On December 29, 1995, Meridian Mutual entered into an indemnity
reinsurance agreement with Celina Mutual Insurance Company
regarding commercial line business in the state of Pennsylvania.
This transaction was recorded as assumed written premium, which
was earned over the succeeding twelve months. Renewals of these
policies will be recorded as direct business of Meridian Mutual.
Through the pooling agreement, Meridian Security assumed premiums
written of approximately $2,100,000 and ceding commissions of
approximately $409,000.
8.Deferred Policy Acquisition Costs:
Changes in deferred policy acquisition costs are summarized as
follows:
1996 1995 1994
Deferred, beginning of period $ 13,354,600 $ 11,977,429 $ 11,972,069
Additions:
Commissions 30,593,227 25,797,651 23,444,057
Equity in acquired unearned
premium reserve 2,312,841 --- ---
Ceding commission --- 409,350 621,494
Premium taxes 2,458,670 1,625,370 2,108,746
Other 3,956,708 4,236,409 3,007,189
Total Additions 39,321,446 32,068,780 29,181,486
Amortization expense 35,985,771 30,691,609 29,176,126
Deferred, end of period $ 16,690,275 $ 13,354,600 $ 11,977,429
9.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:
1996 1995 1994
Tax at statutory rate $ 2,023,000 $ 5,403,000 $ 3,813,000
Tax-exempt interest (1,134,000) (1,005,000) (897,000)
Dividends received deduction (619,000) (598,000) (593,000)
Loss, LAE and Salvage and
subrogation fresh start (17,000) (7,000) (20,000)
Nondeductible expenses 168,000 109,000 74,000
Other (270,859) 203,000 38,000
Total income taxes $ 150,141 $ 4,105,000 $ 2,415,000
The Revenue Reconciliation Act of 1990 required insurance
companies to accrue future recoveries of salvage and subrogation
on a discounted basis. A fresh start of 87 percent of the
beginning 1990 discounted balance was provided for by that act.
The impact of this provision has been calculated at $923,000, of
which no amortization was recognized in 1996. Approximately
$7,000 was recognized in 1995, and $20,000 in 1994. Prior to
1994, $876,000 was recognized.
The Tax Reform Act of 1986 allowed for a fresh start deduction for
reserve discounting requirements. This produced an aggregate tax
benefit of approximately $900,000 of which the Company recognized
approximately $17,000 in 1996. Prior to 1996, the Company had
recognized approximately $855,000 of this benefit.
Under SFAS No. 109, "Accounting For Income Taxes", the Company
recorded a net deferred tax asset in 1996 and 1995, which is
included among other assets. The net deferred tax asset at
December 31, 1996, 1995 and 1994, is comprised of the following:
1996 1995 1994
Deferred tax assets:
Unearned premium reserves $ 5,533,000 $ 4,336,000 $ 3,936,000
Loss and loss adjustment
expense reserves and
salvage and subrogation 6,336,000 4,980,000 5,346,000
Unrealized depreciation on
investment securities --- --- 3,747,000
Other post-employment benefits 496,000 454,000 380,000
Other 875,000 --- 10,000
Total deferred tax assets 13,240,000 9,770,000 13,419,000
Deferred tax liabilities:
Deferred policy acquisition costs 5,842,000 4,674,000 4,132,000
Investments 327,000 178,000 80,000
Unrealized appreciation on
investment securities 3,849,000 3,607,000 ---
Other 425,000 34,000 25,000
Total deferred tax liabilities 10,443,000 8,493,000 4,237,000
Net deferred tax asset $ 2,797,000 $ 1,277,000 $ 9,182,000
The Company has paid income taxes during the last three preceding
years that exceed the recorded deferred income tax asset generated
by operations ($1,678,000 in 1996, $3,248,000 in 1995 and
$2,950,000 in 1994).
10.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 $3,900,000 in 1996, $2,400,000 in
1995 and $2,200,000 in 1994. As of December 31, 1996,
approximately $9,300,000 was available for distribution to the
Company without prior approval of insurance regulatory
authorities.
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:
1996 1995 1994
Statutory capital and surplus $105,506,000 $ 90,952,000 $ 74,716,000
Statutory net investment income $ 15,809,000 $ 14,733,000 $ 13,927,000
Statutory net income $ 3,307,000 $ 11,625,000 $ 10,097,000
11.Shareholders' Equity:
The Company has an Incentive Stock Plan ("Plan") for the purpose
of attracting and retaining key employees. The maximum number of
common shares authorized for issuance under the Plan is 750,000
shares. 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.
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, 1996 and 1995
would have been reduced to the following pro-forma amounts:
$143,000 and $53,000 and $0.02 and $0.01, respectively. The fair
value of each option was estimated to be $13.63 and $13.43 on the
date of the grant using the Black-Scholes model with the following
assumptions for 1996 and 1995, respectively: risk free interest
rates of 6.55 percent and 6.70 percent; dividend yield of 2.15
percent and 2.35 percent; and volatility of .314 and .358. As of
December 31, 1996, options outstanding under these plans had an
exercise price that ranged from $11.88 to $15.28 and a remaining
weighted average contractual life of 6 years.
Stock options granted by the Company for the periods ended December
31, 1996, 1995 and 1994 are summarized in the following table:
1996 1995 1994
Weighted Weighted Weighted
Price Shares Price Shares Price Shares
Outstanding at January 1 $11.69 313,781 $10.88 328,401 $ 8.30 97,713
Granted 14.04 31,000 14.27 37,000 11.81 278,280
Exercised during the year 5.75 (4,042) 5.75 (30,521) 10.98 (47,592)
Canceled during the year 9.51 (37,415) 12.20 (21,099) --- ---
Outstanding at December 31 12.28 303,324 11.69 313,781 10.88 328,401
Portion thereof exercisable
at December 31 $12.30 272,324 $11.52 278,781 $ 5.75 50,121
Available for future grants 220,856 251,856 288,856
12.Unaudited Selected Quarterly Financial Data:
(Amounts in thousands except per-share data)
Quarter Ended
March 31 June 30 September 30 December 31
1996
Revenues $ 41,400 $ 43,262 $ 48,990 $ 52,917
Net income $ 595 $ 702 $ 1,806 $ 2,697
Net income per share $ 0.09 $ 0.10 $ 0.27 $ 0.40
1995
Revenues $ 38,667 $ 39,633 $ 41,400 $ 40,122
Net income $ 2,751 $ 1,261 $ 3,404 $ 4,201
Net income per share $ 0.41 $ 0.19 $ 0.50 $ 0.62
